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Montek-led panel absolves HLL of insider trading

The Union finance ministry has absolved Hindustan Lever Limited of the charges of insider trading and has struck down the Securities and Exchange Board of India's order of March 11, 1998, for prosecution of five HLL and its directors S M Dutta, K B Dadiseth, Gopalakrishnan, A Lahiri and M K Sharma, and payment of compensation of Rs 30.4 million to the Unit Trust of India.

The ministry, which is the appellate authority in all such cases, passed the direction while deciding HLL's appeal against the Sebi order after hearing both parties at length.

The case involved HLL's purchase of 800,000 shares of Brooke Bond Lipton India Limited from UTI, before the announcement of BBLIL's merger with HLL. These 800,000 shares, together with other shares held by HLL in BBLIL, were extinguished on amalgamation.

In a 31-page order issued today, the appellate authority, comprising Union Finance Secretary Montek Singh Ahluwalia and Special Secretary (banking) C M Vasudev, upheld HLL's view that the news of the possibility of merger was ''generally known'', because it had been widely speculated and reported in the national media. The ministry therefore concluded that there was no reason to prosecute the company and its directors.

The appellate authority said, ''An order of prosecution should be based on conclusive determination of all aspects of insider trading and on specific justification in terms of the gravityof the offence for these reasons. We hold that Sebi was not justified in ordering prosecution of the appellants.''

It also held that Sebi did not have the power to grant compensation to any party. More specifically, in the HLL case, UTI which is a well-established and qualified investor, could not but have known about the impending merger given the wide reporting in the media. Further, UTI had not expressed any grievance about the transaction for two years and had in fact sold more BBLIL shares to HLL in December 1996. It made a grievance only in April 1998, after the Sebi order was issued and HLL had appealed to the ministry.

The order also says, ''Since the possibility of merger appears to have been generally speculated about and was probably already discounted by the market, this information is not likely to have significantly impacted on the price at which the transaction was concluded with UTI in March 1996. This is further corroborated by the fact that UTI continued to sell BBLIL shares in the market after the merger at prices close to the price at which they had sold shares to HLL in March 1996.''

Sebi had first issued a ''Communication of Findings'' on August 4, 1997, to which HLL had replied on September 6, 1997, refuting all the allegations point by point. However, Sebi issued its order on March 11, 1998. HLL had appealed against the order to the appellate authority on April 2, 1998.

The appellate authority held that the Sebi order suffered from ''procedural deficiencies and was also lacking in jurisdiction''.

The authority also held that Sebi was not justified in ordering prosecution against HLL and its five directors.

The authority, however, said that Sebi's conclusion that information of merger was price sensitive is justified.

''We feel there is enough circumstantial evidence to indicate that the transaction of acquiring 800,000 shares of BBLIL by HLL from UTI was motivated by the knowledge of the impending merger if only because the merger could have reduced the interest of Unilever in the merged company below the initial holding of 51 per cent in HLL itself.

''We are persuaded that in these circumstances Unilever would have perceived special urgency in increasing its beneficial holding in BBLIL as much as possible before the merger to ensure that the share of Unilever in the merged company does not go below 51 per cent or if it does, then it should do so as little as possible to be made up by subsequent purchases of BBLIL's shares as happened in this case,'' the order said.

''At the same time, since the possibility of merger appears to have been generally speculated about and was probably already discounted by the market, this information is not likely to have a significant impact on the price at which transaction was concluded with UTI in March 1996. This is further corroborated by the fact that UTI continued to sell BBLIL shares in the market after the merger at prices close to the price at which they have sold shares to HLL in March 1996,'' the authority said.

The authority did not feel that it was open to Sebi to initiate investigations under the regulations and then without passing an order under the regulations choose to take recourse to powers under the Act for awarding compensation.

''We also find it difficult to agree with the view of the Sebi that despite specific provisions in the Act and regulations, it is open to it to use the general powers available under the Act. If this were so, the purpose of framing the regulations would be defeated,'' the ruling said.

UNI