* SEBI says Factorial shorted L&T Finance before share sale
* Bars hedge fund from trading; Factorial has 21 days to
* Documents chats by Credit Suisse brokers; bank may be
(Recasts, adds quotes, details, background)
By Himank Sharma and Rafael Nam
MUMBAI, June 6 India's 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 (SEBI) on
Thursday accused Hong Kong-based multi-asset fund Factorial
Capital Management Ltd of shorting L&T Finance Holdings Ltd
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
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unpublished price sensitive information is not ascertainable,"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, Factorial said the allegations by SEBI were
"without merit" and that it would fully cooperate with the
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 and share manipulation,
hoping to stamp out rampant practices that were a key factor
behind the exodus of $5.15 billion in retail investments from
stock funds over the past five years.
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, but these amendments have
yet to come into effect.
"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 250 million rupees ($4.22 million) or
three times the profit made on fraudulent trades.
In a seven-page document, SEBI said it had established that
Factorial was approached by Credit Suisse about their interest
in a potential share sale of L&T Finance by its majority owner
Larsen & Toubro Ltd, India's biggest engineering
company. 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 percent 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 percent to 79.15 rupees on March
13. At the close of the session L&T announced it would sell 55.5
million shares in L&T Finance at a floor price of 70 rupees per
SEBI said Factorial had netted a profit of around 200
million rupees ($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." Scrip refers
to the company's stock.
Factorial returned 2.04 percent in March, its highest
monthly gain since Dec. 2012, according to a newsletter obtained
by Reuters. Equities and the financial sector contributed the
most to the gains in March, the letter showed.
The newsletter did not disclose the amount of money managed
SEBI added its examination of chat transcripts provided by
Credit Suisse Securities (India) Private Ltd showed that on
March 13, before the L&T announcement, brokers at the investment
bank had exchanged messages such as "likely to come in at a
steep discount about 70 types" amongst themselves.
But SEBI said it could not determine the extent to which
such information had been shared, noting that the information on
the pricing could have also come from others involved in the
share sale process, such as other investors.
The drive against insider trading comes after SEBI last year
received enhanced investigation powers from parliament,
including the ability to monitor call records.
The previous government made stamping out insider trading a
priority. Prime Minister Narendra Modi's new government has yet
to comment on insider trading, but his landslide election win
has attracted strong foreign buying and is set to trigger
billions of dollars in share sales by companies.
SEBI's enforcement ability has often been stymied by lengthy
appeals. Last year, it fined a unit of Reliance Industries Ltd
110 million rupees ($2 million) after a six year
insider trading investigation, but the case is being appealed in
($1 = 59.3100 Indian Rupees)
(Additional reporting by Sumeet Chatterjee in MUMBAI and
Nishant Kumar in HONG KONG; Editing by Andrew Roche, Stephen
Coates and Miral Fahmy)