SEBI | Fraudulent misstatements in financial statements will amount to misrepresentation /unfair trade practice under Regulation 4(2) of SEBI PFUTP Regulations, 2003

 Securities Exchange Board of India: G. Mahalingam, Whole-time member retrained the promoters of the Dewan Housing Finance Limited i.e. DHFL from accessing the securities market.

Dewan Housing Finance Limited (“DHFL”) was incorporated on April 11, 1984, and registered with National Housing Bank (NHB) under Section 29A of the National Housing Bank Act, 1987 has been carrying on the business of providing loans to retail customers for construction or purchase of residential property, loans against property, etc.

The equity shares of the Company are listed on BSE Limited and NSE Limited. The Company had issued Non-Convertible Debentures (NCDs) through public issue as well as private placements, which are listed on the stock exchange(s)and had more than Rs. 24000 crores worth of outstanding NCDs issued through the public issue as on May 31, 2019.

On January 29, 2019, Cobrapost, a media portal, published an article alleging that the promoters of the Company- Mr Kapil Wadhawan and Mr Dheeraj Wadhawan, had siphoned off more than Rs. 31,000 crores of public money primarily through grants and advances to shell companies pursuant to which DHFL issued a press release stating that the allegations are baseless.

On November 20, 2019, Reserve Bank of India (“RBI”) vide its Order superseded the Board of Directors of DHFL and appointed Shri. R Subramaniakumar as the Administrator and later filed an application to initiate corporate insolvency resolution process (“CIRP”) under Section 227 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and National Company Law Tribunal, Mumbai Bench admitted the application and confirmed the appointment of Shri R Subramaniakumar as the administrator. Grant Thornton India LLP (“Transaction Auditor”) was appointed to assist the RP in conducting a transaction audit of the Company which filed an initial report stating that certain transactions entered into by DHFL during the period FY 2006-07 to FY 2018-19 are fraudulent in nature, as per Section 66 of the IBC.

Observations made in the initial report

  1. DHFL has entered into certain fraudulent transactions, which were shown as bonafide transactions in its published financial statements as well as corporate announcements disseminated in the public domain.
  2. The Company had created a ‘logical partition’ in the Enterprise Resource Planning (ERP) Software used for bookkeeping and loan management purposes to store data pertaining to only one branch – Bandra, which was a virtual branch having a parallel set of books of accounts maintained by the Company and all the loan accounts presented in the said module appeared to be non-genuine.
  3. Out of Rs 23,815 crores shown as disbursed to Bandra Book entities in the accounts of the Company, only Rs 11,755.79 crores was actually disbursed to 91 entities, but was shown as 2, 60,315 home loan accounts in the books of the company.
  4. On verifying the financial statements of 50 of the said 91 entities it was noted that 34 entities had invested a portion of the loan amount received from the lender in companies which were linked to the promoters of DHFL having weak financial strength. These loans were unsecured and given without taking any collateral.
  5. The report concluded that the Company suffered a notional loss of Rs 3,348 crores as the interest charged on such loans was lower than the interest charged for other similar entities by the Company in the normal course of business.

Order by the Board

The Board observed that financial statements of a company are relied upon by debt investors for assessing the financial health and repayment capacity of the Company and hence their investment decisions would have been sullied by these fraudulent misstatements. The interests of investors who bought equity shares of the Company during this period have also been prejudiced because the financial statements of the company did not state the true and fair picture of the affairs of the Company

The Board relied on Regulation 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 and Regulation 4(1) of SEBI, Regulation 4(2)(f) and Regulation 4(2)(k)  (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (“SEBI PFUTP Regulations, 2003”) which provides as under-

12A. No person shall directly or indirectly—

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange;

(c) No person shall directly or indirectly engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder.

4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a manipulative, fraudulent or an unfair trade practice in securities markets.”

Regulation 4(2)(f) of SEBI PFUTP Regulations, 2003

“Dealing in securities shall be deemed to be a manipulative, fraudulent or an unfair trade practice if it involves knowingly publishing or causing to publish or reporting or causing to report by a person dealing in securities any information relating to securities, including financial results, financial statements, mergers and acquisitions, regulatory approvals, which is not true or which he does not believe to be true prior to or in the course of dealing in securities.”

Regulation 4(2)(k) of SEBI PFUTP Regulations, 2003

“Dealing in securities shall be deemed to be a manipulative, fraudulent or an unfair trade practice if it involves disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading and which is designed or likely to influence the decision of investors dealing in securities.

The Board thus held that the interest of investors who take the decision of investing in the securities of the Company on the basis of financial position of the Company and disclosures made in the financial statements have been, prima facie, affected adversely due to the aforesaid transactions entered into by the Company and the consequent fraudulent misstatements in the financial statements of the Company and have violated Section 12A(a), (b) and (c) of the SEBI Act, 1992, Regulation 3(b), (c), (d), (d), Regulation 4(1) and Regulation 4(2)(f), (k) and (r) of the SEBI PFUTP Regulations, 2003 and Rakesh Kumar Wadhawan and Kapil Wadhawan have prima-facie violated Regulation 4(1) and other related provisions of the SEBI LODR Regulations, 2015.

The Board thus restrained the defaulting promoters from accessing the securities market and are prohibited them from buying, selling or otherwise dealing in securities in any manner whatsoever, either directly or indirectly and associating themselves with any listed public company and any public company as directors/ promoters which intends to raise money from the public or any intermediary registered with SEBI.

In view of the above, the order was passed without any prejudice to Direction(s) or Order that may be passed by NCLT during CIRP of the Company under IBC, 2016.[Dewan Housing Finance Corporation Ltd., In Re., 2020 SCC OnLine SEBI 138, decided on 22-09-2020]


Arunima Bose, Editorial Assistant has put this story together

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