1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JAIPUR BENCH, JAIPUR ORDER 1. D.B. Civil Writ Petition No.4333/2010 21st Century Entertainment Pvt. Ltd. Versus Union of India and others 2. D.B.Civil Writ Petition No.6438/2010 Gopal Aggarwal and others Versus Union of India and others 3. D.B.Civil Writ Petition No.4581/2010 M/s. Cyberinfo Zeeboomba Com and others Versus Union of India and others 4. D.B.Civil Writ Petition No.4582/2010 M/s. Eskay K N I T (India) Ltd. and others Versus Union of India and others 5. D.B.Civil Writ Petition No.5075/2010 M/s. Hanuman Cultivation Pvt. and others Versus Union of India and others 6. D.B.Civil Writ Petition No.5132/2010 M/s. Axon Realpro Pvt. Ltd. and others Versus Union of India and others 7. D.B.Civil Writ Petition No.5133/2010 M/s. Alpha (India) and others Versus Union of India and others 8. D.B.Civil Writ Petition No.5134/2010 M/s. Expro Const. Pvt. Ltd. and others Versus Union of India and others 2 9. D.B.Civil Writ Petition No.5135/2010 M/s. Avon Realcon Pvt. Ltd. and others Versus Union of India and others 10. D.B.Civil Writ Petition No.5136/2010 M/s. Siddhi Cultivation Pvt. Ltd. and others Versus Union of India and others 11. D.B.Civil Writ Petition No.5137/2010 M/s. Allcon Estate Pvt. Ltd. and others Versus Union of India and others 12. D.B.Civil Writ Petition No.5271/2010 M/s. Punit Mercantile Pvt. Ltd. and others Versus Union of India and others 13. D.B.Civil Writ Petition No.5272/2010 M/s. Akshar Mercantile Pvt. Ltd. and others Versus Union of India and others 14. D.B.Civil Writ Petition No.5273/2010 A M Azam and others Versus Union of India and others 15. D.B.Civil Writ Petition No.5274/2010 M/s. Anoop Multitrade Pvt. Ltd. and others Versus Union of India and others 16. D.B.Civil Writ Petition No.5316/2010 M/s. Pallash Construction Pvt. and others Versus Union of India and others 17. D.B.Civil Writ Petition No.6439/2010 M/s. Avera Properties Pvt. Ltd. Versus Union of India and others 3 18. D.B.Civil Writ Petition No.6440/2010 Vijay Sawant and others Versus Union of India and others 19. D.B.Civil Writ Petition No.64412010 Beta Trading Pvt. Ltd. and others Versus Union of India and others 20. D.B.Civil Writ Petition No.6442/2010 M/s. Jaybhart Textiles and others Versus Union of India and others 21. D.B.Civil Writ Petition No.6443/2010 Nitish Nayak and others Versus Union of India and others Date of Order :: 29th October, 2010 PRESENT HON'BLE THE CHIEF JUSTICE MR. JAGDISH BHALLA HON'BLE MR. JUSTICE M.N. BHANDARI Mr.Paras Kuhad ) Mr.R.N.Mathur ) Mr.Nitin Jain ) Mr.Rajendra Prasad ) Mr.Virendra Lodha ) Mr.Lokesh Atrey )-for the petitioners. Ms.Gunjan Pathak ) Mr.Manish Sharma ) Mr.Samit Vishnoi ) Mr.A.S.Saxena ) Mr.Sudhanshu Joshi ) with Mr.Alok Sharma ) Ms.Arpita Mathur ) Mr.Rajiv Surana ) 4 Mr.Kamlakar Sharma ) Mr. Manish Sharma ) Mr.G.K.Garg ) Smt.Anita Agrawal ) Mr.Ashok Mehta )-for the respondents. Mr.S.P.Sharma ) Mr.S.S.Raghav ) Mr.S.S.Sharma ) Mr.Sanjay Joshi ) ***** BY THE COURT : (Per Bhandari, J.) Since on same set of facts, similar issues have been raised, all these writ petitions are decided by this common order. For the purpose of appreciating arguments of all the parties, we have taken D.B. Civil Writ Petition No.4333/2010 - 21st Century Entertainment Pvt. Ltd. Versus Union of India and others as leading writ petition with the consent of all the learned counsel for the parties. The aforesaid writ petition has been filed with the following prayers:- 5 “(i) The section 11(4) and section 11(B) of the Securities & Exchange Board of India Act, 1992 (for short 'the SEBI Act') be declared invalid and ultra vires to the Constitution of India. (ii) The impugned order dated 8.3.2010 passed by the respondent No.2 being illegal and arbitrary be quashed and set aside. (iii) This Hon'ble Court may be pleased to issue a writ of certiorari or in the nature of certiorari or any other appropriate writ, order or direction calling for the records and papers pertaining to the impugned order and investigation of the respondent No.2 in the matter of Bank of Rajasthan. (iv) Any other appropriate writ, order or direction which may be considered just and proper in the facts and circumstances of the case may kindly also be issued in favour of the petitioner.” Perusal of aforesaid reveals that while challenging the order dated 8.3.2010 passed by the respondent No.2 – Securities and Exchange Board of India (for short 'the SEBI'), the constitutional validity of Sections 11(4) & 11 (B) of the SEBI Act has also been challenged. The petitioners are aggrieved by an ad-interim ex- parte order dated 8.3.2010 passed by the SEBI restraining them from accessing security market and prohibiting from buying, selling and dealing in the securities in any manner whatsoever till further orders. 6 Aforesaid order dated 8.3.2010 is under challenge mainly on the ground that same is without jurisdiction and offend fair play apart from violation of principles of natural justice. By the interim order, harsh and excessive penalty has been imposed upon the petitioners. The directions in the impugned order are in respect of shareholding in the Bank of Rajasthan Ltd. The property of the Bank of Rajasthan Ltd. is situated in the State of Rajasthan apart from its registered office. The part of cause of action thereof arose in the State of Rajasthan. It is urged that on 20.2.2005, the Reserve Bank of India (for short 'the RBI') came out with certain guidelines viz. Guidelines on Ownership and Governance in Private Sector Banks (hereinafter referred to as 'the RBI Guidelines' for the short). The RBI Guidelines, inter- alia, require private sector banks to ensure that ultimate ownership and control of private sector banks is well diversified. The objective of the same was to ensure that no single entity or group of related entities has shareholding or control, directly or indirectly, in any bank in excess of 10 per cent of the paid-up capital of the private sector bank. Where ownership is that of a corporate entity, no single individual/entity has 7 ownership and control in excess of 10 per cent of that entity. Pursuant to the aforesaid Guidelines, promoter shareholding in the bank was to be reduced to the extent indicated above. The promoter accordingly diversified their shareholding, though the RBI Guidelines are not statutory in character. The Bank of Rajasthan Ltd. had disclosed to the Stock Exchanges regarding decrease in the promoter shareholding. The RBI, however, recorded that the Bank of Rajasthan has made incorrect disclosures regarding shareholding pattern led by Mr. Pravin Kumar Tayal and others. The RBI thereafter, made a reference to SEBI based on observations set up under their AFI Report showing that reported reduction by the promoter did not appear to be correct. The SEBI thereupon, made so-called investigation followed by passing of the impugned order. The impugned order mainly discloses allegations regarding incorrect disclosures to Stock Exchange for promoter shareholding. It is by presuming that shareholding by Yadav Group and Silvassa Group represents violation of takeover regulations. The petitioners were accordingly restrained from accessing security market and prohibited from buying, selling and dealing in securities. 8 Learned counsel appearing on behalf of the petitioners, at the first instance, submitted that Sections 11(4) & 11(B) of the SEBI Act are unconstitutional. The provisions aforesaid are hit by Articles 14 & 19 of the Constitution of India. It imposes penalties in the garb of remedial measures, that too, without providing procedural safeguards. The Board has been empowered to pass punitive order without following the principles of natural justice. The petitioners have been restrained from accessing security market and prohibited from buying, selling and dealing in securities though, as per the fundamental rights guaranteed under Article 19(1)(g) of the Constitution of India, the petitioners are entitled to carry on any occupation, trade and business. To substantiate the arguments, learned counsel for petitioners placed reliance on the judgments of the Hon'ble Supreme Court in the case of Ritesh Agarwal Versus SEBI reported in (2008) 8 SCC 205. Therein, similar issues were held to be penal in nature. A specific reference of paras 25 to 28 was made to show that such orders are violative of Article 19(1)(g) of the Constitution of India. It is further urged that if the provisions of 9 Regulations 44 & 45 of SEBI (Acquisition of Shares and Takeovers) Regulations of 1997 are looked into, then it becomes clear that any orders passed under Sections 11 (4) & 11(B) of the SEBI Act are considered to be penalties for non-compliance. The Legislature's intention therefore clearly coming out to treat such orders to be punitive. An order of penalty has been passed without affording even opportunity of hearing more so when in Raitesh Agarwal's case (supra), it was held to be unconstitutional. Thus, the impugned order deserves to be set aside on this count itself. The fact further remains that the provisions of Sections 11(4) of the SEBI Act does not apply to the petitioners as the petitioners are not the persons accessing the security market or persons associated with security market, which is a pre-requirement to invoke the provisions of Sections 11(4) & 11(B) of the SEBI Act and they are not the listed public companies. The SEBI yet invoked the provisions of Section 11(4) of the SEBI Act for passing the impugned order. So far as provisions of Section 11(B) of the SEBI Act is concerned, the type of the order to be passed therein cannot prohibit persons to buy, sell or deal in securities. Purpose and scope of the 10 aforesaid provisions is quite different, thus, for the aforesaid reasons, impugned order remains without authority of law. It is a settled proposition of law that in absence of source, prohibition or restrain to do business or trade cannot be imposed. However, ignoring the aforesaid aspect, the respondents have passed the impugned order. This is more so when the provisions of Sections 11(4) & 11(B) of the SEBI Act so as the impugned order provide unreasonable restriction on trade and business. The prayer is accordingly to set aside the impugned order and, at the same time, to declare provisions of Sections 11(4) & 11(B) of the SEBI Act to be unconstitutional. Learned counsel appearing for respondent No.2 has, at the very outset, raised preliminary objections. It is submitted that the impugned order was passed by the SEBI at Mumbai. The petitioners are also residing at Mumbai, hence, no cause of action arose within the territorial jurisdiction of this Court. The retrain order was even conveyed to the petitioners outside territory of the State of Rajasthan. Reference of the following judgments have been made to substantiate the arguments: (i) Eastern Coalfields Ltd. Versus State of Sikkim 11 reported in (2008) 3 SCC 456; (ii) Kusum Ingots & Alloys Ltd. Versus Union of India reported in (2004) 6 SCC 254; (iii) Alchemist Ltd. & Ors. Versus Kalyan Banerjee reported in (2007) 11 SCC 335 and (iv) National Textile Corpn. Ltd. and others Versus Haribox Swalram and others reported in (2004) 9 SCC 786. Other preliminary objection is regarding availability of efficacious alternative remedy. Referring to the provisions of Sections 15(T) of the SEBI Act, it is urged that any order passed by the Board can be challenged by maintaining an appeal to the Securities Appellate Tribunal. Further appeal lies before the Hon'ble Supreme Court. The petitioners without invoking the jurisdiction of the Securities Appellate Tribunal, directly approached this Court though grounds raised for challenge to the order passed by the SEBI can be raised before the Securities Appellate Tribunal. In the light of the availability of efficacious alternative remedy, these writ petitions deserve to be dismissed. It is lastly urged that the impugned order is only an interim order. Aforesaid order was passed in the interest 12 of investors and for their protection. The petitioners therein called upon to submit their objections. Without representing the case before the Board, petitioners have directly challenged the interim order. The writ petitions are not maintainable against the interim order. In reference to the preliminary objections, a prayer has been made to dismiss the writ petitions as not maintainable. This is more so when the Attorney General has not been made the party respondent though vires of the provisions of the SEBI Act are under challenge. In this regard, a reference of the judgment in the case of Basant Lal Versus State of U.P. and another reported in (1998) 8 SCC 589 has been made wherein Hon'ble Apex Court held that a statute cannot be struck down unless notice has been given to the Attorney General. Coming to the merits of the case, learned counsel for respondent No. 2 firstly addressed the issue in regard to the challenge to provisions of Sections 11(4) & 11(B) of the SEBI Act. It is submitted that provision aforesaid does not impose unreasonable restriction on trade and business. If the object of the SEBI Act is looked into, it comes out that it is to protect the interest of the 13 investors in securities and promote development of security market apart from to regulate it. To achieve the aforesaid object, measures have been provided in various provisions of the SEBI Act, which include Sections 11(4) & 11(B) of the SEBI Act. The Hon'ble Apex Court has considered those aspects in a recent judgment in the case of Securities and Exchange Board of India Versus Ajay Agarwal reported in (2010) 3 SCC 765. Therein, object of the SEBI Act were loudly focused wherein similar controversy came up for consideration. The argument that provisions of Sections 11(4)(b) and 11B of the SEBI Act eliminates the principles of natural justice in violation of Article 14 of the Constitution of India is not tenable so as the argument regarding violation of Article 19(1)(g) of the Constitution of India. The Hon'ble Supreme Court had an occasion to consider the aforesaid aspect wherein elimination of the principles of natural justice was made. Therein, it was not held to be unconstitutional. A reference of the judgment in the case of Union of India and Another Versus Tulsiram Patel reported in (1985) 3 SCC 398 has been given apart from the judgment in the case of Ajit Kumar Nag Versus General Manager (PJ), 14 Indian Oil Corpn. Ltd., Haldia and Others reported in (2005) 7 SCC 764. A further reference of the judgment in the case of Swadeshi Cotton Mills Versus Union of India reported in (1981) 1 SCC 664 has been given to substantiate the argument aforesaid. Coming to the facts of this case, it is submitted that if the impugned order is looked into, it comes out to be interim in nature and therein petitioners have been called to submit their objections within a period of 21 days. This is to provide an opportunity of hearing. The impugned order has been passed only as an interim measure to protect interest of investors. Few petitioners herein failed to raise their objections before the Board within the stipulated period and straightway approached this Court. Second Proviso to Section 11(4) of the SEBI Act does not eliminate principles of natural justice, rather it provides for an opportunity of hearing to the intermediaries or persons concerned. In the light of aforesaid fact, a case is not made out to hold that there is a violation of principles of natural justice. The interim orders are passed by the Courts, Tribunals and Quasi Judicial Authorities while exercising their inherent powers. In this case, such powers are contained in the SEBI Act itself. 15 Thus, mere passing of ex-parte interim order during pendency of the proceedings cannot mean elimination of principles of natural justice. The petitioners would be provided opportunity of hearing and for that purpose they must file their objections, if so chooses. The period for filing objections has already expired during pendency of the writ petitions, yet the Board will consider their objections if it is submitted within a period of 10 days from the date of decision of this Court. So far as other aspect is concerned, it is submitted that looking to the violation of the RBI Guidelines, the respondent Board made preliminary enquiry/investigation and thereupon found prima facie violation of the RBI Guidelines and accordingly interim order was passed. Aforesaid is, however, subject to objections by the petitioners. In the light of aforesaid, the issue focused on the merits may not be addressed by the Court and be left for its decision by the SEBI itself. The allegation against the petitioners is that in follow up action pursuant to the Guidelines, the reduction of promoter shareholding and declaration thereupon is found to be incorrect. They acquired and retained the securities, which is only with a view to manipulate shareholding of the promoter. 16 Looking to the prima facie case on the aforesaid aspect, the SEBI has rightly passed the impugned order by invoking provisions of Sections 11(4) & 11(B) of the SEBI Act. The power invoked by the Board is not simplicitor under Section 11 of the SEBI Act as after making or causing enquiry, necessary orders can be passed under Section 11(B) of the SEBI Act. It is under those statutory provisions, the Board passed the order in the interest of investors. The prayer is, accordingly, to dismiss the writ petitions. Learned counsel, Mr. S.P. Sharma, appearing on behalf of applicants for impleadment as party respondents, submits that applicants represent shareholders and accordingly want to be impleaded as party respondents. He otherwise supports the arguments made by learned counsel for respondent No.2 – SEBI. All other respondents have also adopted arguments of learned counsel for respondent No.2 – SEBI. We have heard learned counsel appearing on behalf of the parties and scanned the matter carefully. 17 Since constitutional validity of Sections 11(4) & 11 (B) of the SEBI Act is under challenge, we are dealing the aforesaid issue first. It is mainly on the ground that it is hit by Articles 14 & 19(1)(g) of the Constitution of India. Aforesaid provisions do not provide an opportunity of hearing, thus are violative of Article 14 of the Constitution of India and it otherwise puts restriction on trade and business by the person, thus are hit by Article 19(1)(g) of the Constitution of India. This is more so when orders are punitive in nature and not the remedial. The first issue is as to whether provisions of Sections 11(4) & 11(B) of the SEBI Act are hit by Article 14 of the Constitution of India. We are reproducing aforesaid provisions for ready reference:- “11. Functions of Board : (1) ..... (2) .... (3) .... (4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:- 18 (a) suspend the trading of any security in a recognized stock exchange; (b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; (c) suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position; (d) impound and retain the proceeds or securities in respect of any transaction which is under investigation; (e) attach after passing of an order on an application made for approval, by the Judicial Magistrate of first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder: Provided that only the bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached. (f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation: Provided that the Board may, without prejudice to the provisions contained in sub- section (2) or sub-section (2A), take any of the measures specified in clause (d) or clause (e) or clause (f), in respect of any listed public company or a public company (not being intermediaries referred to in section 12) which 19 intends to get its securities listed on any recognized stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market: Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned. 11B. Power to issue directions : Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary - (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market; or (iii) to secure the proper management of any such intermediary or person, it may issue such direction - (a) to any person or class of persons referred to in section 12, or associated with the securities market; or (b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market.” Perusal of the provisions of Sections 11(4) & 11(B) shows that the Board is given powers to take few measures either pending investigation or enquiry or on 20 its completion. The Second Proviso to Section 11, however, makes it clear that either before or after passing of the orders, intermediaries or persons concerned would be given opportunity of hearing. In the light of aforesaid, it cannot be said that there is absolute elimination of the principles of natural justice. Even if, the facts of this case are looked into, after passing the impugned order, petitioners were called upon to submit their objections within a period of 21 days. This is to provide opportunity of hearing to the petitioners before final decision is taken. Hence, in this case itself absolute elimination of principles of natural justice does not exist. The fact, however, remains as to whether post-decisional hearing can be a substitute for pre-decisional hearing. It is a settled law that unless a statutory provision either specifically or by necessary implication excludes the application of principles of natural justice, the requirement of giving reasonable opportunity exists before an order is made. The case herein is that by statutory provision, principles of natural justice are adhered to after orders are passed. This is to achieve the object of SEBI Act. Interim orders are passed by the Court, Tribunal and Quasi Judicial Authority in given facts and circumstances of the case showing urgency or 21 emergent situation. This cannot be said to be elimination of the principles of natural justice or if ex-parte orders are passed, then to say that objections thereupon would amount to post-decisional hearing. Second Proviso to Section 11 of the SEBI Act provides adequate safeguards for adhering to the principles of natural justice, which otherwise is a case herein also. In the case of Tulsiram Patel (supra) aforesaid issue was taken into consideration. Therein, similar arguments were raised in reference to Article 14 of the Constitution of India when departmental enquiry allowed to be dispensed with in three situations given under Proviso-II to Article 311(2) of the Constitution of India. Therein, in Paras 97, 98, 101 & 102 following was held thus:- “97. Though the two rules of natural justice, namely, nemojudex in causa sua em audi alteram part, have now a definite meaning and