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TMI Blog2024 (9) TMI 250X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fraudulen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ........93 Whether SEBI can continue its proceedings against Noticee Nos. 26 and 28 in view of the moratorium/ approved resolution plan under IBC?.................................95 Whether SEBI is prevented from continuing with the present proceedings against RHFL as it is under the regulatory purview of NHB/ RBI?...................................96 Whether SEBI can proceed against GPCL Borrowers/ Onward Borrowers since they are unlisted entities?...............................96 Whether there has been inordinate delay in the proceedings which has vitiated the proceedings?........................................97 PART II ISSUES ON MERITS .99 Whether the Noticees can be said to have engaged in a fraudulent scheme to divert funds of RHFL for the benefit of Reliance ADAG companies?..........................................99 Irregular Loan Disbursement ..101 Proportion and size of GPC loans disbursed by RHFL .102 Weak financials of the borrowing entities: .107 Fundamental deviations ignored ..110 Loan approvals by unauthorized officials contrary to instructions from RHFL Board and Role of KMPs: ..117 Hasty Approvals to GPCL Borrowers Applications .140 Connection between Noticees wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.00 5 Kokila D. Ambani 0.11 0.11 0.11 0.11 6 Reliance Inceptum Private Limited 20.14 20.14 0.00 0.00 7 Reliance Innoventures Private Limited 0.12 0.12 0.00 0.00 8 Reliance Infrastructure Consulting Engineers Private Limited 5.77 5.62 0.61 0.61 9 Crest Logistics and Engineers Pvt. Ltd. 0.67 0.67 0.67 0.67 10 Reliance Infrastructure Management Private Limited 0.14 0.14 0.14 0.14 11 Reliance Capital Limited (RCL) 47.91 47.91 47.91 47.91 Total 74.99% (of the same 21.62% have been pledged) 74.85% (of the same 31.80% have been pledged) 49.58% 49.58% 4. From the aforementioned shareholding pattern, it is noted that RCL was the major promoter of RHFL during the relevant period holding 47.91% of its shares. Mr. Anil D. Ambani (Noticee no. 2) was also the Promoter and Non-executive and Non- Independent Director of RCL, during FY 2018-19. Further, in terms of the Related Party disclosure made in the Annual Report of RCL, Noticee No. 2 had been disclosed as an Individual Promoter being the person having significant influence during the year . Furthermore, Noticee no. 2 was also found to be a significant beneficial owner of the companies mentioned at Sr. no. 6, 7 and 8 in the table above. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under various heads for the Financial Years 2017-18 and 2018-19, as recorded in the Annual Report for the year 2018-19 is as under: Table-5 (INR in Crore) Loans given to FY 2017-18 FY 2018-19 Corporates 3742.60 8670.80 Small Business 5073.73 3824.00 Residential Mortgagees 5823.40 4034.67 Total 14,639.73 16,529.47 (Source: Annual Report of RHFL for the year 2018-19) 9. The details captured in the Table - 5 above indicate that the loans extended by RHFL to the Corporates had significantly increased from an amount of INR 3742.60 Crore in 2017-18 to INR 8670.80 Crore in the year 2018-19. 10. During the investigation, SEBI had sought copies of certain Loan Application Documents pertaining to the General Purpose Working Capital Loans (hereinafter referred to as GPCL / GPC Loans ). An analysis of such documents (total 70 Loan Application Documents for the loans amounting to INR 6187.78 Crore for GPCL disbursed in FY 2018-19) as furnished by RHFL to SEBI vide its letter dated December 23, 2021, has inter alia revealed the following facts: a) As many as 62 Loan Applications covering an amount of INR 5552.67 Crore (65.55% of INR 8470.65 Crore) were approved on the date of loan application it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Power Limited Reliance Home Finance Limited Reliance Infrastructure Limited 175.00 22/03/2019 Vinayak Ventures Private Limited Reliance Home Finance Limited Reliance Infrastructure Limited 210.00 385.00 B. OTHER REPORTS 12. The conclusions arrived at in two separate reports one by PWC (the statutory auditor of RHFL) and the other by Grant Thornton (the Forensic Auditor appointed by Bank of Baroda which was the lead bank of the consortium of lenders of RHFL), has also been referred to by the Investigation Report of SEBI. A summary of PWCs communication with RHFL and SEBI prior to its report and a summary of the conclusions arrived at in Grant Thornton s report are discussed below- 12.1 PWC report and related communication with RHFL: 12.1.1 In their letter dated June 11, 2019, addressed to the Board of Directors of RHFL, PWC had expressed that due to certain acts on the part of the Company it (PWC) was compelled to withdraw from the audit engagement in compliance with the Code of Ethics issued by the Institute of Chartered Accountants of India and the applicable standards on Auditing. Such acts included non-receipt of substantive/satisfactory responses to the queries raised by them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s raised by PWC in its letter dated April 18, 2019, RHFL, vide its letter dated May 09, 2019, while denying such loans being given to Group Companies as pointed out by PWC, stated that: (a) the credentials of those borrowers were assessed based on their positive track records and references such entities had with Reliance Group entities; (b) it had advanced short term loans (upto 1 year) to these borrower companies for meeting short term working capital requirements and end use could be verified through the financials; (c) loans were extended on the strength of promoters/ project/ collateral; (d) loans had limited risk of weak collaterals or value erosions as RHFL created charge on these instruments; (e) RHFL had been successful in recovering money in the past; (f) appropriate KYC/ AML norms had been put in place; (g) top ten exposures were always presented to the Risk Management Committee, Audit Committee and Board of RHFL and quantum of such GPC Loans were duly reported to NHB; and (h) that there was a delay on principal repayments of an amount of INR 535 Crore with respect to bank borrowings and the regularization of such repayments is expected shortly. 12.1.6 PWC has also filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount potentially received back to Target Entity (i.e. RHFL) as repayment of existing loans 1198.69 12.2.1.3 The loan files review conducted by the Forensic Auditors has highlighted anomalies in the loan approval process followed by RHFL which includes deviation from credit policy and appraisal of loan applications in the absence of various relevant documents like financial statements, income tax returns, contact details etc. 12.2.1.4 The 1st report has also highlighted serious anomalies in the credit appraisal process of RHFL. It was noticed that loans have been disbursed by RHFL prior to the sanction date of such loans; loans have been disbursed to parties with weak financials; and loans have been disbursed to entities which were incorporated recently thus having no significant business track record. There were other potential anomalies noticed in creation of charge on the security provided by the borrowers to RHFL. It was noticed that RHFL had disbursed loans aggregating INR 324.95 Crore during the review period to four (04) entities which had apparently inadequate repayment capacity. As a result, against the aforesaid loan amount, an amount of INR 310.02 Crore remained outstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Private Limited PILE 106.00 10 Gamesa Investment Management Private Limited PILE 100.00 11 Kunjbihari Developers Private Limited PILE 70.00 12 Reliance Mediaworks Financial Services Private Limited Group Co. 14.73 13 Reliance Nippon Life Insurance Limited Group Co. 11.00 14 Unlimit IOT Private Limited Group Co. 5.00 Total 8827.88 12.2.2.3 A part from the aforesaid onward lending, the Forensic Audit Report has also given a classification of an amount of INR 8,842. 87 Crore (Out of INR 8,884.46 Crore involving 100 loan cases mentioned in Table - 8 above), based on utilization of such loans. A scrutiny of such 100 Open Loan cases indicated that some amount of funds advanced by RHFL have returned back to RHFL through circular transactions and also substantial amounts of such loans have been used by the borrowing entities for repayment of existing loans availed by them earlier from RHFL which means, such huge amounts of loans have been used by the borrowing entities for ever- greening of earlier loans. These broad findings about end use of such loans advanced by RHFL that were onward lent to those 14 Group companies/PILE, as noted from the said 2nd report of the Forensic Auditors are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght from the examination of the aforesaid documents/information and replies received in course of the investigation with respect to the aforesaid 45 GPCL Borrower entities (including the top 13 Borrowers and their onward loan transactions), which are relevant for the present proceedings are recorded in later paragraphs of this Order dealing with Issues for Consideration. C. SCN, REPLIES AND HEARING 14. Based on the conclusions arrived at pursuant to the investigation, an Interim Order cum Show Cause Notice dated February 11, 2022 (hereinafter referred to as the Interim Order / SCN ) was passed in the matter. The Interim Order inter alia directed that Noticee Nos. 1-5 be restrained from dealing in securities in any manner whatsoever until further orders. Noticee Nos. 2-5 be restrained from associating themselves with any intermediary registered with SEBI, any listed public company or acting as Directors/ promoters of any public company which intends to raise money from public, till further orders. Also, Noticees were called upon to show cause why suitable directions should not be issued against them and why penalty should not be imposed on them in accordance with the relevant provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer Limited April 25,2022 January 30,2023 N/A# 17 Tulip Advisors Private Limited August 18,2022 May 10,2022 June 29,2022 February 01,2023 July 06,2023 18 Mohanbir Hi-Tech Build Private Limited April 20,2022, August 05, 2022 January 25,2023 January 30,2023 19 Netizen Engineering Private Limited April 22,2022 August 26, 2022 March 06,2023 July 11,2023 20 Crest Logistics and Engineers Private Limited (Now Known As CLE PRIVATE LIMITED) April 22,2022 August 26, 2022 March 09,2023 July 11,2023 21 Reliance Unicorn Enterprises Private Limited August 04,2022 May 05,2022 March 13,2023 July 11,2023 22 Reliance Exchange next Limited August 04,2022 May 05,2022 March 17,2023 July 11,2023 23 Reliance Commercial Finance Limited September 05,2022 April 26,2022 December 23,2022, March 16,2023, April 18,2023, July 28,2023 July 13,2023 24 Reliance Cleangen Limited September 02,2022 May 04,2022 July 05,2022 January 13,2023 January 20,2023 February 21,2023 July 11,2023 25 Reliance Business Broadcast News Holdings Limited June 14,2022 August 18,2022 April 25,2022 January 03,2023 March 18,2023 July 11,2023 26 Reliance Broadcast Network Limited June 14,2022 August 18,2022 April 25,2022 January 03,2023 Marc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny as per the GPCL Policy and not by Noticee No. 2 in his personal capacity. 17.5 RHFL is regulated by National Housing Bank ( NHB ) and generally, as an NBFC, if at all, by the Reserve Bank of India. GPC Loans were in compliance with rules and regulations framed by NHB and NHB permitted up to 50% of the total loan exposure of a housing finance company to be utilized towards GPCL. NHB has not found any fraud or lack of diligence and it is not within SEBI s jurisdiction to determine the propriety or legitimacy of GPC Loans. 17.6 NHB had imposed penalty on RHFL for certain infractions pertaining to extension of GPC Loans and any imposition of any direction/ penalty by SEBI in the matter would violate principles against the proscription of double jeopardy. 17.7 Section 12A of the SEBI Act and the provisions of PFUTP Regulations are only attracted when a person deals in securities market. In granting GPC Loans, RHFL cannot be said to be dealing in securities. 17.8 The decision to extend GPC Loans to borrowers was a business decision taken by the management of RHFL with best interests of the Company in mind. In view of the prevailing issues in housing finance sector, the Company was of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndicate any collusion by the Company with such entities. In the matter of HB Stockholdings v. SEBI, the Hon ble SAT observed that one or two persons sharing common address or one of the persons being promoter of the other group at some point in time are not in themselves sufficient to bring home the residual charge of fraud. 17.16 There is no specific provisions that requires disclosure of corporate guarantees in the Annual Report. 17.17 The documents and evidence relied upon by SEBI do not establish any collusion between the Company and its KMPs with the GPCL borrowers/ onward borrowers. 17.18 The preponderance of probability standard required to bring home a charge of fraud has not been met in the instant matter. 17.19 There was no misstatement in the financials of the company as the facts pertaining to GPCL were adequately conveyed. Further, as a larger portion of the GPC Loans was not due as on the date of signing the balance sheet, standard Expected Credit Loss provisions were made for the same. 17.20 The Interim Order was passed without affording an opportunity of hearing to the Noticee and hence, it is in violation of the principles of natural justice. 18. NOTICEE NO. 2 18.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, RCL was primarily a holding company, holding investment in its subsidiaries, associates, and other group companies, each of which was run by professional management. 18.9 Noticee was merely a non-executive director of RCL and was in no way involved in its day to day affairs. Also, Noticee was not even on the board of remaining entities to whom money was onward lent by borrowers of RHFL. 18.10 Merely by virtue of being tagged a Chairman of RCL/ ADA Group, Noticee No. 2 cannot and did not have the right or authorization to participate or influence the financial or operating policy decisions of RHFL. Further, there is no concept of controlling influence in law. Securities regulation recognizes control but there is no concept of influence for the purposes of imposing penal liability. 18.11 Any action taken by Noticee No. 2 in relation to loans was not in his personal capacity or in his capacity as Chairman of Reliance ADA Group , but instead, by RCL. It is not SEBI s case that RCL wrongly approved/ sanctioned or confirmed such loans. RCL was neither required nor had the locus standi to conduct due diligence or carry out any credit assessment of the proposed borrowers of RHFL, in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of RHFL. 18.16 With reference to allegations of violation of PFUTP Regulations, it is submitted that SCN is based on business decision of RHFL with respect to granting loans and it is not shown in SCN that Noticee No. 2 has devised a scheme to defraud or manipulate dealing in securities. RHFL is regulated by NHB and RBI and any concerns pertaining to business operations of RHFL is a subject matter that needs to be decided by NHB and RBI, and not by SEBI. 18.17 With respect to guarantees provided by RInfra and RPower in favour of RHFL, Noticee No. 2 was a non-executive director of RInfra and RPower during the Investigation Period and had subsequently stepped down from the boards of these companies pursuant to the Interim Order. The process followed by RInfra and RPower whilst granting guarantees was an operational matter and as far as Noticee No. 2 recalls, the proposal for issuing guarantees was not placed before the board of RInfra and RPower for the board to pass a resolution prior to giving of such guarantees. Noticee presumes that such decision would have been taken by management/ executives of such companies having regard to the business and interest of such companies. 19. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Noticee could not have known at the time of extending such loans that they would ultimately turn into NPA or be onward lent or utilized in conflict with loan agreements. 19.8 Noticee cannot be faulted with non-recovery of GPC Loans by RHFL as it was not the role and function of the Noticee as a non-executive director of the Company. Noticee was in a management position only till August 07, 2018 (till which time he was CFO) and there were no defaults at the time as GPC Loans were not due and payable till such time. Further, Noticee, being a non-executive director, cannot be faulted for any non-invocation of guarantees till such time. 19.9 Noticee never directed credit managers and CRO to not follow any required process or put up the file for approval the same day as receipt of the application. 19.10 The mere fact that CAMs contained deviations ought not to lead to an adverse inference or an indication as to fraud as deviations were recorded as per standard practice and higher interest rates were charged on GPC Loans. Noticee was not responsible for the specific CAMs being placed before him/ the Credit Committee for approval. Upon CAMs being recommended for approval, the Credit Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointing towards the involvement of Noticee in onward lending of loans to promoter related entities, the observations and findings in the Interim Order fail and therefore, are liable to be set aside. 19.18 With respect to allegations of violation of PFUTP Regulations, Noticee has not dealt in securities, GPC Loans were as per Company Policy and permitted by NHB. Until the time he was CFO of RHFL, GPC lending was well within regulatory limits. 19.19 Noticee did not provide any compliance certificate for the Financial Year ending March 2019. Noticee only signed the financials/ Annual Report of the Company for year ending March 2019 in his capacity as a non-executive director of the Company, believing such financials to be true and fair. 19.20 Noticee discharged his functions as a non-executive director in accordance with the duties of a director contained in the LODR Regulations. Further, as a non-executive director of RHFL, he was not responsible for placing information before the RHFL Board under Regulation 17(7) of LODR Regulations. 19.21 SEBI has failed to show any urgency in passing the Interim Order as GPC Loans were discontinued from May 2019 and Interim Order was passed with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined when there is a direct or indirect dealing in securities by a person. 20.9 Merely because a business decision to extend GPC Loans turned out to be lossmaking decision, mala fides cannot be attributed to such decision and Company/ its management could not have known at the time of extending such loans that they would ultimately turn into NPA, or be onward lent or utilized in conflict with loan agreements. 20.10 For recovery of dues, legal notices were issued to the defaulting borrowers and such attempts were impacted due to Covid-19. The guarantees obtained by RHFL were not time bound guarantees. 20.11 While there may have been lapses in terms of finalizing formal loan documentation, such findings do not indicate any fraud or collusion by RHFL/ Noticee with the borrower entities. Noticee never directed any person/ concerned team to not follow the required process. 20.12 The mere fact that CAMs contained deviations ought not to lead to an adverse inference or an indication as to fraud. In case of increased risk and significant deviations, higher interest rates were charged to account for such risk. Noticee was not responsible for the specific CAMs being placed before him/ the Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis and the factum of onward lending by certain borrowers. No further disclosure was given as the same was not required and was not within the knowledge of the Company at the relevant time. 20.20 Expected Credit Loss for year ending March 31,2019 considered provisioning for all loans that were due as on date of balance sheet signing (August 13, 2019) which was the most prudent practice. Since a large portion of GPCL Loans were not due for repayment given that their tenure had not ended, standard ECL provisions were made for such loans. 20.21 There has been no misrepresentation of accounts and that the loans have been classified as NPA whenever they turned NPA. There was no way that the Company and/ or Noticee could have predicted that the loans will become NPA subsequently. It is to be noted that not all loans given as GPC Loans have defaulted and some have also been repaid. The loans were to be paid after one year with interest and hence, they turned NPA after 15 months of disbursement. 20.22 PWC had provided an unqualified opinion in relation to the Company s financials in the Financial Year 2017-18 and no issues were raised by PWC in relation to the GPC Loans being furthered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the realm of matters that can be decided by SEBI, being matters that can only be looked into and decided upon by NHB. 21.8 The charge of violation of Section 12A of the SEBI Act and provisions of PFUTP Regulations is unfounded as such a charge can only be sustained when there is a direct or indirect dealing in securities by a person. 21.9 SEBI has not brought on record any material to prove that it was Noticee s duty to carry out due diligence or loan applications and that he failed to discharge such duty, Noticee was aware that PILE entities would onward lent the funds to promoter linked entities of RHFL and that borrowers would default in making repayment. 21.10 The information furnished in the financials were true to the knowledge of the Noticee and Noticee did not believe such information contained in the financials to be false. 21.11 Note 2 to the balance sheet of the Company adequately conveyed to all concerned the factum of GPC Loans being extended at arm s length basis and the factum of onward lending by certain borrowers. No further disclosure was given as the same was not required and was not within the knowledge of the Company at the relevant time. 21.12 SEBI has failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon ble SAT in its order dated March 22,2021 has been held that existence of one or two attendant circumstances cannot be said to meet the test of preponderance of probabilities. 22.8 Out of INR 534.60 Crores taken from RHFL, INR 329.81 Crores has been repaid to RHFL and the remaining amount could not be paid due to certain financial difficulties. Out of the total loans of INR 316.98 Crore extended to other entities, Noticee has received back amounts of INR 178.5 Crores and remaining is outstanding on account of business difficulties. 23. NOTICEE NO. 7 23.1 Noticee is a private limited company which operates as an independent entity controlled by its management. RHFL or any other entity does not control or regulate the day-to-day affairs or business decisions of the Noticee. 23.2 SEBI has been conferred with the jurisdiction to regulate the securities market. However, in the present case, the Noticee is an unlisted private company and has no relation with the securities market. Merely taking loans from RHFL cannot subject the Noticee to SEBI s jurisdiction. 23.3 By wrongly connecting the lending and borrowing transactions, a fraudulent colour has been given to bona fide genuine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Corporate Deposit that was given by Noticee to Indian Agri Services Private Limited on October 12, 2018. 24.5 In order to allege fraud under PFUTP Regulations, the essential requirement is that fraud has to be in relation to securities market. Merely taking of loan and granting of loans/ repaying existing loans cannot be said to be fraud. Noticee neither dealt in the securities of RHFL not induced anyone to deal in the securities. 24.6 SCN does not allege or bring anything on record to show that the Noticee was acting under the instruction of RHFL/ its KMPs or any of its promoter linked entities to divert funds to promoter linked entities. Noticee is an independent entity and merely because of common address and common directorships with certain other entities, SEBI has alleged that Noticee is colluding with RHFL/ its promoter linked entities. 24.7 Interim Order does not meet the standard of preponderance of probabilities which is required to establish a charge under PFUTP Regulations. In the matter of Shruti Vora, the Hon ble SAT in its order dated March 22,2021 has been held that existence of one or two attendant circumstances cannot be said to meet the test of preponderance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gency to dispense with the requirement of pre-decisional hearing. SCN has resulted in permanent and irreversible damage to the reputation of the Noticee. 26.6 In the absence of any finding with respect to role of the Noticee in the affairs of RHFL or role of RHFL or its officials/ officials of its promoter group entities in the affairs of the Noticee, the allegations cannot be levelled against the Noticee. 26.7 A business decision or judgment cannot be called into question at a later stage and that an assumption of legality ought to be taken in case of such decision. 26.8 In order to constitute a fraud under PFUTP Regulations, it is essential that there is dealing in securities. In the present case, though fraud has been alleged but nothing has been brought on record to show that the Noticee has dealt in securities or induced another person to deal in securities. 26.9 LODR Regulations can only be applicable on listed entities and given that Noticee is not a listed entity, any allegation under the LODR Regulations cannot be sustained. 27. NOTICEE NO. 11 27.1 Noticee is a private limited company incorporated in 1991 having a sizeable business and is neither involved nor associated wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view of the aforesaid judgment and consequently, SCN is not sustainable in fact and in law. 28. NOTICEE NO. 12 28.1 Noticee is a private limited company incorporated in 2010 and has no connection/ dealings with securities market. Noticee is an independent entity managed and controlled by its own set of functionaries. 28.2 The Interim Order has caused grave damage to the market reputation of the Noticee and tarnished its commercial prospects. 28.3 As there was no direction in the Interim Order against the Noticee, the requirement of pre-decisional hearing could have been complied with. 28.4 Noticee is an unlisted entity and does not operate in the securities market and is therefore beyond the jurisdictional purview of SEBI. Merely executing a loan transaction cannot bring Noticee within SEBI s jurisdiction. 28.5 The allegation of violation of LODR Regulations is baseless as the same is only applicable on the listed entities. 28.6 The essential ingredient for alleging violation of PFUTP Regulations is to deal in securities or to induce another party to deal in securities which is not met for the Noticee. 28.7 Nothing has been brought on record to show collusion between Noticee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an. 30.3 Interim Order goes on to make conclusive finding that Noticee is a conduit to the alleged fraud without providing any evidence to that effect. SCN has caused reputational damage to Noticee. 30.4 In order to allege fraud under PFUTP Regulations, the essential requirement is that fraud has to be in relation to securities market. Merely taking of loan and granting of loans/ repaying existing loans cannot be said to be fraud. Noticee neither dealt in the securities of RHFL not induced anyone to deal in the securities. 30.5 The loan transactions are genuine and bonafide transactions. Out of loan of INR 664 Crores taken from RHFL, INR 529 Crores has been repaid to RHFL by the Noticee and despite financial difficulties, Noticee is exploring the possibility of repayment of balance amount. 30.6 With respect to loans taken from Noticee No. 8 and 18, Noticee was not aware of the source of funds lent by these entities to Noticee and it is not incumbent on the Noticee to check the source of funds of a company prior to obtaining loans. 30.7 SCN does not allege or bring anything on record to show that the Noticee was acting under the instruction of RHFL/ its KMPs or any of its promoter l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a dealing in securities by a person and inducement to deal in the securities. In the present case, Noticee has neither dealt in securities nor has it induced others to deal in securities. 31.7 Out of the borrowed sum of INR 365.90 Crores from RHFL, INR 163.50 Crores has been repaid and the remaining amount could not be paid because of liquidity crunch. Further, out of the total amount onward lent, a sum of INR 237.66 Crores has been received back by the Noticee. 31.8 With respect to fund transfer to alleged promoter linked entities of RHFL, it is submitted that such loans were provided to entities to take advantage of higher interest component and to derive profits. 31.9 With respect to same date of approval and disbursal of loan, it is submitted that Noticee and RHFL were in discussion for the disbursal of loans as Noticee required funds and only when the discussion fructified that the application was made and loans were disbursed. A delay in documentation cannot lead to a finding of fraud. 31.10 Interim Order does not meet the test of preponderance of probabilities which is required to establish a charge under PFUTP Regulations. 32. NOTICEE NO. 16 32.1 Noticee is a private li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lications were made, it is submitted that Noticee had been discussing loan disbursal with RHFL and paperwork was put in place only when a green signal was observed from RHFL. In any case, Noticee was the recipient of the loan and not the decision maker with regard to disbursal of loan. 33.9 The test of preponderance of probabilities is not satisfied in the matter as allegation of fraud cannot be on the basis of mere surmises and conjectures. 34. NOTICEE NO. 18 34.1 Noticee is a private limited company and is neither in the business of dealing in securities nor associated with the securities market. 34.2 Noticee approached RHFL to raise some funds to meet its working capital requirement. Such loans were onward lent to certain other entities who were in need of funds. 34.3 Interim Order goes on to make conclusive finding that Noticee is a conduit to the alleged fraud without providing any evidence to that effect. SCN has caused reputational damage to Noticee. 34.4 In order to allege fraud under PFUTP Regulations, the essential requirement is that fraud has to be in relation to securities market. Merely taking of loan and granting of loans/ repaying existing loans cannot be said to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Sapphire is not a party to the present proceedings and there are no loan transactions between Sapphire and the Noticee. 35.8 On the approval and disbursal of loan on the same date on which application for such loan was made by Noticee to RHFL, it is submitted that Noticee and RHFL were in discussion with regards to disbursal of loan and only when the discussion between the parties fructified, the application was made and loan disbursed. 35.9 A mere existence of one or two connecting factors would not indicate fraud and reliance is placed on the decision of Hon ble SAT in HB Stockholdings Ltd. v. SEBI. 35.10 In order to sustain charge of Noticee being a part of a fraudulent scheme by which funds of RHFL were knowingly transferred to entities connected to promoters of RHFL through GPC Loans, a collusion between RHFL and its KMPs with Noticee or collusion between Noticee and RCFL has to be shown. However, the documents relied upon by SEBI do not display any collusion. 35.11 The standard of preponderance of probabilities is not met in the matter. 35.12 Noticee is alleged to be in violation of LODR Regulations. As Noticee is an unlisted company, LODR Regulations are not applicable on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by Noticee to RHFL, it is submitted that a delay in completion of documentation does not indicate collusion. 36.12 In order to sustain charge of Noticee being a part of a fraudulent scheme by which funds of RHFL were knowingly transferred to entities connected to promoters of RHFL through GPC Loans, a collusion between RHFL and its KMPs with Noticee or collusion between Noticee and RCFL has to be shown. However, the documents relied upon by SEBI do not display any collusion. 36.13 It has to be displayed with evidence that Noticee was aware of the source of funds of the PILEs from which it borrowed funds. Noticee was not aware that such PILEs had received such funds from RHFL and that too with any alleged irregularity. Similarly, with regards to loans taken directly from RHFL, it has to be displayed with evidence that Noticee would know of the so called irregularities in sanctioning of such loans. Noticee is not aware of any such irregularity. 36.14 The standard of preponderance of probabilities is not met in the matter. 36.15 Noticee is alleged to be in violation of LODR Regulations. As Noticee is an unlisted company, LODR Regulations are not applicable on it. 37. NOTICEE NO. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. 38. NOTICEE NO. 22 38.1 Noticee is a private limited company. 38.2 Interim Order was passed without providing an opportunity of pre- decisional hearing. 38.3 Noticee was in need of funds and approached Gamesa Investment Management Private Limited (Noticee No. 14). Noticee did not know or was supposed to know the source of funds of Noticee No. 14 and Noticee was not aware of any illegality/ deviations in granting of loans by RHFL to Noticee No. 14. The loan of INR 14.37 Crores taken from Noticee No. 14 has been fully repaid with interest in May 2020. 38.4 Though Noticee is a subsidiary of Reliance Capital Limited, the fact that loan borrowed was repaid clearly demonstrates that Noticee was not the ultimate beneficiary of funds allegedly siphoned off from RHFL. 38.5 Noticee is an unlisted entity and it has entered into loan transactions with other unlisted entities. SEBI has failed to show as to how the actions of Noticee has any effect on the investors of the securities market or any impact on the securities market. SEBI has erroneously assumed jurisdiction upon itself. 38.6 The provisions of LODR Regulations can only be applied to a listed entity and its functionaries. As Notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o longer a related party of RHFL or any other Noticees to the SCN. 39.5 In the matter of SEBI v. Rajkumar Nagpal Ors., the Hon ble Supreme Court held that by its conduct post the issuance of RBI Framework, SEBI subscribed to the overall framework of the RBI Circular. Therefore, the object and purpose of such pre-insolvency resolution under RBI framework ought to be kept in mind while determining if SEBI can levy penalties on Noticee or its new management post successful resolution. 39.6 The parent company of Noticee, Reliance Capital Ltd., was undergoing insolvency resolution under IBC. By way of supplemental resolution implementation memorandum, Authum had purchased all securities of Noticee held by Reliance Capital Ltd. in a sale undertaken by the administrator of Reliance Capital Limited and all rights and protective provisions under the IBC that would be available to a resolution applicant thereunder ought to be extended to the Noticee. Accordingly, Authum and Noticee s new management cannot be penalized, specifically, in view of Section 32A of the IBC. 39.7 Noticee cannot be held liable for any lack of diligence being extended by the creditor while disbursing a loan nor can it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablishing a charge of aiding or abetting the commission of an offence, the principles of meeting of minds must be satisfied i.e. such person has allegedly aided or abetted the primary violator in commission of an offence and had a clear and conscious intention to participate in commission of such an offence. In the instant matter, no such meeting of minds has taken place. Noticee was neither privy to nor possessed any knowledge of alleged violations purportedly committed by RHFL. 40. NOTICEE NO. 24 40.1 Noticee is an unlisted public limited company managed by its own functionaries. Noticee has no dealings/ associations/ operations with the securities market. 40.2 SEBI has the jurisdiction to proceed against an entity only when such entity is associated with the securities market. As Noticee is an unlisted entity, SEBI erred in assuming jurisdiction over the Noticee in the present matter. 40.3 There was no urgency to proceed against the Noticee without a pre- decisional hearing. 40.4 There has been delay on part of SEBI in the instant proceedings. 40.5 The loan amount of INR 11 Crores borrowed from Gamesa Investment Management Private Limited (Noticee No. 14) was repaid on August 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n record to display any such collusion. 41.5 Noticee did not know and was not supposed to know the source of funds of the PILE. 41.6 Noticee has repaid the loan taken from Indian Agri Services Private Limited (Noticee No. 7). In light of such repayment, the allegation of the Noticee being the ultimate beneficiary of funds from PILEs and/ or assisting in commission of the alleged fraud does not hold any ground. 41.7 In order to establish fraud under PFUTP Regulations, the act has to be with respect to dealing in securities or inducing another person to deal in securities. The alleged act of Noticee in obtaining loan has no connection with dealing in securities or inducing other person to deal in securities. 41.8 SCN fails to meet the preponderance of probabilities standard to establish a violation of PFUTP Regulations. Mere existence of one or two attendant circumstances will not definitely lead to the satisfaction of the preponderance of probability standard against Noticee. 41.9 Doctrine of doubtful penalization is squarely applicable to the present case in light of submissions made by Noticee and therefore, no penalty should be imposed against the Noticee. 42. NOTICEE NO. 26 Noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Noticee on November 29, 2021 and appointed Mr. Nageswara Rao Y as the administrator of the Noticee. 44.2 Thereafter, an application for initiation of CIRP against the Noticee was filed on December 02,2021 under IBC before the Hon ble NCLT, Mumbai. Vide an order dated December 06, 2021, the Hon ble NCLT commenced CIRP and appointed Mr. Nageswara Rao Y as administrator of the Noticee. 44.3 Pursuant to commencement of CIRP, a moratorium has been imposed on institution or continuation of proceedings against the Noticee. As the moratorium is in effect, SEBI does not have the jurisdiction to institute or continue proceedings against the Noticee and reliance is placed on the decision of Hon ble SAT in the matter of Dewan Housing Finance Corporation Ltd. v. SEBI. 45. The relevant provisions of SEBI Act, 1992, LODR Regulations and PFUTP Regulations, are reproduced hereunder for ready reference: SEBI Act, 1992 11C. . (5) Any person, directed to make an investigation under sub-section (1), may examine on oath, any manager, managing director, officer and other employee of any intermediary or any person associated with securities market in any manner, in relation to the affairs of his busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o consideration the interest of all stakeholders and shall also ensure that the annual audit is conducted by an independent, competent and qualified auditor. (c) The listed entity shall refrain from misrepresentation and ensure that the information provided to recognised stock exchange(s) and investors is not misleading. (d) The listed entity shall provide adequate and timely information to recognised stock exchange(s) and investors. (g) The listed entity shall abide by all the provisions of the applicable laws including the securities laws and also such other guidelines as may be issued from time to time by the Board and the recognised stock exchange(s) in this regard and as may be applicable. (h) The listed entity shall make the specified disclosures and follow its obligations in letter and spirit taking into consideration the interest of all stakeholders. (i) Filings, reports, statements, documents and information which are event based or are filed periodically shall contain relevant information. (j) Periodic filings, reports, statements, documents and information reports shall contain information that shall enable investors to track the performance of a listed entity over regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n high ethical standards and shall take into account the interests of stakeholders. (12) Members of the board of directors shall be able to commit themselves effectively to their responsibilities. . 17 (7) The minimum information to be placed before the board of directors is specified in Part A of Schedule II. (8) The chief executive officer and the chief financial officer shall provide the compliance certificate to the board of directors as specified in Part B of Schedule II. 26 (3) All members of the board of directors and senior management personnel shall affirm compliance with the code of conduct of board of directors and senior management on an annual basis. 30. (1) Every listed entity shall make disclosures of any events or information which, in the opinion of the board of directors of the listed company, is material. (7) The listed entity shall, with respect to disclosures referred to in this regulation, make disclosures updating material developments on a regular basis, till such time the event is resolved/closed, with relevant explanations. Financial results. 33. (1) While preparing financial results, the listed entity shall comply with the following: (a) The financial res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly or indirectly (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. 4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that they have separately undergone resolution in terms of Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 dated June 7, 2019 ( RBI Framework ). The Hon ble Supreme Court, vide its judgments dated March 03, 20232 and August 30, 20223 has approved the resolution plans submitted by the successful Resolution Applicant, Authum Investment and Infrastructure Ltd. ( Authum ), for both Noticee No. 1 and Noticee No. 23 respectively. In the context of these resolution plans, Noticee Nos. 1 and 23 have contended as follows: Noticee No. 1 (i) In terms of the Resolution Plan, the entire business undertaking of RHFL (Noticee No. 1) stands transferred to Authum through its wholly owned subsidiary on a going concern basis. (ii) As on date, while the corporate shell of the Company survives, it has no business what so ever, and has negligible assets. The Company, thus, is a skeleton without soul or flesh, and has to now mandatorily relinquish its license. Therefore, the actions contemplated under the Interim Order are infructuous. Noticee No. 23 (i) Authum became the new owner and promoter of RCFL (Noticee No. 23) upon approval of the Resolution Plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te as follows: (i) In terms of the Resolution Plan, Authum has designated Noticee No. 23/ RCFL, being a wholly owned subsidiary of Authum, as the entity/ special purpose vehicle for acquiring the business of RHFL and to implement the Resolution Plan with respect to Noticee No. 1/ RHFL. (ii) The Authorised Representative of Noticee No. 1 (which has been taken over by Authum) has conceded that there is no prohibition on SEBI under RBI Framework to continue proceedings against it upon approval of its resolution plan while questioning the need for continuing with the proceedings. However, Noticee No. 23, which is under the same management (Authum) at this time and also looking after the affairs of Noticee No. 1 now for implementing Authum s Resolution Plan, has taken a different position by contending that SEBI proceedings would undermine the purpose of RBI Framework and SEBI s actions seem to disregard the judgment of the Hon ble Supreme Court in Rajkumar Nagpal matter (supra). (iii) Upon perusal of the RBI Framework, I note that para 4 of the said notification records the purpose of the Framework as follows: - These directions are issued with a view to providing a framework for early ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trustees are obligated to comply with its circular even though the event of default has taken place prior to issuance of the Circular. However, the Hon ble Court held that SEBI Circular could not be permitted to operate retrospectively and did not govern the Debenture Trustee Deeds. The appeal filed by SEBI before the Division Bench of the Hon ble High Court was also dismissed. (e) SEBI had filed an appeal being SEBI v. Rajkumar Nagpal Ors. (supra) before the Hon ble Supreme Court against the order of the Hon ble High Court wherein the issue to be decided was whether the debenture holders and other parties were required to follow the procedure under the SEBI Circular. The Hon ble Supreme Court in its judgment dated August 30,2022 observed that in its Circular, SEBI had referred to Resolution under RBI Framework and permitted debenture holders to participate in the process specified under RBI Framework along with conditions under which debenture holders could access the Resolution Plan and participate in its formulation. It was in this context that Hon ble Court observed that SEBI subscribed to the overall framework of RBI Circular. Hon ble Supreme Court held that SEBI Circular was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restrict/ limit the present SEBI proceedings. 48. Whether SEBI can proceed against Noticee No. 2 in view of the Interim Moratorium under Section 96 of the IBC? Whether jurisdictional issue needs to be determined through separate order? 48.1 Noticee No. 2 (Anil D. Ambani) has raised a preliminary objection vide written submissions dated February 24,2023 and February 24,2024 that the instant SEBI proceedings against Noticee are barred in law since a statutory moratorium in terms of Section 96 of IBC is in force. Noticee submitted that State Bank of India has filed applications under Section 95 of the IBC against the Noticee in March 2020 and consequently, a moratorium under Section 96 of the IBC with respect to Noticee No. 2 came into force w.e.f. March 12,2020, which is continuing. 48.2 In the context of the aforesaid preliminary objection, Noticee has made the following arguments: (i) Pursuant to Section 96 of IBC, after an application is filed under Section 95 of IBC, there is a statutory bar on commencement or continuation of any legal action or proceeding in respect of any debt and all actions and/ or steps, including but not limited to proceedings to impose any monetary penalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondition precedent c) Sathyanath Anr. v. Sarojamani10- The jurisdiction issue is required to be decided in the first instance. (iv) The Noticee has argued that the definition of the term debt under IBC includes fines and penalties. This is clear from a perusal of the definition of excluded debt (Section 79(15) of IBC) and its usage in Section 94 of IBC (which applies only in case of insolvency proceedings initiated by a debtor). It is only in Section 94 of IBC that the legislature in its wisdom has made an exclusion of excluded debt . There are no such exclusions applicable to Sections 95 and 96 of IBC. There is a deliberate omission by the legislature of the term excluded debt from Sections 95 and 96 of IBC. Therefore, it is evident that the term debt includes fines and penalties and for this purpose, reliance is placed on the decision of Hon ble Supreme Court in the matter of The Employees State Insurance Corporation and Ors. v. The Tata Engineering and Locomotive Co. and Ors. 11 wherein Hon ble Court discussed deliberate omission of a term in a definition by legislature. (v) In view of the definition of terms debt and claim under IBC, Noticee submitted that ambit of Section 95 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the Hon ble Supreme Court held that paid up share capital of a company can be said to be a jurisdictional fact which would confer the jurisdiction on the court to consider the question whether the provisions of the Act were applicable. As there was a specific reference to the paid-up capital for excluding the jurisdiction of the Court, it was a question of law to first decide on the paid up capital of the company for the purpose of applicability of the Act. (ii) In the matter of Sathyanath (supra) cited by the Noticee, the Hon ble Supreme Court was called upon to interpret Order XIV Rule 2 of Code of Civil Procedure, 1908 ( CPC ) which dealt with the decision of Court on issues of law and fact. The present proceedings being quasi-judicial in nature are not bound by the provisions of CPC. Nonetheless, I note that the Hon ble Supreme Court has made it clear that even in cases governed by the CPC, the Court has the discretion to either decide all issues together or only decide the preliminary issues as per the criteria provided under Order XIV Rule 2. The word used in the said amended Order XIV Rule 2 is may , thereby granting discretion to courts and courts are not obligated to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Material change has been brought about in legal position by amended O. 14, R. 2 which reads as follows: XXX XXX XXX 24. The word shall used in old O. 14, R. 2 has been replaced in the present Rule by the word may . Thus now it is discretionary for the Court to decide the issue of law as a preliminary issue or to decide it along with the other issues. It is no longer obligatory for the Court to decide an issue of law as a preliminary issue .. 12. . Patna High Court in a judgment reported as Dhirendranath Chandra v. Apurba Krishna Chandra and Ors ..held as under: 6. ............There is, however, nothing in sub-rule (2) which in my opinion makes it obligatory for the Court to try such an issue first in all cases. If, therefore, the Court is of opinion that in any particular case it will be more expedient to try all the issues together and therefore, if it refuses to try and decide any issue of law even on the points referred to in cls. (a) and (b) of sub-rule (2) as a preliminary issue before taking up other issues. 13. . Bombay High Court in a judgment reported as Usha Sales Ltd. v. Malcolm Gomes and Ors . held as under: 11...... 12. .. The Court may try an issue relating to the j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and (b) during the interim-moratorium period (i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and (ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt. 7. The expression used in Section 96(1)(b)(i) is any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed . 8. The term debt has been defined in the I B Code in Section 3(11), which is to the following effect: 3(11). debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt; 9. When we read Section 96(1)(b) with the definition of debt in Section 3(11), what is contemplated to be stayed is the proceeding relating to debt, which means a liability or obligation in respect of a claim which is due from any person. Interim moratorium shall be for such proceedings which relate to a liability or obligation due i.e. due on date when interim moratorium has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96 101 was in the context of more persons being covered under Sections 96 101 vis- -vis Section 14 of the IBC. The relevant extracts of the Hon ble Court s decision are reproduced below: 23 . the protection of the moratorium under these Sections is far greater than that of Section 14 in that pending legal proceedings in respect of the debt and not the debtor are stayed. The difference in language between Sections 14 and 101 is for a reason. Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to the CIRP under Part II. Section 14(1)(a) provides that on the insolvency commencement date, the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including proceedings in execution shall stand prohibited by an order of the adjudicating authority. Clause (b) of sub-section (1) of Section 14 empowers the adjudicating authority to declare a moratorium restraining the transfer, encumbrance, alienation or disposal by the corporate debtor of any of its assets or any legal right or beneficial interest therein. Significantly, the moratorium under Section 14 operates on the order passed by an adjudicating authority. The purpose of the moratorium under Section 96 is protective. The object of the moratorium is to insulate the corporate debtor from the institution of legal actions or the continuation of legal actions or proceedings in respect of the debt. (emphasis supplied). 48.11 As submitted by Noticee, the proceedings were initiated by SBI against him in his capacity as a personal guarantor for loans taken by a company. I also note that Noticee has not rebutted the findings of Hon ble NCLAT in Ashok Mahindru matter. Therefore, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audit reports to be true, the very foundation of SCN stands obliterated . 49.2 I have perused the judgment of the Hon ble Supreme Court and the submissions of the Noticee No. 11. In this regard, I note the following: (i) The appeal referred to by the Noticee was filed in Rajesh Agarwal matter (supra) challenging the RBI Directions primarily on the ground that banks/ financial institutions were not required to afford an opportunity of being heard to the borrowers before classifying their accounts as being fraudulent . (ii) Upon perusal of the provisions of the said RBI Directions, the Hon ble Supreme Court observed that classification of a borrower s account as fraud under the Master Directions on Frauds has difficult civil consequences for the borrower. Classification of the borrower s account as fraud under the Master Directions on Frauds virtually leads to a credit freeze for the borrower, who is debarred from raising finance from financial markets and capital markets. In view of the aforesaid significant civil consequences of classification of an account as fraud , the Hon ble Supreme Court has held that consistent with the principles of natural justice, the lender banks should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decided/ disposed of through separate orders by SEBI. 51. Whether SEBI is prevented from continuing with the present proceedings against RHFL as it is under the regulatory purview of NHB/ RBI? 51.1 It has been contended by some of the Noticees that RHFL is regulated by NHB/ RBI and SEBI does not have jurisdiction to question such lending transactions. 51.2 In this regard, I note that Noticee No. 1 is a company listed on stock exchanges under the provisions of securities law and therefore, within the regulatory ambit of SEBI. Therefore, SEBI has jurisdiction to continue with its proceedings against RHFL. 52. Whether SEBI can proceed against GPCL Borrowers/ Onward Borrowers since they are unlisted entities? 52.1 Some of the Noticees who are GPCL Borrowers as well as onward borrowers have contended that SEBI lacks jurisdiction to proceed against them as they are not listed and the loan transactions cannot be said to be dealing in securities to allege the charge of fraud. 52.2 I note that these Noticees have allegedly played a key role and acted in connivance with each other, which has resulted in misuse and diversion of funds of a listed entity for the benefit of promoters by acting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also sought from the Noticees and the same/ additional submissions were provided by them which are also listed in the aforesaid Table. In the case of Noticee No. 2, in response to the queries posed during the first two hearings, replies were submitted on three different dates. However, the said Noticee had not confirmed whether there were any further clarifications to provide. Accordingly, one final opportunity of hearing was provided on February 14,2024 after which written submissions were received as well. 53.3 A total of 42 written replies from 28 entities were considered for the purposes of these proceedings. Last written submissions were received on February 26, 2024. 53.4 I note that SEBI has conducted its proceedings in compliance with principles of natural justice wherein opportunity of hearing was granted to all the Noticees and their submissions have been considered. The timeline between alleged violation and issuance of SCN is not more than 3 years. Noticees have not represented how the delay has prejudiced their ability to defend the allegations. Considering all of the above, I am of the view that the proceedings cannot be said to have been unjustifiably or unduly delay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ports Loans given to entities with weak financials 🗸 🗸 🗸 Deviations recorded by RHFL in CAMs 🗸 🗸 No proper documentation of loans 🗸 🗸 🗸 No due diligence 🗸 🗸 🗸 GPCL borrowers are connected to Reliance ADA Group entities viz. common addresses, common directors, etc. 🗸 🗸 🗸 Diversion of loans to promoter group entities 🗸 🗸 🗸 Ever Greening of GPC Loans 🗸 🗸 Loans onward lent on same date 🗸 🗸 🗸 Loans disbursed on same date as date of application 🗸 🗸 Loan disbursed prior to sanction 🗸 🗸 🗸 GPC Loans converted into unquoted investments 🗸 Guarantee given by promoter group entities for GPC lendings 🗸 🗸 Misrepresentation of financials 🗸 Approval of Loans by Anil D. Ambani 🗸 🗸 🗸 54.3 The allegations of violation of securities laws made in the SCN rest on three important conclusions: (A) That there was patent irregularity in disbursement of loans by RHFL; (B) That the loans were granted to entities which are closely connected to/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mphasis supplied) (ii) In view of the above, it is reasonable to infer that RHFL was required to maintain its non-housing portfolio to less than 50%. Yet, RHFL clearly had a much higher proportion of non-housing loans disbursed to its clients. This is discussed in greater detail in subsequent paragraphs. (iii) RHFL as part of its business, provided Housing Loans, Loan against property and Construction Finance etc. The details of the loans extended by RHFL under various heads for the Financial Years 2017-18 and 2018- 19, as recorded in the Annual Report for the year 2018-19 is as under: Table 13 (INR in Crore) Loans given to FY 2017-18 FY 2018-19 Corporates 3742.60 8670.80 Small Business 5073.73 3824.00 Residential Mortgagees 5823.40 4034.67 Total 14,639.73 16,529.47 (Source: Annual Report of RHFL for the year 2018-19) The details captured in the Table above indicate that the loans extended by RHFL to the Corporates had significantly increased from an amount of INR 3742.60 Crore in 2017-18 to INR 8670.80 Crore in the year 2018-19. (iv) RHFL, in addition to various other products, offered General Purpose Corporate Loans (GPCL) also referred to as Demand/ Call Loan . As approved by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.00 04-Oct-18 25.00 27-Apr-18 100.00 3 Mohanbir Hi-Tech Build Private Limited 19-Sep-18 70.00 4 Indian Agri Services Private Limited 18-Apr-18 200.00 12-Jul-18 100.00 5 Gamesa Investment Management Private Limited 06-Nov-18 100.00 Total 824.60 (vii) When SEBI sought response on the aforesaid suspected unaccounted disbursals, RHFL replied vide email/letter dated December 23,2021 that since these amounts were repaid during the year of disbursal itself (2018-19), details of the same were not provided vide its earlier communication dated December 01,2020. (viii) The said amount of INR 9295.25 Crore was extended to 45 GPCL Borrower entities, in which the share of top 14 GPCL Borrower entities aggregated to INR 5208.23 Crore16 (INR 4383.62 Crore+ INR 824.60 Crore, as referred in Table-). However, as stated earlier in this order, one entity out of the said top 14 entities viz. Vinayak Ventures Private Limited (Noticee No. 13) did not respond to the summons issued by SEBI, therefore, the factual findings and the analysis of the alleged fraudulent lending activities of RHFL are primarily based on the responses received by the top 13 GPCL Borrower entities, who have been advanced the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .04 0.04 41.25 (0.02) 0.01 0.22 (0.01) (0.05) (349.95) 0.25 0.29 370.22 - - - (0.40) (0.38) (0.16) 225.00 15.00 Arion Movie Productions Pvt. Ltd. NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA 402.39 214.89 Citi Securities And Financial Services Pvt. Ltd. 0.15 0.03 0.03 (0.19) 0.00 (0.01) 0.33 0.38 0.32 0.33 0.38 0.32 0.33 0.39 0.32 220.80 0.00 Adhar Project Management And Consultancy Pvt. Ltd. 0.00 0.01 0.42 (2.14) (9.65) (8.60) 0.18 2.50 0.77 27.01 21.53 52.79 - - - (2.49) (12.14) (20.76) 534.60 589.41 Deep Industrial Finance Ltd. 0.00 0.10 11.46 (0.22) (0.45) (0.17) 44.02 44.01 313.75 44.02 44.01 313.75 15.87 15.42 15.19 220.00 0.00 Tulip Advisors Pvt. Ltd. 0.00 0.02 0.06 0.00 0.00 0.00 - - - 0.22 0.23 0.22 - - - 0.22 0.22 0.22 215.00 13.00 Netizen Engineering Pvt. Ltd. 1497.39 1548.16 74.66 (1,321.28) (287.36) 0.40 (1,519.28) (1,363.01) (1,395.46) 7756.18 7703.69 8072.65 - - - (5364.82) (5652.19) (5651.79) 212.00 0.00 Medybiz Pvt. Ltd. 0.00 - 0.16 (0.83) 0.00 0.00 (0.02) (0.01) 0.00 0.02 0.01 0.02 - - - (1.70) (6.65) (6.65) 335.90 163.50 (Source: Replies of GPCL borrower entities) (ii) The above Table clearly reveals that for each of these 13 companies, their profits, op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of the Statement with regards to the loan advanced under the General Purpose Corporate Loan product with significant deviation to certain bodies corporate including group companies and outstanding as at March 31,2018 aggregating to Rs. 7489.89 Crs. . majority of Company s borrowers have undertaken onward lending transaction and end use of the borrowings from the Company included borrowings by or for repayment of financial obligation to some of the group companies. .. We are not getting sufficient audit evidence to ascertain recoverability of principal and interest including time frame of recovery of over dues. (emphasis added) (v) I also note that as per Minutes of Board Meeting held on March 28,2019, the then statutory auditors PWC, in pursuance of directions issued on Board Meeting held on February 11,2019, had presented that loans granted under the corporate loan product were seen to be sanctioned without adequate security and without justification based on the net worth and business of the borrowers. (vi) As such, I note that even statutory auditor appointed after PWC resigned in June 2019 i.e. Dhiraj Dheeraj, had observed that GPC Loans were disbursed without adequate secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, it was observed that the 13 borrower entities had availed a loan of INR 4944.34 Crore and had onward lent around 92% of the said funds soon after receipt of the same. As per the Memorandum of Association or financial statements of these 13 GPCL borrower entities, it is observed that none of them were involved in any business activity of financing or financial services which may justify such onward lending as working capital requirement . Despite recording deviations and weak financials, RHFL did not take any step at the time of processing the loan application to determine whether such GPCL borrowers had any working capital requirements or corporate purposes for availing loans of such magnitude. (iv) To illustrate, the loan application document of Gamesa Investment Management Private Limited (Noticee No. 14) reveal the following. (a) Gamesa submitted an application dated September 19,2018 for GPC Loan of INR 200 Crore (Application No. RHML:468480). (b) In the CAM, it is recorded that the 99% shareholding of Gamesa is held by Aadhar Project Management Consultancy Private Limited (Noticee No. 6) and it is availing loan to meet its working capital requirement. (c) The security for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and CAM pertaining to the same are provided below for reference: Image- 1 Image- 2 image-3 Image- 4 Image- 5 (vii) RHFL has contended that loans were given on the strength of the promoters/ projects/ collaterals, etc. and requisite charge has been created over the said collaterals. However, as I have noted in the instance and illustration of Gamesa, the collateral for a loan of INR 200 Crore was made against current assets of a mere INR 20,000. The situation is similar for each of the 13 GPCL borrowers detailed above. As has been noted earlier, RHFL clearly chose to lend hundreds of crores of Rupees to non- descript GPCL borrowers with patently unsuitable financials, with no semblance or record of any cashflows or collateral or any other factor to justify any confidence of repayment, and to boot, has done so while waiving the requirement for the most basic of due diligence in the loan processing. Therefore, this contention of RHFL is patently false. (viii) The deviation from rating the borrowing customer, and for computation of probability of default of the loan facility, is of particular significance. With such weak financials, and with no record of any mitigating security, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prising of Chief Risk Officer (CRO), Chief Executive Officer (CEO) and One Director. It has been informed that during the Financial Year 2018-19, the members of the said Credit Committee were: (a) (Upto November 20,2018) - Mr. Ravindra Sudhalkar (CEO), Mr. Amit Bapna (Director), Mr. Krishnan Gopalkrishnan (CRO) (b) (After November 20,2018) - Mr. Ravindra Sudhalkar (CEO), Mr. Amit Bapna (Director), and Mr. Raj Kumar M (Head - Real Estate Credit Credit Risk (ii) In their meeting on February 11,2019, the Board of Directors of RHFL inter alia decided that: No further lending to the corporates that does not fall under the policy criteria of the Company and loans shall be given only for retail home loan portfolio activities for long terms purposes and to the builders for residential housing constructions and for all purposes as permitted by NHB for individual/ retail residential lending. (emphasis supplied). However, even after such an explicit decision/ direction of the Board of Directors that excluded any further GPCL lending (a decision which was taken by the RHFL Board with attendance of Mr. Amit Bapna (Noticee No. 3), Mr. Ravindra Sudhalkar (Noticee No. 4) and Mr. Pinkesh Shah (Noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be made for the nine months ended December 31,2018. Further, it is also mentioned in the Minutes that the Housing Loan Portfolio of RHFL had dropped from 53% to 45% as compared to quarter ended September 30,2018. (vii) It was in view of the aforesaid submissions that RHFL Board expressed deep concern and further expressed their concerns on the composition of lending portfolio of the Company. In light of such concern, RHFL Board directed the Management of RHFL (as per the Minutes of Meeting, CEO (Noticee No. 4), CFO (Noticee No. 5) and Company Secretary Compliance Officer (Parul Jain) had attended the said Board Meeting) to not lend any further to corporates and that .loans shall be given only for retail home loan portfolio activities for long terms purposes and to the builders for residential housing constructions . In addition to the said direction, RHFL Board also directed the Management of RHFL to present a plan before the Board on their strategy to fulfil the NHB requirements of continuing license as a Housing Finance Company and to hold home loan portfolio more than 50% by March 31,2019. Further, in the said Board Meeting, RHFL Board had also directed statutory auditors a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cap of Rs. 6750 crores. Any deviation or any transaction beyond this threshold shall require confirmation by the Holding Company. (xi) Upon perusal of the said provision, I note that the policy provided for two scenarios wherein confirmation was required from the Holding Company viz. any deviation from policy or when the lending is beyond the threshold of INR 6750 Crore. I note that the said Demand/ Call Loan policy was issued on November 01,2018 after authorisation of Board of Directors and any deviation of policy required confirmation by the Holding Company . During the course of hearing held on February 27, 2023, Noticee No. 2 was advised to provide clarification on the word confirmation and the same was responded to by Noticee No. 2 vide his e-mail dated May 27, 2023. The query raised by SEBI and Noticee No. 2 s response is reproduced below: Table 19 Query raised during hearing held on February 27, 2023 Noticee No. 2 s response vide e-mail dated May 27, 2023 Noticee has submitted that as per GPCL policy, only confirmation of RCAP was required and not approval / sanction. What is the difference between Confirmation and Approval ? Further, what is the basis for granting such con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by him in his capacity as Chairman, Reliance Group and not as a representative of RCL. In this regard, the relevant extracts of the CAMs pertaining to approval of loan of INR 220.80 Crore and INR 210 Crore to Citi Securities and Financial Services Private Limited (Noticee No. 10; Images 6-10) and Vinayak Ventures Private Limited (Noticee No. 13; Images 11-14) respectively are reproduced below: Image 6 Image - 7 Image 8 Image 9 Image 10 Image- 11 Image- 12 Image- 13 Image- 14 (xiv) Noticee No. 2 granted explicit approval and that too in his capacity as Chairman, Reliance Group . There is no mention of either confirmation or Holding Company / RCL in the said CAM. This completely contradicts the submissions of Noticee No. 2. As mentioned above, the Demand/ Call Loan policy provided for confirmation by the Holding Company. However, Noticee No. 2 has granted approval to the loan applications in his capacity as Chairman, Reliance Group . Further, as per submission of Noticee No. 2, he had granted such approval after the loan had already been disbursed. However, as per the available documents, the loans were disbursed on the same day as loan application. Even if the said submission of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as per norms Disbursement to be done without creation of security Principal payment is bullet payment instead of monthly payment Maximum loan amount and Product CAP not as per norms ROI, PF and Foreclosure charges not as per norms Customer rating not done Escrow account not to be opened Monthly booking MIS not to be taken Cash flow statement not to be taken as principal to be repaid as bullet 51% Shareholding of the company not on deal structure Security PDCs not to be obtained (e Despite such weak financials, despite the absence of any cashflows and business, and despite the absence of anywhere near adequate security or any other mitigating collateral or assurance, undue haste was instead shown in approving the application on the same day. An entity having negligible income, assets, cashflows, and operations, and in fact running in loss, with no record of any mitigating circumstances or context whatsoever, was blindly granted loan of INR 220.80 Crore without even adequate security. B. Vinayak Ventures Private Limited (a) Noticee No. 13 s (Vinayak Ventures Private Limited) application seeking loan of INR 210 Crore was submitted on March 19, 2019 (i.e. well after RHFL Board s deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without even adequate security. (xvi) I note that Noticee No. 2 is certainly not a layman who is not aware of how commercial lending works, and of the implications of his signing these RHFL CAM documents. In fact, Noticee No. 2 has been part of governance structures of various companies whereby he was expected to take commercial and business decisions on behalf of the company, keeping in mind the interests of the companies and its shareholders. Noticee No. 2 cannot take refuge behind the policy requiring confirmation from holding company when the CAM itself had a pre-printed column of Approved By Chairman, Reliance Group and Noticee No. 2 signed in the said column even though CAM nowhere mentioned confirmation and holding company . Further, it will not be wrong to expect from such an experienced member of Board of different companies to read the policy of RHFL which made it binding for seeking confirmation of holding company. Noticee No. 2 cannot say that such signature was given for information/ noting purposes when CAM itself recorded various deviations including weak financials of the borrowers and instead of granting such confirmation of holding company, Noticee No. 2 granted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Chairman), he was clearly in a vantage position. This leads to the reasonable inference, by preponderance of probability, of his knowledge of approvals granted by Noticee No. 2 to GPCL that were prohibited by RHFL s Board decision. Despite continuing as director of RHFL and despite being appointed by the board as part of the three-member committee to review the GPCL exposures, there is no evidence of him having taken any measure to ensure compliance with the Board s decision or to ensure that funds were not diverted from RHFL. Noticee 4 - CEO (xix) The CAMs put up for approval by Noticee No. 2 Anil Ambani, as can be seen from the abovementioned illustration were proposed by Mugdha Jain (BCM-CRT), Kruttika Surve (Manager-CRT), Rajkumar M (Head-REF Credit Credit Risk) and Sangram Baviskar (BH). Apart from violation of Board directions to not grant corporate loans, the proposals were also in violation of resolution passed in RHFL Board meeting dated April 24,2017 wherein Credit Committee comprising of CEO, Chief Risk Officer and One Director of RHFL was authorized to approve loans of more than INR 5 Crore. However, as noted above, such proposals do not appear to have been put up to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of RHFL used to disburse the approved loans. The rationale for giving GPC Loans to borrowers with weak financials was the ADAG group s backing and strength and also the fact that the case was brought by the Group s CFO (Amit Bapna). (xxiv) The aforementioned statements of officials of RHFL, merely reiterate the inference drawn from the organogram and the documents available on record. The deliberate non-compliance of procedures by RHFL and its KMPs while considering the GPC Loan applications is all too obvious. When Noticee No. 2 started to approve loans post the February 11,2019 decision of RHFL Board (prohibiting issuance of any more GPC loans) the persons who put up the loan proposals i.e. Raj Kumar M and Sangram Bhavsar (as well as Mugdha Jain and Krutika Surve) continued to report to the CEO- Ravindra Sudhalkar. Therefore, they could not have put up the said loan proposals to Anil Ambani Noticee No. 2 without the knowledge and consent of the CEO. It is not the case of either RHFL or Noticee Nos. 3-5 that the said proposals which were sent after February 11,2019 to the Holding Company were without their knowledge. Even if it is considered that Demand/ Call Loan policy provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to lending. Yet, there is no record of Noticee No. 5 having raised objections to the impugned loans despite the financial impact of such loans on the Company. At any rate, as CFO of RHFL, Noticee No. 5 presented the financials of the company for FY18-19, which clearly showed a marked increase in GPC loans as of March 31,2019, in defiance of the clear instructions of the Board of RHFL from the Board meeting of February 11,2019. Noticee No. 5 had also attended the RHFL Board Meeting held on March 28,2019 wherein then statutory auditor-PWC had presented to the Board that GPC loans were sanctioned without adequate security and without justification based on the net worth and business of the borrowers; Board had expressed its deep concern with respect to these observations and directed management to rectify the position. As CFO, he was also interacting with two sets of auditors for the financials of FY18-19, both of whom had raised fundamental questions around the prudence, viability and nature of the GPC loans. 54.4.5 Hasty Approvals to GPCL Borrowers Applications (i) It is noted that that out of 70 GPC loan documents furnished by RHFL, as many as 62 Loan Applications amounting to I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow: Table-21 Sr. No. Name of the borrower Amount Disburs ed (INR Cr.) Date of Sanction letter Date of disburse ment as per bank statement Difference (no. of days) 1 Aadhar Project Management And Consultancy Pvt. Ltd. 100 30-Apr-18 27-Apr-18 3 54.5 Connection between Noticees who approved the loans/ managed affairs of RHFL, Borrowers and Reliance ADA Group 54.5.1 The following image pictorially represents the transfer of funds from RHFL to GPCL borrowers and onward borrowers who are Noticees in these proceedings: Image- 16 54.5.2 Out of the 45 GPCL borrower entities, 41 entities share common addresses with at least one of such other borrower entities. In fact, all such 41 entities are found to be located at 8 common addresses in Mumbai. Further, as per details available on MCA website, some of the entities share common email addresses The total amount extended as GPCL to these 41 entities was around INR 7,822.90 Crore (92.35% of total amount of GPCL of INR 8470.65 Crore), and the details of such common addresses have been highlighted in row A to H in the table below, while the details of common email address are mentioned in the subsequent table: Table-22 (GPCL Borrowers having same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Developers Pvt. Ltd. 70.00 41. RPL Aditya Power Pvt. Ltd. 139.50 H Common Address: Plot Bearing CTS No. C/1361 B1/1 of at Pali Hill, Bandra West, Mumbai Total 41 entities 7822.90 (Source: Reply of RHFL to SEBI dated December 01, 2020) ^ This entity is also an Onward Borrower Table-23 Sr. No. Registered email ID Details of GPCL Borrower entity 1 [email protected] Entities at serial no. 12, 13 and 37 in Table - 22 2 [email protected] Entities at serial no. 31, 32 and 33 in Table - 22 3 [email protected] Entities at serial no. 1, 2, 3, 4, 5, 6 and 7 in Table - 22 54.5.3 It is also noted that certain GPCL Borrower entities not only have cross shareholding amongst them selves but the GPCL borrowers are effectively owned by Reliance Group entities, details of which have been captured in the following table: Table-24 Details of Shareholding of GPCL Borrowers Name of Shareholder Aadhar Project Mgt. Pvt. Ltd. (%) Azalia Distribution Pvt. Ltd. (%) Gamesa Investment Mgt. Pvt. Ltd. (%) Hirma Power Ltd. (%) Indian Agri Services Pvt. Ltd. (%) Medybiz Pvt. Ltd. (%) Mohanbir Hi-Tech Build Pvt. Ltd. (%) Phi Mgt. Solutions Pvt. Ltd. (%) Reliance Entertainment Networks Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited 3. Phi Management Solutions Private Limited * Ekta Yadav 1. Mohanbir Hi-Tech Build Private Limited 1. Adhar Property Consultancy Private Limited 2. Reliance Alpha Services Private Limited 3. Reliance Entertainment Networks Private Limited (Formerly Reliance Land Private Limited) 4. Reliance Venture Asset Management Private Limited Laxminarayan Ramlal Sharma 1. Arion Movie 2. Hirma Power Limited 1. Jayamkondam Power Limited 2. Reliance Value Services Private Limited Mayank Chimanbhai Padiya 1. Hirma Power Limited 2. Tulip Advisors Private Limited 3. Vinayak Ventures Private Limited 1. Skyline Global Trade Private Limited 2. Space Trade Enterprises Private Limited Narendra Laxminarayan Sharma 1. Azalia Distribution Private Limited 2. Gamesa Investment Management Private Limited Nishant Sinha 1. Netizen Engineering Private Limited 2. Sapphire Cable Services Private Limited Sachin Seth 1. Adhar Project Management Consultancy Private Limited 2. Gamesa Investment Management Private Limited 3. Indian Agri Services Private Limited 4. Medybiz Private Limited 5.Phi Management Solutions Private Limited 1. Adhar Property Consultancy Private Limited 2. Adhar Real Estate Consultancy Privat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Financial Year 2018-19, the following entities are related to Noticee No. 2: Table - 28 Sr. No. Name of the entity Relationship to the promoters/ Noticee No. 2 1 Reliance Capital Limited (Noticee no. 28) Reliance Capital Limited is the holding company of RHFL and Mr. Anil D. Ambani is the individual promoter of Reliance Capital Limited and is disclosed to be the person having significant influence during the year on RCL. 2 Reliance Commercial Finance Limited (Noticee no. 23) Reliance Commercial Finance Limited is the subsidiary of Reliance Capital Limited (as per annual report of RCL for the year FY 2018-19) and hence, is a company under significant influence and indirect control of Mr. Anil D. Ambani. 3 Reliance Exchange next Limited (Noticee no. 22) Reliance Exchange next Limited is the subsidiary of Reliance Capital Limited (as per annual report of RCL for the year FY 2018-19) and hence, is a company under significant influence and indirect control of Mr. Anil D. Ambani. 4 Reliance Big Entertainment Private Limited (Noticee no. 27) Reliance Big Entertainment Private Limited is disclosed as an enterprise over which Mr. Anil D. Ambani has significant influence as per the annual re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. 27-Apr-18 Reliance Capital Ltd. 65.90 4. 23-Jul-18 Adhar Project Management Consultancy Pvt. Ltd. 25.00 23-Jul-18 Reliance Capital Ltd. 25.00 100.00% 5. 08-Aug-18 Adhar Project Management Consultancy Pvt. Ltd. 50.00 08-Aug-18 Reliance Capital Ltd. 50.00 100.00% 6. 09-Aug-18 Adhar Project Management Consultancy Pvt. Ltd. 43.48 09-Aug-18 Reliance Big Entertainment Pvt Ltd 43.48 100.00% 7. 09-Aug-18 Adhar Project Management Consultancy Pvt. Ltd. 51.12 09-Aug-18 Reliance Commercial Finance Ltd. 51.12 100.00% 8. 06-Sep-18 Adhar Project Management Consultancy Pvt. Ltd. 45.00 06-Sep-18 Reliance Big Entertainment Pvt Ltd 24.20 100.22% 9. 06-Sep-18 Reliance Capital Ltd. 20.90 10. 04-Oct-18 Adhar Project Management Consultancy Pvt. Ltd. 25.00 04-Oct-18 Reliance Capital Ltd. 25.00 100.00% 11. 30-Oct-18 Adhar Project Management Consultancy Pvt. Ltd. 95.00 30-Oct-18 Crest Logistics and Engineers Pvt. Ltd. 95.00 100.00% 12. 01-Mar-19 Adhar Project Management Consultancy Pvt. Ltd. 100.00 01-Mar-19 Reliance Commercial Finance Ltd. 100.00 100.00% 13. 11-Dec-18 Arion Movie Production Pvt. Ltd. 200.00 11-Dec-18 Reliance Broadcast 200.00 100.00% 14. 25-Mar-19 Arion Movie Production Pvt. Ltd. 200.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. 20.00 100.00% 39. 01-Mar-19 Indian Agri Services Pvt. Ltd. 50.00 01-Mar-19 Reliance Commercial Finance Ltd. 50.00 100.00% 40. 13-Mar-19 Indian Agri Services Pvt. Ltd. 25.00 13-Mar-19 Reliance Capital Ltd. 25.00 100.00% 41. 10-Sep-18 Medybiz Private Limited 150.00 10-Sep-18 Reliance Capital Ltd. 150.00 100.00% 42. 10-Oct-18 Medybiz Private Limited 40.00 10-Oct-18 Reliance Capital Ltd. 40.00 100.00% 43. 12-Oct-18 Medybiz Private Limited 100.00 12-Oct-18 Adhar Project Management Consultancy Pvt. Ltd. 100.00 100.00% 44. 19-Nov-18 Medybiz Private Limited 75.90 19-Nov-18 Reliance Unicorn Enterprises Pvt. Ltd. 75.90 100.00% 45. 10-Sep-18 Mohanbir Hi- Tech Build Private Limited 80.00 10-Sep-18 Reliance Capital Ltd. 80.00 100.00% 46. 19-Sep-18 Mohanbir Hi- Tech Build Private Limited 70.00 19-Sep-18 Reliance Capital Ltd. 70.00 100.00% 47. 14-Nov-18 Mohanbir Hi- Tech Build Private Limited 200.00 14-Nov-18 Reliance Unicorn Enterprises Pvt. Ltd. 200.00 100.00% 48. 18-Mar-19 Mohanbir Hi- Tech Build Private Limited 25.00 18-Mar-19 Gamesa Investment Mgt. Pvt. Ltd. 25.00 100.00% 49. 21-Dec-18 Netizen Engineering Pvt. Ltd. 32.38 NA NA - 0.00% 50. 18-Dec-18 Netizen Engineering Pvt. Ltd. 50.60 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions made in the preceding paragraphs, it is reasonable to infer that a major portion of GPC loans was extended by RHFL to GPCL Borrower companies only for the purpose of further transferring such loan amounts to promoter and promoter related entities. GPCL Borrowers appear to have acted as mere conduits to obtain loans from RHFL only to immediately pass on those loans onwards to other promoter linked entities. The purpose behind such layering of funds transfers under the garb of advancing GPCL appears to be to hide the facts that the ultimate beneficiaries of such loans are in fact Reliance Capital Limited (Noticee no. 28) and other promoter related entities. A pictorial representation of such fund transfer from RHFL to GPCL borrowers and onward to other Noticees is provided as Annexure A to this Order. 54.5.15 With this, clarity now emerges as to why the RHFL Management and Noticee 2, all of whom are professionals with knowledge of business and finance, approved GPC loans running into hundreds of crores of Rupees to non-descript borrowers with stunningly weak financials and business operations, while deviating from and closing their eyes to even the most basic of due diligence p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umber of entities which are connected using some commonality or the other. For instance, as can be seen in the Interim Order, 8 addresses are shared amongst 41 entities (one address often being shared by around 8 entities). Similarly, (i) three email IDs are shared amongst 13 entities (one email address being seen to be shared amongst 7 entities), (ii) one director was seen to be director in 10 entities (5 GPCL borrowers and 5 onward borrrowers); and, (iii) 4 persons who were directors across 9 borrowers were also employees/former employees in ADA group companies. Further, it is observed that as of the beginning of FY 2018- 19, most of the GPCL borrowers had cross shareholding amongst each other as highlighted in the Table- 24 above, some even holding almost 100% of the shareholding in the other entity. 54.5.19 Since some of the borrowers contended that they were independent entities controlled by their own management, the publicly available data of the shareholding of GPCL borrowers and onward borrowers for the year ending March 31,2019 was looked into in order to determine the extent of the relationship between the borrowers and the promoter group. The brief findings of this anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I find that the Noticees, the borrowers and Reliance ADA Group are closely connected with each other. This also possibly explains the motivation behind the nature and manner of disbursal of the impugned GPC Loans . 54.6 GPC Loans written off/Classified as NPA 54.6.1 GPC Loans turn NPAs/ Written Off (i) As per the information submitted by RHFL, it had, during the investigation period (FY 2018-19), disbursed 97 GPC loans amounting to INR 8470.65 Crore to 45 GPCL Borrowers entities. (ii) The status of these loans as on November 30,2020 as submitted by RHFL was as under: Table 31 : GPC loan status as on November 30, 2020 Classification Number of Loan applications Amount of Disbursement (INR Cr.) No. of Unique GPCL Borrowers Amount Outstanding as on November 30, 2020 (INR Cr.) Standard 32 3,153.30 16 2,920.50 NPA 63 5,165.05 27 3,858.51 Write-Off 2 152.30 2 152.30 Total 97 8,470.65 45 6,931.31 (iii) Further, the Company vide its letter dated November 24,2021, provided updated information about the loan accounts, which is tabulated herein below: Table 32 : GPCL Classification as on September 30, 2021 Classification Number of Loan applications Amount of Disbursement (INR In Crore) No. of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany (Allottees) Onward Borrower Company Loan Amount repaid by borrower Company through OCDs Date of Allotment Details of Allotment and No. of Securities allotted 1. 1) Mohanbir Hi-Tech Build Private Limited 2) Phi Management Solutions Private Limited Indian Agri Services Private Ltd 1) 14,54,82,000 2) 84,55,83,000 Total: 99.11 Crore 1st April 2019 Rs. 1000 per security: 1) 1,45,482 2) 8,45,583 Total: 9.91 lakh OCDs 2. 1) Medybiz Private Limited Adhar Project management Consultancy Pvt Ltd 1) 53,28,00,000 Total: 53.28 Crore 1st April 2019 Rs. 1000 per security: 1) 5,32,800 Total: 5.32 lakh OCDs 3. 1) Adhar Project management Consultancy Pvt Ltd 2) Gamesa Investment Management Pvt Ltd 3) Medybiz Private Limited 4) Mohanbir Hi-Tech Build Private Limited 5) Phi Management Solutions Private Limited 6) Reliance Alpha Services Private Limited 7) Reliance Venture Asset Management Private Limited Reliance Unicorn Enterprises Pvt Ltd 1) 8,35,79,000 2) 1,10,80,00,000 3) 78,66,18,000 4) 1,59,59,00,000 5) 12,15,35,000 6) 3,73,60,00,000 7) 64,33,09,000 Total: 807.49 Crore 1st April 2019 Rs. 1000 per security: 1) 83,579 2) 11,08,000 3) 7,86,618 4) 15,95,900 5) 1,21,535 6) 37,36,000 7) 6,43,309 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 100.00 RPL Solar Power Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 100.00 RPL Solar Power Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 50.00 RPL Solar Power Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 35.00 RPL Solar Power Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 100.00 RPL Solar Power Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 50.00 RPL Solar Power Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 50.00 RPL Solar Power Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 100.00 RPL Solar Power Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 64.00 RPL Solar Power Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 47.00 Hirma Power Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 50.00 Hirma Power Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 175.00 World com Solutions Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 50.00 Skyline Global Trade Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 71.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at upon becoming aware of the onward lending activities of borrowers, guarantees were obtained from listed companies. However, as observed above, such guarantees were only a post facto smokescreen to present the status of loan as secured. They do not explain why such large loans were made to companies with weak financials and credit quality in the first place, other than as part of a fraudulent artifice and scheme to divert money from a listed company to entities connected to the promoter. Such guarantees were taken from Reliance ADA group companies. If such guarantees were genuine, Noticee would have taken steps for recovery of loan amount by invoking such guarantees. However, instead of taking steps for the same, I note that the loan accounts of borrowers were declared NPA when they defaulted in payments and as per information available on record, the guarantees have not been invoked even after such defaults. I find that creation of such ex-post facto guarantees appears to have been only a formality used to deceptively assuage any concerns with respect to the loan defaults. (v) Similarly, Reliance Infrastructure Limited has also executed guarantees on behalf of certain Onward Bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te recipients of the funds viz., Noticee no. 8 and Noticee no. 14 transferred the said amounts back to RHFL, i.e., the Company from where such amounts had originated. The chain of events governing such transactions indicates that RHFL, in connivance with the GPCL borrower entities, was also involved in ever-greening of some of its lending business. (vii) It has been contended by RHFL and its KMPs that the factum of borrowers onward lending transactions as well as the fact that the end use of borrowings from company included borrowings or repayment of financial obligations to some of the group companies was stated in the Annual Report. The relevant passage from the Annual Report for FY18-19 is quoted as under: During the Financial Year, the Company had advanced loans under General Purpose Corporate Loan product to certain bodies corporate including some of the group companies. All the lending transactions undertaken by the Company are in the ordinary course of business, the terms of which are at arms length basis and the same do not constitute transactions with related parties. However, the Company s borrowers in some cases have undertaken onward lending transactions and it is notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Board of RInfra and RPower. I note from the perusal of Annual Reports of RInfra and RPower that Noticee No. 2 was Chairman of Board of Directors of both these companies during the time when guarantees were given by them to RHFL or GPCL borrowers. Further, in the Annual Report of RInfra, it is stated at page-63 that corporate guarantees were provided to RHFL and at page-116 it is stated that corporate guarantees were provided to enterprises wherein Anil D. Ambani had significant influence. Similarly, in the Annual Report of RPower pertaining to FY 2019-20, it is stated at page-164 thereof that Anil D. Ambani had significant influence over RHFL. Therefore, in view of the positions held by Anil D. Ambani in RHFL, RInfra and RPower, the loans sanctioned by Anil D. Ambani to GPCL borrowers as discussed in this Order and the weak financials of the borrowers for whom guarantees were provided, it can be reasonably inferred that Noticee No. 2 played a role in securing such post-facto guarantees on behalf of entities who otherwise would not have been eligible for sanctioning of loan. 54.7 Whether the Noticees can be said to have violated provisions of the PFUTP Regulations? At the core, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the CAMs. He has in his replies sought to distance himself from the aforesaid diversion by claiming that the company was professionally run and that he had no involvement in the same and that loans, if any, were only confirmed by him in the capacity of Chairman of the holding company. However, the facts and circumstances brought out above run contrary to his claims. Noticee No. 2 (Anil D. Ambani) in his replies has chosen to contest the specific expression de facto controlling influence used in the Interim Order, stating that no such expression exists in law. It appears that this expression was used not in the context of any specific provision of law but to summarise the allegation that the scheme was in fact orchestrated at the behest of Noticee No. 2. (vi) Thus, the allegations in this case are two-pronged - the Noticees have together contrived a scheme to (a) divert substantial funds of the Company to the detriment of the company and its stakeholders; and, (b) conceal such acts of diversion from the shareholders of the Company as well as public at large through manipulation of financials and books of accounts, and through egregiously misleading and false statements and assur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er make it amply clear that all the Noticees have played different roles in the elaborate and nefarious device to siphon out funds from RHFL, while concealing such acts from investors thereby lulling them into believing that the financial health of RHFL was far better than it actually was. (xi) I further note that to prove a violation of Section 12A of the SEBI Act, or Regulation 3(b), (c) and (d) of PFUTP, the test is to determine whether the device or scheme would operate as a fraud or deceit on investors dealing in such securities. The scheme of fraudulently diverting large quantum of funds from a listed entity without disclosure, by its very nature, is bound to induce investors (who are oblivious to the true state of affairs of the company) to continue to deal in the company s securities. Inevitably, this would result in artificially inflated prices because of such concealment of the ongoing fraudulent siphoning of funds. (xii) The Explanation to Regulation 4(1) of the PFUTP Regulations, which was inserted on October 19,2020, as a clarification (i.e. something which was earlier implicit has now been made explicit by adding the aforesaid Explanation)18 also effectively reiterate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... using Finance Company and ensure that the home loan portfolio would be more than 50% by March 31, 2019. Also, Statutory as well as Internal Auditors were directed to submit their reports by March 28,2019 after checking the documentation of all GPC Loans for compliance with company policies and to verify adequacy of security. These directions were material in nature and were required to be disclosed on the Exchange platform in accordance with Regulation 4(1)(d), (g), (h), 4(2)(b) (e), 30(1), 30(7) and 51(1) of the LODR Regulations, 2015. However, the Company failed to disclose the said direction of the Board on the Exchange platform in violation of the aforesaid provisions of LODR Regulations. Noticee Nos. 3-5 being KMPs are liable for this failure in disclosure of the Board s directions. 55.2 Misrepresentation of Financials (i) As per the Annual Report of RHFL for 2018-19, GPC Loans were shown under the head Loans-Corporate Loans on the asset side of the Balance Sheet and the relevant extracts of the same are provided below: Table 36 Relevant amounts of the Loans, security and ECL (in INR Crore) as disclosed in the Annual Report of RHFL Particular FY 16-17 FY 17-18 FY 18-19 Gross L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the assets of RHFL had been diverted, and that there was a very high probability that much of it if not all of it - would not come back. As such, the assurances in these so-called disclosures and notes to account can only be labelled as patently false and misleading. (v) RHFL in its Notes to Financial Statements in Annual report for year 2018-1919, in its accounting policy for recognizing expected credit loss (ECL) for the financial assets (Loans) has stated that: Ind AS 109 outlines a three stage model for impairment based on changes in credit quality since initial recognition . Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime expected credit losses that result from default events possible within next 12 months. Instruments in Stage 2 or 3 have their ECL measured based on expected credit losses on a lifetime basis. Stage 1 includes financial instruments that have not had a significant increase in credit risk since initial recognition or that have low credit risk at the reporting date. For these assets, 12-month expected credit losses ( ECL ) are recognised. Stage 3 includes financial assets that have objective evidence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on That financial instrument has increased significantly since initial recognition. Measurement of expected credit losses 5.5.17 An entity shall measure expected credit losses of a financial instrument in a way that reflects: (a) an unbiased and probability-weighted amount that is determined by evaluating a range of possible out comes; (b) the time value of money; and (c) reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. 5.5.18 When measuring expected credit losses, an entity need not necessarily identify every possible scenario. However, it shall consider the risk or probability that a credit loss occurs by reflecting the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the possibility of a credit loss occurring is very low. 5.5.19 The maximum period to consider when measuring expected credit losses is the maximum contractual period (including extension options) over which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by mathematically rendering ECL as NIL (according to RHFL s own computation as mentioned in their Annual Report and recorded in sub-para (v) above). RHFL goes onto record a miniscule amount of INR 278 crore as overall ECL for FY18-19, of which provision for non-housing loan assets was only to the extent of INR 78.84 crore. This clearly did not reflect the true picture of the financials of RHFL and resulted in inflated revenue figures for the Company as all GPC Loans were considered as assets, but only a miniscule amount out of that was considered as ECL. Note that a majority of these GPC Loans were eventually declared NPAs by RHFL; not surprising, given the glaring credit weaknesses that were well known and documented at the time of disbursal of the loans itself. This shows that RHFL has knowingly failed to comply with the applicable accounting standards despite having all information available with it. Therefore, it can be concluded that though there was very high and obvious risk of default at the time of disbursement of GPC Loans itself, the appropriate provision of impairment was not made in the books of accounts in terms of relevant accounting standards. The financials for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or even before the dates of applications made by these borrowers. Further, in the said letter, PWC also sought clarifications as to why the borrower entities should not be considered as group companies as email ID of borrower company was having domain address of Reliance ADA group, brand name of Reliance was appearing in the name of borrower company, Directors of such companies were employees of Reliance ADA group and multiple borrower companies having same registered address. (xiii) It is also relevant to mention that SEBI had inter alia referred this matter to National Financial Reporting Authority ( NFRA ) with respect to the alleged lapses made by the Auditors of the Company. Upon considering the material available with them and the submissions made by M/s Dheeraj Dhiraj (the statutory auditors of RHFL for FY18-19, appointed after the resignation of PWC), NFRA has passed an order dated April 26, 2024 inter alia holding that the statutory auditor did not perform sufficient appropriate audit procedures in respect of verification of company s assumption of Expected Credit Loss and that Auditor did not exercise professional scepticism in view of the fraud or error in respect of RHF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SCROW accounts and no cashflows/ income ..Many borrowers did not have the financial strength to get such loans but the loans were disbursed. Therefore, all such loans disbursed during the year met the definition of Purchased or Originated Credit Impaired asset (POCI). However, the company did not recognise these loan assets as POCI thereby violating provisions of Ind AS 109 and Ind AS 107. Such loans were originated credit impaired and hence were required to account with a carrying value reflecting the lifetime expected credit losses as per Ind AS 109. A few instances noticed, to gauge the extent of misstatements, are given below: i) RHFL sanctioned loans of Rs. 50 crore to Hirma Power Ltd. and Rs. 55 crore to Tulip Advisors Private Ltd. in FY 18-19. The total exposure of these two companies was shown as Rs. 444.67 crore as per the ECL workings. As per the audit documentation, these two companies had virtually no revenues and were in losses. The net worth was completely eroded, and the loans were disbursed without any security, having no credit rating and after waiving all the requirements for a corporate loan as per the company s policies. Still these loans were classified under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and misrepresented the financials. The role of Noticee Nos. 4 and 5 in orchestrating/ executing the fraudulent scheme and their active role in avoiding true and fair disclosures/ misrepresentation of financials has also been explained in detail in preceding paragraphs of this Order. Clearly, therefore, Noticee Nos. 4 and 5 issued a certificate under Regulation 17(8) as a mere formality without presenting a true and fair picture despite being aware of the conduct and true affairs of the Company. I note that Noticee No. 4 was even a member of the Credit Committee which was the approving authority for all loans of more than INR 5 Crore. As a member of the Credit Committee, Noticee No. 4 had approved the loan applications of GPCL borrowers despite observing many deviations from process and weak financials and lack of credit worthiness of the borrower. These loans subsequently turned into NPAs, and no concrete steps were taken for recovery of the said loans. Noticee No. 4 sanctioned loans to such entities who were, from day one, very likely to default on their repayment, thereby causing irreparable loss to the Company and its shareholders. (iii) Accordingly, I find that Noticee Nos. 4 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Roles and Responsibilities of CFO, submitted by RHFL to SEBI vide letter dated December 24, 2021, he was inter alia responsible to ensure that all financial and accounting activities were carried out with highest degree of integrity controls, and in accordance with regulatory requirement and accepted practices. He was also responsible for timely and accurate preparation of all financial and management reports including reports to shareholders and to analyse the company operations to identify variances. As observed in preceding paragraphs of this Order, around 50% of the company s assets were disbursed to GPCL borrowers with dubious financial credentials and of very poor credit quality. Noticee was also responsible for the preparation of financial reports of RHFL, and to ensure that they were true and fair. However, as discussed in the preceding paragraphs of this Order, and despite the RHFL Board and statutory auditors making pointed references and questions related to the quality of GPCL and the implications thereof, the Noticee failed to present true and fair picture of financials of the Company to its shareholders, in violation of the provisions of LODR Regulations. The gross d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each for hundreds of crores of Rupees, cumulating to several thousands of crores of Rupees, to non-descript borrowers with extremely weak financials. In comparison to the quantum of loans disbursed, these borrowers had negative or negligible net worth, profits, assets, cash flows, and businesses. Inexplicably, there was no other collateral or security or assurance that was recorded while disbursing these loans. 57.1.2 In approving these GPC Loans, in many cases, RHFL was again inexplicably, repeatedly, and widely, deviating from standard credit due diligence and processes. Despite the glaringly weak financials, inter alia, the borrowers were not being internally credit rated, the requirement for assessing probability of default of the loans was being waived, and the charge on any security (negligible as it was) was not being created. 57.1.3 Even after the RHFL Board on February 11, 2019 explicitly instructed the company to desist from disbursing any further GPC Loans, RHFL continued to disburse GPC Loans to the tune of thousands of crores of Rupees with impunity, but this time approved by an outsider to RHFL, Noticee No. 2 (Anil Ambani) in his capacity as Group Head. 57.1.4 Despit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious scheme undertaken by all the Noticees to divert funds from RHFL to promoter-linked entities, while concealing the financial implications of their artifice to the investing public. As a result of their egregious device to siphon out several thousands of crores of Rupees from RHFL, aggregating to around half the assets of the company, the company eventually collapsed, causing immense loss to its investors and ecosystem. 57.2 I note that Noticee No. 2 (Anil D Ambani) had a significant role in the affairs of Reliance ADAG, and specifically with respect to the companies who are allegedly part of the fraudulent scheme for diverting the funds of RHFL, for the following reasons: He was the Chairman of ADA Group He was one of the promoters of RCL the Holding company of Noticee 1 RHFL He was disclosed as person having significant influence in the Annual Report of RCL (the Holding company of RHFL) He was disclosed as significant beneficial owner of 3 companies (Reliance Innoventures Pvt. Ltd, Reliance Inceptum Pvt. Ltd. and Reliance Infrastructure Consulting Engineers Pvt. Ltd.) which in turn are disclosed as promoter group entities of RHFL. As per the Annual Report of RCL for FY 2018-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the evidence of senior officials having canvassed for disbursing loans to such entities, the absolute lack of interest in recovering the dues, and Anil Ambani s own involvement in approving such loans all point to the pressing desire on their part to transfer funds one way or another. Coupled with this, the ownership and management pattern of these companies (both lender and borrowers) leads to the conclusion that the loans were motivated by Noticee No. 2 s direct or indirect benefit through fund transfers to these companies. 57.6 The role played by Noticee No. 3 (Amit Bapna) in the scheme of fund diversion, is summarized below: (i) Amit Bapna was a Non-Executive Director of RHFL, CFO of RHFL for one part of FY 2018-19 and CFO of RCL i.e. the holding company of RHFL. (ii) He was a member of the Credit Committee of RHFL which approved the GPC Loans despite observing various deviations. (iii) He had brought/ referred the GPCL borrowers to RHFL Credit Team for processing GPC Loans and played an active role to ensure that such loans were disbursed. (iv) He had attended the RHFL Board Meeting of February 11,2019 and was therefore aware of the decision taken against granting any more G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tters in April-May 2019 letter communicated its concerns with respect to GPC lending. Similarly, the subsequent auditor, Dhiraj and Dheeraj had expressed its qualified opinion that it could not ascertain the recoverability of the loans. Despite these, Noticee No. 5 certified the financials of the company to be true and fair. (iv) He was responsible for ensuring that the financials of the Company represent a true and fair picture to the shareholders. Further, he was under an obligation to ensure that Company adhered to all regulatory norms and analyse company operations to identify variances. However, as can be seen from the scheme of GPCL lending for diversion of funds, he failed in his duty. (vi) Along with Noticee No. 4, he has issued a Compliance Certificate as per LODR Regulations stating that the financials of the company represent the true and fair picture of the company, which was completely false as already discussed in the preceding paragraphs of this Order. 57.9 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. Table 24, Images 17-19 and Annexure B1-B3 of this Order li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehest 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. 62. 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 it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 65. In view of the findings in this Order, that the Noticees have violated the following provisions of the SEBI Act, SEBI (PFUTP) Regulations, 2003 and SEBI (LODR) Regulations, 2015, punitive and deterrent measures must follow: Table - 38 Noticee Nos. Name of the Entity (PAN in bracket) Violations 1. Reliance Home Finance Limited Section 12A(a), (b), (c) of SEBI Act, 1992 r/w Regulation 3 (b), (c), (d), 4(1), 4(2)(f), (k) and (r) of SEBI (PFUTP) Regulations, 2003 Regulations 4(1)(a)(b)(c), (d), (g), (h), (i), (j), 4 (2) (b) and (e), 30(1), 30(7), 51(1) of SEBI (LODR) Regulations, 2015 r/w Sec 21 of SCRA, 1956 2. Anil D. Ambani Section 12A(a), (b), (c) of SEBI Act, 1992 r/w Regulation 3 (b), (c), (d), 4(1), 4(2)(f), (k) and (r) of SEBI (PFUTP) Regulations, 2003 3. Amit Bapna Section 12A(a), (b), (c) of SEBI Act, 1992 r/w Regulation 3 (b), (c), (d), 4(1), 4(2)(f), (k) and (r) of SEBI (PFUTP) Regulations, 2003 Regulation 17(7) read with Schedule II Part A (I), (O) of SEBI(LODR) Regulations, 2015 Reg. 4(2)(f)(ii) (6) (7) (8), 4(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. 67. As per the material available on record for Board Meeting dated February 11,2019, I note that upon being presented with the data pertaining to disproportionate lending to GPCL borrowers by RHFL (55% to GPC Loans as compared to 45% for housing loans), Board of Directors of RHFL expressed concern on composition of lending portfolio. Further, Board of RHFL inter alia directed the management to provide no further lending to corporates, auditors to check the documentation of loans, whether due diligence was done and verifying the adequacy of security. Further, RHFL Board constituted a sub-committee (where Noticee No. 3 was also a member) to review such exposures to corporate loans on bi-monthly basis. I note that Board of RHFL had issued strong and equivocal directions with respect to GPC Loans so as to protect the interests of the company. However, as already discussed in this Order, the functionaries of the Company did not comply with the directions of the Board. As observed from the CAMs approved after F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er refunds/ bring back monies/ disgorge illegal gains made by any person in violation of securities law. 70. I note that 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. I am of the view that there is a need to quantify such receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson is in service/employed. Disgorgement under Sections 11 and 11B can only be made for illegal or unethical acts through such transactions or activity which is in contravention to the provisions of the SEBI Act or the provisions made thereunder. In the absence of any illegal or any unethical acts and in the absence of any finding of unlawful gain being made by them the direction to disgorge 25% of the salary is wholly illegal and cannot be sustained. Directions under Sections 11 and 11B are equitable in nature. Disgorgement has been held to be an equitable direction. In our opinion, direction for disgorgement from salary amounts to penal recovery. It becomes punitive and not equitable. (emphasis supplied) 73. 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, I am of the view that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nil D. Ambani Section 15HA of the SEBI Act 25,00,00,000 3 Amit Bapna Section 15HA of the SEBI Act, Section 15HB of the SEBI Act, Section 15A (a) of the SEBI Act 25,00,00,000 1,00,00,000 1,00,00,000 4 Ravindra Sudhalkar Section 15HA of the SEBI Act 25,00,00,000 Section 15HB of the SEBI Act 1,00,00,000 5 Pinkesh R. Shah Section 15HA of the SEBI Act 20,00,00,000 Section 15HB of theSEBI Act 1,00,00,000 6 Adhar Project Management and Consultancy Private Limited Section 15HA of the SEBI Act 25,00,00,000 7 Indian Agri Services Private Limited Section 15HA of the SEBI Act 25,00,00,000 8 Phi Management Solutions Private Limited Section 15HA of the SEBI Act 25,00,00,000 9 Arion Movie Productions Pvt. Ltd. Section 15HA of the SEBI Act 25,00,00,000 10 Citi Securities and Financial Services Private Limited Section 15HA of the SEBI Act 25,00,00,000 11 Deep Industrial Finance Limited Section 15HA of the SEBI Act 25,00,00,000 12 Azalia Distribution Private Limited Section 15HA of the SEBI Act 25,00,00,000 13 Vinayak Ventures Private Limited Section 15HA of the SEBI Act 25,00,00,000 14 Gamesa Investment Management Private Limited Section 15HA of the SEBI Act 25,00,00,000 15 Medybiz Private Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rve that there are certain discrepancies in the total figures of GPCL as mentioned in the two reports of forensic auditors. 2 Authum Investment and Infrastructure Limited v. R.K. Mohatta Family Trust and Ors. (C.A. No. 1581/2023) with Reliance Home Finance Limited v. R.K. Mohatta Family Trust (C.A. No. 1582/2023) 3 SEBI v. Rajkumar Nagpal Ors. (C.A. No. 5247 of 2022) 4 NCLAT Order dated November 29,2022 in the matter of Ashok Mahindru Anr. v. Vivek Parti (Company Appeal (AT) (Insolvency) No. 1324 of 2022) 5 Kirankumar Moolchand Jain v. TransUnion CIBIL Ltd. Ors. [Arb.O.P. (Com. Div) No. 86 of 2022) - Hon ble Madras High Court 6 P. Mohanraj and Ors. v. Shah Brothers Ispat Pvt. Ltd. [(2021) 6 SCC 258] - Hon ble Supreme Court of India 7 State Bank of India v. V. Ramakrishnan Anr. [(2018) 17 SCC 394] - Hon ble Supreme Court of India 8 (2007) 1 SCC 732 9 (2007) 8 SCC 559 10 (2022) INSC 529; Civil Appeal No. 3680/2022 11 (1975) 2 SCC 835 12 (2024) 242 Comp Cas 358 13 Decision dated October 09,2020 in Appeal No. 206/2020 14 Order dated November 29,2022 15 CA No. 7300/2022 16 This includes an entry of INR 40 Crore (Approx.) as GPC Loan extended to Indian Agri (Noticee no. 6) by RHFL. In it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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