SEBI debars RIL for 1 year from equity derivative market
Published: Mar 25, 2017
By TIOLCORP News Service
MUMBAI, MAR 25, 2017: THE Securities and Exchange Board of India (Sebi) late on Friday barred Mukesh Ambani-led Reliance Industries Ltd (RIL) from accessing the equity derivatives segment for a year and has told the company to disgorge Rs 447.27 crore along with an interest of 12 per cent since November 29, 2007, in a ten year old insider trading case involving its erstwhile arm Reliance Petroleum Ltd (RPL). The total penalty of RIL after adding interest comes close to Rs 1,300 crore.
The ban, which will come into effective immediately, will restrict India's second most valued company from the derivatives market for a year, SEBI said in a 54-page order on Friday.
The Sebi order passed by whole time member G Mahalingam has directed the company to disgorge the "unlawful gains" made by it within 45 days of the order. According to the Sebi order, RIL has made "unlawful gains of Rs 513 crore" by adopting "fraudulent and manipulative strategy/pattern".
"In my view, there is a fraudulent scheme carried out by Noticee No.1 (RIL) through the 12 connected persons/ front entities with the intention of making profits on account of the legally impermissible limits held by it clandestinely and lowering the price in the cash market," said Mahalingam's order. "Throughout its written and oral submissions, Noticee No. 1 has referred to its actions as 'hedging' to justify its elaborate scheme. The strategy of 'hedging', put forward as a defence by Noticee No.1 is nothing but a mirage," said the order.
In March 2007, RIL Board decided to raise RIL board decides to raise resources by off-loading about 5% of its holdings in RPL.
In November 2007 RIL undertook transactions in the cash segment of RPL enlisted services of 12 agents to operate on its behalf in the futures segment of RPL.
Between November 1 to November 6,2007, the 12 agents took substantial positions in the November futures contract of RPL. As a result, on November 06, 2007, the holding in derivatives contracts RPL reached 95% of the market-wide position limit, thereby inviting upon it a restriction of no further increase in open interest. Sebi started investigation into the matter. Analyses price-volume trends in the cash market vis-a-vis the F&O segment.
On December 16, 2010, Sebi issued show-cause notice to RIL and all the other 12 entities alleging violations of fraudulent and unfair trade practices regulations.
The regulator said Reliance Industries, by employing 12 entities to take separate position limits of open interest on its behalf, by executing separate agreements with each one of them and cornering 93.63% of the November stock futures of RPL, has acted in a fraudulent manner. It cannot be held to be a mere breach of position limits by the clients attracting penalty under the exchange circulars.
The regulator said on the basis of the analysis of the trading strategy adopted by RIL in the cash market during the month of November 2007, and specifically on November 29, 2007 - the expiry day of the November Futures of RPL - there has been a manipulation of the last half an hour settlement price.
The SEBI in its order observed that:
"Entrusting a common person to carry out the trades in both cash and F&O segment was the other key factor in the whole operation. Finally when the price dipped on November 29, the entire F&O open positions to the extent of 7.97 crore shares was allowed to expire. In the meanwhile, 1.95 crore shares were also liquidated in the cash segment.
"This is not a normal case of price manipulation or volume manipulation. This is a case of a unique strategy of per se not manipulating the price or volume in a single market, but manipulating the settlement price in one market to gain across the volumes accumulated in the other market. The actual manipulation has happened with respect to the convergence price of the spot with the futures,".
RIL said it will appeal to Securities Appellate Tribunal (SAT) challenging SEBI's order.