India's Market Regulator SEBI Bars Hong Kong's Factorial Capital Management Over Insider-Trading Charges

India's stock-market regulator Securities and Exchange Board of India, or SEBI, on Thursday accused Hong Kong's Factorial Capital Management of insider-trading, and has barred it from participating in the Indian securities market.

A statement released by the regulator claimed that the company had traded derivative contracts for L&T Finance Holdings Ltd (BOM:533519) with participatory notes through five different foreign institutional investors, including Macquarie Bank, Goldman Sachs Singapore, Merrill Lynch CM Espana, Nomura Singapore and Citigroup Global Markets Mauritius. Along with investigating the Cayman Islands-based hedge fund, which made nearly 200 million rupees ($3.38 million) in profits from the transaction, SEBI is also considering investigating the Indian arm of Credit Suisse, which brokered the share sale of L&T Finance.

“It may prima facie, be inferred that Factorial was in possession of the information about the likely floor price of the OFS (Offer For Sale) In the matter of Factorial Master Fund and such information was an ‘unpublished price sensitive information’,” Rajeev Kumar Agarwal, a director at SEBI, said in the statement, adding: “Pending investigation in the matter, (I) hereby restrain Factorial Master Fund from dealing in the securities in Indian securities market (including through Offshore Derivative Instruments) and/or accessing the Indian securities market, directly or indirectly, in any manner whatsoever till further order/s.”

While the hedge fund reportedly gained more than 2 percent in March, according to Reuters, making it the highest monthly gain since December 2012 for the company, its returns jumped another 2.62 percent in April, taking its total gain in 2014 to 5.8 percent.

"In secondary blocks, we were up, mainly from positions in India and Korea," the hedge fund reportedly told its investors in a newsletter, according to Reuters, adding: "The fundamental long-short book was overall up. Key positive contributors were from India.”

SEBI's statement added that the investment-banking team at Credit Suisse had contacted Factorial about L&T Finance, and transcripts of online conversations between members of the Zurich-based bank's equity team showed them exchanging comments about the share price and saying it was “likely to come in at a steep discount about 70 types," before a formal announcement was made on the price of the stock on the same day. And though the watchdog has not accused Credit Suisse directly, it called for a closer examination of the European bank's role in the transaction.

“In my view, this aspect needs thorough investigation so as to come to a definite conclusion,” Agarwal said, in the statement. SEBI also said, in its order, that the substantial shorting of L&T Finance stock, just before the discounted sale, made the regulator suspicious of the whole transaction, and that it based its claims on a study of the stock price movement between March 11 and March 14. The announcement was made on March 13 while the OFS was made on March 14.

“It is highly unlikely that one who does not have any exposure in the scrip will take such an aggressive short position- which is quite contrary to the market behavior on that day as 84.15% was built by Factorial only- unless it had some definite information about fall in price of the scrip in near future,” SEBI said, in the statement.

"Factorial believes that the allegations outlined in an interim order from the Indian regulator (SEBI) are without merit," the hedge fund said, in a statement to Reuters. "The regulator has given 21 days to Factorial to respond. Factorial will continue to fully co-operate, and is confident that a complete investigation will fully absolve it."