2012 (12) TMI 396 - SC - FEMA

Master Circular on Wilful Defaulters - dis-closer of information by the Bank to RBI - Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 - held that - no force in the submission 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. 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. 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 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.

Issues Involved:
1. Interpretation of the Master Circular on Wilful Defaulters.
2. Applicability of the Master Circular to derivative transactions.
3. Legal definitions and implications of "wilful default," "lender," and "borrower."
4. Confidentiality and disclosure of credit information.
5. Consequences of being declared a wilful defaulter.

Detailed Analysis:

1. Interpretation of the Master Circular on Wilful Defaulters
The core issue revolves around whether the Master Circular issued by the Reserve Bank of India (RBI) applies to defaults under derivative transactions. The Master Circular aims to prevent further bank finance to wilful defaulters by disseminating credit information among banks and financial institutions.

2. Applicability of the Master Circular to Derivative Transactions
The appellant-bank argued that the Master Circular covers all banking transactions, including derivatives, guarantees, and Letters of Credit, as these involve payment/repayment obligations. The term "wilful default" in the Master Circular includes defaults in meeting payment obligations to the lender, which the bank interpreted to include derivative transactions.

The respondent contended that the Master Circular applies only to lending transactions involving a lender-borrower relationship. They argued that derivative transactions do not involve lending of funds and thus should not be covered under the Master Circular.

3. Legal Definitions and Implications of "Wilful Default," "Lender," and "Borrower"
The Master Circular defines "wilful default" as a default in meeting payment/repayment obligations to the lender. The appellant-bank and RBI argued that the term "lender" should be interpreted broadly to include all banking transactions, not just traditional loans and advances.

The respondent argued for a strict interpretation, stating that the term "lender" implies a lender-borrower relationship, which does not exist in derivative transactions. They cited various legal precedents to support the need for strict construction of statutes imposing penalties.

4. Confidentiality and Disclosure of Credit Information
The respondent argued that disclosure of information related to derivative transactions would breach the implied contract of confidentiality between the bank and its customer, as well as statutory provisions under Section 45E of the Reserve Bank of India Act, 1934.

The court held that information related to defaults under derivative transactions constitutes "credit information" under Section 45A(c) of the 1934 Act. Such information can be disclosed to the RBI under Section 45C, notwithstanding any confidentiality agreements.

5. Consequences of Being Declared a Wilful Defaulter
The respondent highlighted the severe consequences of being declared a wilful defaulter, such as restricted access to further credit and potential criminal liability. They argued that the Master Circular should be strictly construed to avoid arbitrary and unconstitutional outcomes.

The court clarified that the Master Circular itself does not impose penal consequences; rather, it advises banks to consider initiating criminal action under existing laws based on the facts of each case. Therefore, the Master Circular should be interpreted in its context, not strictly.

Conclusion:
The Supreme Court concluded that the Master Circular on Wilful Defaulters applies to defaults under derivative transactions. The court interpreted the term "lender" in the Master Circular to mean "bank," thus covering all banking transactions, including derivatives. The court set aside the Calcutta High Court's judgment and upheld the Bombay High Court's interpretation, confirming that wilful defaults under derivative transactions are covered by the Master Circular. The appeals against the Bombay High Court's judgment were dismissed, while the appeal against the Calcutta High Court's judgment was allowed.

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