JUDGMENT Sengupta, J.: This appeal has been preferred by the Reserve Bank of India against an interim order dated 7th October, 1988 passed by a learned Single Judge of this Court on the writ petition filed by the first respondent challenging, inter alia, the constitutional validity of the Residuary Non-Banking Companies (Reserve Book) Directions, 1987 framed by the Reserve Bank of India in exercise of powers conferred by sections 45J and 45K of the Reserve Bank of India Act, 1934 as also a purported show cause notice dated 23rd September, 1988. By the said interim order, the learned Single Judge bad granted an interim order in terms of the prayers (g) and (h) of the writ petition. It was however, provided that the interim order would not prevent the Reserve Bank of India to have regular inspection of the writ petitioners business in accordance with law. By the said order liberty was given to the Reserve Bank of India to apply for variation of the interim order on notice to the writ petitioners. Prayers (g) and (h) for the sake of convenience, are set out herein-below :- "(g) Injunction restraining the respondents and each of them, their servants, agents or assigns from giving any effect and/or further effect to the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 and the said purported show cause notice dated 23rd September, 1988 and from taking any steps pursuant thereto or acting in terms thereof and from taking any penal action against the petitioners on the allegation of violation of the provisions of the said 1987 Direction. (h) Stay of the operation of the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 and the said purported show cause notice dated 23rd September, 1988 and all proceedings therein and in respect thereof." 2. As already stated, the Reserve Bank of India has preferred of an appeal against the said interim order. A stay petition was also moved on behalf of the Reserve Bank of India for stay of operation of the order dated 7th October, 1988. Affidavits were filed in the stay petition. After the stay petition was heard for some time, the appeal as well as the stay petition were assigned for final disposal before this Bench. During the course of hearing of the stay petition, an interim order was made on 23rd March, 1989. 3. Affidavits were filed in the stay petition. After the stay petition was heard for some time, the appeal as well as the stay petition were assigned for final disposal before this Bench. During the course of hearing of the stay petition, an interim order was made on 23rd March, 1989. 3. The first respondent is a Company incorporated under the Companies Act, 1956. The Company is engaged inter alia, in the business of offering various saving schemes to the public at large which are known as endowment schemes. The Company's schemes range from 1 year to 10 years. Under the said scheme, moneys are paid by the subscribers in lumpsum or in instalments and the subscriber after the stipulated maturity period in respect of a particular scheme gets refund of his subscription along with some accretion which is known as 'interest' or 'bonus'. A certificate is issued to the subscriber which constitutes a bilateral contract between the individual certificate holder and the Company. 4. The Company follows the actuarial principle of accounting whereunder the whole of the first year's subscription is appropriated Jo the Profit & Loss Account of the Company and the said appropriated amount provides its working capital. The renewal subscription of a certificate holder from the second year onwards is invested in interest bearing investments. By the process of such investment the Company is stated to be in a position to pay the guaranteed amount to a certificate holder at the end of the stipulated maturity period. According to the Company at all points of time it is in a position to meet its contractual liabilities. 5. In or about 1978 an Act known as the Prize Chits and Money Circulation Schemes (banning) Act was enacted by the Union parliament, whereby and where under all business which amounted to a "Prize Chit" or a "Money Circulation Scheme" was banned. Pursuant to the enactment of the said Act, notices were sent by the State of West Bengal to the Company to submit winding up plans as in the opinion of the State Government the business of the Company amounted to a Prize Chit/Money Circulation Scheme within the meaning of the said 1978 Act. 6. Pursuant to the enactment of the said Act, notices were sent by the State of West Bengal to the Company to submit winding up plans as in the opinion of the State Government the business of the Company amounted to a Prize Chit/Money Circulation Scheme within the meaning of the said 1978 Act. 6. The Company as also several other Companies who are similarly placed filed writ applications under Article 226 of the Constitution of India in this Court challenging the legality and validity of the said purported notices and contending that the said 1978 Act was not applicable to the Company. The said writ application was dismissed by a learned Single Judge of this Court. Thereafter an appeal was preferred by the Company against the said judgment and order and a Division Bench of this Court was pleased to grant a stay of the said order. 7. An application under Article 226 of the Constitution of India was filed by the Peerless General Finance and Investment Co. Ltd. which was taken up for bearing before a learned Single Judge of this Court and the said writ application was dismissed by a judgment and order dated 14th March, 1986. Thereafter the said Peerless General Finance & Investment Co. Ltd. preferred an appeal before a Division Bench of this Court and the Division Bench by a judgment and order dated 23rd May, 1986 was pleased to reserve the decision of the learned Single Judge and was pleased to allow the writ petition filed by the said Company. By the said judgment and order, the Division Bench held that the business of Peerless did not amount to Prize Chit within the meaning of the said 1978 Act'. 8. Thereafter, special leave petitions were filed by the Reserve Bank of India and Union of India before the Supreme Court of India against the said judgment and order of the Division Bench. The Supreme Court was pleased to grant special leave. However, by a judgment and order dated 22nd January, 1987 Supreme Court dismissed the said appeals bolding that the business of Peerless General Finance & Investment Co. Ltd. did not amount to a Prize Chit within the meaning of the said 1978 Act. 9. The Supreme Court was pleased to grant special leave. However, by a judgment and order dated 22nd January, 1987 Supreme Court dismissed the said appeals bolding that the business of Peerless General Finance & Investment Co. Ltd. did not amount to a Prize Chit within the meaning of the said 1978 Act. 9. According to the first respondent, since the business carried on by the Company is similar to the business carried on by Peerless in its essential features, the said judgment of the Supreme Court was also applicable to the petitioner Company. After the said- judgment, therefore, the business of petitioner Company cannot be said to be illegal. This position is however not disputed. 10. On and from 15th May, 1987 the Reserve Bank of India has issued a set of Directions known as the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 is exercise of powers under sections 45J and 45K of the Reserve Bank of India Act, 1934. After framing the said Directions, the Reserve Bank classified the respondent company as a Residuary Non-Banking Company within the meaning of the said Directions and directed it to comply with the same. There was a protracted exchange of correspondence between the respondent company and the Reserve Bank of India during the course of which the respondent company asked for certain clarifications regarding compliance with the mode of investment prescribed and in particular on the question of approved securities within the meaning of the said Directions but the same were not furnished by the Reserve Bank of India. On the contrary, the Reserve Bank of India suddenly issued a show cause notice dated 23rd September, 1988 on the respondent company calling upon the respondent company to show cause as to why it should not be prevented from carrying on business. The allegation against the respondent company was contravention of the provisions of the said 1987 Directions. The said Directions have been challenged in the writ application filed by the respondent company under Article 226 of the Constitution out of which the present appeal arises. The main grounds of challenge are in respect of paragraphs 6 and 12 of the said 1987 Directions. These are :- a) The impugned provisions of the said Directions will result in prohibiting the Company from carrying on its existing business and as such is unconstitutional being violative of Article 19(1)(g) of the Constitution. The main grounds of challenge are in respect of paragraphs 6 and 12 of the said 1987 Directions. These are :- a) The impugned provisions of the said Directions will result in prohibiting the Company from carrying on its existing business and as such is unconstitutional being violative of Article 19(1)(g) of the Constitution. b) The said impugned provisions are ultra vires the provisions of section 45K(3) of the Reserve Bank of India Act, 1934. c) The said Directions have been framed in colourable exercise of power under the provisions of Reserve Bank of India Act, 1934 and suffer from Malice in law, non-application of mind and violation of the principles of natural justice. d) The said impugned provisions are unreasonable and unjust and are violative of Article 14 of the Constitution of India. 11. These contentions have to be examined amongst others in the background and the circumstances leading to the issue of the aforesaid Impugned Directions :- i) Development in the legislation relating to acceptance of public deposits began with Banking Companies which handled even then a large volume of public deposits. A special legislation in the form of Banking Regulation Act, 1949 (formerly known as Banking Companies Act) was enacted with the objective, inter alia, of of protecting the interest of depositors. With the enactment of that legislation the entire gamut of operation of Banks was brought under strict regulatory provisions as also under close surviollance of the Reserve Bank of India. ii) Subsequently, it was noticed that non-Banking Companies which were not governed by the Banking Regulation Act commenced accepting public deposits in a big way. In the absence of any regulation regarding acceptance of deposits by such Companies, several unhealthy features and malpractices came to the surface in 1960 when a sharp increase in the volume of public deposits held by such Companies was also noticed. Non-Banking Companies started issuing catchy and misleading advertisements soliciting deposits from public. Such unhealthy, growth of deposits outside the banking system and the proliferation of institutions both financial and non-financial, depending mainly or wholly on public deposits were viewed with concern by the authorities. Non-Banking Companies started issuing catchy and misleading advertisements soliciting deposits from public. Such unhealthy, growth of deposits outside the banking system and the proliferation of institutions both financial and non-financial, depending mainly or wholly on public deposits were viewed with concern by the authorities. Against this background, it was considered desirable, inter alia, in the interest of depositors that these institutions should not have unlimited and unrestricted access to the public fund to meet the situation and to invest the Reserve Bank as the custodian of monetary and credit system of the country with powers enabling it to effectively supervise, control and regulate the deposit acceptance activities of such institutions, Chapter IIIB was inserted in the Reserve Bank of India Act. 1934 which came into force on 1st February, 1964. (Reserve Bank of India Act has since been further amended in January, 1984 by incorporating Chapter IIIC by which deposit acceptance activity of unincorporated bodies is also regulated. The legislative competence and the constitutional validity of those provisions were challenged before the Division Bench of Delhi High Court which has upheld the validity thereof on both the grounds). Powers arc conferred on the Reserve Bank under Chapter IIIB of Reserve Bank of India Act to issue suitable directions (or regulating deposit acceptance activities of those companies and corporate bodies. iii) Pursuant to the provisions of Chapter IIIB of the Reserve Bank issued Directions to both non-banking non-financial Companies as also non-banking financial Companies. Thus, the deposit acceptance activities of the financial and non-financial Companies were brought under regulatory provisions of the Directions. Later on, original set of Directions were replaced by new set of Directions in 1973 which were subsequently replaced by 1977 Directions. iv) In 1974 the Companies Act was amended by which section 58A and section 58B were introduced with the object, viz. "It has been the, practice of the Companies to take deposits from the public at a high rate, of interest. Experience shows that in many cases deposits taken by, Companies have not been refunded on the due dates. In many, such cases either the Companies have gone into liquidation or the, funds are liquidated to such an extent that the Companies, are not in a position to refund the deposits. It is accordingly considered necessary to control the Companies inviting deposits from the public". In many, such cases either the Companies have gone into liquidation or the, funds are liquidated to such an extent that the Companies, are not in a position to refund the deposits. It is accordingly considered necessary to control the Companies inviting deposits from the public". With, the, enactment of section 58A and section 58B of, the Companies Act the, control over non-banking non-financial Companies (like manufacturing or trading) was to have passed on to the Central Government. But the Rules framed under those sections provide more or less similar norms as contained in the Directions issued by the Reserve Bank to financial Companies. The control over deposit acceptance activities of non-banking financial Companies continued to rest with the Reserve Bank. v) For regulating the deposit acceptance activities of the Companies like the writ petitioner, the Reserve Bank had issued a separate set of Directions called, “Reserve Bank of India Miscellaneous Non-Banking Companies Direction”. These miscellaneous non-banking Companies accepted. deposits from the public by floating certain schemes of long duration ranging upto 30 years and the deposits were collected in the form of subscriptions to such schemes monthly, quarterly, half yearly or yearly instalment. vi) In the year 1978, Parliament enacted a legislation called "The Prize Chits and Money Circulation Schemes (Banning) Act 1978; which banned the promotion or the conduct of Prize' Chit's and the Money Circulation Schemes. On the enactment of the legislation, RBI was advised that the schemes conducted, by' the Companies like the writ petitioner' fell within the ambit of the definition of "Prize Chit” contained in that Act. Consequently, view Was taken that since activities of such Companies 'Were banned there was no need to regulate the, deposit acceptance activities of such Companies: Accordingly the Directions issued by the Reserve Bank to Companies like the writ petitioner were revoked. vii) As indicated earlier, Peerless General Finance & Investment Co. Ltd. successfully challenged the said enactment as being not applicable to the company doing business like Peerless, The matter went up to the Supreme Court. The Supreme Court in the case (1) Reserve Bank of India v. Peerless General Finance & Investment Co. Ltd. reported in AIR 1987 SC 1023 , held chat the definition of “Prize Chit” contained in that Act did not cover the schemes like those conducted by Peerless Company. The Supreme Court in the case (1) Reserve Bank of India v. Peerless General Finance & Investment Co. Ltd. reported in AIR 1987 SC 1023 , held chat the definition of “Prize Chit” contained in that Act did not cover the schemes like those conducted by Peerless Company. Thus while holding that the Banning Act did not apply to the schemes of the types conducted by the Peerless Company, the Supreme Court noticed several undesirable features in the schemes of the type conducted by Peerless Company. The important observations made by the Supreme Court in the case of Peerless Company are as under :- Low yield: On the basis of the scheme then operated the depositors got around 7% per annum on the deposits made with the Company and the schemes had a long maturity ranging upto 30 years. Advertisements: It was noticed that for attracting deposits from small and uniformed depositors, advertisements were issued in beguiling terms. First year's subscription : The Company and the agents literally shared the first year's subscription received from the depositors. Forfeiture : The schemes contained provisions for forfeiting the amounts subscribed by the depositors if they committed certain defaults. The Supreme Court observed that there should be no forfeiture clause. viii) In dismissing the appeals preferred by Reserve Bank of India and Union of India, the Supreme Court said that it is open to the Reserve Bank of India to take such steps as are open in law to regulate the schemes such as those run by Peerless to prevent exploitation of ignorent subscribers. The Supreme Court also observed that care must be taken to protect the thousands of employees. ix) Against the above background the impugned Directions were specially formulated for regulating the activities of the Companies like the writ petitioner, particularly taking into account the observations of the Supreme Court in the Peerless case as also the fact that norms made applicable to non-banking non-financial and financial companies could not be applied to the Companies like the writ petitioner. 12. The judgment in Peerless case has made it amply clear that the business carried on by Peerless was neither illegal nor unlawful. The Supreme Court held that the savings and investment schemes were, however, subject to regulation by the Reserve Bank of India to prevent exploitation of the poor subscriber. 12. The judgment in Peerless case has made it amply clear that the business carried on by Peerless was neither illegal nor unlawful. The Supreme Court held that the savings and investment schemes were, however, subject to regulation by the Reserve Bank of India to prevent exploitation of the poor subscriber. The Supreme Court left the matter to the Reserve Bank to regulate the schemes operated by the savings companies which necessarily proceed on the footing that the schemes are legal and lawful but subject to special regulations, if needed, to make ,hem more beneficial to the subscribers. The Supreme Court also pointed out that the scheme should be to prevent exploitation of ignorant subscribers, but at the same time care must also be taken to protect the thousands of employees. The main idea of these guidelines was to have regulatory nature so that the depositor can get back his entire money after the contractual period with requisite returns. 14. At this stage it is necessary to set out some of the provisions which have been impugned in the proceeding. 4. Acceptance of deposit by residuary non-banking companies :- On and from 15th May, 1987, no residuary non-banking company shall receive any deposit repayable on demand or on notice of after a period of less than 12 months or more than 120 months from the date of receipt of such deposit, or renew any deposit received by it whether before or after that date, unless such deposit, on renewal, is repayable not earlier than 12 months and not later than 120 months from the date of such renewal. Explanation: Where a deposit is received in instalments, the period of deposit shall be computed from the date of receipt of the first instalment. 5. Explanation: Where a deposit is received in instalments, the period of deposit shall be computed from the date of receipt of the first instalment. 5. Minimum rate of return : On and from 15th May, 1987, the amount payable by way of interest, premium, bonus or other advantage, by whatever name called, by a residuary non-banking company in respect of deposits received from that date, shall not be less than the amount calculated at the race of 10 per cent per annum (to be compounded annually) on the amount deposited, provided that where, at the request of the depositor, a residuary non-banking company makes repayment of the deposit after the expiry of a period of one year but before the expiry of the period for which the deposit had been accepted, the amount payable by the company by way of interest, premium, bonus or other advantage on such deposit shall be reduced by two per cent from the rate which the company would have ordinarily paid by way of interest, bonus, premium or other advantage, had the deposit been accepted for the period for which such deposit had run. 6. Security for depositors: On and from 15th May, 1987- i) Every residuary non-banking company shall deposit and keep deposited in fixed deposits with public sector banks or invest and keep invested in-unencumbered approved securities (such securities being valued at their market value for the time being), or in other investments, which in the opinion of the company are safe, a sum which shall not, at the close of business on 31st December, 1987 and thereafter at the end of each half year that is, 30th June and 31st December be less than the aggregate amounts of the liabilities to the depositors whether or not such amounts have become payable, provided that of the sum so deposited or invested- (a) not less than 10 per cent shall be in fixed deposits with any of the public sector banks; (b) Not less than 70 per cent shall be in approved securities ; (c) not more than 20 per cent or ten times the net owned funds of the company, whichever amounts is less, shall be in other investment. Provided that such investments shall be with the approval of the Board of Directors of the Company. Provided that such investments shall be with the approval of the Board of Directors of the Company. Explanation :– “ Net owned funds” shall means the aggregate of the paid-up capital and free reserves as appearing in the latest audited balance sheet of the Company as reduced by the amount of accumulated balance of loss, deferred revenue expenditure and other intangible assets, if any, as disclosed in the said balance sheet. ii) Every residuary non-banking company shall entrust to one of the public sector banks designated in that behalf, deposits and securities referred to in clauses (a) and (b) of the proviso the sub-paragraph (i) to be held by such designated bank for the benefit of the depositors. Such securities and deposits shall not be withdrawn by the residuary non-banking company, or otherwise dealt with, except for repayment to the depositors. iii) Every residuary non-banking company shall furnish to the Reserve Bank with thirty days from the close of business on 31st December, 1987 and thereafter at the end of each half year that is as on 30th June and 31st December, a certificate from its auditors, being members of Institute of Chattered Accountants, to the effect that the amounts deposited in fixed deposits and the investments made are not less that the aggregate amounts liabilities to the depositors as on 30th June and 31st December of that year. Explanation :– For the purpose of this paragraph– (a) “Aggregate amounts of liabilities” shall mean total amount of deposits received together with interest, premium, bonus or other advantage by whatever name called, accrued on the amount of deposits according to the terms of contract. (b) “Approved securities” means, the securities in which the Trustee is authorized to invest trust money be any law for the time being in force in India and bonds or fixed deposits issued by any Corporation established or constituted under any Central or State enactments. (c) "Public sector banks" means, the State Bank of India, the Subsidiary Banks and the corresponding new banks referred to in section 45(1) of the Reserve Bank of India Act, 1934 (2 of 1934). (d) "Unencumbered approved securities" shall include the approved securities logdged by the company with another institution for advance or any other credit arrangements to the extent to which, such securities have not been drawn against or availed of. " 12. (d) "Unencumbered approved securities" shall include the approved securities logdged by the company with another institution for advance or any other credit arrangements to the extent to which, such securities have not been drawn against or availed of. " 12. Every residuary non-banking company shall disclose as liabilities in its books of accounts and balance sheets, the total amount of deposits received together with interest, bonus, premium or other advantage, accrued or payable to the depositors.” 14. According to the Reserve Bank of India paragraph 4 of the impugned Directions relates to the permissible period deposits, It lays down that the deposit shall not be accepted for a period of less than 12 months or more than 120 months, from the date of receipt of such deposit. As pointed out earlier, the normal standard applied to non-financial and financial companies is that they cannot accept deposits for a period of more than 36th months (except housing finance company). However, having regard to the fact that the companies like the writ petitioner conducted schemes which extended for a long period the impugned Directions were specially designed to permit them to continue to conduct such schemes but with a ceiling of 120 months. This was done as a special case and by way of concession to the companies of this type, It is absolutely necessary to impose the, ceiling on the maximum period of deposits for protecting the interest of small and uninformed depositors who cannot reasonably be expected to lock up their funds for a period beyond 10 years. 15. According to Reserve, Bank of India, paragraph 5 of the impugned Directions relates to the minimum rate of return. It provides for payment of a minimum return of 10% per annum to the depositors for a deposit with a maturity 10 years. As pointed out in the earlier paragraphs the Supreme Court in the Peerless case noticed that a return or 7 to 8 % was very meagre. Besides, it is common knowledge that a depositor can easily get a return of 10% if he makes a deposit with any bank only for a period of 3 years. The deposits, with non-financial and financial companies as also moneys invested in bonds issued by public sector corporations earn interest @ 14% per annum. 16. Besides, it is common knowledge that a depositor can easily get a return of 10% if he makes a deposit with any bank only for a period of 3 years. The deposits, with non-financial and financial companies as also moneys invested in bonds issued by public sector corporations earn interest @ 14% per annum. 16. According to the Reserve Bank or India, all that is provided is that if a residuary non-banking company makes at the request of the depositor repayment of the deposit before maturity then the amount payable by the company by way of interest etc. shall be 2% less than what would have been ordinarily paid by the company by way of interest etc. if the deposit bad run the full contractual period. In short this part of paragraph 5 of the impugned Directions does not make it obligatory on the petitioner company to repay the deposit after a period of 1 year and with interest @ 8 % per annum. Whether or not deposit should be repaid before maturity or after how many years depends entirely on the contract of deposit entered into between the depositor and the company. If according to the contract governing the acceptance of deposit a depositor is not entitled to claim repayment, of deposits before maturity or before the expiry of stipulated period then there is no obligation on the company to make such premature repayment and the question of paying interest @ 8 % per annum after a period of 1 year does not arise. In fact this part of paragraph 5 of the impugned Directions bas been made according to the normal principles applicable to all premature repayment of deposits and is intended to act as disincentive against such premature withdrawal. 17. Paragraph 6 of the impugned Directions according to the Reserve Bank of India lays down provisions for security for depositors. It prescribes the mode of investment of the funds collected by the companies like the writ petitioner. At the outset, the petitioners state that while collecting deposits the companies like the writ petitioner hold out to the members of public that the moneys so collected by them are invested in Government securities or kept deposited with banks and they also assure the depositors that their moneys are safe and secure. At the outset, the petitioners state that while collecting deposits the companies like the writ petitioner hold out to the members of public that the moneys so collected by them are invested in Government securities or kept deposited with banks and they also assure the depositors that their moneys are safe and secure. On the basis of such representation and on the strength or aggressive and misleading campaign and companies like the writ petitioner collect huge amounts of deposits from a large number of small, poor and uninformed depositors and that too in small instalments spread over a long period. The Reserve Bank of India asserts in this context that the companies like the writ petitioner carry on their activities wholly with the funds provided by the public by way of deposits and hardly have any capital of their own. Reserve Bank of India therefore contends that the provisions made in paragraph 6 of the impugned Directions are absolutely reasonable and are necessary for ensuring repayment of deposits on due date with interest accrued thereon to vast multitude of uninformed depositors who for obvious reasons cannot take care of their own interests. It is common knowledge chat a small depositor cannot have recourse Court proceedings for recovering his amounts if the companies do not repay the deposits on due date because the costs of protracted litigation and the labour involved therein would be totally out of proportion to the amount to be recovered. Therefore, the challenge to paragraph 6 of the impugned Directions is wholly unfounded. A glance at the provisions of paragraph 6 of the impugned Directions would leave no doubt as co the type of security in which investment has to be made by the companies like the writ petitioner. 18. Second explanation under paragraph 6 defines the term “Approved Securities” and according to the definition, approved securities would mean securities in which the trustee is authorised to invest Trust money by law for the time being in force in India. The definition also covers bonds or fixed deposits issued by any corporation established or constituted under the Central or State enactments. Thus, there is no ambiguity whatsoever as to what is meant by approved securities. 19. The definition also covers bonds or fixed deposits issued by any corporation established or constituted under the Central or State enactments. Thus, there is no ambiguity whatsoever as to what is meant by approved securities. 19. Paragraph 12 of the impugned Directions laws down that every residuary non-banking company shall disclose as liabilities in its books of accounts and Balance Sheet the total amount of deposits received, together with interest, bonus etc. accrued or payable to the depositors. The petitioners state that in the light of the observations made by the Supreme Court in the Peerless case, paragraph 7 of the impugned Directions has been formulated providing for the abolition of forfeiture. According to that paragraph no residuary non-banking company shall forfeit any amount deposited by a depositor or any interest, premium etc. accrued thereon. As a necessary consequence of abolition of forfeiture, the amount of deposit received from the depositors would ipso facto constitute liability of the company whether or not it becomes payable at any given point of time. Interest, premium etc. accruing on the amount of deposit received would also necessarily constitute the liability of the company as it is not open to the company to forfeit any amount accrued by way of interest, premium etc. 20. It will be evident from the aforesaid narration that the Reserve Bank is stared to have framed the aforesaid Directions with a view to protecting the interest of the depositors from whom moneys are collected by companies like the writ petitioner. The power to regulate under Chapter IIIB of RBI Act is undisputed. The only question which calls for determination is, are the Directions, particularly the Directions contained in the aforesaid paragraphs reasonable? The Directions of 1987 do not impose any restriction on companies right to carryon business, but they place restrictions with respect to the funds by one of the modes of raising resources by mobilising public deposits. It is no doubt true that one has to strike a balance between the competitive needs, the need to protect the public interest and the need to allow the companies like the writ petitioner to carryon business untill such business is prohibited by any law. It is no doubt true that one has to strike a balance between the competitive needs, the need to protect the public interest and the need to allow the companies like the writ petitioner to carryon business untill such business is prohibited by any law. It is not disputed that the law as in force now does not prohibit the carrying on the business by a company in accepting deposits, but the lesson of chit funds has made the Reserve Bank wiser and the directions of the Supreme Court, in Peerless case would serve as a pointer with regard to the ills which prevent the growth of savings and investments in the private sector. It cannot be disputed that the banking facilities have not been extended to the remote villages. Companies like the respondent company collect moneys from the members of the public who become subscribers of the scheme offered by the said company in lumpsum or in instalments and return the same to such subscribers at the end, of a contractually stipulated period (otherwise known as maturity period) with certain guaranteed accretion and bonus. The respondent company like other similar companies in the field render great service by mopping up small savings from the poorer sections of the rural and semi-urban population which were hitherto unexplored sectors for the purpose of mobilising small savings. The respondent company and similarly situated companies have thus contributed substantially to the building up movement of capital formation in the country, the collections received are mostly invested in nationalised banks or other Government securities and thus the respondent company has made available to the Government and its agencies funds from hitherto untapped sections of the people for investment for developmental and productive purposes. The respondent company issues a certificate to a person who intends to subscribe to any of the schemes of the company. Each such certificate constitutes a bilateral contract between the company and an individual certificate, holder and the terms and conditions of such contract are contained in the said certificate. It may not be out of place to mention that there is at present no forfeiture clause in any of the schemes offered by the company. Each such certificate constitutes a bilateral contract between the company and an individual certificate, holder and the terms and conditions of such contract are contained in the said certificate. It may not be out of place to mention that there is at present no forfeiture clause in any of the schemes offered by the company. Even when the so called forfeiture clause was there, certificate holders had, under the terms of his contract, the option to revive the certificate at any time during its maturity period, by paying arrears of subscription in respect of which there was default by certificate holders and for, reason whereof the certificate was discontinued. 21. Accordingly while encouraging the deposit from the public coming out of their savings, the anxiety of the Reserve Bank was to protect their interest so that their hard earned money is not lost as in the case of chit funds. The Reserve Bank has given reason why the scheme of control introduced with regard to financial and non-financial companies could not be made applicable to the instant case. 22. According to the Reserve Bank of India the Scheme of Control with regard to the Financial Companies and Non-financial Companies introduced by the Reserve Bank of India and the Companies Act envisage a technique involving three main features :- i) There muse be a nexus between the net owned fund of the company and the quantum of deposits which the company is entitled to receive from the public. The fixed ratio is 3 : 1 viz. 25% of the net owned capital is the ceiling on the quantum of public deposit. ii) There is a ceiling on the period of deposit, viz. 6 months-36 months. iii) Brokerage/commission/remuneration for collecting such business must not exceed 2 % for three years' deposit; it is less for one year deposits. 23. It is the case of the Reserve Bank of India that when one comes to consider the Residuary Non-Banking Companies like Timex, three striking features different from the Financial and Non-Financial Companies discussed above are found. These are :- i) They do not have any stake of their own in the business, because inveriably they have negative capital worth. ii) They conduct the entire activities only with the funds provided by the depositors as admitted in the writ petition of the petitioner. These are :- i) They do not have any stake of their own in the business, because inveriably they have negative capital worth. ii) They conduct the entire activities only with the funds provided by the depositors as admitted in the writ petition of the petitioner. The Company has to generate the working capital out of subscription collection which is their only business and only source of income. iii) The admitted activities of the companies are of extremely limited character, viz. collection of moneys from small depositors and depositing with banks or investing them in Government securities. The Companies like the writ petitioner cannot be subjected to the Scheme of Control applied to other Financial and Non-Financial Companies for the simple reason that they have no capital and their schemes are for a period much longer than three years. Therefore, a different type of regulation has to be conceived of for protecting the interest of depositors on whose funds alone these companies conduct their schemes. Therefore, after the Supreme Court judgment in peerless case when some of the leading concerns met Reserve Bank Officials on 24th February, 1987 (a month after the Supreme Court judgment) these companies frankly told the RBI that they cannot comply with the discipline of the Regulations applicable to Financial and Non-Financial Companies, It is only after mature considerations that the 1987 Directions were introduced. 24. It is also the case of the Reserve Bank of India that while devising these Directions of 1987, RBI had taken into account the interests of the depositors and also thought of providing adequate security for ensuring repayment of deposits together with interest on the due date. In this context it has to be borne in mind that:- a) A depositor could easily get interest not less than 11 % per annum on a deposit of 5 to 6 years with 100% security, viz. Government securities. b) He can get 14% interest on a three-years deposit with first class companies (though they are technically unsecure). 25. In this context it has to be borne in mind that:- a) A depositor could easily get interest not less than 11 % per annum on a deposit of 5 to 6 years with 100% security, viz. Government securities. b) He can get 14% interest on a three-years deposit with first class companies (though they are technically unsecure). 25. Therefore, if the depositor could get a minimum return of not less than 11 % per annum with 100% security, for a period of 5 to 6 years, it is the opinion of RBI that it would not be fair to the depositors if he has to get from the companies like the writ petitioner interest @ 10% per annum on 10-years deposit without providing adequate security. That is the reason why paragraph 6 has been introduced to ensure security at least to the extene of 80%. 26. If the Company restructures its organisation and curtails its outfit, it should be possible for them to run the business with the margin of 2 to 3 % which they will get from investment under paragraph 6 of 1987 Directions. Examples: 10% in Bank deposits (may not be any margin) 70% approved Securities which include Public Sector Bonds which yield upto 14%. Units of Unit Trust with an average yield of 12½%-Government Securities give average yield of about 12%. -Indira Vikas Patra-14.87% compound and 20% simple. -Kishan Vikias Patra-13.67% compound. 27. The nature of the business carried on by companies like Timex is that of only a middlemen or commission agents. They only collect money from depositors, invest them in Banks and approved securities and refund the money to depositors on maturity of the Certificates. If such middlemen or brokers are entitled to brokerage not exceeding 2% in respect of financial and non-financial companies; there can be no justification whatsoever for claiming a margin higher than 2 % to 3 % which they can easily obtain by complying with the 1987 Directions, particularly paragraph 6. 28. Paragraph 6 is nothing but simply a method to give effect to the representation made to the public by Timex for enticing the ignorant depositors to make investment. This representation (at page 33 of the Paper Book) is as follows :- “All liabilities to Certificate holders of the Company are covered by statutory deposit and deposit with nationalised banks." 29. Paragraph 6 is nothing but simply a method to give effect to the representation made to the public by Timex for enticing the ignorant depositors to make investment. This representation (at page 33 of the Paper Book) is as follows :- “All liabilities to Certificate holders of the Company are covered by statutory deposit and deposit with nationalised banks." 29. According to the Reserve Bank of India it will not be fair to the depositors who invested on the basis of such advertisement to permit investment in any other manner than in paragraph 6. The writ petitioner company will commit a fraud if it is allowed to make investments inconsistent with paragraph 6 and the statement made in the brochure. 30. The word liabilities in this advertisement must mean liabilities accrued whether or not they have become payable (paragraph 12 of 1987 Directions read with paragraph 6 of 1987 Directions). 31. One of the main purposes of the 1987 Directions is to protect the interest of the depositors by providing for an appropriate pattern of investments in paragraph 6. If this pattern of investment is followed RBI shall at least be able to secure the interest of the depositors to the extent of 80%-yet RBI cannot secure 100% interest as desired by Mr. Justice Khalid in the Peerless case "fool-proof measures". Paragraph 6 provides for investments of funds covering aggregated amount of liabilities whether or not they have become payable. This has to be read with paragraph 12 where disclosure of all liabilities accrued or payable is imperative. If Timex and similar companies follow this pattern of investment then at least for the future RBI shall be able to save the depositors from the devastating effects of the winding up or liquidation of the company. Without paragraph 6 there will be no umbrella of protection when the company folds up its business or becomes sick or is wound up. 32. In this connection reliance was placed in the decision in (2) Delhi Cloth & General Mills Co. Ltd. v. Union of India & Ors. reported in AIR 1983 SC 937 where the Companies (Acceptance of Deposit) Rules 1975 pursuant to section 58A of the Companies Act was challenged and negatived. There the Supreme Court note with approval the submission about the requirement of an umbrella of protection against winding up and sick companies. 33. Ltd. v. Union of India & Ors. reported in AIR 1983 SC 937 where the Companies (Acceptance of Deposit) Rules 1975 pursuant to section 58A of the Companies Act was challenged and negatived. There the Supreme Court note with approval the submission about the requirement of an umbrella of protection against winding up and sick companies. 33. In answer to the Court’s query as to why the RBI did not provide for minimum capital requirement as it did in the case of financial and non-financial Companies, the RBI has answered as follows :- a) Supposing they provide for a minimum requirement of capital of say Rs. 10 lacs, each one of these companies would have said that it amounted to prohibition because as has been seen from the financial position of the 11 companies, the initial capital was very small and eventually over the years it has been totally wiped out by accumulated losses. b) However, in para 6(1) (c) it bas been provided for some sort of nexus with the investment and the net owned capital of the company, viz. the company is at liberty to invest 20% of its aggregate amount of liabilities to depositors in such securities as the Board may approve or which is, 10 times the net owned funds of the company, whichever is less. Supposing a company bas net owned capital of Rs. 10 lacs (which is a very reasonable figure in business investment these days) then under this provision the company can freely invest Rs. 1 crore, i, e. 10 times the net owned fund provided its collection is not less than Rs. 5 crores, 20% of which will be Rs. 1 crore." c) Under Chapter IIIB of RBI Act the legislature expressly provides that the Reserve Bank should regulate acceptance of public deposits by issuing suitable directions for protecting the interest of depositors. There is no doubt that the present Directions do not ban the activities of the companies like the writ petitioner but the professed activity of those companies is such that any discipline introduced for safeguarding the interest of depositors would give rise to a complaint by such companies that it is impossible to run the activity as a commercial venture. 34. It bas been contended that the Directions are not only reasonable but they have been made with a view to protect the public. 34. It bas been contended that the Directions are not only reasonable but they have been made with a view to protect the public. Even if these regulations appear to be harsh, this will not be a ground to hold that the Directions are unreasonable. The reasonableness has to be examined in the context of the interest of the thousands of depositors. 35. It is contended on behalf of the writ petitioners that under Article 19(1) (g) of the Constitution, a citizen of India has a fundamental right to practice any profession or to carryon any occupation, trade or• business. Article 19(6) provides Chat nothing in sub-clause (g) of the said clause shall affect the operation of any existing law in so far as imposes or prevents the State from making any law imposing in the interest of the general public, reasonable restrictions on the exercise of right conferred by the said sub-clause. It is submitted that there is no Jaw prohibiting the business carried on by the respondent company and as such the Respondent No.2 has a fundamental right as a citizen of India to carryon such business subject to imposition of reasonable restriction on exercise of such right. Hence, it is submitted, that any regulatory direction issued by the Reserve Bank of India in respect of such business, in order to be valid, must be a reasonable restriction within the meaning of Article 19(6) of the Constitution. 36. It is submitted that the Compliance with the provisions of paragraphs 6 and 12 of the said 1987 Directions and investment of the deposits received in the mode prescribed by paragraph 6(1) will leave the respondent company without any fund to meet its working capital requirements and the return from the investments made in the prescribed mode will not be sufficient to ensure the minimum return to the certificate holders as fixed under paragraph 5 and to meet the company's expenses like management expenses, payment of agents' commission and meeting all other overheads. During the course of hearing, the respondent company has relied on come charts to show the un-workability and unreasonableness of the said provision. The said charts are self-explanatory and clearly demonstrate that compliance with the impugned provisions will result in deficit and the company will have to close down its business. During the course of hearing, the respondent company has relied on come charts to show the un-workability and unreasonableness of the said provision. The said charts are self-explanatory and clearly demonstrate that compliance with the impugned provisions will result in deficit and the company will have to close down its business. In this context, it is submitted that the purported assumptions at page 152 of the paper book and the purported figures given at page 153 thereof has no basis whatsoever and are hypothetical assumptions clearly divorced from the existing state of facts so far as the respondent company is concerned. It is significant that although the Reserve Bank bas assumed that agents' commission is to be paid @ 5 % on fresh business and 2% on renewal, the said Directions do, not fix the maximum rate of commission which can be given. Further, the figures given at page 153 so far as returns on investments are concerned are totally without any basis, vague and devoid of particulars. The fallacy of the said figures which will strike any reasonable person is that Reserve Bank has not taken into account the obligation of the respondent company to pay taxes on the income derived from the investments. Another aspect which the arguments of the Reserve Bank overlook is that in case of investments in long term schemes such as Indira Vikas Patra and Kishan Vikas Patra, the company will not be able to utilise its return from such investments before the end of the minimum period for which the schemes operate. The respondent company is thus left without any income during the period of operation of such schemes and cannot meet its working capital requirements. It is further submitted that the so called restrictions and/or regulations contained in the impugned provisions really seek to prohibit the, business of the respondent company and therefore impose unreasonable restrictions on the right of the Respondent No.2 under Article 19(1) (g) of the Constitution. It is submitted that the provisions of law which are in terms regulatory but really amount to prohibition in a commercial sense are violative of Article 19(1) (g) of the Constitution of India. If the provisions of law are in terms regulatory but really prohibition in a commercial sense, in that event such prohibitions would be violative of Article 19(1) (g) of the Constitution. If the provisions of law are in terms regulatory but really prohibition in a commercial sense, in that event such prohibitions would be violative of Article 19(1) (g) of the Constitution. In support of this submissions, reliance bas been placed on the several decisions. 37. The Supreme Court in the case of (3) Md. Yasin v. Town Area Committee, Jalalabad, (1952) SCR 572 at p. 577 : (AIR 1952 SC 116 at p. 116) observed :- "Learned Counsel, however, contends-and we think with considerable force and cogency-that although, in form, there is no prohibition against carrying on any wholesale business by anybody, in effect and in substance the bye-laws have brought about a total stoppage of the wholesale dealers" business in a commercial sense. The wholesale dealers who will have Co pay the prescribed fee to the contractor appointed by auction, will necessarily have to charge the grower of vegetables and fruits something over and above the prescribed lee so as to keep a margin of profit for themselves but in such circumstances no grower of vegetables and fruits will have his produce sold to or auctioned by the wholesale dealers at a higher rate of commission but all of them will flock to the contractor who will only charge them the prescribed commission. On the other hand, if the wholesale dealers charge the growers of vegetables and fruits only the commission prescribed by the bye-laws they will have to make over the whole of it to the contractor without keeping any profit to themselves. In other words, the wholesale dealers will be converted into mere tax collectors for the contractor or the respondent Committee without any remuneration from either of them. In effect, therefore, the bye-laws, it is said, have brought about a total prohibition of the business of the wholesale dealers in a commercial sense and from a practical point of view. We are not of opinion that this contention is unsound or untenable." 38. The Supreme Court further held that under Art. 19(1) (g) the citizen has the right to carryon any occupation, trade or business which right under that clause is apparently to be unfettered. We are not of opinion that this contention is unsound or untenable." 38. The Supreme Court further held that under Art. 19(1) (g) the citizen has the right to carryon any occupation, trade or business which right under that clause is apparently to be unfettered. The only restriction to this unfettered right is the authority of the State to make a law relating to the carrying on of such occupation, trade or business as mentioned in Clause (6) of that article as amended by the Constitution (First Amendment) Act, 1951. If, therefore, the licence fee cannot be justified on the basis of any valid law no question of its reasonableness can arise, for, an illegal impost must at all times be an unreasonable restriction and will necessarily infringe the right of the citizen to carry on his occupation, trade or business under Art. 19(1) (g) and such infringement can properly be made the subject-matter of a challenge under Art. 32 of the Constitution. 39. In (4) R. C. Copper v. Union of India reported in AIR 1970 SC 564 the Supreme Court observed :- "Where restrictions imposed upon the carrying on of a business are so stringent that the business cannot in practice be carried on the Court will regard the imposition of the restrictions as unreasonable. In Mohammad Yasin v. Town Area Committee, Jalalabad, 1952 SCR 572 : ( AIR 1952 SC 115 ) this Court observed that under Article 19(1)(g) of the Constitution a citizen has the right to carry on any occupation, trade or business and the only restriction on this right is the authority of the State to make a law relating to the carrying on of such occupation, trade or business as mentioned in Clause (6) of that Article as amended by the Constitution (First Amendment) Act, 1951. In Mohammad Yasin's case, by the bye-laws of the Municipal Committee, it was provided that no person shall, sell or purchase any vegetables or fruit within the limits of the municipal area of Jalalabad, wholesale or by auction, without paying the prescribed fee. In Mohammad Yasin's case, by the bye-laws of the Municipal Committee, it was provided that no person shall, sell or purchase any vegetables or fruit within the limits of the municipal area of Jalalabad, wholesale or by auction, without paying the prescribed fee. It was urged on behalf of a wholesale dealer in vegetables that although there was no prohibition against carrying on business in vegetables by anybody, in effect the bye-laws brought about a total stoppage of the wholesaler's business in a commercial sense, for he had to pay prescribed fee to the contractor and under the bye-laws the wholesale dealer could not charge a higher rate of commission than the contractor. The wholesale dealer, therefore, could charge the growers of vegetables and fruit only the commission permissible under the bye-laws, and he had to make over the entire commission to the contractor without retaining any part thereof. The wholesale dealer was thereby converted into a mere tax-collector for the contractor or the Town Area Committee without any remuneration. The bye-laws in this situation were struck down as impairing the freedom to carryon business." 40. In (5) Nanigopol Paul v. Stale of West Bengal reported in AIR 1966 Cal 167 , this Court referred to the several decisions of the Supreme Court including the decision in Md. Yasin (Supra), and held chat the word "regulate" means to control or adjust by rule. When a statute invests an authority with power to regulate, say, for example, a trade, it does not invest the authority with power wholly to prohibit or to put a stop to the trade. In other words, the contention or the writ petitioner, is that the directions are in fact enacting a prohibition and not a mere regulation. 41. It has also been contended that while adjudging the reasonableness of restrictions within the meaning of Article 19(6) of the Constitution, one has to bear in mind that the businessman is entitled to get reasonable return from his business and cannot be compelled or even expected to embark or continue with or venture which will yield him no return. A businessman may have to suffer loss for a certain period in doing his business and may have to go through the gestation period but he only does so in expectation of earning a profit in the years to come. A businessman may have to suffer loss for a certain period in doing his business and may have to go through the gestation period but he only does so in expectation of earning a profit in the years to come. The businessman cannot be expected to continue with business which will yield no profit to him and where incurring of a loss forever is a certainty. Hence in considering the validity of the impugned provisions the Court, it is submitted, will bear in mind that the respondent company must have adequate resources not only to meet the expenses but also to earn reasonable return from its business. In, support of this submission reliance is placed On behalf of the respondent company on the following decisions. 42. In this connection reference has been made to the several decisions of the Supreme Court. In (6) Premier Automobiles Ltd & Ors. v. Union of India reported in AIR 1972 SC 1690 , the Supreme Court held that while determining the return to which a manufacturer is reasonably entitled the main objective is to protect the interest of the consumer while at the same time provide a reasonable margin of profit to the producer. It is to be found out whether on the facts of this case, the return allowed is adequate or not. 43. Similarly, in (7) Sri Meenakshi Mills Ltd. v. Union of India reported in AIR 1974 SC 366 the Supreme Court held that in fixing the prices, a price line has to be held in order to give preference or predominant consideration to the interest of the consumer or the general public over that of the producers in respect of essential commodities. At the same time, the producer should not be driven out of his producing business. He may have to bear loss in the same way as he does when he suffers losses on account of' economic forces operating in the business. The controlled price will enable both the consumer and the producer to tide over difficulties. Therefore, any restriction in excess of what would be necessary in the interest of general public or to remedy the evil bas too, be very carefully considered so that the producer does not perish and the consumer is not crippled. 44. The controlled price will enable both the consumer and the producer to tide over difficulties. Therefore, any restriction in excess of what would be necessary in the interest of general public or to remedy the evil bas too, be very carefully considered so that the producer does not perish and the consumer is not crippled. 44. It has also been contended that the said 1987 Directions have been framed by the Reserve Bank of India in exercise of powers under section 45K.(3) of the Reserve Bank of India Act which provides that the Bank may, if it considers necessary in the public interest so to do, give directions to non-banking institutions either generally or to any banking institution or group or non-banking institutions in particular, in respect of any matters relating to or connected wish receipts of deposits including rates of interest payable on such deposits, and the period for which the deposits may be received. The said provisions clearly show that the directions which the Reserve Bank has been empowered to issue under the said provisions have to be regulatory and cannot be prohibitory. Any direction issued in exercise of powers under section 45K(3) would thus be ultra vires the said provision and a nullity. This submission of the respondent company is reinforced by the fact that under section 45K(3) of the Reserve Bank of India Act, if any non-banking institution fails to comply with any direction given by bank under the sub-section (3), the bank may prohibit the acceptance of deposits by that non-banking institution. The power to prohibit being separately provided for under section 45K(4) and the power being exercisable only in case of non-compliance of directions issued under section 45K(3), the provision of section 45K(3) does not in the submission of the company, comprehend the power to issue directions prohibiting the conduct of business by a company. 45. It is submitted on behalf of the respondent company that the impugned provisions for the reasons aforesaid are unjust and unreasonable and therefore violative of Article 14 of the Constitution of India. It is submitted that it is a settled law that anything which is unjust or unreasonable is per at violative or Article 14 of the Constitution of India. In support of this submission, reliance is placed on the decision of the Supreme Court in (8) Maneka Gandhiv. It is submitted that it is a settled law that anything which is unjust or unreasonable is per at violative or Article 14 of the Constitution of India. In support of this submission, reliance is placed on the decision of the Supreme Court in (8) Maneka Gandhiv. Union of India reported in AIR 1978 SC 597 where it has been held as follows :- "Now, the question immediately arises as to what is the requirement of Article 14 : What is the content and reach of the great equalising principle enunciated in this article? There can be no doubt that it is a founding faith of the Constitution. It is indeed the pillar on which rests securely the foundation of our democratic republic. And, therefore, it must not be subjected to a narrow, pedantic or lexicographic approach. No attempt should be made to truncate its all embracing scope and meaning, for to do so would be to violate its activist magnitude. Equality is a dynamic concept with many aspects and dimensions and it cannot be imprisoned within traditional and doctrinaire limits. We must reiterate here what was pointed out by the majority in (9) E. P. Royappa v. State of Tamil Nadu, 1974 (2) SCR 348 : AIR 1974 SC 555 namely, that "from a positivistic point of view, equality is antihetic to arbitrariness. In, fact equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic, while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14". Article 14 strikes at arbitrariness in State action and ensures fairness and equality of treatment. The principle of reasonableness, which legally as well as philosophically, is an essential element of equality or non-arbitrariness pervades" Article 14 like a brooding omnipresence and the procedure contemplated by Article 21 must answer the test of reasonableness in order to be in conformity with Article 14. It must be "right and just and fair" and not arbitrary, fanciful or oppressive; otherwise, it would be no procedure at all and the requirement of Article 21 would not be satisfied.” 46. We have given our anxious consideration to the contentions raised by the learned Counsel for the Reserve Bank of India, Mr. It must be "right and just and fair" and not arbitrary, fanciful or oppressive; otherwise, it would be no procedure at all and the requirement of Article 21 would not be satisfied.” 46. We have given our anxious consideration to the contentions raised by the learned Counsel for the Reserve Bank of India, Mr. Subrata Roy Chowdhury, Senior Advocate, Mr. Bhaskar Gupta, Senior Advocate appearing for the writ petitioner and Mr. Biswaroop Gupta, Senior Advocate appearing for the intervenors. 47. It is now well settled that the reasonableness of any regulation has to be viewed from the point of view of the public, for whose protection such regulations are made; the facts that the regulations are harsh or stringent would not make them unreasonable unless they are unnecessarily harsh or unnecessarily stringent and over-reach the scope of objectives and that the question that is always asked is whether a less stringent regulation would ensure protection of public interest. In (10) Md. Querishi v. State of Bihar reported in AIR 1958 SC 731 , 744 the Supreme Court observed, inter alia :- "In determining that question the Court we conceive, cannot proceed on a general notion of what is reasonable in the abstract or even on a consideration of what is reasonable from the point of view, of the person or persons on whom the restrictions are imposed. The right conferred by sub-clause (g) is expressed in general language and if there had been no qualifying provision like clause (6), the right so conferred would have been an absolute one. To the person who has this right any restriction will be irksome and may well be regarded by him as unreasonable. But the question cannot be decided on that basis. What the Court has to do is to consider whether the restrictions imposed are reasonable in the interests of the general public." 48. In (11) Municipal Corporation Ahmedabad v. Jan Mohammed reported in AIR 1986 SC 1205 , 1211, the Supreme Court has stated inter alia, that "obviously it is left to the court in case of a dispute to determine the reasonableness of the restrictions imposed by the law. In (11) Municipal Corporation Ahmedabad v. Jan Mohammed reported in AIR 1986 SC 1205 , 1211, the Supreme Court has stated inter alia, that "obviously it is left to the court in case of a dispute to determine the reasonableness of the restrictions imposed by the law. In determining Chat question the court cannot proceed on a general notion of what is reasonable in the abstract or even on a consideration of what is reasonable from the point of view of the person or persons on whom the restrictions are imposed. The right conferred by sub-clause (g) is expressed in general language and if there had been no qualifying provision like clause (g) the right so conferred would have been an absolute one. To the person who have the right any restriction will be irksome any may well be regarded by them as unreasonable. But the question cannot be decided on that basis. What the Court has to do is to consider whether the restrictions imposed are reasonable in the interest of general public." 49. In (12) Shivarajan v. Union of India reported in AIR 1959 SC 556 , 559, the Supreme Court observed, inter alia :- "The Act, therefore was the result of a long exploratory investigation by exparts in the field, conceived and enacted to regulate the buying and setting of commercial crops by providing suitable and regulated market by eliminating middlemen and bringing face to face the producer and the buyor so that they may meet on equal terms, thereby eradicating or at any rate reducing the scope for exploiation in dealings. Such a statute cannot be said to create unreasonable restrictions on the citizens' right to do business unless it is clearly established that the provisions are too drastic. unnecessarily harsh and over-reach the scope of the object to achieve which it is enacted." 50. In (13) Anumati Sadhukhan v. Assistant Regional Controller (DB) reported in AIR 1953 Cal 187 , it has been observed by the Court that:- "In the case before us, however, there is no total prohibition of the carrying on the appellants' business. All that is sought to be done is to control the husking of paddy by issuing permits and the object of the imposition of the control is to guard against unauthorised movement of paddy and rice, smuggling and black-marketing. All that is sought to be done is to control the husking of paddy by issuing permits and the object of the imposition of the control is to guard against unauthorised movement of paddy and rice, smuggling and black-marketing. The fact that the imposition of the control has rendered the running of the appellants' mill uneconomical cannot, in my opinion, be said to be an unreasonable restriction of the appellants' fundamental right." All these cases have laid down the test that the reasonableness of the regulations has to be looked into from the point of the Company (writ petitioner), to whom any such restriction will be irksome and well may be regarded as unreasonable. 51. The Supreme, Court in (14) Arunachal Nadar v. State of Madras reported in AIR 1959 SC 300 , 304 observed, inter alia, as follows:- "The Act, therefore, was the result of long exploratory investigation by experts in the field, conceived and enacted to regulate the buying and selling of commercial crops by providing suitable and regulated market by eliminating middlemen and bringing face to face the producer and the buyer so that they may meet on equal terms, thereby eradicating or at any rate reducing the scope for exploitation in dealings. Such a statute cannot be said to create unreasonable restrictions on the citizens' right to do business unless it is clearly established that the provisions are too drastic, unnecessarily harsh and over-reach the scope of the object to achieve which it is enacted." 52. In (15) Md. Such a statute cannot be said to create unreasonable restrictions on the citizens' right to do business unless it is clearly established that the provisions are too drastic, unnecessarily harsh and over-reach the scope of the object to achieve which it is enacted." 52. In (15) Md. Faruk v. State of M. P. reported in AIR 1970 SC 93 , the Supreme Court has observed, inter alia, as follows :- "This Court in (16) Narendra Kumar v. Union of India, 1960(2) SCR 375 : AIR 1960 SC 430 held that the word "restriction" in Articles 19(5) and 19(6) of the Constitution includes cases of "prohibition" also; that where a restriction reaches the stage of total restraint of rights special care has to be taken by the Court to see that the test of reasonableness is satisfied by considering the question in the background of the facts and circumstances under which the order was made, taking into account the nature of the evil that was sought to be remedied by such law, the harm caused to the individual citizens by the proposed remedy the beneficial effect reasonably expected to result to the general public, and whether the restraint caused by the law was more than that was necessary in the interests of the general public." 53. In (17) Karan Singh v. State of M. P. reported in AIR 1986 SC 1506 , 1509, following the decisions in Arunachal Nader v. State of Madras (Supra), mentioned above and applying the same to a legislation in M. P., the Supreme Court observed, inter alia, that :- "The Legislature of the State of Madhya Pradesh has enacted sub-section (5) of section, 32 of the Act in the public interest in order to remedy the evil in the system of commission agency (Kachhi Adhat System). We do not, therefore, find any substance in the contention of the petitioner that the abolition of the 'Kachhi Adhat System brought about by the impugned resolution of the Market Committee is in any way violative of Article 19(1)(g) of the Constitution of India or unconstitutional. We do not, therefore, find any substance in the contention of the petitioner that the abolition of the 'Kachhi Adhat System brought about by the impugned resolution of the Market Committee is in any way violative of Article 19(1)(g) of the Constitution of India or unconstitutional. We fail to see how Article 19(1)(g) of the Constitution will be violated if no commission agent shall act in the manner prohibited by section 32(5) of the Act or he cannot deduct any commission or dalali from the sale proceeds payable to the producer or that he cannot act both for the buyer as also for the seller. In prohibiting such practices, Article 19(1)(g) of the Constitution cannot be said to be violated in any manner. Such restrictions being in the interests of the general public are protected by Article 19(6) of the Constitution. There is no merit in this petition." 54. In these cases the test bas been laid down as to whether the restriction caused by the regulations more than what would be necessary in the interest of the general public and whether less drastic restrictions would have ensured the protection of the interest of the general public. In other words, do the restrictions over-reach the scope of the objects achieved by the regulations? 55. There cannot be any dispute about the legal propositions laid down by the Supreme Court in the aforesaid decisions. The question is whether the restrictions and/or requlations contained in the impugned provisions in fact seek to prohibit the business of the respondent company and the similarly situated companies and therefore impose unreasonable restrictions on the right of the writ petitioners guaranteed under Article 19(1)(g) of the Constitution. In other words, even if the provisions of law which are in forms regulatory but really amount to prohibition in a commercial sense, this will be violative of Article 19(1)(g). In judging the reasonableness of the restrictions one has to hear in mind the practical implications of the regulations or directions from the point of the business as well as from the point of view of the depositors with whose money the business is carried on by the writ petitioner and similarly situated companies. If the provisions are unjust and unreasonable, the same will be arbitrary and violative of Article-14 of the Constitution. If the provisions are unjust and unreasonable, the same will be arbitrary and violative of Article-14 of the Constitution. The powers conferred upon the Reserve Bank of India do not comprehend the power to issue directions prohibiting the conduct of the business of a company. It is therefore, necessary to consider in detail the impact of the regulations and whether such regulations are capable of compliance and, if not, whether any modifications are necessary; in other words, whether a less stringent regulation would ensure protection of interests. In deciding the question whether the impugned directions are un-reasonable and consequently arbitrary, one bas to take a pragmatic approach. The crucial question, therefore, is whether the 1987 Directions are impossible of compliance by the writ petitioners and similarly situated companies. It takes us to the question that bas been agitated before us that it is not possible to do any business of savings and investments of the Peerless type within the straight jacket of the said Directions. In other words, it is necessary to examine whether the restrictions arc so stringent that the business cannot in practice be carried on. 56. It is not in dispute that the Reserve Bank of India is empowered under sections 45J and 45K of the Reserve Bank of India Act, 1934 to issue the directions but the question is how far such directions are in conformity with the power vested with the Reserve Bank of India. 57. Sections 45J and 45K empowered the Reserve Bank of India to regulate or prohibit issue of prospectus or advertisement soliciting deposit of money and to collect information from non-banking institutions regarding deposits and also to give directions. Both the aforesaid s section apply to non-banking companies. A non-banking company has been defined under section 45-I(bb), Explanation (ii) (e) of the Act as meaning a company, corporation or a co-operative society. It is significant that although the impugned Directions have been purported to be made under section 45J also, they contain no regulation or prohibition with regard to the issue of any prospectus or advertisement for deposit or money by non-banking companies. Section 45K proceeds on the basis that the business of non-banking companies are lawful and legal but may need regulation. Section 45K proceeds on the basis that the business of non-banking companies are lawful and legal but may need regulation. The Directions must demonstrate genuine attempt to regulate the business of savings and investments with a view to protecting the interest of the depositors without affecting the employment potentiality. 58. The Reserve Bank of India bas indicated the reasons in the affidavit. The impugned Directions applicable to the residuary non-banking companies were designedly framed differently from the Directions framed by the Reserve Bank of India under identical sections in the aforesaid provisions of the Act applicable to non-banking financial companies which are known as "Non-Banking Financial Companies. (Reserve Bank) Directions, 1977." It will appear from the said Directions that in the case of non-financial or financial companies the quantum of public deposits permitted to be accepted will be linked with the net owned fund which is the aggregate of its own capital and free reserve. Furthermore, such companies arc not permitted to accept deposits lasting beyond the period of 36 months. So far as the impugned Directions, known as Residuary Non-Banking Companies (Reserve Bank) Directions, 1987, it has been stated in the affidavit of the Reserve Bank as follows :- "For obvious reasons, the companies like the writ petitioner which had no capital or only had a very meagre capital of their own find which conducted schemes of long maturity could not be subjected to the above norms. Accordingly, your petitioner R. B. I. has, after considerable amount of deliberation at the highest level and taking into account observations of the Supreme Court in the Peerless case, formulated a special set of Directions which are impugned in the present writ petition and the writ petition filed by several other companies like the writ petitioner. Your petitioners respectfully submit that in their view the impugned Directions represent irreducible minimum which are necessary for safeguarding the interests of and preventing exploitation of small and unwary depositors." 59. Your petitioners respectfully submit that in their view the impugned Directions represent irreducible minimum which are necessary for safeguarding the interests of and preventing exploitation of small and unwary depositors." 59. At the hearing it was submitted on behalf of Reserve Bank of India that although the provisions of Clause 6(1) proviso (a) and (b) are very restrictive as it require 80% to be kept in approved securities fetching precious little to enable the paying of 10% annually compounded return to depositors; Clause (c) gives considerable leeway as it permits 20% or 10 times the net owned fund of a company whichever is less, to be kept in other investments. Net owned funds is defined as the aggregate of paid up capital and free reserves reduced by the amount of accumulated balance of loss, deferred revenue expenditure and other intangible assets. 60. It will, therefore, be evident that there is inconsistency between the statement, made in the affidavit and the submissions made in course of the bearing before us. According to the Reserve Bank of India, the special provisions in 1987 Directions were meant for companies carrying on Peerless type of business which bad little or no capital of their own. The provision regarding investment of 20% of the deposits as mentioned in Clause 6(1)(c) is, therefore, an eye wash and an attempt to give seemliness of rationality. According to the Reserve Bank of India's own pleading, there is no factual foundation to support the above contention. This is said to be the irreducible minimum. If it is stated to be irreducible minimum, in our view, Clause 19 of the Directions which empowers the Reserve Bank of India to give exemption would be superfluous. Clause 19 reads as follows:- "19. Exemptions: The Reserve Bank may, if it considers it necessary for avoiding any hardship or for any other just and sufficient reason, grant extensions of time to comply with or exempt any company or Class of companies, from all or any of the provisions of these directions either generally or for any specified period subject to such conditions as the Reserve Bank may impose." 61. According to the Reserve Bank of India, therefore, the irreducible minimum cannot further be reduced, which is necessary for safeguarding the interest of the depositor. If that be the case, then every application for exemption under Clause 19 has to be rejected. According to the Reserve Bank of India, therefore, the irreducible minimum cannot further be reduced, which is necessary for safeguarding the interest of the depositor. If that be the case, then every application for exemption under Clause 19 has to be rejected. This demonstrates the mala fide exercise of power. It sounds as a paradox. While Clause 19 is maintained empowering the Reserve Bank of India to give exemption, the Reserve Bank of India has already decided that there can be no relaxation as the Directions represent only the irreducible minimum restrictions. 62. It may also be mentioned that it has not been stated anywhere in the affidavit that any depositor has suffered any prejudice or his claim has not been paid on maturity. On the contrary, it has been pleaded in justification of the reduction of return to 8% from 10% as provided in Clause 5 of the impugned directions, that the provision is intended as a disincentive against premature withdrawal. This necessarily presupposes that the money deposited is safe and the deposit should be allowed to run its contractual term to ensure the higher return of 10%. It was submitted, however, on behalf of Reserve Bank of India that If the activities are stopped at any given point of time and if all claims irrespective of maturity have to be paid at the same time the activities stop, the company would not be able to meet its liabilities. Every business is planned and is income fetching over a period only and is financially sound on the assumption that it is allowed to continue as otherwise a sudden stoppage would mean heavy loss on receivables and returns and investments would have to be prematurely realised or encashed considerably reducing the yield. This aspect of loss of return on premature realisation of investment is noted in clause 5 of the impugned 1987 Directions and supported in paragraph 8(c) of the stay petition filed by the Reserve Bank of India. 63. During the hearing on 8th June, 1989, a cyclostyled copy of a printed brochure headed "National Savings Schemes at a Glance............ May, 1988" wall banded up to this Court on behalf of R. B. I. as being a list of approved securities within the meaning of clause 6 of the 1987 Directions. 63. During the hearing on 8th June, 1989, a cyclostyled copy of a printed brochure headed "National Savings Schemes at a Glance............ May, 1988" wall banded up to this Court on behalf of R. B. I. as being a list of approved securities within the meaning of clause 6 of the 1987 Directions. What is to be noted is, firstly, these are not approved securities passing the test of section 20 of the Indian Trust Act, 1982. Secondly, all these are subject to income tax which in the case of companies is a straight excision of 50% and thirdly, the yield is very low and in no case, more than 1% gross and that too non-compoundable. The listed securities are (1) Indira Vikas Patra, (2) Kisan Vikas Patra, (3) National Savings Scheme Account, 1987. (4) National Savings Certificates (VI Issue), (5) National Savings Certificate (VII Issue), (6) Post Office Monthly Income Scheme, (7) 10-Year Social Security Certificates, (8) Post Office Time Deposits, (9) 5-Year Post Office Recurring Deposit Account, (10) Post Office Savings Account and (11) 15-Year Public Provident Fund Account. Of the listed securities, No.1 being bearer bonds, are not trustee securities No.4, 6, 7, 9, 10 and 11 are not available to companies No. 5 has been discontinued. It is No. 11 alone where the interest is completely tax free but as no company can take advantage of it, it is of little use to the writ petitioners or similarly situated companies. Fixed deposits with nationalised banks fetch only 10% which is taxable at the rate of 50% in the case of companies, thus leaving 5% in hand. It is pitifully inadequate to meet the requirements. 64. Under Clause 6(2) of the 1987 Directions, the clause 6(1)(a)(b) investments (fixed deposits and approved securities) cannot be withdrawn except for repayment to depositors. Clause 6(1)(c) is a mere pretence since the Directions were framed for Residuary Non-Banking Companies keeping in mind the special fact that they have no capital or very meagre capital of their own. 65. In the affidavit filed by Reserve Bank of India, it is stated the Company can easily discharge its liability of 10% annually compounded return to its depositors by investing in approved Government securities yielding return of at least 14% in 3 years or 7 years investment leaving a margin of 4% Co the company to cover management expenses. 66. 65. In the affidavit filed by Reserve Bank of India, it is stated the Company can easily discharge its liability of 10% annually compounded return to its depositors by investing in approved Government securities yielding return of at least 14% in 3 years or 7 years investment leaving a margin of 4% Co the company to cover management expenses. 66. The statement is not only wrong but it is also misleading. It does not take account of income tax payable. No approved Government security has been brought to the notice of this Court which fetches at least 14% in 3 years or 7 years investment after accounting for 50% income tax and if the net return is 14% of which half has to go out as income tax, no one can pay 10% annually compounded return from out of the said proceeds. 67. It has also been stated in the said affidavit by the Reserve Bank of India that 4% balance (14% less 10%) is enough for management expenses, which is computed on the assumption as aforeside. out of which 2% is earmarked as commission to agents. It is significant to note that 1987 Directions in no manner regulate or restrict commission to agents, costs of advertisements and publicity and office expenses. In fact, the Directions do not contain any provision with regard to any of the aforesaid three matters. Therefore, the reasonableness of commission and office expenses is management function and the Reserve Bank of India has not questioned it. 68. It may be mentioned that the Reserve Bank of India has emphatically asserted that Peerless had been complying with the directions. Pursuant to the direction of this Court Peerless have disclosed certain figures which indicate that their expenses have varied between 97% and 98.94% of gross collection between 1976 and 1986. According to the Reserve Bank of India as stated in the affidavit, the other companies like the writ petitioner & the intervenors, they have to remain content with 4% management expenses including 2% for commission to agent. An illustration has been given by the Reserve Bank of India in its affidavit where management expenses had been taken as 5% of each year's collection. An illustration has been given by the Reserve Bank of India in its affidavit where management expenses had been taken as 5% of each year's collection. We shall presently refer to the case of Peerless and we have got no doubt in our mind that from the facts and figures brought on record or which are appearing from public documents, it is not also possible for a company like Peerless to strictly comply with and carry out the 1987 directions in entirely. 69. In terms of clause 6(1) of the said Directions, the investments in unencumbered approved securities must be al the end of each half year on 30th June and 31st December not less than the aggregate amount of the liabilities to the depositors whether or not such amounts have become payable. In other words, 100% of the total deposits have to be kept invested by residuary non-banking companies for whom the special directions have been framed keeping in view the fact that these companies have no or little capital and, therefore, little owned funds. According to the Reserve Bank of India as disclosed in the affidavit, on a gross return of 14% netted at 7% after payment of income tax, it is possible to pay 10% annually compounded return to the depositors leaving a 4% margin for management expenses including 2% for commission which two percentages are adequate. Strangely enough, the Reserve Bank of India has not placed any restriction or constraint and in any way, regulated the expenses as commission, management expenses or publicity in the impugned Directions. 70. In framing the Directions under sections 45J and 45K of the Reserve Bank of India Act, the Reserve Bank did not find anything unreasonable in the prevalent system with regard to office expenses, commission and the cost of advertisements, presumably became according to the Reserve Bank of India, the Peerless, who is stated to be the model of compliance, spends as high as upto 29% of its gross collections on expenses as revealed by the statement furnished on behalf of Peerless pursuant to the direction of this Court. 71. 71. The illustration given by the Reserve Bank of India shows the workability of paragraph 6 of the 1987 Directions requiring 80% to be kept in approved securities and fixed deposits with nationalised banks (69% and 20% respectively) and 20% or 10 times of the net owned funds, whichever is less, in other investments with the approval of the Board of Directors of the Company, with a further injunction in clause 6(2) that the securities and deposits which must be entrusted to a public sector bank designated in that behalf upto 80% of the deposits in approved securities and fixed deposits, shall not be withdrawn or otherwise dealt with except for repayment to the depositors. The worksheet furnished makes nine assumptions which are all at variance with the Directions and the reasons for the Directions stated on oath. 72. The aforesaid 9 assumptions are as follows:- 1. Paid up capital in the first year Rs. 50 lakhs. 2. Collections in the first year is Rs. 10 lakhs and new business is assumed to grow at 20% of the level in the first year. 3. Renewal collections, it is assumed, will be 75% of the first year collection each and thereafter at 60 % of the first year. 4. Commission paid to agents, it is assumed, will be at 5% on fresh business and 20% on renewal, 5. Interest paid on depositors money is worked out on average funds, i. e. funds at the beginning of the year funds at the end of the year divided by two @ 10% p. a. 6. Management expenses are based on 5% of the collections each year (this will grow proportionately with the growth in the business). 7. Return on share-holders funds (i. e. dividend) at 6% after the first year. 8. Return on investment made of depositor funds at an average rate of 13% of mean funds. 9. Return on investments made of share-holders fund @ 18 % p. a. on Rs. 49 lakhs in the first year and thereafter at 18% on Rs. 49 lakhs + retained profits so as to ensure that 12 % of owner's earnings are retained in the business. 73. The Reserve Bank of India has also relied on the following Chart to emphasise the workability of the Directions. 49 lakhs in the first year and thereafter at 18% on Rs. 49 lakhs + retained profits so as to ensure that 12 % of owner's earnings are retained in the business. 73. The Reserve Bank of India has also relied on the following Chart to emphasise the workability of the Directions. INCOME AND EXPENDITURE STATEMENT (Rupees in Lakhs) INCOME YEAR I II III IV V VI Interest Income @ 13% .65 1.91 4.48 7.16 10.77 15.48 on mean funds (Deposits) Interest earned on 7.02 9.92 10.91 11.91 13.12 14.49 Share holder’s funds Invested on Rs. 49 Lacs @ 18% TOTAL 7.67 11.83 15.39 19.07 23.89 29.97 EXPENSES Commission Paid .50 .75 1.02 1.34 1.73 2.19 Premium in accident cases .01 .19 .39 .41 .55 .72 Interest on depositors funds .50 1.47 3.44 5.50 8.28 11.90 Management Expenses .50 .98 1.97 2.06 2.77 3.62 Dividend to share holders 3.00 3.00 3.00 3.00 3.00 TOTAL 1.51 6.39 9.82 12.31 16.33 21.43 Profit before Tax 6.16 5.44 5.57 6.76 7.56 8.54 74. It would appear from the above that the minimum required paid-up capital is Rs. 50 lakhs, whereas the Reserve Bank has affirmed in its affidavit that related Directions with regard to the non-financial and financial non-banking companies requiring deposits to be linked with owned fund of the company, could not be made applicable to residuary non-banking companies and special Directions had to be framed because the residuary non-banking companies either had no capital or only had a very meagre capital of their own. The assumptions not only presume a paid-up capital in the first year of Rs. 50 lakhs but further show investments under clause 6(1)(c) of the Directions as being upto Rs. 49 lakhs in other investments fetching 18% per annum. Commission has been restricted to 5% on new business and 2% on renewal and management expenses at 5% of each Year’s Collection. First of all there is no restriction or regulation on commission of management expenses in the Directions. 75. We may refer to the balance-sheet of Peerless for the year 1987-88. It shows that after 30th June, 1987 the rate of commission paid is 40.9% against first-year subscription received 13% in second year, 4.75% from 3rd to 6th year and 4.6% in 7th to 10th year. There are all in respect of schemes under table 10 and 11 of Peerless. It shows that after 30th June, 1987 the rate of commission paid is 40.9% against first-year subscription received 13% in second year, 4.75% from 3rd to 6th year and 4.6% in 7th to 10th year. There are all in respect of schemes under table 10 and 11 of Peerless. Such commission upto 30th June, 1987 was as high as 77.5% of the last year subscription received but nothing further was paid. Actually the total commission paid after 30th June, 1987 is spread over from is to 10th year starting with 40.9% in the first year and thereafter a descending scale of 13%, 4.75% and 4.5% in 2nd to 10th year. Only in respect of table 12 the commission is 5%. Again, the return to certificate holders as shown at page 23 of Peerless balance sheet for the year 1987-88 discloses a return of 10% per annum and not 10 % compound annually against table 10 and 11 and 11.5 simple against table 12. No break up is available in the balance-sheet with regard to the total business respectively under tables 10 and 11 on the one hand and table 12 on the other. No proportionate ratio has been indicated either, Having regard to the great discrepancy in the rates of commission it can safely be taken that table 12 has fetched very little business in comparison to business under tables 10 and 11. The Reserve Bank of India has included the Directors. Report in the Paper Book (p. 191) in the appear but has kept back carefully from this Court the very material facts as aforesaid which appear from the balance-sheet of Peerless of which the said Directors Report form a part. 76. Secondly, according to the illustration assumption, 5% of first year's collection taken as management expenses means appropriating to revenue of 5% of collections but according to the Reserve Bank of India all collections are liability and although under clause 6 of the Directions the entirety of the deposits which is equal to the total liabilities shall be kept invested in the manner laid down and certified by Chartered Accountant as having been so done on 30th June and 31st December of each year, clearly the 5% of each year's collection taken to revenue cannot be included in the investment and to that extent clauses 6(1) and (3) are clearly given a go-by. 77. 77. The second and third assumptions regarding the percentage of collections are wholly speculative and are based on no data. It is not even calculated on the basis of Peerless figures which are all with the Reserve Bank of India although the Reserve Bank certifies that peerless are fully complying with the 1987 Directions. There is no basis for assumption 6 that management expenses are 5% of the collections of each year. 78. From the balance-sheet of Peerless for the year 1987-88 it would appear that for the previous year 1986-87, the administrative expenses were about 19.72 crores. The gross collection during the year 1986 as disclosed by the statement filed by Peerless pursuant to direction of this Court being the total of renewal collection and new collection is Rs. 91 24 crores. The percentage of administrative expenses to total collections thus comes to 22%. The same balance-sheet reveals that in the year 1987 the total of subscriptions received from old business and those received from new business or new funds is 104.47 crores (89.22 crores plus 15.25 crores). The administrative expenses in 1987-88 appearing at page 12 of the balance-sheet is Rs.29 crores. The percentage of administrative expenses or management expenses to total collections on certificates both old and new is thus little over. The impugned directions lay down no norms in this behalf. 79. The Sixth assumption is really starting. The management expenses are taken to be 5% of collections each year. Peerless balance-sheet completely negates the aforesaid assumption. The balance sheet of Peerless for the year 1987s-88 gives the administrative expenses at about Rs. 28.60 crores. The total of the year's collection (it is 15 months this year) is Rs. 89.22 crores and Rs. 15.25 crores totalling Rs 104.47 crores. The administrative expenses work out at 27 % of the year's collection of Peerless. Although Director's report has been annexed to the Paper book filed by the Reserve Bank of India, but the balance-sheet bas been kept back. Pursuant to the directions of this Court the balance-sheet of Peerless was produced. The contention of the learned Counsel for the writ petitioner and the intervenors that this has been done only because the balance-sheet on record would demolish the correctness of the aforesaid assumptions, cannot be said to be without substance. 80. Pursuant to the directions of this Court the balance-sheet of Peerless was produced. The contention of the learned Counsel for the writ petitioner and the intervenors that this has been done only because the balance-sheet on record would demolish the correctness of the aforesaid assumptions, cannot be said to be without substance. 80. The 7th assumption regarding return on shareholder's fund, i. e. dividends is bad on the same ground as assumption 1, viz. that according to Reserve Bank's own statement on oath, the 1987 Directions for residuary non-banking companies were drawn up in view of the fact that these companies do not have any capital or have but very meager capital of own and therefore could not be subjected to the norms which were made applicable to non-financial or financial companies, that of linking deposits form the public to owned funds. 81. The 8th assumption is incomprehensible, inter alia, as 'mean funds" has not been explained and also what is meant by average rate of return on depositors' funds, i. e. 13 % of such alleged 'mean funds'. Again, there is no known or declared approved security within the meaning of the impugned Directions, fetching a net return of 13% after income tax. 82. Assumption 9 has no basis either because no known or declared approved security within the meaning of the said Directions fetches a net return of 18%, i e. 18% after payment of tax. As the income is subject to tax and in the case of incorporated bodies such tax is 50%, the net return is only 9% even on the impossible assumption of 18% gross. The total amount in the Income and Expenditure Statement shows the return and investment of Rs. 49 lakhs of owned funds. Clause 6(1) (c) is far exceeding the interest income on subscription to the schemes in the first to 5th year and in the 6th year the two are about equal. This is perhaps not correct in view of the statement giving reasons by the Reserve Bank of India for devising the Directions for residuary non banking companies. 83. Again, very curiously, the Reserve Bank of India does not take into account the income tax payable both on interest income on the subscription made by depositors and interest on owned funds invested which is a clear 60% in She case of a company in both cases. 84. 83. Again, very curiously, the Reserve Bank of India does not take into account the income tax payable both on interest income on the subscription made by depositors and interest on owned funds invested which is a clear 60% in She case of a company in both cases. 84. Therefore, to get a clear picture even on the assumptions made as reproduced hereinbefore the gross total shown in the first half of the said chant will have to be reduced by half giving the following results; INCOME YEAR I II III IV V VI Total - 3.88 5.91 7.69 9.53 11.94 14.98 85. The second part showing expenses will remain the same as- Expenses year I II III IV V VI Total - 1.51 6.39 9.82 12.31 1633 21.43 86. Therefore, the profit after tax will be as follows :- Profit before Tax I II III IV V VI 2.37 1.52 3.77 3.22 5.61 755 87. The net result is clearly negative. The work-out of clause 6 as illustrated proceeds on various incorrect premises including the important ones indicated above and the bidden premises of non-deduction of income tax. 88. Although, a contention was raised on behalf of the Reserve Bank of India that Peerless found no difficulty in complying with the 1987 Directions the facts appearing from the documents submitted pursuant to directions of this Court would indicate that the case is otherwise. From the balance sheet of 1987-88 (15 months upto 31.3.88) it would appear that the paid up capital of Peerless has increased by Rs.36.81 by issue of Bonus Shares by capitalising General Reserve to that extent However, as against its collections in New Fund (new business) amounting to Rs. 15.88 crores, its investments in approved securities and F D with nationalised Banks-reveal a net reduction of Rs 3.16 crores. Its expenses at Rs. 106.92 crores exceed the total net collections in 1987-88 reflecting a negative surplus which leaves no scope for fresh investments. But due to income received from its existing investments, as described above, its total investments show a net increase of Rs. 80.62 crores. Otherwise the increase in investments would not have been possible. The above findings indicate that Peerless is not in a position to comply with the Reserve Bank of India directives so far as its current annual business is concerned. 89. 80.62 crores. Otherwise the increase in investments would not have been possible. The above findings indicate that Peerless is not in a position to comply with the Reserve Bank of India directives so far as its current annual business is concerned. 89. The statement submitted by Peerless pursuant to the directions of this Court reveals that they have persistently taken almost the whole of the collections from new business every year to profit and loss account i. e. the total of new business collections every year has been taken to revenue. No part of this is, of course, income, it is straight liability. The 1987 Directions do not make any provision for appropriation to revenue of any deposits and, in fact, by clause 6 enjoins the investment of the entire collections and even more the entire liability figure, whether the certificates are matured or not, is required to be kept invested. In any event, the sum taken to revenue (and profit and loss account) and accordingly spent, cannot figure and is not included in the investment figures. The total of first year's collections taken to revenue in 11 years from 1976 to 1986 is a sum of Rs. 923.32 crores. The total of investments Upto 1986 as disclosed in the statement submitted to this Court by Peerless is a sum of Rs. 819.19 crores. This tallies with the findings of the Supreme Court in paragraph 37 of the Peerless judgment reported in AIR 1987 SC 1023 that Peerless company bas Rs. 800 crores of investment in Government securities, fixed deposits with nationalised banks etc. There is a clear shortfall, therefore in investments in relation to total liabilities to the extent of Rs. 104.13 crores. It is, therefore, clear that even the Company like Peerless cannot comply with the 1987 Directions in toto. 90. As a matter of fact, the Reserve Bank of India relied on the alleged compliance by Peerless with the 1987 Directions as a measure of the reasonableness of the said Directions. The Reserve Bank of India was reluctant to disclose the records pertaining to Peerless and in fact have not disclosed any records. There application for addition of party made by Peerless was vehemantly objected to by the Reserve Bank of India. Peerless was not added as a party. The Reserve Bank of India was reluctant to disclose the records pertaining to Peerless and in fact have not disclosed any records. There application for addition of party made by Peerless was vehemantly objected to by the Reserve Bank of India. Peerless was not added as a party. However, in view of the submissions made by the learned Counsel appearing for the writ petitioner and the intervenors, we directed Peerless to produce the records, which have been produced, and of which we have already made a reference. The Reserve Bark of India while running the case that Peerless had implemented the 1987 Directions did not disclose that after inspection of the records of Peerless to determine the position as on 31st December, 1987, the Reserve Bank of India had issued a letter dated 11th February, 1989, inter alia, pointing out that the liabilities to the certificate-holders had not been fully secured and there was violation, inter alia, of clause 12. It is not necessary for us to dwell upon the issue whether Peerless had in fact complied with the Directions or net. But it is quite clear that it was not possible for Peerless to comply strictly all the conditions mentioned in the aforesaid Directors. However there is no allegation against Peerless or for that matter against any of the Investment Companies that the depositors have not been paid beck their dues in accordance with the contract. A contention has been raised by Reserve Bank of India in their affidavit that the Investment Companies like the writ petitioners and others carryon their activities wholly with the funds provided by the public and hardly have any capital of their own. This contention cannot be accepted. 91. In all companies working capital is generated from sale of goods or services to the customer. Here too, the deposit of the customer is generating he working capital. The deposit would enable the company as emphasised by the Reserve Bank of India to earn 13% (+) compound interest, Whereas as it bas to pay the depositor only 10% Compound. It is this deferential of interest that is being taken out of the funds. In fact less is being taken out. The deposit would enable the company as emphasised by the Reserve Bank of India to earn 13% (+) compound interest, Whereas as it bas to pay the depositor only 10% Compound. It is this deferential of interest that is being taken out of the funds. In fact less is being taken out. This will be evident from the fact that even after taking out the working capital, the amount of money that accumulates in the fund at the end of the contractual period (8 years or 10 years as the case may be) the fund has more money than required to pay back the contractual dues to the depositor as per the RBI stipulation. 92. According to Reserve Bank of India they have justified their definition of liability (as the total amount of deposits received, together with interest, bonus etc.) in the light of the observations of the Supreme Court in Peerless’ Cases as to enforce abolition of forfeiture. In our view the meaning of "forfeiture" has not been properly understood by the Reserve Bank of India. What was mean, by forfeiture in the Supreme Court's judgment in Peerless case was the fact that all companies including Peerless and LIC forfeited the first year's subscription in the case of a depositor stopping to pay after the first year. The intention of the Supreme Court is that, no portion of the money deposited should be with held or confiscated by the Company at the time of repayment. 93. This question does not however arise at all now as all the money paid by the depositor, even if he has deposited for one year only, has to be returned in full, in terms of contract, after 8 years @ 8% compound interest (as per RBI's Guidelines). Thus the working capital taken out (which in effect is the differenttal between 13% interest earned and 10% interest paid) from the deposits does not in any way mean forfeiture of money deposited by a customer as it bas to be returned in full at the end of 8/10 years. The fact that the money will be returned after 8 years bas also been approved of by the RBI in their affidavit where they have mentioned that the return of money depends entirely on the contract of deposit entered into between the depositor and the Company". The fact that the money will be returned after 8 years bas also been approved of by the RBI in their affidavit where they have mentioned that the return of money depends entirely on the contract of deposit entered into between the depositor and the Company". In fact, they further go on to elaborate that "the depositor is not entitled to claim repayment of deposits before maturity or before the expiry of the stipulated period and there is no obligation on the company to make such premature payment". 94. It may not be out of place to mention that the Supreme Court had expressed grave disapproval on the LIC on account of the forfeiture made by them of the first year's deposit of their clients. In the fact Peerless had got a word of praise, because they had done away with the forfeiture clause even before the Supreme Court judgment and the consequent RBI Guidelines. We are told that LIC has still not abolished its forfeiture clause on their Endowment Table No. 21. The Peerless Deposit Tables are similar to Table 21 of LIC but the returns stated to be much helter with no forfeiture whatsoever. In both the cases life risk is not covered but only accidental death coverage is made. 95. The position therefore emerges in that it is not possible to carryon the business in a commercial sense or practically or at all in accordance with the rigid investment policy and the other requirements of the 1987 Directions. The Directions are apparently not prohibitory. But what is apparent is not real. If the Directions are to be complied with rigidly, many or the companies, if not all will go out of circulation. The effect of the Directions is prohibition of investment business. Reserve Bank of India has trangrassed the statutory power contained in sections 45J and 45K of the Reserve Bank of India Act in mere than one respect. Supreme Court in Peerless (Supra), held that it is open to the RBI to take such steps as are open to them in law to regulate schemes such as those run by the Peerless Company to prevent exploitation of ignorant subscribers. Supreme Court in Peerless (Supra), held that it is open to the RBI to take such steps as are open to them in law to regulate schemes such as those run by the Peerless Company to prevent exploitation of ignorant subscribers. It was also directed that "care must be taken to protect the thousands of employers" The law therefore, is clear that Peerless type business should be permitted to continue but in a regulated manner so as to prevent exploitation of ignorant subscribers and avoiding throwing out of employment those employed by the company and other companies doing like business. No case of exploitation is made out. The grievance of the Reserve Bank of India is that the return n is low. But it cannot be equated with exploitation. If the return in low, it is a sufficient disincentive to invest in Peerless type business on the part of depositors. If the business is prohibited or closed down or it becomes impossible to carry on the business commercially practically it would mean unemployment. Thus the restrictions imposed by the Directions if led to ultimated closure of business, they will run counter to the direction of the Supreme Court in Peerless. The impugned Directions lost sight of the employment potential of the companies. 96. Further the new definition of liability introduced by the Reserve Bank of India in the impugned directions has made the scheme unreasonable. We shall deal with this aspect in greater detail. Suffice it to say that according to the accounting practice followed until the impugned directions came into force, the investment companies like the writ petitioner as well as Peerless, used to take 1st year's subscription less provision into the Revenue Account and liabilities to the certificate holders was calculated every year by discounting method as formulated by the Actuary. This meant that the amount kept in the fund was adequate to meet the contractual liabilities to the certificate holders at any point of time. 97. Although Reserve Bank of India has vehemently supported the clause relating to definition of liability but they have forgotten one very crucial fact. In the affidavit filed by the Reserve Bank of India on 24th January, 1978 in connection with Civil Rule No, 5940(W) of 1977, the Reserve Bank of India emphasised the points of distinction between the case of Peerless and Favorite Small Investment Company Limited. In the affidavit filed by the Reserve Bank of India on 24th January, 1978 in connection with Civil Rule No, 5940(W) of 1977, the Reserve Bank of India emphasised the points of distinction between the case of Peerless and Favorite Small Investment Company Limited. There the Reserve Bank of India has, inter alia, stated about Peerless as follows :- “The Peerless maintains a fund, based on actuarial principles, to which the subscriptions received from each subscriber from the second year onward are credited along with compound interest at 8 per annum, the interest so credited being debited to the profit and loss account of the relative year. From the certificate furnished by the actuarial consultants the fund correctly reflects the deposit liabilities." "The Endowment Certificates are issued for periods ranging from 10 to 30 years. The first year's subscription is credited to the income account but the subscriptions from the second year onwards along with compound interest at 8% per annum on the outstanding balance in the fund as at the end of previous year is credited to an Endowment Certificate Fund. The balance in the fund at any time will cover the paid up value of the outstanding certificates during their currency as also their maturity value on the expiry of their contracted period. To demonstrate, in the case of an endowment certificate for 12 years for face value of Rs. 1000/- (i. e. endowment sum) the balance in the fund in respect of a particular certificates will be Rs. 148.26 at the end of the third year. Assuming that a certificate bas been converted into a paid up one at the end of the third year and the subscriber has discontinued future subscriptions, the company would be required to pay to him a sum of Rs. 249.99 at the end of the twelfth year. As against this amount, the relative balance in the fund i. e. Rs. 148.26 plus compound interest at 8% till the termination of the scheme will amount to Rs.296.37. Similarly, assuming that a subscriber has regularly paid subscriptions for 12 years, the balance in the fund will be Rs. 1186.45 as against which the company will be required to pay the endowment sum of Rs. 1000/- plus a bonus of Rs. 144/-. 148.26 plus compound interest at 8% till the termination of the scheme will amount to Rs.296.37. Similarly, assuming that a subscriber has regularly paid subscriptions for 12 years, the balance in the fund will be Rs. 1186.45 as against which the company will be required to pay the endowment sum of Rs. 1000/- plus a bonus of Rs. 144/-. Thus on the basis of the accounting procedure followed by the company, the outstanding balance in the social welfare scheme at any point of time will not be less than the contractual obligation at that point of time, i. e. the fund gives a true and fair picture of the liabilities. By providing for compound interest at 8%, the profit and loss account also present a fair and ture picture, inasmuch as interest accrued and payable on the termination of the scheme is spread over the entire period of the certificate. The financial position of Peerless is satisfactory. It will be seen from the balance sheet that the cash and other balances in current account along with the investments in Government and other securities short-term and fixed deposits with other banks are more than sufficient to meet the contractual obligations." 98. No reason has been given why the actuarial method of accountancy cannot be followed by the investment companies now. In our judgment this direction is unreasonable and virtually aims to prohibit business of this kind. 99. No doubt the Reserve Bank of India has power to provide for regulation but such power must not be in violation of fundamental rights guaranteed by the Constitution of India to carry on business. Unless investment business of the kind with which we are concerned is prohibited by law, in the guise of regulation, such business cannot be prohibited. If the Directions arc arbitrary the same must be struck down. Our endeavour is however to strike a balance between the competitive needs or the public i. e. to save the depositors and the business needs of the company. Once it is found that the impugned Directions imposed a restriction on the freedom of trade, the burden is on those who support it, to show that the restriction imposed by the impugned law is reasonable and is imposed in the interest of general public. Once it is found that the impugned Directions imposed a restriction on the freedom of trade, the burden is on those who support it, to show that the restriction imposed by the impugned law is reasonable and is imposed in the interest of general public. In other words the burden is on those who seek the protection of clause (6) of Art. 19 and not on the citizen who say that the restrictive enactment is invalid (See (18) M/s. Sukhnandan Saran Dinesh Kumar and Another v. Union of India and Another reported in AIR 1982 SC 902 ), No attempt bas been made even to discharge this onus. Even assuming any such attempt has been made to show reasonableness of the restriction such attempt has miserably failed. 100. Supreme Court in (19) Kuala State Electricity Board v. The India Aluminium. Ltd. reported in AIR 1976 SC 1031 considered the scope of subordinate legislation, "In India many statutes both Central and State provide for subordinate legislation made under the provisions of those statutes to be placed before the Parliament or the State legislature as the case may be and make it subject to such modification, amendment or annulment, as may be made by the particular legislature." 101. In that context- The Supreme Court held :- "Even so, we do not think that where an executive authority is given power to frame subordinate legislation within staled limits, rules made by such authority if outside the scope of the rule making power should be deemed to be valid merely because such rules have been placed before the legislature and are subject to such modification, amendment or annulment as the case may be, as the legislature may think fit. The process of such amendment, modification or annulment is not the same as the process of legislation and in particular, it lacks the assent of either the President or the Governor of the State, as the case may be. We are, therefore, of the opinion that the correct view is that notwithstanding the subordinate legislation being laid on the table of the House of Parliament or the State Legislature and being subject to such modification, annulment or amendment as they may make, the subordinate legislation cannot be said to be valid unless it is within the scope of the rule making power provided in the statute." 102. The principle is clear that a delegate has no plenary powers and has to act as directed and within the limits set by the legislature. Any over-stepping or assumpti0n of power beyond what is given, is ultra vires the delegate and of the statute. The legislature of course bas plenary powers. This is illustrated by the decision relied upon on behalf of R. B I. in the case of (20) Kanta Mehta v. Union of India reported in 62 Company Cases 769 though for the opposite proposition that it is within the power of RBI under sections 45J and 45K (3) to frame such directions so as to make the implementation thereof impossible or commercially Impracticable irrespective of the fact that the power given is to regulate only. 103. In Kanta Mehta’s case the vires of section 45S read with section 58B (5A) the R. B. I. Act, 1934 was challenged as violative of Articles 14 and 19 of the Constitution; Article 19 because it interferred with the right to carryon trade and business and Article 14 because it was unreasonable and accordingly arbitrary. By section 45S of the Act, Parliament enjoined that no person being an individual or a firm or an unincorporated association of individuals shall, at any time, have deposits from more than the Dumber of depositors specified in the table appended to the section; in the case of individual the total number of depositors was to be 25, in the case of firm 25 depositors per partner but Dot more than 250 depositors in all and in case of unicorporated association of individuals not more than 25 depositors per individual but not more than 250 depositors in all. Wherever the actual number of depositors in a given case of was more than that prescribed, the number had to be brought down to the statutory limit within a period of 2 years from the date of the commencement of section 10 of the Banking Laws (Amendments) Act, 1983. The restrictions imposed were made by parliament by Statute and not by a delegate in purported exercise of power and the Delhi High Court held that the restrictions imposed were reasonable. The restrictions imposed were made by parliament by Statute and not by a delegate in purported exercise of power and the Delhi High Court held that the restrictions imposed were reasonable. The report of the Study Group on Non-Banking Financial Intermediaries was considered by the Delhi High Court and it was found and held that the reason Non-Banking Financial Intermediaries had succeeded in mobilising deposits, was by being able to pay higher rates, whereas the commercial banks were required to maintain specific liquidity ratio which tends effectively to limit the earning potential of the funds. It was further held that the risk element in such high return-fetching investment, jeopardised the safety of deposits placed with the Non-Banking Financial Intermediaries by the general public. 104. It is not the case here. The complaint is not high return but a low return which is directed to be marked upta 10% annually campoundable interest .or return. The restraint is regarding investments or deployment of deposits to fetch enough to pay taxes, meet expenses, pay the specified return and keep a balance as profits. R. B. I's own out which we have already analysed shows that this is impassible. 105. Again here it is not a case of the legislature imposing restrictions but purported restrictions being put by subordinate legislation when the section does not so authorise nor does the Supreme Court direct the same to be done. The legal mandate is contrary viz. to keep the business going so as not to throw people out of employment, at the same time ensuring a 10% compound return to the company annually which presupposes that after-tax return is not only sufficient for the aforesaid purpose but leaves a balance besides for the company. In our view maximum hardship from the Directions has been caused by the definition assigned to the word "liability", A new concept of liability has been introduced. It is inextricably connected with the method of accounting hitherto followed by the writ petitioner and similarly situated companies. The Reserve Bank of India have issued Directions based on the provisions of sections 45J and 45K of the Reserve Bank of India Act, 1934. But neither of these sections empowers Bank Reserve Bank of India to issue Directions defining liability and mode of investment of the fund received from the public. 106. The Reserve Bank of India have issued Directions based on the provisions of sections 45J and 45K of the Reserve Bank of India Act, 1934. But neither of these sections empowers Bank Reserve Bank of India to issue Directions defining liability and mode of investment of the fund received from the public. 106. Clause 6 is the core provision of the 1987 Directions, If this clause cannot be implemented, the subscribers cannot be given a return of 10% annually compounded under clause 5, clause 12 requires disclosure of liabilities and total deposits cannot similarly be complied with all related provisions become unworkable. 107. In accordance with paragraph 6 of the said 1987 Directions, the Co. will have to keep the entire amount of deposit together with interest premium, premium bonus and other advantages accrued on the said deposit, in specified investments, whether or not such deposits are payable. This implies that no part of the said deposits is available for the purpose of providing its Working Capital for running the business from day-to-day including disbursement of Salaries, Commission and other overheads etc. Even a Company like Peerless whose only business is to accept deposits from public would be deprived of any Working Capital due to the aforesaid provision. 108. The Directions, therefore, should have provided for the investment of the contractual liability only arid not the entire amount of deposit. The following Cash-flow Chart showing the working capital shortfall would demonstrate the un-workability of the Directions contained in clause 6:- OUT FLOW IN FLOW Particulars Collection of Certificate sold Commission Admn. Exp Total (say) Residual balance Interest @ 13% Total Cash short fall 1st Yr. Rs. 100/- 47.37 17.80 65.00 35.00 4.50 39.50 60.50 2nd Yr. Rs. 100/- 13.00 17.80 31.00 69.00 9.00 78.00 22.00 3rd Yr. Rs. 100/- 4.75 17.80 23.30 77.00 10.00 87.00 13.0 From the above chart, it can be seen that there is a cash shortfall of Rs. 60.50, Rs. 22.00 and Rs. 1300 in 1st year, 2nd year and 3rd year respectively (supposing collection of Rs. 100/- every year). 109. As mentioned earlier, the only income of such Companies is from the investment of the fund as per R.B.I Directions. After taking the fixed expenses from the income, a shall amount of money is left over to make payment of Commission and other expenses to the Field Staff. 100/- every year). 109. As mentioned earlier, the only income of such Companies is from the investment of the fund as per R.B.I Directions. After taking the fixed expenses from the income, a shall amount of money is left over to make payment of Commission and other expenses to the Field Staff. This expense is variable in nature and goes up with the amount of deposit that is coming into the Company each year. After this available amount is exhausted, the Company has no funds left to incur any expenses for further business and nothing is left for profit. Thus the Company gets into a position where the more the business, the more the loss. 110. In paragraph 5 of the said Directions, it has been made obligatory for a Company to refund even after expiry of one year the total amount of subscription deposited by a certificate holder together with 8% compound interest. It is impossible for any such Company to comply with the provision in view of the fact that the deposits of the Certificate-holder have to be invested for a reasonable length of time in order to enable a Company to derive sufficient returns from such investment immediately after one year so that the stipulated 8 % compound interest can be given after defraying management expenses, agents commission and other overheads and after taking out a reasonable amount as Company's profit. 111. Even the nationalised banks in the Lagbu Bachat Yojna rule does not allow a depositor to get interest on premature return. The relevant rules are quoted herein-below:- "The Bank may at its direction and at the request of the depositor allow foreclosure even before completion of 39 months, but after completion of 12 months, in which case, no interest shal be allowed." When a nationalised bank, who does not have to pay agent's Commission and enjoys privileged investment pattern, is not in a position to pay interest on premature return it will be next to impossible for the residuary non Banking Company to pay such interest. The restriction will ultimately result in-a) The immediate closure of small companies, b) Eventual closure of bigger companies in the next 2/3 years and c) No new Company will be able to come up into this line of business, although such business has not been declared illegal by the Supreme Court. 112. The restriction will ultimately result in-a) The immediate closure of small companies, b) Eventual closure of bigger companies in the next 2/3 years and c) No new Company will be able to come up into this line of business, although such business has not been declared illegal by the Supreme Court. 112. The loss a company may suffer if the amount of money deposited by the depositor plus required amount of interest is taken to be the liability, can be illustrated by the following chart. It will be evident from this chart that no money would be left for working capital. STAEMENT SHOWING LOSS IN EXISTING TABLE AS PER R.B.I. DIRECTIONS YEAR OPFUND INSTAL COMMN MGMTEXP 1.00 0.00 100.00 47.37 17.80 2.00 39.36 100.00 13.00 17.80 3.00 122.67 100.00 4.75 17.80 4.00 226.14 100.00 4.75 17.80 5.00 343.05 100.00 4.75 17.80 6.00 475.17 100.00 4.75 17.80 7.00 624.46 100.00 4.50 17.80 8.00 793.44 100.00 4.50 17.80 9.00 984.39 100.00 4.50 17.80 10.00 1200.16 100.00 4.50 17.80 NETIN INTT @ 13% CLFUND FUNDREQD PROFIT 34.83 4.53 39.36 110.00 -70.64 69.20 14.11 122.67 231.00 -108.33 77.45 26.02 226.14 364.10 -137.96 77.45 39.47 343.05 510-51 -167.46 77.45 54.67 475.17 671.56 -196-39 77.45 71.84 624.46 848.72 -224.26 77.70 91.28 793.44 1043.59 -250.15 77.70 113.25 984.39 1257.95 -273.56 77.70 138.07 1200.16 1493.74 -293.58 77.70 166.12 1443.98 1753.00 -309.02 TABLE AS PER R.B.I. DIRECTIONS YEAR OP BAL INSTAL TOTAL INTT @ 10% CL BAL 1.00 0.00 100.00 100.00 10.00 110.00 2.00 110.00 100.00 210.00 21.00 231.00 3.00 231.00 100.00 331.00 33.10 364.10 4.00 364.10 100.00 464.10 46.41 510.51 5.00 510.51 100.00 610.51 61.05 671.56 6.00 671.56 100.00 771.56 77.16 848.72 7.00 848.72 100.00 948.72 94.87 1043.59 8.00 1043.59 100.00 1143.59 114.36 1257.95 9.00 1257.95 100.00 1357.95 135.79 1493.74 10.00 1493.74 100.00 1593.74 159.37 1753.12 NOTE: NO PROVISION FOR WORKING CAPITAL EXCEPT DIFFERENCE OF 13% EARNED ON INVESTMENT OF FUNDS AND 10% CREDITED TO DEPOSITORS' FUND THIS COMES TO 13-10=3% ON EVERY RS. 100 COLLECTED (THAT TOO AVAILABLE ONLY AT THE END OF THE YEAR) WHICH IS INADEQUATE TO MEET EXPENSES 113. On the other hand, if the liability is taken to be the liability according to contractual obligation and in accordance with the method of accounting followed by the Company to which reference has already been made. it will be evident that even after faking out Rs. 30/- in the first year Rs. On the other hand, if the liability is taken to be the liability according to contractual obligation and in accordance with the method of accounting followed by the Company to which reference has already been made. it will be evident that even after faking out Rs. 30/- in the first year Rs. 12/- in the second year and Rs. 7/- every year thereafter the fund has adequate money to pay the full contractual obligations to the Certificate Holders at the end of 10 years and yet leaves some profit margin. A new company can therefore, start business by introducing this type of scheme and it will have working capital and a profit. On the obter hand the full liabilities of the Certificate Holders can be made as per Reserve Bank Direction i. e. the entire deposit would be repaid with 10% compound interest at the end of 10 year period. The following chart will illustrate this position : STATEMENT SHOWING ACCUMULATION OF INVESTED FUND FOR TEN YEARS VIS-A-VIS REQUIRED MATURITY VALUE AND PROFITON FOLIOWING ASSUMPTIONS YEAR OP FUND INSTAL EXP NETIN 1.00 0.00 100.00 30.00 70.00 2.00 79.10 100.00 12.00 88.00 3.00 188.82 100.00 7.00 93.00 4.00 318.46 100.00 7.00 93.00 5.00 464.95 100.00 7.00 93.00 6.00 630.48 100.00 7.00 93.00 7.00 817.54 100.00 7.00 93.00 8.00 1028.91 100.00 7.00 93.00 9.00 1267.75 100.00 7.00 93.00 10.00 1537.65 100.00 7.00 93.00 INT EARNED CL FUND MAT VAL PROFIT % 9.10 79.10 21.72 188.82 36.64 318.46 53.49 464.95 72.53 630.48 94.05 817.54 118.37 1028.91 145.85 1267.75 176.90 1537.65 211.98 1842.64 1753.00 89.64 ASSUMPTIONS 1. CONTINUATION UP TO 10TH YEAR AND REGULAR PAYMENT OF YEARLY INSTALMENT. 2. PREMATURE REFUND CAN BE MADE ONLY AFTER EXPIRY OF 8TH YEAR @ 8% COMPOUND P. A. HOWEVER LOAN CAN BE AVAILED AS PER RULES. 3. INVESTMENT OF FUND AS PER EXISTING GUIDELINES OF RBI IN THE RATIO OF 10+70+20% WHICH EFFECTIVELY YIELDS 13% P. A. 4. OUT OF TOTAL INSTALMENT OF RS. 1000 ONLY A SUM OF RS. 98 HAS BEEN TAKEN OUT DURING A PERIOD OF 10 YEARS LEAVING A SUM OF RS. 902 ON WHICH WE ARE PROVIDING INTEREST OF RS 940 DURING THE PERIOD OF 10 YEARS 114. The method by which liability has been shown in the above chart, as indicated earlier is standard practice and is known as the discounting method of liability recognised by the Accountants the World Over. 902 ON WHICH WE ARE PROVIDING INTEREST OF RS 940 DURING THE PERIOD OF 10 YEARS 114. The method by which liability has been shown in the above chart, as indicated earlier is standard practice and is known as the discounting method of liability recognised by the Accountants the World Over. 115. Under the scheme the liability to the depositors, whether accrued or not, has to be provided for. If that is taken to the logical conclusion, then there will be no funds available with the companies for making any expenditure. Although under the provisions of the aforesaid Reserve Bank of India Act, the Reserve Bank has the power to regulate and issue directions, but in our view, the concept of liability cannot be change by the aforesaid provisions, nor can the regulations direct the companies to adopt an accounting procedure which will leave them without and funds in their bands for utilisation for meeting the expenditure exclusively laid out for the purpose of the business As indicated earlier there bas been no restriction on advertisement or payment of commission or like matters. The writ petitioner and other similar companies in the field adopted and practiced an accounting system whereunder the 1st year's subscription in respect of a certificate was appropriate to the profit and loss account of the company and shown as income. In fact the company has been assessed on the basis of such income and has paid tax thereon. The company used to meet its expenses, namely, management expenses, payment of agents' commission and other working capital requirements out of the said sum of money. The company, however, invested subscriptions received from the 2nd year onwards in interest bearing investments. The said investments and the return therefrom were transferred to a fund known as Social Welfare Scheme fund. The company used to credit such fund at a specified rate. The investment of the subscription from the 2nd year onwards was done in such a manner that the respondent company was in a position to pay off all dues of certificate holders at the end of the contractually stipulated maturity period. In other words, the respondent company was at all points of time in a position to pay and/or discharge its contractual liabilities to the certificate holders. In other words, the respondent company was at all points of time in a position to pay and/or discharge its contractual liabilities to the certificate holders. It may be relevant to mention here that the certificate holder's right to get back the money paid to the company arises only is accordance with the terms of the contract and he is entitled to get back the money only at the end of the maturity period of his certificate. 116. It is no doubt true that the Reserve Bank can and should regulate the business of the companies like the writ petitioner to safeguard the interest of the depositors. That is the paramount consideration. The other consideration is the retention of the employees including the field workers. It cannot be disputed that many unemployed persons have been employed by the companies like the writ petitioner and Peerless Investment and if the business is closed down by reason of the strict and rigid formula of the R.B.I. as contained in the Directions, in that event the employment will suffer a setback. 117. The system of accounting followed by the company is not only applicable to the Life Insurance Companies but it is a recognised method of accounting under the Income Tax Act. The gratuity liability is always followed on actuarial principle. In Clause 6 the provisions which have been made for security of the depositors cannot be said to be unreasonable if the definition of aggregate amount of liabilities is modified. At present, it has been defined by the explanation of Clause 6 as follows:- “Aggregate amounts of liabilities shall mean total amounts of deposits received together with interest, premium, bonus or other advantage by whatever name called, accrued on the amount of deposits according to the terms of contract." 118. If the entire collection is treated as liability, in that event, the Company cannot touch any part of it to meet its expenditure. This cannot be a reasonable restriction. B) Clause 6(1), the deposit shall have to be made which shall not be less than the aggregate amount of liabilities to the depositors whether or not such amounts have become payable. It again means that the entire liabilities shall be deposited in approved securities without giving any scope for spending any part of such deposits. There will in fact be no residuary amount available with the Co. It again means that the entire liabilities shall be deposited in approved securities without giving any scope for spending any part of such deposits. There will in fact be no residuary amount available with the Co. for making the expenditure for commission or for payment of salaries of the employees or for meeting other incidental business expenditure. The accounting procedure followed by the Company would provide for the payment of the liabilities in terms of the contract taking into account the actual liability accruing and/or payable in a year according to the terms of the contract between the depositors and the Co. The Reserve Bank has to provide guidelines for the purpose of ensuring that in following the particular method of accounting by treating a part of the first year's collection as a receipt for the purpose of meeting the expenditure, the balance amount is invested in accordance with Clause 6(1), and there may not be any difficulty in providing for the liability to the depositors year by year in terms of the contract and the security of the money of the depositors• can be adequately met. The question is, however, what should be the percentage which can be made available to the Company from the first year's collection. This, however, will depend on the volume of transaction. 119. On the basis of the charts which have been handed over to us, we have prepared a hypothetical chart extracted hereinbefore which, according to us, would show that the liability of the Company if it is taken according to the method now being followed, taking a part of the first year’s collection as the receipt available for the Company’s expenditure, there will be no difficulty in making the payment on maturity or otherwise. 120. In our view, therefore, the maximum hardship in terms of Directions would be caused by the definition of the aggregate amount of liability. We would, therefore, direct the Reserve Bank to modify the definition of liability by deleting the words "whether or not such amounts have become payable." The aggregate amount of liabilities, we mentioned in 'Explanation' A' of Clause 6 should also be modified. It should mean the total amount of contractual dues of the depositors including the interest premium, bonus or other advantage by whatever name called, accrued on the amount according to the terms of the contract. It should mean the total amount of contractual dues of the depositors including the interest premium, bonus or other advantage by whatever name called, accrued on the amount according to the terms of the contract. Consequentially, Clause 12 of the Directions requires modification. Every residuary non-banking company shall disclose as liabilities in its books of accounts and balance sheets, the aggregate amount of liabilities accrued or payable to the depositors in accordance with the contract. This would mean that valuation in a particular year bas to be made on actuarial method. 121. Although we are of the view that the Reserve Bank of India cannot issue any Direction regarding the pattern of investment but since such Directions are intended to protect the interest of innumerable depositors, we do not think that any change in the pattern of investment as mentioned in Clause 6 is necessary. By the interim order the Division Bench directed that investment pattern would be as follows :- 10% in fixed deposit 50% in approved security 40% in inter-corporate and other deposits as per the discretion of the writ petitioner company. 122. Although we are not continuing the said interim order in respect of the pattern of investment but we direct Reserve Bank of India to consider modification in appropriate case of the pattern of investment keeping in view the interest of the depositors and hardship of the Companies. We may add that with the change in the definition of 'liability' all companies will get reasonable working capital and will be in a position to generate profits, resulting in gradual increase in the net owned funds from year to year, in be company works efficiently. 123. A few other incidental matters should be disposed of Directions must necessarily operate prospectively from 15th May, 1987 and shall be applicable to all contracts entered on or after the date of issue of the said Direction. The period of deposit and the date of return in respect of certificates issued prior to 15th 1987, 1987 have been excluded from the purview of the Directions as per Clause 18(1). This exemption should include all contractual obligations on those certificates. 124. All funds prior to the issue of the Directions Should be allowed to be kept in the manner as was being done by the respective residuary non-banking company. This exemption should include all contractual obligations on those certificates. 124. All funds prior to the issue of the Directions Should be allowed to be kept in the manner as was being done by the respective residuary non-banking company. The Directions with regard to the investment shall be applicable from the moneys collected and/or received an and after 15th May, 1987. The companies shall be allowed reasonable time to make good the deficiency in the investment required to be made in terms of the Directions alter 15th May, 1987. 125. In respect of Certificates sold or issued on and from 15th May, 1987, no residuary non-banking company shall forefeit any amount deposited by any depositor or any interest, premium, bonus or other advantage accrued thereon. 126. Reserve Bank of India shall consider whether the benefit of deposit insurance can be extended to non-banking companies like the writ petitioners. It will prevent the growth of mushroom and fictitious companies from starting similar investment business and defrauding the public 127. No restriction has been imposed on the maximum commission payable. It is desirable that some restrictions should be imposed by the Reserve Bank of India. It may be brought in line with the commission payable by the Life Insurance Corporation keeping in view the business needs of the companies and the security of employment of the field staff. 128. We are also of the view that the Reserve Bank of India should consider incorporation of a stipulation that all expenditure of a non-banking company including commission should be within the guaranted Working Capital of the Company. 129. We are also of the view that suitable provision should be made for a depositor who wants back his money before maturity. If a depositor intends to get refund of the money invested before the expiry of contractual period, he should be required to keep the funds for a minimum period in accordance with the Contract. Before maturity he can only take loan but not the principal amount with interest. The amount of returns should also he less than 5 % to provide for the collection and other expenses of the non-banking company. 130. Before maturity he can only take loan but not the principal amount with interest. The amount of returns should also he less than 5 % to provide for the collection and other expenses of the non-banking company. 130. On consideration of the facts and circumstances of this case we have come to the following findings and conclusions:- a) Reserve Bank of India is empowered to issue directions to the residuary non-banking companies under the provisions of sections 45J and 45K of the Reserve Bank of India Act, 1934 for the interest of thousands of depositors, b) However, to the extent such directions are found to be prohibitory or not workable and as such unreasonable must be held to be beyond the powers of the Reserve Bank of India. c) The impugned directions providing that they represent irreducible minimum for safeguarding the interest of and for preventing exploitation of small and unwary depositors cannot be implemented without suitable modification. It is not reasonably practicable to comply strictly with the directions as they stand by the writ petitioners and the similarly situated companies. The Supreme Court in Peerless Case (Supra), reserved the liberty to the Reserve Bank of India to take such steps as are open to them in law to regulate the schemes such as those granted by the Peerless to prevent exploitation of subscribers and to protect thousands of employees. The impugned directions without modifications will run counter to the aforesaid directions of the Supreme Court. d) The business of savings and investments carried on by the company and similarly situated companies having not been declared unlawful or banned, power of the Reserve Bank of India to regulate such business cannot be permitted to be prohibitory resulting in the ultimate closure of the business carried on by the writ petitioner company and other similarly situated companies. If the modifications as suggested by us are not implemented and if ultimately the business is closed down and the company goes into liquidation, the bard earned money of thousands of depositors will be lost and the employees would also loss their job. If even lifter modifications are made to the impugned directions in terms of this order, any company fails to comply with such directions, the Government may take such steps as are open to them to protect the interests of the thousands of small depositors and numerous employees. If even lifter modifications are made to the impugned directions in terms of this order, any company fails to comply with such directions, the Government may take such steps as are open to them to protect the interests of the thousands of small depositors and numerous employees. e) The reasons why the impugned directions cannot be complied with and are held to be unworkable and unreasonable are mainly because of the definition of liability assigned in the impugned directions. The impugned directions, as they stand new, cannot be implemented by the residuary non-banking companies without incurring loss irrespective of their net worth. According to the impugned directions, the liability is the amount of money deposited by the depositors plus the amount of interest whether or not due to them according to the terms of the respective contracts at the given point of time. In other words, the entire collection with the interest, bonus etc whether payable or not would be the liability of the Company. This leaves no fund for working. If the definition of liability is amended as suggested by us if will be possible for the companies to generate working capital. In our view, liability in Clause 6 and in other clauses of the impugned directions should be construed to mean total amount of contractual dues of the depositors including Interest, Premium, Bonus or other advantages by whatever name called, accrued on the amount according to the terms of contract. Sections 45J and 45K of the Act do not authorise the Reserve Bank of India to introduce a concept of liability which is contrary to the accepted commercial practice and trading principles. The impugned directions have failed to make distinction between the actual liability in praesentt and a liability de futuro. Liberty must be reserved to the companies to adopt no, mal accountancy practice recognised and accepted in the trading circles so long as such accounting practice provides for payment of the liability to the depositors in accordance' with the contractual obligations. However, the Reserve Bank of India may, having regard to the facts and circumstances of each case issue directions regulating the administrative and management expenses and expenditure on commission and publicity, In the impugned directions no restriction has been imposed on the expenditure by a residuary non-banking company on any of these heads. However, the Reserve Bank of India may, having regard to the facts and circumstances of each case issue directions regulating the administrative and management expenses and expenditure on commission and publicity, In the impugned directions no restriction has been imposed on the expenditure by a residuary non-banking company on any of these heads. In our view, the impugned directions without modifications, instead of suppressing the mischief, will only lead to adverse unworkable and/or impracticable, results inasmuch as if the residuary non-banking companies cannot comply with such directions in toto, such companies have to go out of existence. This cannot be the object of the impugned directions. If the liability in terms of the contractual obligations is provided not only in the accounts but also by suitable investments in terms of Clause 6 of the directions, in our view, all the residuary non-banking companies, Irrespective of their net worth, will be able to carryon the business. f) Every residuary non-banking company shall disclose as its liability in its Books of Accounts and balance sheet the aggregate amount of liability accrued and payable to the depositors in accordance with the terms of the contract. g) The directions contained in clause 6 for deposit or investment and the liability shall be lead subject to the modification of the definition of the liability as aforesaid. h) The directions are prospective. The period of deposit and the date of return with respect to all certificates issued prior to 15th May, 1987 have been excluded from the purview of the directions as per Clause 18(1). This exemption should include all contractual obligations on those certificates. i) All funds prior to the issue of the directions should be allowed to be kept in the manner as was being done by the respective residuary non-banking company. The direction with regard to the investment shall be applicable from the moneys collected and/or received on and after 15th May, 1987. The companies shall be allowed reasonable time to make good the deficiency in the investment required to be made in terms of the directions after 15th May, 1987. j) We are not unmindful of the fact that exercise of power by legislature and executive is subject to judicial restraint. The only check on judicial exercise of power is the self-Imposed discipline of judicial restraint. j) We are not unmindful of the fact that exercise of power by legislature and executive is subject to judicial restraint. The only check on judicial exercise of power is the self-Imposed discipline of judicial restraint. But although the courts in exercise of judicial power are not competent to direct the enactment of a particular provision of law, if the statutory directions suffer from arbitrariness, the court is competent to issue necessary directions so that the statutory directions may be brought in conformity with law. As we have held that the Reserve Bank of India has transgressed the statutory, power to the extent indicated elsewhere in the judgment, we are of the view that the Reserve Bank of India shall modify the directions and make them reasonable and workable to safeguard the interest of depositors and protect the employees. 131. Mr. Banerjee has asked for stay of the operation of this judgment and order. If this prayer is allowed, the residuary non-banking companies will not be subject to any restrictions at all in respect of the investments that are required to be made after 15th May, 1987. Subject to the modifications suggested, the residuary non-banking companies must comply with the directions, particularly regarding the deposit and investment in public sector banks and approved securities. Let the Reserve Bank of India consider the findings and conclusions contained in the operative part of the judgment and order and if any modification or variation or stay of any part of the judgment and order is sought for, they would be at liberty to mention before, this Court upon notice to the appearing parties intimating the modification or variation or the stay, as the case may be, to be sought for by them. 132. The appeal and the writ petition are partly allowed and partly dismissed to the extent indicated above. Undertakings will stand discharged. All parties concerned to act on a signed copy of the oparative part of this judgment and order on the usual undertaking. Banerjee, J.: I agree.