Under the Master Circular, to declare a person as a Wilful Defaulter, lender banks have to independently find that the “Wilful Default” is “intentional, deliberate and calculated” and the said conclusion is based on “objective facts and circumstances of the case”. The Forensic Audit Report can act as a piece of corroboration for the said exercise, but not the sole basis. The lender banks must record their satisfaction of commission of Wilful Default which according to them are “intentional, deliberate and calculated”.
Keeping the object of the Master Circular in mind and the consequences that it entails, both civil and penal, the lender banks have an obligation to comply with the inbuilt safeguards in the Master Circular. Lest, the line between persons who commit mere default in repayment of loan obligations and those who commit Wilful Default in terms of the Master Circular, would get obliterated.
In any case, it is evident that the lender banks were aware of the lease agreements and execution of unstamped lease agreements per se cannot amount to diversion of funds.
It is clear that for any act of diversion or siphoning to take place, it is to be seen whether the company in question resulted in losses as a result of the transaction in question.
A transaction where the borrower is making financial gain can hardly be described as diversion of funds.
The act of invoking the Master Circular against the Petitioner by the Respondent Bank, based on observations made in the Forensic Audit Report, several years after the execution of lease agreements, appears to be an afterthought.
that a Forensic Audit Report, at best, is a piece of evidence in liquidation proceedings, and is in no manner a conclusive proof of any illegality committed under a law. The Forensic Audit Report is merely an opinion of the author, which is based on several disclaimers and it cannot be a conclusive proof of its observations
Even under the Indian Evidence Act, 1872, the opinion of an expert witness under Section 45 is not a conclusive proof. It is subject to cross-examination and the opinion and conclusions of an Expert are subject to challenge. In the present scheme of things, the Master Circular casts a specific obligation on the Respondent Bank to act independently and objectively under Clause 2.1.3 read with Clause 2.5 as discussed above.
The lender banks must follow the mandate of Clause 2.1.3 read with Clause 2.5 of the Master Circular and independently find acts of Wilful Default which are “intentional, deliberate and calculated” and the said conclusion should be based on “objective facts and circumstances of the case”. Any other view would lead to consequences where mere cases of default would be categorised as acts of Wilful Default under the Master Circular. The Master Circular is not to be invoked in every case of default but only when the default is Wilful Default as construed under the scheme of the Master Circular.
The Master Circular assumes that where the track record of the borrower is otherwise sound, then isolated transactions or incidents that may not be financially prudent, may not, alone be sufficient to declare a borrower as Wilful Defaulter.
To declare a person as a Wilful Defaulter, lender banks have to independently find that the “Wilful Default” is “intentional, deliberate and calculated” and the said conclusion is based on “objective facts and circumstances of the case”, as required under the Master Circular. The Forensic Audit Report, at best, can act as a piece of corroboration for the said exercise, but not the sole basis.
To take any other view would entail the transfer of jurisdiction to determine acts of Wilful Default to Forensic Auditors, which, by law under the Master Circular, is vested in the Identification and Review Committee of the Respondent Banks. When a law requires a particular act to be done in a particular manner, then it has to be done in that manner alone and no other.
Excerpts of the order;
# 1. By way of this Writ Petition filed under Article 226 of the Constitution of India, the Petitioner has challenged the impugned order dated 20.04.2023 passed by the Review Committee of the Respondent, Punjab National Bank (“Respondent Bank”). By the said impugned order, the Review Committee of the Respondent Bank confirmed the order dated 13.07.2022 passed by the Identification Committee, declaring the Petitioner as a Wilful Defaulter under the “Master Circular on Wilful Defaulters, 2015” (“Master Circular”), issued by the Reserve Bank of India (“RBI”).
# 44. I have heard Mr. Dayan Krishnan, learned Senior Counsel appearing for the Petitioner alongwith Mr. Vaibhav Mishra, Mr. Karan Batura, Mr. Ekansh Mishra and Mr. Jayant Chawla, Advocates and Mr. Sanjay Bajaj, learned counsel appearing for the Respondent Bank alongwith Mr. Shivam Takkar and Mr. Sarthak Sehgal, Advocates, at length, and perused the record.
Satisfaction to issue Show Cause Notice in the instant case
# 51. Keeping in mind the principles laid down by this Court in the final order in W.P. (C) No. 4181/2023 titled as Ratul Puri v. Bank of Baroda, the facts of the case in hand deserves to be analysed.
# 52. This Court, vide order dated 28.11.2023, had directed the Respondent Bank to place on record the document which showed the satisfaction arrived at by the Respondent Bank to issue Show Cause Notice to the Petitioner. On 02.12.2023, the Respondent Bank filed Minutes of Meeting dated 08.11.2019, wherein, the decision to issue Show Cause Notice to the Petitioner was taken. At Serial No.2 in the said minutes of the meeting, the decision to issue Show Cause Notice to Petitioner for alleged acts of Wilful Default is taken by the Respondent Bank. In the reasons column, the Respondent Bank has referred to observations made in the Forensic Audit Report, based on which it has concluded that there is diversion of funds. It is thus evident that the Respondent Bank has issued Show Cause Notice to the Petitioner only by referring to the observations made in the Forensic Audit Report. This Court is of the view that this approach of the Respondent Bank is not in conformity with the scheme of the Master Circular.
# 53. Under the Master Circular, to declare a person as a Wilful Defaulter, lender banks have to independently find that the “Wilful Default” is “intentional, deliberate and calculated” and the said conclusion is based on “objective facts and circumstances of the case”. The Forensic Audit Report can act as a piece of corroboration for the said exercise, but not the sole basis. The lender banks must record their satisfaction of commission of Wilful Default which according to them are “intentional, deliberate and calculated”.
# 54. Further, under Clause 2.1.3 of the Master Circular, the lender banks have to keep in mind the track record of the borrower and the decision to declare an entity or person as Wilful Defaulter cannot be taken on the basis of isolated transactions/incidents. A similar obligation is cast on the lender banks in Clause 2.5 of the Master Circular, which require the lender banks to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It is required to be ensured that solitary or isolated instances are not made the basis for imposing the penal action under the Master Circular.
# 55. In the present case, the satisfaction to issue Show Cause Notice does not appear to have been recorded in accordance with the requirements of the Master Circular. Keeping the object of the Master Circular in mind and the consequences that it entails, both civil and penal, the lender banks have an obligation to comply with the inbuilt safeguards in the Master Circular. Lest, the line between persons who commit mere default in repayment of loan obligations and those who commit Wilful Default in terms of the Master Circular, would get obliterated.
Whether the Petitioner committed acts of Wilful Default?
# 56. The first ground relied upon by the Identification Committee of the Respondent Bank for declaring the Petitioner as Wilful Defaulter is that MBSL gave Rs.135.50 Crores as interest free deposit to its parent company i.e., MBIL, under various lease agreements, which is upto 58.82 times more than the yearly rentals. This, according to the Respondent Bank, amounts to diversion of funds. The Respondent Bank has come to this conclusion on the basis of certain observations made in the Forensic Audit Report.
# 57. The second ground relied upon by the Identification Committee was that MBSL had executed financial lease agreements with MBIL. However, instead of utilizing the said utilities on its own, MBSL leased back the said utilities to MBIL on operating lease. This also, according to the Identification Committee of the Respondent Bank, amounts to diversion of funds.
# 58. Learned Senior Counsel appearing for the Petitioner is at pains to explain that the deposits made by MBSL in favour of its parent company MBIL under lease agreements can never be regarded as diversion of funds, which were refundable security deposits. The observation that the deposits are 58.82 times of the yearly rentals is factually incorrect. The total security deposit under the lease agreements was only 3.05 times of the rental. The Forensic Audit Report and the Respondent Bank considered 58.82 times from one of the lease agreements. Whereas, with respect to all the lease agreements executed between MBSL and MBIL, the average security deposits come to 3.05%, which is evident from the following chart:-
Exhibit 1.3- “Summary of excess security deposits over and above yearly lease rentals” Amt in INR
Sr. No. | Agreement Description | Party with whom agreement has been entered into | Amount of Security Deposit | Amount of rent (P.A) | Ratio of Lease rent per annum to Security deposit (Times) |
1 | Deed for Sub lease of Building – Thin Film 1 | Moser Baer India Limited | 43,50,00,000 | 14,400,000 | 30.21 |
2 | MOU for sub-lease of land – Thin Film 2 | Moser Baer India Limited | 2,00,00,000 | 3,900,000 | 5.13 |
3 | Deed for sub-lease of land – Thin Film 1 | Moser Baer India Limited | 6,00,00,000 | 1,020,000 | 58.82 |
4 | Deed for sub-lease of building – Thin Film 2 | Moser Baer India Limited | 55,00,00,000 | 1,36,80,000 | 40.20 |
5 | MOU for leasing of utilities | Moser Baer India Limited | 29,00,00,000 | 416,460,000 | 0.70 |
| Total/Average | | 133,50,00,000 | 44,94,60,000 | 3.05% |
# 59. Learned counsel for the Respondent Bank has not controverted the aforesaid position. It thus appears that the first alleged act of Wilful Default is based on a factually incorrect premise that the security deposits by MBSL to MBIL were 58.82% of the rental.
# 60. The record of this case would further reveal that in March, 2007, MBSL had entered into an Agreement with Applied Materials, USA for supply of the Thin Film Solar Module Line. The said Agreement necessitated MBSL to establish its manufacturing unit for effecting supplies.
# 61. As noted above, MBSL was a 100% subsidiary of MBIL. MBIL had 27.5 acres of land as Special Economic Zone (“SEZ”) in Greater Noida (U.P.) for non-conventional sources of energy. MBIL was approved by the competent authorities as the developer of the said SEZ. The law at that time and the approval letter dated 01.09.2006 of the competent authority produced by the Petitioner, did not permit any entity other than MBIL to develop and operate the SEZ.
# 62. MBIL, therefore, developed the necessary infrastructure including buildings and manufacturing facilities at the SEZ at a cost of Rs.353.53 Crores. The developed infrastructure was then given by MBIL to MBSL on financial and operating leases. The term of these leases varied between 7 to 20 years.
# 63. Learned Senior Counsel for the Petitioner further contended that under the financial arrangement agreed between MBIL and MBSL, though the security deposit made by MBSL was high, the rental was merely 43.85 Crores. Even after paying the security deposit and the annual rental, MBIL, from the lease agreements, made only a 12.80% Internal Rate of Return, which by no stretch of imagination can be said to be anything out of the ordinary. The commercial lending rate, at the time, was around 13% and hence, a return of 12.80% on the investments made by MBIL was a fair return, which is evident from the following chart relied upon by the Petitioner:- . . . .
# 64. The aforesaid chart, which is also not controverted by the Respondent Bank, indicates that the return made by MBIL for its investments does not appear to be anything out of the ordinary. The surrounding circumstances and the nature of return do not objectively establish that the lease agreements were intentional, deliberate and calculated acts of Wilful Default.
# 65. This Court shall now consider the Forensic Audit Report, which is the basis for invoking the Master Circular by the Respondent Bank. A perusal of the Forensic Audit Report reveals that it pertains to period between 01.04.2012 to 31.03.2015. The said Report is based on the audited financial statements pertaining to the said period. The lease agreements were executed prior to the review period and reflected in the audited financial statements of that period. However, the Forensic Auditor had no access to the same being prior to the review period.
# 66. Since the documents of the relevant time were unavailable to the Forensic Auditor, the Report concludes that in absence of supporting documents justifying agreed rates for leased assets, lease income, electricity and water charges, the lease transactions are questionable. Hence, it may be classified under Section 66 of the IBC. It is thus evident that the Forensic Audit Report has not given any conclusive finding that in the execution of the lease agreements, MBSL diverted any borrowed funds. This inference has been drawn by the Identification Committee of the Respondent Bank on its own without any other supporting material.
# 67. It is also worthwhile to mention that the Bank of Baroda, which is another public sector bank, had also charged the Petitioner for Wilful Default on this allegation. However, considering the explanation given by the Petitioner, the said allegation was dropped by the Review Committee of Bank of Baroda in its order dated 23.03.2023. It appears that lender banks, which were all a common part of the CDR package, are picking and choosing from the Forensic Audit Report and issuing Show Cause Notice, without there being any consistency on the alleged acts of Wilful Default.
# 68. At this stage, it is essential to deal with the argument raised by the Respondent Bank that 7 out of the 9 lease agreements are unstamped. In this regard, reference may be made to the proviso to Section 3 of the Indian Stamp Act, 1899, which provides that no duty is chargeable in respect of any instrument executed in favour of a developer or unit in connection with the carrying out of purposes of the SEZ. In any case, it is evident that the lender banks were aware of the lease agreements and execution of unstamped lease agreements per se cannot amount to diversion of funds.
# 69. This brings us to the second ground relied upon by the Identification Committee that MBSL had executed financial lease agreements with MBIL. However, instead of utilizing the said utilities on its own, MBSL leased back the said utilities to MBIL on operating lease. This, according to the Identification Committee of the Respondent Bank, amounts to diversion of funds.
# 70. Learned Senior Counsel for the Petitioner contends that the aforesaid observation made by the Identification Committee based on the Forensic Audit Report is also made in absence of documents of the relevant period.
# 71. As discussed above, the SEZ was owned by MBIL. MBIL being the parent company of MBSL, executed lease agreements to enable MBSL to manufacture in the SEZ and hence, developed the necessary infrastructure for the same. As per the approval letter dated 01.09.2006 issued by the Ministry of Commerce, Government of India, the right and responsibility to operate utilities including power generation and utility assets on the SEZ remained exclusively with MBIL.
# 72. It is also seen that as per approval dated 22.05.2007, MBSL received permission only to manufacture thin film and crystalline silicon based solar modules.
# 73. Hence, to comply with the said condition, MBSL was necessitated to give back on operating lease in favour of MBIL, the operation of power generation and utility assets for operations. These operating leases were effective from 01.04.2010 for a period of 10 years and whereunder, MBIL agreed to pay MBSL a lease rent of Rs.382.77 crores.
# 74. It is clear that for any act of diversion or siphoning to take place, it is to be seen whether the company in question resulted in losses as a result of the transaction in question.
# 75. The figures produced by the Petitioner and which have not been disputed by the Respondent Bank establish that had MBSL functioned normally, MBIL, over a period of 10 years, would have paid MBSL an amount of Rs.382.77 Crores under the operating leases as against an amount of Rs.390.05 Crores to be paid by MBSL to MBIL under the financial leases.
# 76. It, therefore, appears that the net outflow and inflow are nearly the same with respect to lease transactions ranging between 7-10 years and therefore no significant loss or profit would be made by either MBSL or MBIL under these transactions. In fact, MBSL would have made a financial gain of Rs.5.46 Crores. A transaction where the borrower is making financial gain can hardly be described as diversion of funds. It appears that merely because the Forensic Auditor observed the execution of operating lease by MBSL in favour of MBIL to be unusual, perhaps since the Financial Auditor did not have access to documents of this period, the Respondent Bank could not have drawn an inference of diversion of funds. This is more particularly when the Forensic Auditor in its Report itself has not drawn any conclusion of diversion of funds.
# 77. There is another aspect of the matter. The Respondent Bank sanctioned the loan facilities to MBSL vide sanction letters dated 04.04.2008, 03.06.2010, 20.08.2010, 25.03.2011 and 02.09.2011. The loan sanction letters enabled the Respondent Bank to access the financial statements of MBSL and its balance sheets at all times. The lease agreements were reflected in the financial statements. The Respondent Bank was aware of the lease agreements and the nature of transactions. Even after being aware of the lease agreements, the Respondent Bank continued to sanction further credit facilities. The Respondent Bank, therefore, did not perceive anything out of the ordinary from these lease agreements.
# 78. After MBSL faced financial constraints and was unable to meet its loan repayment obligations, it was considered for CDR by the lender banks under the CDR Master Circular, which required MBSL to submit Flash Report. In 2012, MBSL submitted its Flash Report. In Clause 13, under the head of “Buildings & Infrastructure Facilities”, MBSL categorically disclosed the details of the financial and operating lease agreements entered into with its parent company i.e., MBIL. Thus, even by virtue of the Flash Report, the Respondent Bank was fully aware of the lease agreements and the nature of transactions.
# 79. Based on the Flash Report, at the time of consideration of MBSL’s application for CDR, the lender banks in their meeting held on 10.10.2012 noted that MBSL had accumulated liabilities of around Rs.161 Crores towards lease agreements and MBSL proposed to pay them over a period of 10 years. Thus, even at the time of finalization of the CDR Scheme, the Respondent Bank was aware of the lease agreements and the liabilities arising out of it and did not find these to be questionable or out of the ordinary.
# 80. On 18.03.2013, when MBSL was not in a position to meet its loan repayment obligations, the CDR-EG approved the restructuring package of MBSL. In the letter dated 18.03.2013, the CDR-EG approved the CDR package as per Annexure-1 to the said letter. In Clause IX of Schedule-1, the lender banks again acknowledged that MBSL has lease liabilities towards MBIL. A CDR package even for MBIL was finalized, which required MBIL not to seek further deferment of lease liabilities. Accordingly, the lease liabilities towards MBIL were deferred. This document again shows that the lender banks were fully aware about the lease agreements and lease liabilities of MBSL at the time of approval of the CDR package of MBSL.
# 81. After the approval of the CDR package, the lender banks issued FRS, which is admittedly their own internal document. No adverse finding regarding the lease agreements is recorded in the FRS. The lender banks, including the Respondent Bank, subsequently entered into MRA and TRA with MBSL without any demur.
# 82. It is thus evident that the lender banks were aware of the lease agreements and the nature of liabilities of MBSL pursuant to the said Agreements since 2008. Neither before the approval of the CDR package in 2012 nor thereafter, the lender banks considered the same to be not over board. The lender banks never raised any concern regarding the same until the Show Cause Notice was issued by the Respondent Bank alleging the lease agreements to be an act of diversion of funds. The act of invoking the Master Circular against the Petitioner by the Respondent Bank, based on observations made in the Forensic Audit Report, several years after the execution of lease agreements, appears to be an afterthought.
# 83. The Review Committee in the impugned order has recorded that the Forensic Auditor concluded that the lease agreements between MBIL and MBSL were created for diverting banks funds. The learned Senior Counsel for the Petitioner has taken this Court through the Forensic Audit Report to show that no such observation is made in the Forensic Audit Report. The Review Committee has attempted to add words to the Forensic Auditor, which is nonexistent in the Report.
# 84. When the Petitioner made the aforesaid submissions before the Review Committee, the Review Committee, instead of dealing with each of them on merits, again rejected them by relying on the observations made in the Forensic Audit Report. Thus, there appears to be no independent application of mind by the Respondent Bank. From the Respondent Bank’s Minutes of Meeting dated 08.11.2019, it is evident that the Show Cause Notice was issued by quoting Forensic Audit Report; the Identification Committee passed its order quoting the Forensic Audit Report and even the Review Committee rejected the Petitioner’s explanation by merely quoting the Forensic Audit Report. The Forensic Audit Report itself does not conclude diversion of funds. Hence, this Court is of the view that the Respondent Bank has failed to discharge its obligations under Clause 2.1.3 read with Clause 2.5 of the Master Circular and proceeded to invoke the jurisdiction under the Master Circular merely on the basis of the Forensic Audit Report, which itself did not record any conclusion of diversion of funds.
# 85. The third ground on which the Respondent Bank declared the Petitioner a Wilful Defaulter is that MBSL made investments of Rs.696.49 Crores in its subsidiary Helios Photovoltaic Ltd. (earlier known as MBPV) “without the approval of the lenders”.
# 86. On behalf of the Petitioner, it is contended that the investments by MBSL in Helios Photovoltaic Ltd. were made from funds raised from Private Equity (PE) investors and were within the knowledge of the lender banks. The lender banks cannot allege these investments to be an act of Wilful Default, several years later, by observing that the investments were made without approval of the lenders. It is contended that Helios Photovoltaic Ltd. was a strategic investment made by MBSL for manufacturing and supply of PV cells, which was a critical component for MBSL in its assembly line of solar cells.
# 87. The Petitioner further contends that the investments made by MBSL in Helios Photovoltaic Ltd. were duly reflected in the financial statements and audited balance sheets of MBSL. The lender banks, by virtue of the terms of the loan approval terms, always had access to the financial statements and audited balance sheets of MBSL and were fully aware of the investments.
# 88. Further, prior to the admission of MBSL in the CDR Scheme, MBSL had submitted its Flash Report in 2012 to lender banks which also disclosed the investments made in Helios Photovoltaic Ltd.
# 89. Even during the consideration of the CDR Scheme, the lender banks had a JLM meeting on 10.10.2012. In the said meeting, the representative of PNB Investments Services Ltd., which conducted the Economic Viability Assessment, addressed the lender banks and explained that long term funds were utilized for investment on subsidiaries.
90. In the letter dated 18.03.2013, which approved the restructuring package, the details of package were earmarked in Annexure-1. In Clause 1.1(iii), the lender banks noted that the investments were made by MBSL in its 100% subsidiary. These investments are to be retained and disposal of these investments is not proposed. Relevant portion is reproduced as under:
“(iii) Sale of surplus assets/ investments
There are no significant surplus assets/ investments proposed for sale.
The investments are towards equity and preference share capital in its 100% fully owned subsidiary MBPV. These investments are required to be retained in terms of non-disposal undertaking executed with secured lenders of MBPV. Hence, no disposal of these investments is proposed.”
# 91. The lender banks had issued the FRS before the finalization of the CDR package. In the FRS, which is the lender banks’ internal document, the lender banks noted that MBSL had made investment in its 100% subsidiary. The lender banks also noted that investment in the subsidiary was required to be retained and that the investment by MBSL in Helios Photovoltaic Ltd. was a strategic investment where the latter supplied PV cells to MBSL in its assembly modules. The relevant part of FRS is reproduced as under:
“2.3 Comments on financial position and working results
***
Investments:
The investments are towards equity and preference share capital in 100% fully owned subsidiary MBPV. These investments are required to be retained in terms of non-disposal undertaking executed with secured lenders of MBPV. Further, investment in MBPV is strategic investment, whereby MBPV supplies PV cells to MBSL in its assembly of modules.”
# 92. Even after noting the investments made by MBSL in Helios Photovoltaic Ltd., the lender banks placed MBSL in Class-B borrower under the CDR Master Circular, which applies where a company is affected by external factors and not Class-C, which applies for diversion of funds. The lender banks, therefore, did not treat the investment in Helios Photovoltaic Ltd. as diversion of funds at any stage. On the contrary, the lender banks found the investment to be strategic and required MBSL to retain the said investment.
# 93. In this view of the matter, it is difficult to accept the Respondent Bank’s argument that the investment in Helios Photovoltaic Ltd. amounts to diversion of funds as the same was made without approval of the Respondent Bank. It is evident that the Respondent Bank was aware of the investments; found the same to be strategic and required MBSL to retain them.
# 94. After having complete knowledge of the investments and treating them to be strategic, which is required to be retained, the Respondent Bank, after several years, cannot be permitted to do a volte face and hold that the said investment amounted to diversion of funds.
# 95. For declaring the Petitioner as Wilful Defaulter, the Respondent Bank has relied upon the Forensic Audit Report. In the said Report, it is noted that investment is made by MBSL in Helios Photovoltaic Ltd. which was incurring losses since 2011-12. The Forensic Auditor could not verify any losses prior to this period, as it was beyond the review period. The Forensic Auditor has questioned the wisdom of making these investments in Helios Photovoltaic Ltd., when it was incurring losses.
# 96. Learned Senior Counsel for the Petitioner submits that the Petitioner resigned as Executive Director of MBSL on 16.04.2012 and as full time Director on 16.11.2012. For 2011-12 or onwards, whether Helios Photovoltaic Ltd. was incurring losses or not; or MBSL made further investment or not, is not known to the Petitioner. The Petitioner cannot be held liable for any act that has transpired after he ceased to have any position in MBSL. He further submits that the Forensic Audit Report nowhere has regarded these investments as diversion of funds. The conclusion drawn by the Forensic Audit Report states –
“Owing to inadequacy of documents explaining arrival, basis & justification of investments made in HPVL raises question on the need of such investment. Further, considering the current financial status of HPVL, recovery of these investments seems to be doubtful.”
The Report has not drawn any conclusion owing to the inadequacy of documents. It has not made any conclusion or finding of diversion of funds.
# 97. The lender banks must follow the mandate of Clause 2.1.3 read with Clause 2.5 of the Master Circular and independently find acts of “Wilful Default” which are “intentional, deliberate and calculated” and the said conclusion should be based on “objective facts and circumstances of the case”. Under the Master Circular, transferring funds in the subsidiary may amount to Wilful Default, if the same is found to be “intentional, deliberate and calculated” on an objective assessment of facts and circumstances. However, the said burden is not discharged by merely quoting the Forensic Audit Report, which itself has not drawn any conclusion of diversion of funds. The documents of Respondent Bank of 2012 i.e., several years before the issuance of Show Cause Notice, found the investments to be strategic and required to be retained, cannot subsequently become “intentional, deliberate and calculated” acts of Wilful Default.
# 98. Learned Senior Counsel for the Petitioner has attempted to show that the investment in Helios Photovoltaic Ltd. was made by MBSL from the funds raised from PE investors. Even after making the investments, MBSL had cash surpluses. It is further contended that the Respondent Bank had given a loan of Rs.261.35 Crores, as on 2009-10, to MBSL for creation of fixed assets. MBSL created fixed assets of Rs.477.46 Crores, which implies that that the loan amount was used for the purpose for which it was granted. The investment in Helios Photovoltaic Ltd. was towards the creation of fixed assets as it manufactured PV cells, which was a critical component for MBSL in its assembly line of solar cells. When the investment is made to create a fixed asset and which supports the main business of MBSL, the same cannot be regarded as diversion of funds. However, in light of the discussion made and conclusion drawn above, it is not necessary to record a finding on these submissions.
# 99. The last and fourth ground relied upon by the Respondent Bank is that MBSL had given supplier advances and loans to M/s Value Solar Energy Ltd. of Rs.25.60 Crores as on 31.03.2012, and of Rs.29.67 Crores as on 31.03.2015. MBSL did not provide supporting documents to the Forensic Auditor. Hence, the Forensic Auditor could not ascertain the basis as well as terms and conditions on which the loans and advances were made.
# 100. This Court also perused the Forensic Audit Report in this aspect. The Forensic Audit Report states that MBSL had made loans and advances to M/s Value Solar Energy Ltd. In 2019, when the Forensic Audit took place, the then management of MBSL did not provide the supporting documents to the Forensic Auditor. Hence, the Forensic Auditor could not ascertain the basis as well as terms and conditions on which the loans and advances were made.
# 101. This Court is of the view that the aforesaid observation can hardly be categorized as diversion of funds. The Forensic Auditor has noted the factum of loans and advances. However, it is not in a position to comment on their nature of such transactions, as necessary documents were not available. Thus, the Forensic Audit Report has not drawn any conclusion about diversion of funds.
# 102. Learned Senior Counsel for the Petitioner contends that even otherwise, the Petitioner ceased to have any position in MBSL from 16.11.2012 onwards. If during the Forensic Audit carried out several years later, certain documents are not available to the Forensic Auditor, no fault can be attributed to the Petitioner.
# 103. Learned Senior Counsel has also explained that M/s Value Solar Energy Ltd. was a group company of MBSL and was engaged in the business of solar products including wafers used as raw material in production of modules. Under a MoU dated 13.3.2011, M/s Value Solar Energy Ltd. was supplying wafers to MBSL. Accordingly, advance of Rs.35.59 Crores was made to M/s Value Solar Energy Ltd. for supplying of wafers. Further, Form-2 under Section 75(1) of the Companies Act, 1956 of MBSL indicates that M/s Value Solar Energy Ltd. had invested Rs.16 Crores in MBSL by redeemable preference shares. This amount had to be repaid by MBSL to M/s Value Solar Energy Ltd. Subsequently, under an Agreement dated 29.03.2012, MBSL purchased M/s Value Solar Energy Ltd.’s preference shares. However, MBSL could make the payment with a shortage of Rs.7.2 Crores. Thus, after squaring up the transactions, it is MBSL which owed Rs.7.2 Crores to M/s Value Solar Energy Ltd. The loans and advances by MBSL to M/s Value Solar Energy Ltd., therefore, cannot be termed as a diversion of funds.
# 104. While it is not necessary to go into the aforesaid details, suffice is to say that the Forensic Audit Report only observed that it is not in a position to comment on their nature of loans and advances made to M/s Value Solar Energy Ltd., as necessary documents were not available. Merely because necessary documents were unavailable to the Forensic Auditor, the Respondent Bank could not have drawn an inference of diversion of funds. In doing so, the Respondent Bank failed to adhere to the requirement of Clause 2.1.3 read with Clause 2.5 of the Master Circular to identify “Wilful Default” which is “intentional, deliberate and calculated” and based on “objective facts and circumstances of the case”. The Respondent Bank cannot merely quote an observation from the Forensic Audit Report, which itself is not conclusive, and conclude that the same amounts to the diversion of funds.
# 105. Learned counsel for the Respondent Bank has alleged that the Petitioner’s exit from MBSL was intentional. He has also relied upon an undertaking dated 24.08.2010 and 22.09.2010 of MBSL contending that the management of MBSL would not be changed without the permission of the Respondent Bank. It is alleged that the breach of this undertaking by the Petitioner supports the finding of Wilful Default rendered by the Respondent Bank.
# 106. This argument though impressive on first blush, lacks merit on deeper scrutiny. In this case, the Petitioner resigned from MBSL as Executive Director on 30.04.2012 and as full time Director on 16.11.2012 and submitted Form-32 to that effect with the RoC. Contemporaneously, MBSL had informed the lender banks about the resignation of the Petitioner from MBSL. When MBSL was about to default in its loan repayment obligations, MBSL informed the lender banks to consider the CDR package on the assumption that the Petitioner was no longer associated with MBSL and his personal guarantee was not available. On 20.09.2013, the CDR-EG noted that the lender banks have agreed to the substitution of personal guarantee of the Petitioner with collateral security of Rs.33 Crores. In the meeting held on 27.05.2014, the lender banks agreed to reduce the collateral security of Rs.33 Crores to Rs.25.53 Crores in lieu of the Petitioner’s personal guarantee. The Petitioner did not furnish his personal guarantee for the CDR package nor did he participate in any of the deliberations for the approval of the CDR package. The lender banks still approved the CDR package and acted upon it without the presence and personal guarantee of the Petitioner. The lender banks, therefore, tacitly acquiesced to the Petitioner’s exit from MBSL and approved the CDR package of MBSL without his presence in any capacity or personal guarantee.
# 107. Further, the undertaking relied upon by the Respondent Bank was not given by the Petitioner but by MBSL. Hence, if there exists a breach of the said undertaking, the remedy, if any, lies against MBSL and elsewhere and not against the Petitioner.
# 108. In any case, resignation from a company per se is not an act of Wilful Default under the Master Circular.
Effect of Forensic Audit Report
# 109. From a reading of the orders passed by the Identification Committee and the Review Committee, it is evident that the Respondent Bank attributed acts of Wilful Default to the Petitioner only on the basis of the Forensic Audit Report. The question which arises at this juncture is whether the observations made in the Forensic Audit Report can be the sole basis for the Respondent Bank to conclude an event of Wilful Default.
110. The nature of the Forensic Audit Report in respect of a company is discussed by the Calcutta High Court in Prashant Bothra & Anr. v. Bureau of Immigration & Ors.1 It was held that a Forensic Audit Report, at best, is a piece of evidence in liquidation proceedings, and is in no manner a conclusive proof of any illegality committed under a law. The Forensic Audit Report is merely an opinion of the author, which is based on several disclaimers and it cannot be a conclusive proof of its observations. The relevant observations are reproduced as under:-
“21. The very premise of the request was a forensic audit report allegedly authored by a particular concern. The said report, at best, is a piece of evidence in the liquidation proceeding and is in no manner conclusive proof of evidence of any illegality committed by any entity. In fact, it is common experience that each and every such forensic audit report contains several disclaimers, restricting the operation of the same to the proceeding in which they are filed, as well as confined to the impression of the authors thereof on the basis of the documents which are available to them.
22. Under no stretch of imagination can such a report be conclusive proof of the allegations against the petitioners.”
# 111. This Court is inclined to agree with the aforesaid proposition of law. Even under the Indian Evidence Act, 1872, the opinion of an expert witness under Section 45 is not a conclusive proof. It is subject to cross-examination and the opinion and conclusions of an Expert are subject to challenge. In the present scheme of things, the Master Circular casts a specific obligation on the Respondent Bank to act independently and objectively under Clause 2.1.3 read with Clause 2.5 as discussed above. It would, therefore, be unsafe if lender banks start to declare borrowers as Wilful Defaulter merely on the basis of observations made in the Forensic Audit Report without there being an independent application of mind. The lender banks must follow the mandate of Clause 2.1.3 read with Clause 2.5 of the Master Circular and independently find acts of Wilful Default which are “intentional, deliberate and calculated” and the said conclusion should be based on “objective facts and circumstances of the case”. Any other view would lead to consequences where mere cases of default would be categorised as acts of Wilful Default under the Master Circular. The Master Circular is not to be invoked in every case of default but only when the default is Wilful Default as construed under the scheme of the Master Circular.
Identification of Wilful Default has to be made keeping in view the track record of the borrower and not on the basis of isolated transactions/incidents
# 112. Under Clause 2.1.3 of the Master Circular, the identification of an entity or a person as a Wilful Defaulter has to be made on the basis of the track record of the borrower and not on the basis of the isolated transactions/ incidents. A similar obligation is cast on the lender banks in Clause 2.5 of the Master Circular, which requires the lender banks to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It is required to be ensured that solitary or isolated instances are not made the basis for imposing the penal action under the Master Circular. This requirement is cast in the Master Circular with an object to punish those borrowers who have not acted bonafidely in the interest of the business enterprise but made a concerted effort to divert borrowed funds. The Master Circular assumes that where the track record of the borrower is otherwise sound, then isolated transactions or incidents that may not be financially prudent, may not, alone be sufficient to declare a borrower as Wilful Defaulter.
# 113. Let us now consider the track record of MBSL as per the FRS, which is an internal document prepared by the Respondent Bank before finalizing the CDR package. The FRS was prepared when MBSL was already in financial constraints and was unable to meet its loan repayment obligations.
# 114. In the FRS, the lender banks have noted that MBSL is a subsidiary of MBIL and engaged in the manufacture of photovoltaic cells. The company used the SEZ Unit in Greater Noida to design, manufacture, sell, export photovoltaic cells in the global market. It had a production capacity of 90 MW selective emitter crystalline cells, 50 MW crystalline modules and 40 MW Thin Films PV. The company began its commercial operations at an initial cost of Rs.439.21 Crores. In 2011, the company consolidated and set up a project for advanced high-performance selective emitter high efficiency crystalline silicon cell with annual capacity of 90 MW. The cost of this project was Rs.624.69 Crores. The company demonstrated strong EPC capabilities and quality manufacturing. It has commissioned more than 50 PV projects in India and Germany. The company has significant customer base in Europe, Asia, Pacific, Middle East and the US.
# 115. The FRS noted that 2011-12 onwards, the company’s financial operations were adversely affected due to (a) the global solar photovoltaic market was operating under stress due to huge supply addition from China; (b) China offering USD 43 billion subsidy to its domestic companies, which led to abnormal fall in the prices of solar cell. The company, however, has been able to service its debt till 31.12.2011. The CDR-EG had admitted MBSL in ClassB as per the CDR Master Circular, which applies where MBSL was classified as a Class-B borrower under the CDR Scheme, which has Classes from A to D. In the Class-B category, MBIL was classified as “Corporate/promoters affected by external factors and also having weak resources, inadequate vision and not having support of professional management.” The Class-C is assigned to those corporates who “diverted funds” to unrelated fields with or without lenders’ permission. Thus, the lender banks considered MBSL to be a borrower that was affected by external factors and not by the diversion of funds.
# 116. Before finalization of the CDR package, the lender banks obtained a TEV Report and Stock Audit Report from external agencies. After considering the said Reports, the lender banks approved the CDR package. The net worth of MBSL even as on 31.03.2012 was found to be Rs.658.66 Crores.
# 117. In the Flash Report, it is noted that MBSL could service all its debts till 30.11.2011 and even repaid the principal sum of the term loans.
# 118. The aforesaid position, which is accepted by the lender banks in their own document i.e., the FRS, does not show a consistent negative track record of MBSL. MBSL was seen as a global player in photovoltaic cells. It had presence in several countries. It had serviced its debt and largely repaid the principal dues. The Respondent Bank, under Clause 2.1.3 read with Clause 2.5, was obligated to reflect upon the entire track record of MBSL and then conclude whether there existed events of Wilful Default and not on the basis of isolated transactions/incidents.
Consequences of admitting MBSL for CDR under the CDR Scheme
# 119. This Court deems it appropriate to make certain observations regarding the manner in which the scheme of CDR Master Circular is to be implemented. The CDR Master Circular is equipped with several measures to ensure that cases involving frauds or diversion of funds with mala fide intent are not admitted for CDR.
# 120. These include provisions like Clause 6.3 read with paragraph no.4 of Annexure III, which renders corporates indulging in fraud and malfeasance as ineligible for CDR. Further, CDR scheme provides for four Classes – A to D, out of which, Categories C and D relate to the cases of diversion of funds and which categorisation has to be done by the lenders on their own.
# 121. The classification has a direct bearing on eligibility as well as the conditions to be imposed upon the borrower. The lower the category the more stringent the conditions to be imposed upon a borrower in accordance with paragraphs C and D of Annexure IV. Significantly, before “CDR Reference/Approval”, Clause 3.3 of CDR Scheme expressly empowers Banks to commission a Forensic Audit “wherever necessary and specially in cases of diversion of funds”. 122. The aforesaid provisions in the CDR scheme leads to the conclusion that the categorization of a borrower in one of the categories between A and D has to be based on an objective satisfaction.
# 123. This Court is of the view that it is incumbent upon banks who are dealing with public funds and discharging a public duty to make appropriate enquiries as to whether a borrower is in genuine financial difficulty or whether there exist events of fraud and malfeasance. If the lender banks find fraud or malfeasance, the CDR-EG must either refuse CDR completely or impose such additional onerous conditions as provided in the CDR Scheme itself.
# 124. In the present case, the lender banks were fully aware of all the transactions, which are now alleged to be acts of Wilful Default. This fact is part of the documents leading to the finalization of the CDR scheme. Despite noting all transactions, financial statements, balance sheets, TEV Report and Stock Audit Report, the lender banks placed MBSL in Class-B of CDR Master Circular which cannot be assigned if there is diversion of funds. They found no occasion to order a forensic audit of MBIL before finalization of CDR scheme. The lender banks, therefore, never treated the alleged acts of Wilful Default as an act of diversion or siphoning either during finalization of CDR scheme or after its failure.
# 125. It may so happen that that during the finalisation of CDR Scheme, the lender banks are not aware of certain acts of commission or omission, which may constitute acts of Wilful Default. The lender banks may become aware of such acts subsequently, may be, on their own, or on the basis of subsequent Forensic Audit Report. Having considered such acts, which were known subsequently, the lender banks may take an objective decision under the Master Circular on whether such acts constitute Wilful Default or not. In such a situation, the mere fact that an earlier CDR Scheme was finalised and nothing negative was flagged at that stage, may not come in way of the lender banks in invoking jurisdiction under the Master Circular. However, it may not be open for lender banks to classify known acts as events of Wilful Default merely because subsequently, in respect of the same known acts, the Forensic Audit Report has made certain observations. To declare a person as a Wilful Defaulter, lender banks have to independently find that the “Wilful Default” is “intentional, deliberate and calculated” and the said conclusion is based on “objective facts and circumstances of the case”, as required under the Master Circular. The Forensic Audit Report, at best, can act as a piece of corroboration for the said exercise, but not the sole basis.
# 126. To take any other view would entail the transfer of jurisdiction to determine acts of Wilful Default to Forensic Auditors, which, by law under the Master Circular, is vested in the Identification and Review Committee of the Respondent Banks. When a law requires a particular act to be done in a particular manner, then it has to be done in that manner alone and no other. [See: Tata Chemicals Ltd. v. Commr. of Customs2 and Krishna Rai v. Banaras Hindu University3 ].
# 127. In view of the aforesaid discussion, the reasons assigned in the impugned order dated 20.04.2023 passed by the Review Committee confirming the Petitioner as Wilful Defaulter under the Master Circular are unsustainable and the impugned order is accordingly, quashed and set aside. The Writ Petition is allowed in the aforesaid terms. Pending application(s), if any are disposed of.
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