Holding

Section 45‑S of the Reserve Bank of India Act, 1934 (as amended in 1997) is a valid, reasonable restriction and does not infringe Articles 14 or 19 of the Constitution.

Summary

The petitioners, shroffs who operated as unincorporated firms providing credit and accepting public deposits, challenged the constitutionality of Section 45‑S of the Reserve Bank of India Act (as amended in 1997) which prohibits such entities from accepting deposits. They argued that the provision violated Articles 19(1)(g), 19(6) and 14 of the Constitution by unreasonably restricting their trade. The Court examined the legislative intent, the history of abuse by unincorporated deposit‑taking bodies, and the availability of formal banking and NBFC channels, concluding that the restriction was a reasonable public‑interest measure and not an arbitrary denial of a fundamental right. It held that there is no unrestricted fundamental right to accept public deposits and that courts must exercise restraint in staying economic legislation. Consequently, the petition was dismissed and Section 45‑S was upheld.

Issues considered

The constitutionality of Section 45‑S of the RBI Act, 1934 as amended in 1997
Whether the restriction on unincorporated bodies accepting public deposits violates Article 19(1)(g) and the reasonableness test under Article 19(6)
Whether the provision is arbitrary or discriminatory in violation of Article 14
Whether courts may stay the operation of economic‑policy legislation pending a challenge

Legislation cited

Banking Laws (Amendment) Act, 1983s. Section 45‑S (original)
Constitution of Indias. Article 14, s. Article 19(1)(g), s. Article 19(6), s. Article 226, s. Article 32
Reserve Bank of India Act, 1934s. 45‑S, s. 9 (as substituted by Amendment Act, 1997)

Subjects

constitutional lawfundamental rightsArticle 19Article 14Reserve Bank of India Actnon‑banking financial companieseconomic policyjudicial reviewpublic depositsunincorporated bodiesshroffs

Judgment

BHAVESH D. PARISH AND ORS. A
v.
UNION OF INDIA AND ANR.

MAY 12, 2000

[B.N. KIRPAL AND M.B. SHAH, JJ.] B

Reserve Bank of India Act, I934:

Section 45-S (as substituted by Amendment Act, I997)-
Constitutionality of-Provisions prohibited non-banking institutions from C
accepting deposits from the public and placed certain restrictions on them-
Held: there can be restriction on utilisation of deposits made by the public-
But there can be no unrestricted fundamental right to accept deposits fi·om
the public-Reserve Bank of India (Amendment) Act, 1997, S.9.

Constitution of India, 1950: D
Article 32-Policy matters-Economic policy-Judicial review of-
Scope-Held: Court should not lightly interfere with such matters.

- Article 226-Stay of legislation-During pendency of its challenge-
Held: High Court must show judicial restraint in staying the applicability E
of a piece of legislation unless the provision is manifestly unjust or glaringly
unconstitutional-This is more sc in the case of legislation pertaining to
economic reform or change.

Petitioners were shroffs engaged in the business of providing credit
to the members of the public. The nature of the services practiced by the F
petitioners generally involved maintaining a mutual current account where
the customer either placed deposit on call or withdrew money on call, without
security. The financing activity of shroff firms was through capital
contributions of the partners/proprietor and deposits made by members of
the public. G
Section 9 of the Reserve Bank of India {Amendment) Act, 1997
incorporated a new Section 45-S in the Reserve Bank of India Act, 1934.
The petitioners filed a writ petition in this Court challenging the
constitutionality of Section 45-S on the ground that as:a result of the
~I H
-.
292 SUPREME COURT REPORTS (2000] SUPP. I S.C.R.

A amendment to Section 45-S the petitioners would not be allowed to accept any
deposit from the public for the purposes of their business; that the flexibility
of deposit or withdrawal of the funds available to cotton farmers, tobacco
farmers, vegetable producers etc. who had a seasonal need for finance and a
periodic surplus of investible funds, would cease; that the impugned provisions
B were violative of Articles 19(1)(g); that the impugned provisions neither met
the test of reasonableness nor public interest and, therefore, violative of Article
19(6); and that the provisions were violative of Article 14 of the Constitution
being arbitrary, discriminatory and unreasonable.

Dismissing the petition, this Court
c HELD : 1. The impugned Section 45-S substituted by Section 9 of the
Reserve Bank of India (Amendment) Act, 1997 does not in any way prQhibit
or restrict any unincorporated body or individual from carrying on the
business that it likes. It is open to unincorporated bodies to carry on their
financial business either from their own funds or the funds borrowed from
D their relatives or from financial institutions. The restriction, which is placed
by Section 45-S, is on the carrying on of such business by utilising public
deposits. [300-H; 301-A]

E
2.1. After the introduction of Section 45-S in 1984, several complaints
were received by the Reserve Bank of India (RBI) from various parts of the
country regarding rampant malpractice being adopted by several persons/
-
firms especially in the State of Kerala. [303-F-G)

2.2. Whereas in 1987 the daily newspapers and periodicals were filled
with flashy advertisements for attracting business subsequently most of the
F firms had disappeared. Public confidence had been shattered beyond
description and the fate of several depositors stood sealed. Similarly complaints
were also received by the RBI of individuals/firms and unincorporated bodies
accepting deposits in Tamil Nadu. [30'4-B]

3.1. The spread of formal financial agencies such as commercial banks,
G regional rural banks, cooperative banks, development financial institutions
and non-banking financial companies etc. had taken care of the need to
mobilize the domestic saving of the nation and to deploy the same in a proper
manner. Thus, the institutional finance is available far more easily now than
before. (304-E-F; HJ

H 3.2. With these facilities now being available and in view of the inherent
BHAVESH D. PARISH v. U.0.1. 293
risks to the general public at the hands of the unincorporated bodies engaged A
in financial activities and accepting public deposits, the restrictions now
imposed by the amended Section 45-S cannot be considered as being
unreasonable. (304-H; 305-AI

4. The petitioners cannot claim a fundamental right to carry on the
business of financing with other people's money. In other words, there can be B
no unrestricted fundamental right to accept deposits from the public.
(305-B-q

5. The amended Section 45-S further expands the provisions of Chapter
111-B by making it necessary for all those, who mobilize public funds for C
deployment in the financial sector, to follow the norms of prudent management
which is the internationally accepted practice in relation to those handling
public funds. In view of Chapter III-B, particularly in its revised form after
the amendment, it would have been highly incongruous to permit people to
side step the discipline of Chapter III-B by refusing to incorporate themselves.
Nothing prevented the petitioners who alleged to be the partners of different D
firms from incorporating themselves as a company. There is absolutely no
restriction on any person to utilise his own funds (including the funds received
from his relatives) for any purpose he likes including para banking or
financial activity. [305-F-H; 306-El

6.1. RBI has not acted hastily. Before amending Section 45-S of the E
Reserve Bank oflndia Act, 1934 in 1997, it had the benefit of having with it
the reports of a number of committees, all of which had recommended that
the unincorporated business firms/individuals be brought under certain
discipline and, if possible, non-banking financial business was not to be
permitted to be carried on by the unincorporated bodies. (306-El F
6.2. The question of restricting such financial activity by unincorporated
bodies, is one of economic policy as it involves regulation of economic activities
by different constituents. In such matters of economic policy, this Court does
not interfere with the decision of the expert bodies, which have examined the
matter. (307-B-C) G
I
R.K. Garg v. Union of India, (1982) l SCR 947, relied on.

Morey v. Dond, 354 US 457, cited.

• 7. Even if these restrictions incorporated in the Reserve Bank of India H
294 SUPREME COURT REPORTS [2000) SUPP. I S.C.R.

A (Amendment) Act, 1997 amount to a total prohibition, such action was
necessary in the public interest as the mushroom growth of unincorporated
bodies accepting deposits had gone beyond control calling for restrictions of
the nature imposed by the amended Section 45-S. [308-E-F)

Reserve Bank of India v. Peerless General Finance and Investment Co.
B Ltd, (1987) 61 Comp Case 663 and Srinivasa Enterprises v. Union of India,
I19801 4 sec 507, relied on.
8.1. The inherent danger to the public specially in small towns and
villages in permitting such business to be carried on unchecked and
C unregulated was ample justification for the impugned legislation, keeping in
mind the experience of the public which had been leading with such
unincorporated bodies in Kerala and Tamil Nadu. (309-C-D)

8.2. The prohibition on partnership firms to carry on their business
like that of shroffs, cannot be regarded as being an unreasonable restriction
D on the fundamental right of the petitioners to carry on their trade. They
continue lending money as long as they do not borrow from the public. [309-D-E)

9.1. The services rendered by certain informal sectors of the Indian
economy could not be belittled. However, in the path of economic progress, if
the informal system was sought to be replaced by a more organised system,
E capable of better regulation and discipline, then this was an economic
philosophy reDected by the legislation in question. Such a philosophy might
have its merits and demerits. But these were matters of economic policy. They
are best left to the wisdom of the legislature and in policy matters the accepted
principle is that courts sbould not interfere. Moreover, in the extent of the
changed economic scenario, the expertise of people dealing with the subject
F should not be lightly interfered with. The consequences ofsuch interdiction
can have lnrge-scale ramifications and can put the clock back for a number
of years. The process of rationalisation of the infirmities in the economy can
be put in serious jeopardy and, therefore, it is necessary that while dealing
with economic legislation, this Court, while not jettisoning its jurisdiction to
G curb arbitrary action or unconstitutional legislation, should interfere only
in those few cases where the view reftected in the legislation is not possible
to be taken at alL (309-F-H; 310-A)

9.2. Section 45-S is in no way illegal or bad in law. Section 45-S no
doubt prohibits the conduct of banking business by an unincorporated
H non-banking entity like a shroff, but this prohibition has come about, inter
BHAVESH D. PARISH v. U.0.1. 295
alia, in the interest of unwary depositon and borrowen (from shroffs) and A
with a view to preventing them from committing financial suicide. (310-8-C)

Papanasam Labour Union v. Madura Coats Ltd, (1995) l SCC 501,
relied on.

Kanta Mehta v. Union of India, (1987) 2 Comp Case 769 (Del) and T. B
Velayudhan Achari v. Union of India (1993) 2 SCC 582, referred to.

10.1. When considering an application for staying the operation of a
piece of legislation, and that too pertaining to economic reform or change,
courts must bear in mind that unless the provision is manifestly unjust or
glaringly unconstitutional, Courts must show judicial restraint in staying C
the applicability of the same. Merely because a statute comes up for examination
and some arguable point is raised, which punuades the courts to consider
the cootroveny, the legislative will, should not normally be put under
suspension pending such consideration. It is now well settled that there is
always a presumption in favour of the constitutional validity of any legislation,
unless the same is set-aside after final bearing. The system of checks and D
balances has to be utilised in a balanced manner with the primary objective of
accelerating economic growth rather than suspending its growth by doubting
its constitutional efficacy at the threshold itself. (310-G-H; 311-A-B)

10.2. While the courts should not abrogate its duty of granting interim
injunctions where necessary, equally important is the need to ensure that the E
judicial discretion does not abrogate from the function of weighing the
overwhelming public interest in favo~r of the continuing operation of a f1SCBI
statute or a piece of economic reform legislation, till on a mature consideration
at the final hearing, it is found to be unconstitutional (311-8-C)

CIVIL ORIGINAL JURISDICTION: Writ Petition (c) No. 168 of F
1997.

(Under Article 32 of the Constitution of India.)

K.N. Raval, Additional Solicitor General, A.S. Nambiar, S. Siva
Subramamiam. S. Ganesh, RS. Hegde, Tushar Tijoriwala, P.P. Singh, H.S. Parihar, G
Kuldeep S. Parihar, Ms. Manisha, Ms. Binu Tamta, S.K. Dwivedi, E.M.S. Anam
and S.C. Birla, Ms. Shanta Basudevan, P.K. Manohar, K.V. Vishwanathan, K.V.
Vankataraman, Krishnamurthi Swam~ T. Barish Kumar, V. Balachandran, A.T.M.
Sampath, V. Balaji and Manish Singhvi for the appearing parties.

The Judgment of the Court was delivered by H
296 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A KIRPAL, J. The appellants who carry on the business of 'shroffs' are
impugning the validity of Section 9 of the Reserve Bank of India Act as
amended by the Amendment Act, 1997 (hereinafter referred to as 'the Act')
on the ground that the said provision is violative of Articles 14 and l 9(1 )(g)
of the Constitution of India.

B The trade of business of shroffs in India has been in existence for a
long time. This trade is carried on not only in cities but also in small towns
and villages in parts of India.

The appellants are shroffs engaged in the business of providing credit
C to the members of the public. The traditional mode of organising the business
of shroffs over the past several decades had been by way of partnership
firms. The nature of the services practised by the appellants generally involved
maintaining a mutual current account where the customer may either place
deposit on call or withdraw money on call, without security. The financing
activity of the shroff firms was through capital contributions of the partners/
D proprietor and deposits made by members of the public. Some of the other
activities of the shroffs include cheque discounting, the issuance of hundis,
the collection of cheques from different centres and providing other similar
facilities to customers. The services extended by the appellants are availed
of by small and medium sized traders, professionals, salaried workers,
E agriculturists and individuals.

The Reserve Bank of India (hereinafter referred to as 'the RBI') is a
statutory corporation constituted as the Central Banking Authority for the
country by the Reserve Bank of India Act, 1934. The RBI is constituted, inter

F
alia, to regulate the issue of bank notes and keeping of reserves with a view
to securing monetary stability in India and generally to operate the currency
[
and credit system of the country to its advantage. The RBI is also vested with
various powers to regulate the currency and credit system of the country. The
powers so vested in RBI include the power to issue directions to non-banking
institutions receiving deposits and to financial institutions. By amendment in
1963 a new Chapter 111-B was inserted in the said Act. This chapter inserted
G Sections 45-H to 45-Q which were provisions relating to non-banking
institutions receiving deposits and financial institutions. In the Statement of
Objects and Reasons it was provided that the existing enactments relating to
banks did not provide for any control over companies or institutions, which,
although were not treated as banks, accept deposits from the general public
H or carry on other business which was allied to banking. For ensuring more
BHAVESH D. PARISH v. U.0.1. [KIRPAL, J.] 297
effective supervision and management of the monetary and credit system by A
the RBI, it was observed that the RBI should be enabled to regulate the
conditions on which deposits may be accepted by these non-banking
companies or institutions. The provisions of the said chapter III-B did not
apply to individuals or firms like the appellants who are not incorporated but
still do business which is akin to that of banking.
B
In order to place some restrictions on the acceptance of deposits by
unincorporated bodies, by the Banking Laws (Amendment) Act, 1983 (Act I
of 1984), Chapter III-C and Section 58-B(SA) were inserted into the Act. The
relevant portion of principal restrictions in Chapter III-C which were contained
in Section 45-S, read as under:
c
"Deposits not to be accepted in certain cases.

(I) No person being an individual or a firm or an unincorporated
association of individuais shall at any time, have deposits from more than the
number of deposits specified against each, in the table below:
D
TABLE

"(i) Individual Not more than twenty-five
depositors excluding depositors who
are relatives of the individual.
E
(ii) Fmn Not more than twenty-five
depositors per partner and not more
than two hundred and fifty
depositors in all, excluding, in either
case, depositors who are relatives of
any of the partners. F
(ili) Unincorporated Association of individuals. Not more
than twenty five depositors per
individual and not more than two
hundred and fifty depositors in all, G
excluding, in either case, depositors
who are relatives of any of the
individuals constituting the
association.

2. Where at the commencement of Section 10 of the Banking Laws H
'.
298 SUPREME COURT REPORTS [2000) SUPP. l S.C.R.

A (Amendment) Act, 1983, the deposits held by any such person are not in
accordance with sub-section ( 1), he shall, before the expiry of a period of two
years from the date of s11;h commencement, repay such of the deposits as
are necessary for bringing the number of deposits within the relative limits
specified in that sub-section."

B The constitutional validity of Section 45-S of the Act was upheld by the
Delhi High Court in Kanta Mehta v. Union of India and Ors., (1987) 62
Company Cases 769. The main challenge was on the ground that it infringed
the appellants' right under Article 19( 1)(g) of the Constitution of India and
was violative of Articles 14 & 19 of the Constitution. While upholding the
C validity of Section 45-S, the High Court noted that expert reports by study
groups had recommended that it would not be in the interest of all, especially
the depositors, if unincorporated bodies such as partnerships were to work
as companies without any control or supervision of the RBI. This decision
of the High Court was affirmed by this Court in T. Velayudhan Achari and
Another v. Union of India and Ors., [1993] 2 SCC 582. While upholding the
D validity of Section 45-S, this Court at page 591 observed as follows:
No doubt, the impugned legislation places restrictions on the right of
the appellants to carry on business, but what is essential is to
safeguard the rights of various depositors and to see that they are not
preyed upon. From the earlier narration, it would be clear that' the
E Reserve Bank of India, right from 1966, has been monitoring and
following the functioning of non-banking financial institutions which
invite deposits and then utilise those deposits either for trade or for
other various industries. A ceiling for acceptance of deposits and to
require maintenance of certain liquidity of funds as well as not to
exceed borrowings beyond a particular percentage of the net-owned
F funds have been provided in the corporate sector. But for these
requirements, the depositors would be left high and dry without any
remedy.

It appears that Section 45-S of the Act, as originally incorporated, did
G not have the desired effect. The non-corporate sector was virtually free from
all disciplines even though its activities were same or similar to the corporate
sector, the difference only being in the magnitude and that too only in some
cases. According to the respondents it was to rectify this imbalance that first
an ordinance was issued which sought to completely prohibit any receipt of
deposits by unincorporated associations in the non-corporate sector. When
H certain hardships were pointed out by those who did not carry on the
BHAVESH D. PARISH v. U.0.1. [KIRPAL, J.) 299
business comparable to the companies which were under Chapter III-B i.e. A
who did not borrow money or receive advances to carry on business in the
financial sector but borrow money for their own trade or manufacture, the Act,
which replaced the ordinance, watered down the rigour to some extent.

The newly incorporated Section 45-S, which is impugned in this writ
petition, is as follows: B
"45-S (I) No person, being an individual or a firm or an unincorporated
association of individuals shall, accept any deposit:

(i) If his or its business wholly or partly includes any of the activities
specified in clause (c) of Section 45-I; or C
(ii) If his or its principal business is that ofreceiving of deposits under
any scheme or arrangement or in any other manner, or lending in any
manner.
Provided that nothing contained in this sub-section shall apply to the D
receipt of money by a~ individual by way of loan from any of his
relatives.

(2) Where any person referred to in sub-section (1) other than a body
~orporate holds any deposit on the !st d'ay of April, 1997 which is not
in accordance with sub- section ( 1), such deposit shall be repaid by E
that person immediately after such deposit becomes due for repayment
or within two years from the date of such commencement, whichever
is earlier.

(3) On and from the date of Ist day of April, 1997, no person referred
to in sub-section (I) shall issue or cause to be issued any advertisement F
in any 't'orm for soliciting deposit.
Explanation-For the purpose of this section:
(a) A person shall be deemed to be a relative of another if, and only
if: G
(i) they are members of a Hindu undivided family; or
(ii) they are husband and wife; or
(iii) the one is related to the other in the manner indicated in the list
of relatives below:- H
300 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A LIST OF RELATIVES

I. Father 2. Mother (induding step-mother) 3. Son (including step-son),
4. Son's wife, 5. Daughter t~ncluding step-daughter), 6. Father's father, 7.
Father's mother, 8. Mother's mother, 9. Mother's father, 10. Son's son, 11.
Son's son's wife, 12. Son's daughter, 13. Son's daughter's husband, 14.
B Daughter's husband, 15. Daughter's son, 16. Daughter's son's wife 17
Daughter's daughter 18. Daughter's daughter's husband 19. Brother (including
step-brother), 20. Brother's wife, 21 Sister (including step-sister), 22. Sister's
husband."

The principal features of the amended Section 45-S in so far as they
C relate to the appellants are:
(a) From 1.4.1997, no individual or firm may accept any deposit:

(i) if his or its business wholly or partly includes financing activities,
whether by way of making loans or advances or otherwise; or
D (iI) If his or its principal business is that of receiving deposits under .
any scheme or arrangement or lending in any manner.

(b) The prohibition on the acceptance of deposits does not apply
to loans from relatives.

E (c) A company may continue to accel't deposits for financing
activities or lending subject to the regulations in respect of Non-
Banking Financial Companies.

(d) Individuals and firms holding deposits on 1.4.1997 must repay
such deposits immediately after such deposits become due for
F repayment or within two years (before 31.3.1999), whichever is
earlier.

(e) On and from 1.4.1997 no individual or firm may issue
advertisement in any form for soliciting deposits.

(f) All non-banking financial companies must have a minimum of
G
Rs. 25,00,000 of net owned funds (NOF) and withdraw the
deposits and/or take loans before the agricultural operations
commence. The agriculturists and small traders who earn valuable
interest on net deposits will no longer be able to do so.

H The iinpugned Section 45-S does not in any way prohibit or restrict any
BHAVESH D. PARISH v. U.0.1. [KIRPAL, J.] 301
unincorporated body or individual from carrying on the business that it likes. A
It is open to unincorporated bodies to carry on their financial business either
from their own funds or the funds borrowed from their relatives or from
financial institutions. The restriction, which is placed by Section 45-S, is on
the carrying on of such business by utilising public deposits.

The grievance of the appellants is that the firms of individual shroffs, B
as a result of amendment to Section 45-S, will not be allowed to accept any
deposit from the public for the purposes of their business activities. There
is a complete prohibition on sharafi transactions (mutual c11rrent account
transactions) which had formed the bedrock of the financing activities of the
shroffs. This is because individuals and firms will no longer be entitled to C
accept deposits on current account and the minimum period for which a non-
banking financial company may accept deposit is now one year. The shroffs
will now be compelled to convert from partnership firms into limited companies.

Challenging the virus of Section 45-S, it was submitted by the learned
counsel for the appellants that shroffs provided the facility of deposit and D
loan transactions 24 hours a day and this facility was traditionally extended
to customers like agriculturists, such as cotton farmers, tobacco farmers,
vegetable producc:rs etc. who had a seasonal need for finance and a periodic
surplus of investible funds. The flexibility of deposit and withdrawal of the
funds available to this sector which was provided by the shroff community
will now cease. It was submitted that the impugned provisions are violative E
of the appellants' right to carry on their trade and business guaranteed under
Article 19( 1)(g) of the Constitution. Elaborating this contention it was urged
that though it is open to the Government to impose reasonable restriction in
the public interest under Article 19(6) of the Constitution but impugned
provisions neither met the test of reasonableness nor public interest . It was F
also submitted that the impugned provisions were violative of Article 14 of
the Constitution being artbitrary, discriminatory and un-reasonable.

This Court in Papnasam Labour Union v. Madura Coats limited and
Anr., [ 1995) I SCC 50 I while considering challenge to Section 25-M of the
Industrial Disputes Act, 1947 of being violative of Article 19 of the Constitution G
referred to earlier decisions of this Court and at page S 11 set out the following
principles and guidelines which should be kept in mind for considering the
constitutionality of statutory provision upon a challenge on the alleged vice
of unreasonableness of the restriction imposed by it:

"(a) The restriction sought be imposed on the Fundamental Rights H
302 SUPREME COURT REPORTS (2000] SUPP. I S.C.R.

A guaranteed by Article 19 of the Constitution must not be arbitrary
or of an excessive nature so as to go beyond the requirement
of felt need of the society and object sought to be achieved.
(b) There must be a direct and proximate nexus or a reasonable
connection between the restriction imposed and the object sought
B to be achieved.
(c) No abstract or fixed principle can be laid down which may have
universal application in all cases. Such consideration on the
question of quality of reasonableness, therefore, is expected to
vary from case to case.

c (d) Jn interpreting constitutional provisions, courts should be alive
to the felt need of the society and complex issues facing the
people which the Legislature intends to solve through effective
legislation.
(e) In appreciatL11.g such problems and felt need of the society the
judicial approach must necessarily be dynamic, pragmatic and
D
elastic.
(f) It is imperative that for consideration of reasonableness of
restriction imposed by a statute, the Court should examine whether
the social control as envisaged in Article 19 is being effectuated
by tbe restriction imposed on the Fundamental Rights.
E
(g) Although Article 19 guarantees all the seven freedoms to the
citizen, such guarantee does not confer any absolute or
unconditional right but is subject to reasonable restriction, which
the Legislature may impose in public interest. It is, therefore,
necessary to examine whether such restriction is meant to protect
F social welfare satisfying the need of prevailing social values.
(h) The reasonableness has got to be tested both from the procedural
and substantive aspects. It should not be bound by processual
perniciousness or jurisprudence of remedies.
0) Restriction imposed on the Fundamental Rights guaranteed under
G Article 19 of the Constitution must not be arbitrary, unbridled,
uncanalised and excessive and also not unreasonably
discriminatory. Ex hypothesi, therefore, a restriction to be
reasonable must also be consistent with Article 14 of the
Constitution.
H (k) In judging the reasonableness of the restriction imposed by
BHAVESH D. PARISH v. U.0.1. [KIRPAL, J.] 303
clause (6) of Article 19, the Court has to bear in mind Directive A
Principles of State Policy.
(I) Ordinarily, any restriction so imposed, which has the effect of
promoting or effectuating a directive principle, can be presumed
to be a reasonable restriction in public interest."
B
Keeping the aforesaid principles in mind let us now examine the reasons
for enacting Section 45-S.

In the affidavit filed by the respondent it has been, inter a/ia, stated
that the growing volume of deposits with unorganised financial sector affected
the operation of monetary and credit policy to the extent that it involved a C
loss of control by the central monetary authority on the use of these funds.
Further, the unincorporated bodies were susceptible to default as the costs
of funds and returns could not be matched in a viable way leading to adverse
selection i.e. the funds being directed to risky illiquid investments. Whereas
incorporated bodies were subject to regulatory controls, it was impossible to D
regulate unincorporated bodies at all. It is also stated in the affidavit that over
the years, the functioning of various unincorporated bodies was under
observati.:>n and in 1984 when Chapter III-C was added to the Act, the
prohibition to accept deposits was partial in the sense that unincorporated
bodies were allowed to accept deposits from a limited number of depositors
with no ceiling on the amount of deposit. The working of the provisions of E
Chapter III-C did not result in healthy development but there was a proliferation
of such unincorporated bodies engaged in financial intermediation. As pointed
out in para-3 of the Statement of Objects and Reasons the existing provisions
were flouted by unscrupulous entities by floating different partnership firms
when a firm reached the level of 250 depositors. This multiplication of firms F
took place with a view to circumvent the rigour of the law.

It appears that after the introduction of Section 45-S in 1984, several
complaints were received by the RBI from various parts of the country
regarding rampant mat-practices being adopted by several persons/firms
especially in the State of Kerala. Sample studies, which were conducted, G
revealed several astonishing features and the menace of such unincorporated
associations accepting public deposits and the mushroom growth of such
intermediaries. These business firms were commonly known in Kerala as
"blade companies" so called because of their usurious lending rates. The
study showed that these 'blade companies' drew sustenance from human
greed. These 'blade companies' were offering interest of 36% and in tum were H
304 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A charging excessive interest from the borrowers. By the time the study was
conducted, it showed that _the private financing scenario in Kerala pointed out
to near desolation. Whereas in 1987 the daily newspapers and periodicals
were filled with flashy advertisements for attracting· business subsequently
most of the firms had dis-appeared. Public confidence had been shattered
B beyond description and the fate of several depositors stood sealed with the
tragedy which had over- taken on them having lost their hard earned money.
Similarly complaints were also received by the RBI of individuals/firms and
unincorporated bodies accepting deposits in Tamil Nadu. The report received
from that State recommended that the RBI should over-see the functioning
of such financial firms and it ought to consider banning the activities in public
C interest.
It is the case of the RBI that the flexibility, convenience and facilities
etc. provided by the appellants were turning out to be mirages for the gullible
public who ultimately had to bear the burnt of the callous ways in which the
unincorporated bodies extended credit under the guise of flexibility and
D convenience. Unquestionably high interest rates were charged by such firms
from the borrowers, but when the time came for the return of money borrowed
by such firms, a number of such firms had folded up resulting in great loss
to the depositors. The RBI, being a statutory expert body entrusted with
monetary management, came to the conclusion that these unincorporated
E bodies which were functioning as financial intermediaries in an informal and
unorganised manner be restrained from having access to deposits from public.
The spread of formal financial agencies such as, commercial banks, regional
rural banks, cooperative banks, development financial institutions and non-
banking financial companies etc. had taken care of the need to mobilise the
domestic savings of the nation and to deploy the same in a proper manner.
F
As regards availability of banking facilities in small towns and villages
is concerned, the number of rural branches of commercial banks, which were
1833 in June, 1969, increased to 33069 as on June, 1996. The average population
per branch has increased manifold. The regional rural banks had been
G established in 1975 with a view to serve the people. Several State Governments
had promoted cooperative banking culture amongst the rural masses for
effectively taping the resources so as to meet their credit requirements. It
appears that the institutional finance is available far more easily now than
before. With these facilities now being available and in view of the inherent
risks to the general public at the hands of the unincorporated bodies engaged
H in financial activities and accepting public deposits, we agree that the
BHAVESH D. PARISH v. U.0.1. [KIRPAL, J.] 305
restrictions now imposed by the amended Section 45-S cannot be considered /,
as being un-reasonable.

As has already been observed, there is no total prohibition or ban from
accepting deposits by incorporated bodies. It is only such incorporated
bodies as are carrying on business referred to in Clauses I and II of sub-
section (I) of Section 45-S of the Act which cannot accept deposits from the B
public. They can, however, receive loans from relatives. The appellants cannot
claim a fundamental right to carry on the business of financing with other
people's money. In Other words, there can be no umestricted fundamental
right.to accept deposits from the public. This Hon'ble Court has observed in
• Peerless General Finance and Investment Co. Limited and Another v. Reserve C
Bank of India and Ors., [ 1992] 2 SCC 343 that there is no fundamental right
to do any unregulated business with subscribers/depositors' money. This
Hon'ble Court in that case upheld the directions issued by RBI requiring
residuary non-banking companies to invest the amount collected by them as
deposits in a particular way. This Hon'ble Court further held that such
companies should invest their own working capital and find such resources D
elsewhere with which the Reserve Bank has no concern. Since the deposit ·
acceptance by unincorporated bodies is incapable of being regulated by
virtue of the large number of such bodies, the provisions in the nature of the
amended Section 45-S are necessary and unincorporated bodies should do
their business with their own money or institutional finance or money borrowed E
from relatives.

The amended Section 45-S further expands the provisions of Chapter
III-B by making it necessary for all those, who mobilize public funds for
deployment in the financial sector, to follow the norms of prudential
management which is the internationally accepted practice in relation to those F
handling public funds. In view of Chapter IIIB, particularly in its revised form
after the amendment, it would have been highly incongruous to permit people
to side step the discipline of Chapter IIIB by refusing to incorproate themselves.
In view of this anomaly which has come about it was decided by the legislature
not to permit such activities in the non- corporate sector. Nothing prevented G
the appellants who alleged to be the partners of different firms from
incorporating themselves as a company. The real grievance was that the
appellants did not want to comply with the norms of prudential management
and, therefore, sought to paint a picture as though their trade had been
prohibited. There was no impediment in the trade as long as it was carried
on within the norms of Chapter IIIB. In fact, they would have greater latitude H
306 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A to do trade as a corporate body, in that the present restriction on the amount
of money to be deposited would stand increased. In this context, it may be
emphasised that there is absolutely no restriction on any person to utilise his
own funds (including the funds received from his relatives) for any purpose
he likes including para banking or financial activity.

B Historically, only banks have been allowed to accept deposits repayable
on demand because they were subjected to maintenance of cash reserve
requirement which would enable them to meet liabilities as and when they are
called upon or when any demand is made for repayment. Since non-banking
financial companies were not subjected to such cash reserve requirement, it
C was not desirable to allow non-banking financial companies to accept demand •
deposits. In any case, such bodies were nothing but para banking institutions
and either they had to be regulated on the lines of the financial. institutions
and if that was not feasible, they should have appropriately been prohibited .
from accepting deposits from public. After all, the right to raise public deposit
could no\ be construed as a fundamental right. The restrictions imposed
D .cannot be considered unreasonable or arbitrary.

The RBI has not acted hastily. Before amending Section 45-S of the Act
in 1997, it had the benefit of having with it the reports of number of committees,
all of whom had recommended that the unincorporated business firms/
E individuals be brought under certain discipline and, if possible, non~banking
financial business was not to be permitted to be carried on by the
unincorp"orated bodies. It will be useful in this regard to refer to the report
of the study group on non-banking financial intermediaries appointed by the
Banking Commission in 1971. The study group after making a detailed study
of the then existing non-banking financial intermediaries stated in respect of
F unincorporated bodies in para 8.25 of its report as under:

"8.25 We, therefore, suggest that the Reserve Bank's control may
be extended to finance corporations and necessary enabling legislation
be passed to that effect. We recognise that the administrative task of
watching and regulating the operations of a large number of small
G firms will be difficult. We, therefore, suggest that if the law permits,
only companies may be allowed to do the banking business in the
sense of accepting deposits from the public for the purpose of lending
or investment. In that case, the Banking Regulation Act would govern
the operations of the Bangalore type finance corporations. If, however,
H the law does not permit it, any scheme ofregulation may have as one
BHAVESH D. PARISH v. U.0.1. [KIRPAL, J.] 307
of its objections the reduction in the number of finance corporations A
besides, of course, the safeguarding of depositors interest."

It was further submitted that the amendments were introduced after
taking into account the recommendations of successive committees, appointed
by the Bank and Government of India, which had studied the functioning of
these bodies. The question of restricting such financial activity by B
unincorporated bodies, is a question of economic policy as it involves
regulation of economic activities by different constituents. In such matters of
economic policy, this Hon'ble Court does not interfere with the decision of
the expert bodies which have examined the matter. The following observations
of this Hon'ble Court made in R.K. Garg v. Union ofIndia, [1982) 1 SCR 947 C
at 969 are appropriate:

"Another rule of equal importance is that laws relating to economic
activities should be viewed with greater latitude than laws touching
civil rights such as freedom of speech, religion etc. It has been said
by no less a person than Holmes,]. that the legislature should be D
allowed some play in the joints, because it has to deal with complex
problems which do not admit of solution through any doctrinaire or
straight jacket formula and this is particularly true in case of legislation
dealing with economic matters, where, having regard to the nature of
the problems required to be dealt with, greater play in the joints has
to bt; allowed to the legislature. The court should feel more inclined E
to give judicial deference to legislature judgment in the field of
economic regulation than in other areas where fundamental human
rights are involved. Nowhere has this admonition been more felicitously
expressed than in Morey V. Dond (354 US 457) where Frankfurther J.
said in his inimitable style: F
"In the utilities, tax and economic regulation cases, there are good
reasons for judicial self-restraint if not judicial deference to legislative
judgment. The legislature after all has the affirmative responsibility.
The courts have only the power to destroy, not to reconstruct. When
these are added to the complexity of economic regulation, the G
uncertainty, the liability to error, the bewildering conflict of the experts,
and the number of times the judges have been overruled by events
- self - limitation can be seen to be the path to judicial wisdom and
institutional prestige and stability."

The court must always remember that "legislation is directed to H
308 SUPREME COURT REPORTS [2000) SUPP. I S.C.R.

A practical problems, that the economic mechanism is highly sensitive
and complex, that many problems are singular and contingent, that
laws are not abstract propositions and do not relate to abstract units
and are not to be measured by abstract symmetry" that exact wisdom
and nice adaptation of remedy are not always possible and that
"judgement is largely a prophecy based on meager and uninterrupted
•
B experience". Every legislation particularly in economic matters is
essentially empiric and it is based on experimentation or what one may
call trial and error method and therefore it cannot provide for all
possible situations or anticipate all possible abuses. There may be
crudities and inequities in complicated experimental economic
c legislation but on that account alone it cannot be struck down as
invalid".

At page 988 it is further held:

"That would depend upon diverse fiscal and economic considerations
based on practical necessity and administrative expediency and would
D
also involve a certain amount of experimentation on which the court
would be last fitted to pronounce. The court would not have the
necessary competence and expertise to adjudicate upon such an
economic issue. The court cannot possibly assess or evaluate what
would be the impact of a particular immunity or exemption and whether
E it would serve the purpose in view or not.

Even if these restrictions incorporated in the Act amount to a total
prohibition, such action was necessary in the public interest as the mushroom
growth of unincorporated bodies accepting deposits had gone beyond control
calling for restriction of the nature imposed by the amended Section 45-S. In
F the case of Reserve Bank ofIndia v. Peerless General Finance and Investment
Co. Ltd. and others, (1987) 61 Company Cases 663, this Hon'ble Court took
judicial notice of and expressed concern about the mushroom growth of such
bodies by referring to the advertisements issued by various such bodies in
the press. While upholding the constitutional validity of the Prize Chits and
G Money Circulation Schemes (Banning) Act, 1978 Srinivasa Enterprises v.
Union of India, [1980] 4 SCC 507 this Hon'ble Court pointed "out that for
saving the poor and unwary public from the unscrupulous racketeers who
glamourise and prey upon the gambling instinct to get rich through prizes,
banning was necessary. The court observed "how can you save moth from
the fire except by putting out the fatal fire ?" On the same analogy for .~
H safeguarding or protecting the public from the loss which was likely to be
BHAVESH D. PARISH v. U.0.1. [KIRPAL, J.] 309
caused to them by the failure of unincorporated bodies promising high returns, A
it was necessary to prohibit unincorporated bodies from accepting deposits
from the public. Further, as observed by this Court in Srinivas Enterprises
case (supra) "it is a constitutional truism that restrictions in extreme cases
should be pushed to the point of prohibition, if any lesser strategy will not
achieve the purpose".
B
It cannot be denied that shroffs have played an important roll in providing
finance in the rural sector and in small towns. But, despite the services which
they may have rendered, it is difficult to accept the contention that the RBI
was not justified in imposing ban on unincorporated bodies accepting deposits
from public while carrying on financing business. The inherent danger to the C
public specially in small towns and villages in permitting surh business to be
carried on un-checked and un-regulatory was ample justification for the .
impugned legislation, keeping in mind the experience of the public which had
been dealing with such unincorporated bodies in Kerala and Tamil Nadu. It
is open to the appellants to organise their business within the permissible
legal set up by forming non-banking financial corporations and functioning D
in accordance with Chapter 111-B of the Act and the directives issued by the
Bank from time to time. The prohibition on partnership firms to carry on their
business like that of shroffs cannot be regarded as being an unreasonable
restriction on the fundamental right of the appellants to carry on their trade.
They can continue lending money as long as they do not borrow from the E
public.

The services rendered by certain informal sectors of the Indian economy
could not be belittled. However, in the path of economic progress, if the
informal system was sought to be replaced by a more organised system,
capable of better regulation and discipline, then this was an economic F
philosophy reflected by the legislation in question. Such a philosophy might
have its merits and demerits. But these were matters of economic policy. They
are best left to the wisdom of the legislature and in policy matters the
accepted principle is that the courts should not interfere. Moreover in the
context of the changed economic scenario the expertise of people dealing with G
the subject should not be lightly interfered with. The consequences of such
interdiction can have large-scale ramifications and can put the clock back for
a number of years. The process of rationalisation of the infirmities in the
economy can be put in serious jeopardy and, therefore, it is necessary that
while dealing with economic legislations, this Court, while not jettisoning its
jurisdiction to curb arbitrary action or unconstitutional legislation, should H
310 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A interfere only in those few cases where the view reflected in the legislation
is not possible to be taken at all.

Examining the validity of the amended Section 45-S of the. Act by
applying the principles enunciated over the years by this Court, and as
encapsuled in the passage quoted in the earlier part of this judgment from this
B Court's decision in Papnasam Labour Unions Case (supra) we find that the
said Section is in no way illegal or bad in law. Section 45-S no doubt prohibits
the conduct of banking business by an unincorporated non-banking entity
like a shroff, but this prohibition has come about, inter alia, in the interest of
unwary depositors and borrowers (from shroffs) and with a view to prevent
C them from committing financial suicide. Earlier attempts to adequately regulate
the non-banking institutions not having achieved the desired result of
protecting large number of depositors from unincorporated financial institutions
which would suddenly mushroom overnight and then vanish without a trace,
but taking with it depositors money, left the RBI with no alternative but to
prohibit such unincorporated entities from conducting financial business
D which was more than akin to banking.

The restrictions imposed against acceptance of deposits by
unincorporated bodies carrying on financial activity or the business of deposit
acceptance or lending in any manner are in the larger interest of general public
vis a vis few persons accepting such deposits. The need for such restrictions
E had become acute and imperative in view of large scale mis-management of
public funds by such unincorporated bodies.

Accordingly, we hold that the provisions of Section 45-S of the Act are
valid.

F Before we conclude there is another matter to which we must advert to.
It has been brought to our notice that Section 45-S of the Act has been
challenged in various High Courts and few of them have granted the stay of
provisions of Section 45-S. When considering an application for staying the
operation of a piece of legislation, and that too pertaining to economic reform
G or change then the courts must bear in mind that unless the provision is
manifestly unjust or glaringly unconstitutional, the courts must show judicial
restraint in staying the applicability of the sarr.e. Merely because a statute
comes up for examination and some arguable point is raised, which persuades
the courts to consider the controversy, the legislative will should not normally
be put under suspension pending such consideration. It is now well-settled
H that there is always a presumption in favour of the constitutional validity of
BHAVESH D. PARISH v. U.0.1. [KIRPAL, J.] 311
.any legislation, unless the same is set- aside after final hearing and, therefore, A
the tendency to grant stay of legislation relating to economic reform, at the
interim stage, cannot be understood. The system of checks and balances has
to be utilised in a balanced manner with the primary objective of accelerating
economic growth rather than suspending its ·growth by doubting its
constitutional efficacy at the threshold itself.
B
While the courts should not abrogate its duty of granting interim
injunctions where necessary, equally important is the need to ensure that the
judicial discretion does not abrogate from the function of weighing the
overwhelming public interest in favour of the continuing operation of a fiscal
statute or a piece of economic reform legislation, till on a mature consideration C
at the final hearing, it is found to be unconstitutional. It i~ ·herefore, necessary
to sound a word of caution against intervening at the interlocutory stage in
matters of economic reforms and fiscal statutes.

A number of petitions had been filed in this Court seeking transfer of
writ petitions pending in different High Courts. By order dated 17.2.2000, D
those Transfer Petitions were dismissed as not pressed. Besides the writ
petitions, in respect of which, those transfer petitions had been filed, a
number of other petitions are pending disposal in various High Courts. In
quite a few of them the High Courts have granted an interim injunction
staying the operation of the implementation of the amended Section 45-S of
the Act. For the view we have taken now, it is imperative that these petitions, E
pending in the different High Courts, are formally disposed off at an early
date. We, therefore, request all the High Courts, in which the petitions are
pending challenging the provisions of Section 45-S, to dispose them of within
a period of three months. Needless to say inasmuch as the validity of Section
45-S has been upheld by us, the said provision shall be liable to be enforced p
notwithstanding any interim orders to the contrary which may have been
passed by any High Court, which interim order must necessarily now loose
all its significance.

For the aforesaid reasons, this writ petition is dismissed. The
respondents will be entitled to costs. G
v.s.s. Petition dismissed.