Reliance Communications dubbed “poster child of everything wrong with Corporate India”
Moneylife Digital Team 21 July 2011

A new research alleges that Reliance Industries and Reliance Communications have shortchanged investors by over Rs25,000 crore at the RCom formation and that profits have been inflated at RCom between 2006-2010 by almost Rs11,000 crore

A new research just released by Veritas Investment Research of Canada on 18th July titled "Brothers in Arms. Misappropriating a Fortune—The Full Version" alleges that Reliance Communications Limited "is the poster child of everything that is wrong with corporate India, and irrespective of management's assertions about "values" and "integrity" in various annual reports, we find no credible evidence of either in its financial statements or those of its former parent, Reliance Industries Limited."

One of the key discoveries of Veritas is that between the time RCom was demerged from RIL on 31 August 2005 and listed on 6 March 2006, "the ownership of promoters ballooned from 38.27% to 63% in RCom, under the guise of improving shareholder value and transparency. We firmly believe that the 821,484,568 shares issued to management, as per the "Scheme of amalgamation and arrangement involving reorganization" of the group telecom business, as approved by the High Court of Bombay and Gujarat vide orders dated July 21st , 2006 and July 18th, 2006, should be nullified."

As the detailed 50-page report, painstakingly put together by Veritas, bluntly puts it "…the much discussed Ambani split is a charade to deflect attention from a well thought-out plan to split family wealth via formation of similarly named companies, emboldened through strategically timed share allotments within those companies, confusing nomenclature and repeated name changes to enrich insiders at the expense of public shareholders."

The report argues that "the shareholders of RIL are the true owners of these shares, and that the risks and rewards of funding and creating the telecommunication business have been disproportionally allocated to management. We believe minority RIL shareholders should initiate action to recover monies usurped by RIL's majority owners." Veritas estimates that during the formation of RCom, RIL shareholders invested Rs13,675 crore into the business, compared to a paltry Rs186 crore by the management, but after listing on the BSE, the shareholding of minority RIL shareholders declined to 37% from 61.73%. According to Veritas, for the 821.48 million shares issued to management at the formation of RCom, RIL shareholders suffered a loss of Rs25,204 crore based on the March 06, 2006, RCom closing price of approximately Rs307. There are many other allegations in the report which we summarise as follows:

R Com's profit has been inflated: "We believe that on a cumulative basis from FY07-FY10, the Company has inflated its normalized profit before tax ("PBT") in the core telecommunication business by Rs 10,944 crore (US$ 2,408M).

Accounting Standards subverted:
"We believe RIL and RCom have used Indian Accounting Standards and associated disclosures, the Court System, the Companies Act and various other mechanisms to enrich insiders at the expense of institutional money managers, minority shareholders and foreign institutional investors. We believe investors in RIL should be aware of management's hubris. Subsequently, via various accounting maneuvers, Reliance has inflated its EBITDA, EPS and book equity. Moreover, year-on-year comparability in most instances is compromised on account of whimsical accounting policy changes, use of "cookie jar accounting" to circumvent the P&L impact of cash expenses via creative use of unreliable non-cash general reserves, understatement of cash interest expenses via intermingling non-cash foreign exchange gains and losses in some years and excluding those in others, and changing depreciation policies enabling a one-time boost to earnings, etc."

Zero on Governance: "All these measures cloud the very purpose of the P&L statement. We believe that EBITDA, EPS, and book equity reported by the Company since 2006 are open to interpretation. We give the Company a zero rating on each of corporate governance, balance sheet strength, and accounting and disclosure."

Directors' role:
"We also believe that directors at the helm of RCom and RIL have failed in their fiduciary duties, and that significant and meaningful reform is needed in Indian governance standards for the protection of minority interests and the institutional and retail shareholder base".

The shares of RCom are down 70% from the time it was listed in March 2006 while the Sensex is up 70%. According to Veritas, the equity value of RCom on a going concern basis is just Rs40 per share, compared to the current price of Rs94. RCom has just been booted out of the Sensex, which will take effect in August.

The bigger issue, as pointed out by Veritas is that "if the malaise identified by us at RIL and RCom runs deep in corporate India, and audited financials—which in the case of RCom are of questionable authenticity—are a hodgepodge of audited and unaudited results, SEBI guidelines and Indian Accounting Standards, the Companies Act and "legal opinions" based on interpreting the Companies Act, then investors have very little reliable information on RCom and many other Indian Companies."

India and China have been the darlings of global investors for years, since the worries about governance that kept investors worried in the 1990s, have faded now. However, questionable Chinese companies getting listed in the New York Stock Exchange through reverse mergers have brought back issues like corporate governance and accounting frauds to the forefront.

John Paulson, one of the best-known hedge fund managers (who profited hugely from the sub-prime crisis) lost $720 million when Sino-Forest, which claimed to have forest lands in China, turned out to be cooking up its books and lost 90% of its market value. Sino-Forest is just one of the scores of suspect Chinese companies dubbed "fraud-caps" which have got listed in the US, bypassing the supposedly tough scrutiny of the US regulator.

As Veritas points out, while it is all very well to chase the potential riches available to brave investors in large emerging markets far way from North American climes, "the economics of forecasting differs from the nitty-gritty of investing, and therefore, international investors have suffered both politically (BP in Russia, Google Inc. in China) and financially (Yahoo Inc. and Softbank in China), and more recently, investors have taken a bath on Sino-Forest."

As for India, Veritas points out "Then there is India, the land of the Taj Mahal, the Raj, Yoga, democracy and supposedly "rule of law". The western media has been recently enamoured with the enormous wealth of Indian billionaires and a rapidly rising middle class with its insatiable needs, giving rise to the next great consumer economy of the world. It is our contention that notwithstanding the many positives of a growing Indian economy, corporate governance, accounting standards and disclosure practices adopted by some of India's prominent companies are questionable."

Veritas claims to be Canada's largest and most followed independent equity research firm which writes "objective fundamental research you can trust."  
It claims that its unique forensic accounting-based research approach has proven that a careful understanding of financial information provides the key to a secure investment decision. Veritas, a 100% employee owned firm, claims to be a pure research company "which allows us to provide unvarnished advice when others might be conflicted."

1 decade ago
The regulatory bodies and SEBI should probe the mis handling of such issues diligently.
1 decade ago
The Reliance group shareholders hardly gained but the promoters during this period have outgrown several times the company's growth, all at the expense of minority shareholders and taking benefit from the poor governance issues, loopholes in the accounting system and corporate laws skewed in favour of the Promoters.
Middle Class Indian
1 decade ago
These facts on Reliance Communications were known much earlier. Only, due to the power of the Ambanis, very few would have the courage in India to come out with the facts.
1 decade ago
The shares should be diveded among shareholders
1 decade ago
everybody in business india knew all of this .. and no one cared..

still, today, no one cares ... it's just that the time has changed, the resonant frequency of the culture raising a couple of notes, so things not in harmony stand out a bit ..

but the culture is still the culture ...
Ashok Chowgule
1 decade ago
If the report prepared by the Canadian company is correct, then the ones who should have a mirror shown on their face are the analysts based in India. Tarring the whole of the Indian corporate sector is doing a grave injustice to all those who are working in a sincere manner.

One sees the analysts pushing shares of companies which are making losses. For example, at least till March 2010, both NDTV and IBN have made substantial losses. If one sees the projection of the analysts, they have always projected a rosy picture. In fact, NDTV raised more than $250 million, about three years ago, when it was making a loss. Who would have subscribed to the issues in such a situation.

What we need is a robust and independent analysts who will work in a diligent manner.

Ashok Chowgule
Goa, India
1 decade ago
The big question is that why we need veritas to give us this reserch and reality of the big corporate such as reliance.Infact if we keep our eyes open and analyze the things even we can get the answer.Just go through the history of RPL-RELIANCE merger TWICE.And it's modus operandi before the mergers and the stock price movements in equity and derivatives markets.And recently that of RNRL-RPOWER.Just great.Can anybody thought of the fact that The reliance inspite of thousands of crores of rupees in the balancesheet(????!!!),takes loan of rs.5500 cr @12.5% p.a.from LIC for the expansion programmes.Why??.
Rajan Manchanda
1 decade ago
If I recollect correctly ,there was an earlier story about free shares amounting to Rs. 5000 crores issued to them selves ( Promoters ) under sweat equity. These shares were cancelled when the media exposed issue of such shares.

The punch line goes :

Karlo duniya muthi mein........was it not the advt headlines when the mobile service was launched by Rcom ???????
1 decade ago
Yr write up has opened our eyes and thoughts of such so called large capital companies who make a mockery of the general public. In such case the matter has to be brought to the SEBI, Indian government and the Court of law for them to acertain the facts of these companies.
K P Ganesh
1 decade ago
This is a clear case of like father like son.
1 decade ago
Reliance-duos have mastered the art of "crony capitalism" by funding all major political parties. I hope retail & institutional investors shun such fraudulent managements.

There are several other fraudulent companies as well. I think 3i-infotech is another company in line for a corporate fraud. In its most recent quarterly report, 3i-infotech claims about Rs. 700 crores as "Loans and Advances" - why would a IT company provide such high amount through loans when the company is on the verge of bankruptcy due to total debt exceeding 1800 crores. This company is supposedly promoted by ICICI.

Nagesh K
1 decade ago
It is no wonder that that this group has indulged in such practices. Let us hope SEBI and Serious Frauds Investigating Agency will wake up and do something for shareholders who have lost heavily fo no mistake of them. Let them confiscate the promoters wealth and distribute to the shareholders. It is the next scam after 2G and IPO scam. Let SEBI catch big fish than trying to concentrate on small time people like mutual fund distributors etc in the garb of Regulation
1 decade ago
Thanks for putting on paper what many of us know. If media keeps going the way it is, india could be cleaning up in a few years what it has ignored for many years for various reasons. American bamkers too do things illegal the legal way! Their businesses should have been wound up practically intrest free loans were doled out to save them. Thats a fraud too. But if i think of india, it can still tweak its model and march ahead unlike america which has allowed things to go so out of hand that it is ractically bankrupt today . We have just abt managed to avert a catastrophe by stopping this SEZ fenzy, resource frenzy, and indian investor is avoiding investments in equities for this very reason of poor corporate governance. Thats why indian markets have been termed as a casino where few come and play everyday. Nothing is better than self regulation. People are learning finance the hard way. Imagine loosing 20000 in an mlm scheme. Its a bigger lesson than any mba course. Imagine being mis sold an insurance. Imagine loosing money in an ipo. If i add up all my losses and say itcomes to 1lac, thats a small price to pay for financial literacy! No need for an mba! India will deal with it, we will have to take some pain upfront and there is enough money floating around the world to shore up our balance sheets once we come out of the present gloom. Its a very healthy sign. Sahara, anil, real estate guys, mining, coal, all getting oulled up .The reasons maybbe corporate rivalrly or political. Lid is being blown off each and every thing. Its manageabke now. We just averted a disaster.
Madhav Pande
1 decade ago
Very nice research. In the same way money life should create history by probing the employee stock otion allotmnet made by Larsen and Toubro since 2003-4 and the basis of giving stock option,who benefitted and whose worth is how much today without doing any thing for the company etc.
Likewise other such scheme can also be probed of other corporates in India. There is a big stock option scam in India perhaps bigger than the Reliance demerger scam.
1 decade ago
Anil Ambani is a crook, i always said this and will continue to do so. If one delves deep into RCom as now been done to an extent money laundering, illegal overseas investments will be uncovered. Its the reason Dhirubhai refused to give that thief Anil anything of note, Rcom is a time bomb waiting to explode.
Free Helpline
Legal Credit