Professional Documents
Culture Documents
A REVIEW
2018-19
A DISSERTATION SUBMITTED TO
DEPARTMENT OF LAW,
MANIPAL UNIVERSITY, JAIPUR
DEPARTMENT OF LAW
MANIPAL UNIVERSITY, JAIPUR
RAJASTHAN-303007
DECLARATION
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.
(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.
(iv)
generously allotted me her valuable time for discussing the topic and had
permitted me to delve deep into her immense knowledge 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)
39-75
BIBLIOGRAPHY 141-143
(vi)
LIST OF CASES
(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)
(xi)
CHAPTER – 1
INTRODUCTION
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.
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.
Credit Market- Credit market is a place where banks, FIs and NBFCs
purvey short, medium and long-term loans to corporate and individuals.
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.
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.
Definition of Fraud
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:
6
4. It must induce another to act upon the assertion in question or to
do or not to do certain act.
BANK FRAUDS
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.
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:
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.
9
3. Unscrupulous clients by taking advantages of the laxity in
observance of established, time tested safeguards also committed
frauds.
10
comes to the bank. Care needs to be taken at the time of
recruitment in bank as well.
11
Section 120 A. all the four accused had conspired together to
defraud the bank by making false demand drafts and receipt
vouchers.
12
Savings Bank Accounts : The following are some of the examples
being played in respect of savings bank accounts:
13
LEGAL REGIME TO CONTROL BANK FRAUDS
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 463-Forgery
15
9) Section 477- Fraudulent cancellation, destruction, etc., of will,
authority to adopt, or valuable security.
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.
3
B.R Sharma, Bank Frauds Prevention and Detection (2001), p. 33
16
Section 58
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.
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.
18
Such practices ensure information security and enhance availability.
Bank security is essentially a defense against unforced attacks by
thieves, dacoits and burglars.
2. One person should not continue on the same seat for more than
two months.
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
20
CHANGES IN LEGISLATIONS AFTER ELECTRONIC
TRANSACTIONS
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.
Under the said act the term Financial Fraud has been defined as
under:
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
1. Pre-Nationalization Era.
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.
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."
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:
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
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.
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.
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.
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.
• Andhra Bank.
• Corporation Bank.
• New Bank if India.
• Oriental Bank of Commerce.
• Punjab and Sind Bank.
• Vijaya Bank.
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:
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.
34
• Excessive regulation on organization structure and managerial
resource.
• Excessive support from government.
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.
36
manage volatility but without any fixed exchange rate-and this has
mostly been true.
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
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
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.
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.
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.
From the regulatory angle frauds have been classified by the RBI
committee on Legal Aspects of Bank frauds as
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:-
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
I. Fraud By Insiders11
1. Rogue traders
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
3. Wire fraud
12
S.N.Gupta., The Banking Law, vol.ii, Universal Publication, 5th Edition, New Delhi,
2010, pp.1769
47
4. Forged or fraudulent documents
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
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
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
3. Accounting fraud
17
Bank Frauds prevention and detention By B.R.Sharma, Universal Publication, 3rd
edition, 2011, pp.40
50
4. Bill discounting fraud
5. Cheque kiting
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.
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.
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.
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
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.
55
10. Money laundering
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
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
§ Personal vendetta;
§ Black mail;
§ Ego;
§ Mental aberrations;
§ Mischief
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
• International crime
• No-scene crime:
• Faceless crime:
59
signatures, no fingerprints or voice recognition. The criminal is truly and
in strict sense faceless.
Modus operandi:
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.
Bank rules
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.
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.
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.
66
Phishing scenario in XSS:
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.
68
• ICC World Cup 2011
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.
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:-
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.
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 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.
73
email with urgent/desperate requests for personal financial
information.
2) Check your credit card and bank account statements regularly and
look for unauthorized transactions, even small ones. Report
discrepancies immediately
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.
28
Cyber Fraud by Neeraj Aarora
75
CHAPTER - 4
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
Fraudulently
Counterfeit
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
Electronic record
Abetment of a thing
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
Theft
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.
43
Section 381 of Indian Penal Code, 1860
81
Robbery. —In all robbery there is either theft or extortion.44
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.
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
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
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.
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.
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.
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.
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.
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.
94
CHAPTER- 5
JUDICIAL TRENDS
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…”
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…”
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.
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.
64
AIR 2006 SC 2250,
99
presented before it by the beneficiary and made payment accordingly as
per the instructions of the Respondent-Bank.
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.
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.
(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);
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 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.
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.
79
AIR 2006 Delhi 256.
108
support of such averments. Neither there is a specific pleading nor is any
evidence of fraud. .
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.
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.
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.
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.
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;
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.
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.
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.
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.
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).
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.
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.
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:
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.
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.
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.
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.
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.
125
[2004] 118 Comp Cas 145 (CLB)
126
[2001] 4 Comp LJ 305
129
CHAPTER - 6
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.
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.
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.
(5) Investments
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
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:
- 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.
137
CBI registered FIR against five PSBs and six chargesheets were
filed against the company.
- 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 :
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.
140
BIBLIOGRAPHY
Books
11. Aldridge, Anthony, Jacques Parry and Ian Gatt, Aldridge and
Parry on Fraud, Sweet and Maxwell, London
14. Ratan Lal Basu & Rajkumar Sen: Ancient Indian Economic
Thought, Relevance for Today, Rawat Publications, New Delhi,
2008
141
15. B. R. Tomlinson, The economy of modern India, 1860-1970
(1996)
25. Nainta RP, Banking System, Frauds and Legal Control, Deep &
Deep Publications Pvt. Ltd., New Delhi, 2005
142
4. Industrial Relations Journal
143