Supreme Court upholds Constitutional validity of definition of NPAs in SARFAESI Act

Murali Krishnan

The Supreme Court today upheld the Constitutional validity of Section 2(1)(o) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) which defines “Non-performing Assets”.

The judgment was delivered by a Division Bench of Justice Jasti Chelameswar and Justice SA Bobde in a batch of petitions filed by various companies. The companies had challenged the Constitutionality of Section 2 (1) (o) of the SARFAESI Act on that ground that it was violative of Article 14 of the Constitution.

The judgment puts to rest the confusion that prevailed as a result of conflicting interpretations by different High Courts. The Madras and Delhi High Courts had upheld the legality of the impugned provisions while the Gujarat High Court had partly allowed the challenge.

As per the definition of NPAs under Section 2 (1)(o) of the SARFAESI Act, the power to categorise an asset as an NPA is vested with different authorities. In case of a bank or financial institution which is administered or regulated by any statutory body, the power vests with that statutory body while with respect to any other banks or financial institution, such power is with the Reserve Bank of India (RBI). This differential treatment, the petitioners had contended, was violative of Right to Equality under Article 14 of the Constitution.

The Court, however, held that,

“To make any attempt to define the expression ‘non-performing asset’ valid for the millions of cases of loan transactions of various categories of loans and advances, lent or made by different categories of CREDITORS for all time to come would not only be an impracticable task but could also simply paralyse the entire banking system thereby producing results which are counter productive to the object and the purpose sought to be achieved by the Act. Realising the same, the Parliament left it to the Reserve Bank of India and other REGULATORS to prescribe guidelines from time to time in this regard.”

The Court, further, held that laying down of norms regarding classification of an account as NPA is not essentially a legislative function as it requires expertise in public finance and banking and may require periodic revision and a constant monitoring of financial system.

“We are of the firm opinion that it is not necessary that legislature should define every expression it employs in a statute. If such a process is insisted upon, legislative activity and consequentially governance comes to a standstill. …. Therefore, in our opinion, the function of prescribing the norms for classifying a borrower’s account as a NPA is not an essential legislative function. The laying down of such norms requires a constant and close monitoring of the financial system demanding considerable amount of expertise in the areas of public finance, banking etc., and the norms may require a periodic revision. All that activity involves too much of detail and promptitude of action.”

The Court, therefore, held that leaving an expert body to define an expression like NPA will not amount to delegation of legislative powers.

“If the Parliament chose to define a particular expression by providing that the expression shall have the same meaning as is assigned to such an expression by a body which is an expert in the field covered by the statute and more familiar with the subject matter of the legislation, in our opinion, the same does not amount to any delegation of the legislative powers. Parliament is only stipulating that the expression “NPA” must be understood by all the CREDITORS in the same sense in which such expression is understood by the expert body i.e., the RBI or other REGULATORS which are in turn subject to the supervision of the RBI. Therefore, the submission that the amendment of the definition of the expression ‘non-performing asset’ under Section 2(1) (o) is bad on account of excessive delegation of essential legislative function, in our view, is untenable and is required to be rejected.”

Regarding the submission that different regulators prescribing different norms for identification of NPA is violative of Article 14, the Court held the following:

“Coming to the submission that by authorizing different REGULATORS to prescribe different norms for the identification of a NPA with reference to different CREDITORS amount to unreasonable classification is also required to be rejected for the reason that all the CREDITORS do not form a uniform/homogenous class….Therefore, to say that enabling them to follow different norms would be violative of Article 14, in our view, would be wholly untenable.”

Senior lawyers, including Soli Sorabjee, Amit Sibal, V Giri, Vivek Tankha and Siddharth Luthra appeared for different parties. Additional Solicitor General Tushar Mehta and Senior advocate BB Sawhney represented the Central government.

Read the full judgment below.

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