New Delhi: Seven years after India’s biggest banking fraud came to light, a special CBI court in Mumbai has cleared former PNB executive director K.V. Brahmaji Rao in the Rs 23,000 crore Nirav Modi fraud case, saying there was no evidence to show he gained from the scam and that negligence, if any, on his part cannot be equated to criminal intent to the cheat the bank.
In charge of 7,000 branches of PNB, the court said it was “humanly impossible” for him to monitor each one of them. The court ruled that mere negligence without proof of criminal intent cannot amount to corruption. There was no “prima facie case” made out against PNB’s Rao, the court said. The decision is the first in the case involving the diamantaire, who has himself been declared a fugitive by the court.
Special CBI Judge A.V. Gujarathi delivered the judgement on 3 September, which was uploaded on 8 September. The judge was particularly critical of the attempt to prosecute Rao despite the lack of evidence, stressing that the seriousness of the fraud alone could not justify bringing every senior officer under the scanner.
The court said it was a “serious economic offence and (that a) huge amount of thousands of crores of rupees is involved in the offence is no ground to drag everyone into the prosecution, even (those) not remotely connected with the crime.”
The case involves fraudulent issuance of Letters of Undertaking (LoUs) from PNB’s Brady House branch in Mumbai between 2011 and 2017, allegedly amounting to over USD 3.7 billion (about Rs 23,780 crore). Absconder Nirav Modi and his uncle Mehul Choksi are the prime accused, alongside several bank employees.
Charges and allegations against Rao
The Central Bureau of Investigation (CBI) filed a case in January 2018 after PNB lodged a complaint about large-scale fraud through 1,214 LoUs issued without following due procedure. While branch-level officials like Gokulnath Shetty and Manoj Kharat were accused of issuing fraudulent guarantees, Rao was later named in a supplementary chargesheet.
Rao’s name figured in the 2019 supplementary chargesheet of the CBI. It led to his dismissal from the job.
CBI’s chargesheet argued that as an executive director, Rao failed to act on Reserve Bank of India (RBI) directives warning banks about fraud related to SWIFT (international payment interface). The CBI claimed that despite RBI’s “caution advice” issued in August 2016, Rao did not take corrective measures to protect PNB, thereby facilitating the fraud.
The charges included conspiracy to commit cheating (Section 420 IPC), criminal breach of trust by a public servant (Section 409 IPC), and criminal misconduct under Sections 7, 13(1)(c), 13(1)(d), and 13(2) of the Prevention of Corruption Act.
RBI circulars and internal decisions
The CBI’s case centered on Rao’s alleged failure to implement RBI directives on integrating the SWIFT system with the bank’s Core Banking Solution (CBS). However, the court noted that after the RBI circular in August 2016, a meeting was promptly convened with top officials. The responsibility for implementing SWIFT-CBS integration lay with the Information Technology Division, headed by another executive director, and the decision to align it with a subsequent software upgrade was taken by PNB’s MD & CEO.
This, the court held, placed the matter beyond Rao’s jurisdiction. Moreover, PNB’s head office did circulate the RBI’s caution notice to branches, which showed some compliance from Rao’s side.
‘Humanly impossible’ to monitor all branches
In his order, Special CBI judge Gujarathi observed that Rao was in a “supervisory role” and could not have personally monitored transactions in each branch or been aware of day-to-day operations.
“…the applicant/accused was not directly working at the branch where the fraud was committed by employees. The applicant/accused was working in supervisory capacity. More than 7,000 branches were under his control. Under these circumstances, it is humanly impossible to keep an eye on the transactions taking place in each and every branch,” the judge added.
“Admittedly, there is no material on record to show that fraudulent activities of the co-accused, particularly bank employees, were brought to the notice of the present applicant/accused,” the court added.
The order further clarified that Rao had not received “any illegal consideration/gratification out of the said fraudulent transactions”.
‘Mere negligence not a criminal offence’
Rao had filed a discharge plea claiming he was only involved in high-level policy decisions, not in issuing LoUs. His defence argued that negligence, if any, could not be equated with criminal misconduct, especially in the absence of mens rea (criminal intent).
The court agreed, stating that “dishonest intention or mens rea is the sine qua non of an offence under Section 13(1)(d) of the PC Act, and mere procedural irregularities or lapses in judgment, in absence of corrupt intent, do not constitute criminal misconduct”.
Citing earlier judgments, the court reiterated that conspiracy cannot be presumed on vague allegations without evidence of a “meeting of minds” between the accused and the main perpetrators.
‘Dragging everyone in’ not justified
“The mere fact that the offence is a serious economic offence and a huge amount, thousands of crores of rupees, is involved in the offence is no ground to drag everyone into the prosecution, even (those) not remotely connected with the crime,” the court said.
It added that permitting the proceedings to continue against Rao would serve no useful purpose and subject him to “unwarranted harassment, contrary to the constitutional guarantee of fair procedure”.
“The accused/applicant had played no role in commission of the crime in any manner whatsoever. The internal and external auditors were in fact responsible for mandatory reporting of deviations,” the court said.
Finding no prima facie evidence of criminal conspiracy or corrupt intent, the court concluded that “no useful purpose would be served in continuing proceedings” against Rao.
“The allegations are vague and unsupported by material evidence. Permitting the proceedings to continue against the accused would subject him to unwarranted harassment”, thereby discharging Rao from all charges under IPC and the Prevention of Corruption Act.
(Edited by Viny Mishra)
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