The Supreme Court has upheld the recent amendment to the Reserve Bank of India Act, prohibiting banking business by unincorporated non-banking entities.
The court dismissed a writ petition filed by `shroffs' who are traditionally engaged in the business of lending money in cities and villages.
Earlier, some high courts in the country stayed the operation of Section 45-S of the RBI Act. By this judgment, the apex court allowed the authorities to enforce the provision.
The judgment, delivered by Justice B N Kirpal and Justice M B Shah, acknowledged the service rendered so far by the shroffs, but said the prohibition aimed at preventing unwary depositors and borrowers from committing "financial suicide".
in 1983, an attempt was made to curb the shroffs' activities, but it was not successful.
Therefore, the RBI Act was amended in 1997 to incorporate more foolproof restrictions in Section 45-S of the Act, which has now been upheld.
The judgement observed that the earlier attempt to protect depositors from "unincorporated financial institutions which would suddenly mushroom overnight and then vanish without a trace left the RBI with no other alternative but to prohibit such financial business".
The court emphasised that the restrictions on conducting business by unincorporated bodies had become necessary in view of large- scale mismanagement of public funds.
As a result of the Supreme Court judgment, the shroffs and others of their ilk cannot accept deposits from the public for their business activities.
There is a complete prohibition on mutual current account transactions which had formed the bedrock of their financial activities.
This is because individuals and firms will no longer be entitled to accept deposits on current account and the minimum period for which a non-banking financial company may accept deposit is now one year.
The shroffs will now be compelled to convert from partnership firms to limited companies.
