The Supreme Court has expressed serious concern about the way public sector bank loans are being sold to Asset Reconstruction Companies (ARCs). The Court said there is a need to closely examine how ARCs operate and how large loan amounts are being settled for a very small fraction of their original value. As per report, Public Sector Banks in India are selling loans to ARCs at a very low prices.
First understand what is ARC and why is it a concern?
An Asset Reconstruction Company (ARC) is a company that buys bad loans (Non-Performing Assets or NPAs) from banks and financial institutions. ARCs were introduced in India under the SARFAESI Act, 2002 to help banks clean up their balance sheets and focus on normal banking business.
For example, suppose a company takes a loan of ₹1,000 crore from a public sector bank. After a few years, the company fails to repay the loan and the outstanding amount, including interest, rises to ₹1,200 crore. The bank tries to recover the money but finds that the company’s business has collapsed and recovery is difficult.
Instead of continuing with a long legal battle, the bank sells the bad loan to an Asset Reconstruction Company (ARC) for ₹200 crore. The ARC then acquires the right to recover the loan from the borrower. Later, the ARC negotiates with the borrower and settles the entire debt for ₹250 crore.
In this case, the borrower pays only a small portion of the original dues, the ARC earns a profit because it bought the loan at a discount, and the bank suffers a significant loss compared to the original loan amount. This is why courts and regulators sometimes examine whether such settlements are fair, especially when public sector banks and taxpayers’ money are involved.
Case Details
A bench headed by Chief Justice of India (CJI) Surya Kant and Justice V. Mohana was hearing a petition that alleged irregularities in the settlement of loans given to a company by a consortium of banks led by State Bank of India (SBI).
The petition has requested the Central Government to form a Judicial Commission or an Expert Committee involving officials from RBI, SEBI, SFIO, ED, and CBI to investigate alleged banking and corporate fraud connected to ARCs.
CJI Questions Role of ARCs
During the hearing, CJI Surya Kant said there is a serious need to examine the conduct of ARCs. He observed that public money and taxpayers’ money are involved in such transactions and therefore greater scrutiny is required.
The Chief Justice stated that banks often sell bad loans to ARCs at very low prices. Later, borrowers settle these loans by paying only a small percentage of the outstanding amount. According to the Court, this system benefits borrowers while causing huge losses to banks.
The Court also remarked that ARCs, banks, and borrowers may be working together in some cases and referred to a possible “deep-rooted nexus” among them.
Concern Over Public Money
The Supreme Court said it understands that banks have commercial freedom in making business decisions. However, it questioned whether it can be called commercial wisdom when loans funded by public money are issued carelessly and later recovered at huge discounts.
The Court observed that if public funds are misused and recovery efforts are weak, such conduct cannot be accepted. The judges emphasized that taxpayers’ money should be protected.
Allegations in the JKM Infra Case
The case involves JKM Infra Projects Ltd., a Noida-based infrastructure company.
According to the petition:
- JKM Infra obtained loans from a consortium of seven banks led by SBI.
- The total loan amount involved was more than ₹1,537 crore.
- These loans were eventually settled through ARC transactions for only ₹73.50 crore.
- This allegedly resulted in a loss of over 95% of the public money involved.
The petition relies on a forensic audit conducted by Ernst & Young (EY) in 2018. The audit allegedly found diversion of over ₹902 crore through shell companies, fake invoices, struck-off companies, and undisclosed bank accounts.
Petitioner’s Arguments
Advocate Ashwini Upadhyaya, appearing for the petitioner, argued that the JKM Infra case is only the “tip of the iceberg.”
He claimed that many companies take large bank loans, later become insolvent, and then settle their liabilities through ARCs at heavily discounted amounts. According to him, there is a larger nexus involving borrowers, banks, and ARCs.
Respondent’s Arguments
Senior Advocate Meenakshi Arora, appearing for one of the respondents, opposed the petition. She argued that the matter arose from a family dispute between two brothers and that several legal proceedings had already been filed before different courts and tribunals.
She also stated that the transfer of debt from banks to ARCs is a transaction between those entities and that the borrower had no role in the assignment process.
Supreme Court Focuses on Public Interest
The Supreme Court clarified that it was not concerned with the family dispute. Instead, its focus was on the alleged loss of public money.
CJI Surya Kant observed that even if the case was triggered by a family dispute, the Court could not ignore allegations of fraud involving public funds.
The Court noted that if such allegations are brought before it, simply ignoring them would allow possible wrongdoing to continue unchecked.
Notice Issued to Multiple Authorities
The Supreme Court has issued notices to:
- Ministry of Home Affairs
- Ministry of Finance
- Reserve Bank of India (RBI)
- State Bank of India (SBI)
- Canara Bank
- Union Bank of India
- Securities and Exchange Board of India (SEBI)
- Serious Fraud Investigation Office (SFIO)
- Prudent ARC Ltd.
- Phoenix ARC Pvt. Ltd.
- JKM Infra Projects Ltd.
- Promoters Gaurav Jalan and Vaibhav Jalan
- Ernst & Young (EY)
All respondents have been given four weeks to file their replies.
Background of the Case
The petition states that JKM Infra obtained loans from seven banks between 2012 and 2015.
An Ernst & Young forensic audit submitted in May 2018 allegedly found diversion of more than ₹902 crore through suspicious transactions involving shell companies and non-existent vendors.
Despite these findings, the account was allegedly not classified as fraud.
According to the petition:
- SBI assigned the debt to Prudent ARC in 2020 for around ₹120 crore against an outstanding amount of approximately ₹480 crore.
- In September 2025, Prudent ARC transferred the debt portfolio worth around ₹1,537 crore to Phoenix ARC.
- Phoenix ARC later settled the matter for only ₹73.50 crore on 31 October 2025.
The petition also refers to FIRs registered by the Economic Offences Wing (EOW), New Delhi, and Gautam Budh Nagar police. It alleges that despite complaints to the ED, RBI, and the Ministry of Corporate Affairs, no coordinated investigation has taken place so far.
Next Hearing
The Supreme Court will consider the replies from all respondents after four weeks and continue examining the allegations related to the settlement of public sector bank loans through ARCs.
