| Headnote |
Banking Regulation Act, 1949 – ss.35AA and 35AB – Validity of – Petitioners contended that the Banking Regulation (Amendment) Act, 2017, which introduced ss.35AA and 35AB are unconstitutional on two grounds: (i) that the sections introduced are manifestly arbitrary; and (ii) that they suffer from absence of guidelines – Held: The Banking Regulation (Amendment) Act, 2017 brought these amendments which confer regulatory powers upon the RBI to carry out its functions under the Banking Regulation Act and are not different in quality from any of the sections which have already conferred such power – S.21 makes it clear that the RBI may control advances made by banking companies in public interest, and in so doing, may not only lay down policy but may also give directions to banking companies either generally or in particular – Similarly, u/ s.35A, vast powers are given to issue necessary directions to banking companies in public interest – Therefore, ss.35AA and 35AB which give the RBI certain regulatory powers cannot be said to be manifestly arbitrary – Insofar, guidelines by which the power given to the RBI is to be exercised are concerned, there are catena of judgments that such guidance can be obtained not only from the statement of objects and reasons and preamble to the Act but also from its provisions – There are other regulatory ss.25, 29, 30 and 31, all give guidance as to how the RBI is to exercise these powers under the newly added provisions – Consequently, plea of constitutional validity failed – Banking Regulation (Amendment) Act, 2017.Banking Regulation Act, 1949 – s.35A, 35AA and 35AB – Reserve Bank of India Act, 1934 – s.45L – Reserve Bank of India issued a circular on 12.02.2018, by which RBI promulgated a revised framework for resolution of stressed assets – According to RBI, the said circular attempted to tell banks that insofar as huge debts over INR 2000 crore are concerned, they will be given a reasonable period of six months within which to either resolve stress assests or otherwise, if they cannot do so, would only then have to move under the insolvency and Bankruptcy Code, 2016 – It was also contended that the said circular traced its power from sections 21, 35A, 35AA and 35AB of the Banking Regulation Act and s.45L of the Reserve Bank of India Act – Petitioner contended that impugned RBI Circular dated 12.02.2018 was ultra vires the provisions of the Banking Regulation Act and the RBI Act – Held: Stressed assets can be resolved either through the Insolvency Code or otherwise – When resolution through the Code is to be effected, the specific power granted by s.35AA can alone be availed by the RBI – Prior to the enactment of s.35AA, it may have been possible to say that when it comes to the RBI issuing directions to a banking company to initiate insolvency resolution process under the Insolvency Code, it could have been issued such directions u/ss. 21 and 35A – But after s.35AA, it may do so only within the four corners of s.35AA – And power u/ s.35AB r/w. 35A is to be exercised separately from the power conferred by s.35AA – Now, the directions that can be issued u/s. 35AA can only be in respect of specific defaults by specific debtors – This was also the understanding of the Central Government when it issued a notification dated 05.05.2017, which authorised the RBI to issue such directions only in respect of “a default” under the insolvency Code – Thus, any directions which are in respect of debtors generally, would be ultra vires s.35AA – In the instant case, impugned circular dated 12.02.2018 stated that as one of its sources, the power contained in s.45L of the RBI Act insofar as non-banking financial institution are concerned – However, there is nothing to show that the provisions of s.45L(3) were satisfied – Further, impugned Circular dated 12.02.2018 applied to banking and non banking institutions alike, therefore, they are inseparable insofar as the application of the impugned circular is concerned – It is very difficult to segregate the non-banking financial institutions from banks so as to make the circular applicable to them even if it is ultra vires insofar as banks are concerned – For these reasons also, the impugned circular declared as ultra vires as a whole and declared to be of no effect in law – Insolvency and Bankruptcy Code, 2016 Banking Regulation Act, 1949 – ss.35A, 35AA and 35AB – Scheme of – Held: When it comes to issuing directions to initiate the insolvency resolution process under the Insolvency and Bankruptcy Code, 2016, s.35AA is the only source of power – When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving this problem under the Insolvency Code, such power falls within s.35A r/w. s.35AB – This also becomes clear from the fact that s.35AB(2) enables the RBI to specify one or more authorities or committees to advise any banking company on resolution of stressed assets – This advice is obviously de hors the Insolvency Code, as once an application is made under the Insolvency Code, such advice would be wholly redundant, as the Insolvency Code provisions would then take over and have to be followed – Insolvency and Bankruptcy Code, 2016 |
