Classification of RCoM account as fraud
Granting interim relief to Anil Ambani in proceedings involving Reliance Communications group companies, the Bombay High Court on Wednesday (Annexure-A) stayed all coercive action by public sector banks and warned lenders that the Reserve Bank of India’s Master Directions are “not a mere paper tiger” to be ignored at will.
Justice Milind N Jadhav halted action by Bank of Baroda, IDBI Bank and Indian Overseas Bank, including show cause notices and fraud classification orders against Ambani and RCom, holding that banks cannot invoke RBI norms selectively or act without strict adherence to statutory procedure. The court held that the forensic audit report dated October 15, 2020 was “prima facie inconclusive and incomplete” and noted that it was not signed by a qualified Chartered Accountant, as required under law.
The High Court further held that classification of an account as fraud, or initiation of adverse proceedings solely on the basis of a forensic audit report (FAR), without compliance with the statutory and procedural framework, is legally unsustainable. “It is seen that classification of an account as fraud or initiation of adverse proceedings founded merely on a forensic audit, without fulfilment of the governing statutory and procedural framework, is legally unsustainable,” Justice Jadhav observed.
The court underscored that RBI’s Master Directions impose mandatory obligations on banks and cannot be treated as optional or ornamental guidelines. The court noted that lenders cannot remain inactive for years and later initiate drastic action without adhering to timelines, safeguards and due process prescribed under the RBI framework, particularly when dealing with public money.
In a strongly worded order, Justice Jadhav stated, “The Master Directions of RBI are not a mere paper tiger to enable the Banks to wake up from their deep slumber and initiate action according to their convenience. Had the concerned accounts of Plaintiff being Red Flagged on account of one or two EWS in the year 2013 itself or even thereafter and had the Banks acted strictly in consonance with the prevailing Master Directions, the present situation would not have arisen. The Banks are equally accountable and answerable. I say this so because in the present case, the figures are humongous. They rattle a common man who places his hard earned savings with Public Sector Banks with the hope that they shall remain in safe custody and grow.”
Pointing to the allegations made in FAR about a substantial portion of Rs 31,580 crore being siphoned off, the court said, “It is alleged in the FAR that loans were used for sanction purposes and were siphoned off. The aforesaid figures ring a bell and alarm. Monies with Banks is public money and therefore accounting and/or Audit standards are to be applied strictly as per relevant statutes. Though this issue may not be directly relevant or important to decide the interim relief, the question that begs an answer in this situation is the answerability of the banking system and concerned Banks and to whom. In my opinion in such a situation the Banks are answerable to the common man who reposes faith in the Banks by making investments and deposits. Banks are custodians of public money.”
“If Banks themselves do not follow the Rule of Law and timelines as prescribed under the RBI Master Directions which is prima facie observed in the present case and take action at the right time it will affect the broader economy of the country,” the court added.
