A 'sham' transaction?

"Thus, it can be seen that the buyer and seller were one and the same group, that is, Reliance. The maze of companies and web of fund movement was created only to hide the identity of the group".
PARANJOY GUHA THAKURTA unravels the SFIO documents reported earlier on the Hoot. Pix: Bestmediainfo.com

A report of the Serious Fraud Investigation Office (SFIO) has levelled a series of allegations against India's biggest privately-controlled corporate entity Reliance Industries Limited, headed by the country's richest man Mukesh Dhirubhai Ambani, accusing it of having engineered a series of allegedly illegal transactions to control a company that controlled the NewsX television channel which, in turn, resulted in "wrongful" losses to the extent of hundreds of crores of rupees. Though the SFIO does not explicitly say so, the losses have presumably been incurred by ordinary shareholders of RIL.

The allegedly fraudulent set of transactions have been linked to corporate entities controlled by lobbyist Niira Radia, a Mauritius-based associate of multinational investment firm New Silk Route (whose founders include Rajat Gupta and Raj Rajaratnam who have been found guilty of insider trading charges in the United States of America) and a gas transportation company that was a subsidiary of RIL and which was supposedly "converted" into the "private property" of Mukesh Ambani "through a maze of private companies" in what has been described as a "classic manoeuvre".

The documents containing these sensational allegations were submitted to the Supreme Court of India on Monday (November 11) on behalf of the Centre for Public Interest Litigation (CPIL) by lawyer Prashant Bhushan. The bench of the apex court, comprising Justices G.S. Singhvi and V. Gopalagowda, has been urged to order a fresh investigation into the allegations contained in the SFIO's report as part of the larger probe into apparent criminal acts revealed in the telephone conversations of Radia that were recorded by the Income Tax Department.

(Besides the RIL-NewsX-New Silk Route episode, the documents of the SFIO submitted to the country's apex court include allegations against the Tata group and the Unitech group of companies in a separate land-cum-telecommunications deal.)

The complex set of transactions involving a slew of companies that are part of the Reliance, INX Media (which owned the English television news channel, NewsX) and New Silk Route corporate conglomerates have been meticulously laid out in a series of tables and flow-charts by inspectors and other officials of the SFIO in documents, some of which are as recent as April 2013.

The non-government organisation CPIL claimed that although the SFIO's documents have been in existence for some months now, no action has been taken by the government on the basis of the evidence unearthed which allegedly reveal a host of fraudulent and apparently illegal and criminal acts of corruption. The SFIO is under the Ministry of Corporate Affairs.

The documents reveal that investigations conducted by the Income Tax Department have "proved beyond doubt that the sale of NewsX channel" to a company called Indi Media Co Pvt Ltd by way of subscription of equity to the extent of 92 per cent of INX News Pvt Ltd was a "sham" transaction and a "premeditated plan" of the RIL group to fund the latter corporate entity "through its front companies" employing a "web of transactions".

The SFIO arrived at this conclusion on the basis of the deposition of K R Raja who was a top executive (senior vice president) of RIL handling corporate finance who took instructions from and reported to Manoj Modi, a close associate of Mukesh Ambani.

Here's an excerpt from pages 24 and 25 of the SFIO (edited slightly) report:

"On 9 September 2010, INX Media Pvt Ltd was demerged with Zee Entertainment, a listed company, and all the shareholders of INX Media Pvt Ltd including IM Media Pvt and Indrani Incon Pvt Ltd (both controlled by Pratim [Peter] Mukherjea's wife Indrani Mukherjea) were allotted equity shares of Zee Entertainment.  Further, in June 2011, equity shares of INX Media Pvt Ltd held by IM Media Pvt and Indrani Incon Pvt Ltd were sold to 9X Media Employee Trust and equity shares of Zee Entertainment held by IM Media Pvt and Indrani Incon Pvt Ltd were sold to INX Media Pvt Ltd. Here again, net losses of Rs 215 crore and Rs 86.22 crore was booked by IM Media Pvt and Indrani Incon Pvt Ltd. Thus it can be seen that the strategy employed by the companies, namely, INX Media and IM Media Pvt Ltd, both of them funded by RIL, is to enter into sham share transactions and book losses.

"Thus, as the evidence unfolds, the promoter group companies of Reliance advanced funds in the guise of convertible loans only to acquire the equity in INX Media and IM Media Pvt Ltd. The two companies in turn acquired the equity of INX News Pvt Ltd which was operating the NewsX channel. Hence, (on the) one hand, the promoter group companies of Reliance advanced funds to acquire equity of INX News Pvt Ltd at a premium and, on the other hand, one of the RIL companies, namely, Aarthik Commercials Pvt Ltd advanced funds to Indi Media Co Pvt Ltd through Suvi Info Management Pvt Ltd to acquire the same equity from INX Media Pvt Ltd and IM Media Pvt at Rs 10 per share at par causing wrongful loss of Rs 168.50 crore to ... INX Media Pvt Ltd and IM Media Pvt Ltd and an equivalent wrongful gain to Indi Media Pvt Ltd. Thus, it can be seen that the buyer and seller were one and the same group, that is, Reliance. The maze of companies and web of fund movement was created only to hide the identity of the group and to induce losses in the hands of INX Media Pvt Ltd and IM Media Pvt Ltd and gains at the hands of Indi Media Pvt Ltd as per the premeditated plan..."

Here's another excerpt from pages 33, 34 and 35 of the SFIO report:

"The question which is thrown open for further investigation is the interest of Reliance in New Silk Route (NSR). From the NewsX deal, it can be seen that the NewsX channel was in fact a hindrance in allowing controlling shareholding to New Silk route in the equity of INX Media Pvt Ltd which in turn held 29 per cent equity of INX News Pvt Ltd which ran (the) NewsX channel. INX Media Pvt Ltd was then a subsidiary of IM Media Pvt Ltd which in turn held 62.9 per cent equity of INX News Pvt Ltd. Since the ... FDI (foreign direct investment) (limits) did not allow (for) higher investment (more than 48 per cent) in (news) media (companies)... the entire exercise of sale of NewsX channel was undertaken to dissociate (it)...from INX Media Pvt Ltd. After sale of equity of INX News Pvt Ltd to Indi Media Pvt Ltd, (the former) was controlling only the entertainment channels, namely, 9X, 9XM (etc.) In the (case of) entertainment media, 100 per cent FDI is allowed. Therefore, by organizing the sale of NewsX channel to Indi Media Co Pvt Ltd funded by (the) Reliance group, the channel was held under its (Reliance's) control, as... already established by way of equity holding and (what has been disclosed) in the transcripts of (conversations of) Niira Radia...simultaneously, New Silk Route was allowed a marching entry having controlling stakes in INX Media Pvt Ltd..."

The SFIO report then provides a table which indicates that: "the true story which Shri Raja (of RIL) tried to conceal....the majority stakes in INX Media Pvt Ltd (79.38 per cent) are in the hands of NSR-PE (New Silk Route - Private Equity) contrary to what Shri K R Raja tried to portray. Thus, the sale of NewsX was not organized to allow exit to NSR and the other promoters. The real reason was to introduce NSR as the controlling stakeholder in INX Media Pvt Ltd and this was not possible as long as the NewsX channel was in the control of INX Media Pvt Ltd (it being the holding company, INX News Pvt Ltd) ... in order to allow controlling stakes to NSR in INX Media Pvt Ltd it was (of) utmost importance to turn it wholly into an entertainment channel....By dissociating NewsX from INX Media Pvt Ltd and to accomplish the sale of NewsX channel, another company named Indi Media Pvt Ltd was incorporated (on 27 November 2008) just a month before the date of sale of NewsX channel on 7 January 2009..."

Calling for a "thorough investigation" into the links between the Reliance group and New Silk Route, the SFIO report added: "Investigation of the sale of NewsX has revealed that the funds had been moved from Reliance Gas, Ornate Traders Pvt Ltd, Reliance Explorations, (and) Reliance Extrusions...by utilizing a maze of private companies to make investments in INX News Pvt Ltd. ...

"Further investigation into these (corporate) entities has revealed that Reliance Gas Transportation Infrastructure Limited (RGTIL) was incorporated on 19 March 2003 as a subsidiary of Reliance Industries Limited for transportation of gas from RIL's gas fields from the KG (Krishna-Godavari) basin. On 18 August 2004, RGTIL, while it was still a 100 per cent subsidiary of RIL was granted approval by the Petroleum Ministry to transport 80 million units of gas per day from Kakinanda to Bharuch passing through four states (Andhra Pradesh, Karnataka, Maharashtra and Gujarat...On 21 April 2005, RIL chairman Mukesh Ambani quietly without any disclosure stripped RGTIL from RIL and converted into his personal property at a meagre price of just Rs 5 lakh."

The SFIO document named the "maze of private companies" through which this had been done: Lordwest Invest & Trading, Shangrila Invest & Trading, Proline Invest, Jigna Fiscal, Vayudoot Invest & Trading, Yashasvi Holding and Anumati Mercantile. This "classic manoeuvre", according to the SFIO document, enabled India's richest man to convert a wholly-owned subsidiary of the country's largest private corporate entity into his "personal property".

It was pointed out that these companies had directors who were Reliance group employees and their registered office addresses were also the ones where other RIL group companies are registered -- 84A Mittal Court, 505 Dalamal House, 147 Atlanta, which are located in and around Mumbai's Nariman Point business district.

For more information, readers may read the full 35-page document and the two-page letter (both attached below) sent by an officer of the MCA to the SFIO director to ascertain the veracity or otherwise of the allegations that have been levelled.

The Hoot is the only not-for-profit initiative in India which does independent media monitoring.
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