Introduction:

In a landmark ruling emphasizing the primacy of banking regulations and regulatory compliance, the Bombay High Court in 2025 refused to quash the order passed by the State Bank of India (SBI) which classified the loan account of Reliance Communications and its chairman, Anil Ambani, as “fraud.” The division bench comprising Justices Revati Mohite-Dere and Dr. Neela Gokhale delivered the order. The classification, issued on June 13, 2025, was made in accordance with the Reserve Bank of India’s Master Directions on Fraud Risk Management and SBI’s internal policies. Anil Ambani and his company challenged the classification on grounds that the bank had violated the principles of natural justice by not granting him a personal hearing before taking the decision and that some of the material relied upon by the bank was only furnished to him after a delay of six months. This case highlighted the interplay between regulatory compliance, banking procedures, and the rights of borrowers under law. The High Court’s decision reinforces the principle that banks, while exercising their regulatory and risk-management powers, must ensure that actions taken are in accordance with statutory provisions and internal policy guidelines, and that judicial interference in such decisions will be limited unless there is a clear violation of law or principle of natural justice.

Arguments of the Petitioners:

The petitioners, comprising Anil Ambani and Reliance Communications, contended that the classification of the loan account as “fraud” had a grave and irreversible impact on their creditworthiness, reputation, and business operations. They argued that the bank’s action was procedurally flawed, as it violated the principles of natural justice, which require that an affected party must be given an opportunity to be heard before an adverse decision is taken. The petitioners highlighted that they were not granted any personal hearing prior to the classification of the account, and that crucial materials forming the basis of the bank’s decision were initially withheld. It was contended that these documents were only provided to them after a delay of six months, leaving them without the opportunity to rebut or explain the circumstances. Counsel for the petitioners submitted that the classification as “fraud” was arbitrary and had been made without considering the commercial realities, pending litigations, and financial restructuring initiatives undertaken by Reliance Communications. They relied on various precedents to argue that classification of an account as “fraud” has severe reputational consequences and therefore, banks must act in strict compliance with the principles of natural justice and provide adequate opportunity to the borrowers to present their case. The petitioners also argued that the SBI had relied on internal audit reports, credit risk assessments, and other communications which were not shared contemporaneously, and that this selective reliance on internal material without allowing the petitioners to examine or respond to it rendered the action unjust and legally unsustainable. They prayed for quashing of the bank’s classification order and restoration of the loan account’s prior status to protect the interests of the company and its shareholders.

Arguments of the Respondent-Bank:

On the other hand, the State Bank of India, represented by its counsel, contended that the classification of the loan account was made strictly in accordance with the RBI Master Directions on Fraud Risk Management and SBI’s internal credit risk and fraud management policies. It was submitted that the bank is empowered under the regulatory framework to classify an account as “fraud” when there is prima facie evidence indicating misappropriation of funds, diversion of credit, or other actions detrimental to the lender’s interest. The bank argued that the classification does not represent a final adjudication on the merits but is an internal regulatory requirement aimed at risk management and adherence to statutory directions. The bank’s counsel further submitted that a personal hearing is not mandated under the RBI Master Directions before classifying an account as fraud, as the classification is primarily an internal credit risk management measure. It was also contended that the bank had, at appropriate stages, shared relevant material with the petitioners and that the delay in furnishing certain documents was procedural and did not vitiate the classification order. The counsel emphasized that the decision to classify an account as “fraud” involved a detailed internal audit, review by credit risk management teams, and compliance with RBI guidelines, and that any interference by courts would undermine the ability of banks to manage non-performing assets and mitigate risks. The bank argued that the petitioners’ reliance on the principles of natural justice was misplaced because these principles are not rigidly applicable to internal regulatory measures that are primarily risk-management oriented and that the classification order merely triggers reporting obligations and internal risk mitigation protocols without prejudging liability or criminal culpability.

Court’s Judgment:

After hearing the arguments of both sides, the Bombay High Court refused to quash SBI’s classification of Reliance Communications’ loan account as “fraud.” The Court observed that the classification was made under the Reserve Bank of India’s Master Directions on Fraud Risk Management as well as the bank’s internal policy frameworks, which empower banks to identify and classify accounts where there is reasonable evidence of misappropriation or diversion of funds. The Bench noted that the classification was not an adjudication on the merits of any claim or liability but rather a regulatory measure designed to ensure proper risk management and transparency in banking operations. The Court emphasized that internal procedural measures, such as the timing and furnishing of material, cannot be lightly interfered with unless there is clear evidence that the principles of natural justice were violated in a manner that caused substantive prejudice. It was observed that while the petitioners had argued that certain material was furnished only after a delay of six months, there was no evidence that this delay prevented them from presenting explanations or representations subsequently, or that it caused any legal or financial prejudice that would justify quashing the classification. The Court highlighted that banks are under statutory and regulatory obligations to report frauds to RBI, and that such classification triggers remedial and monitoring measures to protect the financial system and public interest. The Bench also considered that any interference by courts in such classifications must be cautious, as judicial intervention in internal regulatory processes can undermine the statutory objectives and operational autonomy of banking institutions. The Court further noted that the principles of natural justice are not absolute and must be applied in context, particularly in cases involving regulatory compliance where procedural guidelines prescribe the manner and scope of review. Consequently, the High Court held that SBI had acted within its powers and in accordance with law and refused to interfere with the classification of the account as “fraud.” The Court’s ruling underscores that regulatory classifications by banks under RBI guidelines are primarily administrative in nature and that judicial intervention will only be warranted in cases of clear illegality, arbitrariness, or violation of natural justice causing substantive prejudice.