THE 14th SURANA AND SURANA NATIONAL CORPORATE LAW

MOOT COURT COMPETITION 2016

12TH 14TH FEBRUARY 2016

BEFORE THE HONBLE HIGH COURT OF KARNATAKA

W.P. No. 100000 of 2015
Filed under Art. 226 of The Constitution of India, 1950

HASSLETON INVESTMENT LIMITED, SINGAPORE

PETITIONER

v.
THE AUTHORITY FOR ADVANCE RULING (INCOME TAX), NEW DELHI
DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION), BENGALURU

ON THE SUBMISSION TO THE REGISTRY OF

THE HONBLE HIGH COURT OF KARNATAKA

MEMORIAL FOR RESPONDENTS

MMEMORIAL FOR RESPONDENT

RESPONDENTS

1
Table of Contents
LIST OF ABBREVIATIONS..............................................................................3
INDEX OF AUTHORITIES...............................................................................5
I.

Cases..................................................................................................5

II. Statutes..............................................................................................5
III.

Regulations......................................................................................5

IV.

Guidelines........................................................................................5

V. Circulars..............................................................................................5
STATEMENT OF JURISDICTION......................................................................6
STATEMENT OF FACTS..................................................................................7
STATEMENT OF ISSUES................................................................................9
SUMMARY OF ARGUMENTS........................................................................10
I.

THE

APPELLANTS

HAVE

NOT

MADE

TRUE

AND

ADEQUATE

DISCLOSURE...........................................................................................10
II. THE APPELLANTS KNOWINGLY SUPPRESSED MATERIAL INFORMATION
AND FAILED TO DISCLOSE IN TIMELY MANNER.......................................10
III.

THE APPELLANTS ACTED IN VIOLATION OF SEBI ORDERS..............10

IV.

THE APPELLANTS WERE INVOLVED IN INSIDER TRADING...............11

ARGUMENTS ADVANCED...........................................................................12
I.

THE APPELLANTS HAVE NOT MADE TRUE & ADEQUATE DISCLOSURE

12
A.

Appellant has failed to truly and adequately disclose about

counterfeiting......................................................................................12
B.

Appellant has failed to disclose material information on foreign

investments........................................................................................13
II.

THE APPELLANT KNOWINGLY SUPPRESSED MATERIAL INFORMATION

AND FAILED IN TIMELY DISCLOSURE.......................................................14

A.

Failure to inform NSE regarding a suit within timeframe............14

MEMORIAL FOR RESPONDENTS

2
B.
III.

Failure to disclose legal notice with claim of potential litigation. 15

THE APPELLANTS ACTED IN VIOLATION OF SEBI ORDER &

REGULATIONS.........................................................................................16
A.

The Company violated the order.................................................16

B.

Mr. Kanwar violated the order.....................................................17

C.

HNF violated SEBI (SAST) Regulations 2011...............................17

IV. APPELLANTS WERE INVOLVED IN INSIDER TRADING..........................18

A.

HNF was involved in Insider Trading of Securities.......................18

B.

Mr. Kanwar was involved in Inside Trading..................................19

PRAYER......................................................................................................21

MEMORIAL FOR RESPONDENTS

LIST OF ABBREVIATIONS

&..And

Paragraph
%...................................................................................................................
..............Percentage
v.Vers
us
ADR..............................................................................................American
Depositary Receipt
AIR..All

India

Reporter
Anr..Anoth
er
B2C...Business

to

Consumer
Cas..Cas
es
CIT...............................................................................................Commissio
ner of Income Tax
CMD.Chief

Managing

Director
Comp.Comp
any

MEMORIAL FOR RESPONDENTS

4
CriLJCriminal

Law

Journal
DIP......................................................................................Disclosure

and

Investors Protection
DIPP..................................................................Department

of

Industrial

Policy and Promotion

DRHP.........................................................................................Draft

Read

Hearing Prospectus
ED.........................................................................................................Enfor
cement Directorate
FDI.....................................................................................................Foreign
Direct Investment
FEMA.......................................................................Foreign

Exchange

Management Act, 1999

FFSLFinLine

Financial

Services

Ltd.
FPO.........................................................................................................Foll
ow on Public Offer
Govt...........................................................................................................
...........Government
HNF.........................................................................................................Hi
ghNetworth Fund
INDEX OF AUTHORITIES

I.

Cases

Chairman Sebi v. Shriram Mutual Fund and Anr., AIR 2006 SC 2287................................19
Director of Enforcement v. MCTM Corporation Pvt. Ltd. and Ors., 1996 CriLJ 1623..........19
Gluckstein v. Barnes (1900) AC 240 (HL).........................................................................12

MEMORIAL FOR RESPONDENTS

5
Gujarat Tranvancore Agency, Cochin v. CIT, (1989) 177 ITR 455 (SC)..............................20
J.K. Industries Ltd. and Ors. v. Chief Inspector of Factories and Boiler and Ors., (1997) ILLJ
722 SC.......................................................................................................................... 19
M.K. Sreenivasan, In re [1944] 14 Comp. Cas. 193 (Mad.)...............................................12
Progressive Aluminium Ltd. v. Registrar of Companies (1997) 89 Comp. Cas. 147/14 SCI,
(177) AP....................................................................................................................... 13
R.S. Joshi Sales Tax Officer, Gujarat & Ors. v. Ajit Mills Ltd. & Anr., (1978) 1 SCR 338......19
SEBI v. Cabot International Corporation, MANU/MH/0090/2004........................................20
Shanmugam Sundaram Chettiar v. A.A. Rangarama Naicker (1934) 4 Comp. Cas. 367
(Mad.)........................................................................................................................... 13
Swedish Match AB and Anr. v. SEBI and Anr., AIR 2004 SC 4219......................................20

II.

Statutes

SEBI Act, 1992

The Companies Act 2013

III.

Regulations

SEBI (ICDR) Regulations 2009.

SEBI (Prohibition of Insider Trading) Regulations, 1992
SEBI (SAST) Regulations, 2011
The SEBI (Prohibition of Insider Trading) Regulations, 2015

DIP

IV.

Guidelines

V.

Circulars

guidelines 2000

Consolidated FDI Poliy, DIPP, (17/04/2014)

SEBI Circular No. MRD/DoP/SE/Cir- 19 /05, (02/09/2005)
SEBI Master Circular, (30/03/2010)

STATEMENT OF JURISDICTION

The Respondent most humbly submits this memorandum in response to the Writ Petition
filed before this Honble High Court of Karnataka. The writ petition has been filed under Art.

MEMORIAL FOR RESPONDENTS

6
226 of The Constitution of India, 1950. It sets forth the facts, contentions, arguments and the
laws on which the claims are based.

STATEMENT OF FACTS

1. A tech entrepreneur, Mr. Robin Kanwar returned to India in 2002 and setup an online
market place by the name TradEx through his newly incorporated company,
TradExchange Limited (hereinafter the company). Company also provided additional

MEMORIAL FOR RESPONDENTS

7
services through its affiliates. The company did not obtain title over the goods.
Customers enjoyed the seamless experience.
2. The company was listed in NSE after IPO in 2006. In 2007, TradExchange carried out
a sponsored offering of ADRs that were then listed in NASDAQ. Mr Kanwar, held
32% shares in the company through an investment company. The Company appointed
FinLine Financial Services Ltd (FFSL) for a FPO. On April 15, 2014 the Company
filed the DRHP with SEBI. SEBI communicated its comments and asked for
disclosure of counterfeit products. Additional risk factor on counterfeit claims was
added in DRHP.
3. On July 17, 2014, Cranberry Fashion Inc. notified on a suit before the Honble Delhi
High Court alleging infringement of intellectual property rights. The same was
disclosed to NSE on July 24, 2014. It also complained to SEBI on misstatement in
prospectus for the FPO and requested for launch of investigations. It alleged that it
had served legal notice on April 25, 2014 and the same was not disclosed in the
prospectus.
4. SEBI initiated investigation and passed an interim order date August 16, 2014 barring
TradExchange and Mr Kanwar from accessing the capital market or from otherwise
trading in securities on a stock exchange. FFSL was debarred from providing any
investment banking services to its clients, pending investigation. ED had initiated
proceedings against the company for FEMA violations read with FDI policy of
Government. The prospectus did not contain any specific reference to compliance in
foreign investment policies, which was based on legal advice.
5. SEBI confirmed the order on December 21, 2014 for inadequate disclosure in DRHP,
inexcusable delay in disclosing Cranberrys lawsuit to NSE and imposed penalty of
Rs. 5 Crores and passed an order to disgorge ill-gotten gains made on account of nondisclosure.
6. In March 2015, High Networth Fund, LP (HNF), a PE based in Singapore wanted to
acquire significant stake in TradExchange. After some discussions, it agreed to
subscribe to 2.5% of shares by Preferential Allotment, and that it would purchase
another 2.4% shares from Mr. Kanwar. On April 12, 2015 necessary approvals were
obtained from shareholders. HNF proceeded with due diligence and was privy to,
management and unaudited accounts of the company for the financial year 2014-15.

MEMORIAL FOR RESPONDENTS

7. HNF discovered that on March 15,2015 Waltenberg, a significant supplier of

TradExchange had issued notice of termination and on announcement of last quarter
results of Financial Year 2014-15 with board report, the companys shares fell 2%. A
non-binding MOU was signed by the Company with Hi-Sketch, valid until May 31,
2015. The MOUs key terms were redacted and the same was revealed to HNFs top
three official as part of due diligence. MOU expired.
8. HNF was issued 2.5 % of new shares of the Company. During May 10 to May 20,
2015 several block trades were executed in NSE between Mr. Kanwar and HNF
which resulted in 2.4% shares been transferred to HNF. HNF acquired another 0.2%
during the same period. There was 5% increase in share price by end on May
compared to April. In June 5, 2015 Mr Kanwar sold 2% of his shares to satisfy debts
of SharePrise Ltd. Mr Kanwar, held substantial stake in SharePrise Ltd.
9. SEBI noticed some abnormalities in the share price of TradExchange in April and
May, 2015. After issuing notice and conducting hearing, SEBI passed an order finding
TradExchange, Mr. Kanwar and HNF in violation of SEBI Act. Debarred all the three
persons from accessing capital markets or buying and selling shares of a listed
company for a period of five years from the date of order. Additionally 3 Crore
penalty was imposed by SEBI on the parties.
10. Against both SEBI orders the parties have preferred appeal before SAT and SAT has
agreed to hear the relevant appeals together.

STATEMENT OF ISSUES

ISSUE I: Whether MAT provisions will be applicable to the petitioner being a

foreign company as per the definition under Income Tax Act, 1961 and Companies
Act, 2013.
ISSUE II: Whether the petitioner had any type of permanent Establishment / Place of
Business / Business Connection either under Income Tax Act, Companies Act or
relevant tax treaty.

MEMORIAL FOR RESPONDENTS

9
ISSUE III: Whether the petitioner is required to prepare financials as per Companies
Act, 2013 or whether it is governed by SEBI Regulations.
ISSUE IV: Whether the Finance Act, 2015 amendment on imposition of MAT on
foreign company is prospective or retrospective as argued by both parties.
ISSUE V:

Whether capital gains exemption as per India Singapore tax treaty

will be applicable to the petitioner and whether imposition of MAT will be violative
of the tax treaty.
ISSUE VI:

Whether the petitioner can cherry pick the provision of Income Tax Act

and tax treaty for the purpose of definition of PE under the Act and capital gains
exemption under the tax treaty.
ISSUE VII:

Whether 115JB is equally applicable to FIIs / FPIs and Foreign Direct

Investors (FDI) and the scope and nature of functioning of FIIs / FPIs and FDIs to
understand the investments into India.

SUMMARY OF ARGUMENTS

MEMORIAL FOR RESPONDENTS

10

ARGUMENTS ADVANCED

THE APPELLANTS HAVE NOT MADE TRUE & ADEQUATE

DISCLOSURE

(1.) The Appellants have failed to do adequate and true disclosure in

regard to counterfeit material (A) and specific disclosures on foreign
investments which would have material impact on the operations and
financial wellbeing of the firm (B).
A. Appellant has failed to truly and adequately disclose about
counterfeiting

(2.) Appellants are an online marketplace functioning from 2002 and

become a publicly traded company in 2006 1. Further they decided to go
for an FPO and it ended successfully in June 2014 2. The Responded while
issuing statutory comments on the FPO informed the lead investment
banker to disclose on counterfeit products sold in the TradEx platform on
receipt of a complaint by an Employee of TradExchange during the FPO
process.

1 Moot Problem 3.
2 Ibid. 5.

MEMORIAL FOR RESPONDENTS

11
(3.) It is pertinent that such counterfeit products are likely to have
material impact on the operations and financial wellbeing of the firm and
it is likely to affect the investments of investors. The company should
disclose information in regard to DRHP as per Sections 26, 28 3 read with
The Companies (Prospectus and Allotment of Securities) Rules 2014,
Regulation 57 (2) (a) read with Schedule VIII Part A (IV) 4 and Chapter V
and VI5. The company responded by placing additional risk factor on
counterfeiting in the Prospectus6.
(4.) But the company had failed to throw light as to the nature of how
these counterfeit products affects the financial position and operation of
the company and it is in violation of the above mentioned regulations
since they are material information. It is important to note that even if
every word in the prospectus is true, suppression of material facts may
render it fraudulent7 and half the truth is no better than a downright
falsehood8. Mr Kanwar is liable in light of mis-statements in the
prospectus, since he is the Managing Director of the company 9. The
Appellants had intention to defraud the public for pecuniary gain 10 by not
3 The Companies Act 2013.
4 SEBI (ICDR) Regulations 2009.
5 DIP guidelines 2000.
6 Moot Problem 5.
7 M.K. Sreenivasan, In re [1944] 14 Comp. Cas. 193 (Mad.).
8 Gluckstein v. Barnes (1900) AC 240 (HL).
9 Shanmugam Sundaram Chettiar v. A.A. Rangarama Naicker (1934) 4
Comp. Cas. 367 (Mad.).
10 Progressive Aluminium Ltd. v. Registrar of Companies (1997) 89 Comp.
Cas. 147/14 SCI, (177) AP.

MEMORIAL FOR RESPONDENTS

12
fully disclosing the volume of sales of counterfeit products since it will
increase their bottom line of finance.
B. Appellant has failed to disclose material information on foreign
investments.

(5.) According to Regulation 57 (2) (a)11 the company is bound to

disclose its capital structure. The capital structure involves both assets,
liabilities and capital of the company. During such disclosure the company
should disclose foreign investors in the company since it falls under
business to consumer (B2C) multi brand retail ecommerce category as per
Govt. FDI policy 201412. The disclosure is important because it is violation
of FDI Govt. policy and is likely to impact the operations, finance and
potential litigation in the future. Though clarity is lacking as to the nature
of violation, but there is potential for litigation. Therefore the company
should have done due diligence and disclosed the same in the DRHP.
(6.) The company is also has ADRs listed in NASDAQ which comes under
SEC, U.S.A. So it should also be compliant with all the laws both foreign
and domestic required in respects of ADRs. This fact should have been
informed to the public to they can take an informed decision on the FPO.
But the company has not made any specific reference to foreign
investments or its investors abroad.
(7.) The lead investment banker has failed in his statutory duty to
independently verify the contents of DRHP as per SEBI (Merchant Banker)
Regulation 1992 and also failed in statutory compliance by issuing Due
diligence13 certificate is all stages of the FPO and also after the completion
11 SEBI (ICDR) Regulations 2009.
12 Consolidated FDI Policy, DIPP, (17/04/2014), available at
http://dipp.nic.in/English/Policies/FDI_Circular_2014.pdf
13 Due Diligence Process, Dept. of Disinvestment, Ministry of Finance,
available at http://www.divest.nic.in/

MEMORIAL FOR RESPONDENTS

13
of the FPO. The lead investment banker is an independent expert body
who should ask for disclosure from the company, the director and all other
relevant to the preparation of DRHP and also make independent
investigations as to the nature of such disclosures. But the lead
investment banker has failed its bounden duty by not looking at all the
material information of the company but only some. This act by the lead
investment banker has immensely shaken the belief of investors in capital
market and this should be appropriately remedied and thus the
respondent passed the order dated December 21, 2014 debarring lead
investment banker.
(8.) The company till date has not disclosed to the public on the
Enforcement Directorate investigation which is a potential litigation and is
likely to have adverse effect on the finances and operations of the
company. These acts cannot be tolerated since it affects thousands of
shareholders who are common men and they have invested their hard
earned money in confidence with the capital market of the company and
its regulator.
( 8.) It is no defence that the SEBI has approved the FPO since SEBI
doesnt verify the material disclosures of the FPO since it is the duty of
lead investment banker. When any non-disclosure is brought to the
attention of SEBI then it acts upon it to unravel the truth.
II. THE APPELLANT KNOWINGLY SUPPRESSED MATERIAL
INFORMATION AND FAILED IN TIMELY DISCLOSURE.

(9.) The Appellants have been notified of a suit before the Honble Delhi
High Court regarding counterfeit claims. They were notified on July 17,
2014 and the same was disclosed to NSE on July 24, 2014 after a long gap
of a week. This is failure to disclose suit which affects the company (A).
The company has failed to disclose they have received a legal notice from
Cranberry Fashion Inc. on April 25, 2014, this is a potential litigation and
the same must have been disclosed (B).

MEMORIAL FOR RESPONDENTS

14
A. Failure to inform NSE regarding a suit within timeframe

(10.) This might be considered an ordinary and reasonable delay in case

of other disclosures. But the suit has claims which are extraordinary and it
is claimed by one of the shareholder of the company.
(11.) As per Clause 36 listing agreement of NSE, the company is bound
to immediately disclose information which is material in nature and is
likely to affects its operations and finances. The material information is
clearly specified under it which includes litigation and dispute of material
nature. In this case immediate is considered to be within 24 hours of the
notification, since it is likely to affect the share prices of the company on
such developments.
(12.) Such violations are increasing in number due to weak enforcement
by stock exchanges, thereby SEBI had to step in under Section 11, 11A
read with Section 10 of The Securities Contracts (Regulation) Act, 1956.
SEBI has issued directions to stock exchanges for uniform fines and
penalties against the violators14.
B. Failure to disclose legal notice with claim of potential
litigation.

(13.) The Appellants have failed in their duty to disclose legal notice
with claim of potential litigation by Cranberry Inc. In general it in not
necessary to disclose legal notices of nature which have no material
impact to the company. But when there are instances where there is a

14 Non Compliance of listing conditions, SEBI Circular CIR/MRD/DSA/31/2013,

(30/09/2013), available at
http://www.nseindia.com/content/equities/SEBI_Circ_30092013.pdf.

MEMORIAL FOR RESPONDENTS

15
remote chance of potential litigation then such information be disclose in
DRHP as per Chapter V, VI15 and Regulation 57 (2) (a)16
(14.) The Appellants cannot claim that the legal notice has no bearing
on the company because the legal notice was served by one of their
earlier clients and also a shareholder. The counterfeit claims are serious in
nature because of the claims that were made. The Appellants should have
disclose the same and allowed the investor to take a well informed
decision which subscribing to the company.
(15.) It is also not a defence that the company was only an online
market place and is not responsible for third party counterfeit claims.
Since the counterfeit claim has the potential to reduce the volume of
inventory sold which in turn affects the profit of the company, should be
disclosed as per statutes referred in 13.The primary object of DRHP is
that the investor investing in the company makes a well informed decision
before subscription of shares, by supressing vital information it is likely to
affect the judgement of any prudent investor. The failure of lead
investment banker to do independent due diligence about the legal notice
is unacceptable and the appellants are liable for suppressing the same.
(16.) In light of the above said violations the order in challenge was
passed on December 21, 2014 after giving full opportunity to the
Appellants to explain the case and all principles of natural justice 17 was
followed and in compliance with all rules of SEBI.
III. THE APPELLANTS ACTED IN VIOLATION OF SEBI ORDER &
REGULATIONS

15 DIP guidelines 2000.

16 SEBI (ICDR) Regulations 2009.
17 Moot Problem 12.

MEMORIAL FOR RESPONDENTS

16
(17.) SEBI has passed the present challenged order date December 21,
2014 barring the company and Mr. Kanwar from accessing the capital
market or from otherwise trading in securities on a stock exchange. The
company has violated the order (A) and Mr Kanwar has failed to comply
(B) with the order of the Respondent which was issued under powers
enshrined in SEBI Act, 1992. HNF has violated SEBI (SAST) Regulations
2011 (C). The Honble Tribunal or any other court have not stayed the
order and it is very much operational till date.
A The Company violated the order.

(18.) The company has issued new shares via preferential allotment to
HNF LP on May 05, 2015. This was done after the financial results and
accounts were disclosed to the public on April 30, 2015 and the trading
window was opened after two days.
(19.) Trading is defined under Section 2 (l) of the SEBI (Prohibition of
Insider Trading) Regulations, 2015. Securities is defined under Section 2 (i)
of the SEBI (Prohibition of Insider Trading) Regulations, 2015. When a
company issues new shares it sells its shares in the Primary market to
raise capital.
(20.) The shares come under the purview of securities and thus issuing
new shares amounts to selling in securities which falls squarely under the
provision of trading of securities. This was specifically prevented by the
present challenged order.
(21.) Continuous violation of various statutes and the SEBI order has led
the Respondent to believe that the Appellants have no due respect to
authority or the laws of the land. The appellants are repeated violators
and capital market is the financial blood line of the country, SEBI has to
act stringently when taking action against such violators.
(22.) The penalty impose is only nominal compared to the violation by
the Appellants and does not suffer from any infirmity and it shall pass the
Test under Wednesbury rule and rule of proportionality. The penalty is
MEMORIAL FOR RESPONDENTS

17
imposed with due regard to the quantum of violation committed and the
Respondent has duly applied his mind, independently and reasonably to
impose such nominal penalty. The Honble tribunal shall take notice of the
gravity of violations committed by the Appellants, being the largest
publicly traded online marketplace having international exposure should
have acted in compliance with the laws. But it has failed to adhere to
several statutes and is a continuous and repeat violator.
B Mr. Kanwar violated the order.

(23.) Mr Kanwar has conducted block trades on NSE platform with HNF
between May 10, 2015 and May 20, 2015. Block trades are explained
under guideline 318 and Section 1 (1.1)19. Mr Kanwar holds 32% shares of
the company through an investment company.
(24.) Therefore by executing block trades is blatantly in violation of the
order. Even though the investment company had sold the shares on behalf
of Mr. Kanwar it has not acted independently and the defence of separate
entity shall not be applicable here. The lifting of corporate veil is
necessary to look into the structure and control of the investment
company. The investment company has not acted independently and it
has acted in consonance, and instruction of Mr. Kanwar.
(25.) This has seriously affected the view about SEBI amongst common
man. Being the Market Regulator and seeing such wilful, blatant violation
the second impugned order was passed against the Appellants and
suitable nominal penalty impose in view of the gravity, proportionality and
the adverse effects it had on the stock market. The quantum of
18 Guidelines for execution of block deals on the stock exchanges, SEBI Circular No.
MRD/DoP/SE/Cir- 19 /05, (02/09/2005), available at
http://www.sebi.gov.in/circulars/2005/mrdcir0192005.html.
19 Mater Circular for Stock Exchanges on Trading Part-1, SEBI Master Circular,
(30/03/2010), available at http://web.sebi.gov.in/circulars/2010/anncir1.pdf.

MEMORIAL FOR RESPONDENTS

18
punishment is well within the parameter to pass the Test under
Wednesbury rule to be considered reasonable. The Respondent has
properly issued notice, heard the appellants and passed the second
impugned order after following all statutory norms and principles of
natural justice.
C HNF violated SEBI (SAST) Regulations 2011.

(26.) HNF purchased 2.4% shares from Mr. Kanwar, 0.2% shares from
open market between May 10, 2014 and May 20, 2014. HNF also acquired
2.5 % shares from the company. As per Regulation 2 (1) (a) 20, HNF is an
acquirer. As per Regulation 2(1) (q) 21 the company and Mr. Kanwar fall
under the category of persons acting in concert.
(27.) When the transactions looked under the light of Regulation 3 22, it
falls under the ambit of substantial acquisition of shares. Since, Mr.
Kanwar and HNF together hold more than 25% of shares and any
acquisition has to have happened after public announcement of an open
offer for acquiring shares of the target company and disclosure to NSE
within two days. In light of the above circumstances HNF is liable to be
penalised under Regulation 3223. The exemptions so provided under the
Regulations24 doesnt cover such transactions.

IV. APPELLANTS WERE INVOLVED IN INSIDER TRADING.

20 SEBI (SAST) Regulations, 2011.

21 Ibid.
22 Ibid.
23 Ibid.
24 Ibid.

MEMORIAL FOR RESPONDENTS

19
(28.) HNF has bought 2.5 % shares from the company by way of issue of
shares, 2.4% from the Mr. Kanwar and 0.2% of shares from open market.
HNF was involved in insider trading (A). Mr. Kanwar was involved in
insider trading (B).
A HNF was involved in Insider Trading of Securities.

(29.) HNF was given access to MOU signed by the company with
HiSketch. HiSketch being a world famous luxury brand will bring in more
revenue for the company. This information falls under ambit of Section 2
(ha)25. Having such information will make HNF an insider according to
Section 2 (e)26. HNF has acted on this information and traded shares with
Mr. Kanwar, open market and bought new shares from the company27.
(30.) In case of shares bought after May 15, 2015. The SEBI (Prohibition
of Insider Trading) Regulations, 2015 comes into force. It is important to
note that the violations as per Regulation 1992 continued and carried
forward in the new regulations as well. The defence that the transaction is
part of ordinary course of business holds no water in the light of access to
unpublished price sensitive information. During due diligence, HNF has
acquired these information and used it to make quick profits. Since the
same information is not available to common public, this brings out the
act of insider trading.
(31.) Mens rea is not essential28 in this case of insider trading. In case of
a civil obligation attracting penalty mens rea need not be an essential to
impose penalty29. The omission or commission of the statutory breach is
itself the offence and in such strict statutory offence mens rea is not an
25 SEBI (Prohibition of Insider Trading) Regulations, 1992.
26 Ibid.
27 Moot Problem 16.
28 Chairman Sebi v. Shriram Mutual Fund and Anr., AIR 2006 SC2287.

MEMORIAL FOR RESPONDENTS

20
essential30. The classical view of no mens rea, no crime has long gone,
especially in economic crimes and departmental penalties, have created
severe punishments even where the offence have been defined to exclude
mens rea31.
B Mr. Kanwar was involved in Inside Trading.

(32.) Mr. Kanwar had access to price sensitive information always, he

being the Chairman and CMD of the company. In regard to The SEBI
(Prohibition of Insider Trading) Regulations, 1992, the defence of sale of
shares to HNF will not fall under the purview of ordinary course of
business.
(33.) Mr. Kanwar had clear understanding that the prices of the company
will go up in May and he had plans to sell his shares in June to cash in on
the profits32. This shows premeditation and had mens rea to commit
insider trading.
(34.) The sale of 2% of shares in June attracts Regulation 7 33 and Mr.
Kanwar has not disclose any trading plans to the company and has also
failed to intimate the company after sale of shares. In certain laws the
legislature had the intention to penalise without any mens rea and it is

29 Director of Enforcement v. MCTM Corporation Pvt. Ltd. and Ors., 1996

CriLJ 1623.
30 J.K. Industries Ltd. and Ors. v. Chief Inspector of Factories and Boiler
and Ors., (1997) ILLJ 722 SC.
31 R.S. Joshi Sales Tax Officer, Gujarat & Ors. v. Ajit Mills Ltd. & Anr.,
(1978) 1 SCR 338.
32 Moot Problem 17.
33 The SEBI (Prohibition of Insider Trading) Regulations, 2015.

MEMORIAL FOR RESPONDENTS

21
sufficient to show default34. The Board doesnt have discretion in case of
penalty imposed for default of provisions of SEBI Act, 1992 35. Mens rea is
an essential or sine qua non for criminal offence and it cannot be a strait
jacket formula for all cases36.
(35.) Based on all the above circumstances Mr. Kanwar has acted in
violation of The SEBI (Prohibition of Insider Trading) Regulations, 1992 and
The SEBI (Prohibition of Insider Trading) Regulations, 2015. The penalty
was imposed after hearing the appellants, following all procedures,
providing fair and reasonable opportunity to the appellants. The
Respondent has acted in a fair, reasonable and proper application of mind
in arriving the penalty and passing the second impugned order.

34 Gujarat Tranvancore Agency, Cochin v. CIT, (1989) 177 ITR 455 (SC).
35 Swedish Match AB and Anr. v. SEBI and Anr., AIR 2004 SC 4219.
36 SEBI v. Cabot International Corporation, MANU/MH/0090/2004.

MEMORIAL FOR RESPONDENTS

22

PRAYER

In light of the issues raised, arguments advanced and authorities cited,

the counsel for the Respondent humbly prays that the Honble Tribunal be
pleased to adjudge, hold and declare:
1. That, Appellants have failed to truly and adequately disclose about
2.
3.
4.
5.
6.
7.

counterfeiting.
That, Appellants have failed to disclose adequately in DRHP.
That, Appellants knowingly suppressed material information.
That, Appellants unduly delayed in disclosing material information.
That, Appellants violated the orders of SEBI.
That, Appellants were involved in Insider Trading.
That, both the appeals be dismissed.

And pass any order that this Honble Tribunal may deem fit in the interest
of equity, justice and good conscience. And for this act of kindness, the
counsel for the Respondent shall duty bound forever pray.

Sd/- (Counsel for Respondent)

MEMORIAL FOR RESPONDENTS