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BANKING FRAUD IN INDIA :

A REVIEW

2018-19
A DISSERTATION SUBMITTED TO
DEPARTMENT OF LAW,
MANIPAL UNIVERSITY, JAIPUR

In Partial Fulfilment of the Requirements


for the degree of

LL.M (Master of Laws)

Under the Supervision of Submitted by


Dr. Kuldeep Singh Kamlesh Roj
Associate Professor Reg. No.: 1801304007
Department of Law
Manipal University, Jaipur

DEPARTMENT OF LAW
MANIPAL UNIVERSITY, JAIPUR
RAJASTHAN-303007
DECLARATION

This dissertation is presentation of my original research work.


Wherever contributions of others are involved, every effort is made to
indicate this clearly, with due reference to the literature, and
acknowledgement of collaborative research and discussion.

The work was done under the guidance of Dr. Kuldeep Singh, at
Manipal University, Jaipur.

Kamlesh Roj

(ii)
Dr. Kuldeep Singh
Associate Professor
Department of Law,
Manipal University, Jaipur
Rajasthan-303007

CERTIFICATE
This is to certify that this dissertation entitled "BANKING FRAUD
IN INDIA : A REVIEW" submitted by Kamlesh Roj, for the degree of
Master of Laws is the record of bonafide research carried out under my
guidance and supervision from March 2018-2019 in Department of Law,
Manipal University, Jaipur. This dissertation, or any part thereof, has not
been submitted elsewhere for any other degree.

Jaipur Dr. Kuldeep Singh

(Research Supervisor)

(iii)
PREFACE

When after incessant activity and deep study on research the final
phase of her endeavor and steps aside to have a glimpse o the work that she
has undertaken and attempts to appreciate the final product, then along
with the particulars o the end result, the indebtedness that she owes to
many individuals during the whole process comes to the fore.

My experience when I present the result of my study to the world


has not been different. There are those who had been with me when I took
the first step of my journey and had traveled along with me guiding me
through the labyrinthine courses of the subject of study and remained with
me till the final culmination, to share my joy of the final result. There are
also those who joined me at various phases of my journey and guided me
at critical junctures and times when I needed their guidance and help the
most. They gave me guidance, directed me to the proper course and faded
away without even staking to claim my gratitude which was due to them in
abundance. Dr. Kuldeep Singh, Associate Professor, Department of Law,
Manipal University and Dr. Vijay Laxmi Sharma, Head, Department of
Law, Manipal University, Jaipur had been kind enough to accept me as
their student and guided me all along through the complexities of the
subject. They had by their scholarly advice lighted the dark alleys of the
subject and inspired me to take to un-chartered waters with confidence and
poise. When even I found myself entangled in the cobwebs of the subject,
the deftness with which they disentangled the same had left me awestruck
and instilled in me a sort of privilege to claim to be their student. Prof.
(Dr.) Mridul Srivastava, Dean, Faculty of Law, Manipal University,
Jaipur has been equally forthcoming when I needed his help. She had

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generously allotted me her valuable time for discussing the topic and had
permitted me to delve deep into her immense knowledge on the subject.

I thank, all the faculty members of the Faculty of Law, Manipal


University, Jaipur and every other members of the faculty of Law, the
office staff, the library staff and the research scholars and students,
Department of Law, Manipal University, Jaipur for their assistance and co-
operation for the completion of my study. I am also thankful to the
librarian and other staff of the library, Department of Law, Manipal
University, Jaipur for their active assistance give to me to collect materials
on the subject.

Last but not the least my thanks are also due to my Parents for their
immense support and help.

Kamlesh Roj

(v)
CONTENTS

Declaration (ii)

Certificate (iii)

Preface (iv-v)

List of Cases (vii-xi)

CHAPTER–1 INTRODUCTION 1-24

CHAPTER–2 HISTORICAL BACKGROUND 25-38

CHAPTER–3 DIFFERENT KINDS OF BANKING FRAUD

39-75

CHAPTER–4 LAWS RELATING TO BANKING FRAUD IN


INDIA 76-94

CHAPTER–5 JUDICIAL TRENDS 95-129

CHAPTER–6 CONCLUSION & SUGGESTION 130-140

BIBLIOGRAPHY 141-143

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LIST OF CASES

§ A v. B Bank (Governor and Company of the Bank of England


intervening), [1992] 1 All.E.R. 778.
§ Arunachalam Muthu v. State Bank of India, 2010 4 AWC 3289
§ Att.-Gen.’s Reference (No. 1 of 1981), [1982] 2 All.E.R. 417.
§ Att.-Gen.’s Reference (No. 1 of 1982), [1983] 2 All.E.R. 721.
§ Authorized Officer, Indian Overseas Bank v Ashok Saw Mill,
2009(2) BJ 721
§ Bank of Baroda v. Nadiad Machinery and Electrical Merchant
Credit Co-op. Soc., (2004) 1GLR 50
§ Bhagwan Das v. Creet, (1903) 31 Cal, 249
§ Bihta Co-operative Development and Cane Marketing Union Ltd. v.
Bank of Bihar, AIR 1967 SC 389
§ Bombay Dyeing and Manufacturing Co. Ltd. v. Arun Kumar
Bajoria, [2001] 107 Comp Cas 535
§ BSES v. Fenner, (2006) 2 SCC 728
§ Canara Bank v. Canara Sales Corporation, AIR 1987 1603, at para
24
§ Canara Bank v. Nuclear Power Corporation of India Ltd. [1995] 84
Comp Cas 70
§ Central Bureau of Investigation, Bank Securities and Fraud Cell Vs.
Mulangi Krishnaswamy Ashok Kumar & others, 1999(3) Bom CR
189.
§ Chola Turbo Machinery International Pvt. Ltd. v. Development
Credit Bank through its Genreal Manager and Anr., (2008) III BC
547.
§ Citizen Co-operative Bank Ltd. v. Ritesh Mittal, 2004 CTJ 211

(vii)
§ Common Cause (A Regd. Society) Vs. Union of India (UOI) and
Anr., AIR 2010 SC 3351,
§ Dawood v. Firm Pereinan Chetty, AIR 1924 Ran. 264
§ Derry v. Peek, (1889) 14 App. Cas 337 HC.
§ Divya Manaufacturing Company (P) Ltd. v. Union Bank of India
and Others, (2006)1 BC 428 (SC).
§ Dr. Rajbir Singh Dalal. Chaudhary Devi Lal University, Sirsa &
Anr., Civil Appeal No. 4908/2008
§ Duroflex Ltd. v. Johnny Mathew, [2007] 137 Comp Cas 229
§ Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works
(P) Ltd. and Anr., AIR 1997 SC 2477
§ FCS Software Solutions Ltd. v. LA Medical Devices Ltd. and Ors,
AIR 2008 SC 3137
§ Federal Bank Ltd. v. V.M. Jog Engineering Ltd. and Ors., AIR 2000
SC 3166.
§ Griffiths, [1966] 1 Q.B. 589.
§ Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., AIR
2007 SC 2798.
§ Jagatjit Industries Ltd. v. Mohan Meakin Ltd., [1994] 80 Comp Cas
411
§ Kailash Devi Girdhar v. Indian Overseas Bank & Ors.,
MANU/DD/0148/2011
§ L. Pirbhu Dayal v. JwalaBank, AIR 1958 All 374
§ M/s. Bajwa and Company v. M/s. Keshav Rai Naresh Pal Singh and
Another, 1989 PLJ 406
§ Mahatma Gandhi Sahakra Sakkare Karkhane v. National Heavy
Engineering Coop. Ltd., AIR 2007 SC 2716.
§ Mardia Chemicals Ltd. v. Union of India, AIR 2004 SC 2371
§ Maytas Infra v. Utility Energytech, 2009 (111) Bom. LR 3693
(viii)
§ Morlan v. Kelly, No. 2009-UP-002, SC Supreme Court, 2009
§ Mrs. Shobha Thampi v. Federal Bank Ltd. and Anr., [2008] 142
Comp Cas 458 (CLB).
§ N. Venkanna v. Andhra Bank, 2006(2) UC 1024
§ Oil & Natural Gas Corporation Ltd. v. SBI, Overseas Branch,
Bombay, AIR 2000 SC 2548.
§ Popat and Kotecha v. State Bank of India Staff Association, (2005)
7 SCC 510,
§ Prahlad Rai Munka v. Allahabad Bank and Anr., (2005) BC 14
§ Prakash Timbers P. Ltd. v. Smt. Sushma Shingla, [1997] 89 Comp
Cas 770 (All)
§ Punj Lloyd Insulations Ltd. v. State Bank of India and Anr., AIR
2006 Delhi 256.
§ Punjab National Bank v. Ashok Kumar & Anr, (2012)1 BC 38.
§ R v. Arrows Ltd (No.4), [1993] 3 All.E.R. 861.
§ R v. Central Criminal Court, ex p. Director of SFO, [1993] 1 W.L.R.
949.
§ R v. Director of S.F.O., ex p. Johnson, [1993] C.O.D.58.
§ R v. Director of S.F.O., ex p. Wallace Smith, [1992] 1 All.E.R. 730.
§ R v. Salford Magistrates’ Court, ex p. Gallagher, [1994] Crim.L.R.
374.
§ R v. Sansom [1991] 2 All.E.R.145.
§ R. v. Director of S.F.O., ex p Saunders, [1988] Crim L.R.837.
§ R. v. Olan et al., [1978] 2 S.C.R. 1175.
§ R. v. Stewart, [1988] 1 S.C.R. 963.
§ Raj Duggal v. Ramesh Kumar Bansal, AIR 1990 SC 2218.
§ Rajender Singh v. Ramdhar Singh and Others AIR 2001 SC 2220
§ Ram Lal Phutella v. State Bank of India & Ors, (2009) BC 55
(DRAT).
(ix)
§ Ram Murti Pyare Lal and Another v. Central Bank of India and
Others, Appeal No. 256/2010 (decided on 7.6.2011)
§ S. Ravi v. Indian Bank, (2003)III BC 112
§ S.P. Chengal Varaya Naidu (Dead) by LRs. v. Jagannath (Dead) by
LRs. and Ors, (1994) 1 SCC 1853
§ Saleem Bhai v. State of Maharashtra, (2003) 1 SCC 557.
§ Schnellmann v. Roettger, 373 S.C. 379, 382, 645 S.E.2d 239, 241
(2007)".
§ Scott v. Metropolitan Police Commissioner, [1974] 2 All.E.R. 204,
§ Shah Babulal Khimji v. Jayaben D. Kania and Anr., [1982]1 SCR
187.
§ Shailesh Rajnikant Parekh v. Starline Travels P. Ltd., [2004] 118
Comp Cas 145 (CLB)
§ Shailesh Rajnikant Parekh v. Starline Travels P. Ltd., [2004] 118
Comp Cas 145 (CLB)
§ Sham Sunder Kukreja v. Hindustan Lever Ltd., [2001] 4 Comp LJ
305
§ Sheeba Philominal Merlin and Esther Evelyan v. The Repatriates
Co-op Finance and Development Bank Ltd. (Govt of India
Enterprise), The General Manager, Repco Bank, The Authorized
Officer, Repco Bank and S. Sasikumar 2010-4-LW 497
§ Shradha Aromatic Private Limiteds. O.L. of Global Arya Industries
Limited and Ors., (2001) 6 SCC 207 and D.J. Enterprises Ltd. and
Anr. v. IFCI Ltd. and Ors., IV (2009) BC 23
§ Sisir Kumar Mukherjee and Others v. Kanyalal Jhewar and Others,
AIR 1971 Cal 87
§ Smt. Mitta Lal Saha and Maya Saha v. ANZ Grindlays Bank, 4
(2003) CPJ 210
§ Smt. Nupur Mitra v. Basubani P. Ltd., [1999] 2 Cal LT HC 264
(x)
§ Smt. Nupur Mitra v. Basubani P. Ltd., [2002] 108 Comp Cas 359
§ Somchai Liangsirirasert v. Government of the U.S.A. [1990] 2
All.E.R. 866
§ State Bank of India v. Smt. Jigishaben B. Sanghavi and Ors.,
2011(4) ALL MR 262.
§ State of M.P. and Ors. v. Nandlal Jaiswal and Ors., (1986) 4 SCC
566
§ State of Uttar Pradesh v. Babu Ram, AIR 1961 SC 751
§ Tata Iron and Steel v. Jhalani Tools, (Delhi) 2009 (156) DLT 311
§ Trade Well v. Indian Bank, AIR 2007 Bom 656
§ UBS AG v. State Bank of Patiala, AIR 2006 SC 2250,
§ United Bank of India v. Satyawati Tondon, 2010 (3) Bankers
Journal 581, at 17
§ United Commercial Bank v. Bank of India, [1981] 3 SCR 300
§ Valji Khimji & Company v. Official Liquidator of Hindustan Nitro
Product (Gujarat) Ltd. & Ors., (2008) IV BC 536 (SC)
§ Villianur Iyarkkai Padukappu Maiyam v. Union of India and Ors.,
(2009) 7 SCC 561
§ Vineet Narian and Ors. v. Union of India and Anr., (1998) 1 SCC
226
§ Vinitec Electronics Pvt. Ltd. v. HCL Infosystems Ltd, AIR 2005
Delhi 314
§ Vishaka and Ors. v. State of Rajasthan and Ors (1997) 6 SCC 241
§ Williams v. United States, 458 U.S. 279 (1982)

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CHAPTER – 1

INTRODUCTION

The economic development of a nation is reflected by the


progress of the various economic units, broadly classified into corporate
sector, government and household sector. While performing their
activities these units will be placed in a surplus/deficit/balanced
budgetary situations.

There are areas or people with surplus funds and there are those
with a deficit. A financial system or financial sector functions as an
intermediary and facilitates the flow of funds from the areas of surplus
to the areas of deficit. A Financial System is a composition of various
institutions, markets, regulations and laws, practices, money manager,
analysts, transactions and claims and liabilities.

The word "system", in the term "financial system", implies a set


of complex and closely connected or interlined institutions, agents,
practices, markets, transactions, claims, and liabilities in the economy.
The financial system is concerned about money, credit and finance-the
three terms are intimately related yet are somewhat different from each
other. Indian financial system consists of financial market, financial
instruments and financial intermediation. These are briefly discussed
below;

A Financial Market can be defined as the market in which


financial assets are created or transferred. As against a real transaction
that involves exchange of money for real goods or services, a financial
1
transaction involves creation or transfer of a financial asset. Financial
Assets or Financial Instruments represents a claim to the payment of a
sum of money sometime in the future and /or periodic payment in the
form of interest or dividend.

Money Market- The money market ifs a wholesale debt market for
low-risk, highly-liquid, short-term instrument. Funds are available in
this market for periods ranging from a single day up to a year. This
market is dominated mostly by government, banks and financial
institutions.

Capital Market - The capital market is designed to finance the long-


term investments. The transactions taking place in this market will be
for periods over a year.

Forex Market - The Forex market deals with the multicurrency


requirements, which are met by the exchange of currencies. Depending
on the exchange rate that is applicable, the transfer of funds takes place
in this market. This is one of the most developed and integrated market
across the globe.

Credit Market- Credit market is a place where banks, FIs and NBFCs
purvey short, medium and long-term loans to corporate and individuals.

Financial Fraud in Banking Sector

Fraud is any dishonest act and behaviour by which one person


gains or intends to gain advantage over another person. Fraud causes
loss to the victim directly or indirectly. Fraud has not been described or
discussed clearly in The Indian Penal Code but sections dealing with
2
cheating. concealment, forgery counterfeiting and breach of trust has
been discusses which leads to the act of fraud.

In Contractual term as described in the Indian Contract Act, Sec


17 suggests that a fraud means and includes any of the acts by a party to
a contract or with his connivance or by his agents with the intention to
deceive another party or his agent or to induce him to enter in to a
contract.

Banking Frauds constitute a considerable percentage of white-


collar offences being probed by the police. Unlike ordinary thefts and
robberies, the amount misappropriated in these crimes runs into lakhs
and crores of rupees. Bank fraud is a federal crime in many countries,
defined as planning to obtain property or money from any federally
insured financial institution. It is sometimes considered a white collar
crime.

The number of bank frauds in India is substantial. It in increasing


with the passage of time. All the major operational areas in banking
represent a good opportunity for fraudsters with growing incidence
being reported under deposit, loan and inter-branch accounting
transactions, including remittances.

Bank fraud is a big business in today’s world. With more


educational qualifications, banking becoming impersonal and increase in
banking sector have gave rise to this white collar crime. In a survey
made till 1997 bank frauds in nationalised banks was of Rs.497.60 crore.

In the present day, Global Scenario Banking System has acquired


new dimensions. Banking did spread in India. Today, the banking
3
system has entered into competitive markets in areas covering resource
mobilization, human resource development, customer services and
credit management as well.

Indian's banking system has several outstanding achievements to


its credit, the most striking of which is its reach. In fact, Indian banks
are now spread out into the remotest areas of our country. Indian
banking, which was operating in a highly comfortable and protected
environment till the beginning of 1990s, has been pushed into the
choppy waters of intense competition.

A sound banking system should possess three basic characteristics


to protect depositor's interest and public faith. These are (i) a fraud free
culture, (ii) a time tested Best Practice Code, and (iii) an in house
immediate grievance remedial system. All these conditions are their
missing or extremely weak in India. Section 5(b) of the Banking
Regulation Act, 1949 defines banking... "Banking is the accepting for
the purpose of lending or investment, deposits of money from the
purpose of lending or investment, deposits of money from the public,
repayable on demand or otherwise and withdraw able by cheque, draft,
order or otherwise." But if his money has fraudulently been drawn from
the bank the latter is under strict obligation to pay the depositor. The
bank therefore has to ensure at all times that the money of the depositors
is not drawn fraudulently. Time has come when the security aspects of
the banks have to be dealt with on priority basis.

The banking system in our country has been taking care of all
segments of our socio-economic set up. The Article contains a
discussion on the rise of banking frauds and various methods that can be
4
used to avoid such frauds. A bank fraud is a deliberate act of omission
or commission by any person carried out in the course of banking
transactions or in the books of accounts, resulting in wrongful gain to
any person for a temporary period or otherwise, with or without any
monetary loss to the bank. The relevant provisions of Indian Penal
Code, Criminal Procedure Code, Indian Contract Act, and Negotiable
Instruments Act relating to banking frauds has been cited in the present
Article.

Evolution of Banking System in India

Banking system occupies an important place in a nation's


economy. A banking institution is indispensable in a modern society. It
plays a pivotal role in economic development of a country and forms the
core of the money market in an advanced country.

Banking industry in India has traversed a long way to assume its


present stature. It has undergone a major structural transformation after
the nationalization of 14 major commercial banks in 1969 and 6 more on
15 April 1980. The Indian banking system is unique and perhaps has no
parallels in the banking history of any country in the world.

Bank Frauds: Concept and Dimensions

Banks are the engines that drive the operations in the financial
sector, which is vital for the economy. With the nationalization of banks
in 1969, they also have emerged as engines for social change. After
Independence, the banks have passed through three stages. They have
moved from the character based lending to ideology based lending to
today competitiveness based lending in the context of India's economic
5
liberalization policies and the process of linking with the global
economy.

While the operations of the bank have become increasingly


significant banking frauds in banks are also increasing and fraudsters are
becoming more and more sophisticated and ingenious. In a bid to keep
pace with the changing times, the banking sector has diversified it
business manifold. And the old philosophy of class banking has been
replaced by mass banking. The challenge in management of social
responsibility with economic viability has increased.

Definition of Fraud

Fraud is defined as "any behavior by which one person intends to


gain a dishonest advantage over another". In other words , fraud is an act
or omission which is intended to cause wrongful gain to one person and
wrongful loss to the other, either by way of concealment of facts or
otherwise.

Fraud is defined under Section 421 of the Indian Penal Code and
under Section 17 of the Indian Contract Act. Thus essential elements of
frauds are:

1. There must be a representation and assertion;

2. It must relate to a fact;

3. It must be with the knowledge that it is false or without belief in


its truth; and

6
4. It must induce another to act upon the assertion in question or to
do or not to do certain act.

BANK FRAUDS

Losses sustained by banks as a result of frauds exceed the losses


due to robbery, dacoity, burglary and theft-all put together.
Unauthorized credit facilities are extended for illegal gratification such
as case credit allowed against pledge of goods, hypothecation of goods
against bills or against book debts. Common modus operandi are,
pledging of spurious goods, inletting the value of goods, hypothecating
goods to more than one bank, fraudulent removal of goods with the
knowledge and connivance of in negligence of bank staff, pledging of
goods belonging to a third party. Goods hypothecated to a bank are
found to contain obsolete stocks packed in between goods stocks and
case of shortage in weight is not uncommon.1

An analysis made of cases brings out broadly the under


mentioned four major elements responsible for the commission of frauds
in banks.

1. Active involvement of the staff-both supervisor and clerical either


independent of external elements or in connivance with outsiders.

2. Failure on the part of the bank staff to follow meticulously laid


down instructions and guidelines.

1
. Banking System, Frauds and Legal Control, R.P Nainta, Deep & Deep Publications Pvt.
Ltd., 2005

7
3. External elements perpetuating frauds on banks by forgeries or
manipulations of cheques, drafts and other instruments.

4. There has been a growing collusion between business, top banks


executives, civil servants and politicians in power to defraud the
banks, by getting the rules bent, regulations flouted and banking
norms thrown to the winds.2

FRAUDS-PREVENTION AND DETECTION

A close study of any fraud in bank reveals many common basic


features. There may have been negligence or dishonesty at some stage,
on part of one or more of the bank employees. One of them may have
colluded with the borrower. The bank official may have been putting up
with the borrower's sharp practices for a personal gain. The proper care
which was expected of the staff, as custodians of banks interest may not
have been taken. The bank's rules and procedures laid down in the
Manual instructions and the circulars may not have been observed or
may have been deliberately ignored.

Bank frauds are the failure of the banker. It does not mean that the
external frauds do not defraud banks. But if the banker is upright and
knows his job, the task of defrauder will become extremely difficult, if
not possible.

Detection of Frauds

Despite all care and vigilance there may still be some frauds,
though their number, periodicity and intensity may be considerably

2
S.N Maheshwari, Banking Law and Practice (1994), p. 635
8
reduced. The following procedure would be very helpful if taken into
consideration:

1. All relevant data-papers, documents etc. Should be promptly


collected. Original vouchers or other papers forming the basis of
the investigation should be kept under lock and key.

2. All persons in the bank who may be knowing something about the
time, place a modus operandi of the fraud should be examined
and their statements should be recorded.

3. The probable order of events should thereafter be reconstructed


by the officer, in his own mind.

4. It is advisable to keep the central office informed about the fraud


and further developments in regard thereto.

Classification of Frauds and Action Required by Banks

The Reserve Bank of India had set-up a high level committee in


1992 which was headed by Mr. A... Ghosh, the then Dy. Governor
Reserve Bank of India to inquire into various aspects relating to frauds
malpractice in banks. The committee had noticed/observed three major
causes for perpetration of fraud as given hereunder:

1. Laxity in observance of the laid down system and procedures by


operational and supervising staff.

2. Over confidence reposed in the clients who indulged in breach of


trust.

9
3. Unscrupulous clients by taking advantages of the laxity in
observance of established, time tested safeguards also committed
frauds.

In order to have uniformity in reporting cases of frauds, RBI


considered the question of classification of bank frauds on the basis of
the provisions of the IPC. Given below are the Provisions and their
Remedial measures that can be taken.

1. Remedial Measures of Cheating (Section 415, IPC) : The


preventive measures in respect of the cheating can be
concentrated on cross-checking regarding identity, genuineness,
verification of particulars, etc. in respect of various instruments as
well as persons involved in encashment or dealing with the
property of the bank.

2. Remedial Measures of Criminal misappropriation of property


(Section 403 IPC) : Criminal misappropriation of property,
presuppose the custody or control of funds or property, so
subjected, with that of the person committing such frauds.
Preventive measures, for this class of fraud should be taken at the
level the custody or control of the funds or property of the bank
generally vests. Such a measure should be sufficient, it is
extended to these persons who are actually handling or having
actual custody or control of the fund or movable properties of the
bank.

3. Remedial Measures of Criminal breach of trust (Section 405,


IPC) : Care should be taken from the initial step when a person

10
comes to the bank. Care needs to be taken at the time of
recruitment in bank as well.

4. Remedial Measures of Forgery (Section 463, IPC) : Both the


prevention and detection of frauds through forgery are important
for a bank. Forgery of signatures is the most frequent fraud in
banking business. The bank should take special care when the
instrument has been presented either bearer or order; in case a
bank pays forged instrument he would be liable for the loss to the
genuine costumer.

5. Remedial Measures of Falsification of accounts (Section 477A) :


Proper diligence is required while filling of forms and accounts.
The accounts should be rechecked on daily basis.

6. Remedial Measures of Theft (Section 378, IPC) : Encashment of


stolen' cheque can be prevented if the bank clearly specify the
age, sex and two visible identify action marks on the body of the
person traveler's cheques on the back of the cheque leaf. This will
help the paying bank to easily identify the cheque holder. Theft
from lockers and safe deposit vaults are not easy to commit
because the master-key remains with the banker and the
individual key of the locker is handed over to the costumer with
due acknowledgement.

7. Criminal conspiracy (Section 120 A, IPC) : In the case of State of


Andhra Pradesh v. IBS Prasad Rao and Other, the accused, who
were clerks in a cooperative Central Bank were all convicted of
the offences of cheating under Section 420 read along with

11
Section 120 A. all the four accused had conspired together to
defraud the bank by making false demand drafts and receipt
vouchers.

8. Offences relating to currency notes and banks notes (Section 489


A-489E, IPC) : These sections provide for the protection of
currency-notes and bank notes from forgery. The offences under
section are:

1. Counterfeiting currency notes or banks.


2. Selling, buying or using as genuine, forged or counterfeit
currency notes or bank notes. Knowing the same to be
forged or counterfeit.
3. Possession of forged or counterfeit currency notes or bank-
notes, knowing or counterfeit and intending to use the same
as genuine.
4. Making or passing instruments or materials for forging or
counterfeiting currency notes or banks.
5. Making or using documents resembling currency-notes or
bank notes.

Most of the above provisions are Cognizable Offences under


Section 2(c) of the Code of Criminal Procedure, 1973.

FRAUD PRONE AREAS IN DIFFERENT ACCOUNTS

The following are the potential fraud prone areas in Banking


Sector. In addition to those areas I have also given kinds of fraud that
are common in these areas.

12
Savings Bank Accounts : The following are some of the examples
being played in respect of savings bank accounts:

(a) Cheques bearing the forged signatures of depositors may be


presented and paid.

(b) Specimen signatures of the depositors may be changed,


particularly after the death of depositors,

(c) Dormant accounts may be operated by dishonest persons with or


without collusion of bank employees, and

(d) Unauthorized withdrawals from customer's accounts by employee


of the bank maintaining the savings ledger and later destruction of
the recent vouchers by them.

Current Account Fraud : The following types are likely to be


committed in case of current accounts.

(a) Opening of frauds in the names of limited companies or firms by


unauthorized persons;

(b) Presentation and payment of cheques bearing forged signatures;

(c) Breach of trust by the employees of the companies or firms


possessing cheque leaves duly signed by the authorized
signatures;

(d) Fraudulent alteration of the amount of the cheques and getting it


paid either at the counter or though another bank.

13
LEGAL REGIME TO CONTROL BANK FRAUDS

Frauds constitute white-collar crime, committed by unscrupulous


persons deftly advantage of loopholes existing in systems/procedures.
The ideal situation is one there is no fraud, but taking ground realities of
the nation's environment and human nature's fragility, an institution
should always like to keep the overreach of frauds at the minimum
occurrence level.

Following are the relevant sections relating to Bank Frauds

Indian Penal Code (45 of 1860)

(a) Section 23 "Wrongful gain":- "Wrongful gain" is gain by


unlawful means of property to which the person gaining is not
legally entitled.

(b) "Wrongful loss" : "Wrongful loss" is the loss by unlawful means


of property to which the person losing it is legally entitled.

(c) Gaining wrongfully :- Losing wrongfully-A person is said to gain


wrongfully when such person retains wrongfully, as well as when
such person acquires wrongfully. A person is said to lose
wrongfully when such person is wrongfully kept out of any
property, as well as when such person is wrongfully deprived of
property.

(d) Section 24. "Dishonestly" :- Whoever does anything with the


intention of causing wrongful gain to one person or wrongful loss
to another person, is said to do that thing "dishonestly".

14
(e) Section 28. "Counterfeit" : - A person is said to "counterfeit" who
causes one thing to resemble another thing, intending by means of
that resemblance to practice deception, or knowing it to be likely
that deception will thereby be practiced.

BREACH OF TRUST

1. Section 408- Criminal breach of trust by clerk or servant.

2. Section 409- Criminal breach of trust by public servant, or by


banker, merchant or agent.

3. Section 416- Cheating by personating

4. Section 419- Punishment for cheating by personation.

OFFENCES RELATING TO DOCUMENTS

1) Section 463-Forgery

2) Section 464 -Making a false document

3) Section 465- Punishment for forgery.

4) Section 467- Forgery of valuable security, will, etc

5) Section 468- Forgery for purpose of cheating

6) Section 469- Forgery for purpose of harming reputation

7) Section 470- Forged document.

8) Section 471- Using as genuine a forged document

15
9) Section 477- Fraudulent cancellation, destruction, etc., of will,
authority to adopt, or valuable security.

10) Section 477A- Falsification of accounts.

THE RESERVE BANK OF INDIA ACT, 1934

Issue of demand bills and notes Section 31.

Provides that only Bank and except provided by Central


Government shall be authorized to draw, accept, make or issue any bill
of exchange, hundi, promissory note or engagement for the payment of
money payable to bearer on demand, or borrow, owe or take up any sum
or sums of money on the bills, hundis or notes payable to bearer on
demand of any such person3

THE NEGOTIABLE INSTRUMENTS ACT, 1881

Holder's right to duplicate of lost bill Section 45A.

1. The finder of lost bill or note acquires no title to it. The title
remains with the true owner. He is entitled to recover from the
true owner.

2. If the finder obtains payment on a lost bill or note in due course,


the payee may be able to get a valid discharge for it. But the true
owner can recover the money due on the instrument as damages
from the finder.

3
B.R Sharma, Bank Frauds Prevention and Detection (2001), p. 33
16
Section 58

When an Instrument is obtained by unlawful means or for


unlawful consideration no possessor or indorse who claims through the
person who found or so obtained the instrument is entitled to receive the
amount due thereon from such maker, acceptor or holder, or from any
party prior to such holder, unless such possessor or indorse is, or some
person through whom he claims was, a holder thereof in due course.

Section 85: Cheque payable to order.

1. By this section, bankers are placed in privileged position. It


provides that if an order cheque is indorsed by or on behalf of the
payee, and the banker on whom it is drawn pays it in due course,
the banker is discharged. He can debit his customer with the
amount so paid, though the endorsement of the payee might turn
out to be a forgery.

2. The claim protection under this section the banker has to prove
that the payment was a payment in due course, in good faith and
without negligence.

Section 87. Effect of material alteration

Under this section any alteration made without the consent of


party would be void. Alteration would be valid only if is made with
common intention of the party.

Section 138. Dishonour of cheque for insufficiency, etc., of funds


in the account.

17
Where any cheque drawn by a person on an account maintained
by him with a banker for payment of any amount of money to another
person from out of that account for the discharge, in whole or in part, of
any debt or other liability, is returned by the bank unpaid. either because
of the amount of money standing to the credit of that account is
insufficient to honour the cheque or that it exceeds the amount arranged
to be paid from that account by an agreement made with that bank, such
person shall be deemed to have committed an offence and shall, without
prejudice.

Section 141(1) Offences by companies.

If the person committing an offence under Section 138 is a


company, every person who, at the time the offence was committed, was
in charge of, and was responsible to, the company for the conduct of the
business of the company, as well as the company, shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and
punished accordingly.

SECURITY REGIME IN BANKING SYSTEM

Security implies sense of safety and of freedom from danger or


anxiety. When a banker takes a collateral security, say in the form of
gold or a title deed, against the money lent by him, he has a sense of
safety and of freedom from anxiety about the possible non-payment of
the loan by the borrower. These should be communicated to all strata of
the organization through appropriate means. Before staff managers
should analyze current practices. Security procedure should be stated
explicitly and agreed upon by each user in the specific environment.

18
Such practices ensure information security and enhance availability.
Bank security is essentially a defense against unforced attacks by
thieves, dacoits and burglars.

PHYSICAL SECURITY MEASURES-CONCEPT

A large part of banks security depends on social security


measures. Physical security measures can be defined as those specific
and special protective or defensive measures adopted to deter, detect,
delay, defend and defeat or to perform any one or more of these
functions against culpable acts, both covert and covert and acclamations
natural events. The protective or defensive, measures adopted involve
construction, installation and deployment of structures, equipment and
persons respectively.

The following are few guidelines to check malpractices:

1. To rotate the cash work within the staff.

2. One person should not continue on the same seat for more than
two months.

3. Daybook should not be written by the Cashier where an other


person is available to the job

4. No cash withdrawal should be allowed within passbook in case of


withdrawal by pay order.

5. The branch manager should ensure that all staff members have
recorder their presence in the attendance registrar, before starting
work.
19
Execution of Documents

1. A bank officer must adopt a strict professional approach in the


execution of documents. The ink and the pen used for the
execution must be maintained uniformly.

2. Bank documents should not be typed on a typewriter for


execution. These should be invariably handwritten for execution.

3. The execution should always be done in the presence of the


officer responsible for obtain them,

4. The borrowers should be asked to sign in full signatures in same


style throughout the documents.

5. Unless there is a specific requirement in the document, it should


not be got attested or witnessed as such attestation may change
the character of the instruments and the documents may subject to
ad volrem stamp duty.

6. The paper on which the bank documents are made should be


pilfer proof. It should be unique and available to the banks only.

7. The printing of the bank documents should have highly artistic


intricate and complex graphics.

8. The documents executed between Banker and Borrowers must be


kept in safe custody,

20
CHANGES IN LEGISLATIONS AFTER ELECTRONIC
TRANSACTIONS

1. Section 91 of IPC shall be amended to include electronic


documents also.

2. Section 92 of Indian Evidence Act, 1872 shall be amended to


include commuter based communications

3. Section 93 of Bankers Book Evidence Act, 1891 has been


amended to give legal sanctity for books of account maintained in
the electronic form by the banks.

4. Section 94 of the Reserve Bank of India Act, 1939 shall be


amended to facilitate electronic fund transfers between the
financial institutions and the banks. A new clause (pp) has been
inserted in Section 58(2).

RECENT TRENDS OF BANKING SYSTEM IN INDIA

In the banking and financial sectors, the introduction of electronic


technology for transactions, settlement of accounts, book-keeping and
all other related functions is now an imperative. Increasingly, whether
we like it or not, all banking transactions are going to be electronic. The
thrust is on commercially important centers, which account for 65
percent of banking business in terms of value. There are now a large
number of fully computerized branches across the country.

A switchover from cash-based transactions to paper-based


transactions is being accelerated. Magnetic Ink character recognition

21
clearing of cheques is now operational in many cities, beside the four
metro cities. In India, the design, management and regulation of
electronically-based payments system are becoming the focus of policy
deliberations. The imperatives of developing an effective, efficient and
speedy payment and settlement systems are getting sharper with
introduction of new instruments such as credit cards, telebanking,
ATMs, retail Electronic Funds Transfer (EFT) and Electronic Clearing
Services (ECS). We are moving towards smart cards, credit and
financial Electronic Data Interchange (EDI) for straight through
processing.

Financial Fraud (Investigation, Prosecution, Recovery and


Restoration of property) Bill, 2001

Further the Financial Fraud (Investigation, Prosecution, Recovery


and Restoration of property) Bill, 2001 was introduced in Parliament to
curb the menace of Bank Fraud. The Act was to prohibit, control,
investigate financial frauds; recover and restore properties subject to
such fraud; prosecute for causing financial fraud and matters connected
therewith or incidental thereto.

Under the said act the term Financial Fraud has been defined as
under:

Section 512 - Financial Fraud

Financial frauds means and includes any of the following acts


committed by a person or with his connivance, or by his agent, in his
dealings with any bank or financial institution or any other entity
holding public funds;
22
1. The suggestion, as a fact, of that which is not true, by one who
does not believe it to be true;

2. The active concealment of a fact by one having knowledge or


belief of the fact;

3. A promise made with out any intention of performing it;

4. Any other act fitted to deceive;

5. Any such act or omission as the law specially declares to be


fraudulent.

Provided that whoever acquires, possesses or transfers any


proceeds of financial fraud or enters into any transaction which is
related to proceeds of fraud either directly or indirectly or conceals or
aids in the concealment of the proceeds of financial fraud, commits
financial fraud.

513(a) - Punishment for Financial Fraud

Whoever commits financial fraud shall be:

(a) Punished with rigorous imprisonment for a term, which may


extend to seven years and shall also be liable to fine.

(b) Whoever commits serious financial fraud shall be punished with


rigorous imprisonment for a term which may extend to ten years
but shall not be less than five years and shall also be liable for
fine up to double the amount involved in such fraud.

23
Provided that in both (a) and (b) all funds, bank accounts and
properties acquired using such funds subjected to the financial fraud as
may reasonably be attributed by the investigating agency shall be
recovered and restored to the rightful owner according to the procedure
established by law.

24
CHAPTER-2

HISTORICAL BACKGROUND

Banking in India originated in the last decades of the 18th century.


The first banks were The General Bank of India, which started in 1786,
and Bank of Hindustan, which started in 1790; both are now defunct.
The oldest bank in existence in India is the State Bank of India, which
originated in the Bank of Calcutta in June 1806, which almost
immediately became the Bank of Bengal. This was one of the three
presidency banks, the other two being the Bank of Bombay and the
Bank of Madras, all three of which were established under charters from
the British East India Company. For many years the Presidency banks
acted as quasi-central banks, as did their successors. The three banks
merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India in 1955.

There are three different phases in the history of banking in India.

1. Pre-Nationalization Era.

Indian merchants in Calcutta established the Union Bank in 1839,


but it failed in 1848 as a consequence of the economic crisis of 1848-49.
The Allahabad Bank, established in 1865 and still functioning today, is
the oldest Joint Stock bank in India. It was not the first though. That
honor belongs to the Bank of Upper India, which was established in
1863, and which survived until 1913, when it failed, with some of its
assets and liabilities being transferred to the Alliance Bank of Simla.

25
When the American Civil War stopped the supply of cotton to
Lancashire from the Confederate States, promoters opened banks to
finance trading in Indian cotton. With large exposure to speculative
ventures, most of the banks opened in India during that period fey and
lost interest in keeping deposits with banks. Subsequently, banking in
India remained the exclusive domain of Europeans for next several
decades until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the


1860s. The Comptoired Escompte de Paris opened a branch in Calcutta
in 1860, and another in Bombay in 1862; branches in Madras and
Pondicherry, then a French colony, followed. HSBC established itself in
Bengal in 1869. Calcutta was the most active trading port in India,
mainly due to the trade of the British Empire, and so became a banking
center.

The first entirely Indian joint stock bank was the Oudh
Commercial Bank, established in 1881 in Faizabad. It failed in 1958.
The next was the Punjab National Bank, established in Lahore in 1895,
which has survived to the present and is now one of the largest banks in
India.

Around the turn of the 20th Century, the Indian economy was
passing through a relative period of stability. Around five decades had
elapsed since the Indian Mutiny, and the social, industrial and other
infrastructure had improved. Indians had established small banks, most
of which served particular ethnic and religious communities.

26
The presidency banks dominated banking in India but there were
also some exchange banks and a number of Indian joint stock banks. All
these banks operated in different segments of the economy. The
exchange banks, mostly owned by Europeans, concentrated on financing
foreign trade. Indian joint stock banks were generally under capitalized
and lacked the experience and maturity to compete with the presidency
and exchange banks. This segmentation let Lord Curzon to observe, "In
respect of banking it seems we are behind the times. We are like some
old fashioned sailing ship, divided by solid wooden bulkheads into
separate and cumbersome compartments."

The period between 1906 and 1911, saw the establishment of


banks inspired by the Swadeshi movement. The Swadeshi movement
inspired local businessmen and political figures to found banks of and
for the Indian community. A number of banks established then have
survived to the present such as Bank of India, Corporation Bank, Indian
Bank, Bank of Baroda, Canara Bank and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many


private banks in Dakshina Kannada and Udupi district which were
unified earlier and known by the name South Canara ( South Kanara )
district. Four nationalised banks started in this district and also a leading
private sector bank. Hence undivided Dakshina Kannada district is
known as "Cradle of Indian Banking".

During the First World War (1914–1918) through the end of the
Second World War (1939–1945), and two years thereafter until the
independence of India were challenging for Indian banking. The years
of the First World War were turbulent, and it took its toll with banks
27
simply collapsing despite the Indian economy gaining indirect boost due
to war-related economic activities. At least 94 banks in India failed
between 1913 and 1918 as indicated in the following table:

Number of banks Authorised capital Paid-up Capital


Years
that failed (Rs. Lakhs) (Rs. Lakhs)

1913 12 274 35
1914 42 710 109
1915 11 56 5
1916 13 231 4
1917 9 76 25
1918 7 209 1

Post-Independence

The partition of India in 1947 adversely impacted the economies


of Punjab and West Bengal, paralyzing banking activities for months.
India's independence marked the end of a regime of the Laissez-faire for
the Indian banking. The Government of India initiated measures to play
an active role in the economic life of the nation, and the Industrial
Policy Resolution adopted by the government in 1948 envisaged a
mixed economy. This resulted into greater involvement of the state in
different segments of the economy including banking and finance. The
major steps to regulate banking included:

• The Reserve Bank of India, India's central banking authority, was


established in April 1934, but was nationalized on January 1,

28
1949 under the terms of the Reserve Bank of India (Transfer to
Public Ownership) Act, 1948 (RBI, 2005b).
• In 1949, the Banking Regulation Act was enacted which
empowered the Reserve Bank of India (RBI) "to regulate, control,
and inspect the banks in India".
• The Banking Regulation Act also provided that no new bank or
branch of an existing bank could be opened without a license
from the RBI, and no two banks could have common directors.

2. Nationalization Stage.

Despite the provisions, control and regulations of Reserve Bank


of India, banks in India except the State Bank of India or SBI, continued
to be owned and operated by private persons. By the 1960s, the Indian
banking industry had become an important tool to facilitate the
development of the Indian economy. At the same time, it had emerged
as a large employer, and a debate had ensued about the nationalization
of the banking industry. Indira Gandhi, then Prime Minister of India,
expressed the intention of the Government of India in the annual
conference of the All India Congress Meeting in a paper entitled "Stray
thoughts on Bank Nationalisation."4 The meeting received the paper
with enthusiasm.

Thereafter, her move was swift and sudden. The Government of


India issued an ordinance ('Banking Companies (Acquisition and
Transfer of Undertakings) Ordinance, 1969')) and nationalised the 14
largest commercial banks with effect from the midnight of July 19,

4
Austin, Granville (1999). Working a Democratic Constitution - A History of the Indian
Experience. New Delhi: Oxford University Press. pp. 215
29
1969. These banks contained 85 percent of bank deposits in the country.
Jayaprakash Narayan, a national leader of India, described the step as a
"masterstroke of political sagacity." Within two weeks of the issue of
the ordinance, the Parliament passed the Banking Companies
(Acquisition and Transfer of Undertaking) Bill, and it received the
presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks


followed in 1980. The stated reason for the nationalization was to give
the government more control of credit delivery. With the second dose of
nationalization, the Government of India controlled around 91% of the
banking business of India. Later on, in the year 1993, the government
merged New Bank of India with Punjab National Bank. It was the only
merger between nationalized banks and resulted in the reduction of the
number of nationalised banks from 20 to 19. After this, until the 1990s,
the nationalised banks grew at a pace of around 4%, closer to the
average growth rate of the Indian economy.

After Independence, in 1951, the All India Rural Credit survey,


committee of Direction with Shri. A. D. Gorwala as Chairman
recommended amalgamation of the Imperial Bank of India and ten
others banks into a newly established bank called the State Bank of
India (SBI). The Government of India accepted the recommendations of
the committee and introduced the State Bank of India bill in the Lok
Sabha on 16th April 1955 and it was passed by Parliament and got the
president’s assent on 8th May 1955. The Act came into force on 1st July
1955, and the Imperial Bank of India was nationalized in 1955 as the
State Bank of India.

30
The main objective of establishing SBI by nationalizing the
Imperial Bank of India was “to extend banking facilities on a large scale
more particularly in the rural and semi-urban areas and to diverse other
public purposes.”

In 1959, the SBI (Subsidiary Bank) act was proposed and the
following eight state-associated banks were taken over by the SBI as its
subsidiaries.

Name of the Bank Subsidiary with effect from

1. State Bank of Hyderabad 1st October 1959

2. State Bank of Bikaner 1st January 1960

3. State Bank of Jaipur 1st January 1960

4. State Bank of Saurashtra 1st May 1960

5. State Bank of Patiala 1st April 1960

6. State Bank of Mysore 1st March 1960

7. State Bank of Indore 1st January 1968

8. State Bank of Travancore 1st January 1960

With effect from 1st January 1963, the State Bank of Bikaner and
State Bank of Jaipur with head office located at Jaipur. Thus, seven
subsidiary banks State Bank of India formed the SBI Group.

31
The SBI Group under statutory obligations was required to open
new offices in rural and semi-urban areas and modern banking was
taken to these unbanked remote areas.

On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi
announced the nationalization of 14 major scheduled Commercial Banks
each having deposits worth Rs. 50 crore and above. This was a turning
point in the history of commercial banking in India.

Later the Government Nationalized six more commercial private


sector banks with deposit liability of not less than Rs. 200 crores on 15th
April 1980, viz.

• Andhra Bank.
• Corporation Bank.
• New Bank if India.
• Oriental Bank of Commerce.
• Punjab and Sind Bank.
• Vijaya Bank.

In 1969, the Lead Bank Scheme was introduced to extend banking


facilities to every corner of the country. Later in 1975, Regional Rural
Banks were set up to supplement the activities of the commercial banks
and to especially meet the credit needs of the weaker sections of the
rural society.

Nationalization of banks paved way for retail banking and as a


result there has been an alt round growth in the branch network, the
deposit mobilization, credit disposals and of course employment.

32
The first year after nationalization witnessed the total growth in
the agricultural loans and the loans made to SSI by 87% and 48%
respectively. The overall growth in the deposits and the advances
indicates the improvement that has taken place in the banking habits of
the people in the rural and semi-urban areas where the branch network
has spread. Such credit expansion enabled the banks to achieve the goals
of nationalization, it was however, achieved at the coast of profitability
of the banks.

Consequences of Nationalization:

• The quality of credit assets fell because of liberal credit extension


policy.
• Political interference has been as additional malady.
• Poor appraisal involved during the loan meals conducted for
credit disbursals.
• The credit facilities extended to the priority sector at concessional
rates.
• The high level of low yielding SLR investments adversely
affected the profitability of the banks.
• The rapid branch expansion has been the squeeze on profitability
of banks emanating primarily due to the increase in the fixed
costs.
• There was downward trend in the quality of services and
efficiency of the banks.

33
3. Post Liberalization Era.

By the beginning of 1990, the social banking goals set for the
banking industry made most of the public sector resulted in the
presumption that there was no need to look at the fundamental financial
strength of this bank. Consequently they remained undercapitalized.
Revamping this structure of the banking industry was of extreme
importance, as the health of the financial sector in particular and the
economy was a whole would be reflected by its performance.

The need for restructuring the banking industry was felt greater
with the initiation of the real sector reform process in 1992. the reforms
have enhanced the opportunities and challenges for the real sector
making them operate in a borderless global market place. However, to
harness the benefits of globalization, there should be an efficient
financial sector to support the structural reforms taking place in the real
economy. Hence, along with the reforms of the real sector, the banking
sector reformation was also addressed.

The route causes for the lackluster performance of banks, formed


the elements of the banking sector reforms. Some of the factors that led
to the dismal performance of banks were.

• Regulated interest rate structure.


• Lack of focus on profitability.
• Lack of transparency in the bank’s balance sheet.
• Lack of competition.

34
• Excessive regulation on organization structure and managerial
resource.
• Excessive support from government.

Against this background, the financial sector reforms were


initiated to bring about a paradigm shift in the banking industry, by
addressing the factors for its dismal performance.

In this context, the recommendations made by a high level


committee on financial sector, chaired by M. Narasimham, laid the
foundation for the banking sector reforms. These reforms tried to
enhance the viability and efficiency of the banking sector. The
Narasimham Committee suggested that there should be functional
autonomy, flexibility in operations, dilution of banking strangulations,
reduction in reserve requirements and adequate financial infrastructure
in terms of supervision, audit and technology. The committee further
advocated introduction of prudential forms, transparency in operations
and improvement in productivity, only aimed at liberalizing the
regulatory framework, but also to keep them in time with international
standards. The emphasis shifted to efficient and prudential banking
linked to better customer care and customer services.

In the early 1990s, the then Narasimha Rao government embarked


on a policy of liberalization, licensing a small number of private banks.
These came to be known as New Generation tech-savvy banks, and
included Global Trust Bank (the first of such new generation banks to be
set up), which later amalgamated with Oriental Bank of Commerce,

35
Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This
move, along with the rapid growth in the economy of India, revitalized
the banking sector in India, which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government
banks, private banks and foreign banks.

The next stage for the Indian banking has been set up with the
proposed relaxation in the norms for Foreign Direct Investment, where
all Foreign Investors in banks may be given voting rights which could
exceed the present cap of 10%,at present it has gone up to 74% with
some restrictions.

The new policy shook the Banking sector in India completely.


Bankers, till this time, were used to the 4-6-4 method (Borrow at
4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in
a modern outlook and tech-savvy methods of working for traditional
banks.All this led to the retail boom in India. People not just demanded
more from their banks but also received more.

Currently (2010), banking in India is generally fairly mature in


terms of supply, product range and reach-even though reach in rural
India still remains a challenge for the private sector and foreign banks.
In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets relative
to other banks in comparable economies in its region. The Reserve Bank
of India is an autonomous body, with minimal pressure from the
government. The stated policy of the Bank on the Indian Rupee is to

36
manage volatility but without any fixed exchange rate-and this has
mostly been true.

With the growth in the Indian economy expected to be strong for


quite some time-especially in its services sector-the demand for banking
services, especially retail banking, mortgages and investment services
are expected to be strong. One may also expect M&As, takeovers, and
asset sales.

In March 2006, the Reserve Bank of India allowed Warburg


Pincus to increase its stake in Kotak Mahindra Bank (a private sector
bank) to 10%. This is the first time an investor has been allowed to hold
more than 5% in a private sector bank since the RBI announced norms
in 2005 that any stake exceeding 5% in the private sector banks would
need to be vetted by them.

In recent years critics have charged that the non-government


owned banks are too aggressive in their loan recovery efforts in
connection with housing, vehicle and personal loans. There are press
reports that the banks' loan recovery efforts have driven defaulting
borrowers to suicide.

Adoption of banking technology

The IT revolution had a great impact in the Indian banking


system. The use of computers had led to introduction of online banking
in India. The use of the modern innovation and computerization of the
banking sector of India has increased many fold after the economic

37
liberalization of 1991 as the country's banking sector has been exposed
to the world's market. The Indian banks were finding it difficult to
compete with the international banks in terms of the customer service
without the use of the information technology and computers.

38
CHAPTER-3

DIFFERENT KINDS OF BANKING FRAUD

The business of banking is essentially based on trust, the very act of


a person depositing his monies requires trust on his part that his monies
will be handled in a responsible manner and will be available to him
when required. Thus public faith in the Banking system has a dominant
role without which it would be impossible for the system to function. In
the context financial fraud is a very sensitive issue as it affects the
public faith in the system structure. Thus repeated market failure,
undetected frauds in financial institutions and collusion of employees in
financial fraud cause frustration in the public, as well as poses a
challenge to any good governance and market system. In the last decade
especially, instances of ‘scam' have gone up. People, banks and financial
institutions have suffered losses of thousand of crores. The situation is
becoming volatile and can lead to complete breakdown at any time
unless ‘scam' is legally contained. A table of frauds in India in the recent
decade is provided below(the list provided is merely illustrative and not
exhaustive).

Fraud- The Legal Concept

In any legal systems, the following characters determine the


effectiveness and efficacy of the legal system:5

1. Certainty, clarity and definiteness of legal propositions;

5
Nainta RP, Banking System, Frauds and Legal Control, Deep & Deep Publications Pvt.
Ltd., New Delhi, 2005
39
2. Predictability of decisions;
3. Procedural equality in the rules according to principles of natural
justice;
4. Appropriate institutional certainty and regulatory authority;
5. Definite imperatives, both moral and physical; and
6. Efficiency of the dispute resolution system based on
proportionality to time, space and motion

Unfortunately post 1956 syndrome of legislative process in India


cannot pass any of the above tests. Legal propositions are not
understood by the people for whom these are meant. There is no
certainty in the legal system both on account of completeness and
superfluous provision. Legal Provisions are far too complicated to have
clarity. There is a high degree of procedural complexity and uncertainty.
This has lead to a weakness in the administration of justice in India. The
common law pressure of the justice delivery system on account of
‘proof beyond doubt' is very heavy especially in the offences relating to
finance. Financial fraud exclusively is still not an offence in spite of the
fact that the banks and financial institutions suffer heavily in frauds
committed by the borrowers, more often than not, in collusion with the
employees of the banks and financial institutions. This especially is not
exclusively known amongst the legal fraternity in the field but is widely
perceived and felt by the public as well as the regulators.

Before moving on it's important to understand the concept of


‘fraud' and thus in a corollary the difference as well as the similarities
between ‘Bank fraud' and ‘Financial Fraud'. Fraud was first defined in
the Derry v. Peak where it was stated that fraud is proved when it is

40
shown that a false representation has been made either knowingly, or
without belief in the truth, or recklessly or carelessly, whether it be true
or false. Under the Indian Legal System fraud as a legal concept finds
place in the branches of contractual, tortuous and criminal law.

In Contract law, fraud is defined in section 17 of the Indian


Contract Act for the purpose of a contract and in so far as the operation
of the Contract Act is concerned. In such event the contract becomes
voidable. The party suffering from the fraud may terminate the contract
on his option. He may also like to continue with the contract. The
definitional conditions laid down by the Act, that (a) a party having the
knowledge of fact essential to the contract did not disclose the fact
which would have altered the decision of the other party; (b) or a
material misstatement was made knowing that the statement was false;
and (c) that the party intended to obtain a favorable decision from the
other party by committing such an act. Whereas under tort law fraud is
treated as a civil wrong with in the parameter of right in rem discourse,
fraud covers any action or abstinence, statutory or otherwise, which may
cause damages to other. Everyone has a right not to be defrauded in any
situation. So if any fraud is caused on any person in any other situation
other than the contractual situation whether it does or does not fall under
any specified crime, the person can bring the matter to the notice of the
district court for obtaining remedies.6

Further, Fraud is defined as "any behavior by which one person


intends to gain a dishonest advantage over another". In other words ,
fraud is an act or omission which is intended to cause wrongful gain to

6
Section 17 of Indian Contract Act, 1872
41
one person and wrongful loss to the other, either by way of concealment
of facts or otherwise.

Fraud is defined under Section 421 of the Indian Penal Code.


Thus essential elements of frauds are:

1. There must be a representation and assertion;

2. It must relate to a fact;

3. It must be with the knowledge that it is false or without belief in


its truth; and

4. It must induce another to act upon the assertion in question or to


do or not to do certain act.7

Thus normally in any market situation, fraud is regarded as ‘foul'


play in the market game and as such, the regulator may neutralize the
impact of the act by (a) penalizing the player by giving him warning for
minor foul so that he does not dare repeat (b) suspend him from the
game (c) debar him from playing the game permanently; (d) impose
penal compensation to indemnify the person suffering from fraud.

But under criminal law fraud as such, is not a criminal offence in


India. If any fraud is committed in a bilateral contractual situation or
otherwise whether involving personal fund or public fund, also an act of
cheating or if such an act involves impersonation, criminal breach of
trust or criminal conspiracy, or forgery, or falsification or destruction of
documents for wrongful gain, or embezzlement of funds, then and only

7
Section 421 Of Indain Penal Code,
42
then, such fraud can be an offence. Big ‘scams' that often take place in
the secondary capital market by way of ‘price rigging' or ‘insider
trading' are not offences.

Strangely as pointed out by the N.L. Mitra Report on Bank frauds,


the Indian media has already distinguished between contractual frauds
and scam which affect the general public. According to media practice,
any act of cheating the public that involves public fund such as,
government fund, public deposit, public investment, is an act of ‘scam'.
The definition attributed to ‘scam' by media and the public at large, is
now worth for the legislature to recognize for such definition
encompasses a wider mandate for the regulators, investigators and other
interested parties to follow and saves from the definitional limitations as
well.8

From the regulatory angle frauds have been classified by the RBI
committee on Legal Aspects of Bank frauds as

1. Misappropriation of cash tendered by a bank's constitutents and


misappropriation of cash in remittances.
2. Withdrawal from deposit accounts through forged instruments
3. Fraudulent encashment of negotiable instruments by opening an
account in fictitious name.
4. Misappropriation through manipulation of books of accounts.
5. Perpetration of frauds through clearing instruments.
6. Frauds in demand drafts - issue and encashments.

8
N.L. Mitra, The Report of the Expert Committee on Legal Aspects of Bank Fraunds,
Reserve Bank of India, 2001
43
7. Misutilisation/overstepping of lending/discretionary power and
non observance of prescribed norms/procedures in credit
dispensation.
8. Opening/issue of LCs, bank gurantees, co-acceptance of bills
without proper authority and consideration.
9. Frauds in foreign exchange transactions through non adherence of
RBI's prescribed norms and procedures.

Financial Frauds

While the above stated categories are mostly for Bank Frauds, in
reality every financial fraud does to a certain extent involve some bank
fraud as well. And while the term financial frauds and Bank frauds may
seem synonymous their areas of demarcation are quite different and
while the above illustrative list on Bank frauds might give an idea of the
nature of bank frauds, defining financial frauds is a much more complex
exercise due to the varying nature of the modus operandi. Financial
fraud is generally committed not merely in individualized situation.
They are committed in a series of contractual transactions between two
parties in which public interest becomes the victim. An individualized
definition of fraud-driven offence, like ‘cheating' or ‘forgery' makes
intention as apriori condition. Most of the financial frauds committed
between the contracting parties develop in course of transactions and the
impact on the public interest being the victim is the result of aposteriori
action of the contracting parties. An act of cheating requires an act to be
done with the intention “up-front”. Intention later on developed inside
the transaction does not make it cheating. There is a typical
contradiction in treatment under the Civil and Criminal law in matters of

44
financial fraud. If the court finds an accused guilty in a financial fraud
case in a contractual situation, the entire chain of transactions becomes
void ab initio under the present contractual system. In some fraud
related offence cases, the element of cheating is found by the court in
later incidents also. It therefore means that Courts are inclined to believe
that offences relating to fraud can be based on aposteriori intention9.
Some illustrations of Financial frauds are:-

1. A person floats a scheme for tripling money and raises public


fund and vanishes with the amount. This is financial fraud by
cheating.
2. A person took project finance from a Bank creating a security
interest by hypothecating its plant and machinery. The company
afterwards transfers the plant without the permission of the Bank.
This is a financial fraud by suppression of fact.
3. A company having raised its capital by public issue has not
commenced business and is not traceable for any response to the
shareholders. This is a financial fraud by a vanishing company.

Banking Frauds constitute a considerable percentage of white-collar


offences being probed by the police. Unlike ordinary thefts and
robberies, the amount misappropriated in these crimes runs into lakhs
and crores of rupees. Bank fraud is a federal crime in many countries,
defined as planning to obtain property or money from any federally
insured financial institution. It is sometimes considered a white collar
crime.

9
Tannan M.L., Tannan's Banking Law & Practice in India, LexisNexis Butterworths,
22nd Edition, New Delhi, 2008
45
The number of bank frauds in India is substantial. It in increasing
with the passage of time. All the major operational areas in banking
represent a good opportunity for fraudsters with growing incidence
being reported under deposit, loan and inter-branch accounting
transactions, including remittances.10

Bank fraud is a big business in today’s world. With more


educational qualifications, banking becoming impersonal and increase in
banking sector have gave rise to this white collar crime. In a survey
made till 1997 bank frauds in nationalised banks was of Rs.497.60 crore.

This banking fraud can be classified as:

I. Fraud By Insiders11

1. Rogue traders

A rogue trader is a highly placed insider nominally authorized to


invest sizeable funds on behalf of the bank; this trader secretly makes
progressively more aggressive and risky investments using the bank's
money, when one investment goes bad, the rogue trader engages in
further market speculation in the hope of a quick profit which would
hide or cover the loss.

Unfortunately, when one investment loss is piled onto another, the


costs to the bank can reach into the hundreds of millions of rupees; there

10
Tannan M.L., Tannan's Banking Law & Practice in India, LexisNexis Butterworths,
22nd Edition, New Delhi, 2008, pp.1108
11
S.N.Gupta., The Banking Law, vol.ii, Universal Publication, 5th Edition, New Delhi,
2010, pp.1768
46
have even been cases in which a bank goes out of business due to
market investment losses.

2. Fraudulent loans

One way to remove money from a bank is to take out a loan, a


practice bankers would be more than willing to encourage if they know
that the money will be repaid in full with interest. A fraudulent loan,
however, is one in which the borrower is a business entity controlled by
a dishonest bank officer or an accomplice; the "borrower" then declares
bankruptcy or vanishes and the money is gone. The borrower may even
be a non-existent entity and the loan merely an artifice to conceal a theft
of a large sum of money from the bank.

3. Wire fraud

Wire transfer networks such as the international, interbank fund transfer


system are tempting as targets as a transfer, once made, is difficult or
impossible to reverse. As these networks are used by banks to settle
accounts with each other, rapid or overnight wire transfer of large
amounts of money are commonplace; while banks have put checks and
balances in place, there is the risk that insiders may attempt to use
fraudulent or forged documents which claim to request a bank
depositor's money be wired to another bank, often an offshore account
in some distant foreign country.12

12
S.N.Gupta., The Banking Law, vol.ii, Universal Publication, 5th Edition, New Delhi,
2010, pp.1769
47
4. Forged or fraudulent documents

Forged documents are often used to conceal other thefts; banks


tend to count their money meticulously so every penny must be
accounted for. A document claiming that a sum of money has been
borrowed as a loan, withdrawn by an individual depositor or transferred
or invested can therefore be valuable to a thief who wishes to conceal
the minor detail that the bank's money has in fact been stolen and is now
gone.13

5. Uninsured deposits

There are a number of cases each year where the bank itself turns
out to be uninsured or not licensed to operate at all. The objective is
usually to solicit for deposits to this uninsured "bank", although some
may also sell stock representing ownership of the "bank". Sometimes
the names appear very official or very similar to those of legitimate
banks. For instance, the "Chase Trust Bank" of Washington DC
appeared in 2002 with no license and no affiliation to its seemingly
apparent namesake; the real Chase Manhattan bank, New York. There is
a very high risk of fraud when dealing with unknown or uninsured
institutions.

6. Theft of identity

Dishonest bank personnel have been known to disclose


depositors' personal information for use in theft of identity frauds. The

13
Bank Frauds prevention and detention By B.R.Sharma, Universal Publication, 3rd
edition, 2011, pp.193-207
48
perpetrators then use the information to obtain identity cards and credit
cards using the victim's name and personal information.14

7. Demand draft fraud

DD fraud is usually done by one or more dishonest bank


employees that is the Bunko Banker. They remove few DD leaves or
DD books from stock and write them like a regular DD. Since they are
insiders, they know the coding, punching of a demand draft. These
Demand drafts will be issued payable at distant town/city without
debiting an account. Then it will be cashed at the payable branch. For
the paying branch it is just another DD. This kind of fraud will be
discovered only when the head office does the branch-wise
reconciliation, which normally will take 6 months. By that time the
money is unrecoverable.15

II. Fraud By Others

1. Forgery and altered cheques

Thieves have altered cheques to change the name (in order to


deposit cheques intended for payment to someone else) or the amount
on the face of a cheque (a few strokes of a pen can change 100.00 into
100,000.00, although such a large figure may raise some eyebrows).16

Instead of tampering with a real cheque, some fraudsters will


attempt to forge a depositor's signature on a blank cheque or even print

14
S.N.Gupta., The Banking Law, vol.ii, Universal Publication, 5th Edition, New Delhi,
2010, pp.1768
15
Marri Ramu, “Bank Fraud”, Article on Times of India
16
Bank Frauds prevention and detention By B.R.Sharma, Universal Publication, 3rd
edition, 2011, pp.31
49
their own cheques drawn on accounts owned by others, non-existent
accounts or even alleged accounts owned by non-existent depositors.
The cheque will then be deposited to another bank and the money
withdrawn before the cheque can be returned as invalid or for non-
sufficient funds.

2. Stolen cheques

Some fraudsters obtain access to facilities handling large amounts


of cheques, such as a mailroom or post office or the offices of a tax
authority (receiving many cheques) or a corporate payroll or a social or
veterans' benefit office (issuing many cheques). A few cheques go
missing; accounts are then opened under assumed names and the
cheques (often tampered or altered in some way) deposited so that the
money can then be withdrawn by thieves. Stolen blank cheque books are
also of value to forgers who then sign as if they were the depositor.17

3. Accounting fraud

In order to hide serious financial problems, some businesses have


been known to use fraudulent bookkeeping to overstate sales and
income, inflate the worth of the company's assets or state a profit when
the company is operating at a loss. These tampered records are then used
to seek investment in the company's bond or security issues or to make
fraudulent loan applications in a final attempt to obtain more money to
delay the inevitable collapse of an unprofitable or mismanaged firm.

17
Bank Frauds prevention and detention By B.R.Sharma, Universal Publication, 3rd
edition, 2011, pp.40
50
4. Bill discounting fraud

Essentially a confidence trick, a fraudster uses a company at their


disposal to gain confidence with a bank, by appearing as a genuine,
profitable customer. To give the illusion of being a desired customer, the
company regularly and repeatedly uses the bank to get payment from
one or more of its customers. These payments are always made, as the
customers in question are part of the fraud, actively paying any and all
bills raised by the bank. After certain time, after the bank is happy with
the company, the company requests that the bank settles its balance with
the company before billing the customer. Again, business continues as
normal for the fraudulent company, its fraudulent customers, and the
unwitting bank. Only when the outstanding balance between the bank
and the company is sufficiently large, the company takes the payment
from the bank, and the company and its customers disappear, leaving
no-one to pay the bills issued by the bank.18

5. Cheque kiting

Cheque Kiting exploits a system in which, when a cheque is


deposited to a bank account, the money is made available immediately
even though it is not removed from the account on which the cheque is
drawn until the cheque actually clears.

Deposit 1000 in one bank, write a cheque on that amount and


deposit it to your account in another bank; you now have 2000 until the
cheque clears.

18
Tannan M.L., Tannan's Banking Law & Practice in India, LexisNexis Butterworths,
22nd Edition, New Delhi, 2008,pp.1118
51
In-transit or non-existent cash is briefly recorded in multiple
accounts.

A cheque is cashed and, before the bank receives any money by


clearing the cheque, the money is deposited into some other account or
withdrawn by writing more cheques. In many cases, the original
deposited cheque turns out to be a forged cheque. Some perpetrators
have swapped checks between various banks on a daily basis, using each
to cover the shortfall for a previous cheque.19

What they were actually doing was check kiting; like a kite in the
wind, it flies briefly but eventually has to come back down to the
ground.

6. Credit card fraud

Credit card fraud is widespread as a means of stealing from


banks, merchants and clients. A credit card is made of three plastic sheet
of polyvinyl chloride. The central sheet of the card is known as the core
stock. These cards are of a particular size and many data are embossed
over it. But credit cards fraud manifest in a number of ways.
They are:

a. Genuine cards are manipulated


b. Genuine cards are altered
c. Counterfeit cards are created
d. Fraudulent telemarketing is done with credit cards.

19
Tannan M.L., Tannan's Banking Law & Practice in India, LexisNexis Butterworths,
22nd Edition, New Delhi, 2008,pp.1119
52
e. Genuine cards are obtained on fraudulent applications in the
names/addresses of other persons and used.

It is feared that with the expansion of E-Commerce, M-


Commerce and Internet facilities being available on massive scale the
fraudulent fund freaking via credit cards will increase tremendously.20

7. Counterfeit credit cards are known as white plastics.


Booster cheques

A booster cheque is a fraudulent or bad cheque used to make a


payment to a credit card account in order to "bust out" or raise the
amount of available credit on otherwise-legitimate credit cards. The
amount of the cheque is credited to the card account by the bank as soon
as the payment is made, even though the cheque has not yet cleared.
Before the bad cheque is discovered, the perpetrator goes on a spending
spree or obtains cash advances until the newly-"raised" available limit
on the card is reached. The original cheque then bounces, but by then it
is already too late.

Stolen payment cards

Often, the first indication that a victim's wallet has been stolen is
a 'phone call from a credit card issuer asking if the person has gone on a
spending spree; the simplest form of this theft involves stealing the card

20
Tannan M.L., Tannan's Banking Law & Practice in India, LexisNexis Butterworths,
22nd Edition, New Delhi, 2008,pp.1123
53
itself and charging a number of high-ticket items to it in the first few
minutes or hours before it is reported as stolen.21

A variant of this is to copy just the credit card numbers (instead of


drawing attention by stealing the card itself) in order to use the numbers
in online frauds.

Duplication or skimming of card information

This takes a number of forms, ranging from a dishonest merchant


copying clients' credit card numbers for later misuse (or a thief using
carbon copies from old mechanical card imprint machines to steal the
info) to the use of tampered credit or debit card readers to copy the
magnetic stripe from a payment card while a hidden camera captures the
numbers on the face of the card.

Some thieves have surreptitiously added equipment to publicly


accessible automatic teller machines; a fraudulent card stripe reader
would capture the contents of the magnetic stripe while a hidden camera
would sneak a peek at the user's PIN. The fraudulent equipment would
then be removed and the data used to produce duplicate cards that could
then be used to make ATM withdrawals from the victims' accounts.

8. Impersonation and theft of identity

Theft of identity has become an increasing problem; the scam


operates by obtaining information about a victim, then using the
information to apply for identity cards, accounts and credit in that

21
Bank Frauds prevention and detention By B.R.Sharma, Universal Publication, 3rd
edition, 2011, pp.346-360
54
person's name. Often little more than name, parents' name, date and
place of birth are sufficient to obtain a birth certificate; each document
obtained then is used as identification in order to obtain more identity
documents. Government-issued standard identification numbers such as
"Social security numbers, PAN numbers" are also valuable to the
identity thief.

Unfortunately for the banks, identity thieves have been known to


take out loans and disappear with the cash, quite content to see the
wrong persons blamed when the debts go bad.

9. Fraudulent loan applications

These take a number of forms varying from individuals using


false information to hide a credit history filled with financial problems
and unpaid loans to corporations using accounting fraud to overstate
profits in order to make a risky loan appear to be a sound investment for
the bank.

Some corporations have engaged in over-expansion, using


borrowed money to finance costly mergers and acquisitions and
overstating assets, sales or income to appear solvent even after
becoming seriously financially overextended. The resulting debt load
has ruined entire large companies, such as Italian dairy conglomerate
Parmalat, leaving banks exposed to massive losses from bad loans.

55
10. Money laundering

The term "money laundering" dates back to the days of Al


Capone Money laundering has since been used to describe any scheme
by which the true origin of funds is hidden or concealed.22

The operations work in various forms. One variant involved


buying securities (stocks and bonds) for cash; the securities were then
placed for safe deposit in one bank and a claim on those assets used as
collateral for a loan at another bank. The borrower would then default
on the loan. The securities, however, would still be worth their full
amount. The transaction served only to disguise the original source of
the funds.

11. Forged currency notes

Paper currency is the usual mode of exchange of money at the


personal level, though in business, cheques and drafts are also used
considerably. Bank note has been defined in Section 489A.If forery of
currency notes could be done successfully then it could on one hand
made the forger millionaire and the other hand destroy the economy of
the nation. A currency note is made out of a special paper with a coating
of plastic laminated on both sides of each note to protect the ink and the
anti forgery device from damage. More over these notes have security
threads, water marks. But these things are not known to the majority of
the population. Forged currency notes are in full circulation and its very

22
Bank Frauds prevention and detention By B.R.Sharma, Universal Publication, 3rd
edition, 2011, pp.362-385
56
difficult to catch hold of such forgers as once such notes are circulated
its very difficult to track its origin.23

But the latest fraud which is considered as the safest method of


crime without making physical injury is the Computer Frauds in Banks.

Computerization of banks had started since 1994 in India and till


2000 4000 banks were completely and 9000 branches have been
partially computerised. About 1000 branches had the facilities for
International bank Transaction. Reserve Bank Of India has evolved
working pattern for Local area Network and wide area Network by
instituting different microwave stations so that money transactions could
be carried out quickly and safely.

The main banking tasks which computers perform are


maintaining debit-credit records of accounts, operating automated teller
machines, and carry out electronic fund transfer, print out statements of
accounts create periodic balance sheets etc.

Internet facilities of computer have revolutionized international


banking for fund transfer and for exchanging data of interest relating to
banking and to carry out other banking functions and provides certain
security to the customers by assigning different pin numbers and
passwords.24

23
Bank Frauds prevention and detention By B.R.Sharma, Universal Publication, 3rd
edition, 2011, pp.123-156
24
Bank Frauds prevention and detention By B.R.Sharma, Universal Publication, 3rd
edition, 2011, pp.123-167
57
12. Computer Fraud25

Computer frauds are those involve embezzlement or defalcations


achieved by tampering with computer data record or proggramme, etc.
Where as computer crimes are those committed with a computer that is
where a computer acts as a medium. The difference is however
academic only.

Bank computer crimes are committed mainly for money, however


other motive or The Mens rea can be:

§ Personal vendetta;
§ Black mail;
§ Ego;
§ Mental aberrations;
§ Mischief

Bank computer crimes have a typical feature, the evidence


relating to crime is intangible. The evidences can be easily erased,
tampered or secreted. More over it is not easily detectable. More over
the evidence connecting the criminal with the crime is often not
available. Computer crimes are different from the usual crimes mainly
because of the mode of investigation. There are no eyewitness, no usual
evidentiary clues and no documentary evidences.26

It is difficult to investigate for the following reasons:27

25
S.N.Gupta., The Banking Law, vol.ii, Universal Publication, 5th Edition, New Delhi,
2010, pp.1775
26
Marri Ramu, “Bank Fraud”, Article on Times of India
27
S.N.Gupta., The Banking Law, vol.ii, Universal Publication, 5th Edition, New Delhi,
2010, pp.1784
58
• Hi-tech crime

The information technology is changing very fast. the normal


investigator does not have the proper background and knowledge,
special investigators have to be created to carry out the investigations.
the FBI of USA have a cell, even in latest scenario there has been cells
operating in the maharashtra police department to counter cyber
crimes.C.B.I also have been asked to create special team for fighting
cyber crimes.

• International crime

A computer crime may be committed in one country and the


result can be in another country. there has been lot of jurisdictional
problem an though the Interpol does help but it too has certain
limitations. the different treaties and conventions have created
obstructions in relation to tracking of cyber criminals hiding or
operation in other nations

• No-scene crime:

The computer satellite computer link can be placed or located any


where. The usual crime scene is the cyber space. The terminal may be
anywhere and the criminal need not indicate the place. the only evidence
a criminal leaves behind is the loss to the crime.

• Faceless crime:

The major advantage criminal has in instituting a computer crime


is that there is no personal exposure, no written documents, no

59
signatures, no fingerprints or voice recognition. The criminal is truly and
in strict sense faceless.

There are certain spy software’s which is utilized to find out


passwords and other vital entry information to a computer system. The
entry is gained through a spam or bulk mail.

The existing enacted laws of India are not at all adequate to


counter cyber crimes. The Indian Penal code, evidence act, and criminal
procedure code has no clue about computers when they were codified. It
is highly required to frame and enact laws which would deal with those
subjects which are new to the country specially cyber law; Intellectual
property right etc.

The Reserve Bank of India has come up with different proposals


to make the way easier, they have enacted electronic fund transfer act
and regulations, have amended, The Reserve Bank of India Act, Bankers
Book Evidence Act etc., experience of India in relation to information
and technology is limited and is in a very immature state. It is very
much imperative that the state should seek the help of the experienced
and developed nations.

Modus operandi:

The method of alterations of cheques drafts receipts and other


fiduciary documents are comparatively simple both manually and with
the help of technology.

Illustration:

60
A classic case is the recent loan racket busted by the Uppal police
in State Bank of India (SBI)'s Chikkadpally branch. The modus operandi
adopted by the racketeers was interesting. A gang of four members
approached owner of a newly-constructed apartment building saying
they were interested in buying the flats.

The gang took xerox copies of the building documents after


entering into an oral agreement of sale with the builder by paying Rs. 2
lakhs as an advance. Later, they created forged documents in the name
of building's owner establishing that the latter had sold five flats to five
defence employees.

Incidentally, the salary slips and other documents submitted by


the loan seekers were found to be genuine. "This was made possible
because the gang paid money to the defence employees to utilise their
documents," says an investigator. The gang hired an impostor who
executed the sale deed posing as the original building owner.

"We could not establish criminal negligence on the part of the


bank manager and hence he was not arrested," say the detectives. The
police learnt that the main lapse in the system is that the banks never
asked for the original documents at any stage except for the sale deed
for execution of which the offenders planted an impostor.

Bank rules

After receiving xerox papers (which were actually forged by the


offenders) of the property, the bank passed the same on to the legal
section. After scrutiny, the legal consultant told the bank that the xerox

61
documents were `perfect' and to release loan after execution of sale
deed.

The bank rules state that loan applications can be examined "even
with xerox copies of documents. The alleged greediness of employees to
give their salary slips and other documents on payment of some money
made the job of the cheats easier.

This is not an isolated case. With a similar modus operandi, a


gang cheated three banks to the tune of Rs. 1 crore in Saroornagar police
station area. The police opine that unless bankers evolve a foolproof
system, the offenders continue to take advantage of the lapses

Though computer based banking crimes are yet limited but it is


increasing with a huge pace. Their investigation is highly intricate and
daunting. Prevention is the best alternative. It is comparatively easier,
though even with the best laws, efficient investigation team the
successful conclusion of most cyber crimes will remain a remote
possibility .There fore emphasis is more on prevention. In bank
administration, one feels that not much attention is paid to preventive
measures. Bank managements must direct their orientation towards
preventive rather than detective or punitive measures. Preventive
vigilance must be the prime agenda to bring down the occurrence of
fraud in banks.

13. Phishing and Internet fraud

Phishing operates by sending forged e-mail, impersonating an


online bank, auction or payment site; the e-mail directs the user to a
forged web site which is designed to look like the login to the legitimate
62
site but which claims that the user must update personal info. The
information thus stolen is then used in other frauds, such as theft of
identity or online auction fraud.

A number of malicious "Trojan horse" programmes have also


been used to snoop on Internet users while online, capturing keystrokes
or confidential data in order to send it to outside sites.

The media runs stories on an almost daily basis covering the latest
bank to have their customers targeted and how many victims succumbed
to the attack. It may be you too. Suppose, one day you open your email,
and found a weird looking mail, something phisy! A message in your
inbox from your bank with which you have an internet enabled account
asking to update your account with your personal information, login
detail etc. on pretext of up gradation of server of the bank. You would
also see a link, by clicking on which you would be linked to a look alike
website of your bank which looks quite authentic and convincing.
However, you may be smart enough to know that this is a trap by a con
to get your vital personal information to make fraudulent financial
transactions and swindle your money. But there are many others who are
not as smart as you, and fall into the trap and pass on their vital login
details and lose their valuable money.

Phishing is the internet age crime, born out of the technological


advances in internet age. “Phishing" is a newer form of social
engineering. Typically, Phishing is a form of social engineering,
characterized by attempts to fraudulently acquire sensitive information,
such as passwords, usernames, login IDs, ATM PINs and credit card
details, by masquerading as a trustworthy person or business in an
63
apparently official electronic communication, such as an email or an
instant message. The phishing attacks will then direct the recipient to a
web page (mirror webpage) so exactly designed to look as a
impersonated organization’s (often bank & financial institution) own
website and then they cleverly harvest the user's personal information,
often leaving the victim unaware of the attack.
Phishing has become so rampant that even, the Oxford English
Dictionary added “Phishing” to its latest publication making it a
definitive word of English Language. It defines “Phishing” as:

“phishing noun the fraudulent practice of sending emails


purporting to be from reputable companies in order to induce individuals
to reveal personal information, such as passwords and credit card
numbers, online.”

As per the American Banker’s Association “Phishing attacks use


'spoofed' e-mails and fraudulent Web sites designed to fool recipients
into divulging personal financial data such as credit card numbers,
account usernames and passwords, Social Security numbers, etc. By
hijacking the trusted brands of well-known banks, online retailers and
credit card companies, phishers are able to convince up to 5 percent of
recipients to respond to them.”

The Anti-Phishing Working Group (APWG) which is an industry


association focused on eliminating identity theft and fraud from the
growing problem of phishing and email spoofing defines Phishing as a
form of online identity theft that employs both social engineering and
technical subterfuge to steal consumers' personal identity data and
financial account credentials.
64
According to the Annual Report of the Indian Computer
Emergency Response Team (CERT-In), Deptt. of Information
Technology, Ministry of Communications & Information Technology,
(Govt. of India) in the year 2009, the CERT-In handled about 374
phishing incidents.

Major factors for increase in Phishing Attacks:


There are three major factors behind the recent spurt in phishing attacks
worldwide particularly in India:

Unawareness among public: Worldwide, particularly in India,


there has been lack of awareness regarding the phishing attacks among
the common masses. The users are unaware that their personal
information is actively being targeted by criminals and they do not take
proper precautions when they conduct online activities.

Unawareness of policy – The fraudsters often count on victim’s


unawareness of Bank/financial institution policies and procedures for
contacting customers, particularly for issues relating to account
maintenance and fraud investigation. Customers unaware of the policies
of an online transaction are likely to be more susceptible to the social
engineering aspect of a phishing scam, regardless of technical
sophistication.

Technical sophistication – Fraudsters are now using advanced


technology that has been successfully used for activities such as spam,
distributed denial of service (DDoS), and electronic surveillance. Even
as customers are becoming aware of phishing, criminals are developing
techniques to counter this awareness. These techniques include URL

65
obfuscation to make phishing emails and web sites appear more
legitimate, and exploitation of vulnerabilities in web browsers that allow
the download and execution of malicious code from a hostile web site.

Techniques of Phishing attacks

Man-in-the-middle attacks: In this class of attack, the attacker sits


between the customer and the real web-based application, and proxies
all communications between the systems. This form of attack is
successful for both HTTP and HTTPS communications. The customer
connects to the attackers server as if it was the real site, while the
attackers server makes a simultaneous connection to the real site. The
attackers server then proxies all communications between the customer
and the real web-based application server – typically in real-time.

URL Obfuscation Attacks: Using URL obfuscation techniques


which involves minor changes to the URL, the fraudster tricks the user
to follow a hyperlink (URL) to the attacker's server, without the users
realizing that he has been duped. URL Obfuscation uses the unspoken,
unwritten secrets of the TCP/IP protocol to trick users into viewing a
website that they did not intend to visit.

XSS (Cross-site Scripting): Cross-site scripting attacks (XSS)


make use of custom URL or code injection into a valid web-based
application URL or imbedded data field. In general, these XSS
techniques are the result of failure of a site to validate user input before
returning it to the client’s web-browser.

66
Phishing scenario in XSS:

§ Victim logs into a web site


§ Attacker has spread “mines” using an XSS vulnerability
§ Victim fall upon an XSS mine
§ Victim gets a message saying that their session has terminated,
and they have to to authenticate again
§ Victim’s username and password are send to attacker

Some cases of phishing in India:

Phishing is a relatively new concept in India, unheard of couple of


years back but recently there has been rise in the number of phishing
cases in India where the innocent public fall prey to the sinister design
of fraudster. In India, the most common form of phishing is by email
pretending to be from a bank, where the sinister asks to confirm your
personal information/login detail for some made up reason like bank is
going to upgrade its server. Needless to say, the email contains a link to
fake website that looks exactly like the genuine site. The gullible
customers thinking that it is from the bank, enter the information asked
for and send it into the hands of identity thieves.

There were phishing attempts over ICICI Bank, UTI Bank, HDFC
Bank, SBI etc. in which the Modus operandi was similar. It was reported
that a large number of customers of these banks had received emails,
which have falsely been misrepresented to have been originated from
their bank. The recipients of the mails were told to update their bank
account information on some pretext. These emails included a hyperlink
with-in the email itself and a click to that link took recipients to a web

67
page, which was identical to their bank’s web page. Some of the
unsuspecting recipients responded to these mails and gave their login
information and passwords. Later on, through internet banking and by
using the information so collected a large number of illegal/fraudulent
transactions took place.

Apart from the general banking phishing scams, some of the


recent phishing attacks that took place in India are as follows:

• RBI Phishing Scam:

In a daring phishing attack of its kind, the fraudsters even have


not spared the Reserve Bank of India. The phishing email disguised as
originating from the RBI, promised its recipient prize money of Rs.10
Lakhs within 48 hours, by giving a link which leads the user to a
website that resembles the official website of RBI with the similar logo
and web address. The user is then asked to reveal his personal
information like password, I-pin number and savings account number.
However, the RBI posted a warning regarding the fraudulent phishing e-
mail on the bank's official website.

• IT Department Phishing Scam

The email purporting to be coming from the Income Tax


Department lures the user that he is eligible for the income tax refund
based on his last annual calculation, and seeks PAN CARD Number or
Credit Card details.

68
• ICC World Cup 2011

One of the biggest sporting events is also under phishing attack.


The fraudsters have specifically targeted the internet users of the host
countries i.e. India, Bangladesh and Sri Lanka where the matches of the
world cup are going on. India, which has been allotted 29 matches of the
world cup, is obviously the prime targets of the phishing attacks. The
Modus Operandi is similar to the banking phishing attack. The
fraudsters through the similar looking fake website of organizers of the
event have tried to lure victims with special offers and packages for the
grand finale of the event. The Users were asked for credit card details to
book tickets and packages along with their personal information which
once submitted would be used to compromise the online banking
account of the victim leading to financial losses to the victim.

• Google under Phishing Attack:

Recently, the users of the Google email services, “Gmail”


purportedly received a legal notice from the Gmail team which wanted
users to refurbish their account name, password, occupation, birth date
and country of residence with a warning that users who did not update
their details within 7 days of receiving the warning would lose their
account permanently. However, the spokesperson of the Google denied
any such legal notice coming from them and stated it to be a phishing
attack designed to collect personal information, called 'spoofing' or
'password phishing'.

69
Modus Operandi of phishing attack used to target bank customers
in India:-

1. The hackers have created a fake look alike websites of the target
Bank or the organization and sent emails to the customers of the
bank/organization luring them to provide them the login details in
order to upgrade the server. It was revealed that for this purpose
the fraudster hosted the web page containing URL Links of the
target bank/organization with the help of their associates from
foreign countries like Nigeria, Russia etc.

2. Before a transfer of funds through internet banking is executed,


the bank sends a SMS to the transferor in order to confirm the
transaction. The fraudsters, when they get hold of the customer’s
personal information changed the contact numbers of customers
with their own, so that the transfer of funds through victim
account to beneficiary accounts goes unnoticed.

3. In these cases, when the customers fell into trap and passed on
their Internet banking password and user name, the fraud was
perpetuated in three forms:-

a) The account to account transfer from1 the victim’s account


to a beneficiary account.

b) For recharging the mobile phones.

c) Making purchases online permissible by net banking


facility.

70
4. The beneficiary account in which the funds were transferred were
fake accounts which were opened by giving fake ID documents,
like fake passports, fake election I Cards, Fake Pan Cards etc.

5. The phishing scam revealed the involvement of Nigerians but the


beneficiary accounts were opened in the name of Indians as the
account with Nigerian names would arouse suspicion. Some of
the beneficiary account holders were carrier of the hackers while
some of the beneficiary’s accounts were opened by luring the
persons by giving them some consideration in lieu of their
services to open the account in their names and get the ill-gotten
money transferred in their accounts.

6. The suspected IP addresses from which the fraudulent internet


transaction took place were of various foreign countries which
indicate the use of proxy IPs by the hackers to mislead the
investigation agencies.

7. It has been revealed that the amount has been withdrawn


immediately by the hacker after the account has been
compromised.

Phishing-A Cyber Crime, the provisions of Information Technology


Act, 2000

The phishing fraud is an online fraud in which the fraudster


disguise themselves and use false and fraudulent websites of bank and
other financial institutions, URL Links to deceive people into disclosing
valuable personal data, later on which is used to swindle money from
victim account. Thus, essentially it is a cyber crime and it attracts many
71
penal provisions of the Information Technology Act, 2000 as amended
in 2008 adding some new provisions to deal with the phishing activity.
The following Sections of the Information Technology Act, 2000 are
applicable to the Phishing Activity:

Section 66: The account of the victim is compromised by the phisher


which is not possible unless & until the fraudster fraudulently effects
some changes by way of deletion or alteration of information/data
electronically in the account of the victim residing in the bank server.
Thus, this act is squarely covered and punishable u/s 66 IT Act.

Section 66A: The disguised email containing the fake link of the bank
or organization is used to deceive or to mislead the recipient about the
origin of such email and thus, it clearly attracts the provisions of Section
66A IT Act, 2000.

Section 66C: In the phishing email, the fraudster disguises himself as


the real banker and uses the unique identifying feature of the bank or
organization say Logo, trademark etc. and thus, clearly attracts the
provision of Section 66C IT Act, 2000.

Section 66D: The fraudsters through the use of the phishing email
containing the link to the fake website of the bank or organizations
personates the Bank or financial institutions to cheat upon the innocent
persons, thus the offence under Section 66D too is attracted.

The Information Technology Act, 2000 makes penal provisions


under the Chapter XI of the Act and further, Section 81 of the IT Act,
2000 contains a non obstante clause, i.e. “the provisions of this Act shall
have effect notwithstanding anything inconsistent therewith contained in
72
any other law for the time being in force”. The said non obstante clause
gives an overriding effect to the provisions of the IT Act over the other
Acts including the Indian Penal Code. The aforesaid penal provisions of
the IT Act, 2000 which is attracted to the phishing scam are however
been made bailable by virtue of Section 77B IT Act intentionally in
view of the fact that there is always an identity conflict as to the correct
or accurate identity of the person behind the alleged phishing scam and
there is always a smokescreen behind the alleged crime as to the identity
of the person who has actually via these online computer resources have
or have not committed the offence and in view of the possible misuse of
the penal provision for cyber offences as contained in the IT Act, the
offence is made bailable.

What Should Internet Users Do About Phishing Schemes?


With online transactions on rise, certain precautionary measures are to
be taken by all those who make their transactions online, like credit card
holders, internet bank users, to shield themselves from such frauds.
Some of the precautionary measures are as follows:-

1) The US Department of Justice recommends the user to follow a


golden rule what is known as Stop, Look & Call (SLC). The SLC
rule emphasizes that:-

a. You must STOP because the phishing emails are always


desperate in their language and so eager to retrieve
information from you. It generally comes with a warning
you give the personal information or else your account
would be deactivated. Be automatically suspicious of any

73
email with urgent/desperate requests for personal financial
information.

b. You must LOOK because the link provided in the phishing


email is a fake URL and by using your sixth sense, you
would see that email address itself is bogus. For example,
an email which purportedly come from UTI Bank might be
UTI.Bank @ yahoo.com which obviously is not the
original email address of UTI Bank.

c. You must CALL because in case you find the email


suspicious & even if you don’t fall into the trap, it should
be your endeavor as a good citizen to inform the target
bank and the law enforcement agencies so that timely
action should be taken to save other customers from being
trapped by the fraudster.

2) Check your credit card and bank account statements regularly and
look for unauthorized transactions, even small ones. Report
discrepancies immediately

3) Ensure that your system has the current security software


applications like; anti-spam, anti-phishing, anti-virus and anti-
spyware etc.

What do you do if you think you are a victim?

• If you have provided account numbers, pin number, password,


login detail to the phisher, immediately notify the bank with

74
which you have the account so that your accounts can’t be
compromised.

• Even if you don’t fall into the trap, it is your duty as a good
citizen to avoid others from falling into the trap. You should
report phishing to bank or agency that was being impersonated as
well as to police.

Phishing is a major concern in the contemporary e-commerce


environment in India and will continue to be so because of the lack of
awareness among the Internet users who are new to the internet realm.
There is no silver bullet to thwart the phishing attack. However, it has
been noticed in the most of the phishing scams worldwide particularly in
India that the hacker succeeds in phishing attempt due to the
uninformed, gullible customers who without knowing that they are
being trapped unwittingly pass on the information asked for by the
fraudster. Therefore, the awareness and customer education is the key
here to fight the menace of the “Phishing” apart from mitigating or
preventative measures. The law enforcement agencies, the legislature,
the industry should come together and coordinate in their fight against
the menace of the Phishing.28

28
Cyber Fraud by Neeraj Aarora
75
CHAPTER - 4

LAW RELATING TO BANKING FRAUD IN


INDIA

In previous chapter we have discussed about various types of


banking fraud. Now time has come to discuss various laws to deal with
such Banking Fraud and what action can be taken by aggrieved person.
In case Bank officer involved in frauds, then Bank generally initiates
departmental inquiry and in case of offence is proved against delinquent,
punitive action may be pronounced. Punitive action against a delinquent
not only deters the culprit, but also deters other potential fraudsters. In
this chapter, we will discuss various section and provisions of Indian
Penal Code, Indian Evidence Act, Indian Contract Act, Criminal
Procedure Code, The reserve Bank of India Act, The Reserve Bank of
India (Note Refund)Rules and Negotiable Instrument Act etc.

I. Indian Penal Code

The various provisions which dealt with banking fraud are as


under-

"Wrongful gain".--"Wrongful gain" is gain by unlawful means of


property to which the person gaining is not legally entitled.29

29
Section 23 of Indian Penal Code, 1860

76
"Wrongful loss".--"Wrongful loss" is the loss by unlawful meansof
property to which the person losing it is legally entitled30 Gaining
wrongfully.

Dishonestly

Whoever does anything with the intention of causing wrongful


gain to one person or wrongful loss to another person, is said to do that
thing "dishonestly".31

Fraudulently

A person is said to do a thing fraudulently if he does that thing


with intent to defraud but not otherwise.32

Counterfeit

A person is said to "counterfeit" who causes one thing to resemble


another thing, intending by means of that resemblance to practice
deception, or knowing it to be likely that deception will thereby be
practiced.33

When a person causes one thing to resemble another thing, and


the resemblance is such that a person might be deceived thereby, it shall
be presumed, until the contrary is proved, that the person so causing the
one thing to resemble the other thing intended by means of that
resemblance to practice deception or knew it to be likely that deception
would thereby be practiced.

30
Section 23 of Indian Penal Code, 1860
31
Section 24 of Indian Penal Code, 1860
32
Section 25 of Indian Penal Code, 1860
33
Section 28 of Indian Penal Code, 1860
77
Document

The word "document" denotes any matter expressed or described


upon any substance by means of letters, figures, or marks, or by more
than one of those means, intended to be used, or which may be used, as
evidence of that matter.34

Electronic record

The words "electronic record" shall have the meaning assigned to


them in clause (t) of sub-section (1) of section 2 of the Information
Technology Act, 2000.35

Acts done by several persons in furtherance of common intention

When a criminal act is done by several persons in furtherance of


the common intention of all, each of such persons is liable for that act in
the same manner as if it were done by him alone.36

Abetment of a thing

A person abets the doing of a thing, who37—

First.— Instigates any person to do that thing; or

Secondly.—Engages with one or more other person or persons in any


conspiracy for the doing of that thing, if an act or illegal omission takes
place in pursuance of that conspiracy, and in order to the doing of that
thing; or
34
Section 29 of Indian Penal Code, 1860
35
Section 29-A of Indian Penal Code, 1860
36
Section 34 of Indian Penal Code, 1860
37
Section 107 of Indian Penal Code, 1860
78
Thirdly.— Intentionally aids, by any act or illegal omission, the doing of
that thing.

Explanation 1 : A person who, by wilful misrepresentation, or by wilful


concealment of a material fact which he is bound to disclose, voluntarily
causes or procures, or attempts to cause or procure, a thing to be done, is
said to instigate the doing of that thing.

Definition of criminal conspiracy.

Definition of criminal conspiracy.- When two or more persons


agree to do, or cause to be done,38—

(1) an illegal act, or

(2) an act which is not illegal by illegal means, such an agreement is


designated a criminal conspiracy:

Provided that no agreement except an agreement to commit an


offence shall amount to a criminal conspiracy unless some act besides
the agreement is done by one or more parties to such agreement in
pursuance thereof.

Coin defined39

Coin is metal used for the time being as money, and stamped and
issued by the authority of some State or Sovereign Power in order to be
so used.

38
Section 120-A of Indian Penal Code, 1860
39
Section 230 of Indian Penal Code, 1860
79
Indian coin.— Indian coin is metal stamped and issued by the authority
of the Government of India in order to be used as money; and metal
which has been so stamped and issued shall continue to be Indian coin
for the purposes of this Chapter, notwithstanding that it may have ceased
to be used as money.

Counterfeiting coin

Whoever counterfeits or knowingly performs any part of the


process of counterfeiting coin, shall be punished with imprisonment of
either description for a term which may extend to seven years, and shall
also be liable to fine.40

Counterfeiting Indian coin41

Whoever counterfeits, or knowingly performs any part of the


process of counterfeiting Indian coin, shall be punished with
imprisonment for life, or with imprisonment of either description for a
term which may extent to ten years, and shall also be liable to fine

Theft

Whoever, intending to take dishonestly any moveable property


out of the possession of any person without that person’s consent,
moves that property in order to such taking, is said to commit theft.42

40
Section 231 of Indian Penal Code, 1860
41
Section 232 of Indian Penal Code, 1860
42
Section 378 of Indian Penal Code, 1860
80
Explanation1. -A thing so long as it is attached to the earth, not being
movable property, is not the subject of theft; but it becomes capable of
being the subject of theft as soon as it is severed from the earth.

Explanation 2. —A moving effected by the same act which affects the


severance may be a theft.

Explanation3. —A person is said to cause a thing to move by removing


an obstacle which prevented it from moving or by separating it from any
other thing, as well as by actually moving it.

Explanation 4. —A person, who by any means causes an animal to


move, is said to move that animal, and to move everything which, in
consequence of the motion so caused, is moved by that animal.

Explanation 5. —The consent mentioned in the definition may be


express or implied, and may be given either by the person in possession,
or by any person having for the purpose authority either express or
implied.

Theft by clerk or servant of property in possession of master.

Whoever, being a clerk or servant, or being employed in the


capacity of a clerk or servant, commits theft in respect of any property in
the possession of his master or employer, shall be punished with
imprisonment of either description for a term which may extend to
seven years, and shall also be liable to fine.43

43
Section 381 of Indian Penal Code, 1860
81
Robbery. —In all robbery there is either theft or extortion.44

When theft is robbery. —Theft is “robbery” if, in order to the


committing of the theft, or in committing the theft, or in carving away or
attempting to carry away property obtained by the theft, the offender, for
that end, voluntarily cause or attempts to cause to any person death or
hurt or wrongful restraint, or fear of instant death or of instant hurt, or of
instant wrongful restraint.

When extortion is robbery. —Extortion is “robbery” if the offender, at


the time of committing the extortion, is in the presence of the person put
in fear, and commits the extortion by putting that person in fear of
instant death, of instant hurt, or of instant wrongful restraint to that
person or to some other person, and, by so putting in fear, induces the
person so put in fear then and there to deliver up the thing extorted.

Explanation. —The offender is said to be present if he is sufficiently


near to put the other person in fear of instant death, of instant hurt, or of
instant wrongful restraint.

Section 391 Dacoity. —When five or more persons conjointly commit


attempt to commit a robbery, or where the whole number of persons
conjointly committing or attempting to commit a robbery, and persons
present and aiding such commission or attempt to five or more, every
person so committing, attempting or aiding, is said to commit “dacoity”.

Section 392. Punishment for robbery. —Whoever commits robbery


shall be punished with rigorous imprisonment for a term which may
extend to ten years, and shall also be liable to fine; and, if the robbery be
44
Section 390 of Indian Penal Code, 1860
82
committed on the highway between sunset and sunrise, the
imprisonment may be extended to fourteen years.

Section 395. Punishment for dacoity. -Whoever commits dacoity shall


be punished with [imprisonment for life], or with rigorous imprisonment
for a term which may extend to ten years, and shall also be liable to fine.

Dishonest misappropriation of property

Whoever dishonestly mis-appropriates or converts to his own use any


movable property, shall be punished with imprisonment of either
description for a term which may extend to two years, or with fine, or
with both.45

Explanation.1—A dishonest misappropriation for a time only is a


misappropriation with the meaning of this section.

Explanation 2. —A person who finds property not in the possession of


any other person, and takes such property for the purpose of protecting
if for, or of restoring it to, the owner does not take or misappropriate it
dishonestly, and is not guilty of an offence; but he is guilty of the
offence above defined, if the appropriates it to his own use, when the
knows or has the means of discovering the owner, or before he has used
reasonable means to discover and give notice to the owner and has kept
the property a reasonable time to enable the owner to claim it.

What are reasonable means or what is a reasonable time in such a


case, is a question of fact.

45
Section 403 of Indian Penal Code, 1860
83
It is not necessary that the finder should know who is the owner
of the property, or that any particular person is the owner of it; it is at
the time of appropriating it, he does not believe it to be his own
property, or in good faith believe that the real owner cannot found.

Section 408. Criminal breach of trust by clerk or servant. —


Whoever, being a clerk or servant or employed as a clerk or servant, and
being in any manner entrusted in such capacity with property, or with
any dominion over property, commits criminal breach of trust in respect
of that property, shall be punished with imprisonment of either
description for a term which may extend to seven years, and shall also
be liable to fine

Section 409. Criminal breach of trust by public servant, or by


banker, merchant or agent. —Whoever, being in any manner
entrusted with property, or with any dominion over property in his
capacity of a public servant or in the way of his business as a banker,
merchant, factor, broker, attorney or agent, commits breach of trust in
respect of that property, shall be punished with 46[imprisonment for life],
or with imprisonment of either description for a term which may extend
to ten years, and shall also be liable to fine.

Section 410. Stolen Property. —Property, the possession whereof has


been transferred by theft, or by extortion, or by robbery, and property
which has been criminally misappropriated or in respect of which
criminal breach of trust has been committed, is designed as “stolen
property”, [whether the transfer has been made, or the misappropriation

46
Subs. by Act 26 of 1955, sec. 117 and Sch., for “transportation for life” (w.e.f. 1-1-
1956).
84
or breach of trust has been committed, within or without [India]]. But, if
such property subsequently comes into the possession of a person
legally entitled to the possession thereof, it then ceases to be stolen
property.

Cheating

Whoever, by deceiving any person, fraudulently or dishonestly


induces the person so deceived to deliver any property to any person, or
to consent that any person shall retain any property, or intentionally
induces the person so deceived to do or omit to do anything which he
would not do or omit if he were not so deceived, and which act or
omission causes or is likely to cause damage or harm to that person in
body, mind, reputation or property, is said to "cheat".47

Explanation. —A dishonest concealment of facts is deception within the


meaning of this section.

Section 416. Cheating by personation. —A person is said to “cheat by


personation” if he cheats by pretending to be some other person, or by
knowingly substituting one person for another, or representing that he or
any other person is a person other than he or such other person really is.

Explanation. —The offence is committed whether the individual


personated is a real or imaginary person.

Section 419. Punishment for cheating by personation. —Whoever


cheats by personation shall be punished with imprisonment of either

47
Section 415 of Indian Penal Code, 1860
85
description for a term which may extend to three years, or with fine, or
with both Section 420.

Forgery

Whoever makes any false documents or false electronic record or


part of a document or electronic record, with intent to cause damage or
injury], to the public or to any person, or to support any claim or title, or
to cause any person to part with property, or to enter into any express or
implied contract, or with intent to commit fraud or that fraud may be
committed, commits forgery. 48

Making a false document

A person is said to make a false document or false electronic


record—

First—Who dishonestly or fraudulently49—

(a) makes, signs, seals or executes a document or part of a document;

(b) makes or transmits any electronic record or part of any electronic


record;

(c) affixes any electronic signature on any electronic record;

(d) makes any mark denoting the execution of a document or the


authenticity of the electronic signature, with the intention of
causing it to be believed that such document or part of document,
electronic record or electronic signature was made, signed, sealed,
48
Section 463 of Indian Penal Code, 1860
49
Section 464 of Indian Penal Code, 1860
86
executed, transmitted or affixed by or by the authority of a person
by whom or by whose authority he knows that it was not made,
signed, sealed, executed or affixed; or

Secondly—Who, without lawful authority, dishonestly or fraudulently,


by cancellation or otherwise, alters a document or an electronic record in
any material part thereof, after it has been made, executed or affixed
with electronic signature either by himself or by any other person,
whether such person be living or dead at the time of such alteration; or

Thirdly—Who dishonestly or fraudulently causes any person to sign,


seal, execute or alter a document or an electronic record or to affix his
electronic signature on any electronic record knowing that such person
by reason of unsoundness of mind or intoxication cannot, or that by
reason of deception practised upon him, he does not know the contents
of the document or electronic record or the nature of the alteration.

Explanation 1—A man’s signature of his own name may amount to


forgery.

Explanation 2—The making of a false document in the name of a


fictitious person, intending it to be believed that the document was made
by a real person, or in the name of deceased person, intending it to be
believed that the document was made by the person in his lifetime, may
amount to forgery.

Section 467. Forgery of valuable security, will, etc.: - Whoever forges


a document which purports to be a valuable security or a will, or an
authority to adopt a son, or which purports to give authority to any
person to make or transfer any valuable security, or to receive the
87
principal, interest or dividends thereon, or to receive or deliver any
money, moveable property, or valuable security, or any document
purporting to be an acquittance or receipt acknowledging the payment of
money, or an acquittance or receipt for the delivery of any moveable
property or valuable security, shall be punished with [imprisonment for
life], or with imprisonment of either description for a term which may
extend to ten years, and shall also be liable to fine.

468. Section Forgery for purpose of cheating: - Whoever commits


forgery, intending that the document forged shall be used for the
purpose of cheating, shall be punished with imprisonment of either
description for a term which may extend to seven years, and shall also
be liable to fine.

Section 470. Forged document:-A false document made wholly or in


part by forgery is designated “a forged document”.

Section 471. Using as genuine a forged document: --Whoever


fraudulently or dishonestly uses as genuine any document which he
knows or has reason to believe to be a forged document, shall be
punished in the same manner as if he had forged such document.

Section 472. Making or possessing counterfeit seal, etc., with intent


to commit forgery punishable under section 467: -- Whoever makes
or counterfeits any seal, plate or other instrument for making an
impression, intending that the same shall be used for the purpose of
committing any forgery which would be punishable under Section 467
of this Code, or, with such intent, has in his possession any such seal,
plate or other instrument, knowing the same to be counterfeit, shall be

88
punished with 50[imprisonment for life], or with imprisonment of either
description for a term which may extend to seven years, and shall also
be liable to fine.

Section 473. Making or possessing counterfeit seal, etc., with intent


to commit forgery punishable otherwise:-Whoever makes or
counterfeit any seal, plate or other instrument for making an impression,
intending that the same shall be used for the purpose of committing any
forgery which would be punishable under any section of this Chapter
other than Section 467, or, with such intent, has in his possession any
such seal, plate or other instrument, knowing the same to be counterfeit,
shall be punished with imprisonment of either description for a term
which may extend to seven years, and shall also be liable to fine.

Section 474. Having possession of document described in Section


466 or 467, knowing it to be forged and intending to use it as
genuine:-Whoever has in his possession any document, knowing the
same to be forge, and intending that the same shall fraudulently or
dishonestly be used as genuine, shall, if the document is one of the
description mentioned in section 466 of this Code, be punished with
imprisonment of either description for a term which may extend to
seven years, and shall also be liable to fine ; and if the document is one
of the description mentioned in section 467, shall be punished with
51
[imprisonment for life], or with imprisonment of either description, for
a term which may extend to seven years, and shall also be liable to fine.

50
Subs. by Act 26 of 1955, sec. 117 and sch., for “transportation for life” (w.e.f. 1-1-
1956).
51
Subs. by Act 26 of 1955, sec. 117 and sch., for “transportation for life” (w.e.f. 1-1-
1956).
89
Section 475. Counterfeiting device or mark used for authenticating
documents described in Section 467, or possessing counterfeit
marked material: -- Whoever counterfeits upon, or in the substance or,
any material, any device or mark used for the purpose of authenticating
any document described in Section 467 of this Code, intending that such
device or mark shall be used for the purpose of giving the appearance of
authenticity to any document then forged or thereafter to be forged on
such material, or who, with such intent, has in his possession any
material upon or in the substance of which any such device or mark has
been counterfeited, shall be punished with 52[imprisonment for life], or
with imprisonment of either description for a term which may extend to
seven years, and shall also be liable to fine.

Section 476. Counterfeiting device or mark used for authenticating


documents other than those described in Section 467, or possessing
counterfeit marked material: -- Whoever counterfeits upon, or in the
substance of, any material, any device or mark used for the purpose of
authenticating any document other than the documents described in
Section 467 of this Code, intending that such device or mark shall be
used for the purpose of giving the appearance of authenticity to any
document then forged or thereafter to be forged on such material, or
who with such intent, has in his possession any material upon or in the
substance of which any such device or mark has been counterfeited,
shall be punished with imprisonment of either description for a term
which may extend to seven years, and shall also be liable to fine.

52
Subs. by Act 26 of 1955, sec. 117 and sch., for “transportation for life” (w.e.f. 1-1-
1956).
90
Section 477. Fraudulent cancellation, destruction, etc., of will,
authority to adopt, or valuable security: --Whoever fraudulently or
dishonestly, or with intent to cause damage or injury to the public or to
any person, cancels, destroys or defaces, or attempts to cancel, destroy
or deface, or secretes or attempts to secrete any document which is or
purports to be a will, or an authority to adopt a son, or any valuable
security, or commits mischief in respect of such document, shall be
punished with 53[imprisonment for life], or with imprisonment of either
description for a term which may extend to seven years, and shall also
be liable to fine.

Section 477A. Falsification of accounts: -- Whoever, being a clerk,


officer or servant, or employed or acting in the capacity of a clerk,
officer or servant, willfully, and with intent to defraud, destroys, alters,
mutilates or falsifies any book, paper, writing, valuable security or
account which belongs to or is in the possession of his employer, or has
been received by him for or on behalf of his employer, or willfully, and
with intent to defraud, makes or abets the making of any false entry in,
or omits or alters or abets the omission or alteration of any material
particular of any material particular form or in, any such book, paper,
writing, valuable security or account, shall be punished with
imprisonment of either description for a term which may extend to
seven years, or with fine, or with both.

Explanation—It shall be sufficient in any charge under this section to


allege a general intent to defraud without naming any particular person
intended to be defraud without naming any particular person intended to

53
Subs. by Act 26 of 1955, sec. 117 and sch., for “transportation for life” (w.e.f. 1-1-
1956).
91
be defrauded or specifying any particular sum of money intended to be
the subject of the fraud, or any particular day on which the offence was
committed.

Section 489A. Counterfeiting currency-notes or bank-notes:--


Whoever counterfeits, or knowingly performs any part of the process of
counterfeiting, any currency-note or bank-note, shall be punished with
54
[imprisonment for life], or with imprisonment of either description for
a term which may extend to ten years, and shall also be liable to fine.

Explanation—For the purposes of this section and of sections 489B,


55
[489C, 489D and 489E], the expression “bank-note” means a
promissory note or engagement for the payment of money to bearer on
demand issued by any person carrying on the business of banking in any
part of the world, or issued by or under the authority of any State or
Sovereign Power, and intended to be used as equivalent to, or as a
substitute for money.

Section 489B. Using as genuine, forged or counterfeit currency-


notes or bank-notes: - Whoever sells to, or buys or receives from, any
other person, or otherwise traffics in or uses as genuine, any forged or
counterfeit currency-note or bank-note, knowing or having reason to
believe the same to be forged or counterfeit, shall be punished with
56
[imprisonment for life], or with imprisonment of either description for
a term which may extend to ten years, and shall also be liable to fine.

54
Subs. by Act 26 of 1955, s. 117 and Sch., for “transportation for life” (w.e.f. 1-1-1956).
55
Subs. by Act 35 of 1950, s. 3 and Sch. II, for “489C and 489D”.
56
Subs. by Act 26 of 1955, sec. 117 and sch., for “transportation for life” (w.e.f.1-1-1956).
92
Section 489C. Possession of forged or counterfeit currency-notes or
bank-notes: - Whoever has in his possession any forged or counterfeit
currency-note or bank-note, knowing or having reason to believe the
same to be forged or counterfeit and intending to use the same as
genuine or that it may be used as genuine, shall be punished with
imprisonment of either description for a term which may extend to
seven years, or with fine, or with both.

Section 489D. Making or possessing instruments or materials for


forgoing or counterfeiting currency-notes or bank-notes: -- Whoever
makes, or performs, any part or the process of making, or buys or sells
or disposes of, or has in his possession, any machinery, instrument or
material for the purpose of being used, or knowing or having reason to
believe that it is intended to be used, for forging or counterfeiting any
currency-note or bank-note, shall be punished with 57[imprisonment for
life], or with imprisonment of either description for a term which may
extend to ten years, and shall also be liable to fine.]

Section 489E. Making or using documents resembling currency-


notes or bank-notes: -

(1) Whoever makes, or causes to be made, or uses for any purpose


whatsoever, or delivers to any person, any document purporting to
be, or in any way resembling, or so nearly resembling as to be
calculated to deceive any currency-note or bank shall be punished
with fine which may extend to one hundred rupees.

57
Subs. by Act 26 of 1955, s. 117 and Sch., for “transportation for life” (w.e.f. 1-1-1956).
93
(2) If any person, whose name appears on a document the making of
which is an offence under sub-section (1), refuses, without lawful
excuse, to disclose to a police-officer on being so required the
name and address of the person by whom it was printed or
otherwise made, he shall be punished with fine which may extend
to two hundred rupees.

(3) Where the name of any person appears on any document in


respect of which any person is charged with an offence under sub-
section (1) or on any other document used or distributed in
connection with that document it may, until the contrary is
proved, be presumed that person caused the document to be made.

94
CHAPTER- 5

JUDICIAL TRENDS

In one of the more recent decisions on the point, Vinitec


Electronics Pvt. Ltd. v. HCL Infosystems Ltd,58 the Supreme Court
noted:

“11. The law relating to invocation of bank guarantees is by now


well settled by a catena of decisions of this Court. The bank guarantees
which provided that they are payable by the guarantor on demand is
considered to be an unconditional bank guarantee. When in the course
of commercial dealings, unconditional guarantees have been given or
accepted the beneficiary is entitled to realise such a bank guarantee in
terms thereof irrespective of any pending disputes…

“12. When in the course of commercial dealings an unconditional


bank guarantee is given or accepted, the beneficiary is entitled to realise
such a bank guarantee in terms thereof irrespective of any pending
disputes. The bank giving such a guarantee is bound to honour it as per
its terms irrespective of any dispute raised by its customer. The very
purpose of giving such a bank guarantee would otherwise be defeated.
The courts should, therefore, be slow in granting an injunction to
restrain the realisation of such a bank guarantee. The courts have
carved out only two exceptions. A fraud in connection with such a bank
guarantee would vitiate the very foundation of such a bank guarantee.
Hence, if there is such a fraud of which the beneficiary seeks to take

58
AIR 2005 Delhi 314
95
advantage, he can be restrained from doing so. The second exception
relates to cases where allowing the encashment of an unconditional
bank guarantee would result in irretrievable harm or injustice to one of
the parties concerned. Since in most cases payment of money under such
a bank guarantee would adversely affect the bank and its customer at
whose instance the guarantee is given, the harm or injustice
contemplated under this head must be of such an exceptional and
irretrievable nature as would override the terms of the guarantee and
the adverse effect of such an injunction on commercial dealings in the
country. The two grounds are not necessarily connected, though both
may coexist in some cases…”

Must there be a fraud in the creation of the guarantee; such that


the guarantee itself can be entirely avoided? Or is it enough if there is
some dishonesty in the invocation of the guarantee? The Supreme Court
has offered no clear answer to the question of what is meant by ‘fraud’
in this connection (except stating that the fraud must be of an
“egregious” nature – BSES v. Fenner59). However, a recent decision of
a Division Bench of the Bombay High Court – Maytas Infra v. Utility
Energytech60 – suggests that the threshold for fraud is extremely high.
The Court stated:

“Recitals in the preamble do not control operative part of the


deed. In the present case, the operative part may be making a mere
reference to the bank undertaking pecuniary responsibility of the
appellants to the first respondent for due performance of the contract
and for payment of any money but that part or clause does not mean

59
(2006) 2 SCC 728
60
2009 (111) Bom. LR 3693
96
that the parent contract is to be read into the obligations of the bank to
make payment of money in favour of the EPC contractor/ first
respondent…”

The Court went on to suggest that the fact that a party in


encashing a guarantee is violating the underlying contract between the
parties with complete impunity would not be sufficient for establishing
‘fraud’. It is to be hoped that when a matter comes up before the
Supreme Court, a less rigid viewpoint is taken. The question can
perhaps be settled by allowing Courts to look at the conduct of the
parties in individual cases and deciding on the basis of equitable
considerations. At the very least, there appears to be some need for
clarity as to what ‘fraud’ is and what can be considered as ‘irretrievable
injury’ in this regard.

61
In Vineet Narian and Ors. v. Union of India and Anr. in
which this Court has observed that the judiciary must step in, in exercise
of its constitutional obligations under Article 32 read with Article 142 of
the Constitution, to provide a solution till such time as the legislature
acts to perform its role by enacting proper legislation to cover the field.
He submitted that in case this Court is not inclined to issue directions or
writs in the matter, the Court can at least direct that the suggestions
made by the petitioner for checking the NPAs in future be referred to an
independent expert committee.

In Vishaka and Ors. v. State of Rajasthan and Ors. (supra),


this Court laid down guidelines and norms for due observance at work
places and institutions to prevent sexual harassment of working women,
61
(1998) 1 SCC 226
97
because there was no law to prevent such sexual harassment. In the
present case, we find from the additional affidavit filed on behalf of the
Union of India that through various legislative measures such as the
DRT Act, the SARFAESI Act, 2002, the Credit Information Companies
(Regulation) Act, 2005 and through some administrative measures, the
respondents are trying to reduce the number and amount of NPAs and to
detect and check bank frauds in future.

In State of M.P. and Ors. v. Nandlal Jaiswal and Ors.62 in field


of economic activities, there has to be judicial deference to Legislative
and Executive judgment and decisions on complex economic matters are
to be based on experimentation or what one may call `trial and error
method'. It is therefore not for Courts to sit in judgment whether a
particular policy decision of the Government is effective or not, but for
Parliament to debate and decide on the policy decision. In a recent
decision of this Court in Villianur Iyarkkai Padukappu Maiyam v.
Union of India and Ors63., Panchal, J. writing the judgment on behalf
of a three- Judge Bench observed:

It is neither within the domain of the courts nor the scope of


judicial review to embark upon an enquiry as to whether a particular
public policy is wise or whether better public policy can be evolved. Nor
are the courts inclined to strike down a policy at the behest of a
petitioner merely because it has been urged that a different policy would
have been fairer or wiser or more scientific or more logical. Wisdom
and advisability of economic policy are ordinarily not amenable to
judicial review. In matters relating to economic issues the Government

62
(1986) 4 SCC 566
63
(2009) 7 SCC 561
98
has, while taking a decision, right to "trial and error" as long as both trial
and error are bona fide and within the limits of the authority. For testing
the correctness of a policy, the appropriate forum is Parliament and not
the courts.

UBS AG Vs. State Bank of Patiala64

The Petitioner-Bank, namely, United Bank of Switzerland,


Lausanne, Switzerland (hereinafter referred to as 'USB AG') filed three
separate Summary Suits, being Nos. 8907 of 2000, 1515 of 2000 and
6089 of 1999, against the State Bank of Patiala, Federal Bank Limited
and United Western Bank, respectively. The Petitioner-Bank took out
Summons for Judgment No. 783 of 2003 in Summary Suit No. 897 of
2000 against the State Bank of Patiala. Two similar Summons for
Judgment Nos. 784 of 2003 and 786 of 2003 were also taken out by the
Petitioner-Bank in connection with Summary Suit Nos. 1515 of 2000
and 6089 of 1999.

The main contention raised on behalf of the Appellant- Bank is


that since it had no knowledge of any fraud perpetrated by the
constituent of the Respondent-Bank before making payment under the
Letter of Credit in question, the Respondent-Bank could not refuse to
reimburse the Appellant- Bank of payments already made to the
beneficiary under the Letter of Credit before such intimation was
received. It was also the case of the Appellant-Bank that since it had no
knowledge of the fraud said to have been committed with regard to the
Bills of Lading and the Letter of Credit itself, it negotiated documents

64
AIR 2006 SC 2250,
99
presented before it by the beneficiary and made payment accordingly as
per the instructions of the Respondent-Bank.

Appearing for the Appellant-Bank, Mr. Ashok Desai, learned


senior advocate, referred to and relied on the decision of this Court in
Oil & Natural Gas Corporation Ltd. v. SBI, Overseas Branch,
Bombay65 :, wherein while dealing with a summary suit under Order
XXXVII and a similar question involving leave to defend in respect of a
bank guarantee, this Court held that an unconditional bank guarantee
must be given effect to even where there is a dispute between the parties
and that unless there is a plea relating to fraud the Court does not have
jurisdiction to grant unconditional leave to defend. Mr. Desai submitted
that in the instant case the plea relating to fraud was taken by the
Respondent-Bank against its own constituent and such fact was
intimated to the Appellant-Bank long after the payment under the Letter
of Credit had been made to the beneficiary.

Similar sentiments were expressed by this Court in Dwarikesh


Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd.
and Anr.66 , wherein while dealing with a bank guarantee this Court
held that the principle of undue enrichment was not applicable to
encashment of bank guarantees.

Mr. Desai also referred to another decision of this Court in


Federal Bank Ltd. v. V.M. Jog Engineering Ltd. and Ors.67 :,
wherein it was observed that in the case of a bank guarantee or letter of
credit the Court should not issue an order of injunction restraining
65
AIR 2000 SC 2548.
66
AIR 1997 SC 2477
67
AIR 2000 SC 3166.
100
encashment thereof on ground of breach of the main contract between
the buyer and the seller. A contract of bank guarantee or letter of credit
is independent of the main contract and the only exceptions are when
fraud is committed by the seller or where encashment results in
irretrievable damage. This Court went on further to hold that where the
negotiating bank makes payment to the seller after obtaining
confirmation from the issuing bank about the genuineness of the letter of
credit, bill of exchange and other related documents and seeks
reimbursement from the issuing bank, the encashing bank cannot be
restrained by injunction from obtaining reimbursement.

Reference was made to the decision of this Court in Raj Duggal


68
v. Ramesh Kumar Bansal , where a question had been raised
regarding leave to defend in a suit under Order XXXVII of the Code of
Civil Procedure. While considering the said question, this Court set out
the principles to decide whether leave should be granted or denied in the
following manner :-

3. Leave is declined where the court is of the opinion that the


grant of leave would merely enable the defendant to prolong the
litigation by raising untenable and frivolous defences. The test is to see
whether the defence raises a real issue and not a sham one, in the sense
that if the facts alleged by the defendant are established there would be
a good or even a plausible defence on those facts. If the court is satisfied
about that leave must be given. If there is a triable issue in the sense
that there is a fair dispute to be tried as to the meaning of a document
on which the claim is based or uncertainty as to the amount actually due

68
AIR 1990 SC 2218.
101
or where the alleged facts are of such a nature as to entitle the
defendant to interrogate the plaintiff or to cross-examine his witnesses
leave should not be denied. Where also, the defendant shows that even
on a fair probability he has a bona fide defence, he ought to have leave.
Summary judgments under Order 37 should not be granted where
serious conflict as to matter of fact or where any difficulty on issues as
to law arises. The court should not reject the defence of the defendant
merely because of its inherent implausibility or its inconsistency.

In Shah Babulal Khimji v. Jayaben D. Kania and Anr.69 :, Mr.


Nariman submitted that no civil right of the Appellant-Bank had been
adversely affected by grant of such leave and that as far as the
Appellant-Bank was concerned, the suits filed by it remained and the
defendants therein would only get an opportunity to defend the same.

Central Bureau of Investigation, Bank Securities and Fraud Cell


Vs. Mulangi Krishnaswamy Ashok Kumar & others70

The case dealt with the duty of the notary to ascertain


truthfulness. The notary authenticated a document and deposed that it
was not his duty to ascertain whether declarant understood the contents
or truthfulness thereof. It was held that it was a primary duty of the
notary while administrating oath, to ascertain that declarant understood
the contents and believed that they were correct and true.

The bank receipts were issued without receipt of securities and


officers and brokers acted in commission to cover up the deals, Since
the accused was common broker for CANFINA ledgers and accounts to
69
[1982]1 SCR 187.
70
1999(3) Bom CR 189.
102
bank, he forged documents to show that securities had been received,
which in fact did not exist. It was held that the circumstantial evidence
clearly showed that all the accused were party to the deals and guilty of
conspiring to cheat.

State Bank of India Vs. Smt. Jigishaben B. Sanghavi and Ors.71


the dismissal of the appeal by the Gujarat High Court.

Order 7, Rule 11(d) provides that the plaint shall be rejected


"where the suit appears from the statement in the plaint to be barred by
any law". The plain language of the provision mandates the rejection of
the plaint when a case falls within one of the clauses of Rule 11. For
clause (d) to apply, the bar to the suit must be under any law and the bar
must appear from the statement in the plaint. It is trite law that while
considering an application for rejection under Order 7 Rule 11(d), the
averments in the plaint as they stand, have to be construed. The pleas of
the Defendants in the Written Statement are wholly irrelevant. The
plaint has to be construed meaningfully, reading it as a whole to
ascertain its true import. These principles are emphasized in the decision
of the Supreme Court in Saleem Bhai v. State of Maharashtra72 In
Popat and Kotecha v. State Bank of India Staff Association73 the
Supreme Court, on a review of its earlier judgments, formulated the
principle thus :

In view of the judgment of the Supreme Court in Mardia


Chemicals Ltd. v. Union of India74 Under subsection 3(a) as amended,

71
2011(4) ALL MR 262.
72
(2003) 1 SCC 557.
73
(2005) 7 SCC 510,
74
AIR 2004 SC 2371
103
on receipt of a notice under subsection (2), the borrower is permitted to
raise an objection or make a representation. The secured creditor has to
furnish reasons to the borrower in the event that the
objection/representation of the borrower is not accepted. The proviso to
subsection 3(a) entails that the communication of reasons of the likely
action of the secured creditor at that stage shall not confer a right upon
the borrower to prefer an application to the Tribunal under Section 17.
Under subsection (4), the secured creditor is entitled to take 3 recourse
to various measures to recover the secured debt in the event that the
borrower fails to discharge his liability in full within the period specified
in subsection (2). Among the powers which are conferred on the secured
creditor is the power to take possession of the secured assets including
the right to transfer them by assignment or sale.

On the other hand, it has been urged on behalf of the original


Plaintiffs that the order of the Learned Single Judge must be sustained
for the following reasons:

(i). The suit, in the present case, was instituted before the Bank had
taken recourse to the measure under Section 13(4). At that stage,
no appeal under Section 17 could have been filed before the
Tribunal. Consequently, there is no bar to the maintainability of
the suit, on the date when the suit was instituted since no measure
had been taken by the Bank under Section 13(4);

(ii) The case of the Plaintiffs is that (a) There is no mortgage in


respect of the residential flat; (b) No mortgage was in any event
executed by the HUF; (c ) The mortgage, if any, is illegal in
respect of the share of the HUF in the residential flat; and (d) No
104
action had been initiated against the HUF before the Tribunal by
the Bank, yet the property of the HUF was sought to be taken
away;

(iii) There are sufficient pleadings to substantiate the case of the


Plaintiffs that the action of the Bank was fraudulent. In any event,
the exception which is carved out by the Supreme Court in
Mardia Chemicals does not cover only a situation of fraud, but
includes one where the claim of the secured creditor is so absurd
and untenable as to not require any probe whatsoever. Similarly, a
suit can be instituted where the power of sale is being exercised in
any improper manner contrary to the terms of the mortgage. The
averments in the plaint, it was urged, would fall within the
purview of the exception carved out in Mardia Chemicals.

In the earlier part of this judgment, we have already elicited the


extent of the bar which is created by Section 34. The bar, in the first part
of Section 34, is in respect of any matter which the Tribunal or the
Appellate Tribunal is empowered by or under the Act to determine.
When the Tribunal or the Appellate Tribunal is empowered to determine
any matter by or under the Act, the jurisdiction of the Civil Court to
entertain a suit in respect of that matter is barred. In the second part, the
Legislature has used equally comprehensive language when it imposes a
prohibition on the issuance of an order of injunction. In that context, the
Legislature has adverted "to any action taken or to be taken" in
pursuance of the provisions of the Act or the RDDB Act. An action
taken is a course of conduct already adopted. An action to be taken is a
course of conduct which is in contemplation, but one which is

105
necessarily referable to the provisions of the Act or the RDDB Act.
Section 17 provides a right of appeal to any person, including a
borrower. The expression "any person" is broad enough to include not
only the borrower, but any person who is aggrieved by a measure which
is taken by the secured creditor under subsection (4) of Section 13. This
is emphasized in the judgment of the Supreme Court in United Bank of
India v. Satyawati Tondon.75

The expression 'any person' used in Section 17(1) is of wide


import. It takes within its fold, not only the borrower but also guarantor
or any other person who may be affected by the action taken under
Section 13(4) or Section 14.

The same view has been taken by a Division Bench of this Court
in Trade Well v. Indian Bank76 The Division Bench has held that the
remedy provided under Section 17 is available to the borrower as well as
to a third party. Moreover, the remedy provided under Section 17 is an
efficacious alternate remedy available to a third party as well as to the
borrower where all grievances can be raised.

In a recent judgment of the Supreme Court in Authorized


Officer, Indian Overseas Bank v Ashok Saw Mill,77 the Supreme
Court adverting to the wide powers conferred upon banks and financial
Institutions observed that in order to prevent a misuse of those powers
and to prevent prejudice to a borrower on account of an error on the part
of a bank or financial Institution, certain checks and balances have been
introduced in Section 17 which allow any person, including a borrower,
75
2010 (3) Bankers Journal 581, at 17
76
AIR 2007 Bom 656
77
2009(2) BJ 721
106
who is aggrieved by the measures taken under Section 13(4) by the
secured creditor to make an application before the Debts Recovery
Tribunal. In that context, the Supreme Court held as follows :

The intention of the legislature is, therefore, clear that while the
Banks and Financial Institutions have been vested with stringent powers
for recovery of their dues, safeguards have also been provided for
rectifying any error or wrongful use of such powers by vesting the DRT
with authority after conducting an adjudication into the matter to declare
any such action invalid and also to restore possession even though
possession may have been made over to the transferee. The
consequences of the authority vested in DRT under subsection (3) of
Section 17 necessarily implies that the DRT is entitled to question the
action taken by the secured creditor and the transactions entered into by
virtue of Section 13( A) of the Act. The Legislature by including
subsection (3) in Section 17 has gone to the extent of vesting the DRT
with authority to even set aside a transaction including sale and to
restore possession to the borrower in appropriate cases. .... The action
taken by a secured creditor in terms of Section 13(4) is open to scrutiny
and cannot only be set aside but even the status quo ante can be restored
by the DRT.

Arunachalam Muthu v. State Bank of India78

The petitioner had defaulted its loan of respondent viz, S.B.I.


executed deed of assignment and assigned assets of petitioner's company
in favour of Kotak Mahindra Bank (Kotak). But deed of assignment is
outcome of fraud. As Kotak is neither Asset Reconstruction Company
78
2010 4 AWC 3289
107
nor Securitisation Company as defined in 2002 Act. Deed of assignment
declared as insufficiently stamped by A.D.M. (F/R.).Since petitioner's
company has deposited Rs. 195 lakhs being one time settlement offer.
Offer be final and binding on parties- and Said amount deposited by
petitioner's company pursuant to order of Court. To be accepted and
adjusted by S.B.I. towards one time settlement, the Deed of assignment
quashed for Amount of Rs. 195 lakhs so deposited to be accepted.
Finally, S.B.I. to release charge on property of petitioner's company.

Punj Lloyd Insulations Ltd. v. State Bank of India and Anr.79

Appeal filed against order whereby appellant's suit for permanent


injunction for restraining respondent-2 from encashing bank guarantee,
was dismissed. –The Hon’ble Court held, plaint of appellant, there is no
pleadings of a fraud, irretrievable injustice and exceptional or special
equities on part of respondent-2. Only argument sought to be raised
before Court is that invocation of bank guarantee is not as per terms of
bank guarantee inasmuch as he has completed work given by
respondent-2 as per contract which is established by certificate. Bank
guarantee has been encashed as per terms and conditions of contract.
Further, it was neither obligatory nor necessary for beneficiary company
to refer matter to appellant before invoking bank guarantee. Just using
one word in paragraph of plaint relating to cause of action that
respondent-2 fraudulently sought to encash bank guarantee' would, in no
way, satisfy requirement of law. Plea of fraud must be categorical by
specific language of events, Which according to appellant constitutes a
fraud should be stated in plaint and party should lead evidence in

79
AIR 2006 Delhi 256.
108
support of such averments. Neither there is a specific pleading nor is any
evidence of fraud. .

Chola Turbo Machinery International Pvt. Ltd. v. Development


Credit Bank through its Genreal Manager and Anr.80

The Delivery Schedule was outlined in Schedule 13; condition


13.1 stipulated that the petitioner would dispatch all the civil drawings,
Bill of Quantities instructions and specifications within four months.
Schedule 18 dealt with Liquidated Damages, in terms of Clause 18.1
such liquidated damages are payable for delayed delivery; Clause 18.2
deals with liquidated damages for shortfall in performance. The last part
of Clause 18.2 reads thus: the total amount of all liquidated damages for
delayed supply and shortfall in performance shall not exceed 8% of the
FOB supply price.

There is no dispute that the purchaser released the advance


payment equivalent to Rs. 8 crores, to the petitioner.

Held, fraud cannot be the basis for ouster of jurisdiction of a


Tribunal which was constituted under the Act of Parliament with the
reason and object of speedy recovery of dues by the bank from its
debtor, but it cannot be stretched to such an extent to mean that the non-
debtor can be sued independently by the Bank, before the Tribunal,
Appellate Tribunal acted illegally by holding that the decree passed
against the Defendant/opposite party No. 3 is illegal-.

In Mahatma Gandhi Sahakra Sakkare Karkhane v. National


Heavy Engineering Coop. Ltd.81 and Himadri Chemicals Industries
80
(2008) III BC 547.
109
Ltd. v. Coal Tar Refining Co.82 : and submitted that wherever the
Court is called upon to injunct the encahsment of an unconditional bank
guarantee, the fundamental principle to be kept in mind is not the bank
cannot rely of the term underlying contract between the parties. The
bank furnishing such a guarantee is bound to honour it irrespective of
any disputes raised by its customer, since it is an independent contract,
absolute in nature. Counsel also contended that mere mention of fraud is
not sufficient, for a case to fall within the exception, empowering the
Court to injunct operation of a bank guarantee. The evidence must be
clear, both as to the fact of fraud and to the bank's knowledge. It was
urged that there is nothing on record even remotely suggesting that a
fraud had been played upon the petitioner by the respondent which
would entitle this Court issue interim injuction.

Such is the purport of the law declared consistently by the


Supreme Court for these last 25 years, from United Commercial Bank
v. Bank of India,83 down to the decision Himadri Chemicals Industries
Ltd. (supra) referred to above. The rationale invoking the bank
guarantees given on behalf of the respondents was that according to the
contract, a clear bank guarantee for securing 10% of the advance
amounts had to be furnished; likewise a clear bank guarantee, by way of
performance bond (for 5% contract value), in terms of Clause 11 too had
to be furnished. The bank guarantees furnished by the petitioner were
rolled up as they mentioned the intention to secure advances paid,
towards performance and also towards commissioning (which was the

81
AIR 2007 SC 2716.
82
AIR 2007 SC 2798.
83
[1981] 3 SCR 300
110
subject matter of the right to retain 8% of the contract value). They
covered only 10% of the contract.

Bank of Baroda v. Nadiad Machinery and Electrical Merchant


Credit Co-op. Soc. 84

The letters patent appeal filed for challenging order of Single


judge by which directing Appellant/Bank to constitute committee for
disclosed fraudulent act in their matter for not returning amount of
deposits to its creditors/Respondent herein. The Hon’ble Court has held,
there cannot be any dispute about fact that when officers of two
appellant/banks had accepted amounts from Respondent/co-operative
societies/banks, amounts were invested in fixed deposit receipts and
thereafter it was in course of their employment with Appellant banks
that officers had given advances against security of such fixed deposit
receipts and strength of documents which were found to be not genuine
authorizations given by co-operative societies/ co-operative banks
through their duly authorized office bearers. Vicarious liability of bank
will arise in case of any wrong committed by bank employee in course
of his employment, and, therefore, if employee's act is not fraudulent but
found to be negligent or wrongful in any other matter, even then bank
will be vicariously liable. In present case, Respondents are co-operative
banks/co-operative societies and not their office bearers against whom
Appellant banks have made vague allegations. When Appellant banks
themselves have filed complaints against their own officers and have
also suspended them and issued charge sheet in departmental inquiries,
stating that those officers acted fraudulently, Appellant Banks cannot be

84
(2004) 1GLR 50
111
exonerated of their vicarious liability by making allegations against
office bearers of co-operative banks or societies. In facts of present case
apart from fact that high powered Committee comprising of two senior
officers of Reserve Bank of India and one officer of each of Appellant
banks has not given any finding of fraud against Respondent/co-
operative societies or co-operative banks, no reason not to accept
finding that officers of Appellant banks were premarily responsible for
fraud and that without their connivance, fraud could not have taken
place. Parties are required to be directed to implement report in its
entirety in so far as same touches civil rights and liabilities of parties in
respect of fixed deposit receipt amounts which are subject matter of this
group of matters.

Sheeba Philominal Merlin and Esther Evelyan v. The Repatriates


Co-op Finance and Development Bank Ltd. (Govt of India
Enterprise), The General Manager, Repco Bank, The Authorized
Officer, Repco Bank and S. Sasikumar85

Petitioners challenged for auction and Sale Deed under


SARFAESI Act and sought for direction to restore possession sale of
property was vitiated by fraud and not following procedure
contemplated under Act. Hence it was held by Hon’ble court that notice
had been issued under Section 13(2) and 13(4) by Respondent bank
against dead person was invalid. However, no details were given by
Respondent Bank about all steps taken by bank to serve notice and
service of notice on authorized agent was made whereas deceased died.
Consequently, Bank without verifying second Petitioner became Trustee

85
2010-4-LW 497
112
of Trust and without any proof, allowed trust to participate in auction.
Subsequently, bid amounts raises doubts about integrity, bonafiders and
motives of bank officials who were involved in transaction. Thus,
violations were deliberately made by design and fraud by Bank
therefore, no protection or immunity could be available to Respondent.
Therefore, right accrued to Respondent through auction sale could not
be sustained. Therefore, entire proceedings initiated by Respondent bank
in favor of another Respondent vitiated and was set aside.

In Prahlad Rai Munka v. Allahabad Bank and Anr.86 where


there is no express provision in the Act for a remedy, the Tribunal can
invoke at any stage of the proceedings this inherent power to meet the
ends of justice and to prevent abuse of process of Law. But where
there is a specific provision in the Act to meet a particular situation,
this provision is complementary to the other powers mentioned in the
other provisions of the Act. In the case in hand, there is a clear
appellate provision against the order of rejection of objection.
Accordingly, interference with such order under inherent jurisdiction,
by-passing the appellate jurisdiction, does not arise.

In connection with the objection as at ground "g" Para 4 above,


that the judgment has been obtained by fraud, a perusal of the original
case file of O.A. No. 41/2001 reveals that the Bank had in their
possession two relevant sale deeds which were filed before the DRT,
Patna. There was also an agreement to mortgage executed on 15.2.1996.
The Decree Holder Bank had filed legal opinion obtained from their
penal Counsel along with non-encumbrance certificate dated 9.2.1996 to

86
(2005) BC 14
113
establish their claim of creation of equitable mortgage. The Banks claim
was allowed in the impugned ex parte judgment dated 10.12.2001 in
O.A. No, 41/2001 after considering the documents and evidence
produced therein. When title deeds with regard to the properties are with
the Bank, prima facie it is evident that documents must have been
deposited to create mortgage and that there has been Intention to create
equitable mortgage. There is nothing on record to substantiate that the
decree holder Bank has obtained the aforesaid judgment by fraud. When
the allegation pertains to fraud, heavy onus lies on appellant to
substantiate the same. A mere word of mouth is not and cannot be
sufficient evidence. Secondly, the aforesaid judgment has been passed
long before in 2001 and has since attained finality being unchallenged.
After issue of certificate, the Presiding Officer becomes functus officio
to probe further in to the matter. Thirdly, the petitioner suo moto had
moved the Hon'ble Jharkhand High Court and pursuant to the direction
to the Hon'ble High Court Recovery Officer had disposed of his
objection on 25.2.2004, which has not been assailed by the petitioner.
The purview of Section 26(2) is very limited and the finality of aforesaid
orders can not be unsettled under the said provision.

It was held by Hon'ble Apex Court in the case of State of Uttar


Pradesh v. Babu Ram87, that "when a statute requires a thing to be
done in a particular manner, it can only be done in that manner, or not at
all. All other methods are forbidden".

87
AIR 1961 SC 751
114
It is pertinent to refer to the decision in the case of S. Ravi v.
Indian Bank,88 wherein it was observed as follows;

"Presiding Officer Under section 26 has the power to withdraw


the certificate. The power in my opinion is limited. They do not enlarge
the scope of review as if fresh suit or appeal is being decided.

If the order is set aside in appeal, withdrawal is contemplated,


Secondly, in case of settlement or adjustment inter-se the Parties after
the decree is passed, certificate can be withdrawn. In no other
eventuality, Presiding Officer can withdraw his own certificate which
has the effect of finality of determination of 'debt'".

The applicant has referred to Hon'ble Supreme Court ruling in


S.P. Chengal Varaya Naidu (Dead) by LRs. v. Jagannath (Dead) by
LRs. and Ors89., wherein Hon'ble Apex Court has observed that decree
obtained by non-disclosure of the release deed amounted to fraud on
Court and hence decree liable to be set aside. Learned Counsel for
petitioner contended that under inherent power of this Tribunal as
provided Under section 19(25) of the Act read with Rule 18 of DRT
Rules the application be allowed to prevent abuse to its process and to
secure the ends of justice.

In Punjab National Bank v. Ashok Kumar & Anr90 whether


the law strikes a snap in DRT's reviewing its own order when the
review application evinces the commission of a fraud is the main
question which dwells on this appeal.

88
(2003)III BC 112
89
(1994) 1 SCC 1
90
(2012)1 BC 38.
115
Therefore, I hold it is a serious kind of fraud which was never
highlighted by any party prior to filing of the application and this is the
first time that the defendant Nos. 2 and 5 have come up with this plea
which is well proved from the documents filed by the Bank itself. I
further hold that there is a mistake apparent on the face of the record.

In S.P. Chengalvaraya Naidu v. Jagannath, II91. The learned


trial Court also held that the question of limitation does not come into
play because the allegation of fraud has been made against the appellant.
The learned trial Court also observed that it did not rule out the
possibility that actual owners/mortgagors/ defendants might have
purchased the property Benami and, therefore, they did not come
forward to challenge the sale. The learned trial Court also came to the
conclusion that all these facts and circumstances required full probe.
The learned trial Court opined that the patent error revealed could not be
overlooked by the Tribunal. Again, had the entire property of 12 kanals,
which was ordered to be sold by the Tribunal, been shown in the
proclamation for auction, it would have attracted other buyers to
participate in the auction and, in that eventuality, it could have fetched
much more price and the entire liability of defendants 3 and 5 might
have stood discharged as guarantors. The learned trial Court,
consequently, allowed the application for review, the judgment was
recalled and the O.A. was restored to its original number. The Bank was
granted an opportunity to file its explanation with regard to the alleged
fraud. The learned trial Court issued notice to Auctioneer/Receiver and
also directed Mr. B.R. Allagh, the then A.G.M. of the Bank to be present
on the next date of hearing and granted him an opportunity to fi le his

91
AIR 1994 SC 853
116
explanation with regard to the observations made by the Tribunal in the
impugned order. Notice was also issued to the auction purchaser of the
property, i.e., M/s. Vivek Industrial Corporation, D-235, Phase-VII,
Focal Point, Ludhiana to remain present on the next date of hearing.

In N. Venkanna v. Andhra Bank92 fact that the Petitioner had


not kept his passbook in a safe custody might have contributed to the
deficiency in service on the part of the Bank official in not
meticulously comparing with the signatures of the complainant. One
would also not be oblivious about minor changes in signatures which
do occur time and again between the signatures of the same person
made at different times and the specimen signatures, signature on the
withdrawal form and the cheque. It may also be true that to a limited
extent the Bank could not be held to be guilty of negligence simply
because an ultraviolet ray lamp was not kept in the branch and the
cheque in question could not be subjected under the ultraviolet ray
lamp. Despite this, we feel that the Bank official must not rush to clear
the payment just on seeing the pass book and, therefore, the District
Forum was absolutely right in holding the Bank responsible in view of
precedents in this regard.

In Bhagwan Das v. Creet,93 It was held: "The banker's obligation


is to honour his customer's cheque. To that end he is bound to know his
customer's handwriting. If in any way he is deceived without the
instrumentality of his customer, he must himself abide by the loss." In
the case of L. Pirbhu Dayal v. JwalaBank,94 the money was paid by

92
2006(2) UC 1024
93
(1903) 31 Cal, 249
94
AIR 1958 All 374
117
the Bank on presentation of a forged cheque (withdrawal form as is the
case in the present matter), the Bank was held liable to pay for the loss
suffered.

In Dawood v. Firm Pereinan Chetty,95 it was held that the


money paid by Bank under a forged cheque could not be debited to the
customer merely on the ground that the customer was negligent to this
extent that he allowed his cheque book to remain unlocked.

The Hon'ble Supreme Court in Canara Bank v. Canara Sales


Corporation,96 observed as under:

When a cheque duly signed by a customer which is presented for


encashment before a Bank, it carries a mandate to the Bank to pay.
However, if the signature on the cheque is not genuine, there is no
mandate on the Bank to pay. The Bank when it makes the payment on
such a cheque cannot resist the claim of the customer with the defence
of negligence on his part such as leaving the cheque book carelessly so
that third parties would easily get hold of it. This is because a document
in cheque form, on which the customer's name as drawer is forged, is a
nullity. The Bank can succeed only when it establishes adoption or
estoppel.

It was further observed by the Hon'ble Supreme Court in para 30


as under:

In order to sustain a plea of (sic), it is necessary to (sic) that the


party against whom the said plea is raised, had remained silent about the

95
AIR 1924 Ran. 264
96
AIR 1987 1603, at para 24
118
matter regarding which the plea of acquiescence is raised even after
knowing the truth of the matter.

The Supreme Court also observed in para 44 as under:

Nor can inaction for a reasonably long time in not discovering


fraud or irregularity be made a defence to defeat a customer in an action
for loss.

In Canara Bank as many as 42 cheques were found forged on


various dotes between 1957 and 1961. The Hon'ble Supreme Court
rejected the contention based on acquiescence. The Trial Court rejected
the contentions of the Bank and passed a decree for the sum claimed,
with interest at 6% from the date of the suit till recovery of the amount.
In appeal before the Division Bench, the judgment of the Trial Court
was confirmed.

The judgments referred to here in above were referred to in the


case of Citizen Co-operative Bank Ltd. v. Ritesh Mittal,97 (Jammu
and Kashmir High Court), and in that case claim of the complainant was
for loss suffered by the complainant by clearing four forged cheque for
payment. It was allowed by the State Consumer Disputes Redressal
Commission and the Bank was directed to pay a sum of Rs. 1,52,000 but
with interest @ 6% p.a. only. On appeal by the Bank, the High Court of
Jammu and Kashmir also confirmed the order holding that the Bank was
liable to pay.

97
2004 CTJ 211
119
In Bihta Co-operative Development and Cane Marketing
Union Ltd. v. Bank of Bihar,98 the Supreme Court had also taken the
view earlier and held that what was said in Macmillan and Arther's case
(supra) would not be applicable because the accepted principle of law
that if signature on the cheque is genuine and there is a mandate by the
customer to pay then the banker has no obligation but discharge the
liability but if the signature on the cheque or at least one of the
signatures is not genuine, then there is no mandate on the part of Bank
to pay and there would be no question of any negligence on the part of
the customer, such as leaving the cheque book carelessly so that a third
party could easily get hold of it would afford no defence to the Bank.
This view was filed in Canara Bank (supra).

It is not the case of payment collected by an imposter through


ATM card holder where the Petitioner had no opportunity to check and
compare the signature, as was the case in Smt. Mitta Lal Saha and
Maya Saha v. ANZ Grindlays Bank.99

In such a situation, in view of the aforesaid discussion, the fact


that the passbook was misplaced by the complainant, would not be
sufficient to say that the Petitioner, the de facto complainant would not
be entitled to get the entire amount of Rs. 34,000 which was
undoubtedly paid on the basis of withdrawal form bearing forged
signatures. However, seeing the circumstances, it would be proper to
award interest only @ 6% p.a. in the peculiar facts and circumstances
from 12.1.1994 till the date of payment; However, the question of
awarding separate compensation of Rs. 5,000 could not be sustained in

98
AIR 1967 SC 389
99
4 (2003) CPJ 210
120
the peculiar facts and circumstances. Order to award Rs. 5,000 as
compensation is accordingly set aside. The order to pay cost awarded by
the District Forum is upheld. Accordingly, the Complainant Petitioner is
entitled to recover Rs. 34,000 with interest @ 6% p.a. w.e.f. 12.1.1994
with cost of Rs. 500. The Respondent Bank is directed to make the
payment within a period of six weeks from the date of receipt of this
order failing which Bank shall be liable to pay interest @ 12% p.a. The
revision petition is allowed accordingly.

In Valji Khimji & Company v. Official Liquidator of


Hindustan Nitro Product (Gujarat) Ltd. & Ors.,100 Rajender
Singh v. Ramdhar Singh and Others101, and also to the judgment of
the Hon'ble High Court of Delhi in Tata Iron and Steel v. Jhalani
Tools, (Delhi)102, , as well as of this Tribunal in Ram Lal Phutella v.
State Bank of India & Ors.103,

Mr. Karan Khanna, learned Counsel for the respondent Bank,


submitted that the Bank is only interested in the recovery of its
outstanding dues and if the inter se bidding can fetch maximum price for
the property, the Bank has no objection to it.

Mr, Dincur Bajaj, learned Counsel for respondent No. 2,


submitted that as against the reserve price of Rs. 65 lakh for Dwaraka
property only one tender of the appellant was received in the alleged
auction sale, that too with an increase of only Rs. 1,100/- over the
reserve price, which shows that the highest bidder and the officers of the

100
(2008) IV BC 536 (SC)
101
AIR 2001 SC 2220
102
2009 (156) DLT 311
103
(2009) BC 55 (DRAT).
121
Bank were in collusion. He further submitted that appellant had also not
made the payment of the remaining 75% amount within 15 days as per
Rule 9 of the Security Interest (Enforcement) Rules, 2002. It has also
been contended by him that the learned DRT, while making the
impugned order, had relied upon the judgment of the Hon'ble Apex
Court in the case of Divya Manaufacturing Company (P) Ltd. v.
Union Bank of India and Others,104, which has been followed by the
Supreme Court and the High Court in the subsequent cases of FCS
Software Solutions Ltd. v. LA Medical Devices Ltd. and Ors105., ,
Shradha Aromatic Private Limiteds. O.L. of Global Arya Industries
Limited and Ors.106, Mr. Bajaj also drew my attention to the
observations of the Calcutta High Court in Sisir Kumar Mukherjee
and Others v. Kanyalal Jhewar and Others,107 that where the
property worth Rs. 60,000/- has been valued by the decree-holder in its
execution application at Rs. 6,000/-, which was further reduced to Rs.
1,500/- in the sale proclamation, it would be a case where the decree-
holder would be guilty of deliberately putting a shockingly low
valuation of the disputed property in the proclamation of sale which
amount to fraud on Court and would vitiate the sale.

Considering the rival submissions of the learned Counsel for the


parties, it is to be noted that in the case of Valji Khimji & Company v.
Official Liquidator of Hindustan Nitro Product (Gujarat) Ltd. &
Ors. (supra), the Hon'ble Supreme Court while considering the ratio of

104
(2006)1 BC 428 (SC)=AIR 2000 SC 2346
105
AIR 2008 SC 3137
106
(2001) 6 SCC 207 and D.J. Enterprises Ltd. and Anr. v. IFCI Ltd. and Ors., IV (2009)
BC 23
107
AIR 1971 Cal 87
122
the case of Divya Manufacturing Co. 's case (supra) has observed in
paras 29. 30 and 31 that:

Thus, the ratio in Divya Manufacturing Company (P) Ltd.


(supra) was that if there is fraud then even after the confirmation the
sale can be set aside because it is well settled that fraud vitiates
everything. On the facts of that case, the Court was of the view that that
confirmed sale deserved to be set aside.

In our opinion the decision of this Court in Divya Manufacturing


Company (P) Ltd. (supra) cannot be treated as laying down any absolute
rule that a confirmed sale can be set aside in all circumstances. As
observed by one of us (Hon. Katju, J) in his judgment in Dr. Rajbir
Singh Dalal. Chaudhary Devi Lal University, Sirsa & Anr.,108
pronounced on 6.8.2008, a decision of a Court cannot be treated as
Euclid's formula and read and understood mechanically. A decision
must be considered on the facts of that particular case.

If it is held that every confirmed sale can be set aside the result
would be that no auction sale will ever be complete because always
somebody can come after the auction or its confirmation offering a
higher amount.

Besides that, the Apex Court in the case Rajender Singh v.


Ramdhar Singh and Others (supra), while interpreting Order 21 Rule
90, CPC, has held that if no fraud or material irregularity has been
alleged in the conduct of sale, inadequacy of price is not a ground for
setting aside the Court sale.

108
Civil Appeal No. 4908/2008
123
In Ram Lal Phutella v. State Bank of India & Ors. (supra),
which has almost similar facts and circumstances, held that where the
appellant had neither alleged ownership over the property before the
Recovery Officer or the DRT and was also not a borrower/
guarantor/mortgagor nor had he participated in the auction sale, he could
not be deemed to be a person whose interest were affected by the sale. It
has also been held that auction in favour of the respondent at higher
price than the reserve price and the confirmation of sale in consequences
thereof was in proper exercise of discretion and there was due
observance of relevant rules contained in II Schedule to the Income Tax
Act about prior publication of auction sale which was not suffering from
any fraud or irregularity or any defect.

In M/s. Bajwa and Company v. M/s. Keshav Rai Naresh Pal


Singh and Another,109 has observed that if Court auction sales are
permitted to be set aside on offers being made at higher price subsequent
to the auction, there will be no certainty about the auction sale and it
will prejudice the very system of Court auctions and will result in a rule
of thumb, which cannot be permitted. Similarly, the Delhi High Court in
the case of Tata Iron and Steel v. Jhalani Tools, (Delhi) (supra), where
the applicants have failed to show any material irregularity or fraud in
the conduct of sale except making wild allegations that successful and
unsuccessful bidders had formed coterie and also failed to show any
substantial injury caused to them, has held that once the bid is accepted
and the sale is confirmed, the same is not to be set aside merely on
account of higher offer received later on.

109
1989 PLJ 406
124
In Ram Murti Pyare Lal and Another v. Central Bank of
India and Others,110 has observed that 'Veer Arjun' newspaper is
nethera leading newspaper nor it has sufficient circulation in Delhi and
as such the requirement of the Proviso to Section 8(6) of the Security
Interest (Enforcement) Rules, 2002 has not been sufficiently complied
with, loses its efficacy as it is not the case of the applicant/respondent
No. 2 that she did not know about the intended auction sale of the
property in question and has admitted in para 5.2 of her application that
she came to know about the auction of the property from advertisement,
a copy whereof was also annexed as Annexure A-1 to that application.
Moreover, the auction sale was not assailed by the respondent No. 2 on
the aforesaid ground before the learned DRT.

In view of above discussion, I am of the view that the learned


Tribunal below has committed error in properly applying the law and
appreciating the facts and circumstances of the case by directing the
inter se bidding and thereby impliedly setting aside the auction sale
conducted by the authorized officer of the Bank. The impugned order is,
therefore, not sustainable and liable to be set aside

In Jagatjit Industries Ltd. v. Mohan Meakin Ltd.111, that the


share certificates have to be returned without delay to the persons who
lodged them. Further, as per the Circular No. F/37/SE-79 dated
December 29, 1970, of the Ministry of Finance, the share certificates
have to be returned to the parties concerned and in the instant case the
share certificates lodged in the year 1992 have never been returned to
the petitioner. The petitioner has invoked Section 111 instead of Section

110
Appeal No. 256/2010 (decided on 7.6.2011)
111
[1994] 80 Comp Cas 411
125
111A which will not vitiate the proceedings and technical irregularities
should not be allowed to defeat the just cause as has been held in several
cases. Nevertheless, the petitioner has filed a separate application in C.
A. No. 28 of 2004, to treat the petition as if filed under Section 111A of
the Act. The provisions of Section 111A contemplating a period of two
months to file any application before the Company Law Board would
not arise since there has been no refusal by the bank to transfer the
shares in favour of the petitioner. The denial of the impugned transfer by
the second respondent is a clear case of fraud and where fraud is pleaded
the limitation would not apply, as held in Shailesh Rajnikant Parekh
v. Starline Travels P. Ltd.112. In respect of the fraudulent transactions,
as held in Sham Sunder Kukreja v. Hindustan Lever Ltd.113,
limitation cannot strictly be applied. Moreover, the decision of the
Supreme Court in Canara Bank v. Nuclear Power Corporation of
India Ltd.,114 would show that the Company Law Board should be
considered as a court in a restricted sense and the Allahabad High Court
in Prakash Timbers P. Ltd. v. Smt. Sushma Shingla,115 held that the
Company Law Board should be considered as a Tribunal and not a
court. In view of this, provisions of the Limitation Act, 1963, do not
apply to the proceedings before the Company Law Board. Shri Krishna
Srinivasan, learned Counsel, therefore, urged that the bank be directed
to register the transfer of shares in the name of the petitioner ; issue the
original share certificates and pay the dividends accrued thereon from
1992-93.

112
[2004] 118 Comp Cas 145 (CLB)
113
[2001] 4 Comp LJ 305
114
[1995] 84 Comp Cas 70
115
[1997] 89 Comp Cas 770
126
In Canara Bank v. Nuclear Power Corporation of India
Ltd.116 and Prakash Timbers P. Ltd. v. Smt. Sushma Shingla,117 that
provisions of the Limitation Act, do not apply to the proceedings before
the Company Law Board. In this connection, reference is invited to the
decision of this Board in Bombay Dyeing and Manufacturing Co.
Ltd. v. Arun Kumar Bajoria118, wherein the issues relating to
condonation of delay and the applicability of the provisions of the
Limitation Act have been dealt with, the relevant portion of which
assuming importance is reproduced.

As rightly pointed out by Shri Mookherjee, various Benches of


this Board have taken the view that since the Company Law Board is
not a court, the provisions of the Limitation Act are not applicable to the
proceedings under Section 111. However, in Smt. Nupur Mitra v.
Basubani P. Ltd.119, the Division Bench of the Calcutta High Court,
relying on the decision of the Supreme Court in Canara Bank v.
Nuclear Power Corporation of India Ltd.120, held that in a proceeding
under Section 111, the provisions of the Limitation Act would apply.

In Smt. Nupur Mitra v. Basubani P. Ltd.,121 before the Calcutta


High Court being, whether in a proceeding under Section 111, the
provisions of the Limitation Act, shall apply, and the judgment of the
Calcutta High Court to the effect that provisions of the Limitation Act
would apply to a proceeding under Section 111 having been affirmed by
the Supreme Court, the decision in Smt. Nupur Mitra v. Basubani P.
116
[1995] 84 Comp Cas 70
117
[1997] 89 Comp Cas 770 (All)
118
[2001] 107 Comp Cas 535
119
[1999] 2 Cal LT HC 264
120
[1995] 84 Comp Cas 70
121
[1999] 2 Cal LT HC 264
127
Ltd.,122 shall necessarily be applicable to the facts of the present case
and cannot be ignored as direction given by the Supreme Court to the
Company Law Board in that case, namely, Smt. Nupur Mitra v.
Basubani P. Ltd.,123 The Kerala High Court in a recent decision,
namely, Duroflex Ltd. v. Johnny Mathew,124 while considering the
question whether Section 5 of the Limitation Act is attracted to condone
the delay for sufficient cause in filing the appeal under Section 111(2), it
was vehemently argued that the Company Law Board is not a court and
time prescribed by Section 111(3) cannot be extended by using power
under Section 5 of the Limitation Act, 1963. The Kerala High Court,
after taking into account the history of the enactment of Section 111,
provisions of Section 5 of the Limitation Act and several of the
provisions of the Act relating to the Company Law administration and
on making elaborate reference to a plethora of decisions of the Supreme
Court and the Kerala High Court came to hold that the Bench of the
Company Law Board has not only the trappings of the courts but vested
with judicial and curative powers while deciding an application under
Section 111 of the Act and accordingly the Company Law Board
functions as a court. Therefore, the time limit prescribed by Section
111(3) for application filed under Section 111(2) can be extended for
sufficient reasons under Section 5 read with Section 29(2) of the
Limitation Act. The registered office of the Hank being located in the
State of Kerala, this judgment of the Kerala High Court is binding on
this Bench and therefore, the assertion of Sri Krishna Srinivasan, learned

122
[1999] 2 Cal LT HC 264
123
[2002] 108 Comp Cas 359
124
[2007] 137 Comp Cas 229
128
Counsel, that provisions of the Limitation Act do not apply to the
Company Law Board proceedings must fail.

In Shailesh Rajnikant Parekh v. Starline Travels P. Ltd.,125


while the transfer of shares was registered by the bank on the basis of
forged transfer forms, in Sham Sunder Kukreja v. Hindustan Lever
Ltd.,126 the registration of the transfers came to be effected in a
fraudulent manner and fraud was allegedly perpetuated in both these
cases by the respondents and therefore, this Board held that the period of
limitation cannot strictly be applied in such cases, whereas in the present
case, the transfer of shares has never been registered by the bank, but on
the other hand, it had refused to register the transfer in the name of the
petitioner and it is only the petitioner, who is accused of having forged
the signatures of the second respondent. By virtue of Section 17 of the
Limitation Act, the plea of fraud does not apply, unless there has been
fraud on the part of the respondent(s), of the petitioner's right to sue of
his/her title. Therefore, these decisions will be of little assistance to the
petitioner.

125
[2004] 118 Comp Cas 145 (CLB)
126
[2001] 4 Comp LJ 305
129
CHAPTER - 6

CONCLUSION & SUGGESTION

Fraud is defined in section 17 of the Indian Contract Act127


(unlike UK law, where fraud is not defined and is based on common law
practice) for the purpose of a contract and in so far as the operation of
the Contract Act is concerned. In such event the contract becomes
voidable. The party suffering from the fraud may terminate the contract
on his option. He may also like to continue with the contract. Law
provides absolute option to the concerned party as a special additional
right to neutralize the advantage or gain by the party committing fraud.
The court may also compensate him if he suffers from any damage
before terminating the contract. But he has a burden of proof to show to
the court that he was defrauded by the other party intentionally
according to the definitional conditions laid down by the Act, that (a) a
party having the knowledge of fact essential to the contract did not
disclose the fact which would have altered the decision of the other
party; (b) or a material misstatement was made knowing that the
statement was false; and (c) that the party intended to obtain a favorable
decision from the other party by committing such an act.

127
Section 17 of the Contract Act defines fraud as follows: “Fraud means and includes any
of the following acts committed by a party to a contract, with his connivance, or by his
agent, with intent to deceive another party thereto or his agent, or to induce him to enter
into the contract: (a) suggestion as a fact, of that which is not true, by one who does not
believe it to be true; (b) active concealment of a fact by one having knowledge of belief
of that fact; (c) a promise made without any intention of performing it; (d) any other fact
fitted to deceive; (e) any such act or omission as the law specifically describes to be
fraudulent”.
130
As a civil wrong with in the parameter of right in rem discourse,
fraud covers any action or abstinence, statutory or otherwise, which may
cause damages to other. Everyone has a right not to be defrauded in any
situation. So if any fraud is caused on any person in any other situation
other than the contractual situation whether it does or does not fall under
any specified crime, the person can bring the matter to the notice of the
district court for obtaining remedies. Thus, in any market situation,
fraud is regarded as ‘foul’ play in the market game and as such, the
regulator may neutralize the impact of the act by (a) penalizing the
player by giving him warning for minor foul so that he does not dare it
repeat (like showing a green card in a soccer game); (b) suspend him
from the game; (c) debar him from playing the game permanently; and
(d) impose penal compensation to indemnify the person suffering from
fraud. For example, if the CEO of a bank has deliberately violated the
financial prudential norm or guidelines in providing loan for any
transaction, the Regulator may remove the CEO. If the regulations so
provide, the regulator may even ask him to compensate the institution.

Fraud as such, is not a criminal offence in India. If any fraud is


committed in a bilateral contractual situation or otherwise whether
involving personal fund or public fund, also an act of cheating or if such
an act involves impersonation, criminal breach of trust or criminal
conspiracy, or forgery, or falsification or destruction of documents for
wrongful gain, or embezzlement of funds, then and only then, such fraud
can be an offence. Big ‘scams’ that often take place in the secondary
capital market by way of ‘price rigging’ or ‘insider trading’ are not
offences. These are ‘foul play’ only. In the next chapter these activities
are examined so as to see how much gap exists in the substantive

131
criminal law. However, in the example given in the last para, if the
Regulator has any prima facie proof that the same act was done with an
intention of wrongful gain to one or causing wrongful loss to another, or
both, it becomes an offence. In such a situation, regulator may file an
FIR and hand over the matter to the police for investigation and
prosecution. The Committee shall consider how the offence relating to
financial fraud, specially the major ones, can be effectively dealt with
and how these offences are required to be investigated and prosecuted to
obtain effective result. Very often, such activity or chain of activities
brings long term and serious impact on the economy or/and adversely
affect the interest of the public or interest of the investors. The
committee has to critically look into this area and point out the
definitional limitations, if any, to adequately deal with financial fraud;
procedure for expeditious investigation; steps for faster prosecution and
judicial institution. If a new Act is necessary for all these, then the
committee shall recommend the same as well.

Financial institutions today should adopt a proactive, intelligence-


led approach to manage fraud risk. Our team can assist you in
identifying, assessing and improving fraud monitoring process and
system to tackle the unique risks faced by your company.

Buying an off-the-shelf system may not equip the bank with the
most effective technical paraphernalia or strategic methods to deal with
frauds. Selecting the right framework and a seamless integration of bank
systems with the fraud monitoring system is integral to safeguard
business and customer interests.

132
Though followers of Bentham were bent upon experimenting
utilitarianism in the prescription of Indian legal system right from the
days of first Law Commission headed by Sir Macauley, the codification
of Indian laws was systematically based upon the British Common law
system. Fraud simpliciter did not find its place in the definition of any
offence in the Indian Penal Code, 1860. Of course, following the
Common law structure, some definitions and some offences were culled
out from the realm of fraud. A person is said to do a thing fraudulently,
under this Act, if he does the thing with the intent to defraud but not
otherwise128. Such a definition doesn’t take us far except that intention is
the key factor in acting fraudulently. The Roman law of suggestio falsi
and suppresio vari also has the element of intention but anyone
suggesting falsehood with intention of suppressing truth deliberately
where it is needed to be expressed, commits only a civil fraud.
Naturally, any act fraudulently done is not an offence. The fraud
becomes offence when it becomes cheating. Whoever, by deceiving any
person, fraudulently or dishonestly induces the person so deceived to
deliver any property to any person, or to consent that any person shall
retain any property or intentionally induces the person so deceived to do
or omit to do anything which he would not do or omit if he was not so
deceived, and which act or omission causes or likely to cause damage or
harm to that person in body, mind, reputation or property, is said to
“cheat”129. The other fraud-driven offences are cheating by
impersonation130, breach of trust by a clerk or servant27, breach of trust
by a public servant, banker, merchant factor, broker, attorney or an

128
Section 25 of the Indian Penal Code, 1860.
129
Section 415 of the Indian Penal Code, 1860.
130
Section 416 of the Indian Penal Code, 1860.
133
agent131, forgery132, making of a false document133,forgery of valuable
security, will, etc.134, forgery for purpose of cheating135, using as
genuine a forged document136.

Bank frauds have been a cause for concern for the financial sector
of many countries. The Reserve Bank of India, in exercise of its
supervisory powers vested with it, has been focusing on the bank frauds
perpetrated by staff and outsiders. The Reserve Bank of India has
identified the following as fraud-prone areas.

(1) Deposit Accounts

(2) Issue/Payment of Demand Drafts and other Transfer Instruments

(3) Discounting/Purchase of Telegraphic Transfers

(4) Letters of Credit/Guarantees and Co-acceptances

(5) Investments

(6) Credit Portfolio

131
Section 409 of the Indian Penal Code states, “Whoever, being in any manner entrusted
with the property, or with any domination over property in his capacity of a public
servant or in the way of his business as a banker, merchant, factor, broker, attorney or
agent commits criminal breach of trust in respect of that property, shall be punished
with imprisonment for life or with imprisonment of either description for a term which
may extend to ten years and shall also be liable to fine”.
132
Section 463 of the Indian Penal Code, 1860 which stipulates as follows, “whosoever
makes any false document or false electronic record or a part of a document or
electronic record with intent to cause damage or injury, to the public or to any person, or
to support any claim or title, or cause any person to part with the property, or to enter
into any express or implied contract, with the or intent to commit fraud or that fraud
may be committed, commits forgery”.
133
Section 464 of the Indian Penal Code, 1860.
134
Section 467 of the Indian Penal Code, 1860.
135
Section 468 of the Indian Penal Code, 1860.
136
Section 474 of the Indian Penal Code, 1860.
134
(7) Other Common Frauds.137

The modus adopted for perpetrating bank frauds continued to be


(a) opening of new fictitious deposits accounts by persons not properly
identified by the bank followed by deposit of fake/stolen/forged
instruments in such accounts and immediate withdrawals of the
proceeds, (b) submission of false stock/financial statements to avail of
finance, (c) clandestine removal of goods hypothecated and siphoning of
sale proceeds, (d) acceptance of deposits both Resident and Non-
Resident through middlemen and thereafter allowing/availing of
overdraft against fraudulent discharge of these deposits receipts by
forgoing power of attorney and loan documents of third parties who
were also not properly identified, (e) raising of accommodation bills, (f)
kite flying,35 (g) manipulation in outward/inward clearing, (h) raising
unauthorized debits on nominal heads of account, (i) manipulating and
tampering with the books of accounts by passing unauthorised entries,
(j) sanction of one time ad hoc credit facility to non-clients, (k) issue of
letter of Credit, Bank Guarantees without recording in the branch books,
(l) issue of pay orders/demand drafts without consideration, (m) fake
documentation, etc.138

Nirav Modi made 'vague' offer to repay some of defrauded $1.77


billion: PNB

In between April and December 2016, over 3,500 cases of


fraudulent transactions were reported involving Rs 177.50 billion, which
were facilitated by 450 private and public sector employees.

137
Compendium of Instructions Relating to Frauds in Commercial Banks, Department of
Supervision, Reserve Bank of India, 1996.
138
Report of the Study Group on Large Value Bank Frauds, Board of Financial
Supervision, Reserve Bank of India, 1999.
135
Here are some of the biggest scams that shook the country's
banking system and raised several questions:

- In 2011, investigative agency CBI revealed that executives of


certain banks such as the Bank of Maharashtra, Oriental Bank of
Commerce and IDBI created almost created 10,000 fictitious
accounts, and an amount of Rs 1.5 billion or Rs 1,500 crore worth
loans was transferred.

- Three years later in 2014, Mumbai Police filed nine FIRs against
a number of public sector related to a fixed deposit fraud to the
tune of Rs 7 billion or Rs 700 crore. In the same year,
Electrotherm India, which defaulted payment of Rs 4.36 billion or
Rs 436 crore to the Central Bank. Apart from that, Bipin Vohra, a
Kolkata-based industrialist allegedly defrauded the Central Bank
of India by receiving a loan of Rs 14 billion using forged
documents.

- Besides, another scam that was unfolded in 2014 was the bribe-
for-loan scam involving ex-chairman and MD of Syndicate Bank
SK Jain for involvement in sanctioning Rs 80 billion or Rs 8,000
crore.

- In 2014, Vijay Mallya was also declared a willful defaulter by


Union Bank of India, following which other banks such as SBI
and PNB followed suit.

- In 2015, another fraud that raised eyebrows involved employees


of Jain Infraprojects, who defrauded Central Bank of India to the
tune of over Rs two billion. In the same year, employees of
136
various banks were involved in a foreign exchange scam
involving a phony Hong Kong corporation. They had defrauded
the systems to move out Rs 60 billion.

- One of the biggest banking frauds of 2016 is the one involving


Syndicate Bank, where almost 380 accounts were opened by four
people, who defrauded the bank of Rs 10 billion using fake
cheques, LoUs and LIC policies.

- In 2017, Mallya's debt - owing to defunct Kingfisher Airlines -


rises to Rs 9.5 billion or Rs 9,500 crore to IDBI and other bank
branches. CBI prepares chargesheet but he had fled the country in
2016. Currently residing in the UK, Mallya's extradition is being
sought at the country's Westminster Court.

- In the same year, Winsome Diamonds - also known to be India's


second largest corporate defaulter - came under the scanner after
CBI booked six cases against the group and the companies under
it. This case is similar to the one observed in the fresh bank fraud
involving Nirav Modi group: Letters of Undertaking were issued
by Indian Banks to Jatin Mehta's Winsome Diamonds. It may be
noted that the gaps were first discovered in 2014. From mid-2013
the group failed to payback its debts, and was declared a willful
defaulter by banks. The total debt amounts to almost Rs 7,000
crore.

- Another case that grabbed eyeballs in the same years involved


Deccan Chronicle Holdings for causing a loss of Rs 11.61 billion;

137
CBI registered FIR against five PSBs and six chargesheets were
filed against the company.

- A Kolkata business tycoon Nilesh Parekh, a promoter of Shree


Ganesh Jewellery House, was arrested by CBI in 2017 for
causing a loss of Rs 22.23 billion to at least 20 banks. Parekh,
arrested at Mumbai airport last year, allegedly defrauded banks by
diverting loan money via shell companies in Hong Kong,
Singapore, and the UAE.

- In this case, CBI filed a case against the former zonal head of the
Bank of Maharashtra and a director of a private logistics company
based in Surat, owing to an alleged scam involving Rs 8.36
billion.

- Last but not the least by any means, the fresh bank fraud to the
tune of Rs 11,450 crore involving diamond merchant Nirav Modi.
It has come to light that the company, in connivance with retired
employees of PNB, got at least 150 Letter of Undertakings
(LoUs), allowing Nirav Modi Group to defraud the bank and
many other banks who gave loans to him. An Indian Express
report says that in addition to the Rs 11,450 crore, Modi also
defrauded 17 other banks of Rs 3,000 crore. In this case, however,
fake LoUs were recycled by the diamond jewellery group and
illegally issued to other banks for borrowing money. Nirav Modi,
his family and partners have fled the country and an exclusive
report by times now reveals that he is currently in the United
States.

138
- Another case that came to light this year concerns a former
Andhra Bank director, who was arrested by Enforcement
Directorate, in connection to an alleged Rs 5 billion bank fraud
case, involving a Gujarat-based pharma firm.

SUGGESTIONS

Many jurists argued for a long time that criminal law in India is
heavily class biased. Absence of financial fraud in the list of offences in
the penal code is evidence in itself that ‘white collar crime’ is treated
differently in India with all leniencies139. The Suggestions to this regard
are as follows :

1. Development of Best Practice Code : Each bank and financial


institution and intermediarymust, within the time-frame indicated
by the regulator, prepare a Best Practice Code (BPC) forits
officers and staff to provide detailed rule based procedural system
in customer related matters and application of judging power.

2. System of internalization of BPC : There has to be adequate in-


house training-retraining system for internalizing the BPC and all
directives of the Institution and the Regulator.

3. Internal Check and Internal Control : There must be


introduced system of internal check and internal control in the
system management and reporting.

4. Legal Compliance Certificate : A legal compliance certificate


needs to be mandated in all transactions exceeding a value limit.

139
The Report of the Expert Committee on Legal Aspects of Bank Frauds, 2001
139
In case of exercise of judgment power (discretionary power), an
explanation should be needed about the circumstances requiring
the exercise of discretionary power and the manner in which the
same is exercised with a comment as to whether all due diligence
care been taken or not.

5. Legal Compliance Audit : Every institution should have legal


compliance and due diligence audit every year and submission of
the report to the regulator and to the shareholders.

6. Data building on the exercise of discretionary power and


monitoring the same :

Discretionary power is the judging power of exercising the power


in circumstances only when it is essentially needed and there is no
other method left. It is not wild and fact-divorced speculative
power or an arbitrary power. As such, every institution should
build up data of its management and staff exercising discretionary
power recording all the reasons for such exercise and the
consequences. A very close monitoring shall reveal how people
use the power and with what result.

7. Appropriate incentive system : Use of discretionary power must


be result oriented either positively or negatively. Incentive and
promotion system in an organization may have some correlation
with the data of exercise of judging power and the rationality and
appropriateness of such decision.

140
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142
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143