Introduction

The Supreme Court recently clarified that all bank employees (including those employed by private sector banks) will be treated as public servants for the purposes of anti-corruption law.

In its February 23 2016 judgment in Central Bureau of Investigation v Ramesh Geli,(1) when interpreting Section 46A of the Banking Regulation Act 1949 the Supreme Court held that every chair, managing director, director, auditor, liquidator, manager and any other employee of a banking company will be deemed to be a public servant under the anti-corruption legislation in India – the Prevention of Corruption Act 1988.

This ruling has significant implications, as all employees, officers and key managerial personnel of banking companies (private sector, public sector and branches of foreign banks) will now come under the purview of the Prevention of Corruption Act.

Legal analysis of Section 46A of Banking Regulation Act

Section 46A of the Banking Regulation Act provides as follows:

"Every Chairman who is appointed on a whole-time basis, Managing Director, Director, auditor liquidator, manager and any other employee of a banking company shall be deemed to be a public servant for the purposes of Chapter IX of the Indian Penal Code (45 of 1860)."

Chapter IX of the Penal Code (45/1860) dealt with offences related to illegal gratification by a public servant – for example, obtaining a valuable object without consideration.

In 1988 the Prevention of Corruption Act repealed Chapter IX of the Penal Code and established a separate comprehensive legislation which deals with corrupt activities by public servants. The Prevention of Corruption Act prescribes various penalties for corrupt acts by public servants, including acts such as:

  • taking illegal gratification to carry out an official act;
  • taking gratification by corrupt means; and
  • obtaining a valuable thing in connection with conducted business.

Under the Prevention of Corruption Act, a public servant may face severe penal consequences for corrupt actions, including imprisonment for six months or more.

Decision

In Ramesh Geli Justice Gogoi stated as follows:

"The enactment of the Prevention of Corruption Act with the clear intent to widen the definition of 'public servant' cannot be allowed to have the opposite effect by expressing judicial helplessness to rectify or fill up what is a clear omission in Section 46A of the [Banking Regulation Act]. The omission to continue to extend the deeming provisions in Section 46A of the [Banking Regulation Act] to the offences under Sections 7 to 12 of the Prevention of Corruption Act must be understood to be clearly unintended and hence capable of admitting a judicial exercise to fill up the same."

In concurring judgments in Ramesh Geli, Justice Gogoi and Justice Pant held that the reference to Chapter IX of the Penal Code in Section 46A of the Banking Regulation Act must be read as a reference to the Prevention of Corruption Act and that the reading of Section 46A would be that "Every Chairman who is appointed on a whole-time basis, Managing Director, Director, auditor liquidator, manager and any other employee of a banking company" must be deemed to be a public servant under the Prevention of Corruption Act.

Comment

The definition of 'banking company' under the Banking Regulation Act is "any company which transacts the business of banking". 'Company' is broadly defined in Section 3 of the Companies Act 1956 (1/1956) and includes foreign companies within the meaning of Section 591 of the act. This definition also includes all companies and branches of foreign banks which are licensed to carry out the business of banking. Therefore, all employees of private sector banks in India and employees of branches of foreign banks licensed as scheduled commercial banks in India will be deemed to be public servants under the Prevention of Corruption Act.

This decision is likely to increase compliance costs for banks and has widened the scope of regulatory scrutiny and review at a time when the government is seeking to ease the regulatory burden surrounding doing business in India.

For further information please contact Shilpa Mankar Ahluwalia or Suswagata Roy at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700) or email (shilpa.mankar@amarchand.com or suswagata.roy@amsshardul.com).

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