Forensic Audit Reveals Massive Fund Diversions as Bank Flags Fraud at Reliance Communications
Canara Bank has formally classified credit facilities extended to Reliance Communications and its subsidiary, Reliance Telecom Limited, as "fraud," citing a forensic audit that revealed irregularities totaling approximately Rs. 31,580 crores. The bank has ordered that the accounts be reported to the Reserve Bank of India’s Central Fraud Registry. This regulatory escalation follows a search operation by the Central Bureau of Investigation (CBI) at the company’s premises, where officials seized board meeting minutes and financial records spanning seven years.
Background and Context
The classification arises from a comprehensive forensic audit conducted by BDO India LLP covering the period from April 1, 2013, to March 31, 2017. The audit, submitted in 2020, was reviewed as part of the bank's compliance processes. According to regulatory disclosures, the investigation uncovered significant deviations from sanctioned fund usage. The audit findings suggest that funds were utilized for repayments of other bank loans and for payments to connected parties rather than their stated operational purposes.
Key Figures and Entities
The entities directly involved are Reliance Communications Limited and its wholly-owned subsidiary, Reliance Telecom Limited. Canara Bank identified irregularities in specific sanctioned amounts of Rs. 1,790 crores for the parent company and Rs. 100 crores for the subsidiary. However, the forensic audit reviewed a broader group exposure of Rs. 31,580 crores. The companies are currently under the management of Resolution Professional Mr. Anish Niranjan Nanavaty, appointed by the National Company Law Tribunal (NCLT) following the initiation of the Corporate Insolvency Resolution Process (CIRP) in June 2019.
Legal and Financial Mechanisms
The legal proceedings highlight a conflict between insolvency protections and banking regulations. The Resolution Professional contested the fraud classification, arguing that the moratorium under Section 14(1)(a) of the Insolvency and Bankruptcy Code (IBC), 2016 prohibits such actions during CIRP. However, Canara Bank maintained that classifying an account as fraud is a regulatory requirement under the RBI's Master Direction on Frauds and is distinct from debt recovery, which is stayed by the moratorium.
The bank relied on the July 2025 ruling by the Mumbai Bench of the NCLT in Rolta India RP vs. Bank of India, which established that banks can classify accounts as fraudulent even during ongoing insolvency proceedings. Separately, the CBI conducted searches at the company's Navi Mumbai offices under the Bharatiya Nagarik Suraksha Sanhita (BNSS), 2023, seizing original board minutes from 2010 to 2017 and various banking documents to investigate potential criminal liability.
International Implications and Policy Response
The case underscores the complexities of enforcing financial accountability within the framework of corporate bankruptcy. While the IBC is designed to provide a lifeline for distressed assets, the persistence of fraud classifications and criminal investigations suggests that historical financial misconduct remains a priority for regulators. The situation tests the limits of Section 32A of the IBC, which provides immunity from liability for offences committed prior to the commencement of CIRP once a resolution plan is approved. The outcome of these legal challenges could influence how banks and investigative agencies pursue asset recovery and accountability in other major insolvency cases.
Sources
This report draws on regulatory disclosures made pursuant to SEBI Listing Obligations and Disclosure Requirements, forensic audit summaries by BDO India LLP, notifications from Canara Bank, and public records regarding proceedings at the National Company Law Tribunal and the Central Bureau of Investigation.
