Reputation at Risk

The insider trading case against Reliance Industries, or RIL, Indias second-largest company by market value, is back in focus. The capital markets regulator, the Securities and Exchange Board of India, or Sebi, recently banned the crude oil refiner and 12 other entities from trading in equity futures and options (F&O) for one year. It also imposed a Rs1,300 crore fine - which included the fine of Rs447.27 crore with 12 per cent annual interest since 2007. The company has been told to make the payment within 45 days.

The case relates to a 10-year-old transaction in Reliance Petroleum or RPL. Sebi alleged that RIL acted in a fraudulent manner while dealing in RPL derivatives. It stated that RIL manipulated the derivatives segment by engaging in a pre-planned fraudulent practice, allegedly short selling a 4.1 per cent stake in RPL, valued at Rs4,023 crore, in the futures market and then in the spot market on the last day of the F&O expiry, thus making an unlawful gain of Rs513 crore.

G. Mahalingam, whole-time member, Sebi, said in his order that RIL made unlawful gains, which could not have been possible without the fraudulent and manipulative strategy adopted by it. "This is a case of a unique strategy? manipulating the settlement price in one market to gain across the volumes accumulated in the other markets," Sebi said.

The ban and fine has impacted RIL's reputation as international investors and lenders take serious note of insider trading issues. The stock fell 4 per cent in the two trading days after the order. RIL can go up to the Supreme Court to defend its position, but it will be a long procedure, and it will have to live with it during the phase of large-scale fund raising for expanding its 4G business.

Payal Parikh, Partner at ANB Legal, says it will be interesting to see how the Securities Appellate Tribunal, or SAT, acts on the case. "For RIL, more than monetary, it's a reputational risk. Being a global company, it would not want to be seen as involved in an unfair trade practice. RIL will have to prove (as per the stand it seems to have taken) that the entire process was purely a hedging mechanism and there was nothing deliberately done to cheat and make gains," she says.

Some critics asked why Sebi didn't ban the company from accessing the capital market if it's a grave mistake. On this, Parikh says, "Sebi regulations make it clear that it is the discretion of the market regulator if it wants to ban an entity or impose a fine or do both. As it's a decade-old case, the regulator must have found it just to ban the entities from accessing the derivatives markets and impose a penalty for the alleged offence."

RIL says it will challenge "the untenable findings in the order" at the SAT. "There is no market manipulation by the company on account of the trades both in futures and cash segments. There are no profits or losses in a hedging transaction, leave alone undue profits. Open positions in excess of limits prescribed in circulars are neither fraudulent nor manipulative as per the bye-laws and regulations of Stock Exchange and also as per the Securities Contracts (Regulation) Act," RIL executives argue.

@nevinjl, maheshnayak