Case of insider trading Hindustan Lever Limited (HLL) Brooke

Bond Lipton India Limited (BBLIL)

This was a trailblazing case in the domain of INSIDER TRADING cases in India. In 1996
SEBI suspected insider trading in the BBILL share purchase by HLL. This came when the
merger deal between HLL and BBILL had just been announced. But what makes this case
interesting and different from others is the fact both HLL and BBILL are subsidiaries to
UTI (Unit Trust of India). The question that was of massive and breakthrough importance
was:

Can a person/firm/company be insider to oneself/ itself?

Background of the case
On April 7, 1996 HLL and BBILL announced its upcoming merger. But HLL had bought
about 8 lakh shares of BBILL on 23 March 1996, that is just a couple of weeks ago. After
15 months of self initiated scrutiny SEBI issued a show cause notice to HLLs Chairman,
Executive directors, Company Secretary charging all of them of Insider trading.
SEBI asked HLL to pay compensation to UTI, the parent of both HLL and BBILL. It also
initiated criminal charges against the common directors of HLL and BLILL. What followed
was HLLs resistance.

SEBIs charges on HLL

SEBI stated that in accordance to the Section 2(e) of the SEBI Insider Trading Regulations,
any person who is or was connected to the company becomes a connected person by virtue of
which he/she is expected to have access to Unpublished Price Sensitive Information.
SEBI further asserted that these things were satisfied when HLL bought shares in BBILL, its
management had information about the upcoming merger. The connectedness is established by
the Section 370(1) (b) of the Companies Act, 1956 which deems both parties to be under
same management and hence connected. Also HLL dealt in UPSI was established from the fact
that Section 2(k)(v) of the SEBI Insider Trading Regulations asserts that information
related to following matters of amalgamation, mergers, takeovers are unpublished and known
only to the company till the period of conflict.
To HLL reply of doing the above for the reason of maintaining a 51% UTI stake in BBILL, SEBI
replied that it could have been achieved by preference share allotment method which is cleaner
but a bit more expensive and time consuming. HLL avoided this route for its profits.

HLLs defense
HLL maintained that it cannot be an insider to the entire case because it was the primary
party itself. It further asserted that it had purchased shares of BBILL because the parent
company UTI had 51% stake in RIL and 50.34 % stake in BBILL. It further maintained that
it had only that amount of information which a transferee should have. HLL also
contended that the news of the merger was not UNPUBLISHED. It was well known and
published in the media except the swap price rate. Also the preference shares option

would have in fact been cheaper by 5.4 crores but was not executed because it would
have diluted the value of the current stockholders.

Proceedings which followed

Next round of the battle between HLL and SEBI took place under the appellate authority
of Finance Ministry. HLL asserted there once again that it had to bear a notional loss due
to the merger transaction. There was no profit or avoidance of loss. They also presented
before SEBI more than 21 articles citing that news of merger was there in the media and
therefore ceases to be unpublished.

Verdict
HLL was cleared of all charges. It was declared of the allegation of being an insider. You
cannot be insider to yourself, asserted court. When the information is not UPSI, per se,
there is no question about it.

Laws invoked

2(e) of the SEBI Insider Trading Regulations

Section 370(1) (b) of the Companies Act, 1956
Section 2(k)(v) of the SEBI Insider Trading Regulations
Regulation 11B, SEBI