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NO ENTRY FOR KISHORE BIYANI: Why SEBI Banned Future Group Founder From Securities Market?

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A few days back Kishore Biyani’s Future Retail Limited (FRL) created a buzz after the Delhi High Court asked it and Amazon to resolve their issue regarding the deal between Future Retail and Reliance Retail. The completion of the RIL-FRL deal was pending for months and finally, it was given heads up in the last week of December 2020. 

You must be wondering, what is the use of mentioning this information here, right? 

Well, it seems like both Kishore Biyani and Future Retail Limited have been facing roadblocks quite often in recent times. As mentioned by moneycontrol.com, Kishore Biyani has been barred from the securities market by the Securities and Exchange Board of India for one year. Not only this, but it has also barred him from trading in the Future Retail shares for two years in a row. 

But, why? 

What compelled SEBI to issue such an order. Read ahead to understand the reason behind it. 

WHY FUTURE GROUP FOUNDER IS BARRED FROM SECURITIES MARKET 

When people break or do not comply with the set rules and regulations, they do attract punishment of some degree.  In simple terms, something similar happened with Kishore Biyani, his brother Anil Biyani as well as some promoters. 

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The guilty people will not be allowed to - 

  • take part in the activities of the securities market for one year 
  • trade in shares of Future Retail for a total of two years. 

The regulatory body, SEBI has found Kishore Biyani and others guilty of insider trading that they carried out with the Future Retail shares back in 2017. The wrongdoings came into light when SEBI was analyzing the trading pattern between March 10, 2017, to April 20, 2017, of Future Retail shares. 

It found that between the above mentioned time period trading was done on the basis of unpublished price sensitive information (abbreviated as UPSI). Here, the term unpublished price sensitive information implies any piece of information that is not known to the public and has the ability to affect the prices of stocks in the market. 

If we go by the rules set by SEBI then anyone who trades on the basis of such sensitive pieces of information or UPSI then he/she has to pay the penalty for non-compliance of the terms. 

                    WHAT IS INSIDER TRADING IN THE STOCK MARKET? 

The term insider trading sounds alien? Let us understand it with a popular insider trading case that took place in the United States back in 2001. 

Martha Stewart, a known TV personality in the US, owned up to 4000 shares of the BioPharma Company ‘IMCLONE SYSTEMS’ in 2001. Around the same time, the share price of this company fell sharply because the FDA had rejected one of its new cancer drugs. The strange fact was that even after such a sharp fall in the share price, the CEO seemed to be unaffected. Surprising, right? Martha Steward sold all the shares she owned in the company after her broker received advance news that the CEO of ImClone System sold all his holdings. By doing this she was able to save herself from a great loss.

future retail

The question is - How did the CEO of ImClone and Martha Stewart have the knowledge about the rejection before it was out in the market? 

 

Upon investigation, it was found that she and her broker had sold the shares based on the information that the CEO of the company sold his holding in the firm. That particular information was non-public. She was found guilty, sent to prison and was fined with an amount of $30,000. What Martha Stewart did, in this case, is called insider trading in the stock market. 

Defining Insider Trading

Since the establishment of the concept of the stock market, a number of people have tried unethical ways to make money from it and insider trading is one of such unethical tricks. This is a known fact that in the stock market the fluctuation prices depend majorly on the information or the happenings that take place in the economic world. The playing field is the same for the investors when all of them have access to the same piece of information according to which they make their analysis and speculations while investing or trading too. Unfortunately, the concept of insider trading is the opposite. 

It, first of all, nullifies the fact of things being fair and same for all investors. In insider trading, the investors who have anyhow claimed access to any sensitive news or information tend to take advantage while trading. Now, this is unfair for the traders who do not have access to the particular news that could result in fluctuation of the stock prices as and when it comes out. 

CODE OF CONDUCT FOR PROHIBITION OF INSIDER TRADING 

In technical terms, Insider trading is simply defined as the trades that are done based on a non-public piece of information. Thus, the inside traders take advantage of the investors who are unaware of that information. 

In India, insider trading is governed by the Act of 1992 of SEBI. According to this act, any individual who is found guilty of carrying out insider trading can be put behind the bars for a maximum of 5 years and with that, the convict has to pay an amount between 5 lakh to 25 crores or 3 times the profit he/she made by insider trading. One point worth mentioning here is that the rules governing insider trading and the associated enforcement of the rules in this regard different from one nation to another. 

Remember the time or trading which is done by the person in question, must be right. The rule says that trade is termed as an insider, only when the shares of either bought or sold while sensitive information is non-public or has not come out in public. Further, if any person’s name is associated with the person accused of insider trading can also be prosecuted as per law. So, trading on a basis of non-public information as well as passing it to others is also categorised as illegal. 

Who comes under the radar for carrying out Insider trading? 

Insider trading is concerned with the member of an organization as the sensitive information revolves around certain members usually. But, this is not a necessary fact as a person who is not a part of the organization can also carry out insider trading. It depends on who gets access to a sensitive and non-public piece of information in advance. 

For instance, consider an example of Company Z that is planning to acquire another company. In this case, apart from some members of the top management, third parties like lawyers, bankers, etc might have access to this news in advance. Now, they act on this information before the news goes public, then they can be prosecuted for insider trading. 

Some real-life examples of insider trading apart from that of Martha Stweart story mentioned in the former part 

- Joseph Nacchio, chief of Qwest Communication- made around $50 million by selling his shares in the stock market. He gave some good projections about the financials of Qwest Communications to the shareholders but in reality, the company was struggling with its finances. 

- Another example is Reliance Industries that was barred by SEBI in 2017 from the derivatives market for a year and it was fined as well. RIL was charged with the act of unfair trading practices wherein it sold a stake in Reliance Petroleum Ltd. 

kishore biyani

HOW KISHORE BIYANI HAS BEEN FOUND GUILTY OF INSIDER TRADING? 

By reading the code of conduct regarding the inside trading mentioned above, you must have got an idea that there lies a very thin line between a normal piece of information and an unpublished piece of sensitive information. 

In the case of Kishore Biyani, while investigating SEBI found out that back in the year 2017 Future Retail decided to go ahead with the demerger of some of the businesses. The official announcement regarding the same was made on April 20th, 2017. However, it was later found that there were discussions held regarding demerger in the month of March and a company employee was even asked to work on that plan. 

After investigation, SEBI concluded that the news of demerger must be categorised as UPSI, as per March 10, 2017. On the basis of this sensitive information that was not known to the public domain, the shares of Future Retail were traded by Future Corporate Resource Private Limited as well as FCRL Employee Welfare Trust. 

About Future Corporate Resource

For those who are unaware, Future Corporate Resource is actually one of the promoters of Future Retail. It is owned by such entities whose major shareholding belongs to Kishore Biyani and his brother Anil Biyani. On top of that Kishore Biyani is the director of Future Corporate Resources. 

Thus, both Kishore and Anil Biyani are ‘insiders’ in this case and found guilty of wrongdoings by the SEBI. 

CONCLUSION

After the allegations were made by the regulatory body, SEBI, the Biyani Family, as well as Future Corporate Resources, have denied doing any kind of a wrongful act. 

They believe and are pitching the fact that the news of demerger was general information and should not be categorised as a sensitive piece of information. Further, there are chances that Future Corporate Resources will challenge the allegations put by the SEBI. 

It will be interesting to note what turn this case takes in the future! 

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author

Shivani