Sebi's order against RIL lacks punch: It's too little, too late

Last week, the Securities and Exchange Board of India (Sebi) issued an order indicting Reliance Industries Limited (RIL) for “illegal” trades in its erstwhile subsidiary, Reliance Petroleum Limited (RPL). Sebi has directed RIL to “disgorge” both the principal “unlawful” gains of Rs 447 crore as well as “undue extraordinary profits” calculated at a penal interest rate of 12 per cent per annum levied since the occurrence of the trades concerned in November 2007. Apart from the penalty, RIL as well as the 12 agents acting on the company’s behalf have been barred from trading in the futures and options segment for one year. The order is likely to be appealed against but this investigation highlights multiple lacunae with the regulation of financial markets. This case is also a good example of how justice delayed is justice denied. 

In April 2006, RPL was listed as a subsidiary of RIL, after an initial public offer (IPO) where 20 per cent of RPL’s equity was divested at a price of Rs 60 per share. Post-IPO, RIL owned a residual stake of 75 per cent in RPL, and Chevron, a multinational corporation, owned 5 per cent. In November 2007, when the stock was trading at around Rs 290 a share, RIL started to sell 225 million RPL shares in open-market transactions. The price was expected to fall, given the huge volume. Indeed, prices did fall to a low of Rs 190. In derivatives settlement, between November 6 and 29, corporate entities acting as agents on RIL’s behalf short sold the stock futures of RPL. Thus, as the share price fell, those futures positions become increasingly profitable.

The illegality is that those derivative trades flouted position limits. A single entity is entitled to hold a maximum position of 1 per cent of the free float, which amounted to about 10 million shares in this case. Sebi says RIL’s agents cornered a total short position of over 100 million shares, or 10 times the legal limit. In fact, in the last 10 minutes before expiry on November 29, RIL sold 23 million shares, while the agents held a short position of 80 million shares. In total, RIL cleared about Rs 4,023 crore selling shares and made another Rs 447 crore in profits from the derivatives positions. The derivatives profits were shown as “other income”. Subsequently, RIL bought out Chevron’s stake at Rs 60 a share and later merged RPL back into the parent at a valuation of Rs 60 a share.

RIL’s defence is that this derivative position was a hedge. However, Sebi termed these operations “speculative and manipulative” and, hence, the penalty seems justified. But it has come after a 10-year-long delay — the investigation started immediately and the evidence cited was available in 2007 itself. Moreover, the quantum of penalty is low and is unlikely to work as a deterrent against price-rigging and manipulation, which continues to be rampant in the stock market. Lastly, it lacks punitive damages against the individuals responsible. The penalty will be borne by current shareholders, not the beneficiaries of those trades who were the shareholders in 2007-08. Any shareholder who subsequently sold and exited RIL has, in effect, gone scot-free. As such, the Sebi order looks weak.