Case: Pramod Malhotra &amp; Others Vs. Union of India &amp; Others

2. At this stage, the facts may be briefly set out:On 2nd August, 1985 Sikkim Banking Overseas Corporation Limited got itself registered as a Company in Sikkim. On 22nd October, 1987 its name was changed to Sikkim Banking Limited (for short SBL). On 11th December, 1987 the Banking Regulation Act (for short the Act) became applicable to Sikkim. Section 22 of the Act reads asg of Banking Companies.—(1) Save as hereinafter provided, no company shall carry on banking business in India unless it holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject to such conditions as the Reserve Bank may think fit to impose.(2) Every banking company in existence on the commencement of this Act, before the expiry of six months from such commencement, and every other company before commencing banking business in India, shall apply in writing to the Reserve Bank for a licence under this section:Provided that in the case of a banking company in existence on the commencement of this Act, nothing in) shall be deemed to prohibit the company from carrying on banking business until it is granted a licence in pursuance of this section or is by notice in writing informed by the Reserve Bank that a licence cannot be granted to it:Provided further that the Reserve Bank shall not give a notice as aforesaid to a banking company in existence on the commencement of this Act before the expiry of the three years referred to in) of Section 11 or of such further period as the Reserve Bank may under thatthink fit to allow.(3) Before granting any licence under this section, the Reserve Bank may require to be satisfied by an inspection of the books of the company or otherwise that the following conditions are fulfilled, namely—(a) that the company is or will be in a position to pay its present or future depositors in full as their claims accrue;(b) that the affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interestof its present or future depositors;(c) that the general character of the proposed management of the company will not be prejudicial to the public interest of its depositors;(d) that the company hs adequate capital structure and earning prospects;(e) that the public interest will be served by the grant of a licence to the company to carry on banking business in India;(f) that having regard to the banking facilities available in the proposed principal area of operations of the company, the potential scope for expansion of banks already in existence in the area and other relevant factors the grant of the licence would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth;(g) any other condition, the fulfilment of which would, in the opinion of the Reserve Bank, be necessary to ensure that the carrying on of banking business in India by the company will not be prejudicial to the public interest or the interests of the depositors.(3A) Before granting any licence under this section to a company incorporated outside India, the Reserve Bank may require to be satisfied by an inspection of the books of the company or otherwise that the conditions specified in) are fulfilled and that the carrying on banking business by such company in India will be in the public interest and that the Government or law of the country in which it is incorporated does not discriminate in any way against banking companies registered in India and that the company complies with all the provisions of this Act applicable to banking companies incorporated outside India.(4) The Reserve Bank may cancel a licence granted to a banking company under this section—(i) if the company ceases to carry on banking business in India; or(ii) if the company at any time fails to comply with any of the conditions imposed upon it under; or(iii) if at any time, any of the conditions referred to inion (3A) is not fulfilled:Provided that before cancelling a licence under Clause (ii) or Clause (iii) of thison the ground that the banking company has failed to comply with or had failed to fulfil any of the conditions referred to therein, the Reserve Bank, unless it is of opinion that the delay will be prejudicial to the interest of thes or the public, shall grant to the company on such terms as it may specify, an opportunity of taking the necessary steps for complying with or fulfilling such condition.(5) Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence under this section may, within thirty days from the date on which such decision is communicated to it, appeal to the Central Government.(6) The decision of the Central Government where an appeal has been preferred to it under) or of the Reserve Bank where no such appeal has been preferred shall be final.L applied for a licence. It appears that RBI did not issue any notice informing SBL that the licence could not be granted.4. Therefore even though the licence was not granted SBL continued to carry on banking business by virtue of the proviso of. In 1996 RBI pointed out certain opertional deficiencies in the working of SBL. SBL was called upon to cure those deficiencies before a licence could be issued to it. Thereafter RBI advised SBL to raise additional capital to the extent of Rs. 50 crores by way of a rights preferential issue. RBI made it clear that it would consider issue of a licence to SBL only after the capital was so raised. SBL managed to raise an extent of Rs. 15.18 crores, out of which approximately Rs. 5.80 crores was by means of diversion ofn funds.6. In1997 RBI conducted financial inspection of SBL and found several shortcomings and deficiencies in its functioning. Yet on 25th June, 1997 RBI authorised SBL to open a branch in Delhi at the Metropolitan Centre, 37 DLF, Kirti Nagar, New Delhi. All the petitioners arein this branch of SBL. It appears that they deposited pursuant to advertisement issued by SBL offering a higher rate of interest than other banks.7. In a special scrutiny conducted in 1998 RBI found thats or bad debts were Rs. 58.26 crores, whereas provision was for only Rs. 1.52 crores. This meant that SBL had incurred a net loss of Rs. 56.22 crores. Ultimately by a letter dated 15th December, 1998 RBI issued ae to the Managing Director Shri A.M. Mustafi under Section 36AA(2) and pending reply prohibited him from acting as the Managing Director. In January, 1999 RBI removed Shri A.M. Mustafi and appointed three Additional Directors on. Thereafter special audit was carried out. As a result of the audit the Government of India was informed about the poor state of affairs in SBL. The Government of India was informed that the funds had been siphoned out to the tune of Rs. 57.50 crores.8. On 8th March, 1999, on the advice of RBI, the Government of India passed an Order of Moratorium under Section 45(2) of the Act. SBL filed a writ petition in the High Court of Sikkim challenging the Order of Moratorium. However, the petition was dismissed on 2nd September, 1999. The special leave petition filed against the order has also been dismissed.9. On 21st December, 1999 the Government of India issued an order notifying a scheme of amalgamation under Section 45(7) of the Act. By this scheme SBL was amalgamated with the Union Bank of India (for short UBI). Under the scheme all the depositors were to be paid on. It is an admitted position that the depositors are only getting 9.037% of their deposits and they are required to surrender their fixed deposit receipts in return.10. The petitioner filed a writ petition in the Delhi High Court challenging the scheme. However, pursuant to an order of this Court dated 26th April, 2000, wherein it was directed that all matters connected with the amalgamation of SBL with UBI must be filed only in this Court that petition was withdrawn and this petition has been filed.

Court's reasoning:
20. Mr. Sorabjee submitted, and in our view correctly, that the Indian cases relied upon by Mr. Lalit are all cases which relate to infringement of life and liberty under Article 21 i.e. where a person has been injured or killed. It is in those types of cases that the above mentioned principles have been applied in India. Mr. Sorabjee pointed that Mr. Lalit was not able to show any case where these principles have been applied to financial transactions undertaken by individuals with open eyes in the hope of making larger profits. He submitted that except for a few stray averments in the petition there was no averment that by issuing licence RBI represented that SBL was sound and creditworthy.We have heard the submissions of both the parties. Whilst we sympathise with the depositors for their loss, we are unable to accept the submission of Mr. Lalit that the principles laid down in cases relating to breach of Article 21 rights can be applied to cases of loss caused in financial transactions undertaken by individuals with open eyes. In our view the principles laid down in the cases of Yuenof Hong Kong and Davis v. Radcliffe are fully applicable. In our view the principles laid down incase have no application to financial transactions. RBI is undoubtedly performing a statutory function. Undoubtedly the general public interest has to be kept in mind by RBI. But that is not the only thing they have to keep in mind. They also have to balance general public interest with the interests and need of Banks and Financial Institutions. They cannot easily close down a Banking Institution merely because there are a few irregularities. They have to keep in mind the implications of closing a Bank or a financial institution. A closing of a Bank or financial institution has its impact not just on that Bank/financial institution and its customers and debtors but on the future of financial services in that region. Thus competing interests have to be weighed and balanced. In hindsight it is easy to point fingers. However at that stage it would not have been an easy decision for RBI to have closed SBL when it was a major Bank in a small State like Sikkim. One may criticize the decision of RBI to grant SBL a licence to open a Branch in Delhi when the licence under Section 22 had not yet been granted. But still that will not be sufficient to foist liability on RBI to repay all depositors. What the petitioners want is to foist on RBI liability for the default of SBL. Such liability will be rarely imposed. RBI did not havemanagement or control on SBL. Also the relationship of RBI with creditors or depositors of SBL is not such that it would be just or reasonable to impose a liability in negligence on RBI.26. Even otherwise we find that there are no proper averments. There is absolutely no averment regarding bad faith. It was fairly admitted by Mr. Lalit that there is no case made out on the basis of public misfeasance. He fairly stated that at the highest the case could only be that of a violation of statutory duties. However, as observed above, compensation for violation of a statutory duty to enable individuals to recoup financial loan has never been recognized in India. In our view the petitioners having chosen on their own to deposit amounts with the SBL cannot claim to recover against RBI. In such a case the loss has to be allowed to fail where it falls.