Presiding member, justice Tarun Agarwala ruled that the Sebi order should be set aside as it did not make a case for fraud
While RIL argued that it was a mere violation of position limits, SAT held this argument as disastrous for derivatives market
Securities Appellate Tribunal (SAT) on Thursday dismissed Billionaire Mukesh Ambani's Reliance Industries Ltd (RIL) plea against a 2017 Securities and Exchange Board of India (Sebi) which had found the company and 12 other entities guilty of fraud and manipulation.
SAT in its order by 2:1 majority did not find fault in the Sebi order and directed RIL to disgorge ₹447.27 crore at 12% interest within 60 days. Taking the total disgorgement amount to over ₹1,300 crore.
Sebi in its order on 24 March 2017 had also banned RIL and 12 of its promoter group entities from equity derivatives trading for a year.
In response to the SAT order, RIL in a statement to the stock exchanges, said that it will examine the order passed by the SAT and under proper legal advice will prefer an appeal to the Supreme Court of India and is confident of vindicating its position.
Sebi in its order had held that RIL along with 12 agents had indulged in manipulative practices while trading in the futures and options (F&O) segment in the securities of Reliance Petroleum Ltd or RPL in November 2007. RPL was an erstwhile listed subsidiary of RIL, merged with it in 2009.
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. RIL and the other entities were allegedly involved in the short sale of RPL shares ahead of the amalgamation. A short sale involves selling borrowed shares with plans to buy them back later at a lower price.
"All trades carried out by the company were genuine and bonafide. Mo irregularity can be attached to these transactions," said RIL in the statement on Thursday, adding that it has not violated any law or regulation while selling shares of RPL in November 2007.
SAT gave a divided verdict. Presiding member, justice Tarun Agarwala ruled that the Sebi order should be set aside as it did not make a case for fraud.
"The element of fraud has to be established which in the instant case the respondent has miserably failed," Agrawala said.
On the other hand, the remaining two members held that RIL hoisted a scheme to manipulate the market.
"It is undoubtedly a pre-planned strategy of manipulation, with all actions done by a single entity, RIL, and hoisted upon an unsuspecting market, inducing other market participants to deal with a vitiated market," said CKG Nair and Justice MT Joshi, member, SAT.
As per the order RIL had employed 12 other agents and ended up cornering 93.6% of the open interest on the settlement day of November 2007 futures contract. If all the open interest positions are taken into consideration RIL was in violation of the limits prescribed by Sebi.
While RIL argued that it was a mere violation of position limits, SAT held this argument as disastrous for derivatives market.
"The 12 entities in picture were distinct entities and hence for the exchange surveillance mechanism there was no way to capture that these entities were indeed agents of any particular entity," said SAT majority ruling.
SAT also took into consideration the trading action in the last 10 minutes of trading on 29 November 2007.
"If they were responsible market players, they would not have concentrated 100% of their trading activities in both the cash and F&O segments in one month and instead spread it across multiple months," said SAT in the ruling.
The 2017 order passed by Sebi had said that RIL had made “unlawful gains" of Rs513 crore, “which could not have been made but for the fraudulent and manipulative strategy/pattern adopted by them".
Sebi arrived at the unlawful gain of Rs513 crore by considering the net short position that RIL and 12 other entities maintained while trading in the RPL stock in November 2007.
In 2008, Sebi had launched investigations into the matter and initiated quasi-judicial proceedings in 2010. That year, RIL had applied to settle the case through the consent mechanism. Sebi however, rejected the consent application in 2012.
RIL then filed an appeal before SAT challenging the Sebi order. SAT in June 2014 said the dispute was rejected as it was not “consentable and maintainable".
Sebi completed investigation in the matter in 2015 and subsequently issued a show cause notice to RIL.
In Thursday's trade RIL's scrip closed at ₹1955.10, up 2.18% on the BSE.
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