Kotak Mahindra Bank Ltd. Vs Hindustan National Glass & Ind.Ltd.

Page 1

.Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No. 8916 OF 2012 (Arising out of SLP (C) NO. 29599 of 2009)

Kotak Mahindra Bank Ltd. … Appellant

Versus

Hindustan National Glass & Ind. Ltd. & Ors. … Respondents

WITH

CIVIL APPEAL No. 8917 OF 2012 (Arising out of SLP (C) NO. 27730 of 2011)

Emcure Pharmaceuticals Ltd. & Anr. … Appellants Versus

ICICI Bank Ltd. & Ors. … Respondents

AND

CIVIL APPEAL No. 8918 OF 2012 (Arising out of SLP (C) NO. 28477 of 2011)

Finolex Industries Limited & Anr. … Appellants

Versus

Page 2

Reserve Bank of India & Ors. … Respondents

J U D G M E N T

A. K. PATNAIK, J.

CIVIL APPEAL No. 8916 OF 2012 (Arising out of SLP (C) NO. 29599 of 2009)

Leave granted.

2. This is an appeal against the order dated 01.09.2009 of

the Calcutta High Court in Writ Petition No. 7729(W) of 2009.

3. The facts very briefly are that the appellant-bank

sanctioned Derivatives/Forward Contracts facility to

respondent no.1 upto a limit of Rs.2,00,00,000/- (rupees two

crores) only for the purpose of hedging foreign currency

exposures by its letter dated 10.01.2006. On behalf of the

respondent no.1-company, its Joint Managing Director

acknowledged the receipt of the sanction letter dated

10.01.2006 of the appellant and accepted and agreed to be

bound by the terms and conditions of the sanction letter as

well as the annexures thereto being authorized by the

2

Page 3

resolution of the Board of Directors of the respondent no.1-

company. Thereafter, 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

3

Page 4

derivative transactions FXOPT 20536, 20540 and 20544.

Thereafter, on 05.03.2008 and 12.03.2008 the appellant

informed the respondent no.1 that a sum of Rs.2,43,12,000/-

(rupees two crores forty three lacs and twelve thousand)

only had become due and payable on 10.03.2008 by the

respondent no.1. The respondent no.1, however, did not pay

the sum. On 01.07.2008 the Reserve Bank of India (for

short ‘the RBI’) issued the Master Circular on Wilful

Defaulters.

4. The Master Circular on Wilful Defaulters (for short “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. By letter dated 22.10.2008, the

appellant intimated the respondent no.1 that it had classified

the respondent no.1 as a wilful defaulter as it had defaulted

to pay an amount of Rs.2,76,01,908.79 and interest thereon

totalling to Rs.14,62,61,186.69 and respondent no.1 by its

replies dated 04.11.2008 and 21.11.2008 through its

4

Page 5

Advocate contended that neither the appellant was a

“lender” nor the respondent no.1 was a “borrower” within

the meaning of “wilful default” in the Master Circular and,

therefore, action under the Master Circular cannot be taken

against the respondent no.1. By letter dated 02.02.2009,

the appellant informed the respondent no.1 that the replies

dated 04.11.2008 and 21.11.2008 of the respondent no.1

have been referred to the Grievance Redressal Committee of

the appellant-bank for consideration and the Grievance

Redressal Committee has fixed a meeting on 25.02.2009 at

10.00 A.M. at the office of the bank at Nariman Point,

Mumbai, and that the respondent no.1 can represent its case

in the hearing before the Grievance Redressal Committee.

The respondent no.1 then made a representation dated

06.03.2009 before the Grievance Redressal Committee of

the appellant-bank contending that the Master Circular does

not apply to foreign exchange derivative transactions and

was restricted only to the acts of lending by the bank and

borrowing by the bank’s constituents and as there was no

lending by the appellant-bank to the respondent no.1 in any

5

Page 6

manner from the appellant-bank, the entire proceedings

against the respondent no.1 under the Master Circular

should be dropped. While the matter was pending before

the Grievance Redressal Committee, the respondent no.1

filed Writ Petition No.269 of 2009 before the Calcutta 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

6

Page 7

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 appellant was not the

lender and the respondent no.1 was not the borrower, the

respondent no.1 could not be declared as a wilful defaulter

in terms of the Master Circular and accordingly no action

could be taken against the respondent no.1 under the

Master Circular. By the impugned judgment, the Calcutta

High Court, therefore, set aside the decision dated

07.04.2009 of the appellant-bank and allowed the writ

petition of the respondent no.1. Aggrieved, the appellant

has filed this appeal.

5. Mr. C.A. Sundaram, learned senior counsel appearing

for the appellant, submitted that the High Court has not

correctly interpreted the Master Circular. He referred to the

counter affidavit filed on behalf of the RBI before the High

Court to show that the Master Circular had been issued by

7

Page 8

the RBI inter alia in exercise of its powers under the Banking

Regulation Act, 1949 (for short ‘the 1949 Act’) and that

Sections 21 and 35A of the 1949 Act make it clear that the

directions/guidelines issued by the RBI are mandatory and

binding on the clients. He argued that Paragraph 2.1 of the

Master Circular defines the term “Wilful Default” as a default

by a unit in meeting its payment/repayment obligations to

the lender, but the word “lender” has not been defined in

the Master Circular. He submitted that the RBI, which has

issued the Master Circular, has in its counter affidavit before

the High Court stated that the intention of the RBI while

issuing the Master Circular was to cover all eventualities

where “payment/repayment obligations” exist and therefore

the Master Circular would cover all banking transactions

including off balance-sheets transactions, such as,

derivatives, guarantees, Letters of Credit, etc. He referred to

Sections 45U of the Reserve Bank of India Act, 1934 (for

short ‘the 1934 Act’), which defines in Clause (a) the word

“derivative” and also to Section 45V of the 1934 Act which is

titled “Transactions in derivatives” and submitted that the

8

Page 9

derivative transactions with banks had been declared to be

valid by law. He submitted that the word “borrower” has

been defined in Clause (b) of Section 45A of the 1934 Act to

mean any person to whom any credit limit has been

sanctioned by any banking company and has been still more

widely defined in Clause (b) of Section 2 of the Credit

Information Companies (Regulation) Act, 2005 (for short ‘the

2005 Act’) to mean not only 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

9

Page 10

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

derived from price movement in one or more underlying

assets. He referred to Schedule-I of the FEMA Regulations to

show that foreign exchange derivative contract was

permissible for a person resident in India. Mr. Sundaram

vehemently argued that as the purpose of the Master

Circular is to ensure that the clients of the banks who had

defaulted in their payment/repayment obligations of the

dues to the banks are not given additional finance, a client of

the bank who had defaulted in not paying its dues to the

bank under a foreign exchange derivative transaction would

also be covered under the Master Circular. He submitted

that as the respondent no.1 had defaulted in making

10

Page 11

payment of Rs.1,56,08,084.70 as on 29.12.2008 on account

of foreign exchange derivative transactions, the appellant

was required by the instructions of the RBI in the Master

Circular to report the case to the RBI as well as other banks

and financial institutions as a wilful defaulter. He submitted

that the High Court was, therefore, not right in setting aside

the decision dated 07.04.2009 of the appellant-bank and

allowing the writ petition of the respondent no.1.

6. Mr. Bhaskar P. Gupta, learned senior counsel for the

respondent no.1, on the other hand, submitted that

under the Master Circular a wilful default can arise only

out of a lender –borrower relationship between the

bank and its constituent and, therefore, unless the bank

has given a loan or an advance to its constituent, the

question of wilful default under the Master Circular does

not arise. He submitted that a reading of the Master

Circular would show that a declaration of a wilful

defaulter has severe consequences for the party

declared as a wilful defaulter, such as squeezing of

credit under clause 2.5(a) of the Master Circular and

11

Page 12

criminal liability under clause 4.3 of the Master Circular.

He argued that considering the severe consequences

that follow a declaration of wilful defaulter, the

definition of “wilful default” in the Master Circular which

refers to defaults in repayment obligations to a “lender”

has to be strictly construed. He cited the decisions of

this Court in Bijaya Kumar Agarwala v. State of Orissa

[(1996) 5 SCC 1] and Sakshi v. Union of India & Ors.

[(2004) 5 SCC 518] for the proposition that a statute

enacting an offence or imposing a penalty is to be

strictly construed. He submitted that a derivative

transaction 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

12

Page 13

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 argued that if the RBI

intended to include defaulters of dues under the

derivative transactions within the meaning of the

expression “wilful defaulter”, the RBI could have

changed the definition of “wilful defaulter” in the

subsequent Master Circulars.

7. Mr. Bhaskar P. Gupta next submitted that the stand of

the RBI before the High Court in the affidavits filed on

13

Page 14

its behalf was that the question as to whether there

was a lender-borrower relationship between the

appellant and the respondent no.1 under the contract

between them and whether there was a legally

enforceable obligation between the appellant and the

respondent no.1 are issues which can be determined by

a civil court in a properly instituted suit in accordance

with law and it is not possible for the RBI to interpret

the contract between the appellant and the respondent

no.1 and express any opinion in that regard and that

determination of such issues arising under a contract

cannot be done in a proceeding under Article 226 of the

Constitution and hence the writ petition of the

respondent no.1 was liable to be dismissed. He

submitted that the RBI cannot now take a stand before

this Court in this appeal that the respondent no.1 was a

wilful defaulter covered by the Master Circular

inasmuch as it had not paid its dues to the appellant

under the derivative transactions. He submitted that if

the RBI was aggrieved by the finding in the impugned

14

Page 15

judgment of the Calcutta High Court that the Master

Circular did not apply to dues under a derivative

transaction, it could have filed a Special Leave Petition

under Article 136 of the Constitution against the

impugned judgment of the Calcutta High Court, but the

RBI has not done so. According to him, therefore, the

impugned judgment of the Calcutta High Court should

be sustained by this Court in this appeal.

CIVIL APPEAL No. 8917 OF 2012 (Arising out of SLP (C) NO. 27730 of 2011)

8. Leave granted.

9. This is an appeal against the judgment dated

23/24.08.2011 of the Bombay High Court in Writ Petition

(Lodg.) No. 204 of 2011.

10. The facts very briefly are that the appellant no.1, a

pharmaceutical company, agreed to enter into foreign

exchange derivative transactions with respondent no.1-bank

to hedge its foreign currency risks arising out of export of its

products and for this purpose executed an International

15

Page 16

Swaps and Derivative Association (ISDA) Master Agreement

on 29.08.2005. During 2006-2008, the appellant and

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

16

Page 17

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.1 submitted its

reply dated 20.11.2010 to the respondent no.1-bank

contending that the Master Circular was applicable to dues

arising out of a lender-borrower relationship and as the

alleged dues arise under the derivative transactions and not

against a credit facility sanctioned by the bank, there was no

lender-borrower relationship between the respondent no.1-

bank and the appellant and, therefore, the Master Circular

was not applicable to the case of the appellant. The

Grievance Redressal Committee of the respondent no.1-bank

considered the reply of the appellant no.1 and by its decision

dated 28.01.2011 held that the appellant no.1 was a wilful

defaulter covered by the Master Circular as it had defaulted

in its obligations to the bank towards the derivative

transactions. The appellant no.1 filed Writ Petition No. 204

of 2011 challenging the decision dated 28.01.2011 of the

Grievance Redressal Committee of the respondent no.1-bank

and by order dated 24.08.2011, the Bombay High Court

17

Page 18

quashed the order dated 28.01.2011 of the Grievance

Redressal Committee of the respondent no.1-bank on the

ground that the order was passed in breach of principles of

natural justice inasmuch as the appellant no.1 was not heard

before the order was passed. The Bombay High Court,

however, held in the impugned judgment dated 24.08.2011

that the Master Circular covered default by a party in

complying with the payment obligations under derivative

transactions and observed that it will be open to the

Grievance Redressal Committee to pass fresh orders in

accordance with law after complying with the principles of

natural justice. Aggrieved by the finding of the Bombay High

Court in the impugned judgment that the Master Circular

covers defaults in complying with the payment obligations

under derivative transactions, the appellants have filed this

appeal.

11. Mr. Soli J. Sorabjee, learned counsel for the appellant,

submitted that the High Court has not correctly interpreted

the Master Circular and has erroneously recorded a finding

that wilful default covers defaults in complying with payment

18

Page 19

obligations under derivative transactions by relying on

circulars issued by the RBI on 08.08.2008, 13.10.2008,

29.10.2008, 09.04.2009 and 01.07.2010 which do not relate

to wilful defaults but relate to prudential norms, assets

classification as non-performing assets, etc. He submitted

that 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

19

Page 20

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 that whereas a loan of a money results in

a debt, every debt is not a loan. He submitted that in a loan

transaction, therefore, there is a lender and a borrower, but

in a transaction which is not a loan there is no lender and no

borrower, but there may be a creditor and a debtor. He

submitted that in a derivative transaction the dues payable

by a party to the bank may be a debt and the bank may be a

creditor and such party may be a debtor, but the bank in a

derivative transaction is not a lender and such party from

whom the dues are payable to the bank is not a borrower.

He further submitted that the interpretation given by the RBI

to the Master Circular cannot be accepted by the Court by

recourse to the doctrine of contemporanea expositio as this

doctrine was applicable to ancient statutes and has no

application to modern statutes as has been noted in

20

Page 21

Principles of Statutory Interpretation (12th Edn. 2010) by

Justice G.P. Singh at pages 341-349. He further submitted

that if the doctrine of contemporanea expositio is applicable,

the interpretation given by the RBI in the Master Circular

may have some weight, but cannot be decisive as

interpretation of the Master Circular, in the facts of the

present case, is a judicial function to be performed by the

Court. In support of this proposition, he relied on Bhuwalka

Steel Industries Ltd. v. Bombay Iron & Steel Labour Board &

Anr. [(2010) 2 SCC 273]. He submitted that the RBI could

have issued a Circular or a Press Note and made a public

declaration that a defaulter of payment obligations under a

derivative transaction to the bank is also covered by the

Master Circular before the matter reached the Court. He

submitted that after the matter reaches the Court, the RBI

cannot file affidavits taking a stand that defaulters of dues

under derivative transactions to the bank are covered by the

Master Circular.

12. Mr. Sorabjee referred to Section 6 of the 1949 Act to

show that a bank can engage in several businesses other

21

Page 22

than lending such as deal in derivatives and such business

will not fall within the core banking business of the bank

under clauses (a) to (o) of Section 6 of the 1949 Act and it

will also not constitute lending. He referred to the decision

in ICICI Bank Ltd. v. Official Liquidator of APS Star Industries

Ltd. [(2010) 10 SCC 1] in which this Court has broadly

categorised the functions of the banking 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

22

Page 23

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 options and the liability of

the appellant no.1 to the respondent no.1 under these

transactions arose on the settlement date. They referred to

the decision of the Madras High Court in Rajshree Sugars &

Chemicals Ltd. v. Axis Bank Ltd. [(2008) 8 MLJ 261] in which

four categories of derivative transactions have been

described including swaps and options. In this decision, the

Madras High Court has taken note of the fact that a swap is

an agreement made between two parties to exchange

payments on regular future dates and the option gives the

holder the right to buy or sell an underlying asset at a future

date at a predetermined price. They also referred to the

ISDA agreement between the appellant no.1 and the

23

Page 24

respondent no.1 to explain the nature of the derivative

transactions between the appellant no.1 and the respondent

no.1. They submitted that as the appellant no.1 did not pay

dues amounting to Rs.29.2 million under the derivative

transactions, the respondent no.1 issued a notice to the

appellant dated 15.10.2010 to show cause why the

respondent no.1 should not classify the appellant as a wilful

defaulter under the Master Circular and also informed the

respondent no.1 that it could make a representation against

the decision to classify it as a wilful defaulter to the

Grievance Redressal Committee of the respondent no.1-

bank. They submitted that the appellant no.1 did make a

representation and was also subsequently heard, but the

Grievance Redressal Committee held that the appellant was

a wilful defaulter under the Master Circular.

14. They further submitted that the RBI has always treated

a derivative transaction as a facility granted by a bank to its

customer in order to enable the customer to manage its risks

arising from fluctuations in foreign exchange and interest

rates. They referred to the Master Circular as well as the

24

Page 25

other Circulars dated 02.07.2007, 13.10.2008, 08.12.2008

and 09.04.2009 to show that a derivative transaction is a

non-funded credit facility enjoyed by a borrower from a

bank. They submitted that both Section 45A(b) of the 1934

Act and Section 2(c) of the 2005 Act define a “borrower” as

covering a person to whom “any credit facility” has been

granted, including any credit facility other than a loan. They

submitted that, therefore, the word “borrower” in the Master

Circular covers not only a loanee but also any other

customer of 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

25

Page 26

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 Circular

should not be disturbed by this Court.

CIVIL APPEAL No. 8918 OF 2012 (Arising out of SLP (C) NO. 28477 of 2011)

15. Leave granted.

16. This is an appeal against the judgment dated

23/24.08.2011 of the Bombay High Court in Writ Petition

(Lodg.) No. 345 of 2011.

26

Page 27

17. The facts briefly are that the appellant no.1 carries

inter alia the business of PVC pipes and PVC resins and the

appellant no.2 is its Assistant Managing Director and Chief

Officer. The appellant no.1 entered into several derivative

transactions with respondent no.3-bank named as USD/JPY

Target Profit Forward Transactions during the years 2007-

2008. On 01.07.2009, the Reserve Bank of India (for short

‘the RBI’), respondent no.1, issued a Master Circular on

Wilful Defaulters (for short ‘the Master Circular’). The Master

Circular contained instructions of the RBI to the 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 the said banks and

financial institutions. The respondent no.3-bank issued a

demand notice dated 20.08.2009 to the appellant no.1

calling upon the appellant to pay USD 20,821,480.40 with

interest thereon as dues of the appellant no.1 to the

respondent no.3-bank under the derivative transactions. As

the appellant no.1 did not pay the said dues, the respondent

no.3 issued a notice dated 19.04.2010 to the appellant to

27

Page 28

show cause why the appellant will not be classified as a

wilful defaulter under the Master Circular. The appellant

no.1 replied vide its letter dated 10.05.2010 denying the

allegations made by the respondent no.3-bank in the notice

dated 19.04.2010 and requesting the respondent no.3-bank

to give a fair and reasonable opportunity to place its

representation before the Grievance Redressal Committee of

the respondent no.3-bank before a final decision is taken to

classify the appellant no.1 as a wilful defaulter. The

Grievance Redressal Committee of the respondent no.3-bank

heard the appellant no.1 on 13.12.2010, but passed an order

on 20.01.2011 declaring the appellant no.1 as a wilful

defaulter. Aggrieved, the appellants filed Writ Petition

(lodg.) No. 345 of 2011 before the Bombay High Court

challenging the order dated 20.01.2011 of the Grievance

Redressal Committee. By the impugned judgment, the

Bombay High Court held that the Master Circular covers the

outstanding claims of respondent no.3-bank against the

appellant no.1 arising out of the foreign exchange derivative

transactions. The High Court, however, left it open to the

28

Page 29

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 that the banks have to get a separate licence to

29

Page 30

be an authorized person to deal with foreign exchange

derivatives. He submitted that Chapter III-A of the 1934 Act

relates to the collection and furnishing of credit information

and a reading of Section 45A in Chapter III-A would show

that credit information covers only information in relation to

borrowers to whom any credit limit has been sanctioned by

any banking company. He vehemently argued that in any

case Section 45E in Chapter III-A of the 1934 Act clearly

provides that any credit information contained in any

statement submitted by a banking company under Section

45C or furnished by the bank to any banking company under

Section 45D shall be treated as confidential. He submitted

that any information relating to a derivative transaction

entered into by a customer of the bank cannot, therefore, be

disclosed by the bank either to the RBI or to any other bank.

He also cited the decision of the King’s Bench in Tournier v.

National Provincial and Union Bank of England [(1924) 1 KB

461] for the proposition that there is an implied contract

between the bank and the customer that the bank will not

disclose any information relating to the customer to any

30

Page 31

third party. He submitted that any disclosure of information

relating to the defaults made by the customer of his

obligations under a derivative transaction will be breach of

the implied contract of confidentiality between the bank and

its customer. He submitted that similarly the 2005 Act

covers only the “credit information” as defined in the 2005

Act and as dues under a foreign exchange derivative

transaction is not “credit information” within the meaning of

the expression as defined in the 2005 Act, any disclosure of

information relating to foreign exchange derivative

transactions by the bank with its customer is not authorized

under the 2005 Act. He submitted that the FEMA and the

‘FEMA Regulations’ which comprehensively deal with the

foreign exchange derivatives and the 1949 Act also do not

authorize disclosure of any information relating to derivative

transactions affecting the customer of the bank.

19. Mr. Singhvi reiterated the arguments of Mr. Sorabjee

that the Master Circular covers the dues under the borrower-

lender relationship between the customer and the bank. He

submitted that as derivative transactions did not involve a

31

Page 32

borrower-lender relationship 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

32

Page 33

as the Master Circular has a penal effect, it has to be strictly

construed and so construed, it will cover only a lender-

borrower relationship and not the relationship between the

bank and its customer in a derivative transaction. He

submitted that the impugned judgment of the High Court

therefore should be set aside.

20. Mr. Ashok Desai, learned senior counsel appearing for

the respondent no.3, in reply, submitted that the Master

Circular has been issued by the RBI in exercise of its powers

under the 1934 Act and, therefore, for interpreting the

Master Circular, the functions of the RBI under the 1934 Act

have to be kept in mind. He referred to the preamble of the

1934 Act to show that the RBI has been constituted to inter

alia operate the credit system of the country to its

advantage. He also referred to the statement of objects and

reasons of the Amendment Act of 26 of 2006 in which a

reference has been made to the crucial role that derivative

plays in re-allocating and mitigating the risks of corporates,

banks and other financial institutions. He submitted that it is

by the Amendment Act 26 of 2006 that various provisions

33

Page 34

were introduced in the 1934 Act in Chapter III-D for

regulation of transactions in derivatives. He submitted that

transactions in derivative therefore have an important

bearing on the credit policy or credit system of the country

and the views of the RBI whether the Master Circular would

cover the dues under derivative transaction are decisive and

should not be discarded by the Court.

21. He cited Ganesh Bank of Kurundwad Ltd. & Ors. v.

Union of India & Ors. [(2006) 10 SCC 645] for the proposition

that when two views are possible, the view of the regulating

body, such as the RBI, should be accepted by the Court in

matters falling within the domain of the RBI. He also relied

on Joseph Kuruvilla Vellukunnel v. Reserve Bank of India

[1962 Supp (3) SCR 632] in which the functions of the RBI

including the functions relating to operation of the credit

system of the country to its advantage have been discussed.

He cited Peerless General Finance & Investment Company

Ltd. and Another v. Reserve Bank of India and others [(1992)

2 SCC 343] in which this Court has held that the RBI has a

large contingent of expert advice relating to matters

34

Page 35

affecting the economy of the country and nobody can doubt

the bonafides of the RBI in issuing directions to the banks

and it 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

35

Page 36

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 issue of

reduction of non-performing assets in the books of banks.

22. Mr. Desai also referred to the provisions of Chapter III-A

of the 1934 Act on Collection and Furnishing of Credit

Information and in particular Section 45A(b) and 45A(c) and

submitted that information regarding dues under derivative

transactions will come within the expression “credit

information”. He submitted that disclosure of such credit

information is not hit by Section 45E of the 1934 Act as has

been made clear in the language of the said section. He

submitted that the Bombay High Court, therefore, has

correctly interpreted the Master Circular and held that it also

applies to dues under derivative transactions and the narrow

view taken by the Calcutta High Court that the Master

Circular will only apply to dues under a lender-borrower

relationship is not correct.

The stand of the RBI in the three Civil Appeals:

36

Page 37

23. Mr. Jaideep Gupta, learned senior counsel appearing for

the RBI, submitted that the RBI did not challenge the

judgment of the Calcutta High Court because it was not

necessary for the RBI for two reasons: (i) one of the parties,

namely Kotak Mahindra Bank Limited, had challenged the

judgment of the Calcutta High Court and the RBI was a

respondent in the Special Leave Petition filed by the Kotak

Mahindra Bank Limited and (ii) the issue was also pending

before the Bombay High Court which could take a view

different from that of the Calcutta High Court. He submitted

that at no stage, therefore, the RBI has accepted the

judgment of the Calcutta High Court that the Master Circular

did not cover wilful default of dues under derivative

transactions. He submitted that the Bombay High Court has

taken the correct view that the Master Circular will apply to

the dues receivable by a bank under derivative transactions.

24. He referred to the language of the Master Circular to

show that it covered both funded facilities such as loans and

advances and non-funded facilities such as bank guarantees

and derivative transactions. He referred to clause 2.6 of the

37

Page 38

Master Circular to show that when bank guarantees were

invoked and are not honoured by the defaulting units on

whose behalf the bank guarantee has been furnished, the

defaulters are to be treated as wilful defaulters under the

Master Circular. He argued that similarly when dues become

payable under derivative 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

38

Page 39

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 bank. He submitted that the

word “lender” in sub-clauses (a), (b), (c) & (d) of the

definition of wilful defaulter would therefore mean the bank

and not the bank as a lender.

25. Mr. Jaideep Gupta submitted that a reading of Section

45V of the 1934 Act would show that transactions in a

derivative, as may be specified by the RBI from time to time,

shall be valid and therefore derivative transactions are under

the regulatory purview of the RBI. He submitted that the

Master Circular has to be interpreted keeping in view this

regulatory power of the RBI and a purposive interpretation is

to be given to the Master Circular. He cited the decisions of

this Court in Securities and Exchange Board of India v. Ajay

Agarwal [(2010) 3 SCC 765] in which the purpose of the Act

was taken into consideration while interpreting the

39

Page 40

provisions of the Act. He also relied on Executive Engineer,

Southern Electricity Supply Company of Orissa Ltd.

(SouthCo) and another vs. Sri Seetaram Rice Mill [(2012) 2

SCC 108] in which this Court while interpreting the

provisions of the Electricity Act, 2003, held that a

construction which will improve the workability of the statute

and make it more effective and purposive, should be

preferred to any other interpretation which may lead to

undesirable results.

26. He submitted that the definition of wilful defaulter in

the Master Circular need not be altered by the RBI as and

when new products such as the derivatives come into

market as according to the RBI the definition of wilful

defaulter is wide enough to cover such new products which

come into market with the growth of the economy. He

referred to the observations of this Court in Rattan Chand

Hira Chand v. Askar Nawaz Jung (Dead) by L.Rs and Others

[(1991) 3 SCC 67] that the legislature has often failed to

keep pace with the changing needs and values and to

provide for all contingencies and eventualities and it is,

40

Page 41

therefore, not only necessary but obligatory on courts to

step into fill the lacuna. He also placed reliance on the

comments of G.P. Singh’s Principles of Statutory

Interpretation (11th Edition) at p. 328 in this regard. He also

relied on the observation of this Court in ICICI Bank Limited

v. Official Liquidator of APS Star Industries Ltd. and Others

(supra) that while interpreting the Banking Regulation Act,

1949, one needs to keep in mind not only the framework of

the 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

41

Page 42

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, hereinbelow:

“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:-

(a) The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.

(b) The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

(c) The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds

42

Page 43

available with the unit in the form of other assets.

(d) The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed of or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.”

28. We find from the definition of wilful default in the

Master Circular quoted above that a wilful default would be

deemed to have occurred in any of the events mentioned in

sub-clauses (a), (b), (c) and (d) of clause 2.1. These sub-

clauses use the word “lender” and for this reason the

Calcutta High Court has taken a view in the impugned

judgment that the Master Circular applies only to a lender-

borrower relationship and thus only a wilful default by a

borrower to the bank which has lent funds by way of loans

and advances would be covered under the Master Circular

and a party who has not borrowed any money from a bank

and has availed the facility of derivative transaction from a

bank and has defaulted in meeting its payment obligation to

the bank under the derivative transaction is not covered by

43

Page 44

the Master Circular. The Calcutta High Court, therefore, has

gone by a literal interpretation of the word “lender” in sub-

clauses (a), (b), (c) and (d) in the definition of wilful default

in clause 2.1 of the Master Circular.

29. This approach of the Calcutta High Court in interpreting

the Master Circular, in our considered opinion, is not correct

because it is a settled principle of interpretation that the

words in a statute or a document are to be interpreted in the

context or subject-matter in which the words are used and

not according to its literal meaning. In Principles of

Statutory Interpretation, 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

44

Page 45

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 a crystal transparent and unchanged; it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used.” Shorn of the context, the words by themselves are “slippery customers”. Therefore, in determining the meaning of any word or phrase in a statute the first question to be asked is – “What is the natural or ordinary meaning of that word or phrase in its context in the statute? It is only when that meaning leads to some result which cannot reasonably be supposed to have been the intention of the Legislature, that it is proper to look for some other possible meaning of the word or phrase. The context, as already seen, in the construction of statutes, means the statute as a whole, the previous state of the law, other statutes in pari materia, the general scope of the statute and the mischief that it was intended to remedy.”

We will, therefore, have to interpret the word “wilful default”

in the Master Circular by reading the Master Circular as a

whole, looking at the provisions of the 1934 Act and the

1949 Act under which the RBI has powers to issue circulars

45

Page 46

and instructions to the banks, the purpose for which the

Master Circular was issued and the mischief that the Master

Circular intends to remedy because these constitute the

context and the subject-matter in which the definition of

wilful default finds place in the Master Circular.

30. The Bombay High Court, on the other hand, has come

to the conclusion in the impugned judgment that the Master

Circular covers also a default in complying with the payment

obligations under derivative transactions by relying on the

language of not only the Master Circular dated 01.07.2009

but also of the circulars issued by the RBI on 08.08.2008,

13.10.2008, 29.10.2008, 09.04.2009 and 01.07.2010 which

do not relate to wilful default but relate to prudential norms,

assets classification as non-performing assets, etc. This

approach of the Bombay High Court in interpreting the

Master Circular, in our considered opinion, is also not correct

because the subject matter of these circulars of the RBI

issued on 08.08.2008, 13.10.2008, 29.10.2008, 09.04.2009

and 01.07.2010 do not relate to wilful default but relate to

prudential norms, assets classification as non-performing

46

Page 47

assets etc. These circulars issued by the RBI on 08.08.2008,

13.10.2008, 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

47

Page 48

Financial Institutions were required to submit to the RBI the

details of the wilful defaulters. Hence, the Master Circular

originated pursuant to the instructions of the Central

Vigilance Commission and these instructions are contained

in a communication dated 27.11.1998 of the Central

Vigilance Commission on the subject “improving vigilance

administration in banks”. The instructions have been issued

by the Central Vigilance Commission in exercise of its

powers under Section 8(1)(h) of the Central Vigilance

Commission Ordinance, 1998, whereunder it exercises

superintendence over the vigilance administration of the

various Ministries of the Central Government or Corporations

established by or under any Central Act, Government

Companies, Societies and local authorities owned or

controlled by the Central Government. Para 2.3 of the

aforesaid instructions issued by the Central Vigilance

Commission is extracted hereinbelow:

“2.3 Lack of communication between Banks

2.3.1 All cases of willful default of Rs.25 lakhs and above will be reported by all banks to RBI as and when they occur or are detected.

48

Page 49

2.3.2 Whether a matter is a case of willful default will be decided in each bank by a Committee of Officers.

2.3.3 The RBI will circulate the information received from the banks of wilful default, every three months. The data with the RBI will also be accessible directly by the banks concerned after the WAN is installed in position.

2.3.4 There should be greater intra bank communication about willful default, frauds, cheating cases etc. so that the same bank does not get exploited in different branches by the same defaulting parties.”

32. It will be clear from the language of the aforesaid

instructions issued by the Central Vigilance Commission that

all cases of wilful default of Rs.25 lakhs and above were to

be reported by all the banks to the RBI as and when they

occur or are detected and the RBI was required to circulate

the information received from the banks of wilful default

every three months and there was to be greater intra bank

communication about the wilful defaults. These instructions

of the Central Vigilance Commission covered to “all cases of

wilful default of Rs.25 lakhs and above” and were not

49

Page 50

confined to only wilful default by a borrower of his dues to

the bank in a lender-barrower relationship. Thus, it will be

clear from the aforesaid instructions of the Central Vigilance

Commission that all cases of wilful defaults of Rs.25 lakhs

and above were to be reported by 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

50

Page 51

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 cases of

wilful default of Rs.25 lacs and above was to cover not only

loans and advances which are funded facilities, but also

facilities which do not relate to loans and advances.

34. When we look at the Master Circular, we find that the

purpose of the Master Circular is “to put in place a system to

disseminate credit information pertaining to wilful defaulters

for cautioning banks and financial institutions so as to ensure

that further bank finance is not made available to them”.

Hence, the purpose of the Master Circular is to have a

system to disseminate credit information pertaining to wilful

defaulters amongst banks and financial institutions so that

no further bank finance is made available to such wilful

defaulters from such banks and financial institutions. The

51

Page 52

expression “credit information” has not been defined in the

Master Circular, but has been defined in Section 45A(c) of

the 1934 Act as follows:

“45A(c). ‘‘credit information’’ means any information relating to–

(i) the amounts and the nature of loans or advances and other credit facilities granted by a banking company to any borrower or class of borrowers;

(ii) the nature of security taken from any borrower or class of borrowers for credit facilities [granted to him or to such class;

(iii) the guarantee furnished by a banking company for any of its customers or any class of its customers;

(iv) the means, antecedents, history of financial transactions and the credit worthiness of any borrower or class of borrowers;

(v) any other information which the Bank may consider to be relevant for the more orderly regulation of credit or credit policy.]

It will be clear from the language of sub-clause (v) of Section

45A(c) of the 1934 Act quoted above that credit information

means not only any information relating to matters in sub-

clauses (i),(ii),(iii) and (iv), but also relates to any other

52

Page 53

information which the bank considers to be relevant for the

more orderly regulation of credit or credit policy. Hence,

“credit information” is not confined to information relating to

a borrower of the bank, but may also relate to a constituent

of the bank who intends to take some credit from the bank.

The purpose of the Master Circular being to caution banks

and financial institutions from giving any further bank

finance to a wilful defaulter, credit information 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

53

Page 54

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 were to cover “all

cases of wilful defaults of Rs.25 lakhs and above”. Also

Paragraph 2.6 of the Master Circular states inter alia that in

cases where a letter of comfort and/or the guarantees

furnished by the companies within the group on behalf of the

willfully defaulting units are not honoured when invoked by

the banks/financial institutions, such group companies

should also be reckoned as wilful defaulters. It is, thus, clear

that non-funded facilities such as a guarantee is covered by

the Master Circular and when a guarantee is invoked by a

bank/financial institution but is not honoured, the defaulting

constituent of the bank is treated as a wilful defaulter even

54

Page 55

though it may not have borrowed funds from the bank in the

form of advances or loans.

36. The scheme of Collection and Dissemination of

information on cases of wilful default of Rs.25 lakhs and

above was framed by the RBI in the year 1999 when the

derivative transactions were not part of the country’s

economy. Under the FEMA Regulations, 2000 only the banks

were authorized to deal with the derivative transactions.

Section 45V introduced along with other provisions of

Chapter IIID in the 1934 Act by the Reserve Bank of India

(Amendment) Act, 2006 declared that transactions in

derivatives, as may be specified by the RBI from time to

time, shall be valid, if at least one of the parties to the

transaction is the bank, a scheduled bank, or such other

agency falling under the regulatory purview of the RBI under

the 1934 Act, FEMA Act or any other Act or instrument

having the force of law, as may be specified by the RBI from

time to time. Derivative transactions in India thus were valid

only if they were with any bank or any other agency falling

under the regulatory purview of the RBI because they would

55

Page 56

have a substantial bearing on the credit system and credit

policy in respect of which the RBI has regulatory powers

under the 1934 and 1949 Acts. Such derivative transactions

may not involve a lender-borrower relationship between the

bank and its constituent, but dues by a constituent

remaining unpaid to a bank may affect the credit policy and

the credit system of the country. Information relating to

defaulters of dues under derivative transactions who intend

to take additional finance from the bank obviously will come

within the meaning of credit information under Section

45A(c)(v) of the 1934 Act.

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

56

Page 57

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 contained in any statement submitted by a banking company under Section 45C or furnished by the bank to any banking company under Section 45D shall be treated as confidential and shall not, except for the purposes of this Chapter, be published or otherwise disclosed.

(2) Nothing in this section shall apply to—

(a) the disclosure by any banking company, with the previous permission of the bank, of any information furnished to the bank under Section 45C;

(b) the publication by the bank, if it considers necessary in the public interest so to do, of any information collected by it under section 45C, in such consolidated form as it may think

57

Page 58

fit without disclosing the name of any banking company or its borrowers;

(c) the disclosure or publication by the banking company or by the bank of any credit information to any other banking company or in accordance with the practice and usage customary among bankers or as permitted or required under any other law:

Provided that any credit information received by a banking company under this clause shall not be published except in accordance with the practice and usage customary among bankers or as permitted or required under any other law.

(d) The disclosure of any credit information under the Credit Information Companies (Regulation) Act, 2005 (30 of 2005)

(3) Notwithstanding anything contained in any law for the time being in force, no Court, Tribunal or other authority shall compel the bank or any banking company to produce or to give inspection of any statement submitted by that banking company under section 45C or to disclose any credit information furnished by the bank to that banking company under Section 45D.”

We have already held that information relating to a party

who has defaulted in payment of its dues under derivative

transactions to the bank is credit information within the

58

Page 59

meaning of Section 45A(c)(v) of the 1934 Act. Sub-section

(1) of Section 45C of the 1934 Act provides that the RBI 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 RBI

from time to time. Hence, information relating to a party,

who has defaulted in payment of its dues under derivative

transactions being credit information may be called for from

the banking company 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

59

Page 60

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) of Section 45C.

38. We do not also find any force in the submission of Mr.

Mr. Bhaskar P. Gupta that the Master Circular has penal

consequences and, therefore, has to be literally and strictly

construed. Clause 4.3 of the Master Circular, which

contemplates criminal action by banks/financial institutions,

is extracted hereinbelow:

“4.3 Criminal Action by Banks/Fls

It is essential to recognize that there is scope even under the exiting legislations to initiate criminal action against wilful defaulters depending upon the facts and circumstances of the case under the provisions of Sections 403 and 415 of the Indian Penal Code (IPC) 1860.

60

Page 61

Banks/Fls are, therefore, advised to seriously and promptly consider initiating criminal action against wilful defaulters or wrong certification by borrowers, wherever considered necessary, based on the facts and circumstances of each case under the above provisions of the IPC to comply with our instructions and the recommendations of JPC.

It should also be ensured that the penal provisions are used effectively and determinedly but after careful consideration and due caution. Towards this end, banks/Fls are advised to put in place a transparent mechanism, with the approval of their Board, for initiating criminal proceedings based on the facts of individual case.”

All that the aforesaid clause 4.3 of the Master Circular states

is that there is scope even under the exiting legislations to

initiate criminal action against wilful defaulters depending

upon the facts and circumstances of the case under the

provisions of Sections 403 and 415 of the Indian Penal Code,

1860 and the banks and financial institutions are strictly

advised to seriously and promptly consider initiating criminal

action based on the facts and circumstances of each case

under the above provisions of the IPC. Thus, the Master

Circular by itself does not have penal consequences,

whereas Sections 403 and 415 of the IPC have penal

61

Page 62

consequences. The provisions of Sections 403 and 415 of

the IPC obviously have to be strictly construed as these are

penal provisions and will get attracted depending on the

facts and circumstances of each case, but the provisions of

the Master Circular need not be strictly construed. As we

have held, the Master Circular has to be construed not

literally but in its context and the words used in the

definition 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

62

Page 63

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

violative of Article 14 of the Constitution. In these Civil

Appeals, we are concerned with the interpretation of the

Master Circular and on interpretation of the Master Circular,

we find that the Master Circular covers not only wilful

defaults of dues by a borrower to the bank but also covers

wilful defaults of dues by a client of the bank under other

banking transactions such as bank guarantees and

derivative transactions.

40. In the result, we hold that wilful defaults of parties of

dues under a derivative transaction with a bank are covered

by the Master Circular and this we hold not because the RBI

63

Page 64

wants us to take this view, because this is our judicial

interpretation of the Master Circular. The impugned

judgment of the Calcutta High Court is set aside and the

impugned judgment of the Bombay High Court is sustained.

We make it clear that we have not expressed any opinion on

the individual transactions between the bank and the parties

and our judgment is based solely on the interpretation of the

Master Circular. Accordingly, the appeal filed by Kotak

Mahindra Bank Ltd. against the judgment of the Calcutta

High Court is allowed and the appeals filed against the

judgment of the Bombay High Court by different parties are

dismissed. The parties, however, shall bear their own costs.

I.A. for intervention stands disposed of.

.……………………….J. (A. K. Patnaik)

………………………..J. (Swatanter Kumar)

New Delhi, December 11, 2012.

64

Page 65

65