CHENNAI: The Madras High Court has upheld the constitutional validity of the Tamil Nadu Protection of Interest of Depositors (in Financial Establishments) Act 1997, paving the way for resumption of attachment proceedings and criminal action against financial institutions that failed to return Rs.1,925 crore to about 19 lakh depositors.

The Government enacted the impugned legislation to plug loopholes in existing laws for curbing the mushrooming growth of financial establishments, which were grabbing money from the public by promising fabulous interest.

The petitioners challenged the Act, claiming the State lacked legislative competence as they were already been covered by Central legislations such as the Reserve Bank of India Act and the Banking Regulation Act.

Dismissing the petitions, a Full Bench, comprising Justice P.D. Dinakaran, Justice P.P.S. Janarthana Raja and Justice K. Chandru, said: "We have no hesitation to hold that the Legislature is perfectly justified in coming out with the impugned Act so that the tragedy of the victims, who have been exploited by the white-collared, organised crime of the financial establishments and the persons managing their affairs, can be remedied."

Under the existing Acts, there is no provision to deal with the financial establishments, particularly for recovering amounts due to depositors or attach, sell, realise and distribute the sum equitably, the order said.

Mr. Justice Dinakaran said the State Government had rightly provided for a special machinery and judicious mechanism to attach the properties of the financial establishments or the persons involved, including mala fide transferees. It had also envisaged sale of such properties and distribution of the proceeds equitably among the depositors.

"The State, being the custodian of the welfare of the subjects, cannot be a silent spectator without finding a solution for this gruesome plague," he said. Since none of the defaulting companies was registered under the Companies Act, provisions of the Act were not applicable. Also, as they had not obtained licence from the RBI, the applicability and violation of the RBI Act were also out of question. Hence, it would not be proper for the court to hold that Tamil Nadu had erred in bringing out the impugned Act, "when there is no effective remedy to cure the mischief under the existing framework of the statutes."

Rejecting the contention that the punishment enumerated in the Act was "excessive and harsh," the Judge said the petitioners were not entitled to claim premium on their illegal act of accepting deposits, promising exorbitant interest rates. "The Legislature was not unaware of the known malady that the financial establishments were exploiting the weaker sections of society."

Referring to Advocate-General R. Viduthalai's submissions, the order said 1,194 cases, involving 10.43 lakh depositors, were reported, though about 19 lakh depositors had been duped by various companies. Of the Rs. 1,925-crore deposits, Rs. 763 crore was refunded. A sum of Rs. 1,163 crore is yet to be refunded, and the identified properties are worth Rs. 878 crore. "The Tamil Nadu Act as a whole inspires the confidence of the societal realities, magnificently satisfies the principles of natural justice and excellently meets the needs of the victims," the order read.

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