.Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 8916 OF 2012
(Arising out of SLP (C) NO. 29599 of 2009)
Kotak Mahindra Bank Ltd. … Appellant
Versus
Hindustan National Glass & Ind. Ltd.
& Ors. …
Respondents
WITH
CIVIL APPEAL No. 8917 OF 2012
(Arising out of SLP (C) NO. 27730 of 2011)
Emcure Pharmaceuticals Ltd. & Anr. … Appellants
Versus
ICICI Bank Ltd. & Ors. … Respondents
AND
CIVIL APPEAL No. 8918 OF 2012
(Arising out of SLP (C) NO. 28477 of 2011)
Finolex Industries Limited & Anr. … Appellants
Versus
Reserve Bank of India & Ors. … Respondents
J U D G M E N T
A. K. PATNAIK, J.
CIVIL APPEAL No. 8916 OF 2012
(Arising out of SLP (C) NO. 29599 of 2009)
Leave granted.
2. This is an appeal against the order dated 01.09.2009 of the Calcutta
High Court in Writ Petition No. 7729(W) of 2009.
3. The facts very briefly are that
the appellant-bank sanctioned
Derivatives/Forward Contracts facility to respondent no.1 upto a limit of
Rs.2,00,00,000/- (rupees two crores) only for the purpose of hedging
foreign currency exposures by its letter dated 10.01.2006.
On behalf of
the respondent no.1-company, its Joint Managing Director acknowledged the
receipt of the sanction letter dated 10.01.2006 of the appellant and
accepted and agreed to be bound by the terms and conditions of the sanction
letter as well as the annexures thereto being authorized by the resolution
of the Board of Directors of the respondent no.1-company.
Thereafter, on
17.01.2006 the appellant and the respondent no.1 entered into the
International Swaps and Derivatives Association (ISDA) Master Agreement.
Between January, 2006 to January, 2007 the appellant executed nine
derivative transactions with the respondent no.1.
On the request of the
respondent no.1, the appellant enhanced the limit of Derivatives/Forward
Contracts facility of the respondent no.1 to Rs. 10,00,00,000/- (rupees ten
crores) only for the purpose of hedging adverse foreign exchange
fluctuations and to enter into derivative transactions by letter dated
31.01.2007.
During January, 2007 to August, 2007, the appellant executed
various derivatives transactions with respondent no.1.
In August, 2007, on
the request of respondent no.1, the appellant once again increased the
limit for Derivatives/Forward Contracts facility to Rs.20,00,00,000/-
(rupees twenty crores) only for the purpose of hedging adverse foreign
exchange fluctuations and entering into derivative transactions by letter
dated 09.08.2007.
On 06.09.2007, the appellant entered into derivative
transactions FXOPT 20536, 20540 and 20544.
Thereafter, on 05.03.2008 and
12.03.2008 the appellant informed the respondent no.1 that a sum of
Rs.2,43,12,000/- (rupees two crores forty three lacs and twelve thousand)
only had become due and payable on 10.03.2008 by the respondent no.1.
The
respondent no.1, however, did not pay the sum.
On 01.07.2008 the Reserve
Bank of India (for short ‘the RBI’) issued the Master Circular on Wilful
Defaulters.
4. The Master Circular on Wilful Defaulters (for short “the Master
Circular”) contained instructions of the RBI to banks and financial
institutions regarding reporting of wilful defaulters to other banks and
financial institutions and the measures to be imposed on wilful defaulters
by such banks and financial institutions.
By letter dated 22.10.2008, the
appellant intimated the respondent no.1 that it had classified the
respondent no.1 as a wilful defaulter as it had defaulted to pay an amount
of Rs.2,76,01,908.79 and interest thereon totalling to Rs.14,62,61,186.69
and
respondent no.1 by its replies dated 04.11.2008 and 21.11.2008 through
its Advocate contended that neither the appellant was a “lender” nor the
respondent no.1 was a “borrower” within the meaning of “wilful default” in
the Master Circular and, therefore, action under the Master Circular cannot
be taken against the respondent no.1.
By letter dated 02.02.2009, the
appellant informed the respondent no.1 that the replies dated 04.11.2008
and 21.11.2008 of the respondent no.1 have been referred to the Grievance
Redressal Committee of the appellant-bank for consideration and the
Grievance Redressal Committee has fixed a meeting on 25.02.2009 at 10.00
A.M. at the office of the bank at Nariman Point, Mumbai, and that the
respondent no.1 can represent its case in the hearing before the Grievance
Redressal Committee.
The respondent no.1 then made a representation dated
06.03.2009 before the Grievance Redressal Committee of the appellant-bank
contending that the Master Circular does not apply to foreign exchange
derivative transactions and was restricted only to the acts of lending by
the bank and borrowing by the bank’s constituents and as there was no
lending by the appellant-bank to the respondent no.1 in any manner from the
appellant-bank, the entire proceedings against the respondent no.1 under
the Master Circular should be dropped.
While the matter was pending before
the Grievance Redressal Committee, the respondent no.1 filed Writ Petition
No.269 of 2009 before the Calcutta High Court and by order dated 27.03.2009
the Calcutta High Court dismissed the writ petition taking a view that the
matter was pending before the Grievance Redressal Committee.
Thereafter,
on 07.04.2009, the Grievance Redressal Committee of the appellant-bank
after hearing the respondent no.1, declared the respondent no.1 as a wilful
defaulter under the Master Circular and further resolved that the
respondent no.1-company and its directors be reported to the Credit
Information Bureau (India) Ltd., RBI or such other institution/agency as
may be required by RBI in terms of its Master Circular.
The appellant
accordingly intimated the aforesaid decision of the Grievance Redressal
Committee of the appellant-bank to the respondent no.1 and the RBI by two
separate letters dated 07.04.2008.
Aggrieved, the respondent no.1 filed
Writ Petition No.7729 (W) of 2009 in the Calcutta High Court and by the
impugned judgment,
the Calcutta High Court held that the Master Circular
applied only to lending transactions of a bank or financial institution and
as in the foreign exchange derivative transactions between the appellant
and respondent no.1, there was no such lending transactions and the
appellant was not the lender and the respondent no.1 was not the borrower,
the respondent no.1 could not be declared as a wilful defaulter in terms of
the Master Circular and accordingly no action could be taken against the
respondent no.1 under the Master Circular. By the impugned judgment, the
Calcutta High Court, therefore, set aside the decision dated 07.04.2009 of
the appellant-bank and allowed the writ petition of the respondent no.1.
Aggrieved, the appellant has filed this appeal.
5. Mr. C.A. Sundaram, learned senior counsel appearing for the
appellant, submitted that the High Court has not correctly interpreted the
Master Circular.
He referred to the counter affidavit filed on behalf of
the RBI before the High Court to show that the Master Circular had been
issued by the RBI inter alia in exercise of its powers under the Banking
Regulation Act, 1949 (for short ‘the 1949 Act’) and that Sections 21 and
35A of the 1949 Act make it clear that the directions/guidelines issued by
the RBI are mandatory and binding on the clients. He argued that Paragraph
2.1 of the Master Circular defines the term “Wilful Default” as a default
by a unit in meeting its payment/repayment obligations to the lender, but
the word “lender” has not been defined in the Master Circular. He
submitted that the RBI, which has issued the Master Circular, has in its
counter affidavit before the High Court stated that the intention of the
RBI while issuing the Master Circular was to cover all eventualities where
“payment/repayment obligations” exist and therefore the Master Circular
would cover all banking transactions including off balance-sheets
transactions, such as, derivatives, guarantees, Letters of Credit, etc. He
referred to Sections 45U of the Reserve Bank of India Act, 1934 (for short
‘the 1934 Act’), which defines in Clause (a) the word “derivative” and also
to Section 45V of the 1934 Act which is titled “Transactions in
derivatives” and submitted that the derivative transactions with banks had
been declared to be valid by law. He submitted that the word “borrower”
has been defined in Clause (b) of Section 45A of the 1934 Act to mean any
person to whom any credit limit has been sanctioned by any banking company
and has been still more widely defined in Clause (b) of Section 2 of the
Credit Information Companies (Regulation) Act, 2005 (for short ‘the 2005
Act’) to mean not only a person who has been granted loan or any other
credit facility by the credit institution, but also a client of a credit
institution. He referred to the definition of “Client” in Clause (c) of
Section 2 of the 2005 Act to show that “Client” includes a person who has
not only obtained or seeks to obtain financial assistance from a credit
institution, but also obtains assistance in any other form or manner. He
submitted that Clause (d) of Section 2 of the 2005 Act defines the
expression “credit information” more widely to include not only loans but
any other non-funding based facility granted to all its borrowers as well
as any other matter which the RBI may consider necessary for inclusion in
the credit information to be collected.
He submitted that the Foreign
Exchange Management (Foreign Exchange Derivative Contracts) Regulations,
2000 (for short ‘the FEMA Regulations’) had been made by the RBI under
Section 47 of the Foreign Exchange Management Act, 1999 (for short “the
FEMA”) and Regulation 2(v) of the FEMA Regulations defines “foreign
exchange derivative contract” to mean a financial transaction or an
arrangement in whatever form and by whatever name called, whose value is
derived from price movement in one or more underlying assets.
He referred
to Schedule-I of the FEMA Regulations to show that foreign exchange
derivative contract was permissible for a person resident in India.
Mr.
Sundaram vehemently argued that as the purpose of the Master Circular is to
ensure that the clients of the banks who had defaulted in their
payment/repayment obligations of the dues to the banks are not given
additional finance, a client of the bank who had defaulted in not paying
its dues to the bank under a foreign exchange derivative transaction would
also be covered under the Master Circular. He submitted that as the
respondent no.1 had defaulted in making payment of Rs.1,56,08,084.70 as on
29.12.2008 on account of foreign exchange derivative transactions, the
appellant was required by the instructions of the RBI in the Master
Circular to report the case to the RBI as well as other banks and financial
institutions as a wilful defaulter.
He submitted that the High Court was,
therefore, not right in setting aside the decision dated 07.04.2009 of the
appellant-bank and allowing the writ petition of the respondent no.1.
6. Mr. Bhaskar P. Gupta, learned senior counsel for the respondent no.1,
on the other hand, submitted that under the Master Circular a wilful
default can arise only out of a lender –borrower relationship between
the bank and its constituent and, therefore, unless the bank has given
a loan or an advance to its constituent, the question of wilful
default under the Master Circular does not arise. He submitted that a
reading of the Master Circular would show that a declaration of a
wilful defaulter has severe consequences for the party declared as a
wilful defaulter, such as squeezing of credit under clause 2.5(a) of
the Master Circular and criminal liability under clause 4.3 of the
Master Circular. He argued that considering the severe consequences
that follow a declaration of wilful defaulter, the definition of
“wilful default” in the Master Circular which refers to defaults in
repayment obligations to a “lender” has to be strictly construed. He
cited the decisions of this Court in Bijaya Kumar Agarwala v. State of
Orissa [(1996) 5 SCC 1] and Sakshi v. Union of India & Ors. [(2004) 5
SCC 518] for the proposition that a statute enacting an offence or
imposing a penalty is to be strictly construed. He submitted that a
derivative transaction does not involve lending of funds by way of a
loan or an advance by the bank to its constituent and, therefore, the
dues under a derivative transaction will not fall in any of the sub-
clauses (a) to (d) of clause 2, which defines a wilful defaulter for
the purpose of the Master Circular.
He argued that there is a
fundamental difference between a loan/advance and a derivative
transaction and the fundamental difference is that in the case of a
derivative transaction, either party could be required to effect
payment depending on the change in interest rate, foreign exchange
rate credit rating or credit index, price of securities as will be
clear from Section 45U of the 1934 Act, whereas in the case of a loan
or an advance, it is the borrower alone which has to effect payment.
He submitted that in none other circulars issued after the Master
Circular of 01.07.2008 there is any change in the definition of
‘wilful defaulter’ so as to bring in defaulters of payment of dues
under the derivative transactions within the meaning of ‘wilful
defaulters’. In this context, he referred to the Master Circulars
dated 01.07.2009, 01.07.2010, 01.07.2011 and 01.07.2012. He
vehemently argued that if the RBI intended to include defaulters of
dues under the derivative transactions within the meaning of the
expression “wilful defaulter”, the RBI could have changed the
definition of “wilful defaulter” in the subsequent Master Circulars.
7. Mr. Bhaskar P. Gupta next submitted that the stand of the RBI before
the High Court in the affidavits filed on its behalf was that the
question as to whether there was a lender-borrower relationship
between the appellant and the respondent no.1 under the contract
between them and whether there was a legally enforceable obligation
between the appellant and the respondent no.1 are issues which can be
determined by a civil court in a properly instituted suit in
accordance with law and it is not possible for the RBI to interpret
the contract between the appellant and the respondent no.1 and express
any opinion in that regard and that determination of such issues
arising under a contract cannot be done in a proceeding under Article
226 of the Constitution and hence the writ petition of the respondent
no.1 was liable to be dismissed. He submitted that the RBI cannot now
take a stand before this Court in this appeal that the respondent no.1
was a wilful defaulter covered by the Master Circular inasmuch as it
had not paid its dues to the appellant under the derivative
transactions. He submitted that if the RBI was aggrieved by the
finding in the impugned judgment of the Calcutta High Court that the
Master Circular did not apply to dues under a derivative transaction,
it could have filed a Special Leave Petition under Article 136 of the
Constitution against the impugned judgment of the Calcutta High Court,
but the RBI has not done so. According to him, therefore, the
impugned judgment of the Calcutta High Court should be sustained by
this Court in this appeal.
CIVIL APPEAL No. 8917 OF 2012
(Arising out of SLP (C) NO. 27730 of 2011)
8. Leave granted.
9. This is an appeal against the judgment dated 23/24.08.2011 of the
Bombay High Court in Writ Petition (Lodg.) No. 204 of 2011.
10. The facts very briefly are that the appellant no.1, a pharmaceutical
company, agreed to enter into foreign exchange derivative transactions with
respondent no.1-bank to hedge its foreign currency risks arising out of
export of its products and for this purpose executed an International Swaps
and Derivative Association (ISDA) Master Agreement on 29.08.2005. During
2006-2008, the appellant and respondent no.1-bank entered into nine foreign
exchange derivative transactions, out of which four were foreign currency
swap transactions and five were foreign currency option transactions. On
01.07.2010, the Reserve Bank of India (for short ‘the RBI’) issued a Master
Circular on Wilful Defaulters (for short ‘the Master Circular’). The
Master Circular contained instructions of the RBI to banks and financial
institutions regarding reporting of wilful defaulters to other banks and
financial institutions and the measures to be imposed on wilful defaulters
by such banks and financial institutions. Respondent no.1 issued a notice
dated 15.10.2010 to the appellant no.1 to show-cause why the respondent
no.1 should not classify the appellant no.1 as a wilful defaulter under the
Master Circular, as the appellant no.1 had not paid the dues to the tune of
of Rs.2.92 Crores under three of the derivative transactions. In the said
show- cause notice, the appellant no.1 was also informed that it can make a
representation against the decision of the respondent no.1 to classify the
appellant no.1 as wilful defaulter to the Grievance Redressal Committee of
the respondent no.1-bank. The appellant no.1 submitted its reply dated
20.11.2010 to the respondent no.1-bank contending that the Master Circular
was applicable to dues arising out of a lender-borrower relationship and as
the alleged dues arise under the derivative transactions and not against a
credit facility sanctioned by the bank, there was no lender-borrower
relationship between the respondent no.1-bank and the appellant and,
therefore, the Master Circular was not applicable to the case of the
appellant. The Grievance Redressal Committee of the respondent no.1-bank
considered the reply of the appellant no.1 and by its decision dated
28.01.2011 held that the appellant no.1 was a wilful defaulter covered by
the Master Circular as it had defaulted in its obligations to the bank
towards the derivative transactions. The appellant no.1 filed Writ
Petition No. 204 of 2011 challenging the decision dated 28.01.2011 of the
Grievance Redressal Committee of the respondent no.1-bank and by order
dated 24.08.2011, the Bombay High Court quashed the order dated 28.01.2011
of the Grievance Redressal Committee of the respondent no.1-bank on the
ground that the order was passed in breach of principles of natural justice
inasmuch as the appellant no.1 was not heard before the order was passed.
The Bombay High Court, however, held in the impugned judgment dated
24.08.2011 that the Master Circular covered default by a party in complying
with the payment obligations under derivative transactions and observed
that it will be open to the Grievance Redressal Committee to pass fresh
orders in accordance with law after complying with the principles of
natural justice. Aggrieved by the finding of the Bombay High Court in the
impugned judgment that the Master Circular covers defaults in complying
with the payment obligations under derivative transactions, the appellants
have filed this appeal.
11. Mr. Soli J. Sorabjee, learned counsel for the appellant, submitted
that the High Court has not correctly interpreted the Master Circular and
has erroneously recorded a finding that wilful default covers defaults in
complying with payment obligations under derivative transactions by relying
on circulars issued by the RBI on 08.08.2008, 13.10.2008, 29.10.2008,
09.04.2009 and 01.07.2010 which do not relate to wilful defaults but relate
to prudential norms, assets classification as non-performing assets, etc.
He submitted that it is a settled principle of statutory interpretation
that a definition in one Act should not be imported into another Act and
referred to the decision of this Court in Commissioner of Sales Tax, M.P.
v. Jaswant Singh Charan Singh [1967 (2) SCR 720] in which a reference to
other Acts to construe an Act has been critically commented by Lord
Loreburn in Macbeth v. Chislett [(1910) A.C. 220, 224] as a “new terror in
the construction of Acts”. He vehemently submitted that the Master
Circular should be construed on its own terms and language and so
construed, it will be clear that the basic postulate and the underlying
assumption of the Master Circular is existence of a lender-borrower
relationship and that the Master Circular does not contemplate nor cover a
creditor and debtor relationship. He relied on the decisions of this Court
in Bombay Steam Navigation Co. (1953) Private Ltd. v. C.I.T., Bombay [1965
(1) SCR 770], C.I.T., Lucknow v. Bazpur Co-operative Sugar Ltd. [1989 Supp.
(2) SCC 240] and Ram Ratan Gupta v. Director of Enforcement, Foreign
Exchange Regulation & Anr. [1966 (1) SCR 651] in which the distinction
between a loan and a debt has been judicially brought out to say that
whereas a loan of a money results in a debt, every debt is not a loan. He
submitted that in a loan transaction, therefore, there is a lender and a
borrower, but in a transaction which is not a loan there is no lender and
no borrower, but there may be a creditor and a debtor. He submitted that
in a derivative transaction the dues payable by a party to the bank may be
a debt and the bank may be a creditor and such party may be a debtor, but
the bank in a derivative transaction is not a lender and such party from
whom the dues are payable to the bank is not a borrower. He further
submitted that the interpretation given by the RBI to the Master Circular
cannot be accepted by the Court by recourse to the doctrine of
contemporanea expositio as this doctrine was applicable to ancient statutes
and has no application to modern statutes as has been noted in Principles
of Statutory Interpretation (12th Edn. 2010) by Justice G.P. Singh at pages
341-349. He further submitted that if the doctrine of contemporanea
expositio is applicable, the interpretation given by the RBI in the Master
Circular may have some weight, but cannot be decisive as interpretation of
the Master Circular, in the facts of the present case, is a judicial
function to be performed by the Court. In support of this proposition, he
relied on Bhuwalka Steel Industries Ltd. v. Bombay Iron & Steel Labour
Board & Anr. [(2010) 2 SCC 273]. He submitted that the RBI could have
issued a Circular or a Press Note and made a public declaration that a
defaulter of payment obligations under a derivative transaction to the bank
is also covered by the Master Circular before the matter reached the Court.
He submitted that after the matter reaches the Court, the RBI cannot file
affidavits taking a stand that defaulters of dues under derivative
transactions to the bank are covered by the Master Circular.
12. Mr. Sorabjee referred to Section 6 of the 1949 Act to show that a
bank can engage in several businesses other than lending such as deal in
derivatives and such business will not fall within the core banking
business of the bank under clauses (a) to (o) of Section 6 of the 1949 Act
and it will also not constitute lending. He referred to the decision in
ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. [(2010)
10 SCC 1] in which this Court has broadly categorised the functions of the
banking company into two parts, namely, core banking of accepting deposits
and lending and miscellaneous functions and services. Accordingly to him,
derivative is a part of the miscellaneous parts of functions and services
provided by the bank and do not create a lender-borrower relationship. He
submitted that the Master Circular contemplates grave consequences
affecting the right of a person under Article 19(1)(g) of the Constitution
of India to carry on any trade, business or occupation and should be
strictly construed as otherwise it will be exposed to the challenge of
unconstitutionality. In support of this argument, he relied on the
decisions of this Court in Tolaram Relumal & Anr. v. State of Bombay [1955
(1) SCR 158], Chandigarh Housing Board v. Major General Devinder Singh &
Anr. [(2007) 9 SCC 67], Delhi Airtech Services Private Limited & Anr. v.
State of Uttar Pradesh & Anr. [(2011) 9 SCC 354] and Shah & Co., Bombay v.
State of Maharashtra & Anr. [1967 (3) SCR 466].
13. Mr. Dushyant Dave and Mr. S. Ganesh, learned senior counsel appearing
for respondent no.1-bank, submitted that the derivative transactions
between the appellant no.1 and respondent no.1 are swaps and options and
the liability of the appellant no.1 to the respondent no.1 under these
transactions arose on the settlement date. They referred to the decision
of the Madras High Court in Rajshree Sugars & Chemicals Ltd. v. Axis Bank
Ltd. [(2008) 8 MLJ 261] in which four categories of derivative transactions
have been described including swaps and options. In this decision, the
Madras High Court has taken note of the fact that a swap is an agreement
made between two parties to exchange payments on regular future dates and
the option gives the holder the right to buy or sell an underlying asset at
a future date at a predetermined price. They also referred to the ISDA
agreement between the appellant no.1 and the respondent no.1 to explain the
nature of the derivative transactions between the appellant no.1 and the
respondent no.1. They submitted that as the appellant no.1 did not pay
dues amounting to Rs.29.2 million under the derivative transactions, the
respondent no.1 issued a notice to the appellant dated 15.10.2010 to show
cause why the respondent no.1 should not classify the appellant as a wilful
defaulter under the Master Circular and also informed the respondent no.1
that it could make a representation against the decision to classify it as
a wilful defaulter to the Grievance Redressal Committee of the respondent
no.1-bank. They submitted that the appellant no.1 did make a
representation and was also subsequently heard, but the Grievance Redressal
Committee held that the appellant was a wilful defaulter under the Master
Circular.
14. They further submitted that the RBI has always treated a derivative
transaction as a facility granted by a bank to its customer in order to
enable the customer to manage its risks arising from fluctuations in
foreign exchange and interest rates. They referred to the Master Circular
as well as the other Circulars dated 02.07.2007, 13.10.2008, 08.12.2008 and
09.04.2009 to show that a derivative transaction is a non-funded credit
facility enjoyed by a borrower from a bank. They submitted that both
Section 45A(b) of the 1934 Act and Section 2(c) of the 2005 Act define a
“borrower” as covering a person to whom “any credit facility” has been
granted, including any credit facility other than a loan. They submitted
that, therefore, the word “borrower” in the Master Circular covers not only
a loanee but also any other customer of the bank enjoying a credit facility
such as a derivative transaction. They submitted that the Master Circular
is an administrative circular issued by the RBI in exercise of its
regulatory power and, therefore, can be clarified by the RBI where a doubt
arises as to whether derivative transactions are covered under the Master
Circular and the RBI has clarified in its affidavit filed before this Court
that the derivative transactions are covered by the Master Circulation.
They cited the decision of this Court in Desh Bandhu Gupta and Co. and
others v. Delhi Stock Exchange Association Ltd. [(1979) 4 SCC 565] that an
administrative construction placed by the authority or officers charged
with executing a statute generally should be clearly wrong before it is
overturned and is entitled to considerable weight. They also referred to
the decision of this Court in Peerless General Finance & Investment Co. Ltd
and another v. Reserve Bank of India [(1992) 2 SCC 343] wherein it has been
held that Courts are not to interfere with economic policy which is the
function of the expert bodies and submitted that the view taken by the RBI
that dues under derivative transactions covered by the Master Circular
should not be disturbed by this Court.
CIVIL APPEAL No. 8918 OF 2012
(Arising out of SLP (C) NO. 28477 of 2011)
15. Leave granted.
16. This is an appeal against the judgment dated 23/24.08.2011 of the
Bombay High Court in Writ Petition (Lodg.) No. 345 of 2011.
17. The facts briefly are that the appellant no.1 carries inter alia the
business of PVC pipes and PVC resins and the appellant no.2 is its
Assistant Managing Director and Chief Officer. The appellant no.1 entered
into several derivative transactions with respondent no.3-bank named as
USD/JPY Target Profit Forward Transactions during the years 2007-2008. On
01.07.2009, the Reserve Bank of India (for short ‘the RBI’), respondent
no.1, issued a Master Circular on Wilful Defaulters (for short ‘the Master
Circular’). The Master Circular contained instructions of the RBI to the
banks and financial institutions regarding reporting of wilful defaulters
to other banks and financial institutions and the measures to be imposed on
wilful defaulters by the said banks and financial institutions. The
respondent no.3-bank issued a demand notice dated 20.08.2009 to the
appellant no.1 calling upon the appellant to pay USD 20,821,480.40 with
interest thereon as dues of the appellant no.1 to the respondent no.3-bank
under the derivative transactions. As the appellant no.1 did not pay the
said dues, the respondent no.3 issued a notice dated 19.04.2010 to the
appellant to show cause why the appellant will not be classified as a
wilful defaulter under the Master Circular. The appellant no.1 replied
vide its letter dated 10.05.2010 denying the allegations made by the
respondent no.3-bank in the notice dated 19.04.2010 and requesting the
respondent no.3-bank to give a fair and reasonable opportunity to place its
representation before the Grievance Redressal Committee of the respondent
no.3-bank before a final decision is taken to classify the appellant no.1
as a wilful defaulter. The Grievance Redressal Committee of the respondent
no.3-bank heard the appellant no.1 on 13.12.2010, but passed an order on
20.01.2011 declaring the appellant no.1 as a wilful defaulter. Aggrieved,
the appellants filed Writ Petition (lodg.) No. 345 of 2011 before the
Bombay High Court challenging the order dated 20.01.2011 of the Grievance
Redressal Committee. By the impugned judgment, the Bombay High Court held
that the Master Circular covers the outstanding claims of respondent no.3-
bank against the appellant no.1 arising out of the foreign exchange
derivative transactions. The High Court, however, left it open to the
Grievance Redressal Committee to pass fresh orders after complying with the
principles of natural justice. The appellants have, therefore, filed this
appeal.
18. Dr. A.M. Singhvi, learned senior counsel appearing for the
appellants, submitted that in the present case the respondent no.3-bank has
not sanctioned any credit or other facility for derivative transactions in
favour of the appellant no.1 and as such there was no International Swaps
and Derivatives Association (ISDA) agreement between the appellant and the
respondent no.3 for the derivative transactions. He submitted that a
foreign exchange derivative contract means a financial transaction or an
arrangement whose value is derived from price movement in one or more
underlying assets. He submitted that under the FEMA Regulations any
authorized person including an authorized dealer, a money changer, a
financial banking unit, or any other person can deal with foreign exchange
derivatives and thus foreign exchange derivative transactions are not
essentially banking transactions. He explained that the banks have to get
a separate licence to be an authorized person to deal with foreign exchange
derivatives. He submitted that Chapter III-A of the 1934 Act relates to
the collection and furnishing of credit information and a reading of
Section 45A in Chapter III-A would show that credit information covers only
information in relation to borrowers to whom any credit limit has been
sanctioned by any banking company. He vehemently argued that in any case
Section 45E in Chapter III-A of the 1934 Act clearly provides that any
credit information contained in any statement submitted by a banking
company under Section 45C or furnished by the bank to any banking company
under Section 45D shall be treated as confidential. He submitted that any
information relating to a derivative transaction entered into by a customer
of the bank cannot, therefore, be disclosed by the bank either to the RBI
or to any other bank. He also cited the decision of the King’s Bench in
Tournier v. National Provincial and Union Bank of England [(1924) 1 KB 461]
for the proposition that there is an implied contract between the bank and
the customer that the bank will not disclose any information relating to
the customer to any third party. He submitted that any disclosure of
information relating to the defaults made by the customer of his
obligations under a derivative transaction will be breach of the implied
contract of confidentiality between the bank and its customer. He
submitted that similarly the 2005 Act covers only the “credit information”
as defined in the 2005 Act and as dues under a foreign exchange derivative
transaction is not “credit information” within the meaning of the
expression as defined in the 2005 Act, any disclosure of information
relating to foreign exchange derivative transactions by the bank with its
customer is not authorized under the 2005 Act. He submitted that the FEMA
and the ‘FEMA Regulations’ which comprehensively deal with the foreign
exchange derivatives and the 1949 Act also do not authorize disclosure of
any information relating to derivative transactions affecting the customer
of the bank.
19. Mr. Singhvi reiterated the arguments of Mr. Sorabjee that the Master
Circular covers the dues under the borrower-lender relationship between the
customer and the bank. He submitted that as derivative transactions did
not involve a borrower-lender relationship at all, it could not become a
borrower-lender subsequently on default of payment of the demand made by
the bank under the derivative transaction. He submitted that the RBI has
not given any definite opinion as to whether the dues under a derivative
transaction would be covered under the Master Circular and in any case the
opinion of the RBI is not consistent and is in conflict with the statutory
provisions. He cited Desh Bandhu Gupta and Co. and Others v. Delhi Stock
Exchange Association Ltd. [(1979) 4 SCC 565] to submit that the
interpretation given by the RBI to the Master Circular could not have any
controlling effect on the Courts and if occasion arises, will have to be
disregarded by the Courts for cogent and persuasive reasons. He finally
submitted that if the Master Circular is construed to cover derivative
contracts it will have the effect of black listing the customers who resist
demands made by the banks towards their alleged dues under the derivative
transactions and will ruin their business as well as their reputation and
the Master Circular will become arbitrary and violative of Article 14 of
the Constitution. He submitted that as the Master Circular has a penal
effect, it has to be strictly construed and so construed, it will cover
only a lender-borrower relationship and not the relationship between the
bank and its customer in a derivative transaction. He submitted that the
impugned judgment of the High Court therefore should be set aside.
20. Mr. Ashok Desai, learned senior counsel appearing for the respondent
no.3, in reply, submitted that the Master Circular has been issued by the
RBI in exercise of its powers under the 1934 Act and, therefore, for
interpreting the Master Circular, the functions of the RBI under the 1934
Act have to be kept in mind. He referred to the preamble of the 1934 Act
to show that the RBI has been constituted to inter alia operate the credit
system of the country to its advantage. He also referred to the statement
of objects and reasons of the Amendment Act of 26 of 2006 in which a
reference has been made to the crucial role that derivative plays in re-
allocating and mitigating the risks of corporates, banks and other
financial institutions. He submitted that it is by the Amendment Act 26 of
2006 that various provisions were introduced in the 1934 Act in Chapter III-
D for regulation of transactions in derivatives. He submitted that
transactions in derivative therefore have an important bearing on the
credit policy or credit system of the country and the views of the RBI
whether the Master Circular would cover the dues under derivative
transaction are decisive and should not be discarded by the Court.
21. He cited Ganesh Bank of Kurundwad Ltd. & Ors. v. Union of India &
Ors. [(2006) 10 SCC 645] for the proposition that when two views are
possible, the view of the regulating body, such as the RBI, should be
accepted by the Court in matters falling within the domain of the RBI. He
also relied on Joseph Kuruvilla Vellukunnel v. Reserve Bank of India [1962
Supp (3) SCR 632] in which the functions of the RBI including the functions
relating to operation of the credit system of the country to its advantage
have been discussed. He cited Peerless General Finance & Investment
Company Ltd. and Another v. Reserve Bank of India and others [(1992) 2 SCC
343] in which this Court has held that the RBI has a large contingent of
expert advice relating to matters affecting the economy of the country and
nobody can doubt the bonafides of the RBI in issuing directions to the
banks and it is not the function of the courts to sit in judgment over
matters of economic policy and it must necessarily be left to the expert
bodies. He also relied on ICICI Bank Ltd. v. Official Liquidator of APS
Star Industries Ltd. and others (supra) in which this Court has discussed
the power of the RBI under the 1934 Act to regulate the business of banking
companies and to control their management in certain situations. He
submitted that in the aforesaid decision, reference has also been made to
the permission of the RBI required if a banking company seeks to deal in
derivative. He submitted that in Desh Bandhu Gupta and Co. and others v.
Delhi Stock Exchange Association Ltd. [(1979) 4 SCC 565] in which the
principle of contemporanea expositio applied to interpretation of statutes
or any other document has been discussed. He submitted that in Common
Cause (A Registered Society) v. Union of India and Another [(2010) 11 SCC
528] this Court has held that it is neither within the domain of the courts
nor the scope of judicial review to embark upon an enquiry as to whether a
particular public policy is wise or not and submitted that these comments
were made by the Court while dealing with the issue of reduction of non-
performing assets in the books of banks.
22. Mr. Desai also referred to the provisions of Chapter III-A of the
1934 Act on Collection and Furnishing of Credit Information and in
particular Section 45A(b) and 45A(c) and submitted that information
regarding dues under derivative transactions will come within the
expression “credit information”. He submitted that disclosure of such
credit information is not hit by Section 45E of the 1934 Act as has been
made clear in the language of the said section. He submitted that the
Bombay High Court, therefore, has correctly interpreted the Master Circular
and held that it also applies to dues under derivative transactions and the
narrow view taken by the Calcutta High Court that the Master Circular will
only apply to dues under a lender-borrower relationship is not correct.
The stand of the RBI in the three Civil Appeals:
23. Mr. Jaideep Gupta, learned senior counsel appearing for the RBI,
submitted that the RBI did not challenge the judgment of the Calcutta High
Court because it was not necessary for the RBI for two reasons: (i) one of
the parties, namely Kotak Mahindra Bank Limited, had challenged the
judgment of the Calcutta High Court and the RBI was a respondent in the
Special Leave Petition filed by the Kotak Mahindra Bank Limited and (ii)
the issue was also pending before the Bombay High Court which could take a
view different from that of the Calcutta High Court. He submitted that at
no stage, therefore, the RBI has accepted the judgment of the Calcutta High
Court that the Master Circular did not cover wilful default of dues under
derivative transactions. He submitted that the Bombay High Court has taken
the correct view that the Master Circular will apply to the dues receivable
by a bank under derivative transactions.
24. He referred to the language of the Master Circular to show that it
covered both funded facilities such as loans and advances and non-funded
facilities such as bank guarantees and derivative transactions. He
referred to clause 2.6 of the Master Circular to show that when bank
guarantees were invoked and are not honoured by the defaulting units on
whose behalf the bank guarantee has been furnished, the defaulters are to
be treated as wilful defaulters under the Master Circular. He argued that
similarly when dues become payable under derivative transactions but the
customer does not pay the dues, the customer becomes a wilful defaulter.
He submitted that the definition of wilful defaulter in clause 2.1 of the
Master Circular makes it clear in sub-clause (a) that a wilful default will
cover also a case where a unit has defaulted in meeting its payment
obligations to the lender even if it has a capacity to honour the said
obligation. He submitted that in a lender-borrower relationship, there may
be a repayment obligation to the lender but no payment obligation, whereas
in a non-funded facility such as bank guarantee or a derivative
transaction, there is no repayment obligation but a payment obligation. He
submitted that a unit which has defaulted in meeting its payment obligation
under a derivative transaction is thus covered under the Master Circular.
He also referred to sub-clause (d) of clause 2.1 of the Master Circular in
which the expression “bank/lender” finds place. He submitted that this sub-
clause would show that the words “bank” and “lender” have been used
interchangeably in the Master Circular and therefore the expression
“lender” in the definition of sub-clauses (a), (b), (c) & (d) would include
a bank. He submitted that the word “lender” in sub-clauses (a), (b), (c) &
(d) of the definition of wilful defaulter would therefore mean the bank and
not the bank as a lender.
25. Mr. Jaideep Gupta submitted that a reading of Section 45V of the 1934
Act would show that transactions in a derivative, as may be specified by
the RBI from time to time, shall be valid and therefore derivative
transactions are under the regulatory purview of the RBI. He submitted
that the Master Circular has to be interpreted keeping in view this
regulatory power of the RBI and a purposive interpretation is to be given
to the Master Circular. He cited the decisions of this Court in Securities
and Exchange Board of India v. Ajay Agarwal [(2010) 3 SCC 765] in which the
purpose of the Act was taken into consideration while interpreting the
provisions of the Act. He also relied on Executive Engineer, Southern
Electricity Supply Company of Orissa Ltd. (SouthCo) and another vs. Sri
Seetaram Rice Mill [(2012) 2 SCC 108] in which this Court while
interpreting the provisions of the Electricity Act, 2003, held that a
construction which will improve the workability of the statute and make it
more effective and purposive, should be preferred to any other
interpretation which may lead to undesirable results.
26. He submitted that the definition of wilful defaulter in the Master
Circular need not be altered by the RBI as and when new products such as
the derivatives come into market as according to the RBI the definition of
wilful defaulter is wide enough to cover such new products which come into
market with the growth of the economy. He referred to the observations of
this Court in Rattan Chand Hira Chand v. Askar Nawaz Jung (Dead) by L.Rs
and Others [(1991) 3 SCC 67] that the legislature has often failed to keep
pace with the changing needs and values and to provide for all
contingencies and eventualities and it is, therefore, not only necessary
but obligatory on courts to step into fill the lacuna. He also placed
reliance on the comments of G.P. Singh’s Principles of Statutory
Interpretation (11th Edition) at p. 328 in this regard. He also relied on
the observation of this Court in ICICI Bank Limited v. Official Liquidator
of APS Star Industries Ltd. and Others (supra) that while interpreting the
Banking Regulation Act, 1949, one needs to keep in mind not only the
framework of the banking law as it stood in 1949 but also the growth and
the new concepts that have emerged in the course of time. He submitted
that when a Master Circular was issued, it contemplated all kinds of wilful
defaulters of dues to the bank and when new products such as derivative
transactions come into economy, the Courts will have to interpret the
Master Circular in an expansive way so as to cover dues to the bank under
such new products.
Interpretation of the Master Circular by the Court:
27. In these appeals, the only question that we are called upon to decide
is whether a wilful default in meeting payment obligations to a bank under
a derivative transaction will be covered under the Master Circular. The
definition of wilful default is in para 2.1 of the Master Circular dated
01.07.2008 and the Master Circular dated 01.07.2009 and is the same. We,
therefore, extract clause 2.1 of the Master Circular dated 01.07.2008,
hereinbelow:
“2.1 Definition of wilful default
The term “wilful default” has been redefined in supersession of the
earlier definition as under:
A “wilful default” would be deemed to have occurred if any of the
following events is noted:-
(a) The unit has defaulted in meeting its payment/repayment
obligations to the lender even when it has the capacity to
honour the said obligations.
(b) The unit has defaulted in meeting its payment/repayment
obligations to the lender and has not utilized the finance from
the lender for the specific purposes for which finance was
availed of but has diverted the funds for other purposes.
(c) The unit has defaulted in meeting its payment/repayment
obligations to the lender and has siphoned off the funds so that
the funds have not been utilized for the specific purpose for
which finance was availed of, nor are the funds available with
the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment/repayment
obligations to the lender and has also disposed of or removed
the movable fixed assets or immovable property given by him or
it for the purpose of securing a term loan without the knowledge
of the bank/lender.”
28. We find from the definition of wilful default in the Master Circular
quoted above that a wilful default would be deemed to have occurred in any
of the events mentioned in sub-clauses (a), (b), (c) and (d) of clause 2.1.
These sub-clauses use the word “lender” and for this reason the Calcutta
High Court has taken a view in the impugned judgment that the Master
Circular applies only to a lender-borrower relationship and thus only a
wilful default by a borrower to the bank which has lent funds by way of
loans and advances would be covered under the Master Circular and a party
who has not borrowed any money from a bank and has availed the facility of
derivative transaction from a bank and has defaulted in meeting its payment
obligation to the bank under the derivative transaction is not covered by
the Master Circular. The Calcutta High Court, therefore, has gone by a
literal interpretation of the word “lender” in sub-clauses (a), (b), (c)
and (d) in the definition of wilful default in clause 2.1 of the Master
Circular.
29. This approach of the Calcutta High Court in interpreting the Master
Circular, in our considered opinion, is not correct because it is a settled
principle of interpretation that the words in a statute or a document are
to be interpreted in the context or subject-matter in which the words are
used and not according to its literal meaning. In Principles of Statutory
Interpretation, 13th Edition, 2012, Justice G.P. Singh has given this
explanation to the rule of literal construction at page 94:
“When it is said that words are to be understood first in their
natural, ordinary or popular sense, what is meant is that the words
must be ascribed that natural, ordinary or popular meaning which they
have in relation to the subject-matter with reference to which and the
context in which they have been used in the statute. Brett, M.R.
called it a “cardinal rule” that “Whenever you have to construe a
statute or document you do not construe it according to the mere
ordinary general meaning of the words, but according to the ordinary
meaning of the words as applied to the subject-matter with regard to
which they are used”. “No word”, says Professor H.A. Smith “has an
absolute meaning, for no words can be defined in vacuo, or without
reference to some context”. According to Sutherland there is a “basic
fallacy” in saying “that words have meaning in and of themselves”, and
“reference to the abstract meaning of words”, states Craies, “if there
be any such thing, is of little value in interpreting statutes”. In
the words of Justice Holmes: “A word is not a crystal transparent and
unchanged; it is the skin of a living thought and may vary greatly in
colour and content according to the circumstances and the time in
which it is used.” Shorn of the context, the words by themselves are
“slippery customers”. Therefore, in determining the meaning of any
word or phrase in a statute the first question to be asked is – “What
is the natural or ordinary meaning of that word or phrase in its
context in the statute? It is only when that meaning leads to some
result which cannot reasonably be supposed to have been the intention
of the Legislature, that it is proper to look for some other possible
meaning of the word or phrase. The context, as already seen, in the
construction of statutes, means the statute as a whole, the previous
state of the law, other statutes in pari materia, the general scope of
the statute and the mischief that it was intended to remedy.”
We will, therefore, have to interpret the word “wilful default” in the
Master Circular by reading the Master Circular as a whole, looking at the
provisions of the 1934 Act and the 1949 Act under which the RBI has powers
to issue circulars and instructions to the banks, the purpose for which the
Master Circular was issued and the mischief that the Master Circular
intends to remedy because these constitute the context and the subject-
matter in which the definition of wilful default finds place in the Master
Circular.
30. The Bombay High Court, on the other hand, has come to the
conclusion in the impugned judgment that the Master Circular covers also a
default in complying with the payment obligations under derivative
transactions by relying on the language of not only the Master Circular
dated 01.07.2009 but also of the circulars issued by the RBI on 08.08.2008,
13.10.2008, 29.10.2008, 09.04.2009 and 01.07.2010 which do not relate to
wilful default but relate to prudential norms, assets classification as non-
performing assets, etc. This approach of the Bombay High Court in
interpreting the Master Circular, in our considered opinion, is also not
correct because the subject matter of these circulars of the RBI issued on
08.08.2008, 13.10.2008, 29.10.2008, 09.04.2009 and 01.07.2010 do not relate
to wilful default but relate to prudential norms, assets classification as
non-performing assets etc. These circulars issued by the RBI on
08.08.2008, 13.10.2008, 29.10.2008, 09.04.2009 and 01.07.2010 may have been
issued by the RBI but these are not circulars amending or clarifying the
definition of wilful default in the Master Circular. The circulars issued
by the RBI on 08.08.2008, 13.10.2008, 29.10.2008, 09.04.2009 and 01.07.2010
on which the Bombay High Court has relied on while interpreting the
definition of wilful default in the Master Circular do not constitute the
context or the subject-matter in which the definition of wilful default in
the Master Circular has to be construed. The context will only include
pari materia circulars issued by the RBI, but will not include circulars
issued by the RBI on subject-matters other than wilful default.
31. On a reading of the paragraph in the Master Circular titled
“Introduction”, we find that pursuant to the instructions of the Central
Vigilance Commission for collection of information on wilful defaults of
Rs.25 lakhs and above, a scheme was framed by the RBI with effect from
01.04.1999 under which the banks and notified All India Financial
Institutions were required to submit to the RBI the details of the wilful
defaulters. Hence, the Master Circular originated pursuant to the
instructions of the Central Vigilance Commission and these instructions are
contained in a communication dated 27.11.1998 of the Central Vigilance
Commission on the subject “improving vigilance administration in banks”.
The instructions have been issued by the Central Vigilance Commission in
exercise of its powers under Section 8(1)(h) of the Central Vigilance
Commission Ordinance, 1998, whereunder it exercises superintendence over
the vigilance administration of the various Ministries of the Central
Government or Corporations established by or under any Central Act,
Government Companies, Societies and local authorities owned or controlled
by the Central Government. Para 2.3 of the aforesaid instructions issued
by the Central Vigilance Commission is extracted hereinbelow:
“2.3 Lack of communication between Banks
1. All cases of willful default of Rs.25 lakhs and above will be
reported by all banks to RBI as and when they occur or are
detected.
2. Whether a matter is a case of willful default will be decided
in each bank by a Committee of Officers.
3. The RBI will circulate the information received from the banks
of wilful default, every three months. The data with the RBI
will also be accessible directly by the banks concerned after
the WAN is installed in position.
4. There should be greater intra bank communication about willful
default, frauds, cheating cases etc. so that the same bank does
not get exploited in different branches by the same defaulting
parties.”
32. It will be clear from the language of the aforesaid instructions
issued by the Central Vigilance Commission that all cases of wilful default
of Rs.25 lakhs and above were to be reported by all the banks to the RBI as
and when they occur or are detected and the RBI was required to circulate
the information received from the banks of wilful default every three
months and there was to be greater intra bank communication about the
wilful defaults. These instructions of the Central Vigilance Commission
covered to “all cases of wilful default of Rs.25 lakhs and above” and were
not confined to only wilful default by a borrower of his dues to the bank
in a lender-barrower relationship. Thus, it will be clear from the
aforesaid instructions of the Central Vigilance Commission that all cases
of wilful defaults of Rs.25 lakhs and above were to be reported by the
banks to the RBI and not just cases of defaults by borrowers of loans or
advances from banks and the mischief that was sought to be remedied was
that banks are not exploited by parties who have the capacity to pay their
dues to the banks but who willfully avoid paying their dues to the banks.
33. Pursuant to the aforesaid instructions of the Central Vigilance
Commission, the RBI circulated a Scheme for Collection and Dissemination of
information on cases of wilful default of Rs.25 lacs and above which was to
come into force with effect from 01.04.1999. Sub-para (ii) of the scheme
in Para 2 of the Circular dated 20.02.1999 is extracted hereinbelow:
“2(ii) The scheme will cover all non-performing borrowal accounts with
outstandings (funded facilities and such non-funded facilities which
are converted into funded facilities) aggregating Rs.25 lakhs and
above.”
It will be clear from the language of sub-para (ii) of Para 2 of the scheme
quoted above that the scheme was to cover not only funded facilities, but
also non-funded facilities which are converted into funded facilities.
Thus, the scheme relating to Collection and Dissemination of information on
cases of wilful default of Rs.25 lacs and above was to cover not only loans
and advances which are funded facilities, but also facilities which do not
relate to loans and advances.
34. When we look at the Master Circular, we find that the purpose of the
Master Circular is “to put in place a system to disseminate credit
information pertaining to wilful defaulters for cautioning banks and
financial institutions so as to ensure that further bank finance is not
made available to them”. Hence, the purpose of the Master Circular is to
have a system to disseminate credit information pertaining to wilful
defaulters amongst banks and financial institutions so that no further bank
finance is made available to such wilful defaulters from such banks and
financial institutions. The expression “credit information” has not been
defined in the Master Circular, but has been defined in Section 45A(c) of
the 1934 Act as follows:
“45A(c). ‘‘credit information’’ means any information relating to–
(i) the amounts and the nature of loans or advances and other credit
facilities granted by a banking company to any borrower or class of
borrowers;
(ii) the nature of security taken from any borrower or class of
borrowers for credit facilities [granted to him or to such class;
(iii) the guarantee furnished by a banking company for any of its
customers or any class of its customers;
(iv) the means, antecedents, history of financial transactions and
the credit worthiness of any borrower or class of borrowers;
(v) any other information which the Bank may consider to be relevant
for the more orderly regulation of credit or credit policy.]
It will be clear from the language of sub-clause (v) of Section 45A(c) of
the 1934 Act quoted above that credit information means not only any
information relating to matters in sub-clauses (i),(ii),(iii) and (iv), but
also relates to any other information which the bank considers to be
relevant for the more orderly regulation of credit or credit policy.
Hence, “credit information” is not confined to information relating to a
borrower of the bank, but may also relate to a constituent of the bank who
intends to take some credit from the bank. The purpose of the Master
Circular being to caution banks and financial institutions from giving any
further bank finance to a wilful defaulter, credit information cannot be
confined to only the wilful defaults made by existing borrowers of the
bank, but will also cover constituents of the bank, who have defaulted in
their dues under banking transactions with the banks and who intend to
avail further finance from the banks.
35. Keeping in mind the mischief that the Master Circular seeks to remedy
and the purpose of the Master Circular, we interpret the words used in the
definition of ‘wilful default’ in clause 2.1 of the Master Circular to mean
not only a wilful default by a unit which has defaulted in meeting its
repayment obligations to the lender, but also to mean a unit which has
defaulted in meeting its payment obligations to the bank under facilities
such as a bank guarantee. According to us the word ‘lender’ in sub-clauses
(a), (b), (c) and (d) means the “bank” because “payment obligations”
mentioned in clause (a) do not ordinarily refer to obligations to a lender
and clause (d) has used the expression “bank/lender”. Moreover, the
instructions of the Central Vigilance Commission pursuant to which the
scheme relating to Collection and Dissemination of credit information on
wilful defaulters was formulated by the RBI were to cover “all cases of
wilful defaults of Rs.25 lakhs and above”. Also Paragraph 2.6 of the
Master Circular states inter alia that in cases where a letter of comfort
and/or the guarantees furnished by the companies within the group on behalf
of the willfully defaulting units are not honoured when invoked by the
banks/financial institutions, such group companies should also be reckoned
as wilful defaulters. It is, thus, clear that non-funded facilities such
as a guarantee is covered by the Master Circular and when a guarantee is
invoked by a bank/financial institution but is not honoured, the defaulting
constituent of the bank is treated as a wilful defaulter even though it may
not have borrowed funds from the bank in the form of advances or loans.
36. The scheme of Collection and Dissemination of information on cases of
wilful default of Rs.25 lakhs and above was framed by the RBI in the year
1999 when the derivative transactions were not part of the country’s
economy. Under the FEMA Regulations, 2000 only the banks were authorized
to deal with the derivative transactions. Section 45V introduced along
with other provisions of Chapter IIID in the 1934 Act by the Reserve Bank
of India (Amendment) Act, 2006 declared that transactions in derivatives,
as may be specified by the RBI from time to time, shall be valid, if at
least one of the parties to the transaction is the bank, a scheduled bank,
or such other agency falling under the regulatory purview of the RBI under
the 1934 Act, FEMA Act or any other Act or instrument having the force of
law, as may be specified by the RBI from time to time. Derivative
transactions in India thus were valid only if they were with any bank or
any other agency falling under the regulatory purview of the RBI because
they would have a substantial bearing on the credit system and credit
policy in respect of which the RBI has regulatory powers under the 1934 and
1949 Acts. Such derivative transactions may not involve a lender-borrower
relationship between the bank and its constituent, but dues by a
constituent remaining unpaid to a bank may affect the credit policy and the
credit system of the country. Information relating to defaulters of dues
under derivative transactions who intend to take additional finance from
the bank obviously will come within the meaning of credit information under
Section 45A(c)(v) of the 1934 Act.
37. We do not find force in the submission of Dr. A.M. Singhvi that any
information relating to a party who has defaulted in payment of its dues
under derivative transactions cannot be disclosed by a bank to the RBI or
any other bank because of an implied contract between the bank and its
customer or by Section 45E of the 1934 Act. Sections 45C and 45E of the
1934 Act are extracted hereinbelow:
“45C. Power to call for returns containing credit information.—
(1)
For the purpose of enabling the bank to discharge its functions
under this chapter, it may at any time direct any banking company to
submit to it such statements relating to such credit information and
in such form and within such time as may be specified by the Bank
from time to time.
(2) A banking company shall, notwithstanding anything to the
contrary contained in any law for time being in force or in any
instrument regulating the constitution thereof or in any agreement
executed by it, relating to the secrecy of its dealings with its
constituents, be bound to comply with any direction issued under sub-
section (1).”
“45E. Disclosure of information prohibited.—(1) Any credit
information contained in any statement submitted by a banking
company under Section 45C or furnished by the bank to any banking
company under Section 45D shall be treated as confidential and shall
not, except for the purposes of this Chapter, be published or
otherwise disclosed.
(2) Nothing in this section shall apply to—
(a) the disclosure by any banking company, with the previous
permission of the bank, of any information furnished to the
bank under Section 45C;
(b) the publication by the bank, if it considers necessary in
the public interest so to do, of any information collected
by it under section 45C, in such consolidated form as it
may think fit without disclosing the name of any banking
company or its borrowers;
c) the disclosure or publication by the banking company or by
the bank of any credit information to any other banking
company or in accordance with the practice and usage
customary among bankers or as permitted or required under
any other law:
Provided that any credit information received by a banking
company under this clause shall not be published except in
accordance with the practice and usage customary among
bankers or as permitted or required under any other law.
d) The disclosure of any credit information under the Credit
Information Companies (Regulation) Act, 2005 (30 of 2005)
(3) Notwithstanding anything contained in any law for the time being
in force, no Court, Tribunal or other authority shall compel the
bank or any banking company to produce or to give inspection of
any statement submitted by that banking company under section
45C or to disclose any credit information furnished by the bank
to that banking company under Section 45D.”
We have already held that information relating to a party who has defaulted
in payment of its dues under derivative transactions to the bank is credit
information within the meaning of Section 45A(c)(v) of the 1934 Act. Sub-
section (1) of Section 45C of the 1934 Act provides that the RBI may at any
time direct any banking company to submit to it such statements relating to
such credit information and in such form and within such time as may be
specified by the RBI from time to time. Hence, information relating to a
party, who has defaulted in payment of its dues under derivative
transactions being credit information may be called for from the banking
company by the RBI under sub-section (1) of Section 45C of the 1934 Act.
Sub-section (2) of Section 45C of the 1934 Act further provides that the
banking company shall, notwithstanding anything to the contrary contained
in any law for time being in force or in any instrument regulating the
constitution thereof or in any agreement executed by it, relating to the
secrecy of its dealings with its constituents, be bound to comply with any
direction issued under sub-section (1). Sub-section (1) of Section 45E
says that such credit information shall be treated as confidential and
shall not be published or otherwise disclosed “except for the purposes of
this Chapter”, but sub-section (2)(a) of Section 45E clearly provides that
nothing in Section 45E shall apply to the disclosure by any banking
company, with the previous permission of the RBI, of any information
furnished to the RBI under Section 45C. Thus, confidentiality of any
credit information either by virtue of any other law or by virtue of any
agreement between the bank and its constituent cannot be a bar for
disclosure of such credit information including information relating to a
derivative transaction of the RBI under sub-section (1) of Section 45C.
38. We do not also find any force in the submission of Mr. Mr. Bhaskar P.
Gupta that the Master Circular has penal consequences and, therefore, has
to be literally and strictly construed. Clause 4.3 of the Master Circular,
which contemplates criminal action by banks/financial institutions, is
extracted hereinbelow:
“4.3 Criminal Action by Banks/Fls
It is essential to recognize that there is scope even under the
exiting legislations to initiate criminal action against wilful
defaulters depending upon the facts and circumstances of the case
under the provisions of Sections 403 and 415 of the Indian Penal
Code (IPC) 1860. Banks/Fls are, therefore, advised to seriously and
promptly consider initiating criminal action against wilful
defaulters or wrong certification by borrowers, wherever considered
necessary, based on the facts and circumstances of each case under
the above provisions of the IPC to comply with our instructions and
the recommendations of JPC.
It should also be ensured that the penal provisions are used
effectively and determinedly but after careful consideration and due
caution. Towards this end, banks/Fls are advised to put in place a
transparent mechanism, with the approval of their Board, for
initiating criminal proceedings based on the facts of individual
case.”
All that the aforesaid clause 4.3 of the Master Circular states is that
there is scope even under the exiting legislations to initiate criminal
action against wilful defaulters depending upon the facts and circumstances
of the case under the provisions of Sections 403 and 415 of the Indian
Penal Code, 1860 and the banks and financial institutions are strictly
advised to seriously and promptly consider initiating criminal action based
on the facts and circumstances of each case under the above provisions of
the IPC. Thus, the Master Circular by itself does not have penal
consequences, whereas Sections 403 and 415 of the IPC have penal
consequences. The provisions of Sections 403 and 415 of the IPC obviously
have to be strictly construed as these are penal provisions and will get
attracted depending on the facts and circumstances of each case, but the
provisions of the Master Circular need not be strictly construed. As we
have held, the Master Circular has to be construed not literally but in its
context and the words used in the definition of “wilful defaulter” in the
Master Circular have to draw their meaning from the context in which the
Master Circular has been issued.
39. We are also not impressed with the argument of Mr. Soli J. Sorabjee
that the Master Circular contemplates grave consequences affecting the
right of a person under Article 19(1)(g) of the Constitution of India to
carry on any trade, business or occupation and should be strictly construed
as otherwise it will be exposed to the challenge of unconstitutionality.
No challenge was made by the writ petitioners before the Bombay High Court
to the constitutionality of the Master Circular and the challenge by the
writ petitioners before the Calcutta High Court was to the
constitutionality of only Paragraph 3 of the Master Circular relating to
the Grievance Redressal Mechanism. Hence, we are not called upon to decide
in these appeals whether the Master Circular violates the right of a person
under Article 19(1)(g) of the Constitution of India. Similarly, we cannot
consider in these appeals, the contention raised by Dr. A. M. Singhvi that
the Master Circular has the effect of black listing a bank’s client and
would, therefore, be arbitrary and violative of Article 14 of the
Constitution.
In these Civil Appeals, we are concerned with the
interpretation of the Master Circular and on interpretation of the Master
Circular, we find that
the Master Circular covers not only wilful defaults
of dues by a borrower to the bank but also covers wilful defaults of dues
by a client of the bank under other banking transactions such as bank
guarantees and derivative transactions.
40. In the result, we hold that wilful defaults of parties of dues under
a derivative transaction with a bank are covered by the Master Circular and
this we hold not because the RBI wants us to take this view, because this
is our judicial interpretation of the Master Circular. The impugned
judgment of the Calcutta High Court is set aside and the impugned judgment
of the Bombay High Court is sustained. We make it clear that we have not
expressed any opinion on the individual transactions between the bank and
the parties and our judgment is based solely on the interpretation of the
Master Circular. Accordingly, the appeal filed by Kotak Mahindra Bank Ltd.
against the judgment of the Calcutta High Court is allowed and the appeals
filed against the judgment of the Bombay High Court by different parties
are dismissed. The parties, however, shall bear their own costs.
I.A. for intervention stands disposed of.
.……………………….J.
(A. K.
Patnaik)
………………………..J.
(Swatanter
Kumar)
New Delhi,
December 11, 2012.
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