2022 (2) TMI 1348 - SC - Indian Laws

Validity of notifications attaching the property of the respondent under Section 4 of the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act 1999 (MPID Act) - forward contacts of one-day duration for sale and purchase of commodities traded on NSEL - respondent holds 99.99% of the shareholding of National Spot Exchange Ltd (NSEL) - NSEL is a financial establishment or not? Whether NSEL is a financial establishment within the meaning of Section 2(d)? - HELD THAT - Financial Establishment is defined as any person accepting a deposit . The definition excludes from its purview (a) a corporation or cooperative society controlled or owned either by the State or the Central Government; and (b) a Banking Company as defined under Section 5(c) of the Banking Regulation Act 1949. Since NSEL does not fall within any of the exceptions it would be a financial establishment for the purposes of the Act if it is a person accepting deposit . Having referred to the relevant bye-laws we shall determine if NSEL receives deposits as defined by Section 2(c) of the MPID Act. The bye-laws elucidate that NSEL receives both money and commodities from trading members. In order to decide if these receipts by NSEL could be regarded as deposits the test of return will have to be satisfied. The test is that the return be in cash kind or service. It is not necessary that the return should be with the benefit of interest bonus or profit. Therefore if the financial establishment is obligated to return the deposit without any increments it shall still fall within the purview of Section 2(c) of the MPID Act provided that the deposit does not fall within any of the exceptions. The exception of relevance to our case is clause (v) which states that amounts received in the ordinary course of business by way of (a) security deposit; (b) dealership deposit; (c) earnest money; and (d) advance against order for goods or services shall be excluded from the purview of the term deposit . The validity of the MPID Act was specifically dealt with in two decisions of this Court in State of Maharashtra v. Vijay C. Puljal 2005 (9) TMI 303 - HIGH COURT OF BOMBAY and SONAL HEMANT JOSHI AND ORS. VERSUS STATE OF MAHARASHTRA AND ORS. 2011 (5) TMI 1099 - SUPREME COURT . In both the decisions this Court upheld the constitutional validity of the MPID Act in view of the earlier decision in Bhaskaran 2012 (11) TMI 205 - SUPREME COURT - In Soma Suresh Kumar v. Government of Andhra Pradesh 2013 (9) TMI 1292 - SUPREME COURT a two judge Bench of this Court upheld the provisions of the Andhra Pradesh Protection of Depositors of Financial Establishments Act 1999 following the earlier decisions in Bhaskaran 2012 (11) TMI 205 - SUPREME COURT and New Horizons Sugar Mills Limited 2012 (11) TMI 206 - SUPREME COURT . Having discussed the judgments of this Court on the constitutional validity of the state legislations governing financial establishments offering deposit schemes including the MPID Act there is no reason for us to reopen the question. This Court has held that the MPID Act is constitutionally valid on the grounds of legislative competence and when tested against the provisions of Part III of the Constitution. The High Court observed that the decision of this Court in 63 Moons 2019 (5) TMI 522 - SUPREME COURT does not have any serious effect on the present proceeding though this Court has discussed at length the modus operandi of NSEL in duping the trading members by throwing light on the structure of the exchange. Though it was observed that the question of constitutional validity was settled in Bhaskaran 2012 (11) TMI 205 - SUPREME COURT New Horizons 2012 (11) TMI 206 - SUPREME COURT Sonal Hemant Joshi 2011 (5) TMI 1099 - SUPREME COURT and Vijay Kulijal 2005 (9) TMI 303 - HIGH COURT OF BOMBAY the challenge of the respondent to the constitutional validity of the MPID Act was still kept open by the High Court. Further while referring to the earlier order of the Division Bench dated 1 October 2015 where it was prima facie recorded that NSEL is a financial establishment for the purpose of the MPID Act the High Court observed that it was not bound by the prima facie view. The primary ground for the Division Bench for arriving at a prima facie view was the representations made assuring a 14% to 16% yield. However the High Court in its impugned judgment dispelled the argument on the ground that only a faint reference was made to assured returns. Such an observation misrepresents the factual instances which are backed by documentary material. The appellant also contended that the writ petition filed by the respondent is not maintainable since there was an alternative remedy of raising an objection before the Designated Court under Section 7 of the MPID Act. Though there is merit in the argument of the appellant since the High Court decided on the validity of the impugned attachment notifications on merits and arguments have been addressed in the present proceedings we have proceeded to decide the matter on merits. The impugned notifications issued under Section 4 of the MPID Act attaching the properties of the respondent are valid - Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

(i) Whether the National Spot Exchange Limited (NSEL) qualifies as a "financial establishment" within the meaning of Section 2(d) of the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act).

(ii) Whether the amounts received and commodities accepted by NSEL fall within the definition of "deposit" under Section 2(c) of the MPID Act.

(iii) The validity and scope of attachment notifications issued under Section 4 of the MPID Act against the respondent's properties.

(iv) Whether the MPID Act and its provisions, particularly Sections 4 and 5, are constitutionally valid.

(v) The applicability and effect of the findings in the 63 Moons Technologies judgment on the present case.

(vi) The correctness of the Bombay High Court's judgment quashing the attachment notifications and its interpretation of the MPID Act provisions.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether NSEL is a "financial establishment" under Section 2(d) of the MPID Act

The MPID Act defines "financial establishment" as any person accepting deposits under any scheme or arrangement, excluding government-controlled corporations and banking companies. The Court noted that NSEL, being a company incorporated under the Companies Act and not falling within the exceptions, qualifies as a "person." The primary question was whether NSEL accepted "deposits" as defined under Section 2(c).

The Court referred to Section 2(d) and the inclusive definition of "person" under the General Clauses Act, confirming that a company is included. The Court emphasized the broad and comprehensive legislative intent, reflected in the repeated use of the term "any" in defining both "deposit" and "financial establishment," to cover a wide range of transactions.

Thus, if NSEL accepted deposits within the meaning of Section 2(c), it would be a financial establishment under Section 2(d).

Issue 2: Whether the amounts and commodities received by NSEL constitute "deposit" under Section 2(c)

Section 2(c) defines "deposit" inclusively as any receipt of money or acceptance of any valuable commodity by a financial establishment to be returned after a specified period or otherwise, either in cash, kind, or service, with or without benefit. The definition excludes certain categories such as share capital, security deposits, earnest money, and advances against orders.

The Court examined the operational framework of NSEL, including its bye-laws and trading mechanism. NSEL received margin deposits and maintained a Settlement Guarantee Fund (SGF), which was funded by contributions from members and used to meet settlement obligations, pay insurance premiums, cover losses, and repay members. Although termed a "security deposit," the Court held that the SGF's features extended beyond a mere security deposit and did not fall within the statutory exception.

The Court held that the SGF constituted a deposit under Section 2(c) because NSEL received money from members that was to be returned or used to meet obligations, thus satisfying the "return" element of the definition.

Regarding commodities, the Court observed that members were required to deposit commodities in accredited warehouses and obtain warehouse receipts. NSEL coordinated delivery, issued delivery notes, and provided services related to custody and transfer of commodities. The Court rejected the argument that "valuable commodity" should be restricted to precious metals, holding that agricultural and other commodities traded on NSEL's platform qualified as valuable commodities for the purpose of the Act.

Accordingly, the acceptance and custody of commodities by NSEL, coupled with the obligation to return or deliver them, fell within the definition of "deposit."

The Court further noted that NSEL's representations promising assured returns of 14-16% per annum and the services provided in relation to deposits reinforced the conclusion that deposits were accepted under a scheme or arrangement.

Issue 3: Validity of attachment notifications under Section 4 of the MPID Act

Section 4 empowers the Government to attach properties of a financial establishment or its promoters/directors upon satisfaction that deposits have not been returned or services promised have not been rendered.

The State issued notifications attaching the respondent's properties, who held 99.99% shares in NSEL, due to NSEL's default in repayment to depositors. The High Court quashed these notifications, holding that NSEL was not a financial establishment and that the amounts received were not deposits.

The Supreme Court analyzed the statutory scheme, the broad definitions in the MPID Act, and the operational facts of NSEL. It found that NSEL accepted deposits in money and commodities and failed to return them or provide promised services. The Court also referred to the forensic audit (Grant Thornton report) and the findings of the Economic Offences Wing, which revealed misuse of funds and failure to comply with exchange rules.

Accordingly, the Court held that the attachment notifications under Section 4 were valid and justified to protect depositors' interests.

Issue 4: Constitutional validity of the MPID Act and Sections 4 and 5

The respondents challenged the constitutional validity of the MPID Act provisions, contending they violated Articles 14, 19, and 300-A of the Constitution.

The Court reviewed precedents, including Bhaskaran v. State and New Horizons Sugar Mills Ltd. v. Government of Pondicherry, which upheld similar state legislations enacted to protect depositors from fraudulent financial establishments. It noted that the MPID Act is a salutary measure aimed at remedying a social evil where depositors are duped by unscrupulous entities promising high returns.

The Court rejected the challenge, holding that the MPID Act is constitutionally valid, enacted within the legislative competence of the State, and does not violate fundamental rights.

Issue 5: Applicability of the 63 Moons Technologies judgment

The Court considered the earlier judgment in 63 Moons Technologies Ltd. v. Union of India, which examined the nature of NSEL's operations and the conspiracy involving NSEL and its promoters to defraud investors through paired contracts and non-delivery of commodities.

The 63 Moons judgment held that the paired contracts were financing transactions disguised as commodity trades, that NSEL had violated exchange rules, and that the promoters exercised dominant control leading to fraud. The Court in the present case relied on these findings to conclude that NSEL's operations involved acceptance of deposits and failure to return them or render promised services.

The 63 Moons judgment also set aside an amalgamation order merging NSEL with its holding company on procedural grounds but acknowledged the fraud and default by NSEL and its promoters.

Issue 6: Correctness of the Bombay High Court's judgment

The High Court held that NSEL was merely a trading platform and did not accept deposits since it passed on pay-in amounts to sellers on the same day and did not retain money or commodities. It also held that the mere yield or profit from paired contracts did not amount to deposit and that only defaulting trading members could be financial establishments.

The Supreme Court disagreed with this narrow interpretation, emphasizing the broad and inclusive statutory definitions and the purpose of the MPID Act. It held that the High Court erred in requiring retention of money or commodities by NSEL and in reading the definition of deposit restrictively.

The Court further noted that the High Court's observations on the merits of the criminal proceedings were inappropriate in a writ petition challenging attachment notifications.

3. SIGNIFICANT HOLDINGS

"The expression 'deposit' is conspicuously broad in its width and ambit for it includes, not only any receipt of money but also the acceptance of any valuable commodity by a financial establishment under any scheme or arrangement."

"The repeated use of the expression 'any' by the statute while defining both the above expressions is a clear reflection of the legislative intent to cast the net of the regulatory provisions of the law in a broad and comprehensive manner."

"The Settlement Guarantee Fund though termed as a 'security deposit' in nomenclature, its features do not represent a security deposit as contemplated by the exceptions in Section 2(c) of the MPID Act."

"The acceptance and custody of commodities by NSEL, coupled with the obligation to return or deliver them, falls within the definition of 'deposit' under Section 2(c) of the MPID Act."

"The phrase 'valuable commodity' cannot be restricted to precious metals alone; agricultural and other commodities traded on NSEL's platform are valuable commodities within the meaning of the Act."

"The State Government was justified in issuing the attachment notifications under Section 4 of the MPID Act as NSEL accepted deposits and failed to return them or provide promised services."

"The MPID Act is constitutionally valid and enacted within the legislative competence of the State Legislature to protect the interests of depositors."

"The High Court erred in narrowly construing the definition of 'deposit' and in holding that NSEL did not receive deposits merely because it passed on pay-in amounts to sellers on the same day."

"The findings in 63 Moons Technologies judgment on the modus operandi of NSEL and the conspiracy to defraud investors are relevant and support the conclusion that NSEL accepted deposits under the MPID Act."

"The attachment notifications issued under Section 4 of the MPID Act attaching the respondent's properties are valid and are upheld."