Insider Trading

Breach of Corporate
Fiduciary During
Mergers and Acquisition
Scenario
- A Leadership and Corporate
EPGPKC/02/047Accountability
Bijith P. B. Study

EPGPKC/02/063 Madhu Chandran

EPGPKC/02/064 Mahashook Ebrahim
EPGPKC/02/068 Nikhil Hari Kesavan
Paul Cherusseril
EPGPKC/02/070
Mohan
Rakesh Krishnan

What Do You Mean By Insider

and Insider Trading?
Insider:

Corporate insider has privy to information of the company

(sales and profit figures, future growth indicators, management
strategies and initiatives) that is yet to be released to the
public.

Insider Trading :

Trading of public company'sstockor othersecurities(such as

bondsorstock options) by individuals with access to nonpublic
information about the company, ahead of the public release of
the information.

Tips to outsiders(friends, relatives etc.) to buy/sell stocks of his

company and help them make profits or to avoid loss is also
considered as insider trading

Ref: http://en.wikipedia.org/wiki/Insider_trading

How Insider Trading Works and

Its Impact
How Insider Trading Works?

Insider in a company collates key insights of the company position in market

Shares price-sensitive insights with group of people who buy the stocks; in
some cases insider himself gets involved in stock purchase/selling

Artificial demand is created for the particular stock resulting in higher prices;
shareholders are miss leaded with outcomes

Stock price grows and when 'satisfactory limit' reached, insider or his
alliances exits selling stocks and reaping profit

Stock plummet resulting in loss for public investors and sometimes company
itself

Impact:

Unfair to other investors [potential of investors to make large profits]

Violates transparency, which is the basis of a capital market

Investors would lose faith in their deprived position (when compared to

insiders) and would refrain from investing in future.

Breaks the fiduciary duty to the company and its stakeholders

Allowing few people to take advantage of Unpublished Price Sensitive

Information (UPSI) before it is disclosed to the others is a grave

Regulations on Insider Trading

Securities and Exchange Commission(SEC) Regulations

Declares insider trading as violating his or her duty to maintain

confidentiality of such knowledge

Regulation Fair Disclosure (Reg. FD) - companies can no longer be
selective as to how they release information - Everyone who is not
a part of the company is to receive information at the same time.

Securities and Exchange Board of India Act

Section 24 of the SEBI Act - criminalizes insider trading,

punishable with imprisonment of up to ten years, or with fine of

up to INR 25 crores, or both.
Section 15G of the SEBI Act - SEBI can impose a penalty of twentyfive crore rupees or three times the amount of profits made out of
insider trading, whichever is higher
Ref: http://www.investopedia.com/articles/03/100803.asp#ixzz3ahNUYyFj
http://d-fraud.com/insider-trading-the-indian-law-so-far/

Insider Trading Regulations in

India-3,3A
Regulation 3:
No insider shall
either on his own behalf or on
behalf of any other person, deal
in securities of a company listed
on any stock exchange when in
possession of any unpublished
price sensitive information;
communicate or counsel or
procure directly or indirectly any
unpublished price sensitive
information to any person who
while in possession of such
unpublished price sensitive
information shall not deal in
securities

Regulation 3A:
No company shall deal in the
securities of another company or
associate of that other company
while in possession of any
unpublished price sensitive
information.
SEBI has clarified that the term
Person fulfills insider trading only
when:
the person should, have or have
had connection or deemed
connection with the company and
by virtue of such connection
should reasonably be expected to
have access to UPSI; or
the person has received or has
had access to UPSI.

Ref: http://d-fraud.com/insider-trading-the-indian-law-so-far/

Case 1 : Rakesh Agarwal ABS

Industries Ltd.
(June 2001)
Background of ABS Industries Ltd

Location - Vadodara, Gujarat, India

Industry sector Wind energy
Product -ABS is a plastic, chemical, and pharmaceutical company
Has developed several wind projects

Summary

Rakesh Agarwal, Managing Director of ABS Industries Ltd. (ABS), was part of the
negotiations with Bayer A.G and showed interest of their intentions to acquire ABS.

Prior to the announcement of the acquisition, Rakesh Agarwal, through his brother in law,
Mr. I.P. Kedia had purchased shares(1,82,500 shares) of ABS from the market and
tendered the said shares in the open offer made by Bayer thereby making a substantial
profit.

Fund for the purchase of share was provided by Rakesh. The investigations of SEBI
confirmed these allegations.

He was an insider as far as ABS is concerned. By dealing with shares of ABS through his
brother-in-law, while the information regarding the acquisition of 51% stake by Bayer was
not public, the plaintiff had acted in violation of Regulation 3 and 4 of the Insider Trading
Regulations.

Then existing Regulation 11 of SEBI was only to pass necessary interim directions for the
of preserving the status quo during or immediately after the investigation.
Ref:purpose
https://corporateinsiderstrading.wordpress.com/tag/abs/

Case 1 : Rakesh Agarwal ABS

Industries Ltd.
(June 2001)
Damages and consequences

The SEBI directed Rakesh Agarwal to deposit Rs. 34 lakhs

with Investor Education & Protection Funds of Stock
Exchange, Mumbai and NSE.

Securities Appellate Tribunal (SAT) held that the SEBI order

directing Agarwal to pay Rs. 34 lakh couldnt be sustained,
on the grounds that Rakesh Agarwal did that in the
interests of the company.

Amendment was done to Regulation 11 of SEBI, in 2002

where in SEBI is empowered to direct defaulter to deposit
monies in the investor protection fund of a recognized
stock exchange

: https://corporateinsiderstrading.wordpress.com/category/famous-cases/

Case 2 : Hindustan Lever Limited

(HLL) Brooke Bond Lipton India
Limited(BBLIL) (Mar 25, 1996)
Summary

HLLs purchase of 8 lakh shares of BBLIL two weeks prior to the public announcement of the merger of
the HLL and BBLIL companies.

SEBI, suspecting insider trading, conducted enquiries, and after about 15 months, in August 1997.
Later in March 1998 SEBI passed an order charging HLL with insider trading; which created a shock
wave in corporate world

Once the charges were levied, HLL went to the court stating that :

Merger was no surprise to anyone and not price sensitive

The stock prices of BBLIL was already on the rise ( before the deal happened- Rs. 242 to Rs. 320
during Jan Mar, 1997)

Defended that the purchase of share was to enable UniLever to acquire 51% of stake
The SEBIs charges were triggered off by HLLs purchase of 8 lakh shares of Brooke Bond Lipton India Ltd
(BBLIL) from the Unit Trust of India (UTI, 1996-97 income: Rs 7,481 crore) at Rs 350.35 per share.

This transaction took place on March 25, 1996, before the HLL-BBLIL merger was announced on April
19, 1996. A day after the announcement of the merger, the BBLIL scrip quoted at Rs 405, thereby
leading to a estimated gain of Rs 4.37 crore for HLL, which then cancelled the shares bought.

Damages and consequences

SEBI directed HLL to pay UTI compensation (Rs 3.4 Crores ) and also initiated criminal proceedings
against the five common directors of HLL and BBLIL.
HLL filed appeal with the appellate authority, which ruled in its favor

Ref: https://corporateinsiderstrading.wordpress.com/category/famous-cases/

Case Analysis - Different

Perspectives
Loyalty & Self Restraint- Individual Perspective

In these cases, we see the fiduciaries becoming disloyal, putting their

own interest ahead of the investors.

Used the corporate assets for personal advantage at the expense of

the shareholders whose interests were to be protected

Corporate fiduciaries are precluded from pursuing business

opportunities that would be fair game for those unencumbered by
the duty of loyalty

Loyalty & Self Restraint- Company Perspective

As UTI being one of the share holders of the company, there is a

point of disloyalty which occurred in the HLL-BBILL merger case

Company had to disclose the trading window during Merger &

Acquisition scenario. But in the case of BBLIL, there was no trading
window closure, thereby allowing stock trade.

SEBIs Prevent & Control

Mechanism

All listed companies are to frame and adopt code of conduct on lines
of Model Code which includes appointment of a Compliance Officer,
who reports to MD/CEO. Major duties involve in tracking and
regulating various financial transactions in share market concerned to
company.

Preservation of PSI by maintaining the confidentiality, and disclosed

only to those who are required to know.

Few restrictions on Directors, officers & designated employees are

listed:

Ref:

Specify trading window or period, this is when the insiders are allowed to
trade
Prior approval of transactions are required from the company, which
transaction needs to get completed within a week.
Disclosure of mandatory details of insiders to Compliance officer whenever
required

SEBIs Prevent & Control

Mechanism
Adopt Chinese wall policy which separates those areas of
the company having access to private information from
areas which deal with sales and marketing.
Periodic disclosure needs to be performed to the Public by
the Director/CEO on their shareholding in the company
having more than 5 % of share
Also disclosure needs to be done by promoters or part of
promoter group, and by the Company to all respective stock
exchanges
Exclusions:
PIPE,
mergers and
Regulations:
acquisition
Inquiries & Inspection
communications
Investigation
Off-market
Appointment of auditor
transactions amongst
Directions & penalties
promoters,
and
making
a
decision
Ref:

Proposals to Control/ Prevent

Insider Trading
Awareness

Increase external awareness campaigns on Insider Trading and its consequences in social media
and public channels (TV, newspapers, radio etc.)

Increase internal awareness within employees of the company to not involve in insider trading.
Terminate associates if there is breach.

Plant the seeds of fiduciary among children and young employees

Penalty

Blacklist the insider, who is involved in Insider Trading and increase ban period of stock trades by
insider from 6 months to 3 years.

Increase the fines.

Control

Executives only allowed to sell stocks after the earnings has been released.

Enable offline continuous stock monitoring and alert for abnormal behaviors( use pattern
recognition systems). Perform root cause analysis and check for any insider trading occurrences and
take appropriate actions

Process change

Insider trading is said to enable public aware of deficiencies of the company at an early stage;
which otherwise would not have known to the public/ stakeholders. Hence legalize insider trading.

Insider Trading at Sabero

Muruguppa Group case: May 23rd 2015.
Summary:
SEBI alleged that A. Vellayan, Chairman, Muruguppa Group, passed
unpublished price sensitive information related to the acquisition deal of
Sabero Organic Gujarat by Coromandel International to few individuals
who traded in the shares of Sabero with that information. SEBI directed all
to surrender unlawful gains along with interest, total of Rs 2.15 crore.

An Eight Page SEBI Order by whole-time Director, Prashant Saran, of SEBI

SEBI became very reactive with the case, as soon as they received the
complaint

Probable people who would have done insider trading

People in Sabero Organics
People in Coromandel
People in the Investment Banking and Valuation team
Brokers

Ref: http://www.gauravblog.com/?p=1246

Contd
Company : SABERO ORGANICS GUJARAT LTD. ( 524446 )
Period ( 12-May-2011 to 31-May-2011 )
Date

Open

High

Low

Close

Price

Price

Price

Price

12-0558.7 60.4 58.6

59.15
2011
13-0560.15 60.45 57.5
57.8
2011
16-0558
69.35
58
*69.35
2011
17-0570.1 82.3 70.1
78.4
2011
18-0577.9 79.7 71.1
77.7
2011
19-0578
82.5 76.25 80.15
2011
20-0580.6 82.25 77.5
79.1
2011
23-0578.1 83.7 76.3
82.85
2011
24-05Ref:
http://www.gauravblog.com/?p=1246

WAP

No. of

No. of

Shares

Trades

Total
Turnover
(Rs.)

530

33,74,175

325

18,23,523

59.1
57,082
1
58.7
31,043
4
68.1
6,85,599
9
38,17,5
76.8
07
75.5 17,54,97
8
0
80.1 17,11,89
6
5
80.4
9,11,964
9
81.1
8,43,078
6
27,99,2

4,584
28,946
15,697
14,736
8,934
6,795

4,67,51,20
2
29,33,05,
492
13,26,46,5
29
13,72,23,2
86
7,34,06,98
0
6,84,24,56
7
24,93,68,

What went wrong..!!

According to the investigation, Gopalakrishnan had bought 3,19,500 shares for Rs 2.72
croreand this was the only stock he traded in for the last two years.
Bank statements revealed Gopalakrishnan received Rs 1 crore from Subramaniam (son of
Murugappan) and utilized the same for the trade. Subramaniam had received the funds on the
same day (May 28, 2011) from Murugappan.
Gopalakrishnan had paid Rs 1.02 crore to Subramaniam on June 21, 2011, 24 days from the
date of receipt of amount.
Gopalakrishnan made a profit of Rs 1.30 crorethrough this trade. Out of the gains, Rs 1 crore
was invested by him in fixed deposits with City Union Bank Chennai for a maturity period of 1
year.
V Karuppiah, Murugappan' s son-in-law traded the Sabero stock on NSE. While Karuppiah' s
trade included five stocks, Sabero accounted for 64.15 percent of those. He made a gain of
about Rs 15.93 lakh on the sale of the stocks after the news of the acquisition became public.
SEBI said the trading pattern of Gopalakrishnan and Karuppiah was unusual compared to their
regular pattern, thereby giving a clear indication that they had traded based on unpublished
price sensitive information (UPSI)

Prima facie appears that the trading was based on the knowledge of UPSI (unpublished pricesensitive information). Under the new regulations, mere communication of UPSI would be
punishable. Earlier, SEBI's stand was that mere communication (without any trade) would not be
proceeded against.
Ref:
SEBIhttp://www.moneycontrol.com/news/business/sebi-charges-murugappa-chief-3-moreinsiderhas defined connected person as anyone who is or has during the six months
Ref:
http://www.business-standard.com/article/markets/sebi-charges-murugappa-group-chief-3-others-with-insidertrading_1390014.html
prior to the act been associated with a company in any capacity, including by reason of

Thank You!