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4TH GNLU MOOT ON SECURITIES AND INVESTMENT, 2018.

TEAM CODE: 119

4th GNLU MOOT ON SECURITIES AND INVESTMENT LAW

6th -9th SEPTEMBER 2018

BEFORE THE HONOURABLE SUPREME COURT OF INDIA


CIVIL APPEAL FILED UNDER

S. 15Z OF THE SEBI ACT, 1992 AND S. 423 OF THE COMPANIES ACT, 2013

IN THE MATTER OF
[CIVIL APPEAL NO. 1 of 2018]
SECURITIES AND EXCHANGE BOARD OF INDIA........................ (APPELLANT NO. 1)
v.
ZERO CUBED FIN TECH LIMITED................................................ (RESPONDENT NO. 1)
DIRECTORS OF ZERO CUBED FIN TECH LIMITED................... (RESPONDENT NO. 2)
SKYLIGHT CAPITAL PARTNERS.................................................. (RESPONDENT NO. 3)
JACK D’SOUZA................................................................................ (RESPONDENT NO. 4)
MOSES SUARES................................................................................ (RESPONDENT NO. 5)
JANESH SHAH................................................................................... (RESPONDENT NO. 6)

[CIVIL APPEAL NO. 2 of 2018]


INVESTOR PROTECTION ASSOSCIATION OF INDIA................... (APPELLANT NO. 2)
105 INVESTORS OF ZERO CUBED FIN TECH LIMITED................ (APPELLANT NO.3)
v.
ZERO CUBED FIN TECH LIMITED
DIRECTORS OF ZERO CUBED FIN TECH LIMITED
SKYLIGHT CAPITAL PARTNERS
JACK D’SOUZA
MOSES SUARES
JANESH SHAH
GSIBC................................................................................................... (RESPONDENT NO.7)

ON SUBMISSION TO THE SUPREME COURT OF INDIA

MEMORIAL ON BEHALF OF RESPONDENTS

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TABLE OF CONTENTS

I. LIST OF ABBREVIATIONS
II. INDEX OF AUTHORITIES

ARTICLES

INDIAN CASES

FOREIGN CASES

ADJUDICATION ORDERS

UNPUBLISHED SAT ORDERS

REPORTS AND CIRCULARS

STATUTES/ REGULATIONS

III. STATEMENT OF JURISDICTION


IV. STATEMENT OF FACTS
V. STATEMENT OF ISSUES
VI. SUMMARY OF ARGUMENTS
VII. ARGUMENTS ADVANCED
I. SAT HAS NOT ERRED IN ITS DECISION RELATED TO FIRST-SHOW CAUSE NOTICE.
1. THAT SEBI HAS ACTED ULTRA VIRES.
2. THAT ZCFL AND ITS DIRECTORS HAVE NOT CONTRAVENED ANY LEGAL PROVISION.
3. THAT SKYLIGHT HAS NOT INDULGED IN ANY UNLAWFUL ACTIVITY.
II. SAT HAS NOT ERRED IN ITS DECISION RELATED TO SECOND-SHOW CAUSE NOTICE.
1. THAT SEBI DOES NOT HAVE THE POWER TO DEBAR OR IMPOSE PUNITIVE PENALTY.
2. THAT JACK HAS NOT COMMITTED THE OFFENCE OF COMMUNICATION.
3. THAT ZCFL AND ITS DIRECTORS ARE NOT VICARIOUSLY LIABLE.
4. THAT MOSES AND JANESH ARE NOT LIABLE FOR THE OFFENCE OF INSIDER TRADING.
III. NCLAT HAS NOT ERRED IN ITS DECISION.

1. THAT THE PETITIONER’S CONDUCT AMOUNTS TO “JURISDICTION-SHOPPING.”


2. THAT SECTION 245 WAS NOT APPLICABLE AT THE TIME OF THE PROCEEDINGS.

3. THAT CIRCUMSTANCE DID NOT EXIST FOR PAYMENT OF COMPENSATION.

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VIII. PRAYER

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LIST OF ABBREVIATIONS

¶ Paragraph
AIR All India Report
Anr. Another
BOD Board Of Directors
CA, 2013 Companies Act, 2013.
Cl. Clause
Co. Company
Del. Delhi
DRJ Delhi Report Journal
Ed. Edition
EU European union
FDI Foreign Direct Investment
FPO Further Public Offer
FPR Foreign Portfolio Regulations, 2014.
Hon’ble Honourable
ICDR SEBI (Issue of Capital and Disclosure Requirements) Regulations,
2009.
IM Investment Memorandum
Inc. Incorporation
IPAI Investor Protection Association of India
IPO Initial Public Offer
Ltd. Limited
NCLAT National Company Law Appellate Tribunal
NSE National Stock Exchange
Ori. Odisha
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
PSI Price Sensitive Information
r/w Read With
S. Section
SAT Securities Appellate Tribunal
SCC Supreme Court Cases
SCL SEBI and Corporate Laws
SCR Act Securities Contract (Regulations) Act, 1956
SEBI Securities and Exchange Board of India
SEBI Act The Securities and Exchange Board of India Act, 1992
UOI Union Of India
UPSI Unpublished Price Sensitive Information
v. Versus
ZCFL Zero-Cubed FinTech Limited

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INDEX OF AUTHORITIES

ARTICLES

Henk Berkman, Michael D. McKenzie & Patrick Verwijmeren, “Hole in the Wall: Informed
Short Selling Ahead of Private Placements” (Oct. 16,2013),http://ssrn.com/abstract=2233757.

Ola Bengtsson, Na Dai, and Clifford Henson “SEC Enforcement in the PIPE Market: Actions
and Consequences” (Jan. 2014), http://seccom/3456980.

Suneeth Katarki and Namita Viswanath, “Mens Rea” In Insider Trading – A “Sine Qua
Non” MONDAQ (June 3, 2015), http://www.mondaq.com/india/x/401724/Securities/.

BOOKS

Sandeep Parekh, Fraud, Manipulation and Insider Trading in the Indian Securities Market
169(2nd Ed. Wolters Kulwer, 2016).

Sumit Aggarwal and Robin Joseph Baby, Aggarwal & Baby On Sebi Act A Legal
Commentary On Securities And Exchange Board Of India, 1992(Taxmann Publications Pvt.
Ltd, 201).

Vol. 2, Taxmann’s SEBI Manual (14th ed. Taxmann, 2009).

INDIAN CASES

Chetak Construction Ltd. v. Om Prakash, 1998 4 SCC 577.

Chintalpati Srinivasa Raju v. SEBI, 2018 SCC OnLine SC 586.

Jagmohan Bahl v. State (NCT of Delhi), (2014) 16 SCC 501.

K.S. Puttuswamy v. Union of India, W.P NO. 494 of 2012.

Laurel Energetics (P) Ltd. v. SEBI (2017) 8 SCC 541 (India).

N.K. Wahi v. Shekhar Singh & Ors. (2007)9 SCC 481 (India).

Nandkishor Prasad v. State of Bihar AIR (2000) SC 78

Nirma Industries Ltd. v SEBI, [2013] 8 SCC 20 (India).

Padola Veera Reddy vs. State of Andhra Pradesh [AIR (1990) SC 79]

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

Sterlite Industries vs. SEBI [(2001) 34 SCL 485 (SAT)].

Tamilnad Mercantile Bank Shareholders Welfare Assn. v. S.C Sekar, 2009 2 SCC 784.

FOREIGN CASES

Dirk v. SEC 406.U.S 646 (U.S).

UNPUBLISHED SAT ORDERS

Corporation Limited and Ors. v. SEBI, SAT Appeal No. 146 of 2010, (12/08/2011),
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.

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.

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, ¶53.

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;

Manoj Gaur v. SEBI, SAT Appeal No. 64 of 2012 (Oct. 3, 2012),


http://www.sebi.gov.in/sebi_data/attachdocs/13492252240438.pdf, ¶17.

Dilip S Pendse v. SEBI, SAT Appeal No. 80 of 2009, (Nov. 11, 2009)
http://www.sebi.gov.in/satorders/dilippendse1.pdf ¶13.

Factorial Master Fund v. SEBI, SAT Appeal No. 01 of 2017 (June 29, 2017),
https://indiankanoon.org/doc/111148713/, ¶8.

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REPORTS AND CIRCULARS

Discussion Paper on review of clause 36 and related clauses of Equity Listing Agreement,
SEBI discussion paper (Aug. 19, 2014),
https://www.sebi.gov.in/sebi_data/attachdocs/1408444809721.pdf.

Report of the High Level Committee to Review the SEBI (Prohibition of Insider Trading
Regulations 1992), (Dec. 7, 2013).

STATUTES/ REGULATIONS

SEBI (Foreign Portfolio Investors) Regulations, 2014

SEBI (Informal Guidance Scheme), 2003

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market)
Regulations, 2003

SEBI (Prohibition of Insider Trading Regulations), 1992

SEBI (Prohibition of Insider Trading Regulations), 2015

SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011

The Companies Act, 1956

The Companies Act, 2013

The Securities and Exchange Board of India Act, 1992

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STATEMENT OF JURISDICTION

The Respondents humbly submits this memorandum in response to the appeal filed before
this honourable court. The appeal invokes its jurisdiction under Section. 15Z of SEBI Act
against the order of SAT and under Section. 423 of Companies Act, 2013 against the order of
NCLAT. It sets forth the facts and the laws on which claims are based.

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STATEMENT OF FACTS

BACKGROUND: In 2011, Ram and Girija Diwan met Jack D’Souza who was looking to
establish a new venture in Fintech Space. Came up with business proposal to establish a
venture that will provide technological solutions to banking industry. In July 2011, they made
investments into new company ZCFL.75% of the shares were held by Diwans. 24% were
held by Jack with the remaining 1% being held in equal proportion by five initial employees
of ZCFL. In May 2013, ZCFL started IPO process after obtaining SEBI’s comments and
completing other formalities, the IPO successfully closed in November.
PIPE DEAL PROPSAL: For further capital injection, they decided to go for a PIPE deal,. ZCFL
appointed GSIBC to advise on potential deal. GSIBC prepared an IM and, in April 2015,
scouted for investors by distributing IM to about 20 potential suitors. IM contained
information that was already in the public domain. For this reason, no confidentiality
agreement signed. Before ZCFL began approaching potential investors, it had applied to
SEBI to seek a no-action letter in relation to the process it proposed to undertake. SEBI stated
that the proposed transaction was in compliance with the relevant laws.
PERSUASION BY SKYLIGHT: One of the recipients of IM was Skylight. Kamil, director of
Skylight was keen to obtain ZCFL investment at any cost. He was on the phone with Girija to
seek to persuade her to offer the investment to Skylight. Girija in turn was reticent in her
conversation. In order to obtain a “toehold” Skylight acquired 30,000 shares constituting
0.1% shares of ZCFL through the NSE in small trades from several hundred investors at an
average price of Rs. 290 per share. Upon this he addressed a mail to Girija about his interest
in Company and she replied he will hear from the company soon.
COMMENCEMENT OF DUE DILIGENCE: The due diligence process began in early June 2015
after both Skylight and ThreeCent signed a confidentiality agreement with ZCFL that
required the short-listed investor to not disclose the fact of a potential investment transaction.
provided access to a virtual data room for a period of five days from June 6, 2015 to June 10,
2015 and told about a proposed contract of significant proportions that ZCFL was to enter
into with Raider, which would constitute 60% of the total business of ZCFL. On June 15,
2015, a services agreement was signed between ZCFL and Raider, after which ZCFL’s
company’s secretary informed the stock exchange within 15 minutes of the signing.

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SELECTION OF SKYLIGHT: ZCFL’s management decided to invite Skylight as the investor


into the company by proposing to issue 5% shares in the company at a price of INR 460 per
share. ThreeCent failed as it had quoted a bid of INR 450 per share. Kamil was thrilled with
this development and began to foresee the tremendous returns Skylight would receive in the
long term from its investment in ZCFL. On July 15, 2015, the Investment Agreement was
signed between Skylight and ZCFL.
SHOW CAUSE NOTICES RECEIVED: In January 2016, ZCFL, its directors as well as Skylight
received a First Show-Cause Notice from SEBI alleging breach of the provisions of the
Securities law in relation to May trades. Consequently, they received Second Show- Cause
Notice, this time addressed to ZCFL, Jack D’Souza and two persons named Moses Suares
and Janesh Shah. It detailed a set of transactions and events that led to possible violations of
the SEBI Act and the regulations issued thereunder.
FAMILY GATHERING: Moses was the brother-in-law of Jack. During a family gathering on
June 11, 2015, Jack had received a telephone call from Girija to discuss certain matters
pertaining to the Raider contract. Moses confronted Jack about the conversation and intended
to seek further information. It is SEBI’s case that Moses immediately contacted his close
friend, Janesh Shah, who is a technology investment analyst at Manohar Das Stock Broking
Limited. After some brainstorming overnight and reviewing the details of various companies
who could be possible future customers of ZCFL, Moses and Janesh zeroed in on Raider as
being the possible counter-party with whom ZCFL was carrying out discussions for a
possible deal.
CREATION OF GOLDMINE: On June 12, 2015, Janesh created a WhatsApp group which he
titled “Goldmine”, which included Moses and seven other stock brokers known to Janesh,
wherein he conveyed this information regarding the potential contract between ZCFL and
Raider at a value of INR 160 crore for a term of 5 years. Between June 12, 2015 and June 14,
2015, all of them engaged in fervent purchases of ZCFL stock in more than a hundred small
trades. The acquired at Rs. 300 per share and liquidated Rs. 375 per share, thereby earning
profit of INR 25 Lakh.
DECISION OF SAT: The SEBI WTM passed orders on July 15, 2016 by which ZCFL, its
directors, Skylight, Jack, Moses and Janesh were debarred from capital markets for three
years commencing that date. Against all of the SEBI orders, the affected parties filed appeals
before the SAT. On June 7, 2017, SAT ruled against SEBI on all the appeals, and held that
none of the parties had indulged in a violation of law. Against the SAT orders, SEBI has
preferred appeals before the Supreme Court of India.

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NCLAT APPEAL: The IPAI filed a suit under section 245 of companies Act to NCLT. NCLT
granted a compensation of 2 Crores. The appeal went to NCLAT which set aside the orders
and now the appeal is filed before SC and SC has clubbed the appeals
STATEMENT OF ISSUES

I. WHETHER SAT HAS ERRED IN IT S DECISION OF RULING AGAINST


SEBI IN THE ORDER DATED JUNE7, 2017 WITH RESPECT TO FIRST
SHOW CAUSE NOTICE?
II. WHETHER SAT HAS ERRED IN ITS DECISION OF RULING AGAINST
SEBI IN THE ORDER DATED JUNE7, 2017 WITH RESPECT TO SECOND
SHOW CAUSE NOTICE?
III. WHETHER NCLAT HAS ERRED IN ITS DECISION OF RULING AGAINST
IPAI AND INVESTORS?

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SUMMARY OF ARGUMENTS

I. WHETHER SAT HAS ERRED IN IT S DECISION OF RULING AGAINST SEBI IN


THE ORDER DATED JUNE7, 2017 WITH RESPECT TO FIRST SHOW CAUSE
NOTICE?

I. It is humbly submitted that the SAT was correct in holding that no violations under the SEBI
Act or the regulations framed there under were committed by the parties to the first show-
cause notice. It is humbly submitted that the parties were in compliance with all the
disclosure guidelines. Further, SEBI didn’t have the power to debar or impose punitive
penalty, ZCFL & its directors have acted in accordance to the law prevalent. Skylight Capital
Partners has not involved in any unlawful practice.
II.
II. WHETHER SAT HAS ERRED IN ITS DECISION OF RULING AGAINST SEBI IN
THE ORDER DATED JUNE7, 2017 WITH RESPECT TO SECOND SHOW CAUSE
NOTICE?

It is humbly submitted before the Hon’ble court that SAT has not erred in its decision of
ruling against SEBI in the order with regard to Second Show-Cause Notice Jack has not
communicated any UPSI, ZCFL and Directors of ZCFL are not liable, Moses and Janesh
were not in possession of UPSI. Thus, SAT has not erred in its decision of ruling against
SEBI in the order with respect to second show cause notice as there has been no error of law
and fact.

III. WHETHER NCLAT HAS ERRED IN ITS DECISION OF RULING AGAINST IPAI
AND INVESTORS?

NCLAT decision in holding that “circumstances did not exist” for payment of compensation
under section 245 and thereby overturning the decision of the NCLT was legally correct. In
the present case, the law under section 245 could not be invoked for compensation. The
argument is three-fold that the petitioner’s conduct amounts to “jurisdiction-shopping” that
Section 245 of the Companies Act, 2013 was not applicable at the time of the proceedings
that circumstances did not exist for payment of compensation.

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ARGUMENTS ADVANCED

I. SAT HAS NOT ERRED IN ITS DECISION OF RULING AGAINST SEBI IN THE
ORDER WITH RESPECT TO FIRST SHOW CAUSE NOTICE.

It is humbly submitted that the SAT was correct in holding that no violations under the SEBI
Act or the regulations framed there under were committed by the parties to the first show-
cause notice. It is humbly submitted that the parties were in compliance with all the
disclosure guidelines. Further, SEBI didn’t have the power to debar or impose punitive
penalty [1], ZCFL & its directors have acted in accordance to the law prevalent. [2] Skylight
Capital Partners has not involved in any unlawful practice [3].

1.1 THAT SEBI HAS ACTED ULTRA VIRES.

It is submitted that SEBI’s order which debarred respondents 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. SEBI has the power to debar a company from accessing the
capital market under sec. 11 or sec. 11B of the SEBI Actand the directions issued under the
aforementioned provisions ‘have necessarily to be preventive or regulatory in nature’ and not
punitive, as observed in various cases.1 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’.2 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.3
In the instant case, it is humbly submited that the order for debarring respondents 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

1
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), http://www.sebi.gov.in/cms/sebi_data/attachdocs/1300270803772.pdf.
2
DLF Limited v SEBI, SAT Appeal No. 331 of 2014, (13/03/2015),
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1426241669079.pdf.
3
Bank of Baroda v SEBI, SAT Appeal No. 2 of 2000, (27/07/2000),
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1300883330270.pdf, ¶53.

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a ‘public listed company with large public participation 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.4This has been further reiterated in various cases.5
In the instant case, since the respondents 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.6 Debarring the respondents for 3 years is
detrimental to the investors as well because the company will 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. 7
Further, SEBI didn’t take into account
the individual liability of the respondents and imposed a collective liability upon all.
Thus, 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.

1.2THAT ZCFL & ITS DIRECTORS HAVE ACTED IN ACCORDANCE TO THE LAW
PREVALENT.
ZCFL and its directors have complied with various provisions of SEBI Act and regulations
issued there under. Firstly, no UPSI has been communicated by ZCFL. Secondly, interests of
investors have also been protected
A. THAT NO UPSI HAS BEEN COMMUNICATED BY ZCFL.
ZCFL has acted with prudence and has not disseminated any UPSI to any of the prospective
investors before due diligence. The IM contained information that was already in Public
Domain. Girija had even disclosed about company’s decision to explore potential funding
opportunities. Therefore, no new information was divulged to the prospective investors.

4
BPL Limited v SEBI, SAT Appeal No. 14 of 2001, (20/06/2002),
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1300270803772.pdf, ¶190.
5
Id.; Videocon International Ltd. v SEBI and Ors., SAT Appeal No. 23 of 2001, (20/06/2002),
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://www.sebi.gov.in/satorders/StereliteInd.html; Ritesh Aggarwal and Anr. v
SEBI, [2008] 8 SCC 205.
6
DLF Limited, supra note 2.
7
DLF Ltd. Id

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Further, the IM was also filed with the recognized stock exchange and was now available on
a non-discriminatory platform.8
Nextly, assuming arguendo, that even if UPSI was disseminated it was within the ambit of
legal provisions. The High Level Committee to review the PIT Regulations, 19929 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
Respondents humbly submit that it was done in the ordinary course of business. This was
further reiterated by the Supreme Court in Nirma Industries Ltd. v. SEBI.10 The Indian regime
considers the need for due diligence as a practical reality and seeks to embrace it expressly
and provides for a “predictable, clear and conditional framework” for the same11
Further, ZCFL approached SEBI to seek no-action letter in relation to the process it propsed
to undertake. This it did so because it wanted to preempt any legal risks relating to the
transactions. SEBI itself stated that the proposed transaction involving the issue of IM to
potential investors was in compliance with the relevant laws and legal provisions.12 No-action
letter should be relied upon only in those points where law is silent or not clear. 13 And there
exists no prescribed law relating to PIPE in India. Thus, reliance on no-action letter issued by
SEBI is correct.
B. THAT INTEREST OF INVESTORS HAS ALSO BEEN PROTECTED.
ZCFL has acted in the interest of investors as buoyed by Skylight’s investment; the
management of ZCFL was poised for another year of record financial results adding to the
earnings of shareholders. Even, ZCFL gave due regard to the interest of other 19 potential
investors as Girija remained reticent in her conversation with Kamil and insisted that ZCFL
would follow strict process set out by GSIBC and ensure compliance with proper norms that
were above the board and were in interest of shareholders.14
1.3 THAT SKYLIGHT CAPITAL PARTNERS HAS NOT INVOLVED IN ANY UNLAWFUL PRACTICE.

8
Clarification 9.
9
Sodhi Committee Report, supra note 24.
10
Nirma Industries Ltd. v SEBI, [2013] 8 SCC 20 (India).
11
Securities and Exchange Board of India, Report of the High Level Committee to Review the SEBI
(Prohibition of Insider Trading) Regulations, 1992 Under the Chairmanship of N.K. Sodhi (7 December 2013), t
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1386758945803.pdf at [49].
12
Moot proposition, ¶7.
13
Laurel Energetics (P) Ltd. v. SEBI (2017) 8 SCC 541 (India).
14
Moot proposition, ¶8.

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Skylight capital partners has not involved in any unlawful practice. It was an ordinary
business transaction and the manner in which trade was carried clearly shows that it was not
based on any UPSI.
A. THAT IT WAS AN ORDINARY BUSINESS TRANSACTION.
Skylight acquired a 0.1% stake in ZCFL during May 2015 before a prospective bid. An
acquirer rarely makes a offer without first purchasing a sizeable stake in the target. The
process of acquiring shares in the target either on the markets or off it, but outside of an offer,
is referred to as “stake building”.15 This is also sometimes referred to as a “toehold”
acquisition. The purpose of the acquisition in May 2015 was stake building. if an acquirer
engages in stake-building after commencement of due diligence and once it in possession of
inside information, then it would stand in violation of the insider trading laws. However, in
the present case the due diligence process began in June 2015 and the acquisition amounting
to “toehold” was made in May 2015, which was before the due diligence process. The PIT,
2015 had not come in force when the alleged offence was committed and it has no
retrospective effect. When the acquisition of 0.1% was made, Skylight was not in possession
of any information that was not generally available with the market. Skylight had access to an
investment memorandum, which had been filed with the relevant stock exchange, and was
now freely available to all shareholders. Thus, it was an ordinary business transaction.

B. THAT IT IS CONTRARY TO THE NATURE OF UPSI.


Assuming arguendo, that Skylight was in possession of UPSI, even then it is evidently clear
that Skylight didn’t trade on the basis of such UPSI. The Sodhi Committee Report provides
for certain valid defences, one of which is that trade was contrary to the nature of UPSI16. In
the instant case if we assume that information relating to PIPE was UPSI. Even then, Skylight
has not indulged in insider trading as the nature of transaction was contrary to UPSI. In the
PIPE context, the SEC believed that shareholders who gain knowledge of an imminent PIPE
transaction can avoid the likely downturn or death spiral in price by either selling or shorting
their shares.17 However, Skylight purchased shares rather than selling them and that to at
premium thus the trading is not based on UPSI.

15
Raj Panasar & Philip Boeckman (eds.), European Securities Law, 2nd ed. (Oxford: Oxford University Press,
2014) at 298. See also, Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April
2014 on Market Abuse, 2014 O.J. (L173), Art. 3(31).
16
Report of the High Level Committee to Review the SEBI (Prohibition of Insider Trading Regulations 1992),
(Dec. 7, 2013).
17
Ola Bengtsson, Na Dai, and Clifford Henson “SEC Enforcement in the PIPE Market: Actions and
Consequences” (Jan. 2014), http://seccom/3456980.

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Hon'ble SAT in the case of Mrs. Chandrakala v. The Adjudicating Officer, SEBI observed
"...The prohibition contained in regulation 3 of the regulations apply only when an insider
trades or deals in securities on the basis of any unpublished price sensitive information and
not otherwise. It means that the trades executed should be motivated by the information in the
possession of the insider. If an insider trades or deals in securities of a listed company, it may
be presumed that he / she traded on the basis of unpublished price sensitive information in his
/ her possession unless contrary to the same is established. The burden of proving a situation
contrary to the presumption mentioned above lies on the insider. If an insider shows that he /
she did not trade on the basis of unpublished price sensitive information and that he / she
traded on some other basis, he / she cannot be said to have violated the provisions of
regulation 3 of the regulations” it seems highly improbable that trading was done on the basis
of UPSI and therefore there has been no violation of PIT.18 and in the instant case it is
evidently clear that trade was not on the basis of UPSI.

It is must to establish that secret profits have been made. Test is whether an insider will
personally benefit.19 In the instant case no such secret profits have been hoarded by Skylight.

Thus, it is humbly submitted that decision of SEBI was harsh and onerous and was liable to
be set aside.

II. THAT SAT HAS NOT ERRED IN ITS DECISION OF RULING AGAINST SEBI IN
THE ORDER WITH RESPECT TO SECOND SHOW CAUSE NOTICE.

It is humbly submitted before the Hon’ble court that SAT has not erred in its decision of
ruling against SEBI in the order with regard to Second Show-Cause Notice Jack has not
communicated any UPSI [1], ZCFL and Directors of ZCFL are not liable [2], Moses and
Janesh were not in possession of UPSI [3].

2.1 THAT JACK HAS NOT COMMUNICATED ANY UPSI.


It is humbly submitted that jack has not communicated any UPSI as he talked in encrypted
language while talking on phone with Girija and also resented to disclose any information to
Moses when he confronted him. Jack has acted responsibly and fulfilled all the obligations
that he has by the virtue of his position in company.

18
Manoj Gaur v. SEBI, SAT Appeal No. 64 of 2012 (Oct. 3, 2012),
http://www.sebi.gov.in/sebi_data/attachdocs/13492252240438.pdf, ¶17.
19
Dirk v. SEC 406.U.S 646 (U.S).

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2.2 THAT ZCFL AND DIRECTORS ARE NOT LIABLE.


It is humbly submitted that ZCFL and its directors are not liable as they were not aware of
even the slightest disclosure of any inside information. Section 27 of SEBI Act provides that
no director shall be liable for any punishment if he proves that the offence was committed
without his knowledge or that he had exercised all due diligence to prevent the commission
of such offence.
Firstly, no offence has been committed by Company as Jack has not disclosed the
information. Nextly, In the instant case none of the directors had knowledge about even the
slightest of any UPSI. Further, they had exercised all the due diligence as even while
providing information to Skylight and Three-cent even after signing confidentiality
agreement they did not disclose the entire information related to Raider transaction.20 So they
cannot be held liable.
It has been held by Supreme Court that “to launch a prosecution, therefore against the alleged
directors there must be a specific allegation in the complaint as to the part played by them in
the transaction. There should be clear and unambiguous allegation as to how the directors are
in-charge and responsible for the conduct of the business of the company. The description
should be clear. In the absence of any averment or specific evidence the net result would be
that complaint would not be entertainable.”21
2.3 THAT MOSES AND JANESH HAVE NOT INDULGED IN INSIDER TRADING.
It is humbly submitted that Moses and Janesh have not indulged in insider trading. To prove
this argument, it is contended that Moses and Janesh are not insiders, they traded in normal
course of business and further there is no direct evidence to prove them guilty.
A. THAT MOSES AND JANESH ARE NOT INSIDERS.
Moses and Janesh are not insiders as they neither fall in the definition of connected person
nor they were in possession or had reasonable access to UPSI.22 It is quite evident that Jack
resisted disclosing any insider information to Moses even on his confrontation, so Jack can’t
be the source of UPSI. Nextly, Goreman Bushing Investment Company being a source is also
out of place as SEBI itself has acknowledged that Goreman Bushing practicised the concept
of ‘chinese walls’. It has been observed by Supreme Court of India that the expression
“reasonably expected” in the PIT regulations must not be a mere ipse dixit-there must be
material to show that such person can reasonably be expected to have access to unpublished

20
Moot Proposition, ¶12.
21
N.K. Wahi v. Shekhar Singh & Ors. (2007)9 SCC 481 (India).
22
The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, No. 15, The
Gazette of India, pt. III sec. 4, (Jan. 15, 2015).

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4TH GNLU MOOT ON SECURITIES AND INVESTMENT, 2018.

price sensitive information.23 Moreover, the information was already in market as media
reports were doing rounds about a possible transaction.24 So the market already had some
information about some imminent contract and Jack himself didn’t know the specifics of
contract25 so no UPSI was leaked during dinner that night. So Moses and Janesh were not in
possession of any UPSI. Thus, Moses and Janesh are not insiders.
B. THAT THEY TRADED IN NORMAL COURSE OF BUSINESS.
It is humbly submitted that Moses and Janesh traded in normal course of business. The entire
allegation related to forming of a goldmine group is mere speculation of SEBI, there is no
evidence to corroborate the same. SEBI has calculated the exact amount of profit even when
it is unaware of identity of other alleged defaulters clearly point towards the futility of the
investigation of SEBI. Even if the allegation imposed by SEBI regarding the overnight
brainstorming by Janesh and Moses is taken to be true, even then Janesh and Moses cannot
be implicated as all the information which they have suss out is using their research intellect
and SEBI cannot restrict investors to use their research intellect to make wise decisions.
Janesh felt on his analysis and experience that the deal would be worth 150-170 crores and
they have reviewed various companies before zeroing it on raider. So they based their
calculations on experience.26 Also, Moses used to trade in securities of ZCFL before also,
Moreover, he even didn’t sale the entire shares of his, the allegation of SEBI that he did so to
earn long term profits is unsustainable as the price of securities have started falling. There is a
fall in share price from INR 400 to INR 375.27 So, it is humbly submitted that trade was not
based on an UPSI.
C. THAT THERE IS LACK OF DIRECT EVIDENCE.

The onus to establish that insider was in possession of UPSI is on SEBI and it has failed to
establish a prima facie case. The hon’ble SAT in Dilip S Pendse v. SEBI28 held that, “…the
charge of insider trading is one of the most serious charges in relation to the securities market
and having regard to the gravity of this wrong doing, higher must be the preponderance of
probabilities in establishing the same. It is a settled principle of criminal jurisprudence that
the more serious the offence, the stricter the degree of proof, since a higher degree of
assurance is required to convict the accused. This principle applies to civil cases as well
23
Chintalpati Srinivasa Raju v. SEBI, 2018 SCC OnLine SC 586.
24
Moot Proposition, ¶12.
25
Moot Proposition, ¶12.
26
Moot Proposition, ¶17.
27
Moot Proposition, ¶12 ¶18.
28
Dilip S Pendse v. SEBI, SAT Appeal No. 80 of 2009, (Nov. 11, 2009)
http://www.sebi.gov.in/satorders/dilippendse1.pdf ¶13.

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where the charge is to be established not beyond reasonable doubt but on the preponderance
of probabilities.”

Further, The plea of SEBI that it could not gather evidence cannot withstand. In Samir Arora
v. SEBI29 , SAT opined as follows “It was argued before us on behalf of the respondent
(SEBI) that it is very difficult to gather adequate evidence in respect of charges relating to
conflict of interest, market manipulation and insider trading. While we appreciate the
difficulty it is not possible for us to let mere suspicions, conjectures and hypothesis take the
place of evidence as described in the Indian Evidence Act.” SAT further held in the matter
that evidence satisfying reasonable standard of proof would be required for establishing
insider trading

In the absence of direct corroborated evidence, not action for insider trading can be taken
against any person and benefit of doubt will always be in his / her favour. 30SEBI rulings have
a number of times been overruled by SAT due to lack of evidence. SAT dictates that insider
trading can be established by “clinching evidence” only.31

In Nandkishor Prasad v. State of Bihar,32 Supreme Court observed that: “The minimum
requirement of the rules of natural justice is that the Tribunal should arrive at its conclusion
on the basis of some evidence i.e. evidential material which with some degree of definiteness
points to the guilt of the delinquent in respect of the charge against him. Suspicion cannot be
allowed to take place of proof even in domestic enquiries.”

To sustain a conviction based on circumstantial evidence, the evidence must be complete and
incapable of leading to any other explanation. Evidence merely probablising and
endeavouring to prove the fact on the basis of preponderance of probability is not sufficient
to establish serious charges like insider trading and market manipulation etc. 33 Moreover,
SAT in the recent factorial case has also given benefit of doubt to the company.34

Janesh and Moses cannot be compelled to give passwords of their mobile phones as SEBI is
not conferred with any such power. No negative inference can be drawn against respondents

29
Samir Arora v. SEBI SAT Appeal No: 83/2004 (May 5, 2004).
30
Appeal No. 90 of 2007.
31
supra note 29..
32
Nandkishor Prasad v. State of Bihar AIR (2000) SC 78.
33
Padola Veera Reddy vs. State of Andhra Pradesh [AIR (1990) SC 79]; Sterlite Industries vs. SEBI [(2001) 34
SCL 485 (SAT)]
34
Factorial Master Fund v. SEBI, SAT Appeal No. 01 of 2017 (June 29, 2017),
https://indiankanoon.org/doc/111148713/, ¶8.

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by this action as their action is protected by their fundamental right to privacy, which has
been upheld in K.S. Puttuswamy v. Union of India35 It is humbly submitted that Moses and
Janesh have not indulged in any malpractice.

III. WHETHER NCLAT HAS ERRED IN ITS DECISION OF RULING AGAINST IPAI
AND INVESTORS?

NCLAT decision in holding that “circumstances did not exist” for payment of compensation
under section 245 and thereby overturning the decision of the NCLT was legally correct. In
the present case, the law under section 245 could not be invoked for compensation. The
argument is three-fold [1] that the petitioner’s conduct amounts to “jurisdiction-shopping” [2]
that Section 245 of the Companies Act, 2013 was not applicable at the time of the
proceedings [3] that circumstances did not exist for payment of compensation.

3.1 THAT THE PETITIONER’S CONDUCT AMOUNTS TO “JURISDICTION-SHOPPING.”


Investor Protection Association of India (“IPIA”) made representations by filing complaints
before the SEBI; the show-cause notices were issued by SEBI on the basis of those
representations.36 IPIA, immediately after the issue of show-cause notices, initiated their
action before the NCLT. They had made representations before SEBI, but they did not wait
until SEBI decided on the issues. IPIA went to NCLT to decide on the same set of facts
concurrently. As a consequence, two tribunals are simultaneously hearing the same set facts
and adjudicating on the same issues. The conduct of IPIA clearly shows that they wish for a
favourable judgement and are seeking to have their case heard in multiple forums for the
same. The Supreme Court has held that a litigant cannot be permitted “choice” of the “forum”
and every attempt at “forum-shopping” must be crushed with a heavy hand.37 Further, it has
been observed that the superior courts of this country must discourage forum-shopping.38.
The wording of section 245 itself makes it clear that it intends to discourage jurisdiction-
shopping. It provides that the Tribunal will take into account if a member is acting bona fide
in considering the application under the section.39 The section also provides that once an

35
K.S. Puttuswamy v. Union of India, W.P NO. 494 of 2012.
36
Moot Proposition, ¶14.
37
Chetak Construction Ltd. v. Om Prakash, 1998 4 SCC 577
38
Tamilnad Mercantile Bank Shareholders Welfare Assn. 2 v. S.C Sekar, 2009 2 SCC 784, Jagmohan Bahl v.
State (NCT of Delhi), (2014) 16 SCC 501
39
The Companies Act, 2013 §245(4)(a), No. 18, Act of Parliament, 2013 (India).

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4TH GNLU MOOT ON SECURITIES AND INVESTMENT, 2018.

application has been admitted all similar applications in "any jurisdiction” should be
consolidated into a single application. Therefore, the framing of section 245 itself is such that
is discourages forum-shopping. In the present case, IPIA is trying to litigate before various
forums to procure a favourable judgement. IPIA is not acting bona fide in relation to the
present case. The plaint of IPIA is tainted with malice. It is humbly submitted that the NCLT
erred in admitting the application when SEBI was already adjudicating on the same set of
facts, and on representation made by IPIA.
3.2 THAT SECTION 245 WAS NOT APPLICABLE AT THE TIME OF THE PROCEEDINGS.
Section 245 of the CA, 2013 is a new remedy inserted in the CA,2013. Section 1, of the CA,
2013 came into force immediately on 29th August, 2013. The section provides that the
remaining provisions of the act will come into force only once the Central Government
notifies them in the Official Gazette.40 Section 245 was brought into force from 1 June 1,
2016 vide Ministry of Corporate Affairs notification number S.O. 1934(E).41 In the present
case, the facts provide that IPIA initiated their action before the NCLT “immediately after the
issue of noticees by SEBI”.42 The show-cause notices were issued by SEBI in January 2016.43
Therefore, the circumstances were such that the class-action suit under Section 245 could not
be invoked because the relevant provision came into force on 1 June, 2016 whence it was
notified in the Official Gazette. An application under Section 245 could not be made until the
law was brought into force by the notification in the Official Gazette. It is humbly submitted
that the order of the NCLT lacked jurisdiction due to the relevant provisions not being in
force at the time of filling of the petition. The class-action under section 245 could not be
invoked before it came into force. It is humbly submitted that the NCLAT was justified in
holding that circumstances did not exist for payment of compensation in the present case.

3.3 THAT CIRCUMSTANCE DID NOT EXIST FOR PAYMENT OF COMPENSATION.


The NCLAT was correct in holding that circumstances did not exist for payment of
compensation in the present case. IPIA in its petition claimed compensation on the grounds
of “suppression of information” by the respondents.
ZCFL undertook the PIPE transaction to raise capital for its future growth plans.44ZCFL
approached 20 investors with an Investment Memorandum.45 The Investment memorandum

40
The Companies Act, 2013 §1(3), No. 18, Act of Parliament, 2013 (India).
41
http://mca.gov.in/ministry/pdf/notification_02062016_i.pdf
42
Moot Proposition, ¶22.
43
Moot Proposition, ¶14.
44
Moot Proposition, ¶6.

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was filed with the relevant stock exchange.46 ZCFL also sought a no-action letter from SEBI
before approaching investors, and proceeded only once the no-action letter was issued by
SEBI. The Investment memorandum was based generally available information and was also
available as a filing with the stock exchange. Girija had also made an announcement
informing in a press briefing that the company is actively scouting for “further funding
opportunities”.47 ZCFL short-listed the investors and only then allowed the two short-listed
investors access to information which is not publicly available. The due diligence process
was undertaken and the two prospective investors were made to sign non-disclosure and
standstill agreements to ensure that no information in due diligence would not be used to the
detriment of the shareholders. In the due diligence the Raider Banking Company, Inc
(“Raider”) contract which had significant consequence was disclosed—however, without the
specifics since negotiations were ongoing and terms might be subject to change. After due
diligence the only manner in which the acquirer can proceed with the transaction is by
ensuring that any inside information it has obtained during due diligence is placed in the
public domain beforehand through a cleansing announcement.48
In the present case, the contract relating to Raider was completed and disclosed to the market
on June 15, 2015. The PIPE transaction in the form of an Investment Agreement between
Skylight and ZCFL was signed on July 15, 2015. The shareholders approval was procured on
August 17, 2015. The issue was complete on August 25, 2015.49 Therefore, the transaction
was only completed after the market had the information about the Raider contract. The
Raider contract was the only unpublished information that was disclosed in the Due
Diligence process. The PIPE transaction has also added to shareholder value since the
procurement was made by Skylight at some premium to the prevailing market price.50 The
information regarding a prospective contract for ZCFL was already available in the news and
it was of great interest to the market.The details of the contract were contingent on the final
rounds of the negotiations. Jack D’Souza did not disclose any details regarding the Raider
contract during the family gathering. During the brief conversation with Girija he only made
references to “The Lost Ark”. The details of the contract that Moses and Janesh determined

45
Moot Proposition, ¶6.
46
Clarifications, 9.
47
Moot Proposition, ¶6.
48
Umakanth Varottil, “Due Diligence in Share Acquisitions: Navigating The Insider Trading Regime”(April
2016) https://law.nus.edu.sg/wps/pdfs/004_2016_Umakanth.pdf.
49
Moot Proposition, ¶13.
50
Moot Proposition, ¶12.

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were based on their “analysis and experience”. It was not based on any direct or indirect
communication that Jack made to Moses. The facts also do not show that the figures that
Moses and Janesh determined were indeed accurate. The information that there was a
prospective deal which was already freely available on the market through news reports. It
was of great interest to the market and the “subject of great speculation” It is humbly
submitted that no suppression of information by the respondents harmed the interests of the
investors. ZCFL added to shareholder value through the PIPE issue to Skylight and the
Raider contract.

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PRAYER

In light of issues raised, arguments advanced and authorities cited, the counsel for the
appellant humbly prays that the Hon’ble Court be pleased to adjudge, hold and declare:

1. That, the order of SAT that there has been no violation of SABI Act and any of the
regulations in relation to First-Show Cause Notice be upheld.
2. That, the order of SAT that there has been no violation of SABI Act and any of the
regulations in relation to Second-Show Cause Notice be upheld.
3. That, the order of NCLT be upheld.

And pass any order that this Hon’ble court may deem fit in the interest of equity, justice and
good conscience.

For this act of kindness, the counsel for the appellant shall duty bound forever pray.

Dated:
Place:

s/d
Respectfully Submitted by
Counsel for Appellant
____________________
____________________

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