2019 (8) TMI 1038 - HC - Companies Law

Financial Establishment or not - National Spot Exchange Limited (NSEL) - whether the NSEL is a financial establishment within the meaning of Section 2(d) of MPID Act? - HELD THAT - The NSEL has not accepted any deposit and if it has not accepted any deposit then it would not fall within the definition of financial establishment . The NSEL has received money from the buyers at T 2 date and it was immediately paid to the sellers at T 2 date. However on T 25 date the parties who were sellers on T 2 date and who were under obligation to make payment on T 25 date failed to do so and it is not the NSEL but the sellers who receive the money from the buyers on T 2 date with an underlying obligation to make the payment of T 25 date but failed to do so and therefore at the most they could be referred to as financial establishment . The petitioner has admitted that the amount used to come to NSEL to be paid to the respective traders on the T 25 settlement date and the NSEL was entitled to charge its transaction charges. This would clearly dispel the case of the respondent State that the NSEL was accepting deposit and therefore it was a financial establishment. The clients trading on the NSEL platform did not invest with the NSEL in form of Fixed Deposits equity or debentures of NSEL but they traded commodities on the platform of NSEL. The NSEL has always voiced its stand by stating that it is not a Financial Establishment and in response o the notices issued to it it pin pointed towards the defaulters who are responsible for the loss to the investors and the said contention of the NSEL was found to be substantiated by the audit reports. The NSEL has even instituted recovery suits against the defaulters. Since the investors raised an alarm about the losses caused to them as a knee jerk reaction the NSEL and its promoter came to be proceeded under the provisions of the MPID Act without deliberating on the core issue to be determined as a jurisdictional fact as to whether the entity was a Financial Establishment thereby permitting the authorities to proceed against it under the statue intended to govern Financial Establishments. Thus it can be concluded that the NSEL is not an Financial Establishment within the purview of the Maharashtra Protection of Interests of Depositors in Financial Establishments Act 1999.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment revolve around the following questions:

• Whether the National Spot Exchange Limited (NSEL) qualifies as a "Financial Establishment" under the Maharashtra Protection of Interests of Depositors in Financial Establishments Act, 1999 (MPID Act), and whether it accepted "deposits" as defined under the Act.
• The constitutional validity of Sections 4 and 5 of the MPID Act, particularly concerning their compliance with Articles 14, 19, and 300A of the Constitution of India.
• The legality of the notifications issued under Section 4 of the MPID Act, attaching the properties of the petitioner as a promoter of NSEL.
• Whether the actions taken against the petitioner, including the attachment of properties, were justified under the MPID Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: NSEL as a Financial Establishment and Acceptance of Deposits

• Relevant Legal Framework and Precedents: The MPID Act defines a "Financial Establishment" as any entity accepting deposits under any scheme or arrangement. The term "deposit" includes any receipt of money or acceptance of any valuable commodity to be returned after a specified period, with or without any benefit.
• Court's Interpretation and Reasoning: The Court analyzed the operations of NSEL, which provided an electronic trading platform for commodities, facilitating transactions between buyers and sellers. NSEL did not receive deposits as it merely facilitated trade and did not promise any return on investments.
• Key Evidence and Findings: The Court examined the trading process on NSEL's platform, which involved matched transactions between buyers and sellers through brokers. The transactions were not deposits but trades, with no money or commodity being held by NSEL for return.
• Application of Law to Facts: The Court concluded that NSEL did not accept deposits as defined under the MPID Act. The transactions were akin to those on a stock exchange, involving buying and selling commodities, not deposit-taking.
• Treatment of Competing Arguments: The State argued that NSEL promised fixed returns, thus accepting deposits. However, the Court found no evidence of such promises by NSEL itself, as the yield was a result of trading differences, not an assured return.
• Conclusions: NSEL was not a "Financial Establishment" under the MPID Act, as it did not accept deposits.

Issue 2: Constitutional Validity of Sections 4 and 5 of the MPID Act

• Relevant Legal Framework and Precedents: The challenge was based on alleged violations of Articles 14, 19, and 300A of the Constitution, concerning equality, freedom of trade, and property rights.
• Court's Interpretation and Reasoning: The Court referred to precedents, including the Supreme Court's upholding of similar legislation in other states, emphasizing the Act's purpose to protect depositors.
• Key Evidence and Findings: The Court noted the Act's provisions for attaching properties were intended to prevent diversion of funds and protect depositors, with post-decisional hearings available.
• Application of Law to Facts: The Court found the provisions were not arbitrary or unconstitutional, as they provided a mechanism to address financial frauds effectively.
• Treatment of Competing Arguments: The petitioner argued the provisions were vague and allowed for misuse. The Court disagreed, emphasizing the Act's safeguards and objectives.
• Conclusions: Sections 4 and 5 of the MPID Act were constitutionally valid.

Issue 3: Legality of Notifications Attaching Petitioner's Properties

• Relevant Legal Framework and Precedents: Section 4 of the MPID Act allows for the attachment of properties of financial establishments and their promoters if deposits are not returned.
• Court's Interpretation and Reasoning: The Court found the notifications were based on the erroneous assumption that NSEL was a financial establishment accepting deposits.
• Key Evidence and Findings: The Court noted the audit reports and investigations did not trace any money trail to the petitioner, supporting the argument that the properties should not have been attached.
• Application of Law to Facts: Since NSEL was not a financial establishment, the basis for attaching the petitioner's properties under the MPID Act was invalid.
• Treatment of Competing Arguments: The State argued the attachments were necessary due to NSEL's default. The Court found this argument unfounded as NSEL was not a deposit-taking entity.
• Conclusions: The notifications attaching the petitioner's properties were quashed as they were based on an incorrect premise.

3. SIGNIFICANT HOLDINGS

• The Court held that NSEL was not a "Financial Establishment" under the MPID Act, as it did not accept deposits.
• Sections 4 and 5 of the MPID Act were found to be constitutionally valid, as they provided necessary safeguards and addressed financial frauds effectively.
• The notifications attaching the petitioner's properties were quashed, as they were based on the incorrect assumption that NSEL was a financial establishment.
• The Court emphasized the need for a jurisdictional fact to exist before exercising powers under the MPID Act, which was lacking in this case.