Banks’ 'fraud' tag: Bombay HC grants interim relief to Anil Ambani

MUMBAI: Bombay high court on Wednesday granted interim relief to industrialist Anil Ambani, who filed multiple suits against the consortium of banks and BDO India LLP. He alleged that the banks' decision to label his accounts as fraud was based on an "illegal" forensic report by BDO LLP, which he claimed was not recognised as an auditor under the RBI's revised Master Directions on Fraud dated July 15, 2024.Justice Milind Jadhav, who passed the order, said that the Forensic Audit Report dated October 15, 2020, was not in consonance with the RBI Master Directions, and hence interim relief was being granted. The High Court said the effects of the probe following a show cause notice would be “virtually drastic and lead to disastrous consequences like being blacklisted, barred from new bank loans/credit for years, criminal FIR filing, reputation damage, impacting fundamental rights to financial access, and civil death.”Ambani, represented by senior counsel Gaurav Joshi, Ashish Kamat, and advocate Ameet Naik, contended that the BDO’s forensic audit report (FAR) was commissioned by the consortium of banks. On the basis of this report, several lenders, including the State Bank of India, declared Ambani’s account as fraud. SBI also filed an FIR with the CBI. CBI is already conducting investigations against Anil Ambani and his group entities.Ambani's contention was that BDO LLP was not qualified to conduct the Forensic Audit and its signatory-- is not a Chartered Accountant. He relied on a 2024 RBI Master Directions on Fraud Risk Management in commercial banks.The BDO report was prepared under a 2016 RBI circular. Subsequent court rulings mandated that borrowers be provided relevant documents and granted a personal hearing before their accounts are classified as fraud. In July 2024, the RBI revised its Master Directions to incorporate these principles and required that the “external auditor” appointed for such investigations must be an auditor under the Companies Act — meaning they must be registered with the Institute of Chartered Accountants of India (ICAI).Ambani’s arguments were that BDO does not meet this criterion and is therefore not competent to carry out any audit, including a forensic audit. The relief he sought in the interim was to restrain banks from acting on the October 2020 report.The High Court also heard at length for banks—Bank of Baroda, IDBI Bank, and Indian Overseas Bank—senior counsel Zal Andhyarujina and Kevic Setalvad, Zarir Bharucha, and advocate Nishit Dhruva, and counsel Kunal Dwarkadas for BDO. In a 116-page order, Justice Milind Jadhav referred to BDO’s “own letter” and said, “With such overwhelming prima facie evidence emanating from (BDO’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, the High Court noted.Dwarkadas submitted that the report by BDO was submitted in 2020 and that it “was only in 2023 that standards and regulations to govern audit were issued for the first time by ICAI. 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. Hence, no challenge whatsoever can now be made to the FAR on grounds of qualification when no such impediment or requirement existed at the then time and more specifically so under the then prevailing 2016 RBI Master Directions.”The High Court said, “…even though the 2016 Directions may be silent on (it)… Appointment of Auditor, whether internal or external, even under the 2016 RBI Master Directions, has to conform to the applicable 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,” adding, “This is not permissible.”“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 are 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,” the High Court order recorded.The High Court said 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. It also said the injunction was necessary as the FAR was “not” authored by a qualified Chartered Accountant as external auditor.A plea for a six-week stay of its order, the High Court declined.