Mumbai, Dec 24: In a major relief to industrialist Anil Ambani, the Bombay High Court on Wednesday stayed all present and future actions initiated by three public sector banks against him and Reliance Communications Ltd (RCom) to declare their loan accounts as fraud. The court held that the banks had violated mandatory provisions of the Reserve Bank of India’s (RBI) Master Directions.
Forensic Audit Found Non-Compliant With RBI Rules
Justice Milind Jadhav granted interim relief after observing that the banks’ action was founded on a forensic audit report that did not comply with the statutory requirements under the RBI’s 2024 Master Directions on fraud classification. The audit report in question was prepared by external auditor BDO LLP.
Audit Report Cannot Be Relied Upon: Court
In a detailed 116-page order, the court held that the forensic audit report could not be relied upon, as it was not authored and signed by a duly qualified chartered accountant, as required by the RBI Directions.
“The RBI Master Directions are mandatory in nature and they operate within a binding statutory framework requiring banks to engage auditors strictly in accordance with applicable law,” the court said.
Irreparable Harm If Protection Not Granted
Justice Jadhav noted that if interim protection was not granted, it would cause “grave and irreparable harm/loss” to Ambani and his company. Emphasising procedural fairness, the court observed: “Principles of natural justice is based on the maxim – Justice should not only be done but should manifestly be seen to be done.”
Prima Facie Violation By Banks
The court found a prima facie violation of the RBI Directions in the forensic audit conducted by BDO LLP and ruled that the report “cannot be relied upon by the banks to issue show cause notices”.
It added that the Directions must be followed “to the hilt” to ensure that public money lent by banks is protected, while also safeguarding due process.
Banks Must Follow Rule Of Law: HC
Stressing adherence to the rule of law, the court said banks are required to “follow and adhere strictly to the ‘Rule of Law’ and principles of due process of law in all operations, including audits”. It further observed that banks cannot act through arbitrary power or appoint “an ineligible and unqualified auditor”.
Severe Consequences Highlighted By Court
The consequences of allowing the banks to proceed further, the court warned, would be “virtually drastic and lead to disastrous consequences like being blacklisted, barred from new bank loans/credit for years, criminal FIR filing, reputation damage, impacting fundamental rights to financial access and civil death”.
Delay In Action Criticised
The court also criticised the lenders for the timing of their actions, calling it a “classic case where the banks have woken up from their deep slumber”. It noted that the banks sought to conduct a forensic audit for transactions between 2013 and 2017, but did so only in 2019.
Ambani Challenged Show Cause Notices
Ambani had approached the High Court challenging show cause notices issued by Indian Overseas Bank, IDBI Bank and Bank of Baroda, which proposed to classify his and RCom’s accounts as fraud. He argued that the forensic audit report submitted in October 2020 by BDO LLP was invalid, as the signatory was not a chartered accountant.
RBI Master Directions Central To Dispute
Ambani contended that under the RBI’s 2024 Master Directions, a forensic audit prior to fraud classification must be conducted by an auditor qualified under relevant statutes. He further claimed that BDO LLP was an accounting consultant firm and not an audit firm.
Banks’ Defence Rejected At Interim Stage
The banks opposed the petitions, arguing that the audit was conducted under the 2016 Master Directions, which did not require the external auditor to be a chartered accountant. They also alleged that Ambani’s challenge was belated and mala fide.
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Conflict Of Interest Flagged
Rejecting the banks’ stand at the interim stage, the court noted that BDO LLP had been engaged as a consultant to the lenders earlier, creating a conflict with its role as an independent forensic auditor. It reiterated that under the RBI Directions, “a person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant”.
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