A powerful precedent

There’s a common perception that Indian regulators readily prosecute small offenders for infractions, while big fish are let off the hook despite blatantly flouting the law. But SEBI’s latest order against the market heavyweight Reliance Industries (RIL), ordering the company to disgorge ₹447 crore (plus interest) in “unlawful gains”, and barring it and 12 other entities from equity derivatives for a year, belies this perception. While this order comes close on the heels of the new SEBI chairman assuming office, it is actually the culmination of a decade-old investigation by the regulator into trades in the shares of Reliance Petroleum (RPL).

The charges levelled by SEBI in its order are threefold. One, it alleges that RIL, having decided to sell 22.5 crore shares of its subsidiary in November 2007 in the cash market, appointed 12 different “front” entities to build up short positions in the RPL futures in the same month. They then passed on their windfall gains to RIL. Two, it charges that these entities compromised market integrity by cornering 40-60 per cent of the open positions in this futures contract, breaching the clientwise position limit of 5 per cent set by the exchanges to prevent manipulation. Three, it alleges that RIL sold a sizeable chunk of RPL stock at the fag end of the futures expiry so as to artificially suppress the settlement price and pocket more profits from short sales. Based on these findings, it has ordered RIL to immediately pay to it the gains from short sales, with penal interest. In its defence, RIL did not deny these transactions, but argued that the derivative positions were taken as a genuine hedge on its RPL shareholdings. But this claim appears a little weak. If RIL’s intention was to hedge its RPL holdings, there was no need for it to route the hedges through 12 different entities. It could have done so transparently on its own, after disclosing the hedging policy to shareholders. In that case, though, it would have been able to hedge only a fraction of its holdings, bound by exchange position limits. Besides, though it owned shares in RPL right from 2006, RIL sought to dabble in the futures only in November 2007 for a limited period. It is also quite abnormal for holding companies to ‘hedge’ their long-term shareholding in their subsidiaries.

With RIL looking to appeal this order, it will be up to the Securities Appellate Tribunal and, failing that, the court, to decide who is right. But one hopes the appeal process is expedited and the verdict delivered swiftly. If SEBI’s charges are upheld, the real victims would be market participants who traded RPL futures way back in November 2007. Tracing them and reimbursing their losses will be an uphill task for SEBI. As for the disgorgement, RIL’s public shareholders of today will pay the price for windfall profits enjoyed by their predecessors in 2007. In the markets, justice delayed is truly justice denied.