For someone who cut his teeth in the family business as the suave, media face of a large and controversial group, Anil Ambani is an amazingly angry man these days.
He is making enemies of the media, politicians and business partners with rare determination, even as the business empire that he wrested from his brother, Mukesh Ambani, after a horrendous public war, appears to be crumbling. The group has lost 68% in market value
—or Rs47,300 crore—in the past 12 months.
Anil Ambani’s role in the Rafale jet purchase deal—which is now as controversial as Bofors—is where he seems to have gone completely ballistic. According to reports, the defamation suits
, filed against media houses, journalists and nine Congress Party functionaries, had added up to a phenomenal Rs75,000 crore in the past one year.
Apart from suing those who wrote about his role in the Rafale deal, there are defamation suits filed over the sale of his electricity distribution company to the Gautam Adani group and the sale of telecom assets to Mukesh Ambani which has now fallen through. The demand for damages in each of these cases has ranged from Rs1,000 crore to as much as Rs10,000 crore. The numbers alone are enough to warrant a serious debate on defamation as an exercise to gag the media or suppress negative information.
All this has serious implications for investors, especially those whose money goes into the capital market through mutual funds (MFs) and pension funds. Investors depend on expert fund managers and analysts to be alert, on top of developments and act quickly, to protect their wealth. What if they are prevented from doing their fiduciary duties to act in a fair and free manner? And who decides whether an action to sell shares in the market is negative and malicious at any particular time or proper and in investor interest?
We have two such situations here. Last week, I wrote about the Essel/Zee
group where lenders (including MFs that had no business to lend against promoters’ shares) have done a risky deal, ostensibly to protect investor interest. They have jointly agreed to desist from selling shares pledged by Subhash Chandra for a few months, giving him time to raise funds through a strategic investor who could hold as much as 50% of the equity. Since the regulator is silent about the deal, we have no idea whether it will actually proceed as hoped by the, so-called, committee of lenders.
Meanwhile, the failure of the Reserve Bank of India (RBI) to act against the over-leveraged Infrastructure Leasing and Financial Services (IL&FS) for two years and allowing it to create a complex maze of companies and subsidiaries has jeopardised the savings of MF and provident fund investors. Yet, the regulator has not been held accountable and the founding cabal, responsible for inflicting huge losses on investors, appears to be getting away lightly.
It is in this context that we need to look at the litigation and notices exchanged between the Anil Ambani group and Edelweiss (specifically ECL Finance Ltd, a debenture-holding company) with whom he had pledged shares of Reliance Power Ltd (RPL).
Edelweiss has been accused hammering the price of Ambani shares by invoking the pledge on them which, allegedly, amounted to dumping shares in the market, instead of trying to get the best prices for them. Did Edelweiss really have a choice?
On 1st February, Reliance Communications (RCom) filed for bankruptcy after its Rs23,000-crore deal with Mukesh Ambani, for sale of telecom equipment, which was seen as a lifeline for the beleaguered group, had fallen through.
Meanwhile, its creditor Ericsson India Limited had filed three insolvency petitions demanding jail time for Anil Ambani for failure to repay its outstandings. On 13th February, the Supreme Court heard and reserved judgement on the issue. Ericsson argued in Court that Mr Ambani had issued a personal guarantee against the borrowing which was independent of his ability to sell RCom shares.
All this was already impacting stock prices of the group and the stage was set for a further decline. So, on 5th February, Edelweiss sold nearly Rs6 crore of RPL’s shares, after issuing the company a notice on 4th February. The Anil Ambani group responded by rushing to the Bombay High Court seeking a reversal in the sale of shares. It also dashed off a letter to the Securities & Exchanges Board of India (SEBI) seeking action against Edelweiss.
, on 13th February, Janak Dwarkadas, counsel for Edelweiss, pointed out that Edelweiss was within its rights to sell shares, after giving a 24-hour notice. He also pointed out that RPL had previously ignored demands to pay an additional interest of 2% on its loans after its share price had plummeted in August 2018. Again, when RCom filed for bankruptcy, it allegedly did not bother to communicate to Edelweiss. The Court refused any interim relief to RPL and will hear the matter today.
Meanwhile, RPL’s letter to SEBI, on 11th February, demanded a ban on Edelweiss from the capital market as being not fit and proper. Its main allegations are largely procedural – essentially that Edelweiss usurped the powers of the debenture trustee and allegedly “flouted documented process and safeguards for enforcement of security.” (See full letter below).
The letter also argues that Edelweiss ‘hammered’ RPL’s shares and Futures, at its own broking arm, leading to a 57% drop in share price. If Edelweiss has, indeed, done this, which seems unlikely, it would be a foolish move that ought to be investigated and punished by SEBI. However, market participants point out that the mere sale of pledged shares would lead to a precipitous fall when there are no buyers for a beleaguered stock!
While RPL accuses Edelweiss of decimating “value for over 31 lakh retail public shareholders” of RPL, Edelweiss says it has "acted responsibly, not only in safeguarding the interests of its investors but also in ensuring that market integrity is maintained."
Edelweiss may have given a push to the fall in prices, but the many actions of the Anil Ambani group as well its past record
had already combined to decimate the value of its various listed companies. It is another matter that the group does not seem to grasp the enormity of what is going on and is busy filing a public offer for its general insurance company.
Let’s try and understand why this concerns investors in general.
For starters, India has followed the world in adopting disclosure-based regulation which puts the onus on investors to read public disclosures and act on them sensibly. What happens when companies fail to make proper disclosures or attempt to gag those who are most likely to put this information in the public domain, namely, media and analysts?
Secondly, what happens if companies use their financial and political clout over government and regulators to try and browbeat investors/MFs from selling these shares at, what they consider, the best time to optimise gains or reduce losses?
If this were to happen, the entire edifice of disclosure-based investment would break down – and we are already seeing this happen repeatedly. The National Stock Exchange’s (NSE’s) attempt to gag Moneylife by slapping a Rs100-crore defamation suit was a similar display of financial muscle to stop the various irregularities from coming to light. It, subsequently, led to a complete clean-up of top management and the investigation continues.
Thirdly, Edelweiss’s actions in selling shares to protect itself were straightforward. It was nowhere as unorthodox as the lenders forming a committee to protect the price of Zee group shares. If SEBI is silent about that move, ostensibly to protect ‘investor interest’, it cannot possibly fault a rapid sale by Edelweiss to salvage whatever value it can from the RPL shares in the event of a bigger crash. Who is to decide whether its actions precipitated a crash or was it merely the first out of the gate?
Since the market regulator has abdicated its responsibility by remaining silent, the courts may have to decide this highly complex and sensitive issue. Isn’t that completely at odds with the idea of independent regulators with domain expertise? But, like many other aspects of India’s business and economy, we will have to muddle through the situation to find solutions.