Insider

trading refers to a situation when a person having unpublished price-sensitive i

nformation such as financial result, expansion plans, take-over bids, etc. by vi
rtue of his association with a company, trades its share to make undue profits.
a breach of fiduciary duties of officers of a company or connected persons as def
ined under the SEBI regulations,1992, towards the shareholders.
It
is fairly

Corporate officers, directors , and employees who trade the corporations securit
ies after the learning of significant , confidential,corporate developments.
Friends , business associates, family members , and other types of such officers
, directors , and employees, who tradethe securities after receiving such infor
mation.

Price rigging occurs when person acting in concert with each other collude to in
crease or decrease artificially the price of a security. Market manipulation int
erferes with the free and fair operation of the market and creates artificial, f
alse or misleading appearances with respect to the price of or a market for a se
curity, commodity and currency.

HLL bought 8 lakhs worth shares of BBLIL from UTI at Rs 350.35 per share (At a p
remium of 9.5% of the ruling market price of Rs 320) just two weeks before the f
ormal announcement knowing that the HLL and BBLIL were going to merge.
SEBI held that HLL was using unpublished, price-sensitive information to trade,
and was therefore guilty of insider trading. In March 1998, SEBI passes an execu
tive order, which sent shock waves through the countrys corporate sector. SEBI di
rected HLL to pay UTI Rs 30.4 millions in compensation, and also initiated crimi
nal proceedings against the five directors of HLL and BBLIL.

HLL claimed that the purpose of the purchase of shares was to enable Unilever to
acquire 51% shares of BBLIL. In July 1998, the Appellate Authority of the Finan
ce Ministry dismissed the SEBI order. However,SEBIs order was correctly based on
a simple proposition of law : what can not be done directly can not be done indi
rectly.

SEBI took the stand that only HLL knew about the merger and it acted with such u
npublished information. According to SEBI,HLL and its directors misused such inf
ormation. HLL an acted as an insider by buying 8lacs shares of BBLIL from UTI. S
hares where purchased from UTI to ensure 51% stake in Unilever with prior knowle
dge of swap ratio.

SEBI also charged HLL of acting in a manner inimical to the interest of thousand
s of ordinary share holders. Beside HLL depleted its own resources by helping it
s holding company. SEBI charged that HLL deprived the foreign exchange of countr
y and as Unilever would have invested nearly Rs 450 -500million to rise its hold
ing to 51% post merger.

HLL
countered that it was deemed to be connected to BBLIL and though it knew about t
he merger before it bought BBLILs shares, it received information only because it
was one of the parties itself and not merely because of its connection to BBLIL
. SEBI argued that even BBLIL was construed to be unconnected, HLL could still b
e an insider of second type. SEBI also argued that HLL was free to use the infor
mation to further the merger not to buy shares.

While SEBI argued HLL had gone against its regulation on Insider Trading , HLL p
ointed out that the merger was a "generally known information as the share price
of BBLIL moved up from Rs240 to Rs320 between January and March 2006.
HLL point
ed out that UTI was a large enough institutional player and how could it remain
unaware about the merger.UTI did not complain against the transaction either for
mally to SEBI, or informally. However SEBI tried to show proof through an offici
als testimony that he was unaware of the merger.
SEBIs regulation laid down 8 exam
ples of pricesensitive information, which included amalgamations, mergers or tak
eovers.

HLL
asserted that it was unaware of the swap ratio when the company bought BBLIL sha
res in March 1996 and the only thing that was price-sensitive was the swap ratio
, and HLL was not aware of it when it purchased BBLIL shares from UTI.
HLL argue
d that it did not made any gain out of the deal. After the merger the company ca
ncelled its BBLIL shareholding, and so financially there was no gain. Its object
ive was just to consolidate Unilevers shareholdings. However SEBI argued that maki
ng profit or avoiding loss was not a legal requirement under the regulation to e
stablish the charge of insider trading.

Was SEBIs stand justified?

Experts maintained that SEBI had made the wrong decision by favoring UTI and imp
osing a fine on HLL to pay 30.4 million.
But being a regulator also means protec
ting the interests of all market players which includes both small, ordinary and
large institutional players. Therefore SEBI believed it was justified in awardi
ng compensation to UTI.

On
15th July 1998 the Union Finance Ministry absolved HLL of charges of insider tra
ding and struck down SEBIs order of March 11,1998 for prosecution of 5 of the com
panys directors.
The Ministry held that the order of SEBI suffered from procedura
l deficiencies and was also lacking in jurisdiction.SEBI challenged the order be
fore the Mumbai High Court.

The
appellate authority while reiterating its view as as a good opportunity to clear
up differences of opinion between the duo on the interpretations given to some c
rucial provision of the SEBI Act ,which led to conflicting interpretations in the
HLL case.
The ministry would want the court to define clearly whether SEBI has
the claimed powers to adjudicate a matter ,go for prosecution or impose monetary
penalties.

It is very difficult to conclude whether HLL was an insider or not and whether i
nsider trading took place. It can be drawn from the case that merger was price s
ensitive information .
SEBIs role as a watchdog of the Indian capital market and
its ability to control financial crimes such as insider trading.
Several grey ar
eas in the SEBI Act which has to be rectified. The inability of its legal machin
ery to handle legal cases like insider trading and price rigging.

The
case has also triggered the need for an urgent rehaul of SEBIs regulation.
With c
hanging scenario in the capital market such as diverse nature of product and tra
nsanction , technology driven operations and explosion in communication,there is
an urgent need of mechanism which respond immediately and keep an tight check o
f all the activities. Lack of assistance from Central Economic Intelligence Bure
au (CEIB) to investigate the cases.