The State of Karnataka on Monday opposed the petition filed by the Union Bank of India before the Karnataka High Court seeking transfer of the probe into the alleged multi-crore Valmiki Corporation scam to the Central Bureau of Investigation (CBI).

Senior Advocate BV Acharya, who appeared for the State, told Justice M Nagaprasanna that the central agency was synonymous with the Central government. Therefore, the CBI taking over the investigation from the State will effectively mean the Centre encroaching upon the State’s federal powers, he added.

“The CBI has no inherent power to entertain or investigate any case. The State's powers cannot be interfered with by the Central government. The police's power is a statutory one and consistent with the Constitutional provisions. The CBI means the Union government. The Central government is present here today even though it is not a party. It is present through its two wings - the CBI and the Union Bank."

Senior Advocate Prof Ravivarma Kumar, who appeared for the Valmiki Corporation, also opposed the Bank’s petition and said it was a “proxy petition.”

Attorney General of India R Venkatramani, who appeared in his personal capacity for the Union Bank of India, opposed the argument that the CBI was the alter ego of the Central government.

“I am not getting into the argument whether the CBI is the alter ego of the Central government or not because that is not relevant to the case. What the RBI says is that the CBI is the only investigating authority in such cases. 35A is an overarching set of provisions and any systemic risk to the banking functions will all fall under 35A,” Venkatramani said.

Justice Nagaprasanna reserved his orders in the matter and said that he would consider two points on the maintainability of the present petition. Firstly, whether it should be sent to the Supreme Court under Article 131, which gives the apex court original jurisdiction over legal disputes between states or between the states and the Union. Secondly, whether the master circular issued by the Reserve Bank of India (RBI) under Section 35A of the Banking Regulation Act - as per which banking frauds beyond a certain amount must be investigated by the CBI - is a blanket order.

The alleged scam pertains to misappropriation of Karnataka Maharshi Valmiki Scheduled Tribes Development Corporation funds. It came to light in May this year after the Corporation's accounts superintendent Chandrashekhar died by suicide at his residence. Chandrashekhar had left behind a note alleging misappropriation of the welfare funds.

Soon after, the Karnataka government constituted a Special Investigation Team to probe the allegations while the Enforcement Directorate (ED) too began a separate probe.

As per the ED, around ₹90 crore was illegally transferred from the Valmiki Corporation’s Union Bank of India account to several unauthorised accounts.

Interestingly, a first information report (FIR) was registered against ED officers probing the Valmiki Corporation case, but Justice Nagaprasanna had stayed that probe.

The Bank later approached the Court for a CBI probe.

The High Court had sought the State government's response in the matter in July this year.