Insider

trading refers to a situation when a person having unpublished price-sensitive information such as financial result, expansion plans, take-over bids, etc. by virtue of his association with a company, trades its share to make undue profits. a breach of fiduciary duties of officers of a company or connected persons as defined under the SEBI regulations,1992, towards the shareholders.
It

is fairly

Corporate officers, directors , and employees who trade the corporations securities after the learning of significant , confidential,corporate developments.
Friends , business associates, family members , and other types of such officers , directors , and employees, who tradethe securities after receiving such information.

Price rigging occurs when person acting in concert with each other collude to increase or decrease artificially the price of a security. Market manipulation interferes with the free and fair operation of the market and creates artificial, false or misleading appearances with respect to the price of or a market for a security, commodity and currency.

HLL bought 8 lakhs worth shares of BBLIL from UTI at Rs 350.35 per share (At a premium of 9.5% of the ruling market price of Rs 320) just two weeks before the formal announcement knowing that the HLL and BBLIL were going to merge.
SEBI held that HLL was using unpublished, price-sensitive information to trade, and was therefore guilty of insider trading. In March 1998, SEBI passes an executive order, which sent shock waves through the countrys corporate sector. SEBI directed HLL to pay UTI Rs 30.4 millions in compensation, and also initiated criminal proceedings against the five directors of HLL and BBLIL.

HLL claimed that the purpose of the purchase of shares was to enable Unilever to acquire 51% shares of BBLIL. In July 1998, the Appellate Authority of the Finance Ministry dismissed the SEBI order. However,SEBIs order was correctly based on a simple proposition of law : what can not be done directly can not be done indirectly.

SEBI took the stand that only HLL knew about the merger and it acted with such unpublished information. According to SEBI,HLL and its directors misused such information. HLL an acted as an insider by buying 8lacs shares of BBLIL from UTI. Shares where purchased from UTI to ensure 51% stake in Unilever with prior knowledge of swap ratio.

SEBI also charged HLL of acting in a manner inimical to the interest of thousands of ordinary share holders. Beside HLL depleted its own resources by helping its holding company. SEBI charged that HLL deprived the foreign exchange of country and as Unilever would have invested nearly Rs 450 -500million to rise its holding to 51% post merger.

 HLL

countered that it was deemed to be connected to BBLIL and though it knew about the merger before it bought BBLILs shares, it received information only because it was one of the parties itself and not merely because of its connection to BBLIL. SEBI argued that even BBLIL was construed to be unconnected, HLL could still be an insider of second type. SEBI also argued that HLL was free to use the information to further the merger not to buy shares.

While SEBI argued HLL had gone against its regulation on Insider Trading , HLL pointed out that the merger was a "generally known information as the share price of BBLIL moved up from Rs240 to Rs320 between January and March 2006. HLL pointed out that UTI was a large enough institutional player and how could it remain unaware about the merger.UTI did not complain against the transaction either formally to SEBI, or informally. However SEBI tried to show proof through an officials testimony that he was unaware of the merger. SEBIs regulation laid down 8 examples of pricesensitive information, which included amalgamations, mergers or takeovers.

 HLL

asserted that it was unaware of the swap ratio when the company bought BBLIL shares in March 1996 and the only thing that was price-sensitive was the swap ratio, and HLL was not aware of it when it purchased BBLIL shares from UTI. HLL argued that it did not made any gain out of the deal. After the merger the company cancelled its BBLIL shareholding, and so financially there was no gain. Its objective was just to consolidate Unilevers shareholdings. However SEBI argued that making profit or avoiding loss was not a legal requirement under the regulation to establish the charge of insider trading.

Was SEBIs stand justified?

Experts maintained that SEBI had made the wrong decision by favoring UTI and imposing a fine on HLL to pay 30.4 million. But being a regulator also means protecting the interests of all market players which includes both small, ordinary and large institutional players. Therefore SEBI believed it was justified in awarding compensation to UTI.

 On

15th July 1998 the Union Finance Ministry absolved HLL of charges of insider trading and struck down SEBIs order of March 11,1998 for prosecution of 5 of the companys directors. The Ministry held that the order of SEBI suffered from procedural deficiencies and was also lacking in jurisdiction.SEBI challenged the order before the Mumbai High Court.

 The

appellate authority while reiterating its view as as a good opportunity to clear up differences of opinion between the duo on the interpretations given to some crucial provision of the SEBI Act ,which led to conflicting interpretations in the HLL case. The ministry would want the court to define clearly whether SEBI has the claimed powers to adjudicate a matter ,go for prosecution or impose monetary penalties.

It is very difficult to conclude whether HLL was an insider or not and whether insider trading took place. It can be drawn from the case that merger was price sensitive information . SEBIs role as a watchdog of the Indian capital market and its ability to control financial crimes such as insider trading. Several grey areas in the SEBI Act which has to be rectified. The inability of its legal machinery to handle legal cases like insider trading and price rigging.

 The

case has also triggered the need for an urgent rehaul of SEBIs regulation. With changing scenario in the capital market such as diverse nature of product and transanction , technology driven operations and explosion in communication,there is an urgent need of mechanism which respond immediately and keep an tight check of all the activities. Lack of assistance from Central Economic Intelligence Bureau (CEIB) to investigate the cases.