Supreme Court Clarifies Writ Jurisdiction on Non-Banking Financial Companies (NBFCs)
In a significant judgment in the case of S Shobha vs. Muthoot Finance Ltd., the Hon’ble Supreme Court reaffirmed that an entity’s compliance with regulatory guidelines does not automatically subject it to writ jurisdiction. The Court emphasized that for a writ petition under Article 226 of the Indian Constitution to be maintainable, the entity must be discharging a public function or public duty.
Key Takeaways from the Judgment:
1. Writs Against Legal Entities: A writ can only be issued against a legal entity if it qualifies as an instrumentality or agency of the State or performs governmental functions of public importance.
2. Entities Subject to Writ Jurisdiction: The Court held that a writ petition under Article 226 is maintainable against:
o The State Government
o Statutory authorities
o Instrumentalities of the State
o Private entities executing public duties or receiving substantial state funding
3. Regulatory Compliance Does Not Establish Writ Jurisdiction: Muthoot Finance Ltd., an NBFC, follows RBI guidelines, but this compliance is a regulatory measure rather than a governmental function.
4. Public Function Test: A private company engaged in financial services, even if it is a scheduled bank, does not automatically become a public authority.
5. Issuance of Mandamus: A writ of mandamus may be issued against private bodies only if a statutory obligation of public nature is imposed upon them.
6. Public Authority Definition: As per Halsbury's Laws of England, an entity must have statutory public duties and operate for public benefit, not private profit, to be classified as a public authority.
Background of the Case
The case stemmed from an appeal against a Karnataka High Court ruling, which dismissed the petitioner’s writ petition against Muthoot Finance Ltd. on the grounds that it is not a ‘State’ under Article 12 of the Constitution. The petitioner argued that since the NBFC is regulated by the RBI, it should be subject to writ jurisdiction.
However, the Supreme Court rejected this argument, emphasizing that the nature of the function performed determines writ jurisdiction, not merely the regulatory oversight by the RBI.
The Function Test and Supreme Court’s Conclusion
The Court reiterated that for an entity to be subject to writ jurisdiction, it must serve a public duty beyond its contractual obligations to account holders and borrowers. Since Muthoot Finance Ltd. operates as a private financial institution without public obligations, the Supreme Court upheld the High Court’s ruling and dismissed the appeal.
Final Verdict
The Supreme Court’s ruling in S Shobha vs. Muthoot Finance Ltd. sets a crucial precedent in Indian constitutional law, clarifying that private financial institutions are not subject to writ jurisdiction unless they perform public duties. This decision reinforces the significance of the function test in determining judicial scrutiny under Article 226.