Current Affairs: Passage of the Day - 21 February 2025 | Current Affairs & General Knowledge - CLAT PDF Download

Directions: Read the passage carefully and answer the questions that follow.
Investors who were defrauded in the Torres Ponzi scam may receive about Rs 40 crore over the next six months. The Mumbai Police’s Economic Offences Wing (EOW) has begun the procedure to commence auctioning the seized properties of the accused parties, under the MPID Act.
In January, thousands of investors staged protests outside multiple Torres outlets in Mumbai after they suddenly stopped receiving their promised interest payments in various investment schemes in late December 2024. According to the EOW investigation, the company had allegedly floated multiple schemes encouraging them to buy jewellery at exorbitant weekly interest rates, with some yielding an annual return of up to 500 per cent. The company allegedly lured them with incentives such as iPhones, jewellery and other expensive gifts, including branded bags, cars, and apartments. The payments suddenly stopped in December 2024, causing panic among those who had invested with Torres.
This case is the latest to be registered under the MPID Act which concerns the attachment of seized assets from fraudulent establishments and their sale and distribution. Similar acts have been enacted in other states. Here is what to know about the act.
What is the MPID Act and why was it passed in Maharashtra?
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The Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999, was enacted by the state legislature, and received the President’s assent on January 21, 2000. At its introduction, the bill identified the growth of financial establishments in the state, with some intending to defraud the public by grabbing their deposited money. These investors mostly belonged to the middle class and poor economic backgrounds, and were lured with the promise of unprecedented interest rates or returns.
“As such deposits run into crores of rupees, it has resulted in great public resentment and uproar, creating law and order problems in the State of Maharashtra, especially in the city like Mumbai which is treated as the financial capital of India. It is, therefore, expedient to make a suitable legislation in the public interest to curb the unscrupulous activities of such Financial Establishments in the State of Maharashtra,” the statement introducing the bill said.
What are the main provisions of the Act?
The Act states that any financial establishment which fraudulently defaults repayment of deposit on maturity along with benefit in the form of interest, bonus, profit as assured, then every person including its promoter, partner, director, manager, employee responsible for the management or conducting business, can be held responsible. If found guilty, they can be sentenced to imprisonment for a maximum term of six years and fined up to Rs 1 lakh.
The Act also empowers the government to issue an order attaching the money or other property believed to have been acquired by the financial establishment. It lays out the procedure to be followed with powers designated to courts to make the order of attachment absolute.
Once an order is passed, the court can issue directions for the sale of the assets and its equitable distribution of the amount among the depositors. Unlike the provisions in criminal law which deal with cheating and fraud by financial establishments, the speedy procedure for attachment and distribution of the properties makes the Act significant for depositors.
What has the Supreme Court said about the constitutional validity of the Act?
In 2005, the Bombay High Court ruled that the MPID Act was unconstitutional as its provisions were at variance with the central law under the Companies Act, 1956. The high court said that the Maharashtra Act transgressed into the field reserved for the Parliament, with the aspect of non-payment of returns by non-banking financial establishments already covered by the Companies Act and the Reserve Bank of India Act, 1934.
In 2011, the Supreme Court decided on an appeal against the high court order as well as another order regarding a similar act in Tamil Nadu. The Supreme Court held both the MPID Act and the Tamil Nadu Act constitutionally valid. It held that the financial establishments booked under the state laws had not obtained any licence from the RBI.
The apex court held that the existing central laws do not occupy the field of these state laws. According to the SC, the state laws intended to attach and sell properties of fraudulent financial institutions to provide an effective and speedy remedy to aggrieved depositors.
“The conventional legal proceedings incurring huge expenses of court fees, advocates’ fees, apart from other inconveniences involved and the long delay in disposal of cases due to docket explosion in Courts, would not have made it possible for the depositors to recover their money, leave alone the interest thereon,” the Supreme Court had said. In 2022 too, the Supreme Court held the Act valid.
There have been issues raised before courts on what constitutes deposits or financial establishments, which have been decided based on the merits of the particular case.
[Excerpt from Indian Express "Torres Ponzi Scam and MPID Act" Dated 21/02/25]

Q1: When did the Maharashtra Protection of Interest of Depositors (MPID) Act receive the President’s assent?
(a) 1995
(b) 1999
(c) 2000
(d) 2005

View Answer  

Ans: (c) 2000
Sol: The MPID Act was enacted in 1999 and received the President’s assent on January 21, 2000.

Q2: What was the primary reason for enacting the MPID Act in Maharashtra?
(a) To regulate stock market investments
(b) To curb financial frauds targeting middle-class and poor investors
(c) To promote banking and financial services in the state
(d) To introduce a new taxation system for investment schemes

View Answer  

Ans: (b) To curb financial frauds targeting middle-class and poor investors
Sol: The Act was introduced to protect depositors from fraudulent financial establishments promising high returns and defrauding them.

Q3: According to the MPID Act, what is the maximum imprisonment term for individuals guilty of defaulting on deposits?
(a) 2 years
(b) 4 years
(c) 6 years
(d) 10 years

View Answer  

Ans: (c) 6 years
Sol: The Act allows for a maximum imprisonment of six years for those responsible for managing fraudulent financial establishments.

Q4: What did the Bombay High Court rule in 2005 regarding the MPID Act?
(a) It was unconstitutional as it conflicted with the Companies Act
(b) It was the best law for handling financial fraud cases
(c) It should be extended to all states in India
(d) It needed further amendments to be effective

View Answer  

Ans: (a) It was unconstitutional as it conflicted with the Companies Act
Sol: The Bombay High Court ruled that the MPID Act conflicted with central laws, but this was later overturned by the Supreme Court.

Q5: How did the Supreme Court justify upholding the MPID Act as valid in 2011?
(a) It provided a faster process to recover investors’ money
(b) It allowed the RBI to regulate all non-banking financial companies
(c) It created new banking rules for financial institutions
(d) It was aligned with the Companies Act, 1956

View Answer  

Ans: (a) It provided a faster process to recover investors’ money
Sol: The Supreme Court emphasized that the MPID Act ensured quicker recovery of funds from fraudulent firms, benefiting depositors.