SEBI order to haul up Lever "not justified"

The Ministry of Finance on Tuesday struck down the Securities and Exchange Board of India’s (SEBI) order of prosecution against five directors of Hindustan Lever Limited (HLL) and payment of compensation of Rs 3.040000000 to the Unit Trust of India in the alleged insider trading case in the purchase of eight00000 shares of Brooke Bond Lipton India Limited (BBLIL) saying it was not justified in doing so. This was the first case of insider trading initiated by the SEBI. On March 11, 1997 SEBI had passed an order to launch prosecution against HLL on allegations of insider trading as well as to compensate UTI for "losses" it incurred on sale of BBLIL shares to HLL in March 1996, barely a month before announcement of the merger. The appellate authority comprising the Union Finance Secretary M S Ahluwalia and special secretary (banking) C M Vasudev, upheld HLL’s view that the news of the proposed merger was generally known as the same was widely speculated and reported in the media. The five directorsabsolved by the MoF are HLL chairman K B Dadiseth, former chairman S M Datta, director (personnel and corporate strategy) A Lahiri, director (legal) M K Sharma and former vice chairman R Gopalakrishnan. In its 31-page order, 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 gravity of the offence. For these reasons, we hold that SEBI was not justified in ordering prosecution of the appellants." Holding that SEBI did not have the powers to grant compensation to any party, the appellate authority has stated that UTI, which sold the BBLIL shares to HLL prior to the merger, could not but have known about the impending merger given the wide reporting in the media. "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 hadappealed to the ministry," the MoF order said. While SEBI had pegged the compensatory amount to UTI at Rs 3.040000000, UTI later demanded a hike in this amount. Vindicating HLL’s stand, the ministry concluded that there was no reason to prosecute the company and its directors. It, however, left it to SEBI to consider invoking adjudication mechanism prescribed under Section 15 (G) of SEBI Act after following the "prescribed procedure for determining the desirability and legality of imposing a penalty on HLL." HLL had appealed to the appellate authority after SEBI ordered criminal prosecution against HLL on charges of insider trading. Insider trading, which involves trading in shares after possessing sensitive and privileged information, is banned under the Indian rules. SEBI had alleged that since HLL is a sister concern of BBLIL, it was in the know of things and thus an insider. The bone of contention between SEBI and HLL is in defining the term "insider". It may be recalled that HLL — in whichUnilever of the UK holds 51% — had purchased eight00000 shares of erstwhile Brooke Bond Lipton India Limited (BBLIL) at Rs 350 per share from UTI two weeks before announcing the merger of BBLIL with HLL. The whole idea of the deal was to avoid a dilution of Unilever’s stake in the merged entity (i.e. to retain 51% stake in HLL). Prior to the merger, Unilever’s direct stake in BBLIL was less that 51% (50.2%). The ministry order said that it would have been desirable if HLL had informed UTI that the core committee (of HLL and BBLIL) was considering merger of the two Unilever subsidiaries at the time of purchase. The order also upheld SEBI’s view that HLL was privy to decision making on merger issue by virtue of its connection and its conclusion that the information was price sensitive is "justified."