SEBI probe on RPL?

India's stock market regulator is probing the movement of Reliance Petroleum Ltd's (RPL) share over the past few weeks. The share rose by 76% between 22 October and 1 November when it touched a high of Rs295 in intra-day trading on the Bombay Stock Exchange (BSE), and fell by 18% between 5 November and 6 November after the National Stock Exchange (NSE) barred derivatives traders from taking fresh positions in RPL futures.
A senior official of the Securities and Exchange Board of India (Sebi), who did not wish to be named, confirmed that the capital market regulator has called for trading data from stock exchanges and is "looking into the matter". "I can't share with you any information at this point as this is confidential," the official added. He said Sebi routinely looks into stocks that show unusual movements.

 

It is the stock market regulator's job to investigate sharp and sudden movement in share prices, but such investigations, by themselves, do not imply any wrongdoing.

 

RPL's stock fell 2.96% on Tuesday on BSE to close at Rs198 even as the exchange's benchmark index Sensex fell 0.6% to close at 19,127.73.
Between 1 November and 6 November, substantial positions were built in RPL futures on NSE, as a result of which the prescribed marketwide position limit was breached.
A futures contract is an exchange-traded one requiring the delivery of shares at a specified price on a specified future date.

 

The marketwide position limit is defined as 20% of a company's free-float capital, or shares available for trading.

 

In RPL's case, the marketwide position limit was 180 million shares. Over four trading sessions between 1 November and 6 November, the open interest in the RPL futures more than doubled from 86 million shares to 171 million shares.
This was accompanied by a drop of 25.3% in RPL's share price from its intra-day high of Rs295 on 1 November, the day open interest started building up significantly, to Rs220.35 on 6 November.

 

Normally, a drop in share price accompanied by a build-up in open interest suggests that traders are taking fresh short positions.

 

People taking a short position are essentially taking a negative view on the stock. For instance, a person who went short on a certain company when its shares were trading at Rs290 can wait till the settlement date, say 29 November, when its price is down to Rs190, and then buy the shares (since he has already sold it at Rs290, he makes a profit of Rs100 a share). Or, this person can wait for the share price to start going down and buy back an equivalent amount of shares as he has sold, squaring his position.

 

Open interest is the outstanding position traders have in the futures and options market. Most of the outstanding position in RPL futures were in the near-month series—the futures contract set to expire this Thursday, 29 November.

 

On 6 November, nearly 95% of the total futures positions were in the near-month series, which essentially means that a large number of people (or, more accurately, a large number of positions) were betting on the price of the stock to fall, just like it did.
It is this phenomenon that Sebi is investigating because the large number of positions would suggest that there were too many bets being placed that the RPL stock would fall.

 

In a press release issued late on 26 November, RIL said it had sold 180.4 million shares, or 4%, in RPL, bringing down its holding to 70.99%.
The sale raised Rs4,023 crore, at a price of Rs223 a share.