Mumbai: The Bombay High Court on Wednesday stayed all present and future actions by three public sector banks seeking to declare the accounts of Anil Ambani and Reliance Communications Ltd as “fraud,” holding that the process violated the Reserve Bank of India’s Master Directions.
Justice Milind Jadhav said the banks had relied on a forensic audit report prepared by BDO LLP, an external auditor, but the report could not be acted upon as it was not signed by a duly qualified chartered accountant, a mandatory requirement under the RBI’s 2024 Master Directions on fraud. The court observed that granting interim relief was necessary as the absence of a stay would cause “grave and irreparable harm” to Ambani and his company.
Emphasising the principles of natural justice, the High Court said justice must not only be done but must also be seen to be done. It ruled that banks cannot rely on a forensic audit report prepared by an external auditor to issue show-cause notices if the engagement does not strictly comply with RBI norms. The court underlined that the RBI’s Master Directions operate within a binding statutory framework and are mandatory in nature.
The order noted that allowing the banks to declare the accounts as fraud would have drastic consequences, including blacklisting, denial of fresh credit for years, registration of criminal FIRs, severe reputational damage, and an effective denial of access to financial services, amounting to a form of “civil death.”
The High Court also criticised the banks for their delayed action, calling it a classic case of lenders waking up from a “deep slumber.” It pointed out that the banks initiated a forensic audit in 2019 for transactions covering the period from 2013 to 2017, raising serious concerns about delay and procedural fairness.
Ambani had approached the court challenging show-cause notices issued by Indian Overseas Bank, IDBI Bank and Bank of Baroda to declare his and Reliance Communications’ accounts as fraud. He sought an injunction against coercive action, arguing that BDO LLP was not qualified to conduct the forensic audit as its signatory was not a chartered accountant. He also contended that BDO LLP functioned as an accounting consultant and not as an audit firm.
The banks defended their action, arguing that the audit was conducted under the 2016 RBI Master Directions, which did not mandate that an external auditor be a chartered accountant. They claimed Ambani had raised objections to the auditor’s qualifications belatedly and with mala fide intent.
Rejecting this argument, the court held that under the RBI’s Master Directions, only a chartered accountant is eligible to be appointed as an auditor of a company. It further noted that BDO LLP had previously worked as a consultant for the lender banks, creating a conflict of interest that undermined its independence as an auditor.
