Cairn-Vedanta merger: Sebi probes unusual stock movements

Mumbai: The Securities and Exchange Board of India (Sebi) is investigating an unusual rise in the stocks of Cairn India Ltd and Vedanta Ltd during the run-up to the announcement of revised terms for their merger on 22 July, two people with direct knowledge of the matter, including a Sebi official, said on condition of anonymity.

The regulator is checking if any entity made illegitimate gains by trading in these two stocks on the basis of any privileged, unpublished price-sensitive information about the fresh merger terms before they were publicly announced, they added.

Sebi’s spokesperson did not respond to emails sent on 2 August and 16 August seeking comment. Cairn India and Vedanta Ltd both declined to comment on the issue.

The unusual movements in the two stocks in a short span of time before the announcement prompted the investigation, said one of the two people.

“There are certain discrepancies which indicate possibilities of unfair transactions before the merger announcement. Off-market deals among shareholders are also being scrutinized. Sebi’s investigations will look into it to verify if there was any unfair trading by any entity,” said this person.

While the two didn’t reveal details of what exactly these discrepancies were and the time period they are considering, a look at the 10-day and one-month share price rise of Cairn and Vedanta shows that the stocks outperformed their peers.

Between 8 July and 22 July (10 trading sessions), the BSE oil and gas index rose 4.92% while Cairn India’s stock gained 32%. During the month preceding the 22 July announcement, Cairn India rose 41.67% compared with 10.04% for the oil and gas index.

Similarly, between 8 July and 22 July, Vedanta’s stock rose 18.11% versus a 9.08% rise for the BSE Metal Index. In the one month to 22 July, it was up 33.61% compared with 11.55% for the metals group.

On 22 July, almost a year after the merger was first announced, Vedanta sweetened its offer to Cairn India shareholders. Under the new deal, for each share they hold, Cairn India minority shareholders were offered one equity share and four redeemable preference shares in Vedanta, an increase of three redeemable preference shares over the earlier offer.

The merger has been stuck due to opposition from minority investors such as Life Insurance Corporation of India.

A senior Cairn India official said on condition of anonymity that the surge in stock price could be on account of an upturn in the commodity cycle. “Also, share prices of global energy companies have moved in tandem with commodity prices,” this person added.

A Vedanta spokesperson said the company had no information of any probe by Sebi and that it had received no query from the market regulator.

At the current stage of the probe, Sebi is closely examining if any entity has violated norms on insider trading and prevention of fraudulent and unfair trade practices. Typically, the surveillance department of Sebi watches for ambiguities in trading and compiles a report or passes an interim order as an immediate measure, depending on the nature of dealings and the seriousness of the case.

“The report based on the observations will include all such details about transactions that are generally not found in normal trades,” said a former Sebi official, explaining the process. Such details may include off-market transactions, the identities of individuals who traded in the stock, the timing of the trades, the track record of the individuals, their portfolio, the history of their trades, the connections between the entities carrying out the transactions and so on, he said.

If the regulator feels that it needs to intervene immediately to prevent unfair trade practices from continuing, it passes an interim order. Else, the case is forwarded to the investigations department—like in the current instance.

“The investigations department of Sebi verifies the veracity of the preliminary information gathered by the surveillance department. If it does not find enough merit in the initial findings and establishes the fact that no entity or group of connected entities traded with a common objective to make unfair gains either on the basis of any information or otherwise, the matter is closed and the dealings in the stock in question are accepted as legal and fair,” said the former Sebi official.

Given the general difficulty in proving insider trading, there are hundreds of such instances where Sebi has closed cases without any order after investigating them.

However, if the investigation indeed verifies the initial findings, then Sebi issues a show cause notice to the suspected entities and offers them a hearing. It is only after the hearing that it passes a final order.

“Sebi has asked stock exchanges to provide all the relevant details of the trades and the whereabouts of the entities who traded in the stocks of the two firms during the period preceding the date of merger terms announcement,” said the Sebi official, the second person cited above.

Typically, stock exchanges collect data for every listed firm as they possess all the relevant know your customer (KYC) details such as permanent account number, demat account, history and pattern of trading for every investor.

Vedanta has summoned a shareholders’ meeting to consider the new offer on 8 September. Cairn shareholders will convene on 12 September.