The Sebi order in the Hindustan Lever-Brooke Bond Lipton (HLL-BBLIL) case is innovative in its approach to crime and punishment. It has taken the view--not unreasonably--that the HLL decision to buy eight lakh shares of BBLIL just a few weeks before the formal announcement of the merger is tantamount to insider trading, though there is some doubt about whether a company can be an insider to itself. The whole thrust of HLL's argument is that it did not come to know about the merger as an insider, but by being a principal party to the whole deal. So the insider trading regulations do not apply. To be sure, this is the only leg on which the HLL argument stands.Every other argument is either derived from this basic position, or makes no sense at all. Take for example the HLL claim that merger by itself, without knowledge of the swap ratio, is not price-sensitive information. This is absolute rubbish. One has only to look at trading activity and price movements in stocks after merger announcements are made to prove this argument wrong. Look at how HLL and Pond's shares have moved after news about the merger was announced. The swap ratio is still not known. Another argument is that there is no crime at all since UTI has not complained of injury in the transaction involving sale of BBLIL shares before the merger was announced. This again does not hold water: Sebi is empowered to take suo moto action whether someone complains about wrongdoing or not. UTI may have its own reasons to avoid making an issue of the deal it had struck with HLL.
But this does not mean HLL's motives for doing the deal should not be examined. What is certain is that HLL did what it did to safeguard the interests of Unilever; it assumed that the interests of Unilever are coterminus with that of the minority shareholders. UTI may have intended to sell BBLIL shares anyway, but it cannot be presumed that it would have sold out at the same price if it had known about the impending merger. It might have chosen to receive HLL shares and then sell the same for a higher profit. The HLL action, however, pre-empted this option to UTI and other minority shareholders. Where the Sebi order may prove controversial is in its decision to use the main Sebi Act provisions to deal with HLL's alleged sins of omission rather than the insider trading regulations. But this is neither here nor there: a regulator, if he believes wrong has been done, cannot sit on his hands saying he doesn't have the powers. The courts will, no doubt, have the final say in the verdict. But Sebi deservescompliments for bringing the insider trading issue to fore.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
