One of the cases discussed in some detail is that of Dewan Housing Finance Ltd (DHFL), a company with over Rs1.1trn (trillion) in debts due to the banks, the depositors and the debenture-holders which went under due to the brazen plunder by the promoters, undetected in time by the auditors.
If DHFL represented a case where the rear door of the house was broken in the dead of night and the safe was opened with a lockpick, this case represents walking into the house through the portico, helping oneself to a couple of dry martinis from the bar, picking up whatever is wanted and leaving a note for the owner of what has been taken!
The reason this case has been separated and put in an exclusive part is due to the availability of data, more than what is normally available in the public domain, to establish an audit failure.
It is important to start this story from the way this company secured its listing on the stock exchanges.
A provision in the SEBI regulations that was never meant to list a company through the backdoor was effectively accessed to gain the listing.
The listing regulations allow for an exemption under rule 19(2)(b) of the Securities Contracts Regulation Rules (SCRR, 1957) in the case of a merger or a demerger involving a listed and an unlisted entity.
The typical case that qualifies under this category is where a company that is listed in the exchanges demerges one of its businesses into an unlisted company and issues shares to all its shareholders.
Since the undertaking demerged is arising out of a listed entity, the shareholders receiving the shares in the resulting entity would have to be provided liquidity. Therefore, the new entity would be granted listing on an automatic basis without following the tortuous procedures to list a company.
This exemption route may have been exploited in some other cases as well but our candidate is the cheekiest of all!
Reliance Home Finance Ltd (RHFL) was an unlisted entity till the financial year 2017.
During the course of FY17-18, it contrived a standard of auditing (SOA) to take over the real estate lending business of Reliance Capital Ltd, a listed entity.
The SOA was structured as a demerger whereby RHFL would settle the consideration by issuing its shares to the shareholders of Reliance Capital Ltd.
The value of the assets taken over under this arrangement from Reliance Capital was Rs663 crore, and post adjusting the liabilities, the net consideration was Rs73 crore!
The gross assets of Rs663 crore taken over in this arrangement constituted but 6% of the total assets of RHFL of Rs1,1346 crore, and 2% of the assets of Reliance Capital, the demerged company!
The net consideration of Rs73 crore payable was around 0.5% of RHFL’s total balance sheet size.
It is obvious that the entire arrangement was a ruse to demonstrate an arrangement between the shareholders and the companies.
Yet, 252.7mn (million) shares were issued to the shareholders of Reliance Capital, and the façade of a demerger of a business of a listed company into an unlisted company was successfully set up to seek an automatic listing.
The shareholders approved the SOA on 24 July 2017 and the order of the national company law tribunal (NCLT) approving the same was issued on 10 August 2017, an unparalleled record!
Though it was a barging in through the back-door, there was due ceremonial grandeur to commence the trading on the floor of the exchanges. A flavour of the occasion is captured in the news item below.
The above has been set out in detail to indicate that the company knew how to bend the regulatory system with a penchant for pushing the envelope a lot further than any typical Indian promoter.
The company came crumbling down in less than 18 months of its listing.
Sometime in 2023, the banks worked out a settlement outside the Insolvency and Bankruptcy Code (IBC) framework by selling the entire loan portfolio for Rs3,351 crore, at about 80% discount, to a company controlled by the Reliance group.
It is clarified at the outset that the investigation undertaken by SEBI was against the promoters, the connected senior personnel and various entities involved in the siphoning of the funds and not against the auditor.
It is possible that a person who has read the SEBI order may think that the article seeks to indict the auditor when SEBI itself has not!
SEBI’s order is a treasure trove of incriminating data that can be applied both to indict the management and equally expose the audit process.
It is best to start the dissection from the description of RHFL’s business in the annual report.
The composition of the lending book of the company is given below.
Categorising the company’s business as a housing finance company (HFC) was nothing short of a white lie, subscribed to by the auditor, as well. Less than 25% of the loan book was mortgage loans in FYE (financial year ending) March 2019.
Anyone in the know of the non-banking financial company (NBFC) industry would appreciate how different a mortgage business is, compared to loans given to small businesses and corporates, in terms of the risk profile.
The following are some of the findings in the SEBI order that directly relate to the core business of lending and are thereby integral to the integrity of the quarterly and annual audit certification made.
The transactions reviewed by SEBI pertain to the financial year 2018-19.
1.
Sixty-two loan applications of the value of Rs5,552.67 crore were approved on the same day.
2. Rs1,940.58 crore of loans were disbursed on the same day it was applied.
3. Fourteen loan applications amounting to Rs1,472.16 were sanctioned by Anil Ambani who held no formal position in RHFL.
4. Significant deviations were noticed in CAM (credit appraisal memo) of loan documents amounting to Rs5,850.19 crore, and the deficiencies listed are grave and not routine or minor.
5. Fourteen cases of lending were to group companies totaling Rs8,827.28 crore. Fifty-nine instances totaling Rs4,533.43 crore where on the same day the money was lent to a borrower, it was onward lent to a promoter company.
6. Related-party status altered/ modified in giving loans of Rs1,323.43 crore.
7. PILE (potentially inter-linked entity) loans amounted to Rs1,257.48 crore.
8. Evergreening done amounted to Rs785.80 crore.
9. Roundtripping happened in loans of Rs4,12.89 crore.
10. Many borrowers were like Jain ascetics, had practically nothing; no collaterals, no accounts, no personnel, no office, with dummy address and common email IDs.
An illustrative sample of ex facie suspicious cases that may fall into one or more of the above is given in the table just above.
The order provides a few annexures with the diagrams depicting the shareholding pattern of a few of the borrowers, structured with much attention to avoid an immediate relationship between RHFL/ its promoter, and the ultimate borrower.
It is not the case made out in this article that the audit process should have scrambled every such cluster that resembles a typical rangoli drawn in front of many South Indian houses during festivals!
But, with less effort than leaving a ball wide off the leg stick, the audit could have detected that most of the borrowers were but shady, shell entities, ultimately, a cog in the historic swindle undertaken!
Even if the audit took place inside the corporate box while attending an important IPL match, missing these would not have been possible!
The fact that all the 45 corporate borrowers, who borrowed in 97 loan accounts, became a non-performing asset (NPA) must be unparalleled in corporate loot and audit lapse.
The data below gives a graphic summary as culled out from the SEBI order.
How can any auditor defend the audit carried out in the face of a finding by the SEBI as under?
The auditor scrutinised the books for at least 18 months and signed various quarterly accounts as given below with no qualifications or reservations.
They resigned after complaining to the Central government under Section 143(12) - a fraud by the management.
Even if documents, data, diagrams and details could not be verified during the course of the audit, a mere look at the graph on the side should have been enough to alert any man of commerce of the Ponzi scheme they were signing on as ‘true and fair’!
The audit failure in this case rivals that of Arthur Andersen in Enron’s audit!
IL&FS had many hundred subsidiaries. DHFL created millions of dummy borrower accounts. Satyam’s case had parallel books and fabricated bank receipts.
The Institute of Chartered Accountants of India (ICAI) keeps protesting that no simple watchdog could detect such frauds. While they don’t specify the required breed, a German Shepherd or an American Pit Bull Terrier is what they may have in mind!
RHFL tried no sophisticated structures. It made no pretense of its pillage. It was like walking into an ATM and withdrawing the money! ICAI should look at this and confirm if a dog at all was required to detect this!
RHFL is the perfect Ponzi scheme ever by a listed corporation, audited by a top dog auditor, in India.
While Saradha, Sahara, Arudhra, and PACL are often in the news for the loss caused to the deposit holders, this case has been given a good burial except for the exercise SEBI has carried out.
False audited accounts, repeated fundraise from the public through debentures supported by inflated credit ratings issued by cavalier rating agencies, a board that was unaware of the business of the company, and financial jugglery involving every conceivable way of siphoning out the money characterised this, like any of the other cases.
While the government is incurring huge amounts in litigation to get the five famous fugitive Indian businessmen extradited, which they should, and try them under our laws, there is no evidence of booking any of the perpetrators in the RHFL case for criminal conduct and siphoning of public funds.
PNB declared this account as a fraud in 2020 itself, but it appears, based on public search, that none of the other lenders, including SBI, the lead banker, did!
Bernard Madoff, a former chairman of NASDAQ, who founded a famous Wall Street broking and investment firm, holds the record for the biggest Ponzi scheme ever run, totaling approximately to US$65bn (billion).
He was arrested on 11 December 2008, and convicted to a 150-year prison term on 29 June 2009!
The comments sent by a reader on the DHFL case referred to in the initial part of the article can be
accessed in the link here
(This is a part of a multi-part series.)
You may want to read other parts…
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
Woukd suggest to investigate this matter and lot will get unearth with repeat to nclt proceedings too
At least hats off to Sucheta Dalal for focusing on such issues.....off course there was and is never any justice in Mera Bharat. Sau mein se 80 baimaan.....phir bhi mera Desh Mahaan.