Cayman Hedge Fund Barred by India From Securities Trading

India’s market regulator barred an offshore hedge fund based in Cayman Islands from dealing in local securities pending an insider trading probe after “abnormal movement” in L&T Finance Holdings Ltd. shares.

Factorial Master Fund locked in a profit of about 200 million rupees ($3.4 million) by taking an “unusual and aggressive” short position in the futures and options segment before a planned share sale by L&T Finance, while in possession of the likely floor price of the offer, the Securities and Exchange Board of India said in an interim order yesterday.

The order comes amid efforts by the regulator to crack down on insider trading. Chairman U.K. Sinha said June 4 he’s working on a stronger set of rules to curb share manipulation and trading on confidential information. After being goaded by a court on April 30, SEBI said it would investigate a surge in the shares of Ranbaxy Laboratories Ltd. days before an acquisition by Sun Pharmaceutical Industries Ltd.

“It is incumbent to intervene promptly in the interests of investors and to safeguard market integrity,” SEBI said in its order, restraining Factorial from accessing the securities market until further notice. It sought a reply from Factorial within 21 days or present itself before the board for a personal hearing.

No Merit

The SEBI “allegations” are “without merit,” Hong Kong-based Factorial Capital Management Ltd., which runs the Cayman Islands fund, said by e-mail today. “Factorial will continue to fully co-operate, and is confident that a complete investigation will fully absolve it.”

Factorial built a huge short position in L&T Finance futures and options on March 13 from scratch and then covered it through purchases in the heavily discounted share offering, making the profit, SEBI said. The fund’s bearish bets accounted for 84.15 percent of the total outstanding contracts in the stock that day, the regulator said.

Larsen & Toubro Ltd. said it would sell 55.5 million shares in L&T Finance at a floor price of 70 rupees apiece after close of trading on March 13. L&T Finance slumped 17 percent to 70.95 rupees over five sessions through March 20.

The transmission of price sensitive information by traders at Credit Suisse Group AG, which managed the share sale, needs to be examined, SEBI said, without indicating any wrongdoing by Credit Suisse. Sheel Kohli, the Hong Kong-based spokesman for Credit Suisse, declined to comment.

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