IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No 2224 OF 1996 with SPECIAL CIVIL APPLICATION NO.5483 OF 1996 For Approval and Signature: Hon'ble MR.JUSTICE R.BALIA. ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? 2. To be referred to the Reporter or not? 3. Whether Their Lordships wish to see the fair copy of the judgement? 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? -------------------------------------------------------------- ALKA SYNTHETICS LTD Versus SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) -------------------------------------------------------------- DM INVESTMENTS Versus SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) -------------------------------------------------------------- Appearance: 1. Special Civil Application No. 2224 of 1996 MR BR SHAH, SR. ADVOCATE with MR RK MISHRA for Petitioner MR KIRIT RAVAL, SR. ADVOCATE with BH CHHATRAPATI for Respondent No. 1 MR NIRANJAN J BHATT for Respondent No. 2 MR SN SOPARKAR WITH BHARAT T RAO for Respondent No. 3 2. Special Civil Application No.5483 of 1996 MR KAMAL B. TRIVEDI, with Mr Rakesh Gupta with KS JHAVERI for Petitioner MR SN SHELAT, SR. ADVOCATE WITH BH CHHATRAPATI for Respondent No.1 -------------------------------------------------------------- CORAM : MR.JUSTICE R.BALIA. Date of decision: /02/1997 ORAL JUDGEMENT 1. The two petitions raise substantively identical questions and have been heard together at the request of counsel for the parties. Hence, I propose to deal with same by a common order. First about Facts: FACTS AND PRELIMINARY OBJECTIONS RELATING TO SPECIAL CIVIL APPLICATION NO. 2224 OF 1996 2. This petition has been filed in the circumstances to be stated hereinafter and raises the issue about the authority of Securities and Exchange Board of India (for short, "SEBI") to order impounding and/or confiscation of whole or part of consideration of a completed transaction, which in ordinary circumstances concerned party to transaction is entitled to receive and for whom which is an actionable claim, under the existing provisions of law under which SEBI functions. This issue is similar to one raised in Special Civil Application No.5483 of 1996 M/s D.M.Investments vs. SEBI and Others, which also has been heard along with this petition. 3. The petitioner is a company registered under Indian Companies Act, 1956 and is having its registered office at Ahmedabad. As per the case set out in the petition, in pursuance of notice No. B.20/96 dated 7.2.1996 issued by the Bombay Stock Exchange (hereinafter called, "the Stock Exchange") inviting from the members of the Exchange offers for sale of shares of M/s. Magan Industries Limited (for short, "MIL") because transaction of purchases of shares of MIL, remaining outstanding for want of availability of adequate number of shares with the sellers to fulfil their corresponding selling obligation. In response to the said notice dated 7.2.1996 (Annexure A), the petitioner who was holding shares in MIL offered 50000 shares for sale at auction to the Stock Exchange through its member, respondent No.3 Inderlal Agarwal. The transaction of sale of petitioner's shares at auction was at Rs.118 per share inclusive of chargeable expenses. After deducting charges the petitioner was to receive consideration of the said shares from the Stock Exchange through the said broker at Rs.116.80ps per share. The price of the shares so offered by the petitioner at auction for sale was recovered by the Stock Exchange respectively from purchasers and short sellers, as per its byelaws and practice of auctioning the Exchange were to recover part of the consideration for such shares from the purchasers, at the rate at which transaction of purchase has been entered by the purchases who were to take delivery of shares, and difference between the auction price and the purchase price so payable by the purchasers was to be recovered from respective short sellers. The amount so recovered by the Stock Exchange becomes payable to the offerer by crediting his account after deducting chargeable expenses The SEBI in its impugned order dated 4.7.1996 has referred to this aspect . 4. The consideration of transaction at auction was received by the Stock Exchange. However, before the amount could be paid to the offerers, the Stock Exchange issued notice on 15.2.1996 stating that as per the directives received from SEBI the payments due to the members on account of acceptance of their MIL shares offered in pursuance of auction Notice No. B.20/96 is to be retained by the clearing house until completion of investigation and further decision in this regard. Petition was originally filed challenging the directives of SEBI referred to in notice dated 15.2.1996 issued by Stock Exchange (Annexure B), for retaining the amount already collected by Stock Exchange from being paid to the members through whom petitioner has offered his shares for sale, thus affecting its claim to that money. 5. In its reply it was submitted by the SEBI that it has prima facie indication that there was artificial manipulation of the price of the scrips of MIL and preliminary investigation indicate that the petitioner has been heavily buying and selling in this scrip in consortium with its other group of companies. In view of this circumstance, the respondent is actively pursuing its investigation which is likely to take some time, it was pleaded that in the interest of investigation, the auction proceeds may not be disbursed to any person till the investigation report is available and the said directive was only an interim measure. The petitioner had raised a very fundamental issue whether even in case investigation results in indiction of petitioner, SEBI has a jurisdiction to make a final order for confiscating or depriving the petitioner of consideration which has already become due in respect of transaction about its scrips and which has been received by Stock Exchange from respective parties from whom consideration was to be received, without there being any specific provision of law to that effect. 6. Keeping in view the pleadings and respective contentions on 6.5.1996 it was directed by way of interim relief that SEBI shall complete the investigation in respect of share transactions of MIL latest by 3rd June 1996 (which was extended later on on an application being made in this behalf). Respondent No.1 was also directed to consider whether the petitioner has any role to play in the alleged irregularities in the transaction under investigation. It was also stated in the order that if the petitioner is not involved in the alleged malpractices and irregularities, respondent No.2 shall modify its order pertaining to retention of the amount in question by the Stock Exchange and permit the Stock Exchange to release the proceeds of transaction of shares in question in full or in part in favour of the petitioner as it deems fit, proper and equitable. 7. Thereafter the order dated 4.7.1996 came to be made by the Chairman of respondent NO.1. Regarding the amount it was directed to be retained by the Stock Exchange. Concerning the receipts of the auction, it was ordered ; "As regards the amounts retained in respect of the auction proceeds, it may be mentioned that according to the normal stock exchange practices whenever a seller is not able to deliver the securities and when the auction is called for, the monies are taken from the Buyer to the extent of the transaction price/standard price and from the Seller to the extent of the difference between the transaction price/standard price and the auction price and given to the offerer who has given the securities in the auction proceedings. In this case, the securities were taken from the offerers but the auction proceeds were not released to the offerers in view of the SEBI directions as there was alleged price rigging and market manipulation in the trading of the security so that the offerer would not be able to take away undue and ill gotten profits arising out of such manipulations. The investigations carried out have concluded that there was price rigging and market manipulation in the trading of this scrip and therefore the auction price does not reflect the true market value of the scrip. It is also found in investigations that some of the Offerers were directly involved in the manipulation. However, at the same time in the interest of fairness and justice it is to be considered that the securities offered by the offerers have some value and therefore the amounts equal to the standard price of the security for the respective settlement should be released to the offerers as the intention is only to ensure that the offerers should not get undue or ill gotten profits arising out of the rigged/manipulated price. 8. The order also says that while it is necessary to give opportunity to the affected persons in terms of principles of natural justice, it decided to dispense with the formal prior hearing, however left it open to the aggrieved parties to make a written representation within fifteen days on receipt of the intimation of the order from respective Stock Exchange and such representations were to be decided by a committee to be set up by SEBI, which would exclude the members of the investigating team to be on adjudicating committee. Though this order was made on 4.7.96 the same was not communicated to the petitioner or any of the affected parties. However, on the direction of the court a copy of the order was delivered to the counsel for the petitioner by the counsel for the respondent in the court during the course of hearing , and thereafter amendment was sought by the petitioner for challenging the order dated 4.7.1996 as well, on various grounds to be noticed hereafter. 9. However, before proceeding further, learned counsel for respondent No.1 raised preliminary objections which may be considered at this stage. Firstly, it has been urged that as no part of cause of action has arisen within the State of Gujarat, petition under Article 226 challenging the impugned orders are not maintainable, in the High Court of Gujarat. Clause (2) of Article 226 provides that the power conferred by clause (1) to issue directions, orders or writs to any Government, authority or person may also be exercised by any High Court exercising jurisdiction in relation to the territories within which the cause of action, wholly or in part, arises for the exercise of such power, notwithstanding that the seat of such Government or authority or the residence of such person is not within those territories. Clause (2) of Article 226 was inserted as clause (1A) by the Constitution (Fifteenth Amendment) Act, 1963 and was renumbered as clause (2) by the Constitution (Forty-second Amendment) Act, 1976. The amendment in the Constitution was brought as a consequence of difficulties arising out of decisions rendered prior to such insertion that the writs issued by any High Court do not run beyond the territories in relation to which each High Court exercises jurisdiction. As a result of the insertion of the said provision any government or authority or person became amenable to the jurisdiction of the High Court notwithstanding that the seat of such Government or authority or the residence of such person happened to be beyond the territories in respect of which the High Court exercises its jurisdiction if cause of action for issuing any writ, direction or orders whether wholly or in part has arisen within the territory in respect of which the High Court is exercising its jurisdiction. 10. Though cause of action has not been defined either in the Civil Procedure Code or under the Constitution, the expression cause of action has acquired a well settled meaning. It means bundle of facts which the petitioner must prove, if traversed, to be entitled to a judgement in his favour by the court. In determining the objection of lack of territorial jurisdiction, the court is required to take all the facts pleaded in support of the cause of action into consideration without embarking upon the enquiry into the correctness or otherwise of such facts.The question is to be decided on the basis of facts pleaded in the petition or plaint, the truth or otherwise of the averments made in the petition being immaterial. 11. The principle was enunciated by Lord Watson in Chand Kour vs. Partab Singh ILR (1889) 16 Cal 98 - "The cause of action has no relation whatever to the defence which might be set up by the defendant nor it depend upon the character of the relief prayed for by the plaintiff. It refers entirely to the grounds set forth in the plaint as the cause of action, or, in other words, to the media upon which the plaintiff asks the court to arrive at a conclusion in his favour." 12. This principle has been approved by the Supreme Court in Oil and Natural Gas Commission v. Uptal Kumar Basu and others (1994)4 SCC 711, wherein the court said after quoting the aforesaid principle : "Therefore, in determining the objection of lack of territorial jurisdiction the court must take all the facts pleaded in support of the cause of action into consideration albeit without embarking upon an enquiry as to the correctness or otherwise of the said facts. In other words the question whether a High Court has territorial jurisdiction to entertain a writ petition must be answered on the basis of the averments made in the petition, the truth or otherwise whereof being immaterial. To put it differently, the question of territorial jurisdiction must be decided on the facts pleaded in the petition." 13. If we examine the pleading of the petitioner in this respect, the salient features which may be called bundle of facts of which claim for relief of the petitioner is founded are - (1) that on 7.2.1996 petitioner offered 50000 shares of MIL for sale at auction as per invitation by the Stock Exchange; (2) the price settled for such transaction of auction was at Rs.118 per share of which after deducting expenses consideration at the rate of Rs.116.80ps. became payable to the petitioner. The amount was received from those persons from whom the consideration of such shares was to flow, by the Stock Exchange; (3) the Stock Exchange notified that such amount is ordered to be retained by it by SEBI and therefore it cannot be paid; (4) the amount was ordered to be retained by SEBI for completion of investigation and further decision in that regard; (5) as a result of completion of investigation order dated 4.7.96 came to be made for release of part of the money retained by the Stock Exchange to the extent referred to in the order and remaining amount was ordered to be impounded; (6) respondent No.1 has no authority to order impounding of money which had become due to the petitioners for various reasons including lack of authority and breach of principles of natural justice, affecting the order founded on the basis of investigation. It is also to be noted that there is no dispute that but for the intervention of SEBI, as a result of investigation petitioner would have been entitled to that sum in ordinary course. It has also been the averment of the petitioner that the summons for attendance of various representatives of the petitioner issued by the investigating officer appointed by respondent No.1 under Section 11(3) of the Securities and Exchange Board of India Act, 1992 (the Act for short) in connection with enquiry instituted by respondent No.1 in the case of buying or selling or dealing with the shares of the company was served upon the petitioner on 2.4.1996 at Ahmedabad. On the basis of said summons on Shri Satish Pancholia, Managing Director of the petitioner at Ahmedabad his statement was recorded at Ahmedabad on 2.4.1996. The documents as demanded by the investigating officer was handed over to him by the petitioner on the same day at Ahmedabad. 14. Though the pleadings in defence of the claim made by the petitioner are not required to be gone into for the purpose of determining the issue of objection about territorial jurisdiction of the Court, it is pertinent to notice that but for the investigation ordered by respondent No.1, and the order made by as a consequence of such investigation, the petitioners claim to the amount recovered by the Stock Exchange as a result of auction transaction in pursuance of notice dated 7.2.1996 is not disputed and the facts about service of summons, recording of statement, and recovery of documents in connection with the said investigation against the petitioner company at Ahmedabad on 2.4.1996 are also not disputed. 15. In these circumstances, the conclusion is irresistible that holding of investigation in the affairs of buying and selling and dealing with the shares by the petitioner company qua the shares of MIL, is an integral part of the whole cause of action giving rise to the present claim of the petitioner and therefore citus of investigation will obviously be a citus of at least a part of cause of action giving territorial jurisdiction to the court exercising jurisdiction over that citus. On the facts averred by the petitioner, which remain undisputed, lending additional support to the pleadings about investigation, if part of investigation at least has been held at Ahmedabad and the investigation being the foundation of the impugned order and such investigation in the case of petitioner for bringing into existence the impugned order has taken place at Ahmedabad, which undisputedly and undeniably is within the territory over which this court exercises jurisdiction. This alone is sufficient to hold that the High Court of Gujarat had territorial jurisdiction to examine the issue and issue appropriate directions in respect of the impugned orders which have been founded on an investigation part of which have taken place at Ahmedabad within its territorial jurisdiction. 16. It has also been urged that though citus of service of order has also determinative relevance for deciding question of jurisdiction of the court, and the principle has not been disputed by the respondents, but since the order under challenge has been served on the petitioners at Ahmedabad only during these proceedings in court by handing over the order to the counsel for the petitioner, it cannot be used as ground for furnishing cause of action at Ahmedabad. 17. On a close scrutiny, I find no substance in this submission. The order dated 4.7.1996 in no unmistakable terms state that aggrieved persons may be given opportunity of hearing. For this purpose, the order was required to be served on affected parties to enable the aggrieved person to file objections. Instead of SEBI effecting service itself, it directed concerned Stock Exchange to intimate the affected parties. Stock Exchange had the necessary details about the persons whose shares were offered at auction and were thus affected by the order and were entitled to receive intimation. It cannot be said that intimation was required to be given to aggrieved parties by calling them to Stock Exchange only. It may further be noticed that in its written submission also this much has been stated on behalf of SEBI that the order was served on the Bombay Stock Exchange for suitable intimation to its members and other parties. That is clear indication that the impugned order was required to be served not only on members of Stock Exchange but also on other affected parties. Undoubtedly the petitioner is one of the affected parties, which fact is not seriously disputed nor could it be. Even otherwise, without this direction, if the order in terms affected a person's right and was meant to furnish a post decisional hearing to affected parties, without requiring serving of the copy of order, it would have been meaningless. It is not the case of the respondent that the order was not required to be served on the petitioner at all. What is argued is that since SEBI itself was not to serve the order but it was to be served by Stock Exchange its furnishing copy in the court will not furnish cause of action. 18. Once it is held that, as it must be, that the order was required to be served on petitioner, the fact whether author of the order itself effects the service or someone else is directed to discharge the ministerial duty of service will not affect the position. What is required to be seen is where the order was required to be served on person whose rights are affected by it. If the order was required to be served within the territory, where this court exercises jurisdiction, it will not alter the situation if the order has been served in court during proceedings at Ahmedabad. Position may be otherwise, if but for court proceedings the order on the affected party would not be served at a place within the court's territorial jurisdiction. 19. In the present case, it is not disputed that petitioner's registered office is at Ahmedabad within the territorial jurisdiction of this Court. The notice of investigation were served at Ahmedabad. Statements in pursuance of that were recorded at Ahmedabad. As a result of said investigation impugned order came into existence affecting petitioner will also be required to be served at Ahmedabad, and in fact the same has been served at Ahmedabad. 20. In this connection, learned counsel for the respondent placed reliance on decision of Supreme Court in State of Rajasthan vs. Swaika Proprietors reported in AIR 1985 SC 1289. A close reading of the decision makes it clear that whether in a given set of circumstances service of notice is a part of cause of action or not is not to be determined on any absolute rule in abstract but depends on entirety of facts, nature of order, nature of right affected etc. The court had laid down the ratio that: "The answer to question whether service of notice is an integral part of the cause, of action within the meaning of Article 226(2) of the Constitution must depend upon the nature of impugned order giving rise to cause of action." 21. Applying the above test to the facts of the case before Supreme Court, which had arisen in the matter of land acquisition proceedings under Rajasthan Urban Improvement Trust Act the court found that notice under section 52(2) of the said Act was published in Rajasthan proposing the acquisition of land situated in Rajasthan at Jaipur, service of notice inviting objection against proposed acquisition which was to take place in Rajasthan was served on the petitioner in Calcutta, where he was residing. Thereafter, all proceedings took place in Rajasthan, viz., enquiry and hearing. Thereafter notification under Section 52(1) was published in Rajasthan which resulted in vesting of property in State of Rajasthan. The petitioner challenged the notification under Section 52(1) of the Act. In those circumstances, where citus of property affected, enquiry into objections about it, its rejection, and final order vesting of property in Rajasthan had all taken place in Rajasthan. In these circumstances, obviously, mere service of notice of proposal to acquire property under Section 52(2) was held to be not part of cause of action at all. 22. Here, we are not concerned with a case where mere notice of proposed auction is served at one place, but proceedings itself has been completed at other place including the situation of property affected was situated in the other place. Here we are concerned about a case which is not of service of mere notice of enquiry at Ahmedabad, but where order itself has been served at Ahmedabad. Swaika Property's case was not a case of service of final order. Nor it was a case where final order was required to be served, nor was it a case of quasi judicial order, which unlike a statutory order of acquiring land does not depend on its efficacy on service. The court found as a matter of law that order under Section 52(1) of the Act became effective as