Analysis of K. K. Bhaskaran’s Case

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1. Any Act or Statute that comes into force in Centre or State is amenable to challenge before the appropriate Court of Law. The challenge can be with respect to its Constitutionality, i.e. whether any Act is in harmony with the Fundamental Rights guaranteed by the Constitution of India. 

2. The MPID Act faced a similar constitutional challenge. The first challenge was made in the case of Vijay C. Puljal v. State of Maharashtra¹. A Full Bench of Bombay High Court declared the Act as unconstitutional. 

3. The challenge to the decision of the Hon’ble Bombay High Court was carried to the Hon’ble Supreme Court of India in the case of K. K. Baskaran v. State [Represented by its Secretary, Tamil Nadu & Others] ².

4. The judgment rendered by the Supreme Court of India in K. K. Baskaran’s Case summarizes the intention of the Lawmakers at the time of promulgation of the Act. A reading of K. K. Baskaran’s Case provides an insight into the mind of the Legislature for creating the Act. The highest Court of the Land, i.e. Supreme Court of India, succinctly lays down the purposes of the Act and what its seeks to achieve. 

5. The Hon’ble Supreme Court of India was delivered on 4th March 2011 by Hon’ble Justice Shri Markandey Katju and Hon’ble Justice Shri Sudha Mishra in Civil Appeal No. 2341 of 2011. 

6. The Supreme Court while hearing the [constitutional] validity of the Act also adjudicated upon the validity of Tamil Nadu Protection of Interests of Depositors [in Financial Establishments] Act, 1997 [for short “Tamil Nadu Act”]. 

7.  The validity of Tamil Nadu Act was also in question along with the MPID Act. The Court opined that owing to the fact of similar provisions of both the Acts, it would pass a common judgment. The Supreme Court upheld the [constitutional] validity of the Tamil Nadu Act as well as the MPID Act. 

8. The Court’s opening observations referenced to the financial swindling and duping of gullible investors/depositors not being unique to India. It in fact took a cue out of Charles Dickens’ novel Little Dorrit, in which Mr. Merdle sets up a Ponzi scheme resulting in loss of the savings of thousands of depositors including Dorrits and Arthur Clennmam. 

9. Keeping up with the times, the Supreme Court in K. K. Baskaran’s Case also noted an international scam of Bernard Madoff ³ in which the estimated losses of investors were up to 21 billion U.S. dollars. 

10. By comparing the International scam, the Court was also conscious of the unprecedented situation in India. It observed the unfortunate situation wherein the Non-banking financial companies have duped thousands of innocent and gullible depositors of their hard earned money by promising high rates of interest on these deposits, and then done the “moonlight flit, often disappearing into another State or even foreign countries leaving the depositors as well as the State policy high and dry”

11. Thus, at the outset, the Supreme Court in its judgment clarified reason for promulgating the Act as well as acknowledging a plaguing problem in the Country. It set the tone for the entire remainder part its ratio⁴.

12. The challenge to the Tamil Nadu Act was that the said Act is beyond the legislative competence of the State Legislature. Second limb of challenge was that various other Acts already occupy the field of legislation, which the Tamil Nadu Act, seeks to occupy. 

13. The examples of other Acts were the Reserve Bank of India Act 1934, Banking Regulation Act 1949, Companies Act 1956 to state a few. It was further contended that Tamil Nadu Act was arbitrary, unreasonable and violative of important Articles in the Constitution of India. The Court forthwith rejected the said grounds of challenge. 

14. The Court mentioned a statistic as on the month of July 2002 with respect to the collection of monies from either poor, middle class, retired government servants and pensioners, senior citizens or economically backward sections of the society. The amount of such collection stood at a staggering Rs. 1, 945 Crore from 19 Lakh depositors. 

15. The Court also acknowledged that the said figure either stood siphoned off or diverted mala fide by the fraudulent financial establishments. With respect to the working of such Entities the Court observed, rightly so, that “8…The commission and omission of these financial establishments was well organized, and constitutes an organized systematic white-collar crime which jeopardizes the safety and interest of the public.”

16. Thus, the Supreme Court at the outset recognized, acknowledged and addressed the prevalent problem in India. It is extremely appreciative of any Court of Law - to uphold the validity of an Act, which has kept up with times and recognized a gaping void in law. The Hon’ble Supreme Court of India by upholding the Constitutional validity of the said Act has addressed the concerns of those lakhs of depositors who have been boldly duped by over-the-night established Financial Establishments.  

17. One of the most important observations of the Supreme Court comes in paragraph no. 9 and 10 of the judgment. The Apex Court opines in paragraph no. 9 that “9. As noted in the impugned judgment, the Tamil Nadu Act was not focused on the transaction of banking or acceptance of deposits, but it is designed to protect the public from financial establishments who defraud the public by offering lucrative returns on deposits and then disappear with the depositors’ money or refuse to return the same with interest”. 

18. Thus the Court tilted in favour of the rights, and interest of the gullible public at large. It specifically noted a difference between transactions of banks and fraudulent attitude of Financial Establishments. The line between the two may not seem distinctive but it is important to recognize the thin line of difference, which create a class of offences for the area wherein no law operates. By upholding the Tamil Nadu Act and MPID Act, the Hon’ble Court bridged the gaping void. 

19. Perhaps one of the most pertinent observation comes in the reproduction of the Statement of Objects and Reasons⁵  of Tamil Nadu Act. 

20. The Supreme Court in paragraph no. 10 reproduced the Statement of Objects and Reasons of Tamil Nadu Act by stating that: “There is mushroom growth of Financial Establishments not covered by the  Reserve Bank of India Act, 1934 (Central Act II of 1934) in the State in the recent past with the sole object of grabbing money received as deposits from the public, mostly middle class and poor, on the promise of unprecedented high rates of interest and without any obligation to refund the deposits to the investors on maturity. Many of these Financial Establishments have defaulted to return the deposits on maturity to the public running to crores of rupees and thereby inviting the public resentment, which created law and order problems in the State. The Government has, therefore, decided to undertake suitable legislation , in the public interest, in order to regulate the activities of such Financial Establishments, other than those covered by the Reserve Bank of India Act, 1934 (Central Act II of 1934).”

21. The said reproduction of Statement of Objects of Tamil Nadu Act is one of the most important reproduction in the entire judgment and also in the field of the Act. The entire genesis of the Act starts and ends with the said Statement of Objects & Reasons. It defines the precise scope of the Act and what it aims to achieve. 

22. The Act seeks to focus its attention on fly-by-night Institutions that mushroom suddenly out of nowhere in order to fuel the dreams of innocent investors/depositors to achieve financial freedom by offering attractive rates of interest. It is the tall assurances that such Entities offer, which attracts public at large. Once substantial monies are collected, such Entities vanish over night only to execute their modus operandi elsewhere.  

23. The Act allows the Court, Government and investigating authorities to recognize and forthwith attach properties purchased by the Entities from out of the deposits amassed from the public. The Act also allows disbursement of monies back to the public after auctioning such properties in open market. The Court upheld the validity of the Act and Tamil Nadu Act after acknowledging the far-reaching scope of the Acts. 

24. In the words of the Supreme Court “12…At present, there is no provision in the said Act for attaching the properties of the persons who borrowed money from the financial establishments and for the sale of attached property in public auction and for the equitable distribution of the sale proceeds to the depositors”

25. In fact, the Supreme Court directed for Special Courts to be constituted under the MPID Act or the Tamil Nadu Act so as to expedite the procedure of attachment and auction of property. The Court also suggested to specify time-limit within which the Special Courts shall pass the final order. 

26. The Hon’ble Supreme Court of India in paragraph No. 33 parted with befitting observations by noting that- “The State being the custodian of the welfare of the citizens as parens patriae cannot be a silent spectator without finding a solution for this malady. The financial swindlers, who are nothing but cheats and charlatans having no social responsibility, but only a lust for easy money by making false promise of attractive returns for the gullible investors, had to be dealt with strongly. The small amounts collected from a substantial number of individual depositors culminated into huge amounts of money. These collections were diverted in the name of third parties and finally one day the fraudulent financers closed their financial establishments leaving the innocent depositors in the lurch.” 

27. The Hon’ble Supreme Court parted in paragraph no. 35 by making scathing observations against perpetrators of economic crime by noting that- “ We are of the opinion that there is no merit in this petition. The impugned Tamil Nadu Act is constitutionally valid. In fact, it is a salutary measure which was long overdue to deal with these scamsters who have been thriving like locusts in the country.” 

    
    

28. The endeavor of the Hon’ble  Court at the time of upholding the validity in K. K. Baskaran’s Case was to protect the monetary interests of innocent persons with an aim to achieve swift but efficient justice.

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¹  2005 4 CTC 705 [Bom]

² (2011) 3 SCC 793

³ Bernie Madoff is still under-going a jail sentence in North Carolina, United States of America. 

⁴ In legal parlance, a judgment by a Court of Law is also referred to as ‘ratio’

⁵ State of Objects and Reasons defines the Scope of any Act and what the Act intends to address

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FAQ: The MPID Act and Tamil Nadu Act

What are the MPID Act and Tamil Nadu Act?

These Acts are legal measures enacted to protect depositors from fraudulent financial establishments. The Maharashtra Protection of Interest of Depositors Act (MPID Act) and the Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997 (Tamil Nadu Act) both aim to address the issue of financial scams perpetrated by entities promising high returns and then vanishing with investors' money

Why were these Acts created?

What legal challenges did these Acts face?

What was the Supreme Court's reasoning for upholding the Acts?

How do these Acts protect depositors?

What key observations did the Supreme Court make in the K. K. Baskaran case?

How did the Supreme Court characterize the perpetrators of these financial crimes?

What was the overall impact of the K. K. Baskaran judgment?