DHARANI SUGARS AND CHEMICALS LTD. v. UNION OF INDIA & ORS.
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- Supreme Court of India
- Decided
- Bench
- R. F. NARIMAN and VINEET SARAN
- Citation
- [2019] 6 S.C.R. 307
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Headnote — Supreme Court Reports (editorial summary, not part of the judgment)
(Transferred Case (Civil) No.66 of 2018) In B (Transfer Petition (Civil) No.1399 of 2018) C Banking Regulation Act, 1949 – ss.35AA and 35AB – Validity of – Petitioners contended that the Banking Regulation (Amendment) Act, 2017, which introduced ss.35AA and 35AB are unconstitutional on two grounds: (i) that the sections introduced are manifestly arbitrary; and (ii) that they suffer from absence of guidelines –
Held
The Banking Regulation (Amendment) Act, 2017 brought these amendments which confer regulatory powers upon the RBI to carry out its functions under the Banking Regulation Act and are not different in quality from any of the sections which have already conferred such power – S.21 makes it clear that the RBI may control advances made by banking companies in public interest, and in so doing, may not only lay down policy but may also give directions to banking companies either generally or in particular – Similarly, u/ s.35A, vast powers are given to issue necessary directions to banking companies in public interest – Therefore, ss.35AA and 35AB which give the RBI certain regulatory powers cannot be said to be manifestly arbitrary – Insofar, guidelines by which the power given to the RBI is to be exercised are concerned, there are catena of judgments that such guidance can be obtained not only from the statement of objects and reasons and preamble to the Act but also from its provisions – There are other regulatory ss.25, 29, 30 and 31, all give guidance as to how the RBI is to exercise these powers under the newly added provisions – Consequently, plea of constitutional validity failed – G Banking Regulation (Amendment) Act, 2017. Banking Regulation Act, 1949 – s.35A, 35AA and 35AB – Reserve Bank of India Act, 1934 – s.45L – Reserve Bank of India issued a circular on 12.02.2018, by which RBI promulgated a revised H 307
A framework for resolution of stressed assets – According to RBI, the said circular attempted to tell banks that insofar as huge debts over INR 2000 crore are concerned, they will be given a reasonable period of six months within which to either resolve stress assests or otherwise, if they cannot do so, would only then have to move under the insolvency and Bankruptcy Code, 2016 – It was also contended that the said circular traced its power from sections 21, 35A, 35AA and 35AB of the Banking Regulation Act and s.45L of the Reserve Bank of India Act – Petitioner contended that impugned RBI Circular dated 12.02.2018 was ultra vires the provisions of the Banking Regulation Act and the RBI Act –
Held
Stressed assets can be resolved either through the Insolvency Code or otherwise – When resolution through the Code is to be effected, the specific power granted by s.35AA can alone be availed by the RBI – Prior to the enactment of s.35AA, it may have been possible to say that when it comes to the RBI issuing directions to a banking company to initiate insolvency resolution process under the Insolvency Code, it could have been issued such directions u/ss. 21 and 35A – But after s.35AA, it may do so only within the four corners of s.35AA – And power u/ s.35AB r/w. 35A is to be exercised separately from the power conferred by s.35AA – Now, the directions that can be issued u/s. 35AA can only be in respect of specific defaults by specific debtors E – This was also the understanding of the Central Government when it issued a notification dated 05.05.2017, which authorised the RBI to issue such directions only in respect of “a default” under the insolvency Code – Thus, any directions which are in respect of debtors generally, would be ultra vires s.35AA – In the instant case, impugned circular dated 12.02.2018 stated that as one of its sources, the power contained in s.45L of the RBI Act insofar as non-banking financial institution are concerned – However, there is nothing to show that the provisions of s.45L(3) were satisfied – Further, impugned Circular dated 12.02.2018 applied to banking and non- banking institutions alike, therefore, they are inseparable insofar as the application of the impugned circular is concerned – It is very difficult to segregate the non-banking financial institutions from banks so as to make the circular applicable to them even if it is ultra vires insofar as banks are concerned – For these reasons also, the impugned circular declared as ultra vires as a whole and declared to be of no effect in law – Insolvency and Bankruptcy Code, 2016. H
Catchwords
Banking Regulation Act, 1949 – ss.35A, 35AA and 35AB – A Scheme of –
Held
When it comes to issuing directions to initiate the insolvency resolution process under the Insolvency and Bankruptcy Code, 2016, s.35AA is the only source of power – When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving this problem under the Insolvency B Code, such power falls within s.35A r/w. s.35AB – This also becomes clear from the fact that s.35AB(2) enables the RBI to specify one or more authorities or committees to advise any banking company on resolution of stressed assets – This advice is obviously de hors the Insolvency Code, as once an application is made under the Insolvency Code, such advice would be wholly redundant, as the C Insolvency Code provisions would then take over and have to be followed – Insolvency and Bankruptcy Code, 2016 Disposing of the Transferred cases and Petitions, the Court HELD: CONSTITUTIONAL VALIDITY D
Reporter's headnote (continued) and case details
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1. The petitioners have argued that the Banking Regulation (Amendment) Ordinance, 2017 and the Banking Regulation (Amendment) Act, 2017 are unconstitutional on two grounds; (i) that the Sections i.e. 35AA and 35AB introduced are manifestly arbitrary; and (ii) that they suffer from absence of guidelines. [Para 16][340-H; 341-A] E
2. None of the petitioners have been able to point out as to how either of these provisions is manifestly arbitrary. They are not excessive in any way nor do they suffer from want of any guiding principle. As a matter of fact, these amendments are in the nature of amendments which confer regulatory powers upon the RBI to carry out its functions under the Banking Regulation Act, 1949, and are not different in quality from any of the Sections which have already conferred such power. Thus, Section 21 makes it clear that the RBI may control advances made by banking companies in public interest, and in so doing, may not only lay down policy but may also give directions to banking companies either generally or in particular. Similarly, under Section 35A, vast powers are given to issue necessary directions to banking companies in public interest, in the interest of banking policy, to prevent the affairs of any banking company being conducted in a H
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A manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the banking company, or to secure the proper management of any banking company. It is clear, therefore, that these provisions which give the RBI certain regulatory powers cannot be said to be manifestly arbitrary. [Para 16][342-C-F] B
3. When it comes to lack of any guidelines by which the power given to the RBI is to be exercised, it is clear from a catena of judgments that such guidance can be obtained not only from the Statement of Objects and Reasons and the Preamble to the Act, but also from its provisions. Sections 14A, 17, 18, and C 20 impose various restrictions on a banking company. Thus, it is prohibited from having a floating charge on assets; it has to maintain a reserve fund, and a cash reserve; and it cannot grant loans and advances on the security of its own shares, or on behalf of its directors, or any firm in which its directors are interested etc. A banking company is obligated to hold a license that is issued by the RBI, by which the RBI can impose such conditions as it thinks fit under Section 22 of the Act. Section 22(3), in particular, gives guidance as to how the banking company will run its business. These and other regulatory sections such as Sections 25, 29, 30, and 31, all give guidance as to how the RBI is to exercise these powers under the newly added provisions. Therefore, RBI rightly stated that there was no dearth of guidance for the RBI to exercise the powers delegated to it by these provisions. Consequently, the plea of constitutional validity fails. [Para 17][342-G-H; 347-H; 348-A-C] F ULTRA VIRES
4. Section 35AA makes it clear that the Central Govern- ment may, by order, authorise the RBI to issue directions to any banking company or banking companies when it comes to initiat- ing the insolvency resolution process under the provisions of G the Insolvency Code. The first thing to be noted is that without such authorisation, the RBI would have no such power. There are many sections in the Banking Regulation Act which enumer- ate the powers of the Central Government vis-a-vis the powers of the RBI. [Para 29][360-D-E] H
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5. A conspectus of all these provisions ss.36AE, 36AF, A 45Y, 52, 53 and 55A shows that the Banking Regulation Act speci- fies that the Central Government is either to exercise powers along with the RBI or by itself. The role assigned, therefore, by Section 35AA, when it comes to initiating the insolvency resolu- tion process under the Insolvency Code, is thus, important. B Without authorisation of the Central Government, obviously, no such directions can be issued. [Para 29][363-F-G]
6. The corollary of this is that prior to the enactment of Section 35AA, it may have been possible to say that when it comes to the RBI issuing directions to a banking company to initiate insolvency resolution process under the Insolvency Code, it could have issued such directions under Sections 21 and 35A. But after Section 35AA, it may do so only within the four corners of Section 35AA. [Para 30][363-H; 364-A]
7. The matter can be looked at from a slightly different angle. If a statute confers power to do a particular act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any manner other than that which has been prescribed. Following this principle, therefore, it is clear that the RBI can only direct banking institu- tions to move under the Insolvency and Bankruptcy Code, 2016 E if two conditions precedent are specified, namely, (i) that there is a Central Government authorisation to do so; and (ii) that it should be in respect of specific defaults. The Section, therefore, by nec- essary implication, prohibits this power from being exercised in any manner other than the manner set out in Section 35AA. [Para 31][364-B-G; H; 365-A] F
8. It is significant that the power to issue directions given by Section 35AB is without prejudice only to the provisions of Section 35A, i.e., it has to be read in conjunction with Section 35A. What is of even greater significance is that Section 35AB is not without prejudice to the provisions contained in Section 35AA. G This being so, it is clear that the power under Section 35AB, read with Section 35A, is to be exercised separately from the power conferred by Section 35AA. [Para 36][368-C-D]
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A 9. The Press Note dated 05.05.2017, explained the new Sections 35AA and 35AB as the grant of two distinct and separate powers. Section 35AA has been inserted “to resolve specific stressed assets by initiating insolvency resolution process where required”. On the other hand, Section 35AB has been enacted so that the “RBI has also been empowered to issue other B directions for resolution……” It is significant that Section 35AA is enacted exactly as it is in the Ordinance. So is Section 35AB, except for a minor addition in sub-section (1), which adds the words “any banking company or”. Indeed, even the Statement of Objects and Reasons introducing the same Sections by way of an C Amendment Act makes it clear that the powers conferred for resolution of stressed assets, either by invoking the Insolvency Code or by other means, are separate and independent powers, as set out in paragraphs 3(a) and 3(b) of the said Statement of Objects and Reasons. Therefore, the scheme of Sections 35A, 35AA, and 35AB is as follows: (a) When it comes to issuing D directions to initiate the insolvency resolution process under the Insolvency Code, Section 35AA is the only source of power; (b) When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving this problem under the Insolvency Code, such power falls within Section 35A E read with Section 35AB. This also becomes clear from the fact that Section 35AB(2) enables the RBI to specify one or more authorities or committees to advise any banking company on resolution of stressed assets. This advice is obviously de hors the Insolvency Code, as once an application is made under the Insolvency Code, such advice would be wholly redundant, as the F Insolvency Code provisions would then take over and have to be followed. [Para 38][369-C-H; 370-A] 10 Stressed assets can be resolved either through the Insolvency Code or otherwise. When resolution through the Code is to be effected, the specific power granted by Section 35AA can G alone be availed by the RBI. When resolution de hors the Code is to be effected, the general powers under Sections 35A and 35AB are to be used. Any other interpretation would make Section 35AA otiose. In fact, RBI’s argument that the RBI can issue directions to a banking company in respect of initiating H
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insolvency resolution process under the Insolvency Code under A Sections 21, 35A, and 35AB of the Banking Regulation Act, would obviate the necessity of a Central Government authorisation to do so. Absent the Central Government authorisation under Section 35AA, it is clear that the RBI would have no such power. [Para 40][371-B-C] B
11. Having grounded the power to issue directions to banking companies so far as the Insolvency Code is concerned, in Section 35AA, what is important to note is that the Section enables the Central Government to authorise the RBI to issue such directions in respect of “a default”. This is clear also from the Press Note dated 05.05.2017, which introduced the Ordinance C which specifically referred to resolution of “specific” stressed assets which will empower the RBI to intervene in “specific” cases of resolution of NPAs. The Statement of Objects and Reasons for introducing Section 35AA also emphasises that directions are in respect of “a default”. Thus, it is clear that directions that can be issued under Section 35AA can only be in respect of specific defaults by specific debtors. This is also the understanding of the Central Government when it issued the notification dated 05.05.2017, which authorised the RBI to issue such directions only in respect of “a default” under the Code. Thus, any directions which are in respect of debtors generally, would be ultra vires Section 35AA. [Paras 41, 42][371-D-E; 372-F-H]
12. The impugned circular states as one of its sources, the power contained in Section 45L of the Reserve Bank of India Act, 1934 insofar as non-banking financial institutions are concerned. However, there is nothing to show that the provisions of Section 45L(3) have been satisfied in issuing the impugned circular. The impugned circular nowhere says that the RBI has had due regard to the conditions in which and the objects for which such institutions have been established, their statutory responsibilities, and the effect the business of such financial institutions is likely to have on trends in the money and capital markets. Further, it is clear that the impugned circular applies to banking and non-banking institutions alike, as banking and non- banking institutions are often in a joint lenders’ forum which jointly lend sums of money to debtors. Such non-banking financial H
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A institutions are, therefore, inseparable from banking institutions insofar as the application of the impugned circular is concerned. It is very difficult to segregate the non-banking financial institutions from banks so as to make the circular applicable to them even if it is ultra vires insofar as banks are concerned. For these reasons also, the impugned circular will have to be declared B as ultra vires as a whole, and be declared to be of no effect in law. Consequently, all actions taken under the said circular, including actions by which the Insolvency Code has been triggered must fall along with the said circular. As a result, all cases in which debtors have been proceeded against by financial creditors under C Section 7 of the Insolvency Code, only because of the operation of the impugned circular will be proceedings which, being faulted at the very inception, are declared to be non-est. [Para 45] [374-C; 376-E-H; 377-A] Harishankar Bagla v. State of M.P. [1955] 1 SCR 380; D Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. The Assistant Commissioner of Sales Tax and Ors.; Senior Electric Inspector v. Laxminarayan Chopra [1962] 3 SCR 146 ; State of U.P. v. Singhara Singh [1964] 4 SCR 485; Utkal Contractors & Joinery (P) Ltd. v. State of Orissa (1987) 3 SCC 279 : [1987] 3 SCR 317; E J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of U.P. [1961] 3 SCR 185 – relied on. Indian Banks’ Association v. Devkala Consultancy Service (2004) 11 SCC 1 : [2004] 1 Suppl. SCR 225 – held inapplicable F Manohar Lal Sharma v. Principal Secretary and Ors. (2014) 9 SCC 516:[2014] 8 SCR 446; Independent Power Producers Association of India v. Union of India and Ors. (Writ - C No. 18170 of 2018 at the Allahabad High Court); Swiss Ribbons Pvt. Ltd. and Anr. v. Union G of India and Ors. 2019 (2) SCALE 5; Shayara Bano v. Union of India (2017) 9 SCC 1: [2017] 7 SCR 797; Central Bank of India v. Ravindra, (2002) 1 SCC 367: [2001] 4 Suppl. SCR 323 ; Sudhir Shantilal Mehta v. Central Bureau of Investigation (2009) 8 SCC 1:[2009] H 12 SCR 682 ; ICICI Bank Ltd. v. APS Star Industries
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Ltd. (2010) 10 SCC 1: [2010] 12 SCR 644; Bharat A Sanchar Nigam Ltd. v. Telecom Regulatory Authority of India and Ors. (2014) 3 SCC 222 : [2013] 12 SCR 999; Union of India and Anr. v. Pfizer Ltd. and Ors. (2018) 2 SCC 39 : [2017] 12 SCR 179 ; Eera (through Dr. Manjula Krippendorf) v. State (NCT of Delhi) and B Anr. (2017) 15 SCC 133 : [2017] 7 SCR 924 ; Arcelor Mittal India (P) Ltd. v. Satish Kumar Gupta (2019) 2 SCC 1; Asian Resurfacing of Road Agency (P) Ltd. v. Central Bureau of Investigation (2018) 16 SCC 299 : [2018] 2 SCR 1045 ; Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674 ; State (NCT C of Delhi) v. Brijesh Singh (2017) 10 SCC 779: [2017] 11 SCR 899; Commercial Tax Officer, Rajasthan v. Binani Cements Ltd. and Anr., (2014) 8 SCC 319: [2014] 3 SCR 1; Maru Ram and Ors. v. Union of India and Ors. (1981) 1 SCC 107:[1981] 1 SCR 1196 D – referred to. Royal College of Nursing of the United Kingdom v. Department of Health and Social Security [1981] 1 All ER 545 [HL] ; Comdel Commodities Ltd. v. Siporex Trade S.A. [1990] 2 All ER 552 [HL] ; McCartan Turkington Breen (A Firm) v. Times Newspapers Ltd., E [2000] 4 All ER 913 ; Birmingham City Council v. Oakley [2001] 1 All ER 385 [HL] ; Taylor v. Taylor, [1875] 1 Ch. D. 426 – referred to. Case Law Reference F [2014] 8 SCR 446 referred to Para 4 2019 (2) SCALE 5 referred to Para 10 [2017] 7 SCR 797 referred to Para 16 [1955] 1 SCR 380 relied on Para 17 G [1962] 3 SCR 146 relied on Para 19 [2004] 1 Suppl. SCR 225 held inapplicable Para 25 [2001] 4 Suppl. SCR 323 referred to Para 27 [2009] 12 SCR 682 referred to Para 27 H
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A [2010] 12 SCR 644 referred to Para 27 [1875] 1 Ch. D. 426 referred to Para 31 (1964) 4 SCR 485 relied on Para 31 [1987] 3 SCR 317 relied on Para 33 B [2013] 12 SCR 999 referred to Para 35 [2017] 12 SCR 179 referred to Para 35 [2017] 7 SCR 924 referred to Para 37 (2019) 2 SCC 1 referred to Para 37 C [2018] 2 SCR 1045 referred to Para 37 (2018) 2 SCC 674 referred to Para 37 [2017] 11 SCR 899 referred to Para 37 (1961) 3 SCR 185 relied on Para 39 D [2014] 3 SCR 1 referred to Para 39 [1981] 1 SCR 1196 referred to Para 43
CIVIL ORIGINAL/APPELLATE JURISDICTION: Transferred E Case (Civil) No.66 of 2018 in Transfer Petition (Civil) No.1399 of 2018 Under Article 139A (1) of The Constitution of India. WITH W.P.(C) Nos. 339, 802, 1086, 1110, 1124, 1142, 1138, 1156, 1153, F 1166, 1206, 1212, 1236, 1296 of 2018, SLP(C) No. 31421 of 2018, W.P. (C) Nos. 1316, 1308 and 1359 of 2018 T.C.(C) No. 65 of 2018 in T.P. (C) No. 1404 of 2018, W.P.(C) No. 1363, 1364, 1374 of 2018, T.C.(C) No. 71 of 2018 in T.P. (C) No. 1283 of 2018 T.C.(C) No. 73 of 2018 in T.P. (C) No. 1285 of 2018 T.C.(C) No. 72 of 2018 in T.P. (C) No. 1284 G of 2018, T.C.(C) No.75 of 2018 in T.P. (C) No. 1287 of 2018, T.C.(C) No. 76 of 2018 in T.P. (C) No.1288 of 2018, T.C.(C) No. 74 of 2018 in T.P. (C) No. 1286 of 2018, T.C.(C) No.70of 2018 in T.P. (C) No. 1403 of 2018, T.C.(C) No.69 of 2018 in T.P. (C) No. 1402 of 2018, T.C.(C) No. 68 of 2018 in T.P. (C) No. 1401 of 2018, T.C.(C) No. 67 of 2018 in T.P. (C) No. 1400/2018, W.P.(C) Nos. 1383, 1402, 1400, 1391, 1411, H
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1410, 1438 of 2018, W.P.(C) No. 22 of 2019, W.P.(C) No. 1502 of 2018, A W.P.(C) No. 8, 9, 14, 36 50, 81, 117, 246 and 278 of 2019. Attorney General for India, Tushar Mehta, SG, Vikramjit Banerjee and Ms. Madhavi Diwan, ASGs, Navaniti Prasad Singh, Mukul Rohtagi, K.V. Viswanathan, Rakesh Dwivedi, P.S. Narasimha, Sajjan Poovayya, Dhruv Mehta, Arvind Datar, Sr. Advs., R. Balasubramanian, Rajat Nair, B Kanu Agrawal, Rajeev Ranjan Ranvijay Singh, G.S. Makker, Shraddha Deshmukh, Ms. Haripriya, Arvind Kumar Sharma, M.K. Maroria, Birjesh Kumar Sinha, Hitesh Kumar Sharma, Meetali Patel, Jeewesh Prakash, Shantanu Sagar, T. Mahipal, Pulkit Deora, Udit Gupta (for M/s Udit Kishan and Associates), Arvind Kumar Gupta, Mrs. Purti Marawaha Gupta, Mrs. Heena George, Mrs. V. S. Lakshmi, A. Venayagam Balan, C Alok Dhir, Ms. Maneesha Dhir, Ms. Varsha Banerjee, Ashu Kansal, Ms. Stuti Vats, T.V.S. Raghavendra Sreyas, Abhishek Singh, Ytharth Kumar, J. Amal Anand, Ms. Aayushi Mishra, Vanshdeep Dalmia, Ms. Shalini Kaul, Prasanna S., Aakarsh Kamra, Rajiv Shankar Dvivedi, Sushant Sankar, Ms. Sweta Singh, Ms. Neha Mishra, Ms. Aarti Dwivedi, D Mahesh K. Chaudhary, Ms. Kusum Lata, P.V. Dinesh, Ms. T.P. Sindhu, Mukund P. Unny, Lakshman R.S., Bineesh K., M/s Indialaw, Hemant Singh, Nishant Kumar, Lakshyajit Singh Bagdwal, Ambuj Dixit, Ms. Divya Roy, Anil Kumar Sangal, Siddharth Sangal, Ms. Nilanjani Tandon, Amar Gupta, Mayank Mishra, Ashish Joshi, Divyam Agarwal, Ms. Diksha Rai, Ishan Bisht, Ms. Palak Mahajan, Dhananjay Bhaskar Ray, Ravi E Raghunath, Mukunda Rao, Ms. Vrinda Bhandari, R. Venkatraman, Ms. Praveena Gautam, Jitesh P. Gupta, Pawan Shukla, Raja Ram, Ms. Liz Mathew, Rajendra Barot, Vivek Shetty, Jahan Chokshy, Ms. Sansriti Pathak, Eklavya Dwivedi, Siddharth Iyer, Navneet R., Raghav Mehrotra, Ananga Bhattacharyya, Rohit Rao N., Shourya Garg (for M/ F s Veritas Legis), Dhruv Mohan, Ms. Astha Sharma, E.R. Kumar, Ms. Sonal Gupta, Ishan Nagar, Raghav Bansal (for M/s Parekh & Co.), Mrs. Garima Bajaj, Sudarsh Menon, Ms. Nimisha Menon, Vikram Hegde, Chanchal Kumar Ganguli, Rahul Kumar, Ms. Hima Lawrence, Vishrov Mukherjee, Pukhrambam Ramesh Kumar, Ms. Catherine Ayallore, Priyardarshi Banerjee, Pratibhanu Singh Kharola, Ameya Vikram Mishra, G Rajesh Kumar-I, Anant Gautam, Ms. Shruti Vats, Ms. Khushboo Aggarwal, Debayan Banerjee, Anmol Mehta, Sanjay Kapur, Ms. Megha Karnwal, Bharath Gangadharan, Ms. Shubhra Kapur, Vipin Kumar Jai, Vipul Jai, Dushyant Parashar, Shailly Dinkar, Som Raj Choudhary, H
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A Prashant Kumar, Sovi Bipneet Singh, Ms. Vandana Sehgal, Iqram Govind Singh, Pranaya Goyal, Aman Raj Gandhi, Abhishek Sharma, Yash Badkur, Ritin Rai, Abhipsit Mishra, S.B. Arjun, Ms. Ishita Bist, Ms. Kritika Bhardwaj, Ms. Meera Mathur, Vaijayant Paliwal, S.S. Shroff, Bishwajit Dubey, Ms. Srideepa Bhattacharyya, Manpreet Lamba, Ms. Ruchi Choudhury, Aman Singhania(for M/s Cyril Amarchand Mangaldas, O.P. B Gaggar, Aditya Gaggar, Milanka Chaudhury, Sarojanand Jha, Ashly Cherian, Sanket Tiwari, Ms. Pragya Ohri, Abhirup Dasgupta, Ishaan Duggal, Mohit D. Ram, Rajendra Beniwal, Rajesh P., Kaustubh Shukla, Mrs. Lalita Kaushik, Nikhil Jain, Mahesh Agrawal, Sikhil Suri, Soumik Ghosal, Himanshu Satija, Nishant Rao, Divyang Gobind Chandiramani, C Sandeep Ladda, Gaurav Singh, Ms. Neeha Nagpal, Arshit Anand, Ajay Bhargava, Ms. Shally Bhasin, Ms. Aastha Mehta, Rajesh Kumar, Milinka, Nidhi Ram Sharma, Jay Zaveri, Rishi Agrawala, Sumesh Dhawan, Vatsala Kak, Ms. Wamika Trehan, Ms. Maithli Mundra, E.C. Agrawala, Ms. Suruchii Aggarwal, Ms. Usha Nandini V., Ms. Reetu Sharma, Alok Shukla, Neeraj Shekhar, Satish Kumar, Amit Kumar Pathak, Shiv Kumar D Suri, Puneet Singh Bindra, Balaji Srinivasan, Abhishek Agarwal, Anand Shankar Jha, M/s Dharmaprabhas Law Associates, Rajesh Singh, Ashish Rana, Arun Aggarwal, Dr. Vinod Kumar Tewari, Brijesh Kumar Tamber, Rabin Majumder, Mrs. Anil Katiyar, Gaurav Agrawal, Advs. for the appearing parties.
Judgment
E The Judgment of the Court was delivered by R. F. NARIMAN, J. 1. The present batch of petitions and transferred cases raise questions as to the constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949 [“Banking Regulation Act”] introduced by way of amendment w.e.f. F 04.05.2017. The real bone of contention is a Reserve Bank of India [“RBI”] Circular issued on 12.02.2018, by which the RBI promulgated a revised framework for resolution of stressed assets. The important clauses of the aforesaid circular are set out hereinbelow: “Resolution of Stressed Assets – Revised Framework G
11. The Reserve Bank of India has issued various instructions aimed at resolution of stressed assets in the economy, including introduction of certain specific schemes at different points of time. In view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), it has been decided to substitute the existing guidelines H
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with a harmonised and simplified generic framework for resolution A of stressed assets. The details of the revised framework are elaborated in the following paragraphs. I. Revised Framework A. Early identification and reporting of stress B
22. Lenders1 shall identify incipient stress in loan accounts, immediately on default2, by classifying stressed assets as special mention accounts (SMA) as per the following categories: SMA Sub-categories Basis for classification – Principal or interest payment or C any other amount wholly or partly overdue between SMA-0 1-30 days SMA-1 31-60 days D SMA-2 61-90 days
33. As provided in terms of the circular DBS.OSMOS.No.14703/ 33.01.001/2013-14 dated May 22, 2014 and subsequent amendments thereto, lenders shall report credit information, including classification of an account as SMA to Central Repository E of Information on Large Credits (CRILC) on all borrower entities having aggregate exposure3 of 50 million and above with them. The CRILC-Main Report will now be required to be submitted on a monthly basis effective April 1, 2018. In addition, the lenders shall report to CRILC, all borrower entities in default (with aggregate exposure of 50 million and above), on a weekly basis, F at the close of business on every Friday, or the preceding working day if Friday happens to be a holiday. The first such weekly report shall be submitted for the week ending February 23, 2018. 1 Lenders under these guidelines would generally include all scheduled commercial banks (excluding RRBs) and All India Financial Institutions, unless specified otherwise. 2 G ‘Default’ means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be. For revolving facilities like cash credit, default would also mean, without prejudice to the above, the outstanding balance remaining continuously in excess of the sanctioned limit or drawing power, whichever is lower, for more than 30 days. 3 Aggregate exposure under the guidelines would include all fund based and non-fund H based exposure with the lenders.
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A B. Implementation of Resolution Plan
44. All lenders must put in place Board-approved policies for resolution of stressed assets under this framework, including the timelines for resolution. As soon as there is a default in the borrower entity’s account with any lender, all lenders “ singly or jointly “ B shall initiate steps to cure the default. The resolution plan (RP) may involve any actions / plans / reorganisation including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, sale of the exposures to other entities / investors, change in ownership, or restructuring4. The RP shall be clearly documented by all the lenders (even if there is no change C in any terms and conditions). C. Implementation Conditions for RP
55. A RP in respect of borrower entities to whom the lenders continue to have credit exposure, shall be deemed to be D ‘implemented’ only if the following conditions are met: a. the borrower entity is no longer in default with any of the lenders; b. if the resolution involves restructuring; then i. all related documentation, including execution of necessary agreements between lenders and borrower / creation of security charge / perfection of securities are completed by all lenders; and ii. the new capital structure and/or changes in the terms of conditions of the existing loans get duly reflected in the books of all the lenders and the borrower.
66. Additionally, RPs involving restructuring / change in ownership in respect of ‘large’ accounts (i.e., accounts where the aggregate 4 Restructuring is an act in which a lender, for economic or legal reasons relating to the borrower’s financial difficulty (An illustrative non-exhaustive list of indicators of financial difficulty are given in the Appendix to Annex-I), grants concessions to the borrower. Restructuring would normally involve modification of terms of the advances / securities, which may include, among others, alteration of repayment period / repayable amount / the amount of instalments / rate of interest; roll over of credit facilities; sanction of additional credit facility; enhancement of existing credit limits; and, compromise settlements where time for payment of settlement amount exceeds three months.
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exposure of lenders is 1 billion and above), shall require A independent credit evaluation (ICE) of the residual debt5 by credit rating agencies (CRAs) specifically authorised by the Reserve Bank for this purpose. While accounts with aggregate exposure of 5 billion and above shall require two such ICEs, others shall require one ICE. Only such RPs which receive a credit opinion of B RP46 or better for the residual debt from one or two CRAs, as the case may be, shall be considered for implementation. Further, ICEs shall be subject to the following: a. The CRAs shall be directly engaged by the lenders and the payment of fee for such assignments shall be made by the lenders. C
b. If lenders obtain ICE from more than the required number of CRAs, all such ICE opinions shall be RP4 or better for the RP to be considered for implementation. xxx xxx xxx D D. Timelines for Large Accounts to be Referred under IBC
8. In respect of accounts with aggregate exposure of the lenders at 20 billion and above, on or after March 1, 2018 (‘reference date’), including accounts where resolution may have been initiated under any of the existing schemes as well as accounts E classified as restructured standard assets which are currently in respective specified periods (as per the previous guidelines), RP shall be implemented as per the following timelines: i. If in default as on the reference date, then 180 days from the reference date. F ii. If in default after the reference date, then 180 days from the date of first such default.
9. If a RP in respect of such large accounts is not implemented as per the timelines specified in paragraph 8, lenders shall file insolvency application, singly or jointly, under the Insolvency and G
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A Bankruptcy Code 2016 (IBC)7 within 15 days from the expiry of the said timeline8. xxx xxx xxx
12. For other accounts with aggregate exposure of the lenders below 20 billion and, at or above 1 billion, the Reserve Bank B intends to announce, over a two-year period, reference dates for implementing the RP to ensure calibrated, time-bound resolution of all such accounts in default. xxx xxx xxx
C V. Withdrawal of extant instructions
18. The extant instructions on resolution of stressed assets such as Framework for Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), D Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A) stand withdrawn with immediate effect. Accordingly, the Joint Lenders’ Forum (JLF) as an institutional mechanism for resolution of stressed accounts also stands discontinued. All accounts, including such accounts where any of the schemes have been invoked but not yet implemented, shall be governed by the revised framework.
19. The list of circulars/directions/guidelines subsumed in this circular and thereby stand repealed from the date of this circular is given in Annex - 3.
20. The above guidelines are issued in exercise of powers conferred under Section 35A, 35AA (read with S.O.1435 (E) dated May 5, 2017 issued by the Government of India) and 35AB of the Banking Regulation Act, 1949; and, Section 45L of the Reserve Bank of India Act, 1934.”
2. It will be noticed that the salient features of this circular are that restructuring in respect of borrower entities de hors the Insolvency
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and Bankruptcy Code, 2016 [“Insolvency Code”] can only occur if the resolution plan that involves restructuring is agreed to by all lenders, i.e., 100 per cent concurrence. Secondly, what has been chosen to be the subject matter of the circular is debts with an aggregate exposure of INR 2000 crore and over on or after 01.03.2018. With respect to such debts, if default persists for 180 days from 01.03.2018, or if the date of first default is after 01.03.2018, then 180 days calculated with effect from that date, lenders shall file applications singly or jointly under the Insolvency Code within 15 days from the expiry of the aforesaid 180 days. In short, unless a restructuring process in respect of debts with an aggregate exposure of over INR 2000 crore is fully implemented on or before 195 days from the reference date or date of first default, the lenders will have to file applications as financial creditors under the Insolvency Code. It will be noticed that the sources of power for issuance of the aforesaid circular have been stated to be Section 35A of the Banking Regulation Act read with the Central Government’s circular dated 05.05.2017, Sections 35AA and 35AB of the said Act, and Section D 45L of the Reserve Bank of India Act, 1934 [“RBI Act”]. It may be stated here that by an order dated 11.09.2018, this Court allowed various transfer petitions and made orders in Writ Petition No. 1086 of 2018, by which it was ordered that status quo as of today shall be maintained in the meantime. As a result, insofar as the petitions and transferred cases in this Court are concerned, the circular has, in effect, been stayed on E and from 11.09.2018.
3. The charge on behalf of the petitioners was led by Dr. Abhishek Manu Singhvi, learned Senior Advocate. Dr. Singhvi appears on behalf of the Association of Power Producers, representing the power sector in general. According to the learned Senior Advocate, the Electricity F Act, 2003 [“Electricity Act”] was enacted as a complete code to regulate the private sector. According to him, unlike sectors such as the steel and cement sector, the power sector is fully regulated and tariffs that are fixed can only be after they are so determined / adopted by Electricity Regulatory Commissions under Section 62 or Section 63 of the Electricity Act. The power sector, therefore, is a player in a restricted G market – power can only be purchased by distribution licensees or trading licensees under Section 12 of the Electricity Act, which can only be done with the prior approval of State Electricity Regulatory Commissions. Even transmission of power requires prior approval of transmission H
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A licensees, and therefore, substitutability of buyers is impossible since the means to supply power are not readily available. To buttress his submissions, Dr. Singhvi relied heavily upon the reports of the Parliamentary Standing Committees which were looking into the problems of the power sector from time to time. Thus, the 37th Parliamentary Standing Committee Report on Stressed / Non-performing Assets in the B Electricity Sector dated 07.03.2018 recorded that in the private sector, there were 34 stressed projects amounting to 40,130 MWs out of 85,550.30 MWs which have a debt exposure of INR 1,74,468 crore. Out of these, non-performing assets [“NPAs”] amounting to 34,044 crores are primarily on account of Government policy changes, failure to fulfil commitments by the Government, delayed regulatory response and non- payment of dues by DISCOMs. This Report, therefore, recommended the setting up of a task force to look into the NPA problem in the power sector.
4. Dr. Singhvi then went into non-availability of fuel and took us through the New Coal Distribution Policy of 18.10.2007, by which Thermal Power Projects were assured supply of 100 per cent coal. This changed drastically as a result of Government of India restrictions in 2013, which restricted supply of coal to only those Independent Power Producers (IPPs) with long term Power Purchase Agreements (PPAs) and otherwise limited supply to 65 per cent of coal requirement. Another E setback occurred in August/September, 2014 as coal mines allocated to the power sector were cancelled by the Supreme Court by a judgment in Manohar Lal Sharma v. Principal Secretary and Ors., (2014) 9 SCC 516. Remedial measures such as the SHAKTI Scheme were introduced only after three years of the Supreme Court judgment on F 22.05.2017. Even this Scheme limited supply of coal to 75 per cent of the assured coal supply as against what was assured in 2007. All this was commented on by the 37th and 40th Parliamentary Standing Committee Reports. In so far as the gas-based plants are concerned, the 42nd Parliamentary Standing Committee Report referred to the same tale of woe as in coal based power plants – gas, in which the power sector was G originally given priority, was later placed in 2013-14 under a no-cut category, leading to drastic reduction in supply of gas to the power sector. Dr. Singhvi also referred to various reports showing that as on October, 2018, DISCOMs only paid INR 8,710 crore against dues of approximately INR 39,500 crore to generating companies. This situation gets H
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exacerbated by delay in adjudication and consequent payment by A DISCOMs. He then referred to preferential treatment that is given to power companies in the public sector as opposed to power companies in the private sector, and argued that against total stressed assets of 66,000 MWs in the private sector, stressed assets in the public sector amount to nil. Lack of PPAs being entered into was another cause of concern. B Out of the total stressed capacity of 40,130 MWs identified in the 37th Parliamentary Standing Committee Report, PPAs have been executed only for the capacity of 17,708 MWs, as a result of which long term commitments qua fuel supply etc. are lacking. According to him, the impact of the RBI Circular was directly focused upon by the 40th Parliamentary Standing Committee Report. The 40th Parliamentary C Standing Committee has analysed the suitability and impact of the impugned RBI Circular after consultation with the RBI, major banks, and financial institutions as well as the power sector associations. Key observations in the Report are: “(a) As per Department of Financial Services, Ministry of Finance, D “one size fits all” approach of the RBI is erroneous. (b) Lenders like the Rural Electrification Corporation and the State Bank of India have submitted that implementing an optimal solution is impossible within the 180-day time period specified by the impugned RBI Circular. The State Bank of India has stated that E 12 months’ time is required to implement a resolution plan. As per the prescribed timelines, every stressed project of the power sector will land in the NCLT. (c) Arriving at 100 per cent consensus of lenders for approval and implementation of the resolution plan is difficult, especially when there are projects with multiple lenders. (d) The Power Finance Corporation pointed out that even in case of a successfully running project like the Chhattisgarh project, they could only recover INR 2,500 crore out of a total of debt of INR 8,300 crore, i.e., 70 per cent haircut. Thus, there is significant value erosion. (e) The State Bank of India highlighted the need for synchronisation between the RBI’s guidelines and resolution of the systemic issues of the electricity sector.” H
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A After due examination and enquiry, the 40th Parliamentary Standing Committee Report of August 2018 has made the following recommendations: “(a) Appropriate, relevant, and sector-specific measures should be explored to address the issues faced by power sector. Instead B of adopting sector-agnostic approach for stress-resolution, the RBI should look at sector-friendly measures. (b) Revised framework introduced by the RBI has been done ignoring the prevailing realities. (c) Repayment of 20 per cent of the outstanding principal debt as per the RBI Circular is impracticable for power sector entities, and accordingly, the circular disincentivizes restructuring with the existing promoters. (d) Forced sale before the NCLT will cause a big sacrifice of public money without any benefit to the economy or the power sector. (e) The power sector should be protected since it is going through a transition phase from a low-demand-low-supply situation to a moderately-high-demand situation, which is temporary in nature.”
5. Dr. Singhvi then referred to a challenge that was made to the E RBI Circular in the Allahabad High Court in Independent Power Producers Association of India v. Union of India and Ors., Writ - C No. 18170 of 2018. He referred to a copy of the order dated 31.05.2018, by which the Allahabad High Court ordered: “We request the Secretary, Ministry of Finance, Union of India, F to hold a meeting in the month of June, 2018 of respondents 2 to 5 through their Secretaries and a representative of the petitioners’ association to consider their grievance and see whether any solution to the problem is possible, in the light of observations made by the Thirty-Seventh Report of Standing Committee on Energy presented G to Lok Sabha on 7.3.2018 with regard to stressed/non-performing assets in electricity sector. Though, we could not go through the report, our attention was specifically drawn to some observations in Part-II of the report, which reads thus:
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“The Committee are of the considered view that providing finances, though vital, to the project is only one of the several factors essential for the commissioning of the project. As of now, commissioned plants worth of thousands of Mws are under severe financial stress and are currently under SMA-1/2 stage or on the brink of becoming NPA. This is due to fuel shortage, sub-optimal loading, untied capacities, absence of FSA and lack of PPA, etc. These projects were commissioned on the basis of national need/ demand of electricity, availability of all other essentials required in this regard. However, due to unforeseen circumstances, these plants are suffering from cash flows, credit rating, interest servicing etc. Hence, simply applying the C RBI guidelines mechanically by the banks, financial institutions, joint lender forums will push these plants further into trouble without any hope of recovery.” It is needless to mention that the petitioners’ representatives shall supply a copy of this order and of the writ petition with annexures to all the respondents within one week from today. We only observe that action may be avoided on the basis of the impugned circular dated 12.2.2018 issued by respondent no.2-Reserve Bank of India addressed to all Scheduled Commercial Banks and All India Financial Institutions, against members of the petitioners association, subject to condition that the member(s) is/are not wilful defaulter(s) till the meeting is conducted by the Secretary, Ministry of Finance, Union of India. We also observe that the Secretary, Ministry of Finance shall communicate the date and time of the meeting to all concerned, including the President of the petitioners’ association, well in advance.” F
6. Dr. Singhvi then referred to the detailed order passed by the Allahabad High Court in the aforesaid case on 27.08.2018, in which he referred to the stand taken by the Union of India as follows: “24.1. …… As observed earlier, the Central Government is in favour of granting them some more time so as to save the power G sector in the larger interest. Mr. Tushar Mehta, learned ASG, submitted that it is desirable, while considering the “sector (power) specific issues” that a timeline prescribed under the circular be made effective after 180 days from 27.08.2018 and subsequent H
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A steps be taken by the parties based upon the reports of the High Level Empowered Committee presided over by the Cabinet Secretary. He submitted, the time can be extended at this stage and not once process under IBC is set in motion.” He also referred to the fact that a High Level Empowered B Committee is to be set up as follows: “42. In this backdrop, I am inclined to direct the High Level Empowered Committee to submit its report within two months from the date of its constitution. The Ministry of Power shall invite a senior officer of the RBI, after consultation with the Governor C of RBI, as a member of the High Level Empowered Committee forthwith. In the meantime, I observe that the Central Government should consider whether it would like to issue directions under Section 7 of the RBI Act on the basis of the report and other material, including reports of the Standing Committee within 15 days from today in the light of the observations made in this order. D In view thereof, it is not desirable to grant any interim relief at this stage. This shall not preclude the petitioner-Associations or its members from applying for urgent relief, if the circumstances so demand, placing the request and factual details in respect of such an action. This order shall not curtail the rights/powers of the E financial creditors under Section 7 of IBC or even of the RBI in issuing directions in specific case(s) under Section 35AA of BR Act to initiate corporate insolvency resolution process under Chapter II of Part II of IBC, in any given case, including the petitioners or members of the petitioners’ Association.”
77. Dr. Singhvi then referred to the Report dated 12.11.2018 of the High Level Committee so constituted. This Report made various recommendations. It stated: “1. Linkage coal may be allowed to be used against short term PPAs and power be sold through Discovery of Efficient Energy G Price (DEEP) portal following a transparent bidding process.
2. A nodal agency may be designated which may invite bids for procurement of bulk power for medium term for 3 to 5 years in appropriate tranches, against pre-declared linkage by Coal India Limited (CIL). H
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3. NTPC can act as an aggregator of power, i.e., procure power through transparent competitive bidding process from such stressed power plants and offer that power to the DISCOMs against PPAs of NTPC till such time as NTPC’s own concerned plants/units are commissioned.
4. Ministry of Coal may earmark for power, at least 60 per cent of the e-auction coal, and this should be in addition to the regular coal requirement of the power sector.
5. If there is a shortfall in the supply of coal and it is attributable to the Ministry of Coal or Railways; such shortfall need not lapse and be carried over to the subsequent months up to a maximum of three months.
6. Old and high heat rate plants not complying with new environment norms may be considered for retirement in a phased and timebound manner at the same time avoiding any demand/ supply mismatch. D
7. Public Financial Institutions (PFIs) providing the Bill Discounting facility may also be covered by the Tri-partite Agreement (TPA) i.e. in case of default by the DISCOM, the RBI may recover the dues from the account of States and make payment to the PFIs.
88. PPAs, Fuel Supply Agreements (FSA) and LTOA for E transmission of power, EC/FC clearances, and all other approvals including water, be kept alive and not cancelled by the respective agencies even if the project is referred to NCLT or is acquired by any other entity. All of these may be linked to the plant and not the Promoter. F
99. In order to revive gas based power plants, Ministry of Power and Ministry of Petroleum & Natural Gas may jointly devise a scheme in line with the earlier e-bid RLNG Scheme (supported by PSDF).” Dr. Singhvi, therefore, argued that despite the fact that a G representative of the RBI attended meetings of the Parliamentary Standing Committee, the RBI Circular was issued in complete disregard of the recommendations of such Reports, both before and after the impugned circular. According to him, therefore, to apply a 180-day limit to all sectors of the economy without going into the special problems H
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A faced by each sector would treat unequals equally and would be arbitrary and discriminatory, and therefore, violative of Article 14 of the Constitution of India. Also, picking up at random all defaults amounting to INR 2000 crore and above, as well as the fact that even a lender whose stake is only 1 per cent can stall a resolution process de hors the Insolvency Code make the circular manifestly arbitrary and violative of Article 14 B on this score as well.
8. Apart from the aforesaid submissions, Dr. Singhvi referred in great detail to the relevant sections of the Banking Regulation Act and the RBI Act, and argued that the impugned circular was ultra vires the provisions of those Acts. According to him, Section 35A and Section C 35AB of the Banking Regulation Act cannot possibly be the source of power for the impugned circular. Section 35A was introduced by an Amendment Act of 1956 and cannot, therefore, be used to empower the RBI to relegate companies to insolvency under the Insolvency Code as it did not exist at the time, or to give directions for resolution of stressed assets. He strongly referred to and relied upon Indian Banks’ Association v. Devkala Consultancy Service, (2004) 11 SCC 1 [“Indian Banks’ Association”] for the proposition that the RBI’s functions under Section 35A are confined to the boundaries of the RBI Act and the Banking Regulation Act and not to other statutes, such as the Insolvency Code. He also argued that Sections 35AA and 35AB are part of one composite scheme. Section 35AA alone refers to, and can alone be the source of power for directing banking and non-banking companies to file applications under the Insolvency Code. Section 35AB clearly refers to resolution of stressed assets in a manner which is de hors the Insolvency Code. He then referred to the circular of the Central F Government dated 05.05.2017 which empowered the RBI to issue directions qua individual defaults that are committed. This being so, a general circular applying to all defaults of loans above INR 2000 crore, without having reference to the facts of each individual case would, therefore, be ultra vires and bad in law. For this purpose, he strongly relied upon the Press Note that introduced Sections 35AA and 35AB as G well as the Statement of Objects and Reasons introducing the said Sections by the Amending Act of 2017. He also argued that in any case, Sections 35AA and 35AB, being manifestly arbitrary provisions, are violative of Article 14 of the Constitution of India. Further, they are also arbitrary on the ground of excessive delegation of power. H
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9. Shri Mukul Rohatgi, Shri Sajan Poovayya, Shri K.V. A Viswanathan, Shri Neeraj Kishan Kaul, Shri Navaniti Prasad Singh, Shri P.S. Narsimha, Shri Arvind P. Datar, and Shri Gopal Jain, learned Senior Advocates, and Shri Pulkit Deora, Smt. Purti Marwaha Gupta, and Shri E.R. Kumar, learned Advocates, have also supported the submissions of Dr. Singhvi. These counsel have appeared in cases involving many other sectors, such as telecom, steel, infrastructure, sports infrastructure, sugar, fertiliser, shipyard, etc. Each of them has highlighted the difficulties faced as a result of Government policies and other reasons for financial stress in all these sectors, which have nothing to do with the efficiency of management of companies operating in these sectors. All of them have adopted the arguments of Dr. Singhvi in stating that, without looking into each individual sector’s problems and attempting to solve them, the RBI circular applies down the board to good and bad alike, and, despite the fact that some corporate debtors are on the brink of resolution, the chopper of 180 days comes down on them and they are driven into the Insolvency Code. The Government has recognised that, for example, in the sports infrastructure sector, much larger gestation periods are necessary in which capital infrastructure investments take place and which consequently require long periods for resolution. They have also argued with various nuances of their own as to how the RBI circular is both arbitrary and ultra vires the Banking Regulation Act and the RBI Act.
1010. Shri Rakesh Dwivedi, learned Senior Advocate appearing on behalf of the RBI, has taken us through various provisions of the RBI Act and Banking Regulation Act and has impressed upon us the fact that the regulatory regime laid down in these Acts must be construed broadly, being in public interest, in the interest of banking policy, and above all, in the interest of depositors. The RBI Act and the Insolvency F Code are intricately related to the operation of the credit system of the country, and must therefore, be given an expansive interpretation. According to the learned Senior Advocate, the RBI Circular is only an attempt to tell banks that insofar as huge debts over INR 2000 crore are concerned, they will be given a reasonable period of six months within which to either resolve stress assets or otherwise, if they cannot do so, G would only then have to move under the Insolvency Code. According to him, clause 4 of the RBI Circular makes it clear that greater flexibility is given in this period of six months for banking and non-banking financial institutions to resolve stressed assets even de hors earlier restrictive H
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A circulars that have been done away with by the circular dated 12.02.2018 so that an effort be made to resolve stressed assets within a reasonable period, after which it becomes incumbent on such institutions to move the Insolvency Code. According to him, the circular is not manifestly arbitrary. On the contrary, it is in public interest and in the interest of the national economy to see that evergreening of debts does not carry on B indefinitely. Therefore, these huge amounts that are due and owing should come back into the economy for further productive use. Either they can so come back within the six months’ grace period granted by the circular or through the route of the Insolvency Code. He also made it clear that the Parliamentary Standing Committee Reports are for the purpose of C Parliament, which must then act upon them. None of the Reports that have been referred to have been acted upon by Parliament, and therefore, that cannot take the matter much further. Also, it is important to notice that though the executive, i.e., the Government could also have acted in terms of these Reports, it has chosen not to do so. For this purpose, he relied upon Section 7 of the RBI Act, under which the Central Government D may, from time to time, give such directions to the RBI that it may consider necessary in public interest, after consultation with the Governor of the RBI. The sheet anchor of the petitioners’ case, therefore, disappears as all these Parliamentary Standing Committee Reports do not take the petitioners anywhere, not having been acted upon either by the Parliament E or by the Central Government. This is for the very good reason that ultimately, it is in public interest to either resolve stressed assets within a certain timeframe, or if incapable of such resolution, the route of the Insolvency Code should then be followed. So far as the vires of Sections 35AA and 35AB are concerned, Shri Dwivedi relied upon our recent judgment in Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India and F Ors., 2019 (2) SCALE 5 [“Swiss Ribbons”], saying that great leeway must be given to Parliament to deal with the problems which affect the national economy as a whole. There is adequate guiding principle and there is no manifest arbitrariness in any of the aforesaid provisions. Further, there is no question of excessive delegation of power either, as guidance can be obtained from the Preamble of the Banking Regulation Act together with its provisions. Insofar as the RBI Circular is concerned, he argued that it is traceable to four sources of power, namely, Sections 21, 35A, 35AA and 35AB of the Banking Regulation Act. Insofar as non-banking financial companies are concerned, it is traceable to Section 45L of the RBI Act. According to the learned Senior Advocate, a general circular of this kind can certainly be issued in public interest and in the
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interest of the national economy. Any restrictive reading of any of these A provisions will only do harm to the economy of the country as a whole. Broadly read, therefore, the RBI Circular cannot be said to be ultra vires.
1111. Shri Tushar Mehta, learned Solicitor General for India, confined his submissions to the constitutional validity of Sections 35AA B and 35AB of the Banking Regulation Act, and the validity of the Central Government circular dated 05.05.2017. According to the learned Solicitor General, Sections 35AA and 35AB are regulatory provisions made in public interest that cannot possibly be said to be manifestly arbitrary in any way. He relied heavily upon the judgment of Swiss Ribbons (supra). Further, the aforesaid Sections cannot be said to be unguided provisions as the RBI gets sufficient guidance from the Preamble as well as other provisions of the Banking Regulation Act. He further submitted that the authorisation of the Central Government with respect to Section 35AA has to be general in nature, after which, the RBI must exercise such power with due deliberation and with sector-specific care as the expert financial regulator and central bank of the country. He submitted that ideally, there ought to be a sector wise contingency analysis by the RBI before exercising power provided by the Central Government to it under Section 35AA. In any case, so far as the power sector is concerned, he was of the view that the RBI ought to have treated it differently from all other sectors in view of the steps that the Central Government is taking in order to bring back the power sector on its feet.
1212. At this juncture, it is important to note the genesis of the impugned circular. By a press release dated 13.06.2017, the RBI identified certain accounts for reference by banks under the Insolvency F Code. This press release reads as follows: “RBI identifies Accounts for Reference by Banks under the Insolvency and Bankruptcy Code (IBC) G The Reserve Bank of India had issued a Press Release on May 22, 2017 outlining the steps taken and those on the anvil pursuant to the promulgation of the Banking Regulation (Amendment) Ordinance, 2017. The Press Release had mentioned inter alia that the RBI would be constituting a Committee comprised majorly of H
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A its independent Board Members to advise it in regard to the cases that may be considered for reference for resolution under the Insolvency and Bankruptcy Code, 2016 (IBC).
2. An Internal Advisory Committee (IAC) was accordingly constituted and it held its first meeting on June 12, 2017. The B IAC, in the meeting, agreed to focus on large stressed accounts at this stage and accordingly took up for consideration the accounts which were classified partly or wholly as non-performing from amongst the top 500 exposures in the banking system.
3. The IAC also arrived at an objective, non-discretionary criterion C for referring accounts for resolution under IBC. In particular, the IAC recommended for IBC reference all accounts with fund and non-fund based outstanding amount greater than 5000 crore, with 60% or more classified as non-performing by banks as of March 31, 2016. The IAC noted that under the recommended criterion, 12 accounts totaling about 25 per cent of the current gross NPAs D of the banking system would qualify for immediate reference under IBC.
4. As regards the other non-performing accounts which do not qualify under the above criteria, the IAC recommended that banks should finalise a resolution plan within six months. In cases where E a viable resolution plan is not agreed upon within six months, banks should be required to file for insolvency proceedings under the IBC.
5. The Reserve Bank, based on the recommendations of the IAC, will accordingly be issuing directions to banks to file for insolvency F proceedings under the IBC in respect of the identified accounts. Such cases will be accorded priority by the National Company Law Tribunal (NCLT).
6. The details of the resolution framework in regard to the other non-performing accounts will be released in the coming days.” G
1313. At this stage, as a first step, the Internal Advisory Committee [“IAC”] decided to consider the stressed assets within the top 500 exposures of the banking system as on 31.03.2017. This set of 500 accounts was arrived at as per the statement generated from the Central
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Repository of Information on Large Credits [“CRILC”] database. Of A the said top 500 exposures, it was noted that 71 accounts had been partly or wholly classified as NPAs while the other 429 were not classified as NPA by any bank. For the purpose of this first list, the following criteria were applied: a. Accounts where the funded plus non-funded outstanding was more than INR 5000 crore; b. Accounts where more than 60 per cent of the total outstanding by value was NPA as on March 31, 2016. Consequently, 12 accounts which met the above criteria were referred for resolution under the Insolvency Code vide RBI’s direction dated 15.06.2017. It is pertinent to note that the accounts in the First List constituted around 25 per cent of the NPAs in the system and the cumulative fund-based and non-fund-based outstanding therein amounted to INR 197,769 crore.
1414. The IAC subsequently met again and decided, on 25.08.2017, D that out of the 59 remaining NPA accounts of the top 500 exposures, accounts which are materially NPA (i.e., where 60 per cent of the total outstanding has become NPA by 30.06.2017) may be given time till 13.12.2017 for resolution. If the banks fail to finalise and implement a viable resolution plan by the said date, banks will be required to file applications under Insolvency Code before 31.12.2017. The IAC noted that applying this criterion will cover 29 NPA accounts, with total outstanding of INR 135,846 crore and total fund-based NPAs of INR 111,848 crore as on 30.06.2017. It is pertinent to note that on 28.08.2017, the RBI issued a letter directing banks to attempt resolution of the accounts in this Second List by 13.12.2017. As regards the residual accounts, out of the initially identified 71 NPA accounts, the IAC recommended that such accounts may be addressed through a steady-state framework for resolution of stressed assets in a time-bound manner and failing such resolution, the accounts be referred to for resolution under the Insolvency Code. Accordingly, the RBI formulated and issued the revised framework vide its circular dated 12.02.2018.
1515. Meanwhile, the Ministry of Finance issued a notification dated 05.05.2017 under Section 35AA as follows:
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A “MINISTRY OF FINANCE (Department of Financial Services) ORDER New Delhi, the 5th May, 2017 B S.O. 1435(E).¯In exercise of the powers conferred by Section 35AA of the Banking Regulation Act, 1949 (10 of 1949), the Cen- tral Government hereby authorises the Reserve Bank of India to issue such directions to any banking company or banking compa- nies which may be considered necessary to initiate insolvency C resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.” This happened to be on the very next day on which the Banking Regulation (Amendment) Ordinance, 2017 introduced Sections 35AA and 35AB as amendments to the Banking Regulation Act. A Press Note D of the Ministry of Finance of 05.05.2017 explains the genesis of the Ordinance thus: “Press Information Bureau Government of India Ministry of Finance 05-May-2017 E The promulgation of Banking Regulation (Amendment) Ordinance, 2017 will lead to effective resolution of stressed assets, particularly in consortium or multiple banking arrangements. F The Ordinance enables the Union Government to authorise the Reserve Bank of India (RBI) to direct banking companies to resolve specific stressed assets. The promulgation of the Banking Regulation (Amendment) Ordinance, 2017 inserting two new Sections (viz. 35AA and 35AB) G after Section 35A of the Banking Regulation Act, 1949 enables the Union Government to authorise the Reserve Bank of India (RBI) to direct banking companies to resolve specific stressed assets by initiating insolvency resolution process, where required. The RBI has also been empowered to issue other directions for
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resolution, and appoint or approve for appointment, authorities or committees to advise banking companies for stressed asset resolution. This action of the Union Government will have a direct impact on effective resolution of stressed assets, particularly in consortium or multiple banking arrangements, as the RBI will be empowered to intervene in specific cases of resolution of non-performing assets, to bring them to a definite conclusion. The Government is committed to expeditious resolution of stressed assets in the banking system. The recent enactment of Insolvency and Bankruptcy Code (IBC), 2016 has opened up new possibili- C ties for time bound resolution of stressed assets. The SARFAESI and Debt Recovery Acts have been amended to facilitate recov- eries. A comprehensive approach is being adopted for effective implementation of various schemes for timely resolution of stressed assets.” D (emphasis supplied)
The Banking Regulation (Amendment) Ordinance, 2017 was then enacted as follows: E “MINISTRY OF LAW AND JUSTICE 4th May, 2017 An Ordinance further to amend the Banking Regulation Act, 1949. WHEREAS the stressed assets in the banking system have reached unacceptably high levels and urgent measures are re- quired for their resolution; AND WHEREAS the Insolvency and Bankruptcy Coe, 2016 has been enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders; H
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A AND WHEREAS the provisions of Insolvency and Bankruptcy Code, 2016 can be effectively used for the resolution of stressed assets by empowering the banking regulator to issue directions in specific cases; AND WHEREAS Parliament is not in session and the President B is satisfied that circumstances exist which render it necessary for him to take immediate action; NOW, THEREFORE, in exercise of the powers conferred by clause (1) of article 123 of the Constitution, the President is pleased to promulgate the following Ordinance:
C 1. (1) This Ordinance may be called the Banking Regulation (Amendment) Ordinance, 2017. (2) It shall come into force at once.
2. In the Banking Regulation Act, 1949, after section 35A, the D following sections shall be inserted, namely: ‘35AA. The Central Government may by order authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016. E Explanation. – For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016. 35AB. (1) Without prejudice to the provisions of section 35A, F the Reserve Bank may, from time to time, issue directions to the banking companies for resolution of stressed assets. (2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise banking G companies on resolution of stressed assets.” (emphasis supplied) This Ordinance was replaced by the Banking Regulation (Amendment) Bill, 2017 dated 14.07.2017. The Statement of Objects and Reasons for the aforesaid Bill reads as follows: H
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“THE BANKING REGULATION A (AMENDMENT) BILL, 2017 xxx xxx xxx STATEMENT OF OBJECTS AND REASONS Stressed assets in the banking system, or non-performing assets have reached unacceptably high levels and hence, urgent measures are required for their speedy resolution to improve the financial health of banking companies for proper economic growth of the country. Therefore, it was considered necessary to make provisions in the Banking Regulation Act, 1949 for authorising the Reserve Bank of India to issue directions to any banking company or banking companies to effectively use the provisions of the Insolvency and Bankruptcy Code, 2016 for timely resolution of stressed assets.
2. It was accordingly decided to make amendments to the Banking Regulation Act, 1949. Since Parliament was not in session and immediate action was required to be taken, the Banking Regulation (Amendment) Ordinance, 2017 was promulgated by the President on the 4th May, 2017.
3. The Banking Regulation (Amendment) Bill, 2017 which seeks to replace the Banking Regulation (Amendment) Ordinance, 2017, E provides for the following, namely:— (a) to confer power upon the Central Government for authorising the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency F and Bankruptcy Code, 2016; (b) to confer power upon the Reserve Bank to issue directions to banking companies for resolution of stressed assets and also allow the Reserve Bank to specify one or more authorities or committees to advise banking companies on resolution of G stressed assets; and (c) to amend section 51 of the Act so as to make therein the reference of proposed new sections 35AA and 35AB.
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A 4. The Bill seeks to replace the said Ordinance. xxx xxx xxx 14th July, 2017.” (emphasis supplied) Sections 35AA and 35AB were then legislatively introduced as B follows: “THE BANKING REGULATION (AMENDMENT) ACT, 2017 [25th August, 2017] xxx xxx xxx C
2. In the Banking Regulation Act, 1949 (hereinafter referred to as the principal Act), after section 35A, the following sections shall be inserted, namely:— ‘35AA. The Central Government may, by order, authorise D the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016. Explanation.—For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the E Insolvency and Bankruptcy Code, 2016. 35AB. (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to any banking company or banking companies for resolution of stressed assets. F (2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise any banking company or banking companies on resolution of stressed assets’. G xxx xxx xxx” CONSTITUTIONAL VALIDITY
1616. The petitioners have argued that the aforesaid Ordinance and Amendment Act are unconstitutional on two grounds; (i) that the
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Sections introduced are manifestly arbitrary; and (ii) that they suffer A from absence of guidelines. Insofar as the first challenge is concerned, this Court has, in a recent judgment in Swiss Ribbons (supra), made it clear that economic legislation is to be viewed with great latitude. After referring to the Lochner era and its aftermath in paragraph 7 of the aforesaid judgment, this Court referred to various judgments of this Court B in paragraph 8, and concluded as follows: “85. The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. Earlier experiments, as we have seen, in terms of legislations having failed, ‘trial’ having led to repeated ‘errors’, ultimately led to the enactment of the Code. The C experiment contained in the Code, judged by the generality of its provisions and not by so-called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation. We have also seen that the working of the Code is being monitored by the Central Government by Expert Committees that have been set up in this behalf. Amendments have been made in the short period in which the Code has operated, both to the Code itself as well as to subordinate legislation made under it. This process is an ongoing process which involves all stakeholders, including the petitioners.” It is in this background that legislation affecting the economy is to be viewed. This Court, in Shayara Bano v. Union of India, (2017) 9 SCC 1 has made it clear that Article 14 may be infracted by legislation on the ground of such legislation being manifestly arbitrary. This Court F has said in this behalf: “101. It will be noticed that a Constitution Bench of this Court in Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India [Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India, (1985) 1 SCC 641 : 1985 SCC (Tax) 121] stated that it G was settled law that subordinate legislation can be challenged on any of the grounds available for challenge against plenary legislation. This being the case, there is no rational distinction
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A between the two types of legislation when it comes to this ground of challenge under Article 14. The test of manifest arbitrariness, therefore, as laid down in the aforesaid judgments would apply to invalidate legislation as well as subordinate legislation under Article 14. Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without B adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary. We are, therefore, of the view that arbitrariness in the sense of manifest arbitrariness as pointed out by us above would apply to negate legislation as well under C Article 14.” Short of throwing the mantra of manifest arbitrariness at us, none of the petitioners have been able to point out as to how either of these provisions is manifestly arbitrary. They are not excessive in any way nor do they suffer from want of any guiding principle. As a matter of fact, these amendments are in the nature of amendments which confer regulatory powers upon the RBI to carry out its functions under the Banking Regulation Act, and are not different in quality from any of the Sections which have already conferred such power. Thus, Section 21 makes it clear that the RBI may control advances made by banking companies in public interest, and in so doing, may not only lay down policy but may also give directions to banking companies either gener- ally or in particular. Similarly, under Section 35A, vast powers are given to issue necessary directions to banking companies in public interest, in the interest of banking policy, to prevent the affairs of any banking com- pany being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the banking com- pany, or to secure the proper management of any banking company. It is clear, therefore, that these provisions which give the RBI certain regula- tory powers cannot be said to be manifestly arbitrary.
1717. When it comes to lack of any guidelines by which the power given to the RBI is to be exercised, it is clear from a catena of judg- ments that such guidance can be obtained not only from the Statement of Objects and Reasons and the Preamble to the Act, but also from its provisions. Thus, in Harishankar Bagla v. State of M.P., (1955) 1 SCR 380, this Court held:
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“9. The next contention of Mr. Umrigar that Section 3 of the A Essential Supplies (Temporary Powers) Act, 1946, amounts to delegation of legislative power outside the permissible limits is again without any merit. It was settled by the majority judgment in the Delhi Laws Act case [1951 SCR 747] that essential powers of legislature cannot be delegated. In other words, the legislature cannot delegate its function of laying down legislative policy in respect of a measure and its formulation as a rule of conduct. The legislature must declare the policy of the law and the legal principles which are to control any given cases and must provide a standard to guide the officials or the body in power to execute the law. The essential legislative function consists in the determination or choice of the legislative policy and of formally enacting that policy into a binding rule of conduct. In the present case the legislature has laid down such a principle and that principle is the maintenance or increase in supply of essential commodities and of securing equitable distribution and availability at fair prices. D The principle is clear and offers sufficient guidance to the Central Government in exercising its powers under Section 3. Delegation of the kind mentioned in Section 3 was upheld before the Constitution in a number of decisions of their Lordships of the Privy Council, vide Russell v. Queen [7 AC 829], Hodge v. Queen [9 AC 117] and Shannon v. Lower Mainland Dairy Products E Board [1938 AC 708] and since the coming into force of the Constitution delegation of this character has been upheld in a number of decisions of this Court on principles enunciated by the majority in the Delhi Laws Act case [1951 SCR 747]. As already pointed out, the preamble and the body of the sections sufficiently F formulate the legislative policy and the ambit and character of the Act is such that the details of that policy can only be worked out by delegating them to a subordinate authority within the framework of that policy. Mr. Umrigar could not very seriously press the question of the invalidity of Section 3 of the Act and it is unnecessary therefore to consider this question in greater detail.” G Similarly, in Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. The Assistant Commissioner of Sales Tax and Ors., this Court observed: “13. It may be stated at the outset that the growth of the legislative powers of the Executive is a significant development of the H
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A twentieth century. The theory of laissez faire has been given a go-by and large and comprehensive powers are being assumed by the State with a view to improve social and economic well-being of the people. Most of the modern socio-economic legislations passed by the Legislature lay down the guiding principles and the legislative policy. The Legislatures because of limitation imposed upon by the time factor hardly go into matters of detail. Provision is, therefore, made for delegated legislation to obtain flexibility, elasticity, expedition and opportunity for experimentation. The practice of empowering the Executive to make subordinate legislation within a prescribed sphere has evolved out of practical necessity and pragmatic needs of a modern welfare State. At the same time it has to be borne in mind that our Constitution-makers have entrusted the power of legislation to the representatives of the people, so that the said power may be exercised not only in the name of the people but also by the people speaking through their representatives. The role against excessive delegation of legislative authority flows from and is a necessary postulate of the sovereignty of the people. The rule contemplates that it is not permissible to substitute in the matter of legislative policy the views of individual officers or other authorities, however competent they may be, for that of the popular will as expressed by the representatives of the people. As observed on p. 224 of Vol. I in Cooley’s Constitutional Limitations 8th Edn.: “One of the settled maxims in constitutional law is, that the power conferred upon the Legislature to make laws cannot be delegated by that department to any other body or authority. F Where the sovereign power of the State has located the authority, there it must remain; and by the constitutional agency alone the laws must be made until the Constitution itself is changed. The power to whose judgment, wisdom, and patriotism this high prerogative has been entrusted cannot relieve itself of the responsibility by choosing other agencies G upon which the power shall be devolved, nor can it substitute the judgment, wisdom, and patriotism of any other body for those to which alone the people have seen fit to confide this sovereign trust.” xxx xxx xxx H
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Footnotes
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A was difficult to define in general terms, but this much was clear that the essential legislative function must at least consist of the determination of the legislative policy and its formulation as a binding rule of conduct. Thus where the law passed by the legislature declares the legislative policy and lays down the standard which is enacted into a rule of law, it can leave the task of subordinate legislation like the making of rules, regulations or by-laws which by its very nature is ancillary to the statute to subordinate bodies. The subordinate authority must do so within the framework of the law which makes the delegation, and such subordinate legislation has to be consistent with the law under which it is made and cannot go beyond the limits of the policy and standard laid down in the law. As long as the legislative policy is enunciated with sufficient clearness or a standard is laid down, the courts should not interfere with the discretion that undoubtedly rests with the Legislature itself in determining the extent of delegation necessary in a particular case [see observations of D Wanchoo, C.J., in Municipal Corporation of Delhi v. Birla Mills.].
1818. In Harishankar Bagla v. State of Madhya Pradesh [AIR 1954 SC 465 : (1955) 1 SCR 380 : 1954 Cri LJ 1322] this Court dealt with the validity of clause 3 of the Cotton Textile (Control of E Movement) Order, 1948 promulgated by the Central Government under Section 3 of the Essential Supplies (Temporary Powers) Act, 1946. While upholding the validity of the impugned clause, this Court observed that the Legislature must declare the policy of the law and the legal principles which are to control any given F cases and must provide a standard to guide the officials or the body in power to execute the law, and where the Legislature has laid down such a principle in the Act and that principle is the maintenance or increase in supply of essential commodities and of securing equitable distribution and availability at given prices, the exercise of the power was valid.” G The Statement of Objects and Reasons of the Banking Regulation Act, relevant for our purpose, is as follows: “STATEMENT OF OBJECTS AND REASONS The provisions of law relating to banking companies at present H form a subsidiary portion of the general law applicable to
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companies and are contained in Part XA of the Indian Companies A Act, 1913. These provisions, which were first introduced in 1936, and which have undergone two subsequent modifications, have proved inadequate and difficult to administer. Moreover while the primary objective of Companies Law is to safeguard the interests of the stock-holder, that of banking legislation should be the B protection of the interests of the depositor. It has therefore been felt for some time that separate legislation was necessary for the regulation of banking in India. This need has become the more insistent on account of the considerable development that has taken place in recent years in banking, especially the rapid growth of banking resources and of the number of banks and branches. C Regard must also be had to the fact that the banking system is likely in the post-war period to be more vulnerable by reason of the great expansion, both quantitatively and relatively, that has taken place in demand deposits, as compared with time deposits, during the war years. The enactment of a separate comprehensive measure has in consequence now become im- perative.” (emphasis supplied) In particular, the main features of the Bill are as follows: “(i) A comprehensive definition of ‘banking’ so as to bring within the scope of the legislation all institutions which receive deposits, repayable on demand or otherwise, for lending or investment: xxx xxx xxx (x) Empowering the Central Government to take action against banks conducting their affairs in a manner detrimental to the interests of the depositors; F
(xi) Provision for bringing the Reserve Bank of India into closer touch with banking companies; xxx xxx xxx (xiv) Widening the powers of the Reserve Bank of India so as to G enable it to come to the aid of banking companies in times of emergency; xxx xxx xxx” Sections 14A, 17, 18, and 20 impose various restrictions on a bank- ing company. Thus, it is prohibited from having a floating charge on H
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A assets; it has to maintain a reserve fund, and a cash reserve; and it cannot grant loans and advances on the security of its own shares, or on behalf of its directors, or any firm in which its directors are interested etc. A banking company is obligated to hold a license that is issued by the RBI, by which the RBI can impose such conditions as it thinks fit under Section 22 of the Act. Section 22(3), in particular, gives guidance as to how the banking company will run its business. These and other regulatory sections such as Sections 25, 29, 30, and 31, all give guidance as to how the RBI is to exercise these powers under the newly added provisions. We, therefore, agree with Shri Dwivedi that there was no dearth of guidance for the RBI to exercise the powers delegated to it by these provisions. Consequently, the plea of constitutional validity fails. ULTRA VIRES
18. Shri Dwivedi referred to and relied upon Sections 21, 35A, 35AA, and 35AB in order to sustain the validity of the impugned circu- lar. Dr. Singhvi has argued that Section 35A cannot possibly be relied upon for the reason that it is an old provision, introduced in 1956. Whether or not to invoke the Insolvency Code was certainly not in Parliament’s contemplation when it enacted Section 35A, and for this reason, Section 35A cannot possibly be looked at as a source of power authorising the RBI to issue the impugned circular.
1919. Dr. Singhvi’s argument raises an interesting question as to the “ongoing” interpretation of a statute. Generally, statutes are recognised as Acts of Parliament that should be deemed to be “always speaking”. Thus, in Senior Electric Inspector v. Laxminarayan Chopra, (1962) 3 SCR 146, this Court held that the expression “telegraph line” men- F tioned in the Indian Telegraph Act, 1885, is comprehensive enough to take in any wire used for the purpose of an apparatus for post and telegraph, and wireless stations, even though such wires and wireless stations were not in the contemplation of Parliament when the 1885 Act was enacted. The legal position was laid down thus:
G “…… The maxim contemporanea exposition as laid down by Coke was applied to construing ancient statutes, but not to interpreting Acts which are comparatively modern. There is a good reason for this change in the mode of interpretation. The
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fundamental rule of construction is the same whether the Court is asked to construe a provision of an ancient statute or that of a modern one, namely, what is the expressed intention of the Legislature. It is perhaps difficult to attribute to a legislative body functioning in a static society that its intention was couched in terms of considerable breadth so as to take within its sweep the future developments comprehended by the phraseology used. It is more reasonable to confine its intention only to the circumstances obtaining at the time the law was made. But in a modern progressive society it would be unreasonable to confine the intention of a Legislature to the meaning attributable to the word used at the time the law was made, for a modern Legislature C making laws to govern a society which is fast moving must be presumed to be aware of an enlarged meaning the same concept might attract with the march of time and with the revolutionary changes brought about in social, economic, political and scientific and other fields of human activity. Indeed, unless a contrary D intention appears, an interpretation should be given to the words used to take in new facts and situations, if the words are capable of comprehending them. We cannot, therefore, agree with the learned Judges of the High Court that the maxim contemporanea expositio could be invoked in construing the word “telegraph line” in the Act. E For the said reasons, we hold that the expression “telegraph line” is sufficiently comprehensive to take in the wires used for the purpose of the apparatus of the Post and Telegraph Wireless Station.” (at pp. 156-157) F (emphasis supplied)
2020. Guidance on whether a statute can apply to new situations not in contemplation of Parliament when the statute was enacted was felici- tously set out by Lord Wilberforce in his dissenting judgment in Royal College of Nursing of the United Kingdom v. Department of G Health and Social Security, [1981] 1 All ER 545 [HL] as follows: “In interpreting an Act of Parliament it is proper, and indeed necessary, to have regard to the state of affairs existing, and known
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A by Parliament to be existing, at the time. It is a fair presumption that Parliament’s policy or intention is directed to that state of affairs. Leaving aside cases of omission by inadvertence, this being not such a case, when a new state of affairs, or a fresh set of facts bearing on policy, comes into existence, the courts have to consider whether they fall within the Parliamentary intention. They B may be held to do so, if they fall within the same genus of facts as those to which the expressed policy has been formulated. They may also be held to do so if there can be detected a clear purpose in the legislation which can only be fulfilled if the extension is made. How liberally these principles may be applied must depend upon the nature of the enactment, and the strictness or otherwise of the words in which it has been expressed. The courts should be less willing to extend expressed meanings if it is clear that the Act in question was designed to be restrictive or circumscribed in its operation rather than liberal or permissive. They will be much less willing to do so where the subject matter is different in kind or dimension from that for which the legislation was passed.” (at pp. 564-565)
2121. In Comdel Commodities Ltd. v. Siporex Trade S.A., [1990] 2 All ER 552 [HL], Lord Bridge put it thus: E “When a change in social conditions produces a novel situation, which was not in contemplation at the time when a statute was first enacted, there can be no a priori assumption that the enactment does not apply to the new circumstances. If the language of the enactment is wide enough to extend to those F circumstances, there is no reason why it should not apply.” (at p. 557)
2222. The phrase “always speaking” is adverted to by the House of Lords in McCartan Turkington Breen (A Firm) v. Times Newspapers Ltd., [2000] 4 All ER 913. Lord Steyn, speaking for the G Court, stated as follows: “The appeal to the original intent of the statute There is another preliminary matter to be considered. Counsel for the solicitors emphasised that the wording of paragraph 9 can be H
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