Karnataka Valmiki corporation scam: High court says RBI rule not valid ground for referring probe to CBI

“I have not accepted the interpretation of section 35 A to become a ground for reference to the CBI. If I permit that then every banking institution may ask. The DSPE (Delhi Special Police Establishment) Act will become redundant,” Justice M Nagaprasanna observed.

The case has political undertones on account of the ED arrest of B Nagendra on charges of money laundering even as a special investigation team did not find evidence to implicate the former Scheduled Tribes welfare minister in a criminal case. The ED has alleged that Nagendra used the funds diverted from the corporation for the Lok Sabha elections in the Bellary constituency.

After his release last month on bail, however, the former minister alleged that he was forced by ED officials to name Chief Minister Siddaramaiah and Deputy Chief Minister D K Shivakumar in the case.

Rs 94.73 crore deposited by the corporation with Union Bank of India’s M G Road branch in Bengaluru in March 2024 was siphoned away to 18 accounts linked to a firm in Telangana and subsequently sent to multiple accounts. The police filed a case against bank officials and others.

The SIT, however, did not name the bank officials or Nagendra in its first chargesheet in the case.

Union Bank of India filed a separate complaint with the CBI, and a case of cheating, fraud and corruption was registered by the central agency. The bank also approached the Government seeking a reference of the entire investigation to the CBI on June 19, and two days later approached the court with the plea.

The main question before the court was whether section 35A of the Banking Regulation Act empowers the RBI to seek a direction to refer a matter to the CBI.

“In the considered view of this Court, Section 35A of the Act will not give teeth to any banking industry to choose the investigating agency of the investigation being conducted in a particular State. If this would be permitted, it would be doing violence to the statute itself,” Justice Nagaprasanna observed in his order.

“This renders the DSPE Act redundant, as the existence of CBI is under DSPE Act, and it can intervene in any State only in terms of the DSPE Act or when such investigations are handed over to the CBI by the Apex Court or this Court,” the order further said.

Fraud reflects ‘a sorry state of affairs’ but…

The high court observed that the fraud in the scheduled tribes corporation “projects a very sorry state of affairs of the state”. “When the Ministers or high functionaries who are involved in particular allegations and those allegations are being investigated into, such investigations must be entrusted to independent agencies, agencies which are not under the control of the State Government and it is only then it would instil public confidence in the investigation or provide credibility to such investigation. But that cannot be an interpretation of Section 35A of the Act, as is projected by the learned Attorney General,” the court said.

The court added that if any banking institution is permitted “to seek transfer of investigation to the hands of the CBI, it would be giving Section 35A the powers that the Statute itself does not confer”.

According to the court, the section empowers the RBI only with “the supervisory and complete control of the affairs of any banking institution”. “Merely because certain officers of the Union Bank of India/the petitioner are accused at the stage of registration of crime and the fact that the Union Bank of India, as necessary in law qua the Bank, has approached the CBI, would not mean that this Court would accept such far-fetched interpretation of Section 35A,” the court said.

“Non-acceptance of the submission of the learned Attorney General of India would not however mean that the CBI, which is investigating into the crime registered by the petitioner, cannot draw those persons into the web of proceedings, even if they are dropped by the State in Crime No.118 of 2024 or any other person accused in the crime, but that can happen only in accordance with law,” the court added.

Background of the scam

The Congress government has accused the BJP government at the Centre of launching a witch hunt to target Siddaramaiah, who is also the finance minister, through the ED investigation.

The Rs 94.73 crore scam surfaced on May 26, 2024, after an accounts officer in the corporation died by suicide following the disappearance of a portion of Rs 187 crore deposited from the state treasury and other bank accounts in a new account opened for the corporation in the MG Road branch of Union Bank of India.

The emergence of the scam forced the resignation of Nagendra.

The SIT investigation has found that the funds from the corporation were siphoned to 18 primary accounts in Telangana and Andhra Pradesh created by Satyanarayana Verma, who is accused in a similar scam in Chhattisgarh in 2022, and his associates. The funds were subsequently routed to over 170 secondary accounts, from where they were withdrawn.

The scam rocked the state legislature in July after Opposition parties sought Siddaramaiah’s resignation by taking “moral responsibility” for the fraud.

Over 20 people have been linked to the fraud and 14 of them arrested by the SIT. No bank officials, however, have been arrested or charged despite their names figuring in the FIR.

The accused include six officials of Union Bank of India, two officials of the corporation—MD Padmanabha G J and accounts officer Parashuram Dugganavar—and eight others including Nagendra’s close associates.