At least 70 entities including foreign brokerage firms, FIIs and others are under scanner for suspected insider trading activities and circulation of 'unpublished price sensitive information' for fraudulent and unfair trade practices.
The probe against these entities follows unearthing of a major insider trading case in shares of L&T Finance, in which capital markets regulator Sebi last night barred a Cayman Islands-based hedge fund, Factorial Master Fund, from Indian securities markets.
This fund, manged by Hong Kong based Factorial Capital Management, traded in derivative contracts of L&T Finance with Offshore Derivative Contracts (commonly known as P-Notes) through five different Foreign Institutional Investors in an "aberrant and suspicious" manner.
These five FIIs were Macquarie Bank, Goldman Sachs Singapore, Merrill Lynch CM Espana, Nomura Singapore and Citigroup Global Markets Mauritius Ltd.
A probe by the capital markets regulator found that Factorial was involved as potential investor in the market gauging exercise undertaken by Credit Suisse as 'Seller Broker' of L&T Finance for its Offer for Sale (OFS) in March.
While Sebi has passed an interim order barring Factorial from Indian markets, a further probe is underway against other entities and to find out those involved in flow of 'insider information' about shares sale price of L&T Finance.
When contacted Credit Suisse spokesperson declined to comment, while a Factorial spokesperson said that allegations were "without merit" and a thorough probe will absolve it.
As per the Sebi order investment banking team of Credit Suisse had contacted Factorial in relation to the OFS of L&T Finance.
"On examination of Bloomberg chat transcripts provided by CS, it is observed that on March 13, 2014, information like, 'likely to come in at a steep discount about 70 types' was being circulated amongst the members of Equity team of Credit Suisse," Sebi order said.
In this chat, '70' apparently referred to the price for sale of shares in the OFS, the floor price for which was actually later fixed at Rs 70 per share.
"It is noted that this message from one CS employee to another in the Equity team was sent at 09:21:24 much before the formal announcement of OFS and the floor price at 21:22:00 on the same day.
"In my view, this aspect needs thorough investigation so as to come to a definite conclusion," Sebi's Whole-Time Member Rajeev Kumar Agarwal said in his seven-page order.
Factorial built a short position of 5,309 derivative contracts of L&T Finance on March 13, which is equivalent to 2,12,36,000 shares or 84.15% of market wide open interest built during the day in the scrip.
After taking such an unusually aggressive short position in the F&O segment, Factorial took a reverse position of 2,75,10,484 share in the cash market by subscribing to the OFS at a price of Rs 71.50 on March 14.
By taking the said position, Factorial locked-in a profit of around Rs 20 crore based on the difference between the average price at which the short position was created and the OFS subscription price of Rs 71.50.
Sebi has restrained Factorial from dealing in securities in Indian securities market (including through Offshore Derivative Instruments), as also from accessing the Indian markets, directly or indirectly, till further orders.
The fund has been asked to file its reply, if any, to Sebi within 21 days.
The Sebi had begun its probe in this case after it observed abnormal movement in the share price of L&T Finance Holdings Limited.
On March 13, 2014 -- the day on which the shares of L&T Finance were included in the F&O segment -- the future contract price dropped by more than 10 per cent.
In cash segment, the scrip opened at Rs 86, rose to Rs 88 and then dropped by more than 10% close at Rs 79.20.
On examination of order book and trade data in cash and derivative segments, Sebi found on March 13 -- when the shares of LTFH were included in F&O segment -- four FIIs had taken substantial short positions which contributed around 86.83% of the market wide open interest on the short side.
These short positions were built on March 13 much before the formal announcement of OFS and floor price at 21:22:00 hours on the same day.
"On examination of information provided by these FIIs regarding their trading in the derivative contracts of L&T Finance, it was observed that these FIIs had executed the most of these trades (96.74%) on behalf of an Offshore Derivative Instrument (ODI) client Factorial Master Fund which is domiciled in Cayman Islands and operates as a hedge fund.
In addition to these trades, Factorial created a short position of 10 derivative contracts through Citigroup Global Markets Mauritius Private Limited.
It should be noted that in the late evening on March 13, the company's promoter, L&T, made announcements with regard to its planned Offer for Sale exercise and appointment of Credit Suisse as 'seller broker'.
The regulator said that "the facts and circumstances create strong suspicion that Factorial built aforesaid unusual and aggressive short position in the F&O segment ahead of the OFS on the basis of the unpublished price sensitive information, which it had received or had access to, regarding the likely floor price of the OFS.
"The source through which Factorial might have got the information can be established only after detailed investigation in the matter," Sebi said, while adding that it can be "safely inferred" that Factorial is covered by definition of 'insider' in this case.