This article is written by Prusti Nilesh Kansara, 2nd year law student pursuing 3 years LL.B, from Jitendra Chauhan College of Law, Vile Parle, Mumbai during her internship at Ledroit India.
1.Case Name: Hindustan Lever v. Securities Exchange Board of India
2.Court: The Securities Appellate Tribunal (SAT). The matter is currently pending for ruling before the Hon’ble Supreme Court of India.
3. Year: 1998
4. Citation: 18 SCL 311 MOF
This post deals with Securities Exchange Board of India’s (SEBI) interpretation of the term “Unpublished Price Sensitive Information” (UPSI) arising from the alleged insider trading by Hindustan Lever Limited (now Hindustan Unilever Limited) (HLL) in its purchase of shares of Brooke Bond Lipton India Limited (BBLIL). The case of Hindustan Unilever Vs SEBI one of the known insider trading case and several changes were brought after the decision.
INTRODUCTION:
Securities Exchange Board of India (SEBI), the regulatory body of the Securities Market was set up in 1992 with an objective to protect the interest of the investors.
Insider trading, or insider dealing, refers to the illegal practice of trading in the securities of a Company on a stock exchange for personal gain based on access to confidential information which is not generally available.
The history of insider trading in India traces back to the 1940s, with government committees like the Thomas Committee, chaired by Mr. P. J. Thomas, evaluating restrictions on short swing profits. Insider trading has been an issue since the early days of securities trading and remains a challenge for investors worldwide. The U.S. was the first to enact formal legislation on this
matter. In India, various committees have been established to regulate and address insider trading practices.
In 1986, the Patel Committee defined insider trading as “trading in the shares of a company by individuals who are in the company’s management or are close to them, based on undisclosed price-sensitive information about the company’s operations that is not available to others.”
To establish a framework against insider trading in securities, SEBI introduced the SEBI (Prohibition of Insider Trading) Regulations in 1992. These regulations were replaced by the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), which came into effect on May 15, 2015, to enhance their effectiveness. While the initial 1992 regulations were largely punitive, they were revised in 2002 to emphasize preventive measures. Insider trading has significantly contributed to financial scams in the stock market, making effective regulation essential for ensuring transparent and fair returns for shareholders, as well as maintaining public trust to attract investors. The Companies Act of 1956 did not address insider trading, prompting the establishment of the Securities and Exchange Board of India (SEBI) in 1988 as the regulatory authority. Under Section 12-A of the SEBI Act, 1992, SEBI was empowered to regulate insider trading and publish relevant regulations. This led to the introduction of the PIT Regulations in 2015, which closed important loopholes in the earlier regulations. The PIT Regulations were further amended in 2018 to create a more robust framework for detecting and preventing insider trading.
While this post discusses a SEBI order that applies the SEBI (Prohibition of Insider Trading) Regulations, 1992, it also examines relevant provisions of the SEBI (Prohibition of Insider Trading) Regulations, 2015, which were introduced later.
IMPORTANT DEFINITIONS:
- Insider – Insider Regulation 2(g) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, defines the word “insider.” Insiders may be divided into three groups:
- Those who are linked to the company,
- Those who were connected to the company,
- Persons who are thought to be associated with the firm.
A person must meet three criteria in order to become an insider;
- The person must be a natural person or a legal organization;
- The person should be linked/connected or appear to be connected;
- By virtue of such a link, unpublished price sensitive information is acquired/available to such person.
- UPSI – Regulation 2(1)(n) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) defines Unpublished Price Sensitive Information (UPSI). UPSI is any non-public information about a company or its securities that could significantly affect their price once disclosed. It specifically includes information relating company’s capital structure, dividend, mergers, acquisitions, business expansions and changes in key management personnel, etc.
FACTS OF THE CASE:
On March 25, 1996, Hindustan Lever Ltd. (HLL) purchased 800,000 shares of Brooke Bond India Ltd. (BBIL) from the Unit Trust of India (UTI) at ₹350.35 per share, roughly two weeks before the public announcement of their merger. Twenty-five days later on April 19, 1996, HLL announced the merger to the stock exchanges, which led to a ₹50 per share increase in BBIL’s stock price.
SEBI determined that HLL and BBLIL, both subsidiaries of the same London-based Unilever and effectively managed together, had prior knowledge of the merger. As a result, HLL and its directors were classified as insiders. SEBI also found that HLL held unpublished price- sensitive information (UPSI) as defined in Section 2(k) of the 1992 Regulations, which encompasses any non-public information related to mergers that could significantly influence the company’s stock prices if disclosed. Suspecting insider trading, SEBI conducted inquiries and issued a show cause notice to HLL’s Chairman, all executive directors, and the Company Secretary, after 15 months of investigation, alleging insider trading charges in August 1997.
SEBI investigated HLL for insider trading related to a merger, finding that HLL had violated regulations by purchasing BBLIL securities from UTI based on unpublished price-sensitive information. UTI incurred losses of Rs. 3.04 crores, calculated by comparing the market price of BBLIL shares before and after the merger announcement. SEBI ordered HLL to compensate UTI and the five common directors of HLL and BBIL were accused with criminal charges.
HLL then filed an appeal to the appellate authority against SEBI order of imposition of penalty, pleading that an information to be UPSI should fulfil two major criteria as per the definition provided in the Insider Trading Regulations which are:
- information must not be generally known or published by the company, and
- if published or known, is likely to materially affect the price of securities of that company in the market (i.e. it should be a price sensitive information).
HLL further added that since the possibility of merger of the two companies appeared to have been generally speculated about & was probably already discounted by the market, this information (purchase of 8 lakh shares of BBIL) was not likely to have significantly impacted on the price at which the transaction between HLL & UTI concluded which was further strongly evidenced by the fact that UTI continued to sell the shares of BBIL in the market, after the merger, at prices close to the price at which they had sold shares to HLL.
SEBI’s actions caught the corporate sector off guard. While SEBI sought to prove Hindustan Unilever’s guilt in insider trading, Hindustan Unilever was concurrently working to defend itself.
ISSUES
1.Can HLL be classified as an insider?
2.Does the information held by HLL qualify as “Unpublished Price Sensitive Information”?
3.What significant changes were implemented in SEBI Insider Trading Regulations after 2015?
JUDGEMENT
It was argued that the transaction had been widely reported in the news prior to its formal announcement. The Appellate Authority accepted this argument, concluding that market expectations regarding the merger were prevalent before the transaction actually took place. As a result, the Appellate Authority determined that SEBI was not justified in prosecuting HLL and its directors. On reaching this decision, the Authority referred the definition of unpublished price-sensitive information (UPSI) from the Securities and Exchange Board of India (Prohibition of Insider Trading) PIT Regulations, 1992 (“1992 Regulations”), which stated that information was considered unpublished if it was “not generally known or published by the company for general information.”
HLL contended that the merger of two profitable companies is not inherently price-sensitive, arguing that price sensitivity typically arises from a merger between a strong and a weak company, which affects their share prices. However, the Appellate Authority pointed out that even mergers between two healthy companies can create synergistic opportunities that may lead to price sensitivity for either entity. Therefore, the Authority concurred with SEBI’s conclusion that the information regarding the merger was price-sensitive, though it was not considered “unpublished.”
The case is currently pending before the Supreme Court.
- WHAT CHANGES WERE BROUGHT IN AFTER THIS JUDGMENT?
- Following the Appellate Authority’s ruling, SEBI amended the 1992 Regulations in 2002 to clarify that “unpublished” referred to information that was “not published by the company or its agents and is not specific in nature.” Additionally, an explanation was added specifying that “speculative reports in print or electronic media shall not be considered published information.” Additionally, the Amendment Act introduced a new provision, Section 2(ha), which defined “price-sensitive information” to encompass any information related to an amalgamation, merger, or takeover, considering it price-sensitive regardless of whether it actually impacts the market price of the securities.
- The 2015 Regulations clarified what constitutes UPSI by defining “generally available information” in Section 2(1)(e) as follows:
“generally available information” refers to information that is accessible to the public on a non-discriminatory basis.
However, the term “non-discriminatory access” was not defined and was intentionally left open-ended. Instead, several examples were given to illustrate what could qualify as non- discriminatory access. This illustrative (though not exhaustive) list included instances such as
information available on a stock exchange’s website. A useful guideline is to determine whether the information can be accessed by anyone without violating any laws.
- The Regulations have been expanded to encompass not only “listed securities” but also “proposed to be listed securities.” This extension aims to prevent insiders with information about these upcoming listings from trading, as such actions could impact the securities’ prices and influence shareholders’ market decisions, giving insiders an unfair advantage to maximize profits. This provision was not included in the 1992 SEBI Regulations on Insider Trading.
CONCLUSION
Insider trading has long been a significant concern in the financial markets, and since 1992, SEBI has been actively regulating this issue. The regulations have been amended over time, and circulars have been issued to close any loopholes in the regulatory framework. The PIT Regulations of 2015 introduced several effective measures aimed at broadening the scope and applicability of these regulations, successfully addressing insider trading to some extent. However, certain gaps still persist, posing challenges to systematic operations.
The 2015 Regulations include a test for Unpublished Price Sensitive Information (UPSI), enabling SEBI to assess, on a case-by-case basis, whether specific information is available on a non-discriminatory basis, thereby maintaining a regulatory balance. Despite the existence of various laws and robust regulatory frameworks designed to combat insider trading, the pandemic has presented new challenges. Previously, monitoring was relatively straightforward, but the transition to remote work has heightened the risk of critical information being accessed by potential insiders.
