Holding

The amendment to Section 2(1)(o) of the SARFAESI Act is constitutionally valid and does not violate Article 14 or involve excessive delegation of essential legislative power.

Summary

The Supreme Court examined the constitutional validity of the amendment to Section 2(1)(o) of the SARFAESI Act, which altered the definition of a non‑performing asset (NPA) to allow different regulators to prescribe classification guidelines for their respective creditors. The petitioners argued that this amounted to class legislation violating Article 14 and involved an excessive delegation of essential legislative power. The Court held that the amendment is valid, reasoning that creditors are a heterogeneous class and permitting different regulatory norms does not constitute unreasonable classification. It further held that delegating the task of setting detailed classification standards to expert bodies like the RBI and other regulators does not amount to abdication of essential legislative functions. Consequently, the appeals and writ petitions were dismissed, the creditors' appeals were allowed, and the borrowers were ordered to pay costs.

Issues considered

The constitutional validity of the amended definition of 'non‑performing asset' under Section 2(1)(o) of the SARFAESI Act.
Whether the amendment amounts to class legislation in violation of Article 14 of the Constitution.
Whether Parliament has impermissibly delegated an essential legislative function to the RBI or other regulators.
Interpretation of an undefined statutory expression ('non‑performing asset') under the Act.

Legislation cited

Banking Regulation Act, 1949s. 21, s. 35A
Companies Act, 1956
Recovery of Debts Due to Banks and Financial Institutions Act, 1993
Reserve Bank of India Act, 1934
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)s. 13(2), s. 13(3A), s. 13(4), s. 17, s. 17A, s. 2(1)(o)

Subjects

SARFAESI ActNPAArticle 14class legislationdelegated legislationstatutory interpretationsecured creditorReserve Bank of India guidelinesconstitutional validity

Judgment

[2015] 2 S.C.R. 51

KESHAVLAL KHEMCHANDAND SONS PVT. LTD. A
&OTHERS
v.
UNION OF INDIA & OTHERS
(Writ Petition (Civil) No. 901 of2014)
JANUARY 28, 2015 B

[J. CHELAMESWAR AND S.A. BOBDE, JJ.]
Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002:
c
s. 2(1 }(o) (as amended by Act 30 of 2004)- Constitutional
validity of- Prior to amendment of s.2(1)(o) of the Act, NPA
was defined as 'an account of a borrower which has been
classified' by a creditor either 'as a sub-standard asset or a
doubtful asset or a loss asset' of the creditor and such a D
classification is required to be made in accordance with the
directions or guidelines relating to assets classification issued
by the Reserve Bank - But, under the amended definition,
such a classification of the account of a borrower by the
creditor is required to be made in accordance with the E
directions or guidelines issued by an "authority or body either
established or constituted or appointed by any Jaw for the
time being in force", in all those cases where the creditor is
either administered or regulated by such an authority - F
Whether the amended s.2(1)(o) amounts to class legislation
- Held: Authorizing different regulators to prescribe different
norms for the identification of a NPA with reference to different
creditors do not amount to unreasonable classification for
the reason that all the creditors do not form a uniform! G
homogenous class - There are innumerable differences
among the creditors based on the legal structure of the
creditors' organization, nature of the Joan advanced by them,

51 H
52 SUPREME COURT REPORTS (2015] 2 S.C.R.

A and the terms and conditions subject to which such loans or
advances are made by each of those creditors, etc. -
Enabling them to follow different norms would not be violative
of Article 14 - Therefore, amended definition of the
expression "NPA" u/s.2(1)(o) of the Act is constitutionally
B valid.
s.2(1)(o) (as amended by Act 30 of 2004) - Under
s.2(1 )(o), the Parliament left it to the RBI and other Regulators
to prescribe guidelines for classifying a borrower's account
C as a NPA - Whether in making such a prescription, the
Parliament has delegated any essential legislative function
- Held: The laying down of such norms requires a constant
and close monitoring of the financial system demanding
considerable amount of expertise in the areas of public
D finance, banking etc. -All that activity involves too much of
detail and promptitude of action - The stipulation under the
Act of classifying the account of the borrower as NPA as a
condition precedent for enforcing the security interest is an
additional obligation imposed by the Act on the creditor -
E The borrower cannot complain that defining of the conditions
subject to which the creditor could classify the account as
NPA, is part of the essential legislative function - If the
Parliament chose to define a particular expression by
F providing that the expression shall have the same meaning
as is assigned to such an expression by a body which is an
expert in the field covered by the statute and more familiar
with the subject matter of the legislation, the same does not
amount to any delegation of the legislative powers -
G Parliament is only stipulating that the expression "NPA" must
be understood by all the creditors in the same sense in which
such expression is understood by the expert body i.e., the
RBI or other regulators which are in turn subject to the
supervision of the RBI - Legislation - Delegated legislative
H function.
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 53
v. UNION OF INDIA

Interpretation of statutes: Expression not defined in a A
statute- Held: If a statute does not contain the definition of a
particular expression employed in it, it becomes the duty of
the courts to expound the meaning of the undefined
expressions in accordance with the well established rules of
statutory interpretation. B
Disposing of the appeals and writ petition, the Court

HELD: 1. Prior to amendment of Section 2(1)(o) of
the Securitisation and Reconstruction of Financial C
Assets and Enforcement of Security Interest Act, 2002
by Act 30 of 2004, NPA is defined as 'an account of a
borrower which has been classified' by a creditor either
'as a sub-standard asset or a doubtful asset or a loss
asset' of the creditor and such a classification is required D
to be made in accordance with the directions or
guidelines relating to assets classification issued by the
Reserve Bank. But, under the amended definition, such
a classification of the account of a borrower by the
creditor is required to be made in accordance with the E
directions or guidelines issued by an "authority or body
either established or constituted or appointed by any law
for the time being in force", in all those cases where the
creditor is either administered or regulated by such an
authority. By the amendment, the Parliament made it F
possible that different sets of guidelines made by
different bodies may be followed by different creditor
depending upon the fact as to who is the administering
or regulating authority of such creditor. [Paras 18 to 20)
[69-F-H; 70-A-D] G

2.1. One of the two main purposes of the Act is to
facilitate the secured creditors to recover the amounts
due to them from the borrowers by enforcing the security
interest created by the borrowers without the intervention H
54 SUPREME COURT REPORTS [2015] 2 S.C.R.

A of the civil court or the tribunal. The Parliament made
the Act under which the process of ascertainment of the
amounts due from a borrower by an independent
adjudicatory body is dispensed with. The secured
creditor is made the sole judge of the amount due and
B outstanding from a borrower subject to an appeal under
Section 17 of the Act. Such an ascertainment of amount
due and outstanding is not the only criteria on the basis
of which the secured creditor is entitled to initiate
proceedings under Section 13(4) of the Act, but the
C secured creditor is also required to classify the account
of the borrower (asset of the creditor) as an NPA. [Paras
29, 40, 41] [76-G-H; 77-A; 82-H; 83-A-C]

Mardia Chemicals Ltd. &Others v. Union of India & Ors.
D (2004) 4 SCC 311: 2004 (3) SCR 982; /CIC/ Bank Limited v.
Official Liquidator of APS Star Industries Limited & Ors.
(2010) 10 sec 1: 2010 (12) SCR 644; In re Art. 143,
Constitution of India and Delhi Laws Act (1912) etc. AIR 1951
SC 332; Kathi Raning Rawat v. State of Saurashtra AIR 1952
E SC 123: 1952 SCR 435; B. Shama Rao v. Union Territory of
Pondicherry, AIR 1967 SC 1480: 1967 SCR 650; Devi Das
Gopal Krishnan etc. v. State of Punjab & Ors. AIR 1967 SC
1895: 1967 SCR 557; Municipal Corporation of Delhi v. Bir/a
F Cotton, Spinning and Weaving Mills, Delhi &Anr. AIR 1968
SC 1232: 1968 SCR 251; M.K. Papiah &Sons v. The Excise
Commissioner&Anr. (1975) 1SCC492: 1975 (3) SCR 607
- referred to.
2.2. De hors the Act, when the borrower of a term
G loan defaults in the repayment, the creditor can initiate
legal proceeding straight away for recovery of the
amounts due and outstanding from the borrower. The
Act places an additional legal obligation on the creditor
H to examine and decide whether the account of the
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 55
v. UNION OF INDIA

borrower has become an NPA before initiating action A
under the Act. Under the scheme of Section 13(4), the
'secured asset' (generally the assets of an industrial
concern, like plant and machinery etc.) could be taken
possession of and could either be sold or the
management could be taken over etc. Such an action, if B
not taken after an appropriate deliberation in a given case
could result in the disruption of industrial production and
consequently resulting in unemployment and loss of
GDP etc. impacting larger interests of the nation. C
Therefore, Parliament must have thought that the
secured creditors are required to assess whether the
default in repayment by the borrower is due to any factor
which is a temporary phenomenon and the same could
be managed by the borrower if some accommodation is 0
given. The said analysis of the scheme of Section 13 of
the Act would derive support from the fact that even prior
to the coming into force of the Act, the creditors were
classifying the accounts of the borrowers as NPAs under
the statutory guidelines issued by the RBI. Under the E
said guidelines FINANCIAL ASSETS are sub-divided into
4 categories i.e. (i) standard, (ii) sub-standard, (iii)
doubtful, and (iv) loss. Therefore, all NPAs do not belong
to the same class. Their characters vary depending on
the length of time for which they remained NPAs. Such a F
classification is relevant and assumes importance in the
decision making process of the secured creditor under
Section 13(2) as to which one of the steps contemplated
under Section 13(4) should be resorted to in the case of
a given defaulting borrower. It may not be the only factor G
which determines the cause of action to be taken by the
secured creditor. The magnitude of the amount due and
outstanding in a given case, the reasons which
prompted the borrower to default in the repayment H
56 SUPREME COURT REPORTS [2015] 2 S.C.R.

A schedule, the nature of the business carried on by the
defaulting borrower, the overall prospects of the
defaulter's business, national and international market
conditions relevant to the business of a defaulter are
some of the factors which are germane to a decision that
B action under Section 13(4) is required to be taken against
a defaulting borrower. Even in a case where on rational
and objective consideration of all the relevant factors
including the representations/objections referred to
C under Section 13(3A), the creditor comes to a conclusion
that steps contemplated under Section 13(4) are required
to be taken in the case of a particular defaulter, the further
question as to which one of the steps contemplated
under Section 13(4) is required to be taken or would meet
the ends of justice is a matter for a further rational
0
decision on th~ part of the secured creditor. [Paras 42 to
46] [83-C-H; 84-A-H; 85-A-B]
3. The basic definition under the various circulars of
the Reserve Bank of India and also other REGULATORS
E of a NPA is an asset which ceases to generate income
for the creditor (banks or financial institutions) i.e. a loan
or advances made by the banks on which interest and/
or instalment of principal amount is overdue for a
F specified period depending upon the nature of the loan
or advance - whether the loan or advance is a term loan
or agricultural loan, money advanced on bill discounting
etc. To make any attempt to define the expression 'non-
performing asset' valid for the millions of cases of loan
G transactions of various categories of loans and
advances, lent or made by different categories of
creditors for all time to come would not only be an
impracticable task but could also simply paralyse the
entire banking system thereby producing results which
H are counter productive to the object and the purpose
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 57
v. UNION OF INDIA

sought to be achieved by the Act. Realising the same, A
the Parliament left it to the RBI and other REGULATORS
to prescribe guidelines from time to time in this regard.
The Reserve Bank of India is the expert body to which
the responsibility of monitoring the economic system of
the country is entrusted under various enactments like B
the RBI Act, 1934, the Banking Regulation Act, 1949.
[Paras 48 to 50] [85-E-H; 86-A-C]

4. It is not necessary that legislature should define
every expression it employs in a statute. If such a C
process is insisted upon, legislative activity and
consequentially governance comes to a standstill. It has
been the practice of the legislative bodies following the
British parliamentary practice to define certain words
employed in any given statute for a proper appreciation D
of or the understanding of the scheme and purport of
the Act. But if a statute does not contain the definition of
a particular expression employed in it, it becomes the
duty of the courts to expound the meaning of the
undefined expressions in accordance with the well E
established rules of statutory interpretation. Therefore,
the function of prescribing the norms for classifying a
borrower's account as a NPA is not an essential
legislative function. The laying down of such norms F
requires a constant and close monitoring of the financial
system demanding considerable amount of expertise in
the areas of public finance, banking etc., and the norms
may require a periodic revision. The crux of the
impugned Act is the prescription that a secured creditor G
could take steps contemplated under Section 13(4) on
the "default" of the borrower. The stipulation under the
Act of classifying the account of the borrower as NPA as
a condition precedent for enforcing the security interest
is an additional obligation imposed by the Act on the H
58 SUPREME COURT REPORTS [2015] 2 S.C.R.

A creditor. The borrower cannot complain that defining of
the conditions subject to which the creditor could
classify the account as NPA, is part of the essential
legislative function. If the Parliament did not choose to
define the expression "NPA" at all, Court would be
B bound to interpret that expression as long as that
expression occurs in Section 13(2). In such a situation,
Courts would have resorted to the principles of
interpretation (i) as to how that expression is understood
in the commercial world, and (ii) to the existing practice
C if any of either the particular creditor or creditors as a
class generally. If the Parliament chose to define a
particular expression by providing that the expression
shall have the same meaning as is assigned to such an
0 expression by a body which is an expert in the field
covered by the statute and more familiar with the subject
matter of the legislation, the same does not amount to
any delegation of the legislative powers. Parliament is
only stipulating that the expression "NPA" must be
E understood by all the creditors in the same sense in
which such expression is understood by the expert body
i.e., the RBI or other REGULATORS which are in turn
subject to the supervision of the RBI. Therefore, the
amendment of the definition of the expression 'non-
F performing asset' under Section 2(1)(o) cannot be said
to be bad on account of excessive delegation of
essential legislative function. Thus, by authorizing
different REGULATORS to prescribe different norms for
the identification of a NPA with reference to different
G creditors do not amount to unreasonable classification
for the reason that all the creditors do not form a uniform/
homogenous class. [Paras 65 to 67] [93-F-H; 94-A-G; 95-
A-E]
H 5. There are innumerable differences among the
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 59
v. UNION OF INDIA

creditors. Differences based on the legal structure of the A
creditors' organization, differences based upon the
nature of the loan advanced by them, and differences
based on the terms and conditions subject to which such ..
loans or advances are made by each of those creditors,
etc. Enabling them to follow different norms would not B
be violative of Article 14. The amended definition of the.
expression "NPA" under Section 2(1)(o) of the Act is,
therefore, constitutionally valid. [Paras 68, 71, 76) [95-F-
G; 97-F; 99-8-C]
c
Registrar of Cooperative Societies v. K. Kunjaboo AIR
1980 SC 350:1980 (2) SCR 260 - referred to.

Cobb & Co. v. Kropp 1967 1 AC 141; Queen v. Burah
1878 (5) Ind App 178 - referred to.
D
Case Law Reference
2004 (3) SCR 982 referred to Para 11
2010 (12) SCR 644 referred to Para 51
E
AIR 1951 SC 332 referred to Para 53
1952 SCR 435 referred to Para 53
1967 SCR 650 referred to . Para 54
F
1967 SCR 557 referred to Para 55
1968 SCR 251 referred to Para 56
1975 (3) SCR 607 referred to Para 58
G
1878 (5) Ind App 178 referred to Para 59
1980 (2) SCR 260 referred to Para 60
(1975) 3 SCR 607 referred to Para 60
H
60 SUPREME COURT REPORTS [2015] 2 S.C.R.

A CIVIL ORIGINAL JURISDICTION : Writ Petition (C) No.
901 of 2014

Under Article 32 of the Constitution of India

with Writ Petition (C) Nos. 902, 903, 904, 905, 907, 925,
8 926, 937, 938, 939, 940, 945, 946, 947 and 948 of 2014

Civil Appeal Nos. 1230, 1231, 1233, 1234, 1235, 1236,
1237, 1238, 1239, 1240, 1241, 1242, 1243, 1244, 1245, 1246,
1247, 1248, 1249, 1250, 1251, 1252, 1253, 1254, 1255-56,
c 1257, 1258, 1259, 1260, 1261, 1262, 1263, 1264, 1265-66,
1267-68, 1269-70, 1271, 1272, 1273, 1274, 1275, 1276,
1277, 1278, 1279, 1280, 1281-82, 1283, 1284, 1285-86,
1287, 1288, 1289, 1290, 1291-92and 1293of2015

D TusharMehta,ASG, Soli J. Sorabjee, P. 8. Majumdar,Amit
Sibal, 8asava Prabhu S. Patil, A.TM. Rangaramanujam,
Sidharth Luthra, 8. 8. Sawhney, Jaideep Gupta, V. Giri, Vivek
K. Tankha, K. Ramamoorthy, Nikhil Goel, Naveen Goel,
Marsook 8afaki, Amit Kotak, Vishwas K. Shah, Abhishek
E Singh, Dharmesh Gurjar, Priyanka Rai, Masoom K. Shah, Mitul
Shelat, Chirag Shroff, Sharvil P. Majumdar, Shakti Jadeja,
Rahul Pratap, Vaibhav Tyagi, Apoorve Karol, Abhirup
Dasgupta, Sabarish Subramanian, C. 8. Gururaj (For Legion
of Lawyers), S. Gowthaman, Chinmay Deshpande, Venkatesh
Mohanty, Neeraj Kumar Gupta, Anil Kumar, Harmish Sah, Arjun
F Mahajan, Manik Karanjawala (For Karanjawala & Co.), Hitesh
Kumar Sharma, M. A. Chinnasamy, V. Senthil Kumar, T.
Narasimhan, V. N. Subramaniam, Aniruddha P. Mayee, Nitin
Lonkar, Selvin Raja, Chandan Tiwari, Charudatta Mahindrakar,
A. Selvin Raja, A. P. Mayee, Anup Jain, Suruchi Aggarwal,
G Shashank Menon, Anil Kumar Sangal, Siddharth Sangal, D.
P. Mohanty, Ritesh Kumar, D. L. Chidananda. Gargi Khanna,
Sadhana Sandhu, Sushma Suri, Kuldeep S. Parihar, H. S.
Parihar, Surjodipta Seth, Karan Khanna, Firasat Ali, Ram
Swarup Sharma, R. Anand Padmanabhan, Romil Pathak,
H Shashi Bhushan Kumar, Amritha Sarayoo, Pooja Singh, Arti
KESHAVLAL KHEMCHAND AND SONS PVT. LTD. q'..1
v. UNION OF INDIA

Singh, Rishabh Sancheti, D. Kumanan, M. T. George, Kavitha A
K.T., Praveena Gautam, Pusshp Gupta, Vipin Kumar Jai, Vipul
Jai, Badri Prasad Singh, 0. P. Gaggar, Aditya Gaggar,
Madhumita Bhattacharjee, P. S. Sudheer, Rishi Maheshwari,
Anne Mathew, Raj Kumar Kaushik, Amit Bajaj, Sanjay Bhatt,
Dushyant Kumar, Rabin Majumdar, Venkita Subramoniam T.R., B
Mumtaj Bhalla, B. Kumaran Zaidi, Pankaj Jain, Ashok Jain,
Bijoy Kumar Jain, Arun Aggarwal, Shalu Lal, Anil Rai, Ram Lal
Roy, R. N. Keshwani, Sanjay Kapur,Anmol Chandan, Priyanka
·Das, Daisy Hannah, Sudhakar Pandey, Lalit Bhasin, Nina
Gupta, Mudit Sharma, Sachin Sharma, Jos Chiramel, Sanjeev c
Kumar, Sharmila Upadhyay, Basit Kamran Zaidi,
Subramonium Prasad, Nikhil Singhvi, Abhishek Gupta, Mayuri
Raghuvanshi, E. Sreyas, Madhumita Bhatacharya, Brajesh
Pandey, P. R. Kovilan Poonguntran, B. Khushbansi, Sanjeev
Sagar, Chandra Bhushan Prasad, Revathy Raghavan, D
Jayaseelan S., Prabha Swami for the Appearing Parties.

The Judgment of the Court was delivered by
CHELAMESWAR, J. 1. Leave granted in all the SLPs.
2. The Securitisation and Reconstruction of Financial E
Assets and Enforcement of Security Interest Act, 2002,
(hereinafter referred to as the 'Act'), was made by the
Parliament in the year 2002. The Statement of Objects and
Reasons appended to the Act explained the purpose behind
the enactment as follows:- F

"There is no legal provision for facilitating
securitization of financial assets of banks and
financial institutions. Further, unlike international
banks, the banks and financial institutions in India do G
not have power to take possession of securities and
sell them. Our existing legal framework relating to
commercial transactions has not kept pace with the
changing commercial practices and financial sector
reforms. This has resulted in slow place (sic pace) of H
62 SUPREME COURT REPORTS [2015] 2 S.C.R.

A recovery of defaulting loans and mounting levels of
non-performing assets of banks and financial
institutions."

The enactment was preceded by three Committee Reports
1
8 -two headed by Mr. M. Narasimham and the third by Mr. TR.
Andhyarujina 2 .
3. Recovery of money from a debtor by resorting to the
filing of a suit takes painfully long time in this country, for various
reasons 3 . Huge amounts of money are lent by various banks
C and other financial institutions. Speedy recovery of the monies
due to such institutions is an important element determining
the efficiency not only of such institutions but also becomes an
important factor for the financial health of the country.
D 4. In order to facilitate banks and financial institutions
(hereinafter collectively referred to as "CREDITORS" for the
sake of convenience) to speedily recover the monies due to
them from the borrowers, Parliament made a law called 'The
Recovery of Debts due to Banks and Financial Institutions Act,
E 1993' (51 of 1993) under which banks and financial institutions
could approach a tribunal constituted under the said Act. It
deals exclusively with the claims for the recovery of the monies
1
Ex. Governor, Reserve Bank of India
'Senior Advocate, Supreme Court of India
F ' 1.31 There has been a perception, and not without reason, that our legal
system have not kept pace with measures of financial sector reform and
indeed economic reforms more generally. As far as the banking sector is
concerned, there is continuing need for an appropriate legal framework to
· help enforce contracts and protect the interests of secured creditors especially
in bankruptcy proceedings. Some of our laws are outdated and legal
G procedures are cumbersome and time consuming. Even where Court decrees
are obtained their enforcement has been marked by delays. Our experience
with the Debt Recovery Tribunals has not been altogether satisfactory in view
of the legal issues that have been raised. Our laws indeed seem marked by
a basic asymmetry in their protection of creditors as distinct from borrowers
which comes in the way of the proper and smooth functioning of banking and
credit systems. [See: Introduction : The Issues, Report of the Committee on
H Banking Sector Reforms (April 1998), Ch.I page 6]
KESHAVLAL KHEMCHAND AND SONS PVT. LTD. 63
v. UNION OF INDIA[J. CHELAMESWAR, J.]

due from the borrowers to the CREDITORS. Apart from A
creating such an exclusive forum, the Act also provided for a
more simpler procedure for the adjudication of the legality of
the claims brought before it by the CREDITOR and a procedure
for speedy recovery of sums so adjudicated.
B
5. After a decade of working of the tribunals constituted
under Act 51 of 1993, the Parliament felt that even machinery
and procedure established under the Act 51 of 1993 is not
able to produce the desired result of efficiently recovering
monies from the borrowers. The Parliament, therefore, made c
the Act. The crux of the Act is that any 'security interest' 4 created
in favour of a 'CREDITOR' 5 , who by definition under the Act
becomes a 'SECURED CREDITOR', can be enforced without
the intervention either of the court or tribunal 6 constituted under
Act 51of1993 by following the procedure under Section 13 of D
the Act. Section 13(2) of the Act provides as follows:

"(2) Where any borrower, who is under a liability to a
secured creditor under a security agreement, makes
any default in repayment of secured debt or any
E
'Section 2(zf) "security interest" means right, title and interest of any kind
whatsoever upon property. created in favour of any secured creditor and
includes any mortgage, charge, hypothecation, assignment other than those
specified in section 31;
5 Section 2(zd) "secured creditor" means any bank or financial institution or F
any consortium or group of banks or financial institutions and includes-
(i) debenture trustee appointed by any bank or financial institution: or
(ii) securitisation company or reconstruction company, whether acting as
such or managing a trust set up by such securitisation company or
reconstruction company for the securitisation or reconstruction, as the case
may be; or
(iii) any other trustee holding securities on behalf of a bank or financial G
institution in whose favour security interest is created for due repayment by
any borrower of any financial assistance;
6
Section 13. Enforcement of security interest.- (1) Notwithstanding anything
contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4
of 1882), any security interest created in favour of any secured creditor may
be enforced, without the intervention of the court or tribunal, by such creditor H
in accordance with the provisions of this Act.
64 SUPREME COURT REPORTS [2015] 2 S.C.R.

A instalment thereof, and his account in respect of such
debt is classified by the secured creditor as non-
performing asset, then, the secured creditor may
require the borrower by notice in writing to discharge
in full his liabilities to the secured creditor within sixty
B days from the date of notice failing which the secured
creditor shall be entitled to exercise all or any of the
rights under sub-section (4)."

6. It provides that the SECURED CREDITOR may call
c upon the borrower by issuing a notice in writing to discharge
7
,

his liabilities in full within a period of sixty days from the date of
the notice. If the borrower fails to discharge his liabilities after
such a demand, the secured creditor is entitled to take any
one of the steps contemplated under Section 13(4). Sub-
D section (2) also stipulates three conditions precedent for the
issuance of such notice - (i) that the borrower must have a
liability under a 'security agreement' 8 ; (ii) that the borrower
made a default in repayment of the debt or the instalment
thereof; and (iii) that the account in respect of such debt is
E classified by the secured creditor as a 'non-performing asset'
(hereinafter referred to as "NPA")

7. Sub-section (3) stipulates 9 that notice referred to in sub-
7
Section 2(1) "borrower" means any person who has been granted financial
F assistance by any bank or financial institution or who has given any guarantee
or created any mortgage or pledge as security for the financial assistance
granted by any bank or financial institution and includes a person who becomes
borrower of a securitisation company or reconstruction company consequent
upon acquisition by it of any rights or interest of any bank or financial institution
in relation to such financial assistance;
G 'Section 2(zb) "security agreement" means an agreement, instrument or any
other document or arrangement under which security interest is created in
favour of the secured creditor including the creation of mortgage by deposit of
title deeds with the secured creditor;
'Section 13(3) The notice referred to in sub-section (2) shall give details of
the amount payable by the borrower and the secured assets intended to be
enforced by the secured creditor in the event of non-payment of secured
H debts by the borrower.
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 65
v. UNION OF INDIA[J. CHELAMESWAR, J.]

section (2) shall give the details of the amounts payable by the A
borrower and details of the secured assets intended to be
enforced by the secured creditor in the event of borrower not
complying with the demand made in the notice.
8. Sub-section (4) provides that in the event of the B
borrower failing to discharge his liability in spite of notice under
sub-section (2), the secured creditor may take recourse to any
one or more of the measures indicated under sub-section
13(4)10 .
9. Another important aspect of the Act is that the activity C
of the Securitisation Companies (SC) and Reconstruction
Companies (RC) are given a statutory recognition. Their activity
is regulated under Sections 3 and 4 of the Act. Under Section
3 such companies are required to be registered with the RBI.
Such registration is liable for cancellation under Section 4 on D
10
Section 13(4) In case the borrower fails to discharge his liability in full
within the period specified in sub-section (2), the secured creditor may take
recourse to one or more of the following measures to recover his secured
debt, namely:-
(a) take pQssession of the secured assets of the borrower including the right E
to transfer· by way of lease, assignment or sale for realising the secured
asset;
(b) take over the management of the business of the borrower including the
right to transfer by way of lease, assignment or sale for realising the secured
asset:
PROVIDED that the right to transfer by way of lease, assignment or sale F
shall be exercised only where the substantial part of the business of the
borrower is held as security for the debt:
PROVIDED FURTHER that where the management of whole of the
business or part of the business is severable, the secured creditor shall take
over the management of such business of the borrower which is relatable to
the security or the debt.
(c) appoint any person (hereafter referred to as the manager), to manage the G
secured assets the possession of which has been taken over by the secured
creditor;
(d) require at any time by notice in writing, any person who has acquired any
of the secured assets from the borrower and from whom any money is due or
may become due to the borrower, to pay the secured creditor, so much of the
money as is sufficient to pay the secured debt. H
66 SUPREME COURT REPORTS [2015] 2 S.C.R.

A the happening of any one of the events specified therein.
Section 5 confers statutory authority upon SCs and RCs to
acquire the "financial assets" 11 of any CREDITOR. Section
5(2) 12 further pr<?Vides that upon such acquisition of an asset,
the SC or RC, as the case may be, steps into the shoes of the
B original SECURED .CREDITOR from whom the asset is
acquired.

10. Under the Act, SCs and RCs are also treated to be
SECURED CREDITORS by definition. [See Section 2(1 )(zd)]
C 11. The constitutional validity of the Act was examined by
this Court in Mardia Chemicals Ltd. & Others v. Union of
India & Others, (2004) 4 SCC 311. This Court upheld the
constitutionality of the Act except that of sub-section (2) of
Section 17.
D
"82. We, therefore, subject to what is provided in para
80 above, uphold the validity of the Act and its
provisions except that of sub-section (2) of Section
17 of the Act, which is declared ultra viresArticle 14
E ofthe Constitution of India."
11
2(1)(1) "financial asset" means d~bt or receivables and includes -
(i) a claim to any debt or receivables or part thereof, whether secured or
unsecured; or
(ii) any debt or receivables secured by, mortgage of, or charge on, immovable
F property; or
(iii) a mortgage, charge, hypothecation or pledge of movable property; or
(iv) any right or interest in the security, whether full or part underlying such
debt or receivables; or
(v) any beneficial interest in property, whether movable or immovable, or in
such debt, receivables, whether such interest is existing, future, accruing,
G conditional or contingent; o~
(vi) any financial assistance;
,, 5(2) If the bank o,r financial institution is a lender in relation to any financial
assets acquired under sub-section (1) by the securitisation company or the
reconstruction company such securitisation company or reconstruction
company shall, on such acquisition, be deemed to be the lender and all the
rights of such bank or financiai' institution shall vest in such company in
H relation to such financial assets.
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 67
v. UNION OF INDIA[J. CHELAMESWAR, J.]

12. One of the grounds on which the Act was challenged A
in Mardia Chemicals (supra) was that the said Act enables
the SECURED CREDITORS to classify the account of a
borrower as NPA at the whims and fancies of such SECURED
CREDITORS. This Court rejected the said submission for the
reasons that the guidelines laid down by the Reserve Bank of B
India for classifying the account of a borrower as a NPAwould
eliminate the possibility of the SECURED CREDITOR
arbitrarily declaring the account of a borrower as a NPA.

"37. Next we come to the question as to whether it is c
on the whims and fancies of the financial institutions
to classify the assets as non-performing assets, as
canvassed before us. We find it not to be so. As a
matter of fact a policy has been laid down by Reserve
Bank of India providing guidelines in the matter for D
declaring an asset to be a non-performing asset
known as "RBl's prudential norms on income
recognition, asset classification and provisioning -
pertaining to advances" through a circular dafed 30-
8-2001. It is mentioned in the said circular as follows: E

**** **** **** ****
**** **** **** ****

F
From what is quoted above, it is quite evident that
guidelines as laid down by Reserve bank of India
which are in more details but not necessary to be
reproduced here, lay down the terms and conditions
and circumstances in which the debt is to be classified G
as non-performing asset as clearly as possible.
Therefore, we find no substance in the submission
made on behalf of the petitioners that there are no
guidelines for treating the debt as a non-performing
asset." H
68 SUPREME COURT REPORTS [2015] 2 S.C.R.

A 13. Section 2(1)(o) of the Act defines NPA. The said
definition came to be amended by Act 30 of 2004. It is the
amended definition which is the subject matter of dispute in
this bunch of matters. The said amended definition came to
be challenged in various High Courts.
B
14. The High Court of Gujarat, by a common judgment
dated 24.4.14 in a batch of writ petitions, held thatthe amended
Section 2(1 )( o) of the Act is unconstitutional.

"55. In view of the above-discussions, the writ
c application is partly allowed by holding that the
amended provisions of Section 2(1)(o) of the
Securitisation Act are ultra vires the Article 14 of the
Constitution and the object of the above Act itself and
consequently, we restore the provisions which existed
D earlier, i.e., prior to the amendment of 2004 and
existed at the time of decision of the Supreme Court
in the case of Mardia Chemicals (supra). We,
however, uphold the guidelines of the RBI challenged
in this application."
E
15. On the other hand, in another common judgment dated
18.5.14 in a batch of writ petitions, the Madras High Court
rejected the challenge. ·

F 16. Hence these appeals by the various aggrieved parties,
either the borrowers or the SECURED CREDITORS. Various
writ petitions invoking Article 32 of the Constitution also came
to be filed by some borrowers against whom proceedings
under Section 13 of the Act were initiated during the pendency
G of the appeals from the two judgments referred to above.

17. Since the bone of contention in this bunch of matters
is the amended Section 2(1)(o) of the Act, we deem it
appropriate to extract the provision as it existed both prior to
and after the amendment.
H
KESHAVLAL KHEMCHAND AND SONS PVT. LTD. 69
v. UNION OF INDIA[J. CHELAMESWAR, J.]

THE SECURITISATION THE ENFORCEMENT OF
A
AND RECONSTRUCTION SECURITY INTEREST AND
OF FINANCIAL ASSETS RECOVERY OF DEBTS LAWS
AND ENFORCEMENT OF (AMENDMENT) ACT, 2004
SECURITY INTEREST
ACT, 2002 B
2. Definitions 2. Definitions
(1) In this Act, unless the (1) In this Act, unless the context
context otherwise requires: otherwise requires:
(o) "Non-Performing Asset" (o) "Non-Performing Asset" means
means an asset or account an asset or account of a borrower, c
of a borrower, w~ich has which has been classified by a bank
been classified by a bank or financial institution, as sub-
or financial institution as standard, doubtful or loss asset.-
sub-standard, doubtful or (a) In case such bank or financial
loss assets, in accordance institution is administered or D
with the directions or under regulated by any authority or body
guidelines relating to established, constituted or
assets classification issued. appointed by any law for the time
by the Reserve Bank. being in force, in accordance with the
directions or guidelines relating to
assets classifications issued by such E
authority or body;
(b) In any other case, in accordance
with the directions or guidelines
relating to assets classifications
issued by the Reserve Bank.
F
18. It can be seen from the above, that prior to its
amendment by Act 30 of 2004, NPA is defined as 'an account
of a borrowerwh.ich has been classified' by a CREDITOR either
'as a sub-standard asset or a doubtful asset or a loss asset' of
the CREDITOR and such a classification is required to be made G
in accordance with the directions or guidelines relating to
assets classification issued by the Reserve Bank.
19. But, under the amended definition, such a classification
of the account of a borrower by the CREDITOR is required to
be made in accordance with the directions or guidelines H
70 SUPREME COURT REPORTS [2015] 2 S.C.R.

A issued by an "authority or body either established or constituted
or appointed by any law for the time being in force", in all those
cases where the CREDITOR is either administered or
regulated by such an authority (hereinafter referred to as the
"REGULATOR"). If the CREDITOR is not administered or
B regulated by any such REGULATOR then the CREDITOR is
required to classify the account of a borrower as NPA in
accordance with the guidelines and directions issued by the
Reserve Bank of India.

c 20. In other words, by the amendment, the Parliament
made it possible that different sets of guidelines made by
different bodies may be followed by different CREDITORS
depending upon the fact as to who is the administering or
regulating authority of such CREDITOR. Hence, the challenge
D to the amended provision.

21. Before we examine the various submissions made at
the Bar, we deem it appropriate to give a brief analysis of the
judgments of the Madras High Court as well as the Gujarat
E High Court.

22. The High Court of Madras rejected the submission of
the petitioners that the impugned provision suffers from the
vires of excessive delegation.
F (a) The High Court took note of the fact that the Reserve
Bank of India introduced in the year 1992 the
prudential norms of "income recognition, asset
classification, provisioning and other related matters"
and such norms were revised periodically keeping in
G mind various developments in the banking system,
both nationally and internationally. The High Court took
note of the practice of the Reserve Bank of issuing
master circulars annually which contain the
consolidated instructions issued by the Reserve Bank
H from time to time on the above-mentioned matters.
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 71
v. UNION OF INDIA[J. CHELAMESWAR, J.]

(b) The High Court took note of the fact that the Reserve A
Bank of India in exercise of the statutory authority
under Section 21 and Section 35A of the Banking
Regulation Act, 1949 prescribes norms for the various
aspects of banking specified under the Act.
B
(c) The High Court held thatthe Parliament, while defining
a non-performing asset under Section 2(1 )(o) of the
Act, only adopted the norms prescribed from time to
time by the Reserve Bank of India forthe purpose of
identifying the NPA. 13 c
"34 ..... In this case, the Legislature has left the job of
defining "non-performing asset' in the hands of
Reserve Bank of India. Therefore, when once the
Legislature has approved the power of Reserve Bank
of India on the classification of assets, the resultant D
consequence would be that a subsequent
amendment pertaining to such a classification would
apply with its vigour and force to the new Act as well.
35. In the light of the discussions made above, we E
are of the view that it is a case of an adoption involved
in the present case. Therefore it can only be termed
as legislation by reference and hence the impugned
Circular is valid in law."
13
29. However, the question for consideration before us is as to whether F
there is indeed any delegated legislation or not. We are of the view that there
is no delegated legislation involved in the case on hand. As discussed above,
the power exercised by the Reserve Bank of India in a separate enactment
has been taken note of by the Legislature in the subsequent one. It is only a
definition clause, which has been adopted by the Legislature. This has been
done to put its machinery into use towards its avowed object of activity - G
appropriate recovery. Therefore, we do not find any delegated legislation
involved and therefore contentions raised on the power of delegation and
thereafter it is excessive, has no force. We only observe for the sake of
completion, that even assuming that there is a delegated legislation involved,
the same is not excessive as there are sufficient guidelines available in the
earlier enactment and based upon which the Circular has been issued by H
the Reserve Bank of India, being a specialized body.
72 SUPREME COURT REPORTS [2015) 2 S.C.R.

A 23. On the other hand, the Gujarat High Court opined that
the amended definition of the expression 'NPA' creates two
classes of borrowers. In the context of the classification of the
account of a borrower as a NPAofthe CREDITOR, while one
class of borrowers are governed by the guidelines issued by
B the Reserve Bank of India, the other class of borrowers are
governed by the guidelines issued by different authorities. 14
The High Court also placed reliance on the statement of objects
and reasons of the Act, as it was originally enacted, which inter
a/ia stated as:
c
"(h) empowering banks and financial institutions to
take possession of securities given for financial
assistance and sell or lease the same or take over
management in the event of default, i.e. classification
D of the borrower's account as non-performing asset
in accordance with the directions given or guidelines
issued by the Reserve Bank of India from time to time."

and recorded a conclusion that the Parliament deviated
E from the original aims and objects propounded by it. It also
took note of the fact that this Court in Mardia Chemicals
(supra) repelled the attack on the original definition of a NPA
on the ground that the CREDITORS are bound by the policy
guidelines issued by the Reserve Bank of India, and therefore,
F there is no possibility of the CREDITORS arbitrarily or
whimsically classifying the account of any borrower as a NPA.
The High Court therefore opined that the deviation from the
original objects and reasons would be violative of Article 14 of

G 14
23. Thus, borrowers are divided into two different classes; First, the borrowers
in respect of the Banks and Financial Institutions which are administered or
regulated by an authority or body established, constituted or appointed by any
law for the time being in force, and in those cases, it will be for that authority
or body to frame the guidelines for asset classification and, secondly, the
borrowers in respect of all other cases not covered by clause {a), and in
respect of those cases, it will be in accordance with the directions or guidelines
H issued by the Reserve Bank for asset classification.
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 73
v. UNION OF INDIA[J. CHELAMESWAR, J.]

the Constitution of India. A

24. Learned counsel appearing forthe borrowers argued
that the amended Section 2( 1)( o) is unconstitutional for the
following reasons:

(1) that the Parliament, by authorizing the various bodies B
to frame the guidelines in accordance with which the
account of a borrower could be classified as a NPA
abdicated its essential legislative function by making
an excessive delegation;
c
(2) that while the un-amended Section 2( 1)( o) provided
for a uniform standard by which an account of a
borrower is to be classified as NPA of the CREDITOR
by applying the guidelines issued by the Reserve
Bank, the amended provision enables different D
CREDITORS to adopt different guidelines which
prescribe different standards for arriving at a
conclusion that the account of a borrower is NPA.
Such a provision according to the borrowers, is
violative of Article 14 of the Constitution of India as it E
amounts to a class legislation forbidden by Article 14;

(3) Si rice the Act recognizes the possibility of acquisition
of a "financial asset" 15 of a CREDITOR by either a
F
15
Section 2. Definitions - (1) In this Act, unless the context otherwise
requires,- (I) "financial asset" means debt or receivables and includes-
(i) a claim to any debt or receivables or part thereof, whether secured or
unsecured; or
(ii) any debt or receivables secured by, mortgage of, or charge on, immovable
property; or G
(iii) a mortgage, charge, hypothecation or pledge of movable property; or
(iv) any right or interest in the security, whether full or part underlying such
debt or receivables; or
(v) any beneficial interest in property, whether movable or immovable, or in
such debt, receivables, whether such interest is existing, future, accruing,
conditional or contingent; or
(vi) any financial assistance; H
74 SWPREMECOURTREPORTS [2015] 2 S.C.R.

A "securitization company" 16 or a "reconstruction
company" 17 it introduces a great deal of uncertainty
in the matter of the application of the guidelines
appropriate for classification of an account of a
borrower as a NPA. It all depends on the fact as to
B who is the current holder of such financial asset when
the proceedings under Section 13 are sought to be
invoked.
(4) As the Act does not provide for a reasonable
c opportunity to demonstrate that the classification of
the borrower's account as a NPA is untenable, the
power to make such a classification itself becomes
arbitrary and violative of Article 14 of the Constitution.

D 25. On the other hand, the learned counsel appearing for
the Union of India, the RBI and the various CREDITORS
submitted that the impugned amendment is a constitutionally
valid piece of legislation.
E 1. In recognition of the fact that the assessment of an
a.ccount of borrower as NPA depends upon
innumerable factors which constantly keep changing,
Parliament thought it fit to stipulate that the assessment
be made in the light of the guidelines made by either
F the RBI or various other REGULATORS regulating
the activities of various CREDITORS. There is no
delegation of any essential legislative functions.
2. The prescription that the classification of NPA is to
G
" Section 2(za) "securitisation company" means any company formed and
registered under the Companies Act, 1956 (1 of 1956) for the purpose of
securitisation;
17
Section 2(v) "reconstruction company" means a company formed and
registered under the Companies Act, 1956 (1 of 1956) for the purpose of
H asset reconstruction;
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 75
v. UNION OF INDIA[J. CHELAMESWAR, J.]

be made on the basis of the guidelines framed by A
different bodies regulating the different CREDITORS
is a constitutionally permissible classification having
regard to the nature of the different credit facilities
extended by the various CREDITORS to different
categories of borrowers and on different terms and B
conditions.

3. Thethird submission made on behalf of the borrowers
is sought to be repelled on two grounds:

i) that, it is a purely hypothetical submission in the C
context of the present set of cases as in none of
the cases the original SECURED CREDITOR
transferred the financial asset in favour of any other
body;
D
ii) assuming for the sake of argument that there is a
possibility of an asset of the SECURED
CREDITOR being acquired either by a
securitization company or a reconstruction
company and therefore are governed by the E
guidelines (for the determination of the question
whether an acquired asset has become a non-
performing asset) other than those promulgated
by the Reserve Bank of India, it has not been
demonstrated in any one of these cases that such F
guidelines are less favourable to the borrowers
than the guidelines of the Reserve Bank of India.

26. We would like to make it clear that we are not
undertaking the examination of a second round of attack on G
the constitutionality of the Act in its entirety. It is nobody's case
that judgment of this Court in Mardia Chemicals (supra)
requires reconsideration. As pointed out by the borrowers, the
definition of the expression "NPA" [under Section 2(1 )(o)]
underwent an amendment subsequent to the decision in H
76 SUPREME COURT REPORTS [2015] 2 S.C.R.

A Mardia Chemicals, the validity of such an amendment only is
required to be examined in these matters.

27. We have already noticed that under Section 13 of the
Act the right to invoke the provisions of the Act for enforcement
B of a security interest is permissible only on the satisfaction of
the three conditions specified under Section 13(2) of the Act.
One of them being that the account of the borrower is classified
by the SECURED CREDITOR as a non-performing asset
(NPA) of the CREDITOR.
c
28. The expression 'asset' is not defined under the Act.
But the expressions 'financial asset'1 8 and 'non performing
asset' are defined under Section 2(1)(1) and 2(1)(o) of the Act.
The claim of a CREDITOR to any debt or receivables etc. from
D the borrower.becomes the financial asset of the CREDITOR.
Under the unamended definition, an asset (of the CREDITOR
i.e., the account of the borrower) which is classified by the
CREDITOR as "sub-standard, doubtful or loss asset" in
E accordance with the direction or guidelines relating to the
assets classification issued by the Reserve Bank becomes
an NPA. The amended definition however defines a NPA as
an asset classified by the CREDITOR as "sub-standard,
doubtful or loss asset" in accordance with the relevant
F guidelines issued by the appropriate body. In the case of the
CREDITORS "administered or regulated by any authority or
body established, constituted or appointed by any law for the
time being in force", such 'REGULATOR', and with reference
to CREDITORS, not so administered or regulated, the Reserve
G Bank are the appropriate authorities.

29. We have already noticed that one of the two main
purposes of the Act is to facilitate the SECURED

H 18 Footnote 11 supra
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 77
v. UNION OF INDIA[J. CHELAMESWAR, J.]

CREDITORS 19 to recover the amounts due to them from the A
borrowers by enforcing the security interest created by the
borrowers without the intervention of the civil court or the
tribunal.

30. We think that it is necessary to trace out the history of B
the concepts of (i) NPA and (ii) loan transaction for the better
appreciation of the controversy before us.

31. On 14th August, 1991, the Government of India
appointed a nine-member Committee headed by Mr. M.
Narasimham, (13th Governor of the Reserve Bank of India) to c
19
The expression "SECURED CREDITOR" by definition under the Act takes
within its sweep - (i) a bank, (ii) a financial institution, consortium or group of
banks or financial institutions, (4) debentures trustees appointed by any bank
or financial institution, (5) a securitisation company, (6) reconstruction
company etc. Once again the expression 'bank' by definition takes within its
D
sweep six categories of entities specified under Section 2(1)(c). The
expression 'financial institution', by definition under the Act, takes within its
sweep four categories of bodies specified under Section 2(1 )(m). The activities
of all the above mentioned categories of entities are primarily governed by
some in-house managerial body which, in turn, are subject to the control and
regulation either by the Reserve Bank of India or some other statutory body or E
authority, which are also subject to the overall supervisory control of the
Reserve Bank of India. For example, the National Housing Bank, a bank
established under the Act No.53 of 1987 of the Parliament, though is an
autonomous body "to operate as a financial agency to promote housing
finance institutions" with vast powers to regulate the housing finance activity
in the country, it is still obliged under Section 5(5) of the Act 53 of 1987 to be
guided by the directions given by the Reserve Bank of India. F
The National Housing Bank Act, 1987 (No.53 of 1987) -
Section 5(5). In the discharge of its functions under this Act,
the National Housing Bank shall be guided by such
directions in matters of policy involving public interest as
· the Central government, in consultation with the Reserve
Bank, or the Reserve Bank, may give in writing. G
We are informed at the bar by the learned counsel appearing for the Reserve
Bank of India that there are some 49 entities (we doubt the accuracy of the
statement but it does not make any difference for this decision on hand),
such as, 18 State Financial Corporations, Exim Bank, National Housing Bank,
NABARD etc., which fall within the definition of the expression "bank" or
"financial institution" as defined under the SARFAESI Act which fall within the
sweep of Section 2(1 )(o)(a) of the said Act. H
78 SUPREME COURT REPORTS [2015] 2 S.C.R.

A examine various aspects relating to the structure, organization,·
functions and procedures of the banking system. The said
Committee came to be appointed in the backdrop of the
Balance of Payment Crisis which the country was facing at
that point of time.
B
32. The Committee submitted its 1st Report on the 16th
November, 1991. While examining the various aspects of the
financial system, the said Committee considered the
functioning of the banking system in the country. It took note of
c the existing guidelines issued by the Reserve Bank of India
from time to time and also the various practices of the banking
industry. The Committee was of the view that the "ratio of capital
funds in relation to bank's deposits or its assets is a well known
and universally accepted measure of the strength and stability
o of the institution".
33. It took note of the capital adequacy standards
prescribed by the Committee known as Basie Committee 20
and opined that it is necessary that the Indian banks also
E conform to those standards. But as a prelude to the
compliance with the BIS standards, the Committee opined that
the banks should have their assets revalued on a more realistic
basis and on the basis of their realizable value.
34. It also took note of the fact that the banks and
F development financial institutions (DFls) had not been following
a universal practice with regard to the income recognition,
" The Basie Committee on Banking Regulations and Supervisory Practices
appointed by the Bank of International Settlements (BIS) has prescribed
certain capital adequacy standards to be followed by commercial banks and
G these standards have been accepted for implementation by several countries.
The BIS standard, as it is popularly known, seeks to measure capital
adequacy as the ratio of capital to risk weighted assets. It has prescribed
weightages for different categories of assets which include certain off-balance
sheet items as well. The Committee believes that it is necessary that banks
in India also conform to these standards in a phased manner. [See. Capital
Adequacy. Accounting Policies and Other Related Matters. Report of the
H Committee on the Financial System (November 1991). Ch V page 51]
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 79
v. UNION OF INDIA[J. CHELAMESWAR, J.]

valuation of investments or provisioning against doubtful debts. A
It is in this background, the Committee recommended as
follows:-
".. The international practice is that an asset is treated as
"non-performing" when interest is overdue for at least two 8
quarters. In respect of such non-performing assets interest is
not recognized on accrual basis but is booked as income only
when actually received. The Committee is of the view that a
similar practice should be followed by banks and financial
institutions in India and accordingly recommends that interest c
on non-performing assets should not be booked as income
on accrual basis. The non-performing assets would be defined
as an advance where, as on the balance sheet date
(a) in respect of term loans, interest remains past due
for a period of more than 180 days. D
(b) in respect of overdraft and cash credits, accounts
remain out of order for a period of more than 180
days,
E
(c) in respect of bills purchased and discounted, the bill
remains overdue and unpaid for a period of more
than 180 days,
(d) in respect of other accounts, any amount to be
received remains past due for a period of more than F
180days.
An amount is considered past due when it remains
outstanding 30 days beyond the date.
G
**** **** **** ****

The Committee is of the view that for the purposes of
provisioning, banks and financial institutions should classify
their assets by compressing the Health Codes into the following H
80 SUPREME COURT REPORTS [2015] 2 S.C.R.

A broad groups:
i) Standard
ii) Sub-standard
iii) Doubtful and
B iv) Loss
The RBI should prescribe clear and objective definitions
for these 4 categories to ensure a uniform, consistent and
logical basis for classification of assets. Broadly stated, sub-
C standard assets would be those which exhibit problems and
would include assets classified as non-performing for a period
not exceeding two years. Doubtful assets are those non-
performing assets which remain as such for a period exceeding
two years and would also include loans in respect of which
D instalments are overdue for a period exceeding 2 years. Loss
assets are accounts where loss has been identified but the
amounts have not been written off."
35. Narasimham Committee Report on asset
classification by the CREDITORS was accepted by the
E Reserve Bank of India and guidelines are being issued from
time to time. Different instructions culminating into different
"Master Circulars" with respect to various classes of banks
and financial institutions came to be issued by the Reserve
Bank from time to time. For example, the Reserve Bank of
F India issued instructions dealing with the Non Banking Financial
Companies (NBFCs) 21 and also the Securitisation Companies
and Reconstruction Companies. Originally such guidelines
were meant only to enable the CREDITORS to have a rational
G 2
' Section 45-l(f) "non-banking financial company" means-
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its principal
business the receiving of deposits, under any scheme or arrangement or
in any other manner. or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the
Bank may, with the previous approval of the Central Government and by
H notification in the Official Gazette, specify.
KESHAVLAL KHEMCHANDAND SONS PVT LTD. 81
v. UNION OF INDIA[J. CHELAMESWAR, J.]

view of their "assets"/"financial assets" for the better A
administration of their funds and the banking business. The
Parliament thought it fit to adopt the above-mentioned
guidelines issued by the Reserve Bank of India even for the
purpose of identifying NPAs under the Act.
B
36. Now, we proceed to examine what exactly is a loan
transaction - the rights and obligations arising out of a loan
transaction and the impact of the Act on such rights and
obligations.

37. The expression 'loan', though not defined under the C
Act, has a well-settled connotation i.e., advancing of money
by one person to another under an agreement by which the
recipient of the money agrees to repay the amount on such
agreed terms with regard to the time of repayment and the
liability to pay interest. D

"Definition of loan. A contract of loan of money is a
contact whereby one person lends or agrees to lend
a sum of money to another, in consideration of a
promise express or implied to repay that sum on E
demand, or at a fixed or determinable future time, or
conditionally upon an event which is bound to happen,
with or without interest."

- Chitty on Contracts, Vol.II 3Q1h Edn., p.909 F

38. The person advancing the money is generally called
a CREDITOR and the person receiving the money is generally
called a borrower. The most simple form of a loan transaction
is a contract by which the borrower agrees to repay the amount
borrowed on demand by the creditor with such interest as G
stipulated under the agreement. Such a loan transaction may
be attended by any arrangement of a security like a mortgage
or pledge etc. depending upon the agreement of the parties.

39. The Act provides for a mode of speedy recovery of H
82 SUPREME COURT REPORTS [2015)2S.C.R.

A the monies due from the borrowers to one class of creditors
who are banks and financial institutions (CREDITORS).
Advances/loans made by CREDITORS to businessmen and
industrialists are generally not repayable on demand but
repayable in accordance with a fixed time schedule agreed
B upon by the parties known as "term loans".
"Term loans. A loan may be made for a specified
period (a term loan). In such a case repayment is due
at the end of the specified period and, in the absence
c of any express provision or implication to the contrary,
no further demand for repayment is necessary."
-Chitty on Contracts, Vol.II 301h Edn., p.913
In other words, such loans are repayable in instalments
D over a period of time the terms of which are evidenced by a
written agreement between the parties. A default in the
repayment, (in terms of the agreed schedule} generally
provides a cause of action for the CREDITOR to initiate legal
proceedings for the recovery of the entire amount due and
E outstanding from the borrower. Normally such term loans are
also accompanied by some 'security interest' in a 'secured
asset' of the borrower. Such a recovery is to be made normally
by instituting a suit for recovery of the amounts by enforcing
the 'security interest'. The Recovery of Debts due to Banks
F and Financial Institutions Act, 1993 created an exclusive forum
for a speedy ascertainment of the amounts actually due from
the defaulting borrower and also provided for a mechanism
for speedy recovery of the amounts so ascertained from such
borrowers.
G
40. Since such a system was also found to be inadequate
for the speedy recovery of the monies due from the borrowers
to the CREDITORS, the Parliament made the Act under which
the process of ascertainment of the amounts due from a
H borrower by an independent adjudicatory body is dispensed
KESHAVLAL KHEMCHAND AND SONS PVT. LTD. 83
v. UNION OF INDIA(J. CHELAMESWAR, J.]

with. The SECURED CREDITOR is made the sole judge of A
the amount due and outstanding from a borrower subject to an
appeal under Section 17 of the Act.

41. Be that as it may, such an ascertainment of amount
due and outstanding is not the only criteria on the basis of . 8
which the SECURED CREDITOR is entitled to initiate
proceedings under Section 13(4) of the Act, but the SECURED
CREDITOR is also required to classify the account of the
borrower (asset of the CREDITOR) as an NPA.

42. De hors the Act, when the borrower of a term loan C
defaults in the repayment, the CREDITOR can initiate legal
proceeding straight away for recovery of the amounts due and
outstanding from the borrower. The Act places an additional
legal obligation on the CREDITOR to examine and decide
whether the account of the borrower has become an NPA D
before initiating action under the Act.

43. The question -why did the Parliament impose such
an additional obligation on the CREDITORS while proposing
to create a mechanism for the expeditious recovery of the E
money due to the SECURED CREDITORS - requires
examination. The answer appears to be that under the scheme
of Section 13(4) the 'secured asset' (generally the assets of
an industrial concern, like plant and machinery etc.) could be
taken possession of and could either be sold or the F
management could be taken over etc. Such an action if not
taken after an appropriate deliberation in a given case could
result in the disruption of industrial production and consequently
resulting in unemployment and loss of GDP etc. impacting
larger interests of the nation. Therefore, Parliament must have G
thought that the SECURED CREDITORS are required to
assess whether the default in repayment by the borrower is .
due to any factor which is a temporary phenomenon and the
same could be managed by the borrower if some
accommodation is given. H
84 SUPREME COURT REPORTS [2015] 2 S.C.R.

A 44. The above analysis of the scheme of Section 13 of
the Act would derive support from the fact that even prior to the
coming into force of the Act, the CREDITORS wr:;re classifying
the accounts of the borrowers as NPAs under the statutory
guidelines issued by the RBI. We have already noticed that
B under the said guidelines FINANCIAL ASSETS are sub-
divided into 4 categories i.e. (i) standard, (ii) sub-standard,
(iii) doubtful, and (iv) loss. Depending upon the length of the
period for which the installment of money is over due, such
assets are classified as NPA. As the length of the period of
C over due increased, the account of the borrower is
progressively classified from "sub-standard" to "loss".

45. The same classification is adopted by the Parliament
while enacting the Act. Therefore, all NPAs do not belong to
D the same class. Their characters vary depending on the length
of time for which they remained NPAs.

46. In our view, such a classification is relevant and
assumes importance in the decision making process of the
SECURED CREDITOR under Section 13(2) as to which one
E of the steps contemplated under Section 13(4) should be
resorted to in the case of a given defaulting borrower. We hasten
to add that it may not be the only factor which determines the
cause of action to be taken by the SECURED CREDITOR.
F The magnitude of the amount due and outstanding in a given
case, the reasons which prompted the borrower to default in
the repayment schedule, the nature of the business carried on
by the defaulting borrower, the overall prospects of the
defaulter's business, national and international market
G conditions relevant to the business of a defaulter - in our
opinion, are some of the factors which are germane to a
decision that action under Section 13(4) is required to be taken
against a defaulting borrower. Even in a case where on rational
and objective consideration of all the relevant factors including
H the representations/objections referred to under Section
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 85
v. UNION OF INDIA[J. CHELAMESWAR, J.]

13(3A), the CREDITOR comes to a conclusion that steps A
contemplated under Section 13(4) are required to betaken in
the case of a particular defaulter, the further question as to
which one of the steps contemplated under Section 13(4) is
required to be taken or would meet the ends of justice is a
matter for a further rational decision on the part of the B
SECURED CREDITOR.

47. The international practice - noted by Narasimham
Committee - is that "an asset is treated as non-performing
when interest is overdue for at least two quarters". Such a c
practice of classifying the asset for the administrative purposes
of the Banks only indicates that a borrower's account is not
treated as a written off asset, the moment there is a default.
CREDITORS keep a watch on such account and monitor the
performance of the borrower's activity to ensure the recovery D
of the amounts due having regard to the needs of the industrial
sector of the country and the importance of protecting the
industry as far as possible in the larger interest of the economy
of the State.

48. The basic definition under the various circulars of the E
Reserve Bank of India and also other REGULATORS of a NPA
is an asset which ceases to generate income for the
CREDITORS (banks or financial institutions) i.e. a loan or
advances made by the banks on which interest and/or F
instalment of principal amount is overdue for a specified period
depending upon the nature of the loan or advance - whether
the loan or advance is a term loan or agricultural loan, money
advanced on bill discounting etc.

49. To make any attempt to define the expression 'non- G
performing asset' valid for the millions of cases of loan
transactions of various categories of loans and advances, lent
or made by different categories of CREDITORS for all time to
come would not only be an impracticable task but could also
simply paralyse the entire banking system thereby producing H
86 SUPREME COURT REPORTS [2015) 2 S.C.R.

A results which are counter productive to the object and the
purpose sought to be achieved by the Act.
50. Realising the same, the Parliament left it to the
Reserve Bank of India and other REGULATORS to prescribe
B guidelines from time to time in this regard. The Reserve Bank
of India is the expert body to which the responsibility of
monitoring the economic system of the country is entrusted ·
under various enactments like the RBI Act, 1934, the Banking
Regulation Act, 1949. Various banks like the State Bank of
c jndia, National Housing Bank, which are though bodies created
under different laws of Parliament enjoying a large amount of
autonomy, are still subject to the overall control of the Reserve
Bank of India.
51. Regulation of monetary system and banking business
D is one of the fundamental responsibilities of any modern State
and essential for the economic and political stability of the
State. The vast increase of commerce both national and the
international made easy by the tremendous developments of
E technology, renders such regulation a very complicated matter
with complex variables. The span of each variable could vary
from minutes to years. Therefore, it requires constant
monitoring on daily basis sometime even on minute to minute
basis. In lieu of the importance and complexities, the Reserve
F Bank, the prime regulator of the Indian economy and banking
system, has been issuing guidelines and directions from time
to time not only to the banks but to various other financial
institutions which are amenable to its jurisdiction. Such
instructions given from time to time are consolidated annually
G and published in the form of "Master Circulars". One of such
circular dated 30.08.2001 was taken note of by this Court in
Mardia Chemicals. Incidentally, the authority of the Reserve
Bank to issue such instructions was considered by this Court
in /CIC/ Bank Limited v. Official Liquidator of APS Star
H Industries Limited & Others, (2010) 10 SCC 1, and this Court
KESHAVLAL KHEMCHAND AND SONS PVT. LTD. 87
v. UNION OF INDIA(J. CHELAMESWAR, J.]

held that the Reserve Bank did have such authority by virtue of A
Sections 21 and 35-A of the Banking Regulation Act, 194922 .

52. The question is whether in making such a prescription,
the Parliament has delegated any essential legislative function?
To answer the question it is required to understand what is an B
essential legislative function and what are the limits subject to
which such function could be delegated.

53. The first major decision of this Court on the subject of
the validity of delegated legislation is In re Art. 143,
Constitution of India and Delhi Laws Act (1912) etc., AIR C
1951 SC 332, by a Constitution bench of 7-Judges. Seven
separate judgments were delivered. It was a case where
Section 7 of the Delhi Laws Act authorized the provincial
government to extend by a notification in the official gazette to
the provinces of Delhi, any enactment which was in force in D
any part of British India as on the date of such notification.
S)milar provisions were contained in two other enactments.
One of the questions was whether such conferment of power
on the executive amounted to excessive delegation of the
legislative power. Even according to Patanjali Sastri, J., who E
was a member of the Bench which decided the case, in a
subsequent decision in Kathi Raning Rawat v. State of
Saurashtra, AIR 1952 SC 123, while dealing with the decision
in Delhi Laws Act's case observed thus:
F
"While undoubtedly certain definite conclusions were
reached by the majority of the Judges who took part
in the decision in regard to the constitutionality of
certain specified enactments, the reasoning in each
G
22
"39. The Guidelines issued by RBI dated 13.7.2005 itself authorizes the
banks to deal inter se in NPAs. These guidelines have been issued by the
regulator in exercise of the powers conferred by Sections 21 and 35-A of the
Act . All this comes within the ambit of Section 21 which
enables RBI to frame the policy in relation to advances to be followed by the
banking companies under Section 21 (2). These guidelines and directions H
following them have a statutory force."
88 SUPREME COURT REPORTS [2015] 2 S.C.R.

A case was different, and it is difficult to say that any
particular principle has been laid down by the majority
which can be of assistance in the determination of
other cases.".

B 54. In the case of B. Shama Rao v. Union Territory of
Pondicherry, AIR 1967 SC 1480, J.M. Shelat, J. speaking
for majority (3) of a Constitution Bench of 5 Judges, after
summarizing the views of the 7-Judges who delivered the
judgment in Delhi Laws Act's case opined;
c "5 ........ In view of the intense divergence of opinion
except for their conclusion partially to uphold the
validity of the said laws it is difficult to deduce any
general principle which on the principle of stare
decisis can be taken as binding for future cases. It is
D trite to say that a decision is binding not because of
its conclusion but in regard to its ratio and the principle
laid down therein. The utmost, therefore, that can be
said of this decision is that the minimum on which
there appears to be consensus was (1) that
E legislatures in India both before and after the
Constitution had plenary power within their respective
fields; (2) that they were never the delegates of the
British Parliament; (3) that they had power to delegate
within certain limits not by reason of such a power
F
being inherent in the legislative power but because
such power is recognised even in the United States
of America where separatist ideology prevails on the
ground that it is necessary to effectively exercise the
legislative power in a modern State with multifarious
G
activities and complex problems facing legislatures;
and (4) that delegation of an essential legislative
function which amounts to abdication even partial is
not permissible. All of them were agreed that it could
H be in respect of subsidiary and ancillary power."
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 89
v. UNION OF INDIA[J. CHELAMESWAR, J.]

55. In Devi Das Gopal Krishnan etc. v. State of Punjab A
& Others, AIR 1967 SC 1895, another Constitution Bench
though struck down the impugned provision on the ground of
excessive delegation, recognized the need of delegating and
this Court opined as follows:-
B
"......... But in view of the multifarious activities of a
welfare State, it cannot presumably work out all the
details to suit the varying aspects of a complex
situation. It must necessarily delegate the working out
of details to the executive or any other agency. But c
there is danger inherent in such a process of
delegation. An over-burdened legislature or one
controlled by a powerful executive may unduly overstep
the limits of delegation. It may not lay down any policy
at all; it may declare its policy in vague and general o
terms; it may not set down any standard for the
guidance of the executive; it may confer an arbitrary
power on the executive to change or modify the policy
laid down by it without reserving for itself any control
over subordinate legislation. Thus self effacement of E
legislative power in favour of another agency either
in whole or in part is beyond the permissible limits of
delegation. It is for a court to hold on a fair, generous
and liberal construction of an impugned statute
whether the legislature exceeded such limits. F

But the said liberal construction should not be carried by
the courts to the extent of always trying to discover a dormant
or latent legislative policy to sustain an arbitrary power
conferred on executive authorities. It is the duty of the court to G
strike down without any hesitation an arbitrary power conferred
on the executive by the legislature."

56. In 1968, a Constitution Bench of ?-Judges in
Municipal Corporation of Delhi v. Bir/a Cotton, Spinning
and Weaving Mills, Delhi & Another, AIR 1968 SC 1232 H
90 SUPREME COURT REPORTS [2015] 2 S.C.R.

A considered the question whether Section 150 of the Delhi
Municipal Corporation Act (66 of 1957) is unconstitutional on
the ground that it provided for impermissible delegation of the
'essential legislative function'. On an examination of the
abovementioned authorities, apart from others, Chief Justice
B Wanchoo, speaking for himself and Justice Shelat, held as
follows:
"28 ....... The legislature must retain in its own hands
the essential legislative functions and what can be
c delegated is the task of subordinate legislation
necessary for implementing the purposes and objects
of the Act. Where the legislative policy is enunciated
with sufficient clearness or a standard is laid down,
the courts should not interfere. :What guidance should
o be given and to what extent and whether guidance
has been given in a particular case at all depends on
a consideration of the provisions of the particular Act
with which the Court has to deal including its
preamble. Further it appears to us that the nature of
E the body to which delegation is made is also a factor
to be taken into consideration in determining whether
there is sufficient guidance in the matter of delegation."
The Court held that there was no impermissible delegation
F of legislative power.
57. Justice Hidayatullah, speaking for himself and for
Justice Ramaswami, agreed with the conclusion reached at
by the Chief Justice, though on slightly different reasons.
G 58. In M.K. Papiah & Sons v. The Excise
Commissioner & Another, (1975) 1 SCC 492, this Court
once again considered the question of delegated legislation
in the context of a provision in the Mysore Excise Act which
provided for the levy of excise duty "at such rate or rates as the
H Government may prescribe on excisable goods". Such a
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 91
v. UNION OF INDIA[J. CHELAMESWAR, J.]

provision was challenged as unconstitutional on the ground A
that it was a case of abdication of essential legislative function
by the legislature. The Court after reviewing the number of
earlier decisions held the impugned provision to be valid.
Placing reliance on a judgment of the Privy Council in the case
of Cobb & Co. v. Kropp [1967 1 AC 141], this Court held as B
follows:-

"23. The point to be emphasized - and this is rather
crucial - is the statement of their Lordships that the
Legislature preserved its capacity intact and retained C
perfect control over the Commissioner for Tran sport
inasmuch as it could at any time repeal the legislation
and withdraw the authority and discretion it had
vested in him, and, therefore, the Legislature did not
abdicate its functions. D

In other words, the very fact that the legislature has the
power to repeal and withdraw the authority of the delegate and
the discretion vested in the delegate, should lead to the
conclusion that the legislature did not abdicate its essential E
functions.

59. According to Seervai, by its judgment in M.K.
Papiah's case (supra), this Court "after twenty five years of
wandering in the legal maze of its own creation" ...... "come F
round to the view expressed by the Privy Council in 1878" i.e.
Queen v. Burah [1878 (5) Ind App 178].

60. This Court in the case of Registrar of Cooperative
Societies v. K. Kunjaboo, Al R 1980 SC 350 took note of the G
uncertainty prevailing in the following words;

"2. Lawyers and judges have never ceased to be
interested in the question of delegated legislation and
since the Delhi Laws Act case, we have been blessed
by an abundance of authority, the blessing not H
92 SUPREME COURT REPORTS [2015] 2 S.C.R.

A necessarily unmixed. We do not wish, in this case, to
search for the precise principles decided in the Re
Delhi Laws Act case, nor to consider whether M.K.
Papiah v. Excise Commissioner beats the final
retreat from the earlier position. For the purposes of
B this case we are content to accept the "policy" and
"guidelines" theory and seek such assistance as we
may derive from cases where near identical
provisions have been considered."

c This Court declined "to consider whether M.K. Papiah &
Sons v. The Excise Commissioner, (1975) 3 SCR 607, beat
the final retreat from the earlier position" but proceeded to
examine the case before it on the theory of "policy" and
"guidelines" propounded in some of the cases.
D
61. We can safely state that none of the judgments of this
Court so far has laid down any principle indicating as to what
exactly constitutes "essential legislative function".

62. While the Delhi Laws Act's case dealt with the
E delegation of power to the Executive by the Legislature of
applying certain laws with or without modification to new
territories, the other cases essentially dealt with the
permissibility of the delegation of the power to the Executive
F to fix the rates of tax etc.

63. An examination of the above authorities, in our view
leads to the following inferences;

(i) The proposition that essential legislative functions
G cannot be delegated does not appear to be such a
clearly settled proposition and requires a further
examination which exercise is not undertaken by the
counsel appearing in the matter. We leave it open for
debate in a more appropriate case on a future date.
H
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 93
v. UNION OF INDIA[J. CHELAMESWAR, J.]

For the present, we confine to the examination of the A
question:

(a) Whether defining every expression used in an
enactment is an essential legislative function or not?

(ii) All the judgments examined above recognize that B
there is a need for some amount of delegated
legislation in the modern world.

(iii) If the parent enactment enunciates the legislative
policy with sufficient clarity, delegation of the power c
to make subordinate legislation to carry out the
purpose of the parent enactment is permissible.

(iv) Whether the policy of the legislature is sufficiently clear
to guide the delegate depends upon the scheme and
0
the provisions of the parent Act.

(v) The nature of the body to whom the power is delegated
is also a relevant factor in determining "whether there
is sufficient guidance in the matter of delegation."
E
64. Whether defining every word employed in a statute is
really necessary and whether it is a part of the essential
legislative function was never the subject matter of debate in
any of these cases.

65. We are of the firm opinion that it is not necessary that F
legislature should define every expression it employs in a
statute. If such a process is insisted upon, legislative activity
and consequentially governance comes to a standstill. It has
been the practice of the legislative bodies following the British G
parliamentary practice to define certain words employed in
any given statute for a proper appreciation of or the
understanding of the scheme and purport of the Act. But if a
statute does not contain the definition of a particular expression
employed in it, it becomes the duty of the courts to expound H
94 SUPREME COURT REPORTS [2015] 2 S.C.R.

A the meaning of the undefined expressions in accordance with
the well established rules of statutory interpretation.
66. Therefore, in our opinion, the function of prescribing
the norms for classifying a borrower's account as a NPA is not
8 an essential legislative function. The laying down of such norms
requires a constant and close monitoring of the financial system
demanding considerable amount of expertise in the areas of
public finance, banking etc., and the norms may require a
periodic revision. All that activity involves too much of detail
C and promptitude of action. The crux of the impugned Act is the
prescription that a SECURED CREDITOR could take steps
contemplated under Section 13(4) on the "default"23 of the
borrower. The expression "default" is clearly defined under the
Act. Even if the Act were not to be on the statute book, under
D the existing law a CREDITOR could initiate legal action for the
recovery of the amounts due from the borrower, the moment
there is a breach of the terms of the contract under which the
loan or advance is granted. The stipulation under the Act of
E classifying the account of the borrower as NPA as a condition
precedent for enforcing the security interest is an additional
obligation imposed by the Act on the CREDITOR. In our
opinion, the borrower cannot be heard to complain that defining
of the conditions subject to which the CREDITOR could classify
F the account as NPA, is part of the essential legislative function.
If the Parliament did not choose to define the expression "NPA"
at all, Court would be bound to interpret that expression as
long as that expression occurs in Section 13(2). In such a
situation, Courts would have resorted to the principles of
G interpretation (i) as to how that expression is understood in
the commercial world, and (ii) to the existing practice if any of

23
Section 2(1) (j) "default" means non-payment of any principal debt or
interest thereon or any other amount_payable by a borrower to any secured
H creditor consequent upon which the account of such borrower is classified
as non-performing asset in the books of account of the secured creditor ;
KESHAVLAL KHEMCHAND AND SONS PVT. LTD. 95
v. UNION OF INDIA[J. CHELAMESWAR, J.]

either the particular CREDITOR or CREDITORS as a class A
generally. If the Parliament chose to define a particular
expression by providing that the expression shall have the same
meaning as is assigned to such an expression by a body which
is an expert in the field covered by the statute and more familiar
with the subject matter of the legislation, in our opinion, the B
same does not amount to any delegation of the legislative
powers. Parliament is only stipulating that the expression "NPA"
must be understood by all the CREDITORS in the same sense
in which such expression is understood by the expert body
i.e., the RBI or other REGULATORS which are in turn subject C
to the supervision of the RBI. Therefore, the submission that
the amendment of the definition of the expression 'non-
performing asset' under Section 2( 1)( o) is bad on account of
excessive delegation of essential legislative function, in our D
view, is untenable and is required to be rejected.

67. Coming to the submission that by authorizing different
REGULATORS to prescribe different norms for the
identification of a NPA with reference to different CREDITORS
amount to unreasonable classification is also required to be E
rejected for the reason that all the CREDITORS do not form a
uniform/homogenous class.

68. There are innumerable differences among the
CREDITORS. Differences based on the legal structure of the F
CREDITORS' organization, differences based upon the nature
of the loan advanced by them, and differences based on the
terms and conditions subject to which such loans or advances
are made by each of those CREDITORS, etc. For example,
the Exim Bank loans are generally in foreign currencies. G
Similarly, loans granted by Housing Finance CREDITORS
which are in turn regulated by the National Housing Bank are
loans which are term loans for relatively longer periods than
other loans. There is nothing uniform about these CREDITORS
or their activities. H
96 SUPREME COURT REPORTS [2015] 2 S.C.R.

A 69. It is submitted by learned counsel forthe RBI -
"Prior to the amendment in 2004, NPA was defined
as sub-standard, doubtful or loss asset in accordance
with the directions or under guidelines relating to
B assets classification issued by the Reserve Bank.
Irrespective of whether the financial entity was
regulated by RBI or not, for the purposes of
SARFAESI Act, the asset classification stipulated by
RBI was applicable. Though the regulator concerned
c of the financial entity had stipulated different standards
for regulatory purposes, the entities had to apply the
criteria stipulated by RBI for asset classification so
far as SARFAESI Act was concerned. The
amendment brought about in 2004 addresses this
D issue and brings in uniformity in the classification of
assets by financial entities, both for the purposes of
complying with the directions issues by their own
regulations and for the purposes of SAR FAE SI Act.
As such, a situation where an asset is not an NPA as
E per the specifications of the regulator but the same
asset is an NPA for the purposes of SARFAESI Act
or vice versa does not arise after the amendment
made in 2004."

F 70. The Union of India filed a counter affidavit (through
Director, Department of Financial Services, Ministry of Finance)
before the High Court of Gujarat in Special Civil Application
No.2910 of 2013 regarding the purpose for which the
impugned amendment was brought in. It is stated in the counter
G affidavit as follows:
"9. I state and submit that the amendment in Section
2(1)(o) of SARFAESI Act, 2002 was made in 2004
to extend the classification norms of non-performing
assets stipulated buy (sic by) the concerned regulator
H
KESHAVLAL KHEMCHAND AND SONS PVT. LTD. 97
v. UNION OF INDIA[J. CHELAMESWAR, J.]

who is administering or regulating such entity or the A
Reserve Bank of India when the said institution is not
regulated by any regulator in India. There are financial
institutions such as Housing Finance corporations
notified by Central Government under SARFAESI Act,
which are regulated by National Housing Bank. The B
non-performing assets of these institutions are
classified as per guidelines prescribed by National
Housing Bank. The Act covers certain other
institutions such as Asian Development Bank and
assets are classified as per the guidelines prescribed C
by Reserve Bank of India. The above amendments in
the Act were made so that the guidelines issued by
concerned regulator as applicable to them are
covered for the purpose of recovery under the Act.
D
10. I further state and submit that the amendment covered
the entities under the Act regulated by different regulators such
as Reserve Bank of India, National Housing Bank etc. who
had stipulated their own guidelines for the purpose. At the same
time, the amendment also covered the entities like Asian E
Development Bank, which did not fall within the purview of any
regulator in India. Therefore, the amendment was made in the
Act to take care of these situations and these amendments
were necessary to cover the deficiencies noticed in the Act."
F
71. Therefore, to say that enabling them to follow different
norms would be violative of Article 14, in our view, would be
wholly untenable.

72. Coming to the third submission of the borrower, we
would not like to deal with this submission in the instant batch G
of cases as there are few cases where factually the SECURED
ASSETS have been transferred by the ORIGINAL
CREDITORS. Those cases have been de-tagged from this
batch to be heard separately.
H
98 SUPREME COURT REPORTS [2015] 2 S.C.R.

A 73. Coming to the fourth submission of the borrower, it
must fail on the basis of express language of Section 13(3A)24
which obligates the SECURED CREDITORS to examine the
representation/objection, if any, made by the borrower on the
receipt of notice contemplated under Section 13(2) and
B communicate the reasons to the borrower if such a
representation is not accepted by the SECURED
CREDITORS. We have already indicated in our judgment, in
para no. 48, that the representation/objection contemplated
under Section 13(3A) is required to be examined objectively.
C Section 13 obligates the SECURED CREDITOR to
communicate the reasons for non-acceptance of the
representation or objections to the borrowers.

74. Before closing these matters, we may also deal with
D one aspect of the judgment of the Gujarat High Court. The
Gujarat High Court recorded that the impugned amendment
is ultra vires the object of the Act. We presume for the sake of
this judgment that the impugned amendment is not strictly in
consonance with the objects enunciated when the Act was
E initially made. We fail to understand as to how such
inconsistency will render the Act unconstitutional. The objects
and reasons are not voted upon by the legislature. If the
enactment is otherwise within the constitutionally permissible
limits, the fact that there is a divergence between the objects
F appended to the Bill and the tenor of the Act, in our opinion,
cannot be a ground for declaring the law unconstitutional.
24 Section 13(3A). If, on receipt of the notice under sub-section (2), the borrower

makes any representation or raises any objection, the secured creditor shall
consider such representation or objection and if the secured creditor comes
G to the conclusion that such representation or objection is not acceptable or
tenable, he shall communicate within fifteen days of receipt of such
representation or objection the reasons for non-acceptance of the
representation or objection to the borrower.
Provided that the reasons so communicated or the likely action of the secured
creditor at the stage of communication of reasons shall not confer any right
upon the borrower to prefer an application to the Debts Recovery Tribunal
H under section 17 or the Court of District Judge under section 17A.
KESHAVLAL KHEMCHANDAND SONS PVT. LTD. 99
v. UNION OF INDIA[J. CHELAMESWAR, J.]

75. In view of our abovementioned conclusions, we do A
not propose to examine other submissions regarding the
correctness of the Gujarat High Court's declaration that the
unamended definition of the expression "NPA" would continue
to govern the situation in view of the Gujarat High Court's
conclusion that the amended definition of NPA is B
unconstitutional.

76. All the writ petitions and the appeals are disposed of
declaring that the amended definition of the expression "NPA"
under Section 2(1 )(o) of the Act is constitutionally valid. c
77. In the result, all the writ petitions either filed before
this Court or filed before the Madras and Gujarat High Courts
and the appeals of the borrowers stand dismissed. The
appeals of the CREDITORS are allowed. Each of the writ
petitioners/borrowers shall pay costs to the respective D
CREDITORS calculated at 1% of the amount outstanding on
the date of the notice under Section 13(2) of the Act in each of
the cases.

Devika Gujral Appeals & Writ Petition disposed of E