2024 (9) TMI 250 - Board - SEBI

Siphon off funds from the Reliance - public listed company by structuring them as loans to credit unworthy conduit borrowers - disproportionate lending - Moving of funds from the public listed company to non-descript and financially weak privately held companies connected with the Reliance ADA group - HELD THAT - Credit defaults in financing business are not by themselves unusual or suggestive of fraudulent activity. Inter-corporate loans or related party transactions (subject to disclosures and compliance with law) are also not per se illegal or suspicious. However, the facts and circumstances of this case clearly indicate that the defaults are the culmination of an elaborate and coordinated design to move funds from the public listed company to non-descript and financially weak privately held companies connected with the Reliance ADA group. Adequate disclosures around this were not made to the Public shareholders of RHFL, evidenced by the absence of any material disclosures mandated by securities law. SEBI s investigation was not the only one to arrive at this conclusion. Separately the reports of PWC (RHFLs statutory auditor) and that of Grant Thornton (forensic auditor appointed by lead bank of consortium of creditors of RHFL Bank of Baroda) have also arrived at similar conclusions. Significantly, NFRA s order dated April 26, 2024 has also arrived at similar conclusions. The facts of this case is particularly disturbing since it reveals complete breakdown of governance in a large listed company apparently orchestrated by and/ or at the behest of the promoter aided by the indulgent KMPs of the company. The Company which was subject to the regulatory framework laid down by NHB and subsequently RBI (as an HFC) as well as by SEBI (as a listed company) did not seem to care about the need to maintain high standards of governance. This is also a peculiar case where the company s management has brazenly defied the diktat of its own Board that had raised concerns about GPCL lending and asked the company management to ensure compliance with the law. By preponderance of probability, the mastermind behind the fraudulent scheme is the Chairman of ADAG Anil Ambani (Noticee No.2). It is also apparent that Noticees 3 to 5, KMPs of the company, played an active role in perpetrating the fraudulent scheme. While Noticee No. 2 was not a director in RHFL, he has used his position as Chairperson of the ADA group and his significant indirect shareholding in the holding company of RHFL to orchestrate the fraud thereby not just adversely affecting RHFL s stakeholders but also the confidence in the integrity of governance structures in regulated financial sector entities. As a director and a KMP of both the listed company as well as its holding company, Noticee 3 Amit Bapna - has clearly fallen well short of the standards of governance that was expected from him. The watchman appointed by the Board to arrest the continuing decline in the financial stability of the public listed company, turned out to be part of the group that executed the fraudulent scheme. Similarly, Noticee no. 4 in capacity of CEO of RHFL was the central point of communication between the Board of Directors, all the personnel involved in Corporate Operations of the Company, and with all the senior management personnel like CRO, Operational Heads, Company Secretary etc. who were reporting to Noticee no. 4. This Order has elaborated on his direct involvement in the fraud by approving the loans to ineligible customers, defying the decision of RHFL s board, and his wanton non-compliance with the legal mandate to make true and fair disclosures. The Company continued to disburse large quantum of GPC loans despite Noticee Nos. 3- 5 being directly aware of the Board s directions not to do so. Both Noticee Nos. 4 and 5 had also signed off on CEO/ CFO certifications actively hiding the true state of affairs in RHFL. Noticee Nos. 6-28 have played the role of being either recipients of illegally obtained loans or conduits to enable illegal diversion of monies from RHFL. Subsequently, most of the GPCL borrowers accounts turned NPAs and as a consequence of the same, RHFL defaulted in its payment obligations towards its lenders which has culminated in its Resolution under RBI Framework. As a result, the company s public shareholders have been left high and dry. As a point of reference, as of March 2018, the RHFL scrip price had closed at around INR 59.60. By March 2020, as a result of this egregious scheme to hollow out the company by siphoning out significant funds, and as clarity emerged about the extent of the fraud involved, the share price had collapsed to INR 0.75. Even as on date, there are more than 9 lakh shareholders that are invested in RHFL. The findings made in the foregoing paragraphs of this Order have established the existence of a fraudulent scheme, orchestrated by Noticee No. 2 and administered by the KMPs of RHFL, to siphon off funds from the public listed company (RHFL) by structuring them as loans to credit unworthy conduit borrowers, and in turn, to onward borrowers, all of whom have been found to be promoter linked entities i.e. entities associated/ linked with Noticee 2 (Anil Ambani). The relationship of onward borrowers with Noticee No. 2 is described in Table - 28 of this Order. It is well established through various decisions of the Hon ble Supreme Court, Hon ble High Courts and Hon ble SAT that the scope of the power under Section 11B of the SEBI Act is wide, under which directions can be passed to order refunds/ bring back monies/ disgorge illegal gains made by any person in violation of securities law. Investigation in the matter has concluded that the Noticees were involved in perpetrating a fraudulent scheme by disbursing GPC loans resulting in erosion of the company s finances due to such loans ventually being declared NPA. Though the Interim Order cum SCN explicitly alleges that promoter/ promoter linked entities were beneficiaries of the funds diverted from RHFL, the gains they made haven t been quantified and persons haven t been directed to show cause why a specific gain should not be refunded or disgorged. I note that Investigation Report and Interim Order contain repeated references to promoter-linked entities being the beneficiaries of the funds diverted from RHFL. Also, the Investigation Report and Interim Order contain repeated references to GPC loans given by RHFL being rendered NPA. From the aforesaid two sets of references, it may be inferred that NPAs of RHFL were equated with the benefits made by promoter linked entities for the purposes of Show Cause Notice issued to the Noticees. There is a need to quantify such receipts/ gains and ascertain the real beneficiaries behind the web of companies as illustrated in images at Annexure B1-B3 and discussed in paragraph 54.5 above. Therefore, in compliance with principles of natural justice, I find that illegal gains, if any, must be quantified. Noticees who have made the said gain must be identified, and an opportunity should be granted to Noticees to rebut the findings of SEBI on the illegal gains/ benefits made by them, before any direction is passed with respect to such gains. In view of the above and absence of any findings made in the Interim Order cum SCN regarding illegal gains made by Noticee Nos. 3-5, it is not a fit case for issuance of directions for recovery of remuneration against these Noticees. However, the Noticees conduct warrants remedial and punitive directions with respect to their association with the securities market, intermediaries and listed companies considering the serious damages that they have done to the integrity of the securities market. Considering the egregious nature of the fraud perpetrated in this case, I am of the view that the maximum possible penalty must be imposed on all Noticees except against Noticee Nos. 1 and 5 for the reasons cited in paragraphs 67 and 68 respectively. Directions (i) Noticee No. 1 is restrained from accessing the securities market and prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of 6 months, from the date of coming into force of this order. (ii) Noticee Nos. 2 25 and 27 are restrained from accessing the securities market and prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, for a period of 5 years, from the date of coming into force of this order. (iii) Noticee No. 2 is restrained from being associated with the securities market including as a director or Key Managerial Personnel in any listed company, holding/ associate company of any listed company, or in any intermediary registered with SEBI, for a period of 5 years, from the date of coming into force of this direction. (iv) Noticee Nos. 3 - 5 are restrained from being associated with the securities market including as a director or Key Managerial Personnel in any listed company, or any intermediary registered with SEBI, for a period of 5 years, from the date of coming into force of this direction. (v) The present proceedings initiated against Noticee No. 26 (Reliance Broadcast Network Limited) and Noticee No. 28 (Reliance Capital Limited) shall be decided by separate orders for the reasons mentioned at paragraphs 50.2 and 50.3 above.

Summary

The key points from the SEBI order are:

1. SEBI found that Reliance Home Finance Limited (RHFL), its promoter Anil Ambani, and key managerial personnel engaged in a fraudulent scheme to divert funds from the listed company RHFL to entities connected to the Reliance ADA group.

2. RHFL disbursed large corporate loans (General Purpose Corporate Loans or GPCLs) to entities with weak financials and poor credit quality, in violation of due diligence norms, on the instructions of Anil Ambani despite objections from RHFL's board.

3. The borrower entities acted as conduits to transfer the funds to other Reliance group entities related to Anil Ambani. Most of these loans eventually turned non-performing assets (NPAs).

4. RHFL misrepresented its financials by underprovisioning for potential losses from the GPCL lending and making incomplete disclosures about the GPCL disbursals.

5. SEBI found violations of securities laws by RHFL, Anil Ambani, the KMPs (Amit Bapna, Ravindra Sudhalkar, Pinkesh Shah), and the borrower/conduit entities.

6. SEBI has passed directions restraining the entities from the securities market for varying periods and imposed maximum monetary penalties totaling over Rs. 625 crores on the entities involved.

7. SEBI will separately determine the illegal gains from the fraudulent scheme for potential disgorgement.

In summary, SEBI uncovered a major fraud orchestrated by Anil Ambani to divert funds from the listed RHFL to other Reliance group entities through sham corporate loans, leading to restraint and heavy penalties on those involved.