Over three years ago, I wrote in this column about a judgement of the Bombay High Court holding the Maharashtra Protection of Interests of Depositors Act (“MPIDA”) to be unconstitutional. The operation of the MPIDA remains suspended because the Supreme Court had refused to stay the High Court’s order.
However, an identical law (which should make it unconstitutional too) in Andhra Pradesh is now being used to hound directors, including one of India’s tallest investment bankers, of a certain non-banking financial company (“NBFC”) registered with the Reserve Bank of India (“RBI”). Their alleged crime: Having been directors on the board of the NBFC at some point of time, regardless of when the NBFC defaulted in repayment of public deposits borrowed by it.
When the Bombay High Court struck down the MPIDA as unconstitutional it had even stayed its own order to enable an appeal since the proceedings involved an important Constitutional question. However, in appeal, the Supreme Court positively refused to keep the MPIDA in operation pending review of the appeal.
The MPIDA had sought to regulate deposit-taking activities and conferred wide-ranging powers on the Maharashtra state government to attach and auction properties and to recover monies to apply them towards payment to depositors. At the core of this law was a deemed existence of fraud on the part of any person defaulting on repayment of deposits. The definition of the term “deposit” bore close resemblance to the definitions prescribed under the Companies Act and the RBI Act.
The power to make laws to regulate the incorporation of companies, the activity of banking and deposit-taking, are all exclusively listed in the Union List. The Bombay High Court had held the MPIDA to be occupying the areas of law-making that is reserved for the Parliament by the Constitution of India. Acceptance of deposits by NBFCs is governed by the RBI under the RBI Act made by Parliament.
Until 2003, the law in Andhra Pradesh did not cover deposits taken by NBFCs. It is noteworthy that when the State of Tamil Nadu set the precedent of such laws by passing the Tamil Nadu Protection of Interests of Depositors Act (“TNPIDA”), it did not get assent from the President of India precisely on the ground that the TNPIDA occupied fields reserved for Parliament. After the TNPIDA was amended to remove companies and NBFCs from the scope of its coverage, assent of the President of India was received to bring the law into operation. The constitutional validity of the TNPIDA too was challenged thereafter, but in view of the correction effected, its validity was upheld.
Despite the clearly unconstitutional element having been noticed by the Indian legal system – first, by the President of India while approving the TNPIDA and then during the judicial review of the TNPIDA, the law in Andhra Pradesh was amended in 2003, to introduce precisely these very provisions into the law. The Bombay HC has unequivocally struck down the MPIDA thereafter.
The right means of governance for all Indian states would be to suspend the operation of the unconstitutional law against NBFCs and companies in their respective territories until the Supreme Court gives a final ruling. If they feel exercised about the decision of the Bombay HC, they have the option of joining proceedings before the Supreme Court and presenting their point of view.
The leading investment banker who is a director of the NBFC in Andhra Pradesh has repeatedly maintained that there was no default in repayment of deposits when he was a director of the NBFC. In any case, he was not a person in charge of the NBFC’s business. Moreover, when the default took place, the Andhra Pradesh law had not been amended to bring NBFCs within its coverage.
However, this investment banker had made a significant investment in the company of an industrialist considered by the current government of Andhra Pradesh to be an adversary. If the plight of the high and mighty can get so desolate, one can only wonder what small-time businessmen, who are the backbone of the economy, go through.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.
