The Mayavaram Financial Corporation Limited and ors. Vs. the Reserve Bank of India by Its Executive Director, Department of Non-banking Companies and ors. - Court Judgment

V.V. Raghavan, J.

1. These three writ petitions are filed by three Chit Fund Companies for the issue of a writ of mandamus restraining the Reserve Bank of India (1st respondent) from enforcing the provisions of the Non-Banking Financial Companies (Reserve Bank) Directions, 1966, framed under Sections 45-J to 45-L of the Reserve Bank of India Act, 1934. The petitioners are companies carrying on business as foreman of chits. The allegations in each of the writ petitions are of the same pattern and we shall take up the allegations in W.P. No. 1126 of 1967. The scheme of working of chits as set out by the petitioners in their affidavits is as follows:

2. A number of persons called subscribers join together undertaking to subscribe a certain sum of money at stated intervals for a certain period. The aggregate of the sums payable by all the subscribers in one instalment is called the capital of the chit. The prize amount is ascertained by auctioning the fund among the subscribers or by draw. After deducting the discount which is either a fixed percentage of the capital or the difference between the capital and the prize amount, the prize amount is taken by the successful bidder in full satisfaction of his claim under the chit, but subject to his liability to pay future instalments. The person who conducts the chit is called the foreman. It is the duty of the foreman to collect the subscriptions from every subscriber, to conduct and manage the chit, to keep regular accounts and to pay the prize amount-to the subscriber concerned whether or not the other subscribers have paid the instalments due. If all the subscribers pay the instalments due without default, there will be no problem for the foreman in paying the prize amount to the subscriber entitled thereto. But it is often found that 15 to 20 per cent of the subscribers default in payment of instalments. Before drawing the prize amount, the successful subscriber is required to furnish security for due payment of future subscriptions till the culmination of the chit. Sometimes subscribers are unable to furnish the necessary security and allow the prize amounts to remain with the Fund on interest. The petitioners, in addition to carrying on the business of chits, accept deposits and loans from third parties, and they utilise the amounts so obtained as working funds and also do business by lending the deposits so received at higher rates of interest ostensibly to tide over their financial difficulties in meeting their obligations as foreman of chits. A large number of instances came to light where foremen of chits have either disappeared or evaded payments to non-prized subscribers, and, with a view to safeguard the interests of subscribers, the State of Madras enacted the Madras Chit Funds Act, 1961.

3. Section 2 (a) of the Madras Chit Funds Act defines chit as follows:

'Chit' means a transaction whether called chit fund, chit, kuri, or by any other name, by which its foreman enters into an agreement with a number of subscribers that every one of them shall subscribe a certain sum or a certain quantity of grain by instalments for a definite period and that each subscriber in his turn as determined by lot or by auction or by tender or in such other * manner as may be provided for in the agreement, shall be entitled to a prize amount.

Section 2 (5) defines defaulting subscriber as meaning a subscriber who has defaulted in the payment of Subscriptions due according to the terms of the chit agreement. Foreman is defined in Section 2 (10) as meaning the person who under the chit agreement is responsible for the conduct of the chit and includes any other person discharging the functions of the foreman under Section 30. Section 2(13) defines prize money as follows:

'Prize amount' means the difference between the chit amount and the discount, and, in the case of a fraction of a ticket means the difference between the chit amount and the discount proportionate to the fraction of the ticket; and when the prize amount is payable otherwise than in cash the value of the prize amount shall be the value at the time it becomes payable.

Section 2(15) defines Registrar as meaning a Registrar appointed under Sub-section (1) of Section 51. Section 3 provides for registration of by-laws and Section 4 prohibits invitation by subscription to chit of which by-laws have not been registered. Chapter III deals with foreman. Section 12 requires that, for the proper conduct of the chit, every foreman shall, before applying for the certificate of commencement under Section 7. execute an indenture of mortgage and trust in favour of the Registrar as trustee charging by way of security property sufficient to the satisfaction of the Registrar for the realization of the chit amount or deposit in any approved bank an amount of cash not less than half of the chit fund or invest in Government securities of the face value or market value, whichever is less, of not less than half of the chit amount and transfer the amount so deposited or the Government securities in favour of the Registrar to be held in trust by him as security. Section 12 (2) provided that where a foreman conducts more than one chit, he shall furnish security in respect of each such chit. The rights of the foreman mentioned in Section 13 are to obtain the chit amount at the instalment specified in the chit agreement, to charge commission or remuneration not exceeding five per cent. of the chit amount, to receive and realise all contributions from the subscribers and to distribute the prize amounts to prized subscribers and the dividend among the subscribers, to demand sufficient security from any prized subscriber for the due payment of future subscriptions and to substitute subscribers in the place of defaulters. The duties of the foreman are enumerated in Section 14. Under Section 15 the foreman is enjoined to keep registers and books of account in such forms as may be prescribed. Section 16 requires the foreman to file with the Registrar the balance-sheet duly audited. Chapter IV deals with non-prized subscribers, and Chapter V, with prized subscribers. Section 23 requires that, before receiving the prize amount without deducting all future subscriptions, every prized subscriber shall furnish and the foreman shall take sufficient security for the due payment of future subscriptions. Section 24 enjoins upon every prized subscriber to pay the subscription regularly and in default he is liable to make a consolidated payment of all the future subscriptions at once on the issue of notice demanding the same in terms of Section 26. Chapter VI deals with the transfer of rights of foreman and subscribers. Chapter VII deals with termination of chits. Chapter VIII deals with inspection of documents. Under Section 35 a subscriber is permitted inspection of the chit records, including books of account, pass books, balance sheets, profit and loss accounts and such other records showing the actual financial position of the chit scheme. Section 37 authorises the Registrar to inspect chit books and records. Chapter IX deals with the winding up of chits. Section 44 provides for the entire chit assets vesting in Court for distribution among subscribers to whom amounts are due in respect of the chit on the making of an order for winding up of the chit. Section 56 prescribes penalties for contravention of the provisions of Sections 3, 4 and 7 of the Act. Section 59 authorises the Magistrate to issue warrant at the instance of the Registrar or the Inspecting Officer appointed under Section 51 empowering him to inspect the books, registers, accounts or documents etc.

4. Deposits received from investing public, it will be seen, are outside the control of the Madras Chit Funds Act 1961. It is with a view to safeguard the interests of the depositors that Parliament made the impugned enactment namely The Banking Laws (Miscellaneous Provisions) Act (LV of 1963), which received the assent of the President on 30th December, 1963, and was duly published. By this Amending Act, The Reserve Bank of India Act, 1934 ,was amended and a new Chapter III-B was introduced after Chapter III-A in the Reserve Bank of India Act, 1934, (herein after referred to as the Act). The new Chapter contains Sections 45-H to Q relating to non-Banking institutions and financial institutions receiving deposits from third parties. The relevant portions of the impugned provisions are set out below.

5. Section 45 I (c) defines ' financial institution' as follows:

Financial Institution' means any non-banking institution (i) which carries on as its business or part of its business the financing, whether by way of making loans or advances or otherwise, of trade, industry, commerce or agriculture; or (ii) which carries on as its business or part of its business the acquisition of shares, stock, bonds, debentures or debenture stock or securities issued by a Government or local authority or other marketable securities of a like nature; or (iii) which carries on as its principal business hire purchase transactions or the financing of such transactions.

In 1969 after Section 45 I (c) (iii) an Explanation was added and the Explanation runs as follows:

Explanation--For the removal of doubts it is hereby declared that a company registered under Section 3 of the Insurance Act (IV of 1938) for any class of insurance business and a company, not being a banking company, a corporation or a firm, carrying on, as its principal business, the management, conduct or supervision, as the foreman or agent, of any transaction or arrangement by which it enters into an agreement with a number of subscribers that every one of them shall subscribe a certain sum by instalments for a definite period and that each subscriber in his turn as determined by lot or by auction or by tender or in such other manner as provided for in the agreement, shall be entitled to a prize amount shall be deemed to be, a financial institution as defined in this clause.

Section 45-I(c) defines 'non-banking institution' as meaning a company, corporation, co-operative society or firm, Section 45-J confers on the Reserve Bank of India powers to regulate or prohibit issue of prospectus or advertisement in respect of non-banking institutions. Section 45-K authorises the Bank to collect information from such non-banking institutions as to deposits and to give directions; Section 45-L confers power on the Bank to call for information from financial institutions and issue directions to regulate the credit system of the country. Section 45-M casts a duty on non-banking institutions to furnish statements required by the Bank. Section 45-M permits the Bank inspection of such non-banking institutions to satisfy itself on the correctness of information supplied to it. Section 45-O deals with penalties and Section 45-Q, makes the provisions of Chapter B to override the other laws.

6. Purporting to act under Sections 45-J to 45-L, the Bank issued Notification No. D.N.B.C. 1/ED (S)--66 dated 29th October, 1966, giving certain directions to non-banking companies. The said Notification defines 'deposit' thus:

2 (1) (f) 'deposit' means any deposit of money with, and includes, any amount borrowed by, a company, but does not include

(i) any loan received from Governments;

(ii) any loan raised on terms involving the issue of debentures or the creation of a mortgage, pawn, pledge or hypothecation, charge including floating charge, or lien on the assets of the company or any part thereof;

(iii) any loan received from a banking company or from the State Bank of India or from a banking institution notified by the Central Government under Section 51 of the Banking Regulation Act (X of 1949) or from a Co-operative Bank as defined in Clause (b) (ii) of Section 2 of the Reserve Bank of India Act (II of 1934) or from any person registered under law relating to money lending which is for the time being in force;

(iv) any loan received from the industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 or the Industrial Finance Corporation of India established under the Industrial Finance Corporation Act, 1948 or a State Financial Corporation established under the State Financial Corporation Act, 1951, or the Industrial Credit and Investment Corporation of India Limited, or the Madras Industrial and Investment Corporation Limited ;

(v) any loan received by a holding company from its subsidiary or by a subsidiary from its holding company or by a company from a subsidiary of any of its subsidiaries or from a subsidiary of its holding company or from a subsidiary of its holding company or by a company from a holding company of its holding company;

(vi) any loan received by a Government company from any other Government company;

(vii) any loan received from a member of the company or any money received from a member by way of subscription to any shares, stock, bonds and debentures (including calls or deposits received in advance);

(viii) in the case of a chit fund company or any other company carrying on chit or kuri business, any subscriptions received from the members of a chit or kuri series in terms of the contract or other arrangement relating thereto, and in the case of a stock exchange or stock broking company, any money received in connection with the purchase or sale of securities.

The Notification defines 'miscellaneous financial company' thus:

2 (1) (n) miscellaneous financial company means any company, not being a banking company, carrying on as a part of its business but not as its principal business, two or more classes of financial business such as the management, conduct of supervision as a foreman or agent of any transaction or arrangement which is referred to in Clause (d), or the financing of hire-purchase transactions or the acquisition or construction of houses or the acquisition or development of plots of land or the investment of its funds in securities or the grant of loans and advances, but does not include a chit fund, hire-purchase, housing finance, insurance investment, loan, stock exchange or stock broking company or any other company which is an industrial concern or which carries on mainly the business of purchase or sale of any goods or commodities other than securities and which is also engaged in any class of financial business as aforesaid;The notification defines 'non-banking financial company' in clause a (1) (p) as meaning any chit fund, hire-purchase finance, housing finance, investment, loan miscellaneous financial or mutual benefit financial company, but does not include an insurance company or a stock exchange or stock-broking company. In regard to acceptance of deposits, the Notification provides as follows:

3 (b) no other non-banking financial company shall receive any deposit repayable on demand, or on notice, or repayable after a period of less than twelve months from the date of receipt of such deposit or renew any deposit received by it, whether before or after the date of commencement of these directions, unless such deposit, on renewal, is repayable not earlier than twelve months from the date of such renewal, and

(c) No non-banking financial company not being a hire-purchase finance company or a housing finance company shall receive any deposit which together with any other deposits already received and outstanding on the books of the company is in excess of twenty five per cent of the Aggregate of its paid-up capital and free reserves;

4 (3) Every non-banking financial company, not being a hire-purchase finance company or a housing finance company, which on the date of commencement of these directions holds deposits in excess of twenty five per cent. of its paid-up capital and free reserves shall secure before the expiry of a period of two years from the date of such commencement, by taking such steps as may be necessary for this purpose, that the deposits received by the company and outstanding on its books are not in excess of the aforesaid limit.

5. Particulars to be specified in advertisement soliciting deposits. No non-banking financial company and no other person on behalf of such a company shall issue or cause to be issued any advertisement soliciting or inviting deposits unless such advertisement is issued on the authority and in the name of the manager of the company and carries a reference to the date on which the said manager has approved of the text of the advertisement and contains, in addition, the following information, namely:

(a) the date of incorporation of the company;

(b) brief particulars of the management of the company,

(c) the business actually carried on by the company and its subsidiaries,

(d) profits of the company, before and after making provision for tax, for the three proceeding financial years,

(e) dividends declared by the company in respect of the said years,

(f) the liabilities of the company as on the date of the latest audited balance sheet of the company (which date shall also be stated) under the following heads, that is to say,

(i) paid-up capital,

(ii) free reserves,

(iii) deposits,

(iv) any loan or advance obtained by the company and secured by a mortgage or charge including a floating charge or by any other lien on the property of the company;

including temporary loans as defined in Section 293 of the Companies Act (I of 1956), and

(v) any other amount borrowed by the company, including temporary loans as aforesaid.

6. Furnishing of receipts to depositors, (1) Every non-banking financial company shall furnish to every depositor or his agent, unless it has done so already, a receipt for every amount which has been or which may be received by the company by way of deposit before or after the date of commencement of these directions.

(ii) The said receipt shall be duly signed by an officer entitled to act for the company in this behalf and shall state quite clearly in words and figures the amount received by the company by way of the deposit, the rate of interest payable thereon and the date on which the deposit is repayable.

7. Register of deposits:

(i) Every non-banking financial company shall keep one or more registers in which shall be entered separately in the case of each depositor the following particulars, namely,

(a) name and address of the depositor,

(b) date and amount of each deposit,

(c) date and amount of accrued interest or premium on each deposit.

(d) date and amount of each repayment, whether of principal, interest or premium,

(e) any other particulars relating to the deposit.

(ii) The register or registers aforesaid shall be kept at the registered office of the company and shall be preserved in good order for a period of not less than eight calendar years following the financial year in which the latest entry is made of the repayment or renewal of any deposit of which particulars are contained in the register:

Provided that if the company keeps the books of account referred to in Sub-section (1) of Section 209 of the Companies Act (I of 1956), at any place other than its registered office in accordance with the proviso to that sub-section, it shall be sufficient compliance with this clause if the register aforesaid is kept at such other place, subject to the condition that the company delivers to the Reserve Bank a copy of the notice filed with the Registrar under the proviso to the said subsection within seven days of such filing.8. Information to be included in the Board's Report:

(i) In every report of the Board of Directors laid before a company in general meeting under Sub-section (1) of Section 217 of the Companies Act (I of 1956) after the date of commencement of these directions there shall be included in the case of a non-banking financial company, the following particulars or information, namely:

(a) The total number of depositors of the company whose deposits have not been claimed by the depositors or paid by the company after the date on which the deposit became due for repayment or renewal as the case may be according to the contract with the depositor or the provisions of these directions, whichever may be applicable, and

(b) the amounts due to the depositors and remaining unclaimed or unpaid beyond the dates referred to in Clause (a) as aforesaid.

(ii) The said particulars or information shall be furnished with reference to the position as on the last day of the financial year to which the report relates and if the amounts remaining unclaimed or un-disbursed as referred to in Sub-clause (b) of the preceding clause exceed in the aggregate the sum of rupees ten lakhs, there shall also be included in the report a statement on the steps taken or proposed to be taken by the Board of Directors for the payment of the amounts due to the depositors and remaining unclaimed or undisbursed.

9. General Provision regarding repayment of deposits.

On and from the date of commencement of these directions, a non-banking financial company shall not return or repay whether directly or indirectly any deposit in advance of the date on which it is due to be repaid, except on condition that the amount so returned or repaid does not include any sum by way of interest.

Provided that the Reserve Bank of India, may, if it considers it necessary so to do, authorise by general or special order in the case of any class or classes of depositors, the payment of interest at any rate or rates not exceeding the contracted rate or rates, on such terms and conditions as the Bank may specify.

7. In the affidavit filed in support of the writ petitions, the petitioners raised the following contentions. (1) Sections 45-J, 45-K and 45-L of the Act maintain the distinction between deposit and borrowing which is a well recognised distinction. (2) The Notification issued on the basis of the definition of 'deposits' contained therein is ultra vires. (3) As the provisions relating to deposits and borrowings are not severable, the entire directions issued by the Reserve Bank must be struck down. (4) The notification is colourable and motivated.

8. On behalf of the respondent, the Executive Director of the Reserve Bank of India has filed a counter. He denied therein that the non-banking Financial Companies (Reserve Bank) Directions, 1966, are illegal and inoperative, that the same are ultra tires the powers conferred on the Reserve Bank under Sections 45-J, 45-K and 45-L of the Act, that the amendment of the Reserve Bank of India Act by insertion of Chapter III-B became imperative to protect members of the public dealing with such companies, that the insertion of Chapter III-B is to control non-banking institutions in so far as they borrow from and lend out moneys to the public, and that the petitioners are not only non-banking companies but financial institutions as defined in the Act, and that even otherwise Sections 45-J and 45-K will apply to them. It is also contended that Chapter III-B does not relate to the chit subscriptions and the chit fund activities of the foreman but is intended to control and regulate deposits which include every kind of borrowing, that each chit run by the petitioners is a separate transaction and self-financing, the foreman being entitled to 5 per cent or any other fixed ratio of the collections as his remuneration, that the foreman grants loans to subscribers either to pay up instalments or furnish security for drawing prize amounts, that such a loan is an independent transaction unconnected with running of chits, and that the provisions are by and large made only to safeguard the interests of the investing public.

9. The petitioners filed a reply denying all the allegations in the counter and contending that they are only non-banking institutions and not financial institutions as defined in the Act.

10. In October, 1969,- the petitioners have filed a supplemental affidavit questioning the vires of the sections included in Chapter III-B of the Act and contending that chit Funds and kuris are not matters coming within any entry of List I of Seventh Schedule to the Constitution, that they fall under entries 26 and 30 of List II of the Seventh Schedule, and that the impugned provisions in seeking to control the running of chits are beyond the competence of Parliament.

11. A counter has been filed by the under Secretary to the Government of India, Ministry of Finance, Department of Banking, dealing with the contentions raised in the supplemental affidavit filed by the petitioner. Paragraphs 4 and 5 are relevant and we set out the same:

With regard to the Tamil Nadu Chit Funds Act, 1961, I am advised that the State Act and the Reserve Bank of India Act deal with separate matters and in any event there is nothing in the provisions of the Reserve Bank of India Act and the directions issued thereunder which is inconsistent with the Tamil Nadu Legislation.

The provisions of the Explanation to Section 45-I of the Reserve Bank of India Act, 1934, are statedly for the avoidance of doubt and Parliament has declared that the intent of the original provision in that Act was to include all the classes of institutions and business specified therein in the definition of 'Financial Institution'. In other words the Explanation is not a new enactment, but a declaration of the meaning of the words 'Financial Institution' from the inception.

12. Mr. M. K. Nambiar on behalf of the petitioners raised the following main contentions. (1) Chit Fund is a form of money lending or money borrowing transaction and the law relating thereto will fall under entry 30 in List II of Seventh Schedule. In any event, Chit Fund will fall under entry 26 in List II. The pith and substance of the impugned enactment contained in Chapter III-B in so far as it legislates on the activities of the foreman running chits trenches upon entry 30 of List II exclusively reserved for the State and the impugned enactment is, therefore, ultra vires. (2) The pith and substance of the impugned enactment entrenches in any event upon Entry 26 of List II (Trade and Commerce). (3) The Union, under the guise of enacting a regulatory measure, has legislated upon the borrowing and lending activity of the stake holder which is part and parcel of the business of running chits. Thus the impugned legislation under the guise of regulating an activity of the foreman in effect entrenches upon a subject reserved for the State and is a colourable one liable to be struck down. (4) Even if the impugned provisions are. valid, the directions issued are invalid. (5) There is no need to control the activities of the foreman of chit, in view of the Madras Chit Funds Act 1961. (6) ,The Government in their supplemental counter-affidavit did not categorically specify the entry under which the impugned enactment falls except stating that the matters covered by the Madras Chit Funds Act 1961, are separate from those covered by the impugned provisions.

13. Mr. V.K. Thiruvenkatachari appearing for the Reserve Bank of India in answer contends that the impugned provisions fall under Entry 36 currency, coinage and legal tender; foreign exchange; and Entry 38, Reserve Bank of India in List I, that chit fund transactions in pith and substance are in the nature of a special contract falling under Entry 7 in List III and they do not fall under Entry 30 of List II or Entry 26 of List II, that the impugned provisions are in no sense colourable, that the directions issued under Section 45-J. 45-K and 45-L of the Reserve Bank of India Act are valid, that the Madras Chit Funds Act 1961, regulates only the running of chits, that a major portion of the activities of the chit funds which consist in receiving deposits from the investing public and lending them out to third parties do not fall under the Madras Chit Funds Act, that chit funds are non-banking institutions not falling under the control of the Reserve Bank, that, with a view to safeguard the interests of the depositors and to exercise control over such non-banking institutions, the directions have been issued by the Reserve Bank regulating or prohibiting the issue of any prospectus inducing the general public to deposit moneys with them, to call upon the chit funds to furnish information showing the extent of deposits, to file periodical statements with the Bank and to authorise the Bank to inspect the chit fund records, and that in the circumstances the impugned directions are valid,

14. We shall take up the first contention of Mr. Nambiar and consider whether the impugned provisions entrench upon Entry 30 of List II (money lenders and money lending.)

15. In construing the legislative entries in the three lists of the Seventh Schedule, the following principles have to be borne in mind, (1) The entries should be given a large and liberal interpretation. Vide in re, G.P. Motor Spirits Act , and Waverly Jute Mills v. Raymen and Co. : [1963]3SCR209 None of the items enumerated in the Lists is to be read in a narrow and restricted sense and each of the entries should be held to extend to all ancillary and subsidiary matters which can fairly and reasonably be comprehended. See United Provisions v. Atiqa Begum : [1951]2SCR682 Before an Act is declared ultra vires on the ground that it invades any exclusive sphere, there should be an attempt to reconcile the two conflicting jurisdictions and only if such reconciliation is impossible, the Act should be declared invalid Vide Ralla Ram v. Province of East Punjab .

16. The contention of Mr. Nambiar is that the impugned provisions made by Parliament entrench upon Entry 30 of List II of the Seventh Schedule. In this connection, reference was made to the decision of the Privy Council in Prafulla Kumar v. Bank of Commerce, Khulna 74 I.A. 23 : (1947) F.C.R. 28 : (1947) F.C.J. 34 : (1947) M.L.J. 6 : A.I.R. 1947 P.C. 60 .

In that case, the Privy Council, in dealing with the extent to which the Bengal Money lenders Act 1940, entrenched upon the matters reserved to the Federal Legislature, namely, items 28 and 38 in List I of Schedule VII in the Government of India Act 1935, quoted with approval the following passage from the judgment of Sir Maurice Gawyer, C.J., in Subramanyam Chettiar v. Muthuswami Gottndar .

It must inevitably happen from time to time that legislation though purporting to deal with a subject in one list, touches also upon a subject in another list, and the different provisions of the enactment may be so closely intertwined that blind adherence to a strictly verbal interpretation would result in a large number of statutes being declared invalid because the Legislature enacting them may appear to have legislated in a forbidden sphere. Hence the rule which has been evolved by the Judicial Committee, whereby the impugned statute is examined to ascertain its pith and substance or its true nature and character for the purpose of determining whether it is legislation with respect to matters in this list or that.

The Privy Council observed:

No doubt experience of past difficulties has made the provisions of the Indian Act more exact in some particulars and the existence of the Concurrent List has made it easier to distinguish between those matters which are essential in determining to which list particular provisions should be attributed and those which are merely incidental. But the overlapping of subject-matter is not avoided by substituting three lists for two or even by arranging for a hierarchy of jurisdictions.

Subjects must still overlap and where they do the question must be asked what in pith and substance is the effect of the enactment of which complaint is made and in what list is its true nature and character to be found. If these questions could not be asked, much beneficent legislation would be stifled at birth and many of the subjects entrusted to Provincial Legislation could never effectively be dealt with.

17. Thirdly, the extent of the invasion by the provinces into subjects enumerated in the Federal list has to be considered. No doubt it is an important matter not, as their Lordships think, because the validity of an Act can be determined by discriminating between degrees of invasion, but for the purpose of determination what is the pith and substance of the impugned Act. Its provision may advance so far into Federal territory to show that its true nature is not concerned with provincial matters, but the question is not has it trespassed more or less, but is the trespass whatever it be, such as to show that the pith and substance of the impugned Act is not money lending but promissory notes or banking Once that question is determined, the Act falls on one or the other side of the line and can be seen as valid or invalid according to its true content'.

18. Mr. Nambiar referred to Waverly jute Mills v. Raymon and Co. : [1963]3SCR209 and he cited the following passages therein:

It is next argued for the appellants that even if a law on Forward Contracts can be said to be a law on Future Markets, it must be held to be legislation falling under Entry 26 in List II and not Entry 48 List I because Forward Contracts form a major sector of modern trade and constitute its very core and to exclude them from the ambit of Entry 26 in List II would be to rob it of much of its contents.

As the two entries relate to the powers mutually exclusive of two different Legislatures, the question is how these two are to be reconciled. Now it is a rule of construction as well established as that on which the appellants rely that the entries in the Lists should be so construed as to give effect to all of them and that a construction which will result in any of them being rendered futi'e or otiose must be avoided. It follows from this that where there are two entries, one general in its character and the other specific, the former must be construed as excluding the latter. This is only an application of the general maxim Generalia specialibus non derogant. It is obvious that if Entry 26 is to be construed as comprehending Forward Contracts, then 'Futures Markets' in Entry 48 will be rendered useless. We are therefore of opinion that legislation on Forward Contracts must be held to fall within the exclusive competence of the Union under Entry 48 in List I.

Mr. Nambiar submits that the expression 'money lending' includes 'money borrowing', that the foreman of a, chit fund in order to carry on the business, has to borrow moneys and lend to subscribers among others, and that, if the widest amplitude is given to the entry money lending and money lenders' it will mean that the activity of money borrowing of the foreman will fall under Entry 30 of List II and the impugned provisions should therefore be struck down. In this connection Mr. Nambiar refers to the decision Calcutta Gas (Prop.) Co. Ltd. v. State of West Bengal : AIR1962SC1044 and contends that a harmonious construction giving the widest meaning to the entries in their respective fields should be given.

19. In dealing with legislative competenence of Parliament to enact the impugned provisions, Mr. Chari contended that the impugned provisions fall under Entry 38 (Reserve Bank of India) and Entry 36 (currency) and that in order to appreciate this contention it is necessary to consider the functions and working of the Reserve Bank of India. The position of the Reserve Bank which is a Central Bank in the financial affairs of India and its place in the scheme of law are set out in Joseph Kurivilla Vellukunnel v. Reserve Bank of India : AIR1962SC1371 , as follows:

The Reserve Bank of India was established on 1st April, 1935, by the Reserve Bank of India Act, 1934. Even before the establishment of the Reserve Bank, suggestions were made that there should be a central bank in India and the Royal Commission on Indian Currency and Finance had recommended in 1926, that the currency and credit of the country could only be put on a firm foundation, if a central bank was established. The first Bill introduced in 1927 by Sir Basil Blackett was dropped. The Indian Central Banking Inquiry Committee, however, reported in 1931 that there was a need for a central banking institution in India 'for securing the development of the Indian banking and credit system on a sound and proper basis'. The Committee pointed out that some of the Provincial Committees had also suggested the establishment of the Reserve Bank. The Committee ended by saying:

We accordingly consider it to be a matter of supreme importance from the point of view of the development of banking facilities in India and of per economic advancement generally, that a Central or Reserve Bank should be created at the earliest possible date. The establishment of such a Bank would by modalisation of the banking and currency reserves of India in one hand tend to increase the volume of credit available for trade, industry and agriculture and to mitigate the evils of fluctuating and high charges for the use of such credit caused by seasonal stringency.(Vol. Part I, Chap. XXII, para. 605).

The White Paper on Indian Constitutional Reforms also recommended the establishment of a Reserve Bank Tree from political influence'. As a result of these findings, when a fresh Bill was introduced by Sir George Schuster on 8th September, 1933, it was accepted and received the assent of the Governor-General on 6th March, 1934.

The functions of the Reserve Bank were generally indicated in the preamble as the regulation of the issue of the Bank notes and keeping the reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. But to enable the Reserve Bank to function in this manner, it had to be given other powers so that it may function effectively as a central bank. To this end, the Reserve

Bank was given the right to hold the cash balances of important commercial banks, a right to transact Government business in India which was also its obligation, and to enter into agreements with State Governments to transact their business. In addition to these, the Reserve Bank could require all banks included in the Second Schedule to the Act to maintain with the Reserve Bank a balance not less than 5 per cent. of their demand liabilities and 2 per cent. of their time liabilities. The Reserve Bank also performed the normal functions of a central bank as well as an ordinary bank, though the latter functions are not as detailed as those of an ordinary bank.

M.H. Dekock, in his book on Central Banking, at page 22, gives an elaborate description of the functions of a central bank thus.:

(1) The regulation of currency in accordance with the requirements of business and the general public, for which purpose it is granted either the sole right of note issue or at least a partial monopoly thereof.

(2) The performance of general banking and agency services for the State.

(3) The custody of the cash reserves of the commercial banks.

(4) The custody and management of the nation's reserves of international currency.

(5) The granting of accommodation, in the form of re-discounts or collateral advances, to commercial banks, bill brokers, and dealers, or other financial institutions, and the general acceptance of the responsibility of lender of the last resort.

(6) The settlement of clearance balances between the banks.

(7) The control of credit in accordance with the needs of business- and with a view to carrying out the broad monetary policy adopted by the State.

20. The brochure of the Reserve Bank of India, Functioning and Working (1970) sets out its main functions at page 4 as follows:

The main functions of a central bank are broadly the same all over the world, namely, acting as note issuing authority, bankers' bank and banker to Government. The scope and content of policy objectives vary from country to country and from period to period, depending on the stage of development, the structure of the economy, the goals to which the Government are committed, and the current general economic situation, but even so a broad identity of approach is discernible. It is generally agreed that a central bank's objectives should be to promote or facilitate a high growth rate full employment, price stability and available external payment position. It is recognised that these objectives often clash and a working optimum has to be aimed at. According to the preamble to the Reserve Bank of India Act, the main function of the Bank is 'to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.

21. The Reserve Bank of India having thus been vested with comprehensive powers to regulate and control the receipt of public deposits by Banking Institutions, the question as to the need of the Reserve Bank to regulate deposits received by non-banking companies was considered. Some of these non-banking institutions accept deposits from the public and carry on business allied to banking. The study conducted by the Reserve Bank disclosed that the total deposits stood at Rs. 23-7 crores in 1958 as against Rs. 20-8 crores in 1957. A similar study undertaken in 1961, disclosed a small rise in the total deposits of the public limited companies from Rs. 23-8 crores in 1958 to Rs. 25-1 crores in 1959. A somewhat more comprehensive study in respect of the three-year period 1960-61 to 1962-63 was undertaken in 1963 and the bulletin issued by the Reserve Bank in February, 1964, showed a marked rising trend in the deposits of these companies, the rate of growth being about 15 per cent. during 1961-62 as well as in 1962-63. While the Reserve Bank had adequate powers to regulate and control the business of banking companies, it had no such power in respect of non-banking institutions (including financial institutions) which accepted deposits from the public. It was not possible to assess precisely the volume of such deposits. But it was noticed that some of the institutions offered high rates of interest which, in itself, was an unhealthy sign. In view of these considerations, Mr. Chari submitted that it was considered that the Reserve Bank should be vested with adequate authority over these non-banking institutions to regulate their 'deposit receiving ' activities so as to provide adequate protection to the depositors and ensure a more effective control of credit with a view to carrying out the overall monetary policy of the Government. The Reserve Bank of India Act 1934, was accordingly amended in 1963 and the relevant provisions came into force as and from February, 1964. The new provisions, incorporated as Chapter III-B of the Act, are applicable to non-banking institutions and do not cover banks and banking institutions, as defined in the Banking Regulation Act, and specified Co-operative institutions as defined in Section 2 of the Act. Credit control being one of the main functions of the Central Bank in any country and the Reserve Bank in this country, such control necessarily involves control of non-banking credit and the impugned provisions are in pith and substance an enactment relating to the control of credit by the Reserve Bank. In the connection Mr. Chari refers to State of Bombay v. Narottamdoss : [1951]2SCR51 , in considering the vires of the Bombay City Civil Courts Act, Das, J., observed:

The doctrine of pith and substance postulates for its application, that the impugned law is substantially within the Legislature that made it but incidentally encroached upon the legislative field of another Legislature. The doctrine saves this incidental encroachment if only the law is in pith and substance within the legislative field of the particular Legislature which made it.

We are of opinion that the Impugned provisions in pith and substance relate to control of currency by the Reserve Bank and falls under entries 38 and 36 of List I of Seventh Schedule, and that they do not in any way, entrench upon entry 30 of List II.

22. Mr. Chari further contends that chit funds fall under entry 7 of List III and not under entry 30 of List II. He points out that a fund is constituted by the subscriptions received from subscribers and that, when that fund is auctioned at a discount and the highest bidder gets the prize amount, the successful bidder is entitled to be paid the prize amount on furnishing security and executing a bond binding himself to pay future instalments without default. The foreman, in conducting the chit fund, enters into a separate contract with each of the subscribers in relation to the fund disbursed. This special kind of contract falls under entry 7 of List III. After the subscriptions are received and funded, it is no longer in the region of money lending and money lenders. The relationship between the foreman and a subscriber is regulated by the contract entered into between the foreman and the subscriber, such contract being a special contract similar to the contracts enumerated in entry 7. We are of opinion that the contract entered into by the foreman with the subscriber is a special contract falling under entry 7 of List III of Seventh Schedule. The President's assent to the Act confirms our view.

23. Mr. Nambiar contends that the impugned provisions entrench upon entry 26, Trade and Commerce of List II and every conceivable business will fall under the said item. In support of this contention, he relied upon The Common Wealth of Australia v. Bank of New South Wales (1949) a All E.R. 755. The question therein arose whether the business of banking was included among the activities described in Section 92 of the Constitution under the head 'Trade, Commerce and Intercourse' and their Lordships held in the affirmative. Mr. Nambiar relies upon the following passage in Wynes, Legislative Executive and Judicial Powers in Australia at page 304:

24. 'In the Banking Case, Bank of New South Wales v. The Common Wealth (1948) 76 C.L.R. 1. The decision was affirmed by the Privy Council in Common Wealth of Australia v. Sank of New South Wales (1949) 2 All E.R. 755, it was sought to show that trade and commerce was limited to the buying and selling of goods and that, in consequence, banking was not and could not be within the concept (for the purpose of Section 92). This argument was not accepted. In the course of his judgment on this point, Dixon, J., whose description of the concept has recently been accepted and adopted by the Privy Council in the Hughes and Vale Case (1954) 93 C.L.R. 1, spoke of the 'central conception ' of trade and commerce as distinct from the immense field of activities that were ' incident' to the power'. On the other hand, Mr. Chari contended that the relationship between the foreman and the subscribers is contractual and that the conducting of chit fund will not result in carrying on a trade. The learned Counsel referred to Sections 2(2), 2 (3) and 5 of the Madras Chit Funds Act and contended that there is no element of trade involved in the various provisions. We agree with him and hold that the impugned provisions do not entrench upon entry 26 of List II and that chit funds do not fall under entry 26 of List II.

25. Mr. Nambiar further contends that the impugned provisions are colourable. In this connection he relies upon Attorney General for Alberta v. Attorney General for Canada A.I.R. 1939 P.C. 53, where the principles relating to colourable legislation have been fully considered. In this connection Mr. Nambiar refers to page 75 of Lefroy on Canadian Constitution. Mr. Nambiar's contention is that, though apparently a Legislature in passing a statute purported to act within the limits of its powers yet in substance it transgresses its power, the transgression being veiled by what appears on a proper examination to be a mere pretence or disguise. In this connection the learned Counsel refers to K.C.C. Narayana Deo v. State of Orissa : [1954]1SCR1 . Mr. Chari contends that the attack of the impugned provisions on the ground that they are colourable cannot be sustained, as nothing is sought to be done indirectly. In the view we have taken that the impugned legislation falls under entries 36 and 38 of List I, we hold that there is no substance in this contention. 26. Mr. Nambiar next contends that the money received from third parties by the foreman will not amount to banking and as such outside the provisions of the Reserve Bank of India Act. In this connect on he refers to Section 5 (b) of the Banking Companies Act (X of 1949) which defines 'banking' as follows:

'banking' means the accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.

In support of his contention, the learned Counsel relied upon the judgment of Ramachandra Iyer, J. (as he then was) in Sqjjan Bank v. Reserve Bank of India : (1959)2MLJ455 , where the learned Judge observed:

The essence of banking business is, therefore receiving money on current account for deposit from the public repayable on demand and withdrawable by cheque, draft or otherwise.

An ordinary money lender who does not accept moneys on terms enabling a depositor to draw a cheque upon him would not, therefore, be a bank or banker properly so called. The provisions of the Act would apply only where the bank or banker allows the withdrawal of money by the issue of cheques.

The contention of the learned Counsel is that, inasmuch as the petitioners do not issue cheques, their activities do not fall under the definition of 'banking' and that consequently the Reserve Bank has no jurisdiction over such transactions.

27. Mr. Nambiar further referred to Raghavan Pattar v. Arumugham 68 M.L.J. 283 : 158 I.C. 1037 : A.I.R. 1935 Mad. 385, and Ramanadha Aiyer v. Narayanaswamy Aiyer : (1937)1MLJ163 . His argument is that the term 'money lending' includes also money borrowing, that, in order to carry on their business, chit funds have to borrow moneys, in that view the deposits received from the public are borrowings made by the foreman, and that the chit funds in so far as they receive deposits from the public and lend them out are doing only the business of money lending, and that the activity of the petitioners in receiving deposits from third parties amount to normal banking activities which the Parliament is entitled to regulate and control.

28. In dealing with this contention Mr. Chari refers to the Madras Money lenders Act (XXVI of 1937) where 'loan' and ' money lender ' have been defined under Sections 2 (6) and 2 (8), to illustrate the distinction between money lending and money borrowing and that the running chit funds do not fall under the Madras Money Lenders Act. We are of opinion that there is a distinction between money lending and money borrowing and the impugned provisions in so far as they control money borrowing in the State of deposits from third parties and lending the same are valid.

29. Mr. Nambiar attacks the validity of Amending Act IV of 1968 in adding an Explanation to Section 45I(c) which has been extracted in the earlier part of this judgment. Mr. Chari contends that the amendment was made for removal of doubts and the definition of ' financial institutions' was clarified to include ' chit funds'. In this connection, the learned Counsel refers to Maxwell's Interpretation of Statutes, 12th Edition, at pages 224 and 225 where the following passage occurs:

Similarly Section 6 of the Finance Act 1898, provided, for the removal of doubt, that the definition of 'conveyance on sale' in the Stamp Act 1891, included an order for foreclosure. It was held that Section 6 was declaratory and therefore retrospective, so that an order of 1896 foreclosing a legal mortgage required stamping as a conveyance on sale (In re, Lowell and Pollard's Contract (1907) 1 Ch. 249).

We agree with the contention of Mr. Chari that the Amending Act IV of 1968, introducing an Explanation to Section 45-I (c) is valid.

30. Mr. Nambiar next attacks the validity of Section 45-Q, on the ground of-excessive delegation. Mr. Chari sought to uphold the said provision by referring to the decision in Bagla v. State of Madhya Pradesh : 1954CriLJ1322 . The effect of Section 45-Q is not to repeal expressly or impliedly any of the provisions of the pre-existing laws. Nor does it abrogate them. What it does is only to make the provisions of Chapter III-B override the other laws. We hold that Parliament being supreme, is entitled to make a law abrogating or replacing by implication the provisions of any pre-existing law and no exception can be taken to such legislation on the ground of excessive delegation to the Act of Parliament itself.

31. Mr. Chari contends that the foreman, in receiving deposits from the public and utilising the same to advance moneys to the defaulting subscribers to pay their subscriptions or the prized men enabling them to find security, passes on his obligation to such depositors and the investing public have no information as to whether the amounts received are lent out to third parties or to subscribers and if lent out to subscribers to what extent such lending is done. The contention is that, under the Madras Chit Funds Act, the foreman is bound to bear the loss and the Chit Funds Act does not authorise him to receive deposits from third parties and to pass on his obligation to such depositors. The impugned enactment aims at having control over such deposits so as to protect the depositors from the vagaries of the foreman. In this connection Mr. Chari draws our attention to the Director's Report with Balance Sheet and Profit and Loss Account of the petitioner in W.P. No 1127 of 1967 which shows that, out of a sum of Rs. 19,57,264.57 a sum of Rs. 85.610-78 is alone as kuri deposits. Further, the survey conducted by the Reserve Bank on the quantum of deposits from 1962 to 1966 shows that in 1962 the deposits were 2O-crores and in 1966 there were 200 crores. Mr. Chari brings to our notice that the impugned enactment came into force in 1964 and out of 11,000 chit funds functioning in Tamil Nadu only these three petitioners have raised objections regarding the control by the Reserve Bank over their activities. The petitioners themselves call the amounts received from the public as 'deposits' out of which a small fraction alone is utilised by the foreman to what he calls tiding over his financial difficulties and for meeting the demands of the subscribers. The bulk of the amounts received as deposits from the public is lent out to third parties at higher rates of interest. The fixed deposit receipts issued by the petitioners are similar to such deposit receipts issued by banking institutions, and what the petitioners have been doing is only banking business. The impugned provisions controlling such activities are therefore fully justified.

32. Mr. Chari referred us to various inquiries conducted by the Reserve Bank subsequent to 1964, as a result of which the Directions styled as (a) the Non-Banking Financial Companies (Reserve Bank) Directions 1966 and (b) the Non-Banking Companies (Reserve) Bank Directions 1966 were issued. In this connection the learned Counsel quoted the following extract from Vaswani's Indian Banking System, at page 159:

Public Deposits with Non-Banking institutions:

The new powers conferred on the Reserve Bank became effective from February, 1964 and in May 1964, the Bank initiated measures to find out the actual position regarding public deposits with non-banking institutions. For this purpose it called upon these institutions to furnish certain returns in the prescribed form showing the position regarding their deposits and other connected matters, on different dates including 31st March, 1964. In May 1965 revised orders were issued in terms of which these institutions were required to submit returns relating to their deposits as at the end of March and September every year.

The Bank published its findings in regard to the public deposits with these companies as at the end of March, 1964 and March, 1965 in July, 1965 and November, 1966, respectively. These findings bring out the following interesting points:

(i) In March, 1964, there were 1789 companies which were accepting deposits while in March, 1965, the number of such companies stood at 1909.

(ii) The deposits with these companies amounted to Rs. 185.9 crores at the end of March, 1964 and the amount had gone up to Rs. 209.1 crores in March, 1965. A major portion of this increase was accounted for by deposits received by non-financial companies.

(iii) The rates of interest offered were much higher than those offered by major scheduled banks.

(iv) There were 2,81,200 deposit accounts in March, 1965 of which 2,16,800 accounts belonged to the general-public.

(v) Short-term deposits (i.e. deposits repayable on demand or within one year) formed a major portion of the total deposits.

(vi) The growth in the volume of deposits of these companies was not greater than the growth of deposits with commercial banks.

(vii) The deposits in the case of better managed and larger sized public companies were reasonable in relation to their paid up capital and reserves.

(viii) The less well managed and small sized private limited companies were prone to rely on deposits to a considerable extent for their business operations.

In October, 1966, the Government of India, in exercise of the powers conferred under Sections 45-J to 45-L of the Act issued the aforesaid Directions. Notification No. DNBC 1/ED (S) 66 dated 29th October, 1966, the relevant extracts of which have been made in the earlier part of this judgment. The Non-Banking Financial Companies (Reserve Bank) Directions 1966 apply to all non-banking financial companies irrespective of the fact whether they accept deposits from the public or not and include chit fund , hire-purchase finance, housing finance, investment, loan, miscellaneous financial and mutual benefit financial companies. Mr. Nambiar attacks the above Notification, particularly clause 2 (1) (f) defining deposit, clause 3 (b) relating to acceptance of deposit and clause 4 (3) calling upon non-banking financial institutions to deposit 25 per cent, of their paid-up capital and contends that these provisions go beyond the Act. He further contends that the well known distinction between deposit and loan mentioned in the Limitation Act has not been preserved in the notification and referred to the decision of the Privy Council in Sulaiman Haji Ahmed Umar v. Haji Abdulla Haji Rah mtulla . We are of opinion that the distinction between loan and deposit provided in the Limitation Act is only for the purpose of giving different periods for recovery of such loans and deposits and that the impugned directions are not invalid on this account. The said provisions are reasonable, valid and are meant to safeguard the interests of the investing public.

33. Mr. Nambiar further contended that Clause 3 of the Notification is unreasonable, inasmuch as the petitioners cannot accept deposits on and after the date of commencement of the Notification. We are of opinion that the above provision is necessary in order that the Reserve Bank of India may have an effective control over deposits received by non-banking financial companies. The restrictions imposed thereunder are reasonable and have been made in the interests of the investing public.

34. The next contention of Mr. Nambiar relates to clauses of the Notification which deals with the particulars to be furnished in advertisement soliciting deposits. We do not consider anything unreasonable in this clause.

35. We are therefore, of opinion that the impugned provisions falling under Chapter III-B of the Reserve Bank of India Act, 1934 and the Notification dated 29th October, 1966, issued by the Reserve Bank of India are valid and that there is no substance in any of the contentions raised by the petitioners.

36. The writ petitions accordingly fail and are dismissed with costs (one set). Counsel's fee Rs. 250. C.M.P. Nos. 14437 to 14439 of 1969 for leave to raise additional grounds ordered.