Hemant Kanoria & Anr. v. Punjab National Bank

#1. The petitioners have initially challenged the show cause notices dated 16th April, 2024 wherein the bank directed the petitioners to show cause as to why the account of the petitioners shall not be declared as “fraud” and during pendency of the writ application, the respondent bank issued an order declaring the account of the petitioners as “fraud”.

#2. The petitioners contended that the respondent failed to act in accordance with its statutory obligations and responsibilities in terms of the Reserve Bank of India Master Directions.

#3. It is further contended that the show cause notices issued by the respondent are without any jurisdiction and is arbitrary, perverse and violation of principles of natural justice. It is submitted that the respondent bank failed to furnish either the purported Forensic Audit Report or the documents relied in the show cause notices.

#4. It is submitted that the petitioners do not have access to the record of the SREI Entities since October, 2021 and the petitioners are not in a position to deal with and respond to the allegations made in the show cause notices.

#5. Mr. Ratnanko Banerjee along with Mr. Jishnu Chowdhury, Learned Senior Advocates representing the petitioners, submit that the show 3 cause notices have been issued on the basis of the Forensic Audit Report by mechanically and selectively reproducing certain parts thereof without context or basis and the respondent failed to provide a copy of Forensic Audit Report or the copies of the documents on the basis of which the Forensic Audit Reports were prepared.

#6. Mr. Banerjee submits that in the absence of each and every documents on the basis of which the allegations have been made against the petitioners in the show cause notices are being made available to the petitioners and a reasonable time is given to the petitioners, the petitioners will not be in a position to give appropriate reply to the show cause notices.

#7. Mr. Banerjee in support of his submissions, has relied upon the judgement in the case of Hemant Kanoria Vs. Bank of India passed in WPA No. 28329 of 2023 dated 2nd February, 2024 and submits that in the said case, the Coordinate Bench of this Court held that a show-cause notice is to be issued, enumerating the exact offences alleged against the borrower/ Director. If any, Forensic Audit Report or other document forms on the basis of the show-case notice, the same is to be served along with the show cause notice.

#8. Mr. Banerjee further relied upon the judgment in the case of Milind Patel Vs. Union Bank of India and Others reported in 2024 SCC OnLine Bom 745 and submits that the Division Bench of the Bombay High Court held that it is now well settled that due compliance with 4 principles of natural justice must essentially entail compliance with the obligation to provide access to the material on which the allegations are based.

#9. Mr. Banerjee submits that upon receipt of personal hearing notices, the petitioners have filed a detailed reply informing the respondent that the petitioners have not received the entire documents and the details of the documents mentioned in the reply but instead of receipt of the request of the petitioners, the respondent has not supplied the documents to the petitioners and have passed the impugned order declaring the loan account of the petitioners as “fraud”.

#10. Mr. Dhruv Dewan, Learned Advocate representing the respondent submits that the show cause notice was issued on 16th April, 2024 and the petitioners have filed the writ petition on 13th May, 2024 and reply to the show cause notice was filed on 22nd May, 2025, after personal hearing of the petitioners. He submits that second notice for personal hearing was issued on 22nd October, 2025 and the petitioners have filed reply on 10th November, 2025, thereafter the impugned order is passed on 19th December, 2025.

#11. Mr. Dewan has relied upon the judgment in the case of Hemant Kanoria (supra) and submits that the Coordinate Bench of this Court also held that a balance has to be struck between the limit up to which technicalities should be adhered to on the one hand and speed in reporting is ensured on the other. He submits that the time is the 5 essence of the entire Master Directions, which lends an extremely summary character to the process involved therein.

#12. Mr. Dewan submits that in the show cause notices dated 16th April, 2024, 15 days’ time was provided to the petitioners for reply but the petitioners have not filed reply within time. He further submits that with respect to issues no.1 of the show cause notices, the petitioners by a letter dated 22nd May, 2025 in paragraph 61 (a) to (m), they have given the details of the documents which the petitioners requested to supply the same but the said documents are not relevant to give reply to the show cause notices.

#13. Mr. Dewan further submits that as regard to the issue nos. 2 and 6 of the show cause notices, the petitioners have given the descriptions of the documents at paragraph 86 (a) to (n) for supply of the same to the petitioners but the said documents are similar documents as described in paragraph 61(a) to (m) of the letter dated 22nd May, 2025.

#14. As regard to the issue no.3 of the show cause notices, the petitioners have given descriptions of the documents at paragraph 115 (a) to (jj) out of which most of the documents are referred in the previous paragraphs. He submits that the said documents are irrelevant for giving reply to the show cause notices. With respect to the issue no.4, the petitioners have given descriptions of documents at para 122 (a) to (k). 6

#15. Mr. Dewan further submits that as regard to the issue no. 5 of the show cause notices, the petitioners requested the respondent to supply documents mentioned in paragraph 138(a) to (k) of the letter dated 22nd May, 2025 but the said documents are also the same documents as mentioned in above paragraphs. He further submits that the documents are not at all relevant to give reply to the show cause notices. He further submits that the Forensic Audit Report is already with the petitioners and in any of the above mentioned paragraphs, the petitioners have not requested for supply of Forensic Audit Report.

#16. Mr. Dewan submits that how the names and details of the officials of the bank are relevant for the petitioners, who are involved in granting loan, monitoring the loans to SREI Entities were utilized and scrutinized the loan account of the petitioners.

#17. Mr. Dewan submits that appraisal report prepared by the bank officials is no way connected with regard to reply to the show cause notices.

#18. The details of the documents which the petitioners have requested to supply for submitting reply to the show cause notices, are as follows: “115. In light of the issues indicated above, I once again humbly request you to provide me information the documents and with all pertaining to loans furnished by the SREI entities with long moratorium periods and low interest rates which would enable me to provide a business specific justification for sanctioning such loans with long moratoriums and low interest rates. In aid of what I have respectfully stated above, I request your good offices to provide me with the following specific documents which would enable response behind 7 me to effectively and adequately respond to the allegations made in paragraph 3 of the SCNs. (a) Names and details of all officials of your bank who were involved in granting the subject loans to the SREI Entities. (b) Names and details of all officials of your bank who were monitoring the manner in which your loans to SREI Entities were being utilized in respect of the loan accounts mentioned in paragraph 3 of the SCNs and sections 6 and 7 of the KPMG FAR. (c) Names and details of all officials of your bank who were scrutinizing the loan accounts mentioned in paragraph 3 of the SCNs and sections 6 and 7 of the KPMG FAR and preparing appraisal reports which is mandatory as per applicable law. (d) Copies of all appraisal reports prepared by the bank officials in respect of the loan accounts mentioned in paragraph 3 of the SCNs and sections 6 and 7 of the KPMG FAR. (e) Copies of all minutes of meetings of your competent credit committee/ special cell/ relevant competent authority where the appraisal reports prepared by your bank in respect of the loan accounts mentioned in paragraph 3 of the SCNs and sections the KPMG FAR were 6 and 7 of considered and discussed. (f) Specific information as to the security, its present value and also whether the loans are being serviced/restructured by the present management of the SREI Entities in respect of the companies mentioned in paragraph 3 of the SCNs. (g) All documents which demonstrate or evidence the fact that the arrangement of lending over a long moratorium period is without interest 8 justification, as alleged adequate paragraph 3 of the SCNs and paragraph 6.9.5 of the KPMG FAR. loan accounts and (h) Copies of minutes of all meetings held in your bank by your competent authorities where all proposals of SREI Entities were placed and discussed the purpose of sanctioning loans/ enhancing limits to SREI Entities between 1st April, 2015 and 4th October, 2021. (i) Copies of the Detailed Appraisal Report (DAR) and Credit Assessment Memo (CAM) prepared by relationship managers sad regional heads of the SREI Entities of the transactions which are mentioned in paragraph 3 of the SCNs and sections 6 and 7 of the KPMG FAR. (j) Copies of the notes /reports/memos prepared by the relationship managers and the regional heads of the SREI Entities with respect to the transactions mentioned in paragraph 3 of the SCNs and sections 6 and 7 of the KPMG FAR. (k) Copies of the minutes of the meeting of the credit committee dealing with the approval modification/appraisal of the loans which were disbursed and detailed in paragraph 3 of the SCNs and sections 6 and 7 of the KPMG FAR. (l) All documents which demonstrate or evidence the fact that the arrangement of lending over a long moratorium period with low interest rates has created a working capital mismatch, as alleged in paragraph 3 of the SCNs and paragraph 6.9.5 of the KPMG FAR. in observing (m) All documents which were relied upon by “…. The KPMG arrangement moratorium period without adequate Justification with interest rates creating working capital mis-match is lending 9 prima facie detrimental to the financial health of the lenders", as alleged in paragraph 3 of the SCNs and paragraph 6.9.5 of the KPMG FAR. (n) Copy of the Corporate Governance report forming a part of the annual report of the SREI Entities which was reviewed by KPMG as indicated in pg. 205 of the KPMG FAR; (o) Copies of all documents reviewed and analyzed by KPMG on sample basis as to the source and application of funds, revenue, capital and operating expenses during the review period, as indicated in pg. 210 of KPMG FAR. (p) Copies of all documents which were reviewed by KPMG during the review period concerning impairment gains/ losses, incomes including provisions and reversals, expenses, capital expenses and fixed asset registers, investments and other current liabilities and assets and sample transactions which were selected by KPMG considering a threshold value of INR 25,00,000/- along with all supporting documents, as indicated in pg. 210 of KPMG FAR. (q) Copies of all documents which were reviewed by KPMG during the review period which included invoices, vouchers, proof of delivery of service and all other supporting documents which were for ascertaining reviewed by KPMG genuineness of transactions, as indicated in pgs. 210-211 of KPMG FAR. (r) Copies of the internal audit reports prepared by the auditors of the SREI Entities with respect to the transactions. (s) Specific information as to the security, its present value and also whether the loans are being serviced/restructured by the present management of the SREI Entities 10 in respect of the companies mentioned in paragraph 3 of the SCNs. (t) All documents which were reviewed by KPMG during the review period which demonstrate or evidence the fact that fresh loans that have been given with longer moratorium period and interest rates have been given without adequate indicated in paragraph 3 of the SCNs; justification, as more (u) All documents which were reviewed by KPMG during the review period which demonstrate or evidence the fact that loans have not been utilized by borrowers for a purpose other than the stated purpose for which they were sanctioned, as indicated in paragraph 3 of the SCNs. (v) Copies of all “280 selected customer contracts aggregating to Rs. 19,604.98 Crore indicate that loans aggregating to a value of Rs. 7060.52 Crore (36% of Rs. 19,604.98 Crores), which were disbursed post June 2018” as paragraph 3 of the SCN. indicated (w) Copies of all “280 selected customer contracts…. INR aggregating 19,604.98 Crore and which indicate that "loans aggregating to a value of INR 7,060.52 Crore (36% of 19604.98 Crore which were disbursed post June 2018 bear an interest rate of 2% per annum or lower payable on a monthly/quarterly basis during the moratorium period with an Internal Rate of Return (IRR) of around 12% to 15% an exit, as indicated in paragraph 3 of the SCNs, (x) All documents which were reviewed by KPMG during the review period which demonstrate or evidence the fact that loans to customers at a low interest rate of 2% per annum or lower during the initial moratorium period have also created a working capital gap for the 11 SREI Entities, as indicated in paragraph 3 of the SCNS: (y) Copy of the loan contract(s) in respect of Suasth Health Care (India) Limited, as indicated in paragraph 3 of the SCNs along with all related documents, (2) Copies of the loan contract(s) in respect of Solapur Tollways Private Limited, as indicated in paragraph 3 of the SCNs along with all related documents, (aa) All documents which were reviewed by the purported financial auditors during the respective review periods which demonstrate or evidence the fact that loans were sanctioned to connected entities and otherwise wherein moratorium periods have been provided without indicated in paragraph 3 of the SCNs; justification, adequate (bb) All documents which were reviewed by the purported financial auditors during the respective review periods which demonstrate or evidence the fact that loans which were granted with long moratorium period were utilized repaying outstanding taken by another connected entity, as indicated in paragraph 3 of the SCNs; (cc) All documents which were reviewed by KPMG during the review period which demonstrate or evidence the fact that there was business justification for long moratorium with low interest payment in the context of projects revenue, as which were generating indicated in paragraph 3 of the SCNs. inadequate (dd) Copy of the Corporate Governance report forming a part of the annual report of the SREI Entities which was reviewed by KPMG as indicated in pg. 205 of the KPMG FAR; 12 (ee) All records pertaining to related party transactions with Directors and Key Managerial Personnel ("KMP") which was reviewed by KPMG during the review period as indicated in pg. 205 of the KPMG FAR. (ff) Copies of all loan contracts/sanction letters reviewed by KPMG during the review period which demonstrate or evidence the fact that the overall interest rates would be high (12-15% on exit) as indicated in pg. 211 of KPMG FAR. (gg) Copies of all documents which were reviewed by KPMG during the review period on the basis of which observed that "... the working capital facilities and demand loans raised by SREI Entities from Consortium of Bankers for meeting capital requirements have an average interest rate of 9% per annum.” as indicated in pg. 211 of KPMG FAR. the working (hh) Copies of all documents which was reviewed by KPMG during the review period on the basis of which it observed that "... the term loans from domestic banks and FIIs which are raised for the purpose infrastructure financing projects and meeting the on-ward lending requirements have an average interest rate 10.50% per annum are also payable on a monthly/ quarterly basis as indicated in pg. 211 of KPMCO FAR and paragraph 3 of the SCNs. (ii) Details of all alleged connected entities/ alleged related parties alleged potentially related shareholding and ultimate beneficiaries with respect to Kanoria Family members. along with parties (jj) Copies of legal opinions obtained by SREI Entities, reports and internal audit external audit reports carried out from issue of related time on family members' party/entities and 13 ownership, and KPMG's comments on the same.”

#19. In the case of Hemant Kanoria (supra), the Coordinate Bench of this Court held that: investigative agencies. Thus, “56. Chapter VI of the Master Directions gives the guidelines for reporting frauds to the police/CBI and other classification of fraud has two purposes – first, to caution the banking system as to the modus operandi of fraudulent operatives and borrowers initiate proceedings against and secondly, fraudsters by reporting the same to investigative agencies, which, in turn, might lead to convictions under the criminal laws of the country.

#57. Clause 8.4 of the Master Directions speaks about early detection and reporting and highlights that at present the detection of frauds takes an unusually long time since banks tend to report an account as fraud only when they exhaust the chances of further recovery. Clause 8.4.2 says that the most effective way of preventive frauds in loan accounts is for banks to have a robust appraisal and an effective credit monitoring mechanism during the entire life-cycle of the loan account.

#58. Clause 8.7 of the Master Directions provides incentive for prompt reporting by banks.

#59. Thus, looking into the entire tenor of the Master Directions, it is evident that unnecessary reliance of formalities would tend to defeat and frustrate the very purpose of enunciation of the said Directions.

#60. Hence, what has to be ensured is that specific to be instances of allegations are mentioned in the show-cause notice, although all particular documents which are to be relied on and/or intricate details of the frauds alleged need not be given at the show-cause notice stage. The show-cause is a mere indicator of the allegations Director/management. It is to ensure that an borrower against 14 effective opportunity of hearing is given to the accused.

#61. Although the process of fraud declaration is summary under the Master Directions, the principles of natural justice have to be read into it as much as possible, since such principles are the basic features of Rule of Law and cannot be short shrifted.

#62. However, there is no scope of any detailed to be the procedure trial and, as such, streamlined.

#63. Keeping such backdrop in view, in the light of the judgments rendered in Rajesh Agarwal (supra) and Neptune Overseas Limited (supra), the following procedure is, in the opinion of this Court, apt to serve the purposes of the Master Directions as well as to take care of the principles of natural justice, in particular the tenet of Audi Alteram Partem and ensure that an effective opportunity of rebutting the allegations is given to the borrower and its Directors.

#64. First, a show-cause notice is to be issued, enumerating the exact offences alleged against the borrower/Director. If any FAR or other document forms the basis of the show-cause, the same is to be served along with the show-cause notice. (Both the said criteria have, in fact, have been satisfied in the present case in respect of BOI, BOB and UBI.)

#65. A fortnight thereafter would be ample time to give reply to the showcause notice. In its reply, the noticee shall, apart from addressing the allegations and controverting those specifically, specify the documents which are required to be provided to the noticee by the Banks/financial institutions. borrower/Director or promoter can reserve its rights to give a further additional reply upon receiving such documents. If necessary, reply,

#66. Within a week from receiving such replies, the Banks can give an inspection of the documents, if extremely voluminous, and/or furnish copies of 15 the particular documents which are sought by the borrower.

#67. Within a further fortnight, if necessary, the noticee/borrower can be given an opportunity to file additional reply, in the light of the documents which have by now been inspected / served on them. Thereafter, a hearing shall be fixed by the bank on the basis of the reply.

#68. Upon such hearing being concluded, a decision shall be taken whether or not to declare the borrower-company or its Director/promoter as “fraud” or “perpetrator of fraud”. The aforesaid procedure would take, at the most, 8 weeks in total to be concluded, which would be sufficient compliance of the Master Directions of the RBI. Thereafter, if declared as fraud/perpetrator of fraud, the same can be intimated by the Bank to the RBI.”

#20. The petitioners though have requested for supply of various documents but in the said reply, the petitioners have also indicated why the said documents are required. In their representations, the petitioners have categorically described the relevancy of each and every document.

#21. In the impugned order dated 19th December, 2025, the respondent has narrated the total reply of the petitioners. The Committee of the bank have also given their views on each issues but have not given any reasons as to why the documents which the petitioners have requested to supply, is not relevant or the said documents have been supplied. At the end of the impugned order, the Committee has given its view wherein in one part, it is recorded that the said documents are beyond the Forensic Audit Report and in other part, it is recorded that the allegation of fraud detailed in the show cause notices are based on the 16 transaction between the SREI Entities and their customers and these records are already with the borrowers.

#22. It is the specific case of the petitioners that the entire documents of the Forensic Audit Report are not supplied to the petitioners. The respondent has given personal hearing to the petitioners and in the personal hearing also the petitioners have requested the respondent for supply of documents but the same was neither supplied nor have given any justification as to why it is not necessary to supply the same to the petitioners. The respondent has offered personal hearing to the petitioners, the respondent ought to have given an opportunity to the petitioners to inspect the said documents if it was not possible for the respondent to supply the voluminous documents to the petitioners.

#23. Considering the above, this Court finds that the petitioners have specified the documents which the petitioners are required to give proper reply to the show cause notices but without any reasons and without considering the request of the petitioners, the respondent has passed the impugned order, thus the impugned order is set aside and quashed.

#24. The respondent is directed to supply the documents as requested by the petitioners in their reply dated 22nd May, 2025, within two weeks from date and if the documents are voluminous, the respondent shall allow the petitioners to inspect the documents within two weeks from 17 date and the petitioners shall complete the inspection of the documents within a period two weeks.

#25. On receipt of documents or on completion of inspection of documents, the petitioners shall have the liberty to file their supplementary reply within two weeks thereafter.

#26. On receipt of supplementary reply to the show case notices, if any, the respondent shall pass necessary order within two weeks thereafter.

#27. WPA No. 13100 of 2024 is disposed of. Parties shall be entitled to act on the basis of a server copy of the Judgment placed on the official website of the Court. Urgent Xerox certified photocopies of this judgment, if applied for, be given to the parties upon compliance of the requisite formalities. (Krishna Rao, J.)