New Delhi: Yesterday (August 23), the Security and Exchange Board of India (SEBI) barred Anil Ambani and 24 other entities, including former key officials of Reliance Home Finance Ltd, from the securities market for five years for diversion of funds from the companies.
According to SEBI, its investigation had revealed that significant amounts of funds were misused under the watch of Anil Ambani and other key figures of the companies.
The following article, written in December 2021 by Sucheta Dalal, managing editor of Moneylife and commentator on capital markets, provides important context behind SEBI’s much-delayed action against the industrialist.
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On 29th November, when the Reserve Bank of India (RBI) superseded the board of Anil Ambani-run Reliance Capital Ltd (RCL) and placed it under an administrator, the overwhelming reaction was that, finally, the regulator has bestirred itself to act! Or, as our columnist V. Ranganathan says, the RBI has moved with glacial speed.
RCL and the Anil Dhirubhai Ambani Group (ADAG) have been in deep trouble for a long time, certainly as long as Infrastructure Leasing & Financial Services (IL&FS), at least. Yet, while the government and the RBI superseded the board of IL&FS in September 2018 and initiated similar action in Dewan Housing Finance Ltd (DHFL), Yes Bank, Punjab and Maharashtra Cooperative (PMC) Bank and the two SREI companies since then, RCL was given a very long rope.
A report in Business Standard suggests that the RBI waited until RCL had a negative net worth of Rs 7,610 crore and a negative capital ratio of 45% (at the end of March 31, 2021) before summoning up the courage to act. Ranganathan, in his article mentioned above, puts RCL’s negative net worth at Rs 15,912 crore!
A chronology of ADAG’s financial troubles is a good indication of how reluctant the regulator has been to act against the powerful Anil Ambani. RCL’s consolidated debt was estimated to be Rs 26,887 crore at the end of March 2021; ADAG’s financial liabilities are significantly higher. RCL had over 20 subsidiaries and continues to have some valuable assets such as Reliance General Insurance (100% held by it) and Reliance Nippon Life Insurance (51% holding), even after many sell-offs.
• At the end of April 2019, credit rating agencies had downgraded ADAG companies, viz., Reliance Commercial Finance and Reliance Home Finance, to default category. ADAG’s spokespersons were quick to issue statements to paper over these financial problems. Both entities were on the verge of insolvency resolution, with Authum Investment and Infrastructure emerging a possible acquirer at a steep haircut to lenders. The fate of the deal remains uncertain after the RBI’s latest move.
• A major red flag was thrown up in June 2019 when Price Waterhouse & Co (PWC) resigned as the statutory auditor of Reliance Capital as well as Reliance Home Finance, citing unsatisfactory response to certain observations. The management, under Anil Ambani, responded with typical aggression and publicly disagreed with PWC’s findings; but, instead of waking up, the RBI continued to sleep for another 2.5 years! PWC was under tremendous pressure from ADAG at that time and would certainly have conveyed its misgivings to the RBI. Why was it ignored?
• In the same month (June 2019), a report by Risk Event-Driven and Distressed Intelligence (REDD) exposed how RCL and DHFL, among others, used ‘box companies’ to fudge accounts and obfuscate lending to related entities. REDD specifically pointed out that Reliance Capital and its two affiliates, Reliance Home Finance and Reliance Commercial Finance, had engaged in funding through box companies. The report said loan outstanding to these box companies was Rs 137 billion (Rs 13,700 crore) then.
Photo: Moneylife.
• To evade recovery action to collect over US$700 million (around Rs 5,000 crore) lent to Reliance Communications by three Chinese lenders against personal guarantees by Anil Ambani, he declared himself bankrupt in 2019 in a London court. The telecom company’s outstanding was then estimated at nearly Rs 76,000 crore (or US$10 billion). Reliance Naval & Engineering Ltd, which was to build patrolling vessels for the Indian Navy, was already under bankruptcy proceedings.
Yet, Indian regulators pretended like it was business as usual. IRDAI (Insurance Regulatory and Development Authority of India), the insurance regulator, in violation of its own ‘fit & proper’ criteria, allowed Anil Ambani to remain chairman of the two insurance subsidiaries of RCL. More pertinently, Anil Ambani’s holding in RCL had then dwindled to the single digits; but even this did not matter to the regulator.
• In December 2020, the Securities and Exchange Board of India (SEBI) set up its corporation finance investigation department to probe the diversion of funds from listed entities, but there is no action on Reliance Home Finance, despite the forensic audit having revealed a diversion of nearly Rs 8,000 crore to repay loans, statutory dues, corporate expenses, etc of related entities (Brahmayya & Co report of May 7. 2020).
Earlier, a forensic audit by Grant Thornton had also found a diversion of Rs 12,000 crore (Reliance Home Finance gave Rs 12,000 crore loans to ‘indirectly linked’ borrowers: Forensic audit) by the company as well as several anomalies in the credit appraisal and disbursal process. The company had aggressively denied this and claimed that the forensic audit “found no fraud, embezzlement or diversion and siphoning of funds in the company.” Such aggression and defamation notices have been effectively used by ADAG to shut up the media, investigators and whistle-blowers over the years.
• In September 2020, Indian Bank had classified its loan exposure to Reliance Home Finance as fraud. Even that did not trigger stringent action by any financial regulator.
• Even before the RBI’s decision to appoint an administrator, RCL’s debenture trustee had initiated recovery action which was mired in litigation. Several banks have already sold their loans to an asset recovery company and debenture-holders are now stuck with over 95% of RCL’s outstanding debt. Ironically, Reliance Capital, in a statement, blames these multiple litigations for stalling the resolution of its payment issues.
• In October 2021, The Indian Express, as part of the Pandora Papers investigation, revealed how the Anil Ambani group, which had declared itself bankrupt, had borrowed and invested US$1.8 billion through 18 offshore entities between 2007 and 2010. So far, those implementing the draconian Prevention of Money Laundering Act appear not to have noticed this.
• Soon after the IL&FS board was thrown out, the media had reported that Anil Ambani had begun to reduce his stake in RCL from 52%; some of it may have been the sale of pledged shares. But, by March 2020, he held less than 2% of the capital and the public sector insurer, the Life Insurance Corporation (LIC), was the single largest shareholder with a 2.98% stake.
The RBI action raises several questions, many of which suggest that strong political support may have prevented regulators and public sector entities from doing their job. Similar questions were raised about the founder-CEO and, later, chairman of IL&FS Ravi Parthasarathy’s politically powerful connections.
In 2018, the Serious Frauds Investigation Office (SFIO) had asked the RBI to investigate (SFIO Suspects RBI Top Official’s Collusion with IL&FS) the possible role of a senior official in turning a blind eye to the serious financial problems at IL&FS. There has been no development on this. The SFIO’s aggressive investigation petered out by 2020, when it ought to have been asking similar questions about the RBI’s lack of action in RCL as well.
Like the insurance regulator, SEBI also forgot its ‘fit & proper’ rules for bankrupt directors, which have been aggressively applied when the founders are less powerful. LIC, a public sector insurer, also ought to explain why it has hung on to more shares in RCL than Anil Ambani – if the answer is poor investment skills and research, it would be a bigger worry for all Indians. The State Bank of India added to the confusion by withdrawing the ‘fraud’ tag against Reliance Infratel Ltd in June 2010 without explanation.
These actions, along with Reliance Infrastructure’s Rs 2,800 crore arbitration award in September 2021 against Delhi Metro Rail Corporation, combined with its political clout, created the impression that ADAG would be allowed to slither out of its problems once again, even after Anil Ambani had declared himself bankrupt in a London court. Indeed, despite all his financial troubles, his family announced an investment of Rs 400 crore in Reliance Infrastructure with plans to invest another Rs 500 crore via creeping acquisition.
The long history of inaction by all three regulators with regard to Anil Ambani and his companies is scandalous. The only reason our regulators acted like the proverbial three monkeys is, probably, political pressure. This, again, exemplifies a simple principle of regulatory action in India: Show me the person and I will show you the rule. Investors and lenders suffer the losses.
This article first appeared on moneylife.in. It has been lightly edited for style.
