Case: Kotak Mahindra Bank Ltd Vs. Hindustan National Glass &amp; Ind.Ltd

the appellant-bank sanctioned Derivatives/Forward Contracts facility to respondent no.1 upto a limit of Rs.2,00,00,000/- (rupees two crores) only for the purpose of hedging foreign currency exposures by its letter dated 10.01.2006. On behalf of the respondent no.1-company, its Joint Managing Director acknowledged the receipt of the sanction letter dated 10.01.2006 of the appellant and accepted and agreed to be bound by the terms and conditions of the sanction letter as well as the annexures thereto being authorized by the resolution of the Board of Directors of the respondent no.1-company. Thereafter, on 17.01.2006 the appellant and the respondent no.1 entered into the International Swaps and Derivatives Association (ISDA) Master Agreement. Between January, 2006 to January, 2007 the appellant executed nine derivative transactions with the respondent no.1. On the request of the respondent no.1, the appellant enhanced the limit of Derivatives/Forward Contracts facility of the respondent no.1 to Rs. 10,00,00,000/- (rupees ten crores) only for the purpose of hedging adverse foreign exchange fluctuations and to enter into derivative transactions by letter dated 31.01.2007. During January, 2007 to August, 2007, the appellant executed various derivatives transactions with respondent no.1. In August, 2007, on the request of respondent no.1, the appellant once again increased the limit for Derivatives/Forward Contracts facility to Rs.20,00,00,000/- (rupees twenty crores) only for the purpose of hedging adverse foreign exchange fluctuations and entering into derivative transactions by letter dated 09.08.2007. On 06.09.2007, the appellant entered into derivative transactions FXOPT 20536, 20540 and 20544. Thereafter, on 05.03.2008 and 12.03.2008 the appellant informed the respondent no.1 that a sum of Rs.2,43,12,000/- (rupees two crores forty three lacs and twelve thousand) only had become due and payable on 10.03.2008 by the respondent no.1. The respondent no.1, however, did not pay the sum. On 01.07.2008 the Reserve Bank of India (for short ‘theissued the Master Circular on Wilful Defaulters.4. The Master Circular on Wilful Defaulters (for shortcontained instructions of the RBI to banks and financial institutions regarding reporting of wilful defaulters to other banks and financial institutions and the measures to be imposed on wilful defaulters by such banks and financial institutions. By letter dated 22.10.2008, the appellant intimated the respondent no.1 that it had classified the respondent no.1 as a wilful defaulter as it had defaulted to pay an amount of Rs.2,76,01,908.79 and interest thereon totalling to Rs.14,62,61,186.69 and respondent no.1 by its replies dated 04.11.2008 and 21.11.2008 through its Advocate contended that neither the appellant was anor the respondent no.1 was awithin the meaning ofin the Master Circular and, therefore, action under the Master Circular cannot be taken against the respondent no.1. By letter dated 02.02.2009, the appellant informed the respondent no.1 that the replies dated 04.11.2008 and 21.11.2008 of the respondent no.1 have been referred to the Grievance Redressal Committee of the appellant-bank for consideration and the Grievance Redressal Committee has fixed a meeting on 25.02.2009 at 10.00 A.M. at the office of the bank at Nariman Point, Mumbai, and that the respondent no.1 can represent its case in the hearing before the Grievance Redressal Committee. The respondent no.1 then made a representation dated 06.03.2009 before the Grievance Redressal Committee of the appellant-bank contending that the Master Circular does not apply to foreign exchange derivative transactions and was restricted only to the acts of lending by the bank and borrowing by theconstituents and as there was no lending by the appellant-bank to the respondent no.1 in any manner from the appellant-bank, the entire proceedings against the respondent no.1 under the Master Circular should be dropped. While the matter was pending before the Grievance Redressal Committee, the respondent no.1 filed Writ Petition No.269 of 2009 before the Calcutta High Court and by order dated 27.03.2009 the Calcutta High Court dismissed the writ petition taking a view that the matter was pending before the Grievance Redressal Committee. Thereafter, on 07.04.2009, the Grievance Redressal Committee of the appellant-bank after hearing the respondent no.1, declared the respondent no.1 as a willful defaulter under the Master Circular and further resolved that the respondent no.1-company and its directors be reported to the Credit Information Bureau (India) Ltd., RBI or such other institution/agency as may be required by RBI in terms of its Master Circular. The appellant accordingly intimated the aforesaid decision of the Grievance Redressal Committee of the appellant-bank to the respondent no.1 and the RBI by two separate letters dated 07.04.2008. Aggrieved, the respondent no.1 filed Writ Petition No.7729 (W) of 2009 in the Calcutta High Court and by the impugned judgment, the Calcutta High Court held that the Master Circular applied only to lending transactions of a bank or financial institution and as in the foreign exchange derivative transactions between the appellant and respondent no.1, there was no such lending transactions and the appellant was not the lender and the respondent no.1 was not the borrower, the respondent no.1 could not be declared as a wilful defaulter in terms of the Master Circular and accordingly no action could be taken against the respondent no.1 under the Master Circular. By the impugned judgment, the Calcutta High Court, therefore, set aside the decision dated 07.04.2009 of the appellant-bank and allowed the writ petition of the respondent no.1. Aggrieved, the appellant has filed thisappellant no.1, a pharmaceutical company, agreed to enter into foreign exchange derivative transactions with respondent no.1-bank to hedge its foreign currency risks arising out of export of its products and for this purpose executed an International Swaps and Derivative Association (ISDA) Master Agreement on 29.08.2005. During 2006-2008, the appellant and respondent no.1-bank entered into nine foreign exchange derivative transactions, out of which four were foreign currency swap transactions and five were foreign currency option transactions. On 01.07.2010, the Reserve Bank of India (for short ‘theissued a Master Circular on Wilful Defaulters (for short ‘the MasterThe Master Circular contained instructions of the RBI to banks and financial institutions regarding reporting of wilful defaulters to other banks and financial institutions and the measures to be imposed on wilful defaulters by such banks and financial institutions. Respondent no.1 issued a notice dated 15.10.2010 to the appellant no.1 to show-cause why the respondent no.1 should not classify the appellant no.1 as a wilful defaulter under the Master Circular, as the appellant no.1 had not paid the dues to the tune of of Rs.2.92 Crores under three of the derivative transactions. In the said show- cause notice, the appellant no.1 was also informed that it can make a representation against the decision of the respondent no.1 to classify the appellant no.1 as wilful defaulter to the Grievance Redressal Committee of the respondent no.1-bank. The appellant no.1 submitted its reply dated 20.11.2010 to the respondent no.1-bank contending that the Master Circular was applicable to dues arising out of a lender-borrower relationship and as the alleged dues arise under the derivative transactions and not against a credit facility sanctioned by the bank, there was no lender-borrower relationship between the respondent no.1-bank and the appellant and, therefore, the Master Circular was not applicable to the case of the appellant. The Grievance Redressal Committee of the respondent no.1-bank considered the reply of the appellant no.1 and by its decision dated 28.01.2011 held that the appellant no.1 was a wilful defaulter covered by the Master Circular as it had defaulted in its obligations to the bank towards the derivative transactions. The appellant no.1 filed Writ Petition No. 204 of 2011 challenging the decision dated 28.01.2011 of the Grievance Redressal Committee of the respondent no.1-bank and by order dated 24.08.2011, the Bombay High Court quashed the order dated 28.01.2011 of the Grievance Redressal Committee of the respondent no.1-bank on the ground that the order was passed in breach of principles of natural justice inasmuch as the appellant no.1 was not heard before the order was passed. The Bombay High Court, however, held in the impugned judgment dated 24.08.2011 that the Master Circular covered default by a party in complying with the payment obligations under derivative transactions and observed that it will be open to the Grievance Redressal Committee to pass fresh orders in accordance with law after complying with the principles of natural justice. Aggrieved by the finding of the Bombay High Court in the impugned judgment that the Master Circular covers defaults in complying with the payment obligations under derivative transactions, the appellants have filed thisappellant no.1 carries inter alia the business of PVC pipes and PVC resins and the appellant no.2 is its Assistant Managing Director and Chief Officer. The appellant no.1 entered into several derivative transactions with respondent no.3-bank named as USD/JPY Target Profit Forward Transactions during the years 2007-2008. On 01.07.2009, the Reserve Bank of India (for short ‘theued a Master Circular on Wilful Defaulters (for short ‘the MasterThe Master Circular contained instructions of the RBI to the banks and financial institutions regarding reporting of wilful defaulters to other banks and financial institutions and the measures to be imposed on wilful defaulters by the said banks and financial institutions. The respondent no.3-bank issued a demand notice dated 20.08.2009 to the appellant no.1 calling upon the appellant to pay USD 20,821,480.40 with interest thereon as dues of the appellant no.1 to the respondent no.3-bank under the derivative transactions. As the appellant no.1 did not pay the said dues, the respondent no.3 issued a notice dated 19.04.2010 to the appellant to show cause why the appellant will not be classified as a wilful defaulter under the Master Circular. The appellant no.1 replied vide its letter dated 10.05.2010 denying the allegations made by the respondent no.3-bank in the notice dated 19.04.2010 and requesting the respondent no.3-bank to give a fair and reasonable opportunity to place its representation before the Grievance Redressal Committee of the respondent no.3-bank before a final decision is taken to classify the appellant no.1 as a wilful defaulter. The Grievance Redressal Committee of the respondent no.3-bank heard the appellant no.1 on 13.12.2010, but passed an order on 20.01.2011 declaring the appellant no.1 as a wilful defaulter. Aggrieved, the appellants filed Writ Petition (lodg.) No. 345 of 2011 before the Bombay High Court challenging the order dated 20.01.2011 of the Grievance Redressal Committee. By the impugned judgment, the Bombay High Court held that the Master Circular covers the outstanding claims of respondent no.3- bank against the appellant no.1 arising out of the foreign exchange derivative transactions. The High Court, however, left it open to the Grievance Redressal Committee to pass fresh orders after complying with the principles of natural justice. The appellants have, therefore, filed this

Reasoning: of the Calcutta High Court in interpreting the Master Circular, in our considered opinion, is not correct because it is a settled principle of interpretation that the words in a statute or a document are to be interpreted in the context or subject-matter in which the words are used and not according to its literal meaning.On a reading of the paragraph in the Master Circular titledwe find that pursuant to the instructions of the Central Vigilance Commission for collection of information on wilful defaults of Rs.25 lakhs and above, a scheme was framed by the RBI with effect from 01.04.1999 under which the banks and notified All India Financial Institutions were required to submit to the RBI the details of the willful defaulters. Hence, the Master Circular originated pursuant to the instructions of the Central Vigilance Commission and these instructions are contained in a communication dated 27.11.1998 of the Central Vigilance Commission on the subjectvigilance administration inThe instructions have been issued by the Central Vigilance Commission in exercise of its powers under Section 8(1)(h) of the Central Vigilance Commission Ordinance, 1998, whereunder it exercises superintendence over the vigilance administration of the various Ministries of the Central Government or Corporations established by or under any Central Act, Government Companies, Societies and local authorities owned or controlled by the Central Government.have already held that information relating to a party who has defaulted in payment of its dues under derivative transactions to the bank is credit informationwithin the meaning ofSection 45A(c)(v) of the 1934 Act. Sub- section (1) of Section 45C of the 1934 Act provides that the RBI may at any time direct any banking company to submit to it such statements relating to such credit information and in such form and within such time as may be specified by the RBI from time to time. Hence, information relating to a party, who has defaulted in payment of its dues under derivative transactions being credit information may be called for from the banking company by the RBI under sub-section (1) of Section 45C of the 1934 Act. Sub-section (2) of Section 45C of the 1934 Act further provides that the banking company shall, notwithstanding anything to the contrary contained in any law for time being in force or in any instrument regulating the constitution thereof or in any agreement executed by it, relating to the secrecy of its dealings with its constituents, be bound to comply with any direction issued under sub-section (1). Sub-section (1) of Section 45E says that such credit information shall be treated as confidential and shall not be published or otherwise disclosedfor the purposes of thisbut sub-section (2)(a) of Section 45E clearly provides that nothing in Section 45E shall apply to the disclosure by any banking company, with the previous permission of the RBI, of any information furnished to the RBI under Section 45C. Thus, confidentiality of any credit information either by virtue of any other law or by virtue of any agreement between the bank and its constituent cannot be a bar for disclosure of such credit information including information relating to a derivative transaction of the RBI under sub-section (1) of Section