Corp scam by ADAG to hurt investor sentiment

Dev Ghosh

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

According to SEBI's (Securities and Exchange Board of India) guidelines, the

promoters of unlisted companies (contributing their mandatory promoter's
contribution within the preceding one year) have to contribute in cash at the IPO
price, 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 in

by the promoters - Reference clauses 4.1 to 4.6 of SEBI (Disclosure and Investor
Protection) Guidelines, 2000. As per clause 4.1.1, the promoters shall contribute
at least 20 per cent of the post issue capital, in a public issue by an unlisted
company. As per clause 4.6.2, the promoters have to contribute this 20 per cent at
least at the IPO price, if they have contributed this 20 per cent during one year
preceding the public issue.

SEBI guidelines have been blatantly subverted to perpetrate deception on the

prospective investors in the IPO of Reliance Power Limited. Anil Ambani decided to
float an IPO of Reliance Power Limited in last week of July 2007. Without risking
his investment, Anil Ambani wants to retain majority control in Reliance Power.

The group had an existing shell company called Reliance Public Utility Private
Limited (RPUFL). RFUPL, at that time, had a paid up capital of Rs One lakh. The
authorised capital of RPUPL was increased to Rs 1000 crores by a resolution dated
July 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 of
RFUFL on August 3, 2007. RPUPL is still a shell company with just Rs 1000 crores
of 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 would
have gone out of the group).

Simultaneously, RPUPL and RPL pass the necessary Board for merger of RPUPL into
RPL. Both the companies file a scheme of amalgamation in the Bombay High Court in
the first week of August 2007, that is, immediately after infusion of Rs 1000
crores in RPUFL. The rationale of the merger, as stated in the Scheme of
Amalgamation was "RPUPL has put in considerable efforts in acquiring necessary
technical and manpower skills which are ancillary to the business of RPL. RPL can
take benefits of this specialised skill sets and technology available with RPUPL
to undertake mega power project and implement them more efficiently and
successfully," (one is unable to understand how the shell company, having only One
lakh 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, was
already a shareholder in Reliance Power and Reliance Energy's technical experience
have been used by Reliance Power to bag mega power projects).

The High Court of Bombay approved the merger on September 27, 2007 . The order was
filed with ROC on September 29, 2007, making the merger of RPUPL into RPL
effective from that date. On September 30, 2007 RPL allots 250 crores shares of Rs
Two each to AAA Project Venture Private Limited and REL, who are the erstwhile
shareholders of RPUPL.

As a result of this ploy, Anil Ambani and REL both acquired, on September 30, 2007
, 250 crores shares of Reliance Power each for a consideration of Rs. 1000 crores
only. This was also infused into RPUPL only on August 3, 2007 , within one year
prior to public issue. These 250 crores shares of Reliance Power which, have been
allotted to Anil Ambani's personal investment company and REL pursuant to the
amalgamation, apparently becomes eligible for exemption under clause 4.6.4 of SEBI
(DIP) guidelines with respect to promoters contribution. Thus, Anil Ambani, as the
promoter of Reliance Power, has avoided investing a huge amount as promoter's
contribution 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 behind
the merger of RPUPL, a shell company into Reliance Power. The merger has been
sanctioned by the High Court on the basis of the facts put before it and since the
shareholders of both RTUPL and RPL would have approved the merger. The
shareholders of both Reliance Power and RPUPL are Anil Ambani's investment
companies and a representative of Reliance Energy. Reliance Energy owns 50 per
cent of Reliance Power. This merger proposal has never been taken to the
shareholders of REL, who would have presumably questioned the need for and looked
into 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 approximate
issue price per equity share is expected to be Rs 60 per share. Ambani, as one of
the promoters for his acquisition of 113 crores shares (10 per cent of post issue
share capital as per the prospectus) at a price of Rs 50 per share, should have
invested Rs 6780 crores. Against this, by misusing the exemptions in the SEBI
guidelines intended for genuine merger, he has acquired this 10 per cent by
spending only Rs 690 crores. In fact, the subscription by Ambani of Rs 8 crore
share at the IPO price is an eyewash to divert public attention.

Thus, at the expense of prospective investors, Ambani will gain approximately Rs

6000 crores (assuming the IPO price to be Rs 60 per share). In fact, as per clause
3.7.1 (i) SEBI guidelines, a company cannot make a public issue of Rs Two face
value 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 Rs
55,000 crores at the expense of the future investors of Reliance Power.

Thus the total loss to the prospective investors in Reliance Power will be Rs
12,000 crores (assuming IPO price to be Rs 60 per share). If the IPO price is Rs
500 as mandated by SEBI regulations, the loss to the prospective investors will be
Rs 1,10,000 crores. In fact, the loss will be to the general public who will
invest in the public issue, and also to the public financial institutions and
banks, who will invest common man's money in this public issue.

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

The Department of Company Affairs should not remain silent spectators in this
issue and should make use of all the powers to stop this fraud against poor
gullible prospective investors in Reliance Power. The regulators and the govt,
sadly, are turning a blind eye and this will make investors suffer.

Released on: Oct 31, 2007