Mumbai: The stock market regulator may investigate the domestic unit of Credit Suisse Group to determine whether price sensitive information about a share deal that the authority has ruled to be insider trading was leaked by the investment bank. The Securities and Exchange Board of India on Thursday accused Hong Kong-based multi-asset fund Factorial Capital Management of shorting L&T Finance Holding before the announcement of a share sale in mid-March.
Sebi said it may probe whether Credit Suisse staff had revealed to Factorial that the L&T Finance deal would be done at a discount, but the regulator did not accuse the bank of any wrongdoing.
Instead, the regulator focused its investigation on Factorial, barring the hedge fund from trading Indian securities. The hedge fund has 21 days to respond. “At this stage, the channel of communication of the unpublished price sensitive information is not ascertainable,” Sebi said in its case. “This aspect needs thorough investigation so as to come to a definite conclusion.” In a statement, Facto-rial said the allegations by Sebi were “without merit” and that it would fully cooperate with the investigation.
A Credit Suisse spokeswoman in Hong Kong declined to comment. Most investment banks restrict staff access to price sensitive information to avoid leaks. The accusations come after Sebi chairman U.K. Sinha stepped up the fight against insider trading. The regulator, notorious for its timid enforcement of market violations, is also overhauling its two-decade-old insider trading law to give it more muscle. “It’s quite surprising to see such swift action,” Sai Venkateshwaran, a partner at KPMG in Mumbai said, referring to the Factorial case. “Sebi is trying to put in place better enforcement mechanisms to ensure speedy action,” he added.
Lawyers said the maximum penalty for an insider trading conviction was currently Rs 25 crore or three times the profit made on fraudulent trades. In a seven-page document, Sebi said it had established that Facto-rial was approached by Credit Suisse about their interest in a potential share sale of L&T Finance by its majority owner Larsen & Toubro. Such an approach is part of the process of any deal. Sebi said Factorial then aggressively built a big short position in L&T Finance derivatives on March 13 — accounting for 84.15 per cent of all its outstanding futures and options positions — and covered its shorts through purchases in the heavily discounted share offering.
L&T Finance shares fell 7.2 per cent to Rs 79.15 on March 13. At the close of the session L&T annou-nced it would sell 55.5 million shares in L&T Finance at a floor price of Rs 70 per share.
Sebi said Factorial had netted a profit of around Rs 20 crore ($3.37 million) in a transaction it called “aberrant and suspicious.” “It is highly unlikely that one who does not have any exposure in the scrip will take such an aggressive short position,” Sebi said, “unless it had some definite information about fall in price of the scrip in near future.” Factorial returned 2.04 per cent in March, its highest monthly gain since December 2012, according to a newsletter.
