India's stock market regulator may investigate the domestic unit of Credit Suisse Group to determine whether price sensitive information about a share deal that the authority has ruled to be insider trading was leaked by the investment bank.
The Securities and Exchange Board of India (SEBI) on Thursday accused Hong Kong-based multi-asset fund Factorial Capital Management Ltd of shorting L&T Finance Holdings Ltd before the announcement of a share sale in mid-March.
SEBI said it may probe whether Credit Suisse staff had revealed to Factorial that the L&T Finance deal would be done at a discount, but the regulator did not accuse the bank of any wrongdoing.
Instead, the regulator focused its investigation on Factorial, barring the hedge fund from trading Indian securities. The hedge fund has 21 days to respond.
"At this stage, the channel of communication of the unpublished price sensitive information is not ascertainable," SEBI said in its case. "This aspect needs thorough investigation so as to come to a definite conclusion."
In a statement, Factorial said the allegations by SEBI were "without merit" and that it would fully cooperate with the investigation.
A Credit Suisse spokeswoman in Hong Kong declined to comment. Most investment banks restrict staff access to price sensitive information to avoid leaks
The accusations come after SEBI chairman U.K. Sinha stepped up the fight against insider trading and share manipulation, hoping to stamp out rampant practices that were a key factor behind the exodus of $5.15 billion in retail investments from stock funds over the past five years.
The regulator, notorious for its timid enforcement of market violations, is also overhauling its two-decade-old insider trading law to give it more muscle, but these amendments have yet to come into effect.
"It's quite surprising to see such swift action," Sai Venkateshwaran, a partner at KPMG in Mumbai said, referring to the Factorial case. "SEBI is trying to put in place better enforcement mechanisms to ensure speedy action," he added.
Lawyers said the maximum penalty for an insider trading conviction was currently 250 million rupees ($4.22 million) or three times the profit made on fraudulent trades.
In a seven-page document, SEBI said it had established that Factorial was approached by Credit Suisse about their interest in a potential share sale of L&T Finance by its majority owner Larsen & Toubro Ltd, India's biggest engineering company. Such an approach is part of the process of any deal.