NEW DELHI/MUMBAI: In a relief for Reliance Industries Ltd (RIL), the Supreme Court on Friday set aside the market regulator Securities and Exchange Board of India’s (Sebi) ₹447.27-crore disgorgement order in the long-running Reliance Petroleum Ltd (RPL) derivatives trading case, marking a key turn in one of the most significant disputes in India’s capital markets.
A bench comprising Justices J.B. Pardiwala and R. Mahadevan allowed Reliance’s appeal and overturned a November 2020 majority ruling of the Securities Appellate Tribunal (SAT), which had upheld Sebi’s findings of fraudulent and manipulative trading in RPL shares and derivatives in 2007.
The bench directed the refund of ₹250 crore deposited by Reliance in the Investor Protection Fund pursuant to an interim order passed during the pendency of the appeal.
The apex court held that SAT had committed an “egregious error” in sustaining the findings of fraud under the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations. “For all the foregoing reasons, we have reached the conclusion that the SAT, in its majority judgment, committed an egregious error in passing the judgment,” the court observed.
Emailed queries sent to RIL and Sebi earlier on Friday remained unanswered till press time.
While setting aside the fraud findings and the disgorgement order, the court upheld findings relating to violations of Sebi’s 2001 derivatives position-limit and disclosure framework.
The 2001 derivatives position-limit rules were introduced by Sebi and stock exchanges as risk-control measures to prevent a single market participant from acquiring a dominant position in a stock’s futures market.
The dispute
The latest relief follows another Supreme Court victory for RIL in a separate proceeding arising from the same 2007 Reliance Petroleum trading episode. In that case, the court in November 2024 quashed Sebi penalty on RIL chairman and managing director Mukesh Ambani, over alleged share manipulation involving RPL.
The dispute traces its origins to November 2007, when RIL decided to sell around 5% of its stake in Reliance Petroleum, then a listed subsidiary.
Sebi had alleged that before undertaking the sale in the cash market, Reliance entered into arrangements with 12 entities that accumulated substantial short positions in RPL futures contracts. The entities included Chintamani Holdings & Trading, Devarshi Commercial, Darshan Mercantile, Dhriti Investments & Holdings, Fiascon Holdings, Gandhar Trading & Investments, Harish Textiles Engineers, Mahalaxmi Glass Works, Mesmore Investment & Finance, Priority Constructions, Siddhivinayak Investment & Trading and Titanium Investments.
According to the regulator, the 12 entities acted on behalf of RIL and built futures positions equivalent to nearly 9.92 crore shares.
Sebi also alleged that on 29 November 2007, the expiry day of the futures contracts, Reliance sold around 1.95 crore RPL shares in the cash market during the final minutes of trading, depressing the share price and lowering the settlement price of futures contracts.
The regulator claimed that the connected entities benefited from the decline through their short futures positions and that the gains ultimately accrued to Reliance. Sebi estimated that the entities earned profits of around ₹513 crore from the derivatives trades.
In a March 2017 order, then Sebi whole-time member G. Mahalingam held that RIL had engaged in a fraudulent and manipulative scheme in violation of the PFUTP Regulations. Sebi directed the company to disgorge ₹447.27 crore, along with interest at 12% per annum from November 2007.
The matter eventually reached SAT, which upheld the disgorgement order in a split verdict in November 2020. Reliance subsequently challenged the ruling before the Supreme Court.
The apex court in its ruling examined four key issues, including whether the agreements between Reliance and the 12 entities were fraudulent, whether the futures positions constituted legitimate hedges, whether Reliance had cornered positions in the derivatives market, and whether the sale of shares in the cash market was intended to depress prices and generate unlawful gains.