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Court rules against Grindlays bank in scam-related case

The Special Court of Justice S N Variava on Wednesday set aside the Rs 9.12-billion arbitration award in the National Housing Bank-ANZ Grindlays Bank case. The case relates to the infamous securities scandal involving Bombay Stock Exchange broker Harshad Mehta, which was exposed in 1993.

In handing out its judgement, the judge reversed the order passed by the arbitration committee which had favoured the Australian-New Zealand bank. As a result, Grindlays will have to repay NHB Rs 9.12 billion that it had received in March 1997, plus interest at 18 per cent for 10 months, making the total about Rs 10.75 billion.

Delivering the verdict, Justice Variava said there were "errors of law apparent" in the arbitration award. "They are all based on applying wrong principles of law. The award, in my view, must be set aside," he said. Under the Arbitration Act 1940, Indian courts have the power to modify, remit and set aside arbitration awards.

ANZ is all set to take the matter to the Supreme Court. The bank's lawyers -- Dave &; Girish &; Co -- however, said that they had not yet received a brief from their clients about the next course of action. The bank will have to move the Supreme Court within 30 days of the verdict's announcement (February 4, 1998). If it does file an appeal, ANZ Grindlays will not have to make any payment to NHB.

The court's decision implies that State Bank will not be able to file recovery proceedings to get back almost Rs 15 billion back from NHB. The State Bank, like ANZ Grindlays, was forced to pay NHB around Rs 7 billion 1993 by the Reserve Bank of India. With interest, the amount will now be worth more than Rs 15 billion.

The case has been in dispute since 1992, when ANZ Grindlays credited cheques worth around Rs 5 billion, drawn in its favour by NHB, into the account of Harshad Mehta. The money was lost in the scandal, causing a massive loss to the National Housing Bank.

When NHB asked ANZ to return the cheques, the latter refused. The Reserve Bank finally intervened and forced ANZ to return the money to NHB. ANZ Grindlays agreed on the condition that it could take the case to the arbitration committee.

Consequently, as per the arbitration committee judgement, NHB had to pay ANZ Rs 9.12 billion (principal Rs 5 billion + interest). This situation has now been reversed.

Reserve Bank officials were pleased with the verdict. Deputy Governor Jagdish Capoor said: "The verdict has vindicated the Reserve Bank's stance. We understand that the other party is planning to move Supreme Court. We intend to put our views across to the Supreme Court. We are very happy with the verdict."

The State Bank of India, on the other hand, will now wait to see if the Supreme Court rules in favour of ANZ before it can hope to start proceedings to get its money back.

The special court, in its ruling, has held ANZ Grindlays guilty of conversion of NHB cheques worth Rs 5.06 billion to Harshad Mehta's account. It said that NHB is the true owner of the cheques issued under Section 131 of the Negotiable Instruments Act, 1881.

The special court has, however, not commented on the fraud involved since the arbitrators had taken different views with regard to the fraud between NHB and Harshad Mehta as well as that between ANZ and Harshad Mehta.

Justice Variava said in his judgement that it was not necessary for the respondent (ANZ Grindlays) to merely prove that some transactions took place but there had been no independent finding in the arbitration committee report which established that the transactions were with Harshad Mehta.

The judge said that instead of the petitioner showing that the transactions were with Harshad Mehta, the respondent should establish the same. He added that the arbitrators refrained from finding whether these transactions were with Mehta, but had said that it were.

Independent findings were available only in the transaction of the first two cheques, which stated that these two transactions were most likely to be with Harshad Mehta, while in the case of the remaining seven cheques, there were no independent findings by the arbitrators.

Justice Variava stated in his conclusion that the arbitration committee report also did not have any categorical findings on whether the transactions were with Mehta.

However, ANZ Grindlays' lawyers said the money will have to be repaid to NHB only in the event of the Supreme Court turning down the appeal of the foreign bank. "This was made very clear while the verdict was delivered at the special court," said a senior lawyer at Dave & Girish & Co.

On March 29, 1997, the three-member arbitration panel, headed by former Supreme Court chief justice M H Kania, ruled in favour of ANZ Grindlays. The award was the result of a split 2:1 verdict.

The arbitration panel held that ANZ Grindlays was not guilty of wrongly crediting account payee cheques worth over Rs 5.06 billion in the account of Mehta. These cheques were drawn on the Reserve Bank of India in early April 1992, by the NHB. The arbitration proceedings, which were spread over more than 300 meetings in five years, saw more than Rs 150 million spent in litigation.

The NHB challenged the arbitration award saying that if ANZ's action was upheld, it would have grave implications for the Negotiable Instruments Act, 1881. Besides, the prevailing payment system in the country -- through account-payee cheque -- would be severely affected.

Compiled from the Indian media