Telangana High Court
M/S. Shree Saraiwwalaa Agrr … vs Union Of India And 2 Others on 22 December, 2021Bench: Satish Chandra Sharma, N.Tukaramji
THE HON’BLE THE CHIEF JUSTICE SATISH CHANDRA SHARMA
AND
THE HON’BLE SRI JUSTICE N. TUKARAMJI
WRIT PETITION Nos.22588 OF 2019 AND
3648 AND 3667 OF 2020
COMMON ORDER: (Per the Hon’ble the Chief Justice Satish Chandra Sharma)
1. Regard being had to the similitude in the controversy
involved in the present cases, the writ petitions were
analogously heard and by this common order, they are
being disposed of by this Court.
2. The petitioner is common in all the three writ
petitions. The facts of W.P.No.22588 of 2019 reveals as
follows:-
The petitioner, a company registered under the
Companies Act, has filed the present writ petitions being
aggrieved by the action of the respondent No.3/Andhra
Bank (now merged with Union Bank of India) in declaring
the petitioner’s account as ‘fraud’ and is also aggrieved by
the Master Circular issued by the Reserve Bank of India,
dated 01.07.2016 as violative of principles of natural
justice and fair play.
3. The petitioner has prayed the following reliefs:
“In these circumstances and for the reasons stated
above, it is prayed that this Hon’ble Court may be pleased
to pass an order or direction or any other proceedings one
in the nature of Writ of Mandamus declaring the action of
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3rd respondent in declaring the petitioner as ‘Fraud’ as
arbitrary, illegal and contrary to ‘Master Directions on
Frauds – Classification and Reporting by commercial banks
and select FIs dated 01.07.2016 issued by the 2nd
respondent, and further declaring the ‘Master Directions on
Frauds – Classification and Reporting by commercial banks
and select FIs dated 01.07.2016 as violative of principles of
natural justice and consequently to set aside the decision
of the 3rd respondent Bank and the impugned circular, and
pass such other order or orders as this Hon’ble Court may
deem fit and proper in the interest of justice.
It is further prayed that pending the disposal of the
writ petition, this Hon’ble Court may be pleased to stay all
proceedings consequential to the action of the 3rd
respondent in declaring the petitioner as ‘Fraud’ and pass
such other order or orders as this Hon’ble Court may deem
fit and proper in the interest of justice.
It is further prayed that pending the disposal of the
writ petition, this Hon’ble Court may be pleased to direct
the 2nd respondent to produce the record of proceedings in
which the petitioner was declared as ‘Fraud’ and share a
copy of the same with the petitioner, and pass such other
order or orders as this Hon’ble Court may deem fit and
proper in the interest of justice.”
4. The facts, as stated in the writ petition, reveal that
the petitioner company is involved in the business of
manufacture of edible oils and fats, rice and rava products
and is having two manufacturing facilities in the State of
Telangana as well as in the State of Andhra Pradesh. The
petitioner company from 2003 to 2015 sought credit
facilities from a consortium of banks with Andhra Bank
(now merged with Union Bank of India) as a Lead Banker
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for a sum of Rs.675 crores. The petitioner company was
declared as Non Performing Asset (NPA) on 14.05.2018
with effect from 31.03.2018. The petitioner company has
further stated that after the account of the petitioner
company became NPA, the consortium of lenders in the
JLF Meeting dated 10.08.2018 proposed to conduct
forensic audit of the petitioner company for the period till
31.03.2019. The petitioner company, as stated, has
submitted all the requisite information as required by the
forensic auditor appointed in the matter from time to time
and it is the contention of the petitioner company that no
adverse observations or detection of fraud activity by the
petitioner company was noticed in the forensic audit.
However, the respondent No.3 Bank kept on pushing the
auditor to look deeper into the books so that the petitioner
company is declared as ‘fraud’. It has also been stated that
the respondent No.3 Bank also initiated recovery
proceedings before the Debt Recovery Tribunal and finally
an e-mail dated 23.09.2019 was initiated by Tamilnad
Mercantile Bank Limited to the respondent No.3/Union
Bank of India with a copy to the petitioner company
declaring the petitioner’s account as ‘fraud’. The petitioner
company has further stated that the petitioner company
contacted the Officers of the respondent No.3 Bank and it
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was informed to the petitioner that the decision was taken
by the management of the Bank in line with the Directives
of the Reserve Bank of India.
5. The contention of the petitioner company is that the
action taken against the petitioner company by declaring
the petitioner’s account as ‘fraud’ is in violation of the
principles of natural justice and fair play and therefore, the
Circular itself issued by the Reserve Bank of India under
Section 35A of the Banking Regulation Act, 1949 as it
excludes the principles of natural justice and fair play
deserves to be quashed and the consequential action taken
by the Bank also deserves to be quashed on the ground of
violation of principles of natural justice and fair play. The
other ground taken by the petitioner company is that the
forensic audit report nowhere holds the petitioner guilty of
playing any fraud and in fact, the findings of the forensic
audit are in favour of the petitioner company.
6. The learned counsel for the petitioner has vehemently
relied upon the Judgment delivered by the Division Bench
of this Court in the case of Rajesh Agarwal v. Reserve Bank of
India1 and his contention is that this Court while deciding
the aforesaid case on 10.12.2020 has held that the action
of the Bank therein is bad in law as principle of audi
1
2021 (2) ALD 290 : 2021 (1) ALT 454
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alteram partem was not included in the Master Circular.
Attention of this Court has been drawn to paragraphs 69
and 70 of the aforesaid Judgment and his contention is
that in the light of the aforesaid Judgment, the decision
arrived at by the respondent No.3 Bank in declaring the
petitioner’s account as ‘fraud’ deserves to be set aside.
7. The Reserve Bank of India has filed a detailed reply in
the matter and the contention of the Reserve Bank of India
is that Section 35A of the Banking Regulation Act, 1949
empowers the Reserve Bank of India to issue directions to
the Banks and the ‘Master Directions on Frauds’ has been
issued by the Reserve Bank of India in public interest. The
Reserve Bank of India being the regulator and supervisor of
the Banks in the country has been issuing many
instructions to the Banks to sensitize them against
banking frauds. On 22.03.2021, the Reserve Bank of India
had issued a Master Circular on Frauds incorporating the
circulars issued on the subject till that date and the
Master Circular issued on Frauds are updated every year.
It has been further stated that in 2016, the Reserve Bank
of India has started issuing Master Directions on each
subject covering all instructions on that subject and the
Master Directions are being updated suitably whenever
there is a change in the policy. It has been further stated
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that ‘Master Directions on Frauds – Classification and
Reporting by Commercial Banks and select FIs’ (hereinafter
called as ‘Master Directions on Frauds’/’Master Circular’)
was issued on 01.07.2016 and it is nothing but updation
of the existing Master Circular on Frauds – Classification
and Reporting, dated 01.07.2015. It has been further
stated that subsequently Master Directions on Frauds was
updated on 03.07.2015.
8. The Reserve Bank of India has also stated that the
Master Circular does not violate the principles of natural
justice and fair play nor it is arbitrary. The information in
the Central Fraud Registry does not cause injury to the
borrower’s reputation or his/her business and the
information is shared with other banks on private and
confidential basis, which is in the nature of a Bankers
Report on an account. The Reserve Bank of India has
further stated that it is done with an intention to share the
information for the purpose of exercising caution while
dealing with such parties as indicated in Caution
Advice/Central Fraud Registry. It has been further stated
that it is mandatory to file a complaint with the Law
Enforcement Agencies who then independently investigate
the matter and present it in Court of Law.
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9. The Reserve Bank of India has further stated that the
information on frauds is published by the Reserve Bank of
India at aggregate level without revealing the details of
individual cases and it does not cause injury to the
borrower’s reputation or business. It has been further
stated that the loan fraud is a breach/violation of the
terms and conditions of the contract by a borrower as
perceived by the Bank who granted the loan to the
borrower. It has been further stated that in case of
commission of fraud by the borrower, the Bank is the
injured party and has a right to report the crime to Law
Enforcement Agencies. It is not incumbent on the Banks to
provide the perpetrator an opportunity to be heard in a
similar manner for lodging an FIR, no opportunity of
hearing is to be granted. It has been further stated that in
case of classification and reporting of fraud, it is necessary
to file a complaint with Law Enforcement Agencies and the
investigation is done independently by the Law
Enforcement Agencies and it is not a case where by mere
declaration of fraud, a person/entity is punished.
10. It has been further stated that ‘Master Directions on
Frauds’ provides for a comprehensive mechanism and the
forensic auditor does the audit on the basis of the
documents supplied by the borrower. It is not a case where
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the forensic auditor on his own prepared some documents
and it is only based upon the information furnished by the
Bank and the borrower and the forensic audit is done in
respect of the account of the borrower, who is very much
aware of the same and at no stretch of imagination, it can
be presumed that unilateral action is initiated against the
borrower.
11. The Reserve Bank of India has further stated that the
‘Master Circular’ provides a comprehensive mechanism.
The Committee headed by an Executive Director or
equivalent with two senior officers takes a decision and
thereafter the order of the Committee is reviewed by
another Committee headed by the Chairman/CMD or the
MD & CEO/CEO and two independent Directors/non-
executive directors of the Bank. The order is final only after
it is confirmed by the said Review Committee. Meaning
thereby, lot of checks and balances have been provided
under the Master Circular and no case for interference by
this Court is made out and therefore, the Reserve Bank of
India sought for dismissal of the present writ petitions.
12. The respondent No.3/Andhra Bank (Union Bank of
India), Lead Bank of the consortium, has filed a detailed
counter affidavit and it has been stated that action has
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been taken in the matter keeping in view the Master
Directions on Fraud, dated 01.07.2016. It has been further
stated that clause 1.3 of the Circular clearly establishes
that the classification is purely an administrative exercise
meant not only as an exercise necessary for follow up
action in accounts classified as ‘Fraud Account’ but also as
a preventive exercise. The classification of account is thus
necessary and required to be undertaken in the
circumstances. The Master Circular is in the nature of
directions to the Banks as regards classification of
account, its reporting to the Reserve Bank of India and
follow up action and closure of account classified as ‘Fraud
Account’. It has been further stated that the petitioner has
been enjoying credit facilities in consortium with Andhra
Bank (Union Bank of India) as the Lead Bank, being State
Bank of India, Indian Bank, Punjab National Bank and
Tamilnad Mercantile Bank the other member Banks. The
petitioner’s account was declared as NPA and the
Consortium of Bankers has taken steps to realise the
securities and also filed an Application before the Debt
Recovery Tribunal for recovery of an amount of
Rs.617,40,94,702.61/-. It has been further stated that the
petitioner is trying to mislead this Court by drawing
parallel with declaring a borrower as ‘wilful defaulter’. It
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has been stated that classification of an account as a
‘Fraud Account’ is distinct and distinguishable from
declaring the borrower as a ‘wilful defaulter’. In the case of
declaring a borrower as a ‘wilful defaulter’, it is the
person/borrower who is declared (not classified) as a wilful
defaulter and not the account. Since such declaration
affects the person/borrower, a detailed procedure is
prescribed wherein a right of hearing is provided to such
person/borrower in those cases, whereas in respect of
classification of loan account as ‘Fraud Account’, it is done
as a preventive measure purely for reporting, controlling,
monitoring, follow up action and therefore, there is no
necessity nor any requirement of hearing before
classification of account as ‘fraud’.
14. The respondent No.3/Bank has further stated that
the petitioner company has filed Forensic Audit Report and
the petitioner is reading only one paragraph, i.e., last
paragraph of the Report and based upon the last
paragraph of the Report, an attempt is being made before
this Court by the learned counsel for the petitioner that
there is nothing against the petitioner company in the
forensic audit. Attention of this Court has been drawn to
other paragraphs also, wherein there is a categorical
statement against the petitioner company. On the basis of
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which, the account of the petitioner company has been
declared as ‘fraud’. A prayer has been made for dismissal
of the writ petitions.
15. Heard the learned counsel for the parties at length
and perused the record. The matter is being disposed of
with the consent of the parties at admission stage itself.
16. The facts of the case reveal that the petitioner
company, incorporated in the year 1999, is engaged in the
business of manufacture of edible oils and other products
and availed credit facilities from a consortium of banks
with Andhra Bank (Union Bank of India) as a Lead Bank
for a sum of Rs.675 Crores. The account of the petitioner
company was declared as NPA on 14.05.2018 and the
consortium of banks has taken steps to realise the
securities and also filed an Application before the Debt
Recovery Tribunal for recovery of a sum of
Rs.617,40,94,702.61/-. The petitioner company is
aggrieved by the action of the respondent No.3/Andhra
Bank (Union Bank of India) in declaring the petitioner’s
account as ‘fraud’. The Reserve Bank of India is a
Statutory Corporation constituted by the provisions of
Section 3 of the Reserve Bank of India Act, 1934, for the
purpose of regulating the issue of Bank Notes and keeping
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the reserves with a view to secure monetary stability in the
country and generally to operate currency and credit
system of the country. The Reserve Bank of India has been,
inter alia, entrusted with the statutory obligation of
administering the provisions of Banking Regulation Act,
1949. In the Banking Regulation Act, the Reserve Bank of
India has been vested with various powers with respect to
banking companies, such as granting licences, conducting
inspections, giving directions, advises etc. The Reserve
Bank of India has been vested with the powers to
determine the Banking policy in the interest of banking
system, in the interest of monetary stability and sound
economic growth, having due regard to the interests of the
depositors. The Reserve Bank of India is also concerned
with organization of a sound and healthy banking system,
ensuring effective coordination and control over credit
through a proper Monetary and Credit Policies. The
Reserve Bank of India has the primary responsibility to
ensure stability of the banking system in the country and
Directions/Guidelines have been issued by the Reserve
Bank of India from time to time. The Reserve Bank of India
being an expert body, its decisions with regard to
regulation of banks deserve to be given due weightage.
Section 35A of the Banking Regulation Act empowers the
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Reserve Bank of India to issue directions to the banks.
Section 35 A of the Banking Regulation Act is reproduced
as under:-
“35A. Power of the Reserve Bank to give
directions.- (1) Where the Reserve Bank is satisfied that-
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company
being conducted in a manner detrimental to
the interests of the depositors or in a manner
prejudicial to the interests of the banking
company; or
(c) to secure the proper management of any
banking company generally,
it is necessary to issue directions to banking companies
generally or to any banking company in particular, it may,
from time to time, issue such directions as it deems fit, and
the banking companies or the banking company, as the
case may be, shall be bound to comply with such
directions.
(2) The Reserve Bank may, on representation made to it or
on its own motion, modify or cancel any direction issued
under sub-section (1), and in so modifying or cancelling
any direction may impose such conditions as it thinks fit,
subject to which the modification or cancellation shall have
effect.”
17. The ‘Master Directions on Frauds’ has been issued by
the Reserve Bank of India in public interest under Section
35A of the Banking Regulation Act. The Reserve Bank of
India being the regulator and supervisor of the banks in
the country has issued many instructions to the banks to
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sensitize them against banking frauds and to have
deterrent systems against such frauds. The Reserve Bank
of India has issued a ‘Master Circular on Frauds’ dated
01.07.2016 incorporating the earlier circulars issued on
the subject and the Reserve Bank of India updates the
Master Circular on Frauds annually, generally in July
incorporating the instructions issued till then. In 2016, the
Reserve Bank of India has started issuing Master
Directions of each subject covering all the instructions on
that subject and the Master Directions are also updated
suitably whenever there is a change in the policy. All the
changes so made are reflected in the Master Directions
available on the Reserve Bank website and finally ‘Master
Directions on Frauds – Classification and Reporting of
Commercial Banks and select FIs’ was issued on
01.07.2016. It is, in fact, more or less an updation of the
existing Master Circular on Frauds – Classification and
Reporting, dated 01.07.2015. Subsequently, Master
Directions on Frauds was updated on 03.07.2017.
18. Clause 1.3 of the ‘Master Directions on Frauds’ is
reproduced as under:-
“1.3 Purpose
These directions are issued with a view to providing a
framework to banks enabling them to detect and report
frauds early and taking timely consequent actions like
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reporting to the investigative agencies so that fraudsters
are brought to book early, examining staff accountability
and do effective fraud risk management. These directions
also aim to enable faster dissemination of information by
the Reserve Bank of India (RBI) to banks on the details of
frauds, unscrupulous borrowers and related parties, based
on banks’ reporting so that necessary safeguards/
preventive measures by way of appropriate procedures and
internal checks may be introduced and caution exercised
while dealing with such parties by banks.”
19. The purpose set out in the Master Circular clearly
establishes that the classification of account as ‘fraud’ is
purely an administrative exercise, which is necessary to
take follow-up actions and is also a preventive exercise to
ensure that other banks also share the information which
is in the Central Fraud Registry for the purpose of
exercising caution while dealing with such parties. Much
has been argued before this Court on the ground of
principles of natural justice and fair play and a prayer has
been sought to quash the ‘Master Directions on Frauds’,
dated 01.07.2016 to the extent they do not provide for
opportunity of hearing.
20. Heavy reliance has been placed upon the Judgment
delivered by this Court in the case of Rajesh Agarwal (supra).
It is true that a coordinate Bench of this Court has
certainly held that the principle of audi alteram partem,
part of the principles of natural justice, is to be read in
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Clause 8.9.4 and 8.9.5 of the Master Circular. The
aforesaid Judgment delivered by the Division Bench has
not attained finality. In Special Leave Petition filed by the
State Bank of India, i.e., S.L.P. (C) No.3931 of 2021, the
Hon’ble Supreme Court, by order dated 15.04.2021, has
granted interim order and the observation of the High
Court to the extent of personal hearing be given, has been
stayed. The Order passed by the Hon’ble Supreme Court is
reproduced as under:-
“Applications seeking exemption from filing certified
copy of the impugned order are allowed.
Issue notice.
Dasti service, in addition, is permitted.
Learned counsel is permitted to file counter affidavit
within a period of four weeks from today. Rejoinder affidavit
within two weeks thereafter.
Set down for hearing on Tuesday, the 13th July, 2021
on top of the Board.
Meanwhile, the Minutes/Order dated 15.02.2019
passed by the Joint Lenders Meeting is not to be acted
upon. The High Court insofar as it observed that a personal
hearing be given is stayed.”
21. In the considered opinion of this Court, as the issue
of principle of natural justice and fair play is pending
before the Hon’ble Supreme Court, the same is not being
dealt with at present. However, the facts of the case reveal
that the forensic audit, which was conducted, was not a
unilateral exercise on the part of the auditor. The audit
was conducted with full participation of the petitioner
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company and based upon the audit report, which was
certainly prepared with the participation of the petitioner,
the petitioner account has been classified as ‘fraud’.
22. Learned counsel for the petitioner has much argued
upon the ‘Conclusion’ part of the Audit Report and the
same is reproduced as under:-
“Conclusion:
The Company SARL which is in edible oil and rice
business has continuously progressed its turnover and
reached to a peak turnover of Rs.2450 Cr in the last year
ending 31.03.2018. To sustain high turnover at ultra low
profitability, the request for enhancement of working
capital was made but was rejected. The results of the
business at every year end has been very bleak in terms of
margins not even being 1% of the turnover as can be seen
from the financial statements, led to vulnerability of
business.
It is interesting to analyze what circumstances
made company as defaulter and NPA account with bankers
during laws few months post closure of FY 18 though
indication could be seen in last 2 years itself when
company registered high revenue growth with reduced
profitability at cost of Supply chain risks and lack of
control on debtors, which increased substantially. The
Company continued to do higher business volumes with
insignificant enhancement in working capital limits in the
last 3 years. The company had to face many regulatory
hurdles during the current year which were reported and
are known in public domain and it being a business
entirely based on imports, the business came to grinding
halt with the change in government policies and tax
structure, sources of funds dried, with loss of faith by
financial institutions, leading the production to stop,
supplies could not be made, customers started blocking old
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money, because no new supply being possible and as a
result all letter of credits started devolving and account
became irregular with banks, with no possibility for the
company to react by shifting fully to indigenous sources or
arrange for any funds.
The huge amount of debtors of about Rs.500 Cr and
above leaves an important observation about the traditional
practices of business control, extension of credit to
customers without concrete agreements, grouping the
credits at broker level leading to limited visibility of
receivables party wise from a longer period. Further the
lack of unit level financial control and inter dependence of
all the businesses with a common supply chain and
distribution proved fuel in fire when management was
unable to serve the customers and de-risk any of its
business with the change in tax regime and government
policy in the lead business. Further the insistence of
Statutory Auditor on creating provision and writing off
these debtors as bad debts resulted these bad debts falling
the prey of legal proceedings and forcing the company to
commit itself towards a bleak recovery for the receivables.
A question arises as to whether the overall
management accounting system was adequate enough to
run such large operations, which resulted into a total
collapse in event of business exigency which has hit the
entire edible oil industry and was beyond the control of
management, where over leveraging without adequate
control and absence of strong risk mitigation measures led
to the down fall.
The company has conveyed that it has taken legal
action against debtors recovery but being civil suits, law
will take its own time and on the other hand counter claim
of the debtors indicate long drawn futile process of
recovery. The above observation and also key finding and
executive summary narrated in this report leaves a
question on management system control and lack in
adopting adequate risk measures in areas such as recovery
from debtors, legal documentations with the brokers and
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trails of transaction adequate which are essential for the
recovery of receivables, results in bleak recovery of the
same.
SARL was a profitable Company as there has been
positive increase in its revenue, but with high leverage and
thin margins, it would be difficult to run and operate the
units in the current situation without incurring major
repairs and renovation cost and further deterioration will
make the plants unviable for operations.
The majority of investment made by the company
with a prime objective was in distribution, brand building
and increasing the reach other than creating hard assets of
building plant and machinery.
The intangible asset of brand investment in
distribution and non-running fixed assets does have a
severe erosion calling for an impairment in very short
period of time, given the plant and machinery hardly
provides for any cover against the debt.
With the above observations read with key findings
& executive summary and other points narrated in our
report, we conclude that management and promoters
should have been more careful in financial control and one
wonders why aggressive steps for recovery of debtors
(overdue for extra ordinary time with no confirmations) is
not taken which was main reason of account becoming
NPA. Basis the sample audit, review of legal cases,
interviews of brokers, understanding of trade practices,
clarification on reconciliation of debtors by statutory
auditors in recent time, overall substance of the account
and subject to reliance on the data for the recovery of
debtors, we find no diversion of funds or fraud being
intentionally carried out by the management.”
23. Learned counsel for the petitioner contends that the
Forensic Audit did not come to a conclusion that of
declaring the account of the petitioner as ‘fraud’.
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24. Learned counsel for the Andhra Bank (Union Bank of
India) has drawn the attention of this Court towards pages
213, 216 and 219 (of the petitioner’s paper book) of the
Forensic Audit Report. They read as under:-
Obs Observation Unusual Indicators & Level of
No Conclusion based on Unusual
Audit Findings Indications
4 Devolvement of Letter of
Credit:
– The company has a history – Multiple devolvement
of devolvement of LCs with all of LCs simultaneously
the member banks of the resulted in huge
consortium since May 2017. shortage of cash flow in
However the Company had the Company and
made the payment against the increased the bankers
same in the extended period of stress to recover the
time to the banks. loans disbursed.
– Also, due to such
– As per the minutes of the implications the
consortium meeting dated Company has been
28.04.2017, the Company had liable to pay 2% HIGH
informed the consortium additional interest on
banks that the reason for LCs the amount due to the
devolvement initially was due banks increasing their
to strike at Krishnapatnam liabilities. area impacting the production. – This indicates that
This further affected the the Company
realisability of receivables continued to make
impacting the cash flows. procurements and
open LC’s without
– The Company has devolved having any financial
ILCs of amount aggregating to arrangement for
INR 45.86 Crores that were repaying the same on
issued in January 2018 to timely basis. As a
March 2018 and FLCs issued result, once the banks
since August 2017, stopped opening new
aggregating to BOUT USD 73 LC accounts, the
million (equivalent to INR Company could not
476.80 Crores approx), remain repay the commitments
outstanding as on date. for the lack of
availability of funds.
– Subsequent to account being The Company had
declared as NPA, the Company obtained finance from
ahs approached the third third party financiers,
party financiers who have however could not
opened fresh LCs on behalf of sustain for long due to
the Company under the additional finance
arrangement as explained in costs.
the Key findings section. – Approaching third
party financiers for
additional LCs, when
there has been
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devolvement of the
existing ones increases
the liability and risk
potentials.
– The Company has
repaid the LCs of third
party NBFCs, outside
the Consortium, prior
to the member banks.
Obs Observation Unusual Indicators & Level of
No Conclusion based on Unusual
Audit Findings Indications
4 Misutilisation of funds for
purpose other than
sanctioned for: – We are informed that
– The Company has the funds were utilised
transactions during December for purpose of
2016 to September 2018 with purchase of land
Ekaakshara Refineries Pvt unauthorisedly and
Ltd., its associate Company hence indicates
having common directors. The misutilisation of loan
Company during December funds. The Company,
2016 to August 2017 made however, realised the
adjustment of INR 0.70 Crores principal amount from
through vendor account P Ekaakshara Refineries
Ram Mohan Reddy (a water Private Limited.
tank supplier) and payment of MEDIUM
INR 1.90 Crores was made – Credit Limits were
without any business being sanctioned to the two
carried on in the associate divisions in the
Company. No other Company on the basis
transactions were being of its stock and trade
carried until September 2018, receivables valuations
resulting in cumulation of on individual basis.
interest cost for more than a The Company never
year on the funds transferred maintained division
by the Company. However, wise accounts of the
Ekaakshara repaid the funds customers separately,
in September 2018 for INR given the commonality
2.60 Crores for settlement of of customer accounts
the account. led to loss of control on
Risk parameters.
– The Company have been However, funds
sanctioned credit facilities for sanctioned for Rice
Oil and Rice divisions division carry less
separately with specified limits potential risk than Oil
by the lead banker as per the division.
sanction letters, however
funds sanctioned for Rice
division in its account were
being transferred and utilised
in the Oil division. The funds
carried separate charges as
securities on its stocks and
receivable division wise, and
were supposed to be utilised
for the specific purpose they
were sanctioned for, which
was violated.
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RESPONSE TO ABOVE OBSERVATION
Management Response: Forensic Auditor’s Comment:
The Company utilized funds of Funds were spent by SARL on
Rs.2.60 Crores by making payment behalf of Ekaakshara during the
to Ekaakshara. Subsequently, the period 07.10.2016 to 29.08.2017
Company has realised the entire amount to INR 2,60,01,508, The
amount from Ekaakshara Refineries entire amount was repaid by
Pvt Ltd. Ekakshara to SARL during
10.09.2018 to 14.09.2018.
Obs Observation Unusual Indicators & Level of
No Conclusion based on Unusual
Audit Findings Indications
8 Qualified opinion and
Emphasis of matter in FY
2017-18 by new Auditors:
– Substantial losses in
– The Company has reported a the current year have
loss of INR 223.33 Crores due eroded the net worth of
to which net worth of the the Company in single
Company has been fully year completely.
eroded from INR 204.72
Crores to negative net worth of
INR 25.61 crores. Further – These conditions and
devolvement of LC’s on a large events indicate
scale followed with lower scale material uncertainty
of production/No production which may cast
in certain units gives doubts significant doubt on MEDIUM
about the continuity of the entity’s ability to
business. So the Company’s continue as going
ability to continue the concern.
business as going concern is
significantly dependent upon – The proposal for
the viability of the restructuring of the
restructuring plan to be account was declined
approved by Consortium by the bank.
Banks.
– The downgrading of
– The Company’s rating by the rating of Company
Brickwork Ratings India in its indicates the
report “Rating Rationale” inefficiency of the
dated 23 February 2018, Company and the
wherein it downgraded the promoters to repay the
ratings of the Company to loan.
“BWR BBB” for the Fund
Based Bank Loan Facilities of
INR 106.61 Crores of the
Company and to “BWR A3+”
for Non-Fund Based Bank
Loan Facilities of INR 635.11
Crores.
– With respect to the liability
on account of post-retirement
medical benefits of employees
23
including retired employees, a
defined benefit plan, is
recognised on actual basis in
respect of bills received by the
Company instead of
recognizing the liability for the
same as the present value of
the defined benefit obligation
at the balance sheet date
calculated on the basis of
actuarial valuation in
accordance with the notified
AS – 15 on Employee Benefits.
The consequential impact of
adjustment, if any, owing to
this non-compliance on the
financial statements is
presently not ascertainable.
– Sundry debtors worth INR
397.57 Crores are doubtful
debts which have been
classified as non-current
assets against a total debts of
INR 552.39 Crores as on 31
March 2018, of which
balances under significant
accounts are subject to
reconciliations and
confirmation. The Company
has made a provision of INR
132.02 Crores which appears
to be inadequate specially
keeping its view the position of
recovery in subsequent years
and therefore reported loss of
INR 223.33 Crores remains
under reported.
25. The relevant extracts of the audit report reveals that it
is not a case where no adverse findings have been arrived
at by the Forensic Auditor in the entire Report and
therefore, this Court is of the opinion that based upon the
findings arrived at in the Forensic Audit Report, the
petitioner company’s account was rightly declared as
‘fraud’ and the scope of interference in the peculiar facts
and circumstances does not arise. There is no illegality or
24
infirmity in the decision making process warranting
interference in the peculiar facts and circumstances of the
case.
26. This Court has carefully gone through the Audit
Report and it is not a case where there is no whisper
against the petitioner company. This Court does not find
any reason to interfere with the action of the respondent
Bank in declaring the petitioner’s account as ‘fraud’, which
has been done by following due process of law as
prescribed under the Master Circular issued by the
Reserve Bank of India.
27. In the light of the aforesaid, the writ petitions are
dismissed. Miscellaneous petitions, if any pending, shall
stand dismissed. There shall be no order as to costs.
_____________________________
SATISH CHANDRA SHARMA, CJ
________________
N.TUKARAMJI, J
22.12.2021
Pln
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