Bombay High Court clarifies it has not stayed RBI circular on bank fraud; only asked banks to follow Supreme Court order

The Bombay High Court on Tuesday clarified that it has not stayed the operation of the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions of 2016 (master circular) pertaining to bank fraud [SS Hemani v. RBI & Ors.].A division bench of Justices GS Patel and Neela Gokhale issued the clarification in a 9-page order published today.During the course of the hearing yesterday, the division bench had directed the banks to not take any further action based on the master circular. It was reported that the Court had stayed the effect of the circular till it finally hears the petitions challenging the same.However, in the order published today, the division bench clarified that it has not stayed the operation of the Master Circular, per se..The Court clarified that its order on the master circular is restricted only to those actions by the banks or their in-house committees, that are inconsistent with a Supreme Court ruling on the issue.."We have not stayed the operation of the Master Circular (which has not been struck down by the Supreme Court decision). The Supreme Court has only read certain requirements into the Master Circular. It follows, therefore, that actions under the Master Circular consistent with the Supreme Court judgment and decision may undoubtedly proceed," the High Court said..The Court added that this order will continue until September 11, 2023. .Pertinently, the division bench indicated the course of action banks may take during the pendency of petitions challenging the RBI Circular.The Court granted liberty to all banks to rescind, withdraw or cancel any orders already passed under the Master Circular and which may be inconsistent with the Supreme Court judgment. Further, the banks were permitted to re-initiate the process, as specified in the Master Circular, while ensuring that it is consistent with the Supreme Court decision..The Court also allowed investigating agencies to proceed with ongoing investigations against the petitioners on the basis of first information reports (FIRs) since they do not arise from the enquiries conducted under the Master Circular. "The Supreme Court decision clearly states that no hearing is necessary before filing of FIRs, even if the charge is of fraud accounts. In other words, the investigating agencies are at liberty to file and proceed with FIRs without reference to any findings by the bank under the Master Circular in question. Equally, all remedies available in law to private parties remain unaffected by this order and may be pursued," the Court said. .The circular under challenge had permitted banks to make full use of the Central Fraud Registry for timely identification, control, reporting and mitigation of risks associated with fraud.The circular contained two provisions: Once a bank classifies an account as fraud, it is the responsibility of that bank to report the same to the Central Repository of Information on Large Credits platform to alert other banks. If a bank decides to straight away classify the account as a fraud, it is obligated to report the fraud to RBI within 21 days and report the case to any investigating agency.The petitioners before the High Court had claimed that borrowers had no opportunity of hearing before their accounts were classified as fraudulent as per the circular.In effect, the banks were neither giving hearing to the borrowers nor giving them copies of material relied upon before taking further precipitative action, the Court was told. .The matter has been posted to be taken up for final hearing on 7-8 September..[Read Order]