Row over failure to disclose forced move

The decision by Mukesh Ambani, chairman of Reliance Industries as well as Reliance Infocomm, to annul his 12 per cent sweat equity deal in Infocomm may have been forced on him by the controversies surrounding the manner in which the deal was done.

From early afternoon on Thursday, when it became known that there were further questions about the deal and the failure to disclose it in various regulatory filings over the years, company executives became unavailable for comment.

Late in the evening, senior group executives were said to be huddled in meetings with lawyers. The final announcement came at about 8.30 p.m., that the entire deal was being annulled.

It had become known earlier in the day that Ambani had failed to disclose his 12 per cent sweat equity option in Infocomm at critical points in the company's history.

Company documents made available to Business Standard showed that while the equity option was given to Mukesh Ambani in July 2000, documents filed with various authorities in India and elsewhere did not disclose this interest.

The issue was to have been raised at Monday's meeting of Reliance Industries directors, the first such meeting since differences between Mukesh Ambani and his younger brother Anil, vice-chairman of Reliance Industries, became public a month ago.

Anil Ambani had written to all Reliance directors ahead of the meeting, raising questions about the funding of the Infocomm project and Mukesh's sweat equity deal.

It is not known whether these items had been listed on the agenda for the meeting, which the stock exchange has been informed is for considering the question of a share buyback by the company.

Ambani exercised his Rs 50 crore sweat equity option at face value earlier this year, but this became public only last month in the wake of the controversies surrounding the Infocomm project. In the context of some other moves that involved pricing Infocomm shares, the deal could have been valued in the market at close to Rs 5,000 crore.

It has been argued by informed observers that the failure to disclose the chairman's interest represented a violation of company law and would also invite action from the stock market regulator, the Securities and Exchange Board of India.

In addition, it was argued, disclosure was not made to the Securities Exchange Commission (SEC) of the US at the time Reliance bought Flag Telecom.

The sweat equity option has a complicated history. Originally given by a small company called Macronet when Mukesh became its managing director in July 2000, in which Reliance had no interest at the time, the equity option was eventually given through Infocomm, in which Macronet (since renamed Reliance Communications Infrastructure Ltd (RCIL) subsequently became the largest shareholder.

The Reliance explanation for giving the equity in Infocomm, and not in Macronet itself (i.e., RCIL), as already reported by Business Standard, had been that the equity was to be given in the company that managed the Reliance group's voice telephony project.

In the process, what was initially an option for shares worth Rs 3.6 lakh became shares with a face value of Rs 50 crore and a market value in the region of Rs 5,000 crore.

In his mail to Reliance directors, Anil Ambani is believed to have pointed out that at no stage was this entire transaction disclosed to the Reliance Industries board.

Infocomm became the vehicle for the voice business in 2001, when it acquired a series of telecom licences, and it is argued by informed observers that Mukesh had thereby got his equity option in the company (as transferred from Macronet) by that time.

However, in its March 2002 balance sheet, Infocomm made no disclosure of Mukesh Ambani's sweat equity option, although such an option would have to be disclosed as required under Schedule VI of the Companies Act.

Again, towards the end of 2002, Reliance Infocomm (by then a company with a paid-up capital of Rs 450 crore) was merged into its much smaller subsidiary Reliance Information and Communications (RIC), which had a paid-up capital of only Rs 0.1 crore, and the merged firm was renamed Reliance Infocomm.

Papers filed with the Gujarat High Court by Infocomm for sanction of the merger, also failed to mention that Mukesh had any sweat equity option.

Paragraph 18 of the petition to the court said "...the directors of the applicant company have no material interest in the said scheme..." Observers point out that a large sweat equity option would ordinarily be considered to be "material interest".

A third case of disclosure requirements was when papers were filed with the US SEC at the time of acquiring Flag Telecom a year ago.

Reliance Industries was then stated to have a 42 per cent stake in Infocomm, whereas after the dilution of its holding (on account of Mukesh's sweat equity option being exercised), the RIL stake would have been what it is today, 37 per cent.

Also, papers filed with ICICI for a loan application last year made no reference to Mukesh Ambani's equity; the promoter of Infocomm was shown there as Reliance Industries. This changed in other papers filed subsequently when Mukesh was shown as the promoter and Reliance Industries as the lead investor.