Court's Fraud Ruling Could Set Insolvency Precedent

Bank of Maharashtra has classified Reliance Communications Ltd. (RCOM) as a fraudulent account, citing financial misconduct including misappropriation of funds and circular routing of loans between the company and its subsidiaries. The bank's forensic audit revealed that RCOM used Letters of Credit (LCs) to siphon Rs 2,779.38 crores to related entities, a move it claims constitutes criminal breach of trust. The bank has reported the matter to the Reserve Bank of India (RBI) and plans to file complaints with the Central Bureau of Investigation (CBI) as per regulatory directives, according to a ScanX report.

RCOM, already under corporate insolvency resolution process (CIRP) since June 2019, faces limited liability for pre-insolvency offenses under the Insolvency and Bankruptcy Code (IBC). A resolution plan approved by creditors is pending finalization by the National Company Law Tribunal (NCLT). The company argues that the disputed credit facilities predate the CIRP and will be resolved through the insolvency process or liquidation, according to an NDTV Profit report.

The Bombay High Court recently rejected Anil Ambani's petition challenging the classification, ruling that the petition lacked merit and upheld Bank of Maharashtra's decision to report the case to the RBI. Ambani had argued for a personal hearing and access to key documents, but the court found no violation of natural justice. This contrasts with a prior case where Canara Bank withdrew a similar fraud classification after Ambani's legal challenge, as earlier reported by ScanX.

The development adds to RCOM's financial woes, which have been exacerbated by broader struggles in India's telecom sector. The company's protection under the IBC shields it from legal action for pre-CIRP offenses, but the fraud designation could complicate its restructuring. RCOM's stock has declined sharply over the past year, reflecting investor concerns over its viability.

The case highlights intensifying scrutiny of corporate debt by Indian banks and regulators. With RCOM's resolution plan awaiting NCLT approval, the outcome may set a precedent for how fraud allegations are handled within the insolvency framework.