In a 100-page interim order, market regulator Securities and Exchange Board of India (SEBI) has finally issued an interim order following investigation into a letter from Pricewaterhouse Coopers (PwC) addressed to Reliance Housing Finance Ltd (RHFL) refusing to sign the audit report and resigning as the statutory auditor of the company. SEBI says it has also received complaints alleging siphoning off/diversion of funds of RHFL by promoters and management of the company.
The order by whole time member (WTM) SK Mohanty, has been passed against 28 individuals and entities into the disbursal of loans by RHFL. In addition, there were multiple fraud monitoring returns (FMRs) from banks alleging that funds borrowed by RHFL from different lenders were partly used towards repayment of loans, the regulator said.
SEBI also received complaints that various connected parties and companies with weak financials “were used as conduits to siphon off funds from RHFL to entities connected to the promoter company Reliance Capital,” the order said.
"It is noted that one individual person Anil Ambani, who controls the company due to his position as a promoter and controlling shareholder by way his direct and indirect shareholding, is seen to be exercising unfettered powers...," SEBI said.
SEBI has barred Reliance Home Finance Ltd (RHFL), Anil Ambani and three of his associates from the securities market for three months for embezzling funds from the company. The three other individuals involved in siphoning off funds from RHFL are Amit Bapna, Pinkesh R Shah, and Ravindra Sudhalkar. SEBI has also restrained them from associating with any listed company, stock market intermediary or any public company that intends to raise money. The restrictions will remain until further notice, SEBI has said in an interim order directing Mr Ambani and several others ‘show cause’ why further action and investigation shouldn’t be initiated against them.
“Such misconduct on the part of Noticee no. 2 (Anil Ambani) as the chairman of the company/group smacks of fraudulent intent of the top management of the company first, to divert the borrowed funds of the company meant to be advanced to genuine third-party borrowers to the coffers of various promoter group entities under the garb of series of sham GPC (general purpose corporate lending) and then to cover up the losses & NPA arising out of such transactions by concealing actual financial health of the company from the shareholders and general investing public, who could never know the real financial status of RHFL by looking at the cooked up books of accounts presented to them through the stock exchanges,” says the SEBI order.
In a letter dated 18 April 2019, audit firm PwC highlighted certain observations and sought response from the company’s top brass and audit committee. The auditor highlighted that the amount of loans disbursed by RHFL under GPC loans have increased exponentially from Rs900 crore as on 31 March 2018 to around Rs7,900 crore as on 31 March 2019.
PwC also highlighted that the net-worth of borrowers were negative and they had limited or no revenue and profit.
The market regulator launched its own investigation where it found several irregularities in loan disbursal process and collusion between top officials to siphon off money from RHFL. The investigation revealed that several of these borrowers were group companies of RHFL.
Another forensic audit was conducted by the consortium of lenders of RHFL, led by Bank of Baroda.
The forensic auditor has observed that an amount of Rs14,577 crore was disbursed by RHFL to numerous entities as GPC loans, of which Rs12,487 crore was disbursed to 47 potentially indirectly linked entities (PILE).
Another report highlighted that there were 150 loan cases falling under the category of PILEs between FY16-17 and FY18-19. Of these, 100 loan cases amounting to Rs 8,884 crore were still outstanding in the books of RHFL.
“To sum up, all the aforesaid Noticees have played their respective roles in unison duly aided and abetted by other Noticees through a collusive nexus, to translate a preordained scheme into action resulting in siphoning off of huge amounts of funds from RHFL’s accounts, a major portion of which had to be declared NPA soon after their sanctions,” the Sebi order by WTM SK Mohanty states.
The order also restrains these individuals from "associating themselves with any intermediary registered with SEBI, any listed public company or acting directors/promoters of any public company which intends to raise money from the public till further orders."
The order noted executive director and chief executive officer (CEO) Ravindra Sudhalkar and the CFOs -- Amit Bapna and Pinkesh R Shah -- "instead of bringing such misdeeds to the notice of the Board of Directors/Regulators are prima facie found to be hand in gloves with Ambani, in siphoning off the borrowed funds of the company to other financially weak promoter group companies which is evident at different stages of approval of those General Purpose Corporate Loans (GPCL) transactions."
The order also covers the following entities: Adhar Project Management and Consultancy Private Ltd, Indian Agri Services Pvt Ltd, Phi Management Solutions Pvt Ltd, Arion Movie Productions Pvt Ltd, Citi Securities and Financial Services Pvt Ltd, Deep Industrial Finance Ltd, Azalia Distribution Pvt Ltd and Vinayak Ventures Pvt Ltd., Gamesa Investment Management Pvt Ltd, Medybiz Pvt Ltd, Hirma Power Ltd, Tulip Advisors Pvt Ltd, Mohanbir Hi-Tech Build Pvt Ltd, Netizen Engineering Pvt Ltd and Crest Logistics and Engineers Pvt Ltd (now known as Cle Pvt Ltd), Reliance Unicorn Enterprises Pvt Ltd, Reliance Exchange next Ltd, Reliance Commercial Finance Ltd, Reliance Cleangen Ltd, Reliance Business Broadcast News Holdings Ltd, Reliance Broadcast Network Ltd, Reliance Big Entertainment Pvt Ltd and Reliance Capital Ltd.
The regulator noted that the prima facie observations contained in the order are made on the basis of the material available on record and the prima facie findings shall also be considered as a show-cause notice.
They can also indicate whether they desire to avail an opportunity of personal hearing on a date and time to be fixed in that regard.
However, SEBI has clarified that the restraint imposed on RHFL should not come in the way of any resolution/revival plan approved or to be approved, under any law.