21 Years After: SEBI Imposes Rs25 Crore Joint Penalty on Ambani Family & Reliance Promoter Entities for Violation of Takeover Norms
Investigations move slowly for the powerful. After 21 years of inaction, the  Securities and Exchange Board of India (SEBI) imposed a Rs25 crore penalty on the Ambani family and several promoter entities of the Reliance Industries Ltd (RIL), for failure to comply with takeover rules in 1999-2000. 
 
The promoter group, acting together, had raised their stake in RIL by 6.83% in January 2000 through conversion of warrants that were issued in 1994.
 
Under SEBI rules, this acquisition of over 5% ought to have triggered an open offer, as per Substantial Acquisition of Shares and Takeovers (SAST) rules of 1997. SEBI only issued show-cause notices (SCNs) in this matter in February 2011 – which is 11 years later!  
 
Ironically, the SEBI order says that the failure of Reliance promoters to make an ‘open offer’ had “deprived the shareholders of their statutory rights / opportunity to exit from the target company and therefore they breached the provisions of Takeover Regulations. Such charges against the noticees make the instant matter grave,” the SEBI order said. 
 
The regulator also noted that in case of a continuing offence, the liability continues until the rule or its requirement is obeyed or complied with. In this matter, the liability of making an open offer continues even today. 
 
The irony is that the RIL share price was Rs62 at the end of January 2000 and is over Rs2,000 today. Moreover, the group itself has undergone substantial restructuring including shares in the bifurcated group after brothers Anil and Mukesh split. 
 
SEBI says  “… the violation was not one which was committed once and for all but that which continues till date. The violation is a disobedience of the statutory provisions …” 
 
But would the regulator be called to explain the delay of two decades in acting on what is a very simple and straightforward violation that does not require a long-drawn investigation? 
 
The penalty of Rs25 crore has been imposed jointly on the 34 individuals and entities who were allotted the warrants in the year 1994. These include brothers Mukesh Ambani, Anil Ambani, their mother Kokilaben Ambani, Mukesh’s wife Nita Ambani, Anil’s wife Tina Ambani, their sisters Nina Kothari and Deepti Salgaokar, her husband Dattaraj Salgaokar and the children of the Ambani clan. Kankhal Trading LLP (earlier known as Kankhal Investments & Trading Co Ltd) and Reliance Realty Ltd (earlier known as Terene Fibres India (P) Ltd) are also included in the list.
 
Under Section 15H of the SEBI Act (amended in October 2002), a maximum penalty of Rs25 crore or three times the amount of profits made out of the failure is allowed (whichever is higher).
 
Some of the noticees like Akash M Ambani, Jayanmol Ambani, Isha M Ambani, Vikram D Salgaokar, Isheta D Salgaokar, and Nayantara B Kothari were minors at the time of the commencement of the aforesaid violation on 7 January 2000 and, hence, those who are the natural guardians of the minor noticees are responsible not only on their own behalf but also on behalf of the minors, says SEBI. 
 
The noticees had also contended that the initiation of adjudication proceedings in this case with a huge inordinate delay was “unreasonable, arbitrary and causes substantial prejudice to the noticees.” 
 
So, the “adjudication proceedings sought to be initiated against the noticees ought be dropped, on this ground alone.”
 
The adjudicator observed that “It is true that the SEBl Act does not prescribe a period of limitation for the issue of a show cause notice and the commencement of adjudication proceedings. However, it is submitted that this does not mean that SEBl is empowered to initiate proceedings after an inordinate delay. It is further submitted that SEBl should act in a reasonable period of time.”
 
The counsel for the noticees argued that Section 15H of the SEBI Act, 1992 was amended on 29 October 2002 but the adjudicating officer K Saravanan said that the ex-post facto amendment can have no application to an alleged infraction which took place much prior to the said amendment.
 
SEBI adjudicator acknowledged that it was difficult to certain the unfair gains made by RIL promoter entities while noting that the amount of profits made out of such failure has not been brought out in the available records for computing the amount of penalty and says, “…while determining the quantum of penalty, I note that no quantifiable figures or data are available on record to assess the disproportionate gain or unfair advantage and amount of loss caused to an investor or group of investors as a result of the default committed by the noticees. However, the fact remains that the noticees by their failure to make public announcement, deprived the shareholders of their statutory rights/ opportunity to exit from the company.” 
 
As an interesting aside, the fortunes of the two Ambani brothers are a great example of why regulatory action and investigation has got to be time-bound. In this case, Reliance shareholders by not getting an exit opportunity have gained tremendously. 
 
Had it involved the ADAG group alone, SEBI’s action after two decades would have been useless for investors who would have lost badly. Clearly, SEBI needs to study more closely the preamble of its Act and its duty to protect investors. 
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