State laws will not apply to Non­-Banking Financial Companies regulated by RBI: Supreme Court

In the background of the facts of the case, the legal issue arising for consideration was resolved by the Supreme Court by looking at the scheme of the two State enactments, the scheme of RBI Act and the relevant Entries in the appropriate List of the Seventh Schedule, to which these enactments can be traced.

At the outset, the top court clarified that the competence of the legislatures of the States of Kerala and Gujarat to enact a law for the regulation of the business of money lending cannot be questioned, as their power is traceable to Entry 30 of List­II of the Seventh Schedule.

But at the same time, the Court considered whether after the enactment of a law by the Parliament for the incorporation and regulation of financial corporations, such financial corporations would continue to be regulated also by the State enactments, on the ground that they may also fall within the definition of the expression “money lenders” under the State enactments.

The apex court found that the scheme of Chapter III­B of the RBI Act shows that the power of intervention available for the RBI over NBFCs, is from the cradle to the grave.

“In other words, no NBFC can carry on business without being registered under the Act and a NBFC which takes birth with the registration under the Act is liable to be wound up at the instance of the RBI. The entire life of a NBFC from the womb to the tomb is also regulated and monitored by RBI“, the judgment stated.

While the RBI is empowered to declare that any NBFC is not subject to the provisions of Chapter III­B, the court, in the instant, was only concerned with NBFCs registered under the RBI Act.

The top court also observed that NBFCs play a very vital role in contributing to the financial health of the country and therefore, to say that the RBI has no power over the interest rates charged by them would strike at the very root of the statutory power vested in the RBI.

Pertinently, the Court held that even if the State enactments had been valid prior to the Parliament codifying the law on regulation and registration of NBFCs, the State enactments have to give way to the Parliamentary enaction.

Source: Barandbench