The Fault In Mukesh Ambani’s Stars

The Fault In Mukesh Ambani's Star

A 14-year-old event is back to haunt the MD & Chairman of Reliance Industries Mukesh Ambani! SEBI has imposed a penalty of ₹40 crores on RIL Industries along with its Chairman for fraudulent trading in Reliance Petroleum in 2007. Let us understand what was the scenario that led to the current standing point.

Crux of the Matter

The Case
With respect to alleged fraudulent trading of Reliance Petroleum (RPL) shares back in 2007, the Securities & Exchange Board of India (SEBI) imposed a hefty penalty of:

  • ₹25 Crore on Reliance Industries Limited
  • ₹15 Crore on RIL Chairman Mukesh Ambani
  • ₹20 Crore Navi Mumbai SEZ 
  • ₹10 Crore Mumbai SEZ

The Episode

  • November 2007: Alleged manipulative trade in Reliance Petroleum shares through both cash & F&O markets.
  • March 2007:  RIL decides to sell 4.1% of Reliance Petroleum.
  • March 2009: RPL was merged with RIL.

The Case of Insider Trading

  • Between 1st November – 29th November 2007: Reliance appointed 12 agents who took short positions (selling shares you don’t own and then buying them later when price is low) in the RPL shares for the F&O Market and RIL undertook similar transactions but in the cash segment.
  • 15th November onwards: Their short positions in the F&O segment constantly surpassed the proposed sale of shares in the Cash segment.
  • November 29: In cash segment, RIL sold 2.25 crore shares in the last 10 minutes of trading hours. Consequently, RPL’s stock price plummeted. It also lowered the F&O settlement prices for the month of November benefiting the short position held by the agents, who booked huge profits by closing their short positions of 7.97 crore RPL shares at this distressed price. Agents are estimated to have booked a profit of ₹513.12 crores in the illegal trade.

Excerpts From SEBI’S 95 Page Order

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. 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. It also has an adverse impact on the fairness, integrity, and transparency of the stock market.

SEBI’S 95 Page Order

*Open Interest is the number of outstanding (open) Future & Option contracts.

The Standing Point
The case has been hanging on for the past 13 years! In November 2020, the Securities Appellate Tribunal dismissed RIL’s plea challenging the 2017 SEBI order that asked it to pay ₹447 crores for insider trading.

In Other News

  • Mukesh Ambani is no longer Asia’s richest man! He has been replaced by China’s Lone Wolf Zhong Shanshan.
  • Shanshan’s rise is believed to be the fastest in history with the majority of it attributed to the listing of his two companies: vaccine maker Beijing Wantai Biological Pharmacy Enterprises Co and Nongu Spring Co, a bottled water firm.
  • Ambani has also slipped from World’s 10th richest man to 11th position as per Bloomberg Billionaires Index.
  • Experts say the correction is on account of RIL’s falling share price post-Amazon’s appeal to the Reliance and Future Retail’s deal.
  • The Wall Street Journal, in a 2014 article entitled “Why It’s Hard to Catch India’s Insider Trading,” said that despite a widespread belief that insider trading takes place on a regular basis in India, there were few examples of insider traders being prosecuted in India.
  • Mathew Martoma is an American former hedge fund trader. As a portfolio manager at S.A.C. Capital Advisors, he was accused of generating possibly the largest single insider trading transaction profit in history at a value of $276 million. A jury convicted him, and in November 2014 he began serving a nine-year prison sentence.
  • Selective disclosure is a situation when a publicly-traded company discloses material information to a single person, or a limited group of people or investors, as opposed to disclosing the information to all investors at the same time. Material information is roughly defined as information that would cause a reasonable investor to make a buy or sell decision.