(Adds performance of Indian stock market in sixth paragraph and
clarifies timescale in Context News.)
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Jeff Glekin
MUMBAI, May 22 (Reuters Breakingviews) - Here's a mystery.
How did two companies run by Reliance founder Anil Ambani manage
to invest $250 million in a related company without anyone in
the firm realising? And why has the UK's financial regulator
secured a conviction in a connected case, when India's regulator
merely settled? These unknowns reflect poorly on India's already
downtrodden reputation among investors.
At the heart of the story is a suggestion from the UK's
Financial Services Authority that two Ambani firms used a
foreign vehicle to reinvest in group companies - something
prohibited by Indian law. Ambani was not party to the tribunal
over which the FSA made its claims, and has denied any
knowledge. Reliance says it didn't know the $250
million, entrusted to banks in the form of structured notes some
five years ago, was ultimately invested in Reliance
One might expect the Indian regulator to investigate. But
the Securities and Exchange Board of India already settled. Anil
Ambani and several Reliance directors paid $10 million to SEBI
in January 2011, which Reliance claims closes the case.
Three things about the story are disconcerting. First, it
doesn't look great for SEBI that a foreign regulator that raised
the red flag so publicly. The FSA successfully levied a fine
against a former UBS banker who facilitated the trade, where
SEBI has yet to secure a major conviction, and has often settled
with no admission of guilt. While Reliance paid a record $10
million settlement, SEBI looks toothless.
Second, Reliance hasn't provided closure. There's no public
word over whether SEBI's fine was followed by any change in the
group companies' processes and systems or indeed personnel.
Third, there's the potential failure of systems. It's
possible Reliance directors didn't know that $250 million of the
company's money had been invested, albeit indirectly, in another
Reliance group firm. But the 59 percent rise in Reliance
Communications shares over the period should have raised
questions, given their outperformance versus the Sensex index,
which rose 32 percent. And it's not clear why industrial firms
were investing in structured notes in the first place.
Investors are unlikely to get more detail from Ambani. And
SEBI has settled and moved on. The mystery will die down, but
the sense that India's market isn't quite working is hard to
- Legal action by the UK's Financial Services Authority
has revealed that a conglomerate controlled by Indian tycoon
Anil Ambani indirectly invested in a Mauritius-based fund which
was used to make investments in one of its own companies, the FT
reported on May 21. The use of a Foreign Institutional
Investment account by an Indian investor would be in breach of
Indian securities law.
- The FSA found that the fund bought securities linked to
Reliance Communications, in violation of Indian law. The
purchases were made between December 2006 and October 2007.
During the period, Reliance Communications shares rose from
443.80 rupees to 706.95 rupees. At the time, the company had
been engaged in a bidding war for its rival, Hutchison Essar,
which agreed to be acquired by Vodafone in February 2007.
- A former UBS private banker, Jaspreet Ahuja, last year
accepted a £150,000 fine for facilitating the $250m investment.
Ahuja's former manager, Sachin Karpe, has just lost his
challenge against a 1.25 million pound penalty over the same
events in a London tribunal.
- Ambani is not party to the UK tribunal and has not been
charged by the FSA with wrongdoing. He has repeatedly denied any
knowledge - or authorisation - of the transaction.
- Ambani along with several Reliance Group directors and two
Reliance companies paid around $10 million to the Securities and
Exchange Board of India (SEBI), in January 2011 to settle an
inquiry into whether they violated overseas borrowing rules and
misrepresented financial statements.
- Reuters: UK court backs fines, bans on ex-UBS advisers
- FT article: link.reuters.com/nyb48s
- Court decision: link.reuters.com/qyb48s
- For previous columns by the author, Reuters customers can
(Editing by John Foley and David Evans)