The Supreme Court in the case of Dharani Sugars and Chemicals Ltd. v. Union of India and Ors. vide its judgment dated 2.04.2019 struck down the circular issued by the RBI dated 12.02.2018 and that authorization from the Central Government is necessary for RBI to direct insolvency process.
The constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949 under which power to issue circular is contained was challenged by way of this petition. The principal issue in the matter was with respect to the Circular issued by the RBI prescribing that resolution plan involving restructuring can only occur provided that 100% lenders agree to the same. Furthermore, if a debt with aggregate exposure of over INR 2000 crore persists for 180 days, lenders shall file the application within 15 days from such date.
It was contended that a 180 day limit to all sectors of the economy without going into the special problems faced by each sector would treat unequals equally and would be arbitrary and discriminatory, and therefore, violative of Article 14 of the Constitution of India. Furthermore, picking up randomly all defaults amounting to INR 2000 crore and above also make the Circular manifestly arbitrary and violative of Article 14.
On the other hand, it was contended on behalf of the RBI that the regulatory regime laid down in these Acts must be construed broadly, being in public interest, in the interest of banking policy, and above all, in the interest of depositors.
It was held by the two-judge bench comprising of Justices Rohinton Fali Nariman and Vineeth Saran that the RBI has been conferred with powers to direct banks to move under the Insolvency Code against debtors in certain specified circumstances and it cannot be said that they would be acting outside the four corners of the statutes which govern them.
Further, after going through the relevant provisions, it has been specified that the Central government is either to exercise powers along with the RBI or by itself concluding that without authorization by the Central Government, no such directions can be issued. The Court declared the circular as ultra vires on the ground as it is very difficult to segregate the non-baking financial institutions from banks so as to make circular applicable to them.
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