Sucheta Dalal :Another Fake?
Sucheta Dalal

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Another Fake?  

January 28, 2009

CROSSHAIRS (MoneyLIFE Issue, 12th Feb 09)


Reliance Industries Limited (RIL) has charged a brokerage firm, Avendus Capital, with circulating a fake report about an impending out-of-court settlement between the Ambani brothers. It has filed a complaint with the stock exchanges and the regulator accusing the firm of creating a ‘false market’ in its stocks which, indeed, flared up after Bloomberg reported the news. After the RIL action, Avendus made hectic attempts to diffuse the problem and placate the company. It is understood to have claimed that its information came from one Sumanth Krishna of Anand Rathi Securities. A copy of the email from Krishna, which is available with us, reads: “Market buzz in RIL ADAG-MA camps – RNRL (Reliance Natural Resources) is taken over by Mukesh Ambani and will settle with Anil in cash and handover of Reliance Retail. Anand Jain (& maybe even Manoj Modi) tipped to resign. Will be good for ADAG stoks in general and bear hammering handled by Anand Jain. Rumour that it could come post mkt hours today and final settlement on Sunday – 17th.” We emailed Sumanth Krishna for a reaction to this email, but have not heard from him. Meanwhile, Avendus, which apparently received this email, forwarded it to the wire agency with additional input of its own. It said, “Entire report ties with huge cash mobilization done by RIL in the last one month.” Will the bourses and the regulator act on RIL’s complaint? In the past few years, both Ambani siblings have filed a series of complaints against each other with the regulator, but we have yet to see any action on any of these complaints – not even a dismissal of the complaints for lack of evidence or because they are considered frivolous.
Cleaning Consents  
One of the most active departments of the Securities and Exchange Board of India (SEBI) these days is the one that handles consent proceedings. Orders are being issued at a fast and furious pace and a variety of offenders, mainly those investigated under the multiple-application scam, are being allowed to pay up a fine and walk away without admitting or denying guilt. The orders are posted on SEBI’s website but there is no standardisation – some are detailed and outline the charges; others are sketchy to a point that they appear to be protecting the offenders. There is no attempt to collate the information in a searchable database so that a diligent investor can check the antecedents of market intermediaries if they wish to.
On paper, the consent proceedings are supposed to be transparent. When an individual or an entity under investigation files consent proceedings, it is examined by a committee (which includes market experts) who recommend the penalty to be paid to SEBI and the final orders are passed by a committee of two members of the SEBI board. In reality, an internal committee (IC) of junior officials calls the shots and dictates the payment. In the absence of proper procedures, the penalty has often been decided on the basis of the clout and size of the organisation or hiring some legal experts who have now developed a reputation of swinging the best deal for the applicant.
According to a complaint made to the chairman (available with us), the IC maintains no records of meeting with applicants where the consent amount is first proposed and accepted. Meetings are called over the phone. Sometimes the amount agreed is changed by the executive director, but again without any record. What is worse, only cases in which there is an agreement on the amount to be paid are put up to the high-powered advisory committee (HPAC). That makes the IC, comprising junior officials, all-powerful. If an entity cannot get past the IC, it cannot represent itself to the HPAC and stands no chance of getting a consent order. Even a Right to Information (RTI) application may not reveal how many times the HPAC applies its mind and deviates from the IC’s recommendation, especially since it does not even meet the entity filing the consent application and only goes by what the IC says.
SEBI has not laid out clear parameters based on the gravity of the offence or the quantum of ill-gotten gains. After the complaint, an internal circular has been issued detailing the process to be followed in dealing with consent applications. However, applicants have no way of knowing about this change because it has not been posted on SEBI’s website.
Now Compound This  
While capital market offenders get away by filing ‘consent applications’ and paying up a fine without admitting or denying guilt, the Reserve Bank of India (RBI) allows those who have contravened the Foreign Exchange Management Act (FEMA) to go scot-free by applying for ‘compounding of offences’. In November 2006, Reliance Infrastructure (formerly Reliance Energy) raised external commercial borrowing (ECB) of $360 million for its Dadri power project. It quickly repatriated $300 million of this (Rs1,266 crore) to India, in contravention of end-use restrictions under FEMA and invested the money in Reliance Mutual Fund – growth option and Reliance Floating Rate Fund–Growth Option. In April 2007, the money was withdrawn and invested in the Reliance Fixed Horizon Fund. Later, in March 2008, it repatriated the funds with more of its own (now a total of $500 million) for investment in Gourock Ventures Limited, a company based in the British Virgin Islands. Then, in July 2008, having filed for compounding of offences, it told RBI that the money was invested in its mutual fund, against FEMA rules, because the Dadri project was delayed. More interestingly, while this application was pending with RBI, the group applied for withdrawal in August 2008. It wanted to submit a fresh application by including another instance where an ECB of $150 million was raised. RBI struck down its explanations as well as its plea to include the second contravention and asked the company to file a separate application. It has calculated that Reliance Infrastructure earned Rs124.68 crore by violating FEMA rules. It however chose to take a lenient view of the contravention (although the penalty under FEMA could go to thrice the sum involved, which would have been Rs3,798 crore) and asked it to pay only the total financial gain of Rs124.68 crore as compounding fee. The order was issued by Salim Gangadharan, RBI’s chief general manager on 27 August 2008. Interestingly, media reports say that the Anil Ambani group has claimed that it is unable to raise money for its Dadri power project because of the on-going litigation over gas-pricing with the Mukesh Ambani group.
Getting Murkier
The Mumbai police as well as SEBI, both of which are investigating the forged SEBI letter sent to Chennai-based Pyramid Saimira (which owns a chain of cinema houses) have found that the trail leads to one of the promoters as well as a set of dubious characters in media and communications. The forged letter asked Pyramid Saimira to make an open offer to minority shareholders at a hefty Rs250 per share, four times the ruling market price. The Mumbai police have since arrested a former PR agency executive, Rakesh Sharma who, in turn, is understood to have pointed to Nirmal Kotecha, a co-promoter who resigned from the board last November and has sold some of his shares back to PS Saminathan, the chairman and managing director. Reliable sources say that Sharma has also named a journalist from a leading business paper as the person who took him to Kotecha and asked him to circulate the letter. Interestingly, this journalist did not file a report in the newspaper he worked for. Instead, two other newspapers – Business Standard and DNA were lured into publishing a report based on the fake SEBI letter. The police apparently questioned Nirmal Kotecha, since he was a big seller in the stock. Kotecha owned 42% of the equity (along with persons acting in concert) before Pyramid Saimira’s IPO (initial public offering). He held as much as 30% even in January 2008; but, after September that year, he has sold almost his entire shareholding, partly in the open market and partly to the co-promoter PS Saminathan. The question is: will this investigation lead to regulatory action or will it be wound up through a shadowy consent filing?

-Sucheta Dalal

-- Sucheta Dalal