SEBI slaps Rs 25 crore fine on the Ambani family over alleged violation of the takeover code regulations

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It has been reported by SEBI that Reliance Industries (RIL) and its key promoters allegedly have, over two decades, violated stock market norms. Therefore on Wednesday, market regulator Securities and Exchange Group of India (SEBI) slapped a fine of Rs. 25 crores on the Ambani family.

The fine was not only imposed on the Ambani family but also firms linked to the promoter group for violation of takeover code regulations in 2000. In January 2000, the promoter stake in RIL had increased by 6.83 per cent following conversion of warrants issued in 1994.

Thus, the penalty of ₹25 crore will have to be jointly paid by the 34 individuals and entities who were allotted the warrants in 1994.

What SEBI alleges?

SEBI in its report has alleged that the promoter group had failed to make an open offer as required under the norms. In an open offer, a shareholder is allowed to purchase a stock at a price lower than the market price.

The purpose of such an offer is to raise cash for the company efficiently. Under the Substantial Acquisition of Shares and Takeovers (SAST) Regulations 1997, if a promoter group acquires over 5 percent of the voting rights, in a financial year, it needs to make an open offer to minority investors that allows them to exit the company.

An 85-page adjudication order stated that “In the instant case, the violation was not one which was committed once and for all but that which continues till date. The violation is a disobedience of the statutory provisions by which the acquisition of securities giving the Noticees (Ambani family) enhanced control by the exercise of voting rights, etc. and these are violations which are continuing so long as the voting rights are acquired in violation of the letter and spirit of the law,”.

Sebi further added that “the noticees have been alleged to have failed to make public announcement to acquire shares of RIL and deprived the shareholders of their statutory rights / opportunity to exit from the target company and therefore they breached the provisions of Takeover Regulations. Such charges against the noticees make the instant matter grave,” said Sebi.

Ambani’s arguments against the order

In reply to SEBI, the noticees have argued that the initiation of adjudication proceedings in this case with a huge inordinate delay was “unreasonable, arbitrary and causes substantial prejudice to the noticees.” They further argued that the “adjudication proceedings sought to be initiated against the noticees ought to be dropped, on this ground alone.” In addition it was stated that the issue of warrants and the issue of shares on conversion of warrants were not subject to Sebi’s takeover regulations

Reportedly, under Section 15H of the SEBI Act that was amended in 2002, a maximum penalty of ₹25 crore or three times the amount of profits made out of the failure is allowed. SEBI stated that it was difficult to ascertain the unfair gain made by RIL promoter entities.
“…while determining the quantum of penalty, I note that no quantifiable figures or data are available on record to assess the disproportionate gain or unfair advantage and amount of loss caused to an investor or group.” SEBI  stated. SEBI had issued the Show Cause Notice (SCN) to the Ambani family in 2011, almost eleven years after the alleged violation.