Adjudication Order in respect of Reliance Industries Ltd. (In the matter of Non Disclosure of Diluted Earnings Per Share)

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BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

(ADJUDICATION ORDER NO: EAD-3/AO/DRK/JP/ 573/117 of 2014)

__________________________________________________________

UNDER SECTION 23-I OF THE SECURITIES CONTRACTS

(REGULATION) ACT, 1956 READ WITH RULE 5 OF THE SECURITIES

CONTRACTS (REGULATION) (PROCEDURE FOR HOLDING INQUIRY

AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES,

2005.

In respect of:

Reliance Industries Ltd.

(PAN: AAACR5055K)

Regd. Office:- 3rd Floor, Maker Chamber IV, 222, Nariman Point, Mumbai – 400 021

In the matter of:

(Non Disclosure of Diluted Earnings Per Share)

----------------------------------------------------------------------------------------------------Background:

1. Securities and Exchange Board of India (hereinafter referred to as „SEBI‟) had

received complaints against Reliance Industries Limited (hereinafter referred

to as „the Noticee / RIL / Company') alleging that RIL had issued 12 crores

warrants to its promoters entitling its holders to subscribe to equivalent

number of equity shares of RIL and as of October 2008, RIL had issued 12

crores equity shares against the said warrants which resulted in diluting the

pre-issue paid up equity share capital of RIL.

Appointment of Adjudicating Officer:

2. Subsequent to the transfer of erstwhile Adjudicating Officer, the undersigned

was appointed as Adjudicating Officer vide order dated October 21, 2013 in

this matter under Section 23-I of the Securities Contracts (Regulation) Act,

1956 (hereinafter known as 'SCRA') read with rule 3 of the Securities

Contracts (Regulation) (Procedure for Holding Inquiry and Imposing Penalties

by Adjudicating Officer) Rules, 2005 (hereinafter referred to as „ SCR

Adjudication Rules’) to inquire into and adjudge under section 23 A and 23 E

of the SCRA, the alleged violations of Clause 41 of the Listing Agreement

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read with Section 21 of the SCRA, by the Noticee for not disclosing to stock

exchanges the Diluted Earnings Per Share (DEPS) as prescribed for the

quarterly and annual disclosures.

Show Cause Notice, Reply and Hearing:

3. A Show Cause Notice dated February 07, 2013 (herein after referred to as

(“SCN”) was served on the Noticee under rule 4 of the SCR Adjudication

Rules, to show cause as to why an inquiry be not held against the Noticee and

penalty be not imposed under section 23 A (a) and 23 E of the SCRA for the

alleged violations of Clause 41 of the Listing Agreement read with Section 21

of the SCRA. The allegations levelled against the Noticee in the SCN are as

under;

(a) That the Annual report of RIL for the year 2008-09 contained a disclosure in

Schedule A to the Balance sheet 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.

RIL also disclosed that the warrant holders had applied for and were

allotted 12 crores shares during the year 2008-09. It was also observed that

RIL had outstanding share warrants issued on April 2007 which got

converted to equity shares only during the third quarter ended December

2008 of Financial Year 2008-09. Corresponding to the conversion of the

warrants into shares, it was observed that there was increase in the paid –

up share capital of RIL. The Relevant pages of the Annual report of RIL for

the year 2008-09 were provided along with the SCN.

(b) In terms of Clause 41 of the listing agreement, the Companies are required

to disclose both Basic and DEPS in the quarterly financial statements filed

with Stock Exchanges. As the RIL had outstanding share warrants issued in

April 2007 which got converted into equity shares only during the third

quarter of Financial Year 2008-09, the RIL should have disclosed Basic and

DEPS in the filings for the quarters ended June 2007, September 2007,

December 2007, March 2008, June 2008 and September 2008. However,

on scrutiny of the Quarterly Financial Statements of RIL filed with National

Stock Exchange of India Ltd. (hereinafter referred to as “NSE”) during the

quarter ended June 2007 to September 2008, it was observed that RIL did

not disclose separately DEPS in the Quarterly Financial Statements for the

aforesaid period and contained the same figures for Basic and DEPS.

Copies of Quarterly financial statements of RIL filed with NSE were

provided with the SCN.

(c) It was alleged that the RIL did not disclose the DEPS in Quarterly Financial

Results despite the existence of share warrants and therefore has violated

Clause 41 of the Listing Agreement (the relevant portion was provided to

the Noticee along with SCN) read with Section 21 of the SCR Act. The

provision alleged to have been violated are reproduced hereunder;


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SCRA

Conditions for listing.

21. Where securities are listed on the application of any person in any recognised

stock exchange, such person shall comply with the conditions of the listing

agreement with that stock exchange.

4. In respect of the SCN, the Noticee vide letter dated February 25, 2013 sought

certain information / documents viz. (1) whether an investigation was

conducted prior to the issuance of the Notice, (2) Basis of conducting

investigation against the Noticee and (3) Internal Notes and Legal opinion, if

any, received by SEBI in the matter. The Noticee also desired an inspection of

the documents. Vide communiqué dated March 07, 2013, Noticee was

informed that all relevant documents relied upon to issue the SCN, were

already provided and it was also stated that a copy of complaint on the basis

of which the allegations are levelled, has been forwarded to the Chairman,

Audit Committee of the Noticee. In the said communiqué, it was also intimated

to the Noticee that the inspection of documents relied upon in the SCN can be

carried out by the Noticee. Thereafter, the Noticee submitted a reply dated

May 04, 2013 and desired a personal hearing. An inspection of documents

was carried out by the Noticee on May 29, 2013 as the same is admitted by it

vide its letter dated June 03, 2013. Although, the Noticee vide said letter

stated that none of the information/documents, as desired vide its letter dated

February 25, 2013 has been provided under the inspection.

5. Upon transfer of case to the undersigned, an opportunity of hearing was

provided to the Noticee on November 27, 2013 (at SEBI Bhavan at 11:00

a.m.) vide Notice of hearing dated November 11, 2013. In respect to said

notice of hearing, the Noticee vide letter dated November 22, 2011 sought

adjournment of hearing on the ground that the inspection of all documents as

sought earlier have not been provided and requested for further inspection of

documents. Considering the principle of natural justice, another opportunity of

inspection was granted to the Noticee and vide communiqué dated December

11, 2013, the Noticee was advised to avail the inspection on or before

December 26, 2013. It was clearly mentioned in aforesaid communiqué that

this is the last opportunity of inspection and additional reply if any, may be

filed by the Noticee within a week from the date of inspection. Vide said

communiqué, Noticee was also provided with a final opportunity of hearing on

January 09, 2014 in the matter. The Minutes of Inspection dated January 03,

2014 was brought on record which shows that extracts of the complaint


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alleging non disclosure of DEPS was provided to the authorized

representative of the Noticee during the inspection. As regards to the request

of inspection and a copy of an internal Official Noting of the SEBI, it appears

from the said Minutes that it was intimated to the Noticee that same would be

examined internally by SEBI and decision would be informed to Noticee

accordingly. It is brought on records that SEBI vide letter dated February 03,

2014 provided to the Noticee the copies of relevant extracts of said internal

Official Noting as well. Hence, the issue of inspection is completed and not

raised thereafter by the Noticee.

6. Thereafter, vide notice of hearing dated February 05, 2014 the Noticee was

again provided last opportunity of hearing and advised to appear on February

17, 2014 (at SEBI Bhavan at 11:00 a.m.) for the hearing. The hearing on

February 17, 2014 was attended by the authorized representatives of the

Noticee viz. Mr. K. Sethuraman (chief compliance officer of Noticee), Mr.

Ramesh Kumar Damani (vice president – corporate finance of Noticee), Mr.

Mandal Suva Advocate from AZB & Partners, Advocates & Solicitors and Mr.

Mahesh Sahasranahan S. Advocate. Additional reply dated February 14, 2014

was filed by the authorized representatives on the day of hearing. During the

hearing, it was submitted by them that they have engaged Senior Counsel Mr.

Janak Dwarkadas to argue the case and requested to adjourn the hearing for

another date.

7. Vide e-mail dated February 21, 2014, the Noticee was again called upon to

appear for hearing on March 07, 2014 at SEBI Bhavan at 11:00 a.m. The

hearing on March 07, 2014 was attended by authorized representative of the

Noticee viz. Mr. Janak Dwarkadas (Senior Counsel), Mr. P N Modi (Senior

Advocate), Mr. Ankit Lohia Advocate, Mr. Mahesh Sahasranahan Advocate,

Mr. Neiville Lakshari Advocate, Mr. K. Sethuraman (chief compliance officer of

the Noticee), Mr. K. R. Raja (Sr. Vice President of the Noticee) and Mr.

Ramesh Kumar Damani (Vice President of the Noticee). The submissions

made during the hearing were recorded. A certificate dated March 28, 2013

from Auditors namely- Chaturvedi & Shah Chartered Accountants, Deloitte

Haskins & Sells Chartered Accountants and Rajendra & Co. Chartered

Accountants, regarding the Basic EPS and DEPS was submitted by the

Noticee during hearing and same was taken on records.

8. The core submissions made by the Noticee vide its aforesaid replies and

during the personal hearings, are produced hereunder:


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(a) Pursuant to the Special Resolution passed by the members of RIL on 12th

April 2007, the Board of Directors of RIL allotted 12 crores warrants on preferential basis exercisable into equal number of equity shares of ` 10/- each of RIL to the entities belonging to the Promoter Group (“Allottees”) of RIL.

(b) The said warrants were exercisable at any time during 18 months from the

date of issue i.e. 12th April 2007 at an exercise price of ` 1,402/- per share (“Exercise Price”).

(c) On 3rd October, 2008, the Board of Directors of RIL allotted 12 crores equity

shares of ` 10/- each to the allottees, upon exercise of warrants at the Exercise Price.

(d) As per paragraph 35 of the Accounting Standard 20 – Earnings Per Share of the Companies (Accounting Standards) Rules, 2006 (“AS-20”), there will 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. Fair value is defined in paragraph 36 of the said AS.

(e) As per paragraph 37 of AS-20, the options and other share purchase arrangements are dilutive when they would result in issue of equity shares for less than their fair value.

(f) Further, Clause 41 of the Listing Agreement requires compliance by the reporting entity with the provisions of the Accounting Standards prescribed under the AS Rules. It is submitted that calculation of EPS (including DEPS) has to be in accordance with Accounting Standard 20 – (dealing with Earning Per Share) of the Accounting Standard Rules. Paragraph 27 of AS 20 provides as under:-

(a) In calculating diluted earnings per share, effect is given to all dilutive

potential equity shares that were outstanding during the period.

(b) the weighted average number of equity shares outstanding during

the period is increased by the weighted average number of

additional equity shares which would have been outstanding

assuming the conversation of all dilutive potential equity shares.”

(g) Hence, it is submitted that in calculating DEPS, effect is required to be given only to those outstanding Potential Equity Share (“PES”) which are dilutive and not otherwise. Paragraph 4.4 of AS 20 defines a PES as a financial instrument or other contract that entitle or may entitle, its holder to equity shares. Further, Paragraph 4.5 of AS 20 states that share warrants or options are financial instruments that give the holder the right to acquire equity shares. Hence, in view of the above, it is submitted that a PES includes warrants exercisable into equity shares.

(h) 12 crores warrants issued to the promoters group entitling them to acquire 12 crores equity shares of RIL was issued at the price as determined by the method stipulated by SEBI in the then prevailing SEBI (Disclosure and Investment Protection) Guidelines, 2000. The price as determined under these guidelines cannot but be the fair value per share or more than the fair value per share as SEBI would have taken into account the interest of the public shareholders into account while prescribing the above method.


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(i) We humbly submit that according to AS-20 the fair value per share can be the simple average of last six months weekly closing price. As against this, the preferential issue price under the then prevailing SEBI (Disclosure and Investor Protection) Guidelines, 2000 is the higher of (a) and (b) below:

(a)Average of weekly high and low of the closing prices of the equity shares during the six months preceding the relevant date; (b)Average of weekly high and low of the closing prices of the equity shares during the two weeks preceding the relevant date.

(j) From Annexure 1 (auditor's report dated March 28, 2013), it is evident that price as per (a) above is ` 1252.69 per share and as per (b) the price is ` 1401.98 per share. RIL issued the warrants at exercise price of the higher of

the two above which was ` 1402/- per share.

(k) In view of the fact that the exercise Price per share of Rs. 1402/- is more than the fair value of Rs. 1252.69 per share, the potential equity shares due to exercise of warrants are not dilutive potential equity shares but are non-dilutive potential equity shares.

(l) Therefore, as explained in the preceding paragraphs, under the method

prescribed in AS 20, the number of equity shares to be considered for computing the Basic EPS and DEPS will remain the same which is the existing paid up equity shares. Consequently, the Basic EPS and the DEPS will be the same number.

Consideration of Issues and Finding:

9. After taking into account the allegations, replies of the Noticee, hearings in the

matter and other evidences / material available on records, I hereby, proceed

further to decide the case.

10. It is admitted case of the Noticee that it had issued 12 crores warrants in April

12, 2007 and the same were converted into equity shares on October 03,

2008. It is not disputed by RIL that the disclosures made during the quarter

ended June 2007 to quarter ended September 2008 contained the same

figures for DEPS as well as for Basic EPS and no separate DEPS was

disclosed.

11. The main contention / defence of the Noticee is that there is no requirement to

disclose the DEPS separately as the warrants were exercised at the fair value

and no dilution in EPS took place and therefore, no separate disclosures of

DEPS is required. The Noticee contended that for the purpose of calculation

of DEPS, the fair value to be taken into account is the simple average of last

six months weekly closing prices and in the present case, the fair value of the

shares i.e. the average of weekly high and low of the closing price of the

equity shares preceding the relevant date was ` 1252.69 per share which was


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lower than the exercise price of ` 1402 per share. According to the Noticee,

the exercise price was more than the fair value and hence, no question of

DEPS arises. Paragraph 35, 36, 37 of AS 20 as referred by the Noticee are

reproduced as under;

35. For the purpose of calculating diluted earnings per share, an enterprise should assume the

exercise of dilutive options and other dilutive potential equity shares of the enterprise. The assumed

proceeds from these issues should be considered to have been received from the issue of shares at fair

value. The difference between the number of shares issuable and the number of shares that would have

been issued at fair value should be treated as an issue of equity shares for no consideration.

36. Fair value for this purpose is the average price of the equity shares during the period.

Theoretically, every market transaction for an enterprise’s equity shares could be included in

determining the average price. As a practical matter, however, a simple average of last six months

weekly closing prices are usually adequate for use in computing the average price.

37. Options and other share purchase arrangements are dilutive when they would result in the issue of

equity shares for less than fair value. The amount of the dilution is fair value less the issue price.

Therefore, in order to calculate diluted earnings per share, each such arrangement is treated as

consisting of:

(a) a contract to issue a certain number of equity shares at their average fair value during the

period. The shares to be so issued are fairly priced and are assumed to be neither dilutive nor

anti-dilutive. They are ignored in the computation of diluted earnings per share; and

(b) a contract to issue the remaining equity shares for no consideration. Such equity shares

generate no proceeds and have no effect on the net profit attributable to equity shares

outstanding. Therefore, such shares are dilutive and are added to the number of equity shares

outstanding in the computation of diluted earnings per share. Appendix VI illustrates the effects

of share options on diluted earnings per share".

12. Before going to examine the case, it may be added / clarified that

determination of exercise price (for such warrants) is to be carried out as per

the pricing formula as mentioned in the SEBI DIP Guidelines / ICDR

Regulations which the Noticee has done. However, for the purpose of

determining the disclosures of DEPS in the quarterly financial statements

during the relevant reporting periods, the same needs to be carried out as per

the AS 20. Here, the issue that arise for consideration is that whether the

Noticee had rightly disclosed the DEPS in the relevant quarterly financial

statements taking into account the fair value as per AS 20.

13. In order to examine the issue, the following Paras of AS 20 are also observed

to be relevant to decide as to when the dilutive effect of EPS take place and

the same are being discussed as under;

Para 8 of AS 20 -

“An enterprise should present basic and diluted earnings per share on the face of the statement of

profit and loss for each class of equity shares that has a different right to share in the net profit for the

period. An enterprise should present basic and diluted earnings per share with equal prominence

for all periods presented.”

Para 39 of AS 20 –

“Potential equity shares should be treated as dilutive when and only when their conversion to equity

shares would decrease net profit per share from continuing ordinary operations”.


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14. Here, it is necessary to add 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. Therefore, by virtue of aforesaid Para 39 of AS

20, it is clear that the potential equity shares would certainly be dilutive upon

conversion into equity shares and would reduce net profit per share.

15. Further, Para 26 - 28 of AS 20 also provides as under;

26. "For the purpose of calculating diluted earnings per share, the net profit or loss for the period

attributable to equity shareholders and the weighted average number of shares outstanding during the

period should be adjusted for the effects of all dilutive potential equity shares".

27 (b) "the weighted average number of equity shares outstanding during the period is increased by the

weighted average number of additional equity shares which would have been outstanding assuming the

conversion of all dilutive potential equity shares".

28 “For the purpose of this standard, shares application money pending allotment or any advance

shares application money as at the balance sheet date, which is not statutorily required to be kept

separately and is being utilized in the business of the enterprise, is treated in the same manner as

dilutive potential equity shares for the purpose of calculation of diluted earnings per share.”

16. It is worth to mention here that in the instant case, admittedly ` 1682.40

Crores was paid upfront by the warrant holders, which in essence, is in the

nature of advance shares application money and there is no doubt about

utilization of such funds by RIL for its business as the Noticee failed to

establish that such application money / capital was kept separately as

statutorily required and was not utilized in its business. Therefore, it is

categorically required under aforesaid Para 28 of AS 20 that if the application

money pending allotment, or any advance shares application money, is being

utilized in the business of the enterprise, then the same is treated as dilutive

potential equity shares for the purpose of calculation of diluted earnings per

share.

17. Further, the fact that the said advance shares application money becomes the

capital of Company is also clearly explained in Clause 13.1.2.3 (c) of the SEBI

DIP Guidelines 2000 or Regulation 77 (4) of the SEBI ICDR Regulations, 2008

which requires the Companies to forfeit the amount paid by the warrant holder

in case they fail to convert the warrants into equity shares within the stipulated

period. In both circumstances, the initial amount paid by the warrant holders

and the remaining amount paid by them during the exercise of such warrants /

allotment of equity shares, was with the Company and the Company was free

to use the same in its business. In view of aforesaid, the application money

pending allotment or any advance shares application money, being utilized in


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the business of the Company, undoubtedly, the same has effect on dilutive

potential equity shares for the purpose of calculation of DEPS and attracts the

requirement of disclosure of DEPS to the Stock Exchanges by the Company

under Annexure I of Clause 41 of Listing Agreement.

18. I also note that following provisions/paragraph of AS 20 are advancing

concern on the aspect of DEPS which are referred below;

32. For the purpose of calculating diluted earnings per share, the number of equity shares should

be the aggregate of the weighted average number of equity shares calculated in accordance with paragraphs 15 and 22, and the weighted average number of equity shares which would be issued

on the conversion of all the dilutive potential equity shares into equity shares. Dilutive potential

equity shares should be deemed to have been converted into equity shares at the beginning of

the period or, if issued later, the date of the issue of the potential equity shares.

43. Potential equity shares are weighted for the period they were outstanding. Potential equity shares that were cancelled or allowed to lapse during the reporting period are included in the

computation of diluted earnings per share only for the portion of the period during which they were outstanding. Potential equity shares that have been converted into equity shares during the

reporting period are included in the calculation of diluted earnings per share from the

beginning of the period to the date of conversion; from the date of conversion, the resulting

equity shares are included in computing both basic and diluted earnings per share.

19. From bare and combined perusal of aforesaid Para 32 & 43 of AS 20, it is very

much clear that upon conversion of potential equity shares into equity shares

during the reporting periods, the same becomes dilutive in nature for the

purpose of calculation of the DEPS. Upon simple reading of said Paras itself,

there appears to be no ambiguity on the aspect of DEPS as and when such

conversion takes place. Therefore, for the period till the warrants remain

outstanding before converting into equity shares, the same are considered as

dilutive in nature and hence, the disclosure of DEPS becomes compulsory

under AS 20.

20. Therefore, the reliance placed by the Noticee only on Para 27, 35, 36 and 37

of the AS 20 cannot be ignored over Para 8, 26, 28, 32, 39 & 43 of AS 20 and

Clause 13.1.2.3 (c) of the DIP Guidelines or Regulation 77 (4) of the ICDR

Regulations, in the given facts and circumstance of the case, rather, the same

needs to be read into true spirit of AS/DEPS for which they are so enacted.

21. Taking into account the principle of harmonious interpretation, it is required

that the legislation should be read as whole and needs to be considered to

find out the true / most immediate objective behind its enactment. Therefore, I

am inclined to refer certain case laws as under.


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Reserve Bank of India Vs. Peerless General Finance & Investment Co. Ltd. - AIR 1987

SC 1023 & 1987 (1) SCC 424:- Interpretation must depend on the text and the context. They

are the bases of interpretation. One may well say if the text is the texture, context is what

gives the colour. Neither can be ignored. Both are important. That interpretation is best

which makes the textual interpretation match the contextual. A statute is best interpreted

when we know why it was enacted. With this knowledge, the statute must be read, first as a

whole and then section by section, clause by clause, phrase by phrase and word by word.

No part of a statute and no word of a statute can be construed in isolation. Statutes have to

be construed so that every word has a place and everything is in its place.

Kesho Ram & Co. & Ors. Etc vs Union Of India & Ors 1989 SCR (2)1005, 1989 SCC (3)

151:- It is a settled rule of harmonious construction of statutes that a construction which

would advance the object and purpose of the legislation should be followed and a

construction which would result in reducing a provision of the Act to a dead letter or to

defeat the object' and purpose of the statute should be avoided without doing any violence to

the language.

Union of India Vs. Filip Tiago De Gama of Vadem Vasco- 1990 AIR 981 or 1990 (1) SCC

277 :-The paramount object in statutory interpretation is to discover what the legislature

intended. This intention is primarily to be ascertained from the text of enactment in question.

That does not mean the text is to be construed merely as a piece of prose, without reference

to its nature or purpose. A statute is neither a literary text nor a divine revelation . If there is

obvious anomaly in the application of law, the Court could shape the law to remove the

anomaly. If the strict grammatical interpretation gives rise to absurdity or inconsistency, the

Court could discard such interpretation and adopt an interpretation which will give effect to

the purpose of the legislature.

22. Therefore, the entire AS 20 " Earnings Per Share" needs to be considered

holistically to meet its objective / rationale for which they are so constructed.

Here, apparently, the intention of AS 20 is to bring into place those situations

where the DEPS take place and thereafter, it becomes necessary for a

Company to disclose the DEPS to the Stock Exchange. If there are several

Paras under AS 20 (as discussed above) which convey sense of "what the

DEPS is" and if it is so defined, then, undoubtedly, an obligation lies upon a

Company to disclose the same. Therefore, the Para 36 and 37 of AS -20

cannot be read in isolation over the entire AS-20 and necessarily be read in

consonance with other Paras to meet its true objective / mandate for DEPS.


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23. Since, the circumstances where the effect of DEPS take place, have already

been discussed, now, I proceed further to decide the main issue as

mentioned in pre para 12 above.

24. It is observed that AS are meant for certain disclosures of financial reporting

during relevant reporting periods and in order to examine the dilutive effect of

EPS during the relevant reporting periods after determining the exercise

price at the time of allotment of warrants as done in this case (` 1402/-) the

method for 'fair value' as mentioned in Para 36 of AS 20. Further, it is

important to mention here that for the purpose of disclosures of DEPS if any,

in relevant reporting periods/quarters, if the fair value arrived at as per the AS

20 is higher than the exercise price (already calculated), then the same would

have dilutive effect on EPS which needs to be disclosed in the relevant

reporting periods as per Format in clause 41 of the listing agreement.

25. The Noticee in its additional reply dated February 14, 2014, shown a table and

provided certain Annexures of Unaudited Financial Results (Media Release)

etc. for the quarters ended from June 2007 to quarter ended September 2008.

In the said financial results / Annexures, no difference was shown in the Basic

and DEPS. To determine the DEPS during such reporting periods for the

purpose of disclosure, the methods as per para 36 of AS 20 i.e. the volume

weighted average price (theoretical) and the average weekly closing price

during the last six months (practical) is to be considered. For this purpose, it is

observed from the available records that the volume weighted average price

for various quarters during which the warrants were outstanding, the fair value

of RIL shares during these periods so arrived at, were higher than the

exercise price of ` 1402 per share. Further, as per method of para 36 of AS 20

(simple average of last six months weekly closing prices) the calculation of

these periods were also observed to have been higher than the exercise price

of ` 1402 /-. As per transaction records of NSE (source of NSE Website), the

fair value for these reporting periods are shown quarter wise in the below

mentioned tables.

Statement showing fair value of shares of RIL during the quarters ended June

2007 to September 2008.


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Method A - (Based on volume weighted average price)

Period Turnover (In

` Lakhs) Traded quantity

Fair value (in `) of the shares during

the period (Volume weighted average

price)

Closing prices on

last trading day of

the period

(`)

Exercise price of the shares (``) as calculated by Noticee From To

A B C=(A*100000)/B

12-Apr 07 30-Jun-07 2223573.1 135207857 1644.56 1700.55

1402

1-Jul-07 30-Sep-07 3428654.07 179074791 1914.65 2298.05

1-Oct-07 31-Dec-07 6620621.8 245210980 2699.97 2882.7

1-Jan-08 31-Mar-08 5591112.19 218838484 2554.90 2265.8

1-Apr-08 30-Jun-08 5000454.88 209455631 2387.36 2095.15

1-Jul-08 30-Sep-08 5277762.75 252326472 2091.64 1949.35

Method- B:- (Based on average weekly closing prices during last six months)

Quarter ended

Preceding Six month Period

Average weekly closing prices during

the preceding six months period (`)

Exercise price of the shares (``) as calculated by Noticee

From To

30-Jun-07 1-Jan-07 30-Jun-07 1491.79

1402

30-Sep-07 1-Apr-07 30-Sep-07 1764.04

31-Dec-07 1-Jul-07 31-Dec-07 2325.99

31-Mar-08 1-Oct-07 31-Mar-08 2639.83

30-Jun-08 1-Jan-08 30-Jun-08 2492.52

30-Sep-08 1-Apr-08 30-Sep-08 2282.30

26. Hence, it is clear that taking into account both the methods under para 36 of

AS 20, the fair value in the relevant reporting periods were much higher than

the exercise price of ` 1402/- and certainly this has the dilutive effect on EPS.

Therefore, disclosures about such DEPS should have been separately shown

by the Noticee in the Format as prescribed in clause 41 of the Listing

Agreement, which the Noticee has failed to do so for six quarters. The

relevant provisions of clause 41 is produced as under;

Clause 41 of Listing Agreement

I:-Preparation and Submission of Financial Results

(b) The company shall submit its quarterly, year to date and annual financial results to

the stock exchange in the manner prescribed in this clause.

V:- Formats The quarterly financial results shall be in the format given in Annexure I for the

companies other than banks and that given in Annexure II for banks.


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27. From the above observations, it is pertinent to mention that the method

adopted by the Noticee for calculation of DEPS is incorrect since it has

considered the fair value as per pricing formula of SEBI DIP Guidelines / ICDR

which is only used for arriving the exercise price i.e. Rs. 1402/- instead of

adopting the methods as per the provisions of AS 20.

28. It can be seen from the aforesaid two tables that there was huge variance in

"fair value" for the subsequent reporting periods as against the exercise price

calculated by the Noticee and hence, the submission made by the Noticee

that exercise value was not less than the fair value and hence no disclosure of

separate DEPS is required in view of para 36 and 37 of AS 20, is not

maintainable.

29. Further, as per the calculation / observation the difference between the Basic

EPS and the DEPS is around 8% negative in each quarters (except for the

quarter ended September 2007) which the Noticee was required to disclose

such difference separately in equal prominence in its quarterly financial

statements as per the AS 20. Certainly, this is a considerable difference and

would have significant impact on the investor's decision while investing in the

shares of the Noticee Company. Such differences are illustrated as under;

Period Net profit for the period (`)

Total shares outstanding during the period including potential equity shares

DEPS after providing for potential equity shares pursuant to share warrants

Basic and DEPS as disclosed in RIL books

Difference in (`)

Difference in (%)

Qrtr ended June 2007 32,64,00,00,000 1513508041 21.6 23.4 1.8 8.3

Qrtr ended Sep. 2007 38,37,00,00,000 1513508041 25.4 26.4 1.0 3.9

Qrtr ended Dec. 2007 80,79,00,00,000 1565804180 51.6 55.6 4.0 7.8

Qrtr ended Mar. 2008 39,12,00,00,000 1573648601

24.9 26.9 2.0 8.0

Qrtr ended June 2008 41,10,00,00,000 1573648601 26.1 28.3 2.2 8.4

Qrtr ended Sep. 2008 412,20,00,0000 1573709925 26.2 28.4 2.2 8.4

30. It is not out of place to mention 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. EPS is considered as

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


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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 the correct disclosures in relation to DEPS in the respective

quarterly financial results as per AS 20.

31. Therefore, in light of aforesaid observations, I am of the view that the Noticee

was 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.

32. In view of aforesaid observations, facts and records of the case, I am of the

opinion that aforesaid failure by the Noticee, is in violation of Annexure I of

Clause 41 of the Listing Agreement read with Section 21 of the SCRA. The

aforesaid violations make the Noticee liable to penalty under Section 23 A (a)

and 23 E of SCRA which are produced as under;

Penalty for failure to furnish information, return, etc.

23A. Any person, who is required under this Act or any rules made thereunder,—

(a) to furnish any information, document, books, returns or report to a recognised

stock exchange, fails to furnish the same within the time specified therefor in the

listing agreement or conditions or bye-laws of the recognised stock exchange, shall

be liable to a penalty of one lakh rupees for each day during which such failure

continues or one crore rupees, whichever is less for each such failure;

Penalty for failure to comply with provision of listing conditions or delisting

conditions or grounds.

23E. If a company or any person managing collective investment scheme or mutual

fund, fails to comply with the listing conditions or delisting conditions or grounds or

commits a breach thereof, it or he shall be liable to a penalty not exceeding twenty-

five crore rupees.

33. While determining the quantum of penalty under section 23 A (a) and 23 E of

SCRA, it is important to consider the factors stipulated in section 23 J of the

SCRA, which reads as under:-

23 J - Factors to be taken into account by the adjudicating officer

While adjudging quantum of penalty under section 23-I, the adjudicating officer

shall have due regard to the following factors, namely:-

(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable,

made as a result of the default;

(b) the amount of loss caused to an investor or group of investors as a result of the

default;

(c) the repetitive nature of the default.


Page 15 of 15

34. Specific quantum of any direct or indirect unfair gain made by the Noticee and

the loss caused to the investor or group of investors, are not available on

records. However, as observed above, 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.

Order:

35. In view of the above, after considering all the facts and circumstances of the

case and exercising the powers conferred upon me under Section 23 I of the

SCRA and Rule 5 of the SCR Adjudication Rules, I hereby impose a penalty

of ` 1,00,00,000/- (Rupees One Crore only) upon the Noticee for violation of

Section 23 A (a) and ` 12,00,00,000/- (Rupees Twelve Crores only) for the

violation of Section 23 E of the Securities Contracts (Regulation) Act, 1956.

Therefore, a total penalty of ` 13,00,00,000/- (Rupees Thirteen Crores only)

is imposed upon Reliance Industries Ltd. (Noticee). I am of the view that the

said penalty is commensurate with the violations committed by the Noticee.

36. The Noticee shall pay the said amount of penalty by way of demand draft in

favour of “SEBI - Penalties Remittable to Government of India”, payable at

Mumbai, within 45 days of receipt of this order. The demand draft shall be

forwarded to the Chief General Manager, Corporate Finance Department,

Securities and Exchange Board of India, SEBI Bhavan, Plot No.C4-A, “G”

Block, Bandra Kurla Complex, Bandra (East), Mumbai–400 051.

37. Copy of this order is being sent to Reliance Industries Ltd.- 3rd Floor, Maker

Chamber IV, 222, Nariman Point, Mumbai – 400 021and also to Securities

and Exchange Board of India in terms of rule 6 of the SCR Adjudication Rules.

Place: Mumbai D. RAVI KUMAR

Date: 08/08/2014 CHIEF GENERAL MANAGER &

ADJUDICATING OFFICER


Documents

Adjudication Order in respect of Reliance Industries Ltd. (In the matter of Non Disclosure of Diluted Earnings Per Share)