TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 384
X X X X Extracts X X X X
X X X X Extracts X X X X
....ommunications Ltd. ("RCOM") as 'fraud' and reporting the name of the Petitioner to the Respondent No.2 - Reserve Bank of India ("RBI") in terms of the Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions dated 15th July 2024 ("Master Directions 2024") and as such seeks quashing and setting aside of the same. 2 Brief facts giving rise to this petition with which we are concerned, are as under: a) On 22nd September 2012, the Respondent No.1 - SBI sanctioned term loans of INR 1500 Crore to RCOM; INR 125 Crore to Reliance Telecom Limited (hereinafter referred to as 'RTL') and also a non-fund based facility to the tune of INR 859.59 Crores to RCOM. b) On 29th August 2016, the Respondent No.1 - SBI sanctioned term loans of INR 565 Crore to RCOM and INR 635 Crore to Reliance Infratel Limited (hereinafter referred to as 'RITL'). c) On 1st July 2016, the RBI notified the Master Directions on Fraud - Classification & reporting by Commercial Banks & Select Financial Institutions ('Master Directions 2016'). d) In 2017, since RCOM failed to comply with its obligations under res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Petitioner to understand the basis on which impugned SCN was issued and would allow the Petitioner to defend himself; and that non-furnishing of all relevant documents was in breach of the judgment dated 27th March 2023 of the Apex Court in Rajesh Agarwal (supra). (vi) that the Petitioner would provide a detailed response/reply upon receipt of the documents. g) On 5th March 2024, the Respondent No.1 - SBI responded to the Petitioner's aforesaid letter and also called upon the Petitioner to make his submission within 15 days from the receipt of the letter. h) On 19th March 2024, the Petitioner, through his Advocate's letter, acknowledged receipt of Respondent No.1's letter, and stated that 'the Bank instead of providing the documents requested has provided an incomplete copy of the investigation report prepared by BDO India LLP ('BDO') in which several pages were re-dacted'. Accordingly, the Petitioner requested the Respondent No.1 to provide all documents and materials relied upon by the Bank, including the complete BDO report and suitable time of 4 weeks to respond, thereafter. i) On 15th July 2024, in view of Supreme Court decision in Rajes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....contrary to the principles of natural justice i.e. failure to give an opportunity of personal hearing; and non adherence to judicial pronouncements (Rajesh Agarwal (supra) and other judgments); (ii) that the impugned SCN did not contain any allegation against the Petitioner and that it was only in the impugned order that an addition to the effect, that the Petitioner was the Chairman, Promoter, Non-independent Director and the person having control on RCOM, was sought to be made, thereby violating the principles of natural justice; (iii) that the impugned order passed against the Petitioner is contrary to clause 2.1 of the Master Directions 2024, as the Petitioner was not a whole time Director; and that Clause 4.4.1 of the Master Directions 2024 does not create vicarious liability on the Petitioner for any alleged fraud committed by RCOM; and (iv) that the impugned SCN issued under the erstwhile Master Directions 2016 stands superseded in view of the Master Directions 2024. In conclusion, Mr. Khambata contended that the findings and observations in the impugned order are untenable and as such, cannot be sustained, warranting quashing and setting aside ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... case. Mr. Chinoy, further countered the argument canvassed by Mr Khambata by submitting, that the mere fact that the Master Directions 2016 were superseded by the Master Directions 2024 does not render the SCN issued prior to such supersession, as non-est. He submitted that issuance of Master Directions 2024 does not invalidate the SCN issued prior to the said Directions, and that it only meant that post the Master Directions 2024, the proceedings would have to be continued in compliance with the provisions of the new Directions. Mr. Chinoy also brought to our attention Para 10 of the Master Directions 2024, which state the "instructions/guidelines listed in the Appendix stand repealed" and that the Master Directions 2016 does not appear in the list of Directions repealed. In view of the aforesaid submissions, Mr. Chinoy defended the impugned order passed by SBI, pursuant to the impugned SCN dated 20th December 2023 and urged us to dismiss the petition. 5 Mr. Andhyarujina, learned senior counsel appearing for the RBI concurred with the submissions advanced by Mr. Chinoy. He submitted that there is no vested right in a party to be given an oral/personal hearing. He submitted ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The conclusions are summarised below: 98.1. No opportunity of being heard is required before an FIR is lodged and registered. 98.2. Classification of an account as fraud not only results in reporting the crime to the investigating agencies, but also has other penal and civil consequences against the borrowers. 98.3. Debarring the borrowers from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrower. 98.4. Such a debarment under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrowers for being untrustworthy and unworthy of credit by banks. This Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted. 98.5. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time-frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borrowers before classifying their acco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....preme Court in the Rajesh Agrawal (supra). Thus, the deviation relevant to the present matter in the Master Directions 2024 from the Master Directions 2016 is that a SCN must be issued, containing the complete details of transactions, etc. on the basis of which declaration and reporting of fraud is being contemplated. 11 It is settled law that if a subsequent Government Order or Direction is declared to be in the nature of clarification of the earlier Order/Direction, it may be made applicable retrospectively. It is only if the subsequent Order/Direction is held to be a modification or a substantive amendment of the earlier order, its application shall be prospective as the retrospective application thereof, would result in withdrawal of vested rights which is impermissible in law. In a decision of the Supreme Court in State of Bihar v. Ramesh Prasad Verma [(2017) 5 SCC 665], it is observed that it is trite that any legislation or instrument having the force of law which is clarificatory or explanatory in nature and purport, and which seeks to clear doubts or correct an obvious omission in a statute, would generally be retrospective in operation. The footnote to the relevant cla....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ued prior to the Master Directions 2024, as long as principles of natural justice are complied with. The process initiated by SBI by issuing impugned SCN continues post 2024 Master Directions and the impugned SCN merges with the subsequent process. In this view of the matter, we are not inclined to accept the arguments of Mr. Khambata that actions of the Bank pursuant to the SCN dated 20th December 2023 issued prior to the Master Directions 2024 of RBI are invalid. Thus, the doctrine of supersession of the Master Directions 2016 by issuance of Master Directions 2024 as invoked by Mr. Khambata, fails. 14 We shall now deal with the second submission of Mr. Khambatta, that the impugned order is contrary to the principles of natural justice, inasmuch as, no personal hearing was afforded to the Petitioner. 15 Mr. Khambatta, in support of the said submission, argued that classification of an account as fraud not only results in reporting to investigating agencies but also has grave penal and civil consequences for the borrowers. He submitted that courts have consistently held that before a person is black-listed, audi alteram partem must be observed, and that this principle cannot ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n facts based on which Petitioner claims right of personal hearing. 19 Admittedly, the Respondent No.1-SBI sanctioned term loans to RCOM and to RTL and also a Non-Fund Based Facility. It appears that the Petitioner was the Promoter and Director of RCOM and RITL, and had given a personal guarantee of INR 1200 crore for the term loans sanctioned on 29th August 2016. As RCOM failed to comply with its obligations under restructuring of aforesaid loans, in around 2017, the account of RCOM was declared as a Non-Performing Asset by Respondent No. 2 with effect from 26th August 2016 in accordance with the RBI directions. On 7th May 2019, the BDO was appointed to conduct a forensic audit of RCOM for the period from 1st April 2013 to 31st March 2017. The BDO prepared and submitted its preliminary Forensic Audit Report to SBI on 2nd July 2020 and submitted its Final Forensic Audit Report on 15th October 2020. 20 Based on the findings in the BDO Report dated 15th October 2020, RCOM's account was declared as a 'fraud' account by the Fraud Identification Committee ("FIC") of Respondent No. 1-SBI on 10th November 2020. 21 In view of the judgment of the Apex Court in Rajesh Ag....
X X X X Extracts X X X X
X X X X Extracts X X X X
....furnished to the Petitioner, was incomplete. Thus, we are required to go into the same. 26 Vide letter dated 26th September 2024 (though inadvertently typed as 26th September 2023), Respondent No.1- SBI furnished to the Petitioner the annexures with exhibits of the Forensic Audit Report dated 15th October 2020 and once again requested the Petitioner to present his case and make relevant and specific submissions in writing within 21 days, as to why the account and the Petitioner's name should not be categorised and reported as fraud. 27 After September 2024, no response was received by SBI to its letter / Notice dated 26th September 2024, nor was any complaint made by the Petitioner of the BDO Report dated 15th October 2020 being incomplete or any pages thereof being missing. The Petitioner continued to insist that the Show Cause notice was non est, being issued prior to the superseded Master Directions 2016. 28 As no response/representation was received by Respondent No 1 from the Petitioner despite the aforesaid Notice, the Committee concerned of the Respondent No. 1 passed a reasoned order dated 13th June 2025, identifying the account of RCOM as "Fraud" and stating that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....C are, hereby, set aside. 76.3. Thirdly, the JLF is directed to give an opportunity of hearing by furnishing copies of both the Reports, namely the Forensic Auditor Report, dated 06.04.2018 and the subsequent Report submitted by Dr. K.V. Srinivas, IRP, to the Petitioner, and to the OL. 76.4. Fourthly, the JLF is directed to give an opportunity of personal hearing both to the Petitioner and to the OL before taking any decision on the issue whether the account should be classified as 'fraud' or not? 76.5. Fifthly, after the JLF has taken its decision, the FIC is directed to pass its resolution whether the decision of the JLF should be confirmed or not? 76.6. Lastly, the said exercise shall be carried out by the JLF within a period of three months from the date of receipt of the certified copy of this judgment. Furthermore, the subsequent exercise by FIC shall be carried out within two months from the date of the decision of the JLF." (emphasis supplied) 32 The said judgment, as noted herein-above, was challenged by the SBI before the Apex Court. No doubt, the Apex Court upheld the judgment of the Telangana High Court in Rajesh Agarwal (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y to explain why such action should not be taken. 36 Thus, from the aforesaid judgment in Rajesh Agarwal (supra), it is clear that the principles of natural justice demand that the borrowers must be served a notice, furnished with the forensic audit report, and allowed to submit their representation before their account is classified as fraud. The right contemplated is one of representation, not necessarily of personal hearing. Infact, the right of representation is not read specifically as meaning a right to personal hearing. 37 Infact, subsequent to the judgment in Rajesh Agarwal (supra), the State Bank of India preferred a Miscellaneous Application before the Apex Court, expressing apprehension that the said judgment may be construed as mandating a personal hearing in every case. The Apex Court, by order dated 12th May 2023 in Misc. Application No. 810 of 2023 in Civil Appeal No. 7300 of 2022, clarified that its earlier decision dated 27th March 2023 only upheld the judgment of the High Court of Telangana dated 10th December 2020, and that the operative directions are confined to those summarised in Para 81 under section 'E' of the judgment. (Para 81 Section E is P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....025]. We may record that in the said matter, it was the bank which had conceded to grant a personal hearing to the Petitioner therein, and it was in view of such concession that the order came to be passed. Admittedly, RBI was not a party to the said proceeding. Thus, the said order was rendered in that specific factual context. 44 Mr. Khambatta also contended that despite the fact, that there were no allegations against the Petitioner in the impugned SCN, and the Petitioner, not being a whole time director of the Company, the Petitioner's account was declared as fraud. It is well settled that once the Company's account is classified or declared to be a fraud account, the promoters / directors who were in control of the Company are liable to penal measures and to be reported as fraud and debarred from raising funds or seeking credit facilities, as they were in control of the Company and responsible for the acts / omissions of the Company. Thus, in view of the aforesaid position, there is no requirement of the impugned SCN containing specific allegations against the individual or against the Promoter and Director having control over the Company. In this case, it is seen that the ....