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. Subrahmaniam

Swamy (the petitioner) v. State of Kerala represented by The Principal
Secretary to Government and Kerala State Industrial Development
Corporation Limited (the respondents)1 held that the State Government
can participate in a company proposing to register with the Reserve
Bank 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 that
such 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 Services

Industry, the State of Kerala entrusted Kerala State Industrial
Development 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 Company
in 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 making
investments 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

©2011KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwith
KPMGInternational,aSwisscooperative.Allrightsreserved.
1
 percent by private investors. There were 8 subscribers to the
memorandum of which 6 were Muslims and 2 were Hindus.

• A writ petition was filed by the petitioners in December 2009. As

per an order of the Division Bench of the Kerala High Court, the
respondents were asked to ensure that the Company would not
commence any operations until further order.

• The above order was modified by another order which permitted the
Company 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 Kerala

High Court on 29 March 2010.
Petitioner’s Contentions

• The main ground in both the abovementioned writ petitions was that
the 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 amounts

of unutilised funds from the Gulf countries with a view to utilise
such funds for the investment in the State of Kerala. The said
investments would be made for the welfare of the people in the State
of Kerala.

• The motive of the respondents was purely secular as the respondents

wished to derive commercial benefit from the business to be carried
out by the Company.

• The Company was bound to function strictly in accordance with the

law of the country and in addition also comply with requirements of
running business as per the principles of Shariah. The same could
therefore not construe to be inconsistent with the requirements of
secularism.

High Court ruling

• The High Court observed that the Company consisted of

shareholders of multiple religions and was only inspired by certain
principles of Shariah.

• It was also noted that every legal system has some basis of religion
or religious beliefs. Therefore to categorise laws which disapprove
or prohibit such activities as non-secular merely because the
prescription of such laws also coincide with certain religious beliefs
would not be conducive to the promotion of an orderly society.

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

©2011KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwith
KPMGInternationalCooperative(“KPMGInternational”),aSwissentity.Allrightsreserved. 2

 the Constitution of India states that no person can be compelled to
pay any taxes, the proceeds of which were specifically used for the
promotion or maintenance of any particular religion. Based on
various judicial precedents2, the High Court observed that the
spending of money by the State on an activity which has a basis in
some religion does not by itself attract the prohibition contained in
Article 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 respondents
wanted to tap the huge unutilised funds of non-resident Indian in
Gulf countries and use the same towards infrastructure development
in 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 the
development of the State. Given the same, the High Court observed
that the main and primary purpose of the respondent was commerce
and not propagation of religion.

• The High Court however clarified that the RBI was yet to examine
whether the Company could commence business as a NBFC based
on the relevant provisions laid down by the RBI Act, 1934. The
High Court stated that it did not wish to pre-empt the examination to
be 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 Company
to undertake Shariah compliant activities on being registered as a
NBFC.

Nevertheless, this decision paves the way for other States to set-up
companies 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]

©2011KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwith
KPMGInternationalCooperative(“KPMGInternational”),aSwissentity.Allrightsreserved. 3

 www.kpmg.com/in
For further information about KPMG in India and our services,
please contact:

Bangalore
Maruthi Infotech Centre, 11-12/1
Mumbai Inner Ring Road Chennai
Koramangala, Bangalore 560071
Lodha Excelus, Phone: + 91 80 3980 6000 Fax:
No.+91 80 3980 6999
10 Mahatma Gandhi Road,
Apollo Mills Compound Nungambakam,
NM Joshi Marg Chennai Chennai 600 034
Mahalaxmi KPMG House Tel: +91 40 3914 5000
Mumbai 400 011 No.10, Mahatma Gandhi Road,
Fax: +91 40 3914 5999
Tel +91 22 3983 6000 Nungambakkam High Road,
Fax +91 22 24913132 Chennai 600034
Phone: +91 44 39145000 Fax: +91 44 39145999
New Delhi Kolkata
Delhi
Building No.10, Tower B, DLF Cyber City, Building no. 10, Block
Infinity B, Phase II
Benchmark,
8th Floor, DLF Cyber City, Gurgaon, Haryana 122 002 Plot No.G-1, 10th floor,
Phase – II Phone: +91 124 307 4000 Fax: +91-124
Block EP 254
& GP,9195
Gurgaon 122002 Haryana Sector - V, Salt Lake City
Tel: +91 124 3074000 Hyderabad Kolkata 700091
Fax: +91 124 2549101 KPMG, 8-2-618/2 Tel: +91 33 44034066
Reliance Humsafar, 4th FloorFax: +91 33 4403 4199
Road No.11, Banjara Hills
Bangalore Hyderabad - 500 034
Phone: +91 40 66305000/23350060
Pune Fax: + 91 40 6630 5299
Solitaire, 139/26, 3rd Floor,
Inner Ring Road, Kolkata 703, Godrej_Castlemaine
Kormangala, KPMG Infinity Benchmark Bund Garden
Bangalore 560071 Plot No. G-1, 10th floor Block - EP411001
Pune & GP,
Tel: +91 80 3980 6000 Sector – V, Salt Lake City Tel: +91 20 305 85764/65
Kolkata - 700091 Fax: +91 20 305 85775
Fax: +91 80 3980 6999
Phone: +91 33 4403 4000 Fax: +91 33 4403 4199

Mumbai
Hyderabad Kochi
KPMG House, Kamala Mills Compound, 448 Senapati Bapat Marg
Lower Parel, Mumbai 400 013
8-2-618/2 4/F, Palal Towers M.G.Road,
Phone: +91 22 39896000 Fax: + 91 22 39836000
Ravipuram,
Reliance Humsafar,
4th Floor Kochi 682 016
Pune Tel: +91 484 302 7000
Road No. 11, Banjara Hills
703, 7th Floor Godrej Castlemaine, Next to Ruby Hall Clinic,
Hyderabad 500 034 Fax: +91 484 302 7001
Bund Garden Road, Pune 411001
Tel: +91 40 6630 5000
Phone: +91 20 30585764/65 Fax: +91 20 3058 5775
Fax: +91 40 6630 5299

Theinformationcontainedhereinisofageneralnatureandisnotintendedtoaddress © 2011 KPMG, an Indian Partnership and a member firm

the circumstances of any particular individual or entity. Although we endeavour to of the KPMG network of independent member firms
provide accurate and timely information, there can be no guarantee that such
affiliated with KPMG International Cooperative (“KPMG
information is accurate as of the date it is received or that it will continue to be
accurate in the future. No one should act on such information without appropriate International”),aSwissentity.Allrightsreserved.
professionaladviceafterathoroughexaminationoftheparticularsituation.
©2011KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwith
KPMGInternationalCooperative(“KPMGInternational”),aSwissentity.Allrightsreserved. 4