Government' action promoting Islamic Banking not unconstitutional: High Court

Just a few days back we had written over a recent decision of the Supreme Court wherein the Haj subsidy given by the Government was declared to be constitutionally valid and not a violative of the secular character required to be donned by the Government. In a similar spate of reasoning a Division Bench of the Kerala High Court, in a decision authored by the Chief Justice of the High Court himself, has declared that the promotion of Islamic Banking by the Government is not violative of the Constitutional provisions. Holding that whether such an activity could at all be taken place was a question which was required to be answered by the Reserve Bank of India, the High Court set to naught the challenge to the constitutional propriety of the action of the Government to promote Islamic Banking. 

The Division Bench of the Kerala High Court in observed in Dr. Subramaniam Swamy v. State of Kerala inter alia as under;

2. W.P.(C).No.35180 of 2009 is filed with the prayers as follows:

"a) call for the records leading to the case and issue a writ of certiorari or any other appropriate writ, order or direction, quashing Exhibit.P1.

b) issue such other appropriate writ, oder or direction which this Hon'ble Court may deem fit in the circumstances of the case.  

c) award costs to the Petitioner".

3. The impugned order-Exhibit P1 is an Order dated 14.10.2009 evidencing a decision taken by the Government of Kerala. The relevant portion reads as follows:

"The Islamic Financial Services (IFS) Industry has grown substantially over the years forming a significant segment within global financial services and is generating lot of interest as an alternative model of financial intermediation. Growing awareness and demand for investment and financing in compliance with Shariah principles as well as increasing level of affluence have provided a fillip to Islamic Financial Services. With the objective of promoting an interest-free financing entity that follows Shariah principles, Government had entrusted KSIDC with conducting studies and looking into various aspects of formation of an Islamic Investment Company in Kerala for attracting investments in a right manner as per the Shariah of the Muslim Community to the development of the common public at large. The professional studies conducted on this project have concluded that there is a genuine commercial potential for an Islamic Financial Institution based in Kerala that has the potential to become a global payer.

2. The Minister for Industries convened a meeting of investors at Thiruvananthapuram on 15.07.2009 to discuss the formation of Islamic Financial Institution and decided to incorporate a company with 11% equity contribution from KSIDC and the remaining 89% from private investors. 

3. The Board of KSIDC had approved a share contribution of Rs.110 Lakhs (11% of the initial paid up Share Capital) to the proposed Company and decided to proceed with further steps for registration of the Company for promoting the Islamic Financial Institution.

4. Govt. have examined the matter in detail and found that the decision of the Board of Directors of KSIDC is within the area of their competence and delegation of powers and hence accord sanction for proceeding with further steps for registration of the Company."

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10. The main ground of the attack in both the writ petitions is that the decision of the State of Kerala and the K.S.I.D.C. which is an instrumentality of the State of Kerala to contribute to the share capital of the 6th respondent is inconsistent with the constitutional obligation of these two bodies to function on secular principles. Though it is not clearly pleaded it was specifically argued by Dr. Subramaniam Swamy that the impugned decision of the State of Kerala would be directly contrary to the mandate contained under Article 27 of the Constitution of India which reads as follows: 

"27. Freedom as to payment of taxes for promotion of any particular religion.- No person shall be compelled to pay any taxes, the proceeds of which are specifically appropriated in payment of expenses for the promotion or maintenance of any particular religion or religious denomination."

11. On the other hand, the State and the K.S.I.D.C. pleaded in their counter affidavits that the impugned decision was taken in order to garner huge amounts of unutilised funds from the Gulf countries available with the non-resident Indians working in those countries with a view to utilise such funds for the investment in the State of Kerala for the development of its people by promoting and providing financial assistance to the industries in the State of Kerala. In substance the respondents do not dispute the fact that a decision was taken to participate in the business of the 6th respondent company. They claim that notwithstanding the references in the Government Order dated 14.10.2009 and the advertisement issued by the 3rd respondent that the intention of the 6th respondent is to function in accordance with the requirements of Shariah, the motive and object of the State of Kerala and the K.S.I.D.C. is purely secular, i.e. to derive a commercial benefit from the business to be carried on by the 6th respondent. Therefore they cannot be accused of flouting the constitutional mandate of running a secular State. It is also the case of all the respondents that notwithstanding the fact that the 6th respondent company proposes to run its business in compliance with the principles of Shariah the 6th respondent is bound to function strictly in accordance with the law of this country. So long as the 6th respondent company so functions the fact that in addition to compliance with the law of the land the company also proposes to comply with a further requirement of running the business in accordance with the principles of Shariah does not make the activity of the company in any way inconsistent with the requirement of the secularism mandated under the Constitution. Therefore the State and its instrumentalities are not prohibited by the Constitution to be associated with such a business activity of the 6th respondent company.

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22. Two submissions made by the petitioners are required to be examined. The first is that the decision of the State to associate itself with the business of the 6th respondent is contrary to the Constitutional requirement that the State should be a secular State. The 6th respondent Company, which professes to run the business of non-banking financial institution in a manner which is compliant with Shariah is in essence a Company mixing the business with religion. Shariah is a body of law based on the religious principles enunciated in Koran, the holy book followed and venerated by "Umma", i.e., the Muslim brotherhood around the world. Therefore, any association of the State with the 6th respondent would amount to actively promoting or assisting the religion. Such an activity would be inconsistent with the principles of secularism, which is one of the goals sought to be achieved by the Constitution.

23. On the other hand, it is the case of the respondents that though the 6th respondent proposes to conduct the business complying with the dictates of Shariah, the 6th respondent is bound by the law of the land and is obliged to comply with all the requirements of the laws made under the Constitution of India. Therefore, such a business is purely a secular aspect of the Muslim Canon law. Hence, the State is not prohibited from associating with such a business.

24. To resolve the above issue, we are of the opinion that a clear understanding of the expressions "secularism", "religion", "secular activity associated with religious practice" is necessary. 

25. The ambit and meaning of the expression "secularism" contained in the preamble of the Constitution fell for the consideration of the Supreme Court in S.R. Bommai v. Union of India [(1994) 3 SCC 1]. A Larger Bench of the Supreme Court, of nine Judges, considered the issue. Six separate opinions were delivered. Four Judges - Justice P.B.Sawant, Justice K.Ramaswamy, Justice B.P.Jeevan Reddy who spoke for himself  and Justice S.C.Agrawal - made an elaborate enquiry into the meaning of the expression "secularism". Justice Sawant, on an analysis of Articles 25 to 30 and also Articles 14 to 16, the preamble of the Constitution and Article 51A of the Constitution, opined at para 146 as follows:

"These provisions by implication prohibit the establishment of a theocratic State and prevent the State either identifying itself with or favouring any particular religion or religious sect or denomination. The State is enjoined to accord equal treatment to all religions and religious sects and denominations.", 

and again at para 148 the learned Judge held as follows:

"One thing which prominently emerges from the above discussion on secularism under our Constitution is that whatever the attitude of the State towards the religions, religious sects and denominations, religion cannot be mixed with any secular activity of the State. In fact, the encroachment of religion into secular activities is strictly prohibited. This is evident from the provisions of the Constitution to which we have made reference above. The State's tolerance of religion or religions does not make it either a religious or a theocratic State. When the State allows citizens to practise and profess their religions, it does not either explicitly or implicitly allow them to introduce religion into non-religious and secular activities of the State. The freedom and tolerance of religion is only to the extent of permitting pursuit of spiritual life which is different from the secular life. The latter falls in the exclusive domain of the affairs of the State".

Justice Ramaswamy in his judgment at para 178 held as follows:-

"Though the concept of "secularism" was not expressly engrafted while making the Constitution, its sweep, operation and visibility are apparent from fundamental rights and directive principles and their related provisions. It was made explicit by amending the preamble of the Constitution 42nd Amendment Act. The concept of secularism of which religious freedom is the foremost appears to visualise not only of the subject of God but also an understanding between man and man. Secularism in the Constitution is not anti-God and it is sometimes believed to be a stay in a free society. Matters which are purely religious are left personal to the individual and the secular part is taken charge by the State on grounds of public interest, order and general welfare. The State guarantee individual and corporate religious freedom and dealt with an individual as citizen irrespective of his faith and religious belief and does not promote any particular religion nor prefers one against another".

The learned Judge after taking notice of the position obtaining in the United States of America opined at para 180 as follows: 

"Thereby this Court did not accept the wall of separation between law and the religion with a wider camouflage to impress control of what may be described exploitative parading under the garb of religion". 

Justice Jeevan Reddy, once again, on a consideration of the relevant Articles of the Constitution, at para 304 opined as follows: 

"While the citizens of this country are free to profess, practice and propagate such religion, faith or belief as they choose, so far as the State is concerned, i.e., from the point of view of the State, the religion, faith or belief of a person is immaterial. To it, all are equal and all are entitled to be treated equally. How is this equal treatment possible, if the State were to prefer or promote a particular religion, race or caste, which necessarily means a less favourable treatment of all other religions, races and castes. How are the constitutional promises of social justice liberty of belief, faith or worship and equality of status and of opportunity to be attained unless the State eschews the religion, faith or belief of a person from its consideration altogether while dealing with him, his rights, his duties and his entitlements? Secularism is thus more than a passive attitude of religious tolerance. It is a positive concept of equal treatment of all religions. This attitude is described by some as one of neutrality towards religion or as one of benevolent neutrality. This may be a concept evolved by western liberal thought or it may be, as some say, an abiding faith with the Indian people at all points of time. 

That is not material. What is material is that it is a constitutional goal and basic feature of the Constitution as affirmed in Kesavananda Bharati [(1973) 4 SCC 225] and Indira N. Gandhi v. Raj Narain [1975 Supp SCC1]. Any step inconsistent with this constitutional policy is, in plain words, unconstitutional. This does not mean that the State has no say whatsoever in matters of religion. Laws can be made regulating the secular affairs of temples, mosques and other places of worships and maths (See S.P.Mittal v. Union of India [(1983) 1 SCC 51]".

Again at para 307, the learned Judge observed as follows: 

"In short, in the affairs of the State (in its widest connotation) religion is irrelevant; it is strictly a personal affair. In this sense and in this behalf, our Constitution is broadly in agreement with the U.S. Constitution, the First Amendment whereof declares that "Congress shall make no laws respecting an establishment of religion or prohibiting the free exercise thereof..." (generally referred to as the "establishment clause"). Perhaps, this is an echo of doctrine of the separation of Church and State; may be it is the modern political thought which seeks to separate religion from the State - it matters very little". 

The substance of Bommai's judgment, as can be culled out from  the above extracted portions of the judgment in so far as it deals with the meaning of the expression "secularism" obtaining in the preamble of the Constitution and the secular nature of the State emerging from the scheme of various provisions of the Constitution, is that there is no wall of separation between the State and the religion as understood in the context of the American Constitution. The expression "wall of separation" originally employed by Thomas Jafferson in the context of the 1st amendment to the American Constitution, which declares:

"Congress shall make no laws respecting an establishment of religion or prohibiting the free exercise thereof............" 

The question whether the framers of the Indian Constitution imported the theory of "wall of separation" into Indian Constitution initially fell for consideration of the Madras High Court in Kidangazhi Manakkal Narayanan Nambudiripad v. State of Madras [AIR 1954 Madras 385]. Justice Venkatarama Aiyar, speaking for the Bench, on an elaborate examination of the scheme of the American Constitution as expounded by the various decisions of the American Supreme Court and the scheme of the Indian Constitution, opined: 

"Apart from making provisions in respect of particular subjects, the Constitution does not enact a general prohibition of legislation in respect of "establishment of religion". In this respect our Constitution makes a substantial departure from the American Constitution". 

He further held:

"On the other hand, there are provisions in our Constitution which are inconsistent with the theory that there should be a wall of separation between Church and State".

The Bench concluded that:

"It is difficult in the face of these provisions to accede to the contention that our Constitution has adopted the American view that the State should have nothing to do with religious institutions and endowments. It would, therefore, not be safe to build any argument based on the "establishment of religion" clause in the first Amendment and the decisions interpreting the same.",

a conclusion which found acceptance by the apex Court in Bommai's case, as already noticed earlier. 

26. Our Constitution does not create an absolute embargo on the State's association with every and any religious activity; nor does the Constitution permit the establishment of a theocratic State. As observed in Bommai's case (supra), the State's attitude is one of the benevolent neutrality towards religion. While the Constitution grants a great degree of freedom of conscience and guarantees a fundamental right to freely profess, practice and propagate any religion, such a right is made subject to the requirements of public order, morality and health. Our Constitution also recognise a distinction between practices which are essentially religious and activities which are secular, but associated with religious practice. Such activities include the economic, financial, political activities associated with religious practices. They are expressly made amenable to regulation by law. The distinction is recognised by the Supreme Court in The Commissioner, Hindu Religious Endowments, Madras v. Sri.Lakshmindra Thirtha Swamiar of Sri Shirur Mutt [1954 S.C.R.1005=AIR 1954 S.C.282].

27. To understand the distinction, it is necessary to understand the meaning of the expression "religion". The Supreme Court in Shirur Mutt's case (supra) at pages 1023 and 1023 held as follows:

"What then are matters of religion? The word "religion" has not been defined in the Constitution and it is a term which is hardly susceptible of any rigid definition. In an American case [Davis v. Benson, 133 U.S.333 at 342], it has been said "that the term 'religion' has reference to one's views of his relation to his Creator and to the obligations they impose of reverence for His Being and character and of obedience to His will. It is often confounded with cultus of form or worship of a particular sect, but is distinguishable from the latter."

We do not think that the above  definition can be regarded as either precise or adequate. Articles 25 and 26 of our Constitution are based for the most part upon article 44(2) of the Constitution of Eire and we have great doubt whether a definition of "religion" as given above could have been in the minds of our Constitution-makers when they framed the Constitution. Religion is certainly a matter of faith with individuals or communities and it is not necessarily theistic. There are well known religions in India like Buddhism and Jainism which do not believe in God or in any Intelligent First Cause. A religion undoubtedly has its basis in a system of beliefs or doctrines which are regarded by those who profess that religion as conducive to their spiritual well being, but it would not be correct to say that religion is nothing else but a doctrine or belief. A religion may not only lay down a code of ethical rules for its followers to accept, it might prescribe rituals and observances, ceremonies and modes of worship which are regarded as integral parts of religion, and these forms and observances might extend even to matters of food and dress.

The guarantee under our Constitution not only protects the freedom of religious opinion but it protects also acts done in pursuance of a religion and this is made clear by the use of the expression "practice of religion" in article 25".

It was argued by the Attorney General that the right of freedom of religion guaranteed under the Constitution is limited only to the religious activities proper and does not extend to the secular activities associated with religious practice which are not essential part of the religion. Such authority of the State to restrict the fundamental rights guaranteed under Articles 25 and 26 flows from the opening clauses of both the Articles which state that the rights guaranteed therein are subject to "public order, morality and health",

Dealing with the submission, the Supreme Court held at page 1025 as follows:

"In the first place, what constitutes the essential part of a religion is primarily to be ascertained with reference to the doctrines of that religion itself. If the tenets of any religious sect of the Hindus prescribe that offerings of food should be given to the idol at particular hours of the day, that periodical ceremonies should be performed in a certain way at certain periods of the year or that there should be daily recital of sacred texts or oblations to the sacred fire, all these would be regarded as parts of religion and the mere fact that they involve expenditure of money or employment of priests and servants or the use of marketable commodities would not make them secular activities partaking of a commercial or economic character; all of them are religious practices and should be regarded as matters of religion within the meaning of article 26(b). What article 25(2)(a) contemplates is not regulation by the State of religious practices as such, the freedom of which is guaranteed by the Constitution except when they run counter to public order, health and morality, but regulation of activities which are economic, commercial or political in their character though they are associated with religious practices".

28. Thus it can be seen that the Constitution guarantees the fundamental right to freely profess, practice and propagate any religion. However, every activity undertaken by the followers of a religion or religious denomination is not protected or free from the interference of the State on the ground that it forms part of a fundamental right guaranteed under the Constitution. The Constitution expressly recognises that there can be secular activities associated with a religious practice, such as economic, financial and political activities associated with a religious practice. Further the Constitution recognises the authority of the State to regulate such secular activities associated with a religious practice. Even with reference to the non-secular aspects of the religious practices the Constitution declares that the fundamental rights guaranteed under Articles 25 and 26 are subject to the demands of public order, morality and health. In other words, by necessary implication even those activities which can be called "purely religious" are also amenable to regulation by the State's law making authority if the State rationally comes to a conclusion that such practices are not conducive to the public order or requirements of morality of the society or harmful to the health of the society.

29. The resolution in the preamble to constitute a SECULAR REPUBLIC thus has two facets, i.e., that the State shall not unduly (i) interfere with the fundamental rights of the subjects to freely profess, practice and propagate any religion; (ii) unduly associate itself with any religious activity or favour in any way one religion over the other.

30. The complaint in the instant case is that the impugned action of the State of Kerala is objectionable on the ground that it amounts to undue association with a religious activity amounting to favouring or promoting a religion.

31. We have already examined the scheme of the Constitution in the context of the authority of the State to regulate the fundamental right to religious freedom. However the permissible limits of the State's association/entanglement with the religious activity is required to be examined.

32. The Constitution does not totally prohibit the association of the State with all the religious activity. Article 28 categorically prohibits any kind of religious instruction in any educational institution wholly maintained out of State funds. However, sub-Articles (2) and (3) thereof carve out exception to the above rule. Sub-Article (2) recognises the possibility of the existence of educational institutions established under any endowment or trust but under the administration of the State which are obliged by virtue of the mandates of the endowment or trust to impart religious instruction. Sub-Article (3) recognises the possibility of the experience of educational institutions which are established and administered by private parties which are recognised by the State and receive aid from the State, where religious instruction is imparted or religious worship is conducted. Article 28 does not prohibit the association of State with such institutions, either by way of administering such institutions or granting aid to such institutions or recognising such institutions, provided the student or his guardian, wherever the student is a minor, consents to attend such a religious instruction or worship. In our opinion, sub-Articles (2) and (3) clearly establish the fact that our Constitution does not adopt the American doctrine of "wall of separation". The kind of association of the State contemplated under sub-Articles (2) and (3) of Article 28 perhaps would be wholly impermissible under the scheme of American Constitution.

33. Even on the face of an express prohibition of the establishment of a religion by the State some interface between the State and religion is inevitable. Various activities of the State are challenged on the ground that they are inconsistent with the prohibition under the establishment clause. The US Supreme Court over a period of time recognised that there is a "zone of required accommodation". The Supreme Court formulated various tests to determine whether a particular State action is within the zone of required accommodation or not; such as the test of 'political neutrality', 'secular purpose', 'secular effect' and 'excessive entanglement'.

34. Another major difference between the Constitution of India and U.S. is that Article 30 guarantees a fundamental right in favour of the minorities, whether based on religion or language, to establish and administer educational institutions of their choice. Such express provision is absent in U.S. Constitution. The ambit of the said right has been the subject matter of debate before the Supreme Court in the case of St. Stephen's College v. University of Delhi [AIR 1992 SC 1630]. The majority of the Supreme Court, speaking through Justice K.Jagannatha Shetty, held that "minorities cannot be treated in a religious neutral way".The State is prohibited from discriminating against such educational institutions established and administered by a religious minority in the matter of granting aid to them. A Constitutional guarantee of the minority religious denomination's right to establish and administer educational institutions of their choice coupled with the guarantee of non-discrimination in the matter of granting aid is unknown to American constitutional system. Similarly, Article 290A mandates the payment of certain amounts from out of the Consolidated Funds of the States of Kerala and Tamil Nadu for the maintenance of certain Hindu temples and shrines, a Constitutional obligation necessitated by some historical compulsion. These Articles, in our opinion, clearly indicate that the State is not totally prohibited from having any association with religion or a religious denomination. 

35. The question is, whether these provisions of the Constitution are to be understood as exhaustive of the permissible limits of the State's association with religion or a religious denomination or only indicative of the permissible limits of the State's association. In view of the Constitution Bench decision of the Supreme Court in Bommai's case (supra) declaring that the State's attitude is one of the benevolent neutrality in the matter of religion, we find it difficult to come to the conclusion that the abovementioned provisions are exhaustive of the permissible limits of the State's association with religion.

36. Then the question would be, whether the kind of association which the State of Kerala proposes to pursue and the impugned action is Constitutionally permissible? To answer the question, we also deem it appropriate to advert to another aspect of the Constitution. Under Article 298, it is declared that the executive power of the Union and of each State extends to carrying on of any trade or business and also to acquire, hold and dispose of property and making of contracts for any purpose. If the State has the freedom or the authority to carry on any trade or business or acquire, hold or dispose of property by entering into any contract for any purpose, to believe that the State is prohibited from carrying on any trade or business either with a religious organisation or denomination or an organisation though not religious but proposes to carry on its business in a manner compliant with a set of beliefs based on a religion, in our opinion, would be inconsistent with the established rules of interpretation of Constitutional documents. It is well settled that a broad and liberal spirit should inspire those who are entrusted with the duty of interpreting the Constitution. The complexity of administration of a modern State demands a great deal of 'play in the joints' of the State to secure the goal of maintaining benevolent neutrality with regard to religion. To disable the State by imposing fetters on the power of the State would neither be in accordance with the settled principles of Constitutional interpretation or economic health of the State. Therefore, to restrict the commercial interaction of the State even with a religious denomination, on the ground that it is inconsistent with the declaration that the State should be a 'Secular Republic' would be illogical having regard to the scheme of the Constitution. In our opinion, such interpretation of the Constitution is not warranted. 

37. Whether the impugned decision of the State has the effect of promoting a religion: To find a constitutionally viable answer to the said question the principle that even religious associations are required to be treated with political equality and accorded equal civil opportunities for their development on par with other voluntary associations must be kept in mind. Such a principle emerges from the fundamental rights guaranteed under Articles 14 to 16, 19 and 25 to 30.

38. The grievance of the petitioners is that since the 6th respondent Company is proposed to be run in a Shariah compliant manner, association of the State with such a Company would have the effect of either promoting or aiding a religion. It is not very clear from the record nor the respondents, either the State of Kerala or the 6th respondent Company or its promoters, offer any explanation as to what exactly is meant by them when they proclaimed that the 6th respondent would carry on its business in a Shariah compliant manner.

39. Sharia, we understand, is the legal system based on the Koran and teachings of the Prophet Mohammed. 

"Law in the eyes of the Muslim scholars was not in fact an independent or empirical study. It was the practical aspect of the religious and social doctrine preached by Mohammed. For the early Muslims there was little or no distinction between 'legal' and 'religious'. In the Koran the two aspects are found side by side, or rather interwoven one with the other, and so likewise in the Hadith. The study and interpretation of the Koran involved sometimes the one and sometimes the other, and nearly a century elapsed before scholars began to specialize in one or the other aspect. Ultimately they were distinguished by relative terms: 'ilm - `positive knowledge', denoting theology (though not excluding law), and fiqh, `understanding', denoting law (based on theology). Only at a much later date was Greek word `canon' (qanun) adopted to denote administrative rule as distinct from revealed law. (Thus `canon law' in Arabic should mean the exact opposite of canon in European usage.)

The connexion between law and religion thus established by Mohammed and adopted by his followers persisted throughout all later centuries. Characteristically, all expositions of Muslim law begin with the `religious duties' or `acts of worship', such as ablution, prayer, and pilgrimage. As in other Semitic religions, law is thought of, not as a product of human intelligence and adaptation to changing social needs and ideals, but of divine inspiration hence immutable. For Muslims its proof-texts were to be found in the Koran and Prophetic Tradition; and on this assumption the jurists and theologians of the second century elaborated a structure of law that is, from the point of view of logical perfection, one of the most brilliant essays of human reasoning.

Before examining the product of this activity, it is of some importance to look a little more closely into the methods followed by the jurists in their endeavour to systematize their material, for the insight which it affords into the character of Muslim epistemology and reasoning. 

The Koran and the Tradition are not, as it is often said, the basis of Islamic legal speculation, but only its sources. The real foundation is to be sought in the attitude of mind which determined the methods of utilizing these sources. The first question, then, is not `What is laid down in the Koran and the Hadith?', but `Why are the Koran and the Hadith accepted as sources of law?', and the second is `How are their prescriptions to be understood and applied?' To answer the first question by saying that Koran and the Hadith are accepted as infallible sources because they are the foundations and title-deeds of the religion of Islam is to argue in a circle. The ultimate reason is metaphysical and a priori. It is a conviction of the imperfection of human reason and its inability to apprehend by its sole powers the real nature of the Good or indeed any reality whatsoever. Absolute good and evil can therefore be known to men only through a divine revelation mediated through Prophets. By Divine Providence there has been a succession of such Prophets ever since, by the creation of Adam (who was the first of them), mankind has existed on this earth. The revelations accorded to these Prophets were all identical in principle, but formed a gradually developing series adapted to the stages of man's development. Each in turn expanded, modified, and abrogated the preceding revelations. The Koran is the final revelation and therefore contains the final and most perfect solutions for all questions of belief and conduct. (Quoted from HAR Gibb............)

It is claimed to be the municipal law followed by some countries in the Middle East. The principle of the private international law followed by all the countries which follow the Anglo-Saxon jurisprudence is that foreign law is always a question of fact in so far as municipal Courts are concerned. Therefore the question as to what are those principles of the law of Shariah which regulate the business such as the one proposed to be carried on by the 6th respondent Company is required to be clearly pleaded and proved. 

40. In the absence of any clear pleading much less the proof of those principles of Shariah which the respondents propose to comply with while carrying on the business, we can only proceed on the view that the respondents proposed to carry on the business in accordance with some principles based on certain teachings of the Prophet. We must also make it clear that the respondents made an emphatic statement at the Bar that they are bound to follow each and every prescription of law of this country. In addition, they also intend to observe certain principles of Shariah. 

41. In response to a specific query of the Court as to what are those principles of the law of Shariah which are inconsistent with the mandate of secular State contemplated by the Constitution of India or the laws of India, the petitioner rightly answered that unless the respondents plead clearly as to what are the principles of Sharia they propose to follow, it is not possible to answer the question.

42. In the circumstances we are only left with a situation that the respondents propose to carry on the business of a 'non-banking financial institution' in accordance with the laws of the land and in addition follow some principles of Shariah in carrying on such business.

43. Every legal system has some basis in some religion or religious beliefs. For example, all legal systems known to a civilized world disapprove activities such as theft, causing harm to fellow human beings, licentiousness, etc. It is also equally true that no major religion known to humanity approves any one of the above activities. Therefore, to categorize laws which disapprove or prohibit such activities as non-secular merely because the prescription of such laws also coincides with certain religious beliefs and avoid such State action that it should be non-secular would not be conducive to the promotion of an orderly society either secular or non-secular. If the purposes of the State are to be classified as "non-secular" simply because the mandate of the law made by the State coincided with the beliefs of a religion or originated in a religion, virtually no law can be made. In our opinion it is for the above mentioned reason both Articles 25 and 26 open with the clause: 

"subject to public order, morality and health......"

The makers of the Constitution realised that there can always be claims that either a belief or conduct based on a belief is a part of the fundamental right to practice and profess a religion. If such a right were to be absolute most of the modern law would be offending the fundamental right to practice some religion or the other. The same principle in our opinion should apply in deciding the question whether the association of the State with any activity is to be classified as aimed at a non-secular purpose or promoting a religion. 

44. It is not in dispute that whatever the basis of Shariah, the principles of Shariah are meant to regulate the conduct of human beings adhering to the said system of law. Such an adherence may be with a view to either secure the establishment of an orderly society and maintain the same or to secure the devine approval for the human conduct or both. Whatever be the motive of the adherent, so long as the belief results in regulating the interaction between human beings, in our opinion, it is required to be treated as a secular aspect of a religious belief.

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55. One more submission of the petitioners which is required to be examined is the submission made on the basis of paragraph 4 of the counter affidavit filed on 07.09.2010 by the Union of India. Paragraph 4 of the counter affidavit reads as follows: 

"Government of India have always maintained that in the current statutory and regulatory frame work, it is not legally feasible for banks in India to undertake Islamic Banking activities in India or for branches of Indian Banks abroad to undertake Islamic Banking outside India. This has been the stance of the Government of India even while giving reply to Questions in the Parliament as well as in response to various VIP correspondences on the subject. The said stance of the Government of India is applicable mutatis mutandis to the activities of NBFCs also." 

The petitioners argued that in view of the stand taken by the Government of India, the State of Kerala cannot be a shareholder in a company which proposes to carry on the business in Sharia compliant manner. 

56. On the other hand, it is argued by Dr.Dhavan that the opinion such as the one contained in the affidavit filed by the Under Secretary of the Government of India in the Ministry of Finance is not determinative of the Constitutional interpretation. Secondly, even on the examination of the language of the statement of Mr. M.M. Dawla (Under Secretary), it is his opinion that the activities of the Islamic Banking are not legally feasible "in the current statutory and regulatory frame work". Dr. Dhavan submitted that the issue before this Court is the Constitutionality of the action of the State of Kerala, but not whether the existing statutory framework permits the carrying on of "Islamic Banking" activity. He further submitted that except making such an omnibus statement no specific prohibition contained in any statute which makes it impermissible to carry on the Islamic Banking is brought to our notice.

57. We see substantial force in the submission made by Dr. Dhavan. The Supreme Court in Sanjeev Coke Manufacturing Co. v. M/s.Bharat Coking Coal Limited [(1983) 1 SCC 147] at paragraph 25 held as follows:

"But, in the ultimate analysis, we are not really to concern ourselves with the hollowness or the self-condemnatory nature of the statements made in the affidavits filed by the respondents to justify and sustain the legislation. The deponents of the affidavits filed into court may speak for the parties on whose behalf they swear to the statements. They do not speak for the Parliament. No one may speak for the Parliament and Parliament is never before the court. After Parliament has said what it intends to say, only the court may say what the Parliament meant to say. None else. Once a statute leaves Parliament House, the Court is the only authentic voice which may echo (interpret) the Parliament. This the court will do with reference to the language of the statute and other permissible aids. The executive Government may place before the court their understanding of what Parliament has said or intended to say or what they think was  Parliament's object and all the facts and circumstances which in their view led to the legislation. When they do so, they do not speak for Parliament. No Act of Parliament may be struck down because of the understanding or misunderstanding of parliamentary intention by the executive Government or because their (the Government's) spokesmen do not bring out relevant circumstances but indulge in empty and self-defeating affidavits. They do not and they cannot bind Parliament. Validity of legislation is not to be judged merely by affidavits filed on behalf of the State, but by all the relevant circumstances which the court may ultimately find and more especially by what may be gathered from what the legislature has itself said." 

In other words, the Supreme Court held that while interpreting the Constitution or determining the constitutional validity of the statutes the court cannot be guided by the views expressed by individual officers of the State as the court has to ascertain the true meaning of the statutes made by the legislature. In our opinion, the principle applies with a greater vigour in determining the constitutionality of the State action.

58. We do not propose to deal with this question any further for the reason that whether the 6th respondent company can carry on the business such as the one proposed by the Union of India or whether such a business is prohibited by any statute are questions which in our opinion are primarily to be dealt with by the Reserve Bank of India. The Reserve Bank of India is yet to examine this question and we do not propose to preempt such an examination. We are also conscious of the fact, assuming for any reason, that there is some provision in law which either seek to regulate or prohibit such an activity of the 6th respondent, the right of the 6th respondent or its shareholders to question the constitutionality of such a regulation or prohibition cannot be ignored or jeopardised.

Have a look at the decision.

Recent SEBI and RBI Master Circulars: A laudable consolidation attempt

In this post we bring to you a number of Circulars issued recently by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). We generally do not run an update on such items as they are fairly recurring and not of much impact on the legal policy as such from a macro perspective. However in as much as these Circulars reflect a consolidation attempt on the part of these Regulators, we are running an update on these for the information and convenience of our readers and thus can be treated as a new year gift by the regulators in as much as it makes the applicable provisions at one place.

(a) On 28th December, 2010 the RBI issued Comprehensive Guidelines on Over the Counter (OTC) Foreign Exchange Derivatives and Overseas Hedging of Commodity Price and Freight Risks. The A.P. (DIR Series) Circular No. 32 dated 28.12.2010 provides the Comprehensive Guidelines which will come into effect from 01.02.2011 which the Circular states as having been revised "in the light of developments in the domestic and international financial markets" in consultation with the banks, corporates and other stake holders. The Circular provides the guidelines for (i) persons resident in India; (ii) persons resident outside India; (iii) Authorised Dealers; (iv) Commodity Derivatives; (v) Freight Derivatives; and also covers the aspects related to reporting to the RBI.

On 31st December, 2010 SEBI issued a number of Master Circulars to consolidate and replace a number of circulars covering the specified areas. These are;

(b) The Master Circular on Administration of Stock Exchanges, Arbitration in recognised Stock Exchanges and Stock Exchanges/trading platform for Small & Medium Enterprises including guidelines for Market Makers issued vide Circular No. CIR/MRD/DSA/SE/43/2010 dated 31.12.2010 is another consolidation attempt in as much as it consolidates the circulars/directions issued by SEBI in this regard up to December 31, 2010. It covers areas such as (i) Allotment of Codes to Stock Exchanges; (ii) Subsidiary Management by Stock Exchange; (iii) Governance of recognised Stock Exchanges; (iv) Arbitration in recognised Stock Exchanges; and regarding (v) Small and Medium Enterprise.

(c) The Master Circular for Stock Exchange - Cash Market issued vide Circular No. CIR/MRD/DP/42/2010 dated 31.12.2010 runs into about 300 pages to consolidate the legal framework earlier covered by a number of other circulars and thus brings the policy in perspective under one Circular itself. It addresses areas such as (i) Internet trading; (ii) Direct Market Access; (iii) Electronic Contract Note; (iv) Trading Terminals; (v) Smart Order Routing etc.

(d) The Master Circular for Depositories issued vide Circular No. CIR/MRD/DP/41/2010 dated 31.12.2010 enlist the guidelines to the followed by the Depositories on areas such as (i) Beneficial Owner (BO) Accounts; (ii) Issuer related; (iii) Depositories/Depository Participant (DP) Related; and (iv) Other communications to Depositories having policy implications.

(e) The Master Circular on AML/CFT Anti Money Laundering (AML) Standards/Combating the Financing of Terrorism (CFT)/Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed there under issued vide Circular No. CIR/ISD/AML/3/2010 dated 31.12.2010 "consolidates all the requirements/instructions issued by SEBI with regard to AML/CFT till January 31 2010 and supersedes the earlier circulars". The Circular is divided into two parts wherein "the first part is an overview on the background and essential principles that concern combating money laundering (ML) and terrorist financing (TF)" and the "second part provides a detailed account of the procedures and obligations to be followed by all registered intermediaries to ensure compliance with AML/CFT directives".

(f) The Master Circular on Matters relating to Exchange Traded Derivatives issued vide Circular No. CIR/DNPD/7/2010 dated 31.12.2010 consolidates the policy framework on these issues. This Circular, running into about 150 pages relates to (i) Index Futures; (ii) Index Options; (iii) Stock Futures; (iv) Stock Options; (v) Currency Futures; (vi) Currency Options; (vii) Interest Rate Futures; and other miscellaneous issues and deals with them in detail.

No writ to return vehicle recovered by Bank: High Court

That the scope of writ petitions is limited largely against the State is a proposition well founded in the jurisprudence which has developed under the Constitutional precincts. In this respect the Constitutional Courts of India have consistently declared that writ petitions would not be issued against private parties where such parties are not performing state/statutory functions. In this line we came across this decision wherein a High Court refused to issue writ against a private bank wherein the allegation was of illegal recovery of vehicle by the bank against the borrower. While the Court declared that there may be a right, the remedy availed was inappropriate.

The Calcutta High Court in a recently reported decision [Rabindra Kumar Singh v. State of West Bengal, AIR 2010 NOC 949] clarified the law in this respect by passing the following judgment;

ICICI Bank Limited, the fifth respondent in the pending art.226 petition dated March 5, 2008, has filed this application for dismissal of the petition on the ground that it is not maintainable. It is submitted that the application has been served. Affidavit of service has been filed. None appears to oppose the application. 

The principal reliefs seeking which the petition has been filed are these: "(a) A writ in the nature of Mandamus commanding and directing the respondents and their men, agents and/or associates, specially upon the respondent no.4 to take immediate steps in terms of illegal dispossession of the vehicle of the petitioner from his rightful possession. (b) A writ in the nature of Mandamus directing the respondent No.5 to take the part-payment of the due installments from your petitioner in respect of the above mentioned  vehicle. (c) A writ in the nature of Mandamus directing the respondent No.5 to release the Jute as early as possible which is in his custody till now."

The petitioner purchased a truck financed by ICICI Bank. Alleging that he failed and neglected to pay the loan according to the terms and conditions of the agreement between the parties, and that the contract entitled it to repossess the vehicle, ICICI Bank took possession of the vehicle on February 10, 2008 under an inventory of that same day, Annexure P2 at p.20. By a letter of that same day, Annexure P4 at p.22, it informed the petitioner that his failure to pay the amount mentioned therein would compel it to dispose of the vehicle.

On February 12, 2008 the petitioner sent by post a letter of that same day, Annexure P3 at p.21, to the officer in charge of Itahar police station in Uttar Dinajpur alleging that on February 10, 2008 certain unknown persons forcibly took possession of the vehicle. He then gave a reply dated February 26, 2008, Annexure P5 at p.23, to the bank's letter dated February 10, 2008 through his advocate offering to pay the loan. Then seeking the above-noted reliefs he brought this petition.

ICICI Bank is not a state within the meaning of art.12 of the constitution and no public law element was involved in the action it took for repossession of the vehicle. It repossessed the vehicle in exercise of its pure private law contractual right flowing from the contract between the parties. On the basis of the letter dated February 12, 2008 the police could not recover the vehicle from it and restore possession thereof to the petitioner. In exercise of power under art.226 this court cannot direct the bank to accept any amount from the petitioner and return the vehicle and goods. 

I am, therefore, of the view that the bank is right in contending that the petition is not maintainable. The petitioner's remedy, if any, was before the appropriate civil and criminal courts. 

For these reasons, I allow the application and dismiss the art.226 petition.

Have a look at the decision.

Inter-bank transfer of NPAs not illegal: Supreme Court

The Supreme Court recently in ICICI Bank Limited v. Official Liquidator of APS Star Industries Ltd. has reversed the decision of the Gujarat High Court holding that inter-se transfer of Non Performing Assets (NPA) by banks is not illegal under Banking Regulation Act, 1949. The High Court had held that "assignment of debts by banks inter se is not an activity which is permissible under the said BR Act, 1949 and consequently all executed contracts of assignment of debts were illegal."

The Supreme Court, extensively taking note of the provisions of the Banking Regulation Act, 1949, declared the law in the following terms;

14. The test to be applied is whether trading in NPAs has the characteristics of a bona fide banking business. That test is satisfied in this case. The guidelines issued by RBI dated 13.7.2005 itself authorizes banks to deal inter se in NPAs. These guidelines have been issued by the Regulator in exercise of the powers conferred by Sections 21 and 35A of the Act. They have a statutory force of law. They have allowed banks to engage in trading in NPAs with the purpose of cleaning the balance sheets so that they could raise the capital adequacy ratio. All this comes within the ambit of Section 21 which enables RBI to frame the policy in relation to Advances to be followed by the banking companies and which empowers RBI to give directions to banking companies under Section 21(2). These guidelines and directions following them have a statutory force. When a delegate is empowered by the Parliament to enact a Policy and to issue directions which have a statutory force and when the delegatee (RBI) issues such guidelines (Policy) having statutory force, such guidelines have got to be read as supplement to the provisions of the BR Act, 1949. The "banking policy" is enunciated by RBI. Such policy cannot be said to be ultra vires the Act. The idea behind empowering RBI to determine the Policy in relation to Advances is to enable banking companies to expand their business of banking and in that sense such guidelines also define as to what constitutes banking business.

Trading in NPA - a misnomer 

15. At the outset one needs to know what is NPA? When a borrower who is under liability to pay to secured creditors, makes default in repayment of secured debt or any installment thereof, the account of borrower is classified as Non-Performing Asset (NPA). Such NPAs cannot be used for any productive purpose. Continuous growth in NPAs threatens the repayment capacity of the banks. They have an adverse impact on the financial strength of the banks which in the present era of globalization are required to conform to International Standards. Thus, NPA means an asset or account receivable of a borrower, which has been classified by banks or financial institutions in terms of RBI Guidelines as sub-standard, doubtful etc. These guidelines are issued to improve quality of assets of the banks. The 2005 guidelines of RBI are not to eliminate NPAs but to restructure. The BR Act, 1949 vide Section 21 empowers RBI in the interest of the Banking Policy to lay down guidelines in relation to advances to be followed by banking companies. The 2005 guidelines have been issued as "a restructuring measure" in order to  avoid setbacks in the banking system. NPAs do not generate interest. 85% of the Indian Banks' income comes from interest. Thus, NPAs adversely impact profits of the banks and hence, as a matter of Banking Policy, RBI as Regulator seeks through its guidelines under Section 21 r/w Section 35A to manage these NPAs and not to eliminate. The said guidelines deal with restructuring of the banking system which is one of the objects behind giving authority to RBI to frame "banking policy". One more aspect needs to be kept in mind. In this batch of cases we are dealing with assets in the hands of banks. NPAs are "Account Receivables". The impugned guidelines show that RBI considers inter se NPA assignment between banks to be a tool for resolving the issue of NPAs and in the interest of banking policy under Section 21 of the BR Act, 1949. The object is to minimize the problem of credit risk. The corporate debt restructuring is one of the methods for reducing NPAs. Thus, such restructuring as a matter of banking policy cannot be treated as "trading". One has to keep in mind the object behind enactment of BR Act, 1949. Thus, the said Guidelines fall under Section 21 of the 1949 Act. These Guidelines are a part of Credit Appraisal Mechanism. Thus, in our view the impugned Guidelines are not ultra vires the BR Act, 1949. Dealing in NPAs as part of the Credit Appraisal Mechanism and as a part of Restructuring Mechanism falls within Section 21 r/w Section 35A of the Act. Hence, it cannot be said that "transfer of debts/NPAs" inter se between banks is an activity which is impermissible under the 1949 Act. The BR Act, 1949 is an Act enacted to consolidate and amend the law relating to banking. Thus, while interpreting the Act one needs to keep in mind not only the framework of the banking law as it stood in 1949 but also the growth and the new concepts that have emerged in the course of time. (see: Principles of Statutory Interpretation by G.P. Singh, 11 th edition at page 328.) 

16. Thus, in our view on reading the provisions of the BR Act, 1949 with the Guidelines of RBI issued from time to time in relation to Advances and Re-structuring/Management of NPAs we are of the view that the BR Act, 1949 is a complete Code on banking and that dealing in NPAs inter se by the banks needs to be looked in the larger framework of "Re-structuring of banking System". Thus, we need not go into the provisions of the said TP Act. In fact, it is the case of the borrower(s) that provisions of the said TP Act has no application. (See Written Submissions filed on 31.8.2010). 

Invocation of Section 130 of TP Act, 1882

17. In the alternative, since the borrower(s) has relied on Section 130 of the said TP Act, one needs to analyse the contentions raised in that regard. According to the borrower(s) assignment of Financial Instruments in possession of ICICI Bank Ltd. to Kotak Mahindra Bank Ltd. transfers not merely the right to recover the debt but also transfers the obligations under the Financial Instruments "as if they were executed by the clients of ICICI Bank in favour of the assignee", i.e., Kotak Mahindra Bank Ltd. According to the borrower(s), an assignment of a debt can never carry with it the assignment of the obligations of the assignor unless there is a novation of the contract by all parties. Therefore, according to the borrower(s), the impugned Deed of Assignment is legally unsustainable without novation of original contract between ICICI Bank Ltd. (assignor) and the borrower(s) (assignee). We find no merit in the above arguments.

18. As stated above, an outstanding in the account of a borrower(s) (customer) is a debt due and payable by the borrower(s) to the bank. Secondly, the bank is the owner of such debt. Such debt is an asset in the hands of the bank as a secured creditor or mortgagee or hypothecatee. The bank can always transfer its asset. Such transfer in no manner affects any right or interest of the borrower(s) (customer). Further, there is no prohibition in the BR Act, 1949 in the bank transferring its assets inter se. Even in the matter of assigning debts, it cannot be said that the banks are trading in debts, as held by the High Court(s). The assignor bank has never purchased the debt(s). It  has advanced loans against security as part of its banking business. The account of a client in the books of the bank becomes Non Performing Asset when the client fails to repay. In assigning the debts with underlying security, the bank is only transferring its asset and is not acquiring any rights of its client(s). The bank transfers its asset for a particular agreed price and is no longer entitled to recover anything from the borrower(s). The moment ICICI Bank Ltd. transfers the debt with underlying security, the borrower(s) ceases to be the borrower(s) of the ICICI Bank Ltd. and becomes the borrower(s) of Kotak Mahindra Bank Ltd. (assignee). At this stage, we wish to once again emphasize that debts are assets of the assignor bank. The High Court(s) has erred in not appreciating that the assignor bank is only transferring its rights under a contract and its own asset, namely, the debt as also the mortgagee's rights in the mortgaged properties without in any manner affecting the rights of the borrower(s)/mortgagor(s) in the contract or in the assets. None of the clauses of the impugned Deed of Assignment transfers any obligations of the assignor towards the assignee. In the case of Khardah Company Ltd. v. Raymon & Co. (India) Private Ltd. reported in (1963) 3 S.C.R. 183 the Supreme Court has held that the law on the subject of assignment of a contract is well  settled. An assignment of a contract might result by transfer either of the rights or by transfer of obligations thereunder. There is a well recognized distinction between the two classes of assignments. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. That, rights under a contract are always assignable unless the contract is personal in its nature or unless the rights are incapable of assignment, either under the law or under an agreement between the parties. A benefit under the contract can always be assigned. That, there is, in law, a clear distinction between assignment of rights under a contract by a party who has performed his obligation thereunder and an assignment of a claim for compensation which one party has against the other for breach of contract. 

19. In the case of Camdex International Ltd. v. Bank of Zambia reported in (1998) Q.B. 22 (CA) the following observation which is relevant to the present case needs to be quoted:

"The assignment of a debt will not be contrary to public policy solely on the grounds that the assignee has purchased the debt for a considerably discounted price or because that price is only payable after a period of credit. Nor will the assignment be contrary to public policy simply because the assignee may make a profit on the transaction at the end of the day. If there was no prospect of a profit, Hobhouse LJ observed, commercial entities would never purchase debts."

20. Similarly, the following proposition in Chitty on Contracts, 27th edn. (1994) at para 19.027 is relevant to be noted.

"It is also well established that a claim to a simple debt is assignable even if the debtor has refused to pay. The practice of assigning or `selling' debts to debt collecting agencies and credit factors could hardly be carried on if the law were otherwise. "

21. In view of the above exposition of law, we find that under the impugned Deed of Assignment only the Account Receivables in the books of ICICI Bank Ltd. has been transferred to Kotak Mahindra Bank Ltd. The obligations of ICICI Bank Ltd. towards its borrower(s) (customer) under the loan agreement secured by deed of hypothecation/mortgage have not been assigned by ICICI Bank Ltd. to the assignee bank, namely, Kotak Mahindra Bank Ltd. Hence, it cannot be said that the impugned Deed of Assignment is unsustainable in law. The obligations referred to in the impugned Deed of Assignment are the obligations, if any, of  ICICI Bank Ltd. towards Kotak Mahindra Bank Ltd. (assignee) in the matter of transfer of NPAs. For example, when an Account Receivable is treated as NPA and assigned to the assignee bank, the parties have to follow certain Guidelines issued by RBI. If there is a breach of the Guidelines or statutory directions issued by RBI by Assignor in regard to transfer of NPA then the assignee bank can enforce such obligations vis-à-vis the assignor bank. It is these obligations which are referred to in the impugned Deed of Assignment. That, an Account Receivable becomes an NPA only because of the default committed by the borrower(s) who fails to repay. Lastly, it may be mentioned that the said SARFAESI Act, 2002 was enacted enabling specified SPVs to buy the NPAs from banks. However, from that it does not follow that banks inter se cannot transfer their own assets. Hence the said SARFAESI Act, 2002 has no relevance in this case. 

22. Before concluding, we may state that NPAs are created on account of the breaches committed by the borrower. He violates his obligation to repay the debts. One fails to appreciate the opportunity he seeks to participate in the "Transfer of Account Receivable" from one bank to the other. 

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SFIO to investigate bank frauds: Supreme Court

Dealing with a public interest litigation highlighting before the Supreme Court the issue of "increase of the non-recovered loans advanced by the public and private sector banks in India" i.e. the Non-Performing Assets of NPAs, the Court in a recent decision in Common Cause (A Regd. Society v. Union of India has passed directions to be followed by the Serious Fraud Investigation Office so as to ensure that banking frauds were brought down in the country and those behind these offences were brought to the book.

The Supreme Court passed these directions taking note of the fact that the "Finance Ministry of the Union Government is reported to have admitted that 27 nationalised banks had written off a staggering amount of Rs.4,010/- crores as bad debts during 1994-95 and 1995-96" and also the submission of the petitioner society that "most of the bad debts are on account of defaults made by men of substantial means and influence and if proper checks are introduced to ensure that loans and advances are not given to fraudulent borrowers, the NPAs will get substantially reduced". 

In this background, the Supreme Court passed the following directions;

10. The Union Government, however, must ensure that SFIO is effective in detecting and preventing bank frauds by influential people. We find that the Central Government has constituted a Committee of Experts under the Chairmanship of Shri Vepa Kamesam, Ex-Deputy Governor of Reserve Bank of India, with the following terms of reference:

(a) Assessment of the need for and details of a separate stature to govern the constitution and functioning of SFIO; 

(b) The nature and details of the legislative changes as may be required in existing laws, to enable effective functioning of SFIO including prosecution of offences detected by it;

(c) The mechanism for referral of cases to SFIO and coordination of activities of SFIO with other agencies/organizations of the Central and State Governments, including investigating;

(d) Powers of SFIO and its investigation officers;

(e) Specification of offences and penalties to enable effective conduct of investigation agencies and the need for Special Courts for trial of corporate fraud cases; and

(f) Other matters consequential to or in pursuance of the above.

We have no doubt that this Committee of Experts under the Chairmanship of Ex-Deputy Governor of Reserve Bank of India will suggest effective measures, legislative or administrative, to ensure that bank frauds are prevented in future and the NPAs are kept to the minimum. We hope and trust that this Committee under the Chairmanship of Ex-Deputy Governor of Reserve Bank of India will consider the suggestion to make the SFIO (or any similar body) a statutory authority having sufficient powers and having the required autonomy to be able to effectively deal with the problems of bank frauds and NPAs. A copy of this order will be placed by the respondent No.1 before the Committee of Experts.

Have a look at the decision.

Banks to act in good faith and with full accountability: Supreme Court

Not pleased with the actions of a public sector bank in failing to ensure due recovery of the loans advanced by the Bank, the Supreme Court in a recent decision called upon the banks to act in good faith and promote efficiency in action. Holding that banks being instrumentalities of state had to share the public accountability and act in good faith in as much as they dealt with public funds. 

The Bench observed inter alia as under;

42. Having answered both the questions of fact partially and law against the present appellant, still there is another important facet of this case which cannot be ignored by the Court. It relates to the conduct of the respondent Bank and its officers/officials. The witnesses appearing on behalf of the Bank had stated that, at the stage of appraisal report itself, the Bank had come to know, that respondent Nos. 2 and 3 have a leave and license agreement with the appellant. Despite that, and without proper verification, as it appears from the record, heavy loan was sanctioned and disbursed to the above respondents. Even thereafter, the Bank and its officers/officials appear to have taken no serious steps to ensure that the goods hypothecated to the Bank are not disposed off without its consent. The officers/officials of the Bank, even after knowing about the handing over of the possession of the property including the hypothecated goods to the appellant and having communicated the same to the appellant vide their letter dated 24th August, 1987, made no serious efforts to recover its debt and ensure that the goods are not disposed off, as the suit itself was filed for recovery of the amount on 1st February, 1989 after serious delay. These facts, to a great extent, are even conformed in the affidavit which was filed on behalf of the Bank by one Shri Kamal Kumar Kapoor as late as on 22nd August, 2009 before this Court. There is no doubt in our mind that the Bank could have protected its interest and ensured recovery while taking due caution and acting with expeditiousness. There is definite negligence on the part of the concerned officers/officials in the Bank. They have jeopardized the interest of the Bank and consequently the public funds, only saving grace being that orders were passed by the competent forum, requiring the appellant to deposit some money in the suit for recovery of more than 22 lac which was filed by the Bank in the year 1989. Even this order was also vacated by the Tribunal vide its order dated 28th December, 2006 wherein it passed the order for refund of the amount. The concerned quarters in the Bank also failed to act despite the advertisement for sale of the hypothecated material given by the appellant on 12th March, 1988, whereafter the machines like CTC is said to have been sold at a throwaway price. All these facts indicate definite negligence and callousness on the part of the concerned quarters. The legislative object of expeditious recovery of all public dues and due protection of security available with the Bank to ensure pre-payments of debts cannot be achieved when the officers/officials of the Bank act in such a callous manner. There is a public duty upon all such officers/officials to act fairly, transparently and with sense of responsibility to ensure recovery of public dues. Even, an inaction on the part of the public servant can lead to a failure of public duty and can jeopardize the interest of the State or its instrumentality.

43. In our considered opinion, the scheme of the Recovery Act and language of its various provisions imposes an obligation upon the Banks to ensure a proper and expeditious recovery of its dues. In the present case, there is certainly ex facie failure of statutory obligation on the part of the Bank and its officers/officials. In the entire record before us, there is no explanation much less any reasonable explanation as to why effective steps were not taken and why the interest of the Bank was permitted to be jeopardized. The concept of public accountability and performance is applicable to the present case as well. These are instrumentalities of the State and thus all administrative norms and principles of fair performance are applicable to them with equal force as they are to the Government department, if not with a greater rigor. The well established precepts of public trust and public accountability are fully applicable to the functions which emerge from the public servants or even the persons holding public office. In the case of State of Bihar v. Subhash Singh [ (1997) 4 SCC 430], this Court, in exercise of the powers of judicial review stated that, the doctrine of full faith and credit applies to the acts done by officers in the hierarchy of the State. They have to faithfully discharge their duties to elongate public purpose. 

44. Inaction, arbitrary action or irresponsible action would normally result in dual hardship. Firstly, it jeopardizes the interest of the Bank and public funds are wasted and secondly, it even affects the borrower’s interest adversely provided such person was acting bonafide. Both these adverse consequences can easily be avoided by the authorities concerned by timely and coordinated action. The authorities are required to have a more practical and pragmatic approach to provide solution to such matters. The concept of public accountability and performance of functions takes in its ambit proper and timely action in accordance with law. Public duty and public obligation both are essentials of good administration whether by the State instrumentalities and/or by the financial institutions. In the case of Centre for Public Interest Litigation & Anr. v. Union of India & Anr. [(2005) 8 SCC 202], this Court declared the dictum that State actions causing loss are actionable under public law and this is as a result of innovation to a new tool with the court, which are the protectors of civil liberty of the citizens and would ensure protection against devastating results of State action. The principles of public accountability and transparency in State action even in the case of appointment, which essentially must not lack bonafide was enforced by the Court. All these principles enunciated by the Court over a passage of time clearly mandate that public officers are answerable both for their inaction and irresponsible actions. What ought to have been done, if not done, responsibility should be fixed on the erring officers then alone the real public purpose of an answerable administration would be satisfied.

45. The doctrine of full faith and credit applies to the acts done by the officers and presumptive evidence of regularity of official acts done or performed, is apposite in faithful discharge of duties to elongate public purpose and to be in accordance with the procedure prescribed. It is known fact that, in transactions of the Government business, none would own personal responsibility and decisions are leisurely taken at various levels (Refer : State of Andhra Pradesh v. Food Corporation of India [(2004) 13 SCC 53]. Principle of public accountability is applicable to such officers/officials with all its vigour. Greater the power to decide, higher is the responsibility to be just and fair. The dimensions of administrative law permit judicial intervention in decisions, though of administrative nature, but are ex facie discriminatory. The adverse impact of lack of probity in discharge of public duties can result in varied defects not only in the decision making process but in the decision as well. Every public officer is accountable for its decision and actions to the public in the larger interest and to the State administration in its governance. It needs to be seen in the facts and circumstances of the present case, why and how the interest of the Bank has been jeopardized, in what circumstances the loan was sanctioned and disbursed despite some glaring defects having been exposed in the appraisal report. Significant element of discretion is vested in the officers/officials of the Bank while sanctioning and disbursing the loans but this discretion is circumscribed by the inbuilt commercial principles/restrictions as well as that such decisions should be free from arbitrariness, unreasonableness and should protect the interest of the Bank in all events. We are neither competent nor do we wish to venture to examine this aspect, it is for the appropriate authorities in the Bank to examine the matter from all quarters and then to take appropriate action against the erring officers/officials involved in the present case, that too, in accordance with law.

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No recovery agents for Banks: High Court

In a recently reported decision [AIR 2010 NOC 398 (Mad)], the Madras High Court has declared that use of recovery agents by the banks for recovery the loan amounts is against the provisions of law. Even though the High Court declared that such instances cannot be challenged in a writ petition under Article 226 of the Constitution where private banks were involved, nonetheless it stated in no unclear terms "that recovery through musclemen giving them the title 'Recovery Agents' is not permitted by law".

The High Court was hearing a case wherein the petitioner challenged the 

6. The question as to whether ICICI bank would come within the meaning of "other authorities" as defined under Article 12 of the Constitution of India was considered by the Division Bench of our High Court in ICICI Bank Ltd. Vs. Lakshminarayanan [2008 (3) LLN 320] and after considering the matter in extenso, the Division Bench held that the writ petition is not maintainable against ICICI bank. The said judgment was followed by another Division Bench in W.A.No.480 of 2007 (S.Sundaram and others v. ICICI Bank Ltd and another, judgment dated 09.02.2009), wherein it was clearly held that ICICI bank would not come within the purview of  Article 12 of the Constitution of India.  

7. Even though this Court cannot interfere in the realm of contract entered into between the petitioner and the respondent bank, still the bank cannot be heard to say that they are entitled to proceed against the petitioner without resorting to the procedure recognized by law. The respondent bank is bound to act as per the directions and guidelines issued by the Reserve Bank of India from time to time. The practice adopted by the respondent bank in hiring recovery agents and deputing musclemen to seize the vehicles were deprecated by the Hon'ble Supreme Court in ICICI Bank Ltd. v. Prakash Kaur reported in 2007(2) SCC 711. While supplementing the judgment delivered by His Lordship Mr. Justice ALTAMAS KABIR, His Lordship Mr. Justice AR.LAKSHMANAN was pleased to indicate certain factors, which were prevailing in the banking industry in the matter of recovery. The factors so indicated would run thus:-

"* Now the bank is the aggressor and the public is the victim. The first step to recovery of the money due is through the so-called recovery/collection agents. A very dignified term used for paid recovery agents who are individual and independent contractors hired by the banks both to trace the defaulters and to physically, mentally and emotionally torture and force them into submitting their dues.

* A man's self-respect, stature in society are all immaterial to the agent who is only primed at recovery. This is the modernised version of Shylock's pound of flesh. No explanation is given regarding the interest charge and the bank takes cover under the guise of the holder of the card or loan having signed the agreement whose fine print is never read or explained to the owner.

* When a harassed man approaches the court or the police station he is not armed with a recording phone and finds it difficult to give evidence of the abuse he has suffered. Here the bank gets away with everything. Young and old members of the family are threatened on streets, institutions and also at home at godforsaken hours by these agents who have the full support of their contractor bank. The stance taken by the bank in any suit alleging such incidents is that no such agent has been appointed by them or their agents do not misbehave in the manner aforesaid and if found guilty the agents have to bear the cross and the bank gets away scot-free.

* Using of the abusive language for recovery is the norm of the day for most nationalised or multinational banks or non-nationalised banks.  Though some are smart enough to record the abuse and proceed to establish the same through the court of law, most of them are unfortunate not to have recourse to it. Such people form the majority and such litigations are pending in large volumes before the civil and consumer courts. Again the banks escape liability since these agents are not salaried employees of the bank and hence not directly liable for anything."

8. The Hon'ble Supreme Court in Prakash Kaur's case strongly deprecated the practice of the respondent bank in removing the vehicle from the possession of the debtor by hiring recovery agents in the following words:-  

"16. Before we part with this matter, we wish to make it clear that we do not appreciate the procedure adopted by the Bank in removing the vehicle form the possession of the writ petitioner. The practice of hiring recovery agents, who are musclemen, is deprecated and needs to be discouraged. The Bank should resort to procedure recognized by law to take possession of vehicles in cases where the borrower may have committed default in payment of the installments instead of taking resort to strong-arm tactics."

9. The respondent bank being the appellant in the Prakash Kaur's case cited supra, must take note of the strong observation made by the Hon'ble Supreme Court in the matter of recovery, while taking steps to proceed against the hypothecated vehicle involved in the present writ petition and their action should be in accordance with the contract entered into between the parties and it should also be in accordance with the procedure recognized by law. 

10. It is needless to mention that recovery through musclemen giving them the title "Recovery Agents" is not permitted by law.

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