State Bank Of India vs. Amit Iron Private Limited

REPORTABLE
2026 INSC 323
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)

J U D G M E N T
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
1
and measured ( Ridge vs. Baldwin ). 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”).
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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
2
Others . 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
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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
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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
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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
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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
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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;
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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.
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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
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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;
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(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.
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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
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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
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/ 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
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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:-
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Fraud Details from RBI Annual
Report 2024-25

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:

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Fraud Details from RBI Annual Report 2024-25

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
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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
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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
3
Private Limited and Others , and Gorkha Security Services
4
vs. Government (NCT of Delhi) and Others , 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. D ealing 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
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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
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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
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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.
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5
[ A.K. Kraipak vs. Union of India ]. 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
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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.
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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


6
Acharya vs. Bank of India ,. 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
7
India and Another , 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


8
vs. Kelly 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) a nd 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
9
India and others , 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
10
Another , quoting with approval the judgment of the House
11
of Lords in Lloyd v. McMahon 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.
12
Union of India And Others , 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.
13
Jyoti Prakash Mitter , 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
14
Another v. Lok Shikshan Sansatha And Others 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
15
Corporation , 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
16
Dharmander Prasad Singh And Others 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
17
Corporation and Others , 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
18
Others 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
19
Another pertains to a criminal trial in a Court of law and it is
20
in that context that Goldberg vs. Kelly 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
21
the judgment in A.K. Roy v. Union of India and others .
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


22
Wheeler v. John Montgomery 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.
23
Eldridge 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.

24
90. The judgment in Dr. S Sengupta v. CN Holmes 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.
25
91. R vs. Parole Board ex parte Smith 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.
26
In Akshay N. Patel v. Reserve Bank of India and Another ,
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


27
Mining Examination v. Ramjee , 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
28
India and Others , 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


29
Others , 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
30
Another ). 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
31
Others v. State of Kerala and Another , and S. Shanmugavel
32
Nadar v. State of T.N. and Another ,).
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
33
Quinn v. Leathem ). 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
34
Haryana and Another . 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
35
India and Others , 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


36
Limited . v. Commission of Income Tax, West Bengal , 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
37
And Others 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;
th
7 April, 2026

Page 106 of 106