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1998 (7) TMI 496

..... RETARY (BANKING) ORDER 1. These appeals have been filed by Hindustan Lever Ltd. (HLL) and Unit Trust of India (UTI) against SEBI s order, dated 11-3-1998, directing Hindustan Lever Ltd. to compensate Unit Trust of India to the extent of Rs. 3.04 crore and ordering that prosecution be launched by SEBI against Hindustan Lever Ltd. and five directors : Shri S.M. Datta, Shri K.B. Dadiseth, Shri R. Gopalakrishnan, Shri A. Lahiri and Shri M.K. Sharma of Hindustan Lever Ltd. It was also ordered that the above orders shall come into effect only after 30 days of the date of communication of the order of appellant No. 1 and its five directors to enable the persons concerned if they so desire to prefer an appeal before the appellate authority, i.e., the Central Government. 2. Since the two appeals were against 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 (BBLIL) on the basis of unpublished price sensitive in .....

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..... e five directors: Shri S.M. Datta Shri K.B. Dadiseth, Shri R. Gopalakrishnan, Shri A. Lahiri and Shri M.K. Sharma of HLL. The order was to come into effect after one month of the date of communication of the order. The appellant have preferred these appeals against the said order. 4. The appellant 1 (HLL) have contended that appellants 1(a) to 1(e) which formed the core group are directors of appellant 1. At the relevant time, appellants 1(a) to 1(c) were also director of BBLIL. Appellant 1(e) had ceased to be the director of BBLIL on and from 22-11-1995, i.e., before the relevant time. During January, 1996, the core group concluded that there was no serious impediment to implement the proposed merger of BBLIL with HLL subject to necessary approvals of shareholders 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 .....

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..... nce- ment thereby allegedly resulting in a false market. It is their contention that the investigation into the matter was undertaken by the SEBI Chairman and the impugned order had also been passed by him and not by the Board. This violated the [SEBI] (Insider Trading) Regulations, 1992. They have argued that SEBI has wrongly directed the appellants to compensate UTI to the extent of Rs. 3.04 crores, purportedly under section 11(1) read with section 11B of the Act. According, to them, section 11(1) only authorises the Board to make a plan or adopt a course of action for regulating the securities market or safeguard the interests of the investors. Neither the Board nor the Chairman can transgress the limit of law and create a remedy not provided for by the law. It 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 necessar .....

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..... s of BBLIL. On 13-6-1996, UTI was approached by officers of HLL for sale of a large block of shares of BBLIL. The reason for the purchase by HLL was to invest HLL s surplus funds in its group company as stated by HLL. The deal of selling 8 lakh BBLIL shares by UTI to HLL was finalised on 21-3-1996 at the net price of Rs. 350, by adding 10 per cent premium to the closing price of BBLIL share at BSE on the same day. They have further submitted that the officials of HLL, while negotiating the deal, did not give any indication about the proposed merger between HLL and BBLIL. The deal was based on a routine commercial consideration without evaluating the impact of price sensitive information which was not disclosed to the appellant. Upon the proposed merger 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 .....

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..... ements.- (i) The person should be a natural person or legal entity; (ii) he should be a connected person or a deemed connected person, and (iii) acquisition of the unpublished price sensitive information should be by virtue of such connection. There is no difficulty with regard to (i) and (ii) above as both parties agree that HLL is a legal entity and is a deemed connected person. There are, however, different interpretations of the words by virtue of such connection . In the impugned order, SEBI has argued that fulfilment of the requirement indicated at (iii) above envisages two alternative situations, namely, (a) whether the person is reasonably expected to have access to unpublished 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 indica .....

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..... ever as the dominant shareholder also cannot be viewed solely as part of HLL s internal decision-making process. It can be reasonably presumed from this approval that HLL is also privy to decision-making on the merger issue in the BBLIL Board, and this knowledge is clearly by virtue of its connection. SEBI s conclusion on the aspect in para 24 of the impugned order is, therefore, justified. 12. The next set of questions which need to be addressed is whether the information available to HLL constitutes unpublished price sensitive information. Regulation 2(k) which is relevant in this case reads as under : unpublished price sensitive 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 execu .....

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..... Bombay (31-1-1994) (iv)The Sunday Times - Mumbai (11-2-1996) (v)Business India - Mumbai (12/25 February, 1996) (vi)Economic Times - Calcutta (14-3-1996) (vii)Maharashtra Times - Mumbai (15-3-1996) (viii)Business Today - New Delhi (7/21-4-1996) (ix)Business Standard - New Delhi (8-4-1996) (x)Business Standard - New Delhi (20-4-1996) (xi)Economic Times - Mumbai (20-4-1996) (xii)The Telegraph - Calcutta (20-4-1996) (xiii)Times of India - Mumbai (20-4-1996) (xiv)Financial Express - Mumbai (19-4-1996) (xv)Economic 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 t .....

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..... the core committee is considering the proposal of amalgamation. 16. Turning to the second issue of price sensitivity, the appellants have argued that for information to be price sensitive, it should be of a nature which is likely to materially affect the price of securities of that company in the market. According to the appellants, information of merger per se cannot be said to be price sensitive, but it is the information concerning swap ratios which makes the merger 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. Th .....

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..... y is merged into a strong company with a presumed beneficial effect on the share price of the weak company is not involved in this case. Nevertheless, even in the merger of two healthy companies, there are synergetic possibilities which could lead to sensitivity of the price of either company. There is no doubt that the full extent of price sensitivity and even its direction would alter depending upon the exact ratio, but this only means 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 pric .....

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..... olding of 51 per cent by Unilever Group and that even with the acquisition of 8 lakh shares, there was a shortfall in reaching the targeted level of 51 per cent beneficial interest in BBLIL. It was further stated that HLL required another 4,50,000 to 4,75,000 shares to reach 51 per cent holding by Unilever in BBLIL. SEBI has disagreed with this view and has argued that prior to acquisition of shares from LITI, the total 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 ensu .....

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..... read with section 15J of the SEBI Act which provides that the amount of disproportionate gain or unfair advantage was a relevant factor in the qualification of penalties and that there could be no offence of insider trading without the misuse of a fiduciary position in order to have an unfair gain or advantage. SEBI s view is that under regulation 3(1), there is no requirement of profit or avoiding loss for establishing 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 .....

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..... nder those regulations. It chose to pass an order under section 11 which goes beyond its powers under section 11 and goes into areas not specified in the notice and is thus contrary to provisions of law and also contrary to principle[s] of natural justice. It has also been argued that there is no provision either in the Act or in the regulations which empowers SEBI to adjudicate any dispute between HLL 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 particu .....

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..... investigations under the regulations and then without passing an order under the regulations choose to take recourse to powers under the Act for awarding compensation. Indeed, during the course of the hearing, the counsel for SEBI had conceded that with regard to the quantum of compensation, SEBI should have given a notice to the appellants and any order about the quantum of compensation should 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- .....

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