Salim Akbarali Nanji vs Union Of India & Ors

On February 19, 2003, Respondent No.6 Bank made a request to the Reserve Bank of India to grant permission and allow the Bank to write off from its financial records, debts that had turned non-performing assets over the years amounting to Rs.120 crores. It was stated in the letter of request, that to institute better balance sheet management and a tighter control environment, the Board of Directors and the principal shareholders of the Bank in France had approved the bank's strategy to write off these debts, subject to approval of the Reserve Bank of India. The Bank had taken necessary steps to recover the dues and will continue to take follow up action, but there appeared no prospect of early recoveries from some of these accounts. The Bank did not expect to generate enough profits to absorb the write off and, therefore, sought permission to allow the write off from the amount lying as General Reserve in the books of the bank as on March 31, 2003, and not from the operating income for the year. It was assured that the Bank was estimated to show capital adequacy well above the minimum limits as prescribed by the Reserve Bank of India even after the amount is transferred for write off. The Bank brought to the notice of the Reserve Bank of India that it had inducted fresh equity capital of Rs.21 crores. The Bank was also actively considering raising subordinated debt amounting to Rs.75 crores to further augment its capital base during the year. It also referred to various other steps being taken to increase its capital base. The letter also refers to the recommendations of M/s. Mekinsey & Co. and the decision of the Board of the Bank to act on its recommendations. In the above background, the Bank sought approval of the Reserve Bank of India to write off an amount of Rs.120 crores from its General Reserve, consequent upon writing off debts to the tune of Rs.120 crores.

The Reserve Bank of India by its communication of March 3, 2003 responded to the request of the Respondent No.6 Bank and advised the Bank that it may utilize Rs.120 crores from the "Revenue & Other Reserves" to write off the debts that have turned NPAs. The drawal should be "below the line" after arriving at the net profit/loss for the year ended March 31, 2003 on the basis of accepted accounting policies duly approved by the banks Auditors. The above adjustment should be prominently disclosed in the Notes to Accounts.

Dealing with the facts of this case, it was averred that the Respondent No.6 Bank had earned a net profit of Rs.34.05 crores during the financial year 2001- 02 and transferred Rs.8.55 crores to statutory reserve and Rs.0.30 crore to investment fluctuation reserve. The gross and net NPAs of Respondent No.6 Bank were Rs.215.45 crores and Rs.149.33 crores respectively as on March 31, 2002. The Capital to Risk-weighted Assets Ratio (CRAR) was at 11.49% as on March 31, 2002. Even after the amount was transferred from the reserves for write off as on March 31,2003, the CRAR stood at 10.08%. which was above the minimum prescribed CRAR of 9%. During the year 2002-03, an amount of Rs.21 crores has been induced as fresh equity capital by the principal shareholders of the banking company. After taking into consideration the above facts and the need for cleansing the balance sheet of the Respondent No.6 Bank, the Reserve Bank has allowed it to utilize Rs.120 crores from the revenue and other reserves to write off debts that have turned NPAs, vide letter DBOD. No.PSBS.1036/16.01. 132/2002-03 dated March 3, 2003.

Section 45 confers power on the Reserve Bank to apply to the Central Government for suspension of business by a banking company and to prepare scheme of reconstitution or amalgamation. We fail to appreciate how any of these provisions is relevant to the issue that arises in the instant appeal. No doubt, the Reserve Bank has been vested with wide powers to control and regulate the functioning of banks. If need be, those powers may be exercised by the Reserve Bank. In the instant case, we are only concerned with the writing off of non-performing assets. Nothing has been produced on record to satisfy us that the Reserve Bank has acted in breach of its legal obligations in the matter of granting permission to the Respondent No.6 Bank to write off the debts that have become non-performing assets.

We, therefore, find no merit in this appeal. The same is accordingly dismissed but without any order as to costs.

..J (B. P. SINGH ) ..J ( ALTAMAS KABIR ) New Delhi ;

May 11, 2006 IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION TRANSFERRED CASE NO.48 OF 2005 (Arising out of T.P. No.1 of 2005) Salim Akbarali Nanji Appellant Versus Union of India & Ors. Respondents J U D G M E N T B.P. SINGH, J.

The issues involved in this case are the same as in the connected civil appeal which we have dismissed by our judgment and order today. In this case as well the petitioner prayed for quashing or setting aside the permission granted by the Reserve Bank of India to the Respondent Bank to write off the non-performing assets. The petitioner had filed a writ petition before the High Court of Judicature at Bombay being Writ Petition No.2615 of 2004. By our order dated July 25, 2005, the case was transferred to this Court so as to be heard and disposed of with the connected civil appeal. This case is also dismissed but without any order as to costs.