Tribunal Dismisses Reliance Industries’ Appeal Against SEBI Order

The Securities Appellate Tribunal has dismissed an appeal filed by Reliance Industries Ltd., challenging a disgorgement order passed by the market regulator.

The appeal emanates from an order by the Securities and Exchange Board of India which directed the company to disgorge an amount of Rs 447.27 crore, along with interest at 12%, on grounds that the oil-to-gas major made unlawful gains from a transaction where it offloaded 5% of its then holding in Reliance Petroleum Ltd., in March 2007.

A two-member majority comprising MT Joshi and CKG Nair directed Reliance Industries to pay the disgorged amount within 60 days of the order along with 12% interest, effective from November 2007 till the actual date of payment to SEBI.

Reliance Industries disclosed in a stock exchange filing on Nov. 5 that the appellate tribunal, by a 2:1 majority, has dismissed its appeal.

“All trades carried out by the company were genuine and bona fide. No irregularity can be attached to these transactions. The company reiterates that it has not violated any law or regulation while selling shares of RPL in November 2007,” the company said in a statement.

SAT’s Findings

To recap, the market regulator had alleged in its order that Reliance Industries enlisted the services of 12 companies as an agent for taking “huge short positions” in 2007 November futures derivatives of Reliance Petroleum. Further, RIL executed separate agreements with each of the 12 companies under which they earned commission while all profits and losses were transferred to RIL’s account, SEBI had said in its March 2017 order.

After concluding its investigation, SEBI’s whole-time member also made the following allegations against Reliance Industries:

• By employing 12 entities to take separate short positions in November 2007 RPL futures, Reliance Industries did not engage in a hedging strategy. It was in fact a “pre-planned fraudulent scheme” for cornering positions and manipulation of the futures. This act, as per the regulator, cannot be considered as mere breach of position limits.
• The oil-to-gas major sold more 1.95 crore RPL shares in the cash segment during the last 10 minutes of the trading session on Nov. 29, 2007. This was done to depress the weighted average price during the last 30 minutes of trading in order to make gains on outstanding short positions held by the company.
• The company made unlawful gains of Rs 513 crore as a result.

Harish Salve, senior counsel representing Reliance Industries and 12 other appellants, questioned SEBI’s findings on the following grounds:

• Reliance Industries had decided to offload a 5% stake in Reliance Petroleum and took a hedge position to cover the possibility of price fall in the cash segment. As such, the presence of an underlying exposure means that the hedge cannot be termed as a manipulation or speculation.
• The company took a reasonable hedge and engaged 12 front entities to take net short position limits. This engagement for taking position in the F&O segment was not contrary to the stock exchange regulations and was a valid action as per the Indian Contract Act.
• SEBI’s findings that Reliance Industries violated the Prevention of Fraudulent and Unfair Trade Practice regulations was erroneous as it failed to prove if exceeding position limits can be termed as market manipulation or fraud.
• And lastly, an element of inducement is necessary to prove charges of fraud. However, in the current case the total trades undertaken by the company and its agents constituted only 8% of the total trades in futures segment, which were done in a bona-fide manner.

Reading into the past rulings of the apex court on hedging , a two-member majority of the tribunal, while dismissing Reliance Industries’ arguments observed that:

• 12 companies engaged by Reliance Industries as agents were distinct entities. SEBI’s surveillance mechanism could not have detected them as agents of Reliance Industries.
• RIL, along with its 12 agent entities had cornered a substantial portion of the market wide position limits ranging from 62% to 93% on different trading days. This conduct, as per the tribunal, was a pre-planned strategy of manipulation as it was unknown to other market participants. The breach cannot be treated as mere violation of market limits.
• The tribunal dismissed RIL’s argument that its trades in derivatives was a hedging strategy. While doing so, it noted that while market participants with an underlying exposure are free to hedge their position, they cannot use a scheme or device to corner a substantial portion of the position limit and squeeze the market.
• Based on such factors, it can be concluded that the scheme utilised by the petroleum major and its agents was fraudulent and manipulative.

Justice Tarun Agarwala, the presiding officer of the tribunal, gave a dissenting opinion by concluding that SEBI failed to discharge the burden of establishing manipulation by Reliance Industries. SEBI’s disgorgement order is without any authority of law and must be set aside to that extent, Justice Agarwala noted in his dissenting opinion, while partially allowing the oil and gas major’s appeal.