Gujarat High Court Judgement Dt. 24.04.2014

C/SCA/14908/2013
ORDER
SCA149082012Cj11.doc
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 14908 of 2012
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CIVIL APPLICATION NO. 10584 of 2013
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SPECIAL CIVIL
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17995 of 2013
17503 of 2013
17443 of 2013
17233 of 2013
15260 of 2013
15202 of 2013
14792 of 2013
14185 of 2013
13942 of 2013
13489 of 2013
13488 of 2013
13487 of 2013
10651 of 2013
10647 of 2013
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10643 of 2013
10639 of 2013
10506 of 2013
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10502 of 2013
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10494 of 2013
10488 of 2013
10338 of 2013
C/SCA/14908/2013
ORDER

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FOR APPROVAL AND SIGNATURE:
HONOURABLE THE CHIEF JUSTICE Sd/MR. BHASKAR BHATTACHARYA
HONOURABLE MR.JUSTICE
J.B.PARDIWALA
Sd/-
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1
Whether Reporters of Local Papers may be allowed Yes
to see the judgment?
2
To be referred to the Reporter or not ?
Yes
Whether their Lordships wish to see the fair copy

of the judgment?
No
Whether this case involves a substantial question Yes

of law as to the interpretation of the constitution of
India, 1950 or any order made there under?
Whether it is to be circulated to the civil judge?
No
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IONIK METALLICS & ORS.
Versus
UNION OF INDIA & ORS.
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Appearance for the petitioners:

MR VISHWAS K SHAH with MR MASOOM K SHAH, ADVOCATE for the
Petitioners in SCA No.14908/13, 2970/13, 3304/13, 3305/13, 3513/13,
3728/13, 3749/13, 3916/13, 7055/13, 7058/13, 7059/13, 7060/13,
7104/13, 7308/13, 8041/13, 8303/13, 8880/13, 8920/13, 9952/13,
9953/13, 10081/13, 13843/13, 6804/13, 17595/13, 9729/13,
10141/13, 10179/13, 10646/13, 13942/13, 18245/13, 1674/14 and
1690/14.
MR SACHIN D VASAVADA for the petitioners in SCA NO.7053/13.
MR ISHAR MIHIR PATEL for the petitioners in SCA No.7524/13.
MR SS PANESAR for the petitioners in SCA No. 8949/13, 8950/13,
9628/13, 9637/13, 10146/13, 10338/13, 10488/13, 10639/13, and
17443/13.
MR MAHESH BHAVSAR for the petitioners in SCA No. 2085/13 and CA
No. 10584/13.
MR MP SHAH with MS. KRUTI SHAH for the petitioners in SCA No. SCA
No. 8956/13, 8957/13, and 8958/13.
MR SP MAJMUDAR with MR PP MAJMUDAR with MR SHAKTI S JADEJA in
SCA No. 9578/13, 9579/13, 10004/13, 10005/13, 10093/13, 10094/13,
10243/13, 10494/13, 10499/13, 10502/13, 10503/13, 10506/13,
10643/13, 10647/13, 10651/13, 13487/13, 13488/13, 13489/13,
14185/13, 14792/13, 15202/13, 15260/13, 17503/13, 17995/13,
17996/13, 17997/13, 18251/13, and 18252/13.
MR KANDRAP J TRIVEDI in SCA No. 9608/13.
MR RAVINDRA SHAH with MRS KNAN R SHAH for the petitioners in SCA
No. 17233/13.
MR DIGANT B KAKKAD for the petitioner in SCA No. 433/14.
MR URVEST K GOR for the petitioner in SCA No. 1770/14.
Appearance for the respondents:MR S N SOPARKAR, SR. ADVOCATE with AMAR N BHATT, ADVOCATE
for the Respondent-Reserve Bank of India.
MR IH SYED, ASST. SOLICITOR GENERAL for the Union of India in all
matters.
MS NALINI S LODHA, MR ABHIJIT P JOSHI, MR INDRAVADAN PARMAR,
MR NITIN K MEHTA, MR BHARAT JANI, MR ABHISHEK M MEHTA, MR RJ
TRIVEDI with MR JT TRIVEDI with MS JIGNASA B TRIVEDI, MR
DHARMESH V VYAS, MR. LALIT M PATEL, MR PUNIT B JUNEJA, MR K M
PARIKH, MR NAGESH SOOD, MR YH MOTIRAMANI with MR BIJU A NAIR,
MRS VD NANAVATI, M/S WADIAGHANDY & CO., MR PRANAV G DESAI,
MR ANIP GANDHI, MR. YH MOTIRAMANI, MR SH ALMAULA, MR HARDIK
S SONI, MR LALIT M PATEL, MR ANIP A GANDHI, MR VIRENDRA M
GOHIL, and MS MAUNA BHATT for the Respondents in respective
matters.
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CORAM: HONOURABLE THE CHIEF JUSTICE
MR. BHASKAR BHATTACHARYA
and
HONOURABLE MR.JUSTICE J.B.PARDIWALA
Date : 24/04/2014
COMMON CAV JUDGMENT
(PER : HONOURABLE THE CHIEF JUSTICE
MR. BHASKAR BHATTACHARYA)
1.
All these Special Civil Applications were heard analogously as in
all these matters, the questions that had arisen for consideration
were whether the provisions contained in section 2 (1)(o) of the
Securitisation And Reconstruction of Financial Assets & Enforcement
of Security Interest Act, 2002 [hereinafter referred to as the
Securitisation Act or SARFAESI Act] and clause 2.1 of the guidelines
issued by the Reserve Bank of India known as Prudential Norms on
Income Recognition, Asset Classification and Provisioning - pertaining
to
Advances
are
ultra
vires
the
Constitution
of
India,
and,
consequently, the actions taken by various Banks concerned under

the Securitisation Act are illegal and without authority of law.
2.
We, however, propose to treat the Special Civil Application No.
14908 of 2012 as the lead matter.
3.
The case made out by the petitioners in SCA No. 14908 of 2012
may be summed up thus:
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[a].
ORDER
The petitioners are the borrowers and/or guarantors of Punjab
National Bank, which is the respondent No.2 in this writ-petition,

whose account with the respondent-Bank had allegedly become Non
Performing Assets [NPA, for short hereafter] according to the
respondent No.2. The respondent No.1 is the Union of India and it
has been made party as the petitioners wanted to challenge the law
enacted by the Parliament as invalid. Similarly, the Reserve Bank of
India has also been made party as the guidelines of the Reserve Bank
indicated above have been challenged. We, consequently, also issued
notice to the learned Attorney General of India pursuant to which Mr.
I. H. Syed, the learned Assistant Solicitor General of India, has
appeared.
[b].
According to the petitioners, their account had not become NPA
although the respondent No.2-Bank had alleged in the Demand Notice

that their accounts had become NPA on 30th June 2012 in accordance
with the aforesaid RBI Guidelines. The petitioners contend that the
notice under section 13 (2) of the Securitisation Act is vague and
ambiguous one inasmuch as there is no explanation as to how the
petitioners account had become NPA.
The petitioners further
contend that the Bank cannot, of its own will and fancy, declare the
accounts of the petitioners as NPA and it has to show the cogent
reasons and explanation and indicate how the account had become
NPA from a performing one.
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[c].
ORDER
The petitioners have further submitted that the amended
definition of section 2 (1) (o) of the Securitisation Act, which defines

NPA, should be declared as ultra vires the Constitution of India. The
petitioners have further prayed that the clause 2.1 of the Prudential
Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, issued by the Reserve Bank of India, should
also be declared as ultra vires.
[d].
All the respondents, including various respondent-Banks and
the Union of India have opposed this writ application by filing

separate affidavits in which the respondents have submitted that this
writ-application should not be entertained on the ground of lack of
bona fide of the petitioners, and, at the same time, the provisions
contained in section 2(1) (o) of the Securitisation Act and the
guidelines of the RBI challenged herein are quite in conformity with
the provisions of the Constitution of India. According to the
respondents, the sole object of the petitioners is to delay the
execution of the sale of the secured assets although the petitioners
have not paid the dues of the concerned Bank. The respondents,
therefore, pray for dismissal of the writ-application.
4.
Facts and the contentions in the remaining 78 writ-applications
are also more or less similar.
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5.
ORDER
The Union of India has opposed these writ-applications by filing
an affidavit [in Special Civil Application No. 2970 of 2013], which has
been adopted in all these matters, and their objections may be
summed up thus:
[A].
SARFAESI Act was enacted and passed by both the Houses of
the Parliament of India in the year 2002 and got the assent of the
President on 17th December 2002, and came into force with effect
from 21st June 2002.
[B].
SARFAESI Act was enacted to enable the Banks and Financial
Institutions to realize long term assets, manage problems of liquidity,

assets-liability mismatch and improve recovery by exercising powers
to take possession of security and sell such security and thus, to
reduce the NPA by adopting measures for recovery or reconstruction.
[C].
The constitutional validity of SARFAESI Act was finally decided
and all the controversies were settled by the Supreme Court of India
in various Writ Petitions including that of Mardia Chemicals Ltd. v/s
Union of India reported in (2004) 4 SCC 311. Hence, the
contention of the petitioners that section 2(1) (o) of the SARFAESI Act
is unconstitutional is not tenable.
[D].
The provisions of section 2(1) (o) of the SARFAESI Act was
amended by Act No. 30 of 2004 and the earlier provisions containing
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the phrase doubtful or loss asset, in accordance with the directions

or under guidelines relating to asset classification issued by the
Reserve Bank has been substituted by:
doubtful or loss asset,(a). in case such bank or financial institution is administered or
regulated by any authority or body established, constituted or
appointed by any law for the time being in force, in accordance
with
the
directions
or
guidelines
relating
to
assets
classifications issued by such authority or body;

[b]. in any other case, in accordance with the directions or
guidelines relating to assets classifications issued by the
Reserve Bank.
[E].
The amendment in section 2(1)(o) of the SARFAESI Act was
made in the year 2004 to extend the classification norms of NPA

stipulated by the concerned regulator who is administering or
regulating such entity or the RBI when the said institution is not
regulated by any regulator in India. There are financial institutions
such as Housing Finance Corporations notified by Central Government
under the SARFAESI Act, which are regulated by National Housing
Bank. The NPA of these institutions are classified as per guidelines
prescribed by National Housing Bank. The Act covers certain other
institutions such as Asian Development Bank not regulated by any
regulator in India, in whose case their NPA are classified as per the
guidelines prescribed by RBI. The above amendments in the Act were
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made so that the guidelines issued by the concerned regulator as

applicable to them are covered for the purpose of recovery under the
SARFAESI Act.
[F].
The amendment covered the entities under the SARFAESI Act
regulated by different regulators such as Reserve Bank of India,

National Housing Bank etc. who had stipulated their own guidelines
for the purpose. At the same time, the amendment also covered the
entities like Asian Development Bank, which did not fall within the
purview of any regulator in India.
Therefore, the amendment was
made in the Act to take care of these situations and these

amendments were necessary to cover the deficiencies noticed in the
Act, and the amendments do not violate Article 14 of the Constitution
of India.
6.
The stance taken by the Reserve Bank of India may be summed
up thus:
[i].
The guidelines issued by the RBI are neither discriminatory nor
arbitrary. RBI is the regulatory authority of various financial entities

viz., commercial banks, financial institutions, urban co-operative
banks,
non-banking
finance
companies,
primary
dealers,
and,
payment system providers etc. While there could be some similarities

between these entities, the nature and function of these entities are
different from each other, and therefore, it may not be possible or
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desirable to have a uniform set of norms for all financial entities on an

immediate basis. The 90 days delinquency norm for banks is an
internationally accepted norm and is essential to identify impairment
of financial assets in order to provide for it. RBI norms for asset
classification are evolved over a period and the 90 days delinquency
norms were brought in through a calibrated manner as part of the
efforts
to
international
benchmark
the
standards.
RBI
prudential
The
regulations
Narasimham
to
the
Committee's
recommendations made in 1991 regarding income recognition, asset

classification and provisioning were examined by the RBI and it was
decided to implement them in a phased manner over a period of
three years commencing with the accounting year beginning 1 April,
1992, vide circular DBOD No. BC.129/21.04.043/92 dated April 27,
1992 on Income Recognition, Asset Classification, Provisioning and
Other Related Matters. In terms of the said circular, for the year
ending 31 March 1993, a term loan will be treated as NPA if the
interest remains past due for a period of four quarters as on that
date. For the year ending 31 March, 1994 and 31 March, 1995 and
onwards, a loan will be treated as NPA if the interest remains past due
for three quarters and two quarters respectively. Subsequently, in
order to align the RBIs prudential norms with the international
benchmarks, RBI had stipulated vide circular DBOD No. BP.BC.116 /
21.04.048 / 2000-2001 dated 2nd May, 2001 that with effect from
March 31, 2004, a NPA shall be a loan or an advance interest and / or
installment of principal remain overdue for a period of more than 90
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days in respect of a term loan. Comparison of Gross NPAs of banks

with NBFCs is totally unfair. The asset mix of commercial banks varies
quite widely from that of NBFCs. While banks have to mandatorily
lend to agriculture, NBFCs have no such mandatory requirement.
Further, banks also have relatively large exposures to industrial and
infrastructure houses. Hence, the Gross NPAs of banks are not
comparable with that of NBFCs in any manner.
[ii].
The Working Group on the Issues and Concerns in the NBFC
Sector (Usha Thorat Committee), was formed to study the issues and
concerns in the NBFC sector. The terms of reference of the Committee
included review of:
(i).
Entry point norms
(ii).
Concept of principal business for registration of NBFCs
(iii).
Multiple NBFCs within the same business group
(iv).
Disclosure norms for NBFCs
(v).
Principles for frequency and depth of supervision, and,
(vi).
Examine the need for convergence of regulations of NBFCs

with that of best regulatory practice of banks, etc.
[iii].
The focus of the Committee was on the issues related to
NBFCs. The Usha Thorat Committee, in its report, while appreciating

the differences between banks and NBFCS, has opined that:6.1.6 While there are forceful arguments for regulatory
convergence, there are equally forceful views against it. In this
alternative perspective, NBFCs and banks are not viewed as
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similar to each other, but rather as complementary entities.

NBFCs serve niche areas and are more flexible and borrower
friendly. In many cases, particularly in the rural and semi-urban
areas, they have contributed to last mile connectivity and
offered products which banks have not been able to. They have
served the needs of clients in the SME sector and in the
transport industry where banks have been hesitant to cater to.
The NBFCs have also provided funding for equipment purchase,
second hand truck purchases, various types of mergers and
acquisitions, infrastructure and real estate projects that add
productive capacity in the economy. Thus NBFCs play a
valuable economic role which must be supported through an
appropriately designed regulatory framework. It is argued by
some that the absence of regulatory diversity may lead to
convergence of business conduct which results in amplifying
systemic instability, especially during periods of stress. A range
of
regulatory
regimes
could
in
fact
encourage
market
participants to pursue a variety of business strategies within

the financial sector such that the sector may be more resilient
to contagion from systemic financial stress.
6.1.7. In view of the above the Working Group has consciously
refrained from pursuing the option of bringing in exact bank
like policies for NBFCs such as limits on capital market
exposures, real estate lending, priority sector lending, CRR,
SLR and so on. The Working Group is of the view that the policy
and regulatory arbitrage between banks and NBFCs would be
best addressed through the calibrated use of prudential
measures such as, higher capital (already part of regulation)
higher risk weights for sensitive sectors like real estate and
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capital markets, and liquidity ratio for NBFCs. In addition it was

felt that the rapidly evolving NBFC sector could benefit from
the introduction of some of the best practices of banks in the
areas of governance, compensation, accounting and disclosure
norms (including off balance sheet exposures). In making its
recommendations the Working Group is mindful, that the
aggregate assets of NBFCs are only 10 per cent of that of the
banking sector.
[iv].
With regard to asset classification and provisioning norms, the
working group recommended that: 6.2 (v) The asset classification and provisioning norms
(including standard asset provisioning norms) should, in a
phased manner, be made similar to that of banks for all
registered NBFCs irrespective of size;
[v].
Thus, the working group has actually recommended that the
asset classification norms for NBFCs be brought in line with that of

banks and not vice versa.
[vi]. The draft guidelines dated 12th December 2012 on Review of

NBFC Regulatory Framework Recommendations of the Working
Group on Issues and Concerns in the NBFC Sector Prudential
Regulations has inter alia stated that :
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3.1 At present, the period for classifying loans into NPAs in

case of NBFCs is higher at 180/360 days compared to 90 days
for banks. It has been decided that the asset classification and
provisioning norms (including standard asset provisioning
norms) should, in a phased manner, be made similar to that of
banks for all registered NBFCs irrespective of size. The same
will be implemented in phases, viz; a 120 day norm shall be
applied from April 01, 2014 to March 31, 2015 and a 90 day
norm thereafter. A onetime adjustment of the repayment
schedule which shall not amount to restructuring will, however,
be permitted.
[vii].
Thus, the asset classification norms for NBFCs are
proposed to be brought in line with that of banks.
90 days
delinquency norm is essential to identify impairment of financial

assets in order to provide for it. RBI norms for asset classification for
banks have been evolved over a period, and the 90 days delinquency
norms were brought in through a calibrated manner in the efforts to
benchmark the RBI prudential regulations to the international
standards. These prudential norms are one of the building blocks for
financial soundness of Indian banks and any deviation would render
the entire banking system weaker. Further, any delay in recognition of
deterioration in asset quality removes pressure on the banks to deal
promptly with the problem. Commercial banks hold the major share of
banking systems assets (approx. 76 %) and it is imperative that they
are subjected to the best practices to maintain the stability of the
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ORDER
system. This apart, the prudential norms fall within the domain of
policy making of RBI and the Court may not interfere with the same.
7.
Mr. Shah, the learned advocate appearing on behalf of the
petitioners, has made twofold submissions before this Court. First,

according to him,
section 2(1)(o) of the Securitisation Act is ultra
vires the Constitution of India being violative of Article 14 of the

Constitution and is also ultra vires the principal original Act. Mr. Shah
also submits that the amended section 2(1) (o) of the Securitisation
Act is also vague and ambiguous. The principal grievance of Mr. Shah
is that paragraph 2.1 of the RBI Guidelines is discriminatory, arbitrary,
unreasonable and ultra vires the Securitisation Act. According to Mr.
Shah, there is no intelligible differentia for having different and
distinct period of NPA in prudential norms for Banks on one hand and
other institutions on the other which are governed by the same
regulator, Reserve Bank of India, especially in light of Delhi High
Courts decision reported in AIR 2014 DEL 60 wherein it is observed
that two different regulators can have different guidelines which
implies that the same regulator must have same set of guidelines for
all its entities.
Mr. Shah further submits that in the light of Usha
Thorat Committee report, the discrimination engrafted in the Reserve

Bank of Indias guidelines for banks on one hand and NBFCs and
Securitisation Companies on the other show that the guidelines of RBI
are unjustified. Mr. Shah further contends that neither the Union of
India nor the Reserve Bank of India nor the respective banks have
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placed any materials on record to justify the discrimination which

exists for different period of NPA for Banks on one hand and other
institutions on the other. Mr. Shah further contends that the RBI has
permitted different sets of guidelines for Banks, NBFCs and
Securitisation Companies which violates Article 14 of the Constitution
of India. Mr. Shah, therefore, prays for declaring section 2(1)(o) of the
Securitisation Act as ultra vires the Constitution of India and also
prays for setting aside the guidelines issued by the Reserve Bank of
India.
8.
Mr. Syed, the learned Assistant Solicitor General of India, has,
on the other hand, opposed the aforesaid contentions of Mr. Shah and
has contended that it would appear from the Statement of Object
and Reasons for introduction of the Securitisation Act respecthat the
same was for empowering banks and financial institutions to take
possession of securities given for financial assistance and sell or lease
the same or take over management in the event of default, i.e.
classification of the borrowers account as NPA in accordance with the
directions given or under guidelines issued by the Reserve Bank of
India from time to time. By referring to clause (l), Mr. Syed submitted
that the further object of the Act was to extend the application of the
proposed legislation initially to banks and financial institutions and for
empowerment of the Central Government to extend the application of
the proposed legislation to NBFCs and other entities.
Mr. Syed,
therefore, submits that gradually, the other NBFCs and other entities
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are brought within the purview of the Securitisation Act by various

other statutory provisions. Although those NBFCs and other entities
are regulated by different authorities, it was the desire of the
Parliament that section 2(1) (o) of the Securitisation Act also be
necessarily amended enabling those regulators to make guidelines
for NPA in accordance with the provisions of the Statute which
created those entities. Mr. Syed submits that different regulators
having been created for guiding those NBFCs and other entities, it not
desirable to involve RBI in the matter of fixation of NPA in respect of
those entities, as a result, clause (a) to section 2(1) (o) of the
Securitisation Act has been created. Mr. Syed submits that the
aforesaid amendment passes the test of Article 14 of the Constitution
of India.
9.
Mr. Soparkar, the learned Senior Advocate, appearing on behalf
of the RBI has supported Mr. Syed, the learned Assistant Solicitor
General of India, and, at the same time, has contended that clause
2.1 of the RBIs guidelines is quite in conformity with the Constitution
of India. According to Mr. Soparkar, the attempt on the part of the
petitioners to compare Banks with NBFCs is unfair and not tenable as
the asset mix of Banks varies quite widely from that of NBFCs. Mr.
Soparkar further contends that while Banks have to mandatorily lend
for the purpose of agriculture, NBFCs have no such mandatory
requirement. He further submits that Banks also have relatively large
exposure to industrial and infrastructure houses, and hence, the gross
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ORDER
NPAs of Banks are generally not comparable with that of NBFCs in any
manner.
Mr. Soparkar further contends that the reliance of the
petitioners on the Usha Thorat Committee report is misplaced in as

much as the said Committee was formed to examine the issues and
concerns in the NBFC Sector. Besides, according to Mr. Soparkar, the
Committee in its report has appreciated the differences between
Banks and NBFCs in paragraphs 6.1.6 and 6.1.7 of the said Report
[which we have reproduced in the earlier part of this judgment]. Mr.
Soparkar further contends that even as per the Usha Thorat
Committee Report, which is under consideration of the RBI, it has
been recommended that the Asset Classification norms for NBFCs be
brought in line with that of the Banks, i.e. it should be brought down
to 90 days, and not vice-versa. Mr. Soparkar further submits that the
Petitioners in this group of matters are borrowers of different Banks,
and not of NBFCs, and they cannot, therefore, insist that the period
for classification of their account as NPA should be 180 days and not
90 days. Mr. Soparkar further points out that the recommendations
are merely suggestions, which may or may not be accepted by the
RBI.
9.1
Mr. Soparkar further contends that the prudential norms policy
being an economic policy matter, would fall within the domain of the
policy making by RBI and, therefore, the guidelines should not be
struck down by this Court in exercise of its powers under Article 226
of the Constitution of India. In support of this contention, Mr. Soparkar
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relied on the decision of the Supreme Court in the case of MANOHAR

LAL SHARMA VS. UNION OF INDIA reported in (2013) 6 SCC 616.
He also relied upon the judgment of the Supreme Court in the case of
VILLIANUR IYARKKAI PADUKAPPU MAIYAM vs. UNION OF INDIA
reported in (2009) 7 SCC 561 with respect to the policy decision and
economic issues at paragraphs 167 and 169 of the judgment.
9.2
Mr. Soparkar, therefore, prays for dismissal of the writ-
applications.
10.
Other learned advocates appearing on behalf of various Banks
have opposed the above contentions of Mr. Shah and supported the
contentions or Mr. Syed and Mr. Soparkar.
11.
In order to appreciate the contentions of the petitioners in these
writ-applications, it will be profitable to refer to:-
[i].
the objects and reasons of the Securitisation Act;
[ii].
Original section 2(1) (o) of the Securitisation Act as it stood

prior to the amendment of the year 2004;
[iii].
the amended section 2(1) (o) of the Securitisation Act ;
]iv].
Section 2(1) (f) of the Securitisation Act ;
[v].
Section 2(1) (ha) of the Securitisation Act ;
[vi].
Section 2(1) (j) of the Securitisation Act ;
[vii]. Section 2(1) (m) of the Securitisation Act , and,
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[viii]. Sub-clauses 2.1 to 2.3 of clause 2 of the guidelines issued by

the Reserve Bank of India known as Prudential Norms on
Income Recognition, Asset Classification and Provisioning pertaining to Advances, which are quoted below:-
STATEMENT OF OBJECTS AND REASONS

The financial sector has been one of the key drivers in Indias
efforts to achieve success in rapidly developing its economy. While
the banking industry in India is progressively complying with the
international prudential norms and accounting practices, there are
certain areas in which the banking and financial sector do not have a
level playing field as compared to other participants in the financial
markets in the world. There is no legal provision for facilitating
securitisation of financial assets of banks and financial institutions.
Further,
unlike
international
banks,
the
banks
and
financial
institutions in India do not have power to take possession of

securities and sell them. Our existing legal framework relating to
commercial transactions has not kept pace with the changing
commercial practices and financial sector reforms. This has resulted
in slow pace of recovery of defaulting loans and mounting levels of
non-performing
assets
of
banks
and
financial
institutions.
Narasimham Committee I and II and Andhyarujina Committee

constituted by the Central Government for the purpose of examining
banking sector reforms have considered the need for changes in the
legal system in respect of these areas. These Committees, inter alia,
have suggested enactment of a new legislation for securitisation and
empowering banks and financial institutions to take possession of the
securities and to sell them without the intervention of the court.
Acting on these suggestions, the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Ordinance,
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2002
was
promulgated
ORDER
on
the
21st
June,
2002
to
regulate
securitisation and reconstruction of financial assets and enforcement

of security interest and for matters connected therewith or incidental
thereto. The provisions of the Ordinance would enable banks and
financial institutions to realise long-term assets, manage problem of
liquidity, asset liability mismatches and improve recovery by
exercising powers to take possession of securities, sell them and
reduce non-performing assets by adopting measures for recovery or
reconstruction.
2.
It is now proposed to replace the Ordinance by a Bill, which,
inter alia, contains provisions of the Ordinance to provide for-[a]
registration and regulation of securitisation companies or
reconstruction companies by the Reserve Bank of India;

[b]
facilitating securitisation of financial assets of banks and
financial institutions with or without the benefit of underlying

securities;
[c]
facilitating easy transferability of financial assets by the
securitisation company or reconstruction company to acquire

financial assets of banks and financial institutions by issue of
debentures or bonds or any other security in the nature of a
debenture;
[d]
empowering securitisation companies or reconstruction
companies to raise funds by issue of security receipts to

qualified institutional buyers;
[e]
facilitating reconstruction of financial assets acquired by
exercising powers of enforcement of securities or change of

management or other powers which are
proposed to be
conferred on the banks and financial institutions;

[f]
declaration
of
any
securitisation
company
or
reconstruction company registered with the Reserve Bank of

India as a public financial institution for the purpose of section
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4A of the Companies Act, 1956;

[g]
defining security interest as any type of security
including mortgage and change on immovable properties given

for due repayment of any financial assistance given by any
bank or financial institution;
[h]
take
empowering banks and financial institutions to

possession
of
securities
given
for
financial
assistance and sell or lease the same or take over

management in the event of default, i.e. classification of
the borrowers account as non-performing asset in
accordance
with
the
directions
given
or
under
guidelines issued by the Reserve Bank of India from

time to time;
[i]
the rights of a secured creditor to be exercised by one or
more of its officers authorised in this behalf in accordance with

the rules made by the Central Government;
[j]
an appeal against the action of any bank or financial
institution to the concerned Debts Recovery Tribunal and a

second appeal to the Appellate Debts Recovery Tribunal;
[k]
setting up or causing to be set up a Central Registry by
the Central Government for the purpose of registration of

transactions relating to securitisation, asset reconstruction and
creation of security interest;
[l]
application of the proposed legislation initially to banks
and financial institutions and empowerment of the Central

Government to extend the application of the proposed
legislation to non-banking financial companies and other
entities;
[m]
non-application of the proposed legislation to security
interests in agricultural lands, loans not exceeding rupees one

lakh and cases where eighty per cent of the loans are repaid by
the borrower.
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2.
ORDER
The Bill seeks to achieve the above objects.

xxx
xxx
xxx
Original section 2(1)(o) of Securitisation Act.

Non-performing asset means:
An asset or account of a borrower, which has been
classified by a bank or financial institution as sub-standard,
doubtful or loss asset, in accordance with the directions or
under guidelines relating to assets classifications issued by the
Reserve Bank.
Amended Section 2[1][o] of the Securitisation Act.
Non-performing asset means:
An asset or account of a borrower, which has been
classified by a bank or financial institution as sub-standard,
doubtful or loss asset, -[a]
in case such bank or financial institution is administered
or regulated by any authority or body established, constituted

or appointed by any law for the time being in force, in
accordance with the directions or guidelines relating to assets
classifications issued by such authority or body;
[b]
in any other case, in accordance with the directions or
guidelines relating to assets classifications issued by the

Reserve Bank;
xxx
2[1] [f].
xxx
xxx
borrower means any person who has been
granted financial assistance by any bank or financial institution

or who has given any guarantee or created any mortgage or
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ORDER
pledge as security for the financial assistance granted by any

bank or financial institution and includes a person who
becomes
borrower
of
securitisation
company
or
reconstruction company consequent upon acquisition by it of

any rights or interest of any bank or financial institution in
relation to such financial assistance;
xxx
xxx
2[1][ha]
xxx
debt shall have the meaning assigned to it in
clause [g] of section 2 of the Recovery of Debts Due to Banks

and Financial Institutions Act, 1993;
xxx
xxx
2[1][j].-
xxx
default means non-payment of any principal
debt or interest thereon or any other amount payable by a

borrower to any secured creditor consequent upon which the
account of such borrower is classified as non-performing asset
in the books of account of the secured creditor;
xxx
xxx
xxx
2[1][m] financial institution means-[i] a public financial institution within the meaning of section
4A of the Companies Act, 1956;
[ii] any institution specified by the Central Government under
sub-clause [ii]
of clause [h] of section 2 of the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993;

[iii] the International Finance Corporation established under the
International Finance Corporation [Status, Immunities and
Privileges] Act, 1958;
[iv]
any other institution or non-banking financial company as
defined in clause [f] of section 45-I of the Reserve Bank of India

Act, 1934, which the Central Government may, by notification,
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ORDER
specify as financial institution for the purposes of this Act;

Sub-clauses 2.1 to 2.3 of clause 2 of the guidelines issued by
the Reserve Bank of India known as Prudential Norms on Income
Recognition, Asset Classification and Provisioning - pertaining to
Advances:
2.
DEFINITIONS
2.1 Non-performing assets

2.1.1
An asset, including a leased asset, becomes
non-performing when it ceases to generate income for the

bank. A non-performing asset (NPA) was defined as a credit
facility in respect of which the interest and/or instalment of
principal has remained past due for a specified period of
time. The specified period was reduced in a phased manner as
under:
Year ending March 31
Specified
period
1993
four quarters
1994
three quarters
1995 onwards
two quarters
2.1.2
An amount due under any credit facility is
treated as past due when it has not been paid within 30

days from the due date. Due to the improvements in the
payment
and
settlement
systems,
recovery
climate,
upgradation of technology in the banking system, etc., it was

decided to dispense with past due concept, with effect from
March 31, 2001. Accordingly, as from that date, a Nonperforming Asset (NPA) shall be an advance where
i)
interest and/or instalment of principal remain overdue for
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a period of more than 180 days in respect of a Term Loan,

ii)
the account remains out of order for a period of more
than 180 days, in respect of an Overdraft/Cash Credit (OD/CC),

iii)
the bill remains overdue for a period of more than 180
days in the case of bills purchased and discounted,

iv)
interest and/or instalment of principal remains overdue
for two harvest seasons but for a period not exceeding two
half years in the case of an advance granted for agricultural
purposes, and
v)
any amount to be received remains overdue for a period
of more than 180 days in respect of other accounts.

2.1.3
With a view to moving towards international
best practices and to ensure greater transparency, it has been

decided
to
adopt
the
90
days
overdue
norm
for
identification of NPAs, for the year ending March 31, 2004.

Accordingly, with effect from March 31, 2004, a nonperforming asset (NPA) shall be a loan or an advance where;
i)
interest and/or instalment of principal remain overdue for
a period of more than 90 days in respect of a term loan,

ii)
the account remains out of order for a period of more
than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),

iii)
the bill remains overdue for a period of more than 90
days in the case of bills purchased and discounted,

iv)
interest and/or instalment of principal remains overdue
for two harvest seasons but for a period not exceeding two
half years in the case of an advance granted for agricultural
purposes, and
v)
any amount to be received remains overdue for a period
of more than 90 days in respect of other accounts.

2.2 Out of Order status
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An account should be treated as out of order if the

outstanding balance remains continuously in excess of the
sanctioned
limit/drawing
power.
In
cases
where
the
outstanding balance in the principal operating account is less

than the sanctioned limit/drawing power, but there are no
credits continuously for six months as on the date of Balance
Sheet or credits are not enough to cover the interest debited
during the same period, these accounts should be treated as
out of order.
2.3 Overdue
Any amount due to the bank under any credit facility is
overdue if it is not paid on the due date fixed by the bank.
12.
Before we deal with the aforesaid contentions of the learned
counsel appearing for the respective parties, we should bear in mind

that a three-judge-bench of the Supreme Court in the case of
MARDIA CHEMICALS LTD. v. UNION OF INDIA reported in AIR
2004 SC 2371 had an occasion to deal with the legality and
constitutional validity of the Securitisation Act as it stood prior to the
amendment challenged in these applications.
Ultimately, the
Supreme Court, in paragraph 82 of the judgment held as follows:
We, therefore, subject to what is provided in paragraph 80

above, uphold the validity of the Act and its provisions except that of
sub-section (2) of Section 17 of the Act, which is declared ultra vires
of Article 14 of the Constitution of India.
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12.1
ORDER
Thus, except the provisions contained in sub-section 2 of
section 17 of the Securitisation Act, all other provisions of the Act as

those then stood were declared to be intra vires. In a subsequent
decision of the Supreme Court in the case of United Bank of India
vs. Satyawati Tandon and others reported in (2010) 8 SCC 110
in paragraph 27, it has been reiterated that except the provision of
Section 17(2), all other provisions of the Securitisation Act are intra
vires as held in the case of Mardia Chemicals (supra),
13.
Mr. Shah, in this connection, strenuously contended before us
that in the aforesaid decision of the Supreme Court in the case of

Mardia Chemicals [supra], the Supreme Court had no occasion to
deal with the question of validity of
section 2(1)(o) of the
Securitisation Act, and, at the same time, even if it is assumed that

the Supreme Court dealt with such provisions, the amended
provisions of section 2(1)(o) of the Securitisation Act having come
into force after the passing of the judgment in the case of Mardia
Chemicals [supra], we should not be influenced by the said
judgment of the Supreme Court as the Supreme Court had no
occasion to consider the amended provisions of section 2(1)(o) of the
Securitisation Act or paragraph 2.1 of the RBI guidelines which was
not the subject matter of challenge in that case.
14.
We fully accept the contention of Mr. Shah that the Supreme
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ORDER
Court had no occasion to consider the legality or constitutional

validity of the amended section 2(1) (o) of the Securitisation Act, as it
is amended after the decision of the Supreme Court in the case of
Mardia Chemicals [supra], but we are unable to accept his
contention that paragraph 2.1 of the RBI Guidelines is also open to
challenge before this Court after the decision of the Supreme Court in
the case of Mardia Chemicals [supra]. It appears from paragraph
37 of the judgment in the case of Mardia Chemicals [supra] that the
Supreme Court specifically took into consideration the RBI guidelines
contained in paragraph 2.1, and ultimately, came to the following
conclusion [at page 2387]:-
37. ....
....
.... From what is quoted above, it is quite
evident that guidelines as laid down by the Reserve Bank of

India which are in more details but not necessary to be
reproduced here, laying down the terms and conditions and
circumstances in which the debt is to be classified as nonperforming asset, as early as possible. Therefore, we find no
substance in the submission made on behalf of the petitioners
that there are no guidelines for treating the debt as a nonperforming asset.
15.
It is now settled law that once, on consideration of the
provisions contained in a statute, the apex Court has arrived at a

finding that those are not ultra vires either the Constitution of India or
any other statute, it is not open for the High Court in a subsequent
petition to entertain a plea that a particular point relating to the
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selfsame provision was not considered by the Supreme Court or a

specific point was not raised therein. In other words, in a subsequent
petition before the High Court, a High Court cannot come to a
contrary conclusion merely on the ground that in the previous matter
before the Supreme Court, the matter was not properly argued by the
learned counsel for the parties or attention of the Supreme Court was
not drawn to a particular defect. In this connection, we may profitably
refer to the following observations in the three-judge-bench decision
of the Supreme Court in the case of Director of Settlement, A.P
vs. M. R. Apparao reported in AIR 2002 SC 1598 while elaborating
the binding nature of the judgment of the Supreme Court:
So far as the first question is concerned, Article 141 of

the Constitution unequivocally indicates that the law declared
by the Supreme Court shall be binding on all Courts within the
territory of India. The aforesaid Article empowers the Supreme
Court to declare the law. It is, therefore, an essential function of
the Court to interpret a legislation. The statements of the Court
on matters other than law like facts may have no binding force
as the facts of two cases may not be similar. But what is
binding is the ratio of the decision and not any finding of facts.
It is the principle found out upon a reading of a judgment as a
whole, in the light of the questions before the Court that forms
the ratio and not any particular word or sentence. To determine
whether a decision has 'declared law' it cannot be said to be a
law when a point is disposed of on concession and what is
binding is the principle underlying a decision. A judgment of the
Court has to be read in the context of questions which arose for
consideration in the case in which the judgment was delivered.
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An 'obiter dictum' as distinguished from a ratio decidendi is an

observation by Court on a legal question suggested in a case
before it but not arising in such manner as to require a
decision. Such an obiter may not have a binding precedent as
the observation was unnecessary for the decision pronounced,
but even though an obiter may not have a bind effect as a
precedent, but it cannot be denied that it is of considerable
weight. The law which will be binding under Article 141 would,
therefore, extend to all observations of points raised and
decided by the Court in a given case. So far as constitutional
matters are concerned, it is a practice of the Court not to make
any pronouncement on points not directly raised for its
decision. The decision in a judgment of the Supreme
Court cannot be assailed on the ground that certain
aspects were not considered or the relevant provisions
were not brought to the notice of the Court (See AIR 1970
SC 1002 and AIR 1973 SC 794(sic)). When Supreme Court
decides a principle it would be the duty of the High Court or a
subordinate Court to follow the decision of the Supreme Court.
A judgment of the High Court which refuses to follow the
decision and directions of the Supreme Court or seeks to revive
a decision of the High Court which had been set aside by the
Supreme Court is a nullity. (See 1984 (2) SCC 402 and 1984 (2)
SCC 324). We have to answer the first question bearing in mind
the aforesaid guiding principles.
16.
In the case of Ballabhdas
Mathurdas
Lakhani
vs.
Municipal Committee Malkapur reported in AIR 1970 SC 1002,

another three-judge-decision, the Supreme Court made the following
observations when a party wanted to avoid a decision of the Supreme
Court on the ground that all the relevant provisions of law was not
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placed before the Supreme Court:
The first question is concluded by the judgment of this

Court in Bharat Kala Bhandar's case, 1965-3 SCR 499 = (AIR
1966 SC 249). That case arose under the C. P. and Berar
Municipalities Act, 1922. The right of a Municipality governed
by that Act to levy under Section 66 (1) (b) a tax on bales of
cotton ginned at the prescribed rate was challenged by a
taxpayer. This Court held that levy of tax on cotton ginned by
the taxpayer in excess of the amount prescribed by Article
276 of the Constitution was invalid, and since the Municipality
had no authority to levy the tax in excess of the rate
permitted by the Constitution, the assessment proceedings
levying tax in excess of the permissible limit were invalid, and
a suit for refund of tax in excess of the amount permitted by
Article 276 was maintainable. The decision was binding on the
High Court and the High Court could not ignore it
because they thought that "relevant provisions were
not brought to the notice of the Court".
(Emphasis supplied by us).
17.
We, therefore, hold that there is no scope of investigating into
the question whether the RBI Guidelines in paragraph 2.1 are valid or
not in view of the earlier decision of the Supreme Court in the case of
Mardia Chemicals [supra] wherein in paragraph 37 of the judgment,
those RBI guidelines have been taken note of and at the same time,
the Supreme Court approved the position that the RBI is the
appropriate authority to declare the norms of NPA and consequently,
the said guidelines.
We, therefore, hold that the provisions of RBI
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guidelines were very much taken into consideration by the Supreme

Court and the Supreme Court found that notwithstanding those
guidelines the provisions relating NPA were intra vires.
Even on
merits independent of the above decision, we are convinced that

there is no justification of declaring the guidelines by the RBI to be
invalid because different period of default has been indicated for
declaring an asset as NPA of Banks on one hand and NBFCs on the
other. It is rightly pointed out by Mr. Soparkar, the learned counsel
appearing for the RBI that the asset mix of Banks varies quite widely
from that of NBFCs because unlike the NBFCs, Banks have to
mandatorily lend under law for agriculture sector, and its exposure to
industrial and infrastructure houses are relatively larger, and hence,
the gross NPAs of Banks are not comparable with that of NBFCs. In
such circumstances, even the RBI having found, on consideration of
all the aspects, that there should be a different fixation periods for
NPAs of Banks and NBFCs, sitting in a writ jurisdiction, a High Court
cannot interfere with the decision taken by the RBI. After all, those
are matters of economic policy, and therefore, the legislature having
invested power with the RBI to declare an asset NPA according to its
guidelines from time to time, the High Court in writ jurisdiction should
not interfere with such guidelines unless those are found to be
contrary to any statutory provisions or the Constitution.
18.
Even as regards the report of the Usha Thorat Committee, we
find substance in the contention of Mr. Soparkar that the report is
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ORDER
recommendatory in nature, and what has been recommended is that

the norms of NBFCs should be brought in line with that of the Banks,
and not vice-versa, and it is for the RBI to decide whether it would
accept the same or not.
19.
It is rightly pointed out by Mr. Soparkar that in the matter of
economic policy, it falls within the domain of the RBI and therefore,
this Court should not interfere with such policy. The observations of
the Supreme Court in paragraphs 167 and 169 in the case of
VILLIANUR IYARKKAI PADUKAPPU MAIYAM vs. UNION OF INDIA
[supra] are relevant, which are quoted below:
167.
In the matter of policy decision and economic tests
the scope of judicial review is very limited. Unless the decision

is shown to be contrary to any statutory provision or the
Constitution, the Court would not interfere with any economic
decision taken by the State. The court cannot examine the
relative merits of different economic policies and cannot strike
down the same merely on ground that another policy would
have been fairer and better.
169. It is neither within the domain of the courts nor the scope
of judicial review to embark upon an inquiry as to whether a
particular public policy is wise or whether better public policy
can be evolved. Nor are the Courts inclined to strike down a
policy at the behest of a petitioner merely because it has been
urged that a different policy would have been fairer or wiser or
more scientific or more logical. Wisdom and advisability of
economic policy are ordinarily not amenable to judicial review.
In matters relating to economic issues the Government has,
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ORDER
while taking a decision, right to trial and error as long as

both trial and error are bona fide and within the limits of the
authority. For testing the correctness of a policy, the
appropriate forum is Parliament and not the courts.
20.
It further appears that in the case of R.K. GARG VS. UNION
OF INDIA reported in (1981) 4 SCC 675, the Supreme Court made

the following observations in paragraph 8:8. Another rule of equal importance is that laws relating to
economic activities should be viewed with greater latitude
than laws touching civil rights such as freedom of speech,
religion etc. It has been said by no less a person than Holmes,
J., that the legislature should be allowed some play in the
joints, because it has to deal with complex problems which do
not admit of solution through any doctrinaire or strait-jacket
formula and this is particularly true in case of legislation
dealing with economic matters, where, having regard to the
nature of the problems required to be dealt with, greater play
in the joints has to be allowed to the legislature. The court
should feel more inclined to give judicial deference to
legislative judgment in the field of economic regulation than in
other areas where fundamental human rights are involved.
Nowhere has this admonition been more felicitously expressed
than in Morey v. Doud where Frankfurter, J., said in his
inimitable style:
In the utilities, tax and economic regulation cases, there
are good reasons for judicial self-restraint if not judicial
deference to legislative judgment. The legislature after
all has the affirmative responsibility. The courts have only
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ORDER
the power to destroy, not to reconstruct. When these are

added to the complexity of economic regulation, the
uncertainty, the liability to error, the bewildering conflict
of the experts, and the number of times the judges have
been overruled by events self-limitation can be seen to
be the path to judicial wisdom and institutional prestige
and stability.
The Court must always remember that legislation is

directed to practical problems, that the economic mechanism
is highly sensitive and complex, that many problems are
singular
and
contingent,
that
laws
are
not
abstract
propositions and do not relate to abstract units and are not to

be measured by abstract symmetry; that exact wisdom and
nice adaption of remedy are not always possible and that
judgment is largely a prophecy based on meagre and
uninterpreted experience. Every legislation particularly in
economic matters is essentially empiric and it is based on
experimentation or what one may call trial and error method
and therefore it cannot provide for all possible situations or
anticipate all possible abuses. There may be crudities and
inequities in complicated experimental economic legislation
but on that account alone it cannot be struck down as invalid.
The courts cannot, as pointed out by the United States
Supreme Court in Secretary of Agriculture v. Central Roig
Refining Company be converted into tribunals for relief from
such crudities and inequities. There may even be possibilities
of abuse, but that too cannot of itself be a ground for
invalidating the legislation, because it is not possible for any
legislature to anticipate as if by some divine prescience,
distortions and abuses of its legislation which may be made by
those subject to its provisions and to provide against such
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distortions and abuses.
21.
On consideration of the above material, we, thus, find no merits
in the contention of Mr. Shah that paragraph 2.1 of the RBI Guidelines
is violative of Article 14 of the Constitution of India.
22.
The next question is whether the provisions of section 2(1) (o)
of the Securitisation Act [as amended] are ultra vires Article 14 of the
Constitution or the Securitisation Act itself.
23.
We
have
already
noticed
that
prior
to
the
aforesaid
amendment, the norms of declaring NPA was exclusively within the

province of the RBI and it was for the RBI alone to decide the
guidelines for declaring the assets of a borrower as NPA irrespective
of the fact who is the lender. By the amendment of 2004, the old
definition has been divided into two parts; by introduction of clause
[a], the duty to frame guidelines relating to asset classification of a
borrower from a bank or financial institution which is administered or
regulated by an authority or body established, constituted or
appointed by any law for the time being in force, lies upon such
authority or the body to frame the guidelines , and by introduction of
clause (b), in any other cases not governed by clause [a], the same
should be in accordance with the directions or guidelines relating to
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assets classifications issued by the Reserve Bank. Thus, borrowers are

divided in to two different classes; First, the borrowers in respect of
the Banks and Financial Institutions which are administered or
regulated by an authority or body established, constituted or
appointed by any law for the time being in force, and in those cases,
it will be for that authority or body to frame the guidelines for asset
classification; and, secondly, the borrowers in respect of all other
cases not covered by clause [a], and in respect of those cases, it will
be in accordance with the directions or guidelines
issued by the
Reserve Bank for asset classification. We have already pointed out

that in the Object and Reasons for enactment of the Securitisation
Act, in paragraph 2(h), it has been specifically mentioned that the
prime object the Securitisation Act was to empower banks and
financial institutions giving loan to a borrower to take possession of
securities given for financial assistance and sell or lease the same or
take over management in the event of default, i.e. classification of
the borrowers account as non-performing asset in accordance with
the directions given or under guidelines issued by the
Reserve Bank of India from time to time, and based on the
above object, section 2(1)(o) of the Securitisation Act was enacted.
However, by way of the amendment, the Parliament has deviated
from the above object of framing guidelines for classification of assets
of a borrower as NPA by the RBI, and instead of that, in case of some
of the lenders, such power has been conferred to authorities other
than the RBI as indicated above.
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24.
ORDER
We find that the above amendment in section 2(1) (o) of the
Securitisation Act is in direct conflict with the Object and Reasons of

the Act. The Parliament, in accordance with the object of the Act,
permitted the Banks and Financial Institutions to take the drastic step
under section 13 of the Securitisation Act only after the assets of the
borrowers are found to be NPA in accordance with the guidelines
issued by the RBI, and not at the whims of the lender or any other
authority.
By the amended provisions, the Parliament has moved
away from the object of the Act. As indicated earlier, in the case of
Mardia Chemicals [supra], the Supreme Court specifically dealt with
the question whether on the whims and fancies of the financial
institutions, the assets of a debtor can be classified as NPA.
The
Supreme Court, in paragraph 37 of the judgment specifically held that

such contention was not tenable because as a matter of fact, the
policy had been laid down by the RBI providing guidelines in the
matter of declaring an asset to be NPA known as RBIs prudential
norms on income recognition, asset classification and provisioning pertaining to advances" through a Circular dated August 30, 2001.
The observations of the Supreme Court in paragraph 37 of the
judgment are relevant, and the same are quoted below:37. Next we come to the question as to whether it is on
whims and fancies of the financial institutions to
classify
the
assets
as
non-performing
assets,
as
canvassed before us. We find it not to be so. As a matter of
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fact a policy has been laid down by the Reserve Bank of India
providing guidelines in the matter for declaring an asset to be
a non-performing asset known as "RBI's prudential norms on
income recognition, asset classification and provisioning pertaining to advances" through a Circular dated August 30,
2001.
25.
Therefore, only because the RBI had been authorized to fix the
NPA guidelines, the Supreme Court did not find merits in the above
contention of the learned advocates of the borrowers, but the
moment by subsequent amendment, the Parliament has taken away
such power from the hands of the RBI and has entrusted such power
with the regulating authority of some of the banks and financial
institutions as mentioned in clause (a) of Section 2(1) (o) of the
Securitisation Act, such entrustment of fixing guidelines to those
authorities at their whims and fancies patently becomes violative of
Article 14 of the Constitution of India.
26.
In this connection, we may appropriately refer to the following
observations of the Supreme Court in the case of Joseph Kuruvilla

Vellukunnel
v. Reserve Bank of India and others reported in
AIR 1962 SC1371 regarding the role of the RBI in the matter of
banking industries in India:
In the present case, in view of the history of the
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establishment of the Reserve Bank as a central bank for India,

its position as a Bankers' Bank, its control over banking
companies and banking in India, its position as the issuing
bank, its power to license banking companies and cancel their
licences and the numerous other powers, it is unanswerable
that
between
the
Court
and
the
Reserve
Bank,
the
momentous decision to wind up a tottering or unsafe banking

company in the interest of the depositors, may reasonably be
left to the Reserve Bank. No doubt, the Court can also, given
the time, perform this task. But the decision has to be taken
without delay, and the Reserve Bank already knows intimately
the affairs of banking companies and has had access to their
books and accounts. If the Court were called upon to take
immediate action, it would almost always be guided by the
opinion of the Reserve Bank. It would be impossible for the
Court to reach a conclusion unguided by the Reserve Bank if
immediate action was demanded. But the law which gives the
same position to the opinion of the Reserve Bank is
challenged as unreasonable. In our opinion, such a challenge
has no force. The situation that arose in this case is typical of
the occasions on which this extraordinary power would
normally be exercised, and, as we have said already, if the
power is abused by the Reserve Bank, what will be struck
down would be the action of the Reserve Bank but not the
law. An appeal against the Reserve Bank's action or a
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provision for an ex post facto finding by the Court is hardly

necessary. An appeal to the Central Government will be only
an appeal from Caesar to Caesar, because the Reserve Bank
would
hardly
act
without
concurrence
of
the
Central
Government and the finding by the Court would mean, to

borrow the macabre phrase of Raman Nayar, J., a postmortem examination of the corpse of the banking company.
27.
For the above reason, the legislature initially decided to confer
the responsibility of fixing the norms of NPA under the Securitisation

Act to the RBI alone to safeguard the interest of the borrowers.
In this connection, we may profitably refer to the decision of the

Supreme Court in the case of J. PANDURANGARAO V. THE A.P.
PUBLIC SERVICE COMMISSION, HYDERABAD AND ANOTHER,
reported in AIR 1963 SC 268 wherein the Supreme Court laid down
the test to decide whether a particular legislation is violative of Article
14 of the Constitution of India in paragraph 7 of the judgment, which
reads as under:7.
That immediately raises the question about the validity of
the impugned rule. The petitioner argues that by prescribing

the limitation that the applicant must be an Advocate of the
Andhra High Court, the rule has violated his fundamental rights
guaranteed under Articles 14 and 16 (1) of the Constitution. As
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a result of the rule, persons who are not practicing as

Advocates of the Andhra High Court are disqualified and that
amounts to unconstitutional discrimination. Art. 14 which
provides that the State shall not deny to any person equality
before the law or the equal protection of the laws within the
territory of India, as well as Article 16(1) which provides that
there shall be equality of opportunity for all citizens in matters
relating to employment or appointment to any office under the
State have been frequently considered by this Court. The
scope and effect of the provisions of Article 14 can no
longer be the subject-matter of any doubt or dispute. It
is
well-settled
that
though
Art.
14
forbids
class
legislation, it does not forbid reasonable classifications

for the purposes of legislation. When any impugned rule
or statutory provision is assailed on the ground that it
contravenes Art. 14, its validity can be sustained if two
tests
are
satisfied.
The
first
test
is
that
the
classification on which it is founded must be based on

an intelligible differentia which distinguishes persons or
things grouped together from other left out of the
group; and the second is that the differentia in question
must have a reasonable relation to the object sought to
be achieved by the rule or statutory provision in
question. As the decisions of this Court show, the
classification on which the statutory provision may be
founded may be referable to different considerations. It
may be based on geographical considerations or it may
have reference to objects or occupations or the like. In
every case, there must be some nexus between the
basis of the classification and the object intended to be
achieved by the statue, vide Ram Krishna Dalmia v.
Justice S. R. Tendolkar, 1959 SCR 279: (AIR 1958 SC
538).
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(Emphasis supplied by us).
29.
We have already pointed out that the object of the enactment
of the Securitisation Act was not to leave the fate of the borrowers in
the hands of the regulators of banks and financial institutions in the
matter of taking possession of the secured assets or selling those for
recovery of the dues but to protect their interest from the whims and
fancies of the creditors, and for the above reason, only the RBI was
given the power to frame the guidelines for such classification. By
the amendment impugned in these writ-petitions, the Parliament has
taken away such exclusive power of the RBI and in some of the
classes of the Banks and financial institutions, such power has been
conferred upon regulators or administrators of those Banks and
financial institutions where the RBI cannot interfere.
Thus, the
amendment impugned is violative of article 14 of the Constitution

inasmuch it is against the object sought to be achieved by enactment
of the Securitisation Act and, at the same time, the classification on
which the amendment is founded is not based on an intelligible
differentia which distinguishes persons or things grouped together
from other left out of the group, and the differentia in question has no
relation to the object sought to be achieved by the statutory provision
in question. We have already pointed out that the principal object of
the Securitisation Act is empowering banks and financial
institutions
to
take
possession
of
securities
given
for
financial assistance and sell or lease the same or take over
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management in the event of default, i.e. classification of the

borrowers account as non-performing asset in accordance
with the directions given or under guidelines issued by the
Reserve Bank of India from time to time as appearing from the
very object and reason of enacting the Securitisation Act. Thus, there
is no nexus between the basis of the classification and the object
intended to be achieved by the statute.
30.
Our attention has been drawn to the fact that the following
financial institutions within the meaning of the Securitisation Act have

regulators other than the RBI, and as such, those financial institutions
come within the purview of clause (a) of Section 2(1) (o) of the
Securitisation Act as amended.
Sl. Institution
No.
Regulator
No. of
days
EXIM Bank
EXIM BANK u/s. 39 of

EXIM Act, 1981
NHB (balance sheet data as

on 30.06.2003)
NHB authority under

NHB Act
90 days
SIDBI
Central Govt. u/s 51A

of the SIDBI Act, 1989
NABARD
Nabard ( as per s. 39 of Nabard Act, 1981 )
PFC Ltd. (Power Finance

Corporation Ltd.)
PFC [It is a PFI u/s 4A of Six

the Companies Act]
Months
REC Ltd. (Rural

Electrification Corporation
Ltd.)
REC [It is a PFI u/s 4A

of the Companies Act]
Six
Months
IRFC Ltd. ( Indian Railway

Finance Corporation )
Not RBI [as per RBI

report]
IREDA Ltd. (as on 31.3.2002) Not RBI [as per RBI
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report]
9
NEDFI Ltd.( North Eastern

Development Finance
Corporation Ltd. )
Not RBI ( as per RBI

Report )
10
HUDCO Ltd.
NHB
11
UTI ( Unit Trust of India )
SEBI
12
LIC (Life Insurance Corp.)
IRDA established under

the IRDA Act, 1999
13
GIC ltd. (Gen. Insurance

Corp. of India )

the IRDA Act, 1999
14
NIC ltd. ( National Insurance IRDA established under

Company )
the IRDA Act, 1999
15
NIA ltd (New India Assurance IRDA established under

)
the IRDA Act, 1999
16
OIC Ltd. (Oriental Insurance

Corp.)
17
UII ( United India Insurance ) IRDA established under

the IRDA Act, 1999
18
Industrial Credit and

Investment Corporation of
India Ltd.
19
SCICI Ltd.
Not in existence now
20
IFCI Venture Capital Funds

Ltd.
SEBI
21
Technology Development
and Information Company of
India Ltd
22
ICICI Venture Funds

Management Ltd
SEBI
23
Andhra Pradesh State

Financial Corporation
State Govt. of Andhra

Pradesh
24
Assam Financial Corporation State Govt. of Assam
25
Bihar State Financial

Corporation
State Govt. of Bihar
26
Delhi Financial Corporation
State Govt. of Delhi

the IRDA Act, 1999
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27
Gujarat State Financial

Corporation
State Govt. of Gujarat
28
Gujarat Industrial
Investment Corporation
State Govt. of Gujarat
29
Haryana Financial
Corporation
State Govt. of Haryana
30
Himachal Pradesh Financial

Corporation
State Govt. of
Himachal Pradesh
31
Jammu & Kashmir State

Financial Corporation
State Govt. of Jammu &

Kashmir
32
Karnataka State Financial

Corporation
State Govt. of
Karnataka
33
Kerala Financial Corporation State Govt. of Kerala
34
Madhya Pradesh Financial

Corporation
State Govt. of MP
35
Maharashtra State Financial

Corporation
State Govt. of
Maharastra
36
Orissa State Financial

Corporation
State Govt. of Orissa
37
Punjab Financial Corporation State Govt. of Punjab
38
Rajasthan Financial
Corporation
State Govt. of
Rajasthan
39
Uttar Pradesh Financial

Corporation
State Govt. of UP
40
West Bengal Financial

Corporation
State Govt. of WB
41
Tamilnadu Industrial
State Govt. of TN
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Investment corporation Ltd.

42
North Eastern Development

Finance Corporation Ltd.
As per RBI report they

are not governed by
RBI, but as per website
they are PFI under s.
4A of the Companies
Act, and registered as
NBFC under the RBI
Act, 1934 in 2002.
43
Infrastructure Development
Finance Company Ltd.
44
Pradeshiya Industrial and

Investment Corporation of
U.P. Ltd.
45
Rajasthan State Industrial

Development & Investment
Corporation Ltd. RIICO Ltd.
46
State Industrial
Development Corporation of State of Maharashtra
Maharashtra Ltd
47
West Bengal Industrial

Development Corporation
Ltd.
State of WB
48
Tamil Nadu Industrial

Development Corporation
Ltd.
State of TN
49
Asian Development Bank
Central Govt under

scheme of the Act.
30.1
State of Rajasthan
On the other hand, the following 11 financial institutions
have no regulators created under the law for the time being in force,
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and thus, according to the amended provisions of Section 2(1) (o) of

the Securitisation Act, those 11 financial institutions are regulated by
the RBI.
Sl. Institution
No.
Regulator
No. of
days
Scheduled Banks
RBI
90 days
Multi State Co-operative

Bank
RBI ( the vires of which 90 days

is pending before this
Honble Court in PIL
159 of 2012 )
Local Co-operative Banks
RBI ( but Gujarat High 90 days

Court has declared the
notification
empowering the Cooperative Banks as
ultra vires, pending
before Honble Apex
Court )
Non Banking Finance

Companies ( u/s 2 (1) (m)
(iv) of the NPA Act, 2002 )
RBI
180 Days
Securitisation Companies
( under NPA Act, 2002 )
RBI
180 days
Indian Renewable Energy

Development Agency Ltd.
Its a PFI u/section 4 A

and also registered
NBFC with RBI.
Six
months
( Being
Nbfc )
IDBI ( Industrial
RBI ( as per RBI report ) 90 days
Development Bank of India )
IFCI Ltd. ( Industrial Finance

Corporation of India )

and also registered
NBFC with RBI.
IIBI Ltd. ( Industrial

Investment Bank of India )
RBI ( as per RBI report ) -
10
TFCI Ltd. ( Tourism Finance

Corporation )

and also registered
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180 days
Six
months
C/SCA/14908/2013
ORDER
NBFC with RBI.
( Being
Nbfc )
11
IDFC Ltd. ( Infrastructure

Development Finance
Company Ltd. )
RBI (as per RBI report ) -
31.
We also find that although the above banks and financial
institutions have separate regulators, the RBI has the power and
authority to issue policy and directions in respect of those NBFCs as
would appear from section 45JA of the RBI Act, which reads as under:
45JA. Power of Bank to determine policy and issue

directions.
(1). If the Bank is satisfied that, in the public interest or to
regulate the financial system of the country to its advantage or
to prevent the affairs of any non-banking financial company
being conducted in a manner detrimental to the interest of the
depositors or in a manner prejudicial to the interest of the nonbanking financial company, it is necessary or expedient so to
do, it may determine the policy and give directions to all or any
of the non-banking financial companies relating to income
recognition, accounting standards, making of proper provision
for bad and doubtful debts, capital adequacy based on risk
weights for assets and credit conversion factors for off-balance
sheet items and also relating to deployment of funds by a nonbanking financial company or a class of non-banking financial
companies or nonbanking financial companies generally, as the
case may be, and such nonbanking financial companies shall
be bound to follow the policy so determined and the directions
so issued.
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(2).
ORDER
Without prejudice to the generality of the powers vested
under subsection (1) the Bank may give directions to nonbanking financial companies generally or to a class of nonbanking financial companies or to any nonbanking financial
company in particular as to,
(a).
the purpose for which advances or other fund based or

non-fund based accommodation may not be made; and
(b).
the maximum amount of advances or other financial

accommodation or investment in shares and other
securities which, having regard to the paid-up capital,
reserves and deposits of the non-banking financial
company and other relevant considerations, may be
made by that nonbanking financial company to any
person or a company or to a group of companies.
32.
Similarly, the Banking Regulation Act, 1949 gives power to the
RBI to control advances by banking companies vide section 21 of the

BR Act, and also to give directions vide section 35A of the BR Act.
Those sections are quoted below:
21. Power of Reserve Bank to control advances by banking
companies.
1).
Where the Reserve Bank is satisfied that it is necessary
or expedient in the public interest or in the interests of

depositors or banking policy so to do, it may determine the
policy in relation to advances to be followed by banking
companies generally or by any banking company in particular,
and when the policy has been so determined, all banking
companies or the banking company concerned, as the case
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may be, shall be bound to follow the policy as so determined.

(2). Without prejudice to the generality of the power vested in
the Reserve Bank under sub-section (1), the Reserve Bank
may give directions to banking companies, either generally or
to any banking company or group of banking companies in
particular, as to
(a)
the purposes for which advances may or may not be

made,
(b)
the margins to be maintained in respect of secured

advances,
(c)
the maximum amount of advances or other financial

accommodation which, having regard to the paid-up
capital, reserves and deposits of a banking company
and other relevant considerations, may be made by
that banking company to any one company, firm,
association of persons or individual,
(d)
the maximum amount up to which, having regard to

the considerations referred to in clause (c), guarantees
may be given by a banking company on behalf of any
one company, firm, association of persons or individual,
and
(e)
the rate of interest and other terms and conditions on

which advances or other financial accommodation may
be made or guarantees may be given.
(3) Every banking company shall be bound to comply with any

directions given to it under this section.
35A. Power of the Reserve Bank to give directions.

(1).
Where the Reserve Bank is satisfied that
(a).
in the public interest; or
(aa).
in the interest of banking policy; or
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(b).
ORDER
to prevent the affairs of any banking company being

conducted in a manner detrimental to the interests of
the depositors or in a manner prejudicial to the
interests of the banking company; or
(c).
to secure the proper management of any banking

company generally,
it is necessary to issue directions to banking companies

generally or to any banking company in particular, it may,
from time to time, issue such directions as it deems fit, and
the banking companies or the banking company, as the case
may be, shall be bound to comply with such directions.
(2). The Reserve Bank may, on representation made to it or
on its own motion, modify or cancel any direction issued
under sub-section (1), and in so modifying or cancelling any
direction may impose such conditions as it thinks fit, subject
to which the modification or cancellation shall have effect.
33.
It appears that by the amendment impugned in these
applications, the exclusive power of the RBI to formulate guidelines

for declaring the asset of borrowers as NPA has been taken away in
respect of the above financial institutions which come within the
purview of clause (a) of Section 2(1) (o) of the Securitisation Act. As
a result, a borrower taking loan from those financial institutions will
now be governed by the guidelines/norms of NPA declared by those
regulators. We, therefore, find that having regard to the object of the
Securitisation Act, for the conferment of such power in the hands of
some of the secured creditors for the purpose of taking possession of
the secured assets and selling those assets deviating from the
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general law of the land, the amendment impugned has definitely

violated Article 14 of the Constitution of India as such amendment is
contrary to the object of the Securitisation Act as pointed out earlier.
34.
Thus, we agree that for the purpose of enforcing a statute like
the Securitisation Act, which deviates from the ordinary laws of the
land relating to attachment, sale and recovery of possession of the
secured asset, the fate of a borrower cannot be left in the hands of
the regulators of those financiers.
We are also impressed by the
submissions of Mr. Shah that there was no valid reason for fixation of
NPA in respect of some of the financial institutions by the RBI and
some other by the regulators of those financial institutions.
The
amendment makes a clear discrimination either in favour of those

financial institutions which are covered under clause (a) of Section
2(1) (o) of the Securitisation Act or against them, when the RBI has no
authority in fixation of those NPAs. The regulators, by virtue of the
amendment of Section 2(1) (o) of the Securitisation Act, can, at any
point of time, take a liberal approach thereby inducing the citizen to
take loan from them by fixing a relatively longer period as NPA and at
the same time, without any valid reason, for the benefit of only the
financial interest of those financial institutions, can also take a
stringent policy fixing a relatively shorter period of time for declaring
the existing secured assets as NPA.
We are conscious that in the
Board of the regulators of some of the financial institutions coming
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under clause (a) above, the representatives of RBI is also a member,

but he will be minority in respect of the entire number of directors of
those regulatory authorities.
35.
We also fail to find any plausible reason assigned by the
legislature for deviating from the policy of being guided by the RBI.
Mr. Syed, the learned Assistant Solicitor General of India, however,
tried to convince us that since in the matter of regulation of those
financial institutions, those regulators are taking the financial
decisions, for the enforcement of the Securitisation Act, a different
policy decision by the RBI would create problem. We are not at all
impressed by such submission. Under those statutes, those regulators
can definitely take any decision, whether financial or policy, as
provided under the law, but for the purpose of enforcement of the
Securitisation Act, a different law altogether from the general law, if
the destiny of the borrower is placed in the sole whims and fancies of
those regulators, the provisions must be held to be arbitrary.
We
have already pointed out that the Supreme Court, in the case of
Mardia Chemicals [supra] overruled the contention of arbitrariness
only on the ground that as the power for deciding NPA was in the
hands
of
RBI,
such
apprehension
was
baseless.
After
the
amendment, the apprehension now cannot be said to be baseless,

and the basis on which the Supreme Court overruled such contention
has now been removed by the legislature by amending Section 2(1)
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(o) of the Securitisation Act, thereby making it violative of Article 14

of the Constitution of India.
36.
We now propose to deal with the decisions cited by Mr. Shah
appearing on behalf of the petitioners.
37.
In the case of CHIRANJIT LAL CHOWDHURI v. UNION OF
INDIA reported in AIR 1951 SC 41, Mr. Shah relied upon paragraphs
61 to 67 of the decision of majority [per Mukherje, J.], by contending
that the petitioners have discharged the burden by placing material
to prove the case of unreasonable classification so as to make the
provisions hit by Article 14 of the Constitution of India.
37.1
We have already pointed out that the said decision
definitely helps Mr. Shahs clients so far as the amendment

introducing Section 2(1) (o) of the Securitisation Act is concerned, but
by taking aid of those paragraphs, we cannot hold that the policy
taken by the RBI in respect of the NPA is hit by Article 14 of the
Constitution of India as indicated earlier.
38.
In the case of JYOTI PERSHAD v. UNION TERRRITORY OF
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DELHI reported in AIR 1961 SC 1602, the vires of the provisions of

the Slum Areas (Improvement and Clearance) Act, 1956 was
challenged on the ground that the same violates Article 14 of the
Constitution of India. The Supreme Court overruled such contention
by holding that there is enough guideline in the Act for exercising
discretion by competent authority by section 19(1) of the said Act.
38.1
In the cases before us, if the RBI would have been the
sole authority for deciding the norms/guidelines for NPA as was

originally enacted and which is also still the object of the statute, the
same would not have been hit by Article 14 of the Constitution of
India; but the moment the various regulators of financial institutions
have been given such power, restricting the exclusive power of RBI to
only some categories of the creditors, the said decision will be helpful
to the clients of Mr. Shah.
39.
In the case of STATE OF RAJASTHAN v. MUKUNDCHAND
reported in AIR 1964 SC 1633, the question was whether the portion
of section 2(e) of the Rajasthan Jagirdars Debt Reduction Act,
excluding certain debts due to creditors mentioned in clause (i) to (vi)
infringed Article 14 of the Constitution of India and was invalid. The
Constitutional Bench of the Supreme Court held that the said portion
did not satisfy the test of permissible classification. According to the
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Supreme Court, the fact that the debts are owned to a Government or
local authority or other bodies mentioned in the impugned part of
section 2(e) has no rational relationship with the object sought to be
achieved by the Act, i.e. to reduce the debts secured on jagirdar
lands, which had been resumed under the provisions of the Rajasthan
Land Reforms and Resumption of Jagirs Act.
The Supreme Court
further held that no intelligible principle underlied the exempted

categories of debts and the reasons why a debt advanced on behalf
of a person by the Court of Guards was clubbed with a debt due to a
State or a scheduled bank was not excluded from the purview of the
Act was not discernible.
39.1
We also find that having regard to the object of the
Securitisation Act as quoted above by us, which still remains

unchanged, that the NPA should be decided by the policy adopted by
the RBI alone from time to time, there was no justifiable reason for
taking away such powers from the hands of the RBI in respect of
some of the financial institutions having regard to the object of the
Act. However, the above decision, in no way, help Mr. Shah in
contending that the RBI guidelines challenged in these applications
are invalid.
40.
In the case of VAJRAVELU v. SPECIAL DEPUTY COLLECTOR
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reported in AIR 1965 SC 1017, the Constitution Bench of the

Supreme Court, on a comparative study of the Land Acquisition Act,
1894 and the Land Acquisition (Madras Amendment) Act, came to the
conclusion that if a land is acquired for a housing scheme under the
amending Act, the claimant gets a lesser value than he would get for
the same land or a similar land if it is acquired for a public purpose
like hospital under the principal Act. The Supreme Court held that the
classification thus sought to be made by the Land Acquisition (Madras
Amendment) Act between persons whose lands are acquired for other
public purposes has no reasonable relation to the object to be
achieved, and is thus, violative of Article 14 of the Constitution of
India.
40.1
In the cases before us, we are of the opinion that for the
similar reasons, Section 2(1) (o) of the Securitisation Act as amended

should be declared ultra vires but by taking aid of the said principle,
we cannot declare the policy of RBI as invalid as indicated earlier,
more so, when in the case of Mardia Chemicals [supra], the
Supreme Court has specifically taken note of the RBI guidelines
challenged in these applications and did not find those as ultra vires.
41.
In the case of NAGPUR IMPROVEMENT TRUST v. VITHAL
RAO reported in AIR 1973 SC 689, the owner whose land was
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ORDER
acquired under the Nagpur Improvement Act was paid compensation

not according to the market value but market value according to the
use of which the land was put at the date with reference to which the
market value is to be determined in that clause. Moreover, solatium
of 15% available under the Land Acquisition Act was not made
available under the Improvement Trust Act. In other words, if the land
was being used for agricultural purposes, even though it has a
potential value as a building site, the potential value is to be ignored.
Further, the owner did not get solatium of 15% which he would have
got if the land had been acquired under the Land Acquisition Act. In
such context, the Supreme Court held that the government could
acquire the land for a housing accommodation scheme either under
the Land Acquisition Act or under the Improvement Trust Act. Thus, it
enabled the State Government to discriminate between one owner
equally situated from another owner and was, thus, hit by Article 14
of the Constitution of India.
41.1
In the cases before us also, allowing a class of secured
creditors of a class of debtors to enjoy the benefit of norms/guidelines

for NPA declared by their own regulators in a way different from the
one fixed by the RBI in respect of the creditors of another section of
the debtors, is opposed to the object of the Statute, and thus, the
amended provisions of Section 2(1)(o) of the Securitisation Act is
discriminatory and violates Article 14 of the Constitution. We must
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ORDER
not forget that for the business interest of those secured creditors
under the control of such regulators, the power to enforce such
drastic measure is vested upon such regulators without the RBI
having any control on it.
In other words, by the amendment
challenged in these applications, different creditors have been given

rights to treat their debtors according to their whims may be
favourable to the debtors or may be prejudicial to the debtors,
leaving others under the guidelines of the RBI.
42.
In the case of HARBILAS RAI BANSAL v. STATE OF
PUNJAB AND ANR reported in (1996) 1 SCC 1,
the controversy
was that by the impugned amendment of the rent Act, it created two
classes of landlords, one for the commercial premises and the other
for residential premises, which the original act never intended. The
Supreme Court struck down the amendment as ultra vires as the
classification
was
found
arbitrary
and
unreasonable
as
the
amendment had no nexus with the object of the Act and restored the
one originally enacted.
42.1
In our opinion, the same principle applies to the facts of
the present case. Having regard to the object of the Securitisation

Act for classification of the borrowers account as non-performing
asset in accordance with the directions given or under guidelines
issued by the Reserve Bank of India from time to time, the
Page 63 of 75
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ORDER
classification created by the amended clause (a) of Section 2(1) (o) of

the Securitisation Act has no nexus with the object of the Act.
43.
In the case of SAVITRI CAIRE vs. UP AWAS AWAM VIKAS
PARISHAD reported in (2003) 6 SCC 255, it was held that although

Article 14 of the Constitution of India does not apply in the matter of
enforcement of State legislation via-a-vis a parliamentary legislation,
having regard to the similar provisions in the two Acts relating to
acquisition of land, the acquiring authority and public purposes are
the same, the denial of compensation under the Land Acquisition Act
to the land owner would be violative under Article 14 of the
Constitution of India.
43.1
In our opinion, on the same principles, it can be lawfully
contended that there is no justification of fixation of assets of secured

creditors as NPA by some of the financial institutions in the hands of
the regulators of such financial institutions itself without the control
of the RBI, and at the same time, keeping the other strictly under the
control of RBI, is violative of Article 14 of the Constitution of India. In
our opinion, simply because the financial institutions covered under
clause (a) are regulated by some statutory authority, such fact cannot
be a justifiable reason for keeping those out of the control of RBI in
the matter of fixation of norms/guidelines for NPA when the others
Page 64 of 75
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ORDER
coming within the purview of clause (b) are also guided by the some
other statutes, for instance, Banking Regulation Act, Companies Act
etc.
44.
Lastly, in the case of M/S HOLYSTAR NATURAL RESOURCES
PVT. LTD. & ANR vs. UNION OF INDIA & ANR reported in AIR
2014 Del 60, a Division Bench of the Delhi High Court was
considering a case where the petitioners challenged the constitutional
validity of Section 2(1)(o) of the Securitisation Act as well as that of
the Circular dated 1st July, 2013 of the Reserve Bank of India.
44.1
The Delhi High Court in paragraph 47 of the judgment
dealt with the question involved herein and observed as follows:
47. True, the guidelines issued by the RBI and other financial
institutions like National Housing Bank are not identical, but, in
our opinion, the power to issue guidelines has been rightly
vested in the regulator of that particular institution as the said
regulator would understand the need of that institution. There
can
be
no
quibble
over
the
proposition
that
if
the
differentiation is rational, having regard to the objects sought

to be achieved, then such differentiation is not discriminatory.
Article 14 only forbids unreasonable classification. The burden
lies on the petitioners to show that what has been done is
irrational and unreasonable. Nothing has been placed before
us to show that the classification is irrational or unreasonable.
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ORDER
In any event, the classification between different banks and

financial institutions is founded on an intelligible differentia
and the said differentia has a rational relation to the object
sought to be achieved.
44.2
With great respect to the above Division Bench of the
Delhi High Court we are unable to agree with the observation that the
classification between different banks and financial institutions is
founded on an intelligible differentia and the said differentia has a
rational relation to the object sought to be achieved inasmuch as the
object of the Securitisation Act is to confer the power of fixing
norms/guidelines for NPA only to the RBI and not to the whims of the
regulators of the financial institutions as would appear from the
object and reason for enacting the above Act and for which the
Supreme Court in the case of Mardia Chemicals (supra) upheld the
legality of the Act.
45.
On consideration of the entire materials on record, we,
therefore, hold that clause (a) of the amended Section 2(1)(o) of the
Securitisation Act violates Article 14 of the Constitution of India by
discriminating against other financial institutions covered under
clause (b) of Section 2(1)(o) of the Securitisation Act.
46.
We are of the view that the definition is couched in such a
fashion that if clause (a) is held to be ultra vires, then the entire
Page 66 of 75
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ORDER
provision will also be ineffective. In such circumstances, we propose

to follow the principle adopted by the Supreme Court in the case of
Harbilas Rai Bansal (supra) by declaring the provisions of the
amendments made in Section 2(1) (o) of the Securitisation Act
constitutionally invalid and as a consequence, restoring the original
provisions of Section 2(1) (o) of the Securitisation Act
which were
operating before coming into force of the amendment and as a result

hold that in the matter of fixing the norms/guidelines for NPA, all the
financial institutions should be guided by the RBI policy as the same
is the specific object of the Securitisation Act.
47.
We are quite conscious that for our above view, the
petitioners in these applications will not get any material benefit so

far as their transactions are concerned because they are all debtors
of the financial institution covered by clause (b) of amended Section
2(1) (o) of the Securitisation Act and thus, are governed by the
guidelines fixed by the RBI and we have also upheld the policy of the
RBI which was challenged through the second prayer made in these
applications.
48.
However, the petitioners herein have the locus standi to
challenge the validity of the amended provisions of Section 2(1) (o) of

the Securitisation Act for discriminating them from the debtors of the
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ORDER
Secured creditors falling within clause (a), some of whom have been
conferred with the benefit of longer period of the NPA than the one
prescribed by the RBI for the petitioners by virtue of the decisions
taken by the Administrators or Regulators of those financial
institutions and all of them, at any point of time, may be even
conferred with longer period of NPA by virtue of any future decision of
the regulators of those institutions who are not, in any respect, bound
by the guidelines of the RBI for the purpose of fixation of
norms/guidelines for NPA.
49.
After holding that the provisions contained in Section 2(1) (o) of
the Securitisation Act is violative of Article 14 of the Constitution, if

we hold that this writ-application is not maintainable at the instance
of the petitioners because they being debtors of a nationalized bank,
their right is, in no way, affected by the whims and fancy of their
creditor, we will be permitting the violation of Article 14 to continue
against the petitioners in the following ways:
[1].
Some of the other debtors who have taken loan from some of
the creditors falling under clause (a) of Section 2(1) (o) of the
Securitisation Act are availing of the larger period of NPA than
those falling under Clause (b) like the petitioners and thus, such
better benefit to those debtors would deprive the petitioners of
their fundamental right of equal protection of law.
Page 68 of 75
C/SCA/14908/2013
[2].
ORDER
NPA fixed by the RBI being minimum i.e. 90 days, the

petitioners have a right to contend that all the debtors from the
financial institution within the meaning of the Securitisation Act
should be under the norms of the same authority viz. the RBI
which is the object of the above statute in question.
[3].
Having fallen within the purview of the Securitisation Act, a

debtor within the meaning of the said Act has legitimate right to
contend that all the debtors under the above Act should be
governed by the norms of NPA fixed by RBI and no other, and
there should not be any possibility of being governed by
different norms of NPA fixed by the various regulators of the
financial institutions resulting in even the remotest chance of
those debtors being differently treated under the selfsame
provisions of the Securitisation Act.
50.
We, therefore, hold that the petitioners have the locus standi to
maintain this application alleging the violation of Article 14 of the

Constitution. The law relating to locus Standi has undergone a vast
change in the recent years particularly where the statutory provisions
are challenged as ultra vires the Constitution.
51.
In this connection, we propose to rely upon the following
observations of the Supreme Court in the case of Ghulam Qadir v.
Page 69 of 75
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ORDER
Special Tribunal (2002) 1 SCC 33 which has been subsequently,

relied upon by another bench of the Supreme Court in the case of
M/s. Tashi Delek Gaming Solutions Ltd. and Anr. v. State of
Karnataka and Ors reported in AIR 2006 SC 661:
38. There is no dispute regarding the legal proposition

that the rights under Article 226 of the Constitution of India
can be enforced only by an aggrieved person except in the
case where the writ prayed for is for habeas corpus or quo
warranto. Another exception in the general rule is the filing of
a writ petition in public interest. The existence of the legal
right of the petitioner which is alleged to have been violated is
the foundation for invoking the jurisdiction of the High Court
under
the
aforesaid
article.
The
orthodox
rule
of
interpretation regarding the locus standi of a person to

reach the court has undergone a sea change with the
development of constitutional law in our country and
the constitutional courts have been adopting a liberal
approach in dealing with the cases or dislodging the
claim of a litigant merely on hyper technical grounds. If
a person approaching the court can satisfy that the
impugned action is likely to adversely affect his right
which is shown to be having source in some statutory
provision, the petition filed by such a person cannot be
rejected on the ground of his not having the locus
standi. In other words, if the person is found to be not
merely a stranger having no right whatsoever to any
post or property, he cannot be non-suited on the
ground of his not having the locus standi."
Page 70 of 75
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52.
ORDER
This is not a case of judicial review of an executive action
of the statutory authority but is one where the provision of the

legislation, conferring unbridled power upon the authorities without
laying down any guidelines, and, at the same time, against the
specific object of the Statute in question, has been challenged. Thus,
the plea, that the petitioners of their own have chosen their creditor
from clause (b) and now cannot repent that if he had chosen those
falling under clause (a), it would have been benefited, is not tenable
as there cannot be waiver of fundamental rights guaranteed by
Article 14 of the Constitution of India.
53.
The following observations of the Supreme Court in the case of
Basheshar Nath
v. Commissioner of Income-tax, Delhi and
Rajasthan and another reported in AIR 1959 SC 149 on the

question of waiver of Article 14 are worthy of quotation:
Such being the true intent and effect of Art. 14 the
question arises, can a breach of the obligation imposed on the
State be waived by any person? In the face of such an
unequivocal admonition administered by the Constitution,
which is the supreme law of the land, is it open to the State to
disobey the constitutional mandate merely because a person
tells the State that it may do so? If the Constitution asks the
State as to why the State did not carry out its behest, will it be
any answer for the State to make that "true, you directed me
not to deny any person equality before the law, but this person
said that I could do so, for he had no, objection to my doing
Page 71 of 75
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ORDER
it." I do not think the state will be in any better position than
the position in which Adam found himself when God asked him
as to why he had eaten the forbidden fruit and the State's
above answer will be as futile as was that of Adam who
pleaded that the woman had tempted him and so he ate the
forbidden fruit. It seems to us absolutely clear,' on the
language of Art. 14 that it is a command issued by the
Constitution to the State a matter of public policy with a view
to implement its object of ensuring the equality of status and
opportunity which every Welfare State, such as India, is by her
Constitution expected to do and no person can, by any act or
conduct, relieve the State of the solemn obligation imposed on
it by the Constitution Whatever breach of other fundamental
right a person or a citizen may or may not waive, he cannot
certainly give up or waive a breach of the fundamental right
that is indirectly conferred on him by this constitutional
mandate directed to the State.
54.
At this stage we may also aptly refer to the following
observations of the Constitution Bench of the Supreme Court in the

case of the State of Punjab and another v. Khan Chand
reported in AIR 1974 SC 543, which are relevant and quoted
below:
It would be wrong to assume that there is an element of

judicial arrogance in the act of the courts in striking down an
enactment. The Constitution has assigned to the courts the
function of determining as to whether the laws made by the
Page 72 of 75
C/SCA/14908/2013
ORDER
legislature are in conformity with the provisions of the

Constitution. In adjudicating the constitutional validity of
statutes, the courts discharge an obligation which has been
imposed upon them by the Constitution. The courts would be
shirking their responsibility if they hesitate to declare the
provisions of a statute to be unconstitutional, even though
those provisions are found to be violative of the Articles of the
Constitution. Articles 32 and 226 are an integral part of the
Constitution
and
provide
fundamental
rights
and
remedies
other
for
rights
enforcement
conferred
by
of
the
Constitution. Hesitation or refusal on the part of the courts to

declare the provisions of an enactment to be unconstitutional,
even though they are found to infringe the Constitution
because of any notion of judicial humility would in a large
number of cases have the effect of taking away or in any case
eroding the remedy provided to the aggrieved parties by the
Constitution. Abnegation in matters affecting one's own
interest may sometimes be commendable but abnegation in a
matter where power is conferred to protect the interest of
others
against
measures
which
are
violative
of
the
Constitution is fraught with serious consequences. It is as

much the duty of the courts to declare a provision of an
enactment to be unconstitutional if it contravenes any Article
of the Constitution as it is theirs to uphold its validity in case it
is found to suffer from no such infirmity.
55.
In view of the above discussions, this writ-application is partly
allowed by holding that the amended provisions of Section 2(1) (o) of

the Securitisation Act are ultra vires the Article 14 of the Constitution
and the object of the above Act itself and consequently, we restore
the provisions which existed earlier, i.e., prior to the amendment of
2004 and existed at the time of decision of the Supreme Court in the
Page 73 of 75
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ORDER
case of Mardia Chemicals (supra). We, however, uphold the

guidelines of the RBI challenged in this application.
55.1
In view of the disposal of this writ-application, the other
similar writ-applications heard along with the present one are also
disposed of in terms of this judgment. No costs.
Sd/(BHASKAR BHATTACHARYA, CJ.)
Sd/(J.B.PARDIWALA, J.)
mathew
FURTHER ORDER:After the judgment was pronounced, Mr. Shah, the learned
advocate appearing on behalf of the petitioners in some of the writapplications prays for stay of operation of this judgment.
In view of what has been stated above, we find no reason to

stay our judgment. The prayer is refused.
Mr. Shah, thereafter, prays for leave to prefer appeal before the
Supreme Court.
The said prayer is also refused.
Page 74 of 75
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ORDER
However, certified copy of this judgment be given by tomorrow,

if applied for.
Sd/(BHASKAR BHATTACHARYA, CJ.)
Sd/(J.B.PARDIWALA, J.)
mathew
Page 75 of 75

Gujarat High Court Judgement Dt. 24.04.2014

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Gujarat High Court Judgement Dt. 24.04.2014

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C/SCA/14908/2013

SPECIAL CIVIL APPLICATION NO. 8950 of 2013

SPECIAL CIVIL APPLICATION NO. 10243 of 2013

To be referred to the Reporter or not ?

Whether their Lordships wish to see the fair copy

Whether this case involves a substantial question Yes

Whether it is to be circulated to the civil judge?

Appearance for the petitioners:

All these Special Civil Applications were heard analogously as in

consequently, the actions taken by various Banks concerned under

We, however, propose to treat the Special Civil Application No.

14908 of 2012 as the lead matter.

may be summed up thus:

The petitioners are the borrowers and/or guarantors of Punjab

National Bank, which is the respondent No.2 in this writ-petition,

According to the petitioners, their account had not become NPA

although the respondent No.2-Bank had alleged in the Demand Notice

The petitioners further

The petitioners have further submitted that the amended

definition of section 2 (1) (o) of the Securitisation Act, which defines

All the respondents, including various respondent-Banks and

the Union of India have opposed this writ application by filing

Facts and the contentions in the remaining 78 writ-applications

are also more or less similar.

The Union of India has opposed these writ-applications by filing

SARFAESI Act was enacted and passed by both the Houses of

SARFAESI Act was enacted to enable the Banks and Financial

Institutions to realize long term assets, manage problems of liquidity,

The constitutional validity of SARFAESI Act was finally decided

The provisions of section 2(1) (o) of the SARFAESI Act was

amended by Act No. 30 of 2004 and the earlier provisions containing

the phrase doubtful or loss asset, in accordance with the directions

classifications issued by such authority or body;

The amendment in section 2(1)(o) of the SARFAESI Act was

made in the year 2004 to extend the classification norms of NPA

made so that the guidelines issued by the concerned regulator as

The amendment covered the entities under the SARFAESI Act

regulated by different regulators such as Reserve Bank of India,

Therefore, the amendment was

made in the Act to take care of these situations and these

The stance taken by the Reserve Bank of India may be summed

The guidelines issued by the RBI are neither discriminatory nor

arbitrary. RBI is the regulatory authority of various financial entities

payment system providers etc. While there could be some similarities

desirable to have a uniform set of norms for all financial entities on an

recommendations made in 1991 regarding income recognition, asset

days in respect of a term loan. Comparison of Gross NPAs of banks

The Working Group on the Issues and Concerns in the NBFC

Entry point norms

Concept of principal business for registration of NBFCs

Multiple NBFCs within the same business group

Disclosure norms for NBFCs

Principles for frequency and depth of supervision, and,

Examine the need for convergence of regulations of NBFCs

The focus of the Committee was on the issues related to

NBFCs. The Usha Thorat Committee, in its report, while appreciating

similar to each other, but rather as complementary entities.

participants to pursue a variety of business strategies within

capital markets, and liquidity ratio for NBFCs. In addition it was

With regard to asset classification and provisioning norms, the

Thus, the working group has actually recommended that the

asset classification norms for NBFCs be brought in line with that of

[vi]. The draft guidelines dated 12th December 2012 on Review of

3.1 At present, the period for classifying loans into NPAs in