Reasoned fraud classification orders must address the defence; mere reproduction of a notice or report is unsustainable.

A fraud classification order under RBI's fraud directions must be reasoned and must independently address the noticee's defence; a mere reproduction of the show cause notice or forensic report is invalid. The Bombay HC found the impugned order substantially unreasoned because it recorded background facts and conclusions without explaining why the petitioner's specific objections were rejected, and quashed the fraud classification. On the facts, the petitioner had ceased to be a director before the account was declared NPA and no material showed attributable transactions during the relevant review period, so fresh fraud proceedings for that same period were declined.

---

---

Issues: (i) Whether the order classifying the petitioner's account as fraud was vitiated for want of reasons and failure to consider the petitioner's defence under the RBI fraud directions; (ii) Whether, on the facts of the case, the bank could restart or continue fraud proceedings for the relevant review period against the petitioner.

Issue (i): Whether the order classifying the petitioner's account as fraud was vitiated for want of reasons and failure to consider the petitioner's defence under the RBI fraud directions.

Analysis: Clause 2.1.1.4 of the Master Directions on Fraud Risk Management requires a reasoned order stating the relevant facts and circumstances, the submissions made against the show cause notice, and the reasons for classification as fraud or otherwise. The impugned order merely recited the background, reproduced the forensic auditor's observations, and recorded the issuance of opportunities, but did not deal with the petitioner's specific defences or explain why they were unacceptable. The order was found to be substantially a reproduction of the show cause notice, with conclusions appended without independent reasoning.

Conclusion: The fraud classification order was held to be wholly unreasoned and unsustainable, and it was quashed.

Issue (ii): Whether, on the facts of the case, the bank could restart or continue fraud proceedings for the relevant review period against the petitioner.

Analysis: The petitioner had ceased to be a director before the account was declared NPA, and the materials relied upon did not disclose any transaction attributable to him during the short period in which he remained a director within the review period. In these peculiar facts, further fraud proceedings for the same review period were found incapable of being sustained.

Conclusion: Liberty to reinitiate fraud proceedings against the petitioner for the review period was declined.

Final Conclusion: The fraud declaration against the petitioner was set aside and no fresh fraud proceedings for the same review period were permitted, resulting in complete relief to the petitioner.

Ratio Decidendi: Where a regulatory direction mandates a reasoned fraud classification order, the authority must independently address the noticee's defence and record reasons for rejecting it; a mere reproduction of the show cause notice or forensic report without such reasoning is invalid.

---