*THE HONOURABLE SRI JUSTICE P.S.NARAYANA +WRIT PETITION NO. 7869 of 2006 % .01.2008 Between: # M/s. Siddhi Vinayaka Hotels P Limited D.No. 11-9-5, Kothapet X Roads, Saroornagar, R.R. District, represented by its Director, Smt.S. Madhavi, W/o Sri S. Ganesh Reddy .. PETITIONERS versus The Central Bank of India, Khairatabd Branch Near Meera Theatre, Hyderabad 500 004 represented by its Branch Manager. And one another. .. RESPONDENTS !Counsel for Petitioners: Sri T.V.L.Narasimha Rao ^Counsel for the Respondent No.1: Sri Vasudeva Rao. ^Counsel for the Respondent No.2: Sri M.P.Ugle. <Gist : >Head Note: ?Cases Referred: 1. WP No.2528 of 2006, dated 14.2.2006 (Madras High Court) THE HON’BLE SRI JUSTICE P.S.NARAYANA WRIT PETITION NO. 7869 OF 2006 BETWEEN: M/s Siddhi Vinayaka Hotels (P) Limited ------ PETITIONER AND The Central Bank of India, Khairatabad Branch and one another. ----- RESPONDENTS THE HON’BLE SRI JUSTICE P.S.NARAYANA WRIT PETITION NO. 7869 OF 2006 ORAL ORDER: 1. This Court issued Rule Nisi on 20.4.2006. 2. The present Writ Petition is filed for Writ of Mandamus declaring the impugned letter vide ref. No. VLB:KHAIRA:RECY: 5.6.81 dated 27.3.2006 issued by the first respondent-Bank to the petitioner as violative of Mandatory Guidelines under OTS 2005 of the second respondent as also illegal, discriminatory, indiscrete, vague and contrary to Sections 21 and 35 A of the Banking Regulation Act, 1949 and also in violation of fundamental rights guaranteed under Articles 14 and 21 of the Constitution of India and consequently direct the first respondent Bank to receive amount as per OTS-2005 Scheme from the petitioner for full and final settlement of their dues and pass such other order or further orders as this Hon’ble Court may deem fit and proper in the circumstances of the case. 3. Heard Sri T.V.L.Narasimha Rao, learned counsel representing the Writ Petitioner, Sri Vasudeva Rao, learned counsel representing the first respondent and Sri M.P. Ugle, learned counsel representing the second respondent. 4. The counsel representing the petitioner had taken this Court through Sections 21 and 35-A of the Banking Regulation Act, 1949 (for short ‘the Regulations’) and also the guidelines relating to the OTS Scheme and would maintain that in the light of the aforesaid provisions and also the doctrine of ‘legitimate expectation’, the Writ Petitioner is entitled to the relief as prayed for in the present Writ Petition. The counsel also, while making elaborate submissions, had taken this Court through the specific grounds raised in the affidavit filed in support of the Writ Petition and the stand taken in the counter affidavit. 5. On the contrary, the counsel representing the second respondent had taken this Court through the stand taken in the counter affidavit and would maintain that the Writ Petition itself is not maintainable, and even otherwise, the guidelines are not in force and hence this Court cannot issue any positive directions, much less a Writ of Mandamus. 6. Heard the counsel and perused the contents of the affidavit filed in support of the Writ Petition, the counter affidavit and the material papers produced before this Court. 7. It is stated that the first respondent is a statutory corporation constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (for short hereinafter referred to as “the Act”), having its Head Office at Mumbai and one of its branches at Khairatabad, Hyderabad for carrying on banking business as licensed under the Banking Regulation Act, 1949. Hence, the first respondent is an ‘instrumentality of State’ in terms of Article 12 of the Constitution of India. 8. It is further averred that the second respondent is a Statutory Corporation constituted under the RBI Act for the purpose of taking over the Management of the currency from the Central Government and of carrying on the business of Banking besides being the licensing, controlling and monitoring authority of commercial and cooperative banking outfits and their business. Its entire capital is owned and held by the Government of India and thus it is an instrumentality of State in terms of Article 12 of the Constitution of India. 9. Further, the petitioner is a private limited company incorporated under the Indian Companies Act, having its registered office at Hyderabad and is engaged in the activity of Hotel and Restaurant business. 10. It is further averred that the petitioner company grounded its unit on a leased land and commenced its business on 19.8.2001 after investing its margin money to the tune of Rs. 25 lakhs followed by the term loan of Rs. 54 lakhs and cash credit of Rs. 10 lakhs extended by the second respondent bank. It is also averred that the petitioner failed to take off financially due to various external and internal factors, which are beyond the control and comprehension of the petitioner. 11. Further, it is averred that the petitioner could not arrange liquidation of their assets due to distressed price offers in the wake of nagging of separate Telangana State issue. The first respondent Bank issued demand notice on 6.8.2002 to the petitioner and others under Section 13(2) of the Securitization Act, 2002 calling upon the petitioner and others to pay an amount of Rs. 69,68,933.67 ps. within 60 days. Thereafter, the first respondent-Bank issued possession notice dated 22.9.2003 under Section 13(4) of the Securitization Act r/w Rule 8(1) of the Securitization Rules. 12. It is averred that the first respondent-Bank thereafter had restrained from further measures under the Securitization Act and chose to file its claim against the petitioner and others on 25.3.2004 vide O.A.No. 83/2004, on the file of Debts Recovery Tribunal, Hyderabad making a claim of Rs. 83,94,317.24. The O.A. proceedings are at the stage of cross-examination of first respondent Bank’s witness (A.W-1) and the matter was posted to 4.5.2006. 13. Further, it is averred that the Accounts of Cash Credit and the Term Loan of the petitioner were categorized as NPAs as on 31.3.2003 and correspondingly, they have become ‘doubtful assets’ as on 31.3.2004. However, the first respondent bank did not reverse on 31.3.2003 the interest of Rs. 2,43,382/- applied to the term loan account for the quarter ending September 2002 which would have put the notional outstanding balance in the NPA term loan account of the petitioner as on 31.3.2003 at Rs. 57,06,754.08. It is further averred that as per RBI Guidelines, when one of the Credit Facilities of the Borrower is categorized as NPA, then the other credit facilities of the same borrower shall have to be categorized as NPA irrespective of their status of operation. Hence, the cash credit account of the petitioner is deemed to have become NPA as on 31.3.2003 along with the term loan account of the petitioner. 14. It is further averred that the first respondent-Bank, ignoring the guidelines of the RBI on prudential norms, debited the petitioner’s cash credit account towards interest for the months from July 2002 to February 2004 aggregating to Rs. 2,72,166/-. Thus, the notional outstanding balance in the NPA cash credit account of the petitioner as on 31.3.2004 would have been at Rs. 7,47,043.16. 15. Further, the second respondent issued guidelines on One Time Settlement Scheme for SME Accounts vide its letter Ref. No. RPCD. PLNFS. BC. No. 39 /06.02.31 /2005-06 dated 3.9.2005 which are mandatory, non-discretionary and non-discriminatory and hence shall have to be implemented by the public sector banks uniformly including the first respondent-bank. Further it is averred that the term loan and the cash credit account of the petitioner are entitled to be covered under the OTS- 2005 Scheme of the second respondent as the said accounts are ‘doubtful assets’ as on 31.3.2004. 16. It is also averred that the aggregate of the notional outstanding balances of the term loan account and the cash credit account of the petitioner should be Rs. 64,53,797.24, therefore, the petitioner is entitled to pay under OTS-2005 an amount of Rs. 64,53,797.24 together with an interest at PLR on Rs. 64,53,797.24 chargeable from 1.4.2004 till total repayment of the entitled amount for full and final settlement of its dues. The first respondent- Bank is bound to send letters to the eligible borrowers and their guarantors in respect of OTS-2005. However, it did not send any such letter to the petitioner or its guarantors. It is further submitted that the petitioner, in the absence of proper information, made an application to the first respondent-Bank on 12.8.2005 offering an amount of Rs. 64.00 lakhs towards full and final settlement of dues payable by the petitioner. At the behest and inexplicable reasoning of the first respondent-Bank, the petitioner gave another letter on 22.8.2005 offering an enhanced amount of Rs. 71.00 lakhs towards full and final settlement of dues payable by the petitioner. The petitioner considered the enhanced offer towards interest chargeable w.e.f 1.4.2004. 17. It is further averred that the first respondent-Bank sent a rejection letter to the petitioner, seeking improvement in the offer from Rs. 82 lakhs to Rs. 85 lakhs in addition to Commission payable to Recovery Agents, vide its letter No. VLB:KHAIRA:RECY: 2005:06 dated 24.8.2005. The said letter is vague and discriminatory. Further, the claim of the bank seeking payment from the borrowers towards the commission paid by them to recovery agents, which is unheard of in the Banking history and this is in variance of debt contractual terms and the same is illegal. It is submitted that the petitioner gave another offer letter on 3.9.2005 offering an enhanced amount of Rs. 73.00 lakhs towards full and final settlement of dues payable by the petitioner. 18. It is further submitted that the petitioner paid a sum of Rs. 12.50 lakhs comprising Rs. 7.50 lakhs on 5.11.2005, to the first respondent-Bank as a gesture of showing bonafides vide D.D.No. 623816 drawn on Andhra Bank, Kothapeta Branch and another sum of Rs. 5.00 lakhs on 5.12.2005 vide D.D.No. 624335 drawn on Andhra Bank, Kothapeta Branch towards their Claim against the petitioner, and the first respondent-Bank did not respond to the bonafide efforts of the petitioner for the settlement of its dues. 19. It is further averred that an Advocate Commissioner was appointed by the Chief Metropolitan Magistrate, Cyberabad through an ex-parte order dated 28.7.2005 under Section 14 of the Securitization Act, 2002 in Criminal M.P.No. 125 of 2005 and he visited the premises of the petitioner on 2.12.2005 and instructed the petitioner to give vacant possession of the petition schedule immovable property by 12.12.2005, failing which he would be constrained to effect the locked custody of the petition schedule immovable properties to the second respondent-bank through the help of the police after 12.12.2005. The petitioner thereafter, filed W.P.No. 26663 of 2005 challenging the Constitutional validity of Section 14 of the Securitization Act, 2002 as also the consequential ex-parte Order dated 28.7.2005 appointing the Advocate Commissioner to take possession of the notice scheduled property. It is also further submitted that this Court passed an order on 3.1.2006 in W.P.No. 26663 of 2005, which reads as under: “Without going into the controversy regarding the actual amount payable by the petitioners to the Bank, we deem it proper to settle the equities by passing the following order: 1. the petitioners shall, on or before 30th January, 2006, pay a sum of R. 50,00,000/- (Rupees Fifty Lakhs only) to the Bank; 2. The petitioners shall pay the balance amount in three equated instalments on 28.2.2006, 31.3.2006 and 30.4.2006; 3. If the petitioners cannot default in paying either of the instalments, the Bank shall be free to take possession of the property in accordance with law; 4. If the petitioners pay the first instalment by 31.1.2006 but commits default in payment of the remaining instalments, then, on this fact being brought to the notice of the Court, the Writ Petition shall be liable to be dismissed; and 5. If the petitioners pay the entire amount by 30.4.2006, the Bank shall not implement the notice issued under Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Put up n February 13, 2006 to find out whether or not the petitioners have paid the first instalment in terms of direction No. 1” 20. It is also averred that the petitioner paid Rs. 50 lakhs on 31.1.2006 in terms of direction No. 1 of the above Order by way of D.D.No. 625367 dated 3.1.2006 drawn on Andhra Bank, Kothapet Branch, Hyderabad. Further, the petitioner paid Rs. 17 lakhs on 2.3.2006 in terms of the second direction of the above order by way D.D.No. 625989 dated 28.2.2008 pending crystallization of actual balance dues. 21. Further, it is averred that the account of the petitioner is entitled not only for reduced rate of interest on its borrowing account in the wake of floating interest rate system prevailing in the commercial banks, but also for OTS-2005, which enables them to pay crystallized balance as on 31.3.2004 added with few lakhs, of rupees towards interest and the same could be around Rs. 80 lakhs. 22. It is further averred that the petitioner paid a total sum of Rs. 79.50 lakhs since 5.11.2005 out of the entitled amount in terms of OTS-2005 being Rs. 64,53,797.24 together with an interest at PLR on Rs. 64,53,797.24 chargeable from 1.4.2004 till total repayment of the entitled amount for full and final settlement of its dues. Further, the petitioner visited the Bank several times for details of respective changes in the interest rates applicable to the term loan account and the cash credit account of the petitioner since 29.5.2001 and also for ‘Calculation Schedule’. However, the officials of the first respondent-bank did not entertain the petitioner with the required details. Therefore, the petitioner gave a letter to the first respondent-Bank on 31.1.2006 seeking to settle the account under OTS-2005 at Rs. 85.00 lakhs as sought by the bank in its letter dated 24.8.2005 in the absence of details not furnished by the first respondent- Bank. The first respondent-bank sent a reply to the aforesaid letter dated 31.1.2006 stating that the offer of the petitioner to settle the accounts for Rs. 85 lakhs was not acceptable to them and the petitioner was supposed to pay Rs. 51,78,783/- over and above Rs. 62.50 lakhs paid up to 31.1.2006 aggregating to Rs. 1,14,28,783/- vide their letter No. VLB:KHAIRA:RECY: 05.6.60 dated 13.2.2006. In fact, the first respondent’s claim under O.A.No. 83 of 2004, on the file of the Debts Recovery Tribunal, Hyderabad was Rs. 83.94 lakhs as on 31.3.2004 i.e., as on the date it was classified as ‘doubtful asset’. Therefore, the petitioner wrote a letter to the first respondent-Bank on 28.2.2006 disputing the claim of the first respondent- bank in the wake of its entitlement of benefit under OTS-2005. This has forced the petitioner apply to the first respondent-Bank for the required details invoking the provisions of the Right to Information Act, 2002 on 20.3.2006 for which the first respondent bank did not react till today. The first respondent-Bank sent a reply to the petitioner’s letter dated 28.2.2006 stating that it is not bound by OTS-2005 of the second respondent vide their letter ref. No. VLB:KHAIRA:RECY: 5.6:81 dated 27.3.2006. 23. It is also stated that the petitioner needed some breathing time in respect of order of this Court dated 3.1.2006 in W.P.No. 26663 of 2005 to enable them to settle their dues with the first respondent-Bank under the entitled OTS-2005 Scheme of the second respondent. Hence, the petitioner filed the present Writ Petition raising certain grounds. 24. In the counter affidavit filed by the second respondent preliminary objections had been taken regarding maintainability of the Writ Petition. It is averred that the Reserve Bank of India (the Bank), is a body corporate constituted under Section 3 of the Reserve Bank of India Act, 1934 to regulate the issue of Bank notes and keeping the reserves with a view to securing monetary stability in India and to operate the currency and credit system of the country to its advantage. The Bank is the sole note-issuing authority. Bank Notes issued by the Bank are legal under Sections 22 and 39 of the Reserve Bank of India Act. The Bank regulates and controls the money supply in the country. The Bank also acts as statutory banker to the Government of India and all State Governments and also manages their public debts. The Bank regulates and supervises commercial banks and cooperative banks in the country. The Bank exercises various powers and discharge various statutory functions under Foreign Exchange Management Act, 1999, Banking Regulation Act, 1949, Reserve Bank of India Act, 1934 etc. 25. It is also stated that the Bank issued guidelines dated 3rd September 2005 in exercise of the powers conferred under Section 36 of the Banking Regulation Act, 1949 to Public Sector Banks at the request of Government of India. 26. Further, it is stated that the public sector banks are governed by statues constituting them like, State Bank of India Act, 1955, State Bank of India (Subsidiary Banks) Act, 1959, Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980. Board of Directors of public sector banks are appointed by Central Government in consultation with Reserve Bank. Public Sector Banks constitute a different and distinct class by themselves. In terms of section 18 of State Bank of India Act, 1955 and section 8 of Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980, SBI, its subsidiary banks and other Nationalized Banks are governed by the directions issued by the Central Government in consultation with Governor, Reserve Bank of India. 27. The Government of India, Ministry of Finance prepared a policy package for stepping up credit to Small and Medium Enterprises (SMEs) and placed the same before the Parliament on 10 August 2005. The Government forwarded the policy paper vide letter dated 11 August 2005 to Reserve Bank of India and other pubic sector banks requesting therein to take all necessary steps to follow the policy in letter and spirit. The policy paper in paragraph 5 provided inter alia, as under: “One time settlement scheme to apply to small scale NPAs account in the books of the bank as on March 31, 2004 will be introduced. The scheme will be in force up to March 31, 2006.” 28. It is further averred that as required by the Government of India, the Reserve Bank vide letter RPCD PLNF.BC.No. 31/06.2.31/20 dated 19th August 2005 issued the policy package for stepping up credit to SMEs to Chairman/Managing Director of all public sector banks. As the policy was placed by the Government before the Parliament and was addressed to public sector banks, the same was considered for issuance to public sector banks. One time settlement scheme was formulated by the Reserve Bank on the basis of statement made by the Hon’ble Finance Minister before the Parliament on 10.08.2005 in the policy paper submitted for stepping up credit to SMEs and the Reserve Bank issued guidelines on one time settlement scheme for SME account vide RPCD.PLNFS.BC.No. 39/06.2.31/2005-06 dated 3rd September 2005. Para 4 of the said guidelines specifically provide that any deviation from the above settlement guidelines for any borrower shall be made only by the Board of Directors. These guidelines have not been issued under Section 35-A of the Banking Regulation Act, 1949, therefore, they are only directory in nature and each bank has to apply its decision in individual cases. 29. Respondents rely on the decision of the Supreme Court in JOSEPH KURUVILLA VS. RESERVE BANK OF INDIA REPORTED IN AIR 1962 SC PAGE 1371, which is popularly known as Palai Central Bank case. In paragraph 45 of the judgment, the Supreme Court has observed, inter alia, as under: “ In view of the history of the establishment of the Reserve Bank as a central bank for India, its position as a Bankers’ Bank, its control over banking companies and banking in India, its position as the issuing bank, its power to license banking companies and cancel their licenses and the numerous other powers, it is unanswerable that between the Court and the Reserve Bank, the momentous decision to wind up a tottering or unsafe banking company in the interest of the depositors, may reasonably be left to the Reserve Bank. No doubt, the Court can also, given the time, perform this task. But the decision has to be taken without delay, and the Reserve Bank already knows intimately the affairs of banking companies and has had access to their books and accounts. If the Court were called upon to take immediate action, it would almost always be guided by the opinion of the Reserve Bank. It would be impossible for the Court to reach a conclusion unguided by the Reserve Bank if immediate action was demanded. But the law which gives the same position to the opinion of the Reserve Bank is challenged as unreasonable. In our opinion, such a challenge has no force.” 30. The Supreme Court of India in Peerless General Finance and Investment Co. Ltd, and another Vs. Reserve Bank of India reported in Judgments Today 1991 (1) S.C. 2405: (1992) 2 SCC 343, has observed as under: “Reserve Bank of India which is banker’s bank is a creature of Stature. It has large contingent of expect advise relating to the matters affecting the economy of entire country and nobody can doubt the bonafides of the Reserve Bank, in issuing the impugned directions of 1987. The Reserve Bank plays an important role in the economy and financial affairs of India and one of its important functions is to regulate banking system in the country.” The Supreme Court further observed as under: “Courts are not to interfere with economic policy, which is the function of experts. It is not the function of the courts to sit in judgment over the matters of economic policies and it must necessarily be left to the expert bodies.” 31. Karnataka High Court in E. Sathyanarayana V. RBI (Karn.) reported in (2002) 112 Company Cases 272 while considering the guidelines issued by Reserve Bank of India on 27 May 1999 for constitution of Settlement Advisory Committees and guidelines for settlement of debts due to nationalized banks observed on page 276 as under: “Section 21 of the Act referred above contemplates, that if the RBI is satisfied that it is necessary or expedient for it in public interest or in the interest of depositors or banking policy to it and to determine the policy in relation to the advance of loans to the persons to be followed by the baking companies in particular and when the policy has been determined all banking companies as the case may be shall be bound to follow the policy to be determined. By perusing the guidelines mentioned in the circular issued by the Chief Manager of RBI, it is not mentioned as to whether the RBI is satisfied and found that it is expedient in public interest or in the interest of depositors or in the interest of the banking policy to accept the said guidelines issued by the Chief General Manager. By reading the entire dou7cment of the circular produced by the petitioners and the so called guidelines purported to have been issued by the RBI it is clear that the petitioners have not shown that the said guidelines have been issued by the RBI as defined under the Reserve Bank of India Act of 1934, except contending that the Chief General Manager of RBI, who is competent authority under the provisions of the Act has issued the circular. Even in the said circular, it is not disclosed that the same has been issued by him either in the interest of the public or the depositors or the banking policy. In this view of the matter, this court has to record a finding and hold that the guidelines contained in the circular referred to above upon which much relevance is placed upon by the petitioners counsel placing reliance upon the judgments of the apex court, this Court and Andhra Pradesh High Court are not the guidelines issued