IN THE HIGH COURT AT CALCUTTA

(Constitutional Writ Jurisdiction)

APPELLATE SIDE

Present:

The Hon’ble Justice Krishna Rao

W.P.A. No. 12897 of 2026

VFS Capital Limited & Ors.

Vs.

Small Industries Development Bank of India & Ors.

Mr. Jishnu Chowdhury, Sr. Adv.

Mr. Chayan Gupta

Mr. Joydeep Guha

Mr. Abhideepta Tarafdar

....for the petitioners.

Mr. Ratnanko Banerji, Sr. Adv.

Ms. Urmila Chakraborty

Ms. Gunja Pachisia

Md. Minhajuddin

….for the respondent nos. 1 & 2.

Hearing Concluded On : 09.07.2026

Judgment Delivered On : 15.07.2026

Judgment Uploaded On : 15.07.2026

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Krishna Rao, J:

1. The petitioners have filed the present writ petition challenging the Show

Cause Notice dated 20

th November, 2025, and the impugned order

dated 11

th March, 2026, wherein the account of the petitioners have

been declared as fraud on account of misappropriation of funds and

criminal breach of trust.

2. On 18th January, 2024, a Partnership Agreement was entered between

the Petitioner No.1 and the Respondent No.1 for implementation of

"Prayaas Scheme 2.0" for Direct Credit to Micro Enterprises. The

Petitioner No.1 was appointed as partner to provide services. Under the

Scheme, credit availed by the Petitioner No.1 from the Respondent No.1

was to be disbursed to borrowers, and upon collection of the repayment

from such borrowers/customers, the Petitioner No.1 was required to

deposit the collected amounts in a designated Collection Account and

remit the same to the Respondent No.1, for credit to the borrowers' loan

accounts.

3. The stated objective of the scheme was to assist microfinance clients

seeking to upscale or diversify their business with loans ranging from

Rs. 50,000 to Rs.5 lakh, commonly known as "Missing Middle

Segment", to improve access to affordable finance and reduce the

interest rate for borrowers otherwise charged interest as high as 20% or

more, and to improve livelihood opportunities for such borrowers.

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4. In accordance with Clause 5 of the Partnership Agreement dated 18

th

January, 2024, the petitioner no.1 submitted/created fixed deposits

with the respondent No.1. Under Schedule-II of the Partnership

Agreement and the modality of conduct of business contained therein

that money collected from the end of the customers by the petitioner

No.1 were required to be immediately made over to the Respondent

No.1. The petitioners' case is that the Petitioner No.1 had no obligation

to pay the respondent No.1 except to the extent of sums actually

collected from customers/borrowers, and that, in case of default by end

of the customers, its obligation was limited to the extent of the fixed

deposits placed.

5. On 29

th to 30th October, 2025, officials of the Respondent No.1 visited

the office of the Petitioner No.1. The Petitioner No.1 shared data on

Prayaas borrowers. The petitioners showed a portfolio outstanding of

Rs. 56.87 Crores as on 30

th October, 2025, whereas the books of the

respondent No.1 reflected an outstanding portfolio of Rs.74.63 Crores

in respect of Prayaas borrowers under Petitioner No.1. There is a

shortfall of Rs.17 Crores in between both portfolio authorities of

Prayaas. According to the respondents, upon being questioned,

Petitioner No.1 responded that some recoveries from Prayaas borrowers

had not been transferred to the Respondent No.1.

6. Consequently, the respondent No.1 issued a notice dated 20th

November, 2025, calling upon the petitioner No.1 to show cause as to

why its account should not be classified as "fraud" in terms of the

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Reserve Bank of India's Directions, granting 21 days for submission of

a representation. The petitioners have submitted detail reply to the

show cause notice to the respondents on 10

th December, 2025.

7. A notice for personal hearing dated 19th December, 2025, was issued

pursuant to which a personal hearing was held on 5th January, 2026,

attended by the Petitioner No.2. According to the respondents, the

Petitioner No.2, namely, Shri Kuldip Maity, the Managing Director of

the Petitioner No.1 admitted at the said hearing that collections from

Prayaas borrowers were not transferred to the Respondent No.1 within

the stipulated timelines and were instead utilised by Petitioner No.1 to

service its debt obligations to other lenders, and that the same is audio-

recorded and acknowledged in the petitioners' written representation.

8. By an order dated 11th March, 2026, the competent authority of the

respondent No.1 classified the account of Petitioner No.1 as a "fraud

account" under paragraph 6.1 of the RBI Master Directions on Fraud

Risk Management dated 15th July, 2024, on the ground of alleged

misappropriation of funds and criminal breach of trust, relying

substantially on the alleged admission at the hearing dated 5th

January, 2026.

9. Being aggrieved, the petitioners have preferred the present writ petition

challenging the show cause notice dated 20th November, 2025 and the

order dated 11th March, 2026, seeking, inter alia, quashing thereof on

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the grounds of violation of the principles of natural justice, non-

application of mind and arbitrariness.

10. Mr. Jishnu Chowdhury, Learned Senior Advocate representing the

petitioners submits that the Partnership Agreement dated 18th

January, 2024, shows that the Petitioner No.1 was only required to

collect money from customers and make over the same to the

Respondent No.1, and that even where customers failed to pay, the

petitioners' exposure was limited to a security deposit/guarantee to the

extent of 5% of the total sanctioned value. The petitioners' consistent

stand is that they have not collected and retained any money that was

due and payable but could not be collected from the customers.

11. Mr. Chowdhury submits that under Clause 6.1 of the RBI Master

Circular on Fraud dated 15th July, 2024, an account can be termed

"fraud" only where the petitioners collect money from customers and

does not make over to the Respondent No.1. Clause 2.1.1.1 of the

Circular further requires a show cause notice to provide complete

details of the transactions/actions/events on the basis of which

declaration and reporting of fraud is contemplated. He submits that the

show cause notice dated 20th November, 2025, does not meet this

requirement. The first paragraph on merely records an outstanding/

gap, while the succeeding paragraphs rely on expressions such as 'deep

apprehension', 'it is possible', 'if VFSCL' and 'we apprehend', reflecting

surmise and conjecture rather than any direct allegation, particulars,

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documents or instances. Allegations of breach of trust, dishonest

misappropriation and cheating cannot be sustained on such basis.

12. Mr. Chowdhury submits that in the reply dated 10th December, 2025,

the Petitioner No.1 categorically denied any history of fraudulent

conduct, wilful default, diversion of funds or misrepresentation,

diversion or misuse of collections, and affirmed diligence in remitting

amounts to the designated collection account. The order dated 11th

March, 2026, records no independent satisfaction and proceeds entirely

on an alleged admission attributed to Shri Kuldip Maity, the Managing

Director of the Petitioner No.1. No such admission was in fact made,

despite the respondents' claim of an audio recording, none has been

produced, and the respondents did not act upon the petitioners'

willingness to seek a review/deletion of the alleged admission. He

submits that in any event, even as recorded, the alleged admission is,

at best, that collections were not transferred within the stipulated

timelines i.e., a delay/contractual breach and does not establish

collection and retention of money, which alone would constitute fraud.

13. Mr. Chowdhury submits that if a gap exists between the parties'

figures, this shows only that collections have not been made, and does

not prove that money has been collected and withheld an outstanding

or gap is, by itself, meaningless for this purpose. He submits that the

petitioner’s willingness to pay towards the First Loss Default Guarantee

(FLDG) has no bearing on the allegation of fraud and merely reflects a

request for time to pay the 5% guarantee.

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14. Mr. Chowdhury has relied upon the judgment in the case of Hemant

Kanoria Vs. Bank of India reported in 2024 SCC OnLine Cal 1012

and submits that specific instances of allegations are to be mentioned

in the show cause notice and to ensure that an effective opportunity of

hearing is given to the petitioner.

15. Mr. Ratnanko Banerji, Learned Senior Advocate representing the

respondents submits that the petitioners are challenging the show

cause notice dated 20

th

November, 2025 and the order dated 11

th

March, 2026, classifying the account of the petitioner No.1 as a "fraud

account", raises two contentions that is absence of evidence for the

fraud declaration, and reliance on surmise and conjecture - both of

which are wholly misconceived and not maintainable.

16. Mr. Banerji submits that under the Partnership Agreement dated 18

th

January, 2024 for the Prayaas Scheme, the Petitioner No.1 was obliged

to deposit amounts collected from the borrowers into a designated

Collection Account and remit the same to the Respondent No.1. The

Petitioner No.1 failed to do so and misappropriated the collected

amounts, leading to the show cause notice dated 20

th

November, 2025.

17. Mr. Banerji submits that the show cause notice records that during a

visit on 29

th

to 30th October, 2025, data shared by the Petitioner No.1

showed a Prayaas portfolio outstanding of Rs.56.87 Crores, whereas

the Respondent No.1's books showed Rs.74.63 Crores, a shortfall of

Rs.17 Crores. There being no inappropriate receipt at the Respondent

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No.1's end, the Petitioner No.1, on being questioned, responded that

some recoveries had not been transferred to the respondent No.1. The

notice was issued with 21 days for representation, in compliance with

natural justice and the RBI Master Directions on Fraud Risk

Management dated 15th July, 2024.

18. Mr. Banerji submits that in its reply dated 10

th

December, 2025,

Petitioner No.1 admitted defaults, mismatch in data and discrepancies,

admitted "elevated delinquencies" in the portfolio managed by it, and

admitted temporary manpower shortage/staff turnover causing delays/

inconsistencies in submission of collection data, without denying the

portfolio mismatch or seeking further documents rather, it volunteered

to furnish further clarification. The allegation of non-supply of

documents is accordingly an afterthought, raised for the first time in

the petition.

19. Mr. Banerji submits that at the personal hearing held on 5

th January,

2026, pursuant to notice dated 19

th December, 2025, the petitioner

No.2, the Managing Director of the Petitioner No.1, admitted that

collections from Prayaas borrowers were not transferred to Respondent

No.1 within the stipulated time and were misutilised by the Petitioner

No.1 to service its debts/obligations to other lenders, an admission also

acknowledged in the Petitioner No.1's written representation and which

is audio-recorded, the transcript whereof is in the respondents'

custody.

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20. Mr. Banerji submits that the reasoned order dated 11

th March, 2026,

classifying the account as "fraud" under paragraph 6.1 of the RBI

Master Directions, was passed after due compliance with natural

justice, based on documents submitted by the petitioners themselves,

on account of misappropriation of funds and criminal breach of trust.

21. Mr. Banerji has also relied upon the judgment in the case of Hemant

Kanoria (supra), for the proposition that a balance must be struck

between adherence to technicalities and speed in reporting, with

emphasis under the Master Directions on the place of reporting to

protect the banking system from frauds; delay in reporting, and

consequent delay in alerting other banks/disseminating caution advice,

would enable similar fraud elsewhere, and banks are cautioned to

strictly adhere to the prescribed time frame for reporting frauds to the

RBI, time being of the essence.

22. Mr. Banerji submits that the ultimate sufferers are the Prayaas

borrowers who repaid their loans to the Petitioner No.1 but continue to

be shown as defaulters in the Respondent No.1's books, since the

Petitioner No.1 has not repaid to the Respondent No.1 despite having

misappropriated the collected funds.

23. Heard the Learned Counsel for the respective parties, perused the

materials on record and the judgment relied by the parties. As per the

scheme, the credit availed by the petitioner no.1 from the respondent

no.1 was to be disbursed to the borrowers and upon collection of the

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repayment money from the said borrowers, the same was to be

deposited by the petitioner no.1 in the collection account and remit the

same to the respondent no.1. The First Loss Default Guarantee (FLDG)

to the tune of 5% of sanctioned partnership limit will have to be

provided by the petitioner no.1, which would be in the form of

maintenance of minimum 2% in the form of fixed deposit and further

built up on incremental basis till stipulated FLDG i.e. 5% is exhausted.

24. The Show Cause notice was issued to the petitioners on the following

allegations:

“During our recent visit on October 29-30,

2025 to your office, VFSCL shared certain data on

Prayaas borrowers. While VFSCL showed a

portfolio outstanding of Rs.56.87 crore under

Prayaas as on October 30, 2025, SIDBI's books

had outstanding portfolio of Rs.774.63 crore in

respect of Prayaas borrowers under VFSCL. This

shows that the overall Prayaas portfolio at VFSCL

is lowered by a very large amount of Rs17.00

crore. As there were no unappropriated receipts at

SIDBI's end, the matter was raised with VFSCL.

VFSCL responded that some of the recoveries from

Prayaas borrowers have not been transferred to

SIDBI.

Meanwhile, we also have seen that some dues

are transferred to SIDBI with substantial delay by

VFSCL, Further, we also contacted some defaulting

Prayaas borrowers under VFSCL who informed

that dues have been paid on time by them to

VFSCL. SIDBI notes, with deep apprehension, that

VFSCL has been defaulting on transfer of collected

dues to SIDBI in respect of the Prayaas borrowers.

The loan accounts of these borrowers show default

which will adversely impact their credit record and

their ability to mobilise funds in future from

banking system including SIDBI. VFSCL is solely

responsible for creating this fully avoidable

situation. Apart from the deep distress created for

the Prayaas borrowers who have already repaid

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their dues, VFSCL is using their money for other

purposes of which SIDBI is not aware, It is possible

that VFSCL is using these collections from Prayaas

customers to service its borrowings from lenders for

micro finance operations. This throws a much

larger question on the micro finance operations of

VFSCL for which VFSCL has separate credit

facilities from other lenders including SIDBI. If

VFSCL is collecting the dues of Prayaas borrowers

and misuse them for debt servicing of its

borrowings for micro finance operations, the

company's ability to carry its operations

sustainably is in question.”

25. The data shared by the petitioner no.1 to the respondent no.1, the

portfolio outstanding of Rs. 56.87 crores under Prayaas as on 30

th

October, 2025 but as per the books of accounts of the respondent no.1,

the outstanding portfolio of Rs. 74.63 crores in respect of Prayaas

borrowers under the petitioner. The petitioner has not denied the said

difference of figure of Rs. 17.00 crores. The petitioner in its show cause

reply stated as follows:

“As your goodselves are aware, the

microfinance sector has, in recent months, been

facing an exceptionally challenging operating

environment owing to socio-political disruptions

and operational constraints in several regions.

These external factors have adversely affected

borrower cash flows, repayment behaviour and

overall credit discipline across the sector. Given

that Prayaas borrowers primarily belong to bottom-

of-the-pyramid segments, their repayment capacity

has also been affected, resulting in elevated

delinquencies in the portfolio managed by VFSCL.

We submit that these are credit-risk driven

developments, and not in any manner indicative of

fraud-risk or wilful intent.

At the beginning of the current financial year,

both the on-book and off-book portfolios of the

Company were performing strongly. However,

temporary manpower shortages and staff turnover

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in a few branches led to delays or inadvertent

inconsistencies in consolidation and submission of

collection data. These were operational lapses,

arising from short-term constraints, and not

systemic or intentional. Importantly, there has been

no diversion or misuse of collections and the

Company has been diligent in remitting all amounts

to the designated Collection Account as per the

Agreement.”

26. The petitioners have submitted detailed show cause reply but the

petitioners have not stated anything with regard to supply of any

documents. The petitioners in their reply have requested for personal

hearing and accordingly, the respondents have granted personal

hearing to the petitioners. During the personal hearing on 5

th

January,

2026, the petitioner no.2 admitted that the collections from the prayaas

borrowers were not transferred to the respondent no.1 within the

stipulated time and were utilised by the petitioner no.1 for servicing its

debt obligations to other lenders.

27. Mr. Banerji during hearing of the case has handed over the copy of the

communication made by the petitioner no.2 to the respondent no.1 on

30

th

October, 2025, which reads as follows:

“Dated: 30.10.2025

The General Manager,

SIDBI

Mumbai

Dear Sir, Kind Attn: Mr Radha Ramana

Sub: Repayment of Prayaas

As discussed with you on date, please be informed

that on or before 14 November 2025, we shall be

repaying you Rs. 10 crores.

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In between whatever possible we shall be repaying

you in phases along with the daily collection.

In this context, request you, if you can kindly

adjust our FLDG kept with you in the form of FD

against the pending Prayaas repayment amount.

Look forward for your kind cooperation in this

regard.

Thanking you!

Yours faithfully,

Kuldip Maity

MD & CEO.”

28. Mr. Chowdhury has relied upon Clause 2.1.1.1 of Chapter-II of the

Master Directions on Fraud Risk Management in commercial Banks

(including Regional Rural Bank) and All India Financial Institutions

dated 15

th

July, 2024 and submits that in the show cause notice

complete details of transactions has not been provided. The petitioners

have submitted reply to the show cause notice. In the said reply, the

petitioners have not asked for any details. The petitioners only asked

for personal hearing and the same was provided. The petitioners in the

show cause reply even not denied with regard to the details of data of

Prayaas borrowers. In the show cause notice, it is also mentioned that

on 29

th

/30

th

October, 2025, the respondent no.1 visited the office of

the petitioner no.1 and the letter produced by Mr. Banerji is dated 30

th

October, 2025. In the said letter, the petitioner no. 2 admitted that he

will repay an amount of Rs. 10 Crores on or before 14

th

November,

2025, and remaining amount shall be repaying in phase along with

daily collection and the show cause notice was issued on 20

th

November, 2025 but the petitioners have not paid the said amount.

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29. The judgment relied by the petitioners and the respondents in the case

of Hemant Kanoria (supra) wherein the Hon’ble Coordinate Bench of

this Court held that:

“60. Hence, what has to be ensured is that

specific instances of allegations are to be

mentioned in the show-cause notice, although all

particular documents which are to be relied on

and/or intricate details of the frauds alleged need

not be given at the show-cause notice stage. The

show-cause is a mere indicator of the allegations

made against the borrower and its

Director/management. It is to ensure that an

effective opportunity of hearing is given to the

accused.”

In the present case, in the show cause notice, details have been

given regarding the difference amount of Rs. 17.00 Crores after

considering the portfolios maintained by the petitioner no.1 and the

respondent no.1. The petitioners have not denied with regard to the

said figure and even in reply to the show cause notice, have not

demanded any further documents or details. As per request of the

petitioner no.1, personal hearing was also provided to the petitioners.

Thus the judgment relied by the petitioners is not applicable to the

petitioners’ case though it is squarely applicable to the respondents.

30. This Court did not find any justification to interfere with the show

cause notice dated 20

th

November, 2024 and the impugned order dated

11

th

March, 2026.

31. WPA No. 12897 of 2026 is thus dismissed.

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Parties shall be entitled to act on the basis of a server copy of the

Judgment placed on the official website of the Court.

Urgent Xerox certified photocopies of this judgment, if applied for,

be given to the parties upon compliance of the requisite formalities.

(Krishna Rao, J.)