One 11 February 2019, three entities of the Anil Ambani group wrote a letter to Ajay Tyagi, chairman of the Securities and Exchange Board of India (SEBI), demanding an investigation into the decision by Edelweiss group to sell shares of Reliance Power Limited (RPL) that were pledged with it causing a sharp drop in prices. The Anil Dhirubhai Ambani group (ADAG) also wanted “A ban on all Edelweiss Group entities to be declared ‘not fit and proper’ and impose a ban on each of them in the capital market in addition to financial penalties.”
Today (20th February), with the Supreme Court holding Reliance Communication Ltd (RCom) and two ADAG companies guilty of contempt of court
, the ADAG letter to the SEBI chairman takes on a whole new colour.
One may ask if Reliance ADAG is still ‘fit and proper’ to be in charge of investment, finance and insurance-related companies that handle large public funds. The answer to this question impacts millions of investors of mutual funds (MFs) whose schemes have chosen to lend to Reliance ADAG companies and needs an urgent clarification by the regulator.
I sent a message to the SEBI chairman asking how ADAG remains ‘fit and proper’ to be controlling sensitive entities mentioned above and the implications of the ‘standstill’ agreement signed with lenders on 18th February. I have received no response.
Let’s look at what happened in Court today and its implications for lenders and MFs that have invested in the Reliance ADAG companies.
The apex court has held three companies of ADAG guilty of contempt and ‘wilful disobedience’ of its orders; the Court has ordered it to pay Rs453 crore with interest to Ericsson India. This is in accordance with a commitment made to the Court in October 2018. The money has to be paid within four weeks, failing which the chairman of the three telecom companies face a jail term. The apex court also imposed a penalty of Rs1 crore each on three directors. It also asked for the release of Rs118 crore previously deposited by ADAG with the Court to Ericsson India.
Impact on Stocks
The judgement, naturally, had a negative impact on Reliance ADAG companies’stocks whose prices crashed immediately after the judgement to recover sharply at closing. Reliance Capital fell 10.26% but recovered to close 4.26% lower at Rs145.05; Reliance Infrastructure fell 2.29% to close at Rs 119.40. These are the only two companies that still have some significant value.
Reliance Communications (RCom) fell 9.46% to Rs5.45 and then recovered to close at Rs5.80; Reliance Naval and Engineering dropped 8.56% to Rs8.22 and then recovered to close just 3.56% higher at Rs8.67, Reliance Power slipped 5.53% to Rs10.25 but went up to close just 0.92% lower at Rs10.75; and Reliance Home Finance dropped 4.26% to 24.70 and closed down 3.49% at 24.90.
Notice how several of ADAG companies’ shares are already at such a low that there is not much room for them to tumble further. But we know that Edelweiss group, L&F Finance and several others have lent to the group against the pledge of promoters’ shares.
Worse, after the big fracas over the fire-sale of Reliance Power shares by Edelweiss group and L&T Finance, 90% of the lenders entered into an in-principle ‘stand still
’ agreement not to sell anymore shares until September 2019.
This agreement was a similar to the irregular deal of the Zee/Essel group. Since the regulator gave that deal a tacit okay by remaining silent, it has perforce remained mute on this one too. However, as is obvious from the share prices of the ADAG companies, the risks involved are vastly different.
That is not the only problem.
Extent of Pledge
Does SEBI even know how many shares are pledged by the Reliance ADAG companies? Or, what is the exposure of the entire MF industry to this group? MFs, which hard-sold their schemes under the banner of ‘mutual funds sahi hai’, causing assets under management to zoom, have a huge fiduciary responsibility today. Are they fulfilling it?
A source pointed us to mandatory disclosures to stock exchanges and others which indicate that the Reliance ADAG has probably pledged almost its entire holding of shares. On 8th February, Reliance Capital disclosed a pledge of another 2.1 crore shares by which 89.84% of the total promoter holding is encumbered.
On 16th February, Reliance Infrastructure pledged another 1.5 crore shares taking the pledge of promoter holding to 95.09%; on 17th February, Reliance Power pledged 2.5 crore shares taking pledged promoter holding to 95.5%.
The disclosures indicate that the three companies provided additional collateral to the lenders just ahead of the ‘standstill’ agreement
. But how relevant is the pledge when share prices are collapsing? And should ADAG even remain in control of some of these companies?
Isn’t it a breach of the lenders’ fiduciary responsibility not to do everything possible to safeguard (or in this case salvage) the value of their investment? Remember, Reliance Communications has already filed for bankruptcy and any money that can be raised by the group through sale of assets or otherwise will have to be paid to Ericsson India if Mr Ambani and his top executives want to stay out of jail.
In a media statement, the ADAG group had said that it has agreed to place 30% of its holding with a strategic investor and this would help payback 65% of the borrowing based on prices before the crash.
But there is a big question mark both on ADAG’s ability to find a buyer for the 30% and the price at which the deal would be struck, especially after the latest Supreme Court ruling and the further fall in stock prices. When I asked a spokesperson for the group, I was told: “No lenders to the promoter group who had entered into a standstill agreement have sold shares today.”
There are nine lenders involved in this deal. These include: Templeton Mutual Fund, DHFL Primamerica Mutual Fund, Indiabulls Mutual Fund, IndusInd Bank and Yes Bank. Wouldn’t they have failed in their fiduciary duty to investors if the stock prices drop further and they have to take a loss?
Remember, stock prices of the ADAG companies have been in a free fall for the past several months because the bad news emanating from the group doesn’t seem to end. First, the controversy over its role in the Rafale deal; then the failed deal with Mukesh Ambani leading to RCom filing for bankruptcy; the controversial defamation case; failure to report a default in interest payment on non-convertible debentures way back in 2017 (settled by paying Rs62 lakh to SEBI
); a failed attempt to stop the sale of pledged shares; and, now, the most serious of all, being held guilty of contempt and wilful disobedience by the Supreme Court.
The value of ADAG companies has plunged 61% since September last year and 42% since January 2019. Its total market-capitalisation stands at less than half the debt of RCom alone, reports The Hindu. The question then is: Will the regulator keep its eyes widely shut with regard to the irregular agreement by 90% of lenders in breach of their fiduciary duty and will it clarify the application of its ‘fit and proper’ criteria in the context of the ADAG companies?