Does SEBI Have Its 'Eyes Wide Shut'? Anil Ambani Share Saga
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. 
 
Standstill Conundrum
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?
 
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    COMMENTS

    mayur ranjan

    7 months ago

    What about his several companies under the brand name BIG e.g. Big Entertainment , Big Cinemas Big FM. I guess all these are already small by all standard.

    shivkumar

    7 months ago

    As usual Sucheta and Moneylife have been the first ones to raise some inconvenient but very pertinent questions. Will SEBI wake up and smell coffee.

    Samir Nare

    7 months ago

    Madam, You missed covering the PSU banks exposure to ADAG group companies......RCOM stands at a mind boggling debt of 40,000 Crores...they are not paying Erricson 500 Crores...how are they going to repay 40,000 Crores which they own to pvt and psu bank !!! Also their is no news about progress of Essar Ruia's paying back the debt.

    Sudhakar Ojha

    7 months ago

    Older people were gradually increasing percentage of investment in debt funds to reduce risk. Seems we were wrong and sticking to equity funds was safer or is that too a mirage ?

    The framework itself bends to accommodate instead of being sacrosanct.

    REPLY

    SURAJIT SOM

    In Reply to Sudhakar Ojha 7 months ago

    In a growing economy ,equity should perform better than debt fund. A healthy equity market is good for a country's economy. This point is hardly discussed . That is why auditors, regulatory authorities need to reign in rogue elements so
    that market functions in a decent way. But instead they seem to be hand-in-glove with the criminal elements. Otherwise how scam like IL & FS does take place ?

    dv

    7 months ago

    Nobody in government questions any of the regulators. The regulators therefore do not do their job - at least not SEBI & IRDA. Historically, they have bungled their lines and in spite of your persistent spoon feeding, they do nothing. Someone must be getting paid there.

    K V RAO

    7 months ago

    MFs wash their hands through a clause "Investments are subject to market risks". Unfortunately, investors ignore the warning, and go ahead. Here we have to evaluate which MF house has maximum investment to ADAG group. That speaks about their quality of due diligence. Accordingly, investors can shortlist MF houses on a scale of 1 to 10.

    SURAJIT SOM

    7 months ago

    We may see Satyam or IL&FS like collapse in ADAG companies. It will be bad for AA himself ,not to talk of the shareholders. They have lost almost everything already.

    Aditya G

    7 months ago

    Totally off-topic: I liked that movie, even though it was royally panned.

    Coming back to the topic: SEBI needs to pull up its socks. Seriously. It's failing as an institution (or has it failed already?) I'm losing faith in it. SEBI is not only making it difficult for consumers to protect themselves but also harder for small intermediaries (read: fiduciaries) to do business. I don't know but I feel this way. Their lackadaisical attitude towards everything bothers me. I hope I'll be proved wrong.

    Vaibhav Dhoka

    7 months ago

    As I have been telling that our regulators always are most lenient to brokers, AMC'S, exchanges and other entities for which it should act as watch dog but these regulators never act in the interest of investors whose interest they should have utmost care, but SEBI always failed to take due diligent action, on the contrary they make and prescribe such regulations wherein individual entities like IFA'S and petty investors are harassed. In short it is common man who is always on receiving end.

    Savitha KL

    7 months ago

    There are rumours that EPFO and EPS have been invested in Reliance group companies of insurance, please clarify if true

    Aqeel Qureshi

    7 months ago

    What's the hue and cry bout?
    It was just today that I came across a billboard saying 'Mutual Funds Investment mein Patience Rakhna Padta Hai'
    Have patience please! (pun intended)

    All this hanky panky Mutual Fund shadow banking industry. The whole pack is partner in crime for each other. Investor interest?? What's that?
    Remember the ICICI Securities IPO matter? You scratch my back and I shall yours.....

    And we say just the PSU guys are corrupt......

    AAR

    7 months ago

    Good point raised. ADAG is not fit to handle Insurance or Mutual Funds. Regulator should appoint a Special body to take care of public funds being handled by ADAG.

    SC holds Anil Ambani and Two Directors Guilty of Contempt, Orders To Pay Rs453 Crore to Ericsson within 4 Weeks
    The Supreme Court on Wednesday held Reliance Communication Ltd (RCom) chairman Anil Ambani and two directors of the group companies guilty of contempt of court. While directing Reliance Anil Dhirubhai Ambani group (ADAG) to pay Rs453 crore along with interest to Ericsson within four weeks, the apex court had also imposed a fine of Rs1 crore each on three companies of ADA group (ADAG).
     
    This case was related with a contempt plea filed by Ericsson India over its pending dues of Rs550 crore from ADAG.
     
    A two-judge bench comprising Justices Rohinton F Nariman and Vineet Saran also asked Reliance ADAG to purge contempt by paying Rs453 crore with interest to Ericsson within four weeks. If not paid, three months' jail term will follow, the bench said.
     
    The bench directed the Court's registry to give Ericsson Rs118 crore that were earlier deposited by RCom. The apex court said the entire amount that RCom has to pay to Ericsson is Rs550 crore plus the interest that was generated.
     
    The Court also imposed a fine of Rs1 crore each on RCom, Reliance Telecommunication and Reliance Infratel that would be deposited with the Supreme Court Legal Services Committee (SCLSC).

    The two directors held guilty of contempt of the court are: Reliance Telecom chairman Satish Seth and Reliance Infratel chairperson Chhaya Virani. In case of default, chairpersons of all the three companies, including Mr Ambani, Mr Seth and Ms Virani, would have to undergo a sentence of one month each.

    The bench ordered this as it did not accept the 'unconditional apology' tendered to the court by the RCom chairman.

    Mr Ambani was present in the Court when the order was announced.
     
    Last month, the Swedish telecom equipment maker has petitioned the apex court to punish Mr Ambani over recurring delays in payment of its dues worth Rs550 crore. Ericsson had accused the embattled businessman of engaging in 'gross and wilful contempt' of the apex court. 
     
    The company had said that insolvency proceedings should be initiated against RCom and its spectrum and tower sale deal with Reliance Jio should be stopped 'with immediate effect'. 
     
    In its second contempt plea, the Swedish company had also requested the apex court to bar Mr Ambani from leaving India for defaulting on payments.
     
    Earlier in October 2018, Ericsson had filed its first contempt petition in the Supreme Court. At that time, RCom had stated that it sought another 60 days for the repayment of Rs550 to the Swedish company. 
     
    Last week, the Supreme Court dismissed two court masters Manav Sharma and Tapan Kumar Chakaraborty for tampering with its order in Ericsson’s contempt plea against RCom and personal appearance of the company chief Mr Ambani.
     
    According to reports, on 7th January, the apex court had directed Mr Ambani to make personal appearance through a notice. However, when the order was uploaded on the SC website, it read: “personal appearance of the alleged contemnor(s) dispensed with.”
     
    More details soon...  
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    COMMENTS

    Praveen Sakhuja

    7 months ago

    will government be able to punish Anil? NO not the least. Anil will be scot free with some legal applications, public will find theiur oeyes wide spread tp know what happened.

    K V RAO

    7 months ago

    Judiciary's activism is quite welcome. In fact, the business world is observing how the matter is getting unfolded. How come the judiciary is not that active with regard to bank borrowers? Very much needed. I also appreciate Ericsson' s efforts to conclude the issue with great perseverance.

    VASANT KULKARNI

    7 months ago

    POOR ANIL . HE COULD HAVE GONE WITH NIRAV, MALLYA.

    kpushkar

    7 months ago

    Real fun starts now...Welcome to real world..
    Hope the steel company promoters also get to enjoy free meals ..You know where

    Veeresh Malik

    7 months ago

    Body language is everything. All over Delhi there is a re-alignment of thinking on how everything could be gamed going on right now.

    What Are the Practical Difficulties in Identifying SBOs for GDRs
    The Ministry of Corporate Affairs (MCA) on 8 February 2019 issued the Companies (Significant Beneficial Owners) (Amendment) Rules, 2019 amending the Companies (Significant Beneficial Owners) Rules, 2018 (the SBO Rules), thereby drastically amending the definition of SBO. 
     
    However, there are certain practical difficulties in identifying the SBOs, especially in case of global depository receipts (GDRs).
     
    As per the SBO Rules notified by MCA, GDR holders will get covered within the ambit of the SBO, if any individual through GDR is able to:
     
    • get more than 10% of distributable dividend; or 
    • exercise 10% of voting rights based on the instruction given to the depository or on conversion of GDRs into shares;
    • hold 10% of the equity shares in the company on conversion.
     
    There is a legal right for the GDR holders in Euroclear and Clearstream to remain anonymous if they wish to do so. In many cases the GDR holders choose to withhold their identity. GDR holders with shares held in Euroclear and Clearstream have their anonymity protected by the laws of Brussels and Luxembourg respectively.
     
     
    Therefore, reporting company cannot identify the GDR holders, especially the ones issued under the erstwhile scheme i.e. FCCBs and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.  It was also suggested in the Sahoo Committee Report that issuances should be made in FATF complaint jurisdictions as FATF recommendations prohibit financial institutions from keeping anonymous accounts. (https://www.finmin.nic.in/sites/default/files/Sahoo_Committee_Report.pdf)
     
    Accordingly, reporting companies will be required to seek information in Form BEN 4 through the depository bank in order to comply with SBO Rules if the quantum of GDR is 10% or more of the shares of the reporting company.
     
    As per the recent simplified definition, an SBO is described as follows:
     
    “Significant Beneficial Owner in relation to a reporting company means an individual referred to in sub-section (1) of section 90, who, acting alone or, together, or through one or more persons or trust, who possesses one or more of the following rights or entitlements in such company, namely:-
     
    • Holds indirectly, or together with any direct holdings, not less than ten per cent of the shares;
    • Holds indirectly, or together with any direct holdings, not less than ten per cent of the voting rights in the shares;
    • Has the right to receive or participate in not less than ten per cent of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
    • Has the right to exercise or actually exercises, directly or indirectly, significant influence or control, in any manner other than through direct holdings alone.”
    • Meaning of Shares as per the SBO Rules
     
    As per the simplified SBO Rules, apart from the equity shares, instruments in the form of global depository receipts -GDRs, compulsorily convertible preference shares or compulsorily convertible debentures shall also be treated as ‘shares’.
     
    Meaning of Depository Receipt
     
     
    “Depository Receipt means a foreign currency denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of eligible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes ‘global depository receipt’ as defined in section 2(44) of the Companies Act, 2013.”
     
    Meaning of Global Depository Receipts
     
    As per Section 2(44) of the Companies Act, 2013, a global depository receipt (GDR) means any instrument in the form of a depository receipt, by whatever name called or created by a foreign depository outside India and authorised by a company making an issue of such depository receipts.
     
    Process of issuing GDRs by Indian companies:
     
    The process of issuing GDRs by Indian company involves:
     
    1. Issuance of its equity shares (in Indian currency) to an overseas depository bank, through a domestic custodian bank.
    2. The domestic custodian bank acts as the agent of overseas depository bank, and keeps the equity shares in its custody.
    3. The overseas depository bank issues GDRs against the said equity shares to the overseas investors (in foreign currency). 
     
     
    Voting rights of GDR Holders
     
    Companies Act, 2013
     
    As per the Rule 6 of the Companies (Issue of Global Depository Receipts) Rules, 2014:
     
    (1) A holder of depository receipts may become a member of the company and shall be entitled to vote as such only on conversion of the depository receipts into underlying shares after following the procedure provided in the scheme and the provisions of the Companies Act, 2013. 
     
    (2) Until the conversion of depository receipts, the overseas depository shall be entitled to vote on behalf of the holders of depository receipts in accordance with the provisions of the agreement entered into between the depository, holders of depository receipts and the company in this regard.
     
    Depository Receipts Scheme, 2014
     
    As per para 7 of the depository scheme, 2014, issued by the department of economic affairs, the following are the rights and duties of the GDR holders and the foreign depositories:
     
    1. The foreign depository shall be entitled to exercise voting rights, if any, associated with the permissible securities, whether pursuant to voting instructions from the holder of depository receipts or otherwise;
     
    2. The shares of a company underlying the depository receipts shall form part of the public shareholding of the company under the Securities Contracts (Regulations) Rules 1957, if:
     
    • the holder of such depository receipts has the right to issue voting instructions; and
    • such depository receipts are listed on an international exchange.
     
    3. In the cases not covered under sub-paragraph 2, shares of the company underlying depository receipts shall not be included in the total shareholding and in the public shareholding for the purpose of computing the public shareholding of the company.
     
    4. A holder of depository receipts issued on the back of equity shares of a company shall have the same obligations as if it is the holder of the underlying equity shares if it has the right to issue voting instruction.
     
    RBI Master Directions for Private Sector Banks 
     
    Para 10 of RBI master direction – ownership in private sector banks, directions, 2016 provides that banks shall enter into an agreement with the depository to the effect that the depository shall not exercise voting rights in respect of the shares held by them or they shall exercise voting rights as directed by the board of directors of the bank.
     
    In a nutshell
     
    In case of private sector banks, the voting rights shall be exercised by the depositories depending upon the instructions received by the board of directors of the bank.
     
    In case of non-banks, on the collective reading of the aforesaid requirements, it is evident that when the GDR holders exercise their right to exchange with equity shares, then only the GDR holder becomes the shareholder of the issuer company. Till then, the name of the depository bank reflects in the register of members of the issuer company. 
     
    Therefore, until conversion, the voting right is not exercised by the GDR holder but by the overseas depository, pursuant to the agreement between the depository and the issuer.
     
    In case of GDR issued under the Companies Act, 2013, the voting right shall be as per the agreement between the GDR holder, depository and the issuer company.
     
    Right to receive dividend by the GDR holders
     
    Until conversion of the GDR into equity shares, the dividend is paid by the company to the depository bank which further distributes it to the GDR holders.
     
    (The authors are consultants with Vinod Kothari & Company
     
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