IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 25.08.2006 Coram: The Honourable Mr. Justice V. DHANAPALAN W.P. No.11557 of 2006, W.P.M.P. Nos.13159, 13160, 13161 & 13162 of 2006 and W.V.M.P. No.1054 of 2006 1. M/s. Coimbatore Stock Exchange Limited represented by its Director Ashok Lunia Stock Exchange Building 683-686, Trichy Road Coimbatore – 641 035 2. S. Anantharaman 74-75, 30 Feet Road Krishnasamy Nagar Ramanathapuram Coimbatore – 641 045 .. Petitioners Vs. Securities & Exchange Board of India Mittal Court "B" Wing, I Floor 224, Nariman Point Mumbai – 400 021 .. Respondent Writ Petition filed under Article 226 of the Constitution of India praying for issuance of a writ of certiorarified Mandamus as stated therein. For 1st petitioner Mr. Arvind P. Datar, Senior Counsel assisted by Mr. Rahul Balaji for M/s. Satish Parasaran For respondent Mr. V. T. Gopalan, Additional Solicitor General of India assisted by Mr. Shivakumar O R D E R By consent of the learned Senior Counsel on either side, the writ petition itself is taken up for final disposal. 2. This writ petition has been filed seeking issuance of a writ of certiorarified mandamus calling for the records of the respondent as comprised in order No.WTM/GA/MRD/DSA/58/06 dated https://hcservices.ecourts.gov.in/hcservices/ 17.04.2006 and quash the same as being wholly arbitrary, illegal and ultra vires the provisions of the Securities Contract (Regulation) Act and Securities and Exchange Board of India Act and consequently, direct the respondent to forthwith act in pursuance of the communication dated 15.02.2006 issued by the first petitioner and record the de-recognition as sought for. 3. The first petitioner, viz., Coimbatore Stock Exchange Limited ("CSX") has filed the writ petition along with the second petitioner who is its shareholder/member, challenging the show cause notice dated 17.04.2006 issued by the respondent. 4. The case of the first petitioner, in nutshell, is as follows:  It was established on 09.07.1991 as a public limited company under the provisions of the Companies Act, 1956. It was granted recognition as a Stock Exchange under Section 4 of the Securities Contracts Regulation Act, 1956 ("the SCRA") on 18.09.1991 for a period of three years and the recognition is being renewed on application by CSX annually under Rule 7 of the Securities Contracts Regulation Rules, 1957 (“the Rules”) . CSX initially proposed to operate as a Stock Exchange in view of the then felt necessity for a Regional Stock Exchange in Coimbatore since it was a city where a Regional Stock Exchange would benefit various companies that required listing at the Stock Exchange as well as the investor public. However, subsequent thereto, there has been a sea change in the manner in which Stock Exchanges operate. In India, there were initially two broad Groups of Stock Exchanges with 20 Stock Exchanges being set up as Companies and 3 Stock Exchanges functioning as Association of Persons.  By efflux of time, the manner and conduct of business resulted in a situation where Regional Stock Exchanges started playing a continually diminishing role in the trading of securities. Then, the substantial impact of technology and the developments in computerisation resulted in significant changes to the manner in which the market activities took place and in the wake of globalisation and coming into force of the Securities & Exchange Board of India Act, 1992 ("the SEBI Act"), also resulted in various changes in the regulatory mechanism. There were committees constituted to consider the urgent need for corporatisation and demutualisation of Stock Exchanges for better professionalism in the running of Stock Exchanges and some recommendations were also made to the Government in this regard. A Committee headed Justice H.M. Kania https://hcservices.ecourts.gov.in/hcservices/ had made recommendations requiring them to operate as corporate entities and demutualisation was required in order to separate ownership and trading rights. Also, it found the difficulties that were faced by the Regional Stock Exchanges whose business had declined significantly as investors preferred to trade in the BSE and NSE which had opened franchisees in every nook and corner of the country, offering deeper markets and further, with the fall in trading volumes in the Regional Stock Exchanges, (RSEs) the listed companies felt that there was hardly any purpose in remaining listed in the RSEs and with the coming to end of the manual trading system and terminal based trading being introduced, there was further reduction in the business volumes of Regional Stock Exchanges.  Consequent to the recommendations of Justice Kania Committee on corporatisation and de-mutualisation of Stock Exchanges in India, certain amendments were carried out to the SCRA and SEBI Act, principally mandating certain structural changes. In earlier point of time, the CSX in view of the then existing opinion of the members, thought that they would be in a position to take advantage of having a Stock Exchange in Coimbatore and moved forward in this regard by making necessary applications seeking for continuation of recognition as well as for the demutualisation that was statutorily mandated. But the process which began in the year 2004 has till date not been completed because even by 1999, there was nil trading activity in CSX and by 2004-2005, on a review of the trading patterns of the other RSEs and the reach and popularity of the NSE and BSE, it became apparent by 2004 that, having a Stock Exchange in Coimbatore would serve no purpose and all the efforts of the members would be in vain, since many of the members themselves had already expressed the view and had stopped paying their fees. In addition thereto, in view of the coming to end of trading activities ever since 1999, even companies refused to get themselves listed before CSX and hence, it was felt that it would be in the best interest of everybody concerned since the investing and trading public did not require a RSE in Coimbatore and members of CSX were also not interested in pursuing further with the recognition to operate as a Stock Exchange and they wanted to find out some alternatives. https://hcservices.ecourts.gov.in/hcservices/  In the beginning, CSX was established by receiving huge contributions from members and these funds had been utilised principally for creating infrastructure, including purchase of land and building for starting a Stock Exchange and provision of office space to all members as also heavy investment that went into the setting up of the trading mechanism, computerisation terminals, recruitment of staff, etc. and in fact, CSX had started leasing out its properties even from 1997 and by 2001, substantial property of CSX building had been leased out since it had become apparent that space was not required for the Stock Exchange and ultimately, the members felt that they would not be proceeding further with obtaining recognition. Also, the building which was originally constructed to provide office space for all the members could not be utilised as it had to be let out in order to obtain rental income to re-pay bank loans which had been obtained for putting up the said building.  Further, while the application of CSX for demutualisation was pending, there were several other correspondence and meetings with the respondent's officials. However, the respondent has neither approved the scheme of corporatisation and demutualisation nor rejected the same and instead of proceeding further in that regard, had issued a show cause notice in exercise of its powers under Section 11 of the SEBI Act as to show cause as to why the Governing Body of CSX ought not to be superseded. The said show cause notice dated 22.11.2005 was issued subsequent to which a reply dated 06.12.2005 had also been given.  Thereafter, in view of the requisition of several members, there was an open talk about not seeking recognition and getting CSX de-recognised as a Stock Exchange since factually no trading activities were being carried on and even if recognition was renewed, it would have been impossible to commence business and to carry on trading activities and further both traders and investing public did not require a Stock Exchange in Coimbatore in view of the terminal based trading on NSE and BSE which is presently being done throughout the country. This development led to a requisition by 19 members calling for an Extraordinary General Meeting under Section 169 of the Companies Act, wherein the important resolutions that were proposed were, (a) to surrender the recognition granted to CSX which was valid till 16.09.2006 and (b) to carry out such other https://hcservices.ecourts.gov.in/hcservices/ necessary changes and formalities in order to convert the activities of CSX from that of a Stock Exchange which was its original object to other objects that are permissible under law. Consequent thereto, the EGM of the members of CSX was convened on 15.02.2006 and on the said date, resolutions as proposed, were unanimously passed and it was resolved to surrender the recognition and also to the effect that CSX would cease to function with immediate effect as a recognised Stock Exchange. Consequently, the new Articles of Association were also adopted at another EGM held on 31.03.2006 whereby, only members of the Exchange could hold position of a Director and the same was also duly communicated to SEBI, by a letter dated 08.04.2006.  Thus, CSX had resolved to surrender its recognition and not to seek its further renewal as there is absolutely no negative impact on the interests of the investors or the securities market in view of the absence of any trading in it. However, to the shock and surprise of the CSX, instead of taking further steps consequent upon communication for surrendering or recognition, the respondent, by the impugned order dated 17.04.2006, purportedly under powers granted under Section 12A of the SCRA read with Sections 11, 11B and 19 of the SEBI Act, issued certain directions against the rights of CSX without as much as holding an enquiry that is required to be done under the provisions of the SCRA. 5. According to CSX, the main grounds of challenge to the respondent’s impugned order are as follows: a. the impugned order dated 17.04.2006 is wholly arbitrary, illegal and ultra vires the provisions of the SCRA and SEBI Act and also violative of fundamental rights guaranteed under Articles 14 and 19(1)(g) of the Constitution of India; b. the order of the respondent is wholly without jurisdiction as CSX has surrendered its recognition on very detailed and valid grounds that form part of the requisition for the EGM and such resolutions, having been validly passed under the provisions of the Companies Act, 1956, the respondent ought not to have passed the impugned order interfering with the effecting of such resolutions tantamounting to forcing CSX to operate as a Stock Exchange and even assuming that a power under Section 12A of the SCRA can be exercised, the same can be done only after holding an enquiry and evidently, no enquiry or show cause notice itself was issued before passing the impugned order; https://hcservices.ecourts.gov.in/hcservices/ c. the powers to be exercised under Section 12A of the SCRA have to be exercised only after satisfaction that directions are to be issued in the interest of investors or the orderly development of securities market; d. the respondent cannot force CSX and its members to obtain recognition and carry on business as a Stock Exchange and the right to commence and carry on the function of a securities exchange is one that is available to such corporate entities as may desire to do so and the grant of recognition and renewal is strictly governed by the SCRA and SEBI Act; e. the respondent can, under the powers granted to it by various Acts, only regulate the grant of recognition and functioning of security exchange and there is no power under any statute that would permit the respondent to interfere with a step towards de- recognition; f. inasmuch as the legal resolutions had been adopted by the CSX, it ceases to operate as a Stock Exchange and the respondent would have no jurisdiction on CSX except to issue consequent directions upon the intimation seeking for de-recognition; g. the impugned order is to be set aside inasmuch as it is a colourable exercise of power where the respondent has waxed eloquent on several aspects but has however failed to address the principal grounds on which such power could be exercised and the respondent has also failed to consider that CSX has not been carrying on trading activities from 1999 as a RSE since it has found it impossible to carry on any activities and that the investors have sufficient avenues through the trading terminals of NSE and BSE available throughout the country; h. the impugned action of the respondent is clearly an abuse of power inasmuch as by issuance of the impugned directions, the respondent is seeking to exercise powers that are not available to it. The impugned order can be passed only under Section 11 of the SEBI Act since it is effectively supersession of the governing body of a recognised Stock Exchange and is not in the nature of directions, as contemplated under Section 12A of the SCRA inasmuch as not granting a hearing; https://hcservices.ecourts.gov.in/hcservices/ i. there is no ground for urgency to pass an ex-parte order and if even if such power is available, no grounds have been set out and even a show cause notice procedure as mandated has been dispensed with; j. the impugned order is liable to be set aside since even if Section 12A of SCRA is available to the respondent in the facts and circumstances of the case, it could only be to issue directions to a Stock Exchange or the person referred to in Clause 12A(B) and Section 12A does not, in any manner, grant rights to the respondent for issuing the impugned directions and k. none of the grounds required to be complied with for exercise of power under Section 12A have arisen in the case on hand and hence, the impugned order is wholly without jurisdiction and as per Section 12A of SCRA, directions could be issued only where trading activities are carried on and in the absence of any trading activities by CSX, the impugned action could not at all have been initiated. 6. On the other hand, the respondent has filed its counter stating that the writ petition is not maintainable and has to be dismissed in limine since the Director of the CSX has failed to enclose any valid resolution authorising him to file the writ petition and authority from the second petitioner authorising him to file the writ petition on his behalf. 7. The case of the respondent, in nutshell, is as detailed below: a. It is a statutory authority created under the SEBI Act for the purpose of protection of interest of investors in securities and for the development and to regulate the securities market and for matters connected therewith and incidental thereto. It also regulates the Stock Exchanges through the provisions of the SCRA and the Rules, SEBI Act, Government of India directives and circulars/directives issued by SEBI from time to time. The object of establishment of SEBI was to promote orderly and healthy growth of the securities market and to protect the investors. The respondent also obtains periodical reports from the Stock Exchanges and carries out regular inspections. b. A Stock Exchange, under the SCRA, is defined in Section 2 (f) as: https://hcservices.ecourts.gov.in/hcservices/ i any body of individuals, whether incorporated or not, constituted before corporatisation and demutualisation under Section 4A and 4B or ii a body corporate incorporated under the Companies Act, 1956 whether under a scheme of corporatisation and demutualisation or otherwise for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. c. Further, under Section 3 of the SCRA, any Stock Exchange desirous of being recognised has to make an application in the prescribed manner to the Central Government and Section 4 of the SCRA deals with grant of recognition to Stock Exchanges. This power had been delegated to the respondent in exercise of the powers conferred under Section 29A of the SCRA vide notification dated 13.09.1994 and almost all the powers of the Central Government have been delegated to SEBI from time to time as SEBI was considered to be an expert body to deal with and regulate the securities market as a whole, including the Stock Exchanges. d. CSX is a Company incorporated under the provisions of the Companies Act, 1956 as a joint stock company limited by guarantee and as per the original Memorandum of Association, the main object is as follows: “To apply for and obtain from the Government of India recognition of the Exchange as a recognised Stock Exchange within the meaning of the SCRA and to facilitate, assist, regulate and control the trade and businesses in all kinds of securities with a view to safeguard and further the interest of brokers, jobbers, dealers and the investing public.” e. A Stock Exchange performs economic function and is the barometer of the national economy and plays a vital role in the nation's economic development. The Stock Exchange is also a place where savings of the public are normally channeled towards productive purposes. Stock Exchange grants listing approval to the various companies which intend to get their shares listed. Stock Exchange monitors the Corporate Governance Norms of the various listed companies through the listing agreement and through the Arbitration Mechanism, Stock Exchange resolves investor grievances. Any recognised Stock Exchange may, subject to prior approval of SEBI, make bye-laws for the regulation and control of contracts. https://hcservices.ecourts.gov.in/hcservices/ 8. The respondent's answers to certain averments of CSX are as follows: a. The entire writ petition is only concerned with the narrow commercial interests and the entire objective appears to be to appropriate the huge assets of CSX running into several crores of rupees thereby, acting contrary to public interest, contrary to the purpose for which CSX was created as a Stock Exchange and conferred with the public duty and contrary to the interest of large number of investing public of the said region. b. The impugned directions would not in any manner impact the rights of CSX and they have not been passed without holding an enquiry. Members of CSX have no fundamental right to surrender the recognition by passing a resolution to this effect in its EGM and that respondent has every jurisdiction, power and authority to pass the impugned order on the ground that CSX has ceased to be a Stock Exchange. c. While it is a fact that CSX was established as a Public Limited Company on 09.09.1991, it has suppressed the fact that it is a company limited by guarantee and there has been no contribution towards Share Capital. CSX has also not adverted to the fact that when it was originally incorporated, there were specific clauses under the Memorandum and Articles of Associations that in the event of any winding up, merger, or amalgamation of the Company, the surplus assets would not be distributed among the members. Though it may be true that 20 Stock Exchanges have been set up as Companies, the petitioner has failed to advert to the fact that 8 of these Stock Exchanges are companies limited by guarantee. Further, the resolution passed in the EGM dated 15.02.2006 is invalid and is contrary to the provisions of the SCRA inasmuch as SCRA does not envisage surrender of recognition which was communicated to the Stock Exchange by SEBI vide letter dated 17.03.2006. In such a situation, the members of the Stock Exchange rushed to pass the resolution in question just to avoid the disciplinary action which was contemplated by SEBI vide show cause notice dated 22.11.2005. Further, it can be seen from the words of the resolution wherein instead of mentioning that the recognition may be surrendered, the words “the recognition stands surrendered and the Stock Exchange ceases to function as a recognised Stock Exchange” have been used. Further, in the EGM held on 31.03.2006, CSX had passed a resolution to amend its https://hcservices.ecourts.gov.in/hcservices/ Memorandum and Articles of Association ousting Public Representative Directors/SEBI Nominee Director from its Council of Management and thereby perpetuated the illegality in its resolutions dated 15.02.2006. d. After the submission of corporatisation and demutualiation scheme by CSX, SEBI officials had a meeting with the CSX officials and suggested to carry out certain changes taking care of the financial implications to the Exchange and submit the revised scheme for its approval which has not been done CSX. Therefore, the process of corporatisation and demutualisation which began in 2004 could not be completed as SEBI is yet to receive the revised scheme from the Exchange and in fact, the issue is pending before CSX for re-submission of the scheme. The elected Directors/Members have unilaterally decided to surrender the recognition on behalf of investors without following the due process of law assuming that the surrender would be in the best interest of everybody concerned. SEBI, being the regulator of the securities market, has received complaints from investor bodies such as Coimbatore Shareholders & Investors Association, a registered body, being a representation signed by over 60 individuals and also from the Indian Chamber of Commerce and Industry, Coimbatore. e. The contention of CSX that there is lack of interest by investors and trading public cannot be sustained since over 170 companies have been listed with CSX out of which five companies are exclusively listed with CSX. CSX has been receiving Listing Fees periodically from the Companies listed therein by which a sum over and above Rs.2 crores has been collected. Members cannot take unilateral decision of voluntarily surrendering the recognition abruptly since this action would have serious implications on the investing public, listed companies as well as the securities market in general. As per the renewal application dated 16.06.2005, CSX had stated that its active members are trading in NSE segment through ISE Securities and Service Ltd. which is a subsidiary of Interconnected Stock Exchange of India Ltd. (ISEI). These members are trading to the average extent of Rs.20 crores (approx.) per day, using the infrastructure available at present with CSX and ISEIU is incorporated as a separate company to provide a common trading platform to members of all participating Stock Exchanges including CSX, mainly with the objective of boosting trading in the securities listed on the participating Stock Exchanges. The interconnectivity of Stock Exchanges was meant to facilitate the members of various https://hcservices.ecourts.gov.in/hcservices/ Stock Exchanges to deal through an interconnected market system, which was provided by ISEI and therefore, it is clear that the existing infrastructure facilities of CSX are productively used. Further, in the Coimbatore region, trading through BSE and NSE terminals was to the extent 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, the contention of CSX that it is not interested in trading is totally contrary to facts. f. Being recognised as a Stock Exchange and having enjoyed the total exemption of tax on its income which is not available to other public limited companies and having obtained the recognition to perform the public function of Stock Exchange, CSX is different from any other public limited company and cannot abruptly stop its public functions leaving the listed companies and investors of that region in lurch and therefore, has to comply with the provisions of the Companies Act. g. After receipt of the reply dated 06.12.2005 from CSX requesting for a personal hearing, the respondent had issued a letter dated 13.02.2006 scheduling a personal hearing on 09.03.2006 at the former’s premises. However, obviously with ulterior motives, on 15.02.2006, CSX had hurriedly convened an EGM to pass a resolution regarding surrender of the recognition granted to it and that it would cease to function with immediate effect as a recognised Stock Exchange within the scope and meaning of the SCRA and SEBI Act and thereafter, on 04.03.2006, CSX forwarded the copy of the minutes of the EGM dated 15.02.2006