2008 (1) TMI 609 - HC - Companies Law

Procedure for corporatisation and demutualisation - whether the impugned proceedings be declared as invalid for the reason that though the SEBI is having the power to extend further time as stated by the writ petitioners? - Held that - Merely because the regulations had been notified at a later date by that itself it cannot be said that the operation of section 5(2) can be controlled or restricted. Section 4B(8) of the Act is an enabling provision and may be in the light of the language of the said provision an extension may be given. This Court is not inclined to express any further opinion relating to this aspect. With regard to the specific stand taken by the writ petitioners that since the time to be reckoned with from the date of notifying the regulations the impugned action cannot be sustained this Court is unable to accept the same for the reason that section 5(2) of the Act is not controlled by section 4B(8) of the Act and section 5(2) of the Act being mandatory the same would be operative and hence in the light of the same the impugned order in the present writ petition cannot be found fault. It is needless to say that in the result the writ petition is bound to fail and accordingly the same shall stand dismissed.

Issues Involved:
1. Legality of SEBI's proceedings dated 16-08-2007.
2. Compliance with the Securities Contracts (Regulation) Act, 1956.
3. Interpretation of Section 4B(8) and Section 5(2) of the Act.
4. Impact of the Hyderabad Stock Exchange Ltd. (Corporatisation and Demutualisation) Scheme, 2005.
5. Validity of the Regulations, 2006.
6. Petitioners' locus standi.
7. Consequences of de-recognition of the Hyderabad Stock Exchange Ltd.

Detailed Analysis:

1. Legality of SEBI's Proceedings Dated 16-08-2007:
The petitioners challenged SEBI's proceedings dated 16-08-2007 as arbitrary, illegal, and violative of Articles 14, 19(1)(g), and 21 of the Constitution of India. They argued that the proceedings were contrary to the Securities Contracts (Regulation) Act, 1956, and the Hyderabad Stock Exchange Ltd. (Corporatisation and Demutualisation) Scheme, 2005, along with the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006.

2. Compliance with the Securities Contracts (Regulation) Act, 1956:
The petitioners contended that SEBI's actions did not comply with the required timeframes stipulated in Section 4B(8) of the Act. They argued that the 12-month period and subsequent grace period of 12 months should be calculated from the date of notification of the regulations, which was not adhered to by SEBI.

3. Interpretation of Section 4B(8) and Section 5(2) of the Act:
The petitioners argued that Section 4B(8) should be read in conjunction with the regulations, and any action taken without permitting the specified time is unsustainable. SEBI, however, maintained that Section 5(2) of the Act, which mandates the withdrawal of recognition if the demutualisation process is not completed within the specified time, has an overriding effect.

4. Impact of the Hyderabad Stock Exchange Ltd. (Corporatisation and Demutualisation) Scheme, 2005:
The scheme required HSEL to ensure that at least 51% of its equity shares are held by the public within 12 months from the date of publication of the order. SEBI extended this period by another 12 months, but HSEL failed to comply within the extended period, leading to the automatic withdrawal of recognition as per Section 5(2) of the Act.

5. Validity of the Regulations, 2006:
The petitioners argued that the regulations were notified only on 13-11-2006, and thus, the time to implement the scheme should be reckoned from this date. SEBI countered that HSEL had sufficient time to comply with the demutualisation process even before the notification of the regulations.

6. Petitioners' Locus Standi:
SEBI argued that only HSEL, as the aggrieved party, had the locus standi to challenge the withdrawal of recognition, not the petitioners who were merely members of HSEL. The petitioners, however, demonstrated their direct interest and financial impact due to the de-recognition.

7. Consequences of De-recognition of the Hyderabad Stock Exchange Ltd.:
The de-recognition of HSEL would lead to significant financial loss and hardship for its members, sub-brokers, and employees. SEBI issued directions for the post de-recognition procedure, including the transfer of funds and continuation of certain operations for a limited period.

Conclusion:
The court concluded that Section 5(2) of the Act is mandatory and operates automatically upon the failure to complete the demutualisation process within the specified time. The court found no illegality or arbitrariness in SEBI's actions and dismissed the writ petition, stating that the impugned order could not be found fault with. The petitioners' arguments regarding the extension of time and the reckoning of the period from the date of notification of the regulations were not accepted.

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