Mumbai: Anil Ambani-led Reliance Group or Anil Dhirubhai Ambani Group (ADAG) in a heavy worded statement on Friday said that the open market sale of its pledged shares by L&T Finance Services and Edelwiess Group was illegal and led to a fall of 13000 crore in market capitalisation of its group companies.

The two financial services firms refuted these allegations and said that the sale followed contractual terms.

L&T Finance and certain entities of Edelweiss Group between 4 and 7 February invoked pledge of Reliance Group’s shares and sold them in open market. The value of these shares is estimated to be 400 crore.

“The illegal, motivated and wholly unjustified action by the above 2 groups has precipitated a fall of 13,000 crore, an unprecedented nearly 55%, in market capitalisation of Reliance Group over just these 4 short days, causing substantial losses to 72 lakh institutional and retail shareholders, and harming the interests of all stakeholders," said Reliance Capital Ltd in a statement to BSE Ltd.

A similar statement was uploaded by Reliance Infrastructure Ltd and Reliance Power Ltd.

Responding to the allegations Edelweiss Group said that the allegations were unfounded baseless and false.

L&T Finance too refuted the allegations made by Reliance Group companies. L&T said that the pledge was invoked owing to ‘no cure of various events of defaults’. The sale followed ‘due process of contract and law’.

According to data from BSE the group companies stocks took a severe beating in these four days. Reliance Communications or RCom lost 55.26%, Reliance Capital lost 38.57%, Reliance Infrastructure lost 58.49% and Reliance Power lost 62.24%.

To be sure some of the decline in share prices was due to the RCom’s decision to opt for insolvency proceedings.

On 1 February, a Friday, after market hours RCom had announced that it was opting for insolvency proceedings. The stock reacted on Monday, 4 February where it slumped by 48%. Shares of other Anil Ambani group companies also fell. Reliance Capital Ltd declined 11%, Reliance Infrastructure Ltd 7%, Reliance Power Ltd 11%, and Reliance Naval and Engineering Ltd 11%.

Citing legal advice Reliance alleged that this sale was in-violation of norms laid down by Securities and Exchange Board of India (Sebi) and Reserve Bank of India (RBI).

Reliance Capital said the sale lacked ‘orderly market disposal through bids or structured process’ which was illegal on several counts – such as price manipulation, insider trading, front running, market abuse and violation of Sebi’s prevention of fraud regulations.

Sandeep Parekh, Managing Partner, Finsec Law Advisors that such a share sale cannot be considered as fraudulent.

“The statement of manipulation, insider trading, front running etc are terms of art and cannot be loosely used. The company has not provided any rationale for the same, as each of these allegations are grave charges. Broadly speaking, knowledge that selling a large quantity of shares will depress prices cannot by itself be considered fraudulent without more," said Parekh.

Edelweiss and L&T Finance both said that there was nothing sudden about the share sale or lack of orderly disposal.

“Over the last several months, Edelweiss Group has reached out numerous times to Reliance ADAG Group to address concerns on shortfall in margins (via regular margin call notices) and resultant fall in collateral valuation. Despite our best efforts, not only did Reliance ADAG Group fail to address any of the concerns raised by Edelweiss Group, but also continued to breach contractual obligations," said Edelweiss in a statement.

L&T Finance said that despite various notices Reliance group companies continued to default.

“As per loan and pledge agreements, borrower did not cure various events of defaults including providing margin for shortfall in the stipulated security cover. Despite various notices in the past few months, events of defaults continued. Consequently, L&T Finance enforced its rights of invocation and sold pledged shares to the extent of its outstanding dues by following the due process of contract and law," a spokesperson for L&T said.

“On 4th February 19, there was a sharp drop in the prices of Reliance ADAG group shares, which led to further erosion in the collateral value. Edelweiss group once again gave due opportunity for remediation. Since there was no response from Reliance ADAG Group, it necessitated liquidation of the collateral as per the agreed contractual terms," said Edelweiss.

Sumit Agrawal, Founder, RegStreet Law Advisors & ex-Sebi official said manner of pledge invocation cannot be questioned.

“Typically, unless there is a specific clause in pledge agreement regarding the manner of sale of pledged shares, manner of invocation cannot be questioned merely because it affects the company. The bye laws and business rules of depositories or Sebi regulations do not force a seller to only go through bulk or block trade. On the contrary, Sebi promotes market trades. So, it needs to be seen what was agreed in the pledge agreement between the parties and if the allegations of collusion are substantiated by direct evidence or circumstantial evidence." said Sumit Agrawal.

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