RELIANCE INDUSTRIES : Uncertainty Over, Now for Some Sebi Respite

The recent underperformance of the Reliance Industries stock had less to do with the profitability of its businesses or growth prospects and is more related to uncertainties surrounding certain some legal issues. The Comptroller and Auditor General’s (CAG) report on the company’s KGD6 block was one of them. Although the CAG’s report makes a series of comments which are adverse to RIL, what is good is that the uncertainty is now over on this front.
This was evident in the way the stock reacted on Thursday. RIL was down close to 2% at one point during the day after the CAG’s report was tabled in Parliament. However, a press release from the company, which can at best be described as generic, helped breathe fresh life into the scrip, helping it end the day with gains of over 2.5%. RIL has said that it can’t comment on the CAG’s final report, as the company had not viewed it.
The CAG’s report had proved to be a drag on RIL’s valuations, mainly because it affects the company’s flagship KG-D6 project, which it had been marketing as a global benchmark for effective, efficient project completion and capital cost competitiveness. In fact, RIL had already fought a long and tiring legal duel with ADAG over the same KG-D6 block. The allegations of ‘gold-plating of the costs’ raised at a time when the two groups were battling each other had prompted the petroleum ministry to order a CAG probe. Interestingly, CAG’s final report didn’t stress on this issue much, although it sought in-depth review of 10 high value contracts. This could be an indication that the company’s earlier response to the CAG appears to have had an impact. The CAG’s key observations and recommendations do still appear daunting. If the production-sharing contracts and profit-sharing mechanism come in for an immediate review, it could mean the company’s profits from sale of oil and gas could come down substantially. However, every company has to routinely fight several legal battles while running its business and this is likely to end up as just another battle.
The other key uncertainty weighing over RIL’s market performance is its brush with Sebi. For almost two years, RIL has been attempting to work out consent terms in two cases with the securities market regulator — over breach of insider trading norms in 2007 and breach of creeping acquisition norms in 2000. Investors need to watch out for these cases too.