Story Of The Week

Reliance Industries banned from derivatives market

On 24th March 2017, the Security and Exchange Board of India(SEBI) barred Mukesh Ambani-led Reliance Industries Ltd (RIL), the country’s most valuable firm, and 12 other entities   from accessing the equity derivatives segment for a year, directly or indirectly  in a ten year old insider trading case involving its arm Reliance Petroleum Ltd (RPL).

 SEBI has also ordered RIL to disgorge Rs 447.27 Crore along with an interest of 12% from November 29, 2007 onwards till the date of payment, within 45 days from the date of the order.

Who are the 12 other entities?

The 12 entities are Gujarat Petcoke and Petro Product supply, Darshan Securities, Relpol Plastic Products, Aarthik Commercials, Motech software, LPG Infrastructure India, Fine Tech Commercials, Pipeline Infrastructure India, Relogistics (India), Relogistics (Rajasthan), Dharti Investment and Holdings and Vinamara Universal Traders.

What lead to the Order:

In 2008, SEBI alleged that the retail major violated some of its norms when it merged its subsidiary RPL with itself in 2007. RIL, prior to the merger with RPL, allegedly short-sold a 4.1 percent stake in RPL valued at Rs 4,023 Crore to prevent a slump in the stock. As alleged, RPL shares were first sold in the futures market and later in the spot market, covering the sales in the futures market.

RIL had also asked for a consent settlement order previously but SEBI had rejected its plea.  RIL made an appeal in the SAT in 2014 against SEBI’s refusal to agree to a consent order, but that also remained unsuccessful. Subsequently, SEBI continued the investigation of its case and RIL and 12 other entities presented their defense in January 2017.

Hence, the case is related to allege fraudulent trading in the futures and options space in the securities of Reliance Industry Limited’s listed subsidiary Reliance Petroleum Ltd (RPL).


What is SEBI’s View:

As per Mr. G. Mahalingam, SEBI’s member, “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 adopted by them, I am inclined to direct disgorgement of the unlawful gains made by Noticee No.1,” 

As per the order RIL has acted in a “fraudulent manner” 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 futures of RPL.

Sebi also added that on the basis of the analysis of the trading strategy adopted by RIL in the cash market during the month of November 2007, and specially on November 29, 2007 which was  the expiry day of the November Futures of RPL ,  there has been a manipulation of the last half an hour settlement price. 

The calculation of Rs 513 crore has been done by taking into account the net short positions in derivatives for all the days the 12 entities maintained during November 2007. 

Sebi further added that it cannot be held to be a mere breach of position limits by RIL attracting penalty under the exchange circulars.

 What is Reliance’s View:

 Reliance is planning to challenge the order in the Securities Appellate Tribunal.  According to a Reliance Spokesperson “SEBI appears to have misconstrued the true nature of the transactions and imposed unjustifiable sanctions,” He also added “The trades in RPL shares which were examined by SEBI were genuine and bona fide transactions. These were carried out keeping the best interest of the company and specially its shareholders, in view.”

“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.” 


The Future :

As per SEBI, “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”

 Though Reliance has termed it as “hedging”, in its oral submission to SEBI, but as per Mr. Mahalingam, it is a mirage. He also added further “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.”



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