An attempt by the state government to regulate non-banking financial companies (NBFCs) operating in the state failed when justice Jayant Patel of the Gujarat high court ruled that NBFCs can’t be put under the purview of the Money laundering act (ML Act). The judgment is significant in the present scenario as scores of NBFCs in the state and thousands of people are getting advances through such companies regularly. The NBFCs were irked when the registrars of the co-operative department had issued them notices in 2009.
The registrars, by issuing notices, called upon the NBFCs to produce the accounts and documents for verification so that they could check whether the provisions of the ML Act were being complied with, failing which fines and the other punishment could were initiated against them under the act.
Four companies, Sundaram Finance, Indiabulls financial services limited, GE Money financial services limited and Bussan Auto finance India limited, had challenged the notices before the high court. The ML Act was passed by the state government in 1967 essentially for the purpose of regulating transaction of money lending. It enables the state government to control the rate of interest.
The companies contended that the ML act, which is state law, cannot be imposed on them as they are directly governed by the rules stipulated by the Reserve Bank of India (RBI). The notice by thestate government overlaps the jurisdiction of central laws under which the RBI framed laws for the NBFs.
However, the state government said, RBI has not issued any instruction to control the chargeability of rate of interest in the transaction of loan by NBFCs, whereas the state under ML Act, has for all moneylenders prescribed the rate of interest.
If this court holds that the provisions of the ML Act would not apply to companies like NBFC, they would be at liberty to charge exorbitant rates of interest.
