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

Issues Involved:
1. Whether National Spot Exchange Limited (NSEL) is a Financial Establishment under the Maharashtra Protection of Interests of Depositors in Financial Establishments Act, 1999 (MPID Act).
2. The Constitutional validity of Sections 4 and 5 of the MPID Act.
3. The legality of the attachment of the petitioner's properties under the MPID Act.

Detailed Analysis:

1. Whether NSEL is a Financial Establishment under the MPID Act:
The court examined the nature of transactions conducted by NSEL, which provided an electronic platform for trading commodities. It was determined that NSEL did not accept deposits but facilitated transactions between buyers and sellers. The court noted that the transactions involved immediate pay-ins and pay-outs through a clearing house, and NSEL charged transaction fees. The court concluded that NSEL did not accept deposits within the meaning of Section 2(c) of the MPID Act, which requires a promise to return money or a valuable commodity with or without any benefit. Therefore, NSEL cannot be classified as a Financial Establishment under Section 2(d) of the MPID Act.

2. The Constitutional validity of Sections 4 and 5 of the MPID Act:
The petitioner challenged the constitutional validity of Sections 4 and 5 of the MPID Act, arguing that these provisions violate Articles 14, 19, and 300A of the Constitution. The court referred to previous judgments, including the Supreme Court's decision in K.K. Baskaran v. State, which upheld similar provisions in the Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997. The court noted that the MPID Act's provisions are similar to those upheld in K.K. Baskaran and found no reason to declare them unconstitutional. The court emphasized that the Act aims to protect depositors from fraudulent financial establishments and provides a mechanism for the attachment of properties to secure the repayment of deposits.

3. The legality of the attachment of the petitioner's properties under the MPID Act:
The court examined the notifications issued by the State Government attaching the petitioner's properties. It was noted that the attachment was based on the assumption that NSEL was a Financial Establishment and had accepted deposits. Since the court concluded that NSEL is not a Financial Establishment, the basis for the attachment of the petitioner's properties was found to be erroneous. The court also considered the petitioner's argument that the attached properties were in excess of the defaulted amount. The court had previously stayed the notifications on this ground, noting that the properties attached were worth more than the alleged defaulted amount of ?5600 crore.

Conclusion:
The court quashed the impugned notifications attaching the petitioner's properties, concluding that NSEL is not a Financial Establishment under the MPID Act. The court did not find it necessary to address the constitutional challenge to Sections 4 and 5 of the MPID Act, as the primary issue was resolved in favor of the petitioner. The court emphasized the need for a jurisdictional fact to exist before assuming jurisdiction under the MPID Act and found that this requirement was not met in the present case. The court's decision was based on a detailed analysis of the nature of transactions conducted by NSEL and the provisions of the MPID Act.