SEBI Fines  Reliance Industries Rs 1,000 Crore For Fraudulent Trades
Mukesh Ambani, billionaire, chairman and managing director of Reliance Industries Ltd., pauses during a panel session at the World Economic Forum (WEF) in Davos, Switzerland. (Photographer: Simon Dawson/Bloomberg)

SEBI Fines Reliance Industries Rs 1,000 Crore For Fraudulent Trades

Market regulator Securities and Exchange Board of India has imposed a Rs 1,000-crore penalty on Reliance Industries Ltd., the largest in its over 20-year history.

In a case dating back to 2007, SEBI has found Reliance Industries and 12 related entities guilty of fraudulent and manipulative trades.

SEBI’s order, published on its website on March 24, 2017, says Reliance Industries and the 12 entities violated provisions of Section 12A of the SEBI Act, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the securities market) Regulations, 2003.

- Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control
SEBI PFUTP Regulations
- Prohibition of certain dealings in securities
- Prohibition of manipulative, fraudulent and unfair trade practices

The regulator has prohibited the 13 entities, “from dealing in equity derivatives in the F&O segment of the stock exchange, directly or indirectly for a period of one year”, from the date of the order.

The regulator has also directed Reliance Industries, “to disgorge an amount of Rs 447.27 crore...along with interest calculated at the rate of 12 percent per annum from November 29, 2007 onwards, till the date of payment”.

BloombergQuint calculated the interest amount to be approximately Rs 500 crore as of date, amounting to a disgorgement of approximately Rs 1,000 crore.

Reliance Industries has 45 days to make the payment, according to the order.

SEBI Fines  Reliance Industries Rs 1,000 Crore For Fraudulent Trades

The Modus Operandi

According to the SEBI order, this is how Reliance Industries and the 12 entities made unlawful gains:

  • In March 2006, the Reliance Industries board decided to raise resources by selling 5 percent in Reliance Petroleum Ltd (RPL).
  • Reliance enlisted the services of 12 entities to take substantial short positions in November 2007 futures of RPL.
  • The 12 entities together breached the client position limit permitted under the regulations.
  • Total open interest positions in RPL reached 95 percent of overall market-wide position limits allowed for RPL in the derivatives market.
  • This led to an investigation by SEBI into the matter.
  • The 12 entities together had 9.92 crore shares constituting 61.15 percent of the open interest in November futures.
  • Reliance sold 18.04 crore RPL shares in the cash market between November 6 and 23 for Rs 4,023 crore.
  • Reliance sold 1.95 crore RPL shares on the NSE on November 29, the last day of expiry, in the last 10 minutes of trade in the cash market.
  • The sale of RPL shares in the last 10 minutes drove the stock to as low as Rs 209.80 per share.
  • RPL November futures contracts settled at Rs 215.60 and the 12 entities gained on their short positions.
  • The 12 entities together held short position of 7.97 crore share in RPL futures on the day of expiry.
  • SEBI alleges Reliance and the 12 entities gained Rs 60.28 per share amounting to Rs 447.27 crore.

Simply put, according to SEBI’s order Reliance, which wanted to sell a nearly 5 percent stake in RPL, took up short positions through the 12 entities in the futures market, to hedge any losses arising from a fall in the RPL stock when it sells the shares in the cash market.

Under the regulation, any investor could have taken a maximum position of 1.09 crore shares in RPL futures. But the 12 entities related to Reliance together had a nearly 7 times higher exposure to RPL futures, thereby substantially exceeding the limits permitted by SEBI.

After Reliance sold over 18 crore shares in the cash, the 12 entities did not reduce their corresponding exposure in the futures market. SEBI alleges that this helped Reliance gain unlawfully on November 29, when it attempted to sell over 2 crore remainder RPL shares in the last 10 minutes of trade on the day of derivatives expiry.

SEBI Fines  Reliance Industries Rs 1,000 Crore For Fraudulent Trades

Reliance Industries To Appeal

The Reliance Petroleum Ltd. trades examined by SEBI were genuine and bonafide transactions undertaken in the best interests of the company and its shareholders, Reliance Industries said in an emailed statement on Friday night. The market regulator appears to have misconstrued the nature of transactions and imposed unjustifiable sanctions, the company added.

The statement also said that Reliance is in the process of consulting legal advisors and plans to appeal and challenge the order in the Securities Appellate Tribunal (SAT).

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