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Reportable IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL JURISDICTION WRIT PETITION (CIVIL) NO. 901 OF 2014

KESHAVLAL KHEMCHAND AND SONS PVT. LTD. & OTHERS           … Petitioners

Versus

UNION OF INDIA & OTHERS        … Respondents  

WITH WRIT PETITION (C) NO. 902 OF 2014

WRIT PETITION (C) NO. 903 OF 2014

WRIT PETITION (C) NO. 904 OF 2014

WRIT PETITION (C) NO. 905 OF 2014

WRIT PETITION (C) NO. 907 OF 2014

WRIT PETITION (C) NO. 925 OF 2014

WRIT PETITION (C) NO. 926 OF 2014

WRIT PETITION (C) NO. 937 OF 2014

WRIT PETITION (C) NO. 938 OF 2014

WRIT PETITION (C) NO. 939 OF 2014

WRIT PETITION (C) NO. 940 OF 2014

WRIT PETITION (C) NO. 945 OF 2014

WRIT PETITION (C) NO. 946 OF 2014

WRIT PETITION (C) NO. 947 OF 2014

WRIT PETITION (C) NO. 948 OF 2014

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CIVIL APPEAL NO. 1230  OF 2015 (Arising out of SLP (Civil) No.2230 of 2014)

CIVIL APPEAL NO. 1231 OF 2015 (Arising out of SLP (Civil) No.12008 of 2014)

CIVIL APPEAL NO. 1233 OF 2015 (Arising out of SLP (Civil) No.12153 of 2014)

CIVIL APPEAL NO. 1234 OF 2015 (Arising out of SLP (Civil) No.12233 of 2014)

CIVIL APPEAL NO.  1235 OF 2015 (Arising out of SLP (Civil) No.12266 of 2014)

CIVIL APPEAL NO.1236 OF 2015 (Arising out of SLP (Civil) No.12368 of 2014)

CIVIL APPEAL NO. 1237 OF 2015 (Arising out of SLP (Civil) No.12408 of 2014)

CIVIL APPEAL NO.1238 OF 2015 (Arising out of SLP (Civil) No. 12445 of 2014)

CIVIL APPEAL NO.1239 OF 2015 (Arising out of SLP (Civil) No.12461 of 2014)

CIVIL APPEAL NO.1240 OF 2015 (Arising out of SLP (Civil) No.12509 of 2014)

CIVIL APPEAL NO.1241 OF 2015 (Arising out of SLP (Civil) No.12584 of 2014)

CIVIL APPEAL NO.1242 OF 2015 (Arising out of SLP (Civil) No.12585 of 2014)

CIVIL APPEAL NO. 1243 OF 2015 (Arising out of SLP (Civil) No.12588 of 2014)

CIVIL APPEAL NO.1244 OF 2015 (Arising out of SLP (Civil) No.12589 of 2014)

CIVIL APPEAL NO.1245  OF 2015 (Arising out of SLP (Civil) No.12590 of 2014)

CIVIL APPEAL NO. 1246  OF 2015 (Arising out of SLP (Civil) No.12592 of 2014)

CIVIL APPEAL NO. 1247 OF 2015 (Arising out of SLP (Civil) No.12593 of 2014)

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CIVIL APPEAL NO.1248  OF 2015 (Arising out of SLP (Civil) No.12594 of 2014)

CIVIL APPEAL NO.1249 OF 2015 (Arising out of SLP (Civil) No.12596 of 2014)

CIVIL APPEAL NOS.1250-1251 OF 2015 (Arising out of SLP (Civil) Nos. 13706-13707 of 2014)

CIVIL APPEAL NO.1252 OF 2015 (Arising out of SLP (Civil) No.14100 of 2014)

CIVIL APPEAL NO.1253 OF 2015 (Arising out of SLP (Civil) No.14259 of 2014)

CIVIL APPEAL NO.1254 OF 2015 (Arising out of SLP (Civil) No.14343 of 2014)

CIVIL APPEAL NOS.1255-56 OF 2015 (Arising out of SLP (Civil) Nos. 14345-14346 of 2014)

CIVIL APPEAL NO.1257 OF 2015 (Arising out of SLP (Civil) No.14358 of 2014)

CIVIL APPEAL NO.1258  OF 2015 (Arising out of SLP (Civil) No.14407 of 2014)

CIVIL APPEAL NO.1259 OF 2015 (Arising out of SLP (Civil) No.14518 of 2014)

CIVIL APPEAL NO.1260 OF 2015 (Arising out of SLP (Civil) No.14565 of 2014)

CIVIL APPEAL NO.1261  OF 2015 (Arising out of SLP (Civil) No.15076 of 2014)

CIVIL APPEAL NO.1262 OF 2015 (Arising out of SLP (Civil) No.15105 of 2014)

CIVIL APPEAL NO. 1263  OF 2015 (Arising out of SLP (Civil) No.15756 of 2014)

CIVIL APPEAL NO.1264  OF 2015 (Arising out of SLP (Civil) No.15818 of 2014)

CIVIL APPEAL NOS.1265-66 OF 2015 (Arising out of SLP (Civil) Nos.15835-15836 of 2014)

CIVIL APPEAL NOS. 1267-68  OF 2015

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(Arising out of SLP (Civil) Nos.15837-15838 of 2014)

CIVIL APPEAL NOS. 1269-70 OF 2015 (Arising out of SLP (Civil) Nos.15841-15842 of 2014)

CIVIL APPEAL NO.1271 OF 2015 (Arising out of SLP (Civil) No.15963 of 2014)

CIVIL APPEAL NO.1272 OF 2015 (Arising out of SLP (Civil) No.15964 of 2014)

CIVIL APPEAL NO. 1273 OF 2015 (Arising out of SLP (Civil) No.16163 of 2014)

CIVIL APPEAL NO. 1274  OF 2015 (Arising out of SLP (Civil) Nos.16164 of 2014)

CIVIL APPEAL NO.1275  OF 2015 (Arising out of SLP (Civil) No.16165 of 2014)

CIVIL APPEAL NO.1276 OF 2015 (Arising out of SLP (Civil) No.18478 of 2014)

CIVIL APPEAL NO. 1277  OF 2015 (Arising out of SLP (Civil) No.18756 of 2014)

CIVIL APPEAL NO.1278 OF 2015 (Arising out of SLP (Civil) No.18949 of 2014)

CIVIL APPEAL NO. 1279 OF 2015 (Arising out of SLP (Civil) No. 21232 of 2014)

CIVIL APPEAL NO. 1280  OF 2015 (Arising out of SLP (Civil) No.22198 of 2014)

CIVIL APPEAL NOS. 1281-82  OF 2015 (Arising out of SLP (Civil) Nos. 24451-24452 of 2014)

CIVIL APPEAL NO. 1283  OF 2015 (Arising out of SLP (Civil) No. 25752 of 2014)

CIVIL APPEAL NO. 1284  OF 2015 (Arising out of SLP (Civil) No. 28796 of 2014)

CIVIL APPEAL NOS. 1285-86 OF 2015 (Arising out of SLP (Civil) Nos. 29722-29723 of 2014)

CIVIL APPEAL NO.1287 OF 2015 (Arising out of SLP (Civil) No.29792 of 2014)

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CIVIL APPEAL NO. 1288 OF 2015 (Arising out of SLP (Civil) No. 30196 of 2014)

CIVIL APPEAL NO. 1289  OF 2015 (Arising out of SLP (Civil) No. 25444 of 2014)

CIVIL APPEAL NO. 1290 OF 2015 (Arising out of SLP (Civil) No. 25445 of 2014)

CIVIL APPEAL NOS. 1291-92 OF 2015 (Arising out of SLP (Civil) Nos. 32028-32029 of 2014)

AND

CIVIL APPEAL NO. 1293 OF 2015 (Arising out of SLP (Civil) No. 33096 of 2014)

J U D G M E N T

Chelameswar, J.

1. Leave granted in all the SLPs.

2. The  Securitisation  and  Reconstruction  of  Financial  Assets  and  

Enforcement of Security Interest Act, 2002, (hereinafter referred to as  

the  ‘Act’),  was  made  by  the  Parliament  in  the  year  2002.   The  

Statement of Objects and Reasons appended to the Act explained the  

purpose behind the enactment as follows:-

“There is no legal provision for facilitating securitization of financial  assets of banks and financial institutions.  Further, unlike international  banks, the banks and financial institutions in India do not have power  to  take possession of  securities  and sell  them.  Our  existing legal  framework relating to commercial transactions has not kept pace with  the changing commercial practices and financial sector reforms.  This  has resulted in slow place (sic pace) of recovery of defaulting loans  and mounting levels of non-performing assets of banks and financial  institutions.”

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The  enactment  was  preceded  by  three  Committee  Reports  –  two  

headed  by  Mr.  M.  Narasimham1 and  the  third  by  Mr.  T.R.  

Andhyarujina2.

3. Recovery of money from a debtor by resorting to the filing of a  

suit  takes painfully  long time in  this  country,  for  various  reasons3.  

Huge amounts of money are lent by various banks and other financial  

institutions.  Speedy recovery of the monies due to such institutions is  

an  important  element  determining  the  efficiency  not  only  of  such  

institutions  but  also  becomes  an  important  factor  for  the  financial  

health of the country.

4. In order to facilitate banks and financial institutions (hereinafter  

collectively referred to as “CREDITORS” for the sake of convenience)  

to  speedily  recover  the  monies  due  to  them  from  the  borrowers,  

Parliament made a law called ‘The Recovery of Debts due to Banks  

and Financial Institutions Act, 1993’ (51 of 1993) under which banks  1  Ex. Governor, Reserve Bank of India 2  Senior Advocate, Supreme Court of India 3 1.31 There has been a perception, and not without reason, that our legal system have not kept pace with measures of   financial sector reform and indeed economic reforms more generally.   As far as the banking sector is concerned, there is   continuing need for an appropriate legal framework to help enforce contracts and protect the interests of secured creditors  especially in bankruptcy proceedings.    Some of our laws are outdated and legal procedures are cumbersome and time  consuming.  Even where Court decrees are obtained their enforcement has been marked by delays.   Our experience with  the Debt Recovery Tribunals has not been altogether satisfactory in view of the legal issues that have been raised.  Our laws   indeed seem marked by a basic asymmetry in their protection of creditors as distinct from borrowers which comes in the  way of the proper and smooth functioning of banking and credit systems. [See: Introduction : The Issues, Report of the  Committee on Banking Sector Reforms (April 1998), Ch.I page 6]  

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and financial institutions could approach a tribunal constituted under  

the said Act.  It deals exclusively with the claims for the recovery of  

the monies due from the borrowers to the CREDITORS.   Apart from  

creating such an exclusive forum, the Act also provided for a more  

simpler procedure for  the adjudication of the legality of the claims  

brought  before  it  by  the  CREDITOR  and  a  procedure  for  speedy  

recovery of sums so adjudicated.  

5. After a decade of working of the tribunals constituted under Act  

51 of 1993, the Parliament felt that even machinery and procedure  

established  under  the  Act  51  of  1993  is  not  able  to  produce  the  

desired  result  of  efficiently  recovering  monies  from the  borrowers.  

The Parliament, therefore, made the Act.  The crux of the Act is that  

any ‘security interest’4 created  in favour of a ‘CREDITOR’5,  who by  

definition  under  the  Act  becomes  a  ‘SECURED  CREDITOR’,  can  be  

enforced  without  the  intervention  either  of  the  court  or  tribunal6  

4 Section 2(zf) "security interest" means right, title and interest of any kind whatsoever upon property, created in favour of   any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31;

5 Section 2(zd) "secured creditor" means any bank or financial institution or any consortium or group of banks  or financial institutions and includes—

(i) debenture trustee appointed by any bank or financial institution; or (ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such  

securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or (iii) any other trustee holding securities on behalf of a bank or financial institution in whose favour security  

interest is created for due repayment by any borrower of any financial assistance;  6  Section 13. Enforcement of security interest.-  (1)  Notwithstanding anything contained in section 69 or section 69A of  the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may  

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constituted under Act 51 of 1993 by following the procedure under  

Section 13 of the Act.  Section 13(2) of the Act provides as follows:

“(2) Where  any  borrower,  who  is  under  a  liability  to  a  secured  creditor under a security agreement, makes any default in repayment  of secured debt or any instalment thereof, and his account in respect  of such debt is classified by the secured creditor as non-performing  asset, then, the secured creditor may require the borrower by notice  in  writing  to  discharge in  full  his  liabilities  to  the  secured creditor  within sixty days from the date of  notice failing which the secured  creditor shall be entitled to exercise all or any of the rights under sub- section (4).”

6. It  provides  that  the  SECURED  CREDITOR  may  call  upon  the  

borrower7, by issuing a notice in writing to discharge his liabilities in  

full within a period of sixty days from the date of the notice.  If the  

borrower  fails  to  discharge his  liabilities  after  such  a  demand,  the  

secured creditor is entitled to take any one of the steps contemplated  

under Section 13(4).  Sub-section (2) also stipulates three conditions  

precedent for the issuance of such notice – (i) that the borrower must  

have a liability under a ‘security agreement’8; (ii) that the borrower  

made a default in repayment of the debt or the instalment thereof;  

be  enforced, without the intervention of the court or tribunal,  by such creditor in accordance with the  provisions of this Act. 7    Section 2(f) "borrower" means any person who has been granted financial assistance by any bank or financial institution   or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any   bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction  company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such  financial assistance;  

8  Section 2(zb) "security agreement" means an agreement, instrument or any other document or arrangement under which  security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with   the secured creditor;

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and (iii) that the account in respect of such debt is classified by the  

secured creditor as a ‘non-performing asset’ (hereinafter referred to  

as “NPA”)

7. Sub-section (3) stipulates9 that notice referred to in sub-section  

(2) shall give the details of the amounts payable by the borrower and  

details of the secured assets intended to be enforced by the secured  

creditor  in  the  event  of  borrower  not  complying  with  the  demand  

made in the notice.

8. Sub-section (4) provides that in the event of the borrower failing  

to discharge his liability in spite of notice under sub-section (2), the  

secured  creditor  may  take  recourse  to  any  one  or  more  of  the  

measures indicated under sub-section 13(4)10. 9 Section 13(3)  - The notice referred to in sub-section (2) shall give details of the amount payable by the borrower and the   secured  assets  intended to  be  enforced  by  the  secured  creditor  in  the  event  of  non-payment  of  secured  debts  by  the  borrower.

10   Section 13(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the   secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:--  

(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment   or sale for realising the secured asset;

(b) take over the management of the business of the borrower including the right to transfer by way of lease,   assignment or sale for realising the secured asset:

       PROVIDED that the right to transfer by way of lease, assignment or sale shall be exercised only where the   substantial part of the business of the borrower is held as security for the debt:

       PROVIDED FURTHER that where the management of whole of the business or part of the business is   severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the  security or the debt.

(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which  has been taken over by the secured creditor;

(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the  borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the  money as is sufficient to pay the secured debt.

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9. Another important aspect of the Act is that the activity of the  

Securitisation Companies (SC) and Reconstruction Companies (RC) are  

given  a  statutory  recognition.   Their  activity  is  regulated  under  

Sections 3 and 4 of  the Act.  Under Section 3 such companies  are  

required to be registered with the RBI.  Such registration is liable for  

cancellation  under  Section  4  on  the  happening  of  any  one  of  the  

events specified therein.  Section 5 confers statutory authority upon  

SCs  and  RCs  to  acquire  the  “financial  assets”11 of  any  CREDITOR.  

Section 5(2)12 further provides that upon such acquisition of an asset,  

the SC or RC, as the case may be, steps into the shoes of the original  

SECURED CREDITOR from whom the asset is acquired.

10. Under  the Act,  SCs and RCs are also  treated to  be SECURED  

CREDITORS by definition.   [See Section 2(1)(zd)]

11  2(1)(l) “financial asset” means debt or receivables and includes- (i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or (ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or (iii) a mortgage, charge, hypothecation or pledge of movable property; or  (iv) any right or interest in the security, whether full or part underlying such debt or receivables; or (v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables,  

whether such interest is existing, future, accruing, conditional or contingent; or (vi) any financial assistance;

12  5(2) If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section (1) by   the securitisation company or the reconstruction company such securitisation company or reconstruction company shall, on  such acquisition, be deemed to be the lender and all the rights of such bank or financial  institution shall vest in such   company in relation to such financial assets.

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11. The constitutional validity of the Act was examined by this Court  

in  Mardia Chemicals Ltd. & Others v.  Union of India & Others,  

(2004) 4 SCC 311.  This Court upheld the constitutionality of the Act  

except that of sub-section (2) of Section 17.

“82. We, therefore, subject to what is provided in para 80 above, uphold the validity  of the Act and its provisions except that of sub-section (2) of Section 17 of the Act,  which is declared ultra vires Article 14 of the Constitution of India.”

12. One of the grounds on which the Act was challenged in Mardia  

Chemicals (supra)  was  that  the  said  Act  enables  the  SECURED  

CREDITORS to classify the account of a borrower as NPA at the whims  

and fancies of such SECURED CREDITORS.  This Court rejected the  

said submission for the reasons that the guidelines laid down by the  

Reserve Bank of India for classifying the account of a borrower as a  

NPA  would  eliminate  the  possibility  of  the  SECURED  CREDITOR  

arbitrarily declaring the account of a borrower as a NPA.

“37.  Next we come to the question as to whether it is on  the whims and fancies  of  the financial  institutions  to  classify  the  assets  as  non-performing  assets,  as  canvassed before us.  We find it not to be so. As a matter  of fact a policy has been laid down by Reserve Bank of India providing  guidelines in the matter for declaring an asset to be a non-performing  asset known as “RBI’s prudential norms on income recognition, asset  classification  and provisioning –  pertaining to advances” through a  circular  dated  30-8-2001.    It  is  mentioned  in  the  said  circular  as  follows:

**** **** **** **** **** **** **** ****

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From  what  is  quoted  above,  it  is  quite  evident  that  guidelines as laid down by Reserve bank of India which are in more  details  but  not  necessary  to  be  reproduced  here,  lay  down  the  terms and conditions and circumstances in which the  debt  is  to  be  classified  as  non-performing  asset  as  clearly  as  possible.  Therefore,  we  find  no  substance  in  the  submission  made  on  behalf  of  the  petitioners  that  there  are  no  guidelines for treating the debt as a non-performing asset.”

13. Section 2(1)(o) of the Act defines NPA.  The said definition came  

to be amended by Act 30 of 2004.  It is the amended definition which  

is the subject matter of dispute in this bunch of matters.  The said  

amended definition came to be challenged in various High Courts.   

14. The High Court of Gujarat, by a common judgment dated 24.4.14  

in a batch of writ petitions, held that the amended Section 2(1)(o) of  

the Act is unconstitutional.   

“55. In view of the above-discussions, the writ application is partly  allowed by holding that the amended provisions of Section 2(1)(o) of  the Securitisation Act are ultra vires the Article 14 of the Constitution  and the object of the above Act itself and consequently, we restore  the provisions which existed earlier, i.e., prior to the amendment of  2004 and existed at the time of decision of the Supreme Court in the  case  of  Mardia  Chemicals (supra).   We,  however,  uphold  the  guidelines of the RBI challenged in this application.”

15. On the other hand, in another common judgment dated 18.5.14  

in  a  batch  of  writ  petitions,  the  Madras  High  Court  rejected  the  

challenge.   

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16. Hence these appeals by the various aggrieved parties, either the  

borrowers  or  the  SECURED  CREDITORS.   Various  writ  petitions  

invoking Article 32 of the Constitution also came to be filed by some  

borrowers  against  whom proceedings  under  Section  13  of  the  Act  

were  initiated  during  the  pendency  of  the  appeals  from  the  two  

judgments referred to above.  

17. Since  the  bone  of  contention  in  this  bunch  of  matters  is  the  

amended Section 2(1)(o) of the Act, we deem it appropriate to extract  

the provision as it existed both prior to and after the amendment.  

THE  SECURITISATION  AND  RECONSTRUCTION  OF  FINANCIAL  ASSETS  AND  ENFORCEMENT  OF  SECURITY INTEREST ACT, 2002

THE  ENFORCEMENT  OF  SECURITY  INTEREST AND RECOVERY OF DEBTS  LAWS (AMENDMENT) ACT, 2004

2.  Definitions

(1)   In  this  Act,  unless  the  context  otherwise requires:

(o)   “Non-Performing  Asset”  means  an  asset or account of a borrower, which has  been  classified  by  a  bank  or  financial  institution as sub-standard, doubtful or loss  assets, in accordance with the directions or  under  guidelines  relating  to  assets  classification issued by the Reserve Bank.

2.  Definitions

(1)  In this Act, unless the context otherwise  requires:

(o) “Non-Performing Asset” means an asset  or account of a borrower,  which has been  classified by a bank or financial institution,  as sub-standard, doubtful or loss asset.-

(a)   In  case  such  bank  or  financial  institution  is  administered  or  regulated  by  any  authority  or  body  established,  constituted or appointed by any law for the  time being in force, in accordance with the  directions  or  guidelines  relating  to  assets  classifications  issued by such authority  or  

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body;

(b)  In any other case, in accordance with  the  directions  or  guidelines  relating  to  assets classifications issued by the Reserve  Bank.

18. It can be seen from the above, that prior to its amendment by  

Act 30 of 2004, NPA is defined as ‘an account of a borrower which has  

been classified’ by a CREDITOR either ‘as a sub-standard asset or a  

doubtful  asset  or  a  loss  asset’  of  the  CREDITOR  and  such  a  

classification is required to be made in accordance with the directions  

or guidelines relating to assets classification issued by the Reserve  

Bank.

19. But, under the amended definition, such a classification of the  

account of a borrower by the CREDITOR is required to be made in  

accordance with the directions or guidelines issued by an “authority  

or body either established or constituted or appointed by any law for  

the time being in force”, in all  those cases where the CREDITOR is  

either  administered  or  regulated  by  such  an  authority  (hereinafter  

referred  to  as  the  “REGULATOR”).   If  the  CREDITOR  is  not  

administered  or  regulated  by  any  such  REGULATOR  then  the  

CREDITOR is required to classify the account of a borrower as NPA in  

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accordance with the guidelines and directions issued by the Reserve  

Bank of India.

20. In  other  words,  by  the  amendment,  the  Parliament  made  it  

possible that different sets of guidelines made by different bodies may  

be followed by different CREDITORS depending upon the fact as to  

who is the administering or regulating authority of such CREDITOR.  

Hence, the challenge to the amended provision.

21. Before we examine the various submissions made at the Bar, we  

deem it appropriate to give a brief analysis of the judgments of the  

Madras High Court as well as the Gujarat High Court.   

22. The  High  Court  of  Madras  rejected  the  submission  of  the  

petitioners  that  the  impugned  provision  suffers  from  the  vires of  

excessive delegation.   

(a) The High Court took note of the fact that the Reserve Bank of  

India introduced in the year 1992 the prudential  norms of “income  

recognition,  asset  classification,  provisioning  and  other  related  15

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matters” and such norms were revised periodically keeping in mind  

various  developments  in  the  banking  system,  both  nationally  and  

internationally.    The  High  Court  took  note  of  the  practice  of  the  

Reserve Bank of issuing master circulars annually which contain the  

consolidated instructions issued by the Reserve Bank from time to  

time on the above-mentioned matters.  

(b) The High Court took note of the fact that the Reserve Bank of  

India  in  exercise  of  the  statutory  authority  under  Section  21  and  

Section 35A of the Banking Regulation Act, 1949 prescribes norms for  

the various aspects of banking specified under the Act.   

(c) The High Court held that the Parliament, while defining a non-

performing asset under Section 2(1)(o) of the Act, only adopted the  

norms prescribed from time to time by the Reserve Bank of India for  

the purpose of identifying the NPA.13

“34.….In this case, the Legislature has left the job of defining “non- performing asset’ in the hands of Reserve Bank of India.  Therefore,  when once the Legislature has approved the power of Reserve Bank  

13  29.  However, the question for consideration before us is as to whether there is indeed any delegated legislation or not.   We are of the view that there is no delegated legislation involved in the case on hand.  As discussed above, the power   exercised by the Reserve Bank of India in a separate enactment has been taken note of by the Legislature in the subsequent   one.  It is only a definition clause, which has been adopted by the Legislature.  This has been done to put its machinery into   use towards its avowed object  of activity – appropriate recovery.   Therefore,  we do not find any delegated legislation  involved and therefore contentions raised on the power of delegation and thereafter it is excessive, has no force.  We only   observe for  the sake of  completion, that  even assuming that  there is  a delegated legislation involved,  the same is not   excessive as there are sufficient guidelines available in the earlier enactment and based upon which the Circular has been  issued by the Reserve Bank of India, being a specialized body.

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of  India  on  the  classification  of  assets,  the  resultant  consequence  would  be  that  a  subsequent  amendment  pertaining  to  such  a  classification would apply with its vigour and force to the new Act as  well.

35. In the light of the discussions made above, we are of the view  that  it  is  a  case  of  an  adoption  involved  in  the  present  case.  Therefore it can only be termed as legislation by reference and hence  the impugned Circular is valid in law.”

23. On  the  other  hand,  the  Gujarat  High  Court  opined  that  the  

amended definition  of  the  expression  ‘NPA’  creates  two classes  of  

borrowers.   In the context of the classification of the account of a  

borrower as a NPA of the CREDITOR, while one class of borrowers are  

governed by the guidelines issued by the Reserve Bank of India, the  

other  class of  borrowers are governed by the guidelines issued by  

different  authorities.14  The High Court  also  placed reliance on the  

statement  of  objects  and  reasons  of  the  Act,  as  it  was  originally  

enacted, which inter alia stated as:

“(h) empowering banks and financial institutions to take possession  of securities given for financial assistance and sell or lease the same  or take over management in the event of default, i.e. classification of  the borrower’s account as non-performing asset in accordance with  the directions given or guidelines issued by the Reserve Bank of India  from time to time.”

and  recorded  a  conclusion  that  the  Parliament  deviated  from  the  

original aims and objects propounded by it.  It also took note of the  14  23. Thus, borrowers are divided into two different classes; First, the borrowers in respect of the Banks and Financial  Institutions which are administered or regulated by an authority or body established, constituted or appointed by any law for  the time being in force, and in those cases, it will be for that authority or body to frame the guidelines for asset classification   and, secondly, the borrowers in respect of all other cases not covered by clause (a), and in respect of those cases, it will be  in accordance with the directions or guidelines issued by the Reserve Bank for asset classification.  

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fact that this Court in Mardia Chemicals (supra) repelled the attack  

on the original definition of a NPA on the ground that the CREDITORS  

are bound by the policy guidelines issued by the Reserve Bank of  

India,  and  therefore,  there  is  no  possibility  of  the  CREDITORS  

arbitrarily or whimsically classifying the account of any borrower as a  

NPA.      

The High Court therefore opined that the deviation from the original  

objects and reasons would be violative of Article 14 of the Constitution  

of India.

24. Learned counsel  appearing  for  the  borrowers  argued that  the  

amended Section 2(1)(o) is unconstitutional for the following reasons:  

(1)   that the Parliament, by authorizing the various bodies to frame  

the  guidelines  in  accordance  with  which  the  account  of  a  

borrower  could  be  classified  as  a  NPA  abdicated  its  essential  

legislative function by making an excessive delegation;  

(2)   that while the un-amended Section 2(1)(o) provided for a uniform  

standard by which an account of a borrower is to be classified as  

NPA of the CREDITOR by applying the guidelines issued by the  

Reserve  Bank,  the  amended  provision  enables  different  

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CREDITORS  to  adopt  different  guidelines  which  prescribe  

different standards for arriving at a conclusion that the account  

of  a  borrower  is  NPA.   Such  a  provision  according  to  the  

borrowers, is violative of Article 14 of the Constitution of India as  

it amounts to a class legislation forbidden by Article 14;  

(3)     Since  the  Act  recognizes  the  possibility  of  acquisition  of  a  

“financial  asset”15 of  a  CREDITOR  by  either  a  “securitization  

company”16 or a “reconstruction company”17 it introduces a great  

deal  of  uncertainty  in  the  matter  of  the  application  of  the  

guidelines  appropriate  for  classification  of  an  account  of  a  

borrower as a NPA.  It all depends on the fact as to who is the  

current  holder  of  such  financial  asset  when  the  proceedings  

under Section 13 are sought to be invoked.    

15  Section 2. Definitions— (1) In this Act, unless the context otherwise requires,-- (l) "financial asset" means debt or  receivables and includes--

(i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or  (ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or (iii) a mortgage, charge, hypothecation or pledge of movable property; or (iv) any right or interest in the security, whether full or part underlying such debt or receivables; or (v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such  

interest is existing, future, accruing, conditional or contingent; or  (vi) any financial assistance;  

16 Section 2(za) "securitisation company" means any company formed and registered under the Companies Act, 1956 (1 of  1956) for the purpose of securitisation;

17  Section 2(v) "reconstruction company" means a company formed and registered under the Companies Act, 1956 (1 of  1956) for the purpose of asset reconstruction;

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(4) As  the  Act  does  not  provide  for  a  reasonable  opportunity  to  

demonstrate that the classification of the borrower’s account as  

a NPA is untenable, the power to make such a classification itself  

becomes arbitrary and violative of Article 14 of the Constitution.

25. On the other hand, the learned counsel appearing for the Union  

of  India,  the  RBI  and  the  various  CREDITORS  submitted  that  the  

impugned amendment is a constitutionally valid piece of legislation.

1. In recognition of the fact that the assessment of an account of  

borrower  as  NPA  depends  upon  innumerable  factors  which  

constantly keep changing, Parliament thought it fit to stipulate  

that the assessment be made in the light of the guidelines made  

by either the RBI or various other REGULATORS regulating the  

activities of various CREDITORS.  There is no delegation of any  

essential legislative functions.  

2. The prescription that the classification of NPA is to be made on  

the basis of the guidelines framed by different bodies regulating  

the  different  CREDITORS  is  a  constitutionally  permissible  

classification having regard to the nature of the different credit  

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facilities  extended  by  the  various  CREDITORS  to  different  

categories of borrowers and on different terms and conditions.

3. The  third  submission  made  on  behalf  of  the  borrowers  is  

sought to be repelled on two grounds:

i) that, it is a purely hypothetical submission in the context  

of the present set of cases as in none of the cases the  

original  SECURED  CREDITOR  transferred  the  financial  

asset in favour of any other body;

ii) assuming  for  the  sake  of  argument  that  there  is  a  

possibility of an asset of the SECURED CREDITOR being  

acquired  either  by  a  securitization  company  or  a  

reconstruction company and therefore are governed by  

the  guidelines  (for  the  determination  of  the  question  

whether an acquired asset has become a non-performing  

asset)  other  than  those  promulgated  by  the  Reserve  

Bank of India, it has not been demonstrated in any one of  

these cases that such guidelines are less favourable to  

the borrowers than the guidelines of the Reserve Bank of  

India.  

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26. We would like to make it clear that we are not undertaking the  

examination of a second round of attack on the constitutionality of the  

Act in its entirety. It is nobody’s case that judgment of this Court in  

Mardia Chemicals (supra) requires reconsideration.  As pointed out  

by  the  borrowers,  the  definition  of  the  expression  “NPA”  [under  

Section 2(1)(o)] underwent an amendment subsequent to the decision  

in  Mardia Chemicals,  the  validity  of  such an  amendment  only  is  

required to be examined in these matters.

27. We have already noticed that under Section 13 of the Act the  

right to invoke the provisions of the Act for enforcement of a security  

interest is permissible only on the satisfaction of the three conditions  

specified under Section 13(2) of the Act.  One of them being that the  

account of the borrower is classified by the SECURED CREDITOR as a  

non-performing asset (NPA) of the CREDITOR.

28. The expression ‘asset’  is  not  defined under  the Act.   But  the  

expressions ‘financial asset’18 and ‘non performing asset’ are defined  

under Section 2(1)(l) and 2(1)(o) of the Act. The claim of a CREDITOR  

to  any  debt  or  receivables  etc.  from  the  borrower  becomes  the  

18 Footnote 11 supra 22

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financial asset of the CREDITOR. Under the unamended definition, an  

asset  (of the CREDITOR i.e.,  the account of the borrower) which is  

classified by the CREDITOR as “sub-standard, doubtful or loss asset”  

in accordance with the direction or guidelines relating to the assets  

classification  issued  by  the  Reserve  Bank  becomes  an  NPA.   The  

amended definition however defines a NPA as an asset classified by  

the CREDITOR as “sub-standard, doubtful or loss asset” in accordance  

with the relevant guidelines issued by the appropriate body.  In the  

case of the CREDITORS “administered or regulated by any authority or  

body established, constituted or appointed by any law for the time  

being in force”, such ‘REGULATOR’, and with reference to CREDITORS,  

not  so  administered  or  regulated,  the  Reserve  Bank  are  the  

appropriate authorities.

29. We have already noticed that one of the two main purposes of  

the  Act  is  to  facilitate  the  SECURED  CREDITORS19 to  recover  the  

19  The expression “SECURED CREDITOR” by definition under the Act takes within its sweep – (i) a bank, (ii) a financial   institution, consortium or group of banks or financial institutions, (4) debentures trustees appointed by any bank or financial  institution, (5) a securitisation company, (6) reconstruction company etc.  Once again the expression ‘bank’ by definition  takes within its sweep six categories of entities specified under Section 2(1)(c).  The expression ‘financial institution’, by   definition under the Act, takes within its sweep four categories of bodies specified under Section 2(1)(m).  The activities of   all the above mentioned categories of entities are primarily governed by some in-house managerial body which, in turn, are  subject to the control and regulation either by the Reserve Bank of India or some other statutory body or authority, which   are also subject to the overall supervisory control of the Reserve Bank of India.  For example, the National Housing Bank, a   bank established under the Act No.53 of 1987 of the Parliament, though is an autonomous body “to operate as a financial  agency to promote housing finance institutions” with vast powers to regulate the housing finance activity in the country, it  is still obliged under Section 5(5) of the Act 53 of 1987 to be guided by the directions given by the Reserve Bank of India.   

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amounts due to them from the borrowers by enforcing the security  

interest created by the borrowers without the intervention of the civil  

court or the tribunal.   

30. We  think  that  it  is  necessary  to  trace  out  the  history  of  the  

concepts of (i) NPA and (ii) loan transaction for the better appreciation  

of the controversy before us.   

31. On 14th August, 1991, the Government of India appointed a nine-

member Committee headed by Mr. M. Narasimham, (13th Governor of  

the Reserve Bank of India) to examine various aspects relating to the  

structure,  organization,  functions  and  procedures  of  the  banking  

system.   The said Committee came to be appointed in the backdrop  

of the Balance of Payment Crisis which the country was facing at that  

point of time.

32. The Committee submitted its 1st Report on the 16th November,  

1991.  While examining the various aspects of the financial system,  The National Housing Bank Act, 1987 (No.53 of 1987) - Section 5(5). In the discharge of its  

functions under this Act, the National Housing Bank shall be guided by such directions in matters of  policy involving public interest as the Central government, in consultation with the Reserve Bank, or the  Reserve Bank, may give in writing.

We are informed at the bar by the learned counsel appearing for the Reserve Bank of India that there are some 49  entities (we doubt the accuracy of the statement but it does not make any difference for this decision on hand), such as, 18   State Financial Corporations, Exim Bank, National Housing Bank, NABARD etc., which fall within the definition of the   expression “bank” or “financial institution” as defined under the SARFAESI Act which fall within the sweep of Section  2(1)(o)(a) of the said Act.

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the said Committee considered the functioning of the banking system  

in the country.   It took note of the existing guidelines issued by the  

Reserve Bank of India from time to time and also the various practices  

of the banking industry.   The Committee was of the view that the  

“ratio of capital funds in relation to bank’s deposits or its assets is a  

well  known and universally  accepted measure  of  the  strength  and  

stability of the institution”.

33. It took note of the capital adequacy standards prescribed by the  

Committee  known  as  Basle  Committee20 and  opined  that  it  is  

necessary  that  the  Indian  banks  also  conform to  those  standards.  

But  as  a  prelude  to  the  compliance  with  the  BIS  standards,  the  

Committee opined that the banks should have their assets revalued  

on a more realistic basis and on the basis of their realizable value.

34. It  also took note of  the fact  that  the banks and development  

financial institutions (DFIs) had not been following a universal practice  

with regard to the income recognition,  valuation of  investments or  

20 The  Basle  Committee  on  Banking  Regulations  and  Supervisory  Practices  appointed  by  the  Bank  of  International  Settlements  (BIS)  has  prescribed  certain  capital  adequacy  standards  to  be  followed  by  commercial  banks  and  these  standards have been accepted for implementation by several countries.  The BIS standard, as it is popularly known, seeks to   measure capital adequacy as the ratio of capital to risk weighted assets.  It has prescribed weightages for different categories  of assets which include certain off-balance sheet items as well.  The Committee believes that it is necessary that banks in   India also conform to these standards in a phased manner. [See: Capital Adequacy, Accounting Policies and Other Related   Matters, Report of the Committee on the Financial System (November 1991), Ch.V page 51]  

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provisioning  against  doubtful  debts.   It  is  in  this  background,  the  

Committee recommended as follows:-

“..The international practice is that an asset is treated as “non-performing” when interest  is overdue for at least two quarters.   In respect of such non-performing assets interest is   not recognized on accrual basis but is booked as income only when actually received.  The Committee is of the view that a similar practice should be followed by banks and  financial  institutions  in  India  and  accordingly  recommends  that  interest  on  non- performing  assets  should  not  be  booked  as  income  on  accrual  basis.    The  non- performing assets would be defined as an advance where, as on the balance sheet date

(a) in respect of term loans, interest remains past due for a period of more  than 180 days.

(b) in respect of overdraft and cash credits, accounts remain out of order  for a period of more than 180 days,

(c) in respect of bills purchased and discounted, the bill remains overdue  and unpaid for a period of more than 180 days,

(d) in respect of other accounts, any amount to be received remains past  due for a period of more than 180 days.

An amount is considered past due when it remains outstanding 30 days beyond  the date.

**** **** **** **** The Committee is of the view that for the purposes of provisioning, banks and  financial  institutions  should  classify  their  assets  by  compressing  the  Health  Codes into the following broad groups:

i) Standard ii) Sub-standard iii) Doubtful and iv) Loss

The RBI should prescribe clear and objective definitions for these 4 categories to  ensure  a  uniform,  consistent  and  logical  basis  for  classification  of  assets.  Broadly stated, sub-standard assets would be those which exhibit problems and  would include assets classified as non-performing for a period not exceeding two  years.   Doubtful assets are those non-performing assets which remain as such  for a period exceeding two years and would also include loans in respect  of  which instalments are overdue for a period exceeding 2 years.   Loss assets are  

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accounts where loss has been identified but the amounts have not been written  off.”  

35. Narasimham Committee  Report  on  asset  classification  by  the  

CREDITORS was accepted by the Reserve Bank of India and guidelines  

are being issued from time to time.  Different instructions culminating  

into  different  “Master  Circulars”  with  respect  to  various  classes  of  

banks and financial  institutions  came to  be issued by the  Reserve  

Bank from time to  time.   For  example,  the  Reserve Bank of  India  

issued instructions dealing with the Non Banking Financial Companies  

(NBFCs)21 and also the Securitisation Companies and Reconstruction  

Companies.  Originally such guidelines were meant only to enable the  

CREDITORS to have a rational view of their “assets”/”financial assets”  

for the better administration of their funds and the banking business.  

The Parliament thought it fit to adopt the above-mentioned guidelines  

issued  by  the  Reserve  Bank  of  India  even  for  the  purpose  of  

identifying NPAs under the Act.

21  Section 45-I(f) ‘‘non-banking financial company’’ means–  (i) a financial institution which is a company;  (ii) a non-banking institution which is a company and which has as its principal business  

the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in  any manner;  

(iii) such other non-banking institution or class of such institutions, as the Bank may,  with the previous approval of the Central Government and by notification in the Official Gazette,   specify.

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36. Now, we proceed to examine what exactly is a loan transaction –  

the rights and obligations arising out of a loan transaction and the  

impact of the Act on such rights and obligations.   

37. The expression ‘loan’, though not defined under the Act, has a  

well-settled connotation i.e.,  advancing of money by one person to  

another  under  an agreement  by which the recipient  of  the money  

agrees to repay the amount on such agreed terms with regard to the  

time of repayment and the liability to pay interest.   

“Definition of loan.  A contract of loan of money is a contact whereby one person lends  or agrees to lend a sum of money to another, in consideration of a promise express or  implied to  repay that  sum on demand,  or at  a fixed or determinable  future time,  or  conditionally upon an event which is bound to happen, with or without interest.”

- Chitty on Contracts, Vol.II 30th Edn., p.909

38. The person advancing the money is generally called a CREDITOR  

and the person receiving the money is generally called a borrower.  

The most simple form of a loan transaction is a contract by which the  

borrower agrees to repay the amount borrowed on demand by the  

creditor with such interest as stipulated under the agreement.  Such a  

loan transaction may be attended by any arrangement of a security  

like a mortgage or pledge etc. depending upon the agreement of the  

parties.

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39. The Act provides for a mode of speedy recovery of the monies  

due from the borrowers to one class of creditors who are banks and  

financial  institutions  (CREDITORS).     Advances/loans  made  by  

CREDITORS  to  businessmen  and  industrialists  are  generally  not  

repayable on demand but repayable in accordance with a fixed time  

schedule agreed upon by the parties known as “term loans”.   

“Term loans. A loan may be made for  a specified period (a term loan).  In such a case  repayment is due at the end of the specified period and, in the absence of any express  provision or implication to the contrary, no further demand for repayment is necessary.”  

- Chitty on Contracts, Vol.II 30th Edn., p.913

In other words, such loans are repayable in instalments over a period  

of  time the terms of  which are evidenced by a written agreement  

between the parties.   A default in the repayment, (in terms of the  

agreed  schedule)  generally  provides  a  cause  of  action  for  the  

CREDITOR to initiate legal proceedings for the recovery of the entire  

amount due and outstanding from the borrower.  Normally such term  

loans are also accompanied by some ‘security interest’ in a ‘secured  

asset’ of the borrower.   Such a recovery is to be made normally by  

instituting  a  suit  for  recovery  of  the  amounts  by  enforcing  the  

‘security interest’.  The Recovery of Debts due to Banks and Financial  

Institutions  Act,  1993  created  an  exclusive  forum  for  a  speedy  

ascertainment  of  the  amounts  actually  due  from  the  defaulting  29

Page 30

borrower and also provided for a mechanism for speedy recovery of  

the amounts so ascertained from such borrowers.   

40. Since such a system was also found to be inadequate for the  

speedy  recovery  of  the  monies  due  from  the  borrowers  to  the  

CREDITORS, the Parliament made the Act under which the process of  

ascertainment  of  the  amounts  due  from  a  borrower  by  an  

independent  adjudicatory  body  is  dispensed  with.   The  SECURED  

CREDITOR is made the sole judge of the amount due and outstanding  

from a borrower subject to an appeal under Section 17 of the Act.   

41. Be that as it  may, such an ascertainment of amount due and  

outstanding is not the only criteria on the basis of which the SECURED  

CREDITOR is entitled to initiate proceedings under Section 13(4) of the  

Act,  but  the  SECURED  CREDITOR  is  also  required  to  classify  the  

account of the borrower (asset of the CREDITOR) as an NPA.  

42. De hors the Act, when the borrower of a term loan defaults in the  

repayment, the CREDITOR can initiate legal proceeding straight away  

for recovery of the amounts due and outstanding from the borrower.  

The  Act  places  an  additional  legal  obligation  on  the  CREDITOR  to  

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examine and decide whether the account of the borrower has become  

an NPA before initiating action under the Act.

43. The question – why did the Parliament impose such an additional  

obligation on the CREDITORS while proposing to create a mechanism  

for  the  expeditious  recovery  of  the  money  due  to  the  SECURED  

CREDITORS – requires examination.  The answer appears to be that  

under the scheme of Section 13(4) the ‘secured asset’ (generally the  

assets of an industrial concern, like plant and machinery etc.) could  

be taken possession of and could either be sold or the management  

could  be  taken  over  etc.   Such  an  action  if  not  taken  after  an  

appropriate deliberation in a given case could result in the disruption  

of industrial production and consequently resulting in unemployment  

and  loss  of  GDP  etc.  impacting  larger  interests  of  the  nation.  

Therefore,  Parliament  must  have  thought  that  the  SECURED  

CREDITORS are required to assess whether the default in repayment  

by  the  borrower  is  due  to  any  factor  which  is  a  temporary  

phenomenon and  the  same could  be  managed  by  the  borrower  if  

some accommodation is given.  

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44. The above analysis of the scheme of Section 13 of the Act would  

derive support from the fact that even prior to the coming into force  

of  the  Act,  the  CREDITORS  were  classifying  the  accounts  of  the  

borrowers as NPAs under the statutory guidelines issued by the RBI.  

We have already noticed that under the said guidelines FINANCIAL  

ASSETS are sub-divided into 4 categories i.e.  (i)  standard,  (ii)  sub-

standard, (iii) doubtful, and (iv) loss.   Depending upon the length of  

the period for which the installment of money is over due, such assets  

are  classified  as  NPA.   As  the  length  of  the  period  of  over  due  

increased, the account of the borrower is progressively classified from  

“sub-standard” to “loss”.

45. The  same  classification  is  adopted  by  the  Parliament  while  

enacting the Act.  Therefore, all NPAs do not belong to the same class.  

Their characters vary depending on the length of time for which they  

remained NPAs.

46. In  our  view,  such  a  classification  is  relevant  and  assumes  

importance in the decision making process of the SECURED CREDITOR  

under Section 13(2) as to which one of the steps contemplated under  

Section 13(4) should be resorted to in the case of a given defaulting  

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borrower.  We hasten to add that it may not be the only factor which  

determines  the  cause  of  action  to  be  taken  by  the  SECURED  

CREDITOR. The magnitude of the amount due and outstanding in a  

given case, the reasons which prompted the borrower to default in the  

repayment  schedule,  the nature  of  the business  carried on by the  

defaulting borrower, the overall prospects of the defaulter’s business,  

national and international market conditions relevant to the business  

of  a  defaulter  –  in  our  opinion,  are some of  the factors which are  

germane to a decision that action under Section 13(4) is required to  

be taken against a defaulting borrower.   Even in  a case where on  

rational  and  objective  consideration  of  all  the  relevant  factors  

including  the  representations/objections  referred  to  under  Section  

13(3A), the CREDITOR comes to a conclusion that steps contemplated  

under  Section  13(4)  are  required  to  be  taken  in  the  case  of  a  

particular defaulter, the further question as to which one of the steps  

contemplated under Section 13(4) is required to be taken or would  

meet the ends of justice is a matter for a further rational decision on  

the part of the SECURED CREDITOR.   

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47. The international practice - noted by Narasimham Committee – is  

that “an asset is treated as non-performing when interest is overdue  

for at least two quarters”.  Such a practice of classifying the asset for  

the  administrative  purposes  of  the  Banks  only  indicates  that  a  

borrower’s account is not treated as a written off asset, the moment  

there is a default.   CREDITORS keep a watch on such account and  

monitor  the  performance  of  the  borrower’s  activity  to  ensure  the  

recovery  of  the  amounts  due  having  regard  to  the  needs  of  the  

industrial sector of the country and the importance of protecting the  

industry as far as possible in the larger interest of the economy of the  

State.

48. The basic definition under the various circulars of the Reserve  

Bank of India and also other REGULATORS of a NPA is an asset which  

ceases  to  generate  income for  the  CREDITORS (banks  or  financial  

institutions)  i.e.  a  loan  or  advances  made by  the  banks  on  which  

interest  and/or  instalment  of  principal  amount  is  overdue  for  a  

specified period depending upon the nature of the loan or advance -  

whether the loan or advance is a term loan or agricultural loan, money  

advanced on bill discounting etc.  

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49. To make any attempt to define the expression ‘non-performing  

asset’ valid for the millions of cases of loan transactions of various  

categories of loans and advances, lent or made by different categories  

of CREDITORS for all time to come would not only be an impracticable  

task but could also simply paralyse the entire banking system thereby  

producing results which are counter productive to the object and the  

purpose sought to be achieved by the Act.  

50. Realising the same, the Parliament left it to the Reserve Bank of  

India  and other  REGULATORS to  prescribe  guidelines  from time to  

time in this regard. The Reserve Bank of India is the expert body to  

which the  responsibility  of  monitoring the economic  system of  the  

country is entrusted under various enactments like the RBI Act, 1934,  

the Banking Regulation Act, 1949. Various banks like the State Bank  

of  India,  National  Housing  Bank,  which  are  though  bodies  created  

under  different  laws  of  Parliament  enjoying  a  large  amount  of  

autonomy, are still subject to the overall control of the Reserve Bank  

of India.

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51.  Regulation of monetary system and banking business is one of  

the fundamental responsibilities of any modern State and essential for  

the economic and political stability of the State.  The vast increase of  

commerce  both  national  and  the  international  made  easy  by  the  

tremendous developments of technology, renders such regulation a  

very complicated matter with complex variables.  The span of each  

variable  could  vary  from minutes  to  years.   Therefore,  it  requires  

constant  monitoring  on  daily  basis  sometime  even  on  minute  to  

minute basis.  In lieu of the importance and complexities, the Reserve  

Bank, the prime regulator of the Indian economy and banking system,  

has been issuing guidelines and directions from time to time not only  

to  the  banks  but  to  various  other  financial  institutions  which  are  

amenable to its jurisdiction.  Such instructions given from time to time  

are  consolidated  annually  and  published  in  the  form  of  “Master  

Circulars”.   One of such circular dated 30.08.2001 was taken note of  

by this Court in Mardia Chemicals.  Incidentally, the authority of the  

Reserve Bank to issue such instructions was considered by this Court  

in  ICICI  Bank  Limited  v.  Official  Liquidator  of  APS  Star  

Industries Limited & Others, (2010) 10 SCC 1, and this Court held  

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that the Reserve Bank did have such authority by virtue of Sections  

21 and 35-A of the Banking Regulation Act, 194922.   

52. The  question  is  whether  in  making  such  a  prescription,  the  

Parliament  has  delegated  any  essential  legislative  function?   To  

answer the question  it is required to understand what is an essential  

legislative  function  and  what  are  the  limits  subject  to  which  such  

function could be delegated.

53. The first major decision of this Court on the subject of the validity  

of delegated legislation is In re Art. 143, Constitution of India and  

Delhi Laws Act (1912) etc.,  AIR 1951 SC 332,  by a Constitution  

bench of 7-Judges.   Seven separate judgments were delivered.  It was  

a case where Section 7 of the Delhi Laws Act authorized the provincial  

government to extend by a notification in the official gazette to the  

provinces of Delhi, any enactment which was in force in any part of  

British India as on the date of such notification.    Similar provisions  

were contained in two other enactments.   One of the questions was  

whether  such  conferment  of  power  on  the  executive  amounted to  22 “39. The Guidelines  issued  by RBI dated  13.7.2005 itself  authorizes  the  banks  to  deal  inter  se  in  NPAs.   These  guidelines have been issued by the regulator in exercise of the powers conferred by Sections 21 and 35-A of the Act.  ………………….  All this comes within the ambit of Section 21 which enables RBI to frame the policy in relation to   advances to be followed by the banking companies under Section 21(2).  These guidelines and directions following them  have a statutory force.”

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excessive delegation of the legislative power.    Even according to  

Patanjali Sastri, J., who was a member of the Bench which decided the  

case, in a subsequent decision in  Kathi Raning Rawat v.  State of  

Saurashtra,  AIR  1952  SC  123,  while  dealing  with  the  decision  in  

Delhi Laws Act’s case observed thus:  

“While undoubtedly certain definite conclusions were reached by the majority of the  Judges  who  took  part  in  the  decision  in  regard  to  the  constitutionality  of  certain  specified enactments, the reasoning in each case was different, and it is difficult to say  that  any  particular  principle  has  been  laid  down  by  the  majority  which  can  be  of  assistance in the determination of other cases.”.    

54. In  the  case  of  B.  Shama  Rao  v. Union  Territory  of  

Pondicherry, AIR 1967 SC 1480, J.M. Shelat, J. speaking for majority  

(3) of a Constitution Bench of 5 Judges, after summarizing the views of  

the 7-Judges who delivered the judgment in  Delhi Laws Act’s case  

opined;

“5.   …….In  view of  the  intense  divergence  of  opinion  except  for  their  conclusion  partially  to uphold the validity  of the said laws it  is difficult  to deduce any general  principle which on the principle of stare decisis can be taken as binding for future cases.  It is trite to say that a decision is binding not because of its conclusion but in regard to  its ratio and the principle laid down therein.  The utmost, therefore, that can be said of  this decision is that the minimum on which there appears to be consensus was (1) that  legislatures in India both before and after the Constitution had plenary power within  their respective fields; (2) that they were never the delegates of the British Parliament;  (3) that they had power to delegate within certain limits not by reason of such a power  being inherent in the legislative power but because such power is recognised even in the  United States of America where separatist  ideology prevails  on the ground that it  is  necessary  to  effectively  exercise  the  legislative  power  in  a  modern  State  with  multifarious activities and complex problems facing legislatures; and (4) that delegation  of  an  essential  legislative  function  which  amounts  to  abdication  even partial  is  not  permissible.    All of them were agreed that it  could be in respect of subsidiary and  ancillary power.”

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55. In  Devi  Das  Gopal  Krishnan  etc.  v. State  of  Punjab  &  

Others, AIR 1967 SC 1895, another Constitution Bench though struck  

down the impugned provision on the ground of excessive delegation,  

recognized the need of delegating and this Court opined as follows:-

“………  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.  Thus  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.

But the said liberal construction should not be carried by the courts to the extent  of always trying to discover a dormant or latent legislative policy to sustain an arbitrary  power conferred on executive authorities.   It is the duty of the court  to strike down  without any hesitation an arbitrary power conferred on the executive by the legislature.”

56. In  1968,  a  Constitution  Bench  of  7-Judges  in  Municipal  

Corporation  of  Delhi  v. Birla  Cotton,  Spinning and Weaving  

Mills, Delhi & Another, AIR 1968 SC 1232 considered the question  

whether  Section 150 of  the Delhi  Municipal  Corporation Act  (66 of  

1957)  is  unconstitutional  on  the  ground  that  it  provided  for  

impermissible delegation of the ‘essential legislative function’.  On an  

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examination of  the  abovementioned authorities,  apart  from others,  

Chief Justice Wanchoo, speaking for himself and Justice Shelat, held as  

follows:

“28. ……  The  legislature  must  retain  in  its  own  hands  the  essential  legislative  functions and what can be delegated is the task of subordinate legislation necessary for  implementing  the  purposes  and  objects  of  the  Act.  Where  the  legislative  policy  is  enunciated with sufficient clearness or a standard is laid down, the courts should not  interfere.  :What guidance should be given and to what extent and whether guidance has  been given in a particular case at all depends on a consideration of the provisions of the  particular  Act  with  which  the  Court  has  to  deal  including  its  preamble.   Further  it  appears to us that the nature of the body to which delegation is made is also a factor to  be taken into consideration in determining whether there is sufficient guidance in the  matter of delegation.”

The  Court  held  that  there  was  no  impermissible  delegation  of  

legislative power.

57. Justice  Hidayatullah,  speaking  for  himself  and  for  Justice  

Ramaswami,  agreed  with  the  conclusion  reached  at  by  the  Chief  

Justice, though on slightly different reasons.

58. In  M.K.  Papiah  &  Sons  v. The  Excise  Commissioner  &  

Another,  (1975) 1 SCC 492,  this  Court  once again considered the  

question of delegated legislation in the context of a provision in the  

Mysore Excise Act which provided for the levy of excise duty “at such  

rate or rates as the Government may prescribe on excisable goods”.  

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Such a provision was challenged as unconstitutional on the ground  

that it was a case of abdication of essential legislative function by the  

legislature.  The Court after reviewing the number of earlier decisions  

held  the  impugned  provision  to  be  valid.    Placing  reliance  on  a  

judgment of the Privy Council in the case of  Cobb & Co.  v. Kropp  

[1967 1 AC 141], this Court held as follows:-

“23.   The point to be emphasized – and this is rather crucial – is the statement of their   Lordships that the Legislature preserved its capacity intact and retained perfect control  over  the  Commissioner  for  Transport  inasmuch  as  it  could  at  any  time  repeal  the  legislation  and  withdraw  the  authority  and  discretion  it  had  vested  in  him,  and,  therefore, the Legislature did not abdicate its functions.

In other words, the very fact that the legislature has the power to  

repeal and withdraw the authority of the delegate and the discretion  

vested  in  the  delegate,  should  lead  to  the  conclusion  that  the  

legislature did not abdicate its essential functions.

59. According to Seervai,  by its judgment in  M.K. Papiah’s case  

(supra), this Court “after twenty five years of wandering in the legal maze of its own creation”  

…… “come round to the view expressed by the Privy Council in 1878” i.e. Queen v. Burah  

[1878 (5) Ind App 178].   

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60. This Court in the case of  Registrar of Cooperative Societies  

v. K.  Kunjaboo,  AIR  1980  SC  350  took  note  of  the  uncertainty  

prevailing in the following words;

“2.   Lawyers and judges have never ceased to be interested in the question of delegated  legislation and since the Delhi Laws Act case, we have been blessed by an abundance of  authority, the blessing not necessarily unmixed.  We do not wish, in this case, to search  for  the  precise  principles  decided  in  the  Re Delhi  Laws Act  case,  nor  to  consider  whether  M.K. Papiah v. Excise Commissioner beats the final retreat from the earlier  position.    For the purposes of  this  case we are content  to  accept  the “policy”  and  “guidelines” theory and seek such assistance as we may derive from cases where near  identical provisions have been considered.”

This  Court  declined “to consider  whether  M.K. Papiah & Sons  v.  

The Excise Commissioner, (1975) 3 SCR 607, beat the final retreat  

from the earlier position” but proceeded to examine the case before it  

on the theory of “policy” and “guidelines” propounded in some of the  

cases.

61. We can safely state that none of the judgments of this Court so  

far  has  laid  down  any  principle  indicating  as  to  what  exactly  

constitutes “essential legislative function”.   

62. While the  Delhi Laws Act’s case dealt with the delegation of  

power to the Executive by the Legislature of applying certain laws  

with  or  without  modification  to  new  territories,  the  other  cases  

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essentially dealt with the permissibility of the delegation of the power  

to the Executive to fix the rates of tax etc.

63. An examination of the above authorities, in our view leads to the  

following inferences;

(i) The proposition that essential legislative functions cannot be  

delegated  does  not  appear  to  be  such  a  clearly  settled  

proposition and requires a further examination which exercise  

is not undertaken by the counsel appearing in the matter.  We  

leave  it  open  for  debate  in  a  more  appropriate  case  on  a  

future date.

For  the  present,  we  confine  to  the  examination  of  the  

question:

(a) Whether defining every expression used in an enactment  

is an essential legislative function or not?  

(ii) All the judgments examined above recognize that there is a  

need for some amount of delegated legislation in the modern  

world.    

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(iii) If the parent enactment enunciates the legislative policy with  

sufficient clarity, delegation of the power to make subordinate  

legislation to carry out the purpose of the parent enactment is  

permissible.

(iv) Whether  the policy  of  the legislature is  sufficiently  clear  to  

guide  the  delegate  depends  upon  the  scheme  and  the  

provisions of the parent Act.

(v) The nature of the body to whom the power is delegated is also  

a relevant factor in determining “whether there is sufficient  

guidance in the matter of delegation.”

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64. Whether  defining  every  word  employed  in  a  statute  is  really  

necessary and whether it is a part of the essential legislative function  

was never the subject matter of debate in any of these cases.    

65. We are of the firm opinion that it is not necessary that legislature  

should define every expression it  employs in a statute.   If  such a  

process  is  insisted  upon,  legislative  activity  and consequentially  

governance comes to a standstill.   It  has been the practice of  the  

legislative bodies following the British parliamentary practice to define  

certain words employed in any given statute for a proper appreciation  

of or the understanding of the scheme and purport of the Act.  But if a  

statute  does  not  contain  the  definition  of  a  particular  expression  

employed in  it,  it  becomes the duty  of  the  courts  to  expound the  

meaning of  the undefined expressions in  accordance with the well  

established rules of statutory interpretation.  

66. Therefore, in our opinion, the function of prescribing the norms  

for  classifying  a  borrower’s  account  as  a  NPA  is  not  an  essential  

legislative  function.   The  laying  down  of  such  norms  requires  a  

constant  and  close  monitoring  of  the  financial  system  demanding  

considerable  amount  of  expertise  in  the  areas  of  public  finance,  45

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banking etc., and the norms may require a periodic revision.   All that  

activity involves too much of detail and promptitude of action.  The  

crux  of  the  impugned  Act  is  the  prescription  that  a  SECURED  

CREDITOR could take steps contemplated under Section 13(4) on the  

“default”23 of  the  borrower.   The  expression  “default”  is  clearly  

defined under the Act.  Even if the Act were not to be on the statute  

book, under the existing law a CREDITOR could initiate legal action for  

the  recovery  of  the  amounts  due from the  borrower,  the  moment  

there is a breach of the terms of the contract under which the loan or  

advance is granted.  The stipulation under the Act of classifying the  

account of the borrower as NPA as a condition precedent for enforcing  

the security interest is an additional obligation imposed by the Act on  

the  CREDITOR.   In  our  opinion,  the  borrower  cannot  be  heard  to  

complain  that  defining  of  the  conditions  subject  to  which  the  

CREDITOR could classify the account as NPA, is part of the essential  

legislative function.  If  the Parliament did not choose to define the  

expression  “NPA”  at  all,  Court  would  be  bound  to  interpret  that  

expression as long as that expression occurs in Section 13(2).  In such  

23 Section 2(1) (j) "default" means non-payment of any principal debt or interest thereon or any other amount payable by a  borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset  in the books of account of the secured creditor ;  

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a  situation,  Courts  would  have  resorted  to  the  principles  of  

interpretation  (i)  as  to  how  that  expression  is  understood  in  the  

commercial world, and (ii) to the existing practice if any of either the  

particular  CREDITOR  or  CREDITORS  as  a  class  generally.    If  the  

Parliament chose to define a particular expression by providing that  

the expression shall have the same meaning as is assigned to such an  

expression by a body which is an expert in the field covered by the  

statute and more familiar with the subject matter of the legislation, in  

our  opinion,  the  same  does  not  amount  to  any  delegation  of  the  

legislative powers.  Parliament is only stipulating that the expression  

“NPA” must be understood by all the CREDITORS in the same sense in  

which such expression is understood by the expert body i.e., the RBI  

or other REGULATORS which are in turn subject to the supervision of  

the  RBI.   Therefore,  the  submission  that  the  amendment  of  the  

definition of the expression ‘non-performing asset’ under Section 2(1)

(o) is bad on account of excessive delegation of essential legislative  

function, in our view, is untenable and is required to be rejected.

67. Coming  to  the  submission  that  by  authorizing  different  

REGULATORS to prescribe different norms for the identification of a  

NPA with reference to different CREDITORS amount to unreasonable  47

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classification is also required to be rejected for the reason that all the  

CREDITORS do not form a uniform/homogenous class.

68. There  are  innumerable  differences  among  the  CREDITORS.  

Differences  based  on  the  legal  structure  of  the  CREDITORS’  

organization, differences based upon the nature of the loan advanced  

by them, and differences based on the terms and conditions subject  

to  which  such  loans  or  advances  are  made  by  each  of  those  

CREDITORS, etc.  For example, the Exim Bank loans are generally in  

foreign  currencies.   Similarly,  loans  granted  by  Housing  Finance  

CREDITORS which are in turn regulated by the National Housing Bank  

are loans which are term loans for relatively longer periods than other  

loans.  There  is  nothing  uniform  about  these  CREDITORS  or  their  

activities.   

69. It is submitted by learned counsel for the RBI -  

“Prior to the amendment in 2004, NPA was defined as sub-standard,  doubtful  or  loss  asset  in  accordance  with  the  directions  or  under  guidelines relating to assets classification issued by the Reserve Bank.  Irrespective of whether the financial entity was regulated by RBI or  not,  for  the  purposes  of  SARFAESI  Act,  the  asset  classification  stipulated by RBI was applicable.  Though the regulator concerned of  the financial entity had stipulated different standards for regulatory  purposes, the entities had to apply the criteria stipulated by RBI for  asset  classification  so far  as SARFAESI  Act  was concerned.     The  amendment brought about in 2004 addresses this issue and brings in  uniformity in the classification of assets by financial entities, both for  the purposes of  complying  with the directions  issues by their  own  

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regulations  and  for  the  purposes  of  SARFAESI  Act.    As  such,  a  situation where an asset is not an NPA as per the specifications of the  regulator but the same asset is an NPA for the purposes of SARFAESI  Act or vice versa does not arise after the amendment made in 2004.”

70. The  Union  of  India  filed  a  counter  affidavit  (through  Director,  

Department of Financial Services, Ministry of Finance) before the High  

Court of Gujarat in Special Civil Application No.2910 of 2013 regarding  

the purpose for which the impugned amendment was brought in.  It is  

stated in the counter affidavit as follows:

“9. I  state and submit that the amendment in Section 2(1)(o)  of  SARFAESI Act, 2002 was made in 2004 to extend the classification  norms of non-performing assets stipulated buy (sic by) the concerned  regulator  who  is  administering  or  regulating  such  entity  or  the  Reserve Bank of India when the said institution is not regulated by  any regulator in India.  There are financial institutions such as Housing  Finance corporations notified by Central Government under SARFAESI  Act,  which  are  regulated  by  National  Housing  Bank.   The  non- performing assets of these institutions are classified as per guidelines  prescribed by National Housing Bank.  The Act covers certain other  institutions such as Asian Development Bank and assets are classified  as per the guidelines prescribed by Reserve Bank of India.  The above  amendments in the Act were made so that the guidelines issued by  concerned  regulator  as  applicable  to  them  are  covered  for  the  purpose of recovery under the Act.

10. I  further  state  and  submit  that  the  amendment  covered  the  entities  under  the  Act  regulated  by  different  regulators  such  as  Reserve Bank of India, National Housing Bank etc. who had stipulated  their  own  guidelines  for  the  purpose.   At  the  same  time,  the  amendment also covered the entities like Asian Development Bank,  which  did  not  fall  within  the  purview  of  any  regulator  in  India.  Therefore, the amendment was made in the Act to take care of these  situations  and  these  amendments  were  necessary  to  cover  the  deficiencies noticed in the Act.”

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71. Therefore, to say that enabling them to follow different norms  

would  be  violative  of  Article  14,  in  our  view,  would  be  wholly  

untenable.  

72. Coming to the third submission of the borrower, we would not  

like to deal with this submission in the instant batch of cases as there  

are  few  cases  where  factually  the  SECURED  ASSETS  have  been  

transferred by the ORIGINAL CREDITORS.  Those cases have been de-

tagged from this batch to be heard separately.

73. Coming to the fourth submission of the borrower, it must fail on  

the basis of express language of Section 13(3A)24 which obligates the  

SECURED CREDITORS to examine the representation/objection, if any,  

made by the borrower on the receipt of notice contemplated under  

Section 13(2) and communicate the reasons to the borrower if such a  

representation is not accepted by the SECURED CREDITORS.  We have  

already  indicated  in  our  judgment,  in  para  no.  48,  that  the  

representation/objection  contemplated  under  Section  13(3A)  is  24 Section 13(3A). If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any  objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the   conclusion that such representation or objection is not acceptable or tenable, he shall communicate within fifteen days of   receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower.  

Provided  that  the  reasons  so  communicated  or  the  likely  action  of  the  secured  creditor  at  the  stage  of   communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery   Tribunal under section 17 or the Court of District Judge under section 17A.

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required  to  be  examined  objectively.   Section  13  obligates  the  

SECURED CREDITOR to communicate the reasons for non-acceptance  

of the representation or objections to the borrowers.

74. Before closing these matters, we may also deal with one aspect  

of the judgment of the Gujarat High Court.   The Gujarat High Court  

recorded that the impugned amendment is  ultra vires the object of  

the  Act.     We  presume  for  the  sake  of  this  judgment  that  the  

impugned amendment is not strictly in consonance with the objects  

enunciated when the Act was initially made. We fail to understand as  

to how such inconsistency will render the Act unconstitutional.  The  

objects  and reasons are not  voted upon by the legislature.   If  the  

enactment is otherwise within the constitutionally permissible limits,  

the fact that there is a divergence between the objects appended to  

the Bill and the tenor of the Act, in our opinion, cannot be a ground for  

declaring the law unconstitutional.

75. In view of our abovementioned conclusions, we do not propose to  

examine other submissions regarding the correctness of the Gujarat  

High  Court’s  declaration  that  the  unamended  definition  of  the  

expression “NPA” would continue to govern the situation in view of  

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the Gujarat High Court’s conclusion that the amended definition of  

NPA is unconstitutional.  

76. All the writ petitions and the appeals are disposed of declaring  

that the amended definition of the expression “NPA” under Section  

2(1)(o) of the Act is constitutionally valid.  

77. In the result, all the writ petitions either filed before this Court or  

filed before the Madras and Gujarat High Courts and the appeals of  

the borrowers stand dismissed.  The appeals of the CREDITORS are  

allowed. Each of the writ petitioners/borrowers shall pay costs to the  

respective CREDITORS calculated at 1% of the amount outstanding on  

the date of the notice under Section 13(2) of the Act in each of the  

cases.

………………………………….J.                                          (J. CHELAMESWAR)

………………………………….J.                              (S.A. BOBDE)

New Delhi; January 28, 2015

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