The Securities and Exchange Board of India (SEBI), on Friday, imposed a penalty of Rs.13 crore on Reliance Industries Ltd. (RIL) for non-disclosure of a key earnings ratio. The order follows a probe by the regulator in about seven-year-old case alleging irregularities in issuance of 12 crore warrants by the company to its promoters entitling its holders to subscribe to equivalent number of equity shares of RIL.
It was alleged that this issuance in April 2007 had resulted in diluting the pre-issue paid-up equity share capital of RIL, but the company repeatedly failed to disclose a key earnings ratio for as many as six quarters.
Subsequently, SEBI began adjudication proceedings to probe the alleged violation of relevant clauses of the Listing Agreement and the Securities Contracts (Regulation) Act for not disclosing to stock exchanges the diluted earnings per share (DEPS) as prescribed for the quarterly and annual disclosures, the regulator said in its 15-page order.
As RIL had outstanding share warrants issued in April 2007 which got converted into equity shares only during the third quarter of 2008-09, the company should have disclosed basic and DEPS in the filings for the quarters ended June 2007, September 2007, December 2007, March 2008, June 2008 and September 2008.
“However, on scrutiny of the quarterly financial statements of RIL filed with the NSE, during the quarters ended June 2007 to September 2008, it was observed that RIL did not disclose separately DEPS in the quarterly financial statements,” SEBI said.
A show-cause notice was served on RIL in February last year, listing out allegations levelled against the company.
After looking into the company’s reply and further probe into the matter, SEBI said, “EPS (basic or diluted) is a vital factor or one of the fundamental tools for the investors while arriving at decision to continue or invest in the shares of a particular company.”
It further added RIL was “under an obligation to disclose separately the DEPS for the quarters ended June 2007, September 2007, December 2007, March 2008, June 2008 and September 2008, which the notice had failed to do so”.
“In view of the aforesaid observations, facts and records of the case,” SEBI said, the company was in violation of the relevant provisions of the Listing Agreement and the SCRA and, therefore, it was liable to a penalty.
Noting that a specific quantum of any direct or indirect unfair gain made by RIL and the loss caused to the investors were not available on records, SEBI said that “the fact cannot be ignored that millions of shareholders/investors were deprived of correct disclosures about DEPS.”
“As regards to the repetitive nature of default, as observed above that the Notice had failed to disclose the DEPS repetitively for the six quarters.
“Hence, an appropriate penalty needs to be imposed upon the Notice, taking into account the aforesaid gravity of the violations committed,” SEBI said.
Accordingly, the regulator has decided to impose a penalty of Rs.1 crore for violation of Listing Agreement and of another Rs.12 crore for violating the SCRA provision.
Action based onlegal advice: RIL Meanwhile, RIL in a late night statement said, “We are now studying the order as to the interpretation SEBI has taken and would take appropriate action based on legal advice.”
It further states that “The issue relates to the method of calculation of diluted EPS under the Accounting Standards. The issue is not of non-disclosure. It can be observed from the results published by the company of all the quarters in question that both basic and diluted EPS have been disclosed (please see relevant line on basic and diluted EPS in the enclosed media releases relating for six quarters). The company in its arguments and written submission has brought out all the relevant clauses of the Accounting Standards to substantiate why basic EPS and diluted EPS were same in all the quarters.’’
