PMC Bank | Bom HC | RBI’s intervention became necessary because there was virtually a run on the bank; Withdrawal limits issued by RBI –Rationalised

Bombay High Court: A Division Bench of R.I. Chagla and S.C. Dharmadhikari, JJ., dismissed all the writ petitions filed by the P&MC Bank account holders with respect to the withdrawal of directions issued by RBI for placing restrictions on withdrawal of amounts.

In the present petitions, petitioners have challenged the directives issued by the Chief General Manager, Reserve Bank of India.

Following are the reliefs sought by the petitioners:

  • RBI to withdraw restrictions imposed in exercise of its power under Section 35 A of the Banking Regulation Act, 1949.
  • Writ of Mandamus or any other appropriate writ, order or directions to be issued to RBI and then to the Deposit Insurance and Credit Guarantee Corporation to make sufficient funds available for easy and unhindered withdrawal
  • Restrictions placed on withdrawal of amounts to be questioned
  • Direction to the Central and the State Government to exercise its powers under the Multi-State Co-operative Societies Act, 2002 and;
  • To provide aid to the bank in question also sought.

Petitioner 2 was to get married and the preparations of the wedding were about to start but the impugned directives of the RBI started pouring in. Petitioner’s 1 & 2 were unable to arrange enough funds for the marriage due to which the engagement might have broken down; directives of the RBI came as a shock.

Petitioner 3’s son received an offer of employment with an Aviation Company that required the petitioner’s son to undergo training for which a heavy amount was to be paid. If the terms and conditions of the employment letter/offer were not complied with, then, there would not be a post-training employment opportunity fructifying in favour of petitioner 3’s son.

It has further been stated by the petitioners that the interest rates on deposits offered by respondent 6-Bank were quite attractive and, therefore, the petitioners chose to deposit their hard-earned money in this bank.

With respect to the above-stated circumstances, petitioner’s raised questions by saying that the hardship limits prescribed are arbitrary, unreasonable and do not cover extraordinary circumstances or exceptional situations.

Further, the petitioners conceded that after rushing to every High Court including the Supreme Court, The Supreme Court granted liberty to the parties before it to withdraw their cases or petitions and approach the High Court. Accordingly, the present petition was filed.

It is stated that the RBI directs every banking company to maintain, on a daily basis, by way of cash reserve, with itself or with the RBI a sum equivalent to such percentage of the total of its demand on the last Friday of the second preceding fortnight as and when the RBI may specify by notification in the Official Gazette from time to time.

Petitioners were also aware of the fact that the Managing Director of the Bank was placed under suspension because the bank sanctioned a loan of Rs 6,400 crores to Housing Development and Infrastructure Ltd. (HDIL). The loan came to be sanction at the behest of the Chairman of respondent 6. RBI discovered fraud in disbursing the said loan only recently although the loan was sanctioned long back, whereas, the HDIL had stopped paying the loan amount as also the interest since 2016.

It has been stated by petitioners that, RBI was negligent in not ensuring discipline and order in the functioning of the bank. The flagging by the RBI was not timely and this gross irregularity has been perpetuated only because the RBI failed to take prompt action.

Further, they continued to add to the above that, if the accounts were not reflecting the correct position, the profit and loss figures were not accurate, then, the RBI should have taken timely measures.

RBI, apart from its preliminary objection that such petitions are not maintainable and there is no question of depositors’ invoking a public law remedy, also proceeded to state on merits that the accounts of the bank are audited at various levels, including an audit by an Internal Auditor, an audit by a Concurrent Auditor and an audit by the Statutory Auditors.

The modus operandi was detected when some transactions, which were not disclosed in full, came to the notice of RBI’s team. That team was deputed to carry out thorough scrutiny of HDIL Group accounts.

Further, in the stated circumstances, RBI acted on a complaint from a senior official of PM&C Bank, Mumbai alleging that the bank sanctioned a large credit facility to HDIL Group in gross violation of prudent banking practices. It manipulated data/information submitted to RBI in this respect and also confessions of the Managing Director of the bank to many of the alleged irregularities.

Preliminary findings on the inspection revealed serious financial irregularities and the precarious condition of the bank. In the persisting circumstances, RBI stated that it issued the impugned directives.

Rationale behind the issuance of the directives was to protect the interest of the bank and its depositors.

Directives supported on the touchstone of the wording and language of Section 35 A of the Act of 1949.

RBI stated that it was sympathetic towards the hardship faced by the depositors and from time to time relaxed the limits placed on withdrawals.

The above-stated material by the petitioners was placed by S.B. Talekar and Gayatri Singh, Senior Counsel’s appearing for the petitioners. Counsel, Mehmood Abdi also placed his contention representing the petitioners in PIL.

Senior Counsel, Talrekar contended that in the present case, even the Central Government has been impleaded as a party respondent. Central Government has a duty and is carved out by Section 61 of the Act of 2002.  The said section empowers the Government to aid Multi-State Co-operative Societies.

He also submitted that the Central and the State Government must devise schemes to meet the present contingency. There is an obligation to aid the Multi-State Co-operative Societies. RBI’s intervention does not in any manner protect the interest of the depositors.

The Reserve Bank of India allowed the condition of the bank to worsen.

If the power under Section 35 A of the Act of 1949 had been exercised earlier, particularly in2015, possibly, the present situation could have been avoided.

P&MC Bank is duped and because of the RBI’s inaction, the petitioners should not suffer.

Petitioner’s counsel further added to the above-stated contentions that, the affected bank is not filing an affidavit and it forwards no proposal to the Central Government, but the RBI cannot visit the petitioners with serious consequences and virtually freeze their accounts.

The assets and properties of the Directors of the Bank are not attached. No steps are taken by RBI or the ED. There are no prompt steps initiated so as to protect the depositors. Thus the Court should not uphold the directions of the RBI but allow the writ petitions.

Counsel, Abdi, appearing for the PIL petitioners brought the attention of the Court with respect to the plight of the petitioners and averred that some of them are on the verge of committing suicide and the investors and depositors are not responsible for the state of affairs prevailing in the P&MC Bank.

Contentions of RBI by Senior Counsel Venkatesh Dhond

Senior Counsel, Dhond submitted that the action of RBI as has been discussed is part and parcel of ensuring fiscal and financial discipline.

Court does not act as a court of further appeal and will not question the wisdom of RBI in such matters. If RBI has acted in terms of the powers conferred on it by a parliamentary statute, then, all, the more in the absence of clear and proven case of arbitrariness and mala fides, this court should not interfere in writ jurisdiction.

Adding to his submissions, he stated that the bank concerned had a negative credit rating. It suffered an enormous loss. About 29% of the deposits were completely eroded.

Bank even failed to recover the loans and advances given to a group known as HDIL Group. Presently, 46% of the deposits were eroded and the bank’s financial position seemed precarious.

RBI’s intervention became necessary because there was virtually a run on the bank.

To explain the said action of issuing directions and placing restriction withdrawal limits, Senior Counsel, Dhond submitted that a few and selected investors would take away the money lying deposited to the detriment of the interest of other depositors. Those close to the management should not derive such benefits and that is why the arbitrary distribution of limited funds required the intervention of the RBI.

It is not a mere ipse dixit of the RBI. The satisfaction is based on relevant and germane materials and therefore, the RBI did not act arbitrarily.

Analysis and Conclusion

RBI arrived at a satisfaction that the financial position of the P&MC Bank has been substantially impaired by certain persons.

Based on a complaint filed by the bank against its officials and borrowers associated with the fraud/ financial irregularities in the bank and manipulation of its books of accounts, the Economic Offences Wing, Maharashtra Police started its investigation into the matter.

Power of the RBI to give directions is based on the satisfaction that such directions have to be given in public interest or in the interest of banking policy or to prevent the affairs of any banking company being conducted in a manner detrimental to the interest of depositors or in a manner prejudicial to the interest of banking company.

P&MC Bank was subjected to statutory audits on an annual basis on 31st March. Thereafter, there was a concurrent audit. That was carried out by a high-level committee under the Chairmanship of A. Ghosh, the then Deputy Governor of RBI. That was carried out to inquire into the various aspect relating to frauds and malpractices in the banks.

Concurrent audit system is regarded as part of a bank’s early-warning system to ensure

timely detection of irregularities and lapses, which helps in preventing fraudulent transactions at branches.

Petitioner Counsel’s argument, while placing the argument and referring to the Act of 1949, overlooked that the said Act consolidates and amend the law relating to banking.

Petitioners have omitted to state before us anything by which the conclusion could be reached that RBI could not have exercised its power. They have made a bald and general assertion without any specific material.

RBI candidly stated before the High Court that it deputed a team to carry out an annual inspection of the bank and their thorough scrutiny. Thus, on account of financial irregularities, the P&MC Bank’s net worth was noticed.

High Court further noted that the petitioner’s arguments were self-defeating and contradictory.

Thus while concluding its’ decision the Court stated that litigants must realise that the Court cannot grant reliefs on specious ground of sympathy.

Court also stated the clarification submitted by Senior Counsel, Dhond that the RBI intends to bring some order and discipline in the affairs of the P&MC Bank. The bank is not yet placed under liquidation. The RBI is trying to take a stock of all the assets and properties of the P&MC Bank.

High Court added that RBI was trying its best to revive its operations and bring some normality in the affairs of the bank.

In matters of banking practices and the business of banking and its regulation, we must leave everything to the wisdom of the RBI. Presumption is that it will prevent the acts conducted in a manner prejudicial to the interest of depositors.

Hence, the Court held that it cannot interfere with the limits placed by the RBI on the withdrawal, The RBI acted fairly, justly and reasonably in revising they limits from time to time. In dismissing the petitions, Court has applied the test evolved by the Supreme Court in the decision of Indian Bank v. Godhra Nagrik Co-operative Credit Society Ltd, (2008) 12 SCC 541. [Haresh Tekchand Raisinghani v. Union of India, 2019 SCC OnLine Bom 5825, decided on 05-12-2019]

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