‘NBFCs required to comply with RBI Act and directives'

The Reserve Bank of India on Thursday informed the Kerala High Court that it had not issued a certificate of registration to any company for carrying on the business of non-banking financial companies (NBFC) in accordance with the principles of Sharia.

In an additional affidavit, the RBI reiterated before the Division Bench, comprising Chief Justice J. Chelameswar and Justice P.R. Ramachandra Menon, that non-banking financial companies were required to comply with all requirements of the RBI Act and directions, orders, guidelines and circulars issued by the RBI from time to time.

The RBI added that any contravention of the provisions of the Act or directions, guidelines or circulars would attract penalties under Section 58B of the RBI Act as well as other regulatory action by the RBI, such as cancellation of the certificate of registration. The additional affidavit was filed to counter the averments of the Al Baraka Financial Service Limited (ABFSL), a financial service floated by the Kerala State Industrial Development Corporation (KSIDC), that the RBI had granted four non-banking financial institutions registration to operate on the principles of Sharia.

Meanwhile, counsel for ABFSL contended that there was no legal impediment in operating a NBFC (Non Banking Financial Companies) without offering interests. Besides, the company was functioning in accordance with secular principles.

The court was hearing the arguments on two public interest writ petitions filed by Janata Party President Subramanian Swamy and another petitioner challenging a government order according sanction for registration of an Islamic finance service company by the KSIDC.

According to Dr. Swamy, the setting up of the company with government participation, which would follow the canon of law of a particular religion, was a clear instance of the state favouring a particular religion. He said secularism was part of the basic structure of the Constitution as amplified by the Bommai judgment of the Constitutional Bench of the Supreme Court.

Besides, Article 27 of the Constitution prohibited an instrumentality of the state from engaging in a venture such as Islamic banking. He said the finance company was set up strictly in accordance with Sharia. Arguments will continue on November 22.

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