The Bombay High Court on Tuesday ruled that public sector banks do not have the power in law to issue Look Out Circulars (LOCs) against default borrowers.

The HC's verdict would render all LOCs issued by such banks against defaulters as quashed.

A division bench of Justices Gautam Patel and Madhav Jamdar held as unconstitutional the clause of an office memorandum issued by the central government empowering the chairpersons of public sector banks to issue LOCs against default borrowers.

Advocate Aditya Thakker, appearing for the Union government, sought the HC to stay its order but the bench refused.

The court passed its verdict on a bunch of petitions challenging validity of the said clause.

The bench said the Bureau of Immigration shall not act upon such LOCs (issued by banks against defaulters).

The court also said its judgment would not affect the orders issued against any defaulter by a tribunal or a criminal court restraining them from travelling abroad.

While the office memorandum issued by the Centre was not ultra vires the Constitution, the clause empowering the chairperson of a public sector bank to issue LOC was "arbitrary and without power in law", the HC said.

The Centre's office memorandum, in an amendment made in 2018, empowered the public sector banks to issue LOCs in the "economic interest of India".

This essentially restrained a person from travelling abroad if his/her departure could be detrimental to the economic interest of the country.

The petitioners contended that the words "economic interest of India" cannot be equated with the "financial interests" of any bank.