MUMBAI, July 24: The advisory board on bank frauds has absolved former United Bank of India chairman RC Kapoor of any involvement in a Rs 25.5-crore compromise deal with a GP Goenka firm. Kapoor is the banking ombudsman for Punjab, Haryana, Jammu & Kashmir.

The panel, headed by former Reserve Bank of India deputy governor SS Tarapore, has not found fault with Kapoor's "commercial judgement". The compromise settlement, the panel says, was a "calculated risk" taken by the former bank chairman to recover the dues, and hence the case should not be referred to the Central Bureau of Investigation (CBI).

However, the board's recommendation has become slightly controversial with one of its five members, Satish Sawhney, issuing a dissent note saying the CBI should be allowed to register a regular case and investigate the matter.

The panel submitted its findings on the compromise case along with the dissent note to Reserve Bank of India governor this week. It will be forwarded to the finance ministry soon.

Finance minister P Chidambaram had announced the formation of the advisory board in February this year following widespread resentment among public sector bank executives against alleged harassment by the investigating agencies in the country.

The board's basic role is to "advise the Reserve Bank of India on the cases referred to it by the CBI either directly or through the ministry of finance for investigation/registration of cases against bank officers of the rank of general manager and above.

The panel, apart from Tarapore, consists of retired judge of Mumbai high court justice BV Chavan, retired secretary (government of India) BN Bhagwat, former director-general of police (Maharashtra) Satish Sawhney and chartered accountant YH Malegam.

United Bank struck a tripartite compromise deal with New Tobacco Company, a subsidiary of GP Goenka group company Duncan Agro Industries Ltd (DGIL), and RD Builders, the SL Dugar-controlled construction company, which took over the ailing NTC on a three-year lease. RD Builders, according to bank sources, acted as a financial proxy for GP Goenka.

The bank granted a credit facility in 1965 to National Tobacco Co, which was amalgamated with Duncan Agro in 1977. It was subsequently spun off as a subsidiary of the GP Goenka group as New Tobacco Co. Between 1986 and 1990, the bank filed four suits against Duncan Agro, NTC and GP Goenka for recovery of bad debts worth Rs 17.8 crore with interest.

In 1991, the Calcutta high court ordered a winding-up order for NTC and in June 1993, the court granted a decree for Rs 22 crore (with 17.5 per cent simple interest) in favour of the bank. Kapoor took over as chairman of the bank in April 1994. The Reserve Bank blacklisted 14 GP Goenka companies the same year and cautioned banks against granting advances to them as NTC was charged with misappropriation of tobacco stocks hypothecated to the bank and diversion of proceeds.

Against this background, the bank board struck a compromise deal spilitting the liability between NTC (Rs 13 crore) and RDB (Rs 12.5 crore). On December 5, 1994, the board turned down a Rs 10-crore compromise proposal. Khaitan & Co, the solicitor firm engaged by the GP Goenka group, immediately followed it up with another proposal (dated December 23), and the next board meeting on December 28 cleared the Rs 25.5-crore compromise deal.

The brief board note said NTC would pay Rs 13 crore, while RD Builders would settle Rs 9 crore and interest at the rate of 10 per cent with the maximum limit pegged at Rs 3.5 crore.

The board, however, asked RB Builders to get a bank guarantee from any commercial bank which, however, could not be obtained. This is because banks are not allowed to issue a guarantee to another bank ensuring a borrower's repayment.

Soon after, the Calcutta high court dismissed all UBI suits filed against the company and the Reserve Bank withdrew the caution notice to the banks. Finally, on January 20, 1995, the high court drew the curtains on the case by directing the bank to issue no-objection certificates (NOC) to Duncan Agro, GP Goenka and RD Builders for accessing funds from other banks and financial institutions. Subsequently, RD Builders refused to pay up the committed amount.

Kapoor retired on December 31, 1995, and was subsequently appointed banking ombudsman by the Reserve Bank. Six months later, in July 1996, the department of supervision (DoS) of the Reserve Bank found fault with the deal following its inspection of the bank's books.

According to UBI sources, the bank entered into the compromise deal for an "abnormally low" amount at a time when the defaulting company was under pressure to settle the dues following the Calcutta high court's decree in favour of the banks and the RBI caution note blacklisting the GP Goenka group companies.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.