Can The Economic Interest Of Banks Be Equated With The Economic Interest Of India To Justify The Issuance Of LOCs?

LOCs are issued by authorized agencies^[4] to restrict a person from traveling outside the country and are governed by a series of executive instructions/circulars i.e., office memoranda. The first such instructions were issued by the Ministry of Home Affairs ("MHA"), vide letter dated September 5, 1979^[5], which were subsequently amended vide office memorandum dated December 27, 2000^[6]. Thereafter, consolidated guidelines were issued by the MHA vide office memorandum dated October 27, 2010^[7] ("OM dated 27.10.10"), incorporating the necessary checks put in place by the Delhi High Court in Sumer Singh.^[8] These guidelines were then modified vide office memorandums dated December 5, 2017, September 19, 2018^[9], October 12, 2018 and February 22, 2021 ("OM")^[10].

Clause (H) of the OM stipulates that recourse to LOC is to be taken in cognizable offences under the IPC or other penal laws and that 'reason for opening LOC' must be invariably provided by the agency making the request ("Originator"), without which the subject of the LOC will not be arrested or detained. It was further clarified under Clause (I) of the OM, that in cases where no cognizable offence can be made out, an individual cannot be arrested or prevented from leaving the country. In such cases, the Originator can only request that it be informed about the arrival or departure of the subject of LOC. The only exception to this rule is stipulated under Clause (L)^[11] of the OM, which provides that, in exceptional cases, LOCs can be issued when departure of a person is detrimental to the economic interests of India and/or the larger public interest.

It has been held by various High Courts^[12] in India, that a LOC cannot be issued without the satisfaction of the pre-existing conditions, as stipulated in the OM. However, High Courts have expressed differing views on interpretation of the terms "economic interest" and "larger public interest" used in the exception clause.

In Brij Bhushan Kathuria v. Union of India & Ors.^[13], the Delhi High Court set aside the LOC issued at the behest of the Serious Fraud Investigation Office ("SFIO") against a former independent director of a company under investigation. The Court held that phrases such as 'economic interest' or 'larger public interest' used in the exception Clause could not be expanded to include an independent director who was in the past associated with the company, without any specific role being attributed to him.

In Deept Sarup Aggarwal v. Union of India & Anr.^[14] , the Delhi High Court held that the Originator must establish how the Petitioner travelling abroad would affect the economic interest of the country.

In UCO Bank v. Siten Saha Roy^[15], it was contended that the Respondent had failed to discharge a huge quantum of loan which would cause a 'dent' in the economy of the country and thereby would adversely affect the economic interest of the country as a whole. However, the Calcutta High Court opined that the expression "economic interests of India" must be "construed to be on a much higher footing than violation of a mere commercial contract, whatsoever may be the quantum of the defaulted sum." An offence putting a 'dent' on the economic interests of the nation "has to be such that either the economy of the country would be jeopardized by such person leaving the country and/or the offence would hit at the root of the economic system and/or the market itself, including the share market." Pertinently, the Court noted that the bank (Originator) had already availed remedies under law for loan recovery and that none of the grounds including the exception clause had been disclosed by the bank in the request for LOC. Accordingly, the Court held that no exception was made out by the bank to bypass the pre-requisite conditions for issuance of LOC. The Court also cautioned that although the bank was a PSB and the interest of the public was involved, a balance was required to be struck between an individual's liberty and the government's power to restrict the same under "reasonable circumstances". Therefore, individual defaults in commercial transactions could not be labelled as offences against the economic interests of India as the same would open "a floodgate of abuse".

In Hemanta Kumar Banka v. Union of India & Ors.^[16], the Calcutta High Court inter alia distinguished the decision in UCO Bank on facts. The Court observed that the Petitioner, who was a resident of Singapore had availed credit facilities from various banks including the Singapore branch of the Respondent bank (Originator). Further, bankruptcy and winding up orders had been issued by the High Court of Singapore against the Petitioner and his company respectively, which raised sufficient apprehension on the Petitioner's ability to repay the loans due to the Respondent Bank. In this matter, the Court placed reliance on OM dated 04.10.2018, which "…clarified that the guidelines enable LOCs against persons who are fraudsters/persons who take loans, willfully default/lend money and then escape to foreign jurisdictions, since such actions would not be in the economic interests of India or in the larger public interest". Observing that the conspectus of exceptional circumstances to justify the issuance of a LOC had been broadened vide OM dated 04.10.2018, the Court was of the opinion that economic interests of India would in fact suffer if the Petitioner was permitted to leave the country and evade re-payment of the loans owed to the Respondent Bank.

In Chaitya Shah v. Union of India^[17], the Bombay High Court also took a much broader view while interpreting the exception clause. The Petitioner was a shareholder in one Gitanjali Gems Limited which was being investigated by the SFIO for connections with Mehul Choksi. The Court was of the opinion that the phrases "economic interests of India" and "larger public interest" would apply in the present case given the nature of the transactions involving the Petitioner. The Court held that the issuance of LOC against the Petitioner was justified given the "sheer magnitude of the offence and its spread through various banking operations and transfer of money through different modes and different countries". However, it may be relevant to note that the Petitioner was a resident of Hong Kong where he had substantial business interest, which formed the basis of SFIO's argument that the Petitioner may evade the course of the investigation, if permitted to leave the country.

Hence, different views have been expressed by courts on the question of whether the economic interests of PSBs can be equated with the economic interests of the nation. Courts have generally imposed a high threshold on Originators for relying on the economic interest exception. Further, such grounds if sought to be relied upon, must be disclosed by the Originator in the request for LOC or the LOC itself, in the absence of which, the same may not be successfully relied upon during proceedings.^[18] Courts have also observed at several instances that failure to replay loans cannot by itself be a ground for issuance of LOC^[19] and that a borrower should not be restrained from travelling abroad by way of LOC as a pressure tactic or as a mode of recovery by PSBs^[20]. There is a clear burden on banks to establish how the travel abroad of the subject of the LOC will affect the economic interests of India. However, as is evident from the decisions in Hemanta Kumar and Chaitya Shah, the Courts have in certain cases also given due regard to the quantum of default/ exposure of the bank and the possibility of recovery if the subject of LOC is permitted to leave the country. Pertinently, where the subject of the LOC is a non-resident, Courts have opted to expand the scope of the exception clause and bring such individuals within its ambit.

In light thereof, the decision of the Bombay High Court in Rihen Harshad Mehta, on the scope, extent, and authority/power of public sector banks to curtail the fundamental right of a person to travel abroad will posit much-required clarity on the subject matter, considering the multi fold increase in the use of LOCs by PSBs against defaulting borrowers.

Authors: Anant Tripathi, Senior Associate and Nidhi Chaudhary, Associate at Pioneer Legal. Views are personal.