The Securities and Exchange Board of India (SEBI) on Friday banned Reliance Industries and 12 others from equity derivatives trading for one year and directed the Mukesh Ambani-led firm to disgorge nearly Rs 1,000 crore for "unlawful gains" made through alleged fraudulent trading in a nearly 10-year-old case.
Reliance Industries Limited (RIL) said it will challenge the order before the Securities Appellate Tribunal and termed Sebi directions as "unjustifiable sanctions".
After finding that RIL made unlawful gains, Sebi has asked the company to disgorge Rs 447 crore, along with an annual interest of 12% since November 29, 2007, which itself would be more than Rs 500 crore, taking the total disgorgement amount to nearly Rs 1,000 crore.
The case relates to alleged fraudulent trading in the futures and options (F&O) space in the securities of RIL's erstwhile listed subsidiary Reliance Petroleum Limited (RPL).
In a 54-page order passed by Whole-Time Member G Mahalingam, RIL and 12 other entities have been prohibited from dealing in the "equity derivatives in the F&O segment of stock exchanges, directly or indirectly".
The ban will be in place for one year from Friday. The 12 other entities are Gujarat Petcoke and Petro Product supply, Aarthik Commercials, LPG Infrastructure India, Relpol Plastic Products, Fine Tech Commercials, Pipeline Infrastructure India, Motech software, Darshan Securities, Relogistics (India), Relogistics (Rajasthan), Vinamara Universal Traders and Dharti Investment and Holdings.
Reliance Industries has been directed to disgorge the amount, along with interest within 45 days.
Mahalingam said the directions are being passed after taking into consideration the magnitude of the fraud across the markets. "I am inclined to pass certain directions against the noticees in order to protect the interest of the investors and reinstil their faith in the regulatory system," the order said. "The noticees may, however, square off or close out their existing open positions."
In the statement, Reliance Industries said it is in the process of consulting its legal advisors. "We propose to prefer an appeal and challenge the order in the Securities Appellate Tribunal. We remain confident of fully justifying the veracity of the transactions and vindicating our stand," the company said.
The Reliance Industries group had earlier sought settling the case, but Sebi had refused. The proceedings in the long-pending case were expedited in the past few months. RPL has been merged with the listed parent firm.
As per the Sebi order, RIL by employing 12 agents to take separate position limits of open interest on its behalf by executing separate agreements with each one of them and cornering 93.63% of the November futures of RPL, "acted in a fraudulent manner".
Furthermore, Sebi said RIL "manipulated" the F&O segment through 12 of its agents and allowed them to hold the contracts till the last day of expiry.
Thereafter by closing out the derivative contracts on November 29, 2007, RIL "has engaged in a pre-planned fraudulent practice and the same cannot be held to be a mere breach of position limits by the clients attracting penalty under the exchange circulars", the order noted.
On the basis of an analysis of the trading strategy and pattern adopted by RIL in the cash market during November 2007 and specifically on November 29, it was found that there has been a manipulation of the last half an hour settlement price, Sebi said. November 29 was the expiry day of the November futures of RPL.
Mahalingam also said RIL made unlawful gains to the extent of Rs 513 crore.
In March 2007, RIL's board of directors decided to raise resources by offloading its 5% stake in Reliance Petroleum Limited (RPL).
Between November 1-6, 2007, the noticees took substantial positions in the November futures contract of RPL. As a result, the holding in derivatives contracts of RPL reached 95% of the market-wide position limit. Following an investigation into the matter, Sebi later issued show-cause notices.