Omita Paul, SEBI, and RIL’s 2000 crore stock market scam

Reports in the media recently has pointed towards a battle in the country’s financial regulator, Securities and Exchange Board of India (SEBI).

K M Abraham, a whole time member of SEBI wrote to the Prime Minister’s Office and leveled serious allegations against Finance Minister Pranab Mukherjee, his advisor Omita Paul and the regulator’s chairman U K Sinha.

Abraham, in a letter on June 1, has alleged that “the finance minister and his advisor pressurized the SEBI chairman to manage some high-profile corporate cases,” the Indian Express reported.

Now, a complaint filed with the Central Vigilance Commissioner (CVC) on September 10, 2011 confirms Abraham’s allegations.

The complaint is filed against Smt Omita Paul, Special Adviser & Secretary, Ministry of Finance; (2) Sri U K Sinha, Chairman, Securities and Exchange Board of India (SEBI); and (3) Sri Mukesh D. Ambani, Chairman & Managing Director, Reliance Industries Ltd. The complainant has alleged that all of them are engaged in a crime in progress to deprive the exchequer of Rs 2000 crores.

The complainant had earlier complained (CVC ref no: 416/09/02) about the 2G scam showing how Anil Ambani had transferred Swan Telecom as a bribe on the day he was given the GSM license in Reliance Communication. The complaint has been annexed in the pending PIL petition before the Hon’ble Supreme Court.

According to the complainant, “the complaint relates to the mala fide manipulation of appointments to the Securities and Exchange Board of India (SEBI) to the demonstrable benefit of Reliance Industries Ltd (Sri Mukesh Ambani) by over Rs. 2000 crores in the pending Fraudulent and Unfair Trading case before SEBI in which the company is liable to pay a penalty of up to Rs. 1539 crores along with the disgorgement of profit of Rs. 513 crores..”

EXCERPTS FROM THE COMPLAINT LETTER (Reproduced with permission of the complainant)

The facts of the scam/fraud:

The following facts relate to violation under Fraudulent and Unfair Trade Practices Regulations, relating to RIL and its subsidiary,

• In November 2007, the company secured an illegal gain of Rs. 513 crores. Under the law, RIL was liable for a penalty of three times the gain — that is, Rs. 1539 crores – and the disgorgement of its profit of Rs 513 crores, taking the total amount to Rs. 2056 crores. Factoring in interest, this amount would increase by another Rs. 200 -500 crores. More importantly, the violation could also entail criminal prosecution under IPC punishable with seven years imprisonment as unsuspecting g investors had been defrauded/cheated of Rs. 513 crores.

• A clean (or, more accurately, dirty) profit of Rs. 513 crores earned unlawfully in five days by shorting the market on the basis of information not available to investors is most impressive, even by the standards set by Reliance. It bears noting here that  Rs. 7.85 crores shares were sold for Rs. 210 were the very same shares allotted for Rs. 10 a year back and that they earned a 20-fold profit (approximately Rs. 1400 crores) to the promoters of RIL in less than a year. In addition, it is relevant to note that RIL had the guts to indulge in this fraudulent practice in 2007, when SEBI had been around for 15 years, speaks volumes of their complete confidence in the support of the present political dispensation which, incidentally, is almost identical to that of 1983 when Fiasco and Crocodile Investment were used as benami foreign fronts by Reliance to bring in money through Channel Islands. RIL’s confidence is justified: At that time, a leading English newspaper had screamed “Pranab Mukerjee: Minister of Finance or Reliance?” This time around, there has been pin drop silence.

The details of the fraudulent trade:

In the show cause notice to RIL, SEBI had stated that  that between Nov 1-5, 2007, some 12 entities acting on behalf of Reliance Industries had created short position of around Rs. 7.65 crore shares at Rs. 290 per share.

The market watchdog had then gone on to state that the 12 entities had sold the Reliance Petroleum shares heavily in the cash market, amounting to 4.01 percent of the company’s equity, and depressed the price to around Rs. 210.

“By artificially depressing the price in the cash market and thereby lowering the settlement price of the futures on expiry, Reliance Industries gained on its short positions in the derivatives market,” the SEBI notice had said.

It had added: “The whole manipulative operation was arranged by Reliance Industries and it was aided by the 12 related entities. Reliance Industries earned Rs. 513 crore by indulging in these manipulative activities.”

As all with even an elementary knowledge of the capital market in India know only too well, this manipulative and fraudulent transaction was the standard operating procedure for the company in the badla days of the eighties. A group of promoter companies would take short-positions in Reliance Petroleum in the futures market with the prior knowledge that the promoters would sell large quantity of shares in the cash market. In short, they knew the market price would fall when Reliance Petro shares were sold, and that they would be able to make money with this prior knowledge by selling in the futures market. This practice, repeated at regular intervals, was and is in egregious violation of the Prohibition of Fraudulent and Unfair Trade Practices Act.

The matter came into the limelight when it was raised in the Parliament and with SEBI in August 2008 by none other than Sri Amar Singh. Unfortunately for RIL, by then the new SEBI chief, Sri C B Bhave, a no-nonsense officer, had taken over. He had immediately ordered an investigation which had resulted in the finding of the Rs. 513 crores in  illegal profit and the issuance of a a show cause  notice  to the company in May, 2009.

The company had been charged under Prevention of Fraudulent and Unfair Trade Practices Regulations Section 15HA of SEBI Act which states:

15HA – Penalty for fraudulent and unfair trade practices: If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher..

The penalty would be three times the profit, that is Rs. 1539 crores. As the fraud was committed knowingly by a company having the largest market capitalization, the penalty should have been the maximum under the law. This was more so to instill the confidence of the Foreign Institutional Investors  that the Regulator does not surrender before corporates enjoying politic patronage but has the will to discipline the largest and the most influential company listed on the market. There was hardly any scope for leniency, given the nature of the crime.

Faced with the daunting prospect of losing Rs. 2056 crores and inability to influence the  honest and competent officers at SEBI, a long term conspiracy was hatched between RIL and  the Finance Ministry.

The strategy was simple and time tested. Reliance would delay the matter at SEBI for two years during which years certain key officers in SEBI, would complete their tenure – the chairman, whole time directors and three executive directors. The Finance Ministry, on its part, would ensure that the officers were not given an extension. A pliant and obliging SEBI chief would be installed and the case against RIL would be compromised for a token amount.

Smt. Omita Paul whose only qualification (MSC chemistry, M Phil social science and BA Journalism, retired from Indian  Information service) )  to the high office of Adviser with the rank of  Secretary, is her proximity to the Finance Minister, was the point person in the Finance Ministry.

She was to ensure that Bhave would not get an extension, and would be replaced by a pliant and friendly successor. Other senior officers like Dr Abraham and Mr Sahoo (whole time members) who had performed  commendably and would not agree to the compromise  too would not be given an extension.

As a first step towards the objective of removing the key officers, Smt Omita Paul refused to put up the file for the approval of the Cabinet for extension of tenure of Bhave by two years by stating that it was premature, even after it had been approved earlier by the Finance Minister after obtaining the consent of Mr Bhave for the extension. Similar consent of the two whole time members of the Board  including Dr Abraham had been obtained.

Incidentally the decision to call back the file was contemporaneous with the thorough investigation/ inquiry done by SEBI into the illegal trading in RIL shares resulting in an illegal profit of  Rs. 513 crores.

Subsequently, Smt Omita Paul changed the composition of the selection panel for the selection of SEBI Chairman by introducing more members from the Finance Ministry to ensure that Sri C B Bhave was not appointed and that her candidate, the amiable and obliging Sri U K Sinha was selected.

A headline in The Indian Express edition of 23/4/10, is produced below:

After FM cleared Bhave extension, advisor stepped in to roll it back: Records available with The Indian Express reveal that more than a year before his term was to end, Sri Bhave had been cleared for an extension in office of another two years by the Finance Minister, Sri Pranab Mukherjee. This, after he had asked for — and obtained — a positive recommendation from then Finance Secretary, Sri Ashok Chawla, on Sri Bhave’s performance.

But after the Finance Ministry formally wrote to Bhave seeking his consent, Sri Bhave sent a letter to Sri Chawla, affirming that he was willing to accept a two-year extension.

Things were proceeding smoothly — until Smt Omita Paul did what she had been mandated to do by the Finance Minister.

It was her note suggesting that no action was needed so early, records show, which was the tipping point. Sri Pranab Mukherjee lost no time in putting on hold the process for eight months. The Finance Ministry called back the proposal on tenure extension sent to the Appointment Committee of the Cabinet in January 2010.….

When contacted, Smt Paul said she would not like to comment..

Presumably, she did not want to comment about the  ouster of Sri Bhave and her role in the appointment of her protégé U K Sinha as also in ensuring that Dr Abraham too did not get an extension/reappointment. Dr Abraham too had to agree to any consent order (explained in detail below) to be passed in the case against  RIL.

The active involvement of Omita Paul in preventing the then SEBI chief from getting an extension is proof of  her involvement in the conspiracy.

RIL, on its part, had to merely drag its feet to help Smt Omita Paul to oust two key officers who would not compromise their integrity in handing an order to RIL.

Consent Order:

Consent order is a parachute to bail out large corporates from financial crimes. While an ordinary man, if caught in a fraud of ten thousand rupees will be jailed, the super rich, for a stock market fraud of Rs. 500 crores, can buy his way out by a device borrowed from the west known as consent terms. It is an agreement between the offender (RIL) and the regulator (SEBI) by which the company does not admit to the guilt but agrees to pay a certain amount and SEBI in turn agrees not to prosecute the offender or pronounce him guilty, if the mutually agreed amount is paid. It is the price paid by the company for not admitting the guilt and also not being prosecuted under criminal law!

Consent order is resorted to only when the evidence is weak and there is a doubt that the case may not stand in a Court of law. However, when the case is backed by foolproof evidence (though in law nothing is foolproof) there is no question of the Authority agreeing to consent terms .Full penalty is levied. RIL fell in this category.

RIL is the largest company of the country by market capitalization (Coal India overtook it recently). Though a good part lot of the promoters’ wealth has been earned on the Stock market, (the legal Rs. 1400 crores and the illegal Rs. 500 crores mentioned above is an example) they cannot afford the stigma of being caught on a violation of Insider Trading/ Prevention of Fraudulent and Unfair Trade Practices Regulations. The financial consequences would be grave and immediate. It would lead to their being automatically blacklisted the world over by fund managers and their capacity to raise capital would be diminished.

It is the accused party that has to apply for consent orders and to initiate proceedings for such an order, a lengthy process.

However, in the case of RIL, it is  the company that decides the law that would apply to it and the amount it would pay to hush things up through a consent order. There is no question of finding the company guilty.  If officers like Sri Bhave and Dr Abraham insisted on coming in the way of Reliance, then Smt Omita Paul, her boss, or other dubious individuals in government would steamroller them aside.

While Mrs Paul was taking care of the non-renewal of Sri Bhave’s term ,  RIL was doing its little bit to prolong the decision-making beyond Sri Bhave’s term by filing for a consent order and by offering to pay  Rs. 2 crores in November, 2009, knowing fully well that it would be rejected but the process would consume time.

When that was predictably rejected, Reliance file another application for a consent order in August, 2010, this time it for a princely sum of Rs. 8 crores  or  400% more than the previous offer but 0.5% of the Rs. 2056 crores.

These two ridiculously low offers of Rs 2 crores and Rs. 8 crores (as against a total amount of Rs. 2056 crores gain through fraud of Rs. 513 crores, plus penalty of Rs.1539 crores) are in themselves proof that a deal had been struck between RIL and Omita Paul After she had  replaced the existing Chairman, the new Chairman would ensure that the penalty does not exceed Rs. 50 crores. It was for this reason alone that RIL offered the meager amount so that it could negotiate from a low base of Rs. 8 crores. It would make perfect business sense to spend Rs. 50 crores in consent order, Rs. 100 crores in bribes/donations (or much less), and pocket Rs. 1900 crores. That way RIl would be able to pocket Rs. 350 of the illegal/ fraud money!

These offers too had to be rejected, again involving a drawn-out process which would give Smt Omita Paul time to oust Sri Bhave through behind- the-scenes manipulations and to install her very civil servant, Sri Sinha.

With Sri Sinha  duly installed in office, it was expected that things would move smoothly. Reliance would come back with another settlement for a consent order at Rs. 15 crores and the matter would be closed at Rs. 50 or even Rs. 100 crores. RIL would save about Rs. 1900 crores — and ensure that it would be immune from prosecution on that particular transaction for all time.

Predictably enough, another consent order was filed after Sri Sinha planted himself in the SEBI chairman’s office in May 2011. The amount offered is not known.

As anticipated, the obliging Sri Sinha, made it his highest priority to deliver the RIL consent order. After all, the company (and the Finance Minister) had waited long enough.

In his letter to the Finance Ministry in response to the accusation of Dr Abraham that Sri U K Sinha had tried to influence him on various vital cases, he wrote with remarkable sagacity and somewhat less clarity:

Consent is another area where there is prevailing perception that it is subjective, provides escape route to offenders and quality of orders is not high and is not transparent.. While I have publicly defended the decision of consent proceedings which are legal and as per law and is practiced in many advance jurisdictions, I do feel that there is need to bring in uniformity and consistency. All these efforts on my part may not have gone well with everybody in the organization but by and large the officers have appreciated my commitment and drive to improve the system in SEBI. I advised the executives to have more clarity on when consent orders can be passed, how to improve the quality of orders, how to improve the drafting and to provide training to the officers so that the quality of their orders can improve. I presume that these are efforts to improve systems and procedures within SEBI and are my legitimate responsibility and cannot be counted as interfering or influencing the investigation or the quasi – judicial responsibilities of a delegated authority.

Before my joining, SEBI had passed consent orders in January 2011 against Reliance ADAG entity imposing settlement charges and restraint. It was in this background that when briefs were put up regarding Reliance Industries Ltd, I discussed the background of how and in what manner the settlement amount was arrived at in the ADAG case and whether any consent petition has been filed in RIL case or not. Except for the brief that came to me through Dr Abraham, I have not seen any file, passed any orders or given any directions to any employee. The matter is still with the WTM and to the best of my knowledge no decision has been taken so far.

The plain truth is that Sri Sinha has not written a single order in his life on regulatory issues. Though he may have concerns as SEBI chief, he simply does not have proven expertise in drafting or passing quality orders. On the other hand, there are a large number of articles available in the public domain in which orders passed by SEBI during the tenure of Sri Bhave have been hailed as well reasoned and quality orders.

If Sri Sinha was so concerned about transparency as he purports to be, he should have ordered that all consent orders along with the charges and the investigative report be posted on the internet.

Further if he believes that consent orders provided an escape route to the offender, it was his bounden duty to pass orders that no consent order would be passed in cases where there was sufficient evidence against the offender. This would be upholding public policy. Consent orders are resorted to only where there is insufficient evidence.

It is also not true that consent terms are offered to offenders in advance jurisdiction and Sinha may not have heard of Michael Milken, Ivan Boesky, Martha Steward and our own Rajirathanam. He may really not have heard of them or he may be faking ignorance. All of them would have agreed to a consent order!

The very fact that he clubbed ADAG consent order with that of RIL pending application (in the letter mentioned above) shows his anxiety to deliver on the deal between RIL and Smt Omita Paul. Dr Abraham was a whole time member and not a subordinate of Sri Sinha. Could the Chief Justice have similar discussions with his brother judges?

The fact of the matter is that, in the consent order relating to ADAG, no profit was made and yet it was made to pay Rs. 25 crores in each of the two companies that diverted the funds to the capital market! RIL, on the other hand, had made illegal profits Rs. 513 crores and SEBI should not have provided the “escape route to the offender” and should have been fined it Rs. 1539 crores along with interest.

In fact, the two paragraphs quoted above from the correspondence of Sri Sinha to the Finance Ministry show that his overwhelming concern was that liberal consent terms be offered to RIL — and not that an ‘escape route’ to the offender should be denied.

It was logical for Mr Sinha to try and get Dr Abraham to clear the consent terms before he demitted office and not by a successor chosen by him/his mentor (Smt Omita Paul), so that  the stink of the scam would not affect him or his mentor in the Finance Ministry later on!

The importance of this complaint lies in the fact that it has been filed even as a crime is in progress. Unlike most complaints, it has been filed before the crime has been completed and injury done. If acted upon, injury can be prevented. If ignored, injury will result.

Thus, it is important that immediate action is taken against the erring conspirators to prevent the impending loss of Rs. 2000 crores to the exchequer. In case the consent terms are agreed to there will be absolutely no future possibility of recovering the loss to the exchequer. The protagonist will claim that the decision was taken by common consensus by various officers as has been the case in the various scams in the public domain.

It is essential that the following preventive steps are taken to avert the loss:

• The investigative report and the show cause notice be put in public domain so that there is no doubt that the Rs. 513 crores of illegal profit was due to fraudulent and unfair trade practice and that the case is on a sound footing.

• SEBI is prevented from entering into consent term with RIL.

• Policy decision taken that consent terms will not be entertained in cases where there is strong evidence to prove the violation of law. In fact that is the public policy.

• Penalty of three times the profit is levied. It must be remembered the company made a profit of Rs. 1400 crores on sale of shares in addition to the Rs. 513 crores of illegal profit.

• SEBI should ensure that the disgorged amount of Rs. 513 crores is distributed to investors who were defrauded.

• Action be taken against the persons in conspiracy to displace officers of integrity in order to make the deal with RIL possible.

The complainant has also alleged that the SEBI Chairman deliberately leaked his response to the Finance Ministry on Dr Abraham’s letter.

The letter states:

“The Chairman also ensured the exit of three Executive Directors while it is SEBI Board which decides on the appointment and extension of tenure of EDs. The minutes of the Board meeting show that no decision was taken by the Board but it was decided by the Chairman to issue fresh advertisements and that the existing members would have to apply afresh. It is learnt that the Board was deliberately misled by the Chairman. It was not surprising that three of the Executive Directors who had performed admirably chose not to apply and serve under Sri Sinha. By this clever manipulation, three experienced and competent senior officers who are men of high caliber and who worked for SEBI on a salary cut have been lost to the cause of public service as they were denied the job satisfaction of serving under an honest dispensation. Competent and honest people are rare and are not to be insulted by making them re-apply for a post along with others – at least, not by an honest government.”

The letter concludes by requesting the CVC to prevent the scam.