IN THE SUPREME COURT OF INDIA

AT NEW DELHI.

Civil Appeal No. ____/2012

(Under Sec. 15Z of the Securities and Exchange Board of India Act, 1992)

Securities and Exchange Board of India. ...Appellant

v.
LinkPark Investment Partners LLCRespondents

clubbed with

Civil Appeal No. ____/2012

(Under Sec. 15Z of the Securities and Exchange Board of India Act, 1992)

Securities and Exchange Board of India. ...Appellant

v.
Freddie Balsara, Mike Bennington,
Purple Floydeon Investments Private LimitedRespondents

Written submissions on behalf of,

Team Code _______
Counsel for the Appellant.

TABLE OF CONTENTS

Index of Authorities ............................................................................................................. iv

Statement of Jurisdiction ...................................................................................................... vi
Statement of Facts ............................................................................................................... vii
Questions Presented ............................................................................................................. xi
Summary of Pleadings ........................................................................................................ xii
Pleadings............................................................................................................................... 1
I.

LinkPark Has Acquired Control of Novio ................................................................... 1

[A]. Negative Rights Can Amount to Control.............................................................. 1
[B]. The Negative Rights Are Related to the Day to Day Management of Novios
Business Thus Amounting to Control ............................................................................ 3
[C]. In any Event, The Affirmative Rights relate to Major Decisions on Structural and
Strategic Changes .......................................................................................................... 4

II.

The Call Option Agreement is Void ........................................................................ 4

[A]. The Securities Contracts (Regulation) Act, 1956 applies to unlisted companies ... 4
[B]. The Call Option Violates Section 16 of the Securities Contract Regulation Act,
1956 7
[C]. In any Event, The Call Option violates Section 18A of the Securities Contract
Regulation Act, 1956 ................................................................................................... 10

III.

The Information of the 10% Investment by LinkPark for Development of The

Messenger was Unpublished Price Sensitive Information [UPSI] ................................. 11

[A]. Information was unpublished ............................................................................. 11
[B]. Information was Price Sensitive ......................................................................... 12
IV.

The Respondents are Insiders ................................................................................ 12

[A]. Mike Bennington was an Insider ........................................................................ 12

[B]. Freddie is An Insider ......................................................................................... 14
[C]. Purple Floydeon Purchased Shares of Novio When in Possession of UPSI ........ 15
ii

V.

Mere Trading In the Scrip of Novio While in The Possession of UPSI Raises a

Presumption of Guilt Against the Insiders ....................................................................... 16

[A]. The Burden of Proof lies on the Respondents to show that the Trade was not on
the Basis of UPSI. ....................................................................................................... 16
[B]. The Respondents believed the information to be UPSI and therefore traded on the
basis of it. .................................................................................................................... 17
VI.

Evidence Provided by SEBI is Sufficient to Prove that Respondents are Guilty of

Insider Trading ................................................................................................................ 17

[A]. Findings are to be Based on Circumstantial Evidence ........................................ 18
[B]. SEBI Should Have Access to Content of Text Messages Exchanged Between
Mike and Freddie ........................................................................................................ 19
Prayer ................................................................................................................................. 19

iii

INDEX OF AUTHORITIES
Indian Cases
AK Menon and BOI Finance Ltd. v. Fairgrowth Financial Services Ltd and The Custodian
[1994] 81 CompCas 508 ................................................................................................ 5, 6
Anil Harish v. SEBI, [2012] 114 SCL 407................................................................ 10, 11, 12
Assistant Commissioner, Bangalore v. Velliappa Textiles Ltd., (2003) 11 SCC 405 ............ 15
Balwant Singh v. Rajaram, AIR 1975 Raj 73......................................................................... 8
BK Holdings Pvt. Ltd. v. Prem Chand Jute Mills, 84 CWN 876 ........................................ 5, 6
Brooke Bond India Ltd. v. UB Limited, 1999 (2) BomCR 429 .............................................. 6
Chandrakala v. SEBI, (2012) 2 CompLJ 391 ................................................................. 16, 17
Dahiben Umedbhai Patel v. Norman James Hamilton, (1983) 85 BomLR 275 .............. 5, 6, 7
District Mining Officer v. Tata Iron and Steel Company, 2002 (7) SCC 358.......................... 1
East Indian Produce Ltd. v. Naresh Acharya Bhaduri, 1988 64 CompCas 259 Cal. ..... 6
Gujarat NRE Minerals Ltd. v. SEBI, [2012] 106 CLA 37 .................................................... 12
Himachal Pradesh SIDC Ltd. v. PAMWI Tissues Limited and another, 2011 Indlaw HP 699 5
Jethalal C. Thakkar v. R. N. Kapur of Bombay, AIR 1956 Bom 74 ................................... 8, 9
MCX Stock Exchange Limited v. Securities & Exchange Board of India & Ors., (2012) 2
Comp LJ 473 (Bom) .......................................................................................................... 8
Mysore Fruit Products Ltd. v. The Custodian, 2005 (107) BomLR 955 ......................... 5, 6, 7
Naresh K. Aggarwala and Co. v. Canbank Financial Services Ltd., (2010) 6 SCC 178 .......... 5
Niskalp Investments and Trading Company Limited v Hinduja Tmt Limited, 2008 143
CompCas 204 Bom ....................................................................................................... 8, 9
Rajshree Sugars and Chemicals Limited v. Axis Bank Limited, (2008) 8 MLJ 261 ............. 10
Re NRB Bearings, Order NO. : CO/33 /TO/05/2003 ............................................................. 1
Rhodia SA v. SEBI, 2001 Indlaw SAT 27 ......................................................................... 1, 4
Sahara India Real Estate Corporation Ltd v. SEBI, AIR 2012 SC 3829 ................................. 5
Samsung India Electronics Pvt. Ltd. v. State of Assam, 2012(4)GLT546 ...................... 15, 16
Sandeep Jain v. Securities and Exchange Board of India, 2012 Indlaw SAT 111 ................. 18
Securities and Exchange Board of India v. MCX Stock Exchange Ltd. and Ors.,
MANU/SC/0904/2012....................................................................................................... 8
Subhkam Ventures v. Securities and Exchange Board of India, 2010 Indlaw SAT 12 ........ 2, 3
Vodafone International Holdings B.V. v. Union of India & Anr., (2012) 6 SCC 613 ............. 3
iv

US Cases
Chiarella v. United States, 445 U.S. 222 (1980)................................................................... 13
Dirks v. SEC, 103 S Ct 3255 (1983). ................................................................................... 13
SEC v McDermott, 277 F.3d 240 (2d Cir. 2002) ................................................................. 18
SEC v. Lund, 570 F. Supp. 1397 (1983) ........................................................................ 13, 17
SEC v. Rajat Gupta, 11-cr-00907, U.S. District Court, Southern District of New
York (Manhattan) ............................................................................................................ 19
SEC v. Shapiro, 494 F.2d 1301 (2d Cir. 1974)..................................................................... 17
English Cases
HL Bolton Co. Ltd. v. TJ Graham and Sons, 1956 All ER 624 ............................................ 15
Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd, [1915] A.C. 705 ........................ 15
Ranger v. Great Western Ry. Co., (1854) 5 HLC 72 ............................................................ 15
Tesco Supermarkets Ltd. v. Nattrass, (1971) 2 All ER 127 .................................................. 16
Statutes
Bombay Securities Contracts Control Act, 1925 .................................................................... 9
Companies Act, 1956 ............................................................................................................ 3
Securities Contracts (Regulation) Act, 1956 ................................................................. passim
Regulations
Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992
................................................................................................................................. passim
Securities And Exchange Board Of India (Substantial Acquisition Of Shares And Takeovers)
Regulations, 2011...................................................................................................... 1, 3, 4
Reports
Report of the Takeover Regulations Advisory Committee, (2010) ..................................... 1, 2

STATEMENT OF JURISDICTION

APPEAL I
The Appellant has approached this Honble Court under Section 15Z of the Securities and
Exchange Board of India Act, 1992.

APPEAL II
The Appellant has approached this Honble Court under Section 15Z of the Securities and
Exchange Board of India Act, 1992.

vi

STATEMENT OF FACTS

THE COMPANY AND THE INVESTOR

Novio Software Systems Limited [Novio] is a technology company based in
Mumbai, whose shares are listed on the National Stock Exchange of India Limited (NSE) and
Bombay Stock Exchange, Mumbai (BSE). The CEO and founder of Novio is Freddie
Balsara, a technocrat, who is also one of its promoters and directors.
For developing its next generation blockbuster offering codenamed The Messenger,
Novio was in dire need of funds. Since the market conditions were not appropriate for a
public offering, private placement of shares was preferred by Freddie and his team. They
selected LinkPark Investment Partners LLC [LinkPark], a private equity fund based in New
York as the investor.
THE AGREEMENTS
The terms of agreement between Novio and LinkPark were that LinkPark would invest
in 10% shares of Novio at a price of Rs 1500 per share. Under a Share-Subscription-cumShareholders Agreement signed between the parties on March 15, 2012, it was agreed that
LinkPark would nominate two directors on the Board of Directors of Novio. Furthermore,
certain affirmative rights were given to LinkPark by virtue of which no resolution concerning
changes in Articles of Association of the company, adoption of annual accounts, declaration
of dividend, remuneration of the managing director and other such matters could be passed
without the prior consent of LinkPark or its nominee directors.
On the same day, Freddie issued a side letter to LinkPark as per which he assured
LinkPark that if there was any fall in its shareholding within 3 months from the date of
completion of its investment, he would make up for this shortfall so as to maintain its original
shareholding at 10%.
LinkPark, in addition to the 10% stake, also wanted a call option over an additional
16% shares in Novio and therefore entered into a Call Option Agreement with Freddie and
his wife Hannah in relation to their shareholding in Led Skinnard Investment Limited [Led
Skinnard], a company registered in Mumbai. Both Freddie and his wife, along with some
nominees, held 100% stake in Led Skinnard. Under the said agreement, LinkPark could
exercise its right to buy all the shares held by Freddie, Hannah and their nominees in Led
Skinnard within 18 months from the date of signing of the agreement i.e. March 15, 2012.
vii

The only asset held by Led Skinnard was its 16% stake in Novio and therefore the strike price
of the call option was fixed such that the value of Led Skinnards shares represented its 16%
shares in Novio at the price of Rs 1500 per share.
THE ALLOTMENT OF SHARES AND THE SUBSEQUENT EVENTS
LinkParks proposed investment was approved in a meeting of the Board of Directors
of Novio held on March 15, 2012. The stock exchanges were informed of this meeting on
March 13, 2012. The approval of the shareholders was obtained on April 14, 2012 and the
shares were duly allotted to LinkPark on the next day. Though LinkPark had made disclosure
of its investment in Novio on the date of allotment, no disclosures were made regarding the
side letter or the Call Option Agreement.
Upon announcement of LinkParks investment in Novio, the market price of Novios
shares arose due to the bullishness of the stock markets. The proceeds of the issue of shares
were deployed for the development of The Messenger which turned out to be a great success.
During early May, 2012, LinkParks shareholding dropped below 10%, which was
however made up by Freddie as per the terms of the side letter. Such subsequent purchase
and sale of shares to make up for LinkParks shortfall was effected at prices ranging from Rs
1525 to Rs 1575.
SEBIS ORDER AGAINST LINKPARK
On analyzing all the transactions that were entered into between Novio, Freddie and
LinkPark, SEBI issued a show cause notice to LinkPark as to why it should not be subject to
penalties for failing to make an open offer to the shareholders of Novio and also for other
technical violations of the SEBI regulations. After hearing LinkParks submissions, the whole
time director of SEBI issued an order making it mandatory for LinkPark to make an open
offer at a price of Rs. 1575 and also imposed a penalty of Rs. 1 crore on it. The order also
declared the Call Option Agreement entered into between LinkPark and Freddie as void and
unenforceable on the ground of it violating several securities and corporate laws in India.
Aggrieved by this order of SEBI, LinkPark preferred an appeal to the Securities Appellate
Tribunal [SAT] which reversed SEBIs order on all counts.
FURTHER CONTRAVENTIONS NOTICED BY SEBI
During July, 2012 SEBI issued another notice to Freddie seeking information in
relation to possible contravention of applicable regulations issued by SEBI. The notice also
stated that some unusual transactions were detected by SEBI, one of which was the purchase
viii

of 50,000 shares of Novio by Purple Floydeon Investments Private Limited [Purple

Floydeon] on March 7, 2012 at an average price of Rs 1400 per share, a week prior to
Novios announcement about LinkParks proposed investment. Purple Floydeon, Indias
largest hedge fund, was managed by Mr. Mike Bennington, a smart technopreneur.
MIKES RELATIONSHIP WITH FREDDIE AND NOVIO
Mike and Freddie had a close relationship as they, along with their wives, had studied
in the same college. In addition to speaking to each other at least once a week, they used to
go on at least two vacations a year. Moreover, they often discussed tech and gaming matters.
To make up for LinkParks shortfall in May, 2012 Freddie had also contacted Mike, though
this became unnecessary at a later stage due to funding from other sources. Such close was
the relationship between Freddie and Mike that Freddie wanted Mike to join the Board of
Directors of Novio though he didnt take such a step due to the possible negative perception
about Novio that would have arisen in the markets as a result of this step.
In a professional capacity, Mike also provided strategic advisory services to Novio,
relating to financial and business aspects of the company under a formal agreement. For the
same, he was paid an annual consulting fee of Rs. 10 lacs as consideration.
THE ODDITY IN COMMUNICATION PATTERN
During its investigations, SEBI also received Freddies itemized mobile bill, along with
other things. On checking the same, SEBI noticed an odd communication pattern. Between
March 1 and March 7, 2012 an aggregate of 216 text messages was exchanged between Mike
and Freddie. However, for the rest of the month, only a total of only 41 messages were
exchanged. Moreover, no calls were made between them during this period. Noticing this odd
communication pattern, SEBI asked for the content of these messages from both Freddie and
Creedtel, Freddies mobile telephone operator. Having being denied access, SEBI initiated an
action in the Bombay High Court compelling Creedtel to disclose the content of these text
messages. Such proceedings are still pending before the Honble High Court.
SEBIS ORDER AGAINST FREDDIE, MIKE AND PURPLE FLOYDEON
On the basis of the available information, SEBI issued a show cause notice to Mike,
Freddie and Purple Floydeon in relation to possible contravention of various securities laws.
Though it is not disputed that the information relating to Novios search for a large investor
was in the public domain since February, 2012, the official announcement regarding the same
was made by Novio only on March 15, 2012. Moreover, the precise terms of the investment
ix

as well as the identity of the investor were unknown to the markets till the announcement was
made. Also, Purple Floydeon was a short term trader and in this period regularly invested and
divested in securities of various companies. However, the purchase of 50,000 shares was its
first only investment in Novio, with no divestment.
After hearing all the noticees, the whole time member of SEBI found all three guilty
under the applicable regulations issued by SEBI. The order debarred them from accessing the
capital markets and penalty ranging from Rs 10 lacs to Rs 50 lacs was imposed upon them.
Moreover, Purple Floydeon was asked to compensate all investors who had sold their shares
to it on March 7, 2012 with the amount being the difference between Rs 1575 and the price at
which the shares were sold to it. On an appeal by the concerned parties to the SAT, SEBIs
order was reversed. The SAT also pronounced a verdict on the matter relating to SEBI
seeking content of the text messages and held that it did not have the power to do so.
Aggrieved by both the orders of the SAT, SEBI has preferred an appeal before this Honble
Court.

QUESTIONS PRESENTED

I. WHETHER LINKPARK HAS ACQUIRED CONTROL OF NOVIO?

II. WHETHER THE CALL OPTION AGREEMENT IS VALID?

III. WHETHER

THE INFORMATION ABOUT LINKPARKS INVESTMENT IN NOVIO, FOR THE

DEVELOPMENT OF THE MESSENGER IS UNPUBLISHED PRICE SENSITIVE INFORMATION?

IV. WHETHER THE RESPONDENTS ARE INSIDERS?

V. WHETHER

MERE TRADING IN THE SCRIP OF

NOVIO

WHILE IN THE POSSESSION OF UPSI

RAISES A PRESUMPTION OF GUILT AGAINST THE INSIDERS?

VI. WHETHER EVIDENCE PROVIDED BY SEBI IS SUFFICIENT TO PROVE THAT RESPONDENTS

ARE GUILTY OF INSIDER TRADING?

xi

SUMMARY OF PLEADINGS
I. LINKPARK HAS ACQUIRED CONTROL OF NOVIO
In spite of arguments to the contrary, affirmative rights as provided for LinkPark under
the Share-Subscription-cum-Shareholders-Agreement can amount to control. The condition
that needs to be satisfied before such rights can amount to control is that the rights should
relate to day to day management of a companys business. In this case, the rights do relate to
the day to day management of Novio. In any event, the rights relate to major decisions on
structural and strategic changes and hence, amount to control. Thus, LinkPark is obligated to
make an open offer to the shareholders of Novio as it has acquired control over it.
II. THE CALL OPTION AGREEMENT IS VOID
The call option Agreement as contemplated in the present case is illegal under the
Securities Contracts (Regulation) Act, 1956 and is therefore void. Though it may be
contended that the said Act does not apply to unlisted companies such as Led Skinnard, this
is not the case as the Act does not make a distinction between listed and unlisted companies.
The definition of securities as given in the Act and also its legislative intent further support
this proposition. It may also be argued that options being contingent contracts are not
violating Section 16 of the act. This is however not the case and also the mere fact of an
option being a contingent contract does not render it legal under the Act. Further, in any
event, options are violating Section 18A of the Act.
III. THE INFORMATION OF THE 10% INVESTMENT BY LINKPARK FOR THE DEVELOPMENT OF
THE MESSENGER IS UNPUBLISHED PRICE SENSITIVE INFORMATION [UPSI]
It is submitted that firstly information about LinkParks proposed investment had not
been published by the company and news about Novios quest for a large investor was in the
public domain, only due to speculative media reports. Therefore, information about
LinkParks investment in Novio was unpublished. Secondly, when the announcement about
LinkParks investment in Novio was made, the stock prices of Novio rose immediately. This
shows that this news was indeed price sensitive in nature, as it affected the prices of
securities. Thirdly, LinkParks investment also granted it control in Novio as per provisions
in the Share-Subscription-cum-Shareholders Agreement. According to SEBI Regulations,
information about mergers, acquisitions and takeovers is price sensitive in nature.

xii

IV. THE RESPONDENTS ARE INSIDERS

Firstly, Freddie being the founder and only director acting in an executive capacity is
an insider, according to the SEBI [Prohibition of Insider Trading] Regulations, 1992.
Secondly, he shared an extremely close personal relationship with Mike, his college friend, by
virtue of which, it is submitted that Mike too was deemed to be a connected person.
Moreover, since they regularly discussed all upcoming recent developments, it can be
reasonably concluded that Mike would have access to unpublished price sensitive
information. Therefore, Mike is an insider. Thirdly, Mike also shared a professional
relationship with Novio, according to which he provided strategic advisory services relating
to financial and business aspects of the company. Since information relating to these aspects
is price sensitive, it is submitted that Mike too was an insider of Novio. Lastly, Purple
Floydeon was a privately owned hedge fund company in which Mike was managing its
affairs. According to the principle of directing mind and will of the company, a company is
liable for the actions of its officials who are the directing mind of it. Therefore, since Mike
was an important part of Purple Floydeon, and an insider of Novio, hence, Purple Floydeon,
i.e. the investment vehicle used by him will be liable for his actions.
V. MERE TRADING IN THE SCRIP OF NOVIO WHILE IN THE POSSESSION OF UPSI RAISES A
PRESUMPTION OF GUILT AGAINST THE INSIDERS
Firstly, when an insider, who is in possession of unpublished price sensitive
information, trades in the securities market, a presumption of guilt of is raised against him.
The burden of proof lies on the Respondents to prove that they did not trade on the basis of
this information, and their trades were motivated by some other legitimate purpose. Secondly,
the Respondents themselves considered the information to be price sensitive in nature, and
hence they only invested in Novio and did not divest, despite being short term traders. Thus,
it is submitted that Respondents traded not only when in possession of unpublished price
sensitive information, but also on the basis of it.
VI. EVIDENCE PROVIDED BY SEBI IS SUFFICIENT TO PROVE THAT RESPONDENTS ARE GUILTY
OF INSIDER TRADING
It is a well settled principle that in cases of insider trading, it is extremely difficult to
provide direct evidence. Therefore, the cases are entirely based on circumstantial evidence.
Firstly, in the given case, evidence provided by SEBI is sufficient to prove the offence of
xiii

insider trading, as it is clearly established that the Respondents were insiders with access to
unpublished information which was price sensitive in nature, and they traded on the basis of
it, while in possession of the same. Secondly, it is submitted that under SEBI Regulations,
SEBI does have the power to access content of text messages exchanged between Mike and
Freddie, and an appeal requesting the same is still pending before the Honble Bombay High
Court. Therefore, it is submitted that evidence provided is sufficient to prove the Respondents
guilty of insider trading.

xiv

PLEADINGS

Securities and Exchange Board of India v. LinkPark Investments Partners LLC

I. LINKPARK HAS ACQUIRED CONTROL OF NOVIO
1. It is a well settled rule that in interpreting pieces of legislation, one has to look into
the intent of the framers of the legislation. 1 In construing SEBI Regulations, judicial officers
have often resorted to the reports of various committees, based on the recommendations of
which such regulations were drafted.2 It has been emphasized by the Takeover Regulations
Advisory Committee (TRAC), which recommended the enactment of the Securities And
Exchange Board Of India (Substantial Acquisition Of Shares And Takeovers) Regulations,
2011 [Takeover Code, 2011] that not only acquisition of de jure control but also de facto
control would trigger the open offer obligations. 3 In this case, it is submitted that LinkPark
acquired de facto control of Novio, by virtue of the following reasons:
2. Firstly, not merely positive but also negative rights in the form of vetoing resolutions
passed by majority of the board of directors or shareholders can amount to control [A].
Secondly, in order to prove control, the negative rights should relate to the day to day
management of the company [B]. Thirdly, in the event these rights do not relate to the day to
day management of a companys business, it can still amount to control if these rights relate
to major decisions on structural and strategic changes [C]. It is submitted that in this case,
all these ingredients are present.
[A].

NEGATIVE RIGHTS CAN AMOUNT TO CONTROL

3. Regulation 2(1)(e) of the Takeover Code, 2011 defines control to include:

a. a right to appoint a majority of the directors
or
b. a right to control the management or policy decisions of the company.

District Mining Officer v. Tata Iron and Steel Company, 2002 (7) SCC 358.

Rhodia SA v. SEBI, 2001 Indlaw SAT 27 [Rhodia SA]; Re NRB Bearings, Order NO. : CO/33 /TO/05/2003

Report of the Takeover Regulations Advisory Committee, 29, (2010).

4. It is submitted that in this case, the second requirement has been satisfied wherein
LinkPark is exercising control over the management or the policy decisions of Novio by
virtue of the affirmative rights it has been given in the Share-Subscription-cum-Shareholders
Agreement [Agreement].4
5. Though it may be contended that control may occur only through positive rights and
not negative ones as contemplated in the Agreement, it is submitted that the distinction
between the two is minute. For example, if the minority shareholder imposes some conditions
upon an action that the company deems necessary to undertake, it may not be able to do so
until it accepts the minority shareholders conditions. In such a case, a negative right compels
a company to follow a certain course of action which it would otherwise not have followed
had it not been for the minority shareholder.
6. The existence of negative rights in shareholders agreements has also been
acknowledged by the TRAC.5 Though it held that a blanket provision stipulating such rights
as amounting or not amounting to control would be liable to misuse, it subsequently held that
the question of whether such rights amount to control would therefore have to be discerned
from the facts and circumstances surrounding each case.6 It thus did not rule out the
possibility of such negative rights amounting to control under certain circumstances.
7. Though Subhkam Ventures,7 ruled out such rights as amounting to control, the
Supreme Court subsequently held that the judgment by the Securities Appellate Tribunal
(SAT) was not to be taken as a precedent. Even if the reasoning used in Subhkam Ventures is
used to contend that the driving seat test, as per which the requirement of being able to steer
the companys decisions is to be satisfied before a certain action can amount to control, fails
in this case, such reasoning is false on the ground that it doesnt look into the fact that even
one possessing negative rights may be in the driving seat and thus in control of the company.
The example given above8 amply illustrates this.

Factsheet, Annexure.

Report of the Takeover Regulations Advisory Committee, 29, (2010).

Id. at 29.

Subhkam Ventures v. Securities and Exchange Board of India, 2010 Indlaw SAT 12 [Subhkam Ventures].

5, Memorandum for Appellant.

8. Moreover, the trigger point for open offer obligation under the Takeover Code, 2011
is 25%.9 It is submitted that this is not an arbitrary percentage. Under the Companies Act,
195610 a special resolution can only be passed if it has the support of seventy five percent of
the shareholders. In other words, a shareholder having more than twenty five percent stake in
a company can block such a resolution. Therefore, it is submitted that the concept of negative
rights is well built in the Takeover Code, 2011 itself.
[B].

THE NEGATIVE RIGHTS ARE RELATED TO

THE

DAY TO DAY MANAGEMENT OF

NOVIOS BUSINESS THUS AMOUNTING TO CONTROL

9. Though negative rights may not amount to control of a company in itself, but if these
rights are shown to be related to the day to day management of a company, these rights do
amount to control.11
10. Accounting systems such as the US GAAP12 make a distinction between
participative and protective rights. While participative rights relate to the day to day
management of the company, protective rights do not. Furthermore, it has been held by the
Honble Supreme Court of India that participative rights restrict the powers of the majority
shareholder to exercise control over the operations of the company. 13
11. It is submitted that in the given case, a number of affirmative rights as given in the
Agreement amount to participative rights. For example, rights with respect to declaration of
dividends, approval of annual business plan and remuneration of senior personnel of the
company are rights related to the day to day management of a companys business and thus
amount to controlling its management or policy decisions. Thus, LinkPark has acquired
control of Novio and is obligated to make an open offer under Regulation 4 of the Takeover
Code, 2011.

Regulation 3(1), Takeover Code, 2011.

10

Section 189, Companies Act, 1956.

11

Subhkam Ventures, 2010 Indlaw SAT 12.

12

Generally Accepted Accounting Principles [GAAP] are rules and principles for accounting used in the
United States of America.
13

Vodafone International Holdings B.V. v. Union of India & Anr., (2012) 6 SCC 613 at 76.

[C].

IN

ANY

EVENT, THE AFFIRMATIVE RIGHTS

MAJOR DECISIONS

RELATE TO

ON

STRUCTURAL AND STRATEGIC CHANGES

12. In the event it is held that the affirmative rights as given in the Agreement do not
relate to the day to day management of Novios business, the rights still relate to major
decisions on structural and strategic changes and thus amount to control.
13. In Rhodia SA,14 the acquirer was found to have been in joint control of a body
corporate located outside India on the basis that it had certain affirmative rights over major
decisions on structural and strategic changes. These rights related to declaration of
dividends, acquisition or disposal of assets amounting to more than 20% of the total
consolidated assets of the company, issuance of equity securities, stock splits,
commencement of a new line of business, etc. The requirement of the rights being related to
the day to day management of a company was done away with. 15
14. Since the rights the acquirer had in Rhodia SA, are similar to the ones provided in the
Agreement, it is submitted that LinkParks rights under the Agreement allowed it to influence
major decisions on structural and strategic changes of Novio, implying that it has acquired
control over Novio and is thus obligated to make an open offer under the Takeover Code,
2011.
II. THE CALL OPTION AGREEMENT IS VOID
15. It is submitted that the call option agreement entered into between LinkPark on one
side and Freddie and Hannah on the other on March 15, 2012 in relation to their shareholding
in Led Skinnard is void under the relevant securities and corporate laws. This is so as firstly,
the provisions of Securities Contracts (Regulation) Act, 1956 [Securities Act] do apply to
an unlisted company [A]. Secondly, the call option agreement violates both Section 16 [B]
and Section 18A [C] of the Securities Act.
[A].

THE SECURITIES CONTRACTS (REGULATION) ACT, 1956

APPLIES TO UNLISTED

COMPANIES

16. It may be contended that unlisted companies, such as Led Skinnard, unlike listed
companies are outside the purview of the Securities Act. However, it is submitted that under
14

Rhodia SA, 2001 Indlaw SAT 27.

15

Rhodia SA, 2001 Indlaw SAT 27, 20.

Sec. 2(h) of the Securities Act no such distinction should be made between the shares of
listed and unlisted companies and provisions of the Securities Act accordingly apply to both.
The same has also been held in the cases of Naresh K. Aggarwala16 and Himachal Pradesh
SIDC Ltd.17
17. Even if such a distinction is made regarding the applicability of the Securities Act to
listed and unlisted companies, it is submitted that shares of unlisted companies do come
under the ambit of the Securities Act because such shares may be defined as securities
under the Act [i]. Further, the legislative intent clearly shows an intention to include and
regulate unlisted companies [ii].
i.

Shares of unlisted companies are securities as per the Securities Act

18. The provisions of the Securities Act apply only to securities as defined under
Section 2(h) of the Act. The said section also mentions the words or other marketable
securities of a like nature.18 This implies that marketability is a necessary common criterion
that applies to all stated categories of securities such as shares, scrips, stocks, bonds, etc. as
defined under the Securities Act.19
19. In Dahiben, 20 marketable securities were defined as those securities that enjoy a
higher degree of liquidity such that they can be readily sold in the market. In other instances
as well, it has been held that securities that are freely transferable may be regarded as
marketable. 21
20. While, the Court in Dahiben22 concluded that private limited companies, which are
unlisted, did not come under the ambit of the Securities Act, in BK Holdings23 and East India

16

Naresh K. Aggarwala and Co. v. Canbank Financial Services Ltd., (2010) 6 SCC 178.

17

Himachal Pradesh SIDC Ltd. v. PAMWI Tissues Limited and another, 2011 Indlaw HP 699.

18

Sec. 2(h)(i), Securities Act.

19

Dahiben Umedbhai Patel v. Norman James Hamilton, (1983) 85 BomLR 275 [Dahiben].

20

Dahiben, (1983) 85 BomLR 275.

21

Sahara India Real Estate Corporation Ltd v. SEBI, AIR 2012 SC 3829; AK Menon and BOI Finance Ltd. v.
Fairgrowth Financial Services Ltd and The Custodian [1994] 81 CompCas 508 [AK Menon]; Mysore Fruit
Products Ltd. v. The Custodian, 2005 (107) BomLR 955 [Mysore Fruit Products].
22

Dahiben, (1983) 85 BomLR 275.

23

BK Holdings Pvt. Ltd. v. Prem Chand Jute Mills, 84 CWN 876 [BK Holdings].

Produce24, the case was differentiated on account of the fact that the Court in Dahiben,
considered marketability with respect to a private limited company and not a public unlisted
company which is materially different from a private limited company. Despite the fact that
the Brooke Bond case25 later extended the principle in Dahiben to all unlisted companies, it is
submitted that the reasoning employed was flawed and the judgement has also been
subsequently overruled. In Brooke Bond, it was held that the shares of unlisted companies are
not securities under the Securities Act as they are not freely transferable i.e. marketable
given that they do not have a proper market for trade. However, it is submitted that such a
definition of marketable securities would accord a very narrow meaning to them. 26 In BK
Holdings, it was concluded that marketable could be equated with saleable thereby
implying that anything capable of being sold would be deemed marketable. Hence, it is
submitted that definition of marketable under Brooke Bond is unduly restrictive and
therefore the appropriate definition of marketable should simply be shares capable of being
sold.
21. Further, it is submitted that the condition to be marketable laid down in Dahiben
does not necessitate the existence of a market place and such securities may be traded in
without the physical existence of one. There is a very large volume of securities of public
companies that are not listed on the stock exchange. Often these securities are heavily traded
and have such a large market that they have quotations appearing in newspapers. The Court
in AK Menon27, citing the example of units of the Unit Trust of India, came to a similar
conclusion. Thus, it is submitted, on the basis of the above mentioned argument, that despite
the shares of Led Skinnard not being listed, there may be a large market for them where they
are capable of being sold.
22. Moreover, the Bench in AK Menon concluded that shares of a public unlisted
company that are otherwise capable of being listed in the stock exchange would come
under the purview of the Securities Act. Mysore Fruit Products,28 reaffirming this view,
further noted that the decision in Brooke Bond was merely a prima facie view, as repeatedly
24

East Indian Produce Ltd. v. Naresh Acharya Bhaduri, 1988 64 CompCas 259 Cal.

25

Brooke Bond India Ltd. v. UB Limited, 1999 (2) BomCR 429.

26

BK Holdings, 84 CWN 876.

27

AK Menon, [1994] 81 CompCas 508.

28

Mysore Fruit Products, 2005 (107) BomLR 955.

clarified by the Single Judge. Hence, it is submitted that shares of public unlisted companies
qualify as securities under the Securities Act.
ii.

The legislative intent of the Securities Act extends beyond the stock exchanges

23. Though judgements such as Dahiben and Brooke Bond concluded that the Securities
Act was never intended to regulate securities that were not listed on stock exchanges, this was
based on the flawed assumption that the stock exchange was the only market for trading in
securities.
24. It is submitted that the legislators did in fact intend for the mandate of the Securities
Act to extend beyond the stock exchanges. Mysore Fruit Products reinterpreted Dahiben by
drawing attention to the fact that the Securities Act also regulates trading of securities outside
the limits of the stock exchanges through a mechanism of licensing of security dealers. The
Bench concluded that Sec. 1329 read with Sec. 1730 demonstrates that shares not listed on
stock exchanges were also securities. D. K. Deshmukh, J. noted, so far as the Court is
aware, there are only 21 recognised stock exchanges. Thus, in areas where there are no stock
exchanges and where there can be no listed securities, the Government can regulate by
means of licensed dealers.
25. Hence, it is submitted that the Securities Act was also intended to deal with
transactions outside the stock exchanges, i.e. trading in securities of unlisted companies.
[B].

THE CALL OPTION VIOLATES SECTION 16

OF THE

SECURITIES CONTRACT

REGULATION ACT, 1956

26. It is submitted that the call option agreement entered into on March 15, 2012 is illegal
on the grounds of it violating Section 16 of the Securities Act, which applies in this case, as
has been proved in [A]. This is due to the following reasons:
27. Firstly, it may be contended that an option contract being a contingent contract
qualifies to be a spot delivery contract and is thus valid under the SCRA, however this
reasoning is faulty for the reason that an option contract is indeed not a contingent contract
[i]. Secondly, in the event it is a contingent contract, it is still illegal under the Securities Act
[ii].

29

Section 13, Securities Act.

30

Section 17, Securities Act.

i.

A Call Option is not a contingent contract

28. Options, on prior occasions, have been held to invalid by SEBI as they violate Section
16 of the Securities Act.31 Under that section and the subsequent notification issued under
it,32 a contract for the purchase or sale of securities other than such spot delivery contract or
contract for cash or hand delivery or special delivery or contract in derivatives as is
permissible under the said act is illegal. The term spot delivery contract has been defined
in Section 2(i) of the Act. Since an option contract is not a spot delivery contract, it is thus
illegal under Section 16 of the Securities Act.
29. Firstly, in MCX Stock Exchange,33 it was held that since an option contract constitutes
a contingent contract, it qualifies to be a spot delivery contract and thus, is not per se illegal.
The judgement relied heavily upon Jethalal C. Thakkar, 34 wherein it was held that in case of
contingent contracts, a contract is formed only upon the occurrence of a contingency, which
in MCX Stock Exchange, was the exercise of the option. However, the court in MCX Stock
Exchange did not take note of the fact that Jethalal C. Thakkar had been subsequently
overridden by Niskalp Investments,35 which held that in a contract where one party has an
option to buy back shares of another,36 such contract will not be a contingent contract.
Therefore it is submitted that, since options are not contingent contracts as per Niskalp
Investments, they are not spot delivery contracts. Moreover, MCX Stock Exchange has been
held by the Supreme Court to be not binding on SEBI.37
30. Secondly, in addition to the judgements cited above, it has also been held that in a
contingent contract, the contingency contemplated should be outside the control of the
parties. 38 In the present case, even if it is assumed that the contingency is that of the call
31

See Letter of Offer to the Shareholders of Cairn India Limited, April 8, 2011, available at
http://ww.sebi.gov.in/takeover/cairnlof.pdf (Last visited on February 10, 2012).
32

Securities and Exchange Board of India, Notification No. S.O. 184(E) (March 1, 2000).

33

MCX Stock Exchange Limited v. Securities & Exchange Board of India & Ors., (2012) 2 Comp LJ 473
(Bom).
34

Jethalal C. Thakkar v. R. N. Kapur of Bombay, AIR 1956 Bom 74 [Jethalal C. Thakkar].

35

Niskalp Investments and Trading Company Limited v Hinduja Tmt Limited, 2008 143 CompCas 204 Bom.
[Niskalp Investments].
36

Niskalp Investments, 2008 143 CompCas 204 Bom at 11.

37

Securities and Exchange Board of India v. MCX Stock Exchange Ltd. and Ors., MANU/SC/0904/2012.

38

Balwant Singh v. Rajaram, AIR 1975 Raj 73.

option being exercised by LinkPark, it is within the control of one of the parties, i.e.
LinkPark. Thus, the call option agreement in question does not fulfil the definition of a
contingent contract.
31. Hence, it is submitted that the call option agreement entered into between LinkPark
and Freddie is illegal on the ground of it not being a contingent contract and as a
consequence, not falling under the definition of a spot delivery contract, a contract
permitted under the Securities Act.
ii.

In any event, Call Option is still void under the Act

32. In the event it is held that a call option is a contingent contract, it is still void under
the Securities Act. The only instance where a contingent contract of similar nature as a call
option39 was held to be legal and valid was in Jethalal C. Thakkar. However, as stated in
Niskalp Investments, the relevant securities law that was up for consideration in Jethalal C.
Thakkar was the Bombay Securities Contracts Control Act, 1925 [Bombay Act], which is
no longer in force, and not the Securities Act.
33. While the buy back arrangement in question was held to be valid in Jethalal C.
Thakkar on the basis that it constituted a ready delivery contract40 which was permitted
under the Bombay Act, the same could not be held in Niskalp Investments as the term used in
the Securities Act was a spot delivery contract which is substantially different from a ready
delivery contract. While under a ready delivery contract, the contract is supposed to be
performed either immediately or within a reasonable time, in case of a spot delivery
contract, the act of delivering the shares and paying the consideration is to be performed on
the same day of the contract or on the next day. In the case at hand, it is submitted that though
the call option agreement entered into on March 15, 2012 might have been valid had the
relevant legislation in place been the Bombay Act, but since there is no guarantee that the
delivery of shares and the payment of consideration therein will happen on the same day or
the next day of the contract, the agreement between the parties does not fall within the
definition of a spot delivery contract and is thus invalid under the Securities Act.

39

The contract in that case dealt with a buy back arrangement wherein after the lapse of a certain period of time,
the defendants were supposed to buy back the shares of the plaintiff.
40

Section 3(4) of the Bombay Securities Contracts Control Act, 1925 defines a ready delivery contract.

[C].

IN ANY EVENT, THE CALL OPTION VIOLATES SECTION 18A OF THE SECURITIES

CONTRACT REGULATION ACT, 1956

34. Section 18A of the Securities Act prohibits trading in derivatives unless these are
traded and settled on a recognized stock exchange. Derivatives have been defined under
Section 2(ac) of the Securities Act. Options are recognized as derivatives since they derive
their value from the underlying shares. 41 Furthermore, derivatives are of two types: 42
a. Over the Counter (OTC) Derivatives These are traded directly between the
parties without involving the stock exchange.
b. Exchange Traded Derivatives (ETD) These are traded and settled on a
recognized stock exchange.
35. Options have been recognized as Over the Counter Derivatives,43 and are therefore
prohibited under Section 18A of the Securities Act since they are not traded and settled on a
stock exchange. Hence, it is submitted that irrespective of the option agreement between
LinkPark and Novio being void under Section 16, it is prohibited under Section 18A of the
Securities Act.

Securities and Exchange Board of India v. Freddie Balsara, Mike Bennington, Purple
Floydeon Investments Private Limited
36. It has been established in Anil Harish,44 that under the Securities and Exchange Board
of India (Prohibition of Insider Trading) Regulations, 1992 [SEBI PIT Regulations] in
order to prove insider trading, SEBI is required to establish that:
a. The concerned person was an insider
b. S/he was in possession of unpublished information that was price sensitive in
nature
c. S/he traded while in possession of such information.45
41

Rajshree Sugars and Chemicals Limited v. Axis Bank Limited, (2008) 8 MLJ 261[Rajshree]; See Securities
and Exchange Board of India, Letter addressed to Vulcan Engineers Limited, May 23, 2011, available at
http://www.sebi.gov.in/informalguide/Vulcan/sebilettervulcaii.pdf (Last visited on February 10, 2012).
42

Rajshree, (2008) 8 MLJ at 9.

43

Rajshree, (2008) 8 MLJ at 9.

44

Anil Harish v. SEBI, [2012] 114 SCL 407 [Anil].

10

37. It is submitted that in this case, all these requirements have been satisfied and
therefore, the Respondents are guilty under the SEBI PIT Regulations.
III. THE INFORMATION

OF THE

10% INVESTMENT

BY

LINKPARK

FOR

DEVELOPMENT

OF THE MESSENGER WAS UNPUBLISHED PRICE SENSITIVE INFORMATION [UPSI]

37. It is submitted that the information regarding LinkParks investment in Novio to fund
The Messenger was firstly unpublished [A] as well as price sensitive [B]. Secondly, it is
submitted that the Respondents themselves believed the information to be unpublished and
price sensitive, which attributes to them the necessary mental element for Insider Trading
[C].
[A].

INFORMATION WAS UNPUBLISHED

38. Unpublished information is that which has not been published by the company or its
agents, and which is not specific in nature.46 In the given case, it is true that matters
pertaining to Novios quest for an investment company were in the public domain. However,
this information along with the identity of the investor and the precise terms of the
investment was not published by the company. 47 Therefore, since the information was not
specific in nature and there were only speculative media reports, hence it is submitted that the
information about the 10% investment by LinkPark LLC in Novio was unpublished
information. 48 Moreover, the information about Novio developing a new game The
Messenger was unknown to the market. Thus, the information about the game too was
unpublished.

45

Anil, [2012] 114 SCL 407.

46

Regulation 2(k), SEBI PIT Regulations, 1992.

47

Factsheet, 18.

48

According to the Explanation under Regulation 2(k), SEBI PIT Regulations, 1992, Speculative reports in
print or electronic media shall not be considered as published information.

11

[B].

INFORMATION WAS PRICE SENSITIVE

39. Any information which is related either directly or indirectly to a company and which,
if published is likely to materially affect the prices of securities of that particular company is
called price sensitive information.49
40. Firstly, in the given case, LinkPark was a picky investor and had an immaculate track
record in investing in gaming companies that were hugely successful. 50 Moreover, prices of
securities of Novio rallied upwards following the announcement about LinkParks
investment.51 Therefore, it can be reasonably concluded that the information about
LinkParks 10% investment, for the development of the new game was price sensitive.
Secondly, that fact that LinkParks acquisition granted it substantial control over Novio, can
also be deemed to be price sensitive information.
41. Though it is a well settled rule that information which is related to the ordinary course
of a companys business is not price sensitive in nature;52 it is submitted that information
regarding investments and takeovers for a software development company such as Novio is
not in the ordinary course of business and is therefore price sensitive.
42. Thus, it is submitted that the information about LinkParks 10% investment in Novio,
for the development of The Messenger was UPSI.
IV. THE RESPONDENTS ARE INSIDERS
43. It is submitted that Mike [A] and Freddie [B] both can be classified as insiders under
the SEBI PIT Regulations. Further, Purple Floydeon must also be a party to the suit, and
therefore liable along with the other insiders [C].
[A].

MIKE BENNINGTON WAS AN INSIDER

44. It is submitted that Mike Bennington was an insider firstly, because he was in a
position to receive and have access to UPSI, given his relationship with Freddie and Novio
[i]. Secondly, even if he did not in fact have access to UPSI, it is submitted that he was still an

49

Regulation 2(ha), SEBI PIT Regulations, 1992.

50

Factsheet, 3.

51

Factsheet, 9.

52

Gujarat NRE Minerals Ltd. v. SEBI, [2012] 106 CLA 37; Anil [2012] 114 SCL 407.

12

insider given that he was a connected person who was reasonably expected to have access
to UPSI [ii].
i.

Mike had access to UPSI

45. It has been expressly stated in the SEBI PIT Regulations 53 that an insider will be any
person who has received or has access to UPSI. Firstly, in the given case, Mike Bennington
shared a professional relationship with the company Novio, under a consulting agreement
entered into by both the parties. According to this agreement, Mike was required to provide
strategic advisory services on matters relating to the financial as well as business aspects of
the company, in return for which he also received an annual consulting fees of Rs. 10 lakhs. 54
Therefore, there existed a professional relationship between Mike and Novio. Secondly, Mike
and Freddie had been friends since college and maintained close contact with each other,
speaking at least once a week and vacationing together at least twice a year. Moreover, the
two also shared information relating to the gaming and tech industries so that each could gain
from the experience of the other.55 Therefore, it can be reasonably concluded that in this
professional capacity, Mike had access to the information about LinkParks investment in
Novio, which, as has been proved above is UPSI.
46. It was also held in the case of SEC. v. Lund56 that a friend who provided advisory
services to a firm was an insider. Moreover, it was noted in the landmark case of Dirks v.
SEC57 that sometimes, under special circumstances, outsiders may, become fiduciaries to
shareholders, and therefore, be under the same duty to disclose or abstain, as an insider. This
was so if those outsiders gained access to UPSI for corporate purposes, by virtue of being in
a special confidential relationship with the company in question. In addition, Chiarella,58
established that any person, whether corporate insider or not, who receives material nonpublic information of a company must not use that information to trade in securities of that
particular company.
53

Regulation 2(e), SEBI PIT Regulations, 1992: insider means any person who, has received or has had
access to such unpublished price sensitive information.
54

Factsheet, 16.

55

Factsheet, 15.

56

SEC v. Lund, 570 F. Supp. 1397 (1983) [Lund].

57

Dirks v. SEC, 103 S Ct 3255 (1983).

58

Chiarella v. United States, 445 U.S. 222 (1980).

13

47. Therefore, it is submitted that Mike had access to material non-public information
about the LinkPark investment on account from his personal relationship with Freddie as well
as his professional position as a strategic advisor to Novio.
ii.

Mike was a connected person reasonably expected to have access to UPSI.

48. Assuming, that Mike did not have access to UPSI, it is submitted that he was an
insider due to him being a connected person and that he was reasonably expected to have
access to it. According to Regulation 2(c) of the SEBI PIT Regn., Connected person means
any person who holds a position involving a professional or business relationship between
himself and the company (whether temporary or permanent) and who may reasonably be
expected to have an access to unpublished price sensitive information in relation to that
company.59 The SEBI Regulations further define an insider as a person who is connected to
the company, and is reasonably expected to have access to UPSI.60
49. Given Mikes personal relationship with Freddie 61 and professional relationship with
Novio,62 it is submitted that Mike was a connected person. In addition to this, the SEBI PIT
Regulations clearly state that an investment advisor, such as Mike, is deemed to be a
connected person.63 On account of these connections with Novio and its promoter-director
Freddie, he may be reasonably expected to have access to UPSI and is therefore, an insider.
[B].

FREDDIE IS AN INSIDER

50. Since, Freddie is the founder and one of the directors of Novio, he is a connected
person of the company. 64 Moreover, since he is the only director acting in an executive
capacity, it is reasonable to expect that he would have access to UPSI. Therefore, it is
submitted that Freddie is an insider.

59

Regulation 2(c)(ii), SEBI PIT Regulations, 1992.

60

Regulation 2(e), SEBI PIT Regulations, 1992.

61

Factsheet, 15.

62

Factsheet, 16.

63

Regulation 2(h)(iii), SEBI PIT Regulations, 1992: person is deemed to be a connected person if such
personis an Investment Advisorwith the company.
64

Regulation 2(c)(i), SEBI PIT Regulations, 1992: connected person means any person who- is a director, as
defined in clause (13) of Section 2 of the Companies Act, 1956

14

[C].

PURPLE FLOYDEON PURCHASED SHARES

OF

NOVIO WHEN

IN

POSSESSION

OF

UPSI
51. It is further submitted that Purple Floydeon Investments Private Ltd., a hedge fund
managed by Mike, is also liable for insider trading, and hence must be a party to this suit. The
SEBI PIT Regulations65 prohibit companies from dealing in securities of a company while in
possession of unpublished price sensitive information. 66 During the time leading up to the
announcements made by Novio, Purple Floydeon (and not Mike) invested in Novio.67 It is
submitted that Purple Floydeons liability arises out of Mikes breach of duty as an insider, as
he used it as an investment vehicle. Where law seeks to impose liability on juristic persons
for offences that require personal fault or mens rea, the fault of directors or managers may be
treated as the fault of the company. 68 Common Law jurisprudence has determined that when
a companys objectives can only be achieved through agency of individuals, who then act
fraudulently, such acts and associated knowledge shall be attributable to a company, similar
to how a private employer may be liable for the acts of his agents. 69 In this case, the decisions
to invest for a hedge fund are made by its officials. Therefore, it is submitted that if such a
decision is made with fraudulent or guilty intent, such knowledge may be attributed to Purple
Floydeon. Thus, this attribution of knowledge and guilt of a companys officials may render
it guilty of an offence committed by them. This principle was first developed in Lennard70
wherein one of the directors was found to be the directing mind and will of the company. It
was held that the company could not dissociate itself from the director and liability on
account of his actions and could not raise the defence of no actual fault or privity. This
Director or such a person in a similar position is the embodiment of the company, one that

65

Regulation 3A, SEBI PIT Regulations, 1992: No company shall deal in the securities of another company or
associate of that other company while in possession of any unpublished price sensitive information.
66

Regulation 3A, SEBI PIT Regulations, 1992.

67

Factsheet, 14.

68

Samsung India Electronics Pvt. Ltd. v. State of Assam, 2012(4)GLT546 [Samsung India]; HL Bolton Co.
Ltd. v. TJ Graham and Sons, 1956 All ER 624; Assistant Commissioner, Bangalore v. Velliappa Textiles Ltd.,
(2003) 11 SCC 405.
69

Ranger v. Great Western Ry. Co., (1854) 5 HLC 72.

70

Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd, [1915] A.C. 705.

15

hears and speaks through its persona. Within his appropriate sphere, he is the mind of the
company and if it is a guilty mind, then the guilt may be attributed to the company. 71
52. Considering the fact that Mike held a managerial position, as well as a considerable
stake in Purple Floydeon, a privately held hedge fund, it is a reasonable inference that Mike
used Purple Floydeon as an investment vehicle in order to gain from his special knowledge of
Novio. Hence, it is submitted that the price sensitive special knowledge that Mike possessed
may be attributed to Purple Floydeon, given his position in the company. This is because
Mike was in the position to be the directing mind and will of the corporate body. The acts
and state of mind of such persons are, in law, the acts and state of mind of the corporation
itself.72
V. MERE TRADING IN THE SCRIP OF NOVIO WHILE IN THE POSSESSION OF UPSI
RAISES A PRESUMPTION OF GUILT AGAINST THE INSIDERS
53. Firstly, there is a presumption against an insider in possession of UPSI thatany trade
he makes in the relevant securities is on the basis of or motivated by his special knowledge,
rendering him guilty of insider trading [A]. Secondly, even if this presumption is not
sustained, it is submitted that the Respondents believed the information regarding LinkParks
investment to be UPSI and therefore traded accordingly [B].
[A].

THE BURDEN OF PROOF LIES ON THE RESPONDENTS TO SHOW THAT THE TRADE

WAS NOT ON THE BASIS OF UPSI.

54. It was held in the case of Chandrakala73 that 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. Therefore, the burden of proving that the same did not happen, and he/she
traded on some other basis, is on the insider himself. Hence, only if an insider shows that
he/she did not trade on the basis of UPSI, he/she shall not be held liable for violation of SEBI
Regulations. Therefore, in the given case, the burden of proof lies on the Respondents to

71

Tesco Supermarkets Ltd. v. Nattrass, (1971) 2 All ER 127.

72

Samsung India, 2012 (4) GLT 546.

73

Chandrakala v. SEBI, (2012) 2 CompLJ 391 [Chandrakala].

16

prove that they did not trade on the basis of UPSI, i.e. information about LinkParks
investment in Novio, for development of the new game The Messenger.
[B].

THE RESPONDENTS BELIEVED

THE INFORMATION TO BE

UPSI

AND THEREFORE

TRADED ON THE BASIS OF IT.

55. It is observed that Purple Floydeon purchased 50,000 shares of Novio on March 7,
2012, prior to the public announcement of LinkParks investment.74 Further, this was the first
and only investment by Purple Floydeon in Novios scrip, although it did invest and divest in
other companies.75 This situation is extremely similar to the case of SEC v. Lund wherein
Lund, an insider, purchased a substantial amount of stock of a company after learning about a
proposed joint venture with another company. The courts held that Lund himself considered
this information to be material and price sensitive. This was evident from the fact that this
was his only purchase in the companys stocks in a 10 year period. A similar holding was
also given in the case of SEC v. Shapiro76.
56. The fact that only an investment and no divestment in Novios stock was made,
despite Purple Floydeon being a short term trader and regularly investing and divesting in
other companies, shows that it considered this information to have the potential to materially
and positively affect the market price of Novios securities upon being disclosed to the
public, as was also held in Chandrakala. Thus, it is submitted that the Respondents Mike and
Purple Floydeon considered the information to be price sensitive and accordingly purchased
the stock of Novio with the intention of earning profits. This in turn raises a presumption of
guilt against them.
VI. EVIDENCE PROVIDED BY SEBI IS SUFFICIENT TO PROVE THAT RESPONDENTS ARE
GUILTY OF INSIDER TRADING
Due to the nature of the offence, it is rare and problematic to find conclusive evidence against
Insider Trading. Thus, in most instances, the Courts proceed on the basis of circumstantial
evidence [A]. Further, in the given case, even if the circumstantial evidence is not sufficient,
it is submitted that SEBI can access text messages and call records of the Respondents [B].
74

Factsheet, 14.

75

Factsheet, 18.

76

SEC v. Shapiro, 494 F.2d 1301 (2d Cir. 1974).

17

[A].

FINDINGS ARE TO BE BASED ON CIRCUMSTANTIAL EVIDENCE

57. It was held in the case of Sandeep Jain v. SEBI77 that because of the complex nature
of investigations in insider trading, the cases are always built on circumstantial evidence. The
primary reason for this is that the accused rarely ever confess to having committed the
offence and the ways to gain access to the communications between the parties are extremely
limited, along with the ascertainment of intent. In such cases, direct evidence is extremely
hard to find, and therefore, circumstantial evidence is used. In the case of SEC v.
McDermott78 , the government had built its case entirely on circumstantial evidence based on
the ongoing affair between McDermott (the tipper) and Gannon (the tippee), telephone
conversations between the two and records of their trading activities. Although no direct
evidence was produced by the government, of the content of any conversation between
McDermott and Gannon, the Second Circuit held that rational minds could infer such a
conclusion from the above evidence.79 It is submitted that in the given case it can be
reasonably drawn from the proposition that Mike and Freddie shared an extremely close
personal relationship. 80 Moreover, the two also shared a professional relationship wherein
Mike provided strategic advice to Novio. It is also to be noted that just prior to LinkParks
investment, between March 1-7 2012, Mike and Freddie had exchanged an aggregate of 214
text messages, whereas, for the remainder period, only an aggregate of 41 messages, and no
phone calls had been exchanged. This is an odd communication pattern as Mike and Freddie
were otherwise known to converse over the phone at least once a week. It should also be
noted that Mike purchased shares of Novio immediately prior to the announcement of
LinkParks investment.81 Therefore, based on all the evidence that can be clearly inferred
from the circumstances listed above, it can reasonably be concluded that Mike, who was an
insider, did have access to UPSI based on which, he purchased shares in Novio in order to
make a profit. Moreover, drawing on the order of the Court in SEC v. McDermott, even
though SEBI does not yet have access to the content of text messages exchanged between

77

Sandeep Jain v. Securities and Exchange Board of India, 2012 Indlaw SAT 111.

78

SEC v McDermott, 277 F.3d 240 (2d Cir. 2002) [McDermott].

79

McDermott, 277 F.3d 240 (2d Cir. 2002).

80

Factsheet, 15.

81

Factsheet, 17.

18

Mike and Freddie, still, based on the preponderance of circumstantial evidence submitted by
SEBI82 it is submitted that the Respondents should be held guilty of insider trading.
[B].

SEBI SHOULD HAVE ACCESS

TO

CONTENT

OF

TEXT MESSAGES EXCHANGED

BETWEEN MIKE AND FREDDIE

58. According to SEBI PIT Regulations it is the duty of the insider to cooperate with
SEBI and furnish all such records and documents in his custody or control, which relate to
transactions undertaken by him in the securities market, if SEBI is of the opinion that the
same must be investigated.83 It shall be the duty of every director, proprietor, partner, officer
and employee of the insider to give to the investigating authority all assistance in connection
with the investigation, which the insider may be reasonably expected to give. 84 In the given
case, the documents with the content of the text messages are in control of Freddie and Mike.
Being insiders, it is their duty to cooperate and provide SEBI with any documents that may
be required.
___________________________________________________________________________
PRAYER
Wherefore in light of the issues raised, arguments advanced and authorities cited, it is humbly
prayed that this Court may be pleased to hold, adjudge and declare that;
1. The appeals filed by the Appellant are allowed.
2. The orders of the Securities Appellate Tribunal are reversed.
And pass any other order it may deem fit in the interest of justice, equity and good
conscience.
All of which is humbly prayed,
Team Code ______,
Counsel for the Appellant.
82

SEC v. Rajat Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).

83

Regulation 7, SEBI PIT Regulations, 1992.

84

Regulation 7 (4), SEBI PIT Regulations, 1992.

19