FII selling pressure on RIL after CAG report

The stock price of Reliance Industries Ltd (RIL), the country's largest private sector company, has come under selling pressure from foreign institutional investors (FIIs), say market players.

This was after the office of the Comptroller and Auditor General of India (CAG) said in its recent report that RIL was shown undue favour by the Union ministry of petroleum and natural gas and by the Director General of Hydrocarbons (DGH) in its Krishna-Godavari (KG) basin block, causing big loss to the exchequer.

Following this, HSBC, one of Asia's largest banks, downgraded RIL stocks to 'neutral' from ‘overweight’ and cut its price target to Rs 1,040 from Rs 1,084.

The RIL share price on Thursday fell to a 23-month low. It ended at Rs 888 on the Bombay Stock Exchange (BSE) and Rs 886 on the National Stock Exchange (NSE). Intra-day, the stock touched a low of Rs 884 on NSE and Rs 885 on BSE. Since Monday, when the CAG report was put out, RIL has declined nearly six per cent. It is the heaviest scrip in the benchmark Sensex, with a weightage of 11.1 per cent.

"After the CAG report, a large number of FIIs have started selling RIL stock. There is discomfort among institutions. The air on the CAG report needs to be cleared, as the allegations made are serious," said Mumbai-based independent equity advisor S P Tulsian, who tracks RIL closely.

CAG, in its draft report on KG DWN-98/3, or the KG-D6 block, said, "DHG allowed the Mukesh Ambani-led company to hike capital expenditure for developing Dhirubhai-1 and 3, the largest of 18 gas blocks, by 117 per cent from $2.4 billion to $8.5 bn between May 2004 and October 2006. This was likely to have significant adverse impact on the government’s financial take." RIL has denied the allegations.

HSBC took keen note of the wording and its implications in downgrading RIL. "The investigation could result in a freezing of bureaucratic decision making, which would hamper RIL's ability to carry out exploration and production activities effectively in its blocks,” HSBC said in a note.

Market players say no large institution wants to risk client money after what happened with the Satyam Computer stock after its corporate governance scam.

The CAG allegations against RIL are similar to those raised by Mukesh Ambani's brother, Anil Ambani, in 2009, when the court battle between two Reliance Groups had reached a crucial stage in the Supreme Court. At the time, Anil Ambani, through advertisements in leading newspapers, alleged RIL had inflated project costs in the KG basin.

Reliance Industries has underperformed the benchmark Sensex by 12 per cent over the past three months on concerns of falling gas production from the KG-D6 block/

RIL's $20-bn deal with BP, one of the country's largest foreign direct investment proposals, cleared by the government this week, has done nothing to boost investor sentiment in the RIL counter.