Sebi Must Protect the Interest of Investors in Testing Time

It is a testing time for the capital market regulator the Securities and Exchange Board of India. If it approves Reliance Power (RPL) Initial public offering (IPO) draft red herring prospectus (DRHP) in as is form than it will open the back door for unscrupulous promoters for asset striping and increasing their stake at the lower price while forcing other investors to invest in the company at higher prices. This will create imbalance in terms of risks associated with the investment in the IPOs. The public shareholders will face higher risk than promoters of the company.

The purpose of setting up of SEBI is to protect the interest of small investors. Hence the all the relevant SEBI guidelines and regulations are targeting at safeguarding the interest of small investors. If the RPL DRHP is cleared by SEBI without any changes, than it will create ripples in the capital market. Dubious promoters will line up to exploit the investors in Anil Ambani’s style.

The case in point is RPL who has filed its RHDP for the SEBI approval. The fine print of RPL DRHP prospectus draws attention at the dubious means adopted by Anil Ambani to transfer the various projects from Reliance Energy to Reliance Power and merging “dubba company” shell company called Reliance Public Utility Ltd (RPUL). Further the promoters of RPL are doing majority of investment at Rs. 2 per share where as the same shares will be offered to general public at Rs. 60 or at premium. If SEBI passes this RPL offer document in as is form than it will set wrong precedent in the market. The promoters will invest at lower price by merging shell companies and taking advantage of loopholes in the regulatory systems.

Anil Ambani, the promoters of RPL have to contribute in cash at the IPO price, so 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 Investor Protection) Guidelines, 2000. As per clause 4.1.1, the promoters shall contribute at least 20 per cent 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 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 violated to perpetrate deception on the prospective 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 risking his money in the project, he still wants to retain majority control in Reliance Power.

To fulfill his greedy and malefied intention, the following modus operandi was carved. The Anil Dhirubhai Ambani Group a group had an existing shell company called Reliance Public Utility Private Limited (RPUPL). RPUPL, at that time, had a paid up capital of Rs 1.0 lakh. The authorized 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 Ltd (controlled by him) invested Rs 500 crores each, in the equity share capital of RPUPL on August 3, 2007. RPUPL is still a shell company with just Rs. 1000 crores 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 boards passed the proposal for merger of RPUPL into RPL. Both the companies filed a scheme of amalgamation in the Bombay High Court in the first week of August 2007, that is, immediately after infusion of Rs 1000 crores in RPUPL. The rationale of the merger, as stated in the Scheme of Amalgamation was “RPUPL has put in considerable efforts in acquiring necessary technical and manpower skills which are ancillary to the business of RPL. RPL can take benefits of this specialised skill sets and technology available with RPUPL to undertake mega power project and implement them more efficiently and successfully,” (one is unable to understand how the shell company, having only Rs. 1 lakh capital till July 31, 2007, acquired the skill sets to implement a mega power projects. In fact Reliance Energy Ltd (REL), which the one of the largest power companies in India, was already a shareholder 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 approved the merger on September 27, 2007. The order was filed with ROC on September 29, 2007, making the merger of RPUPL into RPL effective from that date. On September 30, 2007 RPL allots 250 crores shares of Rs. 2 each at par to AAA Project Venture Private Limited and REL, who are the erstwhile shareholders of RPUPL.

As a result of this ploy, Anil Ambani and REL both acquired, on September 30, 2007, 250 crores shares of Reliance Power each for a consideration of Rs. 1000 crores 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, have 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 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 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 shareholders of both RTUPL and RPL would have approved the merger. The shareholders 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 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 RPL.

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. Ambani, as one of the 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 guidelines intended for genuine merger, he has acquired this 10 per cent by spending only Rs 690 crores. In fact, the subscription by Ambani of 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 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, 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 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.

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 and 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. If SEBI approves this 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 serious questions on the effectiveness of the regulatory framework of capital issues in Indian capital market.

To protect the interest of small investors and setting correct precedent that all are equal in the eyes of law, SEBI should ask Anil Ambani and REL to pickup entire stake in RPL at IPO price offered to other investors and thereby providing level playing field.

Further, in case of RPL it has not paid any consideration to Reliance Energy Ltd (REL) for acquiring all the projects awarded to latter. This means that the projects under RPL have no value, than why RPL planning to raise money through IPO at premium?

SEBI should look at all the irregularities and should come out with stringent action to set the correct precedent for the promoters and capital market participants that the law of the land is supreme.