Mumbai, Aug 7: The consensus among investment bankers and corporate lawyers is that Hindustan Lever goofed up in its reading of the law regarding Sebi's insider trading rules.

The Financial Express talked to over half-a-dozen investment bankers and corporate lawyers, and not one of them said that Hindustan Lever was absolutely right in what it did; i.e. buy eight lakh shares of Brooke Bond Lipton through an off-market deal with UTI before the merger was announced officially.

Significantly, not one of them wanted to be identified.

This is what SEBI's Insider Trading Regulation of 1992 say on who is an insider and from what acts the insiders are prohibited:

The clause 2(e) of Sebi's Insider Trading Regulations, 1992, define an insider as "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to have been connected with the company and who is reasonably expected to have access, by virtue of such connection, to unpublished price-sensitive information in respect of securities of the company..."

At least three of the directors of Hindustan Lever - former chairman SM Datta, vice-chairman KK Dadiseth, and R Gopalakrishnan - were directors common to both Hindustan Lever and Brooke Bond Lipton India when the decision to buy the shares of the latter for extinguishment after merger was taken on March 6 by the board of Hindustan Lever. All three could, thus, be called insiders by this definition.

q Under clause 2 (h)(i), a person is deemed to be a connected person even "if such person is a company under the same management or group, or any subsidiary company thereof within the meaning of sub-section (IB) of section 370, or sub-section (11) of section 372, of the Companies Act, 1956..."There is no dispute that both Hindustan Lever and Brooke Bond Lipton are companies under the same management or group. So the question of a company not being an insider does not hold.

Clause 2(k)(v) defines what "unpublished price-sensitive information" is. Among other things, the clause specifically mentions information about "amalgamation, mergers and takeovers" as price-sensitive. Clearly, since the Brooke Bond share purchase decision concerned merger-related information, it was price-sensitive.

q Under regulation 3 of the insider trading rules, all "dealing, communication or counselling on matters related to insider trading" are prohibited. In particular, "no insider shall, either on his own behalf, or on behalf of any other person, deal in securities of a company listed on any stock excahnge on the basis of any unpublished price-sensitive information... Any insider who deals in securities... in contravention of the provisions of regulation 3 shall be guilty of insider trading."In the light of these guidelines, investment bankers feel that SEBI has zeroed-in on the right case for deciding what constitutes insider trading, and whether a company can be considered an insider.

Observers also felt that, depending on the outcome of the case, UTI may be justified in seeking compensation for the notional losses it suffered following price movements between the time it sold the shares to Hindustan Lever and the actual announcement of the merger.

Most of them agree that the basic aim of Hindustan Lever was not insider trading but to avoid the need for Unilever to seek a preferential allotment after the merger to take its stake back to 51 per cent.

Some sources also felt that Hindustan Lever could have avoided the current embarrassment of being accused of insider trading if it had specifically sought SEBI's opinion or permission to make the purchase.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.