​BY
DELEP GOSWAMI, FCS, ADVOCATE, SUPREME COURT OF INDIA, NEW DELHI
&
ANIRRUD GOSWAMI, ADVOCATE, GOSWAMI&GOSWAMI, ADVOCATES, NEW DELHI

India has, in recent past, witnessed many scams, like the 2G spectrum scam causing the Government exchequer losses of Rs.1.76 lakh crores and almost Rs.1.86 lakh crores, in the “Coalgate” scam. All these were brought to the notice of the Hon’ble Supreme Court of India through public interest litigations by public interest activists and NGOs like Common Cause and the Centre for Public Interest Litigation (CPIL) and despite the strenuous efforts made by the Government to hide from the public the file noting on decision making processes, the vital information could be fished out by activists by using the Right to Information Act, 2005 (“RTI Act”).  However, another important area of concern is frauds and irregularities committed in the Banking sector in opening of Bank Accounts for siphoning off money from India to foreign tax-free havens.  Adding to this, there is laxity shown in recovering loans and outstanding from the defaulters and non-remedial action on host of other irregularities and illegalities which plague the banking sector.  However, the Reserve Bank of India (‘RBI’) and other banks have been denying disclosure of all these vital and basic information to information seekers/activists under the garb of the veil of secrecy on the plea that the disclosure of such information does not serve any public interest and that, it would, instead adversely impact public interest and confidence in the banking sector, thereby posing very severe implications and prejudicial impact on the financial and economic stability of the country.  More particularly, the RBI argued that the information obtained/provided by the Banks inspected, was “fiduciary” in nature and those were shared on the principle of “trust and confidence” and hence such information could not be shared with the information seekers under the RTI Act.
Given this backdrop, a landmark judgement has been delivered on 16th December, 2015 by the Hon’ble Supreme Court of India in Transferred Cases (Civil) Nos.91 to 101 of 2015 (hereinafter referred to as the “RTI Judgement”) which will have a far-reaching impact on the accountability and responsible behaviour of Banks, and more particularly, the RBI.  The moot question in the RTI Judgement was: whether the information sought for under the RTI Act can be denied by  RBI and other Banks to the public at large on the ground of economic interest, commercial confidence, fiduciary relationship with other Banks on the one hand and the public interest on the other?
On their RTI Applications being denied by the respective Banks, the RTI Activists filed appeals before the Central Information Commission (CIC), which allowed the petitions and directed the Banks to furnish information to the petitioners.  Writ petitions were filed by RBI and other banks against these decisions before the High Courts at Bombay and Delhi.  At the same time, RBI also filed a petition in the Supreme Court of India to transfer the pending cases to the Supreme Court and this resulted in the common hearing in the aforesaid RTI Judgement. 
The information sought for by public interest activists from the RBI and other Banks included, inter alia, the following:-

1. The procedure, rules and regulations of inspection being carried out on Co-operative Banks by the RBI and the copies of inspection and audit reports in respect of Makarpura Industrial Estate Co-op Bank and report on all Co-operative Banks gone into liquidation and action taken against all Directors and Managers for recovery of public funds and powers utilized by RBI and analysis and procedure adopted; and the names of remaining co-operative banks and RBI’s observations against irregularities and action taken reports.        

2. Based on the written statement made by the Finance Minister on the floor of the Parliament that some Banks like SBI, ICICI Bank, Bank of Baroda, Dena Bank, HSBC Bank etc. were issued “letter of displeasure” for violating FEMA guidelines for opening of accounts, whereupon some other Banks were even fined Rs.1 crore for such violations, the RTI activist sought for the names of the Banks with details of violations committed by them.  The Activist also sought for “Advisory Note” issued to the ICICI Bank for accounts opened by some fraudsters at the Patna Branch and information sought was about the exact nature of irregularities committed by the Bank under FEMA, and details of other offences committed by the IBL through various branches in India and abroad, along with action taken by the Regulator, including the names and designations of the officials; branch name; type of offence committed and the punishment awarded by the concerned Authority etc.  While the RBI stated that “Supervisory actions were taken based on scrutiny conducted under Section 35 of the Banking Regulation (BR) Act”, the information in the scrutiny report is denied citing the ground of fiduciary capacity. 

3. In another application, the Activist sought from National Bank for Agriculture and Rural Development (NABARD) copies of all correspondence with Maharashtra State Government/RBI/any other Agency of the State/Central Co-operative Bank from January, 2010 onwards and to provide confirmed/draft minutes of meetings of Governing Boards/Board of Directors/Committee of Directors of NABARD from April, 2007 till date of the application.  

4. With regard to RBI uploading the entire list of Bank defaulters on the Bank’s website, the RBI replied that pursuant to Finance Minster’s speech made in Parliament on 28.2.1994, “in order to alert the Banks and FIs and put them on guard against the defaulters to other lending institutions, the RBI has put in place scheme to collect details about borrowers of banks and FIs with outstanding aggregating Rs.1 crore and above, which are classified as “doubtful” or “loss” or where suits are filed, as on 31st March and 30th September each year.  In February, 1999, RBI had also introduced a scheme for collection and dissemination of information on cases of wilful default of borrowers with outstanding balance of Rs.25 lakhs and above.  At present, RBI disseminates list of above said non-suit filed “doubtful” and “loss” borrowed accounts of Rs.1 crore and above on half-yearly basis (i.e. as on March 31st and September 30th) to Banks and FIs for their confidential use.  The list of non-suit filed accounts of wilful defaulters of Rs.25 lakh and above is also disseminated on quarterly basis to Banks and FIs for their confidential use.  Section 45-E of the RBI Act, 1934 prohibits the RBI from disclosing “credit information” except in the manner provided therein.”    

5. Yet, in another application based on newspaper reports, the Activist sought for details from the RBI on the criterion adopted in deciding fine and penalties imposed on the Banks for contravention of various directions and instructions, such as, failure to carry out proper due diligence on user appropriateness and suitability of products, selling derivative products to users not having risk management policies; not verifying the underlying/adequacy of underlying and eligible limits under past-performance route, issued by RBI in respect of derivate transactions.  In reply, the RBI stated that for violations, the Banks were issued with Show-cause Notices and denied the information. 

6. In another application, an RTI Activist sought for details from RBI about the total Market-to-Market losses suffered on account of currency derivatives to the tune of Rs.32,000/- crores and wanted the Bank-wise breakup of the MTM losses.  In reply, the RBI sought exemption under Section 8(1)(a) and ( e) of the RTI Act, 2005 as, under 8(1)(a) the disclosure of information sought would prejudicially affect the sovereignty and integrity of India and the security, strategic scientific or economic interests of the State, in relation with foreign State or lead to incitement of an offence.  

7. Yet, in reply to another RTI application seeking information regarding accusations against SCB for non-compliances of RBI instructions on “derivatives”, the RBI stated that complaints are received the RBI and they constitute the “third party information” and as such it could not be disclosed in terms of Section 8(1)(d) of the RTI Act, 2005.  As regards, the details sought from RBI regarding all the written replies/correspondence made by SCB with RBI and the RBI recordings on oral submissions made by SCB, the RBI stated that “action has been taken against the Bank based on the findings of Annual Financial Inspection (AFI) of the Bank, which is conducted under the provisions of Section 35 of the BR Act, 1949 and that the findings of the inspection are confidential in nature intended specifically for the supervised entities and for corrective action by them.       

8. Yet, another RTI Activist sought for information from RBI about the basis of classification of Banks into various grades.In all of the above cases, the RBI denied providing any information sought for by citing the ground that the concerned information was received by the RBI in a fiduciary capacity and the disclosure of such information would prejudicially affect the economic interests of the State and harm the Bank’s competitive position and hence such information are exempt from disclosure in terms of the provisions of Section 8(1)(a) (d) and ( e) of the RTI Act, 2005.

Thus, during the course of arguments before the Supreme Court, the RBI submitted  that the impugned orders passed by the CIC under the RTI Act were illegal and without jurisdiction and  referred to various provisions of the RBI Act, 1934; the Banking Regulation (BR) Act, 1949 and the Credit Information Companies (Regulation) (“CICR”) Act, 2005 and submitted that the RBI being the statutory authority has been constituted under the RBI Act, 1934 for the purpose of regulating and controlling the money supply in the country.  The powers, role and duties of the RBI were reiterated before the Supreme Court, including RBI’s powers to determine “Banking Policy” in the interest of banking system, monetary stability and sound economic growth.  The RBI submitted that it exercises powers conferred under Section 35 of the BR Act, 1949 and conducts inspection of the Banks in the country and in its capacity as the regulator and supervisor of the banking system of the country, RBI has access to various information collected and kept by the Banks and such information accessed by the inspecting officers of the RBI would be confidential. RBI also submitted that its role is to safeguard the economic and financial stability of the country and it has large contingent of expert advisors relating to matters deciding the economy of the entire country and nobody can doubt the bona-fide of the RBI.  Referring to the decision of the AP High Court in B. Suryanarayana –vs- TheKolluru Parvathi Co-op Bank Ltd (1986-AIR-AP-244), the RBI  submitted that the Court will be highly chary to enter into and interfere with the decision of the RBI and also referring to another Supreme Court decision in Peerless General Finance and Investment Company Limited & Another –vs- RBI (1992-Vol.2-SCC-343) and contended that the Courts are not to interfere with the economic policy which is a function of the experts.  The RBI also  submitted that it is empowered to supervise and monitor the Banks under its jurisdiction through on-site inspection conducted on annual basis under the statutory powers derived by it under section 35 of the BR Act, 1949, off-site returns on key financial parameters and engaging banks in dialogue through periodical meetings and RBI takes supervisory actions where warranted for violations of its guidelines/directives,  depending on the seriousness of the offence, its systematic implications and penal action may range from imposition of penalty, issuance of strictures or letters of warning.  RBI further submitted that while RBI recognizes and promotes enhanced transparency in bank’s disclosures to the public, as transparency strengthens market discipline, a bank may not be able to disclose all data that may be relevant to assess its risk profile, due to the inherent need to preserve confidentiality in relation to its customers.  Further, as per RBI policy, the reports of the annual financial inspections, scrutiny of all banks/financial institutions are confidential documents and cannot be disclosed as its disclosure would create misunderstanding/misinterpretation in the minds of the public and that may prove significantly counter-productive and would not serve the public interest, as it might adversely impact public confidence on the Banks and would have serious implication for financial stability and  would adversely affect the economic interest of the State and would not serve the larger public interest.
The RBI also argued that the CIC also erred in holding that even if the information sought for is “exempted” under Section 8(1)(a), (d) or ( e) of the RTI Act, still Section 8(2) of the RTI Act would mandate the disclosure of the information and questioned whether the RTI Act, 2005 over-rides various provisions of special statutes, which confer confidentiality in the information obtained by the RBI and if the RTI Applicants were right in their contention, the various provisions of the BR Act; RBI Act and CICR Act would be repealed or over-ruled by the RTI Act, 2005.  Further RBI contended that under Section 34A of the BR Act, 1949, production of documents of confidential nature cannot be compelled and that its inspection report on other Banks u/s 35(5)  can only be disclosed, if the Central Government orders the publishing of such report.  The RBI Counsel also pointed out that other statutory provisions of privacy are contained in the SBI Act, 1955; the SBI(subsidiary Banks) Act, 1959 and Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970 and hence, it was argued that the RTI Act, 2005 cannot override the provisions for confidentiality conferred on the RBI by the earlier statutes referred to hereinabove.
  
RBI also referred to certain exemptions carved out in the RTI Act to harmonise the conflicting interests and in that context referred to the Supreme Court’s decision in CBSE & Another –vs-
Aditya Bandopadhyay & Others (2011-8-SCC-497).
 
On behalf of the RTI Activists, it was argued that it is the people who have created legislatures, executives and the judiciary to exercise such duties and functions as laid down in the Constitution itself and that the right to information regarding the functioning of public institutions is a fundamental right as enshrined in Article 19 of the Constitution of India.  They reiterated observations of the Supreme Court in the case of S.P. Gupta –vs- President of India and Ors (AIR-1982-SC-149) regarding the right to information in the following paragraph:-
 
                “There is also in every democracy, a certain amount of public suspicion and distrust of Government, varying of course, from time to time, according to its performance, which prompts people to insist upon maximum exposure of its functioning.  It is axiomatic that every section of the Government must be actuated by public interest, but even so, we find cases, though not many, where Governmental action is taken not for public good, but for personal gain or other extraneous considerations.  Sometimes Governmental action is influenced by political and other motivations and pressures and at times, there are also instances of misuse or abuse of authority on the part of the executive.  Now, if secrecy were to be observed in the functioning of the Government and the processes of Government were to be kept hidden from public scrutiny, it would tend to promote and encourage oppression, corruption and misuse or abuse of authority, for it would all be shrouded in the veil of secrecy, without any public accountability.  But, if there is an open Government with means of information available to the public, there would be greater exposure of the functioning of Government and it would help to assure the people a better and more efficient administration.  There can be little doubt that exposure to public gaze and scrutiny is one of the surest means of achieving a clean and healthy administration.  It has been truly said that an open Government is clean Government and a powerful safeguard against political and administration aberration and inefficiency.”  
 
The RTI Activist’s counsel also pointed out to para 56 of the Supreme Court’s judgement in Union of India –vs- Association for Democratic Reforms (AIR-2002-SC-2112) that “the right to get information in a democracy is recognized all throughout and is a natural right flowing from the concept of democracy.”  Further submission was made that the RTI Act, 2005, as noted in its very preamble, does not create any new right, but only provides machinery to effectuate the fundamental right to information and that the institution of the CIC and the SICs are part of that machinery.
 
In its aforesaid RTI Judgement, the Supreme Court noted that one of the RTI Activists had asked about the details of the loans taken by industrialists that have not been repaid and he had asked about the names of the top defaulters who have not repaid their loans to public sector banks.  The RBI resisted the disclosure of the information claiming exemption under Section 8(1)(a) and 8(1)( e) of the RTI Act on the ground that disclosure would affect the economic interest of the country, and that the information has been received by the RBI from the Banks in fiduciary capacity.  The CIC found these arguments made by RBI to be totally misconceived in facts and in law, and held that the disclosure would be in public interest.  While tracing the origin of passing of the RTI Bill by the Parliament, the Supreme Court observed that the right to information has been held as inherent in Article 19 of our Constitution, thereby, elevating it to a fundamental right of the citizen. Therefore, a citizen has to merely make a request to the concerned Public Information Officer specifying the particulars of the information sought by him and he is not required to give any reason for seeking information, or any other personal details, except those necessary for contacting him. The RTI Bill also stated that the categories of information exempted from disclosure are a bare minimum and are contained in clause 8 of the Bill and that even these exemptions are not absolute and access can be allowed to them in public interest, if disclosure of the information outweighs the harm to the public authorities.  The information exempted from disclosure are those which would prejudicially affect the sovereignty and integrity of India; which has been expressly forbidden, which may result in a breach of privileges of Parliament or the Legislature; and also information pertaining to defence matters and these are listed in Section 8(1) (a) to (g) and that there are exceptions this clause. 

With regard to the contention of the RBI about “fiduciary relationship”, the Supreme Court referred to its own decisioin in CBSE & Anr –vs- Aditya Bandopadhyay & Ors, where, after referring to various authorities to ascertain the meaning of the term “fiduciary relation” the Court had observed thus :-
 
“ A relationship  in which one person is under a duty to act  for the benefit  of  the other on matters within the scope  of  the  relationship.  Fiduciary  relationships  – such  as  trustee-beneficiary,  guardian-ward, agent-principal,  and  attorney-client  –  require  the highest  duty  of  care.  Fiduciary  relationships  usually arise in one of  four situations :  (1)  when one person places trust in the faithful integrity of another, who as a result gains superiority or influence over the first, (2) when one  person assumes  control  and responsibility over another, (3) when one person has a duty to act for or give advice to another on matters falling within the scope of the relationship, or (4) when there is a specific relationship that  has traditionally  been recognized as involving fiduciary duties, as with a lawyer and a client or a stockbroker and a customer.”
 
The Supreme Court held that the RBI  does not  place itself in a fiduciary relationship with the  financial  institutions (though, in  word  it  puts  itself  to  be  in  that  position)  because,  the reports of the inspections, statements of the bank, information related to the business  obtained by the RBI are not under the pretext of confidence or trust.  In this case neither the RBI nor the Banks act in the interest of each other.  By attaching an additional  “fiduciary”  label  to  the  statutory  duty,  the Regulatory  authorities  have  intentionally  or  unintentionally created an in terrorem effect. The Supreme Court also observed that the RBI is supposed to uphold public interest and not the interest of individual banks.  RBI is clearly not in any fiduciary relationship with any bank.   RBI  has  no  legal  duty  to maximize  the  benefit  of  any  public  sector  or  private  sector bank,  and  thus  there  is  no  relationship  of  ‘trust’  between them.  RBI has a statutory duty to uphold the interest of the public at large, the depositors, the country’s economy and the banking sector.  Thus, RBI ought to act with transparency and not hide information that might embarrass individual banks. It is duty bound to comply with the provisions of the RTI Act and disclose the information sought by the respondents herein.
 
The Supreme Court observed that the baseless and unsubstantiated argument of  the RBI that  the disclosure would  hurt  the economic  interest  of  the country is  totally  misconceived. In the impugned order, the CIC has given several reasons to state why the disclosure of the information sought by the respondents would hugely serve public interest, and non-disclosure would be significantly detrimental to public interest and not in the economic interest of India.  RBI’s argument that if people, who are sovereign, are made aware of the irregularities being committed by the banks then the country’s economic security would be endangered, is not only absurd but is equally misconceived and baseless.
 
The Supreme Court also observed that the Financial Institutions have an obligation to provide all the information to the RBI and such an information shared under an obligation/duty, cannot be considered to come under the purview of being shared in “fiduciary relationship” and that one of the main characteristic of a “fiduciary relationship” is “trust and confidence”, something that RBI and the Banks lack between them.
 
The Supreme Court also referred to section 2(f) of the RTI Act which defines “information” and it means, inter-alia “information relating to any private body which can be accessed by a public authority under any other law for the time being in force”.  The Supreme Court therefore held that the RBI is liable to provide information regarding inspection report and other documents to the general public and that by not making them accessible to the public under the guise of “fiduciary relationship”, reveals that the Banks are trying to cover up their underhand actions and hence they are even more liable to be subjected to public scrutiny, especially when many FIs have resorted to such acts, which are neither clean nor transparent, and the RBI in association with them has been trying to cover up their acts from public scrutiny and thus the Supreme Court observed that it is the responsibility of the RBI to take rigid action against those Banks which have been practising disreputable business practices.  The Supreme Court also rejected the argument of the RBI that disclosure of information sought for will also go against the economic interest of the nation and held that argument to be “wholly misconceived”.  Making the information available to the people is actually economic empowerment of its citizens so that evaluate the actions of the legislature and executives, which is very important in a participative democracy and this will serve the Nation’s interest better, including its economic interests.  
 
This landmark decision of the Supreme Court would hopefully bring in the desired positive changes in the banking industry which is having non-performing assets worth Rs.2.78 lakh crores as in 2014-15, besides addressing numerous violations plaguing the banking sector.
                                                               =============  

BY
 
DELEP GOSWAMI, FCS, ADVOCATE, SUPREME COURT OF INDIA, NEW DELHI
 
AND
 
ANIRRUD GOSWAMI, ADVOCATE, GOSWAMI & GOSWAMI, ADVOCATES, NEW DELHI
====================
 
For regulating the stock market operations and to prevent stock market manipulations, the Securities and Exchange Board of India (SEBI) exercises a significant and unique role.  Towards this end, the SEBI has framed many Rules and Regulations for compliance by the listed companies and by the stock brokers and stock market operators.  One such Regulation which is required to be scrupulously complied with by companies and market operators is the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997 (in short “Takeover Regulations”).  Another important regulation is SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (in short “2003 Regulations”). Since the provisions of the SEBI Act, 1992 (as amended from time to time) and the various regulations framed by SEBI have tremendous bearing on the stock market operations, SEBI performs its assigned role effectively and more forcefully as a market regulator.   
 
In the aforesaid background, the recent judgement of the Hon’ble Supreme Court of India passed on 18th September, 2015,  in re: Kosha Investments Limited –vs- SEBI  (2015-61 taxmann.com 264 –SC) (hereafter referred to as the “Kosha Judgement”)  deserves to be highlighted as the Supreme Court had the occasion to deal with and interpret the provisions of the aforesaid two Regulations and the principles enunciated in the Kosha Judgement will have tremendous impact on such share market transactions in the times to come.  In the Kosha Judgement, the Supreme Court upheld the action taken by SEBI in directing that, in the facts and circumstances of the said case, the Acquirer of shares of a listed company was under obligation to make public announcement for open offer when it exceeded the share acquisition threshold limits set out in the Takeover Regulations, even if the Acquirer subsequently divests the acquired shares.  From the Kosha Judgement it becomes clear that when the acquirer company filed appeal before the SEBI’s Appellate Authority (“SAT”), the SAT also upheld the impugned orders passed by the SEBI.  However, the Acquirer, namely, Kosha Investments Limited (“KIL”) filed an appeal before the Hon’ble Supreme Court of India, and after hearing both the sides, the Hon’ble Supreme Court of India passed the aforesaid Kosha Judgement. 
 
Brief facts leading to the aforesaid Kosha Judgement is that the Appellant KIL is one of the Indian promoters of another company viz. Snowcem India Limited (“SIL”), which is listed in the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).  As a stock market regulator SEBI noticed that there was a heavy trading in the shares of SIL in BSE and NSE and the prices of the scrips of SIL shot up from Rs.52/- to Rs.128/- during heavy transactions in the said scrip during the period of June, 1999 to August, 1999.  SEBI also noticed that the said acquisitions of shares of SIL were made by KIL and by a particular set of share brokers/traders.  During its investigation, SEBI noticed that KIL was already holding between 15% to 75% shares of SIL (also described as “the Target Company” under the Takeover Regulations) and as such pursuant to the Takeover Regulations, KIL could acquire additional shares of SIL through creeping acquisition mode, that is, without public announcement only up to 5% of the paid up share capital of SIL during the period of 12 months ending on 31st March, 2000. However, SEBI’s investigation revealed that by acquiring 11,36,700 shares of SIL during the period during June, 1999 to August, 1999, the Appellant KIL had acquired shares constituting more than 5% of the paid up share capital of SIL and for making such acquisition, KIL was liable to make public announcement as required by Regulation 11(1) of the Takeover Regulations.
 
For the purposes of its investigation, SEBI issued a “Show Cause Notice” (SCN) dated 16.9.2002 to KIL asking it to show cause as to why suitable directions prohibiting it from dealing in securities for a period should not be issued to it under Section 11B of the SEBI Act, 1992 read with Regulation 11 and 12 of the 2003 Regulations for non-compliance of the provisions of the Takeover Regulations.  The SCN mentioned that KIL, who was one of the promoters of SIL, was among the top traders who had traded in the scrip with the intention to artificially raise the price of the scrip in co-ordination with certain entities connected with it. It was pointed out in the SCN that there were a common set of clients acting in concert through selected brokers of BSE and NSE who were involved in circular trading.  It was also mentioned in the SCN that SEBI’s investigating team had observed that on many occasions, KIL had received funds from SIL and the same were deployed to buy shares of SIL and these payments were in turn made to share brokers to purchase shares of SIL.  It was also alleged in the SCN  that orders placed by other clients were done in such a way that they were matching and appearing to be acting in concert,  which indicated circular trading of the SIL scrip.  The  SCN alleged that the Appellant KIL had aided and abetted the management of SIL in the price manipulation of the scrip and therefore it violated the Regulation 4(a), (b) and (d) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.  The SCN also annexed details of the investigation conducted by SEBI during the aforesaid period.  
 
In reply to the show cause notice issued by SEBI and during the course of personal hearing granted to KIL, the acquirer KIL stated that it was an independent company with its own Board of Directors and that SIL was also run by the Board of Directors as an independent legal entity.  However, in their reply, KIL mentioned that being a promoter company, KIL used to get sometimes request from SIL that they needed funds for meeting their financial requirements and KIL would arrange funds from banks and other financial institutions with collateral security of SIL shares.  KIL further stated that sometimes it would become necessary to liquidate the shares in the market to meet with the obligations.  Therefore, the sale and purchase of shares would happen in order to meet with the loan requirements of SIL.   Further, KIL reiterated that all that KIL would do under such circumstances, was to enter into normal financial transactions with the sole objective of meeting the financial needs of SIL and that   all transactions with brokers were financial transactions and no attempt was made by KIL to create artificial volumes in the market.  Further, KIL also denied that there was any transfer of funds from SIL to KIL and to brokers, and that transactions were done during the normal course of business.  On the basis of those submissions KIL requested that the proceedings against it before SEBI should be dropped.  
 
SEBI, in its order, held that KIL was already holding between 15% to 75% in SIL, and thus KIL could acquire additional shares up to 5% during any period of 12 months through creeping acquisition mode and since KIL acquired more than the stipulated 5% shares of SIL during the said period of 12 months, KIL was liable to make a public announcement to acquire shares in accordance with the Takeover Regulations.  In view of the findings made by SEBI and in exercise of the powers conferred upon the SEBI under Section 19 read with Section 11-B of the SEBI Act read with Regulations 44 and 45 of the said Regulations, SEBI directed KIL, inter-alia, to make public announcement in terms of Regulation 11(1) of the said Takeover Regulations, taking 29th June, 1999 as the reference date for circulation of offer price and the public announcement was directed to made within 45 days of passing of the SEBI’s order. 
 
Further, in exercising the powers conferred under Section 19 of the Securities and Exchange Board of India Act, 1992, read with Sections 11 and 11B of the SEBI Act, 1992, and Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, SEBI restrained KIL from buying, selling, or dealing in securities in any manner, directly or indirectly for a period of two years.
 
Against the aforesaid SEBI’s order, KIL filed an appeal before the SEBI’s Appellate Authority (namely, “SAT”) and submitted that the order passed by SEBI was on some surmises, conjectures and suspicion.  KIL also contended that as per its Memorandum and Articles of Association, it was empowered to inter alia, invest, hold, sell and deal with shares, stocks, bonds, etc., and to carry on the business of an investment company, and to buy, underwrite sub-underwrite, invest in and acquire and hold shares, stock, etc.  Therefore, it was a legitimate activity on the part of the appellant to buy and sell shares, including that of SIL.  In SAT, the appellant KIL also argued that the appellant company was trading in the shares of not only SIL, but of other companies also and it also pointed out that the period of June, 1999 to August, 1999 has been taken out of context, whereas KIL had been purchasing and selling the shares of SIL from much earlier period and hence the specified transactions ought to be seen as only financial transactions.  KIL further contended that  it did not act in concert with a common set of clients/through select brokers of the BSE and NSE as alleged by SEBI and that KIL was not involved in circular trading in the scrip of SIL.  KIL contended that it did not push up the price of the SIL scrip to artificial levels and argued that the stated increase in the price of SIL could be because of several independent market factors and reasons and that the share market was buoyant during this period as would be reflected by the indices of BSE and NSE and therefore SEBI should not have come to the conclusion that the increase in the price of the scrip was due to any manipulation.  KIL also argued that there was no conclusive evidence to prove that the appellant was responsible for the spurt in volumes and increase in the price of scrip of SIL.  KIL argued that there was no evidence to corroborate that KIL in concert with the other entities was responsible for increasing the volume of trade and raising the price of SIL scrip. All transactions entered into by KIL were financial transactions between the appellant and SIL and other brokers involved during the investigation period.  Further, KIL argued that there was no evidence to establish the intentions of the Appellant that it had indulged in artificially raising the price of the scrip of SIL in conjunction with other persons /brokers.  KIL further argued that if anybody has to be charged under SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, it should not be done on the basis of preponderance of probability, but there has to be direct evidence to prove. The learned counsel for KIL also argued that SEBI had wrongly restrained KIL from dealing in securities for a period of two years in exercise of the powers conferred on SEBI under Section 19 of the SEBI Act, 1992 read with Sections 11 and 11B of SEBI Act, 1992 and Regulations 11of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market), Regulations, 2003.
 
In SAT, the appellant KIL further argued  that it had been only arranging funds by way of term loan, bridge loan, ICD, etc., and furnishing the shares of SIL as collateral security in respect of such borrowings, and whenever the aforesaid loans became due for repayment, the borrowing company would request the lender to liquidate either the whole or part of the loan by selling the mortgaged shares that were placed as collateral security after obtaining the consent of the appellant i.e., the pledger in this case.  KIL reiterated its argument that such transactions were in the nature of ongoing transactions and there was no intention to increase the volume of transactions and artificially raise the share price of SIL through circular trading.  KIL further argued that it was wrong to interpret that transactions between various brokers named in the impugned order and the appellant were unfair or unjust.
 
Counter arguments were advanced on behalf of SEBI.  The SAT accepted the counter arguments advanced on behalf of the SEBI that even during the period June, 1999 to August, 1999, the appellant KIL had acquired 6,61,800 shares of SIL, which constituted 6.29% of the paid up share capital of SIL, which was beyond the permissible limit of 5% and hence the requirement of making public announcement in terms of Regulation 11(1) of the Takeover Regulations, 1997 had to be met by the appellant KIL, which the Appellant KIL failed to do and upheld the orders passed by SEBI against the appellant KIL.
 
Against the SAT order, the appellant KIL filed appeal in the Hon’ble Supreme Court of India.  The appellant KIL contended that KIL as a promoter of SIL, KIL was having more than 15% shares of SIL, but KIL was also in the business of sale and purchase of shares, which was being done simultaneously and hence exceeding the limit of 5% at any one point of time was immaterial, unless on a net accounting, it could be found that such ceiling of 5% had been violated by the Appellant on account of its retaining more than 5% shares of SIL, at the end of a financial year.  On the other hand, SEBI reiterated its stand  that the ceiling of making acquisition of only up to 5% of the paid share capital of the target company was to be reckoned during a period of 12 months, that is, a financial year, and that  the requirement of Regulation 11(1) of the Takeover Regulations, 1997 of making a public announcement  was triggered not only on actual acquisition beyond the 5% limit, but even on entering into an agreement for such acquisition or deciding to acquire such volume of shares or voting right, in view of provisions of Regulation 14(1) of the Takeover Regulation, 1997. 
 
The Hon’ble Supreme Court heard the arguments of both sides and to explain the rationale, gave an appropriate example in the following words, i.e., “Let us conceptualise the case of an entity holding 20 per cent of shareholding in a target company on 1st April of a given year.  If it were to increase its holding by say 3 per cent and subsequently reduce it to 2 per cent.  If at that point, it intended to purchase 4 per cent shares again, whether by way of fractions or otherwise, it would cross the threshold of 5 per cent.  It would then have to make compliance with Regulation 11 of the Takeover Regulations, 1997.  We hasten to clarify that if the aggregate percentage of acquisitions at any point of time during the financial year exceeds 5 per cent, the provision would get triggered.  In other words, the provision of Regulation 11 mandating a public announcement will kick in at any stage, whence the shareholding of the said entity in the target company would exceed 25 per cent.” 
 
In the Supreme Court, the Appellant KIL also contended that only in the event where the securities or shares are converted by the acquirer into voting rights by getting it registered or upon exercise of option to acquire voting rights, does the liability of making public announcement can be fastened. This was rightly countered by SEBI and the Hon’ble Supreme Court rejected the submissions of KIL and held that in respect of the shares acquired by KIL, only Regulation 14(1) of the Takeover Regulations, 1997 was applicable and also noted that no such plea was raised by KIL before SEBI or before the SAT and that such a plea was in desperation and hence undeserving of acceptance and therefore held that KIL was required to comply with Regulation 11(1).  The Supreme Court thus dismissed KIL’s appeal and imposed cost of Rs.50,000/- on KIL to be paid to SEBI.
 
CONCLUSION    
 
The analysis of the aforesaid judgement of the Supreme Court of India upholding the orders passed by SEBI and its appellate authority, i.e., SAT, points out that the desperate stand of the share market operators to justify the share market manipulations would be dealt with strictly by the regulatory authorities. The Kosha Judgement reinforces the objective behind enacting the Takeover Regulations which were an important step in ensuring that shareholders of a target company are treated equally and not denied any opportunity to decide whether they wish to continue holding shares of a company whose shares have been acquired by the acquirer, triggering the public announcement. Such tactics employed by companies operating in the stock market as intermediaries, only goes on to highlight the manipulative practices used for artificially orchestrating price rise of shares of the target company in the stock market.
 
It is indeed a step in the right direction and would signal well in disciplining the stock market operations which is the need of the hour to upkeep the confidence of the general investors in the stock market management. 
 
 

By
Delep Goswami, F.C.S., Advocate, Supreme Court Of India 
                                                                                                                   along with

Anirrud Goswami, Advocate, Goswami & Goswami

​
Enactment of Debt Recovery Act to quicken recovery of dues by Banks from defaulting borrowers
 
Advancing of loans by Banks to industrial and non-industrial borrowers is quite common and it is well known that to protect the Bank’s interest in recovering dues from the borrowers, apart from getting many documents signed by the borrower and the guarantors, the lending Bank also keeps the title deeds of the properties which are mortgaged to the Bank to ensure that  if the borrower fails to repay the loan and interest thereon, the Bank can at least auction the mortgaged property and recover its dues from the borrower.
 
To cut short the delay in recovery proceedings filed by the lending Banks to the commercial
borrowers, the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 (“Debt Recovery  Act" -  as amended from time to time) have been enacted and  specialised
Tribunals, known as, Debt Recovery Tribunal (“DRTs”) have been set up to speedily dispose of the
recovery proceedings filed by the Banks and Financial Institutions.  On the basis of the orders passed
by the DRT, the Recovery Officer attached to the DRT, proceeds to auction the mortgaged property
and the proceeds are handed over to the lender Bank after completion of the attendant formalities.
Unless the auction purchasers of such properties are protected and assured of their rights over the
purchased property, the whole system of sale of mortgaged properties by the Recovery Officer of
the DRT is put to lots of  difficulties and such sale will lose its importance. 
 
Brief facts of the case and Supreme Court’s decision on auction purchaser’s rights

In this regard, the decision of the Hon’ble Supreme Court of India passed in the case of Sadashiv Prasad Singh –vs- Harendar Singh & Others (2014-1CLJ-417-SC) (in short “SP Singh judgement”)
deserves special mention because  this judgement protects the rights of the auction purchaser and insulates  such auction purchaser  from all possible attempts to thwart and deny the rights of the auction purchaser over the property  purchased in a public auction.
 
Brief facts leading to the aforesaid  SP Singh judgement of the Supreme Court are that the Allahabad Bank sanctioned in 1987 a loan of Rs.12.70 lakhs to a Timber Merchant Partnership Firm (viz. Amar Timber  Works), after its partners  had mortgaged certain properties to secure the loan amount. Since the loan amount, along with the outstanding interest, was not paid to the lending Bank, the
said Bank, in 1998, preferred an  application before the DRT.  The DRT allowed the Bank’s application in November, 2000 and issued  direction for recovery of Rs.75.75 lakhs from the borrower firm.
During the pendency of the  recovery proceedings, one of the partners of the borrower firm viz. Jagmohan Singh died on  27.1.2004.  On 16.4.2004, the Recovery Officer attached a plot measuring 1298 sq.ft in the  ownership of Jagmohan Singh, one of the partners of the firm. On 10.6.2004, one Harender Singh,  brother of  deceased Jagmohan Singh, filed an objection petition before the Recovery Officer alleging that the  attached property did not belong to the judgment debtors, but had been purchased by him from his  brother Jagmohan Singh by executing an Agreement of Sale dated 10.1.1991, which was duly  notarized, though not registered.  The said Harender Singh pursued the objection petition filed by  him before the Recovery Officer till 26.10.2005, but choose
to abandon the proceedings thereafter.   
 
The recovery proceedings remained pending for a further period of more than two years.  Finally, the Recovery Officer passed an order dated 5.5.2008 for the sale of the property by way of public auction on 4.7.2008.  The Recovery Officer fixed Rs.12.92 lakhs as the reserve price and also fixed 28.8.2008 as the date of auction. 
 
At the auction held on 28.8.2008, one Sadashiv Prasad Singh was the highest bidder.  Accordingly, the Recovery Officer ordered the sale of the property in his favour on 28.8.2008.  On 22.9.2008, the
Recovery Officer, in the absence of any objections, confirmed the sale of the property in favour of Sadashiv Prasad Singh, the auction purchaser and the Recovery Officer ordered the handing over of
physical possession of the property to the auction purchaser.  The auction purchaser Sadashiv Prasad Singh, took physical possession of the property on 11.3.2009.  Thereafter, in furtherance of the proceedings initiated through Mutation Case No.295/2/09-10, the land in question was mutated in favour of the auction purchaser.  The auction purchaser, in the mutation proceedings, duly supported his application with a letter dated 14.10.2008, of the Ministry of Finance, Government of India, Realisation Authority, Patna.  No objections were filed in the mutation case preferred by
Sadashiv Prasad Singh, by or on behalf of  Harender Singh, who had initially filed the objections Earlier  before the Recovery Officer, DRT.      
 
High Court’s decision on the petition filed by the objector to the auction sale
The said Harender Singh filed a Writ Petition  in the High Court assailing the order of the Recovery Officer ordering sale of mortgaged property by public auction in discharge of the debts owed by the borrower Amar Timber Works.  The said Writ Petition got dismissed on 27.11.2010 holding as under:-

“The above facts do weigh with the Court in not interfering with the sale or the proceeding where it has been reached.  The Petitioner has no satisfactory explanation for not approaching the Court well within time challenging such a decision or the subsequent proceedings or orders of the Recovery Officer at an appropriate time.  The conduct of the Petitioner by itself has precluded and prevented this Court from passing any order in his favour at this belated stage.  The writ application has no merit.  It is dismissed accordingly.”  
 
Dissatisfied with the dismissal order by the single Judge, the petitioner Harender Singh preferred an appeal before the Division Bench  of the High Court.  In the proceedings before the Division Bench of the High Court,  the said Harender Singh  offered a sum of Rs.39 lakhs.  In the proceedings before the Division Bench,  the lender Bank had accepted  to finally settle the matter on being paid a sum of Rs.45 lakhs, subject to the condition that the  appellant Harender  Singh pays a sum of Rs.15 lakhs immediately, and the balance amount of Rs.30 lakhs within a period of two years in a phased manner.  Even though the learned counsel representing the appellant  Harender Singh was agreeable to proposal of the Bank, the rival parties could not amicably settle the matter. 

 The Division Bench noted that the auction purchaser has purchased the mortgaged property by paying Rs.13.20 lakhs.  The Court also noted that on a suggestion as to whether the Bank would accept Rs.45 lakhs in totality  to settle the dispute and the Bank conveyed its no objection to settle the same, if the appellant paid  Rs.15 lakhs immediately, so that the  same can be paid to the auction purchaser, and Rs.30 lakhs should be paid within a period of two  years in a phased manner.  During the course of appellate proceedings, the High Court referred to  Section 29  of the Debt Recoveries Act.  The High Court, while interpreting section 29 of the Debt Recovery  Act concluded that certain provisions of the Income Tax Act and Income Tax (Certificate  Proceedings) Rules would be applicable mutatis mutandis in the matter of recovery of debts under  the Debt Recovery Act.  The High Court then referred to Rule 11 of the Income Tax  (Certificate  Proceedings) Rules and arrived at the conclusion that sub-rule (2) of rule 11 had not been complied  with by the Recovery Officer, inasmuch as the objection raised by Harender Singh had not been adjudicated upon.  As such, the Division Bench of the High Court  concluded that the proceedings before the Recovery Officer were in flagrant violation of the provisions of rule 11(2) of the Income Tax (Certificate Proceedings) Rules. 

Having  so concluded, the High Court set aside the proceedings  conducted by the Recovery Officer, including the sale of the property by public auction. 
 
Having dealt with the controversy in the manner expressed in the foregoing paragraphs, the Division Bench of the High Court was of the view that the matter in hand ought to be settled by working out
the equities between the parties.  Accordingly, the High Court disposed of the matter in the
following manner :-
“Though we have held the same could not have been sold in auction, yet equities are to be worked out.  Regard being had to the fact that the respondent-purchaser has deposited Rs.13.20 lakhs between 28.8.2008 to 22.9.2009 and thus the amount is with the Bank for almost more than one year and 10 months and thereafter there had been challenge to the order in the writ petition and after dismissal of the writ petition, the present LPA has been filed in quite promptitude and that the amount of the respondent purchaser was blocked, it will be obligatory on the part of the appellant to compensate the respondent-purchaser at least by way of payment of interest at the Bank rate.  We are disposed to think that if a sum of Rs.17 lakhs is paid to the auction-purchaser, it would sub-serve the cause of justice and house of the appellant shall be saved and, accordingly, it is directed that the appellant shall deposit a sum of Rs.17 lakhs within a period of four weeks from today in the Bank.  After such deposit, the Bank shall hand it over to the purchaser by way of a bank draft.  The same shall be sent by registered post with acknowledgement due.  Thereafter, the appellant shall deposit a further sum of Rs.32 lakhs within a period of two years; sum of Rs.16 lakhs by 25th March, 2011 and further sum of Rs.16 lakhs by 25th March, 2012.  Needless to say, pro-rata interest shall accrue in favour of the Bank for the said period.  After the amount is paid to the purchaser, it would be duty of the Recovery Officer to hand over the possession to the Appellant.”   
 
The said Division Bench order of the High Court was assailed in the Supreme Court  by the said auction purchaser Sadashiv Prasad Singh to protect his rights on the property purchased in public auction and separately by the Appellant  Harender  Singh on the ground that the impugned High Court order places him in the shoes of the auction purchaser and as such he could have only been asked to pay a sum of Rs.17 lakhs and that requiring him to pay a further sum of Rs.32 lakhs is unsustainable in law and accordingly deserved to be set aside. 
 
Decided judgements of the Supreme Court on auction purchaser’s rights
In the Supreme Court, counsel for the auction purchaser contended that in terms of the law declared by the Supreme Court , the property purchased by a third party auction purchaser, in compliance of a court order, cannot be interfered with on the basis of the success or failure of the parties to a proceeding, if auction purchaser had bona-fide purchased the property and relied on the judgement rendered by the Supreme Court in Ashwin S Mehta and Another –vs- Custodian and Others (2006-2 CLJ-193-SC), and stressed on the following observation made therein :- 
 
“In that view of the matter, evidently, creation of any third-party interest is no longer in dispute, nor the same is subject to any order of this Court.  In any event, ordinarily, a bona-fide purchaser for value in an auction-sale is treated differently than a decree-holder purchasing such properties.  In the former event, even if such a decree is set aside, the interest of the bona-fide purchase in an auction-sale is saved : see Nawab Zain-ul-abdin Khan –vs- Mohd.Asghar Ali Khan (1887-15-IA 12).  The said decision has been affirmed by the court in Gurjoginder singh –vs- Jaswant Kaur (1994-2 SCC 368)”
 
The Counsel of the auction purchaser also relied on another decision of the Supreme Court in Janatha Textiles and others –vs- Tax Recovery Officer and Another (2008-12-SCC 582), wherein the
conclusions  drawn in Ashwin S. Mehta (supra) came to be reiterated.  In the above judgement, the Supreme Court relied upon the decisions of the Privy Council and other judgements  of the Supreme Court wherein it was concluded that  it is an established principle of law that a third party auction purchaser’s interest, in the auctioned property continues to be protected, notwithstanding that the underlying  decree is subsequently set aside or otherwise.  In the aforesaid  S.P. Singh judgement, the Supreme Court  therefore observed as under :-
 
“Law makes a clear distinction between a stranger who is a bona-fide purchaser of the property at an auction-sale and a decree-holder purchaser at a court auction.  The strangers to the decree are afforded protection by the Court because they are not connected with the decree.  Unless the protection is extended to them, the court sales would not fetch market value or fair price of the property.”
 
The Supreme Court while hearing the aforesaid case, also referred to one exception recorded in Velji Khimji & Company –vs- Official Liquidator of Hindustan Nitro Product (Gujrat) Limited and Others (2008-9 SCC 299), wherein it was held as under :-
“In the first case mentioned above i.e. where the auction is not subject to confirmation by any authority, the auction is complete on the fall of the hammer, and certain rights accrue in favour of the auction purchaser.  However, where the auction is subject to subsequent confirmation by some authority (under a statute or terms of the auction), the auction is not complete and no rights accrue until the sale is confirmed by the said authority.  Once, however, the sale is confirmed by that authority, certain rights accrue in favour of the auction purchaser, and these rights cannot be extinguished, except in exception cases such as fraud.  In the present case, the auction having been confirmed on 30.7.2003 by the Court, it cannot be set aside, unless some fraud or collusion has been proved.  We are satisfied that no fraud or collusion has been established by anyone in this case.”
 
Supreme Court’s judgement upholding the rights of the auction purchaser
The Supreme Court, in the aforesaid judgement noted that it is apparent that the rights of an auction purchaser in the property purchased by him cannot be extinguished, except in cases where the said purchase can be assailed on grounds of fraud or collusion. The Supreme Court noted that the auction purchaser was not a party to the loan given by the Bank to the borrower and was not a party to the controversy with regard to the adjudication of the dues of the Bank recoverable from the borrowers.  The auction purchaser purchased the property in a public auction and there was no objections raised about the said auction process, nor was there any allegation of fraud or collusion.  The property purchased in public auction was handed over to the auction purchaser and he got the same mutated in his name.  The Supreme Court also noted that the impugned High Court order was passed in order to work out the equities between the parties and the entire deliberations in the High Court were based on offers and counter offers, inter-se, between the Allahabad Bank on the one hand and the Objector viz. Harender Singh, on the other, whereas the rights of the auction purchaser Sadashiv Prasad Singh were not at all taken into consideration and was deprived of the property which came to be vested in him as far back as on 28.8.2008.  It revealed that the escalation of prices had taken place thereafter and the value of the property purchased by Sadashiv Prasad Singh was presently much higher than the bid amount.  It was nobody’s case that the auction purchaser purchased the property at a price lesser than the then prevailing market price, there was no justification whatsoever to set aside the auction purchase made by him on account of escalation in the price of the property thereafter.  The Supreme Court held that the High Court in ignoring the vested rights of the auction purchaser committed an error in depriving him to the property which he had genuinely and legitimately purchased at a public auction.  The High Court clearly overlooked the equitable rights vested in the auction purchaser while disposing of the appeal filed by Harender Singh.  The Supreme Court also noted that if  the objector Harender Singh had any grievance against the auction sale, he could have invoked the provisions of Section 30 of the Debt Recovery Act, which he failed to do so.  The Supreme Court therefore observed that in exercise of its Writ Jurisdiction, the High Court ought not to have interfered with the matter agitated by Harender Singh in hiswrit petition.   Also, because of third party rights which had emerged in the meanwhile, the High Court ought to have dismissed/rejected Harender Singh’s petition on the ground of delay and laches. 
The Supreme Court  therefore  came to the conclusion that the High Court clearly erred while setting aside the auction ordered in favour of the auction purchaser.  The High Court’s impugned order dated 17.5.2010 was therefore set aside and sale of the property in favour of Sadashiv Prasad Singh was therefore confirmed.
 
CONCLUSION     
The aforesaid judgement of the Supreme Court confirms the rights of the auction purchaser of properties sold by the Recovery Officer of the Debt Recovery Tribunals in terms of the Debt Recovery Act and  the aforesaid S.P. Singh judgement  will instil confidence of the third party auction purchasers in the auction sale and will go a long way in finality of  sale of mortgaged properties of the defaulting borrowers.  At a time when the Central Government has promulgated the Ordinance to enforce  “The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Bill 2015”, such clear cut rational decision by the Supreme Court in settling commercial disputes will go a long way in giving finality to auction sale of mortgaged properties to recover dues by Banks from the defaulting borrowers.