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Friday, Feb 15, 2002

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Reliance move on `takeover code violation' -- When a fine cannot be a full stop

Suresh Krishnamurthy

RELIANCE Industries Ltd has voluntarily made a payment of Rs 5 lakh to SEBI against allegations of violation of provisions of SEBI's takeover code. The company has done so simply with a view to `avoiding unnecessary controversy', as it puts it.

Reliance, it would appear, had raised its stake in L&T, from a level below 5 per cent to 10 per cent in the first few days of November, last year. At the point when its stake exceeded five per cent of L&T's paid up capital, it was obliged under the takeover code to report to the L&T management of its current holdings.

Whether Reliance did so or not under a strict and literal interpretation of the provisions of the takeover code had become the subject matter of some controversy in the wake of the company's subsequent decision to divest its holdings in the company, in favour of Grasim. This five per cent trigger rule has been incorporated into the `code' with a view to forewarning the incumbent management of possible hostile intentions of the acquirer. Ironically, this rule is now being applied to an investor who, in retrospect, appears to have had in mind only a quick exit.

It is, however, not clear if SEBI has started any investigation and if so, at what stage such an investigation is in. SEBI had never in the past disclosed officially its investigative intentions. Reliance too has not disclosed that it is currently under SEBI lens for any wrong-doing in this regard. It, however, has paid Rs 5 lakh to SEBI without admitting guilt. Reliance has also reserved its rights under the laws.

Now, more than the investigation, Reliance's action will spark off a larger debate. Can a company, which is accused of a rule violation, pay the maximum possible fine for a verdict of guilt, in an attempt to forestall investigation? Though it claims that the decision to pay the fine is only with a view to avoiding controversy, clearly from Reliance's perspective, a controversy can be avoided only if no investigation is launched or if launched already, is aborted.

However, such an approach in itself would trigger a controversy of its own. Managements of BPL, Sterlite, Videocon who stood accused by SEBI of conspiring to manipulate their companies' share prices could quite conceivably have resorted to such a quick exit option. Whether they would have been better served by such a course of action too is debatable as the Appellate Tribunal cleared Sterlite of any wrong-doing while decisions in respect of the other two are still pending.

It is also not clear if SEBI has the powers to engage in any such "settlement." Regulatory authorities in US have such powers. However, in India, such a procedure may set unhealthy precedents since the monetary penalty involved is so small that it cannot be expected to act as a deterrent.

In the end, Reliance's action is set to test the applicable laws on the subject and SEBI's response to the unilateral payment assumes crucial proportions. This action itself also promises to keep the company in the news and generate heated debate. In addition, if SEBI drops its case, it may balloon into another controversy.

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