1987 (1) TMI 452 - SC - Companies Law

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? Whether the Endowment Scheme piloted by the Company falls within the definition of prize chit? Whether these companies are not speculative ventures floated to attract unwary and credulous investors and capture their savings? Held that - Appeal dismissed. If the Reserve Bank of India considers the Peerless Company with eight Hundred Crores invested in Government Securities, Fixed Deposits with National Banks etc. unsafe for depositors, one wonders what they have to say about the mushroom non-banking companies which are accepting deposits, promising most unlikely returns and what action is proposed to be taken to protect the investors. It does not require much imagination to realise 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.

Summary

Issues Involved:
1. Plight of subscribers and employees.
2. Applicability of Section 2(e) of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
3. Comparison between Peerless and Life Insurance Corporation (LIC) schemes.
4. Regulation and oversight of financial schemes.
5. Definition and interpretation of "Prize Chit."

Detailed Analysis:

1. Plight of Subscribers and Employees:
The judgment highlights the "plight of the innumerable subscribers" who lose their money due to the Peerless scheme, particularly those in remote villages who are "lured by the promises of easy money." The agents, motivated by high commissions on the first installment, often neglect subsequent collections, leading to lapses in subscriptions. The court acknowledges the efforts by Peerless to reform but expresses concern for the subscribers and the large number of employees employed by the company.

2. Applicability of Section 2(e) of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978:
The court determined that the Peerless scheme does not fall within the definition of "prize chit" under Section 2(e) of the Act. The judgment references previous cases, notably Srinivasa Enterprises and State of West Bengal v. Swapan Kumar Guha, which support this conclusion. The court emphasizes that any attempt to bring Peerless within this definition would fail, as the position is not res-integra but covered by these judgments.

3. Comparison between Peerless and Life Insurance Corporation (LIC) Schemes:
The court compares the Peerless scheme with LIC schemes, noting that Peerless is "less harsh" than LIC. The judgment criticizes LIC for being "heartless" in handling claims and urges LIC to be more "liberal and generous" when dealing with claims from policyholders. The court suggests that LIC should revise its terms to better serve the poorer policyholders, possibly by eliminating forfeiture clauses in small policies.

4. Regulation and Oversight of Financial Schemes:
The court expresses concern about the "mushroom growth of financial companies" and the need for authorities to evolve "fool-proof schemes" to prevent fraud. The judgment highlights the necessity for regulatory bodies like the Reserve Bank of India (RBI) to take action against speculative ventures offering high returns to protect investors. The court calls for urgent measures to address the issue of non-banking companies promising unrealistic returns.

5. Definition and Interpretation of "Prize Chit":
The court delves into the definition of "prize chit" under Section 2(e) of the Act. It emphasizes that the definition includes schemes where money is collected and used for awarding prizes or refunding subscriptions, but not simple recurring deposit schemes. The judgment references the interpretation in Srinivasa Enterprises, which identified the "prize" element as essential to a "prize chit." The court concludes that the Peerless scheme, lacking this element, does not fall within the definition and thus is not subject to the Act's prohibitions.

Conclusion:
The appeals by the Reserve Bank of India, the Union of India, and the State of West Bengal are dismissed. The court suggests that regulatory bodies should take steps to regulate schemes like those run by Peerless to prevent exploitation while protecting employees and depositors. The judgment also calls for a review and potential reform of LIC schemes to better serve the poorer sections of society.