Classification as “fraud” under RBI regulations causes “civil death” for borrowers, debarring them from institutional finance for five years. In Rajesh Agarwal, the Supreme Court ruled that natural justice must apply, leading to the 2024 Master Directions. Banks must now issue a show-cause notice, disclose the forensic audit report, and pass a reasoned order. Crucially, while a written representation is mandatory, a personal hearing is not required. These procedures balance fairness with administrative efficiency but do not preclude separate criminal proceedings via FIRs.
INTRODUCTION
The classification of a borrower’s account as “fraud” under the Reserve Bank of India’s regulatory framework has serious implications. The borrower and its promoters and directors are debarred from accessing institutional finance for five years, reported to law enforcement agencies, and effectively branded as untrustworthy by the entire banking system. The Supreme Court, in Gorkha Security Services v. State (NCT of Delhi), (2014) 9 SCC 105, has succinctly termed this as the “civil death” of the concerned borrower.
Under such a dire scenario, a fundamental question arose: Whether the borrower is entitled to be heard before being classified as a fraudster? And if so, what does that hearing entail — a mere opportunity to submit a written representation, or a full-fledged personal hearing? Must the forensic audit report that forms the very foundation of the fraud classification be disclosed to the borrower?
JURISPRUDENCE ON THIS SUBJECT
These questions have seen conflicting decisions from various High Courts and the Supreme Court. The jurisprudence began with the decision of the Telangana High Court in the case of Rajesh Agarwal, WP No. 19102 of 2019 Order dated 10th December 2020, followed by the Supreme Court’s decision in State Bank of India v. Rajesh Agarwal & Ors., (2023) 6 SCC 1.
This was followed by the Calcutta High Court’s decision in Amit Iron P Ltd v. State Bank of India; the Division Bench of the Bombay High Court in Anil D. Ambani v. State Bank of India, WP No. 3037 of 2025, and ultimately culminated in the Supreme Court’s judgment in State Bank of India v. Amit Iron Private Limited & Ors., Order dated 7th April 2026. Taken together, these decisions present a comprehensive jurisprudential framework governing the rights of borrowers in fraud classification proceedings.
RBI’S REGULATORY FRAMEWORK
The RBI, exercising its powers under Section 35A of the Banking Regulation Act, 1949, issued the Master Directions on Fraud – Classification and Reporting by Commercial Banks and Select Financial Institutions, dated 1st July 2016 (“Master Directions 2016”). These Directions established a structured mechanism for the detection, classification, and reporting of frauds in loan accounts of banks. Banks were required to identify Early Warning Signals, red-flag suspicious accounts, commission forensic audits, and classify accounts as fraud through a Joint Lenders’ Forum (“JLF”) or a Fraud Identification Committee (“FIC”).
Clause 8.12 of the Master Directions 2016 prescribed penal measures. Borrowers classified as fraudulent — including promoters, directors, and whole-time directors — were debarred from availing bank finance from scheduled commercial banks, development financial institutions, and government-owned NBFCs for a period of five years from the date of full repayment. Critically, neither restructuring nor compromise settlements were permitted for fraud-classified accounts.
However, the Master Directions 2016, were silent on one crucial aspect: they did not provide for any opportunity of hearing to the borrower before classifying the account as fraud. It was this gap that led to the constitutional challenge in Rajesh Agarwal (supra).
Pursuant to the Supreme Court’s directions in Rajesh Agarwal (supra), the RBI issued the revised Master Directions on Fraud Risk Management, dated 15th July 2024 (“Master Directions 2024”). These revised Directions expressly incorporated the requirement of issuing a detailed show cause notice to the borrower, furnishing the forensic audit report, inviting representations, and passing a reasoned order. All of these requirements were as laid down by the Supreme Court’s Order.
SC’S MILESTONE DECISION IN RAJESH AGARWAL
The Supreme Court’s decision in State Bank of India v. Rajesh Agarwal, (2023) 6 SCC 1 is the cornerstone of this entire issue. The Apex Court examined whether the principles of natural justice should be read into the Master Directions 2016, which were silent on any hearing opportunity for borrowers. The Court held that the classification of an account as fraud is not merely a trigger for criminal proceedings, but also carries independent and severe civil consequences. Relying on its earlier decision in State Bank of India v. Jah Developers, (2019) 6 SCC 787, the Court observed that the debarment of borrowers from accessing institutional finance is akin to blacklisting — an action that must be preceded by an opportunity of hearing.
Further, relying on earlier Constitution Bench decisions, the Court held that since the Master Directions did not expressly exclude the application of audi alteram partem, the principle must be read into the Directions to save them from the vice of arbitrariness.
The conclusions of the Supreme Court, as summarised in the judgment, established that: the borrower must be served with a notice; be given an opportunity to explain the findings of the forensic audit report; allowed to make representations before the banks or the JLF; and that the decision classifying the account as fraud must be supported by a reasoned order.
The Supreme Court in Rajesh Agarwal (supra) upheld the Telangana High Court’s judgment, which had directed the grant of a personal hearing to the borrower. Conversely, the Court set aside the judgment of the Gujarat High Court in Mona Jignesh Acharya v. Bank of India, 2021 SCC OnLine Guj 2811, wherein it had been held that a personal hearing was not mandatory and that only a post-decisional opportunity to make a representation was sufficient. However, it is important to note that the Supreme Court did not expressly mandate a personal hearing.
BOMBAY HIGH COURT’S DECISION
The Division Bench of the Bombay High Court, in the case of Anil D. Ambani v. State Bank of India, WP No. 3037 of 2025, examined SBI’s order classifying the account of Reliance Communications Ltd. (“RCOM”) as fraud and reporting the petitioner’s name to the RBI.
The petitioner, who was the Chairman, Promoter, and Non-Executive Director of RCOM, challenged the order on four principal grounds: firstly, that the show cause notice issued under the erstwhile Master Directions 2016 was rendered non est by the subsequent Master Directions 2024; secondly, that the impugned order violated natural justice for want of a personal hearing; thirdly, that no specific allegations were made against the petitioner individually; and fourthly, that a non-executive director could not be held vicariously liable.
The Court held that the Master Directions 2024 were clarificatory in nature, having been issued to bring the framework in conformity with the decision in Rajesh Agarwal (supra). Since a show cause notice had already been issued, the process initiated under the 2016 Directions continued to remain valid and stood merged with the subsequent framework. The doctrine of supersession did not invalidate a validly issued notice.
On the vital issue of a personal hearing, the Court held that the right contemplated by the Supreme Court is one of representation—not necessarily of a personal hearing. The Court noted that subsequent to the decision in Rajesh Agarwal (supra), SBI had itself represented before the Supreme Court expressing its apprehension that the judgment might be construed as mandating a personal hearing in every case. The Supreme Court, by its order dated 12th May 2023, had clarified that the operative directions are confined to those summarised in its judgment — which speak of representation, not of a personal hearing.
On the question of individual allegations, the Court held that once a company’s account is classified as fraud, promoters and directors who were in control of the company are automatically liable to penal measures. Specific individual allegations in the show cause notice are not a prerequisite. Notably, the Court distinguished the Delhi High Court’s decision in IDBI Bank v. Gaurav Goel & Ors., 2025 SCC OnLine Del 935, which had held that personal hearing forms part of the audi alteram partem safeguard, holding that the said decision had no application in the facts and circumstances of the present case. The Court dismissed the petition, finding no infirmity in the impugned order.
A related issue examined by the Bombay High Court in the same matter in Bank of Baroda v. Anil D Ambani, Appeal (L) NO.43022 of 2025 concerned the validity of an interim injunction restraining banks from acting upon a forensic audit report. A Single Judge had granted relief on the prima facie view that the report was invalid, as it was not prepared by a qualified auditor under ICAI Act.
The controversy before the Division Bench centred on whether forensic audits must necessarily be conducted by Chartered Accountants only? The Division Bench held that the Single Judge had transgressed the settled limits of interlocutory jurisdiction by returning conclusive findings on the legality of the forensic report and regulatory interpretation. Accordingly, the injunction was set aside/modified, permitting the banks to proceed in accordance with law.
This issue was appealed before the Supreme Court in SLP(C) No. 012943 – 012944 / 2026. It was argued that only a qualified auditor/chartered accountant can determine siphoning or fraud and conduct a financial audit, and since the report relied upon was not an audit and records finding of fraud, the classification was unsustainable. It was further contended that siphoning can only be determined by a qualified chartered accountant, and not by a forensic service provider who himself admitted that he was not an auditor and was not following accounting standards. It was also argued that under the RBI framework, even where forensic inputs are used, the ultimate determination must be made by an auditor, and banks cannot classify an account as fraud on such a report. By its Order dated 16th April 2026 in Anil D Ambani v. Bank of Baroda, the Supreme Court disposed of the appeal and declined to interfere with the order of the division bench of the Bombay High Court .
AMIT IRON: SUBSEQUENT SC VERDICT
The most recent comprehensive pronouncement on this issue has come from the Supreme Court in State Bank of India v. Amit Iron Private Limited & Ors, CA 4243/2026, Order dated 7th April 2026. The Court examined three issues ~ whether the decision in Rajesh Agarwal (supra) mandated a right to a personal hearing; whether written representation and a reasoned order would suffice; and lastly whether the entire forensic audit report must be furnished to the borrower. The appeals arose from the Calcutta High Court’s decision in Amit Iron P Ltd v. State Bank of India, W.P.A. No. 10195/2024, Order dated 7th August 2024. The Delhi High Court’s decision in the case of Bank of India v. Sanjeev Narula, LPA 472/205, Order dated 29th July 2025 was also considered. Both of these decisions had directed personal hearings to be granted to borrowers, relying on Rajesh Agarwal (supra). The issue had also divided other High Courts: the Delhi High Court in IDBI Bank v. Gaurav Goel, 2025 SCC OnLine Del 935, and in a series of decisions of the Delhi High Court in the cases of TV Vision Limited v. Punjab National Bank W.P.(C) 9302/2022 Order dated 1st December 2023, Manish Jain v. Reserve Bank of India W.P.(C) 9536/2025, Order dated 1st July 2025, Ashish Gupta v. State Bank of India W.P.(C) 4340/2024, Order dated 21st March 2024, and Chandra Kant Khemka v. Reserve Bank of India, W.P.(C) 1354/2023 Order dated 6th April 2023, had consistently held that a personal hearing was a necessary component of the Rajesh Agarwal framework. In contrast, the Bombay High Court in Anil Ambani (discussed above) had taken the view that a written representation would suffice.
The Supreme Court held that Rajesh Agarwal’s decision did not recognise any inherent right vested in the borrower to a personal or oral hearing before the borrower’s account was classified as fraud. The Court analysed the conclusions in Rajesh Agarwal’s case and held that the procedure envisaged (one of issuing of a show cause notice, consideration of the borrower’s reply, and passing of a reasoned order) satisfies the requirements of natural justice. The RBI’s Master Directions 2024, which incorporated this procedure, were held to correctly reflect the scope of the earlier decision in Rajesh Agarwal, thereby ensuring a fair balance between promptitude and fairness.
Relying on its earlier decisions in T. Takano v. SEBI, (2022) 15 SCC 401 and Madhyamam Broadcasting Limited v. Union of India, (2023) 13 SCC 401, the Supreme Court held that the borrower has a right to disclosure of the forensic audit report obtained by the lender bank. It observed that the furnishing only the findings and conclusions alone would not constitute compliance with natural justice; the reasons underlying those conclusions, as contained in the body of the report were essential for the borrower to mount an effective response. Accordingly, the borrower must be supplied with the audit report.
The Court clarified that disclosure of the forensic audit report is the rule. The only exception would arise where the disclosure of any part would impinge upon third-party rights, In such cases, the bank must record reasons and communicate the same to the borrower, who may then respond as to why the information was necessary. However, the Court observed that such situations would be rare in the context of bank fraud proceedings, where the borrower was typically associated at the stage of preparation of the report. All High Court judgments taking a contrary view by mandating personal hearings were overruled by the Supreme Court.
PRACTICAL IMPLICATIONS FOR BORROWERS AND BANKS
The combined effect of these decisions establishes a clear procedural roadmap. Banks must: issue a detailed show cause notice setting out the specific allegations; furnish the complete forensic audit report (subject to the narrow exception of third-party privacy); grant the borrower adequate time to submit a written representation; and pass a reasoned order dealing with the borrower’s submissions. What banks are not required to provide is a personal or oral hearing. Once this matrix has been followed, the principles of natural justice are automatically obtained by the borrower.
For borrowers, the practical consequence is equally clear. The written representation assumes paramount importance. Every contention, rebuttal, and factual and legal defence must be articulated in writing with meticulous precision. There is no fallback of a personal hearing where persuasion or oral advocacy might supplement an inadequately drafted response. A borrower who fails to respond to the show cause notice does so at his own risk and peril.
For professionals (such as readers of this journal) advising clients in fraud classification proceedings, the importance of forensic audit literacy is paramount. The right to receive the forensic audit report has now been elevated to a mandatory disclosure obligation. This report provides the borrower with a meaningful opportunity to rebut the bank’s case. Advisors must ensure that the borrower’s representation addresses each finding in the forensic audit report with fact-based rebuttals supported by documentary evidence.
NO BAR TO AN FIR
The Supreme Court in an ancillary but not directly related judgment in the case of CBI v. Surendra Patwa, SLP (Crl) 00735/2024, Order dated 25th April 2025, examined whether criminal proceedings and FIRs can subsist against borrowers whose fraud classification was set aside by the High Courts by relying on the decision of Rajesh Agarwal (supra).
The Supreme Court upheld the criminal proceedings. It held that an FIR, by taking cognizance of an offence, merely sets the criminal law into motion and operates independently of civil or administrative determinations. The mere similarity of facts does not imply that, in the absence of valid administrative action, a cognizable offence cannot be registered. At that stage, the only consideration is the existence of a cognizable offence as disclosed in the FIR. .
Accordingly, even if no action is sustained on the civil side, an FIR may still be maintainable. The scope and role of both the actions were totally different and distinct, more so when undertaken by different statutory/public authorities. It held that the quashing of FIRs by the High Courts by relying on Rajesh Agarwal’s case was patently erroneous. The principles of natural justice provided in that decision were not applicable at the stage of reporting a criminal offence. Even the setting aside of an administrative action on the grounds of violation of the principles of natural justice did not bar the administrative authorities from proceeding afresh. It was not a decision on the merits of the case. It clarified that there was no bar on the RBI or the Banks to proceed afresh, by adhering to the principles of natural justice. Ultimately, the Court restored the set aside FIRs.
CONCLUSIONS
It appears that, for the moment, the law governing the right to be heard in fraud classification proceedings under the RBI Master Directions has, achieved a degree of finality. The key principles emanating from the various decisions analysed above may be distilled as follows:
a) The principle of natural justice must be read into the RBI Master Directions on Fraud to save them from the vice of arbitrariness, given that fraud classification entails severe civil consequences amounting to the “civil death” of the borrower.
b) The borrower must be served with a show cause notice containing the specific allegations, furnished with the forensic audit report, and given an adequate opportunity to submit a written representation before the account is classified as fraud.
c) The decision classifying the account as fraud must be made by a reasoned order, dealing with the borrower’s submissions.
d) There is no right to a personal or oral hearing. The principles of natural justice are satisfied by the issuance of a show cause notice, consideration of the written representation, and a reasoned order.
e) The forensic audit report must be furnished to the borrower as a matter of rule. The only exception is where specific portions impinge upon third-party privacy rights, in which case redaction with recorded reasons is permissible.
f) The supersession of the Master Directions 2016 by the Master Directions 2024 does not invalidate show cause notices issued under the earlier Directions, provided the principles of natural justice are complied with.
g) Once a company’s account is classified as fraud, promoters and directors in control of the company are liable to penal measures. Individual-specific allegations in the show cause notice are not a prerequisite.
h) The Master Directions 2024 correctly incorporate the procedure mandated by Rajesh Agarwal and strike a fair balance between the competing demands of promptitude and fairness.
While banks, on the one hand, retain the agility to act swiftly against fraud, borrowers on the other hand, are assured of a meaningful opportunity to defend themselves. A written representation but not an oral personal hearing is guaranteed. Hence, a borrower who fails to represent himself does so at his own peril.
