Investigations by the SEC and CBI into the ₹2,850 crore investment by Reliance Mutual Funds in YES Bank's AT-1 Bonds
The Enforcement Directorate (ED) and Central Bureau of Investigation (CBI) are jointly investigating a high-value transaction involving Reliance Mutual Fund and YES Bank's Additional Tier-1 (AT-1) bonds. The probe centres on allegations of a quid pro quo deal, diversion of funds, and loan fraud.
Key details from the investigation reveal:
- Quid Pro Quo Allegation: The ED suspects that Reliance MF's large AT-1 bond investment was part of an illicit quid pro quo arrangement involving promoters of YES Bank and possibly Reliance Group entities.
- Fund Diversion and Hidden Entities: Information from SEBI to the ED alleges that Reliance Infrastructure diverted funds—reported as inter-corporate deposits (ICDs)—to various Reliance Group companies through a previously undisclosed related party called ‘C Company.’ This diversion is reportedly part of a larger sum exceeding ₹10,000 crore.
- Loan Fraud and Illegal Diversion: The probe found that from 2017 to 2019, roughly ₹3,000 crore was illegally diverted via YES Bank loans. There are indications that YES Bank promoters received money in their concerns just before loan approvals. Loan approvals to RAAGA companies were allegedly manipulated with backdated approvals, absence of due diligence, and breaches of regulatory bans.
- Loan Restructuring and Financial Mismanagement: Reliance Infrastructure is accused of orchestrating a ₹5,480 crore loan restructuring deal from which only ₹4 crore in cash was recovered, with the rest routed through defunct power distribution companies (discoms) tied to RAAGA, raising suspicion of deliberate financial mismanagement.
- Broader Enforcement Actions: The ED has conducted searches at over 35 premises linked to Anil Ambani and Reliance entities in Mumbai and Delhi under the Prevention of Money Laundering Act. Around 50 companies and 25 individuals are under the scope of investigation.
The investigations also involve older entities such as Reliance Communications and Reliance Home Finance. The AT-1 bonds, which allow banks to write off debt without returning principal to investors, were ultimately written off during YES Bank's restructuring. Market watchers remain cautious about the outcome of the case and its potential impact on investor confidence.
Shares of Reliance Power and Reliance Infrastructure dropped sharply following the raids. The Reliance Mutual Fund, associated with Anil Ambani, has invested ₹2,850 crore in YES Bank's AT-1 bonds. The ED is investigating this investment, suspecting it as part of a quid pro quo arrangement.
In the past, SEBI has issued penalties against Anil Ambani and 24 others in related matters. The outcome in this case may form a landmark precedent for corporate governance in the mutual fund sector. The CBI is supporting the Enforcement Directorate in the investigation. Only ₹4 crore came back in cash, while the remaining ₹6,499 crore was linked to defunct energy firms with no operations, making recovery unlikely.
The investigations are ongoing, with more details expected as enforcement agencies continue their probe.
- The investigation involving Reliance Mutual Fund and YES Bank's AT-1 bonds entails allegations of a quid pro quo deal, not only between the parties mentioned but potentially extending to Reliance Group entities.
- The probe also uncovers instances of fund diversion, where Reliance Infrastructure reportedly diverted funds to various Reliance Group companies and a previously undisclosed related party, likely impacting the flow of general-news and finance within the business sector.
- In addition to allegations of loan fraud and illegal diversion, there are concerns about financial mismanagement and questionable loan restructuring deals, potentially affecting investing decisions and the overall integrity of the industry, especially in crime-and-justice and corporate governance sectors.
