On September 12, 2023, the Securities and Exchange Board of India (SEBI) passed an adjudication order against Reliance Home Finance Limited (“RHFL”).[i] The order brings forth the crucial role of SEBI’s disclosure norms, and how non-compliance can cost entities dearly.
The order deals with findings against four entities – the first of which is RHFL. The other three being the key managerial personnel (“KMP”) of RHFL during the examination period. The order revolved around violation of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015[ii] (“LODR Regulations”), SEBI (Issue and Listing of Debt Securities) Regulations, 2008[iii] (“ILDS Regulations”) and SEBI (Debenture Trustee) Regulations, 1993[iv] (“DT Regulations”).
The primary issues in consideration before the Adjudicating Officer (“AO”) against RHFL can be summarised below:
Regulation 32 of the LODR Regulations
Statement of deviation, i.e., any deviation in the use of the proceeds from the objects stated in the offer document must be submitted to the stock exchange.
Regulation 30(10) of the LODR Regulations
The listed entity must reply to all queries raised by stock exchange(s).
Regulation 54 of the LODR Regulations
Maintenance of 100% asset cover sufficient to discharge the principal amount at all times.
Regulation 56(2) of the LODR Regulations
Submission of documents/ disclosures to the Debenture Trustee (“DT”).
Regulation 16(1) of the ILDS Regulations
Creation of debenture redemption reserve as per the Companies Act, 2013.
SEBI’s Findings and Analysis
- The primary contention by SEBI was that RHFL diverted the proceeds raised from the issue of non-convertible debentures (“NCDs”) to certain body corporates including group companies of RHFL. SEBI relied on the qualified opinion of the statutory auditor’s report which stated “Loan advanced under the ‘General-Purpose Corporate Loan’ product with significant deviations to certain bodies corporate including group companies and outstanding as on 31 March 2020 aggregating to Rs. 7,965.24 crores…majority of Company’s borrowers have undertaken onward lending transaction and end use of the borrowings from the Company included borrowings by or for repayment of financial obligation to some of the group companies.”
- The AO thus held that the onward lending transaction which resulted in borrowings by or for repayment of obligations to some group companies clearly deviated from the objects of the issue of the NCDs. Consequently, the failure to report such a deviation to stock exchanges on a quarterly basis violated Regulation 32 of the LODR Regulations.
- Issue number 2 pertains to the failure to provide a specific and adequate reply to all queries of the stock exchanges. The background behind this issue was the issuance of a press release by RHFL, in which it indicated that there were no adverse findings in the forensic audit report carried out. RHFL claimed that it had disclosed details of lending to the tune of Rs. 7, 984 crores to indirectly linked entities. Later, a media article was published titled “RHFL gave Rs 12,000 crore loans to ‘indirectly linked’ borrowers: Forensic audit.” Questions were raised by stock exchanges about these contradicting figures, which were not answered by RHFL. Thus, as per the AO, there was a failure to adequately and specifically respond to all queries raised by exchanges, in violation of Regulation 30(10) of LODR Regulations, which mandates that a listed entity has to provide “specific and adequate reply to all queries raised by stock exchanges.”
- SEBI also alleged that RHFL failed to maintain 100% asset cover sufficient to discharge the principal amount at all times for NCDs issued, as mandated under Regulation 54 (1) and (2) of the LODR Regulations. The order noted how the Notes to the financial statements for the financial year (FY) 2019-20, RHFL disclosed that it could not maintain the required security cover. Additionally, RHFL responded to SEBI’s allegation by submitting that “on account of adverse conditions in the financial sector in the FY 2018-2019, (RHFL) was unable to comply with the requirement for maintenance of 100% of asset cover.” Owing to the admission of default by RHFL, the AO held that the allegations by SEBI stand clearly established.
- As per Regulation 56(2) of LODR Regulations, read with Regulation 15(1)(t) of the DT Regulations, periodical reports/ documents/ disclosures have to be submitted by the DT. RHFL claimed to have submitted all necessary disclosures, albeit with delay. However, they provided no documentary evidence of having done so, except from mere statements, as per the AO. Additionally, RHFL contended that due to the sudden onset of the COVID-19 pandemic and subsequent lockdown, they were unable to submit the documents to the DT. However, the AO rejected this contention as well, stating that the failure to submit documents sought by the DT extended even prior to the onset of the pandemic and nationwide lockdown.
- SEBI alleged that RHFL violated Regulation 16(1) of ILDS Regulations, which mandates the creation of a Debenture Redemption Reserve (DRR) as per Rule 18(7) of Companies (Share Capital and Debentures) Rules, 2014. However, the AO noted in the order, that these rules were amended on August 16, 2019. This amendment removed the requirement of maintaining a DRR for housing finance companies registered with the National Housing Bank. Thus, it was held that the non-creation of DRR was not a violation of the ILDS Regulations.
Finally, the AO imposed a penalty of Rs. 15,00,000 against RHFL, under Section 15A(b) and Section 15HB of the SEBI Act. This order brings to the fore the importance of complying with disclosure norms for listed entities. Of late, SEBI has focused on tightening disclosure norms for companies. This is evident from the recent amendments to the LODR Regulations which mandate strict timelines and criteria for determining materiality of events. Non-compliance with SEBI regulations can and will invite strict action from SEBI, as seen from this adjudication order.
[i] Adjudication Order in the matter of Reliance Home Finance Limited; available at: https://www.sebi.gov.in/enforcement/orders/sep-2023/adjudication-order-in-the-matter-of-reliance-home-finance-limited-_76787.html
[ii] Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015; available at: https://www.sebi.gov.in/legal/regulations/aug-2023/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-august-23-2023-_76498.html
[iv] SEBI (Issue and Listing of Debt Securities) Regulations, 2008; available at Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993; available at: https://www.sebi.gov.in/legal/regulations/aug-2023/securities-and-exchange-board-of-india-debenture-trustees-regulations-1993-last-amended-on-august-18-2023-_76330.html
Photo by Kubra Cavus: https://www.canva.com/photos/MAEEZhVPcRI-home-finance/
The order passed by the AO brings to the fore the importance of complying with disclosure norms for listed entities. Of late, SEBI has focused on tightening disclosure norms for companies. This is evident from the recent amendments to the LODR Regulations which mandate strict timelines and criteria for determining materiality of events. Non-compliance with SEBI regulations can and will invite strict action from SEBI, as seen from this adjudication order.