According to highly-placed sources, Agarwal has been accused of purchasing his own company's shares from the market just prior to its takeover by a Bayer AG subsidiary, Bayer Industries, in October 1996. The shares were bought by Agarwal's brother-in-law from the open market and then offered to Bayer Industries following an open offer intended to take the Bayer stake in ABS to 51 per cent.

The sources said that Sebi had completed its investigations in the case and had communicated its findings to Agarwal earlier this week. Agarwal has been asked to respond to Sebi's findings within 15 days of receiving the communication failing which the regulator would go ahead and take action under the Sebi Act and the Sebi (Insider Trading) Regulations.

TheABS Industries insider trading case goes back to August 1996, when the price of the scrip started an upward spiral from a level of Rs 48. It had risen to a level of Rs 82 by October 1996 and the rise came on the back of high volumes.

In October 1996, Bayer Industries was allotted about 55 lakh shares as preferential shares at Rs 70 per share. On October 8, Bayer followed this up with a public offer for picking up 20 per cent shares in ABS Industries at Rs 70 per share. This offer price was raised to Rs 80 later.

Sebi had launched investigations into the share spurt as it suspected that the buying was connected to persons who were in the know of the impending joint venture with Bayer Industries.

Sebi's investigations revealed that the major buying was carried out by two brokers on behalf of a client, one IP Kedia, who was found to be the brother-in-law of Agarwal. He also offered a large number of shares in the public offer.

In a statement to Sebi during the course of investigations, Agarwal isbelieved to have told Sebi that Bayer had set a precondition that it would need to hold at least 51 per cent in ABS Industries for forging an alliance.

As there were other Indian companies interested in forging alliances with Bayer Industries, it was critical for ABS Industries to offer a 51 per cent stake in the company to Bayer.

Sebi's investigations revealed that even after the preferential allotment issue, Bayer was falling well short of its target of 51 per cent shareholding in the company and therefore the Indian promoter decided to buy shares from the market. These shares could later be offered in the open offer to ensure that Bayer's stake after the offer went up to the 51 per cent mark.

Sebi's investigations revealed that serious talks for an alliance with Bayer had taken place as early as May, 1996. The board of ABS Industries was informed of this in June and in the next two months teams from both the sides visited each other.

In September, Agarwal had personally held talks with Bayer AG inGermany. Sebi's investigations also revealed that during the time these negotiations were on Agarwal had instructed Kedia to purchase the shares and had even funded some of the purchases.

Sebi has held that the purchase of these shares by parties who knew in advance about the impending takeover amounted to insider trading. News about takeovers is considered a price-sensitive issue under the Sebi insider trading regulations. Agarwal is thus alleged to have indulged in insider trading as he was privy to information which was not available to the public at large.

The ABS Industries case is the second one involving insider trading in which Sebi has made substantial headway. The first one involved Hindustan Lever Ltd (HLL), which was indicted for having purchased shares of Brooke Bond Lipton from Unit Trust of India (UTI) without disclosing to it (and the public at large) that a merger was being contamplated between HLL and Brooke Bond.

HLL went in appeal against the Sebi order and the issue is currentlypending before the Mumbai High Court. At the same time, Sebi has initiated prosecution proceedings against past and current directors of the company in a Mumbai metropolitan court.

Insight

Parallels with HLL

There are some remarkable parallels with the Hindustan Lever insider trading case. Both cases of alleged insider trading were prompted by the idea of giving (or retaining) 51 per cent stake. In HLL's case, the concern was about retaining Unilever's 51 per cent stake in HLL after the merger with Brooke Bond. In Bayer's case, the idea was to make sure that it held at least 51 per cent after the formation of the joint venture. In HLL's case, the local HLL board went to bat on behalf of Unilever; in ABS' case, the Indian promoter did the job to protect Bayer's interests.