The Inapplicability of Money Lending Laws to Regulated NBFCs

[The following guest post is contributed
by Munmi Phukon, who is a Senior
Manager in the Corporate Law Division at Vinod Kothari & Co.]
In 2011, a landmark judgment of the
Gujarat High Court in Radhe Estate
Developers Vs. Versus Mehta Integrated Finance Co. Ltd. and Ors
(the ‘Gujarat Ruling’) contested
the very fact of applicability of the Bombay Money Lending Act, 1946 (the ‘Bombay
Act’) to non-banking finance companies (‘NBFCs’). In general, money lending
laws are concerned with protecting the interests of borrowers by imposing a
ceiling on interest rates, mandatory licensing requirement for money lenders,
and making further and better provision for the control of money-lenders and
for the regulation and control of money-lending in the respective States. These
laws also place an embargo on the Court’s power to entertain a suit where the
money lender is an unlicensed one.
Article 246 of the Constitution empowers
the Parliament and Legislatures of the States to make laws in respect to any of
the matters enumerated in List-I and List-II in the VII Schedule respectively.
List-III in the said Schedule is a concurrent list in relation to which
Parliament and Legislatures of the States both have the powers to make law. The
matters related to money lending and money lenders are included in Entry 30 of
List II. Therefore, the States may enact their own laws related to money
lending and money lenders. 
Gujarat Ruling
The matter contested in the Gujarat
Ruling related to the applicability of the Bombay Act to an NBFC which is
already regulated by a central law, namely the Reserve Bank of India Act, 1934
(‘RBI Act’).  The Court held that a State Act is always
subject to a Central Act.
After referring the provisions of Chapter IIIB of the RBI Act, held that the
Reserve Bank of India (‘RBI’) has already occupied the field with regard to control
over the NBFCs and all types of regulatory measures, including penal action. Therefore,
the State law cannot transgress on the field occupied by the law of Parliament.
In view of Section 45Q of the RBI Act, the provisions of Chapter IIIB held to be
have an overriding effect on the State law.
The Court further noted that there was no
notification issued under Section 2(10)(b) of the Bombay Act bringing an NBFC
within the definition of ‘money-lender’. The Court therefore held that in the
absence of any such notification, the State Government or its authorities have
no jurisdiction to take any regulatory or penal measures under the said Act.
This was the primary ground for the Court to conclude regarding the inapplicability
of the Bombay Act to NBFCs. Therefore, the Gujarat Ruling still left a scope
for applicability of the State law to an NBFC if any notification under the
aforesaid section comes at a later date.  
Following the Gujarat Ruling
The Gujarat Ruling was decided on April
26, 2011 and thereafter, on May 2, 2011, the new Gujarat Money Lenders Act,
2011 (‘GML Act’) was introduced repealing the erstwhile Bombay Act. Meanwhile, there
was another special civil application pending with the Gujarat High Court in
the matter of Sundaram Finance Limited & others vs.
State of Gujarat
, wherein there was a prayer for declaring that the
provisions of the GML Act and its applicability to the NBFCs registered with
RBI are illegal as ultra vires the
Constitution, and unconstitutional in the absence of legislative competence.
It is to be noted here that the GML Act
has prescribed the definition of ‘company’ to mean a company as defined under
the Companies Act, 1956 and a ‘money lender’ to include a ‘company’. The GML Act
also provides for a doctrine of implied registration for the NBFCs registered
with RBI. Further, the definition of a ‘loan’ excludes the deposit of money or
other property in banks, but not the activities of a company registered under
Chapter IIIB of the RBI Act such as NBFCs. Apparently, the enforcement of the
new GML Act had created lots of complexity.
The Court held that the new GML Act is ultra vires the Constitution for
legislative incompetence of the State Legislature, only to the extent that it
seeks to have control over the NBFCs registered under RBI Act in the matter of
carrying on their business. The Court held that exercising rights as an NBFC is
within the purview of the RBI Act, and therefore they are bound to follow
guidance of RBI and that no other State law can interfere with its business
activities if it conforms to the provisions of the RBI Act. Thus, within the
scope of the activity of an NBFC as provided in the RBI Act, the State
Legislation has encroached upon the RBI’s role by imposing its control over it
in addition to that imposed under the RBI Act and thereon the direct repugnancy
It is worthwhile noting that the decision
of Kerala High Court in the case of M/S. Sundaram Finance Ltd vs State Of Kerala
stood contrary to what the Gujarat High Court held in the aforesaid cases. The
Kerala High Court held that the Kerala Money Lenders Act, 1958 is not without
force, and that both the RBI Act and the provisions of the Kerala Money Lenders
Act simultaneously apply to NBFCs.
The Law Operating in West
In August, 2015, there was a ruling of Calcutta
High Court in the matter of M/S. Arjun Shyam & Co. (P) Ltd vs M/S.
Sagar Trading Co. & Ors
. The
matter was primarily based on the question of maintainability of application as
also the suit, considering the provisions contained in the Bengal Money Lenders
Act, 1940 (BML Act) with respect to mandatory licence requirement for the money
lenders. A question was also raised with regard to encroachment upon the
activity of an NBFC duly registered with RBI to recover the money lent merely due
to the lack of possession of a licence under the BML Act.
The Court held that the NBFCs are not covered by the definition of ‘money-lenders’ as provided in the BML Act. Similar to the Gujarat
High Court, this Court also held that RBI Act has an overriding effect over any
law inconsistent therewith for the time being in force or any instrument having
effect by virtue of any such law. It was held that
once an NBFC holds the licence, it can carry on the business anywhere in the
country. Unless a State legislature specifically requires an NBFC to obtain a
licence under the State legislation, the claim of an NBFC to realize money
cannot be defeated. Even though the decision of the Court was in favour of the
petitioner NBFC, however, it still provides a room for ambiguity: for example,
what if the BML Act is amended to the effect of including an NBFC under its
In L & T
Finance Limited versus M/s. Saumya Mining Ltd. and others
, the Bombay High Court relied on the
interpretation of the Gujarat High Court in the matter of Sundaram Finance Limited & others vs.
State of Gujarat
as discussed aforesaid and held that if the laws passed
by the Parliament are to operate over the earlier laws made by the State
Government, it would be reasonable to hold that the companies which are covered
under chapter IIIB of the RBI Act would not be falling under the BML Act, as
the term ‘money lending’ under the provisions of the BML Act and the Bombay Act
are in pari materia.
Further, there was a special civil application in the matter of
India Credit Company Limited and Ors. vs State of Gujarat
, wherein the writ petitioners have prayed
for issue of an appropriate writ, order or direction declaring that NBFCs
registered with RBI would not come within the purview of GML Act. There was
also a prayer for declaration that the provisions of the GML Act, 2011 and its
applicability to the petitioners are illegal and ultra vires the Constitution. The Chief Justice relied on the
decision of the same Court in
Sundaram Finance Limited & others vs.
State of Gujarat
the GML Act as ultra vires the Constitution
for legislative incompetence of the State Legislature to the extent it seeks to
have control over the NBFCs registered under the RBI Act.
While the
Gujarat High Court in the later case made it clear, however, the decision of
the Calcutta High Court still left a scope for inclusion of NBFCs under the
purview of the State law. Therefore, until a notification is brought into place,
the registered NBFCs operated in Bengal would remain out of the purview of the
BML Act, and accordingly the provisions of the same would not apply to such

It seems that the non-applicability of the provisions of state laws only relates to
those NBFCs which are regulated by the RBI by virtue of being registered with
RBI. Therefore, those entities which are not so regulated by RBI and carrying
on the activities of lending will still get covered under the state laws and
they cannot take benefit of the aforesaid decisions of the Courts.   

Munmi Phukon

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • To share instant thoughts :
    Having read, and somewhat in depth the indicated key portions of, the write-up, it is considered inevitable to raise for due consideration, the POSER:
    Of what relevance could any such old legislations dating back to years 1934, 1946, so on , have today; and could be or continue to be of any material utility for courts to decide any money -related issues of recent times, more so, having regard to/in the context of what the Constitution, again of a later origin, provides or envisages !
    (may be contd.)

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