Issuance of Look out Circular by the Bank: Legal Perspective in view of recent Judicial pronouncements

Look-Out Circulars (LOCs) are tools primarily used by law enforcement agencies in India to track or restrict the movement of individuals who are wanted for an investigation or judicial proceedings. In recent years, an increasing number of LOCs have been issued at the request of banks, especially public sector banks, against individuals accused of loan defaults. While the motive is often to prevent high-value defaulters from absconding, the legality of this practice has become a subject of serious judicial scrutiny.

The question arises:
Can banks, dealing with essentially civil disputes, request an executive restriction like an LOC, which significantly affects an individual's fundamental rights?

The present blog delves into the legal underpinnings, judicial pronouncements, and constitutional issues surrounding the issuance of LOCs by banks, and highlights the procedural safeguards mandated by Indian courts.

LEGAL FRAMEWORK GOVERNING LOCs:
There is no specific statutory enactment that directly governs LOCs in India. Instead, they are governed by administrative instructions issued by the Ministry of Home Affairs (MHA). The primary guidelines come from various Office Memorandums (OMs), particularly the OM dated 27.10.2010 and the updated OM dated 22.02.2021, which outline the conditions and process for opening and maintaining LOCs.

According to these guidelines:

• An LOC can be issued in cognizable offences where the accused is evading arrest or is likely to leave the country to evade trial or investigation.

• The request must originate from a law enforcement agency or another competent authority.

• The request must be approved by an officer not below the rank of Deputy Secretary in the concerned department.

However, ambiguity exists regarding whether banks or financial institutions qualify as competent originating agencies, especially in cases involving civil liability without any criminal investigation.

However, the Delhi High Court in Sumer Singh Salkan v. Assistant Director & Ors. [ILR (2010) VI Delhi 706] laid down the foundational guidelines that LOCs can only be issued in cases involving criminal liability and not mere financial disputes. Prior to issuance of LOC there must be some checklist to be complied. For this purpose Hon’ble High Court framed few following questions to themselves and answered accordingly for the better understanding of need and necessity of such a coercive steps i.e., issuance of LOC against an individual. The questions are as under:

Ques (A) What are the categories of cases in which the investigating agency can seek recourse of Look- out-Circular and under what circumstances?

Ans. Recourse to LOC can be taken by investigating agency in cognizable offences under IPC or other penal laws, where the accused was deliberately evading arrest or not appearing in the trial court despite NBWs and other coercive measures and there was likelihood of the accused leaving the country to evade trial/arrest.

Ques(B): What procedure is required to be followed by the investigating agency before opening a Look- out-circular?

Ans: The Investigating Officer shall make a written request for LOC to the officer as notified by the circular of Ministry of Home Affairs, giving details & reasons for seeking LOC. The competent officer alone shall give directions for opening LOC by passing an order in this respect.

Ques (C.): What is the remedy available to the person against whom such Look-out-Circular has been opened?

Ans: The person against whom LOC is issued must join investigation by appearing before I.O. or should surrender before the court concerned or should satisfy the court that LOC was wrongly issued against him. He may also approach the officer who ordered issuance of LOC & explain that LOC was wrongly issued against him. LOC can be withdrawn by the authority that issued and can also be rescinded by the trial court where case is pending or having jurisdiction over concerned police station on an application by the person concerned.

Ques (D). What is the role of the concerned Court when such a case is brought before it and under what circumstances, the subordinate courts can intervene?

Ans: LOC is a coercive measure to make a person surrender to the investigating agency or Court of law. The subordinate courts' jurisdiction in affirming or cancelling LOC is commensurate with the jurisdiction of cancellation of NBWs or affirming NBWs.

Further, in Vikram Sharma & Ors. v. Union of India [MANU/DE/1994/2010], the court held that statutory bodies like the National Commission for Women (NCW), which are not criminal law enforcement agencies, cannot request the issuance of LOCs. The court directed the MHA to issue a clarification to prevent such misuse. Thereafter MHA issued an official circular which paved the jurisdiction, authority and power to issue LOC vide Notification No. 25016/31/2010-Imm dated 27.10.2010.

Judicial View on Banking-Related LOCs: In Reshma Mittal v. Union of India [2023], the Delhi High Court quashed an LOC issued at the behest of State Bank of India in a money recovery case, where there was no criminal charge or investigation. The court observed that such coercive measures in purely civil disputes violate Article 21 of the Constitution.

The Bombay High Court in Viraj Chetan Shah v. Union of India (WP. No. 719 of 2020) addressed a series of petitions involving multiple banks requesting LOCs in civil recovery matters. The Court held that unless there is a substantiated criminal investigation—such as fraud or money laundering—mere loan default does not warrant such restrictions on travel.

Bombay High Court stated that public sector banks do not have the power to issue Look Out Circulars (LOCs) against individuals, particularly those who are unable to repay loans. This decision highlighted that the power to issue LOCs, previously held by bank chairpersons, managing directors, and chief executives, was deemed arbitrary and without legal basis. The court emphasized that the "economic interest of India" cited in the authorization for issuing LOCs cannot be equated with the "financial interests" of a bank.

An office memorandum from the Central government previously allowed public sector banks to request the issuance of LOCs to prevent individuals from traveling abroad if their departure was deemed detrimental to the "economic interest of India".

The Bombay High Court, in a recent ruling, quashed this clause, stating that it was an overreach of executive power and an infringement on the fundamental right to travel.

The court found that the power to issue LOCs was being used as an "arm-twisting tactic" by banks to recover debts, rather than for genuine national security or law enforcement concerns. The court also noted that the power was not equally applied to private sector banks, leading to discrimination.

PROCEDURAL SAFEGUARDS AND DUE PROCESS
LOCs, being restrictive of an individual’s right to travel abroad, must satisfy the test of reasonableness and due process. Article 21 of the Constitution guarantees the right to personal liberty, which includes the right to travel abroad, as upheld in Maneka Gandhi v. Union of India [1978 AIR 597]. Any restriction must therefore be just, fair, and reasonable.

The Delhi High Court in Mohd. Kashif v. Union of India [WP. (Crl.) 2057 of 2022] emphasized that LOCs are coercive instruments and must not be issued routinely. It stressed that issuance must be predicated upon a real and credible apprehension that the individual may abscond.

Moreover, in Sandeep Singh Deswal v. State (GNCTD) WP. (Crl.) 275 of 2023, the court reiterated that suspicion alone cannot justify an LOC. The petitioner, despite having a chargesheet against him, was permitted to travel due to his cooperation and the absence of any prior evasion.

IMPACT ON FUNDAMENTAL RIGHTS
Courts have consistently held that indiscriminate issuance of LOCs, especially without criminal proceedings, violates the right to equality under Article 14 and personal liberty under Article 21. In Shukla Rani v. UOI WP. ( C) 2048 of 2023], the Delhi High Court quashed an LOC against a woman who was only a guarantor to a loan and not an accused, emphasizing that such restrictions must be based on legal necessity, not on assumptions.

Academic commentary also supports this judicial approach. As highlighted by P. Arun in his article in the International Journal of Law and Legal Jurisprudence Studies, LOCs are part of a broader surveillance apparatus and risk becoming tools of state coercion if not judiciously applied.

CONCLUSION AND WAY FORWARD
The judiciary has sent a clear message: Look-Out Circulars are not to be used as instruments of civil debt recovery. Banks must refrain from seeking LOCs unless the case involves criminality, such as fraud or money laundering, supported by an FIR and an active investigation.

The government must issue clearer statutory guidelines to prevent the misuse of LOCs and ensure their issuance only in legally justified scenarios. There is also a need to create an appellate or review mechanism to allow individuals to challenge wrongful LOCs promptly.

In a constitutional democracy, the balance between enforcement of laws and protection of individual rights is sacrosanct. While it is essential to prevent wilful defaulters from fleeing jurisdiction, it is equally important to uphold the rule of law and protect the civil liberties enshrined in the Constitution.