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Business News/ Companies / News/  Sebi to pass final order on RIL insider trading
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Sebi to pass final order on RIL insider trading

Regulator takes case out of scope of consent process; firm could lose access to capital market or have to disgorge gains

The Sebi headquarters in Mumbai. The regulator in 2008 had launched investigations into the matter and initiated quasijudicial proceedings in 2010. Photo: Abhijit Bhatlekar/Mint (Abhijit Bhatlekar/Mint)Premium
The Sebi headquarters in Mumbai. The regulator in 2008 had launched investigations into the matter and initiated quasijudicial proceedings in 2010. Photo: Abhijit Bhatlekar/Mint

(Abhijit Bhatlekar/Mint)

Mumbai: The case of alleged insider trading against Reliance Industries Ltd (RIL), India’s most valuable company, has taken a new turn.

After rejecting the oil-to-yarn and retail conglomerate’s consent plea three times, the Securities and Exchange Board of India (Sebi) has taken the case out of the scope of the consent process.

The regulator has taken recourse to certain Sebi Act provisions that empower it to ban an entity from accessing the capital market and raising public money, or force it to disgorge any unlawful gains made from insider trading, said the two persons, who have direct knowledge of the development. Neither of the two persons wanted to be named because of the sensitive nature of the matter.

Under section 11B of the Act, Sebi can also force an entity to delist from the stock exchanges if it deems the violations, once proven, to be of a sufficiently serious nature.

To be sure, under 11B proceedings, Sebi can also absolve the entity concerned of all wrongdoing.

“The case has been moved for 11B proceedings. A whole-time member of Sebi will be appointed to pass a final order after conducting a hearing," said one of the two persons cited above.

RIL refused to comment. An email sent to Sebi on Monday remained unanswered.

A consent process is one in which the individual or entity being investigated pays a fee and the regulator drops the case and all charges of wrongdoing. This refers to a settlement of a case dealing with alleged infractions in securities laws without the individual or company involved admitting or denying guilt.

The matter, which has been pending with Sebi for four years now, may be approaching a conclusion after Sebi’s decision to handle it under 11B.

RIL and a few other entities allegedly made unlawful gains, pegged by various media reports at around 513 crore, through insider trading in the shares of the erstwhile Reliance Petroleum Ltd (RPL) in 2007 during the merger of RPL with RIL.

RIL and a few other entities were allegedly involved in the short sale of shares of RPL ahead of that amalgamation. A short sale involves selling borrowed shares with plans to buy them back later at a lower price.

The regulator had, in 2008, launched investigations into the matter and initiated quasijudicial proceedings in 2010.

In 2007, RIL sold a 4.1% stake in RPL, but to prevent a slump in the RPL stock, the shares were sold first in the futures market and later in the spot market, covering the share sales in the futures market.

Sebi’s claim is that because the company was aware of the sale of equity shares and sold futures ahead of that, its actions amount to insider trading. Through the dealings, RIL received revenue of 4,023 crore and its profit from the transaction in the futures segment was 513 crore.

RIL moves SAT against Sebi

Meanwhile, RIL has moved the Securities Appellate Tribunal (SAT) after Sebi refused to entertain its plea for consent for the third time.

Somsekhar Sundaresan, partner at J Sagar Associates and the lawyer representing RIL in SAT, said, “The company has moved SAT against Sebi’s refusal to settle the case through consent. The case has been adjourned to 11 January." He refused to divulge details of RIL’s petition.

The firm has also challenged the new consent order norms of Sebi that do not allow settlement of insider trading cases through consent.

According to the Sebi circular released in May, certain defaults, including insider trading, front-running, failure to make an open offer, redress investor grievances, and respond to the summons issued by the regulator, are excluded from the consent process.

However, under the new norms, the high-powered advisory committee or a panel of whole-time members may still settle such defaults through consent if they deem it necessary.

Also, when a consent application is rejected due to a delay in excess of two months in its filing after show-cause or supplementary notices, it depends on Sebi whether to keep the matter in the consent stage or not.

According to a person familiar with the development, RIL is planning to move the Bombay high court for interim relief because it is unlikely that SAT will hear the matter on 11 January as the two remaining SAT members are on their way out.

SAT is a three-member quasi-judicial body consisting of a presiding officer and two members. The tribunal that hears appeals against Sebi has been working without a permanent presiding officer since the retirement of retired judge N.K. Sodhi in November 2011.

Fallout of 11B proceedings

Moving a case from consent stage to 11B proceedings is not typical. The regulator does have the power to move a case back to consent proceedings at any stage.

Typically, when Sebi finds merit in allegations of violations by an entity, it conducts preliminary investigations and sends a show-cause notice to the latter for an explanation. After hearing out the entity, Sebi can either absolve the entity and close the case if it’s satisfied with the entity’s response, or pursue its investigations.

At this stage, the party is allowed to settle the case through the consent process. If Sebi holds the said violations are serious in nature, a whole-time member decides whether the case can still be settled through consent or the entity needs to be penalized.

Section 11B of the Act is midway between a consent mechanism and direct punishment for insider trading, according to experts. Sebi resorts to 11B when it wants to take a remedial or a preventive measure against an entity in the interest of investors and does not want to impose a direct penalty, they said.

Under section 15G of the same Act, Sebi is also equipped to directly impose a penalty by asking those it deems guilty to pay three times the unlawful gains made through insider trading and disgorge profits made through insider trading. However, Sebi’s decision varies from case to case.

“Under section 11B, Sebi can decide to debar an entity from participating in the capital market or make it devolve any ill-gotten monetary gain, though there is a grey area over Sebi’s power to make an entity forfeit funds. If the entity concerned is not in violation of listing norms, it isn’t common for Sebi to make it delist under 11B," said Jayant M. Thakur, a Mumbai-based chartered accountant and securities law expert who runs Jayant M Thakur and Co.

According to Thakur, 11B is an alternative to 15G, and Sebi’s choice is discretionary, depending upon the nature of the case. If the regulator feels that it isn’t enough to simply levy a monetary penalty (under 15G) and further action needs to be taken, it may resort to using 11B to bar the market participant from accessing the market. Often, both the sections are used in conjunction with each other, Thakur said.

RIL and the market regulator have been trying to settle the case through the so-called consent process for quite some time now. Recently, Sebi disclosed that it had rejected consent applications of RIL and 12 other entities made after 25 May 2012 in the matter.

Sebi-CIC case to be dealt separately

The second person familiar with the development of Sebi’s 11B proceedings against RIL said the ongoing case between Sebi and the Central Information Commission (CIC) in the Bombay high court will be dealt with separately and won’t affect the regulator’s ongoing proceedings in the matter.

In November, the market regulator had appealed to the Bombay high court against a 6 November order of chief information commissioner Satyananda Mishra asking it to disclose all details related to the insider trading case involving RPL in 2007.

Arun Kumar Agrawal, a Bangalore-based lawyer, had sought details of the case from the regulator through a Right to Information (RTI) application. However, Sebi had refused to disclose any information, stating that quasi-judicial proceedings were in progress and that the information sought was exempt under certain sections of the RTI Act. The regulator’s appointed appellate authority endorsed Sebi’s information officer’s decision.

Subsequently, the case moved to CIC, India’s apex body monitoring the enforcement of the RTI Act.

The Bombay high court has now given RIL time till 14 January to explain why information regarding the case involving the company should not be made public under the RTI law. The court will hear the matter again on 23 January.

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ABOUT THE AUTHOR
Anirudh Laskar
Anirudh reports on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the corporate and financial services industry. Over the past 17 years, he has covered many beats including banking, NBFCs, aviation, automobile, insurance, markets, SEBI, IRDAI, mutual funds, investment banking, private equity, deals, and conglomerates.
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Published: 08 Jan 2013, 10:58 PM IST
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