Maharashtra NBFC law: SC rules against Bombay HC

The Supreme Court has ruled that the Bombay High Court judgment quashing the Maharashtra law for protecting depositors in the non-banking financial companies was wrong, and the Madras High Court’s view was the correct one.

In both cases, the state governments passed legislations to protect depositors in these companies who are victims of Ponzi schemes.

A full bench of the Bombay High Court ruled that the Maharashtra Protection of Interests of Depositors (in Financial Establishments) Act was unconstitutional, as only Parliament can pass such a law. The Madras High Court, on the other hand, upheld the Tamil Nadu law, which was almost identical to that of Maharashtra. The Supreme Court dismissed the appeal against the Madras High Court decision.

The bench consisting of Justice Markandey Katju and Justice Gyan Sudha Misra stated that the law was a “salutary measure which was long overdue to deal with scamsters who have been thriving like locusts in this country.”

Rejecting the argument that only Parliament has the power to pass such laws according to the schedule in the Constitution empowering the Centre and states to pass legislations on different subjects, the judges stated that “sharp and distinct lines of demarcation are not always possible and it is often impossible to prevent a certain amount of overlapping”.

It is the pith and substance of the law and its objective which should be looked into. The Reserve Bank of India Act and the Banking Regulation Act do not cover the field of operation of the non-banking financial companies.

The Companies Act also does not directly deal with the problem posed by large-scale cheating of middle class depositors who are lured by promises of high interest rates.

Therefore, the laws to protect small depositors, by attachment of the property of the companies and other steps, was a salutary step and could not be set aside as unconstitutional, the judgment said.