SEBI Imposes Rs 40 Crore Fine On Reliance Industries, Mukesh Ambani For Manipulative Trades In RPL

The Securities Exchange Board of India on Friday imposed a fine of Rs 25 crore on Reliance Industries and Rs 15 crore on its chairman, Mukesh Ambani, for manipulating shares of Reliance Petroleum Ltd (RPL) in November 2007.

The issue relates to manipulation during the sale and purchase of Reliance Petroluem Limited shares in the cash and the futures segments in November 2007. This followed RIL's decision in March 2007 to sell 4.1 per cent stake in RPL, a listed subsidiary that was later merged with RIL in 2009.

The market regulator found that Mukesh Ambani as the Managing Director of RIL was responsible for the manipulative activities of RIL.

"I am of the view that Noticee-2(Ambani),being the Managing Director of the RIL,cannot absolve himself and plead ignorance about the entire scheme of manipulative transactions undertaken for the benefit of RIL in the shares of RPL in the Cash and F&O Segment.Therefore, I find that Noticee-2(Ambani) was liable for the actions of RIL resulting in violations of PFUTP Regulations, 2003 and SEBI Circular.Therefore, I find that Noticee-2 has violated the provisions of Regulations 3(a), (b), (c), (d) and Regulations 4(1), 4(2) (d), (e) of PFUTP Regulations, 2003 and SEBI Circular no. SMDRP/DC/CIR-10/01 dated November 02, 2001", observed the Adjudicating Officer BJ Dilip in a 95-page order.

"I note that a Managing director is responsible for managing the day-to-day affairs and business of the company and he has been vested with the said power under the Companies Act, 1956. This implies a high level of accountability and knowledge of the overall functioning of the company", the order said.

SEBI said that any manipulation in the volume or price of securities always erodes investor confidence in the market when investors find themselves at the receiving end of market manipulators.

It was found that 12 Agents appointed by RIL took short positions in the F&O Segment on behalf of RIL, while RIL undertook transactions in RPL shares in the cash segment. During the period of 1stNovember 2007 to 29th November 2007, various transactions were undertaken by RIL in the Cash Segment and by RIL through the Agents in the F&O Segment. From 15thNovember 2007 onwards, RIL's short position in the F&O Segment constantly exceeded the proposed sale of shares in the Cash Segment. On 29th November 2007, RIL sold a total of 2.25 crore shares in the Cash Segment during the last 10 minutes of trading resulting in fall in the prices of RPL shares, which also lowered the settlement price of RPL November Futures in the F&O Segment. RIL's entire outstanding position of 7.97 crores in the F&O Segment was cash settled at this depressed settlement price resulting in profits on the said short positions. The said profits were transferred by the agents to RIL as per a prior agreement.

The modus operandi of the manipulation was explained as follows :

"RIL has entered into a scheme of manipulative trades in respect of the sale of 5% of RIL stake in RPL. However, before undertaking sale transactionsin the Cash Segment, RIL fraudulently booked large short positions in the RPL November Futures through 12 Agents with whom it had entered into an agreement to circumvent position limits for a commission payment.As a result, RIL fraudulently cornered nearly 93%of open interest in RPL November Futures, when the said 12 Agents took short positions in F&O Segment on its behalf.The funding for the margin payments by the said Agents was provided by Noticee-3 and Noticee-4.A common person connected with RIL had placed orders in the Cash Segment on behalf of RIL and in the F&O segment on behalf of the Agents"

While noting that execution of manipulative trades affects the price discovery system itself, the adjudicating officer said, "I am of the view that such acts of manipulation have to be dealt sternly so as to dissuade manipulative activities in the capital markets."

"In the instant case, the general investors were not aware that the entity behind the above F&O segment transactions was RIL. The execution of the… fraudulent trades affected the price of the RPL securities in both cash and F&O segments and harmed the interests of other investors," SEBI said.

"I am of the view that any manipulation in the volume or price of securities always erodes investor confidence in the market when investors find themselves at the receiving end of market manipulators.In the instant case, the general investors were not aware that the entity behind the above F&O Segment transactions was RIL. The execution of the aforesaid fraudulent trades affected the price of the RPL securities in both Cash and F&OSegments and harmed the interests of other investors.Execution of manipulative trades affects the price discovery system itself. It also has an adverse impact on the fairness, integrity and transparency of the stock market.I am of the view that such acts of manipulation have to be dealt sternly so as to dissuade manipulative activities in the capital markets".

Also, the Navi Mumbai SEZ Pvt Ltd and Mumbai SEZ Ltd, which aided and abetted RIL by providing funds to one of the agents appointed by RIL, have been asked to pay a penalty of Rs 20 crore and Rs 10 crore respectively.

The fine amount has to be paid within 45 days of the order.

Click here to read/download the order