This document summarizes two cases of insider trading and price manipulation in Indian stock markets. The first case discusses Hindustan Unilever Ltd buying shares of Brooke Bond Lipton India prior to announcing their merger, with SEBI accusing them of insider trading. The second case outlines Ketan Parekh's price rigging of several stocks in 2001 through colluding with companies and borrowing heavily from banks in violation of regulations, resulting in penalties and his debarment from markets.
This document summarizes two cases of insider trading and price manipulation in Indian stock markets. The first case discusses Hindustan Unilever Ltd buying shares of Brooke Bond Lipton India prior to announcing their merger, with SEBI accusing them of insider trading. The second case outlines Ketan Parekh's price rigging of several stocks in 2001 through colluding with companies and borrowing heavily from banks in violation of regulations, resulting in penalties and his debarment from markets.
This document summarizes two cases of insider trading and price manipulation in Indian stock markets. The first case discusses Hindustan Unilever Ltd buying shares of Brooke Bond Lipton India prior to announcing their merger, with SEBI accusing them of insider trading. The second case outlines Ketan Parekh's price rigging of several stocks in 2001 through colluding with companies and borrowing heavily from banks in violation of regulations, resulting in penalties and his debarment from markets.
terms ⚫ Present-day Hindustan Unilever Ltd. (HUL) was then known as Hindustan Lever Ltd. (HLL) ⚫ Brooke-Bond Lipton India Ltd. (BBLIL) tea company ( owner of Taj Mahal, Brooke Bond, Lipton tea brands). ⚫ Price-rigging ⚫ Persons collude to artificially decrease or increase the share price ⚫ Insider trading ⚫ When a person having unpublished price-sensitive information such as financial results, expansion plans, takeover bids, by virtue of his/her association with a company, trades its shares to make undue profits The case ⚫ Unilever parent company, HLL and BBLIL sister concerns ⚫ HLL dished out money to buy BBLIL on behalf of Unilever, so that the latter could acquire 51% stake in the post-merger company ⚫ Prior to the merger was officially announced, HLL bought 800,000 shares of BBLIL from UTI ⚫ Jan 1996: Unilever decided on the merger ⚫ March 1996: HLL bought the shares ⚫ April 1996: Merger announced ⚫ Share price of BBLIL shot up ⚫ SEBI accused HLL of insider trading, having found it guilty of acting on the basis of unpublished, price-sensitive information regarding the merger ⚫ Against the interest of shareholders ⚫ Depriving the country of foreign exchange as Unilever would have paid Rs.450-500 m to buy shares in the post-merger company HLL’s side of the story ⚫ Though not officially announced, the merger was generally known to the public and the media ⚫ HLL had the privileged info because it was one of the parties to the merger and not because it was an insider ⚫ SEBI argued that several directors in the two boards were common ⚫ HLL did not make a ‘profit’ from this deal ⚫ Paid UTI 10% more than the prevailing market rate (Bought the shares at Rs.350 instead of the market rate of Rs.318) ⚫ After the merger announcement was made, the share price of BBLIL rose to Rs.405 Legal Action ⚫ Penalties imposed by SEBI ⚫ Rs.34 m compensation to UTI ⚫ Criminal proceedings against 5 of the companies’ common directors ⚫ HLL appealed to the appellate authority (MoF) ⚫ MoF directive ⚫ Merger was generally known ⚫ SEBI’s order suffered from procedural deficiencies and lacking in jurisdiction ⚫ Grey areas in SEBI act ⚫ Whether SEBI had the power to adjudicate a matter, prosecute, and impose penalties ⚫ SEBI appealed in Mumbai High Court Ketan Parekh Scam 2001 ⚫ Known as the ‘Big Bull’ of Indian stock market ⚫ Price-rigging of specific shares ⚫ Zee Telefilms and Himachal Futuristic Communications Ltd. HFCL illegally diverted Rs.6700 m to KP to buy their shares). ⚫ Violated RBI guidelines (Banks can lend a max. of Rs.150 m to a broker) ⚫ KP borrowed Rs.2500 m from Global Trust Bank (GTB) to ramp up GTB’s shares prior to its merger with UTI Bank. ⚫ KP borrowed Rs.10,000 m from Madhavapura Mercantile Bank ⚫ FII Credit Suisse First Boston also gave loans to KP and showed them as genuine financial transactions (brokerage instead of interest) in its books Modus Operandi ⚫ Push up the share prices of selected firms in collusion with their promoters ⚫ SEBI discovered price rigging in what came to be known as the K-10 stocks ⚫ GTB, Zee Telefims, HFCL, Lupin Labs, Aftek Infosys, Padmini Polymer ⚫ Role of UTI ⚫ Though UTI denied any links with KP, their purchases aligned with KP’s buying behaviour ⚫ UTI also bought dubious stocks such as Arvind Johri’s Cyberspace Infosys (erstwhile known as Century Finance). ⚫ Stock rose to Rs.1450 within a short span of its launching, and crashed when BSE started investigation. ⚫ Johri was politically well-connected because of which SEBI was reluctant to initiate investigation against him Penalties ⚫ Probes by Joint Parliamentary Committee, SEBI, SFIO. ⚫ KP and six stock broking firms have been debarred by SEBI from undertaking any fresh business as stock-brokers or merchant bankers ⚫ Registration of these firms has been cancelled ⚫ KP and nine related entities have been debarred from buying, selling or dealing in securities for 14 years ⚫ KP and three directors arrested by CBI ⚫ Penalties imposed on KP, his firm and three directors by Enforcement Directorate of the IT Department, for violation of FEMA provisions ⚫ CBI filed chargesheet against former MD of SBI Mutual Fund and 32 others ⚫ Bought 2.2 m shares of Padmini Technologies at Rs165 per share, through off-market deals with KP’s firms ⚫ In 1998, Bombay High Court sentenced KP and 6 others to one year rigorous imprisonment for the 1992 scam, 2 got six months, and others out on bail. The outcome ⚫ SFIO found that KP manipulated shares thru six companies, and the extent of the fraud to the tune of Rs.30-40,000 crores. ⚫ SFIO report ⚫ KP managed the scam by circular trading, synchronised trading, effecting cross deals, generating high volumes and price by acting in concert with other brokering firms across the stock exchanges. ⚫ “The modus operandi was very systematic, well drilled and precisely executed albeit within a close group of persons who were acting for the furtherance of each other's interests”. ⚫ Part of the "illegitimate money " was taken out of the country using the overseas corporate bodies (OCBs). "Various corporate entities issued shares to OCBs and sub-accounts of the FIIs that were later purchased by these entities from Parekh controlled companies to legitimately transfer money out of the country". ⚫ The trading pattern and volume handled by sixteen Parekh controlled companies is marked by a triple-fold hike in 2000-2001 as compared to 1999-2000. "In fact, the total volume of these entities was arguably many times more than what was reflected in their annual accounts“. ⚫ In March 2014 KP was convicted by a special CBI court in Mumbai for cheating and sentenced to two years rigorous imprisonment.