1998 (11) TMI 453 - HC - Companies Law

Issues Involved:
1. Validity of SEBI's order prohibiting stock brokers from undertaking fresh business pending inquiry.
2. Challenge to the vires of Sections 11 and 11B of the SEBI Act, 1992.
3. Alleged violation of principles of natural justice.
4. Authority of SEBI Chairman to issue the impugned order.
5. Availability of an alternative remedy through appeal.

Detailed Analysis:

1. Validity of SEBI's Order:
The petitions challenge SEBI's order dated 30-10-1998, prohibiting stock brokers from undertaking fresh business until the completion of inquiry proceedings under Regulation 28 of the SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992, and Regulation 13 of the SEBI (Prohibition of Fraudulent & Unfair Trade Practices Relating to Securities Markets) Regulations, 1995. The order was effective from 2-11-1998.

The respondents argue that the order is an interim measure to protect investors and maintain market integrity. It does not amount to suspension or cancellation of the broker's license but merely restricts new business activities.

2. Challenge to Sections 11 and 11B of the SEBI Act, 1992:
The petitions question the constitutionality of Sections 11 and 11B of the SEBI Act. The court issued a rule and directed notice to the Attorney General of India regarding this challenge.

Section 11 imposes a duty on SEBI to protect investors' interests and regulate the securities market. Section 11B empowers SEBI to issue directions to ensure proper management and prevent detrimental activities in the securities market.

3. Alleged Violation of Principles of Natural Justice:
The petitioners contend that SEBI's order was issued without notice and without offering a reasonable opportunity to be heard, violating principles of natural justice. They cite the Supreme Court's decisions in Swadeshi Cotton Mills v. Union of India and Liberty Oil Mills v. Union of India, emphasizing the necessity of a hearing before taking actions that affect fundamental rights.

The court, however, notes that interim orders may be issued ex parte in certain situations to prevent immediate harm, provided there is an opportunity for a post-decisional hearing.

4. Authority of SEBI Chairman to Issue the Impugned Order:
The petitioners argue that the order should have been issued by the SEBI Board, not the Chairman, as Section 11B entrusts the power to the Board. The respondents counter that under Section 4(3) of the SEBI Act, and pursuant to a resolution passed by the Board on 12-8-1997, the Chairman has the authority to take such actions.

The court finds that the Chairman is authorized to act on behalf of the Board, especially in the context of interim measures necessary to protect market integrity.

5. Availability of an Alternative Remedy:
The respondents argue that the petitioners have an alternative remedy through appeal under Section 20 of the SEBI Act and Regulation 32 of the SEBI Regulations. The court acknowledges this but states that the availability of an alternative remedy does not bar the exercise of writ jurisdiction, especially in cases of urgency or where fundamental rights are at stake.

The court cites State of U.P. v. Mohammad Nooh, emphasizing that writ jurisdiction can be exercised even when an alternative remedy exists, particularly when immediate relief is necessary.

Conclusion:
The court concludes that the petitioners have not made a prima facie case for interim relief. The impugned orders are justified as interim measures under Section 11B of the SEBI Act to protect investors and maintain market integrity. The petitions are allowed to proceed, but the interim orders favoring the petitioners are vacated. The petitioners are permitted to trade in shares other than those specifically mentioned for four weeks from the date of the judgment.

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