1998 (7) TMI 496 - CGOVT - Companies Law

Issues Involved:
1. Whether Hindustan Lever Ltd. (HLL) purchased/dealt in the securities of Brook Bond Lipton India Ltd. (BBLIL).
2. Whether HLL could be considered an insider as defined under regulation 2(e) of the SEBI (Insider Trading) Regulations, 1992.
3. Whether HLL dealt in or purchased the shares on the basis of unpublished price-sensitive information.
4. Whether the dealings in or purchase of the shares of BBLIL by HLL was in the nature of insider trading based on unpublished price-sensitive information and as such violative of the regulations and the SEBI Act, 1992.
5. The power of SEBI to award compensation to Unit Trust of India (UTI).
6. Whether SEBI was justified in ordering prosecution under section 24 of the SEBI Act.

Detailed Analysis:

1. Whether Hindustan Lever Ltd. (HLL) purchased/dealt in the securities of Brook Bond Lipton India Ltd. (BBLIL):
The facts are undisputed as HLL admitted to carrying out the transaction in March 1996, purchasing eight lakh shares of BBLIL from UTI.

2. Whether HLL could be considered an insider as defined under regulation 2(e) of the SEBI (Insider Trading) Regulations, 1992:
Regulation 2(e) defines an insider as any person who is or was connected with the company and is reasonably expected to have access to unpublished price-sensitive information. HLL, as a legal entity and a deemed connected person, was expected to receive information by virtue of its connection and had actually received information about the merger. The dominant position of Unilever as a controlling shareholder in both companies suggests that HLL was privy to decision-making on the merger issue in BBLIL, thus meeting the definition of an insider.

3. Whether HLL dealt in or purchased the shares on the basis of unpublished price-sensitive information:
Regulation 2(k) defines unpublished price-sensitive information as information that is not generally known or published by the company but is likely to materially affect the price of securities if known. The information about the merger was considered price-sensitive. Although the appellants cited numerous press reports to establish that the information about the intended merger was widely reported and generally known, SEBI relied on the testimony of UTI's Chief General Manager, who claimed ignorance of the merger proposal. However, the market speculation and widespread reports created a presumption that the impending merger was generally known.

4. Whether the dealings in or purchase of the shares of BBLIL by HLL was in the nature of insider trading based on unpublished price-sensitive information and as such violative of the regulations and the SEBI Act, 1992:
Despite the market speculation, there was circumstantial evidence indicating that the transaction of acquiring eight lakh shares of BBLIL by HLL from UTI was motivated by knowledge of the impending merger. This was to ensure that Unilever's share in the merged company did not fall below 51%. SEBI's conclusion that the information of the merger was price-sensitive was justified.

5. The power of SEBI to award compensation to Unit Trust of India (UTI):
SEBI's order to award compensation to UTI was found to lack jurisdiction. The SEBI Act and regulations do not contain provisions empowering SEBI to adjudicate disputes and award compensation. SEBI initiated investigations under the Insider Trading Regulations but chose to pass an order under section 11 of the SEBI Act without giving a notice to the appellants regarding the quantum of compensation. The specific provisions in the regulations override the general powers under the Act, and imposing a pecuniary burden requires specific legal provisions.

6. Whether SEBI was justified in ordering prosecution under section 24 of the SEBI Act:
SEBI's order to prosecute the members of the Core Committee under section 24 was not justified. An order of prosecution should be based on a conclusive determination of all aspects of insider trading and specific justification in terms of the gravity of the offense. Given the persuasive evidence of market knowledge and speculation about the merger, SEBI's conclusions on some crucial aspects were not fully supported. SEBI can consider invoking the adjudication mechanism under section 15G for imposing a penalty after following the prescribed procedure.

Conclusion:
The appeals are decided with the finding that SEBI's order to award compensation to UTI lacks jurisdiction and procedural validity. SEBI's order for prosecution under section 24 is also not justified. SEBI may consider using the adjudication mechanism under section 15G for imposing penalties. The appeal filed by UTI on the quantum of compensation is not separately addressed due to the jurisdictional finding.

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