Securities and Exchange Board of India (SEBI) on 22 August 2024 passed an order banning industrialist Mr Anil Ambani and other connected entities from the securities market for five years and imposed a hefty penalty of R25 crores. The said order was passed against Mr Anil Ambani and other connected entities for the diversion of funds of Reliance Home Finance Limited (RHFL). This order is passed confirming an interim order cum show cause notice issued by SEBI earlier on 11 February 2022.
Background
SEBI investigated transactions of RHFL for alleged fraudulent practices and diversion of funds to benefit Reliance Anil Dhirubhai Ambani Group (ADAG) companies during the financial year 2018-19 after receiving multiple complaints/reports. RHFL provided housing loans, loans against property, construction finance, etc. The major promoter in RHFL was Reliance Capital Limited (RCL), with a shareholding of 47.91% stake in RHFL as of 31 March 2018 and 31 March 2019. Mr Anil Ambani was also the Promoter and Non-executive and Non-Independent Director of RCL during FY 2018-19.
The key financial highlights of RHFL for the investigation period and the preceding year (FY 2017- 18) showed that the loans extended by RHFL to the corporates had significantly increased from an amount of R3742.60 Crore in 2017-18 to R8670.80 Crore in the year 2018-19. SEBI's investigation uncovered that during the fiscal year 2018-19, RHFL was involved in approving and disbursing a series of significant General Purpose Working Capital Loans (GPC Loans), each amounting to hundreds of crores, totalling several thousand crores, to borrowers with poor financial health. These borrowers often had negative or minimal net worth, profits, assets, business or cash flows compared to the size of the loans they received (collectively referred to as Financially Weak Companies).
Fraudulent scheme to divert funds
During the investigation, SEBI had sought copies of certain Loan Application Documents pertaining to GPC Loans. An analysis of such documents (total 70 Loan Application Documents for an amount of R6187.78 Crore disbursed in FY 2018-19) revealed that a significant portion of the loans were disbursed to Financially Weak Companies other than borrowing money from RHFL for onward lending. The loan sanction dates were found to be on the same date as the date of application for loan or even before the dates of applications made by these borrowers. There were instances where the borrower entities were earlier being reflected as Related Parties of Reliance Power Limited and Reliance Infrastructure Limited (i.e. the group companies of ADAG), however, just before disbursal of such loans, these entities were reclassified as nonrelated party.
A total loan amount of R1,323.43 Crore was found to have been disbursed to such reclassified entities. The repayment pattern of the borrower entities indicated certain trends like circular transactions and ever-greening of loans. In many cases, RHFL deviated from standard credit assessment procedures when approving these GPC loans. All borrowers and the entities to which they transferred funds were connected to the promoter group. Furthermore, RHFL later received guarantees from some promoter group companies for certain GPC loans, emphasizing these connections. SEBI determined this constituted a scheme to divert funds from RHFL to entities associated with the promoters.
Role of Anil Ambani
Anil Ambani, in the capacity of Chairman of the ADAG, was involved in approving 14 loan applications totaling R1,472.16 Crore for various entities, despite the RHFL Board's decision to stop further loans to Financially Weak Companies. These loan applications were approved during a period of just over 1.5 months (i.e., 11 February 2019 to 31 March 2019). SEBI found that Anil Ambani had a significant influence over RHFL and played a crucial role in the operations of ADAG. Thus, SEBI concluded he was "the mastermind behind the fraudulent scheme” as the loan benefitted him and other promoter companies. Although he was not a Key Managerial Person (KMP) or Director of RHFL, SEBI determined that he was the prime orchestrator of the scheme, as the diverted funds were linked to him or the ADAG.
Penalties and fines
SEBI has imposed a five-year ban on Mr Anil Ambani from participating in the securities market or holding a position in any listed company or SEBI intermediary as director/ KMP along with levying a substantial penalty of R25 Crores due to the misappropriation of funds of RHFL. Additionally, SEBI has prohibited RHFL and several affiliated entities and former officials from engaging in capital market activities for the same five-year period. An aggregate penalty of around R655 Crores has been imposed against the 27 entities involved in this matter which is required to be paid within 45 days of receiving the Order.
MHCO Comment
This SEBI Order is subject to the appeal by Mr Anil Ambani and other entities before the Securities Appellate Tribunal. However, imposition of stringent penalties by SEBI on Mr Anil Ambani and others will act as a deterrent to the promoters which engage in the practice of circular and evergreening of loans. This order of SEBI demonstrates that as a market regulator it will not tolerate any unlawful practices from any person and thereby reinforces confidence of the Indian investors.
This article was released on 26 August 2024.
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