Appeal
RBI’s direction on Master Directions on Frauds
2. The Reserve Bank of India (hereinafter referred to as the “RBI”) issued the Master Directions on Frauds – Classification and Reporting by commercial banks and select FIs, dated 01.07.2016 (hereinafter referred to as “Master Directions”). The Master Directions had been formulated with the objective of providing a framework for banks, to enable early detection and reporting of frauds, and consequently taking actions in a timely manner. In view of the same, the Appellant-Banks initiated administrative actions that affected the respondents, by declaring the companies’ bank accounts as fraudulent – an action which had significant civil consequences delineated in the Master Directions. The Appellant-Banks also initiated criminal proceedings against the respondents, with respect to fraudulent activity that was detected, as the Master Directions require the Banks to refer certain categories of cases to the State Police or the Central Bureau of Investigation (hereinafter referred to as “CBI”), as a general rule. Aggrieved by the same, the respondents approached different jurisdictional High Courts, challenging the validity of the Master Directions, and the actions taken consequently.
High Courts quashed both administrative actions and registered FIRs and subsequent criminal proceedings initiated
3. The High Courts, vide the impugned orders, have quashed not only the administrative actions initiated in pursuance of the Master Directions, but also the First Information Reports (FIRs) registered and the subsequent criminal proceedings initiated against the respondents. Placing reliance upon the ratio of the judgment of this Court in State Bank of India and Others v. Rajesh Agarwal and Others, (2023) 6 SCC 1 (hereinafter referred to as “Rajesh Agarwal’s case”), the administrative actions were quashed primarily on the ground of non-adherence to the principles of natural justice, more specifically the principle of Audi Altarem Partem, as the concerned respondents were not given an opportunity of being heard before the companies’ bank accounts were declared as fraudulent/blacklisted. The High Courts consequently quashed the criminal proceedings initiated against the respondents, holding that they are a natural corollary to the administrative action of declaring the aforementioned bank accounts as fraudulent.
Discussion
Master Directions are within the domain of RBI and initiations of criminal proceedings are the domain of CBI
6. Having heard the respective contentions of the parties, the question before us pertains to the nature and scope of administrative actions initiated in pursuance of the Master Directions vis-à-vis criminal proceedings initiated, against the respondents. We clarify that there is an apparent distinction between the two. The former is within the domain of the RBI and the Complainant-Banks, while the latter is within the domain of the Appellant-CBI. We would like to reiterate that an administrative action and a criminal proceeding stand on different footings, as clarified in para 39 of Rajesh Agarwal’s case (supra).
If cognizable offence is found out even no action on the administrative side an FIR can be held to be maintainable
7. An FIR, by taking cognizance of an offence, merely sets the law into motion. This has nothing to do with a decision on the administrative side, made by a different authority. Merely because the facts are same or similar, one cannot say that in the absence of a valid administrative action, no offence which is otherwise cognizable, can be registered. At that stage, one only has to see the existence of a cognizable offence, based on the FIR registered. Therefore, even assuming that there is no action forthcoming on the administrative side, an FIR can be held to be maintainable. The scope and role of both the actions are totally different and distinct, more so when undertaken by different statutory/public authorities.
An administrative order can be set aside on non-compliance of legal necessity but based the facts mentioned there an FIR could be registered
8. The foundational facts may well be the same. Even in a case where an FIR is registered based on an administrative action, setting aside the latter on a technical or a legal premise would not ipso facto nullify the former. It is ultimately a matter for investigation by the appropriate authority. When an administrative order is set aside on the ground of non-compliance of a legal necessity or mandate, the facts mentioned thereunder could still be the basis for the registration of an FIR. Hence, the High Courts have clearly failed to take note of the same.
9. The High Courts have quashed the FIRs and the subsequent criminal proceedings on an erroneous interpretation of Rajesh Agarwal’s case (supra). SBI v. Rajesh Agarwal, (2023) 6 SCC 1
“paras. 37 – 40 and 98”
Principles of natural justice are not applicable at the stage of reporting a criminal offence
10. From a perusal of the above paragraphs, it is clear that the principles of natural justice are not applicable at the stage of reporting a criminal offence. It has further been clarified that providing an opportunity of being heard prior to the commencement of a criminal action (i.e. registration of an FIR), would frustrate the very purpose of initiating a criminal proceeding, which is to meet the ends of justice. More specifically, para 98.1 of Rajesh Agarwal’s case (supra) explicitly states that no opportunity of being heard is required before an FIR is lodged or registered.
12. It is pertinent to mention that the administrative actions initiated in pursuance of the RBI’s Master Directions were set aside only on the ground of nonadherence to the principle of Audi Altarem Partem and not on merits. Setting aside of an administrative action on the grounds of violation of the principles of natural justice does not bar the administrative authorities from proceeding afresh.
…………….
Hence, we clarify that there is no bar on the RBI or the Complainant-Banks to proceed afresh, by adhering to the principles of natural justice.
Key judgment cited
State Bank of India and Others v. Rajesh Agarwal and Others – (2023) 6 SCC 1.
Acts and Sections not listed explicitly, however, it references
Code of Criminal Procedure, 1973 (CrPC) regarding the registration of FIRs and principles of natural justice.
Principles of “natural justice” (audi alteram partem) applied in administrative actions.
Party
Central Bureau of Investigation v. Surendra Patwa & Ors – Crl.Apl No: 2199 of 2025 @ SLP (Crl.) No. 7735 of 2024 and connected matters – 2025 INSC 572 – April 25, 2025 – Hon’ble Justices M. M. Sundresh and Rajesh Bindal.
