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of <h1>Stock-exchange regulatory infractions and improperly constituted Board decision set aside; writ petition maintainable, arbitration objection rejected</h1> Dominant issue: Jurisdiction to entertain writ under Article 226 - Court held stock-exchange regulatory infractions affect fundamental economic functions ... Maintainability of the application - Barred by law - availability of equally efficacious alternative remedy available - liability in respect of the infraction of CSE Bye-Laws - Arbitration clause and Section 8 bar; Ineligibility of arbitrator (s.12) and schedule disqualification - Prejudice test - Claim of refund - Withholding of excess security amount deposited by the petitioner no. 1 with CSE and for ancillary reliefs - unlawful constitution of the Board of Directors - CSE not furnishing copies of the documents relied - violation of the principles of natural justice - HELD THAT:- The issues raised can be divided into two categories-Threshold Issues and Merits. This Court proposes to adjudicate on the threshold issues first. The basic framework of the financial and trading activities of an economy, which is an integral part of the functions of the State, are discharged by stock exchanges and, as such, infractions on the part of such entities are amenable to the writ jurisdiction under Article 226 of the Constitution of India. In addition thereto, it cannot be denied that by the impugned action the right of the writ petitioners to do business, protected under Article 19 of the Constitution of India, has been allegedly violated without due process of law. Thus, the writ court definitely has the jurisdiction to examine such issue within the ambit of Article 226 of the Constitution of India. Thus, the writ petition is maintainable. Since the writ court is also a “judicial authority” under the contemplation of Section 8, in the absence of any application akin to one under the said provision, it cannot be said that the jurisdiction of the writ court is barred. The Executive Director, being an employee of the CSE, one of the parties to arbitration, is ineligible to act as or to appoint an Arbitrator. Thus, the above objection of the CSE is not tenable in the eye of law and the present writ petition is maintainable despite the existence of the arbitration clause. This court is fully aware of its limitations as a writ court and cannot enter into a re-appreciation of detailed evidence on intricate and complex questions of fact. However, the objection taken by the CSE on such count is premature at this stage, since the premise of the challenge, as mentioned earlier, hits at root of the jurisdiction of the CSE, being allegedly violative of fundamental principles of natural justice and infraction of the CSE Bye-laws. Thus, such objection cannot but be turned down. Simultaneously, it was categorically observed that since the 45 days’ period fixed by the learned Single Judge to take final decision had expired on the date of passing of the Division Bench judgment, such final decision, if any taken meanwhile, can also be placed/challenged before the learned Single Judge and would be subject to the final outcome of the writ petition. Thus, it was the clear intention of the Appellate Bench to clarify that if any final decision was taken in the meantime, it can be challenged before the learned Single Judge taking up the writ petition itself, instead of filing a fresh writ petition. Going one step further, the Division Bench further clarified that such decision would be subject to the final outcome of the writ petition. Hence, the order dated March 15, 2022, which was passed by way of the final decision referred to by the Division Bench, is amenable to challenge in the present writ petition itself and would also abide by the final outcome of the same. Hence, it is not a case where relief beyond pleadings are sought in an interlocutory application, but the challenge to the final decision dated March 15, 2022 by way of GA is squarely in terms of the leave granted by the Appellate Bench itself and comes within the broader ambit of the writ petition. Thus, the proposition laid down in the judgments cited by the CSE are not applicable in the present case at all. Accordingly, this objection as to maintainability of GA is also turned down. Merits - No Show Cause Notice (SCN) - The argument that no SCN was issued is not tenable. Even otherwise, the law does not mandate any specific SCN to be issued in case of such infractions. Yet, this Court finds from the records that sufficient opportunity over a long period of time was continuously given to the writ petitioners to disclose all particulars, whereas the writ petitioners consistently warded off such attempts and evaded the investigative process. Even in their last letter dated March 15, 2022, a stand was taken by the writ petitioners through their learned Advocate that no further documents would be furnished by them apart from those which had already been sent. Hence, this issue is decided against the writ petitioners. Violation of Natural Justice - Since the SCN was admittedly served on the petitioners and replied to by them, non-furnishing of such prior inspection report was entirely immaterial. After a decision is taken by the Disciplinary Action Committee/Sub-Committee or Defaulter Committee, there is no further scope of hearing being given to the defaulter under the CSE Bye-Laws and it only remains for the Board to take a final call on the penal action to be taken. Rightly argued by the CSE that the writ petitioners have failed to satisfy the “prejudice test”. No substantive purpose would be subserved if copies of documents which were allegedly not given were given to the petitioners; rather, the writ petitioners were given ample opportunity to comply with the queries of the CSE but failed to do so. The CSE Bye-Laws, particularly the Section thereof pertaining to the SGF, in Clause XVIII thereof, amply provide for action to be taken against a defaulter in case of negotiated, fraudulent and non-bona fide deals, as alleged against the writ petitioners. In view of substantial compliance of all regulations on the part of the CSE and in view of ample opportunity of hearing and explanation having been recurringly given to the writ petitioners, the argument of violation of natural justice raised by the writ petitioners is hereby held to be merely a bogey and such objection is turned down. Ante-dating of the order dated March 15, 2022 - Since there was no statutory mandate to pass the order within 45 days. Moreover, since the Division Bench has already granted leave to challenge any final decision taken subsequently and making it clear that the same would be subject to the outcome of the writ petition, there was no compulsion on the part of the CSE or any incentive to ante-date the order. As such, the said objection is turned down and held to be irrelevant as well. No pending investigation - It has been vociferously argued on behalf of the writ petitioners that there was no pending investigation at all which could culminate in the impugned order dated March 15, 2022 or could prompt the CSE to withhold the refund of the excess security deposit. The term “settlement” is not restricted to withdrawal or mutual settlement out of court but can be equated with the expression “resolution” of the dispute. Hence, the CSE never insisted that it would refund excess security deposit allegedly lying with it to the writ petitioners only upon the writ petitioners withdrawing their pending legal proceedings. The insistence of the settlement of the legal dispute in the legal proceedings as a pre-condition of refund was fully justified, since under its Bye-Laws, the CSE is entitled to take penal action in monetary terms against a defaulting member if fraudulent or non-bona fide or other categories of transactions, as alleged against the writ petitioners, had been undertaken by such member. Thus, the delay in culmination of the investigation itself does not vitiate the process of investigation, more so, since such delay was a result more of the attempts of the writ petitioners to thwart the investigation than inaction on the part of the CSE. The issuance of a communication stating thereby that there were no trading dues cannot, by any stretch of imagination, operate as estoppel against the steps taken upon an investigation for violation of CSE Bye-Laws and Regulations, which have the force of law. It is well-settled that there cannot be any estoppel against law. Moreover, the “no dues” mentioned in the letter dated October 11, 2007 could not, by any stretch of imagination, cover the penalty which might be imposed for violations of CSE Bye-Laws otherwise. The proposition laid down in Surendralal Giridhailal Mehta (Surendralal Giridhailal Mehta vs. Union of India & Ors. [2018 (5) TMI 1841 - CALCUTTA HIGH COURT] is not applicable here, since the investigation in the instant case was ongoing in all relevant points of time and was not re-commenced after a hiatus. Thus, this issue is decided against the writ petitioner. Whether constitution of the Board of Directors was illegal - A Managing Director, only for the purpose of provisions such as sub-clauses (10) and (11), would come under the category of Shareholder Directors to determine the voting ratio between Public Interest Directors and Shareholder Directors, since there is no separate provision in the Regulation in that regard vis-à-vis a Managing Director. As per the above discussion, sub-clause (4) of Regulation 23 per se does not equate a Managing Director with a Shareholder Director but merely brings the former within the category of the latter for specific purposes of compliance of Regulation 23. Thus, the SEBI exemption regarding appointment of Managing Director, due to the funds crunch of CSE and on its own prayer, cannot automatically imply that the appointment of Shareholder Directors in the Governing Board was also exempted. Moreover, the scheme of sub-clauses (10) and (11) and the other sub-clauses of Regulation 23 clearly make the presence of both Shareholder Directors and Public Interest Directors in the Board essential, apparently to strike the balance between the interest of the investors and the shareholders of the CSE. Thus, coupled with the term “shall” in Regulation 23(1) of the 2018 Regulations, there cannot be any manner of doubt that the Board of Directors which took the impugned decision dated March 15, 2022 being comprised only of three Public Interest Directors, was unlawfully constituted, in the absence of any Shareholder Director. Accordingly, although not on merits, the order impugned in GA, has to be set aside on the technical ground of unlawful constitution of the Board of Directors which took such decision. Thus, in conclusion, this Court finds that the investigation by the CSE up to the impugned order dated March 15, 2022 was valid in the eye of law. However, the subsequent decision dated March 15, 2022, being taken by a Board constituted unlawfully and without proper quorum, has to be set aside. Issues: (i) Whether the writ petition is maintainable against the Calcutta Stock Exchange and whether Article 226 jurisdiction is barred by an arbitration clause; (ii) Whether the objection that complex questions of fact preclude writ jurisdiction is tenable; (iii) Whether GA No.1 of 2022 challenging the CSE's final order dated March 15, 2022 is maintainable within the remanded writ petition; (iv) Whether a valid Show Cause Notice was issued; (v) Whether principles of natural justice were violated causing prejudice; (vi) Whether the order dated March 15, 2022 was ante-dated or there was no pending investigation; (vii) Whether the Board that passed the impugned order was lawfully constituted under Regulation 23(1) of the 2018 Regulations.Issue (i): Whether the writ petition is maintainable against the CSE and whether the arbitration clause precludes High Court jurisdiction under Article 226.Analysis: The Court examined precedents recognising stock exchanges as performing public functions and within Article 12, considered party autonomy in arbitration and Section 8 of the Arbitration and Conciliation Act, 1996 which requires an application for reference to arbitration before the first statement on merits. The Court also applied Section 12 and the Schedules to test arbitrator eligibility where the Executive Director of the Exchange is nominated.Conclusion: The writ petition is maintainable and the arbitration clause does not bar exercise of Article 226 jurisdiction; the arbitration objection is not tenable, including because the nominated arbitrator arrangement would render Clause XXXI ineligible under Section 12 and the Schedules.Issue (ii): Whether disputed and complex questions of fact render the writ petition non-justiciable under Article 226.Analysis: The Court distinguished cases limiting factual reappraisal, noting the present challenge alleges jurisdictional defects and breaches of fundamental procedural fairness and Bye-Laws that go to the root of CSE's jurisdiction, making threshold judicial review appropriate without re-appreciation of detailed evidence.Conclusion: The objection based on complexity of facts is premature and rejected; the writ court may examine jurisdictional and natural justice defects.Issue (iii): Whether GA No.1 of 2022 challenging the CSE's final order dated March 15, 2022 is maintainable in the remanded writ petition.Analysis: The Division Bench remanded the writ petition and expressly permitted challenge to any final decision taken after the earlier 45-day direction, clarifying such decision could be placed before the Single Judge and would be subject to the writ outcome; procedural technicalities do not preclude consideration.Conclusion: GA No.1 of 2022 is maintainable and falls within the remanded writ petition's ambit.Issue (iv): Whether a valid Show Cause Notice (SCN) was issued to the petitioners.Analysis: The Court reviewed the March 4, 2004 notice and subsequent communications showing itemised allegations, references to circulars and requests for particulars; petitioners repeatedly failed to provide demanded particulars and materials despite opportunities.Conclusion: A valid SCN was issued and the contention of no SCN is rejected.Issue (v): Whether principles of natural justice were violated and caused prejudice to petitioners.Analysis: The Court assessed disclosure of the inspection report via the SCN, repeated opportunities to respond, the absence of a mandatory textual provision rendering timelines peremptory, and applied the prejudice test from authorities that breach of audi alteram partem alone does not invalidate an order absent real prejudice.Conclusion: No violation of natural justice causing prejudice is established; the objection is rejected.Issue (vi): Whether the order dated March 15, 2022 was ante-dated or there was no pending investigation justifying withholding of deposits.Analysis: The Court found no proof of ante-dating; noted no mandatory 45-day timeline; found continuous correspondence and investigatory steps over years and that SEBI communications did not amount to a clean chit on CSE Bye-Law violations.Conclusion: Allegation of ante-dating is unproven and there was a pending investigation; withholding of deposits pending final decision is justified.Issue (vii): Whether the Board that passed the impugned order was lawfully constituted under Regulation 23(1) of the 2018 Regulations.Analysis: Regulation 23(1) mandates inclusion of Shareholder Directors, Public Interest Directors and a Managing Director (the latter may be treated as a Shareholder Director for certain provisions). The Court found the Board that passed the March 15, 2022 order comprised only Public Interest Directors and lacked Shareholder Directors; the SEBI exemption from appointing a Managing Director did not equate to exemption from appointing Shareholder Directors and sub-clauses on quorum and voting require presence of Shareholder Directors.Conclusion: The Board was unlawfully constituted and the impugned March 15, 2022 order is set aside on that ground; the merits of the order were not decided on substance and the investigatory record remains valid.Final Conclusion: The Court set aside the impugned order dated March 15, 2022 solely because the Board that passed it was unlawfully constituted without Shareholder Directors, directed CSE to constitute a valid governing Board under Regulation 23(1) and to take a fresh decision within an expedited timeframe; investigative steps up to the impugned order were held valid and the security deposit may be withheld pending the fresh decision, subject to adjustment as directed.Ratio Decidendi: A decision of a statutory or regulatory body is vitiated where it is taken by a governing body unlawfully constituted in contravention of mandatory composition requirements; such defect renders the impugned decision invalid while leaving prior valid investigatory actions intact and permitting a fresh decision by a properly constituted body.
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