Sebi To Prosecute 5 Hll Directors For Insider Trading

In the first-ever ruling on an insider trading case in India, the Securities and Exchange Board of India yesterday ordered the prosecution of Hindustan Lever Ltd, chairman K B Dadiseth, former chairman S M Datta and company directors R Gopalakrishnan, A Lahiri and M K Sharma.

The market regulator also directed HLL to pay Unit Trust of India Rs 3.04 crore as compensation. However, Sebi officials said the regulator was yet to take a decision on the individual case of Hindustan Lever vice-chairman

R Gopalakrishnan. He had earlier been indicted for insider trading in his individual capacity.

A Sebi statement said: ... Prima facie it appeared that HLL was an insider as it purchased 800,000 shares of Brooke Bond Lipton India Ltd (BBLIL) prior to the announcement of the merger of BBLIL into HLL. On the basis of unpublished price sensitive information, HLL had violated regulations prohibiting insider trading.

 

The statement said it had found Hindustan Lever guilty of violating subregulation (1) of regulation (3) of the Sebi (Insider Trading) Regulations, 1992.

Sebi said its order on compensating UTI and the prosecution of the company and its five directors would come into effect only after 30 days. The 30-day period was to begin from the day Sebi communicates its decision to Hindustan Lever. Company officials said they had received the order yesterday.

The 30-day period is to enable the persons concerned... to appeal to the appellate authority, the Central government, Sebi said. The HLL scrip had dipped on the bourses in anticipation of an unfavourable Sebi decision, closing at Rs 1,592.50 on the BSE against the previous close of Rs 1612.25. The scrip clocked a turnover of Rs 44.44 crore on the BSE, with a little over 2.7 lakh shares changing hands.

The compensation payable by HLL to UTI has been calculated on the basis of the difference between the market prices of shares of Brooke Bond sold by Unit Trust of India to Hindustan Lever after and before the announcement of the merger. UTI has given a statement that it was not aware of the merger which was decided by the core committee of HLL and BBLIL in January, a Sebi official said.

The initial findings were communicated to 12 HLL directors who participated in the meeting where the decision to acquire the shares was taken. However, prosecution has been ordered only against five directors. The Sebi officials explained that these five directors were also members of the core team of Hindustan Lever and Brooke Bond Lipton India.

A Unilever representative had informed the core team on January 17, 1996, that the parent company had approved the merger in principle. The same knowledge about the merger before the announcement was not ascribable to the other seven directors, stated Sebi.

The run-up

Jan-Feb,1996: Sharp rise witnessed in the stock price of HLL and BBLIL. Intense speculation of an imminent merger dominates scrip movement.

March 1996: HLL purchases eight lakh shares of BBLIL from UTI at Rs 350.35 per share, a 10 per cent premium over the prevailing market price of Rs 318.

April 19: HLL-BBLIL merger announced.

April 22: The two boards announce swap ratio.

May 12: Sebi launches investigation into allegations of insider trading.

August 4, 1997: Sebi fact-finding report accuses the Hindustan Lever brass of insider trading. The regulator finds evidence against HLL bosses and implicates former BBLIL managing director R Gopalakrishnan personally in certain deals.

Ruling & reaction

l Regulator directs HLL to pay Rs 3.04 crore as compensation to UTI

l It orders prosecution of HLL and its five directors, while the verdict against Gopalakrish-nan will be pronounced later

l HLL to appeal to the appellate authority, the finance ministry, while categorically refuting Sebi's charges

l HLL also plans to contest prosecution against five of its directors

l The FMCG major says its purchase of eight lakh shares from UTI was perfectly legal with UTI having no grievance on it till date

l It states that it had no knowledge of swap ratio at the time of purchase.

l HLL has also said that it has realised no financial gain from the purchase of shares from UTI.