CASE STUDY IN ETHICS, CSR & COPRORATE GOVERNANCE

INSIDER TRADING(HLL-BBLIL MERGER)

GROUP – 2

KUMARI AKANSHA (17)SHRUTI DUBEY (18)PUNEET SHARMA (39)

SEBI- “A FAIR WATCHDOG OF INDIAN CAPITAL MARKET”

INSIDER TRADING

SEBI’S ALLEGATIONS ON HLL

FLAWS IN SEBI’S INSIDER TRADING REGULATIONS (ITR)

HLL DEFENCE

VERDICT OF UNION MINSISTRY OF FINANCE

PARTS IN CASE

The controversy involving  HLL's purchase of 8 lakh shares of BBLIL before 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

INTRODUCTION

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

HISTORY OF 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Whether or not the information which HLL had access to was unpublished?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?

SEBI’s allegations & rules were up to the mark?

ISSUES IN THE CASE

Insider Trading refers to a situation when person having unpublished price sensitive information such as financial results, expansion plans, take-over bids, etc.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.

INSIDER TRADING

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is, or was, connected with the company, and who is reasonably expected to have access, by virtue of such connection, to unpublished price-sensitive information.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

According to the SEBI guidelines, HLL can be deemed to be an insider. But the SEBIs definition of an insider has to provide a clearer picture.

 

SEBI’S ALLEGATIONS & HLL DEFENCE

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. 

CONT.

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.

VERDICT OF UNION MINISTRY OF FINANCE

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.

GROUP’S OPINION

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