Top Sebi officials told this newspaper that its legal department is presently studying the investigation report prepared by the regulatory body and, accordingly, recommend prosecution under the Sebi Act. The investigation report said both the promoters had violated the takeover code by not making a public offer.

``We will take action as per the recommendation of our legal team,'' said Sebi executive director O P Gahrotra. The recommendations are expected to be made within the next few days as the officials were busy preparing the draft of share buy-back scheme.

Officialssay that Herbertsons is an unique case under takeover code wherein both promoters increased their stake without making any open offer to its shareholders by taking advantage of the loopholes in the code.

``However, our investigation and legal advice sought by us show that takeover code has been violated,'' say Sebi sources. Herberstons, like Hindustan Lever's insider trading case, will set a precedent and define the takeover code, say Sebi sources.

Liquor baron Mallya had invited Chhabria to join Herbertsons by offering 26 per cent stake. In quid pro quo, Chhabria brought BDA Ltd makers of Officer Choice whiskey under the UB's fold. Both partners later fell out and started buying shares from the market to increase their holdings. Both partners claim that they have 40 per cent stake in the company. Herbertsons even refused to transfer shares bought by Chhabria's associate companies.One of Mallya's close associate later moved the Mumbai high court against Chhabria's buying shares in the company. Thepromoters of Herbertsons told Sebi officials that the hike in equity stake came well before the Sebi finalised the takeover code.

Sebi officials say that as both the partners have not adhered to the take-over code, they will take action against both. As per Sebi Act, the market regulator can impose a monetary fine and file a criminal case in the local court.