I was surprised to hear about fraud and embezzlement accusations that have been raised against reliance group of companies (both Mukesh and Anil) recently.
The most celebrated one being the 51 page report from the Canadian research firm Veritas analyzing Reliance Communications and RIL. He has highlighted various instances (with factual data) of accounting fraud and suspicious issue of share/ownership. Please google and try to go through a copy of this report. (I don’t have distribution rights)
Then Firstpost (TV 18) took a dig against Reliance Ports and Terminals (RPTL) and Reliance Gas Transportation and Infrastructure (RGTIL). Both firms are privately owned and have a bare minimum equity capital of 5Lakhs (lowest possible as per govt regulations). Yet for their operations they have secured over 3,500 Crore debt (and bank guarantees) from RIL. Also not to mention lucrative long term contract with RIL to ensure steady revenue. Hence effectively all the risk of ownership/non-performance is transferred to RIL while the gains would be cornered by Mukesh (who has invested a bare minimum 5 Lakhs into the company).
Have you ever wondered why all of a sudden everybody is after Reliance?
Well answer is simple Reliance Industries was founded with almost no capital from its legendary founder. Over the years through IPO/FPO, mergers, convertible debentures (both public and private) the equity base has grown substantially. So the only way the promoters could preserve their ownership and position in the board was by secretly and clandestinely issuing shares to itself and almost zero costs.
Interestingly most people are aware of this fact, but till recently they did not care. Simply because, RIL traditionally made a lot of money for its common stock holders. So who cares how much the Ambanis make as long as you were getting more than you had dreamed off. However over the past 10 years the stock has consistently under-performed and Ambanis haven’t stopped fudging their books of accounts. Hence the public outrage.
BTW if you still believe that there is some element of truth in Reliance’s financial statements, then consider this:
One of the basic elements of corporate governance is having your books scrutinized by independent auditors. Although Satyam and PWC fiasco has proved that even the Big 4 auditors are not entirely an unbiased and shareholder friendly, but still Reliance has taken it totally different extremes.
Reliance auditors work *exclusively* for RIL and till recently operated out of Reliance Industries’ premises.
Don’t believe me, then check out: http://www.cas.ind.in/clients.html and http://www.rajendraco.com/aboutus.htm These auditors need to work hand in hand with the promoters in order to bring food to the table.
The irregularities I mentioned in the earlier post were:
1) The split decision was taken without taking the 4 important stake holders into confidence: the regulators, the creditors, the investors and the employees.
2) The FM, SEBI, DCA all sat over the various controversies that came into light for more than 7 months and in the end gave a clean chit to the Ambani bros.
3) For India to be a Super-Power, we need dozens of mega conglomerates who have the scale, the size, market influence and purchasing power of any International capacity. Splitting the industrial houses after every generation (happened for Birla too) is doing the reverse.
4) Indian companies esp. the multi billion dollar ones should be professionally managed by a competent board of directors and not bow at the whims and fancies of the individual promoters.
5) There should be lot many professionally managed companies. The only notable one in India was L&T (it also faced 2 hostile takeover attempts and in the second one lost its entire cement division) It is observed that most of the family run business fail be remain attractive by the end of the second generation and the third generation actually sees the downfall. In comparison most of the professional driven well diversified enterprises last longer and generate better returns in the long run.
6) BJP, had it had overcome the internal fighting and interventions from the RSS, could have gained a lot of mileage from the way FM’s statements of giving a clean chit. Alas, the top leadership is senile and the second generation is not just ready.
7) Transparency is the only solution for good corporate governance. Each shareholder has a right to know where his/her money goes and what the roadmap of the company is. Unless the board is made stronger, answerable and filled with some independent directors more and more shareholders wealth will get eroded. Most of the times these predation come to the limelight during the troubled times and often it is too late, and the common investor is left with some bits of paper and a shattered confidence.
What was shocking is that Reliance was considered among the best managed Indian corporate which delivered fantastic returns year after year.
”If there is any specific violation or complaint, we can look into it… after this settlement, I don’t think there is any need for an inquiry,” Chidambaram told a news channel after the Reliance Industries Board meeting in Mumbai.
It has been so unfortunate in India that in recent disputes financial irregularities of the tune of a billion dollars in Reliance Industries came to limelight.
A few gifts were showered on the ruling Congress party (with whom they are already very close); including aircrafts for Sonia Gandhi private use and the Finance minister gave them a clear chit.
It is unfortunate that in India firstly there is not much transparency for the investors to keep track of the management decisions and finances. Then even if some of the skeletons emerge out of the closet, promoters pull some strings and everything is back to normal.