*THE HON’BLE SRI JUSTICE C.V. NAGARJUNA REDDY +WRIT PETITION No.29959 of 1995 %Dated 25-07-2007 #B.Srinivasa Rao … Petitioner VERSUS $The Andhra Bank Central Office, rep by Chairman & Managing Director, Hyderabad And others … Respondents ! Counsel for Petitioner : Sri W.B.Srinivas ^Counsel for Respondents: Sri S.Udaychala Rao. <GIST: > HEAD NOTE: ? Cases referred 1. AIR 1963 SC 1723 2. AIR 1975 SC 2151 3. AIR 1976 SC 1080 4. AIR 1983 SC 1102 5. (1996) 6 SCC 750 6. (2000) 1 SCC 416 7. AIR 1997 SC 1030 8. (2006) 2 SCC 584 9. (1994) 6 SCC 651 THE HON’BLE SRI JUSTICE C.V. NAGARJUNA REDDY WRIT PETITION No.29959 of 1995 Dated: .07.2007 Between: B.Srinivasa Rao … Petitioner AND The Andhra Bank Central Office, rep by Chairman & Managing Director, Hyderabad And others … Respondents THE HON’BLE SRI JUSTICE C.V.NAGARJUNA REDDY WRIT PETITION No.29959 of 1995 ORDER:- This writ petition is filed for a writ of certiorari to quash the proceedings contained in letter No.666/ED/Sctt/42 dated 2.12.1994 of the Executive Director, Andhra Bank (for short ‘The Bank’) and the letter dated 15.4.1995 of the Chairman and Managing Director of the Bank and for a consequential direction to the respondents to treat the petitioner to be continued in services of the Bank as its General Manager with all consequential benefits. The facts that are necessary for the disposal of the writ petition are narrated hereunder: The petitioner joined respondent No.1 - Bank as Assistant General Manager before it was nationalized. Respondent No.1 -Bank was nationalized in the year 1980 and at the relevant point of time the petitioner was working as the General Manager of the Bank. With a view to extend the Bank’s activities to housing and merchant banking and financial services, like other nationalized banks such as Canara Bank, State Bank of India, Bank of India etc., the petitioner established two subsidiary companies; one for merchant banking, housing and financial services and the other for allied activities. This writ petition is concerned with one of the two subsidiary companies namely; Andhra Bank Financial Services Limited (for short ‘ABFSL’). It was constituted on 25.2.1991. The Reserve Bank of India conveyed its No Objection vide its letter dated 6.12.1990 for setting up a wholly owned merchant banking subsidiary for undertaking equipment leasing, hire purchasing, merchant banking and activities incidental thereto. The said letter contains certain conditions which include a condition that the ABFSL shall not undertake activities other than those mentioned in part-II without RBI’s prior approval. In the annexure to the said approval it was clearly mentioned that ABFSL shall not carry out any other business under Section 1(a) to (o) of the Banking Regulation Act 1949 without prior approval of the RBI. The Department of Economic Affairs (Banking Division), Ministry of Finance, Government of India also gave its approval for setting up of the financial subsidiary of the Bank through its letter dated 17.1.1991 wherein it was stipulated that the Bank shall ensure that the Subsidiary follows the guidelines given by the RBI and that it will not undertake any business other than that is permitted by the RBI without seeking prior approval of the RBI. On the eve of promotion of two executives of the Bank as General Managers, the Bank has issued an office order whereby work was distributed among the five General Managers including the petitioner. The work that was entrusted to the petitioner reads “Legal, Financial Subsidiary & Housing Subsidiary”. On the appointment of the Managing Director, the Board of Directors of ABFSL issued an office order on 27.8.1991 wherein he was delegated with full power of purchase and sale of Central, State, other securities, shares, bonds for deployment of short term funds. The petitioner signed three security receipts (marked as Exs.S- 18, S-19, S-20) on 31.10.1991, 2.11.1991 and 29.10.1991 respectively in respect of securities concerning Fair Growth Financial Services Limited (for short ‘FGFSL’) issued to M/s.Krishak Bharati Cooperative Limited (Kribhco). It is in respect of these three transactions that disciplinary proceedings were initiated against the petitioner. On 29.3.1993, Sri A.T.Akolkar, Executive Director of the Bank issued charge sheet against the petitioner which comprises five charges and they read as under: “ 1.You have not ensured that funds of Andhra Bank Financial Services Limited were deployed only against physicals/Banker’s Receipts. Instead, large funds were deployed against “Security Receipts” which have no legal backing. This fact was within your knowledge since you have signed the following security Receipts issued by Andhra Bank Financial Services Limited to M/s.Krishak Bharati Checking officials-operative Limited without satisfying yourself that Andhra Bank Financial Services Limited was physically holding the said securities. i) Security Receipt dated 31.10.1991 towards amount of Rs.10.00 crores received being the cost of 74,34,944 units of UTI of face value of Rs.10/- at the rate of Rs.13.45. ii) Security Receipt dated 2.11.1991 towards amount of Rs.2.00 crores received being the cost of 14,86,989 units of UTI of face value of Rs.10/- at rate of Rs.13.45. iii) Security Receipt issued towards amount of Rs.8.00 crores received being the cost of 7,40,000/- -9% IRFC Bonds of face value of Rs.100/- at the rate of Rs.99.2356 + interest from 1.10.1991. 2) You have put up an undated note to the Chairman among others for posting of staff to Andhra Bank Financial services Limited, wherein you have mentioned as “It may kindly be noted that Bangalore office has to be strong as we expect a good connection with fairgrowth”. Basing on the above note put up by you staff department had arranged for deputation of staff vide their office note dated 5.6.1991. Inspectors from reserve Bank of India, in the course of their inspection sometime during the month of September, 1992 have enquired as to how you were able to envisage good connection with Fairgrowth even before commencing of operations of the Andhra Bank Financial Services Limited. You have handed over on 14.9.1992, a copy of the letter dated 4.2.1991 addressed to the Chairman of Andhra Bank by Sri R.Lakshminarayana, Director, Fairgrowth Financial Services Limited with its enclosures containing proposals which are violative of the Reserve Bank of India guidelines. Fairgrowth Financial Services Limited in their aforesaid letter dated 4.2.1991 had made very clear their intention of using Andhra Bank/Andhra Bank Financial Servides Limited as conduit for receiving funds from Public Sector undertakings through the above mentioned letter, which fact was borneout by subsequent developments that most of the Public Sector undertakings, which kept their surplus funds with Andhra Bank Financial Services Limited either under intercorporate deposits or portfolio management services were not the customers of Andhra Bank. The funds so received were passed on to Fairgrowth Financial Services Limited against Security Receipts. Though you were aware that these transactions referred to in the letter of Fairgrowth Financial Services Limited are not in conformity with the guidelines/instructions given by Reserve Bank of India, you not only did not take any steps to prevent Andhra Bank Financial Services Limited from violating Reserve Bank of India guidelines but also failed to bring the facts to the notice of the Chairman and Managing Director of Andhra Bank and the Board of Andhra Bank Financial Services Limited/Andhra Bank. 3) The ready forward deals entered into by Andhra Bank Financial Services Limited with Fairgrowth Financial Services Limited and others were in contravention of Reserve Bank of India guidelines. Information provided to the Board on the Security transactions either seeking confirmation or for favour of information gives the false impression that these deals were outright purchases and sales and nowhere it was mentioned that they were ready forward deals. You were also aware of the fact that there was no physical delivery of securities at any time (until May 1991). Yet, when the security transactions were reported to the Board of Andhra Bank Financial Services Limited as outright purchase/sales, you failed to report to the Board that Andhra Bank Financial Services Limited was dealing with security receipts only and not with physicals/Banker’s receipts. 4) Vide Reserve Bank of India letter dated 6.12.1990, the bank was required to place before its Board at half- years intervals, as at the end of September, and March, a report on the activities of the subsidiary and business transacted by it and thereafter send the report to the Reserve Bank. As General Manager in charge of Financial subsidiaries you have failed to ensure that this instruction of Reserve Bank of India was complied with. 5) The following officers were deputed to M/s.Fairgrowth Financial Services Limited to be trained at a total cost of Rs.25,000/-. i. Sri M.Anand. ii. Sri T.Chacko iii. Sri S.Varadarajan You have not ensured that Andhra Bank Financial Services Limited derived the benefit of training received by them from M/s.Fairgrowth Financial Services Limited as is evident from the fact that no proper accounting system was evolved to be followed uniformly by all the branches of Andhra Bank Financial Services Limited and also no guidelines were framed and issued to the branches on the general functioning of the branches. Had you acted diligently and monitored the functioning of Andhra Bank Financial Services Limited properly as the general Manager, overseeing the financial subsidiary, Andhra Bank Financial Services Limited would not have been exposed to the possible huge financial loss as is the case now. “ In response to the charges, the petitioner sent his explanation dated 15.4.1993 wherein he denied the charges. As Sri A.T.Akolkar who issued the charge sheet retired on 31.3.1993, the day on which he has signed the charge sheet, the petitioner sent his explanation to the Chairman and Managing Director of the Bank which is the holding company of ABFSL. Not being satisfied with the explanation, the succeeding Executive Director Sri V.B.Taneja appointed Commissioner for Departmental Enquiries as enquiry officer on 11.10.1993. After holding the enquiry he submitted a report dated 5.9.1994 wherein he held the petitioner guilty of all the charges. The petitioner was given show cause notice by the Executive Director and after considering the explanation dated 9.11.1994 submitted by the petitioner, the Executive Director passed orders on 2.12.1994 whereby he imposed on the petitioner the major penalty of compulsory retirement, treating the entire period of suspension as on loss of pay and allowances. It was also directed in the said order that the suspension period shall not be treated as active service for the purpose of proposed pension scheme. The petitioner filed an appeal to the Chairman and Board of Directors of the Bank against the said order dated 2.12.1994 and the said appeal was dismissed by the appellate authority vide its order dated 15.4.1995. Feeling aggrieved by these two orders the present writ petition is filed. Heard Sri W.B.Srinivas, learned counsel for the petitioner and Sri S.Udayachala Rao, learned counsel representing the respondents. Learned counsel for the petitioner submitted that the very initiation of disciplinary proceedings by Sri A.T. Akolkar, the Executive Director of the Bank, was wholly void for the reason that being a Director on the Board of ABFSL, which had ratified the transactions in question, he cannot accuse the petitioner of being responsible for improper deployment of funds against the security receipts. The learned counsel also contended that the petitioner being one among many Directors, cannot be held responsible, in the absence of entrustment of the exclusive responsibility to him to deal with the security receipts. He further submitted that with the appointment of the Managing Director even before the transactions in question took place and in the face of the transactions having received the approval of the Board, there is no justification whatsoever to fix the responsibility on the petitioner. The learned counsel further contended that the charges framed against the petitioner are wholly baseless and that the findings of the enquiry officer, which were accepted by the disciplinary authority, are not based on any evidence and that the order of the appellate authority being cryptic and laconic, the penalty imposed on the petitioner is wholly illegal and liable to be set aside. Per contra, Sri S.Udayachala Rao submitted that the petitioner’s contention that he was not entrusted with the duty relating to acceptance of securities is incorrect in the face of the office order dated 11.05.1991 and that therefore the petitioner having been in exclusive charge of looking after the affairs of financial subsidy, cannot be allowed to disown the responsibility. Learned counsel further contended that the enquiry officer having examined the issue in detail after the full-fledged enquiry found the petitioner guilty of all the charges and the disciplinary authority having agreed with the said findings imposed punishment of compulsory retirement on the petitioner and that this Court, exercising the power of judicial review would not interfere with the punishment imposed on the petitioner. Having regard to the rival submissions, the point that arises for consideration is whether the findings of the enquiry officer are based on any legally acceptable evidence, to sustain and justify the penalty imposed on the petitioner. The gravamen of the charges against the petitioner is that he did not ensure that the funds of the ABFSL were deployed only against physicals/banker’s receipts and that large funds were deployed against security receipts, which have no legal backing. Before examining the issue whether charges against the petitioner are proved, it is necessary to understand the scope of the controversy. Though ABFSL was incorporated as an equipment leasing, hire purchase and Merchant Baking Company, right from the inception it indulged in sale and purchase of securities. It used to accept inter- corporate deposits from certain Governmental/Non-Governmental companies and invest such money in the sale and purchase of securities. (ABFSL was not permitted to carryon this business by the RBI vide its letter dated 6.12.1990, without obtaining prior permission from it) The whole controversy had evidently arisen when M/s.Kribhco deposited certain amounts with the ABFSL which in turn were used in the purchase of securities from FGFSL against the security receipts dated 01.10.1991, 31.10.1991 and 02.11.1991 without the actual verification as to whether the original documents constituting securities were physically received from FGFSL. The tenor of charges 1 to 4 suggests that the acceptance of security receipts without physical receipts is contrary to the guidelines issued by RBI, the petitioner played a lead role in FGFSL exploiting ABFSL in running the transactions, which are allegedly not in conformity with the guidelines/instructions given by RBI, the responsibility for the deployment of funds of M/s.Kribhco against the securities offered by FGFSL exclusively lay with the petitioner and that he failed to prevent the FGFSL from violating RBI guidelines apart from his failing to bring the facts to the notice of the Chairman and Managing Director of the Bank and the Board of ABFSL. The purport of charge No.5 is that the petitioner failed to ensure that the ABFSL has derived the benefit of the training of three employees of the ABFSL, namely; Sri M.Anand, Sri T. Chacko and Sri S. Varadarajan received from FGFSL. Charge No.1: For the sake of convenience, this charge can be divided into two parts. The first part relates to the petitioner’s responsibility qua the affairs of the ABFSL and the second part pertains to his issuing the three security receipts which are the subject matter of controversy. First Part of the Charge: In his explanation submitted to the charge sheet, the petitioner specifically pleaded as under: “Even otherwise, I respectfully submit that my substantive post is that of the General Manager of the Andhra Bank. ABFSL is an independent company incorporated under the provisions of the Companies Act. It has its own Articles of Association and Memorandum of Association. It has a set of Board of Directors of its own who are in-charge of framing policy guidelines for the company to undertake its transactions. It has got its own staff who will be looking after the day to day administration of the company. My job as a General Manager of Andhra Bank is an independent one and incidentally I am one of the Directors of ABFSL. In a general way, I was kept in-charge of the subsidiaries of the Andhra Bank and not that I am the whole and sole of the ABFSL. I am, therefore, a liason Director for ABFSL. I continued to discharge my primary duties as a General manager of the Andhra Bank. In this context, it is improper to make any allegations against me for every transaction or the affairs undertaken by ABFSL. ABFSL being an independent entity, its day to day affairs and administration being handled on its own, I am only one of the several Directors of the ABFSL, you would also kindly bear in mind, sir, that the CMD of Andhra bank is the Chairman of the Board of Directors of ABFSL as well, the then Executive Director of Andhra bank, Sri A.T. Akolkar, waas yet another Director of ABFSL. Sri O. Swaminatha Reddy, the former Chairman of Andhra Bank is one of the Directors of ABFSL. Sri M.J. Pherwani, Chairman, NHB, is one other Director of ABFSL. The noted industrialist and financier, Sri V.L. Dutt is yet another Director of the ABFSL. In this configuration of the Board of Directors, it is improper to single me out for the purposes of alleging that large funds of ABFSL have been deployed against the Security receipts instead of physicals/BRs and therefore, I should alone be held responsible for it. I can at least understand that if I have taken any decision that the funds of the ABFSL should be deployed only against SRs. I have never taken any such decision. Therefore, it is unfair and improper to pick me up for levelling allegations. In this context, it was nowhere set out either in general or specific terms that ABFSL should undertake its transactions only against physicals/BRs. In the absence thereof what ABFSL followed was in keeping with the market trends and practices and consequently deployment of its funds against SRs, does not become an illegal or improper exercise. This apart, the policy decisions of ABFSL are the result of the decisions arrived at by the collective wisdom of its Board of Directors. However, I have no overriding authority or responsibility to lay policy guidelines for ABFSL beyond whatever has been contemplated and undertaken by its well reputed Board of Directors. You will also agree with me, Sir, that barring me, the rest of the Board of Directors of ABFSL were all men accredited for their expertise in money market and the connected buoyancy therewith. Therefore, to single out a Director for having not overruled the decisions of the Board or for having not suggested a different course to be adopted by the ABFSL, is an improper act. The allegation in this regard, that I am guilty of a misconduct, would only reveal the anxiety to pass the blame on to some one rather than to collectively own it up should it be realized that the Board of Directors of ABFSL erred in their wisdom. If Sri A.T. Akolkar, or for that matter, the Enquiry Officer had come to a conclusion that there is an error of judgment on the part of ABFSL in undertaking its transactions against security receipts instead of against physicals/BRs, then the fault would lie against the entire lot of the Board of Directors of ABFSL for having not laid a crystal clear policy in that regard directing the ABFSL not to deploy funds against ‘Security Receipts’ and deploy its funds only against physicals. The fault at any rate does not lie against one single Director, B. Sreenivasa Rao. Collective wisdom prevails and consequently Sri A.T. Akolkar himself should be held as much responsible for the lapse, if any, in this regard. Equally the then CMO, Sri K.R. Nayak should also be held responsible. If that be the case, there will be no end in trying to find fault with one other and it would be an unending process. Therefore, it is neither fair nor proper to lay a charge of misconduct, of all things, against me. This aspect of the matter has been completely ignored by the Enquiry Officer.” In support of the charges, the company examined SW.1, the Managing Director of the ABFSL and SW.2, Chief Officer, C & IFA of Andhra Bank, Central Office, Hyderabad. SW.1 in his chief-examination deposed as follows: “The Managing Director of the company is the whole time Director of the company duly delegated with the following powers in the meeting dated 27.08.1991 (Resolve that in modification of the resolution passed at the Board meeting held on 14.06.1991, Managing Director be and is hereby delegated with full powers to purchase, sale of Central, State, other securities, shares, bonds for deployment of short term funds). As per Ex.S.3, Shri B.Sreenivasa Rao was entrusted with the following work distribution (Legal, Financial Subsidiary and housing subsidiary). The work is allocated to the General Managers in the bank and they are supposed to supervise, monitor and control the works allocated to them. For investment of funds, M.D. is authorized by the Board to take decisions. All Directors are equally responsible on the Board. He has additional responsibilities as G.M. of Andhra Bank because he has been specifically allocated the work of supervision of financial subsidiary.” (emphasis added) In his cross-examination, SW.1 stated that “as per memorandum of Articles of the company (Clause 96) business of the company shall be managed by the Board of Directors, who may exercise all such powers of the company, as are authorized by the Companies Act 1956. The Managing Director or whole time Director shall have subject to the supervision, control and discretions of the Board, the Management of the whole of the business of the company and of all its affairs and shall exercise all powers and perform all duties as are required by law or by these presents to be exercised or done by the company in general meeting. Articles of the company do not specifically state any role to the G.M. of the Andhra Bank.” This witness further stated “there are no records available with the company indicating a role, responsibility to the General Manager other than the office work distribution order. There is no other document issued by the then Chairman or Executive Director of the company on record other than Ex.S3 to Sri B. Sreenivasa Rao”. It is further stated that “the Managing Director of ABFSL was assisted by a team of staff consisting of Senior Vice President and Assistant Vice President. There is no evidence on record that Sri B. Sreenivasa Rao was attending the day to day activities of the company except signing Exs.S18 to 20, S25 to S33 and subscribing the facsimile signature on the FD interest warrants.” (emphasis added) The petitioner in his chief examination stated that he has no role to play in the day-to-day management of the ABFSL. A reading of the enquiry report shows that before the Enquiry Officer the petitioner has reiterated the stand taken by him in his written explanation that as per the Memorandum of Articles of Association of the company, Managing Director and the whole time Director were authorized to carry on the management of the whole of the business of the company and of all its affairs subject to the supervision and control of the Board, that by a Board’s resolution dated 27.08.1991, full powers were delegated to the Managing Director for purchase/sale of securities and deployment of short term funds, the Managing Director was functioning under the supervision of the Board and not of the petitioner and that the office order dated 11.05.1991 (Ex.S3) issued by A.T. Akolkar, Executive Director, does not specifically mention that the petitioner was supposed to supervise all the functioning of the subsidiary, no specific duties or work were allocated to the petitioner with regard to the subsidiary by the said office order. The petitioner also specifically pleaded to the enquiry officer that in his confidential report submitted to the Executive Director against column “Duties allotted”, he has never stated that he was holding