“Karnataka HC: ‘Ordinance Born from Womb of Social Justice’ – Petition Challenging Micro Loan Law Dismissed”
Sanchayita Lahkar
The High Court of Karnataka at Bengaluru has dismissed a petition challenging the constitutional validity of the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025. The Single Bench of Justice M. Nagaprasanna adjudicated that judicial review of the Ordinance is permissible but found that the measure does not suffer from arbitrariness or non-application of mind. The Court recorded that “the Ordinance has taken birth from the womb of social justice” and is “conceived in response to the anguished cries of the vulnerable – farmers, women, workers, marginalized groups”.
The petitioner, a registered association under the Karnataka Societies Registration Act, 1960, comprises motor vehicle and asset financiers engaged in hypothecation, hire purchase, and leasing models in Karnataka. The association approached the Court seeking to declare the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025, unconstitutional, arbitrary, and beyond the legislative competence of the State Government. The petitioner also sought a direction clarifying that motor vehicle and asset financing businesses are outside the Ordinance's purview.
The petitioner, represented by senior counsel, contended that the Ordinance was vague and overbroad, potentially impacting its members. It was submitted that the Ordinance’s provisions, particularly Section 6, which mandates release of securities obtained prior to its promulgation, could adversely affect secured lending operations. The senior counsel argued that “the Ordinance by commanding immediate release of security and prohibiting future collaterization imperils the very life blood of their business.”
Reliance was placed on a Division Bench judgment of the Bombay High Court, where the absence of clear income criteria for defining “vulnerable section” was identified as problematic. The petitioner submitted that the Ordinance lacked precise definitions and threatened to interfere with rights under contract law and other applicable statutes. The counsel further argued that “an ordinance which bears no application of mind becomes manifestly arbitrary and, therefore, it is to be struck down.”
In reply, the respondents, represented by the Advocate General, submitted that the petitioner lacked locus to maintain the petition as the Ordinance concerned only unsecured microfinance transactions aimed at economically vulnerable sections. The Advocate General stated that “the petitioner cannot project that it is aggrieved and it cannot plead for someone else’s grievances.” The respondents asserted that microfinance loans, as defined by Reserve Bank of India (RBI) guidelines, pertained only to unsecured lending to households with an annual income of ₹3 lakh or less, and therefore did not affect asset financiers engaged in hypothecation or secured lending.
The respondents argued that the Ordinance was enacted to protect borrowers from aggressive recovery practices by microfinance entities, which had contributed to multiple suicides among the vulnerable population. The Advocate General further stated that “the impugned Ordinance has been replaced by a legislative enactment now” and requested that the petition be dismissed.
The petitioner raised concern regarding Section 6 of the Ordinance, asserting that the provision directing release of security affected all borrowers indiscriminately, including those involved in the petitioner’s line of business.
Justice M. Nagaprasanna commenced the judgment by addressing whether judicial review of the Ordinance was permissible. The Court referred to decisions in A.K. Roy v. Union of India, Krishna Kumar Singh v. State of Bihar, and Madras Bar Association v. Union of India, noting that “constitutional Courts can exercise judicial review of an Ordinance, to scrutinize whether satisfaction of the Governor in promulgating an Ordinance constitutes fraud or it was actuated by any oblique motive.” The Court observed that such review is limited to cases where there is a “flagrant violation of constitutional provisions” or where a law is “manifestly arbitrary.”
Justice Nagaprasanna then examined the objects and reasons of the Ordinance, noting its intent to “protect the economically vulnerable groups and individuals, especially farmers, women and women’s self-help groups from the undue hardship of usurious interest rates and coercive means of recovery by Micro Finance Institutions or Money Lending Agencies or Organizations.”
The Court examined the Ordinance’s definitions, including that of "borrower," "vulnerable section of the society," and "lender." The Court observed that “borrower would mean an individual or a self-help group or joint liability group or a group of individuals who avail money in the form of loan for any purpose from Micro Finance Institutions.” It was further recorded that “vulnerable section” included farmers, women, agricultural laborers, vendors, construction workers, and other economically disadvantaged persons.
The Court examined Section 6 of the Ordinance, noting that it prohibits microfinance institutions from seeking security and provides that “any security obtained from the borrower, as on the date of Ordinance would stand forthwith released in favour of the borrower.” The Court then considered the RBI circular dated 14.03.2022, which defines microfinance loans as “a collateral free loan given to a household having annual household income up to ₹3,00,000.”
The Court recorded that “the Ordinance aims at protecting the borrowers from excessive interest and harsh recovery measures employed by Micro Finance Institutions and organizations.” The Court noted that “precious lives were lost due to coercive actions and recovery measures.”
Justice Nagaprasanna referenced the Supreme Court decision in Nikesh Tarachand Shah v. Union of India on the concept of “manifest arbitrariness,” observing that “manifest arbitrariness as pointed out by us above would apply to negate legislation as well under Article 14.” The Court recorded that “none of these traits, as held by the Apex Court, are found in the case at hand, to declare the Ordinance to be suffering from manifest arbitrariness.”
The Court held that “the grievance of the petitioner is, on the face of it, imaginary and unacceptable.” It was further recorded that “the Ordinance does not traverse into the realm of secured transactions undertaken by the regulated entities like the petitioner.” The Court stated that “the thread of reasonableness runs through the object of the law.”
Justice Nagaprasanna concluded that “the Ordinance does not suffer from any manifest arbitrariness to declare it to be unconstitutional as is sought by the petitioner.” The Court recorded that “the purport of the Ordinance does not touch upon the business of the petitioner for it to be aggrieved.” The Court held that “the unmistakable inference is, that the thread of reasonableness runs through the object of the law.”
The Court recorded: “The petition wanting in merit should necessarily meet its dismissal. It accordingly meets. The petition stands dismissed.”
It was further recorded: “Consequently, I.A.No.1 of 2025 also stands disposed.”
Advocates Representing the Parties
For the Petitioner: Sri Uday Holla, Senior Advocate, Sri Sanjay H. Sethiya, Advocate
For the Respondents: Sri K. Shashikiran Shetty, Advocate General, Smt. Anishka Vaishnav, Advocate & Sri Shamanth Naik, High Court Government Pleader
Case Title: Karnataka Hire Purchase Association vs. State of Karnataka & Ors.
Case Number: Writ Petition No. 6962 of 2025 (GM – RES)
Bench: Justice M. Nagaprasanna
[Read/Download order]
