The Supreme Court on Friday granted substantial relief to Reliance Industries Limited by setting aside findings of fraud and market manipulation recorded against the company in the 2007 Reliance Petroleum Limited (RPL) futures trading matter, while also quashing the disgorgement direction of Rs 447.27 crore imposed by the Securities and Exchange Board of India (SEBI).
The Bench of Justice JB Pardiwala and Justice R Mahadevan partly allowed the appeals filed by RIL, holding that the findings recorded by SEBI and affirmed by the Securities Appellate Tribunal (SAT) under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations) could not be sustained in law.
The Apex Court observed that the majority decision of the SAT had committed a serious error in affirming allegations of fraudulent and manipulative trading against Reliance Industries in relation to transactions involving shares and futures contracts of Reliance Petroleum Limited during November 2007.
The Court also set aside the disgorgement order directing Reliance Industries to deposit Rs 447.27 crore, along with interest at the rate of 12 per cent per annum. It further directed a refund of Rs 250 crore earlier deposited by Reliance Industries in the Investor Protection Fund pursuant to interim directions passed during the pendency of the proceedings.
The dispute arose from trades executed in the shares and derivatives segment of Reliance Petroleum Limited, then a listed subsidiary of Reliance Industries in which the parent company held approximately 75 per cent shareholding. In 2007, Reliance Industries decided to dilute nearly 5 per cent of its stake in RPL, amounting to around 22.5 crore shares.
SEBI later initiated an investigation into trading activity between November 1 and 29, 2007. According to SEBI, Reliance Industries had engaged 12 entities to take substantial short positions in November 2007 RPL futures contracts while simultaneously offloading shares in the cash segment.
The market regulator alleged that Reliance Industries used the principal-agent arrangement to circumvent position limits prescribed under SEBI circulars governing derivatives trading and artificially depressed the settlement price of RPL futures contracts by selling large quantities of shares in the final minutes of trading on the expiry date.
SEBI had further alleged that the strategy enabled Reliance Industries to earn unlawful gains exceeding Rs 500 crore from short positions in the futures and options segment. In March 2017, a Whole Time Member of SEBI held the company guilty of fraudulent and manipulative trade practices and ordered disgorgement of Rs 447.27 crore with interest, besides imposing market restrictions.
The SAT, by a majority verdict delivered in November 2020, upheld SEBI’s findings and the disgorgement direction. Reliance Industries subsequently challenged the ruling before the Supreme Court.
While granting relief on the allegations of fraud and market manipulation, the Supreme Court held that the material on record was insufficient to sustain findings under Regulations 3 and 4 of the PFUTP Regulations dealing with fraudulent and unfair trade practices in the securities market.
However, the Apex Court upheld the separate finding relating to violation of disclosure and position limit requirements prescribed under SEBI’s 2001 circulars governing derivatives trading. The Court characterised the breach as a technical and regulatory contravention rather than a case involving fraudulent market manipulation.
Accordingly, the Supreme Court upheld the Rs 25 crore monetary penalty imposed upon Reliance Industries in separate adjudication proceedings initiated by SEBI’s Adjudicating Officer.
The Court also took note of earlier SAT proceedings in which penalties imposed upon Mukesh Ambani, Navi Mumbai SEZ Private Limited and Mumbai SEZ Limited had been set aside on the ground that SEBI failed to establish their direct involvement in the alleged manipulative transactions.
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