Sebi's delay makes RIL order absurd

The Securities and Exchange Board of India (Sebi) last week slapped a penalty of Rs 25 crore jointly on 34 entities, including brothers Mukesh and Anil Ambani and various members of the extended Ambani clan and other entities known as persons acting in concert (PAC). In January 2000, the promoters of Reliance Industries Ltd (RIL), and other entities acting in concert, raised their stake in RIL by 6.83 per cent through converting warrants issued in 1994. Under Sebi’s Substantial Acquisition of Shares and Takeovers (SAST) Rules of 1997, any acquisition of over 5 per cent ought to have triggered an open offer to other shareholders. But RIL did not bother to do that. The violation came to light in April 2000. However, it appears that three successive Sebi chairmen — D R Mehta, G N Bajpai, and M Damodaran — had no interest in actively pursuing it.

In April 2010, when C B Bhave was chairman, Sebi pulled out this 10-year-old matter from the deep freeze and issued notices to 38 entities for violating takeover regulations and appointed an adjudication officer in December 2010. On February 17, 2011, Mr Bhave’s term expired and within six days of U K Sinha’s appointment, Sebi issued a notice to these entities, including the entire Ambani clan. As an aside, Mr Sinha battled allegations that he was going soft on investigations all through the first term of his long, seven-year tenure.

Reliance immediately rebutted the charge on the following grounds. One, it was not given access to the documents that Sebi had relied on. Two, there was an unreasonable and unexplained delay and so, according to various case laws, it was too late for Sebi to bring any charges. Three, acquiring shares by way of preferential allotment was exempted from public offer requirements so RIL had done nothing wrong. Four, Sebi has slapped a penalty on the RIL group of Rs 25 crore under the amended Section 15H but this amendment happened only in 2002. The alleged violation had occurred in January 2000, when the penalty was just Rs 5 lakh. Moreover, in August-September 2011, the RIL entities had filed a consent application (under which an accused could pay up some money and walk away, without denying or admitting guilt). Sebi had put the case back in cold storage without deciding the issue. Mr Sinha’s second term ended in February 2017 and Ajay Tyagi became chairman. In May 2020, almost nine years later, Sebi woke up to reject the consent application and to issue and order and impose penalties.

The funny thing about Sebi’s order is the assertion that the failure of Reliance promoters to make an “open offer” had “deprived the shareholders of their statutory rights/opp­ortunity to exit from the target company and therefore they breached the provisions of the Takeover Regul­ations. Such charges against the noti­c­ees make the instant matter grave”. Have shareholders lost out by not being able to exit? RIL’s share price at the end of January 2000 was Rs 62 (price adjusted for restructuring). It is over Rs 2,000 today.

While not putting too fine a point on it, RIL shareholders have enjoyed more than a 30 times increase in their wealth, as a result of the company’s failure to make an open offer and Sebi’s two-decade delay in enforcing it. And, I am not even counting additional shares of the Anil Ambani group that RIL shareholders were allotted when the brothers split. According to Sebi, despite the long delay, RIL’s liability to make the open offer continues till today! While the RIL group must be made to pay for violations, if established, shouldn’t Sebi be aware of the absurd implications of its long-delayed order? Interestingly, Sebi has not bothered to compute the unfair gains made by RIL promoter entities by not making the open offer.

Delay? What delay?

The RIL group in its response quotes the Securities Appellate Tribunal in Ashok Chaudhary v Sebi (order of November 5. 2008): “Long delays in issuing show cause notices to the delinquents will not subserve the purpose for which the Board has been set up. It would rather act against the interest of the securities market …” But here is the most amazing aspect of the episode. Sebi does not even think that there was any delay! It argues in the 85-page order that “only after the examination of the facts is complete and submitted to the Board for initiation of action and approval for filing a complaint under Section 26 does the limitation period, if any, begin to run.” In this case, “various enforcement action… was approved by the Competent Authority on September 15, 2010” and “SCNs (show-cause notices) issued in February 2011”.

This was followed by hearings in 2011, after which the RIL group filed a consent application. The Sebi order claims “… the matter had been kept in abeyance in accordance with the securities law and also considering the undertakings given and requests made by the Noticees”. The settlement applications were rejected on May 15, 2020, pursuant to which the present proceedings have resumed, therefore, “there is no delay, if any, on the part of the SEBI in initiation of the adjudication proceedings”. The regulator’s claim that an order — issued 20 years after a simple and straightforward violation, one that did not require long-drawn investigation, and therefore does not amount to delay — is extremely shocking. The very purpose of setting up independent regulators is to ensure speedy investigation and enforcement action by a trained cadre with domain knowledge, because of the fast-changing nature of the capital market. How would Sebi’s action have served any purpose if RIL had gone the way of the Anil Ambani group? 

The writer is the editor of www.moneylife.in | Twitter: @Moneylifers