Bangalore District Court
India vs 5. The Ofences : 58B(5) R/W Sec.58C on 21 April, 2021
C.C.No.14080 /2000
1
IN THE COURT OF THE I st ADDL.CMM: BENGALURU
Dated this the 21 st day of April 2021.
Present: Shri Bhat Manjunath Narayan,
B.Com., LL.B.
I st Addl. C.M.M BENGALURU.
C.C.No.14080 of 2000
The Reserve Bank of India,
represented by Authorized Ofcer
B.K.Das, aged about 31 years,
Assistant Manager,
Department of Non-Banking Supervision,
Reserve Bank of India,
Regional ofce, 10/3/8,
Nrupatunga road,
Bengaluru 560 001. .....Complainant
( Rep. by Nitin Prasad Advocate )
Vs
1. KirloskarInvestments and Finance
Ltd., Unity Building, II Floor,
'C' Block, J.C. road, Bengaluru 560 002,
represented by its Chairman
Harisingh Champawat,
2. Vijay R. Kirloskar
22 nd cross, Malleshwaram,
Bengaluru 560 055,
3. P.M.S. Mallik
No.20/A, 9 th main,
R.M.V. Extension,
Bengaluru 560 080.
C.C.No.14080 /2000
2
4. Dr.K.S.Krishnaswamy Apartment,
No.C-601, Adarsh Gardens,
47 th cross, 2 nd main, 8th Block,
Jayanagar, Bengaluru 560 082.
(Since deceased - abated)
5. Dr.V.Parameshwara
54(10/3), Kumarakrupa road,
Bengaluru 560 001,
6. S.N.Agarwal
11/3, Nandidurga road,
Bengaluru 560 046,
7. Kamalesh S. Gandhi
208, Regent Chambers,
Nariman point, Mumbai 400 021
8. P.D.Gune
138, Karishma National Co-op.
Housing Society, Baner road, Aundh,
Pune 411 004,
(Since deceased - abated)
9. D.V.Tikekar
66/7C, Erandwana,
15 th cross Lane,
Prabhat road, Pune 411 004,
(Since deceased - abated)
10.Dr.M.V.Patwardhan
Deccan Gymkhana,
behind Cafe Good Luck,
Saraswathi Heights,
Pune 411 004,
11. Jayant Gupta
23, Ishwar Nagar,
Mathura road,
New Delhi 110 065,
C.C.No.14080 /2000
3
12. Sajay C Kirloskar
33, Suyojana Housing Society,
Scheme II, Koregaon Park,
Pune 411 001,
13. P.R. Mundewadi
362, I Block, Rajajinagar,
Bengaluru 560 010,
14. N. Srivatsa
32, "Kaustubha", VHBCS Layout,
West of Chord road,
Mahalakshmipuram post,
Bengaluru 560 086,
15. Harisingh Champawat
No.36, Hirabhai Market,
Diwan Ballubhai road,
Ahmedabad 380 022,
16. Manohar Singh Rathore
101, Shreeji Complex,
near Elis Bridge Post Ofce,
Ashram road,
Ahmedabad 380 006,
17. Kesharsingh Rathore
Bhagwat Niwas,
Bhulabhaichar Rasta,
Gita Mandir road,
Ahmedabad 380 022. .....Accused
(Rep by Sri Srivastav, Advocate for
accused No.1 to 3, 5 to 7, 12 to 17
& Sri Pradhan, Advocate for accused
No.10 & 11)
C.C.No.14080 /2000
4
1. Sl. No. of the case : C.C.No.14080/2000
2. The date of : Between 01-04-1998
commission of the to 31-03-1999
ofence
Name of Reserve Bank of
3. :
Complainant India
4. Name of the : As stated above
accused
5. The ofences : 58B(5) R/w sec.58C
complained or of Reserve Bank of
proved India Act, 1934
6. Plea of the : Pleaded not guilty
accused and their
examination
7. Date of : 16-06-2007
Commencement of
evidence
8. Date of Closing of : 16-03-2019
complainant
evidence
9. Opinion of Judge : Accused not guilty
10. Date of Judgment : 21.04.2021
(Bhat Manjunath Narayan)
Ist Addl. CMM., Bengaluru.
C.C.No.14080 /2000
5
JUDGMENT
That, Reserve Bank of India represented by authorized ofcer Shri B.K.Das, Assistant Manager, has fled this private complaint alleging that the accused No.1 to 17 have committed an ofence punishable under Sec.58B(5) R/w sec.58C of Reserve Bank of India Act, 1934 (herein after referred as 'Act').
2. The averments made in the complaint necessary for disposal of this case are stated in brief as under:
That, it is submitted in the complaint that the complainant Reserve Bank of India is a statutory corporation established by Reserve Bank of India Act, 1934 having Central ofce at Mumbai and one of the branch at Bengaluru along with other places. It is submitted by the complainant Reserve Bank of India that B.K. Das, Assistant Manager, Department of Non-
Banking Supervision has been duly authorized under the provisions of Sub-regulation (1) of Regulation 17 of Reserve Bank of India General Regulations, 1949 R/w Sub-section (1) of Section 58 E of Reserve Bank of India C.C.No.14080 /2000 6 Act to fle this complaint. The complainant further submitted that the accused No.1 Kirloskar Investments and Finance Ltd., is a Non-Banking Financial Company and accused No.2 was the Chairman of the company.
The complainant submits that when violation amounting to the ofence alleged took place, the accused No.3 was the Whole-time Director & Vice-Chairman, accused No.4 to 12 are the Directors of the company, accused No.13 was the Managing Director of the company, accused No.14 is the Company Secretary and accused No.15 to 17 were the present Directors of the Company. The complainant RBI submitted that the Directors of the company present and past are responsible for conduct of its business and liable to be prosecuted as per Sec.58C of the Act. It is submitted by the complainant Reserve Bank of India that in exercise of powers conferred under sec.45J, 45K, 45L of Chapter IIIB of the Act and all the powers enabling it in this behalf, it had issued direction by Notifcation No.DNBC.38/DG(H)-77 on June 20, 1977 and DFC(COC)No.107/ED(JRP)/97 on April 30, 1997 for functioning of Non-Banking fnancial C.C.No.14080 /2000 7 Company. It is further submitted that subsequently the above directions issued was superseded by Notifcation bearing No.DFC.118/DG(SPT)-98 on January 31, 1998 and DFC.121/ED(G)-98 on January 31, 1998. These directions are called as Non-Banking Financial Companies Acceptances of Public Deposits (Reserve Bank) Directions, 1998 (herein after referred as 'The Acceptance of Public Deposits Directions')
3. It is submitted by Complainant-Reserve Bank of India that from May 25 to July 1, 1999 inspection of accused No.1 company was undertaken by Reserve Bank of India under Sec.45N of the Act with reference to its fnancial position as on 31.3.1999. It is submitted by the complainant Reserve Bank of India that upon inspection of the books of accused No.1 company, it is found that following violations are made by the company in contravention of the provision of Reserve bank of India Act 1934 and The Acceptance of Public Deposits Directions issued with respect to functioning of C.C.No.14080 /2000 8 Non-Banking company. The violations stated by Reserve Bank of India are as below:
i). The public deposits aggregating Rs.10927.55 lakh held by the company as on January 1, 1998 were in excess of its eligibility to hold public deposits under the provisions of the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 The company was, therefore, not eligible to accept fresh deposits or renew the existing public deposits, exceeding the amount of public deposits held by it as on January 1, 1998,. The company continued to accept fresh deposits and renew existing deposits up to March 31, 1999 and as such, violated the provisions of paragraph 4(6) of the Acceptance of Public Deposits Directions and did not take any steps to rectify the violation.
ii). The form of application for acceptance of deposits used by the company did not contain particulars relating to the credit rating assigned for its fxed deposits, and other relevant information as well as a statement regarding correctness of the data relating to the fnancial position of the company, the role and responsibility of the Bank has also a verifcation clause to be signed by the applicant depositor. The company has thereby violated the provisions of Paragraph 4 (12) (ii) of the Acceptance of Public Deposits Directions.
iii). AS the company had not issued any advertisement for soliciting deposits, it was required to submit to the Bank, a statement in lieu of advertisement (SILA) under paragraph 4(13) of the Acceptance of Public Deposits C.C.No.14080 /2000 9 Directions. The company has failed to do so and as such has violated the provisions of Paragraph 4(13) of the Acceptance of Public Deposits Directions
iv). The company had not recorded in the register of deposits maintained by it the dates of claim made by the depositors and the reasons for delay in repayment of deposits beyond 5 working days. The company has thereby violated the provision of paragraph 4 (16)(i)(e) and (g) of the Acceptance of Public Deposits Directions.
4. It is submitted by complainant-Reserve Bank of India that after noticing violations, it has issued show cause notice on 10.09.1999 to Chairman and Directors and they have given reply to the show cause notice. It is further submitted by the Reserve Bank of India that the reply submitted by the directors are not tenable in law and they are liable to be prosecuted for the violation stated above as some of the violations are continuing and were within the personal knowledge of the Directors of the Company. Therefore, the complainant Reserve bank of India contended that the violations stated above are punishable under C.C.No.14080 /2000 10 sec.58-B(5) of the Act and accused No.1 to 17 are liable to be prosecuted and punished.
5. It is submitted by the complainant Reserve Bank of India that bank has issued prohibitory order by exercising the power conferred on it under sec.45K(4) R/w sec.45MB(1) of the Act on August 30, 1999 prohibiting the accused No.1 company from accepting deposits in any form either by way of fresh deposit or renewal of existing deposit. It is further submitted that Reserve Bank of India has also issued direction to the accused No.1 company to the efect that the company shall not sell, transfer create, charge or mortgage or deal in any manner with its assets / property without prior written permission of the bank. The Reserve Bank of India further submitted that the accused No.1 company has not maintained liquid assets in the form of unencumbered approved securities at the specifed percentage of outstanding deposit during the period of April 1998 to March 1999. Therefore, the Reserve Bank of India contended that the accused No.1 company has C.C.No.14080 /2000 11 violated the provisions of Sec.45IB of Chapter IIIB of the Act. It is further submitted by Reserve Bank of India that as on 31.3.1999, the accused No.1 company held public deposits aggregating ₹.374.46 lakh which had matured for repayment and these deposits included deposits aggregating ₹.128.15 lakh in 578 deposit accounts which were claimed for repayment, & were not repaid. It is further submitted by Reserve Bank of India that in-spite of public deposits being matured, it is not repaid, but company has increased its public deposit to ₹.972.94 lakh in 6,529 deposits accounts as on June 15, 1999. It is submitted by the complainant Reserve Bank of India that the accused No.1 company has defaulted in repayment of deposits as on the date of maturity and thereby violated the provisions of 45QA(1) of the Act. It is the specifc case of the Complainant Reserve bank of India that under Sec.58C of the Act, where a person committing contravention or default referred to in sec.58B is a company, every person who at the time of contravention or default was committed, was in charge and responsible to the conduct of the business as well C.C.No.14080 /2000 12 as company shall be deemed to be guilty of contravention. Therefore, the complainant contended that the accused No.2 to 17 who are in charge of afairs of the company, were responsible for the conduct of the business of the accused No.1 company & have committed an ofence punishable under Sec.58B(5) R/w sec.58C of Reserve bank of India. Therefore, the complainant RBI has fled this private complaint through its authorized representative.
6. After fling complaint, sworn statement of the complainant is dispensed with as per Sec.200 (a) of Cr.P.C. and cognizance for the ofence punishable under Sec.58-B(5) R/w sec.58C of Reserve Bank of India Act, 1934 is taken against the accused. In response to summons issued, accused have appeared, and got themselves released on bail. Copy of the complaint is supplied to the accused as contemplated under Sec.207 of Cr.P.C.
7. After hearing both complainant RBI and accused, charge for the ofence punishable under C.C.No.14080 /2000 13 Sec. 58-B(5) R/w sec.58C of Reserve Bank of India Act, 1934 is framed, read over and explained to the accused and they pleaded not guilty. As accused pleaded not guilty, the Reserve Bank of India, to prove the guilt of the accused, got examined its ofcial by name Subodh Kumar as P.W.1 and got marked 9 documents as Exs.P1 to P9. On 21.07.2018 PW-1 has produced 2 documents which are marked as Ex-P15 & 16.
8. After closure of evidence on behalf of complainant RBI, statement of accused under Sec.313 of Cr.P.C. is recorded. The accused have denied the incriminating materials in the evidence. Accused have fled their written say under Sec.313 of Cr.P.C. Ex-D1 to 11 are marked on behalf of the defence.
9. On the basis of charge sheet allegation, oral evidence adduced by the prosecution, the following points arose for my consideration:
i). Whether the complainant Reserve bank of India proves beyond reasonable doubt that after-coming in to force of C.C.No.14080 /2000 14 directions as per Non-Banking Financial Companies Acceptances of Public Deposits (Reserve Bank) Directions, 1998, accused No.1 company has violated directions as mentioned in paragraph 6(i) to (iv) of complaint and accused thereby committed an ofence punishable under Section 58 B(5) R/w S.58 C of Reserve Bank of India Act, 1934.?
ii). What order ?
10. Heard learned Counsels appearing for the complainant & accused. Perused the oral and documentary evidence adduced by the complainant RBI & defence. My fndings on the above points are as under:
Point No.1 : In the Negative
Point No.2 : As per fnal order, for
the following:
REASONS
Point No.1 : -
11. That, Complainant Reserve Bank of
India, has fled this complaint alleging that the accused No.2 to 17 being Directors and ofcials of the Accused No.1 company have violated The Acceptance of Public Deposits Directions and thereby committed an ofence punishable under Sec.58B(5) R/w sec. 58C of the Act.
C.C.No.14080 /2000 15 Section 58B(5) of Reserve Bank of India, 1934 reads as under :-
(5) If any person other than an auditor
(a) receives any deposit in contravention of any direction given or order made under Chapter IIIB; or (aa) fails to comply with any direction given or order made by the Bank under any of the provisions of Chapter IIIB; or ( b) issues any prospectus or advertisement otherwise than in accordance with S.45NA or any order made under S.45J , as the case may be, he shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fne which may extend,-
(i) in the case of a contravention falling under clause (a), to twice the amount of the deposit received; and
(ii) in the case of a contravention falling under clause ( b), to twice the amount of the deposit called for by the prospectus or advertisement.
12. The Complainant alleges that accused No.1 company has violated para.4(6), para 4(12)(ii), para 4(13) and para 4(16) (i) (e)and (g) of the Acceptance of Public Deposits Directions.
C.C.No.14080 /2000 16
2. SUBMISSIONS MADE ON BEHALF OF THE COMPLAINANT
i). Counsel for complainant has argued that Ac- cused No.1 is a Non-Banking Financial company, Accused No.2 to 13 were the Directors of the Accused No.1 Company when the ofence is committed and Accused No.14 was the President and Company Secretary and Ac- cused Nos. 15 to 17 were the Directors of the Company when the complaint was fled by RBI. It is submitted by the counsel appearing for complainant that Exhibit P-2, Form 32 fled under Section 303(2) of the Companies Act, 1956 is proof of the above facts.
ii). It is argued on behalf of Complainant RBI that in exercise of powers conferred on it by virtue of Sec- tions 45J,45K,45L and 45MA of the Act, Reserve Bank of India has issued the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 which came into efect from 31.01.1998. Direc- tions are marked as Exhibit P-3. It is submitted that Non- Banking Financial Companies (NBFC) were classifed based on the percentage of assets deployed. NBFCs would therefore are classifed based on the type of busi - ness in which more than 50% of the assets were uti- lized. It is argued that during April 1998, Accused No.1 company was re classifed from an equipment leasing and hire purchase company to a loan company.
iii). It is submitted on behalf of complainant that inspection of Accused No.1 company by the Complainant in exercise of its powers under Section 45N of the Act was conducted between 25.05.1999 to 01.07.1999 when it inspected the books of Accounts of the Accused No.1 company for the Financial year ending 31.03.1999, which revealed many irregularities and violations. The violations are enumerated at Para No.6 to the complaint. It is argued on behalf of the complainant that as the Ac- cused had violated provisions of Section 58B(5) read C.C.No.14080 /2000 17 with 58C of the Act complainant got issued legal notice on 10.09.1999 which is marked as Exhibit P- 9.
iv). It is argued on behalf of the RBI that the Ac- cused No.1 company submitted a reply dated 28.09.1999(Exhibit D-4) which was found to be unsatis- factory. Due to the other violations of the Act and Regu - lations, the Complainant in exercise of powers conferred on it under Sections 45K(4) and 45 MB(1) of the Act, is- sued prohibitory order dated 13.08.1999 inter alia pro- hibiting the Accused from selling, transferring or mort- gaging or dealing with assets of the company , or ac- cepting or renewing deposits without prior permission of the Complainant
v). It is argued by the counsel that to prove com- mission of the violations stated in complaint, the Com- plainant led evidence through P.W-1, Mr. Subodh Kumar and had Exhibits P1 to P9 and P15 and P16 marked in evidence.
vi). Counsel in his written submission has given a table showing the violation committed and how the same is proved Violation of Nature of Violation Proof of Violation Directions Paragraph The public deposits Para 4(6)(i) of 4(6) of the aggregating to Rs. Regulations state that Directions 10927.55 lakh held the NBFC holding by the company as deposits in excess of on January 1, 1998 the prescribed limit as were in excess of its of 18.12.1998 shall eligibility to hold stop accepting public deposits. The deposits and reduce company was, the excess deposits therefore, not to nil before eligible to accept 31.12.2001 fresh deposits or renew the existing C.C.No.14080 /2000 18 public deposits, Admittedly from Page exceeding the No.14 of Exhibit D-4, amount of public the Accused Company deposits held by it admits that it only as on January 1, stopped accepting 1998. The company deposits from continued to accept 01.04.1999 fresh deposits and renew existing deposits up to March Exhibits P-6 and P-7 31, 1999 show that Accused No.1 was accepting fresh deposits in October 1998 which practice admittedly continued till April 1999, when it was duty bound to stop accepting deposits and the Company clearly had deposits in excess of its eligibility.
By continuing to
accept fresh deposits
until April 1999, the
Accused has
admittedly committed
the violation.
Para 4 (12) The form of This violation has also
(ii) of the application for been admitted by the
Directions acceptance of Accused at Exhibit D-4
deposits used by the at Page 11 thereof.
company did not Accused No.1 contends
contain particulars that form was valid
as required and also and admits that no new
a verifcation clause forms could be printed
to be the signed as the company had a
by the stock of old forms and
applicant depositor printing of new forms
C.C.No.14080 /2000
19
would result in
additional cost to the
company . At pages 12
and 13 of Exhibit D-4,
the accused admits
that the omission was
unintentional.
It is clear from the
regulations that the
same came into efect
from 31.01.1998 and
the Accused failed to
print new forms in
compliance of the
Directions.
Exhibit P-8 which
is a deposit
acceptance form
admittedly does not
contain the details
mandated by the
Directions.
iii Para 4 Company had not
This violation was not
(13) of the issued any
denied by the
Directions advertisement for
Accused in Exhibit D-4
soliciting deposits,
at Page 11 of the
it was required to
document. No
submit to the
evidence has been
Complainant, a
placed on record by
statement in lieu of
the Accused to show
advertisement
that they had
(SILA), which it
complied with this
failed to do
requirement.
iii Para 4 company had not Accused admitted the
(16)(i) (e) recorded in the violation in their
and (g) of register of deposits written arguments by
C.C.No.14080 /2000
20
the maintained by it the stating that they
Directions dates of claim made subsequently
by the depositors updated the Register
and the reasons for and do not clearly deny
delay in repayment the same in their reply
of deposits beyond 5 at Exhibit-D4.
working days
vii). It is submitted by the counsel that that the contentions of the Accused are devoid of merits and are liable to be rejected. As pointed out during the course of arguments, none of the violations alleged have any cor- relation whatsoever on the time period prescribed under the Directions for reduction of deposit holding. Further, the contention that the Directions imposed onerous/stringent conditions cannot be urged in the present proceedings and it was open for the Accused to challenge the Directions under Article 226 of the Consti- tution of India, which they had admittedly chosen not to do.
viii). It is submitted on behalf of the complainant that by the admissions made by the Accused as may be seen from the above, the Complainant has proved the violations committed by the Accused.
ix). Counsel relied upon decision reported in Inte- grated Finance v RBI reported in (2015) 13 SCC 772 the Hon'ble Supreme Court at Para Nos.45 and 46 discussed the objectives of Chapter 111-B of the Act and explain that the amendment to the Act to include the said chap - ter was to protect investors and to safeguard the viabil - ity.
x). Counsel has relied upon the Judgement in the case of Bhimappa and Others v. Allisab and Others re- ported in AIR 2006 Karnataka 231, wherein the Hon'ble High Court of Karnataka has at Para 15 of the Judgment held that when there is primary documentary evidence on record, personal knowledge of witness is immaterial. In the Judgment of Reserve Bank of India v Shetty Leas-
C.C.No.14080 /2000 21 ing (/)Ltd and Others reported in (2007)136 Comp Cas 782 at Paras 15 and 18, the Hon'ble High Court of Kar- nataka examined the scope of 58C of the Act and has also held that winding up of the company is not a bar for criminal prosecution. It is settled law that in case of any confict between directions and FAQs, directions having more sanctity than FAQs and being on a higher level in the hierarchy of laws would prevail as was held in the case of /spat Industries Ltd. V. Commissioner of Customs, Mumbai reported in (2006) 12 SCC 583 at Para No.28.
xi).Counsel has also relied upon the Judgments in State of Gujarat and Another v. Acharya 0. Pandey and Others reported in 1970 (3) SCC 183 at Para Nos. 7,9, 10 and 11, Pyarali K. Tejani v. Mahadeo Ramachandra Dange, reported in (1974) 1 SCC 167 at Para No. 15, Di- rector of Enforcement v. MCTM Corporation Pvt. Ltd.and Others reported in (1996) 2 SCC 471 at Para No. 7,8 and 13, State of Tamil Nadu v. R. Vasanthi Stanley and An - other reported in (2016) 1 SCC 376 at Para No.14 all state that it is settled principle of law that mens rea or intention is not an essential element in economic of- fences and mere action or inaction as the case maybe is sufcient to attract penalty.
xii).It is submitted on behalf of the complainant that the Accused No.1 company, by continuing to accept deposits, contrary to the directions and by violation of paragraphs 4(6), 4 (12) (ii) , 4(13) and 4 (16) (i) (e) and
(g) have violated Section 58-8(5) (a) and 58-8(5)(aa) of the Act and some of the ofences are continuing in na- ture. Therefore, it is argued on behalf of the counsel that accused have to be convicted for the ofence as stated in the complaint.
C.C.No.14080 /2000 22
2. SUBMISSIONS MADE ON BEHALF OF THE ACCUSED (as stated in the written arguments/ submissions) THE SUBMISSIONS REGARDING ALLEGATION MADE IN PARA 6 OF COMPLAINT Regarding Allegations made in para 6(i) of the Complaint (1) The Representation at Exh.D-4 specifcally deals with this aspect with regard to allegations in the Complaint at Pa ra 6.(i) and 6.(iii). The Ex - h.D-4 dated 26.09.1999 refers to Question No.15 and reply thereto published by the RBI, Department of Non-Banking Supervision, Central Ofce, Mumbai, dated 16.02.1998 and the same is placed and available on the RBI website. (2) The Frequently Asked Questions [FAQs] on NBFCs is the title & the RBI inter alia, while dealing with regulatory and supervisory objec- tives has enumerated the reasons for intro- ducing new Regulatory Frame work, efective from 31.01.1998 (at Exh.P-3), which directs the focus of the regulatory-cum-supervisory attention primarily on the NBFCs which accept deposits from the public.
(3) The representation at Exlh.D-4 has specifcally re -
ferred to Question No.15 and the answers provided by RBI in relation to new NBFC Policy 1998 by RBI, Mumbai, internal Pg.9 of the said representa- tion at Exh.D-4 reads as under :
Q15 Whether and NBFC with entitlement of accepting public deposits as per the revised Regulations and holding deposits much above the C.C.No.14080 /2000 23 level, can still accept fresh deposits? If so, what are the conditions?
A. All the Rated Companies have been allowed
3 years' time to regularize their excess deposits by repayment or otherwise. During this period. a company can accept fresh deposits and renew such maturing deposits subject to reducing the excess holding of public deposits by one-third at the end of every calendar year beginning December 1998. However, in such a case, the company should not exceed the level of public deposits outstanding as at the close of January 1, 1998. The unrated and under-rated NBFCs are not entitled to accept fresh deposit Therefore, it is argued on behalf of the accused that as per the clarifcation given by the RBI as stated above there was no restriction for accused No.1 company to accept fresh deposits [B] Allegations made in paras 6(ii) and 6[iii) of the Complaint -
It is argued on behalf of the accused that complainant has submitted a blank form along with the complaint which is marked as Ex.P8 which was issued on 21.08.1997 in conformity with RBI Direction. It is further submitted on behalf of the accused that application form and advertisement were approved by the Board of Directors vide Resolution dated 21.08.1997 and is also submitted to RBI.
Counsel for accused argued that in Paragraph 6
(iii) RBI has alleged that the company had not issued a SILA. Counsel submitted that Clause 4 (13) of the Prudential Norms (Exh.P-3) provides for Advertisement and SILA. The RBI has stated that accused No.1 had not issued any advertisement for soliciting deposits. RBI C.C.No.14080 /2000 24 has therefore contended that it was required to submit a SILA. All the papers and documents of accused No.1 are in custody of the RBI and consequently by the Committee constituted by the Hon'ble High Court, Karnataka and, thereafter the Ofcial Liquidator. There is no evidence led about the non-fling of the statement. The complaint does not allege or state which provision of the NBFC and Miscellaneous Non-Banking Companies (Advertisement) Rules, 1977, were violated by accused No.1 company It is submitted on behalf of the accused that according to RBI, the earlier SILA was dated 22.08.1997 Thus, as per Clause 13 (iii) of the Prudential Norms (Exh.P-3) the statement was valid till the expiry of six (6) months from the date of closure of the fnancial year in which it was so delivered . And, therefore, by its own showing the earlier SlLA was valid till 30.09.1998. There is nothing on record to show that the Accused Company solicited / invited deposits from public after expiry of this period without fling a SILA. There is no evidence produced by the RBI on this issue despite having all the records of the Accused No. 1 Company under their custody.
OTHER SUBMISSIONS MADE ON BEHALF OF THE ACCUSED 1.1 It is argued on behalf of the accused that the Accused No.1 Kirloskar Investment & Finance Ltd. [KIFL] was a Non-Banking Financial Company [NB FC] duly registered and was paying dividends to the ex - tent of 29%, 30% and 20% for the year ended 31.03.1995, 31.03.1996 and 31.03.1997 respectively 1.2 Learned counsel submitted that this is a case where the RBI has killed a proft making and fnancially viable NBFC by imprudent ways.
C.C.No.14080 /2000 25 1.3 It is case of the accused company that the RBI has itself acted contrary to the Prudential norms dated 31.01.1998; framed under Section 45J, 45K, 45L and 45MA of the Reserve Bank of In- dia Act, 1934 (RBI Act) .
1.4 It is submitted by the counsel that Nowhere during the trial the RBI have availed an opportunity to explain its conduct by pro - viding data from its archives, pointing out the malicious wrong committed by Accused No.1 Com - pany or providing a justifcation for not acting as a responsible regulator while dealing with the fle of the Accused. Particularly, not allowing the Ac - cused No.1 Company to avail of certain time bound corrective mens res. They were made gener - ally applicable to all the Companies and also bind - ing on RBI as a Regulator. This has been admitted by PW1 Mr.Subodh Kumar during his cross- exami - nation on 04.08.2012 1.1 The RBI has issued prudential Norms on 31.01.1998 by invoking its regulatory Powers un - der the said Act. This is a wide power and can - not be exercised without due care.
1.2 In this connection counsel has relied upon D.K. Trivedi & Sons & Ors Vs State of Gujarat & Anr. - 1 986 (Sup pl.1 ) SCC 20 : AIR 1 986 SC 1323, the Hon'ble Supreme Court held as under:
"........The Shorter Oxford English Dictionary, Third Edition, defnes the word "regulate" as meaning "to control, govern, or direct by rule or regulations; to subject to guidance or restrictions; to adapt to circumstances or surroundings"
[Para 30} C.C.No.14080 /2000 26 1.3 It has been held in K. Ramanathan v. State of Tamil Nadu, (1985) 2 sec 116 : (AIR 1 985 SC 660) that :
"The word 'regulation' cannot have any rigid or infexible reteaming as to exclude 'prohibition' . The word 'regulate' is difcult to defne as having any precise meaning. It is a word of broad import, having a broad meaning, and is very comprehensive in scope. [Para 18}.
It has often been said that the power to regulate does not necessarily include the power to prohibit, and ordinarily the word 'regulate' is not synonymous with the word 'prohibit'. This is true in a general sense and in the sense that mere regulation is not the same as absolute prohibition . At the same time, the power to regulate carries with it full power over the thing subject to regulation and in absence of restrictive words, the power must be regarded as plenary over the entire subject. It implies the power to rule, direct and control, and involves the adoption of a rule or guiding principle to be followed, or the making of a rule with respect to the subject to be regulated. The power to regulate implies the power to check and may imply the power to prohibit under efcacious regulation consists of sup pression. It would, therefore, ap pear that the word 'regulation' cannot have any infexible meaning as to exclude 'prohibition'. It has C.C.No.14080 /2000 27 diferent shades of meaning and must take its colour from the context in which it is used having regard to the purpose and object of the legislation, and the Court must necessarily keep in view the mischief which the Legislature seeks to remedy." [Pa ra 19] RBI DISOBEYS ITS OWN PRUDE TIAL NORMS :
(A) What are the Prudential Norms
framed by RBI - Prudential
Norms are Law and binding on
all including RBI.
(1) The Prudential Norms dated 31.03.1998
are framed by RBI under Section 45J, 45 K, 45L and 45MA of the RBI Act.
(2) The Prudential Norms are in the nature of Regulations / Regulatory Orders / Regulatory Direc-
tions. Sections 45J, 45K, 45L and 4SMA clearly reveal that the RBI is exercising regulatory power in terms of issuing directions / orders. Thus, the RBI has cre- ated a regulatory framework under the Prudential Norms. These Prudential Norms are duly notifed by Notifcation No. 118 dated 31.01.1998 (3) The term "Directions" used in the pru- dential norms is essentially, an expression by which the RBI has exercised the power con- ferred on it, under the subject provisions to make substantive law.
C.C.No.14080 /2000 28 In view of the fact that the Prudential Norms (4) have been framed under the subject provisions, they have statutory backing and are in the nature of dele- gated legislation having the force of law The Prudential Norms contemplates a levy of (5) penalty. It is a settled position of law that penalty can- not be levied without the express sanction under the law. In that view of the matter, it can be deducted that the Prudential Norms are essentially subordi- nate legislation in character.
Additionally, one has to understand the ratio- (6) nale for incorporation of the extended period in the Prudential Norms notifed on 31.01.1998 The period granted under the Prudential Norms to ensure com- pliance there with under the sudden change of arms.
(B)The prosecution launched by RBI contrary to the Prudential Norms, is illegal and bad in law.
The counsel for accused submits that following are admitted factual position:
(1) The Prudential Norms dated 31.01.1998 - Ex-
h.P3 and P4, were introduced by RBI taking up on it- self for the 1 st time, to regulate the nature of busi- ness undertaken by NBFCs under 4 categories, which are as follows :
(i) Equipment leasing
company- cl-2(ii)
(ii) Hire Purchase Fi-
nance Company -Cl-2 (iv)
(iii) Investment com-
pany Cl-2(vi) and
C.C.No.14080 /2000
29
(iv) Loan company Cl-
2 (vii)
Till December 31, 1997, all the NBFCs were allowed to do business in all the four categories, unhindered.
(1) Explanatory Booklet is issued by RBI Central Ofce, Mumbai, on 16.02.1998, explaining the Policy execution prescribing things to be done by NBFCs and the manner of execution of newly laid policy.
(2) Under the Norms, RBI is to decide the size and quantum of public depositors to be retained by the Companies with a concession to reduce the excess pub- lic deposits by 31.12.2001. During the intervening period, however, between 31.01.1998 to 31.12.2001 there was no prohibition or impediment for acceptance of new deposits for making repayment of old deposits and to reduce the overall quantum thereof in a periodi- cal and a phased manner [Reference Exh.D-4 - Repre- sentation of Accused No.1 Company dated September 26, 1999 / internal Pg.9 - In Reference Reply to Ques- tion No.15 of Frequently Asked Questions on new NBFC Policy 1998 issued by RBI, Central Ofce, Mumbai].
(3) Complainant RBI initiated action against Accused No.1 Company by issuing Prohibitory Notice under Section 45-M B R B I Act, dated 13.08.1999 (Ex- h.D-3) .
(4) Complainant RBI further initiated action against Accused No.1 KIFL by issuing a Show Cause No- tice dated 10.09.1999 (Exh.D-4) as a prelude to winding up proceedings under Section 45-M C RBI Act.
(5) Non-adherence by RBI to the timeline stipu- lated in the Prudential Norms has to be, therefore, viewed as an infringement of the binding delegated leg- islation.
C.C.No.14080 /2000 30 The action issued against accused No.1 (6) and its Board of Directors, in infringement of the Pru- dential Norms, which have a general application to all NBFCs is, therefore, liable to be quashed and the Ac- cused be acquitted.
(c) IN APPLICABILITY OF SECTION 58-B (5) OF THE RESERVE BANK OF INDIA ACT, 1934, IN VIEW OF THE JUDGMENT AND ORDER GRANTING SCHEME FOR REPAYMENT DATED 21.03.2000 BY THE COMPANY LAW BOARD, BENCH CHENNAI (at EX.D-2) (1) Counsel for accused has argued that the Southern Region Bench of the Company Law Board formulated a Scheme vide its order dated 21.03.2000 (Ex.D-2) by exercising powers under Section 45QA in respect of accused No.1 company. (2) The approach to the Company Law Board by the depositors and the Scheme approved by the Board, was accepted by the Company. The applica- tion of Section 58-B(5) of Reserve Bank of India Act, 1934 is therefore out of question.
(3)The order was also forwarded to the RBI, which had participated in the said proceedings. (4) In the said order (Exh.D-2) the consistent payment of dividend by KIFL for over a period of ten (10) years from 1986-87 till 1996-97 is recorded as an undisputed fnding (Para 9, Pg. 12 of the Order - Exh.D-2).
(5) The fnancial difculties including the enforcement of the Prudential Norms and the re- sultant: fnancial crunch faced by KIFL, is clearly recorded by learned Company Law Board. The ad- mission by RBI of having initiated action prior to the expiry of the period granted under the Pruden-
C.C.No.14080 /2000 31 tial Norms, is recorded in the order (Para 12, Pg. 5- 7 of the Order - Exh.D-.2).
(6) The learned Registrar of Companies, Kar- nataka, Bangalore, an Independent Authority estab- lished under Section 609 of the erstwhile Companies Act, 1956 (as then applicable) submitted before the Ld. CLB that "The winding - up Petition fled by the Re - serve Bank of India against the Company is not in the interests of the depositors" (Para B, Pg. 7 of the Order
- Exh.D-2).
(7) That it is submitted by the counsel that the contents of order do not in any manner, reveal that this was a case of misleading or misguiding the de - positors by the Accused Company. The Board also, did not term the Fixed Deposit Schemes as Ponzi Schemes.
(8) Despite, the opposition of RBI in the said proceedings, the l earned Company Law Board framed a Scheme and came to the conclusion that the contentions raised by accused No.1 were reiter- ated and justifed by the Company while answering Issue No. 2 accordingly and framing the Scheme in the interest of the depositor and public interest. This judgment has reached its fnality, by RBI not choos - ing to challenge it. And, therefore, the fndings of Company Law Board and the Scheme framed there- under not being challenged in Hon'ble Karnataka High Court by R B I, the fndings given therein, by company Law Board has reached its fnality and, therefore, binding precedent qua issues involved in the inter se litigation.
(9) The said judgment has been given in the discharge of statutory authority conferred under Section 45-QA RB I Act. I t is, therefore, binding on all the parties to the Proceedings, including RBI. By the C.C.No.14080 /2000 32 aforesaid fndings, this judgment has exonerated KI FL from the vice of defying Prudential Norms 1998 by accepting deposits beyond January 1, 1998. No fault can be found with the conduct of Accused No.1 Company for accepting the said de- posits. It was in conformity with the RBI policy, as propounded by, answering Question No.15 of FAQ of new NBFC Policy of 1998 issued by RBI, Mumbai
13. With these submissions made by the counsels appearing for the complainant and accused, oral and documentary evidence adduced by both the parties, I have considered whether Acceptance of Public Deposit Directions are violated by accused No.1 company.
14. It is the allegation made in the complaint that during inspection of accused No.1 company between 25.05.1999 to 01.07.1999 with respect to fnancial position as on 31.3.1999, the Reserve Bank of India noticed violations mentioned in paragraph 6(i) to 6(iv) of complaint and as such the complaint is fled against the accused No.1 to 17. The accused No.2 to 13 are the Directors, accused No.14 is the Company Secretary and accused No.15 to 17 are the present Directors. The accused have not disputed that the accused No.1 to 13 and 15 to 17 were the Directors of the accused No.1 C.C.No.14080 /2000 33 company and the accused No.14 is the Company Secretary. It is the case of the accused that some of the directors have resigned from the directorship of the company before fling of this complaint and as such outgoing directors have contended that they cannot be prosecuted. The accused No.15 to 17 have contended that at the time of alleged violation, they were not the directors and as such they cannot be prosecuted. In this connection, I have perused Ex.P2 form No.32 fled under Sec.303(2) of Company's Act. Ex.P2 shows date of appointment of directors and date of resignation as Directors which is as below:
Accused No.2 has resigned on 10-08-1999 Accused No.3 has resigned on 06-08-1999 Accused No.4 has resigned on 26-07-1999 Accused No.5 has resigned on 26-07-1999 Accused No.6 has resigned on 01-10-1999 Accused No.7 has resigned on 26-07-1999 Accused No.8 has resigned on 06-04-1999(deceased) Accused No.9 has resigned on 16-07-1999 Accused No.10 has resigned on 12-02-1999 Accused No.11 has resigned on 01-10-1999 Accused No.12 has resigned on 31-07-1998 Term of Accused No.13 as Managing Director expired on 01-08-1998 Accused No.14 has resigned as Company Secretary on 03-08-1998 Accused No.15, 16, 17 are appointed as Directors on 26-07-1999.
C.C.No.14080 /2000 34
15. As discussed above the Reserve Bank of India by exercising its power under sec.45N of the Act has conducted inspection of books of accounts pertaining to accused No.1 company for the fnancial year ending 31.03.1999. So, the violation and non-compliance of directions are prior to 31.3.1999. Some of the Directors resigned after commencement of fnancial year 1998-1999. Some of the directors have resigned after 31.03.1999. So, the contention of the accused No.2 to 14 that they cannot be prosecuted, since they have resigned from Directorship of the accused No.1 company prior to fling of this complaint cannot be accepted, because this complaint is regarding the violations made by the company during the fnancial year ending with 31.03.1999. As on the date of commencement of fnancial year, the accused No.2 to 14 were the Directors and Company Secretary, & during fnancial year only they have resigned. Therefore, in my considered opinion the accused No.2 to 14 cannot escape from the C.C.No.14080 /2000 35 prosecution on the ground that they have resigned from the directorship prior to fling of complaint.
16. In this case the accused No.15, 16, 17 are appointed as Directors on 26.07.1999. The violation alleged in this complaint is with respect to fnancial year in which the accused No.15 to 17 were not directors of the company. The acceptance of deposit in violation of directions, non-submission of statement and non-
maintenance of registers of deposit are with respect fnancial year starting from 01-04-1998 to 31-03-1999. Hence accused No.15 to 17 cannot be held liable and prosecution against the accused No.15, 16, 17 is not tenable in law since violation alleged is prior to their appointment as Directors. Therefore, in my opinion the accused No.2 to 14 are responsible for the afairs of the company during 01.04.1998 to 31.03.1999 & their prosecution for the violations of The Acceptance of Public Deposit Directions during fnancial year 01.04.1998 to 31.03.1999 is tenable in law.
C.C.No.14080 /2000 36 Discussion regarding Violation No.1 as stated in Para 6(i) of the Complaint
17. The Reserve Bank of India is contending that the accused No.1 company had public deposit aggregating to ₹.10927.55 lakhs as on 01.01.1998. It is the contention of the Reserve Bank of India that as per Non-banking Financial Companies, Acceptance of Public Deposits (Reserve Bank) Directions 1998, the accused No.1 company was not eligible to hold the deposit to the tune of ₹.10927.55. The Reserve Bank of India contended that in-spite of holding excess deposit and directions not to accept further public deposit, the accused No.1 company continued to accept fresh deposit and renew the deposit up to March 31 st 1999 and as such violated para 4(6) of The Acceptance of Public Deposit Directions issued by the Reserve Bank of India.
18. As per Ex.P3, Reserve Bank of India in exercise of its power confned by 45 K 45L and 45MA of Act has issued directions to Non-banking fnancial institution regarding collection of deposit on C.C.No.14080 /2000 37 31.01.1998. Ex.P3, the Acceptance of Public Deposits Directions defnes Equipment Leasing Company, Hire Purchase Finance Company, Loan Company, Investment company. According to the Reserve Bank of India, the accused No.1 company is classifed as Loan Company as on 31.04.1998. Nowhere in the complaint it is stated that Reserve Bank of India has classifed accused No.1 company as Loan Company. During arguments it was brought to the notice of this court that during April 1998 there was re-classifcation of accused No.1 company from Equipment Leasing Company / Hire Purchase Company to Loan company. As per Para 2(1)(viii) of The Acceptance of Public Deposit Directions, Loan Company means any company which is a fnancial institution carrying on its business providing of fnance whether by making loans or advance otherwise for any activity other than its own, but does not include Equipment leasing company or Hire purchase fnance company. So, it is clear that till April 1998 i.e., even after coming into force of the Acceptance of Public Deposit Directions, C.C.No.14080 /2000 38 accused No.1 company was equipment leasing company / hire purchase company.
19. To ascertain whether accused No.1 had collected excess deposit it is necessary to frst fx the ceiling on collection of deposit. Para 4(4) of The Acceptance of Public Deposit Directions prescribes ceiling on quantum of deposit. Para 4(4) of Acceptance of Public Deposit Directions is extracted as below No equipment leasing company or hire purchase fnance company or loan company or investment company shall, accept or renew public deposit except as provided hereunder -
ELC/HPFC
(a) An equipment leasing company or a hire purchase fnance company -
(i) having NOF of twenty fve lakh of rupees or more; and
(ii) complying with all the prudential norms with capital adequacy ratio of not less than ffteen percent as per last audited balance-sheet, may, accept or renew public deposit, together with the amounts remaining outstanding in the books of the company as on the date of acceptance or renewal of such deposit, not exceeding one and one-half times of its NOF or public deposit up to ten crore of rupees, whichever is lower.
C.C.No.14080 /2000 39
(b) An equipment leasing company or a hire purchase fnance company, -
(i) having NOF of twenty fve lakh of rupees or more;
(ii) complying with all the prudential norms; and
(iii) having minimum investment grade credit rating, may, accept or renew public deposit, together with the amounts remaining outstanding in the books of the company as on the date of acceptance or renewal of such deposit, not exceeding four times of its NOF. LC/IC
(c) A loan company or an investment company, -
(i) having NOF of twenty fve lakh of rupees or more;
(ii) having minimum investment grade credit rating; &
(i) complying with all the prudential norms with capital adequacy ratio of not less than ffteen percent as per last audited balance-sheet, may, accept or renew public deposit, together with the amounts remaining outstanding in the books of the company as on the date of acceptance or renewal of such deposit, not exceeding one and one-half times of its NOF:
Provided that a loan company or an investment company which is complying with all the above conditions and having, as on the date of its coming into force of these directions, AAA (triple A) grade credit rating but not having capital adequacy ratio of ffteen percent may, so long it continues to maintain the same position of its credit rating, accept or renew public deposit only up to the extent of not exceeding the amount outstanding as at the close of business on December 18, 1998 or one and one-half time of its NOF, whichever is more, and shall bring down its public deposit to the level as specifed in paragraph 4(6) of the directions and also attain the capital adequacy ratio of ffteen percent before March 31, 2000.
C.C.No.14080 /2000 40
(d) A loan company or an investment company which complies with all the prudential norms and having, as on the date of coming into force of these directions -
(i) NOF of twenty fve lakh of rupees or more; and
(ii) AA (double A) grade credit rating; but not having capital adequacy ratio of ffteen percent or above as per last audited balance-sheet, may, so long it continues to maintain the same position of its credit rating, accept or renew the public deposit together with the amounts outstanding in the books of the company on the date of acceptance or renewal of such deposit, not exceeding an amount equivalent to its NOF until it attains the capital adequacy ratio of ffteen percent but not later than March 31, 2000 (as per audited balance-sheet) with other stipulations remaining the same.
(e) A loan company or an investment company which complies with all the prudential norms and having, as on the date of coming into force of these directions -
(i) NOF of twenty fve lakh of rupees or more; and
(ii) A (single A) grade credit rating but not having capital adequacy ratio of ffteen percent or above as per last audited balance-sheet, may, so long it continues to maintain the same position of its credit rating, accept or renew the public deposit, together with the amounts outstanding in the books of the company as on the date of acceptance or renewal of such deposit not exceeding an amount equivalent to one-half of its NOF until it attains the capital adequacy ratio of ffteen percent but not later than March 31, 2000 (as per audited balance-sheet) with other stipulations remaining the same.
C.C.No.14080 /2000 41
20. Para 4 (4) of The Acceptance of Public Deposit Direction defnes ceiling on quantum of deposit which can be accepted by non-banking fnancial institutions. Determination of ceiling on quantum of deposit is interconnected with Net Owned Fund of the institution. However, in this case the Reserve Bank of India has not stated what is Net Owned Fund of accused No.1 company as on 01.01.1998 or on 18.12.1998. It has simply stated that the accused No.1 company had deposit aggregating to ₹.10,927.55 lakhs as on 01.01.1998 which is in excess of maximum limit. The accused No.1 company admittedly was classifed as equipment leasing company / Higher purchase Finance Company as on 01.01.1998. In the evidence it has come on record that the accused No.1 company is having 'A' credit rating. As per para4(4)(b) of The Acceptance of Public Deposit Direction it is clear that the Equipment Leasing Company or Hire Purchase Finance Company having NOF of ₹.25 lakhs or more, complying prudential norms and having minimum investment grade credit rating i.e., A+ / A can accept or renew public deposit C.C.No.14080 /2000 42 together with amount remaining outstanding in the books of company as on the date of acceptance or renewal of such deposit not exceeding four time of its Net owned Fund. So, to defne what is excess amount which accused No.1 company has collected, it was necessary for the Reserve bank of India to give information with respect to Net Owned Fund. In this case Reserve Bank of India has not stated what is net owned fund. It is the case of the Reserve Bank of India that in-spite of public deposit held in excess permissible limit, the accused No.1 Company has continued to accept the deposit. Para.4(4) of The Acceptance of Public Deposit Direction does not debar an Equipment Leasing Company / Hire Purchase Company / Loan company or Investment company from accepting or renewing public deposit. However, it defnes that the amount of deposit shall not exceed permissible limit & say that company shall not accept deposit in excess of ceiling limit. As already discussed to arrive at what is the maximum limit of deposit, Reserve Bank of India has to state what is the Net Owned Fund of the accused No.1 company. As C.C.No.14080 /2000 43 ceiling limit cannot be calculated, it cannot be held that collection of deposit by accused No.1 company is violation of para 4(4) of the Acceptance of Public Deposit Directions.
21. The complainant RBI has further contended that the accused no.1 company had public deposit in excess of permissible limit, & violated para 4(6) of The Acceptance of Public Deposit Direction. Para 4(6) of The Acceptance of Public Deposit Direction is extracted as below :
Regularization of the public deposits accepted earlier and held in excess of the permissible extent (6) Where an equipment leasing company or a hire purchase fnance company or a loan company or an investment company holds, at the close of business on December 18, 1998 public deposit in excess of the appropriate extent to which it is entitled to accept under the above provisions of these directions, it shall, -
(i) stop accepting public deposit; and
(ii) reduce, before December 31, 2001, the amount of excess public deposit to nil or the appropriate extent permissible under subclause (d) or (e) of paragraph 4(4) above as the case may be, by repayment as and when such deposit falls due or otherwise.
C.C.No.14080 /2000 44 Note :
In the event of excess public deposits arising out of the regulatory ceiling or downgrading of credit rating, the NBFC may renew the maturing public deposit subject to the compliance of the repayment stipulations contained in subparagraphs (5) and (6) of paragraph 4 and other provisions of these directions. It is to clarify that no matured public deposit shall be renewed without the express and voluntary consent of the depositor.
22. It is clear from plan reading of para 4(6) of The Acceptance of Public Deposit Directions that Equipment leasing Company or Higher Purchase Insurance Company or loan Company or in Investment company holds, at the close of business on 18 th December 1998 public deposit in excess of appropriate extent which it is entitle to accept, shall Stop accepting the public deposit & reduce before December 31, 2001 the amount of excess of public deposit to NIL or appropriate extent permissible under (d) or (e) of paragraph 4 (4) by repayment as and when such deposit falls due or otherwise. Note to direction 4(6) makes it clear that in the event of excess public deposit arising out of regulatory ceiling or down grading of credit rating, the NBFC may renew maturing public deposit subject to compliance of repayment stipulates contained in sub C.C.No.14080 /2000 45 para (5) & (6) of para 4 and other provisions of directions. It is also clarifed that no matured public deposit shall be renewed without express and voluntary consent of depositors. So as per direction at para 4(6) Non-Banking Financial Institution which is having excess public deposit has to stop accepting the public deposit after 18 th December 1998. In this case the Reserve Bank of India is alleging that even after 01.01.1998 the accused No.1 company continued to collect deposit and as such has violated directions of paragraph 4(6). In order to attract the violation as per para 4(6) of the Acceptance of Public Deposit Directions relevant date is 18.12.1998 & not 01.01.1998. So, if the accused No.1 company accept fresh deposit after 18.12.1998 then only it will be violative of direction 4(6) of the Acceptance of Public Deposit Directions.
23. In this case to show that the accused No.1 company has accepted the deposit; the complainant is relying upon Ex.P7 the statement submitted by accused No.1 company. Ex.P7 is monthly data return fled by C.C.No.14080 /2000 46 accused No.1 company for the month of October 1998. Ex.P7 shows that during the month of October 1998, the accused No.1 company has collected fresh deposit of ₹.205.25 lakhs. As discussed above either as investment leasing company or as a loan / investment company the ceiling limit cannot be calculated by this court as Reserve Bank of India has not provided Net Owned Fund of accused No.1. So, this court cannot give fnding that whether the accused No.1 company has violated direction 4(4). In paragraph 6(i) of complaint Reserve Bank of India, has not complained about the violations of para 4 (4), but it is alleged that the accused No.1 has not violated para 4(6) of the Acceptance of Public Deposit Directions. To attract violation of para 4 (6) the important date is 18.12.1998. The Reserve Bank of India has not given any documentary evidence to show that as on 18.12.1998 public deposit held by accused No.1 company was excess of permissible extent. Even if the public deposit held by accused No.1 company was excess of permissible limit then from 18.12.1998 the accused No.1 company shall not accept C.C.No.14080 /2000 47 the deposit. The learned counsel for complainant argued that in Ex.D3 reply notice the accused No.1 has admitted that from 01.04.1999 they have stopped to accept the deposit that means till 31.03.1999 they were accepting the fresh deposit. But in the reply notice marked as Ex- D4 the accused no.1 has stated that it has taken a policy decision that company will not accept deposit with efect from 01.04.1999 & that does not mean that from 18 th December 1998 till 31.03.1999 the accused No.1 company has accepted fresh deposit. The Reserve Bank of India has not produced any documentary evidence to show that after 18.12.1998 the accused No.1 company has accepted the fresh deposit. So, Ex.P7 is not at all helpful to say that accused No.1 company has violated para 4(6) of the Acceptance of Public Deposit Directions as said document pertains to a period prior to 18.12.1998. So, the oral evidence as well as documentary evidence adduced by the prosecution does not show that the accused No.1 company has collected deposit after 18.12.1998 & violated para 4(6) of the Acceptance of Public Deposit Directions. Therefore, in C.C.No.14080 /2000 48 my opinion there is no force in the arguments advanced by the learned counsel for complainant that the accused No.1 company ought to have stopped accepting fresh deposit after 01.01.1998 as the cut-of date mentioned in paragraph 4(6) is 18.12.1998. Therefore, in my opinion, complainant Reserve Bank of India has failed to show that the accused No.1 company has violated the directions mentioned at paragraph 4(6) of the Acceptance of Public Deposit Directions. Discussion regarding Violation No.II as stated in Para 6(ii) of the Complaint
24. Violation II alleged is with respect to form of application printed for accepting the deposit. The complainant Reserve Bank of India is alleging that form of application for acceptance of deposit used by accused No.1 company does not contain particulars relating to credit rating assigned, fxed deposit and other relevant information as well as statement regarding correctness of the data relating to fnancial position of the company, role and responsibilities of bank and also a verifcation C.C.No.14080 /2000 49 clause to be signed by the applicant / depositor. The Reserve Bank of India states that the application form used by accused No.1 is violative of para 12(ii) of the Acceptance of Public Deposit Directions. I have perused the direction 12(ii) in detail. The Acceptance of Public Deposit Directions came into force from 31.01.1998. If a non-banking fnancial institution prints an application form after 31.01.1998, the particulars mentioned in para 12 of Acceptance of Public Deposit Directions has to be complied. I have perused application form produced by the complainant Reserve Bank of India at Ex.P8. Ex.P8 is printed on 21.08.1997 i.e., prior to coming into efect of directions. Ex.P8 is printed by accused No.1 company, before the norms mentioned in Para 12 of Acceptance of Public Deposit Directions came into force. Ex-P8 is in accordance with norms prevailing prior to issuance of Acceptance of Public Deposit Directions 1998. PW-1 has admitted the same in his cross examination which is extracted below (cross examination dated 17-03-2018 at page 21).
C.C.No.14080 /2000 50 It is true to suggest that, the form which is marked as Ex-P8 is the form utilized by the company for the acceptance of deposit. It is true to suggest that, such for has been utilized from 21.08.1997. It is true to suggest that, the format which at Ex-P8 was sent after the approval by board of Directors to RBI. It is true to suggest that, the said format which is at ExP8 was printed in accordance with particulars as per Non-banking fnancial companies and miscellaneous non-banking companies (advertisement) Rules 1977 as amended by RBI. It is true to suggest that Ex.P8 does not contain any details i.e., it is blank. It is not true to suggest that, the form in Ex.P8 was not at all utilized by the company after 01-01-1998. It is true to suggest that, as per the details of Ex.P8 that term or period from every deposits mentioned as minimum 12 months + one day, 25 months, 36 months, 48 months and maximum period is 60 months. It is true to suggest that, it appears in Ex.P8 the fxed deposit he refers to monthly income scheme as well as other income scheme. It is true to suggest that, details of particulars of NBFC to be provided to the depositor along with form as prescribed under 1998 prudential norms, were not there in the year 1997. It is true to suggest that, such norms were introduced in the frst term in the year 1998. It is true to suggest that, the formats which were allowed to be used as per 1997 norms by the companies up to September 1998, i.e., after six months from the date of fnancial closure as provided under 13(iii) of Ex.P3
25. The complainant Reserve Bank of India has not adduced any oral evidence of depositors stating that after 31.01.1998 the accused No.1 company has used C.C.No.14080 /2000 51 application forms marked at Ex-P8. The application forms flled by depositors are not produced by Reserve bank of India. As special ofcer is appointed by Complainant RBI to deal with the afairs of the company and is stationed in the accused No.1 company, the documents are available to special Ofcer appointed by Reserve Bank of India and non-production of application form fled by any of the depositors after 31.01.1998 is fatal to the case of the complainant. Ex.P8 cannot be considered to show that it is a violation of para 4(12)(ii) as it was printed prior to coming into force of the Acceptance of Public Deposit Directions 1998. Therefore, in my considered view the accused No.1 company cannot be held liable for alleged violation of paragraph 4(12). It is not the case of the Reserve Bank of India that after 31.01.1998 the accused No.1 company has printed the application form for deposit collection and said form does not contain required information as per paragraph 4(12). This being the case in my opinion from Ex.P8 this court cannot come to a conclusion that the accused No.1 company has violated paragraph 4(12)(ii) of Acceptance of Public Deposit Directions.
Discussion regarding Violation No.III as stated in Para 6(iii) of the Complaint
26. The complainant is alleging that the accused No.1 company had not issued any advertisement for soliciting C.C.No.14080 /2000 52 deposit which was required to submit to the bank a statement in lieu of advertisement in paragraph 4 (13) of the Acceptance of Public Deposit Directions. It is the case of the prosecution that the company has failed to comply with the provisions of para 13 of the Acceptance of Public Deposit Directions. As per evidence of P.W.1 at cross-examination dated 23.03.2013 he has admitted as under:
It is true to suggest that para 6(iii) in complaint pertaining to the conditions to be complied by Non- banking fnance company at the time of public issue. These conditions are shown in the Ex-P3 para 13 and as per Ex-P8 at page 123 the A-1 Company has complied the condition shown in (a) to (g) except "h" shown in Ex-P3 para (13). I do not know the fact that condition 'h' in para (13) of Ex-P3 is not attracted to the Accused No.1 company.
27. PW-1 has admitted that Accused No.1 company has complied conditions mentioned at (a) to (g) in para 13 of Acceptance of Public Deposit Directions. P.W.1 further admitted that he doesn't know whether condition
(h) in para 13 attracts to accused No.1 company or not. Para 13(h) relates to the information, relating to aggregate dues (including non-fund based facility C.C.No.14080 /2000 53 provided to) from the companies in the same group or other entities or business venture in which directors or NBFC are holding substantial interest and total amount on exposure to such entities. The Reserve Bank of India has not shown by producing oral or documentary evidence to say that the accused No.1 company or its directors were holding substantial interest in the companies or other entities or business ventures of similar nature. As per earlier discussion on violation No.II mentioned in complaint, I have held that Ex-P8 is printed prior to coming in to force of new Directions. So even if Ex.P8 does not contain the information stated at para 13(h) it is not a violation. This being the case in my opinion the violation stated in para 6(iii) is also not attracted.
Discussion regarding Violation No.IV as stated in Para 6(iv) of the Complaint
28. As per complaint it is alleged that the accused company has not properly maintained register of deposits and updated the same with dates of claim made by the depositors and reason for delay in repayment of C.C.No.14080 /2000 54 deposits beyond 5 working days. Therefore, it is alleged that the company has violated the para 4(16)(i)(e) & (g) of the Acceptance of Public Deposit Directions. In this connection Reserve Bank of India has not produced any document to show that the accused No.1 company has not updated the register of deposits as required under para 4 (16)(i). It is argued on behalf of learned counsel for complainant that the accused No.1 company has to produce register to show that they have maintained register of deposits as per para 4(16)(i). It is to be noted that in the criminal prosecution it is the duty on the part of the prosecution to prove that the accused has committed ofences. If the documents required to prove violation is within the possession of accused, then prosecution has to take steps to call for the records from the custody of the accused. If the accused failed to produce the register, then an adverse inference can be drawn. However, in this case complainant RBI has not made any eforts to get register of deposits of accused No.1 company to exhibit that the accused No.1 company has not properly maintained register of deposits in the C.C.No.14080 /2000 55 manner required by the paragraph 4(16)(i) of The Acceptance of Public Deposit Directions. Apart from this, the Reserve Bank of India has appointed the Special ofcer who is having control over the records of the accused No.1 company. When the Special Ofcer appointed by complainant Reserve Bank of India is having control over the documents of the accused No.1 company, then it was necessary for the complainant Reserve Bank of India to produce the register of deposits to show that the accused No.1 company has not updated the date of claim made by the depositors, reason for the delay in repayment of deposits beyond 5 working days. This being the case in my considered view complainant has failed to show that the accused company has failed to maintain register of deposits in accordance with paragraph 4(16)(i) of the Acceptance of Public Deposit Direction. Therefore, I am of the opinion that the complainant has failed to prove the violation mentioned at paragraph 6(iv) of the complaint.
C.C.No.14080 /2000 56
29. That, I have considered Judgments cited by both parties. I do follow the principles laid down in the decisions. Decision rendered are helpful for interpretation of provisions, when evidence adduced is not clear & sufcient. However, in this case oral & documentary evidence adduced does not show violation of directions mention of Acceptance of Public Deposit Direction, Therefore I have not made discussion regarding applicability of decision citied by both the parties.
30. In view of the discussions made in preceding paragraphs, the complainant has failed to prove the violations as alleged in the paragraph 6 of complaint. Therefore, in my considered opinion, point NO.1 raised with respect to violation of Non-Banking Financial Companies Acceptance of Public Deposit (Reserve Bank) Directions, 1998 made by accused No.1 to 3, 5 to 7, 10 to 17 has to be answered in negative. Accordingly point No.1 is answered in negative.
C.C.No.14080 /2000 57 Point No.2: -
31. In view of discussion and conclusion arrived at point No.1, the accused are entitled to be acquitted. Therefore, I proceed to pass following :
ORDER Acting under Section 248(1) of Cr.P.C. the accused No. 1 to 3, 5 to 7, 10 to 17 are acquitted for the ofence punishable under Section 58B(5) R/w sec.58C of Reserve Bank of India Act, 1934.
The bail and surety bond of the accused No. 1 to 3, 5 to 7, 10 to 17 stand canceled.
(Dictated to the stenographer directly in the computer, typed by her, then corrected by me and then pronounced in open court on this the 21 st day of April 2021).
(Bhat Manjunath Narayan) Ist Addl. CMM., Bengaluru.
ANNEXURE List of witnesses examined for prosecution :-
P.W.1, Subodh Kumar;
List of exhibits marked for prosecution :-
Ex.P1, Letter of Authority,
Ex.P2, Form No.32 (8 in nos.),
C.C.No.14080 /2000
58
Ex.P3, Notifcation of Reserve Bank of India
31-01-1998,
Ex.P4, Notifcation No.DFC 121/ED(G)-98
dated 31-01-1998,
Ex.P5, Notifcation No.107 ED dated 30-04-1997,
Ex.P6, Letter written by accused No.1 company
to Reserve Bank of India about furnishing monthly statistical data, Ex.P7, Accused No.1 company's monthly data return of October 1998, Ex.P8, Public Deposit Acceptance Form, Ex.P9, Show cause notice, Ex.P10 to Ex.P14 , Not marked, Ex.P15, Letter dated 1-9-1999, Ex.P16, Copy of order dated 12-12-2000 passed by Appellate Authority;
List of witnesses examined for defence:-
NIL List of documents marked for defence:-
Ex.D1, Letter of Authority given by RBI, Ex.D2, Prohibitory order dated 13-8-1999 issued against the accused No.1 company, Ex.D3, Prohibitory order passed on 13-8-1999, Ex.D4, Reply notice dated 28-9-1999, Ex.D5, Copy of the order dated 8-8-2002 passed by the Hon'ble High Court of Karnataka, Ex.D6, Certifed copy of order dated 21-9-1999 with covering letter, Ex.D7 to Ex.D11, Certifed copies of representations, Order passed by Company Law Board dated 21-3-2000;
(Bhat Manjunath Narayan) I st Addl. CMM., Bengaluru.