Playing with an unfair advantage

Other promoters of Asian paints allege that the deal was deliberately announced and later cancelled so that the Chokseys can increase the stake by picking up equity from the market at a lower rate. An alarmed SEBI Chairman, D.R. Mehta had to announce in a press briefing last week: “We are at present gathering data on many cases whether there is case to launch a probe or not. If we get any evidence of wrong-doing, I can assure you that we will take action.”

Says a legal expert who is on the board of several companies, “Insider trading was going on for the last several years…ever since the concept of stock markets was established in the country in the 18th century. However, it is difficult to prove insider trading in 99 per cent of the cases. There were several instances when directors and promoters used price-sensitive information to buy and sell shares in the markets. Unless you are not in a position to prove it you cannot accuse somebody of insider trading.”

What boosted the morale of these `insider’ traders is the fact that there were no clear-cut guidelines governing insider trading. SEBI formulated the insider trading regulationsthe first such exerciseas late as 1992.

However, by that time many insider trading incidentsmost of them pertaining to takeovers, mergers, bonus/rights issues and even public issues — had happened.

Promoters had adopted dubious ways in the past to take small investors for a ride. Pawan Sachdeva’s price rigging of his own companies’ securities prior to M S Shoes’ public issue is a well-known example. In another case, the market price of a company leap-frogged just before it announced a bonus issue five years ago. However, common investors who were in the dark were taken aback when the company announced a one-for-one bonus issue. Harshad Mehta is a legend as far as shareholders `interests’ are concerned.

In the HLL case it is fact that Unilever has benefitted the most by acquiring control of BBLIL. Though SEBI has sent a `letter of findings’ to HLL and its directors seeking an explanation as to why the company purchased BBLIL shares just before the merger. HLL has a strong defence as SEBI’s regulations on the term `insider’ is ambiguous. HLL says that under SEBI rules a promoter does not amount to being an insider.

HLL had already approached the former Chief Justice of India, P N Bhagwati to interpret the term `insider’ and subsequently announced in a press briefing that a company cannot be called an insider by itself as it is a primary party. Says Keki Dadiseth, Chairman HLL: “We have looked at each and every legal issue before taking a deision on merger. As far as acquiring of BBLIL shares are concerned, it was to increase Unilver’s shareholding to 51 per cent and following the merger we even extinguished those shares.”

SEBI, on the other hand, charges that a company can be prosecuted if it is found guilty of trading in its own associate company’s shares prior to any announcement of any price-sensitive information. The SEBI regulations define insider trader as “any person who is or was connected with the company or is deemed to have been connected wit the company and who is reasonably expected to have access, by virtue of of such connection, to unpublished price-sensitive information in respect of securities of the company…”

Is SEBI sure about its facts? Says L.K. Singhvi, Senior Executive director of SEBI: “We have taken the decision to send a communication to HLL after 14 months of investigation. Those who say that HLL has not indulged in insider trading regulations should read SEBI’s norms carefully.”

Another issue which this controversy has generated is of the corporate governance. Though the corporate governance still remains an ambiguous and misunderstood phrase, promoters and management can no longer afford to ignore better corporate practices. Although the Confederation of Indian Industry (CII) and financial institutions are preparing separate set of corporate governance code, only less than a dozen companies have come forward to formulate the code.

As the country gets integrated with the world economy, both Indian an well as international investors would seek greater disclosures, and more transparent explanation for major decisions taken by the management. Therefore, business groups will have to think twice before taking any sensitive decision. Better corporate governance demands that a company should disclose any information which can affect the small investors. The managements should not take the loyalty of shareholders for granted as nothing will stop an investor to switch his preferences to a foreign mutual fund after the full capital account covertibility comes into force after few years.

Whatever the outcome of the HLL-SEBI fracas, it’s certain that SEBI has a herculean task in hand to curb insider trading. On the positive side it will force SEBI to re-define insider trading regulations once and for all so that promoters and management do not manipulate the law by planning mergers and takeovers in a dubious manner.