Anil Ambani Fraud: Why SEBI imposed Rs.624 crore penalty and banned Anil Ambani for 5 years?

The Securities and Exchange Board of India (SEBI) has taken strict action against Anil Ambani and his company, Reliance Home Finance Limited (RHFL), for giving out loans without proper scrutiny to companies related to the Reliance group. SEBI has fined Anil Ambani Rs 25 crore and banned him from the securities market for five years. You can download order copy from link given below.

The company and other key management personnel have also faced penalties. In its 222-page final order, SEBI found that Anil Ambani, with the help of RHFL’s key managerial personnel, had orchestrated a fraudulent scheme to siphon-off funds from RHFL by disguising them as loans to entities linked to him. SEBI says Anil Ambani is involved in giving unscrutinised loans to parties related to the company. The loans under investigation amounted to Rs 8,470 crore.

Background of the Case

SEBI’s order, released on a Thursday evening, came after a detailed investigation into allegations of breaking SEBI laws. According to the investigation, in 2018-19, RHFL, under Anil Ambani’s leadership, gave out loans disguised as working capital loans without proper due diligence. These loans, totaling Rs 8,470 crore, were given to companies related to the Reliance ADA Group.

SEBI described Ambani as the “mastermind behind the fraudulent scheme,” highlighting how the loans were given out hastily and irregularly. Many of these loans were approved and disbursed on the same day as the application, and proper procedures were not followed. Little to no effort was made to recover these loans, and Anil Ambani was personally involved in approving them.

The SEBI investigation revealed a complex scheme where RHFL disbursed significant loans amounting to ₹9,295.25 crore to 45 General Purpose Working Capital Loans (GPCL) entities. Of this, ₹4,944.34 crore was disbursed to 13 specified GPCL borrowers, who further lent ₹4,013.43 crore to nine promoter-related entities.

The investigation found that these transactions were part of a coordinated effort to move funds from RHFL to financially weak companies linked to the Reliance ADA Group, ultimately leading to non-performing assets (NPAs) of ₹6,931.31 crore, as of September 30, 2021.

SEBI’s Findings on Loan Irregularities

SEBI’s investigation revealed numerous irregularities in the way loans were handled:

• Same-Day Approvals: 62 loans worth Rs 5,552.67 crore were approved on the same day as the loan applications. Similarly, 27 loans worth Rs 1,940.6 crore were disbursed on the same day they were applied for.
• Deviations from Due Process: Credit Approval Memos for loans amounting to Rs 5,850.19 crore showed deviations from the standard process. This included skipping field investigations, not checking customer creditworthiness, not securing the loans, and other procedural lapses.
• Incomplete Documentation: Many loan applications were left blank, with only signatures on the last page, indicating a lack of proper documentation.

Senior officials at RHFL ignored critical issues such as negative net worth and weak financial positions of the borrowing entities. Despite these red flags, loans were approved by the Credit Committee and other leadership figures at RHFL.

Independent Reports Supporting SEBI’s Findings

SEBI’s investigation also considered the findings of two independent reports: one by Price Waterhouse & Co. (the statutory auditor of RHFL) and another by Grant Thornton (a forensic auditor appointed by Bank of Baroda). Both reports supported SEBI’s findings:

• Price Waterhouse & Co.: They withdrew from their audit engagement with RHFL, citing a lack of satisfactory responses to their queries, failure to convene audit committee meetings on time, and legal threats from RHFL.
• Grant Thornton: Their report found similar discrepancies and noted that some borrower entities were initially classified as related parties of other Reliance group companies. Just before loan disbursement, these entities were reclassified as non-related parties, allowing the loans to be processed under less scrutiny.

Penalties Imposed by SEBI

SEBI’s order imposed severe penalties on Anil Ambani, RHFL, and others involved:

• Market Ban: RHFL is banned from accessing or associating with the securities market for six months. Anil Ambani and 26 other individuals and entities face a five-year ban.
• Leadership Ban: Anil Ambani is banned from serving as a director or key managerial personnel in any listed company, holding company, or intermediary registered with SEBI for five years.
• Financial Penalties: SEBI fined RHFL Rs 5 lakh, Anil Ambani Rs 25 crore, RHFL’s CFO Amit Bapna Rs 27 crore, and RHFL’s CEO Ravindra Sudhalkar Rs 26 crore. Other related companies also faced fines of Rs 25 crore each.

Impact on Shareholders

The fraudulent activities caused a significant financial decline for RHFL, severely impacting its shareholders. The company’s share price plummeted from ₹59.60 in March 2018 to ₹0.75 by March 2020, leaving over nine lakh shareholders at a loss. As on today, the share price is Rs 4.45.