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Corp scam by ADAG to hurt investor sentimentDev Ghosh

The Anil Ambani Group (ADAG), promoter of Reliance Power Limited (RPL), isdefrauding investors by launching a dubious IPO to enrich themselves at theexpense of gullible public. SEBI Guidelines are being subverted in a planned andshrewd manner. While investors are asked to pay a premium, the promoters havesubscribed to the company just a month before the IPO at par value.

According to SEBI's (Securities and Exchange Board of India) guidelines, thepromoters of unlisted companies (contributing their mandatory promoter'scontribution within the preceding one year) have to contribute in cash at the IPOprice, 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 inby the promoters - Reference clauses 4.1 to 4.6 of SEBI (Disclosure and InvestorProtection) Guidelines, 2000. As per clause 4.1.1, the promoters shall contributeat least 20 per cent of the post issue capital, in a public issue by an unlistedcompany. As per clause 4.6.2, the promoters have to contribute this 20 per cent atleast at the IPO price, if they have contributed this 20 per cent during one yearpreceding the public issue.

SEBI guidelines have been blatantly subverted to perpetrate deception on theprospective investors in the IPO of Reliance Power Limited. Anil Ambani decided tofloat an IPO of Reliance Power Limited in last week of July 2007. Without riskinghis investment, Anil Ambani wants to retain majority control in Reliance Power.

The group had an existing shell company called Reliance Public Utility PrivateLimited (RPUFL). RFUPL, at that time, had a paid up capital of Rs One lakh. Theauthorised capital of RPUPL was increased to Rs 1000 crores by a resolution datedJuly 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 ofRFUFL on August 3, 2007. RPUPL is still a shell company with just Rs 1000 croresof 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 wouldhave gone out of the group).

Simultaneously, RPUPL and RPL pass the necessary Board for merger of RPUPL intoRPL. Both the companies file a scheme of amalgamation in the Bombay High Court inthe first week of August 2007, that is, immediately after infusion of Rs 1000crores in RPUFL. The rationale of the merger, as stated in the Scheme ofAmalgamation was "RPUPL has put in considerable efforts in acquiring necessarytechnical and manpower skills which are ancillary to the business of RPL. RPL cantake benefits of this specialised skill sets and technology available with RPUPLto undertake mega power project and implement them more efficiently andsuccessfully," (one is unable to understand how the shell company, having only Onelakh capital till July 31, 2007, acquired the skill sets to implement a mega power

project. In fact REL, which the one of the largest power companies in India, wasalready a shareholder in Reliance Power and Reliance Energy's technical experiencehave been used by Reliance Power to bag mega power projects).

The High Court of Bombay approved the merger on September 27, 2007 . The order wasfiled with ROC on September 29, 2007, making the merger of RPUPL into RPLeffective from that date. On September 30, 2007 RPL allots 250 crores shares of RsTwo each to AAA Project Venture Private Limited and REL, who are the erstwhileshareholders of RPUPL.

As a result of this ploy, Anil Ambani and REL both acquired, on September 30, 2007

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, 250 crores shares of Reliance Power each for a consideration of Rs. 1000 croresonly. This was also infused into RPUPL only on August 3, 2007 , within one yearprior to public issue. These 250 crores shares of Reliance Power which, have beenallotted to Anil Ambani's personal investment company and REL pursuant to theamalgamation, apparently becomes eligible for exemption under clause 4.6.4 of SEBI(DIP) guidelines with respect to promoters contribution. Thus, Anil Ambani, as thepromoter of Reliance Power, has avoided investing a huge amount as promoter'scontribution 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 behindthe merger of RPUPL, a shell company into Reliance Power. The merger has beensanctioned by the High Court on the basis of the facts put before it and since theshareholders of both RTUPL and RPL would have approved the merger. Theshareholders of both Reliance Power and RPUPL are Anil Ambani's investmentcompanies and a representative of Reliance Energy. Reliance Energy owns 50 percent of Reliance Power. This merger proposal has never been taken to theshareholders of REL, who would have presumably questioned the need for and lookedinto 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 Two each. Thus the approximateissue price per equity share is expected to be Rs 60 per share. Ambani, as one ofthe promoters for his acquisition of 113 crores shares (10 per cent of post issueshare capital as per the prospectus) at a price of Rs 50 per share, should haveinvested Rs 6780 crores. Against this, by misusing the exemptions in the SEBIguidelines intended for genuine merger, he has acquired this 10 per cent byspending only Rs 690 crores. In fact, the subscription by Ambani of Rs 8 croreshare at the IPO price is an eyewash to divert public attention.

Thus, at the expense of prospective investors, Ambani will gain approximately Rs6000 crores (assuming the IPO price to be Rs 60 per share). In fact, as per clause3.7.1 (i) SEBI guidelines, a company cannot make a public issue of Rs Two facevalue 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 Rs55,000 crores at the expense of the future investors of Reliance Power.

Thus the total loss to the prospective investors in Reliance Power will be Rs12,000 crores (assuming IPO price to be Rs 60 per share). If the IPO price is Rs500 as mandated by SEBI regulations, the loss to the prospective investors will beRs 1,10,000 crores. In fact, the loss will be to the general public who willinvest in the public issue, and also to the public financial institutions andbanks, who will invest common man's money in this public issue.

The above facts clearly point out a fraud being perpetrated on the investors andSEBI should immediately stop the public issue and not approve the prospectus. IfSEBI 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 propermanner. It will set a dangerous precedent. From now on, every promoter in Indiawould subvert SEBI (DIP) guidelines in the same manner. If SEBI approves thisprospectus, they would be unable disapprove any public issue made in future, inthe above manner. In fact, if this public issue is allowed, it may raise seriousquestions on the effectiveness of the regulatory framework of capital issues inIndian capital market.

The Department of Company Affairs should not remain silent spectators in thisissue and should make use of all the powers to stop this fraud against poorgullible prospective investors in Reliance Power. The regulators and the govt,

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sadly, are turning a blind eye and this will make investors suffer.

Released on: Oct 31, 2007