State Bank Of India vs Amit Iron Private Limited

2026 INSC 323 REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.4243-4244 OF 2026 (@ Special Leave Petition (C) Nos. 20618-20619 of 2025)

State Bank of India …Appellant(s)

Versus

Amit Iron Private Limited & Ors. …Respondent(s)

With

CIVIL APPEAL NO.4245 OF 2026 (@ Special Leave Petition (C) 38805 of 2025) (@ Diary No. 55628 of 2025)

JUDGMENT

K. V. Viswanathan, J.

1. Six decades ago, it was aptly proclaimed that principles

of natural justice cannot be cut and dried or nicely weighed Signature Not Verified

and measured (Ridge vs. Baldwin1). This Court rightly Digitally signed by CHANDRESH Date: 2026.04.07 14:16:03 IST Reason: 1 1964 AC 40

Page 1 of 106 described it as a flexible concept, to be adapted to

circumstances. Its elasticity, however, has been tested to its

limits in several cases. We are here confronted with one

such. While the Reserve Bank of India (for short “RBI”) and

the appellant-Banks contend that a notice, an opportunity to

reply, and a reasoned order should serve the ends of justice,

the borrowers implore that they are entitled to a “personal

hearing” before classifying their account as a “fraud

account.” The other issue that arises is the “borrowers”

entitlement to the Forensic Audit Reports.

2. Leave granted.

3. The core issue that arises in the case revolves around

the Reserve Bank of India (Frauds Classification and

Reporting by Commercial Banks and Select FIs) Directions,

2016 (hereinafter referred to as the “Master Directions-

2016”) and the Reserve Bank of India (Fraud Risk

Management in Commercial Banks (including Regional Rural

Banks) and All India Financial Institutions Directions, 2024

(hereinafter referred to as the “Master Directions-2024”). Page 2 of 106

4. When the matter came up on 04.11.2025, this Court

directed the impleadment of RBI as a party-respondent in the

matter in Civil Appeal arising out of SLP(C) Nos. 20618-

20619/2025. The RBI has been duly impleaded and also

been heard in the matter.

5. The respondent-borrowers herein contend that the

issues are no longer res integra since the matter has been

concluded by the judgment of this Court dated 27.03.2023 in

State Bank of India and Others vs. Rajesh Agarwal and

Others2. The appellant-Banks as well as the impleaded

respondent - RBI submit to the contra.

FACTS IN CIVIL APPEAL ARISING OUT OF SLP(C) NOS.20618-20619/2025:-

6. On 20.08.2019, the loan account of respondent No.1 was

classified as a Non-Performing Asset (NPA) by the appellant-

State Bank of India on account of defaults in repayment

obligations. On 27.12.2023, the appellant-Bank issued a

show cause notice to the respondents alleging various acts of

2 (2023) 6 SCC 1

Page 3 of 106 non-compliance with the agreed terms of the loan

documents, commission of irregularities in financial conduct

suggesting fraudulent activity. The respondents were asked

to show cause as to why the account should not be

categorized and reported as “fraud” (as per the RBI

guidelines). On 08.02.2024, respondent Nos.1 and 2

submitted replies and denied any breach of the terms and

conditions of the loan agreement. On 13.03.2024, the

appellant-Bank communicated to the respondents that the

loan account has been classified as “fraud” and a speaking

order passed in this regard was communicated.

7. The respondents filed a Writ Petition before the High

Court at Calcutta. By a judgment dated 07.08.2024, a learned

Single Judge interpreted the judgment of this Court in Rajesh

Agarwal (supra) to mean that the borrower should be given

an opportunity to explain in person and further that the

Forensic Audit Report should be supplied to the borrower.

The Court held that the borrower should be allowed to

represent his case before the authority, by way of a personal Page 4 of 106 hearing and, thereafter, the order ought to have been

passed. The Writ Petition was allowed in the above terms.

The appellant-Bank carried the matter in appeal to the

Division Bench. The Division Bench, by its judgment dated

12.03.2025 dismissed the appeal and did not interfere with

the directions of the learned Single Judge. Aggrieved, the

appellant-Bank is before us.

FACTS IN CIVIL APPEAL ARISING OUT OF SLP(C) NO.38805/2025:-

8. On 27.03.2012, the appellant-Bank of India classified the

account of M/s Liliput Kidswear Limited, of which the

respondent No.1 was the representative/promoter, as a Non-

Performing Asset under the prudential norms of the RBI.

Thereafter, the first forensic audit was carried out. On

18.08.2023, a show cause notice was issued calling upon

respondent No.1 to show cause on the findings in the

Forensic Audit Report. Respondent No.1 was informed that

in case no reply is received within 15 days of the

communication, it shall be presumed that they have nothing Page 5 of 106 to say in the matter. The respondent No.1 was further

informed that upon expiry of the above period, the Bank shall

proceed ahead with the examination of the fraud angle in

terms of RBI Master Circular/Bank’s guidelines on fraud

classification and reporting. The respondent No.1 filed its

reply. On 03.01.2024, a second show cause notice was

issued incorporating the forensic findings of another forensic

auditor. The respondent No.1 filed its reply on 04.02.2024.

9. On 14.05.2025, the appellant-Bank passed an order

classifying the account of M/s Liliput Kidswear Limited as

“Fraud”.

10. The respondent No.1 filed a Writ Petition before the

High Court of Delhi at New Delhi alleging that no personal

hearing was afforded before the adverse order was made. A

learned Single Judge, by his judgment dated 06.06.2025,

quashed the order dated 14.05.2025 and directed the grant

of personal hearing and also to furnish the audit report to

respondent No.1 herein. The Division Bench, by its

Page 6 of 106 judgment dated 29.07.2025, confirmed the order of the

learned Single Judge. Aggrieved, the appellant is before us.

QUESTIONS FOR CONSIDERATION:-

11. In the above background, the questions that arise for

consideration are – (a) Does the decision in Rajesh Agarwal

(supra) recognize a right inhering in the account

holder/borrower to a personal/oral hearing before the

account is declared/classified as “fraud” under the Master

Directions of the RBI? (b) Whether the issuance of a show

cause notice, the consideration of the reply filed by the

borrower and the obligation to pass a reasoned order setting

out the relevant facts/circumstances relied upon, the

submissions made in response to the show cause notice and

the reasons for classification of account as “fraud” would

satisfy the principles of natural justice? (c) Whether there is

an obligation on the banks to furnish the entire Forensic

Audit Report to the borrowers before declaration of the

account as “fraud”?’ If not, whether the furnishing of the

Page 7 of 106 conclusions of the Forensic Audit Report would serve the

ends of justice?

12. We have heard Mr. Tushar Mehta, learned Solicitor

General of India, for the State Bank of India and the Bank of

India; Mr. Venkatesh Dhond, learned senior counsel for the

RBI; and Mr. Parag P. Tripathi, learned senior counsel and

Mr. K. Parameshwar, learned senior counsel for the

borrowers. We have also perused the written submissions

filed by them, including the written submissions filed by Ms.

Purti Gupta, learned Counsel for the intervenor.

MASTER DIRECTIONS OF RBI: -

13. In this case, we need to discuss both the Master

Directions-2016 as well as the Master Directions-2024. In

Civil Appeal arising out of SLP(C) Nos. 20618-20619/2025,

the entire proceedings leading to the classification of the

account as “fraud” commenced and culminated before the

Master Directions-2024 came into force. Insofar as Civil

Appeal arising out of SLP(C) Diary No.55628/2025, while the

Page 8 of 106 show cause notice and reply came on record when the

Master Directions-2016 held the field, by the time the order

was passed the Master Directions-2024 had come into force.

Further, the Master Directions-2016 were directly in issue in

Rajesh Agarwal (supra). The RBI, expressly, in the 2024

guidelines refers in the footnote to the judgment in Rajesh

Agarwal (supra). Hence, the determination of what the

scenario was under the Master Directions-2016; what was the

holding in Rajesh Agarwal (supra); and what are the terms of

Master Directions-2024 assume significance.

14. The Master Directions of the RBI are issued under

Section 35A of the Banking Regulation Act, 1949. Section 35A

reads as under:

“35A. Power of the Reserve Bank to give directions.– (1) Where the Reserve Bank is satisfied that–

(a) in the public interest; or (aa) in the interest of banking policy; or

(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or

(c) to secure the proper management of any banking company generally;

Page 9 of 106 it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.”

As would be clear, the RBI, on being satisfied that in the

public interest; in the interest of banking policy; felt the need

to prevent the affairs of any banking company being

conducted in a manner detrimental to the interests of the

depositors or in a manner prejudicial to the interests of the

banking company and to secure the proper management of

any banking company generally, deems it necessary to issue

directions to banking companies generally or to any banking

company in particular, it may do so. The Section also makes

it clear that the banking companies are bound to comply with

the said directions.

Page 10 of 106

15. It should also be noticed that under Section 21 of the

Banking Regulation Act, 1949, if the RBI finds it necessary or

expedient in the public interest or in the interests of

depositors or banking policy to do so, may determine the

policy in relation to advances to be followed by banking

companies generally or by any banking company in

particular. The Section further provides that on

determination of such policy, all banking companies shall be

bound to follow this regulation.

PURPOSE AND OBJECTIVES OF THE MASTER DIRECTIONS: -

16. The Master Directions-2016 sets out as its purpose in

Clause 1.3 that the directions were to provide a framework

to banks to detect and report frauds early and take timely

consequent actions. The timely consequent actions would

include reporting to the investigative agencies so that

fraudsters are brought to book early; examining staff

accountability and ensuring effective fraud risk

management. Further, these directions were aimed to enable Page 11 of 106 faster dissemination of information by RBI to banks on the

details of frauds, unscrupulous borrowers and related

parties. This would ensure that necessary safeguards /

preventive measures by way of appropriate procedures and

internal checks can be introduced and caution exercised

while dealing with such parties by the banks. Clause 2.2 of

the Master Directions-2016 and Clause 6.1 of the Master

Directions-2024 read together broadly categorized the

following incidents as fraud:-

“(i) Misappropriation of funds and criminal breach of trust;

(ii) Fraudulent encashment through forged instruments;

(iii) Manipulation of books of accounts or through fictitious accounts, and conversion of property;

(iv) Cheating by concealment of facts with the intention to deceive any person and cheating by impersonation;

(v) Forgery with the intention to commit fraud by making any false documents/electronic records;

(vi) Wilful falsification, destruction, alteration, mutilations of any book, electronic record, paper, writing, valuable security or account with intent to defraud;

(vii) Fraudulent credit facilities extended for illegal gratification;

(viii) Cash shortages on account of frauds;

Page 12 of 106 (ix) Fraudulent transactions involving foreign exchange;

(x) Fraudulent electronic banking/digital payment related transactions committed on banks; and

(xi) Other type of fraudulent activity not covered under any of the above.”

17. Clause 8 of the Master Directions-2016 dealing with the

objective of the framework also set out that the idea was to

achieve the purpose of the directives as set out in Clause 1.3

while ensuring that the normal conduct of business of the

banks and their risk taking ability is not adversely impacted

and no new and onerous responsibilities are placed on the

banks.

EARLY WARNING AND RED FLAGGING: -

18. Clause 8.3 of the Master Directions-2016 and Clause 3 of

the Master Directions-2024 deal with Early Warning Signals

(EWS) and Red Flagging of accounts. A Red Flagged

Account (RFA) is one where a suspicion of fraudulent activity

is thrown-up by the presence of one or more EWS indicators,

alerting/triggering deeper investigation from potential fraud

angle and initiating preventive measures by the banks.

Page 13 of 106

19. The guidelines also stipulate that the bank may use

external auditors including forensic experts or an internal

team for investigations before taking a final view on the RFA.

Within a period of six months, banks are obligated to either

lift the RFA status or classify the account as fraud.

20. The State Bank of India informs us that during the period

when account remains red flagged, the bank exercises

greater caution in dealing with the account. Further, other

banks through a shared reporting system such as CRILC

(Central Repository of Information on Large Credits) are also

able to see the ‘red flagged’ status.

PROCEDURE UNDER THE 03.02.2024 MASTER DIRECTIONS-2024 : -

21. Rajesh Agarwal (supra) was occasioned because the

Master Directions-2016 were silent about any opportunity of

hearing being afforded to the borrower before declaring the

account as “fraud” account. Before we deal with Rajesh

Agarwal (supra), it should be pointed out that in the Master

Directions-2024, in Chapter-II, Clause 2.1.1.1 to 2.1.1.4 set Page 14 of 106 out the procedure through which an account is classified as

“fraud”. The Master Directions-2024 in the footnote refers to

the judgment of this Court in Rajesh Agarwal (supra).

Clause 2.1 which consists of four sub-paras is extracted

hereinbelow:-

“2.1 Governance Structure in banks for Fraud Risk Management 2.1.1 There shall be a Board approved Policy on fraud risk management delineating roles and responsibilities of Board / Board Committees and Senior Management of the bank. The Policy shall also incorporate measures for ensuring compliance with principles of natural justice in a time-bound manner which at a minimum shall include:

2.1.1.1 Issuance of a detailed Show Cause Notice (SCN) to the Persons, Entities and its Promoters /Whole-time and Executive Directors against whom allegation of fraud is being examined. The SCN shall provide complete details of transactions / actions / events basis which declaration and reporting of a fraud is being contemplated under these Directions.

2.1.1.2 A reasonable time of not less than 21 days shall be provided to the Persons / Entities on whom the SCN was served to respond to the said SCN.

2.1.1.3 Banks shall have a well laid out system for issuance of SCN and examination of the responses / submissions made by the Persons Page 15 of 106 / Entities prior to declaring such Persons / Entities as fraudulent.

2.1.1.4 A reasoned Order shall be served on the Persons / Entities conveying the decision of the bank regarding declaration / classification of the account as fraud or otherwise. Such order(s) must contain relevant facts / circumstances relied upon, the submission made against the SCN and the reasons for classification as fraud or otherwise.”

22. The contention of the respondents before us is that

Rajesh Agarwal (supra) read into Master Directions-2016 an

opportunity to grant a personal hearing and not just the need

for issuance of show cause notice, consideration of a reply

and the passing of a reasoned order. This has been the main

bone of contention between the parties. The High Courts in

both the matters before us have accepted this interpretation.

There is no dispute that in both the cases before us notice

was issued, reply elicited and reasoned orders made. It is

not disputed that in both cases personal/oral hearing was not

given. Were the banks obliged to grant a personal/oral

hearing to the borrower is the significant issue before us. No

Page 16 of 106 doubt, there is no challenge to the validity of the Master

Directions-2024. However, the learned counsel for the

respondents contended that if Rajesh Agarwal (supra) did, in

fact, mandate the grant of a personal hearing, it is only fair

that Chapter-II, Clause 2.1 of the Master Directions-2024 also

be understood to encompass an oral/personal hearing.

CERTAIN RELEVANT STATISTICS: -

23. Before we grapple with the present issues, certain

statistics which have been placed before us by the RBI and

which, to say the least, are alarming, need to be set out. The

Annual Report of RBI for 2024-25 indicates that while the total

number of fraud cases in FY 2022-2023 was 13,494, in FY

2023-2024 it was 36,060 and in FY 2024-25 it was 23,953.

What is more shocking is the amounts involved in these fraud

cases. While in FY 2022-23 it was Rs.18,981 crores, in FY

2023-24 it was Rs. 12,230 crores, and in FY 2024-25 it was Rs.

36,014 crores. The note indicates that these are only data in

respect of frauds of Rs.1 lakh and above which are reported.

The chart, as produced, is set out hereinbelow:- Page 17 of 106

Fraud Details from RBI Annual Report 2024-25 Frauds Cases - Area of Operations (Amount in ₹ crore) 2022-23 2023-24 2024-25 Number Number of Number Area of Amount Amount Amount Operation of Frauds of Involved Involved Involved Frauds Frauds 1 2 3 4 5 6 7 Advances 4,021 17,542 4,118 10,072 7,950 33,148 (29.8) (92.4) (11.4) (82.4) (33.2) (92.1) Off-balance Sheet 13 280 11 256 8 270 (0.1) (1.5) - (2.1) - (0.7) Forex 13 12 19 38 23 16 Transactions (0.1) (0.1) (0.1) (0.3) (0.1) -

Card/Internet 6,699 278 29,082 1,457 13,516 520 (49.7) (1.5) (80.6) (11.9) (56.5) (1.4) Deposits 652 259 2,002 240 1,208 527 (4.8) (1.4) (5.6) (2.0) (5.0) (1.5) Inter-Branch 3 0 29 10 14 26 Accounts - - (0.1) (0.1) (0.1) (0.1) Cash 1,485 159 484 78 306 39 (11.0) (0.8) (1.3) (0.6) (1.3) (0.1) Cheques/DDS. CIC. 118 25 127 42 122 74 (0.9) (0.1) (0.4) (0.3) (0.5) (0.2) Clearing 18 3 17 2 6 2 Accounts (0.1) - - - - - Others 472 423 171 35 800 1,392 (3.5) (2.2) (0.5) (0.3) (3.3) (3.9) Total 13,494 18,981 36,060 12,230 23,953 36,014 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) - : Nil/Negligible

Note: 1. Figures in parentheses represent the percentage share of the total.

2. Data are in respect of frauds of ₹1 lakh and above reported during the period.

3. The figures reported by banks and FIs are subject to

Page 18 of 106 changes based on revisions filed by them.

4. Frauds reported in a year could have occurred several years prior to year of reporting.

5. Amounts involved reported do not reflect the amount of loss incurred. Depending on recoveries, the loss incurred gets reduced. Further, the entire amount involved is not necessarily diverted.

6. As on March 31, 2025, 783 frauds amounting to ₹ 1,12,911 crore were withdrawn by banks due to non-

compliance with the principles of natural justice as per the judgment of the Hon’ble Supreme Court dated March 27, 2023.

7. Data pertaining to 2024-25 includes fraud classification in 122 cases amounting to ₹18,674 crore, pertaining to previous financial years, reported afresh during the current financial year after re examination and ensuring compliance with the judgement of the Hon’ble Supreme Court, dated March 27, 2023 Source: RBI Supervisory Returns.”

24. The Bank group-wise details have also been made

available. It will be seen that in public sector banks for the

FY 2024-25 there were 6,935 cases of frauds and amount

involved was Rs.25,667 crores and in private sector banks for

the FY 2024-25 the fraud cases were 14,233 and the amount

involved was Rs.10,088 crores. The full chart is set out

hereinbelow:

Page 19 of 106

Fraud Details from RBI Annual Report 2024-25

Fraud Cases - Bank Group-wise (Amount in ₹ crore) 2022-23 2023-24 2024-25 Bank Number or Amount Number Amount Number Amount Group/institution Frauds involved of Frauds involved of involved Frauds

1 2 3 4 5 6 7 Public Sector 3,331 12,557 7,460 9,254 6,935 25,667 Banks (24.7) (66.2) (20.7) (75.6) (29.0) (71.3) Private Sector 8,971 5,206 24,207 2,722 14,233 10,088 Banks (66.4) (27.4) (67.2) (22.3) (59.4) (28.0) Foreign Banks 804 292 2,899 154 1,448 181 (6.0) (1.5) (8.0) (1.3) (6.0) (0.5) Financial 9 888 1 1 2 13 Institutions (0.1) (4.7) - - - -

Small Finance 311 31 1019 64 1,217 58 Banks (2.3) (0.2) (2.8) (0.5) (5.1) (0.2) Payments 68 7 472 35 113 6 Banks (0.5) - (1.3) (0.3) (0.5) - Local Area 0 5 1 0 0 2 Banks - - - - - - Total 13,494 18,981 36,060 12,230 23,953 36,014 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0)

Nil/Negligible

Note: 1. Figures in parentheses represent the percentage share of the total.

2.Data are in respect of frauds of ₹1 lakh and above reported during the period.

3.The figures reported by banks and FIs are subject to changes based on revisions filed by them.

4.Frauds reported in a year could have occurred several years prior to year of reporting.

5.Amounts involved reported do not reflect the amount of loss

Page 20 of 106 incurred. Depending on recoveries, the loss incurred gets reduced. Further, the entire amount involved is not necessarily diverted.

6.As on March 31, 2025, 783 frauds amounting to ₹ 1,12,911 crore were withdrawn by banks due to non-compliance with the principles of natural justice as per the judgment of the Hon’ble Supreme Court dated March 27, 2023.

7.Data pertaining to 2024-25 includes fraud classification in 122 cases amounting to ₹18,674 crore, pertaining to previous financial years, reported afresh during the current financial year after re-examination and ensuring compliance with the judgement of the Hon’ble Supreme Court, dated March 27, 2023 Source: RBI Supervisory Returns.”

25. A close reading of the chart also indicates for the FY

2024-25 while the public sector banks accounted for 29

percent of the total cases of frauds, it accounted for 71.3

percent of the total amount involved in the fraud.

CONTENTIONS OF THE RBI AND THE BANKS:-

26. Mr. Venkatesh Dhond, the learned Senior Advocate,

appearing for the RBI, at the outset, clarified that the role of

the RBI was confined to issuing supervisory directions. The

supervisory directions outlined the procedural and reporting

obligations of regulated entities and it is not the role of the

RBI to interfere with case-specific decisions. Learned senior

counsel, however, submitted that the judgment in Rajesh

Page 21 of 106 Agarwal (supra) only mandated the banks to serve notice

and give an opportunity to explain the conclusions of the

forensic audit report. According to the learned senior

counsel, consistent with the observations in Rajesh Agarwal

(supra), the 2024 Master Directions on frauds makes the final

determination of only “fraud” based on documentation and

data that the bank possesses which either came from the

borrower or was already in the borrowers explicit

knowledge.

27. Learned senior counsel, submitted that the 2024 Master

Directions mandates detailed show cause notice, reasonable

time for reply, an examination of the response and the

making of a reasoned order. According to the learned

senior counsel, Rajesh Agarwal (supra) did not, by any

measure, mandate a personal/oral hearing. On the contrary,

according to the learned senior counsel, Rajesh Agarwal

(supra) made it explicit that personal/oral hearing was not

mandatory and that the principle of audi alteram partem is

sufficiently met if the written/documentary response of the Page 22 of 106 borrower/noticee is duly considered and a speaking order

passed.

28. Learned senior counsel submits that “opportunity of a

hearing” or “opportunity of being heard” contemplated in

Rajesh Agarwal (supra) is not a “personal/oral” hearing.

Learned senior counsel submitted that since unlike the 2024

directions, the 2016 directions did not have explicit clauses

providing for notice, reply and the making of a reasoned

order, the challenge to the 2016 directions were on not being

given an opportunity to present a defence. Learned senior

counsel relies on State Bank of India vs. Jah Developers

Private Limited and Others3, and Gorkha Security Services

vs. Government (NCT of Delhi) and Others4, which, in turn,

were relied on in Rajesh Agarwal (supra) to contend that

oral hearing is not an absolute requirement of the principle

of natural justice and that a consideration of a written

representation would suffice. Dealing with Para seventy-five

3 (2019) 6 SCC 787 4 (2014) 9 SCC 105

Page 23 of 106 of Rajesh Agarwal (supra), learned senior counsel, contends

that the hearing contemplated was not an oral/personal

hearing.

29. According to the learned senior counsel, if there was

any doubt whether Rajesh Agarwal (supra) intended to the

contra, the same was brought to a quietus by the clarification

issued by this Court on 12.05.2023 in M.A. No. 810 of 2023.

30. Learned senior counsel submitted that prescribing a

personal/oral hearing to every borrower before classifying

an account as fraud is neither warranted nor practicable or

desirable. According to the learned senior counsel, the

contention of the respondents to that effect will not only have

undesirable consequences but has the potential to

undermine the very objective of the directions, namely, to

ensure timely and speedy detection and reporting of fraud to

the RBI. According to the learned senior counsel, the 2024

master directions include and embody the principles of

natural justice in the form that RBI considers most expedient

and appropriate since they take note of : the observed Page 24 of 106 realities of the banking sector and credit facilities; draw from

past experience of the working/administration of the master

directions; are alive to the width, diversity and extent of

potential fraud case; the need for mechanism of timely

detection, identification and reporting of fraud which act as a

diagnostic tool and a deterrent, and recommend an efficient

administrative process at the same time not convert the

same into a court adjudication.

31. According to the learned senior counsel, banks ought to

be provided certain “play in the joints” and that is why the

RBI has not made oral hearing as part of the process and

confer any right on the borrower to insist on an oral hearing.

According to the learned senior counsel, frauds are of

various hues and what has been set out as categories are

only illustrative. Learned senior counsel submits that in view

of the same, a straitjacket formula for all cases would be both

conceptually inappropriate and practically inexpedient.

32. Learned senior counsel submits that the classification of

fraud is based on objective documented evidence such as Page 25 of 106 financial statements, transaction records, stock statements

and security valuations which are all within the knowledge of

the borrower. Learned senior counsel submits that the

classification is an internal administrative decision of the

banks, required by regulatory guidelines to trigger

mandatory reporting, asset preservation and immediate

systemic risk mitigation. Learned senior counsel submits

that insisting on oral hearing would convert a swift

administrative process into a protracted procedure causing

significant delays. According to the learned senior counsel,

borrowers would then resort to demand for cross

examination and all these dilatory tactics would severely

impede prompt reporting to law enforcement.

33. This delay will provide borrowers an opportunity to

dissipate assets, destroy evidence or even abscond resulting

in the grave prejudice to public interest. Learned senior

counsel submits that the charts only reflect concluded cases

where accounts have been classified and do not reflect the

cases that are underway. According to the learned senior Page 26 of 106 counsel, imposing a personal hearing will cause significant

logistical and infrastructural burden. According to the

learned senior counsel, as per the procedure fixed in the

Master Directions, the Committee could deliberate at their

convenience after the essential banking functions for the day

are over, which would not be the case if officials are to be

designated for hearing the large number of borrowers at an

appointed time. If oral hearing is insisted, senior officials of

the bank who would otherwise need to attend core banking

functions will be totally engaged in conducting personal

hearings seriously prejudicing the business of the banks.

34. Elaborating on the concept of audi alteram partem,

learned senior counsel submits that the rules of natural

justice are not embodied rules and as to what aspect of

natural justice would apply to a given case would depend on

the facts and circumstances of the case, the framework of law

under which the enquiry is held and the constitution of the

Tribunal or body of persons appointed for that purpose.

Page 27 of 106 [A.K. Kraipak vs.Union of India5]. Learned senior counsel

submits that deference is usually shown to the views of the

experts and the RBI, being the regulator having factored in

natural justice in the form of show cause notice, reply and the

need for a reasoned order, personal hearing ought not to be

insisted and was in fact not insisted upon in Rajesh Agarwal

(supra).

SUBMISSIONS ON BEHALF OF THE BANKS: -

35. Mr. Tushar Mehta, the learned Solicitor General, who

appeared for the appellant-banks extensively referred to the

2016 and 2024 directions and particularly the purpose and

the objective behind the issuance of the directions. Learned

Solicitor General elaborated on the Early Warning Signals

[EWS] and the Red Flagging Accounts [RFA] concepts

highlighted in the directions and explained the significance

of the same. Learned Solicitor General contends that under

the procedure prescribed in the Master Directions the

account holder is aware even before the issuance of show

5 (1969) 2 SCC 262

Page 28 of 106 cause notice about his account showing early warning

signals and, therefore, would be declared a red flagged

account; the borrower participates in the process of audit

when there is a direction for forensic audit; service of show

cause notice along with the conclusions of the forensic audit

report; the consideration of the reply in detail, and the

making of a reasoned order taking into consideration the

facts of the case and the explanation of the account holder

which is served upon the borrower. According to the learned

Solicitor General, the procedure prescribed is in conformity

with the principles of natural justice.

36. Learned Solicitor General reiterated the point that grant

of a personal hearing will defeat the purpose behind the

master directions and cause prejudice to the banks by

creating stumbling blocks for early and timely detection of

reporting of fraud; early and timely reporting to the

investigative agencies; faster dissemination to banks the

details of fraud and fraudulent borrowers, and taking of

safeguards and preventive measures by banks. Learned Page 29 of 106 Solicitor General submits that large banks handled hundreds

of potential fraud alerts involving multiple lenders and

complex borrower groups. According to the learned

Solicitor General, banks not only deal with corporate

borrowers but also deal with retail accounts where frauds

occur.

37. Learned Solicitor General submits that imposing a

compulsory layer of personal hearing in every case would

inevitably lead to an increased case load on the banks and

delay decision-making including the reporting of frauds.

Learned Solicitor General highlighted the aspect that

multiple directors may each seek personal hearing and that

will cause further delay and enormous prejudice to the

public interest. Learned Solicitor General dwelt upon how in

recent times instances of loan fraud have increased and how

banks have been badly affected by the fraudulent practice of

the borrowers especially large borrowers resulting in loss of

billions of public money.

Page 30 of 106

38. Learned Solicitor General submitted that some of the

Early Warning Signals [EWS] which would alert the bank

officials about the wrongdoings in the loan accounts are

default in undisputed payment to the statutory bodies as

declared in the annual report; bouncing of high-value

cheques; delay in payment of outstanding dues; funds from

other banks to liquidate outstanding loan amount except

when they are in normal course; exclusive collateral charge

to the number of lenders without NOC of existing charge

lenders; dispute on title of collateral securities and critical

issues, if any, highlighted in the stock audit report.

According to the learned Solicitor General, these signals put

the banks on alert and trigger a detailed investigation into

accounts. Learned Solicitor General submits that the bank

prepares a report on the red flagged accounts which is to be

put up to the Special Committee of the Board for monitoring

and follow-up of Frauds (SCBF).

39. The Fraud Monitoring Group [FMG] of the banks is

entrusted with the responsibility to take a call on whether an Page 31 of 106 account in which EWS are observed should be classified as

RFA or not within a month of detection of EWS. Learned

Solicitor General submits that in case the account is classified

as RFA, the FMG will stipulate the nature and level of further

investigations or remedial measures to protect the bank’s

interest. Learned Solicitor General submits that the report is

thereafter put up to the special committee of the board for

monitoring and follow-up cases of fraud with the SCBF with

the observations/decisions of the FMG. Thereafter, the bank

uses external auditors including forensic experts or an

internal team for investigation before taking a final view on

the RFA.

40. Under the Master Directions, within a total time-frame of

180 days, banks have to either lift the status of a red flagged

account or classify the account as fraud. Learned Solicitor

General submits that once an account is classified as fraud

by the individual bank, it is the responsibility of the bank to

report the bank status on the CRILC platform so that other

banks are alerted. Thereafter, the fraud has to be reported Page 32 of 106 to RBI and also to the CBI/Police. Learned Solicitor General

submits that in consortium lendings, the individual bank

which has red flagged the account of detected fraud would

ask the consortium leader or the largest lender under the

Multiple Banking Arrangements [MBA] to convene a meeting

of the Joint lending Forum [JLF] to discuss the issue. Based

on the majority of at least 60% share, the account should be

red-flagged by all the banks and would be subjected to a

forensic audit commissioned/initiated by the consortium

leader or the largest lender under the Multiple Banking

Arrangements.

41. Learned Solicitor General highlighted all these aspects

to drive home the point that the decision involves officials

from top level management after necessary forensic audits.

Learned Solicitor General submits that an oral/personal

hearing would act as a forewarning to the fraudsters and

would give an opportunity for the borrower to

delay/abscond, secret assets and siphon off funds from other

Page 33 of 106 banks and hamper investigation by the law enforcement

agencies.

42. Learned Solicitor General submits that the ultimate and

the overriding objective underlying the purpose of the

Master Directions were to ensure that the borrowers who are

found to have committed fraud, should be debarred

immediately from further availing of financial assistance.

Dealing with Rajesh Agarwal (supra), learned Solicitor

General submitted that all that the judgment did was to read

the audi alteram partem into the directions of 2016. Learned

Solicitor General submitted that natural justice is a flexible

concept and must not be unnecessarily expanded contrary to

public interest.

43. Learned Solicitor General further contended that para

81 and para 98.6 of the judgment in Rajesh Agarwal (supra)

only mandate furnishing finding and conclusions

respectively, from the forensic audit report and submits that

that would serve the ends of justice.

Page 34 of 106 CONTENTIONS OF THE BORROWERS: -

44. Shri K. Parameshwar, learned senior counsel, for the

respondent borrower (in Civil Appeal @ SLP (C) Nos. 20618-

20619/2025) submits that in Rajesh Agarwal (supra), it was

specifically held that principles of natural justice could not

be impliedly excluded owing to onerous civil consequences

on the borrower. Specific attention was drawn to paras 98.2,

98.3, 98.4, 98.5, 98.6 and 98.7 of the judgment in Rajesh

Agarwal (supra) to contend that the court interpreted audi

alteram partem in the context of the Master Directions to

include “an opportunity to explain the evidence against it”

and “be allowed to represent why the proposed action

should not be taken”. He drew specific attention to para 81

of the judgment in Rajesh Agarwal (supra). According to the

learned senior counsel, this specific direction was not

disturbed or modified in the subsequent orders of this Court

dated 12.05.2023 and 18.07.2023.

45. Learned senior counsel submitted that the appellant-

Banks specifically sought a clarification in the application for

Page 35 of 106 clarification that the judgment did not afford “a personal

hearing”. Learned senior counsel submitted that considering

that the Miscellaneous Application was disposed of without

any clarification, there is no manner of doubt that Rajesh

Agarwal (supra) contemplated personal hearing. Learned

senior counsel further submitted that similarly, a prayer was

made in the clarification application to clarify that providing

relevant extracts from the forensic audit report would meet

the ends of justice and that since no clarification was made

on the same, it would mean that furnishing the full report was

mandatory.

46. According to the learned senior counsel, the appellant-

Banks are only re-agitating the issue and that the appellant is

cherry-picking since in other cases too where the State Bank

of India is a party, personal hearing was held to be

mandatory by the High Court and those judgments have not

been challenged by the appellant-Banks. Learned senior

counsel submitted that a party, similarly situated, is entitled

Page 36 of 106 to the benefit of judicial pronouncement on the principle of

parity.

47. Learned senior counsel invited attention to the

judgment of the High Court of Telangana at Hyderabad

which was called in question in Rajesh Agarwal (supra).

Drawing the attention to para 70.4 of the High Court

judgment, learned senior counsel submits that a direction to

grant “opportunity of personal hearing” was ordered. Learned senior counsel submitted that this Court in Rajesh

Agarwal (supra) upheld the judgment of the Telangana High

Court. Hence, opportunity of personal hearing ought to be

afforded. Learned senior counsel referred to a large number

of High Court judgments which directed the banks to

provide personal hearing to the borrower while initiating

action under the master directions.

48. Learned senior counsel submits that the appellants are

inviting the court to treat respondent-borrowers in a manner

as if they are already guilty. Learned senior counsel submits

that the submission that due to urgency and systemic risk, Page 37 of 106 oral opportunity is to be denied is inherently and structurally

prejudicial because it presumes the correctness of an

accusation and expects the borrowers to destroy the

presumption without a personal hearing.

49. Dealing with a query from the Court as to whether the

doctrine of merger will not foreclose the Court from looking

at the judgment of the Telangana High Court in Rajesh

Agarwal (supra), learned senior counsel contends that

reliance on the doctrine of merger is not justified. According

to the learned senior counsel, this Court consciously affirmed

the judgment of the Telangana High Court mandating

personal hearing. Learned senior counsel drew attention to

the fact that in Rajesh Agarwal (supra), the Court was well

aware of the need for oral hearing because it highlighted and

characterised cases before it, where personal hearing had

been ordered and where no relief was granted in terms of

personal hearing. Learned senior counsel submitted that in

Rajesh Agarwal (supra), this Court expressly overruled the

judgment of the Gujarat High Court in Mona Jignesh Page 38 of 106 Acharya vs. Bank of India6,. In Mona Jignesh Acharya

(supra), the Gujarat High Court held that personal hearing

was not mandatory in every situation. Learned senior

counsel submitted that in the judgment of the Gujarat High

Court, the Court had ordered issuance of notice, receipt of

reply and passing of a reasoned order. This judgment was

overruled by this Court in Rajesh Agarwal (supra).

50. Learned senior counsel relied upon the judgment of this

Court in T. Takano vs. Securities and Exchange Board of

India and Another7, for disclosure of relevant material and

how it can only be subjected to narrow exceptions. According to the learned senior counsel, Takano (supra)

mandates that all material relevant to the adjudicatory

satisfaction must be disclosed and that the authorities ipse

dixit that it has not relied on any particular material was not

determinative if the material had nexus to the decision.

According to the learned senior counsel, the forensic audit

report is a central investigating material and not a peripheral 6 2021 SCC OnLine Guj. 2811 7 (2022) 8 SCC 162

Page 39 of 106 document. Learned senior counsel submits that the

concurrent findings of the learned Single Judge and the

Division Bench that the declaration of fraud cannot stand

without supply of the forensic audit report was a fact

sensitive application of these decisions. Learned senior

counsel submitted that civil consequences are grave for an

account holder inasmuch as it blacklists the borrower from

institutional finance; is inextricably linked to criminal

proceedings and exposes the borrower to insolvency and

bankruptcy proceedings. According to the learned senior

counsel, all these constitute “civil death” and serious

reputational stigma and hence the bank should be subjected

to rigorous procedural standards like a personal hearing.

51. Learned senior counsel submits that the contention that

the process of personal hearing would “paralyze the entire

process” is a completely untenable submission. According

to the learned senior counsel, banks have been routinely

granting personal hearing under the wilful defaulter

Page 40 of 106 directions, since the oral hearing will be structured time-

bound and is not a proceeding akin to a trial.

52. Drawing attention to the facts, learned senior counsel

submits that in Civil Appeal @ SLP(C) Nos. 20618-20619 of

2025 while the forensic reports were completed on

02.11.2020 and 24.12.2022, the show cause notice was issued

on 27.12.2023, after three years.

53. Dealing with the statistics furnished by the Reserve Bank

of India, learned senior counsel contends that it is only an

attempt to overwhelm the Court and paint a picture of

impracticality to hold personal hearings. Learned senior

counsel submits that the threshold for EWS in RFA was an

exposure of Rs. 50 crores and statistics of cheque frauds and

small retail frauds would not present the correct picture.

Learned senior counsel for the respondent submits that

applying the impact and effect test on fundamental rights,

there is serious infringement on the fundamental rights

under Article 19(1)(g) as a fraud declaration mandatorily

debars them from institutional finance. Further, a fraud Page 41 of 106 declaration virtually forecloses access to capital and impacts

eligibility under Section 29A of the Insolvency and

Bankruptcy Code, 2016 and also exposes them to criminal

proceedings. Learned senior counsel contends that the

Court must be circumspect of the procedure prescribed by

mere administrative instructions. Learned senior counsel

submits that the proportionality standard created by this

Court while evaluating violation of fundamental rights must

apply with even more vigour while considering the impact of

the master directions. Learned senior counsel submits that

full disclosure of the forensic audit report and minimal oral

hearing is the least restrictive alternative which will not only

reduce the risk of error but also uphold the regulatory

objectives of early detection and timely reporting. Learned

senior counsel canvassed on the application of the principle

of non-retrogression considering the holding in Rajesh

Agarwal (supra), which according to the learned senior

counsel, has guaranteed oral hearing. Learned senior

Page 42 of 106 counsel submits that enormous prejudice has been caused to

the respondent by non-grant of a personal hearing.

54. Shri Parag P. Tripathi, learned senior counsel, submitted

that this Court upheld the judgment of the Telangana High

Court. It specifically directed personal hearing to be given.

Learned senior counsel submitted that “hearing in Rajesh

Agarwal (supra) meant personal hearing”. Learned senior

counsel submitted that the specific argument of the banks

before this Court in Rajesh Agarwal (supra) was that the

borrowers had no right to personal hearing. Learned senior

counsel drew specific attention to para seventy-five of the

judgment in Rajesh Agarwal (supra) and highlighted the use

of the phrase “reply and representation” separately.

Learned senior counsel submits that the judgment sets out a

three-stage process: notice; opportunity to explain, and

representation (personal hearing). Learned senior counsel

submits that if reply and representation meant only written

submission, the use of the word “representation” was otiose. Page 43 of 106

55. Learned senior counsel submitted that banks ought to

disclose the audit reports and referred to para 95 of Rajesh

Agarwal (supra) to reinforce the point. Learned senior

counsel inviting attention to the Miscellaneous Application

filed by the State Bank of India for clarification in Rajesh

Agarwal (supra) and submitted that clarification was sought

on three aspects: that hearing contemplated in the judgment

did not include personal hearing; that providing relevant

extracts from the forensic auditor report would meet the

ends of justice, and that the judgment should have

prospective application. According to the learned senior

counsel, the clarification application brought out for the first

time the issue of oral hearing and the Court, according to the

learned senior counsel, made it clear by reiterating the

judgment of the High Court.

56. According to the learned senior counsel, if the Court

which passed the clarificatory order in Rajesh Agarwal

(supra) was of the view that oral hearing was not necessary

or not contemplated in the main judgment, it would have Page 44 of 106 taken the opportunity to clarify the same while disposing of

the Miscellaneous Application.

57. Learned senior counsel submits that the Reserve Bank of

India issued a master circular dated 30.07.2024 on wilful

defaulters and with regard to the wilful defaulters, the

judgment in Rajesh Agarwal (supra) was fully accepted

since according to the learned senior counsel, under the said

circular, forensic audit report as also all documents in the

show cause notice were to be supplied and the Review

Commission was to give a personal hearing. Referring to the

Annual Report of the RBI for 2024-25, learned senior counsel,

submits that this Circular of 30.07.2024 was issued taking into

account the various judgments of this Court and the High

Courts.

58. Learned senior counsel submits that classification as

fraud has serious consequences and that personal hearing

provides a valuable and the jurisprudentially approved

justice-oriented healing to such a party. Learned senior

counsel relied on U.S. Supreme Court judgment of Goldberg Page 45 of 106 vs. Kelly8 to contrast between oral submissions and written

submissions. Learned senior counsel submits that judges

change their minds under the influence of oral arguments

and relied on judgments in support of the proposition.

59. Learned senior counsel disputed the argument of time

being of essence by setting out that while in the case of the

borrower represented by him, the forensic audit reports

were dated 21.08.2022 and 28.03.2023 (addendum); the first

show cause notice was issued on 27.09.2023. Thereafter, a

second auditor was appointed on 30.10.2023 and a second

show cause notice was issued on 03.01.2024 and the final

order was made on 14.05.2025. Learned senior counsel

submits that the arguments advanced by the RBI and the

banks to negate personal hearing like there being no right of

a personal hearing and that it can only be considered on

case by case basis; that the documents are the basis for

proceeding; that there are a large number of cases and that

8 397 US 254 (1970)

Page 46 of 106 time is of essence are all not valid arguments compared to

the consequences that will ensue to the borrower.

HOLDING IN RAJESH AGARWAL (SUPRA): -

60. Time is ripe now to make a brief analysis of the

judgment in Rajesh Agarwal (supra). In Rajesh Agarwal

(supra), this Court dealt with four Civil Appeals and a Writ

Petition. Three Civil Appeals arose out of the judgments

from the High Court of Telangana at Hyderabad, one Civil

Appeal arose from a judgment of the High Court of Gujarat

and the Writ Petition was by the petitioner in the Gujarat

High Court who had challenged the validity of the Master

Directions of 2016 before this Court. Of the three judgments

of the Telangana High Court, in the lead case namely, Rajesh

Agarwal (supra), the High Court had read the principles of

natural justice into the Master Directions of 2016. Hence, the

State Bank of India was in appeal to this Court. In the two

other Appeals from Telangana, the High Court had declined

to grant relief to the writ petitioners and the writ petitioners

Page 47 of 106 therein were in appeal here. In the matter from Gujarat,

namely, Mona Jignesh Acharya (supra) [SLP (C) No. 3388 of

2022] the Division Bench of the Gujarat High Court had, while

declining to read in natural justice, gave an opportunity to

the borrower to file a representation post the declaration of

the account as a fraud account and had directed the bank to

decide on the representation. The borrower in the Gujarat

matter had also filed Writ Petition (C) No. 138 of 2022

challenging the validity of the Master Directions 2016. As

pointed out earlier, unlike the 2024 directions, the 2016

master directions were absolutely silent on the principle of

natural justice to be adopted before classifying an account as

a fraud account.

61. The question that the Court considered was whether the

principle of natural justice should be read into the master

directions 2016. The Court, at the very outset in Para 2 made

it clear that for the reasons that were to follow the principles

of natural justice particularly the rule of Audi Alteram Partem

Page 48 of 106 had to be necessarily read into the master directions on

fraud to save it from the arbitrariness.

62. The contention of the RBI and the lender banks were that

the clamor for reading principles of natural justice into the

circular was devoid of merit. They contended that the master

directions on frauds were necessitated to protect the

interests of the depositors and for timely detection and

dissemination of information and reporting about the fraud.

They specifically contended that the principles of natural

justice are not applicable since the classification is done only

for reporting the matter to the law enforcement agency.

They emphatically submitted that principles of natural justice

are not applicable at the stage of setting the process of

criminal law in motion implying thereby, if that were so,

principles of natural justice cannot apply to classify the

account as fraud accounts. Express submissions were made

to the effect that issuing of a Show Cause Notice may

forewarn the borrower and hamper the investigation by the

law enforcement agencies. The borrowers on the other hand Page 49 of 106 contended that classification of an account as fraud carries

significant consequences akin to black listing which affected

their right to reputation. They contended that since the

classification of account as fraud entailed significant civil

consequences, hence the principles of natural justice ought

to be read into the master directions on frauds.

63. The Court clarified, at the outset, that ‘Audi Alteram

Partem’ depended on the facts and circumstances of the case,

the express language and basic scheme of the statute under

which the administrative powers is exercised as well as the

nature and purpose for which the power is conferred and the

final effect of the exercise of that power (Para 36). The Court

thereafter held that civil consequences ensued to the

borrower (Para 50.3).

64. Thereafter, the Court dealt with the judgment of Jah

Developers (supra), wherein a procedure for consideration

by the first Committee, prior to the issuance of Show Cause

Notice and how the first Committee was mandated under the

circular pertaining to willful defaulters to consider the Page 50 of 106 submissions before recording the finding of fact of willful

default. The Court observed that if the Committee deemed it

necessary it could also provide a personal hearing to the

borrower and the promoters/whole time director of the

borrowing company in the case of willful default. Thereafter,

the Court in Jah Developers (supra) dealt with the second

stage before the Review Committee. Thereafter, the Court

held that while consequences for an account declared as

fraud is the same as willful default, in the case of fraud

account certain additional consequences also ensue.

65. What is significant to note is that even in Jah Developers

(supra) in the case of willful defaulter, as per the extant

procedure, there was no right of personal hearing to the

defaulter and only if the first Committee so desired a hearing

at the discretion of the Committee it was to be given.

66. In Rajesh Agarwal (supra), this Court held that the bar

from raising finances from financial markets and capital

markets which were to visit the borrowers if the account is

classified as ‘fraud’ tantamounts to ‘civil death’ apart from Page 51 of 106 violation of Article 19(1)(g). In view of the same, this Court

held that principles of natural justice should be made

applicable and that a person against whom an action of

debarment is sought should be given an opportunity of being

heard. This Court further held that the action of classifying

an account as fraud not only affected the business or

goodwill of the borrower but also the right to reputation.

This Court held that since the master directions did not

exclude a right of hearing to the borrowers the principle of

natural justice can be read into the same.

67. Much debate centered around Para 75 & 81 of Rajesh

Agarwal (supra) and hence, the same are extracted

hereinbelow for a complete understanding:-

“75. As mentioned above, Clause 8.9.6 of the Master Directions on Frauds contemplates that the procedure for the classification of an account as fraud has to be completed within six months. The procedure adopted under the Master Directions on Frauds provides enough time to the banks to deliberate before classifying an account as fraud. During this interval, the banks can serve a notice to the borrowers, and give them an opportunity to submit their reply and representation regarding the findings of the forensic audit report. Given the wide time-frames contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is

Page 52 of 106 reasonably practicable for banks to provide an adequate opportunity of a hearing to the borrowers before classifying their account as fraud.

81. Audi alteram partem, therefore, entails that an entity against whom evidence is collected must : (i) be provided an opportunity to explain the evidence against it; (ii) be informed of the proposed action, and (iii) be allowed to represent why the proposed action should not be taken.

Hence, the mere participation of the borrower during the course of the preparation of a forensic audit report would not fulfil the requirements of natural justice. The decision to classify an account as fraud involves due application of mind to the facts and law by the lender banks. The lender banks, either individually or through a JLF, have to decide whether a borrower has breached the terms and conditions of a loan agreement, and based upon such determination the lender banks can seek appropriate remedies. Therefore, principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the findings in the forensic audit report, and to represent before the account is classified as fraud under the Master Directions on Frauds.” (Emphasis supplied)

68. The argument of learned Senior Counsel for the

borrowers is that since the Court use the word “reply and

representation”, both cannot mean the same and hence post

the reply there ought to be a personal hearing.

69. We are not persuaded to read the said phrases like a

statute. Read in the context of the entire judgment, it is clear

that what was contemplated was only a Show Cause Notice, a

written representation in the form of a reply. All that the Page 53 of 106 Court meant was to reply to the Show Cause Notice and

represent against the findings in the forensic report while

submitting their response to the Show Cause Notice.

Thereafter, this Court, after reading in principles of natural

justice, upheld the constitutional validity of the master

directions. The Court also mandated that the order passed

there on must be reasoned so as to comport with fairness and

must also indicate due application of mind.

70. The Court made the following operative directions in its

conclusion: -

“98.1. No opportunity of being heard is required before an FIR is lodged and registered.

98.2. Classification of an account as fraud not only results in reporting the crime to the investigating agencies, but also has other penal and civil consequences against the borrowers.

98.3. Debarring the borrowers from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrower.

98.4. Such a debarment under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrowers for being untrustworthy and unworthy of credit by banks.

This Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted.

Page 54 of 106 98.5. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time-frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borrowers before classifying their account as fraud.

98.6. The principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/JLF before their account is classified as fraud under the Master Directions on Frauds. In addition, the decision classifying the borrower's account as fraudulent must be made by a reasoned order.

98.7. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness.”

71. Much was made out of the fact that in the penultimate

paragraph of Rajesh Agarwal (supra), this Court upheld the

judgment of the High Court of Telangana at Hyderabad and

set aside the judgment of the High Court of Gujarat. We have

hereinafter explained in the context of the doctrine of

merger as to which decree would operate as the final

pronouncement.

Page 55 of 106

72. Rajesh Agarwal (supra) resulted in an application for

clarification filed by the State Bank of India with the following

prayers: -

“a) clarify that the hearing contemplated in the judgment dated 27.03.2023 passed in C.A. No. 7300 of 2022 & batch is not understood to be personal hearing and that the banks can decide the time frame of adjudication depending upon the urgency of the matter;

b) Clarify that providing relevant extracts from the forensic auditor report, would meet the ends of justice;

c) Clarify that the judgment dated 27.03.2023 in CA No. 7300 of 2022 & batch matters, to be prospective in operation.”

73. This Court disposed of the clarification application MA

810/2023 in C.A. No. 7300/2022 by ordering as follows:

“1. The apprehension which has been expressed by the Solicitor General of India is that since the judgment of the Division Bench of the High Court of Telangana dated 10 December 2022 was upheld in the judgment of this Court dated 27 March 2023, the judgment of this Court may be interpreted in the future to mean that the grant of a personal hearing is mandatory though it has not been so directed in the conclusions set out in paragraph 81 of the judgment.

2 While upholding the judgment of the High Court of Telangana dated 10 December 2020, the operative directions of this Court are those which are summarized in paragraph 81 in section ‘E’ of the judgment.

Page 56 of 106 3 The Solicitor General states that in respect of his submission that the judgment of the Court should be granted only prospective effect, the State Bank of India may be advised to file a review separately.

4. The Miscellaneous Application is disposed of.

5 Pending applications, if any, stand disposed of.”

74. Nothing was said of the prayers made and we have to

read and understand the judgment as it stands. To our

understanding, Rajesh Agarwal (supra) did not recognize

any right in the borrower to a personal hearing from the

Banks before classifying their accounts as a fraud account.

75. We must also for the sake of completion of record note

that a review petition filed has also been dismissed in the

following terms:-

“1 Application for listing the review petition in open Court is rejected.

2 Delay condoned.

3 Having perused the review petition, there is no error apparent on the face of the record. No case for review under Order XLVII Rule 1 of the Supreme Court Rules 2013. The review petition is, therefore, dismissed.”

Page 57 of 106 PRINCIPLES OF NATURAL JUSTICE – OBJECTIVES AND CONTOURS:-

76. The ultimate objective of the principles of natural justice

is to ensure fairness in action and prevent miscarriage of

justice. It has always been held to be a flexible concept. As

to what rule of natural justice should apply was to depend, to

a great extent, on the facts and circumstances of the case, the

framework of the law under which the enquiry is held and the

constitution of the tribunal or the body of persons appointed

for that purpose. In A.K. Kraipak and others v. Union of

India and others9, this Court held as follows:-

“20. The aim of the rules of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice. These rules can operate only in areas not covered by any law validly made. In other words they do not supplant the law of the land but supplement it. The concept of natural justice has undergone a great deal of change in recent years. In the past it was thought that it included just two rules namely: (1) no one shall be a judge in his own case (Nemo debet esse judex propria causa) and (2) no decision shall be given against a party without affording him a reasonable hearing (audi alteram partem).

Very soon thereafter a third rule was envisaged and that is that quasi-judicial enquiries must be held in good faith, without bias and not arbitrarily or unreasonably. But in the course of years many more subsidiary rules came to be added to the rules of natural justice. Till very recently it

9 (1969) 2 SCC 262

Page 58 of 106 was the opinion of the courts that unless the authority concerned was required by the law under which it functioned to act judicially there was no room for the application of the rules of natural justice. The validity of that limitation is now questioned. If the purpose of the rules of natural justice is to prevent miscarriage of justice one fails to see why those rules should be made inapplicable to administrative enquiries. Often times it is not easy to draw the line that demarcates administrative enquiries from quasi-judicial enquiries. Enquiries which were considered administrative at one time are now being considered as quasi-judicial in character. Arriving at a just decision is the aim of both quasi-judicial enquiries as well as administrative enquiries. An unjust decision in an administrative enquiry may have more far reaching effect than a decision in a quasi-judicial enquiry. As observed by this Court in Suresh Koshy George v. University of Kerala [1968 SCC OnLine SC 9] the rules of natural justice are not embodied rules. What particular rule of natural justice should apply to a given case must depend to a great extent on the facts and circumstances of that case, the framework of the law under which the enquiry is held and the constitution of the Tribunal or body of persons appointed for that purpose. Whenever a complaint is made before a court that some principle of natural justice had been contravened the court has to decide whether the observance of that rule was necessary for a just decision on the facts of that case.” (Emphasis supplied)

77. In Natwar Singh v. Directorate of Enforcement and

Another10, quoting with approval the judgment of the House

of Lords in Lloyd v. McMahon11 and reiterating the

10 (2010) 13 SCC 255 11 (1987) 1 All ER 1118 (HL)

Page 59 of 106 fundamental principle that canons of natural justice have to

be adapted to the circumstances, this Court held as under:-

“26. Even in the application of the doctrine of fair play there must be real flexibility. There must also have been caused some real prejudice to the complainant; there is no such thing as a merely technical infringement of natural justice. The requirements of natural justice must depend on the circumstances of the case, the nature of the inquiry, the rules under which the tribunal is acting, the subject-matter to be dealt with and so forth. Can the courts supplement the statutory procedures with requirements over and above those specified? In order to ensure a fair hearing, courts can insist and require additional steps as long as such steps would not frustrate the apparent purpose of the legislation.

27. In Lloyd v. McMahon, Lord Bridge observed:

“My Lords, the so-called rules of natural justice are not engraved on tablets of stone. To use the phrase which better expresses the underlying concept, what the requirements of fairness demand when any body, domestic, administrative or judicial, has to make a decision which will affect the rights of individuals depends on the character of the decision-making body, the kind of decision it has to make and the statutory or other framework in which it operates. In particular, it is well established that when a statute has conferred on any body the power to make decisions affecting individuals, the courts will not only require the procedure prescribed by the statute to be followed, but will readily imply so much and no more to be introduced by way of additional

Page 60 of 106 procedural safeguards as will ensure the attainment of fairness.”

28. As Lord Reid said in Wiseman v. Borneman:

“… For a long time the courts have, without objection from Parliament, supplemented procedure laid down in legislation where they have found that to be necessary for this purpose.”

29. It is thus clear that the extent of applicability of the principles of natural justice depends upon the nature of inquiry, the consequences that may visit a person after such inquiry from out of the decision pursuant to such inquiry.”

(Emphasis supplied)

78. The flexibility in the concept of natural justice is

inevitable as it encompasses different layers and as to which

one would be applicable would, as held in A.K. Kraipak

(supra), depend on the nature of the enquiry and the

framework of the law under which it is held. For example, an

opportunity to be served with a show cause notice and

eliciting a reply with an obligation to pass a reasoned order

is one facet of natural justice. Another facet is the grant of an

interview to the noticee whereby he is personally heard by

virtue of an oral hearing. A yet higher facet is where in the

said process of a personal hearing he is given the facility of Page 61 of 106 cross-examination of witnesses. To top it all, could be such

cases where the opportunity to be represented by a lawyer

or a legally trained mind is guaranteed.

RIGHT TO PERSONAL HEARING VIS-À-VIS DISCRETION OF THE AUTHORITY:-

79. In the absence of any rule being prescribed in the

statute or rule or in regulations or in any policy, what would

meet the requirements effectively would depend on the

circumstances and the nature of the enquiry. One cannot

start with the assumption that as of right, a noticee is entitled

to personal hearing. In Madhya Pradesh Industries Ltd. v.

Union of India And Others12, K. Subba Rao J., as the learned

Chief Justice then was, felicitously explained the situation

thus:-

“10. As regards the second contention, I do not think that the appellant is entitled as of right to a personal hearing. It is no doubt a principle of natural justice that a quasi-judicial tribunal cannot make any decision adverse to a party without giving him an effective opportunity of meeting any relevant allegations against him. Indeed Rule 55 of the Rules, quoted supra, recognizes the said principle and states that no order shall be passed against

12 (1966) 1 SCR 466

Page 62 of 106 any applicant unless he has been given an opportunity to make his representations against the comments, if any, received from the State Government or other authority.

The said opportunity need not necessarily be by personal hearing. It can be by written representation. Whether the said opportunity should be by written representation or by personal hearing depends upon the facts of each case and ordinarily it is in the discretion of the tribunal. The facts of the present case disclose that a written representation would effectively meet the requirements of the principles of natural justice…. .” (Emphasis supplied)

80. Elucidating on the difference between a right to a

personal hearing in the noticee and the discretion of the

authority to grant one in a given case and further explaining

how it was not an incident of natural justice that personal

hearing must be given (except in proceedings in courts of

law) a Constitution Bench of this Court in Union of India v.

Jyoti Prakash Mitter13, speaking through Chief Justice J.C.

Shah observed as under:-

“26. Article 217(3) does not guarantee a right of personal hearing. In a proceeding of a judicial nature, the basic rules of natural justice must be followed. The respondent was on that account entitled to make a representation. But it is not necessarily an

13 (1971) 1 SCC 396

Page 63 of 106 incident of the Rules of natural justice that personal hearing must be given to a party likely to be affected by the order. Except in proceedings in Courts, a mere denial of opportunity of making an oral representation will not, without more, vitiate the proceeding. A party likely to be affected by a decision is entitled to know the evidence against him, and to have an opportunity of making a representation. He however cannot claim that an order made without affording him an opportunity of a personal hearing is invalid. The President is performing a judicial function when he determines a dispute as to the age of a Judge, but he is not constituted by the Constitution or a court. Whether in a given case the President should give a personal hearing is for him to decide. The question is left to the discretion of the President to decide whether an oral hearing should be given to the Judge concerned. The record amply supports the view that the President did not deem it necessary to give an oral hearing. There were no complicated questions to be decided by the President…...”

(Emphasis supplied)

81. In the same vein are the observations of another

Constitution Bench of this Court in State of Maharashtra And

Another v. Lok Shikshan Sansatha And Others14 wherein it

was held:-

“24. From the mere fact that there is no right provided for the applicant being heard before his application is rejected, it cannot be held that there is a violation of

14 (1971) 2 SCC 410

Page 64 of 106 the principles of natural justice. On the other hand, it is seen that the District Committees have considered the claims of the writ petitioners as well as of the respective third respondents therein and recommended to the educational authorities that the claims of the latter are to be accepted. The reasons for rejection of the applications have also been given in the orders passed by the educational authorities.

25. When all the relevant circumstances have been taken into account by the District Committee and the educational authorities, there is no violation of any principle of natural justice merely for the reason that the applicants were not given a hearing by the educational authorities before their applications were rejected. The particulars which have to be mentioned in the prescribed application form are very elaborate and complete. The provisions in the Code read along with the instructions given by the State in the circular letter, dated October 5, 1965, refer to various relevant and material factors that had to be taken into account for the purpose of deciding whether the application is to be granted or not. As we have already pointed out it is not the case of any of the writ petitioner that these relevant factors have not been considered by the District Committees. Nor is it their case that the reasons given for rejection of the applications are not covered by the provisions contained in the Code. Clauses (1) and (2) of Rule 3 are not to be read in isolation as has been done by the High Court. On the other hand, they must be read along with the other various clauses contained in the same rule as well as the detailed instructions given by the Government in the circular letter, dated October 5, 1965. It follows that the reasoning of the High Court that these two sub-clauses violate Article 14 cannot be accepted.”

(Emphasis supplied)

Page 65 of 106

82. In Union of India and Another v. Jesus Sales

Corporation15, this Court emphasizing how it is up to the

authority to decide in a given case on special facts if a

personal hearing is warranted and how the noticees cannot

insist and courts cannot invalidate orders for want of a

personal hearing where the points raised in the

representation are duly considered, observed as under:-

“5. ……It need not be pointed out that under different situations and conditions the requirement of compliance of the principle of natural justice vary. The courts cannot insist that under all circumstances and under different statutory provisions personal hearings have to be afforded to the persons concerned. If this principle of affording personal hearing is extended whenever statutory authorities are vested with the power to exercise discretion in connection with statutory appeals, it shall lead to chaotic conditions. Many statutory appeals and applications are disposed of by the competent authorities who have been vested with powers to dispose of the same. Such authorities which shall be deemed to be quasi-judicial authorities are expected to apply their judicial mind over the grievances made by the appellants or applicants concerned, but it cannot be held that before dismissing such appeals or applications in all events the quasi-judicial authorities must hear the appellants or the applicants, as the case may be. When principles of natural justice require an opportunity to

15 (1996) 4 SCC 69

Page 66 of 106 be heard before an adverse order is passed on any appeal or application, it does not in all circumstances mean a personal hearing. The requirement is complied with by affording an opportunity to the person concerned to present his case before such quasi-judicial authority who is expected to apply his judicial mind to the issues involved. Of course, if in his own discretion if he requires the appellant or the applicant to be heard because of special facts and circumstances of the case, then certainly it is always open to such authority to decide the appeal or the application only after affording a personal hearing. But any order passed after taking into consideration the points raised in the appeal or the application shall not be held to be invalid merely on the ground that no personal hearing had been afforded. ……”

(Emphasis supplied)

83. Emphasizing that just results can be achieved on written

representation and due consideration, this Court reiterating

the holding in Gorkha Security Services (supra) held as

under in Jah Developers (Supra).

“15. The next question that arises is whether an oral hearing is required under the Revised Circular dated 1-7- 2015. We have already seen that the said circular makes a departure from the earlier Master Circular in that an oral hearing may only be given by the First Committee at the first stage if it is so found necessary. Given the scheme of the Revised Circular, it is difficult to state that oral hearing is mandatory. It is even more difficult to state that in all cases oral hearings must be given, or else the principles of natural justice are breached. A number of

Page 67 of 106 judgments have held that natural justice is a flexible tool that is used in order that a person or authority arrive at a just result. Such result can be arrived at in many cases without oral hearing but on written representations given by parties, after considering which, a decision is then arrived at. Indeed, in a recent judgment in Gorkha Security Services v. State (NCT of Delhi) this Court has held, in a blacklisting case, that where serious consequences ensue, once a show-cause notice is issued and opportunity to reply is afforded, natural justice is satisfied and it is not necessary to give oral hearing in such cases (see para 20).

16. When it comes to whether the borrower can, given the consequences of being declared a wilful defaulter, be said to have a right to be represented by a lawyer, the judgments of this Court have held that there is no such unconditional right, and that it would all depend on the facts and circumstances of each case, given the governing rules and the fact situation of each case. Thus, in Mohinder Singh Gill v. Chief Election Commr., (1978) 1 SCC 405] , in the context of election law, this Court held: (SCC p. 439, para 63)

“63. In Wiseman v. Borneman, 1968 Ch 429 : (1968) 2 WLR 320 : (1967) 3 All ER 1045 (CA)] there was a hint of the competitive claims of hurry and hearing. Lord Reid said:

‘Even where the decision has to be reached by a body acting judicially, there must be a balance between the need for expedition and the need to give full opportunity to the defendant to see material against him’ (emphasis added). We agree that the elaborate and sophisticated methodology of a formalised hearing may be injurious to promptitude so essential in an election under way. Even so, natural justice is pragmatically flexible and is amenable to capsulation under the compulsive pressure of circumstances. To burke it altogether may not be a stroke Page 68 of 106 of fairness except in very exceptional circumstances. Even in [Wiseman v. Borneman, 1971 AC 297 : (1969) 3 WLR 706 (HL)] where all that was sought to be done was to see if there was a prima facie case to proceed with a tax case where, inevitably, a fuller hearing would be extended at a later stage of the proceedings, Lord Reid, Lord Morris of Borth-y-Gest and Lord Wilberforce suggested ‘that there might be exceptional cases where to decide upon it ex parte would be unfair, and it would be the duty of the tribunal to take appropriate steps to eliminate unfairness’ (Lord Denning, M.R., in Howard v. Borneman (2), 1975 Ch 201 : (1974) 3 WLR 660 (CA)] summarised the observations of the Law Lords in this form). No doctrinaire approach is desirable but the court must be anxious to salvage the cardinal rule to the extent permissible in a given case.

After all, it is not obligatory that counsel should be allowed to appear nor is it compulsory that oral evidence should be adduced. Indeed, it is not even imperative that written statements should be called for. Disclosure of the prominent circumstances and asking for an immediate explanation orally or otherwise may, in many cases, be sufficient compliance. It is even conceivable that an urgent meeting with the parties concerned summoned at an hour's notice, or in a crisis, even a telephone call, may suffice.” (Emphasis in original)

PRECEDENTS CITED BY THE BORROWERS: -

84. The decision in State of U.P. And Others v. Maharaja

Dharmander Prasad Singh And Others16 turned on its own

facts, where due to the complexity the Court not only directed

grant of the personal hearing but granted opportunity to 16 (1989) 2 SCC 505

Page 69 of 106 adduce evidence. The said case has no application to the

issue that we are currently considering.

85. In Olga Tellis And Others v. Bombay Municipal

Corporation and Others17, the reading of para 47 to 49

indicates that the Court was considering the contention of the

authorities that notice need not be given of a proposed

action. The reference to S.L. Kapoor vs. Jagmohan And

Others18 only reinforces this aspect.

86. S.L. Kapoor (supra) was a case where the New Delhi

Municipal Committee was not put on notice and not given an

opportunity to explain. The further question about the aspect

of the futility of notice was also considered. Hence, the said

case does not carry the case of respondents any further.

87. Jayendra Vishnu Thakur vs. State of Maharashtra And

Another19 pertains to a criminal trial in a Court of law and it is

in that context that Goldberg vs. Kelly20 was cited. There

17 (1985) 3 SCC 545 18 (1980) 4 SCC 379 19 (2009) 7 SCC 104 20 397 US 254 (1970)

Page 70 of 106 was much debate at the bar on the applicability of the

judgment in Goldberg (supra).

88. Mr. Parag P. Tripathi, learned senior advocate,

vehemently championed for the applicability of the said

judgment, especially the passage where a case for allowing

oral hearing was mentioned and the written submissions

were categorized as unsatisfactory. The Learned Solicitor

General and Mr. Venkatesh Dhond, learned senior advocate

strongly refuted the submission by arguing that Goldberg

(supra) has expressly been rejected in India and referred to

the judgment in A.K. Roy v. Union of India and others21. Reference was made to A.K. Roy (supra) wherein this Court

adverted to the “due process” clause which was peculiar to

the United States Constitution. This Court in A.K. Roy (supra)

also referred to the dissenting opinion of the Black, J., in

Goldberg (supra) and the approval of dissenting opinion of

Chief Justice Burger in Goldberg (supra) in the case of Mae

21 (1982) 1 SCC 271

Page 71 of 106 Wheeler v. John Montgomery22 which described the

majority opinion in Goldberg (supra) as “unwise and

precipitous”. Attention was invited to the holding in A.K.

Roy (supra) that rules of natural justice are not rigid norms of

unchanging content and ought to vary according to the

context and that they have to be tailored to the suit the nature

of the proceeding in relation to which the particular right is

claimed as a component of natural justice. The learned

Solicitor General referred to the judgment of the United

States Supreme Court in F. David Mathews v. George H.

Eldridge23 contending that the holding in Goldberg (supra)

was diluted.

89. In the teeth of the overwhelming holdings by the

Constitution Benches of this Court referred to in the earlier

part of this judgment about the flexible nature of the concept

of natural justice and as to how no right to claim a personal

hearing inheres in the notice and how it is the discretion of

the authority (except of the proceeding in the Court of law or 22 25 L.Ed. 2d 307 23 424 US 319 (1976)

Page 72 of 106 if expressly prescribed) the judgment of the United States

Supreme Court in Goldberg (supra) need not detain us any

longer.

90. The judgment in Dr. S Sengupta v. CN Holmes24 and the

observations of Lord Justice Laws cited by Sh. Parag P.

Tripathi, learned senior advocate is totally inapplicable.

Those observations came to be made in a certain context.

Lord Justice Laws had made an order refusing permission to

appeal to a certain Dr. Sengupta against the judgment of the

Administrative Court. Dr. Sengupta had renewed his

application and a bench of Simon Brown and Tuckey LJJ had

granted permission. Thereafter, the substantive appeal

came up before a three-judge bench of Lord Justice Laws,

Jonathan Parker and Keene, LJJ. An application was made

that Justice Laws having declined leave ought to recuse from

the proceeding. In the context of rejecting the recusal

application and in the process of explaining how judges do

24 [2002] EWCA Civ 1104

Page 73 of 106 change their mind after hearing oral submissions and how an

earlier rejection of leave could not be characterized as

leading to bias, observations were made by Lord Justice

Laws to the following effect:- “He would know of the central

place accorded to oral argument in our common law

adversarial system. This, I think, is important, because oral

argument is perhaps the most powerful force there is, in our

legal process, to promote a change of mind by a judge.”

The context in which the observations were made clearly

demonstrate that they have absolutely no relevance to the

case at hand.

91. R vs. Parole Board ex parte Smith25 cited by the

respondents was a case where a parole license was

cancelled for breach of a condition. In the context of

personal liberty, the House of Lords observed speaking

through Bingham J., as under:-

“The common law duty of procedural fairness does not, in my opinion, require the Board to hold an oral hearing in every case where a determinate sentence prisoner resists

25 [2005] UK HL 1

Page 74 of 106 recall, if he does not decline the offer of such a hearing. But I do not think the duty is as constricted as has hitherto been held and assumed. Even if important facts are not in dispute, they may be open to explanation or mitigation, or may lose some of their significance in the light of other new facts. While the Board’s task certainly is to assess risk, it may well be greatly assisted in discharging it (one way or the other) by exposure to the prisoner or the questioning of those who have dealt with him. It may often be very difficult to address effective representations without knowing the points which are troubling the decision-maker. The prisoner should have the benefit of a procedure which fairly reflects, on the facts of his particular case, the importance of what is at stake for him, as for society.”

In the same judgment, Lord Slynn of Hadley held that there

was no absolute rule that there must be an oral hearing in

every case but if there was a doubt as to whether the matter

can fairly be dealt with, the board should be pre-disposed in

favour of an oral hearing. Lord Hope of Craighead, Lord

Walker and Lord Carswell agreed with Bingham L.J. The

observations made in the context of deprivation of liberty

and that too as to how the parole board should exercise

discretion in favour of hearing, cannot be used on the facts of

the present case to seek a right of hearing by the noticee-

borrowers.

Page 75 of 106 APPLICATION OF LAW TO THE CASE AT HAND:-

92. While deciding on which aspect of natural justice would

befit the circumstances herein, one has to necessarily keep

in mind the purpose and objective of the directions of the

RBI. A well laid out system has been prescribed in the

master directions. When there was a deafening silence on

the aspect of natural justice in the 2016 directions, this Court

stepped in, and in Rajesh Agarwal (supra) read into the

circular the principle of natural justice. We have analyzed the

judgment in Rajesh Agarwal (supra) earlier and we have

concluded that the Court did not hold that the borrowers

have a right of personal hearing, when the Court held that

principles of natural justice like issuance of a Show Cause

Notice, supply of the relied upon material and the obligation

to pass a reasoned order were essential.

93. We are persuaded to accept the stand of the RBI that the

procedure of issuing a show cause notice, furnishing of the

evidentiary material, eliciting a reply and the obligation to

pass a reasoned order will meet the requirements of fairness Page 76 of 106 and also thwart mis-carriage of justice. The RBI considering

the fact that frauds in accounts are of various hues has opined

that granting a right of personal hearing to each and every

borrower would be practically inexpedient considering a

large volume of cases that have already arisen. Independent

of this, as rightly contended by the RBI, the classification of

fraud is predominantly based on documentary evidence

such as financial statements, transaction records, stock

statements and security valuations and other documentary

evidence. Oral hearing is bound to convert an administrative

process which was intended to be swift, into a protracted

one, defeating the very purpose of the exercise. It would

also cause significant logistical and infrastructural burden

apart from providing opportunity to recalcitrant borrowers

who are in possession of the money of the depositors to

dissipate assets, destroy evidence or even abscond causing

enormous prejudice to public interest. It will also put public

money in jeopardy as borrowers will continue to enjoy

exposures from banks. Logistically also, it will seriously Page 77 of 106 encumber the working hours of the bank officials. While

consideration of the representation and the making of a

reasoned order could be made by the committee even

beyond banking hours, a personal hearing would mean that

it will have to be held during office hours. This will also

cause enormous inconvenience to public interest.

94. The learned Solicitor General rightly expressed an

apprehension that if personal hearing is recognised as a

right, multiple Directors may seek multiple personal

hearings and this will throw the banking operations into

disarray. Further, the total timeline under the Master

Directions is 180 days for the banks to either lift the status as

a Red flagged account or to classify the account as fraud. It

will be impossible to stick to the timeline if a right of

personal hearing is to be guaranteed.

95. More importantly, in the ultimate analysis, the exercise

of classification of accounts, is in the broad sense a

housekeeping due diligence, internally carried out by the

bank. It is an internal administrative decision, to trigger Page 78 of 106 mandatory reporting for asset preservation and risk

mitigation.

96. The process of a show cause notice with the supply of

the evidentiary material, consideration of the representation

and the mandate to pass a reasoned order are more than

adequate safeguards. This balances the need for

promptitude with the requirement to maintain fairness in

action.

97. In matters of regulatory policy made by a regulatory

authority like the RBI unless the policy is contrary to the

constitutional principles or ultra vires any statute, a Court

interpreting the policy will defer to the views of the experts.

In Akshay N. Patel v. Reserve Bank of India and Another26,

this Court explained the principle thus.

“62. Thus, it is settled that RBI is a special, expert regulatory body that is insulated from the political arena. Its decisions are reflective of its expertise in guiding the economic policy and financial stability of the nation. Adverting to the facts of this case, RBI is empowered by FEMA to manage, regulate, and supervise the foreign exchange of India. It is trite law that courts do not interfere with the economic or

26 (2022) 3 SCC 694

Page 79 of 106 regulatory policy adopted by the Government. This lack of interference is in deference to the democratically elected Government's wisdom, reflecting the will of the people. As held by a three- Judge Bench of this Court in Internet & Mobile Assn. 46, the regulations introduced by RBI are in the nature of statutory regulation and demand a similar level of deference that is accorded to executive and Parliamentary policy.”

98. Equally, for this reason, we are not impressed with the

argument that the RBI having granted personal hearing to the

banks in the Master Circular dated 30.07.2024 on ‘wilful

defaulter’ ought to provide a personal hearing while

classifying accounts as ‘fraud accounts’. As rightly pointed

out by the RBI, the classification of accounts under the wilful

defaulter circular is on entirely distinct grounds from those of

classification of fraud accounts. They belong to two different

categories and are of a qualitatively different order. Under

the 28.11.2025 circular, which was the same as in the

30.07.2024 circular [Clause 3(t)], wilful default and wilful

defaulter were defined as under: -

“(xviii) “wilful default”

(A) by a borrower shall be deemed to have occurred when the borrower defaults in meeting payment/repayment

Page 80 of 106 obligations to the lender and any one or more of the following features are noticed:

(a) the borrower has the capacity to honour the said obligations;

(b) the borrower has diverted the funds availed under the credit facility from lender;

(c) the borrower has siphoned off the funds availed under the credit facility from lender;

(d) the borrower has disposed of immovable or movable assets provided for the purpose of securing the credit facility without the approval of the lender;

(e) the borrower or the promoter has failed in its commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment and other covenants and conditions.

(B) by a guarantor shall be deemed to have occurred if the guarantor does not honour the guarantee when invoked by the lender, despite having sufficient means to make payment of the dues or has disposed of immovable or movable assets provided for the purpose of securing the credit facility, without the approval of the lender or has failed in commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment.

(xix) "wilful defaulter" shall mean:

(a) a borrower or a guarantor who has committed wilful default and the outstanding amount is ₹ 25 lakh and above, or as may be notified by Reserve Bank of India from time to time, and

Page 81 of 106

(b) where the borrower or a guarantor committing the wilful default is a company, its promoters and the director (s), subject to the provisions of Paragraph 5(14), or

(c) in case of an entity (other than a company), persons who are in charge and responsible for the management of the affairs of the entity.”

99. It has been rightly contended that contrasted with the

categories of fraud as set out in Clause 6.1 of the 2024 Master

Directions read with Clause 2.2 of the 2016 Master Directions

(see Para 16 hereinabove), it will be clear that in the case of

fraud, there is an element of criminality. In the case of a

wilful default, though it may involve financial default, there is

not as yet an element of criminality. This, in any event, is the

perception of the regulator. If the regulator, keeping in mind

the various factors decides to give personal hearing before

classifying an account as a wilful default account and decides

not to grant a hearing as of right in the case of a ‘fraud

accounts’ and instead grants an opportunity to file a

representation after issuance of a show cause notice and the

supply of evidentiary material and further mandates the

passing of a reasoned order, courts cannot second guess the

Page 82 of 106 regulator. A ‘wilful default account’ and a ‘fraud account’ are

not on par and no discrimination can be complained of on

that score.

100. The procedure set out in Rajesh Agarwal (supra) which

has been incorporated in the reincarnated master direction

2024, strike a fair balance between promptitude and fairness.

We find that the procedure is intended to imbue in the

process an element of fairness and attempts to thwart

miscarriage of justice.

101. We hold that the RBI in its Master Directions of 2024 has

correctly understood the scope of Rajesh Agarwal (supra)

and has incorporated Clause 2.1 including sub-Clauses

2.1.1.1 to 2.1.1.4, which amply takes care of the lacunae

identified in Rajesh Agarwal (supra).

102. That a Court of law cannot be oblivious to the

administrative realities and ought to strike a delicate balance

has been repeatedly emphasized. In Chairman, Board of

Page 83 of 106 Mining Examination v. Ramjee27, V.R. Krishna Iyer, J.

speaking for this Court in his inimitable style stated thus: -

“13. ……Natural justice is no unruly horse, no lurking landmine, nor a judicial cure-all. If fairness is shown by the decision-maker to the man proceeded against, the form, features and the fundamentals of such essential processual propriety being conditioned by the facts and circumstances of each situation, no breach of natural justice can be complained of. Unnatural expansion of natural justice, without reference to the administrative realities and other factors of a given case, can be exasperating. We can neither be finical nor fanatical but should be flexible yet firm in this jurisdiction. No man shall be hit below the belt — that is the conscience of the matter.”

103. Mr. K. Parameshwar, learned Senior Counsel in support

of his passionate plea for a personal hearing sought refuge in

the ‘doctrine of proportionality’. According to the learned

Senior Counsel, it is only a minimum oral hearing which

could be characterized as a least restrictive alternative.

Learned Senior Counsel relied upon the judgment of this

Court in case K. S. Puttaswamy and Another v. Union of

India and Others28, and Modern Dental College & Research

Centre and Others v. State of Madhya Pradesh and

27 (1977) 2 SCC 256 28 (2017) 10 SCC 1

Page 84 of 106 Others29, in support of the proposition. We have found that

the procedure evolved in Rajesh Agarwal (supra) as

reiterated in the master direction of 2024 more than meets

the requirements to ensure fairness and saves miscarriage of

justice. That procedure evolved is a proportionate response

to the situation. Hence, the argument based on Article

19(1)(g) is also misconceived since the procedure to classify

accounts, evolved to protect money of public, is after all a

reasonable restriction. Similarly, in view of what we have

held the argument based on the theory of non-retrogression

also lacks merit.

104. In their effort to persuade us that Rajesh Agarwal

(supra) has mandated personal hearing to the borrower, Mr.

Parag Tripathi and K. Parameshwar, learned senior Counsels

read and reread and minutely scanned the said judgment.

Realizing that not once in the judgment containing ninety-

eight Paragraphs did the Court use the word personal

hearing, as part of this Court’s holding, learned Senior

29 (2016) 7 SCC 353

Page 85 of 106 Counsels were still undeterred. They then fell back upon the

judgment impugned in Rajesh Agarwal (supra) passed by

the High Court of Telangana. Pointing to the very last

paragraph, in a chorus, they exclaimed, ‘Eureka’ and

submitted that the word ‘personal hearing’ has been

employed once by the said High Court.

105. It is very well settled that judgments of Court are not to

be read like theorems of Euclid (Haryana Financial

Corporation and Another v. Jagdamba Oil Mills and

Another30). Secondly, under the doctrine of merger, it is well

settled that once the Superior Court has disposed of the lis

and irrespective of whether the decree or order under

appeal is set aside or modified or simply confirmed, it is the

decree or order of the Superior Court, Tribunal or Authority

which is the final binding of an operative decree, wherein

merges the decree passed by the Court below. It has also

been clarified that in certain cases reasons for decision can

also be said to have merged in the order of Superior Court if

30 (2002) 3 SCC 496

Page 86 of 106 the superior Court has while formulating its own judgment or

order either adopted or reiterated the reasoning, or

recorded an express approval of the reasoning,

incorporated in the judgment or order of the fora below. This is not the scenario here (See, Kunhayammed and

Others v. State of Kerala and Another31, and S. Shanmugavel

Nadar v. State of T.N. and Another32,).

106. Equally, the argument that because this Court set aside

the judgment of the Gujarat High Court in Mona Jignesh

Acharya (supra), personal hearing inheres as a right in the

borrower is also misconceived. Apart from what we have set

out hereinabove, it must be remembered that in Mona

Jignesh Acharya (supra), the High Court had only given an

opportunity to make a post-decisional representation.

107. Hence, in law, what will prevail is the final judgment of

this Court in Rajesh Agarwal (supra) and as to what it states

has already been interpreted by us hereinabove. 31

(2000) 6 SCC 359 32 (2002) 8 SCC 361

Page 87 of 106

108. Further, it must never be forgotten and this has been

reiterated from time immemorial that a case is only an

authority for what it actually decides and it cannot be quoted

for a proposition that may seem to follow logically (See

Quinn v. Leathem33). We are not suggesting that what the

learned Senior Counsels contend logically follows, but we

are only paraphrasing the principle in Quinn (supra). The

principle in Quinn (supra) has been accepted by this Court.

(See Goodyear India Limited and Others v. State of

Haryana and Another34. Thus, we reiterate that Rajesh

Agarwal (supra) did not recognize in the borrower a right of

personal hearing.

109. Considerable arguments were advanced on how

different High Courts have ordered the grant of personal

hearing and banks have not appealed against the same. We

are here concerned with interpreting the Circulars and

laying down the correct legal position. Our interpretation

cannot depend on conduct of banks in individual cases. 33

[1901] A.C. 495 34 (1990) 2 SCC 71)

Page 88 of 106 Similarly, the argument that on facts in the present two cases

banks have taken considerable time to initiate proceedings

and they could have granted personal hearing also lacks

merit, for stray instances cannot form the foundation for

interpreting the legal position.

DISCLOSURE OF THE AUDIT REPORT: -

110. In Civil Appeal arising out of SLP (C) Nos. 20618-

20619/2025 the High Court has categorically held that in

terms of directions in Rajesh Agarwal (supra), the writ

petitioner was entitled to the copies of the Forensic Audit

Reports which were referred to in the Show Cause Notices

and which were relied upon by the appellant-Bank in the

proceedings to classify the accounts of the borrower as a

fraud account. As discussed earlier, Para 95 of the Judgment

in Rajesh Agarwal (supra) categorically held as under: -

“In the light of the legal position noted above, we hold that the rule of Audi Alteram Partem to be read in Clauses 8.9.4 and 8.9.5 of the master directions on fraud. Consistent with the principles of natural justice, the lender banks should provide an opportunity to a borrower by furnishing a copy of the audit reports and allow the borrower a reasonable opportunity to submit a representation before classifying the account as fraud.” Page 89 of 106

111. Earlier, in Para 81, the Court held that the borrower

should be given an opportunity to explain the findings in the

forensic audit report and to represent before the account is

classified as fraud. In the conclusion at Para 98.6, set out

hereinabove, this Court in Rajesh Agarwal (supra) directed

that the borrower must be served a notice and given an

opportunity to explain the conclusions of the forensic report.

112. The High Court has rightly followed the judgment of

Rajesh Agarwal (supra) on this aspect of the matter. The

learned Solicitor General of India, Mr. Tushar Mehta, submits

that this Court in Rajesh Agarwal (supra) only directed the

conclusion of the forensic audit report and not the entire

report to be furnished. According to the learned Solicitor

General, since the entire audit report would become a

subject matter of criminal investigation the forensic audit

report cannot be given. According to the Solicitor General

the Show Cause Notice outlines the forensic auditor’s

Page 90 of 106 conclusion in detail so that the account holder can effectively

respond.

113. In response, Shri K. Parameshwar, learned Senior

Advocate, submitted that the forensic audit report is not a

peripheral or a background document. According to the

learned Senior Counsel, it is a central investigative material

used to infer fraud. Learned Senior Counsel, relied on the

holding of this Court in Rajesh Agarwal (supra). The learned

Senior Counsel also relied upon the judgment of this Court T.

Takano (supra), to contend that this Court held that all

material relevant to the adjudicator must be disclosed.

114. The learned Solicitor General, sought to distinguish the

judgment in T. Takano (supra) and contended that in the

concluding directions all that is directed is that there was an

obligation to disclose the material relevant to the

proceedings. Learned Solicitor General further drawing

attention to Para 62.5 of T. Takano (supra) contended

therein it was held, that the right to disclosure was not

absolute and the disclosure of information may affect other Page 91 of 106 third party interest and the stability and orderly functioning

of the securities market.

115. In T. Takano (supra), this Court held that the authority

issuing the show cause notice should prima facie establish

that the disclosure of the report would affect the third party

rights and the stability and orderly functioning of the

securities market. Thereafter, the onus would then shift to the

noticee to prove that the information is necessary to discuss

its case appropriately.

116. The only justification given for denial of disclosure of

the full report, is that the entire audit report would become a

subject matter of criminal investigation. We find no merit in

this submission. Once the criminal proceedings are

launched, Investigating Authority will independently

investigate and file a charge sheet/complaint of which the

forensic audit report may be a part.

Page 92 of 106

117. In Madhyamam Broadcasting Limited v. Union of

India and Others35, this Court, highlighting the importance

of the disclosure of relevant material, this Court held as

under: -

“66. MHA disclosed the material forming the opinion for denying of security clearance solely to the High Court. The High Court instead of deciding if any other less restrictive but equally effective means could have been employed, straight away received the material in a sealed cover without any application of mind. It is now an established principle of natural justice that relevant material must be disclosed to the affected party. This rule ensures that the affected party is able to effectively exercise their right to appeal. When the State Government claims non- disclosure on the ground of public interest under Section 124 of the Evidence Act, the material is removed from the trial itself. As opposed to this method, when relevant material is disclosed in a sealed cover, there are two injuries that are perpetuated. First, the documents are not available to the affected party. Second, the documents are relied upon by the opposite party (which is most often the State) in the course of the arguments, and the court arrives at a finding by relying on the material. In such a case, the affected party does not have any recourse to legal remedies because it would be unable to (dis) prove any inferences from the material before the adjudicating authority.

67. This form of adjudication perpetuates a culture of secrecy and opaqueness, and places the judgment beyond the reach of challenge. The affected party would be unable to “contradict errors, identify omissions, challenge the credibility of informants or refute false allegations”. [Adil Charkaoui v. Minister of Citizenship and Immigration and Minister of Public Safety and Emergency Preparedness, 2007 SCC OnLine Can SC 9 : (2007) 1 SCR 350

35 (2023) 13 SCC 401

Page 93 of 106 (Can SC)] The right to seek judicial review which has now been read into Articles 14 and 21 is restricted. A corresponding effect of the sealed cover procedure is a non-reasoned order.

68. In Amit Kumar Sharma v. Union of India, (2023) 20 SCC 486 : 2022 SCC OnLine SC 1570] , one of us (D.Y. Chandrachud, J.) speaking for the Court commented on the procedural infirmities which the procedure of sealed cover perpetuates : (SCC paras 25-26) “25. The elementary principle of law is that all material which is relied upon by either party in the course of a judicial proceeding must be disclosed. Even if the adjudicating authority does not rely on the material while arriving at a finding, information that is relevant to the dispute, which would with “reasonable probability” influence the decision of the authority must be disclosed. A one-sided submission of material which forms the subject-matter of adjudication to the exclusion of the other party causes a serious violation of natural justice. In the present case, this has resulted in grave prejudice to officers whose careers are directly affected as a consequence.” (Emphasis supplied)

118. Hence, we direct that as held in Rajesh Agarwal (supra)

the forensic audit reports ought to be disclosed if they are to

be considered relevant by the banks in classifying the

account as fraud.

119. In T. Takano (supra), relying upon Natwar Singh

(supra) which, in turn, relied upon Dhakeswari Cotton Mills

Page 94 of 106 Limited. v. Commission of Income Tax, West Bengal 36, this

Court in Paras 37 and 38 held as under: -

“37. During the course of the adjudication, the fundamental principle is that material which is used against a person must be brought to notice. As this Court observed : (Natwar Singh case [Natwar Singh v. Director of Enforcement, (2010) 13 SCC 255] , SCC p. 269, paras 30-31)

“30. The right to fair hearing is a guaranteed right. Every person before an authority exercising the adjudicatory powers has a right to know the evidence to be used against him. This principle is firmly established and recognised by this Court in Dhakeswari Cotton Mills Ltd. v. CIT, (1955) 1 SCR 941 : AIR 1955 SC 65. However, disclosure not necessarily involves supply of the material. A person may be allowed to inspect the file and take notes.

Whatever mode is used, the fundamental principle remains that nothing should be used against the person which has not been brought to his notice. If relevant material is not disclosed to a party, there is prima facie unfairness irrespective of whether the material in question arose before, during or after the hearing. The law is fairly well-settled if prejudicial allegations are to be made against a person, he must be given particulars of that before hearing so that he can prepare his defence. However, there are various exceptions to this general rule where disclosure of evidential material might inflict serious harm on the person directly concerned or other persons or where disclosure would be breach of confidence or might be injurious to the public interest because it would involve the revelation of official secrets, inhibit frankness of comment and the detection of crime, might make it impossible to obtain certain clauses of essential information at all in the future (see R. v. Secy. of State for Home Deptt., ex p H, 1995 QB 43 : (1994) 3 WLR 1110 : (1995) 1 All ER 479 (CA)] ).” (Emphasis supplied) 36 (1954) 2 SCC 602 Page 95 of 106

120. Thereafter, dealing with exceptions to the duty of

disclosure, this Court held as under: -

Exceptions to the duty to disclose

55. ……The RTI Act attempts to balance the interests of third-party individuals whose information may be disclosed and public interest in ensuring transparency and accountability. The RTI Act is reflective of the parliamentary intent to facilitate transparency in the administration, which is the rationale for the disclosure of information. This is subject to certain defined exceptions.

56. We cannot be oblivious to the wide range of sensitive information that the investigation report submitted under Regulation may cover, ranging from information on financial transactions and on other entities in the securities market, which might affect third-party rights. … … … … … … … … … … … … … … The right of the noticee to disclosure must be balanced with a need to preserve any other third-party rights that may be affected.

57. In Natwar Singh [Natwar Singh v. Director of Enforcement, (2010) 13 SCC 255] , this Court has observed that there are exceptions to the general rule of disclosing evidentiary material. This Court held that such exceptions can be invoked if the disclosure of material causes harm to others, is injurious to public health or breaches confidentiality. While identifying the purpose of disclosure, we have held that one of the crucial objectives of the right to disclosure is securing the transparency of institutions.

The claims of third-party rights vis-à-vis the right to disclosure cannot be pitted as an issue of public interest and fair adjudication. The creation of such a binary reduces and limits the purpose that disclosure of information serves. The respondent should prima

Page 96 of 106 facie establish that the disclosure of the report would affect third-party rights. The onus then shifts to the appellant to prove that the information is necessary to defend his case appropriately.

59. The appellant did not sufficiently discharge his burden by proving that the non-disclosure of the above information would affect his ability to defend himself. However, merely because a few portions of the enquiry report involve information on third parties or confidential information on the securities market, the respondent does not have a right to withhold the disclosure of the relevant portions of the report. The first respondent can only claim non-disclosure of those sections of the report which deal with third-party personal information and strategic information on the functioning of the securities market.

60. Therefore, the Board should determine such parts of the investigation report under Regulation 9 which have a bearing on the action which is proposed to be taken against the person to whom the notice to show cause is issued and disclose the same. It can redact information that impinges on the privacy of third parties. It cannot exercise unfettered discretion in redacting information. On the other hand, such parts of the report which are necessary for the appellant to defend his case against the action proposed to be taken against him need to be disclosed. It is needless to say that the investigating authority is duty-bound to disclose such parts of the report to the noticee in good faith. If the investigating authority attempts to circumvent its duty by revealing minimal information, to the prejudice of the appellant, it will be in violation of the principles of natural justice. The court/appellate forum in an appropriate case will be empowered to call for the investigation report and determine if the duty to disclose has been effectively complied with.” (Emphasis supplied)

Thereafter, this Court concluded as under: -

Page 97 of 106

“62. The conclusions are summarised below:

62.1. The appellant has a right to disclosure of the material relevant to the proceedings initiated against him.

A deviation from the general rule of disclosure of relevant information was made in Natwar Singh [Natwar Singh v. Director of Enforcement, (2010) 13 SCC 255] based on the stage of the proceedings. It is sufficient to disclose the materials relied on if it is for the purpose of issuing a show-cause notice for deciding whether to initiate an inquiry. However, all information that is relevant to the proceedings must be disclosed in adjudication proceedings.

62.2. The Board under Regulation 10 considers the investigation report submitted by the investigating authority under Regulation 9, and if it is satisfied with the allegations, it could issue punitive measures under Regulations 11 and 12. Therefore, the investigation report is not merely an internal document. In any event, the language of Regulation 10 makes it clear that the Board forms an opinion regarding the violation of Regulations after considering the investigation report prepared under Regulation 9.

62.3. The disclosure of material serves a threefold purpose of decreasing the error in the verdict, protecting the fairness of the proceedings, and enhancing the transparency of the investigatory bodies and judicial institutions.

62.4. A focus on the institutional impact of suppression of material prioritises the process as opposed to the outcome. The direction of the Constitution Bench of this Court in Karunakar [ECIL v. B. Karunakar, (1993) 4 SCC 727 : 1993 SCC (L&S) 1184] that the non-disclosure of relevant information would render the order of punishment void only if the aggrieved person is able to prove that prejudice has been caused to him due to non-disclosure is founded both on the outcome and the process.

62.5. The right to disclosure is not absolute. The disclosure of information may affect other third-party interests and the stability and orderly functioning of the securities market. The respondent should prima facie establish that the disclosure of the report would affect third-party rights and the stability and orderly functioning of the securities

Page 98 of 106 market. The onus then shifts to the appellant to prove that the information is necessary to defend his case appropriately.

62.6. Where some portions of the enquiry report involve information on third parties or confidential information on the securities market, the respondent cannot for that reason assert a privilege against disclosing any part of the report. The respondents can withhold disclosure of those sections of the report which deal with third-party personal information and strategic information bearing upon the stable and orderly functioning of the securities market.”

121. The Show Cause Notice and reply as well as the

procedure contemplated in Para 2.1, which is a reiteration of

what was held in Rajesh Agarwal (supra), are with regard to

proceedings that have civil consequences for the borrower. It may be a trigger for initiation of criminal proceedings but

as far as the right to reputation as well as impacting Article

19(1)(g) rights, the matter stood concluded with Rajesh

Agarwal (supra). In view of the same, following the holding

in T. Takano (supra), we hold that the borrower has a right

to be disclosed of the material relevant to the proceeding

against him including disclosure of the audit report.

122. The right to disclosure is not absolute if the disclosure of

any part affects third party interest. In the opinion of the

Page 99 of 106 bank, the bank should communicate that the disclosure of

such part would affect third party rights. Thereafter the

borrower will have an opportunity to respond that the

information is necessary to represent effectively.

123. If, thereafter, some portion of the forensic audit report

or other material are found to impinge upon third-party

rights in the opinion of the bank, the bank can withhold

disclosure of those parts of the report.

124. We hold that the supply of the Forensic Audit Report is

the rule. The exceptions are what have been set out

hereinabove. Unlike in the case of T. Takano (supra) which

dealt with the securities market, instances will be rare

where; in the forensic audit reports of banks where the

borrower is associated at the stage of making the report, any

claim for privilege of any part of the report may arise.

However, in the exceptional cases that they do arise, the

above procedure should be followed.

Page 100 of 106

125. The furnishing of findings and conclusion alone would

not tantamount to compliance with the principles of natural

justice. The reasons for the findings and conclusion will be

in the body of the report and a complete sense of the findings

and conclusions can be made only after reading to the

contents of the report. It is apt to recall the memorable

words of this Court in Union of India v. Mohal Lal Capoor

And Others37 which read as under:-

“Reasons are the links between the materials on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject matter for a decision whether it is purely administrative or quasi-judicial. They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable.”

CONCLUSIONS: -

126. In view of the discussion hereinabove, we hold: - 37

(1973) 2 SCC 836

Page 101 of 106

a) Rajesh Agarwal (supra) did not recognize any right

in the borrower to a personal hearing by the banks

before classifying their account as a fraud account;

b) The RBI in its Master Directions of 15.07.2024

correctly understood the scope of Rajesh Agarwal

(supra) and incorporated Clause 2.1.1.1, 2.1.1.2,

2.1.1.3, and 2.1.1.4 as the procedure to be followed

before classifying an account as a fraud account;

c) The procedure set out in Rajesh Agarwal (supra)

which has been incorporated in the Master

Directions of 2024 strikes a fair balance between

promptitude and fairness and duly comports with

the principles of natural justice ensuring fairness to

the borrower whose account is likely to be

classified as a fraud account.

d) Wherever audit reports are available, including

forensic audit reports, the same shall be furnished

to the borrower and their representation on the

Page 102 of 106 report, including on the findings and conclusions

be elicited, in case the banks consider the audit

report relevant for classifying the account as fraud

account. In view of the same, disclosure by

furnishing copies of the audit report, including the

forensic audit report to the borrower is mandatory.

Supply of reports in digital form will be valid

compliance;

e) As held in T. Takano (supra), if the banks, for

reasons to be recorded establish that the

disclosure of any part of the report would effect the

privacy of third parties, in that exceptional situation

banks would be justified to withhold those portions

of the report which concern third party rights;

f) We reiterate that the rule is to supply the audit

reports, including the forensic audit reports since

even under Clause 4 of Chapter IV of the

15.07.2024 Master Directions post the red-flagging

of the account banks use the audit mechanism for Page 103 of 106 further investigation. Even in the exceptional cases

we hope and expect that the banks will not

unreasonably use the power of redaction since that

will only end up delaying the culmination of

proceedings. Clause 4.1.4 also reiterates that

banks shall ensure the principles of natural justice.

That this was the legal position even under the 2016

Master Directions is clear from para 95 of Rajesh

Agarwal (supra);

g) The judgments of the High Courts which have taken

a contrary view to what we have held hereinabove

would stand overruled.

DIRECTIONS: -

127. In view of what we have held hereinabove,

i) Civil Appeal @ SLP (C) Nos. 20618-20619 of 2025 is

partly allowed. While we set aside that part of the

order of the Division Bench in F.M.A. 1201 of 2024

dated 12.03.2025 which upheld the learned Single

Judge’s order directing grant of personal hearing to Page 104 of 106 the respondent-herein, we uphold the order of the

Division Bench insofar as it held that the respondent-

herein was entitled the copies of the forensic audit

reports. Consequently, the Fraud Identification

Committee of the appellant-Bank shall furnish the

forensic audit reports and after granting an

opportunity to the respondent to file its reply proceed

in accordance with the Master Directions of the RBI,

and pass fresh orders depending on the conclusion

they arrive at.

ii) Insofar as Civil Appeal @ Special Leave Petition Diary

No. 55628 of 2025 is concerned, the appeal is partly

allowed. While the direction of the learned Single

Judge as confirmed by the Division Bench in LPA 472

of 2025 dated 29.07.2025 to grant a personal hearing

to the respondent is set aside, the directions insofar

as they mandate the furnishing of the forensic audit

reports are upheld. Consequently, the appellant-

Banks shall furnish the forensic audit reports and after Page 105 of 106 granting an opportunity to file a representation

proceed in accordance with the Master Directions of

the RBI, and pass fresh orders depending on the

conclusion they arrive at.

128. There will be no order as to costs in both the appeals.

……….........................J. [J.B. PARDIWALA]

……….........................J. [K. V. VISWANATHAN]

New Delhi;

7th April, 2026

Page 106 of 106