The consent order mechanism, introduced by the Securities and Exchange Board of India (Sebi) in 2007, came under fresh attack as an investor group raised questions over an order passed in the matter of Anil Dhirubhai Ambani Group (ADAG) companies in 2011. Sebi-registered Midas Touch Investors Association, which has in the past taken up important securities market issues, such as class action suit against Satyam Computer Services and Canstar refund, among others, has, in a submission before the Delhi High Court, said the order is ‘clouded with doubts’.
In August, the court had allowed Midas Touch to implead as a party in a public interest litigation (PIL) filed by entrepreneur Deepak Khosla. Khosla had alleged that Sebi was letting off violators for meagre settlements and had short-collected penalties of over Rs 40,000 crore after the implementation of the mechanism. Midas had also promised to submit crucial details with regard to the Joint Parliamentary Committee (JPC) recommendations following the 1992 Harshad Mehta scam and how the consent mechanism was going against the committee’s stated will.
In an affidavit in response to the PIL, Sebi explained how it had not let off violators for small sums and cited cases of ADAG and HFCL, where heavy settlement amounts were imposed. Midas’ latest submission on the ADAG consent order counters that affidavit. The matter is expected to come up for hearing in Delhi High Court on January 30.
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In the consent order passed on January 14, 2011, Sebi said , “The investigations revealed that Reliance Infrastructure (R-Infra) and Reliance Natural Resources Ltd (RNRL) were prima facie responsible for misrepresenting the nature of investments in ‘Yield Management Certificates/ Deposits’, and the profits and losses thereof in their annual reports.” Sebi also found that the companies misused the Sebi (FII framework). The securities market regulator had conducted investigations into the dealings of shares of another group company, Reliance Communications (RCom), following a tip-off about use of money raised through external commercial borrowings (ECB) and foreign currency convertible bonds (FCCBs) to invest in the stock market. R-Infra and RNRL paid Rs 25 crore each to settle the matter without admission or denial of guilt.
Midas Touch has raised objections on this settlement saying the entire mechanism was “futile” and “clouded with” doubts. “Considering the enormity of the amount and sweep of offences committed by the (ADAG) and prima facie found so by Sebi after its investigations - the amount of Rs 50 crore and certain other sanctions contained in the consent order are peanuts when viewed with implications of such grave offences in its entirety,” Midas has said.
According to the association, “If such cases - in Sebi’s view - do not require a complete process of enforcement and prosecution under Sebi Act and other relevant laws to its logical conclusion, then, no case would. The consent order makes a mockery of natural justice, Sebi Act and Parliament’s specific will.”
Midas Touch has said the consent order revealed that no proceedings were initiated for: “(i) “insider trading” under the Sebi Act. (ii) For violation of clause 41 and 49 of listing agreement; (iii) For various violations for clandestine diversion of funds raised through ECB/FCCB for illegal investments abroad.”
An email sent to ADAG spokesperson seeking comments did not elicit any response. The petition also pointed out that Sebi knew that the UK regulator Financial Services Authority (FSA) had initiated proceedings in the same matter, i.e., against some employees of UBS Bank for assisting Reliance ADAG companies to invest in group companies in violation of Indian (Sebi Act) and FSA laws. Quoting orders, it said that a Sebi official was present in the proceedings of FSA. The decision of FSA to impose a penalty of 1.25 million pounds was dated July 9, 2010 while Sebi issued show cause notices to Reliance ADAG on June 7, 2010 and September 2, 2010.
Midas also quoted the decision of the Upper Tribunal of UK, which confirmed the decision of FSA in May 2012. The UK tribunal had detailed the “investment structure” designed by UBS in order to camouflage Reliance ADAG’s participation to escape detection by Indian law enforcing agencies and found that: “Reliance ADAG invested over $250 million to acquire RCom shares and derivatives via FII vehicles;” and.... “opened an account with UBS Zurich.... RCom shares and derivatives (and other assets) were held on this account. At certain times, the value of these assets exceeded $400 million.” Further, Midas alleged it was well known that some Reliance ADAG companies had violated ECB guidelines of the Reserve Bank of India and proceedings against them under various laws were in progress, citing a Rajya Sabha reply on December 1, 2009, in response to unstarred question No.1,252 by the minister of state for finance. The minister had said Reliance Infra has violated guidelines pertaining to two ECBs worth $360 million and $150 million. A penalty under FEMA of Rs 124.68 crore was levied, which R-Infra did not pay. The minister had also said RNRL’s FCCB worth $300 million, issued in 2006, and RCom’s Rs 5,142 crore raised through various FCCBs were under examination for FEMA violations.
The submission also pointed out how the UK's financial regulator secured a conviction in a connected case, when India’s regulator merely settled, quoting international media reports on the UK Tribunal order. A Sebi spokesperson also did not respond to an email seeking comments.
