Friday, January 30, 2015

Amended definition of NPA allowing different regulators to lay down different NPA norms isn't unconstitutional


Facts:

a)Prior to an amendment to definition of NPA, it was defined as 'an account of a borrower which has been classified' by a bank or financial institution ('Creditor') either 'as a sub-standard asset or a doubtful asset or a loss asset' of the Creditor and such a classification was required to be made in accordance with the guidelines issued by the RBI

b)However, under the amended definition, such a classification of NPA is required to be made in accordance with the guidelines issued by any authority which regulates such creditor and if the Creditor is not administered or regulated by any such Regulator then NPA classification is to be made in accordance with the guidelines issued by the RBI.

c)Amendment to definition of NPA i.e Section 2(1)(o) of SARFAESI Act was challenged in various High Courts. The Gujrat High Court, by a common judgment in a batch of writ petitions, held amended definition of NPA as unconstitutional.

d)On the other hand, the Madras High Court rejected the submission of the petitioners that the impugned provision suffers from the vires of excessive delegation

e)Learned counsel appearing for the borrowers/petitioners argued that the amended definition of NPA was unconstitutional on following grounds:

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.the amended provision enables different Banks and Financial Institutions ('Creditors') to adopt different guidelines to classify account of a borrower as NPA

3.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. On writ, The Supreme Court upheld the Constitutional validity of amended definition of NPA and made following observations:

1)Authorizing different Regulators for e.g. National Housing Bank or Asian Development Bank and Housing Finance corporations to prescribe different norms for the identification of a NPA with reference to different Creditors would not amount to unreasonable classification for the reason that all the Creditors do not form a uniform/homogenous class

2)The function of prescribing the norms for classifying a borrower's account as a NPA was not an essential legislative function. The amendment of the definition of the expression 'NPA' under Section 2(1) (o) was not bad on account of excessive delegation of legislative function

3)Parliament was 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- KESHAVLAL KHEMCHAND AND SONS PVT. LTD. & OTHERS (2015) 53 TAXMANN.COM 470 (SC)
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