Public Sector Banks Permitting Large Exposure Without Adequate Securities A Grave Concern; Revisit Lending Guidelines : Karnataka High Court

A single bench of Justice P S Dinesh Kumar while dismissing the petitions filed by Shetty said "It is no doubt true that a citizen of this Country has a right to travel. But I hasten to add that persons who take public money have a sacred duty to repay it too."

Court Suggests Law makers and Reserve Bank of India to revisit the lending guidelines.

During the hearing the court had called upon the advocates for the Banks to explain on what security the Banks permitted such large exposure (Bank of Baroda Rs 2,000 crore), (Punjab and National Bank Rs 800 crore). The answer given was, the Companies to which loans are advanced were 'listed companies' in London Stock Exchange and the share value had shown that the said Companies had high net worth.

The court noted "Tangible assets, if any, mortgaged in favour of Banks and their valuation is not forthcoming. If Public Sector Banks are permitting such large exposure without adequate securities, it is a matter of great concern and it shall have serious adverse impact on the economy of this Country.

Following which it suggested "It is time, the law makers and Reserve Bank of India re-visit the lending guidelines and the procedures and take necessary remedial measures to ensure that public money is well secured before disbursement."

Shetty, has promoted several companies in pharmaceutical, hospitality, healthcare and foreign exchange businesses. He stepped down from the Management and handed over the companies to the respective Officers between 2015 and 2017. During late 2019 and early 2020, due to various illegal activities and mismanagement in the companies by the persons in-charge, the companies were unable to service the loans amounts to Rs 2,800 crore, obtained from various banks.

Submissions made on behalf of Shetty:

It was submitted on his behalf that the loans were taken in UAE by various Companies and petitioner has given guarantees in UAE and not in India. Further, the default in repayment has occurred due to mismanagement by the borrower Companies which came to light between December 2019 and April 2020. Thereafter, proceedings have been initiated by Banks in UAE. Moreover, the Loans have been given to the listed Companies, which are managed by the Directors and respective CEOs/CFOs.

Petitioner, having stepped down from the Management of Companies in the year 2017 and as transactions have taken place in UAE, respondent Banks have no jurisdiction to invoke his Personal Guarantees in India. The Banks cannot prevent him from travelling to UAE to defend cases against him.

It was also submitted that the Issuance of a LOC is governed by an Official Memorandum issued by the Ministry of Home Affairs, the exercise of power can only be in exceptional cases against fraudsters, persons taking loans and willfully defaulting, money launderers etc. Petitioner does not fall under any such category. Finally it was submitted that the petitioner is "only a guarantor". The banks opposed the petition.

Court findings:

Justice Kumar went through the Official Memorandum and said that "Clause(c) of paragraph No.7 gives liberty for a person against whom LOC is issued, to approach the officer who has ordered issuance of LOC and explain that it is wrongly issued against him. In the letter written by the Commissioner, Bureau of Immigration, it is stated that the LOCs have been issued at the behest of BOB and PNB. Therefore, the petitioner has to first approach the Bank Authorities. Hence, a direction to provide a copy is unnecessary."

As regards the prayer to declare issuance of LOC without prior notice as illegal and violative Article 14, 19 and 21 of the Constitution of India. The court said "On the face of it, the prayer is misconceived because the whole purpose of issuance of LOC would be defeated by a prior notice. By amending the Official Memorandum, Chairmen of Banks have been empowered to issue LOCs. Bankers may consider issuing LOC to protect the Bank's interest based on the subjective satisfaction of the issuing authority and in this case, the BOB and PNB. Therefore, the argument seeking prior notice is incongruous and therefore rejected."

On considering the prayer made by the petitioner to allow him to travel to Abu Dhabi the court said "Unless, petitioner exhausts the remedy of approaching BOB and PNB and explains to them as to how the LOCs have been wrongly issued and the Banks pass any further orders thereon, there is no cause of action to consider the said prayer."

After perusing the judgments relied by the petitioner and respondents the court said "In the facts of this case, it is relevant to note that petitioner is liable for repayment of about Rs.2800 Crores lent by Public Sector Banks. Undoubtedly, this money belongs to this Country in general and the depositors in particular. This Court cannot lose sight of the fact that money belonging to this Country has been utilized by the petitioner in a foreign country to run his businesses. No material is produced to show that money lent by BOB and PNB has resulted in any development of this country. On the other hand, as on date, it has become a bad debt and public sector banks are fighting litigation in India as also in UAE to recover the same."

It added "Therefore, the reliance in the case of Uco Bank Vs. Dr.Siten Saha Roy is of no avail to the petitioner because the amount involved in the said case was Rs.20 Crores and proceedings were initiated under the SARFAESI Act to recover the amount from the assets mortgaged to the bank."

The court opined "In contradistinction, in this case, the amount involved is astronomically high when compared with the Calcutta case, which is about Rs.2800 Crores. It is more than one third of the annual budget of a State like Sikkim. Thus the amount involved in this case is bound to have serious impact on the economy of this Country and therefore the authorities in the case of Shivashakti Sugars Vs. Renu Sugar Ltd., and Marida Chemicals Vs. Union of India are aptly applicable."

Dismissing the submission that the petitioner is only a guarantor, the court said "In the facts of this case, this admission, without anything more, must entail dismissal of this writ petition in limine because a guarantor is equally liable to repay the debt. Further, it is admitted in the pleadings that petitioner is the promoter of the borrower Companies."

It concluded by saying "In view of the liberty available to the petitioner to approach the Bank authorities and explain that LOCs have been wrongly issued, petitioner is not entitled for relief in these writ petitions."

Case Details:-

Case Title: DR. BAVAGUTHU RAGHURAM SHETTY And BUREAU OF IMMIGRATION.

Case No: WRIT PETITION No.15032 OF 2020

Date of Order: 12th February 2021.

Coram: Justice P S Dinesh Kumar

Appearance: Senior Advocate K. SHASHIKIRAN SHETTY, a/w Advocate SANDEEP LAHIRI for petitioner.

Advocate ADITYA SINGH, FOR R1 & R2;

Advocate B. PRASANNA KUMAR AND Advocate D.R. RAVISHANKAR, FOR R4;

Advocate MANU KULKARNI Advocate Dharmendra Chatur and Advocate Rahul Prasad for Poovayya & Co for respondent 3.