Mumbai, Mar 12: The core issue in the Securities and Exchange Board of India's (Sebi) judgement on Hindustan Lever (HLL) has two aspects.First, whether the FMCG major is an insider, second, whether Lever can defend itself on the basis that its knowledge, of what Sebi calls a price sensitive information of the merger with BBLIL, was received because HLL was itself a primary participant and amalgamating party and not by "virtue of its connection" with BBLIL, a key phrase used in the Indian insider trading law.
The following extracts, with minor editing to ensure brevity, provide, in the form of a point and counter-point, the way the above debate has been laid out in this controversy.
Issue: Who is an "insider"?
Sebi: Insider is (A) a person, (B) who is connected, (C) who is reasonably expected to have access by virtue of such connection, to unpublished price sensitive information or (D) who has received or has had access to unpublished price sensitive information.
A company, that is, HLL, its directors and officers are covered under the definition of "person" mentioned in (A).
Before the merger, HLL and BBLIL had common parentage, being the subsidiaries of the same holding company, Unilever, and had a common management. In view of these facts, HLL, in accordance with the above quoted definition is, "a person deemed to be connected with BBLIL" in consonance with (B). The directors, the "mind and limbs"
PN Bhagwati: Whether HLL falls within the definition of "insider" given in Reglation 2(e) of the Sebi regulation: HLL could be said to be an insider within the meaning of this definition only if HLL, being a person deemed to be connected with BBLIL could be stated to have received, "by virtue of its connection" with BBLIL, unpublished price sensitive information in regard to BBLIL.
The important words in this definition of "insider" are, "who is expected to have access by virtue of such connection"... so that, but for the connection, HLL would not have received or have had access to such information.
The words, "by virtue of its connection", should be given full effect (Bhagwati cites Ditcher Vs Denison, 1857 and Hyans vs Stuart-King, 1908 in support of not dismissing words as superfluous).
The words "by virtue of its connection" did not exist at the draft stage, and were included in the final version of the regulations, hence they should be considered as intended to be significant. Here in the present case...it cannot possibly be stated that HLL received any information about the proposed merger by virtue of its connection or deemed connection with BBLIL. It is undoubtedly true that HLL and BBLIL were under the common management and HLL must, therefore, be deemed to be connected with BBLIL, but the knowledge about the proposed merger..... such knowledge came to be acquired by HLL by virtue of the fact that it was a party to the proposed merger.
Sebi rejoinder to this: The evidence on record indicates that HLL was covered by both the alternatives indicated in the definition of an insider: that is, 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.
The 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. It is only where the person "is reasonably expected to have information", his connection with the company, whose shares he has traded in, has to be established. The definition thus distinguishes between "actual access" and "deemed access".
The contention that the words "by virtue of its connection" were added subsequent to the draft stage has no relevance for reaching a correct legal interpretation of the word "insider".
On the question of HLL itself being the amalgamating party: Sebi: If we were to accept the HLL argument, it would lead to a highly incongruous and irrational situation.
It would permit a "connected" or "deemed connected" person to misuse the price-sensitive information because he has received the information independently and not by virtue of his connection with the company whose shares he has traded. 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 companies, 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 the merger, and not because of the virtue of their connection with the other company?
The same situation can be applicable to a company itself buying shares of the other company on the ground that the information in its possession is because of being a principal party to the transaction and not because of its connection with the other party. 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 the 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.
It is wrong to say that the information was not received or derived or accessed by HLL by virtue of its connections 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, its a case where there are common factors all along beginning from the common management....the whole project of merger started with the formation of the core team and all further steps were taken through this team.
The information, which HLL derived, was through this team and therefore to say the information was received by HLL as a contracting party to the merger and not by virtue of its connection with BBLIL is incorrect and misconceived.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
