Holding

Section 45S and Section 58B(5A) of the Reserve Bank of India Act, as amended by the Banking Laws (Amendment) Act, 1983, are constitutionally valid and constitute reasonable restrictions that do not violate Articles 14, 19(1)(g) or 20(1).

Summary

The Supreme Court examined the constitutional validity of Chapter III‑C of the Reserve Bank of India Act, 1934 (Section 45S and Section 58B(5A)) introduced by the Banking Laws (Amendment) Act, 1983, which limit the number of depositors an individual, firm or unincorporated association may accept and prescribe a two‑year period to bring deposits within those limits. The petitioners argued that the provisions violated Articles 14, 19(1)(g) and 20(1) of the Constitution and were unreasonable, especially the two‑year prescription and the penal consequences. The Court held that the restrictions are reasonable regulatory measures aimed at protecting depositors, are within Parliament’s legislative competence, and do not infringe the fundamental rights claimed. It emphasized the need for legislative flexibility in economic regulation and upheld the penal provisions as non‑ex post facto. Consequently, all civil appeals and writ petitions were dismissed.

Issues considered

The provisions of Section 45S and Section 58B(5A) of the RBI Act violate Article 14 (equality) of the Constitution.
The provisions infringe Article 19(1)(g) – the right to practice any profession, trade or business.
The two‑year prescription period for reducing deposits is unreasonable and arbitrary.
The penal provisions constitute an ex post facto law violating Article 20(1).
The legislation is within the competence of Parliament under the relevant entries of the Seventh Schedule.

Legislation cited

Banking Laws (Amendment) Act, 1983s. Section 45S
Companies Act, 1956s. Section 58A
Constitution of Indias. Article 14, s. Article 19(1)(g), s. Article 20(1)
Kerala Moneylenders Act, 1958s. Section 4(2)(iii)
Reserve Bank of India Act, 1934s. Section 45(1)(bb), s. Section 58B(5A)

Subjects

deposit regulationnon‑banking financial companiesconstitutional validityArticle 14Article 19(1)(g)Article 20(1)Reserve Bank of India ActBanking Laws Amendment Act 1983two‑year prescriptionpenal provisionslegislative competence

Judgment

l

.I
T. VELAYUDHAN ACHARI AND ANR.
v.
. UNION OF INDIA AND OTHERS

· FEBRUARY 5~ 1993

B [LALIT MO~ SHARMA, CJ., S. MOHAN AND
N .. VENKATACHALA, JJ.)

Constitution of India 1950: Alfie/es 14, 19(1)(g) and 20(1).
'~~- . '. -- .
' .
. Banking Laws (Amendment) Act, 1983 :_Section 45 S •
c
Reserve Bank of India Act, 1934 : Chapter IIIC, Section 58B (SA).

Deposits-rlcceptance of-l'rovisions imposing ceilings in case of in~
dividuals, Jinns and associations-Validity of-Whether violates fundamental
D rights-f'rescription of two year period to bring down the deposil$-l'rescribed
limas-iwhether reasonable. . ·

The petitioners In the writ petition challenged the constitution"!
validity of chapter 111-C read with Section 588(5A) of the Reserve Bank of
India Act, 1934 introduced by the Banking Laws' (Amendment) Act, 1983.
E Along with the writ jietitlon were heitril several civil appeals, where the
appelfaots. had nusuccessfnlly cfu.11~8ged the aforesaid provisions as
violative or Articles 14 and 19 of th~ Constitution,' in the High Court or
Delhi, which upheld their validity, and granted a certificate to appeal to .
this. Court vlde Kanta Mehta v. Union of India, 1987 (62) Company Cases
p.769•.

The newly incorporated Section 4SS of the Res~rve Bank of India
Act provided that no individual or firm or an unincorporated association
of individuals shall, at any time, have depo~its from more than the num·.. ·
--her of depositors specified against each In the table mentioned therein. It
G .was further pro.ided that where at the ~ommencement or the Act, the
deposits held were not in accordance thereof, a period of two years was
prescri)).,d for bringing down the number !Ir.depositors within the relative
limits s~ifled in the Act, and contravention thereof W..s rendered penal.
These provisions were brought into force on February 15, 1984.

H oi. behalf of the petitioners It was submitted that Section 4SB was
•
832
VELAYUDHAN ACHARI v. U.0.1. 833

violative of the fundamental rights under Article 19(1) \g) of the Constitu- A
tion as it restricts the number of depositors and the rate of interest under
Section 4(2) (iii) of the Kerala Moneylenders Act, 1958, that the two year
period prescribed under Section 42 is unreasonable, and that under the
Kerala Act with effect from 15/10/85 only 14% interest alone could be
charged. It was fnrther submitted that while receiving deposits it was not B
an offence and making it a criminal liability and directing payment, would
amount to ex-post facto law offending Article 20(1) of the Constitution.

The writ petition and appeals were contested by submitting on
behalf of the Reserve Bank of India that it was open to the Government to
regulate economic activities, and that while examining the validity of such C

- provisions courts always have regard to the wisdom of the Legislature a5
it alone has the necessary information and expertise pointing to the needs
for such a legislation. Attention was also drawn to the provisions of the
Non-Banking Financial Companies (Reserve Bank) Directions of 1966
which came into force on January 1, 1969 which specifically provided that
deposits shall be reduced to 25% of the paid-up capital for which a two D
years period was prescribed and that similar directions knows as Non-
Banking Financial Companies Reserve Bank Directions, 1977 came to be
issued with effect from 1st of July, 1977.

Dismissing the writ petition and the appeals, this Court, E
HELD : 1. The impugned 1.!g;slation lio doubt places restrictions on
the right of the appellants to carry on business, but what is essential is to
safeguard the rights of various depositors anil to see that they are not
preyed upon. [844G]
F
2. The Reserve Bank of India, right from 1966, has been monitoring
and following the functianing of non-banking financial Institutions which
invite deposits and utilise those deposits either for trade or for other
various industries. A ceiling for acceptance of deposits and to requires
maintenance of certain liquidity of funds as well as not to exceed borrow- G
ings beyond a particular Jl"reentage of the net-owned funds have been
provid_ed in the corporate sector. But for these requirements, the
depositors would be left high and dry without any remedy. [8448, 845A]

3. Even the corporate sector was not free from blame. It had done
damage to the economy and brought ruination to small depositors. Ex- H
834 SUPREME COURT REPORTS (1993) 1 S.C.R.

A perience bad shown that In many cases deposits takeP by the eompanles
bad not been refunded on the due dates, either the companlnes bad gone
In liquldatien or funds are depleted to such an extent that the companies
were not In a position to refund the deposits. It was accordingly con-
sidered necessary to control the activities of the companies when accepting
B deposits fi'om the "the public'. That was why Section 58A In the Com-
panies Act or 1956 came to be Introduced. [84SB, C·Dl

4. The danger or allowing deposits to be accepted without regulation
Is so acute and urgent, that to bind the bands of the Leglslatnre that only
one course alone is permissible and not to permit a play of joints wonld
C be to totally make it ineffective in meeting the challenge or the social evil.
The mechanics of any economic legislation bas necessarily to be left to the
judgment of the executive and unless it Is patent that there Is hostile
discrimination against a class, the processual basis bas to be accepted.
-
(145F)

D 5. May be, Kerala Moneylenders Act restricts the rates or Interest
under Section 4(2)(iil) but that cannot enable the writ petitioners to
disregard these provisions introduced by the Banking Laws (~dment)
Act 19113 being the non-banking financial institutions. (8460]

6. Section 45 (I) (bb) of the Reserve Bank Act defines 'deposit'. Ir
E there are enough sources of deposit there is no reason why the appellants
and the writ petitioners cannot reduce the deposits. The prescription or
the two year period for reduction Is therefore reasonable. (8470]

7. Moreover, similar directions c:ame to be 18sued as Miscellaneous·
Non-Banking Companies (Reserve Bank) Directions. Ir, thei:efore, this
was the position, it cannot be contended that suddenly the comjiantes like
the appellants and the writ petitioners are called upon the reduce
--+---
deposits. Even otherwise, the interests of the depositors is the prime
concern. [847G, 849B]

G Kanta Mehta v. Union of India and ..others, ·Company Cases Vol. 62
1987 page 769, approved.

Chiney Bottling Co. Pvt. Lt<L. v. Aisistant Registrar of Companies, ~--
Madras, 61 Company Cases 1986 page 770, disapproved. '·

H DCM Ltd. v. U.O.L, [19113] 3 SCR 438; Srinivasa Ente1pnses v. Union
VELAYUDHAN A~ v. U.0.1. [MOHAN,J.] 835

of India, (1981] 1 SCR 801; State of WesM:lengal v. Swapan Kumar Guha, A
~· (1982] 3 SCR 121; R.K. Garg v. Union of India, (1982) 1 SCR 947 and
Fatehchand Himmatlal and othen v. State of Maharashtra, (1977) l SCR
1128, referred to.

Reserve Bank of India v. Peerless General Finance and Investment Co.
Ltd., [1987) 1 SCC 424; Peerless General Finance and Investment Co. Ltd. B
v. Reserve Bank ofIndia, (1992) 2 SCC 344 @· 354; Delhi Cloth and General
~y
Mills v. Union of India, (1983) 3 SCR 438 at page 468 and Reserve Bank of
India v. Tunex Finance and Investment Co. Ltd., (1992) 2 SCC 344 at page
354, referred to.

CIVIL ORIGINAL JURISDICTION : Writ Petition {Civil) No. 508
c
of 1988.

(Under Article 32 of the Constitutioo of India).
-"° 'y- (With WP{C) Nos. 534/88, CA. Nos. 5513/85, 5679/85, 5686/85, D
183/86, 192, 235-36/86, 363/86, 447/86, 510-15/86, 529/86, 646/86, 647/86,
1199/86, 1200/86, 1250/86, WP. (C) Nos. 143, 269, 434/86, T.P. {C) Nos. 76,
77, 78-79/86, 88/86, 139-49/86, 154/86, 155/86, CA. Nos. 81-83/86, T.C. (C)
No. 81/86, I.A. Nos. 1 & 2/92 in CA:No. 5513185)

WITH E
·-~
(CA. No. 174186 Manipal Finance Crop. v. U.0.1., and Anr. With
I
CA Nos. 193/86, 024/86, 509/86, W.P. {C) No. 1506/87, CA. Nos. 696-
99/86, 949-50/86, 541/86, W.P. (C) No. 602/89)

D.N. Dwivedi, Additional Solicitor General, G. Viswanatha Iyer, K.N. F
Bhat, Anil B. Diwan, E.M.S. Anam, P.H. Parekh, C.N. Sree Kumar, R.
---~ - Mohan, S. Balakrishnan, M.K.D. Namboodiri, M.S. Ganesh, S.S. Khanduja,
Y.P. Dhingra, B.K. Satija, Kuldeep, S. Parihar, H.S. Parihar, Ms. A Sub-
hashini, C.V. Sobba Rao, K.R. Nambiar, M.P. Shorawala, D.K. Garg, S.K.
Nandy, Randhir Jain, Ms. Malini Poduval, M.A. Krishna Moorthy, K.J. John, G
Ms. S. Vaidyalingam, AK. Sangbi, P.N. Puri, Ms. Abba Jain, Ms. Madhu
Moolchandani and A.G. Ratnaparkhi for the Appearing Parties.
_,,...
The Judgment of the Court was delivered by

MOHAN, J. ~I these civil appeals arise by certificate granted by the H
836 SUPREME COURT REPORTS [1993) 1 S.C.R.

A High Court of Delhi against the decision reported in Kanta Mehta v. Union
of India and others, Company Cases Vol. 62 1987 page 769. ~

All these civil appeals and writ petitions challenge the constitutional
validity of Chapter III-C read with section 58B (SA) of the Reserve Bank
of India Act, 1934, introduced by the Banking Laws (Amendment) Act,
B 1983 (Act 1 of 1984). Hence, they are dealt with under a common judg-
ment.

In order to appreciate the challenge the necessary legal backgrolind
may be set out.
c In the year 1949, the Banking Regulation Act of 1949 was enacted.
That contained regulatory provisions in regard to banking under the sur-
veillance of the Reserve Bank of India as to what would constitute "bank-
ing" as defined under Section 5(b) of the 1949 Act.
-
D In the year 1959, the Banking Companies (Amendment) Act, 1959
was passed. Sections 17 and 18 were substituted which required banking
companies to create reserve fund and maintain cash reserve. In the year
1%3, Banking Laws (Miscellaneous Provisions) Act, 1%3 inserted Chapter
III-B in the Reserve Bank of India Act. This Chapter conferred extensive
powers on the Reserve Bank of India to issue suitable instructions, to
E regulaie and monitor diverse activities of non-banking companies: The
powers to control and regulate these non-banking institutions are set out
in Sections 45-1 to 45-L. While exercising these powers, the Reserve Bank
of India was issuing various directions to these non-banking fmancial
institutions. One such important direction was issued on 1st of January,
1%7 to the effect that the non-banking financial companies were not io
F hold deposits in excess of 25 per cent of its paid-up capital and the roserves
as also to non-banking, non-financial companies. They were also required
to take steps to keep the deposits \vithin the limits. This direction was
challenged unsuccessfully before the Madras high Court as seen from the
case reported in 1971 41 Company Cases 890 Mayavaram Financial Cor-
poration v. Reserve Bank of India. ·
G
In.1968, by Banking Laws (Amendment) Act, 1968, Sections lOA to
100 were introduced. Section lOA provided that the Board of Directors
shall include persons with professional or special knowledge. Sectfon
lOA(5) empowered the Reserve Bank of India to vary the composition of
H the Board.
VELAYUDHAN ACHARI v. U.0.1. [MOHAN, J.) 837

When a report of the Study Group of non-banking financial inter, A
mediaries was submitted in the year 1971 that was studied. Thereafter in
1973 the Reserve Bank of India issued Miscellaneous Non· Banking Com·
panies (Reserve Bank) Directions, 1973 placing certain restrictions on
companies carrying on prize chit and chit business from receiving deposits
from the public.
B
In 1974, Section 58A of the Companies Act was inserted by the
Companies (Amendment) Act of 1974, which came into force from !st of
February, 1975. The object was to _regulate deposits received by non-bank·

-
ing non-financial companies. The financial companies were already
covered by Reserve Bank of India directions under the Reserve Bank of C
India Act. Therefore, they were exempted under Section 58A (7) from the
purview of that Section. Since the non-banking non-financial companies
. came within the purview of Section 58A, the earlier d;,ections issued by
the Reserve Bank of India Act to non-banking non-financial companies in
the year 1966 were withdrawn. By an amendment of 1977, Section 58A was
further enlarged and the Central Government was empowered to grant D
extensions.

In June 1974, another Study Group was constituted which is popular·
ly known as James Raj Committee.

In July 1975, the above Study Group gave its report. In accordance E
with the recommendations of the Study Group elaborate rules were issued
by the Central Government under Section 58A, called Banking Companies
(Acceptance of Deposits) Rules, 1975 with a view of regulate the various
activities of the companies to accept deposits from public. The validity of
the section and the deposit rules were questioned. This Court in DCM Ltd.
v. U.0.1., [1983) 3 SCR 438 upheld the same.
F

In 1977, directions were issued by the Reserve Bank of India super·
seding earlier directions of 1966 and 1973.

In. 1978, Bill 183 of 1978 called Banking Laws (Arrl_endment) Bill, G
1978 was_ introduced in the Parliament. The said Bill provided ~imits on
depositors which were lower than the current provisions. However, the Bill
lapsed on .dissolution of Parliament. Thereafter prize chits and Money
Circulation Schemes (Banning) Act, 1978 was enacted. This was also
challenged. But that challenge was thrown out by this Court in Srinivasa
Enterprises v. Union of India, (1981) l SCR 801. H
838 SUPREME COURT REPORTS (1993) 1 S.C.R.

A In 1981, several new regulatory directions were given by the Reserve
Bank of India. Inter a/ia they included restrictions on accepting or renewing
deposits from shareholders, Directors etc. which exceeded 15 per cent of
the net-owned funds of the companies as also restricted payment of interest
on deposits at a rate of interest exceeding 15 per cent per annum. The
B validity of the amendment was upheld by the Madras High Court in the
case reported in AIR 1983 Madras 330 A.S.P. Ayar v. Reserve Bank of
India.

In State of West Bengal v. Swapan Kumar Guha, known as Sanchaita

C
case, reported in (1982] 3 SCR 121, this Court while quashing the F.I.R.
launched against the firm, Sanchaita Investments, directed that the Govern-
ment and Reserve Bank of India should look into the matter deeply. It is
in this background the Banking Laws (Amendment) Act, 1983 came to be
enacted. Section 458 states thus:
-
45 S : Deposits not be accepted in certain cases - (1) No
D person, being an individual or a firm or an unincorporated
association of individuals, shall, at any time, have deposits
from more than the number of depositors specified against
each, in the table below:-

E TABLE
(i) Individual -Not more than twenty-five depositors excluding
depositors who are relatives of the individual.
(ii) Firm -Not more than twenty-five depositors per
partner and not more than two hundered and
F fifty depositors in all, excluding, in either case,
depositors who are relatives of any of the
partners.
(iii) U nfilcorporated -Not more than twenty five, depositors per
Association of individual and not more than two hundred and
-·-
individuals fifty depositors in al~ excluding, in either case,
G depositors who are relatives of aay of the
individuals constituting the association.

(2) Where at the commencement of Section 10 of the
Banking Laws (Amendment) Act, 1983 the deposits held
H by any such person are not in accordance with sub-section
VELAYUDHAN ACHARI v. U.0.1. [MOHAN, J.) 839

(1), he sbal1, befole the expiry of a period of two years from A
the date of such oommencement, repay such of the deposits
as are necessary for bringing the number of depositors
within the relative limits specified in that sub-section.

Explanation :- For the purposes of this section -
B
(a) a person shall be deemed to be a relative of another if,
and only if, -

(i) they are members of a Hindu undivided family; or

c
-
(ii) they are husband and wife; or

(iii) the one is related to the other in the manner indicated
in the list of relatives below:-

List of Relatives
D
1. Father. 2. Mother (including step-mother). 3. Son (including Step-
son). 4. Son's wife. 5. Daughter (including step-daughter). 6. Father's
father. 7. Father's mother. 8. Mother's mother. 9. Mother's father. 10. Son's
son. 11. Son's son's wife. 12. Son's daughter. 13. Son's daughter's husband.
14. Daughter's husband. 15. Daughter's son. 16. Daughter's son's wife. 17. E
Daughter's daughter. 18. Daughter's daughter's husband. 19. Brother (in-
. eluding step-brOther). 20. Brother's wife. 21. Sister (including step-sister).
22. Sister's husband;

(b) a person in whose favour a credit balance in outstanding for a
period not exceeding six months in any accoll!lt relating to mutual dealings F
in the ordinary course of trade or business shall not, on account of snch
balance alone, be deemed to be a depj>Sitor."

Thus, the number of depositors has come to be limited.

As to the penalty for contravention of Section 45S it is provided for G
·under Section 58B (5A). It runs thus:

"(5A). lf any person contravenes any provision of Sc:G-
tion 45S, he shall be punishable with imprisonmendor a
terms which may extend to two yearS, or with line which
may extend to twice the amount of deposit received by H
840 SUPREME COURT REPORTS (1993] 1 S.C.R.

A such person in contravention of that section or rupees two
thousand, whichever is more, or with both."

These provisions were challenged by the appellants in the various civil
appeals as violative of Articles 14 and 19 of the Constitution. A Division
Bench of the High Court of Delhi in Kanta Mehta's case (supra) held:
B
"Section 45S read with section 58B {5A} of chapter
111-C of the Reserve Bank of India Act, 1934, as intro-
duced by section 10 of the Banking laws Amendment) Act,
1983, is not violative of articles 14 and 19 of the Constitu-
c tion. There is nothing demonstrably irrelevant or perverse
in limiting in section 45S the number of depositors that
an individual, firm or association could accept. -
Nor is there any element of compulsion on individuals
and firms· or associations which are not incorporated to
D incorporate themselves as a company and article 19{1){c)
is not violated by the provisions of section 45S limiting the
ti.umber of depositors whom individuals, firms and unin-
corporated associations could accept.

Chapter III-C of the Reserve Bank of India Act, 1934,
E
imposes reasonable restrictions on the right of individuals,
firms and unincorporated associations to carry on the
business of acceptance of deposits and advancing or giving
loans to the public. There is also a further safeguard that
Chapter III-C is being operated under the supervision and
F control of the Reserve Bank of India.

The business of acceptance of deposits from the public
dces nol fall within entry 30 or entry 32 of List II of
Schdule VII of the Constitution. it falls within er.try 45
or in any case under entry 97 of List I of Schedule VU
G under which only Parliament has power to pass the ~,,
pugned legislation. Parliament had full competence and
power to pass Chapter III-C of the Reserve Bank of India
Act, 1934."

H Mr. G. Viswanatha Iyer, learned counsel for the writ petitioners in
VELAYUDHAN ACHARI v. U.0.1. [MOHAN, J.] 841

WP. Nos. 508 and 534 of 1988 submits that Section 45B is violative of the A
fundamental right under Article 19(1)(g) of the Constitution as it restricts
~ the number of depositors and the rate of interest under Section 4(2)(iii) of
the Kerala Money Lenders Act, 1958 (hereinafter referred to as the Kerala
Actr

The two years' period prescribed under Section 42 is unreasonable. B

Under Kerala Act, wi.th effect froin 15.10.85 only 14 per cent interest
~-r alone could be charged.

In any event, while receiving deposits it was not an offence, making
c
- it a criminal liability and directing payment, would amount to er post facto
law, offending Article 20(1) of the Constitution. In support of this submis-
sion, reliance is palced on Chinoy Bottling Co. Pvt. Ltd. v. Assistant Registrar
of Companies, Madras, 61 Company Cases 1986 page 770 and Oudh Sugar
Mills Ltd. v. Union of India, AIR 1970 SC 1070.
- )r- D
The other learned counsel seriously pressed the point relating to
criminal liability and prayed for time to comply with the provisions of
Section 45S.

Mr. Anil B. Diwan, learned counsel appearing for Respondent 2 in
CA. No. 447 of 1986, after referring us to the development of law, would E
>
~ submit that it is open to the Government to regulate the. economic ac-
tivities. While examining the validity of such P!ovisions the courts always
have regard to the wisdom of the Legislature because that alone has the
necessary information and expertise pointing to the need of such a legisla-
tion.
F
_, In R.K Garg v. Union of India, (1982) 1 SCR 947 at 969-70 this aspect

...
-- --- . of the matter was highlighted.

It was in this view, this Court upheld Maharashtra Debt Relief Act,
1976 in Fatehchand Himmatlal and others v. State of Maharashtra, (1977) 2
G
SCR 828. If properly .analysed, it can be seen that these provisions con-
stitute. a regulatory scheme and not a penal liability.
•-- ... ~-
Much is made of the penal provisions under Section 58B (5A). It is
submitted that imprisonment of a recalcitrant debtor is permissible in law.
If one goes by. the facts of these cases even after 1986, they collect deposits H
842 SUPREME COURT REPORTS (1993) 1 S.C.R.

A when law required them not to do so.
Under Section 4S(I)(bb) deposit has been defined. If as per the ~
definition there are enough sources of deposit there is no reason why the
appellants cannot reduce the deposits. If, therefore, the package is
reasonable there is no justification to dilute the effect of Section SSB (SA).·
B While examining the scope of the Section it might be contrasted with
Section 125 (3) of the Criminal Procedure Code wherein a sufficient cause
is provided.

In Reserve Bank of India. v. Peerless General Finance and Investment
r--
Co. Lid., (1987) 1 sec 424 this Court had occasion to consider the
c adventures indulged by the persons like appellants. It criticised the fraud
played by such financial vultures.

This approach was approved in Peerless General Finance and Invest-

D
ment Co. Ltd. v. Reserve Bank of India, (1992) 2 SCC 343 @ 354.
---,.. -
,.

The learned counsel also draws our attention to the Non-banking
F"mancial Companies (Reserve Bank) Directions of 1966. They came into
force on January 1, 1967. Clause 4 sub-clause (3) specifically provides that
the deposit shall be reduced to 25 per cent of the paid-up capital for which.
two-year period was provided. Similar directions of 1977 known as Non-
E Banking F"mancial Companies (Reserve Bank) Directions, 1977 came to be
issued with effect from 1st of July, 1977. >- , ' ,
There were complaints, even then, that the financial companies were
not paying interest regularly and the Reserve Bank was requested to help
the depositor. Therefore, in the teeth of this provision, to say that suddenly
F
the appellants and the writ petitioners are called upon to reduce, would
work hardship and they should not be penalised, is incorrect. They took a -_,..-
calculated risk and, therefore, they had to suffer for their own fault.
F

In t:Mmining the various submissions addressed on behalf of the
G appellants and the petitioners we propose to examine the same in the
following background since it is a law refating to regulation of economic
activities.
.....~~
In R.K Gargs case (supra) it is held at pages 969-70:

H 'Another rule of equal importance is that laws relating
VELAYUDHAN ACHARI v. U.0.1. [MOHAN,J.) 843

to economic activities should be viewed with greater A
latitude than laws touching civil rights such as freedom of
~ speech, religion etc. It has heen said by no less a person
than Holmes, J. that the legislature should be allowed
some play in the joints, because it has to deal with complex
problems which do not admit of solution through any
B
doctrinaire or straight jacket formula and this is par-
1 ticularly true in case of legislation dealing with economic
matters, where, having regard to the nature of the
-y problems required to be dealt with, greater play in the
joints has to be allowed to the legtislature. The greater
play in the joints has to be allowed to the legislature. The c
-.. c:Ourt should feel more inclined to give judicial deference
to legislature judgment in the field of economic regulation
than in other areas where fundamental human rights are
involved. Nowhere has ihis admonition been more
~ -y---- felicitiously expressed than in Morey v. Donti, (354 US 457)
D
where Frankfurther, J. said in his inimitable style:

'In the utilities, tax and economic regulation cases,
,there are good reasons for judicial self-restraint if not
judicial deference to legislative judgment. The legislature
after all has the affirmative responsibility. The courts have E
, .--4___ only the power to destroy, not to reconstruct. When these
are added to· the complexity of economic regulation, the
uncertainty, the liability co error, the bewildering conflict
of the experts, and the number of times the judges have
been. overruled by events. - self-limitation can be seen to
F
be the path co judicial wisdom and institutional prestige
and stability.'
......
..,
The court must always remember that 'legislation is
directed to practical problems, that the economic
mechanism is highly sensitive and complex, that many G
problems are sigular and contingent, that laws are not
abstract propositions and do Mt relate to abstract units
->~ and are not to be measured by abstract symmetry' that
exact wisdom and nice adaptation of remedy are not
always p05S1"ble and that "judgment is largely a prophecy H
•
844 SUPREME COURT REPORTS (1993) 1 S.C.R.

A based on meagre and uninterpreted experience". Every
legislation particularly in economic matters is essentially
empiric and it is based on experimentation or what one -~

may call trial and error method and therefore it cannot
provide for all possible situations or anticipate all possible
abuses. There may be crudities and inequities in compli-
B cated experimental economic legislation but on that ac-
count alone it cannot be struck down as invalid."
·-
At page 988 it is held: 'r'-
c "That would depend upon diverse fiscal and economic
considerations based on practical necessity and ad-
ministrative expediency and would also involve a certain
amount of experimentation on which the Court would be
-
least fitted to pronounce. The court would not have the
necessary competence and expertise to adjudicate upon --..(-
D
such an ·~conomic issue. The court cannot possibly assess
or evaluate what would be the impact of a particular
immunity or exemption and whether it would serve the
purpose in view or not.
t
E There are so many imponderables that would enter into
the determination that it would be wise for the court not >---
to hazard an opinion where even economists may differ.
The court must while examining the constitutional validity
of a legislation of this kind, "be resilient, not rigid, forward
F looking, not static, liberal, not verbal" and the court must
always bear in mind the constitutional proposition enun-
ciated by the Supreme Court of the United States in Munn
,.-
v. Illinois, (94 U.S. 13) namely, "that courts do not substitute
~
their social and economic beliefs for the judgment of
lesiglative bodies". The court must defer to legislative judg-
G ment in matters relating to social and economic policies
and must not interfere, unless the exercise of legislative
judgment appears to the palpably arbitrary. The court
should constantly remind itself of what the Supreme Court A-:-
of the United States said in Metropolis Theater Co. v. City
H of Chicago, (57 Lawyers' Edition 730). "The problems of
VELAYUDHAN ACHARI v. U.0.1. [MOHAN,J.] 845

government are practical ones and may justify, if they do A
not require, rough accommodations, illogical it maybe, and
unscientific. But even such criticism should not be hastily
expressed. What is best is not always discernible, the wis-
dom of any choice may be disputed or condemned. Mere
errors of government are not subject to our judicial review.
B
No doubt, the impugned legislation places restrictions on the right
of the appellants to carry on business, but what is essential is to safeguard
the rights of various depositors and to see that they are not preyed upon.
From the earlier narration, it would be clear that the Reserve Bank of
India, right from 1966, has been monitoring and following the functioning C
of non-banking financial institutions which invite deposits and then utilise
those deposits either for trade or for other various industries. A ceiling for
acceptance of deposits and to require maintenance of certain liquidity of
• funds as well as not to exceed borrowings beyond a particular percentage
of the net-owned funds have been provided in the corporate sector. But
for these requirements, the depositors would be left high and dry without D
any remedy.

Even the corporate sector was not free from blame. It had done
damage to the economy and brought ruination to small depositors. This

-
'
was why Section 58A in the Companies Act of 1956 came to be introduced.
It is worthwhile to quote the notes on clauses concerning this provision:-

"It has been the practice of the companies to take
deposits from the public at high rates of interest. Ex-
perience had shown that in many cases deposits taken by
E

the companies have not been refunded on the due dates, F
either the companies have gone in liquidation or funds are
depleted to such an extent that the companies are not in
a position to refund the deposits, it was accordingly con-
sidered necessary to control the activities of the com-
panies when accepting deposits from the "the public".
G
We approve of the reasoning of the Delhi High Court in Kanta
Melrta's case (supra). At pages 798-99 it runs as follows:

"The danger of allowing deposits to be accepted
without regulation is so acute and urgent, that fo bind the H
846 SUPREME COURT REPORTS [1993] 1 S.C.R.

A hands of the Legislature that only one course alone is
permissible and not to permit a play of joints would be to
totally make it ineffective in meeting the challenge of the
social evil. For, it must be remembered that 'in the ul-
timate analysis, the mechanics of any economic legislation
0

has necessarily to be left to the judgment of the execntive
B and unless it is patent that there is hostile discrimination
against a class, the processual basis of price fixation has
to be accepted in the generality of cases as valid." See Prag
. Ice and Oil Mills v. Union of India, AIR 1978 SC 1296, "r" -
para 50). Also such provisions meant to check such evil
c must be viewed, as Krishna Iyer J. said, through a socially
constructive, not legally captious, microscope to discover
glaring unconstitutionnal infirmity, that when laws affect-.
ing large chunks of the community are enacted, stray
misfortunes are inevitable and that social legislation,
without tears, affecting vested rights is virtually impossible.
D
See B. Baneljee v. Smt. Anita Pan, AIR 1975 SC 1146, at
pages 1150-51.

The stress by learned counsel for the petitioners on
the private right of the petitioners to have unrestricted
E deposits and make advanci:~'in any manner they like must
-· -~
receive short shrift, for by pow,.~t is too well settled to be
doubted that private rights must yield to be public need
and that any form of regulation is unconstitutional only if
arbitrary, discriminatory or demonstrably irrelevant to the
policy the Legislature is free to adopt."
F
May be, Kerala Act restricts the rates of interest under Section
4(2)(iii) but that cannot enable the writ petitioners in W.P. Nos. 508 and
534 of 1988 to disregard these provisions, being the non-banking financial
institutions.
G
Hence, we reject the first of the arguments.

As regards the reasonableness of two-year period Se.ction 45(I)(bb)
of the Reserve Bank Act defines "deposit" as follows: _ ...___,_

H "(bb) "deposit" includes and shall be deemed always to have
VELAYUDHAN ACHARI v. U.0.1. [MOHAN,J.] 847

included any receipt of money by way of deposit or loan or A
in any other form, but does not include -

(i) amounts raised by way of share capital;

(ii) amounts contributed as capital by partners of a firm;
B
(iii) any amo~nt received from, -

(iv) any amount received from, -

(a) the Development Bank;
c
(b) a State Financial Corporation established under the
State Financial Corporations Act, 1951;

(c) any financial institution specified in or under section
6A of the Industrial Development Bank of India Act,
1964; or D
(d) any other financial institution that may be specified by
the Bank in this behalf;

(v) amounts received, in !Le ordinary course of business,
by way of security deposit or deaiership deposit; E
.- ..........
I
(vi) any amount received from an individual or a firm or
an association of ipdividuals no! being a body corporate,
registered under any enactment relating to money lending
which is, for the time being in force in any State; and
F
(vii) any amount received by way of subscriptions in respect
- .......,.. of a conventional chit.'

Therefore, as rightly argued by Mr. Anil Diwan as per this definition,
if there are enough sources of deposit there is no reason why the appellants G
and the writ petitioners cannot reduce the-deposits. Further, non-banking
financial companies are required under clause 4 sub-clause (3) as follows:

'(3) Every non-banking financial company, not being
a hire-purchase fmance company, or a holcling finance
company, which on the date of commencement of these H
848 SUPREME COURT REPORTS [1993] 1 S.C.R.

A directions holds deposits in excess of twenty five per cent
of its paid-up capital and free reserves shall secure before
the expiry of a period of two years from •the date of such
commencement, by taking such steps as may be necessary
for this purpose, that the deposits, received by the com-
pany and outstanding on its books are not in excess of the
B
aforesaid limit."

These directions came into force from 1st of January, 1967. Similar
..,.,~

directions came to be issued as Miscellaneous Non-Banking Companies
(Reserve Bank) Directions. Clause 5 dealing with acceptance of deposits
c states as under:

"Acceptance of deposits by miscellaneous non-banking
companies:
-
On and from 1st of July, 1977, no miscellaneous non-
D ----('
banking company shall:-

(a) receive any deposit repayable on demand or on
notice, or repayable after a period of less than six months
an<l more than thirty six months from the date of receipt
of such deposit or renew any deposit received by it,
E
whether before or after the aforesaid date unless such )..__ <
deposit, on renewal, is repayable not earlier than six
months and not later than thirty-six months from the date
1
of such renewal;

F Provided that where a miscellaneous non-banking
company has before the 1st July, 1977, accepted deposits
repayable after a period of more than thritysix months, ...,..
such deposits shall, unless renewed in accordance with
these directions, be repaid in accordance with the terms
of such deposits;
G
Provided further that nothing contained in this clause
shall apply to monies raised by the issue of debentures or
?....._ -
bonds.

H (b) receive or renew:-
VELA YUDHAN ACHARI v. U.O.l. IMOHAN,J.] 849

(i) any deposit against an unsecured debenture or any A
deposit from a shareholder (not being a deposit received
by a private company from its sharesholders as is referred
to in clause (vi) or paragraph 4) or any deposit guaranteed
by any person who, at the time of giving such guarantee,
was or is a director to the company, if the amount of any
B
such deposits together with the amount of such other
deposits of all or any of the kinds rekrred to in this
sub-clause and outstanding in the books of the company
as on the date of acceptance or renewal of such deposits,
exceeds fifteen per cent of its net owned funds.
c
(ii) any other deposit, if the amount of such deposit,
together with the amount of such other deposits, not being
deposits of the kind referred to in sub-clause (i) of this
clause already received and outstanding in the books of
the company as on the date of acceptance of such
deposits, exceeds twenty five per cent of its net owned D
funds."

If, therefore, this was the pos1t1on, it cannot be contended that
suddenly the companies like the appellant and the petitioners arc called
upon to reduce deposits. Even otherwise, the interests of the depositors is E
the prime concern.
___.(_
Coming to the last point, as to whether Section 58B (SA) is violative
of Article 20(1) of the Constitution, we find, when a similar argument was
raised against Section 58A of the Companies Act, that was repelled by this
Court in Delhi Cloth a11d Ge11eral Mills v. U11io11 of India, [1983] 3 SCR 438 F
at page 468 which runs thus:

"Mr. G.A. Shah canvassed one more contention ..A.fter
stating that Rule 31\. becan1e operative ·from April 1, 1978,
he specifically drew attention to the pro,iso to Rule 3A
(I) which required that with relation to the deposits G
maturing during the year ending on the 31st day of March,
1979, the sum required to be deposited or invested under
-./. sub-rule 3A (1) shall be depodted or invested before the
30th day of Septemb.er, 1978. It was then contended that
this provision would necessitate depositing 10% of the H
850 SUPREME COURT REPORTS [1993] 1 S.C.R.

A deposits maturing during the year ending 31st March, 1979
which may have been accepted prior to the coming into
force of rule 3A and to this extent tbe rule has been made
retrospective and as there was no power conferred by
sec. 58A to prescribe conditions subject to which deposits
can be accepted retrospectively Rule 3A is ultra vires sec.
B 58A. Unquestionably, Rule 3A is to deposit 10% of tbe
deposits maturing during the year in the manner
prescribed in Rule 3. Some deposits would be maturing
between April 1, 1978 and March 31, 1979. To provide for
such marginal situation, a proviso is inserted. Does it to
c make the rule retroactive? Of course, not. In D.S. Nakara
v. Unio11 of India, [1983] l SCC 305 a Constitution Bench
of this Court has, in this context, observed as under:

"A statute is not properly called a retroactive statute
because a part of the requisites for its action is drawn
D from a time antecedent to its passing."

Viewed form this angle, the provision can be properly
called prospective and not retroactive. Therefore, the
contention does not commend to us."
E
In the light of this, we should hold that the ruling of the Madras High
Court in Chi11oy Bottling Co. Pvt. Ltd. (supra) is incorrect.

As to the plight of these depositors we need only to quote the case
in Peerless General Fina11ce and Investment Co. Ltd., [1987] 1 SCC 424. At
F paragraph 37 it is held:

"We would also like to query what action the Reserve
Bank of India and the Union of India are taking or
proposing to take against the mushroom growth of
'finance and investment companies' offering staggeringly
G high rates of interest to depositors leading us to suspect
whether these companies are not speculative ventures
floated to attract unwary and credulous investors and
capture their savings. One has only to look at the
morning's newspaper to be greeted· by advertisements
H inviting deposits and offering interest at astronomic rates.
VELAYUDHAN ACHARI v. U.0.1. [MOHAN1 J.) 851

On January 1, 1987 one of the national ne\Vspapers pub- A
~ lished from Hyderabad,· where one of .us happened to be
spending the vacation, carried as many as ten advertise-
ments with 'banner headlines', covering the whole of the
last page, a quarter of the first page and conspicuous
spaces in other pages offering fabulous rates of interest.
B
At least two of the advertisers offered to double the
deposit in 30-months. 2000 for 1000, 10,000 for 5,000, they
-·-.r said. Another a~vertiser offered interest ranging between
30 per cent to 38 per cent for periods ranging between six
months to five years. Alniost all the advertisers offered
extra. interest rangWg between 3 per cent to 6 per cent if c
deposits were made during the Christmas-Pongal season.
Several of them onered gifts and prizes. If the Reserve
Bank of India considers the Peerless Company with eight
hU11dred crores invested in government securities, fixed
deposits with National Banks etc. unsafe for depositors,
D
one wonders what they have to say about the mushroom
non-banking companies which are accepting deposits,
promising mos! unlikely returns and what action is
proposed to be tak"n to protect the investors. It does not
require much imagination to realise the adventurous and
_.... precarious character of these businesses. Urgent action E
. appears to be called for to protect the public. While on
the one hand these schemes encourage two vices affecting
public economy, the desire to take quick and easy money
and the habit of excessive and wasteful consumer spend-
ing, on the other hand the investors who generally belong F
to the gullible and less affluent classes have no security
_,,._ .
whatsoever. Action appears imperative."

And paragraph 42 also requires to be quoted :

"I share my brother's concern about the mushroom G
growth of financial companies all over the country. Such
companies have proliferated. The victims of the schemes,
that the attractively put forward in public media, are
mostly middle class and lower middle class people. lnstan-
ces are legion where such needy people have been H
852 SUPREME C:OURT REPORTS (1993) 1 S.C.R.

A reduced penniless because of the fraud played by such
financial vultures. It is necessary for the authorities to
evolve fool-proof schemes to see that fraud is not allowed
to be placed upon persons who are not conversant with
the practice of such financial enterprises who pose them-
selves as benefactors of people.'
B
We may also add that this has been reaffirmed in Reserve Bank of
India v. Timex Finance and Investment Co. Ltd., [1992] 2 SCC 344 at page
354. 'r"-
Therefore, we are in entire agreement with the Delhi High Court.
c
Since, as we have stated above, all the appellants and writ petitioners
were praying for time to comply with these provisions, the matter was
adjourned from time to time. Though some of them have complied with
the requirements of law yet a few others have not done so. We make it
D clear that in spite of this indulgence, their failure to comply cannot be
countenanced.

We dismiss the appeals and the petitions along with l.A.Nos.1 and 2
in C.A. No.5513 of 1985. However, there shall be no orders as to cost.

N.V.K. Petitions and appeals dismissed.