Look Out Circulars issued by Public Sector Banks are invalid as the empowering MHA clause stands quashed.

The Petitioner was a non-executive/independent director of Educomp Solutions Limited (ESL) and its group entities, which availed loan facilities from a consortium of banks led by the State Bank of India (SBI)

Following alleged financial irregularities, SBI requested a Look Out Circular (LOC) against the Petitioner on 17.05.2019

Subsequently, the CBI registered FIRs naming the Petitioner by virtue of his directorship, though no specific overt acts were alleged against him

The Petitioner challenged his "fraud" classification by SBI in a prior writ petition; following the Supreme Court’s ruling in SBI v. Rajesh Aggarwal, SBI withdrew the "fraud" tag and removed the Petitioner's name from its fraud database

The Petitioner filed the present writ seeking the quashing of the LOC on the grounds that the authority of Public Sector Banks (PSBs) to request LOCs has been invalidated and that he is a non-executive director with no role in day-to-day management

1. Whether a Look Out Circular issued at the instance of a Public Sector Bank official remains legally sustainable following the quashing of the enabling provision by the Bombay High Court

2. Whether the LOC against a non-executive director should be maintained despite the withdrawal of "fraud" tagging and lack of evidence of non-cooperation

Division Bench judgment of the Bombay High Court in Viraj Chetan Shah v. Union of India, which quashed Clause 6(B)(xv) of the Ministry of Home Affairs (MHA) Consolidated Office Memorandum of 2021 (and its 2010 predecessor) for being ultra vires Article 14, thereby stripping Chairmen and CEOs of Public Sector Banks of the power to request LOCs

Section 149(12) of the Companies Act, 2013, which protects non-executive/independent directors from liability for corporate acts unless committed with their knowledge, consent, or connivance

Supreme Court's principles in State Bank of India v. Rajesh Aggarwal regarding natural justice in fraud declarations

The Court observed that the legal foundation for the impugned LOC—the power of PSB officials to request such circulars—was invalidated by the Viraj Chetan Shah decision

While that judgment is under challenge before the Supreme Court, the Court noted that no stay has been granted on its operation, rendering the enabling clause non-existent in law

Applying this to the facts, the Court found the LOC issued at SBI's behest unsustainable

The Court highlighted that SBI had already withdrawn the "fraud" classification against the Petitioner, and the CBI was no longer persisting with an LOC against him

Given the Petitioner’s status as a non-executive director and the absence of any material suggesting he had evaded the process of law since 2019, the Court determined there was no justification to keep the LOC open

The authority of PSBs to request LOCs currently lacks legal sanction and that the Petitioner’s continued cooperation with investigative agencies negated the need for travel restrictions

The quashing was made subject to the Petitioner furnishing an affidavit undertaking to cooperate with ongoing investigations and to provide any documents in his possession as requested by the authorities

The petition was disposed of in these terms