IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD (Special Original Jurisdiction) WEDNESDAY, THE FOURTH DAY OF MARCH TWO THOUSAND AND NINE PRESENT THE HON'BLE MS JUSTICE G.ROHINI WRIT PETITION NO : 12233 of 2005 Between: Charminar Bank Depositors' Association (Regd.No. 878/02) Hyderabad, Rep. by its Secretary, M. Pitchaiah S/o. M. Biksham, aged about 73 yrs, ..... PETITIONER AND 1 Government of Andhra Pradesh, Agricultural Cooperation Department, (Cooperation-III) Rep. by its Secretary, Secretariat, Hyderabad. 2 Commissioner for Cooperation and Registrar of Cooperative Societies, Gruhakalpa, Exhibition Grounds 3 Charminar Cooperative Urban Bank Limited, Saifabad, Hyderabad, Rep. by its Chairman. 4 Reserve Bank of India, Central Office, Urban Banks Department, 1st Floor, Garments House, Worli, Mumbai-18. 5 Shaik Mahaboob Ali S/o. Shaik Razab Ali R/o. Hyderabad R5 is impleaded as per court order dt. 21-9-2005 in WPMP 26385 of 2005 .....RESPONDENTS Petition under Article 226 of the constitution of India praying that in the circumstances stated in the Affidavit filed herein the High Court will be pleased to issue a writ of Mandamus or any other appropriate writ, Order or Orders, Direction or Directions declaring the inaction of the Respondents 1 and 2 in reconstituting the Board for managing the 3rd Respondent Bank in accordance with the Statutory Scheme as illegal and also to set aside the proceedings of the 2nd respondent in Memo No. 1901/Cooperation-III/I/2004-8, dt. 22-1-2005 by declaring the same as illegal and to issue a consequential direction to the respondents 1 and 2 to effectively implement the Statutory Scheme for revival of the 3rd Respondent Bank and pass such other orders as this Hon'ble Court may deem fit and proper in the circumstances of the case. Counsel for the Petitioner : MR. V.SRINIVAS Counsel for the Respondents : MR.M.P.UGLE FOR RVAK-R4 MR.S.ASHOK ANAND KUMAR FOR R01.11.07,VAK-3 MR.T.LAKSHMI NARAYANA FOR R GP FOR COOPERATION FOR RAPP-1&2 The Court made the following : THE HON’BLE MS JUSTICE G.ROHINI WRIT PETITION No.12233 of 2005 ORDER The petitioner is an association formed by the depositors of Charminar Co-operative Urban Bank Limited (the 3rd respondent herein). This writ petition is filed seeking a declaration that the inaction of the respondents 1 and 2 in reconstituting the Board for managing the 3rd respondent Bank in accordance with the statutory scheme, as arbitrary and illegal. The petitioner also seeks a declaration that Memo No.1901/Cooperation-III/I/204-8 dated.22-01-2005 issued by the 2nd respondent - Commissioner for Cooperation and Registrar of Cooperative Societies approving certain modifications to the One Time Settlement (OTS) scheme for recovery of the dues to the 3rd respondent Bank as arbitrary and illegal. The facts which are not in dispute are as under:- The 3rd respondent is a registered Bank under the provisions of the Andhra Pradesh Cooperative Societies Act,1964 (for short “the Act”). The said Bank collapsed during February, 2002 due to various reasons and thereafter the Reserve Bank of India (for short, ‘RBI’) in exercise of powers under Sec.35-A of the Banking Regulation Act, 1949 imposed restrictions on the activities of the 3rd respondent Bank w.e.f.25-02-2002. Consequently, the elected Board of Directors of the 3rd respondent was superseded vide proceedings of the 2nd respondent dated. 02-03- 2002 and an Administrator in the cadre of IAS was appointed to manage the affairs of the said Bank. Proceedings were also initiated under The Andhra Pradesh Protection of Depositors of Financial Establishments Act (17 of 1999) and several properties of the Bank were attached by the Government. In order to see that the depositors of the 3rd respondent Bank are paid their money and the loans due to the Bank are also recovered from the borrowers, the 1st respondent - State Government in exercise of the powers conferred under Section.115-B of the Act and with the previous sanction of the RBI, notified a scheme for reconstruction of the 3rd respondent Bank, vide G.O.Ms.No.4, Agriculture and Co-operation (Co-op.III) Department, dated.27- 02-2003. As per the said scheme, different rates of rebates were given to the borrowers who opted for repayment of the loans under One Time Settlement (OTS). As per the said scheme simple interest on all loan accounts @ 18% p.a. will be recalculated from the date of disbursement to the date of reconstruction. The scheme also provided for appointment of a Board consisting of professionals, depositors and Government representatives. Accordingly the 2nd respondent constituted a Board for a period of one(1) year to manage the affairs of the 3rd respondent Bank vide proceedings dated. 25-03-2003. Since the term of the said Board expired on 24-03-2004, the 2nd respondent by proceedings dated.17-03-2004 reconstituted the committee for a further period of one year which also expired on 25-03-2005. Thereafter the Board was not reconstituted and a Chairman was appointed to manage the affairs of the 3rd respondent Bank. While so, the Government vide G.O.Rt.No.1248, Agriculture and Co-operation Department, dated.23.11.2004 constituted a Committee to examine various issues and to advise on modification of the existing OTS Scheme in order to improve the recoveries of debts of 3rd respondent Bank as well as the Prudential and Vasavi Coop. Urban Bank Ltd. The said Committee held series of meetings and discussions with the borrowers and depositors on 15-12-2004 and 16- 12-2004 and made certain recommendations to the Government. The said recommendations of the Committee were accepted by the Government of A.P. with certain modifications vide Memo dated 22.01.2005 and the Chairman of the 3rd respondent Bank was requested to send the necessary proposals and take the approval of the Reserve Bank of India through the Registrar of Co-operative Societies. The present writ petition is filed challenging the said Memo dated 22.01.2005 issued by the Government of A.P. contending inter alia that the scheme framed by the Government in exercise of its statutory powers under Section.115-B of the Act cannot be superseded by a mere executive order dated 22.1.2005. It is alleged by the petitioner that the impugned Memo dated 22.1.2005 has been issued completely deviating from the terms of the statutory scheme to protect the big defaulters of the 3rd respondent Bank who are politically influenced and who are trying to avoid payment of the loans taken by them with interest. It is also alleged that the terms offered to the borrowers under the impugned memo dated 22.1.2005 are extremely helpful to the borrowers and they are totally at variance from the terms provided in the statutory scheme. Thus it is contended by the petitioner that if the impugned memo is implemented, the Bank would be put to a loss of more than Rs.300 Crores and the depositors cannot recover their dues even to the extent of their principal amount and therefore the Memo dated 22.1.2005 is liable to be set aside. A counter-affidavit has been filed by the Joint Registrar of Cooperative Societies on behalf of the respondents 1 and 2 stating that a Committee was constituted by the Government of A.P. vide G.O.Rt.No.1248, dated 23.11.2004 in terms of the policy decision to oversee the functioning of the Co-operative Urban Bank Sector in the interest of depositors. During the meetings and discussions held by the said Committee with the borrowers and depositors there was a proposal to announce a reasonable package to the loanees to enable them to repay their dues. Accordingly, the Committee made certain recommendations about the OTS scheme and the same were accepted by the Government with certain modifications vide impugned Memo dated 22.1.2005 and the same was communicated to the 3rd respondent Bank with a request to send necessary proposals and take approval of the RBI since the 3rd respondent Bank is covered under reconstruction package of RBI. Accordingly the 3rd respondent Bank in the Board meeting held on 23-01-2005 resolved to forward the modified OTS scheme to the RBI through Registrar of Cooperative Societies for necessary action. Pursuant thereto, by letter dated.23-01-2005 the proposals were forwarded to the RBI for approval through Registrar of Co-operative Societies. By letter dated.02-06-2005 the RBI informed that they have no objection to the proposed modification to the existing OTS scheme subject to compliance with Sec.20-A of the Banking Regulation Act,1949 and requested the 2nd respondent to make the requisite modifications in the scheme to make it inapplicable to the loans and advances granted to the Directors, past and present, any firm or company in which any of the Directors is interested as Director, partner, managing agent or guarantor and to an individual, if any of the directors is his partner or guarantor, so as to make the scheme in compliance with Sec.20-A of the Banking Regulation Act,1949. Accordingly the 2nd respondent by memo dated.16.06.2005 communicated the modified OTS scheme to the 3rd respondent Bank inserting the modifications suggested by the RBI and also asking to proceed with proper civil and criminal action against the defaulters who fail to avail the proposed modified OTS scheme and who fail to honour the commitment given for availing OTS and to initiate action under A.P. Protection of Depositors of Financial Establishment Act, 1999. Thus it is explained that the modifications proposed to the OTS scheme were approved in accordance with law with a view to improve the recoveries and no mala fides were there in formulating the said modified scheme. A separate counter-affidavit has been filed on behalf of the 3rd respondent Bank on the same lines. In the counter-affidavit filed on behalf of the respondent No.4 - Reserve Bank of India - it is stated that guidelines were issued by letter dated 31.10.2001 to all the State Governments relating to the settlements to be entered with the borrowers with regard to Non Performing Assets of Co-operative Banks. The said guidelines were revised by the RBI by letter dated 12.2.2003 requesting the State Governments to consider and issue necessary notifications/administrative orders under respective Co-operative Societies Acts. So far as the modifications proposed to the OTS Scheme under G.O.Ms.No.4 are concerned it is stated that the RBI after careful consideration of the proposed modification by letter dated 2.6.2005 advised that the RBI has no objection to the proposed modification subject to compliance of certain conditions. It is further stated that the modification proposed by the 1st respondent is not a new scheme and the same has been proposed to improve the recovery process so as to facilitate early repayment to the depositors. It is also clarified that the OTS scheme envisages only concession in the rate of interest and not waiver or concessions in the principal amounts. I have heard the learned counsel for all the parties and perused the material on record. The learned counsel for the petitioner vehemently contended that the statutory scheme of OTS notified under G.O.Ms.No.4, dated 27.2.2003, cannot be superseded or modified by a mere executive order of the Government dated 22.01.2005 and therefore the impugned memo is illegal and ultra vires the powers of the Government. It is also contended that the impugned memo has been introduced in a mala fide manner in order to protect the big defaulters and it is nothing but colourable exercise of power by the respondents 1 and 2 at the cost of the depositors. While pointing out that whereas under the original scheme the rate of interest from the date of the loan was provided at 18% simple interest and they will be charged with 15% compounding interest from the date of the scheme, as per the modified scheme 18% interest to be charged from the date of the loan to 31.03.2000 and thereafter 11% simple interest from 1.4.2000 till the date of repayment, the learned counsel contended that the terms offered to the borrowers under the impugned memo by way of modification are totally at variance from the terms provided in the statutory scheme. The said contentions are refuted by the learned counsel appearing for the 3rd respondent Bank as well as the learned counsel for the RBI contending that the modification to the OTS scheme which was affected following due process of law cannot be held to be bad or illegal on any ground whatsoever. As noticed above, the 3rd respondent Bank is a Bank registered as Co-operative Society under the A.P. Co-operative Societies Act, 1964. The said Bank is also included in the second schedule of RBI Act, 1934. In the year 2002 having observed that the 3rd respondent Bank was facing severe liquidity problem, the Reserve Bank of India in exercise of the powers conferred under Section 21 read with Section 35-A and Section 56 of the Banking Regulation Act, 1949, by order dated 25.02.2002 directed the 3rd respondent not to grant/renew any loans and not to make any investments and not to accept fresh deposits without the prior approval of the RBI. That apart, in exercise of the powers conferred under Section 115-B of the A.P. Co-operative Societies Act, 1964, the Reserve Bank of India by letter dated 27.02.2002 directed supersession of the Board of Directors of the 3rd respondent Bank. Pursuant thereto, vide proceedings of the Registrar of Co-operative Societies dated 2.3.2002 the elected Board of Directors was superseded and an Administrator and Person-in-Charge was appointed to manage the affairs of the 3rd respondent Bank for a period of one year. In the meanwhile, the RBI by letter dated 31.10.2001 issued guidelines to all the State Governments relating to the settlements to be entered with the borrowers with regard to Non Performing Assets of Co- operative Banks. The said guidelines were revised by the RBI by letter dated 12.2.2003 requesting the State Governments to consider and issue necessary notifications/administrative orders under respective Co- operative Societies Acts. In the light of the above orders issued by the RBI, the Government of A.P. in exercise of powers conferred under Section 115-B (i) of the A.P. Co-operative Societies Act, 1964 and with the previous sanction of the RBI, issued G.O.Ms.No.4, dated 27.2.2003 notifying a scheme of reconstruction of the 3rd respondent Bank which came into force w.e.f. 3.3.2003. As could be seen from the counter-affidavit of RBI, in view of the scheme notified under G.O.Ms.No.4, dated 27.2.2003, the RBI revoked the earlier prohibitory order dated 25.2.2002. It is also not in dispute that in terms of Clause 7 of G.O.Ms.No.4, dated 27.2.2003 a Committee was constituted for managing the affairs of the 3rd respondent Bank and the RBI was holding quarterly review meetings to monitor its affairs. During such inspections, it was observed that there was no improvement in the financial position and therefore the RBI by letter dated 9.8.2004 requested the State Government to amend the scheme so as to prohibit the 3rd respondent Bank from accepting any fresh deposits. Accordingly, the State Government vide G.O.Ms.No.226, dated 2.9.2004 amended the scheme notified under G.O.Ms.No.4, dated 27.2.2003 by adding Clause 9 as under : “The bank is prohibited from accepting fresh deposits.” The material on record further shows that a separate Committee was constituted by the State Government vide G.O.Rt.No.1248/A & C Department, dated 23.11.2004 to advise the Government on modification of the existing OTS Scheme in order to improve the recovery of dues and to protect the interest of depositors of the 3rd respondent Bank. The said Committee after holding series of meetings and discussions with the depositors and borrowers made certain recommendations. Having examined the same, the Government issued a Memo dated 22.01.2005 accepting the recommendations made by the Committee with certain modifications. Since the 3rd respondent Bank is covered under the Reconstruction Package of the Reserve Bank of India, the Government requested the Chairman of the 3rd respondent Bank to send necessary proposals through the Registrar of Co-operative Societies and to get the modifications approved by the Reserve Bank of India. Accordingly, the Registrar of Co-operative Societies by letter dated 24.01.2005 sought the approval of the Reserve Bank of India. In response to the same, the Reserve Bank of India addressed a letter dated 2.6.2005 to the Registrar of Co-operative Societies which runs as under : “Please refer to your letter RC.No.28260/00 U.B.V. dated January 24, 2005 on the captioned subject. In this connection, we advise that RBI have has no objection to the proposed modification to the existing OTS Scheme subject to compliance with Section 20A of the Banking Regulation Act, 1949 (AACS). It is observed that the existing and the proposed OTS Scheme does not contain the exclusion clause in respect of advances granted to the directors, past and present, any firm or company, in which any of the directors is interested as director, partner, managing agent or guarantor and to an individual. If any of the directors is his partner or guarantor, where the remission of debt requires prior approval of RBI, under Section 20A of the Act, ibid. We, therefore, request you to make the requisite modifications in the Scheme to make it in applicable to such loans and advances so as to make the Scheme complaint with Section 20A of the Act, ibid. Further, the effective date for implementation of the proposed OTS Scheme may have to be modified as the date has lapsed. However, the date of crystallization and the repayment period under various options as proposed may be retained. At that stage, the present writ petition has been filed by the Depositors’ Association of the 3rd respondent Bank to set aside the memo dated 22.1.2005 issued by the Government of A.P. As noticed above, it is primarily contended on behalf of the petitioner that the statutory scheme of OTS notified under G.O.Ms.No.4, dated 27.2.2003 cannot be superseded or modified by the Government Memo dated 22.1.2005, which is nothing but an executive order. Secondly, it is contended that the terms offered to the borrowers under the impugned memo dated 22.1.2005 by way of modification of OTS Scheme which are totally at variance from the terms provided in the statutory scheme of G.O.Ms.No.4, dated 27.2.2003 would be defeating the rights of the depositors and therefore the same cannot be allowed to be implemented. So far as the first contention is concerned, admittedly the OTS Scheme notified under G.O.Ms.No.4, dated 27.2.2003 was made in exercise of the powers conferred on the Government under Section 115- B(i) of the A.P. Co-operative Societies Act, 1964. There can be no dispute that the Government can amend such scheme in exercise of the very same powers conferred under Section 115-B(i) of the Act. As a matter of fact, the petitioner has not disputed the competence of the Government, but it is contended that the impugned memo dated 22.01.2005 being a mere executive order cannot supersede or modify the statutory scheme. It is also contended that the modification, if any, can be only by way of a notification. For proper appreciation of the above contention, it is necessary to refer to Section 115-B (i) of the Act which runs as under : 115-B. Special Provisions applicable to eligible Co- operative Banks:- Notwithstanding anything in this Act, the following provisions shall apply to an eligible co- operative bank, namely:-- (i) an order for the winding up, or an order sanctioning a scheme of compromise or arrangement or of amalgamation or reconstruction, of the bank may be made under the provisions of this Act only with the previous sanction in writing of the Reserve Bank. On a plain reading of the above provision, it is clear that what is required is the previous sanction of the Reserve Bank of India in writing. No other provision could be pointed out to substantiate the contention that the scheme made in exercise of the power conferred under Section 115-B of the Act cannot be enforced unless it is made by way of a notification. In the instant case, under the impugned memo dated 22.1.2005 the recommendations made by the Committee constituted under G.O.Rt.No.1248, dated 23.11.2004 were accepted by the Government and thereafter the proposals were sent for the approval of the Reserve Bank of India through the Registrar of Co-operative Societies. The letter dated 2.6.2005 addressed by the Reserve Bank of India to the Registrar of Co-operative Societies further makes it clear that the RBI expressed that it had no objection to the proposed modification subject to compliance with Section 20-A of the Banking Regulation Act, 1949 which prohibits the remission of certain debts due to the Bank except with the prior approval of the Reserve Bank of India. Accordingly, the RBI asked the 3rd respondent Bank to make the proposed modification inapplicable to certain loans and advances such as advances granted to the Directors, past and present, and etc. The Reserve Bank of India also proposed modification of the effective date for implementation of the proposed OTS Scheme. In the counter-affidavit filed on behalf of the respondents 1 and 2, it is stated that in compliance with the suggestions made by the Reserve Bank of India in its letter dated 2.6.2005, the Registrar of Co- operative Societies issued the proceedings dated 16.6.2005 communicating the OTS Scheme to the Managing Director of the 3rd respondent Bank to take the necessary steps by specifically mentioning as under : “The Scheme is not applicable to the loans and advances granted to Directors, past and present, any firm or company, in which any of the Directors is interested as director, partner, managing agent or guarantor and to an individual, if any of the directors is his partner or guarantor.” The said fact has not been controverted by the writ petitioner. It is also relevant to note that the entire correspondence between the respondent No.2 and the Reserve Bank of India if read together shows that the modification to the existing scheme was accepted at all levels after careful examination of various issues and ultimately the sanction of RBI as required under Section 115-B (i) was granted by letter dated 2.6.2005 subject to compliance with Section 20-A of the Banking Regulation Act, 1949. In compliance with the directions of the RBI, it was specifically mentioned by the 3rd respondent in his proceedings dated 16.6.2005 making the scheme inapplicable to certain loans and advances such as advances granted to the Directors, past and present of the Bank and etc. The expression “previous sanction” in Section 115-B (i) of the Act includes a general approval to the terms and conditions of the scheme and when once it is established that such sanction is granted by the RBI on application of mind to the contents of the scheme and proposing certain modifications, I am of the opinion that the requirements specified under Section 115-B(i) are fully satisfied. Hence the modification to the OTS scheme under G.O.Ms.No.4, dated 27.02.2003, cannot be held to be contrary to law. So far as the next contention that the terms of the modification scheme are in complete variation to the terms of the original scheme is concerned, it is relevant to refer to Clause-5 of G.O.Ms.No.4, dated 27.2.2003 relating to Collection of Advances as under : 5. Collection of Advances : (a) The bank will re-calculate simple interest on all loan accounts, from the date of disbursement to the date of reconstruction @ 18% p.a. simple and arrive at the crystallized amount of overdue principal and interest after adjusting the repayments made by the borrower till date. (b) Those borrowers, who opt for OTS and settle the account by paying the entire crystallized amount in one lumpsum during the currency of OTS scheme by given a further rebate of 25% on the interest component in the crystallized amount. (c) Those who pay 20% upfront and balance 80% of the crystallized amount due in account with a period of 6 months will get a further rebate of 10% on the interest component payable by them. (d) The borrowers not availing the above mentioned 2 options will have their accounts rescheduled to be payable in 35 monthly installments which will carry interest @ 15% p.a. (e) … … … … … … …. (f) … … … … … … …. (g) … … … … … … …. (h) … … … … … … …. The modified terms as approved by the Reserve Bank of India by its letter dated 2.6.2005 are as under: