TMI Blog1987 (1) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... ise the adventurous and precarious character of these businesses Urgent action appears to be called for to protect the public. While on the one hand these schemes encourage two vices affecting public economy, the desire to make quick and easy money and the habit of excessive and wasteful consumer spending, on the other hand the investors who generally belong to the gullible and less affluent classes have no security whatsoever. Action appears imperative. - Civil Appeal Nos. 3562 & 3563 of 1986 - - - Dated:- 22-1-1987 - REDDY, O. CHINNAPPA AND KHALID, V., JJ. JUDGMENT: KHALID, J. I agree with my learned brother in his conclusion. However, I would like to add that short post-script of my own. In the main Judgment the sinister aspects of the Peerless scheme have been brought out in great detail as well as the improvements attempted. What disturbed me most was the plight of the innumerable subscribers who lose their money by the operation of the scheme under consideration. When I say this, I feel concerned of those situated far and wide in the remote villages of the country, uninitiated into the mysteries of financial schemes, who are lured by the promises of easy money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons made by my learned brother regarding some of the aspects of the Life Insurance Corporation schemes. I wish only to emphasise that the L.I.C. should at least in future be liberal and generous when claims are made by those unfortunate few, who when robbed of their bread earners claim for the insured amount and who are invariably met on technical pleas, of concealment of ailment and the like. The Life Insurance Corporation does not come out with glory when some of its dealings are considered. I do not think it would be proper to make more harsh reference about the Life Insurance Corporation when it is not a party before us. 1 felt it necessary to make these observations, with utmost restraint, since an opportunity afforded itself in this case. I share my brother's concern about the mushroom growth of financial companies all over the country. Such companies have proliferated. The victims of the schemes, that are attractively put forward in public media, are mostly middle class and lower middle class people. Instances are legion where such needy people have been reduced penniless because of the fraud played by such financial vultures. It is necessary for the authorities to evolve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of the scheme is the remarkably low yield to the subscriber on his investment. In the example that we gave we said a subscriber investing Rs.77 every year for ten years will get, at the end of the tenth year, a return of Rs. 1000 by way of 'Endowment Sum' and Rs. 100 as bonus. Treating the total sum of Rs. 1,100 as the amount which the investor gets back on his ten-year annual investment of Rs.77, the yield on his investment works out at compound interest of about 6% or simple interest of a little over 7%. This is on the assumption that he does not commit default but pays his annual subscription regularly. But consider what happens to the investments of those who commit default; a subscriber who defaults in payment of annual subscription after payment of the first subscription, forfeits the subscription previously paid by him. A subscriber who pays the first two subscriptions but commits default thereafter is entitled to have a refund of the subscriptions paid by him but only at the end of the full endowment period. That is to say, the amount invested by the subscriber up to the time of default will be with the company, earning interest for the company but nothing for the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents, special agents, sub-organizers, organizers, special organizers and so on. This field staff appears to be chosen for their social, political or official connections. What is of significance is that an agent's commission is 30% of the first year's subscription and 5% only of subsequent years' subscriptions. Straightaway, this offers an incentive to the agents to concentrate on securing fresh business and a disincentive to collect subscriptions of subsequent years. It is common experience and common knowledge that most rural folk particularly those belonging to the poorer sections of people will not pay ,their subscription regularly unless somebody takes the trouble of collecting their subscriptions from them showing the same enthusiasm in doing so as was shown in enrolling subscribers and collecting the first subscription. The incentive of 30% of the collection of the subscription of the first year automatically operates as a disincentive for collecting subscriptions of subsequent years. The results show it and perhaps it is intended to be so. As we have already seen, default after the payment of the first subscription results in forfeiture of the first year's subscription. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ositors and the incentives offered to agents for securing fresh business, neglect and default of renewal subscriptions is an inevitable result. The agents are interested in securing fresh business because of the High rate of commission in regard to fresh business and are loath to waste their time on collecting subsequent years' subscriptions fetching far less commission. We are told that the terms of the scheme have now been revised and the forfeiture clause has been altogether deleted with the result that even a subscriber who commits default after the first year's subscription becomes entitled to get a refund of the amount at the end of the endowment period. While this may be an improvement on the original scheme, we find that agents are even now entitled to a commission of 35% of the first year's subscription. This continued incentive for fresh business will naturally lead to the same result as before, that is, it will encourage agreements to continue to concentrate on collecting first year's subscriptions to the total neglect of subsequent years' subscriptions. At this point we may refer to one of the schemes marketed by the Life Insurance Corporation of India which appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owment scheme of the Peerless Company. We are told that the scheme is primarily devised to enable the subscribers to get tax-benefits under various fiscal enactments. Whatever it is, it is certainly not intended to tap the savings of the rural poor nor is it designed to benefit them. In fact, we find on an examination of some of the Life Assurance Schemes, which we were invited to do by the learned counsel, that the terms of the policies are heavily loaded against the poorer policy holders. The Manual for Agents describes the Endowment Assurance Policy (Tables 11, 14, 47 and 48) as the most popular form of Life Assurance as it is supposed to make 'provision for the family of the Life Assured in the event of his early death' and also 'assures a lump sum at any desired age'. Now, under this Policy, if payment of the annual premium ceases after at least three years' premiums have been paid, a free paid up Policy for an amount bearing the same proportion to the sum assured as the number of premiums actually paid bears to the total number stipulated in the Policy, will be automatically secured. The amount, of course, will be payable at the end of the Endowment period only. What is impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncentives to agents appear to be for securing fresh business and not for continuing old policies. We cannot help but feel distressed that despite Arts. 38, 39, 41 and 43 of the Constitution, the Life Insurance Corporation of India, an instrumentality of the State, which is given the monopoly of Life Insurance business in the country has taken no steps to offer proper security and protection to the needy, poor, rural folk. If the Life Insurance Corporation is really interested in treating the poorer Policy-holders less harshly and more liberally the time has come for the Life Insurance Corporation to revise its terms and conditions and to think in the direction of deleting the forfeiture clause altogether as has now been done by the Peerless Company or to delete it at least from policies for small amounts. Perhaps the Life Insurance Corporation may think of short term, small amount policies with no forfeiture clause and with some incentive such as a reduced premium for continuing to pay premiums regularly. We are sure that with the management expertise at its command the Life Insurance Corporation of India can devise a myriad ways of serving the poorer sections of the people of ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me called, monies in lumpsum or otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person; but does not include any institution, which: (i) is an industrial concern as defined in clause(c) of section 2 of the Industrial Development Bank of India Act, 1964, or (ii) carries on as its principal business :-- (a) agricultural operations; or (b) the purchase or sale of any goods (other than securities) or the providing of any services; or (c) the purchase, construction or sale of immovable property, so, however, that no portion of the income of the. institution is derived from the financing of purchases, constructions or sales of immovable property by other persons; (d) "firm" means a firm as defined in the Indian Partnership Act, 1932; (e) "non-banking institution" means a company, corporation, (or co-operative society)" Section 451(e) defines 'Non-Banking Institution' as meaning 'a company, corporation, or co-operative society'. Section 45K empowers the Reserve Bank to col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill the drawal of prize have been paid; he will then be exempted from further liability to pay. On the contrary the majority of the members may not have got the prize when the scheme closes though they get back their total contributions without any deduction or its equivalent in the shape of an article. This is a scheme which is nothing short of a lottery which is an offence punishable under Section 294-A of the Indian Penal Code. The name 'Chit Fund' is rather a misnomer in this case. (c) Business Chits In this case, there is a promoter called foreman who enrols a number of subscribers and draws up the terms and conditions of the scheme in the form of an agreement. Every subscriber has to pay his subscription in regular installments. The foreman charges, for his service, a commission on which there is a ceiling fixed by law in some States. He also reserves the right to take the entire chit amount at the first or second installment as prize. Depending on the terms of agreement, a fixed amount is also some times set aside for distribution among the non-prized members. After making provision for the above deductions the balance is put to auction (except at the last installment) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in any other capacity, monies in one lump sum or in installments by way of contributions, or subscriptions or by sale of units, certificates or other instruments or in any other manner or as membership fees or admission fees or service charges to or in respect of any savings, mutual benefit, thrift, or any other scheme or arrangement by whatever name called, and utilising the monies so collected or any part thereof or the income accruing from investment or other use of such monies for all or any of the following purposes (a) giving or awarding periodically or otherwise to a specified number of subscribers as determined by lot, draw or in any other manner, prizes or gifts in cash or in kind, whether or not the recipients of the prize or gift is under a liability to make any further payment in respect of such scheme or arrangement; (b) refunding to the subscribers or such of them as have not won any prize or gift,, the whole or part of the subscriptions, contributions, or other monies collected, with or without any bonus, premium, interest or other advantage, howsoever called, on the termination of the scheme or arrangement, or, on or after the expiry of the period stipulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laining the nature of their business and claiming that their business was outside the scope of the directions issued by the Reserve Bank. Most important of all, it was requested that, if it was thought that their business attracted the notification, they should be granted exemption from the applicability of the notification as provided by paragraph 13. It was pointed out that their business was of a special type, that it was carried on scientific lines and actuarial principles and that the applicability of the notification would injuriously affect two hundred thousands of subscribers that 20,000 persons would lose employment and that the potential for future employment would be destroyed. It was further pointed out that over 90% of the concerned Public Fund was invested in Government securities and in Nationalised Banks. The Balance-sheet of the company, its brochure and a copy of its advertisement were enclosed. The Reserve Bank of India by their order dated December 3, 1973 exempted the company from the provisions of paragraph 4 of the notification in so far as those provisions restricted the acceptance of subscriptions under the schemes up to 25% of the paid-up capital and free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was noticed that while the paid-up capital and reserves of Peerless amounted at that time to Rs.2.33 lakhs and its investment in Government securities and fixed deposits amounted to Rs.105.38 lakhs its deposit liabilities amounted to Rs. 114.76 lakhs. This position was considered satisfactory by the Reserve Bank. It was finally stated "having regard to the satisfactory financial position of the Peerless and the fact that it was a well established one and having regard to the certificate furnished by the actuarial consultant of the Peerless supported by data. It was granted exemption from the provisions of paragraph 4 of the 1973 Directions subject to its compliance with the following conditions." After setting out the conditions it was stated that Peerless had been complying with the conditions and that its financial position continued to be satisfactory. We should mention here that whatever vices there may be in the Peerless Scheme and the business methods of Peerless, the financial position of Peerless, on the basis of the criteria mentioned in the affidavit of the Reserve Bank in the Favourire Bank, is far sounder now than then. In 1974, a Study Group headed by Dr. J .S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "6.3 Companies conducting the above types of schemes are comparatively of a recent origin and of late, there has been a mushroom growth of such companies which are doing brisk business in several parts of the country, especially in big cities like Ahmedabad, Bangalore, Bombay, Calcutta and Delhi. They have also established branches in various States. These companies float schemes for collecting money from the public and the modus operandi of such schemes is generally as described below: The company acts as the foreman or promoter and collects subscriptions in one lump sum or by monthly installments spread over a specified period from the subscribers to the schemes. Periodically, the numbers allotted to members holding the tickets or units are put to a draw and the number holding the lucky ticket gets the price either in cash or in the form of an article of utility, such as a motor car, scooter, etc. Once a person gets the prize, he is very often not required to pay further installments and his name is deleted from further draws. The schemes usually provide for the return of subscriptions paid by the members with or without an additional sum by way of bonus or premium at the end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advantage. We are, therefore, of the view that the conduct of prize chits or benefit schemes by whatever name called should be totally banned in the larger interests of the public and that suitable legislative measures should be taken for the purpose if the provisions of the existing enactments are considered inadequate. Companies conducting prize chits, benefits schemes, etc., may be allowed a period of three years which may be extended by one more year to wind up their business in respect of such schemes and/or switch over to any other type of business permissible under the law." Finally, in paragraph 6.21 the study Group made its recommendation for a total ban on the conduct of prize chits. If paragraph 6.21 is read along with paragraph 6.3 ofthe Report we must take it that the recommendation of the Committee was that prize chits of the kind described by them in paragraph 6.3 should be banned, respective of the name under which they were conducted. Simple Recurring Deposit Schemes were not contemplated. Thereafter, as a follow-up of the recommendations of the Raj Committee, in 1977 two sets of directions were issued by the Reserve Bank, called the Miscellaneous Non-Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Sec. 45. 1 c. Clauses (v) and (vi) which are relevant to the following effect: "Financial Institution' means any non-banking institution which carries on as its business or part of its business any of the following activities, namely:- (v) managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuris as defined in any law which is for the time being in force in any State, or any business, which is similar thereto; (vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lump sum or Otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person." It was suggested by the learned Counsel for the Reserve Bank that whether Peerless Company was a miscellaneous Non-Banking Company within the meaning of the expression as defined in the Miscellaneous Non-Banking Companies (Reserve Bank Directions, 1973) or a 'financial institution' which was not such a miscellaneous banking company, undoubtedly, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s collected, with or without any bonus, premium, interest or other advantage by whatever name called, on the termination of the scheme or arrangement, or on or after the expiry of the period stipulated therein, but does not include a conventional chit;" The primary question in the present case is whether the Endowment Scheme piloted by the Company falls within the definition of prize chit? Section 3 bans prize chit and money circulation schemes and is in the following terms: "No person shall promote or conduct any prize chit or money circulation scheme, or enrol as a member to any such chit or scheme, or participate in it otherwise, or receive or remit any money in pursuance of such chit or scheme It is important to notice here that the ban is not merely on promoting or conducting any prize chit or money circulation scheme but also on participation in the scheme. Section 4 makes a contravention of the provisions of Section 3 punishable with imprisonment for a term which may extend to three years or with fine which may extend to five thousand rupees, or with both. Section 5 makes printing, publishing of any ticket, coupon or other document for use in the prize chit or money c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n with the Reserve Bank may approve the winding up plan furnished by the person conducting the scheme with or without modifications or reject the same. Section 13 empowers the State Government to make rules for the purpose of carrying out the provisions of the Act. The Government of West Bengal has made the Prize Chits and Money Circulation Schemes (Banning) (West Bengal) Rules, 1979 in exercise of its powers under Section 13 of the Act. The Miscellaneous Non-Banking Companies (Reserve Bank) Directions 1977 and the Non-Banking Financial Companies (Reserve Bank) Directions came into force on July 1, 1977. On March 3, 1978 the Reserve Bank informed the Peerless Company that under the Miscellaneous Non-Banking Companies Directions which applied to the Company, the Company was prohibited from accepting deposits for more than 36 months and since the deposits accepted by the Company were for periods exceeding 36 months, the Reserve Bank wanted to know what action the Company proposed to take to comply with the requirement stipulating the maximum period for which deposits might be accepted. In reply, the Company, by its letter dated 31st March, 1978 pointed out the special features of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to which we have made a reference above. By this letter the Reserve Bank pointed out to the Company that the schemes conducted by the Company were covered by the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 which had come into force with effect from December 12, 1978. As the Company was banned from doing fresh business and was required to wind up its existing business under the Act, there was no question of granting any exemption to the company. Nevertheless the Reserve Bank stated that they had considered the claim for exemption on merits and found that it was necessary to cancel the exemption already granted. The reasons for the proposed cancellation were set out and the Company was asked to show cause why the exemption should not be cancelled. On August 30, 1979 the Company replied at great length stating how necessary it was in the public interest to grant exemption to the Company. Exemption was, however, refused by the Reserve Bank on March 19, 1980. On August 10, 1979 the Government of West Bengal addressed a communication to the Peerless Company pointed out that the Prize Chits/Money Circulation Schemes conducted by the Company came within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exemption sought. It appears that the Company has filed another writ petition in the Calcutta High Court against the refusal of the Reserve Bank of India to grant exemption. In view of the pendency of the writ petition in the Calcutta High Court we do not desire to say anything on the merits of the claim of the Company for exemption or on the question whether the Company is a financial institution within the meaning of paragraph 11 of the Non-Banking Financial Companies (Reserve Bank) Directions. We leave that question open as we consider that the appeals preferred by the Reserve Bank of India, the Union of India and the State of West Bengal may be decided without expressing any opinion on the question. Appeals preferred by the Company are disposed of with these observations. The question for our consideration is, "Is the Endowment Scheme of the Peerless Company a prize chit within the meaning of Section 2(e) of the Prize Chits and Money Circulation Schemes (Banning) Act?" The particulars of the scheme are not in dispute. What is its nature? It is not a gambling scheme. It is not a lottery scheme. There are no prizes, no gifts, no elements of chance. It is just a plain Rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalised and the Company would raise no protest. According to him the closure of the business of the company will result in throwing out of employment tons of thousands of employees and putting in jeopardy the small savings of millions of little Depositors. We must add here that both sides talked of the public interest and shed copious tears for the 'unfortunate depositors' but neither side appeared to have any ready plan or even a contingent plan to protect or benefit the depositors. On the one hand, there is a demand for the retributive pound of flesh, unmindful of the future of thousands of employees and the fate of the small savings of millions of depositors, all in the name of the interest of the depositors. On the other, having bled the depositors white there is now a glib and make-believe offer of submission to strict regulation or even nationalisation for the protection, it seems, of employees and depositors. In the ultimate analysis the question turns on the interpretation of the definition of 'Prize Chit' in s.2(e) of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. On this, we are not without guidance. We have it in Srinivasa Enterprise v. Union of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wake and protect the vulnerable sector. Another weighty factor which has alerted the state into action is that the flood of funds flowing through prize chits benefit the organisers of such schemes who have no social responsibility for national productivity and in their hands is easy money with little developmental benefits or attractive returns for the poor investors. "The noxious net cast by the prize chit promoters was large and the State moved to stop this menace. Many a little makes a mickle, and those small sums collected from a substantial number of subscribers accumulated into huge resources which otherwise would ordinarily have been available for national development. The grim picture of the luckless may who were losing their money, appetized by gambling prospects, and the sterlisation of people's resources which were siphoned off by private adventurists through prize chits to the detriment of national development ignited the impugned legislation." The Court identified the vice sought to be prevented by the Banning Act as the glitter of glamorous prizes, the lure of big money for small. What it sought to prevent was the exploitation of the ignorant poor by the glare of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the prize element it would be no different from a C onventional Chit, considered harmless by the Parliament. We must notice here that in a 'Conventional Chit' as defined in the Act, though every subscriber is entitled to the prize amount, some get it sooner than the others depending on the result of the auction or the draw and to the extent and it depends on a draw there is a slight element of chance. In the Recurring Deposit Schemes such as the ones we are concerned with, even that element of chance is lacking. If 'Conventional Chits' are not banned, it is a legitimate question to ask whether Parliament could have contemplated the banning of schemes not involving the element of the kind of harm intended to be prevented, even to the slight degree as in Conventional Chits? Much argument was advanced on the significance of the word 'includes' and what an inclusive definition implies. Both sides relied on Dilworth's case. Both sides read out the well known passage in that case where it was stated, "The word "include" is very generally used in interpreta-, tion clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the amount of subscriptions (Vide Para 6.3 of the report of the Raj Study Group). It was recommended that prize chit and the like by whatever name called should be banned. Since prize chits were called differently, 'prize chits', 'benefit/savings schemes', 'lucky draws', etc. it became necessary for the Parliament to resort to an inclusive definitions so as to bring in all transactions or arrangements containing these two elements. We do not think that in defining the expression 'Prize Chit', the Parliament intended to depart from the meaning which the expression had come to acquire in the world of finance, the meaning which the Datta and the Raj Study Groups had given it. That this is the only permissible interpretation will also be further evident from the text Chit and the context as we shall presently see. Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. Wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rshadowed by the 'certain' element. If so, why should any construction be placed on the definition so as to bring in all Recurring Deposit Schemes, even if they do not involve a chance element? Such a construction would reduce the definition to a near absurdity and render the reference to the giving or awarding of a prize or gift, a meaningless superfluity. If a conventional chit is not a 'prize chit' by definition, there appears to be no logic in construing the definition to include a Recurring Deposit Scheme. The argument is that the two clauses (i) and (ii) are to be read disjunctively and that they should not be read as if they are joined by the conjunction 'and'. We do not agree. There is no need to introduce the word 'or' either. How clauses (i) and (ii) of s.2(e) have to be read depends on the context. The context requires the definition to be read as if both clauses have to be satisfied. There is nothing in the text which makes it imperative that it be read otherwise. The learned counsel urges that the expression "all or any of the following purposes" indicates that the purpose may be either the one mentioned in (i) or the one mentioned in (ii). We do not agree with this su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions are far too draconian to be applied to schemes which are but Recurring Deposit Schemes. However we look at it, we arrive at the conclusion that s.2(e) does not contemplate a scheme without a prize and, therefore, the Endowment Certificate Scheme of the Peerless Company is outside the Prize Chits and Money Circulation Schemes (Banning) Act. The conclusion appears to us to be irresistable. The appeals filed by the Reserve Bank of India, the Union of India and the State of West Bangal are accordingly dismissed. It is open to them to take such steps as are open to them in law to regulate schemes such as those run by the Peerless Company to prevent exploitation of ignorant subscribers. Care must also be taken to protect the thousands of employees. We must also record our dissatisfaction with some of the schemes of the Life Insurance Corporation which appear to us to be even less advantageous to the subscribers than the Peerless Scheme. We suggest that there should be a complete ban on forfeiture clauses in all savings schemes, including Life Insurance Policies, since these clauses hit hardest the classes of people who need security and protection most. We have explained this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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