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

India's markets regulator, the Securities and Exchange Board of India (Sebi), has slapped a ₹25 crore fine on industrialist Anil Ambani, accusing him of orchestrating a fraudulent scheme to siphon off funds from Reliance Home Finance Ltd (RHFL).

The action 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 from RHFL, from participating in the securities market for five years.

Mint breaks down Sebi's investigation and the order authored by whole-time member Ananth Narayan G.

What led Sebi to investigate Reliance Home Finance?

Sebi's investigation into RHFL was triggered by multiple complaints alleging the diversion of funds within the company. RHFL, a lender focused on housing loans, loan against property, and construction finance, was found to have disbursed a series of large general-purpose capital (GPC) loans during FY19. These loans were extended to financially weak and obscure borrowers, a practice that raised red flags due to the company's low reported credit losses.

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Sebi's probe revealed that these loans, which made up nearly half of RHFL's assets, were part of a larger scheme designed to siphon off thousands of crores of rupees, leading to the eventual collapse of the company. The scheme not only drained the company’s financial resources but also inflicted significant losses on investors and destabilized the business.

“As a result of their egregious device to siphon out several thousands of crores of rupees from RHFL…the company eventually collapsed, causing immense loss to its investors and ecosystem," Sebi noted 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 allegations against the company and its executives centred on a scheme to divert substantial funds, to the detriment of the company and its stakeholders. They were also accused of concealing these diversionary 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 potential related-party status of loans disbursed by RHFL.

The role of Anil Ambani

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

Ambani served as the promoter, non-executive, and non-independent director of Reliance Capital Ltd during FY19. In the related party disclosures, he was identified as 'the person having 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 halt the disbursement of GPC loans after 2019, the company continued to approve loans authorized by Ambani in his capacity as group head, despite not being an official insider at RHFL. It was also revealed that most of the GPC loan recipients were entities within the Reliance Anil Dhirubai Ambani Group.

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“Ambani approved 14 loan application involving an amount of ₹1472.16 crore in his capacity as chairman of Reliance ADA group during the period of just over 1.5 months,” the order noted.

Ambani’s defence and Sebi's rebuttal

Ambani has disputed Sebi's characterization of his role, particularly the use of the term "de facto controlling influence." He argued that his position as chairman did not confer any formal authority to make or influence financial decisions at RHFL.

“Securities regulation recognizes ‘control’ but there is no concept of ‘influence’ for the purposes of imposing penal liability,” the order recorded his argument.

Furthermore, he cited a statutory moratorium in effect since March 2020, following his insolvency declaration by the National Company Law Tribunal in Mumbai, as a barrier to any proceedings against him.

However, Sebi has dismissed these arguments, clarifying that the term "de facto controlling influence" was employed to summarize the allegations rather than as a legal standard.

Kunal Singhania, partner at Singhania & Co, explained that Sebi's use of this term underscored the importance of recognizing actual control and influence in corporate governance, irrespective of formal legal recognition. He noted that "de facto control" refers to a situation where a person, through commercial arrangements or position, has the ability to significantly influence a company's decision-making, as opposed to "de jure control," which stems from an officially recognized capacity under the law.

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

The investigation found that Ambani had approved loan applications in his capacity as ‘chairman, Reliance Group,’ but there was no evidence to suggest he had been granted any extraordinary power by the company’s board to approve loans on behalf of holding companies.

“Neither RHFL nor Ambani have provided any rationale to justify such self-assumed empowerment of Ambani for taking such vital corporate decisions to sanction sizeable and imprudent loans in defiance of basic lending logic, discipline and directions of RHFL Board and which were financially disastrous for the company and its public shareholders,” Sebi noted.

Sebi's findings on key executives and associated entities

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

These penalties are in addition to the restrictions placed on RHFL, Ambani, and other executives, barring them from accessing the securities market. Ambani has also been prohibited from holding a key managerial position in a listed company or its listed subsidiary for five years.

Fariyal Tahseen, partner at Wadia Ghandy & Co, explained that Sebi's order effectively restrains both the company and Ambani from dealing in securities. "The company's securities account with exchanges will be frozen for six months. Anil Ambani will have to step down from his position on the board with immediate effect from the order," she noted.

Tahseen also added that the Sebi order has set a precedent by 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, aided by the indulgent key managerial personnel (KMPs) of the company.”

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

“As of March 2018, the RHFL scrip price had closed at around ₹59.60. By March 2020, as this egregious scheme to hollow out the company by siphoning off significant funds became apparent, the share price had collapsed to ₹0.75. Even today, more than 9 lakh shareholders remain invested in RHFL,” the order noted.

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