Delhi HC issues notice in Plea challenging validity of RBI’s 2016 Master Circular on Fraud

The Delhi High Court has issued notice to the Reserve Bank of India and the Punjab National Bank in a petition challenging the Constitutional validity of RBI’s Master Circular dated July 1, 2016 on Fraud..The matter was listed for hearing before Justice Vibhu Bakhru..The Petition preferred by Apple Sponge and Power Ltd argues that the said Circular is “manifestly arbitrary” as it was notified without following the principles of natural justice, including the requirement of giving any show cause notice, opportunity of personal hearing and representation to the borrowers before the banks declare their accounts as fraud..Apple Sponge which is engaged in production of sponge iron and other ancillary products, had availed a total loan amount of about Rs. 781 Crores from PNB and slipped into NPA category in the year 2013. The total outstanding debt of Apple Sponge as on December 31, 2018 is about Rs. 702 Crores, inclusive of accumulated interest till the date of NPA..As a result, PNB initiated internal investigation into Petitioner’s account, and declared it as a wilful defaulter in an arbitrary manner, without giving the opportunity of personal hearing, the Petitioner states..This procedure, it is argued, is in violation of the RBI’s Master Circular on Wilful Defaulters dated July 1, 2015. This 2015 Circular laid down a comprehensive procedure including, inter alia, show cause notice, personal hearing etc. prior to declaring an account as wilful defaulter..Therefore, in 2015 itself, the Petitioner challenged PNB’s decision to declare it as a wilful defaulter before the Delhi High Court. The Petitions were disposed of with a direction to PNB’s Grievance Redressal Committee to grant a hearing to the Petitioner..After PNB did not abide by the said directions, Petitioner initiated contempt proceedings. It was during the hearing of contempt petitions that the Petitioner learnt that PNB has already taken a decision to declare the Petitioner as wilful defaulter..The said order which was passed on August 10, 2016 was again challenged before the High Court. The High Court held that since no reasons had been articulated to declare Petitioner as a wilful defaulter, the order ought to be set aside. It thus gave liberty to PNB to revisit the matter after giving an opportunity of personal hearing to the Petitioner..Subsequently, PNB heard the Petitioner and excluded it from the list of wilful defaulters after it found no cause of action. Forensic Audit Reports into the accounts of the Petitioner also concluded that there was no apprehension of fraud against the Petitioner..In the meantime, on July 1, 2016, RBI issued the impugned Circular on ‘Master Directions on Frauds-Classification and Reporting by commercial banks and select FIs’ and named the Petitioner as one of the defaulters..Thereafter, the officials of PNB changed their stance and threatened that the Petitioner’s account would be categorized as ‘Fraud’..The Petitioner has, therefore, challenged the impugned RBI Circular on the ground that it “contains no procedure to satisfy the basic principles of natural justice, despite providing for contemplated/ threatened civil and criminal consequences” in terms of its 2015 Circular..The Petition, filed through Advocate Manohar Malik, also seeks to restrain PNB from categorizing its account as ‘fraud’. In case its account has already been categorized as ‘fraud’ in any ex-parte order, the said categorization ought to be set aside and quashed, it prays..The matter would be next heard on February 4, 2019..The Petitioner Company was represented by Advocate Sameer Rohtagi, Manohar Malik, Ashish Batra, Sarthak Sachdeva, Watan Sharma and Akshit Pradhan..RBI was represented by Advocates HS Parihar and Kuldeep S Parihar..Read the Order:.Read the Petition: