Reliance Communications (RCOM) and its subsidiary Reliance Telecom Limited (RTL) have been classified as fraudulent accounts by multiple banks, including Union Bank of India and Bank of Maharashtra. These decisions come amidst ongoing financial troubles for the telecom company, which has been under corporate insolvency resolution process since June 2019.

Key Findings

The banks' classifications are based on forensic audits that revealed:

• Union Bank of India identified misutilization of Rs. 1,324.86 crores in bank loans for unauthorized payments to connected parties
• Bank of Maharashtra found misuse of Letter of Credit (LC) discounting for round-tripping of loans to related parties
• Utilization of funds for repayment of outstanding LCs, potentially indicating evergreening of loans
• Circular routing of funds between RCOM and its subsidiary Reliance Infratel Limited (RITL) amounting to Rs 2,779.38 crores

Regulatory Actions and Implications

• Union Bank of India has classified the accounts of both RCOM and RTL as fraud
• Bank of Maharashtra has reported the matter to the Reserve Bank of India (RBI)
• Bank of Maharashtra plans to file police/CBI complaints as per RBI directions
• RCOM is currently protected under the Insolvency and Bankruptcy Code (IBC) against liabilities for offenses committed prior to the insolvency process

RCOM's Current Status

• Both RCOM and RTL are currently under corporate insolvency resolution process
• Resolution plans for both companies are awaiting approval from the National Company Law Tribunal (NCLT)
• The company may receive protection under Section 32A of the IBC against prosecution for offenses committed before the insolvency process, once the resolution plan is approved

Company's Response

According to the LODR data, RCOM has acknowledged receipt of the fraud classification letter from Bank of Maharashtra. The company stated:

• The credit facilities in question pertain to the period before the Corporate Insolvency Resolution Process (CIRP)
• These facilities will be resolved as part of the resolution plan or in liquidation, as per the IBC
• RCOM is protected from suits/proceedings during the CIRP under Section 14(1)(a) of the IBC
• The company is seeking legal advice on the way forward regarding this development

These developments add another layer of complexity to RCOM's ongoing financial restructuring and highlight the challenges faced by the Indian telecom sector in recent years.

In a significant legal development, the Bombay High Court has dismissed a petition filed by Anil Ambani, challenging the State Bank of India's (SBI) decision to classify Reliance Communications Ltd. (RCom) loan account as fraudulent.

Court Upholds SBI's Decision

The division bench of the Bombay High Court found that Ambani's petition lacked merit, effectively upholding SBI's order. This order not only designated RCom's account as fraudulent but also directed that Ambani be reported to the Reserve Bank of India (RBI) under fraud risk management guidelines.

Ambani's Arguments Rejected

Anil Ambani had contended that he was denied a personal hearing and access to key documents in the process. He argued that the classification violated principles of natural justice and would have drastic civil consequences. However, these arguments failed to sway the court.

SBI and RBI's Stance

Both SBI and RBI opposed Ambani's plea in court. They stated that repeated notices were served to Ambani, but no satisfactory explanation was provided. This lack of response appears to have strengthened the banks' position in the legal proceedings.

Potential Next Steps

With the High Court's dismissal of his petition, Ambani may now consider approaching the Supreme Court to challenge this decision.

Contrasting Outcome with Another Bank

Interestingly, this case stands in contrast to a similar situation with another bank. Canara Bank had previously withdrawn its fraud classification order after Ambani filed a petition. This divergence in outcomes highlights the complexity of such financial and legal matters.

Implications for RCom and Ambani

The court's decision could have significant implications for both Reliance Communications and Anil Ambani personally. The fraud classification of a loan account is a serious matter in the banking sector and can lead to various regulatory and financial consequences.

This development is part of the ongoing challenges faced by Anil Ambani and his companies in recent years, particularly in the telecom sector. The case underscores the increasing scrutiny of large corporate loans by Indian banks and regulators, especially in sectors facing financial stress.