Mumbai, March 8: The capital market regulator has cracked down on Reliance Industries Ltd (RIL) for irregularities relating to a securities flotation 16 years ago — reopening an investigation that has always been steeped in controversy.

The Securities and Exchange Board of India (Sebi) has started adjudication proceedings over RIL’s flotation in 1994 of debentures that carried convertible warrants.

It is learnt that the market regulator is investigating whether RIL violated the provisions of the Takeover Code when it issued non-convertible debentures to 34 entities affiliated to the promoters.

Later, each warrant was converted into two shares. As a result, the promoters’ stake in RIL rose by almost 16 percentage points to 38.3 per cent in 2000.

This is the first major investigation that Sebi has launched since U.K. Sinha took over as the chairman of the market regulator on February 17.

An adjudicating officer at Sebi is understood to have issued a show-cause notice to RIL on February 24 seeking to know why action should not be taken against it over the warrant conversions.

RIL has been directed to reply to the notice within 14 days.

Officials from Sebi and RIL refused to comment on the latest development.

Observers say the market regulator can impose a monetary penalty if it finds RIL guilty.

RIL can opt for the consent route — a mechanism that was put in place four years ago to allow entities to pay a mutually agreed penalty without admission of guilt. Sources do not rule out the possibility of RIL opting for the consent route.

The case dates back to 1994 when RIL raised Rs 300 crore from the flotation of six crore non-convertible debentures (NCDs). These NCDs were bundled with 12 crore warrants.

Each warrant was convertible into a share of an equal amount. Thus, 12 crore warrants were converted into 12 crore shares in 2000.

These were issued to 34 promoter group entities, raising the undivided Ambani family’s stake from 22 per cent to 38 per cent.

The NCD issue and the subsequent conversion snowballed into a huge controversy when S. Gurumurthy, Chennai-based chartered accountant and former convenor of the Swadesh Jagran Manch, filed a complaint with the market regulator alleging fraud in the allotment of the warrants.

Gurumurthy had said 12 crore equity shares were issued to the 34 entities at a price of Rs 75 per share even as RIL handed out NCDs with non-detachable warrants to the Unit Trust of India at a much higher price. RIL had denied the charge at that time.

There were also allegations that RIL had bankrolled the 34 entities that bought its securities — gross violations under the Companies Act and the investment rules of the capital market watchdog.

Sebi is already investigating an unrelated insider trading charge against Reliance Industries. That case dates back to 2007 when RIL sold a little over 4 per cent equity in its Reliance Petroleum Ltd (RPL) in an open market transaction, thereby raking in huge gains.

RPL has since merged with RIL and has been delisted.

Reliance Industries had offered to settle this case under the consent route. Last August, it had offered to pay a penalty of Rs 10 crore which was turned down by the regulator.