TMI Blog2006 (8) TMI 322X X X X Extracts X X X X X X X X Extracts X X X X ..... ore Stock Exchange Limited ( CSX ) has filed the writ petition along with the second petitioner who is its shareholder/member, challenging the show-cause notice dated 17-4-2006 issued by the respondent. 4. The case of the first petitioner, in nutshell, is as follows : It was established on 9-7-1991 as a public limited company under the provisions of the Companies Act, 1956. It was granted recognition as a Stock Exchange under section 4 of the Securities Contracts Regulation Act, 1956 ("the SCRA") on 18-9-1991 for a period of three years and the recognition is being renewed on application by CSX annually under rule 7 of the Securities Contracts Regulation Rules, 1957 ("the Rules"). CSX initially proposed to operate as a Stock Exchange in view of the then felt necessity for a Regional Stock Exchange in Coimbatore since it was a city where a Regional Stock Exchange would benefit various companies that required listing at the Stock Exchange as well as the investor public. However, subsequent thereto, there has been a sea change in the manner in which Stock Exchanges operate. In India, there were initially two broad Groups of Stock Exchanges with 20 Stock Exchanges being set up as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was nil trading activity in CSX and by 2004-05, on a review of the trading patterns of the other RSEs and the reach and popularity of the NSE and BSE, it became apparent by 2004 that, having a Stock Exchange in Coimbatore would serve no purpose and all the efforts of the members would be in vain, since many of the members themselves had already expressed the view and had stopped paying their fees. In addition thereto, in view of the coming to end of trading activities ever since 1999, even companies refused to get themselves listed before CSX and hence, it was felt that it would be in the best interest of everybody concerned since the investing and trading public did not require a RSE in Coimbatore and members of CSX were also not interested in pursuing further with the recognition to operate as a Stock Exchange and they wanted to find out some alternatives. In the beginning, CSX was established by receiving huge contributions from members and these funds had been utilised principally for creating infrastructure, including purchase of land and building for starting a Stock Exchange and provision of office space to all members as also heavy investment that went into the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 006 and on the said date, resolutions as proposed, were unanimously passed and it was resolved to surrender the recognition and also to the effect that CSX would cease to function with immediate effect as recognised Stock Exchange. Consequently, the new Articles of Association were also adopted at another EGM held on 31-3-2006 whereby, only members of the Exchange could hold position of a Director and the same was also duly communicated to SEBI, by a letter dated 8-4-2005. Thus, CSX had resolved to surrender its recognition and not to seek its further renewal as there is absolutely no negative impact on the interests of the investors or the securities market in view of the absence of any trading in it. However, to the shock and surprise of the CSX, instead of taking further steps consequent upon communication for surrendering or recognition, the respondent, by the impugned order dated 17-4-2006, purportedly under powers granted under section 12A of the SCRA read with sections 11, 11B and 19 of the SEBI Act, issued certain directions against the rights of CSX without as much as holding an enquiry that is required to be done under the provisions of the SCRA. 5. According to CSX ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider that CSX has not been carrying on trading activities from 1999 as a RSE since it has found it impossible to carry on any activities and that the investors have sufficient avenues through the trading terminals of NSE and BSE available throughout the country; ( h )the impugned action of the respondent is clearly an abuse of power inasmuch as by issuance of the impugned directions, the respondent is seeking to exercise powers that are not available to it. The impugned order can be passed only under section 11 of the SEBI Act since it is effectively supersession of the governing body of a recognised Stock Exchange and is not in the nature of directions, as contemplated under section 12A of the SCRA inasmuch as not granting a hearing; ( i )there is no ground for urgency to pass an ex parte order and if even if such power is available, no grounds have been set out and even a show-cause notice procedure as mandated has been dispensed with; ( j )the impugned order is liable to be set aside since even if section 12A of SCRA is available to the respondent in the facts and circumstances of the case, it could only be to issue directions to a Stock Exchange or the person referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d been delegated to the respondent in exercise of the powers conferred under section 29A of the SCRA vide notification dated 13-9-1994 and almost all the powers of the Central Government have been delegated to SEBI from time to time as SEBI was considered to be an expert body to deal with and regulate the securities market as a whole including the Stock Exchanges. ( d )CSX is a Company incorporated under the provisions of the Companies Act, 1956 as a joint stock company limited by guarantee and as per the original Memorandum of Association, the main object is as follows : "To apply for and obtain from the Government of India recognition of the Exchange as a recognised Stock Exchange within the meaning of the SCRA and to facilitate, assist, regulate and control the trade and businesses in all kinds of securities with a view to safeguard and further the interest of brokers, jobbers, dealers and the investing public." ( e )A Stock Exchange performs economic function and is the barometer of the national economy and plays a vital role in the nation s economic development. The Stock Exchange is also a place where savings of the public are monthly channelled towards productive pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resolution in question just to avoid the disciplinary action which was contemplated by SEBI vide show-cause notice dated 22-11-2005. Further, it can be seen from the words of the resolution wherein instead of mentioning that the recognition may be surrendered, the words "the recognition stands surrendered and the Stock Exchange ceases to function as a recognised Stock Exchange" have been used. Further, in the EGM held on 31-3-2006. CSX had passed a resolution to amend its Memorandum and Articles of Association ousting Public Representative Directors/SEBI Nominee Director from its Council of Management and thereby perpetuated the illegality in its resolutions dated 15-2-2006. ( d )After the submission of corporatisation and demutualisation scheme by CSX, SEBI officials had a meeting with the CSX officials and suggested to carry out certain changes, taking care of the financial implications to the Exchange and submit the revised scheme for its approval which has not been done (by) CSX. Therefore, the process of corporatisation and demutualisation which began in 2004 could not be completed as SEBI is yet to receive the revised scheme from the Exchange and in fact, the issue is pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrary to facts. ( f )Being recognised as a Stock Exchange and having enjoyed the total exemption of tax on its income which is not available to other public limited companies and having obtained the recognition to perform the public function of Stock Exchange, CSX is different from any other public limited company and cannot abruptly stop its public functions leaving the listed companies and investors of that region in lurch and therefore, has to comply with the provisions of the Companies Act. ( g )After receipt of the reply dated 6-12-2005 from CSX requesting for a personal hearing, the respondent had issued a letter dated 13-2-2006 scheduling a personal hearing on 9-3-2006 at the former s premises. However, obviously with ulterior motives, on 15-2-2006, CSX had hurriedly convened an EGM to pass a resolution regarding surrender of the recognition granted to it and that it would cease to function with immediate effect as a recognised Stock Exchange within the scope and meaning of the SCRA and SEBI Act and thereafter, on 4-3-2006, CSX forwarded the copy of the minutes of the EGM, dated 15-2-2006 and on 9-3-2006, a personal hearing was given to the entire Council of Management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld have applied to the charges enabling SEBI to pass final order. ( l )The impugned order dated 17-4-2006 has been passed only to ensure that the business of CSX be conducted in a proper manner and in accordance with law. It is only the members such as the second petitioner who are interested in stripping the assets of CSX by changing the basic structure of the Memorandum of Association of CSX, changing the authorised signatory of the bank accounts and changing the personnel of CSX with the singular interest of disposing of the assets of CSX and it also appears that the second petitioner and other members are interested in doing real estate business instead of concentrating on the business as a Stock Exchange. ( m )The respondent had originally issued a show-cause notice on 22-11-2005 for which CSX had sought for personal hearing and even before the personal hearing could be conducted, the second petitioner and other members had sought to amend the Articles and sought for voluntary surrender and passed the resolution illegally making the recognition as surrendered. It is therefore clear that the entire exercise by the second petitioner and other members has been only to sabota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nges and any other securi-ties market. Section 11B of the SEBI Act deals with the powers to issue directions, in the interest of investors for orderly development of securities market and to secure proper management and a plain reading of the above section itself shows that the respondent has to protect the interest of the investors in securities and to regulate the Stock Exchanges and securities market by such measures as it thinks fit. As such, SEBI has the statutory duty and authority to pass interim orders, pending enquiry and these powers do not mandate a pre-decisional hearing by the very nature of the situation and circum-stances in which it is required to be invoked and the interim measure is only to prevent further possible mischief of tampering with the affairs of the Stock Exchange and securities market in order to ensure protection, orderly and health growth of securities market so as to make the respondent s control over the capital market effective and meaningful. Since exigencies and requirements may arise while regulating Stock Exchanges, it has been entrusted with the duty and function to take such measures as it thinks fit and this enabling provision has been enac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng other intermediaries also to defy an order of the regulator and would encourage wrongdoings at the market place. Therefore, CSX can very well participate in the show cause enquiry and subject itself to SEBIs jurisdiction, in which event, the interest of all concerned could have been adequately safeguarded. ( s )Though it is true that power has to be exercised by the respondent only after satisfaction that the directions are being issued in the interest of the investors and orderly development of the securities market, prima facie, the impugned order would make it clear that the action by the respondent has been consistent with the statutory powers. The contention of CSX that some of the RSEs would have to be closed down as per Justice Kania Committee Report cannot be held good since the recommendations of the Justice Kania Committee Report were accepted by SEBI, which, in turn, has issued a circular addressed to all the Stock Exchanges to submit their corporatisation and demutualization scheme. However, the recommendations of the Committee have not been transformed into an Act since the Bill introduced in the Lok Sabha could not be passed as the then Lok Sabha was dissolved. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom transferring or alienating any property of the Exchange ( ii ) directing the day-to-day functioning of the Exchange to be taken over by a three member Committee and ( iii ) authorizing the said Committee to make expenditures in respect of the petitioner is unsustainable and only an arbitrary exercise of power. 10. According to Mr. Datar, the impugned order is a result of the intimation to the respondent that the petitioner, in view of the unviability of carrying on a Regional Stock Exchange has been recognized in two high powered Committee reports namely, the Report of the Group on Corporatisation and Demutualisation of Stock Exchanges headed by former Chief Justice M. H. Kania, 2002 (Kania Committee Report) and the Report of the Committee to study the future of the Regional Stock Exchanges, 2006 headed by Mr. Anantharaman (Anantharaman Committee Report). From the Anantharaman Committee Report, it can be seen that there is "zero" turnover in respect of CSX since 1999 which specifically observes that the respondent has not formulated clear guidelines for exist route for Stock Exchanges but which endorses the steps taken by CSX and particularly, the Committee has been headed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing appropriate applications and getting recognized as a Stock Exchange under the provisions of SCRA, and SEBI Act regulates the conditions to be satisfied and the right to carry on business includes the right not to carry on business and the same is a well recognized principle of law. Granting recognition is provided under section 4 of the SCRA and there is no provision against getting de-recognised under the Act and in fact, under rule 7 of the Rules, it is for the Stock Exchange to apply for renewal if it desires to do so. The recognition itself, under rule 6, unless it is granted on a permanent basis, is for a period of one year to be renewed from time to time and unless there is an express prohibition under a specific enactment, it cannot be read into a statute and prohibitions cannot be presumed. ( c )By introduction of sections 4A, 4B and substitution of section 5 based on Justice Kania Committee s Report, all Stock Exchanges including RSEs like CSX were required to submit their scheme of Corporatisation and Demutualisation which CSX has done and consequent upon several discussions with the respondent s officials, submitted in final scheme in July, 2005 and the respondent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mented by way of affidavits. Considering the fact that the petitioner s only assets are its infrastructure or building, it is therefore but natural that its object would include a real estate business. Merely because an object is to carry real estate business, grave and serious allegations of striping of assets cannot be made. It is CSX which is safeguarding the assets and in fact, one of the nominees of the respondent who was the Registrar of Companies is trying to strip the assets of CSX. ( h )The impugned order can be passed only on the satisfaction of SEBI whereas in the case on hand, the order has been passed not by the Board but by a single member. Unlike the SEBI Act which permits under section 19 for the SEBI to delegate its powers and functions to any member, the SCRA, under section 29A, specifically permits delegation only in respect of the Central Government s powers to the SEBI and there is no further power of delegation provided for and therefore, it follows that ( a ) the SEBI, unlike under the SEBI Act, cannot delegate its power under SCRA to any member and ( b ) even the Central Government s powers can be delegated only to SEBI and SEBI cannot further delegate it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 11B is also inapplicable for the reason that directions under section 11B can be issued only to a person or a class of persons referred to in section 12 and a Stock Exchange is not one such person and as such, the impugned order cannot be sustained. ( k )Lastly, the respondent seeks to rely upon the earlier show-cause notice issued on 22-11-2005 while conveniently failing to state that a reply to the same in great detail was sent as early as 6-12-2005 in respect of which no order was subsequently passed and instead, the respondent has passed the present order in violation of statutory powers and seeks to perpetuate its arbitrary exercise of powers. 15. Per contra, Mr. T. V. Gopalan, learned Additional Solicitor General of India, appearing for the respondent, during the course of his exhaustive arguments has argued that the writ petition has been filed against the show-cause notice dated 17-4-2006 in and by which for the reasons stated therein, certain interim directions had been made in order to prevent the affairs of CSX being conducted in the manner detrimental to the interests of the investors and also to secure proper management of the Stock Exchange. It is his case t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of real estate and also for surrendering their licence to run a Stock Exchange and all these things have been done deliberately in order to wriggle out of the statutory obligations under SCRA and SEBI Act. When once the company had become a Stock Exchange, it ceases to be a pure and simple company because of the nature of the functions of a Stock Exchange involving a great amount of public interest. It has been held that such Stock Exchanges also should be regarded as a "State" within the meaning of article 12 of the Constitution. Once the company had become a Stock Exchange, they could be superseded by an order made under SCRA by the SEBI under the powers delegated to it and there is no question of a Stock Exchange ceasing to do its business as such by unilateral withdrawal of their license. Despite the statutory inhibitions, they have deliberately adopted the course in the shape of resolutions of 2 EGMs the substance of such resolutions militating against the object and purpose of the two enactments and posing an affront to the statutory duties and functions of SEBI. In such a situation, the interim arrangement of the nature specified in the show-cause notice made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, whether such delegation has been authorized, one has to necessarily look into the relevant statutory provisions under section 11 of the SCRA. The power to supersede has been vested with the Central Government and such power to supersede could be validly delegated by the Central Government to the SEBI under section 29A of SCRA. He has pointed out that under section 11(1), there is a generality of the functions and duties cast upon the SEBI i.e., to protect the interest of investors in securities and to promote the development of and to regulate the securities market, by such measures as it thinks fit. Under sub-section (2) of section 11, without prejudice to such generality of power, by section 11(2)( j ), the powers delegated to SEBI under SCRA by the Central Government also becomes part and parcel of the duties and functions of the SEBI. In the said provision, the power under section 11 and section 29 of SCRA have been incorporated by reference and to this extent, they became part of SEBI and when once such a delegation had taken place, it becomes a statutory function and duty of the SEBI under section 11(2)( i ) which could be validly delegated under the provisions of SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve a personal hearing and establish their defence to the show-cause notice, it will also be afforded to them and therefore, the writ petition is totally misconceived and not maintainable in law. 24. I have heedfully considered the submissions made by the learned Senior Counsel on either side. The order impugned in this writ petition is the order passed by SEBI signed by a whole time member under section 12A of SCRA read with sections 11, 11A and 19 of the SEBI Act, 1992. In the impugned order, it is stated as follows : "SEBI conducted an inspection of the Exchange during August 27-30, 2003 and on the basis of the findings indicating certain deficiencies and irregularities in the functioning of the Exchange, granted conditional renewal of recognition for a period of one year commencing on 18-9-2003 and ending on 17-9-2004 and the said conditions were as under:" 25. After discussing the various issues involved in the passing of the impugned order SEBI has issued directions in paragraphs 28 to 30 of the order which read as under : "28. I am of the considered view that, in view of the imminent urgency and in order to safeguard the integrity of the securities market, the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is authorized to make such expenditures and operate the bank accounts of the exchange for meeting out the day-to-day expenses, including salary of staff, etc. till further orders." 26. Before proceeding to consider the issues involved in this writ petition, it would be proper for this Court to deal with the relevant provisions of SEBI Act and SCRA which are as under : Section 11 of the SEBI Act : " Functions of Board. (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. (2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for ( a )regulating the business in stock exchanges and any other securities markets. ( b )to ( h )****** ( i )calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisations in the securities market; ( j )performing such functions and ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viding trading or clearing or settlement facility in respect of securities, being conducted in a manner detrimental to the interests of investors or securities market; it may issue such directions, ( i )to any Stock Exchange or clearing corporation or agency or person referred to in clause ( b ) or any person or class of persons associated with the securities market; or ( ii )to any company whose securities are listed or proposed to be listed in a recognised Stock Exchange, as may be appropriate in the interests of investors in securities and securities market." Section 29A of the SCRA " Power to delegate. The Central Government, may, by order published in the Official Gazette, direct that the powers (except the power under section 30) exercisable by it under any provision of this Act, shall, in relation to such matters and subject to such conditions, if any, as may be specified in the order, be exercisable also by the Securities and Exchange Board of India or the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934 (2 of 1934)." 27. Having dealt with above provisions of SEBI Act and SCRA, let me now consider the various rulings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciple that every procedure is to be taken as prohibited unless it is expressly provided for by the Code, but on the converse principle that every procedure is to be understood as permissible till it is shown to be prohibited by the law. As a matter of general principal, prohibitions cannot be presumed, and in the present case, therefore, it rests upon the defendants to show that the suit in the form in which it has been brought is prohibited by the rules of procedure applicable to the Courts of justice in India. 18. We only intend to invoke the spirit of the principle behind the above dictum in support of our view that every Court or judicial body or authority, which has a duty to decide a lis between two parties, inherently possesses the power to dismiss a case in default. Where a case is called up for hearing and the party is not present, the Court or the judicial or quasi-judicial body is under no obligation to keep the matter pending before it or to pursue the matter on behalf of the complainant who had instituted the proceedings. That is not the function of the Court or, for that matter, of a judicial or quasi-judicial body. In the absence of the complainant, therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing serious difficulties. There is no justification to throw them out of employment and then give them an opportunity of representation when the requirement is that they should have the opportunity referred to above as a condition precedent to action. It is common experience that once a decision has been taken, there is tendency to uphold it and a representation may not really yield any fruitful purpose. 13. The view that has been taken by this Court in the above observation is that once a decision has been taken, there is a tendency to uphold it and a representation may not yield any fruitful purpose. Thus, even if any hearing was given to the employees of CORIL after the issuance of the impugned circular, that would not be any compliance with the rules of natural justice or avoid the mischief of arbitrariness as contemplated by article 14 of the Constitution. The High Court, in our opinion, was perfectly justified in quashing the impugned circular." (p. 572) ( e )The decision of a Constitution Bench of the Supreme Court in the case of Mohinder Singh Gill v. Chief Election Commissioner AIR 1978 SC 851 : "8. The second equally relevant matter is that when a statutory fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that he reserved to himself the right to intervene to impose his own decision upon his delegate. What those words meant was that the Commissioner could control the exercise administratively as to the kinds of cases in which the delegate could take action or the period or time during which the power might be exercised and so on and so forth. In other words, the administrative side of the delegate s duties was to be the subject of control and revision but not the essential power to decide whether to take action or not in a particular case. This is also the intention of section 68 as interpreted in the context of the several delegated powers. This is apparent from the fact that the order of the delegate amounts to an order by the Commissioner and is appealable as such. If it were not so the appeal to the Bombay City Civil Court would be incompetent and the order could not be assailed. The order of the delegate was the order of the Commissioner and the control envisaged both in section 68 and the order of delegation was not control over the decision as such but over the administrative aspects of cases and their disposal. No allegation has been made that the Commissioner intervened in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oach the Court. Further, when the Court passes an interim order, it should be careful to see that statutory functionaries specially and specifically constituted for the purpose are not denuded of powers and authority to initially decide the matter and ensure that ultimate relief which may or may not be finally granted in the writ petition is accorded to the writ petitioner even at the threshold by the interim protection granted." (p. 1468) ( b ) A 3 Judge Bench judgment of the Supreme Court in the case of Standard Chartered Bank v. Directorate of Enforcement [2006] 4 SCC 278 1 : "25. The prayer for the issue of a writ of prohibition restraining the authorities under the Act from proceeding with the adjudication and the prosecution is essentially based on the constitutional challenge to the relevant provisions of the Act on the ground that they violative articles 14 and 21 of the Constitution. Once we have held, as the High Court did, that the provisions are constitutional, the basis on which the writ of prohibition is sought for by the appellants disappears. It is settled by the decisions of this Court that a writ of prohibition will issue to prevent a Tribunal or authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion or by necessary implication. Where, as here, what is sub-delegated is an administrative power and control over its exercise is restrained by the nominee of Parliament, that is, here the Central Government, the power to make a delegation may be inferred. We are, therefore, of the view that the order made by the Chairman on behalf of the Board is not invalid. 20. To sum up, then, our conclusions may be stated thus : The discretion conferred on the Central Government by section 237( b ) to order an investigation and delegated by it to the Company Law Board is administrative, that it could be validly exercised by the Chairman of the Board by an order made in pursuance of a rule enacted by the Central Government under section 642(1) read with section 10E(5), that the exercise of the power does not violate any fundamental right of the company, that the opinion to be formed under section 237( b ) is subjective and that if the grounds are disclosed by the Board the Court can examine them for considering whether they are relevant. In the case before us they appear to be relevant in the context of the matter mentioned in sub-clauses ( i ) to ( iii ) of section 237( b ). Though the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Registrar or the Government. Under section 235, no doubt, the Government can appoint inspectors but it can do so under the three specified ensue set out therein. What sections 235 and 236 do is to give powers to shareholders on the one hand and the Registrar through a report on the other hand to move the Government to take action. These sections do not authorize the Government to appoint inspectors suo motu as in the case of section 237( b ). The discretionary power directing an investigation is contained in section 237( b ). Therefore, section 234, section 235 and section 236 and section 237( b ) give powers to different authorities, viz., the Registrar and the Government, provide powers which are different in extent and nature, exercisable in sets of circumstances and in a manner different from one another. Therefore, there is no question of discriminatory power having been vested in the Government under these sections to pick and choose between one company and the other. The challenge under article 14, therefore, must fail." (pp. 305-329) ( d ) A Division Bench judgment of the High Court of Bombay in the case of Anand Rathi v. SEBI [2001] 32 SCL 227 in which the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Court. Procedural fairness embodying natural justice is to be implied whenever action is taken affecting the rights of parties. It may be that the opportunity to be heard may not be pre-decisional; it may necessarily have to be post-decisional where the danger to be averted or the act to be prevented is imminent or where the action to be taken can brook no delay. If an area is devastated by flood, one cannot wait to issue show-cause notices for requisitioning vehicles to evacuate population. If there is an outbreak of an epidemic, we presume one does not have to issue show-cause notices to requisition beds in hospitals, public or private. In such situations, it may be enough to issue post decisional notices providing for an opportunity. It may not even be necessary in some situations to issue such notices, but it would be sufficient but obligatory to consider any repress- entation that may be made by the aggrieved person and that would satisfy the requirements of procedural fairness and 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the Court is to be based on Wednesbury or CCSU principles as explained by Lord Greene and Lord Diplock respectively to find out if the executive or administrative authority has reasonably arrived at his decision as the primary authority. The question whether the Courts in our country will apply the principles of "proportionality" and assume a primary role was left open to be decided in a case where such action is alleged to offend fundamental freedoms under Articles 19, 21 etc., and not under Article 14. In the light of the principles set out above, in our view, it is not possible to interfere with the interim order passed by the SEBI. It cannot be said the SEBI s orders are absurd or based on no material. In our view, the submission of Dr. Singhvi based on article 19(1)( g ) is equally untenable. The decision of Jammu and Kashmir High Court and Allahabad High Court have no application to the facts of the present case. What is laid down in these cases is that where the effect of a restrictive legislation is to totally prevent a citizen from carrying on trade, business or profession, such a restriction is unreasonable and void. In the instant case, the order impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to such conditions, if any, as may be specified in the order, such of its powers and functions under this Act except the powers under section 29, as it may deem necessary. 15. In the instant case, the counsel for the respondents, has placed for our perusal, a resolution passed by the Board on 12-8-1997 which inter alia provides that the Chairman is authorized and shall be competent to take action for any default under the provisions of the SEBI Act, rules and Regulations. In view of the aforesaid delegation, we have no hesitation in holding that the Chairman of the first respondent is fully justified in taking the impugned action. ****** 24. If one has regard to the aforesaid principles, it would follow that the power which has been conferred by section 11B to issue direction are of a widest possible amplitude and are exercisable in the interests of investors and in order to prevent inter alia, a broker from conducting his business in a manner detrimental to the interests of the investors or the securities market. The said power to issue directions under section 11B must carry with it, by necessary implication, all powers and duties incidental and necessary to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds like Base Minimum Capital ("BMC"), Pay-out Guarantee Fund, Investor Protection Fund, Investor Service Fund, etc. showed huge positive balances in the books of the Exchange, whereas the actual balances were Nil . ( c )Seven members continued to have shortfall in the BMC, out of which four Members had Nil BMC. ( d )CSX was yet to complete the registration formalities of the Trust for the management and administration of the Investor Protection Fund (IPF) and therefore, was yet to obtain exemptions from income-tax. 32. In spite of the aforesaid deficiencies and failure of CSX to comply with the renewal of conditions as above, the recognition of CSX was renewed by SEBI from time to time subject to certain conditions, in the interest of the investing public of the region at large. The recognition of CSX was last renewed for a period of one year ending on 17-9-2006, subject to the conditions ( a ) and ( b ) stated supra . The renewal was also subject to the Exchange complying with the suggestions stated in the Report of the Inspection of the Exchange conducted by the SEBI during the period July 19-21, 2004 and communicated to the Exchange on 11-8-2004. Due to non-complia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect as a recognized Stock Exchange within the scope and meaning of the SCRA and SEBI Act. It was also mentioned therein that a Committee of elected Directors of the Exchange was formed empowering it to take necessary steps for changing the name of the Company, rewriting the Memorandum and Articles of Association, etc. and to exercise all such powers, which would otherwise have been exercised by the Council to give effect to the aforesaid resolutions. 36. It was also brought to the notice of the respondent that the Council of Management of CSX, in its meeting held on 7-3-2006 which was attended by the elected member Directors only, inter alia , considered the draft Memorandum and Articles of Association, the proposed change in the name of the Company and the draft notice for the EGM scheduled for 31-3-2006. The respondent, after examining the issue, issued a letter dated 13-3-2006 to CSX informing that the SCRA provides for the scheme of grant of recognition and withdrawal of recognition and under the statutory mechanism provided in the SCRA, voluntary surrender of recognition as resolved in the abovementioned resolution is not provided and not permissible. A recognized Stock E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Public Representative Directors and the SEBI Nominee Director do not find place in the said Articles of Association. The invitation to them to attend the Board Meeting of CSX scheduled for 10-4-2006 was withdrawn. Knowing fully well that SCRA does not permit any voluntary surrender of recognition by any recognized Stock Exchange, CSX went ahead with the subsequent plan of action on the self-serving assumption that the surrender of recognition by them is legitimate and would, in turn, legitimize the slew of actions pursuant to the same. However, in law, all these actions are tainted with inasmuch as the very act of voluntary surrender lacks legal basis and any action based on the same would be legally vitiated in law. 39. The impugned order further states that the conduct of the elected Broker-Directors is subversive of regulatory discipline and SEBI is charged with the duty of securing proper management of the Stock Exchange and to prevent the affairs of such Exchange from being conducted in a manner detrimental to the interest of the investors in the securities market and it is bad that CSX has adopted a course of extreme defiance and confrontation, despite being reminded that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is a public institution, but also to protect the interest of investors and the integrity of the market. 42. Having highest regard to the duty cast upon it in the context of the unedifying developments that have taken place in CSX, after finding that there are substantial reasons to safeguard the interest of the CSX, SEBI was of the considered view that the conduct of the elected Member-Directors of CSX is highly unbecoming, contumacious and self-serving, besides constituting an obdurate defiance of not only the Regulator but also of the statutory requirements. In addition, the conduct seeks of a pre-meditation to seize control over the exchange and its assets in a planned manner and such deliberateness demonstrates a sordid intention to dismantle the Exchange, which is a public institution in Exchange for a private arrangement to serve collateral purposes which are not in public interest. 43. Considering the sensitivity of the securities market and the possible impact of such pernicious activities of the Member-Directors of CSX on the investors in general and the securities market in particular, it becomes imperative to take immediate action, pending the proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of supersession being passed only after mandatorily giving a hearing, an order cannot be issued without the mandatory compliance and thus, it is a clear case of abuse and a colourable exercise of power. As such, the respondent cannot claim that it is a show-cause notice when the impugned order clearly starts with the caption "Order" and in fact, there are orders that have been passed. 47. Resisting the same, the learned ASG has strongly relied on the principles laid down in the judgment in the cases of Special Director v. Mohd. Ghulam Ghouse AIR 2004 SC 1467 1 and Standard Chartered Bank v. Directorate of Enforcement [2006] 4 SCC 278 2 already referred to above. In the ruling of the latter case, the Apex Court has held that when a show-cause notice is issued under statutory provision calling upon the person concerned to show cause, ordinarily that person must place his case before the authority concerned by showing cause and the Courts should be reluctant to interfere with the notice at that stage unless the notice is shown to have been issued palpably without any authority of law. In the instant case, it cannot be said that the notice has been issued palpably ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the provisions, CSX has acted and passed resolutions militating against the object and purpose of the two enactments namely, SCRA and SEBI Act. In such circumstances, the interim directions made in the impugned order by SEBI for the purpose of preserving the integrity of CSX cannot be taken exception to. Further, the power to make such interim direction pending disposal of the show-cause notice has been upheld by two decisions of the Bombay High Court in the cases of Ramrakh R. Bohra ( supra ) and Anand Rathi ( supra ) already dealt with. On the question whether supersession could be made on the guise of an interim direction, it is not the case that somebody else has been appointed in supersession of the Council of Management. In other words, no stranger has been appointed to lookafter the day-to-day business of CSX but only three of the nominated Directors who had been illegally removed by the petition (petitioner) but in law continued as such Directors have been placed in charge of the CSX, pending adjudication of the show-cause notice. If exclusion of certain Directors from the management of the society could be called supersession, then, it is only CSX which had super ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with SEBI enables it to pass appropriate directions to the Stock Exchanges. Exercise of such power by SEBI is further complimented by the provisions of SCRA. In view of such powers available under the SEBI Act, the impugned show-cause notice has been passed by a whole time member on behalf of the Board and therefore, SEBI has got the necessary power under the SEBI Act to pass interim order pending adjudication of the show-cause notice and the impugned order signed by a whole time member can be sustained. 53. The third point arising for consideration is whether any emergent situation has arisen necessitating the issue of the impugned order. It was argued by Mr. Datar that CSX had become defunct and not doing any business for several years. But on the contrary, the letter dated 21-4-2006 at CSX clearly evidences that CSX is still carrying on the business of a Stock Exchange. It was only to forestall any order of supersession which might be passed against CSX that CSX had chosen to pass such resolutions in the EGM and has filed the present writ petition to avoid further action pursuant to the impugned show-cause notice. Therefore, there is no bona fide in filing this writ pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace without any notice to the Public Representative Directors/SEBI Nominee Director. Thus, all these actions of CSX have given rise to an emergent scenario to SEBI to take some interim measures in order to protect the interest of the larger investing public as Stock Exchanges are creditable building blocks of the country s economy. Thus, I am of the view that on the basis of well settled principles and with available sources of power within its competence, SEBI has issued the interim directions and the same cannot be found fault with as there was certainly an emergent situation warranting issue of interim directions. 56. The fourth and last point for consideration in this petition is whether voluntary surrender of recognition by CSX is permissible. In the absence of any provision under the SCRA, voluntary surrender of recognition as resolved by CSX in its EGM is contrary to law as it is clear that CSX has resorted to this action only in order to wriggle out itself of the statutory obligations under SCRA and SEBI Act for compliance of certain observations and to answer the various issues raised by SEBI for the proper management and control of CSX involving great extent of public ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
