Best Applicant Memorial

118
SECURITIES APPELLATE TRIBUNAL
TRADEXCHANGE LIMITED,
MR. ROBIN KANWAR,
FINLINE FINANCIAL SERVICES LIMITED
& HIGH NETWORTH FUND, LP
(APPELLANTS)
SECURITIES AND EXCHANGE BOARD OF INDIA
(RESPONDENT)
2015
MEMORIAL FOR APPELLANTS

TABLE OF CONTENTS
LIST OF ABBREVIATIONS .................................................................................................... 4
INDEX OF AUTHORITIES...................................................................................................... 7
STATEMENT OF JURISDICTION........................................................................................ 14
STATEMENT OF FACTS ...................................................................................................... 15
ISSUES RAISED ..................................................................................................................... 17
SUMMARY ............................................................................................................................. 18
ARGUMENTS ADVANCED ................................................................................................. 20
I. THE APPELLANTS HAVE NOT VIOLATED ANY DISCLOSURE

REQUIREMENTS ............................................................................................................. 20
A. TradExchange has not delayed in disclosing the filing of lawsuit to stock exchange
…………………………………………………………………………………….20
B. The Appellants have adequately disclosed material information in the prospectus . 22
II. PREFERENTIAL ISSUE MADE BY TRADEXCHANGE IS VALID ................. 30
A. The SEBI order debarring TradExchange from accessing the capital market is ultra
vires .................................................................................................................................. 30
B. Preferential issue can be made even if an issuer company is barred from accessing
the capital market.............................................................................................................. 32
C. Preferential issue can be made even if an issuer company is barred from trading in
securities on a stock exchange .......................................................................................... 34
D. TradExchange complied by all the conditions required for making preferential

allotment under the ICDR Regulations ............................................................................ 35
III. MR. KANWAR HAS NOT VIOLATED THE SEBI ORDER BY SELLING HIS
SHARES .............................................................................................................................. 36
IV. TRADEXCHANGE, MR. KANWAR AND HNF DID NOT INDULGE IN

INSIDER TRADING ......................................................................................................... 37
2
A. Due diligence is an exception to communication of UPSI....................................... 37
B. Due diligence was in the best interest of the company ............................................. 38
C. HNF did not trade in securities on the basis of UPSI................................................ 39
D. Mr. Kanwar did not trade in securities on the basis of UPSI .................................... 41
V. MR. KANWAR AND HNF DID NOT INDULGE IN PRICE MANIPULATION

………………………………………………………………………………………...42
PRAYER .................................................................................................................................. 44
3
LIST OF ABBREVIATIONS
¶ Paragraph
A.P. Andhra Pradesh
ADR American Depository Receipts
AIR All India Reporter
Anr. Another
Art. Article
BOD Board of Directors
Cal Calcutta
CBI Central Bureau of Investigation
CIT Commissioner of Income Tax
CLB Company Law Board
Corp. Corporation
Cranberry Cranberry Fashion Incorporation
DIP Guidelines SEBI( Disclosure and Investment Protection)

Guidelines, 2000
DRHP Draft Red Herring Prospectus
FDI Foreign Direct Investment
FPO Further Public Offer/ Follow-on Public

Offering
4
HNF High Networth Fund ,LP
ICDR Issue of Capital and Disclosure Requirements
Inc. Incorporation
IPO Initial Public Offer
Ltd. Limited
Mad Madras
MoU Memorandum of Understanding
No. Number
NSE National Stock Exchange
Official. J of E.C. Official Journal of European Communities
Ors. Others
PFUTP Regulations SEBI( Prohibition of Fraudulent and Unfair

Trade Practices relating to Securities
Market)Regulations, 2003
PIT Regulations, 1992 SEBI(Prohibition of Insider

Trading)Regulations, 1992
PIT Regulations, 2015 SEBI(Prohibition of Insider

Trading)Regulations, 2015
r/w Read with
Rs. Rupees
SAT Securities Appellate Tribunal
5
Sec. Section
SC Supreme Court
SCC Supreme Court Cases
SCR Act Securities Contracts (Regulation) Act, 1956
SEBI Securities Exchange Board of India
TradExchange TradExchange Limited
U.S. United States of America
UOI Union of India
UPSI Unpublished Price Sensitive Information
v/v. Versus
6
INDEX OF AUTHORITIES
Adjudication Orders
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
................................................................................................................................. ….22, 24, 25
Books
ALAN R. BROMBERG AND LEWIS D. LOWENFELS, BROMBERG & LOWENFELS ON SECURITIES

FRAUD & COMMODITIES FRAUD, § 6:166 (2nd ed., Shepard's/McGraw-Hill 2001).............. 24
DE SMITH, WOOLF AND JOWELL, JUDICIAL REVIEW OF ADMINISTRATIVE ACTION ¶5.044 (5th
ed. Sweet and Maxwell 1995). ............................................................................................. 32
HALSBURY’S LAWS OF ENGLAND 2 (Lord Simonds ed., 3rd ed., Butterworths, 1952) ............. 27
M.P. JAIN AND S.N. JAIN, PRINCIPLES OF ADMINISTRATIVE LAW 111 (6th ed., Lexis Nexis,
2013)..................................................................................................................................... 32
N.S. BINDRA, N.S. BINDRA’S INTERPRETATION OF STATUTUES, 775(10th ed., Lexis Nexis,
2006)............................................................................................................................... 33, 34
PETER MAXWELL, BRIAN GALPIN AND ROY WILSON, INTERPRETATION OF STATUTES 36,315-
316 (11th ed. 1962) ................................................................................................................... 34
Cases
Akbar Badruddin Jiwani v Collector of Customs, Bombay, 1990 AIR 1579.......................... 29
Ashok Malhotra and Ors. v Union of India, W.P.(C) No. 5661/2001 ..................................... 32
Bank of India v Degala Suryanarayana, 1999 AIR 2407......................................................... 42
Cement Marketing Co. of India Ltd. v Assistant Commissioner of Sales Tax, 1980 AIR 346.
.............................................................................................................................................. 29
Cochin Malabar v P.K.C, [2003] 114 Comp Cas 777. ............................................................ 38
7
Consim Info Pvt. Ltd. v Google India Pvt. Ltd., [2013] 54 PTC 578 (Mad). .......................... 26
G.F.F. Foulkes and Ors. v A.S. Suppan Chettiar, 1951 AIR 296, 305. .................................. 33
General Officer Commanding, Rashtriya Rifles v CBI and Anr., [2012] 6 SCC 228. ............ 27
Hemdan v State of Rajasthan, 1996 AIR 5, 6 .......................................................................... 33
Hindustan Steel Limited v State of Orissa, 1970 AIR 253. ............................................... 21, 28
In Re. Sakamari Steel and Alloys Limited. (1981) 51 Com Cas 266. ..................................... 27
Indian Bank Mutual Fund and Ors. v SEBI, WP (C) No. 7463/2000...................................... 31
Jamuna Singh and Ors. v Bhadai Sah, 1964 AIR 1541. .......................................................... 27
Jeet Singh and Anr. v Union of India and Ors., [2011] 13 SCC 534....................................... 35
M.V. Janardhan Reddy v Vijaya Bank, [2008] 7 SCC 738, 746. ............................................ 32
M/S Motilal Padampat Sugar Mills Private Company Limited v State of Uttar Pradesh and
Ors., 1979 AIR 621 .............................................................................................................. 28
Manick Lall v Dabiruddin Ahmad, 1951 AIR 236-38 ............................................................. 34
Mehool Bhuva v M/S Indo-Nippon Chemical Company Ltd and Ors., [2014] 122 CLA 95,
¶12 (CLB)............................................................................................................................. 38
Natesa Mudaliar v Dhanpal Bus Service, 1964 AIR 139 (Mad). ............................................ 34
Neelima v Harinder, 1990 AIR 1402 ....................................................................................... 32
Nirma Industries Ltd. v SEBI, [2013] 8 SCC 20. .................................................................... 37
P.J. Kurien v Renjitha and Ors., (2000) CriLJ 1731 (Ker). ..................................................... 27
Ritesh Aggarwal and Anr. v SEBI, [2008] 8 SCC 205. ........................................................... 31
S. Sharma Transport v Government of Andhra Pradesh and Ors., 2002 AIR 322. ................. 32
S.P. Gupta v President of India, 1982 AIR 149. ...................................................................... 33
Shankar Sharma v SEBI, SAT Appeal No. 29 of 2001, (25/06/2002)………………………28
Shri Gajendra Kumar v Union of India and Ors., [2004] 110 DLT 591.................................. 32
Virtual Soft Systems Ltd. v Commissioner of Income Tax, [2007] 289 ITR 83. .................... 36
8
Circulars and Reports
Guidance note on clause 36 of the Listing Agreement, National Stock Exchange-Circulars

Issued to Listed Companies, (Sept. 30, 2014), available at
http://www.nseindia.com/content/equities/NSE_CIRC_30092014.pdf. .............................. 22
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. ........... 25, 37, 40, 41
SEBI Guidelines for Execution of Block deals on the Stock Exchanges, MRD/DoP/SE/Cir-
19 /05, (02/09/2005), available at
http://www.sebi.gov.in/circulars/2005/mrdcir0192005.html. .............................................. 42
Dictionary
WHARTON LAW LEXICON 167 (14th ed., 1938) ......................................................................... 33
Foreign Cases
Amsted Industries Inc. v. Buckeye Steel Castings Co., 24 F.3d 178, 187 (Fed. Cir. 1994). ... 25
Bristol Guardians v. Bristonl Waterworks Co., [1914] AC 379, 388 ...................................... 33
Cubby Inc. v. CompuServe Inc., 776 F. Supp. 135 (S.D.N.Y. 1991). ..................................... 26
eBay Inc. v. MercExchange, L.L.C 401 F.3d 1323 (Fed. Cir. 2005). ..................................... 26
Employer-Teamster Joint Council Pension Trust v. Am.W. Holding Corp., 320 F.3d 920, 934
(9th Cir. 2003). ..................................................................................................................... 24
General Electric Company v. Cathcart, 980 F.2d 927, 935 (3d Cir. 1992) ............................ 25
In Re Donald J. Trump Casinos Securities Litigation., 7 F.3d 357, 371 (3d Cir. 1993). ........ 23
In Re Merck and Co., Securities Litigation, 432 F.3d 261, 264 (3d Cir. 2005). ..................... 28
In Re Vonage Initial Public Offering (IPO) Securities Litigation, Civil Action No.07-
177(FLW) (D.N.J Apr. 02, 2009)......................................................................................... 25
9
Kuafman v. Trump’s Castle Funding, 7 F.3d 357 (3d Cir. 1993)............................................ 23
New York Casualty Co. v Lawson, 24 S.W. 881, 160 Tenn. 329 ........................................... 32
TSC Industries Incorporation v. Northway Incorporation, 426 U.S. at 449. ........................... 24
Weiner v. Quaker Oats Co., 928 F. Supp. 1372, 1384 (D.N.J. 1996)...................................... 25
Winona Oil Co. v. Barnes, 83 Okl. 248, 200 P.981 32
Internet documents
Closing the Gap-Indian Online Intermediaries and a Liability System Not Yet Fit for Purpose,
Copenhagen Economics, (March, 2014), available at
http://www.globalnetworkinitiative.org/sites/default/files/Closing%20the%20Gap%20-
%20Copenhagen%20Economics_March%202014_0.pdf. .................................................. 26
Insider Trading and the Risks of Due Diligence Access, IndiaCorpLAw, (Jan. 22, 2015),
available at http://indiacorplaw.blogspot.in/2015/01/insider-trading-and-risks-of-due.html.
.............................................................................................................................................. 41
S.K. Agarwalla and Ajay Pandey, Price Impacts of Block Trades and Price Behavior
Surrounding Block Trades in Indian Capital Market, IIM, Ahmedabad (April, 2010),
available at http://www.iimahd.ernet.in/publications/data/2010-04-02Sobheshkumar.pdf. 42
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/. ......................................................... 41
Journals
Alan Kraus and Hans Stoll, Price Impacts of Block Trading on the New York Stock Exchange,
JOF (June 1972) 569-88. .......................................................................................................... 42
Directive 2003/C 71 E/07 of the European Parliament and of the Council 62 (Official J. of
E.C.) (March 25, 2003). ....................................................................................................... 40
10
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. .................................................................................................................... 39
Gordon Gemmill, Transparency and Liquidity: A Study of Block Trades on the London Stock
Exchange under Different Publication Rules, JOF (Dec.1996) 1765-1790 ......................... 42
Robert W. Holthausen and Robert E. Verrecchia The Effect of Informedness and Consensus
on Price and Volume Behavior, ACC. REV (Jan. 1990) 191-208. ........................................ 42
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). ................................................................................................................ 36
Other authorities
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/c
ms/sebi_data/docfiles/30613_t.html..................................................................................... 24
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 . ............................ 20
SAT Cases
Bank of Baroda v SEBI, SAT Appeal No. 2 of 2000, (27/07/2000), available at

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1300883330270.pdf .............................. 30
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. ................. 30, 31, 34
Cabot International Capital Corporation v SEBI, SAT Appeal No. 24 of 2000, (25/01/2011),
available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1300789400648.pdf........... 28
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. ................. 23, 30, 31
11
Gujarat NRE Mineral Resources Ltd. v SEBI, SAT Appeal No. 207 of 2010, (18/11/2011),
available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1321605333083.pdf..... 26, 39
Hindustan Dorr Oliver Ltd and Ors. v SEBI, SAT Appeal No. 107 of 2011, (19/10/2011),
K. Anjaneya Raju v SEBI and Ors., SAT Appeal No. 53 of 2006, (17/03/2006), available at
http://www.sebi.gov.in/cms/sebi_data/pdffiles/11755_t.pdf. .............................................. 21
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. ....................... 36, 42
MAN Industries (India) Limited v SEBI, SAT Appeal No. 208 of 2011, (30/03/2012),
Parsoli Corporation Limited and Ors. v SEBI, SAT Appeal No. 146 of 2010, (12/08/2011),
Samrat Holdings Ltd. v SEBI, [2001] 29 SCL 417 (SAT) ...................................................... 28
Sawaca Business Machines Limited v SEBI, SAT Appeal No. 76 of 2005, (10/08/2006),
available at http://www.sebi.gov.in/cms/sebi_data/pdffiles/12659_t.pdf ............................ 32
SEBI Order In the Matter of: Synchronised Trading By Connected Entities in Allcargo and
others, WTM/SR/IVDID-3/20/09/2013, available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1378463520339.pdf. ............................. 36
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...................................................... 31, 42
Sundaram Finance Ltd. and Ors. v SEBI, SAT Appeal No. 37 of 2002, (29/01/2003),
UBS Securities Asia Limited v SEBI, SAT Appeal No. 97 of 2005, (09/09/2005), available at
http://www.sebi.gov.in/cms/sebi_data/pdffiles/12515_t.pdf. .............................................. 31
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 ............................................. 31
12
SEBI Order
SEBI Order In the Matter of Abhijit Rajan, Ex- Chairman and Managing Director of
Gammon Infrastructure Projects Limited, WTM/ RKA/ISD/ 71 /2014, available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1405588580263.pdf. ............................. 33
SEBI Order In the Matter of Idol India Infrastructures Limited, WTM/PS/08/IMD-

DOF/MAY/2014, available at
SEBI Order In the Matter of IPO of One life Capital Advisors Ltd., WTM/RKA/IVD/ID-
10/35 /2013, available at
SEBI Order in the Matter of Shah Group Builders Ltd., WTM/RKA/CFD/ 65/2015, available
at http://www.sebi.gov.in/sebiweb/home/detail/31501/new/PR-Order-in-the-matter-of-
Shah-Group-Builders-Limited. ...................................................................................... 33, 36
SEBI Order In the Matter of Suresh N. Vijay and Ors., WTM/PS/61/CFD/DIL-1/NOV/2013,

Statutes / Regulations
Foreign Exchange Management Act, 1999………………………………………….……….15
Indian Copyright Act, 1957 ..................................................................................................... 26
SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009………….………..22
SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 2003…………………………………………………………..…………….34,42
SEBI (Prohibition of Insider Trading) Regulations, 1992……………………………….34, 37
SEBI (Prohibition of Insider Trading) Regulations, 2015………………………….……34, 37
Securities and Exchange Board of India Act, 1992………………………………….……….14
Securities Contracts (Regulation) Act, 1956……………………………………….…….18, 20
13
STATEMENT OF JURISDICTION
The Appellants have the honour to submit before the Hon’ble Securities Appellate Tribunal
the memorandum for Appellants in the case of TradExchange & Ors. v Securities and
Exchange Board of India, under Section 15T of the Securities and Exchange Board of India
Act, 1992.
14
STATEMENT OF FACTS
1. Formation of TradExchange: In 2002, Mr Kanwar decided to establish an online

marketplace for luxury goods. Through his newly incorporated company, TradExchange
Limited, he set up an online marketplace by the name ‘TradEx’, under which it would
provide an online platform on which its clients can display and sell their products.
2. Expansion: In 2006, TradExchange decided to do initial public offering (hereinafter,

‘IPO’) and the company’s shares were then listed on the NSE. Later, it carried out a
sponsored offering of American Depository Receipts that were listed on NASDAQ.
3. Further Public Offering: Later, in consultation with FinLine Financial Services Limited,
it decided to go for a follow-on public offering (hereinafter, ‘FPO’).
4. Additional Risk added: An employee of TradExchange wrote a letter to Securities and

Exchange Board of India (hereinafter, ‘SEBI’) indicating the prevalence of counterfeit
products being sold on TradEx. When SEBI communicated its comments on the DRHP, it
asked the company to make appropriate disclosure. TradExchange included an additional risk
factor stating that it may be subject to allegations of counterfeiting claims and that items
listed on TradEx can infringe third party intellectual property rights, providing a takedown
procedure which will not be always successful. TradExchange then proceeded with the 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.
7. Violation of Foreign Investment Policies: Later, the Enforcement Directorate, initiated

investigations against TradExchange on account of violation of the Foreign Exchange
Management Act, 1999 and Government’s policy on foreign investment alleging that
prospectus didn’t contain any reference to compliance with foreign investment policies.
8. Complaint before SEBI: Cranberry filed a complaint before SEBI alleging misstatements
in the prospectus. SEBI initiated investigations and passed an interim order barring
15
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.
16
ISSUES RAISED
I. WHETHER THE APPELLANTS HAVE VIOLATED ANY DISCLOSURE
REQUIREMENTS?
II. WHETHER PREFERENTIAL ISSUE MADE BY TRADEXCHANGE WAS VALID?

III. WHETHER MR. KANWAR HAS VIOLATED THE SEBI ORDER BY SELLING HIS
SHARES?
IV. WHETHER TRADEXCHANGE, MR. KANWAR AND HNF HAVE INDULGED IN
INSIDER TRADING?
V. WHETHER MR. KANWAR AND HNF HAVE INDULGED IN PRICE MANIPULATION?
17
SUMMARY
I. THE APPELLANTS HAVE NOT VIOLATED ANY DISCLOSURE REQUIREMENTS
1. It is humbly submitted that Appellants have not violated any disclosure requirements
because the there was no delay in informing the stock exchange of the suit filed by
Cranberry, and further there was no requirement of disclosing about legal notice in the
prospectus. It is mandatory for a listed company to comply with Listing Agreement which
mandates that disclosure about litigation should be made promptly to stock exchanges. It is
submitted that SEBI in a discussion paper had observed that sometimes the materiality of an
information cannot be judged, and thus it is only after its materiality is known, does the
company is construed to have become aware of the information. In the instant case too,
TradExchange took legal advice, and immediately after it came to know its materiality, it
disclosed it to the stock exchange, therefore not violating the Listing Agreement or the
Securities Contracts (Regulation) Act, 1956.
2. Further, the non-disclosure of legal notice and the consequent ruling that TradExchange
did not adequately disclose material information is contrary to the obligations under the
ICDR Regulations. The Appellants humbly submit that the legal notice does not constitute
material information as the prospectus adequately disclosed material information through the
additional risk factor in the prospectus. Under the ICDR Regulations, the legal notice is not
required to be disclosed and further the legal notice does not meet the test of materiality in
order to constitute a material development under the ICDR Regulations. It is also contended
that the mere possibility of litigation does not mandate disclosure in the prospectus. Moreover
a statement of specific compliance with the FDI policy is not required under the ICDR
Regulations and was also excluded bonafidely on basis of legal advice.
II. PREFERENTIAL ISSUE MADE BY TRADEXCHANGE WAS VALID
3. It is submitted that preferential issue made by TradExchange was valid because the SEBI
order was ultra vires, hence void ab-initio. It has been held in various cases that an order of
debarment is a power exercised in excess of jurisdiction as provided to SEBI because it is
punitive in nature, and not remedial. Further, for public and rights issue there is a condition in
the ICDR Regulation, but there is no such requirement for preferential issue, therefore it is to
be interpreted in good faith that preferential issue can be made even if an issuer is debarred
18
from accessing the capital market. Further, SEBI has used different phrases in earlier orders
that it has passed against other persons, but the phrase in the instant case was not to debar
TradExchange from issuing shares indirectly.
III. MR. KANWAR HAS NOT VIOLATED THE SEBI ORDER BY SELLING HIS SHARES
4. It is submitted that Mr. Kanwar has not violated the SEBI order selling his shares through
block trades as it is an off-market transaction. In the instant case, Mr. Kanwar was debarred
from trading in shares only in stock exchange, but a block deal transaction is an off-market
transaction, therefore SEBI Order has not been violated. Further, the 2% shares sold also are
good in law, since it has been contended that the order of SEBI is invalid.
IV. TRADEXCHANGE, MR. KANWAR AND HNF HAVE NOT INDULGED IN INSIDER
TRADING
5. It is humbly submitted that the Appellants have not indulge in insider trading because due
diligence is an exception to communication to of UPSI if the directors are of the informed
decision that the transaction entered into is for the best interest of the company. Issuing new
shares by means of preferential allotment would benefit the company and help obtain
additional funds. Further, the information received by HNF during due diligence was not
(UPSI) because the Waltenberg and HiSketch were only clients of TradExchange that was in
the field of providing an online platform on which its clients can display its goods and sell its
goods. Waltenberg and HiSketch being such sellers were clients and the information
regarding their withdrawal and negotiation respectively can be construed as one derived in
the ordinary course of business which is an exception to communication of UPSI. Further Mr
Kanwar did not trade in the securities when in possession of UPSI as the MoU between
HiSketch and TradExchange had expired on May 31st and he had traded in the securities on
June 5th, 2015 after he had been cleansed of the UPSI.
V. MR. KANWAR AND HNF HAVE NOT INDULGED IN PRICE MANIPULATION
6. It is submitted that Mr. Kanwar and HNF did not indulge in price manipulation because
block trades in parts does not impact the volatility on the stock market. The Appellants have
traded in parts in order to avoid the allegation of price manipulation. Therefore it is
contended that Appellants have not indulged in price manipulation. Thus did not violated
Regulation 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003.
19
ARGUMENTS ADVANCED
I. THE APPELLANTS HAVE NOT VIOLATED ANY DISCLOSURE

REQUIREMENTS
1. The Appellants humbly submit that TradExchange has not violated any disclosure
requirements. This argument is twofold. Firstly, TradExchange has not delayed ‘in disclosing
the filing of Cranberry’s lawsuit to the stock exchange’ [A]. Secondly, TradExchange has
adequately disclosed all the material information in the prospectus [B].
A. TRADEXCHANGE HAS NOT DELAYED IN DISCLOSING THE FILING OF LAWSUIT TO

THE STOCK EXCHANGE
2. It is humbly submitted that TradExchange has not delayed ‘in disclosing the filing of
Cranberry’s lawsuit to the stock exchanges’. Thus, as a consequence, it has not violated the
Listing Agreement or the Securities Contracts (Regulation) Act, 1956 (hereinafter, ‘SCR
Act’) as TradExchange had disclosed the filing of suit promptly after the ‘event’ to the stock
exchange [1].
1. DISCLOSURE OF SUIT WAS PROMPT AFTER THE ‘EVENT’
3. It is mandatory for a listed company to comply with the conditions of the Listing
Agreement under sec. 21 of the SCR Act, failure of which attracts penalty under sec. 23A and
sec. 23E of the SCR Act. The Appellant humbly submits that TradExchange has not violated
the aforesaid provisions.
4. The disclosure requirement mandatory under Clause 36(5) of the Listing Agreement of
NSE, states that the Company ‘will promptly after the event inform the Exchange’ of any
litigation with a material impact, to which it is a party. Thus, inter alia, it is important to
determine when the event has occurred, in order for the information to be conveyed to the
stock exchange. Although not dealt with in the Listing Agreement, SEBI in a discussion
paper1 has clarified ‘when can an event be said to have occurred?’.
5. It states that at times, the materiality of the information cannot be determined at initial
stage, and the company may need to seek ‘expert advice’ to ‘determine the nature of the
1
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 .
20
information’. In such cases, the company shall be ‘construed to have become aware of the
event when the probable impact of the event becomes known to the extent of 75% of
materiality.’
6. Further, the Guidance Note on Clause 36 of the Listing Agreement 2 issued by National
Stock Exchange of India Ltd. (hereinafter, ‘NSE’) lays down that ‘entity may consider the
impact of such disclosure on legal proceedings while making the disclosures and make the
disclosure accordingly’. In the instant case, since TradExchange had taken all the measures to
ensure that there is no infringement of third-party intellectual copyright, it was ‘shocked’ and
‘taken aback’ after it was notified of the suit. It is humbly submitted that all the matters which
have a bearing under Clause 36 of the Listing Agreement, are internally discussed and upon
the facts and circumstances, legal advice is sought.
7. TradExchange had sought legal advice from the lawyers, and made a public announcement
only after it believed to have known substantial impact of the event. Thus, the event can be
construed to have become known to TradExchange only after one week (after the lawyers
gave initial advice), i.e., on July 24, 2014, after which TradExchange promptly informed the
stock exchange about the same promptly.
8. In addition, it is humbly submitted that objective of Clause 36 of the Listing Agreement is

to enable the shareholders ‘to appraise the position of the Company’ and also to ‘avoid
establishment of a false market’. The disclosure of litigation in isolation would have given an
incorrect picture and therefore would have misled the public.
9. In K. Anjaneya Raju v SEBI,3 SAT observed that unnecessary matter such as ‘delay in
informing the stock exchanges’ should not be pursued. It was further observed in Hindustan v
State of Orissa,4 that even if a penalty is prescribed for a failure of a statutory duty, a matter
can be excused and condoned ‘when there is technical or venial breach of the provisions…or
where the breach flows from a bonafide belief that the offender is not liable to act in the
manner prescribed by the statute’.
2
Guidance note on clause 36 of the Listing Agreement, National Stock Exchange-Circulars Issued to Listed
Companies, (Sept. 30, 2014), available at
http://www.nseindia.com/content/equities/NSE_CIRC_30092014.pdf.
3
K. Anjaneya Raju v SEBI and Ors., SAT Appeal No. 53 of 2006, (17/03/2006), available at
http://www.sebi.gov.in/cms/sebi_data/pdffiles/11755_t.pdf.
4
Hindustan Steel Limited v State of Orissa, 1970 AIR 253.
21
10. It is humbly prayed in the instant case, firstly, that a mere delay of one week, should be
excusable as a delay of one week would not have changed the impact on NSE; and secondly,
TradExchange was under a bonafide belief that it had to make the relevant disclosure only
after the occurrence of the event and not immediately after the knowledge of the litigation
suit.
11. Further, in the New Delhi Television Limited case, 5 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’. Thus, impliedly, the Adjudicating Officer also
reiterated that if sufficient evidence can be produced to prove that legal advice is being
sought, the company can be exempted. Further, in Sundaram v SEBI,6 SAT observed that if
legal advice is sought, then the liability of the Company is subdued.
12. In the instant case, it is certain that legal advice was being sought, at the time when the
disclosure requirement arose. Therefore, TradExchange should not be held liable, and thus
the order should be quashed as TradExchange has not delayed in promptly informing the
stock exchange about the litigation.
B. THE APPELLANTS HAVE ADEQUATELY DISCLOSED MATERIAL INFORMATION IN
THE PROSPECTUS
13. The Appellants humbly submit that non-disclosure of ‘legal notice’ in the prospectus does
not amount to inadequate disclosure. This argument is threefold. Firstly, legal notice does not
constitute material information [1]. Secondly, the legal notice does not amount to litigation
under the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009
(hereinafter, ‘ICDR Regulations’) [2]. Thirdly, the ICDR Regulations do not mandate the
disclosure of specific foreign direct investment (hereinafter, ‘FDI’) policy compliance [3].
1. LEGAL NOTICE DOES NOT CONSTITUTE MATERIAL INFORMATION
14. It is submitted that legal notice does not amount to material information as it is not
mandated to be disclosed in the prospectus [i] and further the legal notice does not merit
disclosure [ii].
5
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.
6
Sundaram Finance Ltd. and Ors. v SEBI, SAT Appeal No. 37 of 2002, (29/01/2003), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1299756576324.pdf, ¶16.
22
i. THE LEGAL NOTICE IS NOT REQUIRED TO BE DISCLOSED
15. The disclosure of legal notice does not constitute material information. This argument is
threefold. Firstly, the prospectus contained adequate information for investors to take a fair
and rational investment decisions [a]. Secondly, the legal notice does not meet the test of
materiality [b]. Thirdly, the mere possibility of litigation does not constitute material
information[c].
a. The prospectus adequately disclosed material information
16. The materiality of the legal notice can be determined on the basis of whether non-
disclosure would have had a ‘devastating effect on the decision making process of the
investors and without which the investors could not have formed a rational and fair’
investment decision.7 In the instant case, TradExchange had clearly stated, by inserting an
additional risk factor in the prospectus, that there is an imminent risk of counterfeit claims
which runs along with the business conducted by the company. Therefore, the imminent risk
that could impact the business was mentioned in the prospectus, which allowed the investors
to make an informed decision.
17. Moreover under the Bespeaks caution doctrine, the ‘presence of a meaningful cautionary
8
language can preclude a finding that investors were misled’. Therefore, the disclosure
through the additional risk factor expressly stated the possibility of allegations of
counterfeiting. Thus, providing adequate information to the investors to rationally arrive at
their investment decision,9 as the disclosure does not require mathematical accuracy. Hence,
the cautionary language ‘renders the alleged omission immaterial as a matter of law.’10
18. Therefore, non-disclosure of Cranberry’s legal notice could not have a devastating effect
on the decision making of the investors. The materiality mandated under the ICDR
Regulations relates to ‘adequacy’, which does not require compliance to the extent of
7
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.
8
In Re Donald J. Trump Casinos Securities Litigation., 7 F.3d 357, 371 (3d Cir. 1993).
9
SEBI Order In the Matter of Suresh N. Vijay and Ors., WTM/PS/61/CFD/DIL-1/NOV/2013, available at
10
Kuafman v. Trump’s Castle Funding, 7 F.3d 357 (3d Cir. 1993).
23
‘arithmetic accuracy of material facts.’11 This was disclosed for the purpose of formulating a
complete opinion by prospective investors to invest or not to invest in the FPO.12
b. The legal notice does not adhere to the test of materiality
19. The qualitative factors of determining materiality become applicable to an event or

information if ‘a) the omission of which 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’. 13 Therefore, in the principle an omission would be material if the
disclosure had altered the entirety of the information made available in the prospectus.
Further, it is ‘not necessary to show that the investor would have acted differently.’ 14
Prospectus had expressly conveyed to the investors that allegations of counterfeiting would
arise and that the take down procedure would not always be successful. Hence, the disclosure
of the legal notice would not have substantially impacted the investment decision.
20. The determination of materiality merely on the basis of market reaction does not address
the multitude of factors, which impact the investor’s decision making15 because it leads to
‘isolating the reaction to the particular information as opposed to reaction to other
information including broader economic, market or industry factors’. 16 The adoption of
requirement of immediate market reaction as a criterion for determining materiality ‘fails to
address the realities… and distortions of the market.’17 As the NDTV case18 has demonstrated
that ‘no negative market reaction’ does not mean that the undisclosed information was not
material event/ information.
21. In the instant case, the reaction of the NSE stock to the disclosure of the information was
not immediate and was in the following days, which demonstrates the economic and industry
factors that influenced the decision of the shareholders. As the price of TradExchange’s ADR
11
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
12
SEBI Order In the Matter of IPO of One life Capital Advisors Ltd., WTM/RKA/IVD/ID-10/35 /2013,
available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1377858926719.pdf.
13
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.
14
TSC Industries Incorporation v. Northway Incorporation, 426 U.S. at 449.
15
Employer-Teamster Joint Council Pension Trust v. Am.W. Holding Corp., 320 F.3d 920, 934 (9th Cir. 2003).
16
ALAN R. BROMBERG AND LEWIS D. LOWENFELS, BROMBERG & LOWENFELS ON SECURITIES FRAUD &
COMMODITIES FRAUD, § 6:166 (2nd ed., Shepard's/McGraw-Hill 2001).
17
Employer-Teamster Joint Council Pension Trust v. Am.W. Holding Corp., 320 F.3d 920, 934 (9th Cir. 2003).
18
Adjudication Order In the Matter of M/s. New Delhi Television Limited, AO/PJ/JAK/1 of 2015, available at
24
fell 20% on the NASDAQ, there was a precipitous slide on the NSE in the following days,
which demonstrates the economic factors that influenced the shareholders on the NSE.
22. Moreover, the shareholders in general merely demonstrated their already prevalent
apprehensions that counterfeiting had become an industry wide phenomenon. Further the
adoption of a lower standard of materiality would lead to ‘overabundance of information
being supplied to investors of dubious significance.’19
c. The mere possibility of litigation does not constitute material information
23. In a case concerning the non- disclosure of a legal notice, in the prospectus concerning
infringement of intellectual property rights,20 there is no obligation to disclose the possibility
of litigation.21 Mere possibility of litigation does not constitute material information, which is
required to be disclosed in the prospectus.22 Therefore, the Appellants humbly contend that
the legal notice conveyed a mere possibility of litigation, which is not required to be
disclosed, in addition to the fact that legal notice had not merit in law.
24. The alleged omission to disclose the legal notice from Cranberry is not material as there
is no duty to disclose a potential lawsuit where the information comprises matters of
supposition.23 Further speculative disclosures can have ‘adverse impact on the market and the
price discovery process’ and should be avoided 24 as it would be against the objective of
ICDR Regulations, which aid the investor in their decision making. 25 The adequate
cautionary language in the form of the additional risk factor, warned the investors of the
potential inadequacy of the take down procedure to tackle intellectual property right
infringement.
25. Since it is the prerogative of companies to decide on materiality,26 TradExchange on bona

fide grounds determined that the legal notice was not material. Further, because the
19
Weiner v. Quaker Oats Co., 928 F. Supp. 1372, 1384 (D.N.J. 1996).
20
In Re Vonage Initial Public Offering (IPO) Securities Litigation, Civil Action No.07-177(FLW) (D.N.J Apr.
02, 2009).
21
General Electric Company v. Cathcart, 980 F.2d 927, 935 (3d Cir. 1992); Amsted Industries Inc. v. Buckeye
Steel Castings Co., 24 F.3d 178, 187 (Fed. Cir. 1994).
22
Amsted Industries Inc. v. Buckeye Steel Castings Co., 24 F.3d 178, 187 (Fed. Cir. 1994).
23
In Re Vonage, supra note 20.
24
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. [Hereinafter
Sodhi Committee Report].
25
Adjudication order In the Matter of M/s. New Delhi Television Limited. AO/PJ/JAK/1 of 2015, available at
26
Id.
25
materiality is dependent upon the facts and circumstances of each case, 27 in the instant case,
liability of intermediary and possibility of litigation needs to be taken into consideration.
ii. THE LEGAL NOTICE DOES NOT MERIT DISCLOSURE
26. The Appellants humbly contend that the ‘legal notice’ does not merit disclosure because
prima facie, TradExchange (an an intermediary) is not liable for copyright infringement. An
intermediary as defined under sec. 2(w) of the IT Act is not liable for intellectual property
infringement 28 if they have complied with the safe harbor provisions 29 as provided forth
under sec. 79 of the said Act. In the instance case, TradExchange being an intermediary is
obligated to take down counterfeit goods on being notified, which was not done by
Cranberry. Moreover, it is the burden of the owner of the intellectual property right to police
infringement. The intermediary cannot be held liable on the basis of the existence of
generalized knowledge concerning infringement, as it is considered impractical for an
intermediary to police all content on its website30 for copyright infringement.31 This position
of law has been acknowledged in the eBay Inc. v MercExchange ,32 a U.S. case, concerning
counterfeit goods, 33 whereby the responsibility lied on the party claiming infringement to
notify the intermediary. Moreover in the ordinary course of business34 TradExchange would
receive such legal notices of intellectual property infringement, as it listed the products of the
seller through its marketplace and would take them down in accordance with the take
procedure mandated under the Intermediary guidelines.
27. In any case, TradExchange is indemnified for claims of intellectual property infringement
on the basis of it listing products on its market place through an agreement between the seller
and TradExchange. Thus, TradExchange would not have to bear the cost arising out of any
27
IPO of One life Capital Advisors Ltd, supra note 12.
28
Consim Info Pvt. Ltd. v Google India Pvt. Ltd., [2013] 54 PTC 578 (Mad).
29
Information Technology (Intermediary guidelines) Rules, 2011, Rule 4 r/w Rule 2(d).
30
Cubby Inc. v. CompuServe Inc., 776 F. Supp. 135 (S.D.N.Y. 1991).
31
Indian Copyright Act, 1957, Sec. 63 and 51.
32
eBay Inc. v. MercExchange, L.L.C 401 F.3d 1323 (Fed. Cir. 2005).
33
Closing the Gap-Indian Online Intermediaries and a Liability System Not Yet Fit for Purpose, Copenhagen
Economics, (March, 2014), available at
http://www.globalnetworkinitiative.org/sites/default/files/Closing%20the%20Gap%20-
%20Copenhagen%20Economics_March%202014_0.pdf.
34
Hindustan Dorr Oliver Ltd and Ors. v SEBI, SAT Appeal No. 107 of 2011, (19/10/2011), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1319018937361.pdf; Gujarat NRE Mineral Resources Ltd. v
SEBI, SAT Appeal No. 207 of 2010, (18/11/2011), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1321605333083.pdf; MAN Industries (India) Limited v SEBI,
SAT Appeal No. 208 of 2011, (30/03/2012), available at
26
infringement litigation.
2. LEGAL NOTICE DOES NOT AMOUNT TO LITIGATION OR LEGAL ACTION PENDING
28. Part A (2) (X) (A) of Schedule VIII under the ICDR Regulations requires disclosures of
various ‘outstanding litigations’ and ‘material developments’ such as litigations against the
issuer. The meaning of litigation has to be determined as ‘judicial controversy or contest in a
court of law’,35 whether it is civil or criminal litigation. In General Officer v CBI,36 the court
analysed the expression ‘institution of a case’ to determine what constitutes litigation, and
thus observed, “The expression may mean filing/presentation or received or entertained by
the Court.” Moreover, it was observed in Jamuna v Badhai 37 that ‘a case is said to be
instituted only when the court takes cognizance of the alleged offence’.
29. The Companies (Prospectus and Allotment of Securities) Rules, 2014, mandates
disclosure of ‘any litigation or legal action pending’, wherein, the term legal action has been
interpreted to mean ‘a proceeding by which one party seeks in a court of justice to enforce
some right’,38 and further proceedings mean legal proceedings in contrast to private action.39
In the instant case, the legal notice did not amount to initiation of legal proceedings before a
court because it constituted a mere private action with no cognizance of the court.
30. Moreover an interpretation to include legal notices, as a necessary disclosure would result
in the distortion of the market, due to the disclosure of non material information such as
frivolous legal notices. Therefore, there is no obligation under the ICDR Regulations or under
the Companies (Prospectus and Allotment of Securities) Rules, 2014 to disclose any
information regarding any legal notice as it does not amount to litigation or legal action
pending.
3. THE ICDR REGULATIONS DO NOT MANDATE THE DISCLOSURE OF SPECIFIC FDI

COMPLIANCE
31. The ICDR Regulations do not mandate the specific disclosure of compliance with the FDI
Policy. Moreover, the Enforcement Directorate investigations were initiated after the
conclusion of the FPO, which were premised on the basis of potential violations by
35
P.J. Kurien v Renjitha and Ors., (2000) CriLJ 1731 (Ker).
36
General Officer Commanding, Rashtriya Rifles v CBI and Anr., [2012] 6 SCC 228.
37
Jamuna Singh and Ors. v Bhadai Sah, 1964 AIR 1541.
38
1 HALSBURY’S LAWS OF ENGLAND 2 (Lord Simonds ed., 3rd ed., Butterworths, 1952); In Re. Sakamari Steel
and Alloys Limited. (1981) 51 Com Cas 266.
39
In Re Sakamari Steel and Alloys Ltd., [1981] 51 Com Cas 266.
27
TradExchange. The ICDR Regulations only require the disclosure of government approvals
and licensing arrangements, which are not mandated to be disclosed as business-to-business
FDI is permitted through the automatic route without governmental approval. The Appellants
humbly submit that there is no requirement to specifically disclose the compliance with the
FDI policy.
i. THE SPECIFIC FDI COMPLIANCE WAS NOT STATED IN THE PROSPECTUS
DUE TO THE ADVICE OF THE LEGAL ADVISORS
32. The Appellants humbly contend that they have not violated the ICDR Regulations and
moreover there is no harm caused to the shareholders due to such alleged violation of specific
non-disclosure in the prospectus. The Appellants have not intentionally violated the
Regulations and based their decision on the legal advice, whereby the liability cannot be
imposed on TradExchange.40 Further there is no presumption that every person knows every
law, which would be contrary to ‘common sense and reason.’41 A technical or venial breach42
which does not impact the shareholders does not necessitate imposition of penalty. In the case
of Hindustan v State of Orissa, the Apex court observed that ‘penalty will not ordinarily be
imposed unless the party either acted deliberately in defiance of law or was guilty of conduct
contumacious or dishonest, or acted in conscious disregard of its obligation’.43
33. In a U.S. case, wherein the court while dealing with an issue of non-disclosure of material
information, held that ‘omission of the bottom line to be immaterial since the data necessary
to calculate the amount had been disclosed.’44 The court went on to state further that ‘merely
on non-mentioning of period and value of transactions for which such tax demand was
outstanding’ does not amount to a non-disclosure and thus termed mandating such disclosures
as ‘totally unjustified and unwarranted’.45 SAT has made reference to principles established
in foreign jurisdiction in various cases such as Shankar Sharma v SEBI.
40
Sundaram Finance Ltd. and Ors. v SEBI, SAT Appeal No. 37 of 2002, (29/01/2003), available at
41
M/S Motilal Padampat Sugar Mills Private Company Limited v State of Uttar Pradesh and Ors., 1979 AIR
621; Samrat Holdings Ltd. v SEBI, [2001] 29 SCL 417 (SAT); Cabot International Capital Corporation v SEBI,
SAT Appeal No. 24 of 2000, (25/01/2011), available at
42
Hindustan Steel Limited v State of Orissa, 1970 AIR 253.
43
Id.
44
In Re Merck and Co., Securities Litigation, 432 F.3d 261, 264 (3d Cir. 2005).
45
Id.
28
34. Moreover in a case where TradExchange has acted in a bonafide manner on the basis of
46
the advice tendered by the legal advisors, ‘no penalty is imposable’. Therefore,
TradExchange cannot be held liable for the violation of non-disclosure.
35. Summarizing, TradExchange, FinLine Services and Mr. Kanwar cannot be held liable for
the non-disclosure of the legal notice as it is not mandated by law and does not constitute
material information.
46
Akbar Badruddin Jiwani v Collector of Customs, Bombay, 1990 AIR 1579;Cement Marketing Co. of India
Ltd. v Assistant Commissioner of Sales Tax, 1980 AIR 346.
29
II. PREFERENTIAL ISSUE MADE BY TRADEXCHANGE IS VALID
36. The Appellants humbly submit that preferential issue made by TradExchange was valid
because the order passed by SEBI debarring TradExchange from accessing the capital market
was ultra vires, hence void ab-initio [A]. Further, TradExchange can make preferential
allotment even though it was barred from accessing the capital market [B] or from otherwise
trading in securities on a stock exchange [C] as it complied with all the conditions required to
be fulfilled under the ICDR Regulations for making preferential allotment [D].
A. THE SEBI ORDER DEBARRING TRADEXCHANGE FROM ACCESSING THE CAPITAL

MARKET IS ULTRA VIRES
37. It is submitted that SEBI’s order which debarred TradExchange from accessing the
capital market for three years is ultra vires because SEBI can pass such directions only if it is
remedial in nature and not punitive, and it is submitted that an order of debarment is punitive
in nature in the instant case.
38. SEBI has the power to debar a company from accessing the capital market under sec. 11
or sec. 11B of the Securities and Exchange Board of India (hereinafter, ‘SEBI’) and the
directions issued under the aforementioned provisions ‘have necessarily to be preventive or
regulatory in nature’ and not punitive, as observed in various cases.47 The reason for such
directions to be restricted only for preventive or regulatory nature is because the
‘predominant consideration for invoking such powers is ‘the investors’ interest and the
regulation of the capital market’. 48 Thus, when a direction prohibiting a company from
accessing the capital market is issued, it has to be seen whether such prohibition is an
investor friendly measure or not, since the power of SEBI is not unlimited.49
39. In the instant case, the Appellant humbly submits that the order for debarring
TradExchange is punitive in nature and not preventive or regulatory. Thus, it is ultra vires as
it is passed by SEBI in excess of its jurisdiction. In the case of BPL v SEBI, where the
company was debarred from accessing the capital market for four years, SAT observed that
since the debarred company is a ‘public listed company with large public participation’
47
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; 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.
48
DLF Limited, supra note 7 at ¶93.
49
Bank of Baroda v SEBI, SAT Appeal No. 2 of 2000, (27/07/2000), available at
30
preventing the company from accessing the capital market is not a measure which will stop
them from indulging in market manipulation. It was further observed that such a direction to
restrict a company from accessing the capital market cannot be considered a ‘remedial
measure in the interest of the investors’ as a ban on raising capital cannot undo the wrong.
Since such an order takes the rights of the company from raising funds ‘from public to carry
on its business’, such a direction was held to be punitive in nature. 50 This has been further
reiterated in various cases.51
40. In Indian Bank Mutual Fund v SEBI,52 the tribunal set aside the directions of SEBI under
sec. 11b since there was no evidence to suggest that any public member was misled due to the
scheme of the company. Further in the UBS Securities Asia v SEBI,53 it was observed that the
rationale behind sec. 11(4) r/w sec. 11B of the SEBI Act, is for ‘emergent situation or
impending dangers to the market conditions or security to the market,’ and the tribunal held
that the company was not liable as it did not ‘endanger the interest of the investors’.
41. In the instant case, since the TradExchange was barred from accessing the capital market,
such an order being punitive was void as restricting a company from accessing the capital
market is counter-productive and impairs one’s business. 54 Moreover, no investor who
suffered by such an alleged inadequate disclosure in the offer document complaint to SEBI,
thus it can be taken into consideration that there was no emergent situation required to debar
TradExchange from accessing the capital market. Debarring the company for 3 years is
detrimental to the investors as well because the company will not be able to sell shares to
raise liquidity to pay off debts and will also not be able to raise further capital leading to
financial problems to the company. This will cut down the profits and thereby the dividends
received by the shareholder. 55
50
BPL Limited, supra note 47 at ¶190.
51
Id.; 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.
52
Indian Bank Mutual Fund and Ors. v SEBI, WP (C) No. 7463/2000.
53
UBS Securities Asia Limited v SEBI, SAT Appeal No. 97 of 2005, (09/09/2005), available at
http://www.sebi.gov.in/cms/sebi_data/pdffiles/12515_t.pdf.
54
DLF Limited, supra note 7.
55
DLF Ltd. Id.
31
42. An ultra vires act is void ab-initio,56 since an order passed having no authority of law has
no effect and it does not ‘impose any obligation on the party against whom it is passed’. 57 It
has been reiterated in various cases58 that ‘an act or order which is ultra vires is a nullity’ and
void. Thus, SEBI is not justified in imposing exorbitant penalty of Rs. 37 crores on the
Appellant as it is arbitrary. 59
43. In the instant case, by issuing a punitive direction which is not permitted by sec. 11 or
sec. 11B of the SEBI Act, SEBI has exercised excess of jurisdiction which was not authorised
by the SEBI Act. Thus the order passed by it is ultra vires and hence void an-initio.
B. PREFERENTIAL ISSUE CAN BE MADE EVEN IF AN ISSUER COMPANY IS BARRED
FROM ACCESSING THE CAPITAL MARKET
44. It is humbly submitted that an issuer company who is debarred from accessing the capital
market is not as a consequence debarred from making a preferential issue. The ICDR
Regulations which regulate the issue of securities through primary market, debars (under
4(2)(a)) an issuer company from making a public or rights issue if it has been debarred from
accessing the capital market by an order of the SEBI. But, no such similar restriction is
prescribed under Chapter VII of the ICDR regulations, which deals with conditions and
restrictions regarding preferential issue. Thus, even if an issuer company is debarred from
accessing the capital market, it can still make preferential allotment.
45. Further, SEBI (Disclosure and Investor Protection) Guidelines, 2000 (hereinafter, ‘DIP
Guidelines’) which regulated the issuance of shares of a company before ICDR regulations
replaced it, provided under Guideline 2.1.3 that no company shall make an issue of securities
if it has been prohibited from accessing the capital market. Thus, earlier, this restriction
applied to all kinds of issue. But the latest regulations (ICDR), which replaced the DIP
Guidelines, expressly omitted such a restriction for an issuer company wanting to make
56
M.P. JAIN AND S.N. JAIN, PRINCIPLES OF ADMINISTRATIVE LAW 111 (6th ed., Lexis Nexis, 2013); DE SMITH,
WOOLF AND JOWELL, JUDICIAL REVIEW OF ADMINISTRATIVE ACTION ¶5.044 (5th ed. Sweet and Maxwell 1995).
57
M.P. JAIN AND S.N. JAIN, PRINCIPLES OF ADMINISTRATIVE LAW 111 (6th ed., Lexis Nexis, 2013); M.V.
Janardhan Reddy v Vijaya Bank, [2008] 7 SCC 738, 746.
58
Winona Oil Co. v. Barnes, 83 Okl. 248, 200 P.981; New York Casualty Co. v Lawson, 24 S.W. 881, 160
Tenn. 329; Ashok Malhotra and Ors. v Union of India, W.P.(C) No. 5661/2001; Shri Gajendra Kumar v Union
of India and Ors., [2004] 110 DLT 591.
59
Sawaca Business Machines Limited v SEBI, SAT Appeal No. 76 of 2005, (10/08/2006), available at
http://www.sebi.gov.in/cms/sebi_data/pdffiles/12659_t.pdf; Neelima v Harinder, 1990 AIR 1402; S. Sharma
Transport v Government of Andhra Pradesh and Ors., 2002 AIR 322.
32
preferential issue. In various cases,60 while interpreting a new law which deviated from the
prior position of the law, it has been observed that a casus omissus (a point unprovided for in
the Statute/Regulation, etc)61 cannot be supplied by a court of law. Thus, even if the court
finds a lacuna in the statute, it is not permitted to supply the lacuna or fill the gaps.62
46. Therefore, since the new ICDR Regulations deviate from the earlier position as provided
forth in the DIP Guidelines regarding preferential allotment restrictions, it is to be presumed
that it was the intention of the draftsmen of the Regulations to do so. Thus, an issuer
company cannot be restricted from making a preferential issue, even if it is barred from
accessing the capital market.
1. THE LANGUAGE OF THE SEBI ORDER AGAINST TRADEXCHANGE DOES NOT
DEBAR TRADEXCHANGE FROM MAKING ALL KINDS OF ISSUE OF SECURITIES
47. In arguendo, it is humbly submitted that the phrase used to debar TradExchange from
accessing the capital market does not restrict the access indirectly, or in any other manner
such as through preferential allotment.
48. SEBI in various other cases have used phrases such as ‘hereby restrain from…accessing
the securities market, either directly or indirectly, in any many whatsoever’;63 ‘…restrained
64
from accessing the securities market for the purposes of raising funds’, ‘directly or
indirectly, accessing the capital market by issuing prospectus, any offer document or
advertisement soliciting money from the public’. 65 But in the instant case it has used the
phrase ‘barred …from accessing the capital markets or from otherwise trading in securities
on a stock exchange’. It is therefore submitted that the language used in all the cases cited
above clearly debars an issuer from issuing securities in any manner, directly or indirectly.
But in the instant case, the phrase used does not debar all kinds of issue of securities since
60
Hemdan v State of Rajasthan, 1996 AIR 5, 6; S.P. Gupta v President of India, 1982 AIR 149.
61
WHARTON LAW LEXICON 167 (14th ed., 1938); N.S. BINDRA, N.S. BINDRA’S INTERPRETATION OF STATUTUES,
775(10th ed., Lexis Nexis, 2006).
62
Bristol Guardians v. Bristonl Waterworks Co., [1914] AC 379, 388; G.F.F. Foulkes and Ors. v A.S. Suppan
Chettiar, 1951 AIR 296, 305.
63
SEBI Order In the Matter of Abhijit Rajan, Ex- Chairman and Managing Director of Gammon Infrastructure
Projects Limited, WTM/ RKA/ISD/ 71 /2014, available at
64
SEBI Order In the Matter of Idol India Infrastructures Limited, WTM/PS/08/IMD-DOF/MAY/2014, available
at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1400501680240.pdf.
65
SEBI Order in the Matter of Shah Group Builders Ltd., WTM/RKA/CFD/ 65/2015, available at
http://www.sebi.gov.in/sebiweb/home/detail/31501/new/PR-Order-in-the-matter-of-Shah-Group-Builders-
Limited.
33
such confining phrases are not used by SEBI. “When the phraseology of the law is changed
by a subsequent law, the presumption will be that some changes in the law is intended.”66
49. Therefore, when the SEBI order was read in light of the ICDR guidelines for preferential
allotment, which also does not debar an issuer company from making preferential issue even
if it is debarred from accessing the capital market, TradExchange in good faith presumed that
it is not debarred from making a preferential allotment.
C. PREFERENTIAL ISSUE CAN BE MADE EVEN IF AN ISSUER COMPANY IS BARRED
FROM TRADING IN SECURITIES ON A STOCK EXCHANGE
50. The Appellants humbly submit that a preferential issue can be made even if an issuer
company is debarred from trading in securities on a stock exchange because accessing the
capital market and dealing or trading in securities are two different things. When money is
raised by a company from the market by issuing shares, it is not considered an act of trading
or dealing in securities,67 but instead an act of accessing the capital market.
51. Further, ‘trading’ or ‘dealing’ in securities are used in the market to denote an act of
buying, selling, or agreeing to do the same, when interpreted in the light of sec. 2(l) of the
SEBI (Prohibition of Insider Trading) Regulations, 2015 (hereinafter, ‘PIT Regulations,
2015’), sec. 2(b) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating
to Securities Market) Regulations, 2003 (hereinafter, ‘PFUTP Regulations’) and repealed
sec. 2(d) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter, ‘PIT
Regulations, 1992’).
52. In the instant case, since the act of issuing shares to HNF was through preferential issue,
thus it is an act to raise money from the market which is an act of accessing the capital
market, and not act of dealing or trading in securities. Therefore, TradExchange was not
barred from making a preferential issue even if it was debarred from trading in securities on a
stock exchange, and as a consequence, TradExchange has not violated the SEBI order as it
has not done trading or dealing of securities by making a preferential allotment.
66
N.S. BINDRA, supra note 61 at 245; Manick Lall v Dabiruddin Ahmad, 1951 AIR 236-38; PETER MAXWELL,
BRIAN GALPIN AND ROY WILSON, INTERPRETATION OF STATUTES 36,315-316 (11th ed. 1962); Natesa Mudaliar v
Dhanpal Bus Service, 1964 AIR 139 (Mad).
67
BPL Limited, supra note 47 at ¶192.
34
D. TRADEXCHANGE COMPLIED BY ALL THE CONDITIONS REQUIRED FOR MAKING
PREFERENTIAL ALLOTMENT UNDER THE ICDR REGULATIONS
53. TradExchange was eligible to make preferential allotment as it complied with all the
conditions prescribed under Chapter VII of the ICDR Regulations, which deals with
preferential issue. Regulation 71(1)(a) states that for making a preferential issue, it is
mandatory that a special resolution should be passed by the shareholders. In the instant case,
this condition was fulfilled on April 12, 2015, a month before preferential issue was made.
Further, all other relevant requirements have been fulfilled as provided forth under
Regulation 72 and 73 of the ICDR Regulations.
54. Further, 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. In the instant case, TradExchange was in compliance with the conditions
for continuous listing agreement which has been substantiated in the I(A) contention. Further,
since SAT is not a court of record, no contempt of court proceedings can be adjudicated by
SAT, even if it is observed that Appellants have violated the SEBI order. 68
55. Summarising, the preferential issue made by TradExchange is valid.
68
Jeet Singh and Anr. v Union of India and Ors., [2011] 13 SCC 534.
35
III. MR. KANWAR HAS NOT VIOLATED THE SEBI ORDER BY SELLING
HIS SHARES
56. The Appellants submit that Mr. Kanwar has not violated the SEBI order which prohibited
him from ‘trading in securities on a stock exchange’ because he sold his shares through block
trades, which is an off-market transaction [A]. In addition, the transaction in which Mr.
Kanwar sold 2% shares on stock exchange is valid since it has already been submitted that
the SEBI order is invalid, thereby having no effect on the shares sold by Mr. Kanwar.
A. MR. KANWAR SOLD HIS SHARES THROUGH AN OFF-MARKET DEAL
57. Block trades, referred to as block deals in India, ‘are an instance of trades that match off-
market’.69 Thus, a block trade deal is an off-market deal,70 price and quantity of which are
settled outside the market. In the instant case, Mr. Kanwar was debarred from ‘trading in
securities on a stock exchange’. Thus, he did not trade in stock exchange, but instead sold his
shares through ‘block trades/deals’ to HNF, which being an off-market transaction, is merely
executed on stock exchange and therefore doesn’t amount to trading in stock exchange. This
interpretation is necessary because interpretation of penal provisions necessitates a strict
interpretation71 of the SEBI order. Since the order of debarment was punitive in nature, the
order of SEBI has to be given a strict interpretation.
58. SEBI in various cases 72 have used phrases such as ‘restrained from…dealing in the
securities market, directly or indirectly, in whatsoever manner’, which clearly indicates that a
person is debarred from dealing in securities in any manner whatsoever. But in the instant
case, SEBI in its order only debarred Mr. Kanwar from trading in securities on a stock
exchange. Therefore, it is submitted that Mr. Kanwar was not debarred from trading in
securities off-market and therefore the block deals are valid.
69
Ketan Parekh v SEBI, SAT Appeal No. 2 of 2004, (14/07/2006), available at
70
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).
71
Virtual Soft Systems Ltd. v Commissioner of Income Tax, [2007] 289 ITR 83.
72
Shah Group Builders Ltd, supra note 65; Idol India Infrastructures Limited, supra note 64; SEBI Order In the
Matter of: Synchronised Trading By Connected Entities in Allcargo and others, WTM/SR/IVDID-3/20/09/2013,
available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1378463520339.pdf.
36
IV. TRADEXCHANGE, MR. KANWAR AND HNF DID NOT INDULGE IN
INSIDER TRADING
59. It is humbly submitted that the Appellants have not indulged in insider trading and
therefore did not violate PIT Regulations, 1992 or the SEBI Act because due diligence is an
exception to communication of unpublished price sensitive information (hereinafter, ‘UPSI’)
[A], which was in the best interest of the company [B]. Further, HNF [C] and Mr. Kanwar
[D] did not trade in securities on the basis of UPSI.
A. DUE DILIGENCE IS AN EXCEPTION TO COMMUNICATION OF UPSI
60. The PIT Regulations, 2015 replaced the earlier PIT Regulations, 1992 with the effect
from May 15th, 2015. The due diligence conducted and trading of securities by HNF in
TradExchange was done while the PIT Regulations, 1992 was in force. Regulation 3 of the
PIT Regulations, 1992, prohibits communicating of UPSI, unless it is done in the ‘ordinary
course of business’ as provided under proviso of the Regulation 3(ii).
61. The High Level Committee to review the PIT Regulations, 199273 published a report on
December 7, 2013 recognizing that investors who invest in the company to fund its business
need more information that what is available in the public domain. Thus, the Appellants
humbly pray that due diligence conducted was done in the ordinary course of business. This
was further reiterated by the Supreme Court in Nirma Industries Ltd. v. SEBI.74
62. Furthermore, the PIT Regulations, 2015 allow communication of UPSI, if the Board of
Directors is of the informed decision that the proposed transaction is in the best interest of the
company. In the instant case, the law applicable is the PIT Regulations, 1992. However even
under the said regulations, the two circumstances provided under the PIT Regulations, 2015
can be construed. This argument is twofold:
63. Firstly, the act of communication or due diligence had occurred between the publication
of the new regulations and its coming into effect. This clearly shows the intent of the
legislation to exclude such communication for the purpose of due diligence within the ambit
of insider trading. Secondly, under the report of the High Level Committee to review PIT
Regulations, 1992, it was observed that in formulating a regulatory policy like the proposed
regulations, legislation must not stop short of articulating what the legislation was meant to
73
Sodhi Committee Report, supra note 24.
74
Nirma Industries Ltd. v SEBI, [2013] 8 SCC 20.
37
achieve and intended to mean. It also believes that it is even more needed in case of
legislations that have quasi criminal implication like the proposed regulations.
64. Thus, the Committee was of the opinion that by looking into the principles underlying the
prohibition on communication of UPSI, due diligence does not constitute a breach of the
rationale of the law regarding insider trading. Therefore, it is a humble submission of
Appellants that the principles imbibed under the PIT Regulations, 2015 should be read while
interpreting the term ‘ordinary course of business’ as the interpretative construction of the
law shows that it does not affect the legal spirit of the PIT Regulations, 1992.
B. DUE DILIGENCE WAS IN THE BEST INTEREST OF THE COMPANY
65. There is a presumption that BOD acts in the best interest of the company, ‘since they
have been entrusted with the task of managing the company by the general body.’ Thus, in
the Cochin Malabar v P.K.C, 75 the Kerala High Court derived business judgement rule,
observing that ‘the judges are ill-equipped to make business judgements’ and should not
‘interfere with internal management of a company’.
66. In the instant case, since the price of TradExchange’s ADR and share price fell on
NASDAQ and NSE respectively, it was financially not doing well. Thus, it was only after the
advisors opined that a deal with HNF would be beneficial for the company, that a special
resolution was passed for conduct of due diligence and preferential issue to HNF. It has been
observed in Mehool Bhuva v Indo-Nippon76 that the shareholders can determine as to what is
beneficial for the company and court should avoid to judge commercial decisions approved
by majority shareholders.
67. No investor would be willing to infuse a substantial amount of funds in a company

without conducting due diligence, especially in the case of long term investors. Thus, due
dillegence was in the best interest of the company. In the instant case, 2.5% shares were
allotted to HNF by means of issuing new shares which would benefit the company and help
obtain additional funds for its basic requirements. Further, Mr. Kanwar had to sell his shares
through block trade because HNF wanted a significant stake in TradExchange.
75
Cochin Malabar v P.K.C, [2003] 114 Comp Cas 777.
76
Mehool Bhuva v M/S Indo-Nippon Chemical Company Ltd and Ors., [2014] 122 CLA 95, ¶12 (CLB).
38
68. Summarising, due diligence conducted by HNF and information given by TradExchange
in the course of due dillegence cannot be construed as a violation of Section 12A (e) of the
SEBI Act or Regulation 3 of the PIT Regulations, 1992.
C. HNF DID NOT TRADE IN SECURITIES ON THE BASIS OF UPSI
69. The Appellant humbly prays that HNF has not violated the SEBI Act or the PIT
Regulations, 1992 because the information regarding the MoU was not a UPSI [1]. In
arguendo, HNF did not deal in the securities while in possession of UPSI [2].
1. INFORMATION REGARDING MOU WAS NOT UPSI
70. Information regarding a transaction that the company does in ordinary course of business
does not amount to UPSI. It is for this reason that the communication in ordinary course of
business is exempted from the purview of Regulation 3 of the PIT Regulations, 1992.
Information relating to ordinary business has been held to be not UPSI in various other
cases.77
71. In the instant case, HiSketch was only a potential client of TradExchange who is in the
business of providing an online platform for sellers and buyers in the market. The normal
activity of TradExchange was to provide an online platform on which its clients can display
and sell their products. HiSketch had approached TradExchange as a potential client who
wanted to sell its products on the online platform. This can be considered as an activity in the
ordinary course of business.
72. Similarly, it might be contended by the Respondent that doing block deal transactions,
HNF was withholding UPSI (which is its full size of the order). But on contrary, the
Appellants submit that any large intuitional buyer like HNF would not want other players to
‘free-ride on the information-research activities of this trader’. 78 Otherwise, informing the
market that the investor would be dealing in parts would instead ‘oblige dealers and broker-
77
Gujarat NRE Mineral Resources Ltd., supra note 34; MAN Industries (India) Limited v SEBI, SAT Appeal
No. 208 of 2011, (30/03/2012), available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1333100153853.pdf; Hindustan Dorr Oliver Ltd and Ors.,
supra note 34.
78
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.
39
dealers to expose their trading positions to such an extent that they would no longer be
willing to provide liquidity support to the market.’79
2. IN ARGUENDO, HNF DID NOT DEAL IN SECURITIES WHILE IN POSSESSION OF UPSI
73. Communication of UPSI is prohibited on the grounds that such information will give the
person an edge over the others with regard to trading in shares. Therefore, it is considered
that the nature of the UPSI would influence the trading behaviour of a person. Therefore, it
can be construed that insider must take advantage of the UPSI available to him. The N.K.
Sodhi Committee 80 in its report looked into the various defences that are available to the
offence of insider trading. One among them being, the defence of an action done contrary to
the nature of UPSI received by the insider. It observed that if the insider’s trading was
contrary to the nature of UPSI in his possession and contrary to how a reasonable man
seeking to benefit from the UPSI would act, it does not amount to a wrongful act.
74. In the instant case, the Appellant humbly contends that such a transaction was not
motivated by the UPSI gained, because the UPSI that Appellant received was regarding the
execution of a non-binding MoU between TradExchange and HiSketch which had no legal
effect and was only means for two parties to reach a decision. It is used to gauge the intention
of the transacting parties before a definitive deal is struck and doesn’t grant any rights to
either of the parties and they can leave the negotiations at any point of time. In this situation
where there is no definitive deal between the parties, no reasonable man would be willing to
invest in the shares of the company. A reasonable man would either wait till a final contract is
entered between them or not invest in the shares of a company.
75. Whereas, in the instant case, HNF invested in TradExchange regardless of what the
outcome of the negotiations would have been. This intent of HNF can be further substantiated
wherein the required approvals of the shareholders for the investment by HNF in the
company was obtained in April, 2015. Therefore, the trade was not motivated by the
possession of UPSI.
76. Further, the SEBI (Insider Trading) (Amendment) Regulations, 2002 had replaced the
term ‘on the basis’ to the term ‘when in possession’. Earlier, the prohibition applied only if
the trading was ‘on the basis of’ the UPSI. This required an element of correlation between
79
Directive 2003/C 71 E/07 of the European Parliament and of the Council 62 (Official J. of E.C.) (March 25,
2003).
80
40
trading and the presence of UPSI. In order to avoid the need for such a correlation, the
wording was altered in 2002. However, the fact that the penalty section for insider trading
under section 15G of the SEBI Act continues to carry the words ‘on the basis of’ resulting in
an incongruous position whereby the charging provision is considerably wider than the penal
provision. Since the offence of insider trading is a crime it is necessary to construe the mental
element in the act and a charge of insider trading should be ‘clear, precise and reasonable’. 81
77. A just legal system does not permit punishment without fault. Hence, justice demands the
reinvigoration and preservation of the mens rea requirement for criminal punishment in the
Indian legal system82. Therefore, due to the existence of the term ‘on the basis of’ present in
the SEBI Act the same has to be read together with the said regulations.
78. Summarising, HNF has not violated the provisions of the SEBI Act or the PIT
Regulations, 1992 by dealing in the securities of the company since there was no existence of
UPSI and the action done was contrary to the nature of UPSI.
D. MR. KANWAR DID NOT TRADE IN SECURITIES ON THE BASIS OF UPSI
79. Trading of securities is prohibited under Regulation 3 and Regulation 3A of the PIT
Regulations, 1992 when a person possesses UPSI. In the instant case, it has already been
proved in the earlier contention that the information regarding non-binding MOU was not a
UPSI.
80. In arguendo, even if it is considered as UPSI, trading restrictions can be lifted when the
UPSI in their possession no longer gives them an information advantage over other market
participants. The non- binding MoU executed between HiSketch and TradExchange expired
on 31st May. Though Mr. Kanwar had UPSI regarding the MoU, he was cleansed of the same
on the abortion of the MoU on 31st May and traded in securities only on 5th June. A public
disclosure of the aborted transaction need not be disclosed, as the insider derives no
advantage over other investors and maintains the level playing field. 83 Thus, Mr. Kanwar has
not violated the provisions of the SEBI Act or the PIT Regulations, 2015 because he did not
possess any UPSI at the time of trading in the securities of the company.
81
82
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/.
83
Insider Trading and the Risks of Due Diligence Access, IndiaCorpLAw, (Jan. 22, 2015), available at
http://indiacorplaw.blogspot.in/2015/01/insider-trading-and-risks-of-due.html.
41
V. MR. KANWAR AND HNF DID NOT INDULGE IN PRICE
MANIPULATION
81. The Appellants humbly submit that that Mr. Kanwar and HNF did not indulge in price
manipulation, and therefore have not violated Regulation 4 of the SEBI PFUTP Regulations.
In Ketan Parekh v SEBI, 84 it was observed that synchronized block deals are not illegal.
Further, SEBI in a circular 85 has permitted stock exchange to provide a separate trading
window for such deals, so that the equilibrium of the market doesn’t get affected. Thus, ‘such
trades have always been recognised by the market and also by the Board as a regulator’.86
82. Block trades can be classified into All-or None (hereinafter, ‘AON’) and Not-AON
trades, on the basis of the number of transactions by which the block trade is executed. In the
case of Not-AON trades, the price impact is higher in comparison to AON trades, which can
be termed pre-negotiated trades.87 Empirical research shows that the ‘permanent price impact
is higher for days where there are more than one block trade of similar nature than for days
with only one block trade.’88
83. The market confidence on the information arrival through block trades is higher only in
the case ‘where multiple block trades have been executed in a single day’. 89 The volatility
after a block trade is negligent90 to amount to price manipulation. Further, the impact of the
block trade is much more in the case of small sized companies91 in contrast to TradExchange
which was one of the largest ecommerce marketplaces.
84. Therefore, in the instant case, the block trades were executed in parts to prevent the
distortion of share value. Furthermore, it has been observed in various cases, 92 that a
84
Ketan Parekh, supra note 69.
85
SEBI Guidelines for Execution of Block deals on the Stock Exchanges, MRD/DoP/SE/Cir- 19 /05,
(02/09/2005), available at http://www.sebi.gov.in/circulars/2005/mrdcir0192005.html.
86
Ketan Parekh supra note 69.
87
S.K. Agarwalla and Ajay Pandey, Price Impacts of Block Trades and Price Behavior Surrounding Block
Trades in Indian Capital Market, IIM, Ahmedabad (April, 2010), available at
http://www.iimahd.ernet.in/publications/data/2010-04-02Sobheshkumar.pdf.
88
Id.
89
Id
90
51 (5) Gordon Gemmill, Transparency and Liquidity: A Study of Block Trades on the London Stock Exchange
under Different Publication Rules, JOF (Dec.1996) 1765-1790; 65 (1) Robert W. Holthausen and Robert E.
Verrecchia The Effect of Informedness and Consensus on Price and Volume Behavior, ACC. REV (Jan. 1990)
191-208.
91
27 (3) Alan Kraus and Hans Stoll, Price Impacts of Block Trading on the New York Stock Exchange, JOF
(June 1972) 569-88.
92
Ketan Parekh, supra note 69 at ¶109; Bank of India v Degala Suryanarayana, 1999 AIR 2407; Sterlite
Industries (India) Ltd., supra note 51 at ¶109.
42
synchronized transaction will be illegal if it is executed with the intention to manipulate the
market. In the instant case, the shares were sold because it was decided by shareholders of the
company, and it was at the time when TradExchange was not doing well financially. Thus,
for the best interest of the company, such block trades were executed, and therefore are valid.
43
PRAYER
Wherefore, in the light of the facts stated, issues raised, arguments advanced and authorities
cited, it is most humbly prayed by the Appellants before the Hon’ble Securities Appellate
Tribunal to adjudge and declare that:
i. The Appellants have not violated any disclosure requirements;

ii. Preferential issue made by TradExchange was valid;
iii. Mr. Kanwar has not violated the SEBI order by selling his shares;
iv. TradExchange, Mr. Kanwar and HNF have not indulged in insider trading;
v. Mr. Kanwar and HNF did not indulge in price manipulation;
vi. Quash and set aside the orders of SEBI;
vii. SEBI should pay compensation of Rs. 2 lakhs as litigation costs;
viii. Grant any other order in favour of Appellants that the Tribunal may deem fit in
the eyes of equity, justice and good conscience.
For this act of kindness, the Appellants shall forever humbly pray.
Dated:
Place:
Respectfully Submitted by
Counsel for Appellants
____________________
____________________
44

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118

SECURITIES APPELLATE TRIBUNAL

MR. ROBIN KANWAR,

FINLINE FINANCIAL SERVICES LIMITED

& HIGH NETWORTH FUND, LP

SECURITIES AND EXCHANGE BOARD OF INDIA

MEMORIAL FOR APPELLANTS

LIST OF ABBREVIATIONS .................................................................................................... 4

STATEMENT OF FACTS ...................................................................................................... 15

ISSUES RAISED ..................................................................................................................... 17

ARGUMENTS ADVANCED ................................................................................................. 20

I. THE APPELLANTS HAVE NOT VIOLATED ANY DISCLOSURE

B. The Appellants have adequately disclosed material information in the prospectus . 22

II. PREFERENTIAL ISSUE MADE BY TRADEXCHANGE IS VALID ................. 30

D. TradExchange complied by all the conditions required for making preferential

IV. TRADEXCHANGE, MR. KANWAR AND HNF DID NOT INDULGE IN

B. Due diligence was in the best interest of the company ............................................. 38

C. HNF did not trade in securities on the basis of UPSI................................................ 39

V. MR. KANWAR AND HNF DID NOT INDULGE IN PRICE MANIPULATION

A.P. Andhra Pradesh

ADR American Depository Receipts

AIR All India Reporter

BOD Board of Directors

CBI Central Bureau of Investigation

CIT Commissioner of Income Tax

CLB Company Law Board

Cranberry Cranberry Fashion Incorporation

DIP Guidelines SEBI( Disclosure and Investment Protection)

DRHP Draft Red Herring Prospectus

FDI Foreign Direct Investment

FPO Further Public Offer/ Follow-on Public

ICDR Issue of Capital and Disclosure Requirements

IPO Initial Public Offer

MoU Memorandum of Understanding

NSE National Stock Exchange

Official. J of E.C. Official Journal of European Communities

PFUTP Regulations SEBI( Prohibition of Fraudulent and Unfair

PIT Regulations, 1992 SEBI(Prohibition of Insider

PIT Regulations, 2015 SEBI(Prohibition of Insider

r/w Read with

SAT Securities Appellate Tribunal

SCC Supreme Court Cases

SCR Act Securities Contracts (Regulation) Act, 1956

SEBI Securities Exchange Board of India

TradExchange TradExchange Limited

U.S. United States of America

UOI Union of India

UPSI Unpublished Price Sensitive Information

ALAN R. BROMBERG AND LEWIS D. LOWENFELS, BROMBERG & LOWENFELS ON SECURITIES

Akbar Badruddin Jiwani v Collector of Customs, Bombay, 1990 AIR 1579.......................... 29

Bank of India v Degala Suryanarayana, 1999 AIR 2407......................................................... 42

Cochin Malabar v P.K.C, [2003] 114 Comp Cas 777. ............................................................ 38

Hemdan v State of Rajasthan, 1996 AIR 5, 6 .......................................................................... 33

Manick Lall v Dabiruddin Ahmad, 1951 AIR 236-38 ............................................................. 34

Neelima v Harinder, 1990 AIR 1402 ....................................................................................... 32

Nirma Industries Ltd. v SEBI, [2013] 8 SCC 20. .................................................................... 37

Ritesh Aggarwal and Anr. v SEBI, [2008] 8 SCC 205. ........................................................... 31

S.P. Gupta v President of India, 1982 AIR 149. ...................................................................... 33

Shankar Sharma v SEBI, SAT Appeal No. 29 of 2001, (25/06/2002)………………………28

Guidance note on clause 36 of the Listing Agreement, National Stock Exchange-Circulars

WHARTON LAW LEXICON 167 (14th ed., 1938) ......................................................................... 33

Bristol Guardians v. Bristonl Waterworks Co., [1914] AC 379, 388 ...................................... 33

TSC Industries Incorporation v. Northway Incorporation, 426 U.S. at 449. ........................... 24

Winona Oil Co. v. Barnes, 83 Okl. 248, 200 P.981 32