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TMI Blog2018 (4) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of such deposits the bank continued to grant loans to the resident individual (third parties) treating them as primary security. Understood that the assets created out of the proceeds of the loan could only be the primary security and not the deposits in the present case. Thus, the action of the bank in lending against the deposit without taking any primary security was not in consonance with the provisions of the Act. Details as enumerated at para 5 supra, proves the violation of FERA. RBI’s suspension of the said account also point towards the wrong doing. Banks are expected to act as trustees of public money rather than misusing the powers granted by the regulators thereby facilitating abuse of the Act by unscrupulous persons. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B/9331 dated 15.03.2002 wherein it was inter alia alleged that the aforesaid deposits in the name of Shri Prem Khanna and his wife were taken as primary security by the bank for the release of aforesaid loans instead of the requirement that these deposits be taken as a collateral security. The said memorandum alleged the violation of Section 9(1) (c) and Section 64 (2) of FERA, 1973. It also alleged contravention of para 13. B.10 (a) of the Exchange Control Manual, 1993 which stipulated that, authorised dealers may grant loans/overdrafts to resident individual/firms/companies in India against collateral of fixed deposits held in NRE accounts subject to certain conditions. The adjudicating Authority had come to the conclusion, in so far as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the definition of primary security. In common parlance as well as in bankers vocabulary a primary security is that asset which is created out of the finance provided by the lender. For example, in a housing loan the primary security is the house which has been purchased out of the bank loan. In contrast, a collateral security means a secondary or additional security which in simple terms means a security which is taken by lenders in addition to primary security to secure loan. Generally, a property or other asset like land, building, shares etc. (other than that for which the loan has been taken) are taken by the lender to secure the loan. Going by this definition, the NRNR deposits cannot be primary security as this is not the asset wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redit of a non-resident Indian, because it has granted a right to the non-resident to pursue recovery. The RBI had during the relevant period, issued an instruction vide their letter dated 03.02.1998 addressed to the Manager of the appellant bank, Fort Branch Mumbai, which reads as under: Blocking of various accounts held by Shri Prem Khanna (list of which is enclosed) Whereas the Reserve Bank of India considers it necessary and expedient for the purpose of securing compliance with the provision of the Foreign Exchange Regulation Act, 1973 and the rules, orders and directions made thereunder, to give the directions hereinafter contained. 2. Now, therefore, in exercise of the powers conferred by sub section (3) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resident individual (third parties) treating them as primary security. As discussed above, it needs to be understood that the assets created out of the proceeds of the loan could only be the primary security and not the deposits in the present case. Thus, the action of the bank in lending against the deposit without taking any primary security was not in consonance with the provisions of the Act. Details as enumerated at para 5 supra, proves the violation of FERA. RBI s suspension of the said account also point towards the wrong doing. 8. Banks are expected to act as trustees of public money rather than misusing the powers granted by the regulators thereby facilitating abuse of the Act by unscrupulous persons. The appellant bank therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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