Hobsons Choice For Investors

This is a period of sleepless nights for investors in financial companies. After the CRB Cap fiasco, their thoughts naturally turn to legal remedies available to them if the companies fail to refund their deposits.

Before the Consumer Protection Act came into force some ten years ago, the only course open was to file a civil suit for recovery of money with interest. One had to pay the court fees and the lawyers fees and wait for years to get the decision in the last appeal. The remedy was illusory.

If one thought of revenge, and not recovery of the money, one could file a criminal complaint for cheating or misappropriation and leave the rest to the police. However, things have improved a little in recent times. In 1993, the National Consumer Commission passed a landmark judgment in Leela Vasant Raje vs Amogh Industries Ltd. When

 

the company failed to return her money, the Pune woman

fought all the way up to the national commission to get a favourable decision.

Down below, some state consumer commissions had doubts whether the Consumer Protection Act was applicable to finance companies. The national commission set at rest all these doubts by including these companies within the purview of consumer laws.

It said that when a firm invited deposits promising attractive rates of interest, it was an offer of a safe avenue for investment of their funds with an assurance of prompt repayment and full security of investment. The commission further underlined that social welfare legislations like the Consumer Act

should be given a benevolent interpretation.

This decision is now being followed by all consumer forums. In a recent case (Kasi Annapurna vs Vemuri Bharathi), the national commission emphasised the liability of partners in financial firms who deny that they were not aware of the activities of their concern. The commission applied the principles of the Partnership Act to nail their responsibility.

The MRTP Commission has also dealt with similar cases and the judgments were in favour of the depositors. In 1994, in the case of Swarna Finance & Investment, the commission instituted an enquiry into the promise made by the company of absolute security and 20 per cent interest, paid monthly. It found that prejudice to public interest was writ large on the scheme. The company was asked to stop the scheme and never to repeat it.

Later, in the Tatia Finance & Leasing Ltd case, the commission again passed a cease and desist order against an attractive financial offer. It held that the scheme amounted to an unfair trade practice under Sections 36A, 36B(d) and 36D of the MRTP Act. There are several such judgments.

In 1989, the Company Law Board was also given powers to deal with defaulting financial companies. The new Section 58A(9) of the Companies

Act says that if a company failed to repay deposits, the board could order the company to make repayment. The board may take action on its own or

at the instance of an aggrieved depositor.

If a company failed to comply with the boards order to repay, its proprietors shall be punishable with imprisonment upto three years and a fine of Rs 50 for every day during which the repayment has not been made. The depositors can now move the board at any of the four places where it sits.

The drawback is that depositors in small towns or cities have to travel to the four metros in order to file their complaint. The board can pass order only in individual cases; it cannot pass a general order against the company. If the depositor did not get back his money, he has to file a separate criminal complaint and follow it up in a criminal court.

One last resort is an application by the creditor to the company court for the winding up of the company under Section 433 of the Companies Act for non-payment of debts. The court may appoint a liquidator. The creditor has to wait for his turn to get his dues after the secured loans are paid.

Each of these remedies have their own drawbacks. Consumer forums are not equipped to deal with mass frauds at the national level. They are also creaking under arrears of complaints and lack of infrastructure. The MRTP commission has slowed down. It would take years in conducting its enquiries, the final hearings and giving judgments.

Since the Company Law Board has parallel jurisdiction in this matter, the commission may not be anxious to take initiative in this field now. The board itself is not easily accessible except to the investors in the four metros. It is yet to learn to flex its judicial muscles in matters like this.

The position of depositors in financial companies is, however, a little better than those who apply for shares in companies. In the 1994 Morgan Stanley judgment, the Supreme Court barred their access to the consumer forums and the MRTP commission. In that judgment, the court stated that a prospective shareholder is not a consumer and issuing of shares is not a trade. Thus such investors were barred from two most effective forums.

The CLB has not come forward to protect the investors effectively. Nor has the Securities and Exchange Board of India. As the investors are subjected to one shell-shock after the other, there is an urgent need to give some guarantees to them to raise their spirits from the pits.

Each of these remedies have their own drawbacks. Consumer forums are not equipped to deal with mass frauds at the national level. They are also creaking under arrears of complaints and lack of infrastructure.