BUSINESS ETHICS AND

CORPORATE GOVERNANCE
Presented By:
Aishwarya Khatri (FA17055)
Tarang Agrawal (FA17057)
Tushar Miglani (FA17058)
Umang Puri (FA17059)
Vrinda Narula (FA17060)
Insider Trading:
HLL – BBLIL Merger Case
 ▫ Case Summary
CONTENTS
▫ Problems in the case

▫ Solutions

▫ Key Learnings
 ▫ Insider Trading refers to a situation when a person having
unpublished price-sensitive information such as financial
CASE result, expansion plans, take-over bids etc. by virtue of his
SUMMARY association with a company, trades its shares to make
undue profits.
▫ This case was the first ever case of insider trading in India
which was taken up by SEBI which exposed some major
flaws in SEBI‘s insider-trading regulations and the need to
plug the loopholes in them.
▫ In 1996, FMCG giant Hindustan Lever Ltd. (HLL) decided
to merge with its sister concern Brooke Bond Lipton India
Ltd. (BBLIL) to enable their parent company Unilever
have a major stake in the merged entity.
▫ However, before the merger news become public, the share prices of BBLIL
witnessed a steep hike i,e. from Rs 242 to Rs 320.
▫ The controversy involved HLL's purchase of 8 lakh shares of BBLIL - two weeks
prior to the public announcement of their merger.
▫ Insider trading charges against HLL with regard to its merger with its sister
concern BBLIL by SEBI.
▫ According to SEBI, shares were purchased from the UTI to ensure 51% stake to
Unilever in the post-merger company with the prior knowledge of swap ratio.
▫ Around 15 months later, SEBI issued a show cause notice to all executive
directors, the then Chairman of HLL and later charging HLL with insider trading.
▫ SEBI held that HLL was in possession of unpublished price sensitive information
and asked HLL to pay UTI Rs 3.4 crores as compensation besides the criminal
charges against management.
 Difference in understanding of clauses of SEBI.
PROBLEMS
▫ HLL was an insider or not
OF THE
CASE ▫ Was the information with HLL ‗Unpublished‘.
▫ HLL had any price-sensitive information or not.
▫ HLL had any unfair advantage out of the deal
or not.
 SEBI‘s argument:

1. HLL was an ▫ Definition of ―Insider‖- Any person who is connected or

insider or not deemed to be connected to the company and may have
access to price sensitive information.

HLL‘s argument:

▫ It was deemed to be connected to BBLIL and it received the

price sensitive information only because it was a party to the
contract.

▫ Nowhere in the world is a primary party to a merger

considered as a insider from point of view of insider-trading.
 SEBI‘s argument:

▫ HLL has gone against the regulation. It had the unpublished

2. Was the information which it used to gain abnormal profits.
information with
HLL ▫ UTI gave the statement that it was unaware about the merger.

“unpublished” HLL‘s argument:

▫ The merger was subject to market and media speculation. Thus it was
no surprise to the market.

▫ The share prices also rise before the merger. This shows that it was
known information.

▫ UTI also remained silent on the deal of the shared despite being the
largest shareholder in BBLIL.
 SEBI‘s argument:

3. HLL had any ▫ SEBI regulation laid down eight examples of price
price sensitive sensitive information which included inter alia
information or ―amalgamation, merger or takeover‖.
not
HLL argument:

▫ 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.
 SEBI‘s argument:

4. HLL had any ▫ In regard to this, neither the act nor the regulation stated that
unfair advantage the SEBI must prove that a profit was made or a loss was
out of the deal or avoided.
not
HLL‘s argument:

▫ It made no gain out of the deal after the merger the company
cancelled its BBLIL shareholding so financially there was no
gain.

▫ HLL bought shares at a premium of almost 10 per cent over

the market price.
 ▫ As per Clause 2(e) of SEBI‘s Regulations : Insider means
SOLUTIONS any person who is or was connected with a company, or is
deemed to have connected with the company and with help
of such connection tries to use price sensitive information
in respect of securities of company.
▫ Being an insider, HLL was free to use the information but
not to buy the shares.
▫ SEBI held that, since, HLL and BBLIL were subsidiaries
of the same London based Unilever, and were effectively
under the same management, HLL and its directors had
prior knowledge of the merger. Thus HLL was covered
under the definition of an insider as above defined.
▫ ―unpublished‖ means information which is not published by the company or its
agents and is not specific in nature.
▫ Explanation—Speculative reports in print or electronic media shall not be
considered as published information.‖
▫ Consequently, under the revised definition speculative reports in print media, as
was the case in relation to the HLL and BBLIL merger, would not be
considered as published information, and HLL‘s knowledge in relation to the
merger would be considered as unpublished information.
▫ HLL was not aware of price sensitive information that is about Swap Ratio,
when it purchased shares of BBLIL before merger.
▫ HLL did not made any gain out of the deal. HLL only purchased shares of
BBLIL from UTI.
▫ SEBI also mentioned that Making Profit or Avoiding loss is not a legal
requirement under the regulation to establish the charge of insider trading.
 ▫ A well structured yet flexible regulatory body is must to
KEY keep pace with technology driven actions.
LEARNINGS ▫ Keep a track of diverse nature transactions and
companies must display an ethical conduct for its
sustenance in the market.
▫ By appointing an in-house watchdog or by timely
investigation of the case, interest of the associated
parties – stakeholders can be protected.
▫ Also awareness of the employees plays an important role
who won‘t let such illegal practices take place in the
organisation and act as whistle blower in case the need
arises.