In S. Shobha v. Muthoot Finance Ltd. (2025 INSC 117), the Supreme Court of India clarified that private financial entities, including Non-Banking Financial Companies (NBFCs), do not qualify as ‘State’ under Article 12 of the Constitution. Consequently, they are not subject to writ jurisdiction under Article 226, unless they perform a public function or duty. The decision reinforces the principle that private banking operations do not fall within the realm of public law remedies.
Facts of the Case
The petitioner, S. Shobha, availed a gold loan from Muthoot Finance Ltd., an NBFC, but defaulted on repayment. Muthoot Finance auctioned the pledged gold as per the loan agreement, which contained an arbitration clause. The petitioner challenged the auction and sought relief through a writ petition before the High Court, alleging that the auction violated an interim court order.
The High Court dismissed the writ petition, holding that Muthoot Finance Ltd. is a private company and does not perform public functions warranting writ jurisdiction. The petitioner then approached the Supreme Court.
Key Legal Issues
- Whether an NBFC like Muthoot Finance Ltd. is amenable to writ jurisdiction under Article 226.
- Whether private banking and financial transactions constitute public functions.
- Whether the presence of regulatory oversight by the Reserve Bank of India (RBI) makes an NBFC subject to writ jurisdiction.
Arguments by the Parties
Petitioner (S. Shobha):
- Muthoot Finance, though a private entity, is governed by RBI regulations and should be held accountable under public law.
- The auction was conducted contrary to an interim court order, justifying writ intervention.
- As financial institutions play a significant role in public life, they should be considered as discharging public functions.
Respondent (Muthoot Finance Ltd.):
- Muthoot Finance is a private NBFC and does not qualify as ‘State’ under Article 12.
- Regulatory compliance with RBI guidelines does not convert a private company into a public authority.
- The dispute is contractual in nature and should be resolved through civil proceedings or arbitration, as per the loan agreement.
Supreme Court’s Reasoning
1. NBFCs Are Not ‘State’ Under Article 12
The Court reaffirmed that only entities meeting the criteria of ‘State’ or its instrumentality under Article 12 can be subject to writ jurisdiction. Citing LIC of India v. Escorts Ltd. (1986 AIR SC 1370), the Court emphasized that mere regulatory oversight by the RBI does not make an NBFC a public entity.
2. Private Financial Transactions Do Not Constitute Public Functions
Relying on Federal Bank Ltd. v. Sagar Thomas (2003) 10 SCC 733, the Court held that banking and financial transactions, even when regulated, remain private commercial dealings. Unlike public sector banks, private entities are not vested with sovereign or governmental functions.
3. Public Duty and Amenability to Writ Jurisdiction
The Court distinguished between private bodies performing statutory duties and those engaged in private business. It cited Zee Telefilms Ltd. v. Union of India (2005) 4 SCC 649, where it was held that a private entity must have a public duty imposed by statute to be amenable to writ jurisdiction. Since Muthoot Finance’s business was purely commercial, no public duty was involved.
4. Availability of Alternative Remedies
The Court noted that the petitioner had adequate remedies under civil law and arbitration. Citing Bihar School Examination Board v. Suresh Prasad Sinha (2009) 8 SCC 483, it reiterated that writ jurisdiction should not be invoked when effective alternative remedies exist.
Conclusion and Implications
The Supreme Court upheld the High Court’s decision, dismissing the writ petition as non-maintainable. It clarified that:
- NBFCs and private lenders are not subject to writ jurisdiction unless they perform public duties.
- Mere regulatory oversight does not convert a private entity into a public authority.
- Disputes arising from private financial transactions should be addressed through civil litigation or arbitration.
This ruling significantly impacts financial litigation, reinforcing that private financial institutions cannot be subjected to public law remedies. Borrowers challenging NBFC actions must seek redress through contractual and civil proceedings rather than writ petitions.
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