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(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 Communications.
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 shake off.
- 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 click on
(Editing by John Foley and David Evans)