Reliance Communications Limited (RCOM) has received a letter from Canara Bank classifying the credit facilities extended to its subsidiary, Reliance Telecom Limited (RTL), as "fraud". The bank has also ordered to report RCOM to the Reserve Bank of India (RBI) to get it reflected in the Central Fraud Registry. The classification is based on a forensic audit report which revealed irregularities in the utilization of bank loans by RCOM, RITL, and RTL. Significant portions of the loans were used for repayment of other loans, payments to connected parties, and investments that were subsequently liquidated for payments. Inter-company loan transactions and discounting of bills among these entities were also highlighted, with funds being routed through various means, including ICDs and capital advances to entities with weak financial backgrounds. RCOM, which is undergoing corporate insolvency resolution process (CIRP), stated that the credit facilities were availed by RTL prior to the CIRP of both entities. The company's Resolution Professional (RP) argued that the moratorium under the Insolvency and Bankruptcy Code (IBC) prohibits the classification of RCOM's accounts as fraudulent during CIRP and that the company enjoys immunity from pre-CIRP liabilities under Section 32A of the IBC. However, Canara Bank maintained that the classification of fraud is a regulatory action by the RBI, not a "proceeding" barred by Section 14 of the IBC, and cited a Mumbai NCLT ruling in the Rolta India case to support its stance. The bank also clarified that the Show Cause Notice was directed at the Corporate Debtor and not the RP. Canara Bank has concluded that the contentions raised by the RP were untenable and has ordered the classification of the matter as fraud, with RCOM to be reported to the RBI's Central Fraud Registry. Legal advice is being sought on the way forward.
