The authority, comprising finance secretary Montek Singh Ahluwalia and special secretary (banking) CM Vasudev, has also held that the SEBI had no jurisdiction in ordering the Rs 3.04 crore compensation to Unit Trust of India (UTI). "SEBI chose to pass an order under section 11 which goes beyond its powers under section 11 and goes into areas not specified in the showcause notice (to HLL) and is thus contrary to provisions of law and also contrary to principle of natural justice," the order said.

It, however, left it to SEBI to consider invoking the adjudication mechanism prescribed under section 15 (G) of the SEBI Act after following the "prescribed procedure for determining thedesirability and legality of imposing a penalty on HLL".

SEBI chairman DR Mehta said that the order was still being examined. He declined to comment on the future course of action that SEBI would adopt. Sources, however, said the SEBI is expected to challenge the verdict in a high court.

SEBI sources pointed out that to say that the information regarding the merger was in the public domain is incorrect as the HLL top brass had all along denied the various news reports that had appeared on the subject. Welcoming the order, an HLL spokesman in Mumbai said: "We always abide by the law and we feel vindicated."

The appellate authority came down heavily on UTI saying that the latter's decision to file an appeal on the quantum of compensation after SEBI had suo-moto awarded compensation to it, "appears to be an after-thought." The order added, "It is surprising that UTI did not choose to approach SEBI in the first instance, soon after it felt that HLL, because of insider trading, had gained an unfair priceadvantage in the purchase of securities of BBLIL from UTI." The authority also pulled up SEBI for using omnibus powers to impose pecuniary burden and stated that it "cannot be the intent of law".

The order pointed out that the SEBI chose not to use the specific provisions for imposing a penalty but has instead decided to use omnibus powers under sections 11 and 11B to adjudicate for awarding compensation.

On March 11, 1997, SEBI had passed an order to launch prosecution against HLL and five of its directors - including SM Datta, KB Dadiseth, R Gopalakrishnan, A Lahiri and MK Sharma - 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 appeals came up for hearing during April, May and June.

Referring to the acquisition of eight lakh shares of BBLIL from UTI, the order said that "since the possibility of merger appears to have been generally speculated about and wasprobably already discounted by the market, this information is not likely to have significantly impact on the price at which the transaction was concluded with UTI in March, 1996." This, it added, was further corroborated by the fact that UTI continued to sell BBLIL shares in the market after the merger - at prices close to the price at which they sold shares to the HLL in March, 1996.

The judgment had a dig at the functioning of the UTI, which claimed that it had no information about the merger. The order said that SEBI seemed to have relied merely on the CGM of UTI that he did not have knowledge about the impending merger of the two companies. SEBI has not addressed the issue whether due diligence on the part of UTI would have alerted them about the possibility of impending merger.

According to the judgment, "In the face of large number of press reports indicating market speculation on the merger during that period, there are strong reasons to believe that the impending merger, though not formallyacknowledged or published, was in one sense generally known and UTI's denial of knowledge cannot be implied to mean that the market in general had no information in this regard."

The order, however, said 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 the merger issue by virtue of its connection and its conclusion that the information was price-sensitive is "justified". However, SEBI, the judgment said, "has not given any reasons for not invoking the procedure and provisions of section 15G of the Act for imposing a penalty on the company for indulging in insider trading. Nor has SEBI given any reasons to conclude that the finding of insider trading in this particular case is of a degree of seriousness warranting prosecution".

What the order says