SEBI bans RIL, 12 others from F&O for fraudulent trading; orders it to pay Rs1,000 crore
The Securities and Exchange Board of India (SEBI) last week banned Reliance Industries Ltd(RIL) and 12 others from equity derivatives trading for one year and directed the company to disgorge nearly Rs1,000 crore for alleged fraudulent trading in a 10-year-old case. RIL, in a statement stated that it will appeal and challenge SEBI order before the Securities Appellate Tribunal (SAT).
The ban, in effect from last Friday, relates to alleged fraudulent trading in the futures and options (F&O), or derivatives, space in the securities of RIL's former listed subsidiary Reliance Petroleum (RPL) - now merged with the listed parent.
A stock is banned in F&O when its derivative contracts cross 95% of the market-wide position limit (MWPL).
The Mukesh Ambani-led RIL has been asked to pay Rs447 crore, which along with an annual interest of 12% since 29 November 2007, taking the total disgorgement liability for the company to nearly Rs1,000 crore. It has been asked to pay the amount in 45 days.
However, according to experts, the punitive action against RIL should have been stricter. Speaking with Business Standard
, Shriram Subramanian, Managing Director of InGovern said, "SEBI needs to be more tough and proactive in such cases. It has taken almost 10 years to come out with this order, which doesn’t contain any penalty. This could set a wrong precedent for companies and market participants who brazenly violate regulations. Banning the company from the F&O segment will not have any impact on the company. Apart from the disgorgement amount, there has to be a penalty to serve as a deterrent to all market participants.”
The SEBI order, passed by whole-time Member G Mahalingam, said RIL and 12 other entities have been prohibited from dealing in the "equity derivatives in the F&O segment of stock exchanges, directly or indirectly".
According to SEBI order, 12 entities, Gujarat Petcoke and Petro Product Supply Pvt Ltd, Aarthik Commercials Pvt Ltd, LPG Infrastructure India Pvt Ltd, Relpol Plastic Products Pvt Ltd, Fine Tech Commercials Pvt Ltd, Pipeline Infrastructure India Pvt Ltd, Motech Software Pvt Ltd, Darshan Securities Pvt Ltd, Relogistics (India) Pvt Ltd, Relogistics (Rajasthan) Pvt Ltd, Vinamara Universal Traders Pvt Ltd, and Dharti Investment and Holdings Pvt Ltd were front entities of RIL. "As the investigation revealed that each of the Front entities of RIL had undertaken F&O transactions in the scrip of RPL under respective agreements with RIL, as stated earlier in this order and as RIL was its ultimate beneficiary, it was alleged that such agreements are benami contracts and therefore, illegal and invalid in terms of the Benami Transactions (Prohibition) Act, 1988. It was further alleged in the show cause notice (SCN) that such arrangements were part of a scheme / artifice intended to manipulate and/or defraud the market. It was alleged that the object of entering into such agreements and executing such trades was to avoid detection of the breach of the client- wise position limits in derivative contracts imposed by the SEBI and NSE circulars issued in this connection," the order says.
Mr Mahalingam from SEBI says, "I am inclined to pass certain directions against the notices in order to protect the interest of the investors and reinstall their faith in the regulatory system."
Quoting sources, the newspaper report says, SEBI had RIL with with violation of insider trading rules in its first show cause notice (SCN) issued in April 2009. Later, the market regulator issued another SCN in December 2010, superseding the earlier notices, in which the company was charged under violation of Fraudulent and Unfair Trade Practice (FUTP) regulations.
RS Loona, Senior Partner, DV Alliance, told the newspaper that "Under Section 11 (B) proceedings, there is no scope of monetary penalty. The penalty can be imposed only after adjudication and by the adjudication officer which is not the case here. One should also not mistake the charges against the entities with the insider trading breaches. The action was taken for violating unfair trade practices regulation which is mostly for price manipulation”.
RIL said it would appeal against SEBI's decision. "We are in the process of consulting our legal advisors. We propose to prefer an appeal and challenge the order in SAT. 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 company said.
The SEBI says, "Throughout its written and oral submissions, RIL has referred to its actions as 'hedging' to justify its elaborate scheme. The strategy of 'hedging', put forward as a defence by RIL is nothing but a mirage. While 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. It is now amply clear that the 'hedging' strategy is a defence set up as an after- thought and was not a pre-planned business strategy. To conclude, I find that RIL 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. RIL cornered the OI position to the extent of 61.5% as on 6 November 2007 and 40.13% as on 29 November 2007 and closed out the outstanding short position of 7.97 crore shares on 29 November 2007 through its agents. This would amount to a well-planned, fraudulent and manipulative trading scheme in terms of the SEBI (PFUTP) Regulations, 2003."
However, as per RIL the trades in RPL shares were genuine and SEBI appears to have misconstrued the true nature of the transactions and imposed unjustifiable sanctions. "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 its shareholders, in view," the company added.