In what is emerging as the biggest insider trading probe in India, watchdog Sebi may seek help from its peers in foreign countries, including Hong Kong, Singapore and Mauritius, as it widens investigations into suspected market activities of several overseas hedge funds.
Sebi has already barred a hedge fund, managed by Hong Kong-based Factorial Capital Management, from Indian markets through an interim order on 'insider trading' charges in L&T Finance shares.
The probe in this case has thrown open the possibility of large-scale fraudulent and unfair trade practices being adopted by many other foreign investors.
It is also suspected that some hedge funds -- operating through fabled tax havens like Cayman Islands, Isle of Man, Bermuda and British Virgin Islands -- may be routing Indian money back into the markets here to evade taxes, sources said.
While it is difficult to get information from these jurisdictions, many such funds are managed by entities registered in countries like Singapore, Mauritius and Hong Kong, and Sebi may seek information from their regulators through bilateral and multilateral MoUs.
Many hedge funds also operate through FIIs which have parent firms that are based in better-regulated markets like the US, UK, and other European countries.
It is suspected that these hedge funds are taking positions in Indian markets with participatory notes, issued through registered FIIs (Foreign Institutional Investors), to generate quick returns after getting access to 'unpublished price sensitive information (UPSI)'.
In the present case of Factorial, which has been charged of making unlawful gains after accessing UPSI about a proposed share sale by corporate giant Larsen & Toubro in its subsidiary L&T Finance Holdings, Sebi may approach Hong Kong's Securities & Futures Commission (SFC) for information.
Hong Kong-based Factorial on its part has said that the allegations against it were "without merit" and it was confident that a complete investigation would absolve it.
Queries mailed to the Hong Kong regulator about this case and its possible coordination with Sebi remained unanswered.
Both Sebi and SFC are signatories to a Multilateral Memorandum of Understanding (MMoU) for consultation, cooperation and exchange of information among various regulators through a platform provided by IOSCO (International Organisation of Securities Commissions).
The signatories of this MMoU also include Bermuda, British Virgin Islands, Cayman Islands and Isle of Man.
Besides, Sebi has also signed bilateral MoUs with many countries, including with regulators in the US, Mauritius, Singapore and China, to cooperate and exchange information for regulatory and enforcement purposes.
Factorial, which has its office in tony central business district of Hong Kong and was founded by Indian-origin management graduate Barun Agarwal, came under Sebi scanner after its multi-asset hedge fund allegedly used insider information and took positions in shares of L&T Finance before a major announcement in the second week of March.
The hedge fund apparently booked profit in excess of Rs 20 crore from these trades alone.
Sebi has already widened its probe and is looking into other market activities of Factorial as also of at least 70 other entities, including foreign brokerages, hedge funds and FIIs, to bring to book those having violated the rules.
As the Factorial case involves insider dealings by a Hong Kong entity, regulators in the two countries may work together on this particular part of a now-widened probe.
Sebi Chairman U K Sinha has also been vocal in recent times about the need to more effectively enforce various securities laws and for punishing the culprits, including in the cases of cross-border violations.
The Factorial case is already being talked about one of the fastest probes by Sebi, as the incident took place on March 13 and irregularities came to the notice of regulators on the same day. A quick probe has already resulted in an interim order being passed on June 5.
Factorial had traded in derivative contracts of L&T Finance with Offshore Derivative Contracts (commonly known as P-Notes) through five different Foreign Institutional Investors in an "aberrant and suspicious" manner.
These five FIIs were Macquarie Bank, Goldman Sachs Singapore, Merrill Lynch CM Espana, Nomura Singapore and Citigroup Global Markets Mauritius Ltd.
A probe by the capital markets regulator found that Factorial was involved as potential investor in the market gauging exercise undertaken by Credit Suisse as 'Seller Broker' of L&T Finance for its Offer for Sale (OFS) in March.
A further probe is now underway against other entities and to find out those involved in flow of 'insider information' about shares sale price of L&T Finance.
"On examination of Bloomberg chat transcripts provided by CS, it is observed that on March 13, 2014, information like, 'likely to come in at a steep discount about 70 types' was being circulated amongst the members of Equity team of Credit Suisse," as per the Sebi order.
In this chat, '70' apparently referred to the price for sale of shares in the OFS, the floor price for which was actually later fixed at Rs 70 per share.
"It is noted that this message from one CS employee to another in the Equity team was sent at 09:21:24 much before the formal announcement of OFS and the floor price at 21:22:00 on the same day," the regulator said.
A Credit Suisse spokesperson declined to comment on the matter.