SEBI order in the case of HLL1. This case relates to the allegation that Hindustan Lever Ltd (hereinafter refereed to as HLL), as an "insider" purchased the securities of Brooke Bond Lipton India Ltd (hereinafter referred to as BBLIL) on the basis of unpublished price sensitive information, thereby violating the provisions of the SEBI (insider trading) Regulations, 1992, and the SEBI Act of 1992 (hereinafter referred to as the Regulations and the Act respectively).
2. HLL is an Indian subsidiary of Unilever plc, UK, (hereinafter called Unilever) with 51 per cent holding of the latter. Unilever also held 50.2 per cent equity of BBLIL. Both these companies were the subsidiaries of the common parent company, ie, Unilever. With the announcement of the merger of BBLIL with HLL to the stock exchanges on April 19, 1996, there were allegations in the market and the media regarding the leakage of information and insider trading. When these came to the notice of SEBI, it was decided to causeinvestigations.
3. In the course of the investigations by SEBI, information was gathered from various sources, including that from both the companies, ie, HLL and BBLIL, about the chronology of the events leading to the merger, the dealings of the employees, particulars of transfer of shares, etc. The statements of directors and senior officials of the companies were also recorded. On the basis of information obtained and statements recorded, it came to light that a core team had been set up in January 1995 to evaluate and consider the possibilities of merger of the Unilever group companies, including that of HLL and BBLIL. Though, to begin with, this exercise undertaken by the core team was in respect to the Unilever group companies in general, on September 13, 1995, it was decided to restrict it to the amalgamation of BBLIL with HLL. The core team included common directors of HLL and BBLIL, viz SM Datta, KB Dadiseth, R Gopalakrishnan, A Lahiri and MK Sharma. CM Jemmett, a representative of Unilever, alsoparticipated in some of the deliberations of the core team. The core team met from time to time to assess and work out the modalities which would be needed to carry out the amalgamation. In October 1995, various sub-teams were also formed to separately look after issues related to finance and accounting, personnel, legal and communications. These sub teams also met from time to time and worked out specifics like preparing draft applications to be filed in the court, communication strategies, staff adjustments and valuation aspects, etc. On January 5, 1996, the valuers were shortlisted. On January 17, 1996, CM Jemmett, the regional director of Unilever in India, informed the core team regarding the granting of the in-principle approval by Unilever for the amalagamation of BBLIL with HLL. During March 6-15, 1996, the core team deliberated on the possible timing of the announcement of the proposed amalgamation of BBLIL and HLL and after considering various circumstances, agreed that the announcement would be onApril 19, 1996, and the board meetings would be convened either on April 22 or April 23, 1996. Meanwhile, in the board meeting on March 6, 1996, HLL decided to buy 8 lakh shares of BBLIL, preferably through a public financial institution and even by payment of a premium over the market price with a view to buying the large block of 8 lakh shares. The shares were purchased by HLL from UTI for Rs 350.35 per share by paying a premium over the market price of around Rs 318. The pruchase deal was finalised on March 25, 1996, and the delivery of shares was taken on March 27/30, 1996. Thus the purchase took place a little prior to the public announcement of merger on April 19, 1996. Further, while HLL appeared to have full knowledge of the impending merger when the shares were acquired from UTI, UTI did not have information about the impending merger.
4. From the investigations, prima facie, it appeared that: (i) HLL was an insider within the meaning of regulation 2(e) read with regulation 2(h) of the (insidertrading) Regulations.
(ii) The information about the merger was unpublished price sensitive information within the meaning of regulation 2(k) of the Regulations.
(iii) By buying 8 lakh shares of BBLIL prior to the announcement regarding the merger of BBLIL with HLL on April 19, 1996, HLL had violated the regulations prohibiting insider trading.
5. Further, according to the provisions of section 27 of the Act, the directors/officers of HLL, viz SM Datta, KB Dadiseth, V Narayanan, R Gopalakrishnan, MS Banga, D Bhattacharya, DM Buckle, H Munwani, A Lahiri, SM Sahani, MK Sharma and OP Aggarwal wre also prima facie deemed to have violated the provisions of the Regulations indicated above.
6. After the consideration of the investigation report, SEBI "communicated the findings on August 4, 1997, to HLL and its directors/officers as required under regulation 9(1) of the Regulations for giving them an opportunity of being heard before taking further action under the Act and the Regulations. In response to thesaid communication of findings, a reply dated September 9, 1997, was received on behalf of HLL and its directors from MK Sharma, director, legal and secretarial, HLL. A personal hearing was also given on October 17, 1997. Written submissions, too, were made pursuant to the personal hearing vide letter dated November 19 and 27, 1997. The basic contentions raised in these submissions can be briefly mentioned as under:
(i) HLL did not fall within the definition of connected person or deemed connected person as it was a principal party to the transaction. In order to satisfy the requirement of regulation, it was not enough to establish that the person charged was not only a connected person but it was also necessary to prove that the person had received information or accessed the information by virtue of such connection. The insider trading (Regulations) prohibited dealings on the basis of derived knowledge and not on the basis of primary knowledge. Just because the merging companies happened to be associatecompanies their status as primary parties to the transaction did not get wiped out and the companies did not assume the secondary status as connected persons and become insiders. The information of merger was available to HLL only because it was a principal party to the amalgamation and not due to HLL being the associated company of BBLIL. The expression by virtue of its connection in regulation 2(e) was not there at the draft stage but was inserted in the final regulations framed under the Act and, therefore, the expression could not be treated as artificial or superfluous. The company could not be an insider to itself. The regulations also envisaged action for the misuse of information to gain advanatge rather than for any limited and legitimate purpose.
(ii) The information had to relate to matters covered in regulation 2(k): the information should not be generally known, information should materially affect the price of securities, news of the merger was not a price sensitive information, the pricesensitive information would be in the swap ratio, the precise timing, the appointed date, etc. In this case, there was no precise information of merger in possession of HLL. HLL did not have any specific or definite information with regard to the merger. As far as the possibility of the amalgamation or merger was concerned, the information HLL possessed was as primary party and had been in the public domain and generally well known before the transaction with UTI was completed. Reference was also made to the press report attributed to the Federation of Brooke Bond Unions dated March 14, 1996, which indicated the possibility of a likely merger of HLL with BBLIL.
(iii) Even assuming that HLL had price sensitive information, it had to be established that HLL acted on the basis of such information. HLL had not acted on the basis of such information. Further, HLL had not made any gain or prevented a loss by taking advantage of the information. The element of making a gain or avoiding a loss was an essentialrequirement which was also to be borne out by the factors whcih were needed to be taken into account under sub-section (a) of section 15J of the Act in determining the quantum of penalty for insider trading. The use of the words "on the basis of" in regulation 3(i) would indicate that the insider should be motivated by the desire to benefit out of the price sensitive information. According to HLL, the actual puropose of purchase was to enable Unilever to acquire 51 per cent shares in BBLIL which was in accordance with the policy of the Unilever group to hold 51 per cent directly or indirectly in all its subsidiary companies. It was also stated that the option of acquiring the shares through the preferntial route would have been much cheaper for the company. Additonally, it was argued that if HLL were to use the information it could have done so in January 1996 itself when the market price of BBLIL shares was low.
7. In the course of submissions it was also stated by HLL that the information regarding thepurchase of BBLIL shares was given by it to SEBI voluntarily. In this context, the factual position is that after the initiation of investigations certain information was sought vide SEBI letter dated April 30, 1996, and subsequent letter dated May 13, 1996, asking for details about the transfer of HLL and BBLIL shares numbering more than 5,000 after September, 1995. HLL, vide its letter dated May 15, 1996, gave the information required by the letter dated April 30, 1996, of SEBI. The reply also mentioned the purchase of 8 lakh shares of BBLIL. Thus the information supplied by HLL was in the course of investigations, after the investigations had commenced and details of transfer of shares had been sought. In any case what is relevant is the factum of purchase of the shares and not when the information was supplied, specially when it is clear that the information had been given after the investigations had started.
8. The submissions made by HLL have been carefully considered. The points to be addressed noware:
(a) Whether HLL purchased/dealt in the securities of BBLIL;
(b) Whether HLL could be considered as an insider as defined under regulations 2(e) of the regulations.
(c) Whether HLL dealt in or purchased the shares on the basis of unpublished price sensitive information.
(d) Whether the dealings in or purchase of the shares of BBLIL by HLL was in the nature of insider trading based on unpublished price sensitive information and as such violative of the Regulations and the Act.
9. Regarding the purchase/dealing in the securities of BBLIL by HLL the facts are undisputed. HLL had admitted that they had purchased 8 lakh shares of BBLIL during the month of March 1996 from UTI.
10. Before dealing with the issues raised on behalf of HLL, it may be appropriate to quote the relevant regulation. The charging regulation is regulation 3(i) of the Regulations. It reads as under: "No insider shall:
(i) "either on his own behalf or on behalf of any other person deal in securties of a company listed on anystock exchange on the basis of any unpublished price sensitive information."
11. This sub-regulation prohibits,
(a) an insider
(b) from dealing in securities of a listed company
(c) on the basis of unpublished price sensitive information.
12. Further, the term insider used in regulation 3(i) has been defined in regulation 2(e) as under:
"Insider means any person who is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access, by virtue of such connection, to unpublished price sensitive information in respect of securities of the company or who has received or has had access to such unpublished price sensitive information."
13. On an analysis of the above definition it can be concluded that the term insider has the following three essential ingredients:
a) An insider is a person, and
b) who is conncted or deemed to be connected with the company, and
c) who is reasonably expected to have access by virtue of suchconnection to unpublished price sensitive information, or
d) who has received or has had access to unpublished price sensitive information.
14. As mentioned above, the first requirement is that the insider has to be a person. The word person has not been defined in the Act. Therefore, reliance is placed on the provisions of section 3(42) of the general Clauses Act which defines the word "person" to include any company, body or individuals. A company, ie HLL and its directors and officers, would be covered by the definition of the word person. Even in the US, where the law in this regard is well established, corporations are held liable under section 10(b) of Securities Exchange Act, 1994, and rule 10 (b5), which covers insider trading. In S William Green and others Vs Hamilton International Corporation and others (437 F Supp 723) it was observed that... "Furthermore, there can be no doubt that the prohibition against insider trading extends to a corporatiuon". The Court further referred to Kohler V KohlerCo., stating that the "fairplay" philosophy of the Act applied "not only to majority stock holders or corporations and corporate insiders, but equally to corporations themselves, when acting through their officers, directors or agents".
15. The second requirement is that the person is or was connected with the company, or is deemed to have been connected with the company. The word connected person has been defined in regulation 2(c). In the facts of the case, reliance is placed on the expression "person is deemed to be connected person" as defined under regulation 2(h)(i). It is quoted thus:
"...if such person is a company under the same management or group or any subsidiary thereof within the meaning of section (1B) of section 370, or sub section (11) of section 372 of the companies Act, 1956) or sub clause (g) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) as the case may be."
16. The applicability of the above definition has to be considered in relation to thefacts of the present case. Before the merger, HLL and BBLIL had common parentage, being the subsidiaries of the same holding company, ie, Unilever, and had common management. In view of these facts, HLL, in accordance with above quoted definition, is a person deemed to be connected with BBLIL. HLL also does not dispute this. Therefore, the second requirement under the definition of the word insider is also satisfied.
17. The third requirement for an insider is a set of two alternatives:
(i) whether the person is reasonably expected to have access to unpublished price sensiitve information by virtue of connection with the comoany, the shares of which have been traded in,
(ii) has received, or had access to such unpublished price sensitive information.
18. While deciding whether the above alternatives either individually or even dually are satisfied, it would be appropriate to deal with the following contentions of HLL which were specifically highlighted. According to HLL, it was not enough to establishthat the person charged was not only a deemed connected person, but should have received the information or accessed the information by virtue of its connection with the company, shares of which it had traded. HLL claimed that it had received the information of merger independently, as one of the principal parties to the transaction, and not by virtue of its deemed connection with BBLIL. In view of this also, HLL submitted that it was not an insider. The argument was rephrased by saying that insider trading (law) prohibited dealing on the basis of derived knowledge through the connection or deemed connection and not on the basis of primary knowledge as a principal party to the decision of merger. In the repeated view of HLL, it was essential to establish that the knowledge of merger should have been obtained by HLL by virtue of its connection with BBLIL for its being indicted for insider trading.
19. The above narrated contention of HLL does not seem to be in conformity with the legal and factual position.The evidence on record indicates that HLL was covered by both the alternatives indicated in para 17 and above, ie, HLL had received the information about the merger and HLL also as a deemed connected person to BBLIL was expected to receive the information by virtue of such connection. This would be borne out of the following analysis and discussion.
20. Of the two situations with reference to regulation 2(e) of the regulations mentioned in para 17 above, the term by virtue of such connection qualifies only one of the sitautions, ie, where the person is reasonably expected to have access to unpublished price sensitive information by virtue of such connection with the company whose shares have been dealt in. On a closer reading of the definition of the word insider it would be apparent that the words "by virtue of such connection" appear after the words "who is reasonably expected to have access" and before the words "or who has received or has had access to such unpublished price sensitve information". Thisclearly shows that these words (by virtue of such connection) qualify only a person "who is reasonably expected to have access" and not to the person who has received or has had access to the information. To repeat, it is only where the person is reasonably expected to have information (that) his connection with the company whose shares he has traded in has to be established. In other words it only when a person is sought to be charged on the basis of a notional premise, about such person being reasonably expected to have access to such information, without his having actually received or accessed the information, that the words "by virtue of such connection" become relevant. The definition thus distinguishes between a case of deemed access and actual access.
21. The further condition that the words "by virtue of its connection" were added subsequent to the draft stage has no relevaance for reaching a correct legal interpretation of the word "insider".
22. If we were to accept the argument of HLL, itwould lead to a highly incongruous and irrational situation. It would permit a connected or a deemed connected person to misuse the price sensitive information because he has received the information independenty and not "by virtue of his connection" with the company whose shares he has traded in. This would be against all canons of fairness and transparency in the securities markets and no legislation can approve, let alone prescribe, it. For example, can it ever be reasonably argued that when two companies are about to merge the directors of the company connected with the merger can legitimately buy or sell securities for their likely advantage on the ground that the information about the merger which they have in their possession is because of their being parties to the decision making about merger, and not because of the virtue of their connection with the company? The same situation can be applicable to a company itself buying shares of the other company on the ground that the information in possessionis because of being a principal party to the transaction and not because of its connection with the other company. No regulatory system in the capital markets anywhere in the world would permit such a dealing because otherwise the markets would become totally unfair to investors. As already stated, the words "by virtue of its connection" qualify the case of a person who is reasonably expected to have access to the information and not to the other case where the person charged has in fact already received or had access to the unpublished price sensitive information.
23. It has already been established that HLL is a person deemed to be connected. Therefore, by virtue of such connection HLL was reasonably expected to have access to the information about the proposed merger and as such would also be an insider within the meaning of regulation 2(e).
24. The contention of HLL is also not factually correct. It is wrong to say that the information was not received or derived or accessed by HLL by virtue of itsconnection with BBLIL. It is not a case where the two companies were having their separate plans and at some point of time decided and informed each other regarding the proposed merger. Instead, it is a case where there are common factors all along, beginning from the common management, common directors on the boards and, what is most relevant, the core team which comprised some common directors from both the companies. It is important to mention here that the whole project of merger started with the formation of the core team, and all further evaluation, processing, working out the modalities, deciding on the timing, etc, had been done through this core team. The information which HLL derived or received was through this core team, which had some common directors and, therefore, to say that the information was received by HLL as a contracting party to the merger and not by virtue of its connection with BBLIL is incorrect or misconceived. It is also to be noted that the company as an entity is only a legalfiction and it acts through its directors which are its limbs and mind. Therefore, otherwise also, a company cannot have any information on its own and it has to be derived from its directors. In any case, in the instant matter, the information about the merger with BBLIL is also derived information by virtue of HLL's connection with BBLIL through the core team which was constitited for the proposed merger.
It is worth repeating that the core team was a body common to both the companies and consisted of some common directors. It is also relevant to restate that HLL and BBLIL were under the management of Unilever, which was the holding company. In fact, CM Jemmett, the regional director of Unilever, attended the meetings of the core team from time to time and also informed the core team about the granting of the "in-principle" approval by Unilever for the merger of BBLIL and HLL. This was conveyed to the core team on January 17, 1996. This, in fact is the point of time when the crucial decision about theimpending merger of BBLIL and HLL went outside the realm of probabilities and became specific and precise and the rest of the actions, as even seen from the chronology of the events, were various followup actions and formalities to put the actual merger in place. Since the competence to decide about BBLIL's merger with HLL did not vest only with the management of HLL but also with the management of BBLIL and with the management of Unilever, the holding company, it cannot be said that information about the merger constituted HLL's own knowledge about its own affairs or even its knowledge as a principal party. Clearly enough, the decision of BBLIL to enter into the merger was also an information within knowledge of BBLIL and its holding company and this information was also in fact received by HLL from the said entitities by virtue of its connection with them. Thus the requirement that the information should have in fact been received "by virtue of such connection", even assuming that this requirement isapplicable, also clearly stands satisfied. Therefore, the argument of HLL and various contentions, including legal opinions in support thereof, to deny the allegation of being an insider on the ground that the information received was as a principal party and not by virtue of its connection as a deemed connected person is not sustainable legally or factually.
25. It is also pertinient to metion that using the information by HLL (sic) regarding the impending merger, whether received as a principal party or by virtue of its deemed connection with BBLIL, for any purpose other than the merger and especially for buying shares of BBLIL amounted to misuse of information and violation of the Regulations apart from being detrimental to the undisputed requirements of fairness, transparency and level playing field in the securities markets.
26. The other set of submissions made by HLL was that the information regarding merger was not a price sensitive information in the absence of the share swap ratio, etc. Further,the information about the merger itself was not specific as it was only at an embryonic stage. It was argued that the information to be price sensitive must be precise and definite and the mere possibility of a merger did not and could not have a material impact on the price. According to HLL, even assuming that information regarding a possible merger, without the swap ratio being known, could be generally regarded as price sensitive, since the same was not precise and definite, the same could not be regarded as unpublished price sensitive information under the Regulations. It was also stated that it was more of a question of speculation than information and that this speculation was generally known to everybody and any specific information could not be ascribed to HLL. It was further argued that since the merger was between the entities of the common management having established branches, common corporate culture etc it was not expected to affect the prices.
27. In order to deal with the above, we have torefer to the relevant regulation itself. The expression "unpublished price sensitive information" is defined in regulation 2(k) of the Regulations which read as under:
"Unpublished price sensitive information means any information which relates to the following matters, or is of concern, directly, or indirectly to a company and is not generally known or published by such company for general information, but which if published or known, is likely to materially affect the price of securites of that company in the market:
(i) Financial results (both half-yearly and annual) of the company
(ii) Intended declaration of dividends (both interim and final)
(iii) Issue of shares by way of public, rights, bonus, etc
(iv) Any major expansion plans or execution of new projects
(v) Amalgamation, mergers and takeovers
(vi) Disposal of the whole or substantially the whole of the undertaking
(vii) Such other information as may affect the earnings of the company
(viii) Any changes in policies, plans ofoperations of the company".
28. It can thus be seen that information which relates to the matters specified in clauses (i) to (viii) is price sensitive. It could further be seen that clause (v) in the above regulation pertains to amalgamation, mergers and takeovers. Regulation 2(k) has left no ambiguity that the information regarding merger is price sensitive in nature.
29. In view of the above, there cannot be any dispute that, as far as the information about merger is concerned, it is a price sensitive information within the meaning of regulation 2(k) of the Regulations. The contention that only the swap ratio is price sensitive and not the merger itself, is not a legally acceptable and correct proposition under the Regulations. Swap ratio may also be a price sensitive information but that does not mean that information of the overall fact of the merger is not price sensitive. During the investigations, HLL had given SEBI an internal comunication on its policy regarding investment in group companyshares under which officials and directors of HLL were prohibited from trading in the shares in situations like mergers and acquisitions, etc, as this could have a significant impact on the share prices. This would clearly indicate that according to HLL's own internal policy, information regarding merger is treated as price sensitive in nature. In this context, it is all the more surprising that HLL as a corporate body had entered into the transaction to purchase BBLIL shares from UTI when the merger of BBLIL with HLL was not only progressing but was round the corner and HLL had the information about the same.
30. Even otherwise also, information about mergers has been consistently recognised all over the world as price sensitive. It has been held in several US court judgments that mergers, even in the possibility stage, can constitute material piece of information from the investors' point of view and further that the materiality will depend on the probability that the transaction will be consummated.Information, even at the stage of discussions about merger, has been held as material. In the case of Basic Incorporated (485 US 224), the court referred to the Texas Gulf Sulphur probability/magnitude approach even for the preliminary stage of merger negotiations. It has been observed that in this judgment that it is not necessary that the merging parties have to agree on price and structure of the merger to render the information about such merger material. The case of TSC Industries Inc vs Northway Inc (US 449) even goes further when it observes that "the possibility of a merger may have an immediate importance to investors in the company's securities even if no merger ultimately takes place".
31. It was argued by HLL that the information about the merger, which if it at all it had, was not specific and as such could not be termed as price sensitive. Before dealing with this point further, for the sake of clarity, it may be appropriate to state that under regulation 2(k), for the information to be pricesensitive the stage of merger is not a relevant factor; information about merger, irrespective of its progress, is clearly price sensitive. Further, when the in-principle approval was granted by Unilever and conveyed by CM Jemmett to the core team on January 17, 1996, the information about the pending merger had ceased to be non-specific. The rest of the steps which were taken by HLL were to complete the further procedure and formalities. In the chronology of events, it is stated that between March 6/15, 1996, the core team even took the decision regarding the possible date for announcement of the merger to be April 19, 1996, and the subsequent board meetings to be held on April 22/23, 1996. The announcement in fact was made on April 19, 1996. In the face of these facts and circumstances the argument that HLL did not have any specific information about merger and did not know more than what was generally speculated in the market does not stand to any test of reasonableness or logic. The argument is incorrecton facts. As already mentioned earlier, it is wrong to say that HLL did not have knowledge of the impending merger of HLL and BBLIL at the time of the decision to purchase BBLIL shares from UTI during March, 1996. The argument of HLL is an unfortunate attempt to acquire a cloak of ignorance about information regarding merger, which was in the specific knowledge of HLL, through several significant steps taken by Unilever and the core team.
32. Another contention was that information about the merger was generally known to the market at the time of purchase of securities of BBLIL by HLL and was also stated in a press report attributed to the Federation of Brooke Bond Unions dated March 14, 1997, in Calcutta indicating the possibility of a likely merger of HLL with BBLIL and as such it was not unpublished. In fact, the press report in a Calcutta newspaper which was being relied on by HLL to support its claim that information about the merger was generally known itself carried a denial about the impendingmerger. Further, UTI categorically deposed that information about the impending merger was not known to it at the time of sale of 8 lakh BBLIL shares to HLL. The chief general manager of UTI, when asked whether he was aware, from whatever source, that BBLIL might be merged with HLL, replied that he "was not at all aware of any such proposal". If the information had generally been known in the market, as was claimed by HLL, it would not have been possible that a large shareholder like UTI, which is also a well established and qualified institutional investor, would not have known about it. It is, therefore, clear that no specific information as was available to HLL was available to others, and it was this specific information about the impending merger which put HLL in an advantageous position vis-a-vis the others, specifically UTI.
33. While arguing about the nature of information and whether it was price sensitive, it was stated that the information should be material enough to have an impact on the pricesof the securites. As regards the information concerning merger, as already stated, regulation 2(k) itself has clearly treated such information as price sensitive. Further, it cannot be disputed by any reasonable person familiar with the operations of the market that an announcement about a merger between companies of the type involved in the instant case was undoubtedly expected to affect the movement of prices of the scrip in the market. However, markets being what they are, could have situations where the expected price movements may not take place but that would not render such information price non-sensitive. It is observed in several US court judgments that materiality depends on whether the facts not disclosed would be important and significant from the point of view of a reasonable investor. In TSC Industries Inc v Northway, Inc (426 US 438) it was observed that facts not disclosed would be treated as material if "there is a substantial likelihood that its disclosure would have been consideredsignificant by a reasonable investor". No reasonable person in the present case could say that the information regarding impending merger of BBLIL with HLL would not be considered significant by any investor, least of all by UTI. In any case, in the instant matter, the prices of the BBLIL scrip, after the announcement of the merger, were at a level of Rs 410/405 as against the market price of about Rs 318 when the shares of BBLIL were purchased by HLL from UTI. The prices of BBLIL shares stabilised later, but still were much higher than Rs 318.
34. It is clear that the term "unpublished price sensitive information" as defined under regulation 2(k) covers any information related to amalgamation, merger or takeover and any endeavor to restrict the scope of regulation 2(k) to the case of swap ratio alone and exclude the information about the decision to merge and the announcement of the merger is contrary to the letter and spirit of regulation 2(k). This legal interpretation receives further conceptualsupport from international practice. It can be seen from court observations adverted to earlier that even when merger negotiations are in preliminary stages, the information has been considered price sensitive. In view of the wordings of regulation 2(k), and as discussed, it is concluded that the information available with HLL about the merger of HLL and BBLIL was undoubtedly price sensitive.
35. It was further pressed that, in the context of regulation 3(i), it was not enough to allege that HLL as an insider dealt in the shares of BBLIL while in the possession of "unpublished price sensitive information", but it was equally important to establish that such dealing was on the basis of such unpublished price sensitive information. At one stage it was contended that the acquisition of shares was made to enable Unilever to hold, directly or indirectly, the stake of 51 per cent in BBLIL, and therefore the decision to acquire was not on the basis of the alleged price sensitive information but was aimed atenhancing the shareholding in BBLIL according to the group policy. It was also stated that there was no unfair gain or advantage accrued to the company by virtue of its transaction with UTI in acquiring 8 lakh shares. In this context, it was further pleaded that profit motive or avoidance of loss, too, was a prerequisite for establishing a charge of insider trading. In this connection reference was also made to penal provision of section 15G read with section 15J of the Act. It was stated that without the necessary ingredient of motive for profit, or gain or advantage, it would be erroneous to construe an offence of insider trading. It was further mentioned by HLL that the shares which had been acquired ultimately got cancelled and therefore the question of taking any advantage or making gain or avoiding loss did not arise.
36. To deal with these arguments, one should refer to the facts, sequence and circumstances of the acquisition of BBLIL shares by HLL from UTI. The decision to acquire the shares wastaken after the in-principle approval had been granted by Unilever on January 17, 1996. As already stated earlier, the actual transaction had taken place only a little prior to the actual announcement of the merger. If it were merely pursuant to the universal group policy of Unilever to have 51 per cent stake in its subsidiaries, the purchase could have been at any stage prior to the decision of Unilever to grant the in-principle approval. But it appears that the last such acquisition by HLL of shares of BBLIL was somewhere in October 1994 only and there were no purchases thereafter. Further, the argument made that, if HLL wanted to use the information it could have done so in January, 1996, is not well placed for the reason that the in-principle approval was received in the later half of January 1996 and only thereafter on organising the cash flow and taking board approval could the purchase have been possible, and not before. While recording the statements, the directors/senior officials of HLL were askedabout the reasons for buying only 8 lakh shares of BBLIL and not more or less. The replies given were that the objective was to reach a level of shareholding of 51 per cent by Unilever group and that even with the acquisition of 8 lakh shares there was a shortfall in reaching the targeted level of 51 per cent in BBLIL. It was also clarified in the statement that it was a step aimed at moving towards the targeted level bearing in mind the funds available for investment. It was further stated that HLL required another around 4,50,000 to 4,75,000 shares to reach 51 per cent holding by Unilever in BBLIL. The questions asked by the investigation officer, and the statement of KB Dadiseth, on the point, are reproduced:Question: Were you present in the board meeting held on March 6 when the resolution for acquiring the shares of BBLIL was passed.
Answer: Yes.
Question: Why did HLL decide to purchase only eight lakh shares of BBLIL?
Answer: Eight lakh shares were purchased based on the cash flow estimate which indicated that there was a free cash flow of Rs 30 crore available. It was a continuum of a decision to take Unilever's direct and indirect holding to 51 per cent in BBLIL (as was the case in all the other group companies.)
37. The statement explaining the purpose and the motive for acquiring 8 lakh shares can be correctly appreciated in the light of the financial data regarding the equity holding of Unilever and its group companies in BBLIL at the relevant time. The actual position was as under:
(i) Total equity of BBLIL prior to the acquisition of shares from UTI: 12,04,80,000 shares
(ii) Holding of Unilever and its group companies amounting to 50.74 per cent: 6,11,40,582.
(iii) Further shares required to take the beneficial holding of Unilever group to 51 per cent: 3,08,838.
38. From these figures it is clear that if the objective was that Unilever should reach 51 per cent holding in BBLIL, the purchase of 8 lakh shares was not required; it required only 3,08,838 shares. From the statements made to SEBI, in the context of the above mentioned figures, it is clear that the purpose and the motive right from the beginning when the decision to acquire 8 lakh shares was taken, was to move towards reaching 51 per cent holding of Unilever in the combined HLL after the merger of BBLIL into HLL and not to reach 51 per cent of Unilever holding in BBLIL, as stated.
39. In this context, the explanation of HLL in its reply dated May 15, 1996, in the course of investigations is very significant. It was stated: "The purpose of this purchase was to supplement the company's existing holding in BBLIL so as to ensure that the percentage holding of Unilever in the combined company was not lower than the existing percentage holding of Unilever in HLL so that the company continued to derive the benefits and advantages that it currently does by virtue of Unilever's 51 per cent shareholding in the company." Thus there is no ambiguity that the purchase was made based on the knowledge of the impending merger in mind and intended and meant to benefit Unilever by raising the holding of Unilever at 51 per cent in the combined company after the merger. The sequence of events is also worth noting. Admittedly, the decision by the core team regarding the possible date of the announcement of the merger was taken during March 6/15, 1996. It was decided that stock exchanges should be notifiedlatest by April 19, 1996. As seen, the announcement was actually made on April 19, 1996. The decision to purchase eight lakh shares from UTI was taken in the board meeting of HLL on March 6, 1996. As already mentioned earlier, there were several common directors of both the companies in the core team. At least there were five directors of the core team who were also on the HLL board, viz, SM Datta, KB Dadiseth, R Gopalakrishnan, A Lahiri, and MK Sharma.
40. It is also to be noted that HLL decided to purchase 8 lakh shares of BBLIL in March 1996 only a few days prior to the announcement of merger, when it was reasonably clear that the merger was to take place, and that on the merger of BBLIL with HLL, the need for maintaining 51 per cent holding of Unilever in BBLIL would not have risen. Thus it is clear that the purchase was directed towards raising the level of equity holding of 51 per cent of Unilever in the combined HLL to 51 per cent after the merger. This established that knowledge of the impending merger was the reason which motivated, and was the basis for acquiring eight lakh of BBLIL shares by HLL from UTI to ensure 51 per cent holding of Unilever in the merged company.
41. Piercing the above evidence and also the circumstances attending the transaction together it can be conclusively said that while entering into the transaction for purchase of eight lakh shares of BBLIL from UTI, HLL was acting on the basis of privileged information in its possession regarding the impending merger of BBLIL with HLL. It may also be stated that by its very nature when it comes to motives and intentions there may not always be any direct evidence. Hovever, the chain of circumstances, the timing of the transaction, and other related factors as discussed earlier, demonstrate beyond doubt that the transaction was founded upon and effected on the basis of unpublished price sensitive information about the impending merger.
42. It also needs to be observed that HLL has been shifting its stand to the extent of giving incorrect statements. It was clearly stated in its reply dated May 15, 1996, in the course of investigations that the purpose of purchase was to ensure that Unilever held 51 per cent shareholding in the combined company, ie, HLL, after the merger. On the other hand, in the subsequent statement of Shri Dadiseth, given to the investigation officer on November 11, 1996, he deposed that the purpose of the purchase was to increase the holdings of Unilever in BBLIL to 51 per cent in accordance with genreal policy of the Unilever group. As already concluded, on the basis of facts and evidence of the case, that the purchase of 8 eight lakh shares was to raise the level of equity of Unilever in the merged company to 51 per cent, the subsequent statement of Shri Dadiseth is contrary to the earlier position of HLL. This appears to have been an afterthought. It also amounts to giving wrong and contradictory statements.
43. However, HLL had further argued that in the scheme of the Regulations, to prove the charge of insider trading, it would be necessary to establish that the transaction was to make a gain or profit or get an advantage or to avoid a loss. In this context reference was made to the penalty provision of section 15G read with section 15J of the Act, stating that the amount of disproportionate gain or unfair advantage was a relevant factor in the quantification of penalties and that there could be no offence of insider trading without the misuse of a fiduciary position in order to have an unfair gain or advantage. First of all it can be very clearly stated that making profit or avoidng a loss is not a legal requirement under the regulation 3(i) to establish the charge of insider trading. There is no scope for reading therein any such requirement as is being argued. Section 15G read with read with 15-I and J are only applicable in case of levy of monetary penalties and have no bearing on the issue ofdetermination of the contravention; the motive of profit or avoidance of loss is helpful only in determining the quantum of punishment and not the factum of violation. Further, section 15J of the SEBI Act, even in cases dealing with the determination of the penalty, does not require the quantification of profit or unfair advantage or avoidance of loss. This is clear from the underscored words used in section 15J of the Act, namely the "amount of disproportionate gain or unfair advantage, wherever quantifiable." While it is clear that monetary gain or avoidance of loss is not the requirement for insider trading, the facts of the case establish that HLL sought to derive advantage by purchase of 8 lakh shares from UTI prior to the announcement of merger. It was brought out in the discussion earlier and established with the facts and evidence on record that the purpose of acquiring these shares was to halt the dilution of holdings of Unilever in HLL and to raise it to 51 per cent after the merger of HLL andBBLIL. Admittedly, HLL wanted to increase the holding of Unilever in its group companies and therefore the advantage was directly sought to be given by HLL to its holding company. In fact the merger proposal became specific only after the in-principle approval was granted by Unilever and the decision to purchase 8 lakh shares from UTI was after this in-principle approval and before the announcement of merger. The decision to purchase was at a stage when the merger had become a serious possibility, if not certainly, as is evidenced from the facts on record. This is also a case where a foreign holding company wanted to increase its equity in its merged group company by making its Indian subsidiary invest and that too when the decision of merger had not been announced to the public at large. Is this not taking an advantage?
44. It had been argued that if HLL had wanted to take advantage it could have made the purchase much earlier when the prices were low. First of all, , this is a hypothetical question and can only be answered in a hypothetical manner. Further, the shares could not have been purchased in January 1996 as the in-principle approval was given by Unilever only in the third week of January 1996. Besides, the decision to purchase was taken after ensuring the availability of cash flow and funds as stated on behalf of HLL. It was additionally argued that any other mode of acquisition such as preferential allotment could have been used even at a lesser price. Again this is a hypothetical question as to why the preferential route was not adopted. But such a step would also have involved various compliances/clearances and would have required Unilever to bring in substantial funds in foreign exchange.
45. While dwelling on the aspect of foreign exchange, it deserves to be mentioned that Unilever, in order to raise its holding in HLL (after its merger with BBLIL), would have been required to bring in about Rs 45 crore to Rs 50 crore (including about Rs 28 crore spent on purchase of eight lakh shares of BBLIL) in foreign exchange. Instead, HLL, the Indian subsidiary of Unilever, depleted its resources or reserves to acquire eight lakh shares before the announcement of merger and 4.73 lakh shares after the announcement of merger. In the corporate world, normally to acquire holding upto 51 per cent, the promoters of holding companies perforce spend substantial amounts. In this case, to put the same point in different words, the holding company, ie, Unilever, without spending a single penny was enabled by its subsidairy, ie, HLL, to acquire holding upto 51 per cent. This way, while on the one hand HLL did secure an advantage for its holding company, on the other this deal caused a loss of foreign exchange ofabout Rs 50 crore to the country. This is a serious matter.
46. It was argued by HLL that it was a company known for transparency and good corporate governance. Without going into the general reputation of HLL, it would be appropriate to consider the facts of this case only in the context of the submission of HLL. In this case HLL as the subsidiary company depleted its resources or reserves to enable its holding company to gain increasing shareholding in the composite company after merger of two subsidiaries. The subsidiary company (HLL before merger) spent sizable funds out of its reserves to purchase shares which were to be extinguished and that too for the benefit of its holding company. In a fair and transparent market, adhering to high regulatory standards, such a practice is abhorrent and would be treated as being against the interest of ordinary shareholders. As already mentioned, the deal was without transparency. Certianly it was not a case of good corporte governance.
47. Again, from the point of view of making profit, if HLL had made the purchase subsequent to the announcement of merger, it would normally have paid more and thus could be considered to have made a profit or avoided a loss. Reasonably, it is expected that an event of merger like this would affect the prices of securities. In real life situations there can be unexpected swings or movements in prices on merger-generated specualtion. In fact, the prices of the BBLIL scrip around the point of merger had been in the vicinity of Rs 410/405 as compared to Rs 318 (excluding the premium), the price at which the transaction was made by HLL with UTI. It is true that prices later had gone down, but stabilised after some time. But this was because of market factors. In any case, after the announcement of the merger, the price closed at Rs 405, and even in later months, after market fluctuations, it stabilised around Rs 368, according to HLL's own admission. HLL's purchase from UTI in March was around the market price ofRs 318 plus premium of 10 per cent for getting a block dal. If the difference between the market price after the announcement of merger and the market price at which the eight lakh shares were bought is taken into consideration, then the gain made or loss avoided by HLL was about Rs 7.04 crore.
48. Assuming that UTI had sold 8 lakh shares of BBLIL to HLL, it would have actually got 3,60,000 shares of the combined HLL on the finalisation of the merger of BBLIL and HLL according to the 20:9 swap ratio for the merger. The market value of 3,60,000 shares of HLL after the merger was around Rs 48.83 crore at around Rs 1,356 per share, which was the market price of HLL after the merger in July 1997. Thus the value of UTI holdings would have been Rs 48.83 crore, which is Rs 20.83 crore more than what UTI actually got from the sale of eight lakh BBLIL shares to HLL.
49. Another situation could be to consider the price which, according to HLL's own admission, stabilised arond Rs 368 within a few months of the merger annoucnement. If the difference between the market price of Rs 318 at which HLL purchased from UTI (excluding 10% premium) and the stabilised market price of Rs 368 after the announcement is taken into consideration, the gain made or loss avoided comes to about Rs 4 crore.
50. Even considering HLL's subsequent purchase from UTI after nine months in December 1996, the price paid by HLL for eight lakh shares, if the same were purchased at that stage, would have been much higher; the initial purchase was at the market rate of Rs 318 (plus premium). Since the premium is a variable factor which is decided on mutual convenience and need, the difference has to be calculated on the basis of the market prices at which the purchases took place. Thus the difference between the two purchases from UTI itself comes to Rs 38 per share, which for the entire deal of eight lakh shares would have amounted to Rs 3.04 crore. This was the gain made/loss avoided.
51. It can thus be seen that HLL entered into a transaction for the purchsae of eight lakh shares from UTI on the basis of unpublished price sensitive information of merger expecting to make a gain or avoid a loss. HLL actually made gain/avoided a loss as can be seen from the calculations given earlier. Taking even the least of these figures, the gain made/loss avoided by HLL is Rs 3.04 crore.
52. It may be mentioned that this gain is in addition to the advantage which HLL derived for Unilever by consolidating the latter's holdings in the combined HLL after the merger of BBLIL and HLL without bringing in any foreign exchange to purchase the shares.
53. In the course of submission, it was also pointed out by HLL that UTI itself, after the announcement of merger, sold the shares of BBLIL to other investors at prices not different than the price paid by HLL to UTI in its transaction on March 25, 1996. This, according to HLL, showed that UTI did not incur any loss as it continued to be a willing seller to other investors around the same price after the announcement of merger. The contention is incorrect conceptually and factually. The basic issue is whether HLL at the time of purchase from UTI disclosed the information about the impending merger to UTI or not. It is already concluded that HLL had specific knowledge about the impending merger when it decided to purchase eight lakh shares from UTI, but UTI neither knew about the impending merger nor HLL disclosed this information to UTI. Generally it is expected that information about merger would affect the prices of securities and any reasonable investor would attach importance to such information.Non-disclosure of this information to UTI put UTI to distinct disadvantage and prevented it from taking an informed decision. That UTI had sold certain shares to other investors after the announcement of merger is not relevant as UTI would sell or purchase shares in the normal course also. In any case the shares sold were not substantial in number and were sold at the market rate, which was also higher than the market rate at which UTI sold to HLL in March 1996. The comparison made by HLL of the premium price which HLL paid for buying a big block of shares with the market price at which UTI sold in smaller quantities to other investors is not correct. It may also be mentioned that even at a later stage UTI sold to HLL shares of BBLIL at a higher rate than the rate at which it sold to HLL in March 1996, when it did not know about the impending merger. The calculation to this effect has been given in the paras above. Thus the contention of HLL in this regard has no basis and therefore not justified.
54. It can thus been seen that there is no legal and factual substance in the argument that as no monetary gain or advantage was made, the charge of insider trading cannot be levelled. This is also a clear case of making monetary gain or taking advantage or avoiding a loss. Besides, legally the gain or advantage or avoidance of loss is not a necessary ingredient for establishing insider trading, as stated earlier.
55. The other important aspect which needs to be specially highlighted is the fact that privileged information, which was received or accessed by HLL regarding the impending merger of HLL and BBLIL, was neither available to other shareholders nor was it made public. When HLL entered into the share purchase transaction with UTI, it was not available to UTI, as is clearly evident from the statement of the chief general manager of UTI. HLL had a fiduciary duty towards UTI in terms of the fact that UTI was the second largest shareholder of HLL and BBLIL after Unilever. UTI was not informed about the impending merger. This clearly puts one dealing party in advantge over the other. Conversely, this certainly placed UTI in a disadvantageous position. The whole philosophy on which securities regulations are based and have evolved all over the world is to ensure availability of common information and fairplay to the participants in the securities markets so that informed decisions can be taken. This is essential tocreate investor confidence in the integrity and fairness of the markets. This principle of transparency and information sharing leads to a few other important outcomes like the evolution of the "fraud on the market" theory and the regulations which create obligations to make full disclosures. Insider trading regulations also emanate from such obligations which prohibit buying or selling of securities in breach of fiduciary duty or other relationships of trust and confidence while in possession of a material non-public information. This is also with a view to prevent an insider, which includes corporate insider, from utilising the position of knowledge and access information to take unfair advantage of the uninformed stockholder. Another important outcome has been the establishment of the principle of "disclose or abstain". In this background, the transaction by HLL in buying BBLIL shares, when it knew about the impending merger, and when UTI did not know about it, has done harm to the concept of transparencyand fairness.
56. For further conceptual clarity and reinforcement, we may briefly refer to the decision of courts in the USA, where the law relating to insider trading is the most developed. Courts in the US have affirmed, time and time again, that both sellers and buyers in the securities market must have full information. In SEC Vs Texas Gulf Sulphur Company (401F 2d at 848), the court stressed that anyone who may not be strictly termed as insider but possesses insider information must either disclose it or abstain from trading. The court held:
"...anyone in possession of material inside information must either disclose it to the investing public or, if he is disabled from disclosing it in order to protect a corporate confidence, or if he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed."
57. Like in Shapiro Vs Merrill Lynch (495F 2d at 235), the "disclose or abstain" theory has been enforced by stating that this "is to protect the investing public and to secure fair dealing in the securities market by promoting full disclosure of inside information so that an informed judgment can be made by all the investors."
58. In the recent case of United States V/s O'Hagan (138L.E*d. 2d 724), the US Supreme Court has even gone to the extent of extending the liability of/for insider trading by endorsing the "misappropriation theory" of liability.
Thus the court has even gone beyond the traditional or classical theory of insider trading in violation of section 10(b) and rule 10(b)(5) of the SEC 1934 Act.
In Kohler v/s Kohler (319F 2d 634), the court has observed that "the statute was intended to create a form of fiduciary relationship between so-called corporate `insiders' and `outsiders' with whom they deal in company securities, which places upon the insider duties more exacting than mere abstention from what generally is thought to be fraudulent practices...". Similarly in Speed v/s Transamerica Corp (99F Supp 808) it was observed by the Court: "It is unlawful for an insider, such as majority stockholder, to purchase the stock of minority stockholders without disclosing material facts affecting the value of the stock, known to the majority shareholder by virtue of his inside position but not known to the selling minority stockholders, which information would have affected the judgment of the sellers."
59. Several other decisions can also be referred to wherein the basic principle upheld is that no insider can deal in securities on the basis of material non-public information which is not available equally to the other investors, shareholders and transacting parties. In such cases, the regulatory body and the courts have ensured that investors who have suffered disadvantage due to the lack of information available only to the inside, are suitably compensated. The regulatory bodies even make special efforts, suo moto, to identify and locate such investors in the overall interest of investor protection and building up of investor confidence.
60. The directors/officials of HLL, viz. SM Datta, KB Dadiseth, V Narayanan, R Gopalakrishnan, MS Banga, D Bhattacharya, DM Buckle, H Munwani, A Lahiri, SM Sahani, MK Sharma and OP Aggarwal, were also communicated the findings of investigations under regulation 9(1) of the Regulations read with section 27(1) of the Act. The replies given by HLL are also the replies on behalf of the said directors/officials. It is seen from the facts and evidence on record that out of these directors/officials who were present in the board meeting of HLL on March 6, 1996, when the decision to purchase 8 lakh shares of BBLIL was taken, only five directors, viz SM Datta, KB Dadiseth, R Gopalakrishnan, A Lahiri and MK Sharma, were also in the core team which dealt with the merger proposal. As such, it is clear that these five directors had the knowledge about the impending merger of BBLIL with HLL, whereas there is no evidence to come to the conclusion that rest of the directors/officials also knew about it. It is, therefore,concluded that five directors, as mentioned above, have also deemed to have violated regulation 3(i) of the Regulations in terms of section 27(1) of the Act.
61. In the light of the findings above, it is concluded that Hindustan Lever Limited (HLL), as an "insider", purchased eight lakh shares of Brooke Bond Lipton India Limited (BBLIL) on the basis of unpublished price sensitive information and had ,therefore, violated sub-regulation (i) of regulation 3 of the SEBI (Insider Trading) Regulations, 1992.
62. The SEBI Act was promulgated on January 30, 1992, and amended in 1995. The SEBI (Insider Trading) Regulations were notified on November 19, 1992. The SEBI Act as well as the SEBI (Insider Trading) Regulations empowers SEBI to take action in case of insider trading. The SEBI Act, and more particularly section 11(1) of the SEBI Act, casts a duty on SEBI "to protect the interests of investors in securities and to promote and develop and to regulate the securities market by such measures as it thinks fit." This duty can be exercised by SEBI in several ways. One of them could be to frame regulations and to take action thereunder. One another alternative which is available to SEBI under the Act and the Regulations is to issue directions.
63. Regulation 11 of SEBI (Insider Trading) Regulations, 1992, empowers SEBI to issue directions for the purpose of prohibiting the insider from dealing in the securities, and prohibiting an insider from disposing of the securities acquired, in violation of the Regulations.
Admittedly, in this case, the securities acquired are today non-existent because of the merger of HLL with BBLIL. Therefore, issuance of directions under this Regulation would be inoperative and infructuous.
64. In view of the above, reliance is now placed on section 11B of the SEBI Act which reads as under:-
"Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary;
(i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; (iii) to secure the proper management of any such intermediary or person.
It may issue such directions:
(a) to any person or class of persons referred to in section 12, or associated with the securities market; or
(b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market."
65. Section 11B was inserted by the Securities (Amendment) Laws, 1995. This provision of the Act operates independently of and in addition to the Regulations. Besides, section 11B being a part of the SEBI Act, is superior and wider to the Regulations which are pieces of subordinate legislation.
66. To protect the interest of investors and integrity of the market it is considered fit and proper, in the facts of the case, to issue a direction because SEBI as a regulatory body would be failing in its duty if it does not take corrective steps to protect the interest of investors and integrity of the market. Besides it is also the duty of SEBI to ensure that transactions in the securities market are carried out in a fair and transparent manner and there is a level playing field for investors transacting in the securities market. In this case, it has been concluded that HLL had bought the shares from UTI on the basis of unpublished price sensitive information. UTI, as one of the contracting parties, has been put in a disadvantageous position and HLL has acquired the shares in violation of the regulation of the Act.
67. In view of the aforesaid, I, under the provisions of section 11(1) read with section 11B hereby direct HLL to compensate UTI to the extent it suffered disadvantage or incurred loss. The calculation given in the earlier paragraphs indicate the likely losses incurred by UTI by adopting different criteria. These losses range from Rs 3.04 crore to Rs 20.83 crore. However, to be conservative and fair, it is decided to estimate the likely loss to UTI at Rs 3.04 crore. This amount is calculated on the basis of the difference between market prices of the shares of BBLIL sold by UTI to HLL after the announcement of the merger and prior to the announcement of the merger (excluding premiums).
68. This direction is being issued suo moto to protect the interest of the investor, ie, UTI, in the present case. For a regulator it is imperative that once a violation has come to its notice, it has to cause corrective action. Besides, till the decision of the insider trading is arrived at, it may not be possible for the affected investor to complain.
69. Further, considering that violations of insider trading are always treated as serious in capital markets all over the world as they impinge on the basic tenets of transparency, fairplay, investor confidence, orderly development of the markets, etc, as such it would be a fit case for invoking the provisions of section 24 of the SEBI Act which provides that any person who contravenes the provisions of the Regulations shall be liable to criminal action. In this case the provision of regulation 3(i) has been violated.
This action can be initiated against the company as well as against the directors/officers of the company as mentioned under the provision of section 27 of the SEBI Act. By invoking this section, the findings of investigation in this case had already been communicated to all the following directors of HLL who were present in the board meeting of March 6, 1996, in which the decision to purchase the shares of BBLIL was taken: SM Datta, KB Dadiseth, V Narayanan, R Gopalkrishnan, MS Banga, D Bhattacharya, DM Buckle, H Munwani, A Lahiri, SM Sahani, MK Sharma and OP Aggarwal.
70. However, only five of these directors, viz, SM Datta, KB Dadiseth, R Gopalkrishnan, A Lahiri and MK Sharma, were also on the core team which processed the merger proposal. As such, these directors were specifically aware about the impending merger which was a price sensitive information.
Since the same knowledge was not clearly brought out in the investigation against the other directors, ie, OP Aggarwal, SM Sahani, H Munwani, DM Buckle, V Narayanan, MS Banga and D Bhattacharya, it would be fair to exclude them from criminal action. Consequently, it is ordered that the prosecution be launched against the following five directors: SM Datta, KB Dadiseth, R Gopalkrishnan, A Lahiri and MK Sharma of Hindustan Lever Ltd along with Hindustan Lever Ltd.
The orderIt is directed that HLL compensate Unit Trust of India to the extent of Rs 3.04 crore.
It is also hereby ordered that prosecution be launched by SEBI against HLL and five directors SM Datta, KB Dadiseth, R Gopalkrishnan, A Lahiri and MK Sharma of HLL along with HLL.
The above mentioned direction to compensate UTI and the order to launch criminal prosecution shall come into effect only after 30 days of the date of communication of this order to HLL and its five directors to enable the persons concerned, if they so desire, to prefer an appeal, before the Appellate Authority, ie, the Central Government.
Signed
DR Mehta
Chairman, SEBI
March 11, 1998
