ORDER
P.S. Narayana, J.
1. This writ petition is filed for a writ of mandamus questioning/challenging the proceedings in MRD/DSA/101507/2007, dated 16.8.2007 issued by the Securities and Exchange Board of India (SEBI) i.e., the 2nd and 3rd respondents, as arbitrary, illegal and violative of Articles 14, 19(1)(g) and 21 of the Constitution of India, apart from contrary to the provisions of the Securities Contracts (Regulation) Act, 1956 and the Hyderabad Stock Exchange Limited (Corporatisation and Demutualisation) Scheme, 2005 and Securities and Contracts (Regulation) (Manner of increasing and maintaining public share holding in recognized stock exchange).
2. 4th respondent-Hyderabad Stock Exchange Limited was impleaded as per order dated 7.9.2007 made in W.P.M.P. No. 23994 of 2007.
3. Counter-affidavit had been filed by respondents 2 and 3 and reply affidavit also had been filed by the writ petitioners. This Court issued notice before admission on 29.8.2007 and further issued Rule nisi on 11.10.2007.
4.Contentions of Sri P. Kesava Rao:
Sri Kesava Rao, learned Counsel representing the writ petitioners had taken this Court through the affidavit filed in support of the writ petition and the counter-affidavit and also pointed out to the relevant portions of the regulations governing the field and the material papers, which had been placed before this Court. The learned Counsel also had taken this Court through Section 4B of the Securities Contracts (Regulation) Act, 1956 (hereinafter in short referred to as ‘the Act’ for the sake of convenience) and in particular, would point out to Section 4B(8) of the Act. The learned Counsel also pointed out to the relevant dates and would maintain that if Sub-sections (8) and (7) of Section 4(B) of the Act are read carefully along with the regulations governing the fields, without permitting the time specified by the Act, with effect from the date of regulations being notified, any action taken cannot be sustained. The learned Counsel in elaboration had taken this Court through the Security and Contracts (Regulation) (Manner of increasing and maintaining public share holding in recognized stock exchange) Regulations, 2006 in general and Regulation 4 in particular and would maintain that these regulations have statutory force since these regulations were made by virtue of Section 31 of the Act read with Sub-section (8) of Section 4B of the Act referred to supra. The learned Counsel would also explain how serious prejudice would be caused to the writ petitioners and how the writ petitioners are having locus standi to question the same. The learned Counsel also demonstrated how the period of 12 months and subsequent grace period of 12 months to be calculated or to be reckoned with and explained the relevant expressions employed in the Act and also the regulations as well. The learned Counsel also placed reliance on SEBI (Disclosure & Investor Protection) Guidelines, 2000 (hereinafter referred to as guidelines for the purpose of convenience). The learned Counsel also had drawn the attention of this Court to a decision of the Madras High Court dated 25.8.2006 made in Coimbatore Stock Exchange Limited rep., by its Director v. Securities & Exchange Board of India. The learned Counsel also while elaborating several facts had also drawn the attention of this Court to the contents of the reply-affidavit.
5. Contentions of the Learned Advocate General:
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 Section 4A and 4B of the Act as well. The learned Advocate General had drawn the attention of this Court to Sub-sections (6), (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, the stand taken by the writ petitioners that some more time should have been given cannot be an acceptable contention and the regulations at any rate cannot provide for such extension. The learned Advocate General also had pointed out that the learned Counsel for the petitioners had relied upon only 2-2-1 of the guidelines, but 2-2-2 also may have to be looked into since alternatives had been made under the guidelines 2-2-2. The learned Advocate General also pointed out to the counter-affidavit in general and paragraph No. 20 in particular. The learned Advocate General also pointed out to certain portions of the letters and would maintain that a new plea is being taken. Further, submissions at length were made by the learned Advocate General pointing out to the relevant portions of the correspondence, provisions of the Act and also the relevant regulations as filed, apart from the guidelines specified above.
6. The petitioners are the members of the Hyderabad Stock Exchange Limited (hereinafter referred to in short as ‘HSEL’), which was originally incorporated on 18th day of October, 1943 under the Hyderabad Companies Act during the Nizam Government, Hyderabad Deccan. The HSEL was established with the main objective of creating, protecting and developing a healthy capital market in the State of Hyderabad and to effectively serve the interests of general public and the investors under the provisions of the Securities and Contracts (Regulation) Act, 1956.
7. The HSEL was accorded recognition by the Government of India on 29th September, 1958 and granted permanent recognition in the year 1983. The HSEL is also regulated and controlled by the Securities and Exchange Board of India (hereinafter referred to in short as ‘SEBI’), which is a statutory body established under the Securities and Exchange Board of India Act, 1992. Further, to serve investors and develop the capital market, the HSEL established a trading software called Hyderabad Stock Exchange Online Securities Trading System (HOST). The HSEL currently has over 292 broker members, which includes the petitioners herein, about 774 companies including some of the leading corporate of the country are listed on HSEL as on 23.4.2007. At present, the authorized share capital of the exchange is Rs. 1,00,00,000/- equity shares of Rs. 1 each and the issued capital of the exchange is 29,20,000/- consisting of 29,20,000/- equity shares of Rs. 1 each. All 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% 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 Limited (Corporatisation and Demutualisation) Scheme, 2005 (herein after 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 (herein after 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 is also further stated that SEBI vide notification dated 29.8.2005 has approved and notified the HSEL Scheme of Corporatisation and Demutualisation. Accordingly, the HSEL was got converted itself from a company Limited by guarantee to company Ltd by shares on 23.11.2005 by following the procedure for the registration of the company under the provisions of the Companies Act, 1956 vide registration No. 629 of 2005 (company Ltd., by guarantee vide No. 629 (3/1953). It is pertinent here to mention that the SEBI notified the scheme of Corporatisation and demutualisation of all stock exchanges to improve governance in stock exchanges in the country. The essence of the Corporatisation and Demutualisation was to segregate trading, ownership and management of the exchanges thereby ensuring independence of stock exchanges from potential conflicts of interests between the brokers and investment communities.
10. One of the key measure of the demutualisation exercise is to ensure induction of non-trading share holders to the extent of 51% of aggregate equity capital of the exchange post-demutualisation. In terms of Clause 9(ii) of the scheme, 2005 the company is to ensure that at least 51% of its equity shares are held by public other than share holders having trading rights in the manner and within the period prescribed in Sub-section 8 of Section 4B. The HSEL is required to comply with the condition with respect to shareholding as above in the manner specified in the regulations made by SEBI within a period of 12 months of the date of publication of the order. The initial period of 12 months came to an end on 29.8.2006 since the scheme, 2005 was notified and approved on 29.8.2005 by the SEBI.
11. In those circumstances in exercise of the powers conferred on SEBI, it has extended the period for a further period of 12 months ending with 28.8.2007. Further, it is averred that for implementation of the Scheme, 2005 the SEBI notified the Securities Contracts (Regulation) (manner of increasing and maintaining public share holding in recognized stock exchange) Regulations, 2006 (herein after referred to in short as Regulations 2006) on 13.11.2006 in terms of which the company has been permitted to achieve the stipulated shareholding pattern either (1) by fresh issue of equity shares (on private placements basis or through a prospectus) or (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% 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 with in 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 as a court litigation in respect of its property measuring 17052 sq. yards at Somajiguda under the ULC Act, the exploitation of the members by the strategic investors in asking the shares at a very low price and etc., apart from other aspects.
14. It is pertinent here to mention that all the efforts made by the shareholders for complementing the Scheme, 2005 in constituting a demutualisation committee and in spite of 51 meetings held by the Committee, no fruitful results have been achieved. In those circumstances, the HSEL has addressed letters in Ref: HSE: ADM: 07: 147, dated 12.8.2007 and REF: HSE:ADM:07: 161 dated 22.8.2007 to the executive director of the 2nd respondent intimating the status of demutualisation and requesting the 2nd respondent to take appropriate steps as far as the HSEL is concerned. Not only the HSEL, some of the broker members also ventilated their grievance in person before the SEBI.
15. Though the SEBI promised to look into the matter, no action has been taken till date. Further, the HSEL also submitted a letter in REF: HES: ADM:07:149 dated 13.8.2007 to the Hon’ble Finance Minister, Government of India stating the difficulties that are being faced by it and requested to give relaxations and exemptions and by extending the time period upto 31.12.2008 for compliance. While matters stood thus, the 2nd respondent through its Chief General Manager, Market Regulation Department i.e., the 3rd respondent herein issued proceedings in MRD/DSA/101507/2007, dated 16.8.2007 to the Chairman of HSEL that if HSEL is unable to demutualise by the specified date then as per Section 5(2) of SCRA, 1956 the recognition granted under Sub-section 4 shall stand withdrawn.
16. The action of respondents Nos. 2 and 3 in issuing the impugned proceedings dated 16.8.2007 is arbitrary, illegal and contrary to the provisions of SCRA, 1956 since the time stipulated under Sub-section 8 of Section 4B of SCRA, 1956 is not given to the HSEL as the Regulations, 2006 are issued only in the month of November, 2006. Further, if the HSEL is de-recognized or the recognition granted is withdrawn, the post de-recognition procedure is also not contemplated and indicated anywhere. If the recognition of HSEL is withdrawn, all the members of HSEL including petitioners herein will be put to great financial loss and hardship. In a way, all the broker members will be at the crossroads. It is stated that the Central Government i.e., the 1st 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 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, 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 Limited (HSE)
This has reference to your letter REF:HSE:ADM:07:147, dated August, 12 2007 in the captioned matter.
As you are aware, the request of FISE/stock exchanges for extension of time was taken up with the Government by SEBI. However, the same has not been acceded to. This has already been communicated to you through FISE and also during the meeting with the stock exchanges in the southern region, held on June 20, 2007 at Bangalore.
In response to specific request for extension of time made by HSE vide it’s letter dated 27/06/2007, we had vide our letter dated 04/07/2007, informed that the request for extension of time for completing demutualisation process was not acceded to. You were accordingly advised to strictly adhere to the time line specified in Section 4B of the Securities Contracts Regulation Act (SCRA) 1956 as communicated to you vide our letter dated August 01, 2006.
You may note that if HSE is unable to demutualise by the specified date then as per Section 5(2) of SCRA 1956 the recognition granted under Section 4 of SCRA-1956 to HSE shall stand withdrawn.
19. In the counter-affidavit filed by respondents 2 and 3, a specific stand had been taken that the withdrawal of recognition came into operation w.e.f., 29.8.2007 by operation of law as per Section 5(2) of the Securities Contracts (Regulation) Act, 1956 as the HSE did not complete the said process. Further, a specific stand was taken that only the HSE can be said to be an aggrieved party by the said action of the 2nd respondent and not the petitioners, who only claim to be members of the HSE. Therefore, the petitioners have no locus standi to challenge the withdrawal of recognition of HSE.
20. Further, it is averrea that the HSE is an incorporated company, whose entire share capital is admittedly held only by the broker members of HSE. With a view to prevent undesirable transactions in securities by regulating the business of dealing therein and for providing for other connected matters, the securities Contracts (Regulation) Act, 1956 (SCRA) was enacted by the Parliament. Section 4A of the SCRA provided that all recognized Stock Exchanges shall be Corporatised and Demutualised in accordance with the provisions contained in Section 4B of SCRA by an appointed date.
21. The reason for corporatisation and demutualisation is to segregate trading, ownership and management of the exchanges thereby ensuring independence of stock Exchanges from potential conflict of interest between the brokers and investment communities. This is sought to be achieved by ensuring that 51 % of the equity share holders 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 in 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 % of its equity share capital is held by the public other than shareholders having trading rights within 12 months of the publication of the scheme.
24. The HSE also submitted a scheme for corporatisation and demutualisation to SEBI as per Section 4B(1) of SCRA and the said scheme was approved and notified as the Hyderabad Stock Exchange Limited (Corporatisation and Demutualisation) Scheme, 2005 vide Gazette Notification S.0.1206(E) dated 29.8.2005.
Section 4B(8) of the SCRA stipulates as follows:
Every recognized stock exchange, in respect of which the scheme for corporatisation or demutualisation has been approved under Sub-section (2) shall, 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 Securities and Exchange Board of India, ensure that at least fifty-one-percent of its equity share capital is held, within twelve months from the date of publication of the order under Sub-section (7), by the public other than share holders having trading rights:
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.
25. Section 5(2) of the SCRA states:
Where the recognized stock exchange has not been corporatised or demutualised or it fails to submit the scheme referred to in Sub-section (1) of Section 4B within the specified time, therefore, 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.
26. It is further averred that within 12 months from 29.8.2005 (the date of publication of Notification of the above scheme in the official gazette) the HSEL had the option of issuing fresh equity shares to the public and ensuring that at least 51 % of its equity share capital is held by public other than the share holders having trading rights and to complete the demutualisation process as per Section 4B of SCRA. This period has expired on 28.8.2006. Subsequently, by invoking the proviso to Section 4B(8) SEBI extended time to complete 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 w.e.f. 29.8.2007. SEBI notified the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchange) 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 exchangespost demutualisation.
27. 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 May 8, 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 Exchange (FISE)/various regional stock exchanges at various times on the subject. Further, the Government of India decided to have a policy regarding foreign investments in infrastructure companies in the securities market, namely stock exchanges, depositories and clearing corporations. Accordingly, SEBI and RBI simultaneously issued a circular dated 22.12.2006 on the “Foreign Investments in Infrastructure Companies in the Securities Market”.
28. Merely because there was a delay in notifying the MIMPS Regulations, the petitioners cannot contend that more time should be granted by SEBI for completing the demutualisation process. This is because HSE always could have diluted its share capital by issue of fresh equity shares and ensuring that 51% of its equity share capital is held by public other than share holders having trading rights by following procedure prescribed under the Companies Act, 1956. However, HSE failed to do so even though it had initially a period of 12 months from 29.8.2005 till 28.8.2006 and another period of 12 months from 28.8.2006 to 28.8.2007. Moreover, in the period after 13.11.2006 also till 28.8.2007, HSE could not complete the demutualisation process by following the method prescribed under MIMPS Regulations.
29. It is further averred that SEBI had various meetings with the Federation of Indian stock exchanges (FISE) as well as regional stock exchanges wherein they expressed their apprehensions in complying with the demutualisation within the prescribed time limits. Accordingly, FISE/regional stock exchanges had requested SEBI for extension of time for demutualisation of stock exchanges. After due consideration of their request in consultation with the Central Government, SEBI vide letter dated May 10, 2007 informed FISE that the demutualisation process has to be completed within the time frame specified in Section 4B(8) of SCRA and advised FISE to bring the same to the notice of all concerned stock exchanges. The same was also reiterated to all the stock exchanges during the region-wise meeting held with them (including HSE during the meeting with stock exchanges in the southern region held at Bangalore on June, 20, 2007) wherein it was informed that there is no scope for extension of time for completing the demutualisation process.
30. In spite of the same, HSE vide letters dated June 27, 2007, August 12, 2007 and August 13, 2007 requested for extension of time. SEBI vide letters dated July 4, 2007, August 16, 2007, August 24, 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 August 12, 2007 stated that the exchanges 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 sub-judice. 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 letter dated August 13, 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 litigations under ULC. As such the exchange cannot complete the demutualisation process, as the shareholders are not able to realize the true value of the shares. As HSE had failed to demutualise within the stipulated time i.e., on or before August 28, 2007, its recognition stood automatically withdrawn in terms of Section 5(2) of the SCRA.
31.It may be pertinent to note that the following 10 stock exchanges including smaller stock exchanges were able to complete the demutualisation process within the stipulated time:
i. Bombay Stock Exchange Ltd.,
ii. The Calcutta Stock Exchange Association Ltd.,
iii. The Utter Pradesh Stock Exchange Association Ltd.,
iv. Bangalore Stock Exchange Ltd.,
v. Delhi Stock Exchange Ltd.,
vi. Madras Stock Exchange Ltd.,
vii. Pune Stock Exchange Ltd.,
viii. Cochin Stock Exchange Ltd.,
ix. Gauhati Stock Exchange Ltd.,
x. Madhya Pradesh Stock Exchange Ltd.
32. It is further stated that so far HSE is the only exchange, which has failed to demutualize as per the statutory mandate. It is further averred that the 3rd respondent had also sent a letter reference MRD/DSA/103154/2007, dated 5.9.2007 to the HSE with regard to what is to be done post de-recognition of HSE. In the said letter, it is specifically stated as follows:
1. With regard to the status of the listed companies it is informed that the companies, which are exclusively listed at HSE may consider seeking listing at other stock exchanges or provide for exit option to the shareholders as per SEBI de-listing guidelines/regulations.
2. With regard to the D.P. operations of HSE, it is informed that in the interest of investors/public, the D.P. operations are allowed to continue for a period of three months to give sufficient time to the investors to transfer/shift the B.O. accounts to another D.P. as per their choice.
3. With regard to status of the share holding of HSE in its subsidiary, the exchange is advised to maintain the status quo till further directions from SEBI.
4. With regard to the operations of HSE securities Ltd., it is informed that the sub-brokers of HSE Securities Ltd., are allowed to continue to trade on Bombay Stock Exchange Ltd., (BSE) and National Stock Exchange of India Ltd., (NSE).
5. With regard to appointment of an Administrator to look after the transitional matters from August 29, 2007, it is informed that the present directors on the Governing Board 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 un-utilized 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 de-registered 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 conditions till further directions from SEBI.
(i) There should be no withdrawal of fixed deposits,
(ii) No capital expenditure without the approval of SEBI.
(iii) Fortnightly report to be submitted to SEBI indicating the details of money withdrawn from bank accounts and the details of the expenditure incurred thereof.
33. Thus, there is no illegality or arbitrariness or violation of Constitution or of SCRA committed by R2 and R3 in issuing the impugned letter dated 16.8.2007 informing HSE that if it did not demutualize by the specified date, then as per Section 5(2) of the SCRA, the recognition granted under Section 4 of SCRA stands withdrawn. Further a specific stand had been taken that SEBI has no power under SCRA to grant further extension for completion of the corporatisation and demutualisation process by HSE. It can only grant a period of 12 months from the date of publication of the scheme and extend it by one further period of 12 months i.e., only 24 months. In the absence of power conferred under the Statute on SEBI to grant further extension, its action cannot be said to be contrary to law. It is not true to say that post de-recognition procedure was not contemplated and indicated any where by SEBI.
34. As stated above in the letter, dated 5.9.2007 the post de-recognition procedure has been indicated clearly. Further specific stand had been taken that the recognition stands withdrawn by operation of law and in such cases statutory time limit itself is a notice. No prejudice is caused because the members of HSE including the petitioners are also registered as sub-brokers with HSE Securities Limited, the 100% subsidiary company holding the terminals of NSE and BSE serving large number of investors. There is no restriction for these sub-brokers of HSE Securities Limited 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 respondents 2 and 3 in their counter-affidavit.
35. 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 2nd respondent, who are called as public representative directors, submitted their resignations on 28.8.2007 itself to the 2nd respondent. The stand taken in the counter-affidavit relating to the operation of law i.e., Section 5(2) of SCRA had been explained in the context of 4B(8) in elaboration in paragraph No. 5ofthe reply-affidavit. Further, it is stated that the 4th respondent could not complete the demutualisation process as it facing difficulties as stated supra, apart from the title dispute of the property relating to U.L.C. which is subjudice before this Court. It is pertinent hereto mention that in fact, the 4,h respondent company have already paid Rs. 2.36 crores towards regularization fee for the land and building in terms of G.O.Ms. No. 455, dated 29.7.2002 to the Government of A.P. The same is also pending.
36. It is also relevant hereto mention that HSE members have offered more than 71% of the equity shares at Rs. 450 per share. However, as there is a dispute with regard to the property and as the period was also short, the buyers could not come forward and even those, who come forward, asked at very low price, which was not acceptable. A specific stand taken in the affidavit itself would indicate that the members are directly affected parties since there be a lot of financial impact on them. Further, it had been asserted that the 2nd respondent has got power for extension of time if it is satisfied that any recognition stock exchange was prevented by sufficient cause from being corporatised and demutualised on or after the appointed date.
37. The impugned order already had been referred to above.
38. Section 4B of the Act deals with the procedure for corporatisation and demutualisation. Sub-clause (8) of the said provision specifies that,
Every recognized stock exchange, in respect of which the scheme for corporatisation or demutualisation has been approved under Sub-section (2), shall, 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 Securities and Exchange Board of India, ensure that at least fifty one percent of its equity share capital is held, within twelve months from the date of publication of the order under Sub-section (7), by the public other than shareholders having trading rights.
39. Sub-section (6) reads as hereunder:
The securities and exchange Board of India may, while approving the scheme under Sub-section (2), by an order in writing, restrict-
(a) the voting rights of the shareholders who are also stock brokers of the recognized stock exchange;
(b) the right of shareholders or a stock broker of the recognized stock exchange to appoint the representatives on the governing board of the stock exchange;
(c) the maximum number of representatives of the stock brokers of the recognized stock exchange to be appointed on the governing board of the recognized stock exchange, which shall not exceed one fourth of the total strength of the governing board.
40. At this juncture, it would be relevant to note Sub-section 7 of Section 4B and the said provision reads as hereunder:
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.
41.Emphasis was laid on the words “within 12 months from the date of publication of the order under Sub-section (7) of 4B”.
42. Further emphasis was laid on the relevant portion of the proviso “Provided that the Securities and Exchange Bpard of India may, on sufficient cause being shown to it and in the public interest, extend the said period by another twelve months.”
43. The Gazette of India Extraordinary Part-II, Section 3 Sub-section (ii) Published by Authority Securities & Exchange Board of India, Notification, Mumbai, the 13th November, 2006 had been placed before this Court.
44. 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) Act, 1956. Chapter II deals with Manner of Increasing Public Shareholding, and relevant Regulation reads as hereunder:
4. Subject to the provisions of Sub-section (8) of Section 4B of the Act and the scheme, the recognized stock exchange shall ensure that at least fifty one percent of its equity share capital is held by the public, either by fresh issue of equity shares to the public through issue of prospectus or in the following manner:
(a) offer for sale, by issue of prospectus, of shares held by shareholders having trading rights therein;
(b) placement of shares held by shareholders having trading rights to such persons or institutions as may be short-listed by the recognized stock exchange with the approval of the Board.
(c) Issue of equity shares on private placement basis by the recognized stock exchange to any person or group of persons not being shareholders having trading rights or their associates subject to the approval of the Board; or
(d) Any combination of the above.
45. Strong reliance was placed on Section 4B(8) of the Act read with Regulation No. 4 referred to supra. The relevant portions of the letters also had been pointed out to substantiate respective stands taken by the parties. The letter of Chief General Manager Market Regulation Department, dated 5.9.2007, Letter of Manager Market Regulation department, dated 24.8.2007, Letter of Chief general manager, Market Regulation Department, dated 16.8.2007, Letter of Executive Director, Hyderabad, Stock Exchange, dated 13.8.2007, Letter of Chairman Hyderabad Stock Exchange, dated 12.8.2007, Letter of Manager Market Regulation Department, dated 4.7.2007, Letter of Executive Director, Hyderabad, Stock Exchange, dated 27.6.2007 and Letter of Chief General Manager, Market Regulation Department, dated 10.5.2007 had been placed before this Court and the contents thereof had been pointed out. Apart from these, letter dated 17.8.2007, press release statement dated 17.11.2006, proceedings dated 29.8.2005, and 13.11.2006 and letters dated 12.8.2007, 13.8.2007 and 22.8.2007 also had been relied upon.
46. Certain submissions were made relating to the requests made for extension of time. Chapter II of the guidelines deals with eligibility norms for companies issuing securities.
2.2 of the guidelines deals with Initial Public Offerings by unlisted companies:
47. The Counsel for the petitioner placed 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 crore in each of the preceding 3 full years (of 12 months each), of which not more than 50% is held in monetary assets. Provided that if more than 50% 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, at least 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name; and
(e) The aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e., offer through offer document + firm allotment + promoters’ contribution through the offer document), does not exceed five (5) times its pre-issue net worth as per the audited balance sheet of the last financial year.
48. The learned Advocate General placed strong reliance on the guidelines 2.2.2, which read as hereunder:
An unlisted company not complying with any of the conditions specified in Clause 2.2.1 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 both the conditions (a) and (b) given below:
(a)(i) The issue is made through the book building process, with at least 50%of (net offer to public) being allotted to the qualified institutional buyers (QIBs), failing which the full subscription monies shall be refunded.
(or)
(a)(ii) The ‘project’ has at least 15% participation by Financial Institutions/ Scheduled Commercial Banks, of which at least 10% comes from the appraiser(s). In addition to this at least 10% of the issue size shall be allotted to QIBs, failing which the full subscription monies shall be refunded.
And
(bi) the minimum post-issue face value capital of the company shall be Rs. 10 crores.
OR
(b)(ii) There shall be a compulsory market making for atleast 2 years from the date of listing of the shares, subject to the following:
(a) Market makers undertake to offer buyandsellquotesfora minimum depth of 300 shares;
(b) Market makers undertake to ensure that the bid ask spread (difference between quotations for sale and purchase) fortheirquotes shall not at any time exceed 10%;
(c) The inventory of the market makers on each of such stock exchanges, as on the date of allotment of securities, shall be at least 5% of the proposed issue of the company).
49. Section 5 of the Act deals with ‘withdrawal of recognition’. Sub-section (2) of Section 5 reads as hereunder:
Where the recognized stock exchange has not been corporatised or demutualised or it fails to submit the scheme referred to in Sub-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.
50. Reliance was placed on the decision of the Madras High Court dated 25.8.2006 in Writ Petition No. 11557 of 2006 in Coimbatore Stock Exchange Limited, represented by its Director Ashok Lunia v. Securities and Exchange Board of India.
Certain portions of the said judgment had been pointed out to show how different stands had been taken by SEBI.
51. 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 exchange Limited, 6-3-654, Adjacent to Erramanjil Bus Stop,
Somajiguda,
Hyderabad-500082
Dear Sir,
Sub: Derecognition of the Hyderabad Stock Exchange Limited (HSE) and consequential actions -Regarding.
Please refer to the letter dated August 22, 2007 received by us on August 27, 2007 seeking clarification on the functioning of the Hyderabad Stock Exchange Limited (HSE) and its subsidiary i.e., HSE Securities Ltd., pursuant to de-recognition of HSE in accordance with Section 5(2) of the Securities Contracts (Regulation) Act, 1956.
In this regard, you are advised as under:
(1) With regard to the status of the listed companies it is informed that the companies, which are exclusively listed at HSE may consider seeking listing at other stock exchanges or provide for exit option to the shareholders as per SEBI Delisting Guidelines/Regulations.
(2) With regard to the DP Operations of HSE it is informed that in the interest of investors/public, the DP operations are allowed to continue for a period of three months to give sufficient time to the investors to transfer/shift the B.O. accounts to another DP as per their choice.
(3) With regard to status of the shareholding of HSE in its subsidiary, the exchange is advised to maintain the status quo till further directions from SEBI.
(4) With regard to the operations of HSE Securities Ltd., it is informed that the sub-brokers of HSE securities Ltd., are allowed to continue to trade on Bombay Stock Exchange Ltd., (BSE) and National Stock Exchange of India Ltd., (NSE).
(5) With regard to appointment of an Administrator to look after the transitional matters from August 29, 2007, it is informed that the present directors on the Governing Board 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 un-utilized 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 furtherdirections.
(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/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 conditions till further directions from SEBI.
i. There should be no withdrawal of fixed deposits.
ii. No capital expenditure without the approval of SEBI.
iii. Fortnightly reportto be submitted to SEBI indicating the details of money withdrawn from bank accounts and the details of the expenditure incurred thereof.
52. The principle question which may have to be decided is 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 and whether such power is conferred by the statute on the SEBI and even assuming that such power to be inferred, whether the impugned action is to be interfered with in the light of Section 5(2) of the Act as referred to supra.
53. Certain submissions were made that Section 4B(8) of the Act and regulation No. 4 may harmoniously be read along with Section 5(2) of the Act and hence, in the facts and circumstances stated supra, instead of extending time, though power exists, declining to extend the same and taking impugned action cannot be sustained and on the contrary, the learned Advocate-General had taken a specific stand that Section 5(2) of the Act being imperative or mandatory, automatically by operation of law, the withdrawal or de-recognition would become operative. The alternatives available specified under guidelines 2-2-2 also cannot be lost sight of in this regard.
54. Certain submissions relating to locus standi also had been made by the learned Counsel representing the parties.
On appreciation of overall facts and circumstances, this Court is of the considered opinion 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.
55. With regard to the specific stand taken I 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.
56. It is needless to say that in the result, the writ petition is bound to fail and accordingly, the same shall stand dismissed. No costs.
