Case Law On Major Banking Fraud Prosecutions
🏦 Major Banking Fraud Prosecutions: Case Law and Explanation
1. CBI v. Ketan Parekh (2003 onwards)
Court: Special CBI Court, Mumbai; appeals in Bombay High Court & Supreme Court
Background:
Ketan Parekh, a stockbroker, was accused of manipulating stock prices using funds illegally obtained from banks, particularly the Bank of India and Madhavpura Mercantile Cooperative Bank (MMCB). He diverted funds through “circular trading” and falsified accounts.
Allegations:
Misuse of bank funds amounting to hundreds of crores.
Violation of RBI norms on capital market exposure.
Criminal breach of trust and conspiracy (Sections 120B, 420, 409 IPC).
Legal Issues:
Whether Ketan Parekh’s acts amounted to criminal conspiracy and fraud.
Whether banks’ internal officials were complicit.
Judgment & Principle:
The CBI proved collusion between Ketan Parekh and some bank officials. He was convicted for fraud and cheating under IPC Sections 420 and 120B.
Key Legal Principle: Misuse of bank funds for speculative stock trading constitutes criminal breach of trust when there is collusion between borrower and bank officer.
Impact:
Led to stricter RBI norms and re-examination of interbank exposure to capital markets.
2. State Bank of India v. M/s. N. Sukumar & Ors. (2011)
Court: Madras High Court
Background:
The accused took loans under multiple names using forged documents and fictitious firms.
Legal Issues:
Whether submission of false documents to obtain loans constitutes “cheating” and “forgery.”
Liability of guarantors and co-conspirators.
Judgment:
The court held that presenting false balance sheets, fake collateral, and inflated valuation reports amounted to cheating (Section 420 IPC) and forgery for the purpose of cheating (Section 468 IPC).
Principle:
The intention to defraud at the inception of the loan application makes it a criminal act, not a civil dispute.
3. CBI v. Harshad S. Mehta & Ors. (1992 Securities Scam Case)
Court: Bombay High Court and Special CBI Court
Background:
Harshad Mehta used fake bank receipts (BRs) and colluded with officials of National Housing Bank, State Bank of India, and other institutions to siphon off over â‚ą4,000 crores from the banking system.
Legal Issues:
Whether use of fake BRs constitutes criminal breach of trust.
Liability of bank officials who facilitated transactions.
Judgment:
Mehta and associates were charged under Sections 409, 420, 467, 471 IPC and Section 13(1)(d) of the Prevention of Corruption Act.
Court observed that misrepresentation of bank receipts and diversion of funds amounted to criminal conspiracy and corruption.
Key Principle:
Any act by a bank officer violating fiduciary duty for personal or third-party benefit constitutes “criminal breach of trust by public servant.”
Impact:
Led to creation of SEBI’s stronger oversight and reform in government securities trading system (introduction of SGL forms and electronic clearing).
4. Punjab National Bank (PNB) v. Nirav Modi & Mehul Choksi (2018)
Court: Ongoing before Special CBI and ED Courts; PMLA Appellate Tribunal
Background:
PNB officials issued fraudulent Letters of Undertaking (LoUs) in favor of Nirav Modi and Mehul Choksi’s companies without proper collateral. The total fraud was approximately ₹13,000 crores.
Charges:
Cheating and criminal conspiracy (Sections 120B, 420, 409 IPC).
Offences under Prevention of Money Laundering Act (PMLA).
Violation of RBI norms and SWIFT message procedures.
Judicial Findings (So Far):
The special court held that LoUs issued without sanction and record entry were fraudulent and criminally conspiratorial acts.
Nirav Modi extradition proceedings in UK recognized the fraud as prima facie proven.
Principle:
If a bank officer issues credit instruments (like LoUs) beyond authority for private gain, it’s a criminal breach of trust and not just departmental misconduct.
Impact:
Led to RBI discontinuing LoUs/LoCs for import transactions and tightening SWIFT system integration.
5. CBI v. Vijay Mallya & Kingfisher Airlines Ltd. (2016 onwards)
Court: Special CBI Court (Mumbai), Extradition trial in UK
Background:
Loans worth over â‚ą9,000 crores from a consortium of banks (led by SBI) were allegedly diverted for purposes other than those stated in the loan agreement.
Legal Issues:
Whether misrepresentation of financial position constitutes fraud.
Whether diversion of borrowed funds amounts to criminal breach of trust.
Judgment (Ongoing):
Courts have recognized prima facie that Mallya conspired with bank officials to obtain loans by misrepresentation. Assets were seized under Fugitive Economic Offenders Act, 2018.
Principle:
Fraudulent diversion of loan proceeds with dishonest intent constitutes criminal breach of trust and money laundering.
Impact:
Strengthened enforcement under the FEO Act and increased due diligence in corporate lending.
6. CBI v. Ramesh Gelli & Madhavpura Mercantile Co-operative Bank Ltd. (2001–2013)
Court: Supreme Court of India (2016)
Citation: (2016) 3 SCC 788
Background:
Ramesh Gelli, ex-chairman of Global Trust Bank, was prosecuted for sanctioning loans beyond permissible limits and granting unsecured advances.
Legal Issue:
Whether a private bank chairman could be considered a “public servant” under the Prevention of Corruption Act.
Judgment:
Supreme Court held that officers of private banks, after RBI’s notification under Section 46A of the Banking Regulation Act, are deemed “public servants.”
Principle:
Corruption laws apply equally to officers of private banks if they perform public financial functions.
Impact:
Expanded PCA applicability to private banking sector and increased accountability.
⚖️ Summary of Legal Principles from These Cases
| Legal Principle | Key Statutory Provision | Illustrative Case |
|---|---|---|
| Cheating and Misrepresentation | Section 420 IPC | SBI v. N. Sukumar |
| Criminal Breach of Trust by Banker | Section 409 IPC | CBI v. Ketan Parekh; Nirav Modi case |
| Forgery and Use of False Documents | Sections 467–471 IPC | Harshad Mehta Case |
| Public Servant Liability | Prevention of Corruption Act | Ramesh Gelli Case |
| Money Laundering from Bank Fraud | PMLA, 2002 | Vijay Mallya; Nirav Modi |
| Conspiracy and Collusion | Section 120B IPC | Harshad Mehta; PNB Fraud Case |
Conclusion
These cases collectively show that banking fraud is treated as a criminal act, not a civil wrong, when dishonest intention exists at the outset.
They also emphasize:
Accountability of bank officials, even in private institutions.
Integration between criminal law, banking regulation, and anti-corruption statutes.
The need for strict compliance and internal audits in banks.
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