The Calcutta High Court has ruled that a bank cannot proceed to classify a borrower’s account as “fraud” without first supplying the forensic audit report and the documents relied upon in the show-cause notice, emphasising that principles of natural justice cannot be sacrificed in the name of expedition under the Reserve Bank of India’s Master Directions. The bench, presided over by Justice Krishna Rao, set aside Indian Overseas Bank’s decision that declared the petitioners’ account to be a fraud, on the ground that the petitioners were deprived of an effective opportunity to respond since they were not provided with the material forming the basis of the fraud classification. The petitioners had challenged show-cause notices dated February 28, 2025, on the contention that the bank relied on forensic audit reports prepared by KPMG and another auditor but failed to provide copies of those reports or the supporting documents relied upon in the notices. They argued that the show-cause notices only reproduced selective portions of the audit findings and that without access to the underlying material they were unable to submit a meaningful reply. It was also submitted that they had not had access to the records of the relevant entities since October 2021, making disclosure of documents even more critical for preparing an effective defence.
During the pendency of the writ petition, and after the matter had been reserved for judgment, the bank issued fresh communications on January 15, 2026 declaring the petitioners’ account as fraud. This prompted the petitioners to file an interim application, contending that the bank acted arbitrarily and in violation of natural justice by proceeding with the fraud classification without addressing their request for documents. In response, the bank argued that the RBI Master Directions provide for a time-bound and summary procedure for addressing suspected frauds, and that the petitioners ought to have filed replies to the original show-cause notices instead of approaching the High Court. It contended that detailed disclosure of all materials was not necessary at the notice stage and that the summary nature of the fraud declaration process under the directions permitted such an approach.
The Court, however, referred to a coordinate Bench decision in Hemant Kanoria v. Bank of India which held that while the fraud declaration process is summary, natural justice must be read into it and that if a forensic audit report or other documents form the basis of the show-cause notice then such materials must be supplied to the noticee. The High Court reiterated this principle, emphasising that the purpose of a show-cause notice is to enable an effective defence, which cannot be achieved unless the documents relied upon by the bank are made available to the party against whom adverse action is proposed. The Court noted that the petitioners had specifically enumerated the documents required for responding to the allegations and that the bank, despite being aware of their request, proceeded to declare the account as fraud during the pendency of the writ petition. It held that the bank’s action in doing so was unsustainable, as it acted without considering the petitioners’ request and thereby deprived them of a fair opportunity to be heard.
Accordingly, the High Court set aside and quashed the fraud declaration dated January 15, 2026. It directed the bank to supply the requested documents within two weeks or, if the records were voluminous, to permit inspection of those records. The petitioners were granted two weeks thereafter to file their reply, and the bank was directed to take a fresh decision within two weeks of receiving the response. With these directions, the writ petition and the connected interim application were disposed of. The judgment underscores that principles of natural justice, particularly the right to be informed of and to respond to the material forming the basis of adverse action, cannot be bypassed even in procedures that are intended by regulatory frameworks to be expedited.
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