The Delhi High Court has upheld the quashing of the "wilful defaulter" tag on businessman Ratul Puri, affirming a previous ruling against Bank of Baroda and Punjab National Bank. The court's decision reinforces the need for a thorough examination of a borrower's conduct before categorizing them as a wilful defaulter under the Reserve Bank of India (RBI)'s Master Circular.

In a judgment passed on February 29, 2024, Justice Purushaindra Kumar Kaurav stated that Bank of Baroda could not have issued a show cause notice to Puri for wilful default without verifying the source of funds invested in the subsidiaries of Moser Baer India Ltd (MBIL), a company with which Puri was formerly associated. The court emphasized that the "genesis of 'diversion' or 'siphoning of' funds is dependent on the funds being borrowed funds". Unless the invested funds were found to be borrowed, the bank lacked the jurisdiction to invoke the Master Circular.

The High Court found that the forensic audit report relied upon by the bank did not provide any conclusion regarding the diversion or siphoning of funds by Puri. The court deemed the bank's reliance on the report to issue the show cause notice as "misconceived". Furthermore, the court stated that the finding of the bank's identification committee, which was later confirmed by the review committee, regarding MBIL's investments in subsidiaries amounting to Rs 1586.75 crore as of December 31, 2013, was "unsustainable". The court noted that the lender banks had initially placed MBIL in Class-B of the CDR Master Circular, a classification that is not permissible if there is a diversion of funds. The court observed, "The lender banks, therefore, never treated the investments in subsidiaries as an act of diversion or siphoning either during finalisation of the CDR scheme or after its failure".

The High Court's order came in response to a petition filed by Puri challenging the validity of an order dated March 23, 2023, passed by the review committee of the Bank of Baroda, which upheld the decision declaring him a wilful defaulter. The court also set aside a similar order passed by Punjab National Bank's review committee on April 20, 2023, which declared Puri and his mother, Nita Puri, as wilful defaulters.

The court clarified that the identification of a wilful defaulter must be based on the borrower's overall track record, rather than isolated transactions or incidents. The court stated, "It is required to be ensured that solitary or isolated instances are not made the basis for imposing the penal action under the Master Circular". This requirement aims to target borrowers who have acted in bad faith and diverted borrowed funds, rather than those who have encountered genuine business difficulties.

The ruling underscores the importance of banks conducting thorough inquiries into borrowers' financial status and potential fraud, especially when dealing with public funds. The court emphasized that if banks discover fraud or malfeasance, they must either refuse restructuring or impose stringent conditions.