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Recently the Supreme Court held that the Reserve Bank of India has wide supervisory powers over financial institutions such as SIDBI. SIDBI refers to Small Industries Development Bank of India. Hence any RBI’s directions issued by deriving its power from the RBI Act or the Banking Regulation Act shall be statutorily binding.
Small Industries Development Bank of India or SIDBI was established under the Act of Parliament in 1990. It is the Principal Financial Institution engaged in promotion, financing & development of Micro, Small and Medium Enterprises sector and also helps in coordination of the functions of the various institutions engaged in similar activities.
Here the matter was related to delayed payments of the principal amount and the interest accumulated on bonds issued by SIDBI. In this matter, Plaintiff SIBCO bought bonds in the form of promissory notes issued by defendant SIDBI. It is called SIDBI bonds 2003 carrying 13.5% interest and SIDBI bonds 2004 generating interest at 12.5% from a person named Shankar Lal Saraf in 1998. The interest is required to be paid on a half-yearly basis on or prior to June 21 and December 21 of every year.
The bonds are freely tradable in market. M/s. SIBCO purchased Bonds of face value of 10 lakhs each for total price of 3.69 crore rupees in 1998 from the said Shankar Lal Saraf. The Bonds were deposited with the defendant in this case i.e., M/s. SIDBI on July 2, 1998 with a request to endorse the name of the Plaintiff-purchaser on the said Bonds. On refusal to register and/or record name of SIBCO by the defendant owing to the reason that CRB Capital had gone into involuntary liquidation proceedings at the behest of the RBI, the plaintiff filed WP before the Calcutta High Court seeking mandamus upon the defendant to transfer the said bonds in plaintiff’s favour and to pay the interest accumulated on it. However the Calcutta HC held that writ court is not the appropriate forum and asked the petitioner to approach company court.
Shankar Lal Sarif filed an interlocutory application in the company court stating that bond transaction payment must be treated as outside the purview of liquidation proceeding under Companies Act. The court held that bonds were beyond the ambit of liquidation proceedings after which SIDBI made the payment of principal amount along with the interest.
Afterwards during an audit, the defendant detected a delayed payment of interest and demanded the payment from SIDBI. However the latter refused. Aggrieved by such refusal, SIBCO filed a civil suit claiming delayed redemption of the bonds. While the trial court treated the order of RBI as a directive and noted that there was a stipulation against affecting the transfer, the Calcutta HC reversed the trial court order. It ordered SIDBI to pay the interest amount from the date of accrual on bonds. An appeal was made against the order of Calcutta HC.
The SC bench observed whether the facsimile issued by RBI to SIDBI was a directive or a suggestion. As per the Banking Regulation Act 1949 that bestows the power to the Reserve Bank to issue directions to banking companies, the SC held that it is not necessary for the Reserve Bank to specify a provision before issuing directions for it to have a statutory consequence. Authority under law is the only thing required here.
The division bench of Justice Subhash Reddy and Hrishikesh Roy ruled that the RBI has wide supervisory powers over financial institutions like SIDBI. Hence deriving power from RBI Act or from the Banking Regulation Act, any direction issued by RBI is statutorily binding.
Further the bench made the following observations while ruling in defendants favour:
It can be concluded that this case has laid down a significant statement about the wide supervisory powers exercised by the Reserve Bank. The apex court has remarked in this case that the Reserve Bank of India has wide supervisory powers over financial institutions such as SIDBI, towards which, any RBI’s directions, deriving power from RBI Act or the Banking Regulation Act is statutorily binding on financial institutions like SIDBI.
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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