TMI Blog2010 (10) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... NOS.4333, 4581, 4582, 5075, 5132 TO 5137, 5271 TO 5274, 5316, 6438 TO 6443 OF 2010 - - - Dated:- 29-10-2010 - JAGDISH BHALLA AND M.N. BHANDARI, JJ. Paras Kuhad, R.N. Mathur, Nitin Jain, Rajendra Prasad, Virendra Lodha, Lokesh Atrey, Gunjan Pathak, Manish Sharma, Samit Vishnoi, A.S. Saxena, Sudhanshu Joshi, Alok Sharma, Ms. Arpita Mathur, Rajiv Surana, Kamlakar Sharma and Manish Sharma for the Petitioner. G.K. Garg, Smt. Anita Agrawal, Ashok Mehta, S.P. Sharma, S.S. Raghav, S.S. Sharma and Sanjay Joshi for the Respondent. JUDGMENT M.N. Bhandari, J. - Since on same set of facts, similar issues have been raised, all these writ petitions are decided by this common order. 2. For the purpose of appreciating arguments of all the parties, we have taken D.B. Civil Writ Petition No. 4333/2010 - 21st Century Entertainment Pvt. Ltd. v. Union of India as leading writ petition with the consent of all the learned counsel for the parties. 3. The aforesaid writ petition has been filed with the following prayers : "( i )The section 11(4) and section 11B of the Securities Exchange Board of India Act, 1992 (for short the SEBI Act ) be declared invalid a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r bank. Where ownership is that of a corporate entity, no single individual/entity has ownership and control in excess of 10 per cent of that entity. Pursuant to the aforesaid Guidelines, promoter shareholding in the bank was to be reduced to the extent indicated above. The promoter accordingly diversified their shareholding, though the RBI Guidelines are not statutory in character. The Bank of Rajasthan Ltd. had disclosed to the Stock Exchanges regarding decrease in the promoter shareholding. The RBI, however, recorded that the Bank of Rajasthan has made incorrect disclosures regarding shareholding pattern led by Mr. Pravin Kumar Tayal and others. The RBI thereafter, made a reference to SEBI based on observations set up under their AFI Report showing that reported reduction by the promoter did not appear to be correct. The SEBI thereupon, made so-called investigation followed by passing of the impugned order. The impugned order mainly discloses allegations regarding incorrect disclosures to Stock Exchange for promoter shareholding. It is by presuming that shareholding by Yadav Group and Silvassa Group represents violation of takeover regulations. The petitioners were accordingly r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the SEBI Act is concerned, the type of the order to be passed therein cannot prohibit persons to buy, sell or deal in securities. Purpose and scope of the aforesaid provisions is quite different, thus, for the aforesaid reasons, impugned order remains without authority of law. It is a settled proposition of law that in absence of source, prohibition or restrain to do business or trade cannot be imposed. However, ignoring the aforesaid aspect, the respondents have passed the impugned order. This is more so when the provisions of sections 11(4) and 11B of the SEBI Act so as the impugned order provide unreasonable restriction on trade and business. The prayer is accordingly to set aside the impugned order and, at the same time, to declare provisions of sections 11(4) and 11B of the SEBI Act to be unconstitutional. 10. Learned counsel appearing for respondent No. 2 has, at the very outset, raised preliminary objections. It is submitted that the impugned order was passed by the SEBI at Mumbai. The petitioners are also residing at Mumbai, hence, no cause of action arose within the territorial jurisdiction of this Court. The retrain order was even conveyed to the petitioners outsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that it is to protect the interest of the investors in securities and promote development of security market apart from to regulate it. To achieve the aforesaid object, measures have been provided in various provisions of the SEBI Act, which include sections 11(4) and 11B of the SEBI Act. The Hon ble Apex Court has considered those aspects in a recent judgment in the case of SEBI v. Ajay Agarwal [2010] 3 SCC 765 1 . Therein, object of the SEBI Act were loudly focused wherein similar controversy came up for consideration. 14. The argument that provisions of sections 11(4)( b ) and 11B of the SEBI Act eliminates the principles of natural justice in violation of Article 14 of the Constitution of India is not tenable so as the argument regarding violation of Article 19(1)( g ) of the Constitution of India. The Hon ble Supreme Court had an occasion to consider the aforesaid aspect wherein elimination of the principles of natural justice was made. Therein, it was not held to be unconstitutional. A reference of the judgment in the case of Union of India v. Tulsiram Patel [1985] 3 SCC 398 has been given apart from the judgment in the case of Ajit Kumar Nag v. General Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncorrect. They acquired and retained the securities, which is only with a view to manipulate shareholding of the promoter. Looking to the prima facie case on the aforesaid aspect, the SEBI has rightly passed the impugned order by invoking provisions of sections 11(4) and 11B of the SEBI Act. The power invoked by the Board is not simplicitor under section 11 of the SEBI Act as after making or causing enquiry, necessary orders can be passed under section 11B of the SEBI Act. It is under those statutory provisions, the Board passed the order in the interest of investors. The prayer is, accordingly, to dismiss the writ petitions. 17. Learned counsel, Mr. S.P. Sharma, appearing on behalf of applicants for impleadment as party respondents, submits that applicants represent shareholders and, accordingly, want to be impleaded as party respon- dents. He otherwise supports the arguments made by learned counsel for respondent No. 2-SEBI. 18. All other respondents have also adopted arguments of learned counsel for respondent No. 2-SEBI. 19. We have heard learned counsel appearing on behalf of the parties and scanned the matter carefully. 20. Since constitutional validity of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nner not to dispose of or alienate an asset forming part of any transaction which is under investigation : Provided that the Board may, without prejudice to the provisions contained in sub-section (2) or sub-section (2A), take any of the measures specified in clause ( d ) or clause ( e ) or clause ( f ), in respect of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognized stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market : Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned. 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 bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue was taken into consideration. Therein, similar arguments were raised in reference to Article 14 of the Constitution of India when departmental enquiry allowed to be dispensed with in three situations given under Proviso-II to Article 311(2) of the Constitution of India. Therein, in Paras 97, 98, 101 and 102 following was held thus: "(97) Though the two rules of natural justice, namely, nemojudex in causa sua audi alteram part em , have now a definite meaning and connotation in law and their content and implications are well understood and firmly established they are nonetheless not statutory rules. Each of these rules yields to and changes with the exigencies of different situations. They do not apply in the same manner to situations which are not alike. These rules are not cast in a rigid would nor can they be put in a legal straitjacket. They are not immutable but flexible. These rules can be adapted and modified by statutes and statutory rules and also by the Constitution of the Tribunal which has to decide particular matter and rules by which such Tribunal is governed. There is no difference in this respect between the law in England and in India. It is unnecessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right can be excluded. This right can also be excluded where the nature of the action to be taken, its object and purpose and the scheme of the relevant statutory provisions warrant its exclusion; nor can the audi alteram partem rule be invoked if importing it would have the effect of paralysing the administrative process or where the need for promptitude or the urgency of taking action so demands, as pointed out in Maneka Gandhi s case at page 681. If legislation and the necessities of a situation can exclude the principles of natural justice including the audi alteram partem rule, a fortiorari so can a provision or the Constitution, for a Constitutional provision has a far greater and all-pervading sanctity than a statutory provision. In the present case, clause ( 2 ) of Article 311 is expressly excluded by the opening words of the second proviso and particularly its key-words this clause shall not apply. As pointed out above, clause ( 2 ) of Article 311 embodies in express words the audi alteram partem rule. This principle of natural justice having been expressly excluded by a Constitutional provision, namely, the second proviso to clause ( 2 ) of article 311, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon ble Apex Court in detail. Taking into consideration not only earlier judgment but even provisions of Article 309 of the Constitution of India, it was held that a provision of appeal is in sufficient compliance of the principles of natural justice. The second proviso to section 11 provides a right of hearing by the same authority apart from a provision of appeal, thus, it cannot be said to be a case of exclusion of principles of natural justice altogether. The hearing even after decision and that too, by maintaining appeal, is found to be in-compliance to the principles of natural justice as specifically referred in para 102 of Tulsiram Patel s case ( supra ). The same view was taken by the Hon ble Apex Court in the case of Ajit Kumar Nag ( supra ). Paras 27, 37 and 44 of aforesaid judgment are quoted hereunder for ready reference: "27. The appellant in Hari Pada Khan relied upon Hindustan Steel Limited (II), and submitted that in that case, this Court struck down a similar provision being violative of natural justice and also violative of Article 14. The Court, however, held that the principles of natural justice had no application when the authority was of the opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the aforesaid judgment, issue of post-decisional hearing was also considered and dealt with. 25. In the case of Swadeshi Cotton Mills ( supra ), similar issue came up for consideration before the Hon ble Apex Court and therein, in the light of the statement made by learned Solicitor General, the Hon ble Apex Court refused to quash the impugned order, rather a direction was given for providing hearing to the aggrieved person within a reasonable period. Learned counsel for respondent No. 2-SEBI has already conceded that though period of 21 days has already passed for submission of objections, if any objection is made by the petitioners within a period of 10 days from the date of order of this Court, same be considered by the Board. 26. In view of aforesaid and what has been stated by the Hon ble Apex Court in Basant Lal s case ( supra ), we are of the view that provisions of sections 11(4) and 11B of the SEBI Act are not hit by Article 14 of the Constitution of India. Para 3 of the said judgment is also quoted hereunder for ready reference: "3. It apparently needs to be stated that statutory provisions are to be assumed to be constitutional, that constitutionality i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also has been prohibited from buying, selling or dealing in securities for a period of five years. (27) If we look at the definition of offence under the General Clauses Act, 1897 it shall mean any act or an omission made punishable by any law from the time being in force. Therefore, the order of restrain for a specified period cannot be equated with punishment for an offence as has been defined under the General Clauses Act. (33) If we look at the legislative intent for enacting the said Act, it transpires that the same was enacted to achieve the twin purposes of promoting orderly and healthy growth of securities market and for protecting the interest of the investors. The requirement of such an enactment was left in view of substantial growth in the capital market by increasing the participation of the investors. In fact such enactment was necessary in order to ensure the confidence of the investors in the capital market by giving them some protection. (34) That said Act is pre-eminently a social welfare legislation seeking to protect the interests of common men who are small investors. It is a well-known canon of construction that when the court is called upon to int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. The provisions aforesaid shows that pending investigation/enquiry, Board can pass certain orders of the nature indicated therein. In the instant case, restrained and prohibitory order has been passed during intervening period. In view of aforesaid and as we have treated the provisions of sections 11(4) and 11B of the SEBI Act as intra vires . It clearly comes out that within the framework of sections 11(4) and 11B of the SEBI Act, certain orders can be passed. The issue as to whether such orders can be passed against the petitioners in ignorance to the provisions of section 11(4) of the SEBI Act, is an issue which can be raised in the form of objections by the petitioners before the SEBI itself. The regulation cannot control or nullify provisions of Act, however, if any order is passed under regulation, it will take its colour accordingly. 30. It has been submitted by learned counsel for respondents that looking to the incorrect disclosure, the matter was inquired upon/investigated by the SEBI and thereupon interim order was passed. If the petitioners can otherwise focus or show that there exist no incorrect disclosures, the matter would be heard and decided by the Board ..... X X X X Extracts X X X X X X X X Extracts X X X X
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