Bombay High Court Imposes Stay on Bank Operation of RBI Master Circular on Bank Fraud

Bombay High Court Imposes Stay on Bank Operation of RBI Master Circular on Bank Fraud

The Bombay High Court has stayed the effect of the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions of 2016 pertaining to bank frauds. The Reserve Bank of India (RBI) had issued a master circular that permitted banks to declare any account as a fraud account without giving a hearing.

The division- judges bench of Justices GS Patel and Neela Gokhale stayed the effect of this circular till September 11, until it finally hears the petitions challenging the same.

The bench was hearing a batch of petitions, including those filed by Jet Airways founder Naresh Goyal and his wife Anita Goyal, apart from others including Supama Trading Pvt Ltd, Abhay Lodha, Omkar Speciality Chemicals Ltd, Asuti Trading, Imran Khan, Shreyas Doshi and Sikkim Ferro Alloys Ltd with senior counsel Milind Sathe for Naresh Goyal, Aabad Ponda for Anita Goyal and Gaurav Joshi for another petitioner, challenging the circulars stating that the RBI’s decision was against the principle of natural justice.

The said circulars permitted banks to make full use of the Central Fraud Registry for timely identification, control, reporting and mitigation of risks associated with the fraud.

Justices Patel and Gokhale first enquired about the clarification order of 12 May, 2023 passed by the Supreme Court in an application filed by the SBI.

Sathe and Joshi submitted that the Supreme Court had recorded Solicitor General Tusha Mehta’s apprehension of it meaning a ‘personal hearing’ and reiterated that its directions are as enunciated in the March 27 order which said “application of audi alteram partem (hear the other side) cannot be impliedly excluded from the RBI) Master Master Direction on Frauds.”

The circular mainly stipulated two provisions:

(a) Once a bank classifies an account as fraud, it is the responsibility of that bank to report the same to the Central Repository of Information on Large Credits platform to alert other banks.

(b) If a bank decides to straight away classify the account as a fraud, it is obligated to report the fraud to RBI within 21 days and report the case to any investigating agency.

The pleas claimed that based on the circular, no opportunity of being heard was given to borrowers before classifying their accounts as fraud accounts. Therefore, the banks would neither give hearing to borrowers nor give them copies of material relied on to take further action.

Further, the bench was informed that the Supreme Court had considered this issue in appeal against the Telangana High Court order. On 27 March, the Apex Court upheld the Telangana High Court order that set aside the RBI decision.

The Supreme Court had observed that, “principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks before their account is classified as fraud under the Master Directions on Frauds.”

The Court held that the decision classifying the borrower’s account as fraudulent must be made by a reasoned order to save directions from the vice of arbitrariness.

The State Bank of India informed the bench led by Justice Patel that it had filed a review plea against the Supreme Court order, which is yet to be heard.

On 30 June, 2022, a coordinate bench of the High Court had passed an interim order restraining banks from taking further precipitative steps pursuant to the impugned circular. However, it clarified that “dehors the circular, the banks may take legal proceedings as may be permissible under the law.”

The High Court has further granted that wherever FIRs are filed, the parties are at liberty to assail the same in accordance with law.

The High Court while staying the effect of the RBI Master circular sought replies and rejoinders. RBI and Banks were directed to file further Affidavits by 17 July, 2023.

Rejoinders by Petitioners, are to be filed by 21 August, 2023 and Counsel was ordered to coordinate and submit short notes on their submissions by 2 September, 2023 directed the High Court listing all matters for final hearing on 7-8 September.