Is RBI bound to cancel registration of NBFCs that violate terms of certificate of registration? Kerala High Court answers

A Bench of Justice N Nagaresh was hearing a petition moved against NBFC Manappuram Finance, seeking the withdrawal of its registration as an NBFC.
Is RBI bound to cancel registration of NBFCs that violate terms of certificate of registration? Kerala High Court answers
RBI

The Kerala High Court has ruled that the Reserve Bank of India (RBI) is not bound to cancel the registration granted to a Non-Banking Finance Company (NBFC) for failing to adhere to the conditions mandated by their certificate of registration (Sreekala Anil v. Secretary of Finance).

A Bench of Justice N Nagaresh held that the RBI is empowered to give opportunity to the concerned NBFC to take corrective steps to bring it in compliance with the registration conditions and no petitioner can compel the RBI to cancel the registration granted to NBFC.

The Court was hearing a petition moved by one Sreekala Anil against NBFC, Manappuram Finance, seeking the withdrawal of its registration.

The petitioner alleged that one of the NBFC's branches accepted her deposit of Rs. 65,898 and gave her a receipt in the name of a non existent entity, despite the fact that NBFCs are not allowed to accept deposits.

Upon verification of her allegations, officials of the RBI investigated and found that her allegations were true. Subsequent to the investigation, RBI’s NBFC supervisor issued a public notice stating that Manappuram Finance was not empowered to accept deposits from the public, since the same was contrary to the terms and conditions of the certificate of registration currently held by it.

The petitioner then proceeded to move a writ petition praying that the investigation into Manappuram be entrusted to a Senior Police Officer. This was allowed by the High Court.

Dissatisfied with the RBI’s response, the petitioner filed a contempt of court proceeding and a criminal complaint. While the contempt proceedings failed, the petitioner contended that the criminal case was settled on the understanding that she could pursue civil remedies.

Despite its finding that the Kodungallur branch was operating in violation of its certificate of registration, the RBI failed to take any action against the NBFC and cancel its registration, the petitioner alleged.

Referring to Section 45IA (6) of the RBI Act, her counsel asserted that the word ‘may’ appearing in the provision should be read as ‘shall’ so that any violation of the terms of the certificate of registration would necessitate the cancellation of its registration. This was necessary to protect the interest of the public, it was urged.

Section 45IA (6) states that the RBI may cancel a certificate of registration granted to a non-banking financial company under certain circumstances.

The Court refused to adopt the interpretation put forward by the petitioner. It said that the provisos to the section demonstrated that the RBI was to exercise discretion when cancelling a certificate of registration, allowing the company in question an opportunity either to be heard or to take steps to comply with such provisions or fulfil such conditions.

In the case at hand, the Court accepted the RBI’s as well as Manappuram’s contention that Manappuram had taken corrective action and complied with the RBI’s directives. Following the RBI’s public announcement, Manappuram had stopped accepting deposits from the public, it was additionally submitted.

Declaring that the writ petition had no merit, the petition was dismissed.

Senior Advocate K Ramkumar and advocates Blaze K Jose and Nivea Liz Peter Fernandez represented the petitioner while Senior Advocate Sumathy Dandapani and Millu Dandapani appeared for the RBI.

Senior Advocate S Sreekumar and advocates R Bindu, and Prasanth MP argued for Manappuram Finance and ASGI P Vijayakumar along with advocate Dinesh Cherukat acted on behalf of the Centre.

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