TaxTMI 
TaxTMI 
2026 (1) TMI 662
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....espondent no. 1 is the Calcutta Stock Exchange Limited (CSE). 2. The writ petition was filed challenging the withholding of excess security amount deposited by the petitioner no. 1 with CSE and for ancillary reliefs. Initially, by an order dated February 2, 2022, the writ petition was disposed of by a learned Single Judge of this Court with an observation that the CSE should take a final call on the investigation that the claim is still pending against the petitioner without prejudice to the rights and contention of the parties, directing a final decision to be taken within a period of 45 days from the date of the order. The learned Single Judge further directed that in the event the CSE finds in its final order that the petitioners are not guilty of violation of any provisions of the Exchange or that continuation of the proceeding is no longer feasible, a suitable decision to that effect may be taken that the deposit together with the accrued interest shall be refunded to the writ petitioner. The petitioners were directed to cooperate in the said proceeding of the CSE and any final decision was directed to be taken strictly in terms of the applicable Rules, Bye-Laws and/or Stat....
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....red to arbitration. 8. Thirdly, it is argued that complex questions of fact are required to be adjudicated in order to examine the grant of reliefs sought in the writ petition, which is beyond the writ court's permissible jurisdiction. It is argued that without taking evidence and/or appreciating the materials on record at length, the writ petition cannot be disposed of and, as such, the application under Article 226 of the Constitution ought not to have been entertained. 9. Although at the initial stages, the CSE had argued that the writ petition is not maintainable against the CSE, which is a registered Company and is an autonomous body not coming within the purview of article 12 of the Constitution of India, the said argument was not pursued seriously in the final arguments, as reflected in the written notes of arguments filed by the CSE as well. 10. The issue of maintainability is controverted by the writ petitioners by placing reliance on Trilochana K. Doshi vs Stock Exchange of India and Another reported at 2000(4) Mh.L.J, delivered by a Division Bench of the Bombay High Court. Learned senior counsel appearing for the petitioners also cites K.C Sharma vs. Delhi S....
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....gainst him. It was also held in the said report that the materials/grounds which according to the department necessitates an action are required to be stated in the SCN, as well as that the particular penalty/action which is proposed to be taken is to be disclosed. 16. Learned senior counsel for the writ petitioners further argues that there was palpable violation of the principles of natural justice on the part of the CSE in not furnishing copies of the documents relied on by the latter while passing the impugned order dated March 15, 2022. 17. By way of example, learned senior counsel argues that the inspection report and the decision of the Disciplinary Action Sub-Committee, which were referred to and relied on by the CSE in the impugned order dated March 15, 2022, were never disclosed to the writ petitioners to enable the latter to deal with the same. Even in the affidavit-in-opposition filed by the CSE to GA No. 1 of 2022, it was mentioned that certain other documents were relied on while passing the said order, which documents were also not furnished to the writ petitioners, thereby denying the latter the opportunity to deal with the same. 18. In support of such cont....
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....ore, lead to the conclusion that prejudice is thereby caused. Where procedural and/or substantive provisions of law embody principles of natural justice, their infraction per se does not lead to invalidity of orders passed, unless prejudice is caused to the litigant, except in case of mandatory provisions of law which are conceived not only in individual interest but also in public interest. 23. Learned senior counsel appearing for the writ petitioners next argues that there was ante-dating of the purported order dated March 15, 2022, which is evident from the fact that a letter issued by the learned advocate for the writ petitioners on the self-same date was also referred to in the order, which would not have been possible unless the order was authored subsequently, pre-dating it to suit the 45-day timeline given by the learned Single Judge. 24. Such contention, of course, is controverted by the CSE. 25. The writ petitioners further submit that there was no pending investigation which could culminate in the penal action taken by the impugned decision of the CSE. It is submitted that the alleged infractions took place long before. Even going by the stand of the CSE, the SC....
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....der Directors, Public Interest Directors and Managing Director. Although sub-clause (4) of Regulation 23 provides that 'Managing Director' shall be included in the category of 'Shareholder Directors', the scheme envisaged in sub-clauses (10) and (11) of Regulation 23 clearly indicate that the presence of Shareholder Directors is mandatory. 32. Despite the CSE having cited a letter by the SEBI exempting the CSE from appointing any Managing Director, such exemption, it is argued, did not exonerate the CSE of the liability to incorporate Shareholder Directors within the Board in terms of Regulation 23. In the present case, all three members of the Board were Public Interest Directors and as such, in the absence of any Shareholder Director in the Board, the quorum required to take a valid decision was not met, which vitiates the impugned order in any event. 33. Learned senior counsel appearing for the writ petitioners cites a judgment of a learned Single Judge of this Court in Surendralal Girdharilal Mehta vs. Union of India & Ors., reported at (2018) SCC OnLine Cal 2937, for the proposition that indifference, disinterest and lack of diligence on the part of the authorities in ca....
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.... Although this objection was not canvassed seriously at the final arguments, for the sake of completion, the same is also dealt with. The writ petitioners have cited Trilochana K. Doshi (supra) Trilochana K. Doshi vs Stock Exchange of India and Another reported at [2000(4) Mh.L.J] as well as K.C Sharma (supra) K.C Sharma vs. Delhi Stock Exchange and Others reported at (2005) 4 SCC 4 for the proposition that applications under Article 226 of the Constitution of India lie against stock exchanges. 40. This Court respectfully agrees with the ratio laid down in the said judgments to the effect that a stock exchange comes within the purview of State within the meaning of Article 12 of the Constitution of India. 41. The premise of such observation is that stock exchanges such as the CSE render public utility services, which come within the domain of the functions of the State. 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. 4....
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....ourts under Article 226 of the Constitution. The answer is obviously in the negative, since the power of a High Court under Article 226 of the Constitution of India is derived directly from the Constitution of India, which is the Grund norm of the legal framework of the country. Being a constitutional remedy, the same cannot be curtailed or taken away by any subordinate legislation, since the Parliament itself derives authority under the Constitution itself to make laws. Moreover, in the absence of any specific bar in any law, including the 1996 Act, to adjudication by a regular court/forum despite the existence of an arbitration clause, the present writ petition is very much maintainable. 49. Even otherwise, the so-called arbitration clause, incorporated in Clause XXXI of the Bye-Laws, would be hit by Section 12 read with the Fifth and Seventh Schedules of the 1996 Act, since it is the Executive Director of the Exchange who is supposed to act as an Arbitrator or nominate the Arbitrator under the said Clause. 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 t....
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..... Ltd. Staff Association reported at (2003) 4 COMPLJ 333 (CAL)) has been relied on for the proposition that where there is no pleading in the writ petition, and/or relief sought, such relief beyond the pleadings cannot be granted on the basis of a new case made in supplementary affidavits. It was held in the said report that the parties cannot be permitted to travel beyond their pleadings in the writ petition. 55. However, such proposition is squarely inapplicable in the present case in view of the Division Bench judgment, in terms of which the writ petition was remanded and is now being heard afresh by this Court. 56. In the Division Bench judgment dated March 29, 2022, passed in APO No. 25 of 2022, the learned Division Bench, while setting aside the initial disposal order of the learned Single Judge in the present writ petition on the limited ground that the aspect of withdrawal of previous litigation by the petitioners, allegedly at the instigation of the CSE, was not looked into, requested the Single Judge to decide the said issue afresh. 57. Simultaneously, it was categorically observed that since the 45 days' period fixed by the learned Single Judge to take final dec....
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....he alleged violations on the part of the petitioner no. 1, as observed from the books and documents produced by the writ petitioners. The said notice, under separate heads, pointed out the fund transactions with tainted business houses, off-market deals by the petitioner no. 1 and its associated firms, with specific details of each of such transactions, along with particulars of the circular activity and contraventions of SEBI Regulations as well as of the CSE Bye-Laws, including fraudulent transactions and collusive trade deals, all of which were elaborately mentioned in the said notice. 61. Item-wise explanation was also sought and an opportunity given to the writ petitioners in the self-same notice to furnish proper explanations. However, the writ petitioners deliberately chose not to avail of such opportunity but shot off a reply on March 18, 2024, primarily containing evasive denials without full particulars, with an insinuation that the CSE had acted in an irresponsible manner with a mala fide intention to harass the writ petitioner. However, the reason for such mala fide intention has never been disclosed. 62. In fact, a subsequent notice was again issued by the CSE on....
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....h was not set aside on that point by the Division Bench, the writ petitioner chose not to co-operate with the investigation. 66. Hence, 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. 67. Hence, this issue is decided against the writ petitioners. ii) Violation of Natural Justice 68. The writ petitioners argue that an inspection report was not given to them. However, from the impugned order dated March 15, 2022 itself, it is evident that the inspection report was the basis not of the said order but of the initial SCN issued on March 4, 2004. Thus, the entire contents of the inspectio....
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....olation of principles of natural justice. 73. In fact, opportunities were given to the writ petitioners ad nauseam, for appearing before the CSE Authorities and giving proper item-wise explanation as well as furnishing further specific documents sought by the CSE, which were repeatedly flouted by the writ petitioners. 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. 74. It is, thus, 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. 75. The principle laid down in K.L. Tripathi (K.L. Tripathi vs. State Bank of India and Others reported at (1984) 1 SCC 43.) and State of Uttar (State of Uttar Pradesh vs. Sudhir Kumar and Others reported at (2021) 19 SCC 706) are rele....
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.... 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. 80. Before proceeding further on such score, the provision regarding security deposit is required to be looked into. 81. As per SEBI Circular No. CIR/MRD/DRMNP/36/2012 dated December 19, 2012, annexed to the supplementary affidavit filed by the writ petitioners themselves, the stock brokers/trading members are to maintain Base Minimum Capital (BMC) to the tune of Rs. 10,00,000/- in case of only proprietary trading without Algorithmic Trading (Algo). The writ petitioners claim exemption under sub-clause (e) of Clause 3 of the Circular, which provides that for stock brokers/trading members of exchanges not having nation-wide trading terminals, the deposit requirement shall be 40% of the above BMC deposit requirements. However, in the correspondence issued on behalf of the writ petitioners to the CSE as well as the pleadings of the writ petitioners, it has been categorically admitted and iterated by the writ petitioners that they have been carrying on stock broking transactions with several other stock ex....
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.... 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. 88. 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. 89. The writ petitioners rely on their purported exoneration on the part of the SEBI. However, the letters of the SEBI in that regard do not exonerate the writ petitioners as such, but clearly let off the writ petitioners with a warni....
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....ralal Giridhailal Mehta (Surendralal Giridhailal Mehta vs. Union of India & Ors., reported at (2018) SCC OnLine Cal 2937) 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. (v) Whether constitution of the Board of Directors was illegal 94. Admittedly, the Board of Directors or the governing body of the CSE, which took the impugned decision dated March 15, 2022, was comprised of three members, all of whom were Public Interest Directors. Rule 23(1) of the Securities Contracts (Regulation)(Stock Exchanges and Clearing Corporations) Regulations, 2018 provides that the Governing Board of every recognized stock exchange shall include: a) Shareholder Directors; b) Public Interest Directors; and c) Managing Director. 95. Thus, the expression "shall" mandates the incorporation of all such three categories of Directors. 96. In the present case, the CSE was exempted by the SEBI by a specific written instruction, on the request of the CSE itself, from appointing a Managing Director. Sub-clause (4) of....
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....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. 101. Accordingly, although not on merits, the order impugned in GA No. 1 of 2022 has to be set aside on the technical ground of unlawful constitution of the Board of Directors which took such decision. CONCLUSION 102. 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. 103. Accordingly, WPO No. 305 of 2022, along with GA No. 1 of 2022, are disposed of with the following directions: (i) The Order dated March 15, 2022, impugned in GA No. 1 of 2022, is hereby set aside only on the ground that the Board of Directors passing the same, being devoid of any Shareholder Director, was unlawfully constituted and without proper quorum. It is, however, made clear that the merits of the said order have not been gone int....