The Government of India and the Reserve Bank of India (RBI) have brought about several measures to resolve non-performing assets (NPAs). Several NPAs may have arisen from credit facilities that were sanctioned by banks as a commercial decision taken in good faith and in the ordinary course of conducting banking business. Equally there could be cases where NPAs arise as a result of siphoning of funds by the borrower or promoters or other connected entities.
Several serving and retired bankers have recently been charged and/or arrested on suspicion of criminal misconduct over alleged loan fraud under the Prevention of Corruption Act, 1988 (Principal Act). There have been instances of arrest of bank officials without any proof of quid pro quo or wrongdoings.
Whilst it is important to take wrongdoers to task, it is equally important to protect innocent bankers from unwarranted criminal investigation as subjecting bankers to criminal investigations without any evidence of fraud or wrongdoings will bring decision making to a halt.
In order to alleviate the fears of the banking community, certain amendments have been made to the Principal Act by way of The Prevention of Corruption (Amendment) Act, 2013 (the Amendment Act), which received the Presidential assent on July 26, 2018. One of the major changes introduced is to restrict the ambit of ‘criminal misconduct’ to fraudulent or dishonest misappropriation and an element of quid pro quo in dealings by public servants. In this article, we provide an overview of the main changes in the Amendment Act
Criminal Misconduct Under Principal Act: Position Prior to Amendment Act
Applicability to Bank Officials
Whilst the definition of “public servant” is clear in its application to employees of public sector banks, it was generally considered that the provisions of the Principal Act were not applicable to the employees of private sector banks. However, this position changed in 2016 in light of the Hon’ble Supreme Court’s decision in Central Bureau of Investigation Vs. Ramesh Gelli and others, (2016) 3 SCC 788, where the Supreme Court has held that the chairman, directors and officers of a private bank could be considered to be ‘public servants’ for the purpose of their prosecution in respect of offences punishable under the provisions of the Principal Act.
Criminal Misconduct: No Requirement of Quid Pro Quo
Charges of criminal misconduct have been invoked frequently to charge and/or arrest bankers involved with bad loans. Under the unamended Section 13 of the Principal Act, ‘criminal misconduct’ by a public servant covered, inter alia, the following offences: (i) fraudulent misappropriation of property in the control of a public servant; (ii) possession of monetary resources or property disproportionate to known sources of income; (iii) habitually taking a bribe or valuable thing for free; (iv) obtaining, either for himself or for any other person, a valuable thing or pecuniary advantage illegally either for himself or for any other person; (v) abuse of position to obtain, either for himself or for any other person, a valuable thing or monetary reward; (vi) obtaining, either for himself or for any other person, a valuable thing or monetary reward without public interest.
Every loan that is sanctioned to a borrower or every decision to restructure an existing loan that may reduce the interest/principal payable by a borrower confers some pecuniary advantage to that borrower. Prior to the Amendment Act, if such borrower’s account turned into an NPA, a criminal investigation could be initiated against any banker involved in sanctioning/restructuring the loan account even if such decisions were taken in good faith and there was no proof of quid pro quo. Such banker could also be arrested as part of investigation. No approval from any authority was required prior to such arrest.
Significant Changes Introduced by the Amendment Act
Ambit of Criminal Misconduct Narrowed and Requirement of Quid Pro Quo Introduced
The Amendment Act has substituted Section 13(1). Now, ‘criminal misconduct’ is restricted to the following 2 offences: (i) dishonest or fraudulent misappropriation or otherwise conversion of any property entrusted to a public servant or any property under his control as a public servant or allows any other person so to do; or (ii) if the public servant intentionally enriches himself illicitly during the period of his office.
The use of the words ‘intentionally enriches himself’ have also introduced the element of ‘mens rea’ in certain cases of criminal misconduct. An explanation to the Sec. 13(1) states that it shall be presumed that the person intentionally enriches himself if he or any person on his behalf, is in possession of or has, at any time during the period of his office, been in possession of pecuniary resources or property disproportionate to his known sources of income which the public servant cannot satisfactorily account for.
Thus, if someone has misused his position to acquire assets for himself in return of giving undue favours, such person will be punished. It accords some protection to innocent persons and narrows the ability to question commercial decisions to cases of fraudulent misappropriation or quid pro quo. Merely because a loan has gone bad cannot be the ground to charge and/or arrest a banker.
Prior Approval before Investigation
The introduction of Section 17A grants another level of protection as it requires prior approval of an appropriate authority to conduct any enquiry or inquiry or investigation into any offence alleged to have been committed by a current public servant or a former public servant. This provisions will ensure that investigating agencies will initiate investigation (and possibly arrest as part thereof) only if they have strong proof indicating either fraud or quid pro quo by a banker. Honest bank officials who had taken decisions in good faith and without quid pro quo will be protected from loss of liberty by arrest.
Section 17A provides that no approval is required before arresting a person caught taking bribe on the spot. It further mandates the concerned authority to convey its decision within 3 months, which period may be extended by 1 month subject to such extension being supported by reasons recorded in writing.
In the past, an executive order issued by the Central Government to Central Bureau of Investigation (CBI) providing for prior approval before initiating enquiry against a decision-making level officer (such as Joint Secretary or equivalent or above in Central Government) was struck down in Vineet Narain vs. Union of India, (1998) 1 SCC 226, on the ground, inter alia, that such requirement has to be provided in legislation and not in an executive order. Thereafter, the Delhi Special Police Establishment Act, 1946 was amended to provide for prior approval for investigation of offences alleged to be committed by officers of the level of Joint Secretary and above. This again was struck down in Subramaniam Swamy vs. Director, Central Bureau of Investigation, (2014) 8 SCC 682 on the ground that it was discriminatory. Section 17A seeks to address both these issues by (a) giving legislative backing to the requirement to seek prior sanction; and (b) making it applicable to all public servants.
Before the Amendment Act, previous sanction of the appropriate authority was required only for prosecution of public servants (under Section 19) but not before commencing enquiry or inquiry or investigation. This is a significant change and barrier.
Prior Sanction Required for Prosecution of Former Public Servants
Before the Amendment Act, prior sanction for prosecution under Section 19, was only required for public servants who held public office at the time when the offence was brought before the Court. Therefore, a public servant who was no longer in office, could be prosecuted for offences committed at the time when he was a public servant, without any sanction. This position has been altered by the Amendment Act. Now, a sanction will also be required to prosecute public servants who have ceased to hold any public office.
The Amendment Act seeks to strike the right balance between bona fide decisions making and misuse of position to unjustly enrich oneself. It will benefit bankers who can go about discharging their duties without the fear of their decisions being questioned on grounds of corruption. It is especially positive in dealing with resolution of stressed assets where any decision taken by bankers may grant some advantage to the borrower or a resolution applicant in cases involving large loan accounts.