We’ll lose, but will die trying

Not accepting ANZ’s settlement makes NHB more vulnerable, but no official has the guts to say so

IF you’re looking for a real horror story on India’s judicial system, and how this is compounded by the short-sightedness of public sector managers, then the National Housing Bank-ANZ Grindlays’ story is your story. For the past 42 months it’s being played out in the country’s Supreme Court, and may remain there for several more years, given how clogged the courts are.

The ANZ story began in March-April 1992 when NHB issued nine cheques worth Rs 506 crore in the name of ANZ, and handed these to scamster Harshad Mehta. He gave these to ANZ, and had them credited to his account. Though what ANZ did (giving NHB’s money to Harshad) was illegal, it appears this was industry practice. To cite precedents, NHB had issued four similar cheques worth Rs 52 crore to ANZ, and ANZ had given this money to Harshad — NHB never objected to this, either then or later Also, NHB had issued similar cheques worth Rs 707 crore to State Bank of India, and Rs 95 crore to State Bank of Saurashtra — they too credited this to Harshad’s accounts. Why did these banks also give Harshad the money if it wasn’t industry (certainly NHB) practice?

Anyway, when the Securities Scam broke out, NHB asked ANZ to return its money. ANZ refused, saying it had given this to Harshad. NHB said it had not authorised ANZ to give the money to Harshad. While both banks were fighting, the RBI leaned on ANZ. ANZ paid up, but insisted on an arbitration.

The arbitration went in ANZ’s favour. While questioning NHB’s staffers, and going through its records, the judges found NHB was lying about its dealings with Harshad. NHB staffers said, for instance, the bank had no dealings with Harshad, but couldn’t explain why the bank had Rs 258 crore of Harshad’s securities lying with it. Or why, while their books of accounts showed transactions with ANZ, there were no corresponding broker receipts for this. In some cases, where NHB’s ledgers showed securities transactions of Rs 2,500 crore with Syndicate Bank, NHB officials confessed that Rs 1,200 crore of these were actually with Fairgrowth Financial Services, and so on. In 1997, the arbitration judges ruled that NHB’s cheques were indeed intended for Harshad, and ruled that NHB refund with interest the money ANZ had given it — this was, by now, Rs 912 crore including an 18 per cent interest.

NHB then appealed against this at the Special Court (of Justice S.N. Variava), set up to try all cases relating to the Securities Scam. Justice Variava set aside the arbitration award arguing, essentially, that it didn’t matter if NHB had dealings with Harshad, what mattered was there were no instructions from NHB that said ANZ should give the Rs 506 crore to Harshad. ANZ, in turn, appealed against the Special Court’s judgement to the Supreme Court in March 1998, arguing that Variava had acted beyond his jurisdiction.

For purposes of this column, which has got complicated enough already, we needn’t go into the details of this. But, suffice it to say that the very purpose of having arbitration clauses built into contracts is so that long-drawn court trials are avoided. More important, even if the arbitration judgement is set aside by the Supreme Court, logically, it will go back to an arbitration court for a review.

Now comes the story of the behaviour of NHB’s managers. ANZ which sold its corporate and retail banking India-business last year has made several offers, the last of which offers to pay NHB Rs 980 crore as an out-of-court settlement. ANZ’s reasons for this are obvious — one, it has quit India and doesn’t want the case to drag on forever. Second, there is no doubt that its actions, though in keeping with prevalent business practice, were illegal.

NHB, however, refuses to take the offer, preferring instead to wait for the Supreme Court judgement, whereby it feels it could stand to get over Rs 1,700 crore, including interest payments. But there could be a few slips here. For one, the court could send the case back for arbitration — in which case, it could take years. Or, let’s say the court gives a final award in favour of NHB. In that case, ANZ could ask for a review. Most certainly, it will argue the 18 per cent interest rate is much higher than that in India during the period of dispute — that’s another delay of a few years, and the amount NHB would get is likely to fall by a few hundred crores. Of course, if NHB loses the case, the State Bank of India and the State Bank of Saurashtra cases will also go against it, and it will lose another Rs 2,200 crore here.

Most sensible managers would, in NHB’s shoes, go for a settlement. For one, it could lose. And, even if it wins, it won’t get the money for years, apart from its case not looking that strong. Besides, even the RBI has specified that when going in for settling dud loans, banks could consider getting back the principal amount and forgoing the interest payments. The reason NHB can’t settle, however, is that it will be accused of selling out to ANZ. And that’s something no public sector manager, or politician, can risk. Much better to risk losing it all — after all, what matters to the gullible public, is that you fought valiantly, even if it was a doomed fight.

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