1997 Supreme(SC) 517

1997(5) Supreme 334
SUPREME COURT OF INDIA
(From Bombay High Court)
A.M. Ahmadi, C.J.I., S.P. Bharucha and B.N. Kirpal, JJ.
B.O.I. Finance Ltd. etc.        —Appellants
versus
The Custodian & Ors. etc. —Respondents
Civil Appeal No. 1753 of 1994
With
C.A. Nos. 3656-57/95, 4863-64/94, 4390/94, 3529-3530/95, 5546/94, 3165/95, 3172/95, 3760/95, 3658-3659/95, 8411/94, 10234/95, 10260/95, 6545/95
and
C.A. 2104/97 @ S.L.P. (C) No. 24258/95
Decided on 19-3-1997
Counsel for the Parties :
For the Appearing Parties : T.R. Andhyarujina, Solicitor General of India, Shanti Bhushan, K. Parasaran, Soli J. Sorabjee, S.K. Cooper, I.M. Chhagla, D.A. Dave, S.K. Dholakia, A.M. Setalwad, Arun Jaitley, Ram Jethmalani, Sr. Advocates, P.K. Mullick, V. Tulzapurkar, (Anand Bhatt, Sandeep Mittal, R.N. Karanjawala Ms. Ruby Ahuja, N. Gore,) Advocates, for Mrs. M. Karanjawala, E.C. Agrawala, Mahesh Aggrawala, Atul Sharma, M. Himayatullah S. Ganesh, S. Sukumaran, T.K. Cooper, U.A. Rana, S. Tripathi, T. Cooper, Neeraj Sharma, Mis. Kiran Neena Gupta, Advocates for Vineet Kumar, D. Khambatta, J.D. Das, Ms. Anjali Seth, Ms. Mona Bhide, Dr. A.F. Julian, Arputham Aruna & Co., Advocates, G.R. Joshi, A. Subba Rao, P. Parmeshwaran, Sunil Dogra, Monica Sharma, S.S. Shroff, Mahesh Jethmalani, S.B. Jaisingham, Anand Desai, Ms. Lata Krishnamurti, Jay Salva and J.K. Das, H.S. Parihar, Subrat Birla, K.S. Parihar, S.K. Mehta, Dhruv Mehta, Fazlin Anam, Ms. Monika Mehta, K.J. John, P.H. Parekh, Ms. Sunita Sharma, Advocates.

IMPORTANT POINT
Infringements of the instructions issued by the Reserve Bank of India under the Banking Regulations Act prohibiting the banks from entering into buy-back arrangements do not invalidate such contracts entered into between the banks and it’s customers.

Headnote:(i) Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992—Banking Regulations Act 1949—Banking Companies Act,—Sections 21, 35A(1)— Directions issued by Reserve Bank of India u/ss 21 and 35A—Binding on banking companies—Infringements of instructions issued by Reserve Bank of India under Banking Regulations Act prohibiting banks from entering into buy-back arrangements—Do not invalidate such contracts entered into between banks and its customers—Non-compliance of directions may result in prosecution/or levy of penalty u/s 46.

       Held : The use of words “caution or prohibit” in Section 36(1)(a) clearly implies that when the Reserve Bank of India prohibits the banking companies from entering into any particular transaction then such a direction which is issued would be binding on the banks and has to be complied with. While the ‘Reserve Bank of India has the power, under Section 36 (1)(a) of the Act, to give advice or to caution the banking companies which may not be binding on the banking companies, but when the Reserve Bank prohibits the banking companies against their entering into any particular transaction or class of transactions, the said prohibition has to be regarded as being binding. The power to prohibit, given by Section 36, will be meaningless if it was not meant to be binding on the banking companies. (Para 19)

       Further held that the circular dated 15.4.1987 states that the banks are “advised” to follow the guidelines given thereunder, but paragraph 2A of the said Circular clearly contains the prohibition relating to the buy-back arrangements. Similarly, under paragraph 28, which is applicable in the present case, by use of the words ‘should be’ the circular clearly implies that the direction contained thereunder is meant to be binding. The word “advised” used in paragraph 2 of the first circular cannot be read in isolation. Reading the said circular, as a whole, it can leave no doubt in any one’s mind that what was stated in the said document was meant to be binding on the banking companies and, was not merely an ‘advice’ or a ‘caution’ which could be ignored. (Para 20)

       It is not in dispute that the said circulars which have been issued were not made public. The said circulars were confidential documents and required the banking companies to transact their businesses in a particular manner namely they should not enter into any buy-back contracts where were not according to the terms of the circulars. The Act itself does not provide that, where the directions issued by the confidential circulars are violated by the bank, the contracts entered into with the third parties would in any way by invalidated. The said circular also, did not say that the consequence of the directions contained therein not being followed by the Banking Companies will result in such transaction being regarded as void. Indeed, no such stipulation could be made which would adversely affect third parties to whom no directions have been or could be issued and who were not aware of such directions issued of the banks. (Para 22)

       The instructions which were issued by the said circulars were meant to be complied with by the banking companies only and did not purport to, nor could they, be binding on the third parties. This being so, even if the appellant banks had been prohibited from entering into the buy-banks arrangements in question, that by itself, would not invalidate the contracts though the infringement of the said directions may lead to action being taken under Section 46 of the Act. (Para 25)

       (ii) Contract Act—Section 57—Securities Contracts (Regulations) Act, 1956—Section 16(1)—Banking Regulations Act, 1949—Banking Companies Act—Ready forward contract—Severable into two parts—Ready leg of transaction having been completed—Forward leg, which alone is illegal, has to be ignored—Illegality of forward leg cannot affect transfers which had already taken place.

       Held : Section 57 applies to cases where two sets of promises are distinct. When the void part of an agreement can be properly separated from the rest, the latter does not become invalid. The ready-forward transaction consists of two parts. In the ready leg there is a purchase or sale of securities at a stated price which is executed on payment of consideration for the spot delivery of the security certificates together with transfer forms. The full and absolute ownership of the title in securities vests in the purchaser, the entire property in the security passing immediately upon such delivery and payment. The seller is divested of all the rights, title and interests in the said securities. The forward leg is to be performed at a later date on the stated price being paid. The securities are to be delivered back when the title in interest therein would pass of the original seller. It is clear that such a ready — forward transaction consists of a set of reciprocal promises. The first set of promises were fully executed, but the second set remained executory. Section 57 of the Contract Act would thus be attracted to the present case, the effect of which would be that the first set of promises would constitute a binding contract but the second or the forward leg would be void and unforceable. Neither the object nor the consideration of the ready leg is illegal, unlawful or prohibited under Section 23 of the Contract Act. The forward leg is neither the consideration nor the object for entering into the ready leg. At best it may be that the forward leg provided the parties with the motive for entering into the contract but that would not affect the severability of the forward leg, which alone is declared illegal under the Securities Control Regulation Act. (Para 32)

       Further held : The trading in the securities purchased by the banks in the ready leg was not in conflict with any law. The appellants were free to deal with them. This would show that with the first or the forward leg of the transaction being completed the banks had become the absolute owners of the said securities and they could deal with them in any manner in which they liked. There was nothing in the terms of ready-forward transaction which prohibited the banks, if they had sold the securities, from purchasing the securities of the same value from the market and selling the same to the broker in order to complete the second or the forward leg of the transaction. This will itself show that the two legs of the transaction are severable. (Para 34)

       What the notification issued under Section 16 did was to prohibit the entering into of a forward contract, i.e., sale at a future date for a fixed price. It expressly permitted sale of securities by spot delivery which, in the present case, is represented by the ready leg. It is only the future sale or the re-sale of the securities at a later date which the notification did not permit. This latter part of the agreement could not have been entered into and is clearly severable and cannot affect the transfer of the title which had already taken place at the time of the execution of the ready leg. This being so the securities which had been purchased by the appellants from the notified persons could not be attached. (Para 37)

       (iii) Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992—Section 4—Position of Custodian. (Para 7)