Case: Mcx Stock Exchange Limited Vs. Securities &amp; Exchange Board of India &amp; Others

This ground in the impugned order is, therefore, extraneous to the MIMPS Regulations. If the requirements of the MIMPS Regulations are fulfilled, then independent of them, there would be no further norm referable to the concentration of economic interest on which the Petitioner would fail in its application.Fit and proper person:101. In holding that it would not be in the public interest and the interest of the trade to grant the application, SEBI has concluded in its impugned order that the Petitioner is not a fit and proper person. This finding is primarily based on the following premises:(i) There was a failure on the part of the Petitioner to disclose the buy back agreements. These should have been shared with SEBI in order to enable it to determine whether Regulation 8(1) has been complied with;(ii) The buy back agreements were illegal under the SCRA and the Petitioner was either instrumental to those agreements or has knowledge of them; and(iii) The Petitioner should have submitted the proposed Scheme of Reduction to SEBI and ought to have sought a confirmation of whether it fully complies with the MIMPS Regulations. The Whole Time Member has, however, concluded that he cannot go so far as to agree with what has been stated in the notice that the Petitioner has been dishonest in not giving SEBI adequate information about the Scheme itself.102. In the earlier part of this judgment, the issue of disclosure has been elaborated upon at length. The relationship of a stock exchange with SEBI must be founded on utmost good faith. Material and relevant facts which have a bearing on compliance with the Act and the Regulations which SEBI enforces must be disclosed. When SEBI, as a condition for the recognition of a stock exchange imposes a stipulation of compliance with the provisions of the MIMPS Regulations and it may be compliance of the relevant provisions as the subsequent notification imposes there has to be a genuine and honest compliance with the requirements of the Regulations. The Petitioner and its promoters may be correct in asserting that the existence of the buy back agreements does not ipso facto result in a violation of the MIMPS Regulations, in the present, once the shareholding of the promoters is brought within the permissible limit. The buy back involves an option which may or may not be exercised in the future. The promoters submit that they have several courses of action open to ensure that their shareholding does not exceed the statutory limit if the option is exercised. New capital can be infused by increasing the authorised capital; or the promoters may find an independent third party to purchase the shares on the exercise of the buy back option. But these are evidently matters which SEBI as regulator must be informed about. The buy back casts an obligation on the promissory to purchase though an option is given to the promisee to sell in future. The regulator is entitled to be in the know of full facts and the existence of a buy back agreement is a relevant fact. Even assuming that the promoters would make legitimate arrangements in future upon the exercise of the buy back option to ensure that their shareholding continues to be within the limit prescribed, SEBI would be within its statutory powers to demand assurances that those conditions would be fulfilled. We are, therefore, unable to accept the submission which was urged on behalf of the promoters that the non-disclosure of the buy back agreements is of no consequence because the buy back agreements were, according to them, a wholly irrelevant consideration. The divestment of shares held by the promoters in excess of the limit prescribed by Regulation 8 was to ensure MIMPS compliance. If as in this case, a divestment of shares was also accompanied by a buy back obligation assumed by the promoters, disclosure of the buy back is a relevant consideration. The existence of the buy back agreements is a relevant consideration in enabling SEBI to determine as to whether there was a genuine divesting of shares held by the promoters in exeess of the limit. Compliance with the provisions of the MIMPS Regulations by the promoters of the stock exchange cannot be cloaked in secrecy qua SEBI as a regulator.103. But having said this, we are of the view that it would not be justifiable in the facts of the present case to reject the application merely on that ground. From the perspective of the Whole Time Member who made the impugned order, the non-disclosure of the buy back agreements is coupled with his finding that the buy back is a forward contract and, is therefore, illegal. This aspect of the finding of the adjudicating officer has been held to be erroneous in the earlier part of the judgment. Once the buy back agreement is held not to be a forward contract, then the alleged illegality of the agreement as a ground for holding that the Petitioner is not a fit and proper person necessarily ceases to exist. Another circumstance which must be borne in mind is that during the course of the proceedings before SEBI, an undertaking has been tendered on behalf of the promoters that the statutory limit which has been prescribed under the MIMPS Regulations would not be exceeded. Moreover, during the course of the proceedings before this Court, the undertaking which has been tendered by the promoters is even more specific and stringent: that notwithstanding the exercise of the option under the buy back or the warrants, the shareholding of both the promoters together jointly or severally will not exceed five per cent. There has, hence, been a bona fide effort on the part of the Petitioner and its two promoters to ensure that they do not breach the provisions of the MIMPS Regulations by undertaking to the Court that the shareholding of the promoters together shall not exceed the limit of five per cent prescribed under the MIMPS Regulations for a resident.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]61. The position on the record, therefore, is that as a result of the scheme of reduction which was put into place, the shareholding of the two promoters was brought down to five per cent each. Each of the two promoters was allotted warrants in lieu of the share capital which was reduced. The warrants were not to carry any voting rights. Under the warrants, the promoters were conferred with an option to obtain the allotment of equity shares after the expiry of six months. The promoters, by the resolutions passed by their Board of Directors, resolved that the exercise of the option under the warrants shall not be carried out to exceed the limit prescribed in the MIMPS Regulations. In pursuance of the statement which was made before the Division Bench of this Court that the promoters would pass Board resolutions to ensure that they would not increase their shareholding beyond the limit prescribed in the MIMPS Regulations, resolutions were, in fact, passed and intimated to SEBI. Having regard to this undisputed background, it is not possible to accept the finding of the Whole Time Member that the issuance of warrants to the two promoters is a device which would result in a restoration of their holding beyond the limit prescribed by the MIMPS Regulations. A mere possibility of what may happen is hypothetical, as the Supreme Court has held and cannot result in the invalidation of a transaction which is otherwise lawful. (Hindustan Lever Employees Union vs. Hindustan Lever Ltd. (1995) Suppl. 1 SCC 499)  .A scheme under Section 391 of the Companies Act, 1956 has statutory force and binds the creditors and shareholders of the Company. SEBI is not a creditor of the Company. SEBI, as a matter of fact, was not heard in the Company Petition. There can be no dispute about the principle of law that the powers of the Company Court, when it sanctions a scheme under Sections 391 to 393 of the Companies Act, 1956, are wide. Before sanctioning a scheme, though approved by a majority of the creditors or members, the Court has to be satisfied that the Company or any other person moving the application for sanction, has disclosed all the relevant matters. The Court has to determine whether the scheme is fair, just and reasonable and is not contrary to the provisions of law or of public policy. The Court would not countenance a scheme which is unconscionable or illegal or which is otherwise unfair and unjust to the class of shareholders or creditors for whom it is meant. (Mihir H.Mafatlal vs. Mafatlal Industries Ltd. (1997) 1 SCC 579  ). Once the scheme is sanctioned, it would bind even the dissenting minority shareholders or creditors. (S.K. Gupta vs. K.P. Jain, (1979 (49) Com. Cases 342)and N.A.P. Allagiri Raja vs. N.Guruswamy (1989) 65 Com.Cases 758). Consequently, when the Company Court sanctions the scheme, the fairness of the scheme qua them has also to be borne in mind. The point, however, to note is that SEBI as a regulatory authority is entitled in law to determine as to whether the provisions of the MIMPS Regulations as a condition subject to which recognition has been granted, have been complied with. The power of SEBI to do so as an expert regulatory body acting within the domain of its own statutory functions is not abrogated by the sanction which was granted by the Company Court. The scheme ofwas also a scheme under Section 100. Such a scheme, as well, will not dilute or abrogate the statutory powers of SEBI to exact compliance with the statutory provisions, the enforcement of which SEBI can oversee.We are unable to accept the submission that a fair, candid and complete disclosure to SEBI would not require a disclosure in respect of the buy back arrangement. The object and purpose of the divestment of shares of the promoters was to ensure compliance with Regulation 8 of the MIMPS Regulations. If in the process of divestment, the promoters were under an obligation to offer to buy back the shares on the completion of a period stipulated, that is a matter which ought to have been brought to the notice of SEBI. The submission which has been urged on behalf of the promoters is that the buy back would not necessarily result in the promoters exceeding the shareholding limit of five per cent in the equity capital of the Petitioner. It was submitted that, for instance, it would be open to the promoters to ensure continued compliance with the MIMPS Regulations despite the exercise of the option under the buy back agreements by (i) increasing the equity capital; or (ii) causing the purchase of shares to be effected by an independent nominee. Hence, it was urged that the buy back agreements would not foreclose the possibility of MIMPS compliance in the future despite the exercise of the buy back option. That, in our view, did not absolve the Petitioner to make a full disclosure before SEBI that while compliance with Regulation 8 was being fulfilled by a divestment of shares, yet buy back agreements were entered into. The basic purpose underlying Regulation 8 is to ensure that no resident should own whether directly or indirectly with any other persons acting in concert, more than five per cent of the equity capital of a recognised stock exchange. Where the promoters hold more than five per cent of the equity capital, the divestment of their excess holding, so as to bring them in compliance with Regulation 8, must be genuine. The fact that the divestment of the shares held by a promoter in a stock exchange is accompanied by a buy back agreement is a material circumstance which must be disclosed to SEBI. On 21 July 2010, SEBIaddressed a letter tothe Petitioner adverting to a news article published on 19 July 2010, stating that the promoters of the Petitioner had entered into buy back agreements with the Banks who are shareholders of the Petitioner. In a reply dated 2 August 2010, the Petitioner informed SEBI that FTIL, as its promoter, had issued a letter of comfort dated 12 August 2009 to PNB without entering into a formal binding buy back agreement or shareholding agreement. It was stated that once the Scheme of Reduction was approved, the letter addressed by FTIL to PNB became infructuous and irrelevant. The Petitioner stated that it has complied with the MIMPS Regulations by virtue of the Scheme as approved and the shareholding of FTIL and MCX stood reduced to five per cent with no right to acquire even a single share in violation of limit prescribed by MIMPS Regulations. Even at that stage, there was no reference to the buy back agreement which was entered into withOn this aspect of the matter, we are unable to accept the contention of the Petitioner and of the Third and Fourth Respondents that the existence of the buy back agreements was a circumstance which was irrelevant and was not required to be disclosed tobuy back agreements furnish to PNB andan option. The option constitutes a privilege, the exercise of which depends upon their unilateral volition. In the case of PNB, the buy back agreements contemplated a buy back by FTIL after the expiry of a stipulated period. But, in the event that PNB still asserted that it would continue to hold the shares, despite the buy back offer, FTIL or its nominees would have no liability for buying back the shares in future. In the case ofn assumed an obligation to offer to purchase either through itself or its nominee the shares which were sold toafter the expiry of a stipulated period. In both cases, the option to sell rested in the unilateral decision of PNB andas the case may be.75. In a buy back agreement of the nature involved in the present case, the promissor who makes an offer to buy back shares cannot compel the exercise of the option by the promisee to sell the shares at a future point in time. If the promisee declines to exercise the option, the promissor cannot compel performance. A concluded contract for the sale and purchase of shares comes into existence only when the promisee upon whom an option is conferred, exercises the option to sell the shares. Hence, an option to purchase or repurchase is regarded as being in the nature of a privilege.In a buy back agreement of the nature involved in the present case, the promissor who makes an offer to buy back shares cannot compel the exercise of the option by the promisee to sell the shares at a future point in time. If the promisee declines to exercise the option, the promissor cannot compel performance. A concluded contract for the sale and purchase of shares comes into existence only when the promisee upon whom an option is conferred, exercises the option to sell the shares. Hence, an option to purchase or repurchase is regarded as being in the nature of athe present case, the contract for sale or purchase of the securities would fructify only upon the exercise of the option by PNB or, as the case may be,in future. If the option were not to be exercised by them, no contract for sale or purchase of securities would come into existence. Moreover, if the option were to be exercised, there is nothing to indicate that the performance of the contract would be by anything other than by a spot delivery, cash or special delivery. Where securities are dealt with by a depository, the transfer of securities by a depository from the account of a beneficial owner to another beneficial owner is within the ambit of spot delivery.In the present case, there is no contract for the sale and purchase of shares. A contract for the purchase or sale of the shares would come into being only at a future point of time in the eventuality of the party which is granted an option exercising the option in future. Once such an option is exercised, the contract would be completed only by means of spot delivery or by a mode which is considered lawful. Hence, the basis and foundation of the order which is that there was a forward contract which is unlawful at its inception is lacking infind merit in the submission urged on behalf of the Petitioner and by Counsel for the Third and Fourth Respondents that this contention which is urged on behalf of SEBI has been raised for the first time during the course of the oral arguments in Court. The contention was not a part of the notice to show cause, nor was it the basis of the order that was passed by the Whole Time Member. Moreover, on 13 September 2011, SEBI has issued a notice to show cause to the Petitioner stating that in the alternative to the findings recorded in paragraphs 66 and 67 of the order dated 23 September 2010 (those relating to the buy back agreements being forward contracts and, therefore, unlawful) and assuming that the buy back agreements are not in the nature of forward contracts, they would amount to an option in securities and, therefore, derivatives which were neither traded nor settled at any recognized stock exchange nor with the permission of SEBI. They are consequently, stated to be in breach of the provisions of Section 18A of the SCRA read with the notification dated 1 March 2000. The Petitioner has been called upon to show cause as to why its application dated 13 June 2011 for the renewal of recognition should not be rejected. Having regard to the fact that SEBI has issued a notice to show cause to the Petitioner raising the very ground which was sought to be urged in the alternative by the Learned Additional Solicitor General, we are of the view that it is manifestly inappropriate for this Court to render an adjudication on the issue at this stage. That is even more so, because a violation of the provisions of Section 18A on the basis that the buy back agreements constitute options in securities or derivatives was not a ground taken in the show cause notice which resulted in the impugned order of the Whole Time Member, nor for that matter, is it a ground in the impugned order itself.Now, it must be emphasized that Explanation (IV) to Regulation 8 provides that the expression persons acting in concert shall have the meaning derived from Regulation 2(1)(e) of the Takeover Regulations. The meaning ascribed to the expression persons acting in concert in Regulation 2(1)(e) is unless the context otherwise requires. But, Explanation IV of Regulation 8 incorporates specifically the definition from Regulation 2(1)(e) of the Takeover Regulations. In deriving the meaning of the expression persons acting in concert from the Takeover Regulations and applying it in the context of the MIMPS Regulations, it will be necessary for the Court to render the expression workable having regard to the context in which the term is used in the MIMPS Regulations. Regulation 8 of the MIMPS Regulations, as it now stands, regulates the holding of equity share capital of a recognized stock exchange. Though Regulation 8 prior to its amendment in 2008 regulated both the acquisition and holding of paid up equity capital, the reference to acquisition was deleted by the amendment. This is indicative of the fact that the common purpose of the acquisition of shares may not be relevant for the purposes of the MIMPS Regulations. Moreover, even the Takeover Regulations themselves contemplate the use of the expression persons acting in concert in connection with the holding of shares, such as in the provisions of Section 6(3). At the same time, while the definition of the expression persons acting in concert in the Takeover Regulations is to be applied in a meaningful sense for the purpose of the MIMPS Regulations, the essential ingredient of the expression is the existence of a common objective. SEBI as a delegate of Parliament, when it made the MIMPS Regulations, incorporated the definition of the expression from the Takeover Regulations. SEBI would be presumed to have known the ambit of that expression as used and interpreted in the Takeover Regulations. When the meaning of the expression persons acting in concert is derived from the Takeover Regulations, the latter constitute the source of the meaning. The essential attributes of the expression are those which are to be found in the Takeover Regulations. In extrapolating the meaning contained in the Takeover Regulations to the MIMPS Regulations, the essential features of the meaning cannot be destroyed. The process of extrapolation may legitimately involve necessary changes in points of detail. To incorporate the meaning mutatis mutandis may be permissible so as to adapt matters of detail to impart effective content to the expression when it is used in the context of the MIMPS Regulations. But that process must necessarily adopt the heart and soul of the meaning and the existence of a common object and purpose constitutes the essence of the meaning of the expression persons acting in concert. Regulation 8 is being applied to a situation where the promoters of a stock exchange held the entire equity capital before the process of divestment commenced. The mere fact that they are promoters is not sufficient to hold that they are acting in concert for the purpose of Regulation 8. If such an extreme position of interpretation were to be adopted, compliance with Regulation 8 norms would be illusory in a situation where the original position is that the entire share capital is held by promoters. Hence, the law requires something more to establish a case of persons acting in concert. The essential ingredients of the definition in Regulation 2(1)(e) must beis merit in the contention which has been urged on behalf of the Petitioner and the Third and Fourth Respondents that the impugned order proceeds to hold that Jignesh Shah is a Manager of both FTIL and MCX primarily on the basis of one letter and the undertaking contained therein. The test which has been adverted to in the judgment of the Supreme Court in Alagappa Textile (supra) has not been considered while assessing the applicability of Regulation 2(2)(e)(2). Moreover, several of the circumstances which have been adverted to during the course of the submissions by the Learned Additional Solicitor General of India do not form the basis of the impugned order. This is apart from the fact that in deciding the issue as to whether FTIL and MCX are persons acting in concert, the Whole Time Member of SEBI has not dealt with whether the principal requirement of a common objective or purpose has been fulfilled. The impugned order is, therefore, rendered vulnerable on account of its failure to apply the requisite legal standard that must determine whether the promoters were acting in concert within the meaning of Regulation 2(1)(e).The Third and Fourth Respondents have now unequivocally stated before the Court that they would undertake together not to exceed five per cent in the shareholding of the Petitioner or such limit as may be prescribed under the MIMPS Regulations from time to time. A further undertaking has been tendered that even if the option under the buy back or under the warrants are exercised, the holding of the Third and Fourth Respondents jointly or severally shall not exceed five per cent. This is an aspect which SEBI must be required to reconsider upon the final order that we propose to pass in the case.Concentration of Economic Interest:100. The finding by SEBI to the effect that there would be a concentration of economic interest has fairly not been canvassed by the Learned Additional Solicitor General during the course of the submissions. None of the Regulations contains an independent statutory norm in regard to the concentration of economic interest. This ground in the impugned order is, therefore, extraneous to the MIMPS Regulations. If the requirements of the MIMPS Regulations are fulfilled, then independent of them, there would be no further norm referable to the concentration of economic interest on which the Petitioner would fail in its application.Fit and proper person:101. In holding that it would not be in the public interest and the interest of the trade to grant the application, SEBI has concluded in its impugned order that the Petitioner is not a fit and proper person. This finding is primarily based on the following premises:(i) There was a failure on the part of the Petitioner to disclose the buy back agreements. These should have been shared with SEBI in order to enable it to determine whether Regulation 8(1) has been complied with;(ii) The buy back agreements were illegal under the SCRA and the Petitioner was either instrumental to those agreements or has knowledge of them; and(iii) The Petitioner should have submitted the proposed Scheme of Reduction to SEBI and ought to have sought a confirmation of whether it fully complies with the MIMPS Regulations. The Whole Time Member has, however, concluded that he cannot go so far as to agree with what has been stated in the notice that the Petitioner has been dishonest in not giving SEBI adequate information about the Scheme itself.102. In the earlier part of this judgment, the issue of disclosure has been elaborated upon at length. The relationship of a stock exchange with SEBI must be founded on utmost good faith. Material and relevant facts which have a bearing on compliance with the Act and the Regulations which SEBI enforces must be disclosed. When SEBI, as a condition for the recognition of a stock exchange imposes a stipulation of compliance with the provisions of the MIMPS Regulationsand it may be compliance of the relevant provisions as the subsequent notification imposesthere has to be a genuine and honest compliance with the requirements of the Regulations. The Petitioner and its promoters may be correct in asserting that the existence of the buy back agreements does not ipso facto result in a violation of the MIMPS Regulations, in the present, once the shareholding of the promoters is brought within the permissible limit. The buy back involves an option which may or may not be exercised in the future. The promoters submit that they have several courses of action open to ensure that their shareholding does not exceed the statutory limit if the option is exercised. New capital can be infused by increasing the authorised capital; or the promoters may find an independent third party to purchase the shares on the exercise of the buy back option. But these are evidently matters which SEBI as regulator must be informed about. The buy back casts an obligation on the promissory to purchase though an option is given to the promisee to sell in future. The regulator is entitled to be in the know of full facts and the existence of a buy back agreement is a relevant fact. Even assuming that the promoters would make legitimate arrangements in future upon the exercise of the buy back option to ensure that their shareholding continues to be within the limit prescribed, SEBI would be within its statutory powers to demand assurances that those conditions would be fulfilled. We are, therefore, unable to accept the submission which was urged on behalf of the promoters that theof the buy back agreements is of no consequence because the buy back agreements were, according to them, a wholly irrelevant consideration. The divestment of shares held by the promoters in excess of the limit prescribed by Regulation 8 was to ensure MIMPS compliance. If as in this case, a divestment of shares was also accompanied by a buy back obligation assumed by the promoters, disclosure of the buy back is a relevant consideration. The existence of the buy back agreements is a relevant consideration in enabling SEBI to determine as to whether there was a genuine divesting of shares held by the promoters in exeess of the limit. Compliance with the provisions of the MIMPS Regulations by the promoters of the stock exchange cannot be cloaked in secrecy qua SEBI as a regulator.103. But having said this, we are of the view that it would not be justifiable in the facts of the present case to reject the application merely on that ground. From the perspective of the Whole Time Member who made the impugned order, theof the buy back agreements is coupled with his finding that the buy back is a forward contract and, is therefore, illegal. This aspect of the finding of the adjudicating officer has been held to be erroneous in the earlier part of the judgment. Once the buy back agreement is held not to be a forward contract, then the alleged illegality of the agreement as a ground for holding that the Petitioner is not a fit and proper person necessarily ceases to exist. Another circumstance which must be borne in mind is that during the course of the proceedings before SEBI, an undertaking has been tendered on behalf of the promoters that the statutory limit which has been prescribed under the MIMPS Regulations would not be exceeded. Moreover, during the course of the proceedings before this Court, the undertaking which has been tendered by the promoters is even more specific and stringent: that notwithstanding the exercise of the option under the buy back or the warrants, the shareholding of both the promoters together jointly or severally will not exceed five per cent. There has, hence, been a bona fide effort on the part of the Petitioner and its two promoters to ensure that they do not breach the provisions of the MIMPS Regulations by undertaking to the Court that the shareholding of the promoters together shall not exceed the limit of five per cent prescribed under the MIMPS Regulations for a resident.