Kishore Biyani, whose several restructuring schemes once made him the darling of the markets, findshimself in a tight corner. Market regulator Sebi has barred him and his associates for a year over insider-trading charges. Will Biyani be lucky one more time?
Kishore Biyani would gure among the most market-savvy promoters India Inc has seen in recent times. He had launched the initial public oer (IPO) of Future Capital just a day after what would later become a multi-year high in Indian equities in January 2008, getting peak valuations for his stock.
The Sensex had touched its all-time high of 21,078, a day before Future Capital IPO hit the market. The shares were sold at a huge premium of 76 times the face value. The issue was allotted at the upper end of the price band of INR700-INR765 and raised INR490 crore.
Though Biyani got peak valuations, he had to face investor criticism for the subsequent destruction of shareholder value. The stock had plunged to an all-time low of INR93 by March 2009.
That did not deter him.
In April 2011, he came up with another IPO — Future Ventures — when the Sensex was again close to 20,000 levels. When this reporter asked him at the IPO press conference, whether this could be another market peak, Biyani played down the timing. “It is diicult to time an IPO. It depends on when you are ling with Sebi and when you get the approval,” he had said, adding that the market may not be so volatile (at that time). By August that year, the Sensex was down to 15,000 levels. Biyani had uncannily caught the top once again.
Nearly a decade and many a fundraising and restructuring schemes later, when the Sensex is irting with another peak at 50,000-plus, luck seems to be running out for India’s Sam Walton, who pioneered organised retail in the country by launching popular brands such as Pantaloons, Big Bazaar, and Central.
The Securities and Exchange Board of India (Sebi) on February 3,2020, barred Biyani and his associates (his family company and its employee welfare trust) from trading for a year. The timing could not have been worse. The group is engaged in a bitter legal battle with e-commerce giant Amazon. The Delhi High
Court upheld a Singapore arbitration court decision putting on hold a deal with Reliance Industries. And, the group’s debt troubles, which had abated because of the deal, are set to come roaring back.
But Biyani seems to be seeing a silver lining.
The company issued a statement saying the Sebi order won’t impact the ongoing scheme of arrangement with Reliance. The scheme of arrangement is legalese for merger and demerger plans executed under the Companies Act provisions.
It was another such scheme of arrangement that got him into trouble with the market regulator.
Tryst with startups In September 2016, speaking at a summit organised by The Economist, Biyani lambasted online startups that had become the nemesis of his brick-and-mortar empire, saying, “I think 90% of the startups have no meaning at all; they are nonsense. I think the canvas of startup needs to be bigger.”
He said most of the startups are coming up with a goal to sell themselves. That is what happening to many as big businesses are taking over major e-commerce companies, Biyani added. “They are just building startups to sell them; there is no long-term goal.”
It is diicult to say now if he was speaking from experience or it was from a broader reading of the situation. For, only months earlier, Future Retail had bought out Bluerock eServices, a Gurgaon-based startup that operated FabFurnish, an online furniture retailer. Bluerock was launched by rst- time entrepreneurs Mehul Agrawal, Vikram Chopra, and Vaibhav Aggarwal in 2011-12. Backed initially by Rocket Internet, the startup underwent turbulence with the exit of all its founders in 2014-15 before being sold to Future Retail.
Biyani decided to spin this off into a separate company by merging it with the physical home-retail vertical.
The Future Group is no stranger to such spinning off and folding-in schemes. It has a long history of many such mergers and demergers, some in quests to unlock value, some dictated by ballooning debt. In 2007, it hived off its logistics department into a separate company called Future Logistics & Solutions. Five years later, Pantaloons Retail was demerged to facilitate an investment from the Birla Group and the remaining business was rechristened as Future Retail. In 2016, it consolidated its infrastructure under the name Future Enterprises, which in turn leased out assets to Future Retail.
The Hometown/FabFurnish restructuring came next.
Future Retail (FRL) made an announcement on April 20, 2017, during market hours on the exchange platform titled “Outcome of Board Meeting stating Composite Scheme of Arrangement between Future Retail Limited (‘FRL’ or ‘First Demerged Company’) and Bluerock eServices Private Limited (‘BSPL’ or ‘Second Demerged Company’) and Praxis Home Retail Private Limited (‘PHRPL’ or ‘Resulting Company’) and their respective Shareholders (‘the Scheme’)”.
Sebi found that the aforesaid scheme of arrangement has resulted in the demerger of certain business of FRL. Also, the said announcement had a positive impact on the share price of FRL. This restructuring and the transactions leading up to the announcement are at the center of the Sebi’s insider-trading case against the Biyanis.
The UPSI period
From the chronology of events obtained from the company, investigation observed that the demerger planhad come into existence on March 10, 2017, as preliminary discussion for the proposed scheme of arrangement was carried out on this date. Subsequently, a team was also created by FRL on March 14, 2017, to work on this scheme. The press release pertaining to the aforesaid scheme was made on April
20, 2017, during market hours. In view of the same, the period of unpublished price sensitive information(UPSI) was identified as March 10, 2017 to April 20, 2017.
The Biyanifamily connection
Though Kishore Biyani has been the face of the group, several members of the extended family, including his brother, cousins, children, and nephews have been part of the operations and ownership.
Future Corporate Resources (FCRL) is a company that holds signicant Future shares and is a designated promoter-group entity of Future Retail. FCRL is owned by a set of seven limited liability partnerships — Samreen Multitrading, Tanushri Infrastructure, Kavi Sales Agency, Oviya Multitrading, Raja Infrastructure, Radha Multitrading, and Salarjung Multitrading. These LLPs are structured in a way that each of them has Kishore and one of the family members as partners. Samreen and Tanushri are Kishore’s partnership with wife Sangita; Kavi with his brother Anil; Raja with his uncle Gopalkishan; Oviya with his cousin Sunil, Radha with Rakesh, another cousin and former head of fashion business; and Salarjung with father Laxminarayan Biyani.
It is this company and its employees’ welfare trust (FCRLWT) that have been found guilty of insider trading between March and April 2017. The former bought 3.62 million shares in the UPSI period, while the latter bought 0.8 million shares. Though both players did not sell any shares during the period, Sebi took the price on day of announcement of the demerger as the sale price to calculate the ill- gotten gains.
FCRL told Sebi that except being promoter of FRL, it had no connection with the company. Hence, any information in relation to FRL, much less UPSI, could have been shared with FCRL. It has further submitted that Prohibition of Insider Trading (PIT) Regulations do not assume reasonable access to UPSI in relation to a promoter.
Sebi whole-time member Ananta Barua said, “In this regard, I note that noticee no.1 (FCRL) is not mere a promoter of FRL. Noticee no.1’s entire shareholding is held by seven LLPs wherein partners are members of the Biyani family, which include noticee nos.2 and 3 (Kishore and Anil) who are also promoters of FRL. FRL is also a company belonging to the Future Group. Noticee no.2, who is CMD (chairman and managing director) of FRL is also a director on the board of noticee no.1 along with noticee no.3. Noticee no.2 also holds benefcial interest to the extent of 32% shares in noticee no.1…. Therefore, the “association” of noticee no.1 and FRL, which is underlying principle of Regulation 2(1)(d), is writ large in the
case of noticee no.1. I note that noticee no.1 has been alleged termed as “insider” being a connected person, in terms of Regulation2(1)(d)(ii)(j) and not because of the fact that noticee no.1 is a promoter of FRL.”
Regulation 2(1)(d)(ii)(j) of PIT Regulations provides that a company wherein a director of a company or his immediate relative or banker of the company, has more than 10% of the holding or interest, shall be deemed to be connected person unless the contrary is proved.
In the present case, it was noted that Kishore was not only the promoter of FRL and FCRL, but also its chairman and managing director and is shown as person exercising significant inuence on FRL — being significant beneficial owner of shares held by noticee no.1 in FRL.
The direct involvement of Kishore and his brother Anil in opening the trading account for FCRL with broker Indiabulls on March 27, 2017, and their authorisation for transfer of funds for the share purchases made on March 29 and 30 proved crucial for Sebi to conclude that they were instrumental in executing
these trades based on UPSI.
FCRL owned a little over 18% in FRL, as per the latest shareholding pattern.
In May 2020, amid the Covid-19-triggered lockdown, FCRL informed that it had defaulted on coupons due on April 30, 2020.
Sebi’s probe on FCRL’s trades underlines the recent trend of insider-trading cases going beyond the natural persons and looking at corporate entities that often front them. This lifting of corporate veil has been seen in recent cases such as Reliance Industries, NDTV, and Yes Bank. Sumit Agrawal, a former founder, Regstreet Law Advisors, and former Sebi officer, says, “The recent trend of notices or orders on
Reliance Industries (RIL), various mutual funds in Manappuram Finance case, Yes Bank directors, Divi’s Laboratories, Aurobindo Pharma and its promoters etc. shows that there is an increase in enforcement of insider-trading cases on corporate entities in addition to the people who preside or are part of key
management”.
Also, Sebi made a crucial distinction between what is disclosed by the companies on the exchanges and what is said in the media, even though it may have come from the top management itself.
Restructuring info available in media Biyanis contended before Sebi that restructuring of HomeTown business does not qualify as UPSI. They said the transaction had been widely reported across numerous media platforms, including television, print and digital media, much before the date that FCRL traded in the scrip of FRL.
Most of such news coverage: (a) emanated pursuant to interviews and statements given by FRL or by its chairman and managing director Kishore Biyani and (b) was fairly specific, in that they had references to the HomeTown Business (including specific references to demerging the FabFurnish and HomeTown business into a new listed company).
Due to this media coverage stock exchanges sought clarifications, and on March 7, 2017, the NSE and BSE sought specific clarifications from FRL with respect to the news article which had appeared in The Economic Times on February 28, 2017.
In this regard, FRL on March 7, 2017, issued clarifications to NSE and BSE, as available on their websites, stating that “board has given an in-principle authority for considering various options with regard to HomeTown format, however, there is no nal understanding which has been arrived at till date […]”.
In addition to the contention that information was not UPSI, noticees also said that the information was not price-sensitive. They submitted that the revenues relating to the HomeTown business constituted only 3.28% of the total consolidated revenues of FRL, and the Ebitda relating to the HomeTown business was approximately 3.3% of FRL’s total Ebitda. Further, the revenues relating to the FabFurnish business constituted only 0.03% of the total consolidated revenues of FRL. Therefore, comparatively, HomeTown and FabFurnish constituted a significantly small portion of FRL’s overall business and was unlikely to contribute significantly to the price movement of the FRL shares.
Sebi argued that an information can be termed as UPSI, if it is generally available in the form along with material, particulars in which it was disclosed to stock exchanges. “To explain it further, price sensitivity of an information pertaining to an event may change as the event proceeds to advanced stages of consummation. Therefore, the ultimate objective may be the same, however, at each stage of development a degree of price sensitivity may be added to it by the information relating to its development. Thus, in order to contend that a particular price- sensitive information was “generally available” and thus, it is not UPSI, it has to be shown/proven that it was generally available in non-discriminatory manner, in the same form along with all material particulars, in which it has been disclosed to stock exchange as UPSI, in terms of either PIT Regulations, 2015 or LODR Regulations, 2015.”
Sebi found that the information shared in interviews was very uid and nebulous as it was bereft of specific details as to how this restructuring will ultimately be executed. Questions and response posed during the interview were varied and did not contain all the information in uniform/structured manner, it said. “Though some of the news reports, relied on by the noticees, mention that FRL would be demerging its HomeTown business and merge it with FabFurnish, to give rise to a new entity which will be listed, however, from the point of view of readers/investors, it was only a plan which could have taken any shape or could not have been consummated or would have been consummated in a way different than the way it was disclosed in the interviews by noticee no.2 or could have been abandoned altogether by the company,” Sebi member Barua said in the order.
Sebi also shot down the promoters’ defence that the shares acquired amounted to only 0.76% stake and was well within the creeping acquisition limits under the takeover code. Creeping acquisition limits can’t condone violation of insider- trading regulations.
Despite all this tough talk, the regulator seems to have given an unusual concession by adding para number 34 in the order.
Going easy on Biyani?
Sebi in para 34 has stated, “During the period of restraint, as directed in para 33 above, the existing holding of securities including the units of mutual funds, of the concerned noticees, shall remain under freeze.
Debarment/restraint/freeze imposed under this order shall not apply to those existing holding of securities of such debarred entities, in respect of which any scheme of arrangement under Section 230-232 of the Companies Act, 2013, is approved by NCLT, requiring extinguishment of such securities and/or receipt of other securities in lieu of such securities.”
In its statement after the Sebi order, Future referred to this clause and said it would not in anyway affect its deal with Reliance. “In view of the above, the above order will have no impact on the ongoing scheme of arrangement of the company. We understand that the relevant parties propose to challenge this order in exercise of their statutory right to appeal,” the statement said. Legal experts feel this is an unusual privilege by the regulator a orded to a person found guilty of violating insider-trading regulations. There has not been any recent instance of a specific exemption been given in this manner nor has there been any discussion of this aspect in the 77-page order. If Biyanis had specifically represented to Sebi seeking this exemption, Barua does not make any mention of it in the order. Things look further messy if one brings in the context of several letters written by Amazon to Sebi to interfere in its ongoing eorts to stop the sale of Future’s retail business to Reliance. Sebi seems to be walking the tight rope
between not been seen as favouring Future/Reliance, and also not jeopardising the
deal itself.
“Sebi has been careful in creating a distinction between an activity of dealing in securities by operation of law (such as scheme of arrangement) and otherwise. The latter category has been banned while the former has been speci cally allowed. This is a new trend,” Agrawal said.
Many years ago, Biyani told this newspaper: “I believe in rewriting rules. Rules are meant to be broken.” He was referring to his decision to choose Kolkata to start the rst Pantaloons departmental store instead of opting for cities such as Mumbai and New Delhi. The markets liked his “rule-breaking” spirit and rewarded him.
Biyani seems to have broken another rule. This time, the treatment could be different.