2024 (1) TMI 77 - HC - Indian Laws

Cheating - petitioner company had not only syphoned the money from the banks but have also not paid the cane dues to the farmers, who had supplied the sugar cane to the petitioner-Company - Validity of impugned communication - direction to respondent no.1, State Bank of India to convene a meeting of the Joint Lenders Forum forthwith, in order to finalize the Settlement Proceedings, in accordance with the provisions of the RBI Circular dated 07.06.2019. HELD THAT - The RBI guidelines are absolutely clear that, if a fraud is committed by the unscrupulous borrower by removal of stocks/hypothecating and disposing of the stocks, inflating the value in the stock statement and drawing excess bank finance, diversion of funds outside the borrowing unit and also due to managerial failure leading to the unit becoming sick and due to laxity in effective supervision, the banks have to report to the CBI. The instant case clearly falls under the ambit of Clause 3.2.1 and 3.2.4 where the unscrupulous borrower enjoy credit facilities under valuable banking arrangement after defrauding one of the financial banks continue to enjoy facilities of other financial banks and in some cases availed even higher limit at those banks. As per the RBI Guidelines it is mandatory for the banks before approval of the loan to carry out a proper due diligence, credit appraisal, to consider the risk report and follow all the norms laid down. It is clearly apparent from the way the loans were sanctioned and disbursed that the banks have failed to carry out regulatory compliances. Even adequate security was not taken before disbursing the loans. A number of loans were given on the personal guarantee of two promoters, whose net-worth was far less than the loans taken by them from the banks. It is surprising that none of the banks while sanctioning or disbursing the funds have ever checked the background of the petitioner-company. The petitioner-company was already defaulting and was NPA in the other banks but still the other banks went ahead with sanctioning huge amount of loan to the petitioner without any proper collateral security or documentation. This is a case, which shocks conscience of the Court as to how few of the bank officers in connivance of the petitioner had advanced almost Rs.900 crores, of public money and had allowed the petitioner to syphon away the funds and did nothing but were the mute spectators when the entire fund was syphoned off. Even after the entire amount was syphoned off, the banks did not take any effective steps to recover the said amount - The RBI Circular dated 01.07.2009 mandates all the banks for classification and reporting of fraud. The said Circular does not provide any exemption or relaxation to the banks not to report regarding fraud committed by unscrupulous borrowers. Even, Clause-6 of the Circular also mandates all the Public Sector Banks to report to the Fraud Cell of CBI in cases of fraud involving more than Rs.5 crores. In case, the CBI finds that there is a case of money laundering as per the provisions of Prevention of Money Laundering Act, 2002 they may also refer the matter to the Enforcement Directorate and take help to recover the said amount - It is further directed that the petitioner will join the investigation and cooperate with the investigation team and if they do not do so, it is open for the investigation agency to proceed against the petitioner in accordance with law. The authorities should endeavour to find out the money trail, where it has been syphoned off and parked. Petition disposed off.

Summary

Issues Involved:
1. Alleged connivance between the petitioner and bank officials in syphoning public money.
2. Failure of banks to follow mandatory procedures before disbursing loans.
3. Petitioner's repeated defaults and banks' lack of recovery efforts.
4. Petitioner's request to quash SBI's communication rejecting settlement and to convene Joint Lenders' Forum.
5. Petitioner's non-compliance with court's interim orders and alleged contemptuous conduct.
6. Banks' non-compliance with RBI guidelines and lack of reporting to CBI.

Summary:

Issue 1: Alleged connivance between the petitioner and bank officials in syphoning public money
The court found a "shocking case of clear connivance of unscrupulous businessman and banks," where bank officials knowingly allowed the petitioner to syphon away approximately Rs. 1300 crores of public money. Despite the petitioner being declared NPA by other banks, new loans were granted without following mandatory procedures.

Issue 2: Failure of banks to follow mandatory procedures before disbursing loans
The banks advanced loans to the petitioner without due diligence, adequate security, or following RBI guidelines. The court noted that loans were disbursed without proper credit approval, risk appraisal, or regulatory compliance. Post-disbursement supervision was also lacking, allowing the petitioner to syphon away the funds.

Issue 3: Petitioner's repeated defaults and banks' lack of recovery efforts
The petitioner defaulted on loans repeatedly, moving from one bank to another. Despite being declared NPA, effective recovery steps were not taken by the banks. The court observed that no sincere efforts were made by the banks to recover the amounts, and actions taken were merely eyewash.

Issue 4: Petitioner's request to quash SBI's communication rejecting settlement and to convene Joint Lenders' Forum
The petitioner sought to quash SBI's communication dated 26.07.2023, which rejected the settlement offer and indicated legal action. The petitioner also requested a mandamus directing SBI to convene a Joint Lenders' Forum to finalize the settlement proceedings. The court noted that the petitioner's proposal was rejected by the banks, and they were only trying to buy time to avoid insolvency proceedings.

Issue 5: Petitioner's non-compliance with court's interim orders and alleged contemptuous conduct
The court found the petitioner in contempt for not depositing the agreed Rs. 20 crores, thereby misleading the court and buying time. The court issued notice to the company's directors to respond as to why contempt proceedings should not be initiated against them.

Issue 6: Banks' non-compliance with RBI guidelines and lack of reporting to CBI
The court highlighted that banks failed to follow RBI guidelines for loan disbursement and did not report the fraud to the CBI as mandated. The court directed the CBI to investigate the banks' actions and the officers involved in sanctioning and recovering the loans.

Conclusion:
The court disposed of the writ petition, directing the CBI to investigate the matter and report any instances of money laundering to the Enforcement Directorate. The court emphasized the need for banks to follow RBI guidelines and take effective steps to recover public money.