RHFL Fraud: Why SEBI Penalized Anil Ambani and Banned Him from the Market

The Securities and Exchange Board of India (SEBI) has taken significant action against Anil Ambani, the Chairman of the Anil Dhirubhai Ambani Group (ADAG), and 24 other entities. SEBI has imposed a five-year ban on them from the securities market for their involvement in diverting funds from Reliance Home Finance Ltd (RHFL). In addition to this, Ambani faces a hefty fine of Rs 25 crore for his role in orchestrating a fraudulent scheme that negatively impacted the company’s stakeholders and eroded confidence in the governance of financial sector entities. The total penalties on Ambani and the implicated entities amount to over Rs 625 crore.

Background of the RHFL Case

RHFL, a non-banking finance company (NBFC), focuses on providing housing loans, loans against property, and construction finance. SEBI began investigating the company after receiving several complaints and reports alleging the diversion of funds. RHFL’s major promoter, Reliance Capital Ltd (RCL), owned a 47.91% stake in the company, with Anil Ambani serving as the promoter and non-executive director of RCL during the financial year 2018-19.

SEBI’s investigation uncovered a significant increase in corporate loans extended by RHFL, from Rs 3,742.60 crore in 2017-18 to Rs 8,670.80 crore in 2018-19. It was found that during FY2018-19, RHFL disbursed a large number of General Purpose Capital (GPC) loans to companies with weak financial standing, many of which had negative net worth, minimal assets, and negligible cash flows. Alarmingly, these loans were issued without any collateral or security, raising serious concerns about due diligence.

SEBI’s Findings

According to SEBI’s detailed 222-page order, RHFL disbursed 97 GPC loans totaling Rs 8,470.65 crore to 45 different entities during FY2018-19. An analysis of 70 of these loan applications, which accounted for Rs 6,187 crore, revealed that 62 applications were approved on the same day they were submitted. In 27 cases, the loans were disbursed to the borrower’s account on the day of the application.

Despite an explicit directive from RHFL’s board on February 11, 2019, to cease issuing GPC loans, the company continued to disburse them with Ambani’s approval in his capacity as Group Head, despite not being a formal part of RHFL. SEBI’s order further states that between February 11, 2019, and March 31, 2019, Ambani approved 14 loan applications amounting to Rs 1,472.16 crore.

Erosion of Financial Stability

RHFL’s financials for FY2018-19 presented an alarmingly low Expected Credit Loss (ECL) despite nearly half of the company’s assets being tied up in GPC loans to financially weak entities. ECL is a financial institution’s estimate of expected future losses on loans due to default. The approval of these loans involved significant deviations from standard credit assessment processes, SEBI noted.

SEBI concluded that Ambani and the 24 other entities were involved in a fraudulent scheme that led to the deterioration of RHFL’s financial position, with many of these loans eventually being declared Non-Performing Assets (NPAs). The funds disbursed as loans were funnelled into entities linked directly or indirectly to the Reliance ADA Group. This transfer of funds, coupled with irregular loan disbursement practices and a lack of effort in recovering the loans, indicated that the primary motivation behind these transactions was to benefit Ambani through fund transfers to related companies.

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SEBI’s Action and Ambani’s Response

The evidence of senior officials advocating for loans to dubious entities and Ambani’s active involvement in approving these loans pointed to a concerted effort to misappropriate funds. This led SEBI to take decisive action, including the market ban and significant financial penalties.

In response, Ambani is exploring legal options to challenge SEBI’s decision. A statement from his spokesperson indicated that Ambani had already resigned from the boards of Reliance Infrastructure and Reliance Power following SEBI’s interim order in February 2022 and has complied with the order for the past two and a half years.