Barun Agarwal is the founder & CIO of a hedge fund called ‘Factorial Capital Management Ltd’, based in the Cayman Islands. The flagship scheme of the fund is called “Factorial Master Fund”.
Barun set up Factorial in January 2012 with a corpus of about $25M. He started his career in 1999 with ICICI Bank Ltd in their fixed-income department. Later, he joined Solomon Smith Barney as an equity researcher. Then, he worked for JP Morgan Chase & later joined DKR Oasis in 2004. In DKR Oasis, Barun learnt the tricks of the trade from Seth Fischer, the legendary hedge fund manager. Seth Fischer managed a gigantic $3.3 billion fund for DKR Soundshore Oasis Fund.
Barun Agarwal is in the news for the wrong reasons. He has been accused by SEBI of indulging in insider trading in the shares of L&T Finance Holdings.
To understand Barun Agarwal’s modus operandi, we have to read the detailed ex-parte order (pdf) passed by Rajeev Kumar Agarwal of SEBI.
In the order, SEBI points out that on March 13, when L&T Finance was included in the F&O segment, the price of the March expiry futures contracts opened at Rs 87.80, and dropped by more than 10% to close at Rs 75.55 on the same day. In the cash segment, L&T Finance shares opened at Rs 86, rose to Rs 88 and then dropped by more than 10% to close at Rs 79.20.
On the same day after trading hours, L&T and L&T Finance issued a press release in which they announced that L&T would make an offer for sale of Rs 5.55 crore shares (or 3.23% stake) in L&T Finance to comply with Sebi’s minimum public holding norms. Within minutes of the release, the floor price (for the offer for sale) was announced at Rs 70 a share.
SEBI claims that Factorial Capital had prior knowledge that the OFS floor price would be Rs 70 and that is why it shorted the L&T Finance stock futures at the level of Rs 80.94. Factorial took home a profit of Rs. 10.94, being the difference between Rs 80.94 and Rs 70, aggregating to a whopping Rs. 20 crore.
In the hard-hitting order, SEBI has pointed out that Factorial had built “unusually aggressive short position” in the F&O segment i.e. 84.15% of the market wide position ahead of the impending OFS, taking a view which was quite contrary to the view of the most of other participants. This was perhaps on the basis of the unpublished price sensitive information. Having short-sold the stock, Factorial took the reverse position of nearly same number of shares in the cash segment by subscribing to OFS on the very next day. Thereby, it locked the profit from the trade.
SEBI has also alleged that the modus operandi, adopted by Factorial prima facie suggests a device or artifice to deceive investors in the securities market and make profit in a manner which was quite disruptive to the market equilibrium.
Now, whether Barun Agarwal is able to escape the long-arm of the law or not remains to be seen. Prima facie, Barun appears to have underestimated SEBI’s ability to conduct surveillance and detect unusual transactions. To his credit, Barun did use four FIIs to trade on his behalf but it was not enough of a camouflage. Perhaps, given that Factorial’s transactions were upto 86% of the total short derivatives in L&T Finance, it was a bit naïve of Barun Agarwal to believe that he can continue to fly under SEBI’s radar.
Now, the big consolation for Barun Agarwal is that unlike in the USA where insider trading is a criminal offence (remember Rajat Gupta & Raj Rajaratnam who got sent to Jail for insider trading), you only get a slap on the wrist by way of a fine for insider trading. The larger worry, however, is that the clients may desert you because they feel jittery about entrusting their money with an alleged insider-trader. Factorial’s present AUM is a whopping $100M.