Rswm Limited Vs Idbi Bank Ltd.

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NC: 2025:KHC:8513 WP No. 30693 of 2018

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 25^TH DAY OF FEBRUARY, 2025 BEFORE

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THE HON'BLE MR JUSTICE HEMANT CHANDANGOUDAR WRIT PETITION NO. 30693 OF 2018 (GM-RES)

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BETWEEN:

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RSWM LIMITED HAVING REGISTERED OFFICE AT. KHARIGRAM, DIST. BHILWARA, RAJASTHAN, (THROUGH THEIR AUTHORISED SIGNATORY SHRI. VINOD MEHTA, AGED ABOUT 52 YEARS, S/O. LATE SH AMAR SINGH JI MEHTA, CHIEF OPERATING OFFICER, RSWM LTD.)

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…PETITIONER

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(BY SRI. S.S.NAGANAND, SENIOR COUNSEL FOR SRI. C.R.RAGHAVENDRA, SRI. VIKAS KUMAR, SRI. CHANDAN N. AND BHANU MURTHY J.S., ADVOCATES)

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AND:

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Digitally signed by R HEMALATHA Location: HIGH COURT OF KARNATAKA

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IDBI BANK LTD., THROUGH ITS MANAGER, BENGALURU ZONAL OFFICE, IDBI HOUSE 58, MISSION ROAD, POST BAG NO.27015, BENGALURU-560027.

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RESERVE BANIK OF INDIA THROUGH ITS GOVERNOR, NEW CENTRAL OFFICE BUILDING, SHAHID BHAGAT SINGH ROAD, FORT, MUMBAI, MAHARASHTRA-400001.

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…RESPONDENTS (BY SRI. RAYAPPA V.HADAGALI, ADVOCATE FOR R1; NOTICE TO R2 IS SERVED)

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THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND

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227 OF THE CONSTITUTION OF INDIA PRAYING TO, DIRECT RESPONDENT NO.1 TO WITHDRAW/DISCHARGE THE LIEN IN

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FORM OF MORTGAGE CREATED OVER THE ASSETS OF THE PETITIONER AND SIGN THE RELEVANT PAPERS FOR FILING WITH NOC AND SIGN THE RELEVANT STATUTORY DOCUMENTS FOR FILING WITH THE APPROPRIATE REGISTRAR OF COMPANIES AND UPLOADED THE SAME ON WEBSITE OF THE MINISTRY OF CORPORATE AFFAIRS AND ETC.

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THIS WRIT PETITION, COMING ON FOR PRELIMINARY HEARING IN ‘B’ GROUP (THROUGH VC AT DHARWAD BENCH), THIS DAY, ORDER WAS MADE THEREIN AS UNDER:

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CORAM: THE HON'BLE MR. JUSTICE HEMANT CHANDANGOUDAR

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ORAL ORDER

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The Petitioner seeks a writ of Mandamus directing Respondent No.1 to withdraw or discharge the mortgage lien on the Petitioner’s assets, to issue a No Objection Certificate (NOC) allowing the Petitioner’s entity to exit the CDR process, and to upload the NOC on the Ministry of Corporate Affairs website.

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1.1. Additionally, the Petitioner seeks a refund of Rs.75,17,000/- , so paid under protest, over and above the agreed Right of Recompense (RoR) amount which was already paid by the subsidiary company, prior to its merger with the petitioner entity.

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1.2. Furthermore, the Petitioner seeks a writ of Certiorari to declare the communication dated 28.08.2017

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(Annexure A) illegal and to quash it, and he also seeks a direction to Respondent No.2 (RBI) to implement the CDR Circular.

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The dispute relates to the amount payable by the Petitioner’s entity to the lender, Respondent No.1, under the lender’s Right of Recompense for losses incurred by the respondent bank during corporate debt restructuring and the amalgamation of the borrower-subsidiary company into the Petitioner’s entity. The Right of Recompense is a recovery by lenders in due course of time for the debt sacrificed on stressed assets at the time of debt restructuring. The Petitioner contends that it discharged all debts of its subsidiary before the scheduled repayment date but was forced to pay an illegal and arbitrary sum of Rs.75,17,000—an amount that exceeds the agreed ROR as approved at the Joint Lenders Meeting held on 20.07.2015 and sanctioned by the CDR Empowered Group. Subsequently, in 2015, the Petitioner paid a lump sum to Respondent No.1 under protest to obtain an NOC and approval for the exit of the subsidiary from the CDR arrangement.

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2.1. In short, the petitioner contends that even though it settled the full Right of Recompense (RoR) amount with all lenders, respondent No.1 (IDBI Bank) has illegally and arbitrarily refused to settle the loan account. The petitioner

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claims this refusal is in contravention of the guidelines in the Master Circular dated 25.06.2015 and the approval issued by the CDR Empowered Group. In contrast, the respondent bank argues that the extra amount sought over and above the settled RoR is justified because the petitioner had pledged Optionally Convertible Redeemable Preference Shares (OCRPS) to all lenders except the respondent bank, so the bank has not been fully compensated for its loss in the sacrifice of the Net Present Value of the outstanding debt.

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2.2. Consequently, after the petitioner made a payment under protest, the respondent bank issued an “in principle” approval for the exit of the subsidiary entity, subject to the payment of Rs.71.85 lakhs as recompense, as stated in its letter dated 29.09.2015.

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2.3. Subsequently, the respondent bank issued the impugned communication dated 28.08.2017 (Annexure A), clarifying that the equity shares issued by the subsidiary company to all CDR banks were intended to pre-fund the sacrifice amount under the CDR Package to protect Net Present Value, and not for the conversion of debt to equity. The bank further contends that because these equity shares were issued at a price higher than the prevailing market price, it was not fully compensated.

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2.4. Aggrieved, the petitioner has filed the present petition seeking a refund of Rs.75,17,000/- alleging that an excess amount was charged and forcibly collected, over and above the agreed upon RoR amount.

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Submissions

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Learned Senior Counsel Shri SS Naganand appearing for the petitioner’s counsel contended as follows:

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The Master circular dated 01.07.2013 stipulates therein that the CDR Empowered Group can approve acceptance of Right to Recompense (ROR) upto 75% on the basis of supermajority and concession upto 25% of sacrifice amount. This has been approved by all lenders and approved by the CDR empowered group. Based on the minutes of meeting of the CDR empowered group dated 28.12.2015, it was reaffirmed that total ROR payable by the petitioner was estimated at Rs. 351.29 lacs and any demand over and above said amount was not in compliance with CDR guidelines.

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The learned senior counsel further submitted that there was no mention of any sum payable over and above the RoR amount finalised in JLM dated 20.07.2015 and the CDR EG Meeting 30.07.2015, and that the petitioner herein had conveyed vide letter dated 22.07.2016 to the respondent bank that the latter had already recovered more than ROR amount payable of Rs. 203 lakh by monetizing equity shares allotted to it by offloading the

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same in market. The net value of said shares worth Rs. 270 Lakh as on present date.

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In conclusion, the learned counsel contended that any demand of payment of a sum, over and above the approved RoR payable to the bank, is illegal and arbitrary and that non-issuance of NOC and retention of charge on the mortgaged assets of the petitioner is in violation of CDR Guidelines and unlawful.

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In support he places reliance upon the following:

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(i) Ashok Kumar Singh and etc v. Bihar Industrial and technical consultancy Organisation Ltd. and Ors AIR 1998 Patna 9 (para 23,25, 28). - Maintainability

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(ii) Zonal Manager, Central Bank of India v. Devi Ispat Ltd and Ors (2010) 11 SCC 186 (Para. 28) - Maintainability

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(iii) Joshi Technologies International Inc v. Union of India and Ors (2015) 7 SCC 728 (para 56,57). - Maintainability

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(iv) Gujarat Credit Corporation Ltd v. Punjab National Bank 2018 GUJHC: 10995 (para 6.1-8).

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(v) Mahabir Auto Stores and Others v. Indian Oil Corporation and Ors (1990) 3 SCC 752. (para 12,20)

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(vi) Central Bank of India v. Ravindra and Ors (2002) 1 SCC 367 9 (para 51).

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(vii) Sardar Associates v. Punjab and Sind Bank (2009) 8 SCC 257 (Para 38, 39).

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(viii) Kurien E Kalathil v. Federal Bank Ltd and Ors (2023) KER 62293 (para 9,10).

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(ix) SCI (India) Ltd v. Bihar State Financial Corporation AIR 2007 PAT 37.

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Per contra, the learned counsel representing the respondents argued that the instant petition is not maintainable as the writ remedy cannot be exercised in enforcement of private contractual obligations and that the respondent-bank herein cannot be construed as a State in the subject dispute.

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4.1. The learned counsel continued that the subsidiary company herein had availed loans since 1989, and had its credit facilities rescheduled under CDR arrangement in the year 2002 and again in the year 2009. However, any restructuring of debts for the second time was permissible only against issue of equity shares upfront, to recoup the sacrifice of the Net Present Value suffered by the bank, which were allotted vide letter of allotment dated 04.08.2012. Therefore, there operated no restriction on the banks to conduct a sale thereof without notifying the borrower-subsidiary company ( as there exists when converting debt into equity ), and accordingly, 28,62,400 equity shares of the subsidiary company were sold between 26.12.2013 and 28.08.2014, upon the expiry of the lock in period of 1 year from the date of allotment. A recovery of Rs. 2.03 Crore was made, upon the sale thereof.

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4.2. The learned counsel for the bank contended that the said shares however, were issued at the face value of Rs.

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10/- per share, against the market value of Rs. 6.50/- per share, resulting in a loss of 35% at the time of their sale. Therefore, the bank has continued to mark a lien on the assets of the petitioner company (in light of the merger between the borrower subsidiary company and the parent petitioner entity ) to the extent of an amount of Rs. 71.85 lacs, owed by the petitioner to the bank under its Right of Recompense. The learned counsel further emphasised that the governing CDR guidelines contained in the amended circular dated 25.06.2015, mandate a minimum recovery of 75% of recompense amount, but does not limit the recovery thereof to the same. Banks are at liberty to recover the recompense amount even beyond 75% of the recompense.

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4.3. The learned counsel further drew the attention of the Court to the fact all other CDR lenders had received their 75% of RoR against the sacrifice of the Net Present Value of the outstanding debt, via the issue of OCRPS (Optionally Convertible Redeemable Preference Shares), fully paid up, at the price of Rs. 7.50/- by the petitioner entity. For every share of the subsidiary company, the petitioner issued its share at the price of Rs. 7.5 and also 12% coupon rate. However, the learned counsel continued, admittedly, the OCRPS could not be issued to the respondent-bank in light of the fact that the bank had monetized the earlier issued equity shares. Therefore, when the things stood thus, the learned counsel

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submitted that in light of the fact that amount of RoR receivable by the bank, as approved in the JLM dated 20.07.2015 and the CDR EG Meeting 30.07.2015 to the tune of Rs. 203 lacs, was to recoverable through means other than those approved under the CDR EG, the bank has continued to retain the assets of the petitioner entity undischarged recompense accruable to it.

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4.4. Finally, rebutting the contention of the learned Senior Counsel that any demand of money over and above the agreed upon recompense by the lenders in CDR EG is violative of the CDR guidelines, the learned counsel for the respondent bank submitted that the banks have continued to retain the assets of the petitioner entity in relation to a lien proportionate to the amount of Rs.71.85 lacs coupled with interest at the prevailing base rate, as specified in the email dated 08.09.2015, in light of the fact that the bank had decided to make a recovery of more than 75% of the RoR to offset its losses incurred between 26.12.2013 and 28.08.2014, at the time of the sale of the equity shares issued by the subsidiary company. Furthermore, the learned counsel contended that the Minutes of CDR EG Meeting dated 27.04.2016 (Annexure S), further revealed that the while the exit of the subsidiary company from CDR mechanism stood approved, any dues over and above the approved RoR payable to the respondent lender must be mutually settled.

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Heard the learned counsels and perused the material on record.

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Issues

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The issues that arise for consideration in this petition are as follows:

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i. Whether this Court can entertain the instant petition under its writ jurisdiction, inasmuch as it relates to a contractual dispute between the petitioner and the respondent bank?

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ii. Whether the respondent bank is entitled to claim any amount over and above the recompense approved by the by supermajority in the CDR Empowered Group Meeting, when the RoR calculation is strictly in accordance with the CDR guidelines?

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iii. Whether the respondent bank is entitled to recover more than 75% of the RoR, despite the supermajority in the CDR Empowered Group having approved a compounded figure amounting to 75% of the RoR?

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Discussion / Analysis

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All issues are decided together for convenience.

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With respect to the issue of maintainability of the

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instant petition, it is settled law that a writ remedy may be

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invoked against any institution discharging functions of a public character, provided that the petitioner’s grievance has arisen from the discharge of those functions. Any failure on the part of an authority vested with public duty to discharge its functions properly shall be sufficient grounds for invoking the constitutional remedy under Articles 226 and 227 of the Indian Constitution. The authorities relied upon by the learned counsel for the petitioner enunciate this principle in favor of the maintainability of the instant petition and, therefore, do not warrant a separate consideration of each case law.

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The petitioner entity is essentially aggrieved by the additional recompense of Rs.75,17,000/-, charged by the respondent bank against the sacrifice of the Net Present Value of the outstanding debt as of 31.03.2015, in its grant of approval for amalgamation of the borrower-subsidiary company with the petitioner company. The subsidiary entity had undergone corporate debt restructuring in June, 2012 and had executed a Master Debt Restructuring Agreement dated 28.06.2012 with all its lenders, including the respondent-IDBI Bank. Accordingly, any merger or amalgamation of an entity undergoing Corporate Debt Restructuring (CDR) is subject to the prior approval of the lenders.

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It is pertinent that the relevant facts of the matter be recorded before arriving at a conclusion.

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10.1. Cheslind Textiles Ltd. (hereinafter referred to as the “subsidiary company”) merged with Rajasthan State Weavers Mills Ltd. (RWSM Ltd) (hereinafter referred to as the “petitioner entity”) in pursuance of an order dated 26.03.2015 passed by the High Court of Rajasthan and an order dated 31.03.2015 passed by the High Court of Madras under Sections 391 and 394 of the Companies Act, 1956 (Annexure F). The Scheme of Amalgamation dated 16.06.2015 sanctioned the transfer with effect from 01.04.2013.

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10.2. However, since the subsidiary entity had undergone Corporate Debt Restructuring on 28.06.2012 (Annexure R2), the above merger was subject to the approval of all lenders under the Master Debt Restructuring Agreement dated 28.06.2012, entered into by the subsidiary company and the respondent bank and other lenders. The Corporate Debt Restructuring (CDR) package of the subsidiary company was approved in March 2012 by the CDR Empowered Group (Annexure G).

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10.3. Incidentally, the respondent bank served as the Monitoring Institution for the CDR process, and its Executive Director headed the CDR Empowered Group as its Chairman during the exit of the subsidiary entity from the CDR mechanism.

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10.4. Subsequently, in pursuance of the letter dated 18.04.2014, the respondent No.1-IDBI Bank had granted conditional approval to the aforesaid merger, vide letter dated 03.11.2014 (Annexure R4), subject to compliance with the following requirements:

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Issuance of similar NOCs by other lenders and clearance by various statutory authorities;

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Exit from CDR, after paying applicable recompense amount.

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10.5. In light of the fact that the subsidiary company had already undergone Corporate Debt Restructuring (CDR) for the first time in 2002, its restructuring for the second time in 2012 was permissible only if the Net Present Value (NPV) of the outstanding debt was protected. Accordingly, the subsidiary company allotted 28,62,400 equity shares to the respondent bank upfront, corresponding to the sacrifice of NPV, with a lock-in period of one year from the date of allotment (i.e., from 26.07.2012 to 25.07.2013), as per the allotment letter dated 04.08.2012 (Annexure R17). Similarly, shares were issued to other lenders. The market price of these shares was Rs.6.50 each, compared to a face value of Rs.10 per share at the time of issuance.

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10.6. However, the respondent bank sold the issued shares between 26.12.2013 and 28.08.2014, recovering an amount of Rs.2.03 crores. The respondent bank contends that

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no prohibition applied to this sale. A perusal of Annexure R7, which details the Right of Recompense (RoR) payable by the petitioner to the respondent bank as computed by an independent auditor, shows an amount of Rs.203.60 lacs. This undisputed fact—that the respondent bank recovered this amount from the sale of the shares in exchange for the sacrificed NPV of the outstanding debt—is the crux of the issue and will be addressed later.

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10.7. A review of the records indicates that the lenders advised the subsidiary to exit the CDR system upon payment of the RoR well before the merger occurred. In response, the subsidiary contended that the issuance of equity shares to CDR lenders was made to the extent of the NPV sacrifice and, therefore, no payment of RoR was applicable.

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10.8. However, the lenders stated that the equity shares, with a face value of Rs.10 per share, were issued at a market value of Rs.6.50 per share, and that a Funded Interest Term Loan (FITL) was charged below the base rate. Consequently, the subsidiary company is required to compensate for an approximate loss of 35% incurred in the conversion of debt to equity and the FITL arrangement.

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10.9. Accordingly, the CDR-EG meeting dated 26.03.2015 (March, 2015) had decided as follows:

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“(i) IDBI bank, the MI and other lenders shall calculate the Recompense amount as under:

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(a) Loss incurred by lenders between face value and market price as on the date of issue of equity in respect of NPV.

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(b) Difference between CDR rate and last sanctioned letter before reference to the CDR system in respect of FITL and working capital and other facilities, if any.

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(ii) Lenders, on calculated RoR amount, shall charge base rate of respective banks till date of payment on annual compounding basis.

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(iii) all lenders shall confirm the recompense amount calculation and give their mandate to IDBI Bank and MI.

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(iv) IDBI Bank, the MI shall bring a Review Note in next CDR EG with RoR amount and proposed payment plan.”

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10.10. Subsequently, an independent auditor, via letter dated 17.07.2015 (Annexure R7), submitted the calculation of the RoR amount payable to all lenders up to 31.03.2015, based on 75% of recompense as per CDR Circular No. 02/2013-14. The interest recompense payable by the petitioner to the respondent bank was calculated to be Rs. 203.60 lakhs only.

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10.11. A perusal of the Minutes of the CDR Empowered Group Meeting dated 30.07.2015 (July 2015) reveals that, given that the aforesaid merger occurred in March 2015 and

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the subsidiary company was no longer in existence, the petitioner had offered the CDR lenders Optionally Convertible Redeemable Preference Shares (OCRPS) of the petitioner entity at a face value of Rs. 7.50 per share, in lieu of one equity share of the subsidiary company at a face value of Rs. 10 per share. These OCRPS carried a coupon rate of 12% and were to be redeemable after six months and before five years from the date of allotment. This arrangement was made in lieu of cash payments for 75% of the RoR payable by the subsidiary to the lenders, considering the approximate 35% loss incurred by the CDR lenders in converting the debt into equity.

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10.12. However, the petitioner did not allot these OCRPS in favor of Respondent-IDBI Bank because the equity shares issued by the subsidiary company in August 2012 were sold, and the respondent bank recovered Rs.2.03 crores from that sale. At the risk of repetition, respondent-IDBI Bank contends that these equity shares were not issued pursuant to the conversion clause (i.e., conversion of debt to equity) but were issued to pre-fund the sacrifice amount envisaged in the CDR package for protecting the Net Present Value (NPV). Therefore, there was no restriction on the respondent regarding the sale of the equity shares, and no notice was required to be given to the subsidiary company.

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10.13. Furthermore, a perusal of the said Minutes of the Meeting reveals that all lenders indicated that the RoR is calculated in accordance with the CDR guidelines and that waivers and concessions of 25% on eligible facilities extended to the subsidiary company are within permissible limits, as examined and recommended by the lenders. The said Meeting concluded by with the following decisions:

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“ Lenders shall confirm to IDBI Bank, the MI regarding the receipt of Right of Recompense (RoR) amount as per review note.

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IDBI to bring an exit note after receipt of RoR amount.”

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10.14. A further review of the Minutes of the Meeting dated 30.07.2015 reveals that all lenders acknowledged that the RoR is calculated in accordance with the CDR guidelines, and that waivers and concessions of 25% on eligible facilities extended to the subsidiary company are within permissible limits, as examined and recommended by the lenders.

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10.15. Subsequently, in an email dated 08.09.2015 (Annexure M), the respondent bank demanded an RoR amount of Rs. 71.85 lakhs along with interest at the IDBI Bank Base Rate from April 01, 2015, until the date of payment/repayment of the loan. The email stated that the IDBI Bank Base Rate was 10.25% from April 01, 2015, to May 10, 2015, and thereafter 10% effective from May 11, 2015.

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10.16. In response, the petitioner paid a lump sum to settle the account in its entirety—a sum of INR 17.06 crores toward the repayment of all outstanding loans as of that date, plus INR 8 lakhs toward interest up to 14.09.2015—via an email dated 15.09.2015. However, this payment was made under protest, and the petitioner expressed disagreement with the respondent bank’s calculations, further contending that they were in violation of the Minutes of the CDR Empowered Group Meeting.

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10.17. Subsequently, the respondent bank, by letter dated 29.09.2015 (Annexure N), conveyed that it had granted “in-principle” approval for the exit of the subsidiary company from the CDR mechanism, subject to, among other conditions, the payment of a recompense amount of Rs. 71.85 lakhs (as vetted by the engaged concurrent auditors and confirmed at the Joint Lenders Meeting held on July 20, 2015), along with interest at the IDBI Bank Base Rate from April 01, 2015.

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10.18. A review of the Minutes of the CDR Empowered Group Meeting dated 27.04.2016 (Annexure S) reveals that all lenders except respondent-IDBI Bank accepted the RoR amount. Since the respondent bank’s demand was for an additional share of 10% over the RoR amount—due to the difference between the issue price and the market value of the upfront equity—this additional amount was to be mutually

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settled. The Minutes further indicate that the successful exit of the subsidiary was approved as of 27.04.2016.

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10.19. Thereafter, the petitioner issued a letter dated 22.07.2016 (Annexure T) to respondent-IDBI Bank and another letter dated 25.04.2017 (Annexure U) to the Department of Financial Services, Ministry of Finance, Government of India, reiterating that the company had fully settled all outstanding loans, and that the RoR payable to IDBI Bank—as approved by the CDR Empowered Group—was realized upon the receipt of Rs. 2.03 crores in August 2012 from the sale of equity shares issued by the subsidiary company. The petitioner requested that the Ministry direct RBI to issue an NOC, close the relevant accounts, direct the payment of any withheld amounts and accrued interest, and release the charge on the pledged assets, with the appropriate documentation for submission to the Registrar of Companies.

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10.20. In response, the respondent bank issued a letter dated 06.07.2017 (Annexure Q) to the petitioner, rejecting the refund request for the Right of Recompense and requiring the submission of the acceptance letter dated 29.09.2015 (Annexure N) to enable the bank to release the charge on the secured assets. Subsequently, the respondent bank issued the impugned communication dated 28.08.2017 (Annexure A), asserting that there was no specific restriction against the

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alienation of the equity shares issued by the subsidiary company. The respondent bank further contended that the right of first refusal did not accrue to the subsidiary company because that right applied only to promoters of the issuing debtor when equity shares were issued as part of a debt-toequity conversion, and not when they were issued to pre-fund the sacrifice amount under the CDR package for NPV protection.

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10.21. A further review of the records indicates that the petitioner issued multiple letters to the respondent bank on 19.07.2017, 19.09.2017, 13.11.2017, and 21.03.2018, and also approached the Consumer Education and Protection Department of the Reserve Bank of India via a letter dated 26.07.2017 (Annexure ZB). Finally, the petitioner had got a legal notice dated 23.05.2018 issued to the respondent bank. Aggrieved by the illegal retention of the excess amount of recompense money, the petition has filed the instant petition seeking a withdrawal of the lien on assets and refund of the excess amount of recompense retained.

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In summary, the petitioner contends that despite settling the full RoR amount with all lenders, respondent-IDBI Bank has illegally retained an additional amount of Rs.75,17,000/-, which is not justified by the terms approved by the CDR Empowered Group. The petitioner argues that this

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retention violates the Master Circular dated 25.06.2015 and the decisions of the CDR Empowered Group, which approved a recompense amount of only 75% of the RoR. Furthermore, the petitioner asserts that the subsequent issuance of equity shares to pre-fund the sacrifice amount under the CDR package was not subject to any restrictions preventing the sale of such shares.

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The petitioner has also appealed to the Department of Financial Services, Ministry of Finance, and the Reserve Bank of India for intervention, as documented in his letters and legal notice. The petitioner claims that, due to the sale of equity shares by respondent-IDBI Bank and the recovery of Rs.2.03 crores from that sale, the bank has already been compensated for the loss of Net Present Value. The petitioner argues that the additional amount of Rs.75,17,000/- is excessive and illegal.

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12.1. In light of the above, the petitioner seeks a comprehensive writ of Mandamus to secure the following reliefs:

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• Withdrawal or discharge of the mortgage lien on the petitioner’s assets;

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• Issuance of an NOC permitting the petitioner’s entity to exit the CDR process, with the NOC being uploaded on the Ministry of Corporate Affairs website;

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• Refund of Rs.75,17,000/-, which the petitioner claims was illegally and arbitrarily charged;

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• A writ of Certiorari quashing the communication dated 28.08.2017 (Annexure A) as illegal;

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• A direction to respondent No.2 (RBI) to implement the CDR Circular.

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12.2. The petitioner submits that the excess retention of recompense money by respondent-IDBI Bank, in violation of the approved CDR guidelines and the Master Circular, constitutes an abuse of the process of law, and that the repayment of this amount is necessary to ensure fairness and to enable the petitioner to exit the CDR process. Therefore, the petitioner seeks to quash the impugned demand and direct a refund of the illegally retained excess recompense amount.

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A review of the Statements of Objection filed by the Respondent Bank reveals that the Bank is claiming 35% of the concessional RoR instead of 25%, as claimed by the other lenders, based on the differential price of Rs.3.50 between the face value of Rs.10 per share and the prevailing market price of Rs.6.50.

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In other words, the bank contends that because the OCRPS were issued by the petitioner to all lenders except the respondent bank, in lieu of 75% of the RoR payable by the petitioner against the sacrifice of the NPV of the outstanding

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debt up to 31.03.2015, the Bank is entitled to an additional 10% of the RoR computed to be payable to it. Hence, the respondent bank asserts that the 35% loss incurred at the time of the sale of the equity shares (i.e., the percentage difference between the face value and the market price of the shares issued by the subsidiary company to the IDBI Bank) is recoverable under its RoR.

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14.1. Furthermore, the respondent bank contends that lenders are not compelled to grant any concessions to borrowers and are at liberty to charge the full 100% of the monies advanced. However, the petitioner has refused to pay an additional 10% of the concessional RoR, despite waiving 25% of the outstanding debt under the head of eligible facilities.

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Essentially, the respondent bank is claiming the right to recover a total of 85% of the Net Present Value of the outstanding debt, thereby providing a waiver on only 15% of the sacrifice of the NPV of the debt. (This recovery claim is calculated as the difference between the total percentage of the debt and the concession percentage of the waiver on eligible facilities.) The petitioner, however, contends that the profit or loss in the books of account of the respondent bank cannot be calculated based on the diminished market price of the equity shares of the subsidiary company at the time of

¶160

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their sale, but rather on the original face value of the shares at the time they were issued to the respondent bank.

¶163

Shri SS Naganand, appearing on behalf of the petitioner, argued that the proper calculation of profit or loss in the accounts of the lender bank should be the difference between the monies lent and the amount recovered upon the sale of the shares issued by the borrower. In this case, the learned counsel contended that since the RoR payable—as evidenced by the figures shown in Annexure R7—is Rs.203.60 lakhs, and the amount recovered from the sale of equity shares by the respondent bank is Rs.2.03 crores, the bank has not suffered any loss.

¶164

Therefore, the essential question before us is whether the petitioner has a right, under the governing CDR and SEBI guidelines, to insist that the respondent-IDBI Bank limit its recovery to the RoR amount calculated by the independent auditor, as set forth in Annexure R7.

¶165

In other words, can the respondent bank keep a lien on the petitioner’s assets—even though the loan account has been closed and the subsidiary company has been allowed to exit the CDR mechanism—and still demand additional compensation beyond the amount determined by an independent auditor and approved by the CDR Empowered Group.

¶166

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¶168

The petitioner relies on amended Master Circular dated 25.06.2015 ( CDR guidelines), more particularly, Section 18.9 which deals with ‘Other Guidelines’, and the relevant portion thereof reads thus:

¶169

“… After recovery of recompense amount the lenders shall not be eligible to claim or recover any further amount from the borrower by way of recompense up to that date. In case company’s performance worsens subsequent to its exit by payment of recompense, the company’s request for restructuring of its debts can be considered by CDR EG on merits. Recompense shall be crystallized on occurrence of trigger event and subsequently on recovery of the recompense either in the form of cash or debt instruments, the company will be treated as successfully exited from CDR. However, till company continues under CDR, the lenders will have Right of Recompense.”

¶170

A perusal of the letter dated 25.04.2017 from the petitioner shows that even after concessions, the interest rate in the approved package was higher than the banks’ base lending rate. Consequently, the CDR Empowered Group approved a RoR of up to 75%. Notably, the respondent bank’s pleadings do not claim that the interest rate in the approved package was below the banks’ base lending rate.

¶171

Clause 18.6. of the amended Master Circular dated 25.06.2015 deals with ‘Methodology of Computation of Recompense Amount’ and the relevant portion thereof reads as follows:

¶172

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¶173

“…In any case minimum 75% of the recompense amount should be recovered by the lenders and in case where some facilities under restructuring have been extended below base rate, 100% of the recompense amount should be recovered.”

¶174

A review of the facts shows that the bank had recovered all outstanding debts and interest by September 2015. Additionally, the recompense of Rs. 203.60 lakhs— which was calculated by the auditor (Annexure R7) and approved by the CDR Empowered Group in its meeting on 30.07.2015 under the CDR Master Circular dated 25.06.2015—was realized by the bank through the sale of equity shares, bringing in Rs. 2.03 crores between December, 2013 and August, 2014.

¶175

However, other CDR lenders did not recover their losses by selling their equity shares. As a result, the petitioner issued OCRPS (Optionally Convertible Redeemable Preference Shares) to all lenders except the respondent bank instead of paying the RoR in cash. This measure was necessary because there was a 35% difference between the face value and the market price of the equity shares. In effect, the petitioner issued OCRPS only up to the compounded RoR amount calculated by the auditor and approved by the CDR Empowered Group in its meeting on 30.07.2015.

¶176

In other words, neither the petitioner nor the respondent bank has paid any amount beyond the

¶177

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compounded RoR (as shown in Annexure R7) to the other lenders. The respondent bank, however, argues that it is entitled to an additional recovery because it suffered a 35% loss when it sold the equity shares.

¶180

Before concluding, the authorities cited at the Bar may be referred supporting the principle that debtors cannot be forced to pay more than the RoR amount approved by the CDR Empowered Group, as determined by the CDR/RBI guidelines. In Gujarat Credit Corporation Ltd. v. Punjab National Bank 2018:GUJHC:10995 , the High Court of Gujarat quashed clause 7 of the recompense terms from a one-time settlement and directed the respondent bank to issue an NOC and return the securities. The Court noted that the respondent bank was prevented by its own conduct from claiming any further recompense, as the recoverable amount in a one-time settlement is mutually agreed upon by the lender and the borrower.

¶181

In the instant case, the equivalent guidelines under Section 18.9. as extracted above, has a similar effect of precluding lenders from recovering any further amount beyond the approved amount of recompense by the supermajority in the CDR EG, provided the RoR amount is calculated to the extent of not less than 75% of the RoR, and that the same is in accordance with the CDR guidelines.

¶182

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¶184

In the case of Mahabir Auto Stores and Others v. Indian Oil Corporation and Ors (1990) 3 SCC 752. (para 12,20), the Apex Court observed that when instrumentalities of the State, such as respondent public body corporate, enter a contract, it must govern its conduct by the incidence of a contract. In the case at hand, the respondent-bank having been endowed with a public character is equally obliged to conform it demand of any dues payable by the petitioner, in accordance with the terms and conditions of the debt restructuring agreement and more particularly, when the respondent-bank has been the Monitoring Institution of the entire CDR EG in respect of the restructuring and exit of the subsidiary entity herein.

¶185

Shri SS Naganand , learned senior counsel further emphasised that since the subject guidelines contained in the amended Master Circular dated 25.06.2015 issued by RBI have a statutory flavour (see, Corpn. Bank v. DS Gowda (1994) 5 SCC 213) any demand for recompense payable over and above the approved amount of the RoR in the CDR EG Meeting dated 30.07.2015, is illegal. He relies on the decision of the Apex Court in the case of Central Bank of India v. Ravindra and Ors (2002) 1 SCC 367 9, wherein the decision in the case of DS Gowda (supra) was reiterated and the Court had opined that a Writ Court could not reopen a transaction

¶186

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between a banking company and the debtor on the ground that the interest charged is excessive.

¶189

28.1. Similarly, this Court cannot reopen a transaction between the petitioner (parent company of the merged subsidiary entity) and the respondent-Bank, but enforce the terms and conditions of the CDR exit, in accordance with the CDR guidelines. Any deviation therefrom, would stand afoul of principles of fairness and equality enshrined in Article 14, and the restrictions imposed by statutory directions in the practice of lending business under Article 19 of the Indian Constitution.

¶190

The learned Senior Counsel further produced the decision in the case of Sardar Associates v. Punjab and Sind Bank (2009) 8 SCC 257, wherein the Apex Court had opined in a case relating to a challenge posed to the rejection of a one time settlement by the bank, that guidelines issued by the RBI are mandatory on banks and directed the respondent bank therein to invite a proposal for settlement and recovery of the agreed amount.

¶191

In the case of Kurien E Kalathil v. Federal Bank Ltd and Ors (2023) KER 62293 the petitioner therein had challenged the act of respondent-bank in adjusting a sum over and above the agreed upon amount in the one time settlement as per RBI guidelines. The High Court of Kerala while determining the question on existence of ‘right to recompense’

¶192

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owed to the respondent-bank held that the RBI had failed to consider the question as to whether the respondent-bank therein was aware of certain extra amount remaining in credit in the account of the petitioner and consequently, remanded back the matter to RBI to pass fresh orders in accordance with law.

¶195

30.1. Similarly, the learned counsel contended that merely reserving ‘right to recompense’ by respondent-bank is not sufficient to exercise the same at later stages as per their own whims and fancies, but that the exercise of the same is subject to the relevant governing guidelines contained in the Master Circular dated 25.06.2015.

¶196

In the case of SCI (India) Ltd v. Bihar State Financial Corporation AIR 2007 PAT 37 (para 19-22), the High Court of Patna dealt with a case relating to demand of recompense raised by the respondent-lender after expiry of more than one and half years, from the date of request to issue a ‘no dues’ certificate, against the alleged waiver of penal interest leviable in case of default of payment of the restructured debt, so payable in ten half yearly installments.

¶197

32.1. The petitioner-debtor therein had paid all dues, particularly the last installment within the stipulated deadline. As regards earlier installments, the petitioner had defaulted by nor more than a few days, but had duly paid the penalty of 2% on the interest at the rate of 17%.

¶198

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32.2. The Court opined that when the debt restructuring agreement recompense meant compensation for loss incurred or effort made and did not mean a revival or restoration of penal charges waived at the time of effecting the debt restructuring agreement, there did not lie any case for recompense when all debts were discharged within the stipulated date.

¶201

In view of the above analysis, it may be reasonably concluded that while CDR lenders are mandated to make a minimum recovery of 75% of RoR, and the calculation of the Recompense payable shall be done so strictly in accordance with the CDR guidelines in the Master Circular dated 25.06.2015, but the compounded amount of RoR was to be approved by a supermajority in the CDR EG, and the same was arrived at, as annexed at Annexure R7, no lender could maintain a lien on the assets of the debtor for a sum of recompense, over and above the agreed upon sum by the supermajority.

¶202

The Banks are certainly at liberty to recover a percentage amount of RoR beyond 75%, but are to subject the recovery to the amount of recompense agreed upon in the Meeting of the CDR EG, in the instant case the amount agreed upon in the said Meeting dated 30.07.2015. The governing guidelines of the said CDR Master Circular

¶203

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extracted at paragraph no. 17 herein clearly bar all CDR lenders from compelling any payment of recompense from debtors, over and above the agreed upon compounded figure of recompense approved by the supermajority in the Meetings of CDR EG. Any latitude to the banks would have an effect of permitting the CDR lenders to make a recovery simultaneously, in parallel to the proceedings under the debt restructuring mechanism, and continue to retain the assets of the debtors, who are otherwise relieved by the CDR EG.

¶206

In the instant case, while the CDR EG had observed in the matter that any demand of recompense over and above the approved compounded sum, by the respondent bank, who was also the Monitoring Institution, must be mutually settled between the petitioner and respondent bank, the latter cannot be permitted under the law, to continue to mark a lien on the assets of the petitioner, whose exit from the CDR mechanism, otherwise stood approved.

¶207

A perusal of the material on record reveals that there exists a discrepancy between the refund of excess amount sought by the petitioner - Rs. 75.17 lacs only, and the recompense amount claimed by the respondent bank as payable by the petitioner - Rs. 71.85 lacs only. In light of the fact that the dispute between the parties has been lingering since the year 2016, it is felt prudent to dispose of this petition

¶208

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by directing the respondent bank to refund the petitioner a sum of Rs. 71.85 lacs, as claimed by the bank, over and above the compounded RoR amount.

¶211

Accordingly, I order the following:

¶212

ORDER

¶213

The instant petition is allowed , and the impugned communication dated 28.08.2017, at Annexure A is hereby quashed.

¶214

Respondent No.1 is hereby directed to withdraw/discharge the lien created in form of mortgage over the assets of the Petitioner and issue the relevant NOCs and the relevant statutory documents for filing with the appropriate Registrar of Companies and upload the same on the website of Ministry of Corporate Affairs, within four weeks from the date of receipt of this order.

¶215

Respondent No.1 is hereby directed to refund a sum of Rs. 71.85 lacs only to the petitioner, within four weeks from the date of receipt of this order.

¶216

Sd/(HEMANT CHANDANGOUDAR) JUDGE

¶217

BKM

¶218

Ct:vh/List No.: 19 Sl No.: 1

Rswm Limited v. Idbi Bank Ltd.

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Rswm Limited v. Idbi Bank Ltd.

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