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Law to protect investors from 'vanishing companies' valid, rules Madras HC

The Madras High Court today upheld the constitutional validity of the Tamil Nadu Protection of Interest of Depositors (in Financial Establishments) Act, 1997.

Dismissing a batch of petitions, filed by the unincorporated finance companies, challenging the act, Justice P Sadhasivam said the Act, seeking to regulate the finance companies and providing for a speedy process to recover matured and defaulted amounts, was necessitated to rescue thousands of depositors from the clutches of unincorporated trading establishments.

In view of Entry 32 in the State List and in Schedule VII of the Constitution, the state legislature was competent to enact the legislation, he said.

Besides, the legislature had obtained the President's assent and the Supreme Court had also given several rulings in this regard. The Act was valid, he ruled.

The state government had brought in the legislation aimed at streamlining the functioning of the finance companies, after it was brought to its notice that these companies had cheated the public to the tune of Rs 1.95 billion.

The judge said the since unincorporated trading establishments such as the petitioners did not have statutory control, particularly for recovery of deposits, the state government had rightly enacted the legislation.

The petitioners submitted that their intention was not to cheat anybody. If action was initiated on a frivolous complaint under this Act, they would be thrown out of business and their reputation would come down in the real estate market, they said.

They contended that the state government had brought the Act in haste and it was not competent to enact the said law.

Parliament alone could enact it since the subject fell under Entry 45, List 1, in Schedule VII of the Constitution.

On behalf of the state government, it was submitted that financial establishments not covered by the RBI Act had mushroomed in the state with the sole object of grabbing money from the public, especially the middle class, without any obligation to refund the deposit on maturity.

Many such establishments were closed down after collecting huge amounts from the public. They had defaulted on returning the deposit amounts and invited public resentment, thereby creating a law and order problem in the state. Hence the government enacted the law to regulate the activities of such establishments.

UNI

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