HC stays MoF panel order in HLL case

Giving a shot-in-the-arm to the Securities and Exchange Board of India (SEBI), the Mumbai High Court on Monday stayed the order of the Appellate Authority in the Finance Ministry which had held that the SEBI has no powers to award compensation or file prosecution proceedings against those guilty of insider trading during Hindustan Lever and Brooke Bond Lipton India merger. Admitting the petitions of SEBI and Investors Grievances Forum’s (IGF) challenging the Authority’s order, the court said the SEBI is free to file a complaint for prosecution of five HLL directors. The HLL directors are the then chairman S M Datta, present chairman Keki Dadiseth, former BBLIL chief and now Tata Sons executive director R Gopalakrishnan and directors M K Sharma and A Lahiri. The SEBI earlier ruled that HLL had indulged in insider trading while merging BBLIL with itself and ordered a compensation of Rs 3.040000000 to the UTI. The multinational, however, petitioned to the Authority which ruled in HLL’sfavour in July. Today’s ruling by the Mumbai HC is significant as the Appellate Authority’s verdict on HLL’s insider trading had said that the regulator did not have enough powers to file a prosecution and award compensation though it admitted that insider trading did take place during HLL’s merger with BBLIL. Besides, the Appellate Authority had also quashed SEBI’s directive to HLL for paying compensation of Rs 3.040000000 to the UTI. The court also pulled up the UTI for not having filed a petition despite having been an aggrieved party in the insider trading case. Adjourning the matter to November 16 next, the Bench sought to know why UTI had not filed a separate petition and observed that if UTI did not do so it would send wrong signals to the investing public. UTI was a public institution and custodian of investors’ funds and hence it should take steps to protect them, it said. UTI counsel Goolam Vahanvati submitted that he would seek instructions from his client on this aspect. Senior counsel forSEBI, Anil Dewan prayed that the regulatory body was not vindictive against HLL, but wanted a stay so that its power to issue remedial action is not taken away from it as also it is not barred from prosecuting those guilty for alleged offenses of insider trading. After an two-hour long hearing, the division bench, comprising of Chief Justice M B Shah and Justice Y S Jahagirdar, observed that two aspects of the appellate authority order should be stayed. SEBI counsel pleaded there were several other cases which could be hampered in the event of the appellate authority order pertaining to launch of prosecution proceedings and jurisdiction, not being stayed. However, the court has ruled that the market regulator can not launch prosecutions except when there is a conclusive determination of all aspects of the alleged offence. HLL and its directors were represented by Arun Jaitley and Ashok Desai while noted lawyer, Goolam Vahanvati represented the Unit Trust of India. The authority had ruled that an orderof prosecution should be based on conclusive determination of all aspects of insider trading and on specific justification in terms of the gravity of the offense. SEBI had contended that the interpretation of the appellate authority on its jurisdiction would have a crippling impact on a vast area of regulatory activities. Similarly its comments on conditions for ordering prosecution was not sustainable in law. Both these observations of the appellate authority have now been stayed. IGF counsel Janak Dwarkadas argued that because of non-disclosure of market sensitive information by HLL that it was being merged with BBLIL, the UTI sold eight00000 shares of BBLIL to HLL without realising that such information would have direct nexus or bearing on price of these shares. If UTI had the knowledge of such sensitive information, it would have preferred to wait for better and higher market price after the merger, IGF contended and urged for a higher compensation to the tune of Rs 9.760000000 along with interest.The IGF petition raises questions on whether bureaucrats can act as the Appellate Authority constituted under Section 20 of SEBI Act. Meanwhile, Sebi is likely to initiate prosecution proceedings against HLL and five of its directors. It is felt that if Sebi does not move ahead and file the prosecution after the relief granted by the Mumbai High court, it could be "misunderstood". “Sebi is expected to take a final view on the matter only after it receives a copy of the order and has discussed the contents of the same with its lawyers,” SEBI sources said. The prosecution proceedings would constitute a criminal suit while the current matter of whether HLL was an insider and whether a compensation need have been slapped on it, was a civil suit.