SEBI in Religare Case Slaps Rs. 5 Crore Fine on Former RFL Chief Arora and Imposes 2 Year Market Ban

SEBI in Religare Case Slaps Rs. 5 Crore Fine on Former RFL Chief Arora and Imposes 2 Year Market Ban

The Securities Exchange Board of India (SEBI) barred the former Religare Finvest Ltd. CEO Kavi Arora (Notice No. 12) from securities market for two years and imposed a fine of Rs 5 crore in connection with a case of fund diversion.

The case pertains to the diversion of funds to the tune of Rs. 2,473.66 crore of Religare Finvest Ltd. (RFL), a subsidiary of Religare Enterprises Lyd. (REL), from Financial Year (FY) 2017-2018, in the garb of loans through layers of entities for the ultimate benefits of entities controlled by the erstwhile promoters- Malvinder Mohan Singh and Shivinder Mohan Singh.

REL is a listed company having its shares listed on NSE and BSE. RFL was a material subsidiary of REL during the investigation period. RFL is an RBI registered NBFC, involved in lending business.

On 14 March, 2019 SEBI had passed an interim order and then an confirmatory order in September, 2019 with respect to alleged diversion of around Rs. 2,315.09 crore from the Religare Enterprises Ltd. for the benefit of promoter/ promoter connected entities.

In July 2022, SEBI passed a final order in the matter where it imposed a penalty totalling of Rs. 60 crore on 10 entities, including Malvinder Mohan Singh and Shivinder Mohan Singh in a case involving the diversion of funds of RFL.

In its latest order, SEBI Whole Time Member (WTM) Ananta Barua found Kavi Arora was involved knee deep in the perpetration of scheme of diversion of funds.

Further, it was noted by SEBI that he was appointed as CEO and MD of RF on 14 November, 2011 and had resigned from the company in 2017. The alleged diversion of funds happened during the period of FY 2014-2015 to FY 2017-2018.

According to Noticee no. 12, no such powers were entrusted to MD of RFL by the AoA of RFL. Noticee no. 12 submitted that by virtue of his nomenclature, he was the MD of RFL, but in terms of its AoA, he was a normal Director exercising no special or substantial powers of management of affairs of RFL.

Furthermore, according to Noticee no. 12, as per the AoA of RFL, the management of the business of RFL was vested with its Board of Directors and Noticee no. 12, being the MD and CEO did not have any special powers in the management of RFL.

In this regard the SEBI on pursual of the definition of Managing Director as per Section 2(54) of the Companies Act, 2013 held that, the substantial powers exercised by the MD may be by virtue of AoA or by virtue of an agreement or by virtue of a resolution passed in the general meeting or by the board of directors.

Thus, the claim that the substantial powers exercised by the MD must be entrusted upon him by the AoA only, was held incorrect by SEBI.

“The aforesaid Article in the AoA of RFL is a resonance of the provision of Section 179 of the Companies Act, 2013. It vests the management of the business of RFL with the Board. However, it would be too naïve to hold that all the members of the Board would enter into day-to-day management of affairs of the company, which is usually handled by the executive management of the company. The Managing Director is the designated director of the Board who is appointed to execute the decisions of the Board through the executive management of the company,” added SEBI.

Further, the board found that out of the 125-crore loan given to RCL, SEBI investigation had revealed that an amount of Rs. 75 Crore stood diverted.

The SEBI also noted, that the financial statements of RFL were consolidated with the financial statements of REL on quarterly basis. The diversion of funds was never disclosed to the shareholders of REL, which mislead them to remain invested in the shares of REL or deal in the securities of REL.

Thus, the apparent diversion of funds from RFL (in the garb of loans), led to indirect manipulation of the price of shares of REL and thus, in terms of Regulation 4(1) SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations), such an act was fraudulent and an unfair trade practice relating to securities market.

Therefore, SEBI found that Noticee no. 12, had violated Regulation 4(1) of PFUTP Regulations, 2003.

SEBI also recorded that by indulging in the scheme of diversion of funds along with the Erstwhile Promoters, Noticee no. 12 had also violated the provisions of Section 12A(c) of the SEBI act, 1992 and Regulation 3(d) of PFUTP Regulations, 2003.

Thus, SEBI ordered that Kavi Arora shall be restrained from accessing the securities market and from buying, selling, or otherwise dealing in securities, directly or indirectly, for two years and imposed a fine of Rs. 5 core.