Reliance Industries’ failure to disclose material information about the steep 80% fall in the reserves of its KG-D6 block has led to questions about its corporate governance Among the independent directors are management guru Dipak C Jain and scientist RA Mashelkar

Reliance investors were startled a few days ago at media reports that its gas reserves at the KG-D6 block were 80% lower than claimed. Niko Resources of Canada, Reliance Industries' joint venture partner in the KG-D6 block came out with a shocking assessment on the KG-D6 block, which was released through PTI. It said, "Reliance Industries' flagging KG-D6 gas block holds 80% less reserves than previously estimated." It further said, "Proved plus probable reserves at Krishna Godavari basin D6 block has decreased to 1.93 trillion cubic feet (tcf) from about 9.65 Tcf previous estimates". This material information should have been disclosed to investors at first moment's notice.

While the news made waves in the market, the regulators remained silent. However EAS Sarma, former expenditure secretary, Government of India has written to U K Sinha, chairman of the Securities & Exchange Board of India (SEBI) and the secretary, Department of Economic Affairs asking them to examine the report. Mr Sarma has said that "this is an important bit of information" ought to have been promptly disclosed to investors. Also, that the capital investments reported in relation to the approved production schedules, as disclosed to the government, seem to go counter to this".

Mr Sarma has correctly requested SEBI to examine the following issues:

• As a result of the non-disclosure, what has been the loss to the investors who have invested their hard earned savings on the premise that the value of the gas deposits was higher?
• Has RIL transacted in its equity on the basis of inflated reporting of the deposits and their value?

What action should SEBI take if the report is correct?

Incidentally, this is not the first time that Moneylife has written about Reliance's patchy disclosures Recently, we had written about its Annual General Meeting, where it did not disclose information on some of its biggest projects. About the KG-D6 project, chairman Mukesh Ambani said, "We are well on the way to creating a pipeline of projects for our next wave of oil and gas development projects which would include R series discoveries and all the satellite discoveries. Subject to receiving the requisite approvals, we hope to add around 30 (million metric standard cubic metres per day (mmscmd) of additional production through the new wave of planned developments," whatever this means.

Earlier, RIL had in 2006 stated that output would rise to 80 mmscmd by 2012-13. It also said it would invest $5.2 billion to double the output to achieve the target. After making these rosy predictions, its share price went up from Rs1,264 to a high of Rs1608. However, natural gas output at KG-D6 fields has dipped to 31.33 million metric standard cubic meters per day (mmscmd) this month after hitting a peak of 61.5 mmscmd in June 2010. It hardly touched 80 mmscmd. After that it has dropped by nearly 55% to Rs719. Was Reliance playing around with the numbers and by having wildly optimistic view of the future?

Niko said the field performance at the D1/D3 fields during 2011 demonstrated "higher than expected pressure draw-downs". Further, "An assessment of reservoir performance concluded that, contrary to the previous geological model, the current D1/D3 producing wells did not appear to be receiving any contribution from outside the main channel areas," Niko said in the PTI release. Niko is known to be conservative in its assessments.

Niko holds 10% stake in KG-DWN-98/3 (or KG-D6 block) where RIL is the operator with 60% interest. The remaining 30% is held by British Petroleum PLC of UK. The 7,645 sq km KG-D6 Block has 19 oil and gas discoveries. Of these, production from the MA oil find began in September 2008 and from the Dhirubhai 1 and 3 gas discoveries in April 2009.