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.
Curiopedia
  • 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.

SEBI Announced New Norms For Mutual Funds

SEBI Announced New Norms For Mutual Funds

Recently, SEBI announced a major change in mutual funds investment. Now multi-cap mutual funds have a compulsion to invest 25% each in mid, large, and small capitalization funds. Let us demystify what multi cap, large cap, mid cap, etc are and understand how mutual funds and investors will be impacted by this move.

Crux of the Matter

Before you deep dive into this piece, you can understand the basics of Mutual Funds in a simple jargon-free language here.

Recent Announcement
SEBI made it mandatory for multi-cap Mutual Funds to invest at least 25% of their funds in each small, mid, and large-cap equities. Mutual funds have been told to abide by the new rules by end of January 2021. A multi-cap mutual fund is the one that invests across equities with varied market capitalization, i.e. large-cap, mid-cap, and small-cap. Market Capitalisation = Share price x Number of outstanding shares.

Currently, minimum equity allocation in multi-cap is 65% but as per the new rule minimum equity allocation will also increase to 75%.

Impact
Experts say that investors who have already invested in mid and small-cap funds will be benefited. As demand for mid and low cap stocks increases, so will their price. Investors’ holdings in mid and small-cap, thus, can go up due to accelerated buying in mid and small-cap space by the multi-cap funds before January 2021.

Response Strategy
Investors can switch their funds from multi-cap to other equity funds. Mutual Funds can merge/dissolve multi-cap funds with large-cap funds or large-mid cap funds. One can also convert multi-cap to ESG (Environmental, Social, and Governance) funds. By doing so one can maintain the same investment process as well as portfolio quality. ESG funds measure the sustainability and ethical impact of an investment in a business or company in Environmental, Social, and Governance areas. ESG criteria are often preferred by socially responsible investors for investments.

Curiopedia
  • An index fund is a mutual fund designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. The first theoretical model for an index fund was suggested in 1960.
  • Dollex 30 is the USD version of the SENSEX. It is designed to measure the performance of the 30 largest, most liquid and financially sound companies across key sectors of the Indian economy that are listed at BSE Ltd.
  • The first modern investment funds were established in the Dutch Republic. In response to the financial crisis of 1772–1773, Amsterdam-based businessman Abraham van Ketwich formed a trust named Eendragt Maakt Magt (“unity creates strength”).

What Caused Havoc On The Stock Exchange?

What Caused Havoc On The Stock Exchange?

The Securities & Exchange Board Of India (SEBI) implemented new margin and share pledging norms from 1st September. It has taken the step after several incidents of misuse of client funds were reported. Let’s have a look at the changes and its consequences that lead to, for the first time in history, disruption in the functioning of the stock exchange.

Before you delve into the story, if you want a layman understanding of the financial jargon like margin, intraday, leverage, etc, click here.

Crux of the Matter

What Are The Changes?

  • Traders must keep a higher margin in their accounts to receive the same leverage as before.
  • Brokers not allowed to extend any higher-margin limit than prescribed.
  • The required margin must be paid (by client) or collected (by broker) within T+1 (for derivatives) and T+2 (for equities and commodities).
  • Clearing corporations will impose a penalty if the broker fails to collect, or the client fails to pay.
  • Now clients’ trades will be carried out directly with the Clearing Corporation. It is associated with exchanges to handle the confirmation, settlement, and delivery of transactions.
  • Clients need a minimum margin at the beginning of the transaction as compared to required at the end of the day before.
  • Most importantly, traders will not be able to utilize funds from the selling of shares for 3 days from trading.
  • Now onwards, intraday profit cannot be used to buy new shares.

Experts say that the new margin rules aim to safeguard retail brokers who fail to manage margin leverage.

Another Reason For Change – Misuse of PoA
Previously, brokers used to give margin if the client pledged shares or signed the Power
of Attorney
(PoA). Now brokers will not have power of attorney over their clients’ Demat account. Earlier, some brokers were using one client’s assets as margin collateral for another client who was likely short of funds.

In the past Karvy Stock Broking Ltd. illegally transferred investments of 95,000 clients to its own account and pledged without any authorization. Similarly, brokers misused the PoA assigned to them.

Immediate Chaos
National Stock Exchange (NSE) could not process clearing and settlement for the first time in history on 1st September 2020. Overloading of orders choked the Clearing Corporations’ systems.

SEBI says that chaos happened as brokers waited till the last minute to pledge and re-pledge large quantities of shares. Whereas brokers pointed fingers at the lack of preparation from the depository to implement new changes. In an interim relief to investors, brokers, and the system, SEBI stopped exchanges from imposing fine till 15th September for not paying margin.

Curiopedia
  • The 1992 Indian stock market scam was a stock market scam orchestrated by Harshad Mehta. The scam was the biggest stock market scam ever committed in the Indian Stock Market. It was a systematic stock fraud using bank receipts and stamp paper which caused the Indian Stock market to crash.
  • Popularly referred to as the “Warren Buffett of India”, Rakesh Jhunjhunwala is an Indian businessman and investor. He is the 48th richest person in India, with a net worth of $2.5 billion.
  • The Big Bull is an upcoming Indian Hindi-language biographical crime film based on Harshad Mehta’s life involving his financial crimes over a period of 10 years, from 1980 to 1990. It stars Abhishek Bachchan as Mehta.

SEBI Changes Margin Requirements for Cash and Derivatives Trading

Sebi

After making changes to the margin framework for commodity derivates in January 2020, Market Regulator SEBI has made amendments to the margin requirements in the cash and derivates segment.

Crux of the Matter

Market Watchdog Securities and Exchange Board of India (SEBI) has amended the margin framework for derivatives and cash segments, a move aimed to enhance the risk management system. SEBI’s Risk Management Review Committee has outlined that the changes are in tandem with the dynamic nature of the market and that it will increase efficiency in the market.

With respect to the Cash Market, SEBI divided the Value at Risk (VaR) margin rates on the basis of liquidity into three categories.

For the Derivates segment, SEBI updated the calculation of volatility, calendar spread charge on various products, extreme loss margin, the margin on consolidated crystallized margin and minimum charge on short option.

There shall be no separate short option minimum charge for index derivatives, single stock derivatives, currency and interest rate derivatives.

– SEBI on charges on Short Option

Most importantly, Sebi put these provisions of upfront additional margin for stocks that are highly volatile.

1. Securities that have an intra-day price movement of more than 10% on the basis of the formula, Maximum of (High-Low), (High-Previous Close), or (Low-Previous Close) for 3 or more days in the preceding 1 month in a particular stock market will attract a minimum total margin equal to the maximum intra-day price movement in the respective market in a month. “This shall be applicable till the monthly expiry date of the derivative contract which falls after completion of three months from the date of levy,” as per SEBI.

2. Securities that have an intra-day price movement of more than 10% on the basis of the formula, Maximum of (High-Low), (High-Previous Close), or (Low-Previous Close) for 10 or more days in the preceding 6 months in a particular stock market will attract a minimum total margin equal to the maximum intra-day price movement in the respective market in 6 months. “This shall be applicable till the monthly expiry date of the derivative contract which falls after completion of one year from the date of levy,” as per SEBI.

The changes will be applicable from May 1, 2020.

Curiopedia

Margin (Finance) is collateral that the holder of a financial instrument has to deposit with a counterparty (most often their broker or an exchange) to cover some or all of the credit risk the holder poses for the counterparty. This risk can arise if the holder has done any of the following:
– Borrowed cash from the counterparty to buy financial instruments,
– Borrowed financial instruments to sell them short,
– Entered into a derivative contract.
The collateral for a margin account can be the cash deposited in the account or securities provided, and represents the funds available to the account holder for further share trading. More Info

Mutual Funds, AIFs to Follow Stewardship Code: SEBI

In a move to enhance Corporate Governance of the Investee Companies, Securities and Exchange Board of India (SEBI) announced that Mutual Funds (MF) and Alternative Investment Funds (AIF) will compulsorily adhere to the Stewardship Code from April 1, 2020. The code will require institutional investors to formulate new policies to enhance transparency and their role in the Financial Market.

Crux of the Matter
  • SEBI, in co-ordination with IRDA and PFRDA, got approval from the Financial Stability and Development Council to implement the stewardship principles in India.
  • Fundamentally, the institutional investor will have to formulate policies for stewardship responsibilities and dissemination of information to the public.
  • It is also required for companies to have a code implemented to manage conflict of interest.
  • The Code will also require institutions to regularly monitor their investee companies, their performances, corporate governance policies, risk management policies, etc. and to seldom intervene if the situation – like poor performance, corporate governance issues, leadership problems, litigation, etc. – demands.
  • Moreover, institutional investors will be required to have a detailed voting policy. It may contain rules and regulations on mechanisms of voting, proxy voting, and when to eschew from voting.
Curiopedia

The Stewardship Code is a part of UK company law concerning principles that institutional investors are expected to follow. It was released in 2010 by the Financial Reporting Council, and is directed at asset managers who hold voting rights on shares in United Kingdom companies. Its principal aim is to make institutional investors, who manage “other people’s money”, be active and engage in corporate governance in the interests of their beneficiaries (the shareholders). India’s Stewardship Code has its root in the seven guiding principles of the UK Code. More Info