In a significant judgment that reinforces the rights of borrowers against arbitrary actions by financial institutions, the Calcutta High Court has held that banks cannot classify a borrower’s account as 'fraud' without first providing the Forensic Audit Report (FAR) and other documents relied upon in the show-cause notice.
Justice Krishna Rao, presiding over the matter, emphasized that the principles of natural justice cannot be sacrificed at the altar of "expedition" or "speedy procedures" under the Reserve Bank of India’s (RBI) Master Directions. The Court observed that the opportunity to respond to a notice becomes "illusory" if the borrower is kept in the dark about the evidence being used against them.
The case, titled Hemant Kanoria & Anr. v. Indian Overseas Bank, arose when the petitioners challenged show-cause notices issued by Indian Overseas Bank (IOB) on February 28, 2025. These notices sought to classify the petitioners' accounts—associated with SREI entities—as fraud based on forensic audit findings.
The forensic audits had been conducted by reputable firms, including KPMG. However, while the bank’s notices contained selective excerpts and summaries of the findings, they failed to provide the full copies of the Forensic Audit Reports or the underlying documents used by the auditors to reach their conclusions.
The petitioners argued that they had been out of control of the SREI entities since October 2021 (following the intervention of the NCLT) and, therefore, did not have access to internal records. Without the specific documents cited by the bank, they claimed it was impossible to draft a meaningful and effective reply to the allegations.
During the proceedings, the bank took a firm stance, arguing that the RBI Master Directions on fraud classification are intended to be a time-bound and summary procedure. The bank contended that the "need for speed" in identifying financial irregularities justifies a more streamlined process and that providing every single document at the notice stage was not mandatory.
Interestingly, while the writ petition was still pending and the judgment had been reserved, the bank moved ahead and officially declared the petitioners' accounts as "fraud" on January 15, 2026. This move was immediately challenged by the petitioners as being arbitrary and an attempt to bypass the judicial process.
Justice Krishna Rao rejected the bank’s arguments, leaning heavily on the "audi alteram partem" principle (hear the other side). The Court referred to a coordinate bench decision in Hemant Kanoria v. Bank of India, which established that even if a process is summary in nature, natural justice must be read into it.