Hindustan Lever Ltd v.

SEBI (1998 SCL 311) was one of the first cases where SEBI took action on
grounds of insider trading. Hindustan Lever Ltd. (HLL) and Brook Bond Lipton India Ltd. (BBIL)
controlled by Unilever, Inc. UK were both under the same management. HLL purchased 0.8 million
shares of BBIL from UTI in March 1996 two weeks prior to the public announcement of the HLL and
BBIL merger. Post announcement, the price of BBIL’s shares shot up thereby causing losses to UTI.
HLL was held liable by SEBI for insider trading. According to SEBI, HLL had full knowledge of the
impending merger and misused the unpublished price sensitive information to its advantage.
However, the Securities Appellate Tribunal reversed the order on the ground that the information
was not price-sensitive as it was reported in the media and, therefore, was public knowledge. As a
result of this case, SEBI amended the Regulations to specifically provide that speculative reports in
the media (print or electronic) would not be treated as publication of price sensitive information.   

There is relatively limited Indian case law on insider trading and relatively fewer convictions as
compared to the US. Section 15G and Section 24 of the SEBI Act, 1992, provide for civil remedies (a
fine which is the greater of Rs 25 crore or three times the amount of profits made out of such
unlawful trade) and criminal remedies (imprisonment for a term which may extend to ten years or
fine or both) for violation of the insider trading regulations.  However, unlike the US, there is no
provision allowing private citizens to claim damages.

This is the  second  piece in our series entitled "Those Were the Days", which will be published
monthly. We hope you enjoy reading this as much as we have enjoyed putting this together.

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"Unpublished Price Sensitive Information" (UPSI) arising from the alleged insider trading by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).

While the subject SEBI order employed provisions of the SEBI (Prohibition of Insider Trading)
Regulations, 1992 (1992 Regulations), this post also analyses the relevant provisions of the
subsequently notified SEBI (Prohibition of Insider Trading) Regulations, 2015 (2015 Regulations) in
relation the subject case.

Case Analysis: Hindustan Lever Limited v. SEBI 1

The facts of the case concerned the purchase by HLL of 8 lakh shares of BBLIL from the Unit Trust of
India (UTI) on March 25, 1996. This purchase was made barely two weeks prior to a public
announcement for a proposed merger of HLL with BBLIL.

Upon investigation, SEBI by its Order dated March 11, 1998 (Order) found that, at the time of the
purchase of shares of BBLIL from UTI, HLL was an "insider" as under Section 2(e) of the 1992
Regulations, the relevant extract of which describes an insider as any person who:

i. is or was connected with the company or is deemed to have been connected with the
company and is reasonably expected to have access by virtue of such connection to
unpublished price sensitive information in respect of securities of the company, or

ii. has received or has had access to such unpublished price sensitive information."

SEBI held that, since, HLL and BBLIL were subsidiaries of the same London based Unilever, and were
effectively under the same management, HLL and its directors had prior knowledge of the merger.
Thus HLL was covered under the definition of an insider as above defined.
SEBI also held that HLL was in possession of UPSI as defined under Section 2(k) of the 1992
Regulations which includes any information in relation to amalgamation, merges and takeovers
that "is not generally known or published by such company for general information, but which if
published or known, is likely to materially affect the price of securities of that company in the
market". As per SEBI, the fact that the information about the merger was available with HLL was
enough to satisfy the requirement of Section 2(k) above.

An appeal was filed by HLL against the said SEBI Order before the Securities Appellate Authority. On
the question of whether HLL could be termed as an insider, the Appellate Authority agreed with the
SEBI Order to hold that, the information available with HLL in relation to the merger was beyond
merely self-generated information, i.e., information arising out of its own decision making. Further,
with respect to the merger, the Appellate Authority noted that the existence of directors common to
both HLL and BBLIL, and a common parent company in Unilever meant that they (i.e., HLL and BBLIL)
were in effect under the same management. Consequently, HLL could be termed as an insider under
the 1992 Regulations and it could reasonably be presumed that HLL was privy to decision making on
the merger issue in the BBLIL board.

On the question of whether the information available with HLL constituted UPSI, the Appellate
Authority agreed with the contentions of HLL that, for information to be considered as UPSI, it must
meet the dual requirements envisaged under Section 2(k) of the 1992 Regulations, i.e.:

1. The information must not be generally known or published by the company; and

2. If published or known, is likely to materially affect the prices of securities of that company in
the market. [...Emphasis supplied]

The Appellate Authority held that for information to be generally known, it is not required to be
confirmed or authenticated by the company as it would otherwise fall under the category of
information "published by the company". The Appellate Authority appreciated the evidence
produced by HLL, including various news articles covering the merger, and concluded that the
information of the merger was generally widely known to the public, and thus failed the first test to
qualify as UPSI as per the abovementioned Section 2(k) of the 1992 Regulations.

HLL also argued that, the information of the merger of two healthy, profit – making companies is per
se not price sensitive, as price sensitivity would arise in case of merger between a strong company
and a weak company, which impacts the share price of the companies. The Appellate Authority
however noted that even in the merger of two healthy companies there are synergistic possibilities
which could lead to price sensitivity for either company. Thus, the Appellate Authority agreed with
SEBI's conclusion that information of the merger was price sensitive (though not 'unpublished'). The
matter is currently pending before the Supreme Court.

Aftermath and consequences of the decision of the Appellate Authority

Subsequently, SEBI by the SEBI (Insider Trading) Amendment Regulations, 2002 amended the
definition under Section 2(k) to the following:

""unpublished" means information which is not published by the company or its agents and is not
specific in nature.

Explanation.—Speculative reports in print or electronic media shall not be considered as published

information."
Consequently, under the revised definition speculative reports in print media, as was the case in
relation to the HLL and BBLIL merger, would not be considered as published information, and HLL's
knowledge in relation to the merger would be considered as unpublished information. By the same
Amendment Act, SEBI also introduced a new provision, Section 2(ha) which defined "price sensitive
information" to include any information relating to an amalgamation, merger or takeover
as deemed price sensitive information, regardless of whether such information actually has any
affect the price of the securities in the market.

However, the amendments did not definitively and expressly define "generally available
information",

Regime under the 2015 Regulations

The 2015 Regulations finally set out what constitutes UPSI by defining "generally available
information" under Section 2(1)(e) as follows:

"generally available information" means information that is accessible to the public on a non-

discriminatory basis;"

The term "non-discriminatory access", however, was left undefined and deliberately open-ended.
Instead, several instances were provided for what would constitute non-discriminatory access. The
illustrative (non-exhaustive) list included instances of information provided on the website of a stock
exchange. A rule of thumb would to be see if the information is capable of being accessed by any
person without breaching any law.

Sometime in early 2017, the SEBI provided Kirloskar Chillers Private Limited (KCPL) with an informal
guidance on broad issues. Significantly, one of the questions addressed to SEBI was whether a KCPL,
as a promoter group entity of Kirloskar Brothers Limited (a listed company), requires a pre-clearance
from such listed company even though it has no role in the management of that company or have
any access whatsoever to UPSI. SEBI referred to the 2015 Regulations, and the listed company's
internal code of conduct, to broadly state that:

 Unless a promoter is designated as a "Designated Person" by the Board of Directors in

consultation with their compliance officer, no pre-clearance for trading is needed.

 There exists an assumption that the actions of compliance officers, Board of Directors and
other entities entrusted with ensuring adherence to Insider Trading Regulations, should be
to ensure compliance with the regulatory framework and not for an "ulterior motive".

 An action of a compliance officer, whether it is extraneous to his or her powers, is to be

examined by the Board of Directors and the audit committee.

 The 2015 Regulations by nature are prohibitive and the applicability of its provisions is with
respect to insiders and such concerned securities to which a UPSI might pertain. This is to
avoid any undue advantage accrued to classes of investors on account of their access to
UPSI.

This development may encourage companies to devise their own code of conduct such as to limit
the persons who may be considered insider, and privy to UPSI and clearly identify the universe of
"Designated Persons". That said, SEBI may nonetheless review the scope of "Designated Person" to
evaluate if it has been formulated in accordance with applicable regulations.

Conclusion
The test for UPSI laid down under the 2015 Regulations grants SEBI the ability to analyse, on a case
by case basis, whether certain information is available on a non-discriminatory basis, thus achieving
the balance of regulation.

Hindustan Lever Ltd versus SEBI 1996 (818 SCL 311 MOF)1 Brief facts of the case are Hindustan Lever
Ltd purchased eight lakh shares of BBLIL from the unit trust of India on March 25, 1996. The
purchase was done before two weeks of announcement for a proposed merger of HLL with BBLIL.
HLL and BBLIL are subsidiaries of Unilever company and they are in the same management which
was situated in London. Hindustan Lever Ltd directors have the knowledge of merger and purchase
the shares of BBLIL before two weeks of announcement. SEBI on 4 August 1997 Issued a show cause
notice to the Hindustan Lever Ltd to explain the purchase of BBLIL shares. SEBI alleged that the
insiders of Hindustan Lever Ltd had the insider information of this crucial swap ratio. Using the
information, they purchased eight lakh shares at the rate of Rs.320 and after the announcement of
merger it was increased up to Rs.410. It caused huge profit to the purchasers of insider trading.
Hindustan Lever Ltd vice-chairman R Gopalakrishnan 1. Hindustan Leaves Ltd Vs SEBI 1998 SCL 311.
found guilty of insider trading by SEBI. SEBI also directed HLL to pay three crores as compensation
and ordered prosecution against Hindustan Lever Ltd Chairman and some others. The Case is still
pending before Supreme Court of India.