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TMI Blog2024 (11) TMI 738X X X X Extracts X X X X X X X X Extracts X X X X ..... o 8 noticees, including the petitioners, gives a glimpse into the allegations against the noticees. Since the adjudication of the SCN is in progress, it would be premature to comment one way or the other on the various allegations contained therein. We cannot help observing that the allegations in the SCN, if proven, are indeed grave. Mr Daruwalla was justified in contending that the main objective of the petitioners, and perhaps the other noticees, was to stall, as long as possible, the adjudication on the SCN dated 29 August 2023. Regulation 8 of the Settlement Regulations provides that filing an application for settlement of any specified proceedings shall not affect the continuance of the proceedings save that the passing of the final order shall be kept in abeyance till the application is disposed of . Thus, as long as the settlement applications remained pending, no final order could be made on the SCN dated 29 August 2023. The record shows that the petitioners made all kinds of applications and even refused to cooperate with the personal hearing offers. Requests in the applications, at times, contradicted each other. From the record, we cannot dismiss Mr Daruwalla s contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a law on the grounds of manifest arbitrariness, must determine if the statute is capricious, irrational, and without an adequate determining principle or excessive and disproportionate. Again, nothing in the impugned provisions suggests they lack any determining principle or logical consistency. The impugned provisions are not capricious, irrational and/or excessively disproportionate. In Franklin Templeton Trustee Services (P.) Ltd. V/s. Amruta Garg And Ors. [ 2021 (7) TMI 751 - SUPREME COURT ] explained that the principle of manifest arbitrariness requires something to be done in exercise in the form of delegated legislation, which is capricious, irrational or without adequate determining principle. Delegated legislations that are forbiddingly excessive or disproportionate can also be manifestly arbitrary. These observations were made in the context of a challenge to the constitutional validity of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. Hon ble Supreme Court, while upholding the constitutional validity of the SEBI, 1996 Regulations, held that since the Regulations are like economic regulations while exercising the power of judicial review, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The settlement regulations need to be pragmatically construed, having regard to their objective and balancing the interests of the defaulters and the public interest. The scheme of the settlement regulations contemplates exchange proposals and counterproposals to see if some settlement could be reached without compromising the public interest. Therefore, there is nothing wrong if the IC suggests terms, adding that it would not favourably recommend a settlement should such terms not be agreed to. Petitioners have even declined to furnish proper information about the disclosures to the waivers or undertakings by arguing that the same would prejudice their case in the SCN. The proceedings in the SCN are also stalled for one reason or another. At least, prima facie, even the settlement application appears to have been made only to benefit from the provisions of Regulation 8, which requires that the final order in the SCN be kept in abeyance until the settlement application is disposed of. Petitioners perhaps expected to benefit from the tremendous pressure on the Court s docket and the consequent inability to decide issues of constitutionality or ultra vires on a priority basis. Oft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noticees acting in concert with each other through common directors, employees, signatories, bank accounts, etc. There are allegations about the noticees acting in concert while acquiring shares of Abans Enterprises Ltd. (AEL) without making the required disclosures under the SAST Regulations. There are allegations about the noticees creating false and misleading appearance of trade and contributing to price rise by manipulative trading practices leading to inflated contribution of net market Long Term Plan (LTP) during the prescribed patches. There are allegations about manipulation of volumes of shares by deliberately placing high buy orders and subsequently deleting the same thereby creating misleading appearance of trading. 7. The petitioners sought for documents, insisted upon cross-examination and raised several preliminary objections. The petitioners filed applications insisting upon the adjudication of the preliminary objections before the proceedings in the SCN could advance any further. Offers of repeated personal hearings were mostly turned down by raising all kinds of objections. Even Writ Petition No. 3147/2024 was filed in this Court for direction to place the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Regulations' clauses and the impugned rejection letter dated 31 July 2024. Significantly, the interim relief in this petition is to direct the SEBI to maintain status quo and keep the personal hearing for adjudication of the SCN in abeyance . Submissions of the Petitioners :- 13. Mr Joshi, the learned Senior Advocate for the petitioners, after taking us through the scheme of the Securities and Exchange Board of India Act, 1992 ( SEBI Act ) and Settlement Regulations, submitted that the impugned provisions were ultra vires the SEBI Act. Mr. Joshi submitted that the impugned provisions have no rationale nexus to the scope and object of what is sought to be achieved via a settlement application under the settlement regulations, as the impugned provisions permit the rejection of a settlement application by the IC imposing arbitrary and unreasonable conditions precedent(s) without the settlement application being placed for consideration before the panel of WTM. He submitted that the impugned provisions, besides being ultra vires the SEBI Act, also suffer from manifest arbitrariness. 14. Mr Joshi submitted that the power of SEBI to agree to the settlement of any proceedings is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... condition precedent(s) , have allowed the IC to act unreasonably and arbitrarily. He submitted that the impugned provisions are an instance of excessive delegation because the SEBI Act contains no provisions to guide the IC on imposing such condition precedent(s) . He submitted that the IC had unfettered discretion in choosing the condition precedent(s) . He submitted all this violated Article 14 of the Constitution of India. 18. Mr Joshi finally submitted that the conditions precedent imposed upon the petitioners by the IC were arbitrary and unreasonable. He submitted that the petitioners could not be forced to call upon other noticees in the SCN to submit their settlement proposals or to join in settlement proposals submitted by the petitioner. He submitted that the direction for disgorgement was contrary to the prescribed scope under the Settlement Regulations. Besides, he submitted that the disgorgement referred to notional profits and not actual profits. For all these reasons, Mr Joshi submitted that the condition precedent(s) imposed by the IC were ultra vires, arbitrary and unreasonable. 19. Mr Joshi did not raise any other contentions in support of this petition, including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss, it would be premature to comment one way or the other on the various allegations contained therein. However, we cannot help observing that the allegations in the SCN, if proven, are indeed grave. 26. From the pleadings in the petition itself, we believe that Mr Daruwalla was justified in contending that the main objective of the petitioners, and perhaps the other noticees, was to stall, as long as possible, the adjudication on the SCN dated 29 August 2023. Regulation 8 of the Settlement Regulations provides that filing an application for settlement of any specified proceedings shall not affect the continuance of the proceedings save that the passing of the final order shall be kept in abeyance till the application is disposed of . Thus, as long as the settlement applications remained pending, no final order could be made on the SCN dated 29 August 2023. 27. The record shows that the petitioners made all kinds of applications and even refused to cooperate with the personal hearing offers. Requests in the applications, at times, contradicted each other. From the record, we cannot dismiss Mr Daruwalla s contention about the petitioners are attempting to stall the proceedings in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fences under the SEBI Act, 1992 held that whether a dispute should be resolved or whether the wider public interest in ensuring regulatory compliance requires that proceedings should be initiated and, if initiated should be followed to their logical conclusion, is a matter which falls within the discretion of SEBI. As a matter of first principle, a person against whom action has been initiated by SEBI or a person who apprehends that action will be initiated by SEBI has no vested right to insist that the dispute be resolved in terms of a consensual settlement. SEBI has been constituted as an expert regulator to ensure the stable and orderly functioning of the securities market. Acting as a regulator of the securities market, decisions taken by SEBI impact upon the economy and financial stability. 32. The Division Bench further observed that SEBI is vested with statutory powers in the public interest, and the exercise of power must be guided by the public interest that SEBI is vested with the power to protect. The considerations spelt out in clause 11 provide some indication of the nature of the power that is exercised. Amongst the circumstances which are to be borne in mind are whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 35. The coordinate Division Bench held that there was no merit in any of the submissions urged on behalf of the petitioners. The Guidelines in so far as they mandate that proceedings should either be in contemplation or be pending before they can be resolved, are based on a valid rationale. The whole purpose of the Guidelines is to ensure that the time and effort of the regulator is devoted to cases which duly merit trial and enforcement. The Guidelines thus recognise an enabling power in SEBI to resolve certain cases which, in the view of SEBI, can be set at rest without compromising either an issue of principle or public interest. The Court, therefore, concluded that the Guidelines do not confer a vested right in any person to insist on the acceptance of a proposed settlement. 36. Though the challenge in the present petition to the impugned provisions in the Settlement Regulations appears to be of a different shade than the one involved in Shilpa Stock Broker Pvt. Ltd. (supra), the observations and the perspective explained by the Coordinate Bench in dealing with the role of SEBI, the broader issues of public interest involved in the parties breaching SEBI regulations and the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f investors in securities and to promote the development of and regulate the securities market and for matters connected therewith or incidental thereto. A Division Bench of the Gujarat High Court in Securities and Exchange Board of India V/s. Alka Synthetics Ltd. AIR 1999 Guj. 221 has explained that the SEBI Act is an Act of remedial nature and, therefore, could not be compared with the cases relating to the fiscal or taxing Statutes or other penal Statutes for collection of levy, taxes, etc. It is a matter of common knowledge that the SEBI has to regulate a speculative market, and in case of a speculative market, varied situations may arise, and all such exigencies and situations cannot be contemplated in advance and, therefore, looking to the exigencies and the requirement, it has been entrusted with the duty and function to take such measures as it thinks fit. 42. Section 15-JB of the SEBI Act is concerned with settlement of administrative and civil proceedings. It provides that notwithstanding anything contained in any other law for the time being in force, any person, against whom any proceedings have been initiated or may be initiated under section 11, section 11-B, section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by the HPAC on the settlement proposal. 46. For example, Regulation 9 provides that the settlement terms may include a settlement amount and/or non-monetary terms in accordance with the guidelines specified in Schedule-II. Regulation 9(2) provides what the non-monetary terms may include. Regulation 10 provides for the factors to be considered to arrive at the settlement terms. All these are detailed provisions, and the charge about the absence of guidelines and excessive delegation is entirely misconceived. 47. Besides, the IC, which is tasked by Regulation 13 to examine whether the proceedings may be settled and, if so, to determine the settlement terms in accordance with the Regulations, is constituted by the Board itself. The IC is to comprise an officer of the Board not below the rank of Chief General Manager and such other officers as may be specified by the Board. As was observed in the Shilpa Stock Broker case, the whole purpose of the Guidelines is to ensure that the time and effort of the regulator is devoted to cases which duly merit trial and enforcement. 48. The Settlement Regulations now also contemplate a three-tiered examination of the settlement proposal. At eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the Settlement Regulations are sufficient to ward off the challenge based on excessive delegation or the challenge that the impugned provisions are ultra vires the parent Act. The impugned regulations do not transgress the scope of delegated powers to the SEBI. The SEBI is a Board composed of the members specified in Section 4 of the SEBI Act, 1992. Having regard to the composition of such a Board and the ample guidelines provided under the SEBI Act, we are satisfied that no case of excessive delegation is made out. 53. In Vivek Narayan Sharma (Demonetisation Case-5 J.) V/s. Union of India 2023 3 SCC 1 , the Hon ble Supreme Court has explained that the Court must examine the challenge of excessive delegation on a fair, generous and liberal construction of an impugned statute. The delegation must be held valid if guidance could be found in whatever part of the Act (including the preamble). The Court explained that empowering the Executive to make subordinate legislation within a prescribed sphere has evolved out of practical necessity and pragmatic needs of a modern welfare State. 54. The court held that much latitude must be given in such matters. It has been consistently held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her expressly or by necessary implication are required to be taken into consideration by the statute or, say, the Constitution . 57. In contrast, applying the manifest arbitrariness test to plenary legislation passed by a competent legislature requires the Court to adopt a different standard because it carries greater immunity than subordinate legislation. A legislative action can also be tested for being manifestly arbitrary. However, it must be clarified that there is, and ought to be, a distinction between plenary and subordinate legislation when challenged for being manifestly arbitrary. 58. Applying the above test in the context of Settlement Regulations, which is subordinate legislation, there is nothing to suggest any failure to account for vital facts required by the SEBI Act or the Constitution to be considered. The impugned Regulations conform with the parent Acts. There is no serious charge for the regulations defying constitutional values or lacking logical consistency. Therefore, the charge of manifest arbitrariness cannot stick. 59. The Constitution Bench has also held that a provision can be struck down as manifestly arbitrary if its determining principle does not al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the legislature must be given free play in the joints regarding economic legislation. Apart from the presumption of constitutionality in such cases, the courts must give the legislative judgment in economic choices a certain degree of deference. Regarding economic legislation, even under-inclusion would not result in the death knell of such laws on the anvil of Article 14. In applying Article 14, mathematical precision, nicety, or perfect equanimity are not required. 64. In Swiss Ribbons Pvt. Ltd. V/s. Union Of India 2019 4 SCC 17, the Hon ble Supreme Court held that to stay experimentation in things social and economic is a grave responsibility. Denial of the right to experiment may be fraught with serious consequences to the Nation. The Courts do not substitute their social and economic beliefs for the judgment of legislative bodies elected to pass laws. Legislative bodies have a broad scope to experiment with economic problems. The court should feel more inclined to give judicial deference to legislative judgment in economic regulation than in other areas involving fundamental human rights. 65. The Court reiterated that every legislation, particularly in economic matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioners' right to insist that their settlement proposal be accepted on the terms they deem most appropriate. 70. The scope of judicial review in examining counterproposals by experts is minimal. It is not for the Courts to second-guess or suggest counterproposals. There is discretion vested in the authorities. This does not appear to be a case where such discretion has been exercised unreasonably, capriciously, or irrationally. Fairness is not a one-way street; litigation is not a chess game. The settlement regulations need to be pragmatically construed, having regard to their objective and balancing the interests of the defaulters and the public interest. The scheme of the settlement regulations contemplates exchange proposals and counterproposals to see if some settlement could be reached without compromising the public interest. Therefore, there is nothing wrong if the IC suggests terms, adding that it would not favourably recommend a settlement should such terms not be agreed to. 71. As noted at the outset, the petitioners have even declined to furnish proper information about the disclosures to the waivers or undertakings by arguing that the same would prejudice their case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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