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Supreme upholds the constitutional validity of MPID in Financial Establishment Act

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The Supreme Court has uphold the constitutional validity of provisions Sections 4 and 5 of the Maharashtra Protection of Interest of Depositors in Financial Establishments Act, 1999 (in short ’MPID’) on grounds of legislative competence, when tested against provisions of Part-III of the constitution.

 The three Judges Bench of Justice D.Y. Chandrachud, Justice Surya Kant and Justice Bela M Trivedi while allowing the Maharashtra Government appeal set aside the Bombay High Court judgment passed in favour of 63 Moons Technologies Limited and uphold the notifications issued under section 4 of MPID Act for attaching the properties of 63 Moons Technologies Limited. 

That this Bench made reference of this apex court judgment decided in Bhaskaran (supra) had observed that the MPID Act and the Tamil Nadu Act have minor differences and that the statute did not violate Articles 14, 19(1)(g) or 21 of the Constitution. 

The High Court ought not to have made observations on the merits of the criminal proceedings when the writ petition was restricted to the issue of whether NSEL is a financial establishment for the purpose of the MPID Act, observed by three Judges Bench. 

The bench comprising of Justice Smt. Bharati H Dangre and Justice Ranjit More, Bombay High Court held that National Spot Exchange Limited (NSEL) was not a ‘financial establishment’ since it did not accept any deposits, as defined under the Maharashtra Protection of Interests of Depositors in Financial Establishments Act, 1999 (MPID Act). 

The court held that NSEL was a commodities exchange where commodities were traded between willing buyers and sellers acting through their brokers. The High Court of Bombay had also observed that, “the EOW finding the entire money trail to the defaulters, the State attached properties of 63 Moons, which was not legally sustainable.”

The petition was filed challenging the Constitutional validity of Sections 4 and 5 of the Maharashtra Protection of Interest of Depositors in Financial Establishments Act, 1999 being violative of Article 14, 19 and Article 300A of the Constitution and also to levy of attachment of assets of the company by 6 notifications issued by the state by invoking the powers conferred on the authority under the said enactment. 

A Full Bench of the Bombay High Court had held that the state legislature did not possess the legislative competence to enact the MPID Act. 

NSEL was charged with violation of terms and conditions of the Exemption Notification dated 5th June 2007 since complaints were received from a number of depositors against NSEL and it was alleged that as a Financial Establishment it had collected money by promising attractive returns to depositors, but there was a failure to return depositors but there was a failure to return the deposits when the time for repayment came.

In 2014, a FIR came to be registered under Section 120B read with Sections 409, 465, 467, 471, 474 and 477(A) of the IPC wherein it was alleged that by unilaterally closing down the Exchange, the NSEL defaulted in repayment of approximately Rs 5600 crore which was due to be paid to approx. 13,000 investors. Since NSEL did not have sufficient money or property to return the deposit or make payment of interest or render services against which the deposits were received in terms of Section 4 of MPID Act, 1999, thus, the petitioners were held liable to attach the properties.

Economic Offences Wing of Mumbai Police (EOW) who was subsequently investigating, had filed three charge sheets but not a single rupee has been traced by money trail to the petitioner as a promoter not the petitioner was named as an accused.

The Bombay High Court relied on Carona Limited Vs. M/s. Parvathy Swaminathan and Sons had concluded that the NSEL is not a Financial Establishment and resultantly, the petitioner who is a promoter of the said establishment cannot proceed under the provisions of MPID Act. Resultantly, we are constrained to quash and set aside the action to which the petitioner is subjected to by taking recourse to the provisions of MPID Act.

BACKGROUND OF THE CASE – 

NSEL is a company incorporated under the Companies Act 1956, and is a wholly owned subsidiary of Financial Technologies (India) Limited, which is now known as 63 Moons Technologies Limited. 

The Union of India issued a notification dated 5 June 2007, under Section 27 of the Forward Contracts (Regulation) Act 1952 exempting forward contracts of one-day duration for sale and purchase of commodities traded on NSEL from the application of the provisions of the enactment. NSEL started operating as an exchange for spot trading in commodities. It further paired contracts. 

Further the Department of Consumer Affairs issued SCN to NSEL as to why action should not be taken against it for permitting transactions in violation of exemption notification on 27th April 2012. 

Pankaj Ramnaresh Saraf, a Director of Vostak Far East Securities Pvt. Ltd., a company involved in the business of investment, trading, and financing filed a complaint on 30 September 2013 against the directors and persons holding key management posts in NSEL, 25 borrowers/trading members and some brokers of NSEL for offences under Sections 120B, 409, 465, 468,471,474 and 477A of the Indian Penal Code 1860. 

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