Fraudulent misstatements in financial statements fall within the ambit of Regulation 4(2) of SEBI PFUTP Regulations, 2003

In the matter of Dewan Housing FinanceLimited vs Securities and Exchange Board of India, a whole-time member of SEBI vide an order dated 22nd September 2020 restrained the promoters of DHFL from accessing the securities market.

Dewan Housing Finance Limited (“DHFL”) has been carrying on the business of providing loans to retail customers for construction or purchase of residential property and loans against property. As on May 31, 2019, DHFL had more than Rs. 24000 crores worth of outstanding Non-Convertible Debentures (NCDs) issued through public issue.

In the instant case, a media portal published an article alleging that the promoters of the Company have 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.

The question raised before SEBI was whether the financial statements of the company for the period ranging from FY 2007 to FY 2019 depict a true and fair view of the state of affairs of the company.

At this juncture, the board relied on an initial report generated during the Corporate Insolvency Resolution Process (“CIRP”), which stated that DHFL has entered into certain fraudulent transactions. 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 promoters of DHFL having weak financial strength and these loans were given without taking any collateral.

Additionally, 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. Further, 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.

Whilst dealing with the aspect as to whether the contents recorded in the Initial Report and Corporate Announcements fall within the ambit of unfair trade practices, reliance was placed on Regulation 4(2)(f) of SEBI PFUTP Regulations, 2003. The board further propounded that disseminating information which the disseminator, i.e., the promoters in the instant case, knew to be false or misleading, also, knowingly planting false or misleading news which may induce sale or purchase of securities will be categorized as a manipulative, fraudulent or an unfair trade practice.

The board by invoking Regulation 4(2)(k) and 4(2)(r) of SEBI PFUTP Regulations, 2003 concluded that DHFL has indulged into fraudulent transactions, which were shown as “Bonafide transactions” in its published financial statements.

On perusal of the above-mentioned facts, the board concurred with the findings recorded in the Initial Report and stated that 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.

Consequently, the promoters were prohibited from buying, selling or otherwise dealing in securities in any manner whatsoever, either directly or indirectly and also restrained from 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.