Delhi High Court issues Notice to RBI on plea of NBFC challenging the order of cancellation of CoR

In a recent case, the Delhi High Court has issued Notice to the Union of India and Reserve Bank of India (RBI) on plea of a Non-Banking Finance Company (NBFC), challenging the order of RBI cancelling its Certificate of Registration and subsequent Appellate order passed by Appellate Authority for NBFC Registration upholding the same.

The background of the case is that the Apex Bank had vide Notification dated 27.03.2015, published in Official Gazette on 11.03.2016 prescribed that every NBFC is required to attain the minimum Net Owned fund (NOF) requirement of Rs. 1 crore as on 31.03.2016 and Rs. 2 crore as on 31.03.2017. The said Notification was issued in exercise of powers under Section 45-IA(1)(b).

The RBI passed an ex parte order cancelling CoR of the Company on the ground that the Company had failed to meet the minimum NOF of Rs. 2 crore as on 31.03.2017. The Company, aggrieved by the cyclostated and ex-parte order of the RBI, filed appeal before the Appellate Authority. The Ld. Appellate Authority vide order dated 16.09.2019 dismissed the said appeal without a speaking order.

Aggrieved by the said order and the order of Appellate Authority for NBFC Registration, the Company moved the Delhi High Court exercising Extraordinary Writ Jurisdiction under Article 226 of the Constitution.
The main plank of the challenge was that the RBI has failed to comply with the strict mandate prescribed of Section 45-IA of the RBI Act. That Section 45-IA (6) governs the powers of Bank in resorting to cancellation of CoR of an NBFC.

It was the submission of the Company that RBI has acted in contravention of Section 45-IA (6) insofar as first proviso to Section 45-IA(6) requires that before cancelling a CoR on the ground that the NBFC has failed to comply with the condition subject to which CoR was issued, the RBI shall give an opportunity to the Company for taking necessary steps to comply with fulfillment of such condition. It was the stated position that the requirement of meeting minimum NOF requirement was a condition subject to which the CoR was issued by RBI, and hence the Proviso stood attracted. In absence of providing such opportunity, the order is bad and hence liable to be quashed.

On the issue of non-attainment of the NOF requirement of Rs. 2 crore as on 31.03.2017, it was explained that the Company had investments having book value of Rs. 82.69 lakhs, with market value of Rs. 372.14 lakhs as on 31.03.2017. The said investments could be liquidated only in FY 2017-18 and the Company attained minimum NOF of Rs. 2 crore much before the issue of Show Cause Notice, i.e. on 31.03.2018.

The Hon’ble Court, on hearing held on 10.01.2020 issued Notice to Respondents. The Company was represented by Adv. Puneet Agrawal, Adv. Deepak Anand, Adv. Gaurav Gupta & Adv. Yuvraj Singh.

It is pertinent to note that the Apex Bank has resorted to cancel the CoR of as many as 1701 NBFCs in FY 2018-19 for failing to meet the minimum capital requirements.

Copy of order of Delhi High Court is provided here. The story was also published on LawSteetIndia. The attachment is provided below:

10.01.2020: Interim order

HC issues notice to RBI in writ challenging cancellation of NBFC’s registration: Published on LawStreetIndia

GST Law India is a blog on GST and allied commercial laws managed by members of the law firm ALA Legal.

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