SBI v. Rajesh Agarwal: natural justice and the bank's fraud-classification machinery

State Bank of India v. Rajesh Agarwal, decided on 27 March 2023 by a 2-judge bench of Dr D.Y. Chandrachud, C.J. and Hima Kohli, J., sits at the intersection of administrative law and banking regulation. The bench was asked whether the classification of a borrower's account as "fraud" under the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016 — issued under Section 35A of the Banking Regulation Act 1949 — could lawfully be effected without the borrower being heard. Chandrachud, C.J., writing for the bench, held that it could not. The principle of audi alteram partem — the right to be heard before an adverse decision — had to be read into the relevant clauses of the 2016 Master Directions. Classification as fraud carried consequences sufficiently grave that the silence of the Master Directions on the borrower's hearing right could not be read as a deliberate legislative exclusion.

The judgment is reported at (2023) 6 SCC 1, 2023 SCC OnLine SC 342 and 2023 LiveLaw (SC) 243. It runs to a substantial print extent in the SCC volume and is written in three parts: a constitutional part on the civil consequences of the classification and the engagement of Articles 14, 19(1)(g) and 21; an administrative-law part on the content of the hearing right; and a clarifying part on the line between the regulatory classification — which requires a hearing — and the criminal-law step of lodging an FIR, which does not.

A first clarification at the outset is important. The case is not about the Reserve Bank of India (Wilful Defaulters) Master Circular 2015. That document governs a distinct regime — the classification of a borrower as a wilful defaulter, addressed by the bench in State Bank of India v. Jah Developers Pvt Ltd (2019) 6 SCC 787. Wilful default is not a determination of criminality and is governed by a different set of consequences. The 2016 Frauds Directions, by contrast, classify borrower accounts as fraud — a determination with consequences that include the bank's obligation to report the fraud, to file an FIR in suitable cases, and to apply consequences that include credit-access debarment. Rajesh Agarwal is the fraud-classification authority; Jah Developers is the wilful-defaulter authority. They run together as a pair but they are not to be conflated.

The statutory architecture

The 2016 Master Directions on Frauds are not legislation in the parliamentary sense. They are statutory directions issued by the Reserve Bank of India under Section 35A of the Banking Regulation Act 1949 — which empowers the RBI to issue directions to banking companies in the public interest, in the interest of banking policy or to prevent the affairs of any banking company being conducted in a manner detrimental to its interests or those of its depositors. Such directions, when issued, are binding on the banks to which they are addressed.

The Master Directions of 2016 set out the framework by which banks identify, investigate and report frauds. The procedural architecture turns on the work of a Joint Lenders' Forum — a consortium body that takes the classification decision where the borrower has exposure to multiple banks. The relevant operative clauses for the Rajesh Agarwal dispute were Clauses 8.9.4 and 8.9.5: the clauses that set out the JLF's powers to declare an account fraud, the procedural steps for that declaration and the downstream reporting obligations.

The Master Directions did not, in terms, mandate notice to the borrower or an opportunity to be heard. The classification was, on the face of the document, an internal-to-the-banks process: a forensic audit was commissioned, the audit's findings were placed before the JLF, the JLF took the decision, the decision was reported to the RBI and to the credit information companies, and downstream consequences followed. The borrower's first knowledge of the classification was, typically, when the consequences began to bite.

The constitutional baseline against which the 2016 Directions were tested in Rajesh Agarwal was the orthodox account of Articles 14, 19(1)(g) and 21 — the classification was an act of a state instrumentality with serious consequences, it impaired the borrower's right to carry on business through credit-access debarment, and the consequences for natural-person directors attracted the right-to-life protections the post-Maneka Gandhi line has read into Article 21.

The factual matrix

The lead matter and a clutch of connected matters concerned borrower accounts that had been classified as fraud by Joint Lenders' Forums under the 2016 Master Directions without the borrowers being heard. The borrowers had not been served with the forensic audit reports that formed the basis of the classifications. They had not been called upon to represent. The first notice they received was, in the typical case, of the consequence: the bar from fresh credit access, the report to the credit information companies, the operation of the prudential framework that disqualifies the directors of a fraud-classified borrower from acting on other corporate boards, and in due course the registration of an FIR.

The borrowers challenged the classifications in writ. Different High Courts took differing views. The Telangana High Court, on the lead matter, held that the principles of natural justice were attracted; the bank's appeal was carried to the Supreme Court, with a clutch of connected appeals from other High Courts.

The bank's submission was that the 2016 Master Directions were a regulatory regime addressed to banks; that the classification was an internal-to-the-banking-system step; that the consequences flowed from the regulatory framework rather than from any adjudication against the borrower; and that the hearing right the borrowers contended for had no basis in the text and would frustrate the regulatory purpose of expeditious fraud-reporting. The bank further argued that the lodging of an FIR was governed by the Code of Criminal Procedure and not by the Master Directions; the FIR step did not require a prior hearing, and the borrower had a remedy in the criminal court.

The Court's reasoning

The civil consequences of fraud classification

Chandrachud, C.J. began with the consequences. Classification of an account as fraud under the 2016 Master Directions is not a regulatory formality. It carries — the bench called the bundle of consequences "civil death" — a set of operational and reputational outcomes that materially impair the borrower's ability to carry on business.

The borrower is debarred from raising fresh credit from any bank or financial institution in India for a period that runs into years. The classification is reported to the credit information companies and reflected in the borrower's credit profile; lenders outside the consortium take notice. The directors are disqualified, under the Reserve Bank's prudential framework, from acting on the boards of other corporate borrowers. The classification supports — and in many cases triggers — the bank's complaint to investigative agencies and the registration of an FIR. The reputational harm to the natural persons implicated is substantial and, in practice, irrecoverable.

The bench held that a determination with these consequences engages the constitutional protections of Articles 14, 19(1)(g) and 21: arbitrary state action with serious consequences for the borrower; operational impairment of the right to carry on business through credit-access debarment; and impact on the dignity and working life of the natural-person directors that the post-Maneka Gandhi doctrine treats as engaging Article 21.

Reading audi alteram partem into the Master Directions

Once the consequences were so characterised, the application of audi alteram partem followed. The orthodox administrative-law rule is that the principles of natural justice apply to any state act with civil consequences unless the statute or the rules excludes them either expressly or by necessary implication. The 2016 Master Directions did not exclude the principles expressly. The bench held that they did not exclude them by necessary implication either: the silence of the Master Directions on the borrower's hearing right was not a deliberate legislative exclusion; it was a gap to be filled by the application of the orthodox administrative-law rule.

The bench then specified the content of the hearing right. A borrower is entitled to (i) notice of the proposed classification — notice that identifies the account, the basis of the proposed classification and the materials relied on; (ii) supply of the forensic audit report that forms the basis of the proposed classification, or — where parts of the report contain third-party sensitive material — supply of the conclusions and the materials relied on against the borrower; (iii) an opportunity to make a representation — an opportunity that may be in writing or, where the borrower so seeks and the JLF considers it necessary, oral; and (iv) a reasoned order by the JLF that addresses the borrower's representation and that records the reasons for accepting or rejecting it.

The hearing right is, on the bench's reasoning, a substantive procedural right. It is not satisfied by a token notice and a pro-forma rejection. The JLF's order must show that the borrower's case has been considered on its merits — that the materials in the forensic audit report have been examined, that the borrower's response has been weighed against those materials, and that the conclusion the JLF has reached is supported by reasons that engage with the borrower's position.

The criminal-law step is distinct

A separate strand of the reasoning addresses the FIR. The bank had argued that any hearing requirement before classification would also apply to the lodging of an FIR. The bench rejected the equivalence. The lodging of an FIR is governed by the Code of Criminal Procedure — Section 154 in particular — and not by the Master Directions. The FIR is the first step in a criminal-law process whose own architecture protects the accused at later stages: bail, framing of charge, trial, appeal. The orthodox rule under Lalita Kumari v. State of UP (2014) is that registration of an FIR is mandatory on disclosure of a cognisable offence and is not preceded by a hearing of the suspect.

Classification and FIR are different steps engaging different bodies of law. The classification engages administrative-law procedural protections; the FIR engages the criminal-procedure architecture and the protections it carries. The two are not to be elided.

The doctrinal contribution

Rajesh Agarwal makes three principal contributions.

It establishes that the principles of natural justice apply to fraud classification by a Joint Lenders' Forum under the 2016 Master Directions. The classification is an act of a state instrumentality with civil consequences sufficient to engage Articles 14, 19(1)(g) and 21; audi alteram partem is read in.

It specifies the content of the hearing right. Notice, supply of the forensic audit report (or its conclusions), an opportunity to represent, a reasoned order — these are the four elements the JLF must observe. The specification gives banks a structured compliance framework and gives borrowers a structured set of procedural entitlements.

It draws the line between the regulatory classification and the criminal-law FIR. The hearing right is for the classification; the FIR is governed by the Code of Criminal Procedure and does not require a prior hearing. The line preserves the operability of the criminal-procedure architecture and confines the Rajesh Agarwal hearing right to its proper administrative-law field.

A subsidiary contribution lies in the bench's analytic extension of the Jah Developers (2019) line. Jah Developers had read a hearing requirement into the classification of a borrower as a wilful defaulter under the 2015 Wilful Defaulters Master Circular. Rajesh Agarwal applies the same analytic frame to the analytically distinct fraud-classification context and extends — without flattening — the procedural-protection jurisprudence applied to RBI Master Directions.

What the judgment did not decide

A number of matters were not before the bench and are best identified at the outset.

The bench did not work through the question of whether an oral hearing is part of the audi alteram partem right under the 2016 Master Directions or whether a written representation suffices. The bench acknowledged that the form of the hearing might vary with the facts but did not commit to a rule one way or the other. That question came up squarely before a different bench in State Bank of India v. Amit Iron Pvt Ltd (2026) — to which we return below — which held that, under the 2024 RBI Fraud Master Directions, there is no inherent right to a personal or oral hearing because the determinations turn on objective documentary evidence.

The bench did not address the post-classification remedies. The borrower's writ remedy against an unlawful classification was, on the facts, the route by which the dispute reached the Supreme Court. The bench did not work through the operation of any alternative-remedy doctrine in this field, nor the standard of review the writ court was to apply.

The bench did not address the relationship between the Rajesh Agarwal hearing right and the FIR-stage protections in the criminal-procedure architecture. The line was drawn — the hearing right is for the classification, not the FIR — but the bench did not work through how an unlawful classification might affect the criminal proceedings that followed it.

The doctrinal arc

Rajesh Agarwal has had a substantial regulatory and judicial after-life.

On the regulatory side, the RBI issued, on 30 July 2024, the Master Directions on Treatment of Wilful Defaulters and Large Defaulters 2024. The 2024 Directions incorporate a structured show-cause and hearing procedure that responds to the Rajesh Agarwal and Jah Developers jurisprudence. The 2024 Directions sit alongside an updated set of fraud directions that build the Rajesh Agarwal procedural architecture into the operational framework that banks now apply.

On the judicial side, CBI v. Surendra Patwa (2025) clarified the line between the Rajesh Agarwal hearing right and the criminal-law step of investigation. The Surendra Patwa decision read Rajesh Agarwal as establishing an administrative-law hearing right that does not impede a properly commenced criminal investigation; the FIR may be lodged without a prior hearing and the criminal investigation may proceed even where the classification has subsequently been quashed for breach of Rajesh Agarwal.

The most consequential after-life decision is State Bank of India v. Amit Iron Pvt Ltd (2026 INSC 323), decided on 7 April 2026 by a 2-judge bench of J.B. Pardiwala, J. and K.V. Viswanathan, J. — the first major Supreme Court pronouncement on the 2024 RBI Fraud Master Directions. The bench held that there is no inherent right to a personal or oral hearing before fraud classification, since determinations rely on objective documentary evidence and a written show-cause and reply procedure satisfies natural justice; that banks must furnish the full forensic audit report to borrowers as the rule, with limited exceptions only for third-party sensitive material; and that the doctrinal distinction between fraud (which carries criminality) and wilful default (which does not) justifies differentiated procedural protections.

The doctrinal arc thus runs: Jah Developers (2019) — hearing right for wilful-default classification; Rajesh Agarwal (2023) — hearing right for fraud classification under the 2016 Directions; RBI Master Directions 2024 — operational framework incorporating the hearing architecture; Amit Iron (2026) — first Supreme Court interpretation of the 2024 framework, holding an oral hearing is not inherent in the Rajesh Agarwal right.

What practitioners take

For banks managing the fraud-classification machinery. The JLF process must now be conducted on a structured procedural footing. The four elements — notice, supply of the forensic audit report (or conclusions), opportunity to represent, reasoned order — are not negotiable. Internal templates and the JLF protocol should be updated to reflect the Rajesh Agarwal and Amit Iron architecture. After Amit Iron, a written show-cause and reply procedure is acceptable; an oral hearing is not required as of right but should be considered where the materials are contested and the borrower seeks one.

For borrowers contesting a classification. The first request is for the forensic audit report. Rajesh Agarwal requires supply of the report (or its conclusions) and Amit Iron sharpens that requirement — the full report should be supplied as the rule, with redactions only for genuinely third-party sensitive material. The second step is a written representation that engages with the materials in the report. After Amit Iron the borrower's request for an oral hearing is unlikely to be granted as of right; the case should be built on the documentary record.

For counsel advising on the FIR / classification interface. The hearing right under Rajesh Agarwal does not condition the lodging of an FIR. An unlawfully effected classification — one that breaches the Rajesh Agarwal procedural requirements — does not, of itself, render the FIR invalid; the FIR engages the criminal-procedure architecture and stands or falls on its own facts. The borrower's remedy against an unlawful classification is in the administrative-law field; the borrower's remedy against an unlawful FIR is in the criminal-procedure field.

For the wilful-default / fraud distinction. Counsel must keep the two regimes separate. Wilful default — governed by the Jah Developers line and the Master Directions on Treatment of Wilful Defaulters and Large Defaulters 2024 — does not carry the criminality element. Fraud classification — governed by Rajesh Agarwal and the updated 2024 Fraud Directions — does. The procedural architecture is similar; the substantive consequences and the downstream criminal-law engagement are different. Pleadings should not elide the two.

Related editorial pieces

• SBI v. Amit Iron Pvt Ltd: the first SC ruling on the 2024 RBI Fraud Master Directions
• Syndicate Bank v. Vijay Kumar: the banker's general lien on FDRs
• IOB v. Ashok Saw Mill: the DRT's substantive review jurisdiction under SARFAESI
• Mardia Chemicals v. Union of India: the constitutional baseline of SARFAESI enforcement
• Canara Bank v. Kavita Chowdhary: the bank as a service provider under consumer-protection law