Vikramajit Sen, J.
1. The Reserve Bank of India has filed this Petition assailing the Order of the First Appellate Authority for NBFC Registration Cases under Section 45-IA(7) of the Reserve Bank of India Act, 1934. In the impugned Order the Appellate Authority comprising two Members had briefly analysed and narrated the assailed Order dated 13.1.2004 passed by Ms. Shyamala Gopinath, Executive Director, RBI. The Order of the Appellate Authority is a short one, and is reproduced from paragraph 4 onwards in order to underscorethat the Appellate Authority has not found any error in the findings recorded in the first Order:-
4. RBI submitted statement of facts before the Appellate Authority stating that the company's NOF was (-) Rs.136.90 crores. The CRAR of the company was also negative. The required level of SLR was also not maintained by the company. As against the deposit liabilities of Rs.135.73 crores it maintained only Rs.1.66 lakhs which was far below the required level of 15%. The rating of the company's fixed deposit programme was down graded to CARE 'D' indicating high risk. The company defaulted in repayments matured deposits under CLB orders dated 22nd December, 2000. RBI received a large number of complaints from matured FD holders. The company is not solvent as outside liabilities are more than realisable value of its assets. The company was issued supervisory concern letter dated 28.8.2000 to rectify the inspection findings and other irregularities. The company was advised vide letter dated 8.1.2003 to submit a time bound action plan for achieving the minimum NOF of Rs.25 lakhs.
5. The company failed to comply with above requirements and accordingly RBI issued a show cause notice on 6th December, 2003. The company's reply dated 26th December, 2003 to show cause notice did not contain:
i)Any concrete proposal to rectify the deficiencies relating to NOF/CRAR
ii)Compliance of SLR requirement not backed by any concrete proposal
iii)The company's assurances to make payment to depositors as per CLB order could not be implemented due to is failure to arrange funds from its promoters.
In view of the above, the reply to the show cause notice was found to be not satisfactory. RBI, thereforee, rejected the company's application for certificate of registration.
The Mumbai High Court order dated 12th March, 2004, the Company and its day to day management has been handed over to a special committee presided over by a retired justice of the High Court. In view of these facts and the steps already taken including te appointment of this special committee the Appellate Authority observed that recoveries due to the company are expected to be expedited as also repayment to all its creditors,whether secured or unsecured. Considering all facts and circumstances of the cse, the Appellate Authority direct to RBI to maintain the status quo for a period of one year.
The position will be reviewed after one year taking into account the views of the special committee appointed by the Mumbai High Court.
All concerned should be informed accordingly.
2. I shall presently advert to the amendments carried out in the present statute which must be seen as a corrective action necessitated by the following observations of the Supreme Court in Peerless General Finance and Investment Co. Limited v. Reserve Bank Of India, : 1991CriLJ1391 :
39. ..We cannot ignore the possibility of persons having no stake of their own starting such business and after collecting huge deposits from the investors belonging to the poor and weaker sections of the society residing in rural areas, and to stop suh business after a few years and thus devouring the hard earned money of the small investors. It cannot be lost sight of that in such kind of business, the agents always take interest in finding new depositors because they get a high rate of commission to of the first Installment, but they do not have same enthusiasm in respect of deposit of subsequent Installments. In these circumstances, if the Reserve Bank has issued the directions of 1987 to safeguard the larger interest of the public and small depositorsit cannot be said that the directions are so unreasonable as to be declared constitutionally invalid.
3. Section 45-IA of the Reserve Bank of India Act, 1934 (hereinafter referred to as `the Act'.) was incorporated into the statute with effect from 9.1.1997 by the Act 23 of 1997. The situation which was sought to be remedied by Parliament can be gleaned from the Statement of Objects and Reasons which reads as follows:-
Act 23 of 1997 :-
The activities of the non-banking institutions and unincorporated bodies receiving deposits are regulated in terms of the provisions of Chapters III-B and III-C of the Reserve Bank of India Act, 1934, respectively. Until recently the emphasiswas on regulating the receipt of deposits by Non-Banking Finance companies (NBFCS) as an adjunct to credit and monetary policies and to provide indirect protection to depositors. However, experience has shown that the provisions were neither sufficientto regulate the business activities of these companies nor do they provide adequate protection to depositors.
2. The Joint Parliamentary Committee which enquired into the irregularities in securities and banking transactions had recommended that the Government should examine whether the legislative framework for regulating NBFCs is sufficiently wide. The Working Groupon Financial Companies appointed by Reserve Bank of India (RBI) under the Chairmanship of Dr. A.C. Shah had suggested regulatory and control measures to ensure the healthy growth and operations of these companies.
3. Despite the provisions before the promulgation of the Reserve Bank of India (Amendment) Ordinance, 1997 contained in Chapter III-C of the Reserve Bank of India Act, the unincorporated bodies circumvented the statutory restrictions by floating different partnership firms as and when a firm reached the level of 250 depositors. Further, it is reported that several unincorporated bodies were advertising aggressively through various media soliciting deposits from public by offering high rates of interest ad other incentives.
4. The Reserve Bank of India (Amendment) Ordinance, 1997, further to amend the Reserve Bank of India Act, provides several safeguards for the NBFCs so as to ensure their viability. These include compulsory registration of the NBFCs with Reserve Bank of India (RBI), stipulation of minimum net owned funds requirement, creation of reserve fund and transfer of certain percentage of profits every year to the fund and prescription of liquidity requirement. RBI has also been vested with powers to issue guidelines encompassing aspects such as income recognition, accounting standards, provision for bad and doubtful debts, capital adequacy, etc, which are intended to ensure sound and healthy operations and the quality of assets of these companies. RBI is also being empowered to issue directions to the auditors of NBFCs, to order special audit of NBFCs, prohibit acceptance of deposits by NBFCs, and to make application for winding up of NBFCs. Whereas earlier the only recourse available to the depositors was to approach to Court of Law for redressal of grievances, powers have been vested with the Company Law Board for directing the defaulting NBFCs to make repayment of the depositors/interest with a view to protect the interest of the depositors.
5. The unincorporated bodies have been totally prohibited from accepting deposits for the purpose other than for personal use. They have been permitted to continue to take deposits after incorporating themselves within the regulatory framework. The unincorporatedbodies have also been specifically prohibited from issuing any advertisements in any form.
6. There are reports of several finance companies and unincorporated bodies having failed to repay the deposits collected from unsuspecting depositors who have been tempted by the attractive returns and incentives offered. Concern has been expressed in severalquarters on the need to take urgent steps to regulate the activities of such companies and unincorporated bodies.
4. Sub-section (4) of Section 45-IA of the Act contains and enumerates all the factors which have to be kept in perspective to justify the grant or rejection of an application by an NBFC for a certificate of registration enabling it to commence or continue such business. It has not been contended before me that the Order that had been assailed before the Appellate Authority fails to address these factors, or in doing so arrives at an erroneous conclusion. The parameters within which the Appellate Authoritycould travel are circumscribed by a consideration of these very factors alone. In those rare cases where subsequent events have transpired which appear to have a significant impact on the impugned decision, the Appellate Authority may consider it appropriateto remand the case for fresh consideration. However, it has not done so. It is not proper for the Appellate Authority to venture into an arena of facts dissimilar to those that were prevailing and had been presented to the Authority whose Order has been appealed against. The only exception can be found in purely legal questions such as the application of a statutory provision.
5. It is immediately relevant to mention the Proviso to Sub-section (3) of Section 45-IA of the Act which places an embargo of six years in the aggregate in respect of the period in which an NBFC/applicant company can be allowed to continue business in order to fulfillthe requirement of the 'net-owned fund'. This is indeed a salutary provision since it does not allow the efforts to comply with the requirements laid down in Section 45-IA to be open-ended. If this factor is lost sight of, the mischief whichis intended to be eradicated could be allowed to fester unendingly. Accordingly, at the time of filing of the application if some deficiencies are found to be in existence, the period in which these must be overcome and eradicated within a reasonably sort period. It is in this regard that the embargo of six years in the aggregate has been laid down. The Executive Director as well as the Appellate Authority, being creatures of the statute, cannot possibly ignore or transgress these statutory frontiers.
The High Court of Bombay has also not done so, as the litigation before it was altogether different.
6. The following enunciation of the law to be found in Income Tax Officer, Cannanore v. M.K. Mohammed Kunhi AIR 1969 SC 430 is, thereforee, of little assistance to the Respondents in the facts of the case:.... The right of appeal is a substantive right and the questions of fact and law are at large and are open to review by the appellate tribunal. Indeed the tribunal has been given very wide powers under Section 254(1) for it may pass such orders as it thinksfit after giving full hearing to both the parties to the appeal. If the Income-tax Officer and the Appellate Assistant Commissioner have made assessments or imposed penalties raising very large demands and if the appellate tribunal is entirely helpless in the matter of stay of recovery the entire purpose of the appeal can be defeated if ultimately the orders of the departmental authorities are set aside. It is difficult to conceive that the legislature should have left the entire matter to the administrative authorities to make such orders as they choose to pass in exercise of unfettered discretion. The assessed, as has been pointed out before, has no right to even move an application when an appeal is pending before the appellate tribunal under Section 220(6) and it is only at the earlier stage of appeal before the Appellate Assistant Commissioner that the statute provides for such a matter being dealt with by the Income-tax officer. It is a firmly established rule that an express grant of statutory owner carries with it by necessary implication the authority to use all reasonable means to make such grant effective (Sutherland Statutory Construction, Third edition, Articles 5401 and 5402). The powers which have been conferred by Section 254 on the Appellate Tribunal with widest possible amplitude must carry with them by necessary implication all powers and duties incidental and necessary to make the exercise of those powers fully effective....
7. The Appellate Authority has taken into consideration the Orders passed by the Mumbai High Court on 12.3.2004 Avowedly, these were in Winding-up proceedings. By any consideration a company which is unable to pay its dues cannot possibly be expected To begranted an NBFC status under Section 45-IA of the Act. No one can be permitted to cajole, or induce or deceive the public into making deposits with it when it is unable to pay its dues. The appointment of a retired Judge of the Mumbai High Court was only with a view to collect and thereafter distribute the highest sums of money with the public depositors. The pendency of these proceedings would only militate against the applicant so far as Section 45-IA is concerned since there remains no doubt as to its lack of liquidity if not the absolute absence of 'net owned funds'. It has been contended by learned counsel for the Respondent that no deposits have been solicited or received from the public. If the decision rejecting the application for registration under Section 45-IA is interfered with the direct effect would be that the applicant company would be able to accept such deposits. This would defeat the purpose of statute itself and would be deleterious to the interests of the public at large. The operativepart of the impugned Order appears to me to be unintelligible and contrary to the understanding of learned counsel for the parties. Since the RBI had rejected the Petitioner's application for being granted permission to operate as an NBFC, maintenance of status quo for a period of one year would mean that this situation would continue. In that case there would have been no need to pass the impugned Orders. This would, however, obviously not meet the expectations of the Respondent Company. It is aso not in dispute that the Appeal stands disposed of and is no longer on the Board of the Appellate Authority. thereforee, it cannot be understood how the matter could be reviewed after one year, and in any event that one year has already elapsed since the Order of the Appellate Authority is dated 26.4.2004
8. In this analysis the impugned Order dated 26.4.2004 of the Appellate Authority is not sustainable and is set-aside. the order dated 13.1.2004 is restored. The effect, inter alia, is that the interim Orders passed by Sanjay Kishan Kaul, J. are made absolute.
9. Parties to bear their respective costs.