Supreme Court of India
KOTAK MAHINDRA BANK LTD.versusHINDUSTAN NATIONAL GLASS & IND. LTD. AND ORS.
- Citation
- 2012 INSC 580
- Decided
- 11 December 2012
- Disposal
- Disposed off
- Bench
- A K PATNAIK
Holding
The Master Circular on wilful default covers wilful defaults arising from derivative transactions and other non‑funded banking facilities, not merely lender‑borrower loan defaults.
Summary
The Supreme Court examined whether the Reserve Bank of India's Master Circular on wilful default applies to defaults arising from derivative transactions or is limited to traditional lender‑borrower relationships. Kotak Mahindra Bank had classified Hindustan National Glass and other parties as wilful defaulters for non‑payment under foreign‑exchange derivative contracts, which the respondents contested. The Court held that the purpose of the Circular—to prevent banks from extending credit to parties capable of paying but willfully avoiding payment—requires a purposive interpretation, covering both funded and non‑funded facilities such as guarantees and derivatives. It emphasized that the term “lender” in the Circular should be read as “bank” and that credit information under Section 45A(c)(v) of the RBI Act includes such defaults. Consequently, the Master Circular does cover derivative transactions. The appeal by Kotak Mahindra Bank was allowed, setting aside the Calcutta High Court judgment, while the appeals against the Bombay High Court judgments were dismissed.
Issues considered
- The scope of the RBI's Master Circular on wilful default: does it include defaults under derivative transactions?
- Whether the term “lender” in the Circular should be interpreted narrowly (lender‑borrower relationship) or broadly (bank as lender) for purposes of wilful default.
- The applicability of Sections 45A, 45C, and 45E of the Reserve Bank of India Act to information on derivative defaults.
Legislation cited
- Banking Regulation Act, 1949s. 21, s. 35A
- Central Vigilance Commission Ordinance, 1998s. 8(1)(h)
- Credit Information Companies (Regulation) Act, 2005s. 2(c)
- Foreign Exchange Management Act, 1999
- Reserve Bank of India Act, 1934s. 45A(c)(v), s. 45C, s. 45E
Subjects
Master Circularwilful defaultderivative transactionsReserve Bank of Indiastatutory interpretationcredit informationbanking regulationlender‑borrower relationship
Judgment
[2012) 13 S.C.R. 697
KOTAK MAHINDRA BANK LTD. A
v.
HINDUSTAN NATIONAL GLASS & IND. LTD. AND ORS.
(Civil Appeal No. 8916 of 2012)
DECEMBER 11, 2012
B
[A.K. PATNAIK AND SWATANTER KUMAR, JJ.]
Bank/Banking - Master Circular on wilful default issued
by Reserve Bank of India - Whether covers a derivative
transaction - Held: In view of the mischief the Master Circular C
seeks to remedy and the purpose of the Master Circular, the
definition of 'wilful default' would be construed to mean not
only wilful defaults of dues by a bonuwer to the bank under
/ender-borrower relationship, but also wilful defaults of dues
by a client of the bank under other banking transactions such D
as bank guarantees and derivative transactions - Reserve
Bank of India, Act, 1934 - ss. 45A(c)(v), 45C and 45E.
Interpretation of Statutes: Rule of construction - Held:
Words in a statute or a document are to be interpreted in the E
context or subject-matter in which the words are used and not
according to its literal meaning.
The question for consideration in the present
appeals against the judgments passed by the Calcutta
High Court and the Bombay High Court, which arose was F
whether the Master Circular on wilful default issued by
Reserve Bank of India would cover the cases of willful
default under a derivative transaction or it was confined
only to a wllful default by a borrower of the bank in a
lender-borrower relationship. G
Allowing the appeal No. 8916 of 2012 and dismissing
the appeal Nos. 8917 and 8918 of 2012, the Court.
HELD: 1. The Master Circular on wilful default issued
~7 H
698 SUPREME COURT REPORTS (2012) 13 S.C.R.
A by Reserve Bank of India, covers not only wilful defaults
of dues by a borrower to the bank but also covers wilful
defaults of dues by a client of the bank under other
banking transactions such as bank guarantees and
derivative transactions. [Para 39] [739-C]
B
2. From the definition of wilful default in the Master
Circular, it is evident that a wilful default would be
deemed to have occurred in any of the events mentioned
in sub-clauses {a), {b), {c) and {d) of clause 2.1 of the
Master Circular. These sub-clauses use the word
C "lender" and for this reason the Calcutta High Court has
taken a view in the impugned judgment that the Master
Circular applies only to a lender-borrower relationship
and a party who has defaulted in meeting its payment
obligation to the bank under the derivative transaction is
D not covered by the Master Circular. The Calcutta High
Court has gone by a literal interpretation of the word
"lender" in sub-clauses {a), {b), {c) and {d) in the definition
of wilful default in clause 2.1 of the Master Circular. This
approach of the Calcutta High Court in interpreting the
E Master Circular 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. [Paras 28 and 29] [727-C-G]
F
'Principles of Statutory Interpretation' by G.P. Singh
(11th Edition) • referred to.
3. The Bombay High Court has come to the
conclusion in the impugned judgment that the Master
G Circular covers also a default in complying with the
payment obligations under derivative transactions by
relying on the language of not only the Master Circular
dated 01.07.2009 but also of the circulars issued by the
RBI on 08.08.2008, 13.10.2008, 29.10.2008, 09.04.2009 and
H 01.07 .2010 which relate to prudential norms, assets
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 699
NATIONAL GLASS & IND. LTD.
classification as non-performing assets, etc. This A
approach of the Bombay High Court in interpreting the
Master Circular is also not correct because the subject
matter of the circulars of the RBI issued on 08.08.2008,
13.10.2008, 29.10.2008, 09.04.2009 and 01.07.2010 do not
relate to wilful default. These circulars are not even B
amending or clarifying the definition of wilful default in
the Master Circular. The circulars do not constitute the
context or the subject-matter in which the definition of
wilful default in the Master Circular has to be construed.
The context will only include parimateria circulars issued c
by the RBI, but will not include circulars issued by the
RBI on subject-matters other than wilful default. [Para 30]
[729-C-G]
4. The Master Circular originated pursuant to the
instructions of the Central Vigilance Commission, on the D
subject "improving vigilance administration in banks",
which required collection of information on wilful defaults
of Rs.25 lakhs and above. These instructions of the
Central Vigilance Commission covered "all cases of
wilful default of Rs.25 lakhs and above" and were not E
confined to only wilful default by a borrower of his dues
to the bank in a lender-barrower relationship. Thus, all
cases of wilful defaults of Rs.25 lakhs and above were
to be reported by the banks to the RBI and not just cases
of defaults by borrowers of loans or advances from F
banks. [Paras 31 and 32) [730-B-C; 731-C-D]
5. The mischief that was sought to be remedied was
that banks are not exploited by parties who have the
capacity to pay their dues to the banks but who willfully G
avoid paying their dues to the banks.The purpose of the
Master Circular was to have a system to disseminate
credit information pertaining to wilful defaulters amongst
banks and financial institutions so that no further bank
finance is made available to such wilful defaulters from
H
700 SUPREME COURT REPORTS [2012] 13 S.C.R.
A such banks and financial institutions. [Paras 32 and 34]
[731-D; 732-8-C]
6. It is evident from the language of sub-clause (v) of
Section 45A(c) of the Reserve Bank of lndiaAct,1934 that
credit information means not only any information relating
8
to matters in sub-clauses (i),(ii),(iii) and (iv), but also
relates to any other information which the bank
considers to be relevant for the more orderly regulation
of credit or credit policy. Hence, "credit information" is
not confined to information relating to a borrower of the
C bank, but may also relate to a constituent of the bank who
intends to take some credit from the bank. The purpose
of the Master Circular being to caution banks and
financial institutions from giving any further bank finance
to a wilful defaulter, credit information cannot be confined
D to only the wilful defaults made by existing borrowers of
the bank, but will also cover constituents of the bank, who
have defaulted in their dues under banking transactions
with the banks and who intend to avail further finance
from the banks. [Para 34] [732-H; 733-A-C]
E
7. In view of the mischief that the Master Circular
seeks to remedy and the purpose of the Niaster Circular,
the words used in the definition of 'wilfuldefault' in clause
2.1 of the Master Circular would be interpreted to mean
F not only a wilful default by a unit which has defaulted in
meeting its repayment obligations to the lender, but also
to mean a unit which has defaulted in meeting its
payment obligations to the bank under facilities such as
a bank guarantee. The word 'lender' in sub-clauses (a),
(b), (c) and (d) means the "bank" because "payment
G obligations" mentioned in clause (a) do not ordinarily
refer to obligations to a lender and clause (d) has used
the expression "bank/lender". [Para 35) [733-D-F]
8. Paragraph 2.6 of the Master Circular states inter
H alia that in cases where a letter of comfort and/or the
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 701
NATIONAL GLASS & IND. LTD.
guarantees furnished by the companies within the group A
on behalf of the wilfully defaulting units are not honoured
when invoked by the banks/financial institutions, such
group of companies should also be reckoned as wilful
defaulters. It is, thus, clear that non-funded facilities such
as a guarantee is covered by the Master Circular and B
when a guarantee is invoked by a bank/financial
institution but is not honoured, the defaulting constituent
of the bank is treated as a wilful defaulter even though it
may not have borrowed funds from the bank in the form
of advances or loans. [Para 35] [733-G-H; 734-A-B] c
9. The scheme of Collection and Dissemination of
Information on cases of wilful default of Rs.25 lakhs and
above was framed by the RBI in the year 1999 when the
derivative transactions were not part of the country's
economy. Under the FEMA Regulations, 2000, only the D
banks were authorized to deal with the derivative
transactions. Section 45V introduced along with other
provisions of Chapter lllD in the 1934 Act by the Reserve
Bank of India (Amendment) Act, 2006 declared that
transactions in derivatives, as may be specified by the E
RBI from time to time, shall be valid, if at least one of the
parties to the transaction is the bank, a scheduled bank,
or such other agency falling under the regulatory purview
of the RBI under the 1934 Act, FEMA Act or any other Act
or instrument having the force of law, as may be specified F
by the RBI from time to time. Derivative transactions In
India thus were valid only if they were with any bank or
any other agency falling under the regulatory purview of
the RBI because they would have a substantial bearing
on the credit system and credit policy in respect of which G
the RBI has regulatory powers under the 1934 Act and
Banking Regulation Act, 1949. Such derivative
transactions may not involve a lender-borrower
relationship between the bank and its constituent, but
dues by a constituent remaining unpaid to a bank may H
702 SUPREME COURT REPORTS (2012) 13 S.C.R.
A affect the credit policy and the credit system of the
country. Information relating to defaulters of dues under
derivative transactions who intend to take additional
finance from the bank obviously will come within the
meaning of credit information u/s. 45A(c)(v) of the 1934
B Act. [Para 36] [734-B-G]
10. 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
C Section 45C of the 1934 Act. 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,
D 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
E (1) of Section 45C. [Para 37] [736-F; 737-C-D]
11. It is not correct to say that the Master Circular has
penal consequences and, therefore, has to be literally and
strictly construed. Clause 4.3 of the Master Circular states
that there is scope even under the exiting legislations to
F initiate criminal action against wilful defaulters depending
upon the facts and circumstances of the case under the
provisions of Sections 403 and 415 of the IPC and the
banks and financial institutions are strictly advised to
seriously and promptly consider initiating criminal action
G based on the facts and circumstances of each case
under the above provisions of the IPC. Thus, the Master
Circular by itself does not have penal consequences,
whereas Sections 403 and 415 of the IPC have penal
consequences. The provisions of Sections 403 and 415
H of the IPC obviously have to be strictly construed as
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 703
NATIONAL GLASS & IND. LTD.
these are penal provisions and will get attracted A
depending on the facts and circumstances of each case,
but the provisions of the Master Circular need not be
strictly construed. [Para 38) [737-E; 738-C-E]
Commissioner of Sales Tax, M.P. v. Jaswant Singh 8
Charan Singh 1967 (2) SCR 720; Bombay Steam Navigation
Co. (1953) Private Ltd. v. C.I. T., Bombay 1965 (1) SCR 770;
C.I. T., Lucknow v. Bazpur Co-operative Sugar Ltd. 1989 Supp.
(2) SCC 240: 1989 (2) SCR 840; Ram Ratan Gupta v.
Director of Enforcement, Foreign Exchange Regulation and C
Anr. 1966 (1) SCR 651; Bhuwalka Steel Industries Ltd. v.
Bombay Iron & Steel Labour Board and Anr. (2010) 2 SCC
273: 2009 (16) SCR 618; /CIC/ Bank Ltd. v. Official Liquidator
of APS Star Industries Ltd. (2010) 10 SCC 1: 2010 (12) SCR
644; Tolaram Relumal and Anr. v. State of Bombay 1955 (1)
SCR 158; Chandigarh Housing Board v. Major General D
Devinder Singh and Anr. (2007) 9 SCC 67: 2007 (3) SCR
1049; Delhi Airtech Services Private Limited and Anr.v. State
of Uttar Pradesh and Anr. (2011) 9 sec 354: 2012 (12) SCR
191; Shah and Co., Bombay v. State of Maharashtra and Anr.
1967 (3) SCR 466; Rajshree Sugars and Chemicals Ltd. v. E
Axis Bank Ltd. (2008) 8 MLJ 261; Desh Bandhu Gupta and
Co. and Ors. v. Delhi Stock Exchange Association Ltd. (1979)
4 SCC 565: 1979 (3) SCR 373; Peerless General Finance
and Investment Co. Ltd and Anr. v. Reserve Bank of India
(1992) 2 SCC 343: 1992 (1) SCR 406; Ganesh Bank of F
Kurundwad Ltd. and Ors. v. Union of lndiaand Ors. (2006) 10
SCC 645: 2006 (5) Suppl. SCR 437; Joseph
KuruvillaVel/ukunnel v. Reserve Bank of India 1962 Supp (3)
SCR 632; Common Cause (A Registered Society) v. Union
of India and Anr. (2010) 11 SCC 528: 2010 (10) SCR 124; G
Securities and Exchange Board of India v. Ajay Agarwal
(2010) 3 SCC 765: 2010 (3) SCR 70; Executive Engineer,
Southern Electricity Supply Company of Orissa Ltd.
(SouthCo) and Anr. vs. Sri Seetaram Rice Mill (2012) 2 SCC
108: 2011 (15) SCR 211; Rattan Chand Hira Chand v. Askar H
704 SUPREME COURT REPORTS [2012) 13 S.C.R.
A Nawaz Jung (Dead) by L.Rs and Ors. (1991) 3 SCC 67: 1991
(1) SCR 327 - cited.
Lord Loreburn in Macbeth v. Chislett (1910) A.C. 220,
224; Tournier v. National Provincial and Union Bank of
England (1924) 1 KB 461- cited.
B
Case Law Reference:
1967 (2) SCR 720 Cited Para 11
(1910) A.C. 220, 224 Cited Para 11
c
1965 (1) SCR 770 Cited Para 11
1989 (2) SCR 840 Cited Para 11
1966 (1) SCR 651 Cited Para 11
D 2009 (16) SCR 618 Cited Para 11
2010 (12) SCR 644 Cited Para 12, 21
1955 (1) SCR 158 Cited Para 12
E 2007 (3) SCR 1049 Cited Para 12
2012 (12) SCR 191 Cited Para 12
1967 (3) SCR 466 Cited Para 12
(2008) 8 MLJ 261 Cited Para 13
F
1979 (3) SCR 373 Cited Para 14, 21
1992 (1) SCR 406 Cited Para 14, 21
(1924) 1 KB 461 Cited Para 18
G
2006 (5) Suppl. SCR 437 Cited Para 21
1962 Supp (3) SCR 632 Cited Para 21
2010 (10) SCR 124 Cited Para 21
'
H
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 705
NATIONAL GLASS & IND. LTD.
2010 (3) SCR 70 Cited Para 25 A
2011 (15) SCR 211 Cited Para 25
1991 (1) SCR 327 Cited Para 26
CIVIL APPELLATE JURISDICTION : Civil Appeal No. B
8916 of 2012.
From the Judgment & Order dated 01.09.2009 of the High
Court of Calcutta in Writ Petition No. 7729 (w) of 2009.
WITH
c
C.A. Nos. 8917 & 8918 of 2012.
C.A. Sundram, Soli J. Sorabjee, Chander Uday Singh, Dr.
Abhishek Manu Singhvi, Jaideep Gupta, Bhaskar P. Gupta,
Dushyant Dave, S. Ganesh, Ashok H. Desai, Dhavram Juneja,
Rohini Musa, Tanuj, Krishnan Dev, Sony Bhatt, Kirat Nagra, D
Senthil Jagadeesan, Shyel Trehan, Hitesh Jain, Diya Kapur,
Pooja Tidka, Nikhil Pillai, Arjun Puri, Vikas Mehta, Amit
Bhandari, Manik Joshi, Chelan Kapadia, R.N. Karanjawala,
Manik Karanjawala, Ruby Singh Ahuja, Ruchira Gupta, Jatin
Mongia, Deepti Sarin, Siddhant Kochhar (for Karanjawala & E
Co.), Pritesh Kapur, Mehernaz Mehta, Arjun Singh Puri, lshan
Gaur, Kuldeep S. Parihar, H.S. Parihar, Ratnakar Banerjee,
Snehal Kakrania, Sanjeev Kapoor (for Khaitan & Co.), Sumeet
Lall, Abhishek Khare, Bharat Sangal, Vikram Trivedi, Sachin
Chandrana, Srijana Sana, Ramandeep Kaur, L.K. Bhushan, F
Anirudh Arun Kumar, Hoshedar Wadia, Fraser Alexander (for
Dua Associates} for the appearing parties.
The Judgment of the Court was delivered by
A.K. PATNAIK, J. G
CIVIL APPEAL No. 8916 OF 2012
(Arising out of SLP (C) N_O. 29599 of 2009)
1. Leave granted.
2. This is an appeal against the order dated 01.09.2009 H
706 SUPREME COURT REPORTS [2012) 13 S.C.R.
A of the Calcutta High Court in Writ Petition No. 7729(W) of 2009.
3. The facts very briefly are that 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
B 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
C 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
D 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
E 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
F 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
G 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
H short 'the RBI') issued the Master Circular on Wilful Defaulters.
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 707
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
4. The Master Circular on Wilful Defaulters (for short "the A
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. By letter dated 22.10.2008, the appellant intimated B
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 c
that neither the appellant was a "lender'' nor the respondent
no.1 was a "borrower'' within the meaning of "wilful default" in
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 D
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 E
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 F
transactions and was restricted only to the acts of lending by
the bank and borrowing by the bank's constituents 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 G
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 H
708 SUPREME COURT REPORTS (2012] 13 S.C.R.
A 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 wilful defaulter under the Master Circular
and further resolved that the respondent no.1-company and its
B 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
c the RBI by two separate letters dated 07.04.2008. Aggrieved,
the respondent no.1 filed Writ Petition No. 7729 0N) 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
0 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
E 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 this appeal.
F
5. Mr. C.A. Sundaram, learned senior counsel appearing
for the appellant, submitted that the High Court has not correctly
interpreted the Master Circular. He referred to the counter
affidavit filed on behalf of the RBI before the High Court to show
G that the Master Circular had been issued by the RBI inter alia
in exercise of its powers under the Banking Regulation Act,
1949 (for short 'the 1949 Act') and that Sections 21 and 35A
of the 1949 Act make it clear that the directions/guidelines
issued by the RBI are mandatory and binding on the clients.
H He argued that Paragraph 2.1 of the Master Circular defines
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 709
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
the term "Wilful Default" as a default by a unit in meeting its A
payment/repayment obligations to the lender, but the word
"lender" has not been defined in the Master Circular. He
submitted that the RBI, which has issued the Master Circular,
has in its counter affidavit before the High Court stated that the
intention of the RBI while issuing the Master Circular was to B
cover all eventualities where "payment/repayment obligations"
exist and therefore the Master Circular would cover all banking
transactions including off balance-sheets transactions, such as,
derivatives, guarantees, Letters of Credit, etc. He referred to
Sections 45U of the Reserve Bank of India Act, 1934 (for short c
'the 1934 Act'), which defines in Clause (a) the word "derivative"
and also to Section 45V of the 1934 Act which is titled
"Transactions in derivatives" and submitted that the derivative
transactions with banks had been declared to be valid by law.
He submitted that the word "borrower'' has been defined in D
Clause (b) of Section 45A of the 1934 Act to mean any person
to whom any credit limit has been sanctioned by any banking
company and has been still more widely defined in Clause (b)
of Section 2 of the Credit Information Companies (Regulation)
Act, 2005 (for short 'the 2005 Act') to mean not only a person
E
who has been granted loan or any other credit facility by the
credit institution, but also a client of a credit institution. He
referred to the definition of "Client" in Clause (c) of Section 2
of the 2005 Act to show that "Client" includes a person who
has not only obtained or seeks to obtain financial assistance
from a credit institution, but also obtains assistance in any other F
form or manner. He submitted that Clause (d) of Section 2 of
the 2005 Act defines the expression "credit information" more
widely to include not only loans but any other non-funding based
facility granted to all its borrowers as well as any other matter
which the RBI may consider necessary for inclusion in the credit G
information to be collected. He submitted that the Foreign
Exchange Management (Foreign Exchange Derivative
Contracts) Regulations, 2000 (for short 'the FEMA Regulations')
had been made by the RBI under Section 47 of the Foreign
Exchange Management Act, 1999 (for short "the FEMA") and H
710 SUPREME COURT REPORTS [2012) 13 S.C.R.
A Regulation 2(v) of the FEMA Regulations defines "foreign
exchange derivative contract" to mean a financial transaction
or an arrangement in whatever form and by whatever name
called, whose value is derived from price movement in one or
more underlying assets. He referred to Schedule-I of the FEMA
B Regulations to show that foreign exchange derivative contract
was permissible for a person resident in India. Mr. Sundaram
vehemently argued that as the purpose of the Master Circular
is to ensure that the clients of the banks who had defaulted in
their payment/repayment obligations of the dues to the banks
c are not given additional finance, a client of the bank who had
defaulted in not paying its dues to the bank under a foreign
exchange derivative transaction would also be covered under
the Master Circular. He submitted that as the respondent no.1
had defaulted in making payment of Rs.1,56,08,084. 70 as on
29.12.2008 on account of foreign exchange derivative
0
transactions, the appellant was required by the instructions of
the RBI in the Master Circular to report the case to the RBI as
well as other banks and financial institutions as a wilful defaulter.
He submitted that the High Court was, therefore, not right in
E setting aside the decision dated 07.04.2009 of the appellant-
bank and allowing the writ petition of the respondent no.1.
6. Mr. Bhaskar P. Gupta, learned senior counsel for the
respondent no.1, on the other hand, submitted that under the
Master Circular a wilful default can arise only out of a lender -
F borrower relationship between the bank and its constituent and,
therefore, unless the bank has given a loan or an advance to
its constituent, the question of wilful default under the Master
Circular does not arise. He submitted that a reading of the
Master Circular would show that a declaration of a wilful
G defaulter has severe consequences for the party declared as
a wilful defaulter, such as squeezing of credit under clause
2.5(a) of the Master Circular and criminal liability under clause
4.3 of the Master Circular. He argued that considering the
severe consequences that follow a declaration of wilful defaulter,
the definition of "wilful default" in the Master Circu1a·r which
H
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 711
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
refers to defaults in repayment obligations to a "lender" has to A
be strictly construed. He cited the decisions of this Court in
Bijaya Kumar Agarwala v. State of Orissa [(1996) 5 SCC 1]
and Sakshi v. Union of India & Ors. [(2004) 5 SCC 518] for
the proposition that a statute enacting an offence or imposing
a penalty is to be strictly construed. He submitted that a B
derivative transaction does not involve lending of funds by way
of a loan or an advance by the bank to its constituent and,
therefore, the dues under a derivative transaction will not fall in
any of the sub-clauses (a) to (d) of clause 2, which defines a
wilful defaulter for the purpose of the Master Circular. He argued c
that there is a fundamental difference between a loan/advance
and a derivative transaction and the fundamental difference is
that in the case of a derivative transaction, either party could
be required to effect payment depending on the change in
interest rate, foreign exchange rate credit rating or credit index, D
price of securities as will be clear from Section 45U of the 1934
Act, whereas in the case of a loan or an advance, it is the
borrower alone which has to effect payment. He submitted that
in none other circulars issued after the Master Circular of
01.07.2008 there is any change in the definition of 'wilful E
defaulter' so as to bring in defaulters of payment of dues under
the derivative transactions within the meaning of 'wilful
defaulters'. In this context, he referred to the Master Circulars
dated 01.07.2009, 01.07.2010, 01.07.2011 and 01.07.2012.
He vehemently argued that if the RBI intended to include
defaulters of dues under the derivative transactions within the F
meaning of the expression "wilful defaulter'', the RBI.could have
changed the definition of "wilful defaulter'' in the subsequent
Master Circulars.
7. Mr. Bhaskar P. Gupta next submitted that the stand of G
the RBI before the High Court in the affidavits filed on its behalf
was that the question as to whether there was a lender-
borrower relationship between the appellant and the respondent
no.1 under the contract between them and whether there was
a legally enforceable obligation between the appellant and the H
712 SUPREME COURT REPORTS [2012] 13 S.C.R.
A respondent no.1 are issues which can be determined by a civil
court in a properly instituted suit in accordance with law and it
is not possible for the RBI to interpret the contract between the
appellant and the respondent no.1 and express any opinion in
that regard and that determination of such issues arising under
B a contract cannot be done in a proceeding under Article 226
of the Constitution and hence the writ petition of the respondent
no.1 was liable to be dismissed. He submitted that the RBI
cannot now take a stand before this Court in this appeal that
the respondent no.1 was a wilful defaulter covered by the
c Master Circular inasmuch as it had not paid its dues to the
appellant under the derivative transactions. He submitted that
if the RBI was aggrieved by the finding in the impugned
judgment of the Calcutta High Court that the Master Circular did
not apply to dues under a derivative transaction, it could have
D filed a Special Leave Petition under Article 136 of the
Constitution against the impugned judgment of the Calcutta
High Court, but the RBI has not done so. According to him,
therefore, the impugned judgment of the Calcutta High Court
should be sustained by this Court in this appeal.
E CIVIL APPEAL No. 8917 OF 2012
(Arising out of SLP (C) NO. 27730 of 2011)
8. Leave granted.
9. This is an appeal against the judgment dated 23/
F 24.08.2011 of the Bombay High Court in Writ Petition (Lodg.)
No. 204 of 2011.
10. The facts very briefly are that the appellant no.1, a
pharmaceutical company, agreed to enter into foreign exchange
derivative transactions with respondent no.1-bank to hedge its
G 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
H four were foreign currency swap transactions and five were
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 713
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
·foreign currency option transactions. On 01.07:2010, the A
Reserve Bank of India (for short 'the RBI') issued a Master
Circular on Wilful Defaulters (for short 'the Master Circular'). The
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 B
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 c
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 0
of the respondent no.1-bank. The appellant no.1 submitted its
reply dated 20.11.201 O 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 E
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 F
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 G
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 H
714 SUPREME COURT REPORTS [2012) 13 S.C.R.
A 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
B 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
c derivative transactions, the appellants have filed this appeal.
11. Mr. Soli J. Sorabjee, learned counsel for the appellant,
submitted that the High Court has not correctly interpreted the
Master Circular and has erroneously recorded a finding that
wilful default covers defaults in complying with payment
o obligations under derivative transactions by relying on circulars
issued by the RBI on 08.08.2008, 13.10.2008, 29.10.2008,
09.04.2009 and 01.07 .2010 which do not relate to wilful defaults
but relate to prudential norms, assets classification as non-
performing assets, etc. He submitted that it is a settled principle
E of statutory interpretation that a definition in one Act should not
be imported into another Act and referred to the decision of
this Court in Commissioner of Sales Tax, M.P. v. Jaswant
Singh Charan Singh [1967 (2) SCR 720) in which a reference
to other Acts to construe an Act has been critically commented
F by Lord Loreburn in Macbeth v. Chislett [(1910) AC. 220, 224)
as a "new terror in the construction of Acts". He vehemently
submitted that the Master Circular should be construed on its
own terms and language and so construed, it will be clear that
the basic postulate and the underlying assumption of the Master
G Circular is existence of a lender-borrower relationship and that
the Master Circular does not contemplate nor cover a creditor
and debtor relationship. He relied on the decisions of this Court
in Bombay Steam Navigation Co. (1953) Private Ltd. v. C.I. T.,
Bombay [1965 (1) SCR 770], C./. T., Lucknow v. Bazpur Co-
operative Sugar Ltd. [1989 Supp. (2) SCC 240] and Ram
H Ratan Gupta v. Director of Enforcement, Foreign Exchange
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 715
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
Regulation & Anr. [1966 (1) SCR 651] in which the distinction A
between a loan and a debt has been judicially brought out to
say that whereas a loan of a money results in a debt, every debt
is not a loan. He submitted that in a loan transaction, therefore,
there is a lender and a borrower, but in a transaction which is
not a loan there is no lender and no borrower, but there may B
be a creditor and a debtor. He submitted that in a derivative
transaction the dues payable by a party to the bank may be a
debt and the bank may be a creditor and such party may be a
debtor, but the bank in a derivative transaction is not a lender
and such party from whom the dues are payable to the bank is c
not a borrower. He further submitted that the interpretation given
by the RBI to the Master Circular cannot be accepted by the
Court by recourse to the doctrine of contemporanea expositio
as this doctrine was applicable to ancient statutes and has no
application to modern statutes as has been noted in Principles D
of Statutory Interpretation (12th Edn. 2010) by Justice G.P.
Singh at pages 341-349. He further submitted that if the
doctrine of contemporanea expositio is applicable, the
interpretation given by the RBI in the Master Circular may have
some weight, but cannot be decisive as interpretation of the
Master Circular, in the facts of the present case, is a judicial E
function. to be performed by the Court. In support of this
proposition, he relied on Bhuwalka Steel Industries Ltd. v.
Bombay Iron & Steel Labour Board & Anr. [(2010) 2 SCC
273]. He submitted that the RBI could have issued a Circular
or a Press Note and made a public declaration that a defaulter F
of payment obligations under a derivative transaction to the
bank is also covered by the Master Circular before the matter
reached the Court. He submitted that after the matter reaches
the Court, the RBI cannot file affidavits taking a stand that
defaulters of dues under derivative transactions to the bank are G
covered by the Master Circular.
12. Mr. Sorabjee referred to Section 6 of the 1949 Act to
show that a bank can engage in several businesses other than
lending such as deal in derivatives and such business will not H
'
716 SUPREME COURT REPORTS [2012] 13 S.C.R.
A fall within the core banking business of the bank under clauses
(a) to (o) of Section 6 of the 1949 Act and it will also not
constitute lending. He referred to the decision in /CIC/ Bank
Ltd. v. Official Liquidator of APS Star Industries Ltd. [(2010)
10 SCC 1) in which this Court has broadly categorised the
B functions of the banking company into two parts, namely, core
banking of accepting deposits and lending and miscellaneous
functions and services. Accordingly to him, derivative is a part
of the miscellaneous parts of functions and services provided
by the bank and do not create a lender-borrower relationship.
c He submitted that the Master Circular contemplates grave
consequences affecting the right of a person under Article
19(1 )(g) of the Constitution of India to carry on any trade,
business or occupation and should be strictly construed as
otherwise it will be exposed to the challenge of
unconstitutionality. In support of this argument, he relied on the
0
decisions of this Court in Tolaram Relumal & Anr. v. State of
Bombay [1955 (1) SCR 158], Chandigarh Housing Board v.
Major General Devinder Singh & Anr. [(2007) 9 SCC 67],
Delhi Airtech Services Private Limited & Anr. v. State of Uttar
E Pradesh & Anr. [(2011) 9 SCC 354] and Shah & Co., Bombay
v. State of Maharashtra & Anr. [1967 (3) SCR 466].
13. Mr. Dushyant Dave and Mr. S. Ganesh, learned senior
counsel appearing for respondent no.1-bank, submitted that the
derivative transactions between the appellant no.1 and
F respondent no.1 are swaps and options and the liability of the
appellant no.1 to the respondent no.1 under these transactions
arose on the settlement date. They referred to the decision of
the Madras High Court in Rajshree Sugars & Chemicals Ltd.
v. Axis Bank Ltd. ((2008) 8 MLJ 261] in which four categories
G of derivative transactions have been described including swaps
and options. In this decision, the Madras High Court has taken
note of the fact that a swap is an agreement made between
two parties to exchange payments on regular future dates and
the option gives the holder the right to buy or sell an underlying
asset at a future date at a predetermined price. They also
H
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 717
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
referred to the ISDA agreement between the appellant no.1 and A
the respondent no.1 to explain the nature of the derivative
transactions between the appellant no.1 and the respondent
no.1. They submitted that as the appellant no.1 did not pay dues
amounting to Rs.29.2 million under the derivative transactions,
the respondent no.1 issued a notice to the appellant dated B
15.10.2010 to show cause why the respondent no.1 should not
classify the appellant as a wilful defaulter under the Master
Circular and also informed the respondent no.1 that it could
make a representation against the decision to classify it as a
wilful defaulter to the Grievance Redressal Committee of the c
respondent no.1-bank. They submitted that the appellant no.1
did make a representation and was also subsequently heard,
but the Grievance Redressal Committee held that the appellant
was a wilful defaulter under the Master Circular.
14. They further submitted that the RBI has always treated D
a derivative transaction as a facility granted by a bank to its
customer in order to enable the customer to manage its risks
arising from fluctuations in foreign exchange and interest rates.
They referred to the Master Circular as well as the other
Circulars dated 02.07.2007, 13.10.2008, 08.12.2008 and E
09.04.2009 to show that a derivative transaction is ·a non-funded
credit facility enjoyed by a borrower from a bank. They
submitted that both Section 45A(b) of the 1934 Act and Section
2(c) of the 2005 Act define a "borrower" as covering a person
to whom "any credit facility" has been granted, including any F
credit facility other than a loan. They submitted that, therefore,
the word "borrower" in the Master Circular covers not only a
loanee but also any other customer of the bank enjoying a credit
facility such as a derivative transaction. They submitted that the
Master Circular is an administrative circular issued by the RBI G
in exercise of its regulatory power and, therefore, can be
clarified by the RBI where a doubt arises as to whether
derivative transactions are covered under the Master Circular
and the RBI has clarified in its affidavit filed before this Court
that the derivative transactions are covered by the Master
Circulation. They cited the decision of this Court in Desh H
718 SUPREME COURT REPORTS [2012] 13 S.C.R.
A Bandhu Gupta and Co. and others v. Delhi Stock Exchange
Association Ltd. ((1979) 4 SCC 565) that an administrative
construction placed by the authority or officers charged with
executing a statute generally should be clearly wrong before it
is overturned and is entitled to considerable weight. They also
B referred to the decision of this Court in Peerless General
Finance & Investment Co. Ltd and another v. Reserve Bank
of India [(1992) 2 SCC 343] wherein it has been held that
Courts are not to interfere with economic policy which is the
function of the expert bodies and submitted that the view taken
c by the RBI that dues under derivative transactions covered by
the Master Circular should not be disturbed by this Court.
CIVIL APPEAL No. 8918 OF 2012
(Arising out of SLP (C) NO. 28477 of 2011)
D 15. Leave granted.
16. This is an appeal against the judgment dated 23/
24.08.2011 of the Bombay High Court in Writ Petition (Lodg.)
No. 345 of 2011.
E 17. The facts briefly are that the appellant 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
F Target Profit Forward Transactions during the years 2007-2008.
On 01.07 .2009, the Reserve Bank of India (for short 'the RBI'),
respondent no.1, issued a Master Circular on Wilful Defaulters
(for short 'the Master Circular'). The Master Circular contained
instructions of the RBI to the banks and financial institutions
regarding reporting of wilful defaulters to other banks and
G · 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 USO 20,821,480.40 with interest thereon as dues of the
H appellant no.1 to the respondent no.3-bank under the derivative
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 719
NATIONAL GLASS & IND. LTD. [A.K. PATNA!K, J.]
transactions. As the appellant no.1 did not pay the said dues, A
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 B
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 c
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
0
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 E
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 appeal.
18. Dr. A.M. Singhvi, learned senior counsel appearing for
the appellants, submitted that in the present case the F
respondent no.3-bank has not sanctioned any credit or other
facility for derivative transactions in favour of the appellant no.1
and as such there was no International Swaps and Derivatives
Association (ISDA) agreement between the appellant and the
respondent no.3 for the derivative transactions. He submitted G
that a foreign exchange derivative contract means a financial
transaction or an arrangement whose value is derived from
· price movement in one or more underlying assets. He
submitted that under the FEMA Regulations any authorized
person including an authorized dealer, a money changer, a
financial banking unit, or any other person can deal with foreign H
720 SUPREME COURT REPORTS [2012) 13 S.C.R.
A exchange derivatives and thus foreign exchange derivative
transactions are not essentially banking transactions. He
explained that the banks have to get a separate licence to be
an authorized person to deal with foreign exchange derivatives.
He submitted that Chapter Ill-A of the 1934 Act relates to the
B collection and furnishing of credit information and a reading of
Section 45A in Chapter Ill-A would show that credit information
covers only information in relation to borrowers to whom any
credit limit has been sanctioned by any banking company. He
vehemently argued that in any case Section 45E in Chapter Ill-
e A of the 1934 Act clearly provides that any credit information
contained in any statement submitted by a banking company
under Section 45C or furnished by the bank to any banking
company under Section 450 shall be treated as confidential.
He submitted that any information relating to a derivative
transaction entered into by a customer of the bank cannot,
0
therefore, be disclosed by the bank either to the RBI or to any
other bank. He also cited the decision of the King's Bench in
Toumier v. National Provincial and Union Bank of England
((1924) 1 KB 461) for the proposition that there is an implied
contract between the bank and the customer that the bank will
E not disclose any information relating to the customer to any third
party. He submitted that any disclosure of information relating
to the defaults made by the customer of his obligations under
a derivative transaction will be breach of the implied contract
of confidentiality between the bank and its customer. He
F submitted that similarly the 2005 Act covers only the "credit
information" as defined in the 2005 Act and as dues under a
foreign exchange derivative transaction is not "credit
information" within the meaning of the expression as defined
in the 2005 Act, any disclosure of information relating to foreign
G exchange derivative transactions by the bank with its customer
is not authorized under the 2005 Act. He submitted that the
FEMA and the 'FEMA Regulations' which comprehensively deal
with the foreign exchange derivatives and the 1949 Act also
do not authorize disclosure of any information relating to
H derivative transactions affecting the customer of the bank.
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 721
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
19. Mr. Singhvi reiterated the arguments of Mr. Sorabjee A
that the Master Circular covers the dues under the borrower-
lender relationship between the customer and the bank. He
submitted that as derivative transactions did not involve a
borrower-lender relationship at all, it could not become a
borrower-lender subsequently on default of payment of the B
demand made by the bank under the derivative transaction. He
submitted that the RBI has not given any definite opinion as to
whether the dues under a derivative transaction would be
covered under the Master Circular and in any case the opinion
of the RBI is not consistent and is in conflict with the statutory c
provisions. He cited Desh Bandhu Gupta and Co. and Others
v. Delhi Stock Exchange Association Ltd. [(1979) 4 SCC 565]
to submit that the interpretation given by the RBI to the Master
Circular could not have any controlling effect on the Courts and
if occasion arises, will have to be disregarded by the Courts D
for cogent and persuasive reasons. He finally submitted that if
the Master Circular is construed to cover derivative contracts
it will have the effect of black listing the customers who resist
demands made by the banks towards their alleged dues under
the derivative transactions and will ruin their business as well E
as their reputation and the Master Circular will become arbitrary
and violative of Article 14 of the Constitution. He submitted that
as the Master Circular has a penal effect, it has to be strictly
construed and so construed, it will cover only a lender-borrower
relationship and not the relationship between the bank and its
customer in a derivative transaction. He submitted that the F
impugned judgment of the High Court therefore should be set
aside.
20. Mr. Ashok Desai, learned senior counsel appearing
for the respondent no.3, in reply, submitted that the Master G
Circular has been issued by the RBI in exercise of its powers
under the 1934 Act and, therefore, for interpreting the Master
Circular, the functions of the RBI under the 1934 Act have to
be kept in mind. He referred to the preamble of the 1934 Act
to show that the RBI has been constituted to inter alia operate
H
722 SUPREME COURT REPORTS [2012] 13 S.C.R
A the credit system of the country to its advantage. He also
referred to the statement of objects and reasons of the
Amendment Act of 26 of 2006 in which a reference has been
made to the crucial role that derivative plays in re-allocating and
mitigating the risks of corporates, banks and other financial
B institutions. He submitted that it is by the Amendment Act 26
of 2006 that various provisions were introduced in the 1934 Act
in Chapter 111-D for regulation of transactions in derivatives. He
submitted that transactions in derivative therefore have an
important bearing on the credit policy or credit system of the
c country and the views of the RBI whether the Master Circular
would cover the dues under derivative transaction are decisive
and should not be discarded by the Court.
21. He cited Ganesh Bank of Kurundwad Ltd. & Ors. v.
Union of India & Ors. [(2006) 10 SCC 645] for the proposition
D that when two views are possible, the view of the regulating
body, such as the RBI, should be accepted by the Court in
matters falling within the domain of the RBI. He also relied on
Joseph Kuruvilla Vel/ukunnel v. Reserve Bank of India [1962
Supp (3) SCR 632] in which the functions of the RBI including
E the functions relating to operation of the credit system of the
country to its advantage have been discussed. He cited
Peerless General Finance & Investment Company Ltd. and
Another v. Reserve Bank of India and others [(1992) 2 SCC
343] in which this Court has held that the RBI has a large
F contingent of expert advice relating to matters affecting the
economy of the country and nobody can doubt the bonafides
of the RBI in issuing directions to the banks and it is not the
function of the courts to sit in judgment over matters of
·economic policy and it must necessarily be left to the expert
G bodies. He also relied on /CIC/ Bank Ltd. v. Official Liquidator
of APS Star Industries Ltd. and Others (supra) in which this
Court has discussed the power of the RBI under the 1934 Act
to regulate the business of banking companies and to control
their management in certain situations. He submitted that in the
aforesaid decision, reference has also been made to the
H
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 723
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
permission of the RBI required if a banking company seeks to A
deal in derivative. He submitted that in Desh Bandhu Gupta
and Co. and others v. Delhi Stock Exchange Association Ltd.
[(1979) 4 sec 565) in which the principle of contemporanea
expositio applied to interpretation of statutes or any other
document has been discussed. He submitted that in Common B
Cause (A Registered Society) v. Union of India and Another
[(2010) 11 SCC 528) this Court has held that it is neither within
the domain of the courts nor the scope of judicial review to
embark upon an enquiry as to whether a particular public policy
is wise or not and submitted that these comments were made c
by the Court while dealing with the issue of reduction of non-
performing assets in the books of banks.
22. Mr. Desai also referred to the provisions of Chapter
111-A of the 1934 Act on Collection and Furnishing of Credit
Information and in particular Section 45A(b) and 45A(c) and D
submitted that information regarding dues under derivative
transactions will come within the expression "credit
information". He submitted that disclosure of such credit
information is not hit by Section 45E of the 1934 Act as has
been made clear in the language of the said section. He E
submitted that the Bombay High Court, therefore, has correctly
interpreted the Master Circular and held that it also applies to
dues under derivative transactions and the narrow view taken
by the Calcutta High Court that the Master Circular will only
apply to dues under a lender-borrower relationship is not F
correct.
The stand of the RBI in the three Civil Appeals:
23. Mr. Jaideep Gupta, learned senior counsel appearing
for the RBI, submitted that the RBI did not challenge the G
judgment of the Calcutta High Court because it was not
necessary for the RBI for two reasons: (i) one of the parties,
namely Kotak Mahindra Bank Limited, had challenged the
judgment of the Calcutta High Court and the RBI was a
respondent in the Special Leave Petition filed by the Kotak'
Mahindra Bank Limited and (ii) the issue was also pending H
724 SUPREME COURT REPORTS [2012] 13 S.C.R.
A before the Bombay High Court which could take a view different
from that of the Calcutta High Court. He submitted that at no
stage, therefore, the RBI has accepted the judgment of the
Calcutta High Court that the Master Circular did not cover wilful
default of dues under derivative transactions. He submitted that
B the Bombay High Court has taken the correct view that the
Master Circular will apply to the dues receivable by a bank
under derivative transactions.
24. He referred to the language of the Master Circular to
show that it covered both funded facilities such as loans and
C advances and non-funded facilities such as bank guarantees
and derivative transactions. He referred to clause 2.6 of the
Master Circular to show that when bank guarantees were
invoked and are not honoured by the defaulting units on whose
behalf the bank guarantee has been furnished, the defaulters
D are to be treated as wilful defaulters under the Master Circular.
He argued that similarly when dues become payable under
derivative transactions but the customer does not pay the dues,
the customer becomes a wilful defaulter. He submitted that the
definition of wilful defaulter in clause 2.1 of the Master Circular
E makes it clear in sub-clause (a) that a wilful default will cover
also a case where a unit has defaulted in meeting its payment
obligations to the lender even if it has a capacity to honour the
said obligation. He submitted that in a lender-borrower
relationship, there may be a repayment obligation to the lender
F but no payment obligation, whereas in a non-funded facility such
as bank guarantee or a derivative transaction, there is no
repayment obligation but a payment obligation. He submitted
that a unit which has defaulted in meeting its payment obligation
under a derivative transaction is thus covered under the Master
G Circular. He also referred to sub-clause (d) of clause 2.1 of the
Master Circular in which the expression "bank/lender" finds
place. He submitted that this sub-clause would show that the
words "bank" and "lender" have been used interchangeably in
the Master Circular and therefore the expression "lender" in the
definition of sub-clauses (a), (b), (c) & (d) would include a bank.
H
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 725
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
He submitted that the word "lender" in sub-clauses (a), (b), (c) A
& (d) of the definition of wilful defaulter would therefore mean
the bank and not the bank as a lender.
25. Mr. Jaideep Gupta submitted that a reading of Section
45V of the 1934 Act would show that transactions in a
derivative, as may be specified by the RBI from time to time, B
shall be valid and therefore derivative transactions are under
the regulatory purview of the RBI. He submitted that the Master
Circular has to be interpreted keeping in view this regulatory
power of the RBI and a purposive interpretation is to be given
to the Master Circular. He cited the decisions of this Court in C
Securities and Exchange Board of India v. Ajay Agarwal
[(2010) 3 SCC 765] in which the purpose of the Act was taken
into consideration while interpreting the provisions of the Act.
He also relied on Executive Engineer, Southern Electricity
Supply Company of Orissa Ltd. (SouthCo) and another vs. D
Sri Seetaram Rice Mill [(2012) 2 SCC 108] in which this Court
while interpreting the provisions of the Electricity Act, 2003, held
that a construction which will improve the workability of the
statute and make it more effective and purposive, should be
preferred to any other interpretation which may lead to E
undesirable results.
26. He submitted that the definition of wilful defaulter in the
Master Circular need not be altered by the RBI as and when
new products such as the derivatives come into market as
according to the RBI the definition of wilful defaulter is wide F
enough to cover such new products which come into market
with the growth of the economy. He referred to the observations
of this Court in Rattan Chand Hira Chand v. Askar Nawaz
Jung (Dead) by L.Rs and Others [(1991) 3 SCC 67] that the
legislature has often failed to keep pace with the changing G
needs and values and to provide for all contingencies and
eventualities and it is, therefore, not only necessary but
obligatory on courts to step into fill the lacuna. He also placed
reliance on the comments of G.P. Singh's Principles of
Statutory Interpretation (11th Edition) at p. 328 in this regard. H
726 SUPREME COURT REPORTS [2012) 13 S.C.R.
A He also relied on the observation of this Court in /CIC/ Bank
Limited v. Official Liquidator of APS Star Industries Ltd. and
Others (supra) that while interpreting the Banking Regulation
Act, 1949, one needs to keep in mind not only the framework
of the banking law as it stood in 1949 but also the growth and
B the new concepts that have emerged in the course of time. He
submitted that when a Master Circular was issued, it
contemplated all kinds of wilful defaulters of dues to the bank
and when new products such as derivative transactions come
into economy, the Courts will have to interpret the Master
c Circular in an expansive way so as to cover dues to the bank
under ljiUCh new products.
Interpretation of the Master Circular by the Court:
27. In these appeals, the only question that we are called
upon to decide is whether a wilful default in meeting payment
D obligations to a bank under a derivative transaction will be
covered under the Master Circular. The definition of wilful
default is in para 2.1 of the Master Circular dated 01.07 .2008
and the Master Circular dated 01.07 .2009 and is the same.
We, therefore, extract clause 2.1 of the Master Circular dated
E 01.07.2008, hereinbelow:
"2.1 Definition of wilful default
The term "wilful default" has been redefined in
supersession of the earlier definition as under:
F A "wilful default" would be deemed to have occurred if any
of the following events is noted:-
(a) The unit has defaulted in meeting its payment/
repayment obligations to the lender even when it has the
G capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment/
repayment obligations to the lender and has not utilized the
finance from the lender for the specific purposes for which
finance was availed of but has diverted the funds for other
H purposes.
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 727
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
(c) The unit has defaulted in meeting its payment/ A
repayment obligations to the lender and has siphoned off
the funds so that the funds have not been utilized for the
specific purpose for which finance was availed of, nor are
the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment/ 8
repayment obligations to the lender and has also disposed
of or removed the movable fixed assets or immovable
property given by him or it for the purpose of securing a
term loan without the knowledge of the bank/lender."
28. We find from the definition of wilful default in the Master
c
Circular quoted above that a wilful default would be deemed
to have occurred in any of the events mentioned in sub-clauses
(a), (b), (c) and (d) of clause 2.1. These sub-clauses use the
word "lender'' and for this reason the Calcutta High Court has
taken a view in the impugned judgment that the Master Circular D
applies only to a lender-borrower relationship and thus only a
wilful default by a borrower to the bank which has lent funds by
way of loans and advances would be covered under the Master
Circular and a party who has not borrowed any money from a
bank and has availed the facility of derivative transac~ion from E
a bank and has defaulted in meeting its payment obligation to
the bank under the derivative transaction is not covered by the
Master Circular. The Calcutta High Court, therefore, has gone
by a literal interpretation of the word "lender'' in sub-clauses (a),
(b), (c) and (d) in the definition of wilful default in clause 2.1 of F
the Master Circular.
29. This approach 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 G
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. In Principles of Statutory
Interpretation, 13th Edition, 2012, Justice G.P. Singh has given
this explanation to the rule of literal construction at page 94:
H
728 SUPREME COURT REPORTS [2012] 13 S.C.R.
A "When it is said that words are to be understood first in
their natural, ordinary or popular sense, what is meant is
that the words must be ascribed that natural, ordinary or
popular meaning which they have in relation to the subject-
matter with reference to which and the context in which they
B have been used in the statute. Brett, M.R. called it a
"cardinal rule" that "Whenever you have to construe a
statute or document you do not construe it according to the
mere ordinary general meaning of the words, but according
to the ordinary meaning of the words as applied to the
c subject-matter with regard to which they are used". "No
word", says Professor H.A. Smith "has an absolute
meaning, for no words can be defined in vacuo, or without
reference to some context". According to Sutherland there
is a "basic fallacy" in saying "that words have meaning in
and of themselves", and "reference to the abstract
D
meaning of words", states Craies, "if there be any such
thing, is of little value in interpreting statutes". In the words
of Justice Holmes: "A word is not a crystal transparent and
unchanged; it is the skin of a living thought and may vary
greatly in colour and content according to the
E circumstances and the time in which it is used." Shorn of
the context, the words by themselves are "slippery
customers". Therefore, in determining the meaning of any
word or phrase in a statute the first question to be asked
is - "What is the natural or ordinary meaning of that word
F or phrase in its context in the statute? It is only when that
meaning leads to some result which cannot reasonably be
supposed to have been the intention of the Legislature, that
it is proper to look for some other possible meaning of the
word or phrase. The context, as already seen, in the
G construction of statutes, means the statute as a whole, the
previous state of the law, other statutes in pari materia, the
general scope of the statute and the mischief that it was
intended to remedy."
We will, therefore, have to interpret the word "wilful default" in
H
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 729
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
the Master Circular by reading the Master Circular as a whole, A
looking at the provisions of the 1934 Act and the 1949 Act
under which the RBI has powers to issue circulars and
instructions to the banks, the purpose for which the Master
Circular was issued and the mischief that the Master Circular
intends to remedy because these constitute the context and the B
subject-matter in which the definition of wilful default finds place
in the Master Circular.
30. The Bombay High Court, on the other hand, has come
to the conclusion in the impugned judgment that the Master
Circular covers also a default in complying with the payment C
obligations under derivative transactions by relying on the
language of not only the Master Circular dated 01.07.2009 but
also of the circulars issued by the RBI on 08.08.2008,
13.10.2008, 29.10.2008, 09.04.2009 and 01.07.2010 which do
not relate to wilful default but relate to prudential norms, assets D
classification as non-performing assets, etc. This approach of
the Bombay High Court in interpreting the Master Circular, in
our considered opinion, is also not correct because the subject
matter of these circulars of the RBI issued on 08.08.2008,
13.10.2008, 29.10.2008, 09.04.2009 and 01.07.2010 do not E
relate to wilful default but relate to prudential norms, assets
classification as non-performing assets etc. These circulars
issued by the RBI on 08.08.2008, 13.10.2008, 29.10.2008,
09.04.2009 and 01.07.2010 may have been issued by the RBI
but these are not circulars amending or clarifying the definition F
of wilful default in the Master Circular. The circulars issued by
the RBI on 08.08.2008, 13.10.2008, 29.10.2008, 09.04.2009
and 01.07.2010 on which the Bombay High Court has relied
on while interpreting the definition of wilful default in the Master
Circular do not constitute the context or the subject-matter in G
which the definition of wilful default in the Master Circular has
to be construed. The context will only include 'pari materia
circulars issued by the RBI, but will not include circulars issued
by the RBI on subject-matters other than wilful default.
31. On a reading of the paragraph in the Master Circular H
730 SUPREME COURT REPORTS [2012) 13 S.C.R.
A titled "Introduction", we 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
B to submit to the RBI the details of the wilful 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 subject "improving vigilance
c administration in banks". The 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
0
any Central Act, Government Companies, Societies and local
authorities owned or controlled by the Central Government. Para
2.3 of the aforesaid instructions issued by the Central Vigilance
Commission is extracted hereinbelow:
E "2.3 Lack of communication between Banks
2.3.1 All cases of willful default of Rs.25 lakhs and above
will be reported by all banks to RBI as and when they occur
or are detected.
2.3.2 Whether a matter is a case cif willful default will be
F
decided in each bank by a Committee of Officers.
2.3.3 The RBI will circulate the information received from
the banks of wilful default, every three months. The data
with the RBI will also be accessible directly by the banks
G concerned after the WAN is installed in position.
2.3.4 There should be greater intra bank communication
about willful default, frauds, cheating cases etc. so that the
same bank does not get exploited in different branches by
the same defaulting parties."
H
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 731
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
32. It will be clear from the language of the aforesaid A
instructions issued by the Central Vigilance Commission that
all cases of wilful default of Rs.25 lakhs and above were to be
reported by all the banks to the RBI as and when they occur or
are detected and the RBI was required to circulate the
information received from the banks of wilful default every three B
months and there was to be greater intra bank communication
about the wilful defaults. These instructions of the Central
Vigilance Commission covered to "all cases of wilful default
of Rs.25 lakhs and above" and were not confined to only wilful
default by a borrower of his dues to the bank in a lender- c
barrower relationship. Thus, it will be clear from the aforesaid
instructions of the Central Vigilance Commission that all cases
of wilful defaults of Rs.25 lakhs and above were to be reported
by the banks to the RBI and not just cases of defaults by
borrowers of loans or advances from banks and the mischief D
that was sought to be remedied was that banks are not
. exploited by parties who have the capacity to pay their dues
to the banks but who willfully avoid paying their dues to the
banks.
33. Pursuant to the aforesaid instructions of the Central E
Vigilance Commission, the RBI circulated a Scheme for
Collection and Dissemination of information on cases of wilful
default of Rs.25 lacs and above which was to come into force
with effect from 01. 04.1999. Sub-para (ii) of the scheme in
Para 2 of the Circular dated 20.02.1999 is extracted F
hereinbelow:
"2(ii) The scheme will cover all non-performing borrowal
accounts with outstandings (funded facilities and such non-
funded facilities which are converted into funded facilities)
aggregating Rs.25 lakhs and above." G
It will be clear from the language of sub-para (ii) of Para 2 of
the scheme quoted above that the scheme was to cover not
only funded facilities, but also non-funded facilities which are
converted into funded facilities. Thus, the scheme relating to
Collection and Dissemination of information on cases of wilful H
732 SUPREME COURT REPORTS [2012] 13 S.C.R.
A default of Rs.25 lacs and above was to cover not only loans
and advances which are funded facilities, but also facilities
which do not relate to loans and advances.
34. When we look at the Master Circular, we find that the
purpose of the Master Circular is "to put in place a system to
B disseminate credit information pertaining to wilful defaulters for
cautioning banks and financial institutions so as to ensure that
further bank finance is not made available to them". Hence, the
purpose of the Master Circular is to have a system to
disseminate credit information pertaining to wilful defaulters
C amongst banks and financial institutions so that no further bank
finance is made available to such wilful defaulters from such
banks and financial institutions. The expression "credit
information" has not been defined in the Master Circular, but
has been defined in Section 45A(c) of the 1934 Act as follows:
D "45A(c). "credit information" means any information
relating to-
(i) the amounts and the nature of loans or advances and
other credit facilities granted by a banking company to any
E borrower or class of borrowers;
(ii) the nature of security taken from any borrower or class
of borrowers for credit facilities [granted to him or to such
class;
(iii) the guarantee furnished by a banking company for any
F of its customers or any class of its customers;
(iv) the means, antecedents, history of financial
transactions and the credit worthiness of any borrower or
class of borrowers;
G (v) any other information which the Bank may consider to
be relevant for the more orderly regulation of credit or
credit policy.]
It will be clear from the language of sub-clause (v) of Section
45A(c) of the 1934 Act quoted above that credit information
H
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 733
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
means not only any information relating to matters in sub- A
clauses (i),(ii),(iii) and (iv), but also relates to any other
information which the bank considers to be relevant for the
more orderly regulation of credit or credit policy. Hence, "credit
information" is not confined to information relating to a borrower
of the bank, but may also relate to a constituent of the bank who B
intends to take some credit from the bank. The purpose of the
Master Circular being to caution banks and financial institutions
from giving any further bank finance to a wilful defaulter, credit
information cannot be confined to only the wilful defaults made
by existing borrowers of the bank, but will also cover constituents c
of the bank, who have defaulted in their dues under banking
transactions with the banks and who intend to avail further
finance from the banks.
35. Keeping in mind the mischief that the Master Circular
seeks to remedy and the purpose of the Master Circular, we D
interpret the words used in the definition of 'wilful default' in
clause 2.1 of the Master Circular to mean not only a wilful default
by a unit which has defaulted in meeting its repayment
obligations to the lender, but also to mean a unit which has
defaulted in meeting its payment obligations to the bank under E
facilities such as a bank guarantee. According to us the word
'lender' in sub-clauses (a), (b), (c) and (d) means the "bank"
because "payment obligations" mentioned in clause (a) do not
ordinarily refer to obligations to a lender and clause (d) has
used the expression "bank/lender''. Moreover, the instructions F
of the Central Vigilance Commission pursuant to which the
scheme relating to Collection and Dissemination of credit
information on wilful defaulters was formulated by the RBI were
to cover "all cases of wilful defaults of Rs.25 lakhs and above".
Also Paragraph 2.6 of the Master Circular states inter alia that G
in cases where a letter of comfort and/or the guarantees
furnished by the companies within the group on behalf of the
willfully defaulting units are not honoured when invoked by the
banks/financial institutions, such group companies should also
be reckoned as wilful defaulters. It is, thus, clear that non-funded H
734 SUPREME COURT REPORTS [2012] 13 S.C.R.
A facilities such as a guarantee is covered by the Master Circular
and when a guarantee is invoked by a bank/financial institution
but is not honoured, the defaulting constituent of the bank is
treated as a wilful defaulter even though it may not have
borrowed funds from the bank in the form of advances or loans.
B 36. The scheme of Collection and Dissemination of
information on cases of wilful default of Rs.25 lakhs and above
was framed by the RBI in the year 1999 when the derivative
transactions were not part of the country's economy. Under the
FEMA Regulations, 2000 only the banks were authorized to
C deal with the derivative transactions. Section 45V introduced
along with other provisions of Chapter lllD in the 1934 Act by
the Reserve Bank of India (Amendment) Act, 2006 declared
that transactions in derivatives, as may be specified by the RBI
from time to time, shall be valid, if at least one of the parties to
D the transaction is the bank, a scheduled bank, or such other
agency falling under the regulatory purview of the RBI under the
1934 Act, FEMA Act or any other Act or instrument having the
force of law, as may be specified by the RBI from time to time.
Derivative transactions in India thus were valid only if they were
E with any bank or any other agency falling under the regulatory
purview of the RBI because they would have a substantial
bearing on the credit system and credit policy in respect of
which the RBI has regulatory powers under the 1934 and 1949
Acts. Such derivative transactions may not involve a lender-
F borrower relationship between the bank and its constituent, but
dues by a constituent remaining unpaid to a bank may affect
the credit policy and the credit system of the country.
Information relating to defaulters of dues under derivative
transactions who intend to take additional finance from the bank
G obviously will come within the meaning of credit information
under Section 45A(c)(v) of the 1934 Act.
37. We do not find force in the submission of Dr. A.M.
Singhvi that any information relating to a party who has
defaulted in payment of its dues under derivative transactions
H cannot be disclosed by a bank to the RBI or any other bank
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 735
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
because of an implied contract between the bank and its A
customer or by Section 45E of the 1934 Act. Sections 45C and
45E of the 1934 Act are extracted hereinbelow:
"45C. Power to call for returns containing credit
information.-(1) For the purpose of enabling the bank to
discharge its functions under this chapter, it may at any time B
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 Bank from time
to time.
(2) A banking company shall, notwithstanding anything to
c
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 )." 0
"45E. Disclosure of Information prohlblted.-(1) Any
credit information contained in any statement submitted by
a banking company under Section 45C or furnished by the
bank to any banking company under Section 450 shall be E
treated as confidential and shall not, except for the
purposes of this Chapter, be published or otherwise
disclosed.
(2) Nothing in this section shall apply to-
(a) the disclosure by any banking company, with F
the previous permission of the bank, of any
information furnished to the bank under
Section 45C;
(b) the publication by the bank, if it considers G
necessary in the public interest so to do, of
any information collected by it under section
45C, in such consolidated form as it may
think fit without disclosing the name of any
banking company or its borrowers;
H
736 SUPREME COURT REPORTS [2012] 13 S.C.R.
A (c) the disclosure or publication by the banking
company or by the bank of any credit
information to any other banking company or
in accordance with the practice and usage
customary among bankers or as permitted or
B required under any other law:
Provided that any credit information received
by a banking company under this clause shall
not be published except in accordance with
the practice and usage customary among
c bankers or as permitted or required under
any other law.
(d) The disclosure of any credit information
under the Credit Information Companies
(Regulation) Act, 2005 (30 of 2005)
D
(3) Notwithstanding anything contained in any law for
the time being in force, no Court, Tribunal or other
authority shall compel the bank or any banking
company to produce or to give inspection of any
E statement submitted by that banking company
under section 45C or to disclose any credit
information furnished by the bank to that banking
company under Section 450."
We have already held that information relating to a party who
F has defaulted in payment of its dues under derivative
transactions to the bank is credit information within the meaning
of Section 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
G 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
H RBI under sub-section (1) of Section 45C of the 1934 Act. Sub-
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 737
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
section (2) of Section 45C of the 1934 Act further provides that A
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 B
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 disclosed "except for
the purposes of this Chapter", but sub-section (2)(a) of Section
45E clearly provides that nothing in Section 45E shall apply to c
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 D
bar for disclosure of such credit information including
information relating to a derivative transaction of the RBI under
sub-section (1) of Section 45C.
38. We do not also find any force in the submission of Mr.
Mr. Bhaskar P. Gupta that the Master Circular has penal E
consequences and, therefore, has to be literally and strictly
construed. Clause 4.3 of the Master Circular, which
contemplates criminal action by banks/financial institutions, is
extracted hereinbelow:
"4.3 Criminal Action by Banks/Fis F
It is essential to recognize that there is scope even under
the exiting legislations to initiate criminal action against
wilful defaulters depending upon the facts and
circumstances of the case under the provisions of Sections G
403 and 415 of the Indian Penal Code (IPC) 1860. Banks/
Fis are, therefore, advised to seriously and promptly
consider initiating criminal action against wilful defaulters
or wrong certification by borrowers, wherever considered
necessary, based on the facts and circumstances of each
case under the above provisions of the IPC to comply with H
738 SUPREME COURT REPORTS [2012] 13 S.C.R.
A our instructions and the recommendations of JPC.
It should also be ensured that the penal provisions are
used effectively and determinedly but after careful
consideration and due caution. Towards this end, banks/
Fis are advised to put in place a transparent mechanism,
B with the approval of their Board, for initiating criminal
proceedings based on the facts of individual case."
All that the aforesaid clause 4.3 of the Master Circular states
is that there is scope even under the exiting legislations to
C initiate criminal action against wilful defaulters depending upon
the facts and circumstances of the case under the provisions
of Sections 403 and 415 of the Indian Penal Code, 1860 and
the banks and financial institutions are strictly advised to
seriously and promptly consider initiating criminal action based
on the facts and circumstances of each case under the above
D provisions of the IPC. Thus, the Master Circular by itself does
not have penal consequences, whereas Sections 403 and 415
of the IPC have penal consequences. The provisions of
Sections 403 and 415 of the IPC obviously have to be strictly
construed as these are penal provisions and will get attracted
E depending on the facts and circumstances of each case, but
the provisions of the Master Circular need not be strictly
construed. As we have held, the Master Circular has to be
construed not literally but in its context and the words used in
the definition of "wilful defaulter'' in the Master Circular have to
F draw their meaning from the context in which the Master Circular
has been issued.
39. We are also not impressed with the argument of Mr.
Soli J. Sorabjee that the Master Circular contemplates grave
G consequences affecting the right of a person under Article
19(1)(g) of the Constitution of India to carry on any trade,
business or occupation and should be strictly construed as
otherwise it will be exposed to the challenge of
unconstitutionality. No challenge was made by the writ
petitioners before the Bombay High Court to the constitutionality
H of the Master Circular and the challenge by the writ petitioners
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN 739
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
before the Calcutta High Court was to the constitutionality of A
only Paragraph 3 of the Master Circular relating to the
Grievance Redressal Mechanism. Hence, we are not called
upon to decide in these appeals whether the Master Circular
violates the right of a person under Article 19(1 )(g) of the
Constitution of India. Similarly, we cannot consider in these 8
appeals, the contention raised by Dr. A. M. Singhvi that the
Master Circular has the effect of black listing a bank's client and
would, therefore, be arbitrary and violative of Article 14 of the
Constitution. In these Civil Appeals, we are concerned with the
interpretation of the Master Circular and on interpretation of the C
Master Circular, we find that the Master Circular covers not only
wilful defaults of dues by a borrower to the bank but also covers
wilful defaults of dues by a client of the bank under other banking
transactions such as bank guarantees and derivative
transactions.
D
40. In the result, we hold that wilful defaults of parties of
dues under a derivative transaction with a bank are covered
by the Master Circular and this we hold not because the RBI
wants us to take this view, because this is our judicial
interpretation of the Master Circular. The impugned judgment E
of the Calcutta High Court is set aside and the impugned
judgment of the Bombay High Court is sustained. We make it
clear that we have not expressed any opinion on the individual
transactions between the bank and the parties and our
judgment is based solely on the interpretation of the Master F
Circular. Accordingly, the appeal filed by Kotak Mahindra Bank
Ltd. against the judgment of the Calcutta High Court is allowed
and the appeals filed against the judgment of the Bombay High
Court by different parties are dismissed. The parties, however,
shall bear their own costs.
G
I.A. for intervention stands disposed of.
K.K.T. Appeals disposed of.
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