Supreme Court's Clarification on Natural Justice and Administrative Action: A Critical Analysis of Judgments CBI v. Surendra Patwa and SBI v. Rajesh Agarwal related to RBI fraud declaration

In a significant development, the Hon’ble Supreme Court of India has recently settled the legal controversy surrounding the interplay between administrative fraud classifications under the Reserve Bank of India’s Master Directions on Frauds, 2016, and the initiation of criminal proceedings. The two judgments State Bank of India & Ors. v. Rajesh Agarwal & Ors. [(2023) 6 SCC 1] and Central Bureau of Investigation v. Surendra Patwa & Ors. [2025 SCC OnLine SC 934] together chart a nuanced trajectory for the future of natural justice in banking regulation, while maintaining the independence of criminal law machinery. While the Rajesh Agarwal judgment firmly entrenched the principles of natural justice in fraud classification processes, the Surendra Patwa decision clarified that violation of natural justice in administrative action does not vitiate parallel criminal proceedings.

This article critically analyses these judgments, evaluates the Court’s reasoning, and explores the broader implications for financial regulation, due process, and the criminal justice system.

Background: RBI's Master Directions and Their Contested Nature

The Master Directions on Frauds (2016), issued by the RBI, require banks to classify borrower accounts as fraudulent based on forensic audits and report such frauds within 21 days (Clause 8.9.5). Clause 8.12.1 imposes penal consequences, including a five-year debarment from institutional finance. However, these directions initially did not mandate any hearing before such classification an omission that soon attracted constitutional challenge.

In SBI v. Rajesh Agarwal, borrowers challenged the classification of their accounts as fraudulent without being afforded a hearing. The Supreme Court agreed, holding that such classifications entailed severe civil consequences—akin to blacklisting—and therefore must conform to the principles of natural justice, especially audi alteram partem.

Judgment in Rajesh Agarwal: A Victory for Due Process

The Division bench, led by Chief Justice D.Y. Chandrachud and Justice Hima Kohli, concluded that:

• Fraud classification under Clause 8.12 has grave civil consequences.

• The process must provide borrowers with notice, disclosure of audit reports, and an opportunity to respond.

• Decisions taken without such safeguards are void for violating natural justice.

• However, this does not prevent banks from initiating fresh action after following due process.

This judgment marked a significant shift from a regulatory convenience approach to a rights-based framework. It firmly grounded banking regulation within the constitutional promise of procedural fairness and reaffirmed that administrative expediency cannot override fundamental rights.

Judgment in Surendra Patwa: Preserving the Autonomy of Criminal Proceedings

The controversy did not end there. In CBI v. Surendra Patwa, the respondents contended that since the fraud classifications were set aside due to non-adherence to natural justice, the consequent criminal proceedings including FIRs and investigations must also fall. The High Courts had agreed, quashing both administrative and criminal proceedings.

A two-Judge Bench comprising Justices M.M. Sundresh and Rajesh Bindal reversed this view. The Supreme Court clarified that:

• The Rajesh Agarwal judgment does not extend to criminal proceedings.

• Setting aside administrative actions for procedural lapses does not render FIRs or investigations void.

• The factual basis for FIRs (forensic audit findings) remains intact, and criminal law may proceed independently.

• The registration of an FIR does not require a prior hearing; thus, the principle of audi alteram partem has no application at the pre-investigative stage.

The Bench observed:

“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.”

Critical Analysis: Balancing Procedural Fairness with Regulatory Efficacy

Both judgments reflect a calibrated judicial approach—one that guards against arbitrary executive action while ensuring that procedural infirmities do not frustrate legitimate criminal investigations. However, several critical issues merit closer scrutiny:

1. Differentiation Between Administrative and Criminal Domains While the Court rightly upheld the independence of criminal law, it arguably under appreciated the psychological and reputational burden of FIRs that are directly triggered by flawed administrative processes. In practice, a borrower’s criminal branding often originates from their classification as fraudulent a stigma that is hard to erase even if later set aside.

2. Re-initiation of Administrative ActionThe Court’s permission for banks and the RBI to proceed afresh after procedural correction is welcome, but it presupposes institutional willingness and capacity to conduct fair hearings. In the absence of binding procedural safeguards, the risk of perfunctory compliance persists.

3. Judicial Deference to Economic Policy The judgments implicitly recognize the importance of maintaining the integrity of India’s financial ecosystem. By preserving the RBI’s framework and allowing for re-initiation of fraud classifications, the Court maintained a fine balance between constitutional safeguards and economic policy imperatives.

4. Doctrine of ‘Civil Death’The Court’s acknowledgment that fraud classification results in ‘civil death’ was central to the Rajesh Agarwal judgment. However, Surendra Patwa draws a linesuggesting that while civil consequences require procedural fairness, criminal law can be initiated even without such safeguards. This compart metallisation, though doctrinally sound, may not reflect the real-world interconnectedness of regulatory and penal consequences.

Conclusion

Together, Rajesh Agarwal and Surendra Patwa form a significant doctrinal pivot in administrative and banking law jurisprudence. While one affirms the constitutional guarantee of natural justice in regulatory classifications, the other safeguards the autonomy of criminal prosecution from procedural lapses in administrative spheres.

On the other hand the judgment Central Bureau of Investigation v. Surendra Patwa & Ors. warrants critical scrutiny, particularly in its departure from the robust procedural safeguards emphasized in State Bank of India v. Rajesh Agarwal. While the Court rightly reaffirmed the distinction between administrative and criminal proceedings, its failure to appreciate the intimate link between fraud classification and subsequent FIRs results in a dilution of the protections afforded under Rajesh Agarwal. The classification of a borrower’s account as fraudulent is often the immediate trigger for criminal prosecution; hence, allowing FIRs to stand despite quashing the administrative classification on grounds of violation of natural justice raises serious concerns about fairness and accountability.

By insulating criminal proceedings from the procedural infirmities in fraud classification, the Court has effectively permitted prosecution to be sustained on the foundation of a void administrative action. This approach undermines the rationale of Rajesh Agarwal, where the Hon’ble Court had categorically recognised the severe civil and reputational consequences of fraud labelling, mandating adherence to audi alteram partem. The judgment, while ostensibly upholding the independence of criminal law, does so at the cost of procedural fairness and the constitutional guarantee of due process.

Credits: Syanne Dsouza, Law Student, Thakur Ramnarayan College of Law, Mumbai.

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