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Factorial Master Fund’s Aggressive Short Position

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In October 2014, SEBI passed an order restraining Factorial Master Fund from accessing the securities market and prohibited the Fund from buying, selling or dealing in securities on the grounds of alleged insider trading in the scrip of L&T Financial Holding Ltd. (LTFH)

In the said order, SEBI had alleged that the Fund created an unusual and aggressive short position on the derivative contracts of LTFH on March 13, 2014 ahead of the LTFH offer for sale and asserted that the short position was taken based on the UPSI available with the Fund. The SEBI Order was based on correspondence between two employees of Credit Suisse, wherein they discussed the likelihood of L&T offering a steep discount in relation LTFH’s shares. Since the Fund was involved as a potential investor in the market gauging exercise undertaken by Credit Suisse for the proposed offer for sale of LTFH shares, it had access to the communication between the two employees. The SEBI order was based on the assumption that L&T had fixed the floor price for the proposed offer for sale on March 13, 2014 even before the close of trading hours and the Fund had the UPSI on the steep discount to be offered therein. SEBI observed that it is highly unlikely and contrary to the market behaviour that the Fund, which previously did not have any exposure to the scrip of LTFH, took an aggressive short position without being in possession of UPSI.

The Fund had filed an appeal against the said order before SAT. SAT in its ruling dated May 8, 2015 held that the floor price for offer for sale cannot be fixed in advance and has to be fixed with reference to the price prevailing at the end of trading hours on the previous day. According to SAT, therefore the presumption drawn by SEBI that L&T had fixed the floor price beforehand is unlikely. SAT observed that the SEBI’s claim that the Fund was in possession of UPSI was primarily based on the correspondence between the two employees of Credit Suisse. However, SAT observed that from perusal of the transcript of the correspondence, it can neither be inferred that Credit Suisse had recommended nor L&T had finalized the floor price of the LTFH shares. Further, SAT held that there was nothing on record to suggest, as to how the Fund had access to the information, therefore the presumption of SEBI that the Fund was privy to UPSI was hypothetical and there was no rational basis for the same. However, since SEBI claimed that the investigation in relation to the alleged misconduct by the Fund is still to be complete and at a crucial stage, SAT allowed the restraint to continue. However SAT directed SEBI to conclude the investigation within two months failing which the restraint order would come to an end.