Calcutta High Court (Appellete Side)
Calcutta Stock Exchange Ltd. & Anr vs Security And Exchange Board Of India & ... on 12 April, 2016
IN THE HIGH COURT AT CALCUTTA
Constitutional Writ Jurisdiction
Appellate Side
W.P. No. 27340 (W) of 2015
with
W.P. No. 31846 (W) of 2014
with
C.A.N. 8384 of 2015
Calcutta Stock Exchange Ltd. & Anr.
Vs.
Security and Exchange Board of India & Ors.
For the Petitioners : Mr. Anindya Kumar Mitra, Sr. Advocate
Mr. Arunabha Deb, Advocate
Mrs. Sanghamitra Mukherjee, Advocate
Mr. Deepak Sarkar, Advocate
Mr. Saptarshi Banerjee, Advocate
For the SEBI : Mr. Hirak Kumar Mitra, Sr. Advocate
Mr. Prasanta Kr. Dutt, Advocate
Mr. Rupak Ghosh, Advocate
Mr. Susanta Kr. Dutt, Advocate
Mr. S. Banerjee, Advocate
For the Respondent
No. 4 : Mr. Utpal Bose, Sr. Advocate
Mr. Aniruddha Roy, Advocate
Mr. Anunoy Basu, Advocate
Hearing concluded on : February 23, 2016
Judgment on : April 12, 2016
DEBANGSU BASAK, J.:-
Two writ petitions have been taken up for hearing analogously. CAN 8384 of 2015 has also been taken up for hearing. Both the writ petitions relates to actions taken by the Securities and Exchange Board of India (SEBI) for compulsory exit of Calcutta Stock Exchange (CSE).
Learned Senior Advocate for the petitioners referring to the various provisions of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as "SEBI Act, 1992") has submitted that, the power to withdraw recognition conferred upon the Central Government or its delegate under the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as "SCR Act, 1956") can be exercised only after the mandatory prerequisites of Section 5 of the SCR Act, 1956 are fulfilled. CSE was a recognized stock exchange. He has submitted that, the Central Government or its delegate has to form an opinion that, it was in the interest of trade or in public interest to initiate proceedings for withdrawal of recognition of stock exchange. A notice stating the grounds on which the withdrawal is proposed must be served upon the stock exchange. Such stock exchange has to be heard before the order of withdrawal can be issued. The order of withdrawal has to be informed with cogent reasons. He has submitted that, any regulation purported to be put in place for the purpose of withdrawal of recognition of a stock exchange by SEBI has to fulfil the requirements of Section 5 of the SCR Act, 1956. According to him, in the instant case, SEBI as the delegate of the Central Government has not formed an opinion that it is in public interest or in the interest of trade to close down CSE. Nothing has been disclosed on record to such effect. CSE has not been heard prior to the order of closure of its business.
Assuming that the Central Government has delegated its authority under Section 5 of the SCR Act, 1956 to SEBI, in the present case, according to petitioners, SEBI has not formed an opinion that it is in public interest or in the interest of trade that CSE should be derecognized. SEBI has not issued any notice giving the reasons as to why SEBI needs to derecognize CSE. Since formation of opinion in a condition precedent for the exercise of powers under Section 5 of the SCR Act, 1956 and the SEBI Act, 1992, and SEBI not having disclosed any materials on record with regard to such formation of opinion, all steps of SEBI to derecognize CSE are, therefore, bad.
SEBI has promulgated an exit policy by a circular dated May 30, 2012. Referring to such Exit Policy, learned Senior Advocate for the petitioners has submitted that, such Exit Policy does not apply to the CSE. The provisions in the Exit Policy do not conform with the requirements of Section 5 of the SCR Act, 1956. Therefore, SEBI in exercise of powers in terms of the Exit Policy cannot derecognize CSE and for that matter any stock exchange. He has referred to Section 11(1) and 11(2)(j) of the SEBI Act, 1992.
Without prejudice to his contention that, SEBI does not have the requisite power to derecognize a stock exchange the learned Senior Advocate for the petitioners has submitted that, the Exit Policy has not been followed by SEBI in the instant case.
Referring to the Securities Contracts (Regulation)(Stock Exchanges and Clearing Corporations) Regulations, 2012 (hereinafter referred to as "SECC Regulations, 2012") he has submitted that, SECC Regulations, 2012 have been claimed to be promulgated in exercise of powers conferred under Sections 4, 8A and 31 of the SCR Act, 1956 read with Sections 11 and 30 of the SEBI Act, 1992. He has submitted that, the SECC Regulations, 2012 are not attracted so far as CSE is concerned. CSE was an existing stock exchange as on the date of the promulgation of the SECC Regulations, 2012. The SECC Regulations, 2012 had come into effect from June 22, 2012. Chapter II of the SECC Regulations, 2012 deals with recognition of stock exchanges and clearing corporations. Clearing corporation has been defined in Regulation 2(1)(d). Regulation 3 of the SECC Regulations, 2012 lays down the obligation to seek recognition. It provides that, a stock exchange which has been recognized under the SCR Act, 1956 as on the date of commencement of the SECC Regulations, 2012 shall be deemed to have been recognized under the SECC Regulations, 2012. Consequently, since the CSE was an existing recognized stock exchange on June 20, 2012 the obligation to apply for regulation under the SECC Regulations, 2012 in view of the first proviso to Regulation 3 under Chapter II of the SECC Regulations, 2012 did not arise. The provisions of Regulation 4 were also not attracted so far as CSE is concerned in view of an existing recognition in its favour on the date of the SECC Regulations, 2012 coming into effect.
Referring to the net worth requirement laid down in Chapter III of the SECC Regulations, 2012 it has been submitted on behalf of the petitioners that, CSE had a continuous turnover in excess of Rs.1,000 Crores up to March 31, 2013. SEBI had issued a notice dated February 8, 2012 closing the business of the clearing house of CSE. SEBI had no authority to close down the business of clearing house of CSE as the provisions for making an application for approval under Regulations 3 and 4 of the SECC Regulations, 2012 were not applicable.
Referring to All India Reporter 1974 Supreme Court page 175 (Narayana Sankaran Mooss v. State of Kerala & Anr.) it has been submitted on behalf of the petitioners that, formation of opinion is a prerequisite for SEBI to invoke the provisions of the SCR Act, 1956 or even the SECC Regulations, 2012. In the present case SEBI not having formed any opinion in terms of Section 5 of the SCR Act, 1956, SEBI should not be permitted to proceed to derecognize CSE. Referring to 2008 Volume 4 Supreme Court Cases page 144 (Bhikhubhai Vithlabhai Patel v. State of Gujarat & Anr.) it has been submitted that, any opinion of the Government to be formed is not subject to objective test. However, there must be material based on which such opinion could be formed. Relying upon 1978 Volume 1 Supreme Court Cases page 405 (Mohinder Singh Gill & Anr. v. The Chief Election Commissioner, New Delhi & Ors.) it has been submitted that, the impugned action of the authorities must stand or fall on the basis of the materials available in the order itself. The authorities cannot be allowed to supplement such order by other materials.
Learned Senior Advocate for the SEBI has submitted that, the petitioners have filed two writ petitions. According to him, both the writ petitions mutually destroy each other. The reliefs sought for by the petitioners cannot be had. He has relied upon 2009 Volume 3 Calcutta high Court Notes page 549 (Harsh Vardhan Lodha v. Institute of Chartered Accountants of India & Ors.) in support of his contention that two writ petitions for the selfsame cause of action are not maintainable.
Learned Senior Advocate of the SEBI has submitted that, the power of SEBI to derecognize a stock exchange is not under Section 5 of the SCR Act, 1956. On the contrary the source of authority lies in Section 29A of the SEBI Act, 1992. According to him, the power of SEBI as sought to be exercised in the facts scenario of the present case have emanated from two different sources. One is the SCR Act, 1956 and the other is the SEBI Act, 1992. The Exit Policy and the SECC Regulations, 2012 being delegated legislations, the approach to the Court ought to be different when it has to decide the validity of such delegated legislations. According to him, three conditions for challenging a delegated legislation must be fulfilled for a successful challenge to be sustained. It must be established that, the Act through which the delegate traces its power is bad. Consequently, anything following out of the parent Act is bad. Secondly, the delegated legislation does not conform to the parent legislation. Thirdly, the delegated legislation is contrary to a cognate Act. On delegated legislation reliance has been placed on All India Reporter 1972 Supreme Court page 1917 (Tata Iron & Steel Co. v. Workmen), All India Reporter 1981 Supreme Court page 711 (State of Tamil Nadu v. M/s. Hind Stone), 1990 Volume 3 Supreme Court Cases page 223 (Shri Sitaram Sugar Company Limited & Anr. v. Union of India & Ors.) and 2007 Volume 13 Supreme Court Cases page 673 (J.K. Industries Limited & Anr. v. Union of India & Ors.) in this regard.
Learned Senior Advocate for the SEBI has submitted that, Section 5 of the SCR Act, 1956 is skeletal in nature. The SECC Regulations, 2012 has been promulgated to fill up the procedural aspect for derecognition which is contemplated in the SCR Act, 1956. The stock market had faced unprecedented scams and market manipulations resulting in loss of confidence of the general public in the capital markets. In order to suggest remedial measures and to prevent future manipulations the authorities had appointed the Bimal Jalan Committee for such purpose. Such Committee had submitted a report. The SECC Regulations, 2012 as well as the Exit Policy are outcomes of such report of the Bimal Jalan Committee. CSE is guided by the SECC Regulations, 2012. CSE was required to apply under the SECC Regulations, 2012 for continuation of its clearing house business. It did not do so. Consequently, SEBI was constrained to close down the clearing house business of CSE. CSE had subsequently sought to enter into an arrangement for the purpose of a clearing house with the respondent no. 4. The respondent no. 4 did not agree to act as the clearing house of CSE. A clearing house is essential for a stock exchange to carry on the business of trading in shares. Since the CSE does not have a clearing house duly recognized by SEBI, the question of CSE carrying on the business of trading in shares as a stock exchange does not arise.
Few issues have arisen in the two writ petitions for consideration. These issues may be summarized as (i) Whether the Exit Policy of SEBI promulgated by the Circular dated May 30, 2012 is in consonance with Section 5 of the SCR Act, 1956 ? (ii) Was the CSE obliged to apply for continuance of its clearing house business in terms of the SECC Regulations, 2012 ? (iii) Is the procedure undertaken by SEBI to close down the clearing house business CSE vitiated by the breach of the principles of natural justice ? (iv) In the facts of this case, is SEBI justified in taking steps to make CSE exit the market compulsorily ?
CSE is a recognized stock exchange. In 1980 the Central Government had recognised CSE as a stock exchange under the provisions of SCR Act, 1956.
SCR Act, 1956 provides both for recognition as well as withdrawal of recognition of a stock exchange. Withdrawal of recognition of a stock exchange is provided under Section 5 of the SCR Act, 1956. Section 29A of the SCR Act, 1956 empowers the Central Government to delegate its powers except the power under Section 30 of the SCR Act, 1956 to be exercised by SEBI or the Reserve Bank of India.
Sections 5 and 29A of the SCR Act, 1956 are as follows:-
"5. Withdrawal of recognition. - (1) If the Central Government is of opinion that the recognition granted to a stock exchange under the provisions of this Act should, in the interest of the trade or in the public interest, be withdrawn, the Central Government may serve on the governing body of the stock exchange a written notice that the Central Government is considering the withdrawal of the recognition for the reasons stated in the notice and after giving an opportunity to the governing body to be heard in the matter, the Central Government may withdraw, by notification in the Official Gazette, the recognition granted to the stock exchange:
Provided that no such withdrawal shall affect the validity of any contract entered into or made before the date of the notification, and the Central Government may, after consultation with the stock exchange, make such provision as it deems fit in the notification of withdrawal or in any subsequent notification similarly published for the due performance of any contracts outstanding on that date.
(2) Where the recognised stock exchange has not been corporatised or demutualised or it fails to submit the scheme referred to in sub-section (1) of section 4B within the specified time therefor or the scheme has been rejected by the Securities and Exchange Board of India under sub-section (5) of section 4B, the recognition granted to such stock exchange under section 4, shall, notwithstanding anything to the contrary contained in this Act, stand withdrawn and the Central Government shall publish, by notification in the Official Gazette, such withdrawal of recognition:
Provided that no such withdrawal shall affect the validity of any contract entered into or made before the date of the notification, and the Securities and Exchange Board of India may, after consultation with the stock exchange, make such provisions as it deems fit in the order rejecting the scheme published in the Official Gazette under sub-section (5) of section 4B."
"29A. 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)."
By a notification dated September 13, 1994 the Central Government in exercise of its power conferred under Section 29A of the SCR Act, 1956 had empowered SEBI to exercise all powers exercisable by the Central Government under Section 5 of the SCR Act, 1956.
SEBI has come into being under the provisions of the Securities and Exchange Board of India Act, 1992. Under Section 11 of the SEBI Act, 1992 lays down the functions of SEBI. Section 11 of the SEBI Act, 1992 is as follows:-
"11. 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) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner; (ba) registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf;]
(c) registering and regulating the working of venture capital funds and collective investment schemes],including mutual funds;
(d) promoting and regulating self-regulatory organizations;
(e) prohibiting fraudulent and unfair trade practices relating to securities markets;
(f) promoting investors' education and training of intermediaries of securities markets;
(g) prohibiting insider trading in securities;
(h) regulating substantial acquisition of shares and take-over of companies;
(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 organizations in the securities market;
(ia) calling for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State or Act which, in the opinion of the Board, shall be relevant to any investigation or inquiry by the Board in respect of any transaction in securities;
(ib) calling for information from, or furnishing information to, other authorities, whether in India or outside India, having functions similar to those of the Board, in the matters relating to the prevention or detection of violations in respect of securities laws, subject to the provisions of other laws for the time being in force in this regard :
Provided that the Board, for the purpose of furnishing any information to any authority outside India, may enter into an arrangement or agreement or understanding with such authority with the prior approval of the Central Government;
(j) performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act, 1947 (29 of 1947) and the Securities Contracts (Regulation) Act, 1956 (42 of 1956), as may be delegated to it by the Central Government;
(k) levying fees or other charges for carrying out the purposes of this section;
(l) conducting research for the above purposes; (la) calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions;
(m) performing such other functions as may be
prescribed.
....................................................................................."
Section 30 of SEBI Act, 1992 empowers SEBI to make regulations. Section 30 of the SEBI Act, 1992 is as follows:-
"30. Power to make regulations. - (1) The Board may, by notification, make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely:-
(a) the times and places of meetings of the Board and the procedure to be followed at such meetings under sub-
section (1) of section 7 including quorum necessary for the transaction of business;
(b) the terms and other conditions of service of officers and employees of the Board under sub-section (2) of section 9;
(c) the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which such matters shall be disclosed by the companies under section 11A;
(ca) The utilization of the amount credited under sub- section (5) of Section 11;
(cb) The fulfilment of other conditions relating to collective investment scheme under sub-section (2A) of Section 11AA;
(d) the conditions subject to which certificate of registration is to be issued, the amount of fee to be paid for certificate of registration and the manner of suspension or cancellation of certificate of registration under section 12.
(da) the terms determined by the Board for settlement of proceedings under sub-section (2) and the procedure for conducting of settlement proceedings under sub-section (3) of section 15JB;
(db) any other matter which is required to be, or may be, specified by regulations or in respect of which provision is to be made by regulations."
The Central Government had delegated its powers under Section 5 of the SCR Act, 1956 to SEBI. As a delegate of the Central Government SEBI enjoys the same powers as that of the Central Government for withdrawal of a recognition of a stock exchange under the provisions of Section 5 of the SCR Act, 1956. Section 11(j) of the SEBI Act, 1992 permits the SEBI to perform such functions and exercise such power and perform such functions as that of the Central Government under the SCR Act, 1956. Under Section 5 of the SCR Act, 1956 if the authority under Section 5 is of the opinion that the recognition granted to a stock exchange is in the interest of the trade or in the public interest, be withdrawn such authority may after serving a notice on the Governing Body of the Stock Exchange a written notice that the authorities are considering the withdrawal of recognition for the reasons stated in the notice and after giving an opportunity of hearing to the Governing Body, the authority may withdraw by notification in the official Gazette the recognition granted to the stock exchange.
Therefore, under Section 5 of the SCR Act, 1956 SEBI has to form an opinion that the recognition granted to CSE under the provisions of SCR Act, 1956 should be withdrawn in the interest of the trade or in the public interest. The formation of such an opinion is the first pre- requisite for the purpose of ultimate withdrawal of the recognition of CSE.
SEBI acting under Section 5 of the SCR Act, 1956 has promulgated the Exit Policy. The Exit Policy notes the earlier circular dated December 29, 2008 of SEBI in this regard. By the Exit Policy the earlier circular stands revised/modified to the extent as appears from the Exit Policy. Section 5 of the SCR Act, 1956 requires SEBI to form an opinion that it is in public interest or in the interest of trade to withdraw the recognition of a recognised stock exchange. By the Exit Policy SEBI has laid down the few grounds on which such opinion may be formed. The Exit Policy requires a stock exchange to have a turnover of Rs.1,000 Crores on continuous basis not to face compulsory exit. SEBI has justified the prescription of Rs.1,000 Crores on the basis of the recommendations of the Bimal Jalan Committee and their experience as the market regulator. Such a prescription has not been established to be arbitrary or capricious exercise of power by SEBI. The Exit Policy provides that in the event of happening of the events specified therein, SEBI would proceed with compulsory de-recognition and exit of a stock exchange. The Exit Policy therefore lays down criteria on the basis of which SEBI may form the requisite opinion under Section 5 of the SCR Act, 1956 and proceed thereunder for withdrawal of recognition. The criteria for formation of requisite opinion under Section 5 of the SCR Act, 1956 laid down in the Exit Policy cannot be said to be exhaustive. Independent of the Exit Policy in a given case, SEBI may form the requisite opinion under Section 5 of the SCR Act, 1956 and proceed thereunder for derecognition. The Exit Policy relates to all stock exchanges in India. It is not with regard to CSE alone. The Exit Policy has been issued in exercise of powers conferred under Sections 11(1) and 11(2)(j) of the SEBI Act, 1992 read with Section 5 of the SCR Act, 1956 to protect the interest of the investors in securities and to promote the development of and to regulate the securities market.
The Exit Policy of SEBI lays down the process of derecognition and exit of a stock exchange. It contemplates two methods of exit. One is voluntary and other is compulsory. It allows a stock exchange to seek a voluntary surrender of recognition. On compulsory exit it provides that, in the event of a stock exchange failing to achieve the prescribed turnover of Rs.1,000 Crores on continuance basis or does not apply for voluntary surrender of recognition and exit before the expiry of two years from the date of Exit Policy SEBI would proceed with the compulsory derecognition and exit of such stock exchange in terms of the conditions as may be specified by SEBI.
In the present case CSE has not applied for voluntary surrender of recognition and exit. It has not applied for voluntary surrender within two years from the date of the Exit Policy also. SEBI, therefore, under the Exit Policy has proposed to make CSE exit the securities market compulsorily. The issue therefore raised is whether SEBI can force CSE to compulsorily exit the market and derecognize CSE.
The Exit Policy prescribes a turnover of Rs.1,000 Crores to be achieved by a stock exchange on a continuing basis. CSE has not been able to achieve the prescribed turn over on a continuing basis in terms of the Exit Policy. The explanation given for the failure to achieve such a turnover by CSE is that SEBI had issued a notice dated April 3, 2013 under Section 12A of the SCR Act, 1956 regarding non-compliance of Regulation 3 of SECC Regulations, 2012 and thereby stopping the clearing house facility of the CSE. Without the clearing house, the business of clearance has come to a stop, thereby preventing trade of securities at CSE. This has prevented CSE to achieve the requisite turnover. Prior to the notice of closure CSE had sufficient volume of business to attain the prescribed turnover.
By the notice dated April 3, 2013 SEBI has invoked the provisions of Section 12A of the SCR Act, 1956 and SECC Regulations, 2012. It notes the contents of the letter dated March 13, 2012 of CSE seeking an extension of deadline to continue clearing house operations. It refers to SEBI's letter dated February 8, 2013 by which it had directed that clearing house at CSE shall cease to undertake the activity of clearing and settling all trades of any recognized stock exchange including CSE. However, to facilitate a process of smooth transition SEBI had allowed CSE to continue with the clearing house operations up to April 5, 2013. It has also observed that CSE had failed to apply with SEBI for recognition of its clearing house under Regulation 4 of SECC Regulations, 2012 within the prescribed time. It goes on to say that SEBI was examining the formation of a clearing corporation of the exchange itself. In the event, CSE establishes a clearing corporation in compliance with the SECC Regulations, 2012 or is able to tie up with another clearing corporation eligible to clear trades as per SECC Regulations, 2012, SEBI would have no objection in permitting recommencement of trading in CSE.
Chapter II of SECC Regulations, 2012 deals with recognition of stock exchanges and clearing corporation. CSE is under obligation under Regulation 3 to seek recognition for operation of a clearing house or a clearing corporation. Regulation 4 relates to the application for such recognition. A clearing corporation has been defined in the regulation 2(d) of the SECC Regulations, 2012. Regulations 2(d), 3 and 4 are as follows:-
"2(d)."clearing corporation" means an entity that is established to undertake the activity of clearing and settlement of trades in securities or other instruments or products that are dealt with or traded on a recognized stock exchange and includes a clearing house."
"3. Obligation to seek recognition - No person shall conduct, organize or assist in organizing any stock exchange or clearing corporation unless he has obtained recognition from the Board in accordance with the Act, rules and these regulations:
Provided that a stock exchange, which has been recognised under the Act as on the date of commencement of these regulations, shall be deemed to have been recognised under these regulations and all the provisions of these regulations as they apply to a recognised stock exchange shall also apply to such stock exchange:
Provided further that an existing clearing house of a recognised stock exchange or any person who clears and settles trades of a recognised stock exchange, as on the date of the commencement of these regulations, may continue to do so for a period of three months from the date of commencement of these regulations or, if he has made an application under regulation 4 for recognition, till disposal of such application."
"4. Application for recognition. - Subject to compliance with the provisions of Act, rules and these regulations, an application for recognition as a stock exchange shall be submitted to the Board in Form A as prescribed under rule 3 of the rules and an application for recognition as a clearing corporation shall be submitted to Board in Form A as specified in Schedule - I of these regulations."
CSE needs a clearing house or a clearing corporation to continue with its business. The second proviso to Regulation 3 of the SECC Regulations, 2012 requires an existing clearing house of a recognized stock exchange or any person who clears and settles trades of a recognized stock exchange as on the date of the commencement of the SECC Regulations, 2012 to make an application for such purpose. CSE had never applied under the SECC Regulations, 2012 for permission. Therefore, its existing clearing house on the date of coming into the SECC Regulations, 2012, was entitled to continue for a period of three months from the date of commencement of SECC Regulations, 2012. SEBI has closed down the clearing business of CSE by a letter dated April 3, 2013 after the expiry of the prescribed period of three months from the coming into effect of the SECC Regulations, 2012. The regulations came into effect on June 20, 2012. Therefore, the action of SEBI in closing down the clearing corporation business of CSE by the letter dated April 3, 2013 cannot be faulted. The letter itself speaks of earlier correspondence between the parties. The contention that the SEBI was not heard prior to the issuance of such closure notice cannot be sustained. The reasons for closure given in the letter cannot be said to be perverse. Closure of the clearing house business of CSE is not the derecognition of CSE itself. Notwithstanding the closure of the clearing house business, CSE as a stock exchange continues to exit. Closure of the clearing house business is not the withdrawal of recognition of CSE under Section 5 of the SCR Act, 1956. Failure to comply with SECC Regulations, 2012 would visit the defaulter with the consequences specified therein. SECC Regulations, 2012 has not been demonstrated to be excess of the SEBI Act, 1992 or the SCR Act, 1956. It has also not been demonstrated to be in violation of any existing law. CSE has suffered the consequences of its failure to comply with the SECC Regulations, 2012. No relief can be granted to CSE on such score.
With effect from April 5, 2013 CSE does not have a clearing corporation. It has not been in a position to tie up with any other clearing corporation. The respondent no. 4 has expressed its unwillingness to act as a clearing house of CSE. The net result is that as on April 5, 2013 CSE is without a clearing house. That being the position CSE now comes under the Exit Policy for compulsory derecognition and exit. The continued existence of a stock exchange without a valid clearing house cannot be said to be in the interest of trade or public interest.
The Exit Policy states that SEBI shall proceed with compulsory derecognition and exit of a stock exchange on the terms and conditions as specified by SEBI. Therefore, the terms and conditions for compulsory derecognition of a stock exchange is yet to be specified by SEBI.
Subsequent to April 3, 2013 the parties have been corresponding with each other. They have also had various meetings and discussions between them. Apparently the correspondence, meetings and discussions did not culminate into a resolution of the issues acceptable to the parties. SEBI by a letter dated February 3, 2014 referring to the earlier correspondence and the discussions as well as the various circulars and regulations has requested CSE to take necessary steps for voluntary exit failing which SEBI would be constrained to initiate the process of compulsory exit in terms of the Exit Policy.
As on November 3, 2014 SEBI did not want to utilize its powers under the Exit Policy and the SCR Act, 1956 to direct a compulsory exit of CSE. It was still providing opportunities to the CSE to either conform to the Exit Policy of SEBI or to apply for voluntary exit. As on that date, therefore, CSE had the option of having a recognized clearing house to continue with its business or to apply for voluntary exit. CSE on its part did not apply under the SECC Regulations, 2012 in respect of a clearing house. It has not arranged any recognized clearing house to continue with its business. It did not conform with the SECC Regulations, 2012. It has also not applied for voluntary exit.
In such circumstances SEBI as the regulator has little option than to enforce the various provisions of law for initiating the process for derecognition of CSE.
During the pendency of the writ petition various efforts were made for the purpose of arriving at an amicable resolution of the disputes. Such efforts did not culminate into an acceptable solution to the parties.
SEBI is yet to derecognize CSE. SEBI has the power to derecognize a stock exchange including CSE under the provisions of Section 5 of the SCR Act, 1956.
As rightly pointed out by the learned Senior Advocate for the petitioners that, Section 5 of the SCR Act, 1956 requires SEBI to form an opinion that it is in interest of the trade or in public interest to withdraw the recognition.
SEBI has put into place an Exit Policy and also SECC Regulations, 2012. Neither the Exit Policy nor the SECC Regulation, 2012 can be said to be acts beyond the jurisdiction of SEBI. The Exit Policy and SECC Regulations, 2012 deal with all stock exchanges in India. It is not CSE specific. SEBI is, therefore, through the Exit Policy as also SECC Regulations, 2012 seeking to regulate the functioning of the stock exchanges in India in public interest and in the interest of trade.
Once a stock exchange fails to comply with the Exit Policy and SECC Regulations, 2012, it opens itself up for further proceedings by SEBI. Exit Policy allows SEBI to take steps to derecognize a stock exchange that has not acted in terms of the Exit Policy.
The failure of CSE to comply with the SECC Regulations, 2012 is sufficient ground to prompt SEBI to form an opinion under Section 5 of SCR Act, 1956 that it is public interest and in the interest of trade to initiate the process for withdrawal of recognition of CSE.
In Narayana Sankaran Mooss (supra) it has been held that, under the provisions of Section 4 of the Electricity Act, 1910 the Government has to consult the Board on the question of revocation of licence. In the context of the provisions of Section 4 of the Electricity Act, 1910 it has held that, revocation of a licence being a drastic power and in order to prevent the abuse of such a power the conditions precedent for the exercise of such power must be found to exist. The order of revocation, in breach of the conditions would be void.
In Bhikhubhai Vithlabhai Patel (supra) it has been held as follows:-
"33. The court is entitled to examine whether there has been nay material available with the State Government and the reasons recorded, if any, in the formation of opinion and whether they have any rational connection with or relevant bearing on the formation of the opinion. The court is entitled particularly, in the event, when the formation of the opinion is challenged to determine whether the formation of opinion is arbitrary, capricious or whimsical. It is always open to the court to examine the question whether reasons for formation of opinion have rational connection or relevant bearing to the formation of such opinion and are not extraneous to the purposes of the statute."
SEBI while proceeding to derecognize CSE would no doubt proceeds under Section 5 of the SCR Act, 1956 and any other law applicable. SEBI has expressed the desire to initiate the process of derecognition by the letter dated November 3, 2004. SEBI may do so being uninfluenced by any of the observations made herein.
In the facts of this case, SEBI is required to consult any other authority to form an opinion that it is in public interest or in the interest of the trade to withdraw the recognition of CSE. It has sufficient material before it to form such an opinion.
In Mohinder Singh Gill & Anr. (supra) it has been held that, the validity of an action of a statutory functionary must be judged by the reasons mentioned in the impugned order and that it cannot be supplemented by fresh reasons in the shape of affidavits or otherwise.
In Harsh Vardhan Lodha (supra) while one writ petition was pending a subsequent writ petition was filed suppressing the pendency of the earlier writ petition. In such circumstances and finding that the issue involved in the second writ petition is same with that of the issue involved in the earlier writ petition, the second writ petition was found to be an abuse of judicial process. The ratio in my mind is not applicable to the facts of this case. The petitioner here has not suppressed the pendency of the earlier writ petition. The prayers made in the two writ petitions may or may not stay together. That per se would not disentitle the writ petitioner from canvassing the points in both the writ petitions. The extent of the relief in view of the various averments made in the two writ petitions and the prayers made therein may be modulated in terms of the facts of the case. Such two writ petitions by themselves do not mutually destroy each other as sought to be contended on behalf of the SEBI.
Tata Iron & Steel Co. (supra) has noted the need for delegating subsidiary or ancillary powers to delegates to meet the increasing complexity of modern administration. M/s. Hind Stone (supra) has held Rule 8C of the Tamil Nadu Minor Mineral Concession Rule, 1959 has made in exercise of power under Section 15 of the Mines and Minerals (Regulation and Development) Act, 1957. Shri Sitaram Sugar Company Limited & Anr. (supra) and J.K. Industries Limited & Anr. (supra) have laid down the nature extent and scope of judicial review of administrative action. These authorities, to my mind are not attracted to the facts herein.
In view of the discussions above, the first and the second issues are answered in the affirmative. The third issue is answered in the negative. The fourth issue is answered in the affirmative, in favour of SEBI and against the CSE.
W.P. No. 27340(W) of 2015, W.P. No. 31846 of 2014 and CAN 8384 of 2015 are disposed of accordingly. Interim orders stand vacated. No order as to costs.
Urgent photostat certified copy of this order, if applied for, be given to the parties on priority basis.
[DEBANGSU BASAK, J.] Later:-
Prayer for stay is considered and refused.
[DEBANGSU BASAK, J.]