Top SEBI sources said that the regulator has received advice from its senior counsel Rafiq Dada that it would be legally correct on the part of the regulator to undertake prosecution proceedings against the five top HLL officials.

Sources said that the regulator is currently giving finishing touches to its petition to be filed shortly before the court of the metropolitan magistrate.

SEBI had sought legal advice from its counsels in the wake of HLL's solicitors writing to their SEBI counterparts saying that it will not be legallycorrect on the part of the regulator to initiate prosecution against the company's directors in the wake of the Mumbai high court order.

The SEBI senior counsel Rafiq Dada has, however, conveyed to the SEBI chairman, DR Mehta, that there is nothing illegal in the regulator initiating prosecution against the company's directors before the metropolitan magistrate. "If our appeal is not legal then the magistrate will throw it out. We believe that we are legally in the right in initiating prosecution proceedings and are therefore going to be filing the same before the magistrate", said a legal source closely associated with SEBI.

Dada confirmed that he had conveyed his views on the matter to the SEBI chairman.

HLL had in its letter to SEBI's solicitors stated that the Mumbai high court verdict does in no way allow SEBI to initiate prosecution. The verdict which stays certain findings of the appellate authority is general and not specific to the HLL insider trading case, the company had contended.

SEBI onthe other hand is of the view that the order is fairly clear in that it allows SEBI to initiate prosecution against the company.

"The written order of the court states explicitly that the operation and effect of the two findings of the appellate authority had been stayed. There is no ambiguity at all", said a SEBI source.

The court order states: "Operation and effect of the following findings given in the impugned order dated July 14, 1998, passed by the appellate authority is stayed--an order of prosecution should be based on conclusive determination of all aspects of insider trading and on specific justification in terms of the gravity of the offence".

In its March 11 order, SEBI had ordered prosecution against five directors and compensation to the Unit Trust of India (UTI) by HLL to the extent of Rs 3.04 crore.

HLL had challenged the SEBI order before the appellate authority which had through its July 14 order struck down the SEBI verdict. Subsequently, SEBI filed an appeal before the Mumbai HighCourt challenging the appellate authority verdict.

On September 28, the court while admitting the petition stayed two findings of the appellate authority pertaining to launch of prosecution proceedings and exercise of powers by SEBI.