H.C. Arora vs State of Punjab

Kanwaljit Singh Ahluwalia, J.—Punjab State Electricity Board, Patiala (hereinafter referred to as ''the Board'') raised a loan of Rs. 300 crore from Punjab National Bank (hereinafter referred to as ''the Bank''). The loan was raised through an arranger and commission of Rs. 1.62 crore was paid to the applicant.

Application for review has been filed in Civil Writ Petition No. 6566 of 2008, decided on 9-10-2009, as we had directed the Director, Central Bureau of Investigation to hold preliminary inquiry into the transaction and Reserve Bank of India to evolve a mechanism to curb such payments of commission to the Loan Arrangers.

By way of present application, M/s. A.K. Capital Services Ltd. through their Director, Deepak Mittal, has prayed for review of the judgment. In the review application and during the course of arguments, following grounds were pressed:

(a) The applicant is registered as a Category-I Merchant Banker with Securities and Exchange Board of India (hereinafter referred to as ''the SEBI'') and to arrange term loan from nationalized Banks, is one of the activities, which is recognized by SEBI and thus, arrangement of the loan and receipt of the commission, being in consonance with the functions of the Merchant Banker, prevailing norms and practice in financial sector, same ought to be construed as part of the activities of the Merchant Banker, as there is no prohibition imposed by the SEBI.

(b) The conclusion arrived by this Court that term loan from the Bank could not be arranged by the Merchant Banker, even if it is so reiterated, various acts of omission and commission on the part of the Merchant Banker can only be examined by SEBI in pursuance of SEBI Act or under Merchant Banker Regulation, 1982, as the SEBI Act has a complete mechanism to regulate the conduct of the Merchant Banker. The Act provides Securities Appellate Tribunal and appeal to Hon''ble the Apex Court, therefore, the role of the Merchant Banker cannot be examined by Central Bureau of Investigation or Reserve Bank of India.

(c) In the present day, in financial/commercial market, Merchant Bankers are recognized as the arrangers of loan, as they have got necessary expertise and a feel of the pulse of the market to facilitate the loans. To fortify this assertion, the applicant has relied upon documents to say that he has got necessary accreditation, track record, staff of professionals and requisite offices to operate as Loan Arranger. Therefore, as per prevailing practice, arrangement of loans for various public sector undertakings being in vogue, no fault can be found with receipt of commission by the applicant.

(d) Petitioner to the writ petition had not impleaded the applicant as party to the writ petition and his conduct has been adversely commented upon by this Court without affording him an opportunity of hearing.

Narration of facts and inferences drawn by us in our judgment have come under criticism on the ground that true facts were not placed before us, which has, according to the review applicant, resulted in the following inaccuracies in the narration of facts by us:

(i) The fact that the Bank had not earlier granted the loan and within 72 hours of the Loan Arranger''s appearance on the scene, the loan was granted, is not factually correct.

(ii) The inference that Loan Arranger was introduced on the pretext of raising loan through non-SLR bonds is also not correct.

(iii) The observation made by us that the Bank had earlier rejected the claim of the Electricity Board, is also not correct, as the local branch had only advised the Board to contact the Head Office.

(iv) The fact that Director General of Vigilance Bureau came to the conclusion that no criminal offence is made out, has not been noticed by us.

Before we deal with the merits of the averments made in the application and the submissions made before us, we need to point out that the applicant has in our view made an attempt to sidetrack the real issues and has attempted to create a smoke screen without understanding the true perspective, in which the order under review was made by us. We may all the same straighten the facts noticed by us in our judgment for purposes of deciding the present review application:

(i) The Comptroller and Auditor General (Commercial) has indicted the Electricity Board for payment of the amount of Rs. 1.62 crore made to the arranger for the loan.

(ii) The Superintendent of Police (Economic Offences Wing), Unit-V, Vigilance Bureau, Punjab has also concluded that there was a connivance between the nationalised Banks and the Arrangers. The Investigating Officer has clearly indicted the Bank officials for collusion with applicant Loan Arranger.

(iii) The Bank requested the Board to extend time for making an offer of loan up to 20-8-2005. The Board officials waited for the response of the Bank up to 22-8-2005. On 23-8-2005, Punjab National Bank, The Mall, Patiala informed that they have not received any sanction from the higher authorities, hence, were unable to consider the request of the Board to sanction the loan. Copy of this letter has been attached as Annexure R3/2 with the writ petition. This letter specifically states that the Bank is unable to quote any rate or other terms and conditions for sanction of the loan. The applicant was appointed to arrange for the loan on 15-9-2005 as per Annexure R3/4. On 16-9-2005, arranger fee was fixed by the Board as 0.49 per cent as per Annexure R3/4 (colly). On 24-9-2005, Punjab National Bank agreed to advance the loan and the communication to this effect noticed that they have been approached on 19-5-2005 through M/s. A.K. Capital Service Ltd. On 26-9-2005, the applicant informed the General Manager (Finance), Punjab State Electricity Board that loan has been sanctioned by the Punjab National Bank. Annexure R3/5 (colly) are the documents to this effect.

In other words, Punjab National Bank was approached on 19-9-2005 vide Annexure A/5, attached with the application.

(iv) Communication dated 27-8-2008 (Annexure R3/1) issued by the Bank, specifically states that as per the Bank policy, all the prospective borrowers including corporate borrowers are required to contact the Branches of the Bank for their fund requirements. It is only in those cases, where loan amount is beyond the vested power of the incumbent/in-charge of the Branch, the cases are referred to the competent authority at Circle Office/Head Office. The Comptroller and Auditor General, in its report laid before the House of Punjab Vidhan Sabha, had specifically stated that the Management/Government kept the case pending up to 22-8-2005, but the Banks had showed their inability to give offers. While commenting, the Comptroller and Auditor General stated that the Board had not approached Head Office of the Bank.

Therefore, these dates were rightly noticed by us in our judgment and we had stated which we believe to be right that the Arranger approached the Bank between 19-9-2005 to 22-9-2005 and on 24-9-2009, the loan was sanctioned; and the rate of interest had fallen from 8.50 per cent to 7.60 per cent.

We had specifically observed that the Respondents had not stated that within four days, the Loan Arranger had prepared any financial papers/documents giving projections regarding requirements of the Board or have used their skill for demonstration of financial viability and strength of the borrower.

In the application filed for review, to controvert our observations, it was only stated that due to consistent, qualitative, comprehensive presentations and financial expertise of the Loan Arranger, the Bank had sanctioned the loan [para 11(e) of the application]. No details and particulars were given in the application. However later, a Civil Misc. application was filed, along with documents, which were provided to the Bank, have been annexed. A perusal of the same shows that the documents only contained balance sheet of Punjab State Electricity Board and only statement of accounts. If this was the presentation given, it hardly depicts any skill or special knowledge and expertise of the applicant.

This brings us to examine the role of Merchant Banker regarding raising of the term loan.

The Securities and Exchange Board of India Act, 1992 states that the securities will have the same meaning as is assigned to it in Section 2 of the Securities Contracts (Regulation) Act, 1956. ''Securities'' have been defined u/s 2(h) of the Securities Contracts (Regulation) Act, 1956 as under:

2(h) "securities" include:

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ii) Government securities;

(iii) Such other instruments as may be declared by the Central Government to be securities;

(iv) Rights or interests in securities;

The definition of ''securities'' does not include term loan.

In our judgment, we had noticed the Merchant Banker under the Securities and Exchange Board of India (Merchant Bankers) Rules, 1992. Relevant portion of the judgment reads as under:

Merchant Banker has been defined under the Securities and Exchange Board of India (Merchant Bankers) Rules, 1992 as "any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management".

Counsel for the applicant has contended that SEBI issued guidelines vide Circular No. 1 (98-99) on 5-6-1998 and had broadened the activities, which a Merchant Banker can undertake. The guidelines are as under:

� Managing of Public Issue of Securities.

� Underwriting connecting with the aforesaid Public Issue Management Business.

� Managing/advising on International Offerings of Debt/Equity i.e., GDR, ADR, bonds and other instruments.

� Private Placement Securities.

� Primary or Satellite dealership of Government Securities.

� Corporate Advisory Services related to Securities Market e.g., takeovers, acquisitions, Disinvestment.

� Stock-broking.

� Advisory services for projects.

� Syndication of rupee term loans.

� International Financial Advisory Services.

A perusal of the circular reveals that except syndication of rupee term loans, the core activity of Merchant Banker pertains to securities and stock exchange. This brings us to the next question, what is the meaning of syndication of rupee term loans.

In the financial system, syndication of loan means as under:

Syndication is an arrangement where a group of banks, which may not have any other business relationship with the borrower, participate for a single loan.

A syndicated facility is a lending facility, defined by a single loan arrangement, in which several or many banks participate.

In a leading financial article, to understand the syndication of loans in common parlance, it has been stated that:

The standard theory for why banks join forces in a syndicate is risk diversification. The banks in the syndicate share the risk of large, indivisible investment projects. Syndicates may also arise because additional syndicate members provide informative opinions of investment projects or additional expertise after the funding has been extended.

In the present case, term loan was raised from single Bank, i.e., Punjab National Bank. It was an ordinary business transaction, therefore, it will not fall under the syndication of rupee term loan, an activity which a Merchant Banker can undertake. Therefore, it can be safely concluded that as per SEBI guidelines, Merchant Banker cannot act as Loan Arranger, in the kind of transaction, which we have examined in the present case. It will be pertinent to mention here that on 1-10-2003, Reserve Bank of India issued a press release No. 2003-04/451, which reads as under:

RBI does not approve Loan Arrangers

October 1, 2003

It has come to the notice of the Reserve Bank of India (RBI) that one M/s. S.V. Management Consultants (P.) Ltd. has published an advertisement in a leading financial daily in Chennai claiming that it is an RBI approved arranger for external commercial borrowing.

The Reserve Bank clarifies that it does not approve such agents.

Members of the public are, therefore, advised to be cautious of such misrepresentations and to bring such instances to the notice of the Reserve Bank.

In the present case, Merchant Banker had carried no activity in the stock exchange, except for arranging a term loan from Punjab National Bank. Reserve Bank of India Act, 1934 set out the objectives of the Reserve Bank. One of the objectives reads as under:

The responsibility for ensuring financial stability has entailed the vesting of extensive powers in and operational objectives for the Reserve Bank for regulation and supervision of the financial system and its constituents, the money, debt and foreign exchange segments of the financial markets in India and the payment and settlement system. The endeavour of the Reserve Bank has been to develop a robust, efficient and diversified financial system so as to anchor financial stability and to facilitate effective transmission of monetary policy. In addition, the Reserve Bank pursues operational objectives in the context of its core function of issuance of bank notes and currency management as well as its agency functions such as banker to Government (Centre and States) and management of public debt; banker to the banking system including regulation of bank reserves and the lender of the last resort.

The Banking Regulation Act, 1949, under Sections 35(a) and 36, vests powers in the Reserve Bank of India to give directions to the Banks. Therefore, we had given a direction to the Reserve Bank of India to regulate the functioning of the Banks, as to act as a Loan Arranger, in our view, is not a part of the duties of Merchant Banker and the same is alien to banking system as per the provisions of various statutes.

This brings us to the argument raised by counsel for the applicant, that the applicant was not made a party to the writ petition and was not heard by this Court. We had only directed the Central Bureau of Investigation to register a preliminary inquiry to inquire into the allegations of criminal misconduct on the part of the public servants, which include Bank officials and officials of the Board. Central Bureau of Investigation has been directed to investigate the transaction.

It has been held in V.C. Shukla and Others Vs. State (Delhi Administration), , that when a First Information Report is filed before a police officer, the law does not require that the officer must hear the accused before recording the FIR. Para 44 of the judgment makes it explicitly clear that for launching a criminal prosecution, accused is not required to be heard. This view is further fortified in R.S. Gill Vs. State and Others, . Still in order to allay the apprehension of the applicant, as a matter of abundant caution, we make it clear that any observations made by us in our judgment, of which review has been sought, shall not be construed as an expression on the merits of the case. We have given no final opinion. We have only set the preliminary inquiry into motion. We have taken into consideration this aspect and have not ordered registration of FIR straightway.

Therefore, the grievance of the applicant that the observations made by us and the directions issued are detrimental to his interest, is unfounded. Hence, there is no merit in the present review application and the same is dismissed with no order as to costs.

As a consequence of the dismissal of the Review Application, all other connected Civil Misc. Applications are disposed of with observation that no separate orders are called for.

Application dismissed.