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whether it is on the whims and fancies of the financial institutions to classify the assets as non- performing assets, as canvassed before us.

Reportable
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL JURISDICTION
WRIT PETITION (CIVIL) NO. 901 OF 2014

KESHAVLAL KHEMCHAND AND SONS PVT. LTD.
& OTHERS … Petitioners

Versus

UNION OF INDIA & OTHERS … Respondents

WITH

WRIT PETITION (C) NO. 902 OF 2014

WRIT PETITION (C) NO. 903 OF 2014

WRIT PETITION (C) NO. 904 OF 2014

WRIT PETITION (C) NO. 905 OF 2014

WRIT PETITION (C) NO. 907 OF 2014

WRIT PETITION (C) NO. 925 OF 2014

WRIT PETITION (C) NO. 926 OF 2014

WRIT PETITION (C) NO. 937 OF 2014

WRIT PETITION (C) NO. 938 OF 2014

WRIT PETITION (C) NO. 939 OF 2014

WRIT PETITION (C) NO. 940 OF 2014

WRIT PETITION (C) NO. 945 OF 2014

WRIT PETITION (C) NO. 946 OF 2014

WRIT PETITION (C) NO. 947 OF 2014

WRIT PETITION (C) NO. 948 OF 2014
CIVIL APPEAL NO. 1230 OF 2015
(Arising out of SLP (Civil) No.2230 of 2014)

CIVIL APPEAL NO. 1231 OF 2015
(Arising out of SLP (Civil) No.12008 of 2014)

CIVIL APPEAL NO. 1233 OF 2015
(Arising out of SLP (Civil) No.12153 of 2014)

CIVIL APPEAL NO. 1234 OF 2015
(Arising out of SLP (Civil) No.12233 of 2014)

CIVIL APPEAL NO. 1235 OF 2015
(Arising out of SLP (Civil) No.12266 of 2014)

CIVIL APPEAL NO.1236 OF 2015
(Arising out of SLP (Civil) No.12368 of 2014)

CIVIL APPEAL NO. 1237 OF 2015
(Arising out of SLP (Civil) No.12408 of 2014)

CIVIL APPEAL NO.1238 OF 2015
(Arising out of SLP (Civil) No. 12445 of 2014)

CIVIL APPEAL NO.1239 OF 2015
(Arising out of SLP (Civil) No.12461 of 2014)

CIVIL APPEAL NO.1240 OF 2015
(Arising out of SLP (Civil) No.12509 of 2014)

CIVIL APPEAL NO.1241 OF 2015
(Arising out of SLP (Civil) No.12584 of 2014)

CIVIL APPEAL NO.1242 OF 2015
(Arising out of SLP (Civil) No.12585 of 2014)

CIVIL APPEAL NO. 1243 OF 2015
(Arising out of SLP (Civil) No.12588 of 2014)

CIVIL APPEAL NO.1244 OF 2015
(Arising out of SLP (Civil) No.12589 of 2014)

CIVIL APPEAL NO.1245 OF 2015
(Arising out of SLP (Civil) No.12590 of 2014)

CIVIL APPEAL NO. 1246 OF 2015
(Arising out of SLP (Civil) No.12592 of 2014)

CIVIL APPEAL NO. 1247 OF 2015
(Arising out of SLP (Civil) No.12593 of 2014)

CIVIL APPEAL NO.1248 OF 2015
(Arising out of SLP (Civil) No.12594 of 2014)

CIVIL APPEAL NO.1249 OF 2015
(Arising out of SLP (Civil) No.12596 of 2014)

CIVIL APPEAL NOS.1250-1251 OF 2015
(Arising out of SLP (Civil) Nos. 13706-13707 of 2014)

CIVIL APPEAL NO.1252 OF 2015
(Arising out of SLP (Civil) No.14100 of 2014)

CIVIL APPEAL NO.1253 OF 2015
(Arising out of SLP (Civil) No.14259 of 2014)

CIVIL APPEAL NO.1254 OF 2015
(Arising out of SLP (Civil) No.14343 of 2014)

CIVIL APPEAL NOS.1255-56 OF 2015
(Arising out of SLP (Civil) Nos. 14345-14346 of 2014)

CIVIL APPEAL NO.1257 OF 2015
(Arising out of SLP (Civil) No.14358 of 2014)

CIVIL APPEAL NO.1258 OF 2015
(Arising out of SLP (Civil) No.14407 of 2014)

CIVIL APPEAL NO.1259 OF 2015
(Arising out of SLP (Civil) No.14518 of 2014)

CIVIL APPEAL NO.1260 OF 2015
(Arising out of SLP (Civil) No.14565 of 2014)

CIVIL APPEAL NO.1261 OF 2015
(Arising out of SLP (Civil) No.15076 of 2014)

CIVIL APPEAL NO.1262 OF 2015
(Arising out of SLP (Civil) No.15105 of 2014)

CIVIL APPEAL NO. 1263 OF 2015
(Arising out of SLP (Civil) No.15756 of 2014)

CIVIL APPEAL NO.1264 OF 2015
(Arising out of SLP (Civil) No.15818 of 2014)

CIVIL APPEAL NOS.1265-66 OF 2015
(Arising out of SLP (Civil) Nos.15835-15836 of 2014)

CIVIL APPEAL NOS. 1267-68 OF 2015
(Arising out of SLP (Civil) Nos.15837-15838 of 2014)

CIVIL APPEAL NOS. 1269-70 OF 2015
(Arising out of SLP (Civil) Nos.15841-15842 of 2014)

CIVIL APPEAL NO.1271 OF 2015
(Arising out of SLP (Civil) No.15963 of 2014)

CIVIL APPEAL NO.1272 OF 2015
(Arising out of SLP (Civil) No.15964 of 2014)

CIVIL APPEAL NO. 1273 OF 2015
(Arising out of SLP (Civil) No.16163 of 2014)

CIVIL APPEAL NO. 1274 OF 2015
(Arising out of SLP (Civil) Nos.16164 of 2014)

CIVIL APPEAL NO.1275 OF 2015
(Arising out of SLP (Civil) No.16165 of 2014)

CIVIL APPEAL NO.1276 OF 2015
(Arising out of SLP (Civil) No.18478 of 2014)

CIVIL APPEAL NO. 1277 OF 2015
(Arising out of SLP (Civil) No.18756 of 2014)

CIVIL APPEAL NO.1278 OF 2015
(Arising out of SLP (Civil) No.18949 of 2014)

CIVIL APPEAL NO. 1279 OF 2015
(Arising out of SLP (Civil) No. 21232 of 2014)

CIVIL APPEAL NO. 1280 OF 2015
(Arising out of SLP (Civil) No.22198 of 2014)

CIVIL APPEAL NOS. 1281-82 OF 2015
(Arising out of SLP (Civil) Nos. 24451-24452 of 2014)

CIVIL APPEAL NO. 1283 OF 2015
(Arising out of SLP (Civil) No. 25752 of 2014)

CIVIL APPEAL NO. 1284 OF 2015
(Arising out of SLP (Civil) No. 28796 of 2014)

CIVIL APPEAL NOS. 1285-86 OF 2015
(Arising out of SLP (Civil) Nos. 29722-29723 of 2014)

CIVIL APPEAL NO.1287 OF 2015
(Arising out of SLP (Civil) No.29792 of 2014)

CIVIL APPEAL NO. 1288 OF 2015
(Arising out of SLP (Civil) No. 30196 of 2014)

CIVIL APPEAL NO. 1289 OF 2015
(Arising out of SLP (Civil) No. 25444 of 2014)

CIVIL APPEAL NO. 1290 OF 2015
(Arising out of SLP (Civil) No. 25445 of 2014)

CIVIL APPEAL NOS. 1291-92 OF 2015
(Arising out of SLP (Civil) Nos. 32028-32029 of 2014)

AND

CIVIL APPEAL NO. 1293 OF 2015
(Arising out of SLP (Civil) No. 33096 of 2014)

J U D G M E N T

Chelameswar, J.

1. Leave granted in all the SLPs.

2. The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, (hereinafter referred to as the
‘Act’), was made by the Parliament in the year 2002. The Statement of
Objects and Reasons appended to the Act explained the purpose behind the
enactment as follows:-
“There is no legal provision for facilitating securitization of financial
assets of banks and financial institutions. Further, unlike international
banks, the banks and financial institutions in India do not have power to
take possession of securities and sell them. Our existing legal framework
relating to commercial transactions has not kept pace with the changing
commercial practices and financial sector reforms. This has resulted in
slow place (sic pace) of recovery of defaulting loans and mounting levels
of non-performing assets of banks and financial institutions.”

The enactment was preceded by three Committee Reports – two headed by Mr.
M. Narasimham[1] and the third by Mr. T.R. Andhyarujina[2].

3. Recovery of money from a debtor by resorting to the filing of a suit
takes painfully long time in this country, for various reasons[3]. Huge
amounts of money are lent by various banks and other financial
institutions. Speedy recovery of the monies due to such institutions is an
important element determining the efficiency not only of such institutions
but also becomes an important factor for the financial health of the
country.

4. In order to facilitate banks and financial institutions (hereinafter
collectively referred to as “CREDITORS” for the sake of convenience) to
speedily recover the monies due to them from the borrowers, Parliament made
a law called ‘The Recovery of Debts due to Banks and Financial Institutions
Act, 1993’ (51 of 1993) under which banks and financial institutions could
approach a tribunal constituted under the said Act. It deals exclusively
with the claims for the recovery of the monies due from the borrowers to
the CREDITORS. Apart from creating such an exclusive forum, the Act also
provided for a more simpler procedure for the adjudication of the legality
of the claims brought before it by the CREDITOR and a procedure for speedy
recovery of sums so adjudicated.
5. After a decade of working of the tribunals constituted under Act 51
of 1993, the Parliament felt that even machinery and procedure established
under the Act 51 of 1993 is not able to produce the desired result of
efficiently recovering monies from the borrowers. The Parliament,
therefore, made the Act. The crux of the Act is that any ‘security
interest'[4] created in favour of a ‘CREDITOR'[5], who by definition under
the Act becomes a ‘SECURED CREDITOR’, can be enforced without the
intervention either of the court or tribunal[6] constituted under Act 51 of
1993 by following the procedure under Section 13 of the Act. Section 13(2)
of the Act provides as follows:
“(2) Where any borrower, who is under a liability to a secured creditor
under a security agreement, makes any default in repayment of secured debt
or any instalment thereof, and his account in respect of such debt is
classified by the secured creditor as non-performing asset, then, the
secured creditor may require the borrower by notice in writing to discharge
in full his liabilities to the secured creditor within sixty days from the
date of notice failing which the secured creditor shall be entitled to
exercise all or any of the rights under sub-section (4).”
6. It provides that the SECURED CREDITOR may call upon the borrower[7],
by issuing a notice in writing to discharge his liabilities in full within
a period of sixty days from the date of the notice. If the borrower fails
to discharge his liabilities after such a demand, the secured creditor is
entitled to take any one of the steps contemplated under Section 13(4).
Sub-section (2) also stipulates three conditions precedent for the issuance
of such notice – (i) that the borrower must have a liability under a
‘security agreement'[8]; (ii) that the borrower made a default in repayment
of the debt or the instalment thereof; and (iii) that the account in
respect of such debt is classified by the secured creditor as a ‘non-
performing asset’ (hereinafter referred to as “NPA”)

7. Sub-section (3) stipulates[9] that notice referred to in sub-section
(2) shall give the details of the amounts payable by the borrower and
details of the secured assets intended to be enforced by the secured
creditor in the event of borrower not complying with the demand made in the
notice.

8. Sub-section (4) provides that in the event of the borrower failing to
discharge his liability in spite of notice under sub-section (2), the
secured creditor may take recourse to any one or more of the measures
indicated under sub-section 13(4)[10].
9. Another important aspect of the Act is that the activity of the
Securitisation Companies (SC) and Reconstruction Companies (RC) are given a
statutory recognition. Their activity is regulated under Sections 3 and 4
of the Act. Under Section 3 such companies are required to be registered
with the RBI. Such registration is liable for cancellation under Section 4
on the happening of any one of the events specified therein. Section 5
confers statutory authority upon SCs and RCs to acquire the “financial
assets”[11] of any CREDITOR. Section 5(2)[12] further provides that upon
such acquisition of an asset, the SC or RC, as the case may be, steps into
the shoes of the original SECURED CREDITOR from whom the asset is acquired.

10. Under the Act, SCs and RCs are also treated to be SECURED CREDITORS
by definition. [See Section 2(1)(zd)]

11. The constitutional validity of the Act was examined by this Court in
Mardia Chemicals Ltd. & Others v. Union of India & Others, (2004) 4 SCC
311. This Court upheld the constitutionality of the Act except that of sub-
section (2) of Section 17.
“82. We, therefore, subject to what is provided in para 80 above, uphold
the validity of the Act and its provisions except that of sub-section (2)
of Section 17 of the Act, which is declared ultra vires Article 14 of the
Constitution of India.”

12. One of the grounds on which the Act was challenged in Mardia
Chemicals (supra) was that the said Act enables the SECURED CREDITORS to
classify the account of a borrower as NPA at the whims and fancies of such
SECURED CREDITORS. This Court rejected the said submission for the reasons
that the guidelines laid down by the Reserve Bank of India for classifying
the account of a borrower as a NPA would eliminate the possibility of the
SECURED CREDITOR arbitrarily declaring the account of a borrower as a NPA.
“37. Next we come to the question as to whether it is on the whims and
fancies of the financial institutions to classify the assets as non-
performing assets, as canvassed before us. We find it not to be so. As a
matter of fact a policy has been laid down by Reserve Bank of India
providing guidelines in the matter for declaring an asset to be a non-
performing asset known as “RBI’s prudential norms on income recognition,
asset classification and provisioning – pertaining to advances” through a
circular dated 30-8-2001. It is mentioned in the said circular as
follows:

**** **** **** ****
**** **** **** ****

From what is quoted above, it is quite evident that guidelines as laid down
by Reserve bank of India which are in more details but not necessary to be
reproduced here, lay down the terms and conditions and circumstances in
which the debt is to be classified as non-performing asset as clearly as
possible. Therefore, we find no substance in the submission made on behalf
of the petitioners that there are no guidelines for treating the debt as a
non-performing asset.”
13. Section 2(1)(o) of the Act defines NPA. The said definition came to
be amended by Act 30 of 2004. It is the amended definition which is the
subject matter of dispute in this bunch of matters. The said amended
definition came to be challenged in various High Courts.

14. The High Court of Gujarat, by a common judgment dated 24.4.14 in a
batch of writ petitions, held that the amended Section 2(1)(o) of the Act
is unconstitutional.
“55. In view of the above-discussions, the writ application is partly
allowed by holding that the amended provisions of Section 2(1)(o) of the
Securitisation Act are ultra vires the Article 14 of the Constitution and
the object of the above Act itself and consequently, we restore the
provisions which existed earlier, i.e., prior to the amendment of 2004 and
existed at the time of decision of the Supreme Court in the case of Mardia
Chemicals (supra). We, however, uphold the guidelines of the RBI
challenged in this application.”

15. On the other hand, in another common judgment dated 18.5.14 in a
batch of writ petitions, the Madras High Court rejected the challenge.

16. Hence these appeals by the various aggrieved parties, either the
borrowers or the SECURED CREDITORS. Various writ petitions invoking
Article 32 of the Constitution also came to be filed by some borrowers
against whom proceedings under Section 13 of the Act were initiated during
the pendency of the appeals from the two judgments referred to above.

17. Since the bone of contention in this bunch of matters is the amended
Section 2(1)(o) of the Act, we deem it appropriate to extract the provision
as it existed both prior to and after the amendment.
|THE SECURITISATION AND |THE ENFORCEMENT OF SECURITY |
|RECONSTRUCTION OF FINANCIAL ASSETS|INTEREST AND RECOVERY OF DEBTS |
|AND ENFORCEMENT OF SECURITY |LAWS (AMENDMENT) ACT, 2004 |
|INTEREST ACT, 2002 | |
|2. Definitions |2. Definitions |
| | |
|(1) In this Act, unless the |(1) In this Act, unless the |
|context otherwise requires: |context otherwise requires: |
| | |
|(o) “Non-Performing Asset” means |(o) “Non-Performing Asset” means |
|an asset or account of a borrower,|an asset or account of a borrower,|
|which has been classified by a |which has been classified by a |
|bank or financial institution as |bank or financial institution, as |
|sub-standard, doubtful or loss |sub-standard, doubtful or loss |
|assets, in accordance with the |asset.- |
|directions or under guidelines | |
|relating to assets classification | |
|issued by the Reserve Bank. | |
| |(a) In case such bank or |
| |financial institution is |
| |administered or regulated by any |
| |authority or body established, |
| |constituted or appointed by any |
| |law for the time being in force, |
| |in accordance with the directions |
| |or guidelines relating to assets |
| |classifications issued by such |
| |authority or body; |
| | |
| |(b) In any other case, in |
| |accordance with the directions or |
| |guidelines relating to assets |
| |classifications issued by the |
| |Reserve Bank. |
18. It can be seen from the above, that prior to its amendment by Act 30
of 2004, NPA is defined as ‘an account of a borrower which has been
classified’ by a CREDITOR either ‘as a sub-standard asset or a doubtful
asset or a loss asset’ of the CREDITOR and such a classification is
required to be made in accordance with the directions or guidelines
relating to assets classification issued by the Reserve Bank.

19. But, under the amended definition, such a classification of the
account of a borrower by the CREDITOR is required to be made in accordance
with the directions or guidelines issued by an “authority or body either
established or constituted or appointed by any law for the time being in
force”, in all those cases where the CREDITOR is either administered or
regulated by such an authority (hereinafter referred to as the
“REGULATOR”). If the CREDITOR is not administered or regulated by any such
REGULATOR then the CREDITOR is required to classify the account of a
borrower as NPA in accordance with the guidelines and directions issued by
the Reserve Bank of India.

20. In other words, by the amendment, the Parliament made it possible
that different sets of guidelines made by different bodies may be followed
by different CREDITORS depending upon the fact as to who is the
administering or regulating authority of such CREDITOR. Hence, the
challenge to the amended provision.

21. Before we examine the various submissions made at the Bar, we deem it
appropriate to give a brief analysis of the judgments of the Madras High
Court as well as the Gujarat High Court.

22. The High Court of Madras rejected the submission of the petitioners
that the impugned provision suffers from the vires of excessive delegation.
(a) The High Court took note of the fact that the Reserve Bank of India
introduced in the year 1992 the prudential norms of “income recognition,
asset classification, provisioning and other related matters” and such
norms were revised periodically keeping in mind various developments in the
banking system, both nationally and internationally. The High Court took
note of the practice of the Reserve Bank of issuing master circulars
annually which contain the consolidated instructions issued by the Reserve
Bank from time to time on the above-mentioned matters.

(b) The High Court took note of the fact that the Reserve Bank of India
in exercise of the statutory authority under Section 21 and Section 35A of
the Banking Regulation Act, 1949 prescribes norms for the various aspects
of banking specified under the Act.

(c) The High Court held that the Parliament, while defining a non-
performing asset under Section 2(1)(o) of the Act, only adopted the norms
prescribed from time to time by the Reserve Bank of India for the purpose
of identifying the NPA.[13]
“34…..In this case, the Legislature has left the job of defining “non-
performing asset’ in the hands of Reserve Bank of India. Therefore, when
once the Legislature has approved the power of Reserve Bank of India on the
classification of assets, the resultant consequence would be that a
subsequent amendment pertaining to such a classification would apply with
its vigour and force to the new Act as well.

35. In the light of the discussions made above, we are of the view that
it is a case of an adoption involved in the present case. Therefore it
can only be termed as legislation by reference and hence the impugned
Circular is valid in law.”

23. On the other hand, the Gujarat High Court opined that the amended
definition of the expression ‘NPA’ creates two classes of borrowers. In
the context of the classification of the account of a borrower as a NPA of
the CREDITOR, while one class of borrowers are governed by the guidelines
issued by the Reserve Bank of India, the other class of borrowers are
governed by the guidelines issued by different authorities.[14] The High
Court also placed reliance on the statement of objects and reasons of the
Act, as it was originally enacted, which inter alia stated as:
“(h) empowering banks and financial institutions to take possession of
securities given for financial assistance and sell or lease the same or
take over management in the event of default, i.e. classification of the
borrower’s account as non-performing asset in accordance with the
directions given or guidelines issued by the Reserve Bank of India from
time to time.”

and recorded a conclusion that the Parliament deviated from the original
aims and objects propounded by it. It also took note of the fact that this
Court in Mardia Chemicals (supra) repelled the attack on the original
definition of a NPA on the ground that the CREDITORS are bound by the
policy guidelines issued by the Reserve Bank of India, and therefore, there
is no possibility of the CREDITORS arbitrarily or whimsically classifying
the account of any borrower as a NPA.
The High Court therefore opined that the deviation from the original
objects and reasons would be violative of Article 14 of the Constitution of
India.

24. Learned counsel appearing for the borrowers argued that the amended
Section 2(1)(o) is unconstitutional for the following reasons:
(1) that the Parliament, by authorizing the various bodies to frame the
guidelines in accordance with which the account of a borrower could be
classified as a NPA abdicated its essential legislative function by making
an excessive delegation;
(2) that while the un-amended Section 2(1)(o) provided for a uniform
standard by which an account of a borrower is to be classified as NPA of
the CREDITOR by applying the guidelines issued by the Reserve Bank, the
amended provision enables different CREDITORS to adopt different guidelines
which prescribe different standards for arriving at a conclusion that the
account of a borrower is NPA. Such a provision according to the borrowers,
is violative of Article 14 of the Constitution of India as it amounts to a
class legislation forbidden by Article 14;
(3) Since the Act recognizes the possibility of acquisition of a
“financial asset”[15] of a CREDITOR by either a “securitization
company”[16] or a “reconstruction company”[17] it introduces a great deal
of uncertainty in the matter of the application of the guidelines
appropriate for classification of an account of a borrower as a NPA. It
all depends on the fact as to who is the current holder of such financial
asset when the proceedings under Section 13 are sought to be invoked.
(4) As the Act does not provide for a reasonable opportunity to
demonstrate that the classification of the borrower’s account as a NPA is
untenable, the power to make such a classification itself becomes arbitrary
and violative of Article 14 of the Constitution.

25. On the other hand, the learned counsel appearing for the Union of
India, the RBI and the various CREDITORS submitted that the impugned
amendment is a constitutionally valid piece of legislation.
In recognition of the fact that the assessment of an account of borrower as
NPA depends upon innumerable factors which constantly keep changing,
Parliament thought it fit to stipulate that the assessment be made in the
light of the guidelines made by either the RBI or various other REGULATORS
regulating the activities of various CREDITORS. There is no delegation of
any essential legislative functions.

The prescription that the classification of NPA is to be made on the basis
of the guidelines framed by different bodies regulating the different
CREDITORS is a constitutionally permissible classification having regard to
the nature of the different credit facilities extended by the various
CREDITORS to different categories of borrowers and on different terms and
conditions.

The third submission made on behalf of the borrowers is sought to be
repelled on two grounds:
that, it is a purely hypothetical submission in the context of the present
set of cases as in none of the cases the original SECURED CREDITOR
transferred the financial asset in favour of any other body;

assuming for the sake of argument that there is a possibility of an asset
of the SECURED CREDITOR being acquired either by a securitization company
or a reconstruction company and therefore are governed by the guidelines
(for the determination of the question whether an acquired asset has become
a non-performing asset) other than those promulgated by the Reserve Bank of
India, it has not been demonstrated in any one of these cases that such
guidelines are less favourable to the borrowers than the guidelines of the
Reserve Bank of India.

26. We would like to make it clear that we are not undertaking the
examination of a second round of attack on the constitutionality of the Act
in its entirety. It is nobody’s case that judgment of this Court in Mardia
Chemicals (supra) requires reconsideration. As pointed out by the
borrowers, the definition of the expression “NPA” [under Section 2(1)(o)]
underwent an amendment subsequent to the decision in Mardia Chemicals, the
validity of such an amendment only is required to be examined in these
matters.

27. We have already noticed that under Section 13 of the Act the right to
invoke the provisions of the Act for enforcement of a security interest is
permissible only on the satisfaction of the three conditions specified
under Section 13(2) of the Act. One of them being that the account of the
borrower is classified by the SECURED CREDITOR as a non-performing asset
(NPA) of the CREDITOR.

28. The expression ‘asset’ is not defined under the Act. But the
expressions ‘financial asset'[18] and ‘non performing asset’ are defined
under Section 2(1)(l) and 2(1)(o) of the Act. The claim of a CREDITOR to
any debt or receivables etc. from the borrower becomes the financial asset
of the CREDITOR. Under the unamended definition, an asset (of the CREDITOR
i.e., the account of the borrower) which is classified by the CREDITOR as
“sub-standard, doubtful or loss asset” in accordance with the direction or
guidelines relating to the assets classification issued by the Reserve Bank
becomes an NPA. The amended definition however defines a NPA as an asset
classified by the CREDITOR as “sub-standard, doubtful or loss asset” in
accordance with the relevant guidelines issued by the appropriate body. In
the case of the CREDITORS “administered or regulated by any authority or
body established, constituted or appointed by any law for the time being in
force”, such ‘REGULATOR’, and with reference to CREDITORS, not so
administered or regulated, the Reserve Bank are the appropriate
authorities.

29. We have already noticed that one of the two main purposes of the Act
is to facilitate the SECURED CREDITORS[19] to recover the amounts due to
them from the borrowers by enforcing the security interest created by the
borrowers without the intervention of the civil court or the tribunal.

30. We think that it is necessary to trace out the history of the
concepts of (i) NPA and (ii) loan transaction for the better appreciation
of the controversy before us.

31. On 14th August, 1991, the Government of India appointed a nine-member
Committee headed by Mr. M. Narasimham, (13th Governor of the Reserve Bank
of India) to examine various aspects relating to the structure,
organization, functions and procedures of the banking system. The said
Committee came to be appointed in the backdrop of the Balance of Payment
Crisis which the country was facing at that point of time.

32. The Committee submitted its 1st Report on the 16th November, 1991.
While examining the various aspects of the financial system, the said
Committee considered the functioning of the banking system in the country.
It took note of the existing guidelines issued by the Reserve Bank of
India from time to time and also the various practices of the banking
industry. The Committee was of the view that the “ratio of capital funds
in relation to bank’s deposits or its assets is a well known and
universally accepted measure of the strength and stability of the
institution”.

33. It took note of the capital adequacy standards prescribed by the
Committee known as Basle Committee[20] and opined that it is necessary that
the Indian banks also conform to those standards. But as a prelude to the
compliance with the BIS standards, the Committee opined that the banks
should have their assets revalued on a more realistic basis and on the
basis of their realizable value.

34. It also took note of the fact that the banks and development
financial institutions (DFIs) had not been following a universal practice
with regard to the income recognition, valuation of investments or
provisioning against doubtful debts. It is in this background, the
Committee recommended as follows:-

“..The international practice is that an asset is treated as “non-
performing” when interest is overdue for at least two quarters. In
respect of such non-performing assets interest is not recognized on accrual
basis but is booked as income only when actually received. The Committee
is of the view that a similar practice should be followed by banks and
financial institutions in India and accordingly recommends that interest on
non-performing assets should not be booked as income on accrual basis.
The non-performing assets would be defined as an advance where, as on the
balance sheet date

in respect of term loans, interest remains past due for a period of more
than 180 days.

(b) in respect of overdraft and cash credits, accounts remain out of
order for a period of more than 180 days,

(c) in respect of bills purchased and discounted, the bill remains
overdue and unpaid for a period of more than 180 days,

(d) in respect of other accounts, any amount to be received remains past
due for a period of more than 180 days.

An amount is considered past due when it remains outstanding 30 days beyond
the date.

**** **** **** ****
The Committee is of the view that for the purposes of provisioning, banks
and financial institutions should classify their assets by compressing the
Health Codes into the following broad groups:

Standard
Sub-standard
Doubtful and
Loss

The RBI should prescribe clear and objective definitions for these 4
categories to ensure a uniform, consistent and logical basis for
classification of assets. Broadly stated, sub-standard assets would be
those which exhibit problems and would include assets classified as non-
performing for a period not exceeding two years. Doubtful assets are
those non-performing assets which remain as such for a period exceeding two
years and would also include loans in respect of which instalments are
overdue for a period exceeding 2 years. Loss assets are accounts where
loss has been identified but the amounts have not been written off.”
35. Narasimham Committee Report on asset classification by the CREDITORS
was accepted by the Reserve Bank of India and guidelines are being issued
from time to time. Different instructions culminating into different
“Master Circulars” with respect to various classes of banks and financial
institutions came to be issued by the Reserve Bank from time to time. For
example, the Reserve Bank of India issued instructions dealing with the Non
Banking Financial Companies (NBFCs)[21] and also the Securitisation
Companies and Reconstruction Companies. Originally such guidelines were
meant only to enable the CREDITORS to have a rational view of their
“assets”/”financial assets” for the better administration of their funds
and the banking business. The Parliament thought it fit to adopt the above-
mentioned guidelines issued by the Reserve Bank of India even for the
purpose of identifying NPAs under the Act.
36. Now, we proceed to examine what exactly is a loan transaction – the
rights and obligations arising out of a loan transaction and the impact of
the Act on such rights and obligations.

37. The expression ‘loan’, though not defined under the Act, has a well-
settled connotation i.e., advancing of money by one person to another under
an agreement by which the recipient of the money agrees to repay the amount
on such agreed terms with regard to the time of repayment and the liability
to pay interest.
“Definition of loan. A contract of loan of money is a contact whereby one
person lends or agrees to lend a sum of money to another, in consideration
of a promise express or implied to repay that sum on demand, or at a fixed
or determinable future time, or conditionally upon an event which is bound
to happen, with or without interest.”
– Chitty on Contracts, Vol.II 30th Edn., p.909

38. The person advancing the money is generally called a CREDITOR and the
person receiving the money is generally called a borrower. The most simple
form of a loan transaction is a contract by which the borrower agrees to
repay the amount borrowed on demand by the creditor with such interest as
stipulated under the agreement. Such a loan transaction may be attended by
any arrangement of a security like a mortgage or pledge etc. depending upon
the agreement of the parties.

39. The Act provides for a mode of speedy recovery of the monies due from
the borrowers to one class of creditors who are banks and financial
institutions (CREDITORS). Advances/loans made by CREDITORS to
businessmen and industrialists are generally not repayable on demand but
repayable in accordance with a fixed time schedule agreed upon by the
parties known as “term loans”.
“Term loans. A loan may be made for a specified period (a term loan). In
such a case repayment is due at the end of the specified period and, in the
absence of any express provision or implication to the contrary, no further
demand for repayment is necessary.”
– Chitty on Contracts, Vol.II 30th Edn., p.913

In other words, such loans are repayable in instalments over a period of
time the terms of which are evidenced by a written agreement between the
parties. A default in the repayment, (in terms of the agreed schedule)
generally provides a cause of action for the CREDITOR to initiate legal
proceedings for the recovery of the entire amount due and outstanding from
the borrower. Normally such term loans are also accompanied by some
‘security interest’ in a ‘secured asset’ of the borrower. Such a recovery
is to be made normally by instituting a suit for recovery of the amounts by
enforcing the ‘security interest’. The Recovery of Debts due to Banks and
Financial Institutions Act, 1993 created an exclusive forum for a speedy
ascertainment of the amounts actually due from the defaulting borrower and
also provided for a mechanism for speedy recovery of the amounts so
ascertained from such borrowers.

40. Since such a system was also found to be inadequate for the speedy
recovery of the monies due from the borrowers to the CREDITORS, the
Parliament made the Act under which the process of ascertainment of the
amounts due from a borrower by an independent adjudicatory body is
dispensed with. The SECURED CREDITOR is made the sole judge of the amount
due and outstanding from a borrower subject to an appeal under Section 17
of the Act.

41. Be that as it may, such an ascertainment of amount due and
outstanding is not the only criteria on the basis of which the SECURED
CREDITOR is entitled to initiate proceedings under Section 13(4) of the
Act, but the SECURED CREDITOR is also required to classify the account of
the borrower (asset of the CREDITOR) as an NPA.

42. De hors the Act, when the borrower of a term loan defaults in the
repayment, the CREDITOR can initiate legal proceeding straight away for
recovery of the amounts due and outstanding from the borrower. The Act
places an additional legal obligation on the CREDITOR to examine and decide
whether the account of the borrower has become an NPA before initiating
action under the Act.

43. The question – why did the Parliament impose such an additional
obligation on the CREDITORS while proposing to create a mechanism for the
expeditious recovery of the money due to the SECURED CREDITORS – requires
examination. The answer appears to be that under the scheme of Section
13(4) the ‘secured asset’ (generally the assets of an industrial concern,
like plant and machinery etc.) could be taken possession of and could
either be sold or the management could be taken over etc. Such an action
if not taken after an appropriate deliberation in a given case could result
in the disruption of industrial production and consequently resulting in
unemployment and loss of GDP etc. impacting larger interests of the nation.
Therefore, Parliament must have thought that the SECURED CREDITORS are
required to assess whether the default in repayment by the borrower is due
to any factor which is a temporary phenomenon and the same could be managed
by the borrower if some accommodation is given.

44. The above analysis of the scheme of Section 13 of the Act would
derive support from the fact that even prior to the coming into force of
the Act, the CREDITORS were classifying the accounts of the borrowers as
NPAs under the statutory guidelines issued by the RBI. We have already
noticed that under the said guidelines FINANCIAL ASSETS are sub-divided
into 4 categories i.e. (i) standard, (ii) sub-standard, (iii) doubtful, and
(iv) loss. Depending upon the length of the period for which the
installment of money is over due, such assets are classified as NPA. As
the length of the period of over due increased, the account of the borrower
is progressively classified from “sub-standard” to “loss”.

45. The same classification is adopted by the Parliament while enacting
the Act. Therefore, all NPAs do not belong to the same class. Their
characters vary depending on the length of time for which they remained
NPAs.

46. In our view, such a classification is relevant and assumes importance
in the decision making process of the SECURED CREDITOR under Section 13(2)
as to which one of the steps contemplated under Section 13(4) should be
resorted to in the case of a given defaulting borrower. We hasten to add
that it may not be the only factor which determines the cause of action to
be taken by the SECURED CREDITOR. The magnitude of the amount due and
outstanding in a given case, the reasons which prompted the borrower to
default in the repayment schedule, the nature of the business carried on by
the defaulting borrower, the overall prospects of the defaulter’s business,
national and international market conditions relevant to the business of a
defaulter – in our opinion, are some of the factors which are germane to a
decision that action under Section 13(4) is required to be taken against a
defaulting borrower. Even in a case where on rational and objective
consideration of all the relevant factors including the
representations/objections referred to under Section 13(3A), the CREDITOR
comes to a conclusion that steps contemplated under Section 13(4) are
required to be taken in the case of a particular defaulter, the further
question as to which one of the steps contemplated under Section 13(4) is
required to be taken or would meet the ends of justice is a matter for a
further rational decision on the part of the SECURED CREDITOR.

47. The international practice – noted by Narasimham Committee – is that
“an asset is treated as non-performing when interest is overdue for at
least two quarters”. Such a practice of classifying the asset for the
administrative purposes of the Banks only indicates that a borrower’s
account is not treated as a written off asset, the moment there is a
default. CREDITORS keep a watch on such account and monitor the
performance of the borrower’s activity to ensure the recovery of the
amounts due having regard to the needs of the industrial sector of the
country and the importance of protecting the industry as far as possible in
the larger interest of the economy of the State.

48. The basic definition under the various circulars of the Reserve Bank
of India and also other REGULATORS of a NPA is an asset which ceases to
generate income for the CREDITORS (banks or financial institutions) i.e. a
loan or advances made by the banks on which interest and/or instalment of
principal amount is overdue for a specified period depending upon the
nature of the loan or advance – whether the loan or advance is a term loan
or agricultural loan, money advanced on bill discounting etc.

49. To make any attempt to define the expression ‘non-performing asset’
valid for the millions of cases of loan transactions of various categories
of loans and advances, lent or made by different categories of CREDITORS
for all time to come would not only be an impracticable task but could also
simply paralyse the entire banking system thereby producing results which
are counter productive to the object and the purpose sought to be achieved
by the Act.

50. Realising the same, the Parliament left it to the Reserve Bank of
India and other REGULATORS to prescribe guidelines from time to time in
this regard. The Reserve Bank of India is the expert body to which the
responsibility of monitoring the economic system of the country is
entrusted under various enactments like the RBI Act, 1934, the Banking
Regulation Act, 1949. Various banks like the State Bank of India, National
Housing Bank, which are though bodies created under different laws of
Parliament enjoying a large amount of autonomy, are still subject to the
overall control of the Reserve Bank of India.

51. Regulation of monetary system and banking business is one of the
fundamental responsibilities of any modern State and essential for the
economic and political stability of the State. The vast increase of
commerce both national and the international made easy by the tremendous
developments of technology, renders such regulation a very complicated
matter with complex variables. The span of each variable could vary from
minutes to years. Therefore, it requires constant monitoring on daily
basis sometime even on minute to minute basis. In lieu of the importance
and complexities, the Reserve Bank, the prime regulator of the Indian
economy and banking system, has been issuing guidelines and directions from
time to time not only to the banks but to various other financial
institutions which are amenable to its jurisdiction. Such instructions
given from time to time are consolidated annually and published in the form
of “Master Circulars”. One of such circular dated 30.08.2001 was taken
note of by this Court in Mardia Chemicals. Incidentally, the authority of
the Reserve Bank to issue such instructions was considered by this Court in
ICICI Bank Limited v. Official Liquidator of APS Star Industries Limited &
Others, (2010) 10 SCC 1, and this Court held that the Reserve Bank did have
such authority by virtue of Sections 21 and 35-A of the Banking Regulation
Act, 1949[22].

52. The question is whether in making such a prescription, the Parliament
has delegated any essential legislative function? To answer the question
it is required to understand what is an essential legislative function and
what are the limits subject to which such function could be delegated.

53. The first major decision of this Court on the subject of the validity
of delegated legislation is In re Art. 143, Constitution of India and Delhi
Laws Act (1912) etc., AIR 1951 SC 332, by a Constitution bench of 7-Judges.
Seven separate judgments were delivered. It was a case where Section 7
of the Delhi Laws Act authorized the provincial government to extend by a
notification in the official gazette to the provinces of Delhi, any
enactment which was in force in any part of British India as on the date of
such notification. Similar provisions were contained in two other
enactments. One of the questions was whether such conferment of power on
the executive amounted to excessive delegation of the legislative power.
Even according to Patanjali Sastri, J., who was a member of the Bench which
decided the case, in a subsequent decision in Kathi Raning Rawat v. State
of Saurashtra, AIR 1952 SC 123, while dealing with the decision in Delhi
Laws Act’s case observed thus:
“While undoubtedly certain definite conclusions were reached by the
majority of the Judges who took part in the decision in regard to the
constitutionality of certain specified enactments, the reasoning in each
case was different, and it is difficult to say that any particular
principle has been laid down by the majority which can be of assistance in
the determination of other cases.”.
54. In the case of B. Shama Rao v. Union Territory of Pondicherry, AIR
1967 SC 1480, J.M. Shelat, J. speaking for majority (3) of a Constitution
Bench of 5 Judges, after summarizing the views of the 7-Judges who
delivered the judgment in Delhi Laws Act’s case opined;
“5. …….In view of the intense divergence of opinion except for their
conclusion partially to uphold the validity of the said laws it is
difficult to deduce any general principle which on the principle of stare
decisis can be taken as binding for future cases. It is trite to say
that a decision is binding not because of its conclusion but in regard to
its ratio and the principle laid down therein. The utmost, therefore, that
can be said of this decision is that the minimum on which there appears to
be consensus was (1) that legislatures in India both before and after the
Constitution had plenary power within their respective fields; (2) that
they were never the delegates of the British Parliament; (3) that they had
power to delegate within certain limits not by reason of such a power being
inherent in the legislative power but because such power is recognised even
in the United States of America where separatist ideology prevails on the
ground that it is necessary to effectively exercise the legislative power
in a modern State with multifarious activities and complex problems facing
legislatures; and (4) that delegation of an essential legislative function
which amounts to abdication even partial is not permissible. All of them
were agreed that it could be in respect of subsidiary and ancillary power.”
55. In Devi Das Gopal Krishnan etc. v. State of Punjab & Others, AIR 1967
SC 1895, another Constitution Bench though struck down the impugned
provision on the ground of excessive delegation, recognized the need of
delegating and this Court opined as follows:-
“……… But in view of the multifarious activities of a welfare State,
it cannot presumably work out all the details to suit the varying aspects
of a complex situation. It must necessarily delegate the working out of
details to the executive or any other agency. But there is danger inherent
in such a process of delegation. An over-burdened legislature or one
controlled by a powerful executive may unduly overstep the limits of
delegation. It may not lay down any policy at all; it may declare its
policy in vague and general terms; it may not set down any standard for the
guidance of the executive; it may confer an arbitrary power on the
executive to change or modify the policy laid down by it without reserving
for itself any control over subordinate legislation. Thus self effacement
of legislative power in favour of another agency either in whole or in part
is beyond the permissible limits of delegation. It is for a court to hold
on a fair, generous and liberal construction of an impugned statute whether
the legislature exceeded such limits.
But the said liberal construction should not be carried by the courts
to the extent of always trying to discover a dormant or latent legislative
policy to sustain an arbitrary power conferred on executive authorities.
It is the duty of the court to strike down without any hesitation an
arbitrary power conferred on the executive by the legislature.”

56. In 1968, a Constitution Bench of 7-Judges in Municipal Corporation of
Delhi v. Birla Cotton, Spinning and Weaving Mills, Delhi & Another, AIR
1968 SC 1232 considered the question whether Section 150 of the Delhi
Municipal Corporation Act (66 of 1957) is unconstitutional on the ground
that it provided for impermissible delegation of the ‘essential legislative
function’. On an examination of the abovementioned authorities, apart from
others, Chief Justice Wanchoo, speaking for himself and Justice Shelat,
held as follows:
“28. …… The legislature must retain in its own hands the essential
legislative functions and what can be delegated is the task of subordinate
legislation necessary for implementing the purposes and objects of the Act.
Where the legislative policy is enunciated with sufficient clearness or a
standard is laid down, the courts should not interfere. :What guidance
should be given and to what extent and whether guidance has been given in a
particular case at all depends on a consideration of the provisions of the
particular Act with which the Court has to deal including its preamble.
Further it appears to us that the nature of the body to which delegation is
made is also a factor to be taken into consideration in determining whether
there is sufficient guidance in the matter of delegation.”

The Court held that there was no impermissible delegation of legislative
power.

57. Justice Hidayatullah, speaking for himself and for Justice Ramaswami,
agreed with the conclusion reached at by the Chief Justice, though on
slightly different reasons.

58. In M.K. Papiah & Sons v. The Excise Commissioner & Another, (1975) 1
SCC 492, this Court once again considered the question of delegated
legislation in the context of a provision in the Mysore Excise Act which
provided for the levy of excise duty “at such rate or rates as the
Government may prescribe on excisable goods”. Such a provision was
challenged as unconstitutional on the ground that it was a case of
abdication of essential legislative function by the legislature. The Court
after reviewing the number of earlier decisions held the impugned provision
to be valid. Placing reliance on a judgment of the Privy Council in the
case of Cobb & Co. v. Kropp [1967 1 AC 141], this Court held as follows:-
“23. The point to be emphasized – and this is rather crucial – is the
statement of their Lordships that the Legislature preserved its capacity
intact and retained perfect control over the Commissioner for Transport
inasmuch as it could at any time repeal the legislation and withdraw the
authority and discretion it had vested in him, and, therefore, the
Legislature did not abdicate its functions.

In other words, the very fact that the legislature has the power to repeal
and withdraw the authority of the delegate and the discretion vested in the
delegate, should lead to the conclusion that the legislature did not
abdicate its essential functions.

59. According to Seervai, by its judgment in M.K. Papiah’s case (supra),
this Court “after twenty five years of wandering in the legal maze of its
own creation” …… “come round to the view expressed by the Privy Council
in 1878” i.e. Queen v. Burah [1878 (5) Ind App 178].

60. This Court in the case of Registrar of Cooperative Societies v. K.
Kunjaboo, AIR 1980 SC 350 took note of the uncertainty prevailing in the
following words;
“2. Lawyers and judges have never ceased to be interested in the question
of delegated legislation and since the Delhi Laws Act case, we have been
blessed by an abundance of authority, the blessing not necessarily unmixed.
We do not wish, in this case, to search for the precise principles decided
in the Re Delhi Laws Act case, nor to consider whether M.K. Papiah v.
Excise Commissioner beats the final retreat from the earlier position.
For the purposes of this case we are content to accept the “policy” and
“guidelines” theory and seek such assistance as we may derive from cases
where near identical provisions have been considered.”
This Court declined “to consider whether M.K. Papiah & Sons v. The Excise
Commissioner, (1975) 3 SCR 607, beat the final retreat from the earlier
position” but proceeded to examine the case before it on the theory of
“policy” and “guidelines” propounded in some of the cases.

61. We can safely state that none of the judgments of this Court so far
has laid down any principle indicating as to what exactly constitutes
“essential legislative function”.

62. While the Delhi Laws Act’s case dealt with the delegation of power to
the Executive by the Legislature of applying certain laws with or without
modification to new territories, the other cases essentially dealt with the
permissibility of the delegation of the power to the Executive to fix the
rates of tax etc.

63. An examination of the above authorities, in our view leads to the
following inferences;
The proposition that essential legislative functions cannot be delegated
does not appear to be such a clearly settled proposition and requires a
further examination which exercise is not undertaken by the counsel
appearing in the matter. We leave it open for debate in a more appropriate
case on a future date.

For the present, we confine to the examination of the question:
(a) Whether defining every expression used in an enactment is an
essential legislative function or not?

All the judgments examined above recognize that there is a need for some
amount of delegated legislation in the modern world.

If the parent enactment enunciates the legislative policy with sufficient
clarity, delegation of the power to make subordinate legislation to carry
out the purpose of the parent enactment is permissible.

Whether the policy of the legislature is sufficiently clear to guide the
delegate depends upon the scheme and the provisions of the parent Act.

The nature of the body to whom the power is delegated is also a relevant
factor in determining “whether there is sufficient guidance in the matter
of delegation.”

64. Whether defining every word employed in a statute is really necessary
and whether it is a part of the essential legislative function was never
the subject matter of debate in any of these cases.

65. We are of the firm opinion that it is not necessary that legislature
should define every expression it employs in a statute. If such a process
is insisted upon, legislative activity and consequentially governance comes
to a standstill. It has been the practice of the legislative bodies
following the British parliamentary practice to define certain words
employed in any given statute for a proper appreciation of or the
understanding of the scheme and purport of the Act. But if a statute does
not contain the definition of a particular expression employed in it, it
becomes the duty of the courts to expound the meaning of the undefined
expressions in accordance with the well established rules of statutory
interpretation.

66. Therefore, in our opinion, the function of prescribing the norms for
classifying a borrower’s account as a NPA is not an essential legislative
function. The laying down of such norms requires a constant and close
monitoring of the financial system demanding considerable amount of
expertise in the areas of public finance, banking etc., and the norms may
require a periodic revision. All that activity involves too much of
detail and promptitude of action. The crux of the impugned Act is the
prescription that a SECURED CREDITOR could take steps contemplated under
Section 13(4) on the “default”[23] of the borrower. The expression
“default” is clearly defined under the Act. Even if the Act were not to be
on the statute book, under the existing law a CREDITOR could initiate legal
action for the recovery of the amounts due from the borrower, the moment
there is a breach of the terms of the contract under which the loan or
advance is granted. The stipulation under the Act of classifying the
account of the borrower as NPA as a condition precedent for enforcing the
security interest is an additional obligation imposed by the Act on the
CREDITOR. In our opinion, the borrower cannot be heard to complain that
defining of the conditions subject to which the CREDITOR could classify the
account as NPA, is part of the essential legislative function. If the
Parliament did not choose to define the expression “NPA” at all, Court
would be bound to interpret that expression as long as that expression
occurs in Section 13(2). In such a situation, Courts would have resorted
to the principles of interpretation (i) as to how that expression is
understood in the commercial world, and (ii) to the existing practice if
any of either the particular CREDITOR or CREDITORS as a class generally.
If the Parliament chose to define a particular expression by providing that
the expression shall have the same meaning as is assigned to such an
expression by a body which is an expert in the field covered by the statute
and more familiar with the subject matter of the legislation, in our
opinion, the same does not amount to any delegation of the legislative
powers. Parliament is only stipulating that the expression “NPA” must be
understood by all the CREDITORS in the same sense in which such expression
is understood by the expert body i.e., the RBI or other REGULATORS which
are in turn subject to the supervision of the RBI. Therefore, the
submission that the amendment of the definition of the expression ‘non-
performing asset’ under Section 2(1)(o) is bad on account of excessive
delegation of essential legislative function, in our view, is untenable and
is required to be rejected.

67. Coming to the submission that by authorizing different REGULATORS to
prescribe different norms for the identification of a NPA with reference to
different CREDITORS amount to unreasonable classification is also required
to be rejected for the reason that all the CREDITORS do not form a
uniform/homogenous class.

68. There are innumerable differences among the CREDITORS. Differences
based on the legal structure of the CREDITORS’ organization, differences
based upon the nature of the loan advanced by them, and differences based
on the terms and conditions subject to which such loans or advances are
made by each of those CREDITORS, etc. For example, the Exim Bank loans are
generally in foreign currencies. Similarly, loans granted by Housing
Finance CREDITORS which are in turn regulated by the National Housing Bank
are loans which are term loans for relatively longer periods than other
loans. There is nothing uniform about these CREDITORS or their activities.
69. It is submitted by learned counsel for the RBI –
“Prior to the amendment in 2004, NPA was defined as sub-standard, doubtful
or loss asset in accordance with the directions or under guidelines
relating to assets classification issued by the Reserve Bank. Irrespective
of whether the financial entity was regulated by RBI or not, for the
purposes of SARFAESI Act, the asset classification stipulated by RBI was
applicable. Though the regulator concerned of the financial entity had
stipulated different standards for regulatory purposes, the entities had to
apply the criteria stipulated by RBI for asset classification so far as
SARFAESI Act was concerned. The amendment brought about in 2004
addresses this issue and brings in uniformity in the classification of
assets by financial entities, both for the purposes of complying with the
directions issues by their own regulations and for the purposes of SARFAESI
Act. As such, a situation where an asset is not an NPA as per the
specifications of the regulator but the same asset is an NPA for the
purposes of SARFAESI Act or vice versa does not arise after the amendment
made in 2004.”
70. The Union of India filed a counter affidavit (through Director,
Department of Financial Services, Ministry of Finance) before the High
Court of Gujarat in Special Civil Application No.2910 of 2013 regarding the
purpose for which the impugned amendment was brought in. It is stated in
the counter affidavit as follows:
“9. I state and submit that the amendment in Section 2(1)(o) of SARFAESI
Act, 2002 was made in 2004 to extend the classification norms of non-
performing assets stipulated buy (sic by) the concerned regulator who is
administering or regulating such entity or the Reserve Bank of India when
the said institution is not regulated by any regulator in India. There are
financial institutions such as Housing Finance corporations notified by
Central Government under SARFAESI Act, which are regulated by National
Housing Bank. The non-performing assets of these institutions are
classified as per guidelines prescribed by National Housing Bank. The Act
covers certain other institutions such as Asian Development Bank and assets
are classified as per the guidelines prescribed by Reserve Bank of India.
The above amendments in the Act were made so that the guidelines issued by
concerned regulator as applicable to them are covered for the purpose of
recovery under the Act.

10. I further state and submit that the amendment covered the entities
under the Act regulated by different regulators such as Reserve Bank of
India, National Housing Bank etc. who had stipulated their own guidelines
for the purpose. At the same time, the amendment also covered the entities
like Asian Development Bank, which did not fall within the purview of any
regulator in India. Therefore, the amendment was made in the Act to take
care of these situations and these amendments were necessary to cover the
deficiencies noticed in the Act.”
71. Therefore, to say that enabling them to follow different norms would
be violative of Article 14, in our view, would be wholly untenable.

72. Coming to the third submission of the borrower, we would not like to
deal with this submission in the instant batch of cases as there are few
cases where factually the SECURED ASSETS have been transferred by the
ORIGINAL CREDITORS. Those cases have been de-tagged from this batch to be
heard separately.
73. Coming to the fourth submission of the borrower, it must fail on the
basis of express language of Section 13(3A)[24] which obligates the SECURED
CREDITORS to examine the representation/objection, if any, made by the
borrower on the receipt of notice contemplated under Section 13(2) and
communicate the reasons to the borrower if such a representation is not
accepted by the SECURED CREDITORS. We have already indicated in our
judgment, in para no. 48, that the representation/objection contemplated
under Section 13(3A) is required to be examined objectively. Section 13
obligates the SECURED CREDITOR to communicate the reasons for non-
acceptance of the representation or objections to the borrowers.

74. Before closing these matters, we may also deal with one aspect of the
judgment of the Gujarat High Court. The Gujarat High Court recorded that
the impugned amendment is ultra vires the object of the Act. We presume
for the sake of this judgment that the impugned amendment is not strictly
in consonance with the objects enunciated when the Act was initially made.
We fail to understand as to how such inconsistency will render the Act
unconstitutional. The objects and reasons are not voted upon by the
legislature. If the enactment is otherwise within the constitutionally
permissible limits, the fact that there is a divergence between the
objects appended to the Bill and the tenor of the Act, in our opinion,
cannot be a ground for declaring the law unconstitutional.

75. In view of our abovementioned conclusions, we do not propose to
examine other submissions regarding the correctness of the Gujarat High
Court’s declaration that the unamended definition of the expression “NPA”
would continue to govern the situation in view of the Gujarat High Court’s
conclusion that the amended definition of NPA is unconstitutional.

76. All the writ petitions and the appeals are disposed of declaring that
the amended definition of the expression “NPA” under Section 2(1)(o) of the
Act is constitutionally valid.

77. In the result, all the writ petitions either filed before this Court
or filed before the Madras and Gujarat High Courts and the appeals of the
borrowers stand dismissed. The appeals of the CREDITORS are allowed. Each
of the writ petitioners/borrowers shall pay costs to the respective
CREDITORS calculated at 1% of the amount outstanding on the date of the
notice under Section 13(2) of the Act in each of the cases.
………………………………….J.
(J. CHELAMESWAR)
………………………………….J.
(S.A. BOBDE)
New Delhi;
January 28, 2015
———————–
[1] Ex. Governor, Reserve Bank of India
[2] Senior Advocate, Supreme Court of India
[3] 1.31 There has been a perception, and not without reason, that our
legal system have not kept pace with measures of financial sector reform
and indeed economic reforms more generally. As far as the banking sector
is concerned, there is continuing need for an appropriate legal framework
to help enforce contracts and protect the interests of secured creditors
especially in bankruptcy proceedings. Some of our laws are outdated and
legal procedures are cumbersome and time consuming. Even where Court
decrees are obtained their enforcement has been marked by delays. Our
experience with the Debt Recovery Tribunals has not been altogether
satisfactory in view of the legal issues that have been raised. Our laws
indeed seem marked by a basic asymmetry in their protection of creditors as
distinct from borrowers which comes in the way of the proper and smooth
functioning of banking and credit systems. [See: Introduction : The Issues,
Report of the Committee on Banking Sector Reforms (April 1998), Ch.I page
6]

[4] Section 2(zf) “security interest” means right, title and interest of
any kind whatsoever upon property, created in favour of any secured
creditor and includes any mortgage, charge, hypothecation, assignment other
than those specified in section 31;

[5] Section 2(zd) “secured creditor” means any bank or financial
institution or any consortium or group of banks or financial institutions
and includes-
(i) debenture trustee appointed by any bank or financial institution;
or
(ii) securitisation company or reconstruction company, whether acting
as such or managing a trust set up by such securitisation company or
reconstruction company for the securitisation or reconstruction, as the
case may be; or
(iii) any other trustee holding securities on behalf of a bank or
financial institution in whose favour security interest is created for due
repayment by any borrower of any financial assistance;

[6] Section 13. Enforcement of security interest.- (1)
Notwithstanding anything contained in section 69 or section 69A of the
Transfer of Property Act, 1882 (4 of 1882), any security interest created
in favour of any secured creditor may be enforced, without the
intervention of the court or tribunal, by such creditor in accordance with
the provisions of this Act.
[7] Section 2(f) “borrower” means any person who has been granted
financial assistance by any bank or financial institution or who has given
any guarantee or created any mortgage or pledge as security for the
financial assistance granted by any bank or financial institution and
includes a person who becomes borrower of a securitisation company or
reconstruction company consequent upon acquisition by it of any rights or
interest of any bank or financial institution in relation to such financial
assistance;

[8] Section 2(zb) “security agreement” means an agreement, instrument
or any other document or arrangement under which security interest is
created in favour of the secured creditor including the creation of
mortgage by deposit of title deeds with the secured creditor;
[9] Section 13(3) – The notice referred to in sub-section (2) shall
give details of the amount payable by the borrower and the secured assets
intended to be enforced by the secured creditor in the event of non-payment
of secured debts by the borrower.

[10] Section 13(4) In case the borrower fails to discharge his
liability in full within the period specified in sub-section (2), the
secured creditor may take recourse to one or more of the following measures
to recover his secured debt, namely:–
(a) take possession of the secured assets of the borrower including
the right to transfer by way of lease, assignment or sale for realising the
secured asset;
(b) take over the management of the business of the borrower
including the right to transfer by way of lease, assignment or sale for
realising the secured asset:
PROVIDED that the right to transfer by way of lease,
assignment or sale shall be exercised only where the substantial part of
the business of the borrower is held as security for the debt:
PROVIDED FURTHER that where the management of whole of the
business or part of the business is severable, the secured creditor shall
take over the management of such business of the borrower which is
relatable to the security or the debt.
(c) appoint any person (hereafter referred to as the manager), to
manage the secured assets the possession of which has been taken over by
the secured creditor;
(d) require at any time by notice in writing, any person who has
acquired any of the secured assets from the borrower and from whom any
money is due or may become due to the borrower, to pay the secured
creditor, so much of the money as is sufficient to pay the secured debt.
[11] 2(1)(l) “financial asset” means debt or receivables and includes-
a claim to any debt or receivables or part thereof, whether secured
or unsecured; or
any debt or receivables secured by, mortgage of, or charge on,
immovable property; or
a mortgage, charge, hypothecation or pledge of movable property; or
any right or interest in the security, whether full or part
underlying such debt or receivables; or
any beneficial interest in property, whether movable or immovable, or
in such debt, receivables, whether such interest is existing, future,
accruing, conditional or contingent; or
any financial assistance;

[12] 5(2) If the bank or financial institution is a lender in
relation to any financial assets acquired under sub-section (1) by the
securitisation company or the reconstruction company such securitisation
company or reconstruction company shall, on such acquisition, be deemed to
be the lender and all the rights of such bank or financial institution
shall vest in such company in relation to such financial assets.
[13] 29. However, the question for consideration before us is as to
whether there is indeed any delegated legislation or not. We are of the
view that there is no delegated legislation involved in the case on hand.
As discussed above, the power exercised by the Reserve Bank of India in a
separate enactment has been taken note of by the Legislature in the
subsequent one. It is only a definition clause, which has been adopted by
the Legislature. This has been done to put its machinery into use towards
its avowed object of activity – appropriate recovery. Therefore, we do not
find any delegated legislation involved and therefore contentions raised on
the power of delegation and thereafter it is excessive, has no force. We
only observe for the sake of completion, that even assuming that there is a
delegated legislation involved, the same is not excessive as there are
sufficient guidelines available in the earlier enactment and based upon
which the Circular has been issued by the Reserve Bank of India, being a
specialized body.
[14] 23. Thus, borrowers are divided into two different classes; First,
the borrowers in respect of the Banks and Financial Institutions which are
administered or regulated by an authority or body established, constituted
or appointed by any law for the time being in force, and in those cases, it
will be for that authority or body to frame the guidelines for asset
classification and, secondly, the borrowers in respect of all other cases
not covered by clause (a), and in respect of those cases, it will be in
accordance with the directions or guidelines issued by the Reserve Bank for
asset classification.
[15] Section 2. Definitions- (1) In this Act, unless the context
otherwise requires,– (l) “financial asset” means debt or receivables and
includes–
(i) a claim to any debt or receivables or part thereof, whether
secured or unsecured; or
(ii) any debt or receivables secured by, mortgage of, or charge on,
immovable property; or
(iii) a mortgage, charge, hypothecation or pledge of movable
property; or
(iv) any right or interest in the security, whether full or part
underlying such debt or receivables; or
(v) any beneficial interest in property, whether movable or
immovable, or in such debt, receivables, whether such interest is existing,
future, accruing, conditional or contingent; or
(vi) any financial assistance;

[16] Section 2(za) “securitisation company” means any company formed and
registered under the Companies Act, 1956 (1 of 1956) for the purpose of
securitisation;

[17] Section 2(v) “reconstruction company” means a company formed and
registered under the Companies Act, 1956 (1 of 1956) for the purpose of
asset reconstruction;
[18] Footnote 11 supra
[19] The expression “SECURED CREDITOR” by definition under the Act takes
within its sweep – (i) a bank, (ii) a financial institution, consortium or
group of banks or financial institutions, (4) debentures trustees appointed
by any bank or financial institution, (5) a securitisation company, (6)
reconstruction company etc. Once again the expression ‘bank’ by definition
takes within its sweep six categories of entities specified under Section
2(1)(c). The expression ‘financial institution’, by definition under the
Act, takes within its sweep four categories of bodies specified under
Section 2(1)(m). The activities of all the above mentioned categories of
entities are primarily governed by some in-house managerial body which, in
turn, are subject to the control and regulation either by the Reserve Bank
of India or some other statutory body or authority, which are also subject
to the overall supervisory control of the Reserve Bank of India. For
example, the National Housing Bank, a bank established under the Act No.53
of 1987 of the Parliament, though is an autonomous body “to operate as a
financial agency to promote housing finance institutions” with vast powers
to regulate the housing finance activity in the country, it is still
obliged under Section 5(5) of the Act 53 of 1987 to be guided by the
directions given by the Reserve Bank of India.

The National Housing Bank Act, 1987 (No.53 of 1987) – Section 5(5).
In the discharge of its functions under this Act, the National Housing Bank
shall be guided by such directions in matters of policy involving public
interest as the Central government, in consultation with the Reserve Bank,
or the Reserve Bank, may give in writing.

We are informed at the bar by the learned counsel appearing for the
Reserve Bank of India that there are some 49 entities (we doubt the
accuracy of the statement but it does not make any difference for this
decision on hand), such as, 18 State Financial Corporations, Exim Bank,
National Housing Bank, NABARD etc., which fall within the definition of the
expression “bank” or “financial institution” as defined under the SARFAESI
Act which fall within the sweep of Section 2(1)(o)(a) of the said Act.
[20] The Basle Committee on Banking Regulations and Supervisory Practices
appointed by the Bank of International Settlements (BIS) has prescribed
certain capital adequacy standards to be followed by commercial banks and
these standards have been accepted for implementation by several countries.
The BIS standard, as it is popularly known, seeks to measure capital
adequacy as the ratio of capital to risk weighted assets. It has
prescribed weightages for different categories of assets which include
certain off-balance sheet items as well. The Committee believes that it is
necessary that banks in India also conform to these standards in a phased
manner. [See: Capital Adequacy, Accounting Policies and Other Related
Matters, Report of the Committee on the Financial System (November 1991),
Ch.V page 51]
[21] Section 45-I(f) ”non-banking financial company” means-
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as
its principal business the receiving of deposits, under any scheme or
arrangement or in any other manner, or lending in any manner;
(iii) such other non-banking institution or class of such
institutions, as the Bank may, with the previous approval of the Central
Government and by notification in the Official Gazette, specify.

[22] “39. The Guidelines issued by RBI dated 13.7.2005 itself authorizes
the banks to deal inter se in NPAs. These guidelines have been issued by
the regulator in exercise of the powers conferred by Sections 21 and 35-A
of the Act. …………………. All this comes within the ambit of
Section 21 which enables RBI to frame the policy in relation to advances to
be followed by the banking companies under Section 21(2). These guidelines
and directions following them have a statutory force.”

[23] Section 2(1) (j) “default” means non-payment of any principal debt
or interest thereon or any other amount payable by a borrower to any
secured creditor consequent upon which the account of such borrower is
classified as non-performing asset in the books of account of the secured
creditor ;

[24] Section 13(3A). If, on receipt of the notice under sub-section (2),
the borrower makes any representation or raises any objection, the secured
creditor shall consider such representation or objection and if the secured
creditor comes to the conclusion that such representation or objection is
not acceptable or tenable, he shall communicate within fifteen days of
receipt of such representation or objection the reasons for non-acceptance
of the representation or objection to the borrower.

Provided that the reasons so communicated or the likely action of the
secured creditor at the stage of communication of reasons shall not confer
any right upon the borrower to prefer an application to the Debts Recovery
Tribunal under section 17 or the Court of District Judge under section 17A.

———————–
51

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