Why SEBI Banned Reliance Industries Ltd?

The SEBI order, published on its website on March 24, 2017, says Reliance Industries and the 12 other entities violated provisions of Section 12A of the SEBI Act, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the securities market) Regulations, 2003.

SEBI has prohibited the 13 entities, including Reliance Industries, “from dealing in equity derivatives in the F&O segment of the stock exchange, directly or indirectly for a period of one year”, from the date of the order. Also SEBI has imposed a Rs 1,000-crore penalty on Reliance Industries Ltd., the largest in its over 20-year history.

The Last Minute Traders

The regulator has also directed Reliance Industries to, to disgorge an amount of Rs 447.27 crore...along with interest calculated at the rate of 12 percent per annum from November 29, 2007 on wards, till the date of payment”. which could be approximately Rs 500 crore.

According to SEBI, this is how Reliance Industries and its 12 entities made unlawful gains: Bloombergquint listed out the activities of RIL and team as below

• In March 2006, the Reliance Industries board decided to raise resources by selling 5 percent in Reliance Petroleum Ltd.
• 12 entities of RIL to take substantial short positions in November 2007 futures of Reliance Petroleum.
• The 12 entities together breached the client position limit allowed under the regulations.
• Total open interest positions in Reliance Petroleum reached 95 percent of overall market-wide position limits allowed for Reliance Petroleum in the derivatives market.
• The 12 entities together had 9.92 crore shares constituting 61.15 percent of the open interest in November futures.
• Reliance sold 18.04 crore Reliance Petroleum shares in the cash market between November 6 and 23 for Rs 4,023 crore.
• Reliance sold 1.95 crore Reliance Petroleum shares on the NSE on November 29, the last day of expiry, in the last 10 minutes of trade in the cash market.
• The sale of Reliance Petroleum shares in the last 10 minutes drove the stock to as low as Rs 209.80 per share.
• Reliance Petroleum November futures contracts settled at Rs 215.60 and the 12 entities gained on their short positions.
• The 12 entities together held short position of 7.97 crore share in Reliance Petroleum futures on the day of expiry.
• SEBI alleges Reliance and the 12 entities gained Rs 60.28 per share amounting to Rs 447.27 crore.

Reliance, which wanted to dilute a nearly 5 percent stake in Reliance Petroleum , built short positions through the 12 entities in the futures market, to hedge any losses arising from a fall in the Reliance Petroleum stock when it sells shares in the cash market.

Under SEBI’s regulation, any investor could have taken a maximum position of 1.09 crore shares in Reliance Petroleum futures. But the 12 entities related to Reliance together had nearly 7 times higher exposure to Reliance Petroleum futures.

After Reliance sold over 18 crore shares in the cash, the 12 entities did not reduce their corresponding exposure in the futures market. SEBI alleges that this helped Reliance gain unlawfully on November 29, when it attempted to sell over 2 crore remainder Reliance Petroleum shares in the last 10 minutes of trade on the day of derivatives expiry.

So What Happened on 24th March 2017??

An interesting data came from twitter. AP has come up with an interesting trade story that happened during the last 10 minutes of trading window. Huge buying happened on RIL 1300 put, which looks strange isn't??. Seems SEBI has to open up another one.😉

Informed buying again??

Here is another one from vish, with a #NationWantsToKnow tagline.
 

#NationWantsToKnow

And readers, don't get confused.  We can still trade RIL derivatives, but "the 13 culprits" cannot trade for an year. The press release of RIL ban is available here in SEBI website

On a lighter note: "The 13 Culprits" is a book return by French author Georges Simenon