M/s. Dalmia Securities Private Limited and Another v. The Calcutta Stock Exchange Limited and Another

available to the writ petitioners by way of arbitration. Clause XXXI of the CSE Bye-Laws, under Chapter XVIII, contains an arbitration clause. It is argued that by dint of the said clause, any dispute arising out of transactions under the said Bye-Laws between the writ petitioner no.1, a registered member of the CSE, and the CSE, is required to be referred to arbitration.

#8. Thirdly, it is argued that complex questions of fact are required to be adjudicated in order to examine the grant of reliefs sought in the writ petition, which is beyond the writ court's permissible jurisdiction. It is argued that without taking evidence and/or appreciating the materials on record at length, the writ petition cannot be disposed of and, as such, the application under Article 226 of the Constitution ought not to have been entertained.

#9. Although at the initial stages, the CSE had argued that the writ petition is not maintainable against the CSE, which is a registered Company and is an autonomous body not coming within the purview of article 12 of the Constitution of India, the said argument was not pursued seriously in the final arguments, as reflected in the written notes of arguments filed by the CSE as well. 5

#10. The issue of maintainability is controverted by the writ petitioners by placing reliance on Trilochana K. Doshi vs Stock Exchange of India and Another reported at 2000(4) Mh.L.J, delivered by a Division Bench of the Bombay High Court. Learned senior counsel appearing for the petitioners also cites K.C Sharma vs. Delhi Stock Exchange and Others reported at reported at (2005) 4 SCC 4. Both the above judgments are relied on for the proposition that writ petitions lie against stock exchanges.

#11. Learned senior counsel appearing for the CSE cites Bachhaj Nahar vs Nilima Mandal and Another reported at (2008) 17 SCC 491 in support of the proposition that no amount of evidence can be looked into on a plea which was never put forward in the pleadings and the court cannot decide a question which did not arise from the pleadings and was not the subject-matter of an issue.

#12. Learned senior counsel appearing for the CSE also cites a Division Bench judgment of this Court in the matter of Bharat Bhari Udyog Nigam Ltd. vs. Jessop And Co. Ltd. Staff Association, reported (2003)4COMPLJ333(CAL) on the proposition that reliefs beyond the pleadings cannot be granted in a writ petition.

#13. On the proposition that disputed and complex questions of facts cannot be adjudicated by the writ court unless the action is male fide and that in commercial matters, the courts should not risk their judgments for that of the bodies to which the task is assigned, learned senior counsel for the CSE cites the following judgments: 6 i. Karnataka State Industrial Investment and Development Corporation Ltd. vs. Cavalet India Ltd and Others reported at (2005) 4 SCC 456 ii. K. Vidya Sagar vs. State of U.P and Others reported at (2005) 5 SCC 581 iii. State of Kerala and Others vs. M.K. Jose reported at (2015) 9 SCC 433

#14. Learned senior counsel appearing for the writ petitioners next argues that no Show Cause Notice (SCN) was issued before the penal action was taken against the writ petitioners by the CSE. The purported notice dated March 4, 2004, relied on by the writ petitioners, it is argued, is not an SCN at all, since it does not specify the contemplated penal action to be taken against the writ petitioners, nor specifies the grounds or materials on the basis which such action was to be taken.

#15. Learned senior counsel cites Gorkha Security Services vs. Government (NCT of Delhi) and Others, reported at (2014) 9 SCC 105, for the proposition that the fundamental purpose behind the serving of SCN is to make the noticee understand the precise case set up against him which he has to meet and to enable the noticee to meet the grounds on which the action is proposed against him. It was also held in the said report that the materials/grounds which according to the department necessitates an action are required to be stated in the SCN, as well as that the particular penalty/action which is proposed to be taken is to be disclosed.

#16. Learned senior counsel for the writ petitioners further argues that there was palpable violation of the principles of natural justice on the part of 7 the CSE in not furnishing copies of the documents relied on by the latter while passing the impugned order dated March 15, 2022.

#17. By way of example, learned senior counsel argues that the inspection report and the decision of the Disciplinary Action Sub-Committee, which were referred to and relied on by the CSE in the impugned order dated March 15, 2022, were never disclosed to the writ petitioners to enable the latter to deal with the same. Even in the affidavit-in-opposition filed by the CSE to GA No.1 of 2022, it was mentioned that certain other documents were relied on while passing the said order, which documents were also not furnished to the writ petitioners, thereby denying the latter the opportunity to deal with the same.

#18. In support of such contention, learned senior counsel cites Kavi Arora vs. Securities & Exchange Board of India, reported at (2022) SCC OnLine SC

#1217. It is contended that in the absence of such opportunity, the impugned order dated March 15, 2022 is fundamentally contrary to the principles of natural justice.

#19. Learned senior counsel appearing for the CSE controverts the argument that no SCN was served and points out that the specific violations committed by the writ petitioners were clearly mentioned in the notice dated March 4, 2004, which was thus a valid SCN. Moreover, it is argued that the correspondence continually taking place between the parties left no manner of ambiguity as to what were the exact charges against the writ petitioners. The writ petitioners, it is argued, continuously warded off the queries of the CSE by pleading that the documents disclosed by them were sufficient and that they had no other documents to disclose, also 8 citing the preoccupation of the writ petitioners for not giving detailed explanations in reply to the questions posed by the CSE.

#20. Insofar as violation of natural justice is concerned, learned senior counsel for the CSE argues that all relevant particulars were mentioned in the SCN and in the further correspondence from the end of the CSE and the mere non-mention of the proposed penal action in the SCN did not, in any manner, prejudice the writ petitioners. It is contended that since the writ petitioner no. 1 is a registered member of the CSE, the petitioners were all along well aware as to the penal consequences in terms of the Bye-Laws of the CSE for the infractions committed by them.

#21. It is argued that unless real prejudice has been caused to a party aggrieved by an order due to non-grant of any formal opportunity of cross- examination or hearing, the absence of such opportunity per se does not invalidate or vitiate the decision arrived at fairly. In support of such contention the CSE cites K.L. Tripathi vs. State Bank of India and Others reported at (1984) 1 SCC 43.

#22. Learned senior counsel for the CSE also relies on the State of Uttar Pradesh vs. Sudhir Kumar Singh and Others reported at (2021) 19 SCC 706, for the proposition that natural justice is a flexible tool in the hand of the judiciary to reach out in fit cases to remedy injustice. Breach of the Audi Alteram Partem Rule, however, cannot by itself, without more, lead to the conclusion that prejudice is thereby caused. Where procedural and/or substantive provisions of law embody principles of natural justice, their infraction per se does not lead to invalidity of orders passed, unless prejudice is caused to the litigant, except in case of mandatory provisions 9 of law which are conceived not only in individual interest but also in public interest.

#23. Learned senior counsel appearing for the writ petitioners next argues that there was ante-dating of the purported order dated March 15, 2022, which is evident from the fact that a letter issued by the learned advocate for the writ petitioners on the self-same date was also referred to in the order, which would not have been possible unless the order was authored subsequently, pre-dating it to suit the 45-day timeline given by the learned Single Judge.

#24. Such contention, of course, is controverted by the CSE.

#25. The writ petitioners further submit that there was no pending investigation which could culminate in the penal action taken by the impugned decision of the CSE. It is submitted that the alleged infractions took place long before. Even going by the stand of the CSE, the SCN was issued in 2004 whereas the impugned actions took place in the year

#26. The long gap of 18 years in-between clearly shows that the CSE was fully satisfied of due compliances by the writ petitioners. In the correspondence between the parties in the meantime, there was no specific mention of any ongoing investigation by the CSE, it is submitted.

#27. Learned senior counsel for the writ petitioners places reliance on a communication by the SEBI to indicate that the SEBI itself exonerated the writ petitioners from any allegations levelled against the writ petitioners. It is argued that since the CSE cites instruction by the SEBI to undertake the purported investigation against the writ petitioners on the ground of 10 alleged financials scams by certain groups with which transactions were purportedly entered into by the writ petitioners, no cause of action remains further for the CSE to continue with such investigation after the SEBI itself let off the writ petitioners of the charges. A letter dated April 24, 2002 issued by the SEBI to the CSE, annexed to GA No.1 of 2022, which was the purported genesis of such investigation, is relied on in such context.

#28. Learned senior counsel also relies on a letter dated October 11, 2007, whereby the CSE itself clearly gave a „No Dues‟ Certificate to the writ petitioners, thereby leaving no scope of further investigation or imposition of penalty.

#29. The petitioners next argue that the 18 years of delay in-between renders the purported resurrection of the investigation harassive and illusory.

#30. It is argued that the procedure provided in the Bye-Laws of the CSE itself for giving prior notice of hearing and other formalities, including the timeline of one month in coming to a decision as to alleged violations or illegal transactions, was not adhered to by the CSE, thereby vitiating the entire investigation as well as the resultant order dated March 15, 2022.

#31. Lastly, it is argued that the constitution of the Board, comprised of only three Public Interest Directors, which took the impugned decision dated March 15, 2022, being contrary to Regulation 23 of the Securities Contract (Regulation) (Stock Exchanges and Clear Corporations) Regulation, 2018, was bad in law. As per the provisions of Regulation 23(1), the Governing Board of every recognised stock exchange is to mandatorily include Shareholder Directors, Public Interest Directors and 11 Managing Director. Although sub-clause (4) of Regulation 23 provides that „Managing Director‟ shall be included in the category of „Shareholder Directors‟, the scheme envisaged in sub-clauses (10) and (11) of Regulation 23 clearly indicate that the presence of Shareholder Directors is mandatory.

#32. Despite the CSE having cited a letter by the SEBI exempting the CSE from appointing any Managing Director, such exemption, it is argued, did not exonerate the CSE of the liability to incorporate Shareholder Directors within the Board in terms of Regulation 23. In the present case, all three members of the Board were Public Interest Directors and as such, in the absence of any Shareholder Director in the Board, the quorum required to take a valid decision was not met, which vitiates the impugned order in any event.

#33. Learned senior counsel appearing for the writ petitioners cites a judgment of a learned Single Judge of this Court in Surendralal Girdharilal Mehta vs. Union of India & Ors., reported at (2018) SCC OnLine Cal 2937, for the proposition that indifference, disinterest and lack of diligence on the part of the authorities in causing inordinate delay vitiates an action of a criminal or quasi criminal nature. Learned senior counsel also cites a decision of the Securities Appellate Tribunal, Mumbai, in Street, Fort, Mumbai 400 023 vs. Securities and Exchange Board of India, reported at (2013) SCC OnLine SAT 67 for the proposition that synchronized trade is per se not illegal but would be illegal if it is executed to manipulate the market, is dubious in nature and executed with a view to avoid regulatory detection, does not involve change of beneficial ownership or is executed 12 to create false volume resulting in upsetting market equilibrium etc. In the absence of any circumstantial evidence to suggest the same, it cannot be inferred that synchronized trading by itself is a violation of any regulation governing brokers. It is further argued that no insider trading or illegal action on the part of the writ petitioners has been established by the CSE.

#34. The CSE, it is submitted, overlooked the fact that the so-called off-market transactions of the writ petitioners were all registered duly with other stock exchanges, including the National Stock Exchange. Thus, the penalty imposed on the writ petitioners, it is argued, is unlawful.

#35. Learned senior counsel for the CSE controverts such submissions and contends that the impugned order dated March 15, 2022 is well-reasoned and the action of the writ petitioners are in clear violation of the CSE Bye- Laws.

#36. It is contended that the writ petitioners were guilty of negotiated deals and fraudulent as well as non-bona fide transactions, having been engaged with several groups of companies which were established to have dubious and unlawful market transactions. It is argued that the SEBI instruction to the CSE to conduct investigation was not restricted to violation of SEBI regulations but also the regulations of the CSE itself. Thus, the so-called clean chit given by the SEBI did not exonerate the writ petitioners of the liability in respect of the infraction of CSE Bye-Laws.

#37. Thus, it is argued that the writ petition as well as GA No.1 of 2022 ought to be dismissed. 13

#38. Upon hearing the arguments of the parties, the issues raised can be divided into two categories - Threshold Issues and Merits. This Court proposes to adjudicate on the threshold issues first. Threshold Issues i) Maintainability of writ petition

#39. Although this objection was not canvassed seriously at the final arguments, for the sake of completion, the same is also dealt with. The writ petitioners have cited Trilochana K. Doshi (supra)1 as well as K.C Sharma (supra)2 for the proposition that applications under Article 226 of the Constitution of India lie against stock exchanges.

#40. This Court respectfully agrees with the ratio laid down in the said judgments to the effect that a stock exchange comes within the purview of State within the meaning of Article 12 of the Constitution of India.

#41. The premise of such observation is that stock exchanges such as the CSE render public utility services, which come within the domain of the functions of the State. The basic framework of the financial and trading activities of an economy, which is an integral part of the functions of the State, are discharged by stock exchanges and, as such, infractions on the part of such entities are amenable to the writ jurisdiction under Article 226 of the Constitution of India.

#42. In addition thereto, it cannot be denied that by the impugned action the right of the writ petitioners to do business, protected under Article 19 of 1 Trilochana k.Doshi vs Stock Exchange of India and Another reported at [2000(4) Mh.L.J] 2 K.C Sharma vs. Delhi Stock Exchange and Others reported at (2005) 4 SCC 4 14 the Constitution of India, has been allegedly violated without due process of law. Thus, the writ court definitely has the jurisdiction to examine such issue within the ambit of Article 226 of the Constitution of India.

#43. Thus, the writ petition is maintainable. ii) Alternative remedy by arbitration

#44. Clause XXXI of the CSE Bye-Laws and Regulations under Chapter XVIII thereof, pertaining to the Settlement Guarantee Fund (SGF), is an arbitration clause. It is not in doubt that the writ petitioner no.1, being a registered member of the CSE, is bound by the said clause otherwise. However, the very premise of arbitration is party autonomy and consensus between the parties to subject themselves to the Alternative Dispute Resolution mode of arbitration.

#45. Thus, it is open to the parties to waive such right and choose to opt for a regular forum of adjudication, beyond the pale of arbitration, which is the other side of the party autonomy coin.

#46. Section 8 of the Arbitration and Conciliation Act, 1996 clearly specifies that only upon an application under the said provision being made on or before the submission of the first statement on the merits of the defence can a reference to arbitration be sought before a judicial authority. Thus, by necessary implication, unless such an application is filed, the defendants/respondent before a judicial authority in any legal action shall not be entitled to seek reference to arbitration. An arbitration agreement, per se, does not operate as an absolute bar to adjudication of the disputes between the parties to such clause before a regular judicial forum/court. 15 The parties, at any point of time subsequent to entering into an arbitration agreement, can waive the right to go to arbitration to resolve the disputes between themselves.

#47. Hence, since the writ court is also a “judicial authority” under the contemplation of Section 8, in the absence of any application akin to one under the said provision, it cannot be said that the jurisdiction of the writ court is barred.

#48. The next question which comes up for consideration on this aspect of the matter is whether an arbitration clause can be an absolute bar to the exercise of the jurisdiction of High Courts under Article 226 of the Constitution. The answer is obviously in the negative, since the power of a High Court under Article 226 of the Constitution of India is derived directly from the Constitution of India, which is the Grund norm of the legal framework of the country. Being a constitutional remedy, the same cannot be curtailed or taken away by any subordinate legislation, since the Parliament itself derives authority under the Constitution itself to make laws. Moreover, in the absence of any specific bar in any law, including the 1996 Act, to adjudication by a regular court/forum despite the existence of an arbitration clause, the present writ petition is very much maintainable.

#49. Even otherwise, the so-called arbitration clause, incorporated in Clause XXXI of the Bye-Laws, would be hit by Section 12 read with the Fifth and Seventh Schedules of the 1996 Act, since it is the Executive Director of the Exchange who is supposed to act as an Arbitrator or nominate the Arbitrator under the said Clause. The Executive Director, being an 16 employee of the CSE, one of the parties to arbitration, is ineligible to act as or to appoint an Arbitrator. Thus, the above objection of the CSE is not tenable in the eye of law and the present writ petition is maintainable despite the existence of the arbitration clause. iii) Complex questions of fact.

#50. CSE cites Cavalet India Ltd (supra)3 for the proposition that complex questions of fact cannot be entered into under Article 226 of the Constitution, since the High Court does not sit as an appellate authority under the said provision. It was also held in K. Vidya Sagar (supra)4 that under normal circumstances, disputed questions of fact cannot be resolved under Article 226 of the Constitution of India.

#51. In. M.K. Jose (supra)5, the Supreme Court reiterated that contractual matters are not generally interfered with under Article 226 of the Constitution of India.

#52. However, in the present case, it is not merely erroneous appraisal of the evidence on record which is the primary ground of challenge but the infraction of basic principles of natural justice as well as violation of the Bye-laws of the CSE itself, which, being at a jurisdictional level, definitely hit at the root of the matter and is amenable to writ jurisdiction. This court is fully aware of its limitations as a writ court and cannot enter into a re-appreciation of detailed evidence on intricate and complex questions