INSIDER TRADING: THE HLL CASE

Presented By:UM15078 – Debidutta SamantrayUM15079 – Girija Prasad NandaUM15086 – Kavita KumariUM15091 – Manisha PandeyUM15109 – Sekhar Suman MohantyUM15117 – Swapnika Das

Case OverviewThe case primarily involves 4 parties namely Unit Trust of India(UTI), Hindustan Lever Limited(HLL), Brooke Bond Lipton India Limited(BBLIL), and Securities & Exchange Board of India(SEBI)

HLL planned a merger with sister concern BBLIL so that Uniliver has a major stake in merged company

Merger was to be carried out by HLL acquiring shares of BBLIL. The corresponding stock exchanges were informed on 19 April, 1996

HLL bought 8,00,000 shares of BBLIL from UTI just before the merger was initiated.

SEBI accused HLL of INSIDER TRADING while entering in the above mentioned transaction

SEBI penalized HLL with Rs. 34 million & also initiated criminal proceedings against five common directors of HLL & BBLIL

On 15 July, 1998 the Union Finance Ministry absolved HLL of all charges of insider trading & quashed all the proceedings against the Directors

WHAT IS INSIDER TRADING...???

Insider trading refers to a situation, where in a

person, by virtue of his position to access

unpublished price sensitive information of the

company, gains such access and subsequently

uses the information obtained for his or her

personal benefits…

ISSUES INVOLVED IN THE CASE…

Whether HLL was an

insider or not?

Whether or not the pre-

merger information

HLL had access to was ‘Unpublished’

?

Whether HLL had any price

sensitive information

with regard to the merger?

Whether or not HLL had gained any

unfair advantage out of the

deal?

ISSUE 1: Whether HLL was an insider or not...???

As per clause 2(e) of SEBI regulations “Insider means any person:

who is or was connected with the company

is deemed to have been connected with the company, and

who is reasonably expected to have access, by virtue of such connection, to unpublished price sensitive information, in respect of securities of the company

or

who has received or has had access to such unpublished price sensitive information.”

Applicability of clause 2(e):SEBI’ Arguments HLL Arguments

Argument 1:As per SEBI, HLL is deemed to be connected with BBLIL and thus had access price sensitive information of the merger

Counter Argument 1:As per HLL, the company had and no merger where in the world primary

Argument 2:HLL falls in the category of insider who might not be connected to the company, but had the access to such undisclosed price sensitive information

Counter Argument 2:None

CONCLUSION FOR ISSUE 1:

As per the above given arguments it can be concluded that HLL was an INSIDER as

they did have access to the price sensitive information, even though they did not obtain it via any connections, but through there position as primary party

in the merger and they took advantage in the form of buying shares from UTI so as

to consolidate there position.

Whether or not the pre- merger information HLL had access to was ‘Unpublished’?

• information which is of concern, directly or indirectly, to a company, and

• is not generally known or published by such company for general information,

• but which if published or known,• is likely to materially affect the price

of securities of that company in the market.”

As per Clause 2(k) “Unpublishe

d price sensitive

information means,

SEBI’S ARGUMENT

SEBI, on the basis of statement of UTI official, tried to prove that information about the merger was “Unpublished.”

They also stated that information about the merger was speculative and that only HLL could sufficiently understand the technicality involved and use this information.

Thus HLL has gone against the regulation.

HLL’S ARGUMENT

As per HLL even before the transaction with UTI the merger was subject matter of wide market and media speculation.

HLL pointed out that before merger took place share price of BBLIL moved from Rs 242 to Rs 320 showing that merger was generally known information.HLL still further contented that UTI was a large institution and it was not possible for UTI to remain ignorant about the wide spread speculation in the market

Conclusion to issue 2

From the above arguments it can be deduced that the merger was something which was being speculated even before the

transaction between HLL & UTI took place.

So it was not an “Unpublished price sensitive Information”. HLL used the

information just like any other investor in the market.

Whether HLL had any price sensitive information with regard to the merger?

Section 2k of SEBI’s regulation laid down

eight examples of price-sensitive information,

which includes inter alia “ amalgamations,

mergers, and takeovers”.

SEBI’S ARGUMENT

As per SEBI, term “merger” is price sensitive information i.e., widespread news of merger in the market would impact the number of shares bought or sold by investors in the market.

HLL had information about the merger with BBLIL.

HLL’S ARGUMENT

HLL argued that merger itself was not a price sensitive information as investors with reasonable knowledge would not be induced to buy the shares unless the share Swap Ratio is known.

HLL did not know the Swap Ratio at the time of buying shares from UTI.

SWAP RATIO

Ratio at which shares are allotted by new company to the old company.

For e.g. Swap ratio of 1:10 means that the new company will issue 1 share for every 10 shares held by shareholders of the old company

Conclusion FOR ISSUE 3

HLL and BBLIL are• sister concerns,• having common board of directors,• under the same holding company i.e. Unilever and• are large profit making companies with frequently traded shares.

Thus the news of merger would not create any ripples across the market as the companies already have many things in common.

It would not cause any excessive trading on the part of investors.

However, market would certainly react if the SWAP ratio arrived is such that it is favourable to one company while unfavourable to other. In that case it becomes a price sensitive information.

Whether HLL had any price sensitive information with regard to the merger?

Section 2k of SEBI’s regulation laid down eight examples of price-sensitive information, which includes inter alia“ amalgamations, mergers, and takeovers”.

SEBI’S ARGUMENT

As per SEBI,” Making profit or losses is not a requirement under the regulation to establish charge to the of insider trading.”.

As per SEBI, HLL benefitted in the form of uncertainty attached with the reaction to the news of Merger and its subsequent impact on share prices.

HLL’S ARGUMENT

As per HLL after the merger all legal the shares purchased got cancelled and so there were no financial gains companyThey bought 8,00,000 of BBLIL shares from UTI at market Rs. 350 while the market price was Rs.318 thus at 10% premium

Finally aim was to consolidate the shareholdings of UNILEVER.

Conclusion to issue 4

Even though HLL says that it was not benefited from the transaction with UTI, however it was able to churn out huge gains. When they formally announced

merger, the market price shot up from Rs. 318 to Rs. 405 per share while they bought

those shares for Rs.350.

If UTI had not sold these shares they would have got shares worth Rs.483.3 million in the merged HLL, Rs. 208.3 million more

than what they received by selling them to HLL before merger.

.

Overall it can be concluded that stand taken by SEBI is incorrect because:-• The information about the Merger was not an “unpublished information”.• The merger itself was not a “price sensitive information”.• Unintentional gains out of the transactions.