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legal | IST

Bankers rattled by arrest of ex-SBI Chief in a case cleared by NCLT and Supreme Court

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What worries bankers and all financial sector experts is the arbitrariness of the process and the few safeguards available to a citizen

The Indian Banks' Association has written to the Rajasthan Chief Minister and the Central Department of Financial Services, protesting arrest of the former State Bank of India Chairman Pratip Chaudhuri in a case of loan sale by an asset reconstruction company in which Chaudhuri is a director.
Former SBI chairman Rajnish Kumar said the arrest is "high-handed action" and "an error of judgement."
Banking sources say the back story is as follows: 'Garh Rajwada' was a hotel project in Jaisalmer owned by the Gaudavan Group which took a loan of Rs 25 crore from SBI in 2007 to construct a hotel. The project remained incomplete for over three years and the account slipped into NPA in June 2010. Unable to recover the loan even through the debt recovery tribunal, the bank sold the loan to Alchemist Asset Reconstruction Company (AARC) for Rs 25 crore (getting principal, and having to forfeit interest). It is common for banks to sell loans of defaulting borrowers to ARCs, which are companies that specialise in recovering or restructuring stressed companies. Banks are supposed to follow a board-vetted policy for this. The loan was sold by SBI in 2014, whereas Pratip Chaudhuri had retired from SBI in 2013.
AARC, after acquiring the loan from SBI, tried to take possession of the company through the debt recovery tribunals but was unsuccessful. Finally in 2017, AARC took it under the Insolvency and Bankruptcy Law to the NCLT. The journey through the DRTs and to the NCLT was met with repeated legal reprisals from the promoters, the Gaudavan Group. They filed an FIR at the Sardar Thana Jaisalmer, alleging SBI sold the property cheap ( which is incorrect because SBI sold the loan, not the company). After investigation, the police recommended closing the matter, since they saw it as a civil offence, not a criminal one.
The promoters then tried to seek arbitration, which the NCLT quashed said an AARC press release. The promoters then secured an order in their favour from the District Judge, Jaislamer, which was stayed by the Supreme Court in 2017. The apex court also quashed an FIR against AARC and the arbitration demand.
Back in the NCLT, under the corporate insolvency resolution process, five bidders came forward to buy the company and AARC as the creditor voted for JCF Finance. As per the NCLT's judgement, which was accessed by CNBC-TV18, the promoters had raised objections in the proceedings before the NCLT to JCF Finance, because JCF Finance had extended a loan to AARC to purchase the loan from SBI in the first place. Retired Chief Justice MM Kumar, who was heading the Delhi NCLT bench, over-ruled the objection on several points and approved the sale of the company to JCF Finance. The promoters appealed against the decision in the NCLAT and then the Supreme Court , both upheld the NCLT decision.
So what's new. AARC says, unknown to them, the promoters had also filed a protest petition before the Jaisalmer District Judge in 2017 against closure of their earlier FIR. This protest petition came up last week, and the district judge issued non-bailable warrants against Pratip Chaudhuri and Alok Dhir, promoter of Alchemist.
SBI said in a press release on Monday, "the borrower had initially filed an FIR with the State Police against the sale of asset to ARC. Aggrieved against the negative closure report filed by Police authorities, the borrower had filed a 'Protest petition' before the Hon'ble CJM Court. Incidentally SBI was not made a party to this case. All the directors of that ARC including Mr Chaudhuri, who joined their Board in Oct. 2014, have been named in the said case."
What worries bankers and all financial sector experts is the arbitrariness of the process and the few safeguards available to a citizen. Firstly can the police of one state arrest an individual in another state. Secondly, shouldn't there be some initial summons where a citizen can defend himself and prove his innocence. More bizarre is that a non bailable warrant is issued and bail denied, on the same charge, which a few years ago the police appeared to have found not criminal and hence not eligible for an FIR. Even the Supreme Court had quashed an FIR issued earlier against AARC.
Media reports suggest that complaint against Chaudhuri and Alok Dhir is the old one: that the sale of the Gaudavan Hotel to AARC by SBI was much lower than the market price and hence fraudulent. Bankers say such sales to ARCs are governed by well laid down processes.
Former Chairman and MD of Bank of Baroda Mr SS Mundra, who later became RBI deputy governor, also worried that such summary arrests are a dangerous precedent. They will scare bankers from taking decisions.
RK Bansal, a former ED of IDBI Bank, said not only bankers but all those involved in the IBC process such as creditors, buyers, and independent directors on the boards of involved companies are in danger of summary arrests even when a distressed company has been sold under the direction of the NCLT and the apex court.