Insider trading case: SEBI bans Reliance Industries, 12 others from equity derivative market for 1 year

MUMBAI: The Securities and Exchange Board of India (Sebi) on Friday barred Reliance Industries Ltd (RIL), the country's second most valued firm, and 12 other entities from dealing in equity derivatives futures and options segment for a period of one year, directly or indirectly, for allegedly indulging in fraudulent trades in Reliance Petroleum in 2007.

The capital markets regulator has also directed RIL to disgorge Rs 447.27 crore along with 12% interest from November 29, 2007 onwards till the date of payment, within 45 days from the date of the order.

Sebi has allowed RIL and the other entities to square off or close out their existing open positions. Reacting to the decision, Reliance said it plans to challenge the order in the Securities Appellate Tribunal. "Sebi appears to have misconstrued the true nature of the transactions and imposed unjustifiable sanctions,'' a Reliance spokesperson said in an emailed statement.

"We remain confident of fully justifying the veracity of the transactions and vindicating our stand. 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."

"In view of the fact that Noticee No.1 (Reliance Industries) has made unlawful gains of Rs 513/-crore, which could not have been made but for the fraudulent and manipulative strategy/pattern adopted by them, I am inclined to direct disgorgement of the unlawful gains made by Noticee No.1," Sebi whole-time member G Mahalingam said in his order.

Sebi calculated Rs 513 crore by taking into account the net short positions in derivatives for all the days the 12 entities maintained during November 2007.

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, Sebi said.

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.

Reliance Industries had submitted before Sebi that the liquidation of 5% stake was decided and there was no outer time fixed for liquidation. Being guided by the analysts' reports and the price trends of the scrip, it decided to start the sale in November 2007.

Before the sale in the cash segment started, RIL booked positions in the F&O segment to the extent of 9.92 crore shares by entering into agreements with 12 entities for a commission payment.

"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," Sebi said.

Reliance Industries through its written and oral submissions before Sebi referred to its actions as 'hedging' to justify its scheme.

"The strategy of 'hedging', put forward as a defence by Noticee No.1(RIL) is nothing but a mirage," Sebi member G Mahalingam said. "While Noticee No.1 (RIL) has sought to depict a strategy of hedging, when one takes a closer look at what was actually done or intended to be done, the facade of hedge wanes off and exposes the hidden motive or strategy of speculation... I find that Noticee No. 1 was not genuinely hedging the risk but was aiming to reap huge speculative profits by cornering futures positions and playing a fraud on the general investors and the market. This would amount to a well-planned, fraudulent and manipulative trading scheme in terms of the SEBI (PFUTP) Regulations, 2003."