Why Did SEBI Impose a Rs 120 Crore Fine and Ban the Wadhawan Brothers from the Market?

Mumbai, Aug 13 (NationPress) The Securities and Exchange Board of India (SEBI) has imposed a ban on Kapil Wadhawan, the former Chairman and Managing Director of Dewan Housing Finance Corporation Ltd, his brother Dheeraj Wadhawan, and four others, preventing them from participating in the stock markets for a period of up to five years. They have also been fined Rs 120 crore for allegedly diverting funds and manipulating financial records.

As per SEBI's findings, the primary offenders in this fraudulent operation were the Wadhawan brothers, each penalized with Rs 27 crore. Others involved include Rakesh Wadhawan, the Non-Executive Chairman, and Sarang Wadhawan, a former Non-Executive Director, both facing penalties of Rs 20.75 crore each. Furthermore, Harshil Mehta, the Joint Managing Director & CEO, and Santosh Sharma, the former CFO, have been fined Rs 11.75 crore and Rs 12.75 crore, respectively.

The SEBI investigation revealed that since 2006, DHFL, along with its promoters and key executives, participated in an “egregiously fraudulent scheme” to misappropriate funds to entities dubbed “Bandra Book Entities” (BBEs) associated with the promoters. By March 31, 2019, DHFL's loans to BBEs had soared to an alarming Rs 14,040.5 crore.

The order specified that significant unsecured loans were extended to these entities, which lacked any tangible assets or business operations, and these loans were falsely represented as retail housing loans.

The modus operandi involved issuing large unsecured loans to BBEs, despite their lack of net worth or cash flows, while circumventing standard loan evaluation processes.

Additionally, these dubious loans to related parties were misclassified as retail housing loans, misleading investors and stakeholders about DHFL's fiscal health.

To create this elaborate deception, a fictitious virtual branch ('Bandra branch') and previously closed retail loan accounts were utilized, alongside three distinct accounting software systems, to disguise the BBE loans as retail housing loans. Initially, over 30 percent of all DHFL loans were directed towards these BBEs, according to SEBI.

Despite the BBEs failing to make interest or principal payments, DHFL falsely recorded interest income, presenting an inflated profit margin from FY 2007-08 to FY 2015-16, thereby distorting the company's financial image and share price.

The investigation uncovered that loans amounting to Rs 5,662.44 crore were disbursed to 39 BBEs, with 40 percent of this amount funneled to 48 other entities tied to the promoters.

SEBI has barred the Wadhawan brothers from engaging in the securities markets for five years, while Rakesh and Sarang Wadhawan face a four-year ban. Mehta and Sharma have received a three-year prohibition.

Throughout these bans, they are prohibited from accessing the securities market, engaging in securities transactions, or holding any significant positions such as director or key managerial personnel in publicly traded companies or registered intermediaries.