A CASE OF INSIDER TRADING
(HLL – BBLIL MERGER)
POOJA GHODDHYAN - 09FT124 RHEA GHOSH - 09FT126 SHIRISH GANESAN - 09FT145 SUSHANT AGARWAL - 09FT158 VARUN SETHI - 09FT170
HUL formerly known as HLL is India‟s largest consumer
products company with an annual turn over of Rs. 13,000 Crores (2007)
Brooke Bond is a brand-name of tea owned Co by Unilever,
formerly an independent manufacturer in the United Kingdom, known for its PG Tips brand and its Brooke Bond tea cards.
HINDUSTAN LEVER LIMITED (1956)
Hindustan Vanaspati Manufacturing Company(1931)
Lever Brothers India Limited (1933)
United Traders Limited (1935)
Brands like Lifebuoy. Lux. Surf Excel.
Pond‟s . Rin. Sunsilk the list is endless… Boost for HLL in India: Liberalization of Indian economy in 1991 Removal of Regulatory framework
. Fair and Lovely.
Unilever acquired Brooke Bond through an international
acquisition in 1984. Unilever acquired Lipton in 1972.
. Brook Bond and Lipton Tea Ltd were merged in 1993 to form BBLIL.Brooke Bond Lipton India Ltd.
Presence of Brook Bond in India dates back to 1903.
Illegal purchase of BBLIL‟s 8 Lakh shares by HLL. SEBI issued a show cause notice to HLL.BBLIL Merger (The Case)
Case analyzes the charges of
insider trading by SEBI against the merger of HLL and BBLIL Controversy . SEBI: suspected insider trading and conducted enquiries.
. prior to public announcement of their merger.HLL .
.INSIDER TRADING ?
Insider trading is buying and selling of securities by the insider of
a company who has price sensitive information about the company. Having special knowledge is unfair to other investors who are oblivious to any such information. It can be both legal as well as illegal.
Punitive in nature – It is defined what constitutes insider trading
and then the offender is punished accordingly.INSIDER TRADING…
Insider trading is for listed companies only.
. Merchant bankers and intermediaries come under the purview .
and combining of different companies for synergy.
. Merger is what concerns us .The ratio in which an acquiring company offers its own shares in exchange for the target company's share.Mergers and Acquisitions (M&A)
M&A – Aspect of corporate strategy dealing with buying.this may fraught a stock swap or cash payment. Stock swap .
. To manage growth. Expansion plans.venturing out into a different field. To reduce operating costs. To be able to control pricing.WHY MERGER ?
HLL BBLIL UTI SEBI
however speculation about the same had been doing rounds in the market. There was no formal announcement from the company‟s side.THE MERGER
Merger was certain as HLL had started consolidating. The big question was WHEN would the merger take place.
A day after the announcement of the merger.Sequence of events
HLL purchased 0. BBLIL scrip quoted @ Rs. 1996.
350. 405 leading to a gain of 4.8 million shares of BBLIL from UTI at Rs. Transaction took place on March 25.35 per share.
. HLL notified the stock exchange of its proposal to merge with BBLIL.35 Crores for HLL. On 19 April 1996.
HLL marshaled its formidable corporate resources to battle it out
against SEBI‟s charges.Preparing for the war
SEBI‟s crack down with India‟s first ever „guilty‟ verdict for an
insider trading offence.
Alleged HLL of using price sensitive information prior to its
merger with BBLIL. 1997. SEBI issued a show cause notice to HLL
claiming that there was prima facie evidence of the company indulging in insider trading.
The timing of the deal and HLL‟s buying of shares further
suggests that the HLL management was almost certain and all geared up for the merger.
March 1998. SEBI found HLL guilty of insider trading as it had
bought shares of BBLIL from UTI even when it was completely aware that a merger was impending.
Pragmatic evaluation of insider trading .This
bolsters the speculation of complicity
.An onerous task. HLL and BBLIL were under a common management .Case Analysis
SEBI „s view: A Thin line exists between an honest action and a
“No company can be an insider to itself ” Transactional knowledge existed as it was a primary party to the
merger and not because BBLIL was an associate company.as the two were not associated. It further endorsed its argument by stating that allegations would not have been made if HLL had purchased shares of TOMCO .
The news of the merger was not price-sensitive as it had been
announced by the media before company‟s announcement.HLL‟s Arguments
Only information about swap ratio is price-sensitive and this
wasn‟t known to HLL or its directors when the BBLIL shares were purchased.
. In fact BBLIL‟s management also concealed information of the merger. It could have informed UTI about the merger when the latter held 8 Lakh shares.“Generally unknown”
An absurd argument put forth by HLL was information about the
merger was known in the market.Merger . It was giving speculation as a justification for its clandestine behavior.
HLL agreed that shares had been bought with the sole intention of
increasing stakes in BBLIL.
UNILEVER wanted to own a 51% stake in HUL. However. section 3 of SEBI [prohibition of] insider trading
regulations clearly defines insider trading irrespective of the fact whether profits have been made or not.
of preferential allotment could have been adopted by HLL. Such a step would have involved various compliances/clearances. and required Unilever to bring in substantial funds in foreign exchange. The implication: HLL depleted its reserves to ensure that Unilever did not have to bring in additional funds.SEBI‟s charge and HLL‟s justification
Instead of buying shares from the secondary market.
it would have been detrimental for other shareholders.would lead to a lower EPS.
While the preferential route would have been beneficial for itself.Cont…
HLL argued that issuing of preferential share would have been a
cheaper option to ensure that it had a 51 per cent stake in HLL.
SEBI accused HLL of dealing with BBLIL shares on the basis of
unpublished price-sensitive information which is prohibited under Section 3 of the Regulations. mergers. price-sensitive information relates to amalgamations. SEBI held that there can be no dispute that the information of the overall fact of the merger fell under this definition. Section 2 (k) states that unpublished. and takeovers or is of concern to a company and is not generally known or published.
violation of corporate governance.
. HLL depleted its reserves for one specific shareholder at the expense of other share holders.Conclusion
Generally it is difficult to determine whether there exists a case of
insider trading. Merger – definitely price sensitive information. All points in this case indicate a clear case of insider trading.
“SURF EXCEL HAI NA”
.On a lighter note…
SEBI‟s verdict is a black spot on a company that excels in
cleaning them up.