Vivekananda Law School Moot Court Society

3rd September 2015

Moot Court Competition for LL.M. students

This is to inform you that the moot court competition on Securities and Investment Law which

was scheduled on 3rd September has been postponed on 15th October. The students are requested

to register themselves by sending an intimation mail on neelamchawla76@gmail.com .

1. The participants shall register in a team of two speakers.

2. The last date for registration is 28 September.

3. The memorial from both the sides should be submitted by 8th October till 4:00 pm.

4. All the participants should be in the formals.

5. The team shall be given 15 minutes for arguments.

6. The category of award shall be Best Speaker, Best Team and Best Memorial.

Dr. NeelamFaculty Coordinator

Advocates’ LegionMoot Court Society, VLS

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Statement of Problem

BEFORE THE SECURITIES APPELLATE TRIBUNAL, MUMBAI

Silicon Exchange Limited.

Mr. Rajesh Malhotra and

Sunlight Financial Services Limited … Appellants

v

Securities and Exchange Board of India … Respondents

1. Mr. Rajesh Malhotra was looking for business prospects in his home country India. In India,

Mr. Malhotra decided to establish an online marketplace for luxury goods such as shoes, bags,

watches and similar accessories. He established contact with leading international and domestic

brands who agreed to list their products on his marketplace. Through his newly incorporated

company, Silicon Exchange Limited, he set up an online market place by the name “Silicon Ex”.

Under this business model, Silicon Exchange would provide an online platform in the form of a

website on which its clients can display and sell their products. Silicon Exchange (together with

some of its affiliates) also provides additional services such as handling the payment

mechanisms, ensuring delivery and also accepting returns of goods. However, Silicon Exchange

did not itself obtain title over the goods, which were transferred directly from the sellers to the

buyers.

2. Silicon Exchange also received equity investments from three different venture capital and

private equity funds. In 2007, Silicon Exchange decided to approach the capital markets, and

following an initial public offering (IPO) the company’s shares were listed on the National Stock

Exchange (NSE).Subsequently, in 2008, Silicon Exchange carried out a sponsored offering of

American Depository Receipts (ADRs) that were then listed on the NASDAQ. Following these

listings, Mr. Malhotra held 32% shares in Silicon Exchange through an investment company.

The remaining shares were held among institutional and retail investors. Mr. Malhotra was the

chairman and managing director (CMD) of the company.

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3. Silicon Exchange had become the largest online retailer in India, leaving the competition far

behind. Therefore, Mr. Malhotra decided that Silicon Exchange required further capital.

Accordingly, in consultation with Silicon Exchange’s lead investment bank, Sunlight Financial

Services Limited, Mr. Malhotra decided that it would be preferable for Silicon Exchange to offer

fresh shares to the public by way of a follow-on public offering (FPO). Accordingly, on April 30,

2014, Silicon Exchange filed a draft red-herring prospectus (DRHP) with the Securities and

Exchange Board of India (SEBI).

4. The news of Silicon Exchange’s further capital raising plan triggered a flurry of developments.

An employee of Silicon Exchange immediately wrote an anonymous letter to SEBI indicating

the prevalence of counterfeit products being sold on Silicon Ex, which would be severely

damaging to the genuine traders who are marketing their products through the portal. The letter

also indicated that Silicon Exchange’s senior management was aware of counterfeiting being

perpetuated on Silicon Ex, but that they did not take any steps to prevent the same as such

activities only boosted sales on the website and enhanced Silicon Exchange’s revenues. When

SEBI communicated its comments on the DRHP to Silicon Exchange through the investment

banks, it specifically asked the company to make appropriate disclosures regarding any

counterfeit products being sold on its portal. In response to SEBI’s comments on this point,

Silicon Exchange included an additional risk factor in the DRHP as follows:

We may be subject to allegations claiming that items listed on our marketplaces are pirated,

counterfeit or illegal.

It is possible that items offered or sold through our online market place by third parties infringe

third-party copyrights, Trademarks and patents or other intellectual property rights. Although we

have adopted measures to verify the authenticity of products sold on our market place and

minimize potential infringement of third-party intellectual property rights through our

intellectual property infringement complaint and take-down procedures, these measures may not

always be successful.

Thereafter, Silicon Exchange proceeded with the FPO, which concluded successfully.

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5. On July 17, 2014, a few weeks after the conclusion of the FPO, Silicon Exchange was notified

of a suit filed by Santaberry Fashion Inc., a leading American luxury retailer, in the Delhi High

Court for infringement of its intellectual property rights on account of alleged counterfeit

products being sold through Silicon Ex. Santaberry itself had been a key client of Silicon

Exchange as it sold its products through Silicon Ex for a number of years. However, that

relationship came to an end in 2013 when Santaberry began doubting the authenticity of the

products being marketed on Silicon Ex. As of the date of filing of the suit in the Delhi High

Court, Santaberry was no longer a client of Silicone Ex.

6. The case was that Mr. Rajesh and Mr. Spine, the CEO of Santaberry, had a strained

relationship. Furthermore, there was speculation that the termination of the contractual

arrangements between Silicon Exchange and Santaberry was the result of payment disputes and

not merely due to the alleged suspicion on the part of Santaberry regarding the counterfeiting of

products on Silicon Ex. The suit was filed for an injunction restraining Silicon Exchange from

selling any products that are deceptively similar to that of Santaberry’s products and also for

damages amounting to Rs. 110 crores for sales of counterfeit products that had already occurred

over the previous years (including during the period when Santaberry had been Silicon

Exchange’s customer).

7. Although Silicon Exchange was notified of the suit on July 17, 2014, it immediately began

consultation with the lawyers and decided to make any public announcement of the same only

after initial advice from the lawyers. Hence, it notified the stock exchange of such suit only on

July 24, 2014. This announcement sent ripples through the stock market. Overnight, the price of

Silicon Exchange’s ADRs fell 40% on the NASDAQ. There was a precipitous slide on the NSE

as well where the stock took a beating in the following days to come.

8. In addition to notifying Silicon Exchange of the suit, Santaberry lodged a complaint with

SEBI alleging misstatements in the prospectus for the FPO. It also requested SEBI to launch an

investigation. Specifically, Santaberry alleged that it had served a legal notice on Silicon

Exchange regarding the counterfeiting claims. This legal notice was served on April 25, 2014

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and this legal notice was suppressed and that it was neither brought to SEBI’s attention nor was

there any disclosure thereof in the FPO prospectus.

9. On the basis of complaint of Santaberry (which incidentally held 1000 shares in Silicon

Exchange), SEBI initiated investigations. The interim order passed by SEBI barred Silicon

Exchange and Mr. Malhotra from accessing the capital markets or from otherwise trading in

securities on a stock exchange, pending further investigation. By way of this order, it also

debarred Sunlight from providing any investment banking services to its clients, again pending

further investigation.

10. In the meanwhile, the Enforcement Directorate, Government of India, initiated investigations

against Silicon Exchange on account of potential violation of the Foreign Exchange Management

Act, 1999 read with the Government’s policy on foreign investment. The Government was

particularly concerned that Silicon Exchange was carrying on its business without complying

with the legal requirements on foreign direct investment (FDI). Specially, the investigation was

premised on the basis that Silicon Exchange “was in breach of the spirit of the law, if not the

letter of the law” relating to foreign investments in the relevant sector. A total of 37% shares in

Silicon Exchange were held by foreign investors, including shares in respect of ADRs. The

prospectus did not contain any specific reference to compliance with foreign investment policies,

which was based on legal advice received by Silicon Exchange.

11. Thereafter, SEBI heard the parties in detail on the merits of the case and passed its final order

on July 30, 2015. In this order, SEBI found inadequate disclosures in Silicon Exchange’s

offer document for the FPO due to which it confirmed its orders against Silicon Exchange, Mr.

Malhotra and Sunlight respectively, which would operate for a period of four years from the date

of the order. Furthermore, SEBI found that there was an inexcusable delay on the part of Silicon

Exchange in disclosing the filing of Santaberry’s lawsuit to the stock exchanges. SEBI also

passed an order requiring Silicon Exchange to disgorge its ill-gotten gains that were computed to

be Rs. 40crores. This was arrived at on the basis of the additional gains made by Silicon

Exchange on account of the non-disclosure of the counterfeiting, and particularly the potential

legal action by Santaberry and its impact on the stock price of Silicon Exchange. Separately,

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SEBI also imposed a penalty of Rs. 4 crores on Silicon Exchange for violation of the SEBI Act

and the relevant regulations there under. Aggrieved by SEBI’s order, the parties preferred an

appeal to the Securities Appellate Tribunal (SAT).

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