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Sebi stuns Mukesh Ambani with its final dash in a 12-year-old marathon RPL share-sale case

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While Sebi’s order could boost public confidence in regulatory bodies, its long struggle to get there tells its own story. The proceedings were fast-tracked with quick hearings only over the past three years.

Ambani claimed ignorance of the mode of the share sale, but Sebi found him “liable for the manipulative trades” and fined him and related entities.

Amar Singh would be turning in his grave. Had he been around today, the wily politician would have perhaps made a characteristic “Tum karo toh raas leela…”- type quip or even recorded a video and put it out on Twitter, like he often did in his last days.

A 2008 complaint by Singh, the then general secretary of Samajwadi Party, to Securities and Exchange Board of India (Sebi) chairman CB Bhave had set the ball rolling on one of the most followed securities-markets cases in recent history, involving illegal gains made by Reliance Industries (RIL) in the sale of 4.1% stake in its then subsidiary Reliance Petroleum (RPL).

After 12 years since Singh wrote to Bhave, the market regulator 􀂄finally fined Reliance Industries and its chairman Mukesh Ambani INR25 crore and INR15crore, respectively, and two other entities related to Anand Jain, a one-time confidant of Ambani, INR30 crore.

Three years ago, Sebi had passed an order disgorging RIL of illegal gains of INR447 crore pertaining to the same transaction along with 12% interest. The quantum of the latest penalty was fixed taking into account this disgorgement, the Sebi order said.

Though Ambani had contended that the responsibility of the transactions wasdelegated to two senior RIL o􀂃icials – CFO Alok Agarwal and controller of accountsLaxmidas V Merchant – and that he was not aware of the details, Sebi found himaccountable as the managing director of the company.

The intervention by Singh, who considered himself a personal friend of Mukesh’syounger brother Anil, was significant because his complaint brought to fore the role of agent entities. The bad blood between the brothers and their multiple battles were no secret.

Singh’s complaint had named 10 of these agent entities, saying they had traded in RPL futures and options (F&O) and booked massive gains. His estimate then was about INR401 crore. Sebi would eventually put the gains made at INR513 crore.

Hedge or manipulation?

Though the RIL’s quiet sale of shares worth INR4,023 crore in the open market and the movements in the F&O market created a lot of buzz in the media and DalalStreet, nobody was sure of what exactly happened till Singh blew the lid.

The company itself was economical in its disclosures. In exchangeannouncements, it was communicated that RIL had sold 180 million shares(4.01%) of RPL for INR4,023 crore. It added that the sale happened in two tranches— 2.54% between November 6 and November 14, 2007, and 1.47% betweenNovember 15 and November 23, 2007.

Though these appear straightforward transactions, Agarwal and Merchant drew upa scheme of what they called a “hedging mechanism”.

Accordingly, 12 entities were appointed as agents. These were companies, whichwere not directly related to RIL but could fall in the realm of “friends of Reliance”as they had directors familiar to the Reliance universe or had registered addressesin Mittal Court, which several RIL entities called home. This aspect perhaps playeda role in many, including Sebi, initially mistakenly approaching it as an insider-trading case. Sebi would eventually proceed under Prohibition of Fraudulent andUnfair Trade Practices regulations. More on that later.

The 12 agents took short positions in the F&O segment on behalf of RIL, undertook transactions in RPL shares in the cash segment.

During the period of November 1, 2007 to November 29, 2007, various transactions were undertaken by RIL in the cash segment and through the agents in the F&Osegment. From November 15, 2007 onwards, RIL’s short position in the F&Osegment constantly exceeded the proposed sale of shares in the cash segment. On November 29, 2007, RIL sold a total of 225 million shares in the cash segment during the last 10 minutes of trading, resulting in a fall in the prices of RPL shares, which also lowered the settlement price of RPL November futures in the F&O segment.

RIL’s entire outstanding position of 79.7 million shares in the F&O segment was cash settled at this depressed settlement price, resulting in profits on the said short positions. The said profits were transferred by the agents to RIL based on aprior agreement.

In submissions before Sebi, RIL claimed that “simple economics dictates that the impact, if any, of selling or buying of a significant quantity of shares would be less if done in the segment where the liquidity is high. Therefore, though nothing prevented RIL from selling the 225 million RPL shares (5% of RPL) starting from November 1, 2007, in the cash market, it was decided by the two authorised senior executives to use the segment where the trading and liquidity was higher to minimise the impact of the sale on the RPL share price and to meet the above objectives.”

The trading in the futures segment was nearly four times more than that in the cash segment. Trading in the segment where liquidity was higher would minimise the impact of the sale and e􀂃ect the sale in an orderly manner factoring in the market integrity. Accordingly, short positions were taken in the November 2007RPL futures by RIL, through the 12 named entities acting as RIL’s agents, in an orderly manner over a period of four trading days and not on a single day.

“The two authorised senior executives could have started selling in the cash market from November 1, 2007, itself when the prices were ruling between INR265 and INR273 and realised more money. Instead, the hedge positions were fairly created first and then the sale in the cash segment started on November 6, 2007, even though the prices had fallen, and the hedge positions protected the risk to some extent,” RIL officials explained to Sebi.

However, Sebi’s investigation concluded that “RIL had entered into a well-planned operation with its agents to corner the open interest in the RPL futures and to earn undue pro􀂄ts from the sale of RPL shares in both cash and futures segments and to dump large number of RPL shares in the cash segment during the last 10minutes of trading on the settlement day, resulting in a fall in the settlement price”.

Sebi followed the following method to calculate the unlawful gains:

  • Average net short open position in derivatives held by noticees 2-13 across 29days (November 1 to November 29) = 85.1 million shares
  • Open interest (OI) limit available to noticees 2-13 = 10.9 million shares
  • OI limit illegally procured = 74.2 million shares
  • Average gain per share = INR513 crore/85.1 million = INR60.28 per share
  • Total illegal gains made = INR60.28 x 74.2 million = INR447.27 crore

Sebi’s investigation also concluded that Mukesh Ambani (referred as notice 2 in the order) “being the chairman and managing director of RIL, was responsible for its day-to-day affairs and, thereby, liable for the manipulative trading done by RIL”.

Ambani’s defence

Ambani, through his representatives, objected to his name being dragged into the proceedings at this late stage. He cited Section 11B proceedings by Sebi whole-time member G Mahalingam, issuing an order to disgorge the illegal gains of INR447 crore from RIL with interest. This order did not include any funding against Ambani and instead found Agarwal and Merchant responsible, he said. He also argued that there were no findings against him, which was a condition precedent for initiation of adjudication proceedings.

Denying any knowledge of or involvement in the funding arrangements entered into the Anand Jain-controlled entities, Ambani argued that it was the RIL board, and not he in his capacity as the managing director, that authorised Agarwal andMerchant to raise funds (and not specifically through the sale of RPL shares). He further said that he was “neither in charge of nor responsible for the identification or implementation of the avenues for raising funds”.

The RIL board (including Ambani, the notice 2) was informed of the sale of 5%shares of RPL only at the meeting held on November 19, 2007, but not of the speciffic details. Ambani said he was only a recipient of information along with the other directors and cannot be alleged to have carried out the trades.

“The purported findings of Sebi referred to above make it evident that the knowledge of specific terms of the sales were only with the authorised officials and not in the knowledge of the RIL board (including notice 2). Such process and procedure were also not out of the ordinary: (a) for a company with the size and scale of operations of RIL; and (b) in the context of the materiality of the value of the transactions qua the overall size of the operations of RIL and the fund raising exercise,” Ambani told the Sebi adjudication officer BJ Dilip.

Dilip in his order, said that a managing director is responsible for managing the day to-day affairs and business of the company and he has been vested with the said power under the Companies Act. This implies a high level of accountability and knowledge of the company’s overall functioning.

“I also note that no agreement between the notice 2 and the board of RIL has been presented before me that limits the notice 2’s powers to implement the said decisions of the board of RIL. Even if such an agreement exists, it would go againstthe interest of the shareholders of RIL, whereby the managing director does nothave any oversight over the decisions relevant to the company,” he added.

Citing minutes of board meeting in November 2007 and a presentation on“Update on the strategic plan including financial performance” that was made by Agarwal, Dilip concluded that the trades could not have been executed withoutoral or written consent of Ambani.

“I find it difficult to believe that the entire asset sale to raise INR87,000 crore, as decided in the board meeting dated March 29, 2007, was left at the discretion of the said two o􀂃icers and without the supervision of the managing director when the said amount was a substantial percentage of its total assets and its turnover,” he said in his order.

Reiterating the role of a managing director in the corporate hierarchy, the adjudicating officer added, “I am of the view that the intention of the board of RILcould never have been to put the entire responsibility of all the three activities towards raising of funding on the said officials without any oversight of the managing director, who is also the member of the board of RIL…”

Citing the chronology of events and other facts on record, the Sebi order said an implementation plan to raise 􀂄nance through disposing of 5% shares of RPL was already in motion and 180 million shares were sold on the cash segment while the agents were holding the short positions in the F&O segment, pursuant to an agreement by Merchant, one of the board-authorised persons.

“Therefore, I am of the view that, given the hierarchy in the corporate structure,such transaction in the cash and F&O segments could not have taken place without the approval (either written or oral) or knowledge of the managing director, who heads the corporate hierarchy of RIL … therefore, I find that there is no merit in the submissions of notice 2 that he was not aware of the transactions undertaken for the bene􀂄t of RIL till the board meeting on November 19, 2007,”

Dilip added in his order.

While that appeared smooth, Sebi did not always have an easy ride.

Sebi’s long struggle and the sudden dash

In April 2009, almost 10 months after the complaint by Singh, Sebi sent the first show-cause notice to RIL, which included charges of fiouting insider-trading regulations. However, in November that year, RIL 􀂄led to settle the matter under consent mechanism. After this was rejected in the following year, Sebi decided to reinvestigate the matter.

In December 2010, a fresh show-cause notice was issued after dropping the insider-trading charges. The charges under this notice pertained to Prohibition ofFraudulent and Unfair Trade Practices regulations. Meanwhile, Bhave’s term asthe Sebi chief was drawing to a close.

Though initially, the finance ministry had given signals that there would be anextension of his term, it later decided to go for a new chairman. Though Sebi is aprocess-based organisation, the leadership also matters.

The term of UK Sinha, Bhave’s successor, began with a spate of controversies after KM Abraham, a whole-time member, who was handling several sensitive cases including the RPL matter, wrote to the prime minister saying there was pressure from the finance ministry, which at the time was helmed by Pranab Mukherjee, on Sinha to go slow on certain cases.

Though Sinha denied these charges vehemently and attributed sinister motives to Abraham’s letter, a decision eluded the RPL matter for the six years that he remained at the helm.

Ajay Tyagi’s ascension to Sebi Bhavan proved to be agame changer, as within weeks of his taking over,Sebi came out with the disgorgement order onMarch 24, 2017. The theadjudication proceedings against RIL and Ambani,which were initiated soon after, have concluded withthe latest order.

Securities lawyers say the long delays are a product of the systems followed by Sebi. “Sebi used to initiate two simultaneous proceedings for two different consequences, one for debarment and another for a monetary penalty. Even though two authorities seemingly independent [would be in charge of each proceeding], the data on Sebi orders would suggest that the adjudicating o􀂃icer, who is lower in rank, would always await the fate of debarment proceedings to decide his order,” says Sumit Agrawal, former Sebi o􀂃icer and founder of Regstreet Law Advisors.

“In this order also, the adjudicating o􀂃icer himself observed that the applicabletime to be considered for the purpose of delay, if any, would begin from the time ofcompletion of Section 11/ 11B proceedings, on March 24, 2017. Hence, the delays inhigh-stakes cases or those involving prominent personalities is a systemic productthan of law. SAT has in many matters set aside the regulatory orders on the groundof delay,” he adds.

Curiously, the last couple of months were a contrast to the case timeline so far,despite the Covid-19 pandemic.

Early in the adjudication proceedings, AZB & Partners, RIL’s law firm had requested for the proceedings to be kept in abeyance till the SAT made its decision on the disgorgement order. Though the adjudication o􀂃icer refused such abeyance requests, the matter was moving at a glacial pace with numerous adjournments, inspection requests, and appeals to SAT, and so on.

On November 5, SAT passed an order upholding the Sebi’s disgorgement order.

Following this, the adjudication matter seemed to have taken fresh legs. Severalquick hearings happened even as the appeal against the SAT order was admitted atthe Supreme Court on December 18. After these concluded on December 23,hearing submissions were made by Ambani and others by December 29.

In the next 72 hours, the 95-page penalty orders were public. That was some sprint. A Reliance spokesperson did respond to an e-mail seeking comments.

Looking ahead

Ghosts of the past have come to mar Ambani’s otherwise stellar year, when he wooed blue-blooded foreign, both strategic and financial, to invest over USD27 billion in his Jio Platforms venture.

Does the penalty order, which is most likely to get into the appeals process, poseany concerns to the investors? Will boards of listed investors such as Facebook and Google sit up and take notice?

Shriram Subramanian, founder of corporate-governance research and advisory firm InGovern, says, “I don’t think FB (Facebook) and Google are so much concerned. They are used to paying fines themselves and defending against antitrust suits and privacy suits. Boards will ask the case facts, hear out potential outcomes, and move on.”

The order slapping a fine of around INR15 crore on Ambani, who is not only the richest but also perceived to be the most influential businessman in India, comes at a time when the efficacy of regulatory mechanisms against Big Business is being questioned by the farmers protesting against farm laws.

While this order is likely to go a long way in boosting public confidence in regulatory bodies, Sebi’s 12-year-long struggle to get there tells its own story.Moreover, appeals are now on the way.