Corporate governance can be defi ned as a desired collection of processes, policies and laws that direct the way any organization or a company works, is controlled and progresses ahead. In today’s era of cut- throat competition due to massive industrialization, it has become mandatory for the companies to have corporate governance. And the biggest advantage of this is that it clearly defi nes the “accountability” on the part of individuals. It also includes relationships among the stakeholders of the respective compa- nies. Corporate governance helps in understanding the various goals for which the company exists and is governed. It thus helps in increasing the overall effi ciency of the company and of its members too as the goals are very specifi c and directed.
CORPORATE GOVERNANCE AT RELIANCE GROUP
ADAG, which is better known as the Reliance Group, is a very active organization in corporate gov- ernance, as it formulates all its policies keeping in mind integrity, transparency and governance. Cor- porate governance in any organization is based on certain aspects and the same is the case with the Reliance group as well, where they have three aspects on which their entire corporate governance works. They are as follows:
A lot of care is taken as regards the compensation structure for employees at all the levels. Also the
fact that the policies should be religiously followed at the appropriate times is stressed upon.
The board has been defi ned with some amount of autonomy, which is maintained always without
any fail in the fi elds of strategy, supervision and fi duciary responsibilities.
Reliance group is very particular about the disclosure and transparency norms at the company.
According to them, it is not only essential for its employees at all levels but is also benefi cial for the company in the long run. The company keeps “public disclosure” as one of its most important obligations and duties.
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Corporate governance at Reliance group
Assessment of the overall compensation structure and the policies
Giving the Board its autonomy
Practice disclosure and transparency
norms
However, even after having its corporate governance defi ned very clearly, knowingly or unknowingly, ADAG has been involved in several controversies. Like any other company, even Reliance group has tried to defend itself. Some of the important issues are discussed below:
Ethical Issues
Reliance Power IPO
Reliance Power is a part of ADAG. This was established for the purpose of development, construction and operation of power projects in the domestic and the international market. The company was estab- lished in 1995 as Bawana Power Private Limited, which later changed its name to Reliance Delhi Power Private Limited. The name was fi nally changed to Reliance Power in 2007. The company has a planned installed capacity of 33,480MW1 and is developing 13 medium- and large-sized projects. The founder and chairman of the company is Anil Ambani and JP Chalsani is the CEO.
Initial Public Offer On 15 January 2008, the company came out with an Initial Public Offer. The IPO was for fi nancing and development of six major power projects that had a future completion date of 2014. The IPO was of 130 crore shares which included 16 crore shares to promoters at the offer price.
The upper limit for the bid was Rs 450. The IPO resulted in creating a record by attracting $27 billion bids on the fi rst day of its IPO. The IPO was oversubscribed by 50 times.
The IPO debuted on 11 February 2008, after restrictions were put in place on the company. The stock plummeted and ended 17% lower than the issuing price of Rs 450 at the day’s end.
The delay in the IPO was due to violations made by ADAG according to the Securities Exchange Board of India (SEBI).
According to the SEBI guidelines, the promoters are to contribute 20% to the IPO at the IPO price so that the risk that might be associated with the IPO is shared with the promoters. However, according to the allegations, Anil Ambani wanted to avoid risking his investment and wanted to gain majority of the control in RPL. This was done through a shell company created by Anil Ambani called Reliance Public Utility Private Limited. This company had a paid up capital of Rs 1 lakh which was increased to Rs 1,000 crore via a resolution passed at the end of July 2007. Out of the Rs 1,000 crore, Anil Ambani’s personal investment was Rs 500 crore in the equity share capital of Reliance Public Utility Private Limited. Thus, Reliance Public Utility Private Limited remained a shell company with Rs 1,000 crore of share capital and investment.
1 As per 2010.
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This resulted in Anil Ambani and Reliance Energy acquiring 250 crore shares of Reliance Power for a consideration of Rs 1,000 cr. One year prior to the issue, on 3 August 2007, this was injected into Reliance Public Utility Private Limited. Reliance Public Utility Private Limited and Reliance Energy had passed SEBI norms and were amalgamated. The 250 crore shares of R-Power were later allotted to Reliance Public Utility Private Limited where Anil Ambani had personal investments, and Reliance Energy thus became eligible under promoter’s contribution under clause 4.6.2.
According to clause 4.6.2:
“In case of public issue by unlisted companies, securities which have been (acquired by) the promoters during the preceding one year, at a price lower than the price at which equity is being offered to public shall not be eligible for computation of promoters’ contribution.”
According to clause 4.6.4:
“Clause 4.6.4 creates an exemption to this requirement in case of the shares which are acquired pursu- ant to a Scheme of Merger/Amalgamation approved by a High Court.”
This would, hence, result in a loss to the investor in Reliance Power and public fi nancial institutions and banks who would invest in the company.
Revenue Dispute – Reliance Communication
RCom, a telecom and communications operator, having a customer base of 136 million subscribers stands 16th largest in the world. A part of the Reliance group founded by Mr. Dhirubhai Ambani, it operates in fi ve different segments namely – wireless, broadband, global, investment and DTH services.
Headquartered at Navi Mumbai, RCom is ranked among the top fi ve telecommunication companies and has different subsidiaries under it – Reliance Telecommunication Limited (RTL), Reliance Globalcom, Reliance Internet Data Center and Reliance Digital TV.
In 2009, Reliance Communication Limited, or RCom, was accused by a government-appointed au- dit fi rm for cooking up its books of accounts and underreporting its revenues to save on the license fee and infl ating numbers to the stock exchange. Anil Ambani rejected the reports and called the reports as biased.
The government appointed fi ve auditors and one of them submitted his report.
The Department of Telecom (DoT) had appointed a Jaipur-based fi rm, Parakh and Company, for carrying out a special audit of the Anil Ambani–controlled company – Reliance Communications. The audit company’s fi ndings, which was presented to the government, mentioned that the company avoided paying around Rs 316 crore in license fees in the two years ending March 2008. The government said that further inquiry was to be made in this regard. However, the auditors had hinted at a difference of around Rs 2,900 crore in the revenue that was shown to the Telecom Regulatory Authority of India (TRAI) and the stock exchanges. The report presented by the auditors states that the underreported amount for FY’07 is Rs 808 crore and Rs 1991 crore for FY’08.
The DoT took RCom under its scanner after a report by Kotak Securities in 2008 suggested some discrepancies between the revenue reported to the regulatory body and the stock exchange. The revenue defi cit according to this report was Rs 197 crore in 2006–07 and Rs 2,563 crore in 2007–08.
The auditors mentioned that RCom’s actual wireless revenue was Rs 12,298 crore against the Rs 15,213 crore reported to the shareholders.
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According to the report, RCom had violated TRAI and DoT rules. The auditors, Parakh and Co., al- leged that the fi rm had accounted a revenue of Rs 617 crore in two different accounting years. Further, a sum of Rs 379 crore was made by selling expired cards to two fi rms – Macronet and Inference Systems Ltd.
This underreporting resulted in a loss of Rs 258 crore in license fees and Rs 57 crore in spectrum usage charges to the government.
Insider Trading
Formerly known as Reliance Energy, and prior to that as Bombay Suburban Electric Supply, Reliance Infra (R-Infra) is the largest private sector enterprise in power utility. Headed by Mr. Anil Ambani, this company has its headquarters at Sector 24, Noida, and is the sole distributor of electricity in Mumbai Suburbs. It is into the business of generation, transmission and distribution of power in parts of India. It has developed India’s only 100% privately owned transmission line on build, own, and operate basis.
Apart from the power sector, it also has its presence in infrastructure business. It has its projects in major growth areas like roads, highways, airports, metro rail and specialty real estate.
On 13 January 2011, SEBI barred Anil Ambani and four top offi cials of ADAG from investing in the secondary market till December 2011. The probe made by the regulatory body was into two of the group’s companies – R-Infra and Reliance Natural Resources Limited (RNRL). SEBI had also barred R-Infra and RNRL from investing in the secondary market till the year 2012 and imposed a fi ne of Rs 50 crore. The ban was, however, not applicable to primary issuances, buy-back and open offers.
The investigation revealed that the money was raised through External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds (FCCBs). The amount raised from these sources was used to invest in the market and the investment vehicles were used as means for the same. The compa- nies, R-Infra and RNRL, were responsible for misrepresenting the nature of the investments and misus- ing the Foreign Institutional Investors Regulations framework of SEBI. In 2009, the Minister of State for Finance – Mr. Namo Meena mentioned that the Reserve Bank of India (RBI) had come across two ECB transactions of $360 million and $150 million by R-Infra that had violated the norms. Anil Ambani and the four offi cials were issued notices several times in the second half of the year 2010 to appear for a personal hearing before the regulatory body.
R-Infra and the involved company directors, Anil Ambani, SC Gupta, Lalit Jalan and JP Chalsani, paid a sum of Rs 25 crore towards settlement. RNRL and Anil Ambani too paid Rs 25 crore towards the same. The settlement also involved R-Infra and RNRL to rotate auditors. Thus, their auditor as of March 2010 shall not be reappointed for a period of three years.
2G Spectrum Scam
The 2G scam exposed in 2011 involved A Raja, the then telecom minister, who had issued around 1232 licenses of the 2G spectrum to companies which also included companies with little or no experience.
The issue of licenses was done in 2008 at 2001 prices.
The scam involved the following allegations:
Manipulation in issuing the licenses in favor of certain companies
Underpricing of the spectrum by DoT which resulted in heavy losses to the exchequer
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The allocation was not in accordance to the market price of the spectrum. The license issued didn’t have a market in India and hence was sold on a fi rst-come basis. The underpricing was because the base price taken was of the year 2001 instead of 2007. According to the investigations made by the Central Bureau of Investigation (CBI), the fi rms obtained the spectrum at a low price and further sold their stake to foreign telecom companies and made a profi t on the difference. Companies like Unitech, Tataand Anil Dhirubhai Ambani Group came under the radar of CBI.
The CBI’s chargesheet alleged that Reliance Telecom Limited structured Swan Telecom as its front company to obtain the 2G spectrum, which was against the UAS guidelines. RTL, under the then exist- ing telecom policy, was not granted license as DoT had barred the CDMA player to enter into the GSM telephony sector.
According to the UAS, the guidelines mentioned that for a substantial equity in a company, the per- centage stake should be 10%. This percentage, according to fi ndings by CBI, was reported to be 10.71%
in Swan Telecom. This percentage enabled RTL to front Swan Telecom. However, statements made by the Reliance Telecom Limited are that their equity holding in Swan Telecom was 9.9% and at the time that license was granted to Swan Telecom, RTL had no stake in the same.
Exclusion from Sensex (R-Infra and R-Com)
R-Infra and R-Com were removed from the Sensex on 8 August 2011, and were replaced by Coal India and Sun Pharmaceutical Industries.
Such decisions involve looking at many aspects. Some of them include market capitalization, listing history, an acceptable track record and decisions on segment representations in the main index.
On one hand, R-Com is under $7billion in net debt and the last seven quarters reported a straight decline in profi ts. The company has been unsuccessful in cutting down its debt. R-Com has also come under the scanner of the CAG regarding the 2G scam. R-Infra, on the other hand, is facing delays in its metro project in Mumbai which would possibly be functional by 2012 end.
R-Infra and R-Com were the index’s worst performing stocks that had fallen 32% and 35%, respec- tively, while the index had fallen 12% (see Exhibits II to V).
CONCLUSION
The World Bank defi nes that corporate governance is about promoting corporate fairness, transpar- ency and accountability.
ADAG has ventured into several areas such as infrastructure, telecom, capital, entertainment and power.
However, it has been vulnerable to delays of big projects and covered under great debt (see Exhibits I to V). The group’s reckless entry into areas in which the group had little or no experience, lack of an effi cient management team and no strict adherence to corporate governance measures has affected the future of ADAG.
With the company looking to venturing into new areas like banking, credibility is a factor that would outweigh all other conditions. With the accusations and controversies, the path would become diffi cult to sustain the group. For example, Crisil has rated a negative outlook for R-Infra in term of long-term debt. The group must concentrate on its company stakeholders.
Anil Dhirubhai Ambani Group (ADAG) 107
The group should revamp the 3Ps of an ethical ecosystem – Philosophies, People and Processes.
Besides this, the company should focus on key areas:
Increase clarity regarding the duties of the directors.
Implement transparent and unambiguous penalties and prosecutions for the breach of duty.
Place an effi cient feedback mechanism.
Use a technology-driven assurance process.
EXHIBIT I: Functioning of companies under the ADAG group
Companies Respective Business Areas
Reliance Capital Mutual funds, life insurance, commercial fi nance, broking and distribution, general insurance, Reliance Securities, spot exchanges, equity advisors, asset reconstruction, etc.
Reliance Infrastructure
Road, metro, airport, cement, real estate and SEZ (special eco- nomic zones)
Reliance Health Managed care administration, health care Delivery, integrated health, health informatics, KPO and consumer health
Reliance Entertainment
a. Internet and new media (Zapak, jump games, etc)
b. Film entertainment (BIG cinemas, ND studio, Synergy, BIG- OYE.com, etc)
c. Broadcasting (BIG Connect, BIG Digital, BIG Live, etc).
Reliance Commu- nications
Mobile, internet, entertainment, enterprise solutions, network- ing, data centre, rural communications, reliance world stores, etc.
Reliance Power Power projects, fuel business, carbon credits, etc.
Reliance BPO a. By industry: communications, banking, fi nancial, insurance, utility and entertainment.
b. By function: customer service, account receivables, account management, technical support, network man- agement, back-offi ce management, transaction process- ing, analytics.
NIS Sparta a. NIS Sparta in corporate training b. NIS Sparta in education
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EXHIBIT II: Quotes from BSE for ADAG group of companies
2600 2550 2500 2450 2400 2350 2300 2250 2200 2150 2100 2050 2000 1950 1900 1850 1800 1750 1700 1650 1600 1550 1500 1450 1400 1350 1300 1250 1200 1150 1100 1050 1000 950 900 850 800 750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0
Reliance Capital RCOM RNRL RPOWER Reliance Infrastructure Jan-07 Apr-07 Jul-07Oct-07 Jan-08 Apr-08 Jul-08Oct-08 Jan-09 Apr-09 Jul-09Oct-09 Jan-10 Apr-10 Jul-10Oct-10 Jan-11 Apr-11 Jul-11
Source: BSE India
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EXHIBIT III: Debt–equity ratio of the companies under the group
3
Debt to Equity Ratio
2.5 2 1.5 1 0.5 0
Mar ′11 Mar ′10 Mar ′09 Mar ′08 Mar ′07
RCAP RNRL RINFRA RCOM
Source: BSE India
EXHIBIT IV: Total debt to owner’s fund
3
Total Debt to Owner’s Fund
2.5
1.5
1 0.5 0
Mar ′11 Mar ′10 Mar ′09 Mar ′08 Mar ′07 2
RCAP RNRL RINFRA RCOM
Source: BSE India
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EXHIBIT V: Return on capital
35
Return On Capital (ROC)
30 25 20 15 10 5 0
Mar ′11 Mar ′10 Mar ′09 Mar ′08 Mar ′07 RNRL
RINFRA
RCOM RCAP
EXHIBIT VI: Cornerstones of an ethical ecosystem of an organization
1 Philosophies
Processes People
2 3
Recruitment Training
Performance management Delegation
Policies
Control environment IT systems Assurance Governance
Leadership value system Code of conduct, ethics
1. Philosophies 2. People 3. Processes
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