Order in the matter of Fortis Healthcare Limited

WTM/GM/IVD/19/2019-20

SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under Sections 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 and Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. In the matter of Fortis Healthcare Limited In respect of Religare Finvest Limited (PAN: AAFCS6801H)

BACKGROUND: 1. Pending investigation in the matter of Fortis Healthcare Limited (FHL), Securities and Exchange Board of India (SEBI) vide an ad interim ex-parte order dated October 17, 2018 read with order dated December 21, 2018 (together referred to as ‘the Interim Order’), had issued certain directions against Fortis Healthcare Limited (FHL), Fortis Hospitals Limited (FHsL), RHC Holding Pvt. Ltd. (RHC), Shivi Holdings Pvt. Ltd., Malav Holdings Pvt. Ltd., Malvinder Mohan Singh, Shivinder Mohan Singh, Religare Finvest Limited, Best Healthcare Pvt. Ltd. (Best), Fern Healthcare Pvt. Ltd. (Fern) and Modland Wears Pvt. Ltd. (Modland) (collectively referred to as ‘the Noticees’). Vide a confirmatory order dated March 19, 2019 (Confirmatory Order), SEBI confirmed the said directions, subject to certain modifications. The modified directions, as contained in Para 17 of the Confirmatory Order, are as follows:

i. The Noticee nos. 1 & 2 (viz. FHL and FHsL) shall continue to pursue the measures to recall the outstanding amount of Rs.403 crore (approx.) along with due interest from Noticee nos. 3 to 11 (viz. RHC, Shivi Holdings Pvt. Ltd., Malav Holdings Pvt. Ltd., Shri Malvinder Mohan Singh, Shri Shivinder Mohan Singh, Religare Finvest Limited, Best, Fern and Modland); ii. The Noticee nos. 3 to 7 and 9 to 11 (viz. RHC, Shivi Holdings Pvt. Ltd., Malav Holdings Pvt. Ltd., Shri Malvinder Mohan Singh, Shri Shivinder Mohan Singh, Best, Fern and Modland), pending

Order in the matter of Fortis Healthcare Limited completion of the investigation, shall not dispose of or alienate any of their assets or divert any funds, except for meeting expenses of day-to-day business operations, without the prior permission of SEBI; iii. The Noticee no. 8 (viz. Religare Finvest Limited), pending completion of the investigation, shall not dispose of or alienate any of its assets or divert any funds, without the prior permission of SEBI, except for meeting expenses of day-to-day business operations and/or complying with the terms of the ‘Corrective Action Plan’ as stipulated by the Reserve Bank of India; and iv. The Noticee nos. 6 and 7 (viz. Shri Malvinder Mohan Singh and Shri Shivinder Mohan Singh) shall not associate themselves with the affairs of FHL and FHsL in any manner whatsoever.

2. While the investigation in the matter is still ongoing, Religare Finvest Limited (hereinafter also referred to as ‘RFL’ or ‘Noticee no. 8’ or ‘the company’), vide its letters dated May 22, 2019 has inter alia requested SEBI for relaxation of the direction issued against it, as contained in para 17(iii) of the Confirmatory Order, so as to allow it to execute revival plan for the betterment of the company by taking required steps including the restructuring of its loans, securitization / assignment of its assets to Asset Reconstruction Companies (ARCs) etc. to reduce its standing liability. In this regard, a personal hearing was granted to RFL on June 19, 2019 and June 26, 2019, which were attended by its authorized representatives. In the meantime, RFL has submitted an application dated June 20, 2019 along with an affidavit, mentioning the specific reliefs sought, which are as under:

(a) To undertake restructuring of the existing loans with the lenders and also raise equity capital;

(b) To assign the SME gross NPAs to ARCs, borrowing, lending, complying with the directions of all regulatory authorities including the RBI and also allow various other activities which are a part and parcel of day to day business operations of any NBFC as per the prevailing regulatory framework.

3. As regards the specific grounds for seeking such relief, RFL vide the said letter dated May 22, 2019 and the application dated June 20, 2019 has submitted inter alia the following:

(a) The modification of directions vide the Confirmatory Order, by which RFL was permitted to dispose of or alienate any of its assets for complying with the terms of the ‘Corrective Action Plan’ (CAP) as stipulated by the Reserve Bank of India (RBI), falls short of providing RFL the flexibility to do business as a normal NBFC, including restructuring of its loans, assignment/securitization of assets, as also normal borrowing / lending operations etc. The restraint imposed vide para 17(iii) of the Confirmatory Order has caused grave prejudice and impediment to the revival actions being taken by the newly appointed board of RFL. It is facing extreme difficulty in carrying out its normal business as an NBFC.

(b) RFL has been going through difficult times in the recent past on account of mismanagement and misappropriation of funds orchestrated by the erstwhile promoters. The company is under RBI’s CAP since January 2018 which inter alia prohibits the company from expansion of credit/investment portfolios other than investment in government securities. Despite being under CAP, RFL has paid off Rs.4400 Crores to lenders /banks between January 2018 to March 2019 through direct recovery, foreclosures, NPA recovery and exit from non-core assets.

(c) As on March 31, 2019, the provisional balance sheet of RFL shows an outstanding debt liability of Rs.5852 Crores vis-à-vis standard loan book of Rs.3229 Crores. Consequently, there is an asset-liability mismatch in the balance sheet on account of difference in timing of maturity of the debt outstanding vis-à-vis the standard loan book. The current cash flows are insufficient to meet the immediate one year debt obligations leaving a cumulative cash gap. Between June to Sept 2019, repayment of Rs.1075 Crores (approx.) is due to banks and given the current profile of SME portfolio, the amount collected will not be sufficient to service the above debt. The banks have the first charge over all the assets of RFL and there is every possibility of the banks taking coercive steps to sell the assets to recover their dues. Therefore, the company had to think of alternatives to service the debt.

(d) The directors of RFL considered various options and had discussion with the RBI from time to time to reduce the loan liability and to get outside the CAP. The various alternatives which are available are restructuring the existing loans with the lenders (as per the new RBI circular) and to assign the SME gross NPAs to Asset Reconstruction Companies (ARCs) either through complete cash consideration deal or through combination of partly cash and partly under Security Receipts (SRs) mechanism. The company has filed a letter dated March 11, 2019 with RBI which clearly shows the involvement and supervision of RBI in the entire matter.

(e) In order to meet the above objective, the newly appointed board of RFL had appointed Ernst & Young (E&Y) to help prepare the debt resolution plan. The resolution plan has been presented to the Joint Lenders Forum (JLF) consisting of all lender banks and the details of the same have also been shared with RBI.

(f) The revival plan also contemplates infusion of funds into the company and towards this end, the required initial discussions were being held by RFL. However, considering the continuing restraints, there were reservations expressed by potential investors in relation to Para 17(iii) of the Confirmatory Order. This infusion of funds into the company will boost the company further and help in clearing the loans borrowed from lender banks.

(g) The prayers and relief sought for is incidental to the compliances and the revival of the company and will only ensure that the Resolution Plan and process as submitted to the lenders and the RBI is effectively implemented. The support from SEBI would only aid in the completion of the process.

(h) While the liability of the company in this matter, as per SEBI’s allegations, is limited to Rs.200 Crores, the SEBI Order has put restriction on the operation of RFL while dealing with their assets which is worth more than Rs.5000 Crores.

(i) The restructuring and the assignment of debt and assets would only be towards the reduction of the NPA and to ensure that all the dues are paid to the lender banks. There would be no payments made to anyone else.

(j) The restructuring exercises would not provide any liquidity to RFL to make any payments and would only result in adjustments of loans and the fulfilment of existing liability. It would also protect the interest of the lender banks and help in complying with the obligations towards loan liability. The entire exercise is being done to protect RFL from being declared as a defaulter which would result in banks taking coercive steps asb all the banks have a charge over the assets of RFL.

(k) RFL is taking all necessary steps for the revival of the company. The company is currently being run by a new management team which is completely free from the influence of Shri Shivinder Singh and Shri Malvinder Singh (Singh Brothers) or entities connected to them (erstwhile promoters) since February 2018. The shareholding of erstwhile promoters in Religare Enterprises Limited (REL), the holding company of RFL, has declined to 1.07% as on March 31, 2019. The reconstituted board of directors of REL has appointed new professional management to manage the affairs of REL and its subsidiaries, including RFL. None of the KMPs or directors of REL/RFL has any association or connection with the erstwhile promoters.

(l) REL/RFL has initiated action against various entities for recovery of money from erstwhile promoters and their connected entities.

(m) While the investigation could continue, the limited relief sought for would not hamper the same. RFL undertakes to abide by all such conditions which SEBI may impose in respect of the relaxations prayed for. RFL also undertakes to keep SEBI informed and intimated over every action and development without any delay.

4. Further, during the personal hearing on June 26, 2019, Shri Sanjay Palve, the CEO of RFL, has submitted inter alia the following:

(a) RFL is trying hard to come out of the CAP regime of the RBI for which the restructuring of its debts with the banks as well as assignment of its SME gross NPAs to ARCs is essential. The company is currently falling short of meeting the capital adequacy norms stipulated by the RBI. Thus, the company is also trying for infusion of funds by raising equity capital to meet the capital adequacy norms to revive the company. All these proposed exercises / processes are intertwined and need to be undertaken simultaneously for coming out of the CAP regime. Since the relaxation given in para 17 (iii) of the Confirmatory Order is limited to meeting expenses of day-to-day business operations and /or complying with the terms of the CAP as stipulated by RBI, the company is unable to give effect to the proposed restructuring exercises which are absolutely necessary for the revival of the company. Thus, the para 17(iii) of the Confirmatory Order should be relaxed so that RFL is able to undertake all such activities which it is permitted to undertake as an NBFC, subject to the regulatory supervision of the RBI.

(b) The repayment to lender banks and FIs is being monitored by RBI. The company is keeping the RBI informed of all the proposed exercises.

(c) The Religare group has 7000 employees and their future is at stake if RFL fails to revive itself.

5. I have carefully considered the reliefs sought by RFL and the grounds cited for such relief. I note that RFL is an NBFC, registered with the RBI, and functions under its overall regulatory supervision. As per RFL’s submissions, its provisional balance sheet shows that it has an outstanding debt of Rs.5852 Crores and a standard loan book of Rs.3229 Crores, as on March 31, 2019. RFL has submitted that its current cash flows are insufficient to meet the immediate one year debt obligations. It has further submitted that the banks have the first charge over all the assets of RFL and there is every possibility of the banks taking coercive steps to sell the assets to recover their dues. I further note that RFL is currently under the CAP regime of the RBI and is prohibited from expansion of credit / investment portfolios other than investment in government securities. Taking note of these facts, it appears that RFL is under severe financial strain and is staring at the possibility of default in meeting its debt obligations to the lender banks. Considering the prevalent circumstances, the proposed measures like restructuring of RFL’s debt with lender banks, assignment of its SME gross NPAs to ARCs and raising of capital to meet capital adequacy norms seem essential for survival and revival of the company.

I note that while the Confirmatory Order itself had provided relaxation to RFL for complying with the terms of the CAP, as stipulated by the RBI, the abovementioned proposed measures cannot be undertaken unless the direction contained in para 17(iii) is further relaxed. In this regard, I note that the CAP regime of the RBI is primarily concerned with early recognition of financial distress, prompt steps for resolution and fair recovery for lenders (ref. RBI Circular DNBS (PD) CC.No.371/03.05.02/2013-14, dated March 21, 2014). Given that the same intends to promote the financial health of a distressed NBFC by taking appropriate corrective actions, it would be in the fitness of things if the proposed exercises involving restructuring of debts/loans, assignment of SME gross NPAs to ARCs, raising of capital and other measures essential for revival of the company are allowed by relaxation of the directions contained in para 17(iii) of the Confirmatory Order. Thus, taking a holistic view, I am inclined to suitably modify the said directions. DIRECTIONS: 6. In view of the foregoing, I, in exercise of the powers conferred upon me under Sections 11, 11(4) and 11B read with Section 19 of the SEBI Act, 1992 and Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, hereby modify the direction specified at para 17(iii) of the Confirmatory Order, as under:

The Noticee no. 8 (viz. Religare Finvest Limited), pending completion of the investigation, shall not dispose of or alienate any of its assets or divert any funds, without the prior permission of SEBI, except for meeting expenses of day-to-day business operations and taking all measurers as it deems fit for revival of RFL (including restructuring of its debts/loans, assignment of its financial assets to ARCs, raising of capital, borrowing etc.), subject to strict adherence to the terms of “Corrective Action Plan” and any other norms stipulated by the Reserve Bank of India and provisions of all other applicable laws. 7. The above directions shall come into force with immediate effect and shall remain in force till further orders.

8. The above directions shall not have any bearing on the prima facie findings against RFL, recorded in the Interim Order, which are currently under detailed investigation. 9. A copy of this order shall also be served upon the Exchanges, the Depositories, FHL (Noticee no. 1) and FHsL (Noticee no. 2). Further, a copy of this order along with the relevant documents submitted by RFL in respect of its application seeking the abovementioned reliefs shall be forwarded to the Department of Non-Banking Supervision (DNBS), Reserve Bank of India, for information and appropriate action.

Place: Mumbai G. MAHALINGAM Date: June 28, 2019 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA