PMC bank scheme of amalgamation: was it not a travesty of justice?

[shivaprasad chhatre]

Brief Note & Preamble:

Brief note:

To understand things one may need to carefully read the write-up. In this write-up, I have used the terminology retail, institutional deposit as has been used in the Scheme of amalgamation of PMC Bank with Unity Small Finance Bank (USFB) as published in the gazette of India notwithstanding it is a ridiculous and misleading terminology not consistent with provisions of DICGC or any existing law.

The focus of the write-up is on the adverse impact on the legitimate interests of PMC bank depositors, the priority of payment to depositors, Tier-II debt product holders (LTD), and associated legal aspects.

This article, a bit lengthy, aims at public interest in mind. I had a small deposit with erstwhile PMC Bank under the retail category. I am very little impacted by the Scheme of amalgamation drawn by the Reserve Bank of India and approved notified by the Government of India that became effective from 25th Jan 2022.

I read news items, reactions in depositors' forums, contents of proposed appeals, and being a senior ex-banker, I felt that the media content is missing on many essential aspects that should raise a question about the credibility of Scheme, the silence of DICGC, the inaction of Govt at pre-approval and post-approval stage of the Scheme, after reading to press & e-media. 

One of the objects of write up is to help the following class of depositors

1. actual institutional depositors (like PF Trusts, Coop Societies of different types, Inter-bank deposits, corporates) 
2. depositors inappropriately classified by RBI as institutional depositors (but are non-institutional) like partnerships, LLP, AoP. These are retail depositors like HUF, Sole proprietary

to make them aware of what was lawful for them to receive and what they have lost due to the unbecoming of RBI.

Scheme practically released DICGC of its guarantee obligation towards all institutional entities upto ₹ 5 lacs.

It was shocking to see that many non-existent conditions in the draft have been introduced in the notification (which are ridiculous and entirely against the interest of non-individual depositors). I wonder which stakeholder and a beneficiary of the Scheme would suggest such onerous conditions like 'Aa bail mujhe maar.' These terms must have been added at the behest of the Unity Small Finance Bank (USFB) to get a very long repayment rope.

RBI did a farce of circulating one draft and finalized Scheme adding many new/undisclosed controversial matters.

If one applies sound mind, one would understand that it is drawn to ensure that this amalgamation goes through; otherwise, the whole well-publicized fiasco would have been bust.

I am aware any amount of write-up and exchange of concerns will not help address the situation created after the gazette notification of amalgamation of PMC bank with Unity Small Finance Bank (USFB), the transferee bank. Even if the Government and RBI are convinced of gross wrong, it will be challenging to correct the situation. The only way left to the aggrieved is to approach the appropriate Court, seek immediately stay over the unimplemented portion of Gazette notification and request the Court to hear the case soon and issue a final order. Hence, I have tried to focus on the points, which can be brought up on the record to convince the Court to grant an interim stay, also to help to present the case aptly to get an excellent final order.

Different stakeholders would look at the approved Scheme of amalgamation PMC Bank with Unity Small Finance Bank (USFB) with different perspectives. Many impacted entities groups of individuals may look at it from filing public interest litigation or something like a class-action suit (prevalent in a limited way in India) with the High Court of Bombay or with the honorable Supreme Court of India.

As mentioned above, I was looking at sustainable points, which can be conveyed to senior advocates or Advocate on Record (AOR). If such facts are effectively brought out in the suit/petition with the High Court of Bombay or Supreme Court of India, it may get concerned as to what gross wrong was done.

For the writ petition is to stand on firm ground, it should evidence points of fundamentally unjust acts of RBI/Govt like arbitrary disallowing/removing insured deposits to other non-insured deposits, allowing better repayment terms to Long Term Deposit (‘LTD’ is a misnomer), bondholders over other unsecured deposits, disregarding the priority/preference

of creditors based on contract plus conventions. The plaint should demonstrate that RBI & Govt had not acted diligently, crossed the legal boundary, absolved DICGC, did not protect the interest of unsuspecting depositors (branch of trust), actions impacted fundamental rights, etc

An advocate would thus need exact technical inputs so that they can highlight them in the plaint, draw the attention of the honorable Court to sustain the case, receive the attention on the violation of the fundamental rights legitimate rights and get quick and positive disposal of the case by securing early dates.

I want to mention the long-term dismissal order issued by the speaker of the Maharashtra Legislation to twelve sitting MLAs in the Maharashtra assembly. Here the Supreme Court stepped into the legislation arena after being convinced of a gross violation/ constitutional breach, without looking at merits/justification of suspension order, etc. (concerning the offense committed by the 12 MLA or their history).

I repeat, I feel if essential points are highlighted in the executive summary and Court receives them appropriately; the case could see quickly desired results. The object of writing this lengthy write-up is to facilitate filing advocates prioritize the fundamental violations and highlight them in the plaints executive summary, also supply them related inputs while presenting the case. The write-up may also help all depositors like PF, Pension Funds, and coop societies of the PMC bank to know to what extent they are wrongfully hit by this Scheme and can bring the case up to proper legal advice.

General:

If a bank goes into liquidation, DICGC is liable to pay the liquidator the claim amount of each depositor up to Rupees five lakhs within two months from the date of receipt of the claim list from the liquidator. However, if a bank is reconstructed or amalgamated/merged with another bank, in that case, DICGC pays the Bank concerned the difference between the total amount of deposit or the limit of insurance cover in force at the time, whichever is less, under the Scheme of reconstruction/amalgamation, within two months from the date of receipt of the claim list from the transferee bank /Chief Executive Officer of the insured bank/transferee bank, as the case may be.

DICGC doesn't directly deal with the depositors of the failed banks. In the event of a bank's liquidation, the liquidator prepares a depositor-wise claim list and sends it to the DICGC for scrutiny and payment. The DICGC pays the liquidator, who acts as a pass-through and pays it to the depositors. In the case of amalgamation/merger of banks, the amount due to each depositor is paid to the transferee bank. In this case, as far as DICGC is concerned, transferee bank acts not only as a pass-through (and its payment to the insured depositor in this manner is final), but the transferee bank is expected to return this money, as per the Scheme of amalgamation. DICGC is discharged of its full guarantee obligation by paying the money as mentioned in the notified scheme instead of what is contractually and lawfully committed under the DICGC Act 1961.

As per the Act, each eligible depositor of the bank is insured up to a maximum of ₹ 5,00,000 (Rupees Five Lakhs) for both principal and interest amount held by a depositor in the ‘same right and same capacity’  as on the date on which the Scheme of Amalgamation comes into force.

In the current case, DICGC would pay a sum equivalent to the amount of liability arrived as per the scheme of amalgamation (not as per the Act) to  Unit Small Finance Bank (USFB), a transferee bank, as a soft loan. It may accordingly get reflected in books of DICGC and USFB. USFB, would receive the money claimed as 'a pass-through' and pay it to scheme-approved depositors as per terms specified in the notification.

Before we probe factual details, let us recapitulate a few highlights of the Scheme, in brief:

No interest for five years* on a deferred retail portion (*commencing from 31-03-2021). Had the bank been liquidated, the aggregate of principal + interest (up to the date of payment) would have been paid to each such depositor (if the aggregate amount had been up to ₹ 5 lacs). In the current scenario, interest would not be paid after 31-03-2021 to the depositor even if such amount together with principal were below ₹ 5 lacs. I wonder where RBI selected date 31-03-2021.

80% of the institutional deposits converted as Perpetual Non-Cumulative Preference Shares (PNCPS) could have the longest repayment schedule of 121 years (portion to redeem after ten years out of recoveries of HDIL- a fraud loan account) balance of PNCPS repayment to commence after 21 years subject to Unity Small Finance Bank (USFB) settling DICGC soft loan amount, in full, and bank meeting all other onerous and impracticable conditions stipulated in the notified scheme. Balance 20% Equity warrants would never be paid (warrant holder may buy shares at the time of IPO at a rate that would be decided at the time of IPO/OFS per normal process and formula).

Thus institutional (non-retail) depositors will get nothing on the table (including DICGC cover of ₹ 5 lacs) all in the form of PNCPS (with repayment schedule between 21 years to 121 years) and likely equity at market rate (additional amount may be needed to be paid if subscribed).

Long Term Deposits (LTD) –Tier II bondholders have been given better deals over the above 80:20 very long period spread over deal given to institutional depositors (non-individual), which goes against the 'basics of liquidation matrices' though technically it is not said to be a liquidation. PMC was a failed bank.

Just because the Bank is not formally liquidated, the banking regulator should not arbitrarily kill/dismiss the legal & financial rights of some section of depositors and pass on the indirect benefit to DICGC and the class of Tier-II bondholders. The Scheme is entirely unjust to the institutional depositors.

As per the legal mandate, all licensed banks pay a DICGC premium half-yearly. It is paid on all liabilities of the insured Bank that are like deposits, excluding the liabilities as specified in the Act. Premium is not paid on ‘retail deposits’ (deposits of individuals) alone but also paid on ‘institutional deposits’ (as defined in the DICGC Act,1961).

We know that DICC is a 100% subsidiary of the Reserve Bank of India. DICGC is a third-party guarantor who has been authorized under the statute to extend such specific guarantee within the provisions of the DICGC Act,1961 so notwithstanding it is a subsidiary of the Reserve Bank of India; it has a force of law and RBI should maintain 'arm's length' relationship with its subsidiary. DICGC should honor the legal and contractual commitments under guarantee. Invocation of the guarantee or release of the guarantor should not, as per the whims of the Reserve Bank of India, at the cost of someone.

A banking regulator, RBI, was expected to act diligently and had to draw a scheme of amalgamation to protect the interest of depositors. In the current case, RBI has acted against the interest of both individual and non-individual depositors.

It appears that it wanted to protect the interest of the guarantee company (DICGC) more than depositors. DICGC ought to have paid to all eligible depositors as mentioned in Sec 2(G) and also under FAQ No: 2  DICGC official website (whether due to amalgamation of Bank drawn under Sec 45(4) of BR Act or due to insolvency of the Bank). It made all depositors bear the burnt.

A Partnership concern, A LLP, an AoP,  PF Trusts, Pension Trust, co-operative credit society, CHS, even a corporate's holding up to a sum of ₹ 5 lacs (held under different forms of deposit accounts, in the aggregate) are covered by the DICGC guarantee. By sanctioning the illegitimate Scheme of amalgamation, the Government has undoubtedly acted negligently. RBI loosely defined all under one umbrella 'institutional’. However, on the other hand, it termed HUF, Sole proprietary, as a retail deposit. Two terms Retail and Institutional deposit don't exist in DICGC there are newly coined by RBI and truly has has no relation so far as DICGC cover is concerned. DICGC cover has a relation to the maximum amount of insurance and whether it falls under the ‘uninsured category’.

The action demonstrates RBI went soft of DICGC. DICGC granted a 20-year soft loan (with no interest) to USFB, equivalent to the amount due as per gazette mandate and not as per contractual obligation. The obligation is cast upon USFB of its repayment in a maximum of 20 years (to be made before any payment to non-individual claimants of PMC bank).

The depositors of PMC bank will be given PNCPS and Equity Warrants in ration 80:20. The Bank is expected to pay a non-cumulative dividend of 1% p.a., redeem PNCPS partly after ten years from net loan recoveries from the fraud accounts of HDIL group on prorate basis, and actual payment of PNCPS to start after 21 years as per the schedule drawn subject to bank meeting many inter-aligned terms and conditions. One major condition is full repayment of the above soft loan given by DICGC to USFB. So DICGC exits even before institutional depositors receive a token. Thus, DICGC, in a way, is to take back its 'soft loan' a preference over long and deferred disbursement proposed to be made by the Bank to institutional depositors.

So on one side, DICGC is not paying as per its obligations under the Act to eligible insured depositors, it is seeking a soft loan back before the commencement of the long-term repayment schedule of 80% portion of the unsecured deposits of PMC bank. In any case, the HDIL group loan is the underlying fraud, and it will not come back any time. Except for some attached properties, there are no securities.

This is a case of illegitimate distinction. Individuals will receive a total principal amount (over ₹ 5 lacs) + paltry interest, in 10 years from the year 2022. Institutional depositors/Non-individuals will bear the major brunt. Non-individuals will hold PCNPS & Equity Warrants. Before paying the soft loan of DICGC, new holders of PNCPS will not get any redemption of principal. Further, such redemption is subject to many conditions that may drag up to 121 years. One wonders what RBI tried to do and what is the message of its action to the bank depositor community.

I regret to mention bluntly, RBI & Govt’s action will certainly give the following few messages:

-Just like Deposits of foreign Governments; Deposits of Central/State Governments, Inter-bank deposits, Deposits of the State Land Development Banks with the State co-operative bank, any amount due on account of and deposit received outside India, Deposits of A Partnership concern, A LLP, an AoP, PF Trusts, Pension Trust, co-operative credit society, CHS, and that of any corporate are not eligible to DICGC cover (in the event of amalgamation) however cover may be available in case of liquidation. [If these were not to be covered, why did DICGC collect a half-yearly insurance premium on such deposit liability and why did under Sec 2 G as well as under FAQ2 it added to the above list?].

-It can design an absurd amalgamation plan and get it approved.

-It is not only a banking regulator; it can overpass the provisions of the existing Act, and in matters of a dispute over the understanding of terms RBI's decision is final.

-RBI can absolve/release DICGC (guarantor) tactfully.

-RBI can make the insured depositors lose altogether their legitimate right [contrary to provision Sec 2(G) of DICGC Act,1961] to receive the insured sum (₹ 5 lacs), re-classify them as a deposit under the so-called institutional category. Further, it can compel them to accept a lower/raw deal than the investor class- Tier-II deposit. It was completely wrong on RBI's part to term it as Long Term Deposit (LTD) as the repayment of it was mandatorily conditional and it investor was not entitled to seek pre-close, its repayment on the due date also was subject to the issuer bank fulfilling stipulated financial conditions and prior approval of RBI to pay the principal on or after the due date. Interest payment from time to time was subject to meeting certain mandatory conditions (This paper is akin to bond or a high-risk debenture). Tier-II investment has a lower repayment priority, and therefore, it assumes greater risk and higher returns.

-RBI can violate mandated ‘credit discharge metrics’ or ‘repayment preference’. It can provide a better deal to someone at the cost of the legitimate rights of someone. It has done this to non-individual/institutional category of depositors (both retail and non-retail deposits, including exempted deposits mentioned above, are unsecured deposits and precede in terms of priority to receive money before Long Term Deposit (LTD))

 -RBI/Govt can make all retail depositors [who are eligible to receive ₹ 5 lacs (principal + interest till DICG payout date)] lose interest from 31-03-2021, Those who are to receive above ₹ 5 lacs lose interest for a longer period

-RBI can make Govt approve the ridiculous Scheme (drawn on the guise of designing an intelligent merger scheme).

-Last but not least through all actions of the above nature it can make a mockery of justice.

-Whether bank deposit is insured or not, anything beyond the available insurance is unsecured and should stand before Tier-II bonds at all times. Offering better terms to Tier-II debt holders is disregarding the contract and liquidation matrix.

Inappropriately RBI/Govt had split all unsecured deposits into two categories (below) and gave different payout terms.:

1.Retail Depositors (entirely and partly covered individual, HUF, Sole proprietory type depositors)

2.Institutional Depositors: Deposit/liabilities of Partnership, LLP, AoP, Regd coop society (HSG, Multi-purpose coop society, etc.), Regd & Unregistered Trusts, Coops, etc., LTD, Corporates (Ltd companies)

This is a violation of the fundamental principle of ‘class equality’

I wonder why Govt did not scrutinize objections/suggestions etc. I have reason to believe that GoI has gone by the stature of RBI as a statutory/autonomous body, that had a bit of credibility hence approved the Scheme of amalgamation without deep probing. It could be also due to political pressure or compulsion on the bureaucracy.  MoF, GoI gave permission to proceed to the RBI’s proposal without doing adequate homework, examining onerous clauses, written concerns lodged with MoF and RBI by depositors/stakeholders like me.  I am unsure whether RBI referred the draft scheme to all those required under section 45 (6).

An effort is made in the latter part of this write-up to cover, some crucial aspects of concerns of insured depositors after RBI tinkered it illegitimately and got it notified as to the Scheme of amalgamation.

RBI attempted to override many provisions specifically covered under different Acts through this Scheme of amalgamation which is not an act. I know, when tabled in both houses of parliament, will receive parliament's nod routinely. Unless some voice is raised.

All erstwhile PMC Bank depositors need to read this portion of the article carefully and be brought to the notice of their advocate.

First, let us go to the most relevant details of Scheme

While designing the Scheme of amalgamation, RBI inappropriately tinkered the contractual definition of 'insured deposit' to retail and institutional deposits in a haphazard manner. It created two vertical splits in one class of unsecured deposits. It arbitrarily decided that non-individuals should bear more burnt. Accordingly, non-individual (other than sole proprietory/HUF) was termed as institutional. I wonder how HUF becomes an individual-like entity while partnership, LLP, AoP become institutions overnight in this case. The Act remained unchanged. This tinkering is unjust.

The future discussion relating to the subject has direct relevance to the above RBI defined term, and hence they are first explained as envisaged/imagined by RBI to this case, for the convenience of the readers.

"eligible depositors" means depositors whose deposits are insured under the DICGC Act, 1961++

"institutional depositors" means corporations, companies, societies, Association of Persons, Trusts & other depositors who are not retail;

"retail depositors" means depositors who hold deposits in the Bank in their Capacity, either singly or jointly with other individuals (s), and include proprietorship firms, partnership firms, and Hindu Undivided Families (HUFs);

Please peruse what an insured deposit is or What does the DICGC insure (No option to any bank to not insure or seek selective insurance)

Source: ++ FAQ No 2. DICGC's official website [also refer (Sec 2G) DICGC Act,1961]

What does the DICGC insure**?

The DICGC insures all deposits such as savings, fixed, current, recurring, etc. deposits except the following types of deposits

• Deposits of foreign Governments;
• Deposits of Central/State Governments;
• Inter-bank deposits;
• Deposits of the State Land Development Banks with the State co-operative bank;
• Any amount due on account of and deposit received outside India
• Any amount which has been specifically exempted by the corporation with the previous approval of the Reserve Bank of India++

Observations & Concerns:

Going by the above FAQ and Sec 2G of DICGC Act,1961, one would correctly conclude that institutional deposit (Partnership, PF and other trusts, LLP, AoP, Regd &unregistered coop society (HSG, Muti purpose coop society), all corporates (public and private) up to ₹ 5 lacs are insured (these are not exempted till the occurring of event) ++.

You would know that only a few forms of 'real' institutional deposits are not covered for DICGC. These are Deposits of Foreign Governments, Deposits of Central/State Governments, Inter-bank deposits, Deposits of the State Land Development Banks with the State Co-operative Banks.

If any other deposit category is not covered in the future or otherwise, it needs to be disclosed 'upfront' so that concerned would be well informed while assessing the risk. Even if DICGC requests, RBI cannot approve post crystallization of the guarantee or the happening of an event. DICGC and RBI should be having a process to examine such requests coming post-board approval of DICGC and RBI must have a system of approval and notification to all concerned.

This aspect has a direct bearing on the premium to be charged. This is not a simple matter over which a casual decision can be taken.

DICGC collects DICGC premium on all deposits and like liabilities of the partnership, PF and other Trusts, LLP, AoP, Regd/Unregistered coop society (HSG, Multi-purpose coop society, etc.) from the insured Bank. It is so in the case of PMC Coop bank.

According to the amalgamation scheme, the newly & loosely coined term 'institutional deposits' are all deposits held by a Partnership, LLP, AoP, PF and other Trusts, Regd/Unregistered coop society (HSG, Multi-purpose coop society ); otherwise ‘insurance eligible deposits’ now disqualified to be eligible to DICGC cover (at least in this case).

There exist no other categories other than insurance eligible and insured ineligible/exempted deposits in DICGC. Both these are unsecured deposits and rank pari-pasu in the event of insolvency. Insured part is paid by DICGC for balance portion it becomes unsecured deposit on par with all other insurance ineligible deposits.  

An institutional deposit has been an ‘eligible deposit’. The institutional depositor is entitled to a claim from DICGC [depending on the outstanding amount principal and interest currently upto ₹ 5 lacs]. Thus unless exempted by DICGC with prior approval of RBI and notified, even a PF deposit/ Trust/Society with deposit account/s with an aggregate amount outstanding are entitled to a DICGC cover of up to ₹ 5 lacs (principal and interest put together). Amount over and above it would remain uninsured. Thus, if the eligible class of depositor has deposited over ₹ 5 lacs (in the ‘same right and same Capacity’), a Portion upto ₹ 5 lacs would have to be fully settled by DICGC. In contrast, the balance over ₹ 5 lacs will fall under the other bracket (unsecured deposit) and be processed under those norms. Just due to its being an institution its creditor class (unsecured deposit) does not and should not change. It is a fundamental violation.

Let me take a simple example:

Individual 'A' has a deposit of ₹ 6 lacs  (including interest). He should be paid as an eligible depositor up to ₹ 5 lacs, and a balance of ₹ 1 lac may fall under uninsured deposit (or the term defined under the Scheme as a retail deposit) and receive the treatment accordingly for that portion.

Let me take another example

Natural Person' A' has one 'LTD' ₹ 600000/- ['LTD' is akin to Tier-II debenture/bond instrument also issued by PMC bank] and three Fixed deposits held as under:

'A' only  ₹ 4 lacs (including interest)

‘A’ + ‘B’   ₹ 4 lacs (including interest)

'A', 'B' & 'C' (jointly held) ₹ 6 lacs

(many will have such pattern of holding/deposits, especially, senior citizen class)

In this case, the 'LTD' will have different treatment as it is not a deposit in a real sense.

Claims in respect of the first two above fixed deposits held should be settled by DICGC in full [including full interest up to date of payment of the claim by DICGC]. Here also RBI twisted to make interest liability of DICGC upto 31-03-2021 (RBI may only know the rationale)

These three deposits are held in different capacities and different rights (in conformity with the example given on the DICGC on its official website). Thus they are three insured deposits (all are eligible to a separate cover) notwithstanding first named is 'A' for income tax purposes etc.

The 3rd deposit held jointly under names A, B  & C is for ₹ 6 lac: ₹ 5 lacs would be insurance eligible and will have to be paid by DICGC. Balance ₹ 1 lac [₹ 6 lacs – ₹ 5 lacs] + interests entire component should fall under the category of other unsecured deposits, outside the DICGC cover and be paid as per the amalgamation criteria (for that portion). As per RBI’s scheme of amalgamation all the three above are retail deposits.

RBI has twisted (beyond delegated authority) to make interest liability of DICGC upto 31-03-2021.

That means neither DICGC nor USFB would pay interest for the period as specified in the DICGC scheme. The whole proposal coming from RBI arbitrary and designed in a highhanded manner disregarding the contractual obligations of DICGC under its guarantee,

 

Just as above a Partnership, an LLP, an AOP, a Corporate/Coop Credit Society may have deposits of ₹ 7,8.9,10 lacs each, and the amount due under each one could exceed ₹ 5 lacs. Even then all these are insured deposits and DICGC ought to have paid (to get proper discharge) ₹ 5 lacs to each such depositor.

However, RBI has disqualified all Partnership, an LLP, an AOP, a Corporate/Coop Credit Society by classifying them as ‘institutional deposits’ (for the scheme of amalgamation) and through the scheme of amalgamation denied the benefit of the entire DICGC cover of ₹ 5 lacs each, made them sit in the queue of 80:20 (PNCPS: Equity warrants), gave very long repayment schedule and poorer terms than LTD holders. This is an unjust act and violation of the basic right to receive money before the equity-like class or creditor.

RBI cannot arbitrarily decide for or in favor of DICGC or for or in favor of USFB. It cannot simply rob someone’s legal right and grant some with a new right or a boon through a hopelessly designed scheme of merger by misusing extensively vide provision of sec 45 of BR Act.

The BR Act,1949 under certain circumstances subject to certain conditions allows RBI to draw a scheme of restructuration or merger but does not give powers to dismiss legitimate rights of someone to favor someone

I know RBI has complied with Sec 45(6)(a), Sec 45(6)(b) of BR Act,1949 while drafting the scheme of amalgamation and completing the formality of seeking views of stakeholders, etc. It had recently complied requirement of Sec 45(11) by filing the notified scheme before both the house parliament.

I am sure that RBI will through GoI use powers under Sec 45(10) of Banking Regulation (BR) Act to sort any difficulty that may arise (like the many posted here above) to give effect to the provisions of the scheme (under this section Central Government may order do anything which appears to it neces­sary or expedient for removing the difficulty).

The test of the section is given below:

Sec 45(10) BR Act: “ If any difficulty arises in giving effect to the provisions of the scheme, the Central Government may by order do anything not inconsistent with such provisions which appears to it necessary or expedient for the purpose of removing the difficulty”.

I am afraid RBI and Govt would vehemently try to defend the scheme notified as it is and try to get the case/petition quashed/dismissed using vide powers available with the Central Govt (who approved the scheme) under Sec 45(10) of BR Act

It is a case where DICGC the guarantor is allowed to back out partially or has been absolved/released at the behest/command of RBI on a soft loan of lesser quantum.

This is a clear act is ‘unbecoming of RBI’ (a statutory/constitutional body) whose one essential function is to protect the interests of depositors and ensure orderly growth of the banking system. The learned advocate presenting this case must be properly intimated with the above. 

The term 'Uninsured' deposit is not adequately defined in the Scheme of amalgamation notified on 25^th Jan 2022*. However, it is possible that there could be uninsured institutional deposits like Inter-bank deposits, Deposits of the State Land Development Banks with the State co-operative bank.

Thus in cases of deposits by eligible class of depositor, it could be wholly or partly insured (hence some portion of it should get partially settled under eligible deposits as per DICGC FAQ 2 (above).

Insured deposits + interest (at the contracted rate) till the date of settlement of the claim (upto defined ceiling of ₹ 5 lacs) from DICGC is an absolute right of the depositor of amalgamated/liquidated Bank and should not get impacted due to the irregularly drawn & approved scheme of amalgamation.

RBI has simply categorized deposits of individuals as retail. It gave a different treatment to all non-individual associates/variants', treating all other deposits irrespective of their ‘pari-pasu’ rank as creditors and their legitimate eligibility of DICGC guarantee cover.

RBI threw vital aspects of DICGC cover to an un-retrievable corner by getting the Scheme notified. It created a new category as ‘institutional deposit’ and denied that class of their valid legal and contractual rights, as unsecured creditors on par with all so-called ‘retail depositors’.

Not only that, in utter disregard to the priority preference of liquidating creditors, it threw at them worst terms of repayment worse than of uninsured non-transferable bond/debentures (hopelessly termed by RBI as LTD debt paper). It gave long term 80:20 [preference share (PNCPS) and equity] allocation whereas LTD holders were given 100 Preference share (PNCPS) allocation.

 

In real terms, as per the terms of the Scheme, if the transferee bank survives, makes profits, meets specified NPA and CRAR ratios, returns money to DICGC, it may repay to these so-called institutional depositors (provided claimants are existed/alive). The repayment can start after 21 years and may drag on to 121 years (mind it, there is no exaggeration whatsoever)

All eligible depositors (retail+ institutional depositors) up to the portion up to ₹ 5 lacs (principal + interest) should get in full from DICGC or the transferor/transferee bank. RBI had no business to compromise their legitimate right (without any mandated authority) in the process of drawing the Scheme of Amalgamation under Sec 45(4) of BR Act,1949 as otherwise, under liquidation, such amount would have been received by such depositors through the liquidator. RBI has done an unjust act.

Splitting single class of eligible deposits into two categories, namely

1. Deposits of individual/s, sole proprietor and HUF 
2. Others to be called as institutional deposits (AoP, Partnership, LLP, PF Trusts, Co-op Societies of all types, Interbank liability, Corporate)

This newly/smartly (stupidly!) created class of institutional depositors has been completely denied a DICGC claim of ₹ 5 lacs and pushed to a hopelessly drawn, very long repayment schedule in the form of PNCPS and Equity warrants.

Firstly, a gross injustice is done to all others (except interbank deposits, Foreign Govt, Coop Bank deposits) by not giving immediate relief of ₹ 5 lacs and asking them to wait on par with uninsured deposits (for the insured & guaranteed portion of ₹ 5 lacs). Does not it mean RBI has released the guarantor to that extent?

RBI has not spared interbank deposits, Coop Bank deposits. Though these are uninsured deposits from the beginning these depositors/creditors stand prior (have preference over LTD holders, legally). In this case, RBI gave them an 80:20 deal while it favored the LTD class.

RBI/Govt must consider that beneficial owners Partnerships, in LLP, PF Trusts, AoP (except in case of Corporates) are individuals and in no way different from beneficial owners in HUF, Individuals.

I wonder why insured depositors are arbitrarily split in two.

Category of individual/s, sole proprietor, and HUF has been given differential relief first ₹ 5 lacs+50000*+ 50000*+100000*+250000*+550000*+remaining* after the lapse of a certain period so on such that they are paid off in full in 10 years from now.

Treatment given to other classes is already mentioned elsewhere.

Giving differential treatment to the same class of unsecured depositors is unjust.

To please the masses, RBI forgot that it has to abide by the law of the land and principles of justice. Just because PMC bank is not technically liquidated, it can do an unjust Act taking the law into its hand. Litigation will get dragged for many years. Even when funds are available with the transferee bank (after 20-30 years), there will be continued cross litigations due to the dissolution of the partnership, the collapse of HUF, liquidation of Corporate, etc there will be many issues to pay rightful owners as the period gets longer. Many people will forget the dues; many will die; many companies will cease to exist, and huge amounts will lie in suspense for new fraud to take place. One may wonder whether this small finance bank will exist then.

To put it in simple terms: All depositors should be paid up to ₹ 5 lacs whether the depositor falls under complete cover or partial cover (eligible, retail, or institutional) category. For the so-called 'eligible deposit' category, principal and interest should be paid till the date of discharge of the corporation's guarantee.

In cases of retail or institutional class where cover is available for ₹ 5 lacs, the balance should be paid as per the approved Scheme of Amalgamation judiciously redrawn, keeping track of creditor class preference, and respecting existing laws.

I repeat:

There could be many retail deposits that may partially qualify as 'eligible deposit' and thus needs to get settled to the extent of eligible deposit insurance cover

Each deposit should be examined under the guiding principle 'same Capacity and same right' so that litigation from such individuals could be reduced and DICGC will be clear of its commitment/payout.

 

It should be clarified to all that clause 6 (c) (ii to vii) applies to the balance/remaining/uninsured portion of each such insured deposit placed in 'same Capacity and same right.

In the 2^nd example referred to above, the claim of depositors holding a deposit of ₹ 6 lacs (A, B & C jointly) should not come under other retail deposits. ₹ 5 lacs would come under eligible guarantee, and for the balance of ₹ 1, lac scheme clause 6 (C) II to VII should be made applicable.

Now let us see what is in store for the Institutional Depositors (an arbitrarily defined term & newly created category Vs. Thus Long Term Deposits)

These are the same type of deposits held by individual depositors, now defined by RBI as retail depositors (individuals, HUF, Sole Prop). The difference is not on the credit risk side. It is based on the person holding it. Holders are   LLP, Partnership, PF, Trusts, AoP, and actual institutional investors like Corporates, Coop Societies, Inter-bank liabilities, etc. Contractually and as per the credit discharge preference wise (legal), such creditors should be on par with retail/individual deposits.

Thus, 100% of dues to so-called 'Institutional Depositor' (a non-individual depositor, so defined now) will get split (from 25^th Jan 2022) as:

Eighty percent into Perpetual Non-Cumulative Preference Shares (PNCPS) of transferee bank with a dividend of one percent per annum payable annually subject to a multi conditional repayment schedule.

Twenty percent into equity warrants of transferee bank at a price of Re.1 per warrant. These equity warrants will further be converted into equity shares of the transferee bank at the time of the Initial Public Offer (IPO) when the transferee bank goes for public Issue. Equity warrants when opted to equity will rank below PNCPS.

Long Term Deposits [Tier II Capital instrument]

Clause 8 (2) of the Scheme:

The entire amount outstanding in the Long Term Deposits (Tier II Capital instrument) of the transferor bank will be converted into Perpetual Non-Cumulative Preference Shares (PNCPS) with a dividend of one percent per annum payable annually and shall be accorded the terms and conditions as specified in clause (f) of sub-paragraph (1) of paragraph 6 of this Scheme.

Long Term Deposits (Tier II non-transferable capital instrument) [Tier II Capital instrument] would rank later than uninsured deposits (even in liquidation). As per the terms of issue debt, capital instruments rank second to last (before ordinary equity, as there are no outstanding PNCPS.

Reserve Bank is compelling through this amalgamation scheme, these institutional depositors to accept 80% of the outstanding amount as PNCPS and 20% as equity warrants.

Long Term Deposits (LTD) [Tier II Capital instrument] should sacrifice more. In this case, holders of LTD are given a better deal at the cost of the so-called 'institutional category.' Long Term Deposits [Tier II Capital instrument] holders will get 100% PNCPS, a better option over above 80:20 given to institutional depositors. Long Term Deposits (Tier II Capital instrument) are destined to get PNCPS for the entire 100% outstanding on the appointed date.

As notified, LTD/Tier II bondholders to get 100% non-convertible preference shares (PNCPS). Contrary to the risk marker and contractually also, this group is getting a better deal than institutional depositors (who are not LTD/Tier II bondholders). This is a gross injustice to unsecured depositors (institutional as well as exempted classes like Coop societies, interbank liabilities, etc who stand in the queue to receive before Tier-II ‘LTD’ bondholders.

Long Term Deposits (Tier II non-transferable capital instrument holders) should get a raw (lower beneficial) deal than the so-called ‘institutional depositor category’. Getting at par with them is also not proper.

I repeat giving them a better deal is mockery rather travesty of justice.

Terminology, eligible deposits, institutional deposit, retail deposit, is hopelessly defined (it is not covered under any Acts, to rely upon). It shows how carelessly, hard copy and soft copy of objections were scrutinized/examined.

One more serious concern is here:

In this case, if you peruse clause 14, you will observe that you cannot approach anybody. You hit the wall as clause 16 reads  If any doubt arises in the interpretation of the provisions of this Scheme, the matter shall be referred to the Reserve Bank, and its views on the Issue shall be final and binding on all concerned

“Point 14 of the notified Scheme: Interpretation of the provisions of the Scheme.-‘If any doubt arises in the interpretation of the provisions of this Scheme, the matter shall be referred to the Reserve Bank, and its views on the Issue shall be final binding on all concerned’  This is undoubtedly an infringement of the fundamental right of aggrieved if the Issue is with definitions proposed.”

One has to approach RBI for clarification necessarily (I am sure most of the readers having experience of dealing with RBI will agree that clarification will not be given at all or for months together or will get tossed between various departments of RBI like [in many cases one approaches CEPD RBI, CEPD RBI refers it to Integrated Ombudsman(IO), IO dismisses it askes to file the case on the website (in prescribed format), once you file a case it disposes of routinely using one of the handy provisions to indicate the case is outside the scope of IO. In the interim aggrieved consumer finds an alternate solution, regrets or forgets]. I have experienced this many many times with RBI.

So one may not get any view of RBI on interpretation and if at all once receives it and wants to challenge it one has to knock on doors of the court. In court Sec 45(10) will hit you unless it is presented most appropriately.

Thus all concerned are told to agree to reality (!) RBI's decision on interpretation etc, is final.

Loose, overlapping, open for interpretation definitions like eligible depositors," institutional depositors," "retail depositors under any scheme of this nature will undoubtedly pose administrative problems, and actual beneficiaries will suffer. The staff of the transferor bank, as well as the transferee bank, should be appropriately trained to avoid the grievances and harassment of many.

No eligible depositor should get less than what the depositor could have received from DICGC had PMC Bank gone into liquidation. The claim amount was settled through an official liquidator.

A multi-angular arrangement of this nature made the scheme acceptable to 'USFB'. It did shield DICGC to the maximum extent is at the cost of losing partial or complete DICGC cover to eligible depositors.

It appears due thought has not been given (!) while drafting the Scheme, technical terms used in the draft are loosely defined. Such ambiguity should have been addressed when it was printed out explicitly.

Any deposit liability should be first segregated in 'the same right and same Capacity' further each such segregation should be aggregated within the same right, and same Capacity' for below and above ₹ 5 lacs (principal + interest), and thereafter, each such category segregated below and above ₹ 5 lacs and processed.

I doubt whether the machinery will act diligently when regulators and regulated are both confused and seem to be violating the law.

RBI has murdered many priorities disrespected the 'risk profile' of debt liability (Tier-II).  

it first allowed investment in the form of Long Term Deposit (LTD) with no existing route. The deposit is a fraud product when it was introduced. I am refraining from writing more about it to remain to the point. Those interested may read my articles (with relevant proofs) available on several websites and a small observation at the end of this write-up under annexure

I wonder who gave this authority to RBI (despite lodging formally, timely, appropriately, the relevant objections) overshooting its authority hitting the fundamental rights of the depositor creditor community. It did it so hurriedly and surreptitiously to raise the eyebrows. It attempted to please more account holders but killed stable depositors (like PF, Pension Fund, etc) amount was huge. I must say both USFB and DICGC are actual beneficiaries. RBI is an indirect beneficiary as it could project its skill in pushing through this plan effectively.

Courts should pull up RBI for RBI's supervisory lapse for not detecting fraud through its 'AFI's and other periodical inspections when such as mass-scale fraud that was going continuously for many years. Now, to save its reputation, it gave license to USFB and drew the Scheme of amalgamation with many written and unwritten favorable terms offered to USFB, all at the cost of gullible depositors.

I reiterate the notified Scheme has illegitimately denied the rights to the eligible institutional depositors* (A Partnership, LLP, AoP, Regd/unregistered coop society (HSG, Muti purpose coop society), PF/Pension Trust up to ₹ 5 lacs are insured) who otherwise would have received the amount from DICGC upto ₹ 5 lacs against each client's aggregate holdings.

 

All these depositors are paid 80% in the form of PNCPS and 20% in the form of equity on very long term

On the other hand, the 'LTD' holders were supposed to get lower benefits are given better.

The payment schedule for retail depositors dragged to 10  years  (of which no interest for five years from 31-03-2021)

Retail depositors who had dues less than ₹ 5 lacs (principal and interest combined) are also made to forgo interest from 31-03-2-21.

It is a mockery to draw a deposit repayment schedule of this nature to a class of unsecured depositors to commence 21 years from now. Depending on many factors, it may go on for 121 years. Such repayment schedules are drawn for huge international FC loans. Here this could even run for a petty deposit amount of ₹ 2 lacs of Partnership, LLP, AoP.

I wonder whether the transferring entity itself would exist/be alive till that time, whether so-called non-retail entities (ridiculously termed/classified as institutional entities) like LLP, Partnership, co-operative housing societies, co-operative credit societies, coop banks would exist till repayment commences? In the interim, these entities may size to exist,  wonder who would come forward and claim the amount and where the amount would lie in the interim.

It appears both RBI and Government were unmindful of operational difficulty while drawing such a long and impracticable schedule. The funny covenants such as the first repayment to DICGC, NPA, CRAR and many useless things brought in that can take repayment to 121 years or so.

There is a conflict of interest :

on one side, there has been an apparent supervisory lapse for many numbers of years from the RBI side. One must admit that incompetence, if not otherwise, of RBI inspecting officials has led to enormous banking fraud for a continuous period of 6-7 years. It is not a case of bank failure due to NPA, business cycle, etc. DICGC is a 100% subsidiary of RBI.

RBI is the regulator of the banking system (supposed to protect the interest of the depositors) but has been acting in the interest of DICGC at the cost of otherwise eligible depositors by redefining the terms of retail deposit and institutional deposits within the eligible sediments.

RBI has gone even to the extent of sidelining the basic legal infrastructure of the country by providing a clause to absolve itself and the Government from any litigation and reserving the right to itself to decide on the matter and that it's stated the decision would be final.

After it was brought to the notice of RBI vide my communication dt:01-12-2021, some sanity prevailed, and it removed the clauses that were there in the draft

I am glad that blanket/blatant/omnibus/unlawful provisions Point 12 from the draft Scheme was removed in the approved Scheme.

Point 12:  Legal proceedings against Central Government, Reserve Bank, Transferee bank or Transferor bank:

No suit or other legal proceedings shall lie against the Central Government, the Reserve Bank or the transferee bank, or the transferor bank for anything in good faith done or intended to be done in pursuance of the Scheme.

I am happy that RBI and Govt realized that the proposer of the Scheme of Amalgamation and the approver of the Scheme cannot isolate themselves from any litigation arising out of the flaws from the Scheme of Amalgamation or legal scrutiny.

RBI has been marketing that the Scheme has helped about 96% of account holders to get a full refund, but RBI and Govt had assumed that people will forget:

-All including retail depositors have lost on the interest component (from 31-03-2021) which would have been duly received from DICGC in many of these cases. Had the Bank been liquidated, all depositors would have got a contracted interest rate until the claim settlement was subject to an aggregate of ₹ 5 lacs. The interest component from 31-03-2021 would have been out of the computation matrix.

-Price a class of depositors partnership, LLP, AoP, Regd/unregistered coop society (HSG, Muti purpose coop society) had paid by missing up to ₹ 5 lacs (insurance payout was denied to them which was their legitimate right). In return given 80:20 ratio close to worthless PNCPS and Equity warrants.

-Retail deposit over Rs five lacs dues will have to keep the money for five years interest-free and receive a paltry simple rate of interest of 2.75% p.a (say) for the next five years

Huge amounts are lost by PF Trusts, Coop Banks, Coop Societies, CHS who kept money with PMC Bank.

Massive deposit balances belonging to the CHS, Muti purpose coop society, PF funds (including RBI staff co-op society /staff PF) will be kept for over 20 years in the form of PNCPS (tier-I) capital. Same with Partnership, LLP, AoP, Regd/unregistered coop society (I wonder whether it would be alive to redeem it and if USFB exists, and could meet the stringent conditions such as repayment of soft loan given by DICGC, healthy CRAR, NPA. In reality, the institutional depositors may safely assume nothing is realizable, and the Scheme of amalgamation has not done any good to them. Also deprived of their legal right to receive DICGC guaranteed amount.

In the financial interests of aggrieved depositors who have been de-classified from eligible depositors to institutional depositors whose rights were stolen/frozen to give the benefit to the DICGC and the transferee Bank this is a clear act of unbecoming of a Central Bank, who is expected to acts as a trustee to bank depositors.

At the implementation level of the current Scheme:

one needs to closely observe whether depositors who have been holding deposits in a 'different capacity and different rights' as mentioned in DICGC Act and FAQ do get their rights recognized and get the amounts for each such set of holding from USFB and as a separate eligible insured deposit.

In past, I had submitted proof to RBI that while settling the claims of Madhavpura Mercantile Cooperative Bank depositors, many eligible claims regarding deposits held in 'different capacity and different rights' were not considered. I had suggested an action to ensure such lapses do not recur. I wonder what will happen to such retail claims. 

This probably happened due to a lapse of the official liquidator or certifying audit team or scrutiny at the level of DICGC. If such a thing happens and remains unnoticed, such depositors would be deprived of the legitimate amounts.

In very recent matters, where I have direct knowledge, a couple of Co-op Banks refused to accept different DICGC claim forms from 'eligible depositor/s' having deposits in 'multiple name combinations' (name of the first depositor was common in some such cases), in utter disregard to the prescribed DICGC, due to lack of proper knowledge.

The reason: while the aggregate of all such multiple deposits with the common first name was far more than ₹ 5 lacs (each deposit case did qualify for full coverage as such deposits were held in a 'different capacity and different right' though first named depositor was 'sequentially common' [each set deposit was falling under 'eligible/insured deposit category'].

Lack of proper training could result in denial of amounts to eligible depositors. If 'USFB' staff lacks in the proper compilation or due to inadequate knowledge, don't consider the deserving cases the amount claimed and received from DICGC on an appointed date would be short, and such normal claims would end with lengthy disputes at the transferee or the transfer Bank.

It is unclear who will verify the data submitted by 'USFB.' Who will be responsible if DICGC eligible claims are not submitted due to the lack of proper knowledge and skills (after quality staff leftover due to uncertain future).

Many depositors like me had deposited money in different name combinations for various reasons (mostly keeping the first name to be that of the IT assessed person, also as funds may belong to him) to maximize the deposit insurance cover. It is a perfect and legitimate way of insurance cover-based investing.

I am apprehensive of proper scrutiny in respect of retail depositor holding deposits concerning holding deposit ‘same Capacity and same right’ will be followed or missed as the Scheme of amalgamation, which became a rule book (post notification) is silent about it.

Unless the computation and verification of the notional claim amounts are proper, many instances may need rectification later. However, once DICGC pays the amount on the appointed date, it will be the funeral of the management of USFB taking over the reins.

Due to multiple instances of fraud, many things would surface later. DICGC may not keep its 'soft loan claim/book open' and accommodate new cases. There is a dire need to have absolute clarity over the associated matters, educate the staff associated with DICGC claims, accurate and detailed audit, etc.

 

Loss to 'eligible depositors/retail'

They are also losers as all will lose interest on their deposits from 31-3-2021 till the date of payment (even if such amount of principal + interest does not exceed ₹ 5 lac).

Depositors would have received interest on outstanding money at contracted rate/s till the payment date. Had the Bank been liquidated or otherwise due to insertion of section 18 A to DICGC Act,1961 (amended in 2021), the eligible depositors would have received the amount of claim from DICGC by Nov 2021. This could have prevented the few depositor's death due to financial/medical reasons and helped others in meeting other urgent financial commitments.

Loss to non-individual/institutional depositors

Excluding non-individuals from 'eligible to DICGC cover' and knocking them to a corner terming them as institutional depositors, thrusting on them 80:20 exceptionally long-term repayment formula, with multiple sacrifices such as interest cut, no interest for a certain period, scheduled repayment could start after 11 years (from 25^th Jan 2022); subject to meeting many onerous terms, conditions, approvals; can go to as long as 121 years, risking them by exposing them to risk of equity up to 20% of bank deposit is a big jolt.

I wonder why RBI released DICGC of its contractual and legal obligations from the guarantee through this illegitimately drawn Scheme of amalgamation, got it vetted & notified from Govt, despite specified written objections, depriving this class of depositors of their legitimate rights to receive insurance compensation upto ₹ 5 lacs in full and balance on par with other depositors (now classified as retail depositors).

It is entirely wrong on the part of RBI to de-classify DICGC cover eligible deposits to a new and illegitimate category and accord certain undue financial benefits to DICGC.

I do not know why institutional deposits (other than from banks/Govt etc., as specified by DICGC FAQ: (2) up to the eligible amount of ₹ 5 lacs have been excluded from the 'full and immediate' payout.

Also, all depositors (other than holding 'LTD') should get a better deal than ''LTD'' bondholders. As stated above, non-individuals are getting a better deal than 'LTD' holders ('LTD' ranks higher risk categorization and lower preference).

Does RBI/Govt have the right to deny legal and contracted credit payout preference, denial of insurance cover through the scheme of amalgamation? It is high time that the regulator is also made accountable for its supervisory lapses, without which the sense of responsibility would not be seen in the future.

Due to strong push from many sections of the society to benefit PMC bank depositors Govt has done the following:

Few changes were made in DICGC Act,1961. The DICGC cover limit was enhanced from ₹ 1 lac to ₹ 5 lacs; Section 18A was introduced in 2021 to fix a timeline for payment to the impacted depositors (subject to certain conditions). The main object of Govt in doing all this retrospectively was to help PMC Bank customers.

Banking Regulation Act,1949 Sec 45 (4): If the Reserve Bank is satisfied that (a) in the public interest; or (b) in the interests of the depositors; or (c) to secure the proper management of the banking company, or (d) in the interests of the banking system of the country as a whole draw a scheme of amalgamation.

I repeat, it appears to me that RBI, in this case, has forgotten its role as a Central Bank of a Country to ensure protect the interest of the gullible depositors, protect the interest of the banking system, remove the spikes, and their faith in the banking system. The above acts of RBI have done effect of wiping off the benefits that were offered by Govt I feel it is acting like not so well informed. This scheme appears to have been drawn in the interest of RBI (to shield it from public wrath), the interest of USFB, and DICGC.

Many concerns are emerging this notified Scheme that clearly shows that the Scheme is not drawn in the best interest of the depositors. I am not making intricate references in this write-up as general readers may not be interested in it.

However, if the depositor's forum, a specialist in public interest matters, wishes to consider while filing the civil suits or writ petition with honorable High Court of Bombay or honorable Supreme Court of India, I would be glad to share with them the concerned all in details.

Conclusion:

Upon reading carefully above, the reader may also see the scheme notified is a case of travesty of justice and needs to have been stayed.  Groups or entities proposing moving the appropriate courts may request their advocates to pray to Court to direct RBI to redraw the Scheme, to the extent it impacts the legal rights of depositors, not to release DICGC of its contractual commitment under guarantee and legal obligations, seeks the views of all stakeholders and Govt to step in actively to see the provisions of solvency law are fully respected, RBI and Government should be directed to pitch in to assume the burn and bridge the financial hurdles as the process of amalgamation has been already given effect to and the process has begun, PMC bank seizes to exist from 25^th Jan 2022.

Before payment to depositors through transferee bank begins (with the first payout from DICGC to USFB), if the stay is granted, the rest of the things can be kept on hold case is decided. Once the payout of DICGC begins, the situation would be further messy. After hearing etc HC/SC may be requested through prayer to direct RBI to give a fixed period to rework all appropriately complying the existing laws and legal and contractual rights of unsecured depositors.

If this matter does not stand in the court for any reason in the future one may always remember the scary situation:

Nothing is certain and one cannot rely on a normal matrix when RBI is on another side of the table and there is amalgamation or reconstruction of the bank. RBI while drawing a scheme of amalgamation/reconstruction under Sec 45(6)(a) can merrily rob someone’s legal rights (available under any statute) and grant some with a new right or a boon, out of the blue. It can further get central government’s assistance to sort any difficulty that may arise (as in PMC bank’s case) to give effect to the provisions of the scheme of amalgamation/reconstruction notified, using vide and all-encompassing powers GOI has under Sec 45(10) under BR Act,1949.

Thus if any bank fails, one would not be sure about the future and one cannot predict the fate of DICGC cover, etc.

RBI’s action through the scheme of amalgamation, restructuring has the same effect of amending prospectively, provisions of any Act to the specified cases. The principle of equality, justice, equity before the law all appears to be meaningless.

As a depositor, investors everyone has neither resources nor the time to contest and get the uncertain result after meeting various legal hurdles. 

Without heeding to the legal objections I had conveyed, and financial suggestions conveyed by thousands of depositors of erstwhile PMC bank RBI’s final draft was approved by Govt (this was despite the past bad history of RBI in many cases Yes Bank was recent).

Such attitude of top functionaries of RBI needs to be appropriately dealt with as in future this will be used as precedence and 'chalta hai' attitude will continue and disastrous. many like me lose confidence in the banking regulator, system, and DICGC.

Assuming no deposit insurance cover to deposits of non-individuals, LLP, Partnership, LLP, AoP, PF, Other Trusts, Small corporates will hesitate in depositing their money's with small finance banks, co-operative banks, Pvt banks, and their growth would hamper, ultimately will hit the country badly.

DICGC would in the future need to come out in advance, with proper advertisements, education campaigns whenever it does any modifications to the insured deposit category, with prior approval of RBI.

Readers interested in perusing my formal communications with RBI on the draft scheme of amalgamation of PMC Bank highlighting gross wrongs and suggesting modifications may read published articles on this subject on the web.

RBI did a travesty of justice a few times in the past

I am a senior ex-banker (observed in and out of RBI's intricate functioning for a few decades). Based on my long experience dealing with RBI on various fronts (in various capacities), I may conclude that it has a habit of dominating, bulldozing, and dictating its terms. At times, knowing well what it is doing is a gross wrong. In many cases, I have noticed that RBI, even after it was made aware that what it is doing is illegal/wrong, never attempted to correct it (even though it was going against the interest of the masses). It stuck to its autocratic stand and dictated the terms.

I have no good words to express unjust situations created. RBI has backed out from its original stand to save its name and reputation.

Only when the threat of judiciary was apparent, it was ready to correct or retract. In the first case Govt had to amend law Banking Regulation Act,1949 prospectively (due to an unusual worrisome situation). The second case was even worst. RBI had to get the product dismantled unceremoniously. While the third case was resolved with major corrective changes after the intervention of the High Court of Bombay. I have a full case of all ***three instances as I had initiated all these, fought vigorously for long periods. In the instant case also, I feel it will need a push from the judiciary.

 

***Three instances

1. Regulating the OTC derivative market
2. CBLO a money market instrument: It got into many serious legal problems due to completely defective design, stamp duty, and many aspects but vehemently backed and blessed money market
3. Long Term Deposits (LTD) are defective products issued by co-op banks, TJSB, PMC Bank, and a few others. Tier-II capital bonds) like non-transferable, unsecured papers redeemable on or after maturity subject to prior approval of RBI and meeting certain pre-requisite conditions

As this write-up has become bulky I am citing the above major instances of the past under annexure-1.

Readers interested may peruse short case references (below and if interested) reach me for further information.

Shivaprasad Laxman Chhatre, Pune

Land: 020 61092392 / 9819380114

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Annexure-1

Case- 1

Regulating OTC Rupee Interest Rate Derivative Market :

I recollect a grave situation market faced in the year 2005-06. RBI, in July 1999, issued a circular on FRA / Swap and Derivatives. RBI assumed it has powers to regulate the OTC derivative market in interest rates and FX derivatives. OTC market except SBI perceived that Banking Regulator has powers to develop and regulate it. Post that market boomed between the year 2000 – 2005. In an individual capacity and as the CEO of FIMMDA, I had written to RBI along with the legal opinion that RBI does not have the power to regulate this market. Without proper examination, this view supported by third-party legal opinion was RBI brushed aside by RBI and went ahead. Five years later, RBI realized its mistake. Then the OTC interest rate derivative markets started facing problems. Sometime in 2005, RBI realized that it did not have absolute powers to regulate this OTC market. Had this news been spread in the market at that time, there could have been panic, and there could have been a jolt in the financial market that could have led to systemic risk. RBI initiated the corrective step & the Government came to its rescue. It passed RBI Amendment Act 2006 in which  Section 45 U(a)  was introduced, and section 45 (V)(1) and 45(V)(2) was introduced, giving and retrospective effect contrary to the normal legal practice of making it applicable prospective. Luckily no losing party questioned/challenged effectively retrospectively. Transactions in such derivatives, as had been specified by the Bank from time to time, shall always be deemed to have been valid, as if the provisions of sub-section (1) were in force at all material times". Had the suggestion been accepted, things could have been averted from slipping.

Case-2

Collateralised Borrowing and Lending (CBLO): This product was discontinued by RBI from 05th Nov 2018 after my tough communications with various departments of RBI, Gov of India, Insp Gen of Stamps, etc. for about six years. Insp Gen of Stamps wrote RBI about massive stamp duty evasion on CBLO products for the last 14 years by market participants (to which RBI showed ignorance). PIL case was taken up at SC.

CBLO was: A collateralized borrowing and lending obligation (CBLO) is claimed to be a money market instrument but does not appear in the definition of Money market Instrument nor explicitly notified under by RBI under the gazette of India. CBLO represents an obligation between a borrower and a lender as to the terms and conditions of a loan. CBLO members who have excess funds can lend their funds and gain interest in this arrangement. Members who require funds can borrow funds by depositing the prescribed securities in a CSGL-Gilt account [with Clearing Corporation of India Ltd. (CCIL)]. Thus the lending was supposed to be done in a collateralized environment. 

Corporate meeting specific criteria are permitted by RBI to borrow and lend in the CBLO market. While they are not members of CCIL and do not have a funds account with RBI for CCIL to do Delivery Vs. Payment settlement. Hence their CBLO related settlement obligations are met by the CCIL member entity. CCIL is a Pvt Ltd company formed by various banks and is a settling agency under the Payment and Settlement Act

I had raised serious objections to the product. Despite several dozen of references/cross-references, RBI was not in a position to reply to simple queries/concerns like:

1. What kind of instrument CBLO is  i.e. nature of instrument pro-note (DPN/UPN), Bill of Exchange(BE), Debenture, Secured Borrowing Agreement-cum deed of assignment, SPN, etc  (if it is an instrument)

2. Text and wording of this so-called Money Market Instrument

3. Who is the issuer of the instrument i.e, who are the primary obligors, 

4. Under which law it is held/converted in electronic form

5. Does CCIL has the powers to Issue CBLOs and hold them as a depository

6. Does CCIL have the power to Borrow and Lend?

7. Whether the settlement agent has the power to run the stock exchange like a platform on a private network without SEBI's license

For many years. It was dodging matters on one or the other pretext.  RBI was flat.

I had highlighted many times stamp duty evasion of trillions of rupees and taxation deduction at source on interest, aspects, and many more serious concerns. They were brushed aside by RBI.

I wondered, does it sound good and acceptable if the Banking Regulator (RBI) state that the regulator who has approved the product and introduced the product to the market is not responsible to look at different dimensions associated with the product such as tax deduction at source (the Income Tax Act) and stamp duty applicable to such instrument of borrowing and lending (which is transferable and creates certain rights and obligation between the parties concerned) claiming that RBI is not responsible for these aspects of the product RBI had approved.

From all the to and fro correspondence on the subject with RBI, I summed up and wrote to the honorable Supreme Court of India in my PIL case as:

“ CBLO is a Money Market Instrument (without its existence either in physical or depository form of instrument), no one knows the nature of this instrument (debenture, pro-Note, Bill of Exchange agreement of borrowing etc) which is supposed to be evidence of financial transaction of collateralized borrowing and lending for tenure between 1-365 days, against Govt Security (no one knows issuer), no one has ever seen the text wording of such Money Market Instrument, Lending under it is treated as investment by lender, such investment (CBLO) can traded in the Secondary Money Market, completely fungible across the obligors/borrowers of same maturity product, with CCIL as primary obligor –cum- guarantor -cum -settlement novator (all in one), no one ever pays stamp duty on this instrument nor deducts TDS on the interest on the underlined borrowing, no one ever bothered to check the appropriateness / validity/legal tenability of the manner in which charge on the Govt security is created (said to be collateralized), dematerialized or brought into electronic mode and transferable in electronic mode by a non-depository (CCIL) without any payment of stamp duty on its transfer,  approved by RBI, dealt across by various players in financial market regulated by IRDA, SEBI & RBI and unregulated palyers like large corporate, claimed to be unique financial product and that wonderful part is it is contracted/dealt for over Rupees trillions per day”.

I further wrote to SC of India that if a corporate client like Nirav Modi, Mehul Choksi, Vijay Mallya, or Sahara borrow and defaults a considerable amount of CBLO repayment obligations and becomes bankrupt. Suppose their lawyers challenge the charge on underlying Govt Security in favor of CCIL before a civil court. In that case, it will hold to be defective (termed as imperfect charge, a charge not created adequately as per the legal provisions). I wonder how the waterfall mechanism or loss allocation process stated by RBI will save the financial markets. Will the Bank/ Institutions engage in the settlement process for its corporate shell out, or will CCIL own the contract as contractual Novation, or will it stand by its so-called guarantee?

Thus when trades of corporate members are taken for CCIL settlement, the CCIL member participating runs a considerable risk. There are allied issues surrounding this product, and I have challenged every aspect RBI chose not to reply from a legal perspective.

I also wrote to RBI, MoF, and finally to SC of India that CBLO is ill-conceived, illegal, untenable, defective from top to bottom, and technically a 'fraud' product that can pose a severe threat to the financial system within India and capable of bringing a bad name to the Indian Financial System / RBI, etc. in the international scenario.

I mentioned I know the product inside out from its birth. It was launched in a great hurry and had suffered several serious shortcomings. After a couple of references highlighting concerns, attempts were made to suppress the lapses instead of correcting those deficiencies and correcting the product by fine-tuning it following the law. I am looking to the High Court as a last resort to avert the systemic risk.

Outstanding market holding in this instrument at any point of time is close to Rupees trillion 1.20 and severe threat to the credibility of this product will shake financial and related markets of the country After the honorable supreme court of India took up the reference for consideration, stamp authority vigorously seeking RBI on the massive loss to the exchequer on account of stamp duty evasion, fine, penalty (initiated vide its letter D5/stamp-17/LR 07/2017/270-73/17 dt: 18-03-2017)  seeing no chance to pull on it unceremoniously withdrew CBLO and introduced a third-party repo.

Stamp duty evasion running in trillions of rupees (which could have resulted in a collapse of the banking system of the country) was one of the major issues apart from 1 to 7 above. It got out it using its might and position as a Central Bank of the country, the constitutional power, clout it has with the Government. It just unceremoniously shut (dismantled) the product and kept quiet.

Case-3

Long Term Deposit (LTD): LTD is an unrated debt receipt issued by coop banks (marked/mis-sold as FD) by coop banks in place of proper subordinated long-term debt (it is surrogate of debenture/bond issued by co-op banks). 

I had raised a couple of substantiated concerns on associated aspects. On seeing there is no progress in the matter except vague responses [some writing by DCBR, RBI to the legal department and after some time, replying to my queries that all aspects have been taken care of], I approached the High Court of Bombay. After their directions to RBI, the matter moved. I have noted facts from the RTI reply (DCBR internal note dated 06th Jul 2015) that matter was pushed and progressed at a legal department where DCBR mentioned that Mr.Chhatre has approached the Court hence needs to address the concern immediately. Thus the matter which was brushed aside or did not move for 5-6 years did move in no time after the High Court of Bombay push, and RBI issued a circular 07th Jul 2016 that addressed concerns and adopted the majority of my suggestions to make to RBI thus to make 'LTD' product legally sound. Copy of correspondence was resupplied to me only in response to follow-up RTI query to UBD, RBI. I hold a considered view that RBI is quite aware of lapses wrongdoings of long past but suppressing them due to fear of not knowing how to correct it.

These three instances are adequate to demonstrate that RBI does not act unless it is pushed to corner through Court or appropriate external authority.

Shivaprasad Laxman Chhatre, Pune

Land: 020 61092392 / 9819380114

Discussions to this article

[ANIL ANIKHINDI]

Very detailed studied article. Good.