A shareholder in the Anil D Ambani Group of companies (ADAG) has threatened to initiate a class action suit against the group, a first of its kind in India’s capital markets. Praveen Rai, a corporate lawyer by profession, raised a number of issues at the annual general meeting of Reliance Power Ltd, and said that the class action suit will be initiated if the issues raised by him are not resolved.
But on the face of it, there doesn’t appear to be any charges of mismanagement. “We will collect evidence. In a class action suit, we don't require much evidence; the share price fall is enough evidence," Rai said on a call. An email sent to ADAG was unanswered at the time of writing.
Experts say such an approach will not yield any results. "The basis of any class action suit would likely be mismanagement of the company. This ADAG shareholder who has threatened them of a class action suit would need sufficient evidence against the directors and promoters of the ADAG of misuse of funds. For this shareholder to file such a legal action, evidence of management's negligence and improper use of funds would be required," said Shriram Subramanian, managing director, InGovern Research.
JN Gupta, managing director, Stakeholders Empowerment Services says, “We need to differentiate between fraud and failure - there has to be enough proof that management's decision to use funds in a particular manner were not in favour of the company. Be it a fraud or a failure, share price will decline in either of the scenario, so a sharp fall in share price alone cannot be an indicator of fraudulent practices." While Rai has emphasised the huge fall in the value of ADAG group shares as evidence of mismanagement, it can be argued that this could also be a result of a lack of good judgment or poor business conditions or disruption by a new entrant. To link the fall in share price with fraud is easier said than proven, as Gupta points out.
It also goes without saying that Rai will need to find other shareholders who join the fight. “As the name suggests, one shareholder alone cannot a file a class action suit. You would need a group of investors for that," says Gupta.
Analysts have noted that the rising debt levels of the group were acting as red signals and that investors should have acted earlier against. “If the shareholder was that bothered about his large investment in the group, he could have voiced his concerns in earlier AGMs - the company has been in bad shape for quite some time. As a shareholder your angst against the company is valid, but you can't wake up at eleventh hour and ask for explanations. As a shareholder you have take a call," said a senior executive at a broking form who did not want to be quoted. In other words, the suggestion is that investors should vote with their feet and safeguard their investment before it’s too late.
On the other hand, sources in the Reliance ADAG group said that around 100 shareholders are signing a petition to file a class-action suit against auditor PwC. The compliant there is that the sudden resignation of the auditor caused a financial loss to these shareholders. Earlier, there were reports that the ADAG group may take legal action against PwC.
While Rai has a list of complaints against the running of ADAG companies, his main grievance was the excessive pledging of shares by the ADAG promoter group. This resulted in huge erosion in the value of his investments in the company, he alleged.
At the AGM, the lawyer noted that his investments in the ADAG group stocks have tumbled 90% in the group companies. He had sold shares of Reliance Industries Ltd in 2005 to buy shares of Anil Ambani Group firms.
He claimed that all his queries at the AGM went unanswered such as why the company is defaulting on a ₹63 lakh loan to Axis Bank, when they have so much reserves on the balance sheet.
At the Reliance Power AGM, chairman Anil Ambani said that the company is among the top three private power generation firms. The group had a string of AGMs and told shareholders that it is committed to repaying its lenders.
The ADAG group’s debt-fuelled expansion has been one of the key reasons behind its downfall. For instance, in FY19, Reliance Power’s debt amounted to ₹27029 crore. Additionally, the company made a loss of ₹2925 crore loss in FY19. ADAG’s combined debt has ballooned to ₹1.5 trillion in FY19. The market value of all ADAG group firms has fallen to Rs2491 crore currently. This excludes Reliance Nippon Life which has a market cap of over Rs16000 crore; but the ADAG group has a stake of only 4.5% left in this company.
As far as class action lawsuits are concerned, this has not been used in India. It’s only in May this year that the corporate affairs ministry allowed shareholders to file class-action suits. Under section 245 of the Companies Act, investors can file a class-action lawsuit if they have evidence that the management has conducted affairs of the company if they are prejudicial to the interests of shareholders.
“Any class action lawsuit will be a first of its kind in India. Though the Companies Act allows class-action lawsuits, nobody has utilized it till now. If admitted, it will set a precedent and benchmark which will be good for vigilant shareholders in the long run," said veteran investor Ambareesh Baliga. “Having witnessed unprecedented wealth erosion in the last 20 months, this could become a useful tool for shareholders to bring to book promoters and management," he continued.
“Whether or not the destruction of shareholders' wealth has happened overnight or during the course of time, shareholders have the very right to question the company. In the case of ADAG, they have had issues with respect to a number of directors on board and their management practices for some time now," says Subramanian.
However, as the experts quoted above note, to proceed with a class-action lawsuit, shareholders would need a battery of evidence.
Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.