Brief Note & Preamble
Brief note
To understand things one may need to carefully read the write-up. In this write-up, I have used the terminology retail, institutional deposit as has been used in the Scheme of amalgamation of PMC Bank with Unity Small Finance Bank (USFB) as published in the gazette of India notwithstanding it is a ridiculous and misleading terminology not consistent with provisions of DICGC or any existing law.
The focus of the write-up is on the adverse impact on the legitimate interests of PMC bank depositors,the priority of payment to depositors,Tier-IIdebt product holders (LTD), and associated legal aspects.
This article,a bit lengthy, aims at public interest in mind. I had a small deposit with erstwhile PMC Bank under the retail category. I am very little impacted by the Scheme of amalgamation drawn by the Reserve Bank of India and approved notified by the Government of India that became effective from 25th Jan 2022.
I read news items, reactions in depositors' forums, contents of proposed appeals, and being a senior ex-banker, I felt that the media content is missing on many essential aspects that should raise a question about the credibility of Scheme, the silence of DICGC, the inaction of Govt atpre-approval and post-approval stage of the Scheme, after reading to press & e-media.
One of the objects of write up is to help the following class of depositors
- actual institutional depositors (like PF Trusts, Coop Societies of different types, Inter-bank deposits, corporates)
- depositors inappropriately classified by RBI as institutional depositors (but are non-institutional) like partnerships, LLP, AoP. These are retail depositors like HUF, Sole proprietary
to make them aware of what was lawful for them to receive and what they have lost due to the unbecoming of RBI.
Scheme practically released DICGC of its guarantee obligation towards all institutional entities uptoRs. 5 lacs.
It was shocking to see that many non-existent conditions in the draft have been introduced in the notification (which are ridiculous and entirely against the interest of non-individual depositors). I wonder which stakeholder and a beneficiary of the Scheme would suggest such onerous conditions like 'Aa bail mujhe maar.' These terms must have been added at the behest of the Unity Small Finance Bank (USFB) to get a very long repayment rope.
RBI did a farce of circulating one draft and finalized Scheme adding many new/undisclosed controversial matters.
If one applies sound mind, one would understand that it is drawn to ensure that this amalgamation goes through; otherwise, the whole well-publicized fiasco would have been bust.
I am aware any amount of write-up and exchange of concerns will not help address the situation created after the gazette notification of amalgamation of PMC bank with Unity Small Finance Bank (USFB), the transferee bank. Even if the Government and RBI are convinced of grosswrong, it will be challenging to correct the situation. The only way left to the aggrieved is to approach the appropriate Court, seek immediately stay over the unimplemented portion of Gazette notification and request the Court to hear the case soon and issue a final order. Hence, I have tried to focus on the points, whichcan be brought up on the record to convince the Court to grant an interim stay, also tohelp to present the case aptly to get an excellent final order.
Different stakeholders would look at the approved Scheme of amalgamation PMC Bank with Unity Small Finance Bank (USFB) with different perspectives. Many impacted entities groups of individuals may look at it from filing public interest litigation or something like a class-action suit (prevalent in a limited way in India) with the High Court of Bombay or with the honorable Supreme Court of India.
As mentioned above, I was looking at sustainable points, whichcan be conveyed to senior advocates or Advocate on Record (AOR). If such facts are effectively broughtout in the suit/petition with the High Court of Bombay or Supreme Court of India, it may getconcerned as to what gross wrong was done.
For the writ petition is to stand on firm ground, it should evidence points of fundamentally unjust acts of RBI/Govt like arbitrary disallowing/removing insured deposits to other non-insured deposits, allowing better repayment terms to Long Term Deposit ('LTD' isa misnomer), bondholders over other unsecured deposits, disregarding the priority/preference
of creditors based on contract plus conventions. The plaint should demonstrate that RBI &Govt had not acted diligently, crossed the legal boundary, absolved DICGC, did not protect the interest of unsuspecting depositors (branch of trust), actions impacted fundamental rights,etc
An advocate would thus need exact technical inputs so that they can highlight them in the plaint, draw the attention of the honorable Court to sustain the case, receive the attention on the violation of the fundamental rights legitimate rights and get quick and positive disposal of the case by securing early dates.
I want to mention the long-term dismissal order issued by the speaker of the Maharashtra Legislation to twelve sitting MLAs in the Maharashtra assembly. Here the Supreme Court steppedintothe legislation arena after being convinced of a gross violation/ constitutional breach, without looking at merits/justification of suspension order, etc. (concerning the offense committed by the 12 MLA or their history).
I repeat,I feel if essential points are highlighted in the executive summary and Court receives them appropriately; the case could see quickly desired results. The object of writing this lengthy write-up is to facilitate filing advocates prioritize the fundamental violations and highlight them in the plaints executive summary, also supply them related inputs while presenting the case. The write-up may also help all depositors like PF, Pension Funds, and coop societies of the PMC bank to know to what extent they are wrongfully hit by this Scheme and can bring the case up to proper legal advice.
General
If a bank goes into liquidation, DICGC is liable to pay the liquidator the claim amount of each depositor up to Rupees five lakhs within two months from the date of receipt of the claim list from the liquidator. However, if a bank is reconstructed or amalgamated/merged with another bank, in that case, DICGC pays the Bank concerned the difference between the total amount of deposit or the limit of insurance cover in force at the time, whichever is less, under the Scheme of reconstruction/amalgamation, within two months from the date of receipt of the claim list from the transferee bank /Chief Executive Officer of the insured bank/transferee bank, as the case may be.
DICGC doesn't directly deal with the depositors of the failed banks. In the event of a bank's liquidation, the liquidator prepares a depositor-wise claim list and sends it to the DICGC for scrutiny and payment. The DICGC pays the liquidator, who acts as a pass-through and pays it to the depositors. In the case of amalgamation/merger of banks, the amount due to each depositor is paid to the transferee bank. In this case, as far as DICGC is concerned, transferee bank acts not only as a pass-through (and its payment to the insured depositor in this manner is final),but the transferee bank is expected to return this money, as per the Scheme of amalgamation.DICGC is discharged of its full guarantee obligation by paying the money as mentioned in the notified scheme instead of what is contractually and lawfully committed under the DICGC Act 1961.
As per the Act, each eligible depositorof the bank is insured up to a maximum of ₹ 5,00,000 (Rupees Five Lakhs) for both principal and interest amount held by a depositor in the 'same right and same capacity'as on the date on which the Scheme of Amalgamation comes into force.
In the current case,DICGC would pay a sum equivalent to the amount of liability arrived as per the scheme of amalgamation (not as per the Act) to Unit Small Finance Bank(USFB), a transferee bank, as a soft loan. It may accordingly get reflected in books of DICGC and USFB.USFB, would receive the money claimed as 'a pass-through' and pay it to scheme-approved depositors as per terms specified in the notification.
Before we probe factual details, let us recapitulate a few highlights of the Scheme, in brief:
No interest for five years* on a deferred retail portion (*commencing from 31-03-2021). Had the bank been liquidated,the aggregate of principal + interest (upto the date of payment) would have been paid to each such depositor (if the aggregate amount had been up to Rs5 lacs). In the current scenario, interest would not be paid after 31-03-2021 to the depositor even if such amount together with principal were below Rs. 5 lacs.I wonder where RBI selected date31-03-2021.
80% of the institutional deposits converted as Perpetual Non-Cumulative Preference Shares (PNCPS) could have the longest repayment schedule of 121 years (portion to redeem after ten years out of recoveries of HDIL- a fraud loan account) balance of PNCPS repayment to commence after 21 years subject to Unity Small Finance Bank (USFB) settling DICGC soft loan amount,in full,and bank meeting all other onerous and impracticable conditions stipulated in the notified scheme.Balance 20% Equity warrants would never be paid (warrant holder may buy shares at the time of IPO at a rate that would be decided at the time of IPO/OFS per normal process and formula).
Thus institutional (non-retail) depositors will get nothing on the table (including DICGC cover of Rs.5 lacs) all in the form of PNCPS (with repayment schedule between 21 years to 121 years) and likely equity at market rate (additional amount may be needed to be paid if subscribed).
Long Term Deposits (LTD) - Tier II bondholders have been given better deals over the above 80:20 very long period spread over deal given to institutional depositors (non-individual), which goes against the 'basics of liquidation matrices' though technically it is not said to be a liquidation. PMC was a failed bank.
Just because the Bank is not formally liquidated, the banking regulator should not arbitrarily kill/dismiss the legal &financial rights of some section of depositors and pass on the indirect benefit to DICGC and the class of Tier-II bondholders. The Scheme is entirely unjust to the institutional depositors.
As per the legal mandate, all licensed banks pay a DICGC premium half-yearly. It is paid on all liabilities of the insured Bank that are like deposits, excluding the liabilities as specified in the Act. Premium is not paid on 'retail deposits'(deposits of individuals) alone but also paid on 'institutional deposits'(as defined in the DICGC Act,1961).
We know that DICC is a 100% subsidiary of the Reserve Bank of India. DICGC is a third-party guarantor who has been authorized under the statute to extend such specific guarantee within the provisions of the DICGC Act,1961 so notwithstanding it is a subsidiary of the Reserve Bank of India; it has a force of law and RBI should maintain 'arm's length' relationship with its subsidiary.DICGC should honor the legal and contractual commitments under guarantee. Invocation of the guarantee or release of the guarantor should not, as per the whims of the Reserve Bank of India, at the cost of someone.
A banking regulator, RBI,was expected to act diligently and had to draw a scheme of amalgamation to protect the interest of depositors.In the current case, RBI has acted against the interest of both individual and non-individual depositors.
It appears that it wanted to protect the interest of the guarantee company (DICGC) more than depositors. DICGC ought to have paid to all eligible depositors as mentioned in Sec 2(G)and also under FAQ No:2 DICGCofficial website(whether due to amalgamation of Bank drawn under Sec 45(4) of BR Act or due to insolvency of the Bank). It made all depositors bear the burnt.
A Partnership concern, A LLP, an AoP, PF Trusts, Pension Trust, co-operative credit society, CHS, even a corporate's holding up to a sum of Rs 5 lacs (held under different forms of deposit accounts, in the aggregate) are covered by the DICGC guarantee. By sanctioning the illegitimate Scheme of amalgamation, the Government has undoubtedly acted negligently. RBI loosely defined all under one umbrella 'institutional'.However,on the other hand,it termed HUF, Sole proprietary, as a retail deposit.Two terms Retail and Institutional deposit don't exist in DICGC there are newly coined by RBI and truly has has no relation so far as DICGC cover is concerned. DICGC cover has a relation to the maximum amount of insurance and whether it falls under the 'uninsured category'.
The action demonstrates RBI went soft of DICGC. DICGC granted a 20-year soft loan (with no interest) to USFB, equivalent to the amount due as per gazette mandate and not as per contractual obligation. The obligation is cast upon USFB of its repayment in a maximum of 20 years (to be made before any payment to non-individual claimants of PMC bank).
The depositors of PMC bank will be given PNCPS and Equity Warrants in ration 80:20. The Bank is expected to pay a non-cumulative dividend of 1% p.a., redeem PNCPS partly after ten years from net loan recoveries from the fraud accounts of HDIL group on prorate basis, and actual payment of PNCPS to start after 21 years as per the schedule drawn subject to bank meeting many inter-aligned terms and conditions. One major condition is full repayment of the above soft loan given by DICGC to USFB. So DICGC exits even before institutional depositors receive a token. Thus, DICGC,in a way,is to take back its 'soft loan' a preference over long and deferred disbursement proposed to be made by the Bank to institutional depositors.
So on one side, DICGC is not paying as per its obligations under the Act to eligible insured depositors, it is seeking a soft loan back beforethe commencement of the long-term repayment schedule of 80% portion of the unsecured deposits of PMC bank. In any case,the HDIL group loan is the underlying fraud, and it will not come back any time. Except for some attached properties, there are no securities.
This is a case of illegitimate distinction. Individuals will receive a total principal amount (over Rs 5 lacs) + paltry interest, in 10 years from the year 2022. Institutional depositors/Non-individuals will bear the major brunt. Non-individuals will hold PCNPS & Equity Warrants.Before paying the soft loan of DICGC,new holders of PNCPS will not get any redemption of principal. Further, such redemption is subject to many conditions that may drag upto 121 years. One wonders what RBI tried to do and what is the message of its action to the bank depositor community.
I regret to mention bluntly, RBI &Govt's action will certainly give the following few messages:
- Just like Deposits of foreign Governments; Deposits of Central/State Governments, Inter-bank deposits, Deposits of the State Land Development Banks with the State co-operative bank, any amount due on account of and deposit received outside India, Deposits of A Partnership concern, A LLP, an AoP, PF Trusts, Pension Trust, co-operative credit society, CHS, and that of any corporate are not eligible to DICGC cover (in the event of amalgamation) however cover may be available in case of liquidation.[If these were not to be covered, why did DICGC collect a half-yearly insurance premium on such deposit liability and why did under Sec 2 G as well as under FAQ2 it added to the above list?].
- It can design an absurd amalgamation plan and get it approved.
- It is not only a banking regulator; it can overpass the provisions of the existing Act, and in matters of a dispute over the understanding of terms RBI's decision is final.
- RBI can absolve/releaseDICGC (guarantor) tactfully.
- RBI can make the insured depositors lose altogether their legitimate right [contrary to provision Sec 2(G) of DICGC Act,1961] to receive the insured sum (Rs.5 lacs),re-classify them as a deposit under the so-called institutional category. Further,it can compel them to accept a lower/raw deal than the investor class-Tier-II deposit. It was completely wrong on RBI's part to term it as Long Term Deposit (LTD) as the repayment of it was mandatorily conditional and it investor was not entitled to seek pre-close, its repayment on the due date also was subject to the issuer bank fulfilling stipulated financial conditions and prior approval of RBI to pay the principal on or after the due date. Interest payment from time to time was subject to meeting certain mandatory conditions (This paper is akin to bond or a high-risk debenture). Tier-II investment has a lower repayment priority, and therefore,it assumes greater risk and higher returns.
- RBI can violate mandated' credit discharge metrics' or 'repayment preference'. It can provide a better deal to someone at the cost of the legitimate rights of someone. It has done this to non-individual/institutional category of depositors (both retail and non-retail deposits, including exempted deposits mentioned above, are unsecured deposits and precede in terms of priority to receive money before Long Term Deposit (LTD))
- RBI/Govt can make all retail depositors [who are eligible to receive Rs 5lacs (principal + interest till DICG payout date)] lose interest from 31-03-2021, Those who are to receive above Rs 5 lacs lose interest for a longer period
- RBI can make Govt approve the ridiculous Scheme (drawn on the guise of designing an intelligent merger scheme).
- Last but not least through all actions of the above nature it can make a mockery of justice.
- Whether bank deposit is insured or not, anything beyond the available insurance is unsecured and should stand before Tier-II bonds at all times. Offering better terms to Tier-II debt holders is disregarding the contract and liquidation matrix.
Inappropriately RBI/Govthad split all unsecured deposits into two categories (below) and gave different payout terms
- Retail Depositors (entirely and partly covered individual, HUF, Sole proprietory type depositors)
- Institutional Depositors: Deposit/liabilities of Partnership, LLP, AoP, Regd coop society (HSG, Multi-purpose coop society, etc.), Regd& Unregistered Trusts, Coops, etc., LTD, Corporates (Ltd companies)
This is a violation of the fundamental principle of 'class equality'
I wonder why Govt did not scrutinize objections/suggestions etc. I have reason to believe that GoI has gone by the stature of RBI as a statutory/autonomous body, that had a bit of credibility hence approved the Scheme of amalgamation without deep probing. It could be also due to political pressure or compulsion on the bureaucracy. MoF, GoI gave permission to proceed to the RBI's proposal without doing adequate homework, examining onerous clauses, written concerns lodged with MoF and RBI by depositors/stakeholders like me. I am unsure whether RBI referred the draft scheme to all those required under section 45 (6).
An effort is made in the latter part of this write-up to cover, some crucial aspects of concerns of insured depositors after RBI tinkered it illegitimately and got it notified as to the Scheme of amalgamation.
RBI attempted to override many provisions specifically covered under different Acts through this Scheme of amalgamation which is not an act. I know, when tabled in both houses of parliament, will receive parliament's nod routinely. Unless some voice is raised.
All erstwhile PMC Bank depositors need to read this portion of the article carefully and be brought to the notice of their advocate.
First, let us go to the most relevant details of Scheme
While designing the Scheme of amalgamation, RBI inappropriately tinkered the contractual definition of 'insured deposit' to retail and institutional deposits in a haphazard manner. It created two vertical splits in one class of unsecured deposits. It arbitrarily decided that non-individuals should bear more burnt. Accordingly, non-individual (other than sole proprietory/HUF) was termed as institutional. I wonder how HUF becomes an individual-like entity while partnership, LLP, AoP become institutions overnightin this case. The Act remained unchanged. This tinkering is unjust.
The future discussion relating to the subject has direct relevance to the above RBI defined term, and hence they are first explained as envisaged/imagined by RBI to this case, for the convenience of the readers.
"eligible depositors" means depositors whose deposits are insured under the DICGC Act, 1961++
"institutional depositors" means corporations, companies, societies, Association of Persons, Trusts & other depositors who are not retail;
"retail depositors" means depositors who hold deposits in the Bank in their Capacity, either singly or jointly with other individuals (s), and include proprietorship firms, partnership firms, and Hindu Undivided Families (HUFs);
Please peruse what an insured deposit is or What does the DICGC insure (No option to any bank to not insure or seek selective insurance)
Source: ++ FAQ No 2. DICGC's official website [also refer (Sec 2G) DICGC Act,1961]
What does the DICGC insure**?
The DICGC insures all deposits such as savings, fixed, current, recurring, etc. deposits except the following types of deposits
- Deposits of foreign Governments;
- Deposits of Central/State Governments;
- Inter-bank deposits;
- Deposits of the State Land Development Banks with the State co-operative bank;
- Any amount due on account of and deposit received outside India
- Any amount which has been specifically exempted by the corporation with the previous approval of the Reserve Bank of India++
Observations & Concerns
Going by the above FAQ and Sec 2G of DICGC Act,1961, one would correctly conclude that institutional deposit (Partnership, PF and other trusts, LLP, AoP, Regd&unregistered coop society (HSG,Muti purpose coop society), all corporates (public and private) up to Rs.5 lacs are insured (these are not exempted till the occurring of event) ++.
You would know that only a few forms of 'real' institutional deposits are not covered for DICGC. These are Deposits of Foreign Governments, Deposits of Central/State Governments, Inter-bank deposits, Deposits of the State Land Development Banks with the State Co-operative Banks.
If any other deposit category is not covered in the future or otherwise, it needs to be disclosed 'upfront' so that concerned would be well informed while assessing the risk. Even if DICGC requests, RBI cannot approve post crystallization of the guarantee or the happening of an event. DICGC and RBI should be having a process to examine such requests coming post-board approval of DICGC and RBI must have a system of approval and notification to all concerned.
This aspect has a direct bearing on the premium to be charged. This is not a simple matter over which a casual decision can be taken.
DICGC collects DICGC premium on all deposits and like liabilities of the partnership, PF and other Trusts, LLP, AoP, Regd/Unregistered coop society (HSG, Multi-purpose coop society, etc.) from the insured Bank. It is so in the case of PMC Coop bank.
According to the amalgamation scheme, the newly& loosely coined term 'institutional deposits' are all deposits held by a Partnership, LLP, AoP, PF and other Trusts, Regd/Unregistered coop society (HSG, Multi-purpose coop society ); otherwise 'insurance eligible deposits' now disqualified to be eligible to DICGC cover (at least in this case).
There exist no other categories other than insurance eligible and insured ineligible/exempted deposits in DICGC. Both these are unsecured deposits and rank pari-pasu in the event of insolvency. Insured part is paid by DICGC for balance portion it becomes unsecured deposit on par with all other insurance ineligible deposits.
An institutional deposit has been an 'eligible deposit'. The institutional depositor is entitled to a claim from DICGC [depending on the outstanding amount principal and interest currently uptoRs 5 lacs]. Thus unless exempted by DICGC with prior approval of RBI and notified, even a PF deposit/ Trust/Society with deposit account/s with an aggregate amount outstanding are entitled to a DICGC cover of up to Rs 5 lacs (principal and interest put together). Amount over and above it would remain uninsured. Thus, if the eligible class of depositor has deposited over Rs. 5 lacs (in the 'same right and same Capacity'), a PortionuptoRs 5 lacs would have to be fully settled by DICGC. In contrast,the balance over Rs 5 lacs will fall under the other bracket (unsecured deposit) and be processed under those norms. Just due to its being an institution its creditor class (unsecured deposit) does not and should not change. It is a fundamental violation.
Let me take a simple example:
Individual 'A' has a deposit of Rs.6 lacs (including interest). He should be paid as an eligible depositor up to Rs.5 lacs, and a balance of Rs.1 lac may fall under uninsured deposit (or the term defined under the Scheme as a retail deposit) and receive the treatment accordingly for that portion.
Let me take another example
Natural Person 'A' has one 'LTD' Rs 600000/- ['LTD' is akin to Tier-II debenture/bond instrument also issued by PMC bank] and three Fixed deposits held as under:
- 'A'only Rs 4 lacs (including interest)
- 'A' + 'B' Rs 4 lacs (including interest)
- 'A', 'B' & 'C' (jointly held) Rs 6 lacs
(many will have such pattern of holding/deposits, especially, senior citizen class)
In this case, the 'LTD' will have different treatment as it is not a deposit in a real sense.
Claims in respect of the first two above fixed deposits held should be settled by DICGC in full[including full interest up to date of payment of the claim by DICGC]. Here also RBI twisted to make interest liability of DICGC upto 31-03-2021 (RBI may only know the rationale)
These three deposits are held in different capacities and different rights (in conformity with the example given on the DICGC on its official website). Thus they are three insured deposits (all are eligible to a separate cover) notwithstanding first named is 'A' for income tax purposes etc.
The 3rd deposit held jointly under names A, B & C is for Rs 6 lac:Rs 5 lacs would be insurance eligible and will have to be paid by DICGC. Balance Rs1 lac [Rs 6 lacs – Rs 5 lacs] + interests entire component should fall under the category of other unsecured deposits, outside the DICGC cover and be paid as per the amalgamation criteria (for that portion).As per RBI's scheme of amalgamation all the three above are retail deposits.
RBI has twisted (beyond delegated authority) to make interest liability of DICGC upto 31-03-2021.
That means neither DICGC nor USFB would pay interest for the period as specified in the DICGC scheme. The whole proposal coming from RBI arbitrary and designed in a highhanded manner disregarding the contractual obligations of DICGC under its guarantee,
CAclubindia
