In Civil Appeal Nos. 2748-49 of 2022-SC- Apex Court upholds constitutional validity of Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999, says State Govt’s action of attaching properties of 63 Moons Technologies justified Justices D.Y. Chandrachud, Surya Kant & Bela M. Trivedi [22-04-2022]

Read Judgment: The State of Maharashtra v. 63 Moons Technologies Ltd 

Tulip Kanth

New Delhi, April 23, 2022: Setting aside the judgment of the Bombay High Court by which certain notifications attaching the property of 63 Moons Technologies were quashed, the Supreme Court has upheld the constitutional validity of  the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act 1999 (MPID Act).

Rejecting the challenge made against the MPID Act and placing reliance on its judgments in State of Maharashtra v. Vijay C. Puljal and Sonal Hemant Joshi v. State of Maharashtra, the  Larger Bench of Justice D.Y. Chandrachud,  Justice Surya Kant and Justice Bela M. Trivedi affirmed, “This Court has held that the MPID Act is constitutionally valid on the grounds of legislative competence and when tested against the provisions of Part III of the Constitution.”

The factual scenario of this case was such that NSEL, a company incorporated under the Companies Act 1956 and a wholly owned subsidiary of Financial Technologies (India) Limited, which is now known as 63 Moons Technologies Limited (FCIL or 63 Moons)  had launched contracts for buying and selling of commodities on its trading platform with different settlement periods, ranging from T+0 to T+36 days. Herein, T indicates the trade date, that is the date on which the trade took place and +0 or +36, indicates the number of business days after the trading day when the delivery of the commodity and the payment of price is made.

In 2007, Union of India issued a notification under Section 27 of the Forward Contracts (Regulation) Act 1952 (FCRA) exempting forward contracts of one-day duration for sale and purchase of commodities traded on NSEL from the application of the provisions of the enactment. NSEL started operating as an exchange for spot trading in commodities and started offering paired contracts which enabled traders either by themselves or through their brokers, to simultaneously enter into such contracts. In 2008, the Central Government withdrew the exemption.

But, in 2012, the Department of Consumer Affairs (DCA) issued a show cause notice to NSEL on why action should not be taken against it for permitting transactions in violation of the exemption notification. The DCA also directed NSEL to give an undertaking that no contracts shall be launched until further instructions, and that all existing contracts must be settled on the due dates.

Later, the Director of Vostak Far East Securities Pvt. Ltd., a company involved in the business of investment, trading, and financing, filed a complaint against authorized persons and brokers of NSEL for offences under Sections 120B, 409, 465, 468,471,474 and 477A of the Indian Penal Code 1860 alleging that he had not received payment of Rs 202 lakh that was due to him under various contracts and commodities were traded by providing false warehouse receipts of non – existent commodities. It was also alleged that NSEL held the commodities in warehouses accredited to it as a trustee on behalf of the depositors (buyers) and that the misappropriation was a criminal breach of trust. In addition to the above, it was also stated that the Settlement Guarantee Fund (SGF) had been misused by NSEL.

The case was registered and Sections 3 and 4 of the MPID Act were added to the FIR. The case was transferred to the Special Court constituted under the MPID Act. NSEL filed a writ petition challenging the invocation of the MPID Act on the ground that the exchange was not a financial establishment under the provisions of the Act but this petition was dismissed by a Division Bench of the High Court.. The State of Maharashtra also issued a notification under Section 4 of the MPID Act by which the properties of the respondent were attached. 

The appellants filed a Writ Petition before the Bombay High Court challenging this notification attaching the properties of the respondent. The validity of Sections 4 and 5 of the MPID Act was challenged on the ground that they are violative of Articles 14, 19 and 300-A of the Constitution.This petition was allowed and hence, the present appeal was filed before the Top Court.

According to the Larger Bench, paired contracts were designed as a unique trading opportunity by NSEL under which a trader would, for instance, purchase a T+2 contract (with a pay-in obligation on T+2) and would simultaneously sell a T+25 contract (with a pay-out of funds on T+25). The price differential between the two settlement dates was represented to offer an annualized return of about 16%. It was considered by the Bench that NSEL categorically represented that all trades were backed by collaterals in the form of stocks and its management activities included selection, accreditation, quality testing, fumigation and insurance. Therefore, NSEL represented that on receiving money and commodities, the members would receive assured returns and a service. 

It was noted by the Court that though NSEL had been receiving deposits, it had failed to provide services as promised against the deposits and had failed to return the deposits on demand. Therefore, the State of Maharashtra was justified in issuing the attachment notifications under Section 4 of the MPID Act.

The Bombay High Court had allowed the petition considering that the judgment of the Top Court in 63 Moons Technologies v. Union of India did not have any bearing on whether the attachment of properties initiated under Section 4 of the MPID Act was valid but the Larger Bench referred to this judgment extensively and opined that in its decision in 63 Moons Case (supra), this Court took note of the modus operandi by which the defaults came about, specifically highlighting the role of NSEL in not complying with the rules. It set aside the amalgamation order on the narrow ground that the pre-conditions for the exercise of power under Section 396 had not been fulfilled. One of the reasons which persuaded this Court to set aside the order of amalgamation was that the EOW and the Enforcement Directorate had already taken steps to realize the amounts in default. The Larger Bench thus held that the judgment in 63 Moons (supra) had after a detailed analysis of the Grant Thornton report and the FMCs order held that the defaulters and NSEL conspired to dupe the members of their money.

Coming to the judgment given by Bombay High Court, the Top Court held that the High Court had formed an erroneous opinion that firstly, only if the return includes interest, bonus or any other added benefit, it would be a deposit for the purpose of the MPID Act. However, Section 2(c) states that the return may be with or without any benefit in the form of interest, bonus, profit or in any other form. The definition does not stipulate that there must be an added benefit, rather that the added benefit is irrelevant for the purpose of the definition. 

The Bench noted that for the purpose of Section 2(c), the receipt of the commodity or money must be retained by itself. The definition does not provide any such embargo. Rather, the definition is broadly worded to include even the possession of the commodities for a limited purpose and so, the High Court had read the definition of deposit narrowly without any reference to the salutary purpose of the MPID Act. It was also clarified that the High Court ought not to have made observations on the merits of the criminal proceedings when the writ petition was restricted to the issue of whether NSEL is a financial establishment for the purpose of the MPID Act.

Further, while referring to the earlier order of the Division Bench dated 1 October 2015, where it was prima facie recorded that NSEL is a financial establishment for the purpose of the MPID Act, the High Court observed that it was not bound by the prima facie view. The primary ground for the Division Bench for arriving at a prima facie view was the representations made assuring a 14% to 16% yield. However, the High Court in its impugned judgment dispelled the argument on the ground that only a faint reference was made to assured returns. Such an observation misrepresented the factual instances which were backed by documentary material, added the Bench.

Hence, considering such reasoning, the Top Court  allowed the appeals and set aside the impugned judgment of the Bombay High Court. The Bench also held that the impugned notifications issued under Section 4 of the MPID Act attaching the properties of the respondent are valid.