In the Charles Dickens novel ‘Little Dorrit’, a Ponzi scheme wiped out the savings of thousands of depositors. Not much has changed in the real world today, where gullible investors are easily lured by finance companies with higher interest rates and end up losing their principal sums. The get-rich-quick syndrome and the spurt in cases of citizens left in the lurch by fly-by-night scamsters triggered a slew of State enactments like the Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) (TNPID) Act, 1997.
The statement of objects of the statute was primarily to tackle the mushrooming of financial establishments not covered by the Reserve Bank of India Act that were “grabbing money received as deposits from the public, mostly middle class and the poor, on the promise of unprecedented high rates of interest and without any obligation to refund the deposits to the investors on maturity.” The consequential “public resentment” created “law and order problems” necessitating this enactment.
The law withstood the highest judicial scrutiny. Upholding its Constitutional validity after considering the doctrine of ‘pith and substance’, the Supreme Court in K.K. Baskaran Vs state of Tamil Nadu had noted that “depositors were often given a small pass book as a token of acknowledgment of their deposit, which they considered as a passport of their children for higher education or wedding of their daughters or as a policy of medical insurance in the case of most of the aged depositors, but in reality in all cases it was an unsecured promise executed on a waste paper. The senior citizens above 80 years, senior citizens between 60 and 80 years, widows, handicapped, driven out by wards, retired government servants and pensioners, and persons living below the poverty line constituted the bulk of the depositors. Without the aid of the impugned Act, it would have been impossible to recover their deposits and interest.”
There were substantial amendments to the Act. Establishments registered under the Companies Act and non- banking financial companies were brought within the purview of this law. The non-payment of interest and failure to render services for which deposit was made were added as offences under the Act. It provided for the attachment of properties of those who borrowed money from the financial establishments and defaulted. Special courts for different areas and for different cases were constituted with special public prosecutors for each of these courts. The provision to sell the attached properties in public auction and to distribute the sale proceeds among the depositors was another important change effected.
The modus operandi of scamsters has exposed loopholes in this law. Even with the amendments, resulting in definitions of ‘deposit’ and ‘financial establishments’ being widened, unscrupulous promoters effortlessly circumvent these provisions. I know of finance companies that gave depositors promissory notes and post dated cheques in the personal name of the promoters just to bypass the TNPID Act. As the amended definition of ‘deposit’ is “the deposit of money either in one lump sum or by installments made with financial establishments for a fixed period, for interest or for return in any kind or for any service”, their strategy was to put these promissory notes outside the pale of this Act.
Sniffing out the ploy, the Madras high court in P.S.Sekar Vs state of Tamil Nadu held that “the crucial factor to be appreciated is that even though the documents are described as pro notes by its nomenclature, whether in law they are pro notes/deposits are all matters to be gone into threadbare by the trial court.” The court was relying on Section 6(4) of the TNPID Act which empowered the special court to also try any offence, other than an offence specified in Section 5 of the Act.
Investigating agencies like the Economic Offences Wing, unfortunately go strictly by the letter of the law and are sometimes reluctant to entertain complaints from investors who have been cheated in this manner. In such cases, the victims of cheating and criminal conspiracy are tossed around, asked to file cheque bounce cases under Section 138 of the Negotiable Instruments Act or advised to seek civil remedies. For financially impoverished victims to cough up substantial court fee and legal costs is a double whammy. The Supreme Court in K.K. Baskaran’s case had reiterated that “the conventional legal proceedings incurring huge expenses of court fees, advocates’ fees, apart from other inconveniences involved and the long delay in disposal of cases due to docket explosion in courts, would not have made it possible for the depositors to recover their money, leave alone the interest.”
Money does not grow on trees. And there are thousands of greedy investors who are led up the garden path! But the special law must not be implemented with blinkers on.
(The writer is an advocate at the Madras high court, columnist & author)...