TMI Blog1998 (7) TMI 496X X X X Extracts X X X X X X X X Extracts X X X X ..... the same order of SEBI, it was decided to hear both of them together. The appeals came up for hearing on the 22-4-1998, 23-5-1998, 30-5-1998 and 3-6-1998. 3. Briefly, the case relates to the allegation that Hindustan Lever Ltd. (HLL - appellant 1 in appeal No. 1) as an insider purchased the securities of Brook Bond Lipton India Ltd. (BBLIL) on the basis of unpublished price sensitive information, thereby violating the provisions of the SEBI (Insider Trading) Regulations, 1992, and the SEBI Act, 1992. HLL and BBLIL are both subsidiaries of the common parent company, Unilever plc., U.K. with the announcement of the merger of BBLIL with HLL to stock exchanges on 19-4-1996, there were allegations in the market regarding the leakage of information and insider trading. When these came to the notice of SEBI, SEBI decided to investigate the matter. During the course of investigations, it came to light that a core team consisting of common directors of HLL and BBLIL, viz., Mr. S.M. Datta [appellant 1( a )], Mr. K.B. Dadiseth [appellant 1(6)], Mr. R. Gopalakrishnan [appellant 1( c )], Mr. A. Lahiri [appellant 1( d )] and Mr. M.K. Sharma [appellant 1( e )] had been set up to consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other legal formalities. The core group, they stated, was actually advisory and could not, and in fact, did not, take any decision in the matter. According to them, on 17-1 -1996, Unilever Pic, holding company of appellant 1, through their director, Mr. CM. Jemmet, communicated the confirmation of Unilever Pic s in-principle approval for the proposal. This approval was general and non-specific and was contingent upon various further steps. As such, they were in possession of information about the proposed merger because it was a contracting party. It was not information that they derived from BBLIL or because of its connection. In pursuance of the general policy of the holding company, Unilever Pic, to have directly or indirectly beneficial holding of 51 per cent shares in all their subsidiaries, the Board of appellant 1 decided to purchase 8 [eight] lakh shares of BBLIL during the Board meeting on 6-3-1996 from a financial institution. The purchase of 8 [eight] lakhs shares of BBLIL had no direct nexus with the impending merger. They purchased these shares at a 10 per cent premium on the market which price was substantially above the price that they would have paid, had they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is their contention that the enquiry and the impugned order circumvent the procedure under the SEBI Act for adjudication and maximum penalty. It was open to SEBI to have followed the adjudication mechanism prescribed under section 15G. In such a case, not only would the maximum penalty provision of Rs. 5 lakhs have been applicable but a number of rights including their right of cross-examination and other aspects necessary for a fair hearing, would have been available. SEBI has misconstrued and misapplied the law laid down in USA with respect to the materiality of information. SEBI had wrongly applied a per se principle, i.e., that once an information relates to a merger, it should be deemed to be a price sensitive information. According to them, the allegation that the purchase of these shares by using the funds of appellant instead of bringing in foreign exchange from Unilever was unfair is also misconceived. The observations in this connection are totally unjustified and extraneous to the issues that SEBI was dealing with, and clearly and conclusively demonstrates its bias against the appellants and its directors. The calcu- lation of the notional loss to UTI, if the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger announcement, it has been stated that the price of BBLIL share rose substantially to close at Rs. 405.05 at NSE on 19-4-1996. Had the appellant been made aware of the proposed merger, it would have waited till the announcement, to enter into a sale transaction with HLL, since the premium to price as well as the base price of the security would have increased. The appellant believes that the compensation payable to it should have been much higher than that ordered by SEBI vide its order, dated 11-3-1998. The appellants have further contended that there was no rational basis for SEBI to limit the compensation to the appellant at Rs. 3.04 crores only. The quantum of compensation awarded to the appellant is not justified. Once the public announcement of the proposed merger was made on 19-4-1996, the BBLIL shares were traded on NSE between Rs. 370.00 to Rs. 410.90. The base price for the purpose of block deal could be reckoned as mean of the high and low on that day, i.e., Rs. 403.95, and to this a premium of 10% was added then the negotiated price would have been Rs. 444 per share. On this basis, HLL should have been directed to pay Rs. 7.52 crores as compensation to the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... npublished price sensitive information by virtue of connection with the company, the shares of which have been traded in or ( b ) has actually received or had access to such unpublished price sensitive information. SEBI s view is that under alternative ( b ) , if a connected person actually gains or receives such information independent of any connection with the company, such person would still fall within the definition of insider . In any case, SEBI has argued that HLL was covered by both the alternatives indicated above, i.e., HLL as a deemed connected person to BBLIL, was expected to receive the information by virtue of such connection and HLL had also actually received information about the merger. The contention of the appellants, however, is that the defini- tion of an insider under 2( e ) requires that he should have access to the information in question only because of his connection. The appellants have argued that SEBI interpretation, restricting the requirement of by virtue of such connection to only alternative ( a ) above is too narrow and is not consistent with the provisions and intent of the regulations. They have argued that in their case, the only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information means any information which relates to the following matters or is of concern, directly or indirectly, to a company, and is not generally known or published by such company for general information, but which, if published or known, is likely to materially affect the price of securities of that company in the market ( i )financial result (both half-yearly and annual) of the company; ( ii )intended declaration of dividends (both interim and final); ( iii )issue of shares by way of public rights, bonus, etc.; ( iv )any major expansion plans or execution of new projects; ( v )amalgamation, mergers and takeovers; ( vi )disposal of the whole or substantially the whole of the undertaking; ( vii )such other information as may affect the earnings of the company; (viii) any changes in policies, plans or operations of the company." 13. SEBI s case is that since mergers are specifically mentioned in item ( v ) of regulation 2( k ) , the fact that information about the merger was available with HLL meets the requirement of reg. 2( k ) relating to unpub- lished price sensitive information. The appellants have contended that to fall within the ambit of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mic Times (Investor s Guide) - Mumbai (22-4-1996) ( xvi )Times of India - Mumbai (22-4-1996) ( xvii )Business World (1/14-5-1996) ( xviii ) Business India (6/19-5-1996) ( xix )Economic Times - Mumbai (20-4-1996) ( xx )Hindu Business Line - Madras (20-4-1996) ( xxi )Economic Times - Mumbai (23-4-1996)" 15. It has been argued on behalf of SEBI and also UTI that many of the reports relate to the period after the merger and as such are not relevant. Nevertheless, there are reports prior to the merger which is significant. Besides, a perusal of the post merger reports indicates that these reports have, by and large, referred to prior market knowledge of the merger. Thus the headline of the story that appeared in the Economic Times, dated 20-4-1996, says Market saw it coming for a while, says it makes sense . Similarly, the headline in the news item in the Telegraph, dated 20-4-1996 says Hind Lever, BBLIL set for mega merger . It appears that the refrain of most of the press reports that appeared in the post merger period was prior market knowledge. While it is true, as pointed out by SEBI, that there are only a few press reports prior to the actual purchase the post me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r information price sensitive. The appellants have argued that the case in question is one where the merger was of two subsidiary companies of a single holding company with similar management structure and skills and with operations in the same sector and where both are large and profit making companies with a common R D Technology base. In such a situation, it is the swap ratio which is the only material information which could have an impact on the prices of securities of BBLIL. In support of this contention, the appellants have also argued that once the swap ratios were announced by the Boards of the two companies, the share price of BBLIL estabilised which reflected the true effect of the proposed merger. The appellants have also cited case law in the United States to substantiate their view that the price sensitivity of the information regarding merger must be established specifically for each case and not simply assumed per se. 17. SEBI has taken a different view based on its interpretation of [regulation] 2( k ) . SEBI has argued that [regulation 2( k ) identifies two kinds of information which could be price sensitive. The first relates to the item specifically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that information about the swap ratio is more price sensitive. Taking all factors into account subject to what we have stated in para 16 above, SEBI s conclusion that the information of merger was price sensitive is justified. 19. The next set of issues concerns the finding of SEBI contained in para 41 of the impugned order regarding the applicability of regulation 3(1). This regulation reads as under : "No insider shall either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information." 20. The appellant has argued that under this regulation, even if it is proved that an insider dealt in securities while in possession of unpublished price sensitive information, it does not establish violation of the regulation, unless it is also established that dealing was on the basis of such information. Mere possession of information does not preclude the dealing and it is for SEBI to prove that the dealing was motivated by the information. The appellants have also contended that it is also necessary to establish the motive for profit or gain or advantage for an offenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity of BBLIL was 12,04,80,000 shares of which holding of Unilever and its group companies amounted to 6,11,40,582 shares (50.74 per cent) and the further shares required to make the beneficial holding of Unilever Group to 51 per cent was only 3,08,838 shares and not 8 lakh shares as claimed by the appellants. SEBI has, therefore, concluded that the purpose and motive right from the beginning when the decision to acquire 8 lakhs shares was taken, was to move towards reaching 51 per cent holding of Unilever in combined HLL after the merger of BBLIL into HLL and was not to reach 51 per cent, of Unilever holding in BBLIL. This shows that the knowledge of the impending merger was the reason which motivated the acquisition of 8 lakh BBLIL shares by HLL from UTI to ensure 51 per cent shareholding of Unilever in the merged company. SEBI s argument treats the entire holding of HLL in BBLIL as contributing an equivalent amount to the holding of Unilever, whereas the appellants argument assumes that only 51 per cent of HLL holding in BBLIL constitutes a beneficial interest of Unilever. In fact, once the objective of Unilever, dutifully implemented by HLL, is defined as acquiring a 51 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablishing the charge of insider trading. Section 15G read with sections 15-1 and 15J are only applicable in case of levy of monetary penalties and have no bearing on the issue of determination of violation of regulation 3(1). Since SEBI has not chosen to impose any penalty for the violations and given the unambiguous provisions of regulation 3(1), we find no reason to disagree with the findings of SEBI on this account. 23. The next set of issues concerns the power of SEBI to award compen- sation to UTI. It is the appellant s case that neither the Act nor the regulations contain any provisions which empower SEBI to make com- pensation to UTI and as such, SEBI s order does not have a legal basis. It would be useful to state the relevant provisions under which SEBI has based its findings. The procedure for investigation is laid down in Chapter DT of the Securities and Exchange Board of India [SEBI] (Insider Trading) Regulations, 1992. Regulation 5 empowers SEBI to order investigation in respect of any matter which has come to its notice on the basis of written information. Regulation 6 provides that before undertaking any investi-gation in regulation, SEBI shall give a reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L and UTI and award compensation. It has also been argued that UTI which has been awarded compensation by SEBI in a suo moto manner did not approach SEBI at all about having suffered any loss or disadvantage in the transaction of shares of BBLIL between UTI and HLL. It has also been argued that the powers available to SEBI under section 11 can only be exercised by it after causing an enquiry to be made under the provisions of that section and it is not open to SEBI to carry out the investigations and enquiry under the provisions of the regulations, and not use the powers available under the regulations to give directions, but instead use the omnibus powers available under section 11. It has been contended that if there are specific provisions in the regulations in relation to a particular exercise of power then the specific powers will override the general powers. In support of this contention, appellants have placed reliance on a number of rulings of the Supreme Court of India. The appellants have also argued that it a settled principle of law that if any pecuniary burden is sought to be imposed, then there should be a specific provision in the statute. SEBI cannot make a pecuni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have been passed after taking into account the response to the notice. We also find it difficult to agree with the view of the SEBI that despite the specific provisions in the Act and regulations, it is open to it to use the general powers available under the Act. If this were so, the purpose of framing the regulations would be defeated. Section 15G which was enacted in 1995 after the framing of regulations specifically provides for insider trading and can now be said to have occupied the field. It is no longer permissible to SEBI to take action outside the scope of adjudica- tion under section 15-1 read with section 15J. SEBI has chosen not to use this specific provision for imposing a penalty, but has instead decided to use omnibus powers under sections 11 and 11B to adjudicate for award- ing compensation. We are of the view that it is a settled principle of law that for imposing a pecuniary burden, there must be specific provisions in law and there should be specific regulations for giving an opportunity to the affected person to present its case before any burden can be imposed on it by an Authority like SEBI. Use of omnibus powers for imposing pecuniary burden cannot be t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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