Case: Salim Akbarali Nanji Vs. Union Of India

3. To appreciate the grievance of the appellant it is necessary to notice the background in which the controversy arises4. 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 banks 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 crores5. 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 Accounts6. After grant of approval by the Reserve Bank of India, the Annual General Meeting of the Company was held on September 30, 2003 and the write off of the bad debts was approved by the shareholders of the Respondent No.6 Bank7. In the counter affidavit filed on behalf of the Reserve Bank of India before this Court, it has been stated that the Board of Directors of the Respondent No.6 Bank and its principal shareholders approved the proposal to write off these debts by appropriating the reserves subject to receiving approval from the Reserve Bank of India. Referring to Section 17(1) of the Banking Regulation Act, 1949, it was explained that every banking company incorporated in India must create the reserve fund and shall out of the balance of profit of each year as disclosed in the profit and loss account prepared under Section 29 of the Act, and before any dividend is declared, transfer to the reserve fund a sum equivalent to not less than 20% of such profit. The said limit was raised to 25% in December 1974. In terms of Section 17(2), a banking company can appropriate sums from the reserve fund or the share premium account, and the same must be reported to the Reserve Bank of India within 21 days explaining the circumstances relating to such appropriation. This implies that appropriation of the statutory reserve fund does not require the Reserve Banks prior approval though there is a statutory obligation on banks to report appropriation to the Reserve Bank of India. The appropriation of other reserves does not cast any obligation on banking companies to report to the Reserve Bank. However, as a matter of practice, the banking companies are approaching the Reserve Bank for permission before appropriating their reserves for writing off the bad debts. The Reserve Bank considers the financial position of the applicant banking company before granting permission to utilize the reserves for the purpose.

Court's reasoning:
14. In the instant case also since the Respondent No.6 Bank proposes to appropriate the sums from their reserves, it sought by way of abundant caution the approval of the Reserve Bank of India. There is, therefore, no justification for the grievance that in granting approval to the bank to write off its non-performing assests to the tune of Rs.120 crores, the Reserve Bank of India committed breach of any statutory provision or acted illegally or arbitrarily in the matter. There is not even an allegation that the Reserve Bank of India acted on extraneous consideration, or that its action was mala-fideIn the instant case there is no material whatsoever to demonstrate that the Reserve Bank of India has failed to exercise its powers under Section 21 of the aforesaid Act, nor is there anything to prove that the Respondent No.6 Bank herein has not followed any policy so determined by the Reserve Bank of India19. Section 22 (4) of the aforesaid Act empowers the Reserve Bank of India to cancel a licence granted to a banking company in the circumstances mentioned therein. We fail to understand how the said provision is at all relevant since it is not the case of the appellant that the licence granted to the Respondent No.6 Bank should be cancelled20. Section 27 casts an obligation on every banking company to submit to the Reserve Bank a return in the prescribed form and manner showing its assets and liabilities in accordance with the aforesaid provision. The Reserve Bank is also authorized at any time to direct a banking company to furnish it such statements and information relating to the business or affairs of the banking company as it may consider necessary or expedient to obtain for the purposes of the Act. We fail to understand how Section 27 is at all relevant in the instant case because it is not the case of the appellant, nor has any material being placed on record to show, that there has been breach of Section 27 of the aforesaid Act21. Similarly, Section 30 which deals with audit of the balance sheet and profit and loss account of a banking company by a qualified auditor is not at all relevant. Sub-Section (1B) of Section 30 empowers the Reserve Bank to order a special audit. In the instant case we are not concerned at all with the appointment of auditors24. 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.In the instant case, though some of the debts have to be written off, with little chance of substantial recovery, we cannot lose sight of the fact that the Bank has generated considerable operating profits and has built up a substantial general reserve over the years, against which the debts written off have been adjusted