Andhra HC (Pre-Telangana)
B. Srinivasa Rao vs National Stock Exchange Of India Ltd. ... on 28 October, 1996
Equivalent citations: 1996(4)ALT940, [2000]100COMPCAS600(AP)
Author: M.H.S. Ansari
Bench: M.H.S. Ansari
JUDGMENT M.H.S. Ansari, J.
1. These three writ petitions raise identical issues and are therefore being disposed of by this common order.
2. The petitioners in the above writ petitions are investors who have sold shares through stockbrokers affiliated to the National Stock Exchange of India Limited-respondent No. 1 (for short "the NSE") and have questioned the action of the NSE in postponing the settlement No. 27 and in conducting special settlement No. 11 which has the effect of postponement of payment of moneys in respect of the shares sold through the first respondent exchange by registered stockbrokers relating to the transactions that have taken place between the period July 3, 1996, to July 9, 1996. The petitioners have dealt with the stockbrokers who are accredited to the first respondent stock exchange and are referred to as trading members. We are concerned here only with respect to the shares and trades involving shares of Maruthi Organics Limited (for short "the MOL") which have taken place between the period July 3, 1996 and July 9, 1996, governed by settlement No. 27 of 1996.
3. The National Stock Exchange (for short "the NSE") was incorporated in 1992 and is an exchange registered under the Securities Contracts (Regulation) Act, 1956 (for short "SCR, 1956"). One of the main objects of the NSE is to facilitate, promote, assist, regulate and manage in the public interest, dealings in securities of all kinds (which shall include all securities defined as such under the Securities Contracts (Regulation) Act, 1956, and all other instruments of any kind including money market instruments) and to provide specialised advanced automated and modern facilities for trading, clearing and settlement of securities, with a high standard of integrity and honour, and to ensure trading in a transparent, fair and open manner with access to investors from areas in or outside India.
4. Respondent No. 2 - the National Securities Clearing Corporation (for short "the NSCC") was incorporated with the object of completing financial settlements for deals which are cleared and settled through the NSCC.
5. The settlement schedule is fixed well in advance for the weekly transactions and is announced. The settlement schedule given for the week July 3, 1996 to July 9, 1996, is governed by settlement No. 27 of 1996 and the same should have been settled by July 17, 1996, and the respective parties ought to have received their monies/securities within 48 hours from July 17, 1996. The grievance of the petitioners is that by a broadcast message on July 10, 1996, issued by the NSE, all pay outs of securities and funds pertaining to shares of MOL were directed to be withheld, and special settlement No. 11 would be conducted in respect thereof.
6. Respondents Nos. 1 to 3 have filed their counters and also additional counter-affidavits have also been filed on their behalf bringing to the notice of the court, the subsequent events. We shall briefly refer to certain facts stated in the said counter-affidavits in so far as they are relevant for the purpose of this order.
7. The procedure of transacting business on the NSE may now be briefly referred to for a proper understanding of the facts in the instant case.
8. The NSE has admitted persons as trading members who are stock-brokers and are registered in accordance with the bye-laws of the NSE. The trading members are spread out across the country and transacting the business by having access to the NSE trading system software known as National Exchange for Automated Trading (NEAT). The trading members by using their computers enter buy or sell orders in securities which are admitted for trading by the NSE and such orders are matched automatically through a central computer system. When such orders are so matched by the NSE computer system, a trade takes place and a trade confirmation slip is generated at the trading member's office which provides the details of the trade such as the name of the security, quantity, price, time of trade, etc. The confirmations of such trades are simultaneously generated at the offices of both the buying trading member as well as selling trading member. The trade regulations formulated by the NSE, inter alia, prescribe the manner in which the trade member shall deal with their constituents. The capital market trading regulations of the NSE stipulate that every trading member shall enter into an agreement with each of his constituents before accepting or placing orders on behalf of the constituent and a specimen copy of such agreement is also prescribed. Apart from the mechanism prescribed by the NSE, the trading member (stock broker) is also governed by the rules and regulations framed under the Securities Contracts (Regulation) Act, 1956.
9. With regard to the postponement of settlement No. 27, the respondents have in their counters stated that a number of complaints were received from trading members in respect of the shares of MOL of a committed well planned fraud by increasing the price of the scrip on a day-to-day basis which facilitated sale of a large quantity of shares of that particular company (MOL) at a higher price. From the complaints so received, the NSE was prima facie satisfied that there appeared to be a case of manipulating the market and that the same had been carried out on an organised basis and the NSE thereupon deferred settlement of the transactions in respect of MOL. The NSE by its letter dated July 9, 1996, apprised the Securities and Exchange Board of India (for short "the SEBI") and sought permission for suspending trading in MOL shares beyond two days until completion of investigation and the SEBI by its letter of July 11, 1996, has given its approval for indefinite suspension of trading in the shares of MOL beyond two days until the investigation is, completed and by the same letter has also asked the NSE to initiate investigations immediately and complete the same within 15 days and send a report to it. The NSE thereupon by way of a computer broadcast informed that trading in shares of MOL would be suspended indefinitely with effect from July 12, 1996, until further notice on account of suspected fraud and manipulation. The NSE has also made a broadcast on July 10, 1996, informing that a special settlement No. 11 would be conducted for trades executed in respect of MOL during the period starting from July 3, 1996, and ending on July 9, 1996. The pay-in day of securities would be held on July 15, 1996, and the pay-in of funds on Tuesday, July 16, 1996, and that the pay-out of the securities and funds would be withheld by the NSE until investigation is completed. It is this action of the NSE that has been assailed in the above writ petitions.
10. The SEBI - third respondent, also filed a counter-affidavit supporting the action of the NSE in withholding of pay-out in respect of settlement No. 27 in view of the large number of complaints received by the NSE. It is further stated in the SEBI's counter that the SEBI has also received complaints from some affected dealers about the alleged fraud and malpractice and that based on the investigation report of the NSE, the SEBI will take action, if any, in terms of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995.
11. An additional counter-affidavit was filed on behalf of the NSE wherein it is, inter alia, stated that fraud and market manipulation of this nature has occurred for the first time in the NSE and the NSE, it is stated, is justified in postponing the settlement. It is further stated that the investigation at the NSE's end has been completed and report was also sub-mitted to the SEBI on July 26, 1996. In the said report, the NSE has also expressed its view on the requirements of further investigation by the SEBI as the NSE did the investigation up to the point of trading members, but could not go beyond as it has no access into the constituents' records. It is further stated that the NSE formed the opinion that there are grounds for annulment of trades in the equity shares of Maruthi Organics Limited in settlement No. 1996027 (trading period July 3rd to 9th, 1996), and that the suggested annulment of trade may affect some of the genuine investors. Therefore, the process of segregation of genuine investors by verification of their claims can only be carried out and completed by the SEBI and it is further submitted that unless the process of investigation is completed in all respects, and appropriate directions are given by the SEBI, the NSE on grounds of expediency did not want to implement the decision for annulment of the trades.
12. The SEBI has also filed an additional counter-affidavit wherein it is stated that the SEBI has received an interim investigation report from the NSE and that on receipt of the said report, some further information and clarifications were sought by the SEBI which have since been furnished by the NSE to the SEBI and after perusal of the said report, the clarifications of the NSE and after making preliminary enquiry, it was found there is sufficient material to investigate into the matter. The investigation report of the NSE, it is stated, mainly revealed names of the brokers and to ascertain the full facts of the persons or clients who placed such orders in respect of the said scrip needs to be examined and investigated. The chairman/Board of the SEBI has vide order dated September 25, 1996, appointed an investigation officer to enquire into the affairs relating to the buying, selling or dealing in shares of MOL and the investigating officer has been asked to submit his report as expeditiously as possible. Reply affidavits have been filed to the aforesaid counters. They are, however, not necessary to be adverted to for the purpose of this order. Learned counsel for respondent No. 3 (the SEBI) offered to place before the court the sealed cover containing the investigation report of the NSE for perusal which, however, was not considered necessary for the purpose of these writ petitions and the offer was accordingly declined.
13. Subrahmanya Reddy, learned senior counsel and V. V. S. Rao, learned counsel, appearing for the petitioners contended that the action of the NSE in postponing the settlement is arbitrary and beyond the scope of its authority. It was their submission that the postponement of settlement No. 27 alone has been singled out allowing all previous settlements to proceed as per schedule and, therefore, the said action is discriminatory. It was further contended that in the entire country only the NSE has postponed the settlement while all other stock exchanges in the country have proceeded with settlement in respect of shares of MOL as per schedule and the SEBI has also not interfered with the same and, therefore, there is no reason why the NSE should be singled out and allowed by the SEBI to postpone settlement No. 27. It was further contended that the aforesaid action is a colourable exercise of power by the NSE to resile from the counter party agreements and assurances given by the NSCC which has assured and taken the responsibility for completing the financial settlements even in the case of defaulting trading members. It was further contended that the special investigation undertaken by the NSE is at the behest of certain trading members who have themselves benefited from the very same scrip and it is for affording protection to such trading members that the interest of genuine and honest investors has been sacrificed by postponement. The impugned action is mala fide, it is pleaded and the postponement cannot be indefinite. Equitable estoppel was pleaded and put forth as one of the contentions on behalf of the petitioners on the ground that the NSE and the NSCC have by their public announcements assured investors of the best price and fair deal in the market apart from safety of the security, early settlement and trade guarantee scheme formulated by setting up a settlement fund. The petitioners have parted with their shares and thus fulfilled their part of the obligation whilst the pay-out-date has been indefinitely postponed.
14. Y. Ratnakar and P. Muralikrishna, learned advocates on behalf of the NSE and the NSCC countered the above contentions and, inter alia, submitted that the petitioners are not trading members and are not, therefore, entitled to question the actions of the NSE and that the above writ petitions are premature. It was further submitted by learned counsel for the respondents that the petitioners have entered into contracts with trading members and they are bound by the redressal procedure prescribed in the contract note for the grievance, if any, that either of them may have in relation to the settlement of transactions relating to MOL and the petitioners are not justified in invoking the extraordinary jurisdiction of this court under article 226 of the Constitution of India, that there is every justifiable cause and reason to postpone settlement No. 27 and that the NSE has acted with promptitude and within the scope of its powers.
15. P. V. S. S. Rama Rao, learned counsel for the SEBI while supporting the stand of the NSE in postponing the settlement, inter alia, submitted that in view of the preliminary report submitted by the NSE, the SEBI-third respondent, has appointed an investigating officer and that the said report is awaited and any orders as prayed for if passed by this court at this stage of pending investigation may jeopardise the ultimate outcome of the investigations.
16. The Securities and Exchange Board of India Act, 1992 (for short "SEBI Act"), was enacted with the object to protect the interest of the investors and securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto. It provides for establishment of the Securities and Exchange Board of India (SEBI) by the Central Government. Section 11 imposes a duty on the SEBI to protect the interests of investors in securities and to promote the development of and to regulate the securities market and for achieving this object, wide powers have been conferred on the SEBI to take such measures as it thinks fit. Sub-section (2) of section 11 enumerates matters for which the SEBI may provide such measures. Section 30 has empowered the SEBI to frame regulations which reads as under :
"Power to make regulations. - (1) The Board may, with the previous approval of the Central Government, 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 :-
(c) the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which such matter shall be disclosed by the companies under section 11A."
17. Section 31 provides that every rule and regulation made under the Act shall be laid before each House of Parliament for a period of 30 days. If both the Houses agree in making any modification, then such rule or regulation will operate only in its modified form. If both the Houses agree that such rule or regulation is not to be made, it ceases to be operative. These provisions clearly show that regulations are legislative in nature and statutory in character, and bear the seal of approval by Parliament, after they are made for their continued existence.
18. In exercise of the aforesaid power and in furtherance of the object to keep a cheek on manipulative or fraudulent transactions which are not bona fide and genuine transactions of sale and purchase, the SEBI has framed the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (for short "the Regulations, 1995").
19. Regulation 3 prohibits the buying or selling of or dealing with securities in a fraudulent manner. Regulation 4 prohibits manipulative trade practices which include the entering into any transactions with the intention of artificially raising or depressing the prices of securities thereby inducing other persons to sell or buy securities; which is calculated to create a false or misleading appearance of trading on the securities market; which results in reflection of prices of securities based on transactions that are not genuine trade transactions; which are not intended to effect transfer of beneficial interest of ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the market price of securities; pay off for inducing another person to purchase or sell the security with the sole object of inflating, depressing or causing fluctuations in the market price of securities.
20. Regulation 5 prohibits the making of misleading statements, which is likely to induce other persons to purchase or sell their securities or affect the market prices of securities. Regulation 6 prohibits fraudulent and unfair trade practices.
21. The SEBI is empowered under regulation 7 to investigate into the buying and selling of securities and regulation 8 provides procedure for such investigation.
22. In so far as the NSE is concerned, it has also its own bye-laws. Bye-law No. 4 specifically lays down that all dealings in securities of the NSE shall be subject to the bye-laws, rules and regulations.
23. Bye-law No. 5 confers power on the NSE to annul a trade on specific allegation of fraud.
24. The NSE has also framed regulations known as the National Stock Exchange (Capital Market Trading) Regulations, 1994. The same is in two parts, viz., Part A and Part B. Part A deals with trading regulations and Part B with clearing and settlement. Regulation 2.16, Part B, is relevant for the purpose of the case on hand and for the sake of convenience is extracted below :
"2.16 Extension or postponement of contracts by the Executive Committee. - Notwithstanding anything to the contrary contained in these regulations, the Executive Committee may for reasons to be recorded from time to time extend or postpone the time for performance of contracts in any security or securities whenever in its opinion such action is called for in public interest or by just and equitable principles of trade or when circumstances beyond the control of either or both of the contracting parties make such action desirable."
25. It is in the light of the above legal position that this court may have to consider the impugned action of the respondent stock exchange (the NSE) in postponing the settlement.
26. The SEBI has directed investigation by appointing an investigating officer with respect to the securities of MOL dealt with on the NSE and the said enquiry falls Within the ambit and scope of the powers of the SEBI under section 11(2)(i) read with the Regulations, 1995. Section 11B empowers the SEBI to issue appropriate directions in the interest of investors in securities and the securities market if after making or causing to be made an enquiry, the SEBI is satisfied that it is necessary to issue such directions. In the instant case, no relief is claimed by the petitioners against the SEBI nor any of the actions of the SEBI have been impugned in the above proceedings. It was no doubt contended that the SEBI should not have allowed the NSE to postpone the settlement. The only directions the SEBI has issued to NSE are to be found in the Letter No. IEMI/MID(N)/2727/96, dated July 11, 1996, and the same read as under :
"This is with reference to your letter No. NSCCL/MORG/4943, dated July 9, 1996, on the above mentioned subject requesting permission from SEBI to suspend the scrip until further notice. We hereby approve your request for indefinite suspension of the above mentioned scrip. You may intimate the other exchanges also accordingly. However, you are advised to initiate investigations immediately and complete the same within 15 days and send a report to us."
27. The above directions are with regard to according approval to the request of NSE for indefinite suspension of the scrip of MOL and advising to initiate investigation immediately and complete the same within 15 days and to send a report to the SEBI. The grievance of the petitioners is not with regard to suspension of trading in the scrip of MOL. The grievance of the petitioners, however, is with regard to initiating investigations and for postponement of settlement No. 27. No fault, in my view, can be found with the action of the SEBI in issuing the above directions to the NSE in the light of the facts on record. No directions also in my view can be issued in these proceedings to the SEBI which has undertaken an investigation on its own in exercise of the powers vested in it, reference to which is made above. What would be the outcome of investigations based on the report of the investigating officer appointed by the SEBI and the nature of directions the SEBI would issue cannot and need not be predicted at this time as it would be dependent upon the outcome of its investigations.
28. The decision to postpone the settlement, however, is that of the NSE based upon the complaints received by the NSE. In its letter No. NSCCL/MORG/4943, dated July 9, 1996, addressed to the SEBI, the NSE has reported that a number of trading members have written to the NSE regarding fraud and malpractice and from the complaints received it appeared to the NSE that a group of persons have been putting through substantial transactions through a number of trading members to manipulate the market, the modus operandi being for a person to approach a trading member who transacted in the said security (MOL), pay up the relevant margin amounts, build up confidence through small transactions and then take large positions. Regulation 2.16 of Part B of the NSE Capital Market Trading Regulations, 1994, vests power in the NSE to extend or postpone the contracts whenever in its opinion such action is called for in public interest or by just and equitable principles of trade or when circumstances of either or both the contracting parties make such action desirable. The NSE in its counter-affidavit has given a list of the trading members as many as 14 from whom complaints were received by the NSE. It was reported that large "buy transactions" had been put through and that subsequently the persons who put those orders had absconded. The NSE was prima facie satisfied and decided to conduct an investigation in the matter and in line with the said decision deferred settlement of the transaction entered into during the period of settlement No. 27.
29. The reasons given by the NSE justifying postponement of settlement No. 27 are neither irrelevant nor insufficient to support the exercise of the power. It cannot also be said that the broadcast for postponement was issued by the NSE for any oblique or extraneous considerations. It is not for this court to go into the adequacy or inadequacy of the material so long as it is found that there was some material or information which was sufficient to form an opinion that there existed a case to extend or postpone the settlement by invoking the provisions of regulation 2.16 extracted above. In the circumstances this court in writ jurisdiction cannot hold that the impugned action of the NSE in postponing settlement No. 27 is without jurisdiction.
30. The NSE has conducted a preliminary investigation to the extent and within the ambit of its powers. The postponement of the settlement however, is an interim measure pending investigation and the NSE has yet to take a final decision in the matter based on the outcome of its investigation. The postponement of any scheduled settlement can only be an interim measure and it cannot therefore be for an indefinite period.
31. The contention of learned counsel for respondents Nos. 1 and 2 that the final decision by the NSE has been deferred until directions are given by the SEBI and that the NSE would not want to implement or take a decision unless appropriate directions are given by the SEBI, however, is not well founded. As already noticed above, the SEBI is empowered to issue directions including directions to the NSE. It has, however, not issued any directions except to the extent indicated in its letter No. IEMI/MID(N)/2727/96, dated July 11, 1996, referred to above. The SEBI is also not precluded from issuing appropriate directions to the NSE in future either pending the enquiry caused to be made by it or after investigations are completed. The SEBI, however, has not issued any directions restraining the NSE from taking a decision based upon the NSE's investigation report.
32. It is one thing to say that the NSE would not want to take a decision until the investigation caused to be made by the SEBI is completed and appropriate directions are issued by the SEBI and altogether another thing to say that the NSE is not empowered to take any decision on the ground that the SEBI is investigating into the matter. The former stand would be inappropriate in the absence of directions by the SEBI to postpone the decision making process by the NSE until the final decision of the SEBI based on the outcome of its investigation. The latter stand, would be untenable as it cannot be traced to any rule or regulation disabling the NSE from taking a decision in the matter.
33. It has, therefore, to be held that in the absence of any directions to the contra from the SEBI, the NSE is obligated to take a final decision with regard to settlement No. 27.
34. In Rakesh Gupta v. Hyderabad Stock Exchange Ltd. a Division Bench of this court observed that it is not possible to hold that rules and bye-laws do not impose upon the stock exchange a public duty and if the exchange has failed to perform its public duty a writ petition before this court under article 226 of the Constitution is maintainable. In the said judgment, reference, inter alia, was made to Mrs. Sejal Rikeeh Dalal v. Stock Exchange, Bombay , which had taken a similar view and a passage from the said judgment was extracted and as it is relevant for the purpose of the instant case, the same passage is also extracted herein (page 714) :
"The stock exchange is, inter alia, established to assist, regulate and control dealings in securities and to ensure fair dealings. These are objects of public interest. Therefore, looking to the wide interpretation given to article 226 of the Constitution, the first respondent can be considered, for the purpose of this petition, as amenable to the jurisdiction of the High Court under article 226 of the Constitution."
35. In determining whether the decision of a particular body is subject to judicial review, the court is not confined to considering the source of that body's powers and duties but also the nature of the duty. In the instant case, the NSE is registered under the Securities Contracts (Regulation) Act, 1956, and the bye-laws and regulations applicable to the NSE being framed only with the approval of the SEBI or as directed by it, the NSE is amenable to writ jurisdiction in the light of the judgment in Rakesh Gupta's case [1999] 96 Comp Cas 645 (AP) and the nature of duty performed by the NSE being in public interest. It is a public duty and the NSE is, therefore, subject to public law and its decision subject to judicial review under article 226.
36. The contention of learned counsel for NSE that the petitioners being non-trading members must seek redressal of their grievance as per the procedure prescribed in the contract note before the appropriate forum is untenable and cannot be acceded to. In the instant case, the settlement has been postponed and unless a final decision is taken with regard to the settlement in respect of the trades between July 3, 1996 and July 9, 1996, the petitioners cannot be relegated to seeking redressal elsewhere. The constituents (investors) cannot be said to have at this point of time any complaint, dispute or difference with trading members in respect of the said security (MOL). The claim or dispute, if any, or putting it differently, cause of action would accrue to the petitioners-constituents/investors against their trading members only after the NSE has taken a decision with regard to settlement No. 27 and if thereafter the trading members failed to honour the commitments to their constituents. On account of the postponement of the settlement, the trading members cannot be said to be at fault and much less in default and consequently, the petitioners also cannot have any claim against the second respondent - the NSCC unless the NSE takes a final decision with regard to settlement No. 27. As long as the said settlement remains postponed, no rights with any corresponding obligations accrue or arise against the NSCC. The contention of learned counsel for respondent No. 1 - the NSE with regard to alternative remedy being available to the petitioners has therefore to be rejected.
37. In so far as the other contentions urged by learned counsel for the petitioners are concerned, the same can be considered only after the NSE takes a final decision with regard to settlement No. 27. It has already been held above that based upon the complaints received by the NSE, it was justified in postponing settlement No. 27, but such postponement cannot be indefinite. The various contentions urged by learned counsel for the petitioners can therefore be appropriately considered in the light of the final decision that the NSE may take and only after the NSE has taken a final decision in the matter and not before. In the circumstances, I do not consider it appropriate to deal with the various other contentions urged by learned counsel for the petitioners and they are left open.
38. In the facts and circumstances of the case, a direction shall issue to the National Stock Exchange (NSE) - respondent No. 1 to take a final decision with regard to settlement No. 27 (trading period July 3, 1996 to July 9, 1996), in respect of the trades relating to scrips of Maruthi Organics Limited (MOL) within a period of two months from the date of receipt of a copy of this order.
39. With the directions as above, the above writ petitions are accordingly disposed of. But, in the circumstances without costs.