Reforms has led to a spectacular improvement in economic performance in India and every one now aware that government target of reaching Gross Domestic Products (GDP) growth of 10 percent is achievable if economic reforms continue. India is definitely emerging as the first choice amongst investors including domestic investors, foreign investors, global financial institutions and international banks as the economy is booming and celebration is on international level. As results, everyday unlisted companies are trying to float IPOs.
India’s top thirty companies are most responsible for the noticeable jump in SENSEX and we are proud of them. But has anyone ever tried to sneak a look at the working in background of the companies, which file the prospectus with SEBI, seeking an approval for floating their IPOs?
Recently, a swindle being perpetrated by the promoters of Reliance Power Limited on the would be investors in the public issue of the company to enrich themselves at the expense of gullible public and how SEBI Guidelines are being subverted in a planned and scheming manner
According to SEBI’s guidelines, the promoter of unlisted companies (contributing their mandatory promoter's contribution within the preceding one year) have to contribute in cash at the IPO price so that the promoters take the same financial risk as the IPO
investors. The issue at reference is the minimum "promoters contribution" to be brought in by the promoters - Reference clauses 4.1 to 4.6 of SEBI (Disclosure and Investor Protection) Guidelines, 2000. As per clause 4.1.1 the promoters shall contribute at least 20% of the post issue capital in a public issue by an unlisted company. As per clause 4.6.2 the promoters have to contribute this 20% at least at the IPO price if they have contributed this 20% during one year preceding the public issue.
SEBI guidelines have been blatantly subverted to perpetrate deception on the prospective investors in the IPO of Reliance Power Limited. Mr. Anil Ambani decides to float an IPO of Reliance Power Limited in last week of July 2007. Without risking his money in the project he still wants to retain majority control in Reliance Power.
The group had an existing shell company called Reliance Public Utility Private
Limited (RPUFL). RFUPL at that time had a paid up capital of Rs. 1 lakh. The authorized capital of RPUPL was increased to Rs 1000 crores by a resolution dated July 30, 2007. Mr. Anil Ambani's personal investment company and Reliance Energy Ltd (controlled by Mr. Anil Ambani) invest Rs 500 cr each in the equity share capital of RFUFL on 3rd August 2007. RPUPL is still a shell company with just Rs 1000 crores of share capital and Rs 1000 cr investment. (The Rs 1000 cr investment will naturally be made only in Mr. Anil Ambani's group companies. Thus no money would have gone out of the group).
Simultaneously, RPUPL and Reliance Power Limited pass necessary Board for merger of RPUPL into Reliance Power Limited. Both the companies file a scheme of amalgamation in the Bombay High Court in the first week of August 2007 i.e. immediately after infusion of Rs 1000 crores in RPUFL. The rationale of the merger, as stated in the Scheme of Amalgamation is "RPUPL has put in considerable efforts in acquiring necessary technical and manpower skills which are ancillary to the business of Reliance Power Limited. Reliance Power Limited can take benefits of this specialized skill sets and technology available with RPUPL to undertake mega power project and implement them more efficiently and successfully",(One should be unable to understand as to from where the shell company having only 1 lakh capital till 31st July 2007 acquired the skill sets to implement mega power project. In fact REL which the one of the largest power companies in India was already a share holder in Reliance Power and Reliance Energy's technical experience have been used by Reliance Power to bag mega power projects.). The High Court of Bombay approves the merger on 27th September 2007 and the order is filed with ROC on 29lh September 2007 making the merger of RPUPL into Reliance Power Limited effective from that date. On 30th September 2007, Reliance Power Limited allots 250 crores shares of Rs. 2 each to AAA Project Venture Private Limited and REL, who are the erstwhile shareholders of RPUPL.
As a result of this ploy, Mr. Anil Ambani and REL both acquire, on 30th September 2QO7, 250 crores shares of Reliance Power each for a consideration of Rs. 1000 crores only which was also infused into RPUPL only on 3d of August 2007 i.e. within one year prior to public issue. These 250 crores shares of Reliance Power which, have been allotted to Mr.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, Mr. Anil Ambani, as the promoter of Reliance Power, has avoided investing a huge amount as promoter's contribution at the IPO price and passed on the entire risk of the project 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 a RPUPL, a shell company into Reliance Power. The merger has been sanctioned by the High Court on the basis of the facts put before it and since the shares holders of both RTUPL and Reliance Power Limited would have approved the merger. The shareholders of both Reliance Power and RPUPL are only Sh. Anil Ambani’s investment companies and a representative of Reliance Energy. Reliance Energy owns 50% of Reliance 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 Reliance Power Limited.
Press reports state that Reliance Power plans to raise approximately Rs 8000 crores by issuing 130 crores equity shares of Rs 2 each. Thus the approximate issue price per equity share is expected to be Rs. 60 per share. Mr. Anil Amabni, as one of the promoters for his acquisition of 113 crores shares (10% 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 guidelines intended for genuine merger, he has acquired this 10% by spending only Rs. 690 crores. In fact, the subscription by Mr. Anil Ambani of Rs, 8 crore share at the IPO price is an eyewash to divert public attention. Thus, at the expense of prospective investors Mr. Anil Ambani will gain approximately Rs. 6000 crores (assuming the IPO price to be Rs. 60 per share). In fact, as per clause 3.7.1 (i) SEBI guidelines, a company cannot make a public issue of Rs. 2 face 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, Mr. Anil Ambani will gain upwards of Rs. 55,000 crores at the expense of the future investors of Reliance Power.
Thus the total loss will be 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. 500 as mandated by SEBI regulations, the loss to the prospective investors will be Rs.1,10,000 crores. In fact, the loss will be to the general public who will invest in the public issue and also to the public financial institutions and banks who will invest common man’s money in this public issue
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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. If SEBI approves this prospectus, it will be a disservice to the future investors in public issues adds SEBI would not be discharging its responsibilities in a proper manner. It will set a dangerous precedent. From now on every promoter in India would subvert SEBI (DIP) guidelines in the same manner and if SEBI approves this-prospectus, they can never in future disapprove any public issue made in the above manner. In fact, If this public issue is allowed, it may raise serious issues on the effectiveness of the regulatory framework of capital issues in Indian capital market
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The Department of Company Affairs should not also remain silent spectator in this issue and should make use of all the powers to stop this fraud poor gullible prospective investors in Reliance Power.
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