A public interest litigation (PIL) filed against the Securities and Exchange Board of India (SEBI) in the Dewan Housing Finance Ltd (DHFL) matter came up before the bench of chief justice Sanjib Banerjee and justice Senthilkumar Ramamoorthy of the Madras High Court (HC) on Tuesday. The Madras HC has issued a notice to SEBI and the matter has been listed for hearing on 13th July. In his petition, Ranganathan V (the petitioner and Moneylife columnist) has said that SEBI, credit rating agencies, auditors and others were lax in performing their role, i.e., to vet DHFL's functioning, due to which investors lost money in excess of Rs40,000 crore.
The petition urges the Court to direct SEBI to investigate, solve and settle the crisis that arose out of the fraudulent affairs of the DHFL and its key managerial personnel (KMP).
The petition has prayed for a direction to SEBI to statutorily perform its duty by taking action in furtherance to his representation (submitted on SCORES platform) dated 15th June as per SEBI (Prohibition Fraudulent and Unfair Trade Practices Regulations), SEBI (Issue and Listing of Debt Securities) Regulations, Securities Contracts (Regulation) Act, SEBI (Listing Obligations and Disclosure Requirements) Regulations read with Securities Exchange Board of India Act and allied rules and regulations issued thereunder.
Mr Ranganathan, who retired as a partner at Ernst & Young, Chennai, heading the tax and regulatory advisory practice, has said in his petition “It is in the common knowledge that the DHFL scam is one of the India’s largest scam in the history of the independent India and there are several thousands of depositors who have lost monies by investing on the platform of the DHFL ... investors were made to believe that DHFL has a sound financial health and that the investors will yield profit in the platform floated by the DHFL.”
The scam has caused a gargantuan loss to the exchequer as well as the general public investors who had reposed the entire trust and faith to invest in the non-convertible debentures (NCDs) of the DHFL, the petition asserted .
Therefore, this scam-ridden entity along with the key managerial personnel ought to be proceeded against under the provisions of the SEBI Act, 1992 considering the enormous powers available to the SEBI, the plea appealed.
In 2019, an exposé by investigative media outlet, Cobrapost highlighted how DHFL used Credit Rating Agencies and statutory auditors as deceptive tools to by-pass regulatory provisions under the SEBI Act and to defraud innocent investors and creditors, the petition recalls.
Despite wide-ranging powers being available to SEBI, there was no action forthcoming towards solving and settling the crisis arising out of the DHFL scam, the petitioner noted. As such, it is a fit case for the HC to exercise its powers under Article 226 of the Constitution to direct SEBI to conduct a probe in the matter and pass and order under Section 11 of the SEBI Act, the petition further argues.
The petition added “DHFL and its KMPs used Statutory Auditors and Credit Rating Agencies as deceptive devices in contravention of the provisions of SEBI Act 1992 and the other Rules and Regulations made thereunder for the sale of Debentures Listed on NSE. Further, DHFL and its KMPs used Statutory Auditors and Credit Rating Agencies as a vehicle to defraud in connection with issuance of debentures which are listed in NSE. The entire modus operandi adopted by the accused persons entails regulatory contraventions under the provisions of the SEBI Act thereby deceiving the innocent investors.”
Mr Ranganathan said in his petition, “As an investor, I wish to submit that the interest of the market ought be considered as pristine and its purity, credibility should not be put in jeopardy due to the fraud committed by the erring entity and its key managerial personnel. In any event, the interest of the investors ought to be treated as paramount in the cases of dealing with economic fraud. There are various investors who have suffered and I am one among the other investors who have lost monies due to the deceitful action committed by the erring entity namely -DHFL. It is further shocking to note that these key managerial personnel have also conspired to commit regulatory contradictions thereby putting the interest of the investors in jeopardy.”
Highlighting the plight of NCD-holders, Mr Ranganathan said that the “…default of interest of debentures was an outcome of various deliberate systematic and well planned fraud conducted by DHFL and its KMPs in collusion with each other over past several years”. He then explained in point-wise format how various rules and regulations were systematically and blatantly violated.
The petition further stresses that DHFL and its KMPs had appointed statutory auditors and credit rating agencies to paint a rosy picture of DHFL as a profitable organisation and used them as artifice to defraud in connection with issue or subscription of debentures which listed on BSE and NSE. Investors were, thus, induced into investing their hard-earned monies.
“DHFL and its KMP being the issuer completely failed to ensure that the security created to secure the debt securities is adequate to ensure 100% asset cover for the debt securities. Contrary to it, they further liquidated the secured assets of DHFL,”the petitioner pointed.
"According to the petitioner, investors may have lost in excess of Rs 40,000 crore, with regulators, credit-rating agencies, auditors and others who were required to vet and look into the functioning of DHFL, its activities and how the funds received from depositors were...lacking in their functioning," the bench said.
The bench issued notice to SEBI after hearing arguments by advocate Nithyaesh Nataraj who appeared for the petitioner, Mr Ranganathan who had invested Rs30 lakhs to purchase NCDs issued by DHFL.
The petition highlights that DHFL was given the highest 'AAA' rating by credit rating agencies. “If it is too good to be true, it is untrue,” the chief justice observed as he heard the submissions.
The bench asked if SEBI had taken any action in the matter and advocate Nataraj submitted that the SEBI, in a measure that was 'too little, too late', held the DHFL promoters as guilty under the SEBI PFUT regulations and restrained them from accessing the securities market. This does not help any of the investors, Mr Nataraj pointed out.
Since SEBI was not represented in the hearing, the Court decided to issue a notice and adjourn the matter so that SEBI may give its response. Chief justice Banerjee noted that in matters such as this, the regulators could object to court interference.
Advocate Nataraj responded that 'commercial wisdom' and 'financial matters' are phrases used by regulators when they are asked questions in such cases to state that the court should not interfere. He contended that while people invest trusting the system, SEBI is seen outsourcing its work to others.
The petition was filed through advocates Nithyaesh Natraj, Vaibhav R Venkatesh and Anirudh A Sriram.
Enforcement Directorate (ED) is also conducting a detailed investigation of DHFL, and its former promoters Kapil Wadhawan and Dheeraj Wadhawan for their role in conducting various offences of money laundering.