Case BriefsHigh Courts

Madras High Court: Dr G. Jayachandran, J., refused to pass a decree in favour of the plaintiff who relied on general admission of facts made by the defendant.

In the instant matter, it was stated that the plaintiff was engaged in the business of providing and arranging finance to various borrowers and had lent a loan to the first defendant company, which is an NBFC.

On the date of filing the suit, a sum of Rs 38,16,45,711/- was due and payable to the plaintiff. While advancing the loan, the second defendant provided personal guarantees for each of the facility agreements entered by the first defendant.

The second and third defendants were jointly and severally liable to pay the suit claim.

According to the plaintiff, since 2014, the transaction between the plaintiff and the first defendant company was regular without any default till the month of September 2020.

Further, it was submitted that the misappropriation of the fund by the Management of the Company came to light, when there was a default and when the Chief Financial Officer of the first defendant issued a Circular on 07-10-2020 disclosing diversion of the fund of the first defendant company by the second defendant as a consequence, criminal proceedings had been initiated by the plaintiff and the matter had been seized by the Directorate of Enforcement Wing.

Extracting a certain portion of the pleadings in the written statement, the plaintiff sought passing of a decree and judgment upon the said statement as admission.

Bench stated that the three admissions which were relied upon by the applicant were all general admissions and did not admit the suit claim.

Further, the Court added that the admission that fraud was committed per se will not entail the plaintiff for a decree as claimed in the suit. Whatever claimed in the suit has to be proved through evidence in the manner known to law and the portions of the admission relied upon by the plaintiff/applicant is a general admission of fact regarding the liability of the first defendant company and its inability to pay his creditors. The general admissions of fact cannot be construed as an admission of suit claim to pass a judgment and decree.

In view of the above application was dismissed. [Northern Arc Capital (P) Ltd. v. Sambandh Finserve (P) Ltd., 2021 SCC OnLine Mad 2577, decided on 5-07-2021]


Advocates before the Court:

For Applicant: Mr Anirudh Krishnan

For 1st Respondent: Mr. Supriyo Ranjan Mahaptra

For 2nd respondent: Mr Prashant Rajapogal

Case BriefsHigh Courts

Karnataka High Court: Suraj Govindraj J., dismissed the writ petition on grounds of maintainability.

The facts of the case are such that the petitioner is a not for profit company registered under Section 8 of the Companies Act 2013 with the object of working in the areas of governance and in transparency. The Respondents 2 and 3 being directors of various companies were carrying on non-banking financial business without registration and hence had committed offences under Section 45 IA of the RBI Act. A private complaint was filed by the petitioner seeking direction to the RBI to initiate proceedings against respondents for offences under Section 45 IA r/w 58B (4A) of the RBI Act. The Magistrate dismissed the complaint stating that the prayer sought in the complaint is only a direction to the RBI to take cognizance and investigate and the representation submitted earlier was still pending with the Governor of the RBI for consideration whose status is unknown and hence no direction can be issued to the Governor of the RBI. Aggrieved by the said dismissal present petition was filed for setting aside the impugned order and restore the private complaint.

Counsel for the petitioners submitted that the proceedings filed before the Delhi High Court are different from the one filed before the Magistrate and the prayer sought for is also different. It was further submitted that there is no order which can operate as res judicata as the present writ petition is not one under Article 226 but is more under Article 227 of the Constitution of India seeking for supervisory jurisdiction as also one under Section 482 of CrPC to exercise inherent power to set aside the order passed by the Magistrate.

Counsel for the respondents submitted that the relief sought for in the complaint is identical to that sought for in the writ petition and as complaint itself was not maintainable therefore the present petition will not be maintainable as well. It was further submitted that PIL was filed and later withdrawn and hence once the proceeding has been filed making allegations and the same is withdrawn, the filing of the present writ petition is barred. It was also submitted that the claim of the petitioner is hit by res judicata and hence the petitioner cannot reagitate the same.

The Court relied on judgment Sarguja Transport Service v. State Transport Appellate Tribunal (1987) 1 SCC 5 and observed that the allegations made and prayer sought in private complaint or PIL is as regards the alleged violation by respondents of Section 45 IA punishable under Section 58 B (4C) of the RBI Act. Thus it cannot be disputed that the relief sought is one and the same though by legal and linguistic gymnastics they have been worded differently. It was further observed that “clever drafting and or subterfuge resorted to in such drafting would not take away the fact that the allegations made in all three proceedings are one and the same.”

 The Court held that in the present case the grievance of the petitioner being the same in all the proceedings, the actions sought also being the same i.e. for the RBI to take necessary action against the respondents hence the present writ petition is not maintainable in view of the various orders passed by the High Court and also the withdrawal made by the petitioner of the PIL.

In view of the above, the writ petition was dismissed.[India Awake for Transparency v. Azim Hasham Premji, 2021 SCC OnLine Kar 200, decided on 18-01-2020]


Arunima Bose, Editorial Assistant has put this story together.

Case BriefsHigh Courts

Orissa High Court: Biswajit Mohanty J., dismissed the petition being non-maintainable.

The facts of the case are such that the petitioner took loan from opposite party 1, a Non-Banking Financial Company i.e. NBFC recognized by Reserve Bank of India and is understood as such under the provisions of the SARFAESI Act, 2002. The petitioner is paying its EMI regularly, however, due to high-interest rate i.e. 12% on a floating basis approached the ICICI Bank Home Loan for taking over of the existing loan with the opposite parties which was later sanctioned by the ICICI Bank. However, the opposite party 2 vide an email declined the request of foreclosure of loan account on the ground that since the loan is under lock-in period, the aforesaid loan cannot be closed. Aggrieved by the same, the present writ petition has been filed for issuance of direction to the opposite parties to foreclose its loan account with the opposite party.

The present issue is regarding maintainability of the writ petition as the opposite party is a private banking company. On being queried the same, Counsel Mr Pal brought the attention of the Court towards the fact is a non-banking financial institution recognized by the Reserve Bank of India and is a financial institution as understood under the provisions of the SARFAESI Act and as such amendable to the jurisdiction of the Court.

Maintainability of the writ petition vis-a vis Opposite Party i.e. Private Banking Company

RBI ACT, 1934

A reading of Sub-Section (c), (e) & (f) of Section 45-I of the Reserve Bank of India Act, 1934 show that a nonbanking financial company/institution mainly deals with advancing of loans, acquisition of share, stock, bonds, debentures and marketable securities, letting or delivering of goods to a hirer under a hire purchase agreement, carrying on insurance business, managing & supervising of chits and collecting monies in lumpsum by way of sale of units and awarding prizes and gifts etc. All these make it clear that non-banking financial companies deal with ordinary commercial activities having no monopoly status. Therefore, such activities cannot be classified as discharging of public function/public duties/statutory duties.

SARFAESI Act, 2002

Chapter-II of the SARFAESI Act, 2002 deals with regulation of securitization and reconstruction of financial assets of banks and financial institutions. Section 12 of the Act deals with power of Reserve Bank to determine policy and issue directions which are in public interest or to regulate financial system of the country. Thus, merely because opposite party 1 is understood as financial institution under the SARFAESI Act and merely because R.B.I. also regulates its activities, it cannot be said that it is discharging public duties.

The Court further relied on judgment titled Federal Bank Ltd. v. Sagar Thomas, (2003) 10 SCC 733 and stated that

“A writ petition under Article 226 of the Constitution of India may be maintainable against (i) the State (Govt.); (ii) Authority; (iii) a statutory body; (iv) an instrumentality or agency of the State; (v) a company which is financed and owned by the State; (vi) a private body run substantially on State funding; (vii) a private body discharging public duty or positive obligation of public nature (viii) a person or a body under liability to discharge any function under any Statute, to compel it to perform such a statutory function.”

The Court further observed that banking is a kind of profession and a commercial activity and the primary motive behind it is to earn returns and profits. It works like any other private company in the banking business having no monopoly status. These companies have been voluntarily established for their own purpose and interest but their activities are kept under check so that their activities may not go way ward and harm the economy in general. Merely because the Reserve Bank of India lays the banking policy in the interest of the banking system or in the interest of monetary stability, it does not mean that private companies carrying on the business of banking, discharge any public function or public duty. Non-banking financial companies only indulge in ordinary business or commercial activities which cannot be described as akin to governmental function.

In view of the authoritative pronouncement and observations laid above, the court held that these private companies would normally not be amenable to the writ jurisdiction unless these violate statutory provisions. When there is no violation of any statutory provisions, a writ may not be issued at all.

Note: No pleadings were made to show that either the opposite party 1 is a “State” within the meaning of Article 12 of the Constitution of India or is under an obligation to discharge any statutory function.

 In view of the above, petition dismissed.[Radhakrishna v. Aditya Birla Finance Ltd., 2020 SCC OnLine Ori 189, decided on 03-04-2020]


Arunima Bose, Editorial Assistant has put this story together

Cabinet DecisionsCOVID 19Legislation Updates

Union Cabinet, has given its approval to the proposal of the Ministry of Finance to launch

a new Special Liquidity Scheme for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) to improve liquidity position of the NBFCs/HFCs.

Financial implication:

The direct financial implication for the Government is Rs. 5 crore, which may be the equity contribution to the Special Purpose Vehicle (SPV). Beyond that, there is no financial implication for the Government until the Guarantee involved is invoked. However, on invocation, the extent of Government liability would be equal to the amount of default subject to the Guarantee ceiling. The ceiling of aggregate guarantee has been set at Rs. 30,000 crore, to be extended by the amount required as per the need.

Details of the Scheme:

The Government has proposed a framework for addressing the liquidity constraints of Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) through a Special Liquidity Scheme. An SPV would be set up to manage a Stressed Asset Fund (SAF) whose special securities would be guaranteed by the Government of India and purchased by the Reserve Bank of India (RBI) only. The proceeds of sale of such securities would be used by the SPV to acquire short-term debt of NBFCs/HFCs. The Scheme will be administered by the Department of Financial Services, which will issue the detailed guidelines.

Implementation schedule:

A large public sector bank would set up an SPV to manage a stressed asset fund which would issue interest bearing special securities guaranteed by the Government of India, to be purchased by RBI only. The SPV would issue securities as per requirement subject to the total amount of securities outstanding not exceeding Rs. 30,000 crore to be extended by the amount required as per the need. The securities issued by the SPV would be purchased by RBI and proceeds thereof would be used by the SPV to acquire the debt of at least investment grade of short duration (residual maturity of upto 3 months) of eligible NBFCs / HFCs.

Impact:

Unlike the Partial Credit Guarantee Scheme which involves multiple bilateral deals between various public sector banks and NBFCs, requires NBFCs to liquidate their current asset portfolio and involves flow of funds from public sector banks, the proposed scheme would be a one-stop arrangement between the SPV and the NBFCs without having to liquidate their current asset portfolio. The scheme would also act as an enabler for the NBFC to get investment grade or better rating for bonds issued. The scheme is likely to be easier to operate and also augment the flow of funds from the non-bank sector.

Benefits:

It has been announced in the Budget Speech of 2020-21 that a mechanism would be devised to provide additional liquidity facility to NBFCs/HFCs over that provided through the PCGS. This facility would supplement the liquidity measures taken so far by the Government and RBI. The Scheme would benefit the real economy by augmenting the lending resources of NBFCs/HFCs/MFls.

Background:

It has been announced in the Budget Speech of 2020-21 that a mechanism would be devised to provide additional liquidity facility to NBFCs/HFCs over that provided through the Partial Credit Guarantee Scheme (PCGS).  There is an urgency to implement the above Budget announcement to strengthen financial stability on account of the emerging situation of Covid-19.


Cabinet

[Press Release dt. 21-05-2020]

[Source:PIB]

Op EdsOP. ED.

(Kritika Krishnamurthy, Director, Bridge Policy Think Tank and Aashrit Verma, Consultant, Bridge Policy Think Tank)

The FinTech industry has grown out of strengthening of linkages between the financial services sector and the technology sector. With a surge of accessibility due to technological support, there is a considerable leap in progress in the financial market. At the same time, India is one of the biggest potential financial services market of the world. To make the most of this large economy, financial data mining is more profitable than gold.

In November 2019, Bridge Policy Think Tank hosted a conference, ‘NBFCs and FinTechs: The road Travelled and Way Forward’. This article is an analysis basis the industry panel discussion on Potential of FinTechs as a New Age Financial Institution. On the basis of the industry deliberations and our research, we believe there are underlying aspects that have the potential to affect the future of the FinTech space and we highlight three such important issues that the market players and investors should carefully consider in this piece.

The analysis of data protection law in China, United States and Europe show that they all have different approaches. The law in Europe, namely the General Data Protection Regulations (GDPR) are a more progressive and integrative set of regulations. The United States, on the other hand, takes a more market-focus approach in their regulations which results a sector-specific regulation on data protection. Legislations such as the California Consumer Privacy Act, New York State Department of Financial Services Cyber Security Regulation and Health Insurance Portability and Accountability Actare examples of sector specific legislations. China takes a more general approach, without highlighting regulations for sectors. The Chinese data privacy regulations function in the general cybersecurity context only.

For India, there are 3 characteristics of data protection that are critical to the amalgamation of financial services and technology. They are:

Data Localization and Cross border data transfers– Data localization has been an issue of debate when it comes to the new Personal Data Protection Bill, 2019 (PDPB) in India. GDPR unlike the new bill does not impose restrictions on the cross-border data transfers but are subjected to some limitations. In the case of FinTechs, localization would hinder various global FinTech organizations to function in the country due to the hindrance of the free flow of information and also forcing such companies to incur heavy costs by setting up data centres locally. According to a 2016 study by the European Centre for International Political Economy, the EU’s GDP would gain 8 Billion Euros, which is the same amount as all EU free trade agreements, by abolishing data localization measures.[1] On the other hand, with data localization measures as strict as those proposed in India, the EU would lose over 50 Billion Euros annually or 0.5% of its entire GDP. If we assume similar effects, India could lose near $8.4 Billion (over INR 62,000 Cr) annually.[2]At the same time there is a thin line of difference between optimum data utilization and abuse of data privacy. There is a need to create a balance to allow fintechs leg space to experiment with commercially feasible business models but at the same time promote the protection of Indian financial data.

Consent – Consent remains a lawful basis to transfer personal data under the GDPR. Consent is of two types when it comes to data protection models globally. They are opt-in and opt-out. GDPR regulation, in accordance with their progressive nature, favours an opt-in model where the data of persons can be used by the controller who have opted-in for giving consent to use their data. While the other people who have not given their expressed consent are to be kept out of their systems. On the other hand, opt-out consent covers a wider range of population where the controllers or processors can use the data for specific purposes until the data subject opts out of it. India in its Bill has taken the opt-in consent approach which is capable of being withdrawn. Both the approaches should not be treated as separate but complementary to each other. Opt-in approach can be useful in processing sensitive data while for other data an opt-out approach can be taken. The opt-in process under Indian law is a laudable measure considering the Indian diaspora is not as aware as the international markets in relation to abuse of personal data.

Pseudonymization or Anonymization – The European Union favours pseudonymization over anonymization. The primary difference between them is re-identification, which is possible with pseudonymization. Anonymization process will erase the link between the data and the subject permanently and make sure that no one can be traced by their data. However, anonymization may hinder research, archiving and statistical purposes. Re-identification is important as the information regarding certain persons may be required for processing. India, on the similar lines, has supported Pseudonymization and de-identification. Encryption of data is an important aspect of data protection and the process of re-identification or decoding should be done only for necessary processes. The chances of misusing this are very high and therefore ought to be scrutinized strictly.

The Way forward

India is awaiting the new Personal Data Protection Bill, 2019 which encompasses the above-mentioned elements. It is essential to deliberate on whether the implementation of the above elements will either deter the growth of technological advancements or regulate it. With the quantum of personal information being shared online or offline, it is essential to ensure that the citizens of the country have autonomy in the digital economy while ensuring all data processors and controllers are regulated.

India needs to ensure there is a thorough impact assessment before introducing localization and pseudonymization. Several companies and institutions that are functional in India are involved in the data processing activities and the introduction of such regulations may hamper their growth and may eventually deter companies from investing in India. The recent example is that of Aadhaar- its successful introduction as a unified identification tool and then the sudden clamp down on its usage which the market is yet to get completely healed from.

At the same time, we have witnessed various data breaches including the recent breach of Facebook’s data that affected millions of Indians. The potential regulations (PDPB) hold companies accountable of such kind of data breaches and puts a higher degree of pressure to ensure such companies to develop tighter security measures. Therefore, the new regulations have the task of a fine balancing act ahead- higher accountability with commercial feasibility. A failure of the law can come in the way of the financial inclusion goals of the economy which may hamper its growth.


[1]https://ecipe.org/wp-content/uploads/2016/12/Unleashing-Internal-Data-Flows-in-the-EU.pdf

[2]https://www.atlanticcouncil.org/blogs/new-atlanticist/india-s-data-localization-efforts-could-do-more-harm-than-good/

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT): Coram of Justice Tarun Agarwala, (Presiding Officer), Justice M. T. Joshi (Judicial Member), and Dr C. K. G. Nair (Member) partly allowed an appeal filed by the appellant against an order of the Disciplinary Action Committee (DAC) of the National Stock Exchange of India Limited (NSE) whereby they rejected an application to review their earlier order dated 02-08-2018.

Through the impugned order, the appellant was fined with a monetary penalty of Rs 15 lakhs and with a suspension of trading membership of the appellant from all segments of NSE for 5 days. The NSE had conducted an inspection for the period from 1-01-2017 to 7-09-2017. They imposed a consolidated monetary penalty of Rs 50,000 for the minor violations and issued a show-cause notice asking as to why the penalty should not be imposed on them for the alleged violations. The stated violations were:-

  • Unexplained use of funds raised by pledging client securities with NBFCs and Banks to the tune of Rs 19.23 crores belonging to 515 clients.
  • Acceptance of deposits by offering fixed returns from more than 200 entities to the tune of Rs 21.56 crores and not reflecting such receipts of funds in the financial ledgers/ trial balance of the appellant.
  • Discrepancy in computation of net worth and misrepresentation of data submitted to the Exchange.

Because of the aforesaid violations, it was held that the appellant has failed to abide by the Code of Conduct for trading member prescribed under Regulation 4.5.1 and 4.5.2 of CM and F&O Segments relating to adherence to SEBI Code of Conduct and general principles of professionalism, adherence to trading principles, honesty and fairness.

Prakash Shah, Counsel for the appellant submitted that securities belonging to some clients were pledged with NBFCs, etc. because of margin shortfall from those clients. Appellant had enough liquid funds available with it to meet the full obligations. Allegation relating to accepting deposits from clients promising assured returns, too was not correct because it was short term unsecured loans taken from external sources to promote appellant’s proprietary arbitrage and ALGO trading business. Regarding the third allegation, it was submitted that a revised net worth certificate was produced which the DAC had noted in the impugned order and therefore no action should be taken. 

The counsel for the respondent, Nimay Dave, on the other hand, stated that the allegations against the appellant were serious as was clearly shown that funds to the tune of ` 19.23 crores were raised in excess of respective client’s obligation by pledging the securities belonging to those clients. More than 350 out of 515 clients did not have any obligation/ debit balance but still, their securities were pledged by the appellant. 

The Tribunal held that the magnitude of money involved was large in terms of acceptance of deposits to the tune of Rs 21.56 crores and non-settlement of funds belonging to 601 clients etc. However, since the appellant had complied with some of the directions issued by the DAC, the penalty imposed on the appellant was disproportionate with the facts and circumstances. However, the violations were not light enough to let off the appellants free as contended by them. They upheld the monetary penalty of Rs 15 lakh imposed on the appellant and modified the direction relating to suspension of the appellant from all segments of the exchange NSE for 5 days to that of a direction not to enroll or register any fresh clients for a period of one month. [KSBL Securities Ltd. v. National Stock Exchange of (India) Ltd., 2019 SCC OnLine SAT 242, decided on 26-11-2019]

Banking and Negotiable InstrumentsHigh Courts

Madras High Court: While hearing a public interest litigation seeking to raise the issue of the excessive rates of interest charged by the Non Banking Financial Companies and praying to issue directions to Reserve Bank of India to formulate policies to regulate the same, the division bench of S.K. Kaul, C.J. and V. Dhanapalan, J., held that even if RBI does not specify the rates of interest to be charged by the NBFCs still the Central Bank must keep a check on the issue as it is a violation of  the Fair Practices Code.

The petitioner appearing in person put forth that the PIL centres around the impugned communication of RBI dated 03.05.2012 whereby it stated that it cannot fix the rates of interest to be charged by the NBFCs as they are governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs, but in order to ensure transparency, the RBI can advise the NBFCs to adopt a Fair Practices Code and lay down internal principles and procedure for determination of rates of interest. The Counsel for RBI, K.R. Laxman however argued that RBI does not specify any interest rate or ceiling rate but it specifies guidelines of Fair Practices Codes and complaints are examined within its parameters.

Upon perusing the facts and arguments, the Court observed that the RBI had issued several circulars to the erring NBFCs in the past to deal with the issue hence its impugned communication of 03.05.2012 is clearly misconceived. The Court further observed that there are borrowers who are illiterate or who borrow for personal need and given the history of the country where a borrower has always been traumatized by lenders charging high interest rates, hence the government took measures to issue norms to control the situation and nationalized the banks etc. but not with the objective of creating a new a class of institutionalized money lenders. Surprised at RBI for shrugging off its responsibility in this matter, the Court quashing the impugned communication directed RBI to look into the issue in accordance to their Fair Practices Code. A.R.Jeyarhuthran v. Union of India, decided on 14.11.2014