Public Sector Banks Become Judge & Executioner At Once; Bombay HC Sets Aside LOCs Issued By PSBs

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The Bombay High Court last month quashed and set aside all Look Out Circulars(LOCs) issued by Public Sector Banks (PSBs) holding that they are in violation of Fundamental Rights.
India Finance and Banking
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The Bombay High Court last month quashed and set aside all Look Out Circulars(LOCs) issued by Public Sector Banks (PSBs) holding that they are in violation of Fundamental Rights. These LOCs are issued under a set of 'Office Memoranda" (OMs) and the OMs have been amended periodically.

Division bench of Justice GS Patel and Justice Madhav Jamdar were hearing a batch of petitions challenging that portion of the OMs which, by amendment, allows public sector banks to request the issuance of a LOC against individuals said to be in default.

Once issued, an LOC of this kind (triggered by a request from a public sector bank) is typically deployed to prevent the individual in question from travelling overseas. An almost invariable feature is that the individual has no prior notice of the issuance of the LOC, and is not even given a copy of the LOC. He or she is merely told that there is such an LOC issued by a particular bank and the person cannot, therefore, be allowed to board the flight.


According to the Petitioners, the amendments to the OMs that allow PSBs to trigger or request such LOCs are all ultra vires Article 21 of the Constitution of India. These are, they say, without the authority of 'law' as understood under Article 13 of the Constitution of India. Mere executive instructions cannot trammel fundamental rights. Besides, the entire field of regulating travel is fully occupied by a statute, namely the Passports Act, 1967.

On the other hand, it was argued on behalf of the PSBs that the Petitioners are, defaulters; and the defaults are not trivial amounts. These are 'public funds' and many of these persons have deliberately avoided their obligations to repay. Moreover, they present a flight risk. If allowed to travel freely, it will be impossible to get them back into local jurisdiction for pursuing or enforcing the banks' claims to recover huge debts. Thus, allowing such defaulters to freely travel overseas is detrimental to the economic interests of India. The banks may have other modes of recovery, civil and criminal, which they are pursuing, but the continued presence of these individuals within local territorial limits is essential to safeguard against vast financial and economic loss to the PSBs and the nation as a whole. There is no fundamental right to defraud and default, and one who is a defaulter cannot be entitled to invoke such fundamental freedoms, the PSBs contended.

Origins Of LOCs & Their Evolution

The first OM in time is of September 5, 1979. It is still not available in the public domain. There is an amendment of December 27, 2000, also unavailable. Our first tangible reference point is an OM of October 27, 2010. This explains that LOCs are issued to keep a watch on the arrival and departure of foreigners and Indians. It notes, apart from the MHA, the authorities empowered to issue LOCs. These include: the Ministry of External Affairs, Directorate of Revenue, CBI, Interpol, Regional Passport Officers, Customs and Income Tax Departments and police authorities from various states. As per the 2010 OM, LOCs lapse after a year.

On December 5, 2017, this 2010 OM was amended. It now said that 'in exceptional cases', the departure of a person from India could be denied. Thus, this 2017 amendment introduced the 'economic interests of India' in the 'exceptional case' category.

Thereafter, a communication dated October 4, 2018 issued by the Ministry of Finance requested the MHA to include the following in the category of authorities who could trigger a LOC request in clause 8(b)- Chairman (State Bank of India) /Managing Directors and Chief Executive Officers (MD & CEOs) of all other Public Sector Banks. On October 12, 2018, the MHA accepted the request and made the addition noted above. This is the amendment that is being used against the Petitioners.

The most recent amendment is dated February 22, 2021, it stipulates that LOCs will be automatically renewed, unless the originating agency makes a deletion request. This is a complete reversal of the earlier one-year lifespan provision.

Observations & Judgment

At the outset, Court said – "The fact that the public sector bank is directly concerned with the recovery of debt and is yet armed with this unilateral power only makes matters worse... These are fundamental rights; and the right to Article 21 cannot be abrogated in this fashion. Here, the public sector bank becomes judge and executioner at once. The canon of nemo judex in causa sua is automatically violated."

Answering to the contentions on behalf of PSBs, Court observed-

"But just how many such financial fugitives are there, according to the banks, persons who have 'settled abroad' and therefore present this huge problem to PSBs? Paragraph 3 of Ms Maravarman's note tell us. There are five. That is all. Exactly five: Vijay Mallya, Nirav Modi, Mehul Choksi, Jatin Mehta and "Sandesnas (Sterling Biotech)" (sic; presumably Nitin Sandesara and family). This, we are asked to believe, is such a monumental problem that every single borrower from a PSB, with no regard at all to degree, must be lumped in the class."

Thereafter, the bench asked- "Is it to be assumed or pre-supposed by a court that just because a borrower is travelling abroad therefore he is bound to settle abroad and flee the country?

The bench noted-

"Consequently, on the question of the Article 14 challenge in relation to impermissible or invalid classification by inclusion of only PSBs (through their Chairmen, Managing Directors and Chief Executive Officers) is ultra vires Article 14 as being an impermissible and invalid classification, and being manifestly arbitrary. Clause 8(b)(xv) of 2010 amended OM (equivalent to Clause 6(B)(xv) of the 2021 consolidated OM) is struck down."

Finally, Court responded to the point that the amendments to OMs were in public interest –

"Restrictions are narrow and limited; freedoms are not. They are, indeed, infinitely elastic, and nothing demonstrates this better than the steady expansion of the ambit of Article 21 over the last six or seven decades.

We state this plainly as our understanding of the law: no amount of 'public interest' can substitute for a 'procedure established by law', i.e., by a statute, statutory rule or statutory regulation in the matter of deprivation of the right to life and personal liberty guaranteed under Article 21 of the Constitution of India."

Click Here To Read/View Judgment

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