Supreme Court Flags ‘Deep-Rooted Nexus’ In Loan Write-Offs, Seeks Responses In ₹1,537 Crore Fraud Plea

The Bench of Chief Justice of India Surya Kant and Justice V. Mohana was hearing a petition seeking an investigation into alleged irregularities in the settlement of loans extended to JKM Infra Projects Ltd. by a consortium of seven banks led by State Bank of India.

The petition filed through AoR Ashwani Kumar Dubey seeks directions to the Centre to constitute a Judicial Commission or an Expert Committee comprising officers of the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Serious Fraud Investigation Office (SFIO), Enforcement Directorate (ED) and Central Bureau of Investigation (CBI) to probe an alleged large-scale corporate and banking fraud facilitated through ARC transactions.

During the hearing, CJI Surya Kant made sharp observations regarding the functioning of ARCs and their dealings with banks and borrowers. "There is a dire need to look into the conduct and affairs of these ARCs also, frankly. The creation of these ARCs is an issue probably required to be revisited, particularly in the context of public money," the Chief Justice remarked.

Emphasising that the Court's concern was confined to public funds and not private commercial transactions, the CJI said that if taxpayers' money meant for public welfare had been diverted into private hands, misutilised or siphoned away, the Court could not remain indifferent.

The Chief Justice further observed that there appeared to be a "very deep-rooted nexus between borrowers, ARC and banks."

Describing the existing mechanism as an "over-clever device", the Court questioned the practice of banks selling distressed loan assets to ARCs at steep discounts and borrowers eventually settling their liabilities by paying only a small fraction of the original dues.

"This is the most over-clever device adopted by these banks to sell the loan liabilities to the ARCs for peanuts. Ultimately, the net beneficiary is the borrower who wriggles out by paying 15% or 20%, that's all," the CJI observed.

The Court acknowledged that it was ordinarily reluctant to interfere with the commercial wisdom of banks but noted that allegations involving public money stood on a different footing. "If this is the commercial wisdom that you collect taxpayers' money, public money, and you recklessly release it and then make no effort to recover it, this kind of conduct is not acceptable," the Chief Justice said.

The petition alleges that JKM Infra Projects Ltd., a Noida-based infrastructure company, availed loans from a consortium of seven banks between 2012 and 2015. According to the petition, the company ultimately secured settlements through ARC transactions for merely Rs. 73.50 crore against liabilities aggregating over Rs. 1,537 crore, resulting in a loss of more than 95 per cent of public money.

The plea relies on a forensic audit report prepared by Ernst & Young and submitted on May 23, 2018. The report allegedly found diversion of more than Rs. 902 crore through shell companies, struck-off entities, fake invoices, undisclosed bank accounts and transactions with non-existent vendors.

The petition further alleges that despite these findings, the account was never classified as fraud.

According to the petition, SBI assigned the debt to Prudent ARC in 2020 for around Rs. 120 crore against an outstanding debt of approximately Rs. 480 crore. Thereafter, in September 2025, Prudent ARC allegedly transferred the debt portfolio, then amounting to approximately Rs. 1,537 crore, to Phoenix ARC. On October 31, 2025, Phoenix ARC reportedly entered into a settlement for only Rs. 73.50 crore.

Appearing for the petitioner, Advocate Ashwini Kumar Upadhyaya argued that the JKM matter was merely the "tip of the iceberg" and alleged a larger nexus involving banks, ARCs and defaulting borrowers. He submitted that companies obtain large loans, subsequently become insolvent and eventually secure settlements through ARC mechanisms at heavily discounted values.

Senior Advocate Meenakshi Arora, appearing on caveat for one of the respondents, opposed the petition and contended that the case essentially arose from a family dispute between her client and his brother. She informed the Court that several proceedings, including criminal cases, writ petitions and proceedings before the National Company Law Tribunal, had already been initiated.

When asked about the assignment process, Arora maintained that the assignment was a transaction solely between the banks and the ARCs and that the borrower had no role in it.

The Chief Justice, however, clarified that the Court's concern was not with the inter se family dispute but with allegations involving public funds.

"Our only concern is that a loan of Rs. 1,537 crore... you file an affidavit," the CJI directed.

The Chief Justice also remarked that while the litigation may have been triggered by family discord, the Court could not ignore allegations of fraud involving public money.

"To be very frank, we also have some suspicion that these petitioners have been planted by your brother. We can't say more than that. But a fraud having been brought to the notice of the Court and if we shut our eyes, this will again perpetuate," he observed.

The Court thereafter issued notice to the Union of India through the Ministries of Home Affairs and Finance, RBI, SBI, Canara Bank, Union Bank of India, SEBI, SFIO, Prudent ARC Ltd., Phoenix ARC Pvt. Ltd., JKM Infra Projects Ltd., its promoters Gaurav Jalan and Vaibhav Jalan, and Ernst & Young.

The respondents have been granted four weeks to file their replies.