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TMI Blog2008 (1) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... nge Ltd. v. SEBI [2007] 137 Comp. Cas. 8631 . Learned counsel also while elaborating several facts had also drawn the attention of this Court to the contents of the reply-affidavit. Contentions of the learned Advocate General 5. On the contrary, the learned Advocate General had explained the facts and circumstances and had drawn the attention of this Court to section 2(ab) of the Act and further pointed out to sections 4A and 4B of the Act as well. The learned Advocate General had drawn the attention of this Court to sub-sections (6) and (7) of section 4B and also sub-section (8) as well. Further, the learned Advocate General would maintain that publication of the regulations may not have any serious consequence for the reason that section 5(2) of the Act being mandatory, the same to be operative by operation of law and, hence, the impugned action cannot be found fault and that section 5(2) of the Act is having overriding effect and, hence, the contention of the writ petitioners that in the light of section 4B(8) of the Act read with the regulations, the action called in question to be held as invalid, cannot be a sustainable ground and in the light of section 5(2) of the Act, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares are held by the broker members of HSEL. 8. Further, it is stated that all the members including the petitioners herein are doing the business in shares registered under HSEL and many members are also registered as sub-brokers with HSE Securities Ltd., a 100 per cent subsidiary company holding the terminals of National Stock Exchange and Bombay Stock Exchange serving large number of investors. While matter stood, thus, in the year 2005, SEBI, as part of its efforts to improve governance in stock exchanges notified a scheme called as the Hyderabad Stock Exchange Ltd. (Corporatisation and Demutualisation) Scheme, 2005 (hereinafter referred to in short "scheme, 2005"). The said scheme shall have effect on its publication under sub-section (4) of section 4B of Securities Contracts (Regulation) Act, 1956 (hereinafter referred to in short as "SCRA"). The HSEL will be corporatised and demutualised in accordance with the scheme, 2005 on and from the appointed date as may be notified by the SEBI under section 4A of SCRA, provided that the activities specified in the respective clauses of this scheme shall be implemented as per the time schedule specified in those clauses. 9. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r (2) through an offer for sale by the existing shareholders or (3) by any combination of the methods. 12. Further, it was stipulated that no person shall directly or indirectly acquire or hold more than 5 per cent in the paid-up equity capital of the company. Further, as per sub-section (8) of section 4B of the Act, 1956, every recognized stock exchange should implement the scheme within 12 months from the date of publication of the order/scheme. Further, the SEBI on sufficient cause being shown to it and in the public interest extended the said period by another 12 months. 13. If any stock exchange fails to implement/submit the scheme within the specified time the recognition granted to such stock exchange under section 4 of the Act, 1956 shall stand withdrawn and the Central Government shall publish by notification in the Official Gazette such withdrawal of recognition. As far as the HSEL is concerned, the scheme, 2005 was notified on 29-8-2005. However, for implementing/submitting the scheme, 2005 the Regulations, 2006 are issued only on 13-11-2006. Hence, within the short time the scheme, 2005 cannot be implemented/submitted by the HSEL since it is facing difficulties such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the broker members will be at the crossroads. It is stated that the Central Government, i.e., the first respondent has not issued any notice to HSEL giving an opportunity of being heard in the matter before the recognition is sought to be withdrawn. 17. Hence, the action of the respondents is arbitrary, illegal and violative of the procedure as contemplated under the SCRA, 1956. In those circumstances, if the recognition of HSEL is withdrawn, it is not in the interest of the trade or in the public interest and also the broker members will be put to great hardship in depriving of their livelihood, apart from that, 20,000 CDSL account holders of 774 listed companies, sub-brokers of HSE Securities Ltd., and their clients, 44 HSEL employees will be put to great financial loss and serious hardship. Hence, the action is violative of articles 14 and 19(1)(g) of the Constitution of India. 18. It may be appropriate to have a glance at the impugned proceedings MRD/DSA/101507/2007, dated 16-8-2007 and the same reads as follows: "Dear Sir, Sub : Demutualisation of Hyderabad Stock Exchange Ltd. (HSE) This has reference to.your letter REF : HSE : ADM : 07 : 147, dated August 12, 2007, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nflict of interest between the brokers and investment communities. This is sought to be achieved by ensuring that 51 per cent of the equity shareholders are held by public other than the broker members. Section 4B(1) of SCRA provides that all recognized stock exchanges shall within such time as may be specified by the SEBI (R2) submit a scheme for corporatisation and demutualisation for its approval. 22. After receipt of the said scheme, SEBI would approve it with or without modification. Such an approved scheme would bind all persons and authorities including all members, creditors, depositors and employees of the recognized stock exchange and on all persons having any contract, right, power, obligation, or liability with, against, over, to or connection with the recognized stock exchange or its members. 23. The order of the SEBI approving the scheme has to be published in the gazette and will come into operation on its publication in the gazette. After the scheme is approved, a recognized stock exchange can either by fresh issue of equity shares to the public or in any other manner as may be specified by the regulations made by the SEBI, ensure that at least 51 per cent of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ete the demutualisation process by 12 more months, i.e., on or before 28-8-2007, which is the maximum specified under the SCRA. However, HSE could not complete the process of demutualisation before 28-8-2007 and, therefore, by operation of law, i.e., section 5(2) of the SCRA its recognition stood automatically withdrawn with effect from 29-8-2007. SEBI notified the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006 (MIMPS Regulations). It may be pertinent to mention that before notifying the aforesaid regulation, SEBI constituted a committee to study the future of regional stock exchanges--post demutualisation. 28. One of the terms of reference of the committee was to recommend modalities for increasing the public shareholding in demutualised stock exchanges in accordance with the provisions of SCRA. The report was put up on the SEBI website on 8-5-2006, for public comments. SEBI also studied the international practice followed by other international stock exchanges and also had discussion with Federation of Indian Stock Exchanges (FISE)/various regional stock exchanges at various times on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007, 16-8-2007 and 24-8-2007, advised HSE to strictly adhere to the time-limit specified in section 4B of the SCRA. Further, HSE was also informed that if it is unable to demutualise by the specified date then as per section 5(2) of the SCRA the recognition granted under section 4 of the SCRA to HSE shall stand automatically withdrawn. Chairman of HSE vide letter dated 12-8-2007, stated that the exchanges were unable to complete the demutualisation process mainly because the EGM of the company fixed a minimum bid price of Rs. 450 per share. This price was fixed because HSE owns an immovable property with a plot area of 17,700 sq. yards and built-up area of 4 lakh sq. feet. But the title to the property is in dispute, as clearance under the Urban Land Ceiling (ULC) Act has not been granted till now. The ULC dispute is subjudice. Hence, bidders are not forthcoming at a purchase price exceeding Rs. 450 per share. The same was also reiterated by the executive director of HSE in the letter dated 13-8-2007. He informed that the exchange is unable to complete the demutualisation process since the exchange is not getting fair valuation of the assets it held due to the Court litigations and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd may continue till further directions from SEBI. In addition to the above, the following directions are also issued : (a)Money available in the Investor Protection Fund (IPF) and Investor Services Fund (ISF) of HSE lying unutilised shall be transferred to SEBI investor protection and education fund. (b)The funds available in the Settlement Guarantee Fund (SGF)/Trade Guarantee Fund (TGF) shall not be alienated till further directions. (c)HSE shall set aside sufficient funds in order to provide for settlement of any claims, pertaining to pending arbitration cases, pending non-implemented arbitration award, if any, liabilities/claims of contingent nature, if any, and unresolved investor complaints/grievances lying with the exchange. (d)Consequent upon withdrawal of recognition of HSE, the trading members of HSE shall cease to be trading members of HSE and, therefore, liable to be deregistered as stock brokers, and, hence, their certificate of registration granted by SEBI shall stand automatically cancelled. However, the said brokers/ trading members of HSE shall be liable to pay SEBI registration fees, if any, due as per Schedule III of the SEBI (Stock Brokers and Sub-Brokers) R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and BSE serving large number of investors. There is no restriction for these sub-brokers of HSE Securities Ltd. to continue to trade on BSE and NSE after recognition of HSE is withdrawn, as clarified in the letter dated 5-9-2007. This is the stand taken by respondent Nos. 2 and 3 in their counter-affidavit. 36. A reply-affidavit had been filed wherein the locus standi of the writ petitioners had been explained further saying how they are interested in maintaining the present writ petition. It is specifically averred that the five directors nominated by the second respondent, who are called as public representative directors, submitted their resignations on 28-8-2007, itself to the second respondent. The stand taken in the counter-affidavit relating to the operation of law, i.e., section 5(2) of the SCRA had been explained in the context of 4B(8) in elaboration in paragraph No. 5 of the reply-affidavit. Further, it is stated that the fourth respondent could not complete the demutualisation process as it facing difficulties as stated supra, apart from the title dispute of the property relating to ULC which is sub-judice before this Court. It is pertinent hereto mention that in fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the governing board." 41. At this juncture, it would be relevant to note sub-section (7) of section 4B and the said provision reads as hereunder : "(7) The order made under sub-section (6) shall be published in the Official Gazette and on the publication thereof, the order shall, notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of 1956), or any other law for the time being in force, have full effect." 42. Emphasis was laid on the words "within 12 months from the date of publication of the order under sub-section (7) of section 4B". 43. Further emphasis was laid on the relevant portion of the proviso "Provided that the Securities and Exchange Board of India may, on sufficient cause being shown to it and in the public interest, extend the said period by another twelve months". 44. The Gazette of India, Extraordinary, Part-II, section 3, sub-section (ii) published by authority Securities and Exchange Board of India, Notification, Mumbai, 13-11-2006, had been placed before this Court. 45. As already aforesaid, these regulations were made by virtue of section 31, read with sub-section (8) of section 4B, of the Securities Contracts (Regulation) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed strong reliance on guidelines 2.2.1., which read as hereunder : An unlisted company may make an Initial Public Offering (IPO) of equity shares or any other security, which may be converted into or exchanged with equity shares at a later date, only if it meets all the following conditions : (a)the company has net tangible assets of at least Rs. 3 crores in each of the preceding 3 full years (of 12 months each), of which not more than 50 per cent is held in monetary assets. Provided that if more than 50 per cent of the net tangible assets are held in monetary assets, the company has made firm commitments to deploy such excess monetary assets in its business/project; (b)The company has a track record of distributable profits in terms of section 205 of the Companies Act, 1956, for at least three (3) out of immediately preceding five (5) years : Provided further that extraordinary items shall not be considered for calculating distributable profits in terms of section 205 of the Companies Act, 1956; (c)The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full years (of 12 months each) ; (d)In case the company has changed its name within the last one year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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." 51. Reliance was placed on the decision of the Madras High Court in Coimbatore Stock Exchange Ltd.'s case (supra). 52. Certain portions of the said judgment had been pointed out to show how different stands had been taken by SEBI. 53. The contents of the letter, dated 5-9-2007, may be glanced at for better appreciation : "Dr. N. R. Siva Swamy, Chairman, The Hyderabad Stock E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d investor complaints/grievance lying with the exchange. (d)Consequent upon withdrawal of recognition of HSE, the trading members of HSE shall cease to be trading members of HSE and, therefore, liable to be deregistered as stock brokers, and, hence, their certificate of registration granted by SEBI shall stand automatically cancelled. However, the said brokers/trading members of HSE shall be liable to pay SEBI registration fees, if any, due as per Schedule III of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. (e)Pursuant to the withdrawal of recognition of HSE, the exchange is directed to refrain from using the expression "stock exchange/exchange" or any variant in its name or in its subsidiary's name. (f)HSE is restrained from transferring or alienating any movable or immovable property of the exchange including bank accounts in any manner till further directions by SEBI in this regard. However, HSE is allowed to operate the bank accounts for a limited purpose of day-to-day administration like payment of salary to its staff, telephone, electricity bills, payment of taxes and property maintenance charges subject to the overall control of SEBI and the following condi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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