Why an appellate Tribunal has quashed SEBI’s order against Mukesh Ambani

The RPL case

Before RPL was merged with RIL, the latter company had sold 4.1 per cent of its stake in the former. However, to prevent a fall in the share price of RPL, the equity was alleged to have been sold first in the futures market (in which commodity and futures contracts are bought and sold for delivery in the future), and later in the spot market (cash market in which financial instruments are traded for immediate delivery).

The markets regulator, the Securities and Exchange Board of India (SEBI), served notice saying that the company was aware there would be a sale of shares in the spot market and hence, its sales in the futures market before that amounted to insider trading.

The SEBI order

In an order dated March 24, 2017, SEBI directed RIL to disgorge an amount of Rs 447.27 crore along with interest calculated at the rate of 12 per cent per annum from November 29, 2007 until the date of payment.

RIL was also prohibited from dealing in equity derivatives in the Futures & Options (F&O) segment of stock exchanges, directly or indirectly, for one year from the date of the order.

In November 2020, the Securities Appellate Tribunal (SAT) upheld SEBI’s disgorgement order. RIL appealed against the SAT order in the Supreme Court. That case is still pending.

In January 2021, SEBI said RIL had appointed 12 agents to undertake transactions in RPL futures in November 2007. It was alleged that the 12 entities were financed by the Navi Mumbai Special Economic Zone (SEZ) and the Mumbai SEZ.

The regulator imposed fines of Rs 25 crore and Rs 15 crore on RIL and Mukesh Ambani respectively. Navi Mumbai SEZ Pvt Ltd was asked to pay Rs 20 crore, and Mumbai SEZ Ltd was fined Rs 10 crore.

Tribunal’s order

Ambani, along with RIL and other entities, challenged SEBI’s 2021 order before the SAT. On Monday (December 4), the Tribunal quashed the regulator’s order in respect of Ambani and the SEZs, but upheld the action against RIL.

A bench comprising Justice Tarun Agarwala and Presiding Officer Meera Swarup said the RIL board had specifically authorised two persons to decide the disinvestment. However, it cannot be suggested that the Managing Director is ipso facto responsible for every alleged contravention of the law by the corporate entities.

“In view of the stark evidence in the form of minutes of the two board meetings of RIL, which conclusively proves that the impugned trades were carried out by two senior officials without the knowledge of the appellant, no liability can be fastened upon Noticee No 2 (Ambani),” the Tribunal said. SEBI had failed to prove that Ambani was involved in the execution of the trades carried out by two senior executives, it said.

However, the bench said, “We do not find any reason to interfere with the impugned order in so far as it relates to the company RIL.”

The Tribunal also said that it was not possible for the Navi Mumbai SEZ and Mumbai SEZ to have information that RIL would take positions in the futures market and sell shares in the cash market and through its agents.

SEBI had argued that manipulation in the volume or price of securities erodes investor confidence in the market. “In the instant case, the general investors were not aware that the entity behind the above F&O segment transactions was RIL. The execution of the… fraudulent trades affected the price of the RPL securities in both cash and F&O segments and harmed the interests of other investors,” it said in its order.

On Ambani, the SEBI order had said: “…The Managing Director of RIL was responsible for the manipulative activities of RIL. Listed companies should exhibit highest standards of professionalism, transparency and good practices of corporate governance, which inspires confidence of the investors dealing in the capital markets…”