9911796707
TMI Blog2012 (12) TMI 396X X X X Extracts X X X X X X X X Extracts X X X X ..... r, on 17.01.2006 the appellant and the respondent no.1 entered into the International Swaps and Derivatives Association (ISDA) Master Agreement. Between January, 2006 to January, 2007 the appellant executed nine derivative transactions with the respondent no.1. On the request of the respondent no.1, the appellant enhanced the limit of Derivatives/Forward Contracts facility of the respondent no.1 to Rs. 10,00,00,000/- (rupees ten crores) only for the purpose of hedging adverse foreign exchange fluctuations and to enter into derivative transactions by letter dated 31.01.2007. During January, 2007 to August, 2007, the appellant executed various derivatives transactions with respondent no.1. In August, 2007, on the request of respondent no.1, the appellant once again increased the limit for Derivatives/Forward Contracts facility to Rs.20,00,00,000/- (rupees twenty crores) only for the purpose of hedging adverse foreign exchange fluctuations and entering into derivative transactions by letter dated 09.08.2007. On 06.09.2007, the appellant entered into derivative transactions FXOPT 20536, 20540 and 20544. Thereafter, on 05.03.2008 and 12.03.2008 the appellant informed the respondent no.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court and by order dated 27.03.2009 the Calcutta High Court dismissed the writ petition taking a view that the matter was pending before the Grievance Redressal Committee. Thereafter, on 07.04.2009, the Grievance Redressal Committee of the appellant-bank after hearing the respondent no.1, declared the respondent no.1 as a wilful defaulter under the Master Circular and further resolved that the respondent no.1-company and its directors be reported to the Credit Information Bureau (India) Ltd., RBI or such other institution/agency as may be required by RBI in terms of its Master Circular. The appellant accordingly intimated the aforesaid decision of the Grievance Redressal Committee of the appellant-bank to the respondent no.1 and the RBI by two separate letters dated 07.04.2008. Aggrieved, the respondent no.1 filed Writ Petition No.7729 (W) of 2009 in the Calcutta High Court and by the impugned judgment, the Calcutta High Court held that the Master Circular applied only to lending transactions of a bank or financial institution and as in the foreign exchange derivative transactions between the appellant and respondent no.1, there was no such lending transactions and the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a person who has been granted loan or any other credit facility by the credit institution, but also a client of a credit institution. He referred to the definition of "Client" in Clause (c) of Section 2 of the 2005 Act to show that "Client" includes a person who has not only obtained or seeks to obtain financial assistance from a credit institution, but also obtains assistance in any other form or manner. He submitted that Clause (d) of Section 2 of the 2005 Act defines the expression "credit information" more widely to include not only loans but any other non-funding based facility granted to all its borrowers as well as any other matter which the RBI may consider necessary for inclusion in the credit information to be collected. He submitted that the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 (for short 'the FEMA Regulations') had been made by the RBI under Section 47 of the Foreign Exchange Management Act, 1999 (for short "the FEMA") and Regulation 2(v) of the FEMA Regulations defines "foreign exchange derivative contract" to mean a financial transaction or an arrangement in whatever form and by whatever name called, whose value is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction does not involve lending of funds by way of a loan or an advance by the bank to its constituent and, therefore, the dues under a derivative transaction will not fall in any of the sub- clauses (a) to (d) of clause 2, which defines a wilful defaulter for the purpose of the Master Circular. He argued that there is a fundamental difference between a loan/advance and a derivative transaction and the fundamental difference is that in the case of a derivative transaction, either party could be required to effect payment depending on the change in interest rate, foreign exchange rate credit rating or credit index, price of securities as will be clear from Section 45U of the 1934 Act, whereas in the case of a loan or an advance, it is the borrower alone which has to effect payment. He submitted that in none other circulars issued after the Master Circular of 01.07.2008 there is any change in the definition of 'wilful defaulter' so as to bring in defaulters of payment of dues under the derivative transactions within the meaning of 'wilful defaulters'. In this context, he referred to the Master Circulars dated 01.07.2009, 01.07.2010, 01.07.2011 and 01.07.2012. He vehemently argue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent no.1-bank entered into nine foreign exchange derivative transactions, out of which four were foreign currency swap transactions and five were foreign currency option transactions. On 01.07.2010, the Reserve Bank of India (for short 'the RBI') issued a Master Circular on Wilful Defaulters (for short 'the Master Circular'). The Master Circular contained instructions of the RBI to banks and financial institutions regarding reporting of wilful defaulters to other banks and financial institutions and the measures to be imposed on wilful defaulters by such banks and financial institutions. Respondent no.1 issued a notice dated 15.10.2010 to the appellant no.1 to show-cause why the respondent no.1 should not classify the appellant no.1 as a wilful defaulter under the Master Circular, as the appellant no.1 had not paid the dues to the tune of of Rs.2.92 Crores under three of the derivative transactions. In the said show- cause notice, the appellant no.1 was also informed that it can make a representation against the decision of the respondent no.1 to classify the appellant no.1 as wilful defaulter to the Grievance Redressal Committee of the respondent no.1-bank. The appellant no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it is a settled principle of statutory interpretation that a definition in one Act should not be imported into another Act and referred to the decision of this Court in Commissioner of Sales Tax, M.P. v. Jaswant Singh Charan Singh [1967 (2) SCR 720] in which a reference to other Acts to construe an Act has been critically commented by Lord Loreburn in Macbeth v. Chislett [(1910) A.C. 220, 224] as a "new terror in the construction of Acts". He vehemently submitted that the Master Circular should be construed on its own terms and language and so construed, it will be clear that the basic postulate and the underlying assumption of the Master Circular is existence of a lender-borrower relationship and that the Master Circular does not contemplate nor cover a creditor and debtor relationship. He relied on the decisions of this Court in Bombay Steam Navigation Co. (1953) Private Ltd. v. C.I.T., Bombay [1965 (1) SCR 770], C.I.T., Lucknow v. Bazpur Co-operative Sugar Ltd. [1989 Supp. (2) SCC 240] and Ram Ratan Gupta v. Director of Enforcement, Foreign Exchange Regulation & Anr. [1966 (1) SCR 651] in which the distinction between a loan and a debt has been judicially brought out to say t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng company into two parts, namely, core banking of accepting deposits and lending and miscellaneous functions and services. Accordingly to him, derivative is a part of the miscellaneous parts of functions and services provided by the bank and do not create a lender-borrower relationship. He submitted that the Master Circular contemplates grave consequences affecting the right of a person under Article 19(1)(g) of the Constitution of India to carry on any trade, business or occupation and should be strictly construed as otherwise it will be exposed to the challenge of unconstitutionality. In support of this argument, he relied on the decisions of this Court in Tolaram Relumal & Anr. v. State of Bombay [1955 (1) SCR 158], Chandigarh Housing Board v. Major General Devinder Singh & Anr. [(2007) 9 SCC 67], Delhi Airtech Services Private Limited & Anr. v. State of Uttar Pradesh & Anr. [(2011) 9 SCC 354] and Shah & Co., Bombay v. State of Maharashtra & Anr. [1967 (3) SCR 466]. 13. Mr. Dushyant Dave and Mr. S. Ganesh, learned senior counsel appearing for respondent no.1-bank, submitted that the derivative transactions between the appellant no.1 and respondent no.1 are swaps and opt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bank enjoying a credit facility such as a derivative transaction. They submitted that the Master Circular is an administrative circular issued by the RBI in exercise of its regulatory power and, therefore, can be clarified by the RBI where a doubt arises as to whether derivative transactions are covered under the Master Circular and the RBI has clarified in its affidavit filed before this Court that the derivative transactions are covered by the Master Circulation. They cited the decision of this Court in Desh Bandhu Gupta and Co. and others v. Delhi Stock Exchange Association Ltd. [(1979) 4 SCC 565] that an administrative construction placed by the authority or officers charged with executing a statute generally should be clearly wrong before it is overturned and is entitled to considerable weight. They also referred to the decision of this Court in Peerless General Finance & Investment Co. Ltd and another v. Reserve Bank of India [(1992) 2 SCC 343] wherein it has been held that Courts are not to interfere with economic policy which is the function of the expert bodies and submitted that the view taken by the RBI that dues under derivative transactions covered by the Master C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k against the appellant no.1 arising out of the foreign exchange derivative transactions. The High Court, however, left it open to the Grievance Redressal Committee to pass fresh orders after complying with the principles of natural justice. The appellants have, therefore, filed this appeal. 18. Dr. A.M. Singhvi, learned senior counsel appearing for the appellants, submitted that in the present case the respondent no.3-bank has not sanctioned any credit or other facility for derivative transactions in favour of the appellant no.1 and as such there was no International Swaps and Derivatives Association (ISDA) agreement between the appellant and the respondent no.3 for the derivative transactions. He submitted that a foreign exchange derivative contract means a financial transaction or an arrangement whose value is derived from price movement in one or more underlying assets. He submitted that under the FEMA Regulations any authorized person including an authorized dealer, a money changer, a financial banking unit, or any other person can deal with foreign exchange derivatives and thus foreign exchange derivative transactions are not essentially banking transactions. He explained th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onship at all, it could not become a borrower-lender subsequently on default of payment of the demand made by the bank under the derivative transaction. He submitted that the RBI has not given any definite opinion as to whether the dues under a derivative transaction would be covered under the Master Circular and in any case the opinion of the RBI is not consistent and is in conflict with the statutory provisions. He cited Desh Bandhu Gupta and Co. and Others v. Delhi Stock Exchange Association Ltd. [(1979) 4 SCC 565] to submit that the interpretation given by the RBI to the Master Circular could not have any controlling effect on the Courts and if occasion arises, will have to be disregarded by the Courts for cogent and persuasive reasons. He finally submitted that if the Master Circular is construed to cover derivative contracts it will have the effect of black listing the customers who resist demands made by the banks towards their alleged dues under the derivative transactions and will ruin their business as well as their reputation and the Master Circular will become arbitrary and violative of Article 14 of the Constitution. He submitted that as the Master Circular has a penal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not the function of the courts to sit in judgment over matters of economic policy and it must necessarily be left to the expert bodies. He also relied on ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. and others (supra) in which this Court has discussed the power of the RBI under the 1934 Act to regulate the business of banking companies and to control their management in certain situations. He submitted that in the aforesaid decision, reference has also been made to the permission of the RBI required if a banking company seeks to deal in derivative. He submitted that in Desh Bandhu Gupta and Co. and others v. Delhi Stock Exchange Association Ltd. [(1979) 4 SCC 565] in which the principle of contemporanea expositio applied to interpretation of statutes or any other document has been discussed. He submitted that in Common Cause (A Registered Society) v. Union of India and Another [(2010) 11 SCC 528] this Court has held that it is neither within the domain of the courts nor the scope of judicial review to embark upon an enquiry as to whether a particular public policy is wise or not and submitted that these comments were made by the Court while dealing with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivative transactions but the customer does not pay the dues, the customer becomes a wilful defaulter. He submitted that the definition of wilful defaulter in clause 2.1 of the Master Circular makes it clear in sub-clause (a) that a wilful default will cover also a case where a unit has defaulted in meeting its payment obligations to the lender even if it has a capacity to honour the said obligation. He submitted that in a lender-borrower relationship, there may be a repayment obligation to the lender but no payment obligation, whereas in a non-funded facility such as bank guarantee or a derivative transaction, there is no repayment obligation but a payment obligation. He submitted that a unit which has defaulted in meeting its payment obligation under a derivative transaction is thus covered under the Master Circular. He also referred to sub-clause (d) of clause 2.1 of the Master Circular in which the expression "bank/lender" finds place. He submitted that this sub- clause would show that the words "bank" and "lender" have been used interchangeably in the Master Circular and therefore the expression "lender" in the definition of sub-clauses (a), (b), (c) & (d) would include a ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e banking law as it stood in 1949 but also the growth and the new concepts that have emerged in the course of time. He submitted that when a Master Circular was issued, it contemplated all kinds of wilful defaulters of dues to the bank and when new products such as derivative transactions come into economy, the Courts will have to interpret the Master Circular in an expansive way so as to cover dues to the bank under such new products. Interpretation of the Master Circular by the Court: 27. In these appeals, the only question that we are called upon to decide is whether a wilful default in meeting payment obligations to a bank under a derivative transaction will be covered under the Master Circular. The definition of wilful default is in para 2.1 of the Master Circular dated 01.07.2008 and the Master Circular dated 01.07.2009 and is the same. We, therefore, extract clause 2.1 of the Master Circular dated 01.07.2008, herein below: "2.1 Definition of wilful default The term "wilful default" has been redefined in supersession of the earlier definition as under: A "wilful default" would be deemed to have occurred if any of the following events is noted: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erpretation, 13th Edition, 2012, Justice G.P. Singh has given this explanation to the rule of literal construction at page 94: "When it is said that words are to be understood first in their natural, ordinary or popular sense, what is meant is that the words must be ascribed that natural, ordinary or popular meaning which they have in relation to the subject-matter with reference to which and the context in which they have been used in the statute. Brett, M.R. called it a "cardinal rule" that "Whenever you have to construe a statute or document you do not construe it according to the mere ordinary general meaning of the words, but according to the ordinary meaning of the words as applied to the subject-matter with regard to which they are used". "No word", says Professor H.A. Smith "has an absolute meaning, for no words can be defined in vacuo, or without reference to some context". According to Sutherland there is a "basic fallacy" in saying "that words have meaning in and of themselves", and "reference to the abstract meaning of words", states Craies, "if there be any such thing, is of little value in interpreting statutes". In the words of Justice Holmes: "A word is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, 29.10.2008, 09.04.2009 and 01.07.2010 may have been issued by the RBI but these are not circulars amending or clarifying the definition of wilful default in the Master Circular. The circulars issued by the RBI on 08.08.2008, 13.10.2008, 29.10.2008, 09.04.2009 and 01.07.2010 on which the Bombay High Court has relied on while interpreting the definition of wilful default in the Master Circular do not constitute the context or the subject-matter in which the definition of wilful default in the Master Circular has to be construed. The context will only include pari materia circulars issued by the RBI, but will not include circulars issued by the RBI on subject-matters other than wilful default. 31. On a reading of the paragraph in the Master Circular titled "Introduction", we find that pursuant to the instructions of the Central Vigilance Commission for collection of information on wilful defaults of Rs.25 lakhs and above, a scheme was framed by the RBI with effect from 01.04.1999 under which the banks and notified All India Financial Institutions were required to submit to the RBI the details of the wilful defaulters. Hence, the Master Circular originated pursuant to the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the banks to the RBI and not just cases of defaults by borrowers of loans or advances from banks and the mischief that was sought to be remedied was that banks are not exploited by parties who have the capacity to pay their dues to the banks but who willfully avoid paying their dues to the banks. 33. Pursuant to the aforesaid instructions of the Central Vigilance Commission, the RBI circulated a Scheme for Collection and Dissemination of information on cases of wilful default of Rs.25 lacs and above which was to come into force with effect from 01.04.1999. Sub-para (ii) of the scheme in Para 2 of the Circular dated 20.02.1999 is extracted hereinbelow: "2(ii) The scheme will cover all non-performing borrowal accounts with outstandings (funded facilities and such non-funded facilities which are converted into funded facilities) aggregating Rs.25 lakhs and above." It will be clear from the language of sub-para (ii) of Para 2 of the scheme quoted above that the scheme was to cover not only funded facilities, but also non-funded facilities which are converted into funded facilities. Thus, the scheme relating to Collection and Dissemination of information on ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation cannot be confined to only the wilful defaults made by existing borrowers of the bank, but will also cover constituents of the bank, who have defaulted in their dues under banking transactions with the banks and who intend to avail further finance from the banks. 35. Keeping in mind the mischief that the Master Circular seeks to remedy and the purpose of the Master Circular, we interpret the words used in the definition of 'wilful default' in clause 2.1 of the Master Circular to mean not only a wilful default by a unit which has defaulted in meeting its repayment obligations to the lender, but also to mean a unit which has defaulted in meeting its payment obligations to the bank under facilities such as a bank guarantee. According to us the word 'lender' in sub-clauses (a), (b), (c) and (d) means the "bank" because "payment obligations" mentioned in clause (a) do not ordinarily refer to obligations to a lender and clause (d) has used the expression "bank/lender". Moreover, the instructions of the Central Vigilance Commission pursuant to which the scheme relating to Collection and Dissemination of credit information on wilful defaulters was formulated by the RBI wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 37. We do not find force in the submission of Dr. A.M. Singhvi that any information relating to a party who has defaulted in payment of its dues under derivative transactions cannot be disclosed by a bank to the RBI or any other bank because of an implied contract between the bank and its customer or by Section 45E of the 1934 Act. Sections 45C and 45E of the 1934 Act are extracted hereinbelow: "45C. Power to call for returns containing credit information.-(1) For the purpose of enabling the bank to discharge its functions under this chapter, it may at any time direct any banking company to submit to it such statements relating to such credit information and in such form and within such time as may be specified by the Bank from time to time. (2) A banking company shall, notwithstanding anything to the contrary contained in any law for time being in force or in any instrument regulating the constitution thereof or in any agreement executed by it, relating to the secrecy of its dealings with its constituents, be bound to comply with any direction issued under sub- section (1)." "45E. Disclosure of information prohibited.-(1) Any credit information containe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny by the RBI under sub-section (1) of Section 45C of the 1934 Act. Sub-section (2) of Section 45C of the 1934 Act further provides that the banking company shall, notwithstanding anything to the contrary contained in any law for time being in force or in any instrument regulating the constitution thereof or in any agreement executed by it, relating to the secrecy of its dealings with its constituents, be bound to comply with any direction issued under sub-section (1). Sub-section (1) of Section 45E says that such credit information shall be treated as confidential and shall not be published or otherwise disclosed "except for the purposes of this Chapter", but sub-section (2)(a) of Section 45E clearly provides that nothing in Section 45E shall apply to the disclosure by any banking company, with the previous permission of the RBI, of any information furnished to the RBI under Section 45C. Thus, confidentiality of any credit information either by virtue of any other law or by virtue of any agreement between the bank and its constituent cannot be a bar for disclosure of such credit information including information relating to a derivative transaction of the RBI under sub-section (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of "wilful defaulter" in the Master Circular have to draw their meaning from the context in which the Master Circular has been issued. 39. We are also not impressed with the argument of Mr. Soli J. Sorabjee that the Master Circular contemplates grave consequences affecting the right of a person under Article 19(1)(g) of the Constitution of India to carry on any trade, business or occupation and should be strictly construed as otherwise it will be exposed to the challenge of unconstitutionality. No challenge was made by the writ petitioners before the Bombay High Court to the constitutionality of the Master Circular and the challenge by the writ petitioners before the Calcutta High Court was to the constitutionality of only Paragraph 3 of the Master Circular relating to the Grievance Redressal Mechanism. Hence, we are not called upon to decide in these appeals whether the Master Circular violates the right of a person under Article 19(1)(g) of the Constitution of India. Similarly, we cannot consider in these appeals, the contention raised by Dr. A. M. Singhvi that the Master Circular has the effect of black listing a bank's client and would, therefore, be arbitrary and v ..... 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