Sudhir Shantilal Mehta Vs. C.B.I. [2009] INSC 1421 (7 August 2009)
Judgment
IN THE SUPREME COURT OF INDIA CRIMINAL APPELLATE JURISDICTION CRIMINAL APPEAL NO. 905 OF 2005 SUDHIR SHANTILAL MEHTA ... APPELLANT Versus [WITH CRIMINAL APPEAL NOS. 945/2005, 925/2005, 922/2005 AND 965/2005]
S.B. Sinha, J.
INTRODUCTION These appeals arise out of a judgment and order dated 9.6.2005 passed by the learned Judge, Special Court, Bombay constituted under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (for short, "the said Act") in Special Case No. 1 of 1993 whereby and whereunder appellants herein with accused Munipally Subramanium Eshwar 2 Chandra (Accused No. 6), Sunil Samtani (Accused No. 7) and Pankaj Brijlal Shah (Accused No. 9) were convicted for commission of offences punishable under Sections 409 and 120B amongst others and sentenced as under:
(a) Accused No. 1, K. Margabanthu was sentenced to undergo R.I. for a period of six months and to pay fine of Rs.1,00,000/-, in default S.I. for two months.
(b) Accused No. 2, Ramaiya Venkatkrishnan was sentenced to undergo R.I. for three months and to pay fine of Rs.50,000/-, in default S.I. for 15 days.
(c) Accused No. 4, Ashwin Mehta was sentenced to undergo R.I. for a period of three months and to pay fine of Rs. 2,00,000/-, in default S.I. for one month.
(d) Accused No. 5, Sudhir Mehta was sentenced to undergo R.I. for a period of three months and to pay fine of Rs.2,00,000/-, in default S.I. for one month.
(e) Accused Nos. 6, Munipally Subramanium Eshwar Chandra, Accused No. 7 Sunil Samtani, Accused No. 9 Pankaj Brijlal Shah were directed to pay fine in the amount of Rs.25,000/- each, in default S.I. for 15 days.
3 (f) Accused No. 8, S.V. Ramanathan was sentenced to undergo R.I. for a period of one month and to pay fine of Rs. 25,000/- in default R.I. for 15 days.
Before proceeding further, we may place on record that Harshad Shantilal Mehta (Original Accused No. 3) expired during the pendency of the criminal proceedings and the case against him, thus, abated. Accused Nos. 1, 2 and 8 who are appellants in Criminal Appeal Nos. 945, 965 and 922 of 2005 respectively were the Chairman-cum-Managing Director, the General Manager and the Divisional Manager of UCO Bank respectively.
Whereas Accused No. 1 and 2 have been found guilty of committing both Criminal Breach of Trust as well as Criminal Conspiracy, Accused No 8, being a Scale IV Bank employee was found guilty only for commission of the offence of criminal conspiracy. Accused Nos. 4 and 5 (hereinafter referred to as, "the private accused") were found guilty of commission of offences only under Section 120B of the Indian Penal Code being related to an otherwise connected with the activities of the original accused No. 3.
Accused Nos. 6, 7 and 9 on whom only a punishment of fine was imposed accepted the judgment and have not preferred any appeal before this Court.
BACKGROUND FACTS
The prosecution case centers around transactions, of discounting and rediscounting of Bills of Exchange and two Pay Orders issued by the State Bank of Patiala and Syndicate Bank, in favour of the UCO Bank. This was said to be at the instance of the private accused.
Harshad Mehta was a dealer in the money and securities market. The Reserve Bank of India had found that Harshad Mehta along with his other associates had diverted a huge amount of public fund belonging to Public Sector Banks and Financial Institutions for short term investment in the securities market, and thus defrauded the banks of a huge amount.
An Inquiry Committee was thereafter constituted under the Chairmanship of Shri Janakiraman. The Committee submitted its report;
pursuant to and in furtherance whereof the said Act was enacted providing inter alia for the constitution of a Special Court for trial of the criminal offences, as also civil disputes arising therefrom during the period between 1.4.1991 and 6.6.1992. The said Act provides for the appointment of a Custodian for attaching the properties of notified parties to prevent diversion of such properties. The properties which were attached included shares of 5 various companies as well as moveable and immoveable properties of the private parties herein.
Accused No. 1 being Chairman-cum-Managing Director of the UCO Bank used to sit in the Head Office of the Bank situated at Calcutta. The Bank has an office and a guest house at Bombay as well.
On or about 14th March 1992, Accused No. 1 visited Harshad Mehta.
Thereafter he came back to his office and called a meeting in which, inter alia, four Prosecution Witnesses being Shri S.V. Prabhu, Assistant General Manager (PW 44), Shri Bhaskar Roy Choudhary, Dy. General Manager (PW-45), Shri Ramanathan, Divisional Manager (Accused No. 8) and Shri R.L. Joshi, Public Relations Officer (PW 7) participated.
Accused No. 1 allegedly informed others that he had met Harshad Mehta who had suggested that it would be in the interest of the Bank to undertake the business of discounting and rediscounting of Bills of Exchange. The officers present were assured by him that the business could be transacted without involving the banks' funds. He furthermore insisted that the said business be undertaken through the Nariman Point Branch of the Bank though such transactions were generally not undertaken therefrom.
6 In course of the meeting, Accused No. 1 contacted Accused No. 2 R. Venkatkrishnan at Calcutta and informed him about the transactions which had to be carried out. On the other officers of the Bank objecting thereto, Accused No. 1 assured them that the business of discounting and rediscounting of Bills of Exchange would be personally looked after by Harshad Mehta himself.
On the same day, that is, on 14.3.1992, a resolution was passed by M/s Growmore Research and Asset Management Ltd. (for short, "Growmore") to open an account in UCO Bank, Nariman Point so as to enable it to avail Bill Discounting facility provided by UCO Bank limited to Rs.50 crores. Harshad Mehta (the Original Accused No. 3), Ashwin Mehta (Accused No. 4) and/or Sudhir Mehta (Accused No. 5) had been authorized by the said resolution to execute necessary documents on behalf of the Company. A similar resolution was also passed by M/s Mazda Industries & Leasing Ltd. (for short, "Mazda") (Accused No. 7), which is a public limited company for the purpose of opening up of a current account in UCO Bank, so that it too could avail the Bill discounting facilities from the Bank .
Two or three days thereafter, Sunil Samtani, the Vice President of Mazda and Pankaj Shah, the Vice President of Growmore (Accused No. 9) 7 met Shri Prabhu (PW 44) with Ramanathan (Accused No. 8). They procured two forms for opening current accounts with the Bank. They were introduced by Accused No. 8, who were also invited for attending the Annual General Meeting of Mazda as also a cocktail party which was to be held on 18.3.1992 at Hotel Oberoi.
The party was attended by Ramanathan (Accused No. 8), Prabhu (PW 44), Roy Choudhary (PW 45), Pankaj Brijlal Shah (Accused No. 9) and Harshad Mehta.
On 24.3.1992, at about 2.30 P.M., Sunil Samtani (Accused No. 7) and Pankaj Shah (Accused No. 9) came to the Nariman Point Branch of the UCO Bank. They had brought with them two banker's cheques; one cheque was from Syndicate Bank dated 24.3.1992 for a sum of Rs.24,63,01,370/- drawn in favour of UCO Bank (Exh. 24); and the other from State Bank of Patiala dated 24.3.1992 for a sum of Rs.25,00,53,636/-.
They had also brought with them the application forms for opening Current Accounts in the Bank. The same were handed over to Prabhu (PW 44). The two cheques that they had brought were handed over to Ranjit Mukherjee (PW 1) for clearance.
8 Two Bills of Exchange for a sum of Rs.14,41,44,000/- and Rs.35,95,24,000/- drawn by J.H. Mehta which were accepted by Ashwin Mehta (Accused No. 4) on behalf of Growmore (Exhibit 154) and by Sunil Samtani (Accused No. 7) on behalf of Mazda respectively were brought by Accused Nos. 7 and 9. Both the Bills of Exchange were executed by Sudhir Mehta (Accused No. 5), authorized signatory of M/s J.H. Mehta. It is not in dispute that original contract note with respect to the underlying security transaction had not been produced and only a photocopy thereof had been produced.
Letters were also issued by Mazda and Growmore to the effect that the said amount would be repaid by them on or before 24.4.1992. They had asked the Bank in writing to issue cheques in the name of ANZ Grindlays Bank.
For the said two cheques receipts were obtained from Syndicate Bank and State Bank of Patiala. The two usance promissory notes were handed over to Accused No. 7 and Accused No. 9. Indisputably, J.H. Mehta, the drawer of the Bills of Exchange did not have any account in his name. The 9 acceptors, namely, Mazda and Growmore also did not have any account at the said branch.
Two draft promissory notes were handed over to Mr.Prabhu (PW 44) by Accused Nos. 7 and 9; one issued in favour of Syndicate Bank and the other in favour of State Bank of Patiala to be executed by UCO Bank in relation to the said cheques. Those usance promissory notes were signed by Mr. Prabhu (PW 44) and Ranjit Mukherjee (PW 1), pursuant whereto the Bank issued two pay orders on the same day in favour of ANZ Grindlays Bank for a sum of Rs.25,27,00,000/- and Rs. 14,14,00,000/-.
An account in the name of M/s J.H. Mehta was opened on the same day; the amount of Bill of Exchange was credited into that account; three accounts were opened in the Bank for carrying on transactions in the name of the aforementioned three entities bearing Nos. 1705, 1706 and 1708. The Account Nos. 1705 and 1706 were introduced by Ashwin Mehta (Accused No. 4) and Account No. 1708 was introduced by Sudhir Mehta (Accused No. 5). Two Bills of Exchange were drawn by M/s J.H. Mehta. The same were signed by Sudhir Mehta (Accused No. 5) as the Constituted Attorney of Mrs. Jyoti Mehta, the proprietor of M/s J.H. Mehta. On behalf of Mazda, 10 the bill was accepted by Ashwin Mehta (Accused No. 4). The amount of Bills of Exchange were credited to the account of M/s J.H. Mehta and thereafter they were transferred to the account of Mazda and Growmore.
The Bills of Exchange in relation to Growmore was accepted by Ashwin Mehta (Accused No.4).
On 25.3.1992, the account of J.H. Mehta in Grindlays Bank credited the said amount and the amount was promptly transferred to Harshad Mehta's Account. On 26.3.1992, Prabhu (PW 44) asked Ranjit Mukherjee (PW 1) to prepare a note for the Chairman so as to enable him to seek approval from the Board for the transaction pursuant whereto the said note was prepared and it was shown to accused No. 1. On the same date, PW 1 was asked by Prabhu (PW 44) to collect the Balance Sheets from Mazda and Growmore. Whether the Balance Sheets and Annual Reports of the said two Companies were ultimately collected or not is unknown. A proposal for ratification of the Bill Discounting transaction was sent to the Head office on 3.4.1992. On 24.4.1992, i.e., the due date for retiring the Bills of Exchange, the payments were not made either by the drawer or by the acceptors.
Accused No. 1 allegedly agreed to the suggestion of Harshad Mehta for 11 rolling over the same for one more month. PW 44 allegedly did not agree thereto and insisted on prompt payment.
As the funds had not been received, UCO Bank made payments to Syndicate Bank and State Bank of Patiala out of its own funds. There being a shortfall in the funds available with UCO Bank, the requisite call money to meet the deficient had to be borrowed by it from the Corporation Bank and the Oriental Bank of Commerce to the tune of Rs. 50 crores for three days.
Officers of UCO Bank thereafter visited the offices of Mazda and Growmore for realization of the payments due. Two cheques were handed over by M/s J.H. Mehta with a request that the same not be encashed and that the cheques of Growmore and Mazda would be given at a later date. Mazda and Growmore also issued two cheques. They were not sent for clearing as the requisite funds there for were admittedly not available in their accounts in Grindlays Bank. The said two Bills of Exchange, for want of fund, were not retired either by M/s J.H. Mehta or Growmore or Mazda.
Subsequent thereto, a formal meeting of the Investment Committee consisting of Accused Nos. 1 and 3 and PW 45 was held. At the instance of Accused Nos. 1 and 3, shares of Gujarat Ambuja Cement worth Rs. 50 crores were purchased by UCO Bank. It was routed through V.B. Desai a 12 broker and an amount of commission for a sum of Rs. 9.53 lakhs was paid to him. The amount received by J.H. Mehta from UCO Bank under the said transaction was transferred by him to Mazda and Growmore so as to facilitate encashment of the said cheques for retiring the Bills of Exchange.
Payment towards purchase of shares was made by UCO Bank before delivery thereof. The amount due to the Bank was sought to be realized in that manner.
However Mr. VB. Desai, could not deliver all the shares of Gujarat Ambuja Cement. It was agreed that in place of 3 lakhs shares of Gujarat Ambuja Cement, 77150 shares of `CASTROL' would be delivered at the rate of Rs.1750/- per share.
Mr. Prabhu thereafter contacted accused No. 2 and informed him about the transactions, which according to him, had to be gone through at the Nariman Point Branch as had been directed by accused No. 1.
CHARGES Several charges were framed against the accused persons by the learned Judge, Special Court on or about 9.10.1995. A Special Leave Petition was preferred thereagainst. Although the order of the Special Court 13 dated 9.10.1995 was not interfered with, this Court recorded a statement made by the Additional Solicitor General of India that charges No. 10 to 13 and 16 would not be pressed. We may also place on record that the prosecution at a later stage did not press charges No.2, 4 and 6. The charges which were, thus, framed and pressed against the accused persons were charge Nos. 1, 3, 5, 7, 8, 9, 14 and 15 as also charge No. 12 and 13 (Exhibit - 228). As charges No. 14 and 15 related to the deceased accused No. 3- Harshad Mehta, the same stood abated. The charges which survived were charges No. 1, 3, 5, 7, 8, 12 and 13.
In the words of the learned Special Court, the said charges read as under:
"2. By charge No.1, it is alleged that the accused nos.
1, 2 and 8 being public servants and being entrusted with public funds entered into a criminal conspiracy to commit offences punishable under Section 409 of the Indian Penal Code. It is also alleged that accused nos. 1, 2, and 8 being public servant entered into a criminal conspiracy and thereby committed offence punishable under Section 120B of the Indian Penal Code. It is further alleged that accused nos. 1, 2 and 8 are also guilty of the offence of criminal misconduct under Section 13(1)(d) and Section 13(2) of the Prevention of Corruption Act.
3. By charge nos. 2, 4, 6 and 9, it is alleged that accused nos. 4, 5, 6, 7 and 9 acted in furtherance of the criminal conspiracy and abetted accused nos. 1, 2 and 8 in committing offence of criminal breach of trust. It is 14 thus, clear that basically the offences with which the accused nos. 1, 2 and 8 are charged are offences of committing criminal breach of trust and entering into a criminal conspiracy, and the accused nos.4, 5, 6, 7 and 9 are charged with the offence of criminal conspiracy."
EVIDENCE The prosecution in support of its case examined a large number of witnesses. The defence also examined some witnesses. Ashwin Mehta (Accused No. 4) also examined himself in defence.
A large number of documents were also brought on record by the parties. We would refer to some of them at an appropriate stage.
PROCEEDINGS BEFORE THE SPECIAL COURT Before the special court it was alleged that the original contract note with respect to the underlying security transaction for the discounting of Bills had not been produced at the time of entering into the said transactions and only a photocopy thereof was produced. It was furthermore alleged that no security was insisted upon for discounting the Bills of Exchange and before signing the promissory notes, the Bank did not have with it the shares in relation to which the Bills of Exchange were drawn. The said acts of 15 omission and commission on the part of Accused Nos. 1, 2 and 8 are said to be in violation of the UCO Bank Manual of Instructions on Bill Discounting (Exhibit-239) as also the Circular letter dated 5.9.1988 issued by the Reserve Bank of India (Exhibit-247).
The prosecution alleged that the transaction of discounting and rediscounting of the two Bills of Exchange was bogus and that the said modus operandi was adopted for siphoning of the public funds wherewith accused Nos. 1, 2 and 8 were entrusted. It was furthermore alleged that the said Bills of Exchange were not issued by way of any bona fide commercial transaction and were prepared only to secure financial accommodation for the deceased Harshad Mehta and his group.
The prosecution further alleged that as the deceased Harshad Mehta was not in a position to pay the amount due to the Bank on 24.4.1992; only with a view to facilitate the payment of amount to the Bank against the two Bills of Exchange, accused Nos. 1 and 2 decided to purchase shares of Gujarat Ambuja Cement and the amount of purchase price of the shares was paid to M/s J.H. Mehta. Growmore and Mazda thereafter issued cheques in favour of the Bank in discharge of the liability in relation to the said two 16 Bills of Exchange. The authority on the part of the accused Nos.1, 2 and 8 to enter into the said transactions without obtaining sanction from the Board of Directors was also questioned.
The defence of the accused persons had been a mere denial of the allegations.
Before proceeding further, we may notice that Bhaskar Roy Choudhary (PW 45) and S.V. Prabhu (P.W. 44) were initially made accused in the case. They were arrested and later on released on bail. Applications were filed on their behalf purported to be in terms of Section 307 of the Code of Criminal Procedure , 1973, which were allowed by the learned Special Judge by order dated 22.6.1993, inter alia, on the condition that they would give evidence during the trial and make a full-and true disclosure of the circumstances within their knowledge relating to the said offences.
The learned Special Judge upon consideration of the entire materials brought on record by the parties, in a very detailed and well considered judgment, held:
17 i. The offence of criminal breach of trust on the part of the accused Nos. 1 and 2 was proved beyond all reasonable doubts as they had been entrusted with the funds of UCO Bank, they had discounted two Bills of Exchange drawn by M/s J.H. Mehta and accepted by two corporate entities, Growmore and Mazda.
ii. The said discounting of bills was illegal as it violated the Circular issued by the Reserve Bank of India dated 5.9.1988 (Exhibit 247); and by reason thereof, a sum of Rs. 50 crores was transferred to the deceased accused No. 3 Harshad Mehta and/or his groups.
iii. The transactions having been carried out in violation of the aforementioned Circular dated 5.9.1988 issued by the Reserve Bank of India, the accused Nos. 1, 2 & 8 having acted contrary thereto or inconsistent therewith, the same constituted an offence within the meaning of Section 405 of the Indian Penal Code.
iv. The said transactions having been carried out to benefit Harshad Mehta Group of Companies by the accused in conspiracy with each other, the prosecution has proved its case. The private accused as well as Accused No.8 were convicted only for commission of the offence of criminal conspiracy.
18 SUBMISSIONS The learned counsel appearing on behalf of the appellants, inter alia, would urge:
i. The transactions being related to discounting and rediscounting of Bills of Exchange and not to securities, the Special Court had no jurisdiction to pass the impugned judgment of conviction and sentence.
ii. The purported Circular Letter dated 5.9.1988 not being law within the meaning of Section 405 of the Indian Penal Code read with Section 43 thereof, the prosecution of the appellants ex facie was illegal and without jurisdiction. In any event, the said Circular Letter not being in the public domain having not been published cannot have any force of law as is ordinarily understood.
iii. The said Circular in any event being not binding on the private accused, they could not be said to have been a party to the offence of conspiracy.
iv. The Circular Letter being confined to rediscounting and a separate procedure having been laid down for discounting of Bills of Exchange permitting the house loan/accommodation loan for some time as provided for in Exhibit 299; the impugned judgment cannot be 19 sustained. No money, thus, having been transferred in violation of any law, the question of commission of any offence under Section 409 did not arise.
v. The transactions having been entered into bona fide by the officials of the Bank and with the accused in order to earn profit for the bank and in that view of the matter, the prosecution cannot be said to have proved any dishonest intention on their part as envisaged under Section 24 of the Indian Penal Code.
vi. The prosecution has not been able to prove that any wrongful loss or wrongful gain was caused to any person. In view of the admitted case that Harshad Mehta or his group had not made any default in payment of the amount due and only because now a purported scam is said to have been committed, all the private accused who were connected with Harshad Mehta Group of Companies are alleged to have committed the offence of conspiracy, although the prosecution had failed to prove any of the charges levied against them.
vii. The deposition of S.V. Prabhu (PW 44), Bhaskar Roy Choudhary (PW 45) should not have been relied upon by the learned Special Judge without any material corroboration having regard to the fact that they were approvers.
20 viii. The judgment of the learned Special Judge being full of speculative inferences and surmises, is wholly unsustainable.
ix. No witness having been examined by the prosecution to show that the action on the part of the official accused was not bona fide, the learned Special Judge committed a serious error in passing the impugned judgment. It suffers not only from misreading and misconstruction of the evidences but also in taking note of the deposition of the witnesses examined on behalf of the defence.
x. Accused No. 1 being the Chairman-cum-Managing Director of the Bank having taken a decision to transact business with Harshad Mehta in the interest of the Bank whose reputation and creditworthiness in those days being unquestionable and particularly in view of the fact that even the prosecution witness accepted that he was respected by all concerned, the inference that the transaction was not entered into bona fide is wholly unsustainable.
xi. The learned Special Judge committed a serious error in arriving at a finding that no contract had been entered into by and between the Banks as it has categorically been accepted by Shri Prashant D. Patel, (P.W. 17) that a contract was entered into. In any event, a contract, it is well known, can be entered into by necessary implication.
21 xii. The learned Special Judge committed a serious error in holding that accused No. 5 was Director of the Company although in fact he was merely an employee.
xiii. Even assuming that Jyoti Mehta, Mazda and Growmore belonged to one group but in terms of the Manual issued by the UCO Bank itself, house loan transactions in favour of persons having the same identity and belonging to a group being permissible; the transactions were not violative of the directions issued by the Reserve Bank of India.
xiv. In any event, the Reserve Bank of India's directions being confined to rediscounting and UCO Bank having knowledge thereof entered into the transaction for discounting, the said Circular was not applicable to the case at hand. The decision to enter into the said transaction having been taken in a meeting and not by Accused No. 1 alone, he cannot be said to have any mens rea particularly when the Bank had earned a huge amount by way of interest.
xv. Purchase of shares of Gujarat Ambuja Cement having been recommended by the Investment Committee which was a separate Department in a meeting held on 27.4.1992; purchase was not in violation of any law.
22 xvi. The learned Special Judge committed a serious error in recording the judgment of conviction against each of the appellants herein without considering their individual involvement.
Mr. Mariarputham learned counsel appearing on behalf of the C.B.I., on the other hand, urged:
i. Conspiracy amongst the accused had clearly been established by the evidence of S.V. Prabhu (PW 44), Bhaskar Roy Choudhary (PW 45) and R.L. Joshi (PW 7).
ii. The manner in which the transactions had been carried through and in particular accused No. 1's meeting with Harshad Mehta on 13.3.1992 as also the transactions taking place in quick succession thereafter clearly establish that all the accused were parties to the conspiracy, which would appear from the following:
a. The decision was taken to make available a sum of Rs. 50 crores to Harshad Mehta by way of Bill Discounting.
b. A branch which had not been dealing with Bill Discounting of such high value had been chosen which demonstratively proved that the transactions in question were not ordinary commercial transactions as the branch which had been dealing with such bill discounting transactions was D.N. Road branch and not the Nariman Point 23 Branch. The said branch was purposely chosen as the officers working there were not familiar with Bill discounting transactions.
c. Immediately after the meeting between accused No. 1 and Harshad Mehta on 13.3.1992, resolutions were passed by Growmore and Mazda for opening accounts with a view to obtaining Rs. 50 crores from the Bank. Transactions were shown to have been entered into between M/s J.H. Mehta on the one hand and Mazda and Growmore on the other, purporting to sell shares worth Rs. 50 crores on 20.3.1992; on the strength whereof two Bills of exchange were prepared by M/s J.H. Mehta and purported to have been accepted by Growmore and Mazda. The same were presented to UCO Bank, Nariman Point branch for discounting. The said Bills of Exchange were not accompanied by the original credit note relating to the alleged sale transaction of share securities. The Bills of Exchange were discounted and payment of Rs.50 crores was made. The accounts for facilitating the said bill discounting had been opened on the same day. No verification as per the required procedure was undertaken.
d. No security was taken even before the Bills of Exchange were discounted, although rediscounting had been carried out by two other 24 Banks. Even the we ance promissory notes for rediscounting was issued by the UCO Bank much later.
e. When there was default in retiring the Bills of Exchange with a view to cover up the matter, shares worth Rs. 49.50 crores were purchased from J.H. Mehta; as a result whereof, the said amount was made available to it for the purpose of retiring the Bills of Exchange.
The acquisition of shares was neither bona fide nor in the interest of the Bank.
f. Mazda had approached Hamam Street Branch of UCO Bank for bill discounting facility upto the limit of Rs. 50 crores. However the same had not been granted as it had been found that Mazda did not satisfy the eligibility criterion, as would appear from the evidence of PW 2, Mazda would have been entitled to a maximum credit limit only of Rs. 2.76 crores; but even then transactions worth Rs. 50 crores were undertaken with J.H. Mehta, Growmore and Mazda.
g. Guidelines laid down in the Manual of UCO Bank (Exhibit 239) and directions of the Reserve Bank of India dated 5.9.1988, which have statutory force, stipulated that the credit limit be fixed only after verifying the creditworthiness of the customer wherefor it was necessary to compile the credit reports and accordingly the credit 25 limit should have been sanctioned only thereafter. In terms of the said directions, if the Bills of Exchange exceeded Rs. 25,000/-, credit report on the drawee on whom the Bill was drawn was required to be obtained. Security was also required to be taken and it was the duty of the Manager to satisfy himself that the Bills of Exchange were a result of genuine trade transactions. But in the instant case, the said procedures were given a complete go by.
h. Accused No. 1 and Accused No. 2 being the officers of the Bank and having dominion over the funds thereof could not part with the same in favour of any person without complying with the statutory requirements. Even if the Manual of the UCO Bank and the Circular of Reserve Bank of India were not statutory in nature, the transactions having dishonestly been carried out, the same would satisfy the requirements of Section 405 read with Section 24 of the Indian Penal Code.
i. By reason of such transaction wrongful loss was caused to the Bank and wrongful gain was made by the Harshad Mehta group.
Money of a Public Sector Bank was diverted to share/securities market transactions in violation of law and the prosecution therefore must be held to have proved the charges made against the accused.
26 The two banker's cheque issued by the Syndicate Bank and State Bank of Patiala, although were not per se securities but as by reason thereof liability to pay interest had been cast on UCO Bank.
j. Accused No. 6 being Chief Executive of Mazda, Accused No. 7 being Vice President of Mazda and Accused No. 9 being Vice President of Growmore, they were also party to the conspiracy for commission of the offence of criminal breach of trust.
JURISDICTION OF THE SPECIAL COURT The history as regards constitution of the Special Courts has been noticed by us heretobefore. Its jurisdiction, inter alia, is confined to trial of offence relating to transactions in securities and for matters connected therewith or incidental thereto committed during the period between 1.4.1991 and 6.6.1992. The alleged offence had been committed admittedly during the staid period.
Section 2(c) of the 1992 Act defines "securities" to mean :- "(c) "securities" includes-- (i) shares, scrips, stocks, bonds, debentures, debenture stock, units of the Unit Trust of India or any other mutual fund or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ii) Government securities; and (iii) rights or interests in securities;"
27 Sub-section (1) of Section 3 of the 1992 Act provides for appointment and functions of custodian. Sub-section (2) of Section 3 enables the custodian, on being satisfied on information being received that any person had been involved in any offence relating to transaction in securities after the 1st day of April, 1991 and on and before the 6th June, 1992, to notify the name of such person in the Official Gazette. Section 4 provides for cancellation of contracts entered into fraudulently. Section 5 provides for the establishment of the Special Court. Section 6 empowers the Special Court to take cognizance of or try such cases which are instituted before it or transferred to it. Jurisdiction of the Special Court is provided for in Section 7 of the 1992 Act. It starts with a non obstante clause providing that any prosecution in respect of any offence referred to in sub-section (2) of Section 3 shall be instituted only in the Special Court and any prosecution in respect of such offence pending in any Court shall stand transferred to the Special Court. Section 9 provides for the procedure and powers of the Special Court.
Let us, at the outset, deal with contention of learned counsel for the appellant that having regard to the definition of `securities' as contained in 28 Section 2(c) of the 1992 Act which does not involve `bill discounting and rediscounting', the Special Court had no jurisdiction to try the accused for the offences alleged against them.
The definition of `securities' is an inclusive one. It is not exhaustive.
It takes within its purview not only the matters specified therein but also all other types of securities as commonly understood. The term `securities', thus, should be given an expansive meaning.
In State of Bombay and others v. The Hospital Mazoor Sabha and others, AIR 1960 SC 610 this Court while interpreting the definition of "industry" as contained in Section 2(j) of the Industrial Disputes Act, 1947 held as under:- "It is obvious that the words used is an inclusive definition denote extension and cannot be treated as restricted in any sense. (Vide : Stroud;s Judicial Dictionary", Vol. , p. 1415). Where we are dealing with an inclusive definition it would be inappropriate to put a restrictive interpretation upon terms of wider denotation"
(See also Regional Director, Employees State Insurance Corporation v.
High Land Coffee Works of P.X.S. Saldanha and sons and another, [ (1991) 3 SCC 617).
29 In Commercial Taxation Officer, Udaipur v. Rajasthan Taxchem Ltd.[(2007) 3 SCC 124, this Court stated:
"22. We have already extracted the definition of raw material under Section 2(34) which specifically includes fuel required for the purpose of manufacture as raw material. The word includes gives a wider meaning to the words or phrases in the statute. The word includes is usually used in the interpretation clause in order to enlarge the meaning of the words in the statute. When the word include is used in the words or phrases, it must be construed as comprehending not only such things as they signify according to their nature and impact but also those things which the interpretation clause declares they shall include."
This jurisdiction of the Special Court is not confined to the scam relating to securities alone but utilization of any amount relating to transactions in securities and for matters connected therewith or incidental thereto.
The jurisdiction of the Special Court is exclusive one. It exercises original jurisdiction to try offences relating to security scam. The said Act having regard to the peculiar nature of offence sought to be dealt with, should receive a liberal construction.
In Harshad S. Mehta and others v. State of Maharashtra, [(2001) 8 SCC 257], this Court held:
30 "The use of different words in Sections 6 and 7 of the Act as already noticed earlier also show that the words in Section 7 that the prosecution for any offence shall be instituted only in Special Court deserve a liberal and wider construction."
We may also notice another decision of this Court in L.S. Synthetics Ltd. v. Fairgrowth Financial Services Ltd. and another, [(2004) 11 SCC 456] wherein it was held as under:- "18. The jurisdiction of the Special Court is of wide amplitude. Subject to a decision in appeal there from, its decision is final."
Jurisdiction of the Special Court is required to be determined with regard to the provisions of Section 6 of the Code of Criminal Procedure , 1973. The Act is a special Act. It contains a non obstante clause. It shall, thus, prevail over any other Act. [See - Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. and others, [(2001) 3 SCC 71].
An offence is committed with a view to circumvent the law. An apparent state of affairs need not be the real state of affairs. A simple transaction of discounting and rediscounting on its face may appear to be genuine and lawful but there may be underlying purposes behind it. It has not been disputed that Harshad Mehta was dealing in the money market and 31 securities market and that Growmore although being a public limited company, was controlled by Harshad Mehta. Both Mazda as also Growmore indisputably were dealing in the business of selling and buying of shares.
Further M/s J.H. Mehta, was the proprietary concern of the wife of Harshad Mehta. She used to execute business through her constituted attorney.
General Power of Attorney had also been issued by the aforementioned Companies in favour of the accused persons. The Harshad Mehta Group of Companies were therefore dealing in securities.
The method of siphoning of the funds of UCO Bank through discounting of two bills of exchange was unlawful. Both the bills of exchange were shown to have been issued in relation to transaction in shares between M/s JH Mehta, Growmore and Mazda.
For the purpose of arranging repayment of the amount, shares were purchased by UCO Bank through M/s VB Desai and Co. The offence of conspiracy to commit the offence of Breach of trust, thus, related to the transaction in securities.
32 It is therefore not a case where it can be said that the Special Court lacked inherent jurisdiction in trying the offence said to have been committed by the accused.
RBI CIRCULAR Banking business is controlled by several Acts of Parliament. We need not go into the history relating thereto in great details being not necessary.
Suffice it to say that UCO Bank is a Nationalized Bank having been taken over under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. It has various branches in Bombay; its main Branch being at D.N. Road. Its Nariman Point Branch was mainly dealing with foreign exchanges. The business as regards discounting and rediscounting usually used to be carried out at the main branch.
The Bank, inter alia, is regulated under the provisions of the Reserve Bank of India Act, 1934 as also the Banking Regulation Act, 1949 (for short, "the 1949 Act") Its directions are statutory in character.
33 In terms of Section 35A of the 1949 Act, the Reserve Bank of India is empowered to issue directions to the Banks in public interest; or in the interest of Banking policy; or 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 interest of the Banking Company; or to secure the proper management of any Banking company generally. The Reserve Bank of India in terms of Section 21 of the 1949 Act is empowered to control advances by banking companies and issue necessary directions in this behalf.
The Reserve Bank of India, therefore, has the requisite power to issue direction to Banks in relation to discounting and rediscounting of bills of exchange and those directions issued by the Reserve Bank of India have statutory force and, thus, can be termed as law in force. {See also Corporation Bank vs. D.S. Gowda & Anr. [(1994) 5 SCC 213] & Central Bank of India vs. Ravindra & Ors. [(2002) 1 SCC 367]} All public sector banks are bound thereby.
Pursuant to or in furtherance of the said power, the Reserve Bank of India issued a Circular dated 5.9.1988 titled "BILLS REDISCOUNTING 34 SCHEME -- INTRODUCTION OF USANCE PROMISSORY NOTES - PROCEDURE THEREFOR", clauses 2(iii) and 2(v) whereof read as under "2(iii) The usance promissory note should be backed by unencumbered usance Bills of Exchange of at least equal value not fallen due for payment, drawn or endorsed in its favour, arising out of bonafide commercial or trade transactions on which the required stamp duty has been paid. The discounting bank will hold and continue to hold such unencumbered usance bills till the date of maturity of the usance promissory note.
2(v) It would be desirable to centralize the function and confine the authority to draw the usance promissory notes etc. at the bank's main Funds Management Centre."
We may also notice that the Bank had issued a Manual, known as the "UCO Bank Manual of Instructions on Bill Discounting" relating to discounting of Bills of Exchange, laying down the procedure there for, relevant portions whereof (marked as Exhibit 239) read as under:
"2.5 The attention of the Sanctioning Authority should be specifically drawn:
(a) If bills drawn on places where the bank does not have branch are to be purchased.
(b) If house bills are to be purchased under the limit.
House bills are bills where drawer and drawee are identical or connected persons. Purchase of house bills obviously involves greater risk than the purchaser of bills drawn on unconnected, independent drawees. Purchase of house bills should be recommended for sanction only when the credit rating, business integrity, past dealings and business methods of the customer are highly 35 satisfactory and he is considered good for the limit on his single signature."
THE EFFECT OF THE CIRCULAR LETTER Accused Nos. 1, 2 and 8 being public servants, they were bound by the aforementioned Circulars having been issued by the Reserve Bank of India.
Mr. Jethmalani, however, has relied upon the decision in B.O.I.
Finance Ltd. v. Custodian & ors. 1997 (10) SCC 488, wherein this Court while dealing with a Circular letter which had been marked confidential opined that such a Circular did not bind third parties, stating:
"22. With regard to the finding of the Special Court that the transactions in question were illegal, as they were in contravention of the circulars which were issued by the Reserve Bank of India under the provision of the Act, it was contended by Mr. Cooper, learned Counsel, that the circulars issued were no more than guidelines which were required to be followed by the Bank and they were not mandatory in nature. Elaborating this contention, Mr. Cooper submitted that the Banking Companies Act contains provisions which enable the Reserve Bank of India to issue directions which were mandatory and also give advice to the banks. Our attention was drawn to Sections 21 and 35A of the said Act and it was contended that the directions which are issued by the Reserve Bank of India under these two provisions are clearly mandatory. On the other hand, Section 36(1)(a) & (1)(b) gives power to the Reserve Bank of India to give advice 36 or lend assistance and any action taken there under cannot be regarded as mandatory. It was submitted that the language of the circulars dated 14.4.1987 and 1.12.1987, which prohibit the banks from entering into buying back arrangements, clearly shows that the said circulars were only in the nature of advice and must be regarded as having been issued under Section 36(1)(a) and (1)(b) of the Act."
Having regard to the provisions of Section 36(1)(a) and (b) of the Banking Regulation Act, it was held that they were only in the nature of an advice and not binding on the third parties.
The distinction between exercise of jurisdiction under the enabling provisions contained in Section 36(1) and the ones under Sections 21 and 35A of the Banking Regulation Act and the provisions contained in Section 45L of the Reserve Bank of India Act, 1934 is absolutely clear and unambiguous.
In terms of Section 36, the Reserve Bank of India may caution or prohibit the Banking Companies but in terms of Sections 21 and 35A of 1949 Act it can issue binding directions. The directions have been issued by the Reserve Bank of India in regard to rediscounting.
37 The said decision therefore is not applicable to the facts and circumstances of this case.
Whether a circular letter issued by a statutory authority would be binding or not or whether the same has a statutory force, would depend upon the nature of the statute. For the said purpose, the intention of the legislature must be considered. Having regard to the fact that the Reserve Bank of India exercises control over the Banking Companies, we are of the opinion that the said Circular letter was binding on the Banking Companies.
The officials of UCO Bank were, therefore, bound by the said circular letter.
The Madhya Pradesh High Court in The State of Madhya Pradesh v. Ramcharan [AIR 1977 MP 68] held:
"6. Although the Constitution does not contain any generic definition of law, it defines "law" for purposes of Article 13 to include "any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the force of law". Article 366(10) of the Constitution also defines the expression "existing law" to mean "any law, Ordinance, Order, bye-law, rule or regulation passed or made before the commencement of this Constitution by any legislature authority or person having power to make such law, Ordinance, order, bye- law, rule or regulation". Another definition which is relevant here is the definition of the expression "Indian law" in the General Clauses Act, 1897. Section 3(29) of this Act defines "Indian Law" to mean "any Act, 38 Ordinance, regulation, rule, order or bye-law, which before the commencement of the Constitution had the force of law in any Province of India or part thereof and hereafter has the force of law in any Part A State or Part C State or part thereof, but does not include any Act of Parliament of the United Kingdom or any Order in Council, rule or other instrument made under such Act".
These definitions go to confirm that under our legal order "law" does not include only legislative enactments but it also includes rules, orders, notifications etc. made or issued by the Government or any subordinate authority in the exercise of delegated legislative power.
... 7. The question relating to a post-constitution order or notification in the context whether it amounts to law was considered by the Supreme Court in Jayantilal Amratlal v F. N. Rana, AIR 1964 SC 648 = 1964-5 SCR 294. ...The Court further observed as follows:
"This is not to say that every order issued by an executive authority has the force of law. If the order is purely administrative, or is not issued in exercise of any statutory authority it may not have the force of law. But where a general order is issued even by an executive authority which confers power exercisable under a statute, and which thereby in substance modifies or adds to the statute, such conferment of powers must be regarded as having the force of law." ..."
It therefore stands established from the above that UCO Bank could only have discounted the bills of exchange out of bonafide commercial transactions as had been provided under the RBI circulars which were statutorily binding on UCO Bank.
So far as the submission of the learned counsel that they had no knowledge of the circulars issued by RBI is concerned, we would affirm the 39 findings of the special judge that the conduct of the accused clearly shows to the contrary that they in fact did have knowledge of the RBI Circulars in question. They otherwise would not have gone to the length of creating documents to show that the bills of exchange had been issued because of a sale of shares of M/s JH Mehta to Growmore and Mazda. If they did not have the knowledge of the said circulars and if the bank had been willing to discount the bills of exchange, a simple accommodation Bill of Exchange could have been executed. In order that the bank could discount a bill of exchange, it was necessary that it related to a bonafide or genuine commercial transaction and it was because of this requirement that the accused persons had gone to the extent of preparing false documents to give an appearance that the discounting related to bona fide commercial transaction.
CRIMINAL BREACH OF TRUST Section 405 of the Indian Penal Code defines Criminal Breach of Trust in the following terms:
"405. Criminal breach of trust - Whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his own use that property, or dishonestly uses or disposes of that property in violation of any direction of law 40 prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or willfully suffers any other person so to do, commits "criminal breach of trust".
An offence of criminal breach of trust by a public servant attracts the penal provision of Section 409 of the Indian Penal Code. Indisputably, the Bank entrusted its funds to its officers; they had the dominion over the said property; they were holding the said money in trust which is an comprehensive expression, inter alia, to denote a relationship of master and servant. The act of Criminal Breach of Trust per se may involve a civil wrong but a breach of trust with an ingredient of mens rea would give rise to a criminal prosecution as well. The ingredients of Section 409 are:
1. Accused must be a Public servant, merchant, agent, a factor, broker or an attorney.
2. In his such capacity he must be entrusted with some property or must have gained dominion there over.
3. He must have committed criminal breach of trust.
The criminal breach of trust would, inter alia, mean using or disposing of the property by a person who is entrusted with or has otherwise dominion there over. Such an act must not only be done dishonestly but also in 41 violation of any direction of law or any contract express or implied relating to carrying out the trust. It is one thing to say that any Circular Letter issued by the Reserve Bank of India being not within the public domain would not be law but it would be another thing to say that it did not contain any direction of law so as to attract the liability in terms of Section 405 of the Indian Penal Code. Lawful directions were issued by the Reserve Bank of India. The Circular Letter was meant for all Scheduled Banks. The authorities and/or officers running the affairs of the Scheduled Banks therefore were aware thereof. If it is binding on the Banks, it would be binding on the officers. Any act of omission or commission on the part of any authority of the Bank would amount to acting in violation of any direction of law. A direction of law need not be a law made by the Parliament or a Legislature; it may be made by an authority having the power therefor; the law could be a subordinate legislation, a notification or even a custom.
Indisputably, the higher authorities of the bank were entrusted with or otherwise had dominion over the properties of the bank. They were dealing with public funds. Indisputably again they were required to apply the same in terms of the Circulars issued by the Bank as also the Reserve Bank of India. It has been accepted at the Bar that failure on the part of the officers 42 of the Bank to abide by the directives issued under the Circulars would result in civil action. Subjecting the bank to a