Sebi bans Cayman Islands-based hedge fund in insider-trading case

Credit Suisse's role in the L&T Finance offer for sale also under scanner

Unearthing a major case of insider trading in the shares of L&T Finance Holdings (LTFH), the Securities & Exchange Board of India (Sebi) on Thursday barred Factorial Master Fund, a Cayman Islands-based hedge fund, from the Indian securities markets. The role of other entities, including some employees of investment banking major Credit Suisse, is also under the regulator's scanner.

Sebi said in an order that Factorial, which is said to be a hedge fund set up by a former investment banker with an Indian origin, might have made gains of about Rs 20 crore by aggressively shorting LTFH shares in the derivatives market and then bidding for the company's shares in its offer for sale (OFS) in March this year.

Factorial traded in derivative contracts of L&T Finance with Offshore Derivative Contracts (commonly known as p-notes) through five different foreign institutional investors (FIIs) - Macquarie Bank, Goldman Sachs Singapore, Merrill Lynch CM Espana, Nomura Singapore and Citigroup Global Markets Mauritius Ltd - in an "aberrant and suspicious" manner.

CRACKING THE WHIP

• Sebi has passed an interim order against hedge fund Factorial Master Fund, domiciled in Cayman Islands
• Hedge fund allegedly made gains of Rs 20 crore by trading in shares of L&T Finance Holdings on 'inside information'
• Factorial took aggressive short positions in L&T Finance in the derivatives market and sold shares below market rate
• Sebi has alleged Factorial knew the tentative share-sale price
• Factorial has been given 21 days to make submissions
• The role of investment bank Credit Suisse, which handled the OFS, has also come under the Sebi scanner

"The facts that it (Factorial) did not have any previous exposure in the securities of LTFH and that it used five different FIIs for its trades in derivatives contracts... make its trades even more aberrant and suspicious," Sebi said in its ad interim ex-parte order on Thursday. The regulator has given Factorial three weeks to file its reply or seek a personal hearing.

Sebi has prima facie found the hedge fund guilty of violating various regulations, including those for prevention of insider trading and fraudulent and unfair trade practices. The market regulator has alleged the fund traded on the basis of its access to 'unpublished price sensitive information' (UPSI).

The role of investment bank Credit Suisse, which handled LTFH's OFS, has also come under the Sebi scanner. "It may be mentioned in this regard that according to its submissions, investment banking team of Credit Suisse had contacted Factorial in relation to the OFS of L&T Finance," the Sebi order said.

"On examination of Bloomberg chat transcripts provided by CS, it is observed that on March 13, 2014, information like, 'likely to come in at a steep discount, about 70 types' was being circulated among the members of the equity team of Credit Suisse," the order said. In this chat, '70' apparently referred to the price for sale of shares in the OFS, the floor price for which was later actually fixed at Rs 70 a share.

The regulator, however, said the entire channel for flow of UPSI in this case needed to be further investigated.

The Sebi order has restrained Factorial from dealing in securities on Indian markets (including via offshore derivative instruments), as also from accessing the Indian markets, directly or indirectly, till further orders. The dealings of Factorial "are prima facie inimical to the interests of participants" in the securities market, the regulator said.

Credit Suisse said in its submissions to Sebi, to gauge market sentiment for the scrip, its team held discussions with over 70 institutional investors, which included their direct clients and potential investors typically investing in India through the overseas direct investment route, between March 10 and 13.

L&T, too, submitted before Sebi that Credit Suisse had given updates on the general pulse of the market and the trends over four days, from March 10 to 13, and also informed investors would seek a good discount to buy shares.

L&T had sold its stake in LTFH to achieve the 25 per cent minimum public shareholding requirement.

Thursday's Sebi order does not affect L&T Finance, its promoters or Credit Suisse.