SEBI rejects RIL's plea to settle insider charges

MUMBAI: The capital market regulator has rejected a second attempt by India’s largest private sector firm, Reliance Industries (RIL), to settle charges of insider trading out of court.

The Securities and Exchange Board of India, or Sebi, will instead continue its investigation into trades carried out by entities allegedly linked to RIL, in November 2007, said a senior official. It’s not clear when the so-called consent application, akin to a negotiated settlement, was rejected, but it is believed to be fairly recent.

The regulator is probing the sale of stock futures of Reliance Petroleum (RPL), in the first week of November 2007, a few days before parent RIL, India’s most valuable company by market capitalisation, started trimming its stake in its refining arm. The sellers were not well-known market players, but they were allegedly located at the address of some RIL group companies, according to information provided to Sebi by unknown complainants.

The regulator has not issued a final order on the veracity of these complaints. It will now pass a final order after hearing RIL. Sebi’s orders can be challenged before the Securities Appellate Tribunal, or SAT.

After Sebi set in motion quasi-judicial proceedings against RIL, the company sought a consent order or a negotiated settlement between the regulator and a capital market entity. The firm or person facing a probe can submit an application for such an order, without admission of guilt and without denial of liability. This practice is common in advanced markets like the US.

RIL’s external spokesman said it would not be able to comment for the story.

The first such attempt was rejected last year and the second application for a consent order has also been rejected, according to a senior official in the regulator’s office.

In the first consent offer, RIL offered to pay a penalty of Rs 2 crore, according to a person close to the company. Details of the terms of the second application, which has also been rebuffed by the regulator, are not in the public domain.

Sebi’s notice to RIL says the company has to provide reasons as to why action should not be taken against it. If Sebi is able to conclude that the charges are true, it has the powers to impose a ban on the company from accessing the securities market and also to prohibit it from buying, selling and dealing in securities directly or indirectly or to force the company to disgorge the proceeds earned by indulging in the transactions.

The entire mechanism of consent is a discretionary exercise on the part of the regulator, whether a case is to be settled or not. The regulator’s internal guidelines clearly make a distinction between grave offences such as violations affecting the integrity of the market and technical violations.

Somasekhar Sundaresan, partner of law firm J Sagar Associates, said consent orders were an important feature of any mature market. “It is important not to waste taxpayers’ funds on regulatory litigation as far as possible. If one can inflict serious commercial injury keeping the regulatory track record intact, one should always opt for that,” he said.