CHEATING DEPOSITORS – WILL THE GOVERNMENT TOOTH THE NCLT WITH POWERS TO CURB THE INCREASING MENACE

CHEATING DEPOSITORS – WILL THE GOVERNMENT TOOTH THE NCLT WITH POWERS TO CURB THE INCREASING MENACE ?

How Depositors are lured?

HDFC Bank pays interest at 8.75% on deposits. Whereas defaulting companies pay 11.5%. The high interest rates are offered by companies is mainly to lure or entice the investors to deposit their hard earned money. When a bank fails, the depositor gets a compensation of up to Rs 1 lac as insurance. When companies fails, no such insurance is available. 

There are many instances of failure to pay the deposits back to depositors by the companies in the recent past.

Name of the Company	Total Amount of deposits collected	No of Depositors
Helios and Matheson Information Technologies Ltd (H&M)	Rs55.25 crores	6,540
Yash Birla  Group Companies	Rs 214 Crores	8000
Elder Pharmaceuticals Ltd
Unitech Ltd	Rs 550Crs
Plethico Pharmaceuticals Ltd	Not Available	NA

Diversion of Funds by the Deposit Taking Companies 

In Zenith Birla India Ltd case, CLB  found that the company had made 11 transactions with the amount obtained through this scheme and diverted the money to other group companies. The police found Rs106 crore had been transferred to Birla Surya as equity; Rs16 crore to Birla Shloka Edutech, with which land was purchased in Oshiwara (a Mumbai suburb); Rs10 crore was transferred to Zenith Birla, used as margin money for letters of credit. Also, Rs29.26 crore was diverted to Birla Energy Infra, Birla Cotsyn and Birla Ahuja.

The economic offences wing (EOW) of the Mumbai police has sent notices to the authorities concerned for freezing of the immovable assets of Birla Power Solutions worth Rs214 crore, in connection with a FD and inter-corporate deposits scam, the company had run.

Maharashtra State has an excellent state legislation -the Maharashtra Protection of Interests of Depositors Act. This Act allows arrest and attachment of properties to protect depositors/investors.” The depositors from Maharashtra can use this law to get refund from the defaulting companies.

Ministry of Corporate Affairs should enact the law as that of -the Maharashtra Protection of Interests of Depositors Act should tooth NCLT with the powers of arrest and attachment of properties.

Deposits collected by companies are covered by various authorities as listed in the following table:

Collective Investment Schemes	SEBI (Now ,  it is dispensed with)
Deposits Schemes of Manufacturing Companies	MCA
Deposits collected by NBFC -	RBI

As the deposits with the company falls under unsecured loans, there is no safety mechanism is available to deposit holders. It will be futile to go to special courts for these matters as it takes time. If you go for winding up proceedings, it is all the more cumbersome. It is all the more reason that NCLT should be empowered

Present mechanism available for deposit holders:

• ·        A deposit holder can make a complaint through online to MCA and can track the status of his complaint

• ·        The RBI Act, 1934, empowers the CLB to order the repayment of deposits accepted by an NBFC

• ·        An offence related to acceptance of deposits is a cognisable offence under the Code of Criminal Procedure, 1973.

• ·        Depositors can also approach the consumer court under Section 12 of the Consumer Protection Act.

• ·        Deposit can also use the Section 245 of the Companies Act, 2013 (Clause Action Suit)  and apply to  the National Company Law Tribunal

Suggestions

• ·        Article 323B of constitution of India empowers that appropriate legislations may by law provide for adjudication or trial by tribunals of any disputes, complaints or offences with respect to all or any of the matters in clause 2  with respect to which such legislature has power to make laws. In view of this, the tribunals in India like NCLT can do the trials for offences if their respective legislations empower them to do so.

• ·        The power for extension is granted NCLT, ideally, the language should have specifically empowered NCLT to initiate prosecution. That is not so. Therefore, defaulting companies are taking advantage of loophole.  CAN MCA plug this loophole? Can CLB / NCLT give directions to ROC to file prosecution? If ROC does not act on such directions, can they be held accountable?

• ·        If the NCLT is able to redress the issues faced by the depositors and suggest the affected parties themselves to move the HC for imposing the punishment under Sec 74 (3) without prejudice to their other remedies and rights? Then , what is the role of NCLT in safeguarding the interest of the deposit holders.

• ·        Since imprisonment provision is there in Section 74(3) of the Companies Act 2013, ROC has to apply and it has to be sanctioned by Secretary, MCA. This may take long time and to reduce the time lag, the power should be delegated to Regional Director Levels.

Recommendations for avoidance of non-payment of Deposits to Deposit Holders

• ·        Prevention is better than Cure: It is submitted that NCLT should be entrusted with the powers of High Court and to order arrest or confiscate the properties of defaulting companies to payback the deposits to depositors. Necessary Amendment should be made under the Article 323B of constitution of India. The Maharashtra Protection of Interests of Depositors Act is the best example in this case. This Act allows arrest and attachment of properties to protect depositors/investors.

• ·        It is submitted that MCA should establish National Depositors Safety Corporation. All the deposit taking companies should be registered with this corporation. They should submit the details of deposits collected , the purpose for which the deposits are collected , the manner in which the deposits are utilised ( utilisation of deposits) , and if there is dilution or diversification of deposit funds through a cash flow statement signed by the auditors of the company on quarterly basis. This will help to track whether deposits collected from the public have been diverted or misused.

• ·        In case of suspicious activities, a forensic audit may be ordered on those deposit companies to find out the status of the deposits collected.

If any diversion or misuse of deposit taking companies on the basis of scrutiny by the above corporation , it shall be referred immediately to the NCLT ( with powers) to demand explanation and order for confiscation or attachment of assets or imprisonment of the directors of the company involved as in the case Sahara as ordered by Supreme Court of India.