DHFL Fund Diversion Case: Why SEBI Banned Wadhawan Brothers From Securities Market for 5 Years

The Securities and Exchange Board of India (SEBI) has restricted promoters Kapil Wadhawan and Dheeraj Wadhawan for five years from the securities market for alleged fund diversion from Dewan Housing Finance Corporation (DHFL).

In addition to that, Rakesh Wadhawan, who was non-executive chairman, Sarang Wadhawan, a former non-executive director, Harshil Mehta, joint managing director & CEO and Santosh Sharma, a former CFO have also been barred by the markets regulator. The individuals were also fined an amount of Rs 120 crore.

As per the SEBI order, Kapil Wadhawan and Dheeraj Wadhawan have been banned from the securities markets for five years, while Rakesh and Sarang Wadhawan have faced a four-year ban. On the other hand, Harshil Mehta and Santosh Sharma have been prohibited for three years.

What the SEBI Order Says

During this time, the individuals cannot access the securities market, deal in securities in any manner, or hold any role such as director or key managerial personnel in listed companies, registered intermediaries, or public companies intending to raise funds from the market.

Besides the ban order, Kapil Wadhawan and Dheeraj Wadhawan have each been fined Rs 27 crore, while Rakesh Wadhawan and Sarang Wadhawan face penalties of Rs 20.75 crore each. Harshil Mehta has been fined Rs 11.75 crore, and Santosh Sharma faces a total penalty of Rs 12.75 crore.

What’s Behind this Ban

Issuing a 181-page order, the markets regulator noted that since 2006, DHFL, along with its promoters, directors, and key managerial personnel have engaged and participated in an "egregiously fraudulent scheme" to divert funds to "Bandra Book Entities" (BBEs) linked to the promoters.

As of March 31, 2019, DHFL's loans to BBEs stood at Rs 14,040.50 crore.

The order further mentioned that the BBEs were directly or indirectly connected to Kapil, Dheeraj Rakesh and Sarang.

According to the order, promoters issued huge unsecured loans to these entities despite their lack of assets or business, bypassing all due diligence, and falsely recording them as retail housing loans.

The regulator also found that the fraud operated in several steps, starting with large unsecured loans being extended to these BBEs even though they had no net worth, assets, or cash flows to justify such exposure. Secondly, all standard loan appraisal processes were deliberately bypassed.

In the third step, these weak intercorporate loans to related parties were misrepresented as retail housing loans, creating a false impression of the company's financial health for investors and other stakeholders.

"To effect this elaborate deception, a fake virtual branch ('Bandra branch') and previously closed retail loan accounts were employed, alongside three different accounting software, camouflaging the BBE loans as retail housing loans. In the initial years, well over 30 per cent of all loans of DHFL were to these BBEs," SEBI stated.

Despite the BBEs not making interest or principal payments, DHFL booked fictitious interest income, thereby allowing it to show increasing profits instead of losses between FY 2007-08 and FY 2015-16. These misleading financials misled shareholders and distorted DHFL's share price.

What Did Investigation Find?

As per SEBI, the main orchestrators of the fraudulent scheme were Kapil Wadhawan and his brother Dheeraj Wadhawan. Rakesh and Sarang Wadhawan were also involved through their roles on DHFL's board.

The investigation found that loans worth Rs 5,662.44 crore were disbursed to 39 BBEs, of which 40 per cent was subsequently routed to 48 other entities connected to the promoters.