Should SEBI not review its consent order on Reliance Communications?

Precise details of how the Anil Dhirubhai Ambani Group (ADAG) illegally used an overseas investment vehicle to bid up prices of Reliance Communications shares between August, 2006, and January, 2008, are now available in the report of the U.K.'s Upper Tribunal on the UBS case released last fortnight in London.

Going by the report, there is enough ground for the stock market regulator, SEBI, and other agencies of the government to re-open the investigations into the case. SEBI closed the case through a consent order in January, 2011, with a fine of a piffling Rs.25 crore on ADAG and Anil Ambani.

The actions of the ADAG group, as revealed in the Upper Tribunal's Report, are not just violative of the securities laws of the country that prohibit residents from investing in domestic securities through a foreign investment vehicle but also RBI regulations on end-use of funds raised abroad by companies through FCCBs (foreign currency convertible bonds) or ECBs (external commercial borrowings). It might not be a surprise if a deeper inquiry reveals violations of other laws relating to foreign exchange.

Modus Operandi

Here are the details of what ADAG did in cahoots with Sachin Karpe, former Desk Head of the Asia II Desk of UBS Wealth Management, in London. Mr. Karpe helped the ADAG group to invest as much as $250 million between December 4, 2006, and October 9, 2007, in Reliance Communications shares in India posing as an FII despite knowing that it was illegal to do so. Pleuri, a fund registered earlier in Mauritius, was used for this purpose. The fund was set up as a Protected Cell Company, which means that it was a single company with several cells. The assets and liabilities of each of these cells were ring-fenced from the rest of the company. One such cell, Cell E, was activated for ADAG. To disguise the fact that the source of funds for this Pleuri Cell E was the ADAG group, the Cell issued shares to third-party banks, which, in turn, issued structured notes to the ADAG group with the shares of Cell E as the underlying security. While the legal owners of the shares of Pleuri Cell E were the banks, the beneficial owners were the ADAG companies.

The Upper Tribunal Report names three ADAG companies — Reliance Energy Ltd., Reliance Natural Resources Ltd. and Reliance Energy Global Pte Ltd. — as the investors of $250 million in Pleuri Cell E, adding that this money was used to buy Reliance Communications shares and derivatives in India.

In addition to this $250 million, a further $68 million was transferred in January, 2007, from Reliance Natural Resources Ltd. to Pleuri Cell E using an unconnected UBS client's account to disguise the source of funds, according to the Upper Tribunal's Report.

Corresponding proof

There is proof to show that Pleuri Cell E invested in Reliance Communications shares in India through offshore derivative instruments (ODIs) issued by at least two banks — Barclays Bank plc and Societe Generale.

These two banks, subject of an investigation by SEBI in 2009 for violation of FII regulations relating to ODIs, were found guilty and punished. (SEBI's order WTM/KMA/IMD/184/12/2009, dated December 9, 2009, signed Dr. K. M. Abraham, Whole Time Member).

The charge against them was that they issued ODIs to UBS with Reliance Communications as the underlying security through a convoluted route that disguised the real client, Pleuri. Barclays, for instance, was accused of issuing its ODIs to a Hythe Securities Ltd, which entity then re-issued them to Pleuri. Under SEBI rules, FIIs can issue ODIs only to entities that are regulated by an appropriate foreign regulatory authority. Pleuri, in this case, was an unregulated entity based in Mauritius.

The facts of the case and the conclusions were similar for Societe Generale, which also issued ODIs to Pleuri with Reliance Communications as the underlying security through a “back-to-back” transaction. (SEBI's order WTM/KMA/207/01/2010, dated January 15, 2010, signed by Dr. K. M. Abraham, Whole Time Member).

Source of funds

Now, what was the source of funds for the ADAG group companies that invested in Pleuri Cell E? They were from FCCBs/ECBs issued by one or more of them. Reliance Natural Resources, for instance, raised $250 million (identical to the investment in Pleuri) as FCCBs in May, 2006.

The ostensible purpose of the borrowings was “project, import of capital goods and rupee expenditure''. Is this not a violation of RBI guidelines on end-use of funds raised abroad? Did the RBI notice this?

Reliance Communications Ventures raised $500 million in March, 2006, as FCCBs ostensibly for import of capital goods and rupee expenditure. Interestingly, the first approach to UBS was made by Reliance ADAG in August, 2006, according to the Upper Tribunal report. The report also says that in January, 2006, and again in June, 2006, Mr. Karpe unsuccessfully tried to seek approval for “an investment structure using an insurance vehicle for Mr. Ambani and/or his family to invest in Indian securities.”

It is clear, therefore, that Pleuri Cell E was not the only attempt or investment vehicle that ADAG, its group companies and Mr. Ambani used to rig up prices of their shares in India.

But what was the impact of these investments on the Reliance Communications share? Between August, 2006, when Pleuri Cell E was activated and January, 2008, when the markets started falling due to the global economic crisis, the Reliance Communications stock more than trebled in value. The share raced from Rs.259 on Aug. 1, 2006 to Rs 821 on January 9, 2008 before it set off on a steep descent with the rest of the market. Today, the share trades at Rs 62.

Consent order

To be sure, these are not unknown or new facts that emerged from the Upper Tribunal report. Much of this was known and SEBI set up a high powered advisory committee (HPAC) to decide on a consent decree that let off ADAG lightly in January 2011. Dr K. M. Abraham, SEBI board member who was one of the two signatories to the consent decree (Mr Prashant Saran, another board member, was the other), must have been able to connect the dots because he was the one who passed the order restraining Barclays and Societe Generale in 2009/2010 in the cases discussed above.

If he did connect the dots, why did he agree to the consent decree? That there was such a provision available in the law is not an excuse for an offence as serious as this. SEBI can re-open the proceedings if it can be proved that any representation made by the ADAG, its executives and Mr Anil Ambani in the consent proceedings is proven to be untrue or wrong. What those “representations” were, only the HPAC and the two SEBI board members probably know. Will they now rise up?

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