Name: Kannegandla Krishna Bharat

Roll No: PGCSM 12007

Exercise -1 Assignment.

SG Trading Company - “Virtual Stock Exchange” Case

Identification of problem:

A. Whether the securities offered by SG Trading Company can be considered as securities.

B. If the game involves securities market unfair trade practices or securities market fraud

A. Law related to the problem:

Sec 2h of SCRA defines securities as securities include shares, scrips, stocks, bonds, debentures, …
units of mutual funds and units of collective investment schemes
CIS is a scheme where the company offers subscription from an investor. The payments made by the
investor are polled and utilized for generating the profit by the management of the CIS.
Therefore, the meaning of Securities is inclusive of 4 factors

1. Investors making investments

2. Expectation of Profit.

3. The Profit is made from the effort of the promoters.

4. Investment is made in common enterprise.

Application of the Law to the given problem.

1. All the participants involved in the game are making investments. Since the funds are being
pooled in a single account under collective investment scheme, it satisfies the first factor
mentioned above.
2. All the participants involved in the game are having the expectation of making profits.
Company also promises to pay 10% per month return, so the problem follows the second
factor as well.
3. Promoters are making efforts in developing the Software and monitoring the system. Also
they are attracting the new investors by providing an incentive for joining. And, it will
allocate a portion of its profits derived from its web site operations to a special reserve fund
designed to support the price of the privileged company’s shares. It satisfies the third factor
as well.
4. All the investors are making investments in a single common enterprise – on a single
platform where different individuals invest money and profits are generated.

So, the methodology of the game satisfies all the parameters of the Securities law and
hence, we can consider them to be securities.

In a similar case, SG vs Securities Exchange Commission, it was held as securities.

B. Whether the game involves securities market unfair trade practices or securities market fraud.

Yes, the game of Stock Generation run by SG Trading Company could be considered an example of
securities market fraud or securities market unfair trade practices.

Definition:

Securities Market Fraud involves misrepresenting or omitting material facts to deceive investors and
manipulate the price of securities.

Securities Market Unfair trade practices involve engaging in manipulative, deceptive, or fraudulent
conduct that undermines the integrity of the securities market

1. In this case, SG Trading Company is making false claims about the returns investors can
expect to receive from the virtual companies listed on their website.
2. SG Trading Company is promising investors a 10% return per month on shares of the
"privileged company" and Buy and Sell prices of virtual companies that are set arbitrarily.
3. This is highly unrealistic and indicates that SG Trading Company is likely engaging in market
manipulation, which is a form of securities market fraud.

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 “Sahara India” Case

Identification of problem:

A. Whether the OFCD are securities.

B. The Limitation of over the number of Investors in Private Placement.
C. Whether SEBI has power over unlisted companies

A. Whether the OFCD are securities?

Law related to the problem:

Sec 2h of SCRA defines securities as securities include shares, scrips, stocks, bonds, debentures, …
units of mutual funds and units of collective investment schemes
CIS is a scheme where the company offers subscription from an investor. The payments made by the
investor are polled and utilized for generating the profit by the management of the CIS.
Therefore, the meaning of Securities is inclusive of 4 factors

1. Investors making investments

2. Expectation of Profit.

3. The Profit is made from the effort of the promoters.

4. Investment is made in common enterprise.

Application of the Law to the given problem.

1. All the participants involved in the game are making investments, it satisfies the first factor
mentioned above.
2. All the participants involved in the game are having the expectation of making profits.
3. Promoters are utilising the deposited Money for some alternate purpose and returns
generated on them will be distributed to the Investors. Though the kind of effort that the
Promoter does with the Invested Money is not clearly provided, we assume that the amount
is put to some purpose where they get some profits/returns on it. So, it satisfies the third
parameter.
4. All the investors are making investments in a single common enterprise – on a single
platform where different individuals invest money and profits are generated.

Hence, all the parameters of the Securities law are satisfied and hence, we can consider
OFCDs to be securities.
B. Limitation of over the number of Investors in Private Placement.

Law related to the problem:

Section 42 of the Companies Act 2013 deals with the private placement of shares or convertible
securities by a company. Private placement refers to the sale of securities to a select group of
investors, such as institutional investors or high net worth individuals, without offering them to the
public at large.

Section 42 also lays down certain restrictions on the offer of securities through private placement.
The offer cannot be made to more than 200 persons in a financial year.

If the shares are issued to more than 200 persons in a year, it is considered as Public Issue and the
Company has to follow all the guidelines issued by SEBI ILDS and ICDR Regulations.

Application of the Law to the given problem.

1. Since the securities are issued to more than 30 million Investors, the issue cannot be
considered as “Private Placement” as the threshold limit of 200 persons has exceeded.
2. It is to be treated as “Public Issue” and the company has to comply all the guidelines
provided by SEBI.

C. Whether SEBI has power over unlisted companies

Sec11. Of SEBI Act 1992 has been amended to protect the interests of investors in securities and to
promote the development of, and to regulate, the securities market and for matters connected
therewith or incidental thereto.

The main plea that the Company has taken is that the relevant matter is under the purview of
Ministry of Corporate Affairs (MOCA) and not under the jurisdiction of SEBI, as the company is not
listed.

Judgement by the Supreme Court:

1. Supreme Court held that SEBI have power to adjudicate and investigate. Also the SC said
that according to the SEBI Act, the SEBI has special powers for doing investigation and
adjudication to protect the interests of the investors.
2. Supreme court held that powers of the central government are supplementary and
complementary and in the matters involving the protection of interest of the investors, SEBI
has the powers. If the offer is made to more than 50 persons, it will have to abide rules and
regulations.
3. Sahara argument of forced listing was denied by the court on the ground that number of
shareholders are more than the number prescribed by the law. So, unlisted companies
cannot offer securities to more than required number of persons provided under the act.

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