Sebi bans Wadhawan brothers for five years in DHFL fund diversion case

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

The former promoters have also been prohibited from holding any key position in a listed company.

The ban on Rakesh Wadhawan and Sarang Wadhawan is for four years each, while former Chief Executive Officer and Joint Managing Director Harshil Mehta and former Chief Financial Officer Santosh Sharma have been debarred for three years each.

Sebi has imposed a total penalty of Rs 120 crore on all of them, with Kapil and Dheeraj each fined Rs 27 crore—the highest among the penalties.

The regulator alleged their involvement in a fraudulent scheme under which loans were disbursed to 87 “Bandra Book Entities” (BBEs) connected to each other and to the DHFL promoter group.

Sebi noted that 39 BBEs, which received Rs 5,662.44 crore from DHFL, transferred 40 per cent of this amount into 48 companies linked to the DHFL promoters. As of March 2019, the net outstanding loans to BBEs totalled Rs 14,040 crore.

The regulator said these large unsecured loans to related parties with extremely weak financials were “blatantly mischaracterised” as retail housing loans.

“The disguised nature of the BBE loans also delayed regulatory intervention and eventually threatened market stability,” said Sebi Whole-Time Member Ananth Narayan.

Sebi will determine the quantum of illegal gains or benefits from the scheme and may take further action.

It added that, had DHFL presented accurate financial statements and excluded “fictitious” interest income from loans to BBEs, the company would have reported losses every year between FY2007–08 and FY2015–16. Instead, it continued to post profits.

“To effect this elaborate deception, a fake virtual branch (‘Bandra branch’) and previously closed retail loan accounts were employed alongside three different accounting software systems, 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,” the order said.

Sebi noted that the publication of false financials misled stakeholders and compromised the integrity of share price discovery, inducing investors to remain invested under the belief that “all was well” at DHFL.

An interim order in the matter had been passed by Sebi in September 2020, imposing initial restraints.