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SEBI Fines RIL and Chairman Mukesh Ambani Over Allegedly Fraudulent Share Trades in 2007

Jan 5, 2021 5:02 AM 4 min read

2021 has gotten off to a rocky start for Reliance Industries.

On Friday, SEBI fined the conglomerate and its Chairman Mukesh Ambani a total of ₹40cr ($5.48m) for allegedly violating share trading rules in 2007.

Two other entities, Navi Mumbai SEZ Pvt Ltd and Mumbai SEZ Ltd, have also been fined ₹20cr ($2.74m) and ₹10cr ($1.37m) respectively.

According to SEBI’s order (link to the same), RIL executed a well-planned operation 13 years ago when it sold a 5% stake in Reliance Petroleum (RPL). This involved hiring 12 shell companies to take short positions on RPL future contracts in the derivatives market using inside information and in violation of SEBI guidelines. All to make a killing from the stake sale.

This might seem like a string of enigmatic words, so let’s break it down a little…

What RIL Allegedly Did

The story begins in 2007. Mukesh Ambani’s conglomerate decided to offload a 5% stake in RPL in the open market. (FYI: RPL merged with RIL in 2009.)

Now, when a stake sale happens, it leads to excess supply of shares, which automatically decreases the share price of the concerned company. RIL decided to profit from the stake sale by simultaneously trading RPL in both the cash and derivatives segment. Specifically, by shorting first in the futures market and then selling in the spot market.

Now, SEBI rules stipulated that any single entity could short only about 1 crore shares of RPL, and RIL wanted to hedge as many of the 22.5 crore shares they intended to sell.

So they outsourced the shorting futures work to 12 trading companies. What this means is, these 12 agents took short positions on RPL futures on RIL’s behalf while RIL traded in RPL shares in the cash segment.


The Ides of November

The month in focus is November 2007. On November 2nd, RPL shares closed at an all-time high of ₹269. Meanwhile, RIL’s 12 shell companies took short positions on RPL’s November contracts in the derivatives market.

By November 6th, the holding in RPL derivatives contracts reached the 95% position limit, alerting regulators.

On the same day, RIL began offloading RPL stock in the open market, selling 18.04 crore shares and pushing down the stock price to c. ₹192 by November 27th.

The bottom line is this: When someone shorts a futures contract, they expect the price of the underlying asset to fall. The 12 entities that shorted RPL futures in November 2007 were privy to inside information provided by RIL, which allowed them to profit from the stake sale. These proceeds were reportedly transferred to RIL’s accounts (minus the commission paid).

In the end of the day, RIL managed to offset the lower realisation in the stake sale in the cash segment by the profit generated in the derivatives market.

SEBI Fines RIL and Chairman Mukesh Amabni Over Allegedly Fraudulent Share Trades in 2007
Source: Moneycontrol

How much did RIL manage to make from the above arrangement in 2007? The trading entities reportedly clocked gains of around ₹513cr ($70m), which “subsequently was transferred to [RIL]”, as per a 2017 SEBI report (link to the same).


He Said, She Said

While RIL has not yet responded to SEBI’s Friday verdict, it had previously contended that its operations in November 2007 constituted hedging, something SEBI dismissed in its 2017 order.

At the time, the conglomerate said the trades examined by SEBI were “genuine and bona fide transactions” and that the regulator had “misconstrued the true nature of the transactions and imposed unjustifiable sanctions”.

SEBI’s order on January 1st 2021 stated that RIL’s activities harmed market operations and true price realisation. “In the instant case, the general investors were not aware that the entity behind the above F&O segment transactions was RIL. The execution of the...fraudulent trades affected the price of the RPL securities in both cash and F&O segments and harmed the interests of other investors.”


Yesterday and Today

After years of investigation, SEBI first issued a show cause notice to RIL in 2010. On March 24th 2017, the market regulator found the conglomerate guilty of fraudulent trading and banned it from equity derivatives trading for a year and directed it to pay c. ₹1,000cr ($137m) in penalties.

RIL’s plea against the order was dismissed by the Securities Appellate Tribunal (SAT) in November last year, following which RIL challenged the order in the Supreme Court, where the case currently stands.

As for where things stand today, RIL has been warned that a failure to pay the penalty within 45 days will result in the initiation of recovery proceedings through the attachment and sale of its properties.

The Supreme Court may yet save RIL’s face should it dismiss the SAT order. But until then, RIL’s response - and how its stock performs when markets open on Monday - will be interesting to see. The amount of penalty is definitely underwhelming and at max constitutes a speeding ticket.


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