TMI Blog1998 (12) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... providing for certain other matters connected therewith. This Act provided for the recognised Stock Exchanges and the control of the Central Government on such recognised Stock Exchanges. With the passage of time, the Government felt more concerned with the healthy growth of the securities market and taking into consideration the relevant factors influencing the growth of capital market it realised the necessity to pass a comprehensive Legislation for setting up a statutory Apex Board to promote orderly and healthy growth of the securities market and pending the enactment of the so conceived comprehensive Legislation, the Ministry of Finance, Department of Eco-nomic Affairs (Investment Division) passed a Resolution dated 12-4-1988 constituting the SEBI under the overall administrative control of the Ministry of Finance. While SEBI was functioning under the aforesaid Resolution dated 12-4-1988 under the new economic policy, certain reform measures were initiated in 1991, including the capital market reforms and Stock Exchange Reforms, and the statutory powers to regulate the Securities Markets were sought to be conferred on the SEBI. Keeping in view the tremendous growth of the cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price and volume movement between 5-12-1995 and 25-1-1996 indicated that unreasonably high shares had been transacted; con-sidering the available floating stock, the volume was high; the price had shot up from Rs. 16.50 on 5-12-1995 to Rs. 180 on 25-1-1996 leading to an appreciation of approximately 600 per cent in 18 Trading days. The Bombay Stock Exchange had, therefore, suspend-ed trading in MIL on five occasions for 1 day each time without SEBI's intervention on 14-12-1995, 4-1-1996, 12-1-1996, 17-1-1996 and 23-1-1996. ( h )On 25-1-1996 Bombay Stock Exchange also noticed the abnormal price rise in Magan shares and brought it to the SEBI's notice by letter dated 25-1-1996. ( i )On 29-1-1996 the Bombay Stock Exchange again suspended trading for 3 days and thereafter sought to extend the suspension indefinite- ly with SEBI's permission, indicating that it had set in motion the investigation into the dealings of members, who dealt in the Scrip. ( j )On 31-1-1996 SEBI responded to the Bombay Stock Exchange and approved its request for suspension, advising Bombay Stock Ex-change to initiate immediate investigation and complete the same in 15 days, time being the essence of act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs at the rate at which the transaction of purchase had been entered and the difference between auction price and purchase price so payable by the pur-chasers was to be recovered from the respective short sellers. The amount so recovered by the Stock Exchange became payable to the offerers by crediting the same on his accounts after deducting chargeable expenses. ( o )The consideration of transaction at auction was received by the Stock Exchange but before the amount could be paid to the offerers, the Stock Exchange issued notice dated 15-2-1996 stating that as per the directives received from SEBI the payment due to the members on account of acceptance of their MIL shares offered in pursuance of auction notice dated 7-2-1996 is to be retained by the Clearing House until the completion of investigation and further decision in this regard. ( p )Whereas the Bombay Stock Exchange investigation report did not come within 15 days as called for by the SEBI, on 15-2-1996 SEBI issued directives to the Bombay Stock Exchange as under : ( i )detain the money payable to the parties offering shares in the auction for settlement No. 20 till the completion of investigation and further decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whom the petitioner offered shares at the auction) wrote to the petitioner that the alleged payment of 50,000 Magan shares offered by the petitioner at the auction for settlement B/20 is retained by the Clearing House as per notice 1125 of 1996 issued by the Stock Exchange. ( u )In March 1996, the special civil application was filed. The petition was thus originally filed challenging the directives of the SEBI and notice dated 15-2-1996 for retaining the amount held by the Stock Ex- change from being paid to the members through whom the petition- er had offered shares for sale, thus effecting its claim to that money. ( v )On 11-4-1996 the Bombay Stock Exchange came out with its report on the price rise in Magan scrip bringing out that the petitioner Alka Synthetics Ltd. alongwith its group companies had been purchasing and taking delivery of Magan shares at the prices ranging from Rs. 25 to Rs. 69 and offering at the auction for Rs. 118 by taking undue advantage of the auction Rules. ( w )On 6-5-1996 the learned single Judge directed by way of interim relief that SEBI shall complete the investigation in respect of the transactions of MIL latest, by 3-6-1996, which was later o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only. On 19-7-1996 the petitioner Alka Synthetics made a represen-tation to SEBI in response to Bombay Stock Exchange notice dated 8-7-1996. On 17-10-1996 notice was given by SEBI to the petitioner - Alka Synthetics for appearing before the Committee on the ques- tion of impounding and it was directed to appear on 31-10-1996 on which date the petitioner did not turn up. The special civil application was decided by the learned single Judge on 19-2-1997. On 14-3-1997 the present letters patent appeal was filed wherein the interim order was granted in terms of para 28 A by the Division Bench on 17-3-1997 in Civil Application No. 3068 of 1997 staying the order dated 19-2-1997 passed by the learned single Judge. 3. In letters patent Appeal No. 237 of 1997, arising out of Special Civil Application No. 5483 of 1996, the original petitioner D.M. Investors is a registered partnership firm having its place of business at Revdi Bazar, Ahmedabad and so far as this petition is concerned, the factual allegations are as under: ( a )On 7-11-1994 a company called Rupangi Impex Ltd. ('RIL') came out with a public issue of 1537500 equity shares of Rs. 10 each at a premium of Rs. 5 per share. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were squared up by NSE at the price of Rs. 565 per share highest recorded price during the trading period from 18-10-1995 to 24-10-1995, instead of taking into consideration the highest price recorded upto the date of squaring up, i.e., from 18-10-1995 to 3-11-1995, which was Rs. 669 per share, which was the highest recorded price as on 27-10-1995 at NSE and, therefore, the outstanding transactions ought to have been squared up at the said price of Rs. 669 per share. ( l )According to the petitioner, as a result of this exercise an amount of about Rs. 3,20,35,500 was collected in respect of remainder shares, i.e., 56,700 shares. Subsequently out of the aforesaid amount, a sum of Rs. 2,67,09,102 was returned to the petitioner by way of its investment towards remainder shares whereas the differential amount between the transaction price, i.e., Rs. 471.06 per share and the alleged highest price, i.e., Rs. 565 per share, came to be held by the Stock Exchange in separate account. ( m )If the correct highest price to the tune of Rs. 669 per share of RIL at NSE as on 27-10-1995 had been taken into consideration, the differ-ence between transaction price, i.e., Rs. 471.06 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... protection fund was not punitive in character. For the same reason, the appellate authority held that the fact that the petitioners were not granted an opportunity of hearing cannot negate the order passed by the SEBI because the appellants had not suffered any substantial injury. ( t )These two orders, namely, order dated 25-1-1996 passed by the Executive Director of the SEBI and the appellate order dated 22-5-1996 were challenged through Special Civil Application No. 5483 of 1996 in July 1996. ( u )Special Civil Application was allowed by the common judgment and order dated 19-2-1997 passed by the learned single Judge in the two Special Civil Application Nos. 2224 and 5483 of 1996. ( v )Against this judgment and order dated 19-2-1997 the present Letters Patent Appeal No. 237 of 1997 was filed on 14-3-1997. ( w )On 14-8-1998, i.e., the date on which the arguments were concluded, a note was submitted under the signatures of Mr. Chhatrapati, Advocate, placing on record the statement of Mr. S.N. Shelat on behalf of the appellant in the case that the order dated 22-5-1996 passed in appeal by the appellate authority be set aside and the original petitioner be relegated for h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation and further decisions in this regard and further that auction in this scrip will not be conducted until further orders, during which period no cancella- tion in the outstanding auction quantities would be permitted. The order dated 4-7-1996 issued by the SEBI and the contents of para 3 thereof show that on receiving complaints and other information from the Stock Exchanges regarding unusual price movement of the scrip, SEBI had directed the Stock Exchanges to freeze the proceeds which were received by the Exchanges from auctions /closing out the transactions. This was done by SEBI in order to ensure that if there was any market manipula- tion, the manipulators should not be in a position to receive ill gotten profits arising out of such market manipulation. Therefore, pending investigations these monies may remain frozen with the Exchanges. With regard to the release or impounding of such monies received from auction or close out of transactions by invoking section 11B of the SEBI Act, it was decided and directed, that in respect of the auction proceeds, which has been withheld by the Exchange, the difference between the auction price and the standard rate and in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entations, the impounded monies would be returned by the Stock Exchange on receipt of SEBI's order." 5. The learned single Judge has passed an elaborate order after consider- ing various grounds on which the aforesaid action and the order dated 4-7-1996 was challenged and has come to the conclusion that SEBI has no authority of law under the existing Statute to impound or forfeit the monies received by Stock Exchange as concluded transactions for squar- ing up the outstanding transactions under its procedure and to use for any other purposes, and that the orders also suffer from breach of principles of natural justice which results in making them void ab initio. The learned single Judge has found that the orders cannot be sustained and the reliefs could not be denied to the petitioners even on the principles of unjust enrichment. Accordingly the impugned order dated 4-7-1996 in Special Civil Application No. 2224 of 1996 and the order dated 25-1-1996 in Special Civil Application No. 5483 of 1996 made by the Board as affirmed by the Central Government by its order dated 22-5-1996 have been quashed to the extent they direct impounding of the monies recovered by the respective St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the order dated 4-7-1996 passed by the SEBI is not at all a final order, it is only an interim order and the proceedings are incomplete. It has been submitted that this order has been passed to preserve the subject-matter till the final decision is taken, that it is only an order in aid of the final order, it is a regulatory order in the course of the decision making process. The SEBI certainly has the power to regulate the Stock Market and regulating the Market includes regulation through prohibito- ry as well as mandatory orders and it has the incidental powers for the protection of the investors. While making reference to section 11 of the Act Mr. Chidambaram has submitted that it is the duty of the Board to protect the interests of investors in securities, to promote the develop- ment and regulate the Securities. Market by such measures as it thinks fit. It was further submitted that section 11B empowers the SEBI to issue directions. While making a pointed reference to section 11(1) and 11(2)( e ), ( g ), ( h ) , ( i ) and ( j ) it was submitted that in due discharge of its functions envisaged under the aforesaid clauses the directions were issued under section 11B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of following the principles of natural justice in this case inasmuch as the order passed by the SEBI is neither a penal order nor a final order and according to him it is not at all a case in which it can be said that the petitioner-company had been unlawfully deprived of any part of its profit. He has also submitted that the measures need not necessarily be the measures prescribed in advance as section 11 only says all measures as the SEBI thinks fit. 8. Mr. S.B. Vakil appearing on behalf of the respondent-company in L.P.A. No. 236 of 1997 has submitted that the SEBI had no jurisdiction to pass the order dated 4-7-1996 so as to impound the money and deprive the company of its property and it is clear violation of article 300A of the Constitution, that the order passed by the SEBI is clearly a penal order depriving the Company of its earned benefits when it seeks to impound the differential amount under section 11B read with section 11 and directs the Stock Exchange to credit the amount to a non-existing Investors Protection Fund, the principles of natural justice ought to have been followed. He has submitted that it is virtually a case of confiscation of the company's money. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company, and pass the impugned order dated 25-1-1996, the minimum requirement of the principles of natural justice have not been followed. He has also submitted that the order dated 22-5-1996 passed by the appellate authority is absolutely illegal and the whole grievance of the company had been examined with a perverse approach. He has submitted that the measure has to precede the action and the measure by itself cannot be an action. The measure has to be approved through legislation and only then the action can be taken. It has been further argued that even if the action and the order passed by SEBI is not punitive, the question is that it has no power to pass the order and the order passed by SEBI is wholly without jurisdiction. He has submitted that the speculation is a way of life in the Stock Market and the regulatory power can be exercised only in the manner prescribed. He has submitted that every right is subject to certain restrictions. There was no question of taking the impugned action in absence of pre-published measures. He has also submitted that the Securities Contracts (Regulation) Act, 1956 is an Act to prevent undesirable transactions in Securities by regulating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the powers exercisable by it under sub-section (5) of section 4, section 7, section 8, section 11, section 12 and section 16 of the said Act shall also be exercisable by the Securities and Exchange Board of India. This notification dated 30-7-1992 is reproduced as under: "Notification S.O. 573 (E) In exercise of the powers conferred by section 29A of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Central Government hereby directs that the powers exercisable by it under sub-section (5) of section 4, section 7, section 8, section 11, section 12 and section 16 of the said Act shall also be exercisable by the Securities and Exchange Board of India." Besides this, Mr. M.R. Anand has laid great emphasis that so far as the respondent-company in L.P.A. No. 237 of 1997, i.e., D.M. Investments is concerned, as a question of fact, as a result of investigation, as ordered by the SEBI, nothing has been found against it. He has made pointed reference to page 206 of the judgment of the learned single Judge wherein the learned single Judge has noted that in this case there is no suggestion that the petitioner was at all concerned with the manipulation of the mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, whether it was required to follow the principles of natural justice before passing the orders dated 4-7-1996 (subject-matter of challenge in Special Civil Application No. 2224 of 1996) and the order dated 25-1-1996 (subject-matter of challenge in Special Civil Application No. 5483 of 1996)? ( 3 )Whether the orders passed by the SEBI can be said to be violative of article 3 00A of the Constitution? ( 4 )Whether the relief could not be granted to the respondents-compa- nies on the principles of unjust enrichment? 15. While considering the question as to whether the SEBI has the authority of law under the existing Statute to impound or forfeit the monies, we may observe in the very beginning that the learned single Judge has approached and decided this question on the basis of the principles of law, which have been laid down by the Courts in matters relating to fiscal and taxing Statutes and the inhibition against the imposition of levy and collection of any tax and the consequential deprivation of property. In our considered opinion, the very approach and the principles on which this question has been decided by the learned single Judge were not at all germane because her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down in advance. It is a matter of common knowledge that the SEBI has to regulate a speculative market and in case of speculative market varied situations may arise and all such exigencies and situations cannot be contemplated in advance and, therefore, looking to the exigencies and the requirement, it has been entrusted with the duty and function to take such measures as it thinks fit. Thus the measures cannot be laid down as a one time exercise to be followed in defined cases. The SEBI has to rise to the occasion for taking appropriate measures to combat even such situations in the speculative market, which may or may not be conceived in advance. We have to therefore consider and interpret the power of SEBI under the provisions so as to see that the objects sought to be achieved by Act is fully served, rather than being defeated on the basis of any technicality. Instead of general principles of law, in such cases we have to consider the matter on first principle. The first principle is that the provisions of an Act have to be given a meaning so as to advance the object sought to be achieved by that Act. The duty and function had been entrusted to take such measures as it th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing, namely ( a )directing the person concerned not to deal in securities in any particular manner ; ( b )requiring the person concerned to call upon any of its officers, other employees or representatives to refrain from dealing in securities in any particular manner ; ( c )prescribing the person concerned from disposing of any of the securities acquired in contravention of these regulations; ( d )directing a person concerned to dispose of any such securities acquired in contravention of these regulations, in such manner as the Board may deem fit, for restoring the status quo ante. " The learned single Judge has examined the scope of these Regulations in paragraphs 213 to 223 and has concluded that these provisions have nothing to do with the authority of the Board in issuing directions to impound the sale proceeds on a completed transaction. The learned single Judge has examined the scope of this Regulation in the context of the power to impose penalty or punishment for breach of Regulations and according to the view taken by him, it can not be considered to be a part of the power to the Board to take measures as it thinks fit for achieving its objects and that ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecisions relating to fiscal and taxing statutes and the principles, which have been decided in such cases are not applicable for the purpose of tracing the powers of the SEBI to take such measures as it thinks fit in the matters relating to controlling the capital market. We find that SEBI had ample authority of law under the existing statutes to take action as have been taken by it. The impounding or forfeiture of the money received by Stock Exchanges as per the concluded transactions for squaring up the outstanding transactions etc. are all steps in aid. On the basis of the settled principles of interpretation of Statutes right from Heydon's case [1584] 3 Co. Rep.7a (V) the construc-tion has to be given so as to suppress the mischief and advance the remedy, and to suppress the subtle inventions and evasions for continuance of the mischief, and pro privato commodo and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico. The SEBI has only taken a remedial measure to ascertain the evils and the directions have been issued to preserve the subject-matter of dispute till the final decision is taken. The first point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the authority to pass such final orders under law, it could certainly pass the orders of ad interim nature to preserve the subject-matter of controversy. It goes without saying that in appropriate cases even judicial orders are passed in the first instance without hearing the parties against whom the ad interim order is passed and, thereafter, when the parties appear, the final orders are passed after hearing both the sides. In the facts of this case, this is exactly what the SEBI has done and it has been mentioned in the operative part of the order, which is reproduced in the end of para 4 in the earlier part of this judgment that the intimation was to be given by the SEBI with regard to the opportunity of hearing and the aggrieved persons could submit detailed representa- tion and such representations were to be dealt with by a Committee to be set up by SEBI and the Committee was to submit a report for final decision on such representation and further that to the extent of the acceptance of the representation impounded monies would be returned by the con- cerned Stock Exchange on receipt of the SEBI's order. It is, therefore, clear that final orders are to be passed only afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication of Rules of natural justice nor it speaks about giving post-decisional hearing. The learned single Judge has also made reference to certain Rules and Regulations and the inquiry to be held. In our opinion, implication has been construed by the learned single Judge on the basis of the use of the word, 'inquiry' and, therefore, an implied pre-decisional hearing is not correct. Merely because of the use of the word, 'inquiry' in section 11B it cannot be said that the pre-decisional hearing is implied. Section 11B is essentially a power to issue directions after inquiry and, therefore, at the time of issuing the directions of ad interim nature it cannot be assumed that the pre-decisional hearing has to be given and in our opinion, on the basis of the use of the word, 'inquiry' the requirement of pre-decisional hearing cannot be read as implied, much less to say that the pre-decisional hearing is a statutory requirement or that in absence of it there will be a case of procedural unfairness at the stage of issuing directions of ad interim nature. 19. We are alive to the fact that the tendency of the Courts at present is to apply the rules of natural justice to very wide r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to the orders being violative of article 300A of the Constitution is concerned, it will be sufficient to say that firstly the respondents-companies have not been deprived of any part of their property as such. It is only a case of not allowing a party to take away the money claimed to have been earned by it in as speculative market controlled by SEBI for the time being till a decision is taken on the basis of the investigation ordered by the SEBI. The question No. 1 regarding SEBI's authority under law under the existing Statutes has already been answered in favour of the appellants and, therefore, it cannot be said to be a case of deprivation of a property without authority of law. Once it has been held that the SEBI had the authority of law to pass the impugned orders, there is no question of invoking Article 300A of the Constitution of India, as even if it is taken to be a case of depriving of property for the time being, it is not a case of doing so without authority of law and, therefore, this third question formulated by us is answered against the respondents companies. 22. On the fourth question relating to unjust enrichment lot of controver- sy had been raised. Whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that nobody had appeared on behalf of the respondent No. 2 - the appellate authority to defend the order dated 22-5-1996 passed by the Central Government and on behalf of the appellant SEBI a note was submitted on 14-8-1998, i . e., the date on which the arguments were concluded. This note submitted on behalf of the SEBI is reproduced as under: "In the High Court of Gajarat at Ahmedabad letters Patent Appeal No. 237 of 1997 in Special Civil Application No. 5483 of 1996 Mr. S.N. Shelat on behalf of the Appellant herein states that the impugned order dated 22nd May, 1996 passed in appeal be set aside and that the Respondent (Original Petitioner) be relegated for hearing before the Committee to be appointed by SEBI to consider the case from the angle whether there was any market manipulation on the part of the Respondent in the case of Rupangi Impex and whether or not the Respondent was entitled to any relief more specifically mentioned hereinbelow. That the said Committee examines the representations of the persons affected by the impounding of the auction proceeds to the extent of the difference between the auction price and the standard rate and the closeout ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offering a post-decisional hearing was also made on behalf of SEBI before the learned single Judge as dis-cussed (See page Nos. 179 and 192 of LPA record) which was negatived by holding that the post-decisional hearing is not cure where pre-decisional hearing is a statutory requirement and the impugned order must stand or fall on what has been stated therein without supplying any additional reasons or facts not flowing from the order itself. (See page No. 199 of LPA record). ( v )In view of the above, as per the say of SEBI itself; consequential benefits may be released to the respondent." 26. In this view of the matter, the order dated 22-5-1996 passed against the respondent-company (D.M. Investments) by the appellate authority is hereby set aside and the respondent-company, i.e., original petitioner in Special Civil Application No. 5483 of 1996 is relegated for hearing before the Committee appointed by the SEBI and it is directed that the said Committee shall examine the case of the respondent original petitioner (D.M. Investments) on the basis of the representation, if any, and/or otherwise on the basis of the final report already given as a result of investigation, wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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