Regulating the market regulator

This is not the first verdict which has gone against the SEBI. NEPC had gone to the appellate authority against the verdict of SEBI and got the latter’s order repealed. Another famous example is the SEBI order against SBI Caps in the M S Shoes case. Here also, the SEBI verdict against SBI Caps was overruled by the appellate authority. As per the laws, any company or market intermediary can approach the appellate authority (which includes the Union Finance Secretary and the Banking Secretary) — constituted under the SEBI Act against an order of the SEBI.

The image of the SEBI has taken a beating after the latest verdict. SEBI had conducted long-drawn investigations, personal hearings, inspection of books in the HLL case. It has assumed importance as the HLL case was the first insider trading case registered by the regulators. SEBI is hardly 10 years old and insider trading laws were enacted only four years ago. The SEBI verdict and now the appellate panel’s ruling have led to confusion onlaws governing insider trading (i.e. buying/selling shares and making profits after getting privileged and price-sensitive information related to a company).

For the SEBI which is a quasi-judicial body, the Finance Ministry order has come as a bolt from the blue. To keep its honour and image intact, the watch dog is now preparing to move the high court against the appellate authority, whose members are part of the executive. SEBI’s contention is that HLL is an `insider’ to the deal. Looking back, HLL bought 8 lakh shares of Brooke Bond Lipton India prior to their merger. HLL also admitted that the shares were purchased so that Unilever could retain the 51 per cent holding in the merged entity (HLL). Unilever, HLL and Brooke Bond (here also Unilever held nearly 51 per cent stake) knew that the companies were going to be merged. “This is a price-sensitive information and violates the insider trading laws,” said a SEBI official.

The appellate authority accepted the SEBI argument and said “HLL is alsoprivy to decision-making on the merger issue in the Brooke Bond board and this knowledge is clearly by virtue of its connection. Sebi’s conclusion is, therefore, justified.” The Finance Ministry panel also agrees with the SEBI on other issues, especially the latter’s argument that the decision to buy Brooke Bond was based on a price-sensitive information. “SEBI’s conclusion that the information of merger was price-sensitive is justified,” the appellate authority said.

From the point of view of HLL, the whole exercise was to retain the 51 per cent Unilever stake in HLL after the merger. Had Unilever purchased shares directly from the market, it would have been forced to bring in around Rs 50 crore to the country. HLL used its money to purchase Brooke Bond shares so that Unilever could retain its stake even after the merger. Said an analyst, “it is surprising that the appellate authority finally exonerated HLL after agreeing with the SEBI on several important points. There is a need to redefine the lawsgoverning insider trading and the concept of appellate authority itself. The appellate authority consists of two officials in the Finance Ministry. How can it judge the verdict of the SEBI which is a quasi-judicial body.” This reinforces the need to have a separate Securities Appellate Tribunal independent of the SEBI and the Finance Ministry. For example, in the case income-tax disputes, there is a separate body called Income-tax Settlement Commission which entertains appeals made by persons not satisfied with the order of the Income-Tax Department.

Charges and counter-charges by various pressure groups have already been made about bureaucrats sitting on judgement on the regulator’s decisions. Corporate lawyers cite the row between Department of Telecommunicatons (DoT) and Telecom Regulatory Authority of India (TRAI). DoT questioned the decision of TRAI, the regulator for the telecom sector, barring MTNL’s entry into cellular services in the high court. The high court verdict went in favour of DoT.“When it comes to interpreting the laws, it should be left to the courts to decide and not bureaucrats,” said a corporate lawyer.

Surely, the last is not heard of the HLL case. The markets are also closely watching the developments. As SEBI officials themselves admit, it is not vey easy to prove insider trading charges. It is very common to see officials of several companies trading in their own shares — after obtaining price-sensitive information — these days. Consider some examples. A Rs 1,200 crore company which is engaged in textiles, cement and steel, recently saw its price going up and down, thanks to insider trading. Its share price shot up after the company announced a joint venture with a multinational firm. However, the tie-up could not take shape due to some reasons. But before the company made this fact public, some officials sold (there were even short sales) a big chunk of shares at the high price. Once the news about the severing of the ties was announced, the share price crashed.Investors are yet to understand what has happened.

In another well-known example, when a drug company acquired another drug company belonging to a leading business group, the share price of the latter shot up prior to the acquisition and the deal was announced. Reason: The acquirer was offering a higher price (more than double the then prevailing market price) for the public offer which was part of the deal. Some persons used the information for material gains. As a broker pointed out, “if one looks at the 123-year old history of our stock markets, there will be hundreds of such cases.” Well, small investors who are always short-changed, need a better deal and of course a stock market without insider trading.