Madras High Court division bench rules in favour of RBI in NoF dispute

A division bench of the Madras High Court on Tuesday set aside a single judge's order related to the cancellation of registration of non-banking financial companies (NBFC) by the Reserve Bank of India (RBI) for failing to comply with the enhanced net owned fund (NOF) norms. The bench also directed the NBFCs to approach the appellate authority within a stipulated timeframe to raise their concerns.

The order was on an appeal filed by the RBI against the order passed by a single judge earlier this year. RBI had notified an enhanced NOF holding by all NBFCs on March 27, 2015, which stipulated them to have Rs 1 crore as NOF as of April 1, 2016 and Rs 2 crore as of April 1, 2017. This stipulation of NOF was not maintained by several NBFCs and show-cause notices were issued to them by the RBI.

The RBI had cancelled the Certificate of Registration (CoR) of over 1,500 NBFCs for non-compliance. Some of these NBFCs had approached the High Court against the cancellation of CoR and the single judge had ordered in favour of the NBFCs, directing the RBI to restore the CoRs and give more time to the companies to comply with the requirements till March 31, 2019. 

After RBI filed an appeal, the division bench comprising Justice T S Sivagnanam and Justice V Bhavani Subbaroyan, issued an order setting aside the single judge's order. The bench, after considering various arguments from the parties, observed that the order passed by the bench extending the time for compliance of the NOF requirement till March 31, 2019, was without jurisdiction and consequently, liable to be interfered with.

The court added that the writ petitions filed by the companies stood disposed of and directed them to file an appeal within a period of 30 days from the date of receipt of a copy of the judgment and raise all contentions before the appellate authority, including the contention that as of now, all the companies, which filed the petition, complied with the requirement of Rs 2 crore of NOF. The court requested the appellate authority to accept the compliance as due compliance of the requirement under the relevant notification to enable these companies to carry on with their business. "Such prayer be considered by the appellate authority on merits and in accordance with law," said the division bench. 

The petitoner companies, including Nahar Finance & Leasing Ltd, Lodha Finance India Ltd, Senthil Finance Pvt Ltd and Valluvar Development Finance Pvt Ltd, had argued that the stipulation by the RBI was contrary to the provisions of the RBI Act, 1934 and against the principles of natural justice. 

While the RBI argued that instead of approaching the court, the companies should have approached the appellate authority before filing the writ petitions, the bench concluded that principles of natural justice had been violated by wrongly construing the statutory provisions.

Senior Counsel G Masilamani, appeared for the RBI, assisted by Chevanan Mohan along with V Ponappa Bharathi, while counsel T Pramodkumar Chopda appeared on behalf of the companies.