SEBI’s Penalty On Mukesh Ambani: What’s At Risk?
Mukesh Ambani, chairman and managing director of Reliance Industries Ltd. (Photographer: Simon Dawson/Bloomberg)

SEBI’s Penalty On Mukesh Ambani: What’s At Risk?

India’s securities market regulator has passed a fresh order in the 2007 Reliance Petroleum Ltd. case. This time SEBI has imposed a penalty of Rs 25 crore on Reliance Industries Ltd. and Rs 15 crore on promoter Mukesh Ambani.

RIL had indulged in fraudulent trade practices with respect to the RPL share sale transaction and Ambani, as its managing director, was “responsible for the manipulative activities of the company”, the adjudicating officer’s order has said.

The specific findings against Ambani will certainly have reputational consequences and disclosure of it will need to be made whenever a company — in which he is a director — does a capital markets transaction, Umakanth Varottil, associate professor of Law at the National University of Singapore, said. “This may also have consequences for group entities where the promoters and directors need to fulfil the ‘fit and proper’ criteria on an ongoing basis,” Varottil said.

This January 2021 order follows a 2017 order by the Securities and Exchange Board of India in the RPL case. In that, the regulator found that RIL in 2007 had decided to raise funds, including by selling in the open market shares amounting to a 5% stake in group company RPL.

At the same time, RIL enlisted the services of 12 companies as agents for taking “huge short positions” in the futures derivatives of Reliance Petroleum Ltd. RIL executed separate agreements with each of the 12 agents under which they earned commission while all profits and losses were transferred to RIL’s account, SEBI found.

According to the 2017 order “RIL had entered into a well-planned operation with its agents to corner the open interest in the RPL Futures and to earn undue profits from the sale of RPL shares in both cash and futures segments”. It directed RIL to disgorge over Rs 1,000 crore in penalty and interest — the largest-ever such disgorgement in the regulator’s 20-year history.

RIL appealed to the Securities Appellate Tribunal but lost in November last year.

Not Aware of Funding Arrangements, Ambani Tells SEBI

The market regulator’s 2017 order was passed by the whole-time member under Section 11 of the SEBI Act. The section allows the regulator to take steps in order to protect the interests of investors in the securities market. Under this provision, SEBI can take measure to prohibit fraudulent and unfair trade practices, conduct inquiries etc. The order last week was passed by the adjudicating officer under Section 15, which allows SEBI to impose penalties.

In the present case Ambani had argued before the market regulator that since the 2017 order made no adverse finding against him, the adjudicating officer’s notice is without application of mind and without jurisdiction.

If this ground is agitated in appeal, it may not find much favour, Poornima Advani, founding partner at The Law Point, said.

SEBI has always maintained that proceedings before the whole time member, which may result in disgorgement or bar from securities market etc is a separate track from adjudication proceedings, which essentially results in a penalty.
Poornima Advani, Founding Partner, The Law Point

Mukesh Ambani has not yet sought to appeal the recent SEBI order. But if he were to move SAT, the arguments for this case will be heard independent of what the tribunal has earlier held in this case, Advani said.

As his second argument, Ambani told the market regulator that there is no basis to suggest that he was involved in or was aware of the funding arrangements for the margin payments of the RPL transaction. He stated that:

  • It was the RIL board, and not him in his capacity as the managing director, that had authorised two senior officials to raise resources for the company—and not specifically through the sale of RPL shares.
  • He was made aware of the 5% share sale of RPL, but not of the specific details, much later along with the rest of the board.
  • Such process and materiality of the transaction were also not out of the ordinary considering the scale of RIL’s operations and the fundraising exercise.

The adjudicating officer dismissed these arguments saying it’s difficult to believe that entire asset sale to raise Rs 87,000 crore was left at the discretion of the two officers and without the supervision of the managing director. The amount was a substantial percentage of RIL’s total assets and its turnover, the order said.

“I am of the view that the hierarchy in a corporate structure is designed in such a way that adequate checks and balances are available to prevent afore-stated situation and a managing director is a key person for such a hierarchy to work properly in the interest of the Company and its shareholders.” – SEBI’s order, January 2021

The intention of RIL’s board couldn’t have been to put the entire responsibility of fund raising on the two officials without any oversight of the managing director, the order said.

From what’s forthcoming in the order by way of board minutes, the responsibility of fund raising and implementation was left to the two officials, Sandip Bhagat, partner at S&R Associates, pointed out.

But what needs to be tested is just because the power was delegated to the two officials, does it mean the managing director is absolved of all responsibility?
Sandip Bhagat, Partner, S&R Associates

Here, Section 27 of the SEBI Act will come into play which says that every person in charge would be responsible for an offence by a company unless he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such an offence.

There’s a presumption under this section that the individuals in charge will be held responsible unless either of these conditions is fulfilled, Varottil explained.

It’s a reverse burden. The person is deemed to be guilty. And so, in this case, the burden of proof is on the managing director to show that either he didn’t know or he tried to prevent the offence. 
Umakanth Varottil, Associate Professor of Law, National University of Singapore

The order has proceeded on the basis that a transaction of this nature couldn’t have been implemented without the knowledge of the managing director — this presumption is what could become a ground for appeal before SAT, Varottil said. The legal treatment to a managing director, he said, will be very different from what’s extended to a non-executive or an independent director because ultimately the buck stops with him.

RIL has yet to respond to BloombergQuint’s request for a comment on the SEBI order.

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