[Analysis] SEBI Investigation into Reliance Home Finance – Financial Irregularities and Penalties Involving Anil Ambani

After receiving complaints of financial irregularities, the Securities and Exchange Board of India (SEBI) launched an investigation into Reliance Home Finance Limited (RHFL). The probe uncovered that RHFL, a non-banking finance company under the Reliance Anil Dhirubhai Ambani Group (ADAG), had significantly increased its corporate loan disbursements without adequate due diligence, with many loans being directed to entities linked to the ADAG group. SEBI identified severe lapses, including fund diversion, loan evergreening, and manipulation of financial statements. Amid these findings, PwC, RHFL's statutory auditor, withdrew from its role, citing non-cooperation and concerns over the company's financial integrity. Despite his non-executive role, SEBI imposed penalties on RHFL and Anil D. Ambani, the company's promoter, highlighting broader governance failures. The investigation has led to prohibitory orders and may trigger further legal actions, casting a shadow over the broader Reliance group's operations and governance practices.

Table of Contents

1. Introduction
2. Key Persons & Entities Involved
3. Discovery of Irregularities in RHFL’s Corporate Loan Disbursements
4. Auditor’s Withdrawal of Audit over ‘Loan Concerns’
5. Forensic Audit on Loan Disbursements and Fund Utilisation
6. Response from RHFL and Anil Ambani
7. Major Irregularities and Manipulations in RHFL
8. Implications and Directives Following SEBI’s investigation into RHFL
9. Conclusion

1. Introduction

Reliance Home Finance Limited (RHFL), a notable non-banking finance company (NBFC) providing housing loans, loans against property, and construction finance, attracted the attention of the Securities and Exchange Board of India (SEBI) following multiple complaints and reports suggesting potential misappropriation of funds. At this time, Reliance Capital Limited (RCL), with a significant 47.91% shareholding, was RHFL’s principal promoter.

The case gained additional prominence due to the involvement of Mr. Anil D. Ambani, a distinguished business personality. As the Promoter and a Non-Executive, Non-Independent Director of RCL during the fiscal year 2018-19, Mr. Ambani’s connection to the alleged financial irregularities was pivotal. Consequently, SEBI imposed a penalty of Rs 25 crores on RHFL and Rs 5 lakhs on Mr Anil D. Ambani under Section 15HA of the SEBI Act, highlighting the severity of the case.

This write-up outlines the significant aspects of SEBI’s investigation and actions concerning RHFL and Mr. Anil D. Ambani.

2. Key Persons & Entities Involved

• Reliance Home Finance Limited (RHFL) – This entity, central to SEBI’s investigation, specializes in housing loans, property loans, and construction finance.
• Anil D. Ambani – A pivotal figure, Mr. Ambani exerted considerable influence over RHFL via his role in Reliance Capital Limited (RCL) as a Promoter and Non-Executive, Non-Independent Director during the fiscal year 2018-19.
• Other Key Individuals and Entities:
• Amit Bapna – Former Chief Financial Officer (CFO) of RHFL
• Ravindra Sudhalkar – Chief Executive Officer (CEO) of RHFL
• Various Corporate Entities – Associated with the Reliance Anil Dhirubhai Ambani Group (ADAG), these entities are integral to the financial and operational framework of RHFL

3. Discovery of Irregularities in RHFL’s Corporate Loan Disbursements

The SEBI investigation uncovered a dramatic increase in corporate loans by RHFL, from INR 3,742.60 Crore in FY 2017-18 to INR 8,670.80 Crore in FY 2018-19. Examination of 70 loan application documents for General Purpose Working Capital Loans (GPCL) totalling INR 6,187.78 Crore disbursed in FY 2018-19 revealed the following critical issues:

• Expedited Approvals – 62 of these loans, accounting for INR 5,552.67 Crore, were approved on the same day they were applied for, with 27 loans worth INR 1,940.58 Crore disbursed immediately on the application date.
• Process Deviations – Significant procedural deviations were noted in the Credit Approval Memos (CAMs) for loans amounting to INR 5,850.19 Crore. These included waived field investigations, overlooked eligibility criteria, failure to establish security or open escrow accounts, and incomplete documentation.
• Approval Despite Red Flags – The Credit Committee/Leadership Committee sanctioned 56 loans totalling INR 4,715.62 Crore despite noting deviations in the CAMs for 50 of these loans (totalling INR 4,378.03 Crore) and the poor financial standing of the borrowers.

4. Auditor’s Withdrawal of Audit over ‘Loan Concerns’

PricewaterhouseCoopers (PwC), the statutory auditor for RHFL, terminated its audit relationship in June 2019, citing RHFL’s non-cooperation with audit queries, failure to hold an Audit Committee meeting, and threats of legal action against the auditors. Before its withdrawal, PwC highlighted a significant escalation in loan disbursements from INR 900 Crore to INR 7,900 Crore, noting issues like borrowers with negative net worth, minimal business operations, and loans approved on or before the application dates. PwC also suspected some borrowers might be connected as group companies within the Reliance ADA Group, an assertion RHFL denied. Nonetheless, PwC escalated the issue to the Ministry of Corporate Affairs under Section 143(12) of the Companies Act, 2013 and informed SEBI of their findings.

5. Forensic Audit on Loan Disbursements and Fund Utilisation

A forensic audit conducted by the Bank of Baroda, the leading entity in RHFL’s lending consortium, scrutinized loan transactions from April 1, 2016, to June 30, 2019, with a specific focus on fund transfers to Potentially Indirectly Linked Entities (PILEs). The initial report, issued on January 2, 2020, revealed that RHFL issued INR 14,577.68 Crore in General Purpose Corporate Loans, directing INR 12,487.56 Crore to 47 PILEs. This audit uncovered practices like loan evergreening, circular transactions, and deviations from established credit policies. The subsequent May 6, 2020 report indicated that out of INR 12,573.06 Crore disbursed to PILEs, INR 8,884.46 Crore remained outstanding, with a considerable sum transferred to group companies connected to the promoter group. The audit detailed that 40% of these funds were allocated for debt repayment, 18% were potentially involved in circular transactions, and 9% were invested in fixed deposits and mutual funds, with the allocation of 22% of the funds remaining untraceable.

6. Response from RHFL and Anil Ambani

Following a resolution process under the RBI Framework, 2019, RHFL’s business was transferred to Authum Investment and Infrastructure Ltd, transforming RHFL into a shell entity with minimal assets. This change rendered SEBI’s proceedings against RHFL as moot. During 2018-19, the loans made by RHFL were secured with additional collateral, which was recognized as a strategic business decision, with the National Housing Bank (NHB) confirming adherence to regulatory standards. The forensic audits did not reveal any fraud or mismanagement, affirming the accuracy of the company’s financial disclosures.

Additionally, Anil Ambani referenced a statutory moratorium under the Insolvency and Bankruptcy Code (IBC) that precludes legal actions against him. He clarified that his involvement with RHFL was limited to a non-executive capacity, with no direct engagement in daily management or decision-making. His participation in loan confirmations was restricted to countersigning, and he was absent from any due diligence responsibilities. The Show Cause Notice (SCN) did not substantiate his fraudulent or manipulative acts, asserting that business decisions taken by RHFL fall under the regulatory purview of the NHB and RBI, not SEBI. Furthermore, obligations under the LODR or PFUTP Regulations were deemed inapplicable to him due to his non-management role in RHFL.

7. Major Irregularities and Manipulations in RHFL

The investigation into RHFL highlighted several critical irregularities:

• Fraudulent Diversion of Funds – SEBI found that RHFL was engaged in a scheme to divert funds intended for General Purpose Corporate Loans (GPCL) to entities closely linked with the Reliance ADAG group. These loans were used primarily to benefit other companies within the group, contrary to their original purposes.
• Irregular Loan Disbursement – The probe revealed significant lapses in due diligence during loan disbursement, including instances where loans were approved on the same application day without adequate review of the borrowers’ financial conditions, and necessary checks such as field investigations and security creation were waived.
• Manipulation of Financial Statements – Manipulations in RHFL’s financial statements involved omitting critical information and misrepresenting the company’s financial health. This included non-disclosure of directives from the Board regarding loan policies and the issuance of misleading statements by the CEO and CFO.
• Violation of SEBI Regulations – RHFL’s actions breached multiple SEBI regulations, including the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations), and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). Violations included non-disclosing material information and providing false statements during the investigation.

8. Implications and Directives Following SEBI’s investigation into RHFL

SEBI’s thorough investigation has led to several significant outcomes:

• Prohibitory Orders – SEBI issued orders barring the noticees from dealing in securities or associating with any SEBI-registered entities pending further review. This includes substantial penalties and restrictions preventing Anil D. Ambani and other key figures from serving as directors or promoters in any public company seeking public investments.
• Further Legal Proceedings – The findings will likely trigger more stringent legal actions, including penalties and potential criminal proceedings under applicable laws. The implications extend beyond individual penalties, potentially affecting the corporate governance framework within the entire Reliance group and inviting stricter regulatory oversight.
• Impact on Reliance ADAG – The investigation’s outcomes could severely affect the Reliance ADAG group, potentially leading to diminished investor confidence, challenges securing capital, and increased regulatory scrutiny.

9. Conclusion

SEBI’s probe into Reliance Home Finance Limited (RHFL) unveiled serious financial misconduct and mismanagement, resulting in extensive prohibitory orders and possible legal repercussions. The investigation underscores profound governance failures within RHFL and the broader Reliance ADAG group, likely influencing future operations, regulatory compliance, and investor trust in the conglomerate. Despite the defences presented by RHFL and Anil Ambani, the severity and breadth of the infractions uncovered suggest substantial impacts on the company’s future trajectory and reputational standing.