Shakun Holdings Private Limited V. Union of India and Reserve Bank of India

CWP/1667/2020

AI Insights

M/s Shakun Holdings Private Limited, a company registered under the Companies Act, 1956, had its Certificate of Registration to operate as a Non-Banking Financial Institution (NBFI) cancelled by the RBI due to non-compliance with the NOF requirement. The petitioner contested the cancellation in the High Court, arguing that the RBI's calculation of NOF was incorrect and that they were entitled to an opportunity to rectify the deficiency. The court examined the definitions and calculations of NOF under the RBI Act and the relevant circulars, ultimately agreeing with the RBI's decision and dismissing the petition.

• Counselvise Citation: [2020] 140 COUNSELVISE.COM (IT) 800626 (HC-HIMACHAL_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 22-07-2020
• Assessment Year: misc
• Laws Referred To: Reserve Bank of India Act, 1934
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: SHASHI SHIRSHOO; NEERAJ SHARMA
• Assessee Lawyers: BIPIN NEGI; ABHISHEK KHIMTA
• Keywords: Certificate of Registration; Net Owned Fund; Non-Banking Financial Institution; Cancellation of CoR
• Section: 45 IA

Judgement Text

"IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA CWP No.1667 of 2020 Reserved on: 16th July, 2020 Decided on: 22nd July, 2020 ------------------------------------------------------------------------------------- M/s Shakun Holdings Private Limited .....Petitioner Versus Union of India and others .....Respondents ------------------------------------------------------------------------------------- Coram The Hon’ble Mr. Justice Tarlok Singh Chauhan, Judge The Hon’ble Ms. Justice Jyotsna Rewal Dua, Judge Whether approved for reporting?1 Yes For the Petitioner: Mr. Bipin C. Negi, Senior Advocate with Mr. Abhishek Khimta, Advocate. For the Respondents: Mr. Shashi Shirshoo, Central Govt. Counsel, for respondent No.1. Mr. Neeraj K. Sharma, Advocate, for respondents No.2 to 4. ---------------------------------------------------------------------------------- Jyotsna Rewal Dua, Judge The Reserve Bank of India has cancelled the Certificate of Registration earlier issued in favour of the petitioner to carry on the business of Non-Banking Financial Institution. The cancellation order has been 2 affirmed by the Appellate Authority, hence, instant writ petition has been preferred. 2. Relevant Facts:- 2(i). Petitioner is a Private Limited Company registered under the Companies Act, 1956. On 23.06.1997, it applied for Certificate of Registration (in short ‘CoR’) to the Reserve Bank of India (in short ‘RBI’) for carrying on the business of Non-Banking Financial Institution (‘NBFI’ in short). Accordingly, the CoR was issued in favour of the petitioner on 17.07.2002. 2(ii). The CoR dated 17.07.2002 was issued by respondents No.2 to 4-RBI under Section 45-IA of the RBI Act, 1934, subject to terms & conditions stipulated therein. Condition No.vi is extracted hereinafter:- “(vi) Your company shall comply with the provisions of the Reserve Bank of India Act, 1934, as applicable to a non-banking financial company, and abide by all the directions, guidelines, instructions or advices of the Reserve Bank of India, as may be in force from time to time.” The CoR was for carrying on “the business of non- banking financial institution without accepting public deposits subject to the conditions given on the reverse.” Conditions No.2 and 3 mentioned on the reverse of certificate were as under:- 3 “2. The Certificate of Registration is issued to your company subject to your continued adherence to all the conditions and parameters stipulated under Chapter III B of the Reserve Bank of India Act, 1934. 3. Your company shall be required to comply with all the requirements of the Directions, guidelines/instructions, etc. Issued by the Bank and as applicable to it.” 2(iii). The quantum of Net Owned Fund (in short ‘NOF’) required by Non-Banking Financial Company (in short ‘NBFC’) for registration as NBFI under Section 45-IA of the RBI Act is as under:- “[45-IA. Requirement of registration and net owned fund.— (1) Notwithstanding anything contained in this Chapter or in any other law for the time being in force, no non-banking financial company shall commence or carry on the business of a non- banking financial institution without- (a) obtaining a certificate of registration issued under this Chapter; and (b) having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the Bank may, by notification in the Official Gazette, specify. (2) Every non-banking financial company shall make an application for registration to the Bank in such form as the Bank may specify. Provided that a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 shall make an application for registration to the Bank before the expiry of six months from such commencement and notwithstanding anything contained in sub-section (1) may continue to carry on the business of a non-banking financial institution until a certificate of registration is issued to it or rejection of application for registration is communicated to it. (3) Notwithstanding anything contained in sub-section (1), a non- banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 and having a net owned fund of less than twenty-five lakh rupees may, for the purpose of enabling such company to fulfil the requirement of the net owned fund, continue to carry on the business of a non- banking financial institution- (i) for a period of three years from such commencement; or 4 (ii) for such further period as the Bank may, after recording the reasons in writing for so doing, extend, subject to the condition that such company shall, within three months of fulfilling the requirement of the net owned fund, inform the Bank about such fulfilment. Provided that the period allowed to continue business under this sub-section shall in no case exceed six years in the aggregate. ................................................” Thus, for registration as NBFI, minimum NOF of Twenty-Five Lakh Rupees, not exceeding Two Hundred Lakh Rupees, as may be specified by the Bank in the Official Gazette, was required by NBFC. However, an NBFC in existence on the commencement of RBI Amendment Act, 1997 and having an NOF of less than Rs.25 Lakh to fulfil the requirement of NOF could carry on the business of NBFI for a period of three years from such commencement or upto a maximum period of six years as the Bank may allow after recording reasons. Meaning thereby that all NBFCs in existence in 1997 and carrying on the business of NBFIs were required to attain the limit of Rs.25-200 Lakhs as NOF notified by the Bank in the Official Gazette, within 3-6 years. Possession of the NOF notified by the Bank was a condition precedent for new registration as NBFI after RBI Amendment Act, 1997. 2(iv). On 27.03.2015, RBI issued a notification specifying Rs.200 Lakhs as NOF required for an NBFC to 5 commence or carry on business of NBFI. This notification further provided that the NBFCs holding CoR, issued by the RBI and having NOF of less than Rs.200 Lakhs can continue to carry on the business of Non-Banking Financial Institution, provided such company achieves NOF of Rs.100 Lakhs before 01.04.2016 and Rs.200 Lakhs before 01.04.2017. Relevant part of the notification is extracted hereinafter:- “In exercise of the powers under clause (b) of sub-section (1) of section 45-IA of the Reserve Bank of India Act, 1934 (Act 2 of 1934) and on the powers enabling it in that behalf the Reserve Bank of India, in supersession of Notification No. 132/CGM(VSNM)-99, dated April 20,1999, hereby specifies two hundred lakhs rupees as the net owned fund required for a non- banking financial company to commence or carry on the business of the non-banking financial institution. Provided that a non-banking financial company holding a certificate of registration issued by the Reserve Bank of India and having net owned fund of less than two hundred lakhs of rupees, may continue to carry on the business of non-banking financial institution, if such company achieves net owned fund of,- i. one hundred lakhs of rupees before April 1,2016; and ii. two hundred lakhs of rupees before April 1,2017. 2(v). RBI issued a letter on 30.11.2018 to the petitioner-NBFC stating that the petitioner had reported its NOF as Rs.201.50 Lakhs for the year 2016-2017 after adding its investment of Rs.17 Lakhs in equities and Rs.54.41 Lakhs advanced/loaned to its Group Companies. The NOF so calculated by the petitioner in its Balance 6 Sheet for the year ending on 31.03.2017 was not correct. The investment of Rs.17 Lakhs in equities and Rs.54.41 Lakhs (totalling Rs.71.41 Lakhs) after allowance of 10% of owned fund (Rs.20.16 Lakhs), i.e. 71.41 – 20.16 Lakhs = Rs.51.25 Lakhs, was required to be deducted from the owned funds in calculating the NOF. Accordingly, RBI determined the NOF of the petitioner at Rs.150.33 Lakhs in following manner (Calculations part of RBI Letter dated 30.11.2018):- “Calculation of Net Owned Fund 2016-17 NET OWNED FUND ITEMS Amount in Rs. Lakh Paid up Capital 200.00 Reserve & Surplus 1.58 201.58 Less Deferred Revenue Expenditure/Deferred Tax Assets (Net Other intangible Assets ) 0.00 Total (Owned Fund) 201.58 Investment in shares of companies in the Same group/Subsidiaries/WoS/JVs/Others Other NBI Cs etc. 17.00 Book value of debentures bonds outstanding Loans and advances bills purchased and discounted (including H.P. and lease finance) made to and deposits with companies in the same group/Subsidiaries/WoS/JVs/Other NBFCs etc. 54.41 71.41 Amount in item 19 in excess of 10% of Owned Fund 51.25 Net Owned Fund (Tier-I) 150.33” 2(vi). In its response to the above referred letter of RBI, petitioner defended its calculation of NOF in the 7 balance sheet for the year 2016-2017 by placing reliance upon RBI master circular no REF.DBS.FID.NO.C-7/ 01.02.00/2003-04, re-issued with amendments in 2012 DBOD.FID.FIC.No.4/01.02.00/2012-13, where following definition of NOF was given in paragraph No.3.4:- “3.4 Net Owned Funds in respect of NBFCs Net owned funds will consist of paid up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets. From the aggregate of items will be deducted accumulated loss balance and book value of intangible assets, if any, to arrive at owned funds. Investments in shares of other NBFCs and in shares, debentures of subsidiaries and group companies in excess of ten percent of the owned fund mentioned above will be deducted to arrive at the Net Owned Funds. The NOF should be computed on the basis of last audited Balance Sheet and any capital raised after the Balance Sheet date should not be accounted for while computing NOF.” The reply of the petitioner was that in terms of provisions of circular (extracted above), loans and advances amounting to Rs.54.41 Lakhs advanced by the petitioner to its Group Companies were not to be deducted from its owned funds while calculating the NOF of the petitioner. Therefore, it contended that Rs.150.33 Lakhs plus Rs.54.41 Lakhs (Loans and Advanced amount)=Rs.204.74 Lakhs, has to be treated as NOF of the petitioner. This amount is over and above the limit of Rs.200 Lakhs prescribed by RBI for carrying out the business of NBFI. 8 2(vii). Not satisfied with petitioner’s reply, the RBI issued a show cause notice to it under Section 45-IA(6) and 58 B of the RBI Act for cancellation of its CoR on the ground that the petitioner did not have NOF of Rs.200 Lakhs as on 31.03.2017, therefore, it did not meet the requirement for carrying on the business of NBFI and was acting in violation of the directions of RBI issued in exercise of its powers under Chapter III B of the RBI Act. Petitioner in its reply dated 15.01.2019, reiterated its stand taken in letter dated 04.12.2018. 2(viii). Observing that reply of the petitioner-company was unsatisfactory with further observation that the petitioner had violated the statutory provisions of Chapter III B of the Act, RBI cancelled the CoR of the petitioner under Sections 45-IA(6) and 58B of the RBI Act on 22.01.2019. Appeal preferred by the petitioner under Section 45-IA(7) of the RBI Act against the order dated 22.01.2019, was dismissed by the Appellate Authority vide order dated 14.02.2020. Aggrieved, instant writ petition has been preferred. 9 3. Contentions:- Mr. B.C. Negi, learned Senior Counsel for the petitioner has canvassed petitioner’s case under following two main points:- (A). RBI had wrongly calculated and thereby arrived at incorrect figure of NOF of the petitioner. The loan and amount advanced by the petitioner to its Group Companies could not be deducted from its owned fund. As on 31.03.2017, the NOF of the petitioner was not less than Rs.200 Lakhs, which was the minimum limit prescribed by RBI for carrying on the business of NBFI, therefore, order dated 22.01.2019, cancelling the petitioner’s CoR, as affirmed by the Appellate Authority on 14.02.2020 was bad in eyes of law. (B). Even if for the sake of argument, petitioner’s NOF is assumed to be less than the minimum prescribed limit of Rs.200 Lakh, then also, the proviso after Section 45-IA(6)(iv) of RBI Act provides for giving an opportunity to the petitioner for complying the provisions/conditions on such terms as may be specified by the Bank. This opportunity has been 10 denied to the petitioner. On this ground also, the impugned order deserves to be quashed and set aside. 4. We may discuss hereinafter the case of the petitioner under the above two points while noticing rival contentions of the parties:- 4(i). Wrong Calculations:- 4(i)(a). Explanation I to Section 45-IA falling under Chapter III B of the RBI Act, defines NOF as under:- “(I) “net owned fund” means- (a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance-sheet of the company after deducting there from— (i) accumulated balance of loss; (ii) deferred revenue expenditure; and (iii) other intangible assets; and (b) further reduced by the amounts representing— (1) investments of such company in shares of— (i) its subsidiaries; (ii) companies in the same group; (iii) all other non-banking financial companies; and (2) the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with,- (i) subsidiaries of such company; and (ii) companies in the same group, to the extent such amount exceeds ten per cent, of (a) above.” 4(i)(b). In terms of the above definition and more specifically in accordance with Clause (b) thereof, inter alia, the investment of the company in the shares of its subsidiaries, group companies, in other NBFCs as well as book value of debentures, bonds, outstanding loans and 11 advances made by the company to its group/subsidiary companies, to the extent such amount exceeds 10% of Owned Fund, are to be deducted from the Owned Funds while calculating its NOF. In the instant case, petitioner invested Rs.17 Lakh and advanced loan of Rs.54.41 Lakhs to its group/ subsidiary companies. Therefore, under the above extracted definition of NOF, these two amounts to the extent exceeding 10% of the Owned Fund as disclosed in the Balance Sheet of the company were required to be deducted and were accordingly deducted by the RBI for determining NOF of the petitioner. After deducting Rs.20.16 Lakhs (10% of Owned Fund of Rs.201.58 Lakhs) from investment of Rs.17 Lakhs in equities and Rs.54.41 Lakhs (totalling Rs.71.41 Lakhs), Rs.150.33 Lakhs (201.58-51.25) was the figure arrived at by the RBI as NOF of the petitioner. Since this figure was below the minimum prescribed limit of NOF required for carrying on the business of Non-Banking Financial Institution, therefore petitioner’s CoR was cancelled. 4(i)(c). Learned Senior Counsel for the petitioner contended that advances and loan amount of Rs.54.41 12 lakhs advanced by the petitioner to its group/subsidiary companies could not be deducted from its owned fund while calculating its NOF. Learned Senior Counsel makes this submission on the strength of the Master Circular issued by the RBI on 01.07.2015. In Clause 3.4 whereof, Net Owned Fund in respect of NBFCs was described as under:- “3.4 Net Owned Funds in respect of NBFCs Net owned funds will consist of paid up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets. From the aggregate of items will be deducted accumulated loss balance and book value of intangible assets, if any, to arrive at owned funds. Investments in shares of other NBFCs and in shares, debentures of subsidiaries and group companies in excess of ten percent of the owned fund mentioned above will be deducted to arrive at the Net Owned Funds. The NOF should be computed on the basis of last audited Balance Sheet and any capital raised after the Balance Sheet date should not be accounted for while computing NOF.” In the description of NOF given in the Master Circular dated 01.07.2015, there is no specific reference to advances and loans advanced by NBFC to its group/ subsidiary companies. Learned Senior Counsel argued that Clause 3.4 of the Circular though, inter alia, provides for deduction of investment made by NBFC in favour of its group/subsidiary companies while calculating its NOF, however, it does not provide for deduction of loans 13 advanced by the NBFC to its group/subsidiary companies from its owned fund to calculate NOF. Relying upon this circular, learned Senior Counsel submitted that Rs.54.41 Lakhs advanced/loaned by the petitioner to its group companies could not be deducted from its Owned Fund while calculating its NOF. Therefore, Rs.150.33+54.41 Lakhs will bring the NOF of the petitioner at Rs.204.74 Lakhs, i.e. within the limit set by the RBI for grant of registration to carry on the business of NBFI. Accordingly, he prayed for quashing of the impugned cancellation order. 4(i)(d). We may observe that in the writ petition, petitioner has not made any effort to justify its calculation of NOF given in its Balance Sheet for the year 2016-17. This contention raised during hearing of the writ petition does not find mention in the body of the writ petition, therefore, has not been responded by RBI in its reply filed to the writ petition. However, in its letter dated 04.12.2018 submitted in response to Bank’s letter dated 30.11.2018 and in its reply dated 15.01.2019 to the show cause notice dated 03.01.2019, the petitioner had specifically relied upon the above extracted circular to justify its calculations of NOF made in the Balance Sheet for the year ending on 14 31.03.2017. In its appeal preferred under Section 45-IA(7) of the RBI Act, the petitioner again defended its calculations in arriving at NOF on the strength of Master Circular of RBI (already extracted above). 4(i)(e). Even though the writ petition does not contain any pleadings seeking applicability of circulars in question over the provisions of the RBI Act in calculating NOF, yet since this question was raised by it before the authorities, therefore, we have gone through the provisions of the Master Circular relied upon by the petitioner for justifying its calculations and determination of NOF in its Balance Sheet for the year 2016-17. The heading of the circular is ‘Master Circular-Exposure Norms for Financial Institutions’. Further under its heading ‘Application’, the Circular states as under:- “Application To all the all India Financial Institutions viz. Exim Bank, NABARD, NHB and SIDBI”. A bare perusal of the circular relied upon by the petitioner makes it evident that NOF described therein only pertains to Exposure norms to be followed by All India Financial Institutions namely Exim Bank, NABARD, NHB and SIDBI. NOF described therein cannot be read for 15 calculating NOF of petitioner NBFC. The NOF of petitioner has to be calculated only in terms of Section 45-IA of RBI Act. Petitioner has not disputed investment of Rs.17 Lakhs and loans of Rs.54.41 Lakhs advanced by it to its Group Companies. Therefore, these amounts in excess of 10% of Owned Fund have been justifiably deducted by RBI while determining Rs.150.33 Lakhs as NOF of the petitioner. In view of the above discussion, there is no need to refer to the judgments cited by learned Senior Counsel for the petitioner, viz. Peerless General Finance and Investment Co. Limited and another Versus Reserve Bank of India, (1992) 2 SCC 343; Sudhir Shantilal Mehta Versus Central Bureau of Investigation, (2009) 8 SCC 1; and Southern Technologies Limited Versus Joint Commissioner of Income Tax, Coimbatore, (2010) 2 SCC 548, seeking enforcement of the circular over and above the provisions of RBI Act. Point is answered accordingly. 4(ii). Learned Senior Counsel for the petitioner next contended that even if the NOF of the petitioner was determined as falling short of the limit prescribed by the RBI, then, also under the following Section 45-IA(6) and 16 proviso coming thereafter in the RBI Act, it should have been granted an opportunity to make good the deficiency:- “(6) The Bank may cancel a certificate of registration granted to a non- banking financial company under this section if such company- (i) ceases to carry on the business of a non-banking financial institution in India; or (ii) has failed to comply with any condition subject to which the certificate of registration had been issued to it; or (iii) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of sub-section (4); or (iv) fails- (a) to comply with any direction issued by the Bank under the provisions of this Chapter; or (b) to maintain accounts in accordance with the requirements of any law or any direction or order issued by the Bank under the provisions of this Chapter; or (c) to submit or offer for inspection its books of account and other relevant documents when so demanded by an inspecting authority of the Bank; or (v) has been prohibited from accepting deposit by an order made by the Bank under the provisions of this Chapter and such order has been in force for a period of not less than three months: Provided that before cancelling a certificate of registration on the ground that the non-banking financial company has failed to comply with the provisions of clause (ii) or has failed to fulfil any of the conditions referred to in clause (iii) the Bank, unless it is of the opinion that the delay in cancelling the certificate of registration shall be prejudicial to public interest or the interest of the depositors or the non-banking financial company, shall given an opportunity to such company on such terms as the Bank may specify for taking necessary steps to comply with such provision or fulfilment of such condition: Provided further that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard.” 4(ii)(a). Learned Senior Counsel argued that CoR of the petitioner was cancelled since the petitioner failed to comply with the condition subject to which the CoR was issued to it. As such, CoR of the petitioner has to be presumed to have been cancelled under Section 45-IA(6)(ii) 17 of the RBI Act. Cancellation of CoR under Section 45- IA(6)(ii) attracts the proviso to the section, which in turn provides for grant of an opportunity to the petitioner for taking necessary steps for complying with provisions and fulfilling the required conditions. Rebutting this submission, learned counsel for the respondent-RBI contended that CoR of the petitioner was not cancelled under the provisions of Section 45-IA(6)(ii), but by taking recourse to Section 45-IA(6)(iv). The proviso relied by the petitioner is not applicable in case of cancellation of CoR under Section 45-IA(6)(iv). Therefore, no opportunity can be granted to the petitioner to make good the non-compliance. 4(ii)(b). In its notification dated 27.03.2015, the RBI had specified Rs.200 Lakhs as minimum NOF required by an NBFC to commence or carry on business of NBFI. The then existing NBFCs holding CoR for carrying on business of NBFI were given timeline upto 01.04.2016 for achieving NOF of Rs.100 Lakhs and upto 01.04.2017 for attaining NOF of Rs.200 Lakhs. Petitioner NBFC did not achieve the minimum prescribed limit of NOF within the stipulated period. It failed to comply with the directions issued by the 18 Bank under the provisions of Chapter III B of RBI Act. Therefore, no opportunity for complying with the directions could be granted to it as the CoR was cancelled by taking recourse to Section 45-IA(6)(iv). Reliance by petitioner upon Section 45-IA(6)(ii) seeking further opportunity is misplaced. Even otherwise, inadequate NOF falling short of prescribed limit, as calculated in undisputed Balance Sheet of the petitioner NBFC for the period ending on 31.03.2017 cannot be made adequate or brought within the prescribed parameters three years later. The clock in such matters cannot be turned back. Otherwise also, sufficient opportunity had already been granted by the Bank in the notification dated 27.03.2015 to achieve prescribed NOF, i.e. to comply with the directions. 5. What comes out from above discussion is that:- (a). Master Circular relied upon by the petitioner for calculating its NOF is not applicable to it. NOF of the petitioner for the year ending on 31.03.2017 (2016-17) is required to be and justifiably determined by RBI in accordance with Explanation I of Section 45-IA of the RBI Act. (b). Since NOF of the petitioner-NBFC determined under the applicable provisions of RBI Act fell short of minimum limit of Rs.200 Lakhs 19 prescribed by RBI for carrying on the business of NBFI, therefore, its CoR was cancelled by RBI taking recourse to Section 45-IA(6)(iv) of the Act. (c). The CoR of the petitioner was cancelled by RBI under the provisions of Section 45-IA(6)(iv) of the RBI Act, which does not entail providing any opportunity for complying with the provisions/ conditions violated by the petitioner. Otherwise also, sufficient opportunity had already been granted by the RBI in the notification dated 27.03.2015 to achieve prescribed NOF, i.e. to comply with its directions. In any case, shortfall in NOF in the Balance Sheet of the petitioner for the year 2016-17 cannot be rectified three years later in 2020. In view of the above, we do not find any merit in the instant writ petition and the same is accordingly dismissed alongwith pending miscellaneous application(s), if any. (Tarlok Singh Chauhan) Judge (Jyotsna Rewal Dua) Judge July 22, 2020 Mukesh "