becg case_r.no. 06,13, 53, 57, 75_reliance (1)
TRANSCRIPT
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decade, India will leave become the third largest consumer of oil, leaving Japan behind. As of
2013, India had 5.7 billion barrels of oil reserves. With regard to natural gas, India stood at
47.8 trillion cubic feet(TCF) in terms of reserves and 33.7 billion cubic metres in terms of
production. Looking at India’s refining capibilities, India has 19 petroleum refineries, of
which, more than half are public sector entities. To support these facilities, India has about
14,000 kilometres of pipelines for the final product and about 9,500 kilometres of pipelines
of crude oil.
The domestic oil production in India is expected to reach 1MBPD by Financial Year 2016.
This is possible due to the fact that India is developing gas-fired power stations and the
consumption is up by more than 1.5 times in the last two decades. The consumption of gas is
also anticipated to grow at a CAGR of 21% during FY2008-2017. Of the total gas
consumption in the country, domestic production accounts for more than 75%. The state-
owned corporation ONGC dominates production and exploration, responsible for about 60%
of the total Indian oil output.
Indian Oil Corporation Limited(IOCL) operates over 11,000 kilometres of gas, crude and
product pipelines with a capacity of 10 million metric standard cubic metres per
day(MMSCMD) of gas and 1.6 MBPD of oil. IOCL operates 10 of the 22 refinieries present
in India.
Reliance was the first company to launch a privately owned refinery in India in 1999. Soon, it
gained 30% of the market share.
India is one of the fastest growing economies and with this expansion, India’s demand for
energy is also expected to grow with India becoming the third largest energy consumer in
another five years.
Reliance Introduction
Reliance Petroleum Limited(RPL) was created as a part of Reliance Industries Limited(RIL)
which one of largest private sector companies in India. Currently, RPL deals with the
downstream business of oil and is a subsidiary of RIL. Chevron India Holdings Pvt Ltd has
aldo partnered with RPL and holds a 5% stake in the corporation.
RPL, currently owned by Mukesh Ambani, was created to tap into the vast potential of the
global refining sector. RIL had a significant position in the energy chain and global leadership
for several product segments. RPL is now a subsidiary of RIL.
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RPL initially created to set up a Greenfield petroleum refinery and polypropylene plant in the
SEZ at Jamnagar in Gujarat, This RPL facility was located right next to RIL’s existing
petrochemicals and refinery complex, which is among the most efficient in the word. Such
strategic placement aids in improving efficiencies to a larger extent.
With the creation of RPL, Reliance became one of largest refiners globally, both in terms of
earnings potential and complex refining capacity. After the completion of the refinery at
Jamnagar, the town was labelled ‘Refining Hub of the World’ with the facility refining up to
1.25 million barrels of oil per day at any single location(Exhibit III and Exhibit IV). The
Reliance Group has now become India’s single largest private sector enterprise with
businesses related to both materials value chain as well as energy. The group’s annual
revenues exceed USD 34 billion. RIL has also become a Fortune 500 company(Exhibit I).
The group’s net exports(including those of RPL and RRL) today exceed USD 20 billion to
over a hundred countries across the globe. The two entities, RPL and RIL, were merged after
the merger was unanimously approved by the board of directors of both the companies in
March 2009. An exchange ratio of 1 share of RIL for every 16 shares of RPL was agreed
upon by both the respective boards. The shareholders and creditors of RPL approved the
terms of the merger in April 2009. RIL issued nearly 7 crore shares to shareholders of RPL as
part of the deal, leading to an increase of 4.4% in its equity base to a whopping 1643 crore.
This merger resulted in much better flexibility in terms of planning operations and expansion
of refined product range and also allowed for more optimal utilisation of secondary
processing units and infrastructure. This also meant that the combined cash flows could be
utilised in a much more efficient manner. Also, since RIL and RPL became integrated energy
companies, this meant they would get higher valuations vis-a-vis companies that only refined
petroleum(Exhibit VI and Exhibit VII).
With the completion of the merger, RPL transformed into a much more diversified business
with a lower cyclicality. The shareholders benefited from getting a stake in a state-of-the-art
refinery without having to undertake the risk of execution(Exhibit II).
Case Development
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Insider Trading
Insider trader is the unethical practice of utilising information specifically available to certain
sect of people as a result of their work to trade the securities of the firm. This information is
otherwise strictly confidential and private and comes into the scheme of things while making
decisions regarding investments. This malpractice is highly looked down upon by the
Securities and Exchange Board of India as it hinders fair trading in the market, otherwise
carried out for the investor’s benefit. This practice causes grave inconvenience to
stockholders as they are denied of important information that is non-public due to a firm’ s
rules and regulations. The reason why insider trading is considered unethical is because of
several factors such as1) Fairness with respect to property rights 2) Causes harm to the people
investing in a firms shares. The most important reason would be, ofcourse, the fact that
insider trading leads to a rift in the relationship between the firm and its shareholders/
investors that are the most important for smooth functioning of a business. Moreover, insider
trading causes a conflict of interest between the insiders who carry out the trading and the
investors, this would lead to fewer individuals purchasing shares of a firm, which is actually
harmful to the business health of any firm and for the market in general. The investors in a
firm are dependent on the decisions that are made ideally in their favour and to suit their
needs by the top management of any organization. Hence, it a given fact that these decisions,
should be one that benefit the shareholders and look after their rights instead of being skewedtowards personal motive. Insider trading prevalent among bigger corporations affect the
market conditions unfavorably. They also cause a sense of insecurity among the individuals
who bestow their trust on firms and put their hard earned money on the same. It is thus, a
practice that needs to be checked upon.
Dilemma faced by Reliance
In the year 2007, Reliance Industries decided to sell 4.1 per cent of its shares in Reliance
Petroleum Ltd; (RPL) This was achieved by first selling its shares in the share market of
futures and spots and thereby making a profit of over 500 crore rupees in the stake sale.
The market regulator in India, the Securities and Exchanges Bureau of India or SEBI in short,
started investigating these nefarious transactions. SEBI claims that the method of RIL selling
its shares in the futures market ahead of the spot sale is tantamount to insider trading. As is
the law, SEBI stops investigations in a case when companies take the route of consent in a
case. But this case is the first of its kind where a consent petition and investigation by SEBI
are being carried out at the same time. This mechanism is similar in procedure to the out-of-
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court settlements that are practiced regularly where certain penalty or fees is levied and the
imposition of restrictions take place without the accused admitting guilt or acquittal.
In 2009, RIL merged with Reliance Petroleum and had since approached SEBI twice for
consent settlement. Its first offer was a penalty of 2 crores which it later upped to 10 crores. A
corporate lawyer who was closely following the case, H P Ranina said “SEBI perhaps hasn’t
decided the quantum of the compounding sentence yet and that is why it is keeping the
proceedings open until it decides the quantum of the compounding sentence.” As per the
norms, any entity found guilty of insider trading is liable to pay 25 crores or 3 times the
illegal profit made, whichever is higher(Exhibit VIII).
SEBI had eventually completed its long drawn investigation into the case by November, 2012
and rejected three attempts by RIL for out of court settlements. It had also issued
supplementary show cause notices by this time to RIL which had incorporated new findings
into the matter. The preliminary investigation report had been submitted to the SEBI board
of inquiry and the regulator decided to go ahead with the charges. The report by SEBI
alleged that the stocks of RPL were sold days before RIL, the parent company began the
process of trimming down its shares in the company. The red flag was raised when SEBI
received anonymous complaints saying that the sellers were not well known and were
allegedly located at the address belonging to some companies of RIL.
In the midst of all this, the Chief Information Officer had asked for the details of the case
from SEBI after an RTI activist and lawyer, Arun Agarwal, filed a case but SEBI had initially
refused to divulge any further details on the matter. In November, the CIC ordered SEBI to
reveal the identities of those individuals or entities that were involved in the short selling of
RPL shares. This was in response to Arun Agarwal filing a petition under the RTI act. SEBI
was ordered to furnish these details along with the investigation report and the consent
proceedings. ON 21st of the same month, SEBI decided to move the Bombay High Court
against the order of the CIC saying that it can’t force the Government regulator to disclose
the details of its investigations before it publishes the final report. The Bombay High Court
then decided to make RIL a party to the case as it deemed that the company was involved in
the settlement process.
But in March 2013, SEBI received a setback when the Bombay High Court decided to
dismiss its plea against the CIC regarding the above order of disclosure. This followed a
similar judgement by the Delhi High Court ruling in January of the same year against the
CIC. The Securities Appellate Tribunal (SAT) then dismissed the hearing on RIL's allure
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against SEBI till April 8, 2013. RIL had approached the SAT after its application for settling
the matter through what is known as an "consent mechanism" was dismissed by the
Government controller. RIL tried to test this decision furthermore the spate of changes made
by SEBI to the regulations with respect to the settlement of cases through the consent
mechanism. In May of the previous year, SEBI tightened the norms and as a result, many
cases that come under the purview of insider trading are no to be settled under consent
mechanism. On January 3rd, SEBI had distributed a rundown of 149 assent requests,
including 16 from elements identified with the RIL companies, which it administered
unsatisfactory to be considered under the consent mechanism process. These included
applications from RIL and that of Manoj Modi, a compatriot and assistant of Mukesh
Ambani.(Unknown, RIL case)
As the fate of the case hung in balance, Reliance Industries Ltd; (RIL) said that it was issued
show cause notices by SEBI on three issues pertaining to the case and that it had submitted a
reply to the Government regulator. RIL sought to give an update on the case in its annual
report for fiscal year 2013-14 that was sent to all the shareholders of RIL ahead of the AGM
that was held on June 18, 2014. The three issues on which show cause notices were issued
were:
1. Sale of shares of Reliance Petroleum Limited (RPL)
2. The allotment of the company’s equity shares to companies against warrants that were
detachable and that were attached to debentures that have been privately placed and
issued by the company
3. Disclosure of Earnings per share (EPS) and diluted EPS in the filings with SENSEX for
the shares issued against the warrants in April 2007.(Unknown, 2014)
RIL had sought to clarify the matter by reiterating that there was never any instance of non-
compliance by them or any of their subsidiaries on any matter related to shares buying and
selling or the capital market and hence there were no penalties imposed on them by SEBI.
RIL further rejected media reports stating the case is of insider trading violation, and said that
the show cause notice from SEBI for alleged violation of the provisions of the SEBI act of
1992 and other related acts. It stated categorically that the case did not mention of any insider
trade violations by RIL or RPL and that SEBI has been keeping the matter under adjudication
without the alleged offence or penalty being confirmed. This is a clear diversion from the
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previous statements given out by RIL in which they said the Reliance Petro investments
bought shares in IPCL without any prior knowledge of any forthcoming acquisitions.
The case is still under consideration by the Special Appellate tribunal. SEBI generally has a
poor track record of proving insider trading violations but is determined to nail RIL on this
one.
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Timeline of Events
2007
• February 22nd: The Securities and Exchange Board of India (SEBI), initiated a probe intothe share dealings of the Indian Petrochemical wing of the Reliance Group. (IPCL).
• 8th March: SEBI puts an end to the investigation to the share trading of the Reliance
Petrochemical.
2008
• SEBI began investigation into the trading of Reliance Petroleum shares, specially between
the period of 1st November- 29th November, 2007.
2009
• March 2nd: RIL issued 69.2 million shares in favour of Reliance Petrochemical Limited to
enable buying of the company with 3.7 million shareholders as a result of the merger. The
equity capital rose to Rs. 1, 643 crores with a fall in promoter’s holding by two percent.
• May: SEBI carried out investigation on the share dealings of RPL.
• September 15th: The meger between RPL and RIL was fixed on September 29th.
• October 8th: SEBI issued a notice to RIL accusing them offering false share prices of RPL;
their subsidiary.
• December 9th: The RIL and RPL merger takes place, following which RIL is delisted.
2010
• March 5th: SEBI further investigates the trading activities associated with shares that
belong to RPL. The decision was informed to the Parliament mainly to carry out quasi-
judicial proceeding i.e., a proceeding that is usually carried by an executive but is on the
lines of a court proceeding.
• Reliance seeks redressal from SAT (Securities Apellate Tribunal) after SEBI refuses to
settle matters through Reliance’s dispute settlement techniques.
• December: The case is taken over by SAT, and it begins looking into the SEBI-RIL
arguments.
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2012
• May – SEBI removed the cases of insider trading and other serious issues from the process
used by Reliance for settlement.
• November 8th- Active participation by The Central Information Commission (CIC) which
asks SEBI to provide details of the case including entities associated. Investigation reports
and the consent proceedings agreed to upon by RIL were also asked for.
• November 21st- SEBI objects to the directions given to it by the CIC putting forth its
arguments to the Mumbai High Court, that CIC cannot dictate terms to it before passing of
the final order.
• December 4th- The Mumbai High Court, included RIL in the case.
• December- RIL tries again for out of court settlement of the issue but to no avail. It
requests for a date of 14th January 2013, to reply aptly to the dispute between the two
regulatory bodies. The hearing was shifted to 23rd January, 2013.
2013
• January- SEBI released 149 pleas for consent; these included 16 pleas for consent by RIL.
These pleas had been negated as unfit for consideration while arriving at settlement.
• May 2nd- SEBI discovered that RIL was involved with insider trading while dealing with
IPCL shares, a wing of RIL. RIL was hence, penalized with an amount of eleven crores.
The profits made by RIL through this scam was about Rs. 3.82 crores; SEBI directed RIL
within forty five days to pay up the compensation for the fraud.
• October 29th- The plea for settlement is sent by RIL to SAT, which is rejected yet again,
the issue of RIL with SEBI is again postponed to November 11th.
2014
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• January 15 – SEBI introduced a new method for carrying out settlements through consent
of involved parties. This consent technique lead to the delay of the verdict of SAT o RIL.
• January 18th - A report was given by RIL in its 2013-2014 fiscal report, which states that
RIL had been marked by SEBI on three grounds over a period of three years; namely, 1)
sale of shares of RPL 2) Distribution of the company’s shares to companies against
warrants that are detachable and attached to debentures that are privately placed and issued
by the company 3)Earnings per share disclosed 4)Earnings per share diluted with stock
exchanges with respect to shares and against warrants that were issued in 2007 April.
• June 26th - SAT revealed that the verdict will be announced in the SEBI and RIL insider
trading case on 30th June.
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Suggestions and Recommendations
Following are the changes made by SEBI in the SEBI Act,
“Section 15T(2) of SEBI Act (as it then stood) provided that no appeal shall lie to thisTribunal from an order made by SEBI with the consent of parties. Obviously, appeal against
an order made without the consent of parties was maintainable before this Tribunal. However,
by Ordinance No. 8 of 2013 and thereafter by Ordinance No. 9 of 2013 and finally by
Ordinance No. 2 of 2014, Section 15T(2) of SEBI Act has been omitted and Section 15JB is
inserted to SEBI Act with retrospective effect from April 20, 2007. Section 15JB inserted to
SEBI Act with retrospective effect from April 20, 2007 reads thus,” “15JB. (1)
Notwithstanding anything contained in any other law for the time being in force, any person,
against whom any proceedings have been initiated or may be initiated under section 11,
section 11B, section 11D, sub-section (3) of section 12 or section 15-I, may file an
application in writing to the Board proposing for settlement of the proceedings initiated or to
be initiated for the alleged defaults. (2) The Board may, after taking into consideration the
nature, gravity and impact of defaults, agree to the proposal for settlement, on payment of
such sum by the defaulter or on such other terms as may be determined by the Board in
accordance with the regulations made under this Ordinance. (3) The settlement proceedings
under this section shall be conducted in accordance with the procedure specified in the
regulations made under this Ordinance. (4) No appeal shall lie under section 15T against any
order passed by the Board or adjudicating officer, as the case may be, under this
section.”” (SEBI, 2014)
The only grounds left for Reliance to have the case solved by consent is to go to the court
against SEBI with how the above mentioned regulations were changed midway during the
case. The guidelines were changed in 2013 but it was made effective for all cases after 2010,
which particularly a convenient time for SEBI to get the Reliance case under the new
guidelines. Furthermore, the changes made in the guidelines are very near to the nature of the
case Reliance is involved in. It may even be said that one of the reasons to change the
guidelines of the Act were to hinder Reliance from settling out of court for which they have
tried since the beginning of the case. If Reliance somehow manages to prove this doubtful
changes made by SEBI, it may still be allowed to settle outside court. Reliance may have a
good chance at this because being a public body, it is unethical for SEBI to act in a way as to
use the organisation to solve its personal grudges.
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For Reliance, we would like to suggest that insider trading is an offence of the highest order
and such malpractices must be avoided at all costs. The offense is considered to be very
serious in the US and leads to even the offender serving time in prison. In India the
provisions are to only fine the offender in monetary terms. The laws must be made stricter by
the organisation to discourage other offenders from taking a similar route. Serving time in
prison is one of them. Also in the whole case we see SEBI’s powers are very limited and
restricted which many times hinders the organisation from taking concrete steps. This should
be changed.
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Exhibit I
Global Ranking in Fortune Global 500
Exhibit II
Growth Since IPO
Criteria Global Ranking
2008 2007
Net Sales 206 269
Net Worth 161 190
Total Assets 273 299
Net Profit 103 179
Growth( in USD million) CAGR% (31 years) CAGR% (5 years)
Turnover 22% 20%
Net Profit 26% 35%
Net Worth 27% 26%
Market Cap 30% 37%
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Exhibit III
Source: BP Statistical Review
Exhibit IV
14
80
85
90
95
100
Average Capacity Utlization from 2001-2008(%)
Asia Pacific Europe North America RIL
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Exhibit V
Top 6 Refineries with respect to Barrels Per Day
Source: http://www.hydrocarbons-technology.com/features/feature-top-ten-largest-oil-refineries-
world/
Name of Refinery Barrels per Day(BPD)
Jamnagar(RIL) 13,00,000
Paraguana Refinery Complex(PDVSA) 9,40,000
Baytown Refinery(ExxonMobil) 5,72,500
Baton Rouge Refinery(ExxonMobil) 5,03,000
Hovensa LLC(PDVSA) (Hess Corporations) 5,00,000
Abadan Refinery 4,50,000
15
0
325000
650000
975000
1300000
Barrels per Day(BPD)
Jamnagar Paraguana Baytown Baton Rouge Hovensa Abadan
http://www.hydrocarbons-technology.com/features/feature-top-ten-largest-oil-refineries-world/
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Exhibit VI
Exhibit VII
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Exhibit VIII
SEBI order was attached in its entirety in the following pages. Removed due to 43%
plagiarism with sebi.gov.in
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