On January 1, 2021, the Securities and Exchange Board of India (SEBI) slapped a fine on the largest company in India by market capitalisation, i.e. Reliance Industries Limited (RIL), and its Chairman and Managing Director Mukesh Ambani of ₹250 million and ₹150 million respectively, along with two other entities, for manipulative trading in the shares of the erstwhile Reliance Petroleum Limited (RPL) in 2007.

So, what activity did RIL engage in to receive a penalty from the market regulator? 

Reliance Petroleum Limited (RPL) was a refinery, partly owned by RIL, which later got merged with the latter in 2009. However, the conglomerate got itself under the radar of the watchdog for the transaction that occurred between the company and its agents in November, 2007, in the cash and futures segment of the secondary market.

RIL had decided to sell off its 4.1% stake in RPL. According to SEBI, in order to make undue gains from the sale, the former had entered into an agreement with 12 agents, who booked large short positions of the refinery’s shares in the futures market. Short positions refer to a situation when a trader sells the security first with the intention of repurchasing it later at a lower price, hence the steeper the decline, greater is the profit for the trader. Following this, in the last ten minutes of the trading session of November 29, 2007, RIL sold close to 20 million RPL shares. This large scale selling triggered mass panic and within a moment’s notice, the stock price collapsed.  Interestingly, it also happened to be the same day that the futures contracts were meant to pay-out.

So, SEBI contends that RIL and the agents colluded together in a bid to make a profit estimated to be around ₹44.7 billion off of this transaction.

Selling of securities by promoters in the capital markets in order to raise cash is a widely accepted practice, however, this act of secretive plotting that can distort the natural price discovery system in the market and cheat investors via non-transparent mechanisms is impermissible and against the objectives of the SEBI or any securities regulator.

SEBI’s adjudicating officer B J Dilip said, “any manipulation in the volume or price of securities always erodes investor confidence in the market when investors find themselves at the receiving end of market manipulators.” He further added, “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 [Futures and Options] segments and harmed the interests of other investors.”

The SEBI order states that Mukesh Ambani as the Managing Director of RIL was equally involved in the malpractice. Apart from the conglomerate and its chairman, SEBI also imposed penalties of ₹2 million and ₹1 million on Navi Mumbai SEZ Pvt Ltd and Mumbai SEZ Ltd respectively, both promoted by Anand Jain, a former member of the Reliance Group, for providing margin payments for the agents.

In March 2017, the market watchdog had ordered RIL and other entities to disgorge ₹4.47 billion in the RPL’s case, against which the latter appealed in the Securities Appellate Tribunal (SAT). The verdict announced by the tribunal in November 2020 was against the appellant. However, the petrochemicals to telecommunication multinational corporation said that it would appeal against the Tribunal’s ruling in the Indian Supreme Court. 

This is not the first time that RIL and a government entity were at loggerheads. In 2014, the Indian market regulator had imposed a fine of ₹1.3 million on the corporation for non-disclosure of a key earnings ratio, which would have impacted investors’ evaluation on the shares. In 2018, the RIL-led consortium of BP Plc and Niko Resources won an award against the Indian government in international arbitration. The case related to a dispute over a penalty of $1.55 billion slapped by the Indian government on the petrochemical companies for allegedly drawing gas from the Oil and Natural Gas Corporation or ONGC’s (a state-owned oil and gas concern) block in 2016.

SEBI was established with the purpose of protecting investors and the development and regulation of capital markets in India. Over the years, it has evolved to meet its objective and has always taken a strong stance against any form of malpractice. However, it is essential that in order to mitigate any future wrongdoing, it penalises defaulters such that cost in fulfilling the punishment supersedes the gain.