Bombay High Court Refuses To Interfere With RBI Circular Permitting Only One Active Current Account If Total Credit Facilities Availed Exceed ₹50 Crore

The Bombay High Court has upheld HDFC Bank’s email that led to the freezing of current accounts held by cocoa manufacturer VJ Jindal Cocoa in various banks observing that since its “exposure” was over Rs. 50 crore it wasn’t permitted multiple active current accounts.

‘Exposure’ in the present context means the total credit facilities availed by a borrower.

A division bench of Justices Gautam Patel and Neela Gokhale dismissed VJ Jindal’s petition to undo HDFC’s action on the ground that it was exempted from the relevant RBI circular since its current accounts with other banks pre-dated the HDFC account.

“The [RBI] circular demands what is best thought of as a funnelling or channelling mechanism: once there is a lending account with an exposure [borrowing] of over Rs 50 crores, all inflows must be routed into that lending account. Inflow and outflow transactions in other current accounts are not permitted. If there are other current accounts, then these are carefully calibrated to be only collection accounts.”

The bench noted that RBI had issued the Consolidated Circular on Opening of Current Accounts and Cash Credit /Over Draft Accounts by Banks dated August 19, 2022 to protect private banks as current accounts in other banks were being used to divert funds and to commit fraud.

“There was a mushrooming of current accounts by unscrupulous borrowers, especially with non-lender banks, and funds were being diverted for unauthorised purposes. Lending banks were unable to monitor cash flows or to efficiently recover their dues. There was a systematic increase, consequently in NPAs.”

CASE

HDFC Bank, Jindal’s primary lender wrote to three other banks – Punjab National Bank, Jammu & Kashmir and Canara Bank- in February 2023 that according to RBI’s circular a banking customer cannot have other current accounts with other banks if that customer already had credit facilities in the form of Cash Credit/Export Packing Credit (“CC/EPC”) in the banking system. All transactions had to be routed through HDFC as it was its principal lending bank.

Canara Bank and J&K Bank blocked Jindal’s accounts and sought an NOC from HDFC Bank after which Jindal approached the High Court to de-freeze the accounts. The company argued that the other accounts were opened much before the HDFC account therefore conditions in the circular were inapplicable. Senior Advocate Navroz Seervai was representing the bank.

He pointed out that certain safeguards under the circular were not in place. Both, Senior Advocate Ashish Kamat for RBI and Senior Counsel Ravi Kadam supported HDFC’s action. They pointed out the petition was not maintainable.

Senior Advocate Ravi Kadam on facts, submitted that Jindal Cocoa had begun routing export proceedings through one or more of the other Banks, i.e., PNB Bank, J&K Bank and CanBank.

The RBI circular in question divides a borrower’s aggregate exposure as less than Rs. 5 crore, Rs 5-15 crore and Rs. 50 crore with different rules for every type of borrower.

The court accepted the argument that RBI and HDFC’s interpretation of the circular might not necessarily be binding on the court but it was accepted to be one of significant persuasive value.

It accepted the argument that a writ against a private bank is not maintainable, and the petitioner couldn’t get the same reliefs in a circuitous manner by seeking directions to RBI.

“There is no public duty or public function shown to be discharged by HDFC Bank. It is in no sense doing it for the collective benefit of the public nor is it appointed whether by RBI or itself as the 10th March 2023 custodian or guardian of RBI governing circulars.”

The bench finally observed that it was unable to see how application of the circular could be called erroneous in the facts and circumstances of the case. “On the contrary, it is our view that granting the Petitioner relief would in effect not only run directly contrary to the circular but would possibly permit the continuance or growth of the very mischief that is sought to be addressed,” the bench observed.

Case Title: VJ Jindal Cocoa Pvt Lt v. Union of India & Ors.

Citation: 2023 LiveLaw (Bom) 186

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