In a significant legal development, the Bombay High Court on Wednesday stayed all coercive proceedings initiated by a consortium of banks against Anil Ambani, the former non-executive director of Reliance Communications Ltd (RCOM). Justice Milind Jadhav restrained Bank of Baroda, IDBI Bank, and Indian Overseas Bank from acting on show-cause notices or fraud classification measures grounded in a controversial October 2020 forensic audit report.
High Court Questions Validity of BDO LLP Audit Report
The court’s decision hinges on a critical procedural lapse regarding the qualifications of the forensic auditor. Justice Jadhav took a strong prima facie view that the audit report, prepared by BDO LLP, could not be relied upon for punitive action because it was not signed by a duly qualified Chartered Accountant (CA).
The court observed that under the Reserve Bank of India's (RBI) 2024 Master Directions on fraud, which supersedes the 2016 regime, an external auditor must hold statutory qualifications. Since the signatory of the BDO LLP report was not a practicing Chartered Accountant, the report was deemed an invalid foundation for classifying the account as fraud.
"The Master Directions of RBI are not a mere paper tiger to enable the Banks to wake up from their deep slumber and initiate action according to their convenience," Justice Jadhav remarked, rejecting the banks' request to stay the order.
Banks "Woke Up From Deep Slumber"
The High Court was critical of the timeline followed by the banks. Justice Jadhav noted that the banks appeared to have "woken up from their deep slumber" in 2019 to conduct a forensic audit for the period between 2013 and 2017. The court pointed out that this delay and the subsequent actions did not adhere to the timelines prescribed under the 2016 RBI Master Directions.
The Judge warned that if banks fail to follow the Rule of Law and RBI timelines, it could have detrimental effects on the country's broader economy.
The Core Legal Argument: RBI Guidelines & Auditor Qualifications
Anil Ambani approached the court challenging the show-cause notices and the fraud classification proceedings. His legal team, led by Senior Advocates Gaurav Joshi and Ashish Kamat, argued that:
- BDO LLP Status: The firm is an "accounting consultant firm" and not a firm of Chartered Accountants registered with the Institute of Chartered Accountants of India (ICAI).
- Signatory Qualification: The sole signatory of the forensic report was admittedly not a CA holding a certificate of practice.
- Jurisdiction: Consequently, the entire exercise was without jurisdiction under both the Companies Act, 2013, and the RBI's 2024 Master Directions.
Ambani’s plea contended that banks could not trigger "draconian consequences" like fraud labelling based on a report authored by an unqualified individual.
The Banks' Defense and Court's Rejection
The consortium of banks, represented by Senior Advocates Zal Andhyarujina and Zarir Bharucha, opposed the interim relief. They argued:
- Limitation and Waiver: RCOM’s account was classified as fraud in December 2020, and Ambani had previously participated in proceedings without challenging BDO LLP's competence.
- 2016 vs. 2024 Rules: They maintained that the 2016 Master Directions did not explicitly require the forensic auditor to be a CA.
However, the Court ruled that once the RBI consciously linked external audits to statutory qualifications in its 2024 Directions, banks could not persist with actions based on reports signed by non-ICAI members.