Several major banks and an audit firm have moved the Bombay High Court Division Bench to challenge an interim order that currently shields businessman Anil Ambani from actions under the Reserve Bank of India's fraud classification framework. The legal battle centers on compliance requirements for forensic audits under RBI's 2024 Master Directions.

Court Proceedings and Timeline

The Division Bench comprising Chief Justice Shree Chandrashekhar and Justice Gautam Ankhad heard the appeal on January 12, 2025. The court has scheduled continuation of arguments for January 14, 2025. The appellants include:

Single-Judge Order Under Challenge

The current legal dispute stems from an earlier ruling by Justice Milind Jadhav, who had restrained the banks from proceeding against Ambani. The single-judge order was based on a prima facie view that the forensic audit relied upon did not comply with RBI's 2024 framework requirements.

According to the RBI's framework, forensic audit reports used to classify accounts as fraudulent must be prepared by statutory auditors registered with the Institute of Chartered Accountants of India (ICAI). In Ambani's case, Justice Jadhav observed that the forensic audit report, dated October 2020 and relating to Reliance Communications and group entities, was signed by a person not registered with ICAI.

Banks' Arguments Against the Stay

Solicitor General Tushar Mehta, representing the banks, presented several arguments before the Division Bench challenging the interim stay. He contended that Ambani's suit was "hopelessly time-barred" and founded entirely on information obtained through a third-party RTI application seeking BDO's registration details.

Mehta's key arguments included:

• The entire cause of action was premised on the RTI application and the Institute's response
• Ambani had long been aware of the forensic audit and had not disputed its conclusions
• The sole ground of challenge was the auditor's non-membership with the Chartered Accountants Institute
• BDO is an approved forensic auditor by SEBI, not "a nobody picked from the street"

Potential Impact on RBI Framework

The Solicitor General warned that allowing the interim stay to continue could have broader implications for the RBI's regulatory framework. He cautioned that the order could undermine the RBI's Master Directions, which bar individuals classified as fraud from accessing credit markets for five years.

Mehta expressed concerns that the stay could:

• Trigger widespread litigation challenging fraud classifications
• Unsettle earlier fraud classifications based on similar audit reports
• Weaken the effectiveness of RBI's fraud prevention measures

He urged the Division Bench to suspend the single-judge order pending final adjudication of the matter. The case highlights the critical importance of procedural compliance in forensic audits used for fraud classification under RBI guidelines.

Reserve Bank of India Deputy Governor T Rabi Sankar has called upon the banking industry to establish complete transparency in services and products while striving toward a zero-fraud environment. Speaking at the concluding session of the 21st Indian Banking Technology Conference, Sankar emphasized that earning and maintaining customer trust remains fundamental to keeping bank customers loyal to the financial system.

Transparency in Banking Services

Sankar stressed the critical importance of transparent pricing mechanisms in banking products and services. He warned that customers may seek alternative solutions if banks fail to demonstrate fair and transparent pricing structures. "It is important to understand that if we do not price things (products and services) in a manner that is transparently shown to the customer, to be fair, it is possible that customers will move to other alternatives," the deputy governor stated.

While acknowledging that India's banking system demonstrates effective pricing capabilities, Sankar noted that fundamental principles must be maintained to ensure customer confidence. He emphasized that customers need assurance that the prices they pay are reasonable and non-exploitative.

Technology's Impact on Banking Functions

The deputy governor cautioned the industry about the uncertainty surrounding traditional banking functions in the face of rapidly evolving technology. Drawing parallels to transformations witnessed in the payment domain, he highlighted how technological advancement can reshape banking operations. Sankar suggested that banks leverage technology to achieve aggregation and obtain necessary pricing efficiency in the current market environment.

He advocated for industry collaboration in developing transparent pricing systems, noting that "innovation will work best when there is collaboration, and a lot of minds are working on it." Sankar urged banks to collaborate and present suggestions for addressing pricing transparency challenges.

Current Fraud Statistics and Concerns

Sankar provided detailed insights into the current state of fraud in India's payment systems, particularly highlighting improvements in card-based transactions. He presented specific data regarding UPI fraud incidents:

While acknowledging that fraud rates appear relatively low when measured against transaction volumes, Sankar expressed concern about the absolute numbers. He emphasized that on a large user base, even small percentages translate to significant absolute numbers that pose concerns for banks and system providers.

Zero-Fraud Environment Vision

Despite the relatively low fraud rates, Sankar declared that even these levels remain unacceptable. He articulated a vision for achieving a zero-fraud environment, clarifying that while complete fraud eradication may seem unlikely, the objective itself serves an important purpose. "Trying to reach an objective of zero fraud is important for us to be constantly on our guard," he explained.

The deputy governor emphasized the need to build robust systems that minimize fraudulent events while maintaining public trust. He stressed that maintaining this trust is essential for continued development and inclusion in payment systems, ensuring that technological advancement in banking continues to benefit all segments of society.