Calcutta High Court (Appellete Side)
Exchange Limited & Anr vs Securities And Exchange on 18 August, 2023
60
18.08.2023
mb
IN THE HIGH COURT AT CALCUTTA
CONSTITUTIONAL WRIT JURISDICTION
APPELLATE SIDE
W.P.A. No. 19816 of 2023
The Calcutta Stock
Exchange Limited & Anr.
Vs.
Securities and Exchange
Board of India & Ors.
Mr. Deepan Kumar Sarkar,
Mr. Saptarshi Banerjee,
Ms. Ashika Daga,
Mr. Jishujit Basu
...for the petitioners
Mr. Prasanta Kumar Dutt,
Mr. Rupak Ghosh,
Mr. Susanta Kumar Dutt,
Mr. Syamantak Banerjee
...for the SEBI
Mr. Jishnu Saha,
Mr. S.R. Kakrania,
Mr. Karanjeet Sharma,
Mr. Nabbendu Das
...for the respondent nos. 3 and 4
Affidavit-of-service and a supplementary affidavit filed in Court today be kept on record.
The writ petitioner no. 1 is the Calcutta Stock Exchange.
The matter is being taken up out of turn on the ground of extreme urgency pleaded by the petitioners.
It is submitted that the transactions of the Calcutta Stock Exchange shall come to a standstill 2 from tomorrow in the event no interim order is passed.
One of the primary limbs of the challenge in the writ petition is against a communication dated July 18, 2023, which is in the form of a notice of withdrawal of arrangement pursuant to Section 13 of the Securities Contracts (Regulation) Act, 1956 (for short "the SCRA") executed between the National Stock Exchange (NSE) and the Calcutta Stock Exchange Limited (CSE). It is contended by learned counsel for the petitioners that there has been a concerted effort on the part of the SEBI on the one hand and the NSE on the other, to stop and cripple the functioning of the CSE. It is submitted that despite the petitioners having sought to comply with all relevant formalities, the impugned notice was issued by the NSE.
Learned counsel submits that certain Regulations issued by the SEBI in and around the year 2012, were challenged in a writ petition by the petitioners, which ultimately met with a dismissal. By operation of the said order, the functioning of the petitioners would almost be wound up; however, an appeal was preferred against the same, which is now pending. In connection with the said appeal, the petitioners are enjoying an interim order.
3
Learned counsel places reliance on the relevant Clauses of the agreement between the NSE and the petitioners and submits that the relevant Clause, that is, Clause 23, contemplates a clear thirty days' prior notice of termination in the event certain acts are not done by the petitioners to the satisfaction of the NSE.
However, recently, almost immediately prior to the issuance of the said notice, it is seen from the correspondence between the NSE and the petitioners that the NSE was quite satisfied with the functioning of the petitioners and, on a request of tie-up of trading platform with the NSE, it had been communicated by the NSE to the petitioners that the NSE would be going to participate to the extent of any support required and requested the petitioners to share any regulatory guidance/approvals that the petitioners may have in that regard. Such communication, that is, a printout of the e-mail, is annexed at page-212 of the writ petition.
It is argued that the primary allegations are against the SEBI, for its machination in virtually attempting to stop the business of the CSE. As such, the petitioners are not entirely bound by the arbitration clause in the contract between the NSE 4 and the petitioners, which is confined to disputes between the parties to the contract.
Insofar as the remedy under Section 23L of the SCRA is concerned, it is argued that here, no challenge has been preferred against any order or decision by a recognized stock exchange or the SEBI. As such, the said Section does not create any bar to the present writ petition.
Learned senior counsel appearing for the NSE contends that the writ petition is not maintainable, in view of the existence of an arbitration clause in the agreement between the NSE and the petitioners. That apart, it is argued that there is no illegality in issuance of the notice dated July 18, 2023. Even after expiry of 30 days contemplated in Clause 23 of the agreement, as reflected in the said notice, the petitioners have not made any endeavour to rectify the drawbacks pointed out by the NSE, nor have the petitioners taken out an appropriate challenge under Section 9 of the Arbitration and Conciliation Act, 1996 or referred the matter to arbitration.
It is argued that the petitioners cannot, by way of a writ petition, get a specific performance of an agreement between the NSE and the petitioners.
Learned counsel for the SEBI vehemently refutes the allegations made against the SEBI. It is 5 sought to be contended, by placing reliance on the materials annexed to the writ petition itself, that the SEBI has all along been acting within the confines of law. It is submitted that the SEBI is well-empowered under the relevant statute to frame regulations. As such, the regulations impugned by the petitioners, now before the appellate court, were well within the authority of the SEBI to be issued. The regulations are for better functioning of the commercial domain of the country. Those relate to fixation of turnover of stock exchanges and for stock exchanges to have their own clearing corporations or having valid tie-up with other existing validly functioning stock exchanges. Such measures were introduced by the SEBI, it is contended, to bring about more transparency in share transactions and to put in sufficient safeguards in the economy of the country.
It is argued that Section 23L of the SCRA operates as a bar to the present challenge, since, in effect, the petitioners are challenging the decision of a recognized stock exchange and have also made allegations against the SEBI itself.
That apart, it is contended, in unison with learned senior counsel for the NSC, that the arbitration clause itself is a sufficient deterrent for the writ petition to be entertained. 6
Learned counsel, in such context, places reliance on the judgment of South Indian Bank Limited and others vs. Naveen Mathew Philip and another, reported at 2023 SCC OnLine SC 435. In the said judgment, it is pointed out, the Supreme Court proceeded to observe that the power under Article 226 of the Constitution of India to issue writs can be exercised not only for the enforcement of fundamental rights but for any other purpose, however, subject to certain restrictions. It is argued that exceptions to the rule of alternative remedy arise where the writ petition has been filed for enforcement of a fundamental right protected by Part-III of the Constitution, in case of a violation of the principles of natural justice, where the order or proceedings are wholly without jurisdiction or the vires of the legislation is challenged. In the absence of any such question having arisen in the present case, the writ court ought not to interfere.
That apart, learned counsel for the SEBI seeks to place reliance on the entire chain of events to indicate that the report authored by Deloitte, which was the premise of the impugned notice, was filed long back. The petitioners have not taken any remedial measures in that regard till date. The SEBI, it is submitted, has all along acted within the bounds of law. In fact, it is hinted that several other 7 stock exchanges have either conformed to the regulations framed by the SEBI or have opted out of operating as recognized/authorised stock exchanges.
A perusal of the material on record indicates that the interim order now sought by the petitioners pertains to the operation of the impugned notice dated July 18, 2023. As to the issue of maintainability, the objection taken by the SEBI on the premise of Section 23L of the SCRA, cannot be entertained, because, as rightly pointed out by the petitioners, the same contemplates a challenge against an order or a decision of a recognized stock exchange within the contemplation of the said Act. In the present case, however, the petitioners have alleged high-handed action on the part of the NSE and not against any specific order passed by the said stock exchange or the SEBI. The entire gamut of the challenge revolves around the issuance of a notice, allegedly in an arbitrary manner and in contravention of the agreement between the parties.
Since the NSE is a public authority and the nature of functioning of the CSE as well as the NSE has an element of public interest involved, the writ petition is entertained.
8
The other issue as to maintainability arises on the arbitration clause, which is a part and parcel of the agreement between the NSE and the petitioners.
It is well-settled that the arbitration clause is not an absolute bar as an alternative remedy. In the present case, the allegations pertain to the alleged arbitrary and mala fide action of the NSE in issuing the notice-in-question.
As such, the nature of the allegations levelled against a public body, that is, the NSE, empowers the court to entertain the writ petition and exercise its powers of judicial review, if found to be a fit case otherwise.
Hence, the arbitration clause does not operate as an absolute bar to the entertaining of the writ petition.
Insofar as the merits of the allegations are concerned, on a prima facie footing for the purpose of deciding the issuance of an interim relief, the primary impediment in the way of the petitioners is that the agreement between the NSE and the petitioners expired lastly in the year 2021, after having initially expired in the year 2016 and, thereafter, being automatically extended till 2021, after which it was never renewed. However, from the conduct of the NSE itself, it transpires that the 9 NSE as well as the petitioners treated the contract to have been renewed and to be a continuing one even after the year 2021.
Apart from the parties acting in terms of the clauses of the agreement, the impugned notice itself clearly shows that the NSE acted on the premise that the agreement was still valid.
In fact, the notice itself was stated to be issued within the contemplation of Clause 23(b)(i) of the agreement between the parties.
Hence, it is deemed that the agreement persisted between the petitioners and the NSE for all practical purposes, inasmuch as the NSE and the petitioners are concerned. Although learned counsel for the SEBI has, on a germane note, argued that the prior approval of the SEBI is required in law for entering into such an agreement, the present case is comprised of a factual scenario where there was a valid agreement, which was being extended from time to time and has been treated to have been extended between the NSE and the petitioners, which are the contracting parties.
Even if, for the time being, we assume that insofar as the SEBI's authorization is concerned, the same has not been granted for further renewal of the agreement, the said fact cannot be a fetter at 10 the present stage, since the SEBI has acquiesced to the acts of the NSE as well as the petitioners, treating the agreement to be a continuing one, for quite a long period, at least for about two years after the year 2021 when it last expired, without taking any action in that regard.
A careful consideration of the clauses of he agreement between the NSE and the petitioners shows that Clause 23(b)(i) clearly provides that NSE may terminate the agreement by giving 30 days' written notice under certain circumstances. The relevant circumstances, as contemplated in (i) is, if the CSE (petitioner no. 1) fails to put in place, to the satisfaction of NSE, such systems, procedures, infrastructure and manpower, etc. in respect of the activities covered under the agreement "in such manner as may be required by NSE within such period as may be intimated by NSE".
Clause (ii) is a carry-over of clause (i) and provides that if CSE fails to rectify the deficiencies pointed out by NSE within "such period as may be intimated by NSE" or, as per clause (iii), if CSE convenes a meeting of creditors or passes a resolution for winding up or appoints a receiver over its assets, the termination provisions apply. In the present case, however, there is nothing on record, at least prima facie, to indicate that the 11 prior procedure, as contemplated in Clause 23(b)(i), regarding the NSE requiring any system or procedure to be put in place by the CSE and/or giving a particular period as intimated by the NSE to the petitioners to rectify such alleged defect, was undertaken prior to issuance of the notice. The issuance of a notice of 30 days' as contemplated in the said cause has a pre-requisite in the form of the NSE giving such opportunity to the petitioners to rectify. The notice dated July 18, 2023 primarily relies on a report by a CSE- appointed authority, namely, Deloitte Touche Tohmatsu India LLP, which was appointed pursuant to a direction from the SEBI itself, on September 25, 2019. On the premise of a report given allegedly by the said Deloitte, after conducting a special audit of CSE for the period from financial 2013-14 to 2018-19, the impugned notice was issued.
Thus, there is nothing indicated in the impugned notice to show that prior opportunity was given to the petitioners to rectify the perceived deficiencies as contemplated in clause 23(b) (i) of the agreement. The observations arrived at by the CSE, as reflected in the notice, were arrived at unilaterally, without giving such opportunity to the petitioners as contemplated in the clause. In fact, 12 there is nothing to indicate that the Deloitte report was ever furnished to the petitioners or that the petitioners were given any opportunity to deal with the allegations made therein.
In fact, although the SEBI has argued that the petitioners got several opportunities but failed to meet the standards required in law, the petitioners have a point in placing reliance on the e-mail dated March 17, 2023 sent by the NSE to the petitioners, where the NSE clearly stated that it was keen to participate and extend any required support to the petitioners, requesting the petitioners to share any regulatory guidance/approval that the petitioners may have in that regard.
The said e-mail also required a prior approval to be given by the petitioners, and no other entity, to pursue the project.
It is surprising as to what went wrong between March 17, 2023 and July 18, 2023, the latter date being the date when the notice was issued. Since in the preceding March, the NSE itself took a stand that they were willing and keen to renew the agreement with the petitioners, the impugned notice dated July 18, 2023 could not have been given after offering prior opportunity to the petitioners to rectify their defects as perceived 13 by the NSE, within the contemplation of the termination clause in the agreement.
As such, on a prima facie premise, the impugned notice dated July 18, 2023 is non- compliant of the provisions of the agreement between the NSE and the petitioners themselves as well as arbitrary in nature.
The Wednesbury test of reasonableness is not satisfied in the present case, on a prima facie footing, since no rhyme or reason can be attributed to the unexplained vicissitude of the NSE between March 23 and July 18, 2023.
In such view of the matter, the petitioners have made out a sufficient strong prima facie case for the writ petition to be heard on merits.
Accordingly, the respondent(s) are directed to file their affidavit(s)-in-opposition within four weeks from date. Reply/replies thereto, if any, shall be filed within a fortnight thereafter.
Liberty to the parties to mention the matter for enlistment for hearing after the period for filing of affidavits is over.
The operation of the impugned notice dated July 18, 2023 shall remain stayed till disposal of the writ petition.
It is made clear that nothing in this order shall preclude the NSE from complying duly with the 14 provisions of Clause 23 of the agreement between the NSE and the petitioners hereinafter and issue a fresh notice for termination in accordance with the said clause.
Parties shall act on the communication of the learned advocates for the parties and/or a server copy of this order without insisting upon prior production of a certified copy thereof.
(Sabyasachi Bhattacharyya, J.)