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IS INSIDER TRADING...???• Insider trading refers to a situation, where in a person, by virtue of his position to access unpublished price sensitive information of the company, gains such access and subsequently uses the information obtained for his or her personal benefits..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IN THE CASE1) Whether HLL was an insider or not?2) Whether or not the pre-merger information HLL had access to was ‘Unpublished’?3) Whether HLL had any price sensitive information with regard to the merger?4) Whether or not HLL had gained any unfair advantage out of the deal?
ISSUE 1Whether 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 or• 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have been connected with the company, and• who is reasonably expected to have access, by virtue of such connection, to unpublished price sensitive information, in respect of securities of the company or• who has received or• has had access to such unpublished price sensitive information.”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’s arguments HLL’s argumentsArgument 1 Counter Argument 1• As per SEBI, HLL is deemed • As per HLL, the company had to be connected with BBLIL access to the information and thus had access to the because it was the primary price sensitive information of party to the merger and no merger where in the world primaryArgument 2 party is considered to be an• HLL falls in the category of insider from view-point of insider who might not be insider connected to the company ,but “who had access to such Counter Argument 2 undisclosed price sensitive • No counter argument information”
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.
ISSUE 2 Whether or not the pre- merger information HLL hadaccess to was ‘Unpublished’?
As per Clause 2(k) “Unpublished 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.”
SEBI’s argument HLL’s argument• SEBI, on the basis of statement of • As per HLL even before the a UTI official, tried to prove that transaction with UTI the merger information about the merger was was subject matter of wide market “Unpublished”. & media speculation.• They also stated that the • HLL pointed out that before information about merger was transaction took place share price speculative and that only HLL of BBLIL moved from Rs. 242 to could sufficiently understand the Rs. 320 showing that merger was technicality involved and use this a ‘generally known information’. information.• Thus HLL has gone against the • HLL still further contended that regulation. UTI was a large institution & it was not possible for UTI to remain ignorant about the widespread speculation in the market.
Conclusion for 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.
ISSUE 3Whether HLL had any price sensitive information with regard to the merger?
Section 2k of SEBI’s regulation laid downeight examples of price-sensitiveinformation, which includes inter alia“amalgamations, mergers, and takeovers”.
SEBI’s arguments HLL’s arguments• As per SEBI, term • HLL argued that the “merger” is a price- “merger” itself was not sensitive information a price-sensitive i.e. Widespread news information as investors of merger in the market with reasonable would impact the knowledge would not number of shares be induced to buy the bought or sold by shares unless the investors in the market. share Swap Ratio is• HLL had information known about the merger with • HLL did not know the BBLIL 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.
ISSUE 4 Whether or not HLL hadgained any unfair advantage out of the deal?
SEBI’s arguments HLL’s arguments• As per SEBI,” Making profit or As per HLL after the merger all losses is not a legal the shares purchased got requirement under the cancelled and so there were regulation to establish charge no financial gains to the of insider trading.” company.• As per SEBI, HLL benefitted in • They bought 8,00,000 of the form of uncertainty BBLIL shares from UTI at attached with the market Rs. 350 while the market price reaction to the news of Merger was Rs.318 thus at 10% and its subsequent impact on premium. share prices. • 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 standtaken by SEBI is incorrect because:-1) The information about the Merger was not an “unpublished information”.2) The merger itself was not a “price sensitive information”.3) Unintentional gains out of the transactions.
RESPONE OFUNION FINANCE MINISTRY...
• Union ministry upheld HLL’S view that the merger was “generally known” as it was widely speculated in national media.• As per the ministry, SEBI should gather conclusive evidence and should present strong case to support its arguments.• Still further the SEBI suffered from procedural deficiencies and prosecuting and penalizing HLL was beyond there jurisdiction.
WAS THE RESPONSEJUSTIFIED...???
• Response of the Union Finance Ministry was correct.• Stance taken by the ministry to treat the merger as ‘generally known information’ is appropriate, as it was being widely speculated in the media and any investor could use the same.• Also there were question marks about the powers of SEBI and without the authority to do so SEBI could not penalize HLL and prosecute the directors.• This case helped us in realising that it is necessary to define the powers of SEBI.