Confusion serves Reliance gameplan better than clarity

The oldest trick in the Reliance Sharp Money Book is to privately encourage the media to write about price-sensitive corporate information, and then put out a formal bland denial saying that "Reliance does not comment on speculative reports."

Confusion about the real state of affairs will help the Ambanis to keep the markets guessing . Arko Datta/ Reuters

Over a period of time, journalists seeking any kind of access to the inner circle around Mukesh and Anil Ambani have learnt that floating speculative stories around Reliance helps them access more stories from the Ambani storehouse.

When contradictory stories about Reliance appear in the media, the promoters benefit quietly. Why? It is common knowledge that the promoters and related parties are behind-the-scenes market-makers in their own shares. They churn money by short-selling when the news is likely to be negative, and vice-versa.

Confusion about the real state of affairs is often critical to the promoters' way of thinking, because only when share price movements are volatile can the shares be bought or sold in significant volumes. The promoters believe in making hay on share trading both on the swings and the roundabouts.

It's not all market lore. Two recent cases illustrate the point.

Anil Ambani and his executives at Reliance Anil Dhirubhai Ambani Group were fined Rs 50 crore - yes, Rs 50 crore - in January this year after they were caught fooling around in the domestic stock market using money borrowed from abroad by two group companies -Reliance Infra, and Reliance Natural Resources Ltd. It is the stiffest penalty ever imposed by market regulator Sebi. The penalty was the result of plea bargaining, with the younger Ambani neither accepting guilt nor denying it. He and four of his executives - Satish Seth, SC Gupta, JP Chalasani and Lalit Jalan - have quietly paid up to avoid excessive public scrutiny of their actions. Money borrowed from abroad cannot be used to play the markets.

Elder brother Mukesh is, meanwhile, still trying to negotiate an out-of-court settlement with Sebi for alleged insider trading involving the shares of Reliance Petroleum, which was merged with the parent company a few years ago. According to media reports, Mukesh has offered a deal, but Sebi apparently thinks the penalty for the offence is paltry. His fault: a bunch of promoter companies took short-positions in the Reliance Petroleum futures market when they knew the promoters planned to actually sell some of their shares. In short, they knew the market price would fall when Reliance Petro shares were sold, and tried to make money with this prior knowledge by selling in the futures market.

If confusion benefits the Ambanis as much as clarity, the recent contradictory stories about declining gas output from Reliance Industries' Krishna-Godavari offshore gasfields (KG-D6) are par for the course. While government spokesmen have been talking of ramping up output, Reliance's story has been downbeat and obfuscatory.

The February Economic Survey of the government said: "Reliance Industries is likely to hit peak output of 80 million metric standard cubic metres per day (mmscmd) from its eastern offshore KG-D6 fields in 2012-13 fiscal." But Reliance's third quarter reports were already hinting at an output drop and equity reports were taking note.

Consider what this HSBC report, put out in the second half of January, one month before the government Economic Survey was presented, had to say: "We expect the current refining and petrochemical margins to continue into FY12e (i.e., 2011-12 estimate). However, we believe RIL is unlikely to ramp-up its natural gas production from current levels of c.52-53 mmscmd near term, in the absence of relevant regulatory approvals for new development, technical limitations with existing wells and long lead time for critical deepwater equipment." Did the government not have information that Reliance was freely sharing with equity researchers? HSBC knew Reliance was cutting output, but the government didn't.

Even assuming a communication gap between what the company knew and the finance ministry did not, what's surprising is that two weeks later, the Directorate General of Hydrocarbons (DGH), the oil sector regulator, was still saying more or less the same thing.

DGH SK Srivastava said on 9 March that gas production would rise to 67 mscmd in April 2011. Some 18 wells had been drilled, and gas was being produced from 16 of them. Two more wells were yet to be connected to the production system, and "Reliance needs to drill two more wells by April," he said.

By this times everyone knew that Reliance was not raising output, and it was also becoming clear to the regulator that the company was not drilling enough wells or connecting the ones already drilled to the output system.

To check things out for itself, the DGH commissioned an independent expert to find out what was going on. The consultant, P Gopalakrishnan, came to the same conclusion. His report said that production would have risen to 61.88 mmscmd if only Reliance had drilled its 22 wells as promised. Reliance demurred, saying Gopalakrishnan came to his conclusions without giving them a chance to rebut. He did not visit the offshore site for a look-see is Reliance's argument.

However, the Reliance defence looks weak. For one, it presumes that experts do give off-the-cuff conclusions without checking their facts. They work on the basis of data and facts.

Moreover, if the real story is different. Reliance isn't telling it clearly either. In a supposed clarification to the stock exchanges, Reliance had this to say. "RIL has discussions, consultations with DGH in respect of regulatory compliance, technical reviews and finalisation of work programmes and budgets for the future years. The projected production figures referred to in the media are purely provisional and indicative and subject to such variations as may emerge during actual operations in the future years. These variations can be on account of physical inputs, work programme as well as geological and reservoir complexity."

Clear? Not really. Confusion helps the Ambanis keep the markets guessing.