| In a recent decision, the Bombay High Court has struck down as unconstitutional the Maharashtra Protection of Interests of Depositors Act (MPIDA), passed by the Maharashtra legislature, on the commendation of the Reserve Bank of India (RBI) to take cue from the Tamil Nadu Protection of Interests of Depositors Act (TNPIDA).
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| This law essentially regulates deposit-taking activities and confers wide-ranging powers on the state government to attach and auction properties and recover monies to apply them towards payment to depositors.
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| At the core of this law is a deemed fraud on the part of any person defaulting on repayment of deposits. The definition of the term “deposit” bears close resemblance to the definitions prescribed under the Companies Act (which regulates deposit-taking by manufacturing companies) and the RBI Act (which regulates deposit-taking by finance companies).
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| The MPIDA is more far-reaching than the TNPIDA. It purports to regulate deposit-taking activities of manufacturing companies and finance companies while the TNPIDA restricts itself to deposit-taking activities of unincorporated bodies. The TNPIDA had survived judicial review by the Madras High Court and its decision remains unchallenged.
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| The Bombay High Court has held the MPIDA to be ultra vires the power conferred on the state legislature by the Constitution of India. State legislatures do not have the legislative competence to make laws in the nature of the MPIDA, the court has ruled.
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| The Constitution distributes law-making powers between Parliament and state legislatures. The Union List contains the subjects on which Parliament may make laws, the State List contains the subjects on which the state legislatures may make laws, while the Concurrent List contains the subjects on which both, Parliament and state legislatures have jurisdiction.
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| 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 Maharashtra government had argued that the MPIDA was constitutional because it was aimed at ensuring that defaults on public deposits do not lead to a breakdown of public order in Maharashtra.
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| The state government also attempted to save the law by arguing that the Bombay High Court may strike down the MPIDA partially to exclude companies from the ambit of the law, and restrict the MPIDA to regulating only unincorporated bodies.
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| However, this did not pass muster. The court relied on earlier Supreme Court decisions on petitions that challenged the very chapters in the Companies Act and the RBI Act, which now regulate deposit-taking activities by manufacturing companies and finance companies.
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| In these decisions, the Court had clearly ruled that these functions clearly fell within the exclusive jurisdiction and scope of Parliament. The Bombay High Court has found that state legislatures are incompetent to legislate on the subject, regardless of whether the deposits have been accepted by a corporate.
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| The MPIDA and the TNPIDA were legislated at a time when numerous business entities were defaulting on high-return deposits taken from the public.
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| While many of these were downright fraudulent schemes (one of the petitioners had promised to double depositors’ monies in 90 days), there were other defaults due to bona fide business failures in a high-interest-rate regime. These laws do not differentiate between the two.
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| If the generic and vague object of maintaining public order were to be as widely interpreted as to enable state legislatures to legislate on matters covered by the Companies Act and the RBI Act, every state legislature in India could pass laws on the lines of any central economic law such as exchange controls, and perhaps even inflation, and claim that the laws are in furtherance of public order. This would lead to utter chaos in the country.
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| The Bombay High Court has stayed the operation of its own order to enable an appeal. If the appeal fails, and the absence of such laws results in a vacuum, it is up to the central government to pilot legislation through Parliament, or for the President to promulgate an Ordinance. That, in the court’s view, is the proper way to go about writing laws.
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| Judges are often faced with a choice – one between laying down the law in its purest form, and, dispensing perceivable justice without regard to the shortcomings of legislation. Adherents to each school of thought abound. However, this important decision rightly lays down the rule of law in law-making.
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| Just as Justice Srikrishna recently wrote that judges ought not to indulge in “judicial heroics” to take on the role of repairing the shortcomings in the law, law-makers ought to note that “legislative heroics”, while seeming spectacular in the short run, can cause long-term damage to the foundation of a sustainable legal system.
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| (The author is a partner of JSA, Advocates & Solicitors. The views expressed are his own)
somasekhar.s@gmail.com |
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