Anil Ambani, an FII investor?

The official investigations into the convoluted case of UBS, the former head of its Asia II wealth management desk, and the mechanism created for Mr Anil Ambani and the Reliance ADA Group to invest in securities of their own group companies through a foreign investor vehicle, in breach of Indian market regulations, may now be wrapped up following three recent judgements by a London Court.

But startling revelations remain, as do a number of outstanding questions.

Strong signal from FSA

First to summarise: last month, the Upper Tribunal, a UK court which deals with appeals against decisions made by the Financial Services Authority, upheld the market regulator's decision to slap a 1.25 million pound (Rs 10.6-crore) fine on Mr Sachin Karpe, former head of UBS's Asia II Desk, and a smaller 75,000 pound (Rs 64 lakh) fine on one of his colleagues.

Mr Karpe was found to have carried out a number of unauthorised trades on customer accounts, resulting in substantial losses for some clients, transferring funds between accounts to hide losses without authorisation, and most notably of all, creating an investment structure that enabled Reliance ADAG to “breach Indian law in clear contravention of UBS's internal compliance rules”, including by taking steps to conceal the nature of the investment being made.

A month earlier, the tribunal had cleared the former head of UBS's UK Wealth Management business, John Pottage, of misconduct, while last year another advisor, Jaspreet Ahuja, opted to settle with the FSA for a 1,50,000 pound (Rs 1.28 crore) fine.

In 2009, UBS itself was fined 8 million pounds (Rs 69 crore) for system and control failures.

It was the third highest ever fine imposed by the regulator — a signal, the FSA said, of the important message it wanted to send to firms about the absolute necessity of having appropriate controls in place. (The bank has also subsequently paid around $42 million in compensation to customers who had been impacted).

The handling of the case was seen as an example of the FSA's increasing efforts — in the wake of considerable past criticism over its effectiveness — to take on more exacting and extensive cases involving the titans of the financial services industry.

SEBI penalty

By contrast, the settlement reached by authorities in India over the matter appears far less impressive — in January last year, SEBI imposed a Rs 50-crore penalty on Reliance Infrastructure and Reliance Natural Resources Ltd, which banned the firms, and five executives, including Mr Ambani, from trading on Indian exchanges until December 2011.

The settlement has enabled the Reliance Group and its executives, who have admitted no liability, to maintain throughout the recent proceedings in Britain — and as further details of the complex arrangements were made public — that it was a matter several years in the past, and had been settled with Indian authorities, who had made their decision in full knowledge of everything that has emerged in the course of the FSA investigations.

Disquieting aspects

Still, the revelations that have emerged in the various tribunal and FSA documents provide a rather disturbing picture of what went on, making little attempt to gloss over the far from passive role of Mr Ambani's Group, and Mr Ambani, (referred to during the tribunal proceedings as a “Mega client” who he had met in December 2005).

Instructions from the group regarding investment decisions were given directly to Mr Karpe, the tribunal ruling says. At one stage, Mr Karpe had attempted (unsuccessfully) to create a vehicle for Mr Ambani and his family to invest in Indian securities using an insurance vehicle.

When informed by Reliance ADAG that it wanted to invest in Reliance Communications, Mr Karpe instructed his colleague to create Cell E, a self-contained cell within a so-called Protected Cell Company in August 2006, through which $250 million was invested by Reliance National Resources Ltd, Reliance Energy Ltd and Reliance Energy Global Private Ltd.

‘Mega' client

It was made to appear that Groupe Opportunite, the France-based fund manager of the Mauritius-based fund Pluri, was making the investments in the securities in order to conceal the fact that Reliance ADAG was Cell E's ultimate beneficial owner.

The investment in Cell E was made indirectly by subscribing to notes issued by third party banks to disguise the Reliance link and by Mr Karpe's provision of “false and misleading” information to UBS's own compliance team.

Over time the value of the initial $250 million (Rs 1,386 crore) investment, held in a Zurich-based UBS account, increased substantially, reaching a whopping $400 million (Rs 2,219 crore) at one point — a Rs 832-crore gain that makes the SEBI settlement appear even more paltry.

The UBS employees were clearly struck by the mega client's clout. In a 2007 email cited in the FSA's opening statement in the Karpe case, one of the client advisors discussed the “business decision” that needed to be made. “The client is a mega client for wealth management and a key relationship account for investment banking” the advisor contended, along with the fact that the chances of being revealed to authorities in India was “very slim” and that the client was “among the top 3 industrialists in India with enormous influence in the country and able to interact with regulators and authorities as required.”

Unanswered questions

While the many documents provide a comprehensive overview of what happened, they do leave some questions unanswered — such as the diamond merchants, mentioned in the initial Enforcement Directorate letter to the British authorities, through whose accounts unauthorised transactions were made as part of the process of creating the investment vehicle. Or the identity of a mysterious Mr X, mentioned in the Karpe tribunal ruling as a person interviewed by the British regulatory authorities in SEBI's presence.

That person denied being the beneficial owner of Customer A, an account to which some 8 million pounds of unauthorised redemption payments were made from the Reliance investment to disguise trading losses.

Interestingly, the tribunal insists that it bases no conclusions on Mr X's denial that he was the beneficial owner of Customer A, just that no instructions had been given by him regarding the many transactions that were undertaken on the account. But did he ever object to the transactions and if not why?

And then of course, there's the question of how widespread the use of such mechanisms is: part of Mr Karpe's defence was that the use of FII structures for Indian resident investors was commonplace.

Interestingly, this isn't a question the British tribunal judgment tackles head-on, perhaps unsurprisingly, given its remit. But surely it is one for our authorities to take on?

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