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
ot her securities securities (e.g. bonds or stock Insider trading is the trading of a corporation's stock or other options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such such as offi o fficers, cers, key employees, emp loyees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of nonpublic information. However, the term is frequently used to t o refer to a practice in which an a n insider or a related party trades based on o n material non-public information obtained during the performance of the insider's duties at the co rporation, or otherwise otherwise in breach breac h of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company. co mpany. In the United States and several severa l other jurisdictions, trading conducted by corporate offi o fficers, cers, key ke y 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 repo rted 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 t hat mimicking these trades will be profitable. While "legal" insider trading cannot be based on o n 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 otherwis ot herwisee convey important information (e.g., about the pending retirement of an important officer selling shares, greater commitment to the co rporation by officers purchasing shares, etc.) Illegal insider trading is believed to raise the cost co st of capital for securities issuers, thus decreasing overall economic growth. Legal insider trading Legal trades by insiders are common, as employees e mployees of publicly-traded corporations often have stock or stock options. These trades are made public in the US through t hrough 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 re leases. 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 co nducting a trade; possession of such information alone is sufficient to violate the provisi pro vision, on, and the SEC would impute an insider in possession of material nonpublic information uses this information when conducting a t rade. 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 o f 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 co mes into into possessi possession on of o f 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 information exist in most jurisdictions around the world, though the t he details and the efforts to enforce them vary considerab ly. 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 o f 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 o n 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 t rack 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 o f 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 avo ided 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 S EC 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 C o. (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 dut y exists.
In 1984, the Supreme Court of the United States ruled in the case of Dirk s 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 Unit ed S t at es v. Car pent er (1986) the U.S. Supreme Court cited an earlier ruling while unanimously upholding mail and wire fraud convictions for a defendant who rece ived 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 Car pent er : "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 pro fits derived therefrom." However, in upholding the securities fraud (insider trading) convictions, t he 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 Ru le 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 o f a duty of loyalty and confidentiality, defrauds the principal of the exclusive use o f 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 co mpany'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 trad ing 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 w illing buyer and a willing seller agree to trade property which the seller rightfully owns, with no prior contract (according to t his 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 marketsensitive information that is not generally known. No r elationship to the issuer of the security is required; all that is required is that the gu ilty 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 o n nonpublic 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 secur ity, in breach of a fiduciary duty or other relationship of trust and co nfidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include t ipping 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 treat ed 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 o f 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 secur ity accurately reflects the risk and return in its future. The primary function of regulation and po licy 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 a nd institutional speculators, but the interests of the economy and t he 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 so me 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 co mmittees, 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 t he 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 a fter 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 o f 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 o f 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 o f the Regulations. Section 2 (k)(v) states that unpublished, price-sensitive information relates to t he 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 rat io is deemed to be price-sensitive. And this ratio was not known to HLL--or its directors--when the BBLIL shares were purchased in Marc h, 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 pre ferential route would have been beneficial for itself, it would have been d ilutory 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 HLLTOMCO 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 t o 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. ³
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 Br itish companies, including water companies Bristol Water Group and South Staffordshire, as well as energ y 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. F or t une 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 acco unting 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 St ates and was a factor in the creation of the Sarbanes± Oxley Act of 2002. The scandal also affected the wider business world by cau sing 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 co unsel. 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 Co mpany, 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 e nergy 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 de veloped 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, Na ncy 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 o ther 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 o n 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 F or t une'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 Corp oration 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 th
Mumbai, the 11 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
³
³
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 ³
³
in Form B´
³
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´ ³
³
³
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´ ³
³
³
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´ ³
³
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´
³
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 s hares in a listed company
Name & addres s of shareh older with teleph one numb er
Shareh olding prior to acquisi tion
No.an d perce ntage of share s /votin g rights acqui red
Date of receipt of allotment /advice. Date of acquisition (specify)
Date of intim ation to Com pany
Mode of acquisiti on (market purchase /public/
Shareh olding subseq uent to acquisi tion
rights/ preferent ial offer etc.)
Tradin g memb er throug h whom the trade was execut ed with SEBI Regist ration No.of the TM
Exch ange on whic h the trade was exec uted
Buy Bu qua y ntity val ue
FORM B
Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (Regulation 13 (2) and (6) Regulation 13 (2) ± Details of s hares held by Director or officer of a Listed company
Name & Address of Director/Offi cer
Date of assumi ng office of Directo r/ Officer
No. & % of shares/voti ng rights held at the time of becoming Director / Officer
Date of intimati on to compan y
Mode of acquisiti on (market purchase / public / rights / preferent ial offer etc.)
Trading member through whom the trade was executed with SEBI Registrati on No. of the TM
Exchan ge on which the trade was execute d
Buy quanti ty
Buy valu e
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 c hange in shareholding of Director or Officer of a Listed Company
Name & Addres s of Direct or/Offi cer
1.
2.
No. & % of shares/ voting rights held by the Direct or/Offi cer
Date of receipt of allotme nt advice/ acquisit ion / sale of shares/ voting rights
Dat e of inti mati on to com pan y
Mode of acquisition(ma rket purchase/publi c/rights/prefere ntial offier etc.)
No. & % of shares/ post acquisit ion/voti ng rights sale
Tradi ng mem ber throu gh who m the trade was exec uted with SEBI Regi strati on no. of the TM
Exc han ge on whi ch the trad e was exe cute d
Bu y qua ntit y
B u y va lu e
Sel l qua ntit y
S el l va lu e
Securities and Exchange Board of India (Insider Trading) Regulations, 1992, the Principal Regulation, was published in the Gazette of India on 19th November 1992, vide S.O.LE/6308/92(E). 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 o f 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
