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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 ..... bir Hi-Tech Build Private Limited AAJCM6196R 19 Netizen Engineering Private Limited AABCR7570C 20 Crest Logistics and Engineers Private Limited (Now Known As CLE PRIVATE LIMITED) AACCR7266A 21 Reliance Unicorn Enterprises Private Limited AAACC2436P 22 Reliance Exchange next Limited AABCR7567D 23 Reliance Commercial Finance Limited AABCR6898M 24 Reliance Cleangen Limited AAACR2664L 25 Reliance Business Broadcast News Holdings Limited AABCU0804C 26 Reliance Broadcast Network Limited AADCR1885L 27 Reliance Big Entertainment Private Limited AAFCA6658L 28 Reliance Capital Limited AAACR5054J (The aforesaid entities are here in after individually referred to by their respective names/Noticee no. and collectively as "Noticees", unless the context specifies otherwise) Contents A. BACKGROUND & INVESTIGATION ......................................4 B. OTHER REPORTS...............................................10 C. SCN, REPLIES AND HEARING.......................................18 D. ISSUES FOR CONSIDERATION...................................................74 PART I-PRELIMINARY OBJECTIONS.................................................76 Whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .............................................166 Guarantees Furnished by GPCL Borrowers and Onward Borrowers 168 Whether the Noticees can be said to have violated provisions of the PFUTP Regulations? ...................................................175 Whether Noticees 1, 3-5 can be said to have violated the provisions of LODR Regulations? .....................................................180 Non-Disclosure of RHFL Board's Directions in its Meeting held on February 11,2019 ....................................................180 Misrepresentation of Financials .......................................................181 CEO/ CFO Certificate issued by Noticee Nos. 4 and 5 ..................................................191 Failure of KMPs in discharging their responsibilities ............................................................193 Whether Noticee No. 3 can be said to have made false statement(s) during the investigation thereby making him liable for monetary penalty under Section 15A(a) of the SEBI Act, 1992? ...........................................................195 SUMMARY OF THE CASE AND ROLE OF NOTICEES ...................................195 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The details of Directors of RHFL during the Financial Year 2018-19 are as under: Table-2 Sr. No. Name of the Director Type of Director From To 1 Mr. Padmanabh Vora Independent Director 01-07-2008 29-04-2019 2 Ms. Deena Mehta Independent Director 24-03-2015 30-03-2019 3 Lt Gen Syed Ata Hasnain (Retd.) Independent Director 26-02-2018 2310-2019 4 Mr. Gautam Doshi Non-Executive & Non-Independent Director 01-07-2008 02-05-2019 5 Mr. Jai Anmol A. Ambani # Additional, Non-Executive & Non-Independent Director 24-04-2018 31-05-2019 6 Mr. Amit Bapna Non-Executive Director 24-04-2017 08-09-2017 23-06-2020 07-08-2018 CFO 7 Mr. Ravindra Sudhalkar Executive Director 24-04-2017 01-10-2016 24- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70.80 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 itself, and 27 Loan Applications amounting to INR 1940.58 Crore (22.90% of INR 8470.65 Crore) were disbursed to the account of borrower entities on the date of the application itself. b) In the Credit Approval Memo (CAM) of loans amounting to INR 5850.19 Crore, deviations from due process have been recorded. The nature of various deviations so recorded in the CAMs are: Field Investigation waived, Probability of Default waived, eligibility criteria not as per the norms, no creation of security, no customer rating undertaken, escrow account not open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 during the audit; failure to call the meeting of Audit Committee within the prescribed time after issuance of letter dated April 18,2019 by PWC; and threatening PWC with legal proceedings etc. RHFL, however, vide its letter dated June 12,2019 addressed to NSE and BSE, expressed its disagreement with the reasons cited by PWC for its resignation. 12.1.2 In its letter dated April 18,2019 addressed to the CEO and CFO of RHFL (Noticee Nos. 4 and 5), PWC highlighted certain observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 a report under Section 143 (12) of Companies Act, 2013 to Ministry of Corporate Affairs (MCA), and the said fact of reporting to MCA was informed to SEBI by PWC. 12.2 Forensic Audit Conducted for Bank of Baroda A Forensic Audit was conducted by the lead bank of the consortium of lenders of RHFL, viz., Bank of Baroda into its loan transactions with RHFL. The scope of work of such audit was to conduct a detailed review for identifying the movement of funds whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 outstanding as on October 31,2019 and all such four accounts have been declared as NPA by RHFL. 12.2.1.5 As per the 1st report, around INR 12,574 Crore (approximately) was disbursed to entities falling in PILEs category and some of such amounts were further lent by these PILEs onwards to other PILEs/Related parties/Group entities. A large portion of such loans was found to have been extended without adhering to prudential lending no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 highlighted as below: Table-10 Sr. No. Particulars Paid to Banks Paid to Non-Banks Potential Circular Transactions Total 1 Reliance Home Finance Limited 1610.13 1610.13 2 Repayment of loan / borrowings 1029.13 276.86 1305.99 3 Bank statement not available 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28,2022, June 30,2022, August 26,2022 January 27,2023 July 06,2023 16 Hirma Power 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was in that context that guarantees came to be furnished. 17.4 The confirmations for loans above a certain threshold were given by Noticee No. 28 as a holding company 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Memos contained deviations ought not to lead to an adverse inference or an indication as to fraud. 17.15 There may be some connection between borrowers. However, such connections do not indicate 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 mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has control. Being a significant beneficial owner does not ipso facto mean Noticee No. 2 was or is liable for all operations of RCL, RHFL or other entities in which such a disclosure was made. 18.8 As a Core Investment Company, 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 R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is on board of directors, chief executive officer and chief financial officer of the listed entity. However, Noticee was neither a member of the board, nor a director, nor an officer of RHFL, nor a chief executive officer, nor a chief financial officer 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 RIn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19.7 RHFL's decision to grant GPC Loans was a business decision that was not contrary to any law. Merely because in hindsight, such decision turned out to be loss making decision, mala fides cannot be attributed to such decision to extend loans to the GPCL borrowers. 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 fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement and Consultancy Private Limited by RHFL and onward lending of INR 69.50 Crore to RCL, it is submitted that it was independent lending and it appears to be re-financing of debt by Aadhar. Also, the said loan was repaid by Aadhar to RHFL. 19.17 In view of absence of cogent evidence 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itimacy of the loans in question does not fall within the realm of matters that can be decided by SEBI, being matters that can only be looked into and decided upon by NHB. 20.8 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. 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 proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Company and its KMPs including the Noticee with the GPCL borrowers/ onward borrowers have to be established and SEBI has not been able to establish any such collusive meeting of minds. 20.19 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. 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 defaulte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RHFL. 21.6 SEBI has already concluded that Noticee was aware of the destination of funds and was involved in siphoning of funds which is in violation of principles of natural justice. 21.7 SEBI does not have the jurisdiction to question the lending transactions of the Company. The issue of propriety or legitimacy of the loans in question does not fall within 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 financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P Regulations, the essential requirement of PFUTP Regulations is that the fraud has to be in relation to securities market. Noticee neither dealt in the securities of RHFL nor induced any one to deal in the securities. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lent some amounts for partaking in interest rate arbitrage to increase its revenues and profitability. 24.3 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. 24.4 SCN wrongly records that Noticee borrowed INR 20 Crores from Indian Agri Services Private Limited. The said transaction was part repayment of an Inter 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 director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and managed by its own set of executive and functionaries who have no link or connection with RHFL or any of its promoter linked entities. 26.4 Noticee had taken a loan of INR 220.80 Crores at the interest rate of 15% and in an independent and bonafide transaction, lent it to another entity at an interest rate of 16.50% with a commercial mindset to take advantage of the interest rate differential. 26.5 SCN fails to make out a prima-facie case against the Noticee and it lacks any urgency 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N is the forensic audit carried out by Bank of Baroda which culminated into forensic audit reports. The said reports were also the basis of the purported classification of the account of Noticee No. 1 as fraud. The Hon'ble Supreme Court of India in State Bank of India v. Rajesh Agarwal & Ors. has held that the entire process of classification as 'fraud' was in violation of principles of natural justice. The forensic audit reports, which forms the basis and foundation of the issuance of SCN, is of no legal consequence 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alt in securities or induced another entity to deal in securities. 30. NOTICEE NO. 14 30.1 Noticee is a private limited company and is neither in the business of dealing in securities nor is associated with the securities market. 30.2 Noticee approached RHFL to raise some funds to meet its working capital requirement. Such loans were used by Noticee to repay certain existing loans and rest of the funds were lent to other entities who were in need of funds. Similarly, Noticee also approached Noticee Nos. 8 and 18 to explore possibility of obtaining a loan. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain 'connecting factors' such as common address with an alleged PILE entity, common directorships, etc. No allegation of control of RHFL or its officials/ functionaries in the affairs of the Noticee has been levelled by SEBI. In this regard, it is submitted that Hon'ble SAT in HB Stockholdings v. SEBI observed that mere fact of one or two persons sharing common address is not sufficient to establish a charge of fraud and that there has to be sufficient evidence on record. 31.6 In order to assign a particular act within ambit of fraud under PFUTP Regulations, it is necessary that there 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dictional purview of SEBI. Merely executing a loan transaction cannot bring Noticee within SEBI's jurisdiction. 33.5 The allegation of violation of LODR Regulations is baseless as the same is only applicable on the listed entities. 33.6 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. 33.7 Nothing has been brought on record to show collusion between Noticee and RHFL or between Noticee and onward borrowers. 33.8 On the allegation of loans being approved and disbursed on same date on which loan applications 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 securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 12A of the SEBI Act and PFUTP Regulations is untenable in law as this charge can only be sustained when there is a direct or indirect dealing in securities by a person. In the present case, taking of loans cannot be said to be dealing in securities. 35.5 Interim Order is liable to be quashed and set aside as it suffers from inordinate delay. 35.6 Common address with other GPCL borrowers and an onward borrower does not in any manner demonstrate involvement of Noticee in the alleged fraud in relation to RHFL. 35.7 On the allegation that one of the directors of Noticee is also a director in Sapphire Cable & Services Private Limited, it is submitted that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable to be quashed and set aside as it suffers from inordinate delay. 36.9 Mere existence of one or two connecting factors do not indicate fraud and reliance is placed on Hon'ble SAT's decision in HB Stockholdings Ltd. v. SEBI to submit that there has to be evidence on record to abundantly display connivance on the part of Noticee. 36.10 The factum of Reliance Infrastructure Limited providing guarantees to Noticee's lenders (RHFL and/ or alleged PILEs) does not indicate any wrongdoing as there is nothing illegal/ unlawful in a group company providing guarantees to the lenders of a borrower. 36.11 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g wrong for a group company to give guarantees towards any borrowing of another group company. 37.9 The issuance of OCDs represents a commercial understanding between two entities as per their commercial wisdom and there is nothing illegal in repayment of loans via issuance of debentures. The fact that OCDs are unquoted cannot by any means lead to a conclusion that they are issued to create an accounting fiction. 37.10 With respect to charge of collusion, there is no evidence to show that Noticee had control over RHFL or its KMPs so as to direct RHFL and its KMPs to provide loans to its lenders. 37.11 The standard of preponderance of probabilities with respect to violation of PFUTP Regulations is not met in the instant matter. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a mode for the early recognition and resolution of stressed assets in a time bound manner in order to avoid impending insolvency proceedings. SEBI has committed an error of fact and law by failing to consider that the principles analogous to IBC relating to protection of successful resolution applicants ought to be reasonably extended and applied to resolution applicants under the RBI Framework. 39.3 During the period of investigation, Authum was neither in management nor in control of Noticee. Since Noticee is now wholly owned subsidiary of Authum, any liability on or prosecution against Noticee adversely affects the entire scheme of resolution under the Resolution Plan and defeats the letter and spirit of IBC as well as RBI Framework. 39.4 Noticee is no 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulative, fraudulent or an unfair trade practice in securities market. 39.15 SEBI has failed to demonstrate or even aver as to what alleged benefit was received by the Noticee. SEBI has neither pleaded nor proved the ingredients of abetment as required under law in order to impose any liability on Noticee. 39.16 The term PILE is not defined or referred to anywhere in the SEBI Act or any of the Regulations promulgated thereunder. Therefore, Noticee cannot be made liable on basis of such alleged relationships that are neither recognized nor provided for in law. 39.17 Only entities who are regulated under the SEBI Act are liable under the penal provisions of SEBI Act. As Noticee is not a listed entity, it cannot be said to "indulge" in fraudulent and unfair trade practices. 39.18 For establishing 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41. NOTICEE NO. 25 41.1 Noticee is an unlisted entity and has no association or connection with the securities market. Noticee does not deal in the securities market and cannot be said to be a person associated therewith. The mere fact that Noticee borrowed certain funds from an unlisted entity cannot confer jurisdiction on SEBI. 41.2 Interim Order has been passed in complete disregard of the principles of audi alterem partem and natural justice that are quintessential to any judicial or quasi-judicial proceedings. 41.3 SCN is liable to be set aside and quashed as it suffers from inordinate delay and laches. 41.4 In order to prove the allegations of fraud, SEBI has to prove collusion of the Noticee with RHFL, its KMPs as well as the PILE from which Noticee received the loan. However, no evidence has been brought on 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 commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities or inducing other person to deal in securities. 43.7 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. 43.8 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. 44. NOTICEE NO. 28 In response to the Interim Order cum SCN, SEBI received a letter dated February 28,2022 from Mr. Nageswara Rao Y, Administrator of the Noticee wherein the following was submitted: 44.1 In exercise of its powers conferred under Section 45-IE(1) of the Reserve Bank of India Act, RBI has superseded the Board of Directors of 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 appo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n securities which are listed or proposed to be listed on a recognised stock exchange (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder SEBI LODR Regulations 4. (1) The listed entity which has listed securities shall make disclosures and abide by its obligations under these regulations, in accordance with the following principles: (a) Information shall be prepared and disclosed in accordance with applicable standards of accounting and financial disclosure. (b) The listed entity shall implement the prescribed accounting standards in letter and spirit in the preparation of financial statements taking into 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Listed Entity shall have the following responsibilities: (ii) Key functions of the Board of Directors - (6) Monitoring and managing potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions. (7) Ensuring the integrity of the listed entity's accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards. (8) Overseeing the process of disclosure and communications. (iii) Other responsibilities: (3) Members of the board of directors shall act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the listed entity and the shareholders. (6) The board of directors shall maintain 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in Part A of Schedule IV. 33 (2) The approval and authentication of the financial results shall be done by listed entity in the following manner: (a) The quarterly financial results submitted shall be approved by the board of directors: Provided that while placing the financial results before the board of directors, the chief executive officer and chief financial officer of the listed entity shall certify that the financial results do not contain any false or misleading statement or figures and do not omit any material fact which may make the statements or figures contained therein misleading. 51.(1) The listed entity shall promptly inform the stock exchange(s) of all information having bearing on the performance/operation of the listed entity, price sensitive information or any action that shall affect payment of interest or dividend or redemption of non-convertible securities. SEBI PFUTP Regulations 3. Prohibition of certain dealings in securities No person shall directly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of NHB/ RBI? (vi) Whether SEBI can proceed against GPCL Borrowers/ Onward Borrowers since they are unlisted entities? (vii) Whether there has been inordinate delay in the proceedings which has vitiated the proceedings? Part II- Issues on Merits (a) Whether the Noticees can be said to have engaged in a fraudulent scheme to divert funds of RHFL for the benefit of Noticee No. 2 and Reliance ADAG companies? (b) Whether Noticees 1, 3-5 can be said to have failed to make disclosures as required under securities law? (c) Whether the Noticees can be said to have violated PFUTP Regulations? (d) Whether Noticee No. 3 can be said to have made false statement(s) during the investigation thereby violating Section 11C(5) and (6) of the SEBI Act, 1992? PART I - PRELIMINARY OBJECTIONS 47. Whether the Resolution Plans for Noticee Nos. 1 and 23 under the RBI framework limit/ restrict the present proceedings? 47.1 Noticee No. 1 (RHFL) and 23 (RCFL) have submitted, vide their written replies dated July 10,2023 and April 18,2023 respectively, that they have separately undergone resolution in terms of Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avoid lengthy process of insolvency resolution under IBC before the Hon'ble NCLT. By continuing with the proceedings, SEBI is effectively discouraging potential resolution applicants from submitting resolution plans under RBI Framework and instead, encouraging only IBC resolutions. SEBI has committed an error of fact and law by failing to consider that the principles analogous to IBC relating to protection of successful resolution applicants ought to be reasonably extended and applied to resolution applicants under the RBI Framework. (vi) Authum's resolution plan for RCFL included the settlement and extinguishment of all claims, including those of government authorities. By continuing with these proceedings despite resolution of RCFL under RBI Framework, SEBI has ignored the judgment of the Hon'ble Supreme Court in the matter of Rajkumar Nagpal (supra) wherein Hon'ble Supreme Court held that by its conduct post the issuance of RBI Framework, SEBI subscribed to the overall framework of RBI Circular. 47.2 I have considered the above submissions of Noticees and note as follows: (i) In terms of the Resolution Plan, Authum has designated Noticee No. 23/ RCFL, being a wholly owned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ework was applicable to banks and specified categories of lenders and other investors were outside its purview. In pursuance of the proceedings under RBI Framework, the Resolution Plan submitted by Authum was approved by RCFL's lenders on July 15,2021. (c) Meanwhile, SEBI had issued a circular dated October 13,2020 titled 'Standardisation of procedure to be followed by Debenture Trustee(s) in case of 'default' by issuers of listed debt securities' ('SEBI Circular'). (d) Some of the debenture holders instituted a suit before a Single Judge of the Hon'ble Bombay High Court for protection of their interests with respect to the amounts due to them by RCFL. In the said proceedings, the Hon'ble High Court opined prima facie that a meeting of debenture holders was required but it could not recommend the manner in which the said meeting should be convened. Debenture Trustee sought a clarification from SEBI for the same and SEBI issued a letter inter alia clarifying that voting would have to be conducted in accordance with SEBI Circular. Further, SEBI in its affidavit submitted that debenture trustees are obligated to comply with its circular even though the event of default has taken p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lace. (vi) With respect to the claim of protection provided to RCFL (Noticee No. 23) under Section 32A of the IBC for prior offences, I note that RCL held - * equity shares of RCFL/ Noticee No. 23, * non-convertible cumulative compulsorily redeemable preference shares of RCFL, and * Inter-Corporate Deposits extended by RCL to RCFL (all cumulatively referred as 'Target Securities'). Authum had purchased the Target Securities of RCFL held by RCL by executing a supplemental resolution implementation memorandum with Administrator of RCL appointed by RBI under the IBC. As per Section 32A of the IBC, the protection from liability for prior offences is provided only to the Corporate Debtor or the new management of the Corporate Debtor. In this case, RCFL (Noticee No. 23) was neither. RCL has only sold the Target securities held by it in RCFL to Authum. Therefore, RCFL is not eligible to claim the protection provided by Section 32A of the IBC. 47.3 In view of the above, the submissions/ objections of Noticee Nos. 1 & 23 cannot be accepted. I find that the Resolution Plans approved under the RBI Framework do not restrict/ limit the present SEBI proceedings. 48. Whether SEBI can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n extends to any legal proceeding even indirectly relatable to recovery of any debt is covered. (c) State Bank of India v. V. Ramakrishnan & Anr. 7 (Hon'ble Supreme Court) - Noticee contended that Hon'ble Supreme Court has interpreted that the scope of Section 96 and 101 of the IBC is far greater than that of Section 14 of the IBC. (iii) According to the Noticee, the 'jurisdictional issue' has to be conclusively decided before proceeding with the matter on merits and requirement of the law is for SEBI to arrive at a conclusive finding on the preliminary issue first and conclude whether it has jurisdiction to proceed against Noticee No. 2 in view of the statutory bar under Section 96 of IBC. Note: The decisions relied upon to support this contention and the summarised contentions made by the Noticee are as follows: a) Arun Kumar & Ors. v. Union of India 8 (Hon'ble Supreme Court) - The existence of a jurisdictional fact is a condition precedent for the exercise of power by a court of limited jurisdiction. b) Carona Ltd. v. Parvathy Swaminathan & Ors. 9 - For assumption of jurisdiction by a Court or tribunal, existence of a jurisdictional fact is a condition precedent c) S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceedings cannot continue against Noticee No. 2. 48.3 I note that the first issue to be decided here is whether or not SEBI is required to pass a preliminary order regarding the 'jurisdictional fact' as contended by the Noticee of bar on proceedings due to the interim moratorium under Section 96 of the IBC. In this regard, I had formed a preliminary view on this issue and the same was shared with the Noticee vide e-mail dated January 15,2024 for his response on the same and an opportunity of personal hearing was also granted to the Noticee. (Note: I note that despite giving opportunities to make oral submissions on both preliminary objections as well as merits of the case, the Noticee chose to only argue the preliminary objections. He has however, in his written submissions, addressed both preliminary objections as well as merits of the case.) With respect to the judicial precedents cited by the Noticees, I note the following - (i) In the matter of Carona Ltd. (supra) cited by the Noticee, Section 3 of the Maharashtra Rent Control Act, 1999 inter alia provided that the said Act would not apply to public limited companies having a paid up share capital of rupees one crore or mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suit created by any law for the time being in force, ........ and for that purpose may, if it thinks fit, postpone the settlement of the other issues until after that issue has been determined, and may deal with the suit in accordance with the decision on that issue." 9. The amended provision of Order XIV came up for consideration before the Full Bench of Allahabad High Court in a judgment reported as Sunni Central Waqf Board and Ors. v. Gopal Singh Vishrad and Ors. It was held that material changes had been brought about by substituting Order XIV Rule 2 of the Code. The word 'shall' in the unamended provision has been replaced by the word 'may' in the substituted provision, therefore, it is now discretionary for the Court to decide the issue of law as a preliminary issue, or to decide it along with the other issues. The High Court held as under: "22. Under the above provision once the court came to the conclusion that the case or any part thereof could be disposed of on the issues of law only it was obliged to try those issues first and the other issues could be taken up only thereafter, if necessity survived. The court had no discretion in the matter. This flo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court on the preliminary issues upon which the trial court had decided". Therefore, in view of the said judgment, the submission of Noticee that preliminary issue has to be decided first before going on merits cannot be accepted. 48.5 The second issue to be decided is whether the interim moratorium under Section 96 of the IBC bars SEBI from continuing with the instant proceedings against Noticee No. 2 (Anil D. Ambani). In this regard, I note that interim moratorium under Section 96 of IBC commences from the date of application filed under Section 95 of IBC and ceases to have effect on the date of admission of the said application. It is pertinent to mention that Hon'ble NCLAT, New Delhi in the matter of Ashok Mahindru & Anr. v. Vivek Parti14 has inter alia clarified that interim moratorium under Section 96(1)(b) of IBC would not extend to future liability or obligation. The instant proceedings were pending at the time of filing of application by SBI and as per the status of the application filed by SBI as available on the website of Hon'ble NCLT, the application is still pending and interim moratorium is still in place. The relevant extracts of Hon'ble NCLAT's Order are reproduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the bank and credit rating agency had published incorrect information about alleged default by petitioner in respect of the said loans and sought constitution of arbitral tribunal. However, respondents alleged that proceedings were instituted against the petitioner as personal guarantor before the Hon'ble NCLT and interim moratorium is triggered under Section 95 and 96 of IBC. Further, it was stated that petitioner had submitted a resolution plan before the Hon'ble NCLT. It was in such facts and circumstances that Hon'ble High Court observed that interim moratorium applies not only to proceedings for recovery of debt but also proceedings determining liability of guarantor in relation to the credit facility. This decision also does not delve into interim moratorium on future/ contingent debt or obligation or on initiation of proceedings not connected with respect to the specific debt. 48.8 With respect to the decision of Hon'ble Supreme Court in the matter of V. Ramakrishnan (supra) cited by the Noticee, I note that in the said matter, the issue to be decided was whether a moratorium under Section 14 of IBC extends to a personal guarantor. The Hon'ble Supreme Court held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h respect to 'the debt'. The relevant extracts of decision of Hon'ble Court are reproduced below: 57. Section 96, as its marginal note indicates, deals with an "interim-moratorium". In terms of Section 96, the interim moratorium takes effect on the date of the application. In other words, the very submission of an application under Section 94 or Section 95 triggers the interim moratorium which then ceases to have effect on the date of the admission of the application (under Section 100). The consequences which flow from an interim moratorium are specified in clause (b) of sub-section (1) of Section 96. The impact of the interim-moratorium under Section 96 is that a legal action or proceeding pending in respect of any debt is deemed to have been stayed and the creditors or the debtors shall not initiate any legal action or proceedings in respect of any debt. The crucial words which are used both in clause (b)(i) and clause (b)(ii) of sub-section (1) of Section 96 are "in respect of any debt". These words indicate that the interim- moratorium which is intended to operate by the legislature is primarily in respect of a debt as opposed to a debtor. Clause (b) of sub-section (1) indic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble NCLAT. In any case, non-monetary directions under section 11B of the SEBI Act, are also outside of the ambit of Section 96 of IBC. Accordingly, the preliminary objection raised by the Noticee is devoid of any merit and cannot be accepted. 49. Whether the decision of Hon'ble Supreme Court in the matter of SBI & Ors. v. Rajesh Agarwal & Ors. bars the present proceedings? 49.1 Noticee No. 11 (Deep Industrial Finance Ltd.), vide his letter dated April 27, 2023, has made the following submissions: (i) The basis for issuance of SEBI's SCN was the forensic audit carried out by Bank of Baroda. The said forensic audit culminated into two forensic audit reports. The said audit reports were the basis of classification of Noticee No. 1's account as fraudulent in terms of Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions, 2016 ('RBI Directions'). (ii) The Hon'ble Supreme Court, vide its judgment dated March 27, 2023, in the matter of SBI & Ors. v. Rajesh Agarwal & Ors. 15 held that the entire process of classification of 'fraud' under RBI Directions is in violation of the principles of natural justice and that before such classi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stigation of RHFL carried out by SEBI independent of the forensic audit reports. Further, there is no violation of principles of natural justice as the Noticees have been provided opportunity of personal hearing in the matter. Further, SEBI has not relied on the findings of forensic audit reports alone to arrive at its conclusions. Therefore, I do not find any merit in the submissions of the Noticee and the same are rejected. 50. Whether SEBI can continue its proceedings against Noticee Nos. 26 and 28 in view of the moratorium/ approved resolution plan under IBC? 50.1 Noticees 26 (Reliance Broadcast Network Limited) and 28 (Reliance Capital Limited) vide their replies had submitted that CIRP under IBC is pending and moratorium under Section 14 of IBC exists with respect to all legal proceedings against Noticees. Therefore, it was submitted by Noticees that instant proceedings cannot continue in view of the said moratorium. 50.2 I have perused the status of CIRP proceedings against Noticee Nos. 26 and 28 as available on the website of NCLT, and I note the following: 50.2.1 NCLT, Mumbai vide order dated May 06,2024 approved the Resolution Plan submitted by Sapphire Media Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation and documents available and disclosures made by RHFL, a detailed investigation was initiated in the matter. In this context, the Interim Order cum SCN records the following : "It is noted that the aforesaid alleged violations by the Noticees pertain to the financial year 2018-19, however, the investigation into such layered loan transaction are always fraught with its own complexities and limitations and as the records before me suggest, many entities were not coming forward to furnish the requisite information for a long time on one pretext or the other and such non-cooperation had, in one way or the other have adversely impacted on the flow of investigation. Further, during the last two crucial years the country has been reeling under the pandemic of COVID-19 which had also put the investigation out of track for a long period, putting impediments in completion of investigation. Nevertheless, the regulator cannot be oblivious to such serious violations and delinquent conduct being perpetrated by the senior functionaries & KMPs including the group Chairman leading to such deplorable corporate governance in the affairs of the Company (Noticee no.1)." 53.2 Pursuant to comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PC loans. (iii) The borrower entities had acted as conduits for siphoning off RHFL's funds to promoter related entities. (iv) The scheme to divert bulk of the borrowed funds of RHFL to & for the benefit of promoter group companies were executed by concealing material facts from the stakeholders and not disclosing the true and correct picture to the investors (v) Noticee No. 2 emerges out to be the natural person behind many such ultimate recipient companies connected to RHFL who have been benefitted from such fund transfers. Noticee Nos. 3-5 who were the key managerial personnel of the company executed the fraudulent scheme and Noticee Nos. 6-28 have either acted as conduits to transfer the funds received as GPC loans from RHFL to onward borrowers belonging to the promoter group or have been unjustly benefitted from the end use of those loan transactions under taken by RHFL through such conduits. 54.2 I note that the allegations in the SCN are based on conclusions made in SEBI's Investigation Report. Further, the findings of the following reports are also mentioned there in - * the Report under section 143(12) of the Companies Act, 2013 filed by PWC (RHFL's statutory audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Approvals to GPCL Borrowers' Applications 54.4.1 Proportion and size of GPC loans disbursed by RHFL: (i) As per Section 2(d) of the National Housing Bank Act, 1987, a housing finance company "includes every institution, whether incorporated or not, which primarily transacts or has as one of its principle objects, the transacting of the business of providing finance for housing, whether directly or indirectly." Upon perusal of the same, I understand that a housing finance company has to primarily transact in housing finance business and that therefore a majority of loans extended by it must be in the nature of housing finance/ housing loans. This is further supported by the following observations by RHFL's Board and NHB's letter to RHFL provided below: (a) The Minutes of RHFL Board Meeting held on February 11,2019 inter alia stated that 'Management to present a plan before the Board at their meeting scheduled to be held on February 14, 2019, regarding their strategy to fulfil the NHB requirements of continuing the license as a Housing Finance Company and to hold the home loan portfolio more than 50% by March 31, 2019'. (emphasis supplied) (b) As per the Grant Thornton Repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... All such loans having stipulated a period beyond 6 months shall be subjected to review of performance not exceeding 6 months 'either on discrete or on a summary basis'. Such Demand/ Call loans shall not be renewed unless the periodical review has shown satisfactory performance/compliance with the terms of sanctions. (d) GPCLs processed under the Branch Code of 'Corporate Branch' shall have a portfolio cap of INR 6750 Crore. Any deviation or any transaction beyond this threshold limit shall require confirmation by its Holding Company viz., Reliance Capital. (v) As per the information submitted by RHFL to SEBI, it had extended an amount of INR 8470.65 Crore as GPC loans to 45 unique entities during the investigation period (FY 2018-19). The top 14 GPCL Borrower accounted for around 51.75% of the total GPC loans advanced by RHFL during the Financial Year 2018-19, to whom an amount of INR 4,383.62 crore was lent out of the total GPC lending of INR 8470.65 Crore. (vi) SEBI issued summons to the said 14 GPCL Borrower entities asking them to provide certain information with respect to the loans extended to them by RHFL. One GPCL Borrower did not respond. The responses of the remaini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Pvt. Ltd. (Noticee no. 12) 386.50 8. Gamesa Investment Management Pvt. Ltd. (Noticee no. 14) 664.00 9. Medybiz Pvt. Ltd. (Noticee no. 15) 365.90 10. Hirma Power Ltd. (Noticee no. 16) 225.00 11. Tulip Advisors Pvt. Ltd. (Noticee no. 17) 215.00 12. Mohanbir Hi-Tech Build Pvt. Ltd. (Noticee no. 18) 375.00 13. Netizen Engineering Pvt. Ltd. (Noticee no. 19) 214.54 Total 13 GPCL borrower entities 4,944.34 (ix) I note that the quantum of GPC Loans disbursed by RHFL were much more than the loans disbursed by RHFL for its primary activity i.e. housing loans. Further, such GPC Loans were disbursed to 45 borrowers and more than 50% were disbursed to the top 14 borrowers. 54.4.2 Weak financials of the borrowing entities: (i) The financial position of the 13 GPCL borrowers is provided in the Table below: Table-16 - Financial Position of the 13 GPCL Borrowers entities All amounts in INR Cr. Name of the Borrower Revenues Profit Operating Cash flows Total Assets Tangible Assets Net Worth Loan disburse d by RHFL in FY 2018-19 Loan repaid in FY 2018-19 FY 16 FY 17 FY 18 FY 16 FY 17 FY 18 FY 16 FY 17 FY 18 FY 16 FY 17 FY 18 FY 16 FY 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntum of loans advanced. These are preliminary and basic financial metrics of a company that any rational lender would first peruse to determine a borrower's ability to repay a loan. It is amply clear, even at first glance and even to a lay person, that none of these 13 companies standalone pass muster as a credible borrower for any loan running into hundreds of crores of Rupees. Some specific instances from the above table are highlighted below: (a) With respect to Hirma Power Ltd. (Noticee No. 16), it had negative cash flows to the tune of INR 349.95 Crore during FY 2017-18 and negative net worth of INR 16 lakh during the same period. Despite such weak financials, Hirma was disbursed GPC Loan of INR 225 Crore during FY 2018-19. (b) With respect to Citi Securities and Financial Services Pvt. Ltd. (Noticee No. 10), during FY 2017-18, it had revenue of just INR 3 lakh, loss of INR 1 lakh, no operating cash flows and a net worth of INR 32 lakh. Despite such weak basic financials, Citi was disbursed GPC Loan of INR 220.80 Crore during FY 2018-19. (c) With respect to Tulip Advisors Pvt. Ltd. (Noticee No. 17), during FY 2017-18, it had revenue of INR 6 lakh, no profit, no operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered. 54.4.3 Fundamental deviations ignored: (i) As mentioned above, an analysis of Loan Application Documents pertaining to the GPC loans (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, inter alia revealed not only were the financial of the would-be borrowers dismal, in addition, there were many deviations from basic due process recorded in the Credit Approval Memos (CAMs). The nature of some of the deviations so recorded in the CAMs are: * Field Investigation waived * Probability of Default waived * Eligibility criteria not as per the norms * No creation of security * No customer rating undertaken * Escrow account not opened (ii) In his statement recorded with SEBI, Noticee No. 4 has stated that loan approval processes were waived for certain borrowing entities due to the fact that those borrower entities were part of ADA Group itself. He does not specify which of these GPC loans were known to be part of the ADA Group at the time of disbursal. The CAMs themselves, for the 13 companies mentioned above, do not record the borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Crore is a charge created on current assets and the current assets of Gamesa on March 31,2017 were INR 26,000 (Rupees Twenty Six Thousand). (d) Further, as on March 31,2017, Gamesa had zero revenue and had expenses of INR 20,000. Therefore, Gamesa was in loss of INR 20,000 (Rupees Twenty Thousand Only). (e) The deviations recorded in the aforesaid CAM are * Field Investigation Waived * Probability of default waived * Individual holding shares in applicant and holding company not on loan structure * Eligibility not 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 (v) Noticees have submitted that granting of such loans was a business decision with best interests of the Company in mind and that they were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no record of any mitigating security, collateral, assurance, or other circumstances of any consequence in the CAM, the rating of the borrower would have been very poor and consequently, the probability of default of the loan would have to be acknowledged as very high. Suppressing these crucial elements allowed RHFL to refrain from accounting for and disclosing the significant expected credit losses that one might expect from such poor lending. (ix) Put together, it requires an incredible stretch of imagination to justify the above mentioned GPC loans as bona fide lending decisions. (x) Noticee 4 - Ravindra Sudalkar submitted that Company charged a higher interest rate while granting GPC Loans and such loans were legitimate within the regulatory framework of NHB. The argument is specious. Well before any lender decides on a rate of interest for a loan, they would first ascertain the ability and the willingness of borrower to repay the loan. No amount of high interest can make up for a clear inability or unwillingness of the borrower to repay a loan. As has been noted earlier, the terribly weak financials of the borrowers as enumerated in the CAMs meant that the GPCL borrowers d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ravindra Sudhalkar (Noticee No. 4) and Mr. Pinkesh Shah (Noticee No. 5)), an amount of INR 2276.52 crore was further disbursed by RHFL towards 24 different GPC Loan applications not pertaining to home loans or having construction related lending, until March 31,2019. (iii) Upon perusal of the information/ loan documents submitted by RHFL, I note that certain loans (14 cases) amounting to INR 1472.16 Crore were found to have been approved after February 11,2019 by the Noticee no. 2 in the capacity of Chairman of Reliance ADA Group, and similar deviations in the sanctioning terms as highlighted above have been observed in all the CAMs of all these loans. The loan application documents pertaining to GPC Loans as submitted by RHFL vide its letter dated December 23,2021 provide the following breakup of loan approvers: Table-17: Loan Approvers and deviations recorded in CAM of GPC loans Approver Details No. of Loan Applications Amount of Disbursement (INR Cr.) No. of Loan Applications where deviations were recorded Leadership Council/ Credit Committee 56 4715.62 50 Chairman of Reliance ADA Group (Noticee no. 2) 14 1472.16 14 Total 70 6187.78 64 (iv) Curiously, while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by March 31,2019. Further, in the said Board Meeting, RHFL Board had also directed statutory auditors as well as internal auditors to check the documentation of all the loans, inter alia, whether due diligence was exercised in sanctioning such loans and verify the adequacy of security. In addition to these directions, the Review Committee of Directors, comprising Ms. Deena Mehta, Lt. Gen. Syed Ata Hasnain (Retd.) and Mr. Amit Bapna- Noticee No.3) was formed to review the GPCL exposures. (viii) I note therefore that there was an express direction from the RHFL Board to the RHFL Management, at the February 11,2019 meeting, not to extend any more GPC Loans. The formation of Review Committee was in addition to this direction, and did not in any way override or obviate the said direction. Note that Noticee Nos. 3-5, who were KMPs in RHFL and attended the Board Meeting held on February 11,2019, have clearly acknowledged that RHFL Board had directed that no further GPC lending should be done. Therefore, Noticee No. 2's casual dismissal of RHFL Board's unequivocal decision to not extend any more GPC Loans is disturbing. (ix) With respect to loan approvals granted by Noticee No. 2, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not approval / sanction. What is the difference between 'Confirmation' and 'Approval'? Further, what is the basis for granting such confirmation by RCAP and what is checked by RCAP before granting such confirmation? 1. Under the GPCL policy, only a confirmation of RCAP (as the holding company) was required from a good business practice perspective. The policy did not envisage any approval from the holding company. 2. The credit approval memos after processing and approval by the relevant RHFL teams were only required to be placed before RCAP (as a holding company) for information/ noting purposes, and not for the purpose of any further approval/ sanctioning of any loans. (xii) I draw reference to the definition of 'confirmation' in the Black's Law Dictionary 17, which reads as follows- "a contract or written memorandum thereof, by which that which was infirm, difficult of proof, void, imperfect, or subject to be avoided is ratified, rendered valid and binding, made firm and unavoidable." The aforesaid definition, in addition to a more common understanding of the word, makes it clear that 'confirmation by the Holding Company' does not only imply 'informing the Holding Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 Noticee No. 2 is accepted, it establishes that such loans were granted in complete violation of the policy and the approvals were a mere formality with the ulterior motive - as shall be elaborated further in the subsequent paragraphs - to divert the funds of RHFL for the benefit of Reliance ADA group companies. I note that the approvals do not specify that they are being provided on behalf of RCL. Instead, the CAMs merely state that the approval is provided by Anil Ambani as Chairman of Reliance Group. (xv) I also note the following based on a perusal of the aforementioned CAMs: A. Citi Securities and Financial Services Private Limited (a) Noticee No. 10's (Citi Securities and Financial Services Private Limited) application seeking loan of INR 220.80 Crore was submitted on March 19, 2019 (i.e. well after RHFL Board's decision on February 11,2019 to not grant further GPC Loan) and intimation of approval of the said application was provided on the same date. (b) The total assets of Not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decision on February 11,2019 to not grant any further GPC Loan) and intimation of approval of the said application was provided on the same date. (b) The total assets of Noticee No. 13 at the end of FY 2017-18 were recorded as INR 3,17,000 (Rupees Three Lakh Seventeen Thousand). The CAM recorded that Vinayak Ventures Private Limited had no income and was in fact in loss of INR 12,000 (Rupees Twelve Thousand). (c) The INR 210 crore proposed loan facility was ostensibly for funding working capital of the borrower with a charge on its current assets. The weak financials of the company for FY 17 and FY 18, as reported in the CAM, did not even remotely indicate any business rationale for the borrower to require working capital to the tune of INR 210 crores, or indicate any ability to repay such sums. In addition, the proposed loan facility amount was to be secured by a charge on the borrower's current assets. For both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olicy 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 approval to the GPC loans in his capacity as 'Chairman, Reliance Group'. (xvii) Such a crucial decision-making power pertaining to a supposedly professionally managed publicly listed Corporate entity (engaged in utilizing huge amounts of borrowed funds for advancing towards housing & GPC Loans, and also governed by NHB/ RBI), was exercised by an outside person who was not even an Executive Director or part of the management of RHFL. One would have expected that all the decisions that could significantly impact the fortunes of RHFL and all its shareholders, ought to have been first approved internally, in compliance with the RHFL Board's directions and through RHFL Board-approved processes. Surprisingly, the investigation could not find any evidence to suggest that such an extra-ordinary power being enjoyed by Noticee No. 2 as Chairman of the Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd 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 Credit Committee for its approval. (xx) The resolution of April 24,2017 further states that Noticee Nos. 3 and 4 were authorised to do all such acts and things and deal with all such matters and take all such steps as may be required to give effect to the said resolution. It is understood from the said resolution that Noticee Nos. 3 and 4 were liable for giving effect to the resolution. In this regard, vide RHFL Letter dated December 24,2021, Parul Jain (Company Secretary & Compliance Officer) submitted the organogram of the organization which is reproduced below: Imag-15 (xxi) As can be seen in the organogram above, Noticee No. 4 (Ravindra Sudhalkar), who was RHFL's CEO, was in-charge of operations of RHFL and all department heads reported to him. Two of the proposers of the CAM (Rajkumar M and Sangram Baviskar) rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) 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 for confirmation by 'Holding Company' in case of deviation, the CAMs must have to go through Credit Committee before being put up to 'Holding Company' for 'confirmation'. Further, the February 11,2019 decision of RHFL Board not to grant any further GPCL corporate loans clearly superseded the Demand/ Call Loan policy, and meant that the said policy was no longer applicable. Therefore, it can be concluded that the said proposals were sent with the approval of RHFL and Noticee Nos. 3-5, in complete violation of RHFL Board's directions not to grant corporate loans, as well as policy approved by RHFL Board pertaining to Credit Committee. (xxv) Noticee no. 4 has also admitted that the borrower entities were indeed part of the ADA Group due to which the loan sancti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect 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 INR 5552.67 Crore (65.55% of INR 8470.65 Crore) were approved on the date of the application for such loans itself. Further, in 27 instances, loan amounts aggregating to INR 1940.58 Crore (22.91% of INR 8470.65 Crore) were both approved as well as disbursed on the same date on which the applications for availing loans were made by the GPCL Borrower entities The details of such cases are as under: Table-20 Date of Application Name of the Borrower Amount of Disburse ment (INR Cr.) Date of disbursal 29/03/2019 Summit Ceminfra Private Limited 32 29/03/2019 28/02/2019 Gamesa Investment Management Private Limited 60 28/02/2019 28/12/2018 Netizen Engineering Private Limited 50.60 28/12/2018 29/10/2018 Azalia Distribution Privat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mon 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 addresses) Sr. No. Name of GPCL Borrower entities Amount of GPCL (In INR Crore) 1. Deep Industrial Finance Limited 220.00 2. Neptune Steel Strips Limited 102.50 3. Pearl Housing Finance India Limited 200.00 4. Traitrya Construction Finance Limited 185.00 5. Valuecorp Securities and Finance Limited 118.49 6. Vishvakarma Equipment Finance (India) Limited 200.00 7. CITI Securities and Financial Services Pvt. Ltd. 220.80 A Common Address : 24/26, Cama Building, 1st Floor, Dalal Street, Fort, Mumbai 8. RPL Solar Power Pvt. Ltd. 85.00 9. RPL Star Power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntities 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. (formerly Reliance Land Pvt. Ltd.) 18 - - - 12.34 - - Reliance Alpha Services Pvt. Ltd. 26 - - - 40.74 - - 40 Reliance Venture Asset Mgt. Pvt. Ltd. 18 - - - - - - - Reliance Financial Advisory Services Ltd. 19 - - - 23.46 - - - Indian Agri Services Pvt. Ltd. 19 - - - - - - - Vrushvik Broadcast Pvt.L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces 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 Private Limited 3. Reliance Alpha Services Private Limited 4. Reliance Entertainment Networks Private Limited (Formerly Reliance Land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 report of RCL for the year FY 2018-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istics and Engineers Pvt. Ltd. 15.10 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 Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. 20-Aug-18 Indian Agri Services Pvt. Ltd. 100.00 20-Aug-18 Reliance Capital Ltd. 100.00 100.00% 37. 06-Sep-18 Indian Agri Services Pvt. Ltd. 198.00 06-Sep-18 Reliance Business Broad casr News Holding Ltd. 198.00 100.00% 38. 05-Nov-18 Indian Agri Services Pvt. Ltd. 20.00 05-Nov-18 Phi Management Solutions Pvt. 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 Buil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs, I note that out of 45 GPCL borrowers, 41 such entities shared common addresses with at least one of such other borrower entities. Further, many of the GPCL borrowers shared same registered e-mail ID. There were instances where GPCL borrowers and Onward Borrowers shared common addresses. In addition to the same, some of the GPCL borrowers and Onward Borrowers were having same persons as Directors and as per the statements recorded by certain directors of GPCL borrowers, they were past/ current directors of Reliance ADA Group itself. 54.5.12 In view of the aforesaid details and the observations 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted. 54.5.18 I note that reliance placed by Noticees on the Hon'ble SAT Order in the matter of HB Stockholdings is misplaced. I note that the said case involved allegations of synchronization of trades and/ or creation of artificial volumes by group of persons. SAT observed that in the facts of that case, the few instances of common address or commonality of promoters between 2 or more companies would not by themselves be sufficient to prove the allegation of connivance between the parties concerned. However, in the present case, the close connection between borrowers is demonstrable by the sheer number 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 observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that Vishwas Cargo Impex was struck off (screenshot at Image 19). Therefore, it appears that there was no beneficiary of these Tulip Advisors as all the shareholdings were collapsing into each other. Image 18 Shareholding of Tulip Advisors Image 19 Status of Vishwas Cargo Impex as per MCA website (iii) Some other similar illustrations are pictographically recorded and appended to this Order as Annexure B1-B3. Such convoluted structuring of borrower companies has only furthered their ability to implement fraudulent schemes to the detriment of investors and the securities market. 54.5.20 In light of all of the above, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) The said fact shows that RHFL has not recovered any amount from such GPCL borrower entities since November, 2020 and the total outstanding amount which was pending to be received by RHFL was INR 6,931.31 Crore. (a sum total of Standard, NPA and write off amount as reflected under Table - 31). 54.6.2 Façade of Loan repayment (i) GPCL borrower entities have contended that some of the amount onward lent by them has been repaid by onward borrowers by issuing 0% Unsecured Optionally Convertible Debentures (OCDs). The details of such OCDs have been tabulated herein below: Table - 33 : Details of Loans onward lent converted to 0% Unsecured Optionally Convertible Debentures (OCDs): S. NO Lending GPCL Borrower Company (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n aggregate Corporate Guarantee of INR 2060.72 crore in respect of the following loans: Table - 34 Date of Guarantee Execution Name of GPCL Borrower Lender Name Guarantor Name Loan Amount (INR In Crore) 18/09/2019 Reliance Cleangen Ltd. Reliance Home Finance Ltd. Reliance Power Ltd. 40.48 08/08/2019 Jayamkondam Power Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 104.00 Species Commerce and Trade Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 71.00 Species Commerce and Trade Pvt. Ltd. Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 50.00 Tulip Advisors Pvt. Ltd Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 60.00 Tulip Advisors Pvt. Ltd Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 100.00 Tulip Advisors Pvt. Ltd Reliance Home Finance Ltd. Reliance Infrastructure Ltd. 55.00 Aashish Power Plant Equipment Pvt. Ltd. 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 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowers who, as noted earlier in this Order, were never in a position to service their debts in view of their financials and weak credit quality. Further, I note that most of the borrowers have defaulted in their payments and their accounts have been declared NPAs. If these guarantees were given with a bona fide reason to service the debts in case of default, Noticee No. 1 and its management should have and would have taken steps to invoke the guarantee and recover its dues. However, as per information available on records, the said guarantees were not invoked and instead such accounts were declared as NPAs. I find that the non-invocation of such corporate guarantees and declaring the loans as NPAs leads to an inference that such guarantees were provided by the promoter group companies only to hoodwink the shareholders at large as well as the relevant authorities and regulators and to give them a false sense of assurance that the GPCLs are well secured by guarantees. (iv) Noticee No. 4 submitted that 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 fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, other than as a fraudulent artifice and scheme to divert money from a listed entity to entities related to the promoter. In this regard, some of the transactions are highlighted for reference: (a) RHFL had received INR 300 Crore on September 10,2018 in its HDFC Bank Account No. 00600310022347 from ICICI Bank. On the same day, out of the said amount, INR 150 Crore was transferred to Medybiz Private Limited (Noticee no. 15) and INR 80 Crore to Mohanbir Hi Tech Build Private Limited (Noticee no. 18). The said two entities transferred the amounts so received to RCL (Noticee No. 28) on the same day itself. (b) RHFL extended GPCL of INR 20 Crore on November 05,2018 to Indian Agri Services Private Limited (Noticee no. 7) which extended the said amount to Phi Management Solutions Pvt. Ltd (Noticee no. 8). On March 18,2019, an amount of INR 25 Crore was extended by RHFL to Mohanbir HI Tech Build Private Limited (Noticee no. 18). The said Noticee no. 18 transferred that amount of INR 25 Crore to Gamesa Investment Management Private Limited (Noticee no. 14). The ultimate recipients of the funds viz., Noticee no. 8 and Noticee no. 14 transferred the said amounts back to RHFL, i.e., th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 to desist from any further GPC Loans. In effect, this so-called 'disclosure' is a fig leaf that suggests 'some' GPC Loan proceeds may have gone to group companies, but then the "disclosure" then reassures its stakeholders that this is not a matter of concern, since "All the lending transactions undertaken by the Company are in the ordinary course of business, the terms of which are at arms' length basis". In reality, there was nothing ordinary and nothing arms' length about these GPC Loans. No right thinking financial institution would have even considered independently making such loans. In effect, by preponderance of probability, RHFL and its KMPs were well aware that half 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 assurance that this so-called "disclosure" contains can only be labelled as patently false and misleading. (ix) Noticee No. 2 has submitted that the process of giving guarantees was an operational matter and the proposal for issuing guarantees was not placed before the Board of RInfra and RPower. I note from the perusal of Annual Reports of RInfra and RPo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FL and its shareholders. (iii) Noticee Nos. 1 - 5 (being the company, its promoter and key management) concealed the facts about the poor quality of the GLPC Loans, and gave false certification about the financial health of RHFL in FY18-19, thereby misleading all of RHFL's investors and other stakeholders. (iv) The only reasonable explanation, by preponderance of probability, that can explain and tie the above series of events together is that this was a nefarious device executed by all the Noticees to siphon off funds from a listed company RHFL, to entities linked to the promoter, while concealing the hollowing out of the company from its investors and stakeholders. (v) Noticee No. 2 was not a member of the Board of RHFL or a KMP of RHFL. Despite the same, by preponderance of probability, he can be said to be the prime orchestrator of the scheme considering that the diversion of monies were to entities that were directly or indirectly linked to him or the ADA group. His own direct role in this scheme is clear from the approvals granted to several GPC loans disregarding the multiple deviations recorded in the CAMs. He has in his replies sought to distance himself from the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b), (c) and (d) of PFUTP Regulations mandate that no person shall "directly or indirectly", employ or engage in any act or device or schemes "in connection with", inter alia, purchase, sale, or dealing in securities. Clearly, this does not restrict the applicability of these clauses to those that are directly dealing in these securities alone. Also, the definition of "dealing in securities" as per regulation 2(1)(b) of the PFUTP Regulations, with effect from February 1,2019, explicitly includes "such acts which may be knowingly designed to influence the decision of investors in securities" and "any act of providing assistance to carry out the aforementioned acts." It is therefore clear that these provisions are not only applicable to those entities that have directly dealt in securities, but also to entities undertaking any act designed to influence the decision of investors in securities, and to those providing assistance to the fraudulent scheme. Therefore, even though GPCL borrowers, onward borrowers, or other Noticees may not have directly dealt in the securities of RHFL, the detailed discussion in preceding paragraphs of this Order make it amply clear that all the Noticees ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me cannot be attributed to Noticee Nos. 6-28 which were corporate borrowers and were not in-charge of the affairs of RHFL directly or indirectly. (xiv) On the basis of the discussions in this Order and on the basis of preponderance of probability, I find Noticees to be liable for having violated Section 12A of the SEBI Act, and Regulation 3(b), (c) and (d) and Regulation 4(1) of the SEBI (Prohibition of Fraudulent Practices relating to Securities Market) Regulations, 2003. Also, I find Noticee Nos. 1 to 5 liable for having violated Regulation 4(2)(f), (k) and (r) of the SEBI (PFUTP) Regulations, 2003. 55. Whether Noticees 1, 3-5 can be said to have violated the provisions of LODR Regulations? 55.1 Non-Disclosure of RHFL Board's Directions in its Meeting held on February 11, 2019 As noted earlier in this Order, the Board of RHFL had on February 11,2019 given express instructions to its management that GPCLs do not fall under the policy criteria of the Company and loans shall be given only for retail home loan portfolio activities. Further, management was directed to present a plan to fulfil the NHB requirements of continuing the license as a Housing Finance Company and ensure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantees and charge on current assets. (iv) As argued earlier, even though the aforesaid Notes claim to disclose that GPCLs were advanced to group companies, there is no mention of, inter alia, the significant quantum of such GPC Loans involved that amounted to around half the assets of RHFL, the significant deviations and hence abysmal due diligence recorded in CAMs while disbursing such large loans, the miniscule current assets of borrowers against which loans amounting to several hundred crore rupees were disbursed, the extraordinarily weak financials of the borrowers, disbursal of loans in breach of directives of RHFL Board, and the approvals given by Noticee No. 2 in his capacity as Chairman of Reliance ADA Group. I find that the aforesaid Notes by themselves do not serve the purpose of disseminating complete and correct financial information to the shareholders and investors. Instead, the notes provide assurances that "...the lending transactions undertaken by the Company are in the ordinary course of business, the terms of which are at arms' length basis" and that "credit facilities given to customers are secured/ partly secured". As argued earlier, RHFL and its KMPs were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequently, the entire outstanding of the GPCL lending of INR 6931.31 Crore as on September 30,2021 has been classified as NPA. (vi) I have perused the provisions of Ind AS 109 the objective of which is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity's future cash flows. The relevant extracts of Ind AS 109 are reproduced below: "Write-off 5.4.4 An entity shall directly reduce the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. A write-off constitutes a derecognition event. 5.5. Impairment Recognition of expected credit loss 5.5.1. An entity shall recognise a loss allowance for expected credit losses on a financial asset that is measured in accordance with paragraphs 4.1.2 or 4.1.2A, a lease receivable, a contract asset or a loan commitment and a financial guarantee contract to which the impairment requirements apply in accordance with paragraphs 2.1(g), 4.2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating of the borrowing customer, and of computing their Probability of Default (PD). Given the blatantly obvious credit weaknesses and absence of reasonable collateral even at the time of disbursal, any rational exercise of assigning a borrower credit rating and computation of PD for such GPC Loans would have led to the inevitable conclusion that a significant proportion of the loan was at risk of default. In other words, had these basic requirements for rating borrowers and computing their PD been carried out rather than waived, given the extremely poor credit quality of the borrowers, the actual Impairment Loss Allowance (Expected Credit Loss or ECL) that would have to be recognised as of March 31, 2019 would have been significantly higher than actually recorded, tending towards the full outstanding amount of the GPCL itself. (ix) In essence, the GPC Loans were not at all low credit risk, and this ought to have been an objective ground in terms of Ind AS 109 for RHFL to consider these GPC Loans under Stage 3. For the calculation of ECL, as per RHFL's Annual Report (reproduced above), Probability of Default is one of the factors to be considered. However, RHFL waived the criteri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Ind AS 109. Therefore, I find that Noticee No. 1 has violated 4(1)(a), (b), (c), (d), (g), (h), (i), (j), 4(2) (b), (e) and 33(1) of LODR Regulations, 2015 read with Ind AS 109. (xii) I note that the then Statutory Auditor of RHFL (PWC) had resigned in June 2019. In April & May 2019, by way of separate letters, PWC had raised serious concerns with the RHFL management, inter alia, in relation to the loans disbursed by RHFL under its GPCL product during the then ongoing Statutory Audit. The said letter, inter alia, noted the fact that the amount of loans disbursed by RHFL under GPCL had increased exponentially from around INR 900 Crore as on March 31,2018 to around INR 7900 Crore as on March 31,2019. Further, based on their examination of different samples of borrowers of such loans advanced by RHFL, PWC had highlighted certain issues of serious concern such as net-worth of such borrowers being negative; having limited/ nil revenue or profit; no business activity of those borrowing companies other than borrowing money from RHFL for onward lending; low equity capital of borrowers in comparison to debt raised by them; incorporation of certain borrower companies shortly before disbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instances of siphoning off of money, indicated by irrational business decisions, multiple layers of transactions and borrowers having insufficient resources. In the latter case, the scope of examination is much deeper than the reasonable assurance expected from a statutory auditor and hence called for specialised investigations.......However, neither the Auditor suggested any such investigation to the Company nor the company suo moto undertook any such examination. ........ C.4. Verification of Expected Credit Loss (ECL) on Financial Assets 36) .... 37) ..... a) There is insufficient evidence of substantive procedures performed to verify the ECL model. ...As per the model, the Company classifies an asset into one of the three stages solely based on Days Past Due (DPD) status. There is no consideration of the qualitative criteria for classifying loans. This is not in conformity with paragraph 5.5.11 of Ind AS 109..... b) Similarly, the Company's assessment of whether a loan or portfolio of loans has experienced significant increase in credit risk should also be based on forward looking indicators, if available without undue cost or effort, as per Ind AS 109... c) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to certify the following: (a) That they have reviewed the Financial Statement and Cash Flow Statement and to the best of their knowledge and belief, such statements do not contain any "materially untrue statement" or "omit" any material fact or "contains any misleading fact". (emphasis supplied) (b) That the aforesaid statements present a true and fair view of the affairs of the company and are also in compliance with the existing laws and accounting standards. (emphasis supplied) (c) That to the best of the knowledge and belief of aforesaid KMPs, the company has not entered into any transaction which is fraudulent, illegal or violative of its Code of Conduct. (emphasis supplied) (d) That its signatories accept responsibility for establishing and maintaining internal controls for financial reporting and also that they have evaluated the effectiveness of internal control systems related to financial reporting. (ii) I note that Noticee Nos. 4 and 5 were CEO and CFO respectively during the relevant period and had issued the Certificate envisaged under Regulation 17(8) of LODR Regulations. A critical responsibility is cast on the CEO and CFO for maintaining professional stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus, Noticee Nos. 3, 4 and 5 have violated Regulation 17(7) read with Schedule II Part A (I), (O) of LODR Regulations, 2015. Noticee Nos. 3, 4 and 5 also went to the extent of allowing defiance of the express instruction of RHFL's Board, prohibiting any additional GPCLs. Every statement/ disclosure issued by Noticee No. 1 (RHFL) is attributable to the said Noticees in their capacity as KMPs, particularly considering their role in the fraudulent extension and disbursal of GPCLs, and the incomplete, false, and misleading disclosures with respect to the financials of the company. (ii) Noticee No. 5 (Pinkesh R. Shah) was the CFO of RHFL from August 2018 to May 2020. He has submitted that as CFO, he was not involved in business functions of RHFL and only dealt with its finance functions. However, he cannot reasonably distance himself from this fraudulent scheme. As CFO, he was overseeing the accounting and finance functions of the Company. In RHFL Board Meeting held on February 11, 2019, the Board had directed that no further lending of GPC Loans should be done by RHFL. However, even thereafter, large quantum of GPC Loans continued to be disbursed with impunity. On March 28, 2019, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2)(f)(ii)(6), (7) & (8) and Regulation 4(2)(f)(iii)(3), (6) & (12) of LODR Regulations, 2015. 56 Whether Noticee No. 3 can be said to have made false statement(s) during the investigation thereby making him liable for monetary penalty under Section 15A(a) of the SEBI Act, 1992? 56.1 During the statement recording of Noticee No. 3 (Amit Bapna) on December 16,2021 before the Investigating Authority, SEBI, Noticee No. 3 stated that he was never associated with Reliance Media Works Limited ('RMWL'). Noticee has submitted that he was never on the board of or had anything to do with the affairs of RMWL directly. However, in the RHFL Board Meeting dated August 07, 2018, he has disclosed that he ceased to be a Nominee Director of RMWL. RMWL was a group company of RCL and as such had funded and supported the business of RMWL as it did for other group companies. 56.2 I note that Noticee was asked whether he was associated with RMWL and he had replied in negative to the same. As a Nominee Director, it is an incontrovertible fact that he was associated with RMWL. 56.3 Therefore, I am of the view that Noticee No. 3 disclosed wrong information to the investigating authority and hence, No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... status of loans disbursed by RHFL under its GPCL product during the then ongoing Statutory Audit. Dhiraj and Dheeraj were appointed auditors in their place, and they offered a qualified opinion with respect to the GPCL Loans. NFRA has subsequently passed an order against Dhiraj and Dheeraj in April 2024, inter alia holding that statutory auditor did not perform sufficient appropriate audit procedures in respect of verification of company's assumption of Expected Credit Loss. 57.1.7 Belying the mild projections of Expected Credit Loss as presented by RHFL for FY18-19, much of the GPC Loans outstanding as of March 31, 2019, including to the borrower Noticees of this order, eventually had to be recognized as Non- Performing Asset or written off. 57.1.8 This is not a case of using the advantage of hindsight to castigate lenders for making out loans that were otherwise approved in good faith. As described above, even at the time of disbursal of the GPC Loans, the internal approval memos themselves recorded that several hundreds of crores of Rupees worth of loans were being made to non-descript and dubious entities that were plainly and utterly credit unworthy, accompanied by severe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orming part of the said group. The expression 'de facto controlling influence' may not be defined by law. It appears that the said expression was used in the SCN along with the reference to Anil Ambani's chairmanship of Reliance ADAG to point out the motivation behind his role in transferring monies to promoter group by approving 'loans' and his ability to influence the management of RHFL to approve such loans, even in cases where he did not directly approve the 'loans'. 57.4 That Noticee No. 2 used his controlling position to ensure disbursal of such loans is also corroborated by the statements of Noticee No. 4 that loans were disbursed despite deviations, since borrowers were closely connected to RHFL and its promoter entities. Even without holding any executive position in RHFL, Noticee No. 2 sanctioned large amount of loans to such GPCL borrowers despite being made aware of the deviations in CAMs such as terribly weak financials and collateral, and waiver of standard due diligence in credit processes. As per material available on record and Interim Order, Noticee No. 2 approved 14 loan applications involving an amount of INR 1472.16 Crore in his capacity as Chairman of Relian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty for the loans etc.) having been recorded in the CAMs. Infact, Noticee seconded the proposals brought by Noticee No. 3 to Credit Team and then approved them hastily. (iii) As CEO, he failed to take steps to recover money from GPCL borrowers and did not even invoke the guarantees taken from R-Power and R-Infra. Due to such failure, most of the GPCL accounts were declared as NPAs. (iv) As CEO of RHFL, all the departments were reporting to him and he was the centre point for communication between RHFL Board and its Management. Even though he attended the Board Meeting dated February 11,2019 and specific directions were issued to Management with respect to GPC Loans, he has failed to implement the directions of the Board as the loans were sanctioned even after February 11, 2019. (v) Along with Noticee No. 5, 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. 57.8 The role played by Noticee No. 5 (Pinkesh Shah) is summarised below: (i) Noticee No. 5 was CFO of RHFL and was respons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 152.30 Crore) as on September 30,2021 for 45 GPCL Entities* 6,931.31 NPA as on September 30,2021 for 13 Specified GPCL Borrowers* 2,646.78 * As per information submitted by RHFL ^ Additional amount as per information submitted by GPCL Borrowers % Specified GPCL Borrowers do not include Noticee No. 14 i.e. Vinayak Ventures Private Limited 60. Credit defaults in financing business are not by themselves unusual or suggestive of fraudulent activity. Inter-corporate loans or related party transactions (subject to disclosures and compliance with law) are also not per se illegal or suspicious. However, the facts and circumstances of this case clearly indicate that the defaults are the culmination of an elaborate and coordinated design to move funds from the public listed company to non-descript and financially weak privately held companies connected with the Reliance ADA group. Adequate disclosures around this were not made to the Public shareholders of RHFL, evidenced by the absence of any material disclosures mandated by securities law. SEBI's investigation was not the only one to arrive at this conclusion. Separately the reports of PWC (RHFLs statutory auditor) and that of Gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of RHFL's board, and his wanton non-compliance with the legal mandate to make true and fair disclosures. The Company continued to disburse large quantum of GPC loans despite Noticee Nos. 3- 5 being directly aware of the Board's directions not to do so. Both Noticee Nos. 4 and 5 had also signed off on CEO/ CFO certifications actively hiding the true state of affairs in RHFL. Noticee Nos. 6-28 have played the role of being either recipients of illegally obtained loans or conduits to enable illegal diversion of monies from RHFL. 63. When juxtaposed against a well regulated financial system where extending even small ticket loans is subject to multiple checks and restrictions, the cavalier approach by the company management and the promoter in approving loans amounting to hundreds of crores to companies many of which had negligible assets, cash flows, net worth, or revenues, suggests a sinister objective behind the 'loans'. This sinister objective becomes all the more clear when the relationship of the borrowers with the promoters of RHFL are taken into account. 64. Subsequently, most of the GPCL borrowers' accounts turned NPAs and as a consequence of the same, RHFL defaulte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 * Regulation 17(8) read with Part B of Schedule II of SEBI (LODR) Regulations, 2015, Regulation 26(3), 33(2)(a) of SEBI (LODR) Regulations, 2015 r/w Sec 21 of SCRA, 1956 6. Adhar Project Management and Consultancy Pvt. Ltd. * Regulation 3 (b), (c), (d), 4(1), 4(2)(f), (k) and (r) of SEBI (PFUTP) Regulations, 2003 r/w Section 12A(a), (b), (c) of SEBI Act, 1992 7. Indian Agri Services Pvt. Ltd. 8. Phi Management Solutions Pvt. Ltd. 9. Arion Movie Productions Pvt Ltd 10. Citi Securities and Financial Services Pvt. Ltd. 11. Deep Industrial Finance Limited 12. Azalia Distribution Pvt. Ltd. 13. Vinayak Ventures Pvt. Ltd. 14. Gamesa Investment Management Pvt. Ltd. 15. Medybiz Pvt. Ltd. 16. Hirma Power Limited 17. Tulip Advisors Pvt. Ltd. 18. Mohanbir Hi-Tech Build Pvt. Ltd. 19. Netizen Engineering Pvt. Ltd. 20. Crest Logistics and Engineers Pvt. Ltd. (Now Known as CLE PVT. LTD.) 21. Reliance Unicorn Enterprises Pvt. Ltd. 22. Reliance Exchange next Limited 23. Reliance Commercial Finance Limited 24. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direction. This being the case, it would be unfair and disproportionate to treat the company RHFL on the same footing as that of the aforesaid persons. The directions must therefore, in my view, take into account the aforesaid mitigating factor. 68. It is a matter of record that Noticee No. 5 had attended the RHFL Board's meetings held on February 11,2019 and March 28, 2019 wherein Board had inter alia expressed concerns on GPC lending and directed the same to be discontinued. The then statutory auditor PWC had also raised queries on the GPCL lending process and was continuously communicating with him. Despite the concerns of the Board and PWC, I note that GPC loans continued to be extended till May 2019. Further, he, along with Noticee No. 4, was responsible for misrepresentation of financials of the Company and issuing certificate under Regulation 17(8) of LODR Regulations certifying that all the financial statements did not contain any materially untrue statement. However, as per the material available on record, I note that Noticee No. 5 did not approve the 'loan' applications of the GPCL borrowers. I also note that Noticee No. 5's direct role in actual disbursal of 'loans' t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of recovery of remuneration as paid by RHFL during the period of investigation be not issued against them. In this regard, I note that the allegation in the Interim Order inter alia is that Noticee Nos. 3-5 are that they aided diversion and/ or misuse of funds of a listed company for the benefit of the other Reliance ADA group entities and exhibited gross misconduct and unprofessional behaviour on their part while approving the GPC loans leading to erosion of wealth of shareholders. However, I note that there is no allegation with respect to the legality of their appointment to the positions held by them in the Company or that they benefitted from the diversion of funds of the listed company. 72. I note that salary/ remuneration of a person is a compensation for the work done by him in the professional capacity for which he is duly appointed by the Company and it cannot be considered as profit made by that person. I note that Hon'ble SAT delved on the issue of disgorgement of salary in the matter of NSE v. SEBI22 and held as follows: "218. We also note that the direction to disgorge 25% of the salary is patently erroneous. The power under Sections 11 and 11B for disgorgement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Penalties) Rules, 1995, direct as under: (i) Noticee No. 1 is restrained from accessing the securities market and prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of 6 months, from the date of coming into force of this order. (ii) Noticee Nos. 2 - 25 and 27 are restrained from accessing the securities market and prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, for a period of 5 years, from the date of coming into force of this order. (iii) Noticee No. 2 is restrained from being associated with the securities market including as a director or Key Managerial Personnel in any listed company, holding/ associate company of any listed company, or in any intermediary registered with SEBI, for a period of 5 years, from the date of coming into force of this direction. (iv) Noticee Nos. 3 - 5 are restrained from being associated with the securities market including as a director or Key Managerial Personnel in any listed company, or any intermediary registered with SEBI, for a period of 5 years, from the date of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HA of the SEBI Act 25,00,00,000 22 Reliance Exchange next Limited Section 15HA of the SEBI Act 25,00,00,000 23 Reliance Commercial Finance Limited Section 15HA of the SEBI Act 25,00,00,000 24 Reliance Cleangen Limited Section 15HA of the SEBI Act 25,00,00,000 25 Reliance Business Broadcast News Holdings Limited Section 15HA of the SEBI Act 25,00,00,000 27 Reliance Big Entertainment Private Limited Section 15HA of the SEBI Act 25,00,00,000 (vii) Noticees shall pay the respective penalty imposed on them within a period of forty-five (45) days from the date of receipt of this order. (viii) Noticees shall pay the monetary penalty by online payment through following path on the SEBI website: www.sebi.gov.in/ENFORCEMENT → Orders → Orders of Chairman/ Members → Click on PAY NOW. In case of any difficulties in payment of penalties, the Noticee may contact the support at [email protected]. (ix) Noticees shall forward details of the online payment made in compliance with the directions contained in this Order to the Division Chief, CFID, SEBI, SEBI Bhavan II, Plot no. C-7, "G" Block, Bandra Kurla Complex, Bandra (E), Mumbai-400 051" and also to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of PFUTP Regulations and observed at para 1.3 at page-24 that "In order to provide more clarity that the conduct/ practices relate to entire securities market, as well as for consistency with Section 11(2)(e) of the SEBI Act, including activities such as giving advice, unauthorized trading, mis- selling, diversion of funds etc., which may impact the eco-system of securities market, it would be prudent that the regulation refers to the securities market rather than just securities." 19 Refer pages 96-97 of Annual Report of RHFL for the year 2018-19 20 Page 99, point no. 6 of the Annual Report of RHFL for the year 2018-19 21 Page 113 of the Annual Report of RHFL for the year 2018-19 22 SAT Order dated Janaury 23,2023 (SAT Appeal No. 333/2019, leading matter in a bunch of appeals) Annexure A - Pictorial representation showing fund flow from RHFL to GPCL Borrower entities and onward borrowers Annexure B1 - Shareholding Pattern of Indian Agri Services Pvt. Ltd. (Noticee No. 7) Annexure B2 - Shareholding Pattern of Crest Logistics and Engineers Pvt. Ltd. (Noticee No. 20) Annexure B3 - Shareholding Pattern of Reliance Business Broadcast News Holdings Limited (Notic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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