Andhyarujina panel for more teeth to DRTs T he T R Andhyarujina Committee has suggested extensive legal changes to confer larger powers on debt recovery tribunals for expeditious disposal of claims of banks and financial institutions. It also said that banks and financial institutions have a case to special treatment for guarantees in the amended provisions of Section 28 of the Indian Contract Act This particularly concerns guarantees to the government, under which claims can be enforced even up to 30 years causing banks and financial institutions to keep securities and margins for long periods. The committee has formulated specific proposals to give effect to the suggestions made by the Narasimham Committee on banking sector reforms.

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Preface 2. Executive Summary and a Road Map 3. Chapter 1 4. Chapter 2 5. Chapter 3 6. Chapter 4 7. Chapter 5 8. Chapter 6 9. Illustrative Bill. I am privileged to present to you the Report of the ExpertCommittee on Legal Aspects of Bank Frauds and an illustrative legislation tocombat financial and bank frauds. Financial Fraud, per se, is no offence inIndia at present. Our recommendations include both preventive and curativeaspects.

The curative aspects include making financial fraud an offence with ashift of burden of proof. Serious financial frauds are required to beinvestigated by multi-dimensional investigative agency and to be tried in a fasttrack special court.

In the preventive aspects, the committee recommended somesystemic adjustment including making legal compliance report necessary andattaching certain functional responsibilities to the financial auditors. We anticipate that there shall now be a national debateover the report and the draft legislation so that the Government may examinepros and cons before taking steps to legislative design. We request Reserve Bankto put the whole report and the draft legislation in its web site for suchnational debate.

The report may also be sent to the appropriate authorities whoare now seriously concerned with financial frauds. We like to record our thanks to you in particular for theconfidence reposed on us for this national task and your staff who supported uswith all possible help. We are obliged to your Legal Department for extendingall secretarial and other support.

The weakness of criminal law and criminal jurisprudence iswrit large in the administration of justice in India. No one can repose faith in others includingentities and institutions. In such a situation, the banks and financialinstitutions can hardly grow. Such an atmosphere inflicts serious injury to theproduction and distribution system. A fair economic system requires a fair financial system withpublic confidence bestowed on it.

If we carefully note, India does not have aquality legal system to ensure quality credit. There is no single law to ensurequality of credit. Presently the only law that is used for creating securityinterest against credit is the Transfer of Property Act, , which wasdesigned in a feudal society and not for a dynamic system of ensuring comfort intrade, commerce and industry. In a feudal society predominantly with subsistenceagriculture, possession and ownership of real property determines the social andpolitical power structure.

In a society with free trade, commerce and industry,movable properties including intangible are very important to ensure quality inthe credit line. The main comfort in the credit system is thecontract-sovereignty. Unfortunately, in India, parties to the contract cannotadd efficiency in the mechanism of enforcement of security interest created in acredit-contract by the consent of both the parties.

Added with the above weakness, there is weakness in theadministration of criminal justice. Financial fraud is not an offence in spiteof the fact that the banks and financial institutions suffer heavily in fraudscommitted by the borrowers, more often than not, in collusion with the employeesof the banks and financial institutions.

People, banks and financial institutions have suffered losses ofthousand of crores. Financial fraud is a verysensitive issue. It affects the public faith in the system structure. The wholebanking system is predominantly based on public faith. Market systems arestructured in a society to ensure public confidence. Repeated market failure,undetected frauds in financial institutions and collusion of employees infinancial fraud cause frustration in the public, which is a challenge to anygood governance.

The Reserve Bank of India, by constituting this committee,following many other studies in this respect, has shown urgency in dealing withthe menace through law and legal instruments. This committee devotedconsiderable time in researching into the issue and examined legal system ofvarious countries in order to draw some analogy. The Committee ultimatelysubmits its recommendations with a proposal of suitable legal intervention.

The Committee has suggested a Bill for establishing a Bureau for investigatingserious financial fraud and has also suggested a fast track special court withsitting or retired High Court Judge to preside over. The Committee would like tohave a national debate on its suggestion before the government acts on thisreport. I am personally obliged to the Governor of the Reserve Bankof India for reposing faith in me for such an important task.

I am also thankfulto all the members of the Committee for very active participation anddeliberation. Each one of them merits special mention. I will be failing in myduties if I do not mention the distinguished service of Mr. Gupta, the Legal Adviser of the ReserveBank. The Committee likes to put on record the services of the staff of theReserve Bank of India who supported the Committee with all assistances in themeetings.

We cannot forget those who from back ground sustained us with delicatedishes. Financial Fraud and its ugly tentacles : Financialfraud involving public fund is a matter of serious public concern and is anissue of governance.

Presently, fraud as defined in the Law of Contract is onlya civil wrong. But financial fraud is far too complicated to be treated merelyas contractual or civil wrong. Of course, if an act of cheating, forgery,criminal breach of trust or embezzlement of funds or manipulation of accounts isinvolved in the fraud, it is an offence. Twofold approach : There has to be two-foldapproach to tackle bank and financial fraud.

Firstly, preventive approach tominimize the number of incidents and secondly, prohibitive approach to dealfirmly with incidents of financial fraud.

System reform in banking practice : Every bank,financial institution and financial intermediary should be required to developBest Practice Code BPC within a time frame and submit the same to theregulator; make effective measures to internalize the BPC in its staff,effectively supervise the fictionalization of the BPC, control and monitorvariation from the BPC, enforce BPC in the use of discretionary power and makedocumentation of the same, periodically review the use of discretionary power,conduct periodical legal system, audit and obtain compliance certificate.

Growth of NPA must be linked with thedegree of supervisory control and regulation and must relate inversely to futurepower of use of discretionary power.

Financial fraud to be defined as an offence : Financialfraud always calls for attention of the people. According to media practice,any act of defrauding the public that involves public fund such as governmentfund, public deposit, public investment, is an act of scam.

In countries like UK or US, serious fraud or majorfraud is an offence. Financial fraud in which a party commits a fraud by suggestiofalse or by suppressio veri or by culpable negligence, which resultsin loss of public fund or in denudation of public deposit or investment, is amajor fraud, specially investigated by special agency in both UK and USA.

InIndia there is an urgent need to attract legislative attention to such financialfraud to be seriously dealt with. Financial frauds are required to be criminalized with theburden of proof to be shifted on the accused to prove absence of commission offraud.

Serious Financial Fraud : A financial fraudinvolving an amount singly or in totality with series of transactions, rupeesten crore or more or causing national publicity and causing wide public concern;or where investigation and prosecution are likely to require high specializedknowledge of financial market conditions; or where cases require legal,financial, investment and investigational skills; or in cases which appear to becomplex to the regulators, banks, capital market or appropriate governments; orcases involving international dimension, can be called serious financial fraud.

It has to be treated separately. Separate Investigation authority for serious fraud : Aseparate investigation bureau should be constituted with a Director at the head. The Bureau shall investigate all serious fraud cases There is now a specialcell in the CBI to deal with economic offences, which is to be made a full bodyon account of increase of such offences and complexity of the fraud.

Similarly,there should be a Committee to constituted by nominees from all financialregulators, such as Banking, Insurance and Capital market to make preliminaryinquiries in the allegations of frauds and advise the regulator whether such actamounts to financial fraud or to deal with such incidence of contractual ortortuous fraud.

Who can approach the Bureau : Concernedinstitution, concerned regulator, party suffering from fraud, CentralGovernment, Court or the District Superintendent of Police within whosejurisdiction the offence has been committed and FIR lodged in a police station,may refer the matter to the Bureau if it appears to the party to be a fit casefor serious fraud investigation.

The Bureau shall establish in such places asthe Bureau may determine from time to time. Appeal againstthe decision of the Special Court shall lie to the Supreme Court. Search, seize and attachment of properties and funds : The Bureau shall have sufficient number of investigators to be assisted byexperts drawn from banks, insurance, capital market regulator, financial expertsand information technologists appointed by the Bureau for such purpose. Theinvestigator shall have power subject to the permission of the Court to search,seize and attach any fund, account or properties acquired with such funds.

TheSpecial Court may confiscate such properties and restore the properties to theinstitutions defrauded. Tracing and restoration of property : Propertiesacquired with amount defrauded can be traced even after conversion and the samecan be attached.

The court shall then forfeit the properties and restore thesame to the institution from which the amount has been defrauded. The right onthe restoration shall be date ante, i. However, a purchaser or seller in good faith shall obtaincompensation. The nominee shall be an experthaving knowledge and experience in banking, insurance, capital market operationand management, finance and management of financial systems. Any affectedinstitution having an allegation against its own employee may either lodge FIRor may refer the matter to the regulator who shall send the matter to theCommittee for enquiry and advise as to whether the case is fit for investigationby the Bureau or to be departmentally dealt with.

If any case is referred by theDistrict Superintendent to the Bureau, in such a case the Bureau shall alsorefer the matter for the advise of the Committee. The regulators of the financial market shall periodicallymeet with the Bureau under the chairmanship of the Governor of Reserve Bank ofIndia to share information and review actions taken in bank and financial fraudcases.

Special prosecutors : There shall be specialprosecutors appointed by the Government for carrying on prosecution in majorfinancial fraud cases investigated by the Bureau. Constitution of the Committee : The Board ofFinancial Supervision of the Reserve Bank of India has, for some time, beenconcerned with the increasing level and complexity of frauds and thedifficulties being faced by the banks.

The Committee wasconstituted under the Chairmanship of Dr. At the first meeting of the Committee, Ms. Subsequently, Shri P. Later on, since Shri P. Shri P. In view of the fact, that the Committee wanted to send a teamof the members to UK and USA to examine the legal framework and the procedure ofinvestigating and proceeding the term of the Committee was extended twice andthe report of the Committee was required to be submitted within August 31, The Terms of Reference : The term of reference forthe committee to address itself were as follows:.

Several issues came up for discussion, such as,. It was also noted that if there was noregulator in any field of operation of law, it was the matter for the individualto bring the matter before the Court of law under the statutory legal provisionor under the law of tort for seeking legal redresses. Regulators do not have anyrole to play once any act of a person or persons falls within the fold ofcriminal law.

It was also noted that a regulator cannot criminalize any act of amarket player by any regulation. Any foul play was required to be controlled orremedied by the Regulations.

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