GS Paper - III
Securities markets regulator Securities and Exchange Board of India (Sebi) has banned ADAG chairman Anil Ambani and 24 other entities, including former key managerial personnel (KMPs) of Reliance Home Finance Ltd (RHFL), from the securities market for five years for diversion of funds from the company.
The RHFL case
ü Sebi opened an investigation into RHFL, a non-banking finance company (NBFC) focused on housing loans, loans against property, and construction finance after receiving multiple complaints/ reports of alleged diversion or siphoning of funds within the company.
ü The major promoter of RHFL was Reliance Capital Ltd (RCL), with a shareholding of 47.91%. Ambani was the promoter and non-executive and non-independent director of RCL during FY2018-19.
ü Sebi found that loans extended by RHFL to corporates increased from Rs 3,742.60 crore in 2017-18 to Rs 8,670.80 crore in 2018-19. It found that through FY2018-19, RHFL disbursed a series of large general purpose working capital (GPC) loans to nondescript borrowers with extremely weak financials.
ü These borrowers had negative or negligible net worth, profits, assets, cash flows, and businesses. Inexplicably, no collateral or security or assurance was recorded while disbursing these loans, Sebi has said in its detailed, 222-page order.
ü The order has noted that as per information submitted by RHFL, the company had disbursed 97 GPC loans amounting to Rs 8,470.65 crore to 45 borrower entities during FY2018-19.
ü An analysis of 70 loan applications for GPC loans worth Rs 6,187 crore showed that as many as 62 applications were approved on the same date and, in 27 cases, the loan too, was disbursed to the account of the borrower entity on the date of application.
ü On 11 February 2019, the RHFL board explicitly instructed the company to desist from disbursing any more GPC loans.
ü However, RHFL continued to disburse such loans with the approval of Ambani in his capacity as Group Head, even though he was an outsider to RHFL.
ü Noticee No. 2 (Anil Ambani) approved 14 loan applications involving an amount of Rs 1,472.16 crore in his capacity as Chairman of Reliance ADA Group during a period of just over 1.5 months (between February 11, 2019 – March 31, 2019).
ü Sebi has also slapped a Rs 25 crore fine on Ambani for orchestrating a fraudulent scheme that adversely affected RHFL’s stakeholders, as well as confidence in the integrity of governance structures in regulated financial sector entities.
ü The total penalty imposed on Ambani and the other 24 entities works out to more than Rs 625 crore.
Sebi’s observations
ü Even though around half the assets of RHFL as of 31 March 2019 were in the form of GPC loans disbursed to dubious and credit-unworthy entities, RHFL’s FY18-19 financials projected a very low Expected Credit Loss (ECL).
ü ECL is a bank’s internal estimate of anticipated future losses on a loan exposure due to default, which is expected to occur during the normal course of business.
ü In approving the GPC loans, in many cases, RHFL inexplicably, repeatedly, and widely deviated from standard credit due diligence and processes, Sebi has found.
ü Investigation in the matter has concluded that the Noticees (Ambani and 24 other entities) were involved in perpetrating a fraudulent scheme by disbursing GPC ‘loans’ resulting in erosion of the company’s finances due to such loans eventually being declared NPA.
ü The transfer of monies, structured as GPC loans, was directly or indirectly made to entities that were related to the Reliance ADA Group.
ü The abrupt and thoroughly irregular manner in which ‘loans’ were disbursed, the evidence of senior officials having canvassed for disbursing loans to such entities, the absolute lack of interest in recovering the dues, and Anil Ambani’s own involvement in approving such ‘loans’ all point to the pressing desire on their part to transfer funds one way or another.
ü Coupled with this, the ownership and management pattern of these companies (both lender and borrowers) leads to the conclusion that the ‘loans’ were motivated by Noticee No. 2’s (Anil Ambani) direct or indirect benefit through fund transfers to these companies.
Anil Ambani’s response
ü Anil Ambani is exploring legal options after Sebi banned him from the stock market for five years and imposed a fine of Rs 25 crore, according to a statement from his spokesperson.
ü Ambani’s spokesperson stated that he had resigned from the boards of Reliance Infrastructure and Reliance Power in the wake of Sebi’s interim order dated 11 February 2022 and “is in compliance with the said interim order for the last two and a half years”.
ü Ambani is now reviewing the final order dated 22 August 2024 and will take appropriate action as advised.
