Supreme Court ‘s concern over nexus of ARCs, Banks and Borrowers in a big banking fraud
A bench comprising Chief Justice of India Surya Kant and Justice N Kotiswar Singh expressed their concern through their observations made over an alleged nexus of asset Reconstruction Companies, banks and borrowers while dealing with PIL case pertaining to a debt of Rs. 1537 crore owned by a public sector banks settled through two ARCs – Prudent and Phoenix- for a mere Rs. 73.5 crore, resulting in a huge loss of public money. Supreme court sought responses from union home and finance ministries as well as RBI and serious fraud investigation office in relation to such a big scam involving JKM Infra Projects, the aforesaid two ARCs and 7 banks consisting of State Bank of India (Lead Bank), Canara Bank, Union Bank of India, Bank of India, State Bank of Hyderabad, State Bank of Patiala and Standard Chartered Bank.
Facts of the case.
The alleged fraud pertains to JKM Infra, a Noida based infrastructure company controlled by Jalan family was sanctioned a loan of Rs912 crore by a consortium of 7 banks led by State Bank of India during the years 2012 to 2015 against the collateral security of a mere Rs. 72 crores. Subsequent to the default by the JKM Infra, a forensic audit was undertaken by Earnst and Young in May 2018 and the audit revealed that more than Rs. 902 crores were siphoned to shell companies, non-existent vendors, forged work orders and unidentified bank accounts. Unmindful of noncompliance of RBI notification, SBI auctioned the loan to sole bidder Prudent ARC at 75% discount for a sum of Rs.120 crores against a debt of Rs. 596 crores. SBI neither classified the account as fraud nor were effective recovery measures initiated. Besides, despite forensic audit findings, the lending consortium failed to initiate criminal proceedings and did not refer the matter to enforcement agencies to classify the account as fraud as per RBI norms.
Yet another important wrong doing of the ARCs, and banks was that during the proceedings before the debt recovery tribunal, the debt was transferred to Phoenix ARC in 2025 at Rs. 73.5 crores as against a total amount outstanding liability of Rs. 1537 crores against the collateral security of Rs. 72 crores. Further reported shocking events are that throughout the process, no assets were attached, no bank accounts were frozen and no coordinated investigation was undertaken by the relevant authorities.
“FIRs and Court Proceedings
1. The PIL petition refers to two criminal cases registered in connection with the matter—FIR No. 53/2021 lodged by the Economic Offences Wing (EOW), Delhi, and FIR No. 43/2026 registered at Phase-1 Police Station in Gautam Budh Nagar, Uttar Pradesh.
2. The EOW attempted to close the first FIR considering the case as a family dispute. But the trial court rejected the closure report In January 2026 and directed investigation into the forensic report.
3. As per the PIL petition, the representation highlighting the alleged fraud were submitted to Enforcement Directorate (ED), I. T Department and the union ministry of Corporate Affairs (MCA) but no effective follow-up action seem to have been taken.
Apprehensions Over Asset Reconstruction Company Transactions
i. The petition argues that the JKM Infra matter reflects broader concerns highlighted in a Central Board of Direct Taxes (CBDT) press release issued in December 2021.
ii. According to the plea, certain ARCs have allegedly acquired non-performing assets (NPAs) using funds linked to borrower groups and subsequently settled debts at steep discounts, resulting in significant losses for lending institutions.
The petitioner has sought:
i. A comprehensive investigation by the ED under the Prevention of Money Laundering Act (PMLA).
ii. A probe by the Serious Fraud Investigation Office (SFIO) into the affairs of JKM Infra and related entities.
iii. Regulatory scrutiny by RBI into the conduct of banks and ARCs involved in the transactions.
iv. Measures to prevent defaulting promoters from regaining control of stressed assets through indirect settlement mechanisms.
v. Accountability for the alleged diversion and erosion of public funds.
Supreme Court to Examine Allegations
While issuing notice, no opinion has been passed by the Supreme Court on the merits of the allegations. However, its decision to hear the matter places refreshed focus on the functioning of the banking system, the effectiveness of fraud-detection mechanisms and the role of ARCs in resolving distressed assets.”
The Apex observed on the sale of debt to ARC, “This is the cleverest device adopted by the banks. Sell the outstanding debt at 10% of the dues and allow the borrower to wriggle out of the liabilities. We do not want to go into the commercial wisdom- give taxpayers money and make no attempt to recover it-then it would require investigation. While doubting the credentials of the PIL petitioners the Apex Court said, “There is a dire need to look into the conduct of ARCs who give a complete go-by to the recovery process. There appears to be a deep-rooted nexus between ARCs, borrowers and banks for misutilisation and siphoning of public money.”
During an earlier occasion on Monday 9th of February, 2026, a bench of Chief Justice Surya Kant, Justice Joymalya Bagchi and N. V. Anjaria made their observations on home ministry revelation about online fraud that an alarming siphoning of nearly 52,000 crores between April 2021 and November 2025 through online fraud including “digital arrest”. The bench said, “the banks’ IT applications devised for seamless transactions cannot be only profit-oriented and must be equipped to detect unusual transactions and verify genuineness.” Justice Bagchi castigated the banks and said, “In the over-anxiety of making profits, banks must realise they are trustees of public money. People have deposited their monies in banks because they trust them. These banks are becoming a huge liability to the public.” The Chief Justice further observed that the courts are becoming recovery agents for the banks, whose officials, in collusion with industrialists, grant huge loans recklessly and then use NCLAT and other tribunals to recover the money.” The bench opined, “The problem is banks are more into business mode, and naturally so, and in doing that, they are becoming, either innocently or connivingly, platforms through which there is a swift and seamless transmission of stolen proceeds of crime.”
The indictment of Supreme Court on the working of banks particularly in dealing with fraud cases principally with regard to cybercrimes involving huge amounts of public money and that too in connivance of bank officials and in collusion with industrialists, is a very serious matter to be tackled purposefully. Reserve Bank of India being the regulatory authority of the banks and financial institutions have been issuing circulars regarding prevention of frauds from time to time and also issuing press briefings on prevention of frauds for the sake of general public. The aforesaid financial fraud shows the callous and casual way the financial sector particularly the ARCs and the banks act with regard to the implementation of RBI directives to prevent the fraud.
RBI issued master directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions dated July 15, 2024 and also a booklet on MODUS OPERANDI OF FINANCIAL FRAUDSTERS RESERVE BANK OF INDIA which includes Modus Operandi and Precautions to be taken against Fraudulent Transactions – Banks. It is so obvious and apparent the aforesaid observations made by the Hon’ble Supreme Court are hard facts and unpleasant truth about the functioning of ARCs, Banks and financial institutions causing huge losses being incurred by the Indian financial sector. The public confidence in the Indian Financial Sector has already eroded considerably. The economy of the country is also being threatened. The utility value and the purpose of ARCs are also being questioned.
It is shocking and surprising that none of the consortium members took cognisance of the fraud and took any measures as envisaged under the aforesaid RBI circular dated July 15, 2024 as stated as under.
“RBI issued their circular as far back dated 14.01.2004 addressed to All Indian Commercial banks on Monitoring of large value frauds by the Board of Directors which among other things states, “Please refer to our circular DOS No BC 14/ Admn.919/16.13.100/95 dated September 26, 1995 containing revised instructions on the constitution and functions of the Audit Committee of Board (ACB).The ACB is required to oversee the internal inspection, statutory audit, inter-branch/inter-bank accounts, balancing of books, major areas of house-keeping, etc. The Committee is also required to focus attention on preventive aspects as well as follow up action on frauds.”
At that time, RBI expressed their concern, “ As delay in various aspects of frauds like detection, reporting to regulatory and enforcement agencies and action against the perpetrators of the frauds has been causing concern, the Chief Vigilance Commissioner has emphasized the need for paying focused attention on monitoring of frauds at the highest level and suggested constituting a sub-committee of the Board which would be exclusively dedicated to the monitoring of fraud cases. The Director, Central Bureau of Investigation (CBI) has also emphasized the need to assign a well-defined role to the Board of the banks in monitoring of fraud cases. It has, therefore, been decided that the Boards of banks should constitute a Special Committee for monitoring and following up cases of frauds involving amounts of Rs 1 crore and above exclusively, while ACB may continue to monitor all the cases of frauds in general.”
Besides, the broad guidelines regarding constitution and functions of the Special Committee of the Board were also formulated and their functions and the half yearly review of the functioning were well defined. Some of the most important extracts from the RBI circular dated July 15, 2024 are reproduced as under.
“2.1 Governance Structure in banks for Fraud Risk Management.
2.1.1.1 Issuance of a detailed Show Cause Notice (SCN) to the Persons, Entities and its Promoters / Whole-time and Executive Directors against whom allegation of fraud is being examined. The SCN shall provide complete details of transactions / actions / events basis which declaration and reporting of a fraud is being contemplated under these Directions.
2.1.1.2 A reasonable time of not less than 21 days shall be provided to the Persons / Entities on whom the SCN was served to respond to the said SCN.
2.1.1.4 A reasoned Order shall be served on the Persons / Entities conveying the decision of the bank regarding declaration / classification of the account as fraud or otherwise. Such Order(s) must contain relevant facts / circumstances relied upon, the submission made against the SCN and the reasons for classification as fraud or otherwise.
2.1.2 The Fraud Risk Management Policy shall be reviewed by the Board at least once in three years, or more frequently, as may be prescribed by the Board
2.1.3 Special Committee of the Board for Monitoring and Follow-up of cases of Frauds:
2.1.3.1 Banks shall constitute a Committee of the Board to be known as ‘Special Committee of the Board for Monitoring and Follow-up of cases of Frauds’ (SCBMF) with a minimum of three members of the Board, consisting of a whole-time director and a minimum of two independent directors / non-executive directors. The Committee shall be headed by one of the independent directors / non-executive directors.
2.1.3.2 SCBMF shall oversee the effectiveness of the fraud risk management in the bank. SCBMF shall review and monitor cases of frauds, including root cause analysis, and suggest mitigating measures for strengthening the internal controls, risk management framework and minimising the incidence of frauds. The coverage and periodicity of such reviews shall be decided by the Board of the bank.
2.1.4 The Senior Management shall be responsible for implementation of the fraud risk management policy approved by the Board of the bank. A periodic review of incidents of fraud shall also be placed before Board / Audit Committee of Board (ACB), as appropriate, by the Senior Management of the bank.
2.1.5 Banks shall put in place a transparent mechanism to ensure that Whistle Blower complaints on possible fraud cases / suspicious activities in account(s) are examined and concluded appropriately under their Whistle Blower Policy. 2.2 Banks shall set-up an appropriate organisational structure for institutionalisation of fraud risk management within their overall risk management functions / Department. A senior official in the rank of at least a General Manager or equivalent shall be responsible for monitoring and reporting of frauds.”
“Staff Accountability
- Banks shall initiate and complete the examination of staff accountability in all fraud cases in a time-bound manner in accordance with their internal policy.
- PSBs and AIFIs shall conduct examination of staff accountability as per the guidelines issued by the Central Vigilance Commission (CVC).
- In terms of CVC Order, PSBs and AIFIs shall also refer all fraud cases of amount involving ₹3 crore and above for examining the role of all levels of officials / whole-time directors (including ex-officials / ex-WTDs) to the Advisory Board for Banking and Financial Frauds (ABBFF) constituted by the CVC.
- In cases involving very senior executives of the bank (MD & CEO / Executive Director / Executives of equivalent rank), the ACB shall initiate examination of their accountability and place it before the Board. However, in case of PSBs and AIFIs, such cases shall also be referred to the ABBFF.
“Role of Auditors
During the course of the audit, auditors may come across instances where the transactions in the account or the documents point to the possibility of fraudulent transactions in the account. In such a situation, the auditor should immediately bring it to the notice of the senior management and if necessary, to the Audit Committee of the Board (ACB) of the bank for appropriate action. 8.3.2 Internal Audit in banks shall cover controls and processes involved in prevention, detection, classification, monitoring, reporting, closure and withdrawal of fraud cases, and also weaknesses observed in the critical processes in the fraud risk management framework of the bank withdrawal of fraud cases, and also weaknesses observed in the critical processes in the fraud risk management framework of the bank.”
Time has come for the government, RBI and the Judiciary to take tough decision and stand, however unpleasant it may be, to prevent such frauds of huge magnitude. It is said that even the smallest step in the right direction becomes being the biggest step of our life. Even it is a tiptoe if they must, but the step has to be taken. The government, RBI and the judiciary have to come out of intellectual lethargy and open up their eyes to new possibilities. It may be able to alter their perspectives, open up new avenues of thought and point them in different directions for the veritable realisation of the objectives. “BETTER LATE THAN NEVER” MUST BE THE MOTTO.
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