New Delhi: In a setback for industrialist Anil Ambani, the Bombay High Court last week upheld the State Bank of India’s (SBI) decision to classify the Reliance Communications’ (RCom) accounts as “fraud” and report his name to the Reserve Bank of India (RBI).
A bench of Justices Revati Mohite Dere and Neela Gokhale ruled on 3 October that a personal hearing was not mandatory and the SBI had provided him adequate opportunity to explain his case in line with the RBI and Supreme Court directions. Ambani claimed that the bank had failed to provide him an opportunity for a personal hearing to make his submissions.
The court said that once RCom–where Ambani was a director and promoter–was marked as “fraud”, his name could be reported to the RBI since he was “in control” of the company during the relevant period.
The court’s decision will effectively debar Ambani from raising funds or seeking credit facilities because of his association with RCom, which defaulted on loans and credit facilities worth over Rs 1,500 crore sanctioned between 2012 and 2016.
This prohibition on access to funding and credit is part of the “penal measures” outlined in the RBI Master Directions on Frauds. Under these rules, anyone classified as fraud–and those “associated” with them–cannot access credit from RBI-regulated entities, such as banks and Non-Banking Financial Companies (NBFCs).
This restriction lasts for five years from the date the defrauded amount is fully repaid, or from the date of settlement of dues.
The court was hearing a petition filed by Ambani challenging a June order by the SBI’s Fraud Identification Committee (FIC). The SBI had first declared RCom accounts “fraud” in 2020 under the RBI’s 2016 Master Directions.
This order was withdrawn after a 2023 Supreme Court ruling mandated a prior hearing for borrowers. The bank then issued a fresh show-cause notice and gave Ambani a chance to respond. It finally classified RCom’s account as fraud in June and said that his name would be reported to the RBI.
The HC decision is based on how the banking system deals with “fraud”, a process governed by the RBI’s Master Directions and modified by the Supreme Court’s landmark State Bank of India & Ors. v. Rajesh Agarwal & Ors decision in 2023.
The RBI’s 2016 Master Directions on fraud classification and reporting by commercial banks and select financial institutions outline how banks detect, classify and report fraud.
When Reliance Communications failed to comply with obligations under the restructuring of loans, the SBI classified the company’s account as a non-performing asset (NPA) in 2017.
In November 2020, SBI’s FIC declared RCom’s account as “fraud” in line with the RBI directions. The directions were later challenged in a separate case for lacking a requirement for a prior hearing before classifying an account as fraud.
The classification of RCom’s account as fraud was withdrawn by SBI after a landmark Supreme Court decision in the Rajesh Agarwal case, which held that borrowers must be given an opportunity to be heard before such classification.
‘Hear the other side’
In the Rajesh Agarwal case, the Supreme Court held that defaulters must be given an opportunity for a hearing before their accounts are classified as fraud, as such classification results in reporting of the crime to investigating agencies in addition to other penal and civil consequences.
“The application of audi alteram partem (Latin for ‘hear the other side’) cannot be impliedly excluded under the Master Directions on Frauds,” the top court said in 2023.
“Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness.”
This meant that the Supreme Court had read the principle of adequate hearing into the 2016 directions, effectively making it mandatory for banks to allow borrowers to present their case before any fraud declaration.
Based on these observations, the RBI later modified its 2016 Master Directions through the 2024 Master Directions, in which banks were required to issue a detailed show-cause notice when allegations of fraud were being examined.
Following the 2023 decision, the SBI withdrew its earlier classification of RCom and issued a fresh show-cause notice to Ambani in December 2023, giving him an opportunity to explain the conduct of RCom’s bank account and suspected fraudulent activity.
When no satisfactory response was received, the FIC again declared RCom’s account a “fraud” in June and said his name would be reported to the RBI.
In response, Ambani filed a writ petition before the high court, claiming that the SBI had proceeded under superseded (overridden) RBI directions and that he was not given a right of hearing.
Ambani’s counsel, senior advocate Darius Khambata, argued that the December 2023 notice was invalid under the 2016 directions, which were now superseded. He said that as a non-executive director, Ambani was not involved in RCom’s daily management and could not be held “vicariously liable” for RCom’s alleged misconduct.
He also contended that Ambani was not given a personal hearing, which was mandatory under the law.
On the other hand, senior advocate Aspi Chinoy, appearing for the SBI, countered that the 2024 Directions were clarificatory and not a new law, and the SBI proceedings remained valid as an adequate opportunity to explain his case had been given to Ambani.
The SBI argued that the principles of natural justice, which mandated personal hearings, were “read into” the earlier directions and so the earlier notice remained valid. It said that Ambani had been given multiple opportunities to explain his case, and it was only after such notices that a show-cause notice was issued.
The High Court agreed with the SBI, holding that a personal hearing is not mandatory under either the 2016 or 2024 Directions. As long as the borrower is allowed to make a written representation before an account is classified as fraud, the principle of audi alteram partem is fulfilled.
The court noted that Ambani had received all relevant documents, had corresponded with the bank, and still failed to submit an adequate explanation. And therefore, the SBI’s decision was valid in law.
Akshat Jain is a final-year student at the National Law University, Delhi and is a contributor with ThePrint
(Edited by Sugita Katyal)