The Securities and Exchange Board of India (SEBI) initiated a probe into certain trades done by Reliance Industries Ltd. (RIL) in the shares of Reliance Petroleum Ltd. (RPL) in November 2007. The investigation led to the capital market regulator issuing a show-cause notice to RIL, among other entities, in December 2010.
According to the investigation — that lasted for 10 years — RIL made unlawful gains amounting to ₹513 crore. The 54-page order states that the gains “could not have been made but for the fraudulent and manipulative strategy/pattern adopted by them.”
After the completion of the probe, during which RIL was given an opportunity to present its case, the regulator said the company would have to pay ₹447.27 crore, along with the interest calculated at the rate of 12% a year from November 29, 2007 till the date of payment.
Simply put, RIL will have to pay nearly ₹1,000 crore. SEBI has also barred RIL from dealing in the equity derivatives segment for one year.
Were the trades unfair?
Though RIL disagrees with the findings, the regulator is of the view that the manner in which the company executed the trades in the cash and derivatives segments showed that there was unfair motive. The regulator has based its case on the fact that there was one single person, an employee of a wholly-owned subsidiary of RIL, who was overseeing the trades to be executed in the cash and derivatives segments. He was thus privy to information on when the company would be selling shares in the cash segment and also the positions that the company would be taking in the futures segment. Further, the trades in the cash segment were executed in the last half hour of the trading session on November 29, 2007, the last Thursday of the month when the settlement price of the derivative contracts are determined.
Incidentally, the settlement price of the futures contract is the volume weighted average price of the shares during the last half-hour of the trading session. The regulator has also alleged that RIL took positions in the futures segment through 12 entities to circumvent the regulations related to permissible position limits for each individual client. The regulator has found it unusual that some of the entities that were used to trade in the futures contracts of RPL had never traded in the derivatives segment before. As per the findings, the combination of trades in the cash and derivatives segments was done with the twin objective of “bringing down the price in the cash segment and consequently the derivatives segment of the RPL scrip” and “making further undue extraordinary profits on the open short positions in the derivatives segment.”
Surprisingly, the regulator has not passed any order against the individual — Sandeep Agarwal — who placed the orders in the cash and futures segment. Also, no stricture has been passed against the directors/promoters of RIL, a common feature among the orders passed under Sections 11 and 11B of the SEBI Act.
How has Reliance responded?
Reliance Industries does not agree with the findings. It says the trades that SEBI has termed unfair and fraudulent are “genuine and bona fide.” These were carried out keeping the best interests of the company and its shareholders, it claims.
It believes that the regulator has “misconstrued the true nature of the transactions and imposed unjustifiable sanctions.” The company plans to challenge the order at the Securities Appellate Tribunal (SAT), the forum where orders of the capital market regulator can be challenged. “We have full confidence in the judicial process and we propose to vigorously exercise all options available to us to challenge the untenable findings in the order,” RIL said in a statement. If SAT finds merit in RIL’s arguments, it can set aside the order and direct SEBI to take a fresh look at the matter. Alternatively, if SEBI wins the case, RIL has the option of filing an appeal at the Supreme Court. Given the high-profile nature of the case, it is most likely that the matter will be decided in the Supreme Court unless RIL gets a favourable ruling at SAT and consequently SEBI comes out with an order that is acceptable to one of the largest private sector entities of the country.
ASHISH RUKHAIYAR
