INSIDER TRADINGThe HLL Case

Submitted by, Anuradha Mohanta(u109055) B. Mayuri(u109060) Ekta Aggarwal(u109065) Manisha Tripathy(u109073) Varsha Agrawal(u109098)

INSIDER TRADING
Insider trading is a term that most investors have heard and usually associate with illegal conduct
But the term actually includes both legal and illegal conduct

The legal version is when corporate insiders officers, directors, and employees buy and sell stock in their own companies
When corporate insiders trade in their own securities, they must report their trades to the SEBI.

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, non public information about the security

 Price sensitive information includes periodical financial results of a company, intended declaration of dividend, issue or buyback of securities, any major expansion plans or execution of new projects, amalgamation, merger, takeovers, disposal of the whole or substantial part of the undertaking and any other significant changes in policies, plans or operations of the company. How does Insider trading work? An insider buys the stock (he might also already own it). He then releases price-sensitive information to a small group of people close to him, who buy the stock based on it, and spread the information further. This results in an increase in volumes and prices of the stock. The inside information has now become known to a larger group of people which further pushes up volumes and prices of the stock.

 After a certain price has been reached, which the insider knows about, he exits, as do the ones close to him, and the stock's price falls. Those who had inside information are safe while the ordinary retail investor is stuck holding a white elephant as, in many cases, the 'tip' reaches him only when the stock is already on a boil. The regular investor gets on the bandwagon rather late in the day as he is away from the buzz with no direct connection to the 'real' source. He buys the overvalued stock due to imbalance in the information flow. While it's common knowledge that insider trading takes place, it is very difficult to prove. Insiders may not trade on their own account. Flow of information is another important factor, but difficult to track. Regulations are in place to prevent this, but the stock price of a company invariably tends to move up or down at least a couple of weeks ahead of any pricesensitive announcement.

EXAMPLES OF INSIDER TRADING INVESTIGATED BY SEBI

Corporate officers, directors, and employees who traded the corporations securities after learning of significant, confidential corporate developments; Friends, business associates, family members, and other tippees of such officers, directors, and employees, who traded the securities after receiving such information; Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded; Government employees who learned of such information because of their employment by the government; and Other persons who misappropriated, and took advantage of, confidential information from their employers

Background of the case

Hindustan Lever Ltd v. SEBI (1998 SCL 311) was one of the first cases where SEBI took action on grounds of insider trading. Hindustan Lever Ltd. (HLL) and Brook Bond Lipton India Ltd. (BBIL) controlled by Unilever, Inc. UK were both under the same management. HLL-BBLIL merger announced on April 19,1996 But both the stocks of HLL and BBLIL show heightened activity from February itself But by the time merger was announced the stocks had reached the bottom. When the merger announcement was made in April, there was a trading holiday so market was waiting till Monday to react. But even before the announcement the share price and share volume started falling. And the most important was that when market opened on Monday post announcement the share volume had halved the volumes and halved and share price decreased from Rs.402Rs 368

 Following the announcement there were allegations in market regarding the leakage of information and insider trading, post which SEBI conducted investigations which included recording of statements of directors of HLL , BBLIL and officer. The findings were communicated to HLL and its directors. According to the findings it was evident from chain of events that HLL was an insider who bought 8 lakh shares of BBLIL from UTI prior to the merger announcement on the basis of unpublished information ,as such it had violated regulations prohibiting insider trading Subsequently the directors were given an opportunity of personal hearing, post which they received written submissions. On the basis of investigation report, facts on record and written submissions SEBI decided that HLL was an insider and violated sub regulation(1) of 3 of the SEBI(insider trading) regulations 1992.

Excerpt from SEBI order that tried to establish an insider trading case against HLL management

"...it can be conclusively said that while entering into the transaction for purchase of 8 lakh shares of BBLIL from UTI, HLL was acting on the basis of the privileged information in its possession, regarding the impending merger of BBLIL with HLL. It also may be stated that, by its very nature, when it comes to motives and intentions, there may not always be any direct evidence. However, the chain of circumstances, the timing of the transaction, and other related factors, as discussed earlier, demonstrates beyond doubt that the transaction was founded upon and effected on the basis of unpublished price sensitive information about the impending merger.

SEBI ordered HLL to compensate UTI by paying Rs. 3.04 crores and launched criminal proceedings against HLL and five of its directors who were present at board meeting of HLL wherein the decision to purchase of shares were taken and who were also members of core team of HLL and BBLIL. This core team was informed by the parent company Unilever on January 17, 1996 regarding their approval of the merger. The action will be effective only after 30 days from date of communication of the order to enable the accused to appeal before the appellate authority i.e. the central government. However, the Securities Appellate Tribunal reversed the order on the ground that the information was not price-sensitive as it was reported in the media and, therefore, was public knowledge. However after much deliberation if it could move the court against the appellate authority ,it went to court . Later UTI appealed appellate authority claiming Rs. 7.52 crores in return of the notional loss it had to incur as it was not aware of merger before the selling of shares.

CHRONOLOGY OF EVENTS

March 6,1996- The board of HLL authorized to buy shares of BBLIL. March 9,1996-HLL buys shares from UTI at rate of Rs. 350.35 per share around 10 % premium to then ruling market price of Rs.320 April 14,1996-Indepenedent valuers make available the swap ratio to both HLL and BBLIL. April 19,1996-Both HLL and BBLIL announce board meetings to consider scheme of amalgamation on April 22 April 22,1996- Announcement of swap ratio of 9 shares of HLL for every 20 shares of BBLIL April 25,1996-SEBI conducts investigation following media reports June 26,1996-BBLIL shareholders approve the merger with HLL at a general meeting in Calcutta August 1,1997-HLL shareholders approve the merger with BBLIL at a general meeting in Mumbai

August 4,1997-SEBI issues letter of communication of findings to HLL and its directors alleging that it purchased its shares so as to enable Unilever to maintain its stake at 51 percent in the merged equity. September 9,1997-

SEBI CHARGE-I

According to Insider trading regulations An insider means any person who is, or was, connected with the company, and who is reasonably expected to have access, by virtue of such connection to unpublished price-sensitive information. These conditions were met when HLL bought BBIL shares from UTI as HLL and BBIL had common parentage as subsidiaries of Unilever.

HLL DEFENCE
No company can be insider to itself. Companys knowledge of the merger was because it was a part of Unilever. To defend, HLL said had it purchased shares of TOMCO(Tata oil Mills Co.) before the two merged it would not have been considered a case of Insider trading because HLL was not associated with TATA which owned TOMCO. Before merger Unilever has 51% stake in HLL but only 50.27% stake in BBIL. HLL purchased BBIL shares so that Unilever could maintain 51% stake in BBIL.

SEBI CHARGE-II
HLL purchased the shares of BBIL based on unpublished price sensitive information as defined by SEBI regulations. According to SEBI the information about the proposed merger between HLL and BBIL falls under this definition.

HLL DEFENCE
HLL said that only the swap ratio, the ratio at which BBLIL shares were exchanged for shares of HLL - at the time of the transaction was price sensitive information. HLL and its directors did not know the swap ratio when the shares of BBIL were purchased in March 1996. HLL argues the news of merger was not unpublished information as the media before the companies announcement had published it. Merger information had little relevance as the company had a common pool of management.

SEBIs Dismissal
Unilever stated that it wanted to own 51% stake in BBIL so it purchased its shares. Prior to the merger purchasing only 3 lakh shares of BBIL would have been sufficient. However, if it had bought only 3 lakh BBLIL shares, its holding in the merged entity would have fallen below 51 per cent post the merger. The fact that 8lakh shares were purchased indicates that the real purpose was to increase Unilever's holding to 51 per cent in the post-acquisition entity, that is, the merged company formed by HLL and BBLIL. Unilever could have also increased its stake by issuing preferential shares. But then it would have had to obtain various clearances from the Reserve Bank of India and the Government, apart from bringing in foreign exchange to buy the shares. Thus the sole purpose of buying the shares was to increase Unilevers stake in the merged entity.