Institutional investors, especially foreign funds, are not keen to make fresh allocations to shares of India’s largest listed company, Reliance Industries, on concerns over insider trading, say some analysts. Proceedings in this regard are pending with the Securities and Exchange Board of India.
A study of RIL’s shareholding over the past 10 years seems to support this. Despite heavy inflows from foreign institutional investors (FII) in 2009 and 2010, FII holding in RIL is well below the peaks touched during the earlier bull run. It is also well below their exposure to peers.
For the quarter ended March, FIIs held 17.7 per cent in the company. In comparison, the average FII holding in companies comrpising the Nifty, the National Stock Exchange benchmark, was 25.97 per cent. Ajay Pandey, vice president — institutional sales, ITI Securities Ltd, says, “The insider trading allegations are a big concern. Beginning 2008, when the allegations surfaced, many funds had not made any fresh allocations.”
He says the collapse of Satyam in early 2009 made investors even more cautious. “Fund managers are now answerable on the investment decisions taken at several levels. They are doubly cautious with companies whose promoters have run into troubles with regulators.”
Insider trading has been the talk of Wall Street after the recent prosecution of billionaire hedge fund owner Raj Rajaratnam, former McKinsey chief Rajat Gupta and several high profile offenders.
“It is definitely a concern,” said S P Tulsian of Premium Investments, adding, “It is a reflection of the company’s governance standards.” RIL publicly acknowledged the Sebi proceedings recently. “Sebi has issued a showcause notice in connection with the sale of shares of erstwhile Reliance Petroleum Ltd by the company.
The company has submitted its reply to the same,” the company said in its annual report for 2011. The showcause pertains to a 2007 transaction in which RIL booked a tax-free profit of Rs 3,800 crore, selling about 4.01 per cent stake in RPL. Reports today suggested the company has moved Sebi for a financial settlement, without accepting or denying guilt.
FII SHIFTS
According to quarterly shareholding data complied by the Business Standard Research Bureau, FII holdings in RIL had crossed 20 per cent in December 2003. It peaked at 22.93 per cent in September. Though they pared marginally, FIIs continued to hold around 20 per cent in the company until September 2007.
Following the Sensex crash in early 2008, FIIs sold a record $13 billion that year. Their stake in RIL began to fall, touching a low of 15.5 per cent in December 2008.
However, when flows reversed, the allocations to RIL, which has the highest weight in the benchmark indices, did not get corresponding allocation. In 2009 and 2010, Indian equities received record foreign flows of $18 billion and $20 billion, respectively.
The Sensex has closed at a new high of 21,000 points, but RIL is trading well below its highs. The FIIs holding in the stock has never crossed 18 per cent after 2007. This is well below their overall India Inc exposure of 20 per cent at the end of March 2011.
But Tulsian feels the Sebi proceeding is not the only reason for FII disinterest. “FIIs are keeping away from the stock because it has been an underperformer,” he said. Analysts also say investors might be underweight on the stock due to concerns over the sector and lack of a clear expectation about production from the management. RIL shares ended today’s trade with a gain of 1.45 per cent, at Rs 914.9.
