Banks action against Anil Ambani, Reliance Comms stayed; Bombay HC says RBI directions violated

The Bombay High Court on Wednesday stayed all present and future actions by three banks seeking to declare the accounts of Anil Ambani and his company Reliance Communications Ltd as `fraud', noting that the provisions of the RBI's Master Directions were violated in the process.

The action 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.

"Principles of natural justice are based on the maxim `justice should not only be done but should manifestly be seen to be done,' the HC said, adding that a forensic audit report prepared by an external auditor cannot be relied upon by the banks to issue a show-cause notice.

"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.

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," said the high court.

The court also berated the banks for their belated action against Ambani and his company and said this was a "classic case where the banks have woken up from their deep slumber" seeking to conduct forensic audit for the period from 2013 to 2017 in 2019.

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.