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TMI Blog2020 (1) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... ary and therefore, it must issue the directions. Further, it has been stated by the RBI in its affidavit that upto 78% of the depositors could withdraw their entire deposits despite these protective measures. We do not think that we can, in writ jurisdiction, substitute the opinion or satisfaction of the RBI with our order or direction, much less to the contrary. We possess no experience and expertise in financial and fiscal matters. In matters of banking practices and the business of banking and its regulation, we must leave everything to the wisdom of the RBI. In fact, the presumption is that it will prevent the acts conducted in a manner prejudicial to the interest of depositors. We do not think that any proof to the contrary has been placed before us and on the sketchy materials in the form of averments and allegations, which are sweeping and general, we can not set aside the impugned directives. The RBI has deliberately not stepped in earlier or has stepped in belatedly in order not to protect the public interest or the interest of the depositors or the banking company, but allowed some of the officials, managing the affairs of the P MC Bank, to get away We do not think tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irections in the nature thereof to the RBI and to the Deposit Insurance and Credit Guarantee Corporation to make sufficient funds available for easy and unhindered withdrawal of the deposits of the depositors and, particularly, to be utilised for their day-to-day expenses, health and educational needs and business requirements. 4. A relief in the nature of a direction to the Central and the State Government to exercise its powers under the Multi-State Co-operative Societies Act, 2002 (hereinafter referred to as the Act of 2002 ) and particularly, to provide aid to the bank in question is also sought. 5. Since the arguments are common in all matters so also the reliefs, we had heard them together. Each of these matters were listed for admission from time to time. 6. On a notice being taken by the RBI, it has filed an affidavit in reply. The contents of which would be adverted by us little later. 7. For convenience sake, we take the facts from Writ Petition (L)No.3030 of 2019. 8. The three petitioners in that petition are the residents of Mumbai and account holders in the sixth respondent bank known as Punjab and Maharashtra Co-Operativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he top five urban co-operative banks. The number of depositors are 16,00,000 and as per the balance-sheet of the bank, it is in a sound financial condition. 12. The bank has received several awards and the gist of the same is set out in para 11. It is said that this bank has been offering interest on fixed deposits or on savings or on current deposits, the rate of which is 1.5% more than the nationalised banks. The rate of interest on deposits offered by respondent no.6-bank was quite attractive and, therefore, the petitioners chose to deposit their hard earned money in this bank. 13. On 24th September, 2019, they came to know, via electronic messages and news reports, that respondent no.3 has issued certain directions restricting the withdrawal by the account holders of respondent no.6-bank. 14. In paragraph 15 of the petition, it is conceded that the initial restriction was that no amount exceeding ₹ 1,000/- would be withdrawn. Now the limit of ₹ 1,000/- is enhanced or restriction is relaxed and the position today is that a sum of ₹ 50,000/- can be withdrawn depending upon the satisfaction of the authority/ Administrator that the depos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the magnitude of this transaction with above entity. Yet, the required degree of vigilance was not maintained by the RBI. Rather, RBI was negligent in not ensuring a discipline and order in the functioning of the bank. The flagging by the RBI was not timely and this gross irregularity has been perpetuated only because the RBI failed to take prompt action. 20. Thus, if the accounts were not reflecting the correct position, the profit and loss figures were not accurate, then, the RBI should have taken timely measures by setting up effective machinery to protect the public from large deception. While conceding to the RBI's wide and extensive powers, the petitioners seem to suggest that the bank was functioning under the directives of the RBI and if the RBI does not take required steps and measures to either control the situation or to take care of the fraud or its perpetuation, then, placing restrictions on the depositors' withdrawal alone would not be sustainable. This Court, therefore, should intervene and issue the necessary directions. 21. An affidavit in reply is filed by the RBI and it is common to all petitions. It is stated that the RBI is served with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the banks and the management related aspects to assess their efficacy. The object and scope of inspection/scrutiny conducted by the Reserve Bank is to ensure compliance with the provisions of the BR Act and the directions/guidelines issued thereunder along with assessment of financials and risks in the bank and not detailed examination of the bank's books of accounts. Thus, the scope of an inspection/scrutiny done by RBI is different from that of an audit conducted by an auditor or an enquiry under the provisions of the law governing co-operative societies. RBI then takes various supervisory actions and measures depending upon the findings of the inspection/ scrutiny. 22. In para 12, there is reference to the extensive report of the sixth respondent-bank as on 31st March, 2018. Para 12 and 13 of this affidavit are relevant and they read as under :- 12. RBI Inspection Report with respect to financial position as on March 31,2018 (a) Since transaction testing is not done in the RBI inspection, and the bank submitted fraudulently manipulated data to RBI for sample checks, the sample of accounts picked for inspection did not contain undisclose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udulent transactions as detected during current Inspection (as on March 31, 2019). 23. Then, it is stated that the modus operandi was detected when some transactions, which were not disclosed in full, came to the notice of RBI's team. That team was deputed to carry out a thorough scrutiny of HDIL Group accounts. On 19th September, 2019, this team carried out this scrutiny and focused its attention on the dealings or exposure of the bank with the HDIL Group apart from other areas required to be checked. The inspection was completed on 2nd November, 2019 and the report is presently under preparation. The preliminary findings, however, are that on account of financial irregularities highlighted in para 16, the bank's net worth has turned negative and it is significant. 24. Para 16 is fairly detailed and reads thus :- 16. Modus operandi of hiding the information related to HDIL exposure. The reason why the above parameters were not detected earlier was:- (i) Tampering with Management information system and NPA identification process: The bank had migrated to FINNACLE Core banking solution (CBS) from April 13, 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter data on advances, information of all the outstanding loan accounts of the bank was called for. The outstanding amount of each loan account was added and it was found that the grand total was tallying with outstanding loans and advances as per the audited balance sheet of the bank, which was ₹ 7475.49 crore as on March 31, 2018. While excluding the undisclosed HDIL related accounts (and other 20 undisclosed loan accounts also) from the aforementioned master-data, the bank replaced these accounts, by adding 21,049 fictitious loan accounts in the master data mentioned above so that the summation of outstanding balance of all the entities tallied with the balance sheet figure of bank loan portfolio (₹ 7475.49 crore). (b) It is pertinent to note here that, the fictitious entries of 21049 loan accounts were added to 'Advances -Master Data', only to tally the summation to ₹ 7475.49 crore. These entries did not relate to actual loan accounts and no such loan accounts were in existence in the CBS system of the bank. (v) Fictitious booking of Profits: The modus operandi used by the bank to camouflage these large scale financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors. The directives are thus supported on the touchstone of the wording and language of Section 35A of the Act of 1949. At the same time, the Reserve Bank of India says that it is sympathetic towards the hardship faced by the depositors and from time to time has relaxed the limits placed on withdrawals. The bank would require further time to complete the process. 26. In the petition filed by Guru Nanak Vidyak Society, the petitioner is an educational institution and is seeking the same reliefs. In fact, it is a trust running 28 educational institutions from primary schools to higher education institutions hiring 700 staff and educating 20,000 students. This petitioner has 66 accounts in the P MC Bank. 27. There is an affidavit filed by the RBI, to which, there is an affidavit in rejoinder. In para 5 of this affidavit in rejoinder, it is stated that the scope of the statutory inspection is different from statutory audit and therefore, the RBI cannot say that it cannot be held liable for its failure to secure the interest of the depositors in timely manner. Moreover, the RBI is equally responsible under section 30 read with section 56 of the Act of 1949. Thus, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Central and the State Government must devise schemes to meet the present contingency. There is an obligation to aid the Multi-State Co-operative Societies. Mr.Talekar would submit that there is no affidavit in reply filed by the P MC Bank nor is there any common affidavit of the Credit Guarantee Corporation. Apart therefrom, this Corporation should aid and assist the bank for the benefit of the investors. Thus, the argument is that the aid or assistance is possible either by recourse to section 61 of the Act of 2002 or by appropriate measures or schemes devised by these Governments. This court can, by way of a writ of mandamus, enforce this obligation in the event the court finds that the Central and the State Government have failed to discharge the same. Mr.Talekar submits that we should issue such a writ all the more because the bank's financial position is not sound. Today, Mr.Talekar complains that the Central and the State Governments are but mute spectators and they cannot be permitted to take such a position. 29. As far as the affidavit of the RBI is concerned, Mr.Talekar would submit that there is absolutely no basis to hold that the interest of the depositor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etition has pointed out that there is an inspection carried out way back in the year 2015. The report of the inspection carried out would demonstrate and prove that the RBI was aware of the irregularities in the functioning of the bank. It was aware of the acts of omission and commission of the bank. In these circumstances, when there are specific allegations of this nature made in the petition, all the more we should not uphold the impugned directions, but allow the petitions. 32. Mr.Abdi learned counsel appearing for the PIL petitioners drew our attention to the plight of the petitioners and averred that some of them are on the verge of committing suicide and the investors and depositors are not responsible for the state of affairs prevailing in the P MC Bank. In these circumstances, we should not allow the RBI to thwart the withdrawals from the depositors' accounts. By such an action, the RBI has closed down the banking operations altogether. For these reasons, we must interfere in writ jurisdiction. 33. Our attention has been invited to some judgments of the Hon'ble Supreme Court enabling this court to interfere in writ jurisdiction in such matters. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint out that full disclosures were not made and even the RBI was not in a position to deduce the extent of the deals and transactions between the bank and the HDIL. The accounts were prepared in such a manner that only few employees of the bank had knowledge of the dealings. The accounts were drawn up in such a manner that the moneys to HDIL were spread over in small and big accounts. An impression was given to the RBI that this is a regular banking transaction, but all details were not entered in the books or in specific accounts. The RBI, therefore, had no knowledge and the moment it derived it, it stepped in. Mr.Dhond has highlighted the efforts by the RBI by relying on the contents of the impugned communications. Mr.Dhond submits that the RBI's intervention became necessary because there was virtually a run on the bank. Mr.Dhond highlighted the situation by urging that the entire lot of depositors and investors rushes to the branches of the bank and seeks to withdraw the amounts lying deposited with the bank. If such a run on the bank is not controlled, there is every possibility of the Management picking and choosing depositors and confer or extend to them benefit of with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve Bank of India (vide Directive dated September 23, 2019) has placed the Punjab and Maharashtra Cooperative Bank Limited, Mumbai, Maharashtra, under Directions. According to the Directions, depositors will be allowed to withdraw a sum not exceeding ₹ 1,000 (Rupees one thousand only) of the total balance in every saving bank account or current account or any other deposit account by whatever name called, subject to conditions stipulated in the RBI Directions. Punjab and Maharashtra Cooperative Bank Limited, Mumbai, Maharashtra without prior approval in writing from the Reserve bank, will also not be able to grant or renew any loans and advances, make any investment, incur any liability including borrowal of funds and acceptance of fresh deposits, disburse or agree to disburse any payment whether in discharge of its liabilities and obligations or otherwise, either into any compromise or arrangement and sell, transfer or otherwise dispose of any of its properties or assets except as notified in the RBI directions dated September 23, 2019. The Directions shall remain in force for a period of six months from the close of business of the bank on September 23, 2019. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or medical expenses of self, spouse, children or parents, the Depositor should furnish (a) Doctor's Certificate (on Letter head in Original, with Registration No.). (b) Medical bills. (c) The name of the person for whom the withdrawal is asked for. 2. for Marriage of self, children, brother or sister, the Depositor should submit Marriage Invitation Card, Hall Booking Receipt, Receipt for Ornaments, etc. 3. For Education of self or children, estimate of fee receipt duly certified by the School or Institute. 4. For livelihood purpose of Senior Citizen or Widow or person suffering from Disability, the Depositor should submit estimated monthly expenses, proof of Senior Citizenship, Doctor's Certificate of disability in case of Disabled person. Hardship Amount Ceiling:- A depositor cannot withdraw more than Rs.l lakh on medical ground and in other cases the maximum ceiling is ₹ 50,000/- from the date the directions are imposed till the bank is either taken under liquidation or the directions are withdrawn. The customers eligible as per above norms may approach the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this is the gist and summary of the communications, then, it is futile to urge, particularly in the absence of contra material, that the directions issued by the RBI are arbitrary or suffer from any error of law apparent on the face of the record. The RBI has been conferred with specific powers. The power of the RBI to give directions is based on the satisfaction that such directions have to be given in public interest or in the interest of banking policy or to prevent the affairs of any banking company being conducted in a manner detrimental to the interest of depositors or in a manner prejudicial to the interest of banking company. The directions are issued to banking company generally or to any banking company in particular from time to time and they have to be issued as the RBI deems it fit and the banking company shall be bound to comply with such directions. These directions can be modified or cancelled by the RBI on a representation made to it or on its own motion and in order to modify or cancel any direction, the RBI may impose such conditions as it thinks fit subject to which the modification or cancellation shall have effect. As far as this satisfaction is concerned, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bank and any other co-operative society, except in the manner and to the extent specified in Part V. A survey of the provisions of the Act of 1949 discloses that by Part II, titled as Business of Banking Companies , there are provisions enacted so as to prohibit trading, disposal of non-banking assets, prohibition of employment of managing agents and restrictions on certain forms of employment. The Board of Directors ought to include persons with professional or other experience. The banking company is to be managed by whole time chairman. Power of the RBI to appoint Chairman of the Board of Directors on a whole-time basis or a managing director of a banking company. There are other provisions with regard to maintaining minimum paid-up capital and reserves. Regulation of paid-up capital, subscribed capital and authorised capital and voting rights of shareholders is possible by section 12 and the regulatory measures postulated by this law extends to the elections, acquisition of shares or voting rights. The restriction mechanism takes care of commission, brokerage, discount etc. on sale of shares and then there are prohibitory sections as well. The further provisions in this Part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore us anything by which we can conclude that this power of the RBI could not have been exercised by it. Far from it, the RBI says in its affidavit in reply that it had not obtained the entire position or that was not disclosed to it. The RBI refers to its inspection report with respect to the financial position of the P MC Bank as on 31st March, 2018. In that, it was revealed that the bank has sanctioned mortgage overdraft limits to a wholly owned group company of HDIL in which the present Chairman of the bank was one of the Directors in the company. The inspection team had also established the relationship between the Chairman of the bank and HDIL Promoters, which might have acted as the primary consideration for sanction of credit facilities and resulted in their utilisation to pay off one time settlement dues with other lenders. Pertinently, the RBI says in this affidavit that the scale of violation and also the connected lending that could be established based on available records was of much lesser extent due to the camouflaging resorted by the bank. What was noted was flagged but was not observed to be impacting the financial health of the bank in any significant manner. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nocent or unaware of the dealings and transactions of the concerned bank with the HDIL Group. The litigants must realise that this court cannot grant reliefs on specious ground of sympathy. We are bound by law. No writ contrary to law can be issued. We render justice in accordance with law. We cannot, therefore, ignore the materials that have been brought before us by the RBI on oath and prefer some general and vague allegations of the petitioners to the contrary. When there are specific materials placed on record by the RBI to support its action under section 35A, we cannot agree with the petitioners' counsel that the RBI was not required to interfere or step in. In fact, Mr.Dhond, on instructions, has clarified that the RBI intends to bring some order and discipline in the affairs of the P MC Bank. The bank is not yet placed under liquidation. The RBI is trying to take a stock of all the assets and properties of the P MC Bank. The RBI is trying to ascertain its financial base as well. The RBI is trying its best to revive its operations and bring some normality in the affairs of the bank. The RBI has not stepped in only because it desired to place restrictions on the bank. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 30 would apply. That reads as under:- 56(sa). for section 30, the following section shall be substituted, namely:- 30. Audit. - (1) Without prejudice to anything contained in any other law for the time being in force, where the Reserve Bank is satisfied that it is necessary in the public interest or in the interest of the co-operative bank or its depositors so to do, it may at any time by general or special order direct that an additional audit of the co-operative bank accounts, for any such transactions or class of transactions or for such period or periods as may be specified in the order, shall be conducted and may by the same or a different order appoint a person duly qualified under any law for the time being in force to be an auditor of companies to conduct such audit, and the auditor shall comply with such directions and make a report of such audit to the Reserve Bank and forward a copy thereof to the co-operative bank. (2) The expenses of, or incidental to, the additional audit specified in the order made by the Reserve Bank shall be borne by the co-operative bank. (3) The auditor referred to in sub-section (1) shall have such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot, by reference to some of the provisions of this Act, conclude that the RBI has deliberately not stepped in earlier or has stepped in belatedly in order not to protect the public interest or the interest of the depositors or the banking company, but allowed some of the officials, managing the affairs of the P MC Bank, to get away We do not think that the RBI can be faulted for issuing the directions as are impugned in these petitions. 48. We also cannot interfere with the limits placed by the RBI on the withdrawal. In fact, the RBI has acted fairly, justly and reasonably in revising the limits on withdrawal from time to time. When the first limit of ₹ 1,000/- was placed, the RBI was aware of the hardship and difficulty of depositors. In a timely manner, it has stepped in to enhance the limit and which is now enhanced as aforenoted. The aspects covered by the RBI regarding medical emergencies and education are such that in appropriate cases, depending upon the facts brought before the Administrator, he can allow the withdrawal up to specific limits. We do not think that the petitioners, styling themselves aggrieved investors and depositors, can complain. They hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have guided us:- 16. A writ court exercising the power of judicial review has a limited jurisdiction. A writ petition would lie against a State within the meaning of Article 12 of the Constitution of India. Indisputably, exercise of jurisdiction by the High Court is permissible in a case where action of the State is found to be unfair, unreasonable or arbitrary. The question which should have been posed by the High Court was as to whether the action of the Bank was so arbitrary so as to invoke the public law jurisdiction. If the answer to the said question was to be in the negative, the High Court should have refused to exercise its jurisdiction. A fraud has been practiced on the Banks. Primary accused may be the Bank officers but a conspiracy with them by the outsiders has also been alleged. The original FDRs only in some cases are available; in most of the cases they are not. Even the Committee could not decide for as to which one was the original FDR and which was not. It could not distinguish between an original FDR and the Xerox copy thereof. Opinion of the expert thereon might have been received, but the final verdict thereupon in the cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation [Harv. Law. Rev. Vol. 89 (1976) at Pg. 128], opines that Traditionally, adjudication has been understood to be a process for resolving disputes among private parties which have not been privately settled. He thus emphasizes the need for a Public Law model wherein the traditional adversary relationship is suffused and intermixed with negotiating and mediating process at every point. The Judge is the dominant figure in organizing and guiding the case, and he draws for support not only on the parties and their counsel, but on a wide range of outsiders-masters, experts and oversight personnel. He goes on to give examples of school desegregation, employment discrimination, and prisoners' or inmates' rights cases as also antitrust, securities fraud and other aspects of the conduct of the corporate business, bankruptcy and reorganizations, union governance, consumer fraud, housing discrimination, electoral reapportionment, environmental management-fields that display in varying degrees the features of public law litigation. According to him, the public law litigation model inter alia has the following features: 7. The Judge is not passive, his f ..... 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