'Mastermind Behind Fraudulent Scheme' : SEBI Imposes Rs 25 Crore Penalty On Anil Ambani & 5-Year Ban For RHFL Fund Diversion

The Securities and Exchange Board of India (SEBI) has banned industrialist Anil Ambani from the securities market for five year and imposed a hefty penalty of Rs 25 crores for the diversion of funds of Reliance Home Finance Ltd.

The SEBI has also barred  Reliance Home Finance Ltd and some of its connected entities and former officials form the capital markets for five years. Altogether, 27 entities have been levied penalties.The fine amounts have to be deposited within 45 days from the date of receipt of the order.

Anil Ambani is restrained from being associated with the securities market including as a director or Key Managerial Personnel in any listed company, holding/ associate company of any listed company, or in any intermediary registered with SEBI, for 5 years.

SEBI found that through FY18-19, RHFL had been approving and disbursing a series of large GPC(General Purpose Capital Working) Loans, each for hundreds of crores of Rupees, cumulating to several thousands of crores of Rupees, to non-descript borrowers with extremely weak financials. In comparison to the quantum of loans disbursed, these borrowers had negative or negligible net worth, profits, assets, cash flows.

 In approving these GPC Loans, in many cases, RHFL was again inexplicably, repeatedly, and widely, deviating from standard credit due diligence and processes. All the GPC Loan borrowers covered, and the entities they appeared to transfer or forward the funds to, were all connected to the promoter-group in some form or another. Subsequently, RHFL also received some post facto guarantees for some of the GPCL from some promoter-group companies, further highlighting the connection.

The SEBI found that it was a scheme to divert the funds from RHFL to promoter-linked entities. The judgment delivered by SEBI Whole Time Member Ananth Narayan G recorded :

"The only rational explanation that can account for the above series of otherwise inexplicably terrible decisions and events, by overwhelming preponderance of probability, is that this was all part of an elaborate and nefarious scheme undertaken by all the Noticees to divert funds from RHFL to promoter-linked entities, while concealing the financial implications of their artifice to the investing public. As a result of their egregious device to siphon out several thousands of crores of Rupees from RHFL, aggregating to around half the assets of the company, the company eventually collapsed, causing immense loss to its investors and ecosystem."

The market regulator found that Anil D Ambani had a significant role in the affairs of Reliance ADAG, and specifically with respect to the companies who are  part of the fraudulent scheme for diverting the funds of RHFL. It said that by preponderance of probabilities, it can be held that "the mastermind behind the fraudulent scheme" is the Chairman of ADAG – Anil Ambani.

"It is also now clear that the transfer of monies, structured as GPC loans, were directly or indirectly made to entities that were related to the Reliance ADA Group. 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. 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 direct or indirect benefit through fund transfers to these companies."

While the SEBI said that nter-corporate loans or related party transactions (subject to disclosures and compliance with law) are also not per se illegal or suspicious, the facts and circumstances of this case clearly indicate that the defaults are the culmination of an elaborate and coordinated design to move funds from the public listed company to non-descript and financially weak privately held companies connected with the Reliance ADA group.

"The facts of this case is particularly disturbing since it reveals complete breakdown of governance in a large listed company apparently orchestrated by and/ or at the behest of the promoter aided by the indulgent KMPs of the company. The Company which was subject to the regulatory framework laid down by NHB and subsequently RBI (as an HFC) as well as by SEBI (as a listed company) did not seem to care about the need to maintain high standards of governance. This is also a peculiar case where the company's management has brazenly defied the diktat of its own Board that had raised concerns about GPCL lending and asked the company management to ensure compliance with the law," the SEBI said.

Click here to read the SEBI judgment