TMI Blog2012 (12) TMI 396X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. No force in the submission that the Master Circular has penal consequences and, therefore, has to be literally and strictly construed. Constitutional right of a person under Article 19(1)(g) - held that: - 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. 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. Wilful d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oney 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Court. 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 deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstrued, 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 deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cording 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 consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntral 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 herein below: 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 gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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