Merchant banker role cannot extend to single-bank term loan arranging; preliminary inquiry may proceed without prior hearing.

A merchant banker's role in the securities market does not extend to arranging a single-bank term loan, because a term loan is not a securities transaction and syndication of rupee term loans contemplates participation by multiple banks. The directions to the banking regulator and the investigative agency were therefore upheld, as the proposed loan arranging activity fell outside the legitimate merchant banker framework and warranted preliminary inquiry into suspected misconduct. The review challenge based on non-impleadment and denial of hearing also failed, because the earlier order was only for a preliminary inquiry and prior hearing was not mandatory at that stage.

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Issues: (i) whether a merchant banker could act as a loan arranger for a single-bank term loan and whether the directions issued to the investigating and regulatory authorities were warranted; (ii) whether the review applicant could succeed on the ground of non-impleadment and alleged denial of hearing.

Issue (i): whether a merchant banker could act as a loan arranger for a single-bank term loan and whether the directions issued to the investigating and regulatory authorities were warranted.

Analysis: The term loan in question was not a securities transaction. The definition of securities under the securities law did not include term loans, and the merchant banker framework was centred on issue management and securities market activities. Although the regulatory circular referred to syndication of rupee term loans, that expression contemplated a syndicated facility involving participation of multiple banks. The transaction under consideration was a loan from a single bank, so it did not fall within that activity. The directions to the Reserve Bank of India were justified because loan arranging of this kind was held to be outside the legitimate role of a merchant banker and inconsistent with the banking regulatory framework. The preliminary inquiry directed to the Central Bureau of Investigation was confined to examining suspected misconduct and was not a final finding of guilt.

Conclusion: The challenge on this issue failed, and the Court held that a merchant banker could not act as a loan arranger in the transaction under review.

Issue (ii): whether the review applicant could succeed on the ground of non-impleadment and alleged denial of hearing.

Analysis: The directions issued earlier were only for a preliminary inquiry into alleged misconduct by public servants and bank officials. The observations made in the earlier judgment were expressly stated not to be a final opinion on merits. The Court relied on the principle that, at the stage of initiating criminal inquiry, prior hearing of the person against whom allegations may later be examined is not mandatory. On that basis, the grievance that the applicant had not been heard or impleaded did not justify review.

Conclusion: The objection was rejected, and no denial of hearing was found to vitiate the earlier order.

Final Conclusion: The review application was found to disclose no error warranting interference, and the earlier directions were left undisturbed.

Ratio Decidendi: A merchant banker's role in the securities market does not extend to arranging a single-bank term loan, and a preliminary inquiry into alleged misconduct may be initiated without first affording a prior hearing to the person potentially affected.

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