Bombay HC stays action by three banks against Anil Ambani, Reliance Communications; says RBI directions violated

Mumbai: The Bombay High Court on Wednesday stayed all "fraud" classification proceedings against Anil Ambani and RCom by a consortium of three banks, citing violations of mandatory RBI rules and a classic case of banks "waking up from deep slumber" after years.

Granting an interim relief to Ambani and his company by staying all present and future action by Indian Overseas Bank, IDBI Bank and Bank of Baroda, Justice Milind Jadhav said that the banks' move was based on a legally flawed forensic audit and violated the Reserve Bank of India's (RBI) mandatory guidelines.

The court refused to take on record a forensic audit report prepared by BDO LLP in October 2020 saying the report was "prima facie inconclusive" and could not be used as a basis for punitive action because it was not signed by a Chartered Accountant (CA) as required under the Reserve Bank of India's 2024 Master Directions on fraud.

The judge also pointed out that the BDO LLP had previously worked as a consultant for one of the lender banks, creating a "conflicting position" that undermined its independence as an auditor.

The consequences of allowing the banks to declare the accounts of Ambani and his company as fraud are "virtually drastic and lead to disastrous consequences like being blacklisted, barred from new bank loans/credit for years, criminal FIR filing, reputation damage, impacting fundamental rights to financial access and civil death," the high court said in its 116-page order.

"Principles of natural justice demand that justice should not only be done but should manifestly be seen to be done," the court said, adding that failing to grant relief would cause "grave and irreparable harm."

The High Court also berated the banks for their "belated action," describing it as a "classic case where the banks have woken up from their deep slumber."

The lenders sought to conduct a forensic audit in 2019 for transactions that occurred between 2013 and 2017, failing to adhere to the timelines prescribed by the RBI.

"The Master Directions are not a mere paper tiger to enable banks to wake up and initiate action according to their convenience," the court order said.

The action of the banks was based on a forensic audit report prepared by an external auditor, BDO LLP, noted Justice Milind Jadhav.

But this report cannot be relied upon because it had not been signed by a duly qualified chartered accountant (CA) as required under the Reserve Bank of India's 2024 Master Directions on fraud, the judge said.

If interim relief was not given to Ambani and Reliance Communications, it would cause "grave and irreparable harm / loss", said the order.

"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," said the court order.

Ambani had challenged show-cause notices issued by the Indian Overseas Bank, IDBI and Bank of Baroda, seeking to declare his and Reliance Communications' accounts as fraud accounts.

As an interim relief, he sought a stay to the notices and an injunction against any coercive action on the ground that BDO LLP was not qualified to conduct the forensic audit as its signatory was not a chartered accountant.

BDO LLP was an accounting consultant firm and not an audit firm, Ambani claimed.

The banks argued that the audit report was submitted as per the 2016 RBI Master Directions, according to which an external auditor need not be a CA.

Ambani belatedly challenged the report on the ground of the auditor's qualification, and it was an afterthought and a malafide exercise, the banks said.

But the court maintained that as per the RBI's Master Directions, a person shall be eligible for appointment as an auditor of a company only if he or she is a CA.

Further, BDO LLP had worked as a consultant for the lender banks earlier, and it created a conflicting position as an independent auditor, the HC said.