SEBI has recently passed an order directing Reliance Industries Limited (RIL) to disgorge unlawful gains amounting to Rs. 4,472 million, along with interest calculated at the rate of 12% per annum from November 2007, for violations of the SEBI Act and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations).

Brief facts of the case are as follows. RIL, which held about 75% of the total equity share capital of Reliance Petroleum Limited (RPL), decided to liquidate a portion of its shareholding amounting to 5% of the total equity share capital. To avoid possible losses resulting from the proposed liquidation, RIL entered into agreements with 12 front entities (Agents) and caused them to take large short positions in November 2007 futures of RPL in the F&O Segment. While the Agents earned a commission for the transactions, any profits or losses resulting from these positions were to be transferred to the account of RIL.

These Agents, as on November 29, 2007 (the day of expiry of the November 2007 futures), held a net short position of 79.7 million shares of RPL in the November 2007 futures, accounting for 93.63% of the open interest in the said contract. Stock exchanges stipulate client wise position limits in equity derivatives markets with the prime objective of avoiding / limiting concentration of positions in a few hands and ensuring a wide dispersal of positions. While each of the Agents were within the maximum permissible client wise position limit of 9 million shares, SEBI noted that the collective net position of the Agents, while acting on behalf of one common ultimate beneficiary, i.e., RIL, exceeded the position limits. SEBI observed that the Agents were used as a shield to corner the position limits and defeat the position restrictions.

Over in the cash segment, RIL proceeded to liquidate a portion of their shareholding in RPL amounting to 4% of the total equity share capital between November 06 and 23, 2007. During this period, the scrip price of RPL fell from an opening price of Rs. 271.7 on November 06, 2007, to an intra-day low of Rs. 188.15 on November 29, 2007. RIL, having chosen not to trade since November 23, 2007, re-entered the market when the scrip price of RPL had begun to surge upwards and had reached Rs. 224.7 with only 10 minutes to spare on November 29, 2007. RIL placed large sell orders at prices lower than the last traded price and successfully sold 19.5 million shares of RPL on NSE (56% of the last 10 minutes’ total traded volume) and 2.9 million shares on the BSE. SEBI observed that the price surge not only seized but reversed, with the scrip price reaching a closing price of Rs. 215.05.

Based on the above, SEBI concluded that the transactions during the last 10 minutes of trading on November 29, 2007, were undertaken to fraudulently depress the closing price in the cash segment which would immediately convert into returns in the futures segment where positions which were cornered by the Agents were set to close out/ allowed to expire on the same day. SEBI observed that the unique strategy employed in this case is not of per se manipulating the price or volume in a single market, but manipulating the convergence price of the spot with the futures markets. Shooting down contentions that RIL was undertaking mere hedging, apart from ordering RIL to disgorge the unlawful gains as discussed above, SEBI also prohibited RIL and the Agents from dealing in equity derivatives in the F&O segment for a period of one year.