Sebi passes Rs 447-cr disgorgement order against Reliance Industries

The Securities and Exchange Board of India (Sebi) on Friday directed Mukesh Ambani’s Reliance Industries Ltd (RIL) to disgorge Rs 447.27 crore, made “unlawfully” by dealing in shares of its erstwhile subsidiary, Reliance Petroleum (RPL).

The markets regulator also barred RIL from the futures and options (F&O) segment for a year and asked it to settle all existing open positions. It will also have to pay 12 per cent interest on the disgorgement amount since November 29, 2007.

“Taking into consideration the magnitude of the fraud across the markets, the quantum of unlawful gains made by the Noticee No. 1 (RIL) and the role of the agents in facilitating the fraudulent design, I am inclined to pass certain directions against the noticees in order to protect the interest of the investors and reinstill their faith in the regulatory system,” said G Mahalingam, wholetime member, Sebi, in a 54-page order. The company has been charged under Sebi’s Prohibition of Fraudulent and Unfair Trade Practices (FUTP) Regulations.

Reliance responded by saying Sebi appeared to have misconstrued the true nature of the transactions and imposed unjustifiable sanctions. “We are in the process of consulting our legal advisors. We propose to prefer an appeal and challenge the order in the Securities Appellate Tribunal,” it said.

It was confident, it said, of justifying the veracity of the transactions and vindicating its stand. “We have full confidence in the judicial process and propose to vigorously exercise all options available to us, to challenge the untenable findings in the order,” went the statement.

The order against RIL and 12 other entities is the first big order by Sebi under the chairmanship of Ajay Tyagi.

It is not clear whether the interest would be charged at a simple or compound rate of 12 per cent. If it is simple interest, the total disgorgement would be Rs 948 crore and if it is compounded, it would be around Rs 1,250 crore.

The case dates back to 2007, when RIL and other related entities took short positions in the F&O segment in the RPL stock, at a time when a large block of shares in the company was to be sold in the cash segment. The share sale caused the stock price of RPL to dip in the cash and derivatives segment, benefiting it by Rs 513 crore.

“Noticee No.1 (RIL) has made unlawful gains of Rs 513 crore, which could not have been made but for the fraudulent and manipulative strategy/pattern adopted by them. I am inclined to direct disgorgement of the unlawful gains made,” the Sebi order said.

In its defence, RIL said the trades were done for hedging purpose. The company “adopted a prudent strategy to hedge the loss that it was expecting due to the impending sales in the cash segment by taking appropriate positions in the F&O segment,” the company had told Sebi.

The regulator, however, didn’t buy into RIL’s defence. “Noticee No 1, armed with the knowledge of its impending large sale in the cash market, undertook the short positions in the futures of RPL to the extent of 99.2 million shares, in an attempt to earn undue extra profit out of the same. Despite the nature of transactions, such a strategy cannot be considered to be a hedging strategy,” Mahalingam said in the order.

An analysis by Sebi showed entities connected to RIL accounted for 93.63 per cent of Open Interest (unsquared positions) in the November 2007 futures contract of RIL and 40.13 per cent of these across all derivatives contracts in RPL.

“There was no rollover of net short positions in the November RPL derivatives by any of the front entities of Noticee No 1 and their short positions were allowed to expire at the settlement price of November 2007 derivatives contracts, which resulted in a huge speculative profit,” the Sebi order says.

Sebi's analysis also showed the front entities that dealt in RPL stock had never traded in the F&O segment between April and November 2007.

RIL had moved the Securities Appellate Tribunal (SAT) to settle this case through the so-called consent route. The plea was dismissed by the tribunal in July 2014.