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Sajjan Bank (Private) Ltd., Alandur Vs. Reserve Bank of India, Madras - Court Judgment

LegalCrystal Citation
CourtChennai High Court
Decided On
Case NumberWrit Petn. No. 373 of 1957
Reported inAIR1961Mad8; [1960]30CompCas146(Mad)
ActsConstitution of India - Articles 19(1), 19(6), 226 and 245; Banking Companies Act, 1949 - Sections 20, 22, 22(1), 35 and 35(4)
AppellantSajjan Bank (Private) Ltd., Alandur
RespondentReserve Bank of India, Madras
Appellant AdvocateK. Rajah Iyer, ;S. Mohan Kumaramangalam and ;K.V. Sankaran, Advs.
Respondent AdvocateAdv. General, i/b., King and Partridge
DispositionPetition dismissed
Cases ReferredNand Ram Agarwala v. H. C. Bhari
company - business - articles 19 (1), 19 (6), 226 and 245 of constitution of india and sections 20, 22, 22 (1), 35 and 35 (2) of banking companies act, 1949 - petition filed to quash order of respondent refusing to grant licence to carry on business as banking company - power given to reserve bank regulated by statute and being entrusted to statutory body which is itself regulating credit of country - exercise of power after investigation prescribed by statute invests it with quasi-judicial character and such power cannot be arbitrary one - refusal of licence under section 22 does not mean stoppage of business - refusal of license only entail loss of particular business - it is perfectly open to petitioner to carry on business as money lenders - it cannot have transactions under which.....orderramachandra iyer, j.1. this is a petition under article 226 of the constitution for the issue of a writ of certiorari calling for the records connected with the notice dated 18-3-1957, issued by the reserve bank of india, madras, in dbo (m) no: l. i. 485/ns-s. 2(l)-57, and quashing the same.2. the sajjan bank (private) ltd, which is carrying on business at alandur, originated from sajjan and co. ltd, which was incorporated in november 1944 with the main object of carrying on money-lending business. in may 1946, the company was converted into a banking company and in november of that year its name was changed into sajjan bank (private). ltd. all its shares are held by its three directors who are said to be closely related. the banking companies act, 1949, referred to hereafter as the.....

Ramachandra Iyer, J.

1. This is a petition under Article 226 of the Constitution for the issue of a writ of certiorari calling for the records connected with the notice dated 18-3-1957, issued by the Reserve Bank of India, Madras, in DBO (M) No: L. I. 485/Ns-S. 2(L)-57, and quashing the same.

2. The Sajjan Bank (Private) Ltd, which is carrying on business at Alandur, originated from Sajjan and Co. Ltd, which was incorporated in November 1944 with the main object of carrying on money-lending business. In May 1946, the company was converted into a banking company and in November of that year its name was changed into Sajjan Bank (Private). Ltd. All its shares are held by its three directors who are said to be closely related. The Banking Companies Act, 1949, referred to hereafter as the Act, came into force on 16-3-1949.

Section 22 of the Act provided amongst other things that every banking company in existence at the commencement of this Act should before the expiry of six months from such commencement and, every other company before commencing banking business in India, apply in writing to the Reserve Bank for a licence under the section to carry on banking business. The section further provided that the Banking Companies in existence at the commencement of the Act could continue to carry on their banking business till final orders were passed on their applications for licence.

3. On 14-9-1949, the petitioner bank applied under Section 22 of the Act, to the respondent for a licence to carry on banking business. The Officers of the Reserve Bank inspected the petitioner bank under Section 22 of the Act in July 1952. A report of that inspection was prepared on 11-10-1952. The inspection appears to have revealed the existence of certain defects in the working of the bank. The Reserve Bank therefore decided to keep in abeyance the consideration of the question of issuing a licence evidently with a view to watch the progress of the bank in eradicating the defects pointed out by the inspection report.

The detects noticed were the subject matter of subsequent correspondence between the petitioner and the Reserve Bank. A fresh inspection of the petitioner Bunk was carried out in September 1956 under Section 35 of the Act. That also revealed certain defects. The respondent was evidently not satisfied that the at fairs of the petitioner Bank were being conducted in the interests of the depositors. The question of the grant of licence was taken up. The petitioner was directed to show cause against the refusal of the licence. The bank was also furnished with a copy of the inspection report.

Alter considering the representation of the petitioner the respondent by its letter dated 18-3-1957, declined to grant the licence to the petitioner to carry on banking business in the terms of the first proviso to Sub-section (2) of Section 22 of the Act. Aggrieved by that the petitioner has moved this court for the issue of a writ of certiorari to quash the Order of the respondent refusing to grant a licence to Carry on business as a banking company.

4. The petition is contested by the respondent, the Reserve Bank of India.

5. Mr. Rajah Iyer, the learned advocate for the petitioner, raised before me three contentions: (1) That Section 22 of the Banking Companies Act was unconstitutional in so tar as it proceeded to restrict the fundamental right of the petitioner to carry on its business, namely, the banking business; (2) even if the provisions of Section 22 of the Act be held to be in accordance with the Constitution, the action of the respondent was arbitrary; (3) In any event the procedure adopted by the respondent was illegal and in that after an inspection under Section 35, it could only proceed to act under Section 35(4) and not refuse the licence altogether.

6. Before considering the various contentions urged on behalf of the petitioner, it is necessary to refer briefly to the position of the Reserve Bank of India and also to certain provisions of the Banking Companies Act of 1949.

7. The Reserve Bank of India came into existence on 1-4-1935. It is a central bank' combining in its functions the regulation of both the credit and the currency of the country. Prior to its formation the responsibility for the currency was vested in the Central Government. The banking functions were performed by the Imperial Bank of India. This dichotomy between currency and credit was found to be a weakness in the Indian monetary system by the Royal Commission of Indian Currency and Finance in 1926. The Commission recommended the establishment of a Central Bank by charier on certain lines which experience had proved to be sound.

It is said that the structure of the Bank was modelled very largely on the Bank of England.

It is a non-political statutory body, the general superintendence and management of the bank's affairs being vested in the Central Board of Directors. For each, of the four regional areas, Bombay, Calcutta, 'Madras and New Delhi, there is a local Board functioning. The functions of the local Boards are to advise the Central Board on such matters as may be referred to them or perform such duties as the Central Board may validly delegate to them. The preamble to the Reserve Bank Act states that the bank was constituted to regulate the issue of bank notes; to keep up reserves with a view to secure monetary stability in India and generally to operate currency and credit system of the country to its ad-Vantage.

The main function, therefore, of the Reserve Bank is to regulate the monetary system of the country so as to ensure the maintenance of economic stability and assist in its growth. The Bank has got the sole right to issue currency notes and it also acts as the Banker to the Government. It also acts as a banker to the various commercial Banks and other financial institutions and it has got various rights and duties prescribed in Chapter II of the Reserve Bank Act. For the performance of its duties in regard to the regulation of the credit of the country, the Reserve Bank is invested with powers of control of the bank rate, open market transactions etc.

The Reserve Bank's responsibilities include the development of an adequate and sound banking system not only for trade and commerce but also for the agricultural industry. The Reserve Bank is, therefore, occupying a position of considerable importance in the economic development of the country and its monetary system.

8. Originally joint stock banks were governed in respect of their incorporation, organisation and management by the Indian Companies Act of 1913, which was common to banking as well as non-banking companies. In 1936, certain new provisions were introduced in the Indian Companies Act of 1913, in regard to the banking companies. In 1949, the Banking Companies Act was passed to consolidate I and amend the law relating to the Banking Companies. The necessity for the legislation was for safeguarding the interests of the depositors, shareholders and of the economic interests of the country in particular. Under Section 5(b) of the Act, the term 'banking' has been defined as

'accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise'.

This definition follows the accepted legal concept of the word 'banking'. In Hart on the Law of Banking, a banker or a bank has been defined as

'a person or company carrying on business of receiving moneys and collecting drafts for customers subject to the obligation of honouring cheques drawn upon them from time to time by the customers to the extent of the amounts available' on their current accounts'.

The essence of a banking business is, therefore, receiving money on current account for deposit from the public repayable on demand and withdrawableby cheque, draft or otherwise.

9. An ordinary money lender who does not accept moneys on terms enabling a depositor to draw cheques upon him would not, therefore, be a bank or banker properly so called. The provisions of the Act would, therefore, apply only to the limited class of cases where the bank or banker allows the withdrawal of money by the issue of cheques. A banking company has been defined to be a company which transacts the business of banking in India. Section 6 provides that in addition to banking business a banking company may engage themselves in various allied businesses which are more 'or less incidental to or essential for the carrying on of the banking business.

Section 13 prescribes the minimum standards as to paid up capital and aggregate reserves. Sections 12 and 12(a) prevent the control of companies by a few persons to the detriment of a majority of shareholders and permits the Reserve Bank of India to require a banking company to call for a general meeting of the shareholders of the company, to elect fresh directors in accordance with the voting rights. Section 14 prohibits the creation of charges on unpaid capital. Sections 17 and 18 provide for minimum reserve funds and cash reserve. Section 20 prohibits loans on security of the company's shares and unsecured loans to its directors to firms or private companies in which they are interested. Section 21 gives power to the Reserve Bank of India to control its advances. Section 22 prescribes a system of licencing of banks, the power of licensing being vested in the Reserve Bank of India. I shall advert to that section in greater detail presently.

Section 23 places restrictions on the opening of new places of business or change of existing place of business. Sections 24 and 25 require the maintenance of sufficient liquid assets. Section 26 obliges a bank to report to the Reserve Bank every year about unclaimed deposits. Sections 27 and 28 invest a power in the Reserve Bank to call for information and to publish them if it so decides. Sections 35 and 36 confer power in the Reserve Bank of India to call for periodical returns and inspection of books of accounts and empowers the Central Government to take action against banks conducting business in a manner detrimental to the interests of the depositors. Section 35-A gives powers to the Reserve Bank of India to give directions to the banking companies to general, or to any banking company in particular, in the national interest or to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company or to secure proper management thereof.

There are also other provisions relating to the management, restriction on the holding of shares and In regard to the winding up of banking companies. Thus the legislation is a comprehensive measure, covering the establishment, the working and the liquidation of the banks. The Reserve Bank of India is substantially invested with the power of regulation of the banking companies. In this country there are various types of banks ranging from the village money lender to a big commercial bank.

It was found necessary in the interests of the public that there should be a regulation of the banking system. The Indian Central Banking Enquiry Committee which had submitted its report in 1931 had felt the need for the Special Bank Act. At page 456 of the Report of the Indian Central Banking Enquiry Committee, Part I, it is observed:

'We, however, recommend that any bank, Indian or non-Indian, wishing to do banking business in India should be required to take out a licence from the Reserve Bank when it is established. This is partly, necessary in the interests of depositors and partly for giving the Reserve Bank some control over the banks operating in the country. Licences should be freely granted to the already established banks and it would be the business of the licensing authority to see that the provisions of the law and any other conditions specified in the licences are complied with ..... Having regard to the present stage of literacy of the people, we consider it essential that a bank should be organised on certain recognised principles of banking and that no institution calling itself a bank should start operations without obtaining a licence from the Reserve Bank. As pointed out by us in Chapter XIX, even the foreign banking experts, who are generally not in favour of introduction of a licensing system recognise that the Reserve Bank may be trusted to act in this respect in a sound and impartial way'.

Section 22 introduces a complete system of licensing of banks by the Reserve Bank. Shortly stated the grant of a licence in the case of banks incorporated in India is dependent upon the maintenance of a satisfactory financial condition. In the case of foreign banks there is a further condition imposed that the country of their origin could not discriminate in any way against the banks registered in India. Section 22 of the Banking Companies Act runs thus:

'(1) Save as hereinafter provided no company shall carry on banking business in India, unless it holds a licence granted by the Reserve Bank in such behalf;

(2) Every banking company in existence on the commencement of this Act, before the expiry of six months from such commencement and every other company before commencing banking business in India, shall apply in writing to the Reserve Bank for a licence under this section;

Provided that in the case of a banking company in existence on the commencement of this Act, nothing in Sub-section (1) shall be deemed to prohibit the company from carrying on banking business until it is granted, a licence in pursuance of Sub-section (2). or is by notice in writing informed by the Reserve Bank that a licence cannot be granted to it; Provided further that the Reserve Bank shall not give a notice as aforesaid to a banking company in existence on the commencement of his Act before the expiry of the three years referred to in Sub-section (1) of Section 11 or of such further period as the Reserve Bank may under that sub-section think fit to allow.

(3) Before granting any licence under this section, the Reserve Bank may require to be satisfied by an inspection of the books of the company or other wise that all or any of the following conditions are fulfilled, namely:

(a) that the company is in a position to pay its depositors in full as their claims accrue;

(b) that the affairs of the company are not being conducted to the detriment of the interests of its depositors;

(c) in the case of a company incorporated outside India that the Government or law of the country in which it is incorporated does not discriminate in any way against banking companies registered in India, and that the company complies with all the provisions of this Act, applicable to banking companies incorporated outside India.

(4) The Reserve Bank may -- (a) cancel any licence granted under this section where any of the conditions set out in Sub-section (3), or the fulfilment of which it requires to be satisfied when granting the licence, cease to be fulfilled or if the company ceases to carry on banking business in India or goes into liquidation;

(b) at any time after granting a licence under this section require that any of the said conditions, on the fulfilment of which it did not require to be satisfied when granting the licence, shall be fulfilled to its satisfaction within such time as it may specify, and if the condition is not so fulfilled, cancel the licence.

(5) Any banking company aggrieved by the cancellation of its licence under Sub-section (4) may appeal to the Central Government, and the decision of the Central Government on such appeal shall be final'.

Sub-sections (1) and (2) provide for the necessity of obtaining a licence by a banking company and the time at which the licence is to be applied. The proviso to Sub-section (2) authorises an existing banking company to continue to function until it is granted a licence or refused a licence. The conditions for granting the licence by the Reserve Bank are set out in Sub-section (3). The section also provides for the cancellation by the Reserve Bank of a licence granted by it. In that case the concerned bank is given a right of appeal. Similar enactments exist in the laws of certain foreign countries like America.

10. Mr. Rajah Aiyar contends that the provisions of Section 22(1) are unconstitutional as being in restraint of trade or business as in effect an arbitrary power is vested in the Reserve Bank of India to grant or refuse a licence, which according to him is really a permit for the doing of the business to be granted by the body. He, therefore, contended that the provisions of Section 22(1) of the Act are unconstitutional and invalid. In support of that contention he relied upon the principle stated in Namazi v. Dy. Custodian of Evacuee Property, Madras, : AIR1951Mad930 . That was a case where a disposition of property by an intending evacuee was made subject to a permission by the Custodian of Evacuee Property. No rules were framed under the Act for his guidance. The nature of the enactment was that the custodian who was a mere officer of the Government could arbitrarily refuse to approve of a transfer by an intending evacuee. My Lord, the Chief Justice, observed at page 9 (of Mad LJ): (at p. 935 of AIR),

'It may be said that the Custodian would not ordinarily refuse to approve any transfer unless for proper grounds. But surely that would be gambling on the reasonableness of the Custodian. As thesection stands, there is nothing to prevent the Custo-dian from most unreasonably refusing to approve of any transfer by an intending evacuee'.

In Balakrishnan v. State of Madras, : AIR1952Mad565 , this point was further adverted to and it was observed that it was dangerous that rights of persons should depend upon any personal quality of a particular officer but a licence is not necessarily a permit. A licence is intended to regulate a business while a permit would be one without which a business can never be started so that a permit may amount to a prohibition of the business in regard to persons who are unable to obtain the same. The distinction between a permit and licence has been considered by this court in C. S. S. Motor Service Tenkasi v. Madras State, AIR 1955 Mad 279.

It was held that while a permit system would be unconstitutional in so far as it related to the exercise of fundamental rights, it was well settled that a system of licensing, which bad for its object the regulation of trades, would not be repugnant to Article 19(1)(g) of the Constitution. That decision is also valuable for ascertaining whether in a particular case what was intended was only a licence for the regulation of trade or a permit as a condition precedent to the exercise of a business by an arbitrary power in the authority to grant or refuse a licence. The existence of rules for the guidance of the authority, the insistence of reasons for the refusal of a licence, provision for a right of appeal, the nature of the enquiry before the refusal of a licence being judicial in an enquiry were held to constitute that what was prescribed by a statute was only a regulation of trade by the issue of licence and not the insistence of a permit.

The question then is whether the provisions of Section 22(1) of the Banking Companies Act which require a licence for carrying on business by a banking company should be held a system of enabling the doing of such a business by the issue of permits or whether only a licence intended to regulate the, business of banking. There is no doubt that the Banking Companies Act was passed in the interests of the public after detailed enquiry by a Committee and after consideration of its reports. As I pointed out already the Committee itself recommended a system of licensing of all banking companies. Even the foreign banking experts were not averse to the proposal. The licensing itself is vested in a statutory authority which is itself a Central Banking institution concerned both with the currency and credit operations in the country.

The Reserve Bank of India was established with a view to fostering the banking business and not for impeding the growth of such business. The powers vested in it under Section 22 are not one invested with a mere officer of the Bank. The standards for the exercise of the power have been laid down in Section 22 itself. The Reserve Bank is a non-political body concerned with the finances of the country. When a power is given to such a body under a statute which prescribes the regulations of a Banking Company, it can be assumed that such power would be exercised so that genuine: banking concerns could be allowed to function as a bank, while institutions masquerading as banks or those run on unsound lines or which would affect the interests of the public could be weeded out.

The power given is regulated by the statute and being entrusted to a statutory body which is itself regulating the credit of the country the nature of the power, its exercise after the investigation prescribed by the statute invests it with a quasi-judicial character such a power cannot be said to be an arbitrary one. It is a mere licence granted as a matter of course to all genuine banking institutions run on sound lines as the judicial character of power would indicate. It cannot be held to be a permit.

11. Mr. Rajah Aiyar next contended that while under Article 19(6) there may be a right to impose reasonable restrictions in the exercise of the fundamental rights of a citizen by the legislature such restrictions could not be imposed by a subordinate authority like the Reserve Bank of India. His contention is that in the instant case the provisions of Section 22(1) amount to an excessive delegation of legislative powers.

12. The law in regard to the delegation of legislative powers has now been well settled by the various decisions of the Supreme Court. In re: Article 143, Constitution of India and Delhi Laws Act; : [1951]2SCR747 , the limits of delegation of legislative powers have been discussed in detail. Das J. as he then was pointed out citing Cincinnati W. and Z. R. Co. v. Clinton Country Commissioners, 1 Ohio St. 88,

'The true distinction is between the delegation of power to make the law which necessarily involves a discretion as to what it shall be and conferring authority or discretion as to its, execution, to be exercised under and in pursuance of the law; The first cannot be done; to the: latter no valid objection can be made'.

In the present case, I have already pointed out that the Banking law has been comprehensively laid down in the Indian Banking Companies Act, 1949. The question then is only to administer the law. A power to carry out its provisions would be necessary having regard to the technical nature of the subject, and necessity for investigation of details in individual cases. Such a power is given to the Reserve Bank of India under Section 22. There could therefore be no valid objections to the grant of the power.

13. In Harishankar Bagla v. State of Madhya Pradesh. : 1954CriLJ1322 , Mahajan C. J. observed at page, 388 (of SCR); (at p. 468 of AIR) thus:

'In other words, the legislature cannot delegate its functions of laying down legislative policy in respect of a measure and its formulations as a rule of conduct The legislature must declare the policy of the law and the legal principles which are to control any given cases and must provide a standard to guide the officials or the body in power to execute the law. The essential legislative function consists in the determination of choice of the legislative policy and of formally enacting that policy into a binding rule of conduct. In the present case the legislature has laid down such a principle and that principle is the maintenance or increase in supply of essential commodities and of securing equitable distribution and availability at fair prices.

The principle is clear and offers sufficient guidance to the Central Government in exercising, its powers under Section 3 . . . As already pointed out the preamble and the body of the sections sufficiently formulate the legislative policy and the ambit and character of the Act is such that the details of that policy can only be worked out by delegating them to a subordinate authority within the framework of that policy'.

To a similar effect is the decision of the Supreme Court in Bhatnagars and Co. 'Ltd. v. Union of India, : 1983ECR1607D(SC) . In Niemla Textile Finishing-Mills v. 2nd Punjab Tribunal, 1957 S.C.J. 275: ((S) AIR 1957 S.C. 329) while considering the provisions of Section 10 of the Industrial Disputes Act, which enabled the Government as and when occasion arose to refer industrial disputes arising between the employers and workmen to one or other authorities according to the exigencies of the case, the Supreme Court held thus:

'No two cases are alike in nature and the industrial disputes which arise or are apprehended to arise in particular establishments or undertakings require to be treated having regard to the situation prevailing in the same. There cannot be any classification and the reference to one or the other of the authorities has necessarily got to be determined in the exercise of its best discretion by the appropriate Government. - Such discretion is not an unfettered or an uncontrolled discretion nor an unguided one because the criteria for the exercise of Such discretion are to be found within the terms of the Act itself. The various authorities are to be set up with particular ends in View and it is the achievement of the particular ends that guides the discretion of the appropriate Government in the matter of setting up one or the other of them.

The purpose sought to be achieved by the Act has been well defined in the preamble to the Act. The scope of industrial disputes is defined in Section 2(k) of the Act and there are also provisions contained in the other sections of the Act which relate to strikes and lockouts lay off and retrenchment etc.. Following the observations of the Supreme Court, I am of the opinion that in the present case there is sufficient legislative guidance for the granting of licence embodied in the provisions of the Act and of Section 22 in particular and the delegation of the power having been made to a non-political body who is statutorily vested with the credit structure of the country, it could not but he held that the restriction imposed in the regulation of the banking business is anything but reasonable.

14. It must also be noticed that the refusal of the licence under Section 22 of the Act does not mean a stoppage of business. I have already referred to the facts that the essence of banking is the opening of current account and the enabling of the constituent to draw by cheques. It follows that the refusal of a licence would only entail a loss of that type of business, and it would be perfectly open to the petitioner to carry on business as money lenders the only disability or restriction being that it cannot have transactions under which the constituents could draw cheque on him.

15. In Yakus v. United States. (1943). 88 Law Ed 834, it was held that the essentials of legislative functions were the determination of the legislativepolicy and its formulation and promulgation as a defined and binding rule of conduct, and these essentials would be preserved when the Congress has specified the basic conditions of fact upon whose existence or occurrence, ascertained from relevant data by a designated administrative agency, it directs that its statutory command shall be effective. At page 848 it is stated,

'It is no objection to a statute that the determination of facts, and of the inferences to be drawn fromthem, in the light of the statutory standards and declaration of policy, call for the, exercise of judgmentand for the formulation of subsidiary administrativepolicy within the prescribed statutory framework.Nor does the doctrine of separation of powers denythe Congress the power to direct that an administrative officer properly designated for that purposeshall have ample latitude within which he has to ascertain conditions which Congress has made pre-requisite to the operation of its legislative command.Since the only concern of the courts is to ascertainwhether the will of Congress has been obeyed andthis depends not upon the breadth of the definitionof the facts or conditions which the administrativeofficer is to find but upon the determination whether the definition sufficiently marks the field within which he is to act, so that it may be known whether he has kept within if in compliance with thelegislative will'.

16. The power that is given to the Reserve Bank under the Act is a wide range of administrative discretion which it is peculiarly competent to under-take, and the determination whether the conditions which are required before the licence could be given or refused exist, would be peculiarly within its competence as an expert statutory body, and the legislature having prescribed the nature of a real banking institution in this country, it could not be said that there has been any excessive delegation of power. As pointed out in Nand Ram Agarwala v. H. C. Bhari, : [1955]28ITR941(SC) a discretionary power is riot necessarily the discriminatory power and abuse of power should not be easily assumed where discretion is vested in a public authority, and not in a minor official.

In such cases the delegation as such could hot be held to be invalid, though in individual cases, if such a body exceeds its jurisdiction or abuses its power it would be open to an aggrieved party to apply to the superior court for the issue of a writ under Article 226 of the Constitution.

17. This leads us to the next question, namely, whether the power in this case has been arbitrarily exercised by the respondent, as is complained by the petitioner. There is no complaint in this case that sufficient opportunity was not given. But what is contended on behalf of the petitioner is that further opportunities should have been given to rectify the errors rather than refuse the licence. It is also contended that the petitioner had complied with all the directions which the respondent gave from time to time and that there was really no default on its part. Mr. Rajah Iyer also contended that while the respondent was giving directions and the petitioner was complying with the same as and when given, the former had made up its mind not to issue the licence and that it did not bring to bear on the decision of the question of a judicial attitude.

The first inspection by the respondent of the petitioner was in 1952 under the provisions of Section 22. That revealed that the petitioner bank was not conducted on sound banking lines. The report dated 11-10-1952 pointed out fundamental errors in the accounts as also non-compliance with the provisions of the Act. The Reserve Bank very properly kept in abeyance the decision of the question of the grant of licence. But the Bank being one that came into existence before the Act, it could continue its banking business till the licence was granted or refused. It was, therefore, necessary that some kind of control should be exercised over the bank pending decision on the issue of the licence. They, therefore, proceeded to give periodical instructions in regard to the conduct of the bank. I have said that the first inspection revealed defects in the method of keeping accounts and contravention of certain provisions of the Act.

Correspondence that ensued was in regard to both the matters. It was not till 1955 that the defects pointed out were sought to be explained away or remedied. This, therefore, entailed a further inspection, undertaken by the Reserve Bank under Section 35 of the Banking Companies Act. A report was duly submitted to the local board of the Bank, who were satisfied that the proposal to refuse the licence was proper in the circumstances. As pointed out in the report of the Reserve Bank on more than one occasion, the bank was not able to effectuate any material improvement in the pattern of its working. It was not able to attract sufficient deposits from the public. As a private limited company to start with it was converted into a banking company evidently to circumvent the provisions of the Madras Pawn Brokers Act of 1943.

The paid up capital was only Rs. 50,000. Its reserves, were found to be poor and the establishment charges had absorbed more than 50 per cent of the gross income. The Reserve Bank gave more than one opportunity to the petitioner to show cause against the refusal of licence. In the report placed before the Central Committee we find a comparative statement of the undesirable features noticed in the inspection reports with the corresponding representation of the bank and the comments of the bank. It was only after a careful consideration of all the matters that the Reserve Bank came to the conclusion that the continuance of the bank would be likely to prove detrimental to the interests of prospective depositors and that the petitioner was not entitled to a licence.

The respondent did not take any hasty action. The progress and working of the bank was closely watched for more than 4 years and every opportunity was given to the bank to justify its claim as a sound banking concern. The learned Advocate General explained that the delay in the disposal of the application by the respondent was due to their anxiety not to precipitate a crisis which a quick decision to refuse licence might occasion and which might further lead to undesirable results.

Far from the action of the Reserve Bank being, arbitrary, I am satisfied that it has given the utmost consideration to the petitioner's case. I can find no justification for the criticism that the respondent had decided to refuse licence, even before waiting to see whether the petitioner rectified the defects. As I have indicated above the directions given by the respondent from time to time were by virtue of their superior powers in respect of a Bank which was entitled to do business till the licence was refused and which was so doing. That has nothing to do with the decision of the question of granting licence which was kept in abeyance in 1952.

18. The last contention of Mr. Rajah Iyer is based upon the provisions of Section 35 of the Act. Section 35 enables the Reserve Bank to inspect a bank. Such inspection was done in the present case. Section 35(4) prescribes that in such a case the matter has got to be reported to the Central Government, and it was only the Central Government that could prohibit the banking company from continuing its business, I cannot, however, accept this argument. Section 35(4) would relate to a bank for which a licence had already been given.

At the same time I am of the opinion that it would be open to the respondent to consider the defects or improvements revealed in an inspection under Section 35 for disposing of the application for licence as there is nothing in the statute to prohibit it from taking into consideration all relevant facts. There has been no excess of jurisdiction, and the refusal of the licence under Section 22(1) of the Act is, therefore, proper in the circumstances of the case.

19. I am, therefore, of the opinion that the,action of the Reserve Bank in refusing to grant thelicence to the petitioner is within its jurisdiction, andsuch jurisdiction has been properly exercised in thecase, and that there is no case for the issue of a writunder Article 226 of the Constitution. This petition isdismissed with costs.

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