Securities Appellate Tribunal dismisses Reliance Industries Appeal against SEBI Order

SAT dismisses Reliance Industries' Appeal against SEBI Order

The Securities Appellate Tribunal has dismissed an appeal filed by Reliance Industries Ltd., challenging a disgorgement order passed by the market regulator Securities and Exchange Board of India (SEBI).

Reliance Industries had appealed against a SEBI order by which the markets regulator had directed the company to disgorge an amount of Rs. 447.27 crore, along with interest at 12%, on the grounds that the company made unlawful gains from a transaction where it offloaded 5% of its then holding in Reliance Petroleum Ltd., in March 2007.

A two-member majority of the tribunal comprising MT Joshi and CKG Nair directed the oil-to-gas major to pay the disgorged amount within 60 days of the order along with 12% interest, effective from November 2007 till the actual date of payment to SEBI.

Justice Tarun Agarwala, the presiding officer of the tribunal, however gave a dissenting opinion by concluding that SEBI failed to discharge the burden of establishing manipulation by Reliance Industries.

Reliance Industries disclosed in a stock exchange filing on Nov. 5 that the appellate tribunal, by a 2:1 majority, has dismissed its appeal.

"All trades carried out by the company were genuine and bona fide. No irregularity can be attached to these transactions. The company reiterates that it has not violated any law or regulation while selling shares of RPL in November 2007," the company said in a statement.

The SEBI had stated in its order that Reliance Industries enlisted the services of 12 companies as an agent for taking "huge short positions" in 2007 November futures derivatives of Reliance Petroleum. SEBI in its order also averred that RIL executed separate agreements with each of the 12 companies under which they earned commission while all profits and losses were transferred to RIL's account.

Harish Salve, senior counsel representing Reliance Industries and the 12 other appellants, questioned SEBI's findings and argued that the company took a reasonable hedge and engaged 12 front entities to take net short position limits.

He added that such an engagement for taking position in the Futures & Options (F&O) segment was not contrary to the stock exchange regulations and was a valid action as per the Indian Contract Act.

Mr. Salve further argued that SEBI's findings that Reliance Industries violated the Prevention of Fraudulent and Unfair Trade Practice regulations was erroneous as it failed to prove if exceeding position limits can be termed as market manipulation or fraud.

Finally, an element of inducement is necessary to prove charges of fraud. However, in the current case the total trades undertaken by the company and its agents constituted only 8% of the total trades in futures segment, which were done in a bona-fide manner.

A two-member majority of the SAT, dismissed Reliance Industries' arguments and observed that:

The 12 companies engaged by Reliance Industries as agents were distinct entities. SEBI's surveillance mechanism could not have detected them as agents of Reliance Industries. RIL, along with its 12 agent entities had cornered a substantial portion of the market wide position limits ranging from 62% to 93% on different trading days.

According to the tribunal, this was a pre-planned strategy of manipulation as it was unknown to other market participants. The breach cannot be treated as mere violation of market limits.

The tribunal dismissed RIL's argument that its trades in derivatives was a hedging strategy. It also noted that while market participants with an underlying exposure are free to hedge their position, they cannot use a scheme or device to corner a substantial portion of the position limit and squeeze the market.

The SAT, based on the aforementioned factors, concluded that the scheme utilised by the petroleum major and its agents was fraudulent and manipulative.