1.

INTRODUCTION

It was only about three decades back that insider trading was recognized in many
developed countries as what it was - an injustice; in fact, a crime against shareholders
and markets in general.
At one time, not so far in the past, inside information and its use for personal profits
was regarded as a perk of office and a benefit of having reached a high stage in life.
It was the Sunday Times of UK that coined the classic phrase in 1973 to describe this
sentiment - "the crime of being something in the city", meaning that insider trading
was believed as legitimate at one time and a law against insider trading was like a law
against high achievement.
Insider trading takes place legally every day, when corporate insiders officers,
directors or employees buy or sell stock in their own companies within the confines
of company policy and the regulations governing this trading.
It is the trading that takes place when those privileged with confidential information
about important events use the special advantage of that knowledge to reap profits or
avoid losses on the stock market, to the detriment of the source of the information and
to the typical investors who buy or sell their stock without the advantage of "inside"
information.

2. INSIDER TRADING AS A CRIME

Insider trading is an extraordinarily difficult crime to prove.

The underlying act of buying or selling securities is, of course, perfectly legal activity.
It is only what is in the mind of the trader that can make this legal activity a prohibited
act of insider trading. Direct evidence of insider trading is rare. Unless the insider
trader confesses his knowledge in some admissible form, evidence is almost entirely
circumstantial.
The investigation of the case and the proof presented to the fact-finder is a matter of
putting together pieces of a puzzle. This is why providing civil, as well as criminal,
liability is vital to an effective insider-trading program.

3. SEBI GUIDELINES ON INSIDER TRADING ARE PREVENTIVE IN

NATURE

According to section 195 of the Companies Act 2013 anyone whos found guilty of
insider trading can be imprisoned for a period extending to 5 years, entitled for a fine
of 5 lacs extending to 25 crore or three times the profit made out of the illegal practice
(whichever is higher).
According to the Section 13 of the Insider Trading Regulations, any person who holds
more than five cent shares in any listed company shall disclose to the company the
number of shares held and change in shareholding, even if such changes result in
shareholding falling below five per cent. If the holding falls below five cent, it has to
be disclosed if there has been change in such holdings from the last disclosure made.

Investors will have to continuously disclose acquisition of additional shares every

time such acquisition rises by two per cent above the threshold limit of five per cent.
Earlier regulations had provision for disclosure just after crossing the five per cent for
the first time and there was no provision for disclosure if the holding falls below the
five-per cent limit.
In its bid to tighten insider-trading norms, the SEBI group has prescribed a code of
internal procedures and conduct for listed companies and for entities associated with
the capital market. The objective is to preserve the confidentiality of information,
prevent its misuse and ensure commitment to transparency.
Access should be limited to those who need it. To prevent misuse of information, it
has been suggested that companies provide a trading window during special events,
whereby trading in those shares would be curtailed.
In this case, we are talking of events like declaration of dividend, company results etc.
The trading window would thereafter be opened a day or two after information is
made public.
The code also prescribes mandatory pre-clearance of trades and reporting to
compliance officer. Further, it prescribes a minimum holding period of one month for
directors, officers and designated employees.
Violation or non-compliance of this would attract a penalty.

4. CASE OF INSIDER TRADING HINDUSTAN LEVER LIMITED (HLL)

BROOKE BOND LIPTON INDIA LIMITED (BBLIL)

The controversy involved HLLs purchase of 8 lakh shares of BBLIL two weeks prior
to the public announcement of the merger of the two companies (HLL and
BBLIL). SEBI, suspecting insider trading, conducted enquiries, and after about 15
months, in August 1997, SEBI issued a show cause notice to the Chairman,
all Executive Directors, the Company Secretary and the then Chairman of HLL. Later
in March 1998 SEBI passed an order charging HLL with insider trading.
SEBI directed HLL to pay UTI compensation, and also initiated criminal proceedings
against the five common directors of HLL and BBLIL. Later HLL filed an appeal
with the appellate authority, which ruled in its favour.

Background of the case:

The SEBIs charges were triggered off by HLLs purchase of 8 lakh shares of Brooke
Bond Lipton India Ltd (BBLIL) from the Unit Trust of India (UTI, 1996-97 income:
Rs 7,481 crore) at Rs 350.35 per share. This transaction took place on March 25,
1996, before the HLL-BBLIL merger was announced on April 19, 1996. A day after
the announcement of the merger, the BBLIL scrip quoted at Rs 405, thereby leading
to a notional gain of Rs 4.37 crore for HLL, which then cancelled the shares bought.
HLL is an insider, according to Section 2 (e) of the SEBI (Insider Trading)
Regulations. It states: An insider means any person who is, or was, connected with the
company, and who is reasonably expected to have access, by virtue of such
connection, to unpublished price-sensitive information.
No company can be an insider to itself. The transnational knowledge of the merger
was because it was a primary party to the process, and not because BBLIL was an
associate company. To buttress this point, HLL maintains that if it had purchased
shares of Tata Oil Mills Co. (TOMCO) before the two merged in April, 1994, SEBI
would not consider it a case of insider trading. Why? Because HLL was not associated
with the Tata-owned TOMCO.
HLL contends that it purchased the BBLIL shares so that its parent company,
Unilever, could maintain a 51 per cent stake in the merged entity. Before the merger,
Unilever had a 51 per cent stake in HLL, but only 50.27 per cent in BBLIL. Thus, the
HLL management feels that the SEBI should consider if it had any additional
information which it should not, legitimately, have had as a transferee company in the
merger.
Only the information about the swap ratio is deemed to be price-sensitive. And this
ratio was not known to HLLor its directorswhen the BBLIL shares were purchased
in March, 1996. Moreover, HLL argues that the news of the merger was not pricesensitive as it had been announced by the media before the companys announcement,
April 7, 1996). HLL also points out that it was a case of a merger between two
companies in the group, which had a common pool of management and similar
distribution systems. Therefore, the merger information in itself had little relevance;
the only thing that was price-sensitive was the swap ratio.

By extinguishing the shares, HLL wanted to maintain Unilevers shareholding at 51

per cent and not realise any financial gains. However, Section 3 defines insider
trading irrespective of whether profits are made or not.
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HLL Not Guilty-Proposal Generally Known':

In support of its ruling, the Appellate Authority cited press reports that indicated
prior market knowledge of the merger. However, by its own admission, there were
only a few reports prior to the actual purchase (of shares from UTI). The Authority
had cited 21 news reports to support the contention that the prospect of a merger
between HLL and BBLIL was widely known.
In its judgement, the concerned authority said that under Regulation 11B, SEBI was
not capable of initiating investigations and then taking recourse to powers under the
Act for awarding compensation without passing an order.