Kobra, Association of Borrowers of Karnataka and ors. Vs. State of Karnataka and ors. - Court Judgment

S.R. Nayak, J.

1. The petitioners in W.P. Nos. 3387 and 5570 to 5576 of 1998 feeling aggrieved by the order of the learned Single Judge of this Court, dated 7th April, 1999 have preferred these writ appeals. Learned Single Judge by the impugned, order has dismissed the writ petitions.

2. The background facts leading to the filing of the writ petitions be noted briefly as under;

The first appellant claims to be an Association of Borrowers from Financial Institutions in Karnataka (FIK). Second appellant is the President of the said Association. The appellants 3 to 9 are SSI units. They are borrowers from the Karnataka State Financial Corporation (for short, 'KSFC'), fourth respondent herein. KSFC is a Corporation established under the State Financial Corporations Act, 1951 (for short, 'the Act'). KSFC receives offers from the State Government and also borrows money from several Financial Institutions like Industrial Development Bank of India (IDBI), Small Industries Development Bank of India (SIDBI), fifth respondent herein and other Commercial Banks. In regard to certain loans sanctioned and disbursed by it, KSFC obtains refinance from IDBI or SIDBI. The interest rates stipulated by KSFC to its borrowers is subject to the guidelines of IDBI and SIDBI in cases where there is refinance by IDBI and/or SIDBI. Many loans advanced by KSFC are not refinanced by IDBI or SIDBI. The loan documents executed by the borrowers in favour of KSFC specify the rates of interest and also provide for revision of interest in certain circumstances.

3. The SIDBI issued a circular dated 9-10-1991 revising the interest rate on term loans to Small-Scale Units and under their refinance scheme in consonance with the revision of the interest rates announced by the Reserve Bank of India on 8-10-1991. The above circular provides that the revised rate of interest would apply to all cases of refinance sanctioned on or after 9-10-1991 and would also apply to the transaction where the sanction was prior to 9-10-1991 but the loan documents were executed after 9-10-1991, Consequent upon such revision of interest rates, KSFC revised the rate of interest from 13.5% to 19.5% per annum in respect of loans sanctioned on or after 9-10-1991 as also in regard to loans for which refinance was yet to be disbursed by SIDBI even though the sanction/disbursement was earlier.

4. It appears that there was agitation by some of the borrowers in regard to revision of interest. Therefore, KSFC took up the matter with SIDBI to give relief to Small-Scale Industries. SIDBI, acting on the said representation of KSFC, by its letter dated 8-5-1995 came forward to reimburse the difference in that interest from 9-10-1991 in regard to loans for which they had refinanced as onetime measure, subject to the conditions stated therein. Such reimbursement was offered only to loans refinanced by SIDBI and not in respect of other loans that were advanced by KSFC. Having regard to the facts and circumstances, after examining the matter in detail, KSFC decided to extend the benefit of reduced rates of interest (that is original rate of interest) only prospec-tively. Consequently, with effect from 1-6-1994, the original rates of interest were restored to all borrowers without distinction, whether refinanced or not. In view of its decision, KSFC did not avail the offer made by SIDBI in regard to the period prior to 1-6-1994.

5. The appellants being aggrieved by the inaction of the KSFC in passing on the benefit received by it from SIDBI to its borrowers with effect from 9-10-1991 to 31-5-1994 made representation to KSFC lodging their grievance. This led to several meetings between officers of KSFC and the borrowers. Finally on 8-1-1997, there was a meeting in the Chamber of Principal Secretary, Commerce and Industries Department, Bangalore, State of Karnataka, attended by the representatives of the Government, Reserve Bank of India, KSFC, IDBI and SIDBI, representatives of Karnataka Small-Scale Industries Association and the first appellant-association. The proceedings of the meeting was produced in the writ petitions as Annexure-F. The decision taken at the said meeting reads as follows:

'After hearing all the explanations, Principal Secretary, Commerce and Industries felt that the KSFC's view in not granting the benefits is not justified. Even though the implication may be around Rs. 5.00 to 6.00 crores, the interest of SSI units have to be protected. He also suggested that the reimbursement of interest may be done in a phased manner. Finally, it was decided that the decision in the matter shall be taken in the Board of Directors meeting of KSFC and to refer the whole issue to SIDBI to reopen the issue and see that the benefit is passed on to the SSI units at the earliest'.

6. The Government of Karnataka sent a follow up letter dated 22-7-1997 produced as Annexure-G requesting the Managing Director of KSFC to bring the matter before Board of KSFC for a decision. The Board of Directors of KSFC considered the matter at its meeting held on 1-2-1997. Having taken note of the fact that the financial implications of KSFC if the benefit had to be granted to the borrowers from 9-10-1991 would be about Rs. 18 to 20 crores over and above the amount that could be claimed from SIDBI, as SIDBI can pass on the benefit only on the refinanced amount (which was only a small portion of the total amounts financed and disbursed by KSFC) and as the burden of passing on the benefit in regard to the balance amount would fall entirely on KSFC, the Board decided that it was neither possible nor feasible to grant the relief sought by the borrowers. This was communicated by the KSFC to RBI by its letter dated 18-8-1997 produced as Annexure-P.

7. The appellants being aggrieved by the resolution of the Board of Directors of KSFC at its meeting held on 1-2-1997 and Annexure-P, dated 18-8-1997 preferred Writ Petition Nos. 3387 and 5570 to 5576 of 1998 for the following reliefs:

'(a) For quashing the resolution dated 1-2-1997 passed by the Board of KSFC (refusing to extend the benefit relating to interest . from 9-10-1991 to 31-5-1994);

(b) For a direction to KSFC to pass on the benefit of pre-revised rate of interest to SSI units in the State of Karnataka by KSFC from 9-10-1991 as per the directions of SIDBI and State Government;

(c) For a direction to State Government to take steps under Section 39(3) of the Act if KSFC failed to pass on the benefit to SSI units;

(d) For a direction to the State Government to nominate a representative of SSI units on the Board of fourth respondent'.

8. Opposing the writ petitions, KSFC and SIDBI, fourth and fifth respondents herein filed their statement of objections. In the statement of objections filed on behalf of the fourth respondent-KSFC, it was contended--

(i) that the ninth appellant, namely, Eastern Press Bangalore (Private) Limited, had filed W.P. No. 27835 of 1992 which was disposed of by this Court on 20-6-1997 and being aggrieved by the order of the learned Single Judge, the writ appeal was preferred and that the writ appeal was also disposed of and therefore, the present writ petition was filed by Eastern Press Bangalore (Private) Limited, is not maintainable;

(ii) that the fifth and sixth appellants, namely, Super Bright Steels (Private) Limited and Micro Precision Moulders have already closed their accounts with KSFC and therefore they cannot maintain the writ petitions in the form in which it is filed;

(iii) that all the appellants have entered into a loan agreement and have further executed legal documents and in terms of these documents, the KSFC is empowered to vary the rate of interest even during the period of contract and in case there is an increase in the interest rates, an option is given to the loanee to pay of the entire loan amount in the event of his not agreeing to pay the increased rate of interest;

(iv) that the appellants 3 (Hoysala Tool Room Private Limited), 4 (Vrushobha Engineers) and 9 (Eastern Press Bangalore (Private) Limited) have availed loan aggregating to Rs. 44,93,689/-, Rs. 10,42,296/- and Rs. 11,00,000/- respectively and excepting the ninth appellant none of the other appellants have ever chosen to challenge the action of the KSFC and therefore at this distance of time they cannot seek the relief which they have not sought earlier and therefore the writ petition is liable to be dismissed on the ground of delay and laches alone;

(v) that since the dispute raised by the appellants relates to interest the remedy of the appellants is to approach the Civil Courts and not to invoke the extraordinary jurisdiction of this Court under/Article 226 of the Constitution;

(vi) that the scheme of the appellants is based on a total misconception that the KSFC had availed of a SIDBI's offer. In fact the KSFC did not avail of the SIDBI's offer and therefore, the very basis of the writ petition is non-existent;

(vii) that since SIDBI's offer covers only 60% of the loan advanced by the KSFC and the offer itself came after a lapse of four years by which time the KSFC had incurred considerable expenditure and several balance-sheets have been finalised, interest tax have been paid, it did not accept the offer of SIDBI.

9. Learned Single Judge having heard the learned Counsels for the parties and perusing the pleadings filed in the writ petitions has opined that Annexure-F and G, merely contained a suggestion to KSFC and a request to the Board of Directors of KSFC to consider the request of the borrowers and that suggestion/request could not be construed as a binding direction issued by the State Government under Section 39 of the Act. Learned Judge has also held that SIDBI has no authority to issue any direction to KSFC and SIDBI can only stipulate terms and conditions while granting finance/refinance. Learned Judge has also opined that under Section 24 of the Act, the Board of Directors have to discharge their duties and functions on business principles, due regard being had by it to the interest of industry, commerce and the general public and therefore, the decision taken by the Board of Directors of KSFC in exercise of its statutory powers anc after weighing the pros and cons by taking into account the interests of industry, commerce and general public cannot lightly be interfered with by the Court under Article 226. In the premise of these findings, learned Single Judge dismissed the writ petitions. Hence, these writ appeals by the aggrieved writ petitioners.

10. We have heard Sri S.M. Chandrashekar, learned Counsel for the appellants, Sri K. Gopal Hegde, learned Standing Counsel for KSFC and Sri G. Nagarajulu Naidu, learned Additional Government Advocate for respondents 1 to 3, the State Authorities. Learned Counsels for the appellants and KSFC reiterated the same contentions advanced by them before the learned Single Judge. At the outset, it needs to be emphasized that the appellants have sought the reliefs noticed above, mainly on the presumption that the State Government has given directions to KSFC who availed all the SIDBI's offer and that the KSFC has failed to follow the same as required under Section 39 of the Act. It is true that Section 39 of the Act on which the appellants have placed reliance, provides that in the discharge of its functions, the Board of State Financial Corporation shall be guided by such instructions on questions of policy as may be given to it by the State Government in consultation with, and after obtaining the advice of the Development Bank. Sub-section (3) of Section 39 of the Act provides that if the Board fails to carry out the instructions on the question of policy laid down by the State Government, the State Government shall have the power to supersede the Board and appoint a new Board in its place to function until a properly constituted Board is set up, and the decision of the State Government as to the grounds for superseding the Board shall not be questioned in any Court.

11. The basic question, therefore, is whether the State Government has issued any direction to KSFC as claimed by the appellants. Annexure-F (the proceedings of the meeting recorded revision of interest rates held on 8-1-1997 in the Chambers of Principal Secretary, Commerce and Industries Department) reads:

'Members Present:

1. Sri N. Vishwanathan, IAS, Principal Secretary, Commerce and Industries, Bangalore;

2. Sri C.N. Seetharam, IAS, Additional Director (SSI), Industries and Commerce, Bangalore;

3. Smt. Jaya Murthy, Assistant General Manager, Reserve Bank of India, Bangalore;

4. Sri AS. Kini, General Manager, Small Industries Development Bank of India, Bangalore;

5. Sri N.R. Kori, General Secretary, Karnataka Small-Scale Industries Association, Bangalore;

6. Sri S.R. Chandrashekar Setty, Executive Director, Karnataka State Financial Corporation, Bangalore;

7. Sri K.N. Nagaraj, Representative of Karnataka Small-Scale Industries Association, Bangalore;

8. Sri N. Sugnana Murthy, Deputy Director (SSI), Industries and Commerce, Bangalore.

At the outset, Principal Secretary, Commerce and Industries Department, welcomed the members present in the meeting.

Sri C.N. Seetharam, Additional Director (SSI), explained the Committee that the meeting is convened mainly to discuss the issue regarding passing of benefit to the SSI units by Karnataka State Financial Corporation wherein the rate of interest earlier revised from 13.5% to 19 5% was restored, with effect from the date on which the interest rate was raised.

Sri S.R. Chandrashekhar Setty, Executive Director, KSFC explained that KSFC's Board took a decision to pass on the benefit of original interest rates from the time Small Industries Development Bank of India agreed to the request, prospectively. Accordingly KSFC passed on Rs. 2.38 crores to the affected borrowers by restoring the original rate of interest. Further, he said since annual accounts have now been closed and income-tax has been paid, it is difficult to reopen the issue to get the additional benefit from SIDBI and besides this also will lead to financial burden of nearly Rs. 20.00 crores from KSFC.

General Manager, SIDBI also stated that the deadline for claim was November 1995, that KSFC has not claimed the benefit in time, that it is not possible now to reopen the issue and that since this problem is same throughout the country, reopening the issue after the last date needs clearance from the Government of India. He also stated that SIDBI, after realising the problems, under the request of SSI units withdrew the circular thus enabling the SSI units for whom term loan was sanctioned prior to 9-10-1991 to be covered by the 3rd circular dated 8-5-1995 of SIDBI. SIDBI circular dated 8-5-1995 clearly states that the rate of interest on loans/refinance there against would be rates prevailing as on the date of 1st disbursement of loan irrespective of date of availment of refinance by the primary leading institutions from the SIDBI. SIDBI has also written to financial institution to work out the excess amount of interest if any recovered on refinance and adjust the same in their interest demand for the half year ending November 30th, 1995.

The representative of KASSIA, Sri K.N. Nagaraj, explained the committee that the stand taken by KSFC is not correct and the SSI units are suffering from abrupt increase in rate of interest, thus effecting the cash flow and economic viability. He also informed the committee that Section 21 of the Banking Regulation Act will not apply to SIDBI and State Financial Corporation, which was later on confirmed by the representative of Reserve Bank of India.

After hearing all the explanations, Principal Secretary, Commerce and Industries felt that the KSFC's view in not granting the benefits is not justified. Even though the implication may be around Rs. 5.00 to 6.00 crores, the interest of SSI units have to be protected. He also suggested that the reimbursement of interest may be done in a phased manner. Finally, it was decided that the decision in the matter shall be taken in the Board of Directors meeting of KSFC and to refer the whole issue to SIDBI to reopen the issue and see that the benefit is passed on to the SSI units at the earliest. It was decided to get a cassette prepared by All India Radio for the 'Spandana Programme' wherein the Hon'ble Minister for Finance, Government of Karnataka has also given assurance to pass on the interest benefit to SSI units.

Sd/-

Principal Secretary to Government,

Commerce and Industries Department,

Bangalore

Additional Director (SSI),

Industries and Commerce,

Head Office,

Bangalore'.

Annexure-G (letter dated 19-7-1997/22-6-1997 of the Commissioner for Industrial Development and Director of Industries and Commerce to the Managing Director, Karnataka State Financial Corporation, 1/1, Thimmiah Road, Bangalore-560 052) reads:

'Sub: Passing the benefits to SSI units after restoration of the original.

May I draw your attention to the proceedings of special meeting regarding revision of interest rates held on 8-1-1997 in the Chambers of Principal Secretary to Government, Commerce and Industries Department. The meeting was attended among others by Sri S.R. Chahdrashekar Setty, Executive Director, KSFC and I also understand that the proceedings of the special meeting were vetted by KSFC before issue.

In the special meeting dated 8-1-1997 after having examined the action taken by SIDBI and KSFC and also examining the third circular dated 8-5-1995 of SIDBI, it was decided that the KSFC should once again take up the entire issue in the Board meeting for review and pass on the benefit and it need to take up the matter with SIDBI.

The issue of passing on the benefit of lower interest rates from 9-10-1991 onwards was discussed in the KSFC Board meeting where it was decided that the benefit should be passed from June 1994 onwards and not for the period 9-10-1991 to June 1994. This was also brought to the notice of the representatives of various organisations in the special meeting on 8-1-1997 by Sri S.R. Chandrashekar Setty, Executive Director, KSFC. However, in the said meeting the General Manager, SIDBI had mentioned that on account of several representations from SSI units and similar problems represented by the local SFCs, SIDBI had given a final clarification on 8-5-1995 vide Circular No. 3 of SIDBI. They had also written to financial institutions to work out the excess amount of interest if any recovered on refinance and adjust the same in their interest demand for the halt-year ending November 30th, 1995.

Though the meeting had taken place and certain decisions arrived at, the SSI units are still nowhere near obtaining any benefits on account of original interest rates restored by SIDBI, The subjects, which need to be taken up, would be--

1. Passing on the benefit of original interest rates from 9-10-1991 till June 1994 to the SSI units;

2. This benefit is by way of revision of excess interest collected by KSFC out of SIDBI rate;

3. KSFC Board to take up this issue once again and agree to pass on the benefit from 9-10-1991;

4. Copy of the KSFC Board Resolution to be sent to the local office of SIDBI, Bangalore. SIDBI, Bangalore would take up the matter with SIDBI Headquarters for consideration the implications of KSFC having agreed to refund of excess interest from 9-10-1991 onwards;

5. SIDBI taking up the matter in its Board to confirm directions issued by SIDBI with regard to restoration of original interest rates and refund thereof, of excess interest collected;

6. The confirmation by the Board of SIDBI would be required to set right the accounts between KSFC and SIDBI.

May I request you to kindly get this issue examined and bring it before the KSFC Board for a decision. If there are any doubts or clarification required, I will be available to clarify the same.

With regards'.

12. A careful reading of Annexure-F and G discloses that certain suggestions were made at the meetings held on 8-1-1997 and decision thereon was left to the decision of Board of Directors of KSFC. Therefore, it is not possible for the Court to construe suggestions made in Annexure-F and G as binding directions issued by the State Government under Section 39 of the Act. It is relevant to notice that the suggestions made at the meeting held on 8-1-1997 in the Chambers of Principal Secretary, Commerce and Industries Department, have been considered by the Board of Directors of KSFC at its meeting held on 1-2-1997 and that having taken into account the financial burden, the KSFC had to bear, if the benefit had to be granted to the borrowers from 9-10-1991 and taking into account the interest of industry, commerce and general public, the Board of Directors of KSFC decided not to avail SIDBI's offer. It is trite that decision taken by the Board of Directors of KSFC falls within the realm of policy and Financial Management of the KSFC and such a decision, it is well-settled, cannot lightly be interfered with by the Court under Article 226 of the Constitution. In addition, the appellants-petitioners have utterly failed to establish their legal right with reference to any of the provisions of the Constitution or any statute to seek mandamus to the KSFC and to show that the KSFC, as a matter of legal obligation ought to have availed of the SIDBI's offer and passed on the same to the borrowers. Mandamus could be issued only to enforce existing and established legal obligations and/or rights. The Court cannot sit in judgment over the policy decision taken by the Board of Directors of KSFC after weighing the pros and cons and taking into account interests of industry, commerce and the general public and also the extra financial burden that may be placed on the Management of KSFC to the tune of Rs. 18 to 20 crores. Additional burden of Rs. 18 to 20 crores, by no stretch of imagination, could be regarded as insignificant and of no consequence to the KSFC.

13. Although Sri K. Gopal Hegde strenuously contended that the writ petition itself is not maintainable for more than one reason such as that the first petitioner-Association, nowhere in the pleading has disclosed its competence to seek relief in respect of SSI units in the State of Karnataka and other circumstances already noticed above while referring to the contention raised by the KSFC, there is no necessity for us to deal with those points because, we are fully satisfied that there are no merits in the writ appeals.

14. In the result, we dismiss the writ appeals with no order as to costs.