Securities and Exchange Board of India (Sebi) on Friday directed Mukesh Ambani-led Reliance Industries (RIL) to disgorge Rs 447.27 crore made “unlawfully” through dealing in shares of its erstwhile subsidiary Reliance Petroleum Ltd (RPL). The capital market regulator also barred the company from dealing in the futures & and options (F&O) segment for a period of one year and asked it to square off all existing open positions. RIL will also have to pay 12 per cent interest on the disgorgement amount since November 29, 2017.
“Taking into consideration the magnitude of the fraud across the markets; the quantum of unlawful gains made by the Noticee No. 1 (RIL) and the role of the agents in facilitating the fraudulent design, I am inclined to pass certain directions against the noticees in order to protect the interest of the investors and reinstill their faith in the regulatory system,” said G Mahalingam, whole-time member, Sebi, in a 54-page order. The company has been charged under Sebi’s Prohibition of Fraudulent and Unfair Trade Practices (FUTP) Regulations.
The order against RIL is the first big order passed by Sebi under the chairmanship of Ajay Tyagi.
The case dates back to 2017, when RIL and other related entities took short positions in the futures and options (F&O) segment in the RPL stock, at a time when a large block of shares in the company was to be sold in the cash segment.
The share-sale caused the stock price of RIL to drop in the cash & derivatives segment and benefited RIL to the tune of Rs 513 crore.
“Noticee No.1 (RIL) 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,” the Sebi order said.
In its defence, RIL said the trades were done for the hedging purchases. The company “adopted a prudent strategy to hedge the loss that it was expecting due to the impending sales in the cash segment by taking appropriate positions in the F&O segment,” the company said in a submission to Sebi.
The market regulator, however, didn’t buy into RIL’s hedging theory.
“Noticee No. 1, armed with the knowledge of its impending large sale in the cash market, undertook the short positions in the futures of RPL to the extent of 99.2 million shares in an attempt to earn undue extra profit out of the same. Despite the nature of transactions, such a strategy cannot be considered to be a hedging strategy…,” Mahalingam said in the order.
An analysis done by Sebi showed entities connected to RIL accounted for 93.63 per cent of open interest (outstanding positions) in the November 2007 futures contract of RIL and 40.13 per cent of open interest across all derivatives contracts in RPL.
“There was no rollover of the net short positions in the November RPL derivatives by any of the front entities of Noticee No. 1 and their short positions were allowed to expire at the settlement price of November 2007 derivatives contracts which resulted in a huge speculative profit,” the Sebi order said.
The Sebi analysis also showed the front entities that dealt in the RPL stock had never traded in the F&O segment between April 2007 and November 2007.
RIL had moved the Securities Appellate Tribunal to settle this case through the so-called consent route. However, the plea had been dismissed by the tribunal in July 2014.