3rd NLIU Juris Corp National Corporate Law Moot Court Competition 2012 In the Honble High Court

t of Madhya Pradesh Innovative Limited (Petitioner) vs. Securities Exchange Board of India (Respondent) and Innovative Limited (Petitioner) vs. Competition Commission of India (Respondent)

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Innovative Limited (Company) is an unlisted public company incorporated in late 2000 and registered under the Companies Act, 1956. Its registered office is at 444B, M.P Nagar, Zone - I in Bhopal. While the Company commenced its functions primarily as an investment advisor, over a period of time, it shifted its primary focus to areas of software development with the intention of aiding investors in the area of capital markets. Additionally, its efforts in the field of investor education have been highly applauded by several newspapers and blogs. In early 2007, the Company felt the need to diversify its activities and on this count, it invested in technology related infrastructure and personnel. This led to the Company developing various websites and applications (apps). The apps were for various tablets and smartphone operating systems. Over a period of time, the Company emerged as one of the leading market participants in the Indian apps development market. This well calculated expansion led to a considerable appreciation in the turnover of the Company and by the year 2009-10, the annual turnover was INR 55 crores and witnessed a further increase to INR 75 crores in the year 2010-2011. Of all the developers, Suresh Naidu, an employee of the Company, was identified and recognised as one of the key personnel for making efficient and creative apps. One such app - SmartStock was launched in February 2011. SmartStock is an investment advisory app that collates market information from different sources for stocks chosen by the user. SmartStock became instantly popular and several investors, including certain high net worth individuals, found it very beneficial to have stock information at their fingertips. In December 2011, Suresh commenced work on a new project called Stock Khoj. Stock Khoj turned out to be an elegant and sophisticated app that provides a platform for any member, registering with a membership fee, to post information of shares of Indian unlisted public companies, including those of delisted companies, that such person would like to sell/buy. In return, any other interested registered member can respond to the post with the proposed purchase/sell price. Such registered members 1

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can then contact each other based on the information provided on their profile available on the app and then sell and purchase the shares. It may be noted that the app mainly stands out for its multi operating system compatibility and its unique invitation only format. Effectively, the format is such that only a person who has received an invite from another Stock Khoj registered member can register on the website and download the app. Upon downloading it, such registered member can send invites to not more than three persons. 5. When a person downloads the app, the person would see a pop up window with terms and conditions and the disclaimer. The relevant extract of the disclaimer is set out below: DISCLAIMER Innovative Limited shall not be responsible for any exchange of information in relation to any securities of any company on Stock Khoj. Innovative Limited shall not be liable for any losses that any individual or entity may suffer as a result of any transaction/activity carried out on or arising out of Stock Khoj. By downloading Stock Khoj and accepting the terms and conditions, you agree that you shall use Stock Khoj in full compliance with all local, state and central laws, regulations, rules or bye-laws in relation to the activities carried out on Stock Khoj and Innovative Limited shall not, in any manner, be liable for any noncompliance/contravention of any laws, regulations, rules or bye-laws. 6. After the acceptance of the terms and conditions and the above disclaimer, a further window pops up asking the registered user for the contact details of the three persons to whom the person intends to send an invite for Stock Khoj. After several rounds of deliberations and modifications, the beta version of Stock Khoj went live in the last week of June 2012. At the launch of the beta version of the app, Suresh sent invites to use the app to all of his colleagues. Thereafter and beyond the expectation of the Company, the app went viral and by mid July 2012, it had more than 3500 registered users. Users on the app applauded it for the invitation only format which ensured that only members with a genuine interest could post on the app. Noticing the unparalleled popularity of the app, not only did the Company renew a focused marketing strategy with Stock Khoj at its forefront, but further the CEOs of the companies whose shares were frequently discussed in member posts, approached the Company with offers to fund their advertising. These offers were gladly accepted by the Company and various website linkage agreements were entered into, thereby providing the companies an opportunity to link their websites through Stock Khoj. With this source of funding in place, the Company launched the final version of Stock Khoj as a free app in the third week of July. The Company had earlier in October 2011 launched an online portal, www.khojduniya.com (khojduniya.com) which was a one stop shop for booking tickets for air travel, movies, theatre events, sports events, hotel and taxi bookings etc. khojduniya.com was highly advertised as the next big thing in the market for the 2

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general public. Like the other existing players in the market, khojduniya.com also charged a fee from its customers for obtaining membership with the online portal. 10. Contrary to expectation, khojduniya.com did not live up to the next big thing status and was not as successful as its competitors in the market. As a result, the turnover of the Company for the year 2011-12 dipped to INR 40 crores. Six months into its launch, the market share of the Company was very less in comparison to its competitors providing services similar to khojduniya.com. khojduniya.com was even given poor reviews on various social fora and blogs. Motivated by the rapid success of their innovative app, Stock Khoj, the Company with the help of Suresh, sought to give a boost to the business of khojduniya.com. By the end of July 2012, the Company parallely changed various features of khojduniya.com, making it more user friendly and attractive and re-marketed khojduniya.com as new and improved. Additionally, many policy decisions were also made by the Company in the first week of August 2012 and some resolutions were passed to the effect. Some of the resolutions duly adopted by the board were as follows: i. Anyone registering with khojduniya.com, who satisfies the terms and conditions of membership of Stock Khoj, would automatically get the membership for Stock Khoj. All the members of Stock Khoj would be compulsorily required to register with khojduniya.com, though at a discounted price and upon such registration, such members will also enjoy additional discounts on khojduniya.com.

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The efforts of the Company and the various changes undertaken by it yielded positive results. The number of people who subscribed to khojduniya.com tripled within a months time. Two of the rival websites publicly expressed their disappointment on the manner in which khojduniya.com was being promoted. It was reported that the price of the services provided by khojduniya.com could not be commercially matched by other websites even if they were to offer the same on a no-profit basis. They further went on to allege that the manner of operation of khojduniya.com was prejudicial to the interest of all the players in the market. One such company, OldIdeas Limited approached the Competition Commission of India (the CCI). On 27th August, 2012, CCI took cognizance of the matter and initiated investigation against the Company, in relation to the promotion of khojduniya.com. On the other hand, on 28th of August, 2012, a financial newspaper with nationwide circulation - Cent, carried a story profiling the various ways in which technology was helping the investors and the Company got prominent mention for SmartStock and Stock Khoj. On the 4th of September, 2012, the Securities and Exchange Board of India (SEBI) issued a public interest advertisement in Cent warning the public at large against using Stock Khoj and engaging in the trading activities being carried out on it. 3

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Unfazed by SEBIs public advertisement, the Company made plans for the future development of Stock Khoj, which included: i. Setting up an optional mechanism by which any registered member who is a prospective buyer on Stock Khoj may deposit a lump sum amount in Innovative Limiteds designated bank account. This is to demonstrate his ability to buy the shares he offers to. On the deposit by the buyer, the buyers profile will be updated to that of a Star Buyer. On the seller releasing the securities to the buyer, Innovative Limited will release the buyers money in the designated bank account to the seller. The objective to be achieved is that a prospective seller would be more comfortable in selling shares to such a Star Buyer. Innovative Limited seeks to have Stock Khoj registered as a Payment and Settlement System with Reserve Bank of India (RBI) under the Payment and Settlement Systems Act, 2007.

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On 10th September, 2012, SEBI passed an ex-parte, ad-interim order against the Company stating that for such activities, it required a stock exchange license. Noting the turnover of the Company, a penalty amount of Rs. 5.5 crores (Rupees Five Crores Fifty Lakhs Only) was levied on the Company. Additionally, the order instructed the Company to suspend the functioning of Stock Khoj with immediate effect and show cause as to why the operating of Stock Khoj should not be permanently prohibited. Aggrieved by this, the Company approached the High Court of Madhya Pradesh, instituting a writ petition against SEBI challenging the order passed by it. By this time, the Director-General of the CCI (the DG) had completed investigation and presented a detailed report, running into over 50 pages, on entire issue to the CCI. The CCI passed an order (the CCI Order) declaring activities of the Company in relation to the online portal to be in violation of Competition Act, 2002. The CCI Order referred to the entire report submitted by DG. The operative part of the CCI Order was as follows: the the the the the

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We substantially agree with the observations made by the DG in its report and under the given facts and circumstances, we declare the activities of Innovative Limited as anti-competitive and having an appreciable adverse effect on the competition in the market. A penalty of Rupees 10 lakhs is also being imposed on Innovative Limited and Innovative Limited is hereby directed to suspend such activities. 20. Aggrieved by the CCI Order, the Company filed another writ petition in the High Court of Madhya Pradesh challenging the CCI Order. Both the writ petitions have been clubbed together for a joint hearing and disposal by the Hon'ble High Court. The main issues to be argued by the parties are as follows-

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Whether the present writ petitions are maintainable before the Honble High Court? Is the Company running an unrecognised stock exchange on account of Stock Khoj? Whether the manner of promoting khojduniya.com by the Company amounts inter alia to an anti-competitive practice in violation of Sections 3 and 4 of the Competition Act, 2002?

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Notes for the Participants i. Participants are encouraged to include issues additional to those outlined above. For the purposes of this moot proposition no local or state laws apply to the present case. All names and references to a person, entity, platforms or trade names used in the proposition are fictitious and any resemblance to any existing persons, entities, platforms or trade names is purely coincidental and unintentional.

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