Bombay High Court
Zusak Agro Pvt LtdversusState Bank of India
- Decided
- Disposal
- DISPOSED OFF
Holding
The impugned order was not a reasoned order as required by the RBI Master Directions and was therefore set aside.
Summary
Zusak Agro Pvt Ltd filed a writ petition seeking to set aside a bank order that declared it a fraud and ordered its name to be reported to the RBI. The bank had issued a show cause notice after the collateral valuation fell by more than 50% and later, through a Review Committee, declared the account fraudulent without providing a detailed reasoned order as mandated by the RBI Master Directions on Fraud Risk Management. The petitioner argued that the order failed to disclose the facts, the submissions made against the notice, and the reasoning for the fraud classification, contrary to Section 2.1.1.4 of the circular. The bank contended that the order contained sufficient facts and that a lower standard of reasoning applied to administrative bodies. The Court examined the circular, prior case law, and the impugned order, finding it lacked the required reasons and did not address the petitioner’s submissions. Consequently, the Court set aside the fraud declaration order and directed the bank to issue a fresh show cause notice if it wishes to proceed.
Issues considered
- Did the bank's order declaring the petitioner’s account as fraud comply with the RBI Master Directions requiring a reasoned order containing relevant facts, the petitioner’s submissions, and reasons for classification?
- Does the absence of a reasoned order violate principles of natural justice and render the order void?
- Can the bank initiate fresh proceedings by issuing a new show cause notice after the order is set aside?
Subjects
- fraud risk management
- RBI Master Directions
- show cause notice
- reasoned order
- natural justice
- bank fraud declaration
- writ petition
- mandamus
Judgment
Digitally
signed by
MEERA
MEERA MAHESH
MAHESH JADHAV
JADHAV Date:
2026.09.11
18:54:04
+0530
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 2092 OF 2026
Zusak Agro Pvt Ltd )
Through its Authorised signatory )
Address:- 19, 1st Orchid Avenue )
Above Hi-tech Tyres, Panchkutir )
Powai, Mumbai 400076 ) ...Petitioner
Versus
State Bank Of India )
Through Asst. General Manager )
FMC, Address: Mumbai Metro )
Synergy, 1st floor, C-6, G Block, )
Bandra Kurla Complex, )
Bandra (east) Mumbai 400051 ) ...Respondent
__________
Mr. Partho Sarkar, Mr. Pratik Sarkar, Mr. Prashant Thakre, Mr.
Ranjit Verma i/b Vidhi Legal for Petitioner.
Mr. Vivek Sawant for Respondent.
__________
CORAM : SARANG V. KOTWAL &
RANJITSINHA RAJA BHONSALE, JJ.
DATE : 10th SEPTEMBER 2026.
JUDGMENT :
1. Rule. Rule made returnable forthwith, with the consent of
the parties.
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2. The Petition is filed for directions to set aside the
impugned order dated 13th January 2026 declaring the Petitioner
company as fraud and further mentioning that the Petitioner’s
name would be reported to Reserve Bank of India (RBI) as per the
RBI guidelines.
3. Heard Mr. Sarkar, learned counsel for the Petitioner and
Mr. Sawant, learned counsel for the Respondent.
4. The Petitioner company was served with a show cause
notice dated 22nd October 2024. It was mentioned in the show
cause notice that Respondent State Bank of India had extended
cash credit facility to the Petitioner to the tune of Rs.9.50 crores. It
was sanctioned on 13th July 2018. According to Respondent Bank,
at the time of sanction, the value of the property based on which
the cash credit was given, was Rs.9.52 crores, as per the valuation
report dated 7th April 2018 given by Shri Sunil Deshpande.
However, as per the valuation report dated 19 th November 2020
issued by M/s Vastukala Consultants Pvt Ltd., the value of the
collateral security had declined to Rs.4.73 crores. The erosion in
valuation was more than 50%, and consequently, the Bank
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initiated proceedings in accordance with the RBI Circular dated
15th July 2024 for declaring the Petitioner company as fraud.
5. Shri Vivek Kumar Mathur, Director of the Petitioner
company through a letter dated 8th November 2024 made
submissions in response to the show cause notice. After that, the
impugned order was passed on 13 th January 2026, pursuant to the
meeting held on 29th December 2025 by the Review Committee for
identification of the account as fraud.
6. Learned Counsel for the Petitioner relied on the Master
Directions on Fraud Risk Management, issued by RBI on 15 th July
2024 bearing No. RBI/DOS/2024-25/118/ DOS.CO. FMG. SEC.
No.5/23.04.001/2024-25. He submitted that in the said circular,
Chapter II provision 2.1 lays down the provisions and in particular
provision 2.1.1.4 which requires the bank to pass a reasoned order
containing the relevant facts / circumstances and submissions
made against the show cause notice. He submitted that the
impugned order does not satisfy any of these requirements.
7. Learned Counsel for the Petitioner also relied on an order
dated 3rd July 2026 passed by a Division Bench of this Court in
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Writ Petition No.2969 of 2025 in the case of Kishore Biyani & Anr.
Vs. Bank of India, in support of his contention.
8. In response, learned counsel for the Respondent bank
relied on the affidavit in reply filed on their behalf. He submitted
that there was clear fraud played on the bank because the
valuation on the basis of which the credit facility was extended to
the Petitioner itself was fraudulent and, therefore, the impugned
order was correctly passed. He submitted that the impugned order
has all the necessary ingredients as mentioned in the said circular
issued by the RBI. He relied on the averments made in the affidavit
in reply that the impugned order was not an unreasoned order.
9. We have considered these submissions. The circular
referred to hereinabove lays down the provisions and requirements
for declaring the fraud. The relevant provisions are as follows:
2.1 Governance Structure in banks for Fraud Risk
Management
2.1.1 There shall be a Board³ approved Policy on fraud risk
management delineating roles and responsibilities of
Board / Board Committees and Senior Management of the
bank. The Policy shall also incorporate measures for
ensuring compliance with principles of natural justice in a
time-bound manner which at a minimum shall include:
2.1.1.1 Issuance of a detailed Show Cause Notice (SCN) to
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the Persons, Entities and its Promoters / Whole-time and
Executive Directors against whom allegation of fraud is
being examined. The SCN shall provide complete details of
transactions / actions / events basis which declaration and
reporting of a fraud is being contemplated under these
Directions.
2.1.1.2 A reasonable time of not less than 21 days shall be
provided to the Persons / Entities on whom the SCN was
served to respond to the said SCN.
2.1.1.3. Banks shall have a well laid out system for
issuance of SCN and examination of the responses /
submissions made by the Persons /Entities prior to
declaring such Persons / Entities as fraudulent.
2.1.1.4 A reasoned Order shall be served on the Persons /
Entities conveying the decision of the bank regarding
declaration / classification of the account as fraud or
otherwise. Such Order(s) must contain relevant facts /
circumstances relied upon, the submission made against
the SCN and the reasons for classification as fraud or
otherwise.
10. Thus, it can be seen that the provision 2.1.1.4 required
that such order to be a reasoned order and that the order must
also contain relevant facts/circumstances relied upon. Importantly,
it must also contain the submission made against the show cause
notice for classification as fraud.
11. The Division Bench of this Court in the case of Kishore
Biyani has also considered the same issue. Paragraphs 5 and 6 of
the said order are important, which are as follows:
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5. We have heard the learned counsel for the parties at
length. We have also perused the papers and proceedings
in the above Writ Petition. After hearing the respective
counsels, we are clearly of the view that dehors any other
arguments canvassed by Mr. Joshi, the above Writ Petition
ought to be allowed on the ground that the Fraud Master
Circular of 2024 mandates the 1" Respondent Bank to issue
a reasoned order, and which is absent in the present case.
Chapter II of the Fraud Master Circular of 2024 deals with
the Governance Structure in Banks for Fraud Risk
Management. Clause 2.1.1.4 clearly stipulates that a
reasoned order shall be served on the Persons /Entities
conveying the decision of the bank regarding
declaration /classification of the account as fraud or
otherwise. For the sake of convenience, Clause 2.1.1.4 is
reproduced hereunder and reads thus:-
"2.1.1.4 A reasoned Order shall be served on the
Persons/Entities conveying the decision of the
bank regarding declaration/classification of the
account as fraud or otherwise. Such Order(s)
must contain relevant facts/circumstances relied
upon, the submission made against the SCN and
the reasons for classification as fraud or
otherwise."
6. As can be seen from this Clause, as per the Master Fraud
Circular of 2024, Banks are mandated to give reasons for
the order classifying or declaring an account as "fraud".
12. In this background we examined the impugned order. The
impugned order in the first part mentions the details wherein there
are averments in consonance with the show cause notice about the
erosion in valuation to the tune of more than 50% and the
allegations that there was misappropriation of funds. After
mentioning those facts, it is further mentioned as follows:-
“The Committee has gone through the
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representation(s) of Mr. Vivek Kumar Mathur
(Director) letter dated 08.11.2024 carefully vide
which the (Director) has made their submissions
and averments in response to the Show Cause
Notice (SCN) dated 22.10.2024. No response
received from any other director/Guarantor.
The Committee has also perused various
records relied upon in detecting and identifying
the suspicious transactions leading to the
apprehension of fraud.”
Thereafter, a chart is provided. First column mentions
misappropriation of funds and criminal breach of trust. Second
column mentions response received from Mr. Vivek Kumar Mathur
(Director) on 12th November 2024 and the third column mentions
final decision “Fraud” (FIC did not concur with the justification
provided in the response). Thereafter, it is mentioned that on a
careful examination of the record and in the light of the
representations submitted by Shri Vivek Kumar Mathur (Director),
the Committee decided to identify the account as Fraud. We do
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not find any reason recorded in the order in reaching that
conclusion. There is absolutely no reference to the issues raised by
the Petitioner’s director in response to the show cause notice. The
impugned order is in clear breach of the guidelines issued in the
Master Circular.
13. A vague reply is given by the Respondent Bank in
paragraphs 14, 15 and 16 of the affidavit in reply, which read as
follows:
“14. It is denied that the impugned order dated
13.01.2026 (Exh.-A) is an unreasoned or non-speaking
order. I say that the said order, on a plain reading sets out
the credit facility extended, the date of sanction, and the
amount due, records both grounds of suspected fraud with
full particulars - namely, the valuation figures, names of
valuers, dates of the respective reports and the extent of
erosion in value and the date and substance of the unit
inspection report, records the issuance of the Show Cause
Notice dated 22.10.2024, records that the response of the
Director, Shri Vivek Kumar Mathur, was received and
considered, and that no response was received from the
other Director/Guarantor, records the Committee's
conclusion that it did not concur with the justification
furnished in the response, and gives reasons for that
conclusion by reference to the material set out therein.
15. I say that Clause 2.1.1.4 of the Master Directions
requires that the order convey "relevant facts /
circumstances relied upon, the submission made against
the SCN and the reasons for classification as fraud or
otherwise." Each of these three elements is expressly
present in the impugned order, which accordingly satisfies
the requirement of a reasoned order within the meaning of
the Master Directions.
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16. I further say that the Review Committee / Fraud
Identification Committee is a departmental/administrative
body constituted under the Master Directions and is not a
court or a tribunal exercising judicial power. The standard
of reasons expected of such an administrative body -
namely, that it disclose application of mind to the material
on record and to the borrower's response - is necessarily
distinct from, and less exacting than, the standard
applicable to judicial orders, upon which line of authority
the Petitioner has misplaced reliance. Read as a whole,
together with the Show Cause Notice and the material
referred to therein, the impugned order discloses due
application of mind and cannot be faulted as unreasoned.”
14. As we have discussed, this response is quite unsatisfactory.
The impugned order does not give any reason and does not refer
to the issues raised by the Petitioner in response to the show cause
notice. Therefore, we are inclined to allow this Petition and set
aside the impugned order. Learned Counsel for the Respondent
submitted that in such event, the Respondent be permitted to
initiate fresh proceedings by issuing a fresh show cause notice.
15. Considering these submissions and the above reasons, the
following order is passed:-
ORDER
(i) Rule is made absolute in terms of prayer clause (A), which
reads as follows:-
A. Be pleased to issue mandamus &/or any other
appropriate writ/directions to set aside the
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impugned order of Respondent 1 under Exh. - A,
classifying the petitioner's account as "Fraud."
(ii) The impugned order dated 13th January 2026 declaring the
Petitioner as fraud is set aside.
(iii) Respondent Bank shall take consequent steps, as a result of
setting aside of the impugned order.
(iv) Respondent Bank would be at liberty to initiate fresh
proceedings by issuing a fresh show cause notice in the present
subject matter.
16. We make it clear that we have not made any observations
on the merits of the matter.
17. With the aforesaid observations, the Petition is disposed of.
(RANJITSINHA RAJA BHONSALE, J.) (SARANG V. KOTWAL, J.)
Meera Jadhav
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