North East Region Finservices Limited And Anr. vs State Of Mizoram And Ors

Ujjal Bhuyan, J

Heard Mr. P.K. Tiwari, learned Senior counsel, assisted by Mr. M.K. Mishra, learned counsel for the petitioners and Mr. A.K. Sharma, learned

Additional Advocate General, Mizoram, assisted by Mr. D. Kalita, learned counsel for the respondents.

By filing this petition under Article 226 of the Constitution of India, petitioner seeks a declaration that Mizoram Money Lenders and Accredited

Loan Providers (Regulation) (First Amendment) Act, 2011 is unconstitutional being ultra vires the constitution. A related challenge has been made to

the consequential letter dated 01.12.2011 issued by the Deputy Commissioner, Champhai district directing petitioner No.1 to register itself as an

‘accredited loan provider’ as per the Mizoram Money Lenders and Accredited Loan Providers (Regulation) Act, 2010, as amended by the

Mizoram Money Lenders and Accredited Loan Providers (Regulation) (First Amendment) Act, 2011.

Petitioner No.1 is the North-East Region Fin-services Ltd. It is a non-deposit taking Non-Banking Finance Company (NBFC) incorporated under

the Companies Act, 1956 and registered with the Reserve Bank of India under Section 45-1A of the Reserve Bank of India Act, 1934 (RBI Act). It is

stated that petitioner No.1 has 122 Branches in 12 States out of which 28 Branches are in the State of Mizoram. Petitioner No.1 avails finance from

institutional creditors like Oriental Bank of Commerce, Corporation Bank, Bank of India, Union Bank of India, Punjab National Bank, UCO Bank, etc.,

for the purpose of on-lending to individuals, self-help groups, joint liability groups and other proprietary sectors under various categories like agriculture,

micro and small enterprises, etc.

It is stated that the categories under which on-lending is extended is in strict compliance to the directions of the Reserve Bank of India (RBI). The

rate of interest at which petitioner No.1 extends financial assistance to its borrowers cannot exceed the rate fixed by the RBI.

Petitioner No.2 is a shareholder and a Director of petitioner No.1. It is stated that petitioner No.2 was authorized by the Board of Directors to

represent petitioner No.1 in the present proceeding.

For the sake of convenience, we will refer to both the petitioners as petitioner Company.

In order to regulate money lending in the State of Mizoram and for protecting the interest of borrowers for regulating transaction of money and to

ensure transparency in such transactions, State of Mizoram enacted Mizoram Money Lenders and Accredited Loan Providers (Regulation) Act, 2010

(briefly, 2010 Act hereinafter). The said Act had received the assent of the Governor on 01.10.2010 and was published vide notification dated

19.10.2010 in the Mizoram Gazette (Extra-ordinary) dated 21.10.2010. The preamble to this Act says that it is an act to regulate money lending in the

State of Mizoram and for matters connected therewith and incidental thereto. It further says that it was expedient to make provisions for protecting

the interest of borrowers, for regulating transactions of money lending and to secure more transparency in such transactions in the State of Mizoram.

Section 1(4) of the 2010 Act provided that nothing contained in this said Act shall apply to the RBI or any bank or any Non-Banking Finance

Company/Micro Finance Company registered under the RBI. In other words, provisions of the 2010 Act were not applicable to the RBI or any bank

or any NBFC/Micro Finance Company registered under the RBI. Therefore, as per Section 1(4) of the 2010 Act, the provisions of the said Act

were not applicable in the case of the petitioner Company.

7.1. As per Section 2(1) of the 2010 Act, ‘accredited loan provider’ has been defined to mean a person or a firm who or which has a

contractual arrangement with an institutional creditor for receiving finance from such institutional creditor for the purpose of lending to the borrower in

his or its name.

7.2. Section 2(8) of the 2010 Act defines the expression ‘loan’. However, as per Clause (m) of Section 2(8), loan does not include a loan or

deposit to or by a NBFC registered with the RBI under Chapter-III (B) of the RBI Act, 1934. Â

7.3. Section 2(9) defines a ‘money lender’ to mean a person whose main or subsidiary occupation is the business of advancing and realizing

loans in the State.

7.4. Section 5 of the 2010 Act requires registration by money lender. It says that no money lender shall commence or carry on the business of

providing loan at any place to which the 2010 Act applies without obtaining registration under the said Act.

In exercise of powers conferred by Section 28 of the 2010 Act, Government of Mizoram framed the Mizoram Money Lending and Accredited

Loan Providers (Regulation) Rules, 2010 (2010 Rules hereinafter). Rule 3 deals with registration. As per Rule 3(4), initial registration fee is rupees

five lakhs and renewal fees on each occasion is rupees two lakhs fifty thousand.

8.1.    Rule 10 puts a limitation on the rates of interest charged by money lenders and accredited loan providers. It says that rate of interest

shall be annualized rates and shall not be more than thrice the interest rate charged on them by the concerned institutional creditor.

According to the petitioner Company, the 2010 Act and the 2010 Rules were validly enacted by the State of Mizoram covering legislative entry of

money lending which is in the State List, i.e., List-II. Since they were governed by the RBI guidelines and since Section 1(4) of the 2010 Act

specifically excluded NBFCs from the application of the said Act with the further clarification that loan under the 2010 Act would not include on-

lending by the NBFCs, it carried on its business activities in the State of Mizoram on the basis of registration with the RBI under Section 45-IA of the

RBI Act. Since the 2010 Act was not applicable in the case of the petitioner Company, there arose no necessity for registration of the petitioner

Company under the 2010 Rules.

State of Mizoram enacted the Mizoram Money Lenders and Accredited Loan Providers (Regulation) (First Amendment) Act, 2011 to amend the

2010 Act. Section 2 of the Mizoram Money Lenders and Accredited Loan Providers (Regulation) (First Amendment) Act, 2011 (Amendment Act of

2011, for short) provided for substitution of Section 1(4) of the 2010 Act and Section 3 of the Amendment Act of 2011 provided for amendment of

Section 2(1) of the 2010 Act pertaining to the definition of ‘accredited loan provider’. As per Section 2 of the Amendment Act of 2011, Section

1(4) of the 2010 Act would read as under:-

“Nothing contained in this Act shall apply to the Reserve Bank of India or any Bank.â€​

In other words, inapplicability of the 2010 Act to NBFCs and Micro Finance Companies registered under the RBI was done away with. The 2010

Act would not be applicable only to the RBI or any Bank which is defined in the 2010 Act as per Section 2(2).

In so far definition of ‘accredited loan provider’ as per Section 2(1) of the 2010 Act is concerned, the same would now stand enlarged

following amendment as per which ‘accredited loan provider’ has been defined as under:-

“(1) “Accredited Loan Provider†means a person or a firm who or which has contractual arrangement with an institutional creditor for

receiving finance from such institutional creditor for the purpose of lending to the borrowers in his or its own name, and it includes any Non Banking

Financial Companies/Micro Finance Companies registered under the Reserve Bank of India.â€​

In other words, following the Amendment Act of 2011, ‘accredited loan provider’ would include NBFCs and Micro Finance Companies

registered under the RBI.

Petitioner Company is aggrieved by the Amendment Act of 2011 because by the said Act, the 2010 Act and the 2010 Rules have been made

applicable to all NBFCs registered with the RBI doing business in the State of Mizoram bringing in multiplicity of regulations, including registration at

each district, and lower fixation of interest rates as compared to the interest rates prescribed by the RBI. That apart, a NBFC like the petitioner

Company has been placed at par with a money lender consequent upon which a host of restrictive measures have been imposed thereby violating the

rights of the petitioner Company to carry on free trade and commerce as guaranteed under Article 19(1)(g) of the Constitution.

As a consequential measure, Deputy Commissioner, Champhai district issued a letter dated 01.12.2011 calling upon the petitioner Company to get

itself registered in the office of the Deputy Commissioner, Champhai by depositing the required fee.

Petitioner Company wrote back to the Chief Secretary to the Government of Mizoram on 19.01.2012 saying that multiple registrations in different

districts would cause difficulties for the petitioner Company and sought for centralized registration.

Petitioner Company was informed by the Additional Secretary to the Government of Mizoram, Finance Department on 08.02.2012 that single

registration for all the 8 administrative districts was not possible. Petitioner Company was asked to register before the respective registering

authorities.

Thereafter, the present writ petition has been filed seeking the reliefs as indicated above.

This Court by order dated 07.03.2012 had issued notice and passed an interim order to the effect that respondents would not resort to coercive

steps pursuant to the letters dated 01.12.2011 and 08.02.2012.

Following an order dated 03.09.2014 passed by this Court, petitioner Company filed an additional affidavit enclosing therewith a statement

disclosing the amounts borrowed from the Banks and the rate of interest at which it lends to the borrowers as well as different types of loans

extended to the borrowers. Referring to the RBI guidelines, it is stated that there is an interest cap at 26% per annum. Therefore, rate of interest at

which petitioner company extends financial assistance to its borrowers does not exceed 26% per annum.

State of Mizoram has filed an affidavit. Stand taken by the State of Mizoram is that Entry-30 of List-II of the 7th Schedule to the Constitution of

India covers the legislative field of money lending and money lenders. Therefore, by virtue of the power conferred by the Constitution of India under

Article 246, legislature of Mizoram has the legislative competence to enact the 2010 Act. It is stated that while enacting the 2010 Act, the objective

was to regulate money lending in the State. But NBFCs registered under the RBI were exempted from its purview. Subsequently, it came to the

notice of the State Government that these NBFCs were carrying on the business of money lending in the State of Mizoram without any specific

regulations with regard to the rate of interest though RBI had issued broad guidelines to regulate the NBFCs. It is stated that due to such exemption,

NBFCs were in a position to exploit the ignorant people by charging excessive rates of interest and consequently, forcing the borrowers to forfeit their

securities on failure to repay the loans. Therefore, to protect the ignorant masses from exploitation, the Amendment Act of 2011 was enacted to bring

in NBFCs operating within the State of Mizoram under the regulatory scheme of the 2010 Act, as amended, and the 2010 Rules. In this connection,

reference has been made to a letter dated 16.01.2009 of the Government of India, Ministry of Finance, Department of Financial Services.

21.1. Petitioner Company is engaged in the business of Non-Banking Financial Institution which is nothing but money lending. This is a subject which

is within the legislative competence of the State.

21.2. Petitioner Company is fully covered within the definition of ‘accredited loan provider’ as per Section 2(1) of the 2010 Act which has been

made more explicit by the amendment Act of 2011.

21.3. By virtue of Article 246(3) of the Constitution of India read with Entry-30 of List-II, the State legislature of Mizoram is competent to legislate so

as to bring all NBFCs engaged in the business of money lending in the State of Mizoram within its regulative framework. The State Government

enacted the amendment Act to protect the ignorant masses from the exploitative hands of unscrupulous NBFCs. It is the stand of the State

Government that any money lender or accredited loan provider interested to commence or carry on business of money lending in the State of Mizoram

shall have to register itself with the concerned registering authority as per the 2010 Act, as amended, and as per the 2010 Rules. The registering

authorities have been arrayed in such a manner so as to bring those in harmony with the 8 administrative districts in the State of Mizoram headed by a

Deputy Commissioner.

21.4. The 2010 Act was drafted following recommendation of the Technical Group constituted by the RBI and on the basis of a model legislation of

money lending prepared by that Technical Group constituted by the RBI.

21.5. Since business of the petitioner Company is primarily money lending, it is not related to banking which is within the exclusive domain of the

Union. In so far registration under the RBI is concerned, it is contended that such registration was done on its free submission which does not debar

the State from regulating its activities since money lending is a subject within the domain of the State. It is further contended that legislation of the

Union on ‘banking’ and legislation on ‘money lending’ by the State are complementary and there is no conflict between the two. A

company which is engaged in the business of money lending cannot claim immunity from the regulative machinery of the State only by virtue of

registration with the RBI.

21.6. Finally, it is contended that the amendment Act of 2011 is not in conflict with any of the laws legislated by the Parliament and that by operation

of the said Act, no fundamental right of the petitioners under Article 19(1)(g), 21 and 300-A of the Constitution has been violated.

21.7. Stating that writ petition is devoid of merit, State seeks dismissal of the same.

Petitioners have filed a rejoinder affidavit to the counter affidavit filed by the State. According to the petitioners, there is no dispute that State

legislature is competent to enact law relating to money lending and money lenders as provided in Entry 30 of List-II of the 7th Schedule to the

Constitution of India. However, legislative competence to regulate financial corporations, such as, NBFCs is with the Parliament under Entry-43 of

List-I of the 7th Schedule. Reserve Bank of India Act, 1934 is relatable to Entry-38 of the Union List and by virtue of the provisions contained in the

aforesaid Act, RBI exercises its powers. Petitioner Company has been registered under Chapter-IIIB of the aforesaid Act as a NBFC. It is bound to

follow the provisions of the Reserve Bank of India Act, 1934 and the guidelines issued by the RBI; no State law can interfere with its business

activities if it conforms to the provisions of the aforesaid Act. As the petitioner Company has confined its business activities strictly within the

provisions of Chapter-IIIB of the RBI Act, 2010 Act, as amended by the amendment Act of 2011 cannot impose any further restriction upon the

petitioner Company in addition to the ones imposed by the RBI in exercise of powers under the RBI Act.

22.1. It is stated that petitioner Company has been categorized as NBFC â€" Micro Finance Institution. RBI has laid down norms and parameters as

regards bank loans to Micro Finance Institutions like pricing guidelines. It has stipulated that interest cap on individual loans at 26% per annum for all

Micro Finance Institutions be calculated on reducing balance basis.

22.2. State Government has misconstrued the concept of money lending. Any credit assistance to any person by a NBFC â€" Micro Finance

Institution like the petitioner Company would not come within the purview of ‘loan’ under the 2010 Act. It is clarified that there is no

acceptance of deposit of the borrowers by the petitioner Company.

22.3. It is contended that the State has completely misconstrued the definition of ‘accredited loan provider’. As such, attempt to bring the

petitioner Company within the ambit of the definition of ‘accredited loan provider’ is misconceived.

22.4. It is further contended that Section 45-Q of the RBI Act makes it clear that provisions of Chapter-IIIB shall have overriding effect

notwithstanding anything contained in any other law. Therefore, if there is any inconsistency between the provisions of the RBI Act and the 2010 Act,

as amended by the amendment Act of 2011, provisions of the RBI Act will prevail.

22.5. Petitioner Company does not dispute the legislative competence of the State legislature to enact the 2010 Act inasmuch as the subject of money

lending or money lender is exclusively within the domain of the State legislature. But under Entry-43 of List-I, legislative field relating to financial

corporations and NBFCs is with the Parliament. By enacting the amendment Act of 2011, State legislature had brought in financial corporations and

NBFCs within the fold of the 2010 Act which amounts to encroachment upon the field of Union legislation and to that extent, State legislature is

incompetent to enact the amendment Act of 2011 because this is a subject which is within the legislative domain of the Union.

22.6. In the above context, it is contended that petitioners are entitled to the reliefs as sought for.

Mr. Tiwari, learned Senior counsel for the petitioners, submits that the legislative field in respect of NBFC is covered by Entry 43 of the Union List

of the 7th Schedule to the Constitution whereas the legislative field in respect of RBI is covered by Entry 38 of the Union List. Therefore, Parliament

has plenary jurisdiction to legislate in matters relating to RBI and financial institutions like NBFCs. On the other hand, the legislative field in respect of

money lending and money lenders is covered by Entry-30 of the State List, i.e., List-II. Therefore, State has the exclusive jurisdiction to legislate in

respect of money lending and money lenders. Viewed in the above context, Mr. Tiwari submits that the 2010 Act as it originally stood is completely

within the legislative competence of Mizoram State Legislature. There is no challenge to it by the petitioners. However, by the amendment Act of

2011, application of the 2010 Act has been extended to the NBFCs like the petitioner Company which is beyond the legislative field of the State. He,

therefore, contends that the impugned amendment Act of 2011 and not the pre-amended Act is unconstitutional having been enacted without having

legislative competence.

23.1. Mr. Tiwari further submits that the RBI Act was amended in 1963 by inserting ChapterIIIB which specifically deals with NBFCs. Therefore,

legislation governing NBFC is a prohibited area in so far the State legislature is concerned.

23.2. Further submission of Mr. Tiwari is that the 2010 Act in its pith and substance does not suffer from any constitutional infirmity and declaration of

the amendment Act of 2011 as unconstitutional would not in any manner impact the pith and substance of the 2010 Act.

23.3. Mr. Tiwari has elaborately taken us to the various provisions contained in Chapter-IIIB of the RBI Act and submits that it is a self-contained

code and contains provisions relating to NBFCs and financial institutions. It is the RBI and RBI alone which is the designated authority to regulate

NBFCs and financial institutions.

23.4. Another submission of Mr. Tiwari is that Section 2(8) of the 2010 Act has remained untouched by the amendment Act of 2011. Pointing out to

clause (m) of Section 2(8), he submits that as per the 2010 Act, definition of ‘loan’ does not include a ‘loan’ or ‘deposit’ to or by a

NBFC registered with the RBI under Chapter-IIIB of the RBI Act. Therefore, if the amendment Act of 2011 is given free play, it will result in

material contradiction in the parent 2010 Act by bringing the NBFCs within its fold on the one hand but excluding loans by NBFCs on the other hand,

thereby making the 2010 Act unworkable. He, therefore, submits that the impugned amendment Act of 2011 being constitutionally and legally

unsustainable should be declared as ultra vires the Constitution and the RBI Act. In support of his submissions, Mr.

Tiwari has placed reliance on the following decisions:-

M. Karunanidhi Vs. Union of India = (1979) 3 SCC 431;

Kanaka Gruha Nirmana Sahakara Sangha Vs. Narayanamma = (2003) 1 SCC 228;

Govt. of AP Vs. JB Educational Society = (2005) 3 SCC 212;

Special Civil Application Nos.6223 and 12009/2011 = Sundaram Finance Ltd. Vs. State of Gujarat, decided by   the Gujarat High Court on

06.09.2012.

Mr. A. K. Sharma, learned Additional Advocate General, Mizoram submits that as perthe definition of person in the General Clauses Act, 1897,

person includes a company. Therefore, a money lender will also include a company. The amendment Act of 2011 deals with money lending and

money lenders and therefore it is within the legislative competence of the State. He further submits that Chapter-IIIB of the RBI Act deals with

regulation of NBFCs whereas objective of the 2010 Act, as amended, is to provide protection to vulnerable borrowers. Both the two Acts operate in

two separate and distinct fields. There is no repugnancy and inconsistency between the two. Legislations to protect the interest of vulnerable

borrowers would not amount to encroachment into the domain of Central legislation. Since petitioner Company is involved in the business of money

lending, the 2010 Act as amended by the amendment Act of 2011 would be fully applicable to it.

24.1. Mr. Sharma has referred to similar enactments in the State of Kerala constitutionality of which has been upheld by the Kerala High Court. He

further submits that the contentions advanced by the petitioners are misconceived and untenable. Mr. Sharma has placed reliance on the following

decisions:-

State of AP Vs. McDowell & Co. = (1996) 3 SCC 709;

State of Rajasthan Vs. Vatan Medical & General Store = (2001) 4 SCC 642;

Sundaram Finance Co. Ltd Vs. State of Kerala =Â Â AIR 2010 Kerala 80.

Replying to the submissions made by Mr. Sharma, Mr. Tiwari submits that petitioner Company does not accept any deposit from any depositor. It

is not a money lender. It is a NBFC which is governed by the provisions of Chapter-IIB of the RBI Act. The impugned amendment Act of 2011 is hit

by direct repugnancy by virtue of Article 254(1) of the Constitution. He has once again placed reliance on the decision of Sundaram Finance Co. Ltd

(supra).

25.1. Winding up his submissions, he submits that if the amendment Act of 2011 is allowed its free play, it will lead to internal inconsistency within the

2010 Act besides being vitiated by external repugnancy, thereby rendering it completely unworkable.

Submissions made by learned counsel for the parties have been considered. Also perused the materials on record.

Before we proceed further, we may once again have a close look at the relevant provisions of the 2010 Act as well as the amendment Act of

2011 and whether it would change the nature and character of the 2010 Act.

27.1. As discussed above, pith and substance of the 2010 Act as originally enacted is to regulate money lenders in the State of Mizoram and for

matters connected therewith and incidental thereto. As per preamble of the 2010 Act, it was enacted to protect the interest of the borrowers, for

regulating transactions of money lending and to secure more transparency in such transactions in the State of Mizoram. Therefore, preliminary

objective of this Act is to regulate money lending and to protect the interest of the borrowers by regulating money lending and making the same more

transparent. Section 1(4) of the 2010 Act as it originally stood provided that nothing contained in the 2010 Act would apply to the Reserve Bank of

India or to any bank or to any non-banking financial companies (NBFCs/Micro-Finance Companies) registered under the RBI. Therefore, it was

clarified at the threshold that the provisions of the 2010 Act were not to apply to the RBI or to any banking or to any NBFCs or micro-finance

companies under the RBI.

27.2. This position is made clear by the definition clause, i.e., Section 2(1) and Section 2(8) (m). As per Section 2(1), ‘accredited loan provider’

has been defined to mean a person or a firm who or which has a contractual arrangement with an institutional creditor for receiving finance from such

institutional creditor for the purpose of lending to the borrowers in his or its own name. Section 2(8)(m) says that ‘loan’ means an advance,

whether of money or of kind, at interest, with or without security and includes advance, discount, money paid for or on account of or on behalf of or at

the request of any person or the forbearance to require payment of money owing on any account whatsoever and every agreement which is in

substance or affect a loan of money and also an agreement to secure repayment of any such loan but does not include a loan or deposit to or by a

NBFC registered with the RBI under Chapter-IIIB of the RBI Act. Therefore, it is quite evident that loan or deposit to or by a NBFC registered with

the RBI under Chapter-IIIB of the RBI Act would not come within the purview of loan and therefore would not be amenable to the 2010 Act.

27.3. By the amendment Act of 2011, two changes have been made in the 2010 Act. By Section 2 of the amendment Act, Section 1(4) of the parent

Act, i.e., 2010 Act was amended by deleting the following portion:-

“or any non-banking financial companies/micro finance companies registered under the Reserve Bank of India.â€​   Â

27.4. Post-amendment, Section 1(4) of the 2010 Act would now read as follows:-

“nothing contained in this Act shall apply to the Reserve Bank or any bank.â€​

The second change brought about by the amendment Act of 2011 is by way of Section 3 amending the definition of ‘accredited loan providerâ€

as per Section 2(1) by expanding the definition of ‘accredited loan provider’ to include any non-banking finance companies/micro-finance

companies registered under the RBI. Post-amendment, the extended meaning of ‘accredited loan provider’ as per Section 2(1) of the 2010 Act

is as under:-

“Accredited loan provider means a person or a firm who or which has contractual arrangement with an institutional creditor for receiving finance

from such institutional creditor for the purpose of lending to the borrowers in his or its own name, and it includes any Non Banking Financial

Companies/Micro Finance Companies registered under the Reserve Bank of India.â€​

28.1. Thus, as a result of the amendment, there has been a definite change in the nature and character of the 2010 Act inasmuch as NBFCs and

Micro-Finance Companies have also been brought within the purview of the 2010 Act by treating these companies as money lenders.

Part-XI of the Constitution of India deals with relations between the Union and the States. Chapter-I specifically deals with legislative relations,

i.e., distribution of legislative powers. As per Article 245 of the Constitution, subject to the provisions of the Constitution, Parliament may make laws in

the whole or any part of the territory of India and the Legislature of a State may make laws for the whole or any part of the State.

Article 246 deals with subject-matter of laws made by Parliament and by the Legislatures of States. Article 246 is extracted as under:-

“246. Subject matter of laws made by Parliament and by the Legislatures of States -(1) Notwithstanding anything in clauses (2) and (3), Parliament

has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as

the ‘Union List’).

(2) Notwithstanding anything in clause (3), Parliament, and, subject to clause ( 1 ), the Legislature of any State also, have power to make laws with

respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the ‘Concurrent List’).

(3) Subject to Clauses (1) and (2), the Legislature of any State has exclusive power to makelaws for such State or any part thereof with respect to

any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the 'State List').

(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included (in a State) notwithstanding that

such matter is a matter enumerated in the State List.â€​

30.1. Clause (1) of Article 246 provides that notwithstanding anything in clause (2) and clause (3), Parliament has exclusive power to make laws with

respect to any of the matters enumerated in List-I in the 7th Schedule, i.e., Union List. Clause (2) says that notwithstanding anything in clause (3),

Parliament and subject to clause (1), Legislature of any State also have the power to make laws with respect to any of the matters enumerated in

List-III, i.e.,Concurrent List in the 7th Schedule. Clause (3) says that subject to clauses (1) and (2), the Legislature of any State has the exclusive

power to make laws for such State or any part thereof with respect to any of the matters enumerated in List-II in the 7th Schedule, i.e., State List.

A careful and conjoint reading of clauses (1), (2) and (3) of Article 246 would reveal that Parliament has overriding and exclusive power to make

laws with respect to any of the matters enumerated in List-I, i.e., Union List and in List-III, i.e., Concurrent List which indicate the respective fields of

legislation.

In M/s. Hoechst Pharmaceuticals Ltd. Vs. State of Bihar, (1983) 4 SCC 45, Supreme Court analysed the limitations on the legislative powers of

the Union and State legislatures in the context of Article 246 of the Constitution and held as under:-

“38. It is obvious that Article 246 imposes limitations on the legislative powers of the Union and State Legislatures and its ultimate analysis would

reveal the following essentials:

Parliament has exclusive power to legislate with respect to any of the mattersenumerated in List I notwithstanding anything contained in clauses (2)

and (3). The nonobstante clause in Article 246(1) provides for predominance or supremacy of Union Legislature. This power is not encumbered by

anything contained in clauses (2) and (3) for these causes themselves are expressly limited and made subject to the non-obstante clause in Article

246(1). The combined effect of the different clauses contained in Article 246 is no more and no less than this: that in respect of any matter falling

within List I, Parliament has exclusive power of legislation.

The State Legislature has exclusive power to make laws for such State or any partthereof with respect to any of the matters enumerated in List II

of the Seventh Schedule and it also has the power to make laws with respect to any matters enumerated in List III. The exclusive power of the State

Legislature to legislate with respect to any of the matters enumerated in List II has to be exercised subject to clause (l) i.e. the exclusive power of

Parliament to legislate with respect to matters enumerated in List I. As a consequence, if there is a conflict between an entry in List I and an entry in

List II which is not capable of reconciliation, the power of Parliament to legislate with respect to a matter enumerated in List II must supersede pro

tanto the exercise of power of the State Legislature.

Both Parliament and the State Legislature have con- current powers of legislation withrespect to any of the matters enumerated in List III.â€​

Thus, Supreme Court held that in respect of any matter falling within List-I, Parliament has exclusive power of legislation. The exclusive power of

the State legislature to legislate with respect to any of the matters enumerated in List-II has to be exercised subject to exclusive power of Parliament

to legislate with respect to matters enumerated in List-I. If there is any conflict between an entry in List-I and an entry in List-II which is not capable

of reconciliation, power of Parliament to legislate with respect to a matter enumerated in List-II must supersede pro tanto exercise of power of the

State legislature.

Elaborating further, Supreme Court held that the non-obstante clause employed in Clause (1) of Article 246 and the use of the expression

“subject to Clauses (1) and (2)†in Article 246 (3) lay down the principle of federal supremacy, namely, that in case of inevitable conflict between

Union and State powers, Union power as enumerated in List-I shall prevail over the State power as enumerated in Lists-II and III. However,

Supreme Court sounded a note of caution by saying that the principle of federal supremacy cannot be resorted to unless there is irreconcilable conflict

between the entries in the Union and the State List. This position is reiterated in State of West Bengal Vs. Committee for Protection of Democratic

Rights, (2010) 3 SCC 571.

In H.R. Banthia Vs. Union of India, (1969) 2 SCC 166, Supreme Court held that entries in the three Lists are only legislative heads or fields of

legislation and they demarcate the area over which the appropriate legislature can operate. However, legislative entries must be given a large and

liberal interpretation, the reason being that allocation of subjects to the Lists is not by way of any scientific or logical definition but is a mere

enumeration of broad and comprehensive categories.

This position is reiterated in TMA Pai Foundation Vs. State of Karnataka, (2002) 8 SCC 481, wherein it was categorically held that various entries

in the three Lists of the 7th Schedule are not powers of legislation but field of legislation. These entries are mere legislative heads and demarcate the

area over which the appropriate legislatures are empowered to enact law. The power to legislate is given to the appropriate legislature by Article 246

and other Articles. It is Article 246 and other Articles which either empower the Parliament or State legislature to enact law and not by entries finding

place in the three Lists of the 7th Schedule. Thus, the function of entries in the three Lists of the 7th Schedule is to demarcate the area over which the

appropriate legislatures can enact laws but do not confer power either on Parliament or the State legislatures to enact laws.

In ITC Ltd. Vs. Agricultural Produce Market Committee, (2002) 9 SCC 232, Supreme Court held that it is a settled principle of interpretation that

entries in the Lists in the 7th Schedule do not provide competence or power to legislate on the legislature for which the source of power is contained in

Article 246 of the Constitution. The entries only demarcate the legislative field of the respective legislature and do not confer legislative power as

such.

Article 254 of the Constitution deals with inconsistency between the laws made by Parliament and laws made by legislature of States. Article 254

reads as under:-

“254. Inconsistency between laws made by Parliament and laws made by the Legislatures of  States:

(1) If any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is

competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the

provisions of clause ( 2 ), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case

may be, the existing law, shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void

(2) Where a law made by the Legislature of a State with respect to one of the matters enumerated in the concurrent List contains any provision

repugnant to the provisions of an earlier law made by Parliament or an existing law with respect to that matter, then, the law so made by the

Legislature of such State shall, if it has been reserved for the consideration of the President and has received his assent, prevail in that State:

Provided that nothing in this clause shall prevent Parliament from enacting at any time any law with respect to the same matter including a law adding

to, amending, varying or repealing the law so made by the Legislature of the State.â€​

A careful analysis of Article 254 would reveal that if any provision of law made by the legislature of a State is repugnant to any provision of a law

made by Parliament which Parliament is competent to enact, then the law made by Parliament shall prevail and the law made by the legislature of the

State to the extent of the repugnancy shall be void.

In the case of UCO Bank Vs. Deepak Debbarma, (2017) 2 SCC 585, Supreme Court has held that repugnancy or inconsistency between a

Central enactment and State enactment can take place in two situations. Firstly, in a case where Central and the State laws are on any field of entry

mentioned in List-III. Secondly, between a Central law under List-I and the State law relatable to List-II. In the first case, Article 254 shall apply and

in the second case, endeavour would be to see if the conflict can be resolved by acknowledging mutual existence of the two legislations. If that is not

possible, then by virtue of the provisions contained in Article 246 (1) of the Constitution, the Parliamentary legislation would prevail and the State

legislation will have to give way.

The decisions relied upon by Mr. Tiwari, learned Senior counsel for the petitioner in M. Karunanidhi (supra), Kanaka Gruha Nirmana Sahakara

Sangha (supra) and J.B. Educational Society (supra) are on similar lines. These decisions are on the proposition that there cannot be any doubt that

Articles 246 and 254 give primacy to the law made by the Parliament which the Parliament is competent to enact. But for application of Article

254(1), there must be repugnancy between the State law and the law made by the Parliament. The repugnancy must be based on clear and direct

inconsistency between the Central law and the State law and that such inconsistency is absolutely irreconcilable. In other words, inconsistency must

be of such a nature as to bring the two laws into direct collision with each other which results in a situation where it is impossible to obey the one

without disobeying the other.

Entry 38 of List-I is RBI whereas Entry 43 of List-I covers the legislative field of incorporation, regulation and winding up of trading corporations,

including banking; insurance and finance corporations but not including cooperative societies.

Entry-30 of List-II covers the legislative field of money lending and money lenders; relief of agricultural indebtedness.

In so far Entry-30 of List II is concerned, there is no doubt that the legislative field of money lending and money lenders is exclusively within the

domain of State legislature. To that extent, there can be no dispute or question mark about the legislative competence of the 2010 Act as was

originally enacted because this is an Act framed to regulate money lenders and money lending in the State of Mizoram.

Likewise Entry-38 of List-I deals with Reserve Bank of India and the said subject being within the domain of the Parliament, the RBI Act can be

traced to the said legislative field.

The bone of contention is the interplay of Entry 43 of List I and Entry 30 of List II. Entry 43 covers legislative field of incorporation, regulation and

winding up of trading corporations including banking, insurance and financial corporations but not including cooperative societies.

According to the petitioners, the RBI Act was amended in 1964 by incorporation of Chapter-IIIB which regulates NBFCs which is traceable to

Entry 43. On the other hand, it is the contention of the State of Mizoram that NBFCs like the petitioner Company are nothing but money lenders and,

therefore, under Entry 30 of List-II, State legislature is competent to enact a legislation to regulate their activities. Hence, the amendment Act of 2011

is intravires the Constitution.Â

To examine the above controversy, let us briefly analyse the relevant provisions of the RBI Act.

Chapter-IIIB was inserted in the RBI Act vide the amendment Act of 1963 with effect from 01.12.1964. This Chapter contains provisions relating

to non-banking institutions receiving deposits and financial institutions. Section 45-I is the definition section. As per Section 45-I(a), ‘business of a

non-banking financial institution’ means carrying on the business of a financial institution referred to in clause (c) and includes business of a

nonbanking financial company referred to in clause (f). Clause (c) defines ‘financial institution’ to mean any non-banking institution which

carries on as its business or part of its business any of the activities mentioned therein including financing, whether by way of making loans or

advances or otherwise, of any activity other than its own. Clause (f) defines ‘non-banking financial company’ to mean a financial institution

which is a company; 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; and such other non-banking institution or class of such institutions as the RBI may

with the previous approval of the Central Government and by notification in the official gazette specify.

Section 45-IA mandates registration of non-banking financial companies. It says that no non-banking financial company shall commence or carry

on business of a non-banking financial institution without obtaining a certificate of registration under the said Chapter. The procedure for obtaining

such a certificate of registration is detailed in the said section.

While Section 45-IB mandatorily requires every non-banking financial company to invest and continue to invest in India in any unencumbered

approved securities, Section 45IC mandates every non-banking financial company to create a reserve fund.

Under Section 45-J, RBI has to regulate or prohibit the issue of prospectus or advertisement soliciting deposits of money from the public by the

NBFCs.

Section 45-JA is the provision which empowers the RBI to determine policy and to issue directions to regulate the affairs of the NBFCs. RBI can

collect information from such institutions and to give directions under Section 45K as well as under Section 45L while regulating the credit system of

the country.

Under Section 45MB, RBI has the power to prohibit acceptance of deposit and alienation of assets by any NBFC. It has also the power under

Section 45MC to file winding up petition for winding up of such NBFCs if the circumstances so warrant.

Under Section 45N, RBI may at any time cause an inspection of any non-banking institution including a financial institution for the purposes of

verifying the correctness or completeness of any statement, information or particulars furnished to it or for the purpose of obtaining any information or

particulars which the non-banking institution had failed to furnish on being called upon to do so.

Thus, provisions of Chapter IIIB of the RBI Act is all encompassing covering every facet of activities of NBFCs which it is mandated under the

law to regulate and monitor. Provisions of Chapter-IIIB of the RBI Act, therefore, may be said to be a self-contained code or a complete code by

itself.

A careful analysis of the provisions contained in Chapter-IIIB of the RBI Act clearly demonstrates that the power to determine the policy vis-Ã -

vis the NBFCs including the policy with respect to rate of interest is vested in the RBI.

We have noticed that RBI Act as a field of legislation is covered by Entry 38 of List-I and NBFCs are covered by Entry 43 of List-I; both within

the domain of the Parliament. In 1964, RBI Act was amended by the Parliament and Chapter-IIIB dealing with the NBFCs was inserted. Thus, the

legislative field governing the NBFCs is totally within the domain of the Parliament. On the other hand, money lending and money lenders as a

legislative entry is within the domain of the State legislature under Entry 30 of List-II. There is no overlapping between the two. Therefore, the 2010

Act was validly enacted and there is no overlapping between the provisions of the 2010 Act and Chapter-IIIB of the RBI Act. However, the

amendment Act of 2011 by directly bringing in NBFCs within the ambit of the 2010 Act has encroached upon the domain of the Parliament. It is not a

case of incidental encroachment. If the provisions of Chapter-IIIB and the amendment Act of 2011 are compared and analysed, it would be apparent

that a NBFC which is otherwise registered and regulated by the RBI in Chapter-IIIB of the RBI Act would not be able to carry on its lawful business

in the State of Mizoram unless he complies with the requirement of the 2010 Act, as amended by the amendment Act of 2011, as well as the

requirement of the 2010 Rules. Post amendment, the 2010 Act would cover the legislative field of Entry 43 of List-I which is within the domain of

Parliament. Therefore, there is clear repugnancy between the two laws.

Elaborating further, we find that pith and substance of the 2010 Act, as it stood prior to the amendment, was to regulate money lending in the State

of Mizoram. On the other hand, the object behind insertion of Chapter-IIIB in the RBI Act was to ensure effective supervision and management of

the NBFCs by the RBI which it is empowered to do by virtue of Entries 38 and 43 of List-I. By this amendment in the RBI Act, Parliament intended

registration and monitoring of NBFCs throughout the country centrally by the RBI. In the present case, petitioner Company has been registered under

Chapter-IIIB of the RBI Act and while functioning as a NBFC, it is bound to follow the requirements of Chapter-IIIB of the RBI Act as well as the

RBI guidelines. If the petitioner Company conforms to the requirements of Chapter-IIIB of the RBI Act and the RBI guidelines, the State would be

precluded from interfering with its legitimate business activities by imposing additional restrictions. But following the amendment Act of 2011, unless

the petitioner Company registers itself district wise under the 2010 Act and the 2010 Rules, it would stand debarred from carrying out its business

activities which are otherwise permitted by the RBI. This would amount to wholesome encroachment into the domain of the Central legislation.

In Sundaram Finance Ltd. (supra), Gujarat High Court was confronted with a similar issue. The question for consideration before the Gujarat High

Court was whether a NBFC registered with the RBI under Section 45-IA of the RBI Act would additionally be governed by the Gujarat Money

Lenders Act, 2011. The question posed was whether the provisions of the Gujarat Money Lenders Act, 2011 was unconstitutional in so far it applied

to NBFCs registered under the RBI Act in the absence of legislative competence.

After elaborately discussing the issue, Gujarat High Court held that to bring an entity under the control of RBI in performance of its business

prescribed in Chapter-IIIB of the RBI Act within the purview of the Gujarat Money Lenders Act would amount to encroachment upon the field of

Central law and to that extent, the same would be violative of the provisions of the Constitution of India on account of legislative incompetence.

Gujarat High Court further held that as provided in Section 45-IA of the RBI Act, petitioner in the said case was entitled to run its particular

business of lending in any manner in accordance with the RBI Act and thus no encroachment in that field would be permissible at the instance of the

Gujarat Money Lenders Act.

We are in respectful agreement with the views expressed by the Gujarat High Court.

There is one more aspect which we had already adverted to at the initial part of the judgment. This aspect relates to unworkability of the 2010 Act

following the 2011 amendment. The 2010 Act as amended by the 2011 amendment Act now brings within its fold NBFCs like the petitioner Company.

But there is no corresponding amendment to Section 2(8)(m) of the 2010 Act whereby loan or advance given by a NBFC would not be construed to

be a loan as defined under the 2010 Act. Therefore, if the loans and advances given by the petitioner Company cannot be construed as a loan then the

other provisions of the 2010 Act and the 2010 Rules may not be applicable to a NBFC like the petitioner Company notwithstanding it being brought

within the fold of the 2010 Act by the amendment Act of 2011.

We may now deal with the decisions cited by Mr. Sharma, learned Additional Advocate General, Mizoram.

In the case of McDowell and Co. (supra), it has been held that the entries in the three lists in the 7th Schedule are mere legislative heads and it is

quite likely that very often they overlap. If such a situation arises, the issue must be solved by applying the rule of ‘pith and substance’. This

decision can be of no assistance to the State as that is not the issue here. Pith and substance of both the enactments are different but by the

amendment Act of 2011, there is wholesome encroachment of the 2010 Act into Chapter-IIIB of the RBI Act which is not a case of overlapping or

incidental encroachment.

Vatan Medical and General Store (supra) is a decision on the doctrine of occupied field. Question of occupied field will come into play only in the

event of Entries in List-III, i.e., Concurrent List which is not the position here.

That brings us to the decision of the Kerala High Court in Sundaram Finance Ltd. (supra). The issue before the Kerala High Court was whether

petitioner Company which was registered with the RBI under Section 45-IA of the RBI Act was a money lender within the meaning of Kerala Money

Lenders Act, 1958. The question was answered in the affirmative by the Kerala High Court. Kerala High Court held that there were no conflicting

provisions in the RBI Act and the Kerala Money Lenders Act. While the provisions of Chapter-IIIB of the RBI Act are intended to protect the

depositors, provisions of the Money Lenders Act are essentially to protect the borrowers. Kerala High Court was not confronted with a situation like

the present one whereby and whereunder an amendment Act was introduced which changed the nature and character of the 2010 parent Act and

thereby legislating on a subject, i.e., NBFCs which is specifically earmarked for the Parliament under the Union List.

Incidentally, the Gujarat High Court did not agree with the decision of the Kerala High Court.

For the aforesaid reasons and upon thorough consideration, we hold that Mizoram Moneylenders and Accredited Loan Providers (Regulation)

(First Amendment) Act, 2011 is ultra vires the Constitution of India and is declared as such. Consequently, respondents are directed not to apply the

provisions of the Mizoram Money Lenders and Accredited Loan Providers (Regulation) Act, 2010 against the petitioner Company while carrying on

its business activities governed under Chapter-IIIB of the RBI Act.

Writ petition is allowed. However, there shall be no order as to costs.Â