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of <h1>Court orders fresh consideration of Stock Exchange application, stresses compliance, trust, and transparency.</h1> The court set aside SEBI's rejection of the Petitioner's application to operate as a Stock Exchange, directing a fresh consideration within one month. The ... Petition for Permission to Undertake Business as a Stock Exchange - Validity of Section 4 SCR Act and Section 11(1) and 19 of SEBI Act – Held that:- Whether the Petitioner was a fit and proper person for the grant of recognition, the finding which had been arrived at in the impugned order was inter alia based on a conclusion as to the illegality of the buyback agreements on the ground that they were forward contracts, which is found to be erroneous in the present judgment - The effect of the non-disclosure of the buyback agreements to SEBI should be considered having regard to the fact that a genuine attempt has been made by the promoters by tendering an undertaking to the Court that their shareholding together shall not exceed five per cent of the equity capital, notwithstanding the exercise of the options - The application filed by the Petitioner shall be reconsidered afresh in terms of the observations contained in this judgment. Upon remand, a fresh decision shall be arrived at after furnishing the Petitioner an opportunity of being heard. Issues Involved:1. Legality of SEBI's rejection of the Petitioner's application.2. Compliance with the MIMPS Regulations.3. Legality of buy back agreements.4. Determination of 'persons acting in concert.'5. Fit and proper person criteria.6. Concentration of economic interest.Detailed Analysis:1. Legality of SEBI's Rejection of the Petitioner's Application:The Whole Time Member of SEBI rejected the Petitioner's application to undertake business as a Stock Exchange under Section 4 of the SCRA and Sections 11(1) and 19 of the SEBI Act, 1992. The rejection was based on grounds including non-compliance with the MIMPS Regulations, failure to disclose buy back agreements, and the assertion that the promoters were acting in concert, among others.2. Compliance with the MIMPS Regulations:The MIMPS Regulations were imposed as a condition for the Petitioner's recognition. The Petitioner's compliance was questioned based on the issuance of warrants and buy back agreements. The court found that the issuance of warrants, which did not carry voting rights and were subject to MIMPS Regulations, did not violate Regulation 8. The court emphasized that the relationship between a stock exchange and SEBI must be based on trust and full disclosure.3. Legality of Buy Back Agreements:The buy back agreements were initially deemed forward contracts by SEBI, thus violating the SCRA. However, the court found that these agreements constituted options, not forward contracts. An option, being a unilateral privilege, does not form a binding contract until exercised. Therefore, the buy back agreements were not illegal as they would be fulfilled by spot delivery upon exercise.4. Determination of 'Persons Acting in Concert':The court examined whether the promoters, FTIL and MCX, were acting in concert under Regulation 8. The term 'persons acting in concert' derived from the Takeover Regulations requires a common objective or purpose. The court found that the Whole Time Member's finding was flawed as it did not apply the correct legal test to determine a common objective or purpose. The court noted that mere promotion of a company does not suffice to establish acting in concert.5. Fit and Proper Person Criteria:SEBI's rejection was partly based on the Petitioner's alleged failure to disclose buy back agreements, which SEBI argued was a breach of trust. The court acknowledged the importance of full disclosure but found that the non-disclosure alone, especially when the agreements were not illegal, did not justify rejecting the application. The undertakings provided by the promoters to comply with the MIMPS Regulations were deemed sufficient.6. Concentration of Economic Interest:The court noted that none of the regulations independently addressed the concentration of economic interest. Thus, this ground was found to be extraneous and not a valid basis for rejecting the application.Conclusion:The court set aside SEBI's order dated 23 September 2010, directing a fresh consideration of the Petitioner's application within one month, ensuring compliance with the observations made in the judgment. The court emphasized the need for SEBI to act within its regulatory framework while ensuring transparency and full disclosure by the stock exchange.
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