M/s.KLN Holdings Private Limited, 8-2-674/B/4, Road No.12 V. Union of India, Ministry of Finanace, rep.by its Secretary

WP/6469/2006

AI Insights

The case involves KLN Private Limited, a private limited company, challenging the constitutional validity of Chapters IIIB, IIIC, and V of the Reserve Bank of India Act, 1934. The petitioner argued that these chapters restrict its business of acquiring shares, stocks, bonds, and other securities with its wholly owned funds, which it claimed was arbitrary, illegal, and unconstitutional. The Reserve Bank of India (RBI) and the Union of India were respondents. The court examined whether the petitioner company fell under the definition of a 'non-banking financial company' as per the Act and whether the restrictions imposed were constitutional.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 724757 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 04-12-2023
• Assessment Year: misc
• Other Referred Cases: National Insurance Company Limited v. Kirpal Singh, Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd, M.K. Ranganathan v. Government of Madras, The South Gujarat Roofing Tiles Manufacturers Association v. The State of Gujarat, Philips Medical Systems (Cleveland) Inc. v. Indian MRI Diagnostic and Research Limited, Chintamanrao v. State of Madhya Pradesh, Anuradha Bhasin v. Union of India, R.M.D. Chamarbaugwalla v. Union of India, State of Uttar Pradesh v. Kartar Singh, Dantuluri Ram Raju v. State of Andhra Pradesh, State of Haryana v. State of Punjab
• Laws Referred To: Reserve Bank of India Act, 1934, Constitution of India
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: GADI KUMAR; B KUMAR
• Assessee Lawyers: K CHOUDARY
• Keywords: Arbitrary; Constitutional Validity; Financial Institution; Illegal; Non banking financial company; Unconstitutional; Writ of Mandamus
• Section: 226; 45-I(c); 45-I(f); 45-IA(1)

Judgement Text

"[ 33e31 HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD (Special 0riginat Jurisdiction) MONDAY, THE FOURTH DAY OF DECEMBER TWO THOUSAND AND TWENTY THRE€ PRESENT THE HONOURABLE THE CHIEF JUSTICE ALOK ARADHE AND THE HONOURABLE SRI JUSTICE ANIL KUMAR JUKANTI WRIT PETITION NO:6469 oF 2006 Between: Counsel for the Petitioners: M/s. K.MAMATA CHOUDARY, SR.COUNSEL FOR SRI CHALLA GUNARANJAN Counsel forthe Respondent No.1: SRI GADI PRAVEEN KUMAR, Dy. SOLICITOR GENERAL OF INDIA Counsel for the Respondent No.2: SRt B.NALIN KUMAR, SC FOR RBI The Court made the following: ORDER '1. M/s. KLN.t1qt9iqg.. Private Limited, B-2-6Z4tBt4, Road No.12, Banjaa Hiils, _ hyderabad-500034 rep.by its Director, Shri K.Harischandra prasad 2. sri K.Harichandra Prasad, s/o.Late KLN prasad, Residents or g-zsl+,E,4, Road No.12 Banjara Hills, Hyderabad. AND ...PET|T|ONERS 1. V.nion of lndia, Ministry of Finanace, rep. by its Secretary, (Banking), North Block, New Delhi-1. 2. Reserve Bank of lndia, Department of Non-banking, Supervision, Secretariat Road, Saifabad, Hyderabad-4 rep. by its General tVtanaipr. ...RESPONDENTS Petition under Article 226 of rhe constitution of lndia praying that in the circumstances stated in the affidavit filed therewith, the High 'Court may be pleased to issue a writ or order or orders more particularly one in the nature oi writ of mandamus declaring- i. that Chapter lllB,lllC and V of the Reserve Bank of lndia Act,1934 in so far as it restricts the petitioner company from carrying its business of acquisition of shares stocks bonds and other securities with its wholly owned funds as arbitrary, illegal, and unconstitutional violative of petitioner rights guaranteed under Article 14 and 19(1)(9) of the constitution of lndia or in the alternative ii. declare that the provisions of chapter lllB,lllc and v of the RBI Act,1934 do not apply to the petitioner company THE HON'BLE THE CHIEF JI,STICE ALOK ARADHE AND THE HON'BLE SHRI JUSTICE ANIL KUMAR JUKANTI WRIT PETITION No.6469 of 20o6 ORDER: (Per the Hon'ble the Chief Justice Atok Aradhe) Ms. K.Mamata Choudary, learned Senior Counsel representing Mr. Challa Gunaranjan, learned counsel for the petitioners. Mr. Gadi Praveen Kumar, learned Deputy Solicitor General of India for respondent No.l. Mr. B.Nalin Kumar, learned Senior Counsel for respondent No.2. 2. In this writ petition, petitioner No.l is a private limited company. The petitioners (hereinafter referred to as 'petitioner companyJ have assailed the constitutional validity of Chapters IIIB, IIIC and V of the Reserve Bank of India Act, 1934 (briefly referred to hereinafter as 'the ActJ insofirr as it restricts the petitioner company from carrying on the business of acquisition of shares, stocks, bonds and other 2 securities with its wholly owned funds on the ground that the same is arbitrary, illegal, unconstitutional and violative of Articles 14 and 19(1)(g) of the Constitution of India. In the alternative, the petitioner company has prayed for the relief that the proyisions of Chapters IIIB, IIIC and V of the Act do not apply to the petitioner company. 3. Facts giving rise to filing of this petition briefly stated are that the petitioner company is a private limited company. The petitioner company neither receives any deposits or contributions from the public nor has undertaken lending/financing business in any manner. The petitioner company invests in equity and accmals in sister concerns and listed securities/ mutual funds. 4. The petitioner company submitted an application on 03.07. 1997 for issuance of certilicate of registration under Section 45-lA( 1) of the Act. The petitioner company by a communication dated lO.O7.2OOO informed the Reserve Bank of India that it is not engaged in the business of non-banking financial company and also tendered a resolution dated O3.O7.2OOO stating that it will not accept deposits from the 3 public without prior regulatory approval. Flowever, by an order dated 04.01.2003, the application sul;mirted by the petitioner company was not processed. Thereupon, the petitioner company has filed this writ petition seeking the relief supra. 5. Learned Senior Counsel for the petitioner company submitted that the petitioner company is ,,not a non-banking financial company, as defined under Section a5-I(f) of the Act as it is neither a finalcial institution nor a company which has its principal business of receiving the deposits and lending in any manner. It is further submitted that the petitioner company is also not a financial institution. Therefore, neither the provisions of Chapter IIIB nor Chapter IIIC of the Act apply to the case of the petitioner company. Alternatively, it is contended that in case provisions of Chapter IIIB of the Act are held to be applir:able to the petitioner company, it is ultra ujres the rights of the petitioner company under Articles 14, t9(1Xg) and l9(6) of the Constitution of India. 4 6. In support of the aforesaid submissions' reliance has been placed on the following decisions: i. National tnsurance Company Limited v' Kirpal Singht ii. Reserve Bank of India v' Peerless General Finance and Investment Co' Ltd'2 iii. M.K. Ranganathan v. Government of Madras3 iv. The South Gujarat Roofrng Tiles Manufacturers Association v. The State of Gujarata v. State of Orissa v. State of A'P's vi. Philips Medical Systems (Cleveland) Inc' v' Indlau MRI Diagnostic and Research Limitedo Chintamanrao v. State of Madhya PradeshT Anuradha Bhasin v. Union of Indias R.M.D. Chamarbaugwalla v. Union of Indiag tx. vll vtll. | (2ot4l 5 SCC 1E9 2 (t987l. r SCC 424 3 (1955) 2-SCR 374 4 (197614 SCC 601 s (2006) 9 scc 591 6 (2008) 1O SCC 227 7 1950 SCC OnLine SC 34 a 1zo2ol 3 scc 637 9 AIR 1957 SC 628 5 7. On the other hand, learned counsel for respondent No.2 has submitted that the provisions of Chapter IIIB of the Act apply to financial institutiorr as well as ngn-banking financial institution. It is further submitted that the petitioner lSa non-banking financial company, which is covered by Section a5-I(f) of the Act. However, it is fairly submitted by learned counsel for respondent No.2 that the provisions of Chapter IIIC of the Act do not apply to the case of the petitioner company as the petitioner company is neither an individual nor an association of persons. It is further submitted that Chapter V of the Act provides for consequences of non-compliance of the provisions contained in Chapters IIIB and IIIC of the Act. It is further submitted that the petitioner company is complying with the provisions of Section as-l(c) of the Act as the petitioner company has filed income tax returns for the years 2O2O-27,2021-22 aod 2022-23, in which it is clearly indicated that the petitioner company is maintaining the reserve funds. It is further submitted that the provisions of the Act do not suffer from any infirmity 6 8. We have considered the rival submissions made on both sides and have perused the record 9. Before proceeding further, it is apposite to take note of the relevant provisions of the Act. The Reserve Bank of India is an Act to establish the National Bank for Financing Infrastructure and Development to support the development of long term non-recourse infrastructure financing in the country including development of bonds and derivatives, markets necessary for infrastructure financing and to carry on the business of financing infrastructure and in the matters acting incidental or ancillary thereto. Chapter IIIB of the Act contains the provisions relating to non- banking institutions receiving deposits and financial institutions. Section 45-I of the Act which deals with definition is relevant for the purposes of controversy involved in this petition. The relevant extract of Section 45-I of the Act reads as under: \"Section 45-I. Deflnitione.- In this Chapter, unless the context otherwise requires,- ,/ 7 (c) \"finiincial institution\" means any non-banking institution which r:arries on as its business or part of its business any of the lollowing activities, namely:-- (i) the flnancing, whether by way of making loans or advances or otherwise, of any activity other than its own; (ii) thc acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature; (iii) letting or delivering of any goods to a hirer under a hire- purchase agreement as defined in clause (c) of section 2 of the Hire-Purchase Act, 1972 126 of 19721; (iv) the carrying on of any class of insurance business; (v) managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto; (vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lunrp sum or otherwise, by way of subscriptions or by sale of units, or other instruments or in arry other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any orher way, to persons from whom tnonies are collected or to any other Person, but does not include any institution, which carries on as its principal business,- (a) agricultural operations; or (aa) industrial activity; or (b) the purchase, or sale of any goods (other than securities) or the providing of any services; or (c) the purchase, construction or sale of immovable property, so, however, that no portion of the income of the instltution 8 is derived from the financing of purchases, constructions or sales of immovable property by other persons; Explanation.-For the purposes of this clause, \"industrial activity\" means any activity specified in sub-clauses (i) to (xviii) of clause (c) of section 2 of the Industrial Development Bank of India Act, 1964 (18 of 1964); (f) \"non-banking financial company\" means- (i) a financia.t institution which is a company; (ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notifrcation in the Official Gazette, specify.\" 10. Section 45-IA of the Act deals with requirement of registration and net owned fund 11. The petitioner company iS a financial institution which includes any non-banking institution which carries on business of acquisition of shares, stocks, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature. Merely because the petitioner company does not deal with securities issued by a Government or local authority or other marketable 9 securities of a like nature, it will not cease to be a financial institution as dehned under Section 45-I(c) of the Act. The petitioner company admittedly deals with the acquisition of shares, stocks and bonds and therefore is covered under Section 45-l of the Act. The contention that the provisions of Chapter IIIB of the Act do not apply to the case of the petitioner company is therefore misconceived. 12. Admittedly, the provisions of Chapter IIIC of the Act do not apply to the case of the petitioner company as the petitioner company is neither the individual nor an association of individuals. Chapter V of the Act provides for consequences of non-compliance with provisions of Chapters IIIB and IIIC of the Act. The provisions of Chapter IIIB of the Act apply to the case of the petitioner iompany and therefore, in case petitioner company does not comply with the provisions contained in Chapter IIIB of the Act, the consequences prescribed in Chapter V of the Act will ensue. 13. It is trite law that a party invoking protection of Article 14 of the Constitution of India has to rnake an averment with details to sustain such a plea and has to 7 :: l0:: adduce material to establish the allegations made and the burden is on the party to plead and prove that its right under Article 14 of the Constitution of India has been infringed. (See State of Uttar Pradesh v. Kartar Singhto and Dantuluri Ram Raju v. State of Andhra Pradeshrr). It is equally well settled legal proposition that in the absence of any pleading, the challenge to the constitutional validity of a provision has to be rejected in limine (See State of Haryana v. State of Punjabr2). 74. In the background of the aforesaid well settled Iegal principles, we may advert to the pleadings made in the writ petition at paragraphs 14 and 15, in which the challenge has been made to the provisions of the Act. Paragraphs 14 and 15 of the writ petition read as follows: '14. It is submitted that placing restrictions on a company engaged in investments in shares, stocks, bonds, debentures and other marketab.le securities with its own money without accepting any deposits is arbitrary illegal and unconstitutional. lt is submitted that in so far as individuals, partnerships and associations of persons are concerned therc to nIR 196q sc t135 tt (1972) | scc 42t t'Z (m04) L2str:C673 ,/ ::ll:: rs no restr lction imposecl by Section 45_lA for carrying on business ol-acrluiring and tracling in sl-rares, st.rcks, bonds, debentrrres and other marketable securities. l{owever, pursuant to the amenclment Act unreasonable restric tion are being imposed on the petitioner company i.e, the pr:titioner company has been called upon to increase its net orvned fund to Rs. 25 lakhs and also to obtain a certificate under Section 45-lA for carrying on business of acquiring alrl trading in shares, stocks, bonds, clebentures ancl other marketable securities with its own money. It is submitted that t he RBI has through various letter referred to herein above called upon the petitioner company to increase its net own tund to Rs. 25 lakhs or wind up the company. The above actiorr of the respondents is arbitrary, illegal and violative of the nghts guaranteed under Article 1a and 19(1)(g) of the Constitrrtion of India. 15. It is submitted that the provisions of Chapter IIIB and IIIC of the RBI Act, 1934 have to be interpreted so as to exclude from within its purview companies engaged in the business of holding shares in its group/associate companies an<[ a.lso companies purchasing shares in other companies from out of its own funds as otherwise the said provisions of Chapter IIIB and IIIC imposing a restriction that the company shall own a minimum nct owned fund to carry on the business of holding shares in its group/associate companies and also compa:ties purchasing shares in other companies from out of its own funds is unreasonable, arbitrary, and violative potitioner,s rights guaranteed under Article l4 and f9(i)(gl of the Constitution of India.\" 15. Thus, it is evident that the petitioner company , has not laid any foundation to challenge the provisions of I tr: ii12.l Chapters IIIB, IIIC and V of the Act' The petitioner company has a fundamental right to carry on the business' but the same car be regulated in exercise of powers under Article l9(2) of the Constitution of lndia' 16. Therefore, we do not hnd anY force in the submission that the provisions of Chapters IIIB' IIIC and V of the Act are violative of guaranteed under Articles Constitution of India' t7. For the aforementioned reasons' we do not frnd any merit in the Petitron' The same fails and is herebY dismissed. No costs ' As a sequel, miscellaneous petitions' pending if any' stand closed. petitioner t4, 19(1)(g) companY's rights and 19(6) of the //TRUE COPY// SD/.A.V.S.PRASAD ASSISTANT HG}'IRAR SECTION OFFICER To '\" 1. On\" CC to SRI CHALLA GUNARANJAN, Ad-vI'99!e-[OIUC] i: il;6c i;SRi e.NnLlN KUMAR, sc FoR-RBlloPUCl 3. one cc to SRr GADllRAvEEi\"'kud R:'ov' s'ot-tctrbn GENERAL OF INDIA [OPUC] 4. Two CD CoPies PSK. GJP }{ HIGH COURT DATED:0411212023 ORDER WP.No.6469 of 2006 DISMISSING THE WRIT PETITION WITHOUT COSTS. 6 ..