Madrasdated High Court · 2006

c.the powers to be exercised under Section 12A of theSCRA have to be exercised only after satisfaction thatdirections are to be issued in the interest ofinvestors or the orderly development of securitiesmarket;d.the respondent cannot force CSX and its members toobtain recognition and carry on business as a StockExchange and the right to commence and carry on thefunction of a securities exchange is one that isavailable to such corporate entities as may desire todo so and the grant of recognition and renewal isstrictly governed by the SCRA and SEBI Act;e.the respondent can, under the powers granted to it byvarious Acts, only regulate the grant of recognitionand functioning of security exchange and there is nopower under any statute that would permit therespondent to interfere with a step towards de-recognition; f.inasmuch as the legal resolutions had been adopted bythe CSX, it ceases to operate as a Stock Exchange andthe respondent would have no jurisdiction on CSX exceptto issue consequent directions upon the intimationseeking for de-recognition;g.the impugned order is to be set aside inasmuch as it isa colourable exercise of power where the respondent haswaxed eloquent on several aspects but has howeverfailed to address the principal grounds on which suchpower could be exercised and the respondent has alsofailed to consider that CSX has not been carrying ontrading activities from 1999 as a RSE since it hasfound it impossible to carry on any activities and thatthe investors have sufficient avenues through thetrading terminals of NSE and BSE available throughoutthe country;h.the impugned action of the respondent is clearly anabuse of power inasmuch as by issuance of the impugneddirections, the respondent is seeking to exercisepowers that are not available to it. The impugnedorder can be passed only under Section 11 of the SEBIAct since it is effectively supersession of thegoverning body of a recognised Stock Exchange and isnot in the nature of directions, as contemplated underSection 12A of the SCRA inasmuch as not granting ahearing; https://hcservices.ecourts.gov.in/hcservices/ i.there is no ground for urgency to pass an ex-parteorder and if even if such power is available, nogrounds have been set out and even a show cause noticeprocedure as mandated has been dispensed with;j.the impugned order is liable to be set aside since evenif Section 12A of SCRA is available to the respondentin the facts and circumstances of the case, it couldonly be to issue directions to a Stock Exchange or theperson referred to in Clause 12A(B) and Section 12Adoes not, in any manner, grant rights to the respondentfor issuing the impugned directions andk.none of the grounds required to be complied with forexercise of power under Section 12A have arisen in thecase on hand and hence, the impugned order is whollywithout jurisdiction and as per Section 12A of SCRA,directions could be issued only where tradingactivities are carried on and in the absence of anytrading activities by CSX, the impugned action couldnot at all have been initiated.6.On the other hand, the respondent has filed its counterstating that the writ petition is not maintainable and has to bedismissed in limine since the Director of the CSX has failed toenclose any valid resolution authorising him to file the writpetition and authority from the second petitioner authorising himto file the writ petition on his behalf.7.The case of the respondent, in nutshell, is as detailedbelow:a.It is a statutory authority created under the SEBI Actfor the purpose of protection of interest of investors insecurities and for the development and to regulate thesecurities market and for matters connected therewith andincidental thereto. It also regulates the StockExchanges through the provisions of the SCRA and theRules, SEBI Act, Government of India directives andcirculars/directives issued by SEBI from time to time.The object of establishment of SEBI was to promoteorderly and healthy growth of the securities market andto protect the investors. The respondent also obtainsperiodical reports from the Stock Exchanges and carriesout regular inspections.b.A Stock Exchange, under the SCRA, is defined in Section 2(f) as: https://hcservices.ecourts.gov.in/hcservices/ iany body of individuals, whether incorporated ornot, constituted before corporatisation anddemutualisation under Section 4A and 4B oriia body corporate incorporated under the CompaniesAct, 1956 whether under a scheme ofcorporatisation and demutualisation or otherwisefor the purpose of assisting, regulating orcontrolling the business of buying, selling ordealing in securities.c.Further, under Section 3 of the SCRA, any Stock Exchangedesirous of being recognised has to make an applicationin the prescribed manner to the Central Government andSection 4 of the SCRA deals with grant of recognition toStock Exchanges. This power had been delegated to therespondent in exercise of the powers conferred underSection 29A of the SCRA vide notification dated13.09.1994 and almost all the powers of the CentralGovernment have been delegated to SEBI from time to timeas SEBI was considered to be an expert body to deal withand regulate the securities market as a whole, includingthe Stock Exchanges.d.CSX is a Company incorporated under the provisions of theCompanies Act, 1956 as a joint stock company limited byguarantee and as per the original Memorandum ofAssociation, the main object is as follows:“To apply for and obtain from the Governmentof India recognition of the Exchange as arecognised Stock Exchange within the meaning ofthe SCRA and to facilitate, assist, regulate andcontrol the trade and businesses in all kinds ofsecurities with a view to safeguard and furtherthe interest of brokers, jobbers, dealers and theinvesting public.”e.A Stock Exchange performs economic function and is thebarometer of the national economy and plays a vital rolein the nation's economic development. The Stock Exchangeis also a place where savings of the public are normallychanneled towards productive purposes. Stock Exchangegrants listing approval to the various companies whichintend to get their shares listed. Stock Exchangemonitors the Corporate Governance Norms of the variouslisted companies through the listing agreement andthrough the Arbitration Mechanism, Stock Exchangeresolves investor grievances. Any recognised StockExchange may, subject to prior approval of SEBI, makebye-laws for the regulation and control of contracts. https://hcservices.ecourts.gov.in/hcservices/

8.The respondent's answers to certain averments of CSX areas follows:a.The entire writ petition is only concerned with thenarrow commercial interests and the entire objectiveappears to be to appropriate the huge assets of CSXrunning into several crores of rupees thereby, actingcontrary to public interest, contrary to the purpose forwhich CSX was created as a Stock Exchange and conferredwith the public duty and contrary to the interest oflarge number of investing public of the said region.b.The impugned directions would not in any manner impactthe rights of CSX and they have not been passed withoutholding an enquiry. Members of CSX have no fundamentalright to surrender the recognition by passing aresolution to this effect in its EGM and that respondenthas every jurisdiction, power and authority to pass theimpugned order on the ground that CSX has ceased to be aStock Exchange. c.While it is a fact that CSX was established as a PublicLimited Company on 09.09.1991, it has suppressed the factthat it is a company limited by guarantee and there hasbeen no contribution towards Share Capital. CSX has alsonot adverted to the fact that when it was originallyincorporated, there were specific clauses under theMemorandum and Articles of Associations that in the eventof any winding up, merger, or amalgamation of theCompany, the surplus assets would not be distributedamong the members. Though it may be true that 20 StockExchanges have been set up as Companies, the petitionerhas failed to advert to the fact that 8 of these StockExchanges are companies limited by guarantee. Further,the resolution passed in the EGM dated 15.02.2006 isinvalid and is contrary to the provisions of the SCRAinasmuch as SCRA does not envisage surrender ofrecognition which was communicated to the Stock Exchangeby SEBI vide letter dated 17.03.2006. In such asituation, the members of the Stock Exchange rushed topass the resolution in question just to avoid thedisciplinary action which was contemplated by SEBI videshow cause notice dated 22.11.2005. Further, it can beseen from the words of the resolution wherein instead ofmentioning that the recognition may be surrendered, thewords “the recognition stands surrendered and the StockExchange ceases to function as a recognised StockExchange” have been used. Further, in the EGM held on31.03.2006, CSX had passed a resolution to amend its https://hcservices.ecourts.gov.in/hcservices/ Memorandum and Articles of Association ousting PublicRepresentative Directors/SEBI Nominee Director from itsCouncil of Management and thereby perpetuated theillegality in its resolutions dated 15.02.2006.d.After the submission of corporatisation anddemutualiation scheme by CSX, SEBI officials had ameeting with the CSX officials and suggested to carry outcertain changes taking care of the financial implicationsto the Exchange and submit the revised scheme for itsapproval which has not been done CSX. Therefore, theprocess of corporatisation and demutualisation whichbegan in 2004 could not be completed as SEBI is yet toreceive the revised scheme from the Exchange and in fact,the issue is pending before CSX for re-submission of thescheme. The elected Directors/Members haveunilaterally decided to surrender the recognition onbehalf of investors without following the due process oflaw assuming that the surrender would be in the bestinterest of everybody concerned. SEBI, being theregulator of the securities market, has receivedcomplaints from investor bodies such as CoimbatoreShareholders & Investors Association, a registered body,being a representation signed by over 60 individuals andalso from the Indian Chamber of Commerce and Industry,Coimbatore. e.The contention of CSX that there is lack of interest byinvestors and trading public cannot be sustained sinceover 170 companies have been listed with CSX out of whichfive companies are exclusively listed with CSX. CSX hasbeen receiving Listing Fees periodically from theCompanies listed therein by which a sum over and aboveRs.2 crores has been collected. Members cannot takeunilateral decision of voluntarily surrendering therecognition abruptly since this action would have seriousimplications on the investing public, listed companies aswell as the securities market in general. As per therenewal application dated 16.06.2005, CSX had stated thatits active members are trading in NSE segment through ISESecurities and Service Ltd. which is a subsidiary ofInterconnected Stock Exchange of India Ltd. (ISEI).These members are trading to the average extent of Rs.20crores (approx.) per day, using the infrastructureavailable at present with CSX and ISEIU is incorporatedas a separate company to provide a common tradingplatform to members of all participating Stock Exchangesincluding CSX, mainly with the objective of boostingtrading in the securities listed on the participatingStock Exchanges. The interconnectivity of StockExchanges was meant to facilitate the members of various https://hcservices.ecourts.gov.in/hcservices/ Stock Exchanges to deal through an interconnected marketsystem, which was provided by ISEI and therefore, it isclear that the existing infrastructure facilities of CSXare productively used. Further, in the Coimbatoreregion, trading through BSE and NSE terminals was to theextent of Rs.20 crores (approx.) in the year 2004-2005.Needless to say that in view of buoyant share markets,the trading has further increased and hence, thecontention of CSX that it is not interested in trading istotally contrary to facts.f.Being recognised as a Stock Exchange and having enjoyedthe total exemption of tax on its income which is notavailable to other public limited companies and havingobtained the recognition to perform the public functionof Stock Exchange, CSX is different from any other publiclimited company and cannot abruptly stop its publicfunctions leaving the listed companies and investors ofthat region in lurch and therefore, has to comply withthe provisions of the Companies Act.g.After receipt of the reply dated 06.12.2005 from CSXrequesting for a personal hearing, the respondent hadissued a letter dated 13.02.2006 scheduling a personalhearing on 09.03.2006 at the former’s premises. However,obviously with ulterior motives, on 15.02.2006, CSX hadhurriedly convened an EGM to pass a resolution regardingsurrender of the recognition granted to it and that itwould cease to function with immediate effect as arecognised Stock Exchange within the scope and meaning ofthe SCRA and SEBI Act and thereafter, on 04.03.2006, CSXforwarded the copy of the minutes of the EGM dated15.02.2006 and on 09.03.2006, a personal hearing wasgiven to the entire Council of Management of CSX. On17.03.2006, the respondent had replied to the letterdated 04.03.2006 of CSX confirming that voluntarysurrender of recognition was not provided and notpermissible and further clearly mentioning that theresolutions would be ultra vires the SCRA and cannot beacted upon by CSX. Despite this letter, CSX had calledfor another EGM on 31.03.2006 wherein various clauses ofthe Memorandum and Articles of Associations of CSX wereamended, contrary to Section 4(5) of SCRA and theestablished practice. Hence, in exercise of powersconferred under Section 12-A of the SCRA read withSections 11, 11B and 19 of the SEBI Act, certain interimmeasures were taken and the order in challenge has beenpassed https://hcservices.ecourts.gov.in/hcservices/ h.The resolution passed by CSX on 15.02.2006 surrenderingrecognition is invalid under the law and it is alsoincorrect to state that the same had been communicated tothe respondent by its letter dated 08.04.2006 as no suchletter was received by SEBI.i.Its order is a valid one to safeguard the interest of thesecurities market invoking powers under Section 12A ofthe SCRA and it also given an opportunity to CSX to showcause within 15 days from the date of the order as to whyany further direction including direction for supersedingthe Council of Management of CSX may not be passed in theinterest of its smooth functioning and the Council ofManagement of CSX also, if so desired, may request for apersonal hearing after replying to the charges alleged inthe impugned order and therefore, the impugned order isonly a show cause notice with certain preventivedirection in the given emergent situation. j.According to the respondent, there is no provision forvoluntary surrender because the role of a Stock Exchangeis complex and involves various members, marketparticipants, investors, companies, etc. and is alsointerlinked with the other Exchanges, national economyand global participation and therefore, the contention ofCSX that being a company, it is its prerogative to windup the Company and surrender the recognition at its willand pleasure cannot be sustained. k.The respondent has got every power and authority toquestion CSX, (ii) to appoint any Committee to take overthe day-to-day functioning of the Exchange even inemergent situation and (iii) to pass orders withoutholding any enquiry and CSX, instead of rushing to thisCourt, should have replied to the charges enabling SEBIto pass final order.l.The impugned order dated 17.04.2006 has been passed onlyto ensure that the business of CSX be conducted in aproper manner and in accordance with law. It is only themembers such as the second petitioner who are interestedin stripping the assets of CSX by changing the basicstructure of the Memorandum of Association of CSX,changing the authorised signatory of the bank accountsand changing the personnel of CSX with the singularinterest of disposing of the huge assets of CSX and italso appears that the second petitioner and other membersare interested in doing real estate business instead ofconcentrating on the business as a Stock Exchange. https://hcservices.ecourts.gov.in/hcservices/ m.The respondent had originally issued a show cause noticeon 22.11.2005 for which CSX had sought for personalhearing and even before the personal hearing could beconducted, the second petitioner and other members hadsought to amend the Articles and sought for voluntarysurrender and passed the resolution illegally making therecognition as surrendered. It is therefore clear thatthe entire exercise by the second petitioner and othermembers has been only to sabotage the efforts of therespondent pursuant to the show cause notice dated22.11.2005.n.CSX cannot be equated with other Companies especially sosince CSX has more than 170 companies listed with it andmany members presently trade through ISEI and more sosince the recognition is valid till September 2006.Further, no Stock Exchange can abruptly surrender itsrecognition and such an act can be done only under thesupervision of the respondent since it is a Board whichis statutorily bound to protect the interest of theinvestors in securities and to promote the development ofand to regulate the securities market. If the contentionof the petitioners are to be accepted, then it would meanthat any Stock Exchange would have the powers tovoluntarily surrender its recognition. Assuming the NSEor the BSE were to adopt such an approach, it would leadto total financial anarchy with catastrophical resultsfor the Indian economy, in specific, and the globaleconomy in general and in such a view of the matter, theStock Exchanges cannot be treated as a mere company withtotal independence for the members to deal as they likeand Stock Exchanges are conferred with certain specificprivileges and concessions which are not available toother companies and therefore, CSX is not right incontending that its fundamental right under Article 19(1)g is violated.o.On the contention of the petitioners that the impugnedorder has been passed without holding an enquiry, therespondent has contended that it has been passed inexercise of powers under Section 12A of the SCRA readwith Sections 11, 11B and 19 of the SEBI Act in order toprevent the affairs of CSX being conducted in any mannerdetrimental to the interest of the investors and tosecure proper management of the Exchange. Further, evenin the Statement of Objects and Reasons appended to theBill by which the Ordinance was promulgated, it has beenclearly mentioned “investor confidence in the capitalmarket can be sustained largely by investor protection.With this end in view, the Government decided to vestSEBI immediate with the statutory powers required to dealeffectively with all matters relating to capital market.” https://hcservices.ecourts.gov.in/hcservices/ p.Further, Section 11 of the SEBI Act deals with thefunctions of the Board. This Section, under 11(2)(a)gives power to SEBI to regulate the business of the StockExchanges and any other securities market. 11B of theSEBI Act deals with the powers to issue directions, inthe interest of investors for orderly development ofsecurities market and to secure proper management and aplain reading of the above Section itself shows that therespondent has to protect the interest of the investorsin securities and to regulate the Stock Exchanges andsecurities market by such measures as it thinks fit. Assuch, SEBI has the statutory duty and authority to passinterim orders, pending enquiry and these powers do notmandate a pre-decisional hearing by the very nature ofthe situation and circumstances in which it is requiredto be invoked and the interim measure is only to preventfurther possible mischief of tampering with the affairsof the Stock Exchange and securities market in order toensure protection, orderly and health growth ofsecurities market so as to make the respondent’s controlover the capital market effective and meaningful. Sinceexigencies and requirements may arise while regulatingStock Exchanges, it has been entrusted with the duty andfunction to take such measures as it thinks fit and thisenabling provision has been enacted to empower therespondent to regulate stock markets and securitiesmarkets, in order to protect the interests of theinvestors and to sub-serve the purpose for which it hasbeen enacted.q.The power to issue directions by the respondent are ofthe widest possible amplitude and are exercisable in theinterest of the investors to prevent any conduct of theStock Exchanges in any manner detrimental to theinterests of investors of the securities market.Therefore, the respondent, as a regulator of securitiesmarket, is empowered to take all necessary measures toprotect the interests of the investors, Stock Exchangesand capital market and hence, is fully competent andempowered by various provisions of SCRA and SEBI Act topass interim order in aid of final orders and in thisview of the matter, pre-decisional hearing would not benecessary in emergent situations like the present onewhen the Act contemplates a post-decisional hearingamounting to a full review of the original order ofmerit, and hence it would be construed as excluding theaudi alteram partem rule at the pre-decisional stage.Also, the respondent has to act, as a regulatory agency,especially when the operation of stock market and itsfunctioning are highly technical and complex and thus,there is no violation of principles of natural justice. https://hcservices.ecourts.gov.in/hcservices/ r.That apart, the order under challenge has also to be seenin the backdrop of the conduct of the second petitionerand other elected members of the Exchange who arehurriedly trying to strip all the assets of CSX runninginto crores of rupees by converting the Stock Exchangeinto a real estate company without considering theconsequence of their act, the impact on the economy,investing public, listed companies, etc. Pendingoperation of the order, the Committee set up for the day-to-day functioning of the Exchange by SEBI consistingPublic Representative Directors/SEBI Nominee Director whoare independent and have no personal stakes in theExchange would seriously jeopardize the functioning theExchange and if the elected members are not stopped fromacting in accordance with the invalid resolutions dated15.02.2006 and 31.03.2006, the situation would beirreversible. Also, any interference with thefunctioning of the independent committee which is set upfor the protection of the Stock Exchange mechanism wouldset a wrong precedent inducing other intermediaries alsoto defy an order of the regulator and would encouragewrongdoings at the market place. Therefore, CSX can verywell participate in the show cause enquiry and subjectitself to SEBI’s jurisdiction, in which event, theinterest of all concerned could have been adequatelysafeguarded. s.Though it is true that power has to be exercised by therespondent only after satisfaction that the directionsare being issued in the interest of the investors andorderly development of the securities market, primafacie, the impugned order would make it clear that theaction by the respondent has been consistent with thestatutory powers. The contention of CSX that some of theRSEs would have to be closed down as per Justice KaniaCommittee Report cannot be held good since therecommendations of the Justice Kania Committee Reportwere accepted by SEBI, which, in turn, has issued acircular addressed to all the Stock Exchanges to submittheir corporatisation and demutualization scheme.However, the recommendations of the Committee have notbeen transformed into an Act since the Bill introduced inthe Lok Sabha could not be passed as the the then LokSabha was dissolved. In respect of demutualizationprocess, certain information were being awaited from CSXand this being the position, without completing theprocess, CSX is seeking to convert itself into a realestate company with a view to strip its assets and siphonoff the immovable properties. https://hcservices.ecourts.gov.in/hcservices/ t.There are various penal provisions including Section 23Gof the SCRA which provide for penalty upto Rs.25 croresand therefore, it is clear that the game plan of thepetitioner members have been exposed and the wholeobjective is only to scuttle the process of show cause.Further, the show cause notice was only to show cause asto why action should not be taken against the Council ofManagement of CSX under the relevant provisions of theAct and there is no colourable exercise of power and itis not correct in contending that no trading activitiesare being carried out by the members of CSX since 1999 asthe annual turnover of the members of CSX has recordedbetween Rs.5,000 to Rs.6,000 crores and further, in theCoimbatore region, trading through BSE and NSE terminalswas to the extent of Rs.20 crores in 2004-2005. Hence,any decision to abruptly surrender the recognition wouldhave serious repercussion and therefore, the action takenby the respondent has been consistent with the statutoryprovisions of the SCRA and SEBI Act.u.SEBI as a regulator of the securities market, the Courtshave upheld the power of the respondent to issue interimdirections without personal hearing in emergentsituations v.Further, there is no prima facie case or balance ofconvenience in favour of the petitioners for grant of anyinterim relief and there is no arbitrary exercise ofpower by the respondent and the petitioners are onlytrying to scuttle the show cause notice and to avoidpenal consequences under Section 23G of the SCRA andother provisions and therefore, in the interest ofinvesting public, listed companies and securities marketamong others, the writ petitioners are not entitled toany relief and as such the writ petition has to bedismissed.9.Mr. Arvind P. Datar, learned Senior Counsel appearing forthe petitioners has contended that the impugned order, passedin purported exercise of powers under Section 12A of the SCRAand 11, 11B and 19 of the SEBI Act, (i) restraining thepetitioner from taking any action pursuant to its resolutionsat its EGM and from transferring or alienating any property ofthe Exchange (ii) directing the day-to-day functioning of theExchange to be taken over by a three member Committee and(iii) authorizing the said Committee to make expenditures inrespect of the petitioner is unsustainable and only anarbitrary exercise of power. https://hcservices.ecourts.gov.in/hcservices/

10.According to Mr. Datar, the impugned order is a result ofthe intimation to the respondent that the petitioner, in viewof the unviability of carrying on a Regional Stock Exchangehas been recognized in two high powered Committee reportsnamely, the Report of the Group on Corporatisation andDemutualisation of Stock Exchanges headed by former ChiefJustice M.H. Kania, 2002 (Kania Committee Report) and theReport of the Committee to study the future of the RegionalStock Exchanges, 2006 headed by Mr. Anantharaman (AnantharamanCommittee Report). From the Anantharaman Committee Report, itcan be seen that there is “zero” turnover in respect of CSXsince 1999 which specifically observes that the respondent hasnot formulated clear guidelines for exit route for stockexchanges but which endorses the steps taken by CSX andparticularly, the Committee has been headed by the very sameperson who has passed the impugned order.11.Mr. Datar has further contended that CSX is a guaranteecompany under the Companies Act, 1956 and it has actedstrictly in terms of the Companies Act amending its Memorandumof Association and since 1999, no trading activities have beencarried on and its application for corporatisation anddemutualization submitted in July 2005 has not been acceptedtill 31.03.2006, thereby leading to its being impossible tocarry on business as a Stock Exchange.12.It is also the strenuous contention of the learned SeniorCounsel that CSX has exhibited its bonafide as evident in itsletter dated 04.03.2006 wherein it has requested therespondent consequent upon its communication to be de-recognised to pass consequential orders and the respondent,rather than passing orders thereto, has sought to take anarbitrary step by issuing the impugned order through its wholetime member rather than by itself and therefore, the impugnedorder has to be set aside.13.According to Mr. Arvind Datar, learned Senior Counsel,the important grounds of challenge are that:a.when a statute provides that an act is to be done inthat manner, it has to be done in that manner or not atall.b.there is no prohibition under the SCRA against thesurrender of recognition.c.in addition to the right available to the petitioner tosurrender its recognition, by virtue of the operationof law, the petitioner has, in any event, become de- https://hcservices.ecourts.gov.in/hcservices/ recognised as a Stock Exchange and the respondent hasno power to act contrary thereto.d.the impugned order is in lack of jurisdiction wholly.e.The action of the respondent in issuing the impugnedorder is a colourable exercise of power.f.The impugned order seeks to pass orders without givinga hearing on the ground of an imminent danger.14.To substantiate the above grounds, Mr. Datar hasvehemently contended that:a.it is a settled proposition of law that when an Actrequires that a particular action or thing is to bedone in that manner, it has to be done in that manneror not at all, particularly when serious consequencesensue and in the present case, the respondent haspassed the impugned order in total violation of severalprovisions of SCRA and SEBI Act. b.The carrying on of a Stock Exchange business is apurely voluntary exercise by making appropriateapplications and getting recognized as a Stock Exchangeunder the provisions of SCRA, and SEBI Act regulatesthe conditions to be satisfied and the right to carryon business includes the right not to carry on businessand the same is a well recognized principle of law.Granting recognition is provided under Section 4 of theSCRA and there is no provision against getting de-recognised under the Act and in fact, under Rule 7 ofthe Rules, it is for the Stock Exchange to apply forrenewal if it desires to do so. The recognitionitself, under Rule 6, unless it is granted on apermanent basis, is for a period of one year to berenewed from time to time and unless there is anexpress prohibition under a specific enactment, itcannot be read into a statute and prohibitions cannotbe presumed.c.By introduction of Sections 4A, 4B and substitution ofSection 5 based on Justice Kania Committee’s Report,all Stock Exchanges including RSEs like CSX wererequired to submit their scheme of Corporatisation andDemutualisation which CSX has done and consequent uponseveral discussions with the respondent’s officials,submitted its final scheme in July 2005 and therespondent, instead of passing orders on it, hasproceeded to pass the impugned order. The notifieddate for completing the process in terms of Press Note https://hcservices.ecourts.gov.in/hcservices/ 9 of 2005 was 31.03.2006 and CSX not having beencorporatised or demutualised by virtue of Section 5(2),its recognition stands automatically withdrawn by theCentral Government and thus, it is therefore not forthe respondent to pass any orders contrary thereto.d.the actions that can be initiated against the StockExchanges are governed by the provisions of SCRA andwhen there is non-compliance of mandatory provisionsand a rather peculiar argument is sought to be advancedby the respondent that even where a mandatory hearingis provided for, the same can be dispensed with. Theorder passed by the whole time member purportedly underSection 12A of the SCRA and a reading of the saidSection makes it clear that no order can be passedwithout holding an enquiry since the statutemandatorily requires that a pre-decisional hearing begiven and such a provision cannot be given a go by.e.the impugned order, though claimed to be a “show causenotice”, is not a show cause notice for the reasonsthat it is expressly termed as an “order” and therespondent has specifically issued orders which areimpermissible under the provisions of Sections 12A ofSCRA itself since none of the conditions therein issatisfied. Clause 12A(b) is inapplicable since byoperation of Section 5(2) of the SCRA, the recognitionstands withdrawn and CSX cannot be said to be arecognized Stock Exchange. Furthermore, suchdirections under Clause (c) can be issued only in theinterest of investor and securities market and in theabsence of any trading activities, there cannot beeither an investor or a security market. f.The power though sought to be having exercised underSection 12A of the SCRA is essentially the one that hasbeen taken under Section 11 of SEBI Act which aloneprovides for supersession. In view thereof, whenSection 11 provides for a hearing to be given and thatan order of supersession being passed only aftermandatorily giving a hearing and as such, an orderunder Section 11 purporting to be in the guise of adirection under Section 12A cannot be issued and it isa clear case of abuse of and colourable exercise orpower.g.Reasons for passing an order have to be set out in theorder itself and cannot be supplemented by way ofaffidavits. Considering the fact that the petitioner’sonly assets are its infrastructure or building, it istherefore but natural that its object would include areal estate business. Merely because an object is to https://hcservices.ecourts.gov.in/hcservices/ carry real estate business, grave and seriousallegations of striping of assets cannot be made. Itis CSX which is safeguarding the assets and in fact,one of the nominees of the respondent who was theRegistrar of Companies is trying to strip the assets ofCSX.h.The impugned order can be passed only on thesatisfaction of SEBI whereas in the case on hand, theorder has been passed not by the Board but by a singlemember. Unlike the SEBI Act which permits underSection 19 for the SEBI to delegate its powers andfunctions to any member, the SCRA, under Section 29A,specifically permits delegation only in respect of theCentral Government’s powers to the SEBI and there is nofurther power of delegation provided for and therefore,it follows that (a) the SEBI, unlike under the SEBIAct, cannot delegate its power under SCRA to any memberand (b) even the Central Government’s powers can bedelegated only to SEBI and SEBI cannot further delegateit and in nutshell, the power of delegation cannottherefore be read to permit a further delegation otherthan what is provided for under the Act. Further, thedelegation power under SCRA is contained innotification dated 30.07.1996 and the same does notprovide for delegation of powers to any individualmember. That apart, the delegation that has been doneunder the SCR Act cannot be utilized for the purpose ofinterpretation of the powers of SEBI under the SEBI Actsince there has admittedly not been any delegation bythe Central Government under Section 11(2)(j) of SEBIAct. Delegation under one Act cannot be used forexercising such power under another Act in the absenceof a specific delegation. i.More importantly, while the order under the SEBI Act isappealable to the Securities Appellate Tribunal underSection 15T, to the Central Government under Section 20and an appeal from Securities Appellate Tribunal, noappeal is provided under the SCRA against an orderpassed under Section 12A or 11 of the SCRA. The appealprovisions under SCRA as set out in Sections 22, 22Aand 23L do not apply to the present order. Whereasunder SEBI Act, the order is appealable but not sounder the SCRA and if delegation of power under SEBIAct is used for exercising powers under SCRA, it wouldbe clearly violative Article 14 since it grants to thebody exercising the power the right to determinewhether its order is appealable or not. Therefore,the right of appeal is a substantive right and can beconferred only by a statute and the existence of theright of appeal cannot be determined by the action of https://hcservices.ecourts.gov.in/hcservices/ the delegate in taking action under one Act or theother since it is a substantive right and such aninterpretation would confer wholly arbitrary power onthe delegate. In effect and substance, the order isone under Section 11 and claimed to be under Section12A of SCR Act and the same could not have beenexercised by the member. In the present case, theimpugned order does not seek to regulate any businessin a Stock Exchange but seeks to take over the StockExchange itself which is impermissible and in fact, noregulations in this regard have been framed under theSEBI Act. j.Also, Section 11(4) of SEBI Act specifically providesfor the circumstances in respect of powers to pass ad-interim exparte orders which clearly do not arise inthe present case. Section 11B is also inapplicable forthe reason that directions under Section 11B can beissued only to a person or a class of persons referredto in Section 12 and a Stock Exchange is not one suchperson and as such, the impugned order cannot besustained and k.lastly, the respondent seeks to rely upon the earliershow cause notice issued on 22.11.2005 whileconveniently failing to state that a reply to the samein great detail was sent as early as 06.12.2005 inrespect of which no order was subsequently passed andinstead, the respondent has passed the present order inviolation of statutory powers and seeks to perpetuateits arbitrary exercise of powers.15.Per contra, Mr. V.T. Gopalan, learned AdditionalSolicitor General of India, appearing for the respondent, duringthe course of his exhaustive arguments has argued that the writpetition has been filed against the show cause notice dated17.04.2006 in and by which for the reasons stated therein,certain interim directions had been made in order to prevent theaffairs of CSX being conducted in the manner detrimental to theinterests of the investors and also to secure proper managementof the Stock Exchange. It is his case that there are two issuesinvolved in the said show cause notice, namely, (i) whether awrit petition can be entertained against the show cause noticeand (ii) whether pending adjudication of the show cause notice,certain interim directions of the nature stated in the said showcause notice be issued by the SEBI. According to him, the abovetwo points are no longer res integra and they are covered by thejudgments of both Supreme Court or High Courts against thepetitioner. https://hcservices.ecourts.gov.in/hcservices/

16.On the first issue of whether a writ petition could beentertained against the show cause notice, learned ASG has reliedon has relied on two judgments of the Supreme Court reported in(2004) 3 SCC 440 and (2006) 4 SCC 278. In his opinion, applyingthe principles laid down in the said judgments, there is no lackof jurisdiction in the issuance of the said show cause notice andeven facts canvassed one way or the other would only relate tothe limits on the exercise of power which will not warrant anyinterference at the threshold. It is the further argument of theASG that such facts and questions of law arising therefrom alsoshould be placed before the authorities issuing the show causenotice and the proceedings before the statutory functionarycannot be stifled even at the threshold by invoking thejurisdiction under Article 226.17.The learned ASG, on the second issue as to whether therespondent has the jurisdiction to make interim directions, hasargued that in view of the extra ordinary situation created bythe conduct of writ petitioners, the interim directions came tobe made without which CS, could not be preserved and the wholeproceedings also would be rendered infructuous if the pastconduct of CSX was not put on hold. When once a company had beenlicensed to become a Stock Exchange, after bringing forth therelevant amendments to the Articles of such Company to enablethem to become a Stock Exchange cannot be reversed unilaterallyby the said Stock Exchange and any amendment to the Articles ofthe Stock Exchange could be made only with the approval ofCentral Government/SEBI as per Section 4(5) read with Section 2(g) of SCRA. In this case, CSX has removed six nominatedDirectors by amending the Articles and again, the Articles havebeen amended enabling them to carry on the business of realestate and also for surrendering their licence to run a StockExchange and all these things have been done deliberately inorder to wriggle out of the statutory obligations under SCRA andSEBI Act. When once the company had become a Stock Exchange, itceases to be a pure and simple limited company because of thenature of the functions of a Stock Exchange involving a greatamount of public interest. It has been held that such StockExchanges also should be regarded as a “State” within the meaningof Article 12 of the Constitution. Once the company had become aStock Exchange, they could be superseded by an order made underSCRA by the SEBI under the powers delegated to it and there is noquestion of a Stock Exchange ceasing to do its business as suchby unilateral withdrawal of their license. Despite the statutoryinhibitions, they have deliberately adopted the course in theshape of resolutions of 2 EGMs the substance of such resolutionsmilitating against the object and purpose of the two enactmentsand posing an affront to the statutory duties and functions ofSEBI. In such a situation, the interim arrangement of the naturespecified in the show cause notice made by SEBI for the purposeof preserving the integrity of CSX cannot be taken exception to. https://hcservices.ecourts.gov.in/hcservices/

18.In support of his contention of the power to make suchinterim direction pending disposal of show cause notice, thelearned ASG has relied on two decisions of Division Bench of theBombay High Court reported in SCL (18) 1998 543 in the case ofRamrakh R. Bohra Vs. SEBI and SCL (32) 2001 227 in the case ofAnand Rathi Vs. SEBI (discussed in the later part of this order)and has pointed out that there are no judgments contrary to theabove two decisions.19.On the question of whether supersession could be madein the guise of an interim direction, the learned ASG hascontended that the expression “supersession” is a misnomer in thelight of the very interim directions made in the impugned showcause notice. According to him, the term “supersession” willmean that the entire body corporate constituted had to besuperseded and somebody else have to be put in place of thesuperceded body to manage the day-to-day affairs. It is hisargument that in this case, no stranger has been appointed tolook after the day-to-day business of CSX but only three of thenominated Directors who had been illegally removed by CSX but inlaw continued as such Directors have been placed in charge ofCSX, pending adjudication of the show cause notice and ifexclusion of certain Directors from the management of theExchange could be called supersession, then, it is only thepetitioners who had superseded the Stock Exchange by unilaterallyremoving the nominated Directors. Also, by placing the threenominated Directors to be in charge of the day-to-day affairs,the Board of Directors, in the eyes of law, before the illegalremoval of the nominated Directors by the SEBI, continued toexist and they have to necessarily perform the statutory dutiesenjoined upon them not only by SCRA and SEBI Act but also underthe provisions of the Companies Act. Therefore, there is nosubstance in the contention that supersession had been made by anominated member of the SEBI without hearing the petitioner.20.On the contention of the petitioner that a delegatedpower cannot be further delegated, the learned ASG has contendedthat the questions of delegation and further delegation are onlymatters of interpretation of the relevant provisions and to findout whether there has been a further delegation and if so,whether such delegation has been authorized, one has tonecessarily look into the relevant statutory provisions underSection 11 of the SCRA. The power to supersede has been vestedwith the Central Government and such power to supersede could bevalidly delegated by the Central Government to the SEBI underSection 29A of SCRA. He has pointed out that under Section 11(1), there is a generality of the functions and duties cast uponthe SEBI i.e. to protect the interest of investors in securitiesand to promote the development of and to regulate the securitiesmarket, by such measures as it thinks fit. Under sub-section 2of Section11, without prejudice to such generality of power, bySection 11(2)(j), the powers delegated to SEBI under SCRA by the https://hcservices.ecourts.gov.in/hcservices/ Central Government also becomes part and parcel of the duties andfunctions of the SEBI. In the said provision, the power underSection 11 and Section 29 of SCRA have been incorporated byreference and to this extent, they became part of SEBI and whenonce such a delegation had taken place, it becomes a statutoryfunction and duty of the SEBI under Section 11(2)(i) which couldbe validly delegated under the provisions of SEBI itself namelySection 19 to the Chairman or any of its officers. Therefore,the delegation is statutorily authorized by the Parliament in theAct itself and as such, the complaint that a delegate cannotfurther delegate will not apply to the facts of the case. 21.In this connection, the learned ASG has relied on adecision of the Supreme Court reported in AIR 1967 SC 295(discussed later) in which in paragraph 71, which is only aminority view, it has been held that when the provisions of thestatutory enactment did not provide for a further delegation, thesame could not be done by way of statutory rules made under thesaid Act. But the case on hand is totally different in that thefunctions of the Central Government under SCRA by delegationbecame the function of the Board under Section 11(2)(i) and whenonce it became the function of the Board, the statute itselfauthorizes the delegation of such function of the Board underSection 19 to the Chairman or its officers.22.The learned ASG has further pointed out that Section 11(2)(a) of SEBI Act empowers SEBI to regulate the business of theStock Exchanges and any other securities market and this specificpower vested in SEBI enables it to pass appropriate directions tothe Stock Exchanges. Exercise of such power by SEBI is furthercomplimented by the provisions of SCRA and there is no statutoryviolation in respect of delegation of powers. The ASG hasstrongly that contended that in any case, in view of theaforesaid powers conferred upon SEBI under the SEBI Act itself,the impugned show cause notice has to be upheld and the writpetition has to be dismissed.23.Lastly, the ASG has vehemently argued that thecontention of the petitioner that it had become defunct and notdoing business for several years is far from truth as the letterof the petitioner dated 21.04.2006 clearly evidenced that it isstill carrying on the business of a Stock Exchange and it wasonly to forestall any order of supersession which might be passedagainst the petitioner that CSX had chosen to pass suchresolutions in the EGM and have filed the present writ petitionto avoid further action pursuant to the impugned show causenotice. Moreover, the attempt of the petitioners in filing thewrit petition is not bona fide and the petitioners, in thecircumstances, can only show cause and should they desire to havea personal hearing and establish their defence to the show causenotice, it will also be afforded to them and therefore, the writpetition is totally mis-conceived and not maintainable in law. https://hcservices.ecourts.gov.in/hcservices/

24.I have heedfully considered the submissions made by thelearned Senior Counsel on either side. The order impugned in thiswrit petition is the order passed by SEBI signed by a whole timemember under Section 12A of SCRA read with Sections 11, 11A and19 of the SEBI Act, 1992. In the impugned order, it is stated asfollows:“SEBI conducted an inspection of the Exchangeduring August 27-30, 2003 and on the basis of thefindings indicating certain deficiencies andirregularities in the functioning of the Exchange,granted conditional renewal of recognition for aperiod of one year commencing on the 18.09.2003and ending on 17.09.2004 and the said conditionswere as under:….….25.After discussing the various issues involved in thepassing of the impugned order, SEBI has issued directions inparagraphs 28 to 30 of the order which read as under:“28.I am of the considered view that, inview of the imminent urgency and in order tosafeguard the integrity of the securities market,the previous notice to show cause can be dispensedwith and it will be in the interest of justice topass an ex-parte interim order. As theirregularities that have taken place subsequent tothe show cause notice dated 22.11.2005 may alsocall for supersession of the Council of Managementof CSX, the allegation mentioned herein may alsobe treated as a fresh show cause notice inaddition to the show cause notice dated22.11.2005.29.The CSX may reply to the charges allegedherein within 15 days from the date of this ordershowing cause as to why any further directionincluding direction for superseding the Council ofManagement of CSX may not be passed in theinterest of smooth functioning of the exchange.The Council of Management of CSX may also if sodesired, request for a personal hearing in thematter before passing of the final order by SEBIwhich may include superseding the Council ofManagement of CSX, in light of the irregularitiesmentioned in the show cause notice dated22.11.2005 as well as the subsequent developmentsmentioned supra. https://hcservices.ecourts.gov.in/hcservices/

30.Therefore in exercise of powersconferred upon me under Section 12A of SCRA readwith Sections 11, 11B and 19 of the SEBI Act, inorder to prevent the affairs of CSX beingconducted in a manner detrimental to the interestsof the investors and also to secure propermanagement of the stock exchange, I hereby directas under:aCSX is refrained from takingany action pursuant to the resolutionspassed at the Extra-Ordinary GeneralMeetings held on February 15, 2006 andMarch 31, 2006 and any other decisionsthat might have been taken without theparticipation of the PublicRepresentative Directors/SEBI NomineeDirector after the EGM dated February15, 2006 and from transferring oralienating any movable or immovableproperty of the exchange in any mannerwhatsoever, till further orders and alsonot to do anything which would have theeffect of or which is likely to have theeffect of altering the basic contours ofthe exchange as well as the character ofthe exchange.b.Pending hearing and finaldecision in the matter, the day to dayfunctioning of the exchange would beundertaken by a three member Committeeconsisting of Shri. V. Selvaraj, SEBINominee Director/ROC/who will be theMember-Chairman of the said Committeeand Shri. C.A. Venkatesan and Shri. K.R.Raman, Public Representative Directors.c.The said committee isauthorized to make such expenditures andoperate the bank accounts of theexchange for meeting out the day to dayexpenses, including salary of staff,etc. till further orders.”26.Before proceeding to consider the issues involved inthis writ petition, it would be proper for this Court to dealwith the relevant provisions of SEBI Act and SCRA which are asunder:Section 11 of the SEBI Act: https://hcservices.ecourts.gov.in/hcservices/ (1)Subject to the provisions of this Act, it shall bethe duty of the Board to protect the interests ofinvestors in securities and to promote thedevelopment of, and to regulate the securitiesmarket, by such measures as it thinks fit.(2)Without prejudice to the generality of theforegoing provisions, the measures referred totherein may provide for (a)regulating the business in stock exchangesand any other securities markets.(i)calling for information from, undertakinginspection, conducting inquiries and auditsof the stock exchanges, mutual funds, otherpersons associated with the securitiesmarket, intermediaries and self-regulatoryorganisations in the securities market(j)performing such functions and exercising suchpowers under the provisions Section 11 (B) of SEBI ActSave as otherwise provided in Section 11, if aftermaking or causing to be made an enquiry, the Board issatisfied that it is necessary-(i)in the interest of investors or orderlydevelopment of securities market; or(ii)to prevent the affairs of any intermediary orother persons referred to in Section 12 beingconducted in a manner detrimental to theinterest of investors or securities market; (iii)to secure the proper management of anysuch intermediary or person, it may issue such directions - (a)to any person or class of persons referred toin Section 12, or associated with thesecurities market; or(b)to any company in respect of mattersspecified in section 11A, as may beappropriate in the interests of investors insecurities and the securities market. https://hcservices.ecourts.gov.in/hcservices/ Section 19 of the SEBI ActThe Board may, by general or special order in writing,delegate to any member, officer of the Board or any otherperson subject to such conditions, if any, as may bespecified in the order, such of its powers and functionsunder this Act (except the powers under Section 29) as itmay deem necessary.Section 4(5) of the SCRANo rules of a recognised stock exchange relating toany of the matters specified in sub-section (2) of section 3shall be amended except with the approval of the CentralGovernment.Section 11(4) of the SCRAThe Central Government may at any time before thedetermination of the period of office of any person orpersons appointed under this section call upon therecognised stock exchange to re-constitute the governingbody in accordance with its rules and on such reconstitutionall the property of the recognised stock exchange which hasvested in, or was in the possession of, the person orpersons appointed under sub-section(1), shall re-vest orvest, as the case may be, in the governing body so re-constituted.Section 12A of the SCRAIf, after making or causing to be made an enquiry, theSecurities and Exchange Board of India is satisfied that itis necessary -ain the interest of investors or orderly development ofsecurities market; orbto prevent the affairs of any recognised Stock Exchangeor clearing corporation, or such other agency orperson, providing trading or clearing or settlementfacility in respect of securities, being conducted in amanner detrimental to the interests of investors orsecurities market, it may issue such directions, -ito any stock exchange or clearing corporation or agencyor person referred to in clause (b) or any person or https://hcservices.ecourts.gov.in/hcservices/ class of persons associated with the securities market;or iito any company whose securities are listed or proposedto be listed in a recognised stock exchange,as may be appropriate in the interests of investors insecurities and securities market.Section 29(A) of the SCRAThe Central Government, may, by order published in theOfficial Gazette, direct that the powers (except the powerunder Section 30) exercisable by it under any provision ofthis Act, shall, in relation to such matters and subject tosuch conditions, if any, as may be specified in the order,be exercisable also by the Securities and Exchange Board ofIndia or the Reserve Bank of India constituted underSection 3 of the Reserve Bank of India Act, 1934 (2 of1934).27.Having dealt with above provisions of SEBI Act andSCRA, let me now consider the various rulings of the SupremeCourt and High Courts relied on by the learned counsel on eitherside.28.On the side of the petitioners, reliance has beenplaced on the following decisions:a.A four Judge Bench decision of the Supreme Courtreported in AIR 1976 SC 789 in the case of Hukam Chand Shyam LalVs. Union of India & Others: (para 18)“It is well settled that where a power isrequired to be exercised by a certain authority ina certain way, it should be exercised in thatmanner or not at all, and all other modes ofperformance are necessarily forbidden. It is allthe more necessary to observe this rule wherepower is of a drastic nature and its exercise in amode other than the one provided, will beviolative of the fundamental principles of naturaljustice. Now, in the present case, if thetelephones of the appellants were to bedisconnected on the ground of misuse, then theyhad to give, in consonance with the principles ofnatural justice, opportunity to the appellants toexplain their conduct before taking action underRule 427 read with Rules 416 and 421. Resort tothe wrong and more drastic course provided in Rule422, on a ground which was not germane to an https://hcservices.ecourts.gov.in/hcservices/ action under that Rule, vitiates the impugnedorder, particularly when it is manifest that inmaking the impugned order, the General Manager wasinfluenced more by this ground and less, if atall, by the existence of ‘public emergency’certified by the Delhi Administration.”b.a Constitution Bench judgment of the Supreme Court inthe case of Excel Wear Vs. Union of India & Others reported inAIR 1979 SC 25 (para 21):“We now proceed to examine whether therestriction imposed under the impugned law isreasonable within the meaning of Article 19(6).This is undoubtedly on the footing, as held by usabove, that the right to close a business is anintegral part of the fundamental right to carry onbusiness. But as no right is absolute in itsscope, so is the nature of this right. It cancertainly be restricted, regulated or controlledby law in the interest of the general public.” c.The Supreme Court judgment reported in (2000) 3 SCC 242in the case of New India Assurance Company Limited Vs. R.Srinivasan (paras 17 and 18)“But, that is not the end of the matter.Mahmood, J. in his dissenting judgment in the FullBench case of Narsingh Das Vs. Mangal Dubeyobserved:“The Courts are not to act upon theprinciple that every procedure is to betaken as prohibited unless it isexpressly provided for by the Code, buton the converse principle that everyprocedure is to be understood aspermissible till it is shown to beprohibited by the law. As a matter ofgeneral principal, prohibitions cannotbe presumed, and in the present case,therefore, it rests upon the defendantsto show that the suit in the form inwhich it has been brought is prohibitedby the rules of procedure applicable tothe courts of justice in India.”We only intend to invoke the spirit of theprinciple behind the above dictum in support ofour view that every court or judicial body orauthority, which has a duty to decide a lis https://hcservices.ecourts.gov.in/hcservices/ between two parties, inherently possesses thepower to dismiss a case in default. Where a caseis called up for hearing and the party is notpresent, the court or the judicial or quasi-judicial body is under no obligation to keep thematter pending before it or to pursue the matteron behalf of the complainant who had institutedthe proceedings. That is not the function of thecourt or, for that matter of a judicial or quasi-judicial body. In the absence of the complainant,therefore, the court will be well within itsjurisdiction to dismiss the complaint for non-prosecution. So also, it would have the inherentpower and jurisdiction to restore the complaint ongood cause being shown for the non-appearance ofthe complainant.” d.Yet another decision of the Supreme Court in the caseof H.L. Trehan & Others Vs. Union of India & Others reported in(1989) 1 SCC 764 (paras 12 and 13):“It is, however, contended on behalf of CORILthat after the impugned circular was issued, anopportunity of hearing was given to the employeeswith regard to the alterations made in theconditions of their service by the impugnedcircular. In our opinion, the post-decisionalopportunity of hearing does not subserve the rulesof natural justice. The authority who embarksupon a post-decisional hearing will naturallyproceed with a closed mind and there is hardly anychance of getting a proper consideration of therepresentation at such a post-decisionalopportunity. In this connection, we may refer toa recent decision of this Court in K.I. Shephardv. Union of India. What happened in that case wasthat the Hindustan Commercial Bank, the Bank ofCochin Ltd. And Lakshmi Commercial Bank, whichwere private banks, were amalgamated with PunjabNational Bank, Canara Bank and State Bank of Indiarespectively in terms of separate schemes drawnunder Section 45 of the Banking Regulation Act,1949. Pursuant to the schemes, certain employeesof the first mentioned three banks were excludedfrom employment and their services were not takenover by the respective transferee banks. Suchexclusion was made without giving the employees,whose services were terminated, an opportunity ofbeing heard. Ranganath Misra, J. speaking for thecourt, observed as follows: (SCC pp448-49, para16) https://hcservices.ecourts.gov.in/hcservices/ “We may now point out that thelearned Single Judge for the Kerala HighCourt had proposed a post-amalgamationhearing to meet the situation but thathas been vacated by the Division Bench.For the reasons we have indicated, thereis no justification to think of a post-decisional hearing. On the other hand,the normal rule should apply. It wasalso contended on behalf of therespondents that the excluded employeescould not represent and their case couldbe examined. We do not think that wouldmeet the ends of justice. They havealready been thrown out of employmentand having been deprived of livelihood,they must be facing seriousdifficulties. There is no justificationto throw them out of employment and thengive them an opportunity ofrepresentation when the requirement isthat they should have the opportunityreferred to above as a conditionprecedent to action. It is commonexperience that once a decision has beentaken, there is a tendency to uphold itand a representation may not reallyyield any fruitful purpose.”The view that has been taken by this Court inthe above observation is that once a decision hasbeen taken, there is a tendency to uphold it and arepresentation may not yield any fruitful purpose.Thus, even if any hearing was given to theemployees of CORIL after the issuance of theimpugned circular, that would not be anycompliance with the rules of natural justice oravoid the mischief of arbitrariness ascontemplated by Article 14 of the Constitution.The High Court, in our opinion, was perfectlyjustified in quashing the impugned circular.”e.The decision of a Constitution Bench of the SupremeCourt in the case of Mohinder Singh Gill & Another v. The ChiefElection Commissioner,New Delhi & Others reported in AIR 1978 SC851(para 8) https://hcservices.ecourts.gov.in/hcservices/ “The second equally relevant matter is thatwhen a statutory functionary makes an order basedon certain grounds, its validity must be judged bythe reasons so mentioned and cannot besupplemented by fresh reasons in the shape ofaffidavit or otherwise. Otherwise, an order badin the beginning may, by the time it comes tocourt on account of a challenge, get validated byadditional grounds later brought out. We may heredraw attention to the observations of Bose, J. inGordhandas Bhanji (AIR 1952 SC 16) pa p.18):“Public orders publicly made, inexercise of a statutory authority cannotbe construed in the light ofexplanations subsequently given by theofficer making the order of what hemeant, or of what was in his mind, orwhat he intended to do. Public ordersmade by public authorities are meant tohave public effect and are intended toaffect the acting and conduct of thoseto whom they are addressed and must beconstrued objectively with reference tothe language need in the order itself.”Orders are not like old wine becoming betteras they grow older.”f.Decision of the Supreme Court reported in 1965 SC 1486(V52 C 246) in the case of Bombay Municipal Corporation Vs.Dhondu Narayan Chowdhary (para 3)“No question has been raised that any of theamendments is ultra vires so the words of S.68must be reasonably construed. It goes withoutsaying that judicial power cannot ordinarily bedelegated unless the law expressly or by clearimplication permits it. In the present case, theamendment of S.68 by inclusion of delegation ofthe functions of the Commissioner under Ss.105B to105E does not indicate the intention that thejudicial or quasi-judicial powers contained inChapter VIA were expressly intended to bedelegated. To the delegation as such there can beno objection. What is objected to is theprovision, both in the section as well as in theorder of delegation, that the exercise of thefunction is to be under “the Commissioner’scontrol” and “subject to his revision”. These https://hcservices.ecourts.gov.in/hcservices/ words are really appropriate to a delegation ofadministrative functions where the control may bedeeper than in judicial matters. In respect ofjudicial or quasi-judicial functions these wordscannot of course bear the meaning which they bearin the delegation of administrative functions.When the Commissioner stated that his functionswere delegated subject to his control andrevision, it did not mean that he reserved tohimself the right to intervene to impose his owndecision upon his delegate. What those wordsmeant was that the Commissioner could control theexercise administratively as to the kinds of casesin which the delegate could take action or theperiod or time during which the power might beexercised and so on and so forth. In other words,the administrative side of the delegate’s dutieswas to be the subject of control and revision butnot the essential power to decide whether to takeaction or not in a particular case. This is alsothe intention of S.68 as interpreted in thecontext of the several delegated powers. This isapparent from the fact that the order of thedelegate amounts to an order by the Commissionerand is appealable as such. If it were not so, theappeal to the Bombay City Civil Court would beincompetent and the order could not be assailed.The order of the delegate was the order of theCommissioner and the control envisaged both inS.68 and the order of delegation was not controlover the decision as such but over theadministrative aspects of cases and theirdisposal. No allegation has been made that theCommissioner intervened in the decision of thecase or improperly influenced it. In thesecircumstances, the order impugned in the appealcannot be sustained.”g.one more ruling of the Supreme Court reported in (1994)5 SCC 346 in the case of Sahni Silk Mills (P) Limited & AnotherVs. Employees’ State Insurance Corporation (paras 10 & 13)“From Section 94-A, it does not appear thatParliament vested power in the Corporation todelegate its power on any officer or authoritysubordinate to the Corporation, and also vestedpower in the Corporation to empower such officeror authority, to authorize any other officer toexercise the said power under Section 85-B91). IfSection 94-A had a provision enabling theCorporation not only to delegate its power to anyother officer or authority subordinate to the https://hcservices.ecourts.gov.in/hcservices/ Corporation, but also to empower such officer orauthority in its own turn to authorize any otherofficer to exercise that power, the resolutioncould have been sustained. As such, it has to beheld that the part of the resolution dated28.02.1976, which authorizes the Director Generalto permit any other officer to exercise the powerunder Section 85-B(1) of the Act is ultra viresSection 94-A.”29.On the other hand, on the side of the respondent,reliance has been placed on the following judgments:a.Decision of the Supreme Court in the case of SpecialDirector & Another Vs. Mohd. Ghulam Ghouse & Another reported in(2004) 3 SCC 440: (para 5)“This Court in a large number of cases hasdeprecated the practice of the High Courtsentertaining writ petitions questioning legalityof the show cause notices stalling enquiries asproposed and retarding investigative process tofind actual facts with the participation and inthe presence of the parties. Unless the HighCourt is satisfied that the show cause notice wastotally non est in the eye of the law for absolutewant of jurisdiction of the authority to eveninvestigate into facts, writ petitions should notbe entertained for the mere asking and as a matterof routine, and the writ petitioner shouldinvariably be directed to respond to the showcause notice and take all stands highlighted inthe writ petition. Whether the show cause noticewas founded on any legal premises, is ajurisdictional issue which can even be urged bythe recipient of the notice and such issues alsocan be adjudicated by the authority issuing thevery notice initially, before the aggrieved couldapproach the court. Further, when the courtpasses an interim order, it should be careful tosee that the statutory functionaries specially andspecifically constituted for the purpose are notdenuded of powers and authority to initiallydecide the matter and ensure that ultimate reliefwhich may or may not be finally granted in thewrit petition is not accorded to the writpetitioner even at the threshold by the interimprotection granted.” https://hcservices.ecourts.gov.in/hcservices/ b.a 3 Judge Bench judgment of the Supreme Court reportedin (2006) 4 SCC 278 in the case of Standard Chartered Bank &Others Vs. Directorate of Enforcement & Others (para 25)“The prayer for the issue of a writ ofprohibition restraining the authorities under theAct from proceeding with the adjudication and theprosecution is essentially based on theconstitutional challenge to the relevantprovisions of the Act on the ground that theyviolate Articles 14 and 21 of the Constitution.Once we have held, as the High Court did, that theprovisions are constitutional, the basis on whichthe writ of prohibition is sought for by theappellants disappears. It is settled by thedecisions of this Court that a writ of prohibitionwill issue to prevent a tribunal or authority fromproceeding further when the authority proceeds toact without or in excess of jurisdiction; proceedsto act in violation of the rules of naturaljustice, or proceeds to act under a law which isitself ultra vires or unconstitutional. Since thebasis of the claim for the relief is found not toexist, the High Court rightly refused the prayerfor the issue of a writ of prohibition restrainingthe authorities from continuing the proceedingspursuant to the notices issued. As indicated bythis Court in State of U.P. Vs. Brahm Datt Sharmawhen a show cause notice is issued under statutoryprovision calling upon the person concerned toshow cause, ordinarily that person must place hiscase before the authority concerned by showingcause and the courts should be reluctant tointerfere with the notice at that stage unless thenotice is shown to have been issued palpablywithout any authority of law. On the facts ofthis case, it cannot be said that these noticesare palpably issued without authority of law. Inthat situation, the appellants cannot successfullychallenge the refusal by the High Court of thewrit of prohibition prayed for by them.c.The decision of the Supreme Court reported in AIR 1967SC 295 (V54 C 59) in the case of Barium Chemicals Ltd. & AnotherVs. Company Law Board and Others:(paras 19,20,36&71)“Bearing in mind the fact that the powerconferred by S.237 (b) is merely administrative,it is difficult to appreciate how the allocationof business of the Board relating to the exerciseof such power can be anything other than a matter https://hcservices.ecourts.gov.in/hcservices/ of procedure. Strictly speaking, the Chairman towhom the business of the Board is allocated doesnot become a delegate of the Board at all. Heacts in the name of the Board and is no more thanits agent. But even if he is looked upon as adelegate of the Board and, therefore, a sub-delegate vis-à-vis the Central Government, hewould be as much subject to the control of theCentral Government as the Board itself. For subs.(6) of S.10E provides that the Board shall, in theexercise of the powers delegated to it, be subjectto the control of the Central Government and theorder distributing the business was made with thepermission of the Central Government. Bearing inmind that the maxim delegatus non potest delegaresets out what is merely a rule of construction,sub-delegation can be sustained if permitted by anexpress provision or by necessary implication.Where, as here, what is sub-delegated is anadministrative power and control over its exerciseis restrained by the nominee of Parliament, thatis, here the Central Government, the power to makea delegation may be inferred. We are, therefore,of the view that the order made by the Chairman onbehalf of the Board is not invalid.To sum up, then, our conclusions may bestated thus: The discretion conferred on theCentral Government by S.237(b) to order aninvestigation and delegated by it to the CompanyLaw Board is administrative, that it could bevalidly exercised by the Chairman of the Board byan order made in pursuance of a rule enacted bythe Central Government under S.642 (1) read withS.10E (5), that the exercise of the power does notviolate any fundamental right of the Company, thatthe opinion to be formed under S.237(b) issubjective and that if the grounds are disclosedby the Board, the Court can examine them forconsidering whether they are relevant. In thecase before us they appear to be relevant in thecontext of the matter mentioned in sub-cls.(i) to(iii) of S.237(b). Though the order could besuccessfully challenged if it were made mala fide,it has not been shown to have been so made. Theattack on the order thus fails and the appeal isdismissed with costs. https://hcservices.ecourts.gov.in/hcservices/ But the maxim “delegates non potest delegare”must not be pushed too far. The maxim does notembody a rule of law. It indicates a rule ofconstruction of a statute or other instrumentconferring an authority. Prima facie, adiscretion conferred by a statute on any authorityis intended to be exercised by that authority andby no other. But the intention may be negativedby any contrary indications in the language, scopeor object of the statute. The construction thatwould best achieve the purpose and object of thestatute should be adopted.Lastly, the order was attacked on the groundthat S.237(b) which empowers the making of such anorder was violative of Articles 14 and 19(1)(g).The challenge was raised on behalf of secondappellant only. The contention under the head ofArticle 14 was that the Act provided threedifferent ways by which the Government can takeaction, under S.234 or S.235 and S.236 and lastlyunder S.237(b), that the power contained underS.237(b) was more drastic than under the formersections and that these sections enabled theGovernment to discriminate between companies andcompanies and pick and choose any one of them atits pleasure for action under Section 237(b). Insupport of this contention, reliance was placed onSuraj Mall Mohi and Co. Vs. A.V. VishwanathaSastri, 195 SCR 448: (AIR 1954 SC 545), where S.5(4) of the Taxation on Income (InvestigationCommission) Act, 1947 was declared discriminatorylegislation and Meenakshi Mills Ltd. Vs.A.V.Vishwanatha Sastri, 1955 SCR 787: (AIR 1955 SC13), reported in the same volume at p.787 whereS.5(1) of the Act was struck down after the IncomeTax (Amendment) Act XXXIII of 1964 was enacted.These decisions, however, cannot avail thepetitioners for the reasons for which theseprovisions were struck down are lacking in thepresent case. No question of discriminationarises in regard to the powers under S.234 andS.237. Section 234 only empowers the Registrar tocall for information or explanation and to takeaction where such information or explanation isnot forthcoming. Under Section 234, there is nopower to order investigation either in theRegistrar or the Government. Under S.235, nodoubt, the Government can appoint inspectors butit can do so under the three specified ensue set https://hcservices.ecourts.gov.in/hcservices/ out therein. What Ss.235 and 236 do is to givepower to shareholders on the one hand and theRegistrar through a report on the other hand tomove the Government to take action. Thesesections do not authorize the Government toappoint inspectors suo motu as in the case ofS.237(b). The discretionary power directing aninvestigation is contained in S.237(b).Therefore, S.234, S.235 and S.236 and S.237(b)give powers to different authorities, viz., theRegistrar and the Government, provide powers whichare different in extent and nature, exercisable insets of circumstances and in a manner differentfrom one another. Therefore, there is no questionof discriminatory power having been vested in theGovernment under these sections to pick and choosebetween one company and the other. The challengeunder Art.14, therefore, must fail.”d.A Division Bench judgment of the High Court of Bombayin the case of Anand Rathi Vs. SEBI reported in (2001) 32 SCL 227(BOM.) in which the order was made by A.P.Shah, J., on behalf ofthe Division Bench and the relevant portions are as under:“13.. . . It is only an interim measure toprevent further possible mischief of tamperingwith the security market. He submitted that SEBIhas certainly a power to regulate the Stock Marketand to intervene in volatile and serioussituations where orders can always be passed asinterim measures pending further investigation andenquiry. He submitted that Section 1 casts a dutyon the SEBI Board to protect the interest of theinvestors in securities market by such measures asit thinks fit. Section 11B empowers the Board toissue necessary directions. While making apointed reference to Section 11(1) and Section 11(2) (a), (e), (g) and (i), it was submitted thatin due discharge of its function envisaged underthe aforesaid clauses, directions have been issuedto the petitioners not to undertake any freshbusiness as brokers till the inquiry proceedingsare completed. In this connection, a referencewas made to a Division Bench judgment of thisCourt in Ramrakh R. Bohra V. SEBI (1998) 18 SCL543 wherein SEBI’s power to ban trading as aninterim measure pending enquiry was categoricallyupheld. Our attention was also drawn to thedecision of the Division Bench of Gujarat HighCourt in SEBI v. Alka Synthetics Ltd. (1999) 95Comp. Cas.772). https://hcservices.ecourts.gov.in/hcservices/ In the instant case, the impugned order hasbeen passed not by way of punishment or penaltybut only by way of an interim measure, pendingenquiry into the manipulations. There is a wellsettled distinction in law between the suspensionswhich are made as holding operation pendingenquiry and suspensions by way of punishment. Asobserved by Lord Denning in Lewis case (supra)(cited with approval by the Supreme Court inLiberty Oil Mills), there is a distinction betweenthe suspensions which are inflicted by way ofpunishment, as for instance, when a member of theBar is suspended for six months or when asolicitor is suspended from practice. In Liberty Oil Mills case (supra), theSupreme Court observed:“15.. . . We do not think that itis permissible to interpret anystatutory instrument so as to excludenatural justice, unless the language ofthe instrument leaves no option to thecourt. Procedural fairness embodyingnatural justice is to be impliedwhenever action is taken affecting therights of parties. It may be that theopportunity to be heard may not be pre-decisional; it may necessarily have tobe post-decisional where the danger tobe averted or the act to be prevented isimminent or whether the action to betaken can brook no delay. If an area isdevastated by flood, one cannot wait toissue show cause notices forrequisitioning vehicles to evacuatepopulation. If thee is an outbreak ofan epidemic, we presume one does nothave to issue show cause notices torequisition beds in hospitals, public orprivate. In such situations, it may beenough to issue post-decisional noticesproviding for an opportunity. It maynot even be necessary in some situationsto issue such notices, but it would besufficient but obligatory to considerany representation that may be made bythe aggrieved person and that wouldsatisfy the requirements of proceduralfairness and natural justice. It mayand indeed it must vary from statute, https://hcservices.ecourts.gov.in/hcservices/ situation to situation and case to case.Again, it is necessary to say that pre-decisional natural justice is notusually contemplated when the decisionstaken are of an interim nature pendinginvestigation or enquiry. Ad interimorders may always be made ex parte andsuch orders may themselves provide foran opportunity to the aggrieved party tobe heard at a later stage. Even if theinterim orders do not make provision forsuch an opportunity, an aggrieved partyhas, nevertheless, always the right tomake an appropriate representationseeking a review of the order and askingthe authority to rescind or modify theorder. The principles of naturaljustice would be satisfied if theaggrieved party is given an opportunityat his request. There is no violationof a principle of natural justice if anex parte ad interim order is made unlessof course, the statute itself providesfor a hearing before the order is madeas in Clause 8-A. Natural justice willbe violated if the authority refuses toconsider the request of the aggrievedparty for an opportunity to make hisrepresentation against the ex parte adinterim orders.In American Power & Light Company V.Securities & Exchange Commission 329 US 90, 112,the U.S. Supreme Court held:“20.Where Congress has entrustedan administrative agency with theresponsibility of selecting the means ofachieving the statutory policy, therelation of remedy to policy ispeculiarly a matter of administrativecompetence.21.The judgment of the Securitiesand Exchange Commission in dealing withthe problem of adjusting holding companysystems in accordance with thelegislative standards prescribed bySection 11(b)(2) of the Public UtilityHolding company Act of 1935, is entitledto the greatest weight; and only if theremedy chosen is unwarranted in law or https://hcservices.ecourts.gov.in/hcservices/ is without justification in fact shoulda Court attempt to intervene in thematter.”. . .The application of the principle ofproportionality which is sought to be invoked byDr. Singhvi is debatable qua its application tothe executive actions Tata Cellular v. Union ofIndia (1994) 6 SCC 651 and State of A.P. v.McDowell & Co. (1996) 3 SCC 709. In G.Ganagutham’s case (supra), the Supreme Court heldthat where no fundamental freedoms are involved,the Courts/Tribunals will only play a secondaryrole while the primary judgment as toreasonableness will remain with the executive oradministrative authority. The secondary judgmentof the Court is to be based on Wednesbury or CCSUprinciples as explained by Lord Greene and LordDiplock respectively to find out if the executiveor administrative authority has reasonably arrivedat his decision as the primary authority. Thequestion whether the Courts in our country willapply the principles of “proportionality” andassume a primary role was left open to be decidedin a case where such action is alleged to offendfundamental freedoms under Articles 19, 21, etc.and not under Article 14.In the light of the principles set out above,in our view, it is not possible to interfere withthe interim orders passed by the SEBI. It cannotbe said the SEBI’s orders are absurd or based onno material.In our view, the submission of Dr. Singhvibased on Article 19(1)(g) is equally untenable.The decision of Jammu and Kashmir High Court andAllahabad High Court have no application to thefacts of the present case. What is laid down inthese cases is that where the effect of arestrictive legislation is to totally prevent acitizen from carrying on trade, business orprofession, such a restriction is unreasonable andvoid. In the instant case, the order impugned isof interim nature which is passed by SEBI in apending enquiry. The question of any violation ofArticle 19(1)(g) does not arise.” https://hcservices.ecourts.gov.in/hcservices/ e.Another Division Bench judgment of High Court of Bombayin the case of Ramrakh R. Bohra v. SEBI reported in SCL (18) 1998543 and the relevant paras are as under:“8.. . . The same is an interim arrangementso as to protect the interests of the investorsand the securities market. The said directionshave been issued after a preliminary inquiry hasbeen conducted by recording statements of variouswitnesses, including those of the petitioners.One of the report in respect of the inquiry hasbeen furnished to the Board and investigation intothe other is in progress. As far as the inquiryreport is concerned, the same cannot be disclosedto the petitioners as it would prejudice thefurther progress of investigation. Since theinquiry is incomplete, the contents of the inquirycannot be disclosed as it would exposeinvestigative content.14.Whereas it is contended on behalf of thepetitioner that the Chairman, under the aforesaidprovision, will not be entitled to exercise allpowers and do all acts and things which may beexercised or done by the Board as the same isexcepted by the regulations by use of phrase “saveas otherwise determined by regulations”. As faras regulations are concerned, the same confer thepower only on the Board and not on the Chairman.It is, however, the contention of the respondentsthat even though regulations may not haveconferred the aforesaid powers on the Chairman,the aforesaid provision does confer the saidpowers on the Chairman. The phrase “save asotherwise determined by the regulations coversonly the phrase immediately following i.e. theChairman shall also have powers of generalsuperintendence and direction of the affairs ofthe Board. The same does not qualify what followsthereafter i.e. “and may also exercise al powersand do all acts and things which may be exercisedor done by the Board”. In our view, it is notnecessary to dilate over this controversy as underSection 19, there is an independent power ofdelegation and the Board in the instant case, hasdelegated its powers on the Chairman. Section 19provides, as under:-“Delegation – The Board may, begeneral or special order in writingdelegate to any member, Officer of theBoard or any other person subject to https://hcservices.ecourts.gov.in/hcservices/ such conditions, if any, as may bespecified in the order such of itspowers and functions under this Actexcept the powers under Section 29, asit may deem necessary”.“15.In the instant case, the counsel for therespondents, has placed for our perusal, aresolution passed by the Board on 12.08.1997 whichinter alia provides that the Chairman isauthorized and shall be competent to take actionfor any default under the provisions of the SEBIAct, rules and Regulations. In view of theaforesaid delegation, we have no hesitation inholding that the Chairman of the first respondentis fully justified in taking the impugned action. 24.If one has regard to the aforesaidprinciples, it would follow that the power whichhas been conferred by Section 11B to issuedirection are of a widest possible amplitude andare exercisable in the interests of investors andin order to prevent inter alia a broker fromconducting his business in a manner detrimental tothe interests of the investors or the securitiesmarket. The said power to issue directions underSection 1B must carry with it, by necessaryimplication, all powers and duties incidental andnecessary to make the exercise of these powersfully effective including the power to passinterim orders in aid of the final orders. Theprovision of Section 11B, it is to be noted, hasbeen introduced by an amendment brought about in1995 and the same seeks to confer additional poweron the Board, by way of interim measures, pendinginquiry. The same is intended for the protectionof the interests of the investors and thesecurities markets.”30.From a plain reading of the impugned order it is seenthat there were two inspections conducted by SEBI, the first oneduring August 27-30, 2003 and the second one during July 19-21,2004 and the final inspection report comprising 20observations/suggestions allegedly not complied with by CSX wasforwarded to CSX vide letter dated 11.08.2004 advising it tofurnish the compliance status and comments. Out of 20observations/suggestions, 4 were not implemented and 10observations/suggestions were at various stages ofimplementation. On the basis of the findings of the inspectionrevealing certain deficiencies and irregularities in thefunctioning of CSX, the respondent has granted conditional https://hcservices.ecourts.gov.in/hcservices/ renewal of recognition for a period of one year commencing from18.09.2003 and ending on 17.04.2004. The conditions stipulatedin the order of renewal of recognition are as follows:a.The Exchange shall commence trading only afterobtaining final approval from SEBI for establishment ofthe Settlement Guarantee Fund / Trade Guarantee Fund.b.The Exchange shall ensure that every member of theExchange maintains adequate Base Minimum Capital (BMC),which is free from any encumbrance before they arepermitted for trade in the Exchange.c.The Exchange shall comply with the suggestions statedin the Report of the Inspection of the Exchangeconducted by the SEBI during the period August 27-30,2003 and communicated to the Exchange vide letterno.SRO/SMD/CSX/EIF/2003/1015 dated September 12, 2003.31.The major observations/suggestions which were notimplemented by CSX are as under:a.A sum of Rs.6,77,976/- was still due from about 73members towards arrears of Annual Subscription fees(Rs.3,61,000/-), Investor Protection Fund contribution(Rs.56,500/-), Service Charges arrears (Rs.1,25,000/-)and other charges.b.CSX continued to function on deficits consecutively forthe third year. Various accounts/funds like BaseMinimum Capital (“BMC”), Pay-out Guarantee Fund,Investor Protection Fund, Investor Service Fund, etc.showed huge positive balances in the books of theExchange, whereas the actual balances were Nil.c.Seven members continued to have shortfall in the BMC,out of which four members had Nil BMC.d.CSX was yet to complete the registration formalities ofthe Trust for the management and administration of theInvestor Protection Fund (IPF) and therefore was yet toobtain exemptions from Income Tax.32.In spite of the aforesaid deficiencies and failure ofCSX to comply with the renewal of conditions as above, therecognition of CSX was renewed by SEBI from time to time subjectto certain conditions, in the interest of the investing public ofthe region at large. The recognition of CSX was last renewed fora period of one year ending on 17.09.2006, subject to theconditions (a) and (b) stated supra. The renewal was alsosubject to the Exchange complying with the suggestions stated in https://hcservices.ecourts.gov.in/hcservices/ the Report of the Inspection of the Exchange conducted by theSEBI during the period July 19-21, 2004 and communicated to theExchange on 11.08.2004. Due to non-compliance of theobservations/suggestions stated in the Inspection Report, SEBIfound that there was serious financial implication, non-fulfilment of basic membership requirement, etc. which weredetrimental to the smooth functioning of the Exchange. 33.Apart from the above, non-compliance by CSX alsoincludes (a) non-submission of the revised Corporatisation andDemutualisation Scheme, (b) Depletion in the contribution forInfrastructure Development Fund, (c) non submission of the reporton allegations pertaining to sale of Land & Building, in spite ofundertaking given to SEBI and (d) deadlock between PublicRepresentative Directors/SEBI Nominee Director and the ElectedDirectors of the Exchange on the aforesaid issues which includesremoval of Executive Director of the Exchange, etc.34.On the basis of the aforesaid findings, a detailed showcause notice dated 22.11.2005 under Section 11 of SCRA was issuedto the Council of Management of CSX calling upon it to show causeas to why appropriate directions including supersession of theCouncil of Management should not be passed in order to regulatethe functioning of the Exchange and orderly development of thesecurities market. In response to the this show cause notice,CSX has submitted a detailed reply dated 06.12.2005 denying theallegations of irregularities/lapses in the functioning of theExchange as alleged in the show cause notice and requested forpersonal hearing. Accordingly, a personal hearing was given tothe Council on 09.03.2006 before the whole time member in whichthree Public Representative Directors, one SEBI Nominee Directorand five Elected Directors appeared and made submissions onbehalf of the Council of Management of CSX. 35.Pending consideration of the above show cause noticedated 22.11.2005, CSX in its letters dated 04.01.2006 and24.01.2006 informed SEBI that 19 of its members have submitted arequisition under Section 169 of the Companies Act before itsCouncil of Management to call for an EGM of the Exchange to passa resolution of voluntary surrender of its recognition.Subsequently, SEBI received a letter dated 15.02.2006 from CSXinforming that the members present in the EGM of the Exchange onthe said date have unanimously passed a resolution for voluntarysurrender of its recognition and also to the effect that theExchange shall cease to function with immediate effect as arecognized Stock Exchange within the scope and meaning of theSCRA and SEBI Act. It was also mentioned therein that aCommittee of elected Directors of the Exchange was formedempowering it to take necessary steps for changing the name ofthe Company, re-writing the Memorandum and Articles ofAssociation, etc. and to exercise all such powers, which would https://hcservices.ecourts.gov.in/hcservices/ otherwise have been exercised by the Council to give effect tothe aforesaid resolutions.36.It was also brought to the notice of the respondentthat the Council of Management of CSX, in its meeting held on07.03.2006 which was attended by the elected member directorsonly, inter alia, considered the draft Memorandum and Articles ofAssociation, the proposed change in the name of the Company andthe draft notice for the EGM scheduled for 31.03.2006. Therespondent, after examining the issue, issued a letter dated13.03.2006 to CSX informing that the SCRA provides for the schemeof grant of recognition and withdrawal of recognition and underthe statutory mechanism provided in the SCRA, voluntary surrenderof recognition as resolved in the above-mentioned resolution isnot provided and not permissible. A recognized Stock Exchangecan cease to function as such if the recognition granted to suchStock Exchange is withdrawn in accordance with the SCRA andtherefore, it cannot cease to function as a recognized StockExchange pursuant to any resolution passed by its members in thisregard. The status of CSX is exclusively governed by theprovisions of the SCRA and therefore, the resolution passed inthe EGM held on 15.02.2006 appears to be ultra vires the SCRA.In view of the above, CSX was advised that the resolutions passedin the EGM held on 15.02.2006 cannot be acted upon by it.37.It is also seen from the impugned order that SEBI wasinformed by the Registrar of Companies, Coimbatore who is alsothe SEBI Nominee Director on the Council of Management of CSXvide his letter dated 29.03.2006 that the members of CSX haveresolved to re-write the Memorandum and Articles of Associationof the Exchange and to change the name of the Company and havealso filed Form No.23 with ROC on 16.03.2006 despite SEBI’sadvice. SEBI also came to know that it was decided to read outthe contents of SEBI’s letter in the EGM scheduled for31.03.2006. However, CSX did not furnish the minutes of the saidmeeting either to SEBI or to the Public RepresentativeDirectors/SEBI Nominee Director. In spite of the said letterbeing read over at the EGM, the members attending the EGM passedthe resolution adopting the new set of Memorandum and Articles ofAssociation, ignoring SEBI’s advice. It also came to theknowledge of SEBI that the Member-Directors of the Exchange havechanged the method of operation of bank accounts in such a mannerthat all the cheques for the Exchanges would be signed by theelected Directors only and they have also removed the Consultantof the Exchange who was appointed by the Management Sub-Committeeduly approved by the Council of Management and have appointed aninternal auditor in his place without the notice of the PublicRepresentative Directors/SEBI Nominee Director. https://hcservices.ecourts.gov.in/hcservices/

38.Further, SEBI has received a copy of letter dated08.04.2006 of CSX addressed to the 6 Public RepresentativeDirectors/SEBI Nominee Director informing that at the EGM of theExchange held on 31.03.2006, the members have unanimously passeda resolution adopting new Articles of Association according towhich no person other than a member of the Exchange can hold theposition of a Director. Consequently, the Public RepresentativeDirectors and the SEBI Nominee Director do not find place in thesaid Articles of Association. The invitation to them to attendthe Board Meeting of CSX scheduled for 10.04.2006 was withdrawn.Knowing fully well that SCRA does not permit any voluntarysurrender of recognition by any recognized Stock Exchange, CSXwent ahead with the subsequent plan of action on the self-servingassumption that the surrender of recognition by them islegitimate and would, in turn, legitimize the slew of actionspursuant to the same. However, in law, all these actions aretainted with inasmuch as the very act of voluntary surrenderlacks legal basis and any action based on the same would belegally vitiated in law.39.The impugned order further states that the conduct ofthe elected Broker-Directors is subversive of regulatorydiscipline and SEBI is charged with the duty of securing propermanagement of the Stock Exchange and to prevent the affairs ofsuch Exchange from being conducted in a manner detrimental to theinterest of the investors in the securities market and it is badthat CSX has adopted a course of extreme defiance andconfrontation, despite being reminded that its actions areillegal and ultra vires of SCRA. By disallowing the Publicrepresentative Directors/SEBI Nominee Director from attending theBoard Meetings of CSX, the elected Broker-Directors haveattempted to seize full control of the administration and controlover the movable and immovable properties of the Exchange with aview to frustrate the on-going proceedings.40.As a stock Exchange is a “State” within the meaning ofArticle 12 of the Constitution of India, SCRA was enacted toprevent undesirable transactions in securities by regulatingbusiness or dealings therein and the Stock Exchanges are crediblebuilding blocks of the economy and fulfill a vital function inthe economic development of the nation. The proper working of aStock Exchange essentially depends not only on the calibre of themembers constituting it but also perhaps, more importantly ontheir standing. In carrying out the activities in a StockExchange, there must be public-spirited men of prudence withequipoise, perspicacity and maturity and the persons so appointedshould have necessary professional competence and experience inthe areas related to securities market. They are included in theGoverning Boards of Stock Exchanges along with the elected brokermembers in a synergy of sorts, to broad base the Governing Boardsand to make them fully representative of various interests in the https://hcservices.ecourts.gov.in/hcservices/ securities markets and in order to ensure that the affairs of theStock Exchanges are conducted on healthy lines with the higheststandards of professional conduct, good governance andtransparency to inspire and sustain the confidence of theinvesting public.41.In order to protect the interest of the investors andthe integrity of the markets as a Regulator, SEBI, therefore, hasto make the market place efficient and clean, wherein all theparticipants play their role diligently and professionally withinthe four corners of the system, without there being any scope forabuse. Where there is an apprehension that certain scrupulouselements are trying to subvert the system to serve their owninterest, it becomes imperative on the part of SEBI to interveneand to curb further mischief and to take necessary action toinstill and maintain public confidence in the integrity of thesecurities market. Also, SEBI has to prevent any loss or damagenot only to the property of the Stock Exchange, which is a publicinstitution, but also to protect the interest of investors andthe integrity of the market.42.Having highest regard to the duty cast upon it in thecontext of the unedifying developments that have taken place inCSX, after finding that there are substantial reasons tosafeguard the interest of the CSX, SEBI was of the consideredview that the conduct of the elected Member-Directors of CSX ishighly unbecoming, contumacious and self-serving, besidesconstituting an obdurate defiance of not only the Regulator butalso of the statutory requirements. In addition, the conductreeks of a pre-meditation to seize control over the exchange andits assets in a planned manner and such deliberatenessdemonstrates a sordid intention to dismantle the Exchange, whichis a public institution in exchange for a private arrangement toserve collateral purposes which are not in public interest.43.Considering the sensitivity of the securities marketand the possible impact of such pernicious activities of theMember-Directors of CSX on the investors in general and thesecurities market in particular, it becomes imperative to takeimmediate action, pending the proceedings pursuant to the showcause notice dated 22.11.2005 to ensure that the assets andproperties of the Exchange are not brazenly usurped by a few, ina manner as would constitute a threat to the regulatorydiscipline and the integrity of the securities market. 44.The impugned order further highlights that unless astringent preventive and remedial measure is taken immediately,there will be a grave jeopardy to the very functioning andmanagement of the Exchange including control of its assets, whichhave been sedulously nurtured over a long period of time in theinterest of the investing public and orderly development of themarket and such an eventuality is fraught with the grave risk of https://hcservices.ecourts.gov.in/hcservices/ the control being taken over by a few for their own benefit tothe detriment of the larger public cause. SEBI, in exercise ofits powers under Section 12A of the SCRA, has issued directionsas indicated supra which are impugned in the present writpetition.45.On a careful analysis of the substantial grounds andthe cogent reasons given by the respondent and on giving dueconsideration to the inspection report and the various provisionsof law, the first question which arises for consideration iswhether a writ petition is maintainable against a show causenotice.46.It is argued by Mr. Datar that the impugned order,though claimed to be a show cause notice, is not a show causenotice, for the reasons that it is expressly termed as an orderand it has specifically issued orders which are impermissibleunder the provisions of Section 12A of SCRA. That apart,directions under clause (c) of the impugned order can be issuedonly in the interest of investor and securities market and in theabsence of any trading activities, there cannot be either theinvestor or a security market. The power, though sought to behaving exercised under Section 12A of the SCRA, is essentiallythe one that has been taken under Section 11 which alone providesfor supersession and the order in letter and in effect, is onesuperseding the governing body of CSX since a three membermanagement committee has been appointed to carry on its day-to-day affairs and such supersession can be done only by the CentralGovernment and no proof of delegation of this power to a memberof the respondent has been furnished by the respondent. Whensection 11 provides for a hearing to be given and that an orderof supersession being passed only after mandatorily giving ahearing, an order cannot be issued without the mandatorycompliance and thus, it is a clear case of abuse and a colourableexercise of power. As such, the respondent cannot claim that itis a show cause notice when the impugned order clearly startswith the caption “Order” and in fact, there are orders that havebeen passed.47.Resisting the same, the learned ASG has strongly reliedon the principles laid down in the judgment in the cases ofSpecial Director & Another Vs. Mohd. Ghulam Ghouse & Anotherreported in (2004) 3 SCC 440 and Standard Chartered Bank & OthersVs. Directorate of Enforcement & Others reported in (2006) 4 SCC278 already referred to above. In the ruling of the latter case,the Apex Court has held that when a show cause notice is issuedunder statutory provision calling upon the person concerned toshow cause, ordinarily that person must place his case before theauthority concerned by showing cause and the courts should bereluctant to interfere with the notice at that stage unless thenotice is shown to have been issued palpably without anyauthority of law. In the instant case, it cannot be said that https://hcservices.ecourts.gov.in/hcservices/ the notice has been issued palpably without the authority of law.Applying the principle laid down in the said judgment, there isno total lack of jurisdiction in the issuance of the said showcause notice and even the facts canvassed one way or the otherwould only relate to the limits on the exercise of power whichwill not warrant any interference at the threshold. Therefore,in the given circumstances and in view of the power exercised bythe respondent and on verification of the materials and recordsplaced before this Court, the petitioner, instead of agitatingthe issues which are canvassed before this Court before SEBI, hasapproached this Court and filed the writ petition on handinvoking jurisdiction under Article 226 of the Constitution,which in my opinion is premature and cannot be sustained. Evenassuming that the writ petition can be sustained, there are alsoother points which emerge for consideration and they are dealtwith in the subsequent paragraphs.48.The second issue for consideration is whether SEBI isempowered to pass interim orders and that too, through its wholetime member, pending adjudication of the show cause notice.49.When once a Company had been licensed to become StockExchange, after bringing forth the relevant amendments to theArticles of such Company to enable them to become a StockExchange, then such amendments to become a Stock Exchange cannotbe reversed unilaterally by the said Stock Exchange. Anyamendment to the Articles of the Stock Exchange could be madeonly with the approval of the Central Government/SEBI as perSection 4(5) read with Section 2(g) of the SCRA. In the case onhand, CSX has removed the SEBI Nominee Director by amending theMemorandum and Articles of Association and again, the Articleshave been amended enabling them to carry on the business of realestate and also for surrendering their licence to run a StockExchange. All these acts have been done by CSX to wriggle out ofthe statutory obligations under the SCRA and SEBI Act. When CSXis regarded as a State within the meaning of Article 12 of theConstitution and once it had become a Stock Exchange under thecontrol of the respondent, it could be superseded by an ordermade under SCRA by the SEBI under the powers delegated to it andthere is no question of a Stock Exchange ceasing to do itsbusiness as such by unilateral withdrawal of their licence. 50.Contrary to the provisions, CSX has acted and passedresolutions militating against the object and purpose of the twoenactments namely, SCRA and SEBI Act. In such circumstances, theinterim directions made in the impugned order by SEBI for thepurpose of preserving the integrity of CSX cannot be takenexception to. Further, the power to make such interim directionpending disposal of the show cause notice has been upheld by twodecisions of the Bombay High Court in the cases of Ramrakh Bohraand Anand Rathi already dealt with. On the question whethersupersession could be made on the guise of an interim direction, https://hcservices.ecourts.gov.in/hcservices/ it is not the case that somebody else has been appointed insupersession of the Council of Management. In other words, nostranger has been appointed to look after the day-to-day businessof CSX but only three of the nominated Directors who had beenillegally removed by the petition but in law continued as suchDirectors have been placed in charge of the CSX, pendingadjudication of the show cause notice. If exclusion of certainDirectors from the management of the society could be calledsupersession, then, it is only CSX which had superseded the StockExchange by unilaterally removing the nominated Directors.Therefore, there is no substance in the contention thatsupersession had been made by a nominated member of SEBI withouthearing CSX.51.On the principle of delegatus non-potest delegare,delegation and further delegation are only matters ofinterpretation of the relevant provisions. In order to answerthe issue whether such delegation has been authorized, one has tonecessarily look into the relevant statutory provisions underSection 11 of the SCRA. The power to supersede has been vestedwith the Central Government and such power to supersede could bevalidly delegated by the Central Government to the SEBI underSection 29A of SCRA. Under Section 11(1), there is a generalityof the functions and duties cast upon the SEBI i.e. to protectthe interest of investors in securities and to promote thedevelopment of and to regulate the securities market, by suchmeasures as it thinks fit. Under sub-section 2 of Section 11,without prejudice to such generality of power, by Section 11(2)(j), the powers delegated to SEBI under SCRA by the CentralGovernment also becomes part and parcel of the duties andfunctions of the SEBI. The power under Section 11 and Section29A of SCRA have been incorporated by reference and to thisextent, they become part of SEBI and when once such a delegationhad taken place, it becomes a statutory function and duty of theSEBI under Section 11(2)(i) which could be validly delegatedunder the provisions of SEBI itself under Section 19 to theChairman or any of its officers. In this case, a whole timemember of the SEBI has passed the order. 52.In view of the ruling of the Supreme Court in the casereported in AIR 1967 SC 295 (supra), when the provisions of thestatutory enactment did not provide for a further delegation, thesame could not be done by way of statutory rules. But, in thecase before me, the functions of the Central Government underSCRA by delegation became the function of the Board under Section11(2)(i) and when once it became the function of the Board, thestatute itself authorizes the delegation of such function of theBoard under Section 19 to the Chairman or its officers. Section11(2)(a) of SEBI Act empowers SEBI to regulate the business ofthe Stock Exchanges and any other securities market and thisspecific power vested with SEBI enables it to pass appropriatedirections to the Stock Exchanges. Exercise of such power by https://hcservices.ecourts.gov.in/hcservices/ SEBI is further complimented by the provisions of SCRA. In viewof such powers available under the SEBI Act, the impugned showcause notice has been passed by a whole time member on behalf ofthe Board and therefore, SEBI has got the necessary power underthe SEBI Act to pass interim order pending adjudication of theshow cause notice and the impugned order signed by a whole timemember can be sustained. 53.The third point arising for consideration is whetherany emergent situation has arisen necessitating the issue of theimpugned order. It was argued by Mr. Datar that CSX had becomedefunct and not doing any business for several years. But, onthe contrary, the letter dated 21.04.2006 of CSX clearlyevidences that CSX is still carrying on the business of a StockExchange. It was only to forestall any order of supersessionwhich might be passed against CSX that CSX had chosen to passsuch resolutions in the EGM and has filed the present writpetition to avoid further action pursuant to the impugned showcause notice. Therefore, there is no bona fide in filing thiswrit petition. 54.It was further argued by Mr. Datar that the impugnedorder is a classical verbosity without any substance. It waspointed out that till the change in the Memorandum consequent tothe EGM resolutions, when the petitioner ceased to operate as aStock Exchange, the petitioner was being managed by its governingbody which consisted of public representatives and SEBI nominees.Therefore, the ground for emergent situation could only have beenafter the said period and no grounds have been set forth in theorder. According to him, the petitioner’s only assets are itsinfrastructure or building and therefore, it is but natural thatits object would include a real estate business and merelybecause an object is to carry real estate business, grave andserious allegations of stripping of assets cannot be made and itis a mere ipsi dixit of the respondent and it is the petitionerwhich is safeguarding the assets and in fact, one of the nomineesof the respondent who was the Registrar of Companies who istrying to strip the assets of the petitioner by trying to forceit to sell its property which has been resisted and prevented bythe petitioner’s office bearers.55.It is seen that two inspections were carried out bySEBI and a show cause notice was also issued to CSX to complywith certain observations/suggestions in order to protect theinvesting public at large. Also, a personal hearing was given tothe Council of Management on 09.03.2006 before passing theimpugned order wherein 3 Public Representative Directors, oneSEBI Nominee Director and 5 Elected Members appeared and madesubmissions on behalf of Council of Management of CSX. CSX hasalso informed SEBI that 19 of its members have submitted arequisition under Section 169 of the Companies Act before theCouncil of Management to call for an EGM of the Exchange to pass https://hcservices.ecourts.gov.in/hcservices/ the resolution of voluntary surrender of recognition. There wereattempts to change the name of the Company, re-writing theMemorandum and Articles of Association of CSX and exercise ofsuch powers which would otherwise have been exercised by CSX togive effect to the aforesaid resolutions of surrender ofrecognition, etc. CSX has also changed the method of operationof bank accounts and removed the Consultant of the Exchange whowas duly appointed by the Council of Management and has appointedan internal auditor in that place without any notice to thePublic Representative Directors/SEBI Nominee Director. Thus, allthese actions of CSX have given rise to an emergent scenario toSEBI to take some interim measures in order to protect theinterest of the larger investing public as Stock Exchanges arecreditable building blocks of the country’s economy. Thus, I amof the view that on the basis of well settled principles and withavailable sources of power within its competence, SEBI has issuedthe interim directions and the same cannot be found fault with asthere was certainly an emergent situation warranting issue ofinterim directions. 56.The fourth and last point for consideration in thispetition is whether voluntary surrender of recognition by CSX ispermissible. In the absence of any provision under the SCRA,voluntary surrender of recognition as resolved by CSX in its EGMis contrary to law as it is clear that CSX has resorted to thisaction only in order to wriggle out itself of the statutoryobligations under SCRA and SEBI Act for compliance of certainobservations and to answer the various issues raised by SEBI forthe proper management and control of CSX involving great extentof public interest. 57.As is known, the National Stock Exchange, Bombay StockExchange and RSEs in India play the role of a barometer in thedevelopment of Indian economy and in such view of the matter, anyaction which is detrimental to the interest of the investingpublic at large and contrary to the provisions of the SCRA andSEBI Act, will certainly have a negative impact on the economicsystem of the country as a whole.58.In view of the above discussion and various rulings ofthe Supreme Court and Bombay High Court, more particularly in thelight of the decision in Anand Rathi’s case, it is not possibleto interfere with the impugned order passed by SEBI since anemergent situation has arisen warranting SEBI to pass such animpugned order through its whole time member to safeguard thesecurities market and the investing public and to ensure orderlydevelopment of securities market in the process of development ofnational economy. https://hcservices.ecourts.gov.in/hcservices/

59.In that view of the matter, I find no infirmity withthe impugned order no.WTM/GA.MRD/DSA/58/06 dated 17.04.2006passed by SEBI giving directions to the effect that (i) CSX isrestrained from transferring or alienating any movable orimmovable property of the Exchange in any manner, (ii) the day-to-day functioning of CSX would be undertaken by a three memberCommittee consisting of Shri.V.Selvaraj, SEBI NomineeDirector/ROC, Shri. C.A. Venkatesan and Shri. K.R. Raman, PublicRepresentative Directors and (iii) the said Committee isauthorized to make such expenditures and operate the bankaccounts of CSX and as such, the same is upheld and the writpetition, which is devoid of merits, is liable to be dismissedand is accordingly dismissed without any order as to costs.Consequently connected W.P.M.P.s and W.V.M.P. are also dismissed.cadSd/Asst.Registrar/true copy/Sub Asst.RegistrarTo1. The ChairmanSecurities & Exchange Board of IndiaMittal Court "B" Wing, I Floor224, Nariman PointMumbai – 400 0212. The Three Members Committee consisting of Shri. V. Selvaraj,SEBI Nominee Director/ROC,Shri C.A. Venkatesan and Shri K.R. Raman Public RepresentativeDirectorsNo. 683-686 Trichy Road,Coimbatore 641 005.3. The Director, Registrar of Company,Coimbatore.+ one cc to Mr. Sathish Parasaraman, Advocate sr no. 38573+ one cc to M/s. Shivakumar and Suresh Advocates sr no. 38560'PV(CO)NM(28.08.2006)W.P. No.11557 of 2006