INSIDER TRADING

(HLL-BBLIL MERGER)
CASE STUDY IN ETHICS, CSR & COPRORATE
GOVERNANCE

SEBI- A FAIR WATCHDOG

OF INDIAN CAPITAL
MARKET
GROUP 2
KUMARI AKANSHA (17)
SHRUTI DUBEY (18)
PUNEET SHARMA (39)

PARTS IN CASE
INSIDER TRADING
SEBIS ALLEGATIONS ON HLL
FLAWS IN SEBIS INSIDER TRADING

REGULATIONS (ITR)
HLL DEFENCE
VERDICT OF UNION MINSISTRY OF FINANCE

INTRODUCTION
The controversy involving HLL's purchase of 8

lakh shares of BBLILbefore the public

announcement of merger.
SEBI suspected HLL of insider trading.
At the end of a 15 month process in March
1998 SEBI charged HLL of insider trading.
On July 14 1998, the Appellate Authority in the
Finance Ministry set aside SEBI's March 1998
ruling

HISTORY OF CASE
HLL PURCHASED THE SHARE OF BBLIL

MARCH 1996
MERGER OF HLL & BBLIL 19TH APRIL 1996
SEBI LAUNCHED INVESTIGATION AGAINST HLL
12TH MAY 1996
SEBI CHARGED HLL OF INSIDER TRADING (BUT
DIRECTORS WERE NOT FOUND ACCUSED)
4TH AUGUST 1997
SEBI CHARGED HLL ALONG WITH THE
DIRECTORS BEING ACCUSED 11TH MARCH
1998

ISSUES IN THE CASE

Whether HLL was an insider?
Whether or not the information which HLL had

access to was unpublished?

Whether HLL had profited from the deal or

gained any unfair advantage?

SEBIs allegations & rules were up to the

mark?

INSIDER TRADING
Insider Trading refers to a situation
when person having unpublished
price sensitive information such as
financial results, expansion plans,
take-over bids, etc. by virtue of his or
her association with a company,
trades its shares to make undue
profits.

SEBIS ALLEGATIONS & HLL DEFENCE

THE SEBI CHARGE -

HLL is an insider, according to Section 2 (e) of the SEBI (Insider

Trading) Regulations. It states: An insider means any person who
is, or was, connected with the company, and who is reasonably
expected to have access, by virtue of such connection, to
unpublished price-sensitive information. The SEBI has argued that
both these conditions were met when HLL bought the BBLIL shares
from the UTI.
THE HLL

DEFENCE -

No company can be an insider to itself. The transnational

knowledge of the merger was because it was a primary party to
the process, and not because BBLIL was an associate company. To
buttress this point, HLL maintains that if it had purchased shares
of Tata Oil Mills Co. (TOMCO) before the two merged in April, 1994,
SEBI would not consider it a case of insider trading. Why? Because
HLL was not associated with the Tata-owned TOMCO.
HLL contends that it purchased the BBLIL shares so that its
parent company, Unilever, could maintain a 51 per cent stake in
the merged entity. Before the merger, Unilever had a 51 per cent
stake in HLL, but only 50.27 per cent in BBLIL

CONT.
THE SEBI CHARGE

HLL purchased, the BBLIL shares on the basis of

unpublished price-sensitive information which is
prohibited under Section 3 of the Regulations.

THE HLL DEFENCE -

Only the information about the swap ratio is deemed to

be price-sensitive. And this ratio was not known to HLL
or its directors--when the BBLIL shares were purchased in
March, 1996. Moreover, HLL argues that the news of the
merger was not price-sensitive as it had been announced
by the media before the companies announcement, April
7, 1996).HLL pointed out that the share price of BBLIL
from 242 to 320 between January and march 1996
showing merger is going to take place.

CONT.
THE SEBI CHARGE -

Why did HLL not follow the route of issuing

preferential shares to allow Unilever stake to rise
to 51 per cent in HLL?

THE HLL DEFENCE -

Issuing of preferential shares would have, indeed,

been a cheaper option to ensure that Unilever had
a 51 per cent take in HLL. Had HLL followed this
route, it would have had to pay Rs 282..35, instead
of Rs 350.35, per share.
In other words, it would have made a profit of Rs
5.41 corers by doing so.

VERDICT OF UNION MINISTRY OF

FINANCE
Union Ministry of Finance stated that HLL

was not guilty and is not to be blamed.

SEBI needs to amend its definition of

Insider-Trading and need to be more

specific in terms of their guidelines and
regulations to control such financial
crimes.

GROUPS OPINION
The case was ethical on part of HLL.
The merger had become " a generally known

information ".
HLL did not make any unfair advantage or

profit out of the deal.

SEBI needs to be more specific about the

definition of insider trading.

THANK YOU