Generally, laws on money lending aim to safeguard the interest and rights of the borrower by imposing licensing requirements on money lenders, limiting the interest rates charged on loans by them, and implementing more such rules and policies so as to control and regulate the activities of private money lending and that of the money lenders in the state. In case the money lender has not fulfilled the criteria mentioned under the act, a suit can be filed against them in court.[1]
List II of Schedule VII of the Indian Constitution has numerous matters enumerated within it upon which the state can exercise the power of making laws. Article 246 of the constitution empowers the state legislature as well as the parliament to do so. Thereby, in accordance with Entry 30 of List II, every state is authorised to enact a state money lenders act in order to protect the interests and rights of its borrowers.[2]
Most states have similar money lending laws. However, most of them have a broad and ambiguous definition of what constitutes the activity of money lending or who is a money lender. Owing to this, immense confusion is created with regard to the control and regulation of Non-Banking Financial Companies (NBFCs). In general, NBFCs are registered by the Reserve Bank of India and constituted under the strictly regulated Reserve Bank of India Act, 1934 (the ‘RBI Act’). So, imposing state legislated money lending acts on NBFCs would lead to complexity and confusion. Therefore, it is pertinent to witness the trajectory of how such ambiguity and confusion has been dealt with over the years using different case laws and relevant legislation.
In the landmark judgement of Radhe Estate Developers vs. Versus Mehta Integrated Finance Co. Ltd. and Ors (2011),[3]the applicability of the Bombay Money Lending Act, 1946 (a state act), on NBFCs in the state was contested. As mentioned above, most NBFCs are regulated by the RBI Act (a central act). In this, the Gujarat High Court upheld that even though the state is empowered to make money lending and money lenders laws, yet the State Act is subject to the Central Act. Since, NBFCs are regulated and controlled in accordance with Chapter III B of the RBI Act, therefore, regulation of the NBFC by the state act would be a transgression of the area occupied by the law passed by the central parliament. Moreover, the court stated that under Section 45 Q of the RBI Act, Chapter IIIB would have an overriding effect over the provisions of the state act. Further, it clarified that no notification has been issued under the aforementioned state act, so as to bring NBFCs within the purview of its definition of a money lender under Section 2(10)(b). Therefore, the state did not have the authority to take any penal action against such NBFCs. This led to the creation of a loophole, since, in accordance with the Gujarat Court’s ruling, if the state act did issue a notification at a later date, NBFCs would be brought within its scope of regulation.
That’s exactly what happened. Five days after the ruling, the new Gujarat Money Lenders Act, 2011 (‘GML Act’) was enacted on 2 May 2011. It repealed the previously enacted Bombay act.[4]
Consequently, the matter of Sundaram Finance Limited & others vs. State of Gujarat,[5] was brought before the Gujarat High Court. Under the GML act, a money lender included companies, as defined under the definition of ‘company’ under the Companies Act of 1956. The act further didn’t exclude the company’s activities registered under the RBI Act in accordance with Chapter IIIB. So, NBFCs did fall within its purview. It further implemented an implied registration policy for NBFCs registered under the RBI act.
Therefore, a prayer was made before the court to declare the applicability of the aforementioned GML act on the NBFCs registered with the Reserve Bank of India to be ultra vires the Indian Constitution. It was further contested that the act must be declared to be unconstitutional due to its legislative incompetence.
The court dealt with the abovementioned issues by firstly stating that NBFCs registered with the RBI are strictly regulated by it without any interference by state laws. It then declared the GML Act ultra vires the Indian constitution due to legislative incompetence, only to the extent that the act tried encroaching upon the RBI’s control over such NBFCs.[6]
However, a contrary stance was taken by the Kerala High Court in the M/S. Sundaram Finance Ltd vs. State Of Kerala.[7]It upheld that the Kerala Money Lenders Act, 1958 (State Act) as well as the RBI Act (Central Act) would have the authority to simultaneously regulate NBFCs in the state.
A few years later in 2015, the M/S. Arjun Shyam & Co. (P) Ltd vs. M/S. Sagar Trading Co. & Ors.[8] case was brought before the Calcutta High Court. The Bengal Money Lenders Act, 1940 (BML Act) mandated licensing for all money lenders in the state. However, the NBFCs registered with the RBI did not procure such license. Owing to this, the activities of the NBFC were hindered and encroached upon.
Therefore, the maintainability of application with regard to the compulsory licencing under the BML Act as well as the RBI Act.
The court took the precedence of the Gujarat High Court in the Radhe Estate case, and upheld that Chapter IIIB of the RBI Act would override the State Act. Further, it laid down the precedence that NBFCs can perform business activities in any state once they have a license under the RBI Act. But, this was subject to the State Act’s definition of money lenders and its mandate. If the state act required the NBFC to get a license under it, the NBFC is expected to do the same to have a smooth functioning of its activities. Since in the current scenario, no notification brought NBFCs within the purview of its definition of ‘money lenders’ under the BML Act, therefore, the business activities of NBFCs could not be hindered. This opened the flood gates for legal complexity and confusion.[9]
Later in the Fullerton India Credit Company Limited and Ors. vs. State of Gujarat,[10] a writ petition was made praying for the court to declare the NBFCs would be outside the purview of the Gujarat Money Lenders Act, if the same is registered with the RBI. Further, the petition requested for the court to declare the applicability of the GML Act to be ultra vires the constitution.
In this case, the Chief Justice relied upon the precedence set by the court in Sundaram Finance Limited & others vs. State of Gujarat,[11] and upheld that the GML Act ultra vires the Indian constitution due to legislative incompetence, only to the extent that the act tried regulating NBFCs which are already registered with the RBI and are therefore within its control.
Further, in the L & T Finance Limited vs. M/s. Saumya Mining Ltd. and others[12] case, the Bombay High Court relied upon the precedence set by the court in Sundaram Finance Limited & others vs. State of Gujarat,[13] and held that since the Central Act would override the State Act therefore, it is only reasonable to hold that entities which fall within the purview of Chapter IIIB of the RBI Act must not fall within the scope of the BML Act.
[1] Phukon, Munmi. “The Inapplicability of Money Lending Laws to Regulated Nbfcs.” IndiaCorpLaw, 9 Aug. 2017, https://indiacorplaw.in/2016/09/inapplicability-of-money-lending-laws.html.
[2] Phukon, Munmi. “The Inapplicability of Money Lending Laws to Regulated Nbfcs.” IndiaCorpLaw, 9 Aug. 2017, https://indiacorplaw.in/2016/09/inapplicability-of-money-lending-laws.html.
[3] Radhe Estate Developers vs. Versus Mehta Integrated Finance Co. Ltd. and Ors, 2011, https://indiankanoon.org/doc/1357712/.
[4] Phukon, Munmi. “The Inapplicability of Money Lending Laws to Regulated Nbfcs.” IndiaCorpLaw, 9 Aug. 2017, https://indiacorplaw.in/2016/09/inapplicability-of-money-lending-laws.html.
[5] Sundaram Finance Limited & others vs. State of Gujarat, https://indiankanoon.org/doc/137966636/.
[6] Phukon, Munmi. “The Inapplicability of Money Lending Laws to Regulated Nbfcs.” IndiaCorpLaw, 9 Aug. 2017, https://indiacorplaw.in/2016/09/inapplicability-of-money-lending-laws.html.
[7] M/S. Sundaram Finance Ltd vs. State Of Kerala, 2009, https://indiankanoon.org/doc/1394347/.
[8] M/S. Arjun Shyam & Co. (P) Ltd vs. M/S. Sagar Trading Co. & Ors., 2015, https://indiankanoon.org/doc/141157628/
[9] Phukon, Munmi. “The Inapplicability of Money Lending Laws to Regulated Nbfcs.” IndiaCorpLaw, 9 Aug. 2017, https://indiacorplaw.in/2016/09/inapplicability-of-money-lending-laws.html.
[10] Fullerton India Credit Company Limited and Ors. vs. State of Gujarat, 2013, https://indiankanoon.org/doc/110239622/
[11] Sundaram Finance Limited & others vs. State of Gujarat, https://indiankanoon.org/doc/137966636/.
[12] L & T Finance Limited vs. M/s. Saumya Mining Ltd. and others, 2014, https://www.legitquest.com/case/lt-finance-limited-v-ms-saumya-mining-ltd-others/89708.
[13] Sundaram Finance Limited & others vs. State of Gujarat, https://indiankanoon.org/doc/137966636/.
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