2020 (2) TMI 586 - HC - Indian Laws

Compliance with paragraph 6.4 of the Master Circular dated 1st July, 2015 issued by the Reserve Bank of India (RBI) - default in repayment of debt - restructuring of petitioner's debt - validity of retrospective declaration of the petitioner to be in default and an NPA with effect from 1st July, 2011. HELD THAT - The petitioner s prayer is that this Circular should be complied with insofar as it lays down the Prudential Norms on Income Recognition Assets Classification and Provisioning pertaining to advances. Now, this part of the Circular would require a closer look. The said aspect is found in Part A, 3, 4 and 5. That says, an asset can be termed as Non Performing Asset, if it satisfies the criteria laid down in the definition of this expression. Firstly, this part says that in line with the international practices and as per the recommendations made by the Committee on the Financial System, the Reserve Bank of India has introduced, in a phased manner, the norms styled as prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks. Pertinently, Mr.Kamdar does not point out that it is to move towards greater consistency and transparency in the published accounts that the policy has been brought into effect. It is clarified that this policy should be objective and based on record of recovery rather than on any subjective considerations. Likewise, the classification of assets of banks has to be done on the basis of objective criteria, which would ensure a uniform and consistent application of the norms. Importantly, the provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained non-performing and the availability of security and the realisable value thereof. The financial assets which can be sold to the Securitisation Company and Reconstruction Company by any bank or financial institution are non-performing assets, including a non-performing bond/debenture, a Standard Asset where the asset is under consortium/multiple banking arrangements and atleast 75% by value of the asset is classified as non-performing asset in the books of other banks/financial institutions and atleast 75% by value of the banks/financial institutions who are under the consortium/multiple banking arrangements agree to the sale of the asset. Secondly, a procedure has to be followed and in the case of consortium/multiple banking arrangements, if 75% (by value) of the banks/financial institutions decide to accept the offer, the remaining banks/financial institutions will be obligated to accept the offer. However, this is preceded by an assessment of each bank/ financial institution of the value offered by the Securitisation Company/Reconstruction Company for the financial asset and decide whether to accept or reject the offer. Further, there cannot be a transfer to this Securitisation Company/ Reconstruction Company at a contingent price, whereby, in the event of shortfall in the realization by the Securitisation Company/Reconstruction Company, the banks/financial institutions would have to bear a part of the shortfall. Finally, if the auction process is used for sale of non-performing assets to Securitisation Companies/ Reconstruction Companies, that should be more transparent and complying with what is laid down in para 6.4 clause (d)(iv). It is the first respondent, which is accusing the petitioner of breach and violation of the packages and the conditions thereof. The bank accuses the petitioner of not fulfilling its commitment or the essential conditions under the packages. This may be or may not be correct, but it is definitely a version contrary to that of the petitioner. In such circumstances, how arbitrariness, much less, mala fides, can be attributed to a public financial institution without resolution of the factual disputes, is unclear to us. In other words, this is not an undisputed factual position, but a highly disputed one. It is in these circumstances that we are disinclined to grant any relief. It may be that the seventh respondent has addressed a letter to the petitioner, copy of which is at page 322 of the paper-book, and it claims that it is entitled to recover from the borrowers or guarantors the total dues of the banks alongwith the interest at contractual rate. It makes reference to certain banks mentioned in Schedule-1. This may not be inclusive of all the debts and dues to even Canara Bank. Therefore, this communication may say that the assignment agreements are with Union Bank of India, Andhra Bank, ICICI Bank Limited, Axis Bank, Bank of Baroda, Bank of India, Dena Bank, Indian Overseas Bank, Punjab National Bank, State Bank of India, Oriental Bank of Commerce and Central Bank of India, still, the petitioner has impleaded Canara Bank, Corporation Bank, Indian Bank, Vijaya Bank, IDBI Bank and Life Insurance Corporation of India Limited, all of which are not a party to this agreement. In these circumstances, marking of the documents in favour of these entities would not suffice. Petition dismissed.

Summary

Issues Involved:
1. Compliance with the Reserve Bank of India's (RBI) Master Circular dated July 1, 2015.
2. Obligations of banks under the Strategic Debt Restructuring (SDR) Scheme.
3. Classification of the petitioner's account as a Non-Performing Asset (NPA).
4. Sale of financial assets to Asset Reconstruction Companies (ARCs).
5. Legal standing and locus of the petitioner to seek relief.
6. Maintainability of the writ petition.
7. Allegations of arbitrariness and mala fides against respondent banks.
8. Application of Prudential Norms on Income Recognition, Asset Classification, and Provisioning (IRAC) guidelines.
9. Proceedings under the Insolvency and Bankruptcy Code (IBC).

Detailed Analysis:

1. Compliance with the RBI's Master Circular:
The petitioner sought a writ of mandamus directing respondent banks to comply with paragraph 6.4 of the RBI's Master Circular dated July 1, 2015. The court examined the circular, which provides guidelines for the sale of financial assets to ARCs, including valuation and pricing aspects. Specifically, clause 6.4(d)(ii) mandates that if 75% (by value) of banks in a consortium accept an offer, the remaining banks are obligated to accept it. However, the court noted that these guidelines are advisory and not binding rules or regulations. The discretion of the banks in financial matters cannot be overridden by issuing a writ of mandamus.

2. Obligations of Banks under the SDR Scheme:
The petitioner argued that the SDR scheme required the conversion of debt into equity and the sale of equity to new investors. The court noted that the SDR scheme's success depended on the induction of a new investor and a change in management, which did not materialize. The court found that the banks had exercised their discretion in evaluating the petitioner's proposals and were not obligated to accept them.

3. Classification of the Petitioner's Account as an NPA:
Respondent banks classified the petitioner's account as an NPA with retrospective effect from July 1, 2011, due to the failure of the SDR scheme. The petitioner contested this classification, arguing that it had not defaulted under the SDR scheme. The court found that the classification was based on the RBI's guidelines and the petitioner's failure to meet its obligations under the SDR and CDR packages.

4. Sale of Financial Assets to ARCs:
The petitioner contended that since more than 75% of its lenders had assigned their debts to respondent No.7 (an ARC), the remaining banks were obligated to do the same under the IRAC guidelines. The court noted that the decision to sell financial assets involves multiple factors and risks, and banks have the discretion to accept or reject offers based on their assessments. The court found no basis to compel the banks to assign their debts to the ARC.

5. Legal Standing and Locus of the Petitioner:
Respondent banks argued that the petitioner, as a borrower, had no locus to seek a direction for the sale of their assets to an ARC. The court agreed, stating that the petitioner could not dictate the terms of the sale or restructuring of its debt, which are matters of commercial discretion for the banks.

6. Maintainability of the Writ Petition:
The court addressed the preliminary objection that the petition sought similar relief to that sought in proceedings before the Supreme Court, which had been disposed of without granting such relief. The court found that the writ petition was not maintainable as it sought to re-litigate issues already decided by the Supreme Court.

7. Allegations of Arbitrariness and Mala Fides:
The petitioner alleged that respondent No.1 (Canara Bank) acted arbitrarily and with mala fides in opposing the sale of its debt to the ARC. The court found that the bank's actions were based on its assessment of the petitioner's financial situation and the risks involved. The court held that the bank's cautious approach could not be deemed arbitrary or mala fide.

8. Application of IRAC Guidelines:
The petitioner relied on the IRAC guidelines to argue that respondent banks were obligated to assign their debts to the ARC. The court noted that these guidelines provide a framework for asset classification and provisioning but do not impose a mandatory obligation on banks to accept offers for the sale of financial assets.

9. Proceedings under the IBC:
Respondent No.1 had filed an application under Section 7 of the IBC to initiate corporate insolvency resolution proceedings against the petitioner. The petitioner argued that this was in violation of the IRAC guidelines. The court found that the proceedings under the IBC were separate and independent of the guidelines and that the banks were entitled to pursue legal remedies under the IBC.

Conclusion:
The court dismissed the writ petitions, holding that the petitioner had not established a legal right to compel the respondent banks to assign their debts to the ARC or to comply with the petitioner's proposals. The court emphasized the discretionary nature of the banks' decisions in financial matters and the lack of a binding mandate in the RBI's guidelines. The court also noted that the petitioner could pursue its objections in appropriate legal forums, including the NCLT.