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For promoters and group chairmen facing allegations of diverting funds from their listed companies for personal gain by using their influence over key managerial personnel (KMPs), Sebi’s latest order in the Reliance Home Finance Ltd (RHFL) case will certainly serve as a warning.
Reliance ADA Group chairman Anil Ambani, who has been barred from the markets and fined by market regulator Securities and Exchange Board of India (SEBI) for his alleged role in the diversion of funds from RHFL, as well as the approved KMPs of RHFL may now face further regulatory action in the coming days, according to an order passed by SEBI whole-time member Anant Narayan G.
“SEBI shall quantify the illegal gains/profits made through the fraudulent scheme set out in this order and action may be initiated in accordance with law,” Mr Narayan said in his 222-page order, which was uploaded on the regulator’s website on Friday. “It is well established through various judgments of the Hon’ble Supreme Court, Hon’ble High Courts and Hon’ble SAT that the scope of power under Section 11B of the SEBI Act is wide under which directions can be passed to order refund/restitution/refund of illegal gains made by any person by violating securities law,” the senior SEBI official noted in the order.
Any additional refund order passed by Sebi will be in addition to the ban on capital markets for 5 years, barred from joining the boards of listed companies and a financial penalty of Rs 624 crore imposed on Mr Ambani and others.
Mr Narayan ruled, “The findings made in this order have established the existence of a fraudulent scheme, which was perpetrated by Noticee No.2 (Shri Anil Ambani) administered by RHFL’s KMPs (Amit Bapna, Ravindra Sudhakar and Pinkesh R Shah) to siphon off funds from the public listed company (RHFL) by structuring them as ‘loans’ for on-lending to ineligible borrowers and, in turn, to further borrowers, all of whom have been found to be ‘promoter linked entities’ i.e. entities linked/connected with Noticee No.2.”
‘Complete fission’
Mr Narayan said the facts of this case are particularly disturbing as they reveal a total breakdown of governance in a large listed company, apparently at the behest of the promoter of the company and/or supported by his benevolent KMP. He said the company, which was subject to the regulatory framework prescribed by the NHB and subsequently RBI (as an HFC) and SEBI (as a listed company), had no regard for the need to maintain high standards of governance.
“This is also a peculiar case where the management of the company has blatantly disregarded the directions of its own board which had raised concerns about the grant of GPCL (general purpose working capital loan) loans and had asked the company management to ensure compliance with the law,” he said. “Based on probability, the mastermind behind the fraud scheme is ADAG chairman Anil Ambani (noticee number 2). It is also evident that noticees 3 to 5 of the company, KMP played an active role in executing the fraud scheme,” he said.
“While Noticee No. 2 was not a director in RHFL, he has used his position as ‘Chairman of ADA Group’ and his significant indirect shareholding in the holding company of RHFL to perpetrate fraud, which has not only adversely affected the stakeholders of RHFL, but also undermined confidence in the integrity of governance structures in regulated financial sector entities,” he asserted.
‘Sinister purpose’
Emphasising that as a director and KMP of both the listed company and its holding company, Noticee 3 – Amit Bapna – clearly did not live up to the governance standards that were expected of him, the Sebi official said: “The ‘chowkidar’ appointed by the board to arrest the continued deterioration in the financial stability of a public listed company, turned out to be part of the group that perpetrated the fraudulent scheme.”
Similarly, according to the order, Noticee No. 4 (Mr. Sudhakar) in the capacity of CEO of RHFL was the central point of communication between the Board of Directors, all personnel involved in the corporate operations of the company and all senior management personnel like CRO, Head of Operations, Company Secretary etc. who were reporting to Noticee No. 4. “The order elaborates on his direct involvement in the fraud by approving ‘loans’ to ineligible customers in defiance of the decision of the Board of RHFL and by not complying with the legal mandate of making true and fair disclosures,” the Sebi official said. “Despite Noticee Nos. 3-5 being directly aware of the Board’s directions not to do so, the company continued to disburse large amounts of GPC loans.
Mr Narayan said, “When compared with a well-regulated financial system where a host of checks and restrictions apply even on small-sized lending, the reckless attitude of company managements and promoters in sanctioning loans amounting to hundreds of crores of rupees to companies many of which have negligible assets, cash flow, net worth or revenues, indicates a sinister motive behind the ‘loans’.”
“This sinister motive becomes more evident when the relationship of the borrowers with the promoters of RHFL is taken into account,” Mr Narayan said in his order.
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