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After 10 years of investigations and a few back-and-forth arguments, market regulator SEBI, under its new chief Ajay Tyagi, has found Reliance Industries Ltd (RIL) guilty of unfair trade practices and “perpetrating fraud in the securities market”, resulting in “illegal gains” for the company.
The case dates back to March 2007, when the Mukesh Ambani-led RIL decided to sell a 5 per cent stake in its listed subsidiary Reliance Petroleum Ltd (RPL).
Instead of selling shares directly in the cash market and risking a fall in the price, RIL chose to bet against its subsidiary’s shares in the derivatives market through 12 front entities. These front entities executed trades in the cash market below the last traded price of the stock, hence triggering a fall in the share price of RPL.
The fall in prices allowed them to profit from their own short positions in the derivatives segment to the tune of ₹447.27 crore. RIL made illegal gains of ₹60.28 a share on 7.42 crore shares, SEBI found. RPL merged with RIL in 2009.
RIL’s contention that the derivatives trades were genuine hedging was not accepted by the regulator.
G Mahalingam, the Whole Time Member at SEBI who passed the order, said the explanation (of RIL) appeared to be created post-facto.
Earlier, SEBI had also refused to entertain a settlement by RIL through the consent route (like an out of court settlement) and last year the Securities Appellate Tribunal allowed SEBI to pass a final order, which was done on Friday. The SEBI order, published on its website, says RIL and 12 other entities violated the law.
SEBI has ordered RIL to give up the ‘illegal gain’ of ₹447.27 crore and pay an additional penal interest of 12 per cent per annum from November 29, 2007, when the trades were executed. This brings the total penalty to ₹900-₹1,300 crore.
RIL and the 12 front entities are also banned from accessing the equity derivatives market for a year.
In a media statement, RIL said: “The trades in RPL were carried out keeping the best interest of the company and its shareholders. SEBI appears to have misconstrued the true nature of the transactions and imposed unjustifiable sanctions.” The company will appeal the order at SAT.
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