Sucheta Dalal :Is Reliance rewriting rules of corp governance
Sucheta Dalal

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Is Reliance rewriting rules of corp governance  

Jun 7, 2005

On January 11, a Joint Director in the Finance Ministry’s Department of Economic Affairs wrote a letter to the Securities and Exchange Board of India (Sebi) asking it to ‘‘look into the matter’’ of a ‘‘note received from Shri Anil D. Ambani regarding buyback of equity shares of up to Rs 3,000 crore by Reliance Industries Limited.’’ The Ministry wanted to be kept informed about Sebi’s findings. Anil Ambani’s note is written on a plain sheet of paper instead of his official letterhead or his insignia as Member of Parliament. He had also publicly voiced his objections to the share buyback just before the board meeting that decided the issue. At the meeting itself, which was the appropriate forum for raising objections, he didn’t file a formal dissent note; instead he made a presentation to the board and merely abstained from voting. The other charges that Anil Ambani has listed in his letter to the Finance Ministry have already been ‘leaked’ to the media by what is euphemistically referred to as the ‘Anil Ambani camp’. But this is probably the first time in Indian corporate history that a Vice Chairman and Managing Director has written to the government demanding an investigation against a company while he continues to hold important fiduciary positions in top management. The action raises important issues about corporate governance and the responsibility of senior management towards the company as well as its shareholders. Before going into those issues, here is a gist of concerns that Ambani junior wants the Finance Ministry to investigate through Sebi, ostensibly in order to protect the ‘‘integrity of the capital market and the interests of RIL’s 30 lakh investors.’’ Firstly, he alleges that RIL’s statutory public announcement of the share buyback on December 29, 2004 failed to reveal that Sebi is investigating insider trading and price manipulation of Reliance shares before the buyback and that the two major stock exchanges are investigating compliance with listing norms. (For the record, Sebi did force Reliance to make additional disclosures, but not necessarily all those that Anil Ambani had demanded.) Secondly, he alleges that RIL failed to reveal the fact that Sebi is investigating a complaint by S. Gurumurthy into the ownerhship and financing of a web of 400 companies who own Reliance shares. Interestingly, Anil Ambani claims that these ‘‘investigations are in progress.’’ In fact, this writer first reported Gurumurthy’s allegations about a ‘‘gigantic fraud’’ by Reliance in February 2002 and I am fairly certain that Sebi did not even bother to initiate an investigation into those charges. Instead, Sebi had gone on to exonerate Reliance of all charges of manipulation and insider trading in its controversial sale of its 10 per cent stake in Larsen & Toubro of which nearly 6 per cent was acquired through open market purchase just two weeks before the block deal with Grasim. A third issue raised by Anil Ambani is that ‘‘two unknown individuals’’ are ‘‘reported to be in control of the 29 per cent promoter stake in Reliance valued at Rs 20,000 crore.’’ He further says the buyback would increase the RIL promoter holding by a further 2 per cent using Rs 3,000 crore of shareholders funds and that there is a ‘‘major public controversy over the classification of a 12 per cent stake in RIL valued at Rs 10,000’’ which actually ‘‘belong to RIL’s 30 lakh investors and not the promoters.’’ Ambani’s final point is that ‘‘Major issues of ownership, management, corporate governance, transparency and disclosure in RIL’’ have ‘‘publicly surfaced in relation to transactions between Reliance and Reliance Infocomm’’ which were not disclosed in the advertisement. All these charges are indeed merit investigation. Newer revelations about a series of friends and corporate entities who seem to have acquired Reliance Infocomm shares at Re 1 each have also raised serious questions about why the publicly listed company ended up paying a much higher price for its Rs 12,000 crore investment and whether RIL shareholders have been badly short-changed in the process. But Reliance has never been a stranger to serious controversy; and, until end July 2004 (when many of his powers were curtailed through a board resolution) Anil Ambani was part of the top management, privy to all confidential information and in fact, the group’s public face. He presented its financial results to the media and analysts and even collected a clutch of good governance awards on its behalf. That is why his sudden activism on behalf of shareholders rings phoney, although it is in public interest. Anil Ambani is clearly at liberty to wage a war against his brother over his share of the Reliance family holding and to fight for management control if he believes that he has been unfairly ousted. But the governance issue that is raised by his damaging revelations and many allegations are clearly at conflict with his role as Vice Chairman and Managing Director of Reliance. If his charges are true, regulatory action can only damage Reliance’s valuation and destroy shareholder wealth instead of protecting their interests. If Reliance been a professionally-managed company instead of a family controlled group, would Anil Ambani have been allowed to remain a director when he was fighting a war against several people in top management? Also, if a company is a distinct and separate legal entity in the eyes of the law, can a board director, or, in this case the Vice Chairman and Managing Director retain his official status while working against its interests? And can he continue to get access to confidential information that is presented to the board or to draw a hefty salary from the company? These are some of the governance issues that are also raised by Anil Ambani’s actions and allegations and they need to be openly debated by peer groups, industry bodies and corporate governance experts. But what can one really expect when juries of these very peer groups have showered the group with awards of corporate excellence (Institute of Company Secretaries in 2003) and Corporate and Social Responsibility awards (Golden Peacock by the Institute of Directors in 2004)?
-- Sucheta Dalal