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High Court of Delhi
THE HONOURABLE CHIEF JUSTICE MR. N.V. RAMANA & THE HONOURABLE MR. JUSTICE MANMOHAN
M/s. Holystar Natural Resources Pvt. Ltd. & Others
Versus
Union of India & Another
W.P. (C). No. 7505 of 2013 & CM APPL. No. 16064 of 2013
Decided On : 17-01-2014
SARFAESI ACT - SECTION 2(1)(O) - RBI CIRCULAR DATED 1ST JULY 2013 - CONSTITUTIONALITY - DELEGATION OF LEGISLATIVE FUNCTION - CLASSIFICATION OF NPA - REASONABLENESS - VALIDITY: The Supreme Court upheld the constitutional validity of Section 2(1)(o) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the legality of the Reserve Bank of India (RBI) Circular dated 1st July 2013. The Court held that the Parliament did not delegate any essential legislative function to RBI under Section 2(1)(o) of the SARFAESI Act. The Court further held that the impugned provision is not violative of Article 14 of the Constitution, as the classification between banks and financial institutions has a reasonable nexus. The Court also held that RBI guidelines, as far as it defines NPA, gives power to banks to decide when and under what circumstances an account is to be declared NPA, basing on the whims and fancies of the bank, which is not only unreasonable but also arbitrary.
Fact of the Case:
The petitioners, who are assailing the constitutional validity of Section 2(1)(o) of the SARFAESI Act as well as the legality of the RBI Circular dated 1st July 2013, contended that Section 2(1)(o) of the SARFAESI Act defines Non-Performing Asset (NPA) to mean an asset/account of a borrower, which had been classified by a bank/financial institution as sub-standard, doubtful or loss asset in accordance with the RBI guidelines relating to asset classification or similar guidelines issued by banks/financial institutions. They submitted that the SARFAESI Act did not define or even indicate any guideline for defining as to what is sub-standard, doubtful or loss asset. According to them, the Parliament by delegating such an essential legislative function and that too, in an uncontrolled manner inter alia by not setting the limits of the power delegated or by laying down standards or guidelines had clearly violated Article 14 of the Constitution of India. The petitioners also submitted that Section 2(1)(o) was violative of Article 19(1)(g) of the Constitution of India as it gave uncontrolled discretion and arbitrary power in the hands of financial institutions/RBI to declare any entity as an NPA. They further submitted that RBI guidelines were contrary to Section 2(1)(o) of the SARFAESI Act. On the other hand, the Union of India submitted that in the wake of the financial reforms undertaken by the Government of India based on the Narasimhan Committee Report I and II, prudential norms were introduced by the RBI to address credit monitoring process being pursued by banks and financial institutions. It pointed out that prior to the SARFAESI Act, an asset/account was considered as an NPA based on the concept of ‘past due’. The Union of India also submitted that the plea of excessive delegation had not been pleaded in the writ petition. It further submitted that the Parliament had not delegated any essential legislative function to RBI under Section 2(1)(o) of the SARFAESI Act.
Finding of the Court:
The Court held that the Parliament did not delegate any essential legislative function to RBI under Section 2(1)(o) of the SARFAESI Act. The Court further held that the impugned provision is not violative of Article 14 of the Constitution, as the classification between banks and financial institutions has a reasonable nexus. The Court also held that RBI guidelines, as far as it defines NPA, gives power to banks to decide when and under what circumstances an account is to be declared NPA, basing on the whims and fancies of the bank, which is not only unreasonable but also arbitrary.
Issues: 1. Whether Section 2(1)(o) of the SARFAESI Act delegates essential legislative function to RBI/Financial Institution with regard to the concept of NPA? 2. Whether Section 2(1)(o) of the SARFAESI Act and the RBI Circular dated 1st July 2013 are violative of Articles 14 and 19(1)(g) of the Constitution of India?
Ratio Decidendi: 1. The Court held that the Parliament did not delegate any essential legislative function to RBI under Section 2(1)(o) of the SARFAESI Act. The Court further held that the impugned provision is not violative of Article 14 of the Constitution, as the classification between banks and financial institutions has a reasonable nexus. The Court also held that RBI guidelines, as far as it defines NPA, gives power to banks to decide when and under what circumstances an account is to be declared NPA, basing on the whims and fancies of the bank, which is not only unreasonable but also arbitrary. 2. The Court held that Section 2(1)(o) of the SARFAESI Act and the RBI Circular dated 1st July 2013 are perfectly legal, valid and are not violative of Articles 14 and 19(1)(g) of the Constitution of India.
Final Decision: The Court dismissed the writ petitions and all pending applications with no order as to costs.
N.V. Ramana, J.
1. In this batch of writ petitions, the petitioners are assailing the constitutional validity of Section 2(1)(o) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as ‘SARFAESI Act') as well as the legality of the Circular dated 1st July, 2013 of the Reserve Bank of India (hereinafter referred to as ‘RBI’).
Petitioner's submissions
2. Mr. Ramesh Singh, learned counsel for the petitioners, pointed out that Section 2(1)(o) of the SARFAESI Act defines Non-Performing Asset (for short, ‘NPA’) to mean an asset/account of a borrower, which had been classified by a bank/financial institution as sub-standard, doubtful or loss asset in accordance with the RBI guidelines relating to asset classification or similar guidelines issued by banks/financial institutions. He submitted that the SARFAESI Act did not define or even indicate any guideline for defining as to what is sub-standard, doubtful or loss asset.
3. According to him, the Parliament by delegating such an essential legislative function and that too, in an uncontrolled manner inter alia by not setting the limits of the power delegated or by laying down standards or guidelines had clearly violated Article 14 of the Constitution of India. In support of his submission, Mr. Ramesh Singh relied upon a judgment of the Supreme Court in Krishna Mohan (P) Ltd. v. Municipal Corporation of Delhi and Ors., (2003) 7 SCC 151 wherein it has been held has under:-
“44. The next question that arises for our consideration is whether, following the reasons given by this Court in New Manek Chowk [AIR 1967 SC 1801] it can be held that sub-section (3) of Section 116 is invalid for excessive delegation of legislative powers as it vests arbitrary and unguided discretion in the Commissioner to declare any machinery situated in or upon a land or building to be deemed to form part of the land and building for the purpose of determining the rateable value thereof. According to learned counsel for the appellant, the reasons given by this Court in New Manek Chowk [AIR 1967 SC 1801] for striking down Rule 7(2) framed under the BPMC Act, 1949 as invalid on account of excessive delegation of power of the legislature equally apply to sub-section (3) of Section 116.
45. For the respondents, however, it is contended that as long as guidelines for exercise of delegated power are discernible in the statute, it cannot be held to be unconstitutional, however skeletal the parent legislation may be. Our attention was drawn to the judgments of this Court in J. Jayalalitha v. Union of India and Kishan Prakash Sharma v. Union of India.
46. Learned counsel for the respondents contends that reading the provisions of the DMC Act, particularly the definition of the expressions “land”, “building”, “premises”, “rateable”, it is clear that the exclusion contemplated by sub-section (3) of Section 116 of the Act can only be of such items which could not normally be included in the concept of land or building. Hence, the Commissioner's power to notify plant or machinery under Section 116(3) must be read as extending only to such things of the same nature as would fall within the definition of “land”as defined in Section 2(24) of the Act. He, therefore, contends that there is thus sufficient guideline indicated in the statute itself and, therefore, the constitutionality of the statute must be upheld. Despite anxiously scanning the provisions of the statute, we hardly find any such guidelines therein. The contention of the learned counsel for the respondent that the statute indicates the guideline, namely, that the Commissioner's power to notify under Section 116(3) is only in respect of things which are of the same nature as would fall within the ambit of the expression “land”, as defined under Section 2(24), appears to be a classic case of post hoc ergo propter hoc. Obviously, the power given to the Commissioner under sub-section (3) o
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