Mint Explainer: Sebi’s crackdown on RHFL: Why Anil Ambani and others were held accountable

The move marks a significant escalation in Sebi’s efforts to hold corporate leaders accountable for financial misconduct as it has also banned Ambani and 24 others, including top executives of RHFL, from participating in the securities market for five years.

Mint breaks down Sebi’s investigation and The order Written by full-time member Ananth Narayan G.

What prompted Sebi to investigate Reliance Home Finance?

Sebi’s probe into RHFL was triggered by multiple complaints alleging diversion of funds within the company. RHFL, a lender focused on housing loans, real estate collateral loans and construction finance, was found to have disbursed a series of large general purpose capital (GPC) loans during FY19. These loans were given to financially weak and unknown borrowers, a practice that raised red flags given the low credit losses reported by the company.

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The Sebi investigation revealed that these loans, which accounted for nearly half of RHFL’s assets, were part of a larger scheme designed to siphon off billions of rupees, leading to the company’s eventual collapse. The scheme not only drained the company’s financial resources but also inflicted significant losses on investors and destabilised the business.

“As a result of its heinous scheme to siphon off several thousand crores of rupees from RHFL… the company ultimately collapsed, causing immense losses to its investors and the ecosystem,” Sebi said in its order.

The case also implicated several other companies including Reliance Inceptum Pvt Ltd, Reliance Innoventures Pvt Ltd, Reliance Infrastructure Consulting & Engineers Pvt Ltd, Crest Logistics and Engineers Pvt Ltd, Reliance Infrastructure Management Pvt Ltd and Reliance Capital Ltd..

What allegations did Sebi address in its order?

The charges against the company and its executives centered on a scheme to embezzle significant funds, to the detriment of the company and its shareholders. They were also accused of concealing these embezzlement activities from shareholders and the public by manipulating financial records and issuing misleading statements.

Concerns about RHFL’s mismanagement came to light after the company’s statutory auditor, PwC, resigned in 2019, citing issues related to the quality, recoverability and possible related party status of loans disbursed by RHFL.

Anil Ambani’s role

The SEBI order paints a damning picture of Ambani’s role in the scandal.

Ambani served as a promoter, non-executive and non-independent director of Reliance Capital Ltd during fiscal 2019. In related party disclosures, he was identified as “the person who had significant influence during the year” and as the beneficial owner of other entities involved in the case.

The allegation against Ambani is that despite the RHFL Board’s directive to stop disbursement of GPC loans after 2019, the company continued to approve loans authorised by Ambani in his capacity as group head, despite not being an official member of RHFL. It was also revealed that most of the beneficiaries of GPC loans were entities within the Reliance Anil Dhirubai Ambani Group.

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“Ambani approved 14 loan applications for an amount of ₹1,472.16 crore in his capacity as Chairman of Reliance ADA Group for a period of a little over 1.5 months,” the order said.

Ambani’s defence and Sebi’s rebuttal

Ambani has questioned Sebi’s characterisation of his role, particularly its use of the term “de facto controlling influence”. He argued that his position as chairman did not give him any formal authority to make or influence financial decisions at RHFL.

“Securities regulations recognize ‘control,’ but there is no concept of ‘influence’ for the purposes of imposing criminal liability,” the order argued.

It also cited a legal moratorium in place since March 2020, following its insolvency declaration by the National Company Law Tribunal in Mumbai, as a barrier to any proceedings against it.

However, Sebi has rejected these arguments, clarifying that the term “de facto controlling influence” was used to summarise the allegations and not as a legal standard.

Kunal Singhania, Partner, Singhania & Co, explained that Sebi’s use of this term underlines the importance of recognising actual control and influence in corporate governance, irrespective of formal legal recognition. He pointed out that “de facto control” refers to a situation where a person, through business arrangements or position, has the ability to significantly influence a company’s decision-making, as opposed to “de jure control”, which stems from a capacity officially recognised by law.

Sebi concluded that the investigation had established the existence of a fraudulent scheme orchestrated by Ambani and executed by key management personnel of RHFL.

The investigation found that Ambani had approved loan requests in his capacity as “chairman of Reliance Group,” but there was no evidence to suggest that the company’s board had given him any extraordinary power to approve loans on behalf of holding companies.

“Neither RHFL nor Ambani has provided any justification to justify such alleged empowerment of Ambani to take such vital corporate decisions as sanctioning large and reckless loans which defied the basic lending logic, discipline and guidelines of the Board of RHFL and which were financially disastrous for the company and its public shareholders,” Sebi said.

Sebi’s findings on senior executives and associated entities

Sebi has imposed significant fines on key officials of RHFL, including Amit Bapna ( ₹27 crores), Ravindra Sudhalkar ( ₹26 crores) and Pinkesh Shah ( ₹21 crores), for their role in the fraudulent scheme. In addition, several entities involved in facilitating or benefiting from illegal loan disbursements were fined ₹25 crore each.

These sanctions come on top of restrictions imposed on RHFL, Ambani and other executives, which prevent them from accessing the stock market. Ambani has also been banned from holding a key management position in a listed company or a listed subsidiary for five years.

Fariyal Tahseen, partner at Wadia Ghandy & Co, said the Sebi order bars the company and Ambani from trading in securities. “The company’s securities account on the exchanges will be frozen for six months. Anil Ambani will have to resign from his position on the board with immediate effect from the order,” she said.

Tahseen also added that the Sebi order has set a precedent in interpreting the definition of ‘control’ through the present order.

The regulator expressed deep concern over the case, saying: “The facts of this case are particularly disturbing as they reveal a complete breakdown of governance in a large listed company, apparently orchestrated by and/or at the behest of the promoter, with the help of the indulgent key management personnel (KMPs) of the company.”

Sebi also highlighted the devastating impact on RHFL shareholders, who were left in dire straits due to the company’s defaults on its payment obligations.

“As of March 2018, RHFL’s share price had closed at around ₹59.60. By March 2020, when this heinous plan to hollow out the company by diverting significant funds became apparent, the stock price had plummeted to ₹0.75. Even today, more than 9 lakh shareholders continue to invest in RHFL,” the order said.

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Ketan Mukhija, senior partner at Burgeon Law, said that while the order is likely to represent a significant setback for shareholders associated with these listed entities, it underlines the regulator’s firm stance that non-compliance will have serious consequences.