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DAMODARAM SANJIVAYYA NATIONAL LAW

UNIVERSITY
SABBAVARAM, VISAKHAPATNAM, A.P., INDIA

NAME OF THE TOPIC:

IN RE, INDIAN INFOTECH AND SOFTWARE LIMITED, [2020 Indlaw SEBI 153]
NAME OF THE SUBJECT:
CORPORATE LAW-2

NAME OF THE FACULTY:

Prof. DAYANANDA MURTHY C P sir

Name of the Candidate: Divija Pidugu

Roll No : 2018LLB064
Semester : 8th Semester
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Acknowledgement:

I would sincerely forward my heartfelt appreciation to our respected Corporate Law-2

professor, Prof. Dayananda Murthy C P sir for giving me a golden opportunity to take up this
project regarding “Case Analysis of In Re, Indian Infotech and Software Limited, 2020
Indlaw SEBI 153”. I have tried my best to collect information about the project in various
possible ways to depict clear picture about the given project topic.
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TABLE OF CONTENTS

1. IDENTIFICATION……………………………………………………………….04
2. FACTS OF THE CASE…………………………………………………………04
3. PROCEDURAL HISTORY BEFORE THE APPEAL……………………….05
i) TRIAL COURT……………………………………………………………...06
ii) THE COURT OF APPEALS……………………………………………….06
4. ISSUES AND HOLDING………………………………………………………07
5. REASONING……………………………………………………………………07
6. EVALUATION………………………………………………………………….09
7. SYNTHESIS……………………………………………………………………..11
i) Classical theory & Misappropriation Theory…………………………….11
ii) Position of Law before Chiarella’s case……………………………………12
iii) Position of Law after Chiarella’s case (Post Chiarella)…………………...13
iv) Comparative study of Insider trading principle with respect to India and
United States of America…………………………………………………….14
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Case Name: - In Re, Indian Infotech and Software Limited.

Citation: -2020 Indlaw SEBI 153

Bench: -Ananta Barua, whole time member Securities and Exchange Board of India

IDENTIFICATION:

The case of In re, Indian infotech and software limited 1, was decided by the Supreme Court
of United States with respect to the violation of 11(1), 11(4), 11A and 11B of Securities and
Exchange Board of India Act, 1992 and Section 12A of Securities Contracts (Regulation)
Act, 1956. The parties to the case are Indian Infotech & Software Limited Kamal Nayan
Sharma, Harish Joshi, Mukund Bhardwaj and Varsha Murakaand the Securities Exchange
Board of India. The SEBI received a letter from MCA for initiating action against 331 shell
companies. Aggrieved by this IISL filed an appeal before SAT.

FACTS OF THE CASE:

SEBI received a letter dated June 9, 2017 from the Ministry of Corporate Affairs in which
MCA had annexed a list of 331 shell companies for initiating necessary action as per SEBI
laws and regulations. MCA had also annexed the letter of Serious Fraud Investigation Office
which contained the database of shell companies along with their inputs. SEBI placed trading
restrictions on promoters/directors of such companies. SEBI also directed the stock
exchanges to place the scrip of such shell companies in the trade-to-trade category with
limitation on the frequency of trades and imposed a limitation on the buyer by way of 200%
deposit on the trade value.

Pursuant to the same, BSE has given notice, to all its market participants, initiated actions
envisaged in the SEBI letter in respect of all the listed shell companies, as identified by MCA
and communicated by SEBI.

IISL vide a letter made a representation to BSE, submitting that company had filed its Annual
Income Tax Return on timely basis and had complied with the Income Tax provision and
there are no pending disputes with Income Tax Department. And Company had done all
compliances with respect to the Companies Act, 2013 and had filed all Annual Returns with
the office of Registrar of Companies (ROC), Mumbai. Also, Company had not taken any loan
from Bank or any Financial Institution. It has submitted that company had done all the
1
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compliances with respect to LODR Regulations and company had obtained certificate from
the Auditor stating that the company is a going concern and no default has been made with
regard to the Companies Act, 2013 and Income Tax and all the above requirements are
complied with. And also company submitted the Certificate of Registration obtained from the
Reserve Bank of India (RBI) for carrying on the business as an NBFC Company.

PROCEDURAL HISTORY:

Appeal before SAT

Aggrieved by the aforesaid letters issued by SEBI and BSE, IISL filed an appeal before the
Hon’ble Securities Appellate Tribunal. The Hon’ble SAT directed thatas appellant has
already made a representation to SEBI against the said ex-parte order accordingly, it
permitted the appellant to withdraw the appeal with liberty to pursue the representation
pending before SEBI.SEBI is directed to dispose of the representation made by the appellant
as expeditiously as possible and in any event within a period of four weeks. It is made clear
that passing of any order on the representation made by the appellant would not preclude
SEBI from further investing the matter and initiate appropriate proceedings if deemed fit.

SEBI Interim Order

Pursuant to the directions by Hon’ble SAT, SEBI passed an order directed the trading in
securities of IISL shall be reverted to the status as it stood prior. It also directed exchange
shall appoint an independent forensic auditor to further verify misrepresentation including of
financials and/or business of IISL, if any; and also misuse of the funds / books of accounts of
the company. It also directed that the promoters and directors in IISL are permitted only to
buy the securities of IISL. The shares held by the promoters and directors in IISL shall not be
allowed to be transferred for sale, by depositories.

Subsequently, SEBI confirmed the directions of interim order against IISL and its promoters
and directors.

Appointment of forensic auditor

BSE had informed the company about the appointment of forensic auditorfor conducting
forensic audit of IISL. IISL was requested to cooperate with the forensic auditor and
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informed that non-cooperation in the matter would be viewed seriously leading to further
appropriate actions. The forensic auditor in its emails requested IISL to provide contact
details of the company officials for co-ordination for conducting the forensic audit. However,
IISL raised objection to interim order and accordingly, forensic audit of IISL was kept on
hold. Despite various correspondences by the forensic auditor and BSE, IISL failed to furnish
the information and documents to the forensic auditor. Subsequently, BSE conducted a site
inspection of IISL and submitted its inspection report to SEBI.

ISSUES & HOLDING:

1. Whether the Noticees have violated the provisions of SEBI Act,

1992, SCRA, 1956, PFUTP Regulations, 2003, LODR
Regulations, 2015 and the applicable clause of Listing Agreement,
as alleged in the Show Cause Notice?
IISL has failed to cooperate with the forensic auditor appointed by
BSE on the directions of SEBI and therefore, have violated Section
11(2)(i) and 11(2)(ia) of the SEBI Act, 1992.
IISL has failed to submit plausible explanations along with suitable
evidence against the allegations relating to misrepresentation of
financials and business in the SCN and has thus failed to present
true and fair financial statements and has executed transactions
which were non-genuine in nature tantamounting to
misrepresentation of the accounts/financial statements and misuse
of account/funds of the company which are detrimental to the
interests of genuine investors.
A company which is listed has to provide material information to
its shareholders and prospective investors on a continuous basis as
per the LODR Regulations/Listing Agreement to enable them to
take informed investment or divestment decisions. It is observed
that IISL has failed to give correct timely information about its
business activity or any change in business activity to its
shareholders/investors.

REASONING:
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Application of law to the facts:

Section-11 of the Securities Exchange Board of India Act, 1992 - The section-11of SEBI
Act basically protects the interests of investors in securities and to promote the development
of, and to regulate the securities market.

Section 12 a of Securities and Exchange Board of India Act, 1992:-This section prohibits
manipulative and deceptive devices, insider trading and substantial acquisition of securities or
control.

Relevant extract of provisions of SCRA :

21. Conditions for listing.Where securities are listed on the application of any person in any
recognised stock exchange, such person shall comply with the conditions of the listing
agreement with that stock exchange.

IISL did not cooperate with the forensic auditor.all the contentions raised by IISL for not
allowing forensic audit are an afterthought and non-cooperation with the forensic auditor by
IISL as directed in the Interim Order was a deliberate attempt by IISL to avoid the forensic
audit. Further, the contention and submission of IISL that they are prepared even today for
audit as required by BSE and cooperate with any forensic auditor anytime is nothing but a
delaying tactic and is an attempt to avoid regulatory action. IISL has failed to cooperate with
the forensic auditor appointed by BSE on the directions of SEBI and therefore, h

ave violated Section 11(2)(i) and 11(2)(ia) of the SEBI Act, 1992.

IISL had received various amounts from DIPL ranging from Rs. 90,000 to Rs. 1 crore on
various dates from December 2015 to February 2016. There is neither
agreement/documentary evidence for the said sale of shares between IISL and DIPL nor is
there any agreement/documentary evidence whereby IISL has agreed to receive the payment
for the shares in such tranches over a period of 3 months. IISL has not submitted as to
whether the shares have now been transferred to DIPL or submitted any documents to show
transfer of shares/delivery of the shares to the account of DIPL. Hence, it is not clear as to
whether the amount of Rs. 8.47 crores transferred by DIPL to the account of IISL was for the
purpose of sale of shares to DIPL as claimed by IISL, as it appears that the shares have not
yet been transferred till date to DIPL, whereas the payments have been made by DIPL to IISL
in 2015 itself.
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Further, IISL has not submitted any proof or evidence of an agreement for such sale of shares
to substantiate their claims that the payment received from DIPL was for the sale of shares.
Hence, the quoted investments of Rs. 8.47 crores approx. from the sale of shares to DIPL in
an off-market transaction in the year 2015-16 is a misrepresentation of the financials in the
balance sheet of IISL.

In the Annual Report of the company, it is stated that approximately 85% of the turnover of
the company is from IT and Software Products. Hence, IISL has made contradictory
statements by stating that in the financial year 2015-16 it continued with the old business of
"investing and lending".

Further, IISL has stated that in the previous year to 2015-16, the company entered into
business activity of IT and Software products and changed the name from "Indian Leasers
Ltd" to "Indian Infotech & Software Ltd". However, IISL has stated that the name of the
company changed from Indian Leasers Limited to Indian Infotech & Software Limited on
July 20, 1998. Therefore, the submissions made by IISL are contradictory.

A company which is listed has to provide material information to its shareholders and
prospective investors on a continuous basis as per the LODR Regulations/Listing
Agreement to enable them to take informed investment or divestment decisions.

But IISL has failed to give correct timely information about its business activity or any
change in business activity to its shareholders/investors.

Further, IISL has kept the investors in the dark about the true nature of income of the
company from interests earned from loans or sale of IT and Software products or gain from
investments and thus, the misleading information with respect to its business activities and
the true nature of its income had the potential to mislead the investors and was unfair.

The directors are expected to take utmost care in dealing with the affairs of the company and
to ensure that all applicable laws are being complied with. In terms of Regulations 4(2)(f)(i)
(2) and 4(2)(f)(ii)(6) and (7) of the LODR Regulations, the Board of Directors are required
to conduct themselves as to meet the expectations of operational transparency to
stakeholders, managing potential conflict of interest in related party transactions and to
ensure the integrity of the listed companys accounting and financial systems.
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As per Regulation 4(2)(f)(iii)(1), (3), (6) and (12) of LODR Regulations, the Board of
Directors are required to ensure effective monitoring of the management, to act in good faith,
with due diligence and care and in the interest of the listed company and shareholders.

However, Noticee no. 2, 3 and 4 as directors of the company are responsible for the company
which has failed to comply with the aforesaid provisions of the LODR Regulations as the
company has failed to cooperate with the forensic auditor appointed by BSE and have failed
to provide any evidence to substantiate the financial transactions and statements of the
company as sought by BSE and SEBI, thereby failing to present true and fair financial
statements and executing transactions which were non-genuine in nature tantamounting to
misrepresentation of the accounts/financial statements and misuse of account/funds of the
company.

Company though a legal entity cannot act by itself, it can act only through its Directors. They
are expected to exercise their power on behalf of the company with utmost care, skill and
diligence. This Court while describing what is the duty of a director of a company held in
Official Liquidator v. P.A. Tendolkar2 that a Director may be shown to be placed and to
have been so closely and so long associated personally with the management of the company
that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of
business of the company even though no specific act of dishonesty is provided against him
personally.

IISL has failed to comply with the aforesaid provisions of the LODR Regulations as the
company has failed to cooperate with the forensic auditor appointed by BSE and have failed
to provide any evidence to substantiate the financial transactions and statements of the
company as sought by BSE and SEBI, thereby failing to present true and fair financial
statements and executing transactions which were non-genuine in nature tantamounting to
misrepresentation of the accounts/financial statements and misuse of account/funds of the
company.

EVALUATION

The case of “In Re: Indian Infotech and Software Limited” is the case in which interests of
genuine investors are protected by barring Indian Infotech & Software Ltd and four
individuals from the securities market for up to one year for fraudulent trading

2
(1973) 1 SCC 602
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activities.Section11(1)of Securities and Exchange Board of India Act, 1992 prohibit unfair
trade practices relating to securities markets and protects interests of investors in securities
and to promote the development of, and to regulate the securities market.

Under Section 11A and 11BSecurities and Exchange Board of India has power to issue
directions or may specify regulations to protect the interests of investors. These sections of
SEBI act have been applied to restrain Indian Infotech & Software Ltd (IISL) along with four
individuals Kamal Nayan Sharma, Harish Joshi, Mukund Bhardwaj and Varsha Muraka from
accessing securities markets for a period ranging from three months to one year.

SEBI in the year 2017,had directed the BSE to appoint an independent forensic auditor to
verify the misrepresentations, including in financials/business of IISL and misuse of
funds/books of account.However, it was found that IISL failed to cooperate with the forensic
auditor appointed by the BSE on the directions of the regulator hence violating the LODR
regulations.

I think SEBI is right in barring Indian Infotech & Software Ltd and four individuals from the
securities market company because, a company which is listed has to provide material
information to its shareholders and prospective investors on a continuous basis as per the
LODR Regulations/Listing Agreement to enable them to take informed investment or
divestment decisions. But here it has been observed that IISL has failed to give correct timely
information about its business activity or any change in business activity to its
shareholders/investors.

According to LODR regulation 4(c) the listed entity shall refrain from misrepresentation and
ensure that the information provided to recognised stock exchange and investors is not
misleading. But here, the company claimed to have been engaged in investment and loan
business as a non-banking financial company (NBFC), but the 2015-16 annual report showed
that it was engaged in IT and software business.

And also, it can be observed that company has not given any evidence to show that any
material disclosure was made for the change in business of the company. Further,it can be
seen that IISL has kept the investors in the dark about the true nature of income of the
company from interests earned from loans or sale of IT and Software products or gain from
investments and thus, the misleading information with respect to its business activities and
the true nature of its incomehad the potential to mislead the investors and was unfair.
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I feel SEBI is also right in making Board of Directors of company liable. Because, in terms of
Regulations 4(2)(f)(i)(2) and 4(2)(f)(ii)(6) and (7) of the LODR Regulations, the Board of
Directors are required to conduct themselves as to meet the expectations of operational
transparency to stakeholders, managing potential conflict of interest in related party
transactions and to ensure the integrity of the listed companys accounting and financial
systems. As per Regulation 4(2)(f)(iii)(1), (3), (6) and (12) of LODR Regulations, the Board
of Directors are required to ensure effective monitoring of the management, to act in good
faith, with due diligence and care and in the interest of the listed company and shareholders.
But Sharma, Muraka, Joshi and Bhardwaj as the directors of IISL failed to present true and
fair financial statements, executed transactions which were non-genuine in nature resulting in
misrepresentation of the accounts/financial statements and misused account/funds of the
company.Sharma, Muraka and Joshi were responsible for the failure of the company to
cooperate with the forensic auditor.

Hence, I think SEBI is right in holding, Board of directors have violated Regulations of
LODR Regulations, and IISL have violated Sections 11(2)(i) and 11(2)(ia) of the SEBI Act,
1992.

SYNTHESIS

The Securities market is a part of the financial market where buying and selling of securities
are done. Just like any other financial market, securities market is also prone to scams, frauds
and illicit activities. Securities market in India involves millions of active investors on a daily
basis investing and earning money through the trade done. So it is very essential to check and
prevent any of the scams or frauds in the market to safeguard the interests of all the investors
in the securities market.

Owing to the growth of securities market in the Indian economy in 1992, the Government of
India established a regulatory body to look after this market. It was called the Securities and
Exchange Board of India (SEBI). This Securities and Exchange Board of India (SEBI) was
entrusted with the following responsibilities:  

1. Protecting the interests of investors in securities market.

2. Regulate the operations of the securities market.

3. Promote and develop securities market.

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4. Regulate the insider trading in a company.

One of SEBI’s key responsibilities is to regulate and maintain the interests of the investors in
the securities market which is the key for the functioning of the securities market. 

Securities and Exchange Board of India (SEBI) plays a pivotal and instrumental role in
prohibiting any sort of activities that are manipulative or fraudulent or unfair in the securities
market. After SEBI encountered many unfair practices, frauds that affect the securities
market, SEBI passed a special regulation pertaining to prohibition of manipulative, fraudulent
and unfair trade practices in chapter II (4) of 2003 regulation. The following has been
mentioned:

 No person shall indulge in frauds or unfair trade practices in the securities market.

 Creating a fake appearance of trading of securities that would give a false appearance
of trading to the investors is not allowed.

 Handling with securities with a purpose of inflating or causing fluctuations in

securities is not allowed instead it should be intended for transfer of ownership only.

 To pay any person money or money’s equivalent for the purpose of handling
securities with a motive of causing fluctuations or inflation is not allowed.

 Any act to manipulate the price of securities is not allowed.

 Use of any information that is false to make a person handle with securities is not
allowed.

 To handle securities without any intention of performing or without the intention of

change in ownership is not allowed.

 Should not deal with any securities that are stolen or fake.

AMENDMENT TO PFUTP

On January 25, 2022, the SEBI amended its regulations to prevent fraudulent and unfair trade
practices in the securities market.

The Securities and Exchange Board Of India (SEBI) has amended its regulations to make it
easier to prosecute fraudulent and unfair trade practices. One of the changes pertains to the
definition of manipulative. The regulator has also added a new provision that states that the
person who provided the misleading information should not be considered reckless and
careless.
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This new section also prohibits the dissemination of misleading information that is likely to
influence the decisions of investors. Previously, it was required for the regulator to prove that
the person had intent to mislead or cause a false or misleading statement. However, with the
addition of the word careless, it has made it easier for the agency to take action against those
who provide misleading information.

It is important that the securities market remains free from any form of frauds, illicit
activities, and manipulative actions in order to maintain a steady growth. The SEBI has taken
various measures to ensure that the market is free from these types of activities. Due to the
large number of investors and the country's rapidly growing population, there is a higher risk
of frauds happening in the securities market.

Since the securities market is now handled through various platforms, such as online
applications and platforms, the regulator should also create a dedicated cyber security
division to safeguard the market.