Académique Documents
Professionnel Documents
Culture Documents
TRADEXCHANGE LIMITED,
(APPELLANTS)
V.
(RESPONDENT)
2015
INDEX OF AUTHORITIES...................................................................................................... 7
STATEMENT OF JURISDICTION.......................................................................................... 7
SUMMARY ............................................................................................................................. 17
C. FinLine Services and Mr. Kanwar are also liable for non disclosure in prospectus . 25
D. The prospectus did not disclose compliance with foreign investment policy ........... 27
A. Order of restraining Appellants from accessing the capital market and trading in
securities is within the powers of SEBI ............................................................................ 29
B. Preferential issue was invalid since TradExchange was debarred from accessing the
capital market ................................................................................................................... 30
A. Mr. Kanwar violated the SEBI order by trading in block deals ................................ 31
2
MEMORIAL FOR RESPONDENT
IV. TRADEXCHANGE, MR. KANWAR AND HNF INDULGED IN INSIDER
TRADING ........................................................................................................................... 32
A. Due Dillegence is a violation of insider trading norms when shares are being traded
through block deals ........................................................................................................... 33
D. Mr. Kanwar and HNF indulged in insider trading when they traded in block deals in
parts .................................................................................................................................. 36
PRAYER .................................................................................................................................. 38
3
MEMORIAL FOR RESPONDENT
LIST OF ABBREVIATIONS
¶ Paragraph
Anr. Another
C/o Care of
Civ. Civil
Cl. Clause
Co. Company
Del. Delhi
Ed. Edition
EU European Union
4
MEMORIAL FOR RESPONDENT
FPO Further Public Offer
Inc. Incorporation
Ltd. Limited
No. Number
Ori. Orissa
Ors. Others
5
MEMORIAL FOR RESPONDENT
r/w Read with
Sec. Section
v/v. versus
6
MEMORIAL FOR RESPONDENT
INDEX OF AUTHORITIES
Adjudication Order
Adjudication Order In the Matter of M/s. Kotak Mahindra Capital Company Limited,
AK/AO/221‐226/2014 available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1417170473056.pdf .............................. 27
Adjudication order In the Matter of M/s. New Delhi Television Limited. AO/PJ/JAK/1 of
2015, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1433431158961.pdf. 20
Books
JAMES ROBERT BROW, THE REGULATION OF CORPORATE DISCLOSURE 5.01 (3rd ed., Wolters
Kluwer 1995 ......................................................................................................................... 21
Cases
21st Century Entertainment Pvt. Ltd. v Union of India and Ors., D.B. Civil W. P. No.
4333/2010 ............................................................................................................................. 29
Chairman-cum-Managing Director, New India Assurance Company Ltd. and Anr. .............. 25
Federation of Associations of Maharashtra and Ors. v Union of India and Ors., [2005] 79
DRJ 426. ............................................................................................................................... 28
H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior and Ors. v Union
of India and Anr., 1971 AIR 530 ......................................................................................... 25
Jeet Singh and Anr. v Union of India and Ors., [2011] 13 SCC 534................................. 31, 32
Kesho Ram and Co. and Ors. v Union Of India and Ors, [1989] 2 SCR 1005........................ 32
7
MEMORIAL FOR RESPONDENT
N. Parthasarathy v Controller Of Capital Issues and Anr., [1991] 3 SCC 153 ........................ 24
Reserve Bank of India v Peerless General Finance and Investment Co. Ltd., 1987 AIR 1023
.............................................................................................................................................. 32
Securities and Exchange Board of India v Ajay Agarwal, [2010] 3 SCC 764 ........................ 29
Sudhoo v. Haji Lal Mohd Biri Works and Anr. 1990 AIR 1971 ............................................. 32
Super Cassettes Industries Ltd v MySpace Inc. and Anr., [2011] 48 PTC 49 (Del). ........ 22, 23
Union of India v Filip Tiago De Gama of Vadem Vasco,1990 AIR 981. ............................... 32
Works Manager, Central Railway Workshop, Jhasi v Vishwanath and Ors., 1970 AIR 488. 32
Consolidated FDI Policy Circular of 2014, Ministry of Commerce and Industry, Government
of India, (April 17, 2014....................................................................................................... 27
Press Release No. 70/2015, SEBI Board Meeting, Securities and Exchange Board of India
(March 22, 2015) .................................................................................................................. 21
Report of the High Level Committee to Review the SEBI (Prohibition of Insider Trading
Regulations 1992), (Dec. 7, 2013), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1386758945803.pdf .............................. 33
SEBI Discussion Paper on review of clause 36 and related clauses of Equity Listing
Agreement ............................................................................................................................ 23
8
MEMORIAL FOR RESPONDENT
Dictionary
3 P RAMANATHA AIYAR,THE MAJOR LAW LEXICON (4th ed., Lexis Nexis, Butterworths
Wadhwa, Nagpur, 2010) ...................................................................................................... 34
Foreign cases
Alna Capital Assocs. v. Wagner, 532 F. Supp. 591, 600 (S.D. Fla. 1982). ............................. 21
Ballan v. Wilfred American Educ. Corp., 720 F.Supp. 241, 248 (E.D.N.Y. 1989). ............... 22
Eider-E-Commerce Ltd. v SEBI, SAT Appeal No. 176 of 2007, (20/08/2008) ...................... 26
In Re Citigroup, Inc. Securties Litigation, 330 F. Supp. 2d 367, 377-78 (S.D.N.Y. 2004); ... 22
In Re Vonage Initial Public Offering (IPO) Securities Litigation, Civil Action No.07-
177(FLW) (D.N.J Apr. 02, 2009)......................................................................................... 22
Kramer v. Time Warner, Inc., 937 F.2d 767, 777 (2d Cir. 1991) ............................................ 21
Veleron Holding, B.V. v Morgan Stanley and Co. LLC and Ors. No. 12 Civ. 5966 (CM) 2015
.............................................................................................................................................. 33
Internet Sources
Martin Sandler, Michael Brown, Peter Willis and Elizabeth Clay, Market abuse,
COMPLIANCE OFFICER BULLETIN, (August, 2014................................................................. 33
Press Release No. 70/2015, SEBI Board Meeting, Securities and Exchange Board of India
(March 22, 2015), available at
9
MEMORIAL FOR RESPONDENT
http://www.sebi.gov.in/sebiweb/home/document_detail.jsp?link=http://www.sebi.gov.in/c
ms/sebi_data/docfiles/30613_t.html..................................................................................... 21
Suneeth Katarki and Namita Viswanath, “Mens Rea” In Insider Trading – A “Sine Qua
Non” MONDAQ (June 3, 2015 ......................................................................................... 35, 36
Journals
E. Avgouleas, Market Accountability and Pre- and Post-trade Transparency: The Case for
the Reform of the EU Regulatory Framework: Parts 1, 19 THE COMPANY LAWYER (1998)
162-70, 202-10 ..................................................................................................................... 36
William K.S. Wang, Stock Market Insider Trading: Victims, Violators and Remedies–
Including an Analogy to Fraud in the Sale of a Used Car with a Generic Defect, 45 VILL.
L. REV. 27 (2000) ................................................................................................................. 33
Other authorities
F.B. PALMER AND C.M. SCHMITTHOFF, PALMER'S COMPANY LAW (24th ed., Sweet and
Maxwell, 1987). ................................................................................................................... 24
Regulations/Statutes
SEBI (Issue and Listing of Debt Securities) Regulations, 2008, Regulation 5 ....................... 20
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ......................... 20,24
10
MEMORIAL FOR RESPONDENT
SAT Cases
DLF Limited v SEBI, SAT Appeal No. 331 of 2014, (13/03/2015) ....................................... 21
Helios and Matheson Information Technology Limited, C/o Corporate Law Chambers India,
Mumbai v SEBI, SAT Appeal No. 69 of 2011 .................................................................... 19
Libord Finance Ltd. v SEBI, SAT Appeal No. 8 of 2008, (31/03/2008 .................................. 29
Milan Mahendra Securities Pvt. Ltd. v SEBI, SAT Appeal No. 4 of 2005 ............................. 26
Parsoli Corporation Limited and Ors. v SEBI, SAT Appeal No. 146 of 2010 ........................ 29
Sterlite Industries (India) Ltd. v SEBI, SAT Appeal No. 20 of 2001, (22/10/2001 .......... 29, 31
SEBI Orders
In the Matter of HSBC Securities and Capital Markets (India) Private Limited,
WTMO/14/CFD/12/03 ................................................................................................... 22, 26
In the Matter of Initial Public Offering of PG Electroplast Ltd and Anr., WTM/SR/IVD/ID-
V/09/03/2014........................................................................................................................ 26
In the Matter of RDB Rasayans Ltd. and Its Directors, WTM/PS/45/ID9/DEC/2011 ...... 24, 26
SEBI Order In the Matter of Bharatiya Global Infomedia Ltd, Directors of BGIL,
WTM/PS/IVD/47/12/2011 ............................................................................................. 25, 27
SEBI Order In the Matter of HSBC Securities and Capital Markets (India) Private Limited,
WTMO/14/CFD/12/03, available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1293009715417.pdf. ............................. 22
SEBI Order In the Matter of Initial Public Offering of PG Electroplast Ltd and Anr ............. 26
SEBI Order In the Matter of RDB Rasayans Ltd. and Its Directors,
WTM/PS/45/ID9/DEC/2011 ................................................................................................ 24
12
MEMORIAL FOR RESPONDENT
STATEMENT OF JURISDICTION
The Respondent has the honour to submit before the Hon’ble Securities Appellate Tribunal
the memorandum for Respondent in the case of TradExchange & Ors. v Securities and
Exchange Board of India, under Rule 14(1) of the Securities Appellate Tribunal (Procedure)
Rules, 2000.
13
MEMORIAL FOR RESPONDENT
STATEMENT OF FACTS
3. Further Public Offering: Later, in consultation with FinLine Financial Services Limited,
it decided to go for a follow-on public offering (hereinafter, ‘FPO’).
5. Litigation suit filed: On July 17, 2014, TradExchange was notified of a suit filed by
Cranberry Fashion Inc., (hereinafter, ‘Cranberry’), for an injunction restraining
TradExchange from selling products that are deceptively similar to that of Cranberry.
6. Delay in disclosing: TradExchange began consultation with the lawyers and decided to
make public announcement and notified NSE on July 24, 2014. The announcement led to
TradExchange’s ADR fall upto 20% on NASDAQ and also a precipitous slide on the NSE.
8. Complaint before SEBI: Cranberry filed a complaint before SEBI alleging misstatements
in the prospectus. SEBI initiated investigations and passed an interim order barring
14
MEMORIAL FOR RESPONDENT
TradExchange and Mr. Kanwar from accessing the capital markets or from otherwise trading
in securities on a stock exchange and also debarred FinLine from providing any investment
banking services to clients, pending further investigations.
9. Final order: SEBI on December 21, 2014 passed its final order in which it found
inadequate disclosures in the prospectus and confirmed its interim order which would operate
for 3 years. The SEBI also found that there was inexcusable delay in disclosing Cranberry’s
lawsuit to the Stock Exchanges. SEBI also passed an order to pay Rs. 37 crores. Aggrieved
by SEBI’s order, the parties preferred an appeal to the Securities Appellate Tribunal (SAT).
10. Entry of HNF: March 2015, High Networth Fund, LP (hereinafter, ‘HNF’), a private
equity enterprise wanted to acquire a significant stake in TradEx. After some discussions, it
was agreed that HNF would subscribe to 2.5% shares in TradExchange through a preferential
allotment, and that it would purchase another 2.4% shares from Mr. Kanwar.
11. Due diligence conducted: HNF also conducted extensive due diligence on the business
affairs of TradExchange. During the due diligence, HNF discovered that Waltenberg, whose
sales provided nearly 22% revenues for TradExchange, had issued a notice of termination of
its relationship with TradExchange. Further HNF came to know about a non- binding
memorandum of understanding (hereinafter, ‘MoU’) entered into by TradExchange and
HiSketch which expired on May 31, 2015 without a definitive deal being struck.
12. Trade in Securities: May 5, 2015, TradExchange issued 2.5% new shares to HNF,
between May 10th-20th, 2015 Mr Kanwar sold 2.4% shares by means of block trades to HNF
and during the same period HNF acquired 0.2% shares from the stock exchange.
13. Sale of shares by Kanwar: The share price of TradExchange rose by about 5% by the
end of May 2015. Later, Mr. Kanwar sold 2% shares in the market. He in an email told his
chartered accountant that he will sell 2% shares in June to raise liquidity to meet debts
belonging to SharePrise Limited, a company in which he had substantial financial stake.
14. SEBI Order: Due to certain abnormalities in the share price, SEBI launched an
investigation and later passed an order debarring TradExchange, Mr Kanwar and HNF from
accessing the capital markets or buying and selling shares of a listed company for a period of
5 years from the date of order. It also imposed a penalty of Rs. 3 crores on the parties.
15. Securities Appellate Tribunal: SAT then agreed to hear the relevant appeals together.
15
MEMORIAL FOR RESPONDENT
ISSUES RAISED
SHARES?
TRADING?
16
MEMORIAL FOR RESPONDENT
SUMMARY
1. The Respondent humbly submits that TradExchange has violated the disclosure
requirements because it has delayed in disclosing the filing of Cranberry’s lawsuit to the
stock exchange and further it failed to disclose about legal notice in the prospectus. Thus, the
filing of the suit by Cranberry was reported after a delay of a week when immediate and
prompt disclosure to the stock exchange is mandatory.
2. The non-disclosure of the legal notice in the prospectus directly violated the obligations
under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
(hereinafter, ‘ICDR Regulations’), which mandates the disclosure of material information.
The Appellants have not disclosed material information, which resulted in significant market
reaction, with the precipitous slide on the NSE.
3. The disclosure of general information in the form of the additional risk factor cannot evade
the specificity of the information regarding the legal notice, which can adversely affect the
investors in making a fair and rational decision. The Respondents also contend that the legal
notice has to be mandatorily disclosed in accordance with the ICDR Regulations. Moreover
the ICDR Regulations mandate the disclosure of specific compliance with the FDI policy
which could materially impact the finances and operations of TradExchange.
4. The Respondents humbly submits that the preferential issue made by TradExchange was
invalid because it is within the powers of SEBI to restrain persons from accessing the capital
markets or trading in securities.
5. SEBI can issue such directions for the interest of the investors and the market irrespective
of whether there was actual loss caused to the investors by the violations caused because
violating the regulations in itself is detrimental to the interests of investors. Further,
preferential issue was done when TradExchange was debarred from accessing the capital
market and such preferential issue was not in compliance with the ICDR Regulations.
17
MEMORIAL FOR RESPONDENT
III. MR. KANWAR HAS VIOLATED THE SEBI ORDER BY TRADING IN SHARES
6. The Respondent humbly submits that Mr Kanwar violated the SEBI order by trading in
shares through block deals and later selling 2% shares in the stock exchange. A block deal
transaction has to be notified, disclosed and executed on stock exchanges and thus the stock
exchange will be involved in the transaction. Thus it is clear violation of the order debarring
him from dealing in the securities on the stock exchange.
IV. TRADEXCHANGE, MR. KANWAR AND HNF HAVE INDULGED IN INSIDER TRADING
7. The Respondent humbly submits that the Appellants have indulged in insider trading
because due diligence is a violation of insider trading norms, when shares are being traded
through block deals. Further TradExchange communicated UPSI to HNF which is in
violation of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter, ‘PIT
Regulations, 1992’).
9. Also, Kanwar and HNF indulged in insider trading when they traded in block deal in parts
because they withheld the information that they are going to trade in parts and the size of the
transaction, which defeats the purpose of the PIT regulations, 1992.
10. The Respondents humbly submits that Mr Kanwar and HNF indulged in price
manipulation violating SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating
to Securities Market) Regulations, 2003 because the block deal was executed to manipulate
the market. Mr Kanwar and HNF transacted block deals in parts creating an artificial rising
and depressing of prices of securities of TradExchange leading to ‘distortion of market
equilibrium’.
18
MEMORIAL FOR RESPONDENT
ARGUMENTS ADVANCED
1. The Respondent humbly submits that TradExchange has violated the disclosure
requirements. This argument is fourfold. Firstly, TradExchange has delayed ‘in disclosing the
filing of Cranberry’s lawsuit to the stock exchange’ [A]. Secondly, TradExchange has not
adequately disclosed material information in its prospectus [B]. Thirdly, FinLine Financial
Services Limited (hereinafter, ‘FinLine Services’) and Mr. Kanwar are also liable as the
merchant banker and promoter respectively [C]. Fourthly, the prospectus did not disclose
compliance with foreign investment policy [D].
2. It is mandatory for a listed company to comply with the conditions of the Listing
Agreement under sec. 21 of the Securities Contracts (Regulation) Act, 1956 (hereinafter,
‘SCR Act’), failure of which attracts penalty under sec. 23A and sec. 23E of the SCR Act.
Sec. 23A lays down that the information to be furnished under the Listing Agreement should
be ‘within the time specified’. Further, Clause 36(5) of the Listing agreement states that
company should ‘promptly after the event inform the Exchange’ of any litigation with a
material impact, to which it is a party.
3. In the instant case, TradExchange informed the stock exchange of a litigation to which it
was a party, after a delay of a week (i.e., it had been notified of the suit on July 17, 2014 but
informed the Stock Exchange about the same on July 24, 2014). Immediate disclosure to the
stock exchanges of the price sensitive information has been reiterated in various cases. 1 Thus,
TradExchange has violated the aforementioned provisions.
4. In arguendo, even if the Appellant contends that it was determining materiality of the
information, the Respondent submits that a legal notice was served to TradExchange by
1
Helios and Matheson Information Technology Limited, C/o Corporate Law Chambers India, Mumbai v SEBI,
SAT Appeal No. 69 of 2011, (16/11/2011), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1321588121023.pdf, ¶¶6,7; Disclosure of price-sensitive
information – FSA Rules, OUTLAW, available at http://www.out-law.com/page-8300 (Last Visited Sept. 2,
2015).
19
MEMORIAL FOR RESPONDENT
Cranberry regarding counterfeiting claims on April 25, 2014, which was fifty-two days
before litigation was filed. The materiality could have been determined by the TradExchange
in those 52 days, which it failed to do so. Thus, the Appellant’s claim would not be justified
that it was determining the materiality of the information by taking legal advice.
5. In the New Delhi Television Limited case,2 in which a tax demand by the Assessing Officer
was not informed to the stock exchange, the Adjudicating Officer held that the Noticee is
liable because it did not have evidence to prove that legal advice was being taken ‘when the
disclosure obligation arose’. In the instant case too, the Appellant does not have any evidence
to prove that it had sought legal advice from lawyers regarding the materiality of the
litigation for seven days.
6. The Respondent therefore submits that this information was not promptly conveyed to the
Stock exchange, and therefore TradExchange is in violation of sec. 21 of the SCR Act. Thus,
the penalty imposed on it under sec. 23A and sec. 23E is warranted and justified.
PROSPECTUS
7. It is humbly submitted that TradExchange has not disclosed the legal notice of Cranberry
in the prospectus, thereby depriving the investors of adequate material information. This
argument is fourfold. Firstly, the legal notice constitutes material information [1]. Secondly,
the legal notice was material as it has merit in law [2]. Thirdly, the prospectus does not
disclose adequate information to the investors in order to form a fair and rational investment
decision [3]. Fourthly, legal notice has to be mandatorily disclosed under the SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009 (hereinafter, ‘ICDR Regulations’)
[4].
8. Though the term material is not defined under the ICDR Regulations, the SEBI (Issue and
Listing of Debt Securities) Regulations, 2008, define the term as ‘anything which is likely to
impact investors’ investment decision.3 Therefore, materiality can be determined on the basis
of the possible impact that the information can have on the investor’s investment decision.
2
Adjudication order In the Matter of M/s. New Delhi Television Limited. AO/PJ/JAK/1 of 2015, available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1433431158961.pdf, ¶¶35,37.
3
SEBI (Issue and Listing of Debt Securities) Regulations, 2008, Regulation 5.
20
MEMORIAL FOR RESPONDENT
The test for determining materiality can be identified as forward looking. Materiality can be
determined on the basis of quantitative factors such as the financials of the company or
qualitative factors such as the impact on markets and the decision making of the investors. 4
The qualitative factors become applicable to an event or information if ‘a) the omission of is
likely to result in a discontinuity of information already available publicly or, b) result in
significant market reaction if the said omission came to light at a later date’. 5
9. In the instant case, the legal notice eventually led to the litigation seeking damages of 100
crores, which when disclosed resulted in a precipitous slide on the NSE, with the price of
TradExchange’s ADR’s value falling by 20% on the NASDAQ. Therefore, the legal notice
constituted material information, which can be determined from the significant market
reaction arising out of the disclosure of the litigation. In DLF v SEBI, 6 in determining
whether the FIR would affect the operation and finances of the company, the court looked
into the outcome of the said FIR. Therefore, the FIR constituted information that would affect
the operations and finances of TradExchange.
10. In determining the materiality of ‘inchoate developments like merger negotiations’ 7 the
courts have developed probability magnitude test.8 Therefore, in the context of contingent
events, the disclosure is mandated on the basis of ‘the balancing of the probability of the
event's occurrence and the magnitude of its impact assuming occurrence.’ 9 Moreover the
magnitude of the impact can be termed as ‘material as an independent fact.’10 In the instant
case, the legal notice sought damages worth Rs. 100 crores for the sale of counterfeit goods
and when disclosed directly resulted in the 20 % decline in the price of TradExchange’s ADR
and also led to a precipitous slide on the NSE.
11. Therefore, the information regarding the ‘status of a patent application can often strongly
influence the value of the shares of a company on the stock exchange. 11 In the In Re Vonage
4
M/s. New Delhi Television Limited, supra note 2.
5
Press Release No. 70/2015, SEBI Board Meeting, Securities and Exchange Board of India (March 22, 2015),
available at
http://www.sebi.gov.in/sebiweb/home/document_detail.jsp?link=http://www.sebi.gov.in/cms/sebi_data/docfiles/
30613_t.html.
6
DLF Limited v SEBI, SAT Appeal No. 331 of 2014, (13/03/2015), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1426241669079.pdf.
7
JAMES ROBERT BROW, THE REGULATION OF CORPORATE DISCLOSURE 5.01 (3rd ed., Wolters Kluwer 1995).
8
Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988).
9
Id.
10
Kramer v. Time Warner, Inc., 937 F.2d 767, 777 (2d Cir. 1991).
11
Alna Capital Assocs. v. Wagner, 532 F. Supp. 591, 600 (S.D. Fla. 1982).
21
MEMORIAL FOR RESPONDENT
case12 a U.S judgment, the court observed that the materiality of the legal notice has to be
decided on the basis immediate possibility of filing of a lawsuit. A company has to disclose
the legal notice, when the litigation ‘was substantially certain to occur during the relevant
period’. 13 Moreover as SAT and other Indian Courts have relied14 on principles of securities
law in foreign jurisdictions, thus the probability magnitude test can be used in the instant
case.
12. Moreover the shareholder is entitled to ‘total and complete information’ for taking an
informed decision and the materiality has to be determined from the ‘standpoint of the
shareholder and not the issuer/ merchant banker.’ 15 Since ‘the non-disclosure cannot be
considered a technical or venial breach irrespective of the consequences’, 16 it is submitted
that the legal notice constitutes material information, and hence mandates disclosure.
13. At the time of filing the prospectus, TradExchange was fully aware of the legal
implications of the legal notice and the liability of the intermediary. The only disclosure
made in the prospectus was with regard to possible allegations against the company and the
takedown procedure, with no disclosure as to the legal notice.
14. The legal notice concerned the intermediary liability for the sale of counterfeit goods,
which cannot be cured through ‘post-infringement curative measures which were insufficient
to allow a service provider to claim immunity from an infringement claim.’17 Moreover, safe
18
harbor provisions providing intermediary immunity are limited by an exception of
19
‘knowingly abetting’ the infringement of a copyright work.
12
In Re Vonage Initial Public Offering (IPO) Securities Litigation, Civil Action No.07-177(FLW) (D.N.J Apr.
02, 2009).
13
In Re Citigroup, Inc. Securties Litigation, 330 F. Supp. 2d 367, 377-78 (S.D.N.Y. 2004);In Re Par Pharm.,733
F.Supp. 668, 678 (S.D.N.Y. 1990); Ballan v. Wilfred American Educ. Corp., 720 F.Supp. 241, 248 (E.D.N.Y.
1989).
14
Shankar Sharma v SEBI, SAT Appeal No. 29 of 2001, (25/06/2001), available at
http://www.sebi.gov.in/satorders/Shankar.html; Rakesh Agarwal v SEBI, [2004] 1 CompLJ 193 SAT.
15
SEBI Order In the Matter of HSBC Securities and Capital Markets (India) Private Limited,
WTMO/14/CFD/12/03, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1293009715417.pdf.
16
HSBC, Id.; M/s. New Delhi Television Limited, supra note 2; DLF Limited, supra note 6.
17
Super Cassettes Industries Ltd v MySpace Inc. and Anr., [2011] 48 PTC 49.
18
Kartik Chawla, Westland v. Flipkart-Online Marketplaces and Questions of Intermediary Liability, SPICY IP
July 8, 2015, available at http://spicyip.com/2015/07/westland-v-flipkart-intermediary-liability-copyright-and-
online-marketplaces.html.
19
Indian Copyright Act, 1957, Sec. 51, 63.
22
MEMORIAL FOR RESPONDENT
15. In the instant case, there were allegations of the senior management of TradExchange
being aware of the counterfeiting being perpetuated on TradExchange.20 Therefore, the legal
notice did constitute material information as it could inculpate TradExchange due to the
allegations of having knowledge 21 of the counterfeiting and the inapplicability of the safe
harbor provisions in such cases.
16. The protection of the safe harbor provisions under sec. 79 of the Information Technology
Act, 2000 (hereinafter, ‘IT Act’)is not applicable in the cases of intellectual property right
infringement and further the immunities specifically provided under the Copyright Act22 do
not extend to the sale of products. The Delhi High Court has further held, “Sec. 79 is meant
for all other internet wrongs wherein intermediaries may be involved including auctioning
networking servicing…but not certainly relating to copyright infringement or patent
infringement which has been specifically excluded by way of proviso to Section 81.”23
17. Further, sec. 81 of the IT Act states that nothing shall affect the rights conferred under the
Copyright Act. Under Section 52 of the Copyright Act, the immunities seem to be limited to
digital content not extending to sale of products. 24 Therefore, the legal notice for sale of
counterfeiting goods against TradExchange had merit in law in order to constitute material
information. Hence, it cannot be inferred that the information is not material due to the nature
of the legal notice considering the intermediary liability of TradExchange, which would have
impacted the investor’s decision to invest in the company at the time of the FPO.
18. Adequate and timely disclosure constitutes the two essential factors necessary to ensure
fairness and efficiency in the securities market. 25 In issuing a prospectus the issuer is bound
to adhere to the obligations of disclosure stating ‘everything with strict and scrupulous
accuracy, and not only to abstain from stating as fact that which is not so, but to omit no one
fact within their knowledge, the existence of which might in any degree affect the nature, or
20
Moot problem, 1st GNLU Moot on Securities and Investment Law, 2015, [Hereinafter Moot Problem].
21
Mark Sommers and Naresh Kilaru ECJ Issues L'Oreal v. eBay Ruling: Online Marketplaces Can Be Liable
for Counterfeit Goods, IP Litigator, Sept.-Oct. 2011, available at
http://www.finnegan.com/resources/articles/articlesdetail.aspx?news=25e81620-010d-47b9-af59-bb879ff719de.
22
Indian Copyright Act, 1957.
23
Super Cassettes Industries Ltd., supra note 17.
24
Kartik Chawla, supra note 18.
25
SEBI Discussion Paper on review of clause 36 and related clauses of Equity Listing Agreement, available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1408444809721.pdf .
23
MEMORIAL FOR RESPONDENT
extent, or quality, of the privileges and advantages which the prospectus holds out as
inducements to take shares.’ 26 Therefore, the primary principle underlying the ‘disclosure
based regulatory mechanism’ is the ‘full, accurate and timely disclosure of all relevant
information.’27
19. The additional risk factor introduced by TradExchange only refers to allegations of
counterfeiting, without referring to the possibility of a lawsuit, which is the general practice
adopted in disclosing the possibility of counterfeit claims to the investors. Therefore, the
contention that disclosure through the general disclaimer would satisfy the obligation of
disclosure does not stand, as the legal notice constituted material information.
20. The ICDR Regulations lay down that in determining the materiality of risk factors, the
criterion of some risks not being material at present but having a material impact in the
future28 has to be considered. Moreover whenever risks about material impact are stated, the
financial implications of the same have to be disclosed. 29 Hence, the generality of the
disclaimer cannot prevail over the specificity required for disclosing the legal notice.
21. The disclosure in the prospectus must be ‘true, fair and adequate to enable the investors to
make a well-informed decision’ as to the investment in the proposed issue.30 Moreover the
disclosure in the prospectus was not adequate enough to provide the investors of the risks
associated with litigation.
22. Since, the ICDR Regulations31 require the disclosure of any material development that
has an impact on performance and prospects of the issuer, legal notice was bound to be
disclosed by TradExchange on the basis of its materiality, irrespective of the nature of legal
notice constituting litigation, dispute or legal action. Therefore as the disclosures through the
additional risk factor are general in nature, without disclosing any specific information with
regard to the legal notice, TradExchange is liable for non- disclosure of material information.
Hence cannot avail blanket protection under the general disclosure in the form of the
additional risk factor in the prospectus.
26
N. Parthasarathy v Controller Of Capital Issues and Anr., [1991] 3 SCC 153; F.B. PALMER AND C.M.
SCHMITTHOFF, PALMER'S COMPANY LAW (24th ed., Sweet and Maxwell, 1987).
27
SEBI Order In the Matter of RDB Rasayans Ltd. and Its Directors, WTM/PS/45/ID9/DEC/2011, available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1418985620239.pdf.
28
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. [Hereinafter ICDR].
29
Id.
30
DLF Limited, supra note 6.
31
ICDR, supra note 28 at Part A (2) (X) (A) of Schedule VIII
24
MEMORIAL FOR RESPONDENT
4. LEGAL NOTICE IS REQUIRED TO BE DISCLOSED AS A DISPUTE UNDER THE ICDR
REGULATIONS
23. Schedule VIII provides for the disclosure in the offer documents under which the risk
factors require a summary of the outstanding litigations and disputes.32 The term dispute is
interpreted as ‘a contention, a controversy, a difference of opinion, a conflict of claims, and
assertion of right on one side and the denial of it by the other’. 33 It represents a conflict of
interest or contest; sometimes used in the sense of controversy. As observed in Chairman v.
Rabi, “There would be a dispute so long as a claim is asserted by one party and denied by the
other, be the claim a false or a true one, or whether it ultimately turns out to be false or
true.”34 Therefore, the legal notice in the present case constitutes a contention or controversy,
constituting a dispute, which has to be mandatorily disclosed under the ICDR Regulations.
C. FINLINE SERVICES AND MR. KANWAR ARE ALSO LIABLE FOR NON DISCLOSURE IN
PROSPECTUS
24. Regulation 64(1) of the ICDR Regulations obligates the merchant banker to exercise due
diligence and adhere to all aspects of the issue including the veracity and adequacy of
disclosure. 35 Further, as per Cl. 4 of the Code of Conduct for Merchant Bankers r/w
Regulation 13 of the Merchant Banker Regulations, ‘(a) merchant banker shall at all times
exercise due diligence, ensure proper care and exercise independent professional judgment’.
Therefore, the lapses in non-disclosure of the legal notice and the inadequate information,
FinLine Services violated Regulation 13 of SEBI (Merchant Bankers) Regulations, 1992 read
with the Code of Conduct prescribed under Schedule III of the same.36
25. As observed under Chander v Rajinder, the term due diligence was interpreted to mean
‘reasonable diligence’ and further ‘such diligence as a prudent man would exercise in the
conduct of his own affairs.’ 37 The merchant banker is obligated to not merely ‘passively
report… but to find out everything that is worth finding out’,38 thereby ensuring the offer
32
ICDR, supra note 28.
33
H.H. Maharajadhiraja Madha v Rao Jivaji Rao Scindia Bahadur of Gwalior and Ors. v Union of India and
Anr., 1971 AIR 530.
34
Chairman-cum-Managing Director, New India Assurance Company Ltd. and Anr. v Rabi Narayan Chhotrai,
1997 AIR 40.
35
SEBI Order In the Matter of Bharatiya Global Infomedia Ltd, Directors of BGIL, WTM/PS/IVD/47/12/2011,
available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1325084198365.pdf.
36
Id.
37
Chander Kanta Bansal v Rajinder Singh Anand, [2008] 5 SCC 117.
38
Id.
25
MEMORIAL FOR RESPONDENT
39
document does not contain false, misleading or material omission The primary
40
responsibility is to ensure truth and correctness of the letter of offer, which has to be
discharged by exercising due diligence. 41 Therefore, the information provided in the offer
document should neither be ‘exaggerated or deficient’ and that material facts should not be
suppressed to the disadvantage of the subscribers.’42 The non-compliance with the letter and
spirit of the regulations by the merchant banker43 directly impacts the investors obligating
SEBI ‘to resort to immediate action to protect the investor’s interests’.44
26. Further, under the ICDR Regulations45 the directors are also required to disclose through
a statement, circumstances which in their opinion would ‘materially and adversely affect or
likely to affect or is likely to affect the trading or profitability of the issuer, or the value of its
assets, or its ability to pay its liabilities within the next twelve months.’46 The directors are
liable for the contravention of the ICDR regulations, for making a ‘public issue of securities
by virtue of their position as directors, as they are the ones who decide its policies, decisions,
business affairs and the manner of functioning’.47
27. Therefore, the non-disclosure of material information violates the ICDR Regulations.48
Moreover the intention of the parties is irrelevant in determining the contravention of the
statutory obligations contemplated under the Securities and Exchange Board of India Act,
1992 (hereinafter, ‘SEBI Act’) and the Regulations.49 The argument that the violations were
technical in nature has been rejected, 50 whilst ‘full, accurate and timely disclosure’ has been
emphasized as the guiding principle of a disclosure based regulatory regime.51 In order to
39
Id.
40
SEBI Order In the Matter of Initial Public Offering of PG Electroplast Ltd and Anr., WTM/SR/IVD/ID-
V/09/03/2014, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1395403139894.pdf.
41
HSBC Securities and Capital Markets, supra note 15.
42
Eider-E-Commerce Ltd. v SEBI, SAT Appeal No. 176 of 2007, (20/08/2008), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1291189260695.pdf.
43
RDB Rasayans Limited and its Directors, supra note 27.
44
Id.
45
ICDR, supra note 28.
46
Id.
47
Bharatiya Global Infomedia, supra note 35; SEBI Order In the Matter of Alchemist Capital Limited and Ors.,
WTM/PS/32/IMD/NRO/AUG/2015, available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1438603610525.pdf.
48
ICDR, supra note 28.
49
SEBI v Shri Ram Mutual Fund, [2006] 68 SCL 216; M/s. New Delhi Television Limited, supra note 2.
50
Milan Mahendra Securities Pvt. Ltd. v SEBI, SAT Appeal No. 4 of 2005, (15/04/2005), available at
http://www.sebi.gov.in/cms/sebi_data/pdffiles/11524_t.pdf.
51
Alchemist Capital Limited, supra note 47.
26
MEMORIAL FOR RESPONDENT
safeguard the integrity of the securities market, SEBI is mandated to exercise its powers
‘firmly, effectively and immediately to insulate the market and its investors.’ 52
POLICY
28. The Foreign Direct Investment Policy of India53 states that 100% FDI is permitted under
the automatic route in e-commerce on the condition of it being business-to-business
(hereinafter, ‘B2B’) and not business to retail. TradEx follows the marketplace model of e-
commerce, which does not necessarily amount to investment through a B2B model. This is
based on the reasoning that under the B2B model, there is a ‘direct interface between the
retail buyer and online portal.’54 This is distinguishable from the marketplace model where in
the ecommerce portal acts as an ‘online agency’ which is absent in the case of the B2B
model. Also, the FDI policy does not expressly state the marketplace model falls under the
B2B model.
29. In the instant case, TradExchange did not specifically state the compliance with the
foreign investment policy considering the fact that foreign investors held 37% of the shares in
TradExchange. Therefore, TradExchange was substantially dependent on foreign investment
for financing its business. The Enforcement Directorate in cases of violation of FDI laws can
impose fines three times the actual investment.55 Further, the resultant violation of the FDI
policy r/w with the Foreign Exchange Management Act, 1992 would materially impact the
finances and operations of TradExchange. Therefore, as a material development, the
information had to be clearly stated in the prospectus in line with the ICDR Regulations.56
30. The FDI policy circular under paragraph 6.2.16.2 57 states that FDI up to 100% is
permitted in e-commerce activities subject to the condition that the companies would only
transact in B2B e-commerce in contrast to retail trading.58 In the instant case, TradExchange
52
Bharatiya Global Infomedia Ltd, supra note 35.
53
Consolidated FDI Policy Circular of 2014, Ministry of Commerce and Industry, Government of India, (April
17, 2014), available at http://dipp.nic.in/English/Policies/FDI_Circular_2014.pdf. [Hereinafter FDI Policy].
54
Discussion Paper, E-commerce in India,
http://dipp.nic.in/English/Discuss_paper/Discussion_paper_ecommerce_07012014.pdf, (Last Visited Sept. 2,
2015).
55
Foreign Exchange Management Act, 1999, Sec. 13.
56
Adjudication Order In the Matter of M/s. Kotak Mahindra Capital Company Limited, AK/AO/221‐226/2014
available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1417170473056.pdf;ICDR supra note 28 at Part
X.
57
FDI Policy, supra note 53.
58
FDI Policy, supra note 53 at ¶¶¶6.2.16.2.1, 6.2.16.3 (2)(f) and 6.2.16.5 (1)(ix).
27
MEMORIAL FOR RESPONDENT
also provides certain additional services of handling the payment mechanisms and ensuring
delivery and return of the goods, therefore representing to the customers that TradEx is the
retail store, which is the seller of the goods, as they enjoy a seamless experience of buying
the luxury goods.59 The Delhi High Court has determined the B2B transaction to mean the
‘purpose for which the transaction takes place. The concept of B2B trade is that the goods
are purchased by the business for further resale or for use in house or for its customers’.60
Hence, TradEx substantially acts as a retailer, involved in the retail transaction and cannot
therefore shed liability by merely stating that the sellers on the TradEx web portal own the
goods.
31. Moreover, in disclosing ‘Legal and other information’ under the ICDR Regulations, 61 the
list is not conclusive and therefore should be interpreted to include compliance with
regulatory norms which are essential to the very functioning of the business of
TradExchange, as it heavy relied on foreign investors. Further, the sponsored issue of
American Depository Shares is possible only if ‘the sales of the existing equity shares are
made in compliance with the Foreign Direct Investment Policy in India’. 62 Thus, Appellants
are liable for not disclosing compliance with FDI policy as it would directly impact the
finance and operations of TradExchange.
32. The Respondent humbly submits that the preferential issue made by TradExchange was
invalid. This argument is twofold. Firstly, it is within the powers of SEBI to pass directions
restraining persons from ‘accessing the capital market’ or ‘trading in securities’’ [A].
Secondly, TradExchange was debarred from accessing the capital market when it made
preferential issue [B].
59
Moot problem, supra note 20.
60
Federation of Associations of Maharashtra and Ors. v Union of India and Ors., [2005] 79 DRJ 426.
61
ICDR, supra note 28 at Part A (2) (X) (B) & Part A (2) (XI) of Schedule VIII.
62
Foreign Exchange Management (Transfer or Issue of Securities by a Person Resident Outside India)
Regulations, 2000.
28
MEMORIAL FOR RESPONDENT
A. ORDER OF RESTRAINING APPELLANTS FROM ACCESSING THE CAPITAL MARKET
AND TRADING IN SECURITIES IS WITHIN THE POWERS OF SEBI
33. SEBI has the power and duty to issue directions to persons from accessing the capital
market or from trading in securities under sec. 11B of the SEBI Act in the interest of
investors and the market. Such directions are not issued to impose a punishment, but instead
to safeguard the interest of the investors and the market. SAT in Libord Finance v. SEBI,63
reiterating the same, further observed, “The directions may result in penal consequences to
the entity to whom those are issued but that would be only incidental. The purpose or the
basis of the order or the directions would nevertheless be to protect the securities market and
the interest of the investors.” It has thus been reiterated in various cases 64 that, while taking
remedial or preventive measures, SEBI can give such directions, as they are not penal in
nature, and thus are well within its powers.
34. Further, the cases such as (BPL Limited v SEBI, Videocon v SEBI, Sterlite v SEBI, Ritesh
Aggarwal v SEBI, etc) 65 wherein the direction given by SEBI, prohibiting a person from
accessing market was set aside and held to be unreasonable and punitive in nature, are all
distinguishable from the instant case. As observed in the DLF v SEBI 66 in the dissenting
opinion, “In all those cases either it is held that there are no violations or it is held depending
on facts of each case, that the remedial/preventive measure taken by SEBI without
establishing that the interest of investors are prejudiced cannot be sustained.” In the instant
case, such directions are necessary so that no other listed company shall indulge in such
activities by making relevant disclosures and further, not adopt such ‘such dubious methods’
again. 67 Since, counterfeiting has becoming an industry-wide phenomenon, 68 other listed
companies will be deterred from repeating such mistakes.
63
Libord Finance Ltd. v SEBI, SAT Appeal No. 8 of 2008, (31/03/2008), available at
http://www.sebi.gov.in/cms/sebi_data/pdffiles/6804_t.pdf.
64
Parsoli Corporation Limited and Ors. v SEBI, SAT Appeal No. 146 of 2010, (12/08/2011), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1313139727992.pdf; Securities and Exchange Board of India
v Ajay Agarwal, [2010] 3 SCC 764; 21st Century Entertainment Pvt. Ltd. v Union of India and Ors., D.B. Civil
W. P. No. 4333/2010.
65
BPL Limited v SEBI, SAT Appeal No. 14 of 2001, (20/06/2002), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1300270803772.pdf.; Videocon International Ltd. v SEBI and
Ors., SAT Appeal No. 23 of 2001, (20/06/2002), available at http://www.sebi.gov.in/satorders/Vediocon.html;
Sterlite Industries (India) Ltd. v SEBI, SAT Appeal No. 20 of 2001, (22/10/2001), available at
http://web.sebi.gov.in/satorders/StereliteInd.html; Ritesh Aggarwal and Anr. v SEBI, [2008] 8 SCC 205.
66
DLF Limited, supra note 6.
67
Id.
68
Moot problem, supra note 20.
29
MEMORIAL FOR RESPONDENT
35. It is submitted that sec.11and 11B of the SEBI Act does not state that the steps
enumerated therein could be taken only once established ‘that the interest of investors were in
fact prejudicially affected by the violations committed’. 69 This is because violating the
Regulations itself is ‘detrimental to the interest of investors’.70
36. Such orders can be passed during pending investigation too, which further reiterates that
‘the emphasis is primarily on protecting the interests of investors and not on investors being
actually prejudiced due to violations.’71 This is because ‘SEBI cannot wait till the investors
are actually prejudiced’.72 Giving any other limited interpretation would defeat the object and
purpose of such powers given to SEBI. Thus, it is submitted that SEBI has powers to restrain
the Appellants from accessing the capital market and trading in securities.
37. It is humbly submitted by the Respondent that the preferential issue done by
TradExchange was invalid. This submission is twofold. Firstly, SEBI had by an order
debarred TradExchange from accessing the capital market [1]. Secondly, since TradExchange
did not comply with the Listing Agreement, it did not qualify to make preferential issue under
the ICDR Regulations [2].
38. SEBI by an order, dated August 16, 2014 had debarred TradExchange from accessing the
capital market. Later after hearing the Appellants in detail, SEBI in its final order confirmed
the restrained which was to operate for a period of three years from the date of the order.
39. It has been observed by this tribunal in SRM v. SEBI,73 “…the words ‘debarred from
accessing the capital market’ will take within its fold, the words ‘restraint on issue of equity
shares or…altering the capital structure in any manner’.” Thus, when a person is debarred
69
DLF Limited, supra note 6.
70
Id.
71
Id.
72
Id.
73
SRM Energy Limited, Mumbai v SEBI and Anr., SAT Appeal No. 77 of 2012, (18/05/2012), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1337329899182.pdf.
30
MEMORIAL FOR RESPONDENT
from accessing the capital market, its ‘entry to the capital market for issuing/offering
securities’74 is, as a consequence, restrained.
40. In the instant case, even though TradExchange was debarred from issuing shares or
altering its capital structure in any manner, it still made preferential issue. Moreover, once a
company has been restrained from accessing the capital market, it ‘is not expected to do
anything’ till it ‘gets communication from the court to the effect that the earlier order was
modified or vacated’. 75 Therefore, the preferential issue made by TradExchange was in
violation of the SEBI order, and thus invalid.
41. An issuer company is restricted from making a preferential issue if it is not in compliance
with the conditions for continuous listing of equity shares specified under the listing
agreement. This is a mandatory requirement under Regulation 72 (1) (c) of the ICDR
Regulations. In the instant case, TradExchange was not in compliance with the Listing
Agreement since it did not make prompt disclosure of litigation filed by Cranberry and
disclosed about it only after a week, due to which the stock of TradExchange also took a
beating in the NSE. Thus, SEBI had passed an order against it. Therefore, it is submitted that
TradExchange was in violation of the ICDR Regulations while issuing preferential shares to
HNF.
42. The Respondent humbly submits that Mr. Kanwar violated the SEBI order by trading in
shares through block deals [A], and later selling 2% of his shares on stock exchange [B].
43. The transactions between Mr. Kanwar and HNF violated the SEBI order which prohibited
him from ‘trading in securities on a stock exchange’. Even though such an order was passed
against Mr. Kanwar, he still traded in securities through block trades.
74
Sterlite Industries (India) Ltd., supra note 65 at ¶108.
75
Jeet Singh and Anr. v Union of India and Ors., [2011] 13 SCC 534.
31
MEMORIAL FOR RESPONDENT
44. A block deal transaction has to be notified, disclosed and most importantly ‘executed’ on
stock exchanges and thus has to be routed through stock exchange. Thus, in any way, stock
exchange will be involved in the transaction. Thus, he was restricted from trading in
securities in any manner whatsoever, including through block deals. This interpretation is
contended due the principle laid down in various cases,76 with regards to interpretation of
remedial provisions, which have to be given a liberal interpretation. An order of debarment
under sec. 11 and sec. 11B of the SEBI Act, as already contended, has been construed as a
remedial measure since it is in the best interest of the investors and market. Thus, such a
remedial order should be interpreted liberally and also harmoniously in order to serve the
purpose and objective behind such a direction.77
45. In any case, Mr. Kanwar was prohibited from trading in securities on stock exchange.
Inspite of such a prohibition, Mr. Kanwar sold 2% of his shares in the market on June 5,
2015.78 It has been observed in Jeet Singh v. UOI,79 “Once a person has been restrained by a
court of competent jurisdiction from doing something, the person concerned is not expected
to do anything till he gets communication from the court to the effect that the earlier order
was modified.” Therefore, by selling 2% of his shares on stock exchange, he has violated the
SEBI order.
46. The Respondent humbly submits that the Appellants have indulged in insider trading and
therefore violated the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter,
‘PIT Regulations, 1992’) and the SEBI Act. This argument is threefold. Firstly, due
dillegence is a violation of insider trading norms, when shares are being traded through block
deals [A]. Secondly, TradExchange communicated unpublished price sensitive information
76
Noor Saba Khatoon v Mohammed Qasim, 1997 AIR 3280; Sudhoo v Haji Lal Mohd Biri Works and Anr.
1990 AIR 1971; Works Manager, Central Railway Workshop, Jhasi v Vishwanath and Ors., 1970 AIR 488.
77
Reserve Bank of India v Peerless General Finance and Investment Co. Ltd., 1987 AIR 1023; Kesho Ram and
Co. and Ors. v Union Of India and Ors, [1989] 2 SCR 1005; Union of India v Filip Tiago De Gama of Vadem
Vasco,1990 AIR 981.
78
Moot problem, supra note 20 at 8¶ 17.
79
Jeet Singh and Anr. [2011] 13 SCC 534.
32
MEMORIAL FOR RESPONDENT
(hereinafter, ‘UPSI’) to HNF even though it was prohibited to do so under the PIT
Regulations, 1992[B]. Thirdly, HNF dealt with the securities when it was in possession of
UPSI [C]. Further, Mr. Kanwar and HNF indulged in insider trading when they traded
through block deals in parts [D].
47. The SEBI (Prohibition of Insider Trading) Regulations, 2015 (hereinafter, ‘PIT
Regulations, 2015’) replaced the earlier PIT Regulations, 1992 with the effect from May
15th, 2015. The communication of UPSI by TradExchange and trading of securities by HNF
was done while the PIT Regulations, 1992 was in force.
48. It is submitted that due dillegence is a violation of insider trading norms, when shares are
to be traded through block deals. This aspect has not yet been dealt by SEBI or any Indian
courts or tribunals, but has been recognized as an industry standard in most jurisdictions.80
Thus, ‘care must be taken not to disclose inside information to the purchasers over and above
trading information’,81 during block trade. Therefore, when there are block deals to be traded
between ‘an institutional investor and a block positioner’, insider trading is considered as a
generic problem82 because one of the consequences of due dillegence is that the institutional
investor gets access to UPSI.83 Further, in the next contention it is substantiated as to how
UPSI was communicated during the process of due dillegence.
49. TradExchange allowed due diligence to be conducted by HNF, even though it had been
decided that Mr. Kanwar was going to sell his shares to HNF through block deals. Later,
HNF bought shares from Mr. Kanwar through block deals. Therefore, such communication is
a violation of Regulation 3 and Regulation 3A of the PIT Regulations, 1992, which prohibits
any communication of UPSI and further trading in securities when the person is in possession
of such UPSI.
80
Veleron Holding, B.V. v Morgan Stanley and Co. LLC and Ors. No. 12 Civ. 5966 (CM) 2015; Martin
Sandler, Michael Brown, Peter Willis and Elizabeth Clay, Market abuse, COMPLIANCE OFFICER BULLETIN,
(August, 2014) available at
http://www.twobirds.com/~/media/PDFs/News/Articles/2014/Compliance%20officer%20bulletin%20-
%20market%20abuse.pdf.
81
Id.
82
William K.S. Wang, Stock Market Insider Trading: Victims, Violators and Remedies–Including an Analogy to
Fraud in the Sale of a Used Car with a Generic Defect, 45 VILL. L. REV. 27 (2000).
83
Report of the High Level Committee to Review the SEBI (Prohibition of Insider Trading Regulations 1992),
(Dec. 7, 2013), available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1386758945803.pdf.
33
MEMORIAL FOR RESPONDENT
B. IN ANY CASE, TRADEXCHANGE COMMUNICATED UNPUBLISHED PRICE SENSITIVE
INFORMATION TO HNF
50. Regulation 2(ha) r/w 2(k) of the PIT Regulations, 1992 defines UPSI as ‘any information
that is not generally available’ and ‘which upon becoming generally available is likely to
materially affect the price of the securities’. Further, even though the list is not conclusive, it
gives few circumstances that can be considered as ‘price sensitive information’.
Communication of such information therefore is prohibited under Regulation 3(ii) of the PIT
Regulations, 1992.
51. In order to attract the provisions of PIT Regulations, 1992 it is necessary that the
information communicated was ‘price sensitive information’. The Respondent submits that
information that affects the ‘earnings’ of a company can be construed as ‘price sensitive
information’.
52. Earnings has been defined as the ‘net income or the profit i.e. revenue minus expenses of
a company,’84 which determines the earnings per share of a company. Further, ‘Earnings per
share’ is a ‘method of expressing the income of a company that is attributable to the
shareholders by the number of shares.’85
53. Thus, earnings of a company affect the dividend paid to the shareholders of a company,
which is one of the factors that a shareholder or any potential investor looks into for investing
in a company. Therefore, any information that affects the earnings of a company can be
construed as ‘price sensitive information.’
54. In instant case, the information received by HNF can be construed as UPSI because,
Waltenberg provided nearly 22% revenues for TradExchange. Thus, the termination of
relationship with Waltenberg would have eventually to a reduction in the profit of the
company, and as a consequence, reduction in the earnings per share which would have further
impacted on the price of the shares of TradExchange. This was further substantiated when
2% shares fell after the announcement of the termination of the same. Further, a deal with
renowned seller like HiSketch would increase the revenues of the company and thereby the
earnings and the earnings per share.
84
3 P RAMANATHA AIYAR,THE MAJOR LAW LEXICON (4th ed., Lexis Nexis, Butterworths Wadhwa, Nagpur,
2010).
85
Id.
34
MEMORIAL FOR RESPONDENT
55. Thus, the information received by HNF when conducting due diligence in TradExchange
is UPSI and therefore, TradExchange and HNF have vitiated the provisions of SEBI Act and
Regulation 3(ii) of the PIT Regulations, 1992.
56. Regulation 3A of the PIT regulations, 1992 states that no company shall deal with the
securities of another company while in possession of any unpublished price sensitive
information about the other company. In the instant case, HNF had knowledge of UPSI
regarding the MoU between HiSketch and TradExchange and also had access to the copy of
the MoU. HNF knew about the details of negotiation and knew that the deal would benefit
the company that would eventually lead to an increase in price of shares. Foreseeing the
increase in price of shares HNF invested in the company.
57. Further, under the SEBI Act it is not necessary to prove that the insider knowingly
indulged in insider trading. This prima facie means that mens rea is not an essential
ingredient of the offence of insider trading.86 Consequently, a person may be convicted of the
offence regardless of whether he has committed it knowingly, deliberately or intentionally.
Similarly, the SEBI Regulations also do not contain the requirement of motive, knowledge or
intention for conviction of insider trading.87
58. Furthermore, in the case of Hindustan Level Limited v. SEBI,88 it was argued that for
insider trading it is essential to prove the misuse of fiduciary position and that the transaction
was undertaken to make a gain, profit or to avoid a loss. These contentions were negated by
SAT and this case was held to be that of insider dealing.
59. Also, in SEBI v. Cabot International Capital Corporation,89 it was held by the Bombay
High Court that the scheme of penalty prescribed under the SEBI Act and the SEBI
Regulations is penalty for failure of statutory obligation or breach of civil obligation. There is
no element of any criminal offence as contemplated under criminal proceedings and hence
mens rea is not an essential element for imposing penalty under the SEBI Act and SEBI
Regulations. This view was upheld by the Supreme Court observing that Section 15G of the
SEBI Act deals with defaults or failure of statutory civil obligations under the SEBI Act and
86
Suneeth Katarki and Namita Viswanath, “Mens Rea” In Insider Trading – A “Sine Qua Non” MONDAQ (June
3, 2015, available at http://www.mondaq.com/india/x/401724/Securities/.
87
Id.
88
Hindustan Level Limited v SEBI, [1998] SCL 311.
89
SEBI v Cabot International Capital Corporation, [2004] 51 SCL 307.
35
MEMORIAL FOR RESPONDENT
SEBI Regulations, while Section 24 of the SEBI Act deals with criminal offences under the
said Act and its punishment.
60. Since the proceedings pertaining to Section 15G are neither criminal nor quasi-criminal,
there is no question of proof of mens rea as an essential element for imposition of penalty and
that the penalty is attracted once the contravention of statutory obligations under the SEBI
Act and Regulations is established regardless of the intention of the parties, and the ‘no mens
rea, no penalty’ principle is erroneous.90
D. MR. KANWAR AND HNF INDULGED IN INSIDER TRADING WHEN THEY TRADED IN
61. Institutional investors at times ‘slice up a block order and trade it in small pieces’, due to
which they deliberately withhold ‘from the market valuable price-relevant information (ie,
the full size of the order)’.91 In the instant case, Mr. Kanwar and HNF transacted block deals
in parts, thus after every transaction they were withholding the information that they are
going to trade in parts and the size they are going to acquire, which defeats the purpose of
transparency to be acquired through the PIT, Regulations, 1992. Thus, the block deals were
illegal because it was traded in parts.
62. Summarising, TradExchange, Mr. Kanwar and HNF have violated the insider trading
provisions, and therefore liable to be penalised and SEBI was therefore justified to take
measures provided forth under Sec. 11, 11-D, 15-G and 24 of the SEBI Act.
63. The Respondent humbly submit that Mr. Kanwar and HNF indulged in price
manipulation, thus violating Regulation 4(a) and (b) of the SEBI (Prohibition of Fraudulent
and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter,
‘PFUTP Regulations’).
64. Regulation 4(a) prohibits a transaction in securities ‘with the intention of artificially
raising or depressing the prices of securities and thereby inducing the sale or purchase of
90
Katarki and Viswanath, supra note 86.
91
E. Avgouleas, Market Accountability and Pre- and Post-trade Transparency: The Case for the Reform of the
EU Regulatory Framework: Parts 1, 19 THE COMPANY LAWYER (1998) 162-70, 202-10.
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MEMORIAL FOR RESPONDENT
securities by any person’. Further, Regulation 4(b) prohibits transaction ‘which is calculated
to create a false or misleading appearance of trading on the securities market’.
65. Even though block deals are not per se illegal, it will be illegal and violative of
Regulations if it is ‘executed with a view to manipulate the market’, 92 which can be
ascertained by circumstantial evidence too in cases of synchronized block deal transaction, as
has been observed in by various cases.93
66. In the instant case, Mr. Kanwar and HNF transacted block deals in parts, thus creating an
artificial rising and depressing of prices of securities of TradExchange. Such a transaction
created a ‘distortion of market equilibrium’. SEBI found94 abnormalities in the share price of
TradExchange, as compared to share price of other companies in the same industry.
67. Thus, the trend in shares had no conformity with the Nifty movements. Also, it was
observed in Sterlite case that ‘Rapidly rising prices in the absence of any demand for
securities are well-known symptoms of manipulative transactions’. 95 The block trade
transactions can effectively change the ‘equilibrium price of a security by the actions of large
investors’. Empirically, the actions of institutions do ‘affect market prices’.96
68. Therefore, the Respondent contends that block deals in parts which had no purpose was
illegal as it was done in order to disturb equilibrium in the market and further manipulate the
market, thus causing abnormalities in share price of TradExchange. Therefore, Mr. Kanwar
and HNF have violated Regulation 4(a) and (b) of the PFUTP Regulations.
92
Ketan Parekh v SEBI, SAT Appeal No. 2 of 2004, (14/07/2006), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1292302731482.pdf.
93
Directorate of Enforcement v MCTM Corporation Ltd. [1996] 2 SCC 471; Ketan Parekh, supra note 92.
94
Moot problem, supra note 20.
95
Dlugash v. SEC., 373 F. 2d 107, 109 (2d Cir. 1967); Sterlite Industries (India) Ltd., supra note 65.
96
27 (3) Alan Kraus and Hans R. Stoll, Price Impacts of Block Trading on the New York Stock Exchange, JOF,
(June, 1972), 569-588.
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MEMORIAL FOR RESPONDENT
PRAYER
Wherefore, in the light of the facts stated, issues raised, arguments advanced and authorities
cited, it is most humbly prayed by the Respondent before the Hon’ble Securities Appellate
Tribunal to adjudge and declare that:
For this act of kindness, the Respondent shall forever humbly pray.
Dated:
Place:
Respectfully Submitted by
____________________
____________________
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MEMORIAL FOR RESPONDENT