Appeal Nos.1 And 2 of 1998. Case: Hindustan Lever Ltd. Vs Securities and Exchange Board of India. Securities and Exchange Board of India

Order:

1. These appeals have been filed by Hindustan Lever Ltd. (HLL) and Unit Trust of India (UTI) against SEBl'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 (BBLIL) on the basis of unpublished price sensitive information, thereby violating the provisions of the SEBI (Insider Trading) Regulations, 1992, and the SEBI Act, 1992.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 exchange 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 l(b)), Mr. R. Gopalakrishnan [appellant l(c)], Mr. A. Lahiri [appellant l(d)J and Mr. M. K. Sharma [appellant l(e)] had been set up to consider modalities of amalgamation of both the companies. On 17-1-1996, Mr. C.M. Jemmet, the Regional Director of Unilever in India informed the core team regarding the granting of the in-principle approval by Unilever for the amalgamation of BBLIL with HLL. Thereafter during 6/ 15-3-1996, the core team agreed to announce the amalgamation on 19-4-1996. Meanwhile, on 6-3-1996, in the Board meeting of HLL, it was, decided to buy 8 [eight] lakh shares of BBLIL, preferably through a public financial institution. The shares were purchased by HLL from UTI for Rs. 350.35 per share by paying a premium of 10 per cent over the market price of around Rs. 318. The purchase deal was finalised on 25-3-1996, and the delivery of the shares was taken on 27/30 March, 1996. The purchase, therefore, took place a little prior to the public announcement of the: merger on 19-4-1996. From the investigations, SEBI concluded that HLL, as an 'insider', purchased eight lakh shares of BBLIL on the basis of unpublished price sensitive information and had, therefore, violated regulation 3(1) of the SEBI (Insider Trading) Regulations, 1992. SEBI also held that, since information about merger would have affected the price of securities and any reasonable investor would have attached importance to such an information, non-disclosure of this information to UTI put UTI to distinct disadvantage and prevented it from taking an informed decision. SEBI, thus, passed the order, dated 11-3-1998 directing HLL to compensate UTI to the extent of Rs. 3.04 crore and also ordered prosecution to be launched by SEBI against HLL and the eye directors: Shri S. M. Datta, Shri K.B. Dadiseth, Shri R. Gopalakrishnan, Shri A. Lahiri and Shri M.K. Sharma of HLL. The order \vas to come into effect after 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(e) 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 crore group concluded that 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 Plc., holding company of appellant 1, through their director, Mr. C. M. Jemmet, communicated the confirmation of Unilever Plc''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 or 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 Plc, 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 acquired 51 per cent beneficial interest through the preferential allotment route and as per the guidelines of SEBI and the RBI. UTI had not suffered any detriment inasmuch as UTI, being the net seller, would have, in any event, sold the shares and could realise the consideration only upto the price paid by the appellants. They further contended that, even after the announcement of the merger, UTI continued to sell BBLIL shares in the market at prices close to the price at which they had sold shares to appellant 1 in March, 1996. It is their contention that, having regard to the nature of Unilever's presence in India, the possibility of the merger was generally speculated and had been expected and discounted by the market, except that the specific share exchange ratio was not known. Reports regarding the expected merger had already appeared in number of newspapers and, therefore, the information was known to the public: UTI like other investors in the market, they argued, was clearly aware of the possibility or such a merger from the press reports. On 19-4-1996, both appellant 1 and BBLIL notified the stock exchange of the forthcoming meeting of 22-4-1996 of their respective Boards to consider the amalgamation and approve the proposed share exchange ratio. This was in accordance with the disclosure requirements under the listing agreement. On 22-4-1996, the formal merger proposal was placed before the Board of appellant 1 for the first time. Thereafter, Chairman, SEBI, commenced investigation on the basic of media reports relating to leakage of the share exchange ratio prior to its formal announcement to leakage 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 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 dearly and conclusively demonstrates its bias against the appellants and its directors. The calculation of the notional loss to UTI, if the shares were not sold and, thus, shares were converted into the shares of HLL post-amalgamation, is totally against legal principles. They have further argued that SEBI failed to appreciate the true meaning and purport of the argument of the appellants that a company could nut be an insider upon itself and that its dealing on the basis of primary knowledge as a principal party to the merger decision could never be considered as having access to information 'by virtue of connection with the company'. The observation that use of information regarding the impending merger amounted to misuse of information and violation of the [SEBI] (Insider Trading) Regulations is erroneous and incorrect. The computations in paragraph 37 of the impugned order are erroneous and mathematically incorrect. This was the basis on which over 7 lakh shares had been acquired by appellants in the past before January, 1995, 8 lakh...