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by Admin
20 December 2025 3:05 PM
“Without proof that investments were from borrowed funds, there can be no diversion or siphoning” – In a significant verdict with implications for banking due process, the Delhi High Court on 8 August 2025 dismissed appeals filed by Punjab National Bank and Bank of Baroda, upholding a series of single-judge rulings that had quashed the classification of industrialist Ratul Puri and his mother Nita Puri as “wilful defaulters” under the Reserve Bank of India’s Master Circular on Wilful Defaulters, 2015.
A Division Bench of Justice C. Hari Shankar and Justice Ajay Digpaul delivered a detailed judgment in Punjab National Bank v. Nita Puri and connected matters, stressing that the wilful defaulter tag—described by the Court as “akin to a civil death”—cannot be sustained unless banks conclusively establish that borrowed funds were intentionally diverted or siphoned off for unauthorised purposes.
The dispute arose from loans extended to Moser Baer India Ltd (MBIL) and its subsidiary Moser Baer Solar Ltd (MBSL). The banks alleged that substantial investments were made in subsidiaries, leading to capital shortages, and classified the Puris as wilful defaulters after internal committee proceedings.
However, the single judge had quashed these findings, holding that:
The investments in question were from MBIL’s and MBSL’s internal accruals and cash surpluses, not from borrowed funds.
The banks’ own Final Restructuring Scheme (FRS) in 2012 recorded that the investments were funded from surpluses generated in FY 2006–08 and FCCB proceeds, not bank loans.
The Forensic Audit Reports (FARs), which formed the sole basis of the show-cause notices, admitted they did not verify the source of funds—fatally undermining their evidentiary value.
The Division Bench fully concurred with the single judge’s reasoning, underscoring two decisive flaws:
“Wilful default, even as per Clause 2.1.3 of the Master Circular, takes place only when borrowed funds are diverted or siphoned off… The investments were made from internal accruals and cash surpluses, not borrowed funds. There could be no question of diversion or siphoning.”
And further: “The sole material for issuing the show-cause notice was the FAR, which itself acknowledged it had not verified the source of funds… The proposal to declare the respondent as a wilful defaulter was vitiated ab initio.”
The Bench noted that during the Corporate Debt Restructuring (CDR) process in 2012, lenders—fully aware of these investments—had classified the companies as Class B borrowers, a category inconsistent with any finding of fund diversion. No forensic audit was ordered then, and all transactions post-MRA were routed through Trust and Retention Accounts (TRA) under bank monitoring, making unapproved fund transfers improbable.
Calling the tag “a financial death knell,” the Court reiterated that it carries severe consequences:
Prohibition on future bank finance.
Potential criminal proceedings.
Reputational damage making commercial dealings difficult.
Given these stakes, the Court stressed strict adherence to RBI’s procedural and substantive safeguards, including mens rea—intentional, deliberate, and calculated default—as an essential element.
The Bench also took note that in parallel criminal proceedings initiated by the banks, all accused had been discharged by the Special CBI Court on 24 May 2025, which found no evidence of fund diversion—an outcome the High Court said “fortifies” its conclusions.
Holding that both the Identification Committees and Review Committees of the banks had failed to objectively establish the core requirement—use of borrowed funds for unauthorised purposes—the Division Bench dismissed the appeals and affirmed the single judge’s orders setting aside the wilful defaulter classifications.
“Without a scintilla of material to indicate that borrowed funds were transferred to subsidiaries, the findings of wilful default cannot stand,” the Court concluded.
Date of Decision: 8 August 2025
