SEBI Watch: RIL insider trading case highlights need for clarity in norms

21 Jun 2022

The insider trading regulations of the Securities and Exchange Board of India are one of the key pillars of investor protection.

It ensures that, on a continuous basis, price sensitive information within a company is brewing it is kept under tight wraps till it is made public and all those in the know-how of such information, including deemed insiders, do not trade and profit from it.

Secondly, when the information is required to be made public under the listing and disclosure norms then it is made public for all and not selectively.

These principles were in full play in the order by SEBI on Monday against Reliance Industries Ltd imposing a penalty of 3 mln rupees on the company for not clarifying, on a suo moto basis, upon media reports claiming that Facebook was close to signing a preliminary agreement to buy a multi-billion dollar stake in Reliance Jio.

The information revealed in the news report, without an ensuing suo moto clarification by the company, was clearly price sensitive in nature and its revelation amounted to leakage of unpublished price sensitive information that was known only to select company officials and non-company persons who are considered as deemed insiders under the norms.

Although the company made a formal announcement of the deal a month later SEBI held it accountable for abdicating its responsibility to issue a timely clarification.

The company protested that the stock exchanges did not seek a clarification from it as covered in the listing and disclosure norms and that suo moto clarification provision in the norms was voluntary and not mandatory.

This is indeed the case when it comes to specific clauses in the norms. Reliance Industries had also said, in its response to SEBI’s show cause notice in the case, that there was “constant speculation in the media and on social media platforms about RIL's (Reliance Industries Ltd’s) business and operations, and it would be impossible for RIL to track every news report and confirm or deny the same suo moto.”

SEBI, in its order, was right in applying the overarching principles of the insider trading norms and its connected provisions in the listing and disclosure norms.

But it must address the strong counter made by Reliance Industries that specific clauses in the norms did not cast a mandatory obligation on a listed company to clarify on any and all media reports.

There is clearly a grey area in the regulations and SEBI would do well to amend it to remove the ambiguity.

Reliance Industries also contended strongly that at the time of the initial media reportage the due diligence process was still going on and there were only tentative agreements on valuations. It told SEBI that no credible and concrete information had got created and so there was no obligation on it to clarify.

Listed companies are frequently in talks with entities for striking agreements or deals, and the stage of finality is reached only when the board of the company and the other entity approve it.

Most of the time the talks do not conclude in legally-binding deals.

But SEBI was right in dismissing this point on the ground that any information that is price sensitive, including a listed company’s ongoing talks with other entities for striking deals, came under the scope of unpublished price sensitive information and consequently attracted the application of insider trading norms.

The provisions of the insider trading norms and its connected provisions in the listing and disclosure norms have evolved over the years but there are still some grey areas that need to be tackled.

SEBI fines RIL, officials 3 mln rupee for insider trading norm breach

20 Jun 2022

The Securities and Exchange Board of India today fined Reliance Industries Ltd and two compliance officers of the company 3 mln rupees for breach of insider trading regulations.

In its order, SEBI said that unpublished price sensitive information pertaining to a likely deal between Facebook and Jio Platforms was not clarified upon by Reliance Industries for nearly a month after the media first reported it on March 24 and March 25, 2020.

The media report had said that Facebook was seeking to buy a multi-billion dollar stake in Reliance Jio and that it was close to signing a preliminary deal.

On April 22, 2020, Reliance Industries made a formal announcement that Facebook was investing 435.7 bln rupees in Jio Platforms for 9.99% stake.

SEBI held that the insider trading norms imposed an obligation on Reliance Industries to clarify on the matter when the deal got reported upon in March since it was a price sensitive information. But the company failed to take initiative in issuing any clarification and committed a breach.

Reliance Industries contended before SEBI that at the time of the media reportage in March the due diligence was still going on and there were only tentative agreements on valuations. It told SEBI that since no credible and concrete information had got created at that time no obligation was cast upon it to suo moto clarify on the media report.

The penalty of 3 mln rupees will have to be paid jointly and severally by Reliance Industries and two compliance officers, the SEBI order said.

SEBI’s income surplus fell in FY21, for the second consecutive year

20 Jun 2022

The surplus of income over expenditure of the Securities and Exchange Board of India fell for the second consecutive year in 2020-21 (Apr-Mar) causing the accumulated income surplus, or SEBI’s General Fund, to record a low single-digit growth for the second year running, according to audited annual accounts for 2020-21 (Apr-Mar) released by it today.

SEBI earned an income surplus of 1.59 bln rupees in 2020-21, down nearly 30% on year. In 2019-20 too it had fallen sharply, by 52% to 2.24 bln rupees. Prior to that, it had recorded a growth of 6% in 2018-19 and 21% in 2017-18.

The capital market regulator has accelerated its spends on operational matters in the last two years while the growth in income from fees and other charges levied on market intermediaries has not kept pace.

This is interesting because the 2020-21 was second year of the effect of a new government rule which required SEBI to transfer 75% of its annual surplus of income over expenditure to the government exchequer. This new rule may have spurred SEBI to spend more on establishment-related items and also on technology.

Fee income stayed flat at 6.1 bln rupees in 2020-21, while establishment expenses rose 16% on year to 4.38 bln rupees. In the previous year, 2019-20, the fee income had dropped 19% to 6.08 bln rupees and establishment expenses had risen sharply by 28% to 3.76 bln rupees.

The establishment expenses of SEBI are mainly on account of staff salaries, staff allowances and bonus, staff welfare expenses, provisions for gratuity and leave encashment.

Overall, in 2020-21, SEBI’s total expenses were up by 13% on year to 6.67 bln rupees and total income inched up by 2% to 8.26 bln rupees.

In the market regulator’s financial accounts, the annual income surplus gets added to its General Fund.

The General Fund of SEBI represents the accumulated annual surplus of all years and its corpus stood at 44.59 bln rupees as of March 31 2021, up by only 4% from the year ago level. In 2019-20 too, the General Fund had gone up by just 6% to 43 bln rupees at the end of the year.

Since the General Fund serves as the pivotal account to tap into for capital expenditure like technology upgrades and acquisition of new software, hardware and network systems for improving surveillance, enforcement and other regulatory matters.

The Investor Protection and Education Fund, like the General Fund, sits on the liabilities side of SEBI’s balance sheet, and its corpus saw a substantial rise to 8.83 bln rupees in 2020-21 from 1.28 bln rupees in the previous year.

SEBI’s annual report for 2021-22 is expected to be released in the next couple of months, while the annual accounts for the year will follow next year.

MFs sold ACC, Ambuja Cem shares in May in likely reaction to Holcim exit

17 Jun 2022

Domestic fund houses sold shares of Ambuja Cements Ltd and ACC Ltd in May during which their promoter, Holcim Group, announced that the Adani Group was buying its entire stake in Ambuja Cements and ACC for a cash payment of 501.8 bln rupees.

Mutual fund schemes, collectively, cut the number of shares they held in Ambuja Cements by 3.8%, and that in ACC by 7.1%, in May as compared to their collective holding in April, data by brokerage East India Securities showed.

The Holcim-Adani deal was announced on May 15 and it triggered the mandatory open offers by the Adani Group to buy 26% stake each from the public shareholders of Ambuja Cements and ACC.

At the declared open offer price of 385 rupees for Ambuja Cements, the Adani Group would pay 198.8 bln rupees to the public shareholders assuming full acceptance. Similarly, for ACC, it would pay 112.6 bln rupees at its declared open offer price of 2,300 rupees.

Mutual funds collectively net sold 4.9 mln shares of Ambuja Cements shares in May from their April-end holding of 130.3 mln shares. Based on the company’s average closing price of 365.7 rupees in May, the net selling would have been for around 1.79 bln rupees.

In ACC, mutual fund net selling was for 1.22 mln shares which bought down their collective holding to 16 mln shares at the end of May from the end of the previous month. Based on the company’s average closing price 2,219.7 rupees in May, mutual funds would have sold ACC shares worth around 2.7 bln rupees.

According to analysts the selling by mutual funds was likely in reaction to the Holcim-Adani deal, although the data did not indicate it took place before or after May 15 when the deal was announced.

The mutual fund selling was not across the board in cement sector stocks, indicating that the selling in Ambuja Cements and ACC was extraordinary.

In UltraTech Cement Ltd, for instance, fund houses collectively bought shares adding 1% to their collective holding, while in case of Shree Cement Ltd, they sold shares and pared their exposure by just 1%.

Among the fund houses, the major sellers in Ambuja Cements included PGIM India Mutual Fund which sold 3.5 mln shares amounting to 99.1% of its holdings as on Apr 30. Mirae Asset India Mutual Fund sold 7.4 mln shares, or 30% of its holdings, while HDFC Mutual Fund sold 1.5 mln shares and pared its stake in the company by 9.2%.

On the other hand, there was significant buying of Ambuja Cements shares by Quant Mutual Fund, Nippon India Mutual Fund and Mahindra Mutual Fund. Quant MF bought 4.6 mln shares raising its holding in the company to 7.6 mln shares from 3 mln shares, while Nippon India MF bought 3.1 mln shares and doubled its holding in the company.

In ACC, major mutual fund sellers were HDFC MF, Franklin Templeton Mutual Fund, PGIM India MF and DSP Mutual Fund, while major buyers were Tata Mutual Fund and SBI Mutual Fund.

Analysts do not expect the same rate of selling by domestic fund houses in the current month as the share prices of Ambuja Cements and ACC have slipped sharply below their respective open offer prices. The tendering period for the open offer has been tentatively fixed as July 6 to 19 by the Adani Group.

SEBI fines Zenith Steel, others 108 mln rupees for GDR fraud

16 Jun 2022

The Securities and Exchange Board of India today levied penalties aggregating to 108 mln rupees against Zenith Steel Pipes & Industries Ltd and six other entities for fraud committed in the company’s global depository receipt (GDR) issue in May 2010.

Zenith Steel Pipes & Industries was levied a penalty of 100 mln rupees, while its managing director, three other directors, and two other entities were fined a total of 8 mln rupees.

In its investigation, SEBI held that $23-mln-GDR issuance of Zenith Steel Pipes & Industries in 2010 was fraudulent.

The company, its directors and two entities, Arun Panchariya and Mukesh Chauradiya were involved in the dubious issue where the proceeds from the GDR issue were pledged with a foreign bank which then provided a loan to a Panchariya-controlled entity to subscribe fully to the GDR issue.

The company projected misleading information to investors when it notified that its GDR issue was fully subscribed by a set of eight investors. This misled the domestic investors and breached SEBI's listing norms and norms on prohibition of fraud in the market.

The company also did not make any disclosures of the pledge agreement and certain other agreements of credit and account charge which were a part of the fraudulent scheme of things.

SEBI issues penalty recovery notice to BSE, NSE in Karvy Broking case

15 Jun 22

The Securities and Exchange Board of India today raised a notice of demand for recovery of penalty of 30.9 mln rupees, including interest, from BSE Ltd and another one for recovery of 20.6 mln rupees, including interest, from the National Stock Exchange of India.

The notices were sent to the two exchanges for not complying with SEBI’s orders in April against them in the Karvy Stock Broking case.

On April 12, SEBI had imposed penalties on the NSE and BSE, through two separate orders, for their failure in timely detection of the fraudulent conduct of Karvy Stock Broking which had membership on both the exchanges.

The NSE was fined 20 mln rupees while the BSE was directed to pay 30 mln rupees in the SEBI orders.

In its orders, SEBI said that Karvy Stock Broking had misutilised client securities worth 23 bln rupees belonging to more than 95,000 clients by illegally pledging them from its demat account and raising funds against the pledges for itself and its group entities.

“The scale of misuse by KSBL (Karvy Stock Broking Ltd) points to the loss to investors which can potentially be caused when irregular conduct is not detected in a timely manner,” SEBI said in its orders, and held the two bourses responsible for not having checks and balances in place which could detect the fraud much earlier.

SEBI’s first order, an interim one, in the Karvy case was issued on November 22, 2019 when it barred the brokerage from taking new clients and imposed other restrictions.

SEBI Watch: Plug loopholes allowing misuse of preferential share issue funds

13 Jun 2022

A recent ruling by the Securities Appellate Tribunal has put a spanner in the works of the Securities and Exchange Board of India with regard to the latter’s regulatory and enforcement rigours in the rules governing preferential issue of shares by listed companies.

Early this month, SAT ruled against a SEBI order of April that had fined a company, Terrascope Ventures, for a significant deviation from the stated use of funds garnered in a preferential issues of equity shares in 2012.

The sole ground on which SAT allowed the appeal was that the deviation in funds use was ratified by shareholders in an annual general meeting in 2017 by a majority vote.

This ruling by SAT may have adverse ramifications for shareholders if companies manage to get majority votes for ratifying earlier use of funds that was not in line with the stated purposes at the time of a preferential issue.

It opens a pandora’s box which SEBI would find it hard to grapple with. A majority approval is easy for companies where promoters hold stakes of 25-30% or more.

At present, the issue of capital regulations require companies raising funds through preferential issue of shares to specifically state the various purposes for which the funds proposed to be raised by them and get shareholder approval prior to giving effect to the preferential allotment of shares.

SEBI had rightly contended in its order against Terrascope Ventures that the company’s use of funds for other purposes would render the information provided prior to the preferential issue as untrue, misleading and distorted.

This violated the listing regulations, the issue of capital norms and the regulations on prohibition of fraudulent and unfair trade practices in the securities market. It was, therefore, appropriate that SEBI impose penalties on the company, its managing director and another director in the case.

But, given the negative implications for investor rights from SAT’s order, SEBI must appeal the ruling in higher courts.

SEBI also has the option to tweak its regulations on issue of capital and listing obligations to specifically prohibit retrospective shareholder approval of deviation in use of funds raised through preferential issues.

Any misuse of funds raised from issue of shares, even if it is within the ambit of court rulings, will hurt the interests of investors. Existing loopholes in the norms that get exploited by companies in the court appeals must get removed.

UltraTech new capex plan to commence in FY23 or FY24, says brokerage

13 Jun 22

UltraTech Cement Ltd’s recently announced 22.6-mln-tonne-per-year capacity expansion is likely to be funded entirely through internal accruals and will commence in 2023-24 (Apr-Mar) or 2024-25, the company said in a recent investor conference according to a report by brokerage Jefferies India.

In 2022-23, the company will be adding 16.5 mln tonne per year capacity which was a part of capex plan announced in 2020.

On Jun 2, UltraTech Cement had announced that it would incur capital expenditure of up to 128.9 bln rupees towards increasing capacity by 22.6 mln tonne per year by way of integrated units, grinding units and bulk terminals, in a phased manner by 2024-25.

It had specified in the stock exchange filing that it would fund the capex through a mix of borrowings and internal accruals.

The brokerage report said that UltraTech specified its blended capex plan was for $76 per tonne, greenfield expansions were likely at around $100 per tonne and brownfield expansions at around $50 per tonne.

The report also stated that the company found cement demand in Apr-May to have fallen short of its expectations which led to price declines of 10-12 rupees per bag in May which followed price hikes of 30 rupees per bag in April.

The company also reportedly said that based on current petcoke prices of 250-260 rupees per tonne and international coal cost of $370 per tonne, its power and fuel costs are likely to increase by around 300 rupees per tonne as compared to the Jan-Mar quarter’s number.

Meanwhile, Fitch Ratings said today that it had raised the outlook of the ‘BBB minus’ long-term foreign currency issuer default rating of UltraTech Cement to stable from negative, following the rating agency’s recent upward revision of the outlook on India’s issuer default rating of ‘BBB minus’ to stable from negative.

The ratings agency said that UltraTech’s higher capacity expansion capex and the faster new capacity additions in the domestic cement industry will weigh on margins and lead to moderately negative free cash flow over the current and next financial year.

SEBI directs F6 Finserve to return siphoned off client funds, shares

9 Jun 2022

The Securities and Exchange Board of India today directed brokerage firms F6 Finserve and F6 Commodities and their promoter directors to return funds and securities of their client, along with annual interest of 15%, which they siphoned off in grave violation of regulatory norms.

In a final order passed against the two brokerage firms, Pankaj Goel, Meenu Goel and two other promoter directors, SEBI held that they were carrying out their broking operations with various flagrant violations and mismanaging their clients’ funds and securities.

Although the SEBI order did not specify the exact amount of client funds and securities that had to be returned, it stated separately that the claims by the clients of the broker valued 433 mln rupees.

The egregious irregularities in handling of client funds and securities were carried out for at least two years during 2016 to 2018 when an inspection by the National Stock Exchange of India brought it out in the open.

SEBI then took over the probe and carried out a detailed investigation. It found that the broker was not settling the credit balances of several clients in contravention of SEBI norms that required brokers to settle once every quarter.

Among several violations, F6 Finserve had used client securities to meet settlement obligations on its proprietary account and had transferred securities inter se between its clients.

Earlier, in April 2018, the NSE and BSE had declared F6 Finserve as a defaulter and expelled it. F6 Commodities was expelled by the commodity derivatives exchanges in May 2018.

In today’s order, SEBI also barred the two brokerage firms and the four promoter directors from all securities market activities and positions for five years.

Gulf Oil Lub’s FY22 receivables jump due to Mar sales surge, says co

9 Jun 2022

The trade receivables of Gulf Oil Lubricants India Ltd at the end of 2021-22 (Apr-Mar) represented a big increase over the year ago level but the company attributed it to the high topline growth during the financial year.

Trade receivables were up sharply by 57% to 3 bln rupees as of Mar 31, data from Informist Corporate Fundamental Database showed. The revenue from operations of the company, which is a leading private player in the domestic lubricants business, rose by 33% on year to 21.9 bln rupees in 2021-22.

Analysts tend to view any significant jump in trade receivable as an indicator of potential liquidity problem,

Manish Gangwal, chief financial officer at Gulf Oil Lubricants, said in a recent conference call with investors and analysts that the full year topline of the company grew by nearly 33% in 2021-22 which increased the receivables overall. Further, March was a “very-very high month” in terms of sales and those were all standing in the trade receivables at the end of the year.

The company’s March quarter net sales of 6.4 bln rupees was 29% of full year sales, the data showed. The revenues for Jan-Mar grew by 24% on year and 6% on quarter.

Given that trade receivables jumped up by 57% while full-year revenues grew by a lower rate of 33%, the March sales surge would have likely been significant.

The company’s clarification on the trade receivables was in response to a query from an analyst on the sudden jump in of high trade receivables. The analyst further pointed to falling cash flows.

The company said it was in control of the working capital and that the trade receivables were “only 5 to 6 days higher” than normal. It said that the buyback it effected in 2021-22 led to a total cash outflow of 1.1 bln rupees.

The company had cash and cash equivalents of 5.7 bln rupees as of March 31, higher than the year-ago level of 5 bln rupees.

Analysts look at trade receivables to turnover ratio of companies to gauge the liquidity position. A rise in the ratio is generally considered as problematic.

In case of Gulf Oil Lubricants, the data showed that that average trade receivables in 2021-22 were nearly 12% of full year revenues and it was significantly up compared to the previous year ratio of 10.1%. The average was calculated as a mean of the Sep 30 and Mar 31 figures provided in the balance sheets as of those two dates.

A rise in operating costs had reined in the company’s growth in earnings before interest, tax, depreciation and amortisation to 3.3 bln rupees in 2021-22 from 3.2 bln rupees in the previous year, while the EBITDA margin contracted sharply to 14.8% from 18.6%.