The Case That Ensnared Former SBI Chairman Pratip Chaudhuri

The officers had travelled early and reached their intended destination in coordination with Delhi Police to serve a non-bailable arrest warrant against Pratip Chaudhuri, former chairman of State Bank of India, currently a director on the board of Alchemist Asset Reconstruction Co.

Chaudhuri read the arrest warrant issued by the Chief Judicial Magistrate in Jaisalmer and had no choice but to go with the officers.

"He did not resist the warrant and came with us willingly. We took him and left for Jaisalmer on the same day and presented him in front of the magistrate the next day," Karan Singh, station house officer, Sadar police station, who led the arrest formalities, told BloombergQuint.

The warrant was issued under Sections 420, 409 and 120 of the Indian Penal Code, in response to a protest petition filed by Harendra Singh Rathore and Lokendra Singh Rathore. The petition was filed after a 2015 first information report filed by the petitioners did not yield desired results.

BloombergQuint could not reach representatives for the Rathores.

Chaudhuri was put under a 14-day judicial custody under the magistrate's orders. He received bail on Nov 9.

But as news of the arrest emerged, it stirred up another storm in the banking sector, which has often felt that genuine commercial decisions are vilified and bankers prosecuted even when not justified.

“While there have been several reactions in the public space, from the banking community as well as a previous chairman, I will only say that it appears that the individual was not given an opportunity to be heard before issuing the arrest warrant," Dinesh Khara, the current chairman of SBI, said while addressing reporters last week.

Uday Kotak, managing director and chief executive officer at Kotak Mahindra Bank Ltd., called for a change in the criminal justice system, which would protect "bona fide" decisions made by bankers.

The case dates back nearly 14 years.

It pertains to Garh Rajwada, a hotel project in Jaisalmer owned by Hotel Gaudavan Pvt. In 2007, SBI had financed the project. In about a year, the company had defaulted on repayment of Rs 25 crore to the bank and later in 2010, a key promoter died.

According to a statement released by SBI after Chaudhuri's arrest, the bank had initiated recovery proceedings against the account after it turned non-performing in June 2010. "As recovery efforts failed, approvals for sale to the ARC were taken in January 2014, the assignment to ARC was completed in March 2014," SBI said.

Chaudhuri retired from SBI in September 2013 and joined the board of Alchemist ARC in October 2014.

In 2015, the promoters of Hotel Gaudavan filed an FIR at the Sadar police station against Alchemist ARC alleging that SBI sold the property at a low of Rs 25 crore, when the actual of the asset was very high. They also alleged that officials of SBI had helped Alchemist ARC acquire the properties at a low .

The police department filed a closure report in December 2015, stating that the dispute was civil in nature and not criminal and closed the FIR, Alchemist ARC said in a statement.

However, the matter did not end there. A protest petition was filed by the promoters in 2017, without the knowledge of the ARC, it said.

"The CJM Jaisalmer, without issuing any summons, accepted the protest petition filed by the ex-directors of HGPL (Hotel Gaudavan) in 2017, took cognizance, and issued non-bailable warrants against the persons for appearance," the ARC said in its statement.

Manish Nihalani, chief operating officer, Alchemist ARC, said that the allegations raised by the promoters of Hotel Gaudavan are "an absolute act of their notorious nature against the law".

The Insolvency Proceedings

While the criminal proceedings were ongoing, Alchemist ARC filed a petition to initiate insolvency proceedings against Hotel Gaudavan in 2017. The National Company Law Tribunal in Delhi admitted the insolvency proceedings in March 2017 and appointed Arunava Sikdar as resolution professional, according to the order.

The proceedings though were tumultuous. Months after the insolvency petition was admitted, Sikdar could not take control of the assets. In Sept. 2017, the NCLT noted in its publicly available order that the promoters of Hotel Gaudavan had created unnecessary complications in the implementation of the insolvency proceedings.

First, when the resolution professional went to the hotel building to take control, the general manager at the hotel refused to comply with the NCLT order.

The promoters also convened a board meeting and initiated arbitration proceedings against Alchemist ARC in May 2017. The NCLT had declared this arbitration as "illegal and unlawful" as the board was no longer in control of the company and a moratorium on legal proceedings was in place.

According to a person directly involved with the insolvency proceedings, who spoke on the condition of anonymity, the promoters created other impediments by filing multiple criminal and civil cases against the resolution professional and Alchemist ARC.

Alchemist ARC filed a special leave petition at the Supreme Court against the various legal proceedings initiated by the erstwhile promoters of Hotel Gaudavan.

"The facts of the present case disclose a very sorry state of affairs," the apex judiciary noted in its order in Oct. 2017, quashing an FIR against the resolution professional filed by erstwhile promoters and allowing the IBC proceedings to go unimpeded.

Finally in Dec. 2017, a resolution plan by JFC Finance (India) Ltd. was approved by the committee of creditors and presented to the NCLT. The erstwhile promoters of Hotel Gaudavan filed a challenge against the resolution plan stating that JFC Finance had originally financed Alchemist ARC's purchase of the loans from SBI in 2014, something which was hidden by the resolution applicant and the financial creditor.

The NCLT dismissed this plea stating that there was no law against JFC Finance submitting a resolution plan in the case, while being an investor in Alchemist ARC. Further, an appeal by the promoters to file a resolution plan of their own was also dismissed. The resolution plan approved by the creditors received judicial approval and JFC Finance was allowed to assume control over assets of Hotel Gaudavan.

JFC Finance is a non-bank finance company registered in Sept 1998, based in Delhi. The company provides commercial loans for industrial units, plant and equipment, real estate, consumer goods, among other things.

As per last available financials, JFC Finance had a loan portfolio of Rs 58.04 crore as of March 2019, compared with Rs 71.83 crore a year ago. It reported a net loss of Rs 2.38 crore for fiscal 2018-19 and capital adequacy ratio of 17.29%.

"The scale of operation of the company is at smaller level. The company also faces single borrower concentration risk as more than 50% of the lending is to a single entity. The company has invested substantial amount of Rs 114.63 as current investment in security receipts," rating agency Brickwork Ratings noted in a note in July 2019.

In June this year, Brickwork Ratings downgraded the rating for the company's Rs 25 crore non-convertible debentures to C+, as JFC Finance did not cooperate with the rating agency, declining to provide further financial information.

An emailed query to JFC Finance remained unanswered. Phone lines to the company were temporarily out of service. Queries emailed to Alchemist ARC on JFC Finance remained unanswered.

For Chaudhuri, the next steps will be legal remedies, even as the banking fraternity comes to his defence.

The Indian Banks' Association has sent representations to the Rajasthan government and even sought a meeting with Chief Minister Ashok Gehlot to intervene. Alchemist ARC, where other directors have also been named in the warrant, is also seeking legal help in the matter.

Like in past such instances, bankers warn of a chilling effect. According to the chief executive of a large public sector lender, who spoke on the condition of anonymity, the arrest has put a dent in banker confidence just as the lending cycle is picking up and the fear of prosecution could impact decision-making.

According to Tripti Shetty, a criminal lawyer, in normal criminal proceedings, the judicial magistrate is required to issue summons, then a bailable warrant and only then a non-bailable warrant. "Typically, this is the process followed by a judicial magistrate. Further, someone under judicial custody can definitely apply for bail. Considering that the closure report by the police had stated that this is a civil proceeding and the matter is quite old, chances of bail are reasonably good," Shetty said.

This story has been updated after Pratip Chaudhuri received bail on Nov 9.