On 17th October, Reliance Industries Ltd (RIL) came out with its financial results for the second quarter (Q2) of FY18-19 results. However, more than the numbers, the buzz was created by its announcement of plan to acquire 66% stake in Den Networks and 51.30% stake in Hathway Cable, which will lead to consolidation in wired broadband space just like the telecom space.
But what is interesting is some people may have known about this information and acted on it and pocketed huge gains. The price action of these two stocks before the announcement points to a clear-cut case of insider trading.
From the end of August, the scrips of Hathway Cable and Den Networks have risen a whopping 57% and 53%, respectively. That too when the Nifty is down 11% and the Small Cap index is down 21%.
There have been no developments on these stocks whatsoever, to warrant such dramatic rise. And how is it that these two completely different stocks rose at the same time in a market hit by bear hammering? The only common element is what came out later, which is RIL buying a controlling stake in both these companies.
It is clear that a small group had the inside information of these deals that has led to these stocks rising in so much in a market going through a huge turmoil, where almost all stocks are down.
Insider trading is rampant in India. This is not the first time, we have pointed out in insider trading in listed companies. However, in almost all cases, the response from market regulator, SEBI, was not up to the mark. In fact, in many cases, entities behind insider trading got away either with miniscule fine or through consent.
We wrote about insider trading in Infosys Ltd in 2013 before the return of NR Narayan Murthy at the helm, then in Ranbaxy Lab in 2014 before it was acquired by Sun Pharma and many more.
In case of Infosys, when the BSE Sensex was down 455 points on 31 May 2013, the company scrip was up 3.32%. That too when its peers like Tata Consultancy Services (TCS) and HCL Technologies were flat. Next day, i.e. on 1 June 2013, Infosys announced that its main founder Mr Murthy, who was on a retirement, would be returning to the company as executive chairman of the board and as an additional director for five years.
As a matter of perspective, this was the highest percentage decline in the Sensex in 14 months and the highest rise for Infosys in one and half months, both happening on the same day! Clearly, someone knew that Mr Murthy was coming back and that many investors will see this as a positive development. There is a prima facie suspicion of insider trading. (Read: Someone knew Narayana Murthy is coming back and traded on it
In 2014, Sudhir Valia, executive director of Sun Pharma bet big in the scrips of Ranbaxy Laboratories it was bought for $4 billion by Sun. Over six trading days, prior to the announcement of its acquisition by Sun Pharma, shares of Ranbaxy had rallied 34%.
According to information available on the BSE, Silverstreet Developers, a firm in which Mr Valia was one of the partners, were found buying stake in Ranbaxy since December quarter of 2013. Silverstreet Developers LLP's stake in Ranbaxy was 1.41% as on December 2013 end. The stake increased to 1.64% at the end of March 2014. And days after this, Sun Pharma announced the big takeover. (Read: Was Sun Pharma's Valia betting big on Ranbaxy?
& Insider trading in Ranbaxy?
During the same year, there were massive volumes and a hefty price rise in ING Vysya scrip one month before the Kotak Mahindra Bank merger deal. At the beginning of October 2014, the 1,000 ING Vysya shares were worth just 586 shares of Kotak Mahindra. This value went up marginally, but soon dropped to 573 shares of Kotak Mahindra for 1,000 shares of ING Vysya. From then on, it started gaining momentum, and reached up to 704 shares of Kotak Mahindra, as per the closing price on 20 November 2014, the date of the announcement. And what was the merger ratio? 725! (Read: Insider trading in ING Vysya stock?)
In July 2018, Moneylife wrote how directors and promoters of BK Birla group company Kesoram Industries may have allegedly indulged in large-scale insider trading in the process short-changing minority shareholders hundreds of crores.
As of 31 March 2015, Kesoram held 27.46 lakh shares of Century Textiles. On 22 March 2016, Kesoram sold all these shares to Camden Industries for Rs141 crore in a bulk deal. In FY17-18, Kesoram invested another Rs400 crore in Cygnet Industries, its wholly owned subsidiary. Cygnet Industries used this amount to buyback 27.46 lakh shares of Century Textiles from Camden Industries in three transactions on 5th, 11th and 12 December 2017; for Rs355 crore. Thus, it is alleged that Camden Industries made a clean profit of Rs214 crore.
Then Cygnet Industries sold these 27.46 lakh shares of Century Textiles to Pilani Investments, a promoter entity of Kesoram, in two transactions on 7th and 14 June 2018, for Rs255 crore and in the process realised an allegedly loss of Rs100 crore.
In this entire round tripping, Camden Industries allegedly made a profit of Rs214 crore but Kesoram shareholders lost Rs100 crore through Cygnet Industries. Also during FY15-16, Kesoram had through a slump sale, sold its spun pipes and chemical business to Camden Industries for Rs400 crore. These businesses were again bought back by Kesoram in FY17-18 for Rs422 crore.