1.0 Background:

1.1 The present matter has been taken up by us pursuant to the order dated 01-11-2007 passed by the Hon'ble High Court of Bombay in the Writ Petition (PIL) No. 90/2007 filed by the complainant on 26-10-07. By the said order dated 01-11-07 the Hon'ble High Court has directed SEBI (ex-parte) to deal and dispose of the representation of the complainant dated 18-10-2007.

1.2 It is noted that the representation of the complainant dated 18-10-2007 is in relation to the Draft Red Herring Prospectus (DRHP) filed by Reliance Power Ltd. (RPL) with SEBI on 03-10-2007. The complainant has stated that there has been a serious breach of corporate governance in the case of Reliance Energy Limited (REL) and RPL. It has submitted that the promoters of REL have transferred certain high value projects such as Rosa Power, Sasan Power, Butibori, Shahpur Coal, Shahpur Gas, Urthing Sobla, Dadri etc. to a company which is owned 50% by REL and 50% by the promoters of REL. It is further alleged that in the context of the proposed Initial Public Offering (IPO) of RPL, the promoters of the RPL have, in an attempt to subvert the spirit of clause 4.6 of the DIP Guidelines, gained huge benefits using several front companies and by means of merger and amalgamation.

1.3 By the said complaint the complainant has requested SEBI to ensure that the DIP Guidelines are not violated in spirit to unjustifiably benefit the promoters of RPL.

2.0 Personal hearing and Submissions:

2.1 On 04.12.07 the representatives of the complainant appeared and made submissions on the lines of written submissions filed by them on the said date. On the said date the representatives of RPL also appeared and made submissions on behalf of RPL. As prayed by the complainant a copy of the written submissions filed by the complainant was given to the learned advocates of RPL with a direction to file its reply to the written submissions of the complainant within a period of 7 days. On 07-12-2007 RPL filed its reply to the written submissions filed by the complainant which was forwarded to the complainant with advice to file its rejoinder before 18-12-2007. On 18-12-2007 the complainant filed rejoinder to the reply filed by RPL. The complainant also requested that they may be allowed time till 26-12-2007 to file further elaborate submissions and another opportunity of hearing may be granted to it. As desired by the complainant, further time till 26-12-2007 was given to the complainant to file its elaborate submission. However, no further submissions were filed by the complainant as on the date indicated by the complainant.

2.2 Before we deal with the complaint of the complainant we find that the request for additional hearing is not desirable in view of the fact that the hearing in the matter had been concluded on 04.12.07 and as requested by the parties the time and opportunity of filing submissions/rejoinders had been given to them on their request. Further, SEBI is expected to process the DRHP in accordance with the DIP Guidelines and SEBI Act within a stipulated time frame. There cannot be undue delay in processing the DRHP.

3.0 Submissions made by the complainant:

3.1 The Complainant has stated that REL has transferred/diverted its major projects to RPL. It is submitted by the Complainant that REL depicted RPL as a Special Purpose Vehicle in 2004-2005 for setting up 3740 MW project at Dadri, U.P and later on in 2005-2006 RPL was portrayed as its affiliate. The complainant has submitted that the promoters of REL have also transferred certain high value projects such as Rosa Power, Sasan Power, Butibori, Shahpur Coal, Shahpur Gas, Urthing, Sobla, Dadri to RPL. The complainant has alleged that these projects can be implemented by REL on its own; however the promoters of REL have transferred the projects to RPL. The above transfer of the major projects, according to the complainant, is in violation of Section 293 of the Companies Act, 1956.

3.2 The complainant has submitted that Reliance Public Utilities Pvt. Ltd. (RPUPL) was a joint venture between REL and AAA Project Ventures Pvt. Ltd., who are also the promoters of RPL. RPUPL was incorporated in 2005. On 03-08-2007 REL and AAA Project Ventures Pvt. Ltd. (company ultimately owned by Mr. Anil Ambani) infused a sum of Rs. 500 Crore each into RPUPL thereby bringing its paid up capital to Rs. 1000 Crores. According to the complainant the setting up of RPL as 50:50 Joint Venture SPV between AAA Project Ventures Ltd. and REL was intended for concealment and diversion of projects at the cost of the shareholders of REL. The subsequent infusion of Rs. 1000 crores has been parked with Mutual Funds and the same clearly suggests that it was a device to conceal the diversion of projects. It has been alleged by the complainant that transferring various projects from REL to RPL and other interest in REL by way of investing funds in RPUPL will adversely affect the interest of the shareholders of REL.

3.3 Thereafter, an amalgamation scheme was filed by RPUPL and RPL in the Hon'ble High Court of Bombay and the same was approved by the Hon'ble High Court on 27-09-2007. The rationale for the merger of RPUPL with RPL, as stated in the Scheme of Amalgamation, was: “RPUPL has put in considerable efforts in acquiring necessary technical and manpower skills, which are ancillary to the business of RPL. RPL can take benefits of this specialised skill sets and technology available with RPUPL to undertake mega power projects and implement them more efficiently and successfully”.

3.4 Pursuant to the merger/amalgamation, the share exchange ratio was 1 equity share of RPL for 1 equity share of RPUPL. Thus, Reliance Energy Ltd. and AAA Project Ventures Pvt. Ltd. were allotted 50 crores share each at Rs. 10 per share. Thereafter through a special resolution of the shareholders dated 30-09-2007 Reliance Power Ltd. approved the division of its equity share from Rs. 10 per share to Rs. 2 per share. Pursuant to the above resolution, RPL allotted 250 crore shares of Rs. 2/- each to REL and AAA Project Ventures Pvt. Ltd.

3.5 The complainant state that RPUPL is a shell company and the claim in Scheme of Amalgamation that RPUPL has acquired necessary technical and manpower skills ancillary to the business of RPL is false and incorrect. It is alleged that the above mentioned scheme of arrangement is bogus and it does not talk about the proposed IPO of RPL and that the DRHP of RPL was filed with SEBI on October 3, 2007 i.e only 6 days after the merger was approved by the Court. It is contended by the complainant that the whole process is an attempt to circumvent the provisions of SEBI (Disclosure and Investor Protection) Guidelines, 2000. Clause 4.6.4 of the DIP Guidelines provides that the shares acquired pursuant to a scheme of merger or amalgamation approved by a High Court shall be eligible for computation of promoters' contribution.

3.6 The learned Senior Advocate appearing for the complainant also argued that the proposed IPO of RPL ignores Clause 3.7.1(i) of DIP Guidelines. Clause 3.7.1 provides that in the case of an initial public offer by an unlisted company, if the issue price is Rs. 500 or more, the issuer company shall have the discretion to fix the face value below Rs. 10 per share subject to the condition that the face value of the share in no case be less than Re. 1 per share and if the issue price is less than Rs. 500 per share, the face value shall be Rs. 10 per share. As per the DRHP of RPL the face value of the share has been provided as Rs. 2 per share, which implies that RPL cannot issue shares at a price less than Rs. 500 per share. This non-disclosure proceeds to mislead the public to believe that the company would raise a minimum of Rs. 65000 crores out of the issue of 130 Crores shares.

4.0 Submissions on behalf of RPL

4.1 The learned Senior Counsel appearing on behalf of RPL submitted that the allegation that REL transferred various projects to RPL is misconceived and fraudulent. He submitted that RPL was set as a Special Purpose Vehicle to carry out the power generation business. The first power project at Dadri in Uttar Pradesh was secured by RPL in its own name. Further the projects at Sasan and Krihnapatnam have been acquired by RPL either in its own name or in the name of its subsidiaries. It is incorrect that these projects have been transferred from REL to RPL.

4.2 Referring to Section 293 of the Companies Act, the Learned Senior Counsel submitted that there is no violation of Section 293 of Companies Act by REL as the term ‘undertaking’ used in Section 293(1)(a) of the Companies Act means the ‘unit’, the business as a going concern. According to him there is no violation of Section 293 of the Companies Act by REL.

4.3 It was also submitted on behalf of RPL that setting up of RPL as an SPV with 50:50 joint venture between REL and AAA Project Ventures Pvt. Ltd. was on account of generally accepted and sound business principles and in accordance with law.

4.4 It was also submitted that in terms of Clause 4.6.4 of the DIP Guidelines the shares acquired by the promoters of RPL pursuant to the scheme of amalgamation and approved by the Hon'ble Bombay High Court by order dated 27-09-2007 are eligible for the purpose of promoters' contribution in the proposed IPO of RPL.

5.0 Consideration of submissions and findings:

5.1 We have carefully considered the rival contentions of the complainant and RPL. On the basis of the submission made by them the following two issues are inferred from the complaint of the complainant:

A. Whether in this case there is a violation of Section 293(1) of the Companies Act with respect to the transfer of any project by REL to RPL?

B. Whether the shares acquired by promoters of RPL pursuant to the Scheme of Amalgamation sanctioned by the Hon'ble High Court of Bombay are eligible for the purpose of computing the contribution of promoters in terms of Clauses 4.6.1 and 4.6.2 read with clause 4.6.4 of the DIP Guidelines?

Regarding Issue A

5.2 We find that with respect to the alleged violation of Section 293 of the Companies Act, SEBI is not vested with power to administer the provisions of Section 293 of the Companies Act, 1956 and it has no jurisdiction to initiate any action for any violation or to conclude a finding on any alleged violation of this section. This matter had been taken up by SEBI with the Ministry of Corporate Affairs (MCA) vide letter 03-12-2007. The MCA has vide their letter dated 18-12-2007 stated that prima facie there does not appear to be evidence at this stage to establish a violation of Section 293 read with Sections 292 and 293 of the Companies Act. It is also suggested by MCA vide their letter dated 18-12-2007 that it is open to the shareholders of REL to seek redressal under Section 397 and 398 of the Companies Act if they perceive any mismanagement or oppression by the management of REL.

5.3 We note that the thrust of the argument on behalf of the complainant is with respect to the shortchanging the shareholders of the REL rather than the RPL. Since the allegation that the interest of the shareholders of REL are adversely affected by the transfer of various interest by REL to RPL may be a matter relating to the oppression and mismanagement of REL and as this issue is not within the jurisdiction of SEBI, we are not in a position to give any finding on this allegation. Accordingly, we are leaving this issue open for the complainant tom take up with appropriate forum.

Regarding Issue B

5.4 We note that the amalgamation/merger of RPUPL with Reliance Power Ltd. was made pursuant to the Scheme of Amalgamation of RPUPL with RPL sanctioned by the Hon'ble Bombay High Court vide order dated 27-09-2007 under Sections 391 to 394 of the Companies Act, 1956. In this regard the judgment of Hon'ble Supreme Court in Hindustan Lever Employees' Union v. Hindustan Lever Ltd., 1995 Supp (1) SCC 499 is worth mentioning. In this case the Hon'ble Supreme Court observed that Section 394 casts an obligation on the Court to be satisfied that the Scheme for amalgamation/merger is not contrary to public interest. It enjoins a duty on the Court to examine objectively and carefully if the merger was not violative of public interest.

5.5 We note that while sanctioning the Scheme of Amalgamation, the Hon'ble Bombay High Court has made the following observations:

“7. Upon perusal of the entire material on record it appears that the same is fair and reasonable and is not violative of any provisions of law and is not contrary to any public policy. None of the parties concerned have come forward to oppose the Scheme. Moreover, both he Regional Director and Official Liquidator have stated that the Scheme as proposed is not contrary to the public interest or prejudicial to the interest of the shareholders or creditors.”

5.6 Further the approval/sanctioning of the amalgamation/merger scheme solely vests with the Court. SEBI is bound by the order of the Hon'ble High Court approving the Amalgamation Scheme. In view of the same we are not competent to give any finding on the allegation that the Scheme on this case is bogus as alleged by the complainant.

5.7 Now we proceed to deal with the issue regarding the eligibility of the promoters' shares acquired by the promoter pursuant to the Scheme of Amalgamation sanctioned by the Bombay High Court. The relevant clause of the DIP Guidelines are reproduced as under:

“4.6 Securities Ineligible for Computation of Promoters' Contribution

4.6.1 Where the promoters of any company making an issue of securities have acquired equity during the preceding three years, before filing the offer documents with the Board, such equity shall not be considered for computation of promoters contribution if it is;

i. acquired for consideration other than cash and revaluation of assets or capitalisation of intangible assets is involved in such transaction(s); or

ii. resulting from a bonus issue, out of revaluation reserves or reserves created without accrual of cash resources (or against shares which are otherwise ineligible for computation of promoters' contribution);

4.6.2 In case of public issue by unlisted companies, securities which have been (acquired by) the promoters during the preceding one year, at a price lower than the price at which equity is being offered to public shall not be eligible for computation of promoters' contribution.

Provided that the shares for which the difference between the offer price and the issue price for these shares is brought in by the promoters shall be considered eligible subject to issuer company complying with the applicable provisions of the Companies Act, 1956 (such as passing of revised resolution by shareholders or issuer's Board, filing of revised return of allotment with ROC, etc.)

(Provided further that nothing contained in clause 4.6.2 shall apply to shares acquired by promoters interse, if such shares had been acquired by the transferor promoter during the preceding one year at a price equal or higher than the price at which equity is being offered to public or had been acquired by the transferor promoter prior to the preceding one year.)

4.6.3 In respect of companies formed by conversion of partnership firms, where the partners of the erstwhile partnership firm and the promoters of the converted company are the same and there is no change in management, the shares allotted to the promoters during previous one year out of the funds brought in during that period shall not be considered eligible for computation of promoters contribution unless such shares have been issued at the same price at which the public offer is made.

Provided that if the partners' capital existed in the firm for a period of more than one year on a continuous basis, the shares allotted to promoters against such capital shall be considered eligible.

4.6.4 In respect of Clauses 4.6.1, 4.6.2 and 4.6.3, such ineligible shares acquired in pursuance to a scheme of merger or amalgamation approved by a High Court shall be eligible for computation of promoters' contribution.”

5.8 From the above Clause 4.6.2 it is noted that in case of public issue by unlisted companies, securities which have been (acquired by) the promoters during the preceding one year, at a price lower than the price at which equity is being offered to public shall not be eligible for computation of promoters' contribution. Clause 4.6.4 creates an exemption to this requirement in case of the shares which are acquired pursuant to a Scheme of Merger/Amalgamation approved by a High Court.

5.9 We note that the Scheme of Merger/amalgamation as approved by the Hon'ble High Court provides that upon coming into effect of the Scheme and in consideration of the shareholders of RPUPL agreeing to the extinguishment to the shares of the RPUPL. Consequent to the amalgamation in terms of the Scheme the RPL shall allot to the equity shareholders of the RPUPL equity shares of Rs. 10/- each. In terms of the said Scheme as approved by the Hon'ble High Court the ratio of such allotment shall be - one fully paid up equity shares of face value Rs. 10/- each in the RPL for every one fully paid up equity share of face value of Rs. 10/- each held in the RPUPL.

5.10 We note that the Scheme of Amalgamation came into effect on 29-09-2007 when the Scheme was filed with the Registrar of Companies. On September 30, 2007, 50,00,00,000 equity shares of Rs. 10 each were allotted by RPL to REL and another 50,00,00,000 shares of Rs. 10 each were allotted to AAA Project Ventures Pvt. Ltd. We find that these equity shares so allotted pursuant to the Scheme of merger/amalgamation approved by the Hon'ble High Court would be eligible for computation of promoters' contribution in terms of Clause 4.6.4 of DIP Guidelines.

5.11 However, it is noted that, thereafter, through a special resolution of the shareholders dated 30-09-2007 RPL approved the division of its equity share from Rs. 10 per share to Rs. 2 per share and on 03-10-2007 the DRHP was filed. In terms of DRHP, these shares (numbering 210,00,00,000 of Rs. 2 each) have been offered for the purpose of lock-in towards promoters' contribution in the IPO.

5.12 It may be mentioned that the DIP Guidelines 2000 have been issued under the powers granted to the Board and also under the beneficial provisions of Section 11 of the SEBI Act 1992. These provisions are meant for the benefit of the investors.

5.13 It is noted that from the sequence of dates of the issue of shares to promoters, approval of the Scheme of Amalgamation, filing the same with the Registrar of Companies, allotment pursuant to the Scheme and subsequently splitting the shares so allotted for the face value of Rs. 2/- each and filing DRHP with SEBI offering 130 Crore of its equity shares having a face value of Rs. 2 at a premium to the public could no doubt be interpreted and conceived as a device to bring the case under the exemption of clause 4.6.4

5.14 As stated in the DRHP, the promoters would be able to lock-in 18.6% (210 crore equity shares) out of the stipulated 20% (226 crore equity shares) of the post issue capital paying a price of Rs. 2/- per share whereas the issue price would be around Rs. 60 per share. It is also noted that the number of shares issued as a result of the amalgamation as a proportion of the total paid up capital of the issuer company is very high in case of RPL (around 50%) and the original shares acquired in RPUPL have been acquired just before filing the scheme of arrangement with the court for the amalgamation. Further, in RPL, more than 18% of the required 20% promoters' contribution comes from the shares acquired through the amalgamation of RPUPL with RPL. In this case, the promoters do not have any other eligible shares to offer towards promoters' contribution.

5.15 The objective of mandatory promoters' contribution and lock-in are to ensure commitment of the promoters of the company making IPO and stability of the issue and to ensure that investors are not deceived by fly by night operators. Further the lock-in provisions are provided to ensure that the promoters do not get unjust enrichment and the shareholders are not discriminated. The exception to shares acquired pursuant to amalgamation has been provided for to facilitate genuine restructuring/consolidation of going concerns prior to going public, on the premise that the promoters' capital stands invested in merging entities over period and the merging concerns have had the benefit of that capital, which goes to the new entity upon merger.

5.16 As mentioned above though the promoters' shares acquired pursuant to the Scheme of amalgamation approved by the Hon'ble High Court are eligible in terms of Clause 4.6.4 of the DIP Guidelines, it is for the Board to ensure that the spirit of the provision is not defeated. It is the bounden duty of the Board to provide the investors in the Issuer Company a level playing field and in no case one group of shareholders should get unjust enrichment at the cost of other shareholders.

5.17 Further Clause 3.7.1 of the DIP Guidelines states that in case of IPOs, if the issue price is less than Rs. 500 per share, the face value shall be Rs. 10 per share. The LM, while submitting the draft offer document, had requested for an exemption from the provisions of this clause in so much that the face value of shares being offered in the issue is Rs. 2 though the expected issue price of the share is less than Rs. 500 per share. However, vide letter dated November 23, 2007, RPL has withdrawn their request for exemption and have requested SEBI to allow them to consolidate the equity shares to face value of Rs. 10 per share in compliance with Clause 3.7.1

6.0 Directions:

6.1 In view of the above findings, in exercise of the powers under Sections 11 and 11A of the SEBI Act, we direct that the equity shares acquired by the promoters of RPL at the face value of Rs. 10/- each pursuant to the Scheme of Merger/Amalgamation approved by the Hon'ble High Court of Bombay vide order dated 27-09-2007 would be eligible for computation of promoters' contribution subject to the following conditions:

a) The entire promoters' quota i.e 20% of the capital in RPL shall be locked-in for a period of five years from the date of allotment in the proposed IPO,

b) The RPL and the Lead Merchant Banker appointed by it in respect fo its proposed IPO shall ensure all disclosures as per the Companies Act, DIP Guidelines and as per the observations/changes suggested by SEBI on the DRHP filed on behalf of RPL.

6.2 The Complaint dated 18-10-2007 filed by the complainant is accordingly disposed of.