SEBI

SEBI Probes Reliance Home Finance, Anil Ambani Penalized

On August 22, 2024, the Securities and Exchange Board of India placed Reliance Home Finance Limited and twenty-four other entities under a five-year ban. Additionally, SEBI fined each entity Rs. 25 crores for participating in a fraudulent scheme run by Anil Ambani and overseen by essential Reliance Home Finance Limited (RHFL) executives.

The scheme involved taking money from the publicly traded company and structuring loans to unworthy borrowers connected to Anil Ambani. By disbursing General Purpose Working Capital Loans (GPCLs), the notices were complicit in a fraudulent operation that eroded the RHFL’s finances because the loans were subsequently labelled Non-Profit Assets.

The act of the Securities and Exchange Board of India from 1992, the Securities Contracts (Regulation) Act of 1956, the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices) Regulations from 2003, and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations from 2015 were all broken.

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Overview of Reliance Home Finance Limited

The Securities and Exchange Board of India (SEBI) became interested in Reliance Home Finance Limited (RHFL), a well-known non-banking finance company (NBFC) that offers loans against property, housing loans, and construction finance, after receiving several complaints and reports indicating possible financial misappropriation.

Reliance Capital Limited (RCL) was the leading promoter of RHFL at the time, controlling a sizable 47.91% of the company’s shares. The matter became even more well-known since renowned businessman Mr Anil D. Ambani was involved. Mr Ambani played a crucial role in the alleged financial irregularities during the fiscal year 2018–19 as the Promoter and a Non-Executive, Non-Independent Director of RCL.

To emphasise the seriousness of the situation, SEBI fined RHFL Rs 25 crores and Mr Anil D. Ambani Rs 5 lakhs under Section 15HA of the SEBI Act. Following the markets regulator SEBI’s five-year ban on the industrialist and 24 other individuals from the securities market on allegations of diverting funds from Reliance Home Finance Ltd., investors continued to flee the counters, causing shares of the Anil Ambani-led group firms, Reliance Home Finance Ltd., Reliance Power, and Reliance Communications, to reach their lower circuit limits.

Reliance Power’s stock fell by 4.99 percent on the BSE, reaching the lower circuit limit of Rs 32.73. Reliance Home Finance Ltd.’s shares fell 4.93 percent to Rs 4.24, the lowest trading amount allowed for the day. Reliance Communications fell 4.92% to reach the Rs 2.32 lower circuit. Reliance Infrastructure saw a 2.90 percent decrease as well, reaching Rs 205.55. Reliance Power, Reliance Home Finance, and Reliance Infrastructure all saw steep declines in their stock prices.

Key Persons & Entities Involved

Reliance Home Finance Limited (RHFL) is critical to SEBI’s inquiry. It is an organisation focusing on construction finance, real estate, and home loans. Anil D. Ambani As a critical player, Mr. Ambani significantly impacted RHFL through his position as a promoter and non-executive, non-independent director at Reliance Capital Limited (RCL) in the 2018–19 fiscal year. Other Key Individuals and Entities:

• Former RHFL Chief Financial Officer (CFO) Amit Bapna
• Ravindra Sudhalkar is RHFL’s chief executive officer.
• Different Corporate Entities: These organisations, part of the Reliance Anil Dhirubhai Ambani Group (ADAG), are essential to RHFL’s operational and financial structure.

Finding Loopholes in RHFL’s Corporate Loan Payouts

According to the SEBI inquiry, RHFL’s corporate loans increased dramatically between FY 2017–18 and FY 2018–19, from INR 3,742.60 Crore to INR 8,670.80 Crore. The following serious problems were discovered during the examination of 70 loan application documents for General Purpose Working Capital Loans (GPCL) aggregating INR 6,187.78 Crore disbursed in FY 2018–19:

Fast Approvals

Of these loans, 62, totalling INR 5,552.67 crore, were granted on the same day as the application, and 27 loans, totalling INR 1,940.58 crore, were issued on the same day.

Process errors: Credit Approval Memos (CAMs) for loans totalling INR 5,850.19 crore revealed significant procedural errors. These included failing to set up security or open escrow accounts, skipping past eligibility requirements, and providing insufficient paperwork.

Approval Despite Red Flags

Despite observing discrepancies in the CAMs for 50 of these loans (totalling INR 4,378.03 Crore) and the borrowers’ subpar financial situation, the Credit Committee/Leadership Committee approved 56 loans totalling INR 4,715.62 Crore.

Auditor’s Withdrawal of Audit over ‘Loan Concerns’

In June 2019, PricewaterhouseCoopers (PwC), RHFL’s statutory auditor, ended their audit partnership, citing RHFL’s refusal to cooperate with audit enquiries, the absence of an Audit Committee meeting, and the auditors’ threats of legal action. Before its withdrawal, PwC reported a notable increase in loan disbursements from INR 900 Crore to INR 7,900 Crore, citing problems such as low-net-worth customers, loans that were authorised on or before the application deadlines, and negligible company operations.

Additionally, RHFL refuted PwC’s suspicion that several borrowers were associated with the Reliance ADA Group as group entities. Nevertheless, PwC notified SEBI of their findings and forwarded the matter to the Ministry of Corporate Affairs by Section 143(12) of the Companies Act 2013.

Forensic Audit on Loan Disbursements and Fund Utilisation

The Bank of Baroda, which is the primary lending institution in RHFL’s consortium, carried out a forensic audit that examined loan transactions from April 1, 2016, to June 30, 2019, with a particular emphasis on fund transfers to entities that are potentially indirectly linked (PILEs). According to the first report, released on January 2, 2020, RHFL directed INR 12,487.56 crore to 47 PILEs by issuing general-purpose corporate loans totalling INR 14,577.68 crore.

This audit found circular transactions, loan evergreening, and credit policy violations. According to the follow-up report dated May 6, 2020, of the INR 12,573.06 Crore paid to PILEs, INR 8,884.46 Crore was still unpaid, with a sizeable portion going to group firms affiliated with the promoter group. According to the audit report, 22% of the funds were untraceable, with 40% going towards debt repayment, 18% perhaps involved in circular transactions, and 9% invested in mutual funds and fixed deposits.

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Response from RHFL and Anil Ambani

RHFL became a shell company with few assets when its operations were transferred to Authum Investment and Infrastructure Ltd. in 2019 as a result of a resolution process conducted under the RBI Framework. Due to this modification, SEBI’s legal action against RHFL was deemed moot.

The National Housing Bank (NHB) confirmed that RHFL had adhered to regulatory criteria when it made the strategic business choice to secure the loans with extra collateral during 2018–19. The forensic audits confirmed the veracity of the company’s financial declarations by finding no evidence of fraud or mismanagement.

Also, Anil Ambani referred to the Insolvency and Bankruptcy Code’s (IBC) statutory moratorium, which bars lawsuits against him. He clarified that he was only involved with RHFL in a non-executive role and did not actively participate in day-to-day management or decision-making. His involvement in loan confirmations was limited to countersigning; he did not undertake due diligence.

The Show Cause Notice (SCN) did not support his deceptive or manipulative actions, which claimed that RHFL’s business decisions were subject to NHB and RBI regulations rather than SEBI. Moreover, owing to his non-management position at RHFL, his responsibilities under the LODR or PFUTP Regulations were considered irrelevant to him.

Significant Irregularities and Manipulations in RHFL

The RHFL inquiry turned up several serious irregularities, including:

Fraudulent Fund Diversion

According to SEBI, RHFL was involved in a conspiracy to transfer money meant for General Purpose Corporate Loans (GPCL) to companies close to the Reliance ADAG group. Contrary to their intended uses, these loans were mainly utilised by other group companies to their advantage.

Irregular Loan Disbursement

The investigation uncovered severe breaches in the due diligence process regarding loan disbursement. These included cases where loans were approved the same day of application without a thorough assessment of the borrowers’ financial situation and where essential checks like field investigations and security creation were omitted.

Manipulation of Financial Statements

RHFL’s financial statements were manipulated by leaving out essential details and falsely portraying the state of the company’s finances. Among these were the CEO and CFO making false statements and the Board’s instructions about lending practices being kept a secret.

RHFL’s conduct broke multiple SEBI regulations, including the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations). During the investigation, violations included making false statements and withholding essential facts.

Consequences and Guidelines After SEBI investigated RHFL

SEBI’s extensive inquiry produced several noteworthy results:

Prohibition Order

SEBI issued orders prohibiting the notices from dealing in securities or relating to any SEBI-registered firms while subject to additional review. Anil D. Ambani and other prominent individuals are prohibited from acting as directors or promoters in any public firm looking for public capital, and significant fines and limits are also in place.

Additional Legal Actions

By existing legislation, the results will probably lead to harsher legal actions, such as fines and perhaps criminal prosecutions. Beyond the specific penalties, the ramifications could impact the corporate governance structure of the whole Reliance business and encourage more stringent regulatory monitoring.

Effect on Dependency ADAG

The study’s findings could significantly impact the Reliance ADAG group, possibly resulting in a decline in investor trust, difficulties obtaining funding, and heightened regulatory attention.

Conclusion

SEBI’s investigation into Reliance Home Finance Limited (RHFL) revealed severe financial wrongdoing and mismanagement, leading to numerous prohibitor orders and potential legal ramifications. The inquiry highlights serious governance shortcomings in RHFL and the larger Reliance ADAG group, which will probably impact the company’s future operations, regulatory compliance, and investor confidence.

The seriousness and scope of the violations found point to significant effects on the company’s future course and reputation, even in the face of the justifications put forth by RHFL and Anil Ambani.

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