TaxTMI 
TaxTMI 
2008 (1) TMI 609
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.....P.M.P. No. 23994 of 2007. 3. Counter-affidavit had been filed by respondent Nos. 2 and 3 and reply affidavit also had been filed by the writ petitioners. This Court issued notice before admission on 29-8-2007 and further issued rule nisi on 11-10-2007. Contentions of Sri P. Keshava Rao 4. Sri Keshava Rao, learned counsel representing the writ petitioners had taken this Court through the affidavit filed in support of the writ petition and the counter-affidavit and also pointed out to the relevant portions of the regulations governing the field and the material papers, which had been placed before this Court. Learned counsel also had taken this Court through section 4B of the Securities Contracts (Regulation) Act, 1956 (hereinafter in short referred to as "the Act" for the sake of convenience) and in particular, would point out to section 4B(8) of the Act. Learned counsel also pointed out to the relevant dates and would maintain that if sub-sections (8) and (7) of section 4B of the Act are read carefully along with the regulations governing the fields, without permitting the time specified by the Act, with effect from the date of regulations being notified, any action taken....
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.... the stand taken by the writ petitioners that some more time should have been given cannot be an acceptable contention and the regulations at any rate cannot provide for such extension. The learned Advocate General also had pointed out that learned counsel for the petitioners had relied upon only 2.2.1 of the guidelines, but 2.2.2 also may have to be looked into since alternatives had been made under the guidelines 2.2.2. The learned Advocate General also pointed out to the counter-affidavit in general and paragraph No. 20 in particular. The learned Advocate General also pointed out to certain portions of the letters and would maintain that a new plea is being taken. Further, submissions at length were made by the learned Advocate General pointing out to the relevant portions of the correspondence, provisions of the Act and also the relevant regulations as filed, apart from the guidelines specified above. 6. The petitioners are the members of the Hyderabad Stock Exchange Ltd. (hereinafter referred to in short as "HSEL"), which was originally incorporated on 18-10-1943, under the Hyderabad Companies Act during the Nizam Government, Hyderabad Deccan. The HSEL was established with ....
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..... 9. It is also further stated that SEBI vide Notification dated 29-8-2005, approved and notified the HSEL scheme of corporatisation and demutualisation. Accordingly, the HSEL was got converted itself from a company limited by guarantee to a company limited by shares on 23-11-2005, by following the procedure for the registration of the company under the provisions of the Companies Act, 1956, vide registration No. 629 of 2005 [company limited by guarantee vide No. 629 (3/1953)]. It is pertinent here to mention that the SEBI notified the scheme of corporatisation and demutualisation of all stock exchanges to improve governance in stock exchanges in the country. The essence of the corporatisation and demutualisation was to segregate, trading, ownership and management of the exchanges thereby ensuring independence of stock exchanges from potential conflicts of interests between the brokers and investment communities. 10. One of the key measure of the demutualisation exercise is to ensure induction of non-trading shareholders to the extent of 51 per cent of the aggregate equity capital of the exchange post-demutualisation. In terms of clause 9(ii) of the scheme, 2005, the company ....
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....ifficulties such as a Court litigation in respect of its property measuring 17052 sq. yards at Somajiguda under the ULC Act, the exploitation of the members by the strategic investors in asking the shares at a very low price and, etc., apart from other aspects. 14. It is pertinent here to mention that all the efforts made by the shareholders for complementing the scheme, 2005 in constituting a demutualisation committee and in spite of 51 meetings held by the committee, no fruitful results have been achieved. In those circumstances, the HSEL has addressed letters in Ref : HSE : ADM : 07 :147, dated 12-8-2007 and REF : HSE : ADM : 07 : 161, dated 22-8-2007, to the executive director of the second respondent intimating the status of demutualisation and requesting the second respondent to take appropriate steps as far as the HSEL is concerned. Not only the HSEL, some of the broker members also ventilated their grievance in person before the SEBI. 15. Though the SEBI promised to look into the matter, no action has been taken till date. Further, the HSEL also submitted a letter in REF : HES : ADM : 07 : 149, dated 13-8-2007, to the Hon'ble Finance Minister, Govern- ment of India, s....
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.... 07 : 147, dated August 12, 2007, in the captioned matter. As you are aware, the request of FISE/stock exchanges for extension of time was taken up with the Government by SEBI. However, the same has hot been acceded to. This has already been communicated to you through FISE and also during the meeting with the stock exchanges in the southern region, held on June 20, 2007, at Bangalore. In response to specific request for extension of time made by HSE vide its letter dated 27-6-2007, we had vide our letter dated 4-7-2007, informed that the request for extension of time for completing demutualisation process was not acceded to. You were, accordingly, advised to strictly adhere to the time line specified in section 4B of the Securities Contracts Regulation Act, 1956 (SCRA), as communicated to you vide our letter dated August 1, 2006. You may note that if HSE is unable to demutualise by the specified date then as per section 5(2) of SCRA, 1956, the recognition granted under section 4 of SCRA, 1956 to HSE shall stand withdrawn." 19. In the counter-affidavit filed by respondent Nos. 2 and 3, a specific stand had been taken that the withdrawal of recognition came into operatio....
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....the SEBI, ensure that at least 51 per cent of its equity share capital is held by the public other than the shareholders having trading rights within 12 months of the publication of the scheme. 24. The HSE also submitted a scheme for corporatisation and demutualisation to SEBI as per section 4B(1) of SCRA and the said scheme was approved and notified as the Hyderabad Stock Exchange Ltd. (Corporatisation and Demutualisation) Scheme, 2005 vide Gazette Notification No. S.O. 1206(E), dated 29-8-2005. 25. Section 4B(8) of the SCRA stipulates as follows : "(8) Every recognized stock exchange, in respect of which the scheme for corporatisation or demutualisation has been approved under sub-section (2), shall, either by fresh issue of equity shares to the public or in any other manner as may be specified by the regulations made by the Securities and Exchange Board of India, ensure that at least fifty-one per cent of its equity share capital is held, within twelve months from the date of publication of the order under sub-section (7), by the public other than shareholders having trading rights : Provided that the Securities and Exchange Board of India may, on sufficient cause be....
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....es (FISE)/various regional stock exchanges at various times on the subject. Further, the Government of India decided to have a policy regarding foreign investments in infrastructure companies in the securities market, namely, stock exchanges, depositories and clearing corporations. Accordingly, SEBI and RBI simultaneously issued a Circular dated 22-12-2006, on the "Foreign Investments in Infrastructure Companies in the Securities Market". 29. Merely because there was a delay in notifying the MIMPS Regulations, the petitioners cannot contend that more time should be granted by SEBI for completing the demutualisation process. This is because FISE always could have diluted its share capital by issue of fresh equity shares and ensuring that 51 per cent of its equity share capital is held by public other than shareholders having trading rights by following procedure pres-cribed under the Companies Act 1956. However, HSE failed to do so even though it had initially a period of 12 months from 29-8-2005, till 28-8-2006 and another period of 12 months from August 28, 2006, to 28-8-2007. Moreover in the period after November 13-11-2006, also till 28-8-2007, HSE could not complete the demu....
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....g fair valuation of the assets it held due to the Court litigations and litigations under ULC. As such, the exchange cannot complete the demutualisation process, as the share-holders are not able to realize the true value of the shares. As HSE had failed to demutualise within the stipulated time, i.e., on or before 28-8-2007, its recognition stood automatically withdrawn in terms of section 5(2) of the SCRA. 32. It may be pertinent to note that the following 10 stock exchanges including smaller stock exchanges were able to complete the demutualisation process within the stipulated time : (i)Bombay Stock Exchange Ltd., (ii)The Calcutta Stock Exchange Association Ltd., (iii)The Utter Pradesh Stock Exchange Association Ltd., (iv)Bangalore Stock Exchange Ltd., (v)Delhi Stock Exchange Ltd., (vi)Madras Stock Exchange Ltd., (vii)Pune Stock Exchange Ltd., (viii)Cochin Stock Exchange Ltd., (ix)Gauhati Stock Exchange Ltd., (x)Madhya Pradesh Stock Exchange Ltd. 33. It is further stated that so far HSE is the only exchange, which has failed to demutualise as per the statutory mandate. It is further averred that the third respondent had also sent a letter ref....
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....able to pay SEBI registration fees, if any, due as per Schedule III of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. (e)Pursuant to the withdrawal of recognition of HSE, the exchange is directed to refrain from using the expression "stock exchange/exchange" or any variant in its name or in its subsidiary's name. (f)HSE is restrained from transferring or alienating any movable or immovable property of the exchange including bank accounts in any manner till further directions by SEBI in this regard. However, HSE is allowed to operate the bank accounts for a limited purpose of day-to-day administration like payment of salary to its staff, telephone, electricity bills, payment of taxes and property maintenance charges subject to the overall control of SEBI and the following conditions till further directions from SEBI : (i)There should be no withdrawal of fixed deposits. (ii)No capital expenditure without the approval of SEBI. (iii)Fortnightly report to be submitted to SEBI indicating the details of money withdrawn from bank accounts and the details of the expenditure incurred thereof. 34. Thus, there is no illegality or arbitrariness or violation of Con....
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....title dispute of the property relating to ULC which is sub-judice before this Court. It is pertinent hereto mention that in fact, the fourth respondent-company have already paid Rs. 2.36 crores towards regularization fee for the land and building in terms of G.O.Ms. No. 455, dated 29-7-2002, to the Government of A.P. The same is also pending. 37. It is also relevant hereto mention that HSE members have offered more than 71 per cent of the equity shares at Rs. 450 per share. However, as there is a dispute with regard to the property and as the period was also short, the buyers could not come forward and even those, who come forward, asked at a very low price, which was not acceptable. A specific stand taken in the affidavit itself would indicate that the members are directly affected parties since there be a lot of financial impact on them. Further, it had been asserted that the second respondent has got power for extension of time if it is satisfied that any recognition stock exchange was prevented by sufficient cause from being corporatised and demutualised on or after the appointed date. 38. The impugned order already had been referred to above. 39. Section 4B of the Act....
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.... As already aforesaid, these regulations were made by virtue of section 31, read with sub-section (8) of section 4B, of the Securities Contracts (Regulation) Act, 1956. Chapter II deals with manner of increasing public shareholding, and relevant regulation reads as hereunder : "4. Subject to the provisions of sub-section (8) of section 4B of the Act and the scheme, the recognized stock exchange shall ensure that at least fifty-one per cent of its equity share capital is held by the public, either by fresh issue of equity shares to the public through issue of prospectus or in the following manner : (a)offer for sale, by issue of prospectus, of shares held by shareholders having trading rights therein ; (b)placement of shares held by shareholders having trading rights to such persons or institutions as may be short-listed by the recognized stock exchange with the approval of the Board ; (c)issue of equity shares on private placement basis by the recognized stock exchange to any person or group of persons not being shareholders having trading rights or their associates subject to the approval of the Board ; or (d)any combination of the above." 46. Strong reliance was....
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....(c)The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full years (of 12 months each) ; (d)In case the company has changed its name within the last one year, at least 50 per cent of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name; and (e)The aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e., offer through offer document + firm allotment + promoters' contribution through the offer document), does not exceed five (5) times its pre-issue net worth, as per the audited balance-sheet of the last financial year. 49. The learned Advocate General placed strong reliance on the guidelines 2.2.2., which read as hereunder : An unlisted company not complying with any of the conditions specified in, clause 2.2.1 may make an Initial Public Offering (IPO) of equity shares or any other security, which may be converted into or exchanged with equity shares at a later date, only if it meets both the conditions (a) and (b) given below : (a)( i)The issue is made through the book building process, with at least 50 per cent of (net offer to pu....
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....d been pointed out to show how different stands had been taken by SEBI. 53. The contents of the letter, dated 5-9-2007, may be glanced at for better appreciation : "Dr. N. R. Siva Swamy, Chairman, The Hyderabad Stock Exchange Ltd., 6-3-654, adjacent to Erramanjil Bus Stop, Somajiguda, Hyderabad-500 082. Dear Sirs, Sub. : Derecognition of the Hyderabad Stock Exchange Limited (HSE) and consequential actions - regarding. Please refer to the letter dated August 22, 2007, received by us on August 27, 2007, seeking clarification on the functioning of the Hyderabad Stock Exchange Ltd. (HSE) and its subsidiary, i.e., HSE Securities Ltd., pursuant to derecognition of HSE in accordance with section 5(2) of the Securities Contracts (Regulation) Act, 1956. In this regard, you are advised as under : (1)With regard to the status of the listed companies it is informed that the companies, which are exclusively listed at HSE may consider seeking listing at other stock exchanges or provide for exit option to the shareholders as per SEBI delisting guidelines/regulations. (2)With regard to the DP Operations of HSE it is informed that in the interest of investors/....
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.... allowed to operate the bank accounts for a limited purpose of day-to-day administration like payment of salary to its staff, telephone, electricity bills, payment of taxes and property maintenance charges subject to the overall control of SEBI and the following conditions till further directions from SEBI : (i)There should be no withdrawal of fixed deposits. (ii)No capital expenditure without the approval of SEBI. (iii)Fortnightly report to be submitted to SEBI indicating the details of money withdrawn from bank accounts and the details of the expenditure incurred thereof." 54. The principle question which may have to be decided is whether the impugned proceedings be declared as invalid for the reason that though the SEBI is having the power to extend further time as stated by the writ petitioners and whether such power is conferred by the statute on the SEBI and even assuming that such power to be inferred, whether the impugned action is to be interfered with in the light of section 5(2) of the Act as referred to supra. 55. Certain submissions were made that section 4B(8) of the Act and regulation No. 4 may harmoniously be read along with section 5(2) of the Act an....