HC Bombay (2025.12.24) in Anil D. Ambani Vs. Indian Overseas Bank and Ors. [2025:BHC-OS:26293, IA (L) NO.37574 of 2025 with IA (L) NO.37575 of 2025 IN SUIT (L) NO.37573 OF 2025] held that;
Banks cannot appoint an ineligible and unqualified Auditor, whether Internal or External for Audit contrary to provisions of eligibility prescribed under the provisions of Section 141(1) and 141(2) of the Companies Act, 2013 if the Auditor is not a practicing Chartered Accountant registered with the ICAI.
Therefore in view of the above it is preposterous to accept the argument of Banks that an External Auditor not having Chartered Accountant qualifications could be validly appointed under the 2016 RBI Master Directions for External Audit.
For grant of interim relief prima facie case and balance of convenience clearly shifts in favour of Plaintiff due to the frailty of the FAR and qualification of the Auditor as discussed above in fact and in law.
Banks’ case that interfering with the Show Cause Notices and further consequential action will derail investigation cannot be countenanced if the edifice on which it is based is itself palpably dubitable.
Excerpts of the Order;
# 73. Though it is true that Plaintiff has filed several proceedings to challenge the show-cause notice and the consequential actions taken thereafter but it is equally true and an admitted position by all parties before me that the validity of the Report on the basis of qualification of the author of the report is not challenged by Plaintiff in any proceedings after he received the Report and this is the first instance of maintaining the challenge. Banks are required to follow and adhere strictly to the “Rule of Law” and principles of due process of law in all operations, including Audits. This obligation stems from the comprehensive legal and regulatory framework governing the Banking Sector. Banks have to operate for all purposes within a clear, established legal framework, and not by arbitrary power. Banks cannot appoint an ineligible and unqualified Auditor, whether Internal or External for Audit contrary to provisions of eligibility prescribed under the provisions of Section 141(1) and 141(2) of the Companies Act, 2013 if the Auditor is not a practicing Chartered Accountant registered with the ICAI.
# 74. In this regard attention is invited to following Master Directions / letters issued by RBI and the Government of India, Ministry of Finance to Banks which are all in the public domain and which are relevant to the issue at hand:-
(i) In the Master Circulars on Inspection and Audit Systems in Primary (Urban) Co-operative Banks issued by RBI on 01.07.2009 and 01.07.2011 in the “Note” appended thereto in Clause 5.1 under “Appointment and Remuneration of Auditor” it is stated that the option to consider whether the concurrent Audit should be done by the External Auditors (professionally qualified Chartered Accountants) or its own staff may be left to the individual Banks. In Clause 5.2 it further states that this is so because in case of omissions or commissions responsibility of the Audit Firms if observed in the concurrent (External) Audit can be fixed and Banks can terminate their appointment and Report may be made to ICAI for such action as Banks deem fit under intimation to RBI / RCS. Certainly the standard for audit in Public Sector/Commercial Banks cannot be lower than for Primary (Urban) Co-operative Banks.
(ii) In the letter dated 26.09.2012 addressed by the Government of India, Ministry of Finance, Department of Financial Services to Chief Executives of all Public Sector Banks on the subject - Master Circular on Audit Systems concerning Guidelines to be followed for Internal Audit, Information System Audit and Concurrent Audit Systems, the guidelines categorically state that for Concurrent Audit, Chartered Accountant Firms should be appointed from the RBI panel as per the gradation based on the size of the Branch.
(iii) In the letter dated 16.07.2015 issued by RBI to CMD/MD/CEO of all scheduled Commercial Banks regarding “Concurrent Audit System in Commercial Banks – Revision of RBI’s Guidelines” it is stated that terms of appointment of the External Firms of Chartered Accountants for Concurrent Audit and their remuneration may be fixed by Banks at their discretion.
(iv) In the letter dated 18.09.2019 issued by RBI to all Scheduled Commercial Banks (other than Regional Rural Banks), Small Finance Banks, Payments Banks and Local Area Banks regarding Concurrent Audit System it is stated under Clause B - “Appointment of Auditors” and under Clause B (ii) that the head of Internal Audit in the Bank should participate in selection of Concurrent Auditors where such function is outsourced and should be responsible for the quality review (including skills of the staff employed) of the work of the Concurrent Auditors reporting to her/him. It further states that It may, however, be ensured that if any Partner of a Chartered Accountant Firm is a Director on the Board of a Bank, no Partner of the same firm should be appointed as Concurrent Auditor in the same Bank. It is stated under Clause C - “Accountability” that if External firms are appointed and any serious acts of omission or commission are noticed in their working, their appointments may be cancelled after giving them reasonable opportunity to be heard and the fact shall be reported to ACB / LMC of the Bank, RBI and ICAI.
# 75. Therefore in view of the above it is preposterous to accept the argument of Banks that an External Auditor not having Chartered Accountant qualifications could be validly appointed under the 2016 RBI Master Directions for External Audit.
# 76. The consequences of allowing the Banks to proceed further and declaring the Plaintiff and Directors of the three Companies as fraud are already discussed hereinabove. They are virtually drastic and lead to disastrous consequences like being black listed, barred from new Bank loans / credit for years, criminal FIR filing, reputation damage, impacting fundamental rights to financial access and civil death. However, in view of all the above observations and findings, the Forensic Audit Report being a highly contentious document, qualification of the author of the Report being inadequate and it not having been authored by a qualified Chartered Accountant as External Auditor, role of the External Auditor in the present case when he being actively engaged before his appointment with the Lender Banks as Consultant and he himself suggesting and canvassing for his own appointment as Forensic Auditor before the Banks in the JLM, his participation in the JLM on 01.03.2019 and acting as Consultant to Lender Banks well before his appointment as External Auditor and most importantly he stating in writing through his Advocates that no fraud or criminal breach of trust has been observed by him in the FAR, the Plaintiff has made out a reasonably strong case for trial.
# 77. The balance of convenience therefore is in favour of Plaintiff.
# 78. For grant of interim relief prima facie case and balance of convenience clearly shifts in favour of Plaintiff due to the frailty of the FAR and qualification of the Auditor as discussed above in fact and in law. Needless to state that this is my prima facie opinion for which I have returned the above reasons on the basis of the prima facie material placed before the Court.
# 79. Banks’ case that interfering with the Show Cause Notices and further consequential action will derail investigation cannot be countenanced if the edifice on which it is based is itself palpably dubitable. Allowing the impugned action to proceed will lead to disastrous consequences in such cases where it leads to a certain civil death without trial. Hence on the parameter of grave and irreparable harm / loss, Plaintiff’s case deserves to be accepted for grant of interim relief for all the above reasons, legal and factual, and in accordance with the principles of natural justice. Principles of natural justice is based on the maxim – “Justice should not only be done but should manifestly be seen to be done”. It provides for a fair hearing, unbiased decision-making and presenting proper evidence before taking any action.
# 80. Having prima facie being satisfied for grant of interim relief on the basis of the above observations and findings, the FAR i.e. Forensic Audit Report dated 15.10.2020 appended at Exhibit ‘A’ to the 3 Suit plaints not being in consonance with the RBI Master Directions and for the aforementioned reasons, interim relief is granted to Plaintiff in terms of prayer clause (i) in Suit (L) No.35923 of 2025 and Suit (L) No.37573 of 2025 and in terms of prayer clause (j) in Suit (L) No.37862 of 2025 which read thus:-
(i) In Suit (L) No.35923 of 2025:-
“i. That pending the hearing and final disposal of this Suit, this Hon’ble Court be pleased to
(i) stay all actions already taken by Defendants under or in reliance upon the Report dated 15 October 2020 (Exhibit “A” hereto) or the Show Cause Notice dated 2 December 2024 (Exhibit “B” hereto); and
(ii) restrain the Defendants from taking any further action or proceedings under or in reliance upon the said Report dated 15 October 2020 or the said Show Cause Notice dated 2 December 2024.”
(ii) In Suit (L) No.37573 of 2025:-
“i. That pending the hearing and final disposal of this Suit, this Hon’ble Court be pleased to
(i) stay all actions already taken by Defendants under or in reliance upon the Report dated 15 October 2020 (Exhibit “A” hereto) or the Show Cause Notice dated 31 May 2024 (Exhibit “B” hereto); and
(ii) restrain the Defendants from taking any further action or proceedings under or in reliance upon the said Report dated 15 October 2020 or the said Show Cause Notice dated 31 May 2024.”
(iii) In Suit (L) No.37862 of 2025:-
“j. That pending the hearing and final disposal of this Suit, this Hon’ble Court be pleased to
(i) stay all actions already taken by Defendants under or in reliance upon the Report dated 15 October 2020 (Exhibit “A” hereto) or the Show Cause Notice dated 2 January 2024 (Exhibit “B” hereto) and Fraud Declaration Order dated 2 September 2025 (Exhibit “C” hereto); and
(ii) restrain the Defendants from taking any further action or proceedings under or in reliance upon the said Report dated 15 October 2020 or the said Show Cause Notice dated 2 January 2024.”
# 81. Interim Application (L) Nos.35925 of 2025, 37575 of 2025 and 37865 of 2025 in all three (3) Suits stand allowed and disposed in the above terms.
[ MILIND N. JADHAV, J. ]
# 82. After this Judgment is pronounced in open Court, Mr. Setalvad, Mr. Bharucha and Mr. Andhyarujina, learned Senior Advocates appearing on behalf of Bank of Baroda, IDBI Bank and Indian Overseas Bank would persuade the Court to stay the effect of this judgment for a period of six weeks.
# 83. Mr. Dwarkadas, learned Senior Advocate appearing on behalf of Defendant Nos.2 and 3 would also persuade the Court to consider the stay of judgment.
# 84. Mr. Joshi, learned Senior Advocate and Mr. Naik, learned Advocate appearing on behalf of Plaintiff oppose the stay.
# 85. I have considered the request made by learned Senior Advocates appearing for Banks and Mr. Dwarkadas, however in view of my prima facie observations and findings and reasons given in the order, I decline to accede to their request for stay. Request for stay is therefore declined.
[ MILIND N. JADHAV, J. ]
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