Fraud
Top management of Reliance group of industries had decided to sell the company's stake of
5% in its subsidiary company of petroleum that's Reliance Petroleum. Reliance industries Ltd
decided to sell 225.5 million of share in Reliance Petroleum 5028.75 crores (50.28 billions
rupees) and they did this in multiple tranches in open market transactions. They sold 4%
stake in Reliance Petroleum i. e. 180.4 millions of share in first tranche and remaining in
second tranche (later in 2009 Reliance Petroleum merged with Reliance Industries Ltd).
Directors or the top management of the Reliance Industries Ltd are aware or known to the
price crash of the share because of this sale at stake. So to overcome that loss of net worth,
top management decided to hedge this risk, which later considered as a fraud as it violates
the insider trading rules.
For hedging they decided to make a position in F&O segments of derivatives market where
investor estimate the future price and purchase or sell the "Call options" or "Put options".
Here they know that the prices of shares will go down so they taken the short position for the
month ending on November.
On November 7, 4% of the stake is sold in open market transactions and remaining 74.2
million share they sold on the last day of the month that is on 29 November. They sold 19.5
million of share (worth of 400 crores) in the last ten minutes when session in derivatives
market of the month is going to end.
As an outcome, price of share is fallen in cash segments and hence affect the derivatives
segments adversely. And as per share market rules that every client has a limit of holding,
Reliance ties with the 12 entity so that they can hold the whole amount of shares. After
investigation done, SEBI come to know that each of the 12 entities had undertaken the trade
on behalf of it as they can not solely hold the whole lots of shares. They made 60.28 rupees
per share and total shares were traded that day were 74.2 million so they made a profit of
447.27 crores which was shown in balance sheet of financial year ending 31 march, 2018 as
'other income'.
Arguments
Reliance Industries Ltd said that they shorted the position only for the purpose of hedging.
The company “adopted a prudent strategy to hedge the loss that it was expecting due to the
impending sales in the cash segment by taking appropriate positions in the F&O segment,”
the company had told Sebi.
But in reply, SEBI said that the strategy used can not be termed as a hedging as they made
for the purpose of making undue profits.
SEBI's order
