TaxTMI 
TaxTMI 
TaxTMI 
2020 (1) TMI 171
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...., Mumbai dated 23rd, 24th, 26th September, 2019 and 3rd and 14th October, 2019. 2. The further relief sought is to direct the RBI to withdraw the restrictions imposed in exercise of its power conferred under Section 35A of the Banking Regulation Act, 1949(hereinafter referred to as "the Act of 1949"). 3. The restrictions placed on withdrawal of amounts by the depositors is questioned and then it is said that this Court should issue a writ of mandamus or any other appropriate writ, order or directions in the nature thereof to the RBI and to the Deposit Insurance and Credit Guarantee Corporation to make sufficient funds available for easy and unhindered withdrawal of the deposits of the depositors and, particularly, to be utilised for their day-to-day expenses, health and educational needs and business requirements. 4. A relief in the nature of a direction to the Central and the State Government to exercise its powers under the Multi-State Co-operative Societies Act, 2002 (hereinafter referred to as "the Act of 2002") and particularly, to provide aid to the bank in question is also sought. 5. Since the arguments are common in all matters so also the reliefs, we had heard them tog....
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.... with a multi-state scheduled urban co-operative bank, duly registered under the Act of 2002, do not suffer. All the more, when the bank was established on 13th February, 1984. It has about 137 branches and 51,000 members across 7 States. It has deposits of around Rs. 11,617.34 crores, cash investments and bank balance of Rs. 4243.12 crores and a net profit of Rs. 99.69 crores as on 31st March, 2019. It is one of the top five urban co-operative banks. The number of depositors are 16,00,000 and as per the balance-sheet of the bank, it is in a sound financial condition. 12. The bank has received several awards and the gist of the same is set out in para 11. It is said that this bank has been offering interest on fixed deposits or on savings or on current deposits, the rate of which is 1.5% more than the nationalised banks. The rate of interest on deposits offered by respondent no.6-bank was quite attractive and, therefore, the petitioners chose to deposit their hard earned money in this bank. 13. On 24th September, 2019, they came to know, via electronic messages and news reports, that respondent no.3 has issued certain directions restricting the withdrawal by the account holders o....
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....ndent-Mr.Waryam Singh. The RBI discovered a fraud in disbursing this loan only recently although the loan was sanctioned long back, whereas, the HDIL had stopped paying the loan amount as also the interest since 2016. 19. From paragraphs 23 to 27, the attempt is to show that the RBI either was aware or ought to be aware of the magnitude of this transaction with above entity. Yet, the required degree of vigilance was not maintained by the RBI. Rather, RBI was negligent in not ensuring a discipline and order in the functioning of the bank. The flagging by the RBI was not timely and this gross irregularity has been perpetuated only because the RBI failed to take prompt action. 20. Thus, if the accounts were not reflecting the correct position, the profit and loss figures were not accurate, then, the RBI should have taken timely measures by setting up effective machinery to protect the public from large deception. While conceding to the RBI's wide and extensive powers, the petitioners seem to suggest that the bank was functioning under the directives of the RBI and if the RBI does not take required steps and measures to either control the situation or to take care of the fraud or....
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....(performing) and Non-performing categories of loans besides picking accounts on random basis and examining certain accounts from various loan categories project loan, home loan, vehicle loan, commercial real estate loan, gold loan, etc. Further, RBI officers test check the System & Controls of the banks and the management related aspects to assess their efficacy. The object and scope of inspection/scrutiny conducted by the Reserve Bank is to ensure compliance with the provisions of the BR Act and the directions/guidelines issued thereunder along with assessment of financials and risks in the bank and not detailed examination of the bank's books of accounts. Thus, the scope of an inspection/scrutiny done by RBI is different from that of an audit conducted by an auditor or an enquiry under the provisions of the law governing co-operative societies. RBI then takes various supervisory actions and measures depending upon the findings of the inspection/ scrutiny." 22. In para 12, there is reference to the extensive report of the sixth respondent-bank as on 31st March, 2018. Para 12 and 13 of this affidavit are relevant and they read as under :- "12. RBI Inspection Report with resp....
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....e the camouflaging resorted by the bank as detailed in the following paragraphs. What was noted was flagged but was not observed to be impacting the financial health of the bank in any significant manner. Present financial position at the bank and modus operandi used in respect of the fraudulent transactions as detected during current Inspection (as on March 31, 2019)." 23. Then, it is stated that the modus operandi was detected when some transactions, which were not disclosed in full, came to the notice of RBI's team. That team was deputed to carry out a thorough scrutiny of HDIL Group accounts. On 19th September, 2019, this team carried out this scrutiny and focused its attention on the dealings or exposure of the bank with the HDIL Group apart from other areas required to be checked. The inspection was completed on 2nd November, 2019 and the report is presently under preparation. The preliminary findings, however, are that on account of financial irregularities highlighted in para 16, the bank's net worth has turned negative and it is significant. 24. Para 16 is fairly detailed and reads thus :- "16. Modus operandi of hiding the information related to HDIL exposure....
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....v) Falsification of information indent submitted to the inspection team: (a) RBI uses indent for gathering information from banks prior to proceeding on inspection as per usual procedure. In one such format for master data on advances, information of all the outstanding loan accounts of the bank was called for. The outstanding amount of each loan account was added and it was found that the grand total was tallying with outstanding loans and advances as per the audited balance sheet of the bank, which was Rs. 7475.49 crore as on March 31, 2018. While excluding the undisclosed HDIL related accounts (and other 20 undisclosed loan accounts also) from the aforementioned master-data, the bank replaced these accounts, by adding 21,049 fictitious loan accounts in the master data mentioned above so that the summation of outstanding balance of all the entities tallied with the balance sheet figure of bank loan portfolio (Rs. 7475.49 crore). (b) It is pertinent to note here that, the fictitious entries of 21049 loan accounts were added to 'Advances -Master Data', only to tally the summation to Rs. 7475.49 crore. These entries did not....
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....nd to provide an opportunity to rectify the irregularities and improve its financial position and to prevent preferential payments. All this is aimed to sub-serve public interest in addition to the interest of the bank and its depositors. The directives are thus supported on the touchstone of the wording and language of Section 35A of the Act of 1949. At the same time, the Reserve Bank of India says that it is sympathetic towards the hardship faced by the depositors and from time to time has relaxed the limits placed on withdrawals. The bank would require further time to complete the process. 26. In the petition filed by Guru Nanak Vidyak Society, the petitioner is an educational institution and is seeking the same reliefs. In fact, it is a trust running 28 educational institutions from primary schools to higher education institutions hiring 700 staff and educating 20,000 students. This petitioner has 66 accounts in the P&MC Bank. 27. There is an affidavit filed by the RBI, to which, there is an affidavit in rejoinder. In para 5 of this affidavit in rejoinder, it is stated that the scope of the statutory inspection is different from statutory audit and therefore, the RBI cannot s....
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....and guarantee pre-payment of interest on loan and advances to Multi-State Co-operative Societies. Therefore, financial assistance, including subsidies can be extended. Therefore, Mr.Talekar would submit that the Central and the State Government must devise schemes to meet the present contingency. There is an obligation to aid the Multi-State Co-operative Societies. Mr.Talekar would submit that there is no affidavit in reply filed by the P&MC Bank nor is there any common affidavit of the Credit Guarantee Corporation. Apart therefrom, this Corporation should aid and assist the bank for the benefit of the investors. Thus, the argument is that the aid or assistance is possible either by recourse to section 61 of the Act of 2002 or by appropriate measures or schemes devised by these Governments. This court can, by way of a writ of mandamus, enforce this obligation in the event the court finds that the Central and the State Government have failed to discharge the same. Mr.Talekar submits that we should issue such a writ all the more because the bank's financial position is not sound. Today, Mr.Talekar complains that the Central and the State Governments are but mute spectators and th....
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.... the writ petitions. 31. Ms.Gayatri Singh appearing for other petitioners adopted the arguments of Mr.Talekar and, in addition, submitted that the education society by the independent petition has pointed out that there is an inspection carried out way back in the year 2015. The report of the inspection carried out would demonstrate and prove that the RBI was aware of the irregularities in the functioning of the bank. It was aware of the acts of omission and commission of the bank. In these circumstances, when there are specific allegations of this nature made in the petition, all the more we should not uphold the impugned directions, but allow the petitions. 32. Mr.Abdi learned counsel appearing for the PIL petitioners drew our attention to the plight of the petitioners and averred that some of them are on the verge of committing suicide and the investors and depositors are not responsible for the state of affairs prevailing in the P&MC Bank. In these circumstances, we should not allow the RBI to thwart the withdrawals from the depositors' accounts. By such an action, the RBI has closed down the banking operations altogether. For these reasons, we must interfere in writ juri....
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.... diverted to this HDIL. Today 46% of the deposits are eroded and the bank's financial position is precarious. 36. Mr. Dhond was at pains to point out that full disclosures were not made and even the RBI was not in a position to deduce the extent of the deals and transactions between the bank and the HDIL. The accounts were prepared in such a manner that only few employees of the bank had knowledge of the dealings. The accounts were drawn up in such a manner that the moneys to HDIL were spread over in small and big accounts. An impression was given to the RBI that this is a regular banking transaction, but all details were not entered in the books or in specific accounts. The RBI, therefore, had no knowledge and the moment it derived it, it stepped in. Mr.Dhond has highlighted the efforts by the RBI by relying on the contents of the impugned communications. Mr.Dhond submits that the RBI's intervention became necessary because there was virtually a run on the bank. Mr.Dhond highlighted the situation by urging that the entire lot of depositors and investors rushes to the branches of the bank and seeks to withdraw the amounts lying deposited with the bank. If such a run on the....
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....king Regulation Act, 1949 (AACS) - Punjab and Maharashtra Cooperative Bank Limited, Mumbai, Maharashtra The Reserve Bank of India (vide Directive dated September 23, 2019) has placed the Punjab and Maharashtra Cooperative Bank Limited, Mumbai, Maharashtra, under Directions. According to the Directions, depositors will be allowed to withdraw a sum not exceeding Rs. 1,000 (Rupees one thousand only) of the total balance in every saving bank account or current account or any other deposit account by whatever name called, subject to conditions stipulated in the RBI Directions. Punjab and Maharashtra Cooperative Bank Limited, Mumbai, Maharashtra without prior approval in writing from the Reserve bank, will also not be able to grant or renew any loans and advances, make any investment, incur any liability including borrowal of funds and acceptance of fresh deposits, disburse or agree to disburse any payment whether in discharge of its liabilities and obligations or otherwise, either into any compromise or arrangement and sell, transfer or otherwise dispose of any of its properties or assets except as notified in the RBI directions dated September 23, 2019. The Directions shall remain in....
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....xpenses of self, spouse, children or parents, the Depositor should furnish (a) Doctor's Certificate (on Letter head in Original, with Registration No.). (b) Medical bills. (c) The name of the person for whom the withdrawal is asked for. 2. for Marriage of self, children, brother or sister, the Depositor should submit Marriage Invitation Card, Hall Booking Receipt, Receipt for Ornaments, etc. 3. For Education of self or children, estimate of fee receipt duly certified by the School or Institute. 4. For livelihood purpose of Senior Citizen or Widow or person suffering from Disability, the Depositor should submit estimated monthly expenses, proof of Senior Citizenship, Doctor's Certificate of disability in case of Disabled person. Hardship Amount Ceiling:- A depositor cannot withdraw more than Rs.l lakh on medical ground and in other cases the maximum ceiling is Rs. 50,000/- from the date the directions are imposed till the bank is either taken under liquidation or the directions are withdrawn. The customers eligible as per above norms may approach the respective branch for completing the....
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....s issued by the RBI are arbitrary or suffer from any error of law apparent on the face of the record. The RBI has been conferred with specific powers. The power of the RBI to give directions is based on the satisfaction that such directions have to be given in public interest or in the interest of banking policy or to prevent the affairs of any banking company being conducted in a manner detrimental to the interest of depositors or in a manner prejudicial to the interest of banking company. The directions are issued to banking company generally or to any banking company in particular from time to time and they have to be issued as the RBI deems it fit and the banking company shall be bound to comply with such directions. These directions can be modified or cancelled by the RBI on a representation made to it or on its own motion and in order to modify or cancel any direction, the RBI may impose such conditions as it thinks fit subject to which the modification or cancellation shall have effect. As far as this satisfaction is concerned, the RBI has filed a detailed affidavit. In the affidavit filed on behalf of the RBI and its Chief General Manager, the RBI has referred to its intern....
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.... that by Part II, titled as "Business of Banking Companies", there are provisions enacted so as to prohibit trading, disposal of non-banking assets, prohibition of employment of managing agents and restrictions on certain forms of employment. The Board of Directors ought to include persons with professional or other experience. The banking company is to be managed by whole time chairman. Power of the RBI to appoint Chairman of the Board of Directors on a whole-time basis or a managing director of a banking company. There are other provisions with regard to maintaining minimum paid-up capital and reserves. Regulation of paid-up capital, subscribed capital and authorised capital and voting rights of shareholders is possible by section 12 and the regulatory measures postulated by this law extends to the elections, acquisition of shares or voting rights. The restriction mechanism takes care of commission, brokerage, discount etc. on sale of shares and then there are prohibitory sections as well. The further provisions in this Part make it possible to carry out the banking business in a regulated manner. There are various powers conferred in the RBI, including the power to control advan....
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.... obtained the entire position or that was not disclosed to it. The RBI refers to its inspection report with respect to the financial position of the P&MC Bank as on 31st March, 2018. In that, it was revealed that the bank has sanctioned mortgage overdraft limits to a wholly owned group company of HDIL in which the present Chairman of the bank was one of the Directors in the company. The inspection team had also established the relationship between the Chairman of the bank and HDIL Promoters, which might have acted as the primary consideration for sanction of credit facilities and resulted in their utilisation to pay off one time settlement dues with other lenders. Pertinently, the RBI says in this affidavit that the scale of violation and also the connected lending that could be established based on available records was of much lesser extent due to the camouflaging resorted by the bank. What was noted was flagged but was not observed to be impacting the financial health of the bank in any significant manner. However, the present financial position and the modus operandi used in respect of the fraudulent transactions referred in the further inspection carried out by a team deputed ....
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....We are bound by law. No writ contrary to law can be issued. We render justice in accordance with law. We cannot, therefore, ignore the materials that have been brought before us by the RBI on oath and prefer some general and vague allegations of the petitioners to the contrary. When there are specific materials placed on record by the RBI to support its action under section 35A, we cannot agree with the petitioners' counsel that the RBI was not required to interfere or step in. In fact, Mr.Dhond, on instructions, has clarified that the RBI intends to bring some order and discipline in the affairs of the P&MC Bank. The bank is not yet placed under liquidation. The RBI is trying to take a stock of all the assets and properties of the P&MC Bank. The RBI is trying to ascertain its financial base as well. The RBI is trying its best to revive its operations and bring some normality in the affairs of the bank. The RBI has not stepped in only because it desired to place restrictions on the bank. We are in agreement with Mr.Dhond that if indiscriminate withdrawals are permitted, possibly, nothing would be left with the bank. Those close to wrongdoers and Management of the affairs at the....
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....ime being in force, where the Reserve Bank is satisfied that it is necessary in the public interest or in the interest of the co-operative bank or its depositors so to do, it may at any time by general or special order direct that an additional audit of the co-operative bank accounts, for any such transactions or class of transactions or for such period or periods as may be specified in the order, shall be conducted and may by the same or a different order appoint a person duly qualified under any law for the time being in force to be an auditor of companies to conduct such audit, and the auditor shall comply with such directions and make a report of such audit to the Reserve Bank and forward a copy thereof to the co-operative bank. (2) The expenses of, or incidental to, the additional audit specified in the order made by the Reserve Bank shall be borne by the co-operative bank. (3) The auditor referred to in sub-section (1) shall have such powers, exercise such functions vested in and discharge the duties and be subject to the liabilities and penalties imposed on auditors of companies by section 227 of the companies Act, 1956 (1 of 1956) and also that of the auditors, if any, ....
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....rest of the depositors or the banking company, but allowed some of the officials, managing the affairs of the P&MC Bank, to get away We do not think that the RBI can be faulted for issuing the directions as are impugned in these petitions. 48. We also cannot interfere with the limits placed by the RBI on the withdrawal. In fact, the RBI has acted fairly, justly and reasonably in revising the limits on withdrawal from time to time. When the first limit of Rs. 1,000/- was placed, the RBI was aware of the hardship and difficulty of depositors. In a timely manner, it has stepped in to enhance the limit and which is now enhanced as aforenoted. The aspects covered by the RBI regarding medical emergencies and education are such that in appropriate cases, depending upon the facts brought before the Administrator, he can allow the withdrawal up to specific limits. We do not think that the petitioners, styling themselves aggrieved investors and depositors, can complain. They have been candid enough to state before this court that they entered into a contractual relationship with the P&MC Bank because that was offering higher interest on the deposits. Attracted by that, this bank was approac....
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....se of jurisdiction by the High Court is permissible in a case where action of the State is found to be unfair, unreasonable or arbitrary. The question which should have been posed by the High Court was as to whether the action of the Bank was so arbitrary so as to invoke the public law jurisdiction. If the answer to the said question was to be in the negative, the High Court should have refused to exercise its jurisdiction. A fraud has been practiced on the Banks. Primary accused may be the Bank officers but a conspiracy with them by the outsiders has also been alleged. The original FDRs only in some cases are available; in most of the cases they are not. Even the Committee could not decide for as to which one was the original FDR and which was not. It could not distinguish between an original FDR and the Xerox copy thereof. Opinion of the expert thereon might have been received, but the final verdict thereupon in the cases initiated by the C.B.I, is still awaited. 17. The law as regards application of the power of judicial review, inter alia, in the contractual field stands covered by a large number of decisions. (See LIC of India & Anr. v. Consumer Education & Research Cent....
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....fused and intermixed with negotiating and mediating process at every point. The Judge is the dominant figure in organizing and guiding the case, and he draws for support not only on the parties and their counsel, but on a wide range of outsiders-masters, experts and oversight personnel." He goes on to give examples of school desegregation, employment discrimination, and prisoners' or inmates' rights cases as also antitrust, securities fraud and other aspects of the conduct of the corporate business, bankruptcy and reorganizations, union governance, consumer fraud, housing discrimination, electoral reapportionment, environmental management-fields that display in varying degrees the features of public law litigation. According to him, the public law litigation model inter alia has the following features: "7. The Judge is not passive, his function limited to analysis and statement of governing legal rules, he is active, with responsibility not only for credible fact evaluation but for organizing and shaping the litigation to ensure a just and viable outcome. 8. The subject-matter of the lawsuit is not a dispute between private individuals about private rights, but a grie....