THE W.B.

NATIONAL UNIVERSITY OF JURIDICAL SCIENCES

Securities Law

Full Marks –50 Time Allowed: 3 hours

Instruction to the Examinees

Examinees are allowed to refer Securities Law Module –I to answer the

The question paper is divided into 2 parts. Part-A and Part-B.

Answer both (two) the questions from Part-A, answer any two question
from Part-B.

PART –A
Answer any both the questions from this part 2x15 = 30 marks

1. Alcon Pharma (hereinafter Alcon) is a biopharmaceutical company primarily engaged in

Mr. Arav is the Chairman and Managing Director of the company. He along with his
family holds 37.31% as on March 31, 2017 which constitutes the Promoter Group of the
company. The shareholding pattern of the company is as under:

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Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) received a
reference dated May 19, 2015 from the Office of Commissioner of Customs, Central
Excise and Service Tax against Alcon. Based on the investigation of the
Commissionerate, it was observed that the books of accounts of the company was being
tailored to a considerable extent and various fictitious transactions were recorded by the
company in the name of Bio-IT Services to project a rosy picture of the company to its
shareholders.

Pursuant to the aforesaid reference, a detailed examination was carried out by SEBI to
ascertain whether books of accounts of company were manipulated by way of fictitious
transactions to project a rosy picture of the company to the shareholders in 2010-11 and
2011-12.

As per the annual reports, the company derives revenue from Formulations (which
include herbal as well as allopathic formulations) and Bio-IT services. The sales of the
company for the years 2010-11 and 2011-12 is as under:

A summary of Profit and Loss accounts of the company for the financial years 2010-11
and 2011-12 is as under:

The company has shown sales to various companies and well-known brands such as Fizer
Limited, Clenmark Pharmaceuticals Limited, Merk Limited, Jhandu Pharmaceuticals,

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 Klaris Life Sciences etc. as well as to various individuals. During inquiry/ investigation
by the SEBI, these entities replied that after verification of their books of accounts and
audited financial statements, they have not come across any services being availed from
Alcon during the financial year 2010-11 and thereafter.

Additionally, the Managing Director of the company (i.e. Mr. Arav) and the statutory
auditors of Alcon have also admitted before SEBI officials that the company received no
funds from the majority of invoices. The statutory auditors confirmed this fact, vide their
certificate dated January 31, 2017 which indicates that the company showed fake sales in
2011-12.

SEBI’s examination found that the company resorted to creative accounting and
misstated its financial statements in order to present a rosy picture of its affairs by
overstating its sales to the tune of Rs.1072 lakh. As a result of this (misrepresentation),
the prices of the shares increased in the secondary market, when the promoter sold off
their stake in the company, around FY 2011 and FY 2012 (as reflected in the first table of
this question).

To this, the company clarified that though Alcon provided clinical testing and trial
services to the aforementioned well-known brands/companies, however, none of them
acknowledged or paid Alcon for its services and hence the same may not reflect in the
financial statements of these clients/companies. Also Alcon could not produce a copy of
any email(s) or other written forms of communication that took place between Alcon and
its client companies in order to corroborate the exchange of services leading to the
aforementioned sale transaction between them. Alcon maintained that all the sale contract
was verbal.

Assuming you to be the adjudicating officer of SEBI and applying appropriate provisions
of law write a detailed reasoned judgment levying appropriate penalties (if any) on
Alcon. 15 marks

2. Assume that the following are the facts, situations and arguments of a case pending
before you.

The modus operandi followed, while applying for shares of two public companies that
came up with an initial public offering were similar. The parties concerned were also
common in both the IPOs. In this case, it was found by the SEBI that the respondent
received 12,053 shares out of which 3272 shares, which were transferred to the respondent
before the day of listing of shares of the company with the stock exchange, 3598 shares on
the day of listing and 5183 shares after the day of listing. The said shares were purchased
by the respondent through off market transactions from 553 demat account holders.

These 553 demat account holders sold the shares to the said Respondent at the rate of Rs.
1170/- per share, though the market value of the said shares was much more than Rs.
1170/- per share. These shares were thereafter sold by the said Respondent at a higher

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price. Upon investigation by SEBI, it was found that there is less material on record to
conclusively establish that the 553 demat account holders were benami or fictitious.
Investigation has not been able to substantiate this point. However, all the 553 accounts
behaved exactly in the same manner in terms of price and timing, that too, in off market,
which is not transparent. However, SEBI held that the said respondent has harmed the
interests of common investors in the retail segment by cornering shares of the two public
companies.

The said Respondent is not a registered share broker with SEBI. But it is an admitted fact that
the said Respondent purchased the shares at the rate of Rs. 1170/- per share though the
market value of the said shares at the time when they were purchased was much more and the
shares were sold at an average market value of Rs. 1296.12 paise, which is higher than the
purchase price paid by the respondent. Subsequently the respondent sold the same shares at a
higher price. The respondent purchased the shares either prior to or on the date of listing of
shares on BSE and NSE, i.e. when the market values of the shares were neither determined
nor known to the purchaser. All the 553 demat account holders were paid the same Rs.
1170/- per share.

The demat accounts were signed by some persons with different spellings of their names and
in different manners.

It is also a fact that most of the demat account holders were not having their trading accounts
and many of them were having a common address. Number of demat accounts were having
same address and that too, care of someone else.

From all the transactions mentioned above SEBI came to the conclusion that the demat
account holders were not genuine and either they were benami or fictitious and the shares
were purchased on behalf of someone, who had financed these demat account holders. The
SEBI also alleged that the Respondents had done something which was against the interest
of small investors because from their quota the shares were allotted to the demat account
holders who were not genuine.

As a result of the aforestated transactions, SEBI held that the Respondents got undue benefit.
It has been noted that many of the demat account holders had used addresses of others and
had signed in a fishy manner in their demat accounts.

The SEBI held that the aforestated facts and the dealings of the Respondents were not fair
and were in violation of the established norms of securities market.

The Respondent maintained that the price paid by him to the demat account holders for
purchasing the shares of the two public companies was ‘reasonable’, though it was admitted
by the respondent that the value of the said shares, during the period varied from Rs. 1172/-
to Rs. 1339/-.

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The respondent also made submissions to the effect that no Retail Individual Investor had
made any complaint to the SEBI.

The Respondent also made a submission that common addresses given by several demat
account holders would not show any irregularity.

Another submission made by the respondent was also to the effect that the shares could have
been sold before they were listed with a stock exchange and such a sale cannot be said to be
an illegality.

Additionally, the respondent also contended that since the alleged transactions in shares took
place before the said shares were listed, the transactions are not illegal because the same
qualifies to be a ‘spot delivery contract’.

Analyzing the facts and arguments provided by both the parties and also applying
appropriate provisions of law, write a reasoned judgment levying appropriate penalties
(if any) upon the respondent in this case. 15 marks

PART –B
Answer any two questions from this part 2x10 = 20 marks

3. Discuss the importance of securities markets in an economy. 10 marks

4. Compare and analyse the provisions of the insider trading regulations 2015 with that of
1992 insider trading regulations. 10 marks

5. Write short notes on any two of the following topics 2x 5 = 10 marks

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