3. INSIDER TRADING
SEBI’S ALLEGATIONS ON HLL
FLAWS IN SEBI’S INSIDER TRADING
REGULATIONS (ITR)
HLL DEFENCE
VERDICT OF UNION MINSISTRY OF FINANCE
4. 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
5. 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
6. 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to was unpublished?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?
7. 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person having unpublished price sensitive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.
8. 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connection, to unpublished price-sensitive information.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.
9. 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.
10. 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.
11. 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.
12. 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.
