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The Supreme Court bench comprising of Chief Justice S A Bobde along with Justices B R Gavai and Surya Kant after considering submissions by the Solicitor General Tushar Mehta partially stayed order of Bombay High Court and allowed the release of HDIL promoters Rakesh Wadhawan and Sarang Wadhawan from Arthur Road Jail in Mumbai to their residence. Such release shall be done under supervision of jail guards. The ‘unusual order’ was passed in light of public interest litigation.
“Until further orders, there shall be a stay of the directions given by the Bombay high court in paragraph 15 (xv) and (xvi) which relates to the release of the accused from the jail of impugned order dated 15 January 2020.”
However, the other notions of High Court regarding appointment of committee for supervision of sale of assets of accused shall be in operation. The High Court set up a 3 member committee for valuation and sale of encumbered assets and property attached by EOW (Economic Offences Wing) of HDIL for speedy recovery of dues payable by the entity to the PMC Bank at the earliest.
Background of the case
Punjab and Maharashtra Co-operative Bank, a scheduled commercial bank is situated in 6 states with extensive network of 137 branches. The total deposits of the bank revolve around 11,617.34 crore rupees. The higher management of the bank advanced huge loans to financially stressed HDIL and its group entities.
EOW filed the chargesheet of 32,959 pages against 5 persons in fraud case of 6,300 crore rupees, holding witnesses of 340 people. Persons charged included HDIL Director Rakesh Wadhawan, his son Sarang, former PMC bank Managing Director Joy Thomas, former bank Chairman Waryam Singh and former Bank Director Surjit Singh Arora. It was claimed that the ‘whistleblower’ was an insider; a senior official.
What exactly was the scam?
HDIL promoters colluded with the management of bank to draw loans from Bhandup branch. Despite non-payment of loans, the bank did not classify them as ‘non-performing assets’. Moreover, bank created fictitious accounts of other companies who borrowed small amount of money and presented fake reports to hide from supervision and regulations.
In the financial year 2018-19, the bank showed annual profit of 99.69 crore rupees and bank reported 315 crore rupees as advances as non-performing assets which adumbrated a good performance as compared to public sector banks. However, the bank created fake annual reports to hide bad loans.
The laundering case for purchase of real estate or ‘evergreening’ of previous loans, relates to the transfer of about 70% of total credit facilities of Punjab and Maharashtra co-operative bank to HDIL and related entities. The bank scam roundabouts at Rs. 4,355 crore with total Non-Performing Assets amounting to 73 percent. The bank allegedly favoured its promoters and allowed them to operate ‘masked or bogus accounts’ protected with password.
Around 21,049 banks accounts were opened to conceal 44 loan accounts in fake names to hoodwink RBI. Not only was this but the bank’s software (opine) also used to interfere with these bank accounts. Only few people used access code to conceal the visibility of dummy accounts. The laundered money was used by them for their personal gains like purchase of real estate outside and within the nation.
Legal provisions involved
The chargesheet was filed against the accused under Sections 420 (fraud), 201 (destruction of evidence), 477A (falsification of accounts) of Indian Penal Code (IPC). Further, sections 408, 419, 467, 468, 120(B) of IPC was added in the FIR filed by EOW.
Developments in the case so far
The Enforcement Directorate working with Mumbai police has attached the movable properties; which comprises of 15 luxury cars, a seven seater speedboat along with two aircrafts and a yatch. It further gave consent for sale of airplanes and the yatch but claimed that it cannot tamper with the vehicles as its disposal would be adjudicated under Prevention of Money Laundering Act (PMLA).
A special committee worked continuously for three months and led to the arrest of 12 people so far. To smoothen the situation, RBI placed restrictions on lending and withdrawal of amount. Earlier the withdrawal limit was restricted to 1000 rupees but gradually it was fixed at 50,000 rupees to provide relief to innocent account holders.
RBI possesses regulatory responsibilities over such co-operative banks and hence it further mires the problem. Only few banks are under the restrictions and hence a direction is vital for future course. The bank’s chairman served on board for around 10 years and any indictment in such a case would undermine the quality of oversight on such banks. Demonetisation has caused a major gain of deployment of public savings in the financial sector.
But such scams are dissolving the benefits and causing loss to the economy. Transparency in action is the need of the hour to fix the mess and a systemic repair is essential to prevent laundering of money. The money laundered must be regained back from the defaulters and strict punishment should be given so that it does not happen in future.
This was not the first time when PMC bank got infamous for a scam and left without any action. Founder chairman Sardar Gurucharan Kochhar had informed about the irregularities of about crore in 1993. He claimed had RBI taken stringent actions then, a strong lesson would have gone to the people and would not have committed this scam.
RBI acted in favor of innocent depositor after financial irregularities, problems in internal control and under-reporting which came into its notice. Few people conceive this move as political one ahead of Maharashtra election. However, despite making it a political issue it should more be concerned with the loss of money to the economy and the fraud done to the nation.
Stringent action is the need of the hour so that a message is circulated to people and fear to process such scam for personal gains.
“Politician-banker nexus, poor governance and slackness on part of watchdogs are some of the pressing issues which must be taken care of sooner”.
The recommendations of RBI Panel under R. Gandhi, former deputy governor of apex bank should be taken into consideration. It focuses on the notion that the umbrella organization must be created and institute board of management to cater the needs.
Other recommendations are hinted by the amendment in the Banking Regulation Act to provide more powers to RBI over such cooperative banks, empowering apex bank to wind up banks independent of regulators under laws of cooperative societies. Even Nirmala Sitharaman promised a legislation to cater such scams.
The scams are increasing manifold but what most shocking was involvement of such cooperative banks. Earlier public sector banks and private sector banks were involved. However, cooperative banks are coming at forefront which is disastrous for society. People will lose faith in the banking system of the economy which is more disastrous for a developing nation.
Author: Naina Agarwal from Rajiv Gandhi National University of Law.
Editor: Ojasvi Agarwal from Jindal Global Law School, Sonipat.