In 1987, the Supreme Court, in the Reserve Bank of India vs Peerless Co case, asked the government the action that it was taking against the "mushroom growth of finance and investment companies" offering staggeringly high rate of interest, like 30 per cent in six months. Analysing a scheme, the judges said the investor was always on the losing end - "perfect case of heads I win, tails you lose". They also wondered whether the weaker sections were not being made to pay the more affluent sections - "robbing Peter to pay Paul?". The Securities and Exchange Board of India (Sebi) was set up soon after this case.
However, the tribe of those who lure the ingenuous has not shrunk. There are promises to rear emus, goats and teak wood on behalf of investors in distant places. Such schemes invariably end up in courts. There was once a unique spectacle of the West Bengal government moving a public interest petition against the Union, peeved by the proliferation of "residuary non-banking companies" and the devastation they cause to small investors.
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Some cases like the Sanchayani Investments Ltd have practically come to a close in the Supreme Court after dragging on for years. There are new instances. Last year, the Supreme Court stated in the Sahara Real Estate case that "economic offences in India like the one committed by Saharas must be treated with an iron hand, or else we may land in another security market pandemonium".
A similar case was decided by the Supreme Court last month in PGF Ltd vs Union of India. Narrating the facts, the judges decided that the firm "should be mulcted with exemplary costs" - asking it to pay Rs 50 lakh to the court's legal services committee. Quoting Mahatma Gandhi, they said: "Earth provides enough to satisfy every man's need, but not every man's greed." Again, Tagore: "The greed of gain has no time or limit to its capaciousness. Its only object is to produce and consume."
The firm was selling parcels of land and promising to develop them so that they appreciated attractively. The investors were supposed to gain manifold by the value addition. However, Sebi found that the scheme was not above board. When the regulator objected to the scheme, the firm moved the Punjab and Haryana High Court, where it received a stinging judgment in 2004. Nearly 10 years later, it was the turn of the Supreme Court to review the scheme and pass even more stringent orders. It asked Sebi, the Central Bureau of Investigation and the Income-Tax Department to investigate the case and take appropriate civil and criminal steps against the firm, its directors and officers.
One of the reasons such cases take so long to conclude is the technical and constitutional issues raised by companies. This judgment is notable for expatiating on the common delaying tactics (or what they don't teach you in law schools). One method is to challenge the constitutionality of the law itself. By this crass "abuse of process", litigation is prolonged. It enables "such unscrupulous elements who always thrive on other people's money... to gain unlawful enrichment to the disadvantage of innocent victims," the judgment said.
The seventh schedule of the Constitution is a gold mine for pettifoggers. The schedule has three lists of powers allotted to the Union, the states and one concurrent list. None of the lists is comprehensive, and many of them are overlapping. Therefore, the staple argument put forward by those who gain by delays is that the Union or the state has no "competence" to pass the law. This argument is heard regularly in courts when liquor barons and miners lose their licences.
In this case, the challenge was to the constitutionality of the Sebi Act. It was argued that agricultural activity was a state subject, and Sebi could not interfere since the firm was involved in developing land for the benefit of investors. The court rejected this contention with detailed reasons. Not only that, the court laid down certain guidelines to bar such wasteful and frivolous arguments.
Among the guidelines, the court said such a constitutional challenge should be tested for its bona fides, and the principle of "lifting the veil" should be applied. The court should also note whether the challenge was made at the earliest point of time when the law was passed, or was it raised after a long time gap to avoid or delay legal consequences. These and other directives, if followed by the high courts, will cut short tedious proceedings and boost revenues.