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Submitted by, Anuradha Mohanta(u109055) B. Mayuri(u109060) Ekta Aggarwal(u109065) Manisha Tripathy(u109073) Varsha Agrawal(u109098)
they must report their trades to the SEBI.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. non public information about the security . while in possession of material. and employees buy and sell stock in their own companies When corporate insiders trade in their own securities. in breach of a fiduciary duty or other relationship of trust and confidence. Illegal insider trading refers generally to buying or selling a security. directors.
and spread the information further. He then releases price-sensitive information to a small group of people close to him. intended declaration of dividend.Price sensitive information includes periodical financial results of a company. amalgamation. merger. who buy the stock based on it. How does Insider trading work? An insider buys the stock (he might also already own it). The inside information has now become known to a larger group of people which further pushes up volumes and prices of the stock. plans or operations of the company. This results in an increase in volumes and prices of the stock. issue or buyback of securities. . takeovers. any major expansion plans or execution of new projects. disposal of the whole or substantial part of the undertaking and any other significant changes in policies.
it is very difficult to prove.After a certain price has been reached. as do the ones close to him. He buys the overvalued stock due to imbalance in the information flow. While it's common knowledge that insider trading takes place. and the stock's price falls. 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. in many cases. Insiders may not trade on their own account. but difficult to track. Those who had inside information are safe while the ordinary retail investor is stuck holding a white elephant as. Flow of information is another important factor. the 'tip' reaches him only when the stock is already on a boil. which the insider knows about. . he exits. 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. Regulations are in place to prevent this.
who traded the securities after receiving such information. and employees who traded the corporations securities after learning of significant. Friends. confidential corporate developments. Government employees who learned of such information because of their employment by the government. brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded. confidential information from their employers . and other tippees of such officers. and took advantage of. and Other persons who misappropriated. directors. business associates. Employees of law. and employees. banking.EXAMPLES OF INSIDER TRADING INVESTIGATED BY SEBI Corporate officers. family members. directors.
Background of the case Hindustan Lever Ltd v. Hindustan Lever Ltd.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.402 Rs 368 . UK were both under the same management. there was a trading holiday so market was waiting till Monday to react. When the merger announcement was made in April. SEBI (1998 SCL 311) was one of the first cases where SEBI took action on grounds of insider trading. 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. Inc. (HLL) and Brook Bond Lipton India Ltd. HLL-BBLIL merger announced on April 19. (BBIL) controlled by Unilever.
post which they received written submissions. 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. . post which SEBI conducted investigations which included recording of statements of directors of HLL . 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 . On the basis of investigation report. The findings were communicated to HLL and its directors.Following the announcement there were allegations in market regarding the leakage of information and insider trading. BBLIL and officer.as such it had violated regulations prohibiting insider trading Subsequently the directors were given an opportunity of personal hearing.
as discussed earlier. there may not always be any direct evidence. However... by its very nature.Excerpt from SEBI order that tried to establish an insider trading case against HLL management ". the chain of circumstances. . the timing of the transaction. It also may be stated that. regarding the impending merger of BBLIL with HLL. when it comes to motives and intentions. demonstrates beyond doubt that the transaction was founded upon and effected on the basis of unpublished price sensitive information about the impending merger. HLL was acting on the basis of the privileged information in its possession. and other related factors.it can be conclusively said that while entering into the transaction for purchase of 8 lakh shares of BBLIL from UTI.
This core team was informed by the parent company Unilever on January 17. 3.52 crores in return of the notional loss it had to incur as it was not aware of merger before the selling of shares. 1996 regarding their approval of the merger. the central government.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. However. However after much deliberation if it could move the court against the appellate authority .e. Later UTI appealed appellate authority claiming Rs. 7. . 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.it went to court . 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. was public knowledge.SEBI ordered HLL to compensate UTI by paying Rs. therefore.
1996-SEBI conducts investigation following media reports June 26.35 per share around 10 % premium to then ruling market price of Rs.1997-HLL shareholders approve the merger with BBLIL at a general meeting in Mumbai . March 9.1996-Indepenedent valuers make available the swap ratio to both HLL and BBLIL.1996-Both HLL and BBLIL announce board meetings to consider scheme of amalgamation on April 22 April 22.1996.1996.1996-BBLIL shareholders approve the merger with HLL at a general meeting in Calcutta August 1.320 April 14.The board of HLL authorized to buy shares of BBLIL.1996-HLL buys shares from UTI at rate of Rs.Announcement of swap ratio of 9 shares of HLL for every 20 shares of BBLIL April 25. 350. April 19.CHRONOLOGY OF EVENTS March 6.
September 9.August 4.1997- .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.
or was. To defend. . HLL said had it purchased shares of TOMCO(Tata oil Mills Co.27% stake in BBIL. HLL purchased BBIL shares so that Unilever could maintain 51% stake in BBIL. and who is reasonably expected to have access.) 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. connected with the company. These conditions were met when HLL bought BBIL shares from UTI as HLL and BBIL had common parentage as subsidiaries of Unilever.SEBI CHARGE-I According to Insider trading regulations An insider means any person who is. Company s knowledge of the merger was because it was a part of Unilever. Before merger Unilever has 51% stake in HLL but only 50. HLL DEFENCE No company can be insider to itself. by virtue of such connection to unpublished price-sensitive information.
According to SEBI the information about the proposed merger between HLL and BBIL falls under this definition. the ratio at which BBLIL shares were exchanged for shares of HLL .SEBI CHARGE-II HLL purchased the shares of BBIL based on unpublished price sensitive information as defined by SEBI regulations.at the time of the transaction was price sensitive information. . Merger information had little relevance as the company had a common pool of management. HLL DEFENCE HLL said that only the swap ratio. HLL argues the news of merger was not unpublished information as the media before the companies announcement had published it. HLL and its directors did not know the swap ratio when the shares of BBIL were purchased in March 1996.
However. the merged company formed by HLL and BBLIL. apart from bringing in foreign exchange to buy the shares. But then it would have had to obtain various clearances from the Reserve Bank of India and the Government. 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. its holding in the merged entity would have fallen below 51 per cent post the merger. Thus the sole purpose of buying the shares was to increase Unilever s stake in the merged entity. . if it had bought only 3 lakh BBLIL shares. Prior to the merger purchasing only 3 lakh shares of BBIL would have been sufficient.SEBI s Dismissal Unilever stated that it wanted to own 51% stake in BBIL so it purchased its shares. Unilever could have also increased its stake by issuing preferential shares.
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