Jyotsna Rewal Dua, J. - (1.)The Reserve Bank of India has cancelled the Certificate of Registration earlier issued in favour of the petitioner to carry on the business of Non-Banking Financial Institution. The cancellation order has been affirmed by the Appellate Authority, hence, instant writ petition has been preferred.
(2.)Relevant Facts:- Observing that reply of the petitioner-company was unsatisfactory with further observation that the petitioner had violated the statutory provisions of Chapter III B of the Act, RBI cancelled the CoR of the petitioner under Sections 45-IA(6) and 58B of the RBI Act on 22.01.2019. Appeal preferred by the petitioner under Section 45-IA(7) of the RBI Act against the order dated 22.01.2019, was dismissed by the Appellate Authority vide order dated 14.02.2020. Aggrieved, instant writ petition has been preferred.
2(i). Petitioner is a Private Limited Company registered under the Companies Act, 1956. On 23.06.1997, it applied for Certificate of Registration (in short 'CoR') to the Reserve Bank of India (in short 'RBI') for carrying on the business of Non-Banking Financial Institution ('NBFI' in short). Accordingly, the CoR was issued in favour of the petitioner on 17.07.2002.

2(ii). The CoR dated 17.07.2002 was issued by respondents No.2 to 4-RBI under Section 45-IA of the RBI Act, 1934, subject to terms & conditions stipulated therein. Condition No.vi is extracted hereinafter:-

"(vi) Your company shall comply with the provisions of the Reserve Bank of India Act, 1934, as applicable to a non-banking financial company, and abide by all the directions, guidelines, instructions or advices of the Reserve Bank of India, as may be in force from time to time."

The CoR was for carrying on "the business of nonbanking financial institution without accepting public deposits subject to the conditions given on the reverse." Conditions No.2 and 3 mentioned on the reverse of certificate were as under:-

"2. The Certificate of Registration is issued to your company subject to your continued adherence to all the conditions and parameters stipulated under Chapter III B of the Reserve Bank of India Act, 1934.

3. Your company shall be required to comply with all the requirements of the Directions, guidelines/instructions, etc. Issued by the Bank and as applicable to it."

2(iii). The quantum of Net Owned Fund (in short 'NOF') required by Non-Banking Financial Company (in short 'NBFC') for registration as NBFI under Section 45-IA of the RBI Act is as under:-

"[45-IA. Requirement of registration and net owned fund.-

(1) Notwithstanding anything contained in this Chapter or in any other law for the time being in force, no non-banking financial company shall commence or carry on the business of a nonbanking financial institution without-

(a) obtaining a certificate of registration issued under this Chapter; and

(b) having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the Bank may, by notification in the Official Gazette, specify.

(2) Every non-banking financial company shall make an application for registration to the Bank in such form as the Bank may specify.

Provided that a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 shall make an application for registration to the Bank before the expiry of six months from such commencement and notwithstanding anything contained in sub-section (1) may continue to carry on the business of a non-banking financial institution until a certificate of registration is issued to it or rejection of application for registration is communicated to it.

(3) Notwithstanding anything contained in sub-section (1), a nonbanking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 and having a net owned fund of less than twenty-five lakh rupees may, for the purpose of enabling such company to fulfil the requirement of the net owned fund, continue to carry on the business of a nonbanking financial institution-

(i) for a period of three years from such commencement; or

(ii) for such further period as the Bank may, after recording the reasons in writing for so doing, extend, subject to the condition that such company shall, within three months of fulfilling the requirement of the net owned fund, inform the Bank about such fulfilment.

Provided that the period allowed to continue business under this sub-section shall in no case exceed six years in the aggregate.

......................................"

Thus, for registration as NBFI, minimum NOF of Twenty-Five Lakh Rupees, not exceeding Two Hundred Lakh Rupees, as may be specified by the Bank in the Official Gazette, was required by NBFC. However, an NBFC in existence on the commencement of RBI Amendment Act, 1997 and having an NOF of less than Rs.25 Lakh to fulfil the requirement of NOF could carry on the business of NBFI for a period of three years from such commencement or upto a maximum period of six years as the Bank may allow after recording reasons. Meaning thereby that all NBFCs in existence in 1997 and carrying on the business of NBFIs were required to attain the limit of Rs.25-200 Lakhs as NOF notified by the Bank in the Official Gazette, within 3-6 years. Possession of the NOF notified by the Bank was a condition precedent for new registration as NBFI after RBI Amendment Act, 1997.

2(iv). On 27.03.2015, RBI issued a notification specifying Rs.200 Lakhs as NOF required for an NBFC to commence or carry on business of NBFI. This notification further provided that the NBFCs holding CoR, issued by the RBI and having NOF of less than Rs.200 Lakhs can continue to carry on the business of Non-Banking Financial Institution, provided such company achieves NOF of Rs.100 Lakhs before 01.04.2016 and Rs.200 Lakhs before 01.04.2017. Relevant part of the notification is extracted hereinafter:-

"In exercise of the powers under clause (b) of sub-section (1) of section 45-IA of the Reserve Bank of India Act, 1934 (Act 2 of 1934) and on the powers enabling it in that behalf the Reserve Bank of India, in supersession of Notification No. 132/CGM(VSNM)-99, dated April 20,1999, hereby specifies two hundred lakhs rupees as the net owned fund required for a nonbanking financial company to commence or carry on the business of the non-banking financial institution.

Provided that a non-banking financial company holding a certificate of registration issued by the Reserve Bank of India and having net owned fund of less than two hundred lakhs of rupees, may continue to carry on the business of non-banking financial institution, if such company achieves net owned fund of,-

i. one hundred lakhs of rupees before April 1,2016; and

ii. two hundred lakhs of rupees before April 1,2017.

2(v). RBI issued a letter on 30.11.2018 to the petitioner-NBFC stating that the petitioner had reported its NOF as Rs.201.50 Lakhs for the year 2016-2017 after adding its investment of Rs.17 Lakhs in equities and Rs.54.41 Lakhs advanced/loaned to its Group Companies. The NOF so calculated by the petitioner in its Balance Sheet for the year ending on 31.03.2017 was not correct. The investment of Rs.17 Lakhs in equities and Rs.54.41 Lakhs (totalling Rs.71.41 Lakhs) after allowance of 10% of owned fund (Rs.20.16 Lakhs), i.e. 71.41 20.16 Lakhs = Rs.51.25 Lakhs, was required to be deducted from the owned funds in calculating the NOF. Accordingly, RBI determined the NOF of the petitioner at Rs.150.33 Lakhs in following manner (Calculations part of RBI Letter dated 30.11.2018):-

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2(vi). In its response to the above referred letter of RBI, petitioner defended its calculation of NOF in the balance sheet for the year 2016-2017 by placing reliance upon RBI master circular no REF.DBS.FID.NO.C-7/ 01.02.00/2003-04, re-issued with amendments in 2012 DBOD.FID.FIC.No.4/01.02.00/2012-13, where following definition of NOF was given in paragraph No.3.4:-

"3.4 Net Owned Funds in respect of NBFCs Net owned funds will consist of paid up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets. From the aggregate of items will be deducted accumulated loss balance and book value of intangible assets, if any, to arrive at owned funds. Investments in shares of other NBFCs and in shares, debentures of subsidiaries and group companies in excess of ten percent of the owned fund mentioned above will be deducted to arrive at the Net Owned Funds. The NOF should be computed on the basis of last audited Balance Sheet and any capital raised after the Balance Sheet date should not be accounted for while computing NOF."

The reply of the petitioner was that in terms of provisions of circular (extracted above), loans and advances amounting to Rs.54.41 Lakhs advanced by the petitioner to its Group Companies were not to be deducted from its owned funds while calculating the NOF of the petitioner. Therefore, it contended that Rs.150.33 Lakhs plus Rs.54.41 Lakhs (Loans and Advanced amount)=Rs.204.74 Lakhs, has to be treated as NOF of the petitioner. This amount is over and above the limit of Rs.200 Lakhs prescribed by RBI for carrying out the business of NBFI.

2(vii). Not satisfied with petitioner's reply, the RBI issued a show cause notice to it under Section 45-IA(6) and 58 B of the RBI Act for cancellation of its CoR on the ground that the petitioner did not have NOF of Rs.200 Lakhs as on 31.03.2017, therefore, it did not meet the requirement for carrying on the business of NBFI and was acting in violation of the directions of RBI issued in exercise of its powers under Chapter III B of the RBI Act. Petitioner in its reply dated 15.01.2019, reiterated its stand taken in letter dated 04.12.2018.

2(viii). Observing that reply of the petitioner-company was unsatisfactory with further observation that the petitioner had violated the statutory provisions of Chapter III B of the Act, RBI cancelled the CoR of the petitioner under Sections 45-IA(6) and 58B of the RBI Act on 22.01.2019. Appeal preferred by the petitioner under Section 45-IA(7) of the RBI Act against the order dated 22.01.2019, was dismissed by the Appellate Authority vide order dated 14.02.2020. Aggrieved, instant writ petition has been preferred.

(3.)Contentions:-
Even if for the sake of argument, petitioner's NOF is assumed to be less than the minimum prescribed limit of Rs.200 Lakh, then also, the proviso after Section 45-IA(6)(iv) of RBI Act provides for giving an opportunity to the petitioner for complying the provisions/conditions on such terms as may be specified by the Bank. This opportunity has been denied to the petitioner. On this ground also, the impugned order deserves to be quashed and set aside.

Mr. B.C. Negi, learned Senior Counsel for the petitioner has canvassed petitioner's case under following two main points:-

(A). RBI had wrongly calculated and thereby arrived at incorrect figure of NOF of the petitioner. The loan and amount advanced by the petitioner to its Group Companies could not be deducted from its owned fund. As on 31.03.2017, the NOF of the petitioner was not less than Rs.200 Lakhs, which was the minimum limit prescribed by RBI for carrying on the business of NBFI, therefore, order dated 22.01.2019, cancelling the petitioner's CoR, as affirmed by the Appellate Authority on 14.02.2020 was bad in eyes of law.

(B). Even if for the sake of argument, petitioner's NOF is assumed to be less than the minimum prescribed limit of Rs.200 Lakh, then also, the proviso after Section 45-IA(6)(iv) of RBI Act provides for giving an opportunity to the petitioner for complying the provisions/conditions on such terms as may be specified by the Bank. This opportunity has been denied to the petitioner. On this ground also, the impugned order deserves to be quashed and set aside.

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