The Association of Karvy Investors, a body representing clients of Karvy Private Wealth, has challenged the constitutional validity of the Banning of Unregulated Deposit Schemes Act, 2019 on the ground that it excludes deposits made before the Act came into force from its ambit. The investors faced defaults on loans advanced to various builders introduced to them by Karvy since 2016 and have sought relief in various cases such as criminal and bankruptcy proceedings. However they have failed to derive any benefit from the Banning of Unregulated Deposit Schemes Act, a law which is meant to held depositors defrauded by operators raising unauthorized deposits from the public, including builders and jewelers. The law, originally enacted as an Ordinance, was enacted in February 2019.
According to the petitioners, the law only applies to deposits after it came into force and hence neglects the rights of older depositors. In addition, no competent authority has been set up to implement the law almost one year after it was enacted. The competent authority is the body tasked with implementing the Act. Without it being constituted, the Act itself does not get implemented. The Supreme Court has issued notices to the Centre in response to the petition.
“We are not asking for retrospective application of the criminal provisions of the Banning of Unregulated Deposit Schemes Act,” said Advocate Srijan Sinha, a Supreme Court lawyer who is representing the Karvy clients. Under the Indian Constitutions, criminal laws cannot have retrospective effect. “The Act has a civil side to it such as provisions for restitution of money,” he added referring to the plea to make the law applicable to deposits made before the Act came into force. Restitution is the return of money to an aggrieved person under the Act.
In addition there is no provision for aggrieved depositors to complain to the competent authority in the Act. No competent authority has been set up under the Act,” he added. Sinha also objected to a clause in the Banning of Unregulated Deposit Schemes Act, which gives priority to the Insolvency and Bankruptcy Code (IBC) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFESI) over itself. The former laws are used by banks and other big financial institutions to enforce their debts. This puts financial institutions on a higher footing than individuals,” he said.
Clients of Karvy private wealth had advanced loans to builders introduced by Karvy. Many of these loans defaulted after 2016.
A few clients had complained to the police, leading to a First Information Report against the CEO and other executives of Karvy Private Wealth in early 2019, in response to the defaults. Karvy investors who have instituted proceedings under the IBC also filed a petition challenging amendments to the Insolvency and Bankruptcy Code (IBC) on grounds of discrimination against individual creditors compared to institutional creditors. The amendments imposed a minimum threshold of 100 creditors or 10% of the creditors in a class for a suit to be filed under the IBC. Failure to meet these conditions would have led to dismissal of existing proceedings under the IBC. The Supreme Court granted them relief by passing a stay order on the IBC amendments affecting existing suits, earlier this month.