Supreme Court’s Scrutiny of Bank‑ARC Settlement Raises Questions on Judicial Review, Regulatory Oversight and Public‑Fund Protection

The Supreme Court bench consisting of the Chief Justice Surya Kant and Justice V Mohana convened to examine a petition that raised the alarming allegation that a substantial quantity of public money may have been diverted in a manner that deprives the general populace of resources that could otherwise be deployed for public welfare initiatives. The petition asserted that loans totalling approximately Rs 1,537 crore, which remained outstanding against public sector banks, were purportedly settled through two asset reconstruction companies for a mere consideration of Rs 73.50 crore, thereby raising serious concerns about the adequacy of compensation for the depletion of public assets. In response to these allegations, the Court issued formal notices to the Union Government, the Reserve Bank of India and other respondents, thereby signalling its willingness to scrutinise the legality of the transaction, the statutory authority exercised by the regulators, and the potential breach of fiduciary duties owed to the public treasury. The Court’s expressed primary concern centred on the alleged misuse of public funds that, according to the petition, could otherwise have been allocated to programmes aimed at enhancing health, education, infrastructure and other pillars of social development, thereby underscoring the constitutional imperative that state resources be deployed for the collective benefit of citizens.

One question is whether the Supreme Court possesses the jurisdiction to entertain a public interest petition challenging a settlement between public sector banks and asset reconstruction companies when the alleged transaction implicates the utilisation of scarce public funds and potentially contravenes the statutory safeguards embedded in the banking regulatory regime. The answer may depend on the doctrine of locus standi in public‑interest litigation, which historically permits any individual or entity to approach the apex court to protect collective societal interests, provided the grievance pertains to a matter of public significance and the petitioner demonstrates a genuine concern for the alleged misappropriation of taxpayer resources. Perhaps the more important legal issue is whether the settlement amount of Rs 73.50 crore, representing a minuscule fraction of the outstanding liability, can be deemed a reasonable consideration under the regulatory framework governing asset reconstruction companies, and whether any breach of fiduciary duty by the banks or the regulator can give rise to a cause of action for restitution of public money. Perhaps a court would examine the statutory mandate of the Reserve Bank of India as the supervisor of public sector banks, scrutinising whether the regulator exercised its oversight functions diligently in approving or acquiescing to a transaction that appears to erode the banks’ asset quality and consequently diminish the fiscal capacity of the government to fund public programmes.

Another possible view is that the principle of public‑interest litigation may be invoked to compel the Centre to disclose the terms of the settlement, thereby ensuring procedural transparency and enabling the judiciary to assess whether the decision aligns with the constitutional duty of the state to manage public exchequer responsibly. Perhaps the procedural significance lies in the issuance of notices, which under judicial review doctrine function as an invitation to the respondents to produce documents and articulate their legal justification, thereby satisfying the requirement of a fair hearing before any adjudicative determination is rendered. Perhaps the constitutional concern is whether the alleged undervaluation of the loan settlement infringes upon the right to property of the government as a sovereign borrower, given that the State’s assets, represented by the outstanding loan, are effectively transferred at a price that may constitute an unreasonable deprivation without due process of law. Perhaps the legal position would turn on whether the regulator’s actions, if found to be arbitrary or lacking a reasoned basis, could be challenged under the doctrine of proportionality, which demands that any restriction on the State’s fiscal discretion be justified by a legitimate objective and be the least restrictive means to achieve that objective.

Another critical angle is the accountability of public sector banks under the banking supervisory framework, which imposes on them a duty to avoid transactions that erode asset quality and to protect depositor interests, and a failure to uphold this duty may give rise to liability for mismanagement of public funds. Perhaps the regulatory implication is that the Reserve Bank of India, as the apex banking regulator, may be required to justify the rationale for allowing the settlement, to demonstrate that it acted within its statutory remit and did not consent to a disposition that undermines the financial stability of the banking system. Perhaps the answer may ultimately depend on whether the court finds that the settlement was negotiated in good faith and whether the reduction in consideration reflects a legitimate commercial resolution of non‑performing assets, or whether it signals a systemic lapse that justifies the invocation of extraordinary remedial powers to protect the public exchequer.

In sum, the Supreme Court’s decision to issue notices underscores the judiciary’s willingness to scrutinise complex financial arrangements that implicate the stewardship of public resources, thereby reinforcing the principle that even sophisticated inter‑bank settlements must withstand constitutional and statutory examination to ensure that taxpayer money is not expended without adequate justification. Whether the forthcoming hearing will result in a declaration of illegality, a directive for restitution, or merely a clarification of procedural compliance will hinge on the Court’s assessment of the statutory powers exercised, the adequacy of the consideration, and the overarching duty of public authorities to manage public finances prudently and transparently.