‘Govt has power to attach properties of financial cos who dupe investors'

The Supreme Court has said the Government has the power to attach the properties of financial companies who dupe gullible depositors of their money by promising high interest rates, and then disappear even overseas, thereby leaving the depositors and the State Police high and dry.

The court was hearing an appeal against an order by a Full Bench of the Madras High Court that held as constitutionally valid the Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997 (or the Tamil Nadu Act).

The apex court observed that the objective of the Tamil Nadu Act was to ameliorate the situation of thousands of depositors from the clutches of financial establishments which had duped investors by offering high interest rates on deposits and committed deliberate fraud in repayment of the principal and interest after maturity on such deposits.

The Act “rightly” provides for measures for attachment of the properties of the financial establishments as well as mala fide transferees and to bring these properties for sale for realisation of the dues payable to the depositors speedily without dragging them into a legal battle, the court said.

Remedying the situation

“The Tamil Nadu Act is …focused on remedying the situation of the depositors who were deceived by the fraudulent financial establishments,” the apex court Bench comprising Justices Mr Markandeya Katju and Ms Gyan Sudha Mishra said.

“Without the aid of the Act, it would have been impossible to recover their deposits and interest thereon,” the court said.

Financial swindlers only have a lust for easy money and, therefore, have to be dealt with strongly, the court said.

The apex court said as on July 2002, about Rs 1,945 crore was collected from over 19 lakh depositors, who were either poor or middle class persons, retired government servants and pensioners and their dependants, senior citizens or economically backward sections of society.

The deposits were either siphoned off or diverted mala fide by these fraudulent financial establishments, the court said, adding that this constituted an organised systematic white collar crime, jeopardising the public interest.

Bombay HC verdict

Though the appellant cited a Full Bench decision of the Bombay High Court by which a similar Act of Maharashtra — the Maharashtra Protection of Interests of Depositors (in Financial Establishments) Act, 1999 — was held to be unconstitutional.

However, the apex court said the Full Bench of the Madras High Court is correct, while the judgment of the Full Bench of the Bombay High Court is not correct.

The appellant also submitted that the Act is liable to be struck down as the field of legislation is already occupied by legislation of Parliament being the RBI Act, 1934, the Banking Regulation Act, 1949, the Indian Companies Act, 1956 and the Criminal Law Amendment Ordinance, 1944 as made applicable by the Criminal Law (Tamil Nadu Amendment) Act, 1977.

It was also contended that the Tamil Nadu Act was arbitrary and unreasonable and that it violates of the Constitution. But the apex court said none of these submissions have any merit.

The apex court also noted that the ‘financial companies' in the present case had not obtained any licence from the RBI, and hence they are not governed by the RBI Act and the Banking Regulation Act. The court added that activities of these financial companies do not come within the meaning of the term ‘banking' as defined in the Banking Regulation Act or the RBI Act. Due to this, they escaped from public control, the court said.

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