The Calcutta High Court has clarified that the Reserve Bank of India cannot indefinitely withhold approval for voluntary surrender of an NBFC’s registration merely because the company still meets the Principal Business Criteria, without affording it a meaningful opportunity to comply or be heard. This judgment reinforces procedural fairness in regulatory actions affecting fundamental business rights.
Background & Facts
The Dispute
The petitioners, J. Thomas Finance Private Limited and another, are Non-Banking Financial Companies (NBFCs) registered with the Reserve Bank of India (RBI) under Certificate of Registration No. 05.00378 dated 26.02.1998. By 2024, the petitioners determined that continuing NBFC operations was no longer commercially viable due to mounting compliance costs and persistent losses. They resolved to discontinue the NBFC business and voluntarily surrender their registration.
Key Facts
- The petitioners’ Net Owned Fund (NOF) as of 31.03.2024 stood at Rs. 2,66,47,000, below the RBI-mandated minimum of Rs. 5,00,00,000 for 31.03.2025
- On 18.02.2025, RBI notified the petitioners of the NOF compliance deadline and warned of regulatory action for non-compliance
- On 28.02.2025, the Board of Directors of the petitioners resolved to surrender the NBFC registration
- On 18.03.2025, the petitioners formally applied for voluntary surrender of their Certificate of Registration
- On 30.05.2025, RBI issued a show-cause notice alleging non-compliance with NOF norms
- On 06.06.2025, the petitioners replied, informing RBI that surrender application was pending and submitted audited financials for FY 2024-25
- On 23.04.2025, RBI internally rejected the surrender application, but the petitioners only became aware of this rejection via email dated 04.07.2025
- The sole reason cited for rejection was non-compliance with Principal Business Criteria (PBC) as of 31.12.2024
- The petitioners had not been given any prior notice, hearing, or opportunity to rectify PBC status before rejection
Procedural History
- 18.02.2025: RBI notifies petitioners of NOF compliance deadlines
- 28.02.2025: Petitioners’ Board resolves to surrender NBFC registration
- 18.03.2025: Formal application for voluntary surrender filed with RBI
- 30.05.2025: RBI issues show-cause notice on NOF non-compliance
- 06.06.2025: Petitioners respond, disclosing surrender application and submitting financial documents
- 23.04.2025: RBI internally rejects surrender application (petitioners unaware until 04.07.2025)
- 04.07.2025: Petitioners receive email rejecting surrender on PBC grounds
- 08.04.2026: Hearing concluded in writ petition
- 20.04.2026: Judgment delivered
- 13.01.2026: Court directs RBI to clarify whether reducing PBC voluntarily would violate registration terms
- 17.03.2026: Petitioners submit updated audited balance sheet showing PBC reduced to 0.81% (Financial Assets/Total Assets) and 99.99% (Financial Income/Gross Income)
Relief Sought
The petitioners sought quashing of the RBI’s rejection order dated 04.07.2025, direction to accept their voluntary surrender application, and an order granting them a fair opportunity to be heard before any final decision.
The Legal Issue
Can the Reserve Bank of India reject an application for voluntary surrender of NBFC registration solely on the ground that the applicant still meets the Principal Business Criteria, without providing a reasonable opportunity to reduce PBC or to be heard before rejection?
Arguments Presented
For the Petitioner
Mr. Ratnanko Banerji, Senior Advocate, argued that under Section 45-IA(6)(i) of the Reserve Bank of India Act, 1934, the RBI is obligated to cancel registration if an NBFC ceases to carry on the business of a non-banking financial institution. The petitioners had clearly expressed intent to exit the NBFC business and had taken concrete steps to wind down operations. The RBI’s refusal to accept surrender without allowing the petitioner to reduce PBC was arbitrary and violated the statutory mandate. He further contended that the Second Proviso to Section 45-IA(6) mandates a reasonable opportunity of hearing before cancellation, which was entirely denied. He relied on Harinagar Sugar Mills Ltd. v. State of Maharashtra to assert that the right to carry on business under Article 19(1)(g) was infringed by the RBI’s unilateral refusal.
For the Respondent
Mr. Aman Agarwal, appearing for RBI, submitted that an entity remains an NBFC as long as it satisfies the twin conditions of PBC - financial assets exceeding 50% of total assets and financial income exceeding 50% of gross income. According to RBI’s 1999 circular, both conditions must be met simultaneously. RBI argued that voluntary surrender cannot be permitted while the entity continues to meet the definition of an NBFC, as this would circumvent regulatory oversight. The RBI maintained that the petitioners had not taken any action to reduce PBC prior to the rejection and that the rejection was therefore justified.
The Court's Analysis
The Court examined the statutory framework under Section 45-IA(6)(i), which empowers the RBI to cancel registration if the NBFC "ceases to carry on the business of a non-banking financial institution." The Court held that the phrase "ceases to carry on" implies a voluntary and intentional discontinuance of the NBFC business, not merely a temporary non-compliance with norms. The petitioners had unequivocally demonstrated their intent to exit the NBFC business through board resolutions, financial disclosures, and application for surrender.
"The Reserve Bank cannot hold a company hostage to its own regulatory framework by refusing to permit exit while the entity continues to technically meet the PBC, without affording it a reasonable opportunity to comply with the very conditions that would enable surrender."
The Court emphasized that the Second Proviso to Section 45-IA(6) mandates a reasonable opportunity of hearing before cancellation. The rejection of the surrender application on 23.04.2025, communicated only on 04.07.2025, without any prior notice, explanation, or hearing, was a clear violation of natural justice. The Court further noted that the RBI itself, in its response to the Court’s order dated 13.01.2026, had acknowledged that reducing PBC below 50% while holding registration was permissible and would not violate any terms. The petitioners, acting in good faith, had complied with this guidance by submitting updated financials showing PBC reduced to 0.81% and 99.99% respectively.
The Court rejected the RBI’s argument that surrender could be denied merely because PBC was still met at the time of application. Such an interpretation would render the statutory provision for voluntary surrender meaningless and create a regulatory trap for entities seeking to exit.
The Verdict
The petitioners succeeded. The Court set aside the RBI’s rejection order dated 04.07.2025 and quashed the communication. The RBI is directed to reconsider the petitioners’ surrender application dated 18.03.2025, along with the updated submission dated 17.03.2026, and pass a reasoned, speaking order after providing a reasonable opportunity of hearing. The RBI must complete this process within four weeks from the date of communication of this order.
What This Means For Similar Cases
Voluntary Exit Cannot Be Blocked by Regulatory Technicalities
- Practitioners representing NBFCs seeking to exit must document intent to discontinue business through board resolutions and formal applications
- RBI cannot refuse surrender merely because PBC is still met if the entity has demonstrated clear intent to cease operations
- Any rejection must be preceded by notice and opportunity to reduce PBC, as clarified by the RBI itself
Natural Justice Is Non-Negotiable in Regulatory Cancellations
- The Second Proviso to Section 45-IA(6) is mandatory, not directory
- Failure to provide hearing before rejection renders the order void ab initio
- Even if the regulator’s grounds are technically valid, procedural illegality invalidates the outcome
PBC Compliance Is a Tool for Exit, Not a Barrier
- NBFCs may proactively reduce financial assets by liquidating investments and redeploying funds into non-financial business
- Updated audited statements showing PBC below 50% must be submitted with surrender applications
- Regulators must accept such compliance as valid grounds for surrender, not as post-facto manipulation
