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TMI Blog2021 (12) TMI 1501X X X X Extracts X X X X X X X X Extracts X X X X ..... lative of principles of natural justice and fair play. 3. The petitioner has prayed the following reliefs: "In these circumstances and for the reasons stated above, it is prayed that this Hon'ble Court may be pleased to pass an order or direction or any other proceedings one in the nature of Writ of Mandamus declaring the action of 3rd respondent in declaring the petitioner as 'Fraud' as arbitrary, illegal and contrary to 'Master Directions on Frauds - Classification and Reporting by commercial banks and select FIs dated 01.07.2016 issued by the 2nd respondent, and further declaring the 'Master Directions on Frauds - Classification and Reporting by commercial banks and select FIs dated 01.07.2016 as violative of principles of natural justice and consequently to set aside the decision of the 3rd respondent Bank and the impugned circular, and pass such other order or orders as this Hon'ble Court may deem fit and proper in the interest of justice. It is further prayed that pending the disposal of the writ petition, this Hon'ble Court may be pleased to stay all proceedings consequential to the action of the 3rd respondent in declaring the petitioner as 'Fraud' and pass such othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India. 5. The contention of the petitioner company is that the action taken against the petitioner company by declaring the petitioner's account as 'fraud' is in violation of the principles of natural justice and fair play and therefore, the Circular itself issued by the Reserve Bank of India under Section 35A of the Banking Regulation Act, 1949 as it excludes the principles of natural justice and fair play deserves to be quashed and the consequential action taken by the Bank also deserves to be quashed on the ground of violation of principles of natural justice and fair play. The other ground taken by the petitioner company is that the forensic audit report nowhere holds the petitioner guilty of playing any fraud and in fact, the findings of the forensic audit are in favour of the petitioner company. 6. The learned counsel for the petitioner has vehemently relied upon the Judgment delivered by the Division Bench of this Court in the case of Rajesh Agarwal v. Reserve Bank of India [2021 (2) ALD 290 : 2021 (1) ALT 454] and his contention is that this Court while deciding the aforesaid case on 10.12.2020 has held that the action of the Bank therein is bad in law as principle of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice/Central Fraud Registry. It has been further stated that it is mandatory to file a complaint with the Law Enforcement Agencies who then independently investigate the matter and present it in Court of Law. 9. The Reserve Bank of India has further stated that the information on frauds is published by the Reserve Bank of India at aggregate level without revealing the details of individual cases and it does not cause injury to the borrower's reputation or business. It has been further stated that the loan fraud is a breach/violation of the terms and conditions of the contract by a borrower as perceived by the Bank who granted the loan to the borrower. It has been further stated that in case of commission of fraud by the borrower, the Bank is the injured party and has a right to report the crime to Law Enforcement Agencies. It is not incumbent on the Banks to provide the perpetrator an opportunity to be heard in a similar manner for lodging an FIR, no opportunity of hearing is to be granted. It has been further stated that in case of classification and reporting of fraud, it is necessary to file a complaint with Law Enforcement Agencies and the investigation is done independently b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India) as the Lead Bank, being State Bank of India, Indian Bank, Punjab National Bank and Tamilnad Mercantile Bank the other member Banks. The petitioner's account was declared as NPA and the Consortium of Bankers has taken steps to realise the securities and also filed an Application before the Debt Recovery Tribunal for recovery of an amount of Rs.617,40,94,702.61/-. It has been further stated that the petitioner is trying to mislead this Court by drawing parallel with declaring a borrower as 'wilful defaulter'. It has been stated that classification of an account as a 'Fraud Account' is distinct and distinguishable from declaring the borrower as a 'wilful defaulter'. In the case of declaring a borrower as a 'wilful defaulter', it is the person/borrower who is declared (not classified) as a wilful defaulter and not the account. Since such declaration affects the person/borrower, a detailed procedure is prescribed wherein a right of hearing is provided to such person/borrower in those cases, whereas in respect of classification of loan account as 'Fraud Account', it is done as a preventive measure purely for reporting, controlling, monitoring, follow up action and therefore, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India has been vested with the powers to determine the Banking policy in the interest of banking system, in the interest of monetary stability and sound economic growth, having due regard to the interests of the depositors. The Reserve Bank of India is also concerned with organization of a sound and healthy banking system, ensuring effective coordination and control over credit through a proper Monetary and Credit Policies. The Reserve Bank of India has the primary responsibility to ensure stability of the banking system in the country and Directions/Guidelines have been issued by the Reserve Bank of India from time to time. The Reserve Bank of India being an expert body, its decisions with regard to regulation of banks deserve to be given due weightage. Section 35A of the Banking Regulation Act empowers the Reserve Bank of India to issue directions to the banks. Section 35 A of the Banking Regulation Act is reproduced as under:- "35A. Power of the Reserve Bank to give directions.- (1) Where the Reserve Bank is satisfied that- (a) in the public interest; or (aa) in the interest of banking policy; or (b) to prevent the affairs of any banking company being conducted in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e investigative agencies so that fraudsters are brought to book early, examining staff accountability and do effective fraud risk management. These directions also aim to enable faster dissemination of information by the Reserve Bank of India (RBI) to banks on the details of frauds, unscrupulous borrowers and related parties, based on banks' reporting so that necessary safeguards/ preventive measures by way of appropriate procedures and internal checks may be introduced and caution exercised while dealing with such parties by banks." 19. The purpose set out in the Master Circular clearly establishes that the classification of account as 'fraud' is purely an administrative exercise, which is necessary to take follow-up actions and is also a preventive exercise to ensure that other banks also share the information which is in the Central Fraud Registry for the purpose of exercising caution while dealing with such parties. Much has been argued before this Court on the ground of principles of natural justice and fair play and a prayer has been sought to quash the 'Master Directions on Frauds', dated 01.07.2016 to the extent they do not provide for opportunity of hearing. 20. Heavy r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year end has been very bleak in terms of margins not even being 1% of the turnover as can be seen from the financial statements, led to vulnerability of business. It is interesting to analyze what circumstances made company as defaulter and NPA account with bankers during laws few months post closure of FY 18 though indication could be seen in last 2 years itself when company registered high revenue growth with reduced profitability at cost of Supply chain risks and lack of control on debtors, which increased substantially. The Company continued to do higher business volumes with insignificant enhancement in working capital limits in the last 3 years. The company had to face many regulatory hurdles during the current year which were reported and are known in public domain and it being a business entirely based on imports, the business came to grinding halt with the change in government policies and tax structure, sources of funds dried, with loss of faith by financial institutions, leading the production to stop, supplies could not be made, customers started blocking old money, because no new supply being possible and as a result all letter of credits started devolving and accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment made by the company with a prime objective was in distribution, brand building and increasing the reach other than creating hard assets of building plant and machinery. The intangible asset of brand investment in distribution and non-running fixed assets does have a severe erosion calling for an impairment in very short period of time, given the plant and machinery hardly provides for any cover against the debt. With the above observations read with key findings & executive summary and other points narrated in our report, we conclude that management and promoters should have been more careful in financial control and one wonders why aggressive steps for recovery of debtors (overdue for extra ordinary time with no confirmations) is not taken which was main reason of account becoming NPA. Basis the sample audit, review of legal cases, interviews of brokers, understanding of trade practices, clarification on reconciliation of debtors by statutory auditors in recent time, overall substance of the account and subject to reliance on the data for the recovery of debtors, we find no diversion of funds or fraud being intentionally carried out by the management." 23. Learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability and risk potentials. - The Company has repaid the LCs of third party NBFCs, outside the Consortium, prior to the member banks. HIGH Obs No Observation Unusual Indicators & Conclusion based on Audit Findings Level of Unusual Indications 4 Misutilisation of funds for purpose other than sanctioned for: - The Company has transactions during December 2016 to September 2018 with Ekaakshara Refineries Pvt Ltd., its associate Company having common directors. The Company during December 2016 to August 2017 made adjustment of INR 0.70 Crores through vendor account P Ram Mohan Reddy (a water tank supplier) and payment of INR 1.90 Crores was made without any business being carried on in the associate Company. No other transactions were being carried until September 2018, resulting in cumulation of interest cost for more than a year on the funds transferred by the Company. However, Ekaakshara repaid the funds in September 2018 for INR 2.60 Crores for settlement of the account. - The Company have been sanctioned credit facilities for Oil and Rice divisions separately with specified limits by the lead banker as per the sanction letters, however funds sanctioned f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Fund Based Bank Loan Facilities of INR 635.11 Crores. - With respect to the liability on account of post-retirement medical benefits of employees including retired employees, a defined benefit plan, is recognised on actual basis in respect of bills received by the Company instead of recognizing the liability for the same as the present value of the defined benefit obligation at the balance sheet date calculated on the basis of actuarial valuation in accordance with the notified AS - 15 on Employee Benefits. The consequential impact of adjustment, if any, owing to this non-compliance on the financial statements is presently not ascertainable. - Sundry debtors worth INR 397.57 Crores are doubtful debts which have been classified as non-current assets against a total debts of INR 552.39 Crores as on 31 March 2018, of which balances under significant accounts are subject to reconciliations and confirmation. The Company has made a provision of INR 132.02 Crores which appears to be inadequate specially keeping its view the position of recovery in subsequent years and therefore reported loss of INR 223.33 Crores remains under reported. - Substantial losses in the current year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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