Question time

Here’s a mystery. How did two companies run by Reliance founder Anil Ambani manage to invest $250 million in a related company without anyone in the firm realising? And why has the UK’s financial regulator secured a conviction in a connected case, when India’s regulator merely settled? These unknowns reflect poorly on India’s already downtrodden reputation among investors.

At the heart of the story is a suggestion from the UK’s Financial Services Authority that two Ambani firms used a foreign vehicle to reinvest in group companies - something prohibited by Indian law. Ambani was not party to the tribunal over which the FSA made its claims, and has denied any knowledge. Reliance says it didn’t know the $250 million, entrusted to banks in the form of structured notes some five years ago, was ultimately invested in Reliance Communications.

One might expect the Indian regulator to investigate. But the Securities and Exchange Board of India already settled. Anil Ambani and several Reliance directors paid $10 million to Sebi in January 2011, which Reliance claims closes the case.

Three things about the story are disconcerting. First, it doesn’t look great for Sebi that a foreign regulator that raised the red flag so publicly. The FSA successfully levied a fine against a former UBS banker who facilitated the trade, where Sebi has yet to secure a major conviction, and has often settled with no admission of guilt. While Reliance paid a record $10 million settlement, Sebi looks toothless.

Second, Reliance hasn’t provided closure. There’s no public word over whether Sebi’s fine was followed by any change in the group companies’ processes and systems or indeed personnel.

Third, there’s the potential failure of systems. It’s possible Reliance directors didn’t know that $250 million of the company’s money had been invested, albeit indirectly, in another Reliance group firm. But the 59 per cent rise in Reliance Communications shares over the period should have raised questions, given their outperformance versus the Sensex index, which rose 32 per cent. And it’s not clear why industrial firms were investing in structured notes in the first place.

Investors are unlikely to get more detail from Ambani. And Sebi has settled and moved on. The mystery will die down, but the sense that India’s market isn’t quite working is hard to shake off.