RAGHAVAN J. - (1.) THESE three writ petitions are filed by the three chit fund companies for the issue of a writ of mandamus restraining the Reserve Bank of India (1st respondent) from enforcing the provisions of the Non-Banking--Financial Companies (Reserve Bank) Directions, 1966, framed under sections 45J to 45L of the Reserve Bank of India Act, 1934. The petitioners are companies carrying on business as foreman of chits. The allegations in each of the writ petitions are of the same pattern and we shall take up the allegations in W.P. No. 1126 of 1967. The scheme of working of chits as set out by the petitioners in their affidavits is as follows : A number of persons called subscribers join together undertaking to subscribe a certain sum of money at stated intervals for a certain period. The aggregate of the sums payable by all the subscribers in one instalment is called the capital of the chit. The prize amount is ascertained by auctioning the fund among the subscribers or by draw. After deducting the discount which is either a fixed percentage of the capital or the difference between the capital and the price amount, the prize amount is taken by the successful bidder in full satisfaction of his claim under the chit, but subject to his liability to pay future instalments. The person who conducts the chit is called the foreman. It is the duty of the foreman to collect the subscriptions from every subscriber, to conduct and manage the chit, to keep regular accounts and to pay the prize amount to the subscriber concerned whether or not the other subscribers have paid the instalments due. If all the subscribers pay the instalments due without default, there will be no problem for the foreman in paying the prize amount to the subscriber entitled thereto. But it is often found that 15 to 20 per cent. of the subscribers default in payment of instalments. Before drawing the prize amount, the successful subscriber is required to furnish security for due payment of future subscriptions till the culmination of the chit. Sometimes subscribers are unable to furnish the necessary security and allow the prize amounts to remain with the fund on interest. The petitioners, in addition to carrying on the business of chits, accept deposits and loans from third parties, and they utilise the amounts so obtained as working funds and also do business by lending the deposits so received at higher rates of interest ostensibly to tide over their financial difficulties in meeting their obligations as foreman of chits. A large number of instances came to light where foreman of chits have either disappeared or evaded payments to non-prized subscribers, and, with a view to safeguard the interests of subscribers, the State of Madras enacted the Madras Chit Funds Act, 1961.Section 2(2) of the Madras Chit Funds Act defines chit as follows : "Chit means a transaction whether called chit fund, chit, kuri, or, by any other name, by which its foreman enters into an agreement with a number of subscribers that every one of them shall subscribe a certain sum or a certain quantity of grain by instalments for a definite period and that each subscriber in his turn as determined by lot or by auction or by tender or in such other manner as may be provided for in the agreement, shall be entitled to a prize amount." Section 2(5) defines defaulting subscriber as meaning a subscriber who has defaulted in the payment of subscriptions due according to the terms of the chit agreement. Foreman is defined in section 2(10) as meaning the person who under the chit agreement is responsible for the conduct of the chit and includes any other person discharging the functions of the foreman under section 30. Section 2(13) defines prize money as follows : "'Prize amount' means the difference between the chit amount and the discount, and, in the case of a fraction of a ticket means the difference between the chit amount and the discount proportionate to a fraction of the ticket and when the prize amount is payable otherwise than in cash, the value of the prize amount shall be the value at the time it becomes payable." Section 2(15) defines Registrar as meaning a Registrar appointed under sub-section (1) of section 51. Section 3 provides for registration of bye-laws and section 4 prohibits invitation by subscription to chit of which bye-laws have not been registered. Chapter III deals with foreman. Section 12 requires that, for the proper conduct of the chit, every foreman shall, before applying for the certificate of commencement under section 7, execute an indenture of mortgage and trust in favour of the Registrar as trustee charging by way of security, property sufficient to the satisfaction of the Registrar for the realisation of the chit amount or deposit in any approved bank an amount of cash not less than half of the chit amount or invest in Government securities of the face value or market value, whichever is less, of not less than half of the chit amount, and transfer the amount so deposited or the Government securities in favour of the Registrar to be held in trust by him as security. Section 12(2) provides that where a foreman conducts more than one chit, he shall furnish security in respect of each such chit. The rights of the foreman mentioned in section 13 are to obtain the chit amount at the instalment specified in the chit agreement, to charge commission or remuneration not exceeding five per cent. of the chit amount, to receive and realise all contributions from the subscribers and to distribute the prize amounts to the prized subscribers and the dividend among the subscribers, to demand sufficient security from any prized subscriber for the due payment of future subscriptions and to substitute subscribers in the place of defaulters. The duties of the foreman are enumerated in section 14. Under section 15, the foreman is enjoined to keep registers and books of account in such forms as may be prescribed. Section 16 requires the foreman to file with the Registrar a balance-sheet duly audited. Chapter IV deals with non-prized subscribers and Chapter V with prized subscribers. Section 23 requires that, before receiving the prize amount without deducting all future subscriptions, every prized subscriber shall furnish and the foreman shall take sufficient security for the due payment of future subscriptions. Section 24 enjoins upon every prized subscriber to pay the subscription regularly and in default he is liable to make a consolidated payment of all the future subscriptions at once on the issue of notice demanding the same in terms of section 26. Chapter VI deals with the transfer of rights of foreman and subscribers. Chapter VII deals with termination of chits. Chapter VIII deals with inspection of documents. Under section 35 a subscriber is permitted inspection of the chit records, including books of account, pass books, the balance-sheets, profit and loss accounts and such other records showing the actual financial position of the chit scheme. Section 37 authorises the Registrar to inspect chit books and records. Chapter IX deals with the winding-up of chits. Section 44 provides for the entire chit assets vesting in court for distribution among subscribers to whom amounts are due in respect of the chit on the making of an order for winding up of the chit. Section 56 prescribes penalties for contravention of the provisions of sections 3, 4 and 7 of the Act. Section 59 authorises the Magistrate to issue warrant at the instance of the Registrar or the inspecting officer appointed under section 51 empowering him to inspect the books, registers, accounts or documents, etc.Deposits received from investing public, it will be seen, are outside the control of the Madras Chit Funds Act, 1961. It is with a view to safeguard the interests of the depositors that Parliament made the impugned enactment, namely, the Banking Laws (Miscellaneous Provisions) Act, 1963 (55 of 1963), which received the assent of the President on December 30, 1963, and was duly published. By this amending Act, the Reserve Bank of India Act, 1934, was amended and a new Chapter III-B was introduced after Chapter III-A in the Reserve Bank of India Act, 1934 (hereinafter referred to as "the Act"). The new Chapter contains sections 45H to 45Q relating to non-banking institutions and financial institutions receiving deposits from third parties. The relevant portions of the impugned provisions are set out below. Section 45-I(c) defines "financial institution" as follows : "'Financial institution' means any non-banking institution-- (i) which carries on as its business or part of its business the financing, whether by way of making loans or advances or otherwise, of trade, industry, commerce or agriculture or (ii) which carries on as its business or part of its business the acquisition of shares, stock, bonds, debentures or debenture stock or securities issued by a Government or local authority or other marketable securities of a like nature or (iii) which carries on as its principal business hire-purchase transactions or the financing of such transactions." In 1969 after section 45-I(c)(iii) an Explanation was added and the Explanation runs as follows : "Explanation.--For the removal of doubts, it is hereby declared that a company registered under section 3 of the Insurance Act, 1938 (4 of 1938), for any class of insurance business and a company, not being a banking company, a corporation or a firm, carrying on, as its principal business, the management, conduct or supervision, as the foreman or agent, of any transaction or arrangement by which it enters into an agreement with a number of subscribers that every one of them shall subscribe a certain sum by instalments for a definite period and that each subscriber in his turn, as determined by lot or by auction or by tender or in such other manner as provided for in the agreement, shall be entitled to a prize amount shall be deemed to be a financial institution as defined in this clause. "Section 45-I(e) defines" non-banking institution" as meaning a company, corporation, co-operative society or firm. Section 45J confers on the Reserve Bank of India powers to regulate or prohibit issue of prospectus or advertisement in respect of non-banking institutions. Section 45K authorises the bank to collect information from such non-banking institutions as to deposits and to give directions. Section 45L confers power on the bank to call for information from financial institutions and issue directions to regulate the credit system of the country. Section 45M casts a duty on non-banking institutions to furnish statements required by the bank. Section 45N permits the bank, inspection of such non-banking institutions to satisfy itself on the correctness of information supplied to it. Section 45-O deals with penalties and section 45Q makes the provisions of Chapter III-B to override the other laws. Purporting to act under sections 45J to 45L, the bank issued notification No. DNBC 1/ED. (S)--66 dated 29-10-1966 giving certain directions to non-banking companies. The said notification defines "deposit" thus : "2(1)(f) 'deposit' means any deposit of money with, and includes any amount borrowed by, a company, but does not include-- (i) any loan received from Government (ii) any loan raised on terms involving the issue of debentures or the creation of any mortgage, pawn, pledge or hypothecation, charge including floating charge, or lien on the assets of the company or any part thereof (iii) any loan received from a banking company or from the State Bank of India or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or from a co-operative bank as defined in clause (vii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934), or from any person registered under any law relating to money-lending which is for the time being in force (iv) any loan received from the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964, or the Industrial Finance Corporation of India established under the Industrial Finance Corporation Act, 1948, or a State Financial Corporation established under the State Financial Corporations Act, l951, or the Industrial Credit and Investment Corporation of India Ltd., or the Madras Industrial and Investment Corporation Ltd. (v) any loan received by a holding company from its subsidiary or by a subsidiary from its holding company or by a company from a subsidiary of any of its subsidiaries or from a subsidiary of its holding company or from a subsidiary of the holding company of its holding company or by a company from a holding company of its holding company (vi) any loan received by a Government company from any other Government company (vii) any loan received from a member of the company or any money received from a member by way of subscription to any shares, stock, bonds and debentures (including calls or deposits received in advance) (viii) in the case of a chit fund company, or any other company carrying on chit or kuri business, any subscriptions received from the members of a chit or kuri series in terms of the contract, variola or other arrangement relating thereto, and in the case of a stock exchange or stock broking company, any money received in connection with the purchase or sale of securities. " The notification defines" miscellaneous financial company "thus : "
(2.) (1) (n) 'Miscellaneous financial company' means any company, not being a banking company, carrying on its a part of its business but not as its principal business, two, or more classes of financial business such as the management, conduct or supervision as a foreman or agent of any transaction or arrangement which is referred to in clause (d), or the financing of hire-purchase transactions or the acquisition or construction of houses or the acquisition or development of plots of land or the investment of its funds in securities or the grant of loans and advances, but does not include a chit fund, hire-purchase, housing finance, insurance, investment, loan, stock exchange or stock-broking company or any other company which is an industrial concern or which carries on mainly the business of purchase or sale of any goods or commodities other than securities and which is also engaged in any class of financial business as aforesaid. "The notification defines" non-banking financial company" in section 2(1)(p) as meaning any chit fund, hire-purchase finance, housing finance, investment, loan, miscellaneous financial or mutual benefit financial company, but does not include an insurance company or a stock exchange or stock-broking company. In regard to acceptance of deposits, the notification provides as follows : (b) No other non-banking financial company shall receive any deposit repayable on demand, or on notice, or repayable after a period of less than twelve months from the date of receipt of such deposit or renew any deposit received by it, whether before or after the date of commencement of these directions, unless such deposit, on renewal, is repayable not earlier than twelve months from the date of such renewal, and (c) no non banking financial company not being a hire-purchase finance company or a housing finance company shall receive any deposit which together with any other deposits already received and outstanding on the books of the company is in excess of twenty-five per cent. of the aggregate of its paid-up capital and free reserves.
(3.) (3) Every non-banking financial company, not being a hirepurchase-finance company, or a housing finance company, which on the date of commencement of these 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 company and outstanding on its books are not in excess of the aforesaid limit.;