Sebi fines RIL Rs 13 cr for not disclosing earnings dilution

Sebi fines RIL Rs 13 cr for not disclosing earnings dilution

Markets regulator Sebi today slapped a penalty of Rs 13 crore on corporate giant RIL on charges of repeated non-disclosure of a key earnings ratio for six quarters, saying this information would have had a significant impact on investors' decision to buy or sell shares.

The company said it is studying the order and would take appropriate action based on legal advice.

The penalty includes a fine of Rs 1 crore for violation of Listing Agreement and another Rs 12 crore for violation of the Securities Contracts (Regulation) Act in relation to non-disclosure of the Diluted Earnings Per Share (DEPS) in the quarterly and annual disclosures.

The order follows a probe by the capital markets regulator in an over seven-year old case involving alleged irregularities in issuance of 12 crore warrants by Mukesh Ambani-led RIL to its promoters entitling its holders to subscribe to equivalent number of equity shares of RIL.

It was alleged that this issuance in April 2007 had resulted in diluting the pre-issue paid-up equity share capital of RIL, but the company repeatedly failed to disclose such dilution in earnings for as many as six quarters.

"We are now studying the order as to the interpretation Sebi has taken and would take appropriate action based on legal advice," an RIL spokesperson said in a late night statement.

"The issue relates to the method of calculation of diluted EPS under the Accounting Standards. The issue is not of non-disclosure," the statement added. "It can be observed from the results published by the company of all the quarters in question that both basic and diluted EPS have been disclosed...."
RIL also released its financial results for six quarters concerned to substantiate its claims on basic and diluted EPS.

"The company in its arguments and written submission has brought out all the relevant clauses of the Accounting Standards to substantiate why basic EPS and diluted EPS were same in all the quarters," the statement said.

In its 15-page order, Sebi said that the company had submitted before it that there would "be no dilutive effect in the Earning Per Share (EPS) if the proceeds from the issue are not less than the fair value of the shares issued".

Sebi ruled that "conversion of warrants into equity shares would necessarily result in reduction in net profit per share of the company as the same amount of profit needs to be distributed to additional equity shares as well upon such conversion".

The latest penalty comes over one year after another fine of Rs 11 crore slapped by Sebi in May 2013 on Reliance Petroinvestments, an RIL subsidiary, in an insider trading case. That case was related to charge that Reliance Petroinvestments bought shares of erstwhile IPCL (Indian Petrochemicals Corp Ltd) in early 2007 just before it declared an interim dividend and announced the merger of IPCL with RIL.

The Securities Appellate Tribunal dismissed a plea by RIL on June 30 this year against Sebi, which had rejected the company's consent application on an alleged irregularities in relation to trading in shares of Reliance Petroleum Ltd, then a separately listed group company, in November, 2007.

In the present case, a show-cause notice was served on RIL in February last year, listing out allegations levelled against the company.

After looking into the company's reply and further probe into the matter, Sebi said that "EPS (Basic or Diluted) is a vital factor or one of the fundamental tools for the investors while arriving at decision to continue or invest in the shares of a particular company.

The regulator said further that RIL "under an obligation to disclose separately the DEPS for the quarters ended June 2007, September 2007, December 2007, March 2008, June 2008 and September 2008, which the noticee had failed to do so".

"In view of aforesaid observations, facts and records of the case", Sebi said, the company was in violation of the relevant provisions of the Listing Agreement and the SCRA and therefore it was liable to a penalty.

Noting that a specific quantum of any direct or indirect unfair gain made by RIL and the loss caused to the investors were not available on records, Sebi said that "the fact cannot be ignored that millions of shareholders/investors were deprived of correct disclosures about DEPS."

"As regards to the repetitive nature of default, as observed above that the Noticee had failed to disclose the DEPS repetitively for the six quarters. Hence, an appropriate penalty needs to be imposed upon the Noticee, taking into account the aforesaid gravity of the violations committed," Sebi said.

Accordingly, the regulator has decided to impose a penalty of Rs one crore for violation of Listing Agreement and of another Rs 12 crore for violating the SCRA provision.

RIL has been asked to pay the total amount of Rs 13 crore within 45 days through a demand draft in favour of 'SEBI - Penalties Remittable to Government of India'.

Sebi said that "EPS is considered as the single most important vehicle in determining a share's price.

"It is key driver of share price and used as a barometer to gauge a company's profitability per unit of shareholder ownership. It is not out of place to mention that the noticee company has millions of shareholders and the prospective investors who were also deprived of correct disclosures in relation to DEPS in respective quarterly financial results..."

The regulator further said RIL's Annual report for the year 2008-09 contained a disclosure regarding issue of 12 crores warrants on preferential basis on April 12, 2007 to entities in the promoter group entitling them to acquire equivalent number of fully paid up equity shares.

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