Mumbai: Stock market regulator Securities and Exchange Board of India (Sebi) on Monday issued a show-cause notice to Reliance Industries Ltd (RIL), India’s biggest company by market value, following a probe into alleged insider trading in Reliance Petroleum Ltd (RPL) shares in November 2007.
A show-cause notice is not an indictment. It only requires the company, RIL in this case, to explain its side of the story.
According to a person familiar with the development, who did not want to be identified, the notice has asked the conglomerate to explain the stock market transactions after a Sebi probe found them to be violating regulations on insider trading norms and other rules related to prevention of fraudulent and unfair practices.
RPL is a refining subsidiary of RIL that commissioned a 580,000 barrels a day refinery in Jamnagar, Gujarat, at the end of 2008 and will soon be merged with its parent company. Sebi investigating officials declined to entertain Mint queries until they received formal clearance to speak to media. RIL hadn’t responded to Mint’s queries till late Tuesday evening.
Television news channel CNBC-TV18 ran a flash on the notice being sent by Sebi late evening on Monday, citing anonymous market sources.
Regulatory overview: The Sebi headquarters in Mumbai. Abhijit Bhatlekar / Mint
News agency PTI ran a story to the same effect on Tuesday, quoting unnamed sources. The PTI story said “a company spokesperson did not comment on queries related to the notice”.
Sebi has been probing transactions by entities that participated in and led to some three months of speculative rally after which the RPL stock surged to an all-time intraday high of Rs295 on 1 November 2007.
This was accompanied by a huge build-up of “open interest”—outstanding position of traders in the futures and options market—in RPL shares.
On 6 November of the same year, the National Stock Exchange banned derivative trading in RPL as open interest in the stock crossed the threshold level of 95% of marketwide position. The ban was lifted in end-November, but by then RIL had announced that it had sold 180.4 million shares of RPL, representing 4.01% of the firm’s equity, for Rs4,023 crore and the outstanding positions had reduced considerably.
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In early 2008, Sebi started investigating allegations of insider trading related to the transactions—a process that resulted in the show-cause notice.
RPL shares have declined nearly 60% since their November 2007 high and closed at Rs116.05 on the Bombay Stock Exchange (BSE) on Tuesday, lower by 0.64%. BSE’s bellwether index Sensex closed flat at 12,131.8 points. RIL’s shares closed at Rs1,876.70 each on BSE, down 0.46%.
On the possible consequences for entities found flouting insider trading norms, Jayant Thakur, a Mumbai-based practising chartered accountant who specializes in securities laws, said: “Assuming the links (between entities and promoters) are established and they are found guilty, the regulator could levy a penalty of Rs25 crore or up to three times the profits earned from insider trading, whichever is higher. Sebi also has powers to prosecute the entities, bar them from trading, but these are only exercised in very serious cases.”
Incidentally, in a separate and independent investigation related to the same issue, the income-tax (I-T) department is looking at possible tax evasion by a dozen entities that Mukesh Ambani-owned RIL has acknowledged to be its “agents”. On 20 March, Mint had reported that the I-T department was assessing tax evasion by 12 companies that had made huge profits by trading in RPL shares.
Manoj Warrier of Neucom Consulting, the official external spokesman for RIL, had said at that time: “All entities referred to in your email have acted as agents of Reliance Industries Ltd. The entire sale proceeds net of commission was paid over by these entities to RIL. The resulting income accruing from the transactions has been duly accounted for in the books of RIL for the period ending 31 March 2008.”
The insider trading norms, however, are loosely defined, said Thakur. “What all constitute price-sensitive information has not been properly defined in the Sebi (prohibition of insider trading) regulations,” he said.
According to Thakur, the insider trading concept has been explained along with examples and in certain decisions of SAT (Securities Appellate Tribunal), these examples have been viewed as the definition of what qualifies as price-sensitive information.
According to Sebi’s findings, the entities that were investigated share the same registered address and phone numbers as RIL in Mumbai and Jamnagar; had opened their accounts with the brokers on the same day; share a common email address; and had received margin financing from two other companies promoted by Ambani—Navi Mumbai SEZ Pvt. Ltd and Mumbai SEZ Pvt. Ltd.
Vinamra Universal Traders Pvt. Ltd, Aarthik Commercials Pvt. Ltd, Dharti Investment and Holdings Ltd, LPG Infrastructure India Pvt. Ltd, Relpol Plastics Products Pvt. Ltd, Pipeline Infrastructure India Pvt. Ltd, Relogistics (India) Pvt. Ltd, Darshan Securities Pvt. Ltd, Fine Tech Commercials Pvt. Ltd and Gujarat Petcoke and Petroproducts Supply Pvt. Ltd are some “RIL agents” that are being investigated.Khushboo Narayan contributed to this story.