The Case of insider trading (HLL-BBLIL Merger)

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Case Details:

Case Code : FINC014
Case Length : 8 Pages
Period : 1995 - 1998
Pub. Date : 2002
Teaching Note : Available
Organization : HLL, BBLIL, SEBI, UTI
Industry : Diversified
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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" can be conclusively said that while entering into the transaction for purchase of 8 lakh shares of BBLIL from UTI, HLL was acting on the basis of the privileged information in its possession, regarding the impending merger of BBLIL with HLL. It also may be stated that, by its very nature, when it comes to motives and intentions, there may not always be any direct evidence. However, the chain of circumstances, the timing of the transaction, and other related factors, as discussed earlier, demonstrates beyond doubt that the transaction was founded upon and effected on the basis of unpublished price sensitive information about the impending merger."

- Excerpt from SEBI order that tried to establish an insider trading case against HLL management.

Locking Horns

It was battle royale, a unique one at that. In one corner was the capital market regulator SEBI, cracking down with India's first-ever 'guilty' verdict for an insider trading offence.

In the other corner was Unilever subsidiary, Hindustan Lever Ltd. (HLL) marshalling its formidable corporate resources to defend itself. On August 4, 1997, SEBI issued a show cause notice to HLL claiming that there was prima facie evidence of the company indulging in insider trading through the use of 'Unpublished price sensitive information' prior to its merger with Brooke Bond Lipton India Ltd. (BBLIL).

In March 1998, SEBI passed an exhaustive order, which sent shock waves through the country's corporate sector. SEBI found HLL guilty of insider trading because it bought shares of BBLIL from Unit Trust of India (UTI), knowing that HLL and BBLIL were going to merge.

Since it bought the shares before the merger was formally announced, SEBI held that HLL was using unpublished, price-sensitive information to trade, and was therefore guilty of insider trading.

SEBI directed HLL to pay UTI Rs 3.4 crore in compensation, and also initiated criminal proceedings against the five common directors of HLL and BBLIL: S.M. Datta, K.V. Dadiseth, R. Gopalakrishnan, A. Lahiri, and M.K. Sharma, who were on the core team which discussed the merger.

Predictably, HLL decided to appeal against the SEBI verdict to the Union Ministry of Finance, the appellate authority in such cases.

The question, which lingered in everyone's mind was - Is HLL, guilty of insider trading and would SEBI's charges hold?

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