Sebi cracks whip on Fatorial, directs hedge fund to disgorge Rs 20 cr

Factorial Master, it says, made unlawful gain in L&T Finance scrip trades

The Securities and Exchange Board of India (Sebi) has directed Fatorial Master Fund, a hedge fund, to disgorge Rs 20 crore made 'unlawfully' by trading in L&T Finance Holdings during March 2014.

This is one of Sebi's biggest disgorgement orders. The markets regulator has said the fund took "unusually aggressive short positions" in L&T Finance's derivatives contracts, before a share-sale in the company. And, that the trades were made by Factorial with access to 'unpublished price-sensitive information' on the floor price for the L&T Finance offer for sale (OFS).

"Such activities are detrimental to the interests of the investors, as well as the securities market. No person can be allowed to enrich by way of wrongful or ill-gotten gains or avoidance of potential loss made on account of such activity. Sebi has been entrusted with the important mandate of protecting investors and safeguarding the integrity of the securities market," went the 31-page order of S Raman, a whole time member at Sebi.

The regulator had observed abnormal price movement in the said scrip on both major exchanges on March 13, 2014, on the day of introduction of the scrip in the futures and options segment. On further examination, it was observed that Factorial reversed its short positions by applying to the OFS in the cash market, making a gain of Rs 20 crore.

On June 5 that year, Sebi had passed an interim ex parte order and restrained Factorial from dealing in the securities market. This was challenged at the Securities Appellate Tribunal. The tribunal heard the appeal and told the regulator to complete its investigation within two months. After doing so, Sebi had issued a show cause notice to the fund, as to why directions for disgorgement of unlawful gain should not be issued for the alleged violations.

By Sebi's probe, the top 10 net short-sellers of L&T Finance futures on March 13, 2014, accounted for 98.74 per cent of the total Open Interest (OI, unsquared contracts). "Further, of the top 10 net short-sellers, four were foreign institutional investors (FIIs) which traded on behalf of Factorial and they accounted for approximately 85 per cent of the market-wide OI," Sebi said in its order.

As Factorial had taken such an aggressive position without any existing exposure in the scrip of L&T Finance, and also as the services of five independents of 31 FIIs were availed of to take such a position and the proximity of events, it appeared that Factorial had access to the 'unpublished price-sensitive information' regarding the likely floor price of OFS of the shares in question, said Sebi.

Factorial, it said, had not disputed the trades out through in the scrip of L&T during the investigation period and the profits gained through such trades. Sebi has asked Factorial to return the said amounts within 45 days from the date of the order.