Conducting mergers, trading charges

Insider trading is a crime which is probably the easiest to commit but among the most difficult to prove. It is for this reason that the Securities and Exchange Board of India’s (SEBI) prosecution of Hindustan Lever Limited (HLL) for alleged insider trading has attracted so much of attention. and if the season of mergers is here, can more charges of insider trading be far behind? Insider trading is a white collar crime which strikes at the heart of stock market system. In its simplest form insider trading occurs when a person who has access to confidential information about his or her company uses it to trade in its shares for personal profit. In a thirty-two page order, SEBI said that there was prima facie evidence to show that HLL was an insider as it purchased eight00000 shares of Brooke Bond Lipton India Limited prior to the announcement of the merger of BBLIL with HLL on April 19, 1996, on the basis of unpublished price sensitive information. Thus, HLL had violated the regulations prohibiting insidertrading. SEBI feels that HLL bought BBLIL shares at a low price before announcing the merger and gained as the share price rose after the announcement. If HLL had bought the same shares from UTI after the merger, then it would have had to pay Rs 3.040000000 more for them. SEBI is launching criminal proceedings against five directors of HLL. These are former chairman S M Datta, current chairman, K B Dadiseth, vice-chairman R Goplakrishnan, director M K Sharma, and FI nominee A Lahiri. The regulatory body also directed HLL to compensate UTI to the extent of Rs 3.040000000 for the notional loss incurred by it. The compensation to UTI has been calculated on the basis of the difference between the market prices of the shares of BBLIL sold by UTI to HLL after the announcement of the merger and prior to the announcement of the merger. Hindustan Lever has said that it will contest the decision of SEBI at the appellate authority in the Finance Ministry. HLL rejects SEBI’s charges. It says that if it wanted tobook profits then it would have bought the shares much earlier when the prices were even lower. Also HLL could also have used the preferential allotment route to buy shares at a low price. HLL says that it bought the shares only to maintain its stake of 51% in BBLIL. Meanwhile there are rumblings in the corporate world, that SEBI is probing other cases of mergers for possible charges of insider trading. But HLL will remain a landmark case. Not only because Hindustan Lever Limited is the largest private company in India is involved but also because it is perhaps the first time that criminal prosecution has been launched on insider trading charges. Only happy mergers, please There was some good news for the promoters who were trembling at the thought of hostile takeovers. The Industrial Development of Bank of India (IDBI), the leading financial institution in the country which has large stakes in hundreds of important Indian private companies, has said that it does not want to encouragehostile takeovers. It has ruled out assisting or financing any hostile takeovers. “We would not get involved in any hostile takeovers which would end up in courts, thus, jeopardising our existing investments in the target/acquirer company”, IDBI chairman S H Khan said. Industrial Development Bank of India holds stake in Raasi Cement which is facing a takeover bid from Indian Cements and in Indal which is being stalked by Sterlite Industries. Meanwhile, the Indal board has asked its shareholders to reject the open offer made by Sterlite Industries to acquire 20% in the company. The rejection by Indal board comes even as Sterlite is believed to be making a revised bid at a much higher price of Rs 120 per share against Alcan’s Rs 105 offer.