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

The Karnataka High Court has dismissed the petition filed by founder of NMC Health, Dr Bavaguthu Raghuram Shetty (B R Shetty) who has challenged the Lookout Circulars (LOCs) issued by Bank of Baroda and Punjab National Bank against him and the endorsement issued by Bureau of Immigration not permitting him to travel to Abu Dhabi. 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...

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

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