REPORTABLE

IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO. 905 OF 2005

SUDHIR SHANTILAL MEHTA     … APPELLANT

Versus

C.B.I.              … RESPONDENT

[WITH CRIMINAL APPEAL NOS. 945/2005, 925/2005, 922/2005 AND  965/2005]

J U D G M E N T

S.B. Sinha, J.

INTRODUCTION  

These appeals arise out of a judgment and order dated 9.6.2005 passed  

by the learned Judge, Special Court, Bombay constituted under the Special  

Court (Trial of Offences Relating to Transactions in Securities) Act, 1992  

(for  short,  “the  said  Act”)  in  Special  Case  No.  1  of  1993  whereby  and  

whereunder appellants herein with accused Munipally Subramanium Eshwar

Chandra  (Accused  No.  6),   Sunil  Samtani  (Accused  No.  7)  and  Pankaj  

Brijlal  Shah (Accused No. 9) were convicted for commission of offences  

punishable under Sections 409 and 120B amongst others and sentenced as  

under:

(a) Accused No. 1, K. Margabanthu was sentenced to undergo R.I. for a  

period of six months and to pay fine of Rs.1,00,000/-, in default S.I. for two  

months.

(b) Accused No. 2, Ramaiya Venkatkrishnan was sentenced to undergo  

R.I. for three months and to pay fine of Rs.50,000/-, in default S.I. for 15  

days.

(c) Accused No. 4, Ashwin Mehta was sentenced to undergo R.I. for a  

period of three months and to pay fine of Rs. 2,00,000/-, in default S.I. for  

one month.

(d) Accused No. 5,  Sudhir Mehta was sentenced to undergo R.I.  for a  

period of three months and to pay fine of Rs.2,00,000/-, in default S.I. for  

one month.

(e) Accused Nos. 6, Munipally Subramanium Eshwar Chandra, Accused  

No. 7 Sunil Samtani, Accused No. 9 Pankaj Brijlal Shah were directed to  

pay fine in the amount of Rs.25,000/- each, in default S.I. for 15 days.

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(f) Accused No. 8, S.V. Ramanathan was sentenced to undergo R.I. for a  

period of one month and to pay fine of Rs. 25,000/- in default R.I. for 15  

days.

Before  proceeding  further,  we  may  place  on  record  that  Harshad  

Shantilal Mehta (Original Accused No. 3) expired during the pendency of  

the criminal proceedings and the case against him, thus, abated.   Accused  

Nos. 1, 2 and 8 who are appellants in Criminal Appeal Nos. 945, 965 and  

922 of 2005 respectively were the Chairman-cum-Managing Director,  the  

General Manager and the Divisional Manager of UCO Bank respectively.  

Whereas Accused No. 1 and 2 have been found guilty of committing  

both Criminal Breach of Trust as well as Criminal Conspiracy, Accused No  

8, being a Scale IV Bank employee was found guilty only for commission of  

the  offence  of  criminal  conspiracy.   Accused  Nos.  4  and  5  (hereinafter  

referred to as, “the private accused”) were found guilty of commission of  

offences only under Section 120B of the Indian Penal Code being related to  

and otherwise connected with the activities of the original accused No. 3.  

Accused Nos. 6, 7 and 9 on whom only a punishment of fine was imposed  

accepted the judgment and have not preferred any appeal before this Court.   

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BACKGROUND FACTS  

The prosecution case centers around transactions, of discounting and  

rediscounting of Bills of Exchange and two Pay Orders issued by the State  

Bank of Patiala and Syndicate Bank, in favour of the UCO Bank.  This was  

said to be at the instance of the private accused.     

Harshad Mehta was a dealer in the money and securities market.  The  

Reserve Bank of India had found that Harshad Mehta along with his other  

associates had diverted a huge amount of public fund belonging to Public  

Sector  Banks  and  Financial  Institutions  for  short  term investment  in  the  

securities market, and thus defrauded the banks of a huge amount.   

An  Inquiry  Committee  was  thereafter  constituted  under  the  

Chairmanship of Shri  Janakiraman.  The Committee  submitted  its  report;  

pursuant to and in furtherance whereof the said Act was enacted providing  

inter  alia  for  the constitution of  a  Special  Court  for  trial  of  the criminal  

offences, as also civil disputes arising therefrom during the period between  

1.4.1991  and  6.6.1992.  The  said  Act  provides  for  the  appointment  of  a  

Custodian for attaching the properties of notified parties to prevent diversion  

of such properties.  The properties which were attached included shares of  

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various companies as well as moveable and immoveable properties of the  

private parties herein.    

Accused No. 1 being Chairman-cum-Managing Director of the UCO  

Bank used to sit in the Head Office of the Bank situated at Calcutta.  The  

Bank has an office and a guest house at Bombay as well.  

On or about 14th March 1992, Accused No. 1 visited Harshad Mehta.  

Thereafter he came back to his office and called a meeting in which, inter  

alia, four Prosecution Witnesses being Shri S.V. Prabhu, Assistant General  

Manager  (PW 44),  Shri  Bhaskar  Roy  Choudhary,  Dy.  General  Manager  

(PW-45), Shri Ramanathan, Divisional Manager (Accused No. 8) and Shri  

R.L. Joshi, Public Relations Officer (PW 7) participated.

 Accused No. 1 allegedly  informed others that  he had met  Harshad  

Mehta who had suggested that it would be in the interest of the  Bank to  

undertake  the  business  of  discounting  and  rediscounting  of  Bills  of  

Exchange.  The officers present were assured by him that the business could  

be transacted without involving the banks’ funds.  He furthermore insisted  

that the said business be undertaken through the Nariman Point Branch of  

the Bank though such transactions were generally not undertaken therefrom.  

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In  course  of  the  meeting,  Accused  No.  1  contacted  Accused  No.  2  R.  

Venkatkrishnan at Calcutta and informed him about the transactions which  

had to be  carried out.  On the other officers of the Bank objecting thereto,  

Accused  No.  1  assured  them  that  the  business  of  discounting  and  

rediscounting  of  Bills  of  Exchange  would  be  personally  looked after  by  

Harshad Mehta himself.   

On the same day, that is, on 14.3.1992, a resolution was passed by  

M/s  Growmore  Research  and  Asset  Management  Ltd.  (for  short,  

“Growmore”) to open an account in UCO Bank, Nariman Point so as  to  

enable it to avail Bill Discounting facility provided by UCO Bank limited to  

Rs.50 crores.  Harshad Mehta (the Original Accused No. 3), Ashwin Mehta  

(Accused No. 4) and/or Sudhir Mehta (Accused No. 5) had been authorized  

by  the  said  resolution  to  execute  necessary  documents  on  behalf  of  the  

Company. A similar resolution was also passed by M/s Mazda Industries &  

Leasing Ltd. (for short, “Mazda”) (Accused No. 7), which is a public limited  

company for the purpose of opening up of a current account in UCO Bank,  

so that it too could avail the Bill discounting facilities from the Bank .   

Two or three days thereafter,  Sunil  Samtani,  the Vice President  of  

Mazda and Pankaj Shah, the Vice President of Growmore (Accused No. 9)  

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met  Shri  Prabhu  (PW  44)  with  Ramanathan  (Accused  No.  8).   They  

procured two forms for opening current accounts with the Bank.  They were  

introduced  by  Accused  No.  8,  who  were  also  invited  for  attending  the  

Annual General Meeting of Mazda as also a cocktail party which was to be  

held on 18.3.1992 at Hotel Oberoi.   

The party was attended by Ramanathan (Accused No. 8), Prabhu (PW  

44),  Roy Choudhary (PW 45),  Pankaj  Brijlal  Shah (Accused No. 9)  and  

Harshad Mehta.

On 24.3.1992, at about 2.30 P.M., Sunil Samtani (Accused No. 7) and  

Pankaj Shah (Accused No. 9) came to the Nariman Point Branch of the UCO  

Bank.   They had brought with them two banker’s cheques; one cheque was  

from Syndicate Bank dated 24.3.1992 for a sum of Rs.24,63,01,370/- drawn  

in favour of UCO Bank (Exh. 24); and the other from State Bank of Patiala  

dated 24.3.1992 for a sum of Rs.25,00,53,636/-.   

They had also brought with them the application forms for opening  

Current Accounts in the Bank.  The same were handed over to Prabhu (PW  

44).  The two cheques that they had brought were handed over to Ranjit  

Mukherjee (PW 1) for clearance.    

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Two  Bills  of  Exchange  for  a  sum  of  Rs.14,41,44,000/-  and  

Rs.35,95,24,000/-  drawn by J.H.  Mehta which were  accepted by Ashwin  

Mehta (Accused No. 4) on behalf of Growmore (Exhibit 154) and by Sunil  

Samtani (Accused No. 7) on behalf of Mazda respectively were brought by  

Accused Nos. 7 and 9.  Both the Bills of Exchange were executed by Sudhir  

Mehta (Accused No. 5), authorized signatory of M/s J.H. Mehta.  It is not in  

dispute that original  contract  note with respect  to the underlying security  

transaction had not been produced and only a photocopy thereof had been  

produced.

Letters were also issued by Mazda and Growmore to the effect that  

the said amount would be repaid by them on or before 24.4.1992. They had  

asked the Bank in writing to issue cheques in the name of ANZ Grindlays  

Bank.  

For the said two cheques receipts were obtained from Syndicate Bank  

and State Bank of Patiala.  The two usance promissory notes were handed  

over to Accused No. 7 and Accused No. 9.  Indisputably, J.H. Mehta, the  

drawer of the Bills of Exchange did not have any account in his name.  The  

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acceptors, namely, Mazda and Growmore also did not have any account at  

the said branch.   

Two draft promissory notes were handed over to Mr.Prabhu (PW 44)  

by Accused Nos. 7 and 9; one issued in favour of Syndicate Bank and the  

other in favour of State Bank of Patiala to be executed by UCO Bank in  

relation to the said cheques.  Those usance promissory notes were signed by  

Mr. Prabhu (PW 44) and Ranjit Mukherjee (PW 1), pursuant whereto the  

Bank issued two pay orders on the same day in favour of ANZ Grindlays  

Bank for a sum of Rs.25,27,00,000/- and Rs. 14,14,00,000/-.   

An account in the name of M/s J.H. Mehta was opened on the same  

day; the amount of Bill of Exchange was credited into that account; three  

accounts were opened in the Bank for carrying on transactions in the name  

of the aforementioned three entities bearing Nos. 1705, 1706 and 1708.  The  

Account Nos. 1705 and 1706 were introduced by Ashwin Mehta (Accused  

No. 4) and Account No. 1708 was introduced by Sudhir Mehta (Accused  

No. 5).  Two Bills of Exchange were drawn by M/s J.H. Mehta.  The same  

were signed by Sudhir Mehta (Accused No. 5) as the Constituted Attorney  

of Mrs. Jyoti Mehta, the proprietor of M/s J.H. Mehta.  On behalf of Mazda,  

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the bill was accepted by Ashwin Mehta (Accused No. 4). The amount of  

Bills  of  Exchange  were  credited  to  the  account  of  M/s  J.H.  Mehta  and  

thereafter  they were transferred to the account of Mazda and Growmore.  

The Bills of Exchange in relation to Growmore was accepted by Ashwin  

Mehta (Accused No.4).   

On 25.3.1992, the account of J.H. Mehta in Grindlays Bank credited  

the  said  amount  and  the  amount  was  promptly  transferred  to  Harshad  

Mehta’s Account.   On 26.3.1992, Prabhu (PW 44) asked Ranjit Mukherjee  

(PW 1) to  prepare  a  note for  the  Chairman so as  to  enable  him to seek  

approval from the Board for the transaction pursuant whereto the said note  

was prepared and it was shown to accused No. 1.  On the same date, PW 1  

was asked by Prabhu (PW 44) to collect the Balance Sheets from Mazda and  

Growmore.  Whether the Balance Sheets and Annual Reports of the said two  

Companies were ultimately collected or not is  unknown.  A proposal  for  

ratification of the Bill Discounting transaction was sent to the Head office on  

3.4.1992.  On 24.4.1992, i.e., the due date for retiring the Bills of Exchange,  

the  payments  were  not  made  either  by  the  drawer  or  by  the  acceptors.  

Accused No.  1  allegedly  agreed  to  the  suggestion of  Harshad Mehta  for  

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rolling over the same for one more month.  PW 44 allegedly did not agree  

thereto and insisted on prompt payment.   

As the funds had not been received, UCO Bank made payments to  

Syndicate Bank and State Bank of Patiala out of its own funds. There being  

a shortfall in the funds available with UCO Bank, the requisite call money to  

meet the deficient had to be borrowed by it from the Corporation Bank and  

the Oriental Bank of Commerce to the tune of Rs. 50 crores for three days.  

Officers of UCO Bank thereafter visited the offices of Mazda and Growmore  

for realization of the payments due.  Two cheques were handed over by M/s  

J.H. Mehta with a request that the same not be encashed and that the cheques  

of  Growmore  and  Mazda  would  be  given  at  a  later  date.   Mazda  and  

Growmore also issued two cheques. They were not sent for clearing as the  

requisite funds therefor were admittedly not available in their accounts in  

Grindlays Bank.  The said two Bills of Exchange, for want of fund, were not  

retired either by M/s J.H. Mehta or Growmore or Mazda.   

Subsequent thereto,  a formal meeting of the Investment Committee  

consisting of Accused Nos. 1 and 3 and PW 45 was held.  At the instance of  

Accused  Nos.  1  and 3,  shares  of  Gujarat  Ambuja  Cement  worth  Rs.  50  

crores were purchased by UCO Bank.   It was routed through V.B. Desai a  

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broker and an amount of commission for a sum of Rs. 9.53 lakhs was paid to  

him. The amount received by J.H. Mehta from UCO Bank under the said  

transaction  was  transferred  by  him  to  Mazda  and  Growmore  so  as  to  

facilitate encashment of the said cheques for retiring the Bills of Exchange.  

Payment  towards  purchase  of  shares  was  made  by  UCO  Bank  before  

delivery thereof.  The amount due to the Bank was sought to be realized in  

that manner.

However Mr. VB. Desai, could not deliver all the shares of Gujarat  

Ambuja Cement.  It was agreed that in place of 3 lakhs shares of Gujarat  

Ambuja Cement,  77150 shares of ‘CASTROL’ would be delivered at the  

rate of Rs.1750/- per share.  

Mr.  Prabhu  thereafter  contacted  accused  No.  2  and  informed  him  

about the transactions, which according to him, had to be gone through at  

the Nariman Point Branch as had been  directed by accused No. 1.   

CHARGES  

Several  charges  were  framed  against  the  accused  persons  by  the  

learned  Judge,  Special  Court  on  or  about  9.10.1995.   A  Special  Leave  

Petition was preferred thereagainst.  Although the order of the Special Court  

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dated 9.10.1995 was not  interfered with,  this  Court  recorded a  statement  

made by the Additional Solicitor General of India that charges No. 10 to 13  

and  16  would  not  be  pressed.   We  may  also  place  on  record  that  the  

prosecution at a later stage did not press charges No.2, 4 and 6.  The charges  

which  were,  thus,  framed  and  pressed  against  the  accused  persons  were  

charge Nos. 1, 3, 5, 7, 8, 9, 14 and 15 as also charge No. 12 and 13  (Exhibit  

– 228).  As charges No. 14 and 15 related to the deceased accused No. 3-  

Harshad Mehta, the same stood abated.  The charges which survived were  

charges No. 1, 3, 5, 7, 8, 12 and 13.   

In the words of the learned Special Court, the said charges read as  

under:

“2. By charge No.1, it is alleged that the accused nos.  1, 2 and 8 being public servants and being entrusted with  public  funds  entered  into  a  criminal  conspiracy  to  commit  offences  punishable  under  Section  409  of  the  Indian Penal Code.  It is also alleged that accused nos. 1,  2,  and  8  being  public  servant  entered  into  a  criminal  conspiracy  and  thereby  committed  offence  punishable  under  Section  120B  of  the  Indian  Penal  Code.   It  is  further alleged that accused nos. 1, 2 and 8 are also guilty  of  the  offence  of  criminal  misconduct  under  Section  13(1)(d)  and  Section  13(2)  of  the  Prevention  of  Corruption Act.  3. By  charge  nos.  2,  4,  6  and  9,  it  is  alleged  that  accused nos. 4, 5, 6, 7 and 9 acted in furtherance of the  criminal conspiracy and abetted accused nos. 1, 2 and 8  in committing offence of criminal breach of trust.  It is  

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thus,  clear  that  basically  the  offences  with  which  the  accused  nos.  1,  2  and  8  are  charged  are  offences  of  committing criminal breach of trust and entering into a  criminal conspiracy, and the accused nos.4, 5, 6, 7 and 9  are charged with the offence of criminal conspiracy.”

EVIDENCE  

The prosecution in support of its case examined a large number of  

witnesses.   The  defence  also  examined  some  witnesses.   Ashwin  Mehta  

(Accused No. 4) also examined himself in defence.  

A large  number of  documents  were  also brought  on record by the  

parties.  We would refer to some of them at an appropriate stage.   

PROCEEDINGS BEFORE THE SPECIAL COURT

Before the special court it was alleged that the original contract note  

with  respect  to the  underlying security  transaction for  the  discounting of  

Bills had not been produced at the time of entering into the said transactions  

and only a photocopy thereof was produced.  It was furthermore alleged that  

no security  was insisted upon for discounting the  Bills  of  Exchange and  

before signing the promissory notes, the Bank did not have with it the shares  

in relation to which the Bills of Exchange were drawn.  The said acts of  

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omission and commission on the part of Accused Nos. 1, 2 and 8 are said to  

be in violation of the UCO Bank Manual of Instructions on Bill Discounting  

(Exhibit-239) as also the Circular letter dated 5.9.1988 issued by the Reserve  

Bank of India (Exhibit-247).   

The  prosecution  alleged  that  the  transaction  of  discounting  and  

rediscounting of  the  two Bills  of  Exchange was bogus  and that  the  said  

modus operandi was adopted for siphoning of the public funds wherewith  

accused Nos. 1, 2 and 8 were entrusted.  It was furthermore alleged that the  

said Bills of Exchange were not issued by way of any bona fide commercial  

transaction and were prepared only to secure financial accommodation for  

the deceased Harshad Mehta and his group.  

The prosecution further alleged that as the deceased Harshad Mehta  

was not in a position to pay the amount due to the Bank on 24.4.1992; only  

with a view to facilitate the payment of amount to the Bank against the two  

Bills  of  Exchange,  accused  Nos.  1  and  2  decided  to  purchase  shares  of  

Gujarat Ambuja Cement and the amount of purchase price of the shares was  

paid to M/s J.H. Mehta.  Growmore and Mazda thereafter issued cheques in  

favour of the Bank in discharge of the liability in relation to the said two  

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Bills of Exchange.  The authority on the part of the accused Nos.1, 2 and 8  

to enter into the said transactions without obtaining sanction from the Board  

of Directors was also questioned.  

The defence of the accused persons had been a mere denial of the  

allegations.  

Before  proceeding  further,  we  may  notice  that  Bhaskar  Roy  

Choudhary (PW 45) and S.V. Prabhu (P.W. 44) were initially made accused  

in the case.  They were arrested and later on released on bail. Applications  

were filed on their behalf purported to be in terms of Section 307 of the  

Code  of  Criminal  Procedure,  1973,  which  were  allowed  by  the  learned  

Special Judge by order dated 22.6.1993, inter alia, on the condition that they  

would give evidence during the trial and make a full-and true disclosure of  

the circumstances within their knowledge relating to the said offences.  

JUDGMENT  

The learned Special Judge upon consideration of the entire materials  

brought  on record by the  parties,  in a  very detailed  and well  considered  

judgment, held:

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i. The offence of criminal breach of trust on the part of the accused Nos.  

1 and 2 was proved beyond all reasonable doubts as they had been  

entrusted with the funds of UCO Bank, they had discounted two Bills  

of Exchange drawn by M/s J.H. Mehta and accepted by two corporate  

entities, Growmore and Mazda.   

ii. The said discounting of bills  was illegal  as it  violated the Circular  

issued by the Reserve Bank of India dated 5.9.1988 (Exhibit 247); and  

by  reason  thereof,  a  sum of  Rs.  50  crores  was  transferred  to  the  

deceased accused No. 3 Harshad Mehta  and/or his groups.   

iii. The  transactions  having  been  carried  out  in  violation  of  the  

aforementioned Circular dated 5.9.1988 issued by the Reserve Bank  

of India, the accused Nos. 1, 2 & 8 having acted contrary thereto or  

inconsistent  therewith,  the  same  constituted  an  offence  within  the  

meaning of Section 405 of the Indian Penal Code.  

iv. The  said  transactions  having  been  carried  out  to  benefit  Harshad  

Mehta Group of Companies by the accused in conspiracy with each  

other, the prosecution has proved its case.  The private accused as well  

as Accused No.8 were convicted only for commission of the offence  

of criminal conspiracy.   

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SUBMISSIONS  

The learned counsel appearing on behalf of the appellants, inter alia,  

would urge:

i. The  transactions  being  related  to  discounting  and  rediscounting  of  

Bills  of  Exchange  and not  to  securities,  the  Special  Court  had  no  

jurisdiction  to  pass  the  impugned  judgment  of  conviction  and  

sentence.  

ii. The purported Circular Letter dated 5.9.1988 not being law within the  

meaning of Section 405 of the Indian Penal Code read with Section 43  

thereof,  the  prosecution  of  the  appellants  ex  facie  was  illegal  and  

without jurisdiction.  In any event, the said Circular Letter not being  

in the public domain having not been published cannot have any force  

of law as is ordinarily understood.  

iii. The  said  Circular  in  any  event  being  not  binding  on  the  private  

accused, they could not be said to have been a party to the offence of  

conspiracy.   

iv. The Circular  Letter  being confined to rediscounting and a separate  

procedure having been laid down for discounting of Bills of Exchange  

permitting  the  house  loan/accommodation  loan  for  some  time  as  

provided  for  in  Exhibit  299;  the  impugned  judgment  cannot  be  

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sustained.  No money, thus, having been transferred in violation of  

any law, the question of commission of any offence under Section 409  

did not arise.   

v. The transactions having been entered into bona fide by the officials of  

the Bank and with the accused in order to earn profit for the bank and  

in  that  view of  the  matter,  the  prosecution  cannot  be said  to  have  

proved  any  dishonest  intention  on  their  part  as  envisaged  under  

Section 24 of the Indian Penal Code.    

vi. The prosecution has not been able to prove that any wrongful loss or  

wrongful gain was caused to any person.  In view of the admitted case  

that Harshad Mehta or his group had not made any default in payment  

of the amount due and only because now a purported scam is said to  

have  been committed,  all  the  private  accused who were  connected  

with  Harshad  Mehta  Group  of  Companies  are  alleged  to  have  

committed  the  offence of  conspiracy,  although the prosecution had  

failed to prove any of the charges levied against them.   

vii. The  deposition  of  S.V.  Prabhu  (PW 44),  Bhaskar  Roy  Choudhary  

(PW 45)  should  not  have been relied  upon by the  learned Special  

Judge without  any material  corroboration having regard to the fact  

that they were approvers.    

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viii. The judgment of the learned Special Judge being full of speculative  

inferences and surmises, is wholly unsustainable.   

ix. No witness having been examined by the prosecution to show that the  

action  on  the  part  of  the  official  accused  was  not  bona  fide,  the  

learned  Special  Judge  committed  a  serious  error  in  passing  the  

impugned  judgment.  It  suffers  not  only  from  misreading  and  

misconstruction  of  the  evidences  but  also  in  taking  note  of  the  

deposition of the witnesses examined on behalf of the defence.   

x. Accused  No.  1  being  the  Chairman-cum-Managing Director  of  the  

Bank having taken a decision to transact business with Harshad Mehta  

in the interest of the Bank whose reputation and creditworthiness in  

those days being unquestionable and particularly in view of the fact  

that even the prosecution witness accepted that he was respected by  

all concerned, the inference that the transaction was not entered into  

bona fide is wholly unsustainable.  

xi. The learned Special Judge committed a serious error in arriving at a  

finding that  no contract  had been entered into by and between the  

Banks as it has categorically been accepted by Shri Prashant D. Patel,  

(P.W. 17) that a contract was entered into.  In any event, a contract, it  

is well known, can be entered into by necessary implication.   

20

xii. The learned Special Judge committed a serious error in holding that  

accused No. 5 was Director of the Company although in fact he was  

merely an employee.

xiii. Even assuming that Jyoti Mehta, Mazda and Growmore belonged to  

one group but in terms of the Manual issued by the UCO Bank itself,  

house loan transactions in favour of persons having the same identity  

and belonging to a group being permissible; the transactions were not  

violative of the directions issued by the Reserve Bank of India.

xiv. In any event, the Reserve Bank of India’s directions being confined to  

rediscounting and UCO Bank having knowledge thereof entered into  

the transaction for discounting, the said Circular was not applicable to  

the case at hand.  The decision to enter into the said transaction having  

been taken in a meeting and not by Accused No. 1 alone, he cannot be  

said to have any mens rea particularly when the Bank had earned a  

huge amount by way of interest.    

xv. Purchase  of  shares  of  Gujarat  Ambuja  Cement  having  been  

recommended  by  the  Investment  Committee  which  was  a  separate  

Department  in  a  meeting  held  on  27.4.1992;  purchase  was  not  in  

violation of any law.  

21

xvi. The learned Special Judge committed a serious error in recording the  

judgment of conviction against each of the appellants herein without  

considering their individual involvement.   

Mr. Mariarputham learned counsel appearing on behalf of the C.B.I.,  

on the other hand, urged:

i. Conspiracy amongst the accused had clearly been established by the  

evidence of S.V. Prabhu (PW 44), Bhaskar Roy Choudhary (PW 45)  

and R.L. Joshi (PW 7).   

ii. The manner in which the transactions had been carried through and in  

particular accused No. 1’s meeting with Harshad Mehta on 13.3.1992  

as  also  the  transactions  taking  place  in  quick succession thereafter  

clearly establish that all the accused were parties to the conspiracy,  

which would appear from the following:

a. The  decision  was  taken  to  make  available  a  sum of  Rs.  50  

crores to Harshad Mehta by way of Bill Discounting.

b. A branch which had not been dealing with Bill Discounting of  

such high value had been chosen which demonstratively proved that  

the transactions in question were not ordinary commercial transactions  

as  the  branch  which  had  been  dealing  with  such  bill  discounting  

transactions  was  D.N.  Road  branch  and  not  the  Nariman  Point  

22

Branch.   The  said  branch  was  purposely  chosen  as  the  officers  

working there were not familiar with Bill discounting transactions.  

c. Immediately  after  the  meeting  between  accused  No.  1  and  

Harshad Mehta on 13.3.1992, resolutions were passed by Growmore  

and Mazda for opening  accounts  with a view to obtaining Rs.  50  

crores from the Bank.  Transactions were shown to have been entered  

into  between  M/s  J.H.  Mehta  on  the  one  hand  and  Mazda  and  

Growmore on the other, purporting to sell shares worth Rs. 50 crores  

on 20.3.1992; on the strength whereof two Bills  of exchange were  

prepared by M/s J.H. Mehta and purported to have been accepted by  

Growmore  and  Mazda.   The  same  were  presented  to  UCO Bank,  

Nariman Point branch for discounting.   The said Bills of Exchange  

were  not  accompanied  by  the  original  credit  note  relating  to  the  

alleged  sale  transaction  of  share  securities.  The  Bills  of  Exchange  

were discounted and payment of Rs.50 crores was made. The accounts  

for facilitating the said bill discounting had been opened on the same  

day.  No verification as per the required procedure was undertaken.     

d. No security was taken even before the Bills of Exchange were  

discounted, although rediscounting had been carried out by two other  

23

Banks.   Even  the  usance  promissory  notes  for  rediscounting  was  

issued by the UCO Bank much later.  

e. When there was default in retiring the Bills of Exchange with a  

view  to  cover  up  the  matter,  shares  worth  Rs.  49.50  crores  were  

purchased from J.H. Mehta; as a result whereof, the said amount was  

made available to it for the purpose of retiring the Bills of Exchange.  

The acquisition of shares was neither bona fide nor in the interest of  

the Bank.  

f. Mazda had approached Hamam Street Branch of UCO Bank for  

bill discounting facility upto the limit of Rs. 50 crores. However the  

same had not been granted as it had been found that Mazda did not  

satisfy the eligibility criterion, as would appear from the evidence of  

PW 2, Mazda would have been entitled to a maximum credit limit  

only of Rs. 2.76 crores; but even then transactions worth Rs. 50 crores  

were undertaken with J.H. Mehta, Growmore and Mazda.  

g. Guidelines  laid  down in  the  Manual  of  UCO Bank (Exhibit  

239)  and  directions  of  the  Reserve  Bank  of  India  dated  5.9.1988,  

which have statutory force,  stipulated that  the credit  limit  be fixed  

only after verifying the creditworthiness of the customer wherefor it  

was necessary to compile the credit reports and accordingly the credit  

24

limit should have been sanctioned only thereafter.  In terms of the said  

directions,  if  the  Bills  of  Exchange  exceeded  Rs.  25,000/-,  credit  

report on the drawee on whom the Bill was drawn was required to be  

obtained. Security was also required to be taken and it was the duty of  

the Manager to satisfy himself that the Bills of Exchange were a result  

of  genuine  trade  transactions.   But  in  the  instant  case,  the  said  

procedures were given a complete go by.   

h.  Accused No.  1  and Accused No. 2 being the officers  of  the  

Bank and having dominion over the funds thereof could not part with  

the same in favour of any person without complying with the statutory  

requirements.  Even if the Manual of the UCO Bank and the Circular  

of Reserve Bank of India were not statutory in nature, the transactions  

having  dishonestly  been  carried  out,  the  same  would  satisfy  the  

requirements of Section 405 read with Section 24 of the Indian Penal  

Code.   

i. By reason of such transaction wrongful loss was caused to the  

Bank  and  wrongful  gain  was  made  by  the  Harshad  Mehta  group.  

Money  of  a  Public  Sector  Bank  was  diverted  to  share/securities  

market transactions in violation of law and the prosecution therefore  

must be held to have proved the charges made against the accused.  

25

The two banker’s  cheque  issued  by  the  Syndicate  Bank  and  State  

Bank of Patiala, although were not per se securities but as by reason  

thereof liability to pay interest had been cast on UCO Bank.   

j. Accused No. 6 being Chief Executive of Mazda, Accused No. 7  

being  Vice  President  of  Mazda  and  Accused  No.  9  being  Vice  

President  of Growmore,  they were also party to the conspiracy for  

commission of the offence of criminal breach of trust.  

JURISDICTION OF THE SPECIAL COURT  

The history as  regards  constitution of  the  Special  Courts  has been  

noticed by us heretobefore.  Its jurisdiction, inter alia, is confined to trial of  

offence  relating  to  transactions  in  securities  and  for  matters  connected  

therewith  or  incidental  thereto  committed  during  the  period  between  

1.4.1991 and 6.6.1992.  The alleged offence had been committed admittedly  

during the said period.   

Section  2(c) of the 1992 Act defines “securities” to mean :-

“(c) "securities" includes--  (i)  shares,  scrips,  stocks,  bonds,  debentures,  debenture  stock, units of the Unit Trust of India or any other mutual  fund or other marketable securities of a like nature in or  of any incorporated company or other body corporate;  (ii) Government securities; and  (iii) rights or interests in securities;”

26

Sub-section (1) of Section 3 of the 1992 Act provides for appointment  

and  functions  of  custodian.   Sub-section  (2)  of  Section  3  enables  the  

custodian, on being satisfied on information being received that any person  

had been involved in any offence relating to transaction in securities after  

the 1st day of April, 1991 and on and before the 6th June, 1992, to notify the  

name  of  such  person  in  the  Official  Gazette.   Section  4  provides  for  

cancellation of contracts entered into fraudulently.  Section 5 provides for  

the establishment  of  the Special  Court.   Section 6 empowers  the Special  

Court to take cognizance of or try such cases which are instituted before it or  

transferred to it.  Jurisdiction of the Special Court is provided for in Section  

7 of the 1992 Act.  It starts with a non obstante clause providing that any  

prosecution in respect of any offence referred to in sub-section (2) of Section  

3 shall be instituted only in the Special Court and any prosecution in respect  

of such offence pending in any Court shall stand transferred to the Special  

Court.    Section 9 provides for  the procedure and powers  of the Special  

Court.

Let us, at the outset, deal with contention of learned counsel for the  

appellant that having regard to the definition of ‘securities’  as contained in  

27

Section 2(c) of the 1992 Act which does not involve ‘bill discounting and  

rediscounting’, the Special Court had no jurisdiction to try the accused for  

the offences alleged against them.    

The definition of ‘securities’ is an inclusive one.  It is not exhaustive.  

It takes within its purview not only the matters specified therein but also all  

other types of securities as commonly understood.  The term ‘securities’,  

thus, should be given an expansive meaning.   

In  State of Bombay and others  v.  The Hospital Mazoor Sabha and  

others,  AIR 1960 SC 610 this  Court  while  interpreting  the  definition  of  

“industry” as contained in Section 2(j) of the Industrial Disputes Act, 1947  

held as under:-

“It  is  obvious  that  the  words  used  is  an  inclusive  definition  denote  extension  and  cannot  be  treated  as  restricted  in  any  sense.   (Vide  :  Stroud;s  Judicial  Dictionary”, Vol. , p. 1415).  Where we are dealing with  an inclusive definition it would be inappropriate to put a  restrictive interpretation upon terms of wider denotation”

(See  also  Regional  Director,  Employees  State  Insurance  Corporation   v.  

High Land Coffee Works of P.X.S. Saldanha and sons and another, [ (1991)  

3 SCC 617).  

28

In  Commercial  Taxation  Officer,  Udaipur  v.  Rajasthan  Taxchem  

Ltd.[(2007) 3 SCC 124,  this Court stated:

“22. We  have  already  extracted  the  definition  of  raw  material under Section 2(34) which specifically includes  fuel  required  for  the  purpose  of  manufacture  as  raw  material. The word includes gives a wider meaning to the  words  or  phrases  in  the  statute.  The  word  includes  is  usually  used  in  the  interpretation  clause  in  order  to  enlarge the meaning of the words in the statute. When the  word include is used in the words or phrases, it must be  construed as comprehending not only such things as they  signify  according  to  their  nature  and  impact  but  also  those things which the interpretation clause declares they  shall include.”  

This  jurisdiction  of  the  Special  Court  is  not  confined  to  the  scam  

relating  to  securities  alone  but  utilization  of  any  amount  relating  to  

transactions in securities and for matters connected therewith or incidental  

thereto.  

The jurisdiction of the Special  Court is exclusive one.  It exercises  

original jurisdiction to try offences relating to security scam.  The said Act  

having  regard  to  the  peculiar  nature  of  offence  sought  to  be  dealt  with,  

should receive a liberal construction.   

In Harshad S. Mehta and others  v.  State of Maharashtra, [(2001) 8  

SCC 257], this Court held:   

29

“The use of different words in Sections 6 and 7 of the  Act as already noticed earlier also show that the words in  Section 7 that the prosecution for any offence shall  be  instituted  only  in  Special  Court  deserve  a  liberal  and  wider construction.”  

We may also notice another decision of this Court in L.S. Synthetics  

Ltd.  v.  Fairgrowth Financial  Services Ltd. and another,  [(2004) 11 SCC  

456] wherein it was held as under:-

“18.  The  jurisdiction  of  the  Special  Court  is  of  wide  amplitude. Subject to a decision in appeal therefrom, its  decision is final.”

Jurisdiction of the Special  Court  is  required to be determined with  

regard to the provisions of Section 6 of the Code of Criminal Procedure,  

1973.  The Act is a special Act.   It contains a non obstante clause.  It shall,  

thus, prevail  over any other Act.  [See – Solidaire India Ltd.  v.  Fairgrowth  

Financial Services Ltd. and others,  [(2001) 3 SCC 71].

An offence  is  committed  with  a  view to  circumvent  the  law.   An  

apparent  state  of  affairs  need not  be  the  real  state  of  affairs.   A simple  

transaction of discounting and rediscounting on its face may appear to be  

genuine and lawful but there may be underlying purposes behind it.  It has  

not been disputed that Harshad Mehta was dealing in the money market and  

30

securities  market  and  that  Growmore  although  being  a  public  limited  

company, was controlled by Harshad Mehta.  Both Mazda as also Growmore  

indisputably were dealing in the business of selling and buying of shares.  

Further M/s J.H. Mehta, was the proprietary concern of the wife of Harshad  

Mehta.   She  used  to  execute  business  through  her  constituted  attorney.  

General  Power  of  Attorney  had  also  been  issued  by  the  aforementioned  

Companies in favour of the accused persons.  The Harshad Mehta Group of  

Companies were therefore dealing in securities.  

The  method  of  siphoning  of  the  funds  of  UCO  Bank  through  

discounting  of  two  bills  of  exchange  was  unlawful.   Both  the  bills  of  

exchange were shown to have been issued in relation to transaction in shares  

between M/s JH Mehta, Growmore and Mazda.

For the purpose of arranging repayment of the amount, shares were  

purchased  by  UCO  Bank  through  M/s  VB  Desai  and   

Co. The offence of conspiracy to commit  the offence of Breach of trust,  

thus, related to the transaction in securities.  

31

It is therefore not a case where it can be said that the Special Court  

lacked  inherent  jurisdiction  in  trying  the  offence  said  to  have  been  

committed by the accused.   

RBI CIRCULAR  

Banking business is  controlled by several  Acts of Parliament.   We  

need  not  go  into  the  history  relating  thereto  in  great  details  being  not  

necessary.  

Suffice it to say that UCO Bank is a Nationalized Bank having been  

taken  over  under  the  Banking  Companies  (Acquisition  and  Transfer  of  

Undertakings)  Act,  1970.   It  has  various  branches  in  Bombay;  its  main  

Branch being at D.N. Road.  Its Nariman Point Branch was mainly dealing  

with  foreign  exchanges.   The  business  as  regards  discounting  and  

rediscounting usually used to be carried out at the main branch.     

The Bank, inter alia, is regulated under the provisions of the Reserve  

Bank of India Act, 1934 as also the Banking Regulation Act, 1949 (for short,  

“the 1949 Act”)  Its directions are statutory in character.

32

In terms of Section 35A of the 1949 Act, the Reserve Bank of India is  

empowered to  issue  directions  to  the  Banks  in  public  interest;  or  in  the  

interest of Banking policy; or to prevent the affairs of any banking company  

being conducted in a manner detrimental to the interests of the depositors or  

in a manner prejudicial to the interest of the Banking Company; or to secure  

the proper management of any Banking company generally.  The Reserve  

Bank of  India  in  terms  of  Section 21 of  the  1949 Act  is  empowered  to  

control  advances by banking companies and issue necessary directions in  

this behalf.  

The Reserve Bank of India, therefore, has the requisite power to issue  

direction to Banks in relation to discounting and rediscounting of bills of  

exchange and those directions issued by the Reserve Bank of India have  

statutory  force  and,  thus,  can  be  termed  as  law  in  force.   {See  also  

Corporation Bank  vs.  D.S. Gowda & Anr.  [(1994) 5 SCC 213] &  Central  

Bank of India vs. Ravindra & Ors. [(2002) 1 SCC 367]}

All public sector banks are bound thereby.

Pursuant to or in furtherance of the said power, the Reserve Bank of  

India issued a Circular  dated 5.9.1988 titled “BILLS REDISCOUNTING  

33

SCHEME --  INTRODUCTION OF USANCE PROMISSORY NOTES –  

PROCEDURE THEREFOR”, clauses 2(iii) and 2(v)  whereof read as under  

“2(iii) The usance promissory note should be backed by  unencumbered usance Bills of Exchange of at least equal  value not fallen due for payment, drawn or endorsed in  its  favour,  arising out  of bonafide commercial  or  trade  transactions on which the required stamp duty has been  paid.   The discounting bank will  hold and continue to  hold  such  unencumbered  usance  bills  till  the  date  of  maturity of the usance promissory note.  

2(v) It would be desirable to centralize the function and  confine  the  authority  to  draw  the  usance  promissory  notes  etc.  at  the  bank’s  main  Funds  Management  Centre.”

We may also notice that the Bank had issued a Manual, known as the  

“UCO  Bank  Manual  of  Instructions  on  Bill  Discounting”  relating  to  

discounting  of  Bills  of  Exchange,  laying  down  the  procedure  therefor,  

relevant portions whereof (marked as Exhibit 239) read as under:

“2.5 The attention of the Sanctioning Authority should  be specifically drawn: (a) If bills drawn on places where the bank does not  have branch are to be purchased. (b) If house bills are to be purchased under the limit.  House  bills  are  bills  where  drawer  and  drawee  are  identical or connected persons.  Purchase of house bills  obviously involves greater risk than the purchaser of bills  drawn on unconnected, independent drawees.  Purchase  of house bills should be recommended for sanction only  when the credit  rating, business integrity, past dealings  and  business  methods  of  the  customer  are  highly  

34

satisfactory and he is considered good for the limit on his  single signature.”

THE EFFECT OF THE CIRCULAR LETTER  

Accused Nos. 1, 2 and 8 being public servants, they were bound by  

the aforementioned Circulars having been issued by the Reserve Bank of  

India.   

Mr.  Jethmalani,  however,  has  relied  upon  the  decision  in  B.O.I.  

Finance Ltd.  v.  Custodian & ors.  1997 (10) SCC 488, wherein this Court  

while  dealing  with  a  Circular  letter  which  had been marked confidential  

opined that such a Circular did not bind third parties, stating:

“22. With regard to the finding of the Special Court that  the transactions in question were illegal, as they were in  contravention of the circulars which were issued by the  Reserve Bank of India under the provision of the Act, it  was contended by Mr. Cooper, learned Counsel, that the  circulars  issued  were  no  more  than  guidelines  which  were required to be followed by the Bank and they were  not mandatory in nature. Elaborating this contention, Mr.  Cooper  submitted  that  the  Banking  Companies  Act  contains  provisions  which  enable  the  Reserve  Bank of  India to issue directions which were mandatory and also  give  advice  to  the  banks.  Our  attention  was  drawn  to  Sections 21 and 35A of the said Act and it was contended  that the directions which are issued by the Reserve Bank  of  India  under  these  two  provisions  are  clearly  mandatory. On the other hand, Section 36(1)(a) & (1)(b)  gives power to the Reserve Bank of India to give advice  

35

or lend assistance and any action taken thereunder cannot  be  regarded  as  mandatory.  It  was  submitted  that  the  language of the circulars dated 14.4.1987 and 1.12.1987,  which prohibit the banks from entering into buying back  arrangements, clearly shows that the said circulars were  only  in  the  nature  of  advice  and  must  be  regarded  as  having been issued under Section 36(1)(a) and (1)(b) of  the Act.”

Having regard to the provisions of Section 36(1)(a)  and (b)  of the  

Banking Regulation Act, it was held that they were only in the nature of an  

advice and not binding on the third parties.   

The distinction between exercise  of  jurisdiction  under the  enabling  

provisions contained in Section 36(1) and the ones under Sections 21 and  

35A of the Banking Regulation Act and the provisions contained in Section  

45L  of  the  Reserve  Bank  of  India  Act,  1934  is  absolutely  clear  and  

unambiguous.   

In terms of Section 36, the Reserve Bank of India may caution or  

prohibit  the Banking Companies but in terms of Sections 21 and 35A of  

1949 Act it can issue binding directions.  The directions have been issued by  

the Reserve Bank of India in regard to rediscounting.   

36

The  said  decision  therefore  is  not  applicable  to  the  facts  and  

circumstances of this case.

Whether a circular letter issued by a statutory authority would  

be binding or not or whether the same has a statutory force, would depend  

upon the nature of the statute.   For the said purpose, the intention of the  

legislature must be considered.  Having regard to the fact that the Reserve  

Bank of India exercises control over the Banking Companies, we are of the  

opinion that the said Circular letter was binding on the Banking Companies.  

The officials of UCO Bank were, therefore, bound by the said circular letter.  

The Madhya Pradesh High Court  in  The State  of  Madhya Pradesh

v. Ramcharan [AIR 1977 MP 68] held:

“6.  Although  the  Constitution  does  not  contain  any  generic definition of law, it defines "law" for purposes of  Article  13  to  include  "any  Ordinance,  order,  bye-law,  rule, regulation, notification, custom or usage having in  the territory of India the force of law". Article 366(10) of  the  Constitution  also  defines  the  expression  "existing  law" to mean "any law, Ordinance, Order, bye-law, rule  or regulation passed or made before the commencement  of this Constitution by any legislature authority or person  having power to make such law, Ordinance, order, bye- law,  rule  or  regulation".  Another  definition  which  is  relevant here is the definition of the expression "Indian  law" in the General Clauses Act, 1897. Section 3(29) of  this  Act  defines  "Indian  Law"  to  mean  "any  Act,  

37

Ordinance,  regulation,  rule,  order  or  bye-law,  which  before  the  commencement  of  the  Constitution  had  the  force of law in any Province of India or part thereof and  hereafter has the force of law in any Part A State or Part  C State or part thereof, but does not include any Act of  Parliament  of  the  United  Kingdom  or  any  Order  in  Council, rule or other instrument made under such Act".  These definitions go to confirm that under our legal order  "law" does not include only legislative enactments but it  also  includes  rules,  orders,  notifications  etc.  made  or  issued by the Government or any subordinate authority in  the exercise of delegated legislative power.  … 7. The question relating to a post-constitution order or  notification in the context whether it amounts to law was  considered by the Supreme Court in Jayantilal Amratlal v  F. N. Rana, AIR 1964 SC 648 = 1964-5 SCR 294. …The  Court further observed as follows: "This is not to say that every order issued by an executive  authority  has  the  force  of  law.  If  the  order  is  purely  administrative,  or  is  not  issued  in  exercise  of  any  statutory authority it may not have the force of law. But  where  a  general  order  is  issued  even  by  an  executive  authority  which  confers  power  exercisable  under  a  statute, and which thereby in substance modifies or adds  to  the  statute,  such  conferment  of  powers  must  be  regarded as having the force of law." …”

It therefore stands established from the above that UCO Bank could  

only  have  discounted  the  bills  of  exchange  out  of  bonafide  commercial  

transactions  as  had  been  provided  under  the  RBI  circulars  which  were  

statutorily binding on UCO Bank.

So  far  as  the  submission  of  the  learned  counsel  that  they  had  no  

knowledge of the circulars issued by RBI is concerned, we would affirm the  

38

findings of the special judge that the conduct of the accused clearly shows to  

the contrary that they in fact did have knowledge of the RBI Circulars in  

question.  They otherwise  would  not  have  gone  to  the  length  of  creating  

documents to show that the bills of exchange had been issued because of a  

sale of shares of M/s JH Mehta to Growmore and Mazda. If they did not  

have the knowledge of the said circulars and if the bank had been willing to  

discount the bills of exchange, a simple accommodation Bill of Exchange  

could have been executed. In order that the bank could discount a bill  of  

exchange,  it  was  necessary  that  it  related  to  a  bonafide  or  genuine  

commercial  transaction  and  it  was  because  of  this  requirement  that  the  

accused persons had gone to the extent of preparing false documents to give  

an  appearance  that  the  discounting  related  to  bona  fide  commercial  

transaction.    

CRIMINAL BREACH OF TRUST  

Section  405  of  the  Indian  Penal  Code  defines  Criminal  Breach  of  

Trust in the following terms:

“405. Criminal breach of trust - Whoever, being in any  manner  entrusted  with  property,  or  with  any dominion  over property, dishonestly misappropriates or converts to  his own use that property, or dishonestly uses or disposes  of  that  property  in  violation  of  any  direction  of  law  

39

prescribing  the  mode  in  which  such  trust  is  to  be  discharged, or of any legal contract, express or implied,  which he has made touching the discharge of such trust,  or willfully suffers any other person so to do, commits  "criminal breach of trust".

An offence of criminal breach of trust by a public servant attracts the  

penal provision of Section 409 of the Indian Penal Code.  Indisputably, the  

Bank entrusted its funds to its officers; they had the dominion over the said  

property;  they  were  holding  the  said  money  in  trust  which  is  an  

comprehensive expression, inter alia, to denote a relationship of master and  

servant.   The act of Criminal Breach of Trust per se may involve a civil  

wrong but a breach of trust with an ingredient of mens rea would give rise to  

a criminal prosecution as well. The ingredients of Section 409 are:

1. Accused must be a Public servant, merchant, agent, a factor, broker or  

an attorney.  

2. In his such capacity he must be entrusted with some property or must  

have gained dominion thereover.

3. He must have committed criminal breach of trust.

The criminal breach of trust would, inter alia, mean using or disposing  

of the property by a person who is entrusted with or has otherwise dominion  

thereover.   Such  an  act  must  not  only  be  done  dishonestly  but  also  in  

40

violation of any direction of law or any contract express or implied relating  

to carrying out the trust.  It is one thing to say that any Circular Letter issued  

by the Reserve Bank of India being not within the public domain would not  

be  law but  it  would  be  another  thing  to  say  that  it  did  not  contain  any  

direction of law so as to attract the liability in terms of Section 405 of the  

Indian Penal Code.  Lawful directions were issued by the Reserve Bank of  

India.  The  Circular  Letter  was  meant  for  all  Scheduled  Banks.   The  

authorities  and/or  officers  running  the  affairs  of  the  Scheduled  Banks  

therefore were aware thereof.   If it  is binding on the Banks, it  would be  

binding on the officers.  Any act of omission or commission on the part of  

any  authority  of  the  Bank  would  amount  to  acting  in  violation  of  any  

direction  of  law.   A  direction  of  law  need  not  be  a  law  made  by  the  

Parliament  or  a  Legislature;  it  may  be  made  by  an  authority  having  the  

power therefor; the law could be a subordinate legislation, a notification or  

even a custom.   

Indisputably, the higher authorities of the bank were entrusted with or  

otherwise had dominion over the properties of the bank.  They were dealing  

with public funds.  Indisputably again they were required to apply the same  

in terms of the Circulars issued by the Bank as also the Reserve Bank of  

India.  It has been accepted at the Bar that failure on the part of the officers  

41

of  the  Bank to  abide  by the  directives  issued under  the  Circulars  would  

result  in civil  action.   Subjecting the bank to a  civil  liability  would thus  

attract one of the ingredients of criminal breach of trust.  There cannot be,  

however,  any doubt whatsoever that a mere error of judgment would not  

attract  the  penal  provision  contained  in  Section  409 of  the  Indian  Penal  

Code.   

The  materials  brought  on  record  by  the  parties  must  be  judged  

keeping in view of the aforesaid legal position.   

The  primary  question  is  whether  the  property  of  the  bank  was  

dishonestly  used  or  disposed  of  in  violation  of  any  direction  of  law  

prescribing the mode therefor.  The mode of disposal of the public money is  

prescribed in terms of the UCO Bank Manual and the Circulars issued by the  

Reserve Bank of India.  It was, however, necessary for the prosecution to  

prove that the same was done with requisite mens rea.   

Before  proceeding  further,  we  may  notice  some  basic  facts  which  

have been proved by the prosecution and in respect  whereof  there is  not  

much controversy.   

42

All the accused were working as full-time employees.  On 13.3.1992,  

Margabanthu  (Accused  No.1)  Chairman-cum-Managing  Director  of  the  

Bank  met  Harshad  Mehta,  the  prime  accused.  This  has  been  proved  by  

Joglekar PW-6 the Driver and R.L. Joshi, PW-7.   

What  transpired  in  the  said  meeting  although  is  not  known,  the  

purport thereof can be found out from the representation made by Accused  

No. 1 in the meeting held on 14.3.1992, which was attended by PW 44 -  

Prabhu, Assistant General Manager of the Nariman Point Branch, PW 45 –  

Bhaskar  Roy  Choudhary,  Dy.  General  Manager,  Accused  No.  8  –  

Ramanathan, Division Manager and PW 7 – R.L. Joshi, Market Promotion  

Officer,  that  the  bank  may  earn  some  profit  without  investing  its  own  

money.  Ex facie, the offer appeared to be attractive as it was for the benefit  

of the Bank but the process involved therein was a complex one.   

It was insisted that the transaction of such magnitude be carried out  

from the Nariman Point Branch of the Bank which was not the main branch  

and was not otherwise well equipped to deal with such transactions.  The  

private accused did not have any account in the said branch.  The employees  

of the said branch did not have enough experience to carry out transaction of  

43

such high values. Despite objection made by Prabhu (PW-44), the same was  

insisted upon.   

It had not been disclosed that a similar offer made by Mazda to carry  

the transactions at the Hamam Street  Branch of the Bank had yielded no  

results.  An assessment of creditworthiness of Mazda was made and it was  

found that their creditworthiness was only to the extent of Rs. 2.76 crores  

and not  beyond the same.   This  appears to be the prime reason why the  

transactions  were  shifted  from  Hamam  Street  Branch  to  Nariman  Point  

Branch.  

The officers  of  the  main  branch of  the  Bank at  Bombay were  not  

taken into confidence at all.   One of the officers who was asked to attend the  

meeting was Ramanathan,  Divisional  Manager  (Accused No.8).   Why he  

was involved had not been explained?  He might not have participated in the  

meeting as contended but then his subsequent role speaks of volumes.  We  

would refer  thereto a little  later.   It  must  be noticed that during the said  

meeting itself the Accused No. 1 spoke to Accused No. 2 over phone.  This  

has been proved by PW-7 in his deposition, stating:  

“When  I  was  in  the  chamber,  Mr.  Margabanthu  had  spoken  to  Mr.  R.  Venkatakrishnan  i.e.  Accused No. 2.

44

“When  the  person  on  the  other  side  of  the  telephone picked up the phone Mr. Margabanthu  said  ‘Venkit’.   Then  Mr.  Margabanthu informed  about  this  bill  transaction  and  added  that  this  would not affect the outflow of the funds from the  Bank.  At that time Mr. Venkatakrishnan, Accused  No.2  was  looking  after  the  Investments  &  Treasurer Division of the Bank that is why I know  that  the  conversation  was  with  Mr.  Venkatakrishnan”

The fact that Accused No.1 spoke to Accused 2 over phone was also  

stated by PW-44 and PW-45 in their statements. The reason why consent of  

Accused No. 2 or at least the necessity of keeping him informed about the  

transaction appears to be that he used to handle the call money.  If a large  

chunk of  money goes out  of  the  coffer  of  the  bank,  it  would have been  

probably necessary to arrange for call money in future.  

Although,  it  is  not  the  case  of  the  prosecution that  Nariman Point  

Branch of the Bank had not been dealing with discounting/rediscounting of  

the Bills of Exchange; what was pointed out was that from the said Branch  

such a huge transaction had never been carried out.  Objection of PW 44 was  

over ruled on the premise that Harshad Mehta who had vast experience in  

the field himself would be taking care of the transaction.

45

Indisputably, thus, the person for whose benefit the transactions were  

sought  to  be carried out,  was involved in  the  internal  functioning of  the  

Bank.  This aspect of the matter has been proved by PW-7 – R.L. Joshi, PW-

44 – S.V. Prabhu and PW-45 – Bhaskar Roy Choudhary.   

On the same day, Growmore passed a resolution to open an account at  

the Nariman Point Branch of the UCO Bank for the purpose of availing Bill  

Discounting limit of Rs. 50 crores.  Harshad Mehta (accused No. 3), Ashwin  

Mehta (accused No. 4) and Sudhir Mehta (accused No. 5) were authorized to  

execute necessary documents on behalf of the company.  Although we do  

not know the exact time of holding of the meeting of the Bank Authorities  

vis-à-vis the time when the Resolution was passed but the fact remains that  

both took place on the same date.   Only a few days later,  Sunil Samtani  

(accused  No.7),  the  Vice  President  of  Mazda  and  Pankaj  Shah  (accused  

No.9), the Vice President of Growmore came to the Bank and met Prabhu  

(PW-44).  They did not come alone; they were accompanied by Ramanathan  

(accused No.8).  Admittedly, they obtained two forms for opening Current  

Accounts.   At  the  same  time,  the  Officers  were  invited  for  attending  a  

cocktail party on 18.3.1992, i.e. on the same day.    

46

We would presume that before accused No. 7 and accused No. 9 came  

to  the  Bank,  a  resolution  was  also  passed  by  Mazda.   Although  no  

documentary evidence in this behalf is available on record but it was spoken  

of by PW 4 Prakash V. Bhat.   The learned special judge also has referred  

thereabout  in  his  judgment.   We  may,  for  this  purpose  also,  take  into  

consideration that a dinner was held at Hotel Oberoi on the same day.  It was  

attended by Ramanathan (Accused No. 8), Prabhu (PW-44), Roy Choudhary  

(PW-45).   Accused  No.  7,  Accused  No.9  and  Harshad  Mehta  (Accused  

No.3) were also present.   It is crucial that on 24.3.1992, at about 2.30 P.M.,  

Samtani  (accused  No.  7)  and  Pankaj  Shah  (accused  No.9)  came  to  the  

Nariman  Point  Branch  of  the  UCO  Bank;  they  brought  with  them  two  

cheques marked Exhibit 24 and Exhibit 26;  the first having been drawn by  

Syndicate Bank on the same date for a sum of Rs.24,63,01,370/- in favour of  

UCO Bank, and second from the State Bank of Patiala of the same date for a  

sum  of  Rs.25,00,53,636/-.   The  application  forms  for  opening  ‘Current  

Accounts’ were handed over to Prabhu (PW-44).   The cheques were handed  

over to Ranjit Mukherjee (PW 1) for clearance.  PW-44 testified that the  

account opening forms were given to the Current Account Department.   At  

the  same  time,  two  draft  promissory  notes  were  brought,  on  the  basis  

whereof usance promissory notes were prepared and signed by Prabhu (PW-

47

44)  and  Ranjit  Mukherjee  (PW-1).   Bank’s  functions  of  preparing  draft  

promissory notes were therefore taken over by the borrower.   

The  promissory  notes  were  issued  (Exhibit  28  and  Exhibit  29)  in  

favour of Syndicate Bank for a sum of Rs. 25 crores and in favour of State  

Bank of Patiala for a sum of Rs. 25,36,64,000/-.   They also brought two  

Bills of Exchange (Exhibit 154 and Exhibit 155) one of which was drawn by  

M/s J.H. Mehta for a sum of Rs. 14,41,44,000/- signed by Ashwin Mehta  

(Accused No.4) and the other for a sum of Rs.35,95,24,000/- signed by Sunil  

Samtani (Accused No.7).  Whereas former (Exhibit 154) was accepted by  

Growmore  and  the  later  (Exhibit  155)  by  Mazda.   Both  the  Bills  of  

Exchange were executed by Sudhir Mehta (accused No. 5).  

Ranjit  Mukherjee  (PW-1)  who was supported by  PW-44 –  Prabhu  

categorically  stated  that  no  original  contract  note  with  regard  to  the  

underlying security transactions had been produced, only a photocopy was  

produced.  No security was received for discounting the Bills of Exchange.  

Banks also did not have the shares in relation to which the Bills of Exchange  

were drawn before the promissory notes were executed.   

48

As is customary, having regard to the nature of the promissory notes  

being usance, Mazda and Growmore were to repay the amount on 24.4.1992.  

They issued letters promising to do so (Exhibit 35 and Exhibit 36).   

Letters were also issued asking the Bank to issue cheques in the name  

of ANZ Grindlays Bank.  The same was complied with.  Accused No. 7 and  

Accused No.  9  were  handed over:  (i)  two pay orders  in  favour of  ANZ  

Grindlays Bank; (ii) receipts for the two cheques received from Syndicate  

Bank and State Bank of Patiala; and (iii) two usance promissory notes.   

Indisputably, as on the said date, M/s J.H. Mehta did not have any  

account at the Nariman Point Branch.  Accounts of Mazda being Account  

No. 1705 (Exhibit 86), Growmore being Account No. 1706 (Exhibit 89) and  

M/s J.H. Mehta being Account No. 1708 (Exhibit 93) were opened later.  

The transactions took place in a post haste manner.   

Accounts of Growmore and Mazda were credited and pay orders were  

issued.  Thereafter, M/s J.H. Mehta’s Account was credited and the amount  

was transferred to the accounts  of Growmore and Mazda.   When certain  

irregularities in regard to the Bill discounting were pointed out, PW 44 and  

PW-1 admitted that confusion was prevailing in the matter.  The Bills were  

rediscounted by State Bank of Patiala before they had been discounted by  

49

UCO Bank.  PW-19 I.B. Gupta, who is an employee of State Bank of Patiala  

categorically  stated  that  Sunil  Samtani  (accused No.7)  had contacted  the  

Bank in the morning about the bill  rediscounting.   Similarly,  S.K. Jindal  

(PW-21), an officer of the State Bank of Patiala testified that Prakash Shah  

(PW-9) had given an offer on behalf of Harshad Mehta for investment in bill  

rediscounting.  Money was credited in the account of M/s J.H. Mehta with  

ANZ Grindlays Bank.  This has been proved by Cheque dated 25.3.1992  

(Exhibit  267)  and  the  deposit  slip  (Exhibit  268).  This  was  the  route  of  

transferring the money agreed to by all the players.    

The submission of the learned counsel for the appellants that there has  

been  no  violation  of  the  RBI  Guidelines  and/or  the  UCO Bank Manual  

cannot be accepted.  It may be true that Shri Veeraraghwan Rangarajan (PW  

40), Executive Director, RBI, Bombay had stated that technically the RBI  

Circular referred to the Bill rediscounting and not discounting, but it is not  

disputed  at  the  Bar  that  Bill  rediscounting  must  be  preceded  by  Bill  

discounting.   UCO  Bank  had  issued  usance  promissory  notes;  it  was  

required to be backed by encumbered usance Bills of Exchange of at least  

equal value not due for payment; the transactions were required to be bona  

fide commercial transaction.  UCO Bank Manual although permits advances  

as  against  house  bills  but  it  stipulates  that  for  the  said  purpose,  

50

creditworthiness of the customer was required to be verified.  Credit limit  

was  also  to  be  fixed.   For  the  said  purpose,  credit  reports  were  to  be  

compiled; limits were to be sanctioned.  The jurisdiction of Chairman-cum-

Managing Director and other Authorities are fixed if the Bill of Exchange  

exceeds Rs. 25,000/-, credit report on drawees on whom the bill is drawn is  

also required to be obtained.  The Manual mandates that security be also  

taken. The duty had been cast on the Manager to satisfy himself that Bill of  

Exchange is the result of genuine trade transaction.   

ILLEGALITY  

Section 43 defines the terms ‘Illegal’ or ‘Legally bound to do” in the  

following terms.

“43. “Illegal”, “Legally bound to do”- The word "illegal"  is applicable to everything which is an offence or which  is prohibited by law, or which furnishes ground for a civil  action; and a person is said to be "legally bound to do"  whatever it is illegal in him to omit.

It carries a very wide meaning.  If any ground for civil action can be  

founded on the basis of any act of omission or commission on the part of a  

person, his act may be held to be illegal or it may be held that he was legally  

bound to do an act which he had omitted to do.  If a person is guilty of  

51

breach of a departmental order, he may be held to be guilty as he was legally  

bound to act in terms thereof.  

  It does not matter whether the violation was in relation to the Circular  

issued by the Reserve Bank of India or whether it was in violation of the  

guidelines issued by the Bank itself.

 The question as to whether the directions are statutory in character  

and binding in law may not depend upon the nature of the powers to be  

exercised by the Reserve Bank of India. Discounting and rediscounting of  

Bills of Exchange is an integral part of banking transactions.  Purchase and  

sale of securities is also a part of the banking transactions as would appear  

from Section 6(1)(a) of the Banking Regulations Act.   

Harshad Mehta was having a very good customers credit rating which  

was even spoken of by PW 7.  The Bills of Exchange being usance Bills of  

Exchange in terms of Section 32 of the Negotiable Instruments Act on their  

maturity,  only  the  acceptors,  namely,  Growmore  and  Mazda  were  

responsible for clearance thereof and not M/s J.H. Mehta.

52

Further we must take note of the fact that the bills had been drawn by  

M/s JH Mehta and were accepted by M/s Growmorw and M/s Mazda. The  

payment on rediscounting by the Bank should therefore have been made to  

M/s JH Mehta, but the payment had in fact been made to M/s Growmore and  

M/s Mazda Industries.  If the Bills of Exchange had been drawn because M/s  

JH Mehta had sold the shares to Mazda and Growmore, it would have been  

M/s JH Mehta which would have been entitled to the purchase price of the  

shares which it  had been sold to M/s Growmore and M/s Mazda.  In the  

present case the Bank had first made a credit  entry in the account of JH  

Mehta and then the amount had been transferred to Growmore and Mazda  

by issuing cheques in favour of ANZ Grindleys Bank favouring Mazda and  

Growmore. Thus the ultimate payment on the rediscounting of the two bills  

of  exchange went to Growmore and Mazda who had been shown as the  

purchasers of the shares from M/s JH Mehta and were therefore to make  

payment of the price of the share to JH Mehta. It must moreover be noted  

that even the cheques for repayment to the Bank on 27.04.1992 had been  

issued by M/s Growmore and M/s Mazda. As the amount paid under the  

Bills of exchange by the Bank was returned to the Bank, it is beyond the  

purview of any explanation why the bills of exchange had been drawn in the  

53

first place. Obviously the discounting of the Bills of exchange in our opinion  

did not represent a bonafide commercial transaction.

It  has  been  brought  to  our  notice  by  the  learned  counsel  for  the  

appellants that Harshad Mehta was behind all the entities.  Apart from his  

individual capacity, he was acting on behalf of M/s J.H. Mehta, Mazda and  

Growmore.  This fact was not unknown to the officers of the Bank. Each one  

of the private accused was connected in one way or the other with each of  

the said entities.  Sudhir Shantilal Mehta (Accused No. 5) held the Power of  

Attorney and was the authorized signatory of M/s J.H. Mehta.   In a situation  

of this nature, in terms of the Manual if house bills were to be purchased  

where the drawer and the drawee were closely interconnected, the following  

requirements were to be satisfied, namely, (i) if the credit rating is high, (ii)  

business integrity and (iii)  past  dealings and the business methods of the  

customer were highly satisfactory and he was considered good for the limit  

on his single signature.  None of the aforementioned ingredients of Para 2.5  

(b) of the Manual were satisfied.  None of them were customers of the said  

Branch;  the Authorities,  namely, PW-44,  PW-45 as also PW-1 did know  

them. Although the past dealings of the accused with the Bank took place at  

Hamam Street Branch, its records were not called for.  So far as J.H. Mehta,  

54

Mazda and Growmore are  concerned,  they  were  new customers.   It  was  

therefore  beyond  anybody’s  comprehension  as  to  how  an  account  was  

opened  on  the  same  day  as  the  Bill  of  Exchange  was  presented  for  

discounting.   It  is  also  beyond  any  doubt  or  dispute  that  the  power  to  

sanction advance  so far as  the Chairman is  concerned is  limited to Rs.5  

crores.   Prior sanction of the Board of Director was necessary if the Bill  

discounting exceeds Rs.5 crores.   

PW-44 in his evidence stated:

“The  limit  upto  which  Shri  Margabanthu  was  authorized  to  sanction  was  Rs.  5  crores.   If  business  was to be in excess  of  Rs.5 crores,  the  authority  to  sanction  was  with  the  Board  of  Directors.”

To the same effect is the evidence of Varanadi Subrahmanyam (PW-

43), who testified:

“According to me a transaction of discounting or  rediscounting of Bills of Exchange in a sum of Rs.  50  crores  could  not  be  undertaken  without  previous sanction of the Board of Directors.

The Manual, therefore, prescribes exercise of greater caution in the  

cases where the drawer and drawee of the Bill are identical or connected  

persons.  It  provides for the meeting of safeguards by way of making an  

55

enquiry as regards the creditworthiness, a satisfaction of which was required  

to be arrived at by the Manager.  Thereabout, having regard to the credit  

rating, business integrity and past dealing, the Manual provides that those  

borrowers who do not satisfy the said tests laid down would not be eligible  

for  any loan.   Evidently,  all  these  procedural  requirements  necessary for  

safeguarding the interests of the Bank were thrown to the  winds.   

The submission of Mr. Mohta, however, is that all such transactions of  

the past had been ratified by the Board of Directors.   It may be or it may not  

be but the fact remains that the law requires prior sanction of the Board of  

Directors and not ratification.  Admittedly, even the Board of Directors did  

not  ratify  the  said  transaction  although  in  terms  of  the  Manual  it  was  

necessary that prior sanction should be obtained.  At least, none has been  

produced before us.

Strong  reliance  has  been  placed  on  a  resolution  of  the  Board  of  

Directors  dated  12.5.1992 whereby all  support  was  extended to  Accused  

No.1.   The same, in our opinion, is of no significance as even on that day  

the Board of Directors did not ratify the transaction.  

56

We may notice that the Officers of the Bank were aware of the fact  

that  the  Bank  finances  were  not  utilized  for  speculative  purposes.   The  

Banking business is governed by sound practice.  Any advance exceeding  

Rs.  5  lakhs  against  shares  and  debentures  was  to  be  sanctioned  by  the  

Board/Committee of Directors.  As it is stated:

“12. Advances  exceeding  Rs.  5  lakhs  against  shares and debentures should be sanctioned by the  Board/Committee  of  Directors.   Suitable  powers  may  be  delegated  to  the  Chief  Executive  and  others for sanctioning advances for lesser amounts.  

Advances against securities/shares/debentures in terms of explanatory  

note included all types of advances.  The Executive Director of UCO Bank  

Biswajit  Choudhari  (PW-37)  accepted  that  the  discounting  of  bills  is  a  

method of advancing credit  to a  party.   Evidently,  therefore,  the prudent  

lending norms were required to be observed.   One of the contentions raised  

by the learned counsel for the appellants was that further security was not  

necessary as two cheques had been issued by two scheduled Banks.  The  

cheques  were  issued  for  the  purpose  of  earning  interest  by  way  of  

rediscounting.  It may be true that whereas the Syndicate Bank and State  

Bank of Patiala were to get 17.5% of interest, the UCO Bank was to receive  

interest from Harshad Mehta at the rate of 21% per month. This itself shows  

the speculative nature of the transaction.  Syndicate Bank and State Bank of  

57

Patiala or even the banker of Harshad Mehta and his group ANZ Grindlays  

Bank were of the opinion that they proceeded with so much amount even for  

a short period.  We fail to see any reasons as to why the usual good credit  

was not taken recourse to. The underlying object of such transaction is that  

the same should be a genuine/bonafide commercial transaction.  It was for  

the said purpose procedural requirements were required to be complied with.  

Even if the words ‘directions of law’ are to be given literal meaning, it  

would  include  a  direction  issued  by  the  authorities  in  exercise  of  their  

statutory  power  as  also  the  power  of  supervision.   We  have  opined  

heretobefore that it has been accepted at the Bar that both the RBI Circulars  

as  also  the Manual  of  UCO Bank were  binding on the  authorities.   Our  

attention, however was drawn to the statement of Srinivas Padiyar (PW-20)  

of the Syndicate Bank to show that a contract was entered into on phone.  It  

was furthermore submitted that the contract was an implied one.  Apart from  

the fact that no sufficient and reliable evidence has come on record to show  

that  the  competent  authorities  of  the  UCO Bank and the other  Banks in  

question, namely, Syndicate Bank and State Bank of Patiala had entered into  

such transactions but we would assume the same for the sake of argument.  

We will also assume that the transaction was otherwise permissible in law in  

58

terms of the provisions of the Contract Act or any other Parliamentary Act  

for the time being in force.   

The prosecution case, however, is that it has been done in a manner  

not known to law and/or in violation of the directions of law.  If it has been  

able to prove the ingredients of Section 405 of the Indian Penal Code that  

the  transaction  had been carried  out  for  the  purpose  of  disposing  of  the  

property  belonging  to  the  Bank  or  having  used  dishonestly  and/or  in  

violation of the direction of law, the prosecution must succeed.  The entire  

transaction was undertaken with one motive that the funds of UCO Bank  

should be made available to Harshad Mehta who was the stock broker.

Evidently,  UCO  Bank  was  approached  as  a  conduit  as  it  had  no  

money of its own.  Whereas other banks were secured as they had issued  

cheques in the name of Nationalized Bank;  UCO Bank did not obtain any  

security or pledge.  The fact that it  had undertaken a grave risk is not in  

dispute.  Money was to be returned by a fixed date, namely, 24.4.1992.   

Even the balance sheet and annual reports of the two banks were not  

sought for far less scrutinized for arriving at a satisfaction as regards the  

capability of the borrower to repay the amount within the stipulated time.  

59

Only after advances were made i.e.  on 26.3.1992, PW-44 asked PW-1 to  

collect the balance sheet from Mazda and Growmore for forwarding them to  

the Head Office for seeking approval of the Bill Discounting already done.   

PW-1 in his evidence stated:

“Round about 26th March, 1992, Mr. Prabhu  also asked me to collect the balance-sheet of  Mazda and Growmore.  He told me that it  was necessary to send the balance sheets to  the Head Office.  He had asked me to go to  their offices.  On 27th or 28th March, 1992, I  visited the office of Mazda. Over there I met  Mr. Samtani.  I requested him to give me the  Balance Sheets and the Annual Reports for  the last  three  years.   Mr.  Samtani told me  that he would send the same.  I also asked  him about the Balance Sheets of Growmore.  Mr.  Samtani  stated  that  he  would  collect  these and send them to the bank.   As Mr.  Samtani did not give the Balance Sheets and  the  Annual  Reports,  I  again contacted Mr.  Samtani. Mr. Samtani gave me two Annual  Reports for the years 1988 to 1990 and for  the year 1991”

Thus, all attempts to procure the balance sheet, etc. were undertaken  

at a later date.   As the date of repayment was coming closer, UCO Bank  

sent letters to Mazda and Growmore for arranging funds to retire the Bill of  

Exchange on due date.  Evidently, they were unable to fulfill their promise.  

60

For the said purpose, Harshad Mehta had already spoken to Accused No.1  

and he agreed that the Bills would be rolled over for one more month.  PW-

44 was informed thereabout by Pankaj Shah (Accused No.9).  Naturally, as  

the entire blame would be put on him, he did not agree thereto and insisted  

on payment. In his evidence, he stated:

“The due date of both the bills of exchange was  24th April, 1992.  On 22nd March 1992, the Bank  addressed  letters  to  Mazda  Leasing  Co.  and  Growmore Finance Ltd. to retire the bills on due  date.  On 22nd April 1992 I was informed by Mr.  Pankaj Shah that Mr. Harshad Mehta has talked to  the Chairman of the Bank and that the bills are not  to be retired on 24th April 1992 but are to be rolled  over. (The witness is shown documents at Exhs. 58  and 59).   This were the letters sent to the above  referred  Companies  on  22nd April,  1992.   I  told  Mr.Pankaj Shah that I do not agree to the re-rolling  and that payment of both the bills should be made  on due date. I also informed Shri Roy Chowdhari,  Zonal Manager that I do not agree to any re-rolling  and that payment has to be made on due date.  I  also  informed  the  same  to  Shri  Ramnathan.   I  remember that I also gave the same information to  Shri Venkatkrishnan at Kolkata on telephone.”

He was corroborated by PW-45 who stated:

“Shri  Harshad  Mehta  told  us  that  he  and  Mr.  Margabanthu had already decided that the period  of discounting will be extended by one month.”

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From the aforementioned evidence, it is evident that PW-44 informed  

about his decision for insistence of payment to Accused No. 2 and PW-45  

also  informed  of  the  same  to  Accused  No.  1.   We can  understand  that  

Accused No. 2 being a high-ranking Officer was informed particularly in  

view of the fact that if the Bank does not get back the money, it has to take  

loan for the purposes of having call money, but the very fact that the high-

ranking officers also informed the Accused No. 8, speaks a volume.  We  

would consider this aspect of the matter a little later.  

Admittedly, even on 24.4.1992 payments were not made either by the  

drawer or by the acceptors. At this stage, it may not be necessary to consider  

the  submission  of  Mr.  Bhattacharyya  that  in  terms  of  Section  32  of  the  

Negotiable  Instruments  Act,  it  was  the  acceptor’s  liability  and  not  the  

drawer’s liability, for the simple reason that whosoever’s liability it was, the  

fact remained that the money had not been re-deposited.   Indisputably, UCO  

bank had to make payment out of its own funds.  As by reason thereof a  

shortfall occurred, call money was borrowed from two other banks, namely,  

Corporation Bank and Oriental  Bank of Commerce to the tune of Rs. 50  

crores for three days.   The evidence of PW-44 in this  regard is  relevant,  

which is as under:  

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“In view of the promissory notes executed by the  Bank  in  favour  of  Syndicate  Bank  and  Bank  of  Patiala, on due date our Bank made payments to  the two Banks in whose favour promissory notes  were signed.  The Bank made these payments from  its own funds.  The Mazda Industries and Leasing  Ltd. and Growmore Finance Ltd. did not retire the  bills of exchange on due date i.e. 24th April, 1992”

To the same effect is the evidence of PW-1:   

“These Promissory Notes were due for payment on  24th April, 1992.  In the morning I had discussed  this  with  Mr.  Prabhu.   He  asked  me  to  make  payments  in  respect  of  these  Promissory  Notes.  We had therefore made payments to the Syndicate  Bank  and  to  the  State  Bank  of  Patiala  respectively.”

We are, therefore, of the opinion that the charge of criminal breach of  

trust  stands  established  against  Accused  1,  and  2.  The  role  played  by  

Accused No. 2 in the entire chain of events is significant. The decision to  

discount the two bills of exchange at Nariman Point Branch had been taken  

by Accused No. 1 only after consulting Accused No. 2. Accussed No. 2 had  

full details of the transaction. He had also played a key role in the purchase  

of shares by UCO Bank to provide for repayment of the amount advanced by  

UCO Bank itself. He had also similarly made an endorsement for issuing a  

cheque  in  favour  of  ANZ  Grindley’s  Bank  on  account  of  JH  Mehta.  

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However  we  may  notice  that  the  role  played  by  Accused  No.  2  was  

subsidiary to that played by Accused No. 1. The entire transaction appears to  

have been gone through because of a deal struck between deceased Harshad  

Mehta and Accused No. 1. We would take note of this aspect of the case  

while  considering  the  quantum of  sentence  so  far  as  Accused  No.  2  is  

concerned.

We  agree  with  the  observations  of  the  learned  Special  Judge  that  

Accused No. 8 was not in a position to issue any directions; he being a Scale  

IV employee. He therefore could not be said to be guilty of the offence of  

Criminal  Breach  of  trust.  We  find  no  justification  advanced  by  the  

prosecution  to  interfere  with  the  judgment  of  acquittal  recorded  by  the  

learned Special Judge as regards the Accused No. 8.

CRIMINAL CONSPIRACY

Criminal  conspiracy  is  an  independent  offence.   It  is  punishable  

independent of other offences; its ingredients being:-

(i) an agreement between two or more persons.  

(ii) the agreement must relate to doing or causing to be done either  

(a) an illegal act; (b) an act which is not illegal in itself but is  

done by illegal means.   

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It is now, however, well settled that a conspiracy ordinarily is hatched  

in secrecy.  The court for the purpose of arriving at a finding as to whether  

the said offence has been committed or not may take into consideration the  

circumstantial evidence.  While however doing so, it must bear in mind that  

meeting of the minds is essential; mere knowledge or discussion would not  

be.   

As the question has been dealt with in some detail in Criminal Appeal  

No. 76 of 2004 (R. Venkatakrishnan vs. Central Bureau of Investigation), it  

is not necessary for us to dilate thereupon any further.  

We may, however, notice that recently in  Yogesh @ Sachin Jagdish  

Joshi v.  State of Maharashtra [(2008) 6 SCALE 469], a Division Bench of  

this Court held:

“23. Thus, it is manifest that the meeting of minds  of two or more persons for doing an illegal act or  an  act  by  illegal  means  is  sine  qua  non  of  the  criminal conspiracy but it may not be possible to  prove the agreement between them by direct proof.  Nevertheless,  existence  of  the  conspiracy and its  objective  can  be  inferred  from  the  surrounding  circumstances and the conduct of the accused. But  the incriminating circumstances must form a chain  of events from which a conclusion about the guilt  of the accused could be drawn. It  is  well  settled  that  an  offence  of  conspiracy  is  a  substantive  

65

offence and renders the mere agreement to commit  an offence punishable even if an offence does not  take place pursuant to the illegal agreement.”

Yet again in Nirmal Singh Kahlon vs. State of Punjab & Ors. [(2008)  

14  SCALE 639],  this  Court  following  Ram Lal  Narang vs.  State  (Delhi  

Administration [(1979) 2 SCC 322] held that a conspiracy may be a general  

one and a separate one meaning thereby a larger conspiracy and a smaller  

which may develop in successive stages.  For the aforementioned purpose,  

the conduct of the parties also assumes some relevance.  {See also Chaman  

Lal & Ors. v. State of Punjab & Ors. [JT 2009 (4) SC 662]}

In K.R. Purushothaman vs. State of Kerala [(2005) 12 SCC 631], this  

Court held:

“11. Section  120A  of  I.P.C.  defines  'criminal  conspiracy.' According to this Section when two or  more persons agree to do, or cause to be done (i)  an illegal act, or (ii) an act which is not illegal by  illegal  means,  such  an  agreement  is  designed  a  criminal conspiracy. In Major E.G. Barsay v. State  of  Bombay,  (1962)  2  SCR  195,  Subba  Rao  J.,  speaking for the Court has said:  

“The  gist  of  the  offence  is  an  agreement  to  break  the  law.  The  parties  to such an agreement will  be  guilty of criminal conspiracy, though  the illegal act agreed to be done has  not  been  done.  So  too,  it  is  not  an  ingredient  of  the offence that  all  the  parties  should  agree  to  do  a  single  

66

illegal  act,  It  may  comprise  the  commission of a number of acts." xxx xxx xxx

13. To constitute a conspiracy, meeting of mind  of two or more persons for doing an illegal act or  an  act  by  illegal  means  is  the  first  and  primary  condition  and  it  is  not  necessary  that  all  the  conspirators must know each and every detail  of  conspiracy. Neither it is necessary that every one  of  the  conspirators  takes  active  part  in  the  commission of each and every conspiratorial acts.  The  agreement  amongst  the  conspirators  can  be  inferred by necessary implications. In most of the  cases,  the  conspiracies  are  proved  by  the  circumstantial  evidence,  as  the  conspiracy  is  seldom an open affair, The existence of conspiracy  and  its  objects  are  usually  deducted  from  the  circumstances of the case and the conduct of the  accused  involved  in  the  conspiracy.  While  appreciating the evidence of the conspiracy,  it  is  incumbent on the Court to keep in mind the well- known rule governing circumstantial evidence viz.,  each and every incriminating circumstance must be  clearly  established  by  reliable  evidence  and  the  circumstances proved must form a chain of events  from which the only irresistible conclusion about  the guilt of the accused can be safely drawn, and  no other  hypothesis  against  the  guilt  is  possible.  The criminal conspiracy is an independent offence  in Indian Penal Code. The unlawful agreement is  sine quo non for constituting offence under Indian  Penal  Code  and  not  an  accomplishment.  Conspiracy consists  of the scheme or adjustment  between  two  or  more  persons  which  may  be  express  or  implied  or  partly  express  and  partly  implied. Mere knowledge, even discussion, of the  Plan would not per se constitute conspiracy. The  offence  of  conspiracy  shall  continue  till  the  termination of agreement.”

67

{See also P.K. Narayanan vs. State of Kerala [(1995) 1 SCC 142]}:

Offence had been committed purely for the benefit of Harshad Mehta.  

He was the prime beneficiary.  He appears to have made elaborate plans to  

obtain liquid cash for a short  period with a view to enable him to make  

investments in the security market so that he could obtain quick returns. He  

involved a  few Nationalized Banks in the process.   Prosecution seeks to  

establish the offence of conspiracy from the evidence of Shri S.V. Prabhu  

(P.W.  44),  Shri  Bhaskar  Roy  Choudhary  (P.W.  45)  and  Shri  R.L.  Joshi  

(P.W. 7).  If the story unfolded by the prosecution through several witnesses  

is taken to its logical conclusion, the following would emerge:

The transactions in relation to which the two bills of exchange were  

drawn  are  dated  20th March,  1992.  Growmore  and  Mazda  opened  the  

account with Nariman Point Branch of the UCO Bank on the same date on  

which the bills of exchange were presented to the Bank on 24 March 1992,  

but a resolution for the purpose of opening the account with the UCO Bank  

was passed by Growmore on 14. 03.1992 and by Mazda on 18.03.1992.  The  

conduct of Growmore and Mazda in passing the resolution for opening the  

accounts even before the alleged purchase of shares by them from JH Mehta  

68

who had drawn the bills of exchange raise doubt about the bonafide of the  

entire transaction.

Accused  No.  4  appearing  as  a  witness  made  a  statement  that  the  

transaction had been settled and executed by Harshad Mehta.  For the said  

purpose, it may be necessary to take into consideration the mode and manner  

in which the same was completed.  Indisputably, a large sum, namely, Rs.50  

crore  was  made  available  to  Harshad  Mehta  through  the  process  of  bill  

discounting.  Evidences have been clearly brought on record to show that the  

business of bill discounting was not being carried out in the Nariman Point  

Branch.  The said branch, therefore, was chosen so as to enable Harshad  

Mehta to open and operate account therein.  Accused No. 1 met Harshad  

Mehta at about 1.00 p.m. on 1.3.1992.  Accused No.8 was present in the said  

meeting.  After  meeting Harshad Mehta,  Accused No.1 came back to  the  

Bank. He asked the officers to undertake bill discounting for Harshad Mehta.  

He, however, did not disclose that for the aforementioned purpose he had  

met Harshad Mehta earlier.  Accused No. 8 was present in the said meeting.  

He, however, is said to have not taken any part therein.  During the said  

meeting itself, Accused No. 1 spoke to Accused No. 2.  Possibility of having  

transactions relating to bill discounting was disclosed.  Accused No. 2 was  

69

consulted.  Accused No. 2 did not deny or dispute receipt of the telephonic  

call but merely took a plea that according to him details thereof had not been  

furnished to him.  As a follow up of the decision taken in the meeting held  

by  Accused  No.1,  resolutions  were  passed  by  Mazda  and  Growmore.  

However,  a  note  in relation to the aforementioned meeting was prepared  

which  related  to  the  aforementioned  discussions.   Why  Nariman  Point  

Branch was chosen for carrying out the said transaction is not known.  P.W.  

44 raised objection stating that only the D.N. Road Branch used to deal with  

the matter relating to bill discounting.  It is now no longer in dispute that  

Mazda  had  approached  D.N.  Road  Branch  for  getting  the  facility  of  

discounting upto 50 crore of rupees but the same was not granted as it did  

not satisfy the eligibility requirements.  The said fact had not been disclosed.  

On the strength of the opening of the account Mazda and Growmore in the  

said Branch, two bills were presented.  It is, however, of some significance  

to notice that the original credit note relating to the alleged sale transactions  

of  shares  had  not  been  presented,  only  a  photocopy  thereof  had  been  

presented.  A sum of Rs. 50 crore is made available on the same day; no  

verification or assessment as per procedure is carried out; no security was  

taken.   Yet  again,  before  the  bills  of  exchange  were  discounted,  

rediscounting had already been done by two other branches.  The usuance  

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promissory notes, however, were issued by UCO Bank later.   Rediscounting  

is permissible only when the transaction of discounting is taken first.  P.W.  

40 said so in no uncertain terms in the following manner:

“There can be no Bills Re-discounting unless there  is a first Bill Discounting.  This Circular is only  laying  down  the  revised  procedure  for  rediscounting.  According to me, in that sense this  is covering Bills Discounting but it is correct that it  does not directly deal with Bills Discounting.”

For the purpose of covering default in retiring the bills of exchange,  

shares were purchased from J.H. Mehta by UCO Bank and a sum of Rs.  

49.50 crore were made available to it by retiring the same.  J.H. Mehta in  

turn transferred the accounts to Mazda and Growmore  

Purchase of shares of J.H. Mehta is neither denied nor disputed.  It  

was projected as a bona fide acquisition of shares in the interest of the Bank.  

However, the very fact that the principal accused made a default of  

repayment  of  Rs.  50  crores,  the  purchase  of  shares  by  the  Bank  itself  

assumes  significance.   Even  Accused  No.  2  took  prominent  part  in  the  

matter of purchase of shares. We have already noted that both Accused 1  

and Accused 2 played a major role in arranging the entire transaction. In fact  

had it not been for Accused No. 1, in our opinion it would not have been  

71

possible for Harshad Mehta or his associates to take the Bank for a ride and  

unlawfully utilize the funds of the bank.   

With  a view to  achieve the said object,  neither  the  RBI directions  

requiring bills of exchange to satisfy the tests of bona fide commercial or  

cash transactions were complied with nor the procedure laid down under the  

UCO  Bank  Manual  were  followed.   The  power  of  the  Chairman  for  

investment  in  shares  is  upto  Rs.  10  crore.   His  power  in  regard  to  bill  

discounting is only upto Rs.5 crore.  So far as other accused are concerned,  

namely Accused No.3, Accused No. 4 and Accused 5, they were not only  

residing at the same place but Accused No. 4 and Accused 5 were men of  

trust of Harshad Mehta.  A power of attorney had been executed in their  

favour.  

The Board of Directors of Growmore had by their resolution dated  

14th March, 1992 authorized Accused 4 and 5 to seek bill discounting facility  

from UCO Bank to the limit of Rs. 50 crores. The application for opening  

the account of Growmore at Nariman point had been signed by Accused No.  

4. Further on behalf of Growmore the Bill of exchange had been accepted by  

Accused No. 4. Not only this but the letter dated 24th March,1992 addressed  

to UCO Bank by Growmore undertaking to repay the amount by 24th April,  

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1992 had also been signed by Accused No. 4. Legally the Bank would have  

been concerned only with M/s JH Mehta. But the letter of Growmore signed  

by  Accused  No.  4  clerly  indicates  his  involvement  in  the  Criminal  

conspiracy.

So far as Accused No. 5 is concerned, it is he who had signed the Bill  

of Exchange as the Power of attorney of the proprietors of of M/s JH Mehta.  

It is he who had signed the forms for opening the account with the Nariman  

Point  Branch  of  UCO  Bank.  He  had  signed  the  letter  dated  23.3.1992  

requesting the Bank to discount the two bills of Exchange. The relationship  

between  the  parties  both  personal  and  professional  clearly  establishes  

criminal conspiracy on the Part of Accused No. 5. We therefore affirm the  

decision of the special judge finding Accused No. 5 guilty of the offence of  

Criminal Conspiracy.

As we have already mentioned  Accused Nos. 6,  7 and 9 have not  

preferred appeals before us challenging their conviction. We find no reason  

to interfere with the judgment of conviction arrived at by the learned Special  

Judge with respect to the said accused.

We however disagree with the conclusions arrived at by the learned  

Special Judge with regard to the guilt of Accused No. 8 for the offence of  

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Criminal Conspiracy. The mere fact that he might have been present at the  

meeting dated 14.3.1992 of the officers of UCO Bank by itself does not in  

our opinion conclusively prove his involvement in the conspiracy hatched by  

the other officers of the Bank. Something more was needed to be shown that  

he was a party thereto.    

In conclusion we hold Accused No. 1 (K. Margabanthu), Accused No.  

2 (Ramaiya Venkatkrishnan), Accused No. 4 (Ashwin Mehta) and Accused  

No. 5 (Sudhir Mehta) guilty of the offence of Criminal conspiracy. We need  

not interfere with the conviction of Accused 6, 7 and 9. Accused No 8 (S.V.  

Ramanathan) is acquitted of the charge of Criminal Conspiracy.

SENTENCING

We must,  while  pronouncing  on the  sentence  to  be  passed  on  the  

accused make note of the fact that the CBI has not preferred any appeals for  

enhancement  against  the impugned judgment  of  the  Special  Court.   This  

Court, therefore, cannot impose a higher sentence.

Accused No. 1, K Margabanthu had been sentenced to undergo RI for  

a  period  of  six  months  and  to  pay  a  fine  of  Rs.1,00,000/-  in  default  to  

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undergo SI for two months, by the learned Special Judge.  We find no reason  

to interfere therewith.

Accused  No.  2,  Ramaiya  Venkatkrishnan  had  been  sentenced  to  

undergo rigorous imprisonment (RI) for three months and to pay a fine of  

Rs. 50,000/- in default simple imprisonment (SI) for 15 days, by the learned  

Special Judge. We set aside the sentence of the special judge and sentence  

him to imprisonment for a period of one month of RI and to pay a fine of  

Rs.1,00,000/- and in default thereof Simple Imprisonment for 15 days.  

Accused No. 4 Ashwin Mehta is sentenced to undergo RI for a period  

of  one  month  and  to  pay  a  fine  of  Rs.1,00,000/-  in  default  Simple  

Imprisonment for 15 days.  

Accused  No.  5  (Sudhir  Mehta)  is  sentenced  to  undergo  Rigorous  

Imprisonment for a period of one month and to pay a fine of Rs.1,00,000/- in  

default Simple Imprisonment for 15 days.

  All  the  accused  should  be  entitled  to  set  off  for  the  period  of  

imprisonment undergone by them in this case.

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..…………………………..…J.     [S.B. Sinha]

..…………………………..…J.  [Cyriac Joseph]

New Delhi; August 7, 2009

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