Sucheta Dalal :S Gurumurthy on the warpath against Reliance again
Sucheta Dalal

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S Gurumurthy on the warpath against Reliance again  

February 8, 2002

Twenty years ago, Swaminathan Gurumurthy, a young chartered accountant, suddenly gained national fame spearheading virulent attacks against the Reliance group in India's bloodiest corporate war.

Gurumurthy has since metamorphosed into a leader of the Swadeshi Jagran Manch, a nationalist group with strong political linkages to a section of the ruling coalition led by the Bharatiya Janata Party. Now Gurumurthy is on the warpath again - and his target is once again Reliance Industries.

In characteristically strong language, Gurumurthy has filed a formal 38-page complaint (with a six-page 'Executive Summary') with the chairman of the Securities and Exchange Board of India. It complains of a 'gigantic fraud perpetrated by Ambanis' in allotting themselves 120 million shares of Reliance Industries Ltd in January 2000. The modus operandi was the conversion of a preferential issue of non-convertible debentures with warrants (representing 11.38 per cent of the capital at that time), causing, according to Gurumurthy, wrongful loss to the company and its investors a huge Rs 27 billion.

In view of the 'facts that have been marshalled' by him, Gurumurthy wants Sebi to treat his complaint as a 'virtual criminal charge sheet.'

The crux of the 'fraud' as alleged by Gurumurthy is as follows: On December 10, 1992, Reliance Industries passed a single resolution (No 13) authorising the company to issue Rs 3 billion worth of NCDs with or without warrants and which prohibited any issue to directors or to entities which the directors were interested or concerned with.

However, instead of one issue, the Ambanis allegedly made two issues under this single resolution.

The first was an NCD issue of Rs 3 billion with detachable warrants to 34 private corporates, which Gurumurthy says are 'admittedly associated with the Ambanis.' This issue (described as the PPD IV series) entitled them to 60 million equity shares at an effective price of Rs 61 per share.

He goes on to claim that in fact the price paid by them worked out to just Rs 30 per share when the market price of the shares was over Rs 300 per scrip This step, he says, enhanced the Ambani holding in RIL by 11.38 per cent.

The second issue of Rs 3 billion worth of NCDs with non-detachable warrants was made to the Unit Trust of India entitling them to 74,80,000 equity shares at a price of Rs 401 per share.

Gurumurthy alleges that this 'fraud' was hatched because the merger of Reliance Petro Products with RIL, and its various debenture and GDR issues would have reduced the Ambani holding in RIL from 26 per cent in 1992 to 14 per cent. Through the 'fraudulent' preferential allotment they managed to increase to 33 per cent, says the anti-Ambani crusader.

Gurumurthy alleges that the preferential allotment to 34 Ambani companies was only the beginning. The merger of the Reliance twins - Reliance Polypropylene Limited and Reliance Polyethylene Limited - with RIL, also increased the Ambani holding in RIL by 7.76 per cent at an effective price of Rs 64 per share (pre-bonus) when the market price was over Rs 300. "These twin frauds" allegedly allowed the Ambanis to acquire a 19.14 per cent stake in RIL.

These 'facts', he says, are based on the records filed by RIL with different stock exchanges, documents filed by RIL as regards the listing of the NCDs in January 1994, listing of 74,80,000 shares (PPD V) issued to the UTI in March 1995 and listing of 120 million shares allotted against exercise of rights under warrants in January 2000.

"The documents clearly establish that the very same resolution, namely resolution no 13 of the AGM held on 10 Dec 1992, had been submitted to support the issue of NCDs with detachable warrants to the Ambani corporates and also the issue of NCDs with non-detachable warrants (PPD V) aggregating Rs 3 billion issued to UTI. The case against RIL is, therefore an open and shut case as under the same resolution number 13," says Gurumurthy's complaint.

He alleges that the RIL board in 1993 granted blanket authority to a committee of directors, consisting of Ambanis only, to negotiate and settle the terms of the issue of NCDs with warrants and to effect the allotment, without further reference to the board. Gurumurthy charges that such delegation is itself ultra vires the powers of the board.

He claims that 10 months later the RIL board passed another resolution on October 11, 1993 to vest the authority on the same Ambani-controlled committee of directors, in pursuance of the very same special resolution (No.13). The purpose was also exactly the same, i.e. to issue NCDs aggregating Rs 3 billion with warrants, to the same generic classes of persons (FIs/mutual funds/banks and others) - identically as they did 10 months earlier on January 21, 1993. This meant the use of the same resolution no. 13 twice.

One was for making a 'fraudulent issue' of NCDs aggregating Rs 3 billion with warrants to themselves and another for issuing NCDs aggregating Rs 3 billion with warrants to UTI.

There is more. Firstly, he says the allotment of shares to the 34 Ambani companies was simply not possible under the special resolution No. 13 at the December 1992 meeting, and was "explicitly and implicitly forbidden".

Also, the preferential issue to UTI could be made only if the original issue contemplated under the resolution was undersubscribed.

Gurumurthy further says that as per special resolution 15 at the same meeting, the price of the issue could not have exceeded Rs 250 per share.

Gurumurthy says the preferential issue to the 34 private companies is void ab initio and amounts to 'fraud and breach of trust' of investors' interest. He wants Sebi to cancel the issue and to declare it 'unauthorised and fraudulent.'

A copy of the complaint has also gone to the prime minister, the home minister, the law minister, the minister for divestment, the chief vigilance commissioner, the Cabinet secretary, various stock exchanges and others.

However, one would have expected Gurumurthy to call a press conference to declare his war, as he has done in the past. That he has instead chosen to send copies of the complaint only to official agencies is indeed curious.

When contacted Sebi Chairman D R Mehta said the main charge is that Reliance has allotted shares twice, based on the same resolution. He said he had forwarded the complaint to the Unit Trust of India to respond to the charge. Sebi officials are in the process of verifying all the information that Gurumurthy has marshalled.

This columnist contacted the Reliance spokesperson on January 31 for the company's response to Gurumurthy's charges.

On Tuesday night, Reliance replied to this columnist's queries by sending a copy of the letter written to Finance Minister Yashwant Sinha in July 27, 2001 in connection with the UTI private placement by Yogesh Desai, President, Corporate Communications.

This columnist then wrote to Mr Desai saying that the letter does not address Gurumurthy's main charge that the same special resolution was used twice to allot shares -- first to the UTI and then to 34 companies belonging to Reliance. We also asked for a specific reply to Gurumurthy's charge, but have received no answer.

E-mail: [email protected]

-- Sucheta Dalal