Friday, November 11, 2011

Rigging in Reliance GDR

http://www.telegraphindia.com/1111111/jsp/business/index.jsp

Rigging in Reliance GDR

Mumbai, Nov. 10: Ramesh Goenka, a secretive diamond businessman who has been living in Dubai for the past 12 years, has been ordered to pay a penalty of $9.62 million (about Rs 48 crore) after he was found guilty of ramping up the global depositary receipts (GDRs) of Reliance Industries on the London Stock Exchange in October 2010.

The fine imposed by the Financial Services Authority (FSA) of the UK is the biggest penalty imposed on an individual. The charge against Goenka was that he had pumped up the price of the Reliance GDR on October 18 last year in the closing stages of trading to head off a potential $3-million loss on an exotic structured product that he had bought in 2007.

"In publishing its findings against Goenka, the FSA is not in any way criticising Reliance," UK's financial services regulator said in a note.

GDR is a capital-raising instrument floated on the European bourses and derives its value from underlying shares of the firm. The instrument can be converted into shares after a certain period at the option of the investor.

Reliance Industries floated GDRs in two tranches in June 1992 and March 2004. As of March 31 this year, it had outstanding GDRs worth 3.73 per cent of RIL's share capital that were backed by 121.96 million shares held in a depositary.

Goenka had placed orders with a complicit broker to buy 800,000 Reliance GDRs at $48.71 apiece in a desperate attempt to ensure that the security closed above $48.65 — a pre-determined knock-in price — and allowed him to break even on his three-year-old deal and collect $10 million.

He was able to buy only 193,500 GDRs in the last gasp of trading, but it was enough to nudge the price above a critical level and save his investment.

Goenka did not contest the charge and agreed to settle at an early stage of the FSA's investigation, winning a 30 per cent discount on the penalty that was imposed. He was asked to pay $6,517,6000 as penalty instead of $9,310,920 that he would have had to pay.

He was also ordered to pay another $3,103,640 by way of restitution to the counter-party to the deal — equalling the loss that he would have made if he hadn't manipulated the price of the GDR.

The 66-year-old businessman is a former chairman of Suashish Diamonds — a well-known diamond jewellery firm that is listed on the BSE with its offices at Mehta Mahal in the Opera House area that teems with diamond businessmen.

In June, Goenka stepped down as chairman of Suashish Diamonds in favour of his son Ashish. The group has operations and established subsidiaries in the US, Hong Kong, Dubai, Shanghai, and Botswana.

Suashish Diamonds — which is a sightholder at DTC UK and Botswana and is, therefore, assured of a steady supply of rough diamonds — could not be reached for comment on Goenka's involvement. Although Goenka was chairman till June this year, the company's annual report for 2009-10 shows that he did not attend any board meeting or AGM and did not collect any salary in that year.

Stephen Gentle, who represented Goenka, said his client had moved to settle with the FSA to minimise disruption to his life, but he had not admitted intentional market abuse.

"He's pleased to have settled quickly so the matter can be brought to a swift conclusion. FSA investigations can go on for a very long time and can be disruptive both personally and with regards to business practices," he said.

Gentle added: "His view is that he was hedging a position on which he was running a significant risk."

It wasn't immediately clear how Goenka was busted. A 28-page report on the FSA website talks about conference calls between Goenka and his London-based investment adviser and the broker who put through the orders and quotes snatches of conversation, suggesting that phone taps were used.

Goenka had bought two structured products in 2007 for $10 million each both of which were due to mature in 2010. The Russian structured product related to a basket of GDRs representing the shares of Gazprom, Lukoil and Surgutneftegaz Oil. This product matured in April 2010, and investigations showed that Goenka had tried to manipulate the price of Gazprom's GDR.

The plan was scuppered when President Vladimir Putin announced a merger between Gazprom and NAK Naftogaz Ukrainy, causing the price of the securities to fall too far to be manipulated, the FSA said. However, the experience he gained helped Goenka to later rig the Reliance GDR.

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