Happy new year, folks!
Even as we ring into 2021 with excitement, hoping that the deadly pandemic finally bids a goodbye, business tycoon Mukesh Ambani and his empire Reliance Industries Limited had a rather shocking start to the year on learning about the hefty-penalty that arose from a 13-yr old case. Let’s find out more.
The article covers:
The gist of the case
On 1st Jan 2021, SEBI declared in its order that RIL and its agents were involved in alleged manipulative trading, which garnered them undue profits. SEBI holds Mukesh Ambani liable for this on the grounds of him being the Chairman and Managing Director of RIL.
Timeline of the case
- March 2007: Ambani-led RIL looked to sell a 4.1% stake in RPL
- Nov 2007: RIL appoints 12 unlisted agents to trade in Futures of RPL on its behalf. RIL itself trades the RPL stock in the cash segment. RPL’s derivatives holdings touched 95% of the permissible limit, attracting SEBI’s probe
- Dec 2010: SEBI alleges RIL and the 12 agents of fraudulent trades by issuing show-cause notices
- Mar 2017: SEBI penalises RIL and associated parties Rs 447 cr. The watchdog also bans RIL from trading in the F&O segment of Indian capital markets. RIL challenges SEBI’s order in Securities Appellate Tribunal (SAT)
- Nov 2020: The SAT dismissed RIL’s appeal against the order
- Jan 2021: RIL, Mukesh Ambani, and two other entities slapped with a hefty penalty. The penalty is in addition to the previous order to disgorge Rs 447 cr
The 13-yr old case in brief
Back in 2007, the RIL’s Board of Directors had passed a resolution that approved the operating plan for 2007-08 and resource requirement for the next 2 yrs, which was ~Rs 87,000 cr. In Nov of the same year, RIL decided to offload 4.1% of its stake in Reliance Petroleum Limited, it’s subsidiary. To undertake transactions thereof, RIL appointed 12 agents between in the 2 months that followed.
Reportedly, RIL and the 12 agents bought stocks of RPL and put their bets against the securities. That way, the trade would be favourable if the price of RPL declined and not increased. Now, SEBI alleges that RIL and the 12 agents had entered a prior agreement to take short positions in RPL and transfer the gains thereon to RIL. A short position means when a trader sells securities with the intention of repurchasing it at a lower price.
Accordingly, the 12 agents took short positions in RPL on behalf of RIL in the F&O Segment and Reliance itself conducted the transactions in the cash segment. By Nov 2007, RIL’s short positions in the derivative segment had exceeded 95%, the permissible limit. Put together, RIL’s outstanding position of 7.97 cr in the F&O Segment was settled for cash at a reduced settlement price, which resulted in undue profits. What’s more, these gains were then transferred to RIL by the agents.
These series of manipulative trades in stocks of Reliance Petroleum Limited in the Cash and the F&O markets triggered SEBI’s probe into the matter. After years of investigation, in 2017, RIL was directed to disgorge Rs 447.27 cr along with interest at 12% p.a. from 29th Nov 2007 to the date of payment. In addition, SEBI had also imposed a 1-yr ban on RIL from trading in India’s F&O segment, either directly or indirectly.
Securities and Exchange Board of India (SEBI) observed that the violation of trade was a well-planned operation:
- To earn undue profits from the sale of RPL stocks in cash and futures markets
- To bring down the settlement price of RPL by dumping a large number of stocks in the cash market during the last 10 min of trading on the settlement day
RIL appealed against the order but SAT dismissed the plea in Nov 2020. But grey days seemed to continue for RIL. In Jan 2021, SEBI imposed a hefty penalty on RIL, Mukesh Ambani, Mumbai SEZ Limited, and Navi Mumbai SEZ Private Limited. The latter two entities had allegedly aided RIL by offering funds to an agent appointed by the company. The agent in question, in turn, offered funds to the other 11 fellow agents to fund the margin required to take short positions in RPL November Futures. As per the latest SEBI order, the parties are fined as follows:
- RIL: Rs 25 cr
- Mukesh Ambani: Rs 15 cr
- Mumbai SEZ Limited: Rs 10 cr
- Navi Mumbai SEZ Private Limited: Rs 20 cr
This penalty is in addition to the earlier disgorgement order.
How do such violations affect shareholders?
As per SEBI, manipulation in the volume or price of securities erodes investor confidence. In this case, investors were unaware that RIL had conducted fraudulent transactions in the F&O segment, the execution of which impacted both the price of RPL and their interest. In addition, SEBI also held that manipulative trades impact the price discovery system as well.
What is RIL’s stance?
Back in 2017, RIL had appealed against the order mentioning that the claims were “unjustifiable sanctions” on genuine transactions carried out in the shareholders’ interest. However, since the shareholders were unaware that RIL itself had conducted the transactions, it resulted in manipulative trading, which is unfair and against shareholders interest. So far, after the latest hearing, RIL hasn’t released any statement either admitting violations or defending itself.