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Nedumpilli Finance Company Limited vs. State of Kerala & Ors.

Transfer Petition (Crl.) · 2022 INSC 545Decided 10 May 2022
Transfer Petition (Crl.) No. 359 of 2015
Hemant Gupta · V. Ramasubramanian

Background

NBFCs are companies registered with and regulated by the Reserve Bank of India (RBI) under the RBI Act. The State of Kerala tried to additionally require these NBFCs to take a license under the Kerala Money Lenders Act, 1958, threatening penal action for non-compliance, and a similar dispute arose in Gujarat under its own 2011 Money Lenders Act. The Kerala and Gujarat High Courts reached opposite conclusions on whether such state laws could bind RBI-regulated NBFCs, leading to this batch of appeals (including a related criminal matter where an NBFC officer sought to quash an FIR filed under the Kerala Act).

Decision Breakdown

The Supreme Court held that the Kerala Act and the Gujarat Act have no application to NBFCs registered with and regulated by the RBI. It reasoned that the RBI Act is traceable to the Union List (incorporation/regulation of financial corporations, and "Reserve Bank of India" specifically), while state money-lending laws fall under the State List entry for "money lending and money lenders": a different subject matter altogether, so Parliament has exclusive competence under Article 246(1) over RBI-regulated entities. The Court also noted that Section 45-Q of the RBI Act gives the RBI's regulatory chapter an overriding effect over other laws, and pointed to concrete conflicts (e.g., state laws letting borrowers approach civil courts, when the Securitisation Act routes such disputes to Debt Recovery Tribunals instead). Consequently, appeals by the NBFCs against the Kerala High Court's ruling were allowed, Gujarat's appeals against its own High Court's contrary ruling were dismissed, and the connected criminal FIR/transfer petition was quashed.

Lesson Learnt

Once a financial entity is registered with and regulated by the RBI as an NBFC, individual states cannot impose their own separate money-lending licensing or enforcement regime on it: borrowers dealing with such NBFCs must look to the central regulatory and recovery framework (RBI regulation, Debt Recovery Tribunals, etc.), not local money-lenders' laws.

Official source (sci.gov.in)View Judgment (PDF)

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