3. 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.
4. 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access unpublished price sensitive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.
.
5. ISSUES INVOLVED IN THE
CASE
1) 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‘Unpublished’?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?
7. 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virtue of such connection, to unpublished price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• has had access to such unpublished price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.”
8. Applicability of Clause 2(e)
SEBI’s arguments HLL’s arguments
Argument 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 primary
Argument 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”
9. 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.
10. ISSUE 2
Whether or not the pre-
merger information HLL had
access to was ‘Unpublished’?
11. 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.”
12. 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.
13. 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.
14. ISSUE 3
Whether HLL had any price
sensitive information with
regard to the merger?
15. Section 2k of SEBI’s regulation laid down
eight examples of price-sensitive
information, which includes inter alia
“amalgamations, mergers, and takeovers”.
16. 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
17. 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.
18. 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.
19. ISSUE 4
Whether or not HLL had
gained any unfair advantage
out of the deal?
20. 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.
21. 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.
22. Overall it can be concluded that stand
taken 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.
24. • 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.
26. • 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.
