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EPGPKC/02/047Bijith P. B.EPGPKC/02/063Madhu ChandranEPGPKC/02/064Mahashook EbrahimEPGPKC/02/068Nikhil Hari KesavanEPGPKC/02/070Paul Cherusseril MohanEPGPKC/02/076Rakesh Krishnan Sudheer

Insider Trading Breach of Corporate Fiduciary During Mergers and Acquisition Scenario

- A Leadership and Corporate Accountability Study

What Do You Mean By Insider and Insider Trading?Insider:Corporate insider has privy to information of the company (sales and profit figures, future growth indicators, management strategies and initiatives) that is yet to be released to the public.

Insider Trading :Trading of public company'sstockor othersecurities(such asbondsorstock options) by individuals with access to nonpublic information about the company, ahead of the public release of the information.

Tips to outsiders(friends, relatives etc.) to buy/sell stocks of his company and help them make profits or to avoid loss is also considered as insider tradingRef: http://en.wikipedia.org/wiki/Insider_tradingHow Insider Trading Works and Its ImpactHow Insider Trading Works?Insider in a company collates key insights of the company position in marketShares price-sensitive insights with group of people who buy the stocks; in some cases insider himself gets involved in stock purchase/selling Artificial demand is created for the particular stock resulting in higher prices; shareholders are miss leaded with outcomesStock price grows and when 'satisfactory limit' reached, insider or his alliances exits selling stocks and reaping profitStock plummet resulting in loss for public investors and sometimes company itselfImpact:Unfair to other investors [potential of investors to make large profits]Violates transparency, which is the basis of a capital marketInvestors would lose faith in their deprived position (when compared to insiders) and would refrain from investing in future. Breaks the fiduciary duty to the company and its stakeholdersAllowing few people to take advantage of Unpublished Price Sensitive Information (UPSI) before it is disclosed to the others is a grave compromise on fairness and equity. Affects the integrity and performance of the company in the share market

Regulations on Insider TradingSecurities and Exchange Commission(SEC) RegulationsDeclares insider trading as violating his or her duty to maintain confidentiality of such knowledgeRegulation Fair Disclosure (Reg. FD) - companies can no longer be selective as to how they release information - Everyone who is not a part of the company is to receive information at the same time.

Securities and Exchange Board of India ActSection 24 of the SEBI Act - criminalizes insider trading, punishable with imprisonment of up to ten years, or with fine of up to INR 25 crores, or both.Section 15G of the SEBI Act - SEBI can impose a penalty of twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higherRef: http://www.investopedia.com/articles/03/100803.asp#ixzz3ahNUYyFj http://d-fraud.com/insider-trading-the-indian-law-so-far/Insider Trading Regulations in India-3,3ARegulation 3:No insider shall either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information;communicate or counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securitiesRef: http://d-fraud.com/insider-trading-the-indian-law-so-far/Regulation 3A:No company shall deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information.

SEBI has clarified that the term Person fulfills insider trading only when:the person should, have or have had connection or deemed connection with the company and by virtue of such connection should reasonably be expected to have access to UPSI; or the person has received or has had access to UPSI. 5Case 1 : Rakesh Agarwal ABS Industries Ltd.(June 2001)Background of ABS Industries LtdLocation - Vadodara, Gujarat, IndiaIndustry sector Wind energyProduct -ABS is a plastic, chemical, and pharmaceutical company Has developed several wind projectsSummaryRakesh Agarwal, Managing Director of ABS Industries Ltd. (ABS), was part of the negotiations with Bayer A.G and showed interest of their intentions to acquire ABS.

Prior to the announcement of the acquisition, Rakesh Agarwal, through his brother in law, Mr. I.P. Kedia had purchased shares(1,82,500 shares) of ABS from the market and tendered the said shares in the open offer made by Bayer thereby making a substantial profit.

Fund for the purchase of share was provided by Rakesh. The investigations of SEBI confirmed these allegations.

He was an insider as far as ABS is concerned. By dealing with shares of ABS through his brother-in-law, while the information regarding the acquisition of 51% stake by Bayer was not public, the plaintiff had acted in violation of Regulation 3 and 4 of the Insider Trading Regulations.

Then existing Regulation 11 of SEBI was only to pass necessary interim directions for the purpose of preserving the status quo during or immediately after the investigation.

Ref: https://corporateinsiderstrading.wordpress.com/tag/abs/Damages and consequencesThe SEBI directed Rakesh Agarwal to deposit Rs. 34 lakhs with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE.

Securities Appellate Tribunal (SAT) held that the SEBI order directing Agarwal to pay Rs. 34 lakh couldnt be sustained, on the grounds that Rakesh Agarwal did that in the interests of the company.

Amendment was done to Regulation 11 of SEBI, in 2002 where in SEBI is empowered to direct defaulter to deposit monies in the investor protection fund of a recognized stock exchange

Case 1 : Rakesh Agarwal ABS Industries Ltd.(June 2001)Ref: https://corporateinsiderstrading.wordpress.com/category/famous-cases/Case 2 : Hindustan Lever Limited (HLL) Brooke Bond Lipton India Limited(BBLIL) (Mar 25, 1996)SummaryHLLs purchase of 8 lakh shares of BBLIL two weeks prior to the public announcement of the merger of the HLL and BBLIL companies.

SEBI, suspecting insider trading, conducted enquiries, and after about 15 months, in August 1997. Later in March 1998 SEBI passed an order charging HLL with insider trading; which created a shock wave in corporate world

Once the charges were levied, HLL went to the court stating that :Merger was no surprise to anyone and not price sensitiveThe stock prices of BBLIL was already on the rise ( before the deal happened- Rs. 242 to Rs. 320 during Jan Mar, 1997)Defended that the purchase of share was to enable UniLever to acquire 51% of stakeThe 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 estimated gain of Rs 4.37 crore for HLL, which then cancelled the shares bought.

Damages and consequencesSEBI directed HLL to pay UTI compensation (Rs 3.4 Crores ) and also initiated criminal proceedings against the five common directors of HLL and BBLIL. HLL filed appeal with the appellate authority, which ruled in its favor

Ref: https://corporateinsiderstrading.wordpress.com/category/famous-cases/Case Analysis - Different PerspectivesLoyalty & Self Restraint- Individual PerspectiveIn these cases, we see the fiduciaries becoming disloyal, putting their own interest ahead of the investors.

Used the corporate assets for personal advantage at the expense of the shareholders whose interests were to be protected

Corporate fiduciaries are precluded from pursuing business opportunities that would be fair game for those unencumbered by the duty of loyalty

Loyalty & Self Restraint- Company PerspectiveAs UTI being one of the share holders of the company, there is a point of disloyalty which occurred in the HLL-BBILL merger case

Company had to disclose the trading window during Merger & Acquisition scenario. But in the case of BBLIL, there was no trading window closure, thereby allowing stock trade.

SEBIs Prevent & Control MechanismAll listed companies are to frame and adopt code of conduct on lines of Model Code which includes appointment of a Compliance Officer, who reports to MD/CEO. Major duties involve in tracking and regulating various financial transactions in share market concerned to company.

Preservation of PSI by maintaining the confidentiality, and disclosed only to those who are required to know.

Few restrictions on Directors, officers & designated employees are listed:Specify trading window or period, this is when the insiders are allowed to tradePrior approval of transactions are required from the company, which transaction needs to get completed within a week.Disclosure of mandatory details of insiders to Compliance officer whenever required

Ref: http://www.mondaq.com/india/x/371002/Securities/SEBI+Tightens+Rope+New+Insider+Trading+Norms+IntroducedSEBIs Prevent & Control MechanismAdopt Chinese wall policy which separates those areas of the company having access to private information from areas which deal with sales and marketing.Periodic disclosure needs to be performed to the Public by the Director/CEO on their shareholding in the company having more than 5 % of shareAlso disclosure needs to be done by promoters or part of promoter group, and by the Company to all respective stock exchanges

Regulations:Inquiries & InspectionInvestigationAppointment of auditorDirections & penalties

Ref: http://www.mondaq.com/india/x/371002/Securities/SEBI+Tightens+Rope+New+Insider+Trading+Norms+IntroducedExclusions:PIPE, mergers and acquisition communicationsOff-market transactions amongst promoters, and making a decision which are informalProposals to Control/ Prevent Insider TradingAwarenessIncrease external awareness campaigns on Insider Trading and its consequences in social media and public channels (TV, newspapers, radio etc.)Increase internal awareness within employees of the company to not involve in insider trading. Terminate associates if there is breach.Plant the seeds of fiduciary among children and young employees

PenaltyBlacklist the insider, who is involved in Insider Trading and increase ban period of stock trades by insider from 6 months to 3 years. Increase the fines.

ControlExecutives only allowed to sell stocks after the earnings has been released.Enable offline continuous stock monitoring and alert for abnormal behaviors( use pattern recognition systems). Perform root cause analysis and check for any insider trading occurrences and take appropriate actions

Process changeInsider trading is said to enable public aware of deficiencies of the company at an early stage; which otherwise would not have known to the public/ stakeholders. Hence legalize insider trading.Insider Trading at SaberoMuruguppa Group case: May 23rd 2015.

Summary:SEBI alleged that A. Vellayan, Chairman, Muruguppa Group, passed unpublished price sensitive information related to the acquisition deal of Sabero Organic Gujarat by Coromandel International to few individuals who traded in the shares of Sabero with that information. SEBI directed all to surrender unlawful gains along with interest, total of Rs 2.15 crore.

An Eight Page SEBI Order by whole-time Director, Prashant Saran, of SEBISEBI became very reactive with the case, as soon as they received the complaint

Probable people who would have done insider tradingPeople in Sabero OrganicsPeople in CoromandelPeople in the Investment Banking and Valuation team Brokers

Ref: http://www.gauravblog.com/?p=1246ContdCompany : SABERO ORGANICS GUJARAT LTD. ( 524446 ) Period ( 12-May-2011 to 31-May-2011 )DateOpenHighLowCloseWAPNo. ofNo. ofTotal TurnoverPricePricePricePriceSharesTrades(Rs.)12-05-201158.760.458.659.1559.1157,08253033,74,17513-05-201160.1560.4557.557.858.7431,04332518,23,52316-05-20115869.3558*69.3568.196,85,5994,5844,67,51,20217-05-201170.182.370.178.476.838,17,50728,94629,33,05,49218-05-201177.979.771.177.775.5817,54,97015,69713,26,46,52919-05-20117882.576.2580.1580.1617,11,89514,73613,72,23,28620-05-201180.682.2577.579.180.499,11,9648,9347,34,06,98023-05-201178.183.776.382.8581.168,43,0786,7956,84,24,56724-05-201182.992.482.3590.8589.127,99,28625,41524,93,68,67925-05-201191.593.2588.3590.2591.469,63,9548,4878,81,66,01226-05-201190.9592.188.0589.990.035,08,9474,1174,58,21,67727-05-201189.9591.880.9580.9587.483,76,9702,5443,29,76,17830-05-201177.48973.6*89.0085.248,18,3423,9856,97,55,66231-05-20119497.990.8*97.9096.084,07,9131,5033,91,91,240Ref: http://www.gauravblog.com/?p=1246What went wrong..!!According to the investigation, Gopalakrishnan had bought 3,19,500 shares for Rs 2.72 croreand this was the only stock he traded in for the last two years. Bank statements revealed Gopalakrishnan received Rs 1 crore from Subramaniam (son of Murugappan) and utilized the same for the trade. Subramaniam had received the funds on the same day (May 28, 2011) from Murugappan. Gopalakrishnan had paid Rs 1.02 crore to Subramaniam on June 21, 2011, 24 days from the date of receipt of amount. Gopalakrishnan made a profit of Rs 1.30 crorethrough this trade. Out of the gains, Rs 1 crore was invested by him in fixed deposits with City Union Bank Chennai for a maturity period of 1 year. V Karuppiah, Murugappan' s son-in-law traded the Sabero stock on NSE. While Karuppiah' s trade included five stocks, Sabero accounted for 64.15 percent of those. He made a gain of about Rs 15.93 lakh on the sale of the stocks after the news of the acquisition became public. SEBI said the trading pattern of Gopalakrishnan and Karuppiah was unusual compared to their regular pattern, thereby giving a clear indication that they had traded based on unpublished price sensitive information (UPSI)

Prima facie appears that the trading was based on the knowledge of UPSI (unpublished price-sensitive information). Under the new regulations, mere communication of UPSI would be punishable. Earlier, SEBI's stand was that mere communication (without any trade) would not be proceeded against.

SEBI has defined connected person as anyone who is or has during the six months prior to the act been associated with a company in any capacity, including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or employee. It also covers persons holding any position that allows access to unpublished price-sensitive information.

Ref: http://www.moneycontrol.com/news/business/sebi-charges-murugappa-chief-3-moreinsider-trading_1390014.htmlRef: http://www.business-standard.com/article/markets/sebi-charges-murugappa-group-chief-3-others-with-insider-trading-115052200054_1.html15Thank You!