Corp scam by ADAG to hurt investor sentiment

Dev Ghosh
The Anil Ambani Group (ADAG), promoter of Reliance Power Limited (RPL), is defra
uding investors by launching a dubious IPO to enrich themselves at the expense o
f gullible public. SEBI Guidelines are being subverted in a planned and shrewd m
anner. While investors are asked to pay a premium, the promoters have subscribed
to the company just a month before the IPO at par value.
According to SEBI's (Securities and Exchange Board of India) guidelines, the pro
moters of unlisted companies (contributing their mandatory promoter's contributi
on within the preceding one year) have to contribute in cash at the IPO price, s
o that the promoters take the same financial risk as the IPO investors.
The issue in reference is the minimum 'promoters' contribution' to be brought in
by the promoters - Reference clauses 4.1 to 4.6 of SEBI (Disclosure and Investo
r Protection) Guidelines, 2000. As per clause 4.1.1, the promoters shall contrib
ute at least 20 per cent of the post issue capital, in a public issue by an unli
sted company. As per clause 4.6.2, the promoters have to contribute this 20 per
cent at least at the IPO price, if they have contributed this 20 per cent during
one year preceding the public issue.
SEBI guidelines have been blatantly subverted to perpetrate deception on the pro
spective investors in the IPO of Reliance Power Limited. Anil Ambani decided to
float an IPO of Reliance Power Limited in last week of July 2007. Without riskin
g his investment, Anil Ambani wants to retain majority control in Reliance Power
.
The group had an existing shell company called Reliance Public Utility Private L
imited (RPUFL). RFUPL, at that time, had a paid up capital of Rs One lakh. The a
uthorised capital of RPUPL was increased to Rs 1000 crores by a resolution dated
July 30, 2007. Anil Ambani's personal investment company and Reliance Energy Lt
d (controlled by him) invested Rs 500 crores each, in the equity share capital o
f RFUFL on August 3, 2007. RPUPL is still a shell company with just Rs 1000 cror
es of share capital and Rs 1000 crores investment (The Rs 1000 crores investment
will naturally be made only in Anil Ambani's group of companies. Thus no money
would have gone out of the group).
Simultaneously, RPUPL and RPL pass the necessary Board for merger of RPUPL into
RPL. Both the companies file a scheme of amalgamation in the Bombay High Court i
n the first week of August 2007, that is, immediately after infusion of Rs 1000
crores in RPUFL. The rationale of the merger, as stated in the Scheme of Amalgam
ation was "RPUPL has put in considerable efforts in acquiring necessary technica
l and manpower skills which are ancillary to the business of RPL. RPL can take b
enefits of this specialised skill sets and technology available with RPUPL to un
dertake mega power project and implement them more efficiently and successfully,
" (one is unable to understand how the shell company, having only One lakh capit
al till July 31, 2007, acquired the skill sets to implement a mega power project
. In fact REL, which the one of the largest power companies in India, was alread
y a shareholder in Reliance Power and Reliance Energy's technical experience hav
e been used by Reliance Power to bag mega power projects).
The High Court of Bombay approved the merger on September 27, 2007 . The order w
as filed with ROC on September 29, 2007, making the merger of RPUPL into RPL eff
ective from that date. On September 30, 2007 RPL allots 250 crores shares of Rs
Two each to AAA Project Venture Private Limited and REL, who are the erstwhile s
hareholders of RPUPL.
As a result of this ploy, Anil Ambani and REL both acquired, on September 30, 20
07 , 250 crores shares of Reliance Power each for a consideration of Rs. 1000 cr
ores only. This was also infused into RPUPL only on August 3, 2007 , within one
year prior to public issue. These 250 crores shares of Reliance Power which, hav
e been allotted to Anil Ambani's personal investment company and REL pursuant to
the amalgamation, apparently becomes eligible for exemption under clause 4.6.4
of SEBI (DIP) guidelines with respect to promoters contribution. Thus, Anil Amba
ni, as the promoter of Reliance Power, has avoided investing a huge amount as pr
omoter's contribution at the IPO price and passed on the entire risk of the proj
ect to the prospective investors to his personal gains.
It is apparent that the High Court was not aware of the ulterior motives behind
the merger of RPUPL, a shell company into Reliance Power. The merger has been sa
nctioned by the High Court on the basis of the facts put before it and since the
shareholders of both RTUPL and RPL would have approved the merger. The sharehol
ders of both Reliance Power and RPUPL are Anil Ambani's investment companies and
a representative of Reliance Energy. Reliance Energy owns 50 per cent of Relian
ce Power. This merger proposal has never been taken to the shareholders of REL,
who would have presumably questioned the need for and looked into the merits and
demerits of the merger of a shell company into RPL.
Press reports state that Reliance Power plans to raise approximately Rs 8000 cro
res by issuing 130 crores equity shares of Rs Two each. Thus the approximate iss
ue price per equity share is expected to be Rs 60 per share. Ambani, as one of t
he promoters for his acquisition of 113 crores shares (10 per cent of post issue
share capital as per the prospectus) at a price of Rs 50 per share, should have
invested Rs 6780 crores. Against this, by misusing the exemptions in the SEBI g
uidelines intended for genuine merger, he has acquired this 10 per cent by spend
ing only Rs 690 crores. In fact, the subscription by Ambani of Rs 8 crore share
at the IPO price is an eyewash to divert public attention.
Thus, at the expense of prospective investors, Ambani will gain approximately Rs
6000 crores (assuming the IPO price to be Rs 60 per share). In fact, as per cla
use 3.7.1 (i) SEBI guidelines, a company cannot make a public issue of Rs Two fa
ce value share at the price less than Rs 500 each. Hence, in case Reliance Power
issues the shares at the price of Rs 500 per share, Ambani will gain upwards of
Rs 55,000 crores at the expense of the future investors of Reliance Power.
Thus the total loss to the prospective investors in Reliance Power will be Rs 12
,000 crores (assuming IPO price to be Rs 60 per share). If the IPO price is Rs 5
00 as mandated by SEBI regulations, the loss to the prospective investors will b
e Rs 1,10,000 crores. In fact, the loss will be to the general public who will i
nvest in the public issue, and also to the public financial institutions and ban
ks, who will invest common man's money in this public issue.
The above facts clearly point out a fraud being perpetrated on the investors and
SEBI should immediately stop the public issue and not approve the prospectus. I
f SEBI approves this prospectus, it will be a disservice to the future investors
in public issues and SEBI would not be discharging its responsibilities in a pr
oper manner. It will set a dangerous precedent. From now on, every promoter in I
ndia would subvert SEBI (DIP) guidelines in the same manner. If SEBI approves th
is prospectus, they would be unable disapprove any public issue made in future,
in the above manner. In fact, if this public issue is allowed, it may raise seri
ous questions on the effectiveness of the regulatory framework of capital issues
in Indian capital market.
The Department of Company Affairs should not remain silent spectators in this is
sue and should make use of all the powers to stop this fraud against poor gullib
le prospective investors in Reliance Power. The regulators and the govt, sadly,
are turning a blind eye and this will make investors suffer.
Released on: Oct 31, 2007