47778826 Insider Trading

7/29/2019 47778826 Insider Trading

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INSIDER TRADING-

The HLL Case

Submitted by,

Anuradha Mohanta(u109055)

B. Mayuri(u109060)

Ekta Aggarwal(u109065)

Manisha Tripathy(u109073)

Varsha Agrawal(u109098)


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INSIDER TRADING

Insider trading is a term that most investors have heard and usuallyassociate with illegal conduct

But the term actually includes both legal and illegal conduct

The legal version is when corporate insiders officers, directors, andemployees buy and sell stock in their own companies

When corporate insiders trade in their own securities, they must reporttheir trades to the SEBI.

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


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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 orsubstantial 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 closeto 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.


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After a certain price has been reached, which the insider knows about, heexits, as do the ones close to him, and the stock's price falls. Those whohad inside information are safe while the ordinary retail investor is stuckholding 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. Hebuys the overvalued stock due to imbalance in the information flow.

While it's common knowledge that insider trading takes place, it is verydifficult to prove. Insiders may not trade on their own account. Flow of

information is another important factor, but difficult to track. Regulationsare in place to prevent this, but the stock price of a company invariablytends to move up or down at least a couple of weeks ahead of any price-sensitive announcement.


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EXAMPLES OF INSIDER TRADING

INVESTIGATED BY SEBI

Corporate officers, directors, and employees who traded thecorporations securities after learning of significant, confidential corporatedevelopments;

Friends, business associates, family members, and other tippees of suchofficers, directors, and employees, who traded the securities afterreceiving such information;

Employees of law, banking, brokerage and printing firms who were givensuch information to provide services to the corporation whose securitiesthey traded;

Government employees who learned of such information because oftheir employment by the government; and

Other persons who misappropriated, and took advantage of, confidentialinformation from their employers


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Background of the case

Hindustan Lever Ltd v. SEBI (1998 SCL 311) was one of the first cases whereSEBI took action on grounds of insider trading. Hindustan Lever Ltd. (HLL) andBrook Bond Lipton India Ltd. (BBIL) controlled by Unilever, Inc. UK were bothunder the same management.

HLL-BBLIL merger announced on April 19,1996

But both the stocks of HLL and BBLIL show heightened activity from Februaryitself

But by the time merger was announced the stocks had reached the bottom.

When the merger announcement was made in April, there was a tradingholiday 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 andshare price decreased from Rs.402Rs 368


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Following the announcement there were allegations in market regardingthe leakage of information and insider trading, post which SEBIconducted investigations which included recording of statements ofdirectors 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 themerger announcement on the basis of unpublished information ,as suchit had violated regulations prohibiting insider trading

Subsequently the directors were given an opportunity of personalhearing, post which they received written submissions.

On the basis of investigation report, facts on record and writtensubmissions SEBI decided that HLL was an insider and violated subregulation(1) of 3 of the SEBI(insider trading) regulations 1992.


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

"...it can be conclusively said that while entering into the transactionfor purchase of 8 lakh shares of BBLIL from UTI, HLL was acting on thebasis of the privileged information in its possession, regarding theimpending merger of BBLIL with HLL. It also may be stated that, by itsvery nature, when it comes to motives and intentions, there may notalways be any direct evidence. However, the chain of circumstances,

the timing of the transaction, and other related factors, as discussedearlier, demonstrates beyond doubt that the transaction was foundedupon and effected on the basis of unpublished price sensitiveinformation about the impending merger.


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SEBI ordered HLL to compensate UTI by paying Rs. 3.04 crores and launchedcriminal proceedings against HLL and five of its directors who were presentat board meeting of HLL wherein the decision to purchase of shares weretaken 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 groundthat the information was not price-sensitive as it was reported in the mediaand, therefore, was public knowledge.

However after much deliberation if it could move the court against theappellate authority ,it went to court .

Later UTI appealed appellate authority claiming Rs. 7.52 crores in return ofthe notional loss it had to incur as it was not aware of merger before theselling of shares.


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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 sharearound 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 every20 shares of BBLIL

April 25,1996-SEBI conducts investigation following media reports

June 26,1996-BBLIL shareholders approve the merger with HLL at ageneral meeting in Calcutta

August 1,1997-HLL shareholders approve the merger with BBLIL at ageneral meeting in Mumbai


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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-


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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 suchconnection to unpublished price-sensitive information.

These conditions were met when HLL bought BBIL shares from UTI asHLL 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 MillsCo.) before the two merged it would not have been considered a case ofInsider 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 inBBIL.


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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.


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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 51per 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 increaseUnilevers stake in the mer ed entit .


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47778826 Insider Trading

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