Finance Case Study - The Case of insider trading (HLL-BBLIL Merger)|Finance|Case Study|Case Studies

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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Excerpts

Face To Face

The SEBI's charges were based on HLL's purchase of 8 lakh shares of BBLIL from UTI at Rs 350.35 per share (At a premium of 9.5% of the ruling market price of Rs. 320). This transaction took place on March 25, 1996, just 25 days before the HLL-BBLIL merger was announced on April 19, 1996. UTI was on the verge of closing its accounts for 1995-96 and had been selling shares in the market to fund its dividend payouts. On 19 April 1996, HLL notified the stock exchanges of its proposal to merge BBLIL...

Is HLL An Insider?

According to HLL, though it was deemed to be connected to BBLIL, and though it knew about the merger before it bought BBLIL's shares, it received the information only because it was one of the parties to the merger itself and not merely because of its connection to BBLIL. According to HLL this distinction was important because, to be considered an insider, HLL should have received the information "by virtue of such connection" to the other company. HLL's defense revolved around the fact that as an initiator and also the transferee, it was the 'primary party' to the merger. M.K Sharma, Legal director, HLL, said, "Nowhere in the world is the primary party to a merger considered to be an insider from the point of view of insider-trading." (Refer Box)...

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Is the Information Un-Published?

HLL contended that before the transaction, the merger was the subject of wide speculation by the market and the media. After the formal announcement, press articles mentioned that the merger was no surprise to anyone. HLL pointed out that the share price of BBLIL moved up from Rs. 242 to Rs. 320 between January and March, before the transaction, indicating that the merger was "generally known information"...

Information About Merger-Price-Sensitive?

In this regard, HLL argued that only the information about the swap ratio could be deemed to be price-sensitive and that this ratio was not known to HLL or its directors when the BBLIL shares were purchased in March, 1996. HLL pointed out that the two audit firms who valued the merger, S.S. Billimoria & Co. and M.N. Raiji & Co., recommended the ratio to the HLL board only in mid-April, 1996, which was only after the UTI transaction, i.e. after HLL's purchase of shares from UTI. HLL further argued that the news of the merger was not price-sensitive as it had been announced by the media before the official announcement...

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