ASSIGNMENT ON INSIDER TRADING

DR.P.SRIDHARAN, ANSHUL JAIN

ASSOCIATE PROFESSOR, MBA-IB(II YEAR)

DEPT OF INTERNATIONAL BUSINESS, IV SEMS-1095605

SCHOOL OF MANAGEMENT, 2009-11

PONDICHERRY UNIVERSITY
Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock
options) by individuals with potential access to non-public information about the company. In
most countries, trading by corporate insiders such as officers, key employees, directors, and large
shareholders may be legal, if this trading is done in a way that does not take advantage of non-
public information. However, the term is frequently used to refer to a practice in which an insider
or a related party trades based on material non-public information obtained during the
performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or
other relationship of trust and confidence or where the non-public information was
misappropriated from the company.

In the United States and several other jurisdictions, trading conducted by corporate officers, key
employees, directors, or significant shareholders (in the U.S., defined as beneficial owners of ten
percent or more of the firm's equity securities) must be reported to the regulator or publicly
disclosed, usually within a few business days of the trade. Many investors follow the summaries
of these insider trades in the hope that mimicking these trades will be profitable. While "legal"
insider trading cannot be based on material non-public information, some investors believe
corporate insiders nonetheless may have better insights into the health of a corporation (broadly
speaking) and that their trades otherwise convey important information (e.g., about the pending
retirement of an important officer selling shares, greater commitment to the corporation by
officers purchasing shares, etc.)

Illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing
overall economic growth. Legal insider trading

Legal trades by insiders are common, as employees of publicly-traded corporations often have
stock or stock options. These trades are made public in the US through SEC filings, mainly Form
4. Prior to 2001, US law restricted trading such that insiders mainly traded during windows when
their inside information was public, such as soon after earnings releases. SEC Rule 10b5-1
clarified that the U.S. prohibition against insider trading does not require proof that an insider
actually used material nonpublic information when conducting a trade; possession of such
information alone is sufficient to violate the provision, and the SEC would impute an insider in
possession of material nonpublic information uses this information when conducting a trade.
However, Rule 10b5-1 also created for insiders an affirmative defense if the insider can
demonstrate that the trades conducted on behalf of the insider were conducted as part of a
preexisting contract or written, binding plan for trading in the future. For example, if a corporate
insider plans on retiring after a period of time and, as part of his or her retirement planning,
adopts a written, binding plan to sell a specific amount of the company's stock every month for
the next two years, and during this period the insider comes into possession of material
nonpublic information about the company, any subsequent trades based on the original plan
might not constitute prohibited insider trading.

Illegal insider trading

Rules against insider trading on material non-public information exist in most jurisdictions
around the world, though the details and the efforts to enforce them vary considerably. The
United States is generally viewed as having the strictest laws against illegal insider trading, and
makes the most serious efforts to enforce them.

Definition of "insider"

In the United States and Germany, for mandatory reporting purposes, corporate insiders are
defined as a company's officers, directors and any beneficial owners of more than ten percent of
a class of the company's equity securities. Trades made by these types of insiders in the
company's own stock, based on material non-public information, are considered to be fraudulent
since the insiders are violating the fiduciary duty that they owe to the shareholders. The
corporate insider, simply by accepting employment, has undertaken a legal obligation to the
shareholders to put the shareholders' interests before their own, in matters related to the
corporation. When the insider buys or sells based upon company owned information, he is
violating his obligation to the shareholders.

For example, illegal insider trading would occur if the chief executive officer of Company A
learned (prior to a public announcement) that Company A will be taken over, and bought shares
in Company A knowing that the share price would likely rise.

In the United States and many other jurisdictions, however, "insiders" are not just limited to
corporate officials and major shareholders where illegal insider trading is concerned, but can
include any individual who trades shares based on material non-public information in violation
of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of
where a corporate insider "tips" a friend about non-public information likely to have an effect on
the company's share price, the duty the corporate insider owes the company is now imputed to
the friend and the friend violates a duty to the company if he or she trades on the basis of this
information.

Liability for insider trading

Liability for insider trading violations cannot be avoided by passing on the information in an "I
scratch your back, you scratch mine" or quid pro quo arrangement, as long as the person
receiving the information knew or should have known that the information was company
property.

For example, if Company A's CEO did not trade on the undisclosed takeover news, but instead
passed the information on to his brother-in-law who traded on it, illegal insider trading would
still have occurred.

Misappropriation theory

A newer view of insider trading, the "misappropriation theory" is now part of US law. It states
that anyone who misappropriates (steals) information from their employer and trades on that
information in any stock (not just the employer's stock) is guilty of insider trading.
For example, if a journalist who worked for Company B learned about the takeover of Company
A while performing his work duties, and bought stock in Company A, illegal insider trading
might still have occurred. Even though the journalist did not violate a fiduciary duty to Company
A's shareholders, he might have violated a fiduciary duty to Company B's shareholders
(assuming the newspaper had a policy of not allowing reporters to trade on stories they were
covering).

Proof of responsibility

Proving that someone has been responsible for a trade can be difficult, because traders may try to
hide behind nominees, offshore companies, and other proxies. Nevertheless, the U.S. Securities
and Exchange Commission prosecutes over 50 cases each year, with many being settled
administratively out of court. The SEC and several stock exchanges actively monitor trading,
looking for suspicious activity.

Trading on information in general

Not all trading on information is illegal inside trading, however. For example, while dining at a
restaurant, you hear the CEO of Company A at the next table telling the CFO that the company's
profits will be higher than expected, and then you buy the stock, you are not guilty of insider
trading unless there was some closer connection between you, the company, or the company
officers. However, information about a tender offer (usually regarding a merger or acquisition) is
held to a higher standard. If this type of information is obtained (directly or indirectly) and there
is reason to believe it is non-public, there is a duty to disclose it or abstain from trading.[7]

Tracking insider trades

Since insiders are required to report their trades, others often track these traders, and there is a
school of investing which follows the lead of insiders. This is of course subject to the risk that an
insider is making a buy specifically to increase investor confidence, or making a sell for reasons
unrelated to the health of the company (e.g. a desire to diversify or pay a personal expense).

As of December 2005 companies are required to announce times to their employees as to when
they can safely trade without being accused of trading on inside information

American insider trading law

The United States has been the leading country in prohibiting insider trading made on the basis
of material non-public information. Thomas Newkirk and Melissa Robertson of the U.S.
Securities and Exchange Commission (SEC) summarize the development of U.S. insider trading
laws. Insider trading has a base offense level of 8, which puts it in Zone A under the U.S.
Sentencing Guidelines. This means that first-time offenders are eligible to receive probation
rather than incarceration.

Common law
U.S. insider trading prohibitions are based on English and American common law prohibitions
against fraud. In 1909, well before the Securities Exchange Act was passed, the United States
Supreme Court ruled that a corporate director who bought that company’s stock when he knew it
was about to jump up in price committed fraud by buying while not disclosing his inside
information.

Section 17 of the Securities Act of 1933 contained prohibitions of fraud in the sale of securities
which were greatly strengthened by the Securities Exchange Act of 1934.

Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any
purchases and sales within any six month period) made by corporate directors, officers, or
stockholders owning more than 10% of a firm’s shares. Under Section 10(b) of the 1934 Act,
SEC Rule 10b-5, prohibits fraud related to securities trading.

The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud
Enforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three
times the profit gained or the loss avoided from the illegal trading.[12]

SEC regulations

SEC regulation FD ("Fair Disclosure") requires that if a company intentionally discloses material
non-public information to one person, it must simultaneously disclose that information to the
public at large. In the case of an unintentional disclosure of material non-public information to
one person, the company must make a public disclosure "promptly."

Insider trading, or similar practices, are also regulated by the SEC under its rules on takeovers
and tender offers under the Williams Act.

Court decisions

Much of the development of insider trading law has resulted from court decisions.

Various famous cases on Insider Trading

In SEC v. Texas Gulf Sulphur Co. (1966), a federal circuit court stated that anyone in possession
of inside information must either disclose the information or refrain from trading.

In 1909, the Supreme Court of the United States ruled in Strong v. Repide that a director upon
whose action the value of the shares depends cannot avail of his knowledge of what his own
action will be to acquire shares from those whom he intentionally keeps in ignorance of his
expected action and the resulting value of the shares. Even though in general, ordinary relations
between directors and shareholders in a business corporation are not of such a fiduciary nature as
to make it the duty of a director to disclose to a shareholder the general knowledge which he may
possess regarding the value of the shares of the company before he purchases any from a
shareholder, yet there are cases where, by reason of the special facts, such duty exists.
In 1984, the Supreme Court of the United States ruled in the case of Dirks v. SEC that tippees
(receivers of second-hand information) are liable if they had reason to believe that the tipper had
breached a fiduciary duty in disclosing confidential information and the tipper received any
personal benefit from the disclosure. (Since Dirks disclosed the information in order to expose a
fraud, rather than for personal gain, nobody was liable for insider trading violations in his case.)

The Dirks case also defined the concept of "constructive insiders," who are lawyers, investment
bankers and others who receive confidential information from a corporation while providing
services to the corporation. Constructive insiders are also liable for insider trading violations if
the corporation expects the information to remain confidential, since they acquire the fiduciary
duties of the true insider.

In United States v. Carpenter (1986) the U.S. Supreme Court cited an earlier ruling while
unanimously upholding mail and wire fraud convictions for a defendant who received his
information from a journalist rather than from the company itself. The journalist R. Foster
Winans was also convicted, on the grounds that he had misappropriated information belonging to
his employer, the Wall Street Journal. In that widely publicized case, Winans traded in advance
of "Heard on the Street" columns appearing in the Journal.

The court ruled in Carpenter: "It is well established, as a general proposition, that a person who
acquires special knowledge or information by virtue of a confidential or fiduciary relationship
with another is not free to exploit that knowledge or information for his own personal benefit but
must account to his principal for any profits derived therefrom."

However, in upholding the securities fraud (insider trading) convictions, the justices were evenly
split.

In 1997 the U.S. Supreme Court adopted the misappropriation theory of insider trading in United
States v. O'Hagan, 521 U.S. 642, 655 (1997). O'Hagan was a partner in a law firm representing
Grand Metropolitan, while it was considering a tender offer for Pillsbury Co. O'Hagan used this
inside information by buying call options on Pillsbury stock, resulting in profits of over $4
million. O'Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so that
he did not commit fraud by purchasing Pillsbury options.

The Court rejected O'Hagan's arguments and upheld his conviction.

The "misappropriation theory" holds that a person commits fraud "in connection with" a
securities transaction, and thereby violates 10(b) and Rule 10b-5, when he misappropriates
confidential information for securities trading purposes, in breach of a duty owed to the source of
the information. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's
information to purchase or sell securities, in breach of a duty of loyalty and confidentiality,
defrauds the principal of the exclusive use of the information. In lieu of premising liability on a
fiduciary relationship between company insider and purchaser or seller of the company's stock,
the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those
who entrusted him with access to confidential information.
The Court specifically recognized that a corporation’s information is its property: "A company's
confidential information...qualifies as property to which the company has a right of exclusive
use. The undisclosed misappropriation of such information in violation of a fiduciary
duty...constitutes fraud akin to embezzlement – the fraudulent appropriation to one's own use of
the money or goods entrusted to one's care by another."

In 2000, the SEC enacted Rule 10b5-1, which defined trading "on the basis of" inside
information as any time a person trades while aware of material nonpublic information – so that
it is no defense for one to say that she would have made the trade anyway. This rule also created
an affirmative defense for pre-planned trades.

Security analysis and insider trading

Security analysts gather and compile information, talk to corporate officers and other insiders,
and issue recommendations to traders. Thus their activities may easily cross legal lines if they are
not especially careful. The CFA Institute in its code of ethics states that analysts should make
every effort to make all reports available to all the broker's clients on a timely basis. Analysts
should never report material nonpublic information, except in an effort to make that information
available to the general public. Nevertheless, analysts' reports may contain a variety of
information that is "pieced together" without violating insider trading laws, under the mosaic
theory. This information may include non-material nonpublic information as well as material
public information, which may increase in value when properly compiled and documented.

In May 2007, a bill entitled the "Stop Trading on Congressional Knowledge Act, or STOCK
Act" was introduced that would hold congressional and federal employees liable for stock trades
they made using information they gained through their jobs and also regulate analysts or
"Political Intelligence" firms that research government activities. The bill has not passed.

Arguments for legalizing insider trading

Some economists and legal scholars (e.g. Henry Manne, Milton Friedman, Thomas Sowell,
Daniel Fischel, Frank H. Easterbrook) argue that laws making insider trading illegal should be
revoked. They claim that insider trading based on material nonpublic information benefits
investors, in general, by more quickly introducing new information into the market.[20]

Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more
insider trading, not less. You want to give the people most likely to have knowledge about
deficiencies of the company an incentive to make the public aware of that." Friedman did not
believe that the trader should be required to make his trade known to the public, because the
buying or selling pressure itself is information for the market.

Other critics argue that insider trading is a victimless act: A willing buyer and a willing seller
agree to trade property which the seller rightfully owns, with no prior contract (according to this
view) having been made between the parties to refrain from trading if there is asymmetric
information.
Legalization advocates also question why "trading" where one party has more information than
the other is legal in other markets, such as real estate, but not in the stock market. For example, if
a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Smith's
land, he may be entitled to make Smith an offer for the land, and buy it, without first telling
Farmer Smith of the geological data.[14] Nevertheless, circumstances can occur when the
geologist would be committing fraud if, because he owes a duty to the farmer, he did not disclose
the information; e.g., if he had been hired by Farmer Smith to assess the geology of the farm.

Advocates of legalization make free speech arguments. Punishment for communicating about a
development pertinent to the next day's stock price might seem to be an act of censorship.If the
information being conveyed is proprietary information and the corporate insider has contracted
to not expose it, he has no more right to communicate it than he would to tell others about the
company's confidential new product designs, formulas, or bank account passwords.

There are very limited laws against "insider trading" in the commodities markets, if, for no other
reason, than that the concept of an "insider" is not immediately analogous to commodities
themselves (e.g., corn, wheat, steel, etc.). However, analogous activities such as front running are
illegal under U.S. commodity and futures trading laws. For example, a commodity broker can be
charged with fraud if he or she receives a large purchase order from a client (one likely to affect
the price of that commodity) and then purchases that commodity before executing the client's
order in order to benefit from the anticipated price increase.

Legal differences among jurisdictions

The US and the UK vary in the way the law is interpreted and applied with regard to insider
trading.

In the UK, the relevant laws are the Criminal Justice Act 1993 Part V Schedule 1 and the
Financial Services and Markets Act 2000, which defines an offence of Market Abuse. It is also
illegal to fail to trade based on inside information (whereas without the inside information the
trade would have taken place). The principle is that it is illegal to trade on the basis of market-
sensitive information that is not generally known. No relationship to the issuer of the security is
required; all that is required is that the guilty party traded (or caused trading) whilst having inside
information.

Japan enacted its first law against insider trading in 1988. Roderick Seeman says: "Even today
many Japanese do not understand why this is illegal. Indeed, previously it was regarded as
common sense to make a profit from your knowledge."

In accordance with EU Directives, Malta enacted the Financial Markets Abuse Act in 2002,
which effectively replaced the Insider Dealing and Market Abuse Act of 1994.

The "Objectives and Principles of Securities Regulation" published by the International

Organization of Securities Commissions (IOSCO) in 1998 and updated in 2003 states that the
three objectives of good securities market regulation are (1) investor protection, (2) ensuring that
markets are fair, efficient and transparent, and (3) reducing systemic risk. The discussion of these
"Core Principles" state that "investor protection" in this context means "Investors should be
protected from misleading, manipulative or fraudulent practices, including insider trading, front
running or trading ahead of customers and the misuse of client assets." More than 85 percent of
the world's securities and commodities market regulators are members of IOSCO and have
signed on to these Core Principles.

The World Bank and International Monetary Fund now use the IOSCO Core Principles in
reviewing the financial health of different country's regulatory systems as part of these
organization's financial sector assessment program, so laws against insider trading based on non-
public information are now expected by the international community. Enforcement of insider
trading laws varies widely from country to country, but the vast majority of jurisdictions now
outlaw the practice, at least in principle.

Larry Harris claims that differences in the effectiveness with which countries restrict insider
trading help to explain the differences in executive compensation among those countries. The
U.S., for example, has much higher CEO salaries than do Japan or Germany, where insider
trading is less effectively restrained

The paper tries to highlight the most celebrated case of Hindustan Lever Limited (HLL) –
Brooke Bond Lipton India Limited Case (BBLIL). It tries to make out whether HLL is guilty
of insider trading or SEBI ruling is technically damning.

Insider trading is a term that most investors have heard and usually associate with illegal
conduct. But the term actually includes both legal and illegal conduct. The legal version is when
corporate insiders officers, directors, and employees buy and sell stock in their own companies.
When corporate insiders trade in their own securities, they must report their trades to the SEBI.
Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary
duty or other relationship of trust and confidence, while in possession of material, nonpublic
information about the security. Insider trading violations may also include tipping such
information, securities trading by the person tipped, and securities trading by those who
misappropriate such information.

Examples of insider trading cases that have been brought by the SEBI are cases against:
.         Corporate officers, directors, and employees who traded the corporations securities after
learning of significant, confidential corporate developments;
.         Friends, business associates, family members, and other tippees of such officers, directors,
and employees, who traded the securities after receiving such information;
.         Employees of law, banking, brokerage and printing firms who were given such
information to provide services to the corporation whose securities they traded;
.         Government employees who learned of such information because of their employment by
the government; and
.         Other persons who misappropriated, and took advantage of, confidential information from
their employers.
Because insider trading undermines investor confidence in the fairness and integrity of the
securities markets, the SEBI has treated the detection and prosecution of insider trading
violations as one of its enforcement priorities.
Why forbid insider trading?
The prevention of insider trading is widely treated as an important function of securities
regulation. In the United States, which has the most--studied financial markets of the world,
regulators appear to devote significant resources to combat insider trading. This has led many
observers in India to mechanically accept the notion that the prohibition of insider trading is an
important function of SEBI. In most countries other than the US, government actions against
insider trading are much more limited. Many countries pay lip service to the idea that insider
trading must be prevented, while doing little by way of enforcement.
 
In order to make sense of insider trading, we must go back to a basic understanding of markets,
prices and the role of markets in the economy. The ideal securities market is one which does a
good job of allocating capital in the economy. This function is enabled by market efficiency, the
situation where the market price of each security accurately reflects the risk and return in its
future. The primary function of regulation and policy is to foster market efficiency, hence we
must evaluate the impact of insider trading upon market efficiency..
 
Insider trading appears unfair, especially to speculators outside a company who face difficult
competition in the form of inside traders. Individual speculators and fund managers alike face
inferior returns when markets are more efficient owing to the actions of inside traders. This does
not, in itself, imply that insider trading is harmful. Insider trading clearly hurts individual and
institutional speculators, but the interests of the economy and the interests of these professional
traders are not congruent. Indeed, inside traders competing with professional traders is not unlike
foreign goods competing on the domestic market -- the economy at large benefits even though
one class of economic agents suffers
 
History behind the regulatory mechanism in India
 
Insider trading in India was unhindered in its 125 year old stock market till about 1970. It was in
the late 1970s this practice was recognized as unfair. In 1979, the Sachar committee said in its
report that company employees like directors, auditors, company secretaries etc. may have some
price sensitive information that could be used to manipulate stock prices which may cause
financial misfortunes to the investing public. The company recommended amendments to the
Companies Act, 1956 to restrict or prohibit the dealings of employees / insiders. Penalties were
also suggested to prevent the insider trading.
 
In 1986 the Patel committee recommended that the securities contracts (Regulations) Act, 1956
may be amended to make exchanges curb insider trading and unfair stock deals. It suggested
heavy fines including imprisonment apart from refunding the profit made or the losses averted to
the stock exchanges.
 
In 1989 the Abid Hussain Committee recommended that the insider trading activities may be
penalized by civil and criminal proceedings and also suggested that the SEBI formulate the
regulations and governing codes to prevent unfair dealings.
 
Following the recommendations by the committees, India through Securities and Exchange
Board of India (Insider Trading) Regulations 1992 has prohibited this fraudulent practice and a
person convicted of this offence is punishable under Section 24 and Section 15G of the SEBI Act
1992. These regulations were drastically amended in 2002 and renamed as SEBI (Prohibition of
Insider Trading) Regulations 1992. Both the Insider Trading Regulations are basically punitive
in nature in the sense that they describe what constitutes insider trading and then seek to punish
this act in various ways. More importantly, they have to be complied with by all listed
companies; all market intermediaries (such as brokers) and all advisers (such as merchant
bankers, professional firms, etc.).

Case Study--HLL BBLIL Merger Case

Crux of the case

 
The case study analyses the issues related to the insider trading charges against HLL with regard
to its merger with Brooke Bond Lipton India Ltd. The case focuses on the legal controversy
surrounding these charges. 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.
 
THE SEBI CHARGE
 
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. The SEBI has argued that both these conditions were met when HLL bought the
BBLIL shares from the UTI. HLL and BBLIL had a common parentage--as subsidiaries of the
London-based $33.52-billion Unilever--and were then under a common management. Thus, HLL
and its directors had prior knowledge of the merger. Agrees Both HLL and BBLIL are deemed to
be under the same management even under Section 370 (1)(b) of the Companies Act, 1956.
 
THE HLL DEFENCE
 
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.
 
According to the SEBI guidelines, HLL can be deemed to be an insider. But the SEBIs definition
of an insider has to be fleshed out by it to provide a clearer picture.
 
THE SEBI CHARGE
 
HLL dealt in, or purchased, the BBLIL shares on the basis of unpublished price-sensitive
information which is prohibited under Section 3 of the Regulations. Section 2 (k)(v) states that
unpublished, price-sensitive information relates to the following matters (amalgamations,
mergers, and takeovers), or is of concern to a company and is not generally known or published
According to the SEBI, there can be no dispute that the information of the overall fact of the
merger falls under this definition.
 
THE HLL DEFENCE
 
Only the information about the swap ratio is deemed to be price-sensitive. And this ratio was not
known to HLL--or its directors--when the BBLIL shares were purchased in March, 1996.
Moreover, HLL argues that the news of the merger was not price-sensitive as it had been
announced by the media before the companies 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.
 
THE SEBI CHARGE
 
Why did HLL not follow the route of issuing preferential shares to allow Unilevers stake to rise
to 51 per cent in HLL? As per the SEBI chargesheet Such a step would have involved various
compliances/ clearances, and required Unilever to bring in substantial funds in foreign exchange.
The implication: HLL depleted its reserves to ensure that Unilever did not have to bring in
additional funds

THE HLL DEFENCE

Issuing of preferential shares would have, indeed, been a cheaper option to ensure that Unilever
had a 51 per cent stake in HLL. Had HLL followed this route, it would have had to pay Rs
282..35, instead of Rs 350.35, per share. In other words, it would have made a profit of Rs 5.41
crore by doing so. However, Unilever always enjoyed the option. Says a senior manager with
HLL: The forex angle falls flat on that ground itself. HLL also states that while the preferential
route would have been beneficial for itself, it would have been dilutory for other shareholders
since it would have resulted in an expanded capital base, leading to a lower earnings per share in
the future. HLL was probably worried that the clearances for a preferential allotment from the
SEBI and the Reserve Bank of India (RBI) would take their time in coming--or not be given at
all. It had already faced a time-consuming and expensive run-in with the RBI during the HLL-
TOMCO merger in 1994.
 
THE SEBI CHARGE
 
Levers cancelled the entire holding of HLL in BBLIL
 
THE HLL DEFENCE
 
HLL was upfront that its entire holding in BBLIL--1.60 per cent--including the lots purchased
from the UTI would be cancelled after the merger in March, 1997. HLL maintains that this is
perfectly legal. In addition, shareholders of both HLL and BBLIL approved of the cancellation of
shares as part of the merger scheme. Says Iyer: By this process of cancellation, which normally
happens in every amalgamation, the voting rights of Unilever have gone up. However, so have
the voting rights of other shareholders. So, no exclusive benefit--profits or avoidance of loss--has
accrued to HLL or Unilever.
 
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.
 
By virtue of being in uncharted territory, the parallel hearing before the Union Ministry of
Finance will be disposed of within four or five months from the date of filing. And if the verdict
goes against Levers, the group will then go to court. If so, expect a long-drawn legal battle. For
now, the SEBI verdict is a black spot on a company that excels in cleaning them up.

LONDON – A former Dresdner Kleinwort investment banker was sentenced to more than three
years in jail on Wednesday for insider trading in Britain.

Christian Littlewood pleaded guilty to passing on inside information about takeover deals he was
working on at the bank. Mr. Littlewood’s wife and a friend of hers, who took part in the scam,
were also sentenced.

The case is one of the most high-profile brought to court by Britain’s financial regulator, The
Financial Services Authority, and Mr. Littlewood’s sentence is the longest imposed for insider
trading in Britain. The F.S.A. stepped up prosecutions over the last three years, with its
enforcement division making insider trading a priority.
“We can and we will uncover insider dealing, even across borders, and that the people who
commit these market offenses will not go unpunished,” Margaret Cole, the F.S.A.’s head of
enforcement and financial crime, said.

Mr. Littlewood’s wife, Angie, received a suspended sentence while her friend Helmy Omar
Sa’aid was sentenced to two years.

The financial regulator first noticed some irregular trades in 2008. Mr. Sa’aid had made several
hundred thousand pounds buying stock in British insurer Highway Insurance shortly before it
said it had received a takeover offer and its shares jumped. The regulator soon started to monitor
Mr. Sa’aid’s investments. The F.S.A. looked into trades preceding a total of 22 takeover
announcements and found that Dresdner Kleinwort was working as an adviser on a majority of
them.

The regulator also found money transfers from Mrs. Littlewood to her husband and to Mr. Sa’aid
from a bank account she ran under her maiden name. The F.S.A. said it found that Mr.
Littlewood would pass information about upcoming deals to his wife, who would then tell Mr.
Sa’aid. Mrs. Littlewood and Mr. Sa’aid together invested about 5.5 million pounds, or $8.8
million, over ten years and made about 1 million pounds of profit, according to the F.S.A.

The three mainly traded shares in medium-sized British companies, including water companies
Bristol Water Group and South Staffordshire, as well as energy company Viridian Group

The Littlewoods were arrested in 2009 following a dawn raid by the regulator and police at an
address in London. Mr. Sa’aid had fled to the Comoros Islands, off the coast of Africa. He was
tracked down on the island after British officials found the address at his London home on bills
for pizza ovens. Mr. Sa’aid was extradited to Britain last year.
ENRON

Enron Corporation (former NYSE ticker symbol ENE) was an American energy, commodities,
and services company based in Houston, Texas. Before its bankruptcy in late 2001, Enron
employed approximately 22,000 staff and was one of the world's leading electricity, natural gas,
communications, and pulp and paper companies, with claimed revenues of nearly $101 billion in
2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years.
At the end of 2001, it was revealed that its reported financial condition was sustained
substantially by institutionalized, systematic, and creatively planned accounting fraud, known as
the "Enron scandal". Enron has since become a popular symbol of willful corporate fraud and
corruption. The scandal also brought into question the accounting practices and activities of
many corporations throughout the United States and was a factor in the creation of the Sarbanes–
Oxley Act of 2002. The scandal also affected the wider business world by causing the dissolution
of the Arthur Andersen accounting firm.

Enron filed for bankruptcy protection in the Southern District of New York in late 2001 and
selected Weil, Gotshal & Manges as its bankruptcy counsel. It emerged from bankruptcy in
November 2004, pursuant to a court-approved plan of reorganization, after one of the biggest and
most complex bankruptcy cases in U.S. history. A new board of directors changed the name of
Enron to Enron Creditors Recovery Corp., and focused on reorganizing and liquidating certain
operations and assets of the pre-bankruptcy Enron. On September 7, 2006, Enron sold Prisma
Energy International Inc., its last remaining business, to Ashmore Energy International Ltd.
Enron traces its roots to the Northern Natural Gas Company, which was formed in 1932, in
Omaha, Nebraska. It was reorganized in 1979 as the leading subsidiary of a holding company,
InterNorth which was a highly diversified energy and energy related products company.
Internorth was a leader in natural gas production, transmission and marketing as well as natural
gas liquids and an innovator in the plastics industry. It owned Peak Antifreeze and developed
EVAL resins for food packaging. In 1985, it bought the smaller and less diversified Houston
Natural Gas.

The separate company initially named itself "HNG/InterNorth Inc.", even though InterNorth was
the nominal survivor. It built a large and lavish headquarters complex with pink marble in
Omaha (dubbed locally as the "Pink Palace"), that was later sold to Physicians Mutual. However,
the departure of ex-InterNorth and first CEO of Enron Corp Samuel Segnar six months after the
merger allowed former HNG CEO Kenneth Lay to become the next CEO of the newly merged
company. Lay soon moved the company's headquarters to Houston after swearing to keep it in
Omaha and began to thoroughly re-brand the business. Lay and his secretary, Nancy McNeil,
originally selected the name "Enteron" (possibly spelled in camelcase as "EnterOn"), but, when it
was pointed out that the term approximated a Greek word referring to the intestines, it was
quickly shortened to "Enron". The final name was decided upon only after business cards,
stationery, and other items had been printed reading Enteron. Enron's "crooked E" logo was
designed in the mid-1990s by the late American graphic designer Paul Rand. Almost
immediately after the move to Houston, Enron began selling off key assets such as Northern
PetroChemicals and took on silent partners in Enron CoGeneration, Northern Border Pipeline
and Transwestern Pipeline and became a less diversified company. Early financial analysts said
Enron was swimming in debt and the sale of key operations would not solve the problems.

Misleading financial accounts

In 1990, Enron CEO Jeffrey Skilling, a Harvard M.B.A., hired Andrew Fastow who was well
acquainted with the burgeoning deregulated energy market Skilling wanted to exploit. In 1993,
Fastow set to work establishing numerous limited liability special purpose entitites (common
business practice); however, it also allowed Enron to place liability so that it would not appear in
its accounts, allowing it to maintain a robust and generally growing stock price and thus keeping
its critical investment grade credit ratings.

Enron was originally involved in transmitting and distributing electricity and natural gas
throughout the United States. The company developed, built, and operated power plants and
pipelines while dealing with rules of law and other infrastructures worldwide. Enron owned a
large network of natural gas pipelines, which stretched ocean to ocean and border to border
including Northern Natural Gas, Florida Gas Transmission, Transwestern Pipeline company and
a partnership in Northern Border Pipeline from Canada. The states of California, New
Hampshire and Rhode Island had already passed power deregulation laws by July 1996, the time
of Enron's proposal to acquire Portland General Electric. In 1998, Enron moved into the water
sector, creating the Azurix Corporation, which it part-floated on the New York Stock Exchange
in June 1999. Azurix failed to break into the water utility market, and one of its major
concessions, in Buenos Aires, was a large-scale money-loser. After the move to Houston, many
analysts criticized the Enron management as swimming in debt. The Enron management pursued
aggressive retribution against its critics, setting the pattern for dealing with accountants, lawyers,
and the financial media.

Enron grew wealthy due largely to marketing, promoting power, and its high stock price. Enron
was named "America's Most Innovative Company" by "Fortune (magazine)" for six consecutive
years, from 1996 to 2001. It was on the Fortune's "100 Best Companies to Work for in America"
list in 2000, and had offices that were stunning in their opulence. Enron was hailed by many,
including labor and the workforce, as an overall great company, praised for its large long-term
pensions, benefits for its workers and extremely effective management until its exposure in
corporate fraud. The first analyst to publicly disclose Enron's financial flaws was Daniel Scotto,
who in August 2001 issued a report entitled "All Stressed up and no place to go", which
encouraged investors to sell Enron stocks and bonds at any and all costs.

As was later discovered, many of Enron's recorded assets and profits were inflated or even
wholly fraudulent and nonexistent. Debts and losses were put into entities formed "offshore" that
were not included in the firm's financial statements, and other sophisticated and arcane financial
transactions between Enron and related companies were used to take unprofitable entities off the
company's books.

Its most valuable asset and the largest source of honest income, the 1930s-era Northern Natural
Gas, was eventually purchased back by a group of Omaha investors, who moved its headquarters
back to Omaha, and is now a unit of Warren Buffett's MidAmerican Energy Holdings Corp.
NNG was put up as collateral for a $2.5 billion capital infusion by Dynegy Corporation when
Dynegy was planning to buy Enron. When Dynegy looked closely at Enron's books, they backed
out of the deal and fired their CEO, Chuck Watson. The new chairman and head CEO, the late
Daniel Dienstbier, had been president of NNG and an Enron executive at one time and an
acquaintance of Warren Buffett. NNG continues to be profitable today.
 THE GAZETTE OF INDIA

EXTRAORDINARY

PART –II – SECTION 3 – SUB SECTION (ii)

PUBLISHED BY AUTHORITY

SECURITIES AND EXCHANGE BOARD OF INDIA

NOTIFICATION

Mumbai, the 11th July, 2003

SECURITIES AND EXCHANGE BOARD OF INDIA

(PROHIBITION OF INSIDER TRADING)  (AMENDMENT) REGULATIONS, 2003

S.O. No. 796 (E). In exercise of the powers conferred by section 30 of the Securities and
Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following
regulations to amend the Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992, namely:-

1.      (i)These regulations may be called the Securities and Exchange Board of India
(Prohibition of Insider Trading) (Amendment) Regulations, 2003.

         (ii) They shall come into force on the date of their publication in the Official Gazette.

2.      In the Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992, in regulation 13 in sub-regulation (1), after the words “shall disclose to
the company” and before the words “the number of shares, the following shall be inserted
namely -  “in Form A”

3.      In the Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992, in regulation 13 in sub-regulation (2), after the words “shall disclose to
the company” and before the words “the number of shares, the following shall be inserted
namely -
 

            “in Form B”

4.      In the Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992, in regulation 13 in sub-regulation (3), after the words “shall disclose to
the company” and before the words “the number of shares, the following shall be inserted
namely -“in Form C”

5.      In the Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992, in regulation 13 in sub-regulation (4), after the words “shall disclose to
the company” and before the words “the number of shares, the following shall be inserted
namely - “in Form D”

6.         In the Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992, in regulation 13 in sub-regulation (6), after the words “sub-regulations
(1), (2), (3) and (4)”, the following shall be added  namely:-“in the respective formats
specified in Schedule III”

7.         In the Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992, after Schedule II, the following shall be inserted namely -

“SCHEDULE III”

FORMS

FORM A

Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992

(Regulation 13 (1) and (6)

Regulation 13(1) – Details of acquisition of 5% or more shares in a listed company

Name Shareh No.an Date of Date Mode of Shareh Tradin Exch Buy Bu
& olding d receipt of of acquisiti olding g ange qua y
addres prior to perce allotment / intim on subseq memb on ntity val
s of acquisi ntage advice. ation (market uent to er whic ue
shareh tion of Date of to purchase acquisi throug h the
older share acquisition Com /public/ tion h trade
with s (specify) pany whom was
teleph /votin rights/ the exec
one g trade uted
numb rights preferent was
er acqui ial offer execut
red etc.) ed
with
SEBI
Regist
ration
No.of
the
TM
                     

FORM B

Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992

(Regulation 13 (2) and (6)

Regulation 13 (2) – Details of shares held by Director or officer of a Listed company

Name & Date of No. & % Date of Mode of Trading Exchan Buy Buy
Address of assumi of intimati acquisiti member ge on quanti valu
Director/Offi ng shares/voti on to on through which ty e
cer office ng rights compan (market whom the the
of held at the y purchase trade was trade
Directo time of / public / executed was
r/ becoming rights / with execute
Officer Director / preferent SEBI d
Officer ial offer Registrati
etc.) on No. of
the TM
 FORM C

Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992

(Regulation 13 (3) and (6)

FORM D

Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992

(Regulation 13 (4) and (6)

Regulation 13(4) – Details of change in shareholding of Director or Officer of a Listed

Company

Name No. & Date of Dat Mode of No. & Tradi Exc Bu B Sel S
& % of receipt e of acquisition(ma % of ng han y u l el
Addres shares/ of inti rket shares/ mem ge qua y qua l
s of voting allotme mati purchase/publi post ber on ntit va ntit va
Direct rights nt on c/rights/prefere acquisit throu whi y lu y lu
or/Offi held advice/ to ntial offier ion/voti gh ch e e
cer by the acquisit com etc.) ng who the
Direct ion / pan rights m trad
or/Offi sale of y sale the e
cer shares/ trade was
voting was exe
rights exec cute
uted d
with
SEBI
Regi
strati
on
no.
of
the
TM

1.      Securities and Exchange Board of India (Insider Trading) Regulations, 1992, the Principal
Regulation, was published in the Gazette of India on 19 th November 1992, vide
S.O.LE/6308/92(E).

2.      The principal regulation was subsequently amended by

(a)                 SEBI (Appeal to Securities Appellate Tribunal) (Amendment) Regulations,
2000 vide S.O. No. 278(E) published in the Gazette of India on 28th March 2000.

(b)                SEBI (Prohibition of Insider Trading) (Amendment)(Regulations), 2002 vide

SO.221/(E) published in the Gazette of India on 20th February, 2002

(c)                 SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2002

vide SO.1245(E) published in the Gazette of India on 29th November, 2002