B.O.I. FINANCE LIMITED ETC. versus THE CUSTODIAN AND ORS. ETC.

Citation: [1997] 3 S.C.R. 51 · Decided: 19-03-1997 · Supreme Court of India · Bench: A.M. AHMADI · Disposal: Appeal(s) allowed

Cited by 2 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

B.0.1. FINANCE LIMITED ETC. 
A 
v. 
THE CUSTODIAN AND ORS. ETC. 
MARCH 19, 1997 
[AM. AHMADI, CJ., S.P. BHARUCHA AND B.N. KIRPAL, JJ.] 
B 
Banking Regulation Act 1949, ss. 21, 35-A, 36(1) (a) and (b) r/w 
Secwities Contracts (Regulation) Act 1956, s. 16 and Special Court (Trial of 
Offences relating to Transactions in Securities) Act 1992, s. ]()--Circulars is-
sued by Reserve Bank of India under Banking Act prohibiting ready-f 01ward C 
transactions-Special Court holding ready forward contracts entered into by 
appellant banks in violation of circulars to be illegal (/Jld ordering retum of 
securities to Custodian-Held, non-compliance of circulars did not result in 
invalidation of contract by banks with third parties. 
Contract Act 1872, ss.23 and 57-Ready-fonvard contracts entered into D 
by appellant banks with third parties in violation of Rese1ve Bank of India 
circulars-Whether ready leg of transaction severable from the forward 
leg-Held, yes; the ready leg having been pe1fonned, the f 01ward leg which 
alone was illegal, had to be ignored. 
Trai1sfer of Property Act 1882, s.5, 6(11) r/w Sale of Goods Act 1930, 
ss.4, 19 and 20-Ready-forward contracts entered into by appellant banks with 
third parties in violation of Rese1ve Bank of India circular:.-Wliether illegality 
of agreement preceding transfer of title in securities could invalidate the 
transf e1-H eld, no; illegality off onvard leg could not affect transfers that had 
already taken place. 
The appellant banks had prior to June 6, 1992, entered into ready-
fonvard contracts with different brokers for the purchase and sale of 
certain securities which were not listed on any stock exchange. These 
E 
F 
transactions consisted of two inter-connected legs, viz., the first or the G 
ready leg, consisting of purchase or sale of certain securities at a specified 
price, and the second or fonvard leg, consisting of the sale or purchase of 
the same or similar securities at a later date at a price determined on the 
first date. 
The ready leg of the transactions were completed with the appellants H 
51 
52 
SUPREME COURT REPORTS 
[1997] 3 S.C.R. 
A paying the agreed price and receiving the delivery of securities agreed to 
be purchased. Before the forward leg could be completed, a Special Court 
(Trial of Offences relating to Transactions in Securities) Ordinance, 1992 
was issued on June 6, 1992 which was subsequently replaced by the Act 
('Special Court Act'). The Custodian, under the Special Court Act filed 
B applications before the Special Court to the effect that the ready forward 
contracts entered into between the banks and the notified persons were in 
violation of the Banking Regulation Act, 1949 ('Banking Act') and the 
Securities Contracts Regulation Act, 1956 and therefore void. Consequent-
ly those securities which had been sold to the appellants in the ready leg 
continued to be, in law, the properties of the notified persons and stood · 
C attached under s. 3 (3) of the Special Courts Act. The Custodian required 
the Special Court to direct the appellant banks to return the said 
securities. 
Allowing the applications of the respondents, the Special Court held 
that the circulars issued under the Banking Act were binding and the ready 
D forward contracts being contrary thereto were illegal and void in respect 
of the third parties. The appellants were directed to return the securities 
to the Custodian. 
· 
In this Court the appellants contended that the violation of the 
E circulars issued under the Banking Act did not invalidate the contracts 
entered by them with their customers. Further, the forward· leg of the 
transaction, which was alone illegal, was severable from the ready leg and 
had to be ignored. Even assuming that the transaction was not severable, 
the ready leg having been performed, the illegality of the agreements could 
F 
not invalidate the transfers that had already taken place. 
Allowing the appeals, this Court 
Held : 1.1. Infringements of the instructions issued by the Reserve 
Bank of India under the Banking Regulation Act, 1956 prohibiting the 
G banks from entering into buy-back arrangements did not invalidate such 
contracts entered into between the banks and it's customers. The instruc-
tions which were issued by the circulars were meant to be complied with 
by the banking companies only and did not purport to, nor could they, be 
binding on third parties. [87-A-B, 70-A-B] 
H 
1.2. It would be unjust and inequita

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