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REPORTABLE  

 IN THE SUPREME COURT OF INDIA  

CIVIL ORIGINAL/APPELLATE JURISDICTION  

TRANSFERRED CASE (CIVIL) NO.66 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO.1399 OF 2018    

DHARANI SUGARS AND CHEMICALS LTD.    … PETITIONER  

 VERSUS  

 UNION OF INDIA & ORS.              … RESPONDENTS    

  WITH  

 WRIT PETITION (CIVIL) NO.339 OF 2018  

WRIT PETITION (CIVIL) NO.802 OF 2018    

WRIT PETITION (CIVIL) NO.1086 OF 2018    

WRIT PETITION (CIVIL) NO.1110 OF 2018    

WRIT PETITION (CIVIL) NO.1124 OF 2018    

WRIT PETITION (CIVIL) NO.1142 OF 2018    

WRIT PETITION (CIVIL) NO.1138 OF 2018    

WRIT PETITION (CIVIL) NO.1156 OF 2018    

WRIT PETITION (CIVIL) NO.1153 OF 2018    

WRIT PETITION (CIVIL) NO.1166 OF 2018    

WRIT PETITION (CIVIL) NO.1206 OF 2018   

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WRIT PETITION (CIVIL) NO.1212 OF 2018    

WRIT PETITION (CIVIL) NO.1236 OF 2018    

WRIT PETITION (CIVIL) NO.1296 OF 2018    

SLP(C) NO. 31421 OF 2018    

WRIT PETITION (CIVIL) NO.1316 OF 2018    

WRIT PETITION (CIVIL) NO.1308 OF 2018    

WRIT PETITION (CIVIL) NO.1359 OF 2018    

TRANSFERRED CASE (CIVIL) NO.65 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO. 1404 OF 2018     

WRIT PETITION (CIVIL) NO.1363 OF 2018    

WRIT PETITION (CIVIL) NO.1364 OF 2018    

WRIT PETITION (CIVIL) NO.1374 OF 2018    

TRANSFERRED CASE (CIVIL) NO.71 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO. 1283 OF 2018     

TRANSFERRED CASE (CIVIL) NO.73 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO. 1285 OF 2018     

TRANSFERRED CASE (CIVIL) NO.72 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO. 1284 OF 2018     

TRANSFERRED CASE (CIVIL) NO.75 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO. 1287 OF 2018      

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TRANSFERRED CASE (CIVIL) NO.76 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO. 1288 OF 2018     

TRANSFERRED CASE (CIVIL) NO.74 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO. 1286 OF 2018     

TRANSFERRED CASE (CIVIL) NO.70 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO. 1403 OF 2018     

TRANSFERRED CASE (CIVIL) NO.69 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO. 1402 OF 2018     

TRANSFERRED CASE (CIVIL) NO.68 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO. 1401 OF 2018     

TRANSFERRED CASE (CIVIL) NO.67 OF 2018  IN  

TRANSFER PETITION (CIVIL) NO. 1400 OF 2018     

WRIT PETITION (CIVIL) NO.1383 OF 2018    

WRIT PETITION (CIVIL) NO.1402 OF 2018    

WRIT PETITION (CIVIL) NO.1400 OF 2018    

WRIT PETITION (CIVIL) NO.1391 OF 2018    

WRIT PETITION (CIVIL) NO.1411 OF 2018    

WRIT PETITION (CIVIL) NO.1410 OF 2018    

WRIT PETITION (CIVIL) NO.1438 OF 2018    

WRIT PETITION (CIVIL) NO.22 OF 2019    

WRIT PETITION (CIVIL) NO.1502 OF 2018

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 WRIT PETITION (CIVIL) NO.8 OF 2019  

 WRIT PETITION (CIVIL) NO.9 OF 2019  

 WRIT PETITION (CIVIL) NO.14 OF 2019  

 WRIT PETITION (CIVIL) NO.36 OF 2019  

 WRIT PETITION (CIVIL) NO.50 OF 2019  

 WRIT PETITION (CIVIL) NO.81 OF 2019  

 WRIT PETITION (CIVIL) NO.117 OF 2019  

 WRIT PETITION (CIVIL) NO.246 OF 2019  

 WRIT PETITION (CIVIL) NO.278 OF 2019  

JUDGMENT    R.F. NARIMAN, J.       1. The present batch of petitions and transferred cases raise  

questions as to the constitutional validity of Sections 35AA and 35AB  

of the Banking Regulation Act, 1949 [“Banking Regulation Act”]  

introduced by way of amendment w.e.f. 04.05.2017. The real bone of  

contention is a Reserve Bank of India [“RBI”] Circular issued on  

12.02.2018, by which the RBI promulgated a revised framework for  

resolution of stressed assets. The important clauses of the aforesaid  

circular are set out hereinbelow:

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“Resolution of Stressed Assets – Revised  Framework  

1. The Reserve Bank of India has issued various  instructions aimed at resolution of stressed assets in the  economy, including introduction of certain specific  schemes at different points of time. In view of the  enactment of the Insolvency and Bankruptcy Code, 2016  (IBC), it has been decided to substitute the existing  guidelines with a harmonised and simplified generic  framework for resolution of stressed assets. The details  of the revised framework are elaborated in the following  paragraphs.  

I. Revised Framework  

A. Early identification and reporting of stress  

2. Lenders1 shall identify incipient stress in loan  accounts, immediately on default2, by classifying  stressed assets as special mention accounts (SMA) as  per the following categories:  

SMA   

Sub- categories  

Basis for classification –  Principal or interest payment or  

any other amount wholly or  partly overdue between  

SMA-0 1-30 days  

SMA-1 31-60 days  

SMA-2 61-90 days  

3. As provided in terms of the circular  DBS.OSMOS.No.14703/33.01.001/2013-14 dated May  22, 2014 and subsequent amendments thereto, lenders  shall report credit information, including classification of  an account as SMA to Central Repository of Information  on Large Credits (CRILC) on all borrower entities having  

                                                           1 Lenders under these guidelines would generally include all scheduled commercial banks  (excluding RRBs) and All India Financial Institutions, unless specified otherwise.  2 ‘Default’ means non-payment of debt when whole or any part or instalment of the amount of  debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the  case may be. For revolving facilities like cash credit, default would also mean, without prejudice to  the above, the outstanding balance remaining continuously in excess of the sanctioned limit or  drawing power, whichever is lower, for more than 30 days.

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aggregate exposure3 of ₹ 50 million and above with  them. The CRILC-Main Report will now be required to be  submitted on a monthly basis effective April 1, 2018. In  addition, the lenders shall report to CRILC, all borrower  entities in default (with aggregate exposure of ₹ 50  million and above), on a weekly basis, at the close of  business on every Friday, or the preceding working day  if Friday happens to be a holiday. The first such weekly  report shall be submitted for the week ending February  23, 2018.  

B. Implementation of Resolution Plan  

4. All lenders must put in place Board-approved policies  for resolution of stressed assets under this framework,  including the timelines for resolution. As soon as there is  a default in the borrower entity’s account with any lender,  all lenders − singly or jointly − shall initiate steps to cure  the default. The resolution plan (RP) may involve any  actions / plans / reorganisation including, but not limited  to, regularisation of the account by payment of all over  dues by the borrower entity, sale of the exposures to  other entities / investors, change in ownership, or  restructuring4. The RP shall be clearly documented by all  the lenders (even if there is no change in any terms and  conditions).  

C. Implementation Conditions for RP  

5. A RP in respect of borrower entities to whom the  lenders continue to have credit exposure, shall be  deemed to be ‘implemented’ only if the following  conditions are met:  

a. the borrower entity is no longer in default  with any of the lenders;  

                                                           3 Aggregate exposure under the guidelines would include all fund based and non-fund based  exposure with the lenders.  4 Restructuring is an act in which a lender, for economic or legal reasons relating to the  borrower’s financial difficulty (An illustrative non-exhaustive list of indicators of financial difficulty  are given in the Appendix to Annex-I), grants concessions to the borrower. Restructuring would  normally involve modification of terms of the advances / securities, which may include, among  others, alteration of repayment period / repayable amount / the amount of instalments / rate of  interest; roll over of credit facilities; sanction of additional credit facility; enhancement of existing  credit limits; and, compromise settlements where time for payment of settlement amount exceeds  three months.

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b. if the resolution involves restructuring; then  

i. all related documentation, including  execution of necessary agreements  between lenders and borrower /  creation of security charge / perfection  of securities are completed by all  lenders; and  

ii. the new capital structure and/or  changes in the terms of conditions of  the existing loans get duly reflected in  the books of all the lenders and the  borrower.  

6. Additionally, RPs involving restructuring / change in  ownership in respect of ‘large’ accounts (i.e., accounts  where the aggregate exposure of lenders is ₹ 1 billion  and above), shall require independent credit evaluation  (ICE) of the residual debt5 by credit rating agencies  (CRAs) specifically authorised by the Reserve Bank for  this purpose. While accounts with aggregate exposure of  ₹ 5 billion and above shall require two such ICEs, others  shall require one ICE. Only such RPs which receive a  credit opinion of RP46 or better for the residual debt from  one or two CRAs, as the case may be, shall be  considered for implementation. Further, ICEs shall be  subject to the following:  

a. The CRAs shall be directly engaged by  the lenders and the payment of fee for such  assignments shall be made by the lenders.  

b. If lenders obtain ICE from more than the  required number of CRAs, all such ICE  opinions shall be RP4 or better for the RP to be  considered for implementation.  

xxx xxx xxx  

D. Timelines for Large Accounts to be Referred  under IBC  

                                                           5 The residual debt of the borrower entity, in this context, means the aggregate debt (fund based  as well as non-fund based) envisaged to be held by all the lenders as per the proposed RP.  6 Annex – 2 provides list of RP symbols that can be provided by CRAs as ICE and their  meanings.

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8. In respect of accounts with aggregate exposure of the  lenders at ₹ 20 billion and above, on or after March 1,  2018 (‘reference date’), including accounts where  resolution may have been initiated under any of the  existing schemes as well as accounts classified as  restructured standard assets which are currently in  respective specified periods (as per the previous  guidelines), RP shall be implemented as per the  following timelines:  

i. If in default as on the reference date, then  180 days from the reference date.  

ii. If in default after the reference date, then 180  days from the date of first such default.  

9. If a RP in respect of such large accounts is not  implemented as per the timelines specified in paragraph  8, lenders shall file insolvency application, singly or  jointly, under the Insolvency and Bankruptcy Code 2016  (IBC)7 within 15 days from the expiry of the said  timeline8.  

xxx xxx xxx  

12. For other accounts with aggregate exposure of the  lenders below ₹ 20 billion and, at or above ₹ 1 billion, the  Reserve Bank intends to announce, over a two-year  period, reference dates for implementing the RP to  ensure calibrated, time-bound resolution of all such  accounts in default.  

xxx xxx xxx  

V. Withdrawal of extant instructions  

18. The extant instructions on resolution of stressed  assets such as Framework for Revitalising Distressed  Assets, Corporate Debt Restructuring Scheme, Flexible  Structuring of Existing Long Term Project Loans,  Strategic Debt Restructuring Scheme (SDR), Change in  Ownership outside SDR, and Scheme for Sustainable  Structuring of Stressed Assets (S4A) stand withdrawn  

                                                           7 Applicable in respect of entities notified under IBC.  8 The prescribed timelines are the upper limits. Lenders are free to file insolvency petitions under  the IBC against borrowers even before the expiry of the timelines, or even without attempting a  RP outside IBC.

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with immediate effect. Accordingly, the Joint Lenders’  Forum (JLF) as an institutional mechanism for resolution  of stressed accounts also stands discontinued. All  accounts, including such accounts where any of the  schemes have been invoked but not yet implemented,  shall be governed by the revised framework.  

19. The list of circulars/directions/guidelines subsumed  in this circular and thereby stand repealed from the date  of this circular is given in Annex - 3.  

20. The above guidelines are issued in exercise of  powers conferred under Section 35A, 35AA (read with  S.O.1435 (E) dated May 5, 2017 issued by the  Government of India) and 35AB of the Banking  Regulation Act, 1949; and, Section 45L of the Reserve  Bank of India Act, 1934.”  

 2. It will be noticed that the salient features of this circular are that  

restructuring in respect of borrower entities de hors the Insolvency  

and Bankruptcy Code, 2016 [“Insolvency Code”] can only occur if  

the resolution plan that involves restructuring is agreed to by all  

lenders, i.e., 100 per cent concurrence. Secondly, what has been  

chosen to be the subject matter of the circular is debts with an  

aggregate exposure of INR 2000 crore and over on or after  

01.03.2018. With respect to such debts, if default persists for 180  

days from 01.03.2018, or if the date of first default is after  

01.03.2018, then 180 days calculated with effect from that date,  

lenders shall file applications singly or jointly under the Insolvency  

Code within 15 days from the expiry of the aforesaid 180 days. In

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short, unless a restructuring process in respect of debts with an  

aggregate exposure of over INR 2000 crore is fully implemented on  

or before 195 days from the reference date or date of first default, the  

lenders will have to file applications as financial creditors under the  

Insolvency Code. It will be noticed that the sources of power for  

issuance of the aforesaid circular have been stated to be Section 35A  

of the Banking Regulation Act read with the Central Government’s  

circular dated 05.05.2017, Sections 35AA and 35AB of the said Act,  

and Section 45L of the Reserve Bank of India Act, 1934 [“RBI Act”]. It  

may be stated here that by an order dated 11.09.2018, this Court  

allowed various transfer petitions and made orders in Writ Petition  

No. 1086 of 2018, by which it was ordered that status quo as of today  

shall be maintained in the meantime. As a result, insofar as the  

petitions and transferred cases in this Court are concerned, the  

circular has, in effect, been stayed on and from 11.09.2018.  

3. The charge on behalf of the petitioners was led by Dr. Abhishek  

Manu Singhvi, learned Senior Advocate. Dr. Singhvi appears on  

behalf of the Association of Power Producers, representing the power  

sector in general. According to the learned Senior Advocate, the  

Electricity Act, 2003 [“Electricity Act”] was enacted as a complete

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code to regulate the private sector. According to him, unlike sectors  

such as the steel and cement sector, the power sector is fully  

regulated and tariffs that are fixed can only be after they are so  

determined / adopted by Electricity Regulatory Commissions under  

Section 62 or Section 63 of the Electricity Act. The power sector,  

therefore, is a player in a restricted market – power can only be  

purchased by distribution licensees or trading licensees under  

Section 12 of the Electricity Act, which can only be done with the prior  

approval of State Electricity Regulatory Commissions. Even  

transmission of power requires prior approval of transmission  

licensees, and therefore, substitutability of buyers is impossible since  

the means to supply power are not readily available. To buttress his  

submissions, Dr. Singhvi relied heavily upon the reports of the  

Parliamentary Standing Committees which were looking into the  

problems of the power sector from time to time. Thus, the 37th  

Parliamentary Standing Committee Report on Stressed / Non-

performing Assets in the Electricity Sector dated 07.03.2018 recorded  

that in the private sector, there were 34 stressed projects amounting  

to 40,130 MWs out of 85,550.30 MWs which have a debt exposure of  

INR 1,74,468 crore. Out of these, non-performing assets [“NPAs”]  

amounting to 34,044 crores are primarily on account of Government

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policy changes, failure to fulfil commitments by the Government,  

delayed regulatory response and non-payment of dues by DISCOMs.  

This Report, therefore, recommended the setting up of a task force to  

look into the NPA problem in the power sector.   

4. Dr. Singhvi then went into non-availability of fuel and took us  

through the New Coal Distribution Policy of 18.10.2007, by which  

Thermal Power Projects were assured supply of 100 per cent coal.  

This changed drastically as a result of Government of India  

restrictions in 2013, which restricted supply of coal to only those  

Independent Power Producers (IPPs) with long term Power Purchase  

Agreements (PPAs) and otherwise limited supply to 65 per cent of  

coal requirement. Another setback occurred in August/September,  

2014 as coal mines allocated to the power sector were cancelled by  

the Supreme Court by a judgment in Manohar Lal Sharma v.  

Principal Secretary and Ors., (2014) 9 SCC 516. Remedial  

measures such as the SHAKTI Scheme were introduced only after  

three years of the Supreme Court judgment on 22.05.2017. Even this  

Scheme limited supply of coal to 75 per cent of the assured coal  

supply as against what was assured in 2007. All this was commented  

on by the 37th and 40th Parliamentary Standing Committee Reports.  

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In so far as the gas-based plants are concerned, the 42nd  

Parliamentary Standing Committee Report referred to the same tale  

of woe as in coal based power plants – gas, in which the power  

sector was originally given priority, was later placed in 2013-14 under  

a no-cut category, leading to drastic reduction in supply of gas to the  

power sector. Dr. Singhvi also referred to various reports showing  

that as on October, 2018, DISCOMs only paid INR 8,710 crore  

against dues of approximately INR 39,500 crore to generating  

companies. This situation gets exacerbated by delay in adjudication  

and consequent payment by DISCOMs. He then referred to  

preferential treatment that is given to power companies in the public  

sector as opposed to power companies in the private sector, and  

argued that against total stressed assets of 66,000 MWs in the  

private sector, stressed assets in the public sector amount to nil.   

Lack of PPAs being entered into was another cause of concern. Out  

of the total stressed capacity of 40,130 MWs identified in the 37th  

Parliamentary Standing Committee Report, PPAs have been  

executed only for the capacity of 17,708 MWs, as a result of which  

long term commitments qua fuel supply etc. are lacking. According to  

him, the impact of the RBI Circular was directly focused upon by the  

40th Parliamentary Standing Committee Report. The 40th

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Parliamentary Standing Committee has analysed the suitability and  

impact of the impugned RBI Circular after consultation with the RBI,  

major banks, and financial institutions as well as the power sector  

associations. Key observations in the Report are:   

“(a) As per Department of Financial Services, Ministry of  

Finance, “one size fits all” approach of the RBI is  

erroneous.  

(b) Lenders like the Rural Electrification Corporation and  

the State Bank of India have submitted that  

implementing an optimal solution is impossible within the  

180-day time period specified by the impugned RBI  

Circular. The State Bank of India has stated that 12  

months’ time is required to implement a resolution plan.  

As per the prescribed timelines, every stressed project of  

the power sector will land in the NCLT.  

(c) Arriving at 100 per cent consensus of lenders for  

approval and implementation of the resolution plan is  

difficult, especially when there are projects with multiple  

lenders.  

(d) The Power Finance Corporation pointed out that  

even in case of a successfully running project like the  

Chhattisgarh project, they could only recover INR 2,500  

crore out of a total of debt of INR 8,300 crore, i.e., 70 per  

cent haircut. Thus, there is significant value erosion.   

(e) The State Bank of India highlighted the need for  

synchronisation between the RBI’s guidelines and  

resolution of the systemic issues of the electricity sector.”  

After due examination and enquiry, the 40th Parliamentary Standing  

Committee Report of August 2018 has made the following  

recommendations:

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“(a) Appropriate, relevant, and sector-specific measures  should be explored to address the issues faced by power  sector. Instead of adopting sector-agnostic approach for  stress-resolution, the RBI should look at sector-friendly  measures.   

(b) Revised framework introduced by the RBI has been  done ignoring the prevailing realities.   

(c) Repayment of 20 per cent of the outstanding principal  debt as per the RBI Circular is impracticable for power  sector entities, and accordingly, the circular  disincentivizes restructuring with the existing promoters.   

(d) Forced sale before the NCLT will cause a big  sacrifice of public money without any benefit to the  economy or the power sector.   

(e) The power sector should be protected since it is  going through a transition phase from a low-demand- low-supply situation to a moderately-high-demand  situation, which is temporary in nature.”  

5. Dr. Singhvi then referred to a challenge that was made to the  

RBI Circular in the Allahabad High Court in Independent Power  

Producers Association of India v. Union of India and Ors., Writ -  

C No. 18170 of 2018. He referred to a copy of the order dated  

31.05.2018, by which the Allahabad High Court ordered:  

“We request the Secretary, Ministry of Finance, Union of  India, to hold a meeting in the month of June, 2018 of  respondents 2 to 5 through their Secretaries and a  representative of the petitioners’ association to consider  their grievance and see whether any solution to the  problem is possible, in the light of observations made by  the Thirty-Seventh Report of Standing Committee on  Energy presented to Lok Sabha on 7.3.2018 with regard  to stressed/non-performing assets in electricity sector.  Though, we could not go through the report, our

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attention was specifically drawn to some observations in  Part-II of the report, which reads thus:   

“The Committee are of the considered view that  providing finances, though vital, to the project is  only one of the several factors essential for the  commissioning of the project. As of now,  commissioned plants worth of thousands of  Mws are under severe financial stress and are  currently under SMA-1/2 stage or on the brink  of becoming NPA. This is due to fuel shortage,  sub-optimal loading, untied capacities, absence  of FSA and lack of PPA, etc. These projects  were commissioned on the basis of national  need/ demand of electricity, availability of all  other essentials required in this regard.  However, due to unforeseen circumstances,  these plants are suffering from cash flows,  credit rating, interest servicing etc. Hence,  simply applying the RBI guidelines  mechanically by the banks, financial  institutions, joint lender forums will push these  plants further into trouble without any hope of  recovery.”  

It is needless to mention that the petitioners’  representatives shall supply a copy of this order and of  the writ petition with annexures to all the respondents  within one week from today. We only observe that action  may be avoided on the basis of the impugned circular  dated 12.2.2018 issued by respondent no.2-Reserve  Bank of India addressed to all Scheduled Commercial  Banks and All India Financial Institutions, against  members of the petitioners association, subject to  condition that the member(s) is/are not wilful defaulter(s)  till the meeting is conducted by the Secretary, Ministry of  Finance, Union of India. We also observe that the  Secretary, Ministry of Finance shall communicate the  date and time of the meeting to all concerned, including  the President of the petitioners’ association, well in  advance.”  

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6. Dr. Singhvi then referred to the detailed order passed by the  

Allahabad High Court in the aforesaid case on 27.08.2018, in which  

he referred to the stand taken by the Union of India as follows:  

“24.1. …… As observed earlier, the Central Government  is in favour of granting them some more time so as to  save the power sector in the larger interest. Mr. Tushar  Mehta, learned ASG, submitted that it is desirable, while  considering the “sector (power) specific issues” that a  timeline prescribed under the circular be made effective  after 180 days from 27.08.2018 and subsequent steps  be taken by the parties based upon the reports of the  High Level Empowered Committee presided over by the  Cabinet Secretary. He submitted, the time can be  extended at this stage and not once process under IBC  is set in motion.”  

 He also referred to the fact that a High Level Empowered Committee  

is to be set up as follows:  

“42. In this backdrop, I am inclined to direct the High  Level Empowered Committee to submit its report within  two months from the date of its constitution. The Ministry  of Power shall invite a senior officer of the RBI, after  consultation with the Governor of RBI, as a member of  the High Level Empowered Committee forthwith. In the  meantime, I observe that the Central Government should  consider whether it would like to issue directions under  Section 7 of the RBI Act on the basis of the report and  other material, including reports of the Standing  Committee within 15 days from today in the light of the  observations made in this order. In view thereof, it is not  desirable to grant any interim relief at this stage. This  shall not preclude the petitioner-Associations or its  members from applying for urgent relief, if the  circumstances so demand, placing the request and  factual details in respect of such an action. This order  shall not curtail the rights/powers of the financial

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creditors under Section 7 of IBC or even of the RBI in  issuing directions in specific case(s) under Section 35AA  of BR Act to initiate corporate insolvency resolution  process under Chapter II of Part II of IBC, in any given  case, including the petitioners or members of the  petitioners’ Association.”  

7. Dr. Singhvi then referred to the Report dated 12.11.2018 of the  

High Level Committee so constituted. This Report made various  

recommendations. It stated:  

“1. Linkage coal may be allowed to be used against short  term PPAs and power be sold through Discovery of  Efficient Energy Price (DEEP) portal following a  transparent bidding process.  

2. A nodal agency may be designated which may invite  bids for procurement of bulk power for medium term for 3  to 5 years in appropriate tranches, against pre-declared  linkage by Coal India Limited (CIL).  

3. NTPC can act as an aggregator of power, i.e., procure  power through transparent competitive bidding process  from such stressed power plants and offer that power to  the DISCOMs against PPAs of NTPC till such time as  NTPC’s own concerned plants/units are commissioned.  

4. Ministry of Coal may earmark for power, at least 60  per cent of the e-auction coal, and this should be in  addition to the regular coal requirement of the power  sector.  

5. If there is a shortfall in the supply of coal and it is  attributable to the Ministry of Coal or Railways; such  shortfall need not lapse and be carried over to the  subsequent months up to a maximum of three months.  

6. Old and high heat rate plants not complying with new  environment norms may be considered for retirement in  a phased and timebound manner at the same time  avoiding any demand/supply mismatch.

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7. Public Financial Institutions (PFIs) providing the Bill  Discounting facility may also be covered by the Tri- partite Agreement (TPA) i.e. in case of default by the  DISCOM, the RBI may recover the dues from the  account of States and make payment to the PFIs.  

8. PPAs, Fuel Supply Agreements (FSA) and LTOA for  transmission of power, EC/FC clearances, and all other  approvals including water, be kept alive and not  cancelled by the respective agencies even if the project  is referred to NCLT or is acquired by any other entity. All  of these may be linked to the plant and not the Promoter.  

9. In order to revive gas based power plants, Ministry of  Power and Ministry of Petroleum & Natural Gas may  jointly devise a scheme in line with the earlier e-bid  RLNG Scheme (supported by PSDF).”  

 Dr. Singhvi, therefore, argued that despite the fact that a  

representative of the RBI attended meetings of the Parliamentary  

Standing Committee, the RBI Circular was issued in complete  

disregard of the recommendations of such Reports, both before and  

after the impugned circular. According to him, therefore, to apply 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. Also, picking up at random all  

defaults amounting to INR 2000 crore and above, as well as the fact  

that even a lender whose stake is only 1 per cent can stall a

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resolution process de hors the Insolvency Code make the circular  

manifestly arbitrary and violative of Article 14 on this score as well.  

8. Apart from the aforesaid submissions, Dr. Singhvi referred in  

great detail to the relevant sections of the Banking Regulation Act  

and the RBI Act, and argued that the impugned circular was ultra  

vires the provisions of those Acts. According to him, Section 35A and  

Section 35AB of the Banking Regulation Act cannot possibly be the  

source of power for the impugned circular. Section 35A was  

introduced by an Amendment Act of 1956 and cannot, therefore, be  

used to empower the RBI to relegate companies to insolvency under  

the Insolvency Code as it did not exist at the time, or to give  

directions for resolution of stressed assets. He strongly referred to  

and relied upon Indian Banks’ Association v. Devkala  

Consultancy Service, (2004) 11 SCC 1 [“Indian Banks’  

Association”] for the proposition that the RBI’s functions under  

Section 35A are confined to the boundaries of the RBI Act and the  

Banking Regulation Act and not to other statutes, such as the  

Insolvency Code. He also argued that Sections 35AA and 35AB are  

part of one composite scheme. Section 35AA alone refers to, and can  

alone be the source of power for directing banking and non-banking

21  

companies to file applications under the Insolvency Code. Section  

35AB clearly refers to resolution of stressed assets in a manner  

which is de hors the Insolvency Code. He then referred to the circular  

of the Central Government dated 05.05.2017 which empowered the  

RBI to issue directions qua individual defaults that are committed.  

This being so, a general circular applying to all defaults of loans  

above INR 2000 crore, without having reference to the facts of each  

individual case would, therefore, be ultra vires and bad in law. For  

this purpose, he strongly relied upon the Press Note that introduced  

Sections 35AA and 35AB as well as the Statement of Objects and  

Reasons introducing the said Sections by the Amending Act of 2017.  

He also argued that in any case, Sections 35AA and 35AB, being  

manifestly arbitrary provisions, are violative of Article 14 of the  

Constitution of India. Further, they are also arbitrary on the ground of  

excessive delegation of power.  

9. Shri Mukul Rohatgi, Shri Sajan Poovayya, Shri K.V.  

Viswanathan, Shri Neeraj Kishan Kaul, Shri Navaniti Prasad Singh,  

Shri P.S. Narsimha, Shri Arvind P. Datar, and Shri Gopal Jain,  

learned Senior Advocates, and Shri Pulkit Deora, Smt. Purti Marwaha  

Gupta, and Shri E.R. Kumar, learned Advocates, have also supported

22  

the submissions of Dr. Singhvi. These counsel have appeared in  

cases involving many other sectors, such as telecom, steel,  

infrastructure, sports infrastructure, sugar, fertiliser, shipyard, etc.  

Each of them has highlighted the difficulties faced as a result of  

Government policies and other reasons for financial stress in all these  

sectors, which have nothing to do with the efficiency of management  

of companies operating in these sectors. All of them have adopted  

the arguments of Dr. Singhvi in stating that, without looking into each  

individual sector’s problems and attempting to solve them, the RBI  

circular applies down the board to good and bad alike, and, despite  

the fact that some corporate debtors are on the brink of resolution,  

the chopper of 180 days comes down on them and they are driven  

into the Insolvency Code. The Government has recognised that, for  

example, in the sports infrastructure sector, much larger gestation  

periods are necessary in which capital infrastructure investments take  

place and which consequently require long periods for resolution.  

They have also argued with various nuances of their own as to how  

the RBI circular is both arbitrary and ultra vires the Banking  

Regulation Act and the RBI Act.  

23  

10. Shri Rakesh Dwivedi, learned Senior Advocate appearing on  

behalf of the RBI, has taken us through various provisions of the RBI  

Act and Banking Regulation Act and has impressed upon us the fact  

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. The RBI Act and the  

Insolvency Code are intricately related to the operation of the credit  

system of the country, and must therefore, be given an expansive  

interpretation. According to the learned Senior Advocate, the RBI  

Circular is only an attempt to tell banks that insofar as huge debts  

over INR 2000 crore are concerned, they will be given a reasonable  

period of six months within which to either resolve stress assets or  

otherwise, if they cannot do so, would only then have to move under  

the Insolvency Code. According to him, clause 4 of the RBI Circular  

makes it clear that greater flexibility is given in this period of six  

months for banking and non-banking financial institutions to resolve  

stressed assets even de hors earlier restrictive circulars that have  

been done away with by the circular dated 12.02.2018 so that an  

effort be made to resolve stressed assets within a reasonable period,  

after which it becomes incumbent on such institutions to move the  

Insolvency Code. According to him, the circular is not manifestly

24  

arbitrary. On the contrary, it is in public interest and in the interest of  

the national economy to see that evergreening of debts does not  

carry on indefinitely. Therefore, these huge amounts that are due and  

owing should come back into the economy for further productive use.  

Either they can so come back within the six months’ grace period  

granted by the circular or through the route of the Insolvency Code.  

He also made it clear that the Parliamentary Standing Committee  

Reports are for the purpose of Parliament, which must then act upon  

them. None of the Reports that have been referred to have been  

acted upon by Parliament, and therefore, that cannot take the matter  

much further. Also, it is important to notice that though the executive,  

i.e., the Government could also have acted in terms of these Reports,  

it has chosen not to do so. For this purpose, he relied upon Section 7  

of the RBI Act, under which the Central Government may, from time  

to time, give such directions to the RBI that it may consider necessary  

in public interest, after consultation with the Governor of the RBI.  The  

sheet anchor of the petitioners’ case, therefore, disappears as all  

these Parliamentary Standing Committee Reports do not take the  

petitioners anywhere, not having been acted upon either by the  

Parliament or by the Central Government. This is for the very good  

reason that ultimately, it is in public interest to either resolve stressed

25  

assets within a certain timeframe, or if incapable of such resolution,  

the route of the Insolvency Code should then be followed. So far as  

the vires of Sections 35AA and 35AB are concerned, Shri Dwivedi  

relied upon our recent judgment in Swiss Ribbons Pvt. Ltd. and  

Anr. v. Union of India and Ors., 2019 (2) SCALE 5 [“Swiss  

Ribbons”], saying that great leeway must be given to Parliament to  

deal with the problems which affect the national economy as a whole.  

There is adequate guiding principle and there is no manifest  

arbitrariness in any of the aforesaid provisions. Further, there is no  

question of excessive delegation of power either, as guidance can be  

obtained from the Preamble of the Banking Regulation Act together  

with its provisions. Insofar as the RBI Circular is concerned, he  

argued that it is traceable to four sources of power, namely, Sections  

21, 35A, 35AA and 35AB of the Banking Regulation Act. Insofar as  

non-banking financial companies are concerned, it is traceable to  

Section 45L of the RBI Act. According to the learned Senior  

Advocate, a general circular of this kind can certainly be issued in  

public interest and in the interest of the national economy. Any  

restrictive reading of any of these provisions will only do harm to the  

economy of the country as a whole. Broadly read, therefore, the RBI  

Circular cannot be said to be ultra vires.   

26  

11. Shri Tushar Mehta, learned Solicitor General for India, confined  

his submissions to the constitutional validity of Sections 35AA and  

35AB of the Banking Regulation Act, and the validity of the Central  

Government circular dated 05.05.2017. According to the learned  

Solicitor General, Sections 35AA and 35AB are regulatory provisions  

made in public interest that cannot possibly be said to be manifestly  

arbitrary in any way. He relied heavily upon the judgment of Swiss  

Ribbons (supra). Further, the aforesaid Sections cannot be said to  

be unguided provisions as the RBI gets sufficient guidance from the  

Preamble as well as other provisions of the Banking Regulation Act.  

He further submitted that the authorisation of the Central Government  

with respect to Section 35AA has to be general in nature, after which,  

the RBI must exercise such power with due deliberation and with  

sector-specific care as the expert financial regulator and central bank  

of the country. He submitted that ideally, there ought to be a sector  

wise contingency analysis by the RBI before exercising power  

provided by the Central Government to it under Section 35AA. In any  

case, so far as the power sector is concerned, he was of the view that  

the RBI ought to have treated it differently from all other sectors in  

view of the steps that the Central Government is taking in order to  

bring back the power sector on its feet.

27  

 12. At this juncture, it is important to note the genesis of the  

impugned circular. By a press release dated 13.06.2017, the RBI  

identified certain accounts for reference by banks under the  

Insolvency Code. This press release reads as follows:   

“RBI identifies Accounts for Reference   

by Banks under the Insolvency and Bankruptcy  Code (IBC)  

The Reserve Bank of India had issued a Press Release  on May 22, 2017 outlining the steps taken and those on  the anvil pursuant to the promulgation of the Banking  Regulation (Amendment) Ordinance, 2017. The Press  Release had mentioned inter alia that the RBI would be  constituting a Committee comprised majorly of its  independent Board Members to advise it in regard to the  cases that may be considered for reference for  resolution under the Insolvency and Bankruptcy Code,  2016 (IBC).  

2. An Internal Advisory Committee (IAC) was accordingly  constituted and it held its first meeting on June 12, 2017.  The IAC, in the meeting, agreed to focus on large  stressed accounts at this stage and accordingly took up  for consideration the accounts which were classified  partly or wholly as non-performing from amongst the top  500 exposures in the banking system.  

3. The IAC also arrived at an objective, non-discretionary  criterion for referring accounts for resolution under IBC.  In particular, the IAC recommended for IBC reference all  accounts with fund and non-fund based outstanding  amount greater than ₹ 5000 crore, with 60% or more  classified as non-performing by banks as of March 31,  2016. The IAC noted that under the recommended  criterion, 12 accounts totaling about 25 per cent of the  current gross NPAs of the banking system would qualify  for immediate reference under IBC.

28  

4. As regards the other non-performing accounts which  do not qualify under the above criteria, the IAC  recommended that banks should finalise a resolution  plan within six months. In cases where a viable  resolution plan is not agreed upon within six months,  banks should be required to file for insolvency  proceedings under the IBC.  

5. The Reserve Bank, based on the recommendations of  the IAC, will accordingly be issuing directions to banks to  file for insolvency proceedings under the IBC in respect  of the identified accounts. Such cases will be accorded  priority by the National Company Law Tribunal (NCLT).  

6. The details of the resolution framework in regard to  the other non-performing accounts will be released in the  coming days.”  

13. At this stage, as a first step, the Internal Advisory Committee  

[“IAC”] decided to consider the stressed assets within the top 500  

exposures of the banking system as on 31.03.2017. This set of 500  

accounts was arrived at as per the statement generated from the  

Central Repository of Information on Large Credits [“CRILC”]  

database. Of the said top 500 exposures, it was noted that 71  

accounts had been partly or wholly classified as NPAs while the other  

429 were not classified as NPA by any bank. For the purpose of this  

first list, the following criteria were applied:  

a. Accounts where the funded plus non-funded  

outstanding was more than INR 5000 crore;

29  

b. Accounts where more than 60 per cent of the  

total outstanding by value was NPA as on March  

31, 2016.   

Consequently, 12 accounts which met the above criteria were  

referred for resolution under the Insolvency Code vide RBI’s direction  

dated 15.06.2017. It is pertinent to note that the accounts in the First  

List constituted around 25 per cent of the NPAs in the system and the  

cumulative fund-based and non-fund-based outstanding therein  

amounted to INR 197,769 crore.   

14. The IAC subsequently met again and decided, on 25.08.2017,  

that out of the 59 remaining NPA accounts of the top 500 exposures,  

accounts which are materially NPA (i.e., where 60 per cent of the  

total outstanding has become NPA by 30.06.2017) may be given time  

till 13.12.2017 for resolution. If the banks fail to finalise and  

implement a viable resolution plan by the said date, banks will be  

required to file applications under Insolvency Code before  

31.12.2017. The IAC noted that applying this criterion will cover 29  

NPA accounts, with total outstanding of INR 135,846 crore and total  

fund-based NPAs of INR 111,848 crore as on 30.06.2017. It is  

pertinent to note that on 28.08.2017, the RBI issued a letter directing

30  

banks to attempt resolution of the accounts in this Second List by  

13.12.2017. As regards the residual accounts, out of the initially  

identified 71 NPA accounts, the IAC recommended that such  

accounts may be addressed through a steady-state framework for  

resolution of stressed assets in a time-bound manner and failing such  

resolution, the accounts be referred to for resolution under the  

Insolvency Code. Accordingly, the RBI formulated and issued the  

revised framework vide its circular dated 12.02.2018.  

15. Meanwhile, the Ministry of Finance issued a notification dated  

05.05.2017 under Section 35AA as follows:  

“MINISTRY OF FINANCE  

(Department of Financial Services)  

ORDER  

New Delhi, the 5th May, 2017  

S.O. 1435(E).―In exercise of the powers conferred by  Section 35AA of the Banking Regulation Act, 1949 (10 of  1949), the Central Government hereby authorises the  Reserve Bank of India to issue such directions to any  banking company or banking companies which may be  considered necessary to initiate insolvency resolution  process in respect of a default, under the provisions of  the Insolvency and Bankruptcy Code, 2016.”  

 This happened to be on the very next day on which the Banking  

Regulation (Amendment) Ordinance, 2017 introduced Sections 35AA  

and 35AB as amendments to the Banking Regulation Act. A Press

31  

Note of the Ministry of Finance of 05.05.2017 explains the genesis of  

the Ordinance thus:  

“Press Information Bureau  Government of India  Ministry of Finance  

05-May-2017  

The promulgation of Banking Regulation (Amendment)  Ordinance, 2017 will lead to effective resolution of  

stressed assets, particularly in consortium or multiple  banking arrangements.  

The Ordinance enables the Union Government to  authorise the Reserve Bank of India (RBI) to direct  

banking companies to resolve specific stressed assets.  

The promulgation of the Banking Regulation  (Amendment) Ordinance, 2017 inserting two new  Sections (viz. 35AA and 35AB) after Section 35A of the  Banking Regulation Act, 1949 enables the Union  Government to authorise the Reserve Bank of India  (RBI) to direct banking companies to resolve specific  stressed assets by initiating insolvency resolution  process, where required. The RBI has also been  empowered to issue other directions for resolution, and  appoint or approve for appointment, authorities or  committees to advise banking companies for stressed  asset resolution.   

This action of the Union Government will have a direct  impact on effective resolution of stressed assets,  particularly in consortium or multiple banking  arrangements, as the RBI will be empowered to  intervene in specific cases of resolution of non- performing assets, to bring them to a definite conclusion.   

The Government is committed to expeditious resolution  of stressed assets in the banking system. The recent  enactment of Insolvency and Bankruptcy Code (IBC),  2016 has opened up new possibilities for time bound  resolution of stressed assets. The SARFAESI and Debt  Recovery Acts have been amended to facilitate  recoveries. A comprehensive approach is being adopted

32  

for effective implementation of various schemes for  timely resolution of stressed assets.”  

(emphasis supplied)    The Banking Regulation (Amendment) Ordinance, 2017 was then  

enacted as follows:  

“MINISTRY OF LAW AND JUSTICE  

4th May, 2017  

An Ordinance further to amend the Banking Regulation  

Act, 1949.  

WHEREAS the stressed assets in the banking system  

have reached unacceptably high levels and urgent  

measures are required for their resolution;  

AND WHEREAS the Insolvency and Bankruptcy Coe,  

2016 has been enacted to consolidate and amend the  

laws relating to reorganisation and insolvency resolution  

of corporate persons, partnership firms and individuals in  

a time bound manner for maximisation of value of assets  

to promote entrepreneurship, availability of credit and  

balance the interest of all the stakeholders;   

AND WHEREAS the provisions of Insolvency and  

Bankruptcy Code, 2016 can be effectively used for the  

resolution of stressed assets by empowering the banking  

regulator to issue directions in specific cases;  

AND WHEREAS Parliament is not in session and the  

President is satisfied that circumstances exist which  

render it necessary for him to take immediate action;  

NOW, THEREFORE, in exercise of the powers  

conferred by clause (1) of article 123 of the Constitution,  

the President is pleased to promulgate the following  

Ordinance:  

1. (1) This Ordinance may be called the Banking  

Regulation (Amendment) Ordinance, 2017.  

(2) It shall come into force at once.

33  

2. In the Banking Regulation Act, 1949, after section  

35A, the following sections shall be inserted, namely:  

‘35AA. The Central Government may by  

order authorise the Reserve Bank to issue  

directions to any banking company or banking  

companies to initiate insolvency resolution  

process in respect of a default, under the  

provisions of the Insolvency and Bankruptcy  

Code, 2016.  

Explanation. – For the purposes of this  

section, “default” has the same meaning  

assigned to it in clause (12) of section 3 of the  

Insolvency and Bankruptcy Code, 2016.  

35AB. (1) Without prejudice to the provisions  

of section 35A, the Reserve Bank may, from  

time to time, issue directions to the banking  

companies for resolution of stressed assets.  

(2) The Reserve Bank may specify one or  more authorities or committees with such  members as the Reserve Bank may appoint or  approve for appointment to advise banking  companies on resolution of stressed assets.”  

(emphasis supplied)    

This Ordinance was replaced by the Banking Regulation  

(Amendment) Bill, 2017 dated 14.07.2017. The Statement of Objects  

and Reasons for the aforesaid Bill reads as follows:  

“THE BANKING REGULATION   (AMENDMENT) BILL, 2017  

xxx xxx xxx  

STATEMENT OF OBJECTS AND REASONS  

Stressed assets in the banking system, or non- performing assets have reached unacceptably high  levels and hence, urgent measures are required for their  speedy resolution to improve the financial health of

34  

banking companies for proper economic growth of the  country. Therefore, it was considered necessary to make  provisions in the Banking Regulation Act, 1949 for  authorising the Reserve Bank of India to issue directions  to any banking company or banking companies to  effectively use the provisions of the Insolvency and  Bankruptcy Code, 2016 for timely resolution of stressed  assets.  

2. It was accordingly decided to make amendments to  the Banking Regulation Act, 1949. Since Parliament was  not in session and immediate action was required to be  taken, the Banking Regulation (Amendment) Ordinance,  2017 was promulgated by the President on the 4th May,  2017.  

3. The Banking Regulation (Amendment) Bill, 2017  which seeks to replace the Banking Regulation  (Amendment) Ordinance, 2017, provides for the  following, namely:—  

(a) to confer power upon the Central  Government for authorising the Reserve Bank  to issue directions to any banking company or  banking companies to initiate insolvency  resolution process in respect of a default, under  the provisions of the Insolvency and Bankruptcy  Code, 2016;  

(b) to confer power upon the Reserve Bank to  issue directions to banking companies for  resolution of stressed assets and also allow the  Reserve Bank to specify one or more  authorities or committees to advise banking  companies on resolution of  

stressed assets; and  

(c) to amend section 51 of the Act so as to  make therein the reference of proposed new  sections 35AA and 35AB.  

4. The Bill seeks to replace the said Ordinance.  xxx xxx xxx  

14th July, 2017.”  (emphasis supplied)  

35  

Sections 35AA and 35AB were then legislatively introduced as  

follows:  

“THE BANKING REGULATION  

(AMENDMENT) ACT, 2017  

[25th August, 2017]  

xxx xxx xxx  

2. In the Banking Regulation Act, 1949 (hereinafter  referred to as the principal Act), after section 35A, the  following sections shall be inserted, namely:—   

‘35AA. The Central Government may, by order,  authorise the Reserve Bank to issue directions to any  banking company or banking companies to initiate  insolvency resolution process in respect of a default,  under the provisions of the Insolvency and Bankruptcy  Code, 2016.  

Explanation.—For the purposes of this section,  “default” has the same meaning assigned to it in clause  (12) of section 3 of the Insolvency and Bankruptcy Code,  2016.  

35AB. (1) Without prejudice to the provisions of  section 35A, the Reserve Bank may, from time to time,  issue directions to any banking company or banking  companies for resolution of stressed assets.  

(2) The Reserve Bank may specify one or more  authorities or committees with such members as the  Reserve Bank may appoint or approve for appointment  to advise any banking company or banking companies  on resolution of stressed assets’.  

xxx xxx xxx”  

 CONSTITUTIONAL VALIDITY   

16. The petitioners have argued that the aforesaid Ordinance and  

Amendment Act are unconstitutional on two grounds; (i) that the  

Sections introduced are manifestly arbitrary; and (ii) that they suffer

36  

from absence of guidelines. Insofar as the first challenge is  

concerned, this Court has, in a recent judgment in Swiss Ribbons  

(supra), made it clear that economic legislation is to be viewed with  

great latitude. After referring to the Lochner era and its aftermath in  

paragraph 7 of the aforesaid judgment, this Court referred to various  

judgments of this Court in paragraph 8, and concluded as follows:  

“85. The Insolvency Code is a legislation which deals  with economic matters and, in the larger sense, deals  with the economy of the country as a whole. Earlier  experiments, as we have seen, in terms of legislations  having failed, ‘trial’ having led to repeated ‘errors’,  ultimately led to the enactment of the Code. The  experiment contained in the Code, judged by the  generality of its provisions and not by so-called crudities  and inequities that have been pointed out by the  petitioners, passes constitutional muster. To stay  experimentation in things economic is a grave  responsibility, and denial of the right to experiment is  fraught with serious consequences to the nation. We  have also seen that the working of the Code is being  monitored by the Central Government by Expert  Committees that have been set up in this behalf.  Amendments have been made in the short period in  which the Code has operated, both to the Code itself as  well as to subordinate legislation made under it. This  process is an ongoing process which involves all  stakeholders, including the petitioners.”  

It is in this background that legislation affecting the economy is to be  

viewed. This Court, in Shayara Bano v. Union of India, (2017) 9  

SCC 1 has made it clear that Article 14 may be infracted by

37  

legislation on the ground of such legislation being manifestly arbitrary.   

This Court has said in this behalf:  

“101. It will be noticed that a Constitution Bench of this  Court in Indian Express Newspapers (Bombay) (P) Ltd.  v. Union of India [Indian Express Newspapers (Bombay)  (P) Ltd. v. Union of India, (1985) 1 SCC 641 : 1985 SCC  (Tax) 121] stated that it was settled law that subordinate  legislation can be challenged on any of the grounds  available for challenge against plenary legislation. This  being the case, there is no rational distinction between  the two types of legislation when it comes to this ground  of challenge under Article 14. The test of manifest  arbitrariness, therefore, as laid down in the aforesaid  judgments would apply to invalidate legislation as well as  subordinate legislation under Article 14. Manifest  arbitrariness, therefore, must be something done by the  legislature capriciously, irrationally and/or without  adequate determining principle. Also, when something is  done which is excessive and disproportionate, such  legislation would be manifestly arbitrary. We are,  therefore, of the view that arbitrariness in the sense of  manifest arbitrariness as pointed out by us above would  apply to negate legislation as well under Article 14.”  

Short of throwing the mantra of manifest arbitrariness at us, none of  

the petitioners have been able to point out as to how either of these  

provisions is manifestly arbitrary. They are not excessive in any way  

nor do they suffer from want of any guiding principle. As a matter of  

fact, these amendments are in the nature of amendments which  

confer regulatory powers upon the RBI to carry out its functions under  

the Banking Regulation Act, and are not different in quality from any  

of the Sections which have already conferred such power. Thus,

38  

Section 21 makes it clear that the RBI may control advances made by  

banking companies in public interest, and in so doing, may not only  

lay down policy but may also give directions to banking companies  

either generally or in particular. Similarly, under Section 35A, vast  

powers are given to issue necessary directions to banking companies  

in public interest, in the interest of banking policy, to prevent the  

affairs of any banking company being conducted in a manner  

detrimental to the interest of the depositors or in a manner prejudicial  

to the interest of the banking company, or to secure the proper  

management of any banking company. It is clear, therefore, that  

these provisions which give the RBI certain regulatory powers cannot  

be said to be manifestly arbitrary.  

 17. When it comes to lack of any guidelines by which the power  

given to the RBI is to be exercised, it is clear from a catena of  

judgments that such guidance can be obtained not only from the  

Statement of Objects and Reasons and the Preamble to the Act, but  

also from its provisions. Thus, in Harishankar Bagla v. State of  

M.P., (1955) 1 SCR 380, this Court held:  

“9. The next contention of Mr. Umrigar that Section 3 of  the Essential Supplies (Temporary Powers) Act, 1946,  amounts to delegation of legislative power outside the

39  

permissible limits is again without any merit. It was  settled by the majority judgment in the Delhi Laws Act  case [1951 SCR 747] that essential powers of legislature  cannot be delegated. In other words, the legislature  cannot delegate its function of laying down legislative  policy in respect of a measure and its formulation as a  rule of conduct. The legislature must declare the policy  of the law and the legal principles which are to control  any given cases and must provide a standard to guide  the officials or the body in power to execute the law. The  essential legislative function consists in the  determination or choice of the legislative policy and of  formally enacting that policy into a binding rule of  conduct. In the present case the legislature has laid  down such a principle and that principle is the  maintenance or increase in supply of essential  commodities and of securing equitable distribution and  availability at fair prices. The principle is clear and offers  sufficient guidance to the Central Government in  exercising its powers under Section 3. Delegation of the  kind mentioned in Section 3 was upheld before the  Constitution in a number of decisions of their Lordships  of the Privy Council, vide Russell v. Queen [7 AC 829],  Hodge v. Queen [9 AC 117] and Shannon v. Lower  Mainland Dairy Products Board [1938 AC 708] and since  the coming into force of the Constitution delegation of  this character has been upheld in a number of decisions  of this Court on principles enunciated by the majority in  the Delhi Laws Act case [1951 SCR 747]. As already  pointed out, the preamble and the body of the sections  sufficiently formulate the legislative policy and the ambit  and character of the Act is such that the details of that  policy can only be worked out by delegating them to a  subordinate authority within the framework of that policy.  Mr. Umrigar could not very seriously press the question  of the invalidity of Section 3 of the Act and it is  unnecessary therefore to consider this question in  greater detail.”  

40  

Similarly, in Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. The  

Assistant Commissioner of Sales Tax and Ors., this Court  

observed:   

“13. It may be stated at the outset that the growth of the  legislative powers of the Executive is a significant  development of the twentieth century. The theory of  laissez faire has been given a go-by and large and  comprehensive powers are being assumed by the State  with a view to improve social and economic well-being of  the people. Most of the modern socio-economic  legislations passed by the Legislature lay down the  guiding principles and the legislative policy. The  Legislatures because of limitation imposed upon by the  time factor hardly go into matters of detail. Provision is,  therefore, made for delegated legislation to obtain  flexibility, elasticity, expedition and opportunity for  experimentation. The practice of empowering the  Executive to make subordinate legislation within a  prescribed sphere has evolved out of practical necessity  and pragmatic needs of a modern welfare State. At the  same time it has to be borne in mind that our  Constitution-makers have entrusted the power of  legislation to the representatives of the people, so that  the said power may be exercised not only in the name of  the people but also by the people speaking through their  representatives. The role against excessive delegation of  legislative authority flows from and is a necessary  postulate of the sovereignty of the people. The rule  contemplates that it is not permissible to substitute in the  matter of legislative policy the views of individual officers  or other authorities, however competent they may be, for  that of the popular will as expressed by the  representatives of the people. As observed on p. 224 of  Vol. I in Cooley’s Constitutional Limitations 8th Edn.:  

“One of the settled maxims in constitutional law  is, that the power conferred upon the  Legislature to make laws cannot be delegated  by that department to any other body or

41  

authority. Where the sovereign power of the  State has located the authority, there it must  remain; and by the constitutional agency alone  the laws must be made until the Constitution  itself is changed. The power to whose  judgment, wisdom, and patriotism this high  prerogative has been entrusted cannot relieve  itself of the responsibility by choosing other  agencies upon which the power shall be  devolved, nor can it substitute the judgment,  wisdom, and patriotism of any other body for  those to which alone the people have seen fit to  confide this sovereign trust.”  

xxx xxx xxx  

“15. The Constitution, as observed by this Court in the  case of  Devi Das Gopal Krishnan v. State of Punjab  [AIR 1967 SC 1895 : (1967) 3 SCJ 557 : (1967) 20 STC  430] confers a power and imposes a duty on the  Legislature to make laws. The essential legislative  function is the determination of the legislative policy and  its formulation as a rule of conduct. Obviously it cannot  abdicate its functions in favour of another. 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. This 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.”

42  

xxx xxx xxx  

“17. The matter came up for the first time before this  Court  In re The Delhi Laws Act, 1912. [AIR 1951 SC  332 : 1951 SCR 747 : 1951 SCR 527] Although each  one of the learned Judges who heard that case wrote a  separate judgment, the view which emerged from the  different judgments was that it could not be said that an  unlimited right of delegation was inherent in the  legislative power itself. This was not warranted by the  provisions of the Constitution, which vested the power of  legislation either in Parliament or State Legislatures. The  legitimacy of delegation depended upon its being vested  as an ancillary measure which the Legislature  considered to be necessary for the purpose of exercising  its legislative powers effectively and completely. The  Legislature must retain in its own hands the essential  legislative function. Exactly what constituted “essential  legislative function” was difficult to define in general  terms, but this much was clear that the essential  legislative function must at least consist of the  determination of the legislative policy and its formulation  as a binding rule of conduct. Thus where the law passed  by the legislature declares the legislative policy and lays  down the standard which is enacted into a rule of law, it  can leave the task of subordinate legislation like the  making of rules, regulations or by-laws which by its very  nature is ancillary to the statute to subordinate bodies.  The subordinate authority must do so within the  framework of the law which makes the delegation, and  such subordinate legislation has to be consistent with the  law under which it is made and cannot go beyond the  limits of the policy and standard laid down in the law. As  long as the legislative policy is enunciated with sufficient  clearness or a standard is laid down, the courts should  not interfere with the discretion that undoubtedly rests  with the Legislature itself in determining the extent of  delegation necessary in a particular case [see  observations of Wanchoo, C.J., in Municipal Corporation  of Delhi v. Birla Mills.].  

18. In Harishankar Bagla v. State of Madhya Pradesh  [AIR 1954 SC 465 : (1955) 1 SCR 380 : 1954 Cri LJ

43  

1322] this Court dealt with the validity of clause 3 of the  Cotton Textile (Control of Movement) Order, 1948  promulgated by the Central Government under Section 3  of the Essential Supplies (Temporary Powers) Act, 1946.  While upholding the validity of the impugned clause, this  Court observed that the Legislature must declare the  policy of the law and the legal principles which are to  control any given cases and must provide a standard to  guide the officials or the body in power to execute the  law, and where the Legislature has laid down such a  principle in the Act and that principle is the maintenance  or increase in supply of essential commodities and of  securing equitable distribution and availability at given  prices, the exercise of the power was valid.”   

The Statement of Objects and Reasons of the Banking Regulation  

Act, relevant for our purpose, is as follows:  

“STATEMENT OF OBJECTS AND REASONS  The provisions of law relating to banking companies  

at present form a subsidiary portion of the general law  applicable to companies and are contained in Part XA of  the Indian Companies Act, 1913. These provisions,  which were first introduced in 1936, and which have  undergone two subsequent modifications, have proved  inadequate and difficult to administer. Moreover while  the primary objective of Companies Law is to safeguard  the interests of the stock-holder, that of banking  legislation should be the protection of the interests of the  depositor. It has therefore been felt for some time that  separate legislation was necessary for the regulation of  banking in India. This need has become the more  insistent on account of the considerable development  that has taken place in recent years in banking,  especially the rapid growth of banking resources and of  the number of banks and branches. Regard must also be  had to the fact that the banking system is likely in the  post-war period to be more vulnerable by reason of the  great expansion, both quantitatively and relatively, that  has taken place in demand deposits, as compared with

44  

time deposits, during the war years. The enactment of a  separate comprehensive measure has in consequence  now become imperative.”  

(emphasis supplied)    In particular, the main features of the Bill are as follows:  

“(i) A comprehensive definition of ‘banking’ so as to bring  within the scope of the legislation all institutions which  receive deposits, repayable on demand or otherwise, for  lending or investment:  

xxx xxx xxx  

(x) Empowering the Central Government to take action  against banks conducting their affairs in a manner  detrimental to the interests of the depositors;  

(xi) Provision for bringing the Reserve Bank of India into  closer touch with banking companies;  

xxx xxx xxx  

(xiv) Widening the powers of the Reserve Bank of India  so as to enable it to come to the aid of banking  companies in times of emergency;  

xxx xxx xxx”    Sections 14A, 17, 18, and 20 impose various restrictions on a  

banking company. Thus, it is prohibited from having a floating charge  

on assets; it has to maintain a reserve fund, and a cash reserve; and  

it cannot grant loans and advances on the security of its own shares,  

or on behalf of its directors, or any firm in which its directors are  

interested etc. A banking company is obligated to hold a license that  

is issued by the RBI, by which the RBI can impose such conditions as  

it thinks fit under Section 22 of the Act. Section 22(3), in particular,  

gives guidance as to how the banking company will run its business.  

45  

These and other regulatory sections such as Sections 25, 29, 30, and  

31, all give guidance as to how the RBI is to exercise these powers  

under the newly added provisions. We, therefore, agree with Shri  

Dwivedi that there was no dearth of guidance for the RBI to exercise  

the powers delegated to it by these provisions. Consequently, the  

plea of constitutional validity fails.   

 ULTRA VIRES   

18. Shri Dwivedi referred to and relied upon Sections 21, 35A,  

35AA, and 35AB in order to sustain the validity of the impugned  

circular. Dr. Singhvi has argued that Section 35A cannot possibly be  

relied upon for the reason that it is an old provision, introduced in  

1956. Whether or not to invoke the Insolvency Code was certainly not  

in Parliament’s contemplation when it enacted Section 35A, and for  

this reason, Section 35A cannot possibly be looked at as a source of  

power authorising the RBI to issue the impugned circular.   

 19. Dr. Singhvi’s argument raises an interesting question as to the  

“ongoing” interpretation of a statute. Generally, statutes are  

recognised as Acts of Parliament that should be deemed to be  

“always speaking”. Thus, in Senior Electric Inspector v.  

Laxminarayan Chopra, (1962) 3 SCR 146, this Court held that the

46  

expression “telegraph line” mentioned in the Indian Telegraph Act,  

1885, is comprehensive enough to take in any wire used for the  

purpose of an apparatus for post and telegraph, and wireless  

stations, even though such wires and wireless stations were not in  

the contemplation of Parliament when the 1885 Act was enacted. The  

legal position was laid down thus:   

“…… The maxim contemporanea exposition as laid  down by Coke was applied to construing ancient  statutes, but not to interpreting Acts which are  comparatively modern. There is a good reason for this  change in the mode of interpretation. The fundamental  rule of construction is the same whether the Court is  asked to construe a provision of an ancient statute or  that of a modern one, namely, what is the expressed  intention of the Legislature. It is perhaps difficult to  attribute to a legislative body functioning in a static  society that its intention was couched in terms of  considerable breadth so as to take within its sweep the  future developments comprehended by the phraseology  used. It is more reasonable to confine its intention only to  the circumstances obtaining at the time the law was  made. But in a modern progressive society it would be  unreasonable to confine the intention of a Legislature to  the meaning attributable to the word used at the time the  law was made, for a modern Legislature making laws to  govern a society which is fast moving must be presumed  to be aware of an enlarged meaning the same concept  might attract with the march of time and with the  revolutionary changes brought about in social, economic,  political and scientific and other fields of human activity.  Indeed, unless a contrary intention appears, an  interpretation should be given to the words used to take  in new facts and situations, if the words are capable of  comprehending them. We cannot, therefore, agree with  the learned Judges of the High Court that the maxim

47  

contemporanea expositio could be invoked in construing  the word “telegraph line” in the Act.  

For the said reasons, we hold that the expression  “telegraph line” is sufficiently comprehensive to take in  the wires used for the purpose of the apparatus of the  Post and Telegraph Wireless Station.”  

(at pp. 156-157)  (emphasis supplied)  

 20. Guidance on whether a statute can apply to new situations not  

in contemplation of Parliament when the statute was enacted was  

felicitously set out by Lord Wilberforce in his dissenting judgment in  

Royal College of Nursing of the United Kingdom v. Department  

of Health and Social Security, [1981] 1 All ER 545 [HL] as follows:   

“In interpreting an Act of Parliament it is proper, and  indeed necessary, to have regard to the state of affairs  existing, and known by Parliament to be existing, at the  time. It is a fair presumption that Parliament’s policy or  intention is directed to that state of affairs. Leaving aside  cases of omission by inadvertence, this being not such a  case, when a new state of affairs, or a fresh set of facts  bearing on policy, comes into existence, the courts have  to consider whether they fall within the Parliamentary  intention. They may be held to do so, if they fall within  the same genus of facts as those to which the expressed  policy has been formulated. They may also be held to do  so if there can be detected a clear purpose in the  legislation which can only be fulfilled if the extension is  made. How liberally these principles may be applied  must depend upon the nature of the enactment, and the  strictness or otherwise of the words in which it has been  expressed. The courts should be less willing to extend  expressed meanings if it is clear that the Act in question  was designed to be restrictive or circumscribed in its  operation rather than liberal or permissive. They will be  much less willing to do so where the subject matter is

48  

different in kind or dimension from that for which the  legislation was passed.”  

(at pp. 564-565)    

21. In Comdel Commodities Ltd. v. Siporex Trade S.A., [1990] 2  

All ER 552 [HL], Lord Bridge put it thus:   

“When a change in social conditions produces a novel  situation, which was not in contemplation at the time  when a statute was first enacted, there can be no a priori  assumption that the enactment does not apply to the  new circumstances. If the language of the enactment is  wide enough to extend to those circumstances, there is  no reason why it should not apply.”  

(at p. 557)  

22. The phrase “always speaking” is adverted to by the House of  

Lords in McCartan Turkington Breen (A Firm) v. Times  

Newspapers Ltd., [2000] 4 All ER 913. Lord Steyn, speaking for the  

Court, stated as follows:  

“The appeal to the original intent of the statute  

There is another preliminary matter to be considered.  Counsel for the solicitors emphasised that the wording of  paragraph 9 can be traced back to the Law of Libel  Amendment Act 1888. He observed that at that time the  phenomenon of press conferences was unknown. This  was an invitation to the House to say that press  conferences could not have been within the original  intent of the legislature. There is a clear answer to this  appeal to Victorian history. Unless they reveal a contrary  intention all statutes are to be interpreted as “always  speaking statutes”. This principle was stated and  explained in R v Ireland, R v Burstow [1997] 4 All ER  225 at 233, [1998] AC 147 at 158. There are at least two  strands covered by this principle. The first is that courts

49  

must interpret and apply a statute to the world as it exists  today. That is the basis of the decision in R v  Ireland where ‘bodily harm’ in a Victorian statute was  held to cover psychiatric injury. Equally important is the  second strand, namely that the statute must be  interpreted in the light of the legal system as it exists  today. In the classic work of Sir Rupert Cross, Statutory  Interpretation (3rd edn, 1995) pp 51-52, the position is  explained as follows:  

“The somewhat quaint statement that a statute  is “always speaking” appears to have originated  in Lord Thring’s exhortations to drafters  concerning the use of the word “shall”: “An Act  of Parliament should be deemed to be always  speaking and therefore the present or past  tense should be adopted, and “shall” should be  used as an imperative only, not as a future”.  But the proposition that an Act is always  speaking is often taken to mean that a statutory  provision has to be considered first and  foremost as a norm of the current legal system,  whence it takes its force, rather than just as a  product of an historically defined Parliamentary  assembly. It has a legal existence  independently of the historical contingencies of  its promulgation, and accordingly should be  interpreted in the light of its place within the  system of legal norms currently in force. Such  an approach takes account of the viewpoint of  the ordinary legal interpreter of today, who  expects to apply ordinary current meanings to  legal texts, rather than to embark on research  into linguistic, cultural and political history,  unless he is specifically put on notice that the  latter approach is required.” (My emphasis.)  

In other words, it is generally permissible and indeed  necessary to take into account the place of the statutory  provision in controversy in the broad context of the basic  principles of the legal system as it has evolved. If this  proposition is right, as I believe it to be, it follows that on

50  

ordinary principles of construction the question before  the House must be considered in the light of the law of  freedom of expression as it exists today. The appeal to  the original meaning of the words of the statute must be  rejected.”  

(at pp. 926-927)  (emphasis supplied)  

23. This exposition of the law is to be read along with the judgment  

in Birmingham City Council v. Oakley, [2001] 1 All ER 385 [HL],  

where Lord Hoffmann cautioned thus:  

“Mr. Supperstone argued that section 79(1)(a) must be  construed in the light of modern conditions. When it  speaks of a ‘state ... prejudicial to health’, this does not  mean a state which would have been so regarded in  1846. It requires the application of modern knowledge  and standards of hygiene. The words must be construed  as ‘always speaking’ in the sense used by Lord Steyn  in R v Ireland, R v Burstow [1997] 4 All ER 225 at 233,  [1998] AC 147 at 158-159. I quite agree that when a  statute employs a concept which may change in content  with advancing knowledge, technology or social  standards, it should be interpreted as it would be  currently understood. The content may change but the  concept remains the same. The meaning of the statutory  language remains unaltered. So the concept of a vehicle  has the same meaning today as it did in 1800, even  though it includes methods of conveyance which would  not have been imagined by a legislator of those days.  The same is true of social standards. The concept of  cruelty is the same today as it was when the Bill of  Rights 1688 (1 Will & Mary, sess 2, c 2) forbade the  infliction of ‘cruel and unusual punishments’ (section 10).  But changes in social standards mean that punishments  which would not have been regarded as cruel in 1688  will be so regarded today.

51  

This doctrine does not however mean that one can  construe the language of an old statute to mean  something conceptually different from what the  contemporary evidence shows that Parliament must  have intended. So, for example, in the recent case  of Goodes v East Sussex County Council [2000] 3 All ER  603, [2000] 1 WLR 1356, the House of Lords decided  that the statutory duty of highway authorities to ‘maintain’  the highway did not include the removal of ice and snow.  Although the word ‘maintain’ was capable of including  the removal of ice and snow and such removal might be  expected by modern road users, the contemporary  evidence showed that the concept of maintenance in the  legislation was confined to keeping the fabric of the road  in repair. To require the removal of ice and snow would  not be to apply that concept in accordance with modern  standards (such as requiring a metalled surface instead  of gravel) but would be using the word ‘maintain’ to  express a broader concept than Parliament intended.  Such a change would not be in accordance with the  meaning of the statute. Likewise it seems to me in this  case that an extension of the concept of ‘premises in  such a state as to be prejudicial to health’ to the absence  of facilities, as such, is an illegitimate extension of the  statutory meaning.  

My Lords, it seems to me that the temptation to  make such an extension should be resisted for much the  same reasons as your Lordships in Southwark London  Borough Council v Mills [1999] 4 All ER 449, [1999] 3  WLR 939 refused to extend the common law of nuisance  and quiet enjoyment so as to require landlords to install  soundproofing. Parliament has dealt expressly with the  obligation to provide toilet facilities in different sections  and usually in different Acts. Until 1991 it did not require  a basin to be installed in the WC even in new  constructions. It has never done so in respect of existing  buildings. For the courts to give section 79(1)(a) an  extended “modern” meaning which required suitable  alterations to be made to existing houses would impose  a substantial financial burden upon public and private  owners and occupiers. I am entirely in favour of giving

52  

the 1990 Act a sensible modern interpretation. But I do  not think that it is either sensible or in accordance with  modern notions of democracy to hold that when  Parliament re-enacted language going back to the 19th  century, it authorised the courts to impose upon local  authorities and others a huge burden of capital  expenditure to which the statutory language had never  been held to apply. In my opinion the decision as to  whether or not to take such a step should be made by  the elected representatives of the people and not by the  courts.”  

(at pp. 396-397)    

24. A cursory reading of Section 35A makes it clear that there is  

nothing in the aforesaid provision which would indicate that the power  

of the RBI to give directions, when it comes to the Insolvency Code,  

cannot be so given. The width of the language used in the provision  

which only uses general words such as ‘public interest’ and ‘banking  

policy’ etc. makes it clear that if otherwise available, we cannot  

interdict the use of Section 35A as a source of power for the  

impugned RBI circular on the ground that the Insolvency Code, 2016  

could not be said to have been in the contemplation of Parliament in  

1956, when Section 35A was enacted. Dr. Singhvi’s contention must,  

therefore, fail.   

 25. Dr. Singhvi then relied upon the judgment in Indian Banks’  

Association (supra). In this case, the power of the RBI under Section

53  

35A of the Banking Regulation Act was held not to extend to granting  

approval to banks under a separate and distinct enactment, namely,  

the Interest Tax Act, 1974. In this context, this Court held:  

“37. The submission of the learned counsel for the  appellants to the effect that they had been permitted to  enhance the rate of interest by the Reserve Bank of  India, is equally misconceived. The Reserve Bank of  India apparently proceeded on the basis that the mode  of calculation of rate of interest vis-à-vis the tax under  the Act, as contended by Appellant 1, was correct. The  Reserve Bank of India was not an authority for  construction of a statute. Its functions are confined only  to the provisions of the Reserve Bank of India Act and  the Banking Regulation Act and not any other statute.  

38. Section 35-A of the Banking Regulation Act  empowers the Reserve Bank of India to issue directions  in relation to matters specified under Section 35-A and  not for any other purpose. The contention of the  appellants to the effect that rate of interest had been  enhanced by them pursuant to or in furtherance of the  directions issued by the Reserve Bank of India must be  held to be self-contradictory inasmuch as according to  them the Reserve Bank of India fixes only the minimum  rate of interest leaving a determination thereof in the  case of each individual borrower upon the bank  concerned. If the matter relating to increase in the rate of  the interest was within the power of the appellants, we  fail to understand as to why the Reserve Bank of India  was approached at all. The same being not permissible  under the Act, any approval given by the Reserve Bank  of India for the satisfaction of the members of the first  appellant herein was futile.”  

xxx xxx xxx  

“40. In any view of the matter, the purported directions  contained in the letter dated 2-9-1991 of the Reserve  Bank of India are not even in the nature of executive  instruction under the said Act. It was not binding on the

54  

banks, far less on the borrowers. In any event, by reason  of a misplaced and misapplied construction of statute, a  third party cannot suffer.  

41. Furthermore, having regard to the provisions  contained in Article 265 of the Constitution read with  Article 366(28) thereof, the purported demand from the  borrower for a higher amount of tax and consequently a  higher amount of interest by way of rounding-up was  wholly illegal and without jurisdiction. We also fail to  understand as to why in this modern electronic age, this  difficulty would be encountered while calculating the  exact amount of tax.  

42. We, therefore, are of the opinion that the purported  approval granted by the Reserve Bank of India was  wholly without jurisdiction and ultra vires the provisions  of the said Act.”  

Based on this judgment, Dr. Singhvi contended that the RBI cannot  

possibly give directions as to how the banks must exercise their  

discretionary power before filing applications under Section 7 of the  

Insolvency Code. Shri Dwivedi, however, distinguished this judgment  

by stating that this was a tax case and it must be remembered that  

the entries in the Seventh Schedule qua taxation are separate from  

general entries. Even otherwise, according to Shri Dwivedi, the RBI  

directions are at a stage anterior to the application of the provisions of  

the Insolvency Code, as a result of which, this judgment would have  

no application.  

55  

26. We are of the view that Shri Dwivedi is right. If a specific  

provision of the Banking Regulation Act makes it clear that the RBI  

has a specific power to direct banks to move under the Insolvency  

Code against debtors in certain specified circumstances, it cannot be  

said that they would be acting outside the four corners of the statutes  

which govern them, namely, the RBI Act and the Banking Regulation  

Act. On this score, therefore, Dr. Singhvi’s contention must fail.  

 27. Shri Dwivedi has cited certain judgments stating that  

discretionary powers given to the RBI under the Banking Regulation  

Act generally, and under Section 35A, in particular, are broad and  

expansive, and have been expansively expounded upon by this  

Court. He relied, in particular, upon Central Bank of India v.  

Ravindra, (2002) 1 SCC 367. In particular, he relied upon paragraph  

51 and paragraph 55 (5) which state:   

“51. The Banking Regulation Act, 1949 empowers the  Reserve Bank, on it being satisfied that it is necessary or  expedient in the public interest or in the interest of  depositors or banking policy so to do, to determine the  policy in relation to advances to be followed by banking  companies generally or by any banking company in  particular and when the policy has been so determined it  has a binding effect. In particular, the Reserve Bank of  India may give directions as to the rate of interest and  other terms and conditions on which advances or other  financial accommodation may be made. Such directions  are also binding on every banking company. Section 35-

56  

A also empowers the Reserve Bank of India in the public  interest or in the interest of banking policy or in the  interests of depositors (and so on) to issue directions  generally or in particular which shall be binding. With  effect from 15-2-1984 Section 21-A has been inserted in  the Act which takes away power of the court to reopen a  transaction between a banking company and its debtor  on the ground that the rate of interest charged is  excessive. The provision has been given an overriding  effect over the Usury Loans Act, 1918 and any other  provincial law in force relating to indebtedness.  xxx xxx xxx  

55. During the course of hearing it was brought to our  notice that in view of several usury laws and debt relief  laws in force in several States private moneylending has  almost come to an end and needy borrowers by and  large depend on banking institutions for financial  facilities. Several unhealthy practices having slowly  penetrated into prevalence were pointed out. Banking is  an organised institution and most of the banks press into  service long-running documents wherein the borrowers  fill in the blanks, at times without caring to read what has  been provided therein, and bind themselves by the  stipulations articulated by the best of legal brains.  Borrowers other than those belonging to the corporate  sector, find themselves having unwittingly fallen into a  trap and rendered themselves liable and obliged to pay  interest the quantum whereof may at the end prove to be  ruinous. At times the interest charged and capitalised is  manifold than the amount actually advanced. Rule of  damdupat does not apply. Penal interest, service  charges and other overheads are debited in the account  of the borrower and capitalised of which debits the  borrower may not even be aware. If the practice of  charging interest on quarterly rests is upheld and given a  judicial recognition, unscrupulous banks may resort to  charging interest even on monthly rests and capitalising  the same. Statements of accounts supplied by banks to  borrowers many a times do not contain particulars or  details of debit entries and when written in hand are  worse than medical prescriptions putting to test the eyes

57  

and wits of the borrowers. Instances of unscrupulous,  unfair and unhealthy dealings can be multiplied though  they cannot be generalised. Suffice it to observe that  such issues shall have to be left open to be adjudicated  upon in appropriate cases as and when actually arising  for decision and we cannot venture into laying down law  on such issues as do not arise for determination before  us. However, we propose to place on record a few  incidental observations, without which, we feel, our  answer will not be complete and that we do as under:  

xxx xxx xxx  

(5) The power conferred by Sections 21 and  35-A of the Banking Regulation Act, 1949 is  coupled with duty to act. The Reserve Bank of  India is the prime banking institution of the  country entrusted with a supervisory role over  banking and conferred with the authority of  issuing binding directions, having statutory  force, in the interest of the public in general and  preventing banking affairs from deterioration  and prejudice as also to secure the proper  management of any banking company  generally. The Reserve Bank of India is one of  the watchdogs of finance and economy of the  nation. It is, and it ought to be, aware of all  relevant factors, including credit conditions as  prevailing, which would invite its policy  decisions. RBI has been issuing  directions/circulars from time to time which,  inter alia, deal with the rate of interest which  can be charged and the periods at the end of  which rests can be struck down, interest  calculated thereon and charged and  capitalised. It should continue to issue such  directives. Its circulars shall bind those who fall  within the net of such directives. For such  transaction which are not squarely governed by  such circulars, the RBI directives may be  treated as standards for the purpose of  deciding whether the interest charged is

58  

excessive, usurious or opposed to public  policy.”    

Similarly, in Sudhir Shantilal Mehta v. Central Bureau of  

Investigation, (2009) 8 SCC 1, he relied upon paragraphs 51 and 52  

which state as follows:  

“51. In terms of Section 35-A of the 1949 Act, Reserve  Bank of India is empowered to issue directions to the  banks in public interest; or in the interest of banking  policy; or to prevent the affairs of any banking company  being conducted in a manner detrimental to the interests  of the depositors or in a manner prejudicial to the interest  of the banking company; or to secure the proper  management of any banking company generally.  

52. Reserve Bank of India in terms of Section 21 of the  1949 Act is empowered to control advances by banking  companies and issue necessary directions in this behalf.  Reserve Bank of India, therefore, has the requisite  power to issue direction to banks in relation to  discounting and rediscounting of bills of exchange and  those directions issued by Reserve Bank of India have  statutory force and, thus, can be termed as law in force.  (See also Corporation Bank v. D.S. Gowda [(1994) 5  SCC 213] and Central Bank of India v. Ravindra [(2002)  1 SCC 367].) All public sector banks are bound thereby.”  

 Also, in ICICI Bank Ltd. v. APS Star Industries Ltd., (2010) 10 SCC  

1, this Court, when it came to whether derivatives could be a  

business which banks could do, stated with respect to Sections 21  

and 35A of the RBI Act as follows:  

“35. Section 21 deals with the power of RBI to control  advances by banking companies. Section 21 empowers  RBI to frame policies in relation to advances to be  followed by banking companies. It further says that once

59  

such policy is made all banking companies shall be  bound to follow them. Section 21(1) is once again a  general provision empowering RBI to determine policy in  relation to advances whereas Section 21(2) empowers  RBI to give directions to banking companies as to items  mentioned there i.e. in Section 21(2). Under Section  21(3) every banking company is bound to comply with  directions given by RBI at the peril of penalty being  levied for non-compliance. Section 35-A says that where  RBI is satisfied that in the interest of banking policy it is  necessary to issue directions to banking companies it  may do so from time to time and the banking companies  shall be bound to comply with such directions. Thus, in  exercise of the powers conferred by Sections 21 and 35- A of the said Act, RBI can issue directions having  statutory force of law. Section 36 deals with further  powers and functions of RBI. Under Section 39 it is RBI  which shall be the Official Liquidator in any proceedings  concerning winding up of a banking company.”  xxx xxx xxx  

“38. The BR Act, 1949 basically seeks to regulate  banking business. In the cases in hand we are not  concerned with the definition of banking but with what  constitutes “banking business”. Thus, the said BR Act,  1949 is an open-ended Act. It empowers RBI (regulator  and policy framer in matter of advances and capital  adequacy norms) to develop a healthy secondary  market, by allowing banks inter se to deal in NPAs in  order to clean the balance sheets of the banks which  guideline/policy falls under Section 6(1)(a) read with  Section 6(1)(n). Therefore, it cannot be said that  assignment of debts/NPAs is not an activity permissible  under the BR Act, 1949. Thus, accepting deposits and  lending by itself is not enough to constitute the “business  of banking”. The dependence of commerce on banking is  so great that in modern money economy the cessation  even for a day of the banking activities would completely  paralyse the economic life of the nation. Thus, the BR  Act, 1949 mandates a statutory comprehensive and  formal structure of banking regulation and supervision in  India.”

60  

 He also referred to the Statement of Objects and Reasons of the  

Amendment Act, 1956, which brought in Section 35A in order to  

tighten up control over banking companies so as to enable the RBI to  

give directions to banking companies in relation to matters of policy or  

administration affecting the public interest.  

 28. There is no doubt that Sections 21 and 35A do confer very wide  

powers on the RBI to give directions when it comes to the matters  

specified therein. However, this does not answer the precise question  

before us. This question can only be answered by referring to  

Sections 35AA and 35AB.  

 29. Section 35AA makes it clear that the Central Government may,  

by order, authorise the RBI to issue directions to any banking  

company or banking companies when it comes to initiating the  

insolvency resolution process under the provisions of the Insolvency  

Code. The first thing to be noted is that without such authorisation,  

the RBI would have no such power. There are many sections in the  

Banking Regulation Act which enumerate the powers of the Central  

Government vis-à-vis the powers of the RBI. Thus, Section 36ACA(1)  

provides as follows:  

61  

“36ACA. Supersession of Board of Directors in  certain cases.—(1) Where the Reserve Bank is  satisfied, in consultation with the Central Government,  that in the public interest or for preventing the affairs of  any banking company being conducted in a manner  detrimental to the interest of the depositors or any  banking company or for securing the proper  management of any banking company, it is necessary so  to do, the Reserve Bank may, for reasons to be recorded  in writing, by order, supersede the Board of Directors of  such banking company for a period not exceeding six  months as may be specified in the order:  

  Provided that the period of supersession of the  

Board of Directors may be extended from time to time,  

so, however, that the total period shall not exceed twelve  

months.  

xxx xxx xxx”  

This Section makes it clear that the RBI’s satisfaction in superseding  

the board of directors of banking companies can only be exercised in  

consultation with the Central Government, and not otherwise.   

Similarly, under Sections 36AE and 36AF, the Central Government  

alone has the power to acquire undertakings of banking companies in  

certain cases, on receipt of a report from the RBI. Section 36AE(1)  

reads as follows:  

“36AE. Power of Central Government to acquire  

undertakings of banking companies in certain  

cases.—(1) If, upon receipt of a report from the Reserve  

Bank, the Central Government is satisfied that a banking  

company—  

(a) has, on more than one occasion, failed to  comply with the directions given to it in writing

62  

under Section 21 or Section 35-A, in so far as  such directions relate to banking policy, or  

(b) is being managed in a manner detrimental  to the interests of its depositors,—  

and that—  

(i) in the interests of the depositors of such  banking company, or  

(ii) in the interest of banking policy, or  

(iii) for the better provision of credit generally or  of credit to any particular section of the  community or in any particular area;  

it is necessary to acquire the undertaking of such  

banking company, the Central Government may, after  

such consultation with the Reserve Bank as it thinks fit,  

by notified order, acquire the undertaking of such  

company (hereinafter referred to as the acquired bank)  

with effect from such date as may be specified in this  

behalf by the Central Government (hereinafter referred  

to as the appointed day):  

 Provided that no undertaking of any banking  

company shall be so acquired unless such banking  

company has been given a reasonable opportunity of  

showing cause against the proposed action.  

Explanation.—In this Part,—  

(a) “notified order” means an order published  in the Official Gazette;  

(b) “undertaking,” in relation to a banking  company incorporated outside India, means the  undertaking of the company in India.  

xxx xxx xxx”    Likewise, under Section 36AF, the Central Government may, after  

consulting the RBI, make a scheme for carrying out the purpose of

63  

acquisition of such undertakings of banking companies. Section  

36AF(1) reads as follows:   

“36AF. Power of the Central Government to make  scheme.—(1) The Central Government may, after  consultation with the Reserve Bank, make a scheme for  carrying out the purposes of this Part in relation to any  acquired bank.  

xxx xxx xxx”  

 Under Section 45Y, the Central Government may after consulting the  

RBI make rules for preservation of records as follows:  

“45Y. Power of Central Government to make rules for  

the preservation of records.—The Central Government  

may, after consultation with the Reserve Bank and by  

notification in the Official Gazette, make rules specifying  

the periods for which—  

(a) a banking company shall preserve its books,  accounts and other documents; and  

(b) a banking company shall preserve and keep  with itself different instruments paid by it.”  

 Under Section 52(1), the Central Government may, after consultation  

with the RBI, make rules to give effect to the provisions of the Act as  

follows:  

“52. Power of Central Government to make rules.— (1) The Central Government may, after consultation with  the Reserve Bank, make rules to provide for all matters  for which provision is necessary or expedient for the  purpose of giving effect to the provisions of this Act and  all such rules shall be published in the Official Gazette.  

xxx xxx xxx”  

64  

Importantly, the Central Government may, on the recommendation of  

the RBI, declare that all or any of the provisions of the Banking  

Regulation Act shall not apply to any banking company, either  

generally or for a prescribed period. Section 53(1) of the Act reads as  

follows:  

“53. Power to exempt in certain cases.—(1) The  Central Government may, on the recommendation of the  Reserve Bank, declare, by notification in the Official  Gazette, that any or all of the provisions of this Act shall  not apply to any banking company or institution or to any  class of banking companies either generally or for such  period as may be specified.  

xxx xxx xxx”  

 The power to remove difficulties is also vested in the Central  

Government under Section 55A of the Act, which reads as follows:  

“55A. Power to remove difficulties.—If any difficulty  

arises in giving effect to the provisions of this Act, the  

Central Government may, by order, as occasion  

requires, do anything (not inconsistent with the  

provisions of this Act) which appears to it to be  

necessary for the purpose of removing the difficulty:  

Provided that no such power shall be exercised after  

the expiry of a period of three years from the  

commencement of Section 20 of the Banking Laws  

(Amendment) Act, 1968.”  

 A conspectus of all these provisions shows that the Banking  

Regulation Act specifies that the Central Government is either to  

exercise powers along with the RBI or by itself. The role assigned,

65  

therefore, by Section 35AA, when it comes to initiating the insolvency  

resolution process under the Insolvency Code, is thus, important.   

Without authorisation of the Central Government, obviously, no such  

directions can be issued.    

 30. The corollary of this is that prior to the enactment of Section  

35AA, it may have been possible to say that when it comes to the RBI  

issuing directions to a banking company to initiate insolvency  

resolution process under the Insolvency Code, it could have issued  

such directions under Sections 21 and 35A.  But after Section 35AA,  

it may do so only within the four corners of Section 35AA.   

 31. The matter can be looked at from a slightly different angle. If a  

statute confers power to do a particular act and has laid down the  

method in which that power has to be exercised, it necessarily  

prohibits the doing of the act in any manner other than that which has  

been prescribed.  This is the well-known rule in Taylor v. Taylor,  

[1875] 1 Ch. D. 426, which has been repeatedly followed by this  

Court. Thus, in State of U.P. v. Singhara Singh, (1964) 4 SCR 485,  

this Court held:  

“The rule adopted in Taylor v. Taylor [(1875) 1 Ch D 426,  431] is well recognised and is founded on sound  principle. Its result is that if a statute has conferred a

66  

power to do an act and has laid down the method in  which that power has to be exercised, it necessarily  prohibits the doing of the act in any other manner than  that which has been prescribed. The principle behind the  rule is that if this were not so, the statutory provision  might as well not have been enacted. A Magistrate,  therefore, cannot in the course of investigation record a  confession except in the manner laid down in Section  164. The power to record the confession had obviously  been given so that the confession might be proved by  the record of it made in the manner laid down. If proof of  the confession by other means was permissible, the  whole provision of Section 164 including the safeguards  contained in it for the protection of accused persons  would be rendered nugatory. The section, therefore, by  conferring on Magistrates the power to record  statements or confessions, by necessary implication,  prohibited a Magistrate from giving oral evidence of the  statements or confessions made to him.”  

(at pp. 490-491)       Following this principle, therefore, it is clear that the RBI can only  

direct banking institutions to move under the Insolvency Code if two  

conditions precedent are specified, namely, (i) that there is a Central  

Government authorisation to do so; and (ii) that it should be in  

respect of specific defaults. The Section, therefore, by necessary  

implication, prohibits this power from being exercised in any manner  

other than the manner set out in Section 35AA.  

32. Shri Dwivedi then argued relying upon the Finance Minister’s  

speech that Section 35AA was really enacted by way of abundant  

caution inasmuch as there was a doubt as to whether such power

67  

could be exercised generally or otherwise. He relied, in particular, on  

the following statement in the speech of the Finance Minister, Shri  

Arun Jaitley, while moving the Bill which introduced Sections 35AA  

and 35AB into the Banking Regulation Act. The Finance Minister  

stated:  

“This issue was discussed at length. There were two  views that the general power may not include this power.  One view was exactly what you are saying. The other  view was this. It is a very short amendment. Therefore,  to obviate any controversy, the RBI will direct the  consortium of banks to go and move an IBC insolvency  petition.”  

  33. A Finance Minister’s speech, introducing certain provisions, can  

certainly shed some light on such provisions, particularly in cases of  

ambiguity. In the present case, what is missed is the fact that two  

conditions precedent have been introduced in Section 35AA, without  

which, power cannot be exercised by the RBI. This itself shows that it  

is not possible to say that Section 35AA has been introduced ex  

abundanti cautela. Further, it is well settled that Parliament does not  

legislate where no legislation is called for. Thus, in Utkal  

Contractors & Joinery (P) Ltd. v. State of Orissa, (1987) 3 SCC  

279, this Court held:  

“9. In considering the rival submissions of the learned  Counsel and in defining and construing the area and the

68  

content of the Act and its provisions, it is necessary to  make certain general observations regarding the  interpretation of statutes. A statute is best understood if  we know the reason for it. The reason for a statute is the  safest guide to its interpretation. The words of a statute  take their colour from the reason for it. How do we  discover the reason for a statute? There are external and  internal aids. The external aids are Statement of Objects  and Reasons when the Bill is presented to Parliament,  the reports of committees which preceded the Bill and  the reports of Parliamentary Committees. Occasional  excursions into the debates of Parliament are permitted.  Internal aids are the preamble, the scheme and the  provisions of the Act. Having discovered the reason for  the statute and so having set the sail to the wind, the  interpreter may proceed ahead. No provision in the  statute and no word of the statute may be construed in  isolation. Every provision and every word must be looked  at generally before any provision or word is attempted to  be construed. The setting and the pattern are important.  It is again important to remember that Parliament does  not waste its breath unnecessarily. Just as Parliament is  not expected to use unnecessary expressions,  Parliament is also not expected to express itself  unnecessarily. Even as Parliament does not use any  word without meaning something, Parliament does not  legislate where no legislation is called for. Parliament  cannot be assumed to legislate for the sake of  legislation; nor can it be assumed to make pointless  legislation. Parliament does not indulge in legislation  merely to state what it is unnecessary to state or to do  what is already validly done. Parliament may not be  assumed to legislate unnecessarily. Again, while the  words of an enactment are important, the context is no  less important. For instance:  

“...the fact that general words are used in a  statute is not in itself a conclusive reason why  every case falling literally within them should be  governed by that statute, and the context of an  Act may well indicate that wide or general

69  

words should be given a restrictive meaning.”  [Halsbury 4th Edn., Vol. 44 p. 874]”  

 This contention of Shri Dwivedi must, therefore, fail.   

34. Yet another contention of Shri Dwivedi is that concurrent  

powers have been given to the RBI on a combined reading of  

Sections 21, 35A, 35AA, and 35AB.  Interestingly, when concurrent  

powers are given to the same or to two different authorities, the  

Banking Regulation Act expressly says so. Thus, Section 35(1) of the  

Act is an example of concurrent power given to the RBI as well as to  

the Central Government. Section 35(1) of the Act reads as follows:  

“35. Inspection.—(1) Notwithstanding anything to the  contrary contained in Section 235 of the Companies Act,  1956, the Reserve Bank at any time may, and on being  directed so to do by the Central Government shall, cause  an inspection to be made by one or more of its officers of  any banking company and its books and accounts; and  the Reserve Bank shall supply to the banking company a  copy of its report on such inspection.  xxx xxx xxx”  

   When it comes to the inspection of books of accounts, the RBI may,  

either by itself or by being directed to do so by the Central  

Government, cause an inspection to be made of any banking  

company’s books and accounts in the manner specified in the  

Section. This is to be contrasted with Section 35AA, which makes it  

clear that de hors the authorisation of the Central Government, the

70  

RBI has no power to issue directions on its own, unlike Section 35.  

This argument also must, therefore, fail.   

 35. Shri Dwivedi then argued that Section 35AB uses the words  

“without prejudice” to indicate that the power granted under the said  

Section was to be read as additional to other powers granted by  

Sections 35A and 35AA. This Court, in Bharat Sanchar Nigam Ltd.  

v. Telecom Regulatory Authority of India and Ors., (2014) 3 SCC  

222, at paragraphs 90 to 97, has indicated that the words “without  

prejudice” appearing in a Section make it clear that powers that are  

enumerated are only illustrative of a general power and do not restrict  

such general power. Indeed, in Union of India and Anr. v. Pfizer  

Ltd. and Ors., (2018) 2 SCC 39, this Court held:  

“14. Having heard the learned counsel for the parties, it  is clear that Section 26-A has been introduced by an  amendment in 1982. A bare reading of this provision  would show, firstly, that it is without prejudice to any  other provision contained in this Chapter (meaning  thereby Chapter IV). This expression only means that  apart from the Central Government's other powers  contained in Chapter IV, Section 26-A is an additional  power which must be governed by its own terms. Under  Section 26-A, the Central Government must be  “satisfied” that any drug or cosmetic is likely to involve (i)  any risk to human beings or families; or (ii) that any drug  does not have the therapeutic value claimed or  purported to be claimed for it; or (iii) contains ingredients  in such quantity for which there is no therapeutic  justification. Obviously, the Central Government has to

71  

apply its mind to any or all of these three factors which  has to be based upon its “satisfaction” as to the  existence of any or all of these factors. The power  exercised under Section 26-A must further be exercised  only if it is found necessary or expedient to do so in  public interest. When the power is so exercised, it may  regulate, restrict or prohibit manufacture, sale or  distribution of any drug or cosmetic.”  

 Thus, the power to issue directions given by Section 35AB is in  

addition to the power that is given under Section 35A.  

36. It is significant that the power to issue directions given by  

Section 35AB is without prejudice only to the provisions of Section  

35A, i.e., it has to be read in conjunction with Section 35A. What is of  

even greater significance is that Section 35AB is not without prejudice  

to the provisions contained in Section 35AA. This being so, it is clear  

that the power under Section 35AB, read with Section 35A, is to be  

exercised separately from the power conferred by Section 35AA.  

37. All the learned counsel appearing on both sides referred to  

external aids to construe the statute at hand. In Eera (through Dr.  

Manjula Krippendorf) v. State (NCT of Delhi) and Anr., (2017) 15  

SCC 133, Nariman, J. referred to what may be called the theory of  

creative interpretation. Instances of creative interpretation are when  

the Court looks at both the literal language as well as the purpose or  

object of the statute in order to better determine what the words used

72  

by the draftsman of legislation mean [see paragraph 122]. He then  

concluded:  

“127. It is thus clear on a reading of English, US,  Australian and our own Supreme Court judgments that  the “Lakshman Rekha” has in fact been extended to  move away from the strictly literal rule of interpretation  back to the rule of the old English case  of Heydon [Heydon case, (1584) 3 Co Rep 7a : 76 ER  637] , where the Court must have recourse to the  purpose, object, text and context of a particular provision  before arriving at a judicial result. In fact, the wheel has  turned full circle. It started out by the rule as stated in  1584 in Heydon case [Heydon case, (1584) 3 Co Rep 7a  : 76 ER 637] , which was then waylaid by the literal  interpretation rule laid down by the Privy Council and the  House of Lords in the mid-1800s, and has come back to  restate the rule somewhat in terms of what was most  felicitously put over 400 years ago in Heydon  case [Heydon case, (1584) 3 Co Rep 7a : 76 ER 637].”  

 This judgment has since been followed by this Court in ArcelorMittal  

India (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1 [at paragraph  

29]; Asian Resurfacing of Road Agency (P) Ltd. v. Central  

Bureau of Investigation, (2018) 16 SCC 299 [at paragraph 51.5];  

Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., (2018) 2  

SCC 674 [at paragraphs 27 and 30]; State (NCT of Delhi) v. Brijesh  

Singh, (2017) 10 SCC 779 [at paragraph 13].  

 38. The Press Note dated 05.05.2017, set out supra, explained the  

new Sections 35AA and 35AB as the grant of two distinct and

73  

separate powers. Section 35AA has been inserted “to resolve specific  

stressed assets by initiating insolvency resolution process where  

required”. On the other hand, Section 35AB has been enacted so that  

the “RBI has also been empowered to issue other directions for  

resolution……” It is significant that Section 35AA is enacted exactly  

as it is in the Ordinance. So is Section 35AB, except for a minor  

addition in sub-section (1), which adds the words “any banking  

company or”. Indeed, even the Statement of Objects and Reasons  

introducing the same Sections by way of an Amendment Act makes it  

clear that the powers conferred for resolution of stressed assets,  

either by invoking the Insolvency Code or by other means, are  

separate and independent powers, as set out in paragraphs 3(a) and  

3(b) of the said Statement of Objects and Reasons. Therefore, the  

scheme of Sections 35A, 35AA, and 35AB is as follows:  

(a) When it comes to issuing directions to initiate the insolvency  

resolution process under the Insolvency Code, Section 35AA is  

the only source of power.  

(b) When it comes to issuing directions in respect of stressed  

assets, which directions are directions other than resolving this  

problem under the Insolvency Code, such power falls within  

Section 35A read with Section 35AB. This also becomes clear

74  

from the fact that Section 35AB(2) enables the RBI to specify  

one or more authorities or committees to advise any banking  

company on resolution of stressed assets. This advice is  

obviously de hors the Insolvency Code, as once an application  

is made under the Insolvency Code, such advice would be  

wholly redundant, as the Insolvency Code provisions would  

then take over and have to be followed.  

 39. When one section of a statute grants general powers, as  

opposed to another section of the same statute which grants specific  

powers, the general provisions cannot be utilised where a specific  

provision has been enacted with a specific purpose in mind. Thus, in  

J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of U.P.,  

(1961) 3 SCR 185, this Court held:  

“9. There will be complete harmony however if we hold  instead that clause 5(a) will apply in all other cases of  proposed dismissal or discharge except where an inquiry  is pending within the meaning of clause 23. We reach  the same result by applying another well-known rule of  construction that general provisions yield to special  provisions. The learned Attorney-General seemed to  suggest that while this rule of construction is applicable  to resolve the conflict between the general provision in  one Act and the special provision in another Act, the rule  cannot apply in resolving a conflict between general and  special provisions in the same legislative instrument.  This suggestion does not find support in either principle  or authority. The rule that general provisions should yield

75  

to specific provisions is not an arbitrary principle made  by lawyers and Judges but springs from the common  understanding of men and women that when the same  person gives two directions one covering a large number  of matters in general and another to only some of them  his intention is that these latter directions should prevail  as regards these while as regards all the rest the earlier  direction should have effect. In Pretty v. Solly (quoted in  Craies on Statute Law at p.m. 206, 6th Edn.) Romilly,  M.R., mentioned the rule thus: “The rule is, that  whenever there is a particular enactment and a general  enactment in the same statute and the latter, taken in its  most comprehensive sense, would overrule the former,  the particular enactment must be operative, and the  general enactment must be taken to affect only the other  parts of the statute to which it may properly apply”. The  rule has been applied as between different provisions of  the same statute in numerous cases some of which only  need be mentioned: De Winton v. Brecon [28 LJ Ch  598], Churchill v. Crease [5 Bing 177], United States v.  Chase [135 US 255] and Carroll v. Greenwich Ins. Co.  [199 US 401].”  

This judgment has been followed in Commercial Tax Officer,  

Rajasthan v. Binani Cements Ltd. and Anr., (2014) 8 SCC 319 [at  

paragraph 39].  

 40. Stressed assets can be resolved either through the Insolvency  

Code or otherwise. When resolution through the Code is to be  

effected, the specific power granted by Section 35AA can alone be  

availed by the RBI. When resolution de hors the Code is to be  

effected, the general powers under Sections 35A and 35AB are to be  

used.  Any other interpretation would make Section 35AA otiose. In

76  

fact, Shri Dwivedi’s argument that the RBI can issue directions to a  

banking company in respect of initiating insolvency resolution process  

under the Insolvency Code under Sections 21, 35A, and 35AB of the  

Banking Regulation Act, would obviate the necessity of a Central  

Government authorisation to do so. Absent the Central Government  

authorisation under Section 35AA, it is clear that the RBI would have  

no such power.   

 41. Having grounded the power to issue directions to banking  

companies so far as the Insolvency Code is concerned, in Section  

35AA, what is important to note is that the Section enables the  

Central Government to authorise the RBI to issue such directions in  

respect of “a default”.  Default, in the explanation to Section 35AA,  

has the same meaning assigned to it under Section 3(12) of the  

Insolvency Code. Section 3(12) of the Insolvency Code reads as  

under:  

“3. Definitions.—In this Code, unless the context  otherwise requires,—  

xxx xxx xxx  

(12) “default” means non-payment of debt when whole or  any part or instalment of the amount of debt has become  due and payable and is not paid by the debtor or the  corporate debtor, as the case may be;  

xxx xxx xxx”  

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“Debt” has been defined under Section 3(11) of the Insolvency Code  

as follows:  

“3. Definitions.—In this Code, unless the context otherwise  requires,—  

xxx xxx xxx  

(11) “debt” means a liability or obligation in respect of a claim  which is due from any person and includes a financial debt and  operational debt;  

xxx xxx xxx”  

 Also, “corporate debtor” has been defined under Section 3(8) of the  

Insolvency Code as follows:  

“3. Definitions.—In this Code, unless the context otherwise  requires,—  

xxx xxx xxx  

(8) “corporate debtor” means a corporate person who owes a  debt to any person;  

xxx xxx xxx”  

 A reading of these definitions would make it clear that default would  

mean non- payment of a debt when it has become due and payable  

and is not paid by the corporate debtor. Therefore, what is important  

to note is that it is a particular default of a particular debtor that is the  

subject matter of Section 35AA. It must also be observed that the  

expression “issue directions to banking companies generally or to any  

banking company in particular” occurring in Section 35A is  

conspicuous by its absence in Section 35AA.  This is another good

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reason as to why Section 35AA refers only to specific cases of default  

and not to the issuance of directions to banking companies generally,  

as has been done by the impugned circular.  

 42. This is clear also from the Press Note dated 05.05.2017, which  

introduced the Ordinance which specifically referred to resolution of  

“specific” stressed assets which will empower the RBI to intervene in  

“specific” cases of resolution of NPAs. The Statement of Objects and  

Reasons for introducing Section 35AA also emphasises that  

directions are in respect of “a default”. Thus, it is clear that directions  

that can be issued under Section 35AA can only be in respect of  

specific defaults by specific debtors. This is also the understanding of  

the Central Government when it issued the notification dated  

05.05.2017, which authorised the RBI to issue such directions only in  

respect of “a default” under the Code. Thus, any directions which are  

in respect of debtors generally, would be ultra vires Section 35AA.   

 43. However, Shri Dwivedi argued that “specific cases” would  

include specification by category or class. All the definitions given by  

him in his written argument, however, belie this. Thus, in the Oxford  

Dictionary, the word “specific” is defined as follows:

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“Specific / adjective 1. clearly defined. 2. relating to  particular subject; peculiar. 3. exact; giving full details. 4.  archaic (of medicine etc.) for a particular disease. noun  1. archaic specific medicine. 2. specific aspect.”  

 Black’s Law Dictionary also defines the word “specific” as follows:  

“specific, adj. 1. Of, relating to, or designating a  particular or defined thing; explicit <specific duties>. 2.  Of, relating to, or involving a particular named thing  <specific item>. 3. Conformable to special requirements  <specific performance>. – specificity, n. – specifically,  adv.”  

 Shri Dwivedi referred to Maru Ram and Ors. v. Union of India and  

Ors., (1981) 1 SCC 107, to argue that specification by category  

would be something well-known to law. He relied upon paragraph 33  

of the aforesaid judgment which reads as follows:  

“33. The anatomy of this savings section is simple, yet  subtle. Broadly speaking, there are three components to  be separated. Firstly, the Procedure Code generally  governs matters covered by it. Secondly, if a special or  local law exists covering the same area, this latter law  will be saved and will prevail. The short-sentencing  measures and remission Schemes promulgated by the  various States are special and local laws and must  override. Now comes the third component which may be  clinching. If there is a specific provision to the contrary,  then that will override the special or local law. Is Section  433-A a specific law contra? If so, that will be the last  word and will hold even against the special or local law.”  

A reading of paragraph 33 would show that the specific provision to  

the contrary, referred to therein, would refer only to a particular

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Section, as opposed to a category or Chapter which contains various  

Sections. This judgment, therefore, directly militates against the  

submission of Shri Dwivedi in this behalf.   

 44. Shri Dwivedi then relied upon Section 13 of the General  

Clauses Act, 1897 [“General Clauses Act”] to state that the singular  

would include the plural. There is no doubt whatsoever that this would  

be so unless the context otherwise requires, as is provided by  

Section 13 of the General Clauses Act itself. In the present case, the  

context of Section 35AA makes it clear, as has been correctly argued  

by Shri Tushar Mehta, learned Solicitor General, that the power to be  

exercised under the authorisation of the Central Government requires  

“due deliberation and care” to refer to specific defaults. This argument  

also does not take Shri Dwivedi very much further.  

 45. The impugned circular states as one of its sources, the power  

contained in Section 45L of the RBI Act insofar as non-banking  

financial institutions are concerned. Non-banking financial institutions  

are referred to in Section 45-I(c) as follows:  

“45-I. Definitions.—In this Chapter, unless the context  otherwise requires,—  

xxx xxx xxx

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(c) ‘‘financial institution’’ means any non-banking  institution which carries on as its business or part of its  business any of the following activities, namely:–   

(i) the financing, whether by way of making  loans or advances or otherwise, of any activity  other than its own;  

(ii) the acquisition of shares, stock, bonds,  debentures or securities issued by a  Government or local authority or other  marketable securities of a like nature;  

(iii) letting or delivering of any goods to a  hirer under a hire-purchase agreement as  defined in clause (c) of section 2 of the Hire- Purchase Act, 1972;  

(iv) the carrying on of any class of insurance  business;   

(v) managing, conducting or supervising, as  foreman, agent or in any other capacity, of chits  or kuries as defined in any law which is for the  time being in force in any State, or any  business, which is similar thereto;   

(vi) collecting, for any purpose or under any  scheme or arrangement by whatever name  called, monies in lumpsum or otherwise, by way  of subscriptions or by sale of units, or other  instruments or in any other manner and  awarding prizes or gifts, whether in cash or  kind, or disbursing monies in any other way, to  persons from whom monies are collected or to  any other person,  

but does not include any institution, which carries on as  its principal business,–  

(a) agricultural operations; or  

(aa) industrial activity; or   

Explanation.–For the purposes of this clause,  ‘‘industrial activity’’ means any activity specified in sub- clauses (i) to (xviii) of clause (c) of section 2 of the  Industrial Development Bank of India Act, 1964;

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(b) the purchase or sale of any goods (other  than securities) or the providing of any services;  or   

(c) the purchase, construction or sale of  immovable property, so however, that no  portion of the income of the institution is derived  from the financing of purchases, constructions  or sales of immovable property by other  persons;  

xxx xxx xxx”  

 Section 45L reads as follows:  

“45L. Power of Bank to call for information from  financial institutions and to give directions.—(1) If  the Bank is satisfied for the purpose of enabling it to  regulate the credit system of the country to its advantage  it is necessary so to do, it may—  

(a) require financial institutions either generally  or any group of financial institutions or financial  institution in particular, to furnish to the Bank in  such form, at such intervals and within such  time, such statements, information or  particulars relating to the business of such  financial institutions or institution, as may be  specified by the Bank by general or special  order;  

(b) give to such institutions either generally or  to any such institution in particular, directions  relating to the conduct of business by them or  by it as financial institutions or institution.  

(2) Without prejudice to the generality of the power  vested in the Bank under clause (a) of sub-section (1),  the statements, information or particulars to be furnished  by a financial institution may relate to all or any of the  following matters, namely, the paid-up capital, reserves  or other liabilities, the investments whether in  Government securities or otherwise, the persons to  whom, and the purposes and periods for which, finance

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is provided and the terms and conditions, including the  rates of interest, on which it is provided.  

(3) In issuing directions to any financial institution under  clause (b) of sub-section (1), the Bank shall have due  regard to the conditions in which, and the objects for  which, the institution has been established, its statutory  responsibilities, if any, and the effect the business of  such financial institution is likely to have on trends in the  money and capital markets.”  

   There is nothing to show that the provisions of Section 45L(3) have  

been satisfied in issuing the impugned circular. The impugned  

circular nowhere says that the RBI has had due regard to the  

conditions in which and the objects for which such institutions have  

been established, their statutory responsibilities, and the effect the  

business of such financial institutions is likely to have on trends in the  

money and capital markets. Further, it is clear that the impugned  

circular applies to banking and non-banking institutions alike, as  

banking and non-banking institutions are often in a joint lenders’  

forum which jointly lend sums of money to debtors. Such non-banking  

financial institutions are, therefore, inseparable from banking  

institutions insofar as the application of the impugned circular is  

concerned. It is very difficult to segregate the non-banking financial  

institutions from banks so as to make the circular applicable to them  

even if it is ultra vires insofar as banks are concerned. For these

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reasons also, the impugned circular will have to be declared as ultra  

vires as a whole, and be declared to be of no effect in law.  

Consequently, all actions taken under the said circular, including  

actions by which the Insolvency Code has been triggered must fall  

along with the said circular. As a result, all cases in which debtors  

have been proceeded against by financial creditors under Section 7  

of the Insolvency Code, only because of the operation of the  

impugned circular will be proceedings which, being faulted at the very  

inception, are declared to be non-est.  

46. In view of the declaration by this Court that the impugned  

circular is ultra vires Section 35AA of the Banking Regulation Act, it is  

unnecessary to go into any of the other contentions that have been  

raised in the transferred cases and petitions. The transferred cases  

and petitions are disposed of accordingly.      

          …........................... J.                (R.F. NARIMAN)  

       …........................... J.                (VINEET SARAN)  New Delhi;  April 2, 2019.