Anil Ambani, chairman of Reliance Communications Ltd. (Photographer: Adeel Halim/ Bloomberg News)

Reliance Vs Edelweiss: Anil Ambani’s Companies’ Stand ‘Smacks Of Deceit’, Says Court

They say offence is the best defence – but that approach did not succeed for the Reliance Anil Dhirubhai Ambani Group. Instead, the Bombay High Court not only refused to grant an interim relief but also described the group’s stand as deceitful and misleading.

The matter pertains to sale of ADAG companies’ pledged shares by Edelweiss Group companies. These shares served as collateral to underlying debentures worth Rs 300 crore subscribed to by the Edelweiss Group companies. But when the ADAG companies defaulted on terms of the debt, the Edelweiss Group companies sold some of these shares. That sale was contested by the Ambani entities, who approached the Bombay High Court seeking a stay on any further share sale.

That’s not all, the Ambani companies also sought Rs 274 crore in damages and Rs 2,734 crore in compensation from Edelweiss.

The illegal, motivated and wholly unjustified action by the above 2 groups (L&T Finance and Edelweiss entities) has precipitated a fall of Rs 13,000 crore, an unprecedented nearly 55 percent, in market capitalisation of Reliance Group over just 4 short days, causing substantial losses to 72 lakh institutional and retail shareholders, and harming the interests of all stakeholders.
Reliance ADAG Group Statement (Feb. 8, 2019)

Despite the aggressive statements and compensation claim, Reliance ADAG lost the first round in the Bombay High Court.

Here’s what went down...

Debenture Documentation

In October 2017, Reliance Project Ventures and Management Pvt. Ltd., a Reliance ADAG entity, issued debentures worth Rs 300 crore to a group of lenders, including Edelweiss Group entities.

To secure these debentures, 9 percent of the total issued shares of Reliance Power Ltd. and 2 percent of the total issued shares of Reliance Communications Ltd. were pledged in favour of debenture trustee, as per details stated in the Bombay High Court judgment.

As of Feb. 4, 2019, the total number of Reliance companies’ shares pledged towards these debentures were:

  • RPL: 21,09,67,570
  • RCom: 5,31,30,313

The court judgment lists the key terms of agreement between the borrower and lender...

  • The maintenance of a security cover ratio (pledged shares).
  • In the event of a default the trustee shall be entitled to enforce the pledge, including sale of pledged shares with notice of one working day.
  • A default would be triggered if

–the borrower failed to pay any amount payable under the agreement
–the credit rating of RPL is downgraded
–if the value of pledged shares fell by 40 percent or more from the date of deemed allotment of debentures

The default event could be cured upon pledging additional shares to the satisfaction of the debenture trustee.

The debenture trust deeds also specified that in the case of a default the borrower would have to pay an additional 2 percent interest (over and above the agreed 10 percent) as penal or default interest. Any payments by the borrower after a default would first be counted toward penal interest.

The Default Event

From October 2017, the Reliance ADAG companies regularly serviced the debentures and when required pledged additional shares or even released the pledge on some, if required.

But, as the judgment states, there were two events of defaults in 2018.

In August 2018, RPL’s credit rating was revised downward from BBB to BB (negative). The trustee informed the Reliance company of the default and said it was liable to pay 2 percent penal interest in addition to the 10 percent agreed interest. The trustee also reserved its right to redeem the debentures, enforce the security or take any other action.

In October 2018, the trustee informed the Reliance company that RPL’s share price had fallen and the value of pledged shares had declined by 40 percent since the debenture allotment.

In subsequent communication the trustee stated the two default events and sought an additional 2 percent interest payment.

There was no response from the Reliance group, the judgment noted. Nor was the security cover raised.

In February 2019, Anil Ambani announced that RCom would be filing for insolvency resolution under the Insolvency and Bankruptcy Code, 2016. Share prices of his group companies fell sharply the day after the announcement. That prompted debenture holders Edelweiss Group to enforce their securities (sell pledged shares). On giving a day’s notice they sold 5.97 crore RPL shares.

The Reliance Argument

Reliance’s lawyers argued that this “dumping” of shares resulted in the RPL share price falling further by Rs 12, reducing the value of shares sold by Rs 274 crore. Therefore, the Edelweiss Group companies should be restrained from selling the remaining pledged shares until Reliance is paid a sum of Rs 274 crore as damages.

“It is also plaintiffs case that due to the acts of defendants, plaintiffs are also entitled to compensation/damages in the sum of Rs 2734,41,00,000/, i.e., in excess of Rs 2,734 crore.” 

In seeking a stay on any further sales and damages for sales done already they argued that

  • the sale should have been done in a structured manner so that best value was obtained.
  • by dumping shares the Edelweiss companies ignored fiduciary obligations to realise fair value.
  • Hence, they must compensate for the loss.

Interestingly, they also argued the one day notice given before sale of share was “inadequate”.

The High Court View

The single judge bench of the Bombay High Court did not agree with any of the arguments made by the Reliance counsel.

The judge noted that the Reliance company did nothing to correct the default situation.
– The security cover ratio was not restored.
– The 2 percent default interest had not been paid.
– Hence any interest payment towards the debentures would first be appropriated towards penalty leading to a shortfall in debenture servicing.

As for the ‘one working day’ notice period, the judge was clear. When the contract was entered into these were the terms that both parties had agreed to as reasonable notice and at no point after the defaults did the Reliance companies ask for an increase in the notice period.

The Reliance stand is misleading and “smacks of deceit”, he said.

Plaintiffs don’t pay default interest, don’t top up the security ratio, don’t even tell defendants how they are going to make good, don’t even reply to letters from plaintiffs and now take a mendacious stand that notice period in the contract was not reasonable.
Bombay High Court Judgment

On the Reliance argument that the sale could have been structured to preserve value, the judge held that Edelweiss companies did nothing contrary to the contract.

“It is settled law that no pledgor can decide when and how a pledgee should exercise its right to sell.”

The judgment also noted that in some of the Edelweiss companies are equity/investment funds in which the general public would have placed funds for investment. Therefore, grave prejudice would be caused to the companies and their defendants if the relief as Reliance prayed for is granted.

Thus, ruling against any interim relief, the judge posted the matter for hearing in March. Anil Ambani’s companies have now appealed to a division bench.