The Bombay High Court has issued an interim stay until September 11 on the implementation of the master circulars issued by the Reserve Bank of India (RBI). These circulars enable banks to classify any account as a fraud account without conducting a hearing.
The division bench comprising Justices Gautam Patel and Neela Gokhale has granted a stay on the implementation of the Reserve Bank of India Master Directions on Frauds Classification and Reporting by Commercial Banks and Select FIs, issued in 2016. This stay will remain in effect until September 11.
Jet Airways promoters had challenged RBI's circulars
During the hearing of several petitions, including those filed by Naresh Goyal and his wife Anita Goyal, former promoters of Jet Airways, challenging the circulars issued by the RBI, the High Court issued the order.
The Goyals argued that the circulars issued by the RBI violated the principle of natural justice since borrowers were not afforded the opportunity to present their case before their accounts were classified as fraudulent. The State Bank of India had declared their accounts as fraudulent.
The circulars stated that once a bank classifies an account as fraud, it is the responsibility of that bank to report the same to the Central Repository of Information on Large Credits platform to alert other banks.
If a bank decides to straightaway classify the account as fraud, it is obligated to report the fraud to RBI within 21 days and report the case to any investigating agency.
In effect, the banks were neither giving the opportunity to borrowers to be heard nor giving them copies of material relied upon by the bank before taking further precipitative action, claimed the petition.
Final hearing on Sept 7 & 8
On Monday, the high court admitted the petitions and kept them for final hearing on September 7 and 8. Meanwhile, it stayed the circulars till September 11.
The HC clarified that the Banks are entitled to take any proceedings, in accordance with law, which are not pursuant to the RBI Master Circular and does not rely on findings of the fraud declaration
The Central Bureau of Investigation (CBI) urged the court that they should be allowed to carry on with their probe.
The Bench clarified that where FIRs had been lodged and investigation was ongoing, the proceedings in those cases would proceed de hors the findings arrived at on the basis of the RBI's circulars.
The high court was informed that these issues have been raised before the Supreme Court in appeal against an order of the Telangana High Court.
The Supreme Court held that a decision by a bank classifying a borrower's account as fraudulent must be a reasoned order and that such an order should be passed only after giving the borrower an opportunity of hearing.
