In an over six-year old insider trading case involving shares of Reliance Industries' erstwhile subsidiary Indian Petrochemicals Corp Ltd, market regulator Sebi Thursday imposed a penalty of Rs. 11 crore on Reliance Petroinvestments Ltd.
Pronouncing Reliance Petroinvestments Ltd (RPIL) guilty of violating the insider trading regulations with regard to its dealings in shares of Indian Petrochemicals Corp Ltd (IPCL) in early 2007, Sebi said that RPIL made profits of over Rs. 3.82 crore through these trades.
After taking into account the quantum and nature of the violations, Sebi decided to impose a penalty of Rs. 11 crore on RPIL, which was listed as one of the promoter entities by IPCL itself in its regulatory filings as on March 31, 2006, the regulator said in its 17-page late night order.
The regulator said the penalty needs to be paid within 45 days to the account of "SEBI–Penalties Remittable to Government of India".
Once a subsidiary of Mukesh Ambani-led Reliance Industries Ltd (RIL), IPCL used to be a separately listed entity of the group, but was later merged with RIL and delisted from the stock exchanges.
Sebi said in its order that its investigations into charges of insider trading norm violations by RPIL showed that the company was having control over IPCL as "promoter having control over the company with the total shareholding of approximately 46%".
Further, RIL was shown as a 'person(s) acting in concert' with RPIL with regard to the shareholding of IPCL, Sebi said.
Sebi said it conducted an investigation in the trading of the shares of IPCL during the period from February 22, 2007 to March 08, 2007.
In the same case, Sebi recently passed another order wherein it dropped the charges of violations of insider trading norms in IPCL shares against Manoj Modi and his wife. Modi is known as a close confidante of RIL chief Mukesh Ambani and held some senior positions at group entities in the past. But, Sebi said that the charges of insider trading violations could not be proved against Modi.
Sebi's probe into the matter showed an irregular trading pattern in IPCL shares during the period under review, when two key announcements were made by the company -- one about an interim dividend payment and another regarding the amalgamation of IPCL with RIL.
IPCL originally used to be a government-owned entity and was sold to RIL group during a disinvestment exercise.
Sebi found that RPIL has violated the Prohibition of Insider Trading norms through its dealings in these shares while being in possession of "unpublished price sensitive information (UPSI) while trading in the scrip of IPCL prior to announcement of declaration of interim dividend and amalgamation of IPCL with RIL".
"It is observed from the Investigation Report that RPIL received a dividend of approximately Rs. 1.28 crore and made a notional profit of approximately Rs. 2.54 crore (difference between acquisition cost of IPCL shares and market price of RIL shares on dealing dates based on average price).
"Thus, the Noticee made a profit of approximately Rs. 2.83 crore when in possession of UPSI relating to declaration of interim dividend and amalgamation of IPCL with RIL."
During the course of its inquiry, Sebi served a Show Cause Notice in January 2011, wherein RPIL and RIL were termed as 'insiders' on the basis of the shareholding patterns submitted by IPCL itself about their promoters and related entities.
Besides, Mukesh Ambani was chairman of IPCL, as well as chairman and MD of RIL during the period under review, thus putting both the companies under same management, while RPIL held more than one-third of total voting power of IPCL at that time.
Also, RIL held the entire share capital of RPIL through two wholly owned subsidiaries.
It was also stated in the show-cause notice that "RPIL was conceived by the management of RIL for the sole purpose of acquiring shares at the time of disinvestment by the Government in favour of RIL.
"Further, it is observed that during the period June 9, 2006 to February 26, 2007 RPIL has not dealt in the shares of IPCL but all of sudden started buying the shares of IPCL from February 27, 2007, that is just before the major announcement of declaration of the interim dividend and amalgamation of IPCL with RIL," the notice said.
In its reply submitted in February 2011, RPIL sought an opportunity of inspection of all documents/information relied upon in the notice and an opportunity for the same was granted to the company by Sebi's Investigating Authority on October 18, 2011. However, the company later claimed that it was not shown all the documents.
Later in November, 2011, the company however filed for settlement of the case through Sebi's 'consent mechanism'. However, Sebi rejected this plea after due consideration and informed RPIL about the same in November 2012.
Sebi said in its order that RPIL did not reply to its show-cause notice in spite of lapse of more than one-and-a-half years, after which it called the company for personal hearing on October 22, 2012, after submit its reply by October 15, 2012.
The company, however, sought a short extension of time to submit its reply and for the personal hearing. Later in November 2012, the reply was submitted to Sebi, wherein the company rejected the various charges made against it for violation of insider trading norms.
After taking into account the relevant facts and regulations, and the submissions made by the company, Sebi, however, concluded that RPIL had indeed violated the insider trading norms and was liable to be penalised for the same.
"From the Investigation Report it is noted that RIL holds the entire share capital of RPIL through two of its wholly owned subsidiaries. As per the Annual Report of RIL for the year 2005-06, RPIL is shown as an 'associate companies and joint ventures'," Sebi said.
Besides, the purchase of shares of IPCL by RPIL was financed by Reliance Ventures Ltd (RVL) through an interest free loan, Sebi said, while adding that RVL was a wholly owned subsidiary of RIL.
Sebi further said that K Sethuraman, group company secretary of RIL, represented on behalf of RPIL before it, wherein it said that the orders for buying IPCL shares were placed by one Ashok C Jain, who is an employee of RIL.
"It is also pertinent to mention that Sethuraman was the contact person on behalf of RIL for interacting with the legal advisor, valuers, financial advisors, etc., in the matter of merger of IPCL with RIL," Sebi said.
"Therefore, in view of the above findings, the charge of insider trading against the Noticee (RPIL) as per regulation... stands established," the Sebi order said.