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The Securities and Exchange Board of India (SEBI) has imposed a substantial penalty of Rs 21.5 lakh on Reliance Home Finance Ltd (RHFL), as well as its top executives, including CEO Ravindra Sudhalkar, CFO Pinkesh Shah, and Compliance Officer Parul Jain. This penalty comes as a result of their failure to disclose crucial information and deviations related to the issuance of non-convertible debentures (NCDs) and concealing adverse findings from a forensic audit report.
SEBI's adjudicating officer, Soma Majumder, explained that RHFL had failed to disclose the discrepancies in the proceeds raised from NCDs to the stock exchanges. Additionally, RHFL did not provide necessary information to the debenture trustee despite repeated follow-ups during the examination period. The company also neglected to submit periodic reports as required by DT (Debenture Trustee) Regulations for several quarters, despite multiple correspondences from the stock exchanges.
Furthermore, RHFL selectively disclosed the forensic audit report, highlighting only portions that presented the company in a favourable light while concealing adverse information. The noncompliance with these regulations and circulars was deemed by SEBI to be wilful and reckless.
The auditor's qualified opinion revealed that a significant portion of RHFL's borrowers engaged in onward lending transactions, and the use of funds borrowed from the company included repayments of financial obligations to some group companies. The objections raised by RHFL regarding these findings were not accepted by SEBI, as they deemed it a clear deviation from the intended use of NCDs.
RHFL had previously released a detailed press release on January 12, 2020, regarding a forensic audit conducted by Grant Thornton (GT). In this press release, RHFL claimed there were no adverse findings in the forensic audit report related to fraud, embezzlement, fund diversion, or falsification of accounts. They also stated that they had transparently disclosed lending details to potential indirectly linked entities to auditors, regulators, lenders, and shareholders. RHFL maintained that lending to potential group companies was solely for debt servicing by listed group companies, with no adverse findings in the forensic audit regarding the quantum and end-use of lending to potentially linked entities.
However, SEBI pointed out adverse findings from the GT report, including that general purpose corporate loans (GPCL) were extended by RHFL to entities with weak financials and potentially indirectly linked entities (PILE). This significantly altered RHFL's financial information, with 88% of GPCL disbursed to PILE. Loans disbursed before the issuance of sanction letters were also noted.
The GT report indicated that during the review period, a total of Rs 14,577.68 crore was disbursed as GPCL, with approximately 88.76% of loans going to PILE, amounting to Rs 12,487.56 crore. By October 31, 2019, loans disbursed to PILE stood at around Rs 7,984.39 crore, of which loans totalling Rs 2,727.59 crore were declared as non-performing assets (NPAs).
The forensic audit report further highlighted that loans disbursed to Valucorp Securities and Financial Ltd were written off within four months of disbursement. The financial statements of Valuecorp Securities showed no income from business operations, minimal operating expenditure, and accumulated losses.
Considering these findings and circumstances, SEBI's adjudicating officer imposed penalties, with RHFL facing a fine of Rs 15 lakh, while Mr. Sudhalkar and Mr. Shah each received fines of Rs 2 lakh. Ms. Jain, RHFL's compliance officer, was penalized Rs 2.50 lakh.
This SEBI penalty underscores the importance of transparency, compliance, and accurate disclosure of financial information in the securities market to protect the interests of investors and maintain the integrity of the financial system.
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