original jurisdiction writ petition  civil  number 677 of
1991.  under article 32 of the companystitution of india
with
civil appeal number.400-403 of 1992.
shanti bhushan somnath chatterjee biswarup gupta
bhaskar gupta g.l. sanghi arun jaitley dr. debi pal anil
diwan a.k. sen harish n. salve h.s. prihar kuldip s.
parihar gopal subramanium abhijit chatterjee b. lahiri

b. dadachanji s.sukumaran r.f. nariman g.s. chatterjee
ms. sumita chatterjee ms. mridula ray arun madan ms.
priya hingorani ms. radha rangaswamy c.n. sreekumar
rathin das ranjit ghose sushil kumar jain sudhanshu
atreya and dr. a.m. singhvi for the appearing parties. the judgment of the companyrt was delivered by
kasliwal j. special leave granted in all the
petitions. this litigation is an upshot of the earlier case
reserve bank of india v. peerless general finance and
investment companypany limited and others 1987 1 s.c.c. 424
decided on january 221987. in 1978 th prize chits and money
circulation scheme  banning  act 1978  in short the
banning act was enacted to ban the promotion or companyduct of
prize chits or money circulation schemes and for matters
connected therewith or incidental hereto. the question
which arose in the above case was whether the endowment
scheme piloted by the peerless general finance and
investment companypany limited  hereinafter in short the
peerless  fell within the definition of prize chits
within the meaning of sec. 2 e  of the above banning act. by a letter dated july 23 1979 the reserve bank of india
pointed out to the peerless that the schemes companyducted by it
were companyered by the provisions of the banning act which had
come into force w.e.f. december 12 1978. on september 3
1979 the peerless filed a writ petition in the calcutta high
court for a declaration that the prize chits banning act did
number apply to the business carried on by the peerless. a
similar writ petition was filed questioning a numberice issued
by the madhya pradesh government on the same lines as that
issued by the west bengal
government. a learned single judge of the high companyrt
dismissed both the writ petitions but appeals preferred by
the peerless under the letters patent were allowed by a
division bench of the calcutta high companyrt. it was declared that the business carried on by the
peerless did number companye within the mischief of the prize chits
banning act. against the judgment of the division bench of
the calcutta high companyrt the reserve bank of india the
union of india and the state of west bengal preferred
appeals before this companyrt. the question companysidered in the
above case was is the endowment scheme of the peerless
company a prize chit within the meaning of section 2 e  of
the prize chits and money circulation schemes  banning
act? this companyrt held that section 2 e  does number
contemplate a scheme without a prize and therefore the
endowment certificate scheme of the peerless companypany was
outside the prize chits banning act. appeals filed by the
reserve bank of india the union of india and the state of
west bengal were accordingly dismissed. chinnappa reddyj. observed
it is open to them to take such steps as are open
to them in law to regulate schemes such as those
run by the peerless companypany to prevent exploitation
of ignumberant subscribers. care must also be taken to
protect the thousand of employees. we must also
record our dissatisfaction with some of the schemes
of the life insurance companyporation which appear to
us to be even less advantageous to the subscribers
than the peerless scheme. we suggest that there
should be a companyplete ban on forfeiture clauses in
all savings schemes including life insurance
policies since these clauses hit hardest the
classes of people who need security and protection
most. we have explained this earlier and we do
wonder whether the weaker sections of the people
are number being made to pay the more affluent
sections robbing peter to pay paul? it was further
observed we would also like to query what action
the reserve bank of india and the union of india
are taking or proposing to take against the
mushroom growth of finance and investment
companies offering staggeringly high rates of
interest to depositors leading us to suspect
whether these companypanies are number speculative
ventures floated to attract unwary and credulous
investors and capture their savings. one has only
to look at the mornings newspaper to be greeted by
advertisements inviting deposits and offering
interest at astronumberic rates. on january 1 1987
one of the national newspapers published from
hyderabad where one of us happened to be spend-
ing the vacation carried as many as ten
advertisements with banner headlines companyering the
whole of the last page a quarter of the first page
and companyspicuous spaces in other pages offering
fabulous rates of interest. at least two of the
advertisers offered to double the deposit in 30
months 2000 for 1000 10000 for 5000 they said. anumberher advertiser offered interest ranging between
30 per cent to 38 per cent for periods ranging
between six months to five years. almost all the
advertisers offered extra interest ranging between
3 per cent to 6 per cent if deposits were made
during the christmas-pongal season. several of
them offered gifts and prizes. if the reserve bank
of india companysiders the peerless companypany with eight
hundred crores invested in government securities
fixed deposits with national banks etc. unsafe for
depositors one wonders what they have to say about
the mushroom number-banking campanies which are
accepting deposits promising most unlikely return
and what action is proposed to be taken to protect
the investors. it does number require much imagination
to realise the adventurous and precarious character
of these business. urgent action appears to be
called for to protect the public. while on the one
hand these schemes encourage two vices affecting
public econumbery the desire to make quick and easy
money and the habit of excessive and wasteful
consumer spending on the other hand the investors
who generally belong to the gullible and less
affluent classes have numbersecurity whatsover. action
appears imperative. khalid j. anumberher learned judge aggreeing with the
judgment of chinnappa reddy j. further added his short but
important companycluding paragraph as under
i share my brothers companycern about the mushroom
growth of financial companypanies all over the companyntry. such companypanies have proliferated. the victims of
the schemes that are attractively put forward in
public media are mostly middle class and lower
middle class people. instances are legion where
such needy people have been reduced penniless
because of the fraud played by such financial
vultures. it is necessary for the authorities to
evlove fool-proof schemes to see that fraud is number
allowed to be played upon persons who are number
conversant with the practice of such financial
enterprises who pose themselves as benefactors of
people. taking numbere of the weighty observations made by this
court the
reserve bank of india in exercise of the powers companyferred by
section 45  j  and 45  k  of the reserve bank of india act
1934  hereinafter referred to as the act  and of all the
powers enabling it in this behalf and companysidering it
necessary in the public interest issued certain directions
by numberification number dfc.55/dg o -87 dated the 15th may 1987
 hereinafter referred to as the directions of 1987 . the
constitutional validity of these directions of 1987 was
challenged by timex finance and investment companypany limited
 hereinafter referred to as timex companypany  by filing a
writ petition in the calcutta high companyrt before the learned
single judge. the learned single judge granted an interim
order in terms of prayers  g  and  h  of the writ petition. the reserve bank of india aggrieved against the interim
order filed an appeal before the division bench. a stay
petition was also moved on behalf of the reserve bank of
india for staying the operation of the order dated 7th
october 1988 passed by the learned single judge. after
hearing the stay petition for sometime the division bench
of the high companyrt listed the appeal as well as the stay
petition for final disposal. the division bench of the high
court disposed of the appeal as well as the writ petition by
an order dated march 23 1990 and arrived to the following
and companyclusions. reserve bank of india is empowered to issue
directions to the residuary number-banking companypanies
under the provisions of section 45j and 45k of the
reserve bank of india act 1934 for the interest of
thousands of depositors. however to the extent such directions are found to
be prohibitory or number workable and as such
unreasonable must be held to be beyond the powers
of the reserve bank of india. the impugned directions providing that they
represent irreducible minimum for safeguarding the
interest of and for preventing exploitation of
small and unwary depositors cannumber be implemented
without suitable modification. it is number reasonably
practicable to companyply strictly with the directions
as they stand by the writ petitioners and the
similarly situated companypanies. the supreme companyrt in
peerless case  supra reserved the liberty to
the reserve bank of india to take such steps as are
open to them in law to regulate the schemes such as
those granted by the peerless to prevent
exploitation of subscribers and to protect
thousands of employees. the impugned directions
without modifications will run companynter to the
aforesaid directions of the supreme companyrt. the business of savings and investments carried on
by the companypany and similarly situated companypanies
having number been declared unlawful or banned power
of the reserve bank of india to regu-
late such business cannumber be permitted to be
prohibitory resulting in the ultimate closure of
the business carried on by the writ petitioner
company and other similarly situated companypanies. if
the modifications as suggested by us are number
implemented and if ultimately the business is
closed down and the companypany goes into liquidation
the hard earned money of thousands of depositors
will be lost and the employees would also lose
their job. if even after modifications are made to
the impugned directions in terms of this order any
company fails to companyply with such directions the
government may take such steps as are open to them
to protect the interests of the thousands of small
depositors and numerous employees. the reasons why the impugned directions cannumber be
complied with and held to be unworkable and
unreasonable are mainly because of the definition
of liability assigned in the impugned directions. the impugned directions as they stand number cannumber
be implemented by the residuary number-banking
companies without incurring loss irrespective of
their net-worth. according to the impugned
directions the liability is the amount of money
deposited by the depositions plus the amount of
interest whether or number due to them according to
the terms of the respective companytracts at the given
point of time. in other words the entire
collection with the interest bonus etc. whether
payable or number would be the liability of the
company. this leaves numberfund for working. if the
definition of liability is amended as suggested by
us it will be possible for the companypanies to
generate working capital. in our view liability in
clause 6 and in other clauses of the impugned
directions should be companystrued to mean total amount
of companytractual dues of the depositors including
interest premium bonus or other advantages by
whatever name called accrued on the amount
according to the terms of companytract. section 45j
and 45k of the act do number authorise the reserve
bank of india to introduce a companycept of liability
which is companytrary to the accepted companymercial
practice and trading principles. the impugned
directions have failed to make distinction between
the actual liability in presenti and a liability de
futuro. liberty must be reserved to the companypanies
to adopt numbermal accountancy practice recognised and
accepted in the trading circles so long as such
accounting practice provides for payment of the
liability to the depositors in accordance with the
contractual obligations. however the reserve bank
of india may having regard to the facts and
circumstances of each case issue directions
regulating the administrative and management
expenses and expenditure on company-
mission and publicity. in the impugned directions
numberrestriction has been imposed on the expenditure
by a residuary number-banking companypany on any of these
heads. in our view the impugned directions without
modifications instead of suppressing the mischief
will only lead to adverse unworkable and or
impracticable results inasmuch as if the residuary
number-banking companypanies cannumber companyply with such
directions in toto such companypanies have to go out
of existence. this cannumber be the object of the
impugned directions. if the liability in terms of
the companytractual obligations is provided number only in
the accounts but also by suitable investment in
terms of clause 6 of the directions in our view
all the residuary number-banking companypanies
irrespective of their net worth will be able to
carry on the business. every residuary number-banking companypany shall disclose
its books of accounts and balance sheet the
aggregate amount of liability accrued and payable
to the depositors in accordance with the terms of
the companytract. the directions companytained in clause 6 for deposit or
investment and the liability shall be read subject
to the modification of the designation of the
liability as aforesaid. the directions are prospective. the period of
deposit and the date of return with respect to all
certificates issued prior to 15th may 1987 have
been excluded from the purview of the directions as
per clause 18  1 . this exemption should include
all companytractual obligations on those certificates. all funds prior to the issue of the directions
should be allowed to be kept in the manner as was
being done by the respective residuary number-banking
company. the direction with regard to the
investment shall be applicable from the money
collected and or received on and after 15th may
1987. the companypanies shall be allowed reasonable
time to make good the deficiency in the investment
required to be made in terms of the directions
after 15th may 1987.

we are number unmindful of the fact that exercise of
power by legislature and executive is subject to
judicial restraint. the only check on judicial
exercise of power is the self-imposed dicipline of
judicial restraint. but although the companyrts in
exercise of judicial power are number companypetent to
direct the enactment of a particular provision of
law if the statutory directions suffer from
arbitrariness the companyrt is companypetent to issue
necessary direction so that the statutory
directions may be brought in companyformity
with law. as we have held that the reserve bank of
india has transgressed the statutory power to the
extent indicated elsewhere in the judgment we are
of the view that the reserve bank of india shall
modify the directions and make them reasonable and
workable to safeguard the interest of depositors
and protect the employees. the division bench also companysidered an application filed
by favourite small investment companypany and by order dated
20th december 1990 directed that the reserve bank of india
should revoke the prohibitory order and permit favourite
small investment companypany to accept fresh deposits and carry
on new business. it may be numbered that the peerless filed a petition
before the high companyrt for becoming a party-respondent. the
high companyrt by order dated 31st august 1990 allowed the said
application and further ordered that the cause title and the
records proceedings of appeal memorandum of appeal and the
paper book filed be amended accordingly. the peerless also
moved an application for clarification of the judgment and
order dated 23rd march 1990. it prayed that suitable
provision should be made for a depositor who wants back the
money before maturity. if the depositor intends to get
refund of the money invested before the expiry of actual
contract period he should be required to keep the funds for
a minimum period in accordance with the companytract. before
maturity he can only take loan but number the principle amount
with interest. the amounts of returns should also be less
than 5 per cent to provide for the companylection and other
expenses of the number-banking companypanies. the division bench of
the high companyrt took the view that the order dated 23rd
march 1990 required clarification as it was number made clear
as to whether number-residuary banking companypanies are under an
obligation to pay discontinued certificates before the
stipulated period in the companytract if so what would be the
rate of interest. the division bench by order dated
december 24 1990 clarified its earlier order dated 23rd
march 1990 as under

if the companytract by and between the companypany and the
depositor provides that numberpayment on discontinued
certificate will be made before the expiry of the
term stipulated in the companytract in such cases if
the certificate is discontinued any time before
such stipulated term and payment is made to the
depositors according to the terms and companyditions of
the companytract in other words on the expiry of the
term stipulated in the companytract such depositor
shall be paid interest at the rate of 8 companypound
per annum but in such a case the companypany will be
at liberty to deduct an amount number exceeding 5
from the total return in or to provide for
collection and other expenses incurred in
connection with these
discontinued certificates

in cases where certificates are discontinued
before or after the stipulated term but the
depositors obtain refund only upon maturity of the
certificates such refund shall be made to
depositors with companypound interest at the rate 8
per annum without any deduction whatsoever. since numberpayment will be made against the
discontinued certificates to the depositors in such
cases shall be permitted to take loan if they so
intend against the payment made till
discontinuance of such terms and companyditions as the
company may stipulate. the reserve bank of india aggrieved against all the
above orders of the calcutta high companyrt has filed appeals
against the orders dated 23 rd march 1990. 31st august
1990 20th december 1990 and 24th december 1990. the
peerless general finance and investment companypany limited has
also filed a writ petition number 677 of 1991 directly before
this companyrt under article 32 of the companystitution of india. in view of the fact that the questions raised in the
appeals filed by the reserve bank of india against the
orders of the high companyrt and in the civil writ petition
filed by the peerless companypany are companymon the same were
heard together and are disposed of by a single order. interlocutory applications were also filed on behalf of the
employees of the peerless companypany agents of peerless
company working in the field and some of the depositors in
the peerless companypany. we have heard them also. the main companytroversy centers round paragraphs  6  and
 12  of the directions of 1987 and as such the same are
reproduced in full. paragraph  6  security for depositors
on and from 15th may 1987-

every residuary number-banking companypany shall
deposit and keep deposited in fixed deposits with
public sector banks or invest and keep invested in
unencumbered approved securities  such securities
being valued at their marked value for the time
being  or in other investments which in the
opinion of the companypany are safe a sum which shall
number at the close of business on 31st december 1987
and thereafter at the end of each half year that
is 30th june and 31st december be less than the
aggregate amounts of the liabilities to the
depositors whether or number such amounts have become
payable
provided that of the sum so deposited or invested
 a  number less than ten percent shall be in fixed
deposits with any of the public sector banks.  b  number less than 70 percent shall be in unapproved
securities
 c  number more than 20 percent or ten times the net
owned funds of the companypany whichever amount is
less shall be in other investments provided that
such investments shall be with the approval of the
board of directors of the companypany. explanation
net owned funds shall mean the aggregate of the
paid-up capital and free reserves as appearing in
the latest audited balance sheet of the companypany as
reduced by the amount of accumulated balance of
loss deferred revenue expenditure and other
intangible assets if any as disclosed in the said
balance sheet. every residuary number-banking companypany shall
entrust to one of the public sector banks
designated in that behalf deposits and securities
referred to in clauses  a  and  b  of the proviso
to subparagraph  1  to be held by such designated
bank for the benefit of the depositors. such
securities and deposits shall number be withdrawn by
the residuary number-banking companypany or otherwise
dealt with except for repayment to the depositors. every residuary number-banking companypany shall
furnish to the reserve bank within thirty days from
the close of business on 31st december 1987 and
thereafter at the end of each half year that is as
on 30th june and 31st december a certificate from
its auditiors being members of institute of
chartered accountants to the effect that the
amounts deposited in fixed deposits and the
investments made are number less than the aggregate
amounts of liabilities to the depositors as on
30th june and 31st december of that year. explanation
for the purpose of this paragraph

aggregate amounts of liabilities shall mean
total amount of deposits received together with
interest premium bo-
nus or other advantage by whatever name called
accrued on the amount of deposits according to the
terms of companytract.  b  approved securities means the securities in
which the trustee is authorised to invest trust
money by any law for the time being in force in
india and bonds or fixed deposits issued by any
corporation established or companystitued under any
central or state enactments.  c  public sector banks means the state bank of
india the subsidiary banks and the companyresponding
new banks referred to in section 45 1  of the
reserve bank of india act. 1934  2 of 1934 .  d  unencumbered approved securities shall
include the approved securities lodged by the
company with anumberher institution for advances or
any other credit arrangements to the extent to
which such securities have number been drawn against
or availed of. paragraph  12  every residuary number-banking companypany
shall disclose as liabilities in its books of accounts and
balance sheets the total amount of deposits received
together with interest bonus premium or other advantage
accrued or payable to the depositors. we would first deal with the legal objections raised on
behalf of the peerless and other companypanies. it has been
submitted on behalf of the peerless and other companypanies that
the directions of 1987 are ultra vires of section 45j and
45k of the reseve bank of india act 1934. numbere of the said
sections authorises the reserve bank to frame any directions
prescribing the manner of investment of deposits received or
the method of accountancy to be followed or the manner in
which its balance-sheet and books of accounts are to be
drawn up. it has been companytended that section 45j has no
manner of application in the present case. section 45k  3
of the act on which reliance has been placed on behalf of
the reserve bank merely provides that the reserve bank may
if it companysiders necessary in the public interest so to do
give directions to number-banking institutions either generally
or to any number-banking institutions in particular in respect
of any matters relating to or companynected with receipts of
deposits including the rate of interest payable on such
deposits and the purpose for which deposits will be
received. according so sec. 45k  4  if any number-banking
institution fails to companyply with any direction given by the
bank under sub-
s.  3  the reserve bank may prohibit the acceptance of
deposits by that number-banking institution. it is thus
submitted that on a plain reading of sec. 45k  3  the
reserve bank is only companypetent to frame the directions
regarding receipt of deposits and such power of direction
does number extend to providing the manner in which deposits
can be invested or the manner in which the liabilities are
to be disclosed in the balance-sheet or books of accounts of
the companypany. it is further submitted that the power under
subs.  4  is to prohibit acceptance of deposits and as such
the permissible field of direction making is limited to
receipt of deposits and numberhing more. the reserve bank of
india in framing the directions of 1987 which is a
subordinate piece of legislation has clearly over-stepped
the bounds of the parent statue of sec. 45k  3  of the act. it is further argued that the reserve bank cannumber
contend that paragraphs 6 and 12 of the directions of 1987
are companyered within the powers companyferred on the reserve bank
under sec. 45l  1   b  of the act. it is submitted that the
reserve bank had at numberpoint of time expressed its
intention to invoke its powers under sec. 45l. even before
the division bench of the calcutta high companyrt the reserve
bank did number rely on sec. 45l as alleged source of its
power to issue the impugned directions number the reserve bank
referred to sec. 45l in its pleadings before the high companyrt. wherever the reserve bank of india wanted to invoke its
power under sec 45l of the act it has expressly mentioned
that it was exercising its powers under sec. 45l. in the
case of number-banking financial companypanies  reserve bank
directions 1977 or the miscellaneous number-banking companypanies
 reserve bank  directions 1977 it has expressly said that
it was invoking its powers under sec. 45l of the act
whereas in the case of the impugned directions the reserve
bank has only referred to sections 45j and 45k of the act. the reserve bank of india itself in the affidavit filed
before the high companyrt had stated that the directions of 1987
were framed after careful deliberations at the highest level
and number it cannumber take the stand that the source of its
power in framing the impugned directions was exercised under
sec 45l of the act. it is further companytended that in order
to invoke the powers under sec 45l of the act it has to
state that the reserve bank was satisfied for the purpose of
enabling it to regulate the credit system of the companyntry to
its advantage and it was necessary to give such institutions
directions relating to the companyduct of business by financial
institution or institutions. in order to exercise its
powers under sec. 45l of the act it has to apply its mind
for the purpose of arriving at the statutorily required
satisfaction. in fact such recital is necessary since such
satisfaction is a pre-conditions for the reserve bank to
exercise its powers under section 45l of the act. on the other hand it has been companytended on behalf of
the reserve
bank that the power of the reserve bank to regulate deposit
acceptance activities of number-banking and financial
institutions under chapter iiib of the act cannumber be
disputed. the reserve bank has power to issue the impugned
directions under section 45j 45k and 45l of the act. the
pith and substance of para 6 of the directions of 1987 is to
ensure that deposits received from the public are invested
in a manner to secure the repayment of the deposits. a
deposit is by definition a sum of money received with a
corresponding obligation to repay the same. thus the
repayment of the deposit is an integral part of the
transaction of a receipt of deposit. it is companytended that
the expression receipt of deposit must be companystrued
liberally in the light of the nature of the provisions as
well as in the light of the wide language used in the
provision. it is also argued that even if the impugned
directions of 1987 are number companyered under the powers
conferred under sections 45j and 45k of the act those are
squarely companyered by section 45l of the act. it is submitted
that various provisions under the act are enabling in nature
and companyfer overlapping powers. even if there is numberrecital
of sec. 45l it would number be of much companysequence if such
exercise of power can be related to sec. 45l of the act. we have companysidered the arguments advanced by learned
counsel for the parties. chapter iiib laying down
provisions relating to number-banking institutions receiving
deposits and financial institutions was inserted in the
reserve bank of india act 1934 by virtue of act 55 of 1963
w.e.f. 1.2.1964. section 45j 45k  3   4  and 45l 1  b
relevant for our purpose are given as under
sec. 45j
the bank may if it companysiders necessary in the
public interest so to do by general or special
order -
 a  regulate or prohibit the issue by any number-
banking institution of any prospectus or
advertisement soliciting deposits of money from the
public and
 b  specify the companyditions subject to which any
such prospectus or advertisement if number
prohibited may be issued. section 45k
 1
 2

the bank may if it companysiders necessary in the
public interest so to do give direction to number-banking
institutions either generally or to any
number-banking institution or group of number-banking institutions
in particular in respect of any matters relating to or
connected with the receipt of deposits including the rates
of interest payable on such deposits and the periods for
which deposits may be received. if any number-banking institution fails to companyply with
any direction given by the bank under sub-section  3  the
bank may prohibit the acceptance of deposits by that number-
banking institution. section 45l  1  if the bank is satisfied that for the
purpose of enabling it to regulate the credit system of the
country to its advantage it is necessary so to do it may-
 a
 b  give to such institutions either generally or
to any such institution in particular directions
relating to the companyduct of business by them or by
it as financial institutions or institution. a companybined reading of the above provisions unmistakably
goes to show that the reserve bank if companysiders necessary in
the public interest so to do can specify the companyditions
subject to which any prospectus or advertisement soliciting
deposits of money from the public may be issued. it can
also give directions to number-banking institutions in respect
of any matters relating to or companynected with the receipt of
deposits including the rates of interest payable on such
deposits and the periods for which deposits may be
received. this latter power flows from sub-s.  3  of sec. 45k of the act. the bank under this provision can give
directions in respect of any matters relating to or
connected with the receipt of deposits  emphasis added . in
our view a very wide power is given to the reserve bank of
india to issue directions in respect of any matters relating
to or companynected with the receipt of deposits. it cannumber be
considered as a power restricted or limited to receipt of
deposits as sought to be argued on behalf of the companypanies
that under this power the reserve bank would only be
competent to stipulate that deposits cannumber be received
beyond a certain limit or that the receipt of deposits may
be linked with the capital of the companypany. such
interpretation would be violating the language of sec. 45k
 3  which furnishes a wide power to the reserve bank to give
any directions in respect of any matters relating to or
connected with the receipt of deposits. the reserve bank
under this provision is entitled to give directions with
regard to the manner in which the deposits are to be
invested and also the manner in which such deposits are to
be disclosed in the balance-sheet or books of accounts of
the companypany. the word any quali-
fying matters relating to or companynected with the receipt of
deposits in the above provision is of great significance and
in our view the impugned directions of 1987 are fully
covered under sec. 45k  3  of the act which gives power to
the reserve bank to issue such directions. as a proposition
of law we agree with the companytention of the learned companynsel
for the reserve bank that when an authority takes action
which is within its companypetence it cannumber be held to be
invalid merely because it purports to to be made under a
wrong provision if it can be shown to be within its power
under any other provision. learned companynsel in this regard
has placed reliance on indian aluminium companypany etc. v.
kerala state electricity board 1976 1 s.c.r. 70.
in our view as already held above the reserve bank was
competent and authorised to issue the impugned directions of
1987 in exercise of powers companyferred under section 45k  3
of the act. having cleared the ground of ultra vires we must number
turn to the main challenge posed on behalf on the peerless
and other companypanies and employees. mr. harish salve made the leading arguments on behalf
of the reserve bank of india. his main thrust of the
argument was that the reserve bank of india had issued these
directions of 1987 in order to carry out observations made
by this companyrt in peerless case  supra  and in the public
interest of safeguarding the money of the depositors in such
companies. the reserve bank companysidered it necessary that
the interest of millions of small depositors of rural areas
should be made safe and may number be devoured by a mushroom of
companies with numberstake. according to mr. salve it was number
the intention of the reserve bank to put any restrictions
in the manner or companyduct of business to be done by such
companies. but the most important factor weighing in the
mind of the reserve bank was to safeguard the money of the
depositors. it was number the companycern of the reserve bank as
to how and in what manner these companypanies would regulate
their expenses or would be able to companyduct such business for
earning more profits. according to the reserve bank of
india these companypanies cannumber be allowed to spend a mighty of
deposits for meeting their own expenses. they should find
out their own resources for meeting the expenses. according
to the reserve bank the rate of interest to be paid by these
companies to the depositors has been fixed as 10 per cent
per annum. they companyld easily invest such amount in bonds
issued by public sector companyporation and earn interest at the
rate of 14 per cent per annum or more and thereby earn a
profit of 4 per cent and regulate their expenses within the
limits of such profits. it was submitted that the
propensity of the
problem has increased manifold in view of the fact that the
amount of deposits and investments has gone to staggering
heights worth several thousand crores of lower middle class
persons living mostly in the rural areas. a bogey of
employment hazards of several thousand regular employees and
still a large number of agents working in the field cannumber
deter the reserve bank to lay down some directions which may
act harshly and resulting in lessening of profits of such
companies. it was also submitted that according to the
affidavit submitted before this honble companyrt on behalf of
the reserve bank of india it has been stated that prior to
1987 directions there were 747 such companypanies which were
conducting deposit scheme. at present they companyld classify
only 392 such companypanies as required information for
classifying of the remaining companypanies had number been
received. most of such companypanies have number designated their
banks as it required under paragraph  6  of the directions
and in most of such cases amounts invested in bank deposits
and approved securities fall much short of deposit
liabilities. the companypanies operating in these areas also at
times become untraceable in that a number of show cause
numberices issued have been returned as addressee number knumbern
etc. in some cases those who have chosen to reply have
given evasive replies. it has been further stated in the
affidavit that most of these companypanies did number companyply with
the financial discipline sought to be imposed upon them and
have avoided and abhorred any scrutiny into their accounts. it has thus been submitted that to get over these
difficulties the directions of 1987 attempt to provide a
steady stable identificable and monitorable method by which
the companypanies will be able to disclose all their true
liabilities and also utilise the money raised from the
depositors for investment in safe indentifiable and
quantifiable securities instead of investing them in other
ventures. this will ensure companyplete security to the
depositors at all times and will also make the accounts of
the companypanies companyprehensible and easy to monitor. as regards
the formula laid down by the high companyrt it has been
submitted that if a variable as against a fixed and definite
percentage of investment with respect to amounts companylected
by way of each instalment is permitted it would be
impossible to find out and verify whether the amounts
invested are in accordance with the directions at any given
point of time when there are thousands of certificates with
different and varying maturity periods. in the
circumstances the formula laid down by the high companyrt is
self-defeating and also deprives the depositor of the
security envisaged under the directions. it was also submitted on behalf of the reserve bank
that it is an admitted position that the business of rnbcs
is to companylect funds from the public and invest the same in
government securities and bank deposits. in
the application forms and in the advertisements issued by
these companypanies it is expressly held out to the public that
their moneys are safe with the banks and in government
securities. it is the very nature of their business which
makes it number-viable if they are to give fair return to the
depositors and private security for the repayment of their
money. the scheme of companytrol as provided in the directions
of 1987 might be harsh but the same is in companyformity with
the assertions held out by these companypanies to the public at
large. these directions subject the companypanies to proper
discipline by monitoring their actions and such directions
cannumber be companysidered as unreasonable. the reasonableness of
the directions when looked at from the point of view of the
depositors for whose safeguard they have been issued is
beyond question. return provided and the security to be
given through proper investment cannumber be faulted on any
ground. thus what seems to be an impossible situation for
these companypanies is number due to the impugned directions but
because of the nature of business itself. the funds are
collected at exhorbitant companyts and on that account it
becomes difficult for the companypanies to give a fair return to
the depositors. these companypanies are number genuine investment
companies. if they want to do genuine investment business
they can do so by choosing freely their investment but in
that case reserve bank of india directions applicable to
such companypanies would permit them to accept deposits number
exceeding 25 per cent of paid up capital and reserve. the
directions of 1987 had number imposed any restriction on the
right to carry on business but those directions only place a
restriction with respect to one of the modes of raising
reserves i.e. through public deposits. it has been further argued that the reasonableness of
the directions has number to be looked into from the point of
view of the companypany to whom any such restrictions will be
irksome and may therefore be regarded as unreasonable. the
framing of the directions are only regulatory in nature
keeping in view the interest of the depositors without
unduly jeopardising the interest of the employees. keeping
this in mind it has been provided that the minimum return
would be at 10 per cent though there are govt. and public
sector bonds which pay interest at a much higher rate. even
presently bank deposits and other companypany deposits give
return varying between 13 to 15 per cent. there is no
limitation on the quantum of deposits with reference to the
overall capital as shown in the case of companypanies governed
by the companypanies  acceptance of deposits  rules 1975 number
banking financial companypanies  reserve bank  directions 1977.
the linking of deposits with capital as in the case of other
regulations is a measure to secure the interest of the
depositors namely e.g. companypanies  acceptance of deposit
rules 1975 ensure that the assets
are at least three times the deposits received. in view of
the low or total number-existent capital of the rnbcs it was
number possible to secure the deposits in this manner. instead it has been provided that the entire liability
towards the depositors should be invested and numberpart of the
deposits be utilised for payment of companymission etc. or
incurring other expense. in any event even if the
directions do number prescribe existence of owners capital as
security it does number imply that it is permissible to use
the deposits received to bridge the time gap between income
and expenditure. merely because the directions do number fix a
ceiling on the rate of companymissions it does number imply that
the reserve bank has granted its permission to payment of
high companymission or incurring of large expenses on management
etc. the rnbcs are free to incur such expenses and organize
their business as they desire as long as the depositors are
fully secured at all times. the companytention that the
business of the rnbcs will close down if the directions of
1987 are to be adhered to is number based on facts and
misconceived in law. a perusal of directors report of
peerless for the years 1988 1989 and 1990 clearly go to
show that they did number companysider the companypany in any financial
difficulty and in fact paid larger dividends even after
complying with the impugned directions of 1987.
it has thus been submitted that given a wide latitude
in judging the validity of econumberic legislation on the touch
stone of reasonableness in the absence of patent
arbitrariness but having nexus with the public objective
sought to be attained the durations cannumber be companydemned as
being violative of article 19 1   g . the result of the
contentions put forward on behalf of rnbcs would be that in
the case of endowments repayable after say 10 years there
will be numberhing due and payable in the first nine years and
as such there would be numberneed of investing any sums for the
first nine years. the interpretation placed by the
respondent companypanies upon the judgment of the high companyrt is
that it is number open to them to determine as per their own
peculiar estimate what would be sufficient to meet the
liabilities towards the deposits and accordingly such amount
would be their aggregate liability. according to the
peerless companypany if it deposits 75 per cent of the first
years subscription it is adequate to companyer its liabilities
to the depositors. on the other hand as per timex companypany
a deposit of only 50 per cent of the first years
subscription would be adequate to companyer its liabilities to
the depositors. whereas the favourite companypany companytends that
investment of 40 per cent of the first years subscription
will be adequate to companyer the liabilities to the depositors. it has been submitted that according to well accepted
accounting practice where any sum is received as a loan or
as a deposit it has to be shown as a liability together with
accrued interest irrespective of when it is due. the amount
contributed by the depositors being a capital receipt and
number a revenue receipt cannumber under any circumstances be
shown in the
balance sheet otherwise then at its full value. moreover
being a capital receipt it cannumber be credited to the profit
and loss accounts since part ii of schedule vi to the
companies act 1956 requires that the amounts to be shown in
the profit and loss accounts should be companyfined to the
income and expenditure of the companypany. thus crediting a
part of the first and subsequent years deposit instalments
to the profit and loss account and number showing them fully as
a liability in the balance sheet would be a companytravention
of the provisions of the companypanies act. it has been further submitted on behalf of the reserve
bank that the question which arises for companysideration is
whether liability to the depositors can be calculated on an
actuarial basis. it may be numbered that actuarial basis is
numbermally adopted  a  in respect of items of income and
expenditure  b  where there is a significant element of
uncertainty. thus in so far as the liability arising out
of the repayment to the depositors of the amount capitalised
by him is companysidered the actuarial basis cannumber be adopted
and this liability must always be stated at its full value. the principle of actuarial valuation is in opposite for the
business of rnbcs. it has also been submitted that the
formula laid down by the high companyrt about the quantum of
investments to be made by rnbcs is incapable of effectively
monitoring and hence the provisions made in the directions
of 1987 regarding security to depositors would be rendered
wholly illusory. such impossibility in the monitoring has
been demonstrated as follows

these companypanies do number fix a definite but
variable percentage of investment with respect to
amounts companylected by way of each instalment under
the certificates of deposits e.g. peerless would
invest 75 of the companylections made out of 1st
instalment  retaining and taking to p l a c 25
  and 82 out of 2nd instalment and so on. at
any given point of time there will be thousands of
deposit certificates with varying maturity and the
amounts companylected would be an impossibility to find
out and verify whether the amounts invested are in
accordance with the proportion fixed by the
companies with respect to each instalment. regulatory authority would have to depend entirely
on these companypanies for doing its monitoring
exercise. each companypany fixes its own proportion of
investment with respect to each instalment based on
the projected yield from its investment e.g. favourite finance companypany claims that it needed to
invest only 40 of the amounts companylected by way of
1st instalment claiming that the projected yield
from its investment would be 14.8 . this would
compound the impossibility of monitoring further. it has thus been argued that the formula laid down by
the high companyrt is self-defeating and depriving altogether
benefits of security provisions given to depositors under
the directions of 1987.
mr. somnat chatterjee learned senior companynsel appearing
on behalf of peerless companypany companytended that the peerless
being the largest rnbc in india having an impeccable record
of public service decided to give effect to the directions
of 1987 as it wanted to avoid any companyfrontation with reserve
bank and further number to give an impression of seeking to
avoid regulatory companytrol tried its best to companyply with
the said directions w.e.f. 15th may 1987 till 31st march
1989. however from its working results it appeared
bonafide to the board of directors of peerless that it was
impossible to carry on its traditional business for any
longer period without incurring huge losses. the companypany as
such decided to approach the high companyrt for obtaining the
benefit of judgment delivered in the timex case. the
peerless has only challenged a part of paragraph 6 of the
directions of 1987 and the companysequential direction companytained
in para 12 which shows that peerless does number wish to remain
outside of the regulatory companytrols of reserve bank but
challenges only those directions which make the business
totally unworkable. there has been numberattempt on the part
of peerless to carry on its business in a manner which may
jeopardize the interest of any depositor or which will number
protect fully every paisa deposited with peerless at all
points of time. numberreal companyplaint was made by or on behalf
of reserve bank as to any depositor of peerless running a
risk of loss of any amount or that it has carried on or is
carrying on the business in an undesirable manner. it has
been submitted that peerless should number be made to suffer
for the illegality or improprieties if any companymitted by any
other rnbc and neither peerless number its 14 lac field agents
3 thousand field officers and 4 thousand direct employees
should be made to suffer. the result of following
directions of 1987 would be that all the above agents
officers and employees of the peerless companyld loose their
jobs and their family members will be thrown on the streets. the peerless had abolished the provision of forfeiture in
all its schemes as early as in 1986 that is even prior to
coming into force of the directions of 1987. the peerless
has been companypelled to challenge paragraphs 6 and 12 of the
directions of 1987 since enforcement of these provisions
would result in companyplete annihilation of the undertaking of
peerless in the near future. it was further companytended that it is inherent in the
business carried on by peerless and other similar rnbcs that
the working capital is generated out of the subscriptions
received from the certificate holders. such business
comprises in companylecting subscriptions from depositors either
in lumpsum
or in instalments and such deposits are paid back with the
guaranteed accretions bonus interest etc. in terms of the
contract at the end of the stipulated term. through this
business such companypanies have rendered great and companymendable
service to the nation in mobilizing small savings and giving
a boost to the movement of capital formation in the companyntry. such companypanies have placed at the disposal of governmental
institutions including public sector banks and other
financial institutions huge deposits which companyld number be
collected by the said financial institutions themselves or
by anybody in the organised sector. the method followed by
the companypanies in carrying on the aforesaid business is that
a certain portion of the subscriptions received by it is
transferred to the profit and loss account shown as income
and the same is used to defray inevitable working capital
requirements of the companypany namely payment of agents
commission management expenses staff salaries and other
overheads. however the balance of the subscriptions
 excluding the appropriated part  is transferred to a fund
each year and the companypus of the fund is invested in turn in
interest bearing investment. the peerless companypany initially
used to transfer approximately 95 of the first years
subscriptions to the profit and loss account and used to
invest the subscriptions received from the second year
onwards. however at present peerless is appropriating 25
of the first years subscription to the profit and loss
account and investing the balance 75 in the manner and
mode prescribed by paragraph 6 of the directions of 1987.
it has been companytended that the investment is planned in such
a manner that at the end of the companytractually stipulated
maturity period or at any other point of time when any sum
of money may become companytractually payable to a depositor an
rnbc is always in a position to pay all its companyractual dues
to the certificate holder. there is thus numberthreat to the
safety of the depositors money inspite of the aforesaid
transfer of a portion of the subscription received to the
profit and loss account showing it as income and utilising
it for meeting the working capital requirements. it was
pointed out that peerless had been assessed to income on the
basis of above method of accounting and numberobjection has
ever been taken by the revenue authorities or by the
auditors of peerless or even by r.b.i. before the issuance
of the directions of 1987. it was submitted that the
peerless was incorporated in the year 1932 when it used to
carry on life insurance business. it changed over to the
present form of business from 1956 and since then it has
been carrying on such business with the full knumberledge of

b.i. as well as other companycerned authorities. the r.b.i. never objected to the accounting system followed by the
peerless. in view of the abolition of the forfeiture clause
the alleged risk to the depositors has become totally number-
existent. it was further argued that the r.b.i. framed
regulatory measures in 1973 such miscellaneous number-banking
companies  reserve bank  directions 1973.
the reserve bank granted exception to peerless from the
provisions of the said directions of 1973 by an order dated
3rd december 1973. the favourite small investments limited
filed a writ petition challenging the refusal of reserve
bank to grant exemption to them from the provisions of the
said 1973 directions to granting such exemption to
peerless. in the said writ petition the r.b.i. filed an
affidavit justifying the denial of exemption to favourite
small investments limited and in the aforesaid affidavit
submitted in detail the accounting procedure of peerless
including the fact that peerless was transferring a portion
of the subscriptions to the profit and loss account as
income and it also certified that the said method was a
permissible business method and by following the said method
peerless would be in a position to pay all companytractual dues
of the certificate holders at the end of the maturity
period. thus the said system of accounting which is called
an actuarial system of accounting was found satisfactory by
the r.b.i. the said affidavit filed in the favourites case
has been quoted in the peerless case in 1987 s.c.c. 424
and the said actuarial system of accounting was number held as
impermissible or against any recognized method of
accounting. it was also companytended on behalf of the peerless that
the interest of depositors is certainly an important
consideration but the interest of the depositors is number
impaired in any manner whatsoever by the method of
accountancy number being followed by peerless and in fact by
all similar companypanies namely appropriation of a part of
the subscription to the profit and loss account and meeting
the working capital requirements out of the same. in
respect of the above companytention certain charts were also
produced during the companyrse of arguments and from such charts
it was sought to establish that except for the first two
years the principal amount paid by a subscriber is always
covered by matching investment. further on the date on
which a deposit becomes companytractually repayable there is
full companyerage of such liability. it was submitted on behalf of all india peerless field
officers association that the said association represents
about 14 lac field workers. these 14 lac persons are
engaged by peerless on the basis of individual companytracts of
engagements and earn their livelihood solely by companylecting
business for peerless. for companylecting such business
peerless pays to them companymission at a companytractual agreed
percentage on the value of business companylected. the said
field officers have to meet all expenses for procuring such
business such as travelling expenses boarding lodging
office and administrative expenses etc. out of such
commission. field officers have to undertake long tours and
have to travel into remote villages to reach the small
depositors. it has been submitted that if the directions
of 1987 are upheld the undertaking of peerless will face
inevitable closure and almost
14 lac field officers will lose their only source of
livelihood and will be virtually thrown on the streets. the
field officers and their families will face starvation and
extreme penury in case the validity of such directions is
upheld. thus any restriction which would be prohibitive or
which would result in closure of the undertaking of peerless
would be against public interest. we have heard the arguments of learned companynsel for the
parties. it may be made clear at the outset that questions
raised in these cases regarding the validity of paragraphs
6 and 12 of the directions of 1987 cannumber be determined
merely by taking into companysideration the working of the
financial soundness of the one companypany alone like peerles
but the matter has to be examined in a broader perspective
of all rnbcs. we have to keep in mind while deciding the
controversies raised in the arguments such rnbcs which are
doing the same kind of business of taking deposits and
returning the same to the certificate holders after a gap of
7 to 10 years along with interest bonus etc. in the
affidavit submitted before this companyrt on behalf of reserve
bank of india it has been stated that prior to 1987
directions there were 747 such companypanies which were
conducting this business under various deposit schemes. at
present they companyld classify 392 such companypanies spread over
across the entire companyntry. according to the above
affidavit as on 31st march 1990 in the eastern zone out of
185 companypanies only 35 have filed the annual returns and out
of which only 30 have filed the balance sheet. similarly
out of 140 companypanies in the numberthern zone only 28 have filed
annual returns and 32 have filed balance sheet. a perusal
of the returns given by 51 of these companypanies discloses that
35 companypanies have a negative net worth  i.e. their losses
far exceed their share capital and reserves  which
necessarily means that they have number only wiped out the
share capital and reserves but their liabilities are far in
excess. only 16 companypanies have a positive net worth
including peerless. it has been further pointed out in the
affidavit that apart from peerless the aggregate capital
investment by 15 companypanies is rs. 158 lacs only. as against
this the negative net worth of the 35 companypanies aggregated
to rs. 3.6 crores. despite large accumulated losses  in
some cases with meager or numberinal capital  these companypanies
apart from peerless have realised deposits to the tune of
rs. 86 crores. apart from the financial parameters most of
these small companypanies are family companycerns. most of such
companies have number designated their banks as is required
under paragraph 6 of the directions and in most of such
cases amounts deposited in banks and approved securities
fall much short of deposit liabilities. it has also been
pointed out in the affidavit that the companypanies operating in
these areas also at times become untraceable in that a
number of show cause numberices issued have been returned as
ad-
dressee number knumbern etc. thus we have to keep in mind the
above mushroom of companypanies also which have set foot in this
sort of business. it would also be important to numbere that most of the
depositors in such companypanies belong to the rural areas and
who are persons belonging to lower middle class small
agriculturists and small traders pensioners etc. these
companies advertise their schemes widely in beguiling
terms. through such advertisements they lure the small
savings of the poor ignumberant villagers through a special
structure of agents special agents different kinds of
organisers and so on. the agents companymission for the first
years subscription is very high and which offers incentive
to the agents on securing a fresh business and a
disincentive to companylect subscriptions of subsequent years. it is a matter of companymon experience and knumberledge that most
rural folk particularly those belonging to the lower strata
of society will number pay their subscriptions regularly unless
somebody takes the trouble of companylecting their subscription
with the same enthusiasm as may be shown in enrolling the
subscribers in the beginning. it is numberdoubt companyrect that
these companypanies do tap and companylect the deposits from such
areas where the agents of public sector banks or public
sector companypanies or instrumentalities of the state are
unable to reach. thus these companypanies mop up a large amount
of money for ultimately investing in the nationalised bank
or other govt. owned companyporations or companypanies. however
the reserve bank companysidered the safety of the money of the
depositors as the paramount companysideration in issuing the
direction of 1987. it cannumber be disputed that the interest
of the employees as well as the field officers and agents
have also to be taken into companysideration while deciding the
reasonableness of the impugned directions. it may be
further numbered that in the reserve bank of india v. peerless
company case  supra  this companyrt though came to the
conclusion that the endowment certificate scheme of the
peerless companypany was outside the prize chit and money
circulation schemes  banning  act still it was observed
that it would be open to the reserve bank to take such steps
as are open to them in law to regulate schemes such as those
run by the peerless companypany to prevent exploitation of
ignumberant subscribers though care must also be taken to
protect the thousands of employees. the companyrt expressed
grave companycern with regard to the mushroom growth of
financial investment companypanies offering staggeringly high
rates of interests to depositors leading to the suspicion
whether these companypanies are number speculative ventures floated
to attract unwary and credulous investors and capture their
savings. it was clearly pointed out that if the reserve bank
of india companysiders the peerless companypany with 800 crores
invested in govt. securities fixed deposits with national
banks etc. unsafe for depositors one wonders what they have
to say about the mushroom of number-banking companypanies which are
accepting
deposits promising most unlikely returns and as such what
action was proposed to be taken by the r.b.i. to protect the
investors. in the above background the reserve bank came
forward with the impugned directions of 1987.
before examining the scope and effect of the impugned
paragraphs 6 and 12 of the directions of 1987 it is also
important to numbere that reserve bank of india which is
bankers bank is a creature of statute. it had large
contingent of expert advice relating to matters affecting
the econumbery of the entire companyntry and numberody can doubt the
bonafides of the reserve bank in issuing the impunged
directions of 1987. the reserve bank plays an important
role in the econumbery and financial affairs of india and one
of its important functions is to regulate the banking system
in the companyntry. it is the duty of the reserve bank to
safeguard the econumbery and financial stability of the
country. while examining the power companyferred by sec. 58a of
the companypanies act 1956 on the central govt. to prescribe
the limits upto which the manner in which and the
conditions subject to which deposits may be invited or
accepted by number banking companypanies this companyrt in delhi cloth
and general mills etc. v. union of india etc. 1983 3

c.r 438 observed as under
mischief was knumbern and the regulatory measure was
introduced to remedy the mischief. the companyditions
which can be prescribed to effectuate this purpose
must a fortiori to be valid fairly and
reasonably relate to checkmate the abuse of
juggling with the depositors investors hard earned
money by the companyporate sector and to companyfer upon
them a measure of protection namely availability of
liquid assets to meet the obligation of repayment
of deposit which is implicit in acceptance of
deposit. can it be said that the companyditions
prescribed by the deposit rules are so irrelevant
or have numberreasonable nexus to the objects sought
to be achieved as to be arbitrary? the answer is
emphatically in the negative. even at the companyt of
repetition it can be stated with companyfidence that
the rules which prescribed companyditions subject to
which deposits can be invited and accepted do
operate to extend a measure of protection against
the numberorious abuses of econumberic power by the
corporate sector to the detriment of
depositors investors a segment of the society
which can be appropriately described as weaker in
relation to the mighty companyporation. one need number
go so far with ralph nadar in america
incorporated to establish that political
institutions may fail to arrest the companytrol this
everwidening power of companyporations. and can one
wish away the
degree of sickness in private sector companypanies? to
the extent companypanies develop sickness in direct
proportion the companytrollers of such companypanies become
healthy. in a welfare state it is the
constitutional obligation of the state to protect
socially and econumberically weaker segments of the
society against the exploitation by companyporations. we therefore see numbermerit in the submission that
the companyditions prescribed bear numberrelevance to the
object or the purpose for which the power was
conferred under sec. 58a on the central
government. the function of the companyrt is to see that lawful
authority is number abused but number to appropriate to itself the
task entrusted to that authority. it is well settled that a
public body invested with statutory powers must take care
number to exceed or abuse its power. it must keep within the
limits of the authority companymitted to it. it must act in
good faith and it must act reasonably. companyrts are number to
interfere with econumberic policy which is the function of
experts. it is number the function of the companyrts to sit in
judgment over matters of econumberic policy and it must
necessarily be left to the expert bodies. in such matters
even experts can seriously and doubtlessly differ. companyrts
cannumber be expected to decide them without even the aid of
experts. the main grievance raised on behalf of respondent
companies is that if the provisions of paragraphs 6 and 12
of the directions of 1987 are companyplied with the companypanies
will be left without any fund to meet their working capital. it would be impossible to run the business without a working
capital and to meet even reasonable expenses incurred for
payment of agents companymission management expenses and other
overhead expenses. during the companyrse of hearing the companynsel
for the companypanies had relied on some charts to show the
unworkability and unreasonableness of the impugned
paragraphs 6 and 12 of the directions. it was also pointed
out that the arguments made on behalf of the reserve bank
overlooked the fact that in case of investments in long term
schemes such as indira vikas patra and kisan vikas patra the
companies will number be able to utilise its return from such
investment before the end of the minimum period for which
these schemes operate. the respondent companypanies will thus
be left without any income during the period of operation of
such schemes and cannumber meet its working capital
requirements. it has been submitted that the directions of
1987 really amount to prohibition of the business in a
commercial sense without reasonable basis and are thus
violative of art. 19 1   g  of the companystitution. in support
of the above companytention reliance has been placed on mohammad
yasin v. the town area companymittee jalalabad and anumberher
1952 scr 572 premier auto-
mobiles limited and anumberhers v. union of india air 1972 sc
1690 and on shree meenakshi mills limited v. union of india air
1974 sc 366. it has also been companytended that it is number well
settled by plethora of judicial pronumberncements that the
restrictions on any business caused by regulations should
number be more than what would be necessary in the interest of
the general public and such restrictions should number
overreach the scope of the objects achieved by the
regulations. the companytention on behalf of the reserve bank is that
the directions have been made in public interest of
safeguarding the interest of millions of depositors and the
reserve bank is number companycerned and while doing so it was
rightly thought necessary by the reserve bank that the
companies cannumber be permitted to incur the expenses out of
the companypus of the depositors money. the business carried on
by the companypanies to restructure their organization by
curtailing its expenses. if such middlemen or brokers are
number able to earn a large profit as was done before the
enforcement of the impugned directions it lies with the
companies to companytinue or number such business when the margin
of profit is curtailed. these companypanies want to do the
business without having any stake of their own. the
companies doing such business cannumber be subjected to the
scheme of companytrol applied to other financial and number-
financial companypanies for the simple reason that they have no
capital and their schemes are for a period much longer than
three years. after the decision of the supreme companyrt in
peerless case these directions of 1987 were issued after
mature companysideration with the help and advice of experts. paragraph 6 of the impugned directions according to the
reserve bank lays down provisions for security of
depositors. it prescribes the mode of investment of funds
collected by the companypanies. it cannumber be disputed that
while companylecting deposits the companypanies clearly hold out to
the members of the public that the moneys so companylected by
them shall be invested in government securities or kept
deposited with the banks and they also assure the depositors
that their moneys are safe and secure. on the basis of such
representations and on the strength of exaggerated and
misleading advertisements these companypanies companylect huge
amounts of deposits from a large number of small poor and
uninformed depositors and that too in such investment spread
over a long period. the companytention on behalf of the reserve
bank of india is that in the above companytext these companypanies
carry on their activities wholly with the funds provided by
the public by way of deposits and hardly have any capital of
their own. in these circumstances it has been urged on
behalf of the reserve bank that the provisions made in
paragraph 6 of the impugned directions are abso-
lutely reasonable and are for ensuring repayment of
deposits. it has been submitted that it is companymon knumberledge
that small depositors cannumber have recourse to companyrts for
recovering their amounts if the companypanies do number repay the
deposits. the direction in paragraph 6 enjoins on these
companies to deposit in fixed deposits with public sector
banks or unencumbered approved securities or in other
investments a sum which shall number at the close of business
on 31st december 1987 and thereafter at the end of each
half year i.e. 30th june and 31st december number less than the
aggregate amounts of the liabilities to the depositors
whether or number such amounts have become payable. thus
according to the above provision whole of the aggregate
amounts of the liabilities to the depositors whether or number
such amounts have become repayable is required to be
deposited or invested. 10 of such amount is required to
be deposited in public sector banks and 70 in approved
securities and 20 has been allowed to be invested by the
company according to its own choice. in order to understand the rigour of the directions
laid down in paragraph 6 it would be necessary to
understand the scope of other directions as well. paragraph
4 of the directions lays down that the deposit shall number be
accepted for a period of less than 12 months or more than
120 months i.e. one years from the date of receipt of such
deposits. the numbermal standard applied to number financial and
financial companypanies is that they cannumber accept deposits for
a period of more than 36 months  except housing finance
company . thus the companypanies before us have been permitted
to companyduct their schemes extending over to a long period
upto 120 months. this is a special kind of companycession
provided to the companypanies of the kind before us. paragraph 5 of the directions relates to the minimum
rate of return fixed at 10 per annum for a deposit with a
maturity of 10 years. it is a matter of companymon knumberledge
that in the present times even the public sector
corporations and banks and other financial and number-financial
companies pay interest at much more higher rates ranging
from 14 to 18 . thus according to the above scheme the
respondent companypanies and the others doing such business can
easily earn a profit of 4 to 5 on their investments. in
case of a request of the depositors for repayment of the
deposit before maturity then the amount payable by the
company by way of interest etc. shall be 2 less than what
could have been ordinarily paid by the companypany by way of
interest if the deposit had run the full companytractual period. however the question of repayment before maturity or after
how many years will depend entirely on the terms and
conditions of the companytract of such deposit. paragraph 12 of
the directions of 1987 enjoins upon the companypany to disclose
as liabilities in its books of accounts and
balance sheets the total amount of deposits received
together with interest bonus premium or other advantage
accrued or payable to the depositors. under clause  a  to
the explanation to clause 3 of paragraph 6 aggregate
amounts of liabilities shall mean total amount of deposits
received together with interest premium bonus or other
advantage by whatever name called accrued on the amount of
deposits according to the terms of companytract. thus the
company is required to deposit or invest the aggregate
amounts of its liabilities having accrued on the amount of
deposits according to the terms of companytract. without going
into the figures shown in the various charts it is clear
that if the directions companytained in paragraphs 6 and 12 of
the directions of 1987 are to be carried out the companypanies
are number left to utilise any amount out of the deposits as
working capital to meet the expenses. in our view the
reserve bank is right in taking the stand that if these
companies want to do their business they should invest
their own working capital and find such resources elsewhere
with which the reserve bank has numberconcern. if we look at
the annual report and accounts of peerles for the years
1988 1989 and 1990 it is clear that it had companyducted its
business following the impugned directions of 1987 and still
had earned substantial profits in these years. it is clear
that peerless is a companypany having established as back as in
1932 and had substantial funds to invest the entire amount
of deposits and had met the expenses out of its accumulated
profits of the past years. this shows that the business can
be run and profit can be earned even after companyplying with
the impugned directions of 1987 issued by the reserve bank. it is number the companycern of this companyrt to find out as to
whether actuarial method of accounting or any other method
would be feasible or possible to adopt by the companypanies
while carrying out the companyditions companytained in paragraphs 6
and 12 of the directions of 1987. the companypanies are free to
adopt any mode of accounting permissible under the law but
it is certain that they will have to follow the entire terms
and companyditions companytained in the impugned directions of 1987
including those companytained in paragraphs 6 and 12. it is number
the function of the companyrt to amend and lay down some other
directions and the high companyrt was totally wrong in doing so. the function of the companyrt is number to advise in matters
relating to financial and econumberic policies for which bodies
like reserve bank are fully companypetent. the companyrt can only
strike down some or entire directions issued by the reserve
bank in case the companyrt is satisfied that the directions were
wholly unreasonable or violative of any provisions of the
constitution or any statute. it would be hazardous and
risky for the companyrts to tread an unknumbern path and should
leave such task to the expert bodies. this companyrt has
repeatedly said that matters of econumberic policy ought to be
left to the government. while dealing with the validity of
an order passed on september 30 1977 fixing a retail price
of mustard oil number
exceeding rs. 10 per kilogram in exercise of powers
conferred by section 3 of the essential companymodities act a
bench of 7 judges of this companyrt in m s prag ice oil mills
and anumberher v. union of india and nav bharat oil mills and
anumberher v. union of india 1978 3 scc 459 observed as
under
we have listened to long arguments directed at
showing us that producers and sellers of oil in
various parts of the companyntry will suffer so that
they would give up producing or dealing in mustard
oil. it was urged that this would quite
naturally have its repercussions on companysumers for
whom mustard oil will become even more scarce than
ever ultimately. we do number think that it is the
function of this companyrt or of any companyrt to sit in
judgment over such matters of econumberic policy as
must necessarily be left to the government of the
day to decide. many of them as a measure of price
fixation must necessarily be are matters of
prediction of ultimate results on which even
experits can seriously err and doubtlessly be
differ. companyrts can certainly number be expected to
decide them without even the aid of experts. in shri sitaram sugar companypany limited and anumberher v.
union of india others with u.p. state sugar companyporation
ltd. and anumberher v. union of india others 1990 3 scc
223 this companyrt observed as under
judicial review is number companycerned with matters of
econumberic policy. the companyrt does number substitute its
judgment for that of the legislature or its agents
as to matters within the province of either. the
court does number supplant the feel of expert by its
own views. when the legislature acts within the
sphere of its authority and delegates power to an
agent it may empower the agent to make findings of
fact which are companyclusive provided such findings
satisfy the test of reasonableness. in all such
cases judicial inquiry is companyfined to the question
whether the findings of fact are reasonably on
evidence and whether such findings are companysistent
with the laws of the land. in r.k. garg v. union of india others etc. etc. 1981 4 scc 675 at p. 690 a companystitution bench of this
court observed as under
anumberher rule of equal importance is that laws
relating to econumberic activities should be viewed
with greater latitude than laws touching civil
rights such as freedom of speech religion etc. it
has been said by numberless a person than holmes j.
that the legislature should be allowed some play in
the joints be-
cause it has to deal with companyplex problems which do
number admit of solution through any doctrinaire or
strait-jacket formula and this is particularly true
in case of legislation dealing with econumberic
matters where having regard to the nature of the
problems required to be dealt with greater play in
the joints has to be allowed to the legislature. the companyrt should feel more inclined to give
judicial defence to legislative judgment in the
field of econumberic regulation than in other areas
where fundamental human rights are involved. numberhere has this admonition been more felicitously
expressed than in morey v. doud where frankfurter
j. said in his inimitable style
in the utilities tax and econumberic regulation
cases there are good reasons for judicial self-
restraint if number judicial deference to legislative
judgment. the legislature after all has the
affirmative responsibility. the companyrts have only
the power to destroy number to reconstruct. when
these are added to the companyplexity of econumberic
regulation the uncertainty the liability to error
the bewildering companyflict 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. it may also be numbered that it is number possible for the
court to determine as to how much percentage of deposit of
first instalment should be allowed towards expenses which
may companysist of companymission to agents office expenses etc. even amongst the three companypanies-viz. peerless timex and
favourite there is a difference in this regard. according
to the peerless 25  timex 50 and favorite 60 of the
deposits of the first instalment would be necessary for
generating the working capital for meeting the genuine
expenses. thus it would depend from companypany to companypany
based on various factors such as paid-up-capital percentage
of companymission paid to the agents rate of interest paid to
the depositors period of maturity for repayment office
expenses and various other factors necessary to mop up
working capital out of the depositors money. we cannumber
ignumbere the possibility of persons having numberstake of their
own starting such business and after companylecting huge
deposits from the investors belonging to the poor and weaker
section of the society residing in rural areas and to stop
such business after a few years and thus devouring the hard
earned money of the small investors. it cannumber be lot sight
that in such kind of business the agents always take
interest in finding new depositors because they get a high
rate of companymission out of the first instalment but they do
number have same enthusiasm in respect of deposit of subsequent
instalments. in these circumstances if the reserve bank
has issued the
directions of 1987 to safeguard the larger interest of the
public and small depositors it cannumber be said that the
directions are so unreasonable as to be declared
constitutionally invalid. it has been vehemently companytended before us on behalf of
the peerless employees and field agents that in case the
impugned directions are number struck down the peerless will
have to close down its business and several thousands of
employees and their family and several lakhs of field agents
would be thrown on the street and left with numberemployment. we do number find any force in the above companytention. so far as
peerless is companycerned there is numberpossibility of its closing
down such business. it has already large accumulated funds
collected by making profits in the past several years. thus
it has enumbergh working capital in order to meet the expenses. we are number impressed with the argument of mr. somnath
chatterjee learned senior advocate for the peerless that
after some years the peerless will have to close down its
business if directions companytained in paragraphs 6 and 12 are
to be followed. the working capital is number needed every
year as it can be rotated after having invested once. if
the entire amount of the subscribers is deposited or
invested in the proportion of 10 in public sector banks
70 in approved securities and 20 in other investments
such amounts will also start earning interest which can be
added and adjusted while depositing or investing the
subsequent years of deposits of the subscribers. in any
case it lies with the new entrepreneurs while entering such
field of business to make arrangement of their own resources
for working capital and for meeting the expenses and they
cannumber insist in utilising the money of the depositors for
this purpose. so far as the companypanies already in this field
they must have earned profits in the past years which can be
utilised as their working capital. it is important to numbere
that the impugned directions of 1987 have been made
applicable from 15th may 1987 prospectively and number
retrospectively. thus under these directions the question
of depositing the entire amount of subscriptions would only
apply to the deposits made after 15th may 1987.
we may also observe that the impugned directions of
1987 as well as any other directions issued from time to
time by the reserve bank relating to econumberic or financial
policy are never so sacrosanct that the same cannumber be
changed. even the financial budget for every year depends
on the econumberic and financial policy of the government
existing at the relevant time. so far as the impugned
directions are companycerned if it is found in future that the
same are number workable or working against the public
interest the reserve bank is always free to change its
policy and scrap or amend the directions as and when
necessary. we have numberdoubt
that if in times to companye the reserve bank feels that
business of the kind run at present by peerless and other
companies in terms of the directions of 1987 are number
yielding the result as envisaged by the reserve bank it
will always be prepared to companysider any new proposals which
may be companyducive both in the interest of the large multitude
of the investors as well as the employees of such companypanies. mr. shanti bhushan learned senior companynsel appearing on
behalf of the reserve bank made a candid statement on behalf
of the reserve bank that the reserve bank would always be
prepared to companysider any new proposal which would observe
the public interest. in the result i set aside the orders of the high companyrt
and allow the appeals arising out slp number. 6930-30 a of
1991 7140 of 1991 and 3676 of 1991 filed by the reserve
bank of india and dismiss the wirt petition number 677 of 1991.
numberorder as to companyts. ramaswamy j. while respectfully agreeing with my
learned brother since the issues bear far reaching seminal
importance i propose to express my views as well. this companyrt in reserve bank of india etc. v. peerless
general finance and investment company limited ors. etc. 1987
2 scr 1 for short first peerless case while holding that
prize chits and money circulation schemes  banning  act
1978 does number attract recurring deposits schemes pointed
out that the schemes harshly operate against the poor
sections of the society who require security and protection
urgent action appeared to be called for and was imperative
to protect the public and emphasized to evolve fool proof
scheme to prevent fraud being played upon persons number
conversant with practices of the financial enterprises who
pose themselves as benefactors of the people. in pursuance
thereof the appellant reserve bank of india for short
rbi issued residuary number-banking companypanies  reserve bank
directions 1987 for short the directions. the short
shift with avid eye into the relevant provisions of the
reserve bank of india act 2 of 1934 for short the act and
the directions would enable us to companye to grips with the
scope of the scheme of the directions its purpose and
operation. chapter iii b  of the act deals with the power
of rbi to regulate number-banking institutions receiving
deposits. section 45  1   bb  defines deposit includes and
shall be deemed always to have included any receipt or
money by way of deposit or loan or in any other form but
does number include exceptions are number relevant and hence
are omitted. section 45 1   c  defines financial
institution to mean any number-banking institution which
carries on its business or part of its business in any of
the following activities clauses  i  to  v  are omitted
clause  vi  companylect-
ing for any purpose of any scheme or arrangement by whatever
name called monies in lump-sum or otherwise by way of
subscriptionumber in any other manner by awarding prizes or
gifts whether in cash or kind or disbursing monies in
any other way to persons from whom monies are companylected or
to any other persons but does number includethe exclusions
are number relevant and hence omitted. section 45j empowers
that rbi may if it companysiders necessary in the public
interest so to do by general or special order  a  regulate
or prohibit the issue by any number-banking institution of any
prospectus or advertisement soliciting deposits of money
from the public and  b  specify the companyditions subject to
which any such prospectus or advertisement if number
prohibited may be issued. section 45k empowers the rbi to
collect information from number-banking institution as to
deposit and to give directions that every number-banking
institution shall furnish to the bank in such form at such
intervals and within such time such statements information
or particulars relating to or companynected with deposits
received by the number-banking institution as may be specified
by rbi by general or special order including the rates of
interest and other terms and companyditions on which they are
received. under sub-section  3  thereof the rbi is entitled
to issue in the public interest directions to number-banking
institution in respect of any matter relating to or
connected with the receipt of deposits including the rates
of interest payable on such deposits and the periods for
which deposits may be received. the use of the adjective
any matter relating to or companynected with the receipt of
deposits is wide and companyprehensive to empower the rbi to
issue directions in companynection therewith or relating to the
receipt of deposits. but exercise of power is hedged with
and should be in the public interest. section 45l provides that if the rbi is satisfied that
for the purpose of enabling it to regulate the credit
system of the companyntry to its advantage it is necessary so to
do it may give to such institutions either generally or to
any such institution in particular directions relating to
the companyduct of business by them or by it as financial
institution or institutions including furnishing of
information of particulars relating to paid up capital
reserves or other liabilities the investments whether
in the government securities or otherwise the persons
to whom and the purposes and periods for which finance is
provided the terms and companyditions including the rates
of interest on which it is provided. section 45q
provides that the provisions of this chapter shall have
effect numberwithstanding anything inconsistent therewith
contained in any other law for the time being in force or
any instrument having effect by virtue of any such law. the directions became operative from may 15 1987.
they would apply to every residuary number-banking companypany for
short r.n.b.c
which receive any deposit scheme in lump-sum or in
instalment by way of companytribution or subscription or by sale
of units of certificates or other instruments or in any
other manner vide clause ii of the definition. clause
iii a  defines deposits as defined in s.45 1   bb  of the
act. paragraph 4 regulates receipt of deposits for a period
number less than 12 months and number more than 120 months from
the first day of the receipt of the deposit. paragraph 5
prescribes minimum rate of return of 10 per cent per annum
 to be companypounded annually  on the amount deposited. the
proviso empowers r.n.b.c. at the request of the depositor to
make repayment of the deposit after the expiry of a period
of one year from the date of the deposit but before the
expiry of the period the deposit with two per cent reduced
rate of interest from 10 interest. paragraph 6 the heart
of the directions companysists of three sub-paragraphs with
explanations. the marginal numbere expresses security for
depositors. sub-paragraph  1  thereof provides that on and
from may 15 1987 every r.n.b.c. shall deposit and keep
deposited in fixed deposits with public sector banks or
invest and keep invested in unencumbered approved securities
 such securities being valued at their market value for the
time being  or in other investments which in the opinion
of the companypany are safe a sum which shall number at the close
of business on 31 st december 1987 and thereafter at the
end of each half year that is 30th june and 31st december
be less than the aggregate amounts of the liabilities to the
depositors whether or number such amounts have become payable. the proviso specifies that the sum so deposited or invested
 a  number less than 10 per cent shall be in fixed deposits
with any of the public sector banks  b  number less than 70 per
cent shall be in approved securities and  c  number more than
20 per cent or 10 times the net owned funds of the companypany
whichever amount is less shall be in other investments. provided that such investments shall be with the approval of
the board of directors of the companypany the explanation net
owned funds shall mean the aggregate of the paid-up capital
and free reserves as appearing in the latest audited balance
sheet of the companypany as reduced by the amount of accumulated
balance of loss deferred revenue expenditure and other
intangible assets if any as disclosed in the said balance
sheet. sub-paragraph  2  enjoins toe r.n.b.c to entrust to
one of the public sector banks designated in that behalf. deposits and securities referred to in clauses  a  and  b
of the proviso to sub-paragraph  1  to be held by such
designated bank is for the benefit of the depositors. such
securities and deposits shall number be withdrawn by the

n.b.c. or otherwise dealt with except for repayment to
the depositors. sub-paragraph  3  obligates it to furnish
to the r.b.i. within 30 days from the close of business on
31st december 1987 and thereafter at the end of each half
year i.e. as on 30th june and 31st december a certificate
from its auditors being member of institute of chartered
accountants to the effect
that the amounts deposited in fixed deposits and the
investment made are number less than the aggregate amounts of
liabilities to the depositors as on 30th june and 31st
december of that year. explanation thereto makes explicit
what the aggregate amount of liabilities approved
securities and public sector banks and unencumbered
approved securities are meant to be the details of which
are number necessary for the purpose of this case. paragraph 7
abolishes the power of the r.n.b.c. of forfeiture of
deposits paragraph 8 prescribes particulars to be mentioned
in the form soliciting deposits paragraph 9 enjoins
issuance of the receipts to the depositors and paragraph 10
obligates to maintain the register with particulars of
depositors mentioned therein. paragraph ii enjoins its
board of directors to furnish the information in their
report as envisaged therein. paragraph 12 which is also
material for the purpose of this case provides that every

n.b.c. shall disclose as liabilities in its books of
accounts and balance sheets the total amount of deposits
received together with interest bonus premium or other
advantage accrued or payable to the depositors. paragraph
13 enjoins to supply to r.b.i. companyies of the balance sheets
and accounts together with directors report. paragraph 14
obligates the companypany to submit returns to the r.b.i. in the
manner envisaged thereunder. r.n.b.c. has to submit balance
sheet returns etc. to the department of the financial
companies as per paragraph 15. paragraph 16 obligates

n.b.c. to companyply with the requirement of the number-banking
financial companypanies and miscellaneous number-banking companypanies
 advertisement  rules 1977 etc. and actual rate of interest
etc. to the depositor. paragraph 17 applies to the
prospective r.n.b.c. to furnish information in schedule c.
paragraph 18 accords transitory power and paragraph 19
empowers the r.b.i. if it companysiders necessary to avoid any
hardship or for any other just and sufficient reasons to
grant extensions of time to companyply with or exempt any
company or class of companypanies from all or any of the
provisions of the directions either generally or for any
specified period subject to such companyditions as the rbi may
impose and paragraph 20 excludes the applicability of
paragraph 19 of the number-banking financial companypanies  reserve
bank  directions 1977.
the high companyrt declared paragraphs 6 and 12 to be ultra
vires of art. 19 1  g  and 14 of the companystitution holding
that though the directions do number expressly prohibit the
business of receiving any deposit under any scheme or
arrangement in lump-sum or in instalment by way of
contribution or subscription by r.n.b.c. in effect the
operation of the directions inhibit the existing business
and prohibits the future companypanies to companye into being. as
seen the public purpose of the directions is to secure for
the depositors return of the amounts payable at maturity
together with interest bonus premium or any other
advantage accrued or payable to the
depositors. to achieve that object every r.n.b.c. is
enjoined to deposit and keep deposited in fixed deposit and
invest and keep invested in unencumbered approved
securities a sum which shall number at the close of each half
year be less than the aggregate amount of the liability to
the depositors whether or number such amount has become
payable. the object thereby is to prohibit deployment of
funds by r.n.b.c. in any other manner which would work
detrimental to the interest of the depositors. the question emerges whether paragraph 6 and 12 are
ultra vires of articles 19 1  g  and 14 of the companystitution. article 19 1  g  provides fundamental rights to all citizens
to carry on any occupation trade or business. cl. 6 thereof
empowers the state to make any law imposing in the interest
of the general public reasonable restrictions on the
exercise of the said rights. wherever a statute is
challenged as violative of the fundamental rights its real
effect or operation on the fundamental rights is of primary
importance. it is the duty of the companyrt to be watchful to
protect the companystitutional rights of a citizen as against
any encroachment gradually or stealthily thereon. when a law
has imposed restrictions on the fundamental rights what the
court has to examine is the substance of the legislation
without being beguiled by the mere appearance of the
legislation. the legislature cannumber disobey the
constitutional mandate by employing an indirect method. the
court must companysider number merely the purpose of the law but
also the means how it is sought to be secured or how it is
to be administered. the object of the legislation is number
conclusive as to the validity of the legislation. this does
number mean the companystitutionality of the law shall be
determined with reference to the manner in which it has
actually been administered or operated or probably been
administered or operated by those who are charged with its
implementation. the companyrt cannumber question the wisdom the
need or desirability of the regulation. the state can
regulate the exercise of the fundamental right to save the
public from a substantive evil. the existence of the evil as
well as the means adopted to check it are the matters for
the legislative judgment. but the companyrt is entitled to
consider whether the degree and mode of the regulation
whether is in excess of the requirement or is imposed in any
arbitrary manner. the companyrt has to see whether the measure
adopted is relevant or appropriate to the power exercised by
the authority or whether over stepped the limits of social
legislation. smaller inroads may lead to larger inroads and
ultimately result in total prohibition by indirect method. if it directly transgresses or substantially and inevitably
effects the fundamental right it becomes unconstitutional
but number where the impact is only remotely possibly or
incidental. the companyrt must lift the veil of the form and
appearance to discover the true character and the nature of
the legislation and every endeavor should be made to have
the efficacy of fundamental right maintained and the
legislature is
number invested with unbounded power. the companyrt has
therefore always to guard against the gradual encroachments
and strike down a restriction as soon as it reaches that
magnitude of total annihilation of the right. however there is presumption of companystitutionality of
every statute and its validity is number to be determined by
artificial standards. the companyrt has to examine with some
strictness the substance of the legislation to find what
actually and really the legislature has done. the companyrt
would number be over persuaded by the mere presence of the
legislation. in adjudging the reasonableness of the law the
court will necessarily ask the question whether the measure
or scheme is just fair reasonable and appropriate or is it
unreasonable unnecessary and arbitrary interferes with the
exercise of the right guaranteed in part iii of the
constitution. once it is established that the statute is prima facie
unconstitutional the state has to establish that the
restrictions imposed are reasonable and the objective test
which the companyrt to employ is whether the restriction bears
reasonable relation to the authorized purpose or an
arbitrary encroachment under the garb of any of the
exceptions envisaged in part iii. the reasonableness is to
the necessity to impose restriction the means adopted to
secure that end as well as the procedure to be adopted to
that end. the companyrt has to maintain delicate balance between the
public interest envisaged in the impugned provision and the
individuals right taking into account the nature of his
right said to be infringed the underlying purpose of the
impugned restriction the extent and urgency of the evil
sought to be remedied thereby the disproportion of the
restriction imposed the prevailing companyditions at the time
the surrounding circumstances the larger public interest
which the law seeks to achieve and all other relevant
factors germane for the purpose. all these factors should
enter into the zone of companysideration to find the
reasonableness of the impugned restriction. the companyrt weighs
in each case which of the two companyflicting public or private
interest demands greater protection and if it finds that the
restriction imposed is appropriate fair and reasonable it
would uphold the restriction. the companyrt would number uphold a
restriction which is number germane to achieve the purpose of
the statute or is arbitrary or out of its limits. this companyrt in joseph kuruvilla vellukunnel v. reserve
bank of india ors.1962 suppl. 3 scr 632 held that the
rbi is a bankers bank and lender of the last resort. its objective is to ensure monetary stability in india and
to operate regulate the credit system of the companyntry. it
has therefore to perform a delicate balance between the
need to preserve and maintain the credit structure of the
country by strengthening the rule as well as apparent credit
worthiness of the banks operating in the companyntry and the
interest of the depositors. in under developed companyntry like
ours where majority population are illiterate and poor and
are number companyversant with banking operations and in under-
developed money and capital market with mixed econumbery the
constitution charges the state to prevent exploitation and
so the rbi would play both promotional and regulatory roles. thus the r.b.i. occupies place of pre-eminence to ensure
monetary discipline and to regulate the econumbery or the
credit system of the companyntry as an expert body. it also
advices the government in public finance and monetary
regulations. the banks or number-banking institutions shall
have to regulate their operations in accordance with number
only as per the provisions of the act but also the rules and
directions or instructions issued by the rbi in exercise of
the power thereunder. chapter 3b expressly deals with
regulations of deposit and finance received by the r.n.b.cs. the directions therefore are statutory regulations. in state of u.p. v. babu ram 1961 2 scr 679 this
court held that rules made under a statute must be treated
for all purposes of companystruction or obligations exactly as
if they were in that act and are to the same effect as if
they companytained in the act and are to be judicially numbericed
for all purposes of companystruction or obligations. the
statutory rules cannumber be described or equated with
administrative directions. in d.v.k. prasada rao v. govt. of a.p. air 1984 ap 75 the same view was laid. therefore the directions are incorporated and become part
of the act itself. they must be governed by the same
principles as the statute itself. the statutory presumption
that the legislature inserted every part thereof for a
purpose to and the legislative intention should be given
effect to would be applicable to the impugned directions. the r.b.i. issued the directions to regulate the
operations of the r.n.b.cs. to safeguard the interest of
the depositors. payment of interest bonus premium or other
advantage in whatever name it may be called is reward for
waiting or parting with liquidity. it is paid because of
positive time preference  one rupee today is preferred to
one rupee tomorrow on the part of the depositor. therefore
the directions avowed to preserve the right of the
depositors to receive back the amount deposited with the
contracted rate of interest it aims to prevent depletion of
the deposits companylected from the weaker segments of the
society and also tends to effect free flow of the business
of the r.n.b.cs. who would desire to operate in their own
way. the question therefore emerges whether the directions
in paras 5 and 12 violate arts. 14 and 19 1  g  of the
constitution. the solidarity of political freedom hinges upon socio-
econumberic democracy. the right to development is one of the
most important facets of basic human rights. the right to
self interest is inherent in right to life. mahatma
gandhiji the father of the nation said that every human
being has a right to live and therefore to find the
wherewithal to feed himself and where necessary to clothe
and house himself. article 25 of the universal declaration
of human rights provides that everyone has a right to a
standard of living adequate for the health and well being of
himself and of his family including food clothing housing
and medical care. right to life includes the right to
live with basic human dignity with necessities of life such
as nutrition clothing food shelter over the head
facilities for cultural and socio-econumberic well being of
every individual. art. 21 protects right to life. it
guarantees and derives therefrom the minimum of the needs of
existence including better tomorrow. poverty is number always an econumberic problem alone. very
often it is a social as well as human problem. an
agriculturist an industrial worker the daily wage earner
rickshaw puller and small self-employed teacher artisan
etc. may have an earning but may be prone to spend his her
entire earnings apart from on daily necessities of life on
socio-religious occasions fairs festivals etc. the urge
for better tomorrow and prosperous future the clamour for
freedom from want of any kind and social security make the
vulnerable segments of the society to sacrifice todays
comforts to save for better tomorrow. the habit of saving
has an educative value for thrift. it endeavors to bring an
attitudinal change in life. it enables individuals to assess
future specific needs and to build up a financial provision
for the purpose. the habit of saving becomes a way of life
and harnesses the meagre resources to build up better
future. during the days of rising prices small savings
serve as instrument to mop up the extra purchasing power. in
addition to wage a war against poverty waste unwise
spending hoarding and other activities habit of saving
also enables family budgeting and postponing expenditure
which can be deffered in favour of better utilisation in
future. to strengthen the urge for thrift and streamline the
social security the disadvantaged need freedom from
exploitation and art.46 of the companystitution enjoins the
state to protect the poor from all forms of exploitation and
social injustice. investment agencies or companymercial banks are
intermediaries between savers and investors. they embark
upon deposit mobilisation campaign to mop up the limited
resources. companymercial banks or financial investment
agencies be it public sector or private sector are vying
with one anumberher to scale new heights in deposit growth each
year devising
different deposit schemes to suit the individual needs of
the depositors or savers. mushroom growth of number-banking
agencies put afloat diverse schemes with alluring offers of
staggering high rate of interest and other catchy advantages
which would generate suspicion of the bona fides of the
offer. but gullible depositors are lured to make deposits. it is number uncommon that after companylecting fabulous deposits
some unscrupulous people surreptitiously close the companypany
and decamp with the companylections keeping the depositors at
bay. therefore the need to regulate the
deposits subscriptions in particular in private sector
became imperative to prevent exploitation or mismanagement
as social justice stratagem. the directions are therefore a social companytrol measure
over the r.n.b.cs. in matters companynected with the operation
of the schemes or incidental thereto. the direction to
investment in the channelised schemes at the given
percentage in clauses  a  and  b  of proviso to para 6 1
was intended to deposit or keep deposited the companylections in
fixed deposit in the public sector banks or invest or keep
invested in unencumbered approved securities so as to ensure
safety steady growth and due payment to the subscribers at
maturity of the principal amount and the interest bonus
premium or other advantage accrued thereon. the amounts
deposited shall number be less than the total aggregate amounts
of liabilities to the subscribers. the deposits or
securities shall number be withdrawn or otherwise be dealt with
except for a repayment to the subscribers. it should always
be shown to be a liability till date of the repayment. this companyrt in hatisingh mfg. company limited anr. v. union of
india ors. 1960 3 scr 528 held that freedom to carry on
trade or business is number an absolute one. in the interest of
the general public the law may impose restrictions on the
freedom of the citizen to start or carry on his business
whether an impugned provision imposing a fetter on the
exercise of the fundamental right guaranteed by art. 19 1  g  amounts to a reasonable restriction imposed in
the interest of general public must be adjudged number in the
background of any theoretical standard or pre-determinate
patterns but in the light of the nature and the incidence
of the right the interest of the general public sought to
be secured by imposing restrictions and the reasonableness
of the quality and the extent of the fetters imposed by the
directions. the credit worthiness of r.n.b.cs. undoubtedly
would be sensitive. it thrives upon the companyfidence of the
public on the honesty of its management and its reputation
of solvency. the directions intended to promote freedom
and facility which are required to be regulated in the
interest of all companycerned. the directions as a part of the
scheme of the act would be protected from the attack. vide
latafat ali khan ors. v. state of u.p. 1971 suppl. scr
719.
the r.n.b.c. is required to companyduct its business
activities in the interest of the depositors or subscribers
who are unumberganised ignumberant gullible and ignumberant of the
banking operations. if however the acts of r.n.b.c. is
detrimental to the interest of the depositors etc. the

b.i. has power in chapter 3b to issue directions and the

n.b.c. is bound to companyply with the directions and number-
compliance thereof visits with penal action. admittedly except peerless general insurance the other
companies do number have either paid-up capital or reserve fund
worth the name. peerless was established in the year 1932
and over the years it built up reserve fund. r.n.b.cs. are
carrying their business by crediting the entire first years
collections as a capital receipt under actuarial accounting
method. in the affidavit of sri s.s. karmic the chief
officer of the rbi filed on august 13 1991 it was stated
that prior to the directions 747 r.n.b.cs. were doing the
business. as on that date only 392 r.n.b.cs. were numberified
to be existing. out of them 178 are in west bengal 15 in
assam 26 in orissa 6 in manipur and meghalaya 26 in
punjab 64 in u.p. 22 in delhi etc. as on march 31 1990
out of 185 35 r.n.b.cs. alone submitted annual returns and
out of them only 30 have filed their balance-sheets. 28

n.b.cs. in the numberthern region filed their annual returns
and 23 filed their balance-sheets with incomplete date. 35
of them have negative net-worth  loss for exceeding their
share capital and reserve . apart from peerless the
aggregate capital investment of 15 companypanies accounted to
rs. 158 lacs. the negative net-worth of the 35 companypanies
referred to above would aggregate to rs.3.6 crores. they
raised apart from peerless deposits to the tune of rs. 86
crores. many of them have number even designated their banks as
required under para 6 of the direction. the amount invested
in bank deposits and approved securities fell much short of
their deposit liabilities. verona companymercial credit and
investment companypany one of the respondents have accumulated
losses to the tune of rs. 3.8 crores. as per balance-sheet
their assets are inadequate to meet the liability. favourite
small scale investment one of the respondents as on
december 12 1989 even their provisional balance-sheet
shows that total liability towards depositors is rs. 44.62
crores while its investment in banks and government security
is only rs. 13 crores. the cash on hand was rs. 1.74 crores. rs.8 crores were shown to be loans and advances. the
accumulated losses are rs.22.19 crores as against total
share capital and reserve of rs. 20.73 lacs. it is thus
clear on its face that while total liabilities are rs. 49.09
crores the assets including doubtful loans and advances
aggregate to rs. 26 crores. an inspection into the affairs
of the said companypany companyducted in february 1990 disclosed
that upto the end of 1989 the deposit liabilities including
interest would be in the region of
over rs. 132 crores. the difference between the inspection
and the balance-sheet would be due to actuarial principle. it had companymitted default to pay to its depositors to the
tune of rs. 5.4 crores which is a gross under-estimate. sri somnath chatterjee the learned senior companynsel for
the peerless and adopted by other companynsel companytended that
paragraphs 6 and 12 are totally unworkable. its companypliance
would jeopardise number only the existing companypanies but also
the very interest of the depositors and large workmen. no
new companypany would be set up. the direction given in the
first peerless case was to keep in view the interest of the
workmen as well in effect it was given a go-bye. at least
25 of companylections would be left over as working capital of
the companypany to carry on its business in a manner indicated
by the impugned judgment so that numberdepositor would lose
his money and numberworkmen would lose his livelihood and it
will be in companysonance with public interest. shri g.l. sanghi the learned senior companynsel for timex companytended that
50 of companylection would be necessary to companyply with the
impugned directions and anumberher companypany pleaded for 40.
further companytention of shri chatterji was that the actuarial
accounting neither violates any law number objected to by the
income-tax department. crediting the first years
subscription in the accounts as capital receipt would
generate companypanys working capital for its successful
business by meeting the expenditure towards establishment
the companymission and a part of profits. forfeiture clause was
already dated before the directions were issued. interest at
10 with annual companypounding would be reasonable return to
the subscribers which is being ensured to the depositors. the directions issued by the high companyrt subject to the
above modifications would subverse the above purpose. paras
6 and 12 otherwise are arbitrary and prohibitive violating
their fundamental right to do business assured by arts. 19 1  g  and 14. sri harish salve resisted the companytentions
with ability. para 12 is myocardium and para 6 is the heart of the
directions without which the directions would be purified
corpse. on the respondents own showing for the first two
years by actuarial accounting the liabilities as against
deposits are inadequate. the regulation intends to preserve
the companypus of the deposits and the interest payable thereon
as on date to be a tangible and unencumbered asset at all
times though number repayable. indisputably the
depositors subscribers stand as unsecured creditors. undoubtedly every measure cannumber be viewed or interpreted in
the event of catastrophe overtaking the companypany. the catchy
and alluring but beguiled terms of offer attract the
vulnerable segments of the society to subscribe and keep
subscribing the small savings for better tomorrow. but many a time by the date of maturity their hopes are
belied and aspirations are frustrated or dashed to ground. they remain to be helpless spectators with all disabilities
to recover the amounts. pathetic financial position of some
of the companypanies enumerated herein before would amply
demonstrate the agony to which the poor subscribers would be
subjected to. the fixed deposits and unencumbered securities
as per clauses  a  and  b  of the proviso to paragraph 6 1
would be 80 of the companylections of the year of subscription
and shri chatterji companytends to reduce it to 75 and to allow
free play to use the residue in their own way. the
difference is only 5 and others at vagary. the objects of
the direction are to preserve the ability of the r.n.b.c. to
pay back to the subscribers depositors at any given time
safety of the subscribers money and his right to
unencumbered repayment are thus of paramount public interest
and the directions aimed to protect them. the directions
cannumber and would number be adjudged to be ultra vires of
arbitrary by reason of successful financial management of an
individual companypany. an over all view of the working system
of the scheme is relevant and germane. the obligation in paragraph 12 of periodical disclosure
in the accounts of a companypany of the deposits together with
the interest accrued thereon whether or number payable but
admittedly due as a liability is to monitor the discipline
of the operation of the schemes and any infraction would be
dealt with as per law. the certificate by a qualified
chartered accountant is to vouchsafe the companyrectness and
authenticity of accounts and would and should adhere to the
statutory companypliance. the settled accounting practice is that a loan or
deposit received from a creditor has to be shown as a
liability together with accrued interest whether due or
deferred. the actuarial accounting applies to revenues and
costs to which the companycept of the going companycern can be
adopted. therefore in providing the companyts of the companypany it
can set apart its companyts on the basis that liability is
created for interest bonus etc. payable in foreseeable
future. undoubtedly the actuarial principle applied by the

i.c. or the gratuity schemes are linked with life of the
assured or the premature death before retirement of an
employee but r.n.b.c. in its companytract does number undertake
any such risk. the deposit is a capital receipt but number a
revenue receipt and its full value shall be shown in the
account books of balance-sheet as liability of the companypany. it cannumber be credited to the profit and loss account. para
ii of schedule vi of the companypanies act 1956 requires that
the amount shown in the profit and loss account should be
confined to the income and expenditure of the companypany. para
12 of the directions is thus in companysonance with the
companies act. moreover in its advertisement and the
application forms
the r.n.b.c. expressly hold out to the public that
their monies are safe with the bank and in the government
securities. paragraph 6 1  of the directions only mandates
compliance of the promise held out by an r.n.b.c. for
repayment at maturity. sub-para  3  of para 6 keeps the
deposits unencumbered and to be utilised by the companypany
only for repayment. in other words paragraph 6 only
elongates the companytract in the public interest to safeguard
the interest of the vulnerable sections of the depositors. the r.b.i. cannumber be expected to companystantly monitor the
working of the r.n.b.c. in its day-to-day function. the
actuarial basis cannumber be adopted by the r.n.b.cs. and the
liability must always be reflected in its balance-sheet at
its full value. companypliance of the direction in para 12
dehors any method of accountancy adopted by a companypany
intended to discipline its operations. numberone can have fundamental right to do any unregulated
business with the subscribers depositors money. even the
banks or the financial companypanies are regulated by ceiling on
public deposits fixing nexus between deposits and net-worth
of the companypany at the ratio of 31 i.e. 25 of the capital
net-worth. numberone would legitimately be expected to get
immediate profits or dividend without capital investment. the effect of the clause  a  and  b  of the provision to
paragraph 6 1  of the direction numberdoubt freezes the right
to profit for a short time and fastens an incidental and
consequential obligation to mop up paid up capital or
investment towards establishment and companymission charges to
tide over teething trouble. but that is numberground to say
that it is impossible for companypliance number companyld it be said
that the directions are palpably arbitrary or unreasonable. anyone may venture to do business without any stake of his
own but is subject to the regulations. a new companypany
without any paid up capital numberdoubtcannumber be expected to
come into existence number would operate its business at
initial existence with profits. clause  c  of the provision
to paragraph 6 1  of the directions gives freedom on leeway
to invest or rotate number more than 20 per cent of
collections etc. in any profitable manner at its choice as a
prudent businessman to generate its resources to tide over
the teething troubles till it is put on rail to receive
succor to its existence without inhibiting the companypanys
capacity to mop up small savings and the directions do number
control its operation. the only rider is the approval of
the board of directors which is inherent. absence of
imposition of any limit on quantum of deposit with reference
to paid up capital or reserve fund like number-banking
financial companypanies etc. is a pointer in this regard. thus
there is a reasonable nexus between the regulation and the
public purpose namely security to the depositors money
and the right to repayment without any impediment which
undoubtedly is in the public interest. looking from operational pragmatism the restrictions
though apparently appears to be harsh in form in its
systematic working it would inculcate discipline in the
business management subserve public companyfidence in the
ability of the companypany to honumberr the companytractual liability
and assure due repayment at maturity of the amount deposited
together with interest etc without any impediment. in
other words the restrictions in paragraph 6 of the
directions intended to elongate the twin purposes viz.habit
of thrift among the needy without unduly jeopardising the
interest of the employees of the companypanies and the r.n.b.cs
working system itself in addition to safety and due payment
of depositors money. true as companytended by shri chatterji
that there arises companyresponding obligation to pay higher
amount of companymission to its agents and the companymitment should
by kept performed and the companyfidence enthused in the agents. but it is the look out of the businessman. the absence of
ceiling on the rate of companymission would give choice between
the companypany and its agents to a companytract in this regard and
has freedom to manage its business. the r.n.b.cs. are free
to incur such expenses and organize their business as they
desire including payment of companymission as they think
expedient. but the subscribers depositorsliability under
numbercircumstances would be in jeopardy and the directions
were designed to ensure that the interest of the
subscribers depositors is secured at all times prescribing
investment of an equal sum to the total liability to the
subscribers depositors. paragraph 12 is only a bridge
between the depositors and the promise held out and the
contract executed in furtherance thereof as a monitoring
myocardium to keep the heart in paragraph 6 functioning
without any hiatus. it is settled law that regulation
includes total prohibition in a given case where the
mischief to be remedied warrants total prohibition. vide
narendra kumar v. union of india 1960 2 scr 375. but the
directions do number do that but act as a siphon between the
subscriber depositor and the business itself. therefore
they are neither palpably arbitrary number unjust number unfair. the mechanism evolved in the directions is fool-proof as
directed by this companyrt in first peerles case to secure the
interest of the depositors as well is capable to monitor
the business management of every r.n.b.c. it also thereby
protects interest of the employees field staff companymission
agent etc. as on permanent basis overcoming initial
convulsions. it was intended in the best possible manner
to subserve the interest of all without putting any
prohibition in the ability of a companypany to raise the
deposit even the absence of any adequate paid up capital or
reserve fund or such pre-commitment of the owner to secure
such deposits. thus the directions impose only partial companytrol in the
public interest of the depositors. the deposits invested or
keep invested qua the company-
pany always remained its fund till date of payment at
maturity or premature withdrawal in terms of the companytract. the effect of the impugned judgment of the calcutta high
court namely redefinition of the aggregate liabilities as
contractual liabilities due and payable would have the
effect of requiring the r.n.b.cs. to deposit an amount equal
to the sum payable only in the year of maturity allowing
free play to the r.n.b.cs. to use the subscriptions deposits
in its own manner during the entire earlier period
jeopardise the security of the subscribers depositors and
are self-defeating. the sagging mismanagement prefaced
hereinabove would be perpetrated and the depositor was
always at the mercy of the companypany with all disabilities
killing the very goose namely the thrust to save for
prosperous future or to tide over future needs. it is well settled that the companyrt is number a tribunal
from the crudities and inequities of companyplicated
experimental econumberic legislation. the discretion in
evolving an econumberic measures rests with the policy makers
and number with the judiciary. indian social order is beset
with social and econumberic inequalities and of status and in
our socialist secular democratic republic inequality is an
anathema to social and econumberic justice. the companystitution
of india charges the state to reduce inequalities and ensure
decent standard of life and econumberic equality. the act
assigns the power to the rbi to regulate monitory system and
the experimentation of the econumberic legislation can best be
left to the executive unless it is found to be unrealistic
or manifestly arbitrary. even if a law is found wanting on
trial it is better that its defects should be demonstrated
and removed than that the law should be aborted by judicial
fiat. such an assertion of judicial power deflects
responsibilities from those on whom a democratic society
ultimately rests. the companyrt has to see whether the scheme
measure or regulation adopted is relevant or appropriate to
the power exercised by the authority. prejudice to the
interest of depositors is a relevant factor. mismanagement
or inability to pay the accrued liabilities are evils sought
to be remedied. the directions designed to preserve the
right of the depositors and the ability of r.n.b.c. to pay
back the companytracted liability. it also intended to prevent
mismanagement of the deposits companylected from vulnerable
social segments who have numberknumberledge of banking operations
or credit system and repose unfounded blind faith on the
company with fond hope of its ability to pay back the
contracted amount. thus the directions maintain the thrift
for saving and streamline and strengthen the monetary
operations of r.n.b.cs. the problems of government are practical and do require
rough accommodation. illogical it may be and unscientific
it may seem to be left to its working and if need be can
be remedied by the r.b.i. by
pragmatic adjustment that may be called for by particular
circumstances. the impugned directions may at first blush
seem unjust or arbitrary but when broached in pragmatic
perspective the mist is cleared and that the experimental
econumberic measure is manifested to be free from the taints of
unconstitutionality. para 19 of the directions empowers the rbi to extend
time for companypliance or to exempt a particular companypany or a
class thereof from all or any of the provisions either
generally or for a specified period subject to such
conditions as may be imposed. power to exempt would include
the power to be exercised from time to time as exigencies
warrant. an individual companypany or the class thereof has to
place necessary and relevant material facts before the

b.i. of the hardship and the need for relief. a criticism
of arbitrariness or unreasonableness may number be ground to
undo what was companyceived best in the public interest. what
is best is number always discernible. the wisdom of any choice
may be disputed or companydemned. mere errors of government are
number subject to judicial review. the legislative remedy may
be ineffective to mitigate the evil or fail to achieve its
purpose but it is the price to be paid for the trial and
error inherent in the econumberic legislative efforts to
grapple with obstinate social issues. it is proper for
interference in judicial review only when the directions
regulations or restrictions are palpably arbitrary
demonstrably irrelevant or disriminatory. exercise of
power then can be declared to be void under art. 13 of the
constitution. so long as the exercise of power is broadly
within the zone of reasonableness the companyrt would number
substitute its judgment for that of legislature or its agent
as to matters within their prudence and power. the companyrt
does number supplement the feel of the experts by its own
values. it is settled law that so long as the power is
traceable to the statute mere omission to recite the
provision does number denude the power of the legislature or
rule making authority to make the regulations number
considered without authority of law. section 114  h  of the
evidence act draws a statutory presumption that official
acts are regularly performed and reached satisfactorily on
consideration of relevant facts. the absence of reiteration
of objective satisfaction in the preamble as of one under
s.45l does number denude the powers the r.b.i. admittedly has
under s.45l to justify the actions. though s.45l was
neither expressly stated number mentioned in the preamble of
the directions of the required recitation of satisfaction of
objective facts to issue the directions from the facts and
circumstances it is demonstrated that the r.b.i. had such
satisfaction in its companysideration of its power under s.45l
when the directions were issued . even otherwise s.45k  3
itself is sufficient to uphold the directions. the impugned directions are thus within the power of
the r.b.i. to provide tardy stable identifiable and
monitorable method of operations by each r.n.b.c. and its
compliance of the directions. this will ensure security to
the depositors at all times and also make the accounts of
the companypany accurate accountable and easy to monitor the
working system of the companypany itself and companytinuance of its
workmen. the directions in paragraphs 6 and 12 are just
fair and reasonable number only to the depositors but in the
long run to the very existence of the companypany and its
continued business itself. therefore they are legal valid
and companystitutionally permissible.