Delhi High Court Upholds Maintainability of Writ Petition Under Article 226: “RBI’s Inaction on Regulatory Breaches by NBFC Justifies Judicial Oversight and Mandamus to Ensure Statutory Compliance”

The Delhi High Court, in a judgment delivered on February 12, 2025, dismissed an appeal challenging the maintainability of a writ petition filed under Article 226 of the Constitution. The writ petition was filed against the Reserve Bank of India (RBI) for its failure to act on regulatory violations by a Non-Banking Financial Company (NBFC), Exclusive Capital Limited (ECL). The judgment establishes that RBI’s statutory powers imply a duty to act in cases of regulatory violations and that judicial intervention is justified when such duty is not performed.

Court’s Decision

The High Court upheld the Single Judge’s decision that the writ petition was maintainable. It rejected the appellant’s arguments that the Single Judge exceeded jurisdiction and violated principles of natural justice by issuing directions to the RBI. The court emphasized that statutory powers are coupled with a duty to act, and when a public authority like RBI fails to perform its duty, a writ of mandamus can be issued to compel such action. The court also confirmed that the directions issued by the Single Judge were appropriate and necessary in light of RBI’s inaction.

Facts

1. Background of ECL:
   • Exclusive Capital Limited (ECL), an NBFC registered with RBI, was engaged in financial activities regulated under the RBI Act. It was a Non-Systemically Important Non-Deposit taking NBFC.
   • The company issued optionally convertible debentures (OCDs) worth ₹315 crores between October 2021 and March 2022.
   • These OCDs were later converted into compulsorily convertible preference shares (CCPS), a move that violated RBI regulations and disturbed the leverage ratio of the company.
2. Minority Shareholder Dispute:
   • A minority shareholder filed a petition before the National Company Law Tribunal (NCLT), alleging oppression and mismanagement by ECL’s Board of Directors.
   • The NCLT found that the conversion of OCDs into CCPS was not bona fide and amounted to oppression of minority shareholders. It appointed a retired High Court Judge as an Administrator of ECL.
3. RBI’s Supervisory Role:
   • Despite finding several regulatory breaches, including non-compliance with leverage ratios, unauthorized issuance of financial instruments, and failure to submit statutory filings, RBI did not initiate action against ECL.
   • The petitioner filed a writ petition before the High Court, seeking directions to the RBI to act under its statutory powers, including those under Sections 45IE and 45MA of the RBI Act.

Issues

1. Whether the writ petition under Article 226 against RBI for inaction was maintainable.
2. Whether the RBI’s failure to act on evident regulatory breaches constituted a dereliction of its statutory duties.
3. Whether the directions issued by the Single Judge were beyond the scope of the writ jurisdiction.

Petitioner’s Arguments

1. RBI’s Role as a Regulator:
   • The RBI has statutory powers under Chapter IIIB of the RBI Act to oversee NBFCs, including the power to supersede their boards and conduct special audits. The failure to exercise these powers in the case of ECL violated public interest and the rights of depositors.
   • The writ petition sought to compel RBI to exercise its powers, which cannot be adjudicated by tribunals like NCLT and NCLAT.
2. Judicial Oversight:
   • The RBI’s inaction, despite noting regulatory violations, warranted judicial oversight under Article 226.
   • The relief sought could not have been granted by NCLT or NCLAT, as their jurisdiction is confined to matters under the Companies Act and does not extend to RBI regulations.
3. Public Interest:
   • The petitioner argued that immediate regulatory action was necessary to protect the assets of ECL and prevent further mismanagement.

Respondent’s Arguments

1. Maintainability of Writ:
   • The respondents contended that the writ petition was not maintainable, as the issues raised were already being addressed before the NCLT and NCLAT.
   • The RBI was already investigating the affairs of ECL and would act as per the findings of its inquiry.
2. Natural Justice:
   • The appellant claimed that the Single Judge violated principles of natural justice by issuing directions on merits without granting the Board of Directors a proper opportunity to be heard.
3. Scope of Directions:
   • It was argued that the Single Judge exceeded the scope of judicial intervention by issuing directions to RBI, which were not sought in the writ petition.

Analysis of the Law

1. Writ Jurisdiction:
   • The High Court reaffirmed that a writ of mandamus can be issued to compel public authorities to perform their statutory duties. Under Article 226, courts have the authority to address instances of regulatory inaction where such failure affects public interest.
2. Statutory Duty of RBI:
   • The RBI, as the primary regulator of NBFCs, is mandated to ensure compliance with financial regulations. Its supervisory powers are not discretionary but are coupled with a duty to act to protect public interest and financial stability.
3. Jurisdictional Distinction:
   • The court distinguished the jurisdiction of NCLT and NCLAT, which are limited to company law matters, from the RBI’s role as a regulatory body. The relief sought in the writ petition—compelling RBI to act—was outside the scope of company law tribunals.
4. Precedents:
   • The court relied on judgments such as CAG v. K. S. Jagannathan and IFB Agro Industries Ltd. v. SICGIL India Ltd., which establish that public authorities are duty-bound to exercise their statutory powers in furtherance of public interest.

Precedent Analysis

The court referred to cases like Padfield v. Minister of Agriculture, highlighting that statutory powers must be exercised to promote the objectives of the statute. Failure to act frustrates the legislative intent and justifies judicial intervention.

Court’s Reasoning

1. RBI’s Failure to Act:
   • The RBI admitted in its status report that ECL breached mandatory regulations. However, it failed to take corrective measures despite clear evidence of violations.
2. Judicial Oversight:
   • The High Court emphasized that judicial intervention is warranted when public authorities fail to perform their statutory duties, especially in cases involving public interest.
3. Natural Justice:
   • The court found no merit in the appellant’s claim that the Single Judge violated principles of natural justice. The parties were given sufficient opportunity to present their arguments on both maintainability and merits.

Conclusion

The High Court upheld the Single Judge’s findings that the writ petition was maintainable and dismissed the appeal. The judgment reinforces the principle that regulatory authorities like RBI must perform their statutory duties and that courts have the jurisdiction to ensure compliance when such duties are neglected.

Implications

1. Accountability of Regulators:
   • The judgment underscores the accountability of regulatory bodies like RBI in ensuring compliance with statutory frameworks.
2. Judicial Oversight:
   • It reaffirms the judiciary’s role in addressing regulatory inaction and protecting public interest.
3. Investor Protection:
   • The decision sets a precedent for investor protection in cases of NBFC mismanagement and regulatory lapses.

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