For promoters and group chairpersons facing charges of using their influence over Key Managerial Personnel (KMP) to divert funds from their listed companies for personal gain, the latest SEBI order in the Reliance Home Finance Ltd. (RHFL) case will surely serve as a salutary warning.

Reliance ADA Group chairman Anil Ambani, who has been barred from the markets and fined by the markets regulator Securities & Exchange Board of India (SEBI) for his alleged role in diversion of RHFL’s funds, as well as the sanctioned KMP of RHFL now face the prospect of further regulatory action in the coming days, the order passed by SEBI’s Whole Time Member Ananth Narayan G shows.

“SEBI shall determine the quantum of illegal gains/ benefit made by way of the fraudulent scheme as established 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 decisions of the Hon’ble Supreme Court, Hon’ble High Courts and Hon’ble SAT that the scope of the power under Section 11B of the SEBI Act is wide, under which directions can be passed to order refunds/ bring back monies/ disgorge illegal gains made by any person in violation of securities law,” the senior SEBI official noted in the order.

Any further disgorgement order passed by SEBI would be over and above the ban from the capital market for 5 years, the debarment from inclusion on boards of listed companies and financial penalty on Mr. Ambani and others amounting to ₹624 crore.

“The findings made in... this Order have established the existence of a fraudulent scheme, orchestrated by Noticee  No. 2 [Mr. Anil Ambani] administered by the KMP of RHFL [Amit Bapna, Ravindra Sudhalkar & Pinkesh R. Shah], to siphon off funds from the public listed company (RHFL) by structuring them as ‘loans’ to credit unworthy conduit borrowers, and in turn, to onward borrowers, all of whom have been found to be ‘promoter linked entities’ i.e. entities associated/ linked with Noticee 2,” Mr. Narayan ruled.

‘Complete breakdown’

Stating that the facts of this case were particularly disturbing since they revealed complete breakdown of governance in a large listed company apparently orchestrated by and/or at the behest of the promoter aided by the indulgent KMP of the company, Mr. Narayan said that 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 [general purpose working capital loans] lending and asked the company management to ensure compliance with the law,” he observed. “By preponderance of probability, the mastermind behind the fraudulent scheme is the Chairman of ADAG – Anil Ambani (Noticee No.2). It is also apparent that Noticees 3 to 5, KMP of the company, played an active role in perpetrating the fraudulent scheme,” he added.

“While Noticee No. 2 was not a director in RHFL, he has used his position as ‘Chairperson of the ADA group’ and his significant indirect shareholding in the holding company of RHFL to orchestrate the fraud thereby not just adversely affecting RHFL’s stakeholders but also the confidence in the integrity of governance structures in regulated financial sector entities,” he stressed.

‘Sinister objective’

Emphasising that as a director and a KMP  of both the listed company and its holding company,  Noticee  3 — Amit Bapna — had clearly fallen well short of the standards of governance that were expected from him, the SEBI  official said: “The ‘watchman’ appointed by the Board to arrest the continuing decline in the financial stability of the public listed company, turned out to be part of the group that executed the fraudulent scheme.”

Similarly, Noticee  no. 4 [Mr. Sudhalkar] in capacity of CEO of RHFL was the central point of communication between the Board of Directors, all the personnel involved in corporate operations of the company, and with all the senior management personnel like CRO, Operational Heads, Company Secretary etc. who were reporting to Noticee no. 4, as per the order. “This Order has elaborated on his direct involvement in the fraud by approving the ‘loans’ to ineligible customers, defying the decision of RHFL’s board, and his wanton non-compliance with the legal mandate to make true and fair disclosures,” the SEBI official  said. “Company continued to disburse large quantum of GPC  loans despite Noticee Nos. 3-5 being directly aware of the Board’s directions not to do so. Both Noticee Nos. 4 and 5 had also signed off on CEO/ CFO certifications actively hiding the true state of affairs in RHFL.

“When juxtaposed against a well regulated financial system where extending even small ticket loans is subject to multiple checks and restrictions, the cavalier approach by the company management and the promoter in approving loans amounting to hundreds of crores to companies many of which had negligible assets, cash flows, net worth, or revenues, suggests a sinister objective behind the ‘loans’,” Mr. Narayan highlighted.

“This sinister objective becomes all the more clear when the relationship of the borrowers with the promoters of RHFL are taken into account,” Mr. Narayan observed in his order.