MUMBAI: The Bombay high court on Friday stayed a Canara Bank order passed in November 2024 classifying the loan account of industrialist Anil Ambani’s now defunct Reliance Communications (RCom) as fraudulent.
A division bench of justices Revati Mohite-Dere and Neela Gokhale noted that the bank’s action was in contravention of the Reserve Bank of India’s master circular and a Supreme Court ruling mandating that borrowers must be given a hearing before banks classify their accounts as fraudulent.
The bench also sought a response from the Reserve Bank of India (RBI) on whether it proposes to take any action against banks that have repeatedly defied its master circular and Supreme Court precedents.
In November 2024, Canara Bank had issued a communication to Reliance Communications stating that their loan account with them had been classified as “fraudulent” because it had allegedly sanctioned several credit facilities like term loans, guarantees, and letters of credit under a non-fund-based credit limit of ₹1,050 crore over an unspecified period of time. A non-fund-based credit limit is a credit facility that doesn’t involve actual bank funds but uses a promise of financial support in the form of a bank guarantee or a letter of credit.
The bank claimed that after availing and enjoying the credit facilities, the company had defaulted and breached the sanctioned terms and conditions. As a result, the company’s loan accounts became a non-performing asset (NPA) on March 9, 2017. The bank also alleged that RCom misused the funds for “undeclared” purposes even after the loans turned into NPAs.
After a forensic audit of the company’s bank accounts revealed several alleged irregularities, Canara Bank issued a show-cause notice to RCom in October 2023. Eventually, the bank declared the company’s loan accounts as fraudulent.
Since it was a serious matter with civil and criminal consequences, RCom founder Anil Ambani had pleaded for an opportunity to be heard before classifying his company’s accounts as fraudulent. When that didn’t transpire, Ambani challenged the Canara Bank order in court. His counsel on Friday informed the court that the order was issued on November 5, 2023, but they were not informed about it till December 25, 2023.
“It looks like the bank was treating it as a joke. They have passed the order mechanically”, Ambani’s counsel said, adding that in September 2024, even before the order was issued, Canara Bank had already communicated the fraud classification to the Reserve Bank of India (RBI).
The counsel also informed the court that a show cause notice was issued to them in October 2023, after which the bank failed to provide relevant documents in support of the classification despite several requests.
“This is how lightly they are taking the Supreme Court judgment. Why did they declare the account as fraud even before the order was passed?” the counsel said. He added that the bank did share the forensic report on November 22, but it was of no help.
On the other hand, Canara Bank’s counsel argued that the classification order was issued on September 6, 2024, following a communication to the RBI. The bank maintained that the reports handed over to Ambani contained the required details.
The division bench, however, noted inconsistencies in the bank’s statements and ordered the RBI to be added as a respondent to the petition. The bench sought the RBI’s stance in proposing action against banks for repeatedly disregarding their master circular dated July 15, 2016, and Supreme Court precedents, which mandate granting defaulting borrowers an opportunity to be heard before declaring their loan accounts fraudulent. “We are noticing that the banks are making the same mistakes repeatedly,” the court said.
Relying on an order issued by the court in a similar case in December 2024, the bench stayed Canara Bank’s order and directed it to file its reply to Ambani’s plea by February 28. The matter was then posted for further hearing on March 6.