[Cites 72, Cited by 0]
Bombay High Court
Anil D Ambani vs Bank Of Baroda on 24 December, 2025
Author: Milind N. Jadhav
Bench: Milind N. Jadhav
2025:BHC-OS:26293
IAL.35925.2025 with Group.doc
RMA / ATU / HHS
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL JURISDICTION
INTERIM APPLICATION (L) NO.35924 OF 2025
WITH
INTERIM APPLICATION (L) NO.35925 OF 2025
IN
SUIT (L) NO.35923 OF 2025
Anil D. Ambani .. Applicant
IN THE MATTER BETWEEN:
Anil D. Ambani .. Plaintiff
Versus
Indian Overseas Bank and Ors. .. Defendants
WITH
INTERIM APPLICATION (L) NO.37574 OF 2025
WITH
INTERIM APPLICATION (L) NO.37575 OF 2025
IN
SUIT (L) NO.37573 OF 2025
Anil D. Ambani .. Applicant
IN THE MATTER BETWEEN:
Anil D. Ambani .. Plaintiff
Versus
IDBI Bank Ltd. and Ors. .. Defendant
WITH
INTERIM APPLICATION (L) NO.37868 OF 2025
WITH
INTERIM APPLICATION (L) NO.37865 OF 2025
IN
SUIT (L) NO.37862 OF 2025
Anil D. Ambani .. Applicant
IN THE MATTER BETWEEN:
Anil D. Ambani .. Plaintiff
Versus
Bank of Baroda and Ors. .. Defendants
....................
Mr. Gaurav Joshi, Senior Advocate a/w. Mr. Ameet Naik, Mr.
Piyush Raheja, Mr. Abhishekh Kale, Mr. Devashish Jagirdar and Mr.
Ronit Doshi, Advocates i/by Naik Naik & Company for Plaintiff in
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Suit (L) No.35923 of 2025 and Applicants in Interim Application
(L) No.35924 of 2025 and Interim Application (L) No.35925 of
2025.
Mr. Ashish Kamat, Senior Advocate a/w Mr. Ameet Naik, Mr.
Abhishek Kale, Mr. Devashish Jagirdar and Mr. Rohit Doshi i/b
Naik Naik & Company for Plaintiff in Suit (L) No.37573 of 2025
and Applicants in Interim Application (L) No.37575 of 2025 and
Interim Application (L) No.37574 of 2025.
Mr. Mayur Khandeparkar a/w Mr. Ameet Naik, Mr. Abhishek Kale,
Mrs. Madhu Gadodia, Mr. Devashish Jagirdar, and Mr. Ronit Doshi,
Advocates for Plaintiff in Suit (L) No.37862 of 2025 and Applicants
in Interim Application (L) No. 37865 of 2025 and Interim
Application (L) No.37868 of 2025.
Mr. Zal Andhyarujina, Senior Advocate a/w Ms. Akansha Agarwal,
Mr. Babu Sivaprakasam, Ms. Nandita Bajpai, Ms. Rahat Kalptri and
Mr. Vijay Srinivasan, Advocates i/by Yogesh Pirtani for Defendant
No.1 in Suit (L) No.35923 of 2025 and Respondent No.1 in Interim
Application (L) No. 35924 of 2025.
Mr. Zarir Bharucha, Senior Advocate a/w. Mr. Rishi Thakur and
Ms. Dhwani Gala, Advocates for Defendant No.1 in Suit (L)
No.37573 of 2025.
Mr. Kevic Setalvad, Senior Advocate a/w. Mr. Jeehan Lalka, Mr.
Nishit Dhruva, Ms. Niyati Merchant and Ms. Rajlaxmi Pawar,
Advocates i/by MDP Legal for Respondent No.1 in Suit (L)
No.37862 of 2025 and Applicants in Interim Application (L)
No.37868 of 2025 and Interim Application (L) No.37865 of 2025.
Mr. Kunal Dwarkadas, a/w. Mr. Rahul Dwarkadas, Ms. Prachi
Dhanani, Mr. Raushan Kumar and Mr. Aniket Kharote, Advocates
i/by RJD and Partners for Defendant Nos.2 and 3 in all Suits.
....................
CORAM : MILIND N. JADHAV, J.
DATE : DECEMBER 24, 2025.
JUDGEMENT:
1. Heard Mr. Joshi and Mr. Kamat, learned Senior Advocates
and Mr. Khandeparkar, learned Advocate for Plaintiff / Applicant, Mr.
Andhyarujina, Mr. Setalvad and Mr. Bharucha, learned Senior
Advocates for Defendant No.1 - Bank and Mr. Dwarkadas, learned
Advocate for Defendant Nos.2 and 3 in all three (3) suits.
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2. In Indian Overseas Bank Suit (L) No. 35923 of 2025, Interim
Application (L) No. 35925 of 2025 is filed by Plaintiff seeking interim
reliefs under Order XXXIX Rule 1 & 2 of Civil Procedure Code, 1908
(for short 'CPC') and Interim Application (L) No.35924 of 2025 is filed
seeking order under Order II Rule 2 of CPC. In IDBI Bank Ltd. Suit (L)
No. 37573 of 2025, Interim Application (L) No. 37575 of 2025 is filed
by Plaintiff seeking interim reliefs under Order XXXIX Rule 1 & 2 of
CPC and Interim Application (L) No. 37574 of 2024 is filed seeking
order under Order II Rule 2 of CPC. In Bank of Baroda Suit (L) No.
37862 of 2025, Interim Application (L) No. 37865 of 2025 is filed by
Plaintiff seeking interim reliefs under Order XXXIX Rule 1 & 2 of CPC
and Interim Application (L) No. 37868 of 2025 is filed seeking order
under Order II Rule 2 of CPC. Interim Application (L) No.35925 of
2025, Interim Application (L) No.37575 of 2025 and Interim
Application (L) No.37865 of 2025 and are taken up for hearing for
grant of interim reliefs. Pleadings are completed.
2.1. Mr. Andhyarujina, Mr. Setalvad and Mr. Bharucha, learned
Senior Advocates appearing for the Banks and Mr. Dwarkadas, learned
Advocate for Defendant Nos.2 and 3 oppose interim reliefs.
3. Mr. Joshi, learned Senior Advocate for Plaintiff would
submit that Plaintiff was the Non-Executive Director of Reliance
Communications Limited (for short "RCOM") from its inception till the
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year 2019. He would submit that RCOM, Reliance Telecom Limited
(for short "RTL") and Reliance Infratel Limited (for short "RITL")
together with its 98 subsidiaries operated as a Single Economic Unit.
3.1. He would submit that on 01.07.2016, Reserve Bank of India
issued Master Directions on Fraud - Classification and Reporting by
Commercial Banks and select FIs (for short "2016 RBI Master
Directions") and in terms of Clause 8.9.4 thereof a Forensic Audit was
required to be carried out before classifying a person as a "Fraud".
3.2. He would submit that in June 2017, Joint Lenders' Forum
(for short "JLF") of which Defendant No.1 - Bank is a Member
considered appointment of an Audit firm for Forensic Review of
RCOM, RTL and RITL. He would submit that Banks were primarily
interested in recovery of their dues through sale of assets of the said
Companies.
3.3. He would submit that in September 2017, Ericsson Indian
Pvt. Ltd. filed Company Petition against RCOM. He would submit that
on 15.05.2018 RCOM was admitted into Corporate Insolvency
Resolution Process (for short "CIRP") by National Company Law
Tribunal and the Board of Directors stood superseded by the
Resolution Professional.
3.4. He would submit that, in the meanwhile, on 07.05.2019,
State Bank of India (for short "SBI") as the lead lender of the
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consortium appointed Defendant No.2 - BDO LLP as Forensic Auditor.
He would submit that on 15.10.2020, Defendant No.2 - BDO LLP
submitted Forensic Audit Report (for short "FAR") to SBI. He would
submit that on 19.01.2021, Plaintiff's erstwhile Advocates addressed
letter to Defendant No.2 - BDO LLP seeking clarification on the FAR.
He would submit that on 03.02.2021, Defendant No.2 - BDO LLP
through its Advocates replied and confirmed that no conclusion of
fraud or breach of trust was arrived at in respect to Plaintiff and
Plaintiff's accounts.
3.5. He would submit that Reserve Bank of India issued new
Master Directions on Fraud Risk Management in Commercial Banks
(including Regional Rural Banks) and All India Financial Institutions
Directions, 2024 (for short "the 2024 RBI Master Directions") on
15.07.2024 wherein Clause 10 expressly provided that the 2024 RBI
Master Directions superseded the 2016 RBI Master Directions. He
would submit that Clause 4.1 readwith Footnote No.14 of the 2024
RBI Master Directions, clarify and mandate that the Auditor qualified
to conduct an audit under "relevant statutes" be appointed as External
Auditor. He would submit that proceedings under the 2024 RBI Master
Directions are founded upon this principle and if Forensic Audit
conducted by an entity lacking statutory qualification, the defect is
jurisdictional and vitiates the proceedings at inception.
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3.6. He would submit that on 02.12.2024 after a lapse of 4 years
Defendant No.1 - Indian Overseas Bank (for short "IOB") issued Show
Cause Notice to Plaintiff under the 2024 RBI Master Directions solely
on the basis of the FAR dated 15.10.2020. He would submit that on
12.12.2024, Plaintiff's Advocate addressed letter to Defendant No.2 -
BDO LLP seeking copy of the FAR and documents relied upon by the
Auditor. He would submit that on 18.01.2025, Defendant No.1 - IOB
in its reply furnished a copy of FAR however the same was shared
without its Annexures. He would submit that due to incomplete
disclosure by Defendant No.1 - IOB, Plaintiff on 10.03.2025 once
again addressed letter to Defendant No.1 - IOB seeking complete
disclosure of all documents and Annexures relied upon in preparation
of the FAR.
3.7. He would submit that on 10.09.2025, Plaintiff received
letter from Defendant No.1 scheduling a personal hearing on
09.10.2025. He would submit that pursuant thereto on 29.09.2025, an
RTI Application was filed by one Ms. Siddhi Vora, a third party seeking
clarification whether Defendant No.2 - BDO LLP was registered with
the Institute of Chartered Accountants of India (for short "ICAI"). He
would submit that on 24.10.2025, the RTI reply confirmed that
Defendant No.2 - BDO LLP was not registered with the ICAI. He would
submit that a profile verification revealed that Defendant No.3, the
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author and sole signatory of the FAR is not a Chartered Accountant
(for short "CA") and did not hold a Certificate of Practice as CA and
was not a Member of ICAI.
3.8. He would submit that Clause 4.1 read with Footnote 14 of
the 2024 RBI Master Directions mandates Forensic Audit must be
conducted by an Auditor who is qualified as Auditor under the
relevant statutes. He would submit that the FAR prepared by
Defendant No.2 - BDO LLP is not an entity competent to conduct the
External Audit. He would submit that the Report prepared by
Defendant No.2 - BDO LLP does not bear the signature of a Chartered
Accountant Partner who has acted in preparation of the Report as
mandated by law. He would submit that Defendant No.2 is the author
and sole signatory of the Report and admittedly he is not a CA. He
would submit that Show Cause Notice issued by Defendant No.1 - IOB
is founded solely on the said Report and therefore it cannot be
sustained in law. He would submit that Sections 2(b), 2(e) and 6 of
the Chartered Accountants Act, 1949 restrict audit practice to ICAI -
registered Chartered Accountants holding valid Certificate of Practice.
Hence, he would submit that an entity and a signatory who is not a
qualified CA and does not hold a valid Certificate of Practice cannot
under the 2024 RBI Master Directions be permitted to conduct
Forensic Audit or prepare a Report in that regard or such Report can
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be relied upon for indictment.
3.9. He would submit that Forensic Audit was conducted solely
by Defendant No.3 on information and documentation furnished by
the Corporate Debtor, the Resolution Professional and the Lenders and
most importantly erstwhile Directors or Management Personnel of the
Company were never afforded an opportunity to offer their
explanation neither was the Forensic Report shared with Plaintiff until
it was referred to in the Show Cause Notices issued by various banks
and was supplied for the first time on 18.01.2025.
3.10. He would submit that Defendant No.2 - BDO LLP in its reply
has effectively admitted its non-compliance with statutory qualification
requirements prescribed under the 2024 RBI Master Directions. He
would submit that in that view of the matter there is no dispute that
Defendant No.2 - BDO LLP is not a CA firm and that the signatory of
the FAR is not a CA. He would submit that this position is clearly
established from internal page No.380 of the Report wherein
Defendant No.2 has described itself as an "accounting consultant firm"
and not an Audit firm which is a primary requirement under the 2024
RBI Master Directions. He would next submit that the Report does not
bear a Unique Document Identification Number (UDIN) which is made
mandatory for all Certificates, GST and Tax Audit Reports, and other
attestation functions undertaken or signed by a practicing CA as per
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ICAI requirements. He would submit that copy of RTI reply
conclusively establishes that Defendant No.2 - BDO LLP is not a
member of ICAI.
3.11. He would submit that Defendant No.1's reliance on
Defendant No.2 - BDO LLP's empanelment with the Indian Banks'
Association (for short "IBA") or being empanelled by SEBI as an
Auditor as a defence and justification for its appointment as External
Auditor / Forensic Auditor is misplaced and misconceived in law as
IBA lacks statutory authority and neither it is backed by a
governmental body. He would submit that the 2024 RBI Master
Directions issued by RBI operate within a binding statutory framework
requiring banks to engage Auditors for external audit strictly in
accordance with law. He would submit that considering IBA's or for
that matter SEBI's empanelment as sufficient would amount to
delegating RBI's statutory mandate to a non-statutory private body like
IBA which is impermissible in law and render the provisions of the
Companies Act, 2013 nugatory. He would argue that from the above
conduct there is a clear malice in law on the part of Defendant No.1 to
rely on such a Report which does not prima facie meet the statutory
compliances and qualifications of its author.
3.12. He would submit that the Report if read is nothing but
inconclusive, incomplete and error-ridden. He would submit that
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Defendant No.2 - BDO LLP in its reply through its Advocate has
categorically confirmed that no conclusion of fraud or breach of trust
is drawn in the said Report qua the Plaintiff's 3 Companies' accounts
which were investigated. He would submit that Defendant Nos.1 and 2
have not refuted this in their reply filed to the Interim Application
neither dealt with it or clarified the same. He would submit that the
entire exercise of preparing the Report is rendered futile as only 24 CA
Certificates are reviewed whereas 341 Certificates were not made
available or examined, further 42% Bank Accounts were omitted from
review despite which adverse findings and conclusions are drawn
which once again establish malice in law and facts on the part of
Defendant No.1 in relying on the Report for indicting the Plaintiff.
3.13. He would submit that the Report on the face of record lacks
of information and is ridden with incomplete data. He would submit
that "Management Comments" were taken only from the Resolution
Professional under CIRP and no consultation with Plaintiff or erstwhile
management of the 3 Companies was made which is a clear violation
of the principles of natural justice rule of audi alteram partem. He
would submit that despite repeated written requests for supplying
documents relied upon in preparation of the Report, Defendant No.1 -
IOB failed to furnish the same which was necessary for an effective
response to the Show Cause Notice.
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3.14. He would submit that the law governing repeal and
supersession of statutory instruments is settled, namely that
proceedings under a superseded regime cannot continue unless
expressly saved. In support of his above submissions he has referred to
and relied upon decisions of the Privy Council, Supreme Court and this
Court in the case of Nazir Ahmad Vs. King Emperor 1, OPTO Circuit
India Limited Vs. Axis Bank and Ors. 2, Arun Kumar and Ors. Vs. Union
of India and Ors.3 , Kholapur Canesugar Works Ltd and Another Vs.
Union of India 4, Tara Singh and Others Vs. State of Rajasthan 5 and
Kangana Ranaut Vs. MCGM and Ors.6
3.15. Mr. Joshi, learned Senior Advocate would submit that
Section 2 and Section 5(o) of the Banking Regulation Act, 1949 are
relevant in this regard and read thus:-
"2. Application of other laws not barred.-- The provisions of this
Act shall be in addition to, and not, save as hereinafter expressly
provided, in derogation of the [Companies Act, 1956], and any
other law for the time being in force."
5. Interpretation:-
xxxxxx
xxxxxx
(o) all other words and expressions used herein but not defined
and defined in the Companies Act, 1956 (1 of 1956), shall have the
meanings respectively assigned to them in that Act."
3.16. Next, he would draw my attention to Section 226 of the
Companies Act, 1956 wherein there was a specific provision which
1 44 L.W. 583
2 (2021) 6 SCC 707
3 (2007) 1 SCC 732
4 (2000) 2 SCC 536
5 (1975) 4 SCC 86
6 2020 SCC OnLine Bom 3132
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stated that Auditor appointed shall not be qualified as Auditor of the
Bank unless he is a Chartered Accountant.
3.17. He would submit that the same provision has transitioned
into Section 141(1) and (2) read with Section 145 of the Companies
Act, 2013 which is the relevant statute for consideration. He would
submit that if argument of the Banks is to be accepted then there will
be two different yardsticks of eligibility, viz; one under the 2016 RBI
Master Directions and second under the 2024 RBI Master Directions
for determining qualification of External Auditor. He would submit
that External Auditor will have to be a person having the basic
minimum requisite qualification of Chartered Accountant for Audit as
envisaged by the relevant statutes.
3.18. He would submit that in Writ Petition No.3037 of 2025, SBI
relied upon the same FAR, but the contention of competency, validity
and qualification of the author of the Report and its signatory qua the
2024 RBI Master Directions was not raised, neither argued nor
adjudicated by the Division Bench however it was permitted only
because the circular therein was held to be entirely clarificatory in the
limited context of a Show Cause Notice. He would persuade the Court
to allow the present Interim Application in the interest of justice on
the basis of the aforesaid submissions.
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4. Mr. Kamat, learned Senior Advocate for Plaintiff in the
second Suit has adopted the principal submissions made by Mr. Joshi
and for the sake of brevity they are not repeated and reiterated and
stand adopted as if traversed herein. In addition to those submissions,
to the extent of some differential facts concerning IDBI Bank he would
make some additional submissions as under:-
4.1. He would submit that on 31.05.2024, Defendant No.1 - IDBI
Bank issued Show Cause Notice to Plaintiff under the 2024 RBI Master
Directions placing sole reliance on FAR dated 15.10.2020 and on
19.06.2024 Advocate for Plaintiff addressed letter to the Bank
requesting for copies of all documents which were relied upon to
prepare the Forensic Report. He would submit that between
17.01.2025 to 23.07.2025, Defendant No.2 - BDO LLP supplied
extracts of the FAR and later supplied the full Report albeit without its
Annexures. He would submit that on 23.07.2025, Defendant No.2 -
BDO LLP supplied the full Report with its Annexures however
supporting documents were not annexed. He would submit that
further correspondence was addressed to Defendant No.2 - BDO LLP
seeking the supporting documents however Defendant No.2 - BDO LLP
refused to furnish the same.
4.2. He would submit that Defendant No.1 seeks stay of Show
Cause Notice on jurisdictional grounds which are raised for the first
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time in the present proceedings. He would submit that since Plaintiff
was not supplied with any supporting documents to the Report, he
was unable to effectively reply to the alleged fraud as enumerated in
the Show Cause Notice dated 31.05.2024. He would submit that
Defendant No. 1 addressed reply dated 17.01.2025 to Plaintiff stating
that only extracts of the relevant documents would be made available
to Plaintiff hence even considering this at the highest, cause of action
in present suit against IDBI arose on 17.01.2025. Hence he would
submit that there is no delay in filing of present Suit and the Suit is
filed within limitation. He would refer to and rely upon the letter
dated 03.02.2021 addressed by the Advocates of Defendant No.2
asserting that no conclusion of fraud or breach of trust was arrived at
in the FAR qua the Plaintiff's Companies' Accounts.
4.3. He would fairly inform that in the meanwhile Plaintiff filed
Writ Petition (L) No. 34065 of 2025 against IDBI Bank seeking
deferment of personal hearing, however on 28.10.20205 the said
Petition was withdrawn reserving liberty to raise all contentions.
4.4. He would refer to and rely upon the decision of the Calcutta
High Court in the case of Prashant Bothra and another Vs. Bureau of
Immigrations and Others7 (in support of Plaintiff's case) and another
decision of this Court in the case of Ankit Bhuwalka Vs. IDBI Bank and
7 2023 SCC Online Cal 2643
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Another8 wherein Paragraph No.26 in the case of Ankit Bhuwalka
(supra) is relevant and reproduced hereunder:-
"26. It is thus clear from the table that the position of the
borrower as relied upon by the wilful defaulter committee is as
per the transaction review report dated March 5, 2020 prepared
by the auditor M/s. G.D. Apte and Co. At the cost of repetition, it
is necessary to note that the resolution professional had made an
application before the National Company Law Tribunal bearing
I.A. No. 133 of 2020 under section 60 read with section 66 of
the Insolvency and Bankruptcy Code. By its order dated March
10, 2021, the National Company Law Tribunal disposed the
application holding that the same was premature and directed
the resolution professional to carry out basic enquiry of all
surrounding facts to make out his case, make enquiries from all
concerned parties with reference to the transactions highlighted
in the forensic report, and arrive at some definite conclusion
before referring the matter to the Tribunal under section 66 of
the Code. The National Company Law Tribunal has also
observed that the forensic report prepared by the auditors simply
assumes the transactions to be fraudulent and the conclusions
that funds were siphoned away were reached in a summary
manner. We specifically enquired with both the counsels as to
whether the forensic report commented upon by the National
Company Law Tribunal was the same as the transaction audit
report referred to in the show-cause notice. We were assured by
both the counsels that it was the same report. It is thus safe to
accept that the basis of issuance of the show-cause notice was
primarily the findings in the transaction audit report, which
were observed by the National Company Law Tribunal to be
mere assumptions. Considering the grave consequences that
follow a finding by the wilful defaulter committee, the degree of
proof required and expected to have been relied upon by the
wilful defaulter committee should be much higher and not
simply based on a transaction audit report which itself was
unacceptable to the National Company Law Tribunal."
4.5. On the basis of the aforesaid submissions he would urge the
Court to consider the challenge to the jurisdictional fact raised in the
first instance by Plaintiff herein and allow the Interim Application.
5. Mr. Khandeparkar, learned Advocate for Plaintiff in the third
suit would adopt the submissions made by Mr. Joshi and Mr. Kamat
8 2025 SCC OnLine Bom 96
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and for the sake of brevity they are not repeated and reiterated herein
and stand adopted as if traversed herein. He would make the
following additional submissions:-
5.1. He would submit that Defendant No.1 - Bank of Baroda
issued Show Cause Notice dated 02.01.2024 to Plaintiff under the
2024 RBI Master Directions placing sole reliance on the same FAR
dated 15.10.2020 prepared by Defendant No.2. He would submit that
Plaintiff through his Advocates addressed letter dated 19.01.2024
requesting copies of all documents relied upon to prepare the FAR and
Plaintiff received the FAR vide letter dated 27.06.2024.
5.2. He would submit that Plaintiff filed Writ Petition (L) No.
9342 of 2025 challenging Show Cause Notice issued by Defendant
No.1 however he withdrew the same on 17.04.2025. He would submit
that on 02.09.2025 Defendant No.1, placing sole reliance on FAR,
issued Fraud Classification Order against Plaintiff which was
challenged in Writ Petition (L) No.29095 of 2025 wherein vide order
dated 17.09.2025 Defendant No.1 undertook not to act in furtherance
of Fraud Classification Order. He would submit that it is case of
Defendant No.1 - Bank of Baroda that SEBI has empanelled Defendant
No.2 as Forensic Auditor however he would submit that the same has
no bearing on the present Suit as SEBI is a Market Regulator and not a
Banking Regulator and appointment of Auditor whether internal or
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external by Banks is governed by the relevant statutes and the RBI
Master Directions on Fraud.
5.3. He would submit that Defendant No. 2 admittedly is not a
CA as contemplated by Section 4(2) of the Chartered Accountants Act,
1949. He would submit that Defendant No.1 is not part of the
consortium led by State Bank of India since Defendant No.2's Report
obtained by State Bank of India is used against Bank of Baroda,
therefore a separate and different FAR is required.
5.4. He would submit that the FAR is challenged by way of Suit
on the ground that the issuing entity i.e. Defendant No.2 is not an
entity performing public / government functions hence Writ
jurisdiction of this Court cannot be invoked against the Report
prepared by Defendant No.2 or Defendant No. 3. He would submit
that Defendant No.1 - Bank of Baroda served the impugned FAR on
27.06.2024 for the first time therefore there is no delay in filing the
present suit. He would submit that the FAR is the sole basis and
foundation for Defendant No.1 to issue the Show Cause Notice in
2024, hence there is no other legal remedy available to Plaintiff
besides filing of present suit wherein disputed questions of facts can
only be decided.
5.5. In support of his submissions he would refer to and rely
upon a decision of the Supreme Court in the case of S. Shobha Vs.
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Muthoot Finance Ltd.9 to contend that although writ of mandamus is
issued to public bodies only, in exceptional cases writ of mandamus
may be issued to a private body but only where a public duty is cast
upon such private body by a statute or statutory rule and only to
compel such body to perform its public duty.
5.6. He would therefore urge the Court to consider the challenge
to the jurisdictional issue raised by the Plaintiff and allow the Interim
Application.
6. PER CONTRA, Mr. Andhyarujina, learned Senior Advocate
appearing for Defendant No.1 - Indian Overseas Bank in Suit (L) No.
35953 of 2025 would submit that if the 2016 RBI Master Directions
and 2024 RBI Master Directions are juxtaposed with each other then it
is derived that under the 2016 RBI Master Directions no qualification
is prescribed for the Auditor to be a CA. He would submit that the
requirement of the Auditor to be a CA was introduced for the first time
by way of a clarificatory Footnote in the 2024 RBI Master Directions.
He would vehemently submit that Plaintiff is not entitled to any
interim relief since account of RCOM has already been declared as
fraud by Defendant No. 1 bank as far back as on 21.12.2020. He
would submit that as a consequence thereof Plaintiff was all along
aware of the classification of RCOM account as fraud since then and
therefore filing of the present suit in the year 2025 is barred by
9 2025 SCC Online 177
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limitation on the face of record.
6.1. He would submit that Plaintiff filed several judicial
proceedings in Court in the year 2024 and 2025 to challenge
determination of fraud wherein he failed to secure any relief. He
would in his usual fairness submit that though the ground on which
interim relief is sought namely qualification and competency of the
Auditor it was never challenged, agitated by Plaintiff or dealt with in
any previous proceedings in Court, however Plaintiff cannot deny the
fact that he was not aware of the competence of Defendant No.2 and
qualification of Defendant No.3 since the year 2020 and further this
Court has taken cognizance of the FAR and Plaintiff has failed to raise
challenge on the aforesaid grounds in these proceedings.
6.2. That apart he would submit that Plaintiff fully participated
in the enquiry conducted by Defendant No.1 bank which is borne out
by extensive correspondence during the years 2024 and 2025 but
never objected to the competency and qualification of the Auditor. He
would submit that Defendant No. 1 - Indian Overseas Bank accorded
Plaintiff opportunity of hearing on 2 occasions but he never raised the
issue of qualification of the Auditor. He would submit that cause of
action stated in the Suit Plaint is on the basis of a RTI reply dated
24.10.2025 for filing the Suit which was made by a third person called
Ms. Siddhi Vora only as a ruse to bring the Suit within limitation when
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all along since 2020 Plaintiff was fully aware of the FAR. Rather he
would submit that the RTI application was a bogus application and
challenge to the FAR if any ought to have been made by Plaintiff in the
year 2020 when he gained knowledge about the same. On the basis of
the above submissions he would persuade the Court to consider that
no balance of convenience whatsoever exists in favour of Plaintiff for
seeking interim relief in 2025 albeit being on a completely fresh
ground. He would submit that no prima facie case is therefore made
out for interim relief and if at all any interim relief is granted it will
result in irreparable loss to the Defendant - Banks as also all other
lender banks who have relied upon the FAR and proceeded further
with consequential steps in accordance with law.
6.3. The next submission advanced by Mr. Adhyarujina for
rejecting interim relief is on merits. At the outset he would place on
record meaning of the word "Audit" as per Black's Law Dictionary 10 to
mean a formal examination of individuals' or organization's
accounting record, financial situation, or compliance with other set of
standards. He would submit that Black's Law Dictionary refers to 9
different types of Audit namely Compliance Audit, Correspondence
Audit, Desk Audit, Field Audit, Independent Audit, Internal Audit,
Office Audit, Post Audit, and Tax Audit. He would submit that the
terminology used in the present case pertains to Forensic Audit by
10 Black's Law Dictionary 126 (7th ed.1999)
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External Auditor as envisaged under the 2016 and 2024 RBI Master
Directions.
6.4. He would persuade me to juxtapose and read both the
aforesaid Master Directions and would submit that the 2016 Master
Directions determine and envisage a holistic architecture for
determining fraud supervision and loan fraud as one of the key aspect
thereof. He would draw my attention to Clause 8.8.2 of the 2016
Master Directions which refer to the word "may" therein and would
argue that it would be the choice of the bank to appoint a Forensic
Expert for conducting Forensic Audit. While referring to Clause No.
8.9.5 of the 2016 RBI Master Directions he would fairly submit that a
precise timeline has been laid down for not only completion of
Forensic Audit but also to determine fraud classification within 6
months of the early detection of one or two EWS. He would submit
that 2016 RBI Master Directions refer to Audit in the widest possible
sense which can be conducted by several rather a multitude of
different types of professionals and does not prescribe qualification of
CA for the External Auditor.
6.5. Thereafter he would submit that 2014 Directions supersede
the 2016 RBI Master Directions but with a caveat that all actions
legitimately undertaken under the 2016 RBI Master Directions can be
continued. He would submit that the 2024 RBI Master Directions
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provide for following the principles of natural justice before
determination of fraud which would include personal hearing to be
given to the borrower which in the present case has been offered not
once but twice. He would submit that 2024 RBI Master Directions
have a well laid out regime permitting the Bank to conduct External
Audit or Internal Audit and call for report before issuance of Show
Cause Notice and examination of responses / submissions and enquiry
for classifying the account as fraud which also entails grant of personal
hearing. He would submit that action taken against Plaintiff in the
instant case is under the 2016 RBI Master Directions wherein no
qualification is prescribed for External Auditor and therefore the core
issue raised by Plaintiff for seeking interim relief by challenging the
qualification and competence of Auditor is impermissible to be taken
in law.
6.6. He would submit that the 2024 RBI Master Directions are
issued pursuant to the decision of the Supreme Court in the case of
State Bank of India vs Rajesh Agarwal and Ors. 11 wherein challenge to
the said Directions was considered and determined by improving and
consolidating the enquiry procedure under the 2016 RBI Master
Directions. He would submit that Footnote 14 to Clause 4.1 in the
2024 RBI Master Directions will have to be considered as prospective
in application and Plaintiff's reliance on the same to challenge the
11 (2023) 6 SCC 1
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Show Cause Notice under the 2016 RBI Master Directions cannot be
sustained in law. He would submit that the legal position in this
regard is well settled in as much as once there is no specific statutory
direction of retrospective applicability any subsequent statutory
legislation then it will be prospective in application and character.
6.7. He would submit that the Master Directions are issued under
the provisions of Section 35A of the Banking Regulation Act, 1949 and
are clear in its legislative intent. He would submit that the issue
framed by the learned Division Bench of this Court while determining
Writ Petition No. 3037 of 2025 filed by Plaintiff against State Bank of
India and another and decided on 03.10.2025 to challenge the Show
Cause Notice issued by State Bank of India and the resultant order
passed by State Bank of India classifying the account of RCOM
company as fraud squarely answers the aforesaid question. He would
submit that while upholding the impugned action of the Bank and the
issue pertaining to grant of personal hearing the learned Division
Bench of this Court in paragraph No.25 clearly noted and
acknowledged the FAR but because Plaintiff did not press the same on
any ground the Division Bench observed that it was not required to go
into the same. He would submit that Plaintiff failed to raise challenge
to the FAR in several previous proceedings and therefore he is
precluded from raising the same in the present proceedings.
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6.8. He would submit that the Plaint is conspicuously silent on
the issue of declaration of fraud. He would submit that Defendant
No .1 Bank had as far back as on 21.12.2020 taken the statutory steps
to declare and upload the Fraud Monitoring Return qua Plaintiff
company RCOM on the Extensible Business Reporting Language
platform (for short "XBRL") of the RBI after Defendant No. 2
submitted the FAR on 15.10.2020 observing many major irregularities
and thus the fraud came to light. He has drawn my attention to the
said document appended at page No. 181 Exhibit "F" of the reply of
Defendant No. 1 to the Interim Application.
6.9. He would submit that Master Directions are a form of
delegated legislation and in the present case even though 2024 RBI
Master Directions state that the previous RBI Master Directions are
repealed, it is not so in the present case.
6.10. He would submit that 2016 RBI Master Directions are not
expressly repealed by the 2024 RBI Master Directions. He would
submit that there is no express repeal of the previous Directions since
validity of all pending actions under the previous Directions would
have to be continued despite the 2024 RBI Master Directions. He
would submit that there is no express omission of 2016 RBI Master
Directions in the 2024 RBI Master Directions and statutes speak
expressly as also positively and by omissions.
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6.11. He would submit that since the 2016 RBI Master Directions
and all actions taken thereunder continue, the clarification contained
in Footnote 14, inter alia, of the 2024 RBI Master Directions pertaining
to qualification of the Auditor under the relevant statutes does not
apply.
6.12. He would submit that Footnote 14 in the 2024 RBI Master
Directions fixes the qualification of the External Auditor for the first
time and by no stretch of imagination it could be said that the same
applies retrospectively to the External Auditor appointed by Banks
under the 2016 RBI Master Directions.
6.13. He would submit that the 2016 RBI Master Directions clearly
rule out the External Auditor to have qualification of Chartered
Accountant. He would submit that 2024 RBI Master Directions and
Footnote 14 contained therein will have to be therefore considered by
the Court as a substantive change in delegated legislation for the
purpose of fixing qualification of the External Auditor which was
otherwise inherently absent in the 2016 RBI Master Directions.
6.14. He would submit that a purposeful meaning is to be ascribed
to Footnote 14 and it is to be held as a substantive change to operate
prospectively and it cannot have any retrospective application.
6.15. He would submit that if interim relief is granted to the
Plaintiff it would render appointment of Defendant No.2 as illegal due
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to competence of Defendant No.2 and qualification of Defendant No.3.
6.16. He would submit that some Banks have declared Plaintiff as
fraud and it would have an effect on the said declaration since it has
been done after following the due process of law.
6.17. He would submit that the entire investigation pursuant to
issuance of show-cause notice and steps taken by Banks which have
been acquiesced by the Plaintiff and Plaintiff having participated in the
same would be rendered nugatory. Finally, he would submit that it
would seriously affect a vested position which is established pursuant
to issuance of show-cause notices by Banks and render all action for
effecting recovery null and void. He would submit that in so far as
Footnote 14 is concerned, the 2024 RBI Master Directions will have to
be considered as explanatory and clarificatory for the purpose of
consolidation of the substantive directions contained in the previous
2016 RBI Master Directions and hence it will have to be considered as
a substantive change.
6.18. Mr. Andhyarujina has referred to and and relied upon the
decision of the Supreme Court in the case of Zile Singh Vs. State of
Maharashtra and Ors.12 to contend that unless there are specific words
stated in the statute to show the intention of the legislature, the
statute will have to be determined as prospective in application only.
12 (2004) 8 Supreme Court Cases 1
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He would submit that qualification of the External Auditor rendered
vide Footnote 14 in 2024 RBI Master Directions will have to be
therefore considered as a substantive change and it cannot be merely
considered to be explanatory or clarificatory. Paragraph Nos.13 to 18
of the aforesaid judgment are relevant in this regard according to him
and are reproduced below:-
"13. It is a cardinal principle of construction that every statute
is prima facie prospective unless it is expressly or by necessary
implication made to have a retrospective operation. But the rule
in general is applicable where the object of the statute is to affect
vested rights or to impose new burdens or to impair existing
obligations. Unless there are words in the statute sufficient to
show the intention of the legislature to affect existing rights, it is
deemed to be prospective only -- "nova constitutio futuris
formam imponere debet non praeteritis" -- a new law ought to
regulate what is to follow, not the past. (See Principles of
Statutory Interpretation by Justice G.P. Singh, 9th Edn., 2004 at
p. 438.) It is not necessary that an express provision be made to
make a statute retrospective and the presumption against
retrospectivity may be rebutted by necessary implication
especially in a case where the new law is made to cure an
acknowledged evil for the benefit of the community as a whole
(ibid., p. 440).
14. The presumption against retrospective operation is not
applicable to declaratory statutes.... In determining, therefore,
the nature of the Act, regard must be had to the substance rather
than to the form. If a new Act is "to explain" an earlier Act, it
would be without object unless construed retrospectively. An
explanatory Act is generally passed to supply an obvious
omission or to clear up doubts as to the meaning of the previous
Act. It is well settled that if a statute is curative or merely
declaratory of the previous law retrospective operation is
generally intended.... An amending Act may be purely
declaratory to clear a meaning of a provision of the principal Act
which was already implicit. A clarificatory amendment of this
nature will have retrospective effect (ibid., pp. 468-69).
15. Though retrospectivity is not to be presumed and rather
there is presumption against retrospectivity, according to Craies
(Statute Law, 7th Edn.), it is open for the legislature to enact
laws having retrospective operation. This can be achieved by
express enactment or by necessary implication from the
language employed. If it is a necessary implication from the
language employed that the legislature intended a particular
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section to have a retrospective operation, the courts will give it
such an operation. In the absence of a retrospective operation
having been expressly given, the courts may be called upon to
construe the provisions and answer the question whether the
legislature had sufficiently expressed that intention giving the
statute retrospectivity. Four factors are suggested as relevant: (i)
general scope and purview of the statute; (ii) the remedy sought
to be applied; (iii) the former state of the law; and (iv) what it
was the legislature contemplated. (p. 388) The rule against
retrospectivity does not extend to protect from the effect of a
repeal, a privilege which did not amount to accrued right. (p.
392)
16. Where a statute is passed for the purpose of supplying an
obvious omission in a former statute or to "explain" a former
statute, the subsequent statute has relation back to the time
when the prior Act was passed. The rule against retrospectivity is
inapplicable to such legislations as are explanatory and
declaratory in nature. A classic illustration is the case of Attorney
General v. Pougett [(1816) 2 Price 381 : 146 ER 130] (Price at
p. 392). By a Customs Act of 1873 (53 Geo. 3, c. 33) a duty was
imposed upon hides of 9s 4d, but the Act omitted to state that it
was to be 9s 4d per cwt., and to remedy this omission another
Customs Act (53 Geo. 3, c. 105) was passed later in the same
year. Between the passing of these two Acts some hides were
exported, and it was contended that they were not liable to pay
the duty of 9s 4d per cwt., but Thomson, C.B., in giving
judgment for the Attorney General, said: (ER p. 134) "The duty
in this instance was, in fact, imposed by the first Act; but the
gross mistake of the omission of the weight, for which the sum
expressed was to have been payable, occasioned the amendment
made by the subsequent Act: but that had reference to the
former statute as soon as it passed, and they must be taken
together as if they were one and the same Act;" (Price at p. 392)
17. Maxwell states in his work on Interpretation of Statutes
(12th Edn.) that the rule against retrospective operation is a
presumption only, and as such it "may be overcome, not only by
express words in the Act but also by circumstances sufficiently
strong to displace it" (p. 225). If the dominant intention of the
legislature can be clearly and doubtlessly spelt out, the inhibition
contained in the rule against perpetuity becomes of doubtful
applicability as the "inhibition of the rule" is a matter of degree
which would "vary secundum materiam" (p. 226). Sometimes,
where the sense of the statute demands it or where there has
been an obvious mistake in drafting, a court will be prepared to
substitute another word or phrase for that which actually
appears in the text of the Act (p. 231).
18. In a recent decision of this Court in National Agricultural
Coop. Marketing Federation of India Ltd. v. Union of India
[(2003) 5 SCC 23] it has been held:
that there is no fixed formula for the expression of legislative
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intent to give retrospectivity to an enactment. Every legislation
whether prospective or retrospective has to be subjected to the
question of legislative competence. The retrospectivity is liable
to be decided on a few touchstones such as: (i) the words used
must expressly provide or clearly imply retrospective operation;
(ii) the retrospectivity must be reasonable and not excessive or
harsh, otherwise it runs the risk of being struck down as
unconstitutional; (iii) where the legislation is introduced to
overcome a judicial decision, the power cannot be used to
subvert the decision without removing the statutory basis of the
decision. There is no fixed formula for the expression of
legislative intent to give retrospectivity to an enactment. A
validating clause coupled with a substantive statutory change is
only one of the methods to leave actions unsustainable under the
unamended statute, undisturbed. Consequently, the absence of a
validating clause would not by itself affect the retrospective
operation of the statutory provision, if such retrospectivity is
otherwise apparent."
6.19. He has also relied upon the decision of Supreme Court in the
case of Commissioner of Income Tax (Central)-I, New Delhi Vs. Vatika
Township Private Limited13 in this regard. The relevant paragraph
Nos.27 to 31 therein read by him are reproduced below:-
"27. A legislation, be it a statutory Act or a statutory rule or a
statutory notification, may physically consists of words printed
on papers. However, conceptually it is a great deal more than
an ordinary prose. There is a special peculiarity in the mode of
verbal communication by a legislation. A legislation is not just a
series of statements, such as one finds in a work of fiction/non-
fiction or even in a judgment of a court of law. There is a
technique required to draft a legislation as well as to
understand a legislation. Former technique is known as
legislative drafting and latter one is to be found in the various
principles of "interpretation of statutes". Vis-à-vis ordinary
prose, a legislation differs in its provenance, layout and features
as also in the implication as to its meaning that arise by
presumptions as to the intent of the maker thereof.
28. Of the various rules guiding how a legislation has to be
interpreted, one established rule is that unless a contrary
intention appears, a legislation is presumed not to be intended
to have a retrospective operation. The idea behind the rule is
that a current law should govern current activities. Law passed
today cannot apply to the events of the past. If we do something
today, we do it keeping in view the law of today and in force
and not tomorrow's backward adjustment of it. Our belief in the
13 (2015) 1 Supreme Court Cases 1 : (2014) 367 ITR 466 : 2014 SCC OnLine SC 712.
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nature of the law is founded on the bedrock that every human
being is entitled to arrange his affairs by relying on the existing
law and should not find that his plans have been retrospectively
upset. This principle of law is known as lex prospicit non
respicit : law looks forward not backward. As was observed in
Phillips v. Eyre [(1870) LR 6 QB 1] , a retrospective legislation
is contrary to the general principle that legislation by which the
conduct of mankind is to be regulated when introduced for the
first time to deal with future acts ought not to change the
character of past transactions carried on upon the faith of the
then existing law.
29. The obvious basis of the principle against retrospectivity is
the principle of "fairness", which must be the basis of every
legal rule as was observed in L'Office Cherifien des Phosphates
v. Yamashita-Shinnihon Steamship Co. Ltd. [(1994) 1 AC 486 :
(1994) 2 WLR 39 : (1994) 1 All ER 20 (HL)] Thus, legislations
which modified accrued rights or which impose obligations or
impose new duties or attach a new disability have to be treated
as prospective unless the legislative intent is clearly to give the
enactment a retrospective effect; unless the legislation is for
purpose of supplying an obvious omission in a former legislation
or to explain a former legislation. We need not note the
cornucopia of case law available on the subject because
aforesaid legal position clearly emerges from the various
decisions and this legal position was conceded by the counsel
for the parties. In any case, we shall refer to few judgments
containing this dicta, a little later.
30. We would also like to point out, for the sake of
completeness, that where a benefit is conferred by a legislation,
the rule against a retrospective construction is different. If a
legislation confers a benefit on some persons but without
inflicting a corresponding detriment on some other person or on
the public generally, and where to confer such benefit appears
to have been the legislators' object, then the presumption would
be that such a legislation, giving it a purposive construction,
would warrant it to be given a retrospective effect. This exactly
is the justification to treat procedural provisions as
retrospective. In Govt. of India v. Indian Tobacco Assn. [(2005)
7 SCC 396] , the doctrine of fairness was held to be relevant
factor to construe a statute conferring a benefit, in the context
of it to be given a retrospective operation. The same doctrine of
fairness, to hold that a statute was retrospective in nature, was
applied in Vijay v. State of Maharashtra [(2006) 6 SCC 289] . It
was held that where a law is enacted for the benefit of
community as a whole, even in the absence of a provision the
statute may be held to be retrospective in nature. However, we
are (sic not) confronted with any such situation here.
31. In such cases, retrospectivity is attached to benefit the
persons in contradistinction to the provision imposing some
burden or liability where the presumption attaches towards
prospectivity. In the instant case, the proviso added to Section
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113 of the Act is not beneficial to the assessee. On the contrary,
it is a provision which is onerous to the assessee. Therefore, in a
case like this, we have to proceed with the normal rule of
presumption against retrospective operation. Thus, the rule
against retrospective operation is a fundamental rule of law that
no statute shall be construed to have a retrospective operation
unless such a construction appears very clearly in the terms of
the Act, or arises by necessary and distinct implication.
Dogmatically framed, the rule is no more than a presumption,
and thus could be displaced by outweighing factors."
7. Mr. Setalvad, learned Senior Advocate is appearing for
Defendant No. 1 - Bank of Baroda ( for short "BOB") in Suit (L) No.
37862 of 2025. He would adopt the principal submissions made by
Mr. Andhyarujina which are not repeated herein for brevity but stand
adopted as traversed by him. He would submit that some facts qua
BOB are different as Fraud Classification Order dated 02.09.2025 is
passed by BOB which is pending challenge in Writ Jurisdiction before
this Court. At the outset he would draw my attention to the prayer
clauses in the Suit Plaint and would submit that the only prayer that
would survive in the facts and circumstances of Plaintiff's case qua
BOB as on date would be the prayer for seeking damages which is
prayer Clause (a). He would submit that all other prayer clauses from
prayer Clauses (b) to (f), inter alia, pertaining to challenge to the FAR,
recall of FAR, challenge to the Show Cause Notice, recall of Show
Cause Notice and all actions taken in furtherance thereof do not
survive since fraud classification Order has already been passed and
further consequential steps are contemplated.
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7.1. He would draw my attention to the order dated 17.04.2025
passed by this Court in Writ Petition (L) No. 9343 of 2025 in respect of
the very same show-cause-notice which is the subject matter of
challenge in the present Suit proceedings. He would next draw my
attention to the proceedings in Writ Petition (L) No. 2905 of 2025
filed by Plaintiff in this Court once again for the very same cause of
action i.e. to challenge the same Show Cause Notice and all
consequential actions taken in furtherance thereof. He would submit
that once such aforesaid multiple challenges for the same cause of
action are maintained in the Writ Court, present Suit proceeding for
the same reliefs are nothing but an abuse of the due process of law
and on this count alone, Plaintiff is disentitled to interim relief. He
would submit that there is no delay whatsoever on the part of
Defendant No. 1 to issue the Show Cause Notice and a completely
false case of urgency has been pleaded by Plaintiff seeking interim
relief in paragraph No. 11 of the Suit Plaint by building a false
narrative that Plaintiff was not aware of the FAR. He would submit
that Plaintiff is not entitled to interim relief concerning the alleged
cause of action stated in the Suit Plaint of having obtained the Report
and information on qualification of Respondent No. 2 through RTI
when Plaintiff was fully aware about the FAR prepared by Defendant
No. 2 almost 5 years ago. Hence he would submit that the Plaintiff is
not entitled to any interim relief as grant of interim relief would upset
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the consequential steps taken by the Bank in furtherance of the Show
Cause Notice and personal hearing granted to Plaintiff.
7.2. He would adopt the submissions made by Mr. Andhyarujina
with respect to acquisition of knowledge of the FAR by Plaintiff
through RTI Application filed by a third party stranger and with
respect to the date of cause of action having arisen as stated in the Suit
plaint to argue the bar of limitation. He would submit that Plaintiff
was all along aware of the FAR and its signatory i.e. Defendant No. 3,
but did not take any steps whatsoever in the last five years until filing
of the present Suit proceedings to challenge the BDO LLP report on the
ground of competence and qualification of Defendant Nos.2 and 3. He
would submit that multiple proceedings filed by Plaintiff before
different Courts including the Supreme Court and despite he not
having raised any objection to the FAR on the above grounds during
the past five years clearly amount to waiver and estoppel by Plaintiff
of the alleged grounds pleaded in the Suit Plaint. He would submit
that the conduct and action of Plaintiff clearly amount to giving up the
plea to challenge the Auditor's qualification when the Plaintiff is
consistently litigating in this Court for the past two years.
7.3. In his usual fairness he would submit that Defendant No. 1
Bank was not a party to the consortium led by SBI leading to
appointment of the Forensic Auditor namely Defendant No. 2.
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However he would submit that BOB is exposed to the account of
Plaintiff's Companies and is a member of the JLF and FAR dated
15.10.2020 clearly records potential diversion of funds including
transfer of funds to subsidiary group companies and related parties
affecting the Defendant No.1 - Bank.
7.4. He would submit that as a matter of fact Defendant No. 1
Bank paid Rs. 19.21 Lakhs as fee towards its share for preparation of
the FAR to Defendant No.2. He would submit that the ground of
challenge to Auditor's qualification is taken by Plaintiff as a complete
afterthought and is a malafide exercise of the due process of law after
he having failed to obtain reliefs for the past two years in a multitude
of proceedings filed by him. He would submit that the Suit is hit by the
bar of limitation since Plaintiff had knowledge about the FAR as far
back as in 2021 and he chose not to challenge the same on the
grounds of challenge in the present Suit proceedings and therefore the
Interim Application seeking reliefs be dismissed with exemplary costs.
7.5. He would submit that SEBI as one of the market regulator
does not require the Forensic Auditor to be a Chartered Accountant as
Forensic Auditor can be an expert having expertise in the field of
investigation and forensic auditing. He would draw my attention to
the JLF decision at page No. 102 of the Bank's reply Affidavit wherein
Plaintiff has been declared as fraud and substantial investigation is
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underway and therefore would vehemently persuade the Court to
consider that if any interim relief is granted at this stage to Plaintiff,
the entire investigation undertaken by the Law Enforcement Agencies
will be derailed and set to naught.
7.6. He would submit that the only remedy therefore available to
Plaintiff at this stage, considering the present facts and circumstances,
is to go for a personal hearing before the Bank as final order declaring
Plaintiff's account as fraud has already been passed on 02.09.2025. He
would submit that Plaintiff would have to submit his explanation to
the findings and conclusions in the FAR rather than challenge the
Report on the ground of competency and qualification of Defendant
No.2 and 3 which is a complete afterthought. He would draw my
attention to the FAR at page No. 130 of the Suit Plaint and would
submit that the FAR is prepared and signed by Defendant No. 3, then
Partner of Defendant No.2 firm and it is not Plaintiff's case that he did
not know as to who was the author and signatory of the said report.
7.7. He would submit that as far back as in the year 2020,
Plaintiff was fully aware of the fact that FAR was prepared and signed
by Defendant No. 3. He would draw my attention to the 2016 RBI
Master Directions and would contend that holistically reading the said
Directions clearly envisage no requirement of a Chartered Accountant
to conduct a Forensic Audit. He would submit that considering the
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gamut of proceedings in the last five years and more specifically in the
last two years filed by Plaintiff and he being well aware of the FAR
which forms an integral part of all his challenges, he cannot now turn
around and seek to challenge the qualification and competence of the
Forensic Auditor on the specious ground that the 2024 RBI Master
Directions require a Chartered Accountant to be a Forensic Auditor.
7.8. He would submit that in the present case insofar as BOB is
concerned, a complete copy of the FAR was forwarded to Plaintiff on
27.06.2024 which is duly acknowledged by him on 09.07.2024. He
would submit that in that view of the matter when Plaintiff was fully
aware of the Forensic Audit even otherwise since 2021, which is borne
out from the correspondence between the Advocates for the Bank and
Plaintiff, a clear case of clever drafting of attempting to bring the Suit
proceeding within limitation is made by challenging the competency
and qualification of the author of the Report. He would submit that
insofar as BOB is concerned, Plaintiff himself by letter dated
15.07.2024 sought eight weeks' time on the ground that he was still
analyzing the Report.
7.9. He would submit that Plaintiff raised his grievances with
respect to the cause of action, inter alia, referring to the FAR prepared
by BDO LLP before the Reserve Bank of India by his detailed complaint
dated 22.03.2025 appended at page No. 710 Exh. "CC" to the Suit
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plaint wherein he did not question the competence and qualification of
Defendant Nos. 2 and 3 and accepted the Report. He would submit
that despite raising several grievances Plaintiff never raised any
grievance whatsoever to challenge the competence and qualification of
the Auditor in multiple proceedings. He would submit that by order
dated 01.08.2025 Reserve Bank of India closed the complaint of
Plaintiff and thus pursuant thereto on 02.09.2025 fraud classification
Order was passed. He would submit that Writ Petition is filed by
Plaintiff to challenge the fraud classification Order and in paragraph
No. (f) thereof identical ground of challenge has been taken.
7.10. In view of above submissions, he would submit that since all
along Plaintiff was fully aware of the External Auditor's qualification
and credentials and he having filed multiple proceedings, he is now
estopped from launching a fresh challenge in the present Suit
proceeding on the same cause of action in law and the Court should
not permit the same.
7.11. On merits of the matter he would adopt the submissions
made by Mr. Andhyarujina and in addition thereto submit that 2016
RBI Master Directions do not refer to External Auditor which will have
to be construed as distinct and separate from that of appointment of
Internal Auditor of the Company envisaged under Section 141 of the
Companies Act. He would submit that 2016 RBI Master Directions do
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not refer to any qualification for the Auditor and therefore case of
Plaintiff is bad in law since Show Cause Notice has been issued to
Plaintiff under the 2016 Master Directions.
7.12. He would submit that if this Court gives any interim relief to
the Plaintiff it would render the entire investigation undertaken so far
by the Law Enforcement Agencies nugatory for all practical purposes
and all orders denying relief to the Plaintiff by the Superior Courts
shall stand overturned. He would submit that the 2024 RBI Master
Directions are issued in supersession of the 2016 RBI Master
Directions and they cannot be applied retrospectively to the 2016
Directions. He would refer to and rely upon paragraph No. 66 of the
decision in the case of State of Orissa v. Titaghur Paper Mills Co. Ltd. 14
in support of his above submissions.
7.13. On the issue of limitation he would submit that he would
adopt the submissions made by Mr. Andhyarujina and further submit
that in view of consistent action of Plaintiff in approaching the Court
of law repeatedly and filing multiple proceedings in the past two
years, Plaintiff being fully aware of the author of the FAR as far back
as in 2020, this is a fit case for exercise of inherent jurisdiction of the
Court under Section 151 of the Civil Procedure Code, 1908 (for short
"CPC") for dismissing the Suit Plaint at the threshold with exemplary
costs.
14 1985 Supp SCC 280
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7.14. He would refer to and rely upon the decisions of the
Supreme Court in the following cases viz; Patil Automation (P) Ltd v.
Rakheja Engineers (P) Ltd. 15 , Dhanbad Fuels Private Limited Vs.
Union of India16 and Shri Mukund Bhavan Trust v. Shrimant
Chhatrapati Udayan Raje Pratapsinh Maharaj Bhonsle 17 in support of
his submissions. He would submit that it has been held by the
Supreme Court in the case of Shri Mukund Bhavan Trust (supra) at
paragraph No. 41 thereof that if it is a case of clever drafting noticed
by Court, then such action of Plaintiff has to be nipped in the bud
itself.
7.15. He would submit that balance of convenience and prima
facie case has not been made out and hence Plaintiff is disentitled to
any interim relief. On the issue of irreparable loss, he would submit
that grave consequences would follow if this Court grants interim
relief to the Plaintiff since pursuant to the Show Cause Notice and
fraud classification Order substantial steps have been taken in that
direction and all those actions will stand overturned in the process and
not only the Defendant No. 1 Bank but all members of the consortium
who are lenders and who have suffered will be affected. Hence, he
would submit that Plaintiff is not entitled to any interim relief
whatsoever.
15 (2022) 10 SCC 1
16 (2025) 9 SCC 424
17 (2024) 15 SCC 675
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8. Mr. Bharucha, learned Senior Advocate appears for
Defendant No.1 - IDBI Bank in Suit (L) No.37573 of 2025. In his usual
fairness, at the outset, he would submit that he adopts the submissions
and arguments canvassed by both the Learned Senior Advocates Mr.
Andhyarujina and Mr. Setalvad. For brevity the same are not repeated
and reiterated herein and they stand adopted as traversed. He would
submit that in addition thereto and to the extent of additional /
differential facts qua IDBI Bank he would like to make the following
submissions:-
8.1. He would submit that case of Plaintiff qua IDBI Bank stands
on a completely different footing to some extent. He would submit
that case of Plaintiff is on the premise that IDBI's Fraud Committee
proceedings are based on BDO LLP's FAR and that Defendant No.2 is
not an Auditor appointed under the 2024 RBI Master Directions. He
would submit that the case of Plaintiff is erroneous since IDBI's Fraud
Committee proceedings are issued under the 2016 RBI Master
Directions.
8.2. Next, he would submit that the Defendant No.2 - Auditor -
BDO LLP is an empanelled Forensic Auditor with IBA and since IDBI
Bank is a Member of this Association it cannot be faulted for relying on
BDO LLP's FAR. He would submit that IDBI Bank has followed the
entire procedure set out in the 2016 RBI Master Directions on Fraud, it
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has complied with Supreme Court's directions on principles of natural
justice which the Plaintiff has availed of to defend himself and once
that is done it is now not open to Plaintiff to challenge the FAR on the
ground that the 2024 RBI Master Directions provide for a different
process / qualification of the Auditor.
8.3. He would submit that in so far as IDBI Bank is concerned
Plaintiff after much delay and several failed Court challenges
eventually appeared personally for hearing before IDBI's Fraud
Committee on 30.10.2025 and thereafter has submitted a detailed
written representation. He would submit that from the date of
issuance of Show Cause Notice on 31.05.2024 to the Plaintiff filing
detailed written representation after October 2025 and Plaintiff fully
being aware of the FAR and status of its author, not even once Plaintiff
has raised challenge to the Report on the ground of Auditor's
qualification. Hence, he would submit that it is a complete
afterthought on the part of Plaintiff to file the present Suit proceeding
which is an abuse of the due process of law.
8.4. He would submit that in October 2025, Plaintiff filed Writ
Petition (L) No.34065 of 2025 before this Court seeking stay of his
scheduled personal hearing which he had agreed to attend. However,
he withdrew the Writ Petition and agreed to appear before IDBI's
Fraud Committee. He would submit that all along for the past several
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years Plaintiff has never objected or raised grievance about
competency and qualification of the Forensic Auditor and he has filed
the present Suit entirely on a new ground of which he was fully aware
of during the last 5 years. Hence, he would submit that the Suit cannot
maintain a challenge to the FAR either on merits or competency and
no equities are created in favour of Plaintiff. He would therefore
vehemently urge the Court to dismiss the Suit itself at the threshold
with exemplary costs.
8.5. On the issue of merits, he would additionally submit that the
2024 RBI Master Directions do not invalidate either the Show Cause
Notice or the process (including the Audit Report) initiated under the
2016 RBI Master Directions. He would submit that the Division Bench
of this Court in the Plaintiff's own case i.e. Anil Ambani Vs. State Bank
of India18 has settled this issue. He would submit that the said
judgment covers IDBI Bank's Show Cause Notice and the fraud
proceedings. He would submit that the 2024 RBI Master Directions
apply 'prospectively' and do not cover the process initiated and
completed under the 2016 RBI Master Directions. He would submit
that even otherwise, the Directions in the 2014 RBI Master Directions
of appointment of "Auditor" are directory and not mandatory.
8.6. He would submit that no statute provides for conducting a
Forensic Audit by an 'Auditor' in terms of the Companies Act, 2013. He
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would submit that if the interim relief sought by Plaintiff is granted
then it will set the clock four years backwards and cause serious
prejudice to IDBI Bank and other Lender Banks. He would submit that
the alleged fraudulent transactions in the FAR are of approximately to
the tune of Rs. 33603 crores and interim relief or any other relief
would have an adverse cascading effect on the Indian economy
because of the sheer size of the transactions.
8.7. Next, he would submit that this Court should take into
cognizance the fact that since the year 2019 the lead Bank of the
consortium consisting of 20 banks and Lenders of RCOM, RTL and
RITL appointed Defendant No.2 BDO LLP to conduct the Forensic
Audit of the three (3) Companies of Plaintiff for the period from 2013
to 2017. He would submit that on 15.10.2020 Defendant No.2
submitted its FAR to the JLF alleging that substantial payment
received from the Banks were used to pay connected parties and other
Bank loans and were used as Investment by the three (3) Companies.
8.8. He would submit that since the year 2021, Plaintiff was fully
aware of the status of BDO LLP Report. He would fairly submit that
though the BDO LLP Report was shared with Plaintiff by other banks
in and around 2023-2024, Defendant No.1 - IDBI Bank shared and
forwarded it to Plaintiff on 26.06.2025. He would submit that despite
the above fact, on 17.10.2025 Plaintiff filed Writ Petition (L)
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No.34065 of 2025 against IDBI Bank seeking order for production and
disclosure of all documents relied upon in the Show Cause Notice
before conducting a personal hearing. He would submit that this Writ
Petition was withdrawn on 28.10.205 by Plaintiff and he agreed to
appear before IDBI Bank's Fraud Committee for personal hearing and
sought liberty to answer all contentions before the Committee.
8.9. He would vehemently submit that during the aforesaid
proceedings not even once Plaintiff raised the grievance of Auditor's
status and qualification under the 2024 RBI Master Directions. Neither
he raised challenge for withdrawal of Show Cause Notice on that
ground. He would submit that on 29.10.2025 IDBI Bank declared
RCOM - the borrower as "fraud account" based on Defendant No.2's
FAR and thus action is completed. He would submit that Plaintiff was
RCOM's Promoter and thus in control of RCOM. He would submit that
declaration as "Fraud" by order dated 29.10.2025 is not challenged
rather Plaintiff has appeared before IDBI's Fraud Committee and made
oral submissions for almost (two) 2 hours recently.
8.10. He would submit that even thereafter correspondence is
exchanged with IDBI Bank seeking list of documents but no grievance
or complaint is made alleging that the 2024 RBI Master Directions
superseded the 2016 Directions or for that matter to challenge
qualification of the Auditor. He would submit that it is in this
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background that present Suit is filed by Plaintiff now to seek a
declaration that Show Cause Notice by IDBI Bank is bad in law after
he having appeared at the personal hearing before the Committee,
which should not be countenanced by Court.
8.11. On the basis of the above critical dates he would submit that
Plaintiff's entire argument that IDBI's fraud proceedings rely on
Defendant No.2's FAR and that Defendant No.2 is not an "Auditor'
under the 2024 RBI Master Directions on Fraud fails because IDBI's
proceedings are governed by the old 2016 RBI Master Directions on
Fraud and not the new one. He would submit that Defendant No.2 was
qualified to conduct the Forensic Audit of RCOM - the borrower and
Plaintiff. He would submit that Defendant No.2 is an empanelled
Forensic Auditor with the IBA. He would submit that as Member of
the consortium, IDBI cannot be blamed for relying on Defendant
No.2's Report. He would submit that the list of empanelled Forensic
Auditors appended at page No.46 of IDBI's reply show that Defendant
No.2's name appears at serial No.96 of the said list.
8.12. He would submit that Defendant No.2's Report is now
sought to be impugned as being contrary to the new 2024 RBI Master
Directions on Fraud which is the basis on which RCOM, i.e. the
Borrower was found to be a "fraud account". He would submit that
neither RCOM nor Plaintiff has challenged this classification of fraud
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on any ground whatsoever and hence it has attained finality.
8.13. He would submit that the entire fraud proceeding as
mandated by the 2016 RBI Master Directions on Fraud has been
concluded in the case of IDBI. He would submit that Plaintiff cannot at
this stage now seek to belatedly stay further proceedings or seek any
relief, interim or otherwise, from this Court on a wholly misconceived
contention that was available to him for over a year.
8.14. He would submit that after the conclusion of fraud
proceeding under the 2016 RBI Master Directions on Fraud including
adherence to the principles of natural justice as mandated by the
Supreme Court in Rajesh Agarwal (supra) any stay at this stage would
irretrievably prejudice and harm the Bank's right and duty to initiate
legal action against the mastermind of the fraudulent transactions. He
would submit that the Bank is an injured party because its money was
wrongly diverted by Plaintiff's Companies by fraudulent transactions.
He would submit that Bank's right and duty to act against a party that
defrauded it cannot be taken away on wholly misconceived grounds.
8.15. He would submit that IDBI's fraud proceedings are distinct
from those of other banks. He would submit that IDBI has adhered to
the procedure outlined in the 2016 RBI Master Directions on Fraud
and has provided multiple opportunities for Plaintiff to defend himself.
He would submit that once the process under old 2016 RBI Master
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Directions on Fraud has been completed both in respect of the
principal borrower i.e., RCOM and Plaintiff no challenge can now be
made to it on the ground that the 2024 RBI Master Directions on
Fraud provide for a different process.
8.16. He would submit that Plaintiff's claim must fail since under
both 2024 Master Directions and 2016 Master Directions, FAR need
not be prepared by a statutory Auditor and is prepared merely for
investigative purposes. He would submit that a statutory Auditor
cannot undertake Forensic Audit within the meaning of Section 143 of
Companies Act, 2013.
8.17. On the issue of Footnote 14 in the 2024 RBI Master
Directions, he would submit that the same cannot be used by Plaintiff
to qualify the main provision stated in the Directions. He would submit
that its plain wording is not limited to the Companies Act, 2013 alone
as the relevant statute but other Acts and Laws are also applicable,
that the SEBI guidelines and Notification dated 02.09.2015 and more
specifically sub Section 17 of Listing Obligations and Disclosure
Requirement (for short "LODR") would also be applicable. In support
of this submission he has referred to and relied upon the decision of
the Supreme Court in the case of C. Bright Vs. The District Collector
and Others.19
19 Civil Appeal No. 3441 of 2020 decided on 05.11.2020
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8.18. With regard to the contention regarding Footnote he has
referred to and relied upon the decision of the Supreme Court in the
case of V.B. Prasad Vs. Manager, P.M.D.U.P. School and Ors. 20. He
would further refer to and rely upon the recent decision of the Delhi
High Court in the case of Avantha Holdings Limited and Another Vs.
Union of India and Ors.21 to contend that a power to declare fraud lies
solely with banks not with Forensic Auditors, that FAR is merely a
piece of evidence and not amenable to challenge as it is nothing but an
opinion of expert and no civil or evil consequences flow directly from
such a Report until and unless some prejudicial administrative
decision is taken by the Lender - Bank (s) or JLF on the basis of the
said Report and FAR by itself will not cause any prejudice since it is
merely opinion of an expert.
8.19. In furtherance to above, in support of his submissions he has
referred to and relied upon the following decisions of the Courts:-
(i) The decision of the Supreme Court in the case of
Chairman, U. P. Jal Nigam and Another Vs. Jaswant Singh
and Another22 wherein reliance is placed on paragraph Nos.9
and 12 thereof which are reproduced below for reference:-
"9. ...similarly in Jagdish Lal v. State of Haryana this Court
reaffirmed the rule if a person chose to sit over the matter
and then woke up after the decision of the court, then such
20 (2007) 10 SCC 269
21 WP (C) 274 of 2023
22 2006 11 SCC 464
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person cannot stand to benefit. In that case it was
observed as follows: (SCC p. 542). "The delay disentitles a
party to discretionary relief under Article 226 or Article 32
of the Constitution. The appellants kept sleeping over their
rights for long and woke up when they had impetus from
Virpal Singh Chauhan case. The appellants' desperate
attempt to redo the seniority is not amenable to judicial
review at this belated stage" .
10. xxxxxx
11. xxxxxx
"12. ...it is unjust to give the claimant a remedy where, by
his conduct, he has done that which might fairly be
regarded as equivalent to a waiver of it; or where by his
conduct and neglect, though not waiving his remedy, he
has put the other party in a position in which it would not
be reasonable to place him if the remedy were afterwards
be asserted."
(ii) The decision of the Supreme Court in the case of
Chairman, State Bank of India and Anr Vs. M. J. James 23,
wherein reliance is placed on paragraph No.41 relevant
excerpt of which reads thus:-
"41. ...it is, therefore, necessary for the court to consciously
examine whether a party chosen to sit over the matter and
has woken up to gain any advantage and benefit, which
aspects have been noticed in Dehri Rohtas Light Railway
Co. v. District Board, Bhojpur and State of Maharashtra v.
Digambar. These facets, when proven, must be factored
and balanced, even when there is delay and laches on the
part of authorities."
8.20. He would submit that the Division Bench of this Court in the
case of Anil Ambani (supra), specifically in paragraph No.13 has held
as under:-
"13. ...there is no mention in the Master Directions 2024
relating to the validity of a SCN being issued prior to the said
Directions. Issuance of a detailed SCN to give an opportunity to
23 2022 2 SCC 301
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the borrower of being heard is the only sine qua non as per the
Master Directions 2024. As long as the principles of natural
justice are complied with and the doctrine of audi alteram
partem is ensured, there is no violation of the Master Directions
2024 nor the directions issued by the Supreme Court in Rajesh
Agrawal (supra)" (para 12 of the judgment). The High Court
further held that, "SBI was entitled to proceed pursuant to the
impugned SCN issued 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".
8.21. He would submit that relying on this decision, this Court
held that SBI's Show Cause Notice dated 20.12.2023 is valid under the
new 2024 RBI Master Direction of Fraud. From the above, he would
submit that IDBI's case falls under the same category. Hence, he would
submit that Plaintiff has made out no case for interference by Court at
this stage.
8.22. In addition to above, he would contend that even otherwise,
the 2024 RBI Master Directions on Fraud do not invalidate the
proceedings initiated (and completed) under the 2016 RBI Master
Directions as it is clear from the language of the 2024 RBI Master
Directions. He would submit that the 2024 RBI Master Directions on
Fraud apply 'prospectively' and do not cover the process initiated and
completed under the 2016 RBI Master Directions on Fraud.
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8.23. In support of his above submission, he has referred to and
relied upon the decision of the Supreme Court in the case of P.
Mahendran and Ors. v. State of Karnataka 24 wherein on the rule of
construction of statute the Court in paragraph No.5 held as under:-
"5. ...it is well settled rule of construction that every statute or
statutory rule is prospective unless it is expressly or by necessary
implication made to have retrospective effect. Unless there are
words in the statute or in the Rules showing the intention to
affect existing rights the rule must be held prospective. If a rule
is expressed in a language which is fairly capable of either
interpretation it ought to be construed as prospective only. In
the absence of any express provision or necessary intendment
the rule cannot be given retrospective effect except in the
manner of procedure."
8.24. He would submit that the 2024 RBI Master Directions on
Fraud cannot be interpreted to have retrospective effect. He would
submit that the process (including the Show Cause Notice) initiated
and concluded under the 2016 RBI Master Directions on Fraud cannot
be impacted by the new 2024 RBI Master Directions. He would submit
that Plaintiff's position that Defendant No.2 must be an 'Auditor' in
terms of the new Directions therefore must fail and cannot be
countenanced as there is no clear provision in the new 2024 RBI
Master Directions on Fraud, giving it retrospective effect.
8.25. In support of his above submissions, he has referred to and
relied upon the decision of the Supreme Court in the case of
Chandravathi P.K. and Ors. Vs. C.K. Saji25 , more specifically on
paragraph No.34 therein which reads thus:-
24 1990 1 SCC 411
25 2004 3 SCC 734
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" 34. ...the State in exercise of its power under Article 309 of the
Constitution of India may give retrospective effect to a rule but
the same must be explicit and clear by making express provision
therefor or by necessary implication but such retrospectivity of a
rule cannot be inferred only by way of surmises and
conjectures."
8.26. In furtherance to above, he has referred to and relied upon
the decision of the Supreme Court in the case of State of Punjab and
Others Vs. Arun Kumar Aggarwal and Others 26 wherein the Court has
reconfirmed the rule of 'prospectivity' while interpreting a delegated
legislation. He would submit that the decision in paragraph No.30 of
the above citation records that if there is no quarrel over the
proposition of law then normal rule is that the vacancy prior to the
new Rules would be governed by the old Rules and not by the new
Rules. Hence, he would submit that the new 2024 RBI Master
Directions on Fraud is a delegated legislation and the 'rule of
prospectivity' applies to it. Therefore, he would urge the Court to
reject the Interim Application for interim relief in the interest of
justice.
9. Mr. Dwarkadas, learned Advocate appears on behalf of
Defendant Nos. 2 and 3 - BDO LLP - the Auditor who has prepared
and signed the Report. He would draw my attention to 3 separate
Affidavits - In - Reply filed in the three Interim Applications in the
three suit proceedings. He would submit that all 3 affidavits are
absolutely identical and his submissions are common with regard to all
26 2007 10 SCC 402
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3 proceedings on behalf of Defendant Nos.2 and 3. At the outset he
would submit that in so far as Defendant Nos. 2 and 3' s outlook is
concerned as per clause 8.8.2 of 2016 RBI Master Directions
Defendant No.2 was appointed as External Auditor on 07.05.2019. He
would submit that on 15.10.2020 Defendant No.2 submitted FAR to
SBI which was prepared by its then Partner i.e. Defendant No.3 and
signed by him. He would submit that it was only in 2023 that
Standards and Regulations to govern Audit were issued for the first
time by ICAI and by virtue of Footnote 14 in the 2024 RBI Master
Directions the relevant statute was referred to for the purpose of
qualification of the Auditor whether for Internal Audit or External
Audit.
9.1. He would submit that since the exercise conducted by
Defendant No.2 was duly completed and complied with in the year
2020 itself no challenge whatsoever can now be made to the FAR on
the ground of qualification of the author of the Report when no such
impediment or requirement existed at the then time and more
specifically so under the then prevailing 2016 RBI Master Directions.
In the aforesaid background he would draw my attention to the Suit
plaint and averments made therein pertaining to the purpose of filing
the Suit qua Defendant Nos. 2 and 3 in paragraph nos 6.1 and 9.3
thereof.
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9.2. He would submit that even according to Plaintiff in all 3 suit
proceedings as stated in paragraph No. 9.4(iv) of the Suit plaint,
Plaintiff has accepted the 2016 RBI Master Directions governing
appointment of Defendant No.2 as Auditor. Therefore he would
submit that on the date of signing of the FAR and its submission to
State Bank of India i.e. on 15.10.2020 there was no requirement
prescribed under the 2016 RBI Master Directions for the author of the
Report to be a CA. He would submit that it is only in the 2024 RBI
Master Directions that there was a change in regime wherein
clarification was issued under Footnote 14 for the first time for the
External Auditor to be a CA under the relevant statutes. He would
vehemently submit that in 2019 - 2020 there was no such eligibility
requirement and therefore FAR filed by Defendant No.2 and authored
by Defendant No.3 cannot be faulted.
9.3. He would on instructions submit that on the date on which
the report was issued i.e. 15.10.2020 Defendant No. 2 - BDO LLP had
40 CA's as partners out of the then 59 partners representing Defendant
no.2 - BDO LLP. He would fairly admit that all the CAs of Defendant
No. 2 - BDO LLP did not have certification from ICAI under the
Chartered Accountants Act, 1949 but according to him this would not
be fatal to the answering Defendants' case at all. He would submit
that there are two 2 types of CAs' envisaged under the Chartered
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Accountants Act,1949 namely CA in practice and CA not in practice He
would submit that under Section 4 of the Act, entry of names in the
Register is referred to and Section 6 refers to Certificate of Practice.
9.4. He would submit that it is only in 2023 that ICAI began
regulating Forensic Auditing for the first time and even as per the said
regulations which are mandatory in application after 01.07.2023 it is
not mandatory for a CA to be the signatory of the Audit Report. He
would persuade me to consider the distinction between a certified
qualified professional engaged in Forensic Auditing and a member of
ICAI who is a CA. He would submit that it is only for the first time that
a detailed compendium of Forensic Accounting and Investigating
Standards was issued in 2023 by ICAI offering detailed guidance on
planning and executing Forensic Investigations which is placed on
record by him.
9.5. He would persuade me to consider Clause 4.0 and Clause
5.0 therein pertaining to Forensic Accounting and Investigating
Standards which would apply to all members of ICAI when conducting
FAR Assignments of any entity. He would submit that these standards
do not require the professional to be a CA which is clear when
definition of Professional under Clause 3.0 of Section 2 thereof is seen.
He would submit that forensic accounting is defined in the framework
therein as gathering and evaluation of evidence by a professional to
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interpret and report findings before a competent authority. He would
submit that the Code of Ethics govern a member of ICAI by not only
the Chartered Accountants Act, 1949 but even other other relevant
pronouncements / statutes as well.
9.6. He would vehemently submit that skill and competence of
the professional do not necessarily reflect qualification of the
professional as a CA only. He would submit that what is stated in the
Regulations is that the professional shall have the appropriate
qualification to undertake FAR engagements. He would submit that it
is stated therein that a CA qualification or post qualification certificate
courses are ideal and global qualifications, certifications and such
similar credentials carry requisite weight.
9.7. In the above background he would draw my attention to
paragraph Nos. 33, 34, 37 and 38 in the Defendant No.2's affidavit in
reply. In these paragraphs the competency and skills of Defendant Nos.
2 and 3 have been stated. He would submit that Defendant No.2 -
BDO LLP is a Forensic Auditor Firm empanelled by the IBA for
conducting Forensic Audit. He would submit that the 2016 RBI Master
Directions admittedly permit special Forensic Investigations by
Forensic Auditors and Defendant Nos.2 and 3 are / were competent to
conduct Forensic Audit and prepare FAR. He would submit that
Defendant No. 3 was partner of Defendant No.2 - BDO LLP firm at the
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then time who led the Audit assignment and authored and signed the
FAR on behalf of Defendant No.2 - BDO LLP. He would submit that
Defendant No.3 is a highly experienced Forensic and Risk practitioner.
9.8. He would submit that Defendant No. 3 was a Senior Partner
for more than 2 years and served as leader of the Forensic Services
Team of Defendant No.2 - BDO LLP at the then time. He would submit
that Defendant No. 3 was a member of the Association of Certified
Fraud Examiners, USA; that he was practicing in the area of forensics
since 2002 - 2003 and had worked with Hill and Associates Private
Limited and held Senior and leadership roles in Risk Consulting and
Forensics; that he had worked with KPMG India, KPMG Nigeria and
PWC India (all consulting firms) before joining Defendant No. 2 at the
then time and is presently partner and leader of Forensic and Risk
Advisory Services at Nangia Anderson LLP. He would submit that
Defendant No. 3 had experience of 600 Risk Consulting Assignments
with specialization in Fraud and Misconduct Investigations,
Investigative due diligence, compliance reviews, Computer Forensics
and Fraud Risk Assessments at the then time.
9.9. He would vehemently submit that Defendant No. 3 is a
seasoned Forensic professional meeting competence and expectations
for conducting Forensic Audit and preparing FAR. He would submit
that equally Defendant No. 2 is a respected firm and member entity of
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BDO International Limited, a UK based Company, which is a leading
professional services company operating in more than 166 countries
and territories globally. He would submit that Defendant No.2 - BDO
LLP is a member of BDO International Limited in India and
consistently renders professional services of the highest standards and
has over the years built a strong reputation and goodwill in the
professional services sector. He would submit that by dragging
Defendant Nos. 2 and 3 in the present dispute causes harm to their
reputation and causes them grievous loss and injury despite they being
thoroughly qualified as professionals.
9.10. On the issue of merits he would vehemently submit that
Plaintiff's reliance on the 2024 RBI Master Directions is a complete
after thought since for the past more than 5 years Plaintiff was fully
aware about the credentials of the Defendant Nos.2 and 3 despite
which Plaintiff did not raise any grievance whatsoever attacking the
eligibility, qualification or competency of the answering Defendants.
He would submit that Plaintiff's reliance on the 2024 RBI Master
Directions is wholly opportunistic due to repeated failure met by
Plaintiff in multiple judicial proceedings before filing the present Suits.
In support of his submissions he would refer to and rely upon the
following judgments apart of the compendium of Forensic Accounting
and Investigations standard placed on record:-
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(i) In the cases of P Mahendran and Others Vs. State of
Karnataka27, A.A Carlton Vs. Director of Education and
Another28; he would rely on the well settled proposition of
rule of construction that every statue or statutory rule is
prospective unless expressly or by necessary implication
made to have retrospective effect; (ii) In the case of Sri
Vijaya Laxmi Rice Mills Vs. State of Andhra Pradesh 29 also
delivered on the same proposition he would submit that it
further upholds the principle that statutes cannot be
construed to create new disabilities or obligations or impose
new duties in respect of transactions that were complete at
the time of the amending act coming into force.
9.11. By relying on the aforesaid 3 judgments he would contend
that only for the first time in 2024 that prescription of qualification
under the relevant statues was introduced by way of a clarification in
Footnote 14 which was conspicuously absent in the 2016 RBI Master
Directions. Hence he would submit that when so such qualification
applied at the time of appointment of Defendant No.2, the FAR
submitted by Defendant No.2 and authored by Defendant No. 3, its
partner, is perfectly valid and cannot be questioned on eligibility and
competence.
27 (1990) 1 SCC 411
28 (1983) 3 SCC 33
29 (1976) 3 SCC 37
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9.12. Next he has drawn my attention to the decision of the
Division Bench in the case of Anil. Ambani Vs. State Bank of India
wherein despite the Court acknowledging and taking cognizance of
the BDO LLP FAR as stated in paragraph No. 25 therein, the Plaintiff
did not press any challenge to the same and thus gave up any
challenge whatsoever to the said FAR and therefore now cannot be
held to say that the said Report is unqualified and incompetent on the
ground that Defendant No. 2 and its partners are not CA. On the basis
of the above submissions he would persuade the Court to reject
interim relief.
10. I have heard the learned Senior Advocates, Advocates /
Counsels appearing on behalf of the respective parties and with their
able assistance perused the record of the Suit proceedings.
Submissions made by them have received due consideration of the
Court for hearing on interim relief.
11. Plaintiff seeks interim relief in consequence of the Show
Cause Notices and coercive action in furtherance thereof on the
principal ground that Forensic Audit Report ("FAR") dated 15.10.2020
prepared and submitted by Defendant No. 2 firm i.e. BDO LLP was not
qualified to conduct the Forensic Audit and its signatory i.e. Defendant
No. 3 is not a Chartered Accountant. Reliance is placed on Chapter 4
of the 2024 RBI Master Directions on Fraud Risk Management in
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Commercial Banks. Clause 4.1 thereof reads as under:-
"4.1 In case of a credit facility / loan account classified as red-
flagged account, banks shall use an external auditor 14 an
internal audit as per their Board approved Policy, for further
investigation in such accounts."
11.1. Footnote "14" affixed to the word "external auditor" in the
aforesaid clause 4.1 reads as follows:-
"Footnote 14 - Auditors who are qualified to conduct audit
under relevant statutes ."
12. According to Plaintiff Show Cause Notices issued by
Defendant No. 1 Bank in all three Suit proceedings are issued on the
basis of FAR dated 15.10.2020. Show Cause Notice in Bank of Baroda
Suit proceeding is issued on 02.01.2024. Show Cause Notice in IDBI
Suit proceeding is issued on 31.05.2024 whereas Show Cause Notice
in Indian Overseas Bank Suit proceeding is issued on 02.12.2024. For
the sake of interim relief, it is argued on behalf of Plaintiff that due to
aforestated twin objections the Show Cause Notices and all
consequential steps taken in furtherance thereof including declaring
Plaintiff as "fraud" by one of the Bank be stayed forthwith.
13. Both parties, viz. Plaintiff and Defendants - Banks are ad
idem on the issue that the reason and ground for maintaining
challenge to the Show Cause Notice in the Suit proceedings namely on
the basis of incompetency of Defendant No.2 and qualification of
Defendant No.3 to prepare and sign the FAR has not been agitated
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previously in any proceedings neither decided by any Court in any
proceedings qua the Plaintiff. Thus the issue of qualification and
competency of Defendant Nos.2 and 3 to prepare and submit the FAR
is the question for determination for grant of interim relief.
Additionally banks have argued doctrine of waiver and estoppel by
Plaintiff contending that FAR and its signatory was to the knowledge
of Plaintiff since 15.10.2020, that Plaintiff received full copy of FAR in
March 2024 in the case of State Bank of India (on 27.06.2024 in the
case of Bank of Baroda, on 18.01.2025 in the case of Indian Overseas
Bank and on 26.06.2025 in the case of IDBI Bank), the FAR was the
same in respect of all Banks, Plaintiff already having being classified as
'fraud', Plaintiff having attended and contested the Show Cause
Notices and hearings, Plaintiff having filed Affidavits / Undertakings to
attend hearing, and he not having challenged the FAR on the
aforestated twin grounds disentitle the Plaintiff to seek interim relief
in the present Suit proceedings.
14. Present three Suit proceedings are filed on 22.11.2025. It is
vehemently argued by Banks that by virtue of Plaintiff's conduct in not
having challenged the FAR on the aforestated twin grounds of
competency / eligibility of Defendant No.2 and qualification of the
signatory i.e. Defendant No.3 not being a Chartered Accountant is a
complete afterthought after the Plaintiff having failed in all his
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endeavours to resist the inevitable i.e. declaration of Plaintiff as fraud.
15. There is a little difference in the facts of the three cases, but
otherwise the challenge is identical. In the case of Bank of Baroda,
Plaintiff has pursuant to issuance of Show-Cause-Notice dated
02.01.2024 attended personal hearing conducted by the Bank on
18.07.2025, submitted his written submissions dated 22.07.2025
pursuant to which Bank has issued a fraud classification order on
02.09.2025. This order of fraud classification is also challenged by
Plaintiff in Writ Petition (L) No. 29095 of 2025 which is pending in
this Court. In the case of IDBI pursuant to Show-Cause-Notice dated
31.05.2024 Plaintiff has attended personal hearing conducted by the
Bank on 30.10.2025 and submitted his written submissions to the
Bank on 28.11.2025. IDBI has not taken any further step to issue fraud
classification order as yet. In 2021 fraud classification order was issued
by IDBI but was withdrawn since Plaintiff was not given a personal
hearing. In the case of Indian Overseas Bank pursuant to issuance of
Show-Cause-Notice dated 02.12.2024 Plaintiff has sought complete
disclosure of the relied upon documents on 10.03.2025 and thereafter
Indian Overseas Bank has repeatedly scheduled personal hearing of
Plaintiff which is not yet fructified. Plaintiff has in the present suit
proceedings for the first time challenged Show Cause Notices and all
consequential actions by Banks on the ground of competency and
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eligibility of Defendant No.2 to prepare and submit the FAR and
qualification of Defendant No.3 not being a CA who has signed the
FAR as partner of Defendant No.2.
16. The entire thrust of Plaintiff's case is on Clause 4.1 of 2024
RBI Master Directions and Footnote 14 therein regarding Auditors who
are qualified to conduct Audit under relevant statutes as applying to
Plaintiff's case. Plaintiff's case is that relevant statutes as applicable
would be provisions of Section 141(1), 142(2) and 145 of the
Companies Act, 2013 read with Section 2(b), 2(c) and 6 of the
Chartered Accountants Act, 1949 and the decision of the ICAI Council
dated 01.07.2019 in its 379th Meeting which mandated that all Audit
Reports carry the Unique Document Identification Number (UDIN).
Provisions of Section 141(1), 141(2) and 145 of the Companies Act,
2013 and definitions under Section 2(b), 2(c) and Section 6 of the
Chartered Accountants Act, 1949 are reproduced below for reference:-
"Section 141(1), 141(2) and 145 of the Companies Act, 2013":-
"141. Eligibility, qualifications and disqualifications of auditors.
-- (1) A person shall be eligible for appointment as an auditor of
a company only if he is a chartered accountant:
Provided that a firm whereof majority of partners
practising in India are qualified for appointment as aforesaid may
be appointed by its firm name to be auditor of a company.
(2) Where a firm including a limited liability partnership is
appointed as an auditor of a company, only the partners who are
chartered accountants shall be authorised to act and sign on
behalf of the firm.
142. xxxxxx
143. xxxxxx
144. xxxxxx
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145. Auditor to sign audit reports, etc.--The person appointed as
an auditor of the company shall sign the auditor's report or sign
or certify any other document of the company in accordance
with the provisions of sub-section (2) of section 141, and the
qualifications, observations or comments on financial
transactions or matters, which have any adverse effect on the
functioning of the company mentioned in the auditor's report
shall be read before the company in general meeting and shall
be open to inspection by any member of the company."
"Section 2(b), 2(c) and Section 6 of the Chartered Accountants Act,
1949":-
"2. Interpretation.-- (1) In this Act, unless there is anything
repugnant in the subject or context,--
(a) xxxxxx
(aa) xxxxxx
(aaa) xxxxxx
(ab) xxxxxx
(b) "chartered accountant" means a person who is a member
of the Institute;
(c) "Council" means the Council of the Institute 7 [constituted
under section 9];"
"6. Certificate of practice.--(1) No member of the Institute
shall be entitled to practise 10[whether in India or elsewhere]
unless he has obtained from the Council a certificate of practice:
[(2) Every such member shall pay annual fee for the
certificate as may be determined, by notification, by the
Council, and such fee shall be payable on or before the 1st
day of April each year:]
[(3) The certificate of practice obtained under sub-section
(1) may be cancelled by the Council under such
circumstances as may be prescribed.]"
17. Reliance is equally placed by Plaintiff on the contents of FAR
and the Affidavit-in-Reply filed by Defendant No. 2 on behalf of
Defendant Nos. 2 and 3 in reply to the Interim Applications for
opposing interim relief. Defendant No. 2 has effectively admitted in
the FAR that it is an accounting consulting firm, that FAR does not
constitute an engagement to provide Audit, completion, review or
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attestation..., that it is not an opinion or testimony of expert witness,
that it makes no representation about the suitability of the information
in the Report and most importantly that it has not observed any fraud
or criminal breach of trust as stated in its letter appended to the Suit
plaint. It is not in dispute that Defendant No.2 is not a firm of
Chartered Accountants registered with the ICAI despite there being
some CA partners at the then time having CA qualification and that
the signatory of FAR i.e Defendant No. 3, the then partner of
Defendant No.2 not a qualified Chartered Accountant.
18. It is seen from the FAR that Defendant No. 2 is described
therein as an "Accounting Consultancy Firm" whereas Defendant No. 3
has stated that he has not applied Auditing standards while preparing
the Report. FAR admittedly does not bear the UDIN. Plaintiff has
placed reliance on RTI response received by a third party which states
that Defendant No. 2 is not a member of ICAI which is an admitted
position and equally Defendant No. 3 is not a Chartered Accountant by
qualification and does not have a certificate of practice as Chartered
Accountant and is not a member of ICAI. Defendant No. 3 claims to
be an expert in Forensic Auditing having enormous experience and
was a partner spearheading the Forensic Audit Team in Defendant
No.2 at the then time and is the author and signatory of FAR.
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19. Case of Plaintiff is sought to be resisted by Banks on the
ground that action was invoked against the three Companies of
Plaintiff by appointing Defendant No. 2 as External Forensic Auditor to
carry out Forensic Audit of their accounts for the period between
01.04.2013 to 31.03.2017 by SBI, the lead Bank in the consortium of
20 Banks by letter of appointment dated 07.05.2019. According to
Banks, it is common ground that Footnote 14 regarding qualification
would apply prospectively post 2024 and therefore appointment of
Defendant No.2 and FAR signed by Defendant No.3 is proper and
valid.
20. Before I delve to adjudicate the crux of the matter namely
the twin objections raised to challenge validity and legality of FAR on
the basis of interpretation of the 2016 and 2024 RBI Master
Directions, there is a very crucial factor on facts which has acted as a
precursor to the FAR. It concerns with the appointment of Defendant
No.2 as Forensic Auditor by the Banks leading to the FAR, which will
have direct relevance on the FAR and the challenge maintained to the
same. This is so because both sides have extensively referred to and
dealt with appointment of Defendant No.2 as External Forensic
Auditor and scope of Audit in the course of their submissions.
21. Unfortunately, I must note that none of the Advocates or
Senior Advocates on the Plaintiff's side have pointed out this material
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issue of fact. Bank's Advocates may have a good reason to not point
out the same as it is to their disadvantage, but Plaintiff's Advocates
failed to point it out. Banks may even argue that this issue is not
pleaded nor argued, but it is a fundamental issue in my opinion which
needs consideration at the outset as it goes to the root of the matter
concerning appointment of the Defendant No.2 as External Forensic
Auditor. Banks have filed Affidavit-in-Reply annexing copy of
appointment letter dated 07.05.2019 of Defendant No.2 as Forensic
Auditor to determine fraud angle examination through Forensic Audit
of Reliance Communications (RCOM), Reliance Infratel (RITL) and
Reliance Telecommunication Limited (RTL). All parties before me
have argued that period to be covered for Audit was from 2013 to
2017 (i.e. 01.04.2013 to 31.03.2017). Even in the FAR period of
Forensic Audit stated is from 2013 to 2017 (4 years). However a close
scrutiny of the letter of appointment would reveal that Defendant No.2
was appointed to conduct the Forensic Audit for the period F.Y. 2014
i.e. 01.04.2013 till date i.e. 07.05.2019. It is so stated in the
appointment letter itself. Thus the FAR is not prepared and submitted
as per the term and period for which it was to be prepared. Banks
have argued before me that Defendant No.2 was paid a staggering
professional Audit fee of Rs.65,00,000/- for the assignment plus GST
@ 18% and costs of actuals separately. The appointment letter states
that the timeline for completing the Audit was two months from the
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date of acceptance by Defendant No.2. In the scope for Forensic Audit
contained in Annexure I to the appointment letter period to be
covered is stated as "Last four (4) years". Acceptance by Defendant
No.2 is however by email dated 27.04.2019 even before the
appointment letter dated 07.05.2019 is issued by the lead consortium
Bank. Be that as it may, since the bids of Forensic Auditors were
opened on 24.04.2019, the email for acceptance may have been
addressed by Defendant No.2 on intimation. This email is appended at
page No.179 of the Bank's reply Affidavit.
22. All parties have argued that Defendant No.2 was appointed
as External Forensic Auditor which is borne out from the above.
Learned Advocates of Banks have also concurred with the Court that
such External Forensic Auditor has to be an independent Auditor when
asked by the Court but what is seen and gathered from the record
placed by the Banks is that even well before its appointment,
Defendant No.2 was actively engaged by the Lender Banks and he had
already submitted a Report to SBI and all Lender Banks which was
circulated by SBI in the Joint Lenders Meeting held on 01.03.2019 and
Defendant No.2 made a detailed presentation to all Banks in the said
Joint Lenders Meeting and all Lender Banks deliberated on that BDO
LLP's Report which was presented. Minutes of this Meeting are
appended as Exhibit 'D' to the Bank's Affidavit-in-Reply in all three
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proceedings from which it is clearly determinant that Defendant No.2
was invited to the JLF meeting as a Consultant to make a presentation
to all Lender Banks and Defendant No.2 was given a further task to
accomplish on the discussion and queries raised by the Lender Banks.
It is seen that Defendant No.2 itself suggested to the Lender Banks that
it should appoint Defendant No.2 as a Forensic Auditor for conducting
Forensic Audit of RCOM and its two group companies in this Meeting.
23. What is seen from the above Minutes of Meeting is that BDO
LLP i.e. Defendant No.2 was already actively involved with all Lender
Banks well before his appointment as External Forensic Auditor on
07.05.2019 and it is he who suggested to all Lender Banks to appoint
him as a Forensic Auditor to audit the accounts of the three entities.
Thus it is seen that it was not an independent decision arrived at by
the Banks by following the due procedure prescribed in the 2016
Master Directions for undertaking an External Audit. Neither any
procedure or timeline was followed by the Lender Banks. It is clearly
derivated that Defendant No.2 was an interested party engaged by the
Lender Banks in the consortium in undertaking the External Forensic
Audit. The exercise of engaging an External Auditor for conducting
Forensic Audit by Banks is to ensure that someone independent,
neutral and duly qualified entity is appointed. Rather here is a case
that BDO LLP i.e. Defendant No.2 who was a Consultant engaged by
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the Lender Banks himself played a vital role in his own appointment
which can be seen from the following excerpts of the Lenders Minutes
of Meeting dated 01.03.2019 at Exhibit "D" to the Affidavit-in-Reply of
the Banks:-
" xxxxxx
1) Shri Padmakumar M. Nair, General Manager (Stressed
Assets Resolution Group), SBI welcomed all the Lenders of the
Company and the consultants."
8) Standard Chartered Bank also sought amendment to para
no. 13(vi) of Minutes of the Meeting held on 21.02.2019. During
the meeting BDO made a presentation of the amount of debt
repaid to lenders over a period of May 2017 to March 2018.
However, there was no discussion on adjustment of this payment
from the share of individual lender at the time of settlement of /
recovery from sale of assets / resolution of debt.
9) The above points were heard by all the lenders. However,
it was brought to the attention of the lenders by BDO on
01.03.2019 that an amount of Rs. 5,056 Cr has been paid by the
Company during May 2017 - March 2018 to the accounts of
following lenders towards Company's debt service obligation:
Name of the Lender Rs. In Cr
IndusInd Bank 1500.00
Yes Bank 1058.00
China Development Bank 1027.40
ICBC 129.74
Export Import bank of China 129.74
IDFC Bank 550.00
Standard Chartered Bank 293.00
ICICI Bank 133.61
Axis Bank 123.00
DBS Bank 112.00
Total 5056.49
12) SBI informed Lenders that they have called for fresh
bidding for Forensic Audit from the interested parties.
13) SBI invited Mr. Sivaraman Parthasarathy, Partner, BDO to
deliberate on the presentation circulated by BDO via email dated
25.02.2019 showcasing the key issues on the Fund flow review.
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14) Lenders deliberated on BDO report, which highlighted
possible circular LCs between RCOM group companies. BDO
also proposed lenders to increase their scope to verify and
comment on the aforesaid LC transactions, however Lenders
opined that since forensic auditor is already being appointed, it
will be more appropriate to include verification of such
transactions in the scope of work of forensic Auditors.
15) BDO requested the lenders about their interest in getting
appointed as Forensic auditor for RCOM and its 2 group
companies, lenders have shown agreement that BDO may take
participation in bidding process.
16) It was also decided that based on the BDO report already
circulated, Lenders will verify and revert on details of payments
received by them post May 2017.
17) After due deliberations, it was decided that
(a) BDO will confirm whether Union Bank of India was part of
5 banks with whom LC circular transaction were performed.
Also, BDO will share details of LC with Union bank which are
pertaining to them.
b) In case of preferential payments to the banks, BDO will
provide the date of payments to the lenders.
c) BDO will share the fund flow report to the Corporation
Bank."
24. The active participation of the BDO LLP i.e. Defendant No.2
before an even after the JLF Meeting held on 01.03.2019 can be
clearly gauged from the above Minutes. Therefore from the above it is
clearly concluded that BDO LLP was actively engaged by the Lender
Banks well before his appointment, that he presented Report to the
Lender Banks and advised them, that he himself suggested and
requested for its own appointment as Forensic Auditor and was even
otherwise later appointed as External Auditor. In view of this
Defendant No.2's appointment and independentness was undoubtedly
compromised because of its association with all Lender Banks as a
Consultant well before his appointment as Forensic Auditor.
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25. From the material on record, it appears that Defendant No.2
was already engaged with the Lender Banks as Consultant all
throughout. A Forensic Auditor's independentness is extremely crucial
for objectivity, ensuring that he is free from bias and external
influence to investigate fraud impartially acting as a credible, unbiased
expert for courts, boards, and all stakeholders and most importantly
not advocating for any specific party but for the truth and for
upholding professional standards. He must be free from obligations,
interests, or relationship with the client or else it could impair his
objectivity. He cannot support a client's predetermined position. In
the present case, association of Defendant No.2 with the Lender Banks
as Consultant clearly creates a conflicting position as an independent
External Forensic Auditor. In essence, the Forensic Auditor serves as
an independent truth seeker providing reliable financial analysis for
legal or decision making purposes, making independence the bedrock
of his professional role.
26. It is seen that the timeline for completing the Forensic Audit
stipulated in the Appointment order was 2 months. FAR was submitted
to Lead Banks on 15.10.2020 i.e. after 1 year, 5 months and 8 days
later. This erosion of the stipulated timeline on the face of record
itself proves the above issue and clearly shows how Banks have treated
the statutory Master Directions and the timeline of six (6) months
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stated therein for completion of the External Audit process with
disdain. I am fully conscious of the fact that the above issue is not
argued by the Plaintiff, but in my opinion, it paves the way to the issue
on merits which is the interplay of the 2016 and 2024 RBI Master
directions qua the qualification of the Auditor appointed for External
Forensic Audit argued by both parties.
27. Both sides have effectively relied upon the RBI Master
Directions of 2016 viz-a-viz 2024 and made their submissions.
According to Banks under the 2016 RBI Master Directions all that is
contemplated in clause 8.8.2 is appointment of external auditor
including forensic expert or an internal team for investigation. For
immediate reference clause 8.8.2 is reproduced below:-
"8.8.2. The bank may use external auditors, including
forensic experts or an internal team for investigations before
taking a final view on the RFA. At the end of this time line,
which cannot be more than six months, banks should either lift
the RFA status or classify the account as a fraud."
28. Learned Senior Advocates for the Banks all in tandem have
emphasized on the discretionary power of the Bank to appoint
External Auditor which would include Forensic Expert or internal team
for investigation before taking a final view on the Red Flagged
Account (RFA). It is argued by Banks that as per discretion given to
the Bank, Defendant No. 2 firm was appointed as External Auditor /
Forensic Expert. Banks have vehemently argued that there is no
qualification prescribed for the Forensic Expert appointed or that the
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Auditor appointed should be a practicing Chartered Accountant under
relevant statutes and therefore appointment of Defendant No. 2 was in
consonance with the then existing 2016 RBI Master Directions.
29. Contrary to the aforesaid submissions case of Plaintiff is that
the 2024 RBI Master Directions, prima facie, and mandatorily
superseded the earlier 2016 directions on the subject and provided a
comprehensive and robust framework to the Banks for prevention,
early detection and timely reporting of the incidents of fraud to Law
Enforcement Agencies, Reserve Bank of India and for dissemination of
information by RBI and matters connected therewith or incidental
thereto but by preserving the structure for investigation and
declaration as it was by consolidating the procedure. Banks have
argued that for the first time Chapter 4 of 2024 RBI Master Directions
gave a mandate to the Bank to use External Auditor or Internal
Auditor as per its board approved policy for further investigation.
Clause 4.1 is depicted with a footnote namely Footnote 14 to the word
"external audit" which is reproduced hereinabove. This argument of
the Bank is not correct at all. It is rather erroneous on the face of
record.
30. Perusal of the 2024 RBI Master Directions prima facie show
that insofar as External Audit is concerned the Footnote clarifies that
Auditors to be appointed have to be qualified under the relevant
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statutes. Relevant statutes undoubtedly in my opinion are provisions of
the Companies Act i.e. Sections 141(1), 141(2) read with Section 145
thereof, though it is argued by the Banks vigorously that other statutes
like the SEBI Act will also be relevant. This submission cannot be
accepted due to the use of the word "relevant".
31. In Section 141(1) it is stated that a person shall be eligible
for appointment as an Auditor of a company only if he is a Chartered
Accountant. Proviso to said Section states that a firm whereof majority
of partners practicing in India are qualified for appointment as
aforesaid may be appointed by its firm name to be auditor of a
company. Section 141(2) states that where a firm including a limited
liability partnership is appointed as an auditor of a company, only the
partners who are chartered accountants shall be authorized to act and
sign on behalf of the firm. In the present case Defendant No. 2 is a
Limited Liability Partnership (for short "LLP") which was appointed as
Auditor to conduct the Forensic Audit. These provisions came into
effect on 01.04.2014 on the date of enactment of the Companies Act,
2013.
32. I am not in agreement with the Banks' submission when they
state that there will be two different yardsticks / qualification for
Internal statutory Auditor and External Auditor in the 2016 RBI
Master Directions and the prescription of CA qualification shall apply
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prospectively only after coming into force of the 2024 RBI Master
directions. Aforesaid provisions will have to be read as a whole,
harmoniously and as applicable to the relevant subsisting statutes at
the then time in 2016 even though the 2016 Directions may be silent
on the same. Appointment of Auditor, whether internal or external
even under the 2016 RBI Master directions has to conform to the
applicable / relevant statute namely the Companies Act. It will
otherwise lead to a disastrous situation wherein there will be a clear
dichotomy for appointment of statutory Internal Auditor and External
Forensic Auditor as any unqualified person having vast experience can
get appointed in that case at the discretion of the Bank. This is not
permissible.
33. Section 141(2) of the Companies Act, 2013 envisages that
only the Partners of a firm who are Chartered Accountants shall be
authorized to act (mandatory to act and complete the audit) and sign
on behalf of the firm (signatory of the audit report). Section 145
thereafter further fortifies that the person appointed as Auditor of the
Company shall sign the Auditor's Report or sign or certify any other
document of the Company in accordance with the provisions of sub-
section (2) of section 141, and the qualifications, observations or
comments on financial transactions or matters, which have any
adverse effect on the functioning of the Company mentioned in the
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Auditor's Report shall be read before the Company in the General
Meeting and shall be open to inspection by any Member of the
Company. If Section 141(2) read with Section 145 has to apply to the
present case then it is incumbent upon Defendant No. 2 appointed as
Forensic Auditor to do External Audit through any of its Partner who is
a Chartered Accountant and prepare the Audit Report and append
such CA Partner's signature thereon.
34. In the present case, it is an admitted position by Defendant
No. 2 in its Affidavit-in-Reply that Defendant No. 2 though being
appointed as statutory External Forensic Auditor is not the signatory of
the Report whereas FAR is signed by Defendant No. 3 being one of its
then Partner. Most crucial fact is that Defendant No. 3 is admittedly
not a qualified Chartered Accountant either which is also admitted by
him. It is also an admitted fact that none of the Chartered Accountant
Partners of Defendant No.2 at the then time were registered with ICAI.
This position is undisputed. If that be the case then there is prima
facie violation of the extant statutory provisions namely the RBI
Master Directions which refer to the "relevant statutes" and call upon
the signatory of the Audit Report to be a Chartered Accountant
appointed under the relevant statutes. The submission of Banks that
the 2024 RBI Master Directions would not apply to the present case
because appointment of Defendant No. 2 was done under the 2016
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RBI Master Directions and its Report was submitted in 2020 well
before the 2024 RBI Master Directions came into force cannot also be
countenanced. This is for the simple reason that 2024 RBI Master
Directions have in fact built upon, improvised and consolidated the
2016 RBI Master Directions by clarifying the same. The 2016 RBI
Master Directions clearly provide for appointment of External Auditors
including Forensic Experts and such External Auditors will have to
conform to the qualification standard and construed as having
Chartered Accountant qualification. The RBI Master Directions
whether 2016 or 2024 have a statutory force since they are issued
under Section 35A of the Banking Regulations Act, 1949.
35. It is seen that by virtue of enactment of 2024 RBI Master
Directions the earlier Directions stood superseded which effectively
means that in place of earlier Directions the new 2024 RBI Master
Directions would now apply. It cannot be argued by Banks that it is
only in 2024 that Footnote 14 giving effective direction for Auditors
who are qualified under relevant statutes to conduct Audit is reflected
for the first time and thus it would be applicable prospectively. What is
important to be noted is the fact that if Clause 4.1 of Chapter 4 in the
2004 RBI Master Directions is juxtaposed with Clause 8.8.2 it will be
seen that Banks were permitted to appoint External Auditor including
Forensic expert or its internal team for investigation before taking a
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final view of RFA in 2016 itself. It cannot be argued by Banks that
appointment of External Auditor would be de-hors the relevant /
applicable statutes and any entity merely having expertise in the field
of forensic investigation can be considered for appointment. Use of
word "External Auditor" itself signifies that the Auditor that the Bank
may appoint will have to be in conformity with the relevant statutes
because the Auditor will have to be qualified and conduct audit in
accordance with law.
36. As per the Companies Act 2013 only a practicing Chartered
Accountant is eligible to be appointed as statutory auditor of the
Company. Needless to state that Chartered Accountants' firm can be
appointed as auditor of the Company but such an appointment is
possible exclusively when majority of the partners of the Firm are
practicing Chartered Accountants and only a qualified CA partner signs
the Audit Report. This statutory provision provides that a LLP can also
be appointed as Auditor in its name but to qualify for the said
appointment all / majority of its partners in the LLP shall be engaged
in full time practice as Chartered Accountants, that they shall be
registered as CA and have an UDIN. Provisions of Section 141 read
with Section 145 leave no room for doubt that person eligible for
appointment as Auditor of Company whether internal or external has
to be a Chartered Accountant by qualification.
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37. Specific provisions namely Sections 138 (Internal Auditor for
certain Clauses of Companies), 148 (Cost Auditor for Cost Accounting
and Cost Records) and Section 204 (Secretarial Audit) of the
Companies Act provide appointment of Auditors for specific purposes
statutorily. However insofar as appointment of External Auditor by a
Company is concerned, there cannot be two different yardsticks for
qualification prescribed for an Internal and External Auditor
separately. Internal Auditor of the Company which is a statutory
Auditor has to satisfy the standards of relevant statute namely the
Companies Act. Similarly in the same breath if an External Auditor is
appointed, the said Auditor cannot merely be an expert in the field of
forensic or investigation without being a qualified Chartered
Accountant and he will have to also have the minimum qualification of
Chartered Accountant to be eligible to conduct the Audit. Section
141(1) uses the words appointment of Auditor of Company and does
not distinguish between Internal and External Auditor. Hence, the
provisions of Banking Regulation Act, 1949 under which the RBI
Master Directions are issued will have to be harmoniously read with
the Companies Act, 2013 provisions. If Bank's case and argument is
accepted, there will be two different qualifications for Auditors
appointed by a Company. Hence, Footnote 14 is nothing but a
clarification issued for an omission to supply explanation and nothing
more. In the present case, it is argued by Banks that the Audit
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conducted by Defendant No. 2 was a Forensic Audit as a skilled Expert
and not a statutory Audit but it is seen that Defendant No. 3 has
signed the Forensic Audit Report and he is admittedly not a Chartered
Accountant.
38. In this regard, it is seen that Forensic Audit involves a
detailed examination and evaluation of firms or individuals financial
records. In Forensic Audit, the goal is to derive evidence that can be
used in Court of Law and other proceedings. A Forensic Audit is a
specialized accounting field focused on investigating financial records
for fraud, embezzlement or other financial crimes. It is seen that
Forensic Audit covers a wide range of investigation activities and is
often conducted to prosecute a party for fraud, embezzlement and
other financial crimes. It is also seen that in the process of Forensic
Audit the Auditor may be called to serve as an expert witness during
the trial proceedings. In the present case, in this regard say of
Defendant No. 2 in the Audit Report and its Affidavit-in-Reply
becomes very relevant for adjudicating grant of interim relief.
39. In the Forensic Audit Report, Defendant No.3 has stated as
under:-
(i) On internal page No.2 of the FAR reference is made to
Management comments / clarifications received by the
Auditor uptil June 2020, when admittedly these comments
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were not received from the Management of the 3
Companies, but from the Resolution Professional; the
Companies have denied being consulted at all;
(ii) On the same page, it states that Defendant Nos.2 and 3
accepts no responsibility or liability to a third party to whom
the Report would be shown; If this is to be accepted then
assuming that the Report is accepted, Defendant Nos.2/3
have assured no responsibility for the Report; in that case
how could the Report be proven in Court proceedings if at
all it is required to be proved;
(iii) On internal page No.3 of the Report, it is stated that "the
information contained in this Report is not an advice and
should not be treated as such". It is further stated that "......
BDO India makes no representation about the suitability of
the information contained in this Report";
(iv) On internal page No.3 of the Report, it is stated that RCOM
and subsidiaries have been considered as separate economic
units for this Report, as all companies are separate legal
entities and have their individual assets and liabilities. Any
transfer of funds between RCOM/RITL/RTL and other group
companies has not been considered as inside a single
economic unit. Thus, transfer of funds outside the books of
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RCOM/RITL/RTL has been accordingly noted in the Report;
(v) On internal page No.37 of the Report, for preparing the FAR
out of number of accounts held in 27 Banks, accounts
statement of only 283 accounts out of total 594 accounts
held were received and audited. Several reasons are given
for non-receipt of statement of accounts; In such a case how
is Forensic Audit possible?;
(vi) On internal page 40 of the Report, it is stated that CA
certificates for only 24 disbursements were provided and
341 CA certificates are not available. Thus in such case
without CA certificate how is Forensic Audit possible?;
(vii) On internal page 67 of the Report, it is stated that "Access to
Company's BRS was given on June 2020, however access to
view documents (SAP Code FB03) was not provided". It is
further stated that "in the absence of supporting bank
statements and documents, the veracity of transactions
cannot be commented upon;
(viii) In the disclaimer statement at internal page Nos.378 to 380
of the Report, Defendant No.3 has inter alia, stated and
concluded as follows which becomes very relevant for prima
facie deciding interim relief:-
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"The work carried out and analysis presented in this Report are
based on the result of our discussion with representatives of the
Banks and are not always supported by written documentation.
We make no representation regarding the sufficiency of the
procedures performed either for the purpose for which this
engagement was sought or for any other. Findings are based on
circumstantial evidence and partially concluded in the absence
of adequate supporting / documents. Should additional
information and documents be subsequently available,
observations and change, and it may be necessary to revise our
findings accordingly.
We have relied on the information provided by the Banks and
RCOM, RITL and RTL and our observations are based primarily
on the review of such information. In respect of the Bank
account statements of RCOM, RITL and RTL received in soft
copy form, no statements of RCOM, RITL and RTL were not
sufficient to ascertain the payee and nature of transaction.
The nature of our work pertaining to conducting desktop search
was based on the information available on public domain in
India (and to the extent relevant, outside India). Information
obtained was not subjected to independent verification by us.
This Report does not constitute an engagement to provide audit,
compilation, review, or attestation services made in accordance
with the generally accepted auditing standards in India and,
consequentily, no assurance will be expressed. Our work would
not be any expression of an opinion or testimony of expert
witness. In any manner, the engagement does not extend to
provide advice, analysis and observations relating to legal and
regulatory issues.
In no circumstances shall we be liable, for any loss or damage,
of whatsoever nature, arising from information material to our
work being withheld or concealed from us or misrepresented to
us by any person of whom we made information requests at the
bank or on field.
Our findings and reports should not be interpreted as a
documentary evidence or as a title search verification report and
/ or as a valuation report / certification for any of the assets or
properties identified in our reports.
BDO India is an accounting consulting firm and we have formed
our findings basis our understanding of the Master Circular
guidelines from the Reserve Bank of India. Our procedures are
based on analysis of transactions as presented in the books of
account on best effort basis and to the extent of information
made available by the Corporate Debtor, the Resolution
Professional, and the Lenders till 26 June 2020. We did not
obtain a legal view / interpretation from legal counsel to
interpret the RBI guidelines or applicability."
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40. From the above it is prima facie seen that the Auditors
namely Defendant Nos.2/3 do not own any responsibility for the
alleged Forensic Audit carried out by them thereby defeating the very
purpose of Forensic Audit investigation. Perusal of the said Report and
above statements prima facie shows that said Report is not a Forensic
Audit Report even according to Defendant No. 2. It is prima facie
inconclusive and incomplete. The Report filed by Defendant No. 2 is
appended to the Suit plaint and it does not bear the UDIN. Though it
may be true and an admitted position that Defendant No. 2 is
empanelled with the Indian Bank's Association but Indian Bank
Association is a private association of banks with no statutory backing,
no regulatory authority or powers derived from any statutory
enactment. The Indian Banks' Association is not a government body, a
statutory or regulatory authority, nor does it issue directions having
the force of law. The Indian Banks' Association is not amenable to the
writ jurisdiction neither the Right to Information Act placing it outside
the statutory banking supervision regime.
41. In the present case, it is seen that 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 Affidavit-in-Reply filed by Defendant No. 1
and Defendant No. 2 is completely silent on the aforementioned
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observations and findings in the FAR. It is seen that the Show Cause
Notice issued to Plaintiff has been issued by the Bank after coming into
force of the 2024 RBI Master Directions and if the said Show-Cause-
Notice is on that basis, then it must comply with the 2024 RBI Master
Directions in letter and spirit. In the present case a purposeful
interpretation of qualification of Auditor will thereafter have to be
made to harmoniously read it into the 2016 RBI Master Directions.
42. In so far as the internal statutory audit of the Company is
concerned, the same is governed by the statutory provisions and
therefore there cannot be a different standard made applicable for
conducting the External Audit. The External Audit conducted by the
Auditor will have to conform to the same and similar standard of
qualification as an Internal Auditor and will have to have a base
qualification of being a Chartered Accountant. In the present case, the
FAR travels beyond this issue. It is not acted (prepared) and signed by
a partner of Defendant No.2 who is a Chartered Accountant, rather by
Defendant No.3 who is admittedly not a Chartered Accountant.
43. It is seen that relevant statutes in the present case which
prescribe qualification for Auditor is the Companies Act, 2013. SEBI
Act which is heavily relied upon along with the LODR by Banks does
not provide for any qualification of Auditor neither LODR provides for
any qualification. Mere empanellment by SEBI cannot be argued as
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ground for qualification of Defendant No. 2 or for that matter for
Defendant No. 3 as Auditor based merely on credentials. The purpose
of SEBI Act being completely different does not apply to the case in
hand. SEBI is neither a Banking Regulatory Authority nor an
Accounting Regulatory Authority. The statutory mandate, scope of
powers, and regulatory objectives of SEBI are entirely distinct from
those governing Banking Regulation or accounting standards. The
objects and reasons of the SEBI Act, 1992 are confined to Regulation
of the Securities Market and protection of interests of investors
therein, and do not extend to matters falling within the exclusive
domain of Banking Regulation or accounting oversight. Though
Section 11(c) would apply to investigation but that investigation
cannot apply in the same manner in which it applies under SEBI Act to
Plaintiff's Forensic Audit of Accounts of the three (3) Companies in the
present case. The argument of Banks that the 2024 RBI Master
Directions is to be considered as a regime change from what was
prescribed under the 2016 RBI Master Directions cannot be
countenanced at all. Once 2016 RBI Master Directions are superseded
by 2024 RBI Master Directions all acts done under the earlier
Directions will have to be construed to be done under the 2024 RBI
Master Directions. The clarificatory Footnote 14 cannot be considered
as a piece of prospective legislation.
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44. Plaintiff has referred to the decision of the Supreme Court in
the case of Kolhapur Canesugar Works Ltd. and Anr (supra) in this
regard. Paragraph Nos.20, 31, 34 and 37 of the said decision are
directly relevant and most importantly Section 6 of the General
Clauses does not apply to circulars. Paragraph Nos.20, 31, 34 and 37
are reproduced below:-
"20. At this stage we may also note the definition of "rule" in
Section 3(51) of the Act wherein it is provided that the term
"rule" shall mean a rule made in exercise of a power conferred
by an enactment and shall include a regulation made as a rule
under any enactment.
31. We have carefully considered the decisions in Saurashtra
Cement and Chemical Industries [(1993) 42 ECC 126 (Guj)
(FB)] and Falcon Tyres case [(1992) 60 ELT 116 (Kant)] .
Though the judgments in these cases were rendered after the
decision of the Constitution Bench in Rayala Corpn. (P) Ltd.
[(1969) 2 SCC 412 : (1970) 1 SCR 639] a different view has
been taken by the High Courts for the reasons stated in the
judgments. The Full Bench of the Gujarat High Court in
Saurashtra Cement and Chemical Industries [(1993) 42 ECC 126
(Guj) (FB)] as it appears from the discussions in the judgment,
tried to distinguish the decision of the Constitution Bench in
Rayala Corpn. [(1969) 2 SCC 412 : (1970) 1 SCR 639] for
reasons, we are constrained to say, not sound in law. The
decision of the Constitution Bench is directly on the question of
applicability of Section 6 of the General Clauses Act in a case
where a rule is deleted or omitted by a notification and the
question was answered in the negative. The Constitution Bench
said that
"Section 6 only applies to repeals and not to
omissions, and applies when the repeal is of a
Central Act or regulation and not of a rule" (p. 424,
para 17 of SCC : p. 656 of SCR).
34. For the reasons set forth above we do not accept the view
taken in Saurashtra Cement and Chemical Industries Ltd.
[(1993) 42 ECC 126 (Guj) (FB)] in Falcon Tyres Ltd. [(1992) 60
ELT 116 (Kant)] and the other decisions taking similar view. It is
not correct to say that in considering the question of
maintainability of pending proceedings initiated under a
particular provision of the rule after the said provision was
omitted the court is not to look for a provision in the newly-
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added rule for continuing the pending proceedings. It is also not
correct to say that the test is whether there is any provision in
the rules to the effect that pending proceedings will lapse on
omission of the rule under which the notice was issued. It is our
considered view that in such a case the court is to look to the
provision in the rule which has been introduced after omission
of the previous rule to determine whether pending proceedings
will continue or lapse. If there is a provision therein that pending
proceedings shall continue and be disposed of under the old rule
as if the rule has not been deleted or omitted then such
proceedings will continue. If the case is covered by Section 6 of
the General Clauses Act or there is a pari materia provision in
the statute under which the rule has been framed, in that case
also the pending proceedings will not be affected by omission of
the rule. In the absence of any such provision in the statute or in
the rule the pending proceedings would lapse on the rule under
which the notice was issued or proceedings were initiated being
deleted/omitted. It is relevant to note here that in the present
case the question of divesting the Revenue of a vested right does
not arise since no order directing refund of the amount had been
passed on the date when Rule 10 was omitted.
37. The position is well known that at common law, the
normal effect of repealing a statute or deleting a provision is to
obliterate it from the statute-book as completely as if it had
never been passed, and the statute must be considered as a law
that never existed. To this rule, an exception is engrafted by the
provisions of Section 6(1). If a provision of a statute is
unconditionally omitted without a saving clause in favour of
pending proceedings, all actions must stop where the omission
finds them, and if final relief has not been granted before the
omission goes into effect, it cannot be granted afterwards.
Savings of the nature contained in Section 6 or in special Acts
may modify the position. Thus the operation of repeal or
deletion as to the future and the past largely depends on the
savings applicable. In a case where a particular provision in a
statute is omitted and in its place another provision dealing with
the same contingency is introduced without a saving clause in
favour of pending proceedings then it can be reasonably inferred
that the intention of the legislature is that the pending
proceedings shall not continue but fresh proceedings for the
same purpose may be initiated under the new provision."
45. Attention is also drawn to paragraph Nos.11 to 13 of the
decision of this Court in the case of Anil Ambani Vs. State Bank of
India wherein this Court has categorically held as under:-
"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
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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 Verma3, 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 clause in Chapter II clearly states that
ensuring compliance of principles of natural justice is included in
the Master Directions 2024, pursuant to the decision in Rajesh
Agarwal (supra). Directions to issue a detailed SCN is an integral
part of adherence to the principles of natural justice. This
modification in the Master Directions 2024 is clarificatory, for the
purpose of bringing the same in conformity with the decision of
the Supreme Court. It is also settled law that the judgment of a
Court operates retrospectively unless expressly made prospective.
Thus, the principles of audi altrem partem are to be read as
already existing, right from the beginning, in the Master
Directions 2016. In this view of the matter and in consonance
with the settled law, the SCN issued by the SBI, although not
mandatory at that point of time, is in consonance with the
decision in Rajesh Agarwal (supra) followed by the clarificatory
clause in the Master Directions 2024.
12. As aforesaid, admittedly the impugned SCN was already
given to the Petitioner detailing the basis of declaration of fraud
as contemplated by SBI. The Petitioner failed to reply the said
notice and continued to seek documents, leading to SBI finally
proceeding to pass the impugned order. It was in the intervening
period i.e., from the date of issuance of the impugned SCN and
the final order impugned herein, that the Master Directions 2024
envisaging a SCN came to be issued. SBI was to now ensure that
principles of natural justice were followed before any declaration
of fraud was made. Issuance of a detailed SCN was mandated.
There is no mention in the Master Directions 2024 relating to
validity of a SCN being issued prior to the said Directions.
Issuance of a detailed SCN to give an opportunity to the borrower
of being heard is the only sine qua non as per the Master
Directions 2024. As long as the principles of natural justice are
complied with and the doctrine of audi alteram partem is
ensured, there is no violation of the Master Directions 2024 nor
the directions issued by the Supreme Court in Rajesh Agrawal
(supra).
13. Furthermore, mere conveying to the Banks, by way of a
covering letter, that the Master Directions 2024 supersede the
Master Directions 2016 will not render the SCN already issued by
the SBI to the Petitioner, invalid. Thus, SBI was entitled to
proceed pursuant to the impugned SCN issued prior to the Master
Directions 2024, as long as principles of natural justice are
complied with. The process initiated by SBI by issuing impugned
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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 20 th
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."
46. It is seen that the 2016 RBI Master Directions state that from
the time when the fraud is detected within the period of six months
the Bank has to take appropriate action after Red Flagging the account
on the basis of one or more Early Warning Signals (EWS). Clause 8.6
of 2016 RBI Master Directions stipulate role of Auditor which require
the Auditor to report possibility of fraudulent transactions to the
Management of Bank or to the Audit Committee of the Board for
appropriate action. Clause 8.8.2 require Banks to engage External
Auditor including Forensic Expert but the timeline provided for either
classifying the action as fraud or lifting the RFA is six months. It is also
provided that when there are multiple banks involved then the lead
bank can take steps to appoint an Auditor on behalf of the consortium.
What the regime of 2016 RBI Master Directions specifies is to complete
the entire exercise within six months. Exactly the same exercise is
prescribed by the 2024 RBI Master Directions with more checks,
balances and clarifications but to be completed within the same
timeline. 2024 RBI Master Directions, inter alia, supersede 2016
directions and therefore any action taken under 2016 RBI Master
Directions will now have to comply with the provisions and standards
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prescribed under the 2024 RBI Master Directions.
47. In the present case, if the timeline is seen, it is shocking to
the core that Banks, instead of adhering to the EWS and Red Flagging
of the account have not adhered to the regime of the Master Directions
at all. I am once again aware and conscious of the fact that though this
issue is not directly germane for the purpose of considering the Interim
Application, it is an issue which in my opinion once again goes to the
root of the matter. There are 41 types of EWS prescribed in the 2016
RBI Master Directions and the said directions clearly contemplate that
even if one or two EWS are detected, the account has to be red flagged
and immediate consequential steps have to be taken by the Bank as
detailed therein while adhering to the stipulated timeline of
completing the declaration within six (6) months.
48. In the present case in 2019 the External Auditor is appointed
to investigate the accounts pertaining to the period between 2013 and
2017. The RBI Master Directions are rendered completely redundant if
this timeline is seen. It is seen that under the 2016 RBI Master
Directions or even the 2024 RBI Master Directions once the Auditor is
appointed he has to submit his Report within three months but in the
present case it has taken an invariably long time of 17 months for
submitting the FAR. It is seen that after the date of appointment
despite two months having been granted to the Forensic Auditor to
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submit the Report, it has given a complete go by to the timeline
stipulated or even prescribed in the Master Directions and submitted
the FAR after more than 17 months. The Master Directions of RBI are
not a mere paper tiger to enable the Banks to wake up from their deep
slumber and initiate action according to their convenience. Had the
concerned accounts of Plaintiff being Red Flagged on account of one
or two EWS in the year 2013 itself or even thereafter and had the
Banks acted strictly in consonance with the prevailing Master
Directions, the present situation would not have arisen. The Banks are
equally accountable and answerable. I say this so because in the
present case, the figures are humongous. They rattle a common man
who places his hard earned savings with Public Sector Banks with the
hope that they shall remain in safe custody and grow.
49. In the present case, it is seen that SBI the lead Bank with a
consortium of 20 banks are Lenders of RCOM, RTL & RITL. Their total
exposure as stated in the FAR qua RCOM, RTL & RITL is Rs.31580
Crores through lending. There has been a restructuring of the Loan
Account in 2017 which is seen from the record. It is argued by Plaintiff
that properties and assets worth thousands of crores of the said
Companies have been attached. It is seen that out of this Rs. 12692
Crores (41%) was used to pay connected / related parties; Rs.
6265.85 Crore were used to pay other bank loans, Rs. 18883.08 Crore
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was used for investment which was liquidated subsequently to pay
related parties. It is alleged in the FAR that loans were used for
sanction purpose and were siphoned of. The aforesaid figures ring a
bell and alarm. Monies with Banks is public money and therefore
accounting and/or Audit standards are to be applied strictly as per
relevant statutes. Though this issue may not be directly relevant or
important to decide the interim relief, the question that begs an
answer in this situation is the answerability of the banking system and
concerned Banks and to whom. In my opinion in such a situation the
Banks are answerable to the common man who reposes faith in the
Banks by making investments and deposits. Banks are custodian of
public money. Bank deposists consist of money placed into banking
institutions for safe keeping. Banks pool the funds from many
depositors and lend this money to borrowers (individual and
businesses) who need capital. This process allows money to circulate
in the economy. This is the reason why the RBI Master Directions are
required to be followed to the hilt so that money borrowed should not
be lost. A Bank Audit is a systematic, unbiased examination of a Bank's
financial records, internal controls and operational processes. It
ensures compliance with statutory regulations (like the RBI guidelines
in India), verifies the accuracy of financial statements, and assesses the
effectiveness of risk management systems. Because Banks handled
large-scale transactions and rely heavily on technology, a Bank Audit
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places special emphasis on IT security, fraud detection and money
laundering safeguards. By identifying potential weaknesses and
recommending improvements, a Bank Audit upholds the institution's
financial integrity and strengthens public confidence in the banking
sector. If Banks themselves do not follow the Rule of Law and
timelines as prescribed under the RBI Master Directions which is prima
facie observed in the present case and take action at the right time it
will affect the broader economy of the country. This is a classic case
where the Banks have woken up from their deep slumber seeking to
conduct Forensic Audit for the period from Audit 2013 and 2017 in
the year 2019 without adhering to any of the timelines prescribed
under the 2016 RBI Master Directions.
50. The clauses of Master Directions on Fraud must be
interpreted in light of their purpose and objective i.e. timely indication
and dissemination of information and repository about fraud. The
Supreme Court in the case of Rajesh Agarwal (supra) holds that
provisions of Master Directions on fraud must be construed keeping in
mind the following thresholds:-
(i) Justness;
(ii) Fairness towards parties who are aggrieved;
(iii) Reasonability;
(iv) Proportionality between mischief and corrective
measures.
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51. It holds that banks already have in place a structured
organization set up to identify and investigate fraudulent activity in
Bank Accounts and specific timelines are mentioned. However in the
present case the Banks have behaved in a manner by throwing caution
to the wind which is clearly seen from the timeline in the present case.
52. In the decision of the Supreme Curt in the case of Rajesh
Agarwal (supra) in paragraph No. 75, it is held as under:-
"75. As mentioned above, Clause 8.9.6 of the Master Directions
on Frauds contemplates that the procedure for the classification
of an account as fraud has to be completed within six months.
The procedure adopted under the Master Directions on Frauds
provides enough time to the banks to deliberate before classifying
an account as fraud. During this interval, the banks can serve a
notice to the borrowers, and give them an opportunity to submit
their reply and representation regarding the findings of the
forensic audit report. Given the wide time-frames contemplated
under the Master Directions on Frauds as well as the nature of
the procedure adopted, it is reasonably practicable for banks to
provide an adequate opportunity of a hearing to the borrowers
before classifying their account as fraud."
53. Reason for referring to the aforesaid is only to point out that
EWS i.e. Early Warning Signals and timelines act as checks and
balances and the 2016 as well as 2024 RBI Master Directions strictly
adhere to the said timelines for declaring an account as fraud. They
have to be scrupulously followed. In paragraph No. 81 of the same
decision, Supreme Court has held as under:-
"81. Audi alteram partem, therefore, entails that an entity
against whom evidence is collected must : (i) be provided an
opportunity to explain the evidence against it; (ii) be informed
of the proposed action, and (iii) be allowed to represent why the
proposed action should not be taken. Hence, the mere
participation of the borrower during the course of the
preparation of a forensic audit report would not fulfill the
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requirements of natural justice. The decision to classify an
account as fraud involves due application of mind to the facts
and law by the lender banks. The lender banks, either
individually or through a JLF, have to decide whether a
borrower has breached the terms and conditions of a loan
agreement, and based upon such determination the lender banks
can seek appropriate remedies. Therefore, principles of natural
justice demand that the borrowers must be served a notice,
given an opportunity to explain the findings in the forensic audit
report, and to represent before the account is classified as fraud
under the Master Directions on Frauds."
54. The decision in the case of State Bank of India (supra)
rendered by the Division Bench of this Court on 03.10.2025 in the
Plaintiff's case relied upon the decision in the case of Rajesh Agarwal
(supra) and mandated that personal hearing contemplated following
principles of natural justice and also opportunity to make
representation be followed. The result with respect to declaring
Plaintiff as fraud or classification of the loan account of the Company
as fraud would have very serious consequences. It would inevitably
mean that the Promoters / Directors who are in control of the
Company would be liable to penal measures and to be reported as
fraud and most importantly debarred from raising funds or seeking
credit facilities in future for their acts / omissions. However
opportunity of hearing as envisaged by the Supreme Court is to be
read into the Master Directions issued by RBI.
55. However in this regard before classification of the account as
fraud it is also incumbent to provide details on the basis of which the
SCN is issued and the supporting material thereof to take such action.
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Principles of natural justice as held by the Supreme Court being of
universal application constitute an important facet of procedure
envisaged under Article 14 of the Constitution of India. In this regard
attention is invited to paragraph No. 87 of the decision in the case of
State Bank of India Vs. Rajesh Agarwal (supra) which summarizes this
position by referring to the decision of the Constitution Bench in the
case of Union of India Vs. Tulsiram Patel and Ors. 30 so as to ensure
that there is no violation of the principles of natural justice and the
proceedings do not result in arbitrariness and discrimination is not
practiced as a result of the said action. It is therefore imperative on
the part of banks to give copies of the entire material forming part of
the foundation of the Show-Cause-Notice for indictment of the
borrower so that borrower can meet the Bank's case during the course
of personal hearing. Supreme Court in paragraph No. 87 in the
decision of Rajesh Agarwal (supra) has held as under:-
"87. Administrative proceedings which entail significant civil
consequences must be read consistent with the principles of
natural justice to meet the requirement of Article 14. Where
possible, the rule of audi alteram partem ought to be read into a
statutory rule to render it compliant with the principles of
equality and non-arbitrariness envisaged under Article 14. The
Master Directions on Frauds do not expressly provide the
borrowers an opportunity of being heard before classifying the
borrower's account as fraud. Audi alteram partem must then be
read into the provisions of the Master Directions on Frauds."
56. In the present case it is seen that though the FAR was
received by the lead bank in the year 2020, the same was never given
30 1985 3 SCC 398
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to the Plaintiff along with its annexures and exhibits. Admittedly it
was given to Plaintiff only in the year 2024, the earliest being in
January 2024. There is substantial correspondence placed on record to
this effect. Therefore, argument on limitation pleaded by banks cannot
be prima facie countenanced. Once the Plaintiff had the complete
report he has filed multiple proceedings in this Court but it is an
admitted position which is not denied by the Banks that the issue
regarding validity and legality of the FAR and qualification of the
author and signatory of the Report was never challenged by Plaintiff in
any of those proceedings. This issue as discussed above goes to the
root of the matter. Once it is an admitted position that Defendant No.
3 is the sole author and signatory of the report and he is not a
qualified Chartered Accountant though he may possess vast experience
and hold certificates and citations from various Institutes around the
world in the field forensic investigation, but he still does not qualify to
be an Auditor within the requisite qualification under the relevant
statutes to sign the FAR in India. Once this is the prima facie admitted
position, there is absolutely no room for doubt and no matter
whatsoever be concluded in the FAR, the FAR cannot be relied upon
by the Banks before me to issue the Show Cause Notices and take steps
in furtherance thereof. Hence the FAR and all consequential action
based thereupon with which Plaintiff is aggrieved will have to be
interfered with by this Court as the FAR forms the foundation of the
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Show Cause Notices and all consequential steps adopted by the Banks.
In Clause 4 of the FAR at internal page No.3 it categorically stated that
information contained in the Report is not an advise and should not be
treated as such.
57. It is seen that FAR is the sole basis and foundation for
issuance of the Show Cause Notices dated 02.01.2024 (Bank of
Baroda), 31.05.2024 (IDBI Bank) and 02.12.2024 (Indian Overseas
Bank) issued by Defendant No.1 Banks and all consequential actions
thereafter. Once it is confirmed that full copy of the Report was given
to the Plaintiff only in the year 2024 for the first time, the cause of
action can only arise thereupon to challenge the Report and in turn
the Show Cause Notices which rely on the said Report and therefore
under Article 58 of the Limitation Act, the Suit is clearly within
limitation and therefore maintainable. It is seen that because the
Plaintiff has filed a multitude of proceedings in the last one (1) year it
cannot be argued that Plaintiff has waived his right to challenge the
FAR on the ground of its validity and competency to which challenge
is maintained in the present Suit proceedings for the first time.
Admittedly, when the Plaintiff has not taken the said grounds in any of
the previous proceedings, certainly it entitles the Plaintiff to challenge
the same in accordance with law, otherwise the Plaintiff would be
rendered remediless for all practical purposes.
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58. Attention is invited to page No. 989, Exhibit "H" appended to
the Suit plaint in the case of Bank of Baroda. Exhibit "H" is a letter
dated 28.05.2024 written by Defendant No.2 to the Bank. It states that
if the FAR is shared by the Bank then the Bank will accept the
condition that Defendant No.2 (BDO LLP) will neither own nor accept
any duty or responsibility to the Bank in connection with the Report.
There is a paragraph namely (paragraph No.4) therein devoted to
acknowledgment of no duty or responsibility by Defendant No.2
regarding the FAR if it is shared by the Bank to any third party without
its prior written consent.
59. In the case of IDBI, attention is invited to a letter dated
03.02.2021 addressed by the Advocates of Defendant No.2 to the
erstwhile Advocates for Plaintiff. This letter is appended at page
No.650 of the Suit plaint by Plaintiff. It is a very significant letter
wherein in paragraph 'I' and 'J', it is stated as under:-
"I. Our clients report deals with flow of funds and their
designated end use and the responses received from
management / relevant group of companies in respect thereof. It
reports on whether or not such funds have been diverted /
used / appropriated for purposes other than those stated. Our
clients have not concluded / commented on any legal issues such
as criminal breach of trust or commission of any offences.
J. In order to ascertain where such funds ultimately landed,
our client would have to undertake a forensic audit of such
parties to whom the Relevant Group of Companies have
transmitted such funds in the first instance which clearly was
nos within the scope of work for our client. We would like to
again make it clear that our client's report deals with the flow of
funds and their designated end use. It reports on whether or not
such funds have been diverted / used L appropriated for
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purposes other than those staled. Our client has not commented
in its report on any issues such as criminal breach of trust or
commission of any offences or unlawful gains. Our client's report
does not contain any conclusion as to fraud as defined in the RBI
Circular."
60. From the above, it is clearly seen that Defendant No.2 has
accepted that the FAR relied upon by the Bank for indicting Plaintiff
deals with mere flow of funds and their designated end use and the
responses received from Management / relevant group of Companies
in respect thereof (which is denied by the Plaintiff since only the RP
was consulted). Shockingly Defendant No.2 in this letter owns up the
fact that in order to ascertain where such funds ultimately landed, it
would have to undertake a Forensic Audit of such parties to whom the
relevant group of companies have transmitted such funds in the first
instance (which clearly was the actual scope of work of Defendant
No.2). Rather this actual scope of work is denied by Defendant No. 2.
It is reiterated further by Defendant No.2 that the FAR deals with the
flow of funds and their designated end use. It further asserts that
Defendant No.2 has not commented in its report on any issues such as
criminal breach of trust or commission of any offences or unlawful
gains. Most crucially the letter signs of by stating that the FAR does
not contain any conclusion as to fraud as defined in the RBI Circular
(to be read as 2016 and 2024 Master Directions). The concerned Bank
has not denied this letter neither referred to or responded to it during
their submissions / arguments.
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61. With such overwhelming prima facie evidence emanating
from Defendant No.2's own letter and correspondence there is no
reason as to how the FAR becomes sustainable for issuance of the
Show Cause Notices by the concerned Banks. The FAR is the same for
all Banks as confirmed by the parties. In the Affidavit-in-Reply filed in
the present proceedings by Defendant No.2 the above letter at Exhibit
"H" to the Plaint is not replied to or commented at all but a complete
contrary stand is adopted by Defendant No.2 qua the aforesaid
assertions made by its Advocates in the year 2021. Hence prima facie,
Defendant No.1 - Banks cannot justify their action in the wake of such
irrefutable prima facie documentary evidence admitted by Defendant
No.2 qua the FAR.
62. In the case Commissioner of Income Tax (Central)-I, New
Delhi Vs. Vatika Township Private Limited (supra) in paragraph No.29,
the Supreme Court has held that legislation which modify accrued
rights or which impose qualifications or impose new duties or attach
new disabilities have to be treated as prospective unless the legislative
intent is clear to give enactment a retrospective effect. However, the
Supreme Court has further clarified therein that this can only be
unless the legislation is for the purpose of supplying an obvious
omission in a former legislation or to explain a former legislation.
These words of the Supreme Court clearly echo and give answer to the
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Banks' case before me. The 2024 RBI Master directions is a legislation
for the purpose of supplying an obvious omission / clarification in a
former legislation and to explain the former legislation. I say this
because the entire regime and framework of determining an account
as fraud has been retained in the 2024 RBI Master directions with the
added directions being explanatory and clarificatory in nature.
63. On irreparable injury I would like to quote the decision of
Supreme Court in the case of Best Sellers Retail (India) Private Limited
Vs. Aditya Birla Nuvo Limited and Others 31 , wherein the words of
Alderson B. in Attorney General Vs. Hallett32 are quoted:-
"...I take the meaning of irreparable injury to be that which, if
not prevented by injunction, cannot be afterwards compensated
by any decree which the court can pronounce in the result of the
cause."
64. In the decision of Supreme Court in the case of Gujarat
Bottling Ltd and Others Vs. Coco Cola Co. and Others 33 in paragraph
No.47, the Court has held thus:-
"47. In this context, it would be relevant to mention that in the
instant case GBC had approached the High Court for the
injunction order, granted earlier, to be vacated. Under Order 39
of the Code of Civil Procedure, jurisdiction of the Court to
interfere with an order of interlocutory or temporary injunction is
purely equitable and, therefore, the Court, on being approached,
will, apart from other considerations, also look to the conduct of
the party invoking the jurisdiction of the Court, and may refuse
to interfere unless his conduct was free from blame. Since the
relief is wholly equitable in nature, the party invoking the
jurisdiction of the Court has to show that he himself was not at
31 (2012) 6 Supreme Court Cases 792.
32 (1857) 16M & W 569 : 153 ER 1316
33 (1995) 5 Supreme Court Cases 545.
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fault and that he himself was not responsible for bringing about
the state of things complained of and that he was not unfair or
inequitable in his dealings with the party against whom he was
seeking relief. His conduct should be fair and honest. These
considerations will arise not only in respect of the person who
seeks an order of injunction under Order 39 Rule 1 or Rule 2 of
the Code of Civil Procedure, but also in respect of the party
approaching the Court for vacating the ad interim or temporary
injunction order already granted in the pending suit or
proceedings."
65. In the above case, Court has introduced a fourth parameter
namely conduct of the party apart from consideration of the triple test
of prima facie case, balance of convenience and irreparable loss for
considering injunctive reliefs. Court has held that Court may refuse to
interfere unless the conduct of the party was free from blame because
the relief of injunction is only equitable in nature and the party
invoking jurisdiction of the Court has to show that he himself was not
at fault and that he himself was not responsible for bringing all state of
things complained of and that he was not unfair or inequitable in his
dealings with the parties against whom he was seeking relief.
66. It is seen that the legal character of explanatory notes and
footnotes appended to statutory instruments stands settled by the
Supreme Court in the case of Tara Singh Vs. State of Rajasthan (1975)
4 SCC 86 wherein paragraph No. 20 states that notes appended to
rules are promulgated contemporaneously, they form part of the
legislative framework and are intended to guide application, control
discretion and fill gaps where the rule is silent, without creating
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independent or substantive rights. It is stated in paragraph No. 22 that
such notes "make explicit what is implicit" in the substantive provision
and that the absence or deletion of express language in the rule does
not alter the legal position where the note clarifies the underlying
intent and paragraph No. 25 further reiterates that notes appended to
rules operate as aids to interpretation not as sources of fresh power
and merely restate or clarify the scope of authority already conferred
by the parent provision.
67. It is seen that the SEBI regime applies to listed companies
and intermediaries in the securities market; its empanellment
mechanisms are therefore confined to listed entities and securities-
related investigations. The present subject matter concerns loan
transactions, lending decisions, fraud classification, and willful default
areas exclusively mandated and regulated by the RBI under the
Banking Regulation Act, 1949, and not by SEBI.
68. It is seen that SEBI is concerned with investor protection, not
lender protection. RBI Master Directions issued under Section 35A
operate within the banking domain and, when they require audits,
such audits necessarily fall within the statutory audit framework under
Section 141 of the Companies Act, 2013 (and the corresponding
provisions of the erstwhile Companies Act).
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69. It is seen that Classification of an account as fraud or
initiation of adverse proceedings founded merely on a forensic audit,
without fulfillment of the governing statutory and procedural
framework, is legally unsustainable. In Prashant Bothra (supra) in
paragraphs 23-24, 39-44, the Court held that fraud classification and
investigative processes are distinct from criminal culpability and
cannot be equated with proof of a cognizable offence.
70. In Ankit Bhuwalka Vs. IDBI Bank Ltd. (Supra) , the Court
reiterated that serious civil and economic consequences flowing from
fraud classification require strict adherence to statutory procedure and
natural justice, and that a forensic audit report, cannot be treated as
determinative or decisive in isolation. The cumulative jurisprudence
thus establishes that proceedings predicated solely or predominantly
on a forensic audit report, without independent statutory compliance,
are jurisdictionally infirm and liable to be set aside.
71. In the present case, it is seen that even though Forensic
Audit Report was prepared and given to the lead Bank on 15.10.2020
by Defendant No.2, atleast until 2024 the Banks did not share the said
Report with the Plaintiff or the 3 Companies.
72. It is seen that it is only when repeated proceedings were
filed by Plaintiff in this Court that the Forensic Audit Report was
shared with the Plaintiff and the Companies in the year 2024.
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73. Though it is true that Plaintiff has filed several proceedings
to challenge the show-cause notice and the consequential actions
taken thereafter but it is equally true and an admitted position by all
parties before me that the validity of the Report on the basis of
qualification of the author of the report is not challenged by Plaintiff in
any proceedings after he received the Report and this is the first
instance of maintaining the challenge. 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. This obligation stems from
the comprehensive legal and regulatory framework governing the
Banking Sector. Banks have to operate for all purposes within a clear,
established legal framework, and not by arbitrary power. Banks cannot
appoint an ineligible and unqualified Auditor, whether Internal or
External for Audit contrary to provisions of eligibility prescribed under
the provisions of Section 141(1) and 141(2) of the Companies Act,
2013 if the Auditor is not a practicing Chartered Accountant
registered with the ICAI.
74. In this regard attention is invited to following Master
Directions / letters issued by RBI and the Government of India,
Ministry of Finance to Banks which are all in the public domain and
which are relevant to the issue at hand:-
(i) In the Master Circulars on Inspection and Audit Systems in
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Primary (Urban) Co-operative Banks issued by RBI on 01.07.2009 and
01.07.2011 in the "Note" appended thereto in Clause 5.1 under
"Appointment and Remuneration of Auditor" it is stated that the
option to consider whether the concurrent Audit should be done by
the External Auditors (professionally qualified Chartered Accountants)
or its own staff may be left to the individual Banks. In Clause 5.2 it
further states that this is so because in case of omissions or
commissions responsibility of the Audit Firms if observed in the
concurrent (External) Audit can be fixed and Banks can terminate
their appointment and Report may be made to ICAI for such action as
Banks deem fit under intimation to RBI / RCS. Certainly the standard
for audit in Public Sector/Commercial Banks cannot be lower than for
Primary (Urban) Co-operative Banks.
(ii) In the letter dated 26.09.2012 addressed by the Government of
India, Ministry of Finance, Department of Financial Services to Chief
Executives of all Public Sector Banks on the subject - Master Circular
on Audit Systems concerning Guidelines to be followed for Internal
Audit, Information System Audit and Concurrent Audit Systems, the
guidelines categorically state that for Concurrent Audit, Chartered
Accountant Firms should be appointed from the RBI panel as per the
gradation based on the size of the Branch.
(iii) In the letter dated 16.07.2015 issued by RBI to CMD/MD/CEO of
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all scheduled Commercial Banks regarding "Concurrent Audit System
in Commercial Banks - Revision of RBI's Guidelines" it is stated that
terms of appointment of the External Firms of Chartered Accountants
for Concurrent Audit and their remuneration may be fixed by Banks at
their discretion.
(iv) In the letter dated 18.09.2019 issued by RBI to all Scheduled
Commercial Banks (other than Regional Rural Banks), Small Finance
Banks, Payments Banks and Local Area Banks regarding Concurrent
Audit System it is stated under Clause B - "Appointment of Auditors"
and under Clause B (ii) that the head of Internal Audit in the Bank
should participate in selection of Concurrent Auditors where such
function is outsourced and should be responsible for the quality review
(including skills of the staff employed) of the work of the Concurrent
Auditors reporting to her/him. It further states that It may, however,
be ensured that if any Partner of a Chartered Accountant Firm is a
Director on the Board of a Bank, no Partner of the same firm should be
appointed as Concurrent Auditor in the same Bank. It is stated under
Clause C - "Accountability" that if External firms are appointed and
any serious acts of omission or commission are noticed in their
working, their appointments may be cancelled after giving them
reasonable opportunity to be heard and the fact shall be reported to
ACB / LMC of the Bank, RBI and ICAI.
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75. Therefore in view of the above it is preposterous to accept
the argument of Banks that an External Auditor not having Chartered
Accountant qualifications could be validly appointed under the 2016
RBI Master Directions for External Audit.
76. The consequences of allowing the Banks to proceed further
and declaring the Plaintiff and Directors of the three Companies as
fraud are already discussed hereinabove. They are virtually drastic and
lead to disastrous consequences like being black listed, barred from
new Bank loans / credit for years, criminal FIR filing, reputation
damage, impacting fundamental rights to financial access and civil
death. However, in view of all the above observations and findings,
the Forensic Audit Report being a highly contentious document,
qualification of the author of the Report being inadequate and it not
having been authored by a qualified Chartered Accountant as External
Auditor, role of the External Auditor in the present case when he being
actively engaged before his appointment with the Lender Banks as
Consultant and he himself suggesting and canvassing for his own
appointment as Forensic Auditor before the Banks in the JLM, his
participation in the JLM on 01.03.2019 and acting as Consultant to
Lender Banks well before his appointment as External Auditor and
most importantly he stating in writing through his Advocates that no
fraud or criminal breach of trust has been observed by him in the FAR,
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the Plaintiff has made out a reasonably strong case for trial.
77. The balance of convenience therefore is in favour of Plaintiff.
78. For grant of interim relief prima facie case and balance of
convenience clearly shifts in favour of Plaintiff due to the frailty of the
FAR and qualification of the Auditor as discussed above in fact and in
law. Needless to state that this is my prima facie opinion for which I
have returned the above reasons on the basis of the prima facie
material placed before the Court.
79. Banks' case that interfering with the Show Cause Notices
and further consequential action will derail investigation cannot be
countenanced if the edifice on which it is based is itself palpably
dubitable. Allowing the impugned action to proceed will lead to
disastrous consequences in such cases where it leads to a certain civil
death without trial. Hence on the parameter of grave and irreparable
harm / loss, Plaintiff's case deserves to be accepted for grant of interim
relief for all the above reasons, legal and factual, and in accordance
with the principles of natural justice. Principles of natural justice is
based on the maxim - "Justice should not only be done but should
manifestly be seen to be done". It provides for a fair hearing, unbiased
decision-making and presenting proper evidence before taking any
action.
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80. Having prima facie being satisfied for grant of interim relief
on the basis of the above observations and findings, the FAR i.e.
Forensic Audit Report dated 15.10.2020 appended at Exhibit 'A' to the
3 Suit plaints not being in consonance with the RBI Master Directions
and for the aforementioned reasons, interim relief is granted to
Plaintiff in terms of prayer clause (i) in Suit (L) No.35923 of 2025 and
Suit (L) No.37573 of 2025 and in terms of prayer clause (j) in Suit (L)
No.37862 of 2025 which read thus:-
(i) In Suit (L) No.35923 of 2025:-
"i. That pending the hearing and final disposal of this
Suit, this Hon'ble Court be pleased to
(i) stay all actions already taken by Defendants
under or in reliance upon the Report dated 15
October 2020 (Exhibit "A" hereto) or the Show
Cause Notice dated 2 December 2024 (Exhibit
"B" hereto); and
(ii) restrain the Defendants from taking any further
action or proceedings under or in reliance upon
the said Report dated 15 October 2020 or the
said Show Cause Notice dated 2 December
2024."
(ii) In Suit (L) No.37573 of 2025:-
"i. That pending the hearing and final disposal of this
Suit, this Hon'ble Court be pleased to
(i) stay all actions already taken by Defendants
under or in reliance upon the Report dated 15
October 2020 (Exhibit "A" hereto) or the Show
Cause Notice dated 31 May 2024 (Exhibit "B"
hereto); and
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(ii) restrain the Defendants from taking any further
action or proceedings under or in reliance upon
the said Report dated 15 October 2020 or the
said Show Cause Notice dated 31 May 2024."
(iii) In Suit (L) No.37862 of 2025:-
"j. That pending the hearing and final disposal of this
Suit, this Hon'ble Court be pleased to
(i) stay all actions already taken by Defendants
under or in reliance upon the Report dated 15
October 2020 (Exhibit "A" hereto) or the Show
Cause Notice dated 2 January 2024 (Exhibit "B"
hereto) and Fraud Declaration Order dated 2
September 2025 (Exhibit "C" hereto); and
(ii) restrain the Defendants from taking any further
action or proceedings under or in reliance upon
the said Report dated 15 October 2020 or the
said Show Cause Notice dated 2 January 2024."
81. Interim Application (L) Nos.35925 of 2025, 37575 of 2025
and 37865 of 2025 in all three (3) Suits stand allowed and disposed in
the above terms.
[ MILIND N. JADHAV, J. ]
82. After this Judgment is pronounced in open Court, Mr.
Setalvad, Mr. Bharucha and Mr. Andhyarujina, learned Senior
Advocates appearing on behalf of Bank of Baroda, IDBI Bank and
Indian Overseas Bank would persuade the Court to stay the effect of
this judgment for a period of six weeks.
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83. Mr. Dwarkadas, learned Senior Advocate appearing on
behalf of Defendant Nos.2 and 3 would also persuade the Court to
consider the stay of judgment.
84. Mr. Joshi, learned Senior Advocate and Mr. Naik, learned
Advocate appearing on behalf of Plaintiff oppose the stay.
85. I have considered the request made by learned Senior
Advocates appearing for Banks and Mr. Dwarkadas, however in view
of my prima facie observations and findings and reasons given in the
order, I decline to accede to their request for stay. Request for stay is
therefore declined.
[ MILIND N. JADHAV, J. ]
Ajay
AJAY TRAMBAK
TRAMBAK UGALMUGALE
UGALMUGALE Date:
2025.12.24
12:00:32 +0530
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