INSIDER TRADING: THE HLL

CASE

Presented By:
UM15078 Debidutta Samantray
UM15079 Girija Prasad Nanda
UM15086 Kavita Kumari
UM15091 Manisha Pandey
UM15109 Sekhar Suman Mohanty
UM15117 Swapnika Das

Case Overview
The case primarily involves 4 parties namely Unit Trust of India(UTI), Hindustan Lever Limited(HLL),
Brooke Bond Lipton India Limited(BBLIL), and Securities & Exchange Board of India(SEBI)
HLL planned a merger with sister concern BBLIL so that Uniliver has a major stake in merged
company
Merger was to be carried out by HLL acquiring shares of BBLIL. The corresponding stock exchanges
were informed on 19 April, 1996
HLL bought 8,00,000 shares of BBLIL from UTI just before the merger was initiated.
SEBI accused HLL of INSIDER TRADING while entering in the above mentioned transaction
SEBI penalized HLL with Rs. 34 million & also initiated criminal proceedings against five common
directors of HLL & BBLIL
On 15 July, 1998 the Union Finance Ministry absolved HLL of all charges of insider trading &
quashed all the proceedings against the Directors

WHAT IS INSIDER TRADING...???

Insider trading refers to a
situation, where in a
person, by virtue of his
position to access
unpublished price sensitive
information of the
company, gains such
access and subsequently
uses the information
obtained for his or her
personal benefits

ISSUES INVOLVED IN THE CASE

Whether HLL
was an insider
or not?

Whether or
not the premerger
information
HLL had
access to was
Unpublished?

Whether HLL
had any price
sensitive
information
with regard to
the merger?

Whether or
not HLL had
gained any
unfair
advantage out
of the deal?

ISSUE 1: Whether HLL was an insider or

not...???
As per clause 2(e) of SEBI regulations Insider means any person:

who is or was connected with the company

is deemed to have been connected with the company, and

who is reasonably expected to have access, by virtue of such connection, to

unpublished price sensitive information, in respect of securities of the company or
who has received or has had access to such unpublished price sensitive
information.

Applicability of clause 2(e):

SEBI Arguments

HLL Arguments

Argument 1:
As per SEBI, HLL is deemed to be
connected with BBLIL and thus had access
price sensitive information of the merger

Counter Argument 1:
As per HLL, the company had and no
merger where in the world primary

Argument 2:
HLL falls in the category of insider who
might not be connected to the company,
but had the access to such undisclosed
price sensitive information

Counter Argument 2:
None

CONCLUSION FOR ISSUE 1:

As per the above given arguments it can
be concluded that HLL was an INSIDER as
they did have access to the price
sensitive information, even though they
did not obtain it via any connections, but
through there position as primary party
in the merger and they took advantage in
the form of buying shares from UTI so as
to consolidate there position.

Whether or not the pre- merger

information HLL had access to was
Unpublished?
As per
Clause 2(k)
Unpublishe
d price
sensitive
information
means,

information which is of concern,

directly or indirectly, to a company,
and
is not generally known or published by
such company for general information,
but which if published or known,
is likely to materially affect the price of
securities of that company in the
market.

SEBIS ARGUMENT

HLLS ARGUMENT

SEBI, on the basis of statement of UTI official,

tried to prove that information about the
merger was Unpublished.

As per HLL even before the transaction

with UTI the merger was subject matter
of wide market and media speculation.

They also stated that information about the

merger was speculative and that only HLL
could sufficiently understand the technicality
involved and use this information.

HLL pointed out that before merger took

place share price of BBLIL moved from
Rs 242 to Rs 320 showing that merger
was generally known information.

Thus HLL has gone against the regulation.

HLL still further contented that UTI was

a large institution and it was not
possible for UTI to remain ignorant
about the wide spread speculation in
the market

Conclusion to issue 2

From the above arguments it can be

deduced that the merger was
something which was being speculated
even before the transaction between
HLL & UTI took place.

So it was not an Unpublished price

sensitive Information. HLL used the
information just like any other investor
in the market.

Whether HLL had any price sensitive

information with regard to the merger?

Section 2k of SEBIs
regulation laid down
eight examples of pricesensitive information,
which includes inter alia
amalgamations,
mergers, and
takeovers.

SEBIS ARGUMENT

As per SEBI, term merger is price

sensitive information i.e.,
widespread news of merger in the
market would impact the number of
shares bought or sold by investors
in the market.

HLL had information about the

merger with BBLIL.

HLLS ARGUMENT
HLL argued that merger itself was
not a price sensitive information as
investors with reasonable
knowledge would not be induced to
buy the shares unless the share
Swap Ratio is known.

HLL did not know the Swap Ratio at

the time of buying shares from UTI.

SWAP RATIO

Ratio at which shares are allotted by new company to the

old company.

For e.g. Swap ratio of 1:10 means that the new company will issue 1
share for every 10 shares held by shareholders of the old company

Conclusion FOR ISSUE 3

HLL and BBLIL are

sister concerns,
having common board of directors,
under the same holding company i.e. Unilever and
are large profit making companies with frequently traded shares.

Thus the news of merger would not create any ripples across the market as the companies
already have many things in common.
It would not cause any excessive trading on the part of investors.
However, market would certainly react if the SWAP ratio arrived is such that it is favourable
to one company while unfavourable to other. In that case it becomes a price sensitive
information.

Whether HLL had any price sensitive

information with regard to the merger?

Section 2k of SEBIs regulation laid down eight

examples of price-sensitive information, which includes
inter alia amalgamations, mergers, and takeovers.

SEBIS ARGUMENT

As per SEBI, Making profit or losses is not a

requirement under the regulation to establish
charge to the of insider trading..

As per SEBI, HLL benefitted in the form of

uncertainty attached with the reaction to the
news of Merger and its subsequent impact on
share prices.

HLLS ARGUMENT
As per HLL after the merger all legal the
shares purchased got cancelled and so
there were no financial gains company
They bought 8,00,000 of BBLIL shares from
UTI at market Rs. 350 while the market
price was Rs.318 thus at 10% premium
Finally aim was to consolidate the
shareholdings of UNILEVER.

Conclusion to issue 4

Even though HLL says that it was not

benefited from the transaction with UTI,
however it was able to churn out huge
gains. When they formally announced
merger, the market price shot up from Rs.
318 to Rs. 405 per share while they bought
those shares for Rs.350.

If UTI had not sold these shares they would

have got shares worth Rs.483.3 million in
the merged HLL, Rs. 208.3 million more than
what they received by selling them to HLL
before merger.

Overall it can be concluded that stand taken by SEBI is

incorrect because: The information about the Merger was not an unpublished information.
The merger itself was not a price sensitive information.
Unintentional gains out of the transactions.