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Pratibha Rathore
Mumbai, Sept 18: The Karnataka high court has dismissed 2,300 writ petitions filed by unincorporated bodies and partnership firms challenging the validity of the section 25 S of the Reserve Bank of India Act, 1934, which prohibits unincorporated bodies from accepting deposits from the public.
More than 4,000 cases filed by various unincorporated bodies, individuals and firms are still pending in various high courts throughout the country, questioning the right of such companies to accept deposits under clause 25 S of the RBI Act, 1934.
While dismissing all the writ petitions, the court has observed that the objective of the centre and apex bank's decision to ban acceptance of deposits by unincorporated bodies is to safeguard the monetary stability in the country and prevent these institutions from doing any further harm to gullible depositors.
According to the court order, section 25 S was introduced with the twin objective of preventing the financial institutions in the unorganised sector from doingany serious harm to the monetary system and credit policies formulated by the bank and to protect general public interest.
"The introduction of section 25 S has to be seen in the light of prevailing conditions and magnitude of problem the country is currently facing," the court observed.
Section 25 S was introduced in financial year 1997 through an amendment in the RBI Act, 1934. The section was introduced to debar individuals, firms and unincorporated associations from accepting deposits from the public.
Section 25 S prohibits any person, firm or an unincorporated association of individuals, whose business includes any of the activities of a financial institution or whose principal business is receiving or arranging deposits under any scheme or lending in any manner, from accepting deposits.
Prior to the amendment, an individual was allowed to accept deposits only from 25 depositors and 25 depositors per partner not exceeding 250 depositors in the case of a partnership firm.
Stating the rationaleof the said section, the court stated that the restriction was imposed based on past experience. "It was aimed at protecting the economy from going haywire due to fund flows to such institutions which are considered bad for the health of the nation," it said.
Citing the case of Sapan Kumar Guha and the three Pearless cases, the court observed that such cases have focussed the attention of the union government on the urgent need to control activities of such institutions which are running a parallel economy and luring depositors by offering high rates of interest.
Dismissing the petitioners contention that the legislation cannot be related to banking as deposits cannot be withdrawn by cheques, the court observed that deposit collection from the public is a part of banking activity.
Rejecting the petitioners contention that the activity of money lending also included money borrowing, the court observed that non-banking credit should also be controlled by the central bank as one of its main function is tocontrol credit. Further citing the case involving Kanta Mehta Vs Union of India, the court said, "Deposit receiving is not connected with money lending which mainly consists of advancing loans from money lenders' own funds to earn a return on the advances made."
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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