Capital markets regulator Sebi is veering around to the idea of a consent order to settle charges of alleged insider trading in 2007 when the Mukesh Ambani-led Reliance Industries (RIL) sold shares in erstwhile subsidiary Reliance Petroleum (RPL). The settlement charges could be close to R500 crore ? the highest so far in India ? which the regulator has all along held was the gain made by the company.
In January this year, the regulator had passed a similar R50-crore consent order on Reliance Infrastructure and Reliance Natural Resources, two Anil Ambani-led companies.
Though Sebi had earlier rejected two offers from RIL to pay a consent fee, the regulator is now more amenable to the idea. According to sources, the earlier offers from RIL, India’s largest listed company, had come way before the completion of Sebi investigations. So, an acceptance then would have substantially diluted the charges and the quantum of the fine.
The Sebi investigation has brought up a range of evidence which would have to go through a tortuous, time-consuming course through the courts. The long duration would render the very proceedings useless, the sources felt. Instead, presenting the evidence and allowing RIL to claim a position of neither admitting nor denying them would serve the cause of the markets better, the sources said.
A consent order means the company will not have to carry the stigma of a regulatory rap on its subsequent activities, but a hefty sum like R500 crore would be a clear warning to other entities on the likely cost of any transgression. This is in line with Sebi’s developing ability to go for the jugular in cases involving corporates. In a recent interview with FE, Sebi chairman UK Sinha said that while companies may have been able to ?get away with something in the past, they better be careful now?.
Sebi had launched investigations and later quasi-judicial proceedings in the trading pattern of Reliance Petroleum (RPL) for the month of November in 2007. During that period, RIL had sold 4.1% of its stake in RPL. However, to prevent a plunge in RPL share price, the equity was apparently sold first in the futures market and later in the spot market. The crux of the Sebi notice is the company was aware there would be a sale of shares in the spot market and hence, its sales in the futures market before that amounted to insider trading.
On March 2, 2009, the RIL board cleared the merger with RPL. After reading the pattern of share sales in the spot and futures market, Sebi issued a show-cause notice to RIL in May. From the alleged total revenue of R4,023 crore generated by RIL from the sale, the profit made from the transaction in the futures segment was estimated at about R500 crore.
An RIL spokesperson declined to comment on an email from FE sent to the company on Wednesday.
As per Sebi rules, the penalty for most crimes is thrice the gain or R25 crore, whichever is higher.
But the penalty for insider trading does not fall within this zone as among stock market offences, it falls in the category of the rarest of rare cases. In fact, there are no clear rules set out for what should be the penalty for such crimes, but the regulator has, of late, held that the penalty should match the magnitude of the crime.
In the history of Sebi, it has never prosecuted any entity for insider trading. Sebi sources say this is mostly because it is ?hellishly difficult? to prove such charges. The proposed consent order on RIL will, therefore, be a first of sorts for Sebi, even though it will involve dropping the charges against RIL.
