TMI Blog2001 (5) TMI 874X X X X Extracts X X X X X X X X Extracts X X X X ..... The petitioner nos. 2 to 5 are private limited companies engaged in broking, investments, banking etc. The respondent no. 1 SEBI is constituted under section 3 of the said Act. The respondent no. 2 is the Bombay Stock Exchange which is recognized under the said Act and is a leading Stock Exchange in the country. The respondent no. 2 is regulated by the SEBI under the Securities Contracts (Regulations) Act, 1956 and the said Act. 4. A few months ago on 28-2-2001, the Finance Minister introduced what was widely seen as an investor friendly budget . The general expectation was that the stock markets in the country would be buoyed by such a budget. In fact between 28-2-2001 and 1-3-2001 itself, as a reaction to the budget, the sensex rose by 201 points. However, on the next day i.e., 2-3-2001 there was a sudden and unexpected fall in the stock market and the sensex dropped by a total of 176 points. In the wake of the drastic and totally unexpected fall in the market and apprehending possible attempts to manipulate the securities market, investigations were undertaken by the SEBI. Some newspapers carried articles alleging that the 1st petitioner who was the President of Stock Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber and President of the Mumbai Stock Exchange has obtained information from Arun Dhanawade from the surveillance department. Such action is against the stated directives of the SEBI and also leads to an absence of a level playing field amongst all brokers wherein some brokers have more information than the other brokers. Further such an action would also cause harm to the fairness, transparency and integrity of the stock exchanges and capital markets at large. In other words it would adversely affect the confidence of investors in the integrity and fairness of the stock exchanges. After taking into consideration the material and evidence gathered during the enquiry against Shri Anand Rathi and the gravity and the seriousness of his action, I am of the prima facie opinion that the integrity of the capital market has been affected. In order to ensure that no further harm or detriment is caused to the market or that investors are not adversely affected or that the safety and security of the markets remains unimpaired I, in exercise of the powers conferred on me under the provisions of section (3) of section (4) ( sic ) read with section 11 and 11B of the SEBI Act, pass the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this behalf made it amply clear that this department would function under the executive director of the Stock Exchange or the senior most official of the Exchange in his absence and there should be no interference in the functioning of the department from individual directors, member brokers or any other vested interests. The SEBI Board expressly rejected the plea of the petitioner that in his capacity as a President he was entitled to call for the information. According to the Board, such an interpretation of the by laws cannot be accepted as it would go against the very concept of confidentiality, surveillance and a level playing field. The explanation of the 1st petitioner that he did not seek any price sensitive information and the information sought by him was of a general nature was found to be equally unacceptable. In this regard the Board observed : "The petitioner s defence that he was seeking information only of institutional sales and that also only because of the market conditions is not tenable. The BSE starts its operations at around 10.00 in the morning. As per the petitioner s contention, there was a sharp fall in the market from morning, an emergent situation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king detailed and highly price sensitive information from the surveillance department was totally improper and unacceptable and constituted a clear subversion of the governance regime of the Stock Exchanges which led to erosion of investor confidence in the integrity of the stock markets. 9. We may also mention that during the pendency of the petition the case of the petitioners was again reviewed by the Board and vide order dated 23-4-2001 the earlier order of suspension was confirmed. It was observed by the Board that the preliminary report has thrown up prima facie evidence of the involvement of the petitioners in the price manipulation and that, the gravity of the charges, which require further investigation and the need for not permitting anyone suspected of such serious charges from operating on the Stock Exchange, has been considered for subserving the public interest. A further direction was issued to appoint an inquiry officer to investigate into the charges against the petitioners. Prof. Varma however, recorded a dissenting opinion on a technical legal aspect holding that the Regulations need to be amended to confer powers upon the SEBI to implement the majority v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra vires article 14 of the Constitution. Applying these principles to the facts of the instant case, Dr. Singhvi submitted that there was ample time at the disposal of the SEBI to give even a reasonably short notice to the petitioners to present their case. In this connection, it is pointed out that the transcripts of the telephonic conversation on the basis of which the impugned order was passed, were not disclosed to the petitioners till after the petitioners had filed the present petition to challenge the impugned order. It is emphasised that if the transcripts were to contain something adverse to the petitioners, there was time enough for giving reasonable opportunity to the petitioners to explain the adverse material against them. It is urged that even if there was urgency, situational modifications could be made to meet the requirements of fairness by reducing the period of notice; that even the manner and form of such notice could be simplified to eliminate the delay; that a telephonic notice or short opportunity for furnishing their explanations to the SEBI Board might have satisfied that requirements of natural justice. 11. Reference in this connection has been made t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atti, the learned Advocate General appearing on behalf of the SEBI, contended that the 1st petitioner had no authority to seek price sensitive information from the surveillance department, knowing full well that by this act he would be violating the SEBI s Circulars and further that he himself was a member/broker of the Exchange and information which was sought was sensitive and confidential. By these means, the 1st petitioner had abused his position as a President of the Stock Exchange by seeking information which in his normal course of business could never have been available or made available to him. It was submitted that there is a prima facie case to investigate and enquire into the manner and means by which the 1st petitioner together with associate companies have acted or traded and whether this was done on the basis of inside information procured illegally and surreptitiously and also whether this particular information was legally obtained. In countering the argument of Dr. Singhvi that the impugned order is punitive in nature, the learned Advocate General submitted that this action of the SEBI cannot be termed as either punishment or penalty. It is only an interim meas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nkar [1992] 2 SCC 206; Liberty Oil Mills v. Union of India [1984] 3 SCC 465; Lewis v. Heffer [1978] 3 All E.R. 354; R.V. State, ex. p. Pegasus Holidays [1989] 2 All E.R. 481. 15. The main issue raised in this petition is concerning the limits of powers of the SEBI Board which regulates capital market of the country. The capital market has acquired a status of the system as a part and parcel of the national economy where companies seek to raise funds for different types of transactions in the course of their business and individuals invest their savings. Previously there was Securities Contracts (Regulation) Act to prevent undesirable transactions in securities by regulating business or dealings therein and providing for certain other matters connected therewith. This Act provided for 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 the capital market it realised the necessity to pass a comprehensive legislation for setting up a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries and self-regulatory organisation in the securities market. ( j )to ( la )****** ( m )performing such other functions as may be prescribed. 11B. Power to issue directions. Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary, ( i )in the interest of investors, or orderly development of securities market; or ( ii )to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or ( iii )to secure the proper management of any such intermediary or person, it may issue such directions, ( a )to any person or class of persons referred to in section 12, or associated with the securities market; or ( b )to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market." 17. The plain reading of section 11 itself shows that SEBI has to protect interests of the investors in securities and to regulate the securities market by such measures as it thinks fit and such measures may be for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leted and further proceedings in the matter are taken. In our opinion, the impugned order as passed by SEBI is only an interim measure which the SEBI is fully empowered in taking. 18. While considering the question as to whether the SEBI has authority of law under sections 11 and 11B to order interim suspension, we have to bear in mind that SEBI is invested with statutory powers to regulate securities market with the object of ensuring investors protection, orderly and healthy growth of securities market so as to make SEBI s control over the capital market to be effective and meaningful. It cannot be gainsaid that SEBI has to regulate speculative market and in case of speculative market varied situations may arise and looking into the exigencies and requirements, it has been entrusted with the duty and functions to take such measures as it thinks fit. Section 11B is an enabling provision enacted to empower the SEBI Board to regulate securities market in order to protect the interests of the investors. Such an enabling provision must be so construed as to subserve the purpose for which it has been enacted. It is well settled principle of statutory construction that it is the dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under section 12, as contended but the same has been passed under section 11B. It is in the nature of a direction restraining the petitioners from carrying on their business of dealing in shares. The same has been passed pending the inquiry into the manipulations. The same has been passed in the interests of investors and in the interest of the securities market. 21. Section 11B is an enabling provision enacted to empower SEBI to protect interest of investors and to promote the development of and to regulate the securities market and to prevent malpractices and manipulations inter alia by brokers. Such an enabling provision must be construed so as to subserve the purpose for which it is enacted. It would be the duty of the court to further the legislative object of providing a remedy for the mischief. A construction which advances this object should be preferred rather than one which attempts to find a way to circumvent it. In the case of Reserve Bank of India v. Peerless General Finance Investment Co. Ltd. AIR 1996 SC 646 the Supreme Court has observed as under : 22. It would thus appear that section 45K(3) is an enabling provision enacted to empower the Bank to reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional power on the board, by way of interim measures, pending inquiry. The same is intended for the protection of the interests of the investors and the securities markets." (p. 559) 20. In the case of Alka Synthetics Ltd. ( supra ) the Division Bench of Gujarat High Court has observed as under : ". . . We have to, therefore, consider and interpret the power of the SEBI under the provisions so as to see that the objects sought to be achieved by the 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 principles. 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 thinks fit and in order to discharge this duty, the power is vested under section 11B. In such a situation it cannot be said that there was no authority of law with the SEBI to take appropriate measures. Now the question arises as to whether such measures should essentially be provided and published in advance. No one can be expected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal for British Columbia in Exchange Bank Trust v. British Columbia Securities Commission 2000 BCCA 389 wherein the following observations of Ontario Securities Commission were cited with approval : "There are few areas in our public life that are as dynamic and as innovative as our capital markets. For the most part, that dynamism and innovation enure to the benefit of the economy at large and individual investors in particular. But that same dynamism and innovation can, and does, lead to abuse. A regulatory agency charged with oversight of the capital markets must have the capacity to move quickly to stop transactions which it considers to be injurious to the capital markets. Like a section 144(2) [now section 161(2) temporary cease trade order or a section 73 (now section 89)] halt order, a freeze order enables the Commission to respond immediately to information that, in its opinion, warrants regulatory intervention to prevent or minimize prejudice to the public interest. Often it is necessary to take these steps before any investigation is commenced or concluded. The ability of the Commission to act in this fashion is necessary to instill and maintain public confiden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very exceptional circumstances where compulsive necessity so demands. The court must make every effort to salvage this cardinal rule to the maximum extent possible, with situational modifications. But, to recall the words of Bhagwati J. the core of it must however, remain namely that the person affected must have reasonable opportunity of being heard and the hearing must be a genuine hearing and not an empty public relations exercise." (p. 689) 23. A reference was made to the observations of Krishna Iyyer, J. in Mohinder Singh Gill s case ( supra ), namely, ". . . subject to certain necessary limitations natural justice is now a brooding omnipresence although varying in its play. . . . Its essence is good conscience in a given situation; nothing more - but nothing less (SCC page 434 paras 47 and 48). After noticing the observations of Lord Upjohn that while urgency may rightly limit such opportunity timeously, perhaps severely, there can never be a denial of that opportunity if the principles of natural justice are applicable , the Court explained that mere invocation or existence of the urgency does not preclude the duty of giving a fair hearing to the person affected : " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further steps got under way he could not have afforded an opportunity of hearing the parties, and revoke the earlier directions. . . All that we need emphasize is that the content of natural justice is a dependent variable, not an easy casualty." (p. 439) 24. Reliance is also placed by Dr. Singhvi on the observations of the Supreme Court in K.J. Shephard s case ( supra ) which read as follows : (SCC pp. 448-49, para 16) "We may now point out that the learned Single Judge of the Kerala High Court had proposed a post-amalgamation hearing to meet the situation but that has been vacated by the Division Bench. For the reasons we have indicated, there is no justification to think of a post-decisional hearing. On the other hand the normal rule should apply. It was also contended on behalf of the respondents that the excluded employees could not represent and their case could be examined. We do not think that would meet the ends of justice. They have already been thrown out of employment and having been deprived of livelihood they must be facing serious difficulties. There is no justification to throw them out of employment and then give them an opportunity of representation when t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We guard ourselves against being understood as laying down any proposition of universal application. Other statutes providing for speedy action to meet emergent situations may well be construed as excluding the principle audi alteram partem. All that we say is that section 238(1) of the Punjab Municipal Act does not." (p. 388) 27. Indeed, the principles of natural justice, like ultra vires and public policy, is a branch of public law and is formidable weapon which can be wielded to get justice to a citizen. In Maneka Gandhi s case ( supra ), Bhagwati, J. emphasised that audi alteram partem is a highly effective rule devised by the Courts to ensure that a statutory authority arrives at a just decision and it is calculated to act as a healthy check on the abuse or misuse of power. Where authority functions under a statute and the statute provides for observance of natural justice in a particular manner natural justice will have to be observed in that manner and in no other. Where the statute is silent about the observance of the principles of natural justice, such statutory silence is taken to imply compliance with the principles of natural justice. It is equally well se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Liberty Oil Mills) there is a distinction between the suspensions which are inflicted by way of punishment, as for instance, when a member of the Bar is suspended for six months or when a solicitor is suspended from practice. He said : (All E.R. page 364 para 13). "But they do not apply to suspensions which are made, as a holding operation, pending enquiries. Very often irregularities are disclosed in a Government department or in a business house; and a man may be suspended on full pay pending enquiries. Suspicion may rest on him; and so he is suspended until he is cleared of it. No one, so far as I know, has ever questioned such a suspension on the ground that it could not be done unless he is given notice of the charge and an opportunity of defending himself and so forth. The suspension in such a case is merely done by way of good administration. A situation has arisen in which something must be done at once. The work of the department or the office is being affected by rumours and suspicions. The others will not trust the man. In order to get back to proper work, the man is suspended. At that stage the rules of natural justice do not apply. See Furnell v. Whangarei H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the aggrieved person and that would satisfy the requirements of procedural fairness and natural justice. There can be no tape measure of the extent of natural justice. It may and indeed it must vary from statute to statute, situation to situation and case to case. Again, it is necessary to say that pre-decisional natural justice is not usually contemplated when the decisions taken are of an interim nature pending investigation or enquiry. Ad interim orders may always be made ex parte and such orders may themselves provide for an opportunity to the aggrieved party to be heard at a later stage. Even if the interim orders do not make provision for such an opportunity, an aggrieved party has, nevertheless, always the right to make an appropriate representation seeking a review of the order and asking the authority to rescind or modify the order. The principles of natural justice would be satisfied if the aggrieved party is given an opportunity at his request. There is no violation of principle of natural justice if an ex parte ad interim order is made unless of course, the statute itself provides for a hearing before the order is made as in clause 8A. Natural justice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral justice which are never excluded will be satisfied if a post-decisional opportunity is given, if demanded. In the present case the order of 12-3-2001 itself provided a post-decisional hearing on 21-3-2001. The same was availed of by the petitioners. At the post-decisional hearing, full opportunity was given to them to produce evidence and documents and the ex parte order was confirmed only after considering the submissions made by them. In these circumstances, the plea of Dr. Singhvi that there was violation of principles of natural justice, cannot be accepted. 33. We may add that if interim action, which is of a drastic nature is to be taken ex parte, it must necessarily be animated by sense of urgency and to quote the words of Chinnappa Reddy J; (SCC pp. 492, 493 paras 23, 24). "The sense of urgency may be infused by a host of circumstances such as trafficking and unscrupulous puddling in licences, large scale misuse of imported goods, attempts to monopolise or corner the market, whole sale prevalence of improper practices among classes of importers, public sentiment etc. etc. . . . Public interest must nolens volens be the paramount consideration. . . ." Bearing in m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information obtained by him was available to anyone at anytime. The learned Advocate General on the other hand submitted that this price sensitive information would not have been available to anyone at anytime. We decline the invitation to assess the material including an analysis of the transcripts. It is not for the Courts, especially while exercising powers under article 226, to analyse the evidence in detail and come to conclusion on the merits of the case. The operation of Stock markets and the functioning of brokers is not only highly technical but very complex. The exercise to be carried out will invoke not merely the interpretation of the above circulars and the parameters of the authority of the President of the BSE but also the collection of the material relating to innumerable transactions, the correlation of the same with various factors such as the time and rate at which they were entered into and also the relationship between the conflicting entries thereto. It is the SEBI and not the Court that must carry out this analysis. 35. SEBI has recorded a prima facie finding that the information sought was price sensitive and further investigation is required in order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Secondly, this very question would involve weighing the nature of the allegations the extent of the petitioners involvement and, most importantly the element of public interest. But there are all matters for the consideration of the authority making the order which in this case is SEBI. In the facts of this case it cannot be said that SEBI s orders are unwarranted in law or without any justification. The SEBI is charged with the duty to protect the public. What will protect the public must involve an exercise of discretionary powers. And so the question of the appropriate remedy is necessarily a matter of administrative competence. To judge the validity of any decision or order passed by the SEBI, normally, the Wednesbury test is to be applied to find out if the decision was illegal and suffered from procedural improprieties or was one which no sensible decision maker could, on the material before him and within the framework of the law, have arrived at. The Court would consider whether relevant matters had not been taken into account or whether irrelevant matters had been taken into account or whether the action was not bona fide . The Court would also consider whether the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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