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Context:

• Recently in feb 2025, Mumbai Police’s Economic Offences Wing (EOW) is investigating a news scam that is Torres Ponzi scam.
• In this scam, many investors were manipulated by a company called Torres. This company promised high returns to Mumbai investors through investment schemes in jewelry.
• These schemes claimed returns up to 500% annually. However, in December 2024, the company suddenly stopped paying reuters.
• And that caused panic among investors. Now they are protesting.
• After this EOW started taking legal action like seizing the accused properties. These properties will be sold to compensate the victims.
• The investigation is being carried out under the Maharashtra Protection of Interest of Depositors (MPID) Act, 1999.

What is the Torres Scam?

• The Torres Ponzi scam is a fraud investment scheme where Torres attracts investors by showing extremely high returns (up to 500% annually), if they invest in jewelry and other goods.
• The company also gave them incentives (iPhones, jewelry, branded bags, cars, & even apartments) to attract more people to invest.
• Whenever new investors invest their money, then the previous investors get a return from the new investment.
• There is no actual return, they just manipulate new investors and circulating new money to old investors and so on.

What is the MPID Act?

• Maharashtra state government passed the Maharashtra Protection of Interest of Depositors Act, 1999 to protect investors from fraud financial institutions.
• It received the President's approval in January, 2000.
• The law provides a fast process to attach & sell the assets of such institutions & return the money to the defrauded investors.

What are the Key Provisions of the MPID Act?

• If a financial institution commits fraud and fails to return money or returns, then the people responsible for running the business (promoters, directors, managers, partners & employees) can be held accountable.
• Penalty: If found guilty, they can face up to 6 years in jail & a fine of up to Rs 1 lakh.
• The government can seize the assets of the fraudulent institution, including any assets acquired through illegal means.
• The court can also make the order for seizing these assets final & direct the sale of these assets.
• The money raised by selling these assets will be returned to the investors who were defrauded.
• The MPID Act provides a quick process for seizing and selling assets, while regular criminal cases can take several years.

What is the Constitutional Validity of the MPID Act?

• Initially, in 2005 the Bombay High Court had ruled that the MPID Act was unconstitutional.
• The Court also said that its provisions conflict with the Companies Act, 1956 & the Reserve Bank of India Act, 1934, because these acts regulate financial institutions at the national level.
• However, in 2011, the Supreme Court of India overruled the Bombay High Court's ruling and held the MPID Act to be constitutional.
• The Supreme Court said that state laws such as the MPID Act were valid because many financial institutions operating without an RBI license could not be regulated by central laws.
• Supreme Court Ruling: The Court explained that the MPID Act provides victims with a faster & more effective way to get their money back from fraudulent financial institutions.

Challenges in Defining "Deposits" and "Financial Establishments"

• There have been debates about what exactly makes a "deposit" or a "financial establishment" under the MPID Act.
• The courts examine each case based on its specific facts and determine whether it falls under the scope of the Act.
• The interpretation of these terms depends on the details of the case.

Source: IE