TaxTMI 
TaxTMI 
2023 (3) TMI 792
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....tions : Mr Nishit Dhruva, with Prakash Shinde, Niyati Merchant, Yash Dhruva & harsh Sheth, i/b MDP & Partners. For Respondent 6 In WP(L)/4051/2023 : Mr Ravi Kadam, Senior Advocate, with Gaurav Mehta, CD Metha, Aamir Ali Shaikh, i/b Dhruve Liladhar & Co. ORAL JUDGMENT (PER GS PATEL J): 1. The 1st Petitioner imports and exports Cocoa products of various kinds. Some of its business involves exports. Petitioner No. 2 is a director of Petitioner No. 1, VJ Jindal Cocoa Private Limited ("Jindal Cocoa"). 2. The Petition, brought under Article 226 of the Constitution of India, seeks the following reliefs: "(A1) This Hon'ble Court be pleased to issue a Writ of Mandamus or any other appropriate writ or order or direction in the nature of Mandamus under Article 226 of the Constitution of India, 1950 thereby directing Respondent Nos. 3 to 5 to refrain from acting and /or taking any coercive steps with respect to Petitioner No. 1's respective Accounts maintained/operated with Respondent Nos. 3 to 5, in furtherance of Respondent No. 6's aforesaid Email dated 2nd February 2023 and two e-mails both dated 4th February 2023; (A2) This Hon'ble Court be pleased to issue a ....
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....4 and 5 are, respectively, the Punjab National Bank ("PNB"), the Jammu and Kashmir Bank ("J&K") and Canara Bank ("CanBank"). As we shall presently see, they are not active participants in the present litigation. It is the 6th Respondent, HDFC Bank Limited ("HDFC Bank"), not a state-controlled bank, that is really the focus of the Petition. Jindal Cocoa is aggrieved by certain communications that HDFC Bank sent to PNB, J&K Bank and CanBank. These were by an email dated 2nd February 2023 and two emails of 4th February 2023. To put this as compactly as possible, what HDFC Bank said in these emails to the three other banks was that there was a circular issued by the RBI circular that not allow any banking customer to have a current account with other banks if that customer already had credit facilities in the form of Cash Credit/Export Packing Credit ("CC/EPC") in the banking system. According to HDFC Bank, all transactions had to be routed through the account of the borrowing customer with its principal lending bank. HDFC Bank said that it was the Bank with whom Jindal Cocoa had a EPC account and therefore any amounts in current accounts with any of the other three banks, i.e., PNB, J....
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....mit the balance to Jindal Cocoa's account with HDFC Bank. It also noted that Jindal Cocoa's group company was classified as a Non- Performing Asset ("NPA"). 8. On 4th February 2023, HDFC Bank sent similar emails to J&K Bank and to CanBank. Copies of these are at Exhibit "O" and "P" to the Petition at pages 95 and 97 respectively. There is no material difference for our purposes between these and the email sent to PNB. 9. All three banks, PNB Bank, J&K Bank and CanBank forwarded the mails that they had received from HDFC Bank to Jindal Cocoa. It replied on 6th and 7th February to the three banks. In substance, it said that it had maintained accounts with these three banks for several years earlier, well before it set up its banking relationship with HDFC Bank. Jindal Cocoa said that the RBI circular in question would not and did not apply to Jindal Cocoa and there was therefore no question of acting on HDFC Bank's demand nor of Jindal Cocoa having violated any circular or guidelines. It also pointed out that there were pending disputes between Jindal Cocoa and HDFC Bank which were being taken up by the Banking Ombudsman and, therefore, Jindal Cocoa requested that no action sho....
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....may have referred to an earlier circular of 6th August 2020 but all before us have proceeded on the basis of the consolidated circular. This brings together the previous circular of 6th August 2020 and subsequent circulars of 4th August 2021 and 29th October 2021. 15. HDFC Bank in its Affidavit in Reply says that the Writ Petition is not maintainable, a submission in which Mr Kadam is joined by Mr Kamat. In any case, even if it is assumed that a writ petition will lie because the relief is fashioned as a direction to RBI to issue appropriate orders to HDFC Bank, the impugned actions are consistent with the consolidated circular and are reasonable. It is also submitted that these are matters of contract and specifically arise under the sanction letter issued by HDFC Bank on 8th August 2017 and a later document of 10th August 2020. These are the contractual banking and commercial relations between Jindal Cocoa and HDFC Bank. These sanction letters have express reference to all RBI circulars and make these applicable. No exception is carved out for the consolidated circular in question. 16. On facts, Mr Kadam submits that it was found that contrary to the sanction letter and con....
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....uctions". 20. In paragraph 1, the threshold criterion for application is a split between cases where a borrower's aggregate exposure in the banking system is less than Rs 5 crores and where it is more than Rs 5 crores. Paragraph 1.1 deals with the situation where the aggregate exposure is under Rs 5 crores. We are not concerned with this. Paragraph 1.2 deals with the situation where the aggregate exposure is Rs. 5 crores or more. But paragraph 1 has two other criteria. First, there must be an opening of a current account and it must apply to borrower "availing" CC/OD facilities. What paragraph 1.2 says is that in this situation, i.e., where a current account is obtained by a borrower who does have a CC/OD facility, a borrower can open a current account provided the bank has at least 10% of the aggregate exposure of the banking system to that borrower. Other banks can open only collection accounts. Non-lending banks cannot open current/collection accounts. 21. We then come to paragraph 2. The threshold criteria here are: (i) opening of current accounts by borrowers and (ii) the borrowers do not avail of CC/OD facilities from the banking system. Paragraph 2....
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.... exposure exceeds Rs. 5 crores, banks who have 10% or more in the aggregate exposure can provide a CC/OD facility without restrictions. If no bank has at least a 10% exposure, the bank with the highest exposure can provide the CC/OD facility. Then there are similar provisions for credits and so on. 24. Paragraph 4 deals with exemptions and Ms Mistry has drawn our attention specifically to items (b) and (c) of paragraph 4.1 saying that accounts opened under the Foreign Exchange Management Act 1999 ("FEMA") Act are exempted because they are meant to comply with the FEMA framework. There is a similar exemption to accounts for payment of taxes, duties, statutory dues which bank is authorised to collect these. The argument presented by Ms Mistry runs like this. The accounts in question with the other three banks were not "opened". These were indeed current accounts, but they pre-dated, at least in two of the three cases, the opening of the HDFC Bank account. She submits that this fact alone would immediately exclude the operation of the consolidated circulars. She accepts that what is being invoked by HDFC Bank is paragraph 2, i.e., a situation where there is a current account by a b....
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....ssertion in paragraph 13 of the Affidavit. 26. Paragraphs 14 to 17 of the RBI Affidavit at pages 357 to 358 are relevant: "14. Banks, specifically non-lending banks had no incentive to prevent a borrower of other bank from opening accounts with it, as a current account meant cheap inflow of funds for the account-opening bank. Often, the lending banks did not invoke the terms and conditions under the loan agreement to discipline the erring borrowers owing to highly competitive banking system which further encouraged unscrupulous borrowers and non-lending banks. 15. The aforesaid situation resulted in (i) increase in frauds and NPAs; (ii) divergence in the assessment of NPAs; and (iii) diversion of funds. Respondent No. 2 introduced the circulars to: (i) prevent unscrupulous fund diversions; (ii) monitor cash flows of borrowers; (iii) prevent frauds and NPAs; and (iv) ultimately, increase credit discipline among the borrowers. 16. The circulars were introduced as a pre-emptive step to avoid loss of public money. The importance of the circulars is strengthened from the fact that if such activities are permitted to continue, it will cause immense loss to t....
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.... regards to existing accounts. Banks were advised to utilize the additional time provided for ensuring compliance to engage with their customers and arrive at mutually satisfactory resolutions within the ambit of the circulars. In case, the constituent banks are not able to resolve the issues banks may escalate those issues with Indian Banks' Association ("IBA"). IBA was required to raise such residual issues requiring regulatory consideration with Respondent No. 2 for examination by September 30, 2021. Respondent No. 2 issued the circular dated October 29, 2021 after taking into consideration all the feedbacks received." (Emphasis added) 28. Mr Kadam for HDFC Bank supports Mr Kamat's interpretation and says that as the prime lender of a credit facility, and this is a case, he points out, where there is no other competing credit facility but only a question of a single credit facility and multiple current accounts, HDFC Bank is bound to observe and follow the RBI consolidated circular both in letter and spirit. He contests the formulation advanced by Ms Mistry and says that if her interpretation is to be accepted, then it presents the simplest device to get around the a....
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....g allowed unrestricted use of pre-existing current accounts. Indeed, according to Mr Kadam, that is precisely what is happening and what is being done by Jindal Cocoa: funds that should have the HDFC Bank lending EPC account as a destination are re-routed into current accounts with other banks, and this is being done on the basis that those other current accounts are not 'being opened' but are 'already opened'. 31. As to Ms Mistry's submission that there must therefore be an escrow mechanism, we agree with Mr Kadam that this is an argument that rejects itself. The provision for an escrow mechanism is predicated on there being multiple lending banks. One of these may be chosen as the escrow bank. But where there is only one lending bank and there are also several other non-lending banks where a borrower has a current account then there is no question of an 'escrow'. The entire concept of an 'escrow' mechanism is to create a common pool from which disbursement is triggered only on the occurrence of defined events. Multiple lenders would be rival claimants to the funds in the escrow account. Which one should have priority, or how the funds should be shared (equally, pro rata to the....
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....g bank was to the banking system: the unacceptable increase in the number of NPAs. The RBI Affidavit clearly says that the result was difficulty in recovery of those assets and of the loans and this thus weakens the entire banking system. 35. At this point Mr Kadam points out that whatever be the differences about debits, credits, subventions and so forth, the test is not about the validity of those transactions because those lie outside the remit of the writ court but whether the borrower's action fall within the parameters of the guidelines or can be reasonably said to so fall. 36. We believe we must accept the interpretation of both Mr Kadam and Mr Kamat. Our view is fortified by a quick consideration of the flow chart that is appended. This is obviously meant for greater understanding, but it provides a nearly algorithmic or binary interpretation of as an aid to navigating the consolidated circulars. The flow chart is in two parts. Appendix 1 clearly applies to paragraph 2 of the circular. The first threshold test when a borrower approaches a bank to open a current account is to see whether the borrower has a CC/OD facility from the banking system. This admits of yes/no a....
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.... business commercial activity of banking discharge any public function or duty. In Chanda Deepak Kochhar v ICICI Bank Ltd, Mumbai & Anr 2020 (5) MhLJ 219., a Division Bench of this Court held that no writ would lie against ICICI Bank being a private body and not an instrumentality of the State. A Special Leave Petition from that decision was dismissed on 1st December 2020. 2020 SCC OnLine SC 969. Mr Kadam also submits that if a writ against a private bank is not maintainable, it cannot seek to get the same relief in a circuitous manner by referencing RBI: MK Rappai & Ors v John & Ors. (1969) 2 SCC 590, paragraphs 12. 40. The submission by Ms Mistry on maintainability runs like this. First, that because that HDFC Bank provides broad banking facilities, therefore it must be held to perform to the extent necessary to invoke this Court's jurisdiction, a public function. Funding from the State or State control is not, she submits, the only test. It has not been the only test for a very long time. She refers to the 2005 decision of the Supreme Court in Board of Control for Cricket in India v Cricket Association of Bihar & Ors 2015 3 SCC 251. and to the decision of the Supreme C....
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....ourt without hesitation refuse to follow the construction recommended by that. 42. In Ultratech Cement Ltd & Anr v State of Rajasthan & Ors. (2020) 7 SCR 392., in paragraphs 25, 25.3 and 25.5, the Supreme Court referred to the decision in Desh Bandhu Gupta but did not depart from the principle. In fact, in paragraphs 25 and 25.1, we find that the attempt was to persuade the Supreme Court that the authority's understanding deserved to be accepted. The doctrine was said to be embodied in a maxim which meant that the best way to construe a document would be to read it as it would have read when made. In paragraph 25.3, the Ultratech Cement court said that the principle is applied as a guide to interpretation by referring to the exposition that the document received from the competent authority at the relevant point in time. The Ultratech Cement Court said that when there is a contemporaneous construction placed by an executive or administrative authority charged with executing the statute - in this case the RBI - the Courts would lean in favour of attaching considerable weight to it, but it cannot be said that the understanding of a particular administrative or executive authority ....
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....following circulars issued on the above subject: (i) DOR.No.BP.BC/7/21.04.048/2020-21 dated August 6, 2020 (ii) DOR.No.BP.BC.27/21.04.048/2020-21 dated November 02, 2020 (iii) DOR.No.BP.BC.30/21.04.048/2020-21 dated December 14, 2020 (iv) DOR.CRE.REC.35/21.04.048/2021-22 dated August 4, 2021 (v) DOR.CRE.REC.63/21.04.048/2021-22 dated October 29, 2021 C. Applicability The provisions of these instructions shall apply to current accounts and CC/OD accounts opened or maintained with the following Regulated Entities (REs): (i) All Scheduled Commercial Banks (ii) All Payments Banks D. Definitions (i) "Exposure" for the purpose of these instructions shall mean sum of sanctioned fund based and non-fund-based credit facilities availed by the borrower^3. All such credit facilities carried in their Indian books shall be included for the purpose of exposure calculation. (ii) "Banking System" for the purpose of these instructions, shall include Scheduled Commercial Banks and Payments Banks only. 1. Opening of Current Accounts for borrowers availing Cash Credit/ Overdraft Facilities from the Banking Syst....
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....to the said escrow account at the frequency agreed between the bank and the borrower. Further, balances in such collection accounts shall not be used for repayment of any credit facilities provided by the bank, or as collateral/ margin for availing any fund or non-fund based credit facilities. While there is no prohibition on amount or number of credits in 'collection accounts', debits in these accounts shall be limited to the purpose of remitting the proceeds to the said escrow account. However, banks maintaining collection accounts are permitted to debit fees/ charges from such accounts before transferring funds to the escrow account. 2.1.4 Non-lending banks shall not open any current account for such borrowers. 2.2 In case of borrowers where aggregate exposure of the banking system is Rs. 5crore or more but less than Rs. 50 crore, there is no restriction on opening of current accounts by the lending banks. However, non-lending banks may open only collection accounts as detailed at para 2.1.3 above. 2.3 In case of borrowers where aggregate exposure of the banking system is less than Rs. 5 crore, banks may open current accounts subject to obtaining an undertaking from the....
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....feree CC/OD account at the frequency agreed between the bank and the borrower. Further, the credit balances in such collection accounts shall not be used for repayment of any credit facilities provided by the bank, or as collateral/ margin for availing any fund or non-fund based credit facilities. However, banks are permitted to debit interest/ charges pertaining to the said CC/OD account and other fees/ charges before transferring the funds to the CC/OD account of the borrower with bank(s) having 10 per cent or more of the aggregate exposure. It may be noted that banks with exposure to the borrower of less than 10 per cent of the aggregate exposure of the banking system can offer working capital demand loan (WCDL)/ working capital term loan (WCTL) facility to the borrower. 3.2.4 In case there is more than one bank having 10 per cent or more of the aggregate exposure, the bank to which the funds are to be remitted may be decided mutually between the borrower and the banks. 4. Exemptions Regarding Specific Accounts 4.1 Banks are permitted to open and operate the following accounts without any of the restrictions placed in terms of paras 1, 2 and 3 of this Circular: ....
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....ccounts are used for permitted/ specified transactions only. Further, banks shall flag these accounts in the CBS for easy monitoring. Lenders to such borrowers may also enter into agreements/ arrangements with the borrowers for monitoring of cash flows/ periodic transfer of funds (if permissible) in these accounts. 5. Other Instructions 5.1 In case of borrowers covered under guidelines on loan system for delivery of bank credit issued vide circular DBR.BP.BC.No.12/21.04.048/2018-19 dated December 5, 2018, bifurcation of working capital facility into loan component and cash credit component shall continue to be maintained at individual bank level in all cases, including consortium lending 5.2 All banks, whether lending banks or otherwise, shall monitor all accounts regularly, at least on a half-yearly basis, specifically with respect to the aggregate exposure of the banking system to the borrower, and the bank's share in that exposure, to ensure compliance with these instructions. If there is a change in exposure of a particular bank or aggregate exposure of the banking system to the borrower which warrants implementation of new banking arrangements, such changes shall be i....