SEBI turns the lever, decides to prosecute HLL

In a 32-page order, the SEBI said that prima facie, HLL was an insider as it purchased eight lakh shares of BrookeBond Lipton India Ltd prior to the announcement of the merger of BBLIL with HLL on April 19, 1996, on the basis of unpublished price sensitive information. Thus, HLL had violated the regulations prohibiting insider trading.

Both the orders would be enforced after a month during which time the company has the right to go to challenge the verdict. Under Section 24 of the SEBI Act, HLL bosses face either hefty fine or one year jail term for the offence.

The compensation to UTI has been calculated on the basis of the difference between the market prices of the shares of BBLIL sold by UTI to HLL after the announcement of the merger and prior to the announcement of the merger. Although the initial findings by SEBI had been communicated to 12 directors of HLL, who participated in the meeting where the decision on the acquisition of the shares was taken, the prosecution has been ordered only against those five directors who were present at the meeting of the board where the decision on the acquisition of theshares was taken. These five directors were also the part of the core team of HLL and BBLIL which went into the modalities of the merger.

The representative of parent Dutch transnational, Unilever, had informed the core team on January 17, 1996 regarding the in-principle approval of Unilever for the merger of the two companies and this price sensitive information was available to these five directors. The same knowledge of the merger before the announcement was not ascribable to the other seven directors.

It took more than two years of hard labour and collecting evidence by the SEBI to prosecute India’s second largest corporate firm on serious charge of insider trading. This is for the first time SEBI is taking action against any Indian company as it is all set to become a test case in the years to come.

“It is not easy to prosecute a company like HLL with established managers at the helm. We had to tread cautiously,” SEBI official said. SEBI took help from the most powerful and much experienced USmarket regulator, the Securities Exchange Commission (SEC). At least 10 cases of insider trading in the US were referred by SEBI to arrive at a verdict.