SEBI bars promoters from company affairs after Rs 2315 crore fund diversion through subsidiary fixed deposits

SEBI Board issued an interim ex-parte order following investigation into financial mismanagement and diversion of approximately Rs. 2315.09 crores from subsidiary for promoters' benefit through fixed deposits. The Board directed two companies to recall all loans extended to 23 entities within three months with interest, while restricting asset disposal and fund diversion except for daily operations without SEBI permission. Two specific entities were barred from associating with the companies' affairs. Order issued under sections 11(1), 11(4)(d), 11B, and 19 of SEBI Act pending detailed investigation to protect shareholders' interests.

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Issues Involved
1. Financial Mismanagement and Diversion of Funds
2. Non-Compliance with Board Approved Investment Policy
3. Improper Practices in Corporate Loan Book
4. Misrepresentation of Financial Position
5. Violation of SEBI Regulations

Issue-wise Analysis

1. Financial Mismanagement and Diversion of Funds
Background: SEBI received complaints alleging financial mismanagement and diversion of funds in Religare Finvest Ltd (RFL), a subsidiary of Religare Enterprises Limited (REL), for the benefit of promoters and group companies of REL.

Findings:
- Fixed Deposits with Lakshmi Vilas Bank (LVB): RFL placed Rs. 750 Crores in fixed deposits with LVB, which were used to secure loans for promoter group entities Ranchem Private Limited and RHC Holding Private Limited. These funds were ultimately used to pay off debts and for internal purposes of RHC Holding.
- Investment in Non-Convertible Debentures (NCDs): RFL invested Rs. 200 Crores in NCDs of OSPL Infradeal Private Limited and gave a corporate loan of Rs. 50 Crores to Bharat Road Network Limited (BRNL). These transactions were part of back-to-back loan arrangements benefiting RHC Holding.
- Corporate Loan Book (CLB): RFL's unsecured loans under CLB increased despite RBI's concerns. Loans were given to various entities, which ultimately benefitted promoter group companies.

2. Non-Compliance with Board Approved Investment Policy
Findings:
- Fixed Deposits: RFL placed fixed deposits with LVB at lower interest rates while having higher-cost working capital loans, resulting in a direct loss.
- NCDs and Corporate Loans: Investments and loans were made without proper documentation and board approval, indicating non-compliance with RFL's investment policy.

3. Improper Practices in Corporate Loan Book
Findings:
- RBI's Concerns: RBI raised concerns about the creditworthiness of borrowers and improper practices in RFL's CLB. Despite assurances to reduce CLB exposure, it increased significantly.
- Loans to Group Companies: Loans were routed through unrelated entities to ultimately benefit promoter group companies, indicating misuse of funds.

4. Misrepresentation of Financial Position
Findings:
- Auditor's Qualification: PricewaterhouseCoopers (PwC) highlighted amounts doubtful of recovery and RBI's concerns in their audit report.
- Rolling Over Loans: Loans were rolled over to misrepresent the financial position of REL and RFL, violating disclosure requirements.

5. Violation of SEBI Regulations
Findings:
- Fraudulent Practices: The diversion of funds and non-disclosure of related party transactions violated Section 12A(a), (b), and (c) of the SEBI Act, 1992, and Regulations 3(b), (c), and (d), 4(1), and 4(2)(f) & (r) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
- Non-Disclosure: Funds routed through unrelated entities were not disclosed in the books of REL, violating the Listing Agreement and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Orders Issued
1. Recall of Loans: REL and RFL are directed to recall all loans amounting to Rs. 2315.09 Crores from the entities involved within three months.
2. Asset Disposal Restriction: The entities involved are prohibited from disposing of or alienating any assets or diverting funds without SEBI's prior permission.
3. Disassociation of Promoters: The promoters, Shri Malvinder Mohan Singh and Shri Shivinder Mohan Singh, are barred from associating with the affairs of REL and RFL.

Conclusion
The judgment highlights significant financial mismanagement and diversion of funds by the promoters of REL and RFL, resulting in violations of SEBI regulations. SEBI's interim ex-parte order aims to protect investor interests and maintain market integrity pending a detailed investigation.

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