An eye opener about upcoming IPO of Reliance Power Limited
ALLAN PETER
A swindle is being perpetrated by the promoters of Reliance Power Limited on the 'would be investors', to enrich themselves at the expense of gullible public. SEBI Guidelines are being subverted in a planned and shrewd manner.
REFORMS HAVE LED to a spectacular improvement in economic performance in India. Government target of reaching Gross Domestic Products (GDP)growth of 10 per cent is achievable if economic reforms continue. India is definitely emerging as the first choice amongst investors,including domestic investors, foreign investors, global financial institutions and international banks, as the economy is booming and
the celebration is on an international level. As results, everyday unlisted companies are trying to float IPOs (Initial Public Offerings). India's top thirty companies are responsible for the noticeable jump in Sensex and we are proud of them. But has anyone ever tried to sneak a look at the workings in the background of the companies,which file the prospectus with SEBI, seeking an approval for floating
their IPOs?
Recently, a swindle is being perpetrated by the promoters of Reliance Power Limited (RPL) on the 'would be investors' in the public issue of the company, to enrich themselves at the expense of gullible public. SEBI Guidelines are being subverted in a planned and shrewd manner. 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 money in the project, he still 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.
Zerodha (Trading & Demat Account)
RHP
