Last week SEBI slapped a ₹25 crore fine on members of India’s wealthiest family - the Ambanis, over an alleged takeover violation and we need to talk about it.

The Story

The case dates back to 1994. The company issued non-convertible debentures with equity warrants in a bid to raise ₹300 crores from people closely associated with Reliance. These people were acting on behalf of the promoters of the company and the transaction went through without a hitch. And while this might seem like a complicated arrangement, it’s really not. Think of these warrants as a privilege accorded to a few select people who’d have the opportunity to convert them to shares at some point in time. If you exercised the option you could be part owners of RIL. And in 2000, this is precisely what happened. The group of promoters who held the warrants decided to exercise their option and received about 6.83% of the company.

But according to SEBI’s regulations, they were expected to intimate shareholders about this exercise in advance. If promoters or those closely associated with the promoter group acquired more than 5% of the company in any given year, they were mandated to offer an exit option to other shareholders in the company. After all, when certain new people are accorded voting rights (even if they were the promoters themselves) that could fundamentally alter the way companies are run. Promoters could change their strategy altogether if they believed they could exercise more control. So it’s imperative to ask other shareholders if they still wanted to be a part of the company. Reliance didn’t comply with these rules and SEBI initiated proceedings against the company in 2011. And while it took another decade for the regulator to penalize them for their transgressions, it’s still imperative to ask — What was RIL’s defence here?

Well, for starters the promoter group simply didn’t believe they did anything wrong. Their contention was this — It took SEBI 10 years to initiate proceedings after the shares were allotted and 16 years after the warrants were issued. They believed these inordinate delays deprived them of a fair trial and the constitutional right of natural justice. After all, a lot has happened since the year 2000. Reliance is no longer one gargantuan entity. You have the Anil Ambani led Reliance, fading into obscurity and you have the Mukesh Ambani led Reliance that’s breaking new ground each year. It’s not the same company any more and it’s not the same group of people that once held all the control.

Besides, the promoter group had another argument in tow. Back in 1994, when the original warrants were first issued, the company had in fact fully complied with the law. Even the officers at SEBI thought as much. However, it was only in 1997 did SEBI overhaul the existing regulations. And the claim was that the group violated these new provisions in 2000 when they allowed certain people to convert their warrants to shares. So they argued that the new regulations mustn’t apply since the warrants were originally issued much earlier.

But the adjudicating officer in the matter did not see it this way. On the matter of delay, he had this to say —

“I find it relevant to note that the investigation generally is a detailed process involving analysis of various data, gathering of evidences, etc. that shall stand the test of legal scrutiny at various judicial fora. This, generally, consumes considerable time and efforts depending on the number of entities involved, the complexity of the transactions, correspondences with the entities involved etc.”

Also, once the show cause notice was issued in 2011, the promoter group and SEBI have been trying to settle the matter internally. It was only when a compromise wasn’t deemed feasible, did SEBI finally decide to act. So technically, you couldn’t blame the regulator for the delays. At least, not entirely. More importantly, he also argued that this was to be classified as an “economic offence.” And as such, you could not possibly give people a pass simply because there’s been some delay in the matter. So that argument fell flat.

But what about the other one — where they contested that the new regulations only came into force after the warrants were issued.

Well, as we already pointed out — Warrants can be converted to shares if the option were exercised. The voting rights are conferred on people at that moment in time. So technically, RIL had an obligation to comply with the regulations when they made the choice to convert those warrants to shares. They had to intimate other shareholders about this exercise. But they didn’t and they refused to offer investors an exit option.

Therefore the officer found them guilty and imposed a ₹25 crore penalty for these transgressions.

So yeah, that’s the story and now you know how a 21-year-old saga finally came to a close.

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