kerala islamic nbfc - kpmg

8/7/2019 Kerala Islamic NBFC - KPMG

1/4

2011KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwith

KPMGInternational,aSwisscooperative.Allrightsreserved.

1

KPMG IN INDIA

KPMGFlashNews

1 March 2011

Kerala High Court gives its assent to Kerala State Industrial

Development Corporation to participate in a NBFC set-up with the

objective of making investments based on the principles laid down

by Shariah law

Recently, the Kerala High Court in the case of Dr. SubrahmaniamSwamy (the petitioner) v. State of Kerala represented by The PrincipalSecretary to Government and Kerala State Industrial Development

Corporation Limited (the respondents)1

held that the State Governmentcan participate in a company proposing to register with the ReserveBank of India (RBI) as a NBFC for making investments in the

infrastructure sector based on the principles laid down in Shariah Law.

Further, based on the facts before the High Court, it was also held thatsuch investment cannot be construed as investment made to promote a

particular religion.

Facts of the case

Looking at the substantial growth in the Islamic Financial ServicesIndustry, the State of Kerala entrusted Kerala State IndustrialDevelopment Corporation Limited (KSIDC), a company wholly

owned by the State of Kerala, to conduct a study and look into

various aspects of the formation of a Islamic Investment Companyin Kerala for attracting investment as per the Shariah Law and

deploying the funds for infrastructure development in the State of

Kerala.

Accordingly, a company was incorporated on 30 November 2009(the Company) with the objective of collecting funds and makinginvestments in the infrastructure sector based on the principles of

Shariah Finance. It was proposed that the Company would have 11

percent initial equity contribution by KSIDC and the remaining 89

1 Dr. Subrahmaniam Swamy vs. State of Kerala represented by The Principal Secretary

to Government and Kerala State Industrial Development Corporation Limited [WP(C).

No. 35180 of 2009], dated 27 January 2011


2/4


KPMGInternationalCooperative(KPMGInternational),aSwissentity.Allrightsreserved.

2

percent by private investors. There were 8 subscribers to thememorandum of which 6 were Muslims and 2 were Hindus.

A writ petition was filed by the petitioners in December 2009. Asper an order of the Division Bench of the Kerala High Court, the

respondents were asked to ensure that the Company would notcommence any operations until further order.

The above order was modified by another order which permitted theCompany to undertake any business as permitted by law. However,the State and its instrumentalities were prohibited from participating

either directly or indirectly in the business of the Company.

A second writ petition by the petitioners was admitted by the KeralaHigh Court on 29 March 2010.

Petitioners Contentions

The main ground in both the abovementioned writ petitions was thatthe decision of the respondents to contribute to the share capital of

the Company was inconsistent with the constitutional obligation of

the respondents to function on secular principles.

Respondents contentions

The decision to promote the Company was to garner huge amountsof unutilised funds from the Gulf countries with a view to utilisesuch funds for the investment in the State of Kerala. The said

investments would be made for the welfare of the people in the Stateof Kerala.

The motive of the respondents was purely secular as the respondentswished to derive commercial benefit from the business to be carriedout by the Company.

The Company was bound to function strictly in accordance with thelaw of the country and in addition also comply with requirements ofrunning business as per the principles of Shariah. The same could

therefore not construe to be inconsistent with the requirements ofsecularism.

High Court ruling

The High Court observed that the Company consisted ofshareholders of multiple religions and was only inspired by certain

principles of Shariah.

It was also noted that every legal system has some basis of religionor religious beliefs. Therefore to categorise laws which disapproveor prohibit such activities as non-secular merely because the

prescription of such laws also coincide with certain religious beliefswould not be conducive to the promotion of an orderly society.

Further, the High Court accepted that the State would necessarilyhave to involve expenditure from the exchequer (i.e. collection byway of tax) to participate in equity of the Company. Article 27 of


3/4



3

the Constitution of India states that no person can be compelled topay any taxes, the proceeds of which were specifically used for the

promotion or maintenance of any particular religion. Based onvarious judicial precedents

2, the High Court observed that the

spending of money by the State on an activity which has a basis insome religion does not by itself attract the prohibition contained inArticle 27 of the Constitution. The High Court further stated that

what is to be examined was the purpose behind the expenditure.

From the perusal of the records, it was observed that the respondentswanted to tap the huge unutilised funds of non-resident Indian inGulf countries and use the same towards infrastructure developmentin the State of Kerala. Therefore, the High Court held that the

decision to make the investments by the respondents was to secure a

commercial benefit from the Company by generating funds for thedevelopment of the State. Given the same, the High Court observed

that the main and primary purpose of the respondent was commerceand not propagation of religion.

The High Court however clarified that the RBI was yet to examinewhether the Company could commence business as a NBFC based

on the relevant provisions laid down by the RBI Act, 1934. TheHigh Court stated that it did not wish to pre-empt the examination tobe undertaken by the RBI.

Accordingly, the High Court dismissed both the writ petitions.Our Comments

This is a welcome ruling by the Kerala High Court to those States

proposing to undertake Shariah compliant finance activities in India.

However, it is yet to be seen whether the RBI will allow the Companyto undertake Shariah compliant activities on being registered as aNBFC.

Nevertheless, this decision paves the way for other States to set-upcompanies with the objective of undertaking Shariah compliant finance

activities.

2 The Commissioner, Hindu Religious Endowments, Madras v. Sri.Lakshmindra Thirtha

Swamiar of Sri Shirur Mutt [1954 S.C.R.1005=AIR 1954 S.C.282]; T.M.A. Pai

Foundation and others v. State of Karnataka and others [(2002) 8 SCC 481]; Surksh

Chandra Chiman Lal Shah v. Union of India and others (ILR 1975 Delhi 32);

Mahanagar Gaziabad Chetna Munch v. State of U.P. (2007 (2) AWC 1113); Vijay

Harishchandra Patel v. Union of India [(2009) 3 GLR 2153]


4/4



4

For further information about KPMG in India and our services,

please contact:Bangalore

Maruthi Infotech Centre, 11-12/1

Inner Ring Road

Koramangala, Bangalore 560071

Phone: + 91 80 3980 6000 Fax: +91 80 3980 6999

Chennai

KPMG House

No.10, Mahatma Gandhi Road,

Nungambakkam High Road,

Chennai 600034

Phone: +91 44 39145000 Fax: +91 44 39145999

Delhi

DLF Cyber City, Building no. 10, Block B, Phase II

Gurgaon, Haryana 122 002

Phone: +91 124 307 4000 Fax: +91 124 254 9195

Hyderabad

KPMG, 8-2-618/2

Reliance Humsafar, 4th Floor

Road No.11, Banjara Hills

Hyderabad - 500 034

Phone: +91 40 66305000/23350060 Fax: + 91 40 6630 5299

Kolkata

KPMG Infinity BenchmarkPlot No. G-1, 10th floor Block - EP & GP,Sector V, Salt Lake City

Kolkata - 700091

Phone: +91 33 4403 4000 Fax: +91 33 4403 4199

Mumbai

KPMG House, Kamala Mills Compound, 448 Senapati Bapat Marg

Lower Parel, Mumbai 400 013

Phone: +91 22 39896000 Fax: + 91 22 39836000

Pune

703, 7th Floor Godrej Castlemaine, Next to Ruby Hall Clinic,

Bund Garden Road, Pune 411001

Phone: +91 20 30585764/65 Fax: +91 20 3058 5775

Mumbai

Lodha Excelus,Apollo Mills Compound

NM Joshi Marg

Mahalaxmi

Mumbai 400 011

Tel +91 22 3983 6000

Fax +91 22 24913132

New Delhi

Building No.10, Tower B,

8th Floor, DLF Cyber City,

Phase II

Gurgaon 122002 HaryanaTel: +91 124 3074000

Fax: +91 124 2549101

Bangalore

Solitaire, 139/26, 3rd Floor,

Inner Ring Road,

Kormangala,

Bangalore 560071

Tel: +91 80 3980 6000

Fax: +91 80 3980 6999

Hyderabad

8-2-618/2

Reliance Humsafar,

4th Floor

Road No. 11, Banjara Hills

Hyderabad 500 034

Tel: +91 40 6630 5000

Fax: +91 40 6630 5299

Chennai

No. 10 Mahatma Gandhi Road,Nungambakam,

Chennai 600 034

Tel: +91 40 3914 5000

Fax: +91 40 3914 5999

Kolkata

Infinity Benchmark,

Plot No.G-1, 10th floor,

Block - EP & GP,

Sector - V, Salt Lake CityKolkata 700091

Tel: +91 33 44034066

Fax: +91 33 4403 4199

Pune

703, Godrej_Castlemaine

Bund Garden

Pune 411001

Tel: +91 20 305 85764/65

Fax: +91 20 305 85775

Kochi

4/F, Palal Towers M.G.Road,

Ravipuram,

Kochi 682 016

Tel: +91 484 302 7000

Fax: +91 484 302 7001

2011KPMG,anIndianPartnershipandamemberfirm

of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (KPMG

International),aSwissentity.Allrightsreserved.

www.kpmg.com/in

Theinformationcontainedhereinisofageneralnatureandisnotintendedtoaddress

the circumstances of any particular individual or entity. Although weendeavour to

provide accurate and timely information, there can be no guarantee that such

information is accurate as of the date it is received or that it will continue to be

accuratein the future. Noone should act onsuch informationwithout appropriate

professionaladviceafterathoroughexaminationoftheparticularsituation.

kerala islamic nbfc - kpmg

Documents