In a major relief to Anil Ambani and his company Reliance Communications Ltd, the Bombay High Court has barred efforts to declare the accounts of three banks as fraudulent. The court said that the main directives of the Reserve Bank of India (RBI) were not followed properly in the entire process.
Do not trust the forensic audit report
Justice Milind Jadhav, in his order, said the banks’ action was based on a forensic audit report, which was prepared by external auditor BDO LLP. But the court clarified that this report cannot be trusted as it is not signed by any qualified Chartered Accountant (CA), while it is mandatory in the RBI 2024 key directives.
Failure to provide interim relief will result in heavy losses
The High Court said that had Anil Ambani and Reliance Communications not been granted interim relief, they would have suffered grievous and irreparable loss. According to the court, the consequences of declaring the accounts fraudulent are very serious, including blacklisting, deprivation of new bank loans or credit for many years, registration of criminal cases and huge damage to reputation.
Emphasis on principles of justice
The court said that according to the principles of justice, justice should not only be done, but should also be seen to be done. The court also made it clear that banks are not entitled to issue show-cause notices based on forensic reports prepared by external consultants.
Blame the banks’ delay
The High Court also expressed displeasure over the late action taken by the banks. The court said that this is a case where the bank has woken up from a deep slumber and a forensic audit was conducted in 2019 for the period 2013 to 2017.
Arguments of Banks and Ambani
Anil Ambani challenged the show cause notice issued by Indian Overseas Bank, IDBI Bank and Bank of Baroda. They said BDO LLP was a consulting firm, not an audit firm, and therefore not qualified to conduct forensic audits. The banks argued that the audit was conducted under the RBI Master Directions of 2016, which does not require the external auditor to be a CA.
Clear attitude of the court
The High Court finally clarified that the main directives of the RBI are mandatory and the appointment of auditors should be in accordance with law. Further, the court also held that BDO LLP was previously acting as a consultant to banks, thereby creating a conflict of interest situation.