Supreme Court Sets Aside Rs 447 Crore Disgorgement Against RIL, Finds No Fraud in RPL Futures Trade
A Division Bench of Justices J.B. Pardiwala and R. Mahadevan holds that exceeding position limits through agency arrangements does not, without more, constitute fraud under the PFUTP Regulations.
The Supreme Court has set aside the Securities Appellate Tribunal's majority finding of fraud against Reliance Industries Limited in connection with its trading in Reliance Petroleum Limited futures in November 2007. In a judgment delivered on 29 May 2026, a Division Bench of Justices J.B. Pardiwala and R. Mahadevan held that the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 were not attracted on the facts, quashed the order of disgorgement of Rs 447.27 crore, and directed SEBI to refund Rs 250 crore that RIL had deposited in the Investor Protection Fund. The Court did, however, uphold a separate penalty for violating the disclosure requirements under the 2001 SEBI Circular on position limits. The judgment resolves a dispute that had wound through SEBI's adjudicatory machinery and the SAT over nearly fifteen years.
How the Dispute Reached the Court
RPL was a 75% subsidiary of RIL in 2007. Its shares had risen from Rs 60 at the May 2006 IPO to nearly Rs 248 by the end of October 2007 — a near-quadrupling in seventeen months. Analyst reports from Goldman Sachs, Morgan Stanley and Kotak Institutional Equities described the stock as among the costliest refining stocks in the world and flagged the risk of a price correction.
Against that backdrop, RIL's board passed a resolution on 29 March 2007 authorising two officials to raise Rs 87,000 crore through various means, including divestment of investments. It was decided that 5% of RIL's RPL holding — 22.50 crore shares — would be sold in the cash segment. Noting that liquidity in the November 2007 RPL futures segment was nearly four times that of the cash segment, RIL also decided to take short positions in the futures segment as a hedge against the expected price decline from selling such a large block.
To do so, RIL entered into agreements with twelve independent entities. Between 1 November and 6 November 2007, those entities took aggregate short futures positions of 9.92 crore RPL shares in the November 2007 series. Under the agency agreements, all profits and losses were to flow to RIL; the twelve entities earned only a commission. The settlement date for the November 2007 series was 29 November 2007.
By the settlement date, 7.97 crore short futures positions remained open and were automatically closed by the NSE at the settlement price — the last half-hour weighted average price of RPL in the cash segment on that day. Meanwhile, 20.29 crore RPL shares were sold in the cash segment during November 2007, realising Rs 4,500 crore. The futures settlement yielded Rs 513 crore. In the last 8 minutes and 20 seconds of trading on 29 November 2007, RIL sold 1.95 crore shares in the cash segment.
SEBI issued a show cause notice in 2009, superseded by a fresh notice in December 2010. The Whole Time Member held that RIL had manipulated the settlement price by dumping shares in the final minutes of trading, that the agency arrangements were a fraudulent device to circumvent position limits, and that RIL had made unlawful gains of Rs 513 crore. The WTM directed disgorgement and barred RIL from equity derivatives for one year. The SAT, by a 2:1 majority on 5 November 2020, upheld the fraud finding and the disgorgement, though it reduced the disgorged amount to Rs 447.27 crore. RIL appealed to the Supreme Court under Section 15Z of the SEBI Act.
The SAT Split and the Questions Before the Court
The SAT majority held that the twelve entities were agents of RIL, that the agency structure was a pre-planned scheme to evade position limits, that the futures positions were not genuine hedges, and that the sale of 1.95 crore shares in the last ten minutes of the settlement date was designed to depress the settlement price. The minority member took the opposite view on each point: the breach of position limits could attract only the monetary penalty prescribed under the SCRA framework, inducement — an essential ingredient of fraud under the PFUTP Regulations — had not been established, and SEBI had not discharged the burden of proving manipulation.
Before the Supreme Court, RIL was represented by Mr Harish Salve, senior counsel, who argued that the trades were bona fide hedges, that the 2001 SEBI Circular did not prohibit persons acting in concert from taking positions in single-stock futures, that inducement is the sine qua non of fraud under the PFUTP Regulations, and that a breach of position limits could at best attract penalties under the SCRA. SEBI's counsel argued that what cannot be done directly cannot be done indirectly, and that the coordinated use of twelve agents to corner 62% to 93% of market-wide open interest in the November 2007 RPL futures was a pre-planned manipulative scheme.
The Court's Reasoning on Fraud and the PFUTP Regulations
The Court's analysis turned on the relationship between a breach of position limits and the definition of fraud under Regulation 2(1)(c) of the PFUTP Regulations. That definition requires an act, expression, omission or concealment while dealing in securities “with the object of inducing another person to deal in securities.” The Court held that inducement is the sine qua non of fraud under the Regulations, drawing on this Court's earlier decision in SEBI v. Kanaiyalal Baldevbhai Patel, reported in (2017) 15 SCC 1.
The Court acknowledged that in SEBI v. Rakhi Trading (P) Ltd., reported in (2018) 13 SCC 753, this Court had held that inducement need not be separately proved where the factum of manipulation is sufficiently and cogently established. It reconciled the two decisions by laying down a framework: where injury caused by inducement is established — meaning the other person was adversely affected and the accused party gained unlawful profits at that person's expense — deceitful intention need not be separately proved. Conversely, where deceitful or mala fide intention is clear from blatant misconduct or attending circumstances, injury need not be proved. In all other cases, the respondent authority must establish both.
Applying that framework, the Court found that SEBI had proved neither inducement nor a separate act of price manipulation with the cogency required. The Court held that the PFUTP Regulations cannot be attracted on the sole circumstance of RIL using twelve agency agreements to take positions in excess of the prescribed limits. It was necessary for SEBI to prove that the manner in which the agency agreements were utilised was itself fraudulent.
Position Limits, the 2001 SEBI Circular, and the Agency Structure
The Court accepted that the 2001 SEBI Circular and the 2001 NSE Circular prescribed client-level position limits for single-stock futures, and that RIL, by aggregating the positions of twelve agents, exceeded those limits. However, it held that the 2001 SEBI Circular did not prohibit trading through persons acting in concert and imposed no disclosure requirement in that regard. The concept of aggregating positions of persons acting in concert for single-stock futures was introduced only in December 2016. The Court held that RIL could not be penalised under the PFUTP Regulations for conduct that the regulatory framework in force in 2007 did not expressly prohibit.
The Court also rejected the argument that the agency structure was a fictitious or benami arrangement. The agreements were disclosed to SEBI at the first instance of inquiry, not uncovered through independent investigation. The Court held that a literal interpretation of the 2001 SEBI Circular would not even permit penalisation of the conduct; the only basis for upholding any penalty was the principle that what cannot be done directly cannot be done indirectly — and that principle, while sufficient to sustain the disclosure-related penalty, did not transform the breach into fraud.
Whether the Futures Positions Were Valid Hedges
The Court held that the 9.92 crore short futures positions taken by RIL in the November 2007 RPL series were valid hedges. The underlying exposure in the cash segment — 22.50 crore shares to be sold — exceeded the futures positions by more than half. The Court found SEBI's reliance on the Gujarat High Court's decision in Pankaj Oil Mills v. CIT to be misplaced, since the underlying risk exposure in the cash segment far exceeded the derivatives positions.
The Court rejected the SAT majority's finding that the futures positions constituted “naked hedges” from 23 November 2007 onwards. It held that there is no legal requirement for a perfect hedge with a 1:1 ratio of underlying risk to hedge positions. It also held that the absence of a formal hedging policy or a specific board resolution for the hedging transactions was not fatal: no such legal requirement existed in 2007, and the NSE's hedge policy and SEBI's position limits for hedges were introduced only in 2016, in the context of commodity derivatives. No equivalent policy exists for equity derivatives even today.
The Calculation of Open Interest and the Cornering Allegation
The Court found a fundamental flaw in SEBI's calculation of RIL's share of open interest. SEBI had calculated the percentage only with reference to the November 2007 RPL futures series, arriving at a figure of 93.63% on the settlement date. The Court held that the correct denominator was the total open positions across all derivatives in the RPL stock — the November 2007 series, the December 2007 series, the January 2008 series, and RPL options. On that basis, RIL's share of open interest on 29 November 2007 was 40.10%, not 93.60%.
The Court held that even 40.10% exceeded the position limits in the 2001 SEBI Circular, but that this excess did not indicate an intent to manipulate prices. The hedging requirements of RIL were proportionate to the risk it faced from selling a large block of RPL shares, even if in absolute terms the positions exceeded the prescribed limits. The Court held that cornering which includes within itself the intent to manipulate prices must be patently clear from the conduct and transactions of the party accused of fraud — and on the facts, it was not.
The Last-Ten-Minutes Sale on 29 November 2007
The Court examined the allegation that RIL sold 1.95 crore RPL shares in the last 8 minutes and 20 seconds of trading on 29 November 2007 to depress the settlement price and profit on its 7.97 crore outstanding short futures positions.
The Court found that RIL had not sold any RPL shares in the cash segment after 23 November 2007, when the price was around Rs 210 per share. Between 26 and 28 November, prices remained below Rs 208 and RIL made no sales. On 29 November, the share opened at Rs 193.80, rose to Rs 208.20 by 3:00 p.m., and then spiked to Rs 224.70 by 3:21 p.m. It was at that point that RIL placed sell orders for 1.95 crore shares.
The Court held that the pattern of RIL's sales — consistently refusing to sell below Rs 208 and making no sales during the period when prices were below that threshold — was inconsistent with an intent to depress prices. Had the intention been to depress the settlement price, RIL would have sold far more than 1.95 crore shares and at prices below Rs 210. The Court also noted that RIL retained approximately 70% of its RPL shareholding throughout. Any deliberate depression of the RPL share price would have depreciated that entire holding, making the alleged trade-off commercially implausible.
The Court applied the standard of preponderance of probabilities and held that SEBI had not discharged the higher burden of proof required to establish manipulation in the circumstances.
Outcome
The Court set aside the SAT majority judgment dated 5 November 2020 insofar as it found fraud under Regulations 3 and 4 of the PFUTP Regulations. The order of disgorgement was set aside. The Court directed SEBI to refund Rs 250 crore deposited by RIL in the Investor Protection Fund pursuant to this Court's order dated 17 December 2020.
The Court upheld the penalty levied by the WTM and the SAT majority for violation of the disclosure requirements under the 2001 SEBI Circular in respect of position limits. Both civil appeals — Civil Appeal No. 4015 of 2020 and Civil Appeal Diary No. 4723 of 2024 — were partly allowed. Pending applications were disposed of.