Supreme Court on RIL–RPL Futures Trades: Hedging, Position Limits and PFUTP Liability

1. Background of the Dispute

The Supreme Court adjudicated statutory appeals in Reliance Industries Limited & Ors. Vs Securities And Exchange Board of India, arising from majority decisions of the Securities Appellate Tribunal (SAT) dated 05.11.2020 and 04.12.2023. The controversy centred on trading in Reliance Petroleum Ltd. (RPL) shares and derivatives in November 2007, and whether such conduct amounted to fraud and market manipulation under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations).

At the relevant time, RPL was a 75% subsidiary of Reliance Industries Limited (RIL), the main appellant.

1.1 RPL Share Price Run-Up and Concern of Overvaluation

RPL’s initial public offering in May 2006 was at ₹60 per share. By late 2007, prices had escalated sharply:

  • March 2007: ₹66–₹74
  • September 2007: around ₹150
  • 29.10.2007: ₹223
  • 30.10.2007: ₹238
  • 31.10.2007: ₹247.90

Within roughly seventeen months, the stock price had increased fourfold. Several global and domestic research houses (including Goldman Sachs, Morgan Stanley and Kotak Institutional Equities) published reports stating that RPL was among the most expensive refining stocks globally and appeared highly overvalued. These assessments raised a serious possibility of a price correction.

1.2 RIL’s Fund-Raising and Proposed Stake Sale

On 29.03.2007, RIL’s Board approved a resolution empowering two senior officials to raise approximately ₹87,000 crore for projects through multiple modes, including sale of investments. This necessarily covered a potential partial divestment of RPL shares.

Pursuant to this broad authorisation, RIL decided to disinvest 5% of its RPL holding, i.e., 22.50 crore RPL shares, through market sales. The 29.03.2007 Board resolution did not specifically deal with hedging or RPL-focussed trades; it simply conferred a wide mandate to mobilise funds.

1.3 Market Liquidity in November 2007 Futures

RIL observed that in the November 2007 RPL futures series, market activity was significantly higher than in the cash segment:

  • Between 24.10.2007 and 31.10.2007, traded quantity in RPL November futures was about 109.90 crore shares,
  • vis-à-vis only 29.46 crore shares in the cash market.

Given this deep liquidity, RIL resolved to:

  • Build short positions in RPL November 2007 futures, and
  • Simultaneously offload RPL shares in the cash segment.

2. Principal–Agent Structure With Twelve Entities

2.1 Agreements With 12 Entities

To implement this strategy, RIL executed written agreements with twelve independent entities. Between 01.11.2007 and 06.11.2007, these entities collectively took sale positions aggregating 9.92 crore RPL shares in the November 2007 futures series. Settlement was scheduled for 29.11.2007.

Key features of the agreements included:

  • The entities were required to transact strictly as per RIL’s instructions (Clause 1.2).
  • All profits and losses on the derivatives trades were for RIL’s account (Clause 3.2).
  • The entities earned only a fixed commission, with no real market risk.

On this basis, both SAT (including its minority member) and the Supreme Court accepted that the entities were acting as agents and that RIL was the principal, bringing Section 226 of the Indian Contract Act, 1872 squarely into play.

2.2 Closing Out Futures Positions

Of the 9.92 crore short futures:

  • RIL (through its agents) squared off 1.95 crore contracts before expiry by taking corresponding long positions.
  • The remaining 7.97 crore contracts were left open and automatically closed out by the National Stock Exchange (NSE) on 29.11.2007 at the settlement price, i.e., the last half-hour volume-weighted average price (VWAP) of RPL in the cash market on that day.

2.3 Cash Segment Sales

In parallel, RIL disposed of 20.29 crore RPL shares in the cash segment during November 2007, delivering shares on a rolling basis. Notably:

  • A significant tranche of 1.95 crore shares was sold in the last 8 minutes 20 seconds of trading on 29.11.2007 on the NSE.

2.4 Aggregate Realisation

Across both segments, RIL realised about ₹5,013 crore:

  • Approximately ₹4,500 crore from cash segment sales; and
  • About ₹513 crore profit from the November 2007 futures trades of the 12 entities.

The latter figure represented the differential between:

  1. The average sale price at which 9.92 crore short futures were created; and
  2. The prices at which 1.95 crore futures were squared off plus the NSE-determined settlement price applicable for the balance 7.97 crore contracts.

3. SEBI’s Show Cause Notice and WTM Findings

3.1 Show Cause Notice (SCN)

SEBI issued an SCN on 16.12.2010, superseding earlier notices. The core allegations (as later summarised by the SAT minority) were that:

  1. RIL, acting through 12 entities, took massive short positions in November 2007 RPL futures, allegedly in breach of client-level position limits fixed by SEBI, NSE and NSCCL, and did so with knowledge of impending large cash sales – amounting to a pre-planned fraudulent and manipulative trading scheme under the PFUTP Regulations.
  2. The futures trades were illegal and invalid under Section 18A of the Securities Contracts (Regulation) Act, 1956 (SCRA).
  3. RIL allegedly depressed the settlement price by aggressively selling 1.95 crore shares in the last 10 minutes on 29.11.2007, thereby earning unjust profit of ₹513.12 crore.
  4. Transactions routed through the 12 entities were characterised as benami, and hence void.

3.2 Order of the Whole Time Member (WTM)

After considering material on record, the WTM concluded that:

  • By using 12 agents, each availing separate client limits, RIL effectively cornered 93.63% of open interest in the November 2007 RPL futures. This was held to be a fraudulent circumvention of position limits.
  • Allowing the 7.97 crore short futures to run to expiry and be cash-settled at the VWAP on 29.11.2007 allegedly reflected a pre-planned manipulation rather than a mere technical breach.
  • Price movement analysis for November 2007, with focus on trades in the last half hour and especially the last 10 minutes of 29.11.2007, led the WTM to conclude there was manipulation of the settlement price.
  • The conduct was held to contravene Section 12A of the SEBI Act, 1992 read with Regulations 3, 4(1) and 4(2)(e) of the PFUTP Regulations, and also violate:
    • SEBI Circular No. SMDRP/DC/CIR-10/01 dated 02.11.2001 (2001 SEBI Circular), and
    • NSE Circular No. NSE/CMPT/2982 dated 07.11.2001 (2001 NSE Circular).

On this reasoning, the WTM held that RIL had made unlawful gains of ₹513 crore through fraudulent means, declared the 7.97 crore short futures invalid under Section 18A of the SCRA, and ordered disgorgement.

4. SAT’s Majority and Minority Views

RIL appealed to the SAT.