Bengaluru: The Karnataka High Court yesterday dismissed a petition by Union Bank of India seeking transfer of the investigation of the alleged scam involving the Karnataka Maharshi Valmiki Scheduled Tribes Development Corporation Ltd to the Central Bureau of Investigation (CBI).

The petition was heard by Justice M. Nagaprasanna, who ruled that Section 35A of the Banking Regulation Act could not be used as grounds for such a transfer. He noted that allowing this could lead to an overreach by banking institutions, potentially undermining the Delhi Special Police Establishment Act (DSP Act).

The case, reserved for judgment on Sept. 30, focused on two main questions: whether the petition should be referred to the Supreme Court under Article 131 of the Constitution, and if Section 35A of the Banking Regulation Act justified seeking a CBI investigation without invoking the DSP Act.

The Karnataka Government, represented by senior advocate B.V. Acharya, argued against allowing the petition, stating that the State Police have the statutory authority to investigate the case, and this authority should not be overridden by the Central Government.

Acharya emphasised that any dispute between the Central and State Governments must be addressed by the Supreme Court, not the High Court, as per Article 131 of the Constitution. He added that the RBI’s master circular does not grant CBI the power to register or investigate cases and Section 35A of the Banking Regulation Act does not extend such authority.

Senior Advocate Prof. A. Ravivarma Kumar, representing the state-run Corporation, supported the State’s stance.

The illegal money transfer scam involving the Karnataka Maharshi Valmiki Scheduled Tribes Development Corporation came to the fore, after its accounts superintendent, P. Chandrasekharan, died by suicide on May 26, leaving behind a note.

After the scam came to light, Congress MLA B. Nagendra resigned as the Scheduled Tribes Welfare Minister in June. The Enforcement Directorate (ED) had in July arrested Nagendra under the provisions of the Prevention of Money Laundering Act (PMLA) and also five other key accused during the investigation. He was released on bail last month.

The ED had said its investigation revealed that under the influence of Nagendra, the account of the Corporation was moved to the M.G. Road Branch (of the bank) without any proper authorisation, where Rs. 187 crore, including Rs. 43.33 crore from the State Treasury under the ‘Ganga Kalyana Scheme’, were deposited without following proper procedures and in violation of government guidelines.

These funds were subsequently siphoned off through multiple shell accounts and converted into cash and bullion. ED investigation also revealed that an amount of Rs 20.19 crore of the diverted funds was used to support a candidate contesting the 2024 Lok Sabha election from the Bellary Constituency, as well as for the personal expenses of Nagendra, the federal probe agency has said.