TMI Blog2023 (3) TMI 792X X X X Extracts X X X X X X X X Extracts X X X X ..... have come into the lending bank s account were being moved into current accounts elsewhere. The circular attempts to curb and stop this. The circular s purpose is not achieved by permitting an unregulated dispersal of inflows into diverse accounts at the option of the borrower. Correctly read, the circular demands what is best thought of as a funnelling or channelling mechanism: once there is a lending account with an exposure of over Rs 50 crores, all inflows must be routed into that lending account. Inflow and outflow transactions in other current accounts are not permitted. If there are other current accounts, then these are carefully calibrated to be only collection accounts. The provision for an escrow mechanism is predicated on there being multiple lending banks. One of these may be chosen as the escrow bank. But where there is only one lending bank and there are also several other non-lending banks where a borrower has a current account then there is no question of an escrow . The entire concept of an escrow mechanism is to create a common pool from which disbursement is triggered only on the occurrence of defined events. Multiple lenders would be rival claimants to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For Respondent 2 In WP(L)/4051/2023 : Mr Ashish Kamat, Senior Advocate, with Akshay Puranik, Vivek Shetty, Amey Mirajkar Parimal Kashyap, i/b AZB Partners. For Respondent 3 In Both Petitions : Ms Sabiha Ansari, with Aisha Shaikh Tanvi Rane. For Respondent 4 In WP(L)/4051/2023 : Mr Dharmesh S Jain, i/b Anil T Agrawal. For Respondent 5 In Both Petitions : Mr Nishit Dhruva, with Prakash Shinde, Niyati Merchant, Yash Dhruva harsh Sheth, i/b MDP Partners. For Respondent 6 In WP(L)/4051/2023 : Mr Ravi Kadam, Senior Advocate, with Gaurav Mehta, CD Metha, Aamir Ali Shaikh, i/b Dhruve Liladhar Co. ORAL JUDGMENT (PER GS PATEL J): 1. The 1st Petitioner imports and exports Cocoa products of various kinds. Some of its business involves exports. Petitioner No. 2 is a director of Petitioner No. 1, VJ Jindal Cocoa Private Limited ( Jindal Cocoa ). 2. The Petition, brought under Article 226 of the Constitution of India, seeks the following reliefs: (A1) This Hon ble Court be pleased to issue a Writ of Mandamus or any other appropriate writ or order or direction in the nature of Mandamus under Article 226 of the Constitution of India, 1950 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the second prayer (a) (shown as (A2) above) for a certiorari is not pressed. What remain, therefore, are the various reliefs for mandamus. 4. The 1st Respondent is the Union of India through the Ministry of Finance. It has almost no role to play in this. The 2nd Respondent is the Reserve Bank of India ( RBI ) represented by Mr Kamat. The Respondents Nos. 3, 4 and 5 are, respectively, the Punjab National Bank ( PNB ), the Jammu and Kashmir Bank ( J K ) and Canara Bank ( CanBank ). As we shall presently see, they are not active participants in the present litigation. It is the 6th Respondent, HDFC Bank Limited ( HDFC Bank ), not a state-controlled bank, that is really the focus of the Petition. Jindal Cocoa is aggrieved by certain communications that HDFC Bank sent to PNB, J K Bank and CanBank. These were by an email dated 2nd February 2023 and two emails of 4th February 2023. To put this as compactly as possible, what HDFC Bank said in these emails to the three other banks was that there was a circular issued by the RBI circular that not allow any banking customer to have a current account with other banks if that customer already had credit facilities in the form of Cash Credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facility with HDFC Bank and therefore, following the RBI circular, Jindal Cocoa could not have current accounts with any other bank. HDFC Bank said that it had found that Jindal Cocoa also held a current account with PNB Bank. Therefore, the PNB Bank current account of Jindal Cocoa had be closed. HDFC Bank asked PNB to arrange this closure immediately and to remit the balance to Jindal Cocoa s account with HDFC Bank. It also noted that Jindal Cocoa s group company was classified as a Non- Performing Asset ( NPA ). 8. On 4th February 2023, HDFC Bank sent similar emails to J K Bank and to CanBank. Copies of these are at Exhibit O and P to the Petition at pages 95 and 97 respectively. There is no material difference for our purposes between these and the email sent to PNB. 9. All three banks, PNB Bank, J K Bank and CanBank forwarded the mails that they had received from HDFC Bank to Jindal Cocoa. It replied on 6th and 7th February to the three banks. In substance, it said that it had maintained accounts with these three banks for several years earlier, well before it set up its banking relationship with HDFC Bank. Jindal Cocoa said that the RBI circular in question would no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uations and for a clear understanding annexes a flow chart. 14. Mr Seervai and Ms Mistry have contended that the circular in its entirety is inapplicable. If it is applicable, the safeguards in it must be followed and there is no possibility of applying the circular without those safeguards. The consolidated circular is of 19th April 2022. The correspondence may have referred to an earlier circular of 6th August 2020 but all before us have proceeded on the basis of the consolidated circular. This brings together the previous circular of 6th August 2020 and subsequent circulars of 4th August 2021 and 29th October 2021. 15. HDFC Bank in its Affidavit in Reply says that the Writ Petition is not maintainable, a submission in which Mr Kadam is joined by Mr Kamat. In any case, even if it is assumed that a writ petition will lie because the relief is fashioned as a direction to RBI to issue appropriate orders to HDFC Bank, the impugned actions are consistent with the consolidated circular and are reasonable. It is also submitted that these are matters of contract and specifically arise under the sanction letter issued by HDFC Bank on 8th August 2017 and a later document of 10th Augu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g system. Paragraph 2, which is the contentious one, speaks of opening of current accounts for borrowers not availing CC/OD facilities from the banking system. Paragraph 3 is simply captioned opening of CC/OD facilities. As we shall see it operates in a different context. Paragraph 4 sets out exemptions regarding specific accounts. Paragraph 5 has other instructions . 20. In paragraph 1, the threshold criterion for application is a split between cases where a borrower s aggregate exposure in the banking system is less than Rs 5 crores and where it is more than Rs 5 crores. Paragraph 1.1 deals with the situation where the aggregate exposure is under Rs 5 crores. We are not concerned with this. Paragraph 1.2 deals with the situation where the aggregate exposure is Rs. 5 crores or more. But paragraph 1 has two other criteria. First, there must be an opening of a current account and it must apply to borrower availing CC/OD facilities. What paragraph 1.2 says is that in this situation, i.e., where a current account is obtained by a borrower who does have a CC/OD facility, a borrower can open a current account provided the bank has at least 10% of the aggregate exposure of the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ches a bank for a CC/OD facility this can be done without restrictions, i.e., without restrictions in the circular, if the aggregate exposure to the banking system of that borrower is under Rs. 5 crores. However, the borrower must give an undertaking to inform the bank if the credit facilities go above Rs. 5 crores. For borrowers whose aggregate exposure exceeds Rs. 5 crores, banks who have 10% or more in the aggregate exposure can provide a CC/OD facility without restrictions. If no bank has at least a 10% exposure, the bank with the highest exposure can provide the CC/OD facility. Then there are similar provisions for credits and so on. 24. Paragraph 4 deals with exemptions and Ms Mistry has drawn our attention specifically to items (b) and (c) of paragraph 4.1 saying that accounts opened under the Foreign Exchange Management Act 1999 ( FEMA ) Act are exempted because they are meant to comply with the FEMA framework. There is a similar exemption to accounts for payment of taxes, duties, statutory dues which bank is authorised to collect these. The argument presented by Ms Mistry runs like this. The accounts in question with the other three banks were not opened . These were i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intained with the lender banks. There was a mushrooming of current accounts by unscrupulous borrowers, especially with nonlender banks, and funds were being diverted for unauthorised purposes. Lending banks were unable to monitor cash flows or to efficiently recover their dues. There was a systematic increase, consequently in NPAs. This is the assertion in paragraph 13 of the Affidavit. 26. Paragraphs 14 to 17 of the RBI Affidavit at pages 357 to 358 are relevant: 14. Banks, specifically non-lending banks had no incentive to prevent a borrower of other bank from opening accounts with it, as a current account meant cheap inflow of funds for the account-opening bank. Often, the lending banks did not invoke the terms and conditions under the loan agreement to discipline the erring borrowers owing to highly competitive banking system which further encouraged unscrupulous borrowers and non-lending banks. 15. The aforesaid situation resulted in (i) increase in frauds and NPAs; (ii) divergence in the assessment of NPAs; and (iii) diversion of funds. Respondent No. 2 introduced the circulars to: (i) prevent unscrupulous fund diversions; (ii) monitor cash flows of borrowers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular was extended vide subsequent circulars and time till November 29, 2021 was provided to banks for ensuring compliance. 20. Respondent No. 2 had inter alia provided an alternate mechanism to the stakeholders to seek redressal of their grievances, if any, in a streamlined manner during the implementation of instructions with regards to existing accounts. Banks were advised to utilize the additional time provided for ensuring compliance to engage with their customers and arrive at mutually satisfactory resolutions within the ambit of the circulars. In case, the constituent banks are not able to resolve the issues banks may escalate those issues with Indian Banks Association ( IBA ). IBA was required to raise such residual issues requiring regulatory consideration with Respondent No. 2 for examination by September 30, 2021. Respondent No. 2 issued the circular dated October 29, 2021 after taking into consideration all the feedbacks received. (Emphasis added) 28. Mr Kadam for HDFC Bank supports Mr Kamat s interpretation and says that as the prime lender of a credit facility, and this is a case, he points out, where there is no other competing credit facility but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the restrictions of the circular cannot apply. But absolutely nothing is shown to us in this direction. Ms Mistry cannot show how the mischief perceived by the RBI (of current accounts being used to keep money from entering the lending account) is inapplicable or without any possibility of occurrence on her construct, i.e., of being allowed unrestricted use of pre-existing current accounts. Indeed, according to Mr Kadam, that is precisely what is happening and what is being done by Jindal Cocoa: funds that should have the HDFC Bank lending EPC account as a destination are re-routed into current accounts with other banks, and this is being done on the basis that those other current accounts are not being opened but are already opened . 31. As to Ms Mistry s submission that there must therefore be an escrow mechanism, we agree with Mr Kadam that this is an argument that rejects itself. The provision for an escrow mechanism is predicated on there being multiple lending banks. One of these may be chosen as the escrow bank. But where there is only one lending bank and there are also several other non-lending banks where a borrower has a current account then there is no question o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of the consolidation circular, and its evolution from 2004, is noted in the RBI Affidavit. As to the question of mischief, the RBI Affidavit clearly points out what the effect of opening unregulated current accounts and more particularly of maintaining that is to say, operating these outside the control of the primary lending bank was to the banking system: the unacceptable increase in the number of NPAs. The RBI Affidavit clearly says that the result was difficulty in recovery of those assets and of the loans and this thus weakens the entire banking system. 35. At this point Mr Kadam points out that whatever be the differences about debits, credits, subventions and so forth, the test is not about the validity of those transactions because those lie outside the remit of the writ court but whether the borrower s action fall within the parameters of the guidelines or can be reasonably said to so fall. 36. We believe we must accept the interpretation of both Mr Kadam and Mr Kamat. Our view is fortified by a quick consideration of the flow chart that is appended. This is obviously meant for greater understanding, but it provides a nearly algorithmic or binary interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, Mr Kadam relies on the decision of the Supreme Court in Federal Bank Ltd v Sagar Thomas and Ors. (2003) 10 SCC 733. In paragraph 32, the Supreme Court said that just because the RBI prescribes the banking policy and controls various banks under the Banking Regulation Act, this does not mean that private entities that carry on the business commercial activity of banking discharge any public function or duty. In Chanda Deepak Kochhar v ICICI Bank Ltd, Mumbai Anr 2020 (5) MhLJ 219., a Division Bench of this Court held that no writ would lie against ICICI Bank being a private body and not an instrumentality of the State. A Special Leave Petition from that decision was dismissed on 1st December 2020. 2020 SCC OnLine SC 969. Mr Kadam also submits that if a writ against a private bank is not maintainable, it cannot seek to get the same relief in a circuitous manner by referencing RBI: MK Rappai Ors v John Ors. (1969) 2 SCC 590, paragraphs 12. 40. The submission by Ms Mistry on maintainability runs like this. First, that because that HDFC Bank provides broad banking facilities, therefore it must be held to perform to the extent necessary to invoke t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banks say. We have not suggested that their interpretation is binding or has a controlling effect on Courts. But if that interpretation is to be dislodged, as Desh Bandhu Gupta itself says, this must be for cogent and persuasive reasons. It must be demonstrated that there is a facial error in the interpretation canvassed by the contemporary authority. Only then will a Court without hesitation refuse to follow the construction recommended by that. 42. In Ultratech Cement Ltd Anr v State of Rajasthan Ors. (2020) 7 SCR 392., in paragraphs 25, 25.3 and 25.5, the Supreme Court referred to the decision in Desh Bandhu Gupta but did not depart from the principle. In fact, in paragraphs 25 and 25.1, we find that the attempt was to persuade the Supreme Court that the authority s understanding deserved to be accepted. The doctrine was said to be embodied in a maxim which meant that the best way to construe a document would be to read it as it would have read when made. In paragraph 25.3, the Ultratech Cement court said that the principle is applied as a guide to interpretation by referring to the exposition that the document received from the competent authority at the relevant poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Overdraft Facilities 4 Exemptions Regarding Specific Accounts 5 Other Instructions Appendix 1 Flow Chart Opening of Current Accounts Appendix 2 Flow Chart Opening of Cash Credit/ Overdraft Accounts Opening of Current Accounts and CC/OD Accounts by Banks A. Purpose This Circular consolidates earlier instructions issued by the Reserve Bank of India, on opening and operation of current accounts and CC/OD accounts with a view to enforce credit discipline amongst the borrowers as well as to facilitate better monitoring by the lenders. B. Previous Instructions This circular consolidates instructions contained in the following circulars issued on the above subject: (i) DOR.No.BP.BC/7/21.04.048/2020-21 dated August 6, 2020 (ii) DOR.No.BP.BC.27/21.04.048/2020-21 dated November 02, 2020 (iii) DOR.No.BP.BC.30/21.04.048/2020-21 dated December 14, 2020 (iv) DOR.CRE.REC.35/21.04.048/2021-22 dated August 4, 2021 (v) DOR.CRE.REC.63/21.04.048/2021-22 dated October 29, 2021 C. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion accounts. 2. Opening of Current Accounts for borrowers not availing Cash Credit/ Overdraft Facilities from the banking system 2.1 In case of borrowers where aggregate exposure of the banking system is ₹ 50 crore or more: 2.1.1 Banks shall be required to put in place an escrow mechanism. Borrowers shall be free to choose any lending bank as their escrow managing bank. All lending banks should be part of the escrow agreement. The terms and conditions of the agreement may be decided mutually by lending banks and the borrower. 2.1.2 Current accounts of such borrowers can only be opened/ maintained by the escrow managing bank. 2.1.3 Other lending banks can open collection accounts subject to the condition that funds will be remitted from these accounts to the said escrow account at the frequency agreed between the bank and the borrower. Further, balances in such collection accounts shall not be used for repayment of any credit facilities provided by the bank, or as collateral/ margin for availing any fund or non-fund based credit facilities. While there is no prohibition on amount or number of credits in collection accounts , debits in these accounts shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;5 crore or more: 3.2.1 Banks having a share of 10 per cent or more in the aggregate exposure of the banking system to such borrower can provide CC/OD facility without any restrictions placed vide this circular. 3.2.2 In case none of the banks has at least 10 per cent exposure, bank having the highest exposure among CC/OD providing banks can provide such facility without any restrictions. 3.2.3 Where a bank s exposure to a borrower is less than 10 per cent of the aggregate exposure of the banking system to that borrower, while credits are freely permitted, debits to the CC/OD account can only be for credit to the CC/OD account of that borrower with a bank that has 10 per cent or more of aggregate exposure of the banking system to that borrower. Funds will be remitted from these accounts to the said transferee CC/OD account at the frequency agreed between the bank and the borrower. Further, the credit balances in such collection accounts shall not be used for repayment of any credit facilities provided by the bank, or as collateral/ margin for availing any fund or non-fund based credit facilities. However, banks are permitted to debit interest/ charges pertaining to the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el ATM Operators and their agents for sourcing of currency (f) Accounts of Cash-in-Transit (CIT) Companies/ Cash Replenishment Agencies (CRAs) for providing cash management services (g) Accounts opened by a bank funding a specific project for receiving/monitoring cash flows of that specific project, provided the borrower has not availed any CC/OD facility for that project (h) Inter-bank accounts (i) Accounts of All India Financial Institutions (AIFIs), viz., EXIM Bank, NABARD, NHB, and SIDBI (j) Accounts attached by orders of Central or State governments/ regulatory body/ Courts/ investigating agencies etc. wherein the customer cannot undertake any discretionary debits 4.2 Banks maintaining accounts listed in para 4.1 shall ensure that these accounts are used for permitted/ specified transactions only. Further, banks shall flag these accounts in the CBS for easy monitoring. Lenders to such borrowers may also enter into agreements/ arrangements with the borrowers for monitoring of cash flows/ periodic transfer of funds (if permissible) in these accounts. 5. Other Instructions 5.1 In case of borrowers covered under guidelines on loan system ..... X X X X Extracts X X X X X X X X Extracts X X X X
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