NBFCs cannot be regulated by state enactments, says Supreme Court

The Supreme Court Tuesday held that Non­-Banking Financial Companies (NBFCs) regulated by the Reserve Bank of India cannot be regulated by state enactments.

A bench of Justices Hemant Gupta and V Ramasubramanian said NBFCs play a very vital role in contributing to the financial health of the country whose operations are controlled by RBI.

Therefore, to say that RBI has no say in such a matter of vital interest, will strike at the very root of the statutory control vested in RBI, it said.

“It may be true that many times RBI may not be controlling the rate of interest charged by NBFCs on the loans advanced by them. It does not mean that they have no power to step in,” the bench said.

The top court was examining a question as to whether NBFCs regulated by RBI could also be regulated by State enactments such as Kerala Money Lenders Act, 1958 and Gujarat Money Lenders Act, 2011.

“Once it is found that Chapter III­B of the RBI Act provides a supervisory role for the RBI to oversee the functioning of NBFCs, from the time of their birth (by way of registration) till the time of their commercial death (by way of winding up), all activities of NBFCs automatically come under the scanner of RBI.

“As a consequence, the single aspect of taking care of the interest of the borrowers which is sought to be achieved by the State enactments gets subsumed in the provisions of Chapter III­B,” the bench said.

The top court said it was of the considered opinion that the Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regulated by RBI.

“Therefore, all the appeals filed by NBFCs against the judgment of the Kerala High Court are allowed. Likewise, the appeals filed by the State of Gujarat against the judgment of the Gujarat High Court are dismissed,” the bench said.