Court’s Decision
The Delhi High Court quashed the 02.08.2018 order of the Reserve Bank of India (RBI), which canceled the Certificate of Registration (CoR) of the petitioner, an NBFC, for failing to meet the Net Owned Funds (NOF) requirement of ₹200 lacs. The court also set aside the 19.05.2023 appellate order that upheld the cancellation.
The matter was remitted back to the RBI for fresh consideration with the following directions:
- RBI shall reexamine the matter based on the material submitted by the petitioner before the court.
- The petitioner is granted two weeks to submit any additional documents to justify its compliance with NOF requirements.
- RBI must decide afresh in accordance with applicable laws and regulations, without being influenced by the earlier stand taken.
- All rights and contentions of both parties are left open for further consideration.
Facts of the Case
The case revolves around the RBI’s power to regulate and cancel registrations of Non-Banking Financial Companies (NBFCs) under Section 45-IA(6) of the RBI Act, 1934. The section mandates that an NBFC must maintain a minimum Net Owned Fund (NOF) of ₹200 lacs.
- RBI’s Notice and Action:
- The RBI issued a Show Cause Notice to the petitioner on 02.05.2018 for failing to maintain the minimum NOF.
- The petitioner submitted its reply on 18.05.2018.
- Despite the reply, RBI canceled the CoR on 02.08.2018, citing non-compliance with NOF requirements.
- Petitioner’s Stand:
- The petitioner claimed it achieved the required NOF on 17.07.2018 (before the cancellation date) and relied on a certificate issued by its Chartered Accountant, Manoj Singhal and Associates.
- The certificate confirmed that the petitioner’s Net Owned Funds stood at ₹2,23,33,360.03 as of 17.07.2018.
- Precedent Cited:
- The petitioner relied on a similar case, RBG Leasing and Credit Limited v. Reserve Bank of India, where the court had quashed RBI’s cancellation order since the petitioner achieved NOF compliance prior to the cancellation.
- Legal Challenge:
- The petitioner approached the Delhi High Court, arguing that RBI failed to consider its evidence showing compliance before the cancellation date.
Issues Before the Court
- Was RBI’s cancellation of the petitioner’s registration justified when the petitioner achieved compliance with NOF before the cancellation date?
- Should RBI reconsider the cancellation order in light of the material evidence provided by the petitioner?
Petitioner’s Arguments
- The petitioner submitted that it had achieved the ₹200 lacs NOF requirement before the RBI passed the cancellation order on 02.08.2018.
- The certificate issued by its Chartered Accountant on 17.07.2018 provided conclusive evidence of compliance.
- RBI’s failure to consider this material evidence rendered the cancellation arbitrary.
- The petitioner relied on the judgment in RBG Leasing and Credit Limited v. Reserve Bank of India, which set aside RBI’s order in similar circumstances.
Respondent’s Arguments (RBI)
- RBI did not dispute the factual position that the petitioner’s case was similar to the precedent set in RBG Leasing and Credit Limited.
Analysis of the Law
Under Section 45-IA(6) of the RBI Act, 1934, RBI has the authority to cancel the registration of an NBFC for failure to meet NOF requirements. However, such cancellation must be:
- Based on fair consideration of all facts and materials submitted by the affected NBFC.
- Preceded by the opportunity to respond to show cause notices.
The court noted that while RBI has regulatory powers, these must be exercised fairly and in compliance with the principles of natural justice.
Precedent Analysis
The court relied on the case of RBG Leasing and Credit Limited v. Reserve Bank of India, where:
- The petitioner’s registration was canceled despite achieving the NOF requirement before the cancellation date.
- The court set aside RBI’s order and directed reconsideration based on the petitioner’s compliance evidence.
The Delhi High Court found the present case to be squarely covered by the RBG Leasing judgment.
Court’s Reasoning
- The petitioner provided credible evidence of achieving the NOF requirement prior to the cancellation of registration.
- RBI failed to consider this material evidence before passing the cancellation order.
- The principle of natural justice mandates that material evidence submitted by the petitioner must be taken into account.
- Since the facts mirrored the RBG Leasing case, RBI’s action could not stand without a fresh review.
Conclusion
The court quashed the following orders:
- RBI’s cancellation order dated 02.08.2018.
- The Appellate Authority’s order dated 19.05.2023.
The matter was remanded to RBI for fresh consideration with directions to:
- Reexamine the petitioner’s compliance with NOF requirements.
- Consider any additional material submitted by the petitioner within two weeks.
The court clarified that RBI must decide the matter afresh in accordance with law, without being influenced by its previous stand. All rights and contentions of both parties remain open.
Implications
This judgment underscores the importance of:
- Fair consideration of evidence in regulatory proceedings.
- Adherence to principles of natural justice by authorities such as RBI.
- Providing NBFCs a reasonable opportunity to justify compliance before adverse orders are passed.