Holding

The rule of audi alteram partem must be read into the RBI's Master Directions on Frauds, requiring borrowers to be given notice, an opportunity to be heard, and a reasoned order before their accounts are classified as fraudulent.

Summary

The Supreme Court examined civil appeals filed by State Bank of India and other banks challenging the classification of borrowers' accounts as fraudulent under the RBI's 2016 Master Directions on Frauds. Borrowers contended that the directions denied them a hearing before such classification, violating the principles of natural justice and their constitutional rights under Articles 14 and 19(1)(g). The Court held that, although the directions are silent on a hearing, the rule of audi alteram partem must be read into them to prevent arbitrariness, especially because classification carries severe civil consequences such as debarment from credit. It further ruled that a reasoned order and an opportunity to present a representation must accompany any fraud classification. Consequently, the High Court's judgment upholding the need for a hearing was affirmed and the appeals were disposed of.

Issues considered

Whether the principles of natural justice, particularly audi alteram partem, should be read into the RBI's Master Directions on Frauds.
Whether classification of a borrower’s account as fraud under the directions entails civil consequences that trigger the requirement of a hearing.
Whether the RBI and banks can implicitly exclude the right to be heard on the ground of urgency or public interest.
Whether the directions violate Articles 14 and 19(1)(g) of the Constitution.

Legislation cited

Subjects

natural justiceaudi alteram partemRBI Master Directions on Fraudsborrower debarmentcivil consequencesblacklistingArticle 14Article 19(1)(g)procedural fairnessbanking regulation

Judgment

476 [2023]REPORTS
SUPREME COURT 7 S.C.R. 476 [2023] 7 S.C.R.

A STATE BANK OF INDIA & ORS
v.
RAJESH AGARWAL & ORS
(Civil Appeal No. 7300 of 2022)
B MARCH 27, 2023
[DR. DHANANJAYA Y CHANDRACHUD, CJI AND
HIMA KOHLI, J.]
Reserve Bank of India Act, 1934 – Banking Regulation Act,
1949 – Reserve Bank of India (Frauds Classification and Reporting
C
by Commercial Banks and Select FIs) Directions 2016 – Master
Directions on Frauds – Principle of Natural Justice – Rule of Audi
Alteram Partem – The civil appeals arise out of a challenge to the
Reserve Bank of India (Frauds Classification and Reporting by
Commercial Banks and Select FIs) Directions 2016 – These
D directions were challenged before different High Courts primarily
on the ground that no opportunity of being heard is envisaged to
borrowers before classifying their accounts as fraudulent – Whether
the principles of natural justice should be read into the provisions
of the Master Directions on Frauds – Held : The principles of natural
justice demand that the borrowers must be served a notice, given
E
an opportunity to explain the conclusions of the forensic audit
report, and be allowed to represent by the banks/ JLF before their
account is classified as fraud under the Master Directions on Frauds
– In addition, the decision classifying the borrower’s account as
fraudulent must be made by a reasoned order; and since the Master
F Directions on Frauds do not expressly provide an opportunity of
hearing to the borrowers before classifying their account as fraud,
audi alteram partem has to be read into the provisions of the
directions to save them from the vice of arbitrariness.
Reserve Bank of India Act, 1934 – Banking Regulation Act,
G 1949 – Reserve Bank of India (Frauds Classification and Reporting
by Commercial Banks and Select FIs) Directions 2016 – Principle
of Natural Justice – Civil consequences to borrowers – Whether
the classification of a borrower’s account as fraudulent under the
Master Directions on Frauds entails civil consequences to
borrowers – Held: Clause 8.12 of the Master Directions on Frauds
H
476
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 477

deals with the penal measures for borrowers – Clause 8.12.1 A
provides that penal provisions as applicable to wilful defaulters
would apply to fraudulent borrowers, including the promoters and
directors of the borrower company – In addition, borrowers are
also liable to suffer the following consequences under the Master
Directions on Frauds : a) No restructuring may be made in the case
B
of an RFA or fraud accounts (clause 8.12.2); b) No compromise on
settlement involving a fraudulent borrower is allowed unless the
conditions stipulate that the criminal complaint will be continued
(clause 8.12.3) – The classification of a borrower’s account as fraud
under the Master Directions on Frauds has difficult civil
consequences for the borrower – Classification of the borrower’s C
account as fraud under the Master Directions on Frauds virtually
leads to a credit freeze for the borrower, who is debarred from raising
finance from financial markets and capital markets – The bar from
raising finances could be fatal for the borrower leading to its ‘civil
death’ in addition to the infraction of their rights under Article
19(1)(g) of the Constitution – Since, debarring disentitles a person D
or entity from exercising their rights and/or privileges, it is elementary
that the principles of natural justice should be made applicable
and the person against whom an action of debarment is sought
should be given an opportunity of being heard.
Reserve Bank of India Act, 1934 – Banking Regulation Act, E
1949 – Reserve Bank of India (Frauds Classification and Reporting
by Commercial Banks and Select FIs) Directions 2016 – No implied
exclusion of audi alteram partem – The RBI and the lender banks
have contended that the Master Directions on Frauds impliedly
exclude the right to be heard – Held: The Master Directions on F
Frauds do not expressly exclude a right of hearing to the borrowers
before action to class their account as frauds is initiated – The
principles of natural justice can be read into a statute or a
notification where it is silent on granting an opportunity of a hearing
to a party whose rights and interests are likely to be affected by the
orders that may be passed. G
Principles/Doctrines – Principles of natural justice – Two
fundamental principles of natural justice are entrenched in Indian
jurisprudence: (i) nemo judex in causa sua, which means that no
person should be a judge in their own cause; and (ii) audi alteram
partem, which means that a person affected by administrative, H
478 SUPREME COURT REPORTS [2023] 7 S.C.R.

A judicial or quasi-judicial action must be heard before a decision is
taken – The courts generally favor interpretation of a statutory
provision consistent with the principles of natural justice because
it is presumed that the statutory authorities do not intend to
contravene fundamental rights.
B Disposing of the appeals, the Court
HELD: Audi Alteram Partem
1. The principles of natural justice are not mere legal
formalities. They constitute substantive obligations that need to
be followed by decision-making and adjudicating authorities. The
C principles of natural justice act as a guarantee against arbitrary
action, both in terms of procedure and substance, by judicial,
quasi-judicial, and administrative authorities. Two fundamental
principles of natural justice are entrenched in Indian
jurisprudence: (i) nemo judex in causa sua, which means that no
D person should be a judge in their own cause; and (ii) audi alteram
partem, which means that a person affected by administrative,
judicial or quasi-judicial action must be heard before a decision
is taken. The courts generally favor interpretation of a statutory
provision consistent with the principles of natural justice because
it is presumed that the statutory authorities do not intend to
E contravene fundamental rights. Application of the said principles
depends on the facts and circumstances of the case, express
language and basic scheme of the statute under which the
administrative power is exercised, the nature and purpose for
which the power is conferred, and the final effect of the exercise
F of that power. [Para 29][502-E-G]
2. Chapter VIII of the Master Directions on Fraud provides
detailed procedures to be followed by the banks before forming
an opinion to proceed with a criminal complaint against the
borrowers. Under the said chapter, the lender banks have to
G report a borrower to the CBI after classifying the borrower’s
account as fraudulent. However, the classification of the
borrower’s account does not simpliciter lead to reporting of
criminal complaint with the enforcement authorities; it also entails
penal consequences for the borrowers as laid down under Clause
8.12. The process of forming an informed opinion under the
H
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 479

Master Directions on Frauds is administrative in nature. This A
has also been acceded to by RBI and lender banks in their written
submissions. It is now a settled principle of law that the rule of
audi alteram partem applies to administrative actions, apart from
judicial and quasi-judicial functions. It is also a settled position in
administrative law that it is mandatory to provide for an
B
opportunity of being heard when an administrative action results
in civil consequences to a person or entity. [Paras 31, 32][503-D-
G]
3. The RBI and lender banks have argued that the civil
consequences contemplated in Clause 8.12.1 of the Master
Directions on Frauds are reasonable. Under the said clause, the C
borrower, including the promoters and directors of the company,
are barred from availing credit from financial markets and credit
markets for a period of five years, and possibly even beyond.
According to RBI and lender banks, such a restriction has to be
perceived from the perspective of public interest. While D
acknowledging that the procedure which has been laid down in
the Master Directions on Frauds is conceived in public interest,
to protect the banking system, it cannot be ignore the serious
civil consequences which emanate to the borrowers. [Para
38][505-G; 506-A-B]
E
4. Classification of the borrower’s account as fraud under
the Master Directions on Frauds virtually leads to a credit freeze
for the borrower, who is debarred from raising finance from
financial markets and capital markets. The bar from raising
finances could be fatal for the borrower leading to its ‘civil death’
in addition to the infraction of their rights under Article 19(1)(g) F
of the Constitution. Since debarring disentitles a person or entity
from exercising their rights and/or privileges, it is elementary
that the principles of natural justice should be made applicable
and the person against whom an action of debarment is sought
should be given an opportunity of being heard. Indeed, debarment G
is akin to blacklisting a borrower from availing credit. [Para
42][509-A-C]
No implied exclusion of audi alteram partem
5. The Master Directions on Frauds do not expressly
exclude a right of hearing to the borrowers before action to class H
480 SUPREME COURT REPORTS [2023] 7 S.C.R.

A their account as frauds is initiated. The principles of natural justice
can be read into a statute or a notification where it is silent on
granting an opportunity of a hearing to a party whose rights and
interests are likely to be affected by the orders that may be passed.
[Para 53][513-E]
B 6. Audi alteram partem, therefore, entails that an entity
against whom evidence is collected must: (i) be provided an
opportunity to explain the evidence against it; (ii) be informed of
the proposed action, and (iii) be allowed to represent why the
proposed action should not be taken. Hence, the mere
participation of the borrower during the course of the preparation
C
of a forensic audit report would not fulfil the requirements of
natural justice. The decision to classify an account as fraud
involves due application of mind to the facts and law by the lender
banks. The lender banks, either individually or through a JLF,
have to decide whether a borrower has breached the terms and
D conditions of a loan agreement, and based upon such determination
the lender banks can seek appropriate remedies. Therefore,
principles of natural justice demand that the borrowers must be
served a notice, given an opportunity to explain the findings in
the forensic audit report, and to represent before the account is
classified as fraud under the Master Directions on Frauds. [Para
E
65][520-F-H]
7. The conclusions are summarized as follows: i. No
opportunity of being heard is required before an FIR is lodged
and registered; ii. Classification of an account as fraud not only
results in reporting the crime to investigating agencies, but also
F
has other penal and civil consequences against the borrowers;
iii. Debarring the borrowers from accessing institutional finance
under Clause 8.12.1 of the Master Directions on Frauds results
in serious civil consequences for the borrower; iv. Such a
debarment under Clause 8.12.1 of the Master Directions on
G Frauds is akin to blacklisting the borrowers for being
untrustworthy and unworthy of credit by banks. This Court has
consistently held that an opportunity of hearing ought to be
provided before a person is blacklisted; v. The application of audi

H
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 481

alteram partem cannot be impliedly excluded under the Master A
Directions on Frauds. In view of the time frame contemplated
under the Master Directions on Frauds as well as the nature of
the procedure adopted, it is reasonably practicable for the lender
banks to provide an opportunity of a hearing to the borrowers
before classifying their account as fraud; vi. The principles of
B
natural justice demand that the borrowers must be served a
notice, given an opportunity to explain the conclusions of the
forensic audit report, and be allowed to represent by the banks/
JLF before their account is classified as fraud under the Master
Directions on Frauds. In addition, the decision classifying the
borrower’s account as fraudulent must be made by a reasoned C
order; and vii. Since the Master Directions on Frauds do not
expressly provide an opportunity of hearing to the borrowers
before classifying their account as fraud, audi alteram partem has
to be read into the provisions of the directions to save them from
the vice of arbitrariness. [Para 81][528-A-H]
D
Maneka Gandhi v. Union of India (1978) 1 SCC 248 :
[1978] 2 SCR 621; Union of India v. Tulsiram Patel
(1985) 3 SCC 398 : [1985] 2 Suppl. SCR 131; Olga
Tellis v. Bombay Municipal Corporation (1985) 3 SCC
545 : [1985] 2 Suppl. SCR 51; C B Gautam v. Union of
E
India (1993) 1 SCC 78 : [1992] 3 Suppl. SCR 12 –
followed.
State of Orissa v. Dr (Miss) Binapani Dei AIR 1967 SC
1269 : [1967] SCR 625; Canara Bank v. V K Awasthy
(2005) 6 SCC 321 : [2005] 3 SCR 81; Erusian
F
Equipment & Chemicals Ltd v. State of West Bengal
(1975) 1 SCC 70 : [1975] 2 SCR 674; Joseph
Vilangandan v. Executive Engineer (1978) 3 SCC 36 :
[1978] 3 SCR 514; Raghunath Thakur v. State of Bihar
(1989) 1 SCC 229 : [1988] 3 Suppl. SCR 867; Gorkha
Security Services v. Govt (NCT of Delhi) (2014) 9 SCC G
105: [2014] 13 SCR 617; State of Maharashtra v. Public
Concern for Governance Trust (2007) 3 SCC 587 :
[2007] 1 SCR 87; Swadeshi Cotton Mills v. Union of

H
482 SUPREME COURT REPORTS [2023] 7 S.C.R.

A India (1981) 1 SCC 664 : [1981] 2 SCR 533; Mangilal
v. State of Madhya Pradesh (2004) 2 SCC 447 : [2004]
1 SCR 1; K I Shephard v. Union of India (1987) 4 SCC
431 : [1988] 1 SCR 188; Union of India v. Col. J N
Sinha (1970) 2 SCC 458 : [1971] 1 SCR 791; Kesar
Enterprises Ltd v. State of Uttar Pradesh (2011) 13 SCC
B
733 : [2011] 9 SCR 19 – relied on.
State Bank of India v. Jah Developers (2019) 6 SCC
787: [2019] 7 SCR 701; Union of India v. Col. J N
Sinha (1970) 2 SCC 458 : [1971] 1 SCR 791; Anju
Chaudhary v. State of UP (2013) 6 SCC 384 : [2012]
C
13 SCR 901; A K Kraipak v. Union of India (1969) 2
SCC 262 : [1970] 1 SCR 457; Governing Body, St
Anthony’s College, Shillong and Ors v. Rev. Fr. Paul
Petta of Shillong (1988) Supp SCC 676 : [1988] Suppl.
SCR 507; Uma Nath Pandey and Ors v. State of Uttar
D Pradesh (2009) 12 SCC 40 : [2009] 4 SCR 374;
Mohinder Singh Gill v. Chief Election Commissioner,
New Delhi (1978) 1 SCC 405 : [1978] 2 SCR 272; D K
Yadav v. J M A Industries (1993) 3 SCC 259 : [1993] 3
SCR 930; Peerless General Finance and Investment
Co. Ltd v. Reserve Bank of India (1992) 2 SCC 343 :
E
[1992] 1 SCR 406; Joseph Kuruvilla Vellukunnel v.
Reserve Bank of India AIR 1962 SC 1371 : [1962]
Suppl. SCR 632; Internet and Mobile Association of
India v. Reserve Bank of India (2020) 10 SCC 274 :
[2020] 2 SCR 297; Ajit Kumar Nag v. General Manager
F (PJ), Indian Oil Corp. Ltd. (2005) 7 SCC 764 : [2005]
3 Suppl. SCR 314; Keshav Mills Co. Ltd. v. Union of
India (1973) 1 SCC 380 : [1973] 3 SCR 22; Delhi Cloth
Mills & General Mills v. Union of India (1983) 4 SCC
166 : [1983] 3 SCR 438; E P Royappa v. State of Tamil
Nadu (1974) 4 SCC 3 : [1974] 2 SCR 348; State of AP
G v. McDowell (1996) 3 SCC 709 : [1996] 3 SCR 721;
Om Kumar v. Union of India (2001) 2 SCC 386 : [2000]
4 Suppl. SCR 693; Chairman and Managing Director,
United Commercial Bank v. P C Kakkar (2003) 4 SCC
364 : [2003] 1 SCR 1034; Cantonment Board v.
H Taramani Devi 1992 Supp (2) SCC 501; Delhi Transport
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 483

Corporation v. DTC Mazdoor Congress 1991 Supp (1) A
SCC 600 : [1990] 1 Suppl. SCR 142; Sahara India
(Firm), Lucknow v. Commissioner of Income Tax,
Central-I (2008) 14 SCC 151 : [2008] 6 SCR 427;
Kranti Associates (P) Ltd. v. Masood Ahmed Khan
(2010) 9 SCC 496 : [2010] 10 SCR 1070 – referred
B
to.
Black’s Law Dictionary, 5th edn (1979); P Ramanatha
Aiyar, ‘The Law Lexicon : The Encyclopedic Law
Dictionary’ (1997 edn) – referred to.
Case Law Reference C
[2019] 7 SCR 701 referred to Para 10
[1971] 1 SCR 791 relied on Para 29
[2012] 13 SCR 901 referred to Para 30
[1970] 1 SCR 457 referred to Para 32 D

[1988] Suppl. SCR 507 referred to Para 32
[2009] 4 SCR 374 referred to Para 32
[1967] SCR 625 relied on Para 33
E
[1978] 2 SCR 621 followed Para 34
[1978] 2 SCR 272 referred to Para 35
[1993] 3 SCR 930 referred to Para 35
[2005] 3 SCR 81 relied on Para 36
F
[1975] 2 SCR 674 relied on Para 44
[1978] 3 SCR 514 relied on Para 45
[1988] 3 Suppl. SCR 867 relied on Para 46
[2014] 13 SCR 617 relied on Para 47 G
[2007] 1 SCR 87 relied on Para 49
[1992] 1 SCR 406 referred to Para 50
[1962] Suppl. SCR 632 referred to Para 50
[2020] 2 SCR 297 referred to Para 50 H
484 SUPREME COURT REPORTS [2023] 7 S.C.R.

A [1981] 2 SCR 533 relied on Para 54
[2004] 1 SCR 1 relied on Para 56
[2005] 3 Suppl. SCR 314 referred to Para 57
[1985] 2 Suppl. SCR 131 followed Para 57
B
[1988] 1 SCR 188 relied on Para 59
[1973] 3 SCR 22 referred to Para 62
[1983] 3 SCR 438 referred to Para 66
[1974] 2 SCR 348 referred to Para 68
C
[1996] 3 SCR 721 referred to Para 68
[2000] 4 Suppl. SCR 693 referred to Para 68
[2003] 1 SCR 1034 referred to Para 68
D 1992 Supp (2) SCC 501 referred to Para 70
[1990] 1 Suppl. SCR 142 referred to Para 70
[1985] 2 Suppl. SCR 51 followed Para 72
[1971] 1 SCR 791 referred to Para 73
E [1992] 3 Suppl. SCR 12 followed Para 74
[2008] 6 SCR 427 referred to Para 75
[2011] 9 SCR 19 relied on Para 76
[2010] 10 SCR 1070 referred to Para 78
F
CIVIL APPELLATE/ORIGINAL JURISDICTION: Civil Appeal
No. 7300 of 2022.
From the Judgment and Order dated 10.12.2020 of the High Court
for the State of Telangana at Hyderabad in WP No. 19102 of 2019.
G With
Civil Appeal Nos. 7301, 7302, 7303, 7304, 7305, 7306, 7307 of
2022 and Writ Petition no. 138 of 2022.
Tushar Mehta, SG, Gopal Jain, Ranjit Kumar, Dhruv Mehta, Dr.
H Abhishek Manu Singhvi, Navin Pahwa, Arunabh Chowdhury, Gopal Jain,
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 485

Sr. Advs., Sanjay Kapur, Ms. Megha Karnwal, Arjun Bhatia, Ms. Akshata A
Joshi, Ms. Shubhra Kapur, Ms. Pragya Baghel, Ramesh Babu M.R.,
Ms. Manisha Singh, Ms. Nisha Sharma, Ms. Jagrati Bharti, Mahesh
Agarwal, Sumesh Dhawan, Rishi Agrawala, Vastala Kak, Himanshu
Satija, Pranjit Bhattacharya, Kailashnath, V. Murali Manohar, Nishant
Rao, E.C. Agrawala, Suraj Prakash, Mrinal Litoriya, Ms. Priyanka
B
Solanki, Ms. Nidhi Mohan Parashar, Ravi Pahwa, Ms. Monisha Handa,
Rajul Shrivastav, Mohit D. Ram, Anubhav Sharma, Kanu Agrawal, Ms.
Neela Kedar Gokhale, Ms. Akanksha Kaul, Ms. Praveena Gautam,
Arvind Kumar Sharma, M.K. Maroria, Mayank Pandey, Annam
Venkatesh, Ms. Sairica Raju, Ms. Swati Ghildiyal, Jasmeet Singh,
Mahinder Singh Hura, Saif Ali, Divjot Singh Bhatia, Pushpendra Singh C
Bhadoriya, Ms. Rusheet Saluja, Ms. Mandeep Kaur, Siddharth Handa,
Karma Dorjee, Dechen W. Lachungpa, Anirudh M. Sethi, Siddharth
Seem, Sourabh Tandon, Ms. Richa Kapoor, Kunal Anand, Ms. Shivani
Sharma, Ms. Jyoti Zongluju, M/s. Coac, Ms. Suvarna Kashyup, Pankaj
Vivek, Krishan Kumar, Nitin Pal, Swikirtimala Dubey, Anand Shankar
Jha, Arpit Gupta, Ms. Meenakshi S. Devgan, Girish Bhardwaj, Abhilekh D
Tiwari, Alok Kumar, G.N. Reddy, Manan Gambhir, Ms. Garima Soni,
Ms. Neetu Rahi, Rohil Pandit, A. Radhakrishnan, Ms. Astha Deep, Ms.
Ruma Sarasani, PBA Srinivasan, Parth Tandon, Ms. Prerana Sabharwal,
Ms. Srishti Bansal, Parth Kumar, V. Aravind, Amit K. Nain, Brijesh
Kumar Tamber, Yashu Rustagi, Advs. for the appearing parties. E
The Judgment of the Court was delivered by
DR. DHANANJAYA Y CHANDRACHUD, CJI
A. Background ................................................................. 4*
B. Facts ............................................................................. 5* F
C. Submissions ................................................................ 10*
D. Analysis ...................................................................... 15*
D.1 Regulatory Framework ........................................... 15*
D.2 Audi Alteram Partem ............................................... 25* G
D.3 No implied exclusion of audi alteram partem ...... 39*
D.4 Challenge to constitutional validity ....................... 48*
E. Conclusion .................................................................. 57*

*Ed. Note: Pagination is as per the original judgment. H
486 SUPREME COURT REPORTS [2023] 7 S.C.R.

A A. Background
1. The civil appeals arise out of a challenge to the Reserve Bank
of India (Frauds Classification and Reporting by Commercial Banks and
Select FIs) Directions 2016.1 Issued by the Reserve Bank of India2,
these directions were challenged before different High Courts primarily
B on the ground that no opportunity of being heard is envisaged to borrowers
before classifying their accounts as fraudulent. The High Court of
Telangana has heldin the impugned judgment3 that the principles of natural
justice must be read into the provisions of the Master Directions on
Frauds. The decision has been assailed by the RBI and lender banks
through these civil appeals.
C
2. In this background the court has to consider whether the
principles of natural justice should be read into the provisions of the
Master Directions on Frauds. For the reasons to follow, we hold that the
principles of natural justice, particularly the rule of audi alteram partem,
has to be necessarily read into the Master Directions on Frauds to save
D it from the vice of arbitrariness. Since the classification of an account as
fraud entails serious civil consequences for the borrower, the directions
must be construed reasonably by reading into them the requirement of
observing the principles of natural justice.
B. Facts
E I. SLP (C) No. 3931 of 2021; SLP (C) No. 4922 of 2021;
SLP (C) No. 5056 of 2021
3. B S Limited is a company engaged in the business of power
transmission and distribution, passive telecom infrastructure, renewable
energy, and mineral resources. It availed loans amounting to Rs. 1406
F crores from various banks. The company failed to meet its payment
obligations to lender banks, thereby defaulting in repayment of credit
facilities. In accordance with the Master Directions on Frauds, all the
lender banks formed a Joint Lenders Forum4 with State Bank of India
as the lead bank.
G 4. The JLF declared the company’s assets as Non-Performing
Assets5 on 29 August 2016. The lender banks decided to adopt the
1
“Master Directions on Frauds”
2
“RBI”
3
Writ Petition No. 19102 of 2019
4
“JLF”
H 5
“NPA”
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 487
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

Sustainable Structuring of Stressed Assets Scheme6 and suggested a A
forensic audit report and Techno Economic Viability7 study in its meeting
held on 11 July 2016. Based on the conclusions of the forensic audit
report, the JLF closed the issue stating that there were no irregularities.
However, based on the TEV study it was concluded that the company
was not eligible for the S4A scheme and requested it to submit an
B
alternative plan for regularization of its account. In the meanwhile, IDBI
Bank - one of the lender banks - red-flagged the account of the company.
Additionally, proceedings under the Insolvency and Bankruptcy Code,
2016 were also initiated against the company. On 15 February 2019, the
JLF declared the account of the company as fraud by invoking Clause
2.2.1(g) of the Master Directions on Frauds. Subsequently, the Fraud C
Identification Committee8 passed a resolution on 31 July 2019 identifying
the company’s account as fraud. The company filed a writ petition
challenging both the decision of the JLF dated 15 February 2019 and the
resolution of the FIC dated 31 July 2019 before the High Court of
Telangana.
D
5. By a judgment dated 10 December 2020, a Division Bench of
the High Court allowed the writ petition by holding that the principle of
audi alteram partem ought to be read into Clauses 8.9.4 and 8.9.5 of the
Master Directions on Frauds. The High Court further directed the lender
banks: (i) to give an opportunity of a hearing to the borrowers after
furnishing a copy of the forensic auditreport; and (ii) to provide an E
opportunity of a personal hearing to the borrower before classifying their
account as fraud. The judgment of the High Court was challenged in
SLP (C) No. 3931 of 2021. On 15 April 2021, this Court, while issuing
notice, partially stayed the directions issued by the Telangana High Court
in the following terms: F
“Meanwhile, the Minutes/Order dated 15.02.2019 passed by the
Joint Lenders Meeting is not to be acted upon. The High Court
insofar as it observed that a personal hearing be given is stayed.”
II. SLP (C) No. 762 of 2022; SLP (C) No. 873 of 2022; and
SLP (C) No. 1514 of 2022 G
6. The appellant is a company involved in the manufacture of
edible oils, fats, rice and semolina products in the State of Telangana.
6
“S4A Scheme”
7
“TEV”
8
“FIC” H
488 SUPREME COURT REPORTS [2023] 7 S.C.R.

A From 2003 to 2015, the appellant availed of credit facilities to the tune of
Rs. 675 crores from a consortium of banks led by the Andhra Bank
(now merged with the Union Bank of India). The appellant was declared
as an NPA on 14 May 2018 with effect from 31 March 2018. Thereafter,
the consortium of lenders in a meeting of the JLF decided to conduct a
forensic audit of the appellant for the period till 31 March 2019. The
B
appellant participated in the audit process and submitted all the information
required by the auditor from time to time. In September 2019, the appellant
learnt that its account has been declared as fraud by the Union Bank of
India (erstwhile Andhra Bank). Aggrieved by that classification, the
appellant filed a writ petition before the High Court of Telangana. The
C High Court declined to deal with the issues pertaining to the principles of
natural justice and fair play considering the fact that they were pending
before this Court in SLP (C) No. 3931 of 2021. By its judgment dated 22
December 2021, the High court dismissed the writ petitions. The court
held that the appellant’s account was rightly classified as fraud because
the forensic audit report contained adverse findings against the appellant.
D
7. On 24 January 2022, this Court, while issuing notice in SLP(C)
No. 762 of 2022, directed that the matter may not be reported to the
Central Bureau of Investigation9 for the time being. On 28 March 2022,
this Court passed a similar ad-interim order in SLP(C) No. 873 of 2022
and SLP(C) No. 1514 of 2022.
E
III. SLP (C) No. 2980 of 2022
8. The appellant is a promoter and director of Golden Jubilee Hotels
Pvt Ltd.10 GJHPL availed financial assistance from the respondent banks
for the construction and development of a hotel in Hyderabad. GJHPL’s
F account was declared as NPA from 31 December 2015 because of its
inability to service its debts to the respondent banks. At its meeting on 21
April 2016, the JLF decided to carry out a special audit of the appellant’s
company. Thereafter, the appellant participated in a series of meetings
between the JLF and was consulted by the forensic auditor during the
preparation of the audit report. Bank of Baroda red-flagged the appellant’s
G account on 03 May 2019 based on the observations in the forensic audit
report. The appellant’s account was classified as fraud on 14 August
2019. A criminal complaint was also lodged with the CBI. The appellant
came to know about the classification of their account as fraud in 2021,
9
“CBI”
H 10
“GJHPL”
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 489
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

when they received a copy of the FIR. The appellant filed a writ petition A
before the High Court of Telangana challenging the validity of the Master
Directions on Frauds. The High Court by its judgment dated 31 December
2021 held that no relief could be granted to the appellant on the issue of
personal hearing since SLP (C) No. 3931 of 2021 was pending before
this Court. The High Court also held that the appellant’s account was
B
rightly classified as fraudulent in view of the adverse findings in the
forensic audit report.
IV. Writ Petition (C) No. 138 of 2022 and SLP (C) No. 3388
of 2022
9. The appellant is one of the directors of a company called M/s C
Vimal Oil & Foods Limited. The said company availed of loan facilities
from various financial institutions over a period of time. In 2015, the
auditor of the respondent bank flagged certain irregularities in the accounts
of the company. Based on a special audit, the respondent bank declared
the account of the company as NPA on 30 September 2015. Thereafter,
on 05 July 2016, the company’s account was red-flagged by the D
respondent bank. In the meantime, the Corporate Insolvency Resolution
Process11 was initiated against the company on 19 December 2017 and
the appellant was suspended as Managing Director of the company.
Upon suspension, the appellant was not invited to attend the meetings of
the JLF. The appellant allegedly learnt that the respondent bank had E
classified their account as fraud on 21 February 2018 though without
any intimation. Further, based on a letter addressed by the respondent
bank to the CBI, an FIR came to be registered against the appellant.
The appellant alleges that they acquired knowledge about their account
being classified as fraud and registration of the FIR only when a search
was carried out at their residential premises in pursuance of the FIR. F
The appellant filed a Special Civil Application challenging the actions of
the respondent bank, which was dismissed by the Single Judge of the
High Court of Gujarat. The Division Bench partly allowed a Letters
Patent Appeal by its judgment dated 23 December 2021 by permitting
the appellant to address a representation tothe respondent bank but G
declined to allowa personal hearing. The appellant/ petitioner has also
invoked the writ jurisdiction of this Court by challenging the validity of
the Master Directions on Frauds.

11
“CIRP” H
490 SUPREME COURT REPORTS [2023] 7 S.C.R.

A C. Submissions
10. On behalf of the borrowers, we have heard Dr Abhishek Manu
Singhvi, Mr Ranjit Kumar, Mr Dhruv Mehta, Mr Arunabh Chowdhury,
Mr Navin Pahwa, Senior Advocates and Mr Suraj Prakash, learned
counsel. The counsel submit that the procedure for classification of an
B account as fraud under the Master Directions on Frauds suffers from
illegalities because:
a. Under Clauses 8.9.4 and 8.9.5 of the Master Directions on
Frauds, no notice is given to the borrowing company or its
promoters, and directors including whole-time directors.
C They are not given an opportunity to present a defense and
even a copy of the final decision is not provided to them.
b. The classification of the borrower’s bank accounts as fraud
under the Master Directions on Frauds carries serious civil
consequences. The penal provisions under Clause 8.12 of
D the Master Directions on Frauds are also applicable to the
promoters, directors, and other whole-time directors. Once
a bank account is classified as fraudulent, it carries
significant consequences according to the Master Directions
on Frauds such as filing of a complaint with the CBI and
debarment of the promoters and directors from accessing
E institutional finance. Further, the action of the banks of
classifying an account as ‘fraud’ is stigmatic, akin to
blacklisting the borrower, which affects their right to
reputation. Thus, there is a direct impact on the fundamental
rights of the individuals concerned, as a consequence of
F the classification of an account as fraud.
c. The Master Directions on Frauds are violative of Articles
14, 19, and 21 of the Constitution of India as they debar a
company and its promoters and directors from accessing
financial and credit markets for a period of five years without
G even providing a show cause notice or opportunity of being
heard.
d. There are other facets to the principle of audi alteram
partem apart from a personal hearing. The Master
Directions on Frauds does not stand good on other facets
of audi alteram partem such as notice of allegations levelled
H
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 491
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

and evidence collected,notice of the penalty proposed, A
among others. According to the procedure laid down under
the Master Directions on Frauds, a company or its promoters
and directors are not even informed that they have been
classified as fraud and that a penalty has been imposed
upon them.
B
e. The Master Directions on Frauds are silent on whether or
not the borrower is entitled to an opportunity of being heard
after the receipt of forensic audit report and before deciding
whether the borrower’s account should be classified as
fraud. Since the decision to classify the account as fraud
entails significant civil consequences, principles of natural C
justice ought to be read into the Master Directions on Frauds.
f. Clause 8.12.5 of the Master Directions on Frauds expressly
stipulates that an opportunity of hearing be provided to third
parties. The directionsare manifestly arbitrary since on the
one hand they provide an opportunity of hearing to third D
parties, but such an opportunity is denied to borrowers.
g. Although the purpose and object of the Master Directions
on Frauds is speedy detection and reporting of fraud to law
enforcement agencies, such exigencies cannot be a valid
ground to exclude the applicability of the principles of natural E
justice.
h. The decision of this Court in State Bank of India v. Jah
Developers12 read in the requirement of natural justice
for the purposes of declaring a borrower as a willful
defaulter. The principles laid down in Jah Developers F
(supra) would be squarely applicable to the present matters.
i. The participation of the borrower during the preparation of
the forensic audit report does not in itself fulfil the
requirement of the principles of natural justice under the
Master Directions on Frauds. Those directions do not
G
expressly provide for the participation or inputs from a
borrower during the preparation of the forensic audit report,
giving rise to the possibility that in some cases, the borrower
is completely excluded from the forensic audit process.
12
(2019) 6 SCC 787 H
492 SUPREME COURT REPORTS [2023] 7 S.C.R.

A 11. On behalf of the RBI and lender banks, we have heard Mr
Tushar Mehta, Solicitor General of India, Mr Gopal Jain, Senior Counsel
and Mr Ramesh Babu M R and Mr G N Reddy, learned counsel. Counsel
submitted that the challenge to the classification of a loan account as
fraudulent on the ground of a violation of the principles of natural justice
is devoid of merit for the following reasons:
B
a. The Master Directions on Frauds were necessitated to
protect the interests of depositors and banks from the
growing instances of frauds. RBI is duly empowered to
take pre-emptive measures in public interest to ensure that
fraudulent borrowers are brought to justice and loss caused
C to the banks is mitigated. The clauses of the Master
Directions on Frauds, therefore, must be interpreted in light
of their purpose and objective, that is, timely detection and
dissemination of information and reporting about the fraud.
b. The provisions of the Master Directions on Frauds must be
D construed keeping in mind the following thresholds: (i)
justness; (ii) fairness towards the parties aggrieved; (iii)
reasonability; and (iv) proportionality between the mischief
and the corrective measure. Considering that the Master
Directions on Frauds is an economicpolicy decision, this
E Court must exercise greater latitude while construing its
provisions.
c. The procedure for classifying an account as fraud under
the Master Directions on Frauds is not arbitrary. The
classification is done only for reporting the matter to law
F enforcement agencies. The banks already have in place a
structured organizational setup to identify and investigate
fraudulent activities in bank accounts. Banks file complaints
before law enforcement agencies, who conduct an
investigation. The ultimate decision on fraud is rendered by
a competent court of law.
G
d. Principles of natural justice are not applicable at the stage
of setting the process of criminal law in motion. Since the
lender bank is an injured party in case of fraudulent accounts,
it has the right to report the crime to the law enforcement
agencies without giving an opportunity of being heard to
H
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 493
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

the fraudulent borrower. Issuing of a show cause notice to A
fraudulent borrowers may forewarn them and hamper the
investigation by law enforcement agencies.
e. Debarring fraudulent borrowers from availing bank finances
is a preventive measure without which the Master Directions
on Frauds will be rendered toothless. Such a measure is B
necessary to prevent a fraudulent borrower from
committing frauds in other banks.
f. The requirement of notice or prior hearing could be excluded
if it impedes the taking of prompt action. Further, it is not an
inviolable rule that personal hearing ought to be given in all C
cases.
g. The process for classification of a borrower as a willful
defaulter under the Master Circular on Willful Defaulters13
significantly differs from the process of classification of an
account as fraud under the Master Directions on Frauds. D
Therefore, the decision of this Court in Jah Developers
(supra) will not be applicable to the facts of the present
appeal.
D. Analysis
D.1 Regulatory Framework E
12. RBI is a statutory body constituted under Section 3 of the
Reserve Bank of India Act, 1934. The RBI has been constituted for the
purpose of taking over the management of currency from the Central
Government, regulating the issue of bank notes, keeping of reserves
with a view to securing monetary stability, and operating the currency F
and credit system of India.RBI is entrusted with the statutory obligation
of administering the provisions of the Banking Regulation Act, 194914.
The BR Act vests RBI with various powers with respect to banking
companies such as granting licenses, conducting inspections and giving
directions.
G
13. Section 35A of the BR Act empowers RBI to issue directions
to banking companies. Such directions are statutory in nature. Section
35A is extracted below:
13
Master Circular on Wilful Defaulters, 2015
14
“BR Act” H
494 SUPREME COURT REPORTS [2023] 7 S.C.R.

A “35A. Power of the Reserve Bank to give directions – (1)
Where the Reserve Bank is satisfied that –
(a) in the public interest; or
(aa) in the interest of banking policy; or
B (b) to prevent the affairs of any banking company being
conducted in a manner detrimental to the interests of the
depositors or in a manner prejudicial to the interests of the
banking company; or
(c) to secure the proper management of any banking company
C generally,
it is necessary to issue directions to banking companies generally
or to any banking company in particular, it may, from time to time,
issue such directions as it deems fit, and the banking companies
or the banking company, as the case may be, shall be bound to
D comply with such directions.
(2) The Reserve Bank may, on representation made to it or on its
own motion, modify or cancel any direction issued under sub-
section (1), and in so modifying or cancelling any direction may
impose such conditions as it thinks fit, subject to which
modifications or cancellation shall have effect.”
E
14. RBI has been issuing ‘master directions’ on diverse issues
since 2016. These directions encompass the instructions on that particular
subject. The master directions are updated whenever there is a change
in policy, and such changes get reflected on RBI’s website. In exercise
of the power conferred by Section 35A, RBI issued the Master Directions
F
on Frauds on 01 July 2016 to consolidate and update seven earlier
circulars on classification of fraud, reporting and monitoring issued
between June 2009 and January 2016. The Master Directionson Frauds
were updated on 03 July 2017. The purpose of the Master Directions is
extracted below:
G “1.3 Purpose
These directions are issued with a view to providing a framework
to banks to enable them to detect and report frauds early and
taking timely consequent actions like reporting to the Investigative
agencies so that fraudsters are brought to book early, examining
H
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 495
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

staff accountability and do effective fraud risk management. These A
directions also aim to enable faster dissemination of information
by the Reserve Bank of India (RBI) to banks on the details of
frauds, unscrupulous borrowers and related parties, based on the
banks’ reporting so that necessary safeguards / preventive
measures by way of appropriate procedures and internal checks
B
may be introduced and caution exercised while dealing with such
parties by banks.”
15. The above directions were issued to achieve specific purposes:
(i) early and timely detection and reporting of fraud; (ii) early and timely
reporting of fraud to investigative agencies; (iii) quicker dissemination of
information pertaining to details of fraud and fraudulent borrowers to C
banks; and (iv) to facilitate the adoption of preventive measures by banks.
These purposesare reflected in Clause 2.1.1 of the Master Directions
on Frauds:
“Clause 2.1.1 The Chairmen and Managing Directors/Chief
Executive Officers (CMD/CEOs) of banks must provide focus D
on the “Fraud Prevention and Management Function” to enable,
among others, effective investigation of fraud cases and
prompt as well as accurate reporting to appropriate
regulatory and law enforcement authorities including
Reserve Bank of India.” E
(emphasis supplied)
16. Clause 2.2.1 classifies frauds based on the provisions of the
Indian Penal Code, 1860:
“Clause 2.2.1 In order to have uniformity in reporting, frauds have F
been classified as under, based mainly on the provisions of the
Indian Penal Code:
a. Misappropriation and criminal breach of trust
b. Fraudulent encashment through forged instruments,
manipulation of books of account or through fictitious G
accounts and conversion of property.
c. Unauthorised credit facilities extended for reward or for
illegal gratification
d. Cash shortages.
H
496 SUPREME COURT REPORTS [2023] 7 S.C.R.

A e. Cheating and forgery
f. Fraudulent transactions involving foreign exchange
g. Any other type of fraud not coming under the specific heads
as above.”
B 17. Clause 3 advises banks to make full use of the Central Fraud
Registry15 (a database created by RBI to enable banks to share
information on fraudulent accounts) for timely identification, control,
reporting, and mitigation of risks associated with fraud. Clause 3.3 of
the said directions emphasizes theneed to provide timely information on
frauds and penalizes banks for non-adherence to timelines:
C
“3.3.1 Banks should ensure that the reporting system is suitably
streamlines so that delays in reporting of frauds, submission of
delayed and incomplete fraud reports are avoided. Banks must
fix staff accountability in respect of delays in reporting fraud cases
to RBI.
D
3.3.2. Delay in reporting of frauds and the consequent delay
in alerting other banks about the modus operandi and
dissemination of information through Caution Advice/ CFR
against unscrupulous borrowers could result in similar
frauds being perpetrated elsewhere. Banks should therefore,
E strictly adhere to the timeframe fixed in this circular for reporting
of fraud cases to RBI failing which they would be liable for penal
action prescribed under Section 47(A) of the Banking Regulation
Act, 1949.”
(emphasis supplied)
F
18. The Master Directions on Frauds provides a regulatory
framework for four types of frauds: (i) Chapter IV deals with attempted
fraud; (ii) Chapter VII deals with cheque related frauds; (iii) Chapter
VIII deals with loan frauds; and (iv) Chapter X deals with cases relating
to theft, burglary, dacoity, and bank robberies. The dispute in the present
G batch of cases is concerned with Chapter VIII dealing with loan frauds.
19. Chapter VI states that as a general rule, cases involving fraud/
embezzlement should invariably be referred to the state police or CBI.
Chapter VIII provides for more robust safeguards which ensure that

15
H “CFR”
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 497
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

banks report frauds to investigating agencies after forming an informed A
opinion. The framework for dealing with loan frauds was put in place by
a circular dated 07 May 2015. The objective of the framework has been
enumerated in Clause 8.2:
“8.2 Objective of the framework
The objective of the framework is to direct the focus of banks on B
the aspects relating to prevention, early detection, prompt reporting
to the RBI (for system level aggregation, monitoring &
dissemination) and the investigative agencies (for instituting
criminal proceedings against fraudulent borrowers) and timely
initiation of the staff accountability proceedings (for determining C
negligence or connivance, if any) while ensuring that the normal
conduct of business of the banks and their risk taking ability is not
adversely impacted and no new and onerous responsibilities are
placed on the banks. In order to achieve this objective, the
framework has stipulated time lines with the action incumbent on
a bank. The time lines / stage wise actions in the loan life-cycle D
are expected to compress the total time taken by a bank to identify
a fraud and aid more effective action by the law enforcement
agencies. The early detection of Fraud and the necessary
corrective action are important to reduce the quantum of loss
which the continuance of the Fraud may entail.” E
20. Clause 8.3 deals with Early Warning Signals16 and Red Flagged
Accounts.17 Under Clause 8.3.1, a RFA is one where a suspicion of
fraudulent activity is thrown up by the presence of one or more EWS.
EWS which should alert bank officials about wrong doings in a loan
account are set out in Annexure II. Some of those enumerated are set F
out below:
i. a. Default in undisputed payment to statutory bodies as
declared in the annual report;
b. Dishonour of high value cheques;
G
ii. Delay in payment of outstanding dues;
iii. Funds coming from other banks to liquidate the
outstanding loan amount except in the normal course;
16
“EWS”
17
“RFA” H
498 SUPREME COURT REPORTS [2023] 7 S.C.R.

A iv. Exclusive collateral charged to a number of lenders
without NOCs of existing charge holders;
v. Dispute on title to collateral securities; and
vi. Critical issues in the stock audit report.
B 21. EWS provide indications of wrongdoing which may later turn
out to be frauds. A bank is put on alert by the presence of EWS and
must use them to trigger a detailed investigation into the concerned bank
account. According to Clause 8.3.5, the officer responsible for operations
in the account should promptly report any manifestation of EWS to the
Fraud Monitoring Group18 constituted by the bank. The clause directs
C banks to take cognizance of EWS and launch a detailed investigation
into an RFA.
22. Clause 8.8 deals with situations where a bank is the sole lender.
In such situations, the FMG is entrusted with the responsibility to take a
call on whether a bank account in which EWS are observed should be
D classified as RFA. The bankis permitted to use external auditors before
taking a final call on RFA status. However, within six months the bank is
required to either lift the RFA status or classify the account as fraud in
accordance with the investigation or forensic audits.
23. Clause 8.9 deals with lending under consortium or multiple
E banking arrangements19. Clause 8.9.2 provides that all banks which have
financed a borrower under an MBA should take coordinated action based
on a commonly agreed strategy for subsequent legal actions, follow-ups,
exchange of details and information on a consistent basis. Clauses 8.9.4
and 8.9.5 provide the procedure for classification of a borrower’s account
F as fraud:
“8.9.4 The initial decision to classify any standard account or
NPA account as RFA or Fraud will be at the individual level and
it would be the responsibility of this bank to report the RFA or
Fraud status of the account on the CRILC platform so that other
banks are alerted. In case it is decided at the individual bank
G
level to classify the account as fraud straightaway at this stage
itself, the bank shall then report the fraud to RBI within 21 days
of detection and also report the case to CBI/Police, as it is being

18
“FMG”
19
H “MBA”
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 499
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

done hitherto. Further, within 15 days of RFA/Fraud classification, A
the bank which has red flagged the account or detected the
fraud would ask the consortium leader or the largest lender under
MBA to convene a meeting of the JLF to discuss the issue. The
meeting of the JLF so requisitioned must be convened
within 15 days of such a request being received. In case
B
there is a broad agreement, the account should be
classified as fraud; else based on the majority rule of
agreement amongst bank with at least 60% share in the
total lending, the account should be red flagged by all the
banks and subjected to a forensic audit commissioned or
initiated by the consortium leader or the largest lender C
under MBA. All banks, as part of the consortium of multiple-
banking arrangement, shall share the costs and provide the
necessary support for such an investigation.
8.9.5 The forensic audit must be completed within a maximum
period of three months from the date of the JLF meeting D
authorizing the audit. Within 15 days of the completion of the
forensic audit, the JLF shall reconvene and decide on the status
of the account, either by consensus or the majority rule as specified
above. In case the decision is to classify the account as a
fraud, the RFA status shall be changed to Fraud in all banks
and reported to RBI and on the CRILC platform within a E
week of the said decision. Besides, within 30 days of the
RBI reporting, the bank commissioning/ initiating the
forensic audit should lodge a complaint with the CBI on
behalf of all banks in the consortium/MBA. For this
purpose, if the bank initiating the forensic audit is a private F
sector bank, the complaint shall be lodged with the CBI by
the PSU bank with the largest exposure to the account in
the consortium/MBA. If there is no PSU bank in the
consortium/MBA or it is a solo bank lending by a private
sector bank/ foreign bank, the private bank/foreign bank
shall report to the Police as per extant instructions. This G
would be in addition to the complaint already lodged by the first
bank which had detected the fraud and informed the consortium/
MBA.”
(emphasis supplied)
H
500 SUPREME COURT REPORTS [2023] 7 S.C.R.

A 24. Clause 8.9.4 stipulates that the initial decision to classify an
account as RFA or fraud vests with the individual bank. Once the bank
classifies the account as fraud, it is the responsibility of that bank to
report the RFA or fraud status on the account on the Central Repository
of Information on Large Credits20 platform to alertother banks. In case
the individual bank decides to straightaway classify the account as fraud,
B
it is obligated to report the fraud to RBI within 21 days of detection and
also report the case to CBI/Police. Further, within 15 days the individual
bank could ask the consortium leader or the largest lender under the
MBA to convene a meeting ofthe JLF to discuss the issue. The meeting
of the JLF has to be convened within 15 days of the request being
C received. The JLF can classify an account as fraud in case there is a
broad consensus. Otherwise, the clause indicates that based on an
agreement amongst banks with at least a 60 percent share in total lending,
the account should be red-flagged by all banks and subjected to forensic
audit commissioned or initiated by the consortium leader or the largest
lender under MBA.
D
25. Clause 8.9.5 states that the forensic audit has to be completed
within 3 months from the date of the JLF meeting authorizing the audit.
Within 15 days of the completion of the audit, the JLF has to decide to
classify the account as fraud and report it to the RBI. The clause also
requires the bank commissioning the audit to lodge a complaint with CBI
E on behalf of all banks in the consortium within 30 days of reporting to RBI.
26. Clause 8.11 deals with the filing of complaints to law
enforcement agencies. Clause 8.11.1 requires banks to lodge complaints
with law enforcement agencies immediately on detecting fraud. The
clause enjoins banks to avoid delay in filing a complaint as it may result
F in loss of documents, unavailability of witnesses, absconding borrowers,
loss of money trail and asset tripping by fraudulent borrowers.
27. The penal measures for fraudulent borrowers are set out in
Clause 8.12 which reads as follows:
8.12 Penal measures for fraudulent borrowers
G
8.12.1 In general, the penal provisions as applicable to wilful
defaulters would apply to the fraudulent borrowers including
the promoter director(s) and other whole time directors of
the company insofar as raising of funds from the banking

H 20
“CRILC”
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 501
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

system or from capital markets by companies with which A
they are associated is concerned, etc. In particular,
borrowers who have defaulted and have also committed a
fraud in the account would be debarred from availing bank
finance from Scheduled Commercial Banks, Development
Financial Institutions, Government owned NBFCs,
B
Investment Institutions, etc., for a period of five years from
the date of full payment of the defrauded amount. After this
period, it is for individual institutions to take a call on whether to
lend to such a borrower. The penal provisions would apply to non-
wholetime directors (like nominee directors and independent
directors) only in rarest of cases based on conclusive proof of C
their complicity.
8.12.2 No restructuring or grant of additional facilities may
be made in the case of RFA or fraud accounts. However, in
cases of fraud/malfeasance where the existing promoters are
replaced by new promoters and the borrower company is totally D
delinked from such erstwhile promoters/management, banks and
JLF may take a view on restructuring of such accounts based on
their viability, without prejudice to the continuance of the criminal
actions against the erstwhile promoters/management.
8.12.3 No compromise settlement involving a fraudulent borrower E
is allowed unless the conditions stipulate that the criminal complaint
will be continued.
8.12.4 In addition to above borrower – fraudsters, third parties
such as builders, warehouse/ cold storage owners, motor vehicle/
tractor dealers, travel agents, etc. and professionals such as F
architects, valuers, chartered accountants, advocates, etc. are also
held accountable if they play a vital role in credit sanction/
disbursement or facilitated the perpetration of frauds. Banks are
advisable to report to Indian Banks Association (IBA) the details
of such parties involved in frauds.
G
8.12.5 Before reporting to IBA, banks have to satisfy themselves
of the involvement of third parties concerned and also provide
them with an opportunity of being heard. In this regard the banks
should follow normal procedures and the processes followed should
be suitably recorded. On the basis of such information, IBA would,
H
502 SUPREME COURT REPORTS [2023] 7 S.C.R.

A in turn, prepare caution lists of such third parties for circulation
among the banks.”
(emphasis supplied)
28. Clause 8.12.1 provides that the penal provisions as applicable
to willful defaulters would apply to fraudulent borrowers as regards the
B raising of funds from the banking system and financial institutions.
Importantly, under the clause, fraudulent borrowers include promoters,
directors, and other whole-time directors of the borrowing company. It
debars fraudulent borrowers from availing banking finance from
scheduled commercial banks, development financial institutions,
C government owned NBFCs, investment institutions, etc. for a period of
five years from the date of full payment of the defrauded amount. Even
after the completion of the five-year period, it is for the individual financial
institutions to decide whether to lend to fraudulent borrowers, including
directors and promoters of the borrowing company. Additionally, under
Clause 8.12.2, fraudulent borrowers are denied restructuring or grant of
D additional facilities by banks and other such financial institutions.
D.2 Audi Alteram Partem
29. We need to bear in mind that the principles of natural justice
are not mere legal formalities. They constitute substantive obligations
that need to be followed by decision-making and adjudicating authorities.
E
The principles of natural justice act as a guarantee against arbitrary
action, both in terms of procedure and substance, by judicial, quasi-judicial,
and administrative authorities. Two fundamental principles of natural
justice are entrenched in Indian jurisprudence: (i) nemo judex in causa
sua, which means that no person should be a judge in their own cause;
F and (ii) audi alteram partem, which means that a person affected by
administrative, judicial or quasi-judicial action must be heard before a
decision is taken.The courts generally favor interpretation of a statutory
provision consistent with the principles of natural justice because it is
presumed that the statutory authorities do not intend to contravene
fundamental rights. Application of the said principles depends on the
G
facts and circumstances of the case, express language and basic scheme
of the statute under which the administrative power is exercised, the
nature and purpose for which the power is conferred, and the final effect
of the exercise of that power.21
21
H Union of India v. Col. J N Sinha, (1970) 2 SCC 458
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 503
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

30. While the borrowers argue that the actions of banks in A
classifying borrower accounts as fraud according to the procedure laid
down under the Master Directions on Frauds is in violation of the principles
of natural justice, the RBI and lender banks argue that these principles
cannot be applied at the stage of reporting a criminal offence to
investigating agencies. At the outset, we clarify that principles of natural
B
justice are not applicable at the stage of reporting a criminal offence,
which is a consistent position of law adopted by this Court. In Union of
India v. W N Chadha, a two-judge bench of this Court held that that
providing an opportunity of hearing to the accused in every criminal
case before taking any action against them would “frustrate the
proceedings, obstruct the taking of prompt action as law demands, defeat C
the ends of justice and make the provisions of law relating to the
investigation lifeless, absurd, and self-defeating.”22 Again, a two-judge
bench of this Court in Anju Chaudhary v. State of UP23 has reiterated
that the Code of Criminal Procedure, 1973 does not provide for right of
hearing before the registration of an FIR.
D
31. Chapter VIII of the Master Directions on Fraud provides
detailed procedures to be followed by the banks before forming an
opinion to proceed with a criminal complaint against the borrowers.
Under the said chapter, the lender banks have to report a borrower to
the CBI after classifying the borrower’s account as fraudulent.
However, the classification of the borrower’s account does not E
simpliciter lead to reporting of criminal complaint with the enforcement
authorities; it also entails penal consequences for the borrowers as
laid down under Clause 8.12.
32. The process of forming an informed opinion under the Master
Directions on Frauds is administrative in nature. This has also been acceded F
to by RBI and lender banks in their written submissions. It is now a
settled principle of law that the rule of audi alteram partem applies to
administrative actions, apart from judicial and quasi-judicial functions.24
It is also a settled position in administrative law that it is mandatory to
provide for an opportunity of being heard when an administrative action G
results in civil consequences to a person or entity.
22
1993 Supp (4) SCC 260
23
(2013) 6 SCC 384
24
A K Kraipak v. Union of India, (1969) 2 SCC 262; Governing Body, St Anthony’s
College, Shillong and Ors v. Rev. Fr. Paul Petta of Shillong, (1988) Supp SCC 676; Uma
Nath Pandey and Ors v. State of Uttar Pradesh, (2009) 12 SCC 40. H
504 SUPREME COURT REPORTS [2023] 7 S.C.R.

A 33. In State of Orissa v. Dr (Miss) Binapani Dei25, a two-
judge bench of this Court held that every authority which has the power
to take punitive or damaging action has a duty to give a reasonable
opportunity to be heard. This Court further held that an administrative
action which involves civil consequences must be made consistent with
the rules of natural justice:
B
“9. […] The rule that a party to whose prejudice an order is
intended to be passed is entitled to a hearing applies alike to judicial
tribunals and bodies of persons invested with authority to adjudicate
upon matters involving civil consequences. It is one of the
fundamental rules of our constitutional set-up that every citizen is
C
protected against exercise of arbitrary authority by the State or
its officers. Duty to act judicially would therefore arise from the
very nature of the function intended to be performed: it need not
be shown to be super-added. If there is power to decide and
determine to the prejudice of a person, duty to act judicially is
D implicit in the exercise of such power. If the essentials of justice
be ignored and an order to the prejudice of a person is made, the
order is a nullity. That is a basic concept of the rule of law and
importance thereof transcends the significance of a decision in
any particular case.”
E 34. In Maneka Gandhi v. Union of India26, a seven-judge bench
of this court held that any person prejudicially affected by a decision of
the authority entailing civil consequences must be given an opportunity
of being heard. This has been reiterated in a catena of decisions of this
Court. In view of the settled position of law, the next question that arises
F before us is the scope and definition of the phrase ‘civil consequences’.
35. In Mohinder Singh Gill v. Chief Election Commissioner,
New Delhi27, a Constitution Bench of this Court held that ‘civil
consequences’ cover infraction of not merely property or personal rights
but of civil liberties, material deprivations, and non-pecuniary damages.
G In that case, the Court held that denial of a democratic right to cast a
vote inflicts civil consequences. In D K Yadav v. J M A Industries28,

25
AIR 1967 SC 1269
26
(1978) 1 SCC 248
27
(1978) 1 SCC 405
28
H (1993) 3 SCC 259
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 505
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

a three-judge bench of this Court observed that “everything that affects A
a citizen in his civil life inflicts a civil consequence.”
36. In Canara Bank v. V K Awasthy29, a two-judge bench of
this Court succinctly summarized the history, scope, and application of
the principles of natural justice to administrative actions involving civil
consequences in the following terms: B
14. Concept of natural justice has undergone a great deal of change
in recent years. Rules of natural justice are not rules embodied
always expressly in a statute or in rules framed thereunder. They
may be implied from the nature of the duty to be performed under
a statute. What particular rule of natural justice should be implied C
and what its context should be in a given case must depend to a
great extent on the fact and circumstances of that case, the
framework of the statute under which the enquiry is held. The old
distinction between a judicial act and an administrative act has
withered away. Even an administrative order which involves
civil consequences must be consistent with the rules of D
natural justice. The expression “civil consequences”
encompasses infraction of not merely property or personal
rights but of civil liberties, material deprivations and non-
pecuniary damages. In its wide umbrella comes everything
that affects a citizen in his civil life. E
(emphasis supplied)
There is a consistent pattern of judicial thought that civil
consequences entail infractions not merely of property or personal rights,
but also of civil liberties, material deprivations, and non-pecuniary
damages. Every order or proceeding which involves civil consequences F
or adversely affects a citizen should be in accordance with the principles
of natural justice.
37. The next question that requires our consideration is whether
the classification of a borrower’s account as fraudulent under the Master
Directions on Frauds entails civil consequences to borrowers. G
38. The RBI and lender banks have argued that the civil
consequences contemplated in Clause 8.12.1 of the Master Directions
on Frauds are reasonable. Under the said clause, the borrower, including
29
(2005) 6 SCC 321 H
506 SUPREME COURT REPORTS [2023] 7 S.C.R.

A the promoters and directors of the company, are barred from availing
credit from financial markets and credit markets for a period of five
years, and possibly even beyond. According to RBI and lender banks,
such a restriction has to be perceived from the perspective of public
interest. While acknowledging that the procedure which has been laid
down in the Master Directions on Frauds is conceived in public interest,
B
to protect the banking system, we cannot ignore the serious civil
consequences which emanate to the borrowers.
39. Clause 8.12 of the Master Directions on Frauds deals with
the penal measures for borrowers. Clause 8.12.1 provides that penal
provisions as applicable to wilful defaulters would apply to fraudulent
C
borrowers, including the promoters and directors of the borrower
company. The consequences that apply to a wilful defaulter under the
Master Circular on Wilful Defaulters have been culled out in Jah
Developers (supra):
“9. […] serious consequences follow after a person has been
D
classified as a wilful defaulter. These consequences are as follows:
(a) No additional facilities to be granted by any bank/financial
institution [para 2.5(a)].
(b) Entrepreneurs/Promoters would be barred from institutional
E finance for a period of 5 years [para 2.5(a)].
(c) Any legal proceedings can be initiated, including criminal
complaints [para 2.5(b)].
(d) Banks and financial institutions to adopt proactive approach in
changing the management of the wilful defaulter [para 2.5(c)].
F
(e) Promoter/Director of wilful defaulter shall not be inducted by
another borrowing company [para 2.5(d)].
(f) As per Section 29-A of the Insolvency and Bankruptcy Code,
2016, a wilful defaulter cannot be a resolution applicant.”
G 40. In addition to the above consequences, borrowers are also
liable to suffer the following consequences under the Master Directions
on Frauds:
a) No restructuring may be made in the case of an RFA or
fraud accounts (clause 8.12.2)
H
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 507
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

b) No compromise on settlement involving a fraudulent A
borrower is allowed unless the conditions stipulate that the
criminal complaint will be continued (clause 8.12.3)
The above consequences show that the classification of a
borrower’s account as fraud under the Master Directions on Frauds has
difficult civil consequences for the borrower. The classification of an B
account as fraud not only results in reporting the fact to investigating
agencies, but has other penal and civil consequences as specified in
Clauses 8.12.1 and 8.12.3. The borrowers have placed reliance on Jah
Developers (supra) to submit that debarring them from accessing
institutional finance under Clause 8.12.1 of the Master Directions affects
C
the fundamental right of the borrower to carry on business. On the other
hand, the RBI and lender banks have argued that reliance on the
observations in Jah Developers (supra) is misplaced because the
decision dealt with the classification of a borrower as wilful defaulter,
whereas the present batch of appeals deal with the classification of a
borrower’s account as fraud. D
41. The question in Jah Developers (supra) was whether a
person who is declared to be a wilful defaulter according to the procedure
laid down in the Master Circular on Wilful Defaulters is entitled to be
represented by a lawyer of their choice before sucha declaration is made.
The Court held that a borrower does not have the right to be represented E
by a lawyer in the course of in-house proceedings envisaged in Paragraph
3 of the Master Circular on Wilful Defaulters. Paragraph 3 of the Master
Circular on Wilful Defaulters provides a two-tier process for identification
of a wilful defaulter. At the first stage, a First Committee headed by an
Executive Director or equivalent and consisting of two other senior
F
officers of the bank must, after examining the evidence of wilful default
and concluding that wilful default has occurred, issue a show-cause notice
to the concerned borrowers and promoters/ whole-time directors calling
for their submissions. The First Committee has to consider the
submissions before recording the fact of wilful default with reasons. If
the Committee deems it necessary, it could also provide a personal hearing G
to the borrower and the promoter/ whole-time director of the borrowing
company. The second stage is that the order of the First Committee is
reviewed by another Committee, known as the Review Committee. Thus,
it is clear that the procedure for declaration of a borrower as a wilful
defaulter is different from the procedure envisaged under the Master
H
508 SUPREME COURT REPORTS [2023] 7 S.C.R.

A Directions on Frauds for classifying a borrower’s account as fraud.
However, by virtue of Clause 8.12.1 of the Master Directions on Frauds,
the penal provisions applicable to wilful defaulters also apply to
fraudulent borrowers. Thus, although the procedure adopted for
declaration of a wilful defaulter is different from that envisaged for
classifying the borrower’s account as fraud, they will face similar
B
consequences. In fact, as mentioned above, the borrowers’ accounts
classified as fraud under the Master Directions on Frauds will face
certain additional consequences which have been laid down in Clauses
8.12.2 and 8.12.3. Since the consequences flowing from the two
circulars are similar, the observations in Jah Developers (supra) on
C the effect of declaring a borrower as wilful defaulter will be squarely
applicable to the present case. The observations of the Court are extracted
below:
24. However, we are of the view that Article 19(1)(g) is
attracted in the facts of the present case as the moment a
D person is declared to be a wilful defaulter, the impact on its
fundamental right to carry on business is direct and
immediate. This is for the reason that no additional facilities
can be granted by any bank/financial institutions, and
entrepreneurs/promoters would be barred from institutional
finance for five years. Banks/financial institutions can even
E change the management of the wilful defaulter, and a
promoter/director of a wilful defaulter cannot be made
promoter or director of any other borrower company. Equally,
under Section 29-A of the Insolvency and Bankruptcy Code, 2016,
a wilful defaulter cannot even apply to be a resolution applicant.
F Given these drastic consequences, it is clear that the
Revised Circular, being in public interest, must be
construed reasonably.
(emphasis supplied)
In Jah Developers (supra), this Court construed the Master
G Circular on Wilful Defaulters by harmonizing it with the principles of
natural justice. Particularly, it was directed that: (i) the First Committee
must give its order to the borrower as soon as possible; (ii) the Borrower,
thereafter, can file a written representation against the order of First
Committee to the Review Committee; and (iii) the Review Committee
H must pass a reasoned order which must be provided to the borrower.
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 509
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

42. Classification of the borrower’s account as fraud under the A
Master Directions on Frauds virtually leads to a credit freeze for the
borrower, who is debarred from raising finance from financial markets
and capital markets. The bar from raising finances could be fatal for the
borrower leading to its ‘civil death’ in addition to the infraction of their
rights under Article 19(1)(g) of the Constitution. Since debarring disentitles
B
a person or entity from exercising their rights and/or privileges, it is
elementary that the principles of natural justice should be made applicable
and the person against whom an action of debarment is sought should be
given an opportunity of being heard.Indeed, debarment is akin to
blacklisting a borrower from availing credit. Black’s Law Dictionary30
explains the term ‘blacklist’ has been defined in the following terms: C
“A list of persons marked out for special avoidance, antagonism,
or enmity on the part of those who prepare the list or those among
whom it is intended to circulate; as where a trades-union
“blacklists” workmen who refuse to conform to its rules, or where
a list of insolvent or untrustworthy persons is published by D
a commercial agency or mercantile association.”
(emphasis supplied)
Similarly, P Ramanatha Aiyar’s Law Lexicon31 defines the term
“blacklist” as follows:
E
“Black List is a list of persons or firms against whom its compiler
would warn the public, or some section of the public; a list of
persons unworthy of credit, or with whom it is not advisable
to make contracts. Thus the official list of defaulters on the
Stock Exchange is a black list. To put a man’s name on such a
black list without lawful cause is actionable; and the further F
publication of such a list will be restrained by injunction.”
(emphasis supplied)
43. A blacklist is: (i) a list of insolvent or untrustworthy persons
published by a commercial agency or mercantile association; and (ii) a
G
list of persons unworthy of credit, or with whom it is not advisable to
make contracts. Before this Court, the RBI and lender banks have

30
Black’s Law Dictionary, 5 thedn (1979)
31
P Ramanatha Aiyar, ‘The Law Lexicon: The Encyclopedic Law Dictionary’ (1997
edn) H
510 SUPREME COURT REPORTS [2023] 7 S.C.R.

A submitted that debarring borrowers from accessing institutional finance
is necessary to not only prevent the same persons from committing frauds
in other banks, but also to proscribe banks from dealing with unscrupulous
borrowers in public interest. Debarring a borrower under Clause 8.12.1
of the Master Directions on Frauds is akin to blacklisting the borrower
for being untrustworthy and unworthy of credit by the banks. This Court
B
has consistently held that an opportunity of a hearing ought to be provided
before a person is put on a blacklist.
44. In Erusian Equipment & Chemicals Ltd v. State of West
Bengal32, the issue before this Court was whether a person is entitled
to a notice to be heard before being blacklisted by the government. This
C Court held that since blacklisting affects the privileges of the blacklisted
person, fundamentals of fair play require that such a person be provided
an opportunity of being heard:
“20. Blacklisting has the effect of preventing a person from the
privilege and advantage of entering into lawful relationship with
D the Government for purposes of gains. The fact that a disability is
created by the order of blacklisting indicates that the relevant
authority is to have an objective satisfaction. Fundamentals of
fair play require that the person concerned should be given an
opportunity to represent his case before he is put on the blacklist.”
E 45. In Joseph Vilangandan v. Executive Engineer33, the issue
before the two-judge pertained to debarment of a government contractor
from seeking any further contract with the government without providing
an opportunity of being heard. The material sentence of the notice there
read as follows:
F “You are therefore requested to show cause ... why the work
may not be arranged otherwise at your risk and loss, through other
agencies after debarring you as a defaulter....”
(emphasis original)
This Court applied the position of law in Erusian Equipment &
G
Chemicals Ltd (supra) to hold that the Executive Engineer ought to
have given the contractor adequate opportunity to represent against the
proposed action of debarment.

32
(1975) 1 SCC 70
33
H (1978) 3 SCC 36
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 511
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

46. In Raghunath Thakur v. State of Bihar34, a two-judge bench A
of this Court held that since blacklisting entails civil consequences an
order of blacklisting should be issued only after following the principles
of natural justice:
“4. […] Insofar as the contention that there is no requirement
specifically of giving any notice is concerned, the respondent is B
right. But it is an implied principle of the rule of law that any order
having civil consequence should be passed only after following
the principles of natural justice. It has to be realised that blacklisting
any person in respect of business ventures has civil consequence
for the future business of the person concerned in any event.
Even if the rules do not express so, it is an elementary principle of C
natural justice that parties affected by any order should have right
of being heard and making representations against the order. […]”
47. In Gorkha Security Services v. Govt (NCT of Delhi)35,
the issue before this Court pertained to the form and content of a show-
cause notice that is required to be served before blacklisting the noticee. D
A two-judge bench of this Court observed that that an order blacklisting
a person is stigmatic. The relevant observation is extracted below:
16. It is a common case of the parties that the blacklisting has to
be preceded by a show-cause notice. Law in this regard is firmly
grounded and does not even demand much amplification. The E
necessity of compliance with the principles of natural justice by
giving the opportunity to the person against whom action of
blacklisting is sought to be taken has a valid and solid rationale
behind it. With blacklisting, many civil and/or evil
consequences follow. It is described as “civil death” of a F
person who is foisted with the order of blacklisting. Such
an order is stigmatic in nature and debars such a person
from participating in government tenders which means
precluding him from the award of government contracts.
(emphasis supplied) G
48. Classification ofa borrower’s account as fraud has the effect
of preventing the borrower from accessing institutional finance for the

34
(1989) 1 SCC 229
35
(2014) 9 SCC 105 H
512 SUPREME COURT REPORTS [2023] 7 S.C.R.

A purpose of business. It also entails significant civil consequences as it
jeopardizes the future of the business of the borrower. Therefore, the
principles of natural justice necessitate giving an opportunity of a hearing
before debarring the borrower from accessing institutional finance under
Clause 8.12.1 of the Master Directions on Frauds. The action of classifying
an account as fraud not only affects the business and goodwill of the
B
borrower, but also the right to reputation.
49. In State of Maharashtra v. Public Concern for Governance
Trust36, a two-judge bench of this Court held that a decision taken by
any authority affecting the right to reputation of an individual has civil
consequences. Therefore, in such situations the principles of natural
C justice would come into play. The Court held that any order or decision
of the authority adversely affecting the personal reputation of an individual
must be taken after following the principles of natural justice:
“41. It is thus amply clear that one is entitled to have and preserve
one’s reputation and one also has a right to protect it. In case any
D authority in discharge of its duties fastened upon it under the law,
travels into the realm of personal reputation adversely affecting
him, it must provide a chance to him to have his say in the matter.
In such circumstances, right of an individual to have the safeguard
of the principles of natural justice before being adversely
E commented upon is statutorily recognised and violation of the same
will have to bear the scrutiny of judicial review.”
50. The RBI and lender banks have relied on Peerless General
Finance and Investment Co. Ltd v. Reserve Bank of India 37,
Joseph Kuruvilla Vellukunnel v. Reserve Bank of India38, and
F Internet and Mobile Association of India v. Reserve Bank of
India39 to submit that the Master Directions on Frauds are akin to a
statutory regulation and a decision on economic policy, which must be
accorded a level of deference.
51. The competence of the RBI to issue the Master Directions on
G Frauds is not a bone of contention in these appeals. The RBI, in its
estimation, has the power to determine and frame economic measures

36
(2007) 3 SCC 587
37
(1992) 2 SCC 343
38
AIR 1962 SC 1371
39
H (2020) 10 SCC 274
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 513
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

in the public interest to ensure the proper management of banking A
companies. The point however is that the implementation of a decision
to secure the health of banking companies must comport with the due
process of law. The civil consequences which follow upon a classification
of a borrower’s account as fraud are serious and prejudicial to the
interests of a borrower. Principles of fair play require that borrower
B
ought to be given an opportunity of being heard before classifying the
account as fraud in accordance with the procedure laid down under the
Master Directions on Frauds.
D.3 No implied exclusion of audi alteram partem
52. The RBI and the lender banks have contended that the Master C
Directions on Frauds impliedly exclude the right to be heard. The objective
of the Master Directions on Frauds is to ensure timely detection and
reporting of cases of fraud to alert other banks and initiate criminal
proceedings. The Directions contemplate an opportunity of hearing to a
third party who is involved in the commission of fraudulent activity, but
do not explicitly provide for hearing to a borrower. Thus, it is urged that D
hearing to the borrowers is excluded by necessary implication.
53. The Master Directions on Frauds do not expressly exclude a
right of hearing to the borrowers before action to class their account as
frauds is initiated. The principles of natural justice can be read into a
statute or a notification where it is silent on granting an opportunity of a E
hearing to a party whose rights and interests are likely to be affected by
the orders that may be passed.
54. In a decision of a three-judge bench of this Court in Swadeshi
Cotton Mills v. Union of India40, the issue was whether the Central
government was required to comply with the requirements of audi alteram F
partem before it took over the management of an industrial undertaking
under Section 18-AA(1)(a) of the Industries (Development and
Regulation) Act, 195141. R S Sarkaria, J speaking for the majority
consisting of himself and D A Desai, J laid down the following principles
of law: G
44. In short, the general principle — as distinguished from an
absolute rule of uniform application — seems to be that where a
statute does not, in terms, exclude this rule of prior hearing but
40
(1981) 1 SCC 664
41
“IDR Act, 1951” H
514 SUPREME COURT REPORTS [2023] 7 S.C.R.

A contemplates a post-decisional hearing amounting to a full review
of the original order on merits, then such a statute would be
construed as excluding the audi alteram partem rule at the pre-
decisional stage. Conversely, if the statute conferring the
power is silent with regard to the giving of a pre-decisional
hearing to the person affected and the administrative
B
decision taken by the authority involves civil consequences
of a grave nature, and no full review or appeal on merits
against that decision is provided, courts will be extremely
reluctant to construe such a statute as excluding the duty
of affording even a minimal hearing shorn of all its formal
C trappings and dilatory features at the pre-decisional stage,
unless, viewed pragmatically, it would paralyse the
administrative progress or frustrate the need for utmost
promptitude. In short, this rule of fair play “must not be
jettisoned save in very exceptional circumstances where
compulsive necessity so demands”. The court must make
D
every effort to salvage this cardinal rule to the maximum
extent possible, with situational modifications. But, to recall
the words of Bhagwati, J., the core of it must, however, remain,
namely, that the person affected must have reasonable opportunity
of being heard and the hearing must be a genuine hearing and not
E an empty public relations exercise.
(emphasis supplied)
55. The main point for consideration before this Court in Swadeshi
Cotton Mills (supra) was whether the use of the phrase “immediate
action is necessary” under Section 18-AA(1)(a) of the IDR Act impliedly
F excluded the application of the audi alteram partem rule. Sarkaria, J held
that the expression “immediate action”, construed in light of the overall
context, object and reasons of the legislation,did not necessarily indicate
an intention to exclude the requirement of prior hearing. The Court held
that the use of the phrase does not exclude the duty to comply with the
G audi alteram partem rule:
“77. The second reason — which is more or less a facet of
the first — for holding that the mere use of the word
“immediate” in the phrase “immediate action is necessary”,
does not necessarily and absolutely exclude the prior
H application of the audi alteram partem rule, is that immediacy
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 515
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

or urgency requiring swift action is a situational fact having A
a direct nexus with the likelihood of adverse effect on fall
in production. And, such likelihood and the urgency of action
to prevent it, may vary greatly in degree. The words “likely
to affect. . .production” used in Section 18-AA(1)(a) are
flexible enough to comprehend a wide spectrum of situations
B
ranging from the one where the likelihood of the happening
of the apprehended event is imminent to that where it may
be reasonably anticipated to happen sometime in the near
future. Cases of extreme urgency where action under Section
18-AA(1)(a) to prevent fall in production and consequent injury
to public interest, brooks absolutely no delay, would be rare. In C
most cases, where the urgency is not so extreme, it is practicable
to adjust and strike a balance between the competing claims of
hurry and hearing.”
(emphasis supplied)
Sarkaria, J observed that that the owner of an undertaking is entitled D
to a fair hearing at the pre-decisional stage because the power of the
Central government under Section 18AA-(1)(a) to take over is far-
reaching and adversely affects the rights and interests of owners.
56. In Mangilal v. State of Madhya Pradesh42, a two-judge
bench of this Court held that the principles of natural justice need to be E
observed even if the statute is silent in that regard. In other words, a
statutory silence should be taken to imply the need to observe the
principles of natural justice where substantial rights of parties are affected:
10. Even if a statute is silent and there are no positive words
in the Act or the Rules made thereunder, there could be F
nothing wrong in spelling out the need to hear the parties
whose rights and interest are likely to be affected by the
orders that may be passed, and making it a requirement to
follow a fair procedure before taking a decision, unless the
statute provides otherwise. The principles of natural justice G
must be read into unoccupied interstices of the statute,
unless there is a clear mandate to the contrary. No form or
procedure should ever be permitted to exclude the
presentation of a litigant’s defence or stand. Even in the
42
(2004) 2 SCC 447 H
516 SUPREME COURT REPORTS [2023] 7 S.C.R.

A absence of a provision in procedural laws, power inheres in every
tribunal/court of a judicial or quasi-judicial character, to adopt
modalities necessary to achieve requirements of natural justice
and fair play to ensure better and proper discharge of their duties.
Procedure is mainly grounded on the principles of natural justice
irrespective of the extent of its application by express provision in
B
that regard in a given situation. It has always been a cherished
principle. Where the statute is silent about the observance
of the principles of natural justice, such statutory silence is
taken to imply compliance with the principles of natural
justice where substantial rights of parties are considerably
C affected. The application of natural justice becomes
presumptive, unless found excluded by express words of
statute or necessary intendment. Its aim is to secure justice
or to prevent miscarriage of justice. Principles of natural
justice do not supplant the law, but supplement it. These
rules operate only in areas not covered by any law validly made.
D
They are a means to an end and not an end in themselves. […]
(emphasis supplied)
57. As a counter to the above legal position, the RBI and lender
banks have contended that the principles of natural justice could be
E excluded in cases where there is a requirement of promptitude or exigent
action. In support of the submission, the RBI and banks have relied upon
Ajit Kumar Nag v. General Manager (PJ), Indian Oil Corp. Ltd43,
which in turn relied on the Constitution Bench decision of this Court in
Union of India v. Tulsiram Patel.44 In Tulsiram Patel (supra), this
Court observed that a right to a prior notice and an opportunity to be
F heard could be excluded if allowing for such a right would obstruct the
taking of prompt action:
101. […] So far as the audi alteram partem rule is concerned,
both in England and in India, it is well established that where a
right to a prior notice and an opportunity to be heard before an
G order is passed would obstruct the taking of prompt action, such a
right can be excluded. This right can also be excluded where the
nature of the action to be taken, its object and purpose and the
scheme of the relevant statutory provisions warrant its exclusion;
43
(2005) 7 SCC 764
H 44
(1985) 3 SCC 398
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 517
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

nor can the audi alteram partem rule be invoked if importing it A
would have the effect of paralysing the administrative process or
where the need for promptitude or the urgency of taking action so
demands, […]
58. The borrowers have dwelt on Clause 8.9.6 of the Master
Directions on Frauds according to which the entire exercise commencing B
from the detection of fraud by an individual bank upto the declaration of
fraud by the JLF is to be completed within six months. Clause 8.9.6
provides thus:
“8.9.6 It may be noted that the overall time allowed for the entire
exercise to be completed is six months from the date when the C
first member bank reported the account as RFA or Fraud on the
CRILC platform.”
59. In K I Shephard v. Union of India45, this Court was called
upon to decide the validity of amalgamation schemes drawn by the RBI,
whereunder three private banks were amalgamated with nationalized
D
banks. At the time of merger, some employees of the private banks
were excluded from employment as their services were not taken over
by the transferee banks in view of allegations of misconduct against
them. While noting the fact that the entire process of amalgamation was
statutorily required to be completed within 6 months, this Court held that
the said time frame provides scope for granting an opportunity of hearing E
to the affected employees:
15. […] We do not think in the facts of the case there is any
justification to hold that rules of natural justice have been ousted
by necessary implication on account of the time frame. On the
other hand we are of the view that the time limited by statute F
provides scope for an opportunity to be extended to the intended
excluded employees before the scheme is finalised so that a hearing
commensurate to the situation is afforded before a section of the
employees is thrown out of employment.
60. The decision of this Court in Swadeshi Cotton Mills (supra)
G
and K I Shephard (supra) demonstrates that the exigency of a situation
is contextual. The Court must lean in favour of reading in the principles
of natural justice when faced with a regulatory silence. Any exclusion
must be confined to the narrowest possible limits. The application of the
45
(1987) 4 SCC 431 H
518 SUPREME COURT REPORTS [2023] 7 S.C.R.

A requirement of a prior hearing could be excluded only in situations where
importing it would have the effect of paralyzing the entire process. As
mentioned above, Clause 8.9.6 of the Master Directions on Frauds
contemplates that the procedure for the classification of an account as
fraud has to be completed within six months. The procedure adopted
under the Master Directions on Frauds provides enough time to the banks
B
to deliberate before classifying an account as fraud. During this interval,
the banks can serve a notice to the borrowers, and give them an opportunity
to submit their reply and representation regarding the findings of the
forensic audit report. Given the wide time frames contemplated under
the Master Directions on Frauds as well as the nature of the procedure
C adopted, it is reasonably practicable for banks to provide an adequate
opportunity of a hearing to the borrowers before classifying their account
as fraud. The exclusion contemplated in the decision of this Court in
Tulsiram Patel (supra) would not be applicable because giving an
opportunity of a hearing to the borrowers will not obstruct the taking of
prompt action under the Master Directions on Frauds.
D
61. The RBI and lender banks have further submitted that the
requirement of natural justice is already fulfilled under the Master
Directions on Frauds as the borrower is allowed to participate during the
preparation of the forensic audit report. On the other hand, the borrowers
have submitted that the Master Directions do not expressly provide for
E participation of the borrowers during forensic audit report. It was also
submitted that merely seeking inputs of borrowers during the preparation
of the forensic audit report does not satisfy the requirements of the
principles of natural justice as the borrowers should also be heard before
classifying them as fraud.
F 62. In Keshav Mills Co. Ltd. v. Union of India46, this Court
was dealing with the issue of a takeover of a company by the government
under the IDR Act, 1951 after completion of a full investigation into the
affairs of the company. The issue was whether the report of an
investigating body appointed by an administrative authority should be
G made available to the person concerned before the authority takes a
decision upon that report. While deciding to lay down a general principle,
this Court observed that there may be certain situations where an
investigation report is required to be furnished to the concerned party to
make an effective representation about the proposed action:

H 46
(1973) 1 SCC 380
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 519
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

21. In our opinion it is not possible to lay down any general principle A
on the question as to whether the report of an investigating body
or of an inspector appointed by an administrative authority should
be made available to the persons concerned in any given case
before the authority takes a decision upon that report. The answer
to this question also must always depend on the facts and
B
circumstances of the case. It is not at all unlikely that there
may be certain cases where unless the report is given the
party concerned cannot make any effective representation
about the action that Government takes or proposes to take
on the basis of that report. Whether the report should be
furnished or not must therefore depend in every individual C
case on the merits of that case. We have no doubt that in the
instant case non-disclosure of the report of the Investigating
Committee has not caused any prejudice whatsoever to the
appellants.
(emphasis supplied) D
63. In Swadeshi Cotton Mills (supra), this Court held that a
company is entitled to an opportunity to explain the evidence collected
against it and represent why the proposed action should not be taken:
85. The contention does not appear to be well founded. Firstly,
this documentary evidence, at best, shows that the Company was E
in debt and the assets of some of its “units” had been hypothecated
or mortgaged as security for those debts. Given an opportunity
the Company might have explained that as a result of this
indebtedness there was no likelihood of fall in production, which
is one of the essential conditions in regard to which the Government F
must be satisfied before taking action under Section 18A-A(1)(a).
Secondly, what the rule of natural justice required in the
circumstances of this case, was not only that the Company
should have been given an opportunity to explain the
evidence against it, but also an opportunity to be informed
of the proposed action of take over and to represent why it G
be not taken.
(emphasis supplied)
64. Audi alteram partem has several facets, including the service
of a notice to any person against whom a prejudicial order may be passed
H
520 SUPREME COURT REPORTS [2023] 7 S.C.R.

A and providing an opportunity to explain the evidence collected. In Tulsiram
Patel (supra), this Court explained the wide amplitude of audi alteram
partem:
96. The rule of natural justice with which we are concerned
in these appeals and writ petitions, namely, the audi alteram
B partem rule, in its fullest amplitude means that a person
against whom an order to his prejudice may be passed
should be informed of the allegations and charges against
him, be given an opportunity of submitting his explanation
thereto, have the right to know the evidence, both oral or
documentary, by which the matter is proposed to be decided
C against him, and to inspect the documents which are relied
upon for the purpose of being used against him, to have
the witnesses who are to give evidence against him
examined in his presence and have the right to cross-
examine them, and to lead his own evidence, both oral and
D documentary, in his defence. The process of a fair hearing
need not, however, conform to the judicial process in a Court of
law, because judicial adjudication of causes involves a number of
technical rules of procedure and evidence which are unnecessary
and not required for the purpose of a fair hearing within the
meaning of audi alteram partem rule in a quasi-judicial or
E administrative inquiry. […]
(emphasis supplied)
65. Audi alteram partem, therefore, entails that an entity against
whom evidence is collected must: (i) be provided an opportunity to explain
the evidence against it; (ii) be informed of the proposed action, and (iii)
F be allowed to represent why the proposed action should not be taken.
Hence, the mere participation of the borrower during the course of the
preparation of a forensic audit report would not fulfil the requirements
of natural justice. The decision to classify an account as fraud involves
due application of mind to the facts and law by the lender banks. The
G lender banks, either individually or through a JLF, have to decide whether
a borrower has breached the terms and conditions of a loan agreement,
and based upon such determination the lender banks can seek appropriate
remedies. Therefore, principles of natural justice demand that the
borrowers must be served a notice, given an opportunity to explain the
findings in the forensic audit report, and to represent before the account
H is classified as fraud under the Master Directions on Frauds.
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 521
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

D.4 Challenge to constitutional validity A
66. The borrowers have argued that the Master Directions on
Frauds will have to be struck down as arbitrary and unconstitutional for
conferring unguided and unbridled powers on banks. To counter the
submission, the RBI and lender banks have relied upon the decision in
Delhi Cloth Mills & General Mills v. Union of India47 to submit B
that the provisions of the Master Directions on Frauds are not arbitrary
as they have a reasonable nexus to the object sought to be achieved. It
was further argued that the Courts should not interfere with and supplant
their wisdom in an economic policy decision unless there is blatant
perversity, arbitrariness, or mala fides.
C
67. The RBI hasthe right to take all such measures as are
necessary to protect the health of the banking system. Hence, the Master
Directions on Frauds lay down the procedure for banks, who in case of
a breach of loan agreements by borrowers, can seek appropriate remedies
by approaching law enforcement agencies and debarring borrowers from
accessing further institutional finance. However, any policy decision which D
contemplates serious civil consequences for any person will be open to
challenge for being arbitrary if the principles of natural justice are not
applied during the process.
68. In E P Royappa v. State of Tamil Nadu48, this Court held
that an arbitrary state action is violative of Article 14 of the Constitution. E
Again, in Maneka Gandhi (supra) this court reiterated that the principle
of non-arbitrariness pervades Article 14.An administrative action can
be tested for constitutional infirmities under Article 14 on four grounds:
(i) unreasonableness or irrationality; (ii) illegality; (iii) procedural
impropriety;49 and (iv) proportionality. However, the scope of such judicial F
review is limited to ascertaining the deficiency in the decision-making
process, and not the correctness of the choice made by the administrator.50
69. Fairness in action requires that procedures which permit
impairment of fundamental right sought to be just, fair, and reasonable.
The principles of natural justice have a universal application and constitute G
47
(1983) 4 SCC 166
48
(1974) 4 SCC 3
49
State of AP v. McDowell, (1996) 3 SCC 709; Om Kumar v. Union of India, (2001) 2
SCC 386
50
Chairman and Managing Director, United Commercial Bank v. P C Kakkar, (2003) 4
SCC 364 H
522 SUPREME COURT REPORTS [2023] 7 S.C.R.

A an important facet of procedural propriety envisaged under Article 14.
The rule of audi alteram partem is recognized as being a part of the
guarantee contained in Article 14. A Constitution Bench of this Court in
Tulsiram Patel (supra) has categorically held that violation of the
principles of natural justice is a violation of Article 14. The court held
that any state action in breach of natural justice implicates a violation of
B
Article 14:
“95. The principles of natural justice have thus come to be
recognized as being a part of the guarantee contained in Article
14 because of the new and dynamic interpretation given by this
Court to the concept of equality which is the subject-matter of
C that article. Shortly put, the syllogism runs thus: violation of a rule
of natural justice results in arbitrariness which is the same as
discrimination; where discrimination is the result of State action, it
is a violation of Article 14: therefore, a violation of a principle
of natural justice by a State action is a violation of Article
D 14. Article 14, however, is not the sole repository of the
principles of natural justice. What it does is to guarantee
that any law or State action violating them will be struck
down. The principles of natural justice, however, apply not
only to legislation and State action but also where any
tribunal, authority or body of men, not coming within the
E definition of State in Article 12, is charged with the duty of
deciding a matter. In such a case, the principles of natural justice
require that it must decide such matter fairly and impartially.”
(emphasis supplied)

F 70. In Cantonment Board v. Taramani Devi51, a two-judge
bench of this Court held that the rule of audi alteram partem is a part of
Article 14. Similarly, in Delhi Transport Corporation v. DTC Mazdoor
Congress52, this Court observed that the rule of audi alteram partem
enforces the equality clause in Article 14. Therefore, any administrative
action which violates the rule of audi alteram partem is arbitrary and
G violative of Article 14.
71. Administrative proceedings which entail significant civil
consequences must be read consistent with the principles of natural

51
1992 Supp (2) SCC 501
H 52
1991 Supp (1) SCC 600
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 523
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

justice to meet the requirement of Article 14. Where possible, the rule of A
audi alteram partem ought to be read into a statutory rule to render it
compliant with the principles of equality and non-arbitrariness envisaged
under Article 14. The Master Directions on Frauds do not expressly
provide the borrowers an opportunity of being heard before classifying
the borrower’s account as fraud. Audi alteram partem must then be
B
read into the provisions of the Master Directions on Frauds.
72. In Olga Tellis v. Bombay Municipal Corporation53, a
Constitution Bench of this Court was called upon to adjudge the validity
of Section 314 of the Bombay Municipal Corporation Act, 1888. The
provision enabled the Municipal Commissioner to remove, without notice, C
any object, structure or fixture which was set up in or upon any street.
Chief Justice Y V Chandrachud delivering the judgment of the Constitution
Bench held that the impugned provision must be construed to ensure
that the procedure contemplated is fair and reasonable. It was further
held:
D
44. […] What Section 314 provides is that the Commissioner may,
without notice, cause an encroachment to be removed. It does
not command that the Commissioner shall, without notice, cause
an encroachment to be removed. Putting it differently, Section
314 confers on the Commissioner the discretion to cause an
encroachment to be removed with or without notice. That E
discretion has to be exercised in a reasonable manner so
as to comply with the constitutional mandate that the
procedure accompanying the performance of a public act
must be fair and reasonable. We must lean in favour of this
interpretation because it helps sustain the validity of the F
law. Reading Section 314 as containing a command not to
issue notice before the removal of an encroachment will
make the law invalid.
(emphasis supplied)
G
73. In Union of India v. Col.J N Sinha54, a two-judge bench of
this Court held that an endeavor must be made to interpret a statutory
provision consistent with the principles of natural justice:
53
(1985) 3 SCC 545
54
(1970) 2 SCC 458 H
524 SUPREME COURT REPORTS [2023] 7 S.C.R.

A 8. […] It is true that if a statutory provision can be read
consistently with the principles of natural justice, the courts
should do so because it must be presumed that the
Legislatures and the statutory authorities intend to act in
accordance with the principles of natural justice. But if on
the other hand a statutory provision either specifically or by
B
necessary implication excludes the application of any or all the
principles of natural justice then the court cannot ignore the mandate
of the Legislature or the statutory authority and read into the
concerned provision the principles of natural justice. Whether the
exercise of a power conferred should be made in accordance
C with any of the principles of natural justice or not depends upon
the express words of the provision conferring the power, the nature
of the power conferred, the purpose for which it is conferred and
the effect of the exercise of that power.
(emphasis supplied)
D 55
74. In C B Gautam v. Union of India , the question before a
Constitution Bench of this Court was whether a show cause notice must
be issued to an intending purchaser and seller of property before making
a compulsory purchase under Section 269-UD(1) of Chapter XX-C of
the Income Tax Act, 1961. Chief Justice M H Kania speaking for the
E Constitution Bench held that where the validity of a provision would be
open to serious challenge for want of an opportunity of being heard,
Courts have read such a requirement into the provision. In C B Gautam
(supra), this Court read the principles of natural justice into the provisions
of Chapter XX-C to save them from the vice of arbitrariness. The
Constitution Bench held:
F
30. […] Again, there is no express provision in Chapter XX-C
barring the giving of a show-cause notice or reasonable opportunity
to show cause nor is there anything in the language of Chapter
XX-C which could lead to such an implication. The observance
of principles of natural justice is the pragmatic requirement of fair
G play in action. In our view, therefore, the requirement of an
opportunity to show cause being given before an order for
purchase by the Central Government is made by an appropriate
authority under Section 269-UD must be read into the provisions

55
H (1993) 1 SCC 78
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 525
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

of Chapter XX-C. There is nothing in the language of Section A
269-UD or any other provision in the said Chapter which
would negate such an opportunity being given. Moreover,
if such a requirement were not read into the provisions of
the said Chapter, they would be seriously open to challenge
on the ground of violations of the provisions of Article 14
B
on the ground of non-compliance with principles of natural
justice. The provision that when an order for purchase is made
under Section 269-UD — reasons must be recorded in writing
is no substitute for a provision requiring a reasonable
opportunity of being heard before such an order is made.
(emphasis supplied) C

75. In Sahara India (Firm), Lucknow v. Commissioner of
Income Tax, Central-I56, a two-judge bench of this Court was called
upon to decide whether an opportunity of being heard has to be granted
to an assesee before any direction could be issued under section 142(2-
A) of the Income Tax Act, 1961 for special audit of the accounts of the D
assessee. This Court held that since the exercise of power under section
142(2-A) of the Income Tax Act leads to serious civil consequences for
the assesee, the requirement of observing the principles of natural justice
is to be read into the said provision.
76. In Kesar Enterprises Ltd v. State of Uttar Pradesh57, the E
Court dealt with a challenge to the validity of Rule 633(7) of the Uttar
Pradesh Excise Manual which allowed the imposition of a penalty for
breach of the conditions of a bond without expressly issuing a show-
cause notice. D K Jain, J speaking on behalf of the two-judge bench
held that a show-cause notice should be issued and an opportunity of F
being heard should be afforded before an order under Rule 633(7) is
made. The Court held that the rule would be open to challenge for being
violative of Article 14 of the Constitution unless the requirement of an
opportunity to show cause is read into it. The Court observed:
30. Having considered the issue, framed in para 16, on the G
touchstone of the aforenoted legal principles in regard to the
applicability of the principles of natural justice, we are of the
opinion that keeping in view the nature, scope and

56
(2008) 14 SCC 151
57
(2011) 13 SCC 733 H
526 SUPREME COURT REPORTS [2023] 7 S.C.R.

A consequences of direction under sub-rule (7) of Rule 633
of the Excise Manual, the principles of natural justice
demand that a show-cause notice should be issued and an
opportunity of hearing should be afforded to the person
concerned before an order under the said Rule is made,
notwithstanding the fact that the said Rule does not contain
B
any express provision for the affected party being given an
opportunity of being heard.
[…]
32. In our view, therefore, if the requirement of an opportunity
C to show cause is not read into the said Rule, an action
thereunder would be open to challenge as violative of
Article 14 of the Constitution of India on the ground that
the power conferred on the competent authority under the
provision is arbitrary.

D (emphasis supplied)
77. It has been elucidated in the preceding paragraphs that the
classification of a borrower’s account as fraud in accordance with the
procedure laid down in the Master Directions on Frauds entails significant
civil consequences for the borrower. Since the Master Directions on
E Frauds do not expressly provide an opportunity of being heard to the
borrower before classifying an account as fraud, the rule of audi alteram
partem has to be read into the provisions of the said directions to save
them from the vice of arbitrariness.
78. Before concluding, we also want to address the argument by
F the borrowers that the requirement of passing a reasoned order must be
read into the Master Directions on Frauds. The borrowers also relied on
Jah Developers (supra) where it was held that a final decision of the
Review Committee declaring the borrower as a ‘wilful defaulter’ must
be made by a reasoned order. We agree with this contention of the
borrowers because: (i) a reasoned order allows an aggrieved party to
G demonstrate that the reasons which persuaded the authority to pass an
adverse order against the interests of the aggrieved partyare extraneous
or perverse; and (ii) the obligation to record reasons acts as a check on
the arbitrary exercise of the powers.58 The reasons to be recorded need

58
H Kranti Associates (P) Ltd. v. Masood Ahmed Khan, (2010) 9 SCC 496
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 527
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

not be placed on the same pedestal as a judgment of a court. The reasons A
may be brief but they must comport with fairness by indicating a due
application of mind
79. In light of the legal position noted above, we hold that the rule
of audi alteram partem ought to be read in Clauses 8.9.4 and 8.9.5 of the
Master Directions on Fraud. Consistent with the principles of natural B
justice, the lender banks should provide an opportunity to a borrower by
furnishing a copy of the audit reports and allow the borrower a reasonable
opportunity to submit a representation before classifying the account as
fraud. A reasoned order has to be issued on the objections addressed by
the borrower. On perusal of the facts, it is indubitable that the lender
banks did not provide an opportunity of hearing to the borrowers before C
classifying their accounts as fraud. Therefore, the impugned decision to
classify the borrower account as fraud is vitiated by the failure to observe
the rule of audi alteram partem. In the present batch of appeals, this
Court passed an ad-interim order restraining the lender banks from taking
any precipitate action against the borrowers for the time being. In D
pursuance of our aforesaid reasoning, we hold that the decision by the
lender banks to classify the borrower accounts as fraud, is violative of
the principles of natural justice. The banks would be at liberty to take
fresh steps in accordance with this decision.
80. Lastly, the borrowers have argued that the Master Directions E
on Frauds suffer from manifest arbitrariness because they stipulate an
opportunity of a hearing to third parties, while denying the same to
borrowers, who face significant civil consequences. Clause 8.12.5 of
the Master Directions on Frauds provides that banks have to satisfy
themselves of the involvement of third parties and provide them with an
opportunity of being heard before reporting them to Indian F
Banks’Association. We are unable to accept this argument of the
borrowers in light of the fact that the borrowers and the third parties
stand on a different footing because: (i) the borrowers are the main
perpetrators of fraud, while the third parties are merely facilitators; and
(ii) it is the borrowers who face the significant civil consequences G
stipulated under clauses 8.12.1 and 8.12.2, while the third party service
providers are merely referred to the Indian Banks’ Association which
maintains a caution list of such service providers. However, this view
doesnot affect our conclusions in view of the discussion in the preceding
paragraphs.
H
528 SUPREME COURT REPORTS [2023] 7 S.C.R.

A E. Conclusion
81. The conclusions are summarized below:
i. No opportunity of being heard is required before an FIR is
lodged and registered;
B ii. Classification of an account as fraud not only results in
reporting the crime to investigating agencies, but also has
other penal and civil consequences against the borrowers;
iii. Debarring the borrowers from accessing institutional finance
under Clause 8.12.1 of the Master Directions on Frauds
C results in serious civil consequences for the borrower;
iv. Such a debarment under Clause 8.12.1 of the Master
Directions on Frauds is akin to blacklisting the borrowers
for being untrustworthy and unworthy of credit by banks.
This Court has consistently held that an opportunity of
D hearing ought to be provided before a person is blacklisted;
v. The application of audi alteram partem cannot be impliedly
excluded under the Master Directions on Frauds. In view
of the time frame contemplated under the Master Directions
on Frauds as well as the nature of the procedure adopted, it
E
is reasonably practicable for the lender banks to provide an
opportunity of a hearing to the borrowers before classifying
their account as fraud;
vi. The principles of natural justice demand that the borrowers
must be served a notice, given an opportunity to explain the
F
conclusions of the forensic audit report, and be allowed to
represent by the banks/ JLF before their account is classified
as fraud under the Master Directions on Frauds. In addition,
the decision classifying the borrower’s account as fraudulent
must be made by a reasoned order; and
G
vii. Since the Master Directions on Frauds do not expressly
provide an opportunity of hearing to the borrowers before
classifying their account as fraud, audi alteram partem has
to be read into the provisions of the directions to save them
from the vice of arbitrariness.
H
STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS 529
[DR. DHANANJAYA Y CHANDRACHUD, CJI]

82. In the result, the judgment of the Division Bench of the High A
Court of Telangana dated 10 December 2020 is upheld. The judgments
of the High Court of Telangana dated 22 December 2021 and31
December 2021, and of the High Court of Gujarat dated 23 December
2021 are accordingly set aside. The Civil Appeals are disposed of. Writ
Petition (C) No. 138 of 2022 is also disposed of in above terms. There
B
shall be no order as to costs.
83. Pending application(s), if any, shall stand disposed of.

Ankit Gyan Appeals disposed of.
(Assisted by : Mahendra Yadav, LCRA)
C

D

E

F

G

H