The Curious Case of the Angry Ambani
Money Life
Sucheta Dalal
February 14, 2019
For someone
who cut his teeth in the family business as the suave, media face of a large
and controversial group, Anil Ambani is an amazingly angry man these days.
He is
making enemies of the media, politicians and business partners with rare
determination, even as the business empire that he wrested from his brother,
Mukesh Ambani, after a horrendous public war, appears to be crumbling. The
group has lost 68% in market value—or Rs47,300 crore—in the past 12 months.
Anil Ambani’s role in the Rafale jet purchase
deal—which is now as controversial as Bofors—is where he seems to have gone
completely ballistic. According to reports, the defamation
suits, filed against media houses, journalists and nine Congress
Party functionaries, had added up to a phenomenal Rs75,000 crore in the past
one year.
Apart from suing those who wrote about his role in
the Rafale deal, there are defamation suits filed over the sale of his
electricity distribution company to the Gautam Adani group and the sale of
telecom assets to Mukesh Ambani which has now fallen through. The demand for
damages in each of these cases has ranged from Rs1,000 crore to as much as
Rs10,000 crore. The numbers alone are enough to warrant a serious debate on
defamation as an exercise to gag the media or suppress negative
information.
All this has serious implications for investors,
especially those whose money goes into the capital market through mutual funds
(MFs) and pension funds. Investors depend on expert fund managers and analysts
to be alert, on top of developments and act quickly, to protect their wealth.
What if they are prevented from doing their fiduciary duties to act in a fair
and free manner? And who decides whether an action to sell shares in the market
is negative and malicious at any particular time or proper and in investor
interest?
We have two such situations here. Last week, I
wrote about the Essel/Zee group
where lenders (including MFs that had no business to lend against promoters’
shares) have done a risky deal, ostensibly to protect investor interest. They
have jointly agreed to desist from selling shares pledged by Subhash Chandra
for a few months, giving him time to raise funds through a strategic investor
who could hold as much as 50% of the equity. Since the regulator is silent about
the deal, we have no idea whether it will actually proceed as hoped by the,
so-called, committee of lenders.
Meanwhile, the failure of the Reserve Bank of India
(RBI) to act against the over-leveraged Infrastructure Leasing and Financial
Services (IL&FS) for two years and allowing it to create a complex maze of
companies and subsidiaries has jeopardised the savings of MF and provident fund
investors. Yet, the regulator has not been held accountable and the founding
cabal, responsible for inflicting huge losses on investors, appears to be
getting away lightly.
It is in this context that we need to look at the
litigation and notices exchanged between the Anil Ambani group and Edelweiss
(specifically ECL Finance Ltd, a debenture-holding company) with whom he had
pledged shares of Reliance Power Ltd (RPL).
Edelweiss has been accused hammering the price of
Ambani shares by invoking the pledge on them which, allegedly, amounted to
dumping shares in the market, instead of trying to get the best prices for them.
Did Edelweiss really have a choice?
On 1st February, Reliance Communications (RCom)
filed for bankruptcy after its Rs23,000-crore deal with Mukesh Ambani, for sale
of telecom equipment, which was seen as a lifeline for the beleaguered group,
had fallen through.
Meanwhile, its creditor Ericsson India Limited had
filed three insolvency petitions demanding jail time for Anil Ambani for
failure to repay its outstandings. On 13th February, the Supreme Court heard
and reserved judgement on the issue. Ericsson argued in Court that Mr Ambani
had issued a personal guarantee against the borrowing which was independent of
his ability to sell RCom shares.
All this was already impacting stock prices of the
group and the stage was set for a further decline. So, on 5th February,
Edelweiss sold nearly Rs6 crore of RPL’s shares, after issuing the company a
notice on 4th February. The Anil Ambani group responded by rushing to the
Bombay High Court seeking a reversal in the sale of shares. It also dashed off
a letter to the Securities & Exchanges Board of India (SEBI) seeking action
against Edelweiss.
In Court,
on 13th February, Janak Dwarkadas, counsel for Edelweiss, pointed out that
Edelweiss was within its rights to sell shares, after giving a 24-hour notice.
He also pointed out that RPL had previously ignored demands to pay an
additional interest of 2% on its loans after its share price had plummeted in
August 2018. Again, when RCom filed for bankruptcy, it allegedly did not bother
to communicate to Edelweiss. The Court refused any interim relief to RPL and
will hear the matter today.
Meanwhile, RPL’s letter to SEBI, on 11th February,
demanded a ban on Edelweiss from the capital market as being not fit and
proper. Its main allegations are largely procedural – essentially that
Edelweiss usurped the powers of the debenture trustee and allegedly “flouted documented
process and safeguards for enforcement of security.” (See full letter below).
The letter also argues that Edelweiss ‘hammered’
RPL’s shares and Futures, at its own broking arm, leading to a 57% drop in
share price. If Edelweiss has, indeed, done this, which seems unlikely, it
would be a foolish move that ought to be investigated and punished by SEBI.
However, market participants point out that the mere sale of pledged shares
would lead to a precipitous fall when there are no buyers for a beleaguered
stock!
While RPL accuses Edelweiss of decimating “value
for over 31 lakh retail public shareholders” of RPL, Edelweiss says it has
"acted responsibly, not only in safeguarding the interests of its
investors but also in ensuring that market integrity is maintained."
Edelweiss may have given a push to the fall in
prices, but the many actions of the Anil Ambani group as well its past record had
already combined to decimate the value of its various listed companies. It is
another matter that the group does not seem to grasp the enormity of what is
going on and is busy filing a public offer for its general insurance
company.
Let’s try and understand why this concerns
investors in general.
For starters, India has followed the world in
adopting disclosure-based regulation which puts the onus on investors to read
public disclosures and act on them sensibly. What happens when companies fail
to make proper disclosures or attempt to gag those who are most likely to put
this information in the public domain, namely, media and analysts?
Secondly, what happens if companies use their
financial and political clout over government and regulators to try and
browbeat investors/MFs from selling these shares at, what they consider, the
best time to optimise gains or reduce losses?
If this were to happen, the entire edifice of
disclosure-based investment would break down – and we are already seeing this
happen repeatedly. The National Stock Exchange’s (NSE’s) attempt to gag Moneylife by slapping a
Rs100-crore defamation suit was a similar display of financial muscle to stop
the various irregularities from coming to light. It, subsequently, led to a
complete clean-up of top management and the investigation continues.
Thirdly, Edelweiss’s actions in selling shares to
protect itself were straightforward. It was nowhere as unorthodox as the
lenders forming a committee to protect the price of Zee group shares. If SEBI
is silent about that move, ostensibly to protect ‘investor interest’, it cannot
possibly fault a rapid sale by Edelweiss to salvage whatever value it can from
the RPL shares in the event of a bigger crash. Who is to decide whether its actions
precipitated a crash or was it merely the first out of the gate?
Since the market regulator has abdicated its
responsibility by remaining silent, the courts may have to decide this highly
complex and sensitive issue. Isn’t that completely at odds with the idea of
independent regulators with domain expertise? But, like many other aspects of
India’s business and economy, we will have to muddle through the situation to
find solutions.
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