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INTHEHIGHCOURTOFJUDICATUREATBOMBAY O.O.C.J. WRITPETITIONNO.213OF2011 MCXStockExchangeLimited. ...Petitioner. Vs. Securities&ExchangeBoardofIndia&Ors. ...Respondents. .... Mr.C.AryamaSundaram,SeniorAdvocatewithMr.J.J.Bhatt,Senior Advocate with Mr.Nitin Potdar i/b. J.Sagar Associates for the Petitioner. Mr.Darius J. Khambatta, Additional Solicitor General with Mr.Shiraz Rustomjee, Mr.Aditya Mehta, Mr.Jayesh K.Ashar, Mr.MihirMody,Mr.RajeshTalekar,Mr.MobinSheikhandMr.Faiz Khani/b.Ashar&Co.forRespondentNos.1and2. Dr.Virendra Tulzapurkar, Senior Advocate with Mr.Ameet B.Naik andMr.AbhishekKalei/b.Naik,Naik&Co.forRespondentNo.3. Dr.VirendraTulzapurkar,SeniorAdvocatei/b.Mr.MunirMerchat forRespondentNo.4. ..... CORAM:DR.D.Y.CHANDRACHUDAND ANOOPV.MOHTA,JJ. March14,2012. JUDGMENT(PERDR.D.Y.CHANDRACHUD,J.): 1. Rule,byconsentreturnableforthwith.Withtheconsent

ofCounselandattheirrequestthePetitionistakenupforhearing andfinaldisposal.

2.

TheWholeTimeMemberoftheSecuritiesandExchange

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BoardofIndiahasrejected anapplicationfiledbythePetitioner forpermission toundertakebusinessasaStockExchange,other than for the Currency Derivatives Segment. The order is under Section 4 of the Securities Contracts (Regulation) Act, 1956 (SCRA)andSections11(1)and19oftheSecuritiesandExchange BoardofIndiaAct,1992. ThePetitionchallengesthelegalityof theorder.

3.

Forconvenienceofexposition,thisjudgmentisdivided

intoParts,whichareasfollows:

I Facts.1 II ShowCauseNoticebySEBIandtheImpugnedorder.2 IIISubmissions.3 IV TheSCRAandMIMPsRegulations.4 V RoleofStockExchanges.5 VIRegulation4andRegulation8.6 VIITheprocessofdilution.7

1 2 3 4 5 6 7

Paragraphs 4-27 Paragraphs 28-30 Paragraphs 31-36 Paragraphs 37-46 Paragraphs 47-53 Paragraphs 54-55 Paragraphs 56-57

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VIIISharewarrants.8 IXBuybackarrangements.9 XDutyofdisclosure.10 XILegalityofbuybacks.11 XIIPersonsActinginconcert.12 XIIITheValidityoftheimpugnedorder.13 XIVConclusion.14

I:Facts. 4. TheFourthRespondent,MultiCommodityExchangeof

India Limited, who is a promoter of the Petitioner made an applicationon12August2008forrecognitionofthePetitioneras aStockExchange. ThePetitionerwasincorporatedon14August 2008andreceivedacertificateforcommencementofbusinesson 19 August 2008. The Petitioner has two promoters, Financial Technologies (India) Limited (FTIL) and Multi Commodities ExchangeofIndia(MCX),theThird and theFourthRespondents.
8 Paragraphs 58-62 9 paragraphs 63-66 10 Paragraphs 67-69 11 Paragraphs 70-81 12 Paragraphs 82-93 13 Paragraphs 94-103 14 Paragraph 104

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On 22 August 2008, thePetitionerappliedtoSEBIforthegrantof

recognitionasaStockExchangeundertheprovisionsofSection3 of theSCRA. On 23August 2008,SEBIgrantedaninprinciple approvaltothePetitionertosetupaStockExchangeinitiallyinthe CurrencyDerivativesSegmentinaccordancewiththeSCRAandits Regulations.On18September2008,SEBIaddressedalettertothe Petitioner granting recognition under Section 4 of the SCRA for operatingaStockExchangeforaperiodofoneyearcommencing on16September2008andendingon15September2009. The approvalwassubjecttovariousconditions,amongthembeingthe following: Full compliance with the provisions of the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges)Regulations,2006withinoneyearfromthe dateofrecognitionofthestockexchange. TheacronymMMIPSRegulationswillbeutilisedinthisjudgment forthoseRegulations.

5.

The Petitioner commenced operations in the Currency

DerivativesSegmenton7October2008.TheMIMPSRegulations have a background. In August 2002, a Committee headed by

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Mr.JusticeM.H.Kania,formerChiefJusticeofIndiarecommended that(i)StockExchangesshouldbecorporatisedanddemutualised; and(ii)OwnershipofStockExchangesshouldnotbeconcentrated in the hands of a single entity or groups of related entities. ParliamentintroducedSections4Aand4BintotheSCRAtofoster theseparationofownershipandcontrolofstockexchangesfrom their trading members by implementing a scheme of corporatisation and demutualisation. When the MIMPS Regulationswereissuedin2006,theywereintendedtoprovidefor corporatisation and demutualisation of old Stock Exchanges and diversification of the ownership of Stock Exchanges. Full compliance with the provisions of MIMPS Regulations was mandatedbySEBIinthisbackgroundon18September2008when it granted recognition to the Petitioner for a period of one year under Section 4 of the SCRA. The MIMPS Regulations have introducedacapof5%ontheholdingofanyresidentintheequity capitalofarecognisedstockexchange. Thecapappliestodirect and indirect shareholding and the holding of persons acting in concert.

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6.

On 5 November 2008, SEBI issued a framework for

introducingtradingofsecuritiesofSmallandMediumEnterprises, followingwhichon8December2008,thePetitionerfurnisheda proposalfor commencementofoperationsinthat Segment. On 22December2008,thePetitionerappliedtoSEBIforpermissionto commencebusinessintheEquitiesandDerivativesegmentonthe ExchangeplatforminadditiontotheSmallandMediumEnterprise Segment.

7.

On31March2009,thePetitionerofferedtoissueshares

on a preferential basis to Punjab National Bank (PNB) together withanexitoption.Theexitoptionstipulatedthat(i)PNBwould beentitledtoasimplerateofreturnattherateof16%perannum aftercompletionofthreeyearsfromthedateofinvestmentonthe totalamountinvested;(ii)FTILoritsnomineeswouldhavearight to buy back shares from PNB at any time after the expiry of a periodofoneyearfromthedateofinvestment;and(iii)IfPNB retainedthesharesinspiteofthebuybackoffer,itwouldnotbe entitled to an assured rate of return and FTIL would have no liabilitytobuybackthesharesinfuture.

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8.

On 21 May 2009, the Petitioner addressed a letter to

SEBIseekinganextensionofoneyeartoensurefullcompliance withtheMIMPSRegulations.

9.

BetweenMayandNovember2009,inordertocomply

withtheMIMPSRegulations,thePetitionerinthefirststagemade aseriesofprimaryallotmentsofsharesonapreferentialbasisto eighteenBanks. Asaresult,thepaidupcapitalofthePetitioner increased from Rs.135 crores to Rs.173.45 crores. On 15 June 2009,thePetitionerappliedforrenewalofitsexistingrecognition inthefieldofcurrencyderivatives.

10,

On 17 June 2009, the RBISEBI Standing Technical

Committee introduced a regulatory framework for trading on Interest Rate Futures. Following this, on 19 June 2009, the Petitioner made an application to SEBI for permission to launch tradinginInterestRateFutures.

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11.

On 18 July 2009, FTIL sold 7.18 crore shares of the

Petitioneramountingto4.91percentofitspaidupsharecapital toIFCILimited. On20July2009,PNBaddressedalettertothe PetitionersettingoutthetermsandconditionsonwhichitsBoard hadapproveditsinvestmentinthesharesofthePetitioner. The letterstipulatedthat(i)PNBwouldbeentitledtoasimplerateof returnat16%perannumonthecompletionofthreeyearsfrom thedateofinvestment;(ii)FTILoritsnomineeswouldhavearight tobuybacksharesfromPNBatanytimeaftertheexpiryofone yearfromthedateofinvestment;and(iii)IntheeventthatPNB desiredtoretainthesharesinspiteofthebuybackofferbyFTIL, PNBwouldnotbeentitledtotheassuredrateofreturnandFTIL wouldhavenoliabilitytobuybackthesharesinfuture. On12 August2009,FTILacceptedthetermsandconditionsstipulatedby PNB, but expressed its inability to execute a share purchase agreement.

12.

On20August2009,thePetitionerenteredintoaShare

PurchaseAgreement(SPA)withIL&FSFinancialServicesLimited (IL&FS)andtheFourthRespondentunderwhichIL&FSagreedto

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purchasesharesofthePetitionerworthRs.159.12croresfromthe Fourth Respondent. On the same date, as the execution of the SPA,acompanybythenameofLaFinFinancialServicesPvt.Ltd. (LaFin)addressedalettertoIL&FSofferinganexitoption.LaFin, whichisapromoterofFTIL,furnishedanundertakingaccepting the obligationtopurchaseinitssolediscretionduringtheagreed periodallthesharespurchasedbyIL&FSunderthesharepurchase agreementatanytimeafterthecompletionofoneyearfromthe dateofinvestment,butnolaterthanthreeyearsfromthedateof investment after which the right of IL&FS would lapse. The undertakingfurnishedbyLaFintoIL&FSinteraliacontainedthe followingstipulation: 1. LaFinFinancialServicesPvt.Ltd.(LAFin)or its appointed nominees have an obligation to offer to purchase at any time during the Agreed Period (as defined hereinafter) in its sole discretion considers appropriate,allthesharespurchasedbyyouunderthe SPAsinMCXSXbygivingawrittennoticeatanytime after completion of one (1) year from the date of investment but no later than three (3) years from the date of investment (Agreed Period), post which your rightshereinstatedshalllapse.Youwillhavetoconfirm your acceptance/non acceptance for the offer within a maximumperiodof30days. Thepriceatwhichsuch shareswillbeofferedtobepurchasedbyuswillbeata pricewhichwillbehigherofthefollowing(BuyBack Price):

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(i) Price which provides an internal rate of return (IRR)of15%ontheinvestmentor; (ii)PriceatwhichthemostrecenttransactionMCXSX equitysharesiscarriedoutbyMCXSXorMCXorFTIL Group. 2. It being clarified that in the event MCXSX plansanIPOwithinoneyearfromthedateofinvestment weherebycovenantthatweshallnotproceedwiththe IPOincasetheIPOpriceislessthantheBuyBackPrice. Further, in theevent MCXSX plansan IPO within the AgreedPeriodweundertakethattheIPOpricewillnot be less than the Buy Back Price and you would be providedtherighttocompletelyexitinsuchanIPOby wayofanofferforsaleorelseweshallprovidethebuy back offer as per point 1 above at the BuyBack Price beforethelistingoftheshares.... 5. WeaspromotersofMCXSXshallensurethat, save and except issuance of shares of MCXSX to (a) banksaslistedinannexuretothislettertoenhanceits sharecapitaltoRs.180crores,and(b)totheemployees of MCXSX in terms of the employees stock options plans/schemesformulatedbyMCXSX,MCXSXshallnot issueanysharestoanypersonatapricebelowRs.35/ per equity share, without the prior written consent of IL&FS Financial Services Limited, which consent shall notbe unreasonably withheld ordelayed ordeniedby IL&FSFinancialServicesLimited. 6. We agree that pursuant to purchase of the MCXSXsharesfromyouasperpoint1,weundertake forandonourbehalfandonbehalfofFTIL,MCXand ourgroupcompanies,nottosell/issueanyequityshares of MCXSX for a period of three months commencing from the date of purchase as per point 1 above, for a priceexceedingtheBuyBackPrice.

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ThesaleofsharestoIL&FSwaseffectedon21August2009.

13.

The recognition granted to the Petitioner as a Stock

Exchange wasrenewedbySEBIforafurtherperiodofoneyear endingon15September2010byanotificationdated31August 2009,subjecttothefollowingconditions:(i)ThePetitionershall ensurefullcompliancewiththerelevantprovisionsoftheMIMPS Regulationswithinaperiodofoneyear;(ii)ThePetitionerwould permit trading only in securities in which trading was earlier permittedandshallnotbeeligibleforintroductionofanyclassof contractsinsecuritiestillsuchtimeascompliancein(i)abovewas ensured; and (iii) The Petitioner shall comply with such other conditions as may be imposed by SEBI from time to time. The renewalwaswithoutprejudicetotherightsofSEBItodecidethe applicationofthePetitionerdated7April2010.

14.

On22October2009,thePetitionersubmittedareportto

SEBIunderRegulation11(2)oftheMIMPSRegulations.Thereport includedastatementoftoptenshareholdersofthePetitioner as on

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30 September 2009. Among those shareholders were the Third

Respondent with a shareholding of 35.05%, theFourthRespondent withashareholdingof38.31%andIFCILtd.withashareholdingof 4.27%. Hence, the shareholding pattern reflected that the PromoterCompanieshadashareholdingof73.36%.

15.

On31October2009,thePetitionersBoardofDirectors

called upon the initial promoters, the Third and Fourth Respondents, to reduce their shareholding by cancelling their sharesinexcessoftheprescribedlimit,byaschemeofreduction cumarrangement under Sections 391 to 393 of the Companies Act,1956readwithSections100to104.On14December2009, theFourthRespondentaddressedalettertoIL&FSreferringtothe Share Purchase Agreement dated 20 August 2009 and LaFins letterofthesamedateandrequestedIL&FStoapprovethescheme of reductioncumarrangement proposed to be considered at an ExtraordinaryGeneralMeetingtobeheldon15December2009.

16.

Theschemeforreductionoftheequityshareholdingof

thepromoterswasapprovedbytheshareholdersofthePetitioner

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atanExtraordinaryGeneralMeetingon15December2009.The schemeexplainedinparagraph2.4thattheconventionalmethod ofbringingdowntheexistingstakeofpromotersbysellingshares toinvestorsmaysubstantiallydelayregulatorycompliance.This,it was stated, was because while on the one hand, investors were willing to invest only after the Company received approvals for selling other segments, the regulator wanted the process of disinvestment to be completed before giving such approvals. Hence, it was stated that in order to expedite regulatory compliance,itwasproposedtoreducetheexcessshareholdingof thereducingshareholdersandcompensatethembywayofissue oftransferablewarrantstothem;whichmaybeexercisedbythe holder after six months of the issue without entailing any cash outflow from the Company. The exercise of warrants, it was clarified,wouldalwaysbesubjecttotheSCRRegulations. The objective of the scheme, it was stated, was to reduce the shareholdingofFTILandMCX,theThirdandFourthRespondents, each to 5%, as a result of which their combined equity shareholdingintheCompanywouldbe10%ofthetotalsubscribed sharecapital.Themannerinwhichtheschemewastobeworked

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outwasasfollows: (i)Theissuedsubscribedpaidupequitysharecapitalof theCompanywouldstandreducedtotheextentofanaggregateof 199.66croreequitysharescomprisedofthefollowing: (a)61.71croreequitysharesheldbyMCXwouldstand cancelled; (b)56.24croreequitysharesheldbyFTILwouldstand cancelled;and (c)1.70croreequitysharesheldbyIL&FSwouldstand cancelled. (ii) Simultaneously, with the reduction of the equity capital, the Company would issue an aggregate of 119.66 crore warrantstothethreereducingshareholdersexactlycorresponding tothesharecapitalcancelledandreduced;and (iii)Eachwarrantwouldentitletheholdertosubscribe tooneequityshareofthefacevalueofRe.1atanytimeaftersix monthsfromthedateofissue.Thewarrantholderwasentitledto exerciseitsoptiontosubscribetothefullypaidupequitysharesof the Company at any time after six months from the date of allotment.Thewarrantswerenottocarryanyvotingrightsinthe Company.

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17.

On18December2009,aPetitionwasfiledinthisCourt

for sanctioning a Scheme of ReductioncumArrangement under Sections100to104and391to394oftheCompaniesAct,1956. InthePetitionthatwasfiledbeforethisCourt,itwasstatedthat though the reducing shareholders had a right to transfer the
warrants to other investors or to exercise the option under the warrants, thePetitionerwouldensurecompliancewiththeMIMPS

Regulationsaswellastheregulatoryregime: ThesaidReducingShareholdersshall,overaperiodof time, transfer their warrants to other prospective investorsorexercisetheoptionattachedtothewarrants. However,thePetitionerCompanyshallensurethatsuch transferorexerciseshallalwaysbeincompliancewith the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in RecognizedStockExchanges)Regulations,2006,orany other equivalent regulatory regime laid down by the competent regulator, which is for the time being in force.

18.

On21December2009,thePetitioneraddressedaletter

toSEBIhighlightingthemainfeaturesoftheSchemeofReduction. The letter accepted that the scheme will be in contrast to the normalpracticeofreducingholdingbysellingsharesandrealising value. Among the main features of the Scheme which were

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highlightedwereasfollows: a) TheshareholdingofFTILandMCXeachwould notbeinexcessof5%(postreduction)andexcessshares would be extinguished by corresponding reduction of paidupequitycapitalofthecompany. ... d) MCX, FTIL and the other shareholder whose equitysharesareextinguishedasaboveshallbeallotted anequalnumberofwarrantsasapartoftheScheme. e) Promoters once having reduced their shareholding to 5% shall not be permitted to increase their holding beyond limits specified under MIMPS Regulation,thereafter.

19.

The Scheme of ReductioncumArrangement was

approvedbytheCompanyJudgeofthisCourton12March2010 andtheSchemetookeffectfrom19March2010.Theorderofthe Company Judge dated 12 March 2010 notes that the Regional Director had filed an affidavit stating that the Scheme does not appear tobe prejudicial to theinterestsof theshareholders and publicexceptasstatedinparagraphs6(a)and6(b).Inparagraph 6(a)itwasstatedbytheRegionalDirectorthatsincetheCompany was recognized as a stock exchange by SEBI, it was required to inform the regulator about the proposed Scheme of Reduction.

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ThePetitionerbyitsletterdated21December2009wasrecorded as having informed SEBI and of having obtained an acknowledgment. ThesecondobjectionoftheRegionalDirector was that there was no enabling provision in the Articles of Associationtoissuewarrantsinlieuofareductionofsharecapital to which it was submitted on behalf of the Petitioner that the warrants are securities convertible into shares and hence, the issuanceofwarrantswasenabledundertheArticlesofAssociation. On19March2010,theRegistrarofCompaniesissuedacertificate registering the order of this Court consequent upon which the reductionofcapitalandtheschemestoodimplemented.

20.

On7April2010,thePetitionerinformedSEBIofhaving

compliedwiththeMIMPSRegulationsandsoughtitsapprovalto deal in interest rate derivative markets, equities, futures and optionsonequityandwholesaledebtsegmentsandinallsegments whicharepermittedtotheBombayStockExchangeandNational Stock Exchange. On 13 April 2010, a copy of the order of the CompanyJudgesanctioningtheSchemetogetherwiththeScheme which was sanctioned was furnished by the Petitioner to SEBI.

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SEBI had conducted an inspection of the Petitioner in July and August 2009 in respect of which an inspection report was forwardedon16April2010.

21.

On4June2010,thePetitionerappliedforrenewalofits

recognitionvaliduntil15September2010totradeintheexisting securities. The Petitioner also sought an expeditious grant of


permission to commence operation in other segments.

22.

On 16 July 2010,

the Petitioner instituted a writ

proceedingunderArticle226oftheConstitutionbeforethisCourt aggrievedbythedelayonthepartofSEBIindecidinguponthe applicationforapprovalforcommencingtradinginothersegments inadditiontoexchangecreditcurrencyderivatives.

23.

On 21 July 2010, SEBI addressed a letter to the

Petitioner statingthat it had been brought to itsnotice that the Petitioner had entered into buy back arrangements with a Bank whichwasashareholderofthePetitioner.This,itwasstated,was observedfromanewsarticlepublishedon19July2010. On 2

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August2010,thePetitionerinareplytoSEBIsletterencloseda copyofthecomfortletterwhichwasissuedtoPNBbyFTIL,its promoter and theThirdRespondent.

24.

On 10 August 2010, a Division Bench of this Court

disposed of the Writ Petition by directing SEBI to take a final decision on the application submitted by the Petitioner by 30 September2010. TheCourtrecordedthestatementoftheThird and Fourth Respondents that they would convey to SEBI, Board resolutionsindicatingtheirresolvetocomplywiththerequirement of the statutory regulations regarding the shareholding not exceeding the prescribed percentage. Pursuant to the statement made before the Division Bench, both FTIL and MCX, the two Promoters of the Petitioner, passed and submitted Board resolutionstoSEBItotheeffectthattheyshallnotincreasetheir equityshareholdingbyacquiringequitysharesunderanybuyback orotherarrangementswhichwouldresultinthelimitsprescribed undertheMIMPSRegulationsbeingexceededandthattheyshall atalltimescontinuetocomplywiththeRegulations.

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25.

On11August2010,IL&FSaddressedalettertoSEBIin

order to explain the background of the investment made in the Petitioner.TheletterstatedthataSharePurchaseAgreementhad been executed in August 2009 for the purchase of 44.2 million shares of the Petitioner from MCX. Another Share Purchase Agreementwasexecutedbyaprivateequityfundmanagedbyan IL&FSGroupCompanywithrespectto27.8millionshares.Under anexitarrangementitwasagreedthatLaFinFinancialServices whichhelda26%equitystakeinFTIL wasobligatedtoofferto purchasethesharesheldbytheIL&FSGrouponthecompletionof oneyearandwithinaperiodofthreeyearsatastipulatedrate. Theletterstatedthaton10August2010,IL&FSFinancialServices Ltd.had,inameetingofitsBoard,resolvedtoexploreanexitfrom theinvestmentmadeinthesharesofthePetitioner,includingby expeditingtherighttoselltheinvestmentinaccordancewithexit termstothepromotersofthePetitioner.

26.

On 19 August 2010, PNB addressed a letter to SEBI

regarding the buy back arrangement stating that in view of the Scheme sanctioned by this Court for reduction of capital, there

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wouldbeaninferencethatPNBsarrangementwithregardtobuy backofshareshasimplicitlybeenextinguished.

27.

On30August2010,SEBIrenewedtherecognitionofthe

Petitionerforaperiodofoneyearwitheffectfrom16September 2010withoutprejudicetoitsrighttodecideupontheapplication submittedbythePetitioneron7April2010.

II:TheNoticebySEBIandtheimpugnedorder: 28. A notice was issued by SEBI to the Petitioner on 30

August2010underSections4(4)and12AoftheSCRAreadwith Sections 11(1) and 11B ofthe SEBI Act toshow cause why the application dated 7 April 2010 should not be rejected. Five groundsweresetoutinsupportofthenoticetoshowcause:(i) ConcentrationofthepromotersinterestinthePetitionerasastock exchange : the case being that both the Third and Fourth Respondentscontinuetoretainthesamepercentageshare(38.01% and 33.89%) of the issued equity shares and warrants taken togetherastheydidwhenboththepromoterswereholdingonly equitysharesofthePetitioner;(ii)Themannerofcompliancewith

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Regulation8(1)oftheMIMPSRegulationsdidnotaccordwiththe modes set out in Regulation 4. All other Stock Exchanges had adopted one of the modes explicitly recognised in Regulation 4, whereasthePetitionerhadmerelysubstitutedtheholdingofequity by a right to acquire equity; (iii) Neither the Petitioner nor its promoters,theThirdandFourthRespondents,couldberegarded asfitandproperpersonssinceinteraliathedetailsofthebuyback arrangement had been concealed from SEBI. Prior to the letter dated 21 December 2009, the Petitioner had not furnished any informationtoSEBIinregardtotheproposedSchemeofReduction andevenatthetimeoffilingoftheapplicationon7April2010, theSchemewasnotsharedwithSEBI;(iv)Thepromotersofthe Petitioner are persons acting in concert within the meaning of ExplanationIVtoRegulation8(1);and(v)ThePetitionerandits promoters,theThirdandFourthRespondents,wereinviolationof the SCRA inasmuch as the buy back agreements were forward contractswhichwereincontraventionoftheprovisionsoftheAct. ThePetitionersubmittedareplytothenoticetoshowcauseon16 September2010.

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29.

The Whole Time Member of the SEBI passed the

impugnedorderon23September2010,rejectingtheapplicationof thePetitionerdated7April2010.Thefindingswhichhavebeen arrived at in the impugned order, may be broadly summarised thus:

(i)

The MIMPS Regulations are not applicable to Stock

Exchanges that are already corporatised and demutualised. The Petitionerwasalreadycorporatisedanddemutualisedatthetime ofitsrecognition. But,theRegulationsbecame applicable tothe PetitionerbecauseSEBIspecificallyimposedaconditionthatthe Petitioner shall comply fully with the relevant provisions of the Regulationswithinoneyear;

(ii)

TheapprovalgrantedbytheHighCourttotheSchemeof

capitalreductiondoesnotconcludetheissueastowhetherthere wascompliancewiththerequirementsoftheSCRAortheMIMPS Regulationssincethatwasnotasubjectmatterforconsiderationof theCourtwhenitapprovedtheScheme;

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(iii)

Since the object of the Scheme was to ensure full

compliancewiththeRegulations,therewasnoreasonastowhy thePetitionerdidnotseektheopinionofSEBIastowhetherthe SchemewasinfullcompliancewiththeRegulations;

(iv)

Excluding the warrants held by a shareholder in

computing the limits of ownership in a Stock Exchange would violate the spirit of the MIMPS Regulations. If the holding of equitysharesinexcessoftheshareholdinglimitsisnotpermissible, the holding of a right to equity shares cannot be held to be permissible;

(v)

Theconversionofsharesintowarrantswasnotoneof

the four modes set out in Regulation 4 and was, therefore, not permissible;

(vi)

The undertaking furnished by the Petitioner together

with its promoters not to violate the MIMPS Regulations in the SchemeofCapitalReductionwillnotrenderitcompliantwiththe Regulations;

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(vii)

Thedifficultyofthepromotersindivestingshareswas

purely a commercial consideration. SEBIs interpretation of the meaningoffullcomplianceundertheRegulationsshouldnotbe tailoredtomeetthebusinessobjectivesofthepromoters;

(viii)

Other Stock Exchanges have not adopted any method

other than one of the methods referred to in the MIMPS Regulations;

(ix)

Themeaningoftheexpressionactinginconcertisto

bederivedfromtheTakeoverRegulationsbyvirtueofExplanation (IV)toRegulation8;

(x)

The meaning in the Takeover Regulations has to be

adoptedmutatismutandis.Regulation8usestheexpressionhold incontrasttotheTakeoverRegulationswhichusetheexpression acquire. This would mean that a common objective attaches itselftotheholdingofsharesandnotacquiringatargetcompany. A person holding shares in a recognized Stock Exchange with a

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common objective would be a person acting in concert for the purposesofRegulation8;

(xi)

FTILandMCXaredejure,personsactinginconcertfor

thepurposeofRegulation8. Section370oftheCompaniesAct, 1956 defines when two bodies corporate shall be deemed to be underthesamemanagement. Reliance hasbeenplacedontwo lettersdated14December2009and20August2009addressedby MCXtoIL&FSFinancialServicesLimitedandbyLaFintothesame Company (stated to be addressed by Jignesh P.Shah), Jignesh ShahistheChairmanandGroupChiefExecutiveOfficerofFTIL andViceChairmanofMCX,bothpromotersofthePetitioner. He hasalsobeennonexecutiveViceChairmanofthePetitioner. He has issued undertakings on behalf of the promoters and other GroupCompaniesthatthePetitionershallnotissuesharesexcept asprovidedfor. MCXislistedonthewebsiteofFTILasaGroup Company and Jignesh Shah, CEO. He is, therefore, a de facto Manager for both the promoter Companies. He is in effective controlandthedrivingforcefortheaffairsofbothFTILandMCX. Consequently,theholdingofbothFTILandofMCXexceedsthe

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permissiblelimitoffivepercent inaStockExchange. MCXand FTILarepersonsactinginconcertforthepurposesofRegulation8;

(xii)

Thebuybackarrangementsconstituteforwardcontracts

andarecontrarytotheprovisionsoftheSCRA;

(xiii)

ThePetitionerisnotafitandproperpersonanditwould

notbeinpublicinteresttoallowtheapplication. ThePetitioner had knowledge of the buy back arrangements and failed to discharge its obligation to SEBI as a regulatory body to disclose these transactions. In none of the quarterly reports submitted under Regulation 11(5) were the arrangements disclosed. The buy back arrangements were material to a determination of whether the sale and transfer of ownership by promoters or shareholderswhoseholdingwasinexcessofpermissiblelimitsisin fullcompliancewithRegulation8(1). Therewasafailureonthe part ofthePetitionertofulfillitsfiduciary responsibilitiesunder Regulation11formakingafulldisclosure.TheproposedScheme oughttohavebeensubmittedtoSEBIandaconfirmationshould have been sought as to whether it was in compliance with the

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MIMPSRegulations;

(xiv)

There is a concentration of economic interest in the

Petitionerinthehandsofthetwopromoters.

The conclusions which have been arrived at by the Whole Time Memberareasfollows: a. The concentration of economic interest in a recognisedstockexchangeinthehandsoftwopromoters is not in the interest of a wellregulated securities market; b. TheApplicantisnotfullycompliantwiththe MIMPSRegulationsassubstitutionofsharesbywarrants is an attempt to work around the requirements of Regulation8andthesameisnotamoderecognisedas fallingwithinthescopeofthesaidRegulations; c. The Applicant has been dishonest in withholding material information on arrangements regardingtheownershipofsharesofitsshareholdersand therefore has not adhered to fair and reasonable standards of honesty that should be expected of a recognisedStockExchange; d. TheApplicanthasfailedtoensurecompliance withRegulation8oftheMIMPSRegulationsasitstwo promoters(FTILandMCX)arepersonsactinginconcert andcannotholdmorethan5%intheequitysharesofa recognizedstockexchange; e. The Applicant is instrumental to buy back

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transactions that are illegal under the SCR Act and cannot be considered to have adhered to fair and reasonablestandardsofintegritythatshouldbeexpected ofarecognizedStockexchange.

30.

Before we deal with the rival submissions, it must be

notedat theoutset that theapplication dated7 April 2010 was filedbythePetitioner.SEBIissuedanoticetoshowcausetothe Petitioneron30August2010toexplainwhytheapplicationshould not be rejected. The Third and Fourth Respondents, who are promotersofthePetitioner,werenotheardbySEBI. NoPetition independentlyhas beenfiledbythem.Duringthecourseofthe hearing, Counsel appearing on behalf of the Third and Fourth Respondents submitted before the Court that in support of the Petitioner, they would urge submissions on merits about the legalityoftheorderpassedbySEBIon23September2010and would, therefore, not be urging that there is a breach of the principlesofnaturaljustice.

III:SUBMISSIONS: a. ThePetitionerssubmissions

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31.

ThePetitionerhassubmittedbefore theCourt thatthe

principalfindingsagainstitarethat: (i) The Petitioner has not fully complied with the MIMPS Regulations; (ii)ThePetitionerisnotafitandproperperson;and
(iii)Thereisaconcentrationofeconomicinterestinthehandsof

the Third and Fourth Respondents qua the Petitioner. As regardstheissueoffullcompliance,ithasbeenurgedthat thefindingisbasedontheallegationthat:(a)Themannerof effecting capital reduction is different from the modes specifically provided in Regulation 4 which does not meet with the standards of full compliance; (b) The Scheme of CapitalReductioniscontrarytotheunderstandingfurnished to SEBI by the Petitioner; (c) The Petitioner cannot be permitted adifferent mode ofcompliance withtheMIMPS RegulationsthanwhatispermittedtootherExchanges;(d) The right to acquire equity shares through warrants is contrarytotheobjectivesoftheMIMPSRegulations;and(e) TheScheme ofReduction hasnotledtodiversification of ownership and economic interest. The submissions which

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havebeenurgedonbehalfofthePetitionerarethat:

A.(i)Theinitialpermissiontostartacommoditiesexchangewas subject to the condition of full compliance with the MIMPS Regulationswhichwassubsequentlychangedtocompliancewith therelevantprovisionsofthoseRegulations.TheRegulationsdo not ipsofacto applytothePetitionersincethePetitionerwasnot subjected to a scheme for corporatisation or demutualisation approvedbySEBI,butweremadeapplicableasaconditionofa permissiongrantedtoestablishanexchange.Regulation4applies to dilution of equity of persons having trading rights in a Stock Exchange and cannot apply in terms to the Petitioner. At the highest,Regulation4canapplyasregardstherequirementofat least 51% shares being held by the public. Regulation 2(1)(h) defines the expression public as including a member of the public,butexcludingashareholderwithtradingrights.Inthecase ofthePetitioner,theentireequityisheldbypersonsotherthan thoseholdingtradingrights;

(ii)Themethodofreductionofsharecapitalhasresultedinthe

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Third and Fourth Respondents reducing their shareholding respectivelytolessthanfivepercent;

(iii) The letter dated 21 December 2009 addressed by the PetitionerpointsoutthemannerinwhichtheMIMPSRegulations wouldbecompliedwithanditwasthecaseofthePetitionerthat themethodofreductionwassuggestedbySeniorOfficersofSEBI;

(iv) Other Stock Exchanges in India historically had trading members,whereasthePetitionerhadnotradingmembersatall. Consequently,themeansadoptedbyotherStockExchangescannot applytothePetitioner;

(v)Thesubmissionofconcentrationofeconomicinteresthasnot beenpressedbySEBIbeforetheCourt.Concentrationofeconomic interest is not contemplated as a ground in any Regulation, statutoryprovisionorinthepermissiongrantedtothePetitioner;

(vi) ThePetitionerhascompliedwiththeMIMPSRegulationsto theextenttowhichtheycanbeappliedtoit;

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(vii) The right to convert warrants into equity shares has erroneously been equated by SEBI with equity shares. In any event,undertakingshavebeenfiledbeforethisCourtandbefore SEBItotheeffectthatatnopointwilltheMIMPSRegulationsbe violatedorthelimitofshareholdingcrossed.

B.

On the issue as to whether the Petitioner is a fit and

properperson,ithasbeenurgedthattheorderpassedbySEBIis basedonthenondisclosureofthebuybackarrangementsbythe Petitioneranditspromoters.Inthisregard,ithasbeenurgedthat:

(i)Thebuy back arrangementsare lawful. Thepromotershave filed undertakings that they would not violate the MIMPS Regulations which presupposes that they would not exceed the limitoffivepercent;

(ii) Moreover, it is not necessary that the promoters themselves wouldbuybacksharesanditwouldbeopentothemtofindother buyerstopurchasesharesontheexerciseoftheoption.

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C.

Finally, it has been urged that none of the relevant

provisions of law embody the concept of economic interest in regardtotherecognition oftheStock Exchanges. SEBIdidnot press the point during the course of the arguments, but merely reliedontheorderoftheWholeTimeMember.

b.TheThirdRespondentssubmissions 32. OnbehalfoftheThirdRespondent,whichhassupported

the Petitioner as its promoter, it has been urged that SEBI has advanced the following grounds in regard to the buy back arrangements between the promoters on the one handandPNB andIL&FSontheotherhand: (i) The buy back arrangement which is a forward contract, is illegalbyreasonoftheprovisionsoftheSCRA;

(ii)Evenifpresentlythebuybackarrangementdoesnotgiverise toaconcludedcontract,acontractwouldstandconcludedonthe exerciseoftheoptionbyPNBand/orIL&FStosellbacktheshares to the promoters. In that event, it has been presumed that the

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promoters upon the performance of the obligation to buy back would exceed the limit of five percent set out in the MIMPS Regulations;and

(iii) The promoters are not fit and proper persons within the meaning of Regulation 9 since they are parties to an illegal contract.

A.

The submissions which have been urged by the Third

Respondent on the legality of the buy back arrangement are as follows: (i) The buy back arrangement does not constitute a

concludedcontractforthepurchaseandsaleofshares,butonly furnishes an option to PNB/IL&FS. This is in the nature of a privilege or concession entirely dependenton the volition ofthe PNB/IL&FS.Anoptioninvolvesaunilateralexerciseofvolitionas distinct from a contract of sale and purchase which involves reciprocalobligations;

(ii)

Ifandwhen,thebuybackarrangementfructifiesintoa

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contract, the contract will be for sale and transfer of shares necessarily on a spot delivery basis. Spot delivery contracts are expresslypermittedbythenotificationissuedunderSection16of theSCRA. Spot delivery inSection 2(i) oftheSCRA applies to sharesindematerialisedformheldinadepositoryaccountwhichis the case in the present case. The contract would, therefore, necessarilybeonaspotdeliverybasisandwouldnotsufferfrom anyillegality;

(iii)

ThebuybackarrangementwithPNBisexemptedfrom

theapplicabilityoftheSCRAbyvirtueofSection28(1)(a)since PNB is set up under a special law, the Banking Companies (AcquisitionandTransferofUndertakings)Act,1970;

(iv)

Inthealternative,boththebuybackarrangements are

exemptedunderthenotificationdated27June1961underwhich an exemption under Section 28(1)(b) had been granted to contractsforpreemptionorsimilarrightscontainedinpromotion orcollaborationagreements;

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(v)

Ontheprincipleofcontemporaneaexpositio,thebuyback

arrangement is lawful because SEBI has followed a consistent practicefromthetimethatSection16wasenacted,ofnotholding suchbuybackarrangementstobeunlawful. Inatleastthirteen casesofRedHerringProspectusclearedbySEBI,thereisanexit optionofthenatureinvolvedinthepresentcasetowhichSEBIhas granted its approval. Over the last half a century of the enforcementoftheAct,neithertheCentralGovernment,norSEBI have taken the position that buy back arrangements would be unlawfulunderSection16orSection18A;

(vi)

Thelegalityofbuybackarrangementsisalsoimplicitly

recognisedintheTakeoverRegulationsof1997and2011which independentlyhavetheforceoflawunderSection30oftheSEBI Act,1992.

B.

Thealternative submission ofSEBI isthatevenifthe

buy back is not a forward contract, it amounts to an option in securitieswhichisacontractinderivativesnottradedorsettledon any recognised Stock Exchange or with the permission of SEBI.

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Consequently,thebuybackarrangementwouldbeinviolationof Section18AoftheSCRA.OnthissubmissionofSEBI,ithasbeen urgedthat: (i)Thissubmissionwasnotpartoftheshowcausenotice,norisit the basis of the order passed by SEBI. Hence, the submission cannot be urged for the first time in these proceedings; In the alternative:

(ii) From the definition of the expression derivative in Section 45U(a)oftheR.B.I.Act,1934andSection2(ac)oftheSCRA,it wouldbeevidentthataderivativeisaninstrumentwhosevalueis tobederivedfromanunderlyingasset.Inthecaseofthebuyback arrangementinthepresentcase,thesubjectmatteristhebuyback ofsharesdirectlyandthereisnoquestionofderivingthevalueof thesharesfromanyunderlyingasset;

(iii)Inthecaseofanoptioncontract,therighttobuyortheright tosellisitselfthesubjectmatterofthecontractandtheoptionis tradedontheStockExchange.Itisonlysuchoptioncontractsthat arerequiredtobetradedontheStockExchange;

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(iv)Thebuybackarrangementinthepresentcasedoesnotresult inanoptionbeingtradedorsold.Thearrangementisdirectlywith referencetosharesandisnotanoptioncontract.

C.

As regards the second contention of SEBI that the

exerciseoftheoptionunderthebuybackarrangementwillresult in a contract coming into existence and which upon being performedbythepromoterswillresultintheirexceedingthelimit offivepercentundertheMIMPSRegulations, ithasbeenurged that:

(i) SEBI is not entitled to take into consideration the mere possibilityoffutureeventstakingplace,particularlywhenthereis no obligation on PNB and/or IL&FS to sell the shares to the promotersinfuture.Aschemewhichisotherwisevalidcannotbe questioned on an apprehension or speculation of what might possiblyhappeninfuture.SEBI,bytakingthisfactorintoaccount, hasmisdirecteditselfbyproceeding onthebasisofanirrelevant consideration;

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(ii)SEBIdidnothave anyreasonable basistopresume thatthe exercise of the buy back option would result in the promoters exceedingthelimitontheshareholdingoffivepercent,particularly havingregardtothefactthattheconductofthepromotersthusfar hasreducedtheirshareholdingincompliancewiththeRegulations. More over, evenif thepromoters were to acquire shares on the exerciseoftheoptionunderthebuybackarrangementbyPNBor IL&FS,thepromoterscouldlawfullycomplywiththeRegulations byincreasingtheauthorisedsharecapitalofthePetitionertosuch anextentthattheacquisitionofsharespursuanttothebuyback arrangement would not result in the promoters exceeding the shareholding of five percent. Alternatively, the promoters could arrange for the acquisition of the shares by some other independentpersonssothatnoonewouldcrossthelimitoffive percent. Inanyevent,theeffectoftheexerciseofthebuyback optionwouldhavetobeconsideredonlyatthatstageinthelight ofthesituationasitwouldemerge. AllowingSEBItotakeinto consideration hypothetical future possibilities would result in an arbitraryexerciseofpowerscontrarytoArticle14;

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(iii)SincetheorderpassedbySEBIisbasedonspecificgrounds,no generalitiescanbeusedtosustaintheorderifitisotherwisenot sustainable. Public interest does not include mere future possibilitiesbeingtakenintoaccount.Asamatteroffact,SEBIhas actedagainstpublicinterest,byperpetuating,themonopolyofone StockExchangewhichaloneatpresenthaspermissiontodealin thesegments.ThePetitionerisreadyandwillingtoprovidesuch safeguardsasmayberequiredbytheCourt;

(iv) The only reason furnished by SEBI for holding that the promotersarenotfitandproperpersonsisthattheywereparties to a buy back arrangement which is alleged to be illegal. This groundbeingmisconceived,sincethebuybackarrangementisnot illegal,thereisnobasistoholdthatthepromotersarenotfitand properpersons;

(v) Even though SEBI is a statutory regulator, it cannot claim immunity from judicial review though in a restricted field. If withintherestrictedareawherejudicialreviewispermissible,itis

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demonstrated that the order is arbitrary, based on irrelevant considerationsandcontrarytolaw,theCourtoughttoexerciseits jurisdictiontosetasidetheorder.

c. 33.

TheFourthRespondentssubmissions On behalf of the Fourth Respondent, the following

submissionshavebeenurged:

(i) In view of the order of the Company Court dated 12 March 2010sanctioningtheSchemeofCapitalReduction,theissueasto whether the holding of the promoters stands reduced to five percent andtheeffect of theconvertible warrantsonpromoters shareholding stands conclusively decided in favour of the Petitioner. The object of the Scheme was solely to reduce the holdingofthepromoterstofivepercenttocomplywiththeMIMPS Regulations. It was the function of the Company Court to scrutinizetheSchemeandoncesanctioned,theSchemebindsSEBI andoperatesasresjudicataonallissuesinvolvedinthePetition;

(ii)Thefindingthatareductioncanbeachievedonlyinoneofthe

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modesprescribedinRegulation4isunsustainable:(a)Regulation 4 does not apply to the Petitioner which was already a demutualised exchange with no trading member shares to be divested and hence the modes specified are not exhaustive or mandatory; (b) The object of the Regulation is more important thanthemannerinwhichitisachievedespeciallybecausethereis noprohibitionofachievingtheobjectinanyparticularmanner;

(iii)SEBIhaserredinignoringthefactualpositiononthedateof theconsiderationoftheapplication.Onthatdate,thepromoters shareholdingstoodreducedtofivepercentandthemerepossibility ofthepromotersincreasingtheirshareholdingbeyondfivepercent infuturecouldnotjustifytheorder.SEBIsconclusionwouldhave beencorrectifthewarrantsprovidedforautomaticconversioninto sharesandifthewarrantswerenottransferableatall.Thatisnot thecase;

(iv)IfSEBIweretoactonthebasisofamerepossibilityofafuture breach,theactionwouldberenderedarbitraryandunreasonable;

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(v) Thewarrant holderdoesnotbecome ashareholderandhis nameisnotborneontheregisterofmembersuntiltheoptionis exercised;

(vi) The existence of the buy back arrangement is an irrelevant factorasinthecaseofwarrants.Nondisclosureofthebuyback arrangementhasnoeffectonthedecision.Whatwasrequiredto be disclosed were facts pertaining to the shareholding of the promotersonthedateoftheconsiderationoftheapplicationand not the possibility of an event happening in future which could resultinabreach;

(vii) The possibility of the buy back arrangement increasing the shareholdingofpromoterstobeyondfivepercentisnotarelevant consideration.Inspiteoftheexerciseoftheoptionunderthebuy backarrangement,thepromotersshareholdingcanstillbewithin the limit of five percent by the promoters (a) disposing of their otherexistingshareholdingsothatthetotalshareholdingdoesnot exceed five percent; (b) increasing the share capital so that the increasedholdingofthepromotersdoesnotexceedfivepercent;

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and (c) performing the buy back arrangement by nominating a thirdpartytobuybacktheshares;

(viii)TheMIMPSRegulationsdonotupontheirtermsapplytothe Petitioner, but they have been made applicable by notifications dated18September2008and31August2009. Underthelater notification, only the relevant Regulations are made applicable. Thisnotificationwasissuedtogetoveranimpassecreatedbythe earlier notification. If a limited Company already in existence applied for permission, such permission could not be granted becauseallpromoterstakentogetherwouldordinarilyholdmore than five percent shares. In such an event, there would be no application made byanexisting Companyandalltheprovisions would be rendered useless. Hence, that regulation has no application tothefacts ofthepresentcase andtherecan beno occasiontocommitabreachthereof;

(ix) Alternatively, even if the combined shareholding of two promotersistobeconsidered,eventhen,unlessitisestablished thattheywereactinginconcert, therewouldbenoviolation of

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Regulation8.Actinginconcertpresupposesarequirementofan overtact. ActinginconcertinpromotingaCompanycannotbe regardedasactinginconcertwhileconsideringanapplicationfor permissionunlessanovertactpostpromotionisestablished;

(x)Theissueastowhethertwopromotersbyholdingmorethan fivepercentofthesharesareactinginconcertisaquestionoffact to be determined after considering the entire material. An inferenceofpromotersactinginconcertisnegatedbythefactthat (a) The promoters have made efforts to bring down their shareholdingfrom49%and51%respectivelytofivepercenteach; and(b)Theyhavefurnishedanundertakingtokeeptheirholding withinlimits;

(xi)Theessentialrequirement ofactinginconcert isacommon objective as held by the Supreme Court. Explanation IV to Regulation 8(1) refers to Regulation 2(1)(e) of the Takeover Regulationsindicatingalegislativeintenttoadoptthedefinition. An explanation is an integral part of the statute and has to be construedharmoniouslywiththemainprovision. Theexpression

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derivedfromisanarrowexpressionandtheessentialfeaturesof the definition of a person acting in concert in the Takeover Regulationscannotbedestroyed. Sincethedefinitionofperson actinginconcertisincorporatedfromtheTakeoverRegulations, the expression has to be interpreted in the sense in which it appears in those Regulations. Even if the definition is applied mutatis mutandis, it cannot destroy the essential features of the MIMPS;

(xii)ThecontentionthatMr.JigneshShahcontrolsthepromoters andthePetitionerandthathence,inviewofRegulation2(e)(2)(i), thepromotersareactinginconcertisnotsustainable. Theonly materialallegedisthatMr.JigneshShahhadaddressedtwoletters. One of the two letters was in fact, not signed by Mr.Shah. He cannot be considered as a Manager within the meaning of Section2(24)oftheCompaniesAct,1956merelyonthebasisof addressingoneletter.InviewoftheprovisionsofRegulation2(2) oftheTakeoverRegulations,theexpressionCompaniesunderthe same management shall have the meaning given in Section 370(1B)oftheCompaniesAct,1956;

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(xiii) SEBI at all material times, was aware of the position of Mr.Jignesh Shah and that at no point of time was a grievance made;

(xiv)TheonlybasisonwhichthePetitionerhasbeenheldnottobe afitandproperpersonisthattherewasanoptiontoconvertthe warrants and there was a buy back arrangement. Both are irrelevant. Even if an option is exercised, that would not necessarily result in increasing the shareholding beyond five percent. Moreover,thebuybackarrangementisnotgoingtobe operated since the undertaking given is that the shareholding wouldnotbeincreased;

(xv)Inanyevent,thefindingswhichhavebeenmadeagainstthe promoters cannot be permitted to be used in any other proceedings,sincethepromotersarenotpartiestotheproceedings inwhichtheorderwaspassed.

d.SubmissionsofSEBI

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34.

On behalf of the First Respondent, the following

submissionshavebeenurgedbytheAdditionalSolicitorGeneralof India: (i) StockExchangesplayavitalandimportantroleinthe

economyandareaninstrumentofregulation.Recognitionunder Section4oftheSCRAhastobeintheinterestoftradeandpublic interest.SEBIhastobesatisfiedofthesuitabilityandintegrityof anapplicant;

(ii)

TheinitialapprovalgrantedbySEBItothePetitioneron

18September2008wassubjecttofullcompliancewiththeMIMPS Regulations. The fact that in the renewal notification dated 31 August2009,theexpressionrelevantprovisionswasused,does notmakeanydifference;

(iii)

Between 2008 and 2010, the Petitioner adopted a

number of steps to achieve compliance with the MIMPS Regulationsincludingthesaleofsharescoupledwithanobligation ofthepromoterstobuybacksharesandtheSchemeofReduction cumArrangement to convert some of the equity shares into

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warrants. Onscrutiny,SEBIdiscoveredthatthePetitionerhas failed to comply with the MIMPS Regulations for the following reasons:

(a)Thebuybackarrangementbetweenthepromoterswithvarious BanksandFinancialInstitutionsindicatedthatthetransferswere not true sales and the promoters had not divested their shareholdingforthepurposesoftheMIMPSRegulations;

(b)ThewarrantsissuedundertheSchemeofReduction didnot resultinadiversificationofownershipinamannersoughttobe achievedbytheMIMPSRegulations;

(c) The Third and Fourth Respondents were persons acting in concertandtogetherholdingtenpercentoftheequitycapitalof thePetitionerinbreachofRegulation8;and

(d) The Petitioner failed to adhere to fair and reasonable standards of honesty by suppressing relevant information from SEBI;

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(iv)

Sections 4A and 4B of the SCRA were introduced

followingthereportoftheKaniaCommittee.Thesesectionsgave animpetustoseparateownershipandcontrolofStockExchanges from trading members by implementing a Scheme of corporatisationanddemutualisation.TheMIMPSRegulationsonly applytotheoldmutualisedStockExchangesforwhichaScheme wasapprovedbySEBI.However,inordertoavoiddiscrimination againsttheoldStockExchangeswhichwereestablishedpriorto the Regulations, SEBI imposed compliance with the MIMPS Regulations as a condition for recognition of the Petitioner. Consequently, the provisions of the Regulations must be read contextually;

(v)

ThefindingintheimpugnedorderthatFTILandMCX

arepersonsactinginconcertforthepurposesofRegulation8and thattheircombinedholdingoftenpercentoftheequitycapitalof thePetitionerisinbreachofRegulation8,isafindingoffact;

(vi)

UnderSection370(1B)oftheCompaniesAct,1956,two

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Companiesaredeemedtobeunderthesamemanagementifinter aliatheyhaveacommonManager.FTILandMCXhaveacommon Manager(JigneshShah)andare,therefore,deemedtobepersons actinginconcertforthepurposesoftheMIMPSRegulations.This finding is based on certain letters addressed by Jignesh Shah, DirectorofLaFinandthepromoterofFTIL.HeisaChairmanand GroupExecutiveOfficerofFTIL(apromoterofthePetitioner)and theViceChairmanofMCX(theSecondpromoterofthePetitioner). He is also a nonexecutive Vice Chairman of the Petitioner. He issuedanundertakingonbehalfofMCXandFTILandothergroup Companies that the Petitioner will not issue shares except as providedfor.Thisshowsthathewasnotonlyinapositiontoissue anundertakingforFTILofwhichheisManagingDirector,butalso forMCXofwhichheisdesignatedasnonexecutiveViceChairman. MCXislistedasaGroupCompanyofFTIL.Thetwopromotersare, therefore,underacommonmanagement;

(vii)

Theexpressionpersonsinconcertasitisusedinthe

TakeoverRegulationsmustapplymutatismutandistotheMIMPS Regulations and hence, there is no requirement of a common

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objectiveofacquisitionforthepurposesoftheMIMPSRegulations. ThisisbuttressedbytheuseofthewordderivedinExplanation 4.Priortoitsamendmentin2008,Regulation8providedthatno personshalldirectlyorindirectlyacquireorholdmorethanfive percent in the paid up equity capital of a recognized Stock Exchange.Aftertheamendment,thereferencetoacquirehasbeen deletedindicatingthatacommon purpose ofacquiringsharesis notrelevanttotheMIMPSRegulations;

(viii)

Even the Takeover Regulations use the expression

persons acting in concert in the context of a mere holding of shareswithoutacquisition;

(ix)

FTILandMCXcontinuetoactinunisonwithacommon

objectofcontinuingtoholdequitysharesofthePetitionerinexcess ofthelimitspecifiedinRegulation8:(a)Inresponsetoaletterof PNBofferingtopurchasesharesofthePetitionerifabuybackwas provided, FTIL wrote toPNBofferingabuyback; (b)MCXsold sharesofthePetitionertoIL&FSforwhichabuybackwasentered intobetweenIL&FSandLaFin.However,on26March2010when

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IL&FS exercised its right under the buy back arrangements, the warrantswerepurchasedbyMCXinsteadofLaFin.FTILcontrols MCX.Controlhasawidemeaningandmeanseffectivecontrol;

(x)

The shareholding pattern of the promoters of the

Petitioner is also in breach of Regulation 8. LaFin Financial ServicesPvt.Ltd.isaCompanyownedandcontrolledbyJignesh ShahandhiswifeandasapromoterofFTILandMCX.Theshares ofthePetitionerheldbyFTILandMCXareindirectlyheldbyLa Fin/JigneshShahbreachingthefivepercentlimit;

(xi)

LaFin, FTIL and MCX constitute one group which is

evidentfromthefollowingcircumstances:(a)JigneshShahandhis wife hold hundred percent of the equity capital of LaFin as admitted at the hearing by the Petitioner and by the Third and FourthRespondents;(b)LaFintogetherwithJigneshShahandhis familyhold45.53%oftheequitysharecapitalofFTIL;(c)FTIL holds31.18%oftheequitycapitalofMCX;(d)ThewebsiteofFTIL showsthePetitionerandMCXaspartoftheFTILGroup;and(e) LaFinsletterdated20August2009andMCXsletterdated 14

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December2009corroboratestheposition;

(xii)

Asregardsthebuybackarrangements,thesubmissions

areasfollows:(a)Thoughthebuybackagreementswereentered intotocomplywiththeMIMPS Regulations, thesearrangements were not disclosed to SEBI, thereby withholding relevant information;(b)Theenteringintothebuybackagreementsand theconductofthegrouparerelevantfactorsthatSEBIcantake into account while deciding as to whether to recognize a Stock Exchange; (c) The buy back agreements are illegal, albeit for reasonsdifferentfromthosesetoutintheimpugnedorderandin theshowcausenoticedated30August2010.Hence,ifamember oftheStockExchangeentersintoanillegalcontract,itisrendered unfittorunaStockExchange.SEBIshouldbeallowedtopleadthe illegalityoftheagreementsintheseproceedingsongroundsother thanthosecontainedintheshowcausenoticeandtheimpugned order;

(xiii)

TheSchemeofReductiondidnothaveanyimpactonthe

buy back agreements. IL&FS was offered a fresh buy back

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agreement by MCX in respect of warrants that were issued to it


pursuant to the Scheme of Reduction. IL&FS exercised that right on 26 March 2010 by requiring MCX to procure the purchase of some warrants. In fact, IL&FS in a letter to SEBI asserted that the buy

backagreementisavalidcontract;

(xiv)

Thebuybackagreementsarevalidcontractsinpraesenti

thoughthereisnoobligationinpraesenti.Theenforceabilityofthe contractisdependentonthevolitionofoneofthepartiesandnot onacontingentevent;

(xv)

The SCRA applies equally to listed and unlisted

companiesandwouldapplytothesharesofthePetitioner;

(xvi)

Theimpugnedorderproceedsonthebasisthatthebuy

backagreements are forward contracts and, therefore, illegal under Sections13and16oftheSCRA.However,onaclosescrutiny,it appearsthatthebuybackagreementsareactuallyoptioncontracts andare,therefore,illegalunderSection18AandoftheSCRA.A buybackagreementenvisagesthattheinstitutionalinvestorhasa

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right,butnotanobligationtosellsharestothepromotersofthe Petitioner and constitutes an option in securities under Section 2(1)(d). Option contracts are derivatives under Section 2(ac). Under Section 18A, contracts in derivatives are lawful only if tradedonarecognizedStockExchangeandsettledonitsclearing house. Neitherwerethebuybackagreementsenteredintoona recognizedStockExchange,norwasSEBIspermissionobtainedas requiredbythenotificationdated1March2000. Thebuyback agreementsare,therefore,unlawful;

(xvii)

As regards the issuance of warrants as a mode for

compliance with the MIMPS Regulations, Regulation 8 unlike Regulation4doesnotspecifythemannerinwhichshareholding shouldbereducedtobelowthespecifiedthreshold. Themodes specified in Regulation 4 are not required to be followed mandatorily for the purposes of Regulation 8. Reducing shareholding by the issuance of warrants, however, leaves an escapehatchopentothepromoterstoincreasetheirshareholding whenevertheysodesire.ThesubmissionofthePetitionerthatthe Scheme sanctioned by the Company Court operates in rem and

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wouldbindSEBIiserroneous.ASchemeunderSection391binds thecreditorsandshareholdersandcannotbindSEBIwhichdoes notinanyeventhavelocusinaSection391Petition.SEBIisnota creditorandtheSchemedoesnotbinditunderSection391(2);

(xviii)

In the event that the Third and Fourth Respondents

couldnothavecompliedwiththeshareholdinglimitprescribedin Regulation 8, they could have made an application under Regulation9forpermissiontoexceedtheshareholdinglimit. No suchapplicationwasmade;

(xix)

Thedoctrineofcontemporaneaexpositoappliedinthe

contextofancientstatuteshasnoapplicabilitytotheinterpretation ofmodernstatutes.ThemeresilenceofSEBIinthefaceofcertain RedHerringProspectusesmentioningtheexistenceofthebuyback agreementsisnotsufficientandsomemanifestationofaconscious act or clarification on the part of SEBI was necessary even assumingthatthedoctrineisattracted;

(xx)

Inexerciseofthepowerofjudicialreview,theCourtwill

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not sit in judgment over the decision of the regulator as an Appellate Forum, butwill interfere only whenthedecision isso unreasonablethatnoreasonableauthoritycouldhavecometothat decision. When dealing with orders of the expert bodies, the interference of the Court is confined to those cases where an order is perverse, based on no evidence or on a misreading of evidence. On these grounds, it has been urged that the interference of theCourt isnotwarrantedintheexercise ofthe jurisdictionunderArticle226oftheConstitution.

35.

Thesesubmissionsnowfallfordetermination.

36.

The adjudication in the present case is by the Whole

TimeMemberofSEBI,whichisanexpertstatutorybody. While assessingthechallengetothosefindings,theCourtmustbearin mindthattheinterferenceoftheCourtunderArticle226ofthe Constitution is confined to certain well settled, if restricted, parameters.Theviewoftheexpertshouldnotbedisturbedunless itisperverseornotbasedonevidenceorisbasedonamisreading ofevidence.ThisprinciplewaslaiddownbytheSupremeCourt

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eveninthecontextoftheappellatepoweroftheHighCourtovera determination made by the Electricity Regulatory Commission. (West Bengal Electricity Regulatory Commission vs. C.E.S.C. Ltd.)15TheHighCourtunderArticle226oftheConstitutionwould notbejustifiedinsubstitutingtheviewofanexpertadjudicatorfor anotherviewmerelybecauseitcommendsitselftotheCourt.16

IV:TheprovisionsoftheSCRA : 37. Section 4 of the SCRA empowers the Central

Government to grant recognition to a Stock Exchange if it is satisfied,aftermakinganenquiryasmayberequired: (a) that the rules and bye laws of a stock exchange applying for registration are in conformity with such conditionsasmaybeprescribedwithaviewtoensure fairdealingandtoprotectinvestors; (b)thatthestockexchangeiswillingtocomplywithany otherconditions(includingconditionsastothenumber of members) which the Central Government, after consultation with the governing body of the stock exchange and having regard tothe area servedby the stock exchange and its standing and the nature of the securitiesdealtwithbyit,mayimposeforthepurposeof
15 AIR 2002 SC 3588 (U.P.Financial Corporation Vs.Gem Cap (India) Pvt. Ltd.) (1993) 2 SCC 299. (Haryana Financial Corporation vs. Jagdamba Oil Mills), (2002) 3 SCC 496. 16 [See also the judgment of Mr.Justice Moses in the Queens Bench Division Administrative Court in the U.K. in The Queen On the application of London and Continental Stations and Property Limited vs. The Rail Regulator, 2003 EWHC 2607.]

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carryingouttheobjectsofthisAct;and (c)thatitwouldbeintheinterestofthetradeandalso in the public interest to grant recognition to the stock exchange.

Undersubsection(2)ofSection4,theCentralGovernmentmay prescribebywayofRules,conditionsforthegrantofrecognition relating to (i) the qualifications for membership of the stock exchange;(ii)themannerinwhichcontractsshallbeenteredinto; (iii) the representation of the Central Government; and (iv) maintenanceandauditofaccounts.

38.

Historically, Stock Exchanges were owned and

controlled by persons who were also trading members of the Exchange. In August 2002, an Expert Committee headed by Mr.JusticeM.H.KaniaexaminedtheownershipstructuresofStock Exchangesandrecommendedthat:(a)StockExchangesshouldbe corporatised and demutualised; and (b) Ownership of Stock Exchanges should not be concentrated in the hands of a single entity or groups of related entities. In paragraph 9.30 of its report, theCommittee statedthatdemutualisation demandsthat

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shareholding in a stock exchange should not remain exclusively withthebrokersonthestockexchange. TheCommitteeopined thatdispersalofmembershipcanbeachievedinoneoftwoways: (a)bythesharesinitiallyissuedtobrokersbeingofferedforsaleto the public; and (b) by the stock exchange making an issue of sharestothepublic.TheCommitteeopinedthatnospecificform ofdispersalneedbeprescribed,butthereatimelimitshouldbe prescribedwithinwhichatleast51%oftheshareswouldbeheld bynontradingmembersofthestockexchange.Inparagraph9.32, theCommitteewasoftheviewthathavingregardtothepublic interest in the efficient functioning of stock exchanges, it is importantthatnosingleentityorgroupsofrelatedentitiesshould be allowed to control a stock exchange through a cornering of shares.TheCommittee'sviewwasthatthereshouldbeaceilingof five per cent on the voting rights which can be exercised by a singleentityorgroupsofrelatedentitiesirrespectiveofthesizeof theownershipofshares.

39.

Followingthereport oftheKaniaCommittee, Sections

4Aand4Bwereintroducedwitheffectfrom12October2004by

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the Securities Laws (Amendment) Act, 2004 into the SCRA. Section 4A stipulates that on and from the appointed date, all recognizedstockexchangesifnotcorporatisedanddemutualised beforetheappointeddate,shallbecorporatisedanddemutualised inaccordancewiththeprovisionsofSection4B. Section4Blays down the procedure for corporatisation and demutualisation. Undersubsection(1)allrecognisedstockexchangesreferredtoin Section4A,weremandatedtosubmitaschemeforcorporatisation anddemutualisationtoSEBIforitsapprovalwithinsuchtimeas may be stipulated. SEBI is empowered to approve a scheme submitteduponbeingsatisfiedthatitwouldbeintheinterestof tradeandinpublicinterest.SEBIisempoweredinsubsection(6) while approving the scheme to restrict the voting rights of the shareholderswhoarealsostockbrokersoftheexchange;theright ofshareholdersorstockbrokerstoappointrepresentativesonthe governing board and to provide that the maximum number of representativesofthestockbrokersonthegoverningboardshall not exceed onefourth of the total strength of the board. Sub section (8) of Section 4B stipulates that every recognised stock exchange in respect of which a scheme for corporatisation or

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demutualisation has been approved under subsection (2), shall, eitherbyfreshissueofequitysharestothepublicorinanyother manner as may be specified by the regulations made by SEBI, ensurethatatleastfiftyonepercentofitsequitysharecapitalis held,withintwelvemonthsofthepublicationoftheorderunder subsection (7) notifying the scheme by the public other than shareholdershavingtradingrights.

40.

Section 12A of the SCRA empowers SEBI to issue

directions in the interests of investors and the securities market whereitissatisfiedthatitisnecessary: (a)intheinterestofinvestors,ororderlydevelopment ofsecuritiesmarket;or (b) to prevent the affairs of any recognised stock exchange,or,clearingcorporationorsuchotheragency or person, providing trading or clearing or settlement facility in respect of securities, being conducted in a manner detrimental to the interest of investors or securitiesmarket;or (c)tosecurethepropermanagementofanysuchstock exchangeorclearingcorporationor agencyorperson, referredtoinclause(b).

MIMPSRegulations

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41.

InexerciseofthepowersinteraliaconferredbySection

31 read with subsection (8) of Section 4B, SEBI notified the Securities Contracts (Regulation)(Manner of Increasing and MaintainingPublicShareholdinginRecognizedStockExchanges) Regulations,2006.

42. Regulation 2 contains definitions. The expression control is defined in Regulation 2(e) to have the meaning assigned to it, in Regulation 2(1)(c) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The expression publicisdefinedinRegulation2(h)toincludeany member or section of the public, but not to include any shareholderofarecognizedstockexchangehavingtradingrights oranyassociateofsuchshareholder.Theexpressionassociateis defined in Regulation 2(b). In Regulation 2(j) a shareholder having trading rights means a shareholder, who has a trading interestinthestockexchange,whetherdirectlyorindirectly.

43.

Regulation3providesthattheMIMPSRegulationsshall

beapplicabletoallrecognizedstockexchangesinrespectofwhich

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aschemeforcorporatisationordemutualisationhasbeenapproved bytheBoardunderSection 4B. Regulation3indicatesthatthe MIMPS Regulations were to apply only to old mutualised stock exchanges for which a scheme is approved by SEBI. The applicationoftheRegulationstothePetitionerwasbroughtabout initiallybySEBI'sapprovalon18September2008tosetupastock exchange which was subject to the condition that the Petitioner wouldensurefullcompliancewiththeMIMPSRegulations.The approval being valid initially for a period of one year, it was renewed subsequently. In the course of the renewal dated 31 August2009,thePetitionerwascalledupontocomplyfullywith the relevant provisions of the MIMPS Regulations. The modification in the terminology effected on 31 August 2009 by requiring full compliance with the relevant provisions of the MIMPSRegulationsisanaspectwhichwouldhavetobebornein mind.ThePetitionerwasassuch,notastockexchangeinrespect ofwhichaschemewasapprovedbySEBIunderSection4B.There canbenomannerofdoubtthatevenso,asaconditionattachingto thegrantofrecognition,SEBIwasentitledtoimposestipulations. AmongthoseinSubsection(2)ofSection 4,isastipulationfor

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qualificationformembershipofthestockexchange. Subsection (2) of Section 4 contemplates that Rules can be framed for the grant of recognition to stock exchanges to include among other matters,conditionsrelatingtothosespecifiedinclauses(1),(2), (3)and(4).SEBIalsohasabroadpower,whichisconferredupon itinSection12A,toissuedirectionstosecuretheinterestofthe investors, the orderly development of the securities market, to preventtheaffairsofarecognisedstockexchangebeingconducted inamannerdetrimentaltotheinterestofinvestorsorthesecurities market and to secure the proper management of any stock exchange. SEBI has the power to require compliance with the MIMPSRegulationsasaconditionforthegrantofrecognitioneven toanexchangesuchasthePetitioner. Asamatteroffact,these proceedingshavebeenconductedby Counselonthebasisthatit was as a result of SEBI's notification that the provisions of the MIMPSRegulationswereattracted.

44.

Regulation4providesthatastockexchangeshallensure

thatatleast51%ofitsequitysharecapitalisheldbythepublic eitherbyafreshissueofequitysharestothepublicthroughthe

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issueofaprospectusorinthefollowingmanner: (a)offerforsale,byissueofprospectus,ofsharesheld byshareholdershavingtradingrightstherein; (b) placement of shares held by shareholders having tradingrightstosuchpersonsorinstitutionsasmaybe shortlisted by the recognised stock exchange with the approvaloftheBoard; (c)issueofequitysharesonprivateplacementbasisby therecognizedstockexchangetoanypersonorgroupof personsnotbeingshareholdershavingtradingrightsor theirassociatessubjecttotheapprovaloftheBoard;or (d)anycombinationoftheabove.

Regulation4formspartofChapterIIoftheMIMPSRegulations which deals with the manner of increasing public shareholding. Regulation 8 forms part of Chapter III which deals with shareholdingrestrictions.Regulation8(1)providesthatnoperson resident in India shall, at any time, directly or indirectly, either individuallyortogetherwithpersonsactinginconcertholdmore thanfivepercentoftheequitysharecapitalinarecognizedstock exchange.Underthefirstproviso,therestrictionoffivepercentis enhanceduptofifteenpercentofthepaidupequitysharecapital ofarecognizedstockexchangeinthecaseofastockexchange,a

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depository, a clearing corporation, a banking or an insurance company and a public financial institution. Explanation (IV) to Regulation8statesthattheexpressionpersonsactinginconcert shallhavethemeaning derived fromclause(e)ofsubregulation (1)ofRegulation2oftheSEBI(SubstantialAcquisitionofShares andTakeovers)Regulations,1997.

45.

Regulation8(1),initspresentform,wassubstitutedby

anamendmentwhich waswitheffectfrom 23December2008. Prior to its substitution, Regulation 8(1) contained a stipulation prohibitingapersonfrom acquiring or holding morethanfiveper cent in the paid up equity share capital in a recognized stock exchange. The reference to acquisition has been deleted in the Regulationasithasbeenrecastafteramendment.Theprohibition inRegulation 8(1)brings withinitspurviewaholdingwhether directlyorindirectlyoreitherindividuallyortogetherwithpersons actinginconcertof morethanfivepercentoftheequityshare capital.Regulation9(1)stipulatesthatnopersonshall,directlyor indirectly, either individually or together with persons acting in concertwithhim,acquireand/orholdmorethanfivepercentof

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thepaidupequitysharecapitalunlessheisafitandproperperson andhastakenpriorapprovaloftheBoardfordoingso.Hence,if the stipulation restricting the holding to five per cent is to be exceededafterthecommencementoftheRegulations,thiscanonly takeplacewiththepriorapprovaloftheBoardandsubjecttothe fitnessoftheperson. Whoistoberegardedasafitandproper personisdefinedinRegulation9(2).

46.

Regulation11dealswiththeobligationsofarecognized

stockexchange.Suchanexchangeundersubregulation(1)hasto ensurethat: (a)thatnotransferorissueofequitysharesthereinis made otherwise than in accordance with these regulations; (b) that at least fiftyone per cent of its equity share capitaliscontinuouslyheldbythepublic;and (c)thattherestrictionscontainedinregulations8and9 are complied with in respect of the shareholding therein. At the end of every quarter, every recognized stock exchange is requiredtosubmitareporttotheBoardon:(a)Thenamesoften

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largestshareholderstogetherwiththenumberandpercentageof thesharesheld;(b)Thenamesoftheshareholdersfallingunder Regulation8,whohadacquiredsharesinthatquarter;and(c)The shareholding pattern in the stock exchange. An undertaking confirmingcomplianceoftheprovisionsofsubregulation(1)has tobe submitted tothe Board on a quarterly basis within fifteen daysfromtheendofeachquarter. Regulation11(4)confersan overriding power on SEBI to call for any information inter alia fromarecognizedstockexchange.Everyexchangeisrequiredby Regulation 11(5) tomaintain andpreserve books, registersand documentsandrecordsrelatingtotheissueorsaleofequityshares undertheRegulationsforaperiodoftenyears.TheBoardhasthe powerunderRegulation12toundertakeinspectionandconduct enquiries and audit of a recognized stock exchange or any shareholderhavingtradingrightsintheexchange.

V:RoleofStockExchanges 47. Stock Exchanges traditionally were constituted by

brokersanddealers,whowereinmanagement.Thispositionhas undergone a radical change in several countries. Andreas M

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Fleckner in a seminal article titled Stock Exchanges at the Crossroads17 notes that with increased competition caused by deregulation, technological advances and globalization, the organisation of stock exchanges was at crossroads. The organization of stock exchanges was altered with the onset of demutualization: Traditionally, stock exchanges were organized as not forprofit organizations foundedandownedbybrokers anddealerswhomanagedtheirstockexchangelikean exclusiveclub,withhighbarriersfornewentrantsanda regional or even national monopoly, comparable to a medieval gild. Today, domestic and international competitionincreasinglycompelstockexchangestogive uptheirexclusivity,undergorestructuring,andbecome publiclytradedforprofit companies, aprocessreferred to as demutualization. At first glance, it might seem incestuousthatstockexchangesthemselvesissuestock. But in fact this development brings a kind of normalization: The public corporation the most efficientorganizationalformforlargeenterpriseswill help stock exchanges catch up with domestic and internationalcompetitors.

48.

Stock exchanges, as the author notes, bring together

sellersandbuyers,investorsandissuersandthroughinformation distribution,informedanduninformedmarketparticipants. What makesstockexchangesinstitutionswithadistinctivecharacteris


17 Fordham Law Review- April, 2006

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that they are both regulators and regulated entities. They are regulatorsbecausetheyoverseethemarketwhichtheyorganize. They are regulated because they are subject to the control and supervisionofaregulator(SEBIinIndia).

49.

Fleckneridentifiesfivefunctionsofstockexchanges:

(i)

Stockexchangesaremarketorganizers.Inthisrolethey

provideamarketplacewherestockscaneasilybeboughtandsold. Stock markets serve the economy and the public by bringing togetherthosewhodemandcapital(corporations)andthosewho supplycapital(investors). Investorscanreduceriskbyspreading theirinvestments.Stockexchangesmakethoseinvestmentsliquid enoughtoinvestanddivestwithoutsignificantpricechangesby providingliquidity.Traditionally,thisfunctionwasperformedon thefloorofthestockexchangewherebrokersmet,negotiatedand agreed upon the price for stock transfers executed for their principals. In an electronic age, the trading floor of the stock exchange is becoming increasingly obsolescent with stock exchanges maintaining electronic systems world wide that can

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matchordersforthebuyingandsellingofsharesautomatically;

(ii)

Stock exchanges are information distributors. This

function consists of the trades executed, the volume, price, and partiesinvolved.Thisfunctionhasaconsiderableeconomicvalue inprovidingfinancialservicessuchasmarketreportsandanalysis of stocks. Information about previous trades is of material significance in the market for derivatives which are financial instrumentswhosevalueisderivedfromanunderlyingassetsuch as stocks. Information about settled trades has a regulatory functionsince it is thebasisofmarketsurveillance andhelpsin detecting securities fraud such as insider trading or market manipulation;

(iii)

Stockexchangesareregulatorsofthemarketwhichthey

organize. This ranges from compliance surveillance to enforcement. The brokerdealers who trade on the market are subject to rules of the stock exchanges. Stock exchanges also monitor compliance by participants with the regulatory regime includingthatdirectedbythestatutoryregulator.Stockexchanges

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performanimportantroletoensurefairtradingandaccurateprice discoverybothofwhicharecriticalincreatinginvestorconfidence;

(iv)

Stockexchanges setstandardsofcorporate governance

throughtheirlistingrules;

(v)

Finally, while fulfilling this function, stock exchanges

carryonbusinessenterprises.Asbusinessenterprises(thoughthe business of running a stock exchange may not necessarily be commercial),theperformanceofthestockexchangehasabearing onitscompetitivepositioninrelationtoitsowncompetitors.

50.

Commencing with the Stockholm Stock Exchange in

1993 stock exchanges worldwide transformed themselves from memberowned companies into publicly held companies, a developmentknownasdemutualisation. Consequently,theright to trade at the stock exchange came to be separated from ownership. Among the factors that fostered competition among stock exchanges worldwide, were deregulation, technological progressandglobalization.Capitalandinvestorsseamlesslycross

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borders in a globalised world, brought together by modern technology. Theconsequenceofdemutualisationwastoprovide stock exchanges with access to capital suppliers, high end technology and state of the art information systems. Demutualisation also resulted in changes in the management structure of stock exchanges. Under the traditional structure broker dealers were key decision makers. With demutualisation there was a separation of ownership and the control. If the shareholdingisdispersed,theroleofmanagementoughttostand transferred,atleastintheory,toseniormanagement.

51.

Stockexchangesprovidewhatisdescribedasthefirst

layer of oversight. In many areas, stock exchanges are self regulators.Asselfregulatoryorganizations,stockexchangeshave afrontline responsibility forregulation oftheirmarketsand for controlling compliance by members of rules to which they are subject. They ensure in that capacity, compliance of the requirementsestablishedthestatutoryregulator. Apartfromthe regulation of members, market surveillance carried on by stock exchangesincertainjurisdictionsregulatesissuers.Theydosoby

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ensuring that the stocks of issuers are reliably traded and that issuers meet standards of corporate governance. In exercising thesepowers,stockexchangesmayfaceissuesinvolvingaconflict of interest. Such conflicts of interest have to be handled and addressedeffectivelywithintheregulatoryframework.

52.

Stock exchanges as institutional mechanisms have an

importantroletoplayinensuringthestabilityofthefinancialand economic system. The orderly functioning of the market for securitiesisnolongeramatterofaprivateconcern,forthosewho transactonthemarket. Themarketforsecuritiescanbevolatile. Transactions in the securities market and the transparency of institutionalmechanismshaveasignificantbearingonthewealth ofinvestors.Inflowsandoutflowsofcapitalfromthestockmarket haveanimmediateand,oftenserious,impactonfinancialstability in the country. The orderly functioning of stock exchanges as institutionsthroughwhichtransactionsinsecuritiestakeplaceisa matterofpublicinterest.Theregulatorypowerswhichhavebeen conferred upon SEBI to recognise stock exchanges must be understoodinthecontextofensuringtheprotectionofinvestorson

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one hand and the public interest that is involved on the other. SEBIisanexpertregulatorybodywhichisvestedwiththepowerto directandregulatethefunctioningofstockexchanges.SEBI,asa regulatory authority, is vested with wide powers to ensure the protectionoftheinterestofinvestorsandtheorderlydevelopment of the securities market. Ensuring the proper management of stock exchanges is a matter which falls within the regulatory frameworkwhichSEBIdirects. Wheretheaffairsofarecognized stock exchange are conducted in a manner detrimental to the interest of the investors or the securities market, it has consequencesnotjustforthestockholdersinthemarket,butfor thefinancialstabilityofthenation.Stockexchangesarethefirst frontiersof regulation,foritistheirdutytoensure,inthefirst instance,thattransactionsareconductedinatransparentmanner andinaccordancewiththerulesandregulationsandbyelawsthat havebeenapproved.TheirdutytoreporttoSEBIisanadjunctof thepowerconferreduponSEBItoregulate.

53.

Historically,stockexchangeswerecontrolledbytrading

members.ItwasthereportoftheKaniaCommitteewhichbrought

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tobearpublicfocusupontheneedtocorporatiseanddemutualise stock exchanges and to ensure that their ownership is not concentratedinthehandsofasingleentityor groupsofrelated entities.Sections4Aand4BoftheSCRAenabledSEBItoputinto placeamechanismofseparationofownershipandcontrolofstock exchanges from trading members by implementing a scheme for corporatisation and demutualisation. Conflicts of interest of trading members were sought to be obviated by ensuring a disassociationbetweenmemberswhotradeontheexchangeand control over the ownership of the exchange. The MIMPS Regulationsweremadeapplicabletorecognisedstockexchangesin respectofwhichsuchaschemehasbeenapprovedunderSection 4B by SEBI. A stock exchange, such as the Petitioner, had no tradingmembersassuch,butSEBIconsidereditappropriateasan expert body to avoid discrimination against old stock exchanges whichwereestablishedpriortotheenforcementoftheRegulations byimportingarequirementofcompliancewiththeRegulationsas aconditionfortherecognitionofthePetitioner.

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VI:Regulation4andRegulation8 54. Regulation8providesarestrictionagainsttheholdingof

morethanfivepercentoftheequitysharecapitalinarecognized stockexchangebyapersonresidentinIndiadirectlyorindirectly either individually or together with persons acting in concert. Regulation4alsoprovidesforthemannerofincreasingthepublic shareholdingsoastoensurethatatleast51%oftheequityshare capital is held by the public. Regulation 8 which contains a restrictionontheholdingofsharesdoesnotexpresslyincorporate theprovisionsofRegulation4inregardtothemannerinwhicha reductionoftheshareholdinghastobebroughtabouttoensure compliancewiththefivepercentnorm.Theorderpassedbythe WholeTimeMemberproceedsonthebasisthatcompliancewith oneofthemodesspecifiedinRegulation4istheonlyacceptable methodforbringingaboutconformitywithRegulation8.SEBIin thecourseofitsoralandwrittensubmissionsalsoaccedestothe positionthatRegulation 8,unlikeRegulation 4,doesnotspecify themannerinwhichshareholdingshouldbereducedtobelowthe specifiedthreshold.

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55.

SEBI,however,suggeststhatonewouldordinarilyexpect

themodesspecifiedinRegulation4tobefollowedforthepurposes ofRegulation8,eventhoughtheyarenotmandatory.Now,allthe modes which are provided for in Regulation 4 may not be applicable to a situation involved such as in the case of the Petitioner.Amongthemodeswhicharespecified,areanofferfor sale of shares held by shareholders having trading rights; the placementofsharesheldbyshareholdershaving tradingrights to suchpersonsorinstitutionsasmaybeshortlistedbytheexchange withtheapprovalofSEBI. Thethirdmodeistheissueofequity shares on private placement basis by a stock exchange to any personorgroupofpersonsnotbeingshareholdershavingtrading rights or their associates. In a stock exchange having no shareholderswithtradingrights,themodesspecifiedinclauses(a) and(b)ofRegulation 4wouldhavenoapplication. Hence,the issue as to whether there is compliance with the provisions of Regulation8mustbedeterminedonthebasisofwhetherthereis, infact,agenuinedivestmentofsharesheldinexcessoffiveper centbya person resident, directlyorindirectlyor togetherwith personsactinginconcert.

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VII:Theprocessofdilution 56. Now, in the present case, on 12 August 2008, the

shareholding structure of the Petitioner at the time of the applicationforrecognitionwasonewhereMCXheld51%,while FTILheld49%.ThetwopromotersofthePetitioner,MCXandFTIL respectively held the entire equity capital. As on 30 September 2009, theshareholdingstructureofthePetitionerafterthesale (accompaniedbythebuybackagreements)toPNB,IL&FSandIFCI reflectedashareholdingofMCXat38.31%andofFTILat35.05%. TheholdingofIFCIwas4.27%,thatofPNBat2.97%andofIL&FS at2.63%.TherestofthesharecapitalwasheldbytheBanks.On 30 November 2009, the shareholding pattern of the Petitioner, priortotheschemeofreductionreflectedtheholdingofMCXat 37.03% and of FTIL at 33.89%. On 31 March 2010, the shareholding structure of the Petitioner after the scheme of reductioncumarrangement was such that the shareholding of MCXandFTILwasreducedtofivepercenteach.Inaddition,MCX wasallotted63.41crorewarrantsandFTILwasalloted56.24crore warrants.

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57.

TheWholeTimeMemberofSEBIinhisimpugnedorder

hasheldthat: (i) The issuance of warrants did not constitute a permissible methodofensuringcompliancewithRegulation8andonly substitutedequitysharesintoarighttoequityshareswitha viewtocircumventingRegulation8(1);and (ii)The buy back agreements were forward contracts which violatedtheprovisionsoftheSCRA.Thesetwoaspectsofthe determinationintheimpugnedorderfallforconsideration.

VIII:IssuanceofShareWarrants 58. ThePetitionwhichwasfiledbeforetheCompanyJudge

underSections391to394readwithSections100to103ofthe Companies' Act, 1956 on 18 December 2009, envisaged that in order to comply with the provisions of Regulation 8(1), the Petitionerwasimplementingaschemeofcapitalrestructuringso thatthevotingrightsofthepromotersandtheirequitystakewould bebroughtdowntofivepercenteach.Theschemeenvisagesthat warrantswouldbeissuedtotheshareholders,whoaresubjectto

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the scheme of capital reduction, namely, MCX, FTIL and IL&FS. Eachwarrantwouldentitletheholdertosubscribetooneequity shareatanytimeaftersixmonthsfromthedateofissueandan optiontothateffectcouldbeexercisedaftersixmonthsfromthe dateofallotment. Thewarrantswere,however,nottocarryany votingrights.Clause2.4oftheschemeprovidedthattheexercise ofthewarrantwouldbesubjecttotheRegulations.

59.

Byaletterdated21December2009,SEBIwasinformed

oftheScheme. TheletterintimatedSEBIthat(i)Postreduction, theshareholdingofthetwopromoterswouldnotbeinexcessof fivepercent;(ii)Thetwopromotersandanothershareholder,a financialinstitutionwhoseequityshareswerebeingextinguished wouldtotheextentofequitycapitalbeingextinguishedbeallotted anequalnumberofwarrants;and(iii)Thepromotersoncehaving reducedtheirshareholdingtofivepercentshallnotbepermitted to increase their shareholding beyond the limit specified in the MIMPSRegulations. 60. DuringthependencyoftheearlierWritPetition before

thisCourt,astatementwasmadeonbehalfofthetwopromoters

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before the Division Bench on 10 August 2010 that Board resolutionswouldbepassedtoensurethatthepromoterswould notincrease theirshareholdingbeyondthelimit specified inthe MIMPSRegulations.Followingthis,Boardresolutionswerepassed of both thepromoters on11August 2010 and17August 2010. Copies of the Board's resolutions were furnished to SEBI on 20 August2010.BoththeresolutionswerebeforeSEBImuchpriorto thepassingoftheimpugnedorderdated23September2010.

61.

Thepositionontherecord,therefore,isthatasaresult

of the scheme of reduction which was put into place, the shareholdingofthetwopromoterswasbroughtdowntofiveper centeach.Eachofthetwopromoterswasallottedwarrantsinlieu ofthesharecapitalwhichwasreduced.Thewarrantswerenotto carryanyvotingrights. Underthewarrants,thepromoterswere conferredwithanoptiontoobtaintheallotmentofequityshares aftertheexpiryofsixmonths. Thepromoters,bytheresolutions passedbytheirBoardofDirectors,resolvedthattheexerciseofthe optionunderthewarrantsshallnotbecarriedouttoexceedthe limit prescribedintheMIMPS Regulations. Inpursuance ofthe

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statementwhichwasmadebeforetheDivisionBenchofthisCourt that the promoters would pass Board resolutions to ensure that they would not increase their shareholding beyond the limit prescribedintheMIMPSRegulations, resolutionswere,infact, passedandintimatedtoSEBI. Havingregardtothisundisputed background,itisnotpossibletoacceptthefindingoftheWhole TimeMemberthattheissuanceofwarrantstothetwopromotersis a device which would result in a restoration of their holding beyondthelimit prescribedbytheMIMPS Regulations. Amere 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 EmployeesUnionvs.HindustanLeverLtd.).18Theaspectasto whether the promoters can be regarded as persons acting in concert,willbedealtwithseparately.

62.

Havingregardtothisfinding,thesubmissionwhichhas

beenurgedonbehalfoftheFourthRespondentbyCounsel,tothe effectthattheschemewhensanctioned,becamebindingonSEBI
18 (1995) Suppl. 1 SCC 499

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and would be res judicata of all issues involved in the Petition assumessubsidiarysignificance. AschemeunderSection 391of the Companies' Act, 1956 has statutory force and binds the creditorsandshareholdersoftheCompany.SEBIisnotacreditor oftheCompany. SEBI,asamatteroffact,wasnotheardinthe CompanyPetition.Therecanbenodisputeabouttheprincipleof law thatthepowers of theCompanyCourt, whenitsanctionsa schemeunderSections391to393oftheCompanies'Act,1956,are wide.Beforesanctioningascheme,thoughapprovedbyamajority ofthecreditorsormembers,theCourthastobesatisfiedthatthe Companyoranyotherpersonmovingtheapplicationforsanction, hasdisclosedalltherelevantmatters.TheCourthastodetermine whethertheschemeisfair,justandreasonableandisnotcontrary totheprovisionsoflaworofpublicpolicy. TheCourtwouldnot countenanceaschemewhichisunconscionableorillegalorwhich is otherwise unfair and unjust to the class of shareholders or creditors forwhom itismeant. (MihirH.Mafatlalvs.Mafatlal Industries Ltd.)19 Once the scheme is sanctioned, it would bind eventhedissentingminorityshareholdersorcreditors.(S.K.Gupta
19 (1997) 1 SCC 579

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vs. K.P. Jain,20 and N.A.P. Allagiri Raja vs. N.Guruswamy.21 Consequently,whentheCompanyCourtsanctionsthescheme,the fairnessoftheschemequathemhasalsotobeborneinmind.The point, however, tonote is that SEBIasa regulatory authority is entitledinlawtodetermine astowhethertheprovisionsofthe MIMPS Regulations as a condition subject to which recognition hasbeengranted,havebeencompliedwith.ThepowerofSEBIto dosoasanexpertregulatorybodyactingwithinthedomainofits ownstatutoryfunctionsisnotabrogatedbythesanctionwhichwas grantedbytheCompanyCourt.Theschemeofarrangementcum reductionwasalsoaschemeunderSection100.Suchascheme, aswell,willnotdiluteorabrogatethestatutorypowersofSEBIto exactcompliancewiththestatutoryprovisions,theenforcementof whichSEBIcanoversee.

IX:Buybackarrangements 63. The next aspect of the case which is required to be

consideredrelatestothebuybackagreements. PNBbyitsletter dated20July2009recordedthetermsofthebuybackagreements.


20 1979 (49) Com. Cases 342 21 (1989) 65 Com.Cases 758

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Undertheagreement,FTILoritsnomineeswasconferredwiththe righttobuybacksharesofPNBatanytimeaftertheexpiryofone yearfromthedateofinvestment.Byaletterdated19August2010 addressedtoSEBIbyPNB,itwasstatedthataftertheschemewas sanctionedbytheCompanyCourt,andkeepinginmindtheMIMPS Regulations,PNB'sarrangementwithregardtothebuybackstood implicitlyextinguished sincethepromotercouldnotholdmore thanfivepercentoftheequityshares.

64.

On 20 August 2009, a Share Purchase Agreement was

enteredintobetweenthePetitionerandMCXontheonehandand IL&FSFinancialServicesLtd.(IL&FS)ontheotherforthesaleof 4.42croresharesofMCXforaconsiderationofRs.159.12crores withafurtheroptiontopurchaseanadditional1.80croreshares. PriortotheSchemeofReduction,theshareholdingofIL&FSinthe Petitioner was 2.54% of the equity capital. As a result of the SchemeofReduction,theholdingofIL&FSwouldhaveincreased to 8.13% of the equity capital of the Petitioner. Consequently, undertheSchemeofreductionIL&FSwastobeallotted1.70crore warrants. UpontheSchemeofArrangementcumReduction,the

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shareholding of IL&FS was brought down to five per cent, in additiontowhich,IL&FSheld1.70crorewarrants.

65.

On 20 August 2009, IL&FS entered into a buy back

agreementwithLaFinFinancialServicesPvt.Ltd.(LaFin). The terms of the buy back agreement stipulated that LaFin or its nominees would be under an obligation to purchase back the sharesatanytimeafterthecompletionofoneyearfromthedate of investment and no later than three years. On 14 December 2009, MCX addressed a letter to IL&FS seeking approval of the Scheme of Reduction, but confirmed that this would not be construed as a dilution of the terms of the Share Purchase AgreementandoftheletterissuedbyLaFin.On11August2010, IL&FSaddressedacommunicationtoSEBIreaffirmingthatthebuy backagreementwasaliveandwasintendedtobeenforced.

66.

There are two aspects in relation to the buy back

agreementuponwhichthereisadispute. Thefirstrelatestothe nondisclosureofthebuybackagreement. Thesecondrelatesto whetherthebuybackagreementisaforwardcontractinviolation

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oftheprovisionsoftheSCRA.

X:Dutyofdisclosure 67. Thefactthatthebuybackagreementwasnotinitially

disclosedtoSEBIisnotindispute.Thesubmissionwhichhasbeen urged on behalf of the Fourth Respondent is that the non disclosure of the buy back arrangement had no effect on the decision and the existence of such an arrangement was an irrelevantfactorinthedetermination.

68.

We are unable to accept the submission that a fair,

candid and complete disclosure to SEBI would not require a disclosureinrespectofthebuybackarrangement.Theobjectand purposeofthedivestmentofsharesofthepromoterswastoensure compliancewithRegulation8oftheMIMPSRegulations.Ifinthe processofdivestment,thepromoterswereunderanobligationto offer to buy back the shares on the completion of a period stipulated, thatisamatterwhichoughttohavebeenbroughtto the notice of SEBI. The submission which has been urged on behalfofthepromotersisthatthebuybackwouldnotnecessarily

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resultinthepromotersexceedingtheshareholdinglimitoffiveper centintheequitycapitalofthePetitioner.Itwassubmittedthat, 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) increasingtheequitycapital;or(ii)causingthepurchaseofshares tobeeffectedbyanindependentnominee. Hence,itwasurged thatthebuybackagreementswouldnotforeclosethepossibilityof MIMPS compliance in the future despite the exercise of the buy backoption. That,inourview,didnotabsolvethePetitionerto make a full disclosure before SEBI that while compliance with Regulation8wasbeingfulfilledbyadivestmentofshares,yetbuy backagreementswereenteredinto.Thebasicpurposeunderlying Regulation 8 is to ensure that no resident should own whether directlyorindirectlywithanyotherpersonsactinginconcert,more than five per cent of the equity capital of a recognised stock exchange.Wherethepromotersholdmorethanfivepercentofthe equitycapital,thedivestmentoftheirexcessholding,soastobring themincompliancewithRegulation8,mustbegenuine.Thefact thatthedivestment of thesharesheldby apromoter inastock

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exchangeisaccompaniedbyabuybackagreementisamaterial circumstancewhichmustbedisclosedtoSEBI.On21July2010, SEBIaddressedalettertothePetitioneradvertingtoanewsarticle published on 19 July 2010, stating that the promoters of the PetitionerhadenteredintobuybackagreementswiththeBanks whoareshareholdersofthePetitioner.Inareplydated2August 2010,thePetitionerinformedSEBIthatFTIL,asitspromoter,had issuedaletterofcomfortdated12August2009toPNBwithout enteringintoaformalbindingbuybackagreementorshareholding agreement. ItwasstatedthatoncetheSchemeofReductionwas approved,theletteraddressedbyFTILtoPNBbecameinfructuous andirrelevant.ThePetitionerstatedthatithascompliedwiththe MIMPSRegulationsbyvirtueoftheSchemeasapprovedandthe shareholdingofFTILandMCXstoodreducedtofivepercentwith no right to acquire even a single share in violation of limit prescribedbyMIMPSRegulations.Evenatthatstage,therewasno referencetothebuybackagreementwhichwasenteredintowith IL&FS. Onthisaspectofthematter,weareunabletoacceptthe contention of the Petitioner and of the Third and Fourth Respondentsthattheexistenceofthebuybackagreementswasa

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circumstance which was irrelevant and was not required to be disclosedtoSEBI.

69.

The relationship between a Stock Exchange and SEBI

mustbefoundedintrustandgoodfaith.Bothconstituteimportant limbs of the regulatory framework, SEBI is the cornerstone in ensuring regulatory compliance. Mandating full disclosure of compliance requirements is necessary in order to ensure transparentandaccountablegovernance.StockExchangescannot maintain a cloak of secrecy over their affairs and management, particularly when they are required to conform to regulatory standards.AllowingaregimeofsecrecyandpermittingExchanges to suppress information from SEBI will encourage a culture of nepotism.TheMIMPSRegulationssubserveanimportantobjective based on the public interest in protecting investors and in an orderlymarketforsecurities.Fulldisclosureofcomplianceactions isanecessaryelementinthatprocess.

XI:LegalityoftheBuybackagreements: 70. The order passed by the Whole Time Member of SEBI

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holdsthatthebuybackagreementsareforwardcontractsandare notlawfularrangementsundertheSCRA.

71.

Section 13 of the SCRA provides that if the Central

Governmentissatisfied,havingregardtothenatureorthevolume oftransactionsinsecuritiesinanyStateorarea,thatitisnecessary sotodo,itmay,byanotification,declarethesectiontoapplyto such State or area and thereupon every contract ... which is enteredafterthedateofthenotificationotherwisethanbetween themembers ofarecognizedstockexchange...shallbeillegal. Section2(h)definestheexpressionsecuritiestoincludeshares, scrips, stocks, bonds, debentures, debenture stock, or other marketable securities of a like nature in or of any incorporated company or other body corporate. Section 16 empowers the CentralGovernment todeclare,whereitisofopinionthatitis necessarytopreventundesirablespeculationinspecifiedsecurities, thatnopersonintheStateorareaspecifiedshall,savewiththe permissionoftheCentralGovernment,enterintoanycontractfor the sale or purchase of any security specified in the notification except to the extent and in the manner specified therein. Sub

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section(2)providesthatallcontractsenteredintoincontravention oftheprovisionsofsubsection(1)shallbeillegal.

72.

InexerciseofthepowersconferredbySubsection(1)of

Section 16, the Central Government by a notification dated 27 June1969declaredthatsavewithitspermission,nopersonshall enterinto anycontract forthesaleorpurchase ofanysecurity other than such spot delivery contract or a contract for cash or handdeliveryorspecialdeliveryinanysecurityasispermissible under the Act and the Rules, Byelaws and Regulations of a recognized stock exchange. On 1 March 2000, the earlier notificationwasrescindedandafreshnotificationwasissuedby which it has been declared that no person shall save with the permissionofSEBIenterintoanycontractforthesaleorpurchase ofsecurities otherthanaspotdeliverycontractoracontractfor cashorhanddeliveryorspecialdeliveryoracontractinderivatives asispermissibleundertheSCRAortheSEBIAct,1992;andthe RulesandRegulationsmadeunderthoseActsandtheRulesand RegulationsandByelawsofarecognizedstockexchange. Aspot deliverycontractisdefinedinSection2(i)oftheSCRAtomeana

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contract which provides for actual delivery of securities and the payment of theprice eitheron the same dayasthe date of the contract or on the next day, the actual period taken for the dispatchofthesecuritiesortheremittanceofmoneythroughpost beingexcludedif thepartiesdonot reside inthesame townor locality. The definition also covers a transfer of securities by a depositoryfromtheaccountofabeneficialownertotheaccountof another beneficial owner when securities are dealt with by a depository.

73.

Theimpugnedorderproceedsonthebasisthatthebuy

back agreement is a forward contract and, is therefore, illegal. Now,beforewedealwiththequestionoflaw,itmustbenotedat the outset that in the course of the submission, the Additional SolicitorGeneralofIndiahasnotsupportedthegroundthatthe buy back agreements constitute forward contracts. An alternate submissionwassoughttobeurgedthatthebuybackagreements wereactuallyoptioncontractsorderivativesandwere,therefore, illegalunderSection18AoftheSCRA.Thefindingastoillegality wassought tobesustainedonthebasisofagroundwhichwas

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neitherraisedinthenotice toshowcause,norintheimpugned order of the Whole Time Member. Whether such a submission shouldbepermittedtobeurgedatthisstagewouldbeconsidered separately. But,itmeritsemphasisthatthebasisandfoundation onwhichthebuybackagreementswereconstruedasbeingillegal onthegroundofthesebeingforwardcontractsdoesnotfind supportintheoralsubmissionsurgedbytheLearnedAdditional SolicitorGeneralorinthewrittensubmissions.

74.

Now,itisinthisbackgroundthatthefindingofillegality

intheimpugnedordermustbeassessed.Thebuybackagreements furnish to PNB and IL&FS an option. The option constitutes a privilege, the exercise of which depends upon their unilateral volition. In the case of PNB, the buy back agreements contemplatedabuybackbyFTILaftertheexpiryofastipulated period. But, in the event that PNB still asserted that it would continuetoholdtheshares,despitethebuybackoffer,FTILorits nominees would have no liability for buying back the shares in future.InthecaseofIL&FS,LaFinassumedanobligationtooffer topurchaseeitherthroughitselforitsnomineetheshareswhich

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weresoldtoIL&FSaftertheexpiryofastipulatedperiod.Inboth cases, theoptiontosellrestedintheunilateraldecisionofPNB andIL&FS,asthecasemaybe.

75.

Inabuybackagreementofthenatureinvolvedinthe

presentcase,thepromissorwhomakesanoffertobuybackshares cannotcompeltheexerciseoftheoptionbythepromiseetosellthe shares at a future point in time. If the promisee declines to exercisetheoption,thepromissorcannotcompelperformance.A concludedcontractforthesaleandpurchaseofsharescomesinto existence only when the promisee upon whom an option is conferred,exercisestheoptiontoselltheshares.Hence,anoption topurchaseorrepurchaseisregardedasbeinginthenatureofa privilege.

76.

In V.Pechimuthu vs. Gowrammal,22 Mrs.Justice Ruma

Pal, speaking for a Bench of the Supreme Court explained the natureofanoptionorprivilegethus: Aprivilegehasbeendefinedasaparticularandpeculiar benefit or advantage enjoyed by a person, and a
22 (2001) 7 SCC 617

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concessionasaformofprivilege.Anoptiontopurchase or repurchase has been held to be such a privilege or concession(SeeShanmugamPillaiv.Annalakshmi,(AIR 1950FC38;K.Simrathmullv.NanjalingiahGowder,AIR 1963 SC 1182). This is because an option by its very natureisdependententirelyonthevolitionoftheperson grantedtheoption. Hemayormaynotexerciseit. Its exercisecannotbecompelledbythepersongrantingthe option. It is because of this onesidedness or unilaterality, as it were, that the right is strictly construedand [a]n option for the renewal of a lease, or for the purchaseorrepurchaseofproperty,mustinallcasesbe exercisedstrictlywithinthetimelimitedforthepurpose, otherwiseitwilllapse (HalsburysLawsofEngland,3rdEdn.,Vol.3,Art.281,p. 165) 13. An agreement for sale and purchase simpliciter, on the other hand, is a reciprocal arrangementimposingobligationsandbenefitsonboth partiesandisenforceableattheinstanceofeither.

77.

The distinction between an option to purchase or

repurchaseandanagreementforsaleandpurchasesimpliciterlies in the fact that the former is by its nature dependent on the discretion of the person who is granted the option whereas the latterisareciprocalarrangementimposingobligationsandbenefits onthepromissorandthepromisee.Theperformanceofanoption

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cannotbecompelledbythepersonwhohasgrantedtheoption. Contrariwise in the case of an agreement, performance can be elicitedatthebehestofeitheroftheparties. Inthecase ofan option,aconcludedcontractforpurchaseorrepurchasearisesonly if the option is exercised and upon the exercise of the option. Under the notification that has been issued under the SCRA, a contract for the sale or purchase of securities has to be a spot deliverycontractoracontractforcashorhanddeliveryorspecial delivery. Inthepresentcase,thecontractforsaleorpurchaseof thesecuritieswouldfructifyonlyupontheexerciseoftheoptionby PNBor,asthecasemaybe,IL&FSinfuture.Iftheoptionwerenot to be exercised by them, no contract for sale or purchase of securitieswouldcomeintoexistence.Moreover,iftheoptionwere tobeexercised,thereisnothingtoindicatethattheperformanceof thecontractwouldbebyanythingotherthan byaspotdelivery, cash or special delivery. Where securities are dealt with by a depository, the transfer of securities by a depository from the accountofabeneficialownertoanotherbeneficialowneriswithin theambitofspotdelivery.

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78.

Reliance is sought to be placed by the Additional

Solicitor General on a decision of Chief Justice M.C.Chagla, speaking for a Division Bench in Jethalal P.Thakkar vs. R.N. Kapur.23 In that case, an undertaking was furnished by the DefendanttothePlaintifftoselloffforthePlaintiffastipulated quantity of shares of a Bank at a specified price within twelve months from the date on which the Bank was converted into a Financial Corporation and if at the end of twelve months, the DefendantwasnotabletoselloffthesharesforthePlaintiff,the Defendantacceptedtheobligationtotakedeliveryofthoseshares againstthepaymentofastipulatedamounttothePlaintiffwithout interest.TheDefendantfailedtosellofftheshareswithinthetime stipulated upon which the Plaintiff sued for damages on the strengthofthecontract.Inthatcase,theprovisionsoftheBombay SecuritiesControlContractAct,1925cameupforconsideration. The Act defined a ready delivery contract as a contract for the purchaseorsaleofsecuritiesfortheperformanceofwhichnotime isspecifiedandwhichistobeperformedimmediatelyorwithina reasonabletime.ThecontentionofthePlaintiffwasthatthiswasa
23 AIR 1956 Bombay 74

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readydeliverycontractand,therefore,waslawful.Ifthecontract wasnotareadydeliverycontract,itwouldbevoidunderSection 6oftheActof1925. ChiefJusticeChaglaheldthatonaplain reading of the contract, it was clear that no obligation attached with regard to the purchase of the shares on the part of the Defendant until the contingency contemplated occurred after a lapseoftwelvemonths.TheLearnedChiefJusticeheldthat:

Acleardistinctionmustbeborneinmindbetweenthe case where there is a present obligation under the contract and the performance is postponed to a later date,andthecasewherewhereisnopresentobligation at all and the obligation arises by reason of some condition being complied with or some contingency occurring. Thecontractinthatcasewasheldtofallinthesecondcategory anditwasheldthatthiswasnotacasewhereapresentobligation wascreatedbutpartieshadagreedtopostponetheperformance. Ifonthedatewhenthecontractwasenteredinto,therewasno contract for sale or purchase of the shares, it was impossible to suggestthatonthatdatethecontractwasvoidbecause itcame withinthemischiefoftheAct.TheCourtheldthattheintention ofthepartieswasthattherewouldbeacontractforthepurchase

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or sale on the occurring of a contingency and as soon as the obligation ripened and a contract subsisted between them that contractwastobeperformedimmediatelyorwithinareasonable time.ThesuitfiledbythePlaintiffwas,therefore,heldnottobe renderedbadbyreasonoftheprovisionsoftheBombayAct.The judgmentofaLearnedSingleJudgein NiskalpInvestmentsand Trading Company Ltd. vs. Hinduja TMT Ltd.,24 has been renderedonaSummonsforJudgmentinaSummarySuitinwhich theLearnedJudgegrantedunconditionalleavetodefend,anddoes notadvancethediscourse.

79.

TheambitoftheexpressionsecuritiesinSection2(h)

oftheSCRAhasfallenfordeterminationinseveraljudgmentsof this Court. Would the expression cover listed and unlisted securities? The issue, as would be noted hereinafter, has been settled in a judgment of the Supreme Court. In Dahiben UmedbhaiPatelvs.NormanJamesHamilton,25aDivisionBench of this Court held that the definition of securities requires marketability which the shares of a private Company do not
24 (2008) 143 Com.Cases 204 Bom. 25 (1983) 85 BOMLR 275

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possessandhence,thatexpressionwillonlytakein sharesofa publiclimitedcompany.InBrookeBondIndiaLtd.vs.U.B.Ltd.,26 a Learned Single Judge of this Court held prima facie at the hearing of a motion for interlocutory relief thata transaction of sharesofapubliclimitedCompanyunlistedonthestockexchange isnotintendedtobegovernedbytheSCRA. In MysoreFruit ProductsLtd.vs.TheCustodian,27anotherLearnedSingleJudge held that the forward sale of shares even of public limited Companies which are not listed on the stock exchange are prohibited by the SCRA. This aspect of the controversy is now resolved by the decision of the Supreme Court in Naresh K.Aggarwalla&Co.vs.CanbankFinancialServicesLtd.28 The Supreme Court observed that the definition of the expression securities in Section 2(h)(i) does not make any distinction betweenlistedsecuritiesandunlistedsecuritiesandthenotification dated27June1969issuedunderSection16oftheSCRAwillalso applytothesecuritieswhicharenotlistedonthestockexchange. Finally, it will be necessary to advert to the decision of the

26 (1994) 3 Comp.LJ. 279 (Bom.) 27 (2005) 107 Bom.L.R. 955 28 (2010) 6 SCC 178

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Supreme Court in Bank of India Finance Ltd. vs. The Custodian.29 Inthatcase,theAppellantBankhadenteredintoa contractwithdifferentbrokersforthepurchaseandsaleofcertain securities which were not listed on any stock exchange. The transaction consisted of two legs. The first or the ready leg consisted of purchase or sale of certain securities at a specified price and the second or forward leg consisted of the sale or purchaseofthesameorsimilarsecuritiesatalaterdateataprice determinedonthefirstdate.Thereadylegofthetransactionwas completed with the Appellant paying the agreed price and receiving delivery of the securities which were agreed to be purchased. Before the forward leg of the transaction would be completed,theSpecialCourtOrdinancewasissuedon6June1992 whichwasreplacedbyanAct.TheCustodianfiledanapplication before the Special Court contending that such ready forward transactions were illegal inter alia under the SCRA and the securities which were sold to the Appellant in the ready leg continuedtobeinlawthepropertiesofthenotifiedpersonsonthe datewhentheywerenotifiedundertheAct.TheSupremeCourt
29 AIR 1997 SC 1952

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heldthatthevalidpartorthereadylegofthetransactionhasbeen completed while the invalid part of the forward leg has to be ignored. What the notification under Section 16 was held to prohibitistheenteringintoofaforwardcontractthatisasaleata futuredateforafixedprice. Thislatterpartoftheagreement couldnothavebeenenteredinto,butwasclearlyseverable and wouldnotaffectthetransactionwhichhasalreadytakenplaceat thetime oftheexecution ofthereadyleg. The decision ofthe SupremeCourtin BankofIndiaFinance therefore,dealtwitha situationwherethereadylegofthecontracthadbeendulyfulfilled whiletheforwardleghadremainedtobeperformed.Thelatter, involvingacontractforthepurchaseandsaleofsharesinfutureat aspecifiedpricewasareadyforwardcontractandwasunlawful.

80.

Inthepresentcase,thereisnocontractforthesaleand

purchase of shares. A contract for the purchase or sale of the shareswouldcomeintobeingonlyatafuturepointoftimeinthe eventualityofthepartywhichisgrantedanoptionexercisingthe optioninfuture. Oncesuchanoptionisexercised,thecontract wouldbecompletedonlybymeansofspotdeliveryorbyamode

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whichisconsideredlawful. Hence,thebasisandfoundationof the order which is that there was a forward contract which is unlawfulatitsinceptionislackinginsubstance.

81.

The Learned Additional Solicitor General, however,

soughttosustainthefindingofillegalitybysubmittingthatthebuy back agreements constitute an option in securities within the meaningofSection2(1)(d)andderivativesunderSection2(ac)of the SCRA and are violative of the provisions of Section 18A. Section18Astipulatesthatnotwithstandinganythingcontainedin anyotherlawforthetimebeinginforce,contractsinderivatives shallbelegalandvalidifsuchcontractsaretradedinarecognised stockexchangeinaccordancewiththerulesandbyelawsofsuch exchange.Ithasbeenurgedthatasthebuybackagreementswere notenteredintoonarecognizedstockexchange,theyareillegal. Moreover,nopermissionwasobtainedfromSEBIinrespectofsuch option(derivative)asrequiredbythenotificationdated1March 2000. Onthisaspect,wefindmeritinthesubmissionurgedon behalfofthePetitionerandbyCounselfortheThirdandFourth RespondentsthatthiscontentionwhichisurgedonbehalfofSEBI

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has been raised for the first time during the course of the oral argumentsinCourt.Thecontentionwasnotapartofthenotice toshowcause,norwasitthebasisoftheorderthatwaspassedby theWholeTimeMember.Moreover,on13September2011,SEBI hasissuedanoticetoshowcausetothePetitionerstatingthatin thealternativetothefindingsrecordedinparagraphs66and67of theorderdated23September2010(thoserelatingtothebuyback agreementsbeingforwardcontractsand,therefore,unlawful)and assumingthatthebuybackagreementsarenotinthenatureof forward contracts, theywould amount to anoption insecurities and,therefore,derivativeswhichwereneithertradednorsettledat anyrecognized stock exchange nor withthepermission ofSEBI. Theyareconsequently,statedtobeinbreachoftheprovisionsof Section18AoftheSCRAreadwiththenotificationdated1March 2000. ThePetitionerhasbeencalledupontoshowcauseasto why its application dated 13 June 2011 for the renewal of recognitionshouldnotberejected.Havingregardtothefactthat SEBIhasissuedanoticetoshowcausetothePetitionerraisingthe verygroundwhichwassoughttobeurgedinthealternativebythe LearnedAdditionalSolicitorGeneral,weareoftheviewthatitis

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manifestlyinappropriateforthisCourttorenderanadjudication ontheissueatthisstage.Thatisevenmoreso,becauseaviolation of the provisions of Section 18A on the basis that the buy back agreementsconstituteoptionsinsecuritiesorderivativeswasnota ground taken in the show cause notice which resulted in the impugnedorderoftheWholeTimeMember,norforthatmatter, isitagroundintheimpugnedorderitself.

XII:PersonsActinginconcert. 82. The impugned order contains a finding that MCX and

FTIL are persons acting in concert and consequently their combinedequityshareholdingoftenpercentofthetotalequity capitalofthePetitionerisnotincompliancewithRegulation8of theMIMPSRegulations. Thesefindingshavebeenchallengedon behalfofthePetitionerandasubstantialareaofsubmissionhas coveredtheambitandpurviewofExplanation(IV)toRegulation8.

83.

Regulation8containsabaronapersonresidentholding

directlyorindirectlyeitherindividuallyortogetherwith persons acting in concert, more than five per cent of the equity share

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capital of a recognized stock exchange. The expression person acting in concert is defined in Explanation (IV) to have the meaning derived from Regulation 2(1)(e) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.Regulation2(1)(e)oftheTakeoverRegulationsdefinesthe expressionpersonactinginconcertasfollows: (e)personactinginconcertcomprises. (1)personswho,foracommonobjectiveorpurposeof substantial acquisition of shares or voting rights or grainingcontroloverthetargetcompany,pursuanttoan agreement or understanding (formal or informal), directlyorindirectlycooperatebyacquiringoragreeing toacquiresharesorvotingrightsinthetargetcompany orcontroloverthetargetcompany. (2)Withoutprejudicetothegeneralityofthisdefinition, the following persons will be deemed to be persons acting in concert with other persons in the same category,unlessthecontraryisestablished: (i) a company, its holding company, or subsidiary or suchcompanyorcompanyunderthesamemanagement eitherindividuallyortogetherwitheachother;

Regulation2(2)specifiesthatallotherexpressionsunlessdefined thereinshallhavethemeaningassignedtothemundertheSEBI Act,1992,theSCRAortheCompanies'Act,1956.Theexpression

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controlisdefinedinRegulation2(1)(c)asfollows: (c)controlshallincludetherighttoappointmajority ofthedirectorsortocontrolthemanagementorpolicy decisions exercisable by a person or persons acting individuallyorinconcert,directlyorindirectly,including byvirtueoftheirshareholdingormanagementrightsor shareholdersagreementsorvotingagreementsorinany othermanner.

84.

Forthepurposeofcomputingtheceilingontheholding

of equity share capital in a recognized stock exchange which is fixedatfivepercent,Regulation8(1)requirestheholdingofthe person resident in India to be taken into account, whether held directlyorindirectlyeitherindividuallyortogetherwithpersons actinginconcert. WhileinterpretingRegulation 8aprefatory point is that the ambit of the regulation has quite intentionally beencastinwideterms. Theobjectoftheprovisionistoensure thatapersonorgroupofpersonsorrelatedentitiescannotcontrol voting rights in a stock exchange. In order to effectuate that purposeanoutsidelimitoffivepercentontheequityholdingofa personresidenthasbeenimposed.Theregulationseekstoensure that its provisions should not be diluted through an indirect holding of shares and the use of the expression directly or

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indirectlyareindicativeofthefactthatthenetofRegulation8is setinwideterms.

85.

Theexpressionpersonsactinginconcertistohavethe

meaning derived from Regulation 2(1)(e) of the Takeover Regulations.Theexpressionderivemeanstodraworreceive,or obtainasfromasourceororigin.30Theprocessofderivationis totraceorshowtheorigin.Theactofderiving,ithasbeenstated, isimmediateanddirectandisperhapsdistinguishablefromanact oftracingwhichmaybeasomewhatmoregradualprocess. To deriveameaningistoobtainthatmeaningfromasourceororigin. ThesourceindicatedinExplanation(IV)isRegulation2(1)(e)of theTakeoverRegulations.

86.

Inconstruingthewordsofanexplanationinastatute,it

mustbeborneinmindthatwhiletraditionally,thefunctionofan explanationistoexplainthemeaningofawordusedinastatutory provisionortoclearupanydoubt,ultimatelytheissueisoneof legislative intent. The position has been elucidated in the
30 P.Ramanatha Aiyars The Law Lexicon, Second Edition, Reprint 2007 page 530

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judgment of the Supreme Court in Dattatraya Govind Mahajan vs.StateofMaharashtra,31thus: ...theorthodoxfunctionofanexplanationistoexplain themeaningandeffectofthemainprovisiontowhichit isanexplanationandtoclearupanydoubtorambiguity init.Butultimatelyitistheintentionofthelegislature which is paramount and mere use of a label cannot controlordeflectsuchintention.Itmustberemembered thatthelegislaturehasdifferentwaysofexpressingitself andinthelastanalysisthewordsusedbythelegislature alone are the true repository of the intent of the legislatureandtheymustbeconstruedhavingregardto thecontextandsettinginwhichtheyoccur. Therefore, eventhoughtheprovisioninquestionhasbeencalledan Explanation,wemostconstrueitaccordingtoitsplain languageandnotonanyaprioriconsiderations.32

In Sundaram Pillai vs. Pattabiraman,33 the Supreme Court indicatedthatanexplanationmayhavethefollowingobjects: (a)toexplainthemeaningandintendmentoftheAct itself; (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve; (c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful;
31 (1977) 2 SCC 548 32 See in this context G.P.Singhs Principles of Statutory Interpretation pages 204 & 205 33 (1985) 1 SCC 591 at page 613

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(d)anExplanationcannotinanywayinterferewithor change the enactment or any part thereof but where somegapisleftwhichisrelevantforthepurposeofthe Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Courtininterpretingthetruepurportandintendmentof theenactment,and (e)itcannot,however,takeawayastatutoryrightwith whichanypersonunderastatutehasbeenclothedorset at naught the working of an Act by becoming an hindranceintheinterpretationofthesame.

JusticeG.P.SinghinhisseminalworkonthePrinciplesofStatutory Interpretation observes that the meaning to be given to the explanation will really depend upon its terms and not on any theory as to its purpose.34 Indeed, as the Supreme Court has observedin Mahajan (supra),theessentialtaskinconstruingan explanationistodeducethelegislativeintentfromthewordsused.

87.

Prior to its amendment in 2008, Regulation 8(1)

containedareferencebothtotheacquisitionorholdingofmore than five per cent in the paid up equity capital in a recognized stock exchange. Following the amendment andthe recasting of
34 Tenth Edition 2006 pg 205

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Regulation8,thereferencenowistotheholdingofnotmorethan five per cent of the equity share capital. In the Takeover Regulations, Regulation 2(1)(e) defines the expression person actinginconcertintwoparts. Clause(1)ofRegulation2(1)(e) referstoasituationwherepersonswho,foracommonobjectiveor purpose of substantial acquisition of shares or voting rights or gaining control over the target Company, pursuant to an agreement or understanding, formal or informal, directly or indirectlycooperatebyacquiringoragreeingtoacquiresharesor voting rights in the target Company or control over the target Company. The elements which go to comprise clause (1) of Regulation 2(1)(e) are: (i) A group of persons who share a common object or purpose; (ii) The object or purpose is the substantialacquisitionofsharesorvotingrightsorgainingcontrol; (iii)TheobjectorpurposemustbereferabletoatargetCompany; (iv) Such persons must act in pursuance of an agreement or understanding, though the agreement or understanding may be formal or informal; (v) Pursuant to the agreement or understanding,theremustbecooperationbetweenthosepersons directlyorindirectlybyacquiringoragreeingtoacquiresharesor

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voting rights in the target Company or control over the target Company.

88.

The existence of a common object or purpose is an

essentialrequirementofRegulation2(1)(e)(1).InDaichiSankyo CompanyLimitedvs.JayaramChigurupati,35 aBenchofthree Learned Judges of the Supreme Court while interpreting the provisions of Regulation 2(1)(e)(1) emphasised the requirement thattheremustexistatargetCompanyontheonehand,andthe comingtogetheroftwoormore personswithasharedcommon objective orpurpose ontheotherhand. Thisemergesfromthe followingobservations: 48. Tobegin with, the concept of "person acting in concert" under regulation 2(e)(1) is based on a target companyontheoneside,andontheothersidetwoor morepersonscomingtogetherwiththesharedcommon objectiveorpurposeofsubstantialacquisitionofshares etc. of the target company. Unless there is a target company,substantialacquisitionofwhosesharesetc.is thecommonobjectiveorpurposeoftwoormorepersons coming together there can be no "persons acting in concert". For, dehors the target company the idea of "personsactinginconcert"isasirrelevantasacheatwith nooneasvictimofhisdeception.Twoormorepersons may join hands together with the shared common objective or purpose of any kind but so long as the
35 (2010) 7 SCC 449paras 48 and 49 pages 471 & 472

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common object and purpose is not of substantial acquisitionofsharesofatargetcompanytheywouldnot comprise"personsactinginconcert". 49. Theotherlimboftheconceptrequirestwoor morepersonsjoiningtogetherwiththesharedcommon objectiveandpurposeofsubstantialacquisitionofshares etc. of a certain target company. There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the targetcompany.For,dehorstheelementoftheshared commonobjectiveorpurposetheideaof"personacting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitousrelationshipcomingintoexistencebyaccident orchance.Therelationshipcancomeintobeingonlyby design, by meeting of minds between two or more persons leading to the shared common objective or purposeofacquisitionofsubstantialacquisitionofshares etc.ofthetargetcompany.Itisanothermatterthatthe commonobjectiveorpurposemaybeinpursuanceofan agreementoranunderstanding,formalorinformal;the acquisitionofsharesetc.maybedirectorindirectorthe persons acting in concert may cooperate in actual acquisitionofsharesetc.ortheymayagreetocooperate in such acquisition. Nonetheless, the element of the sharedcommonobjectiveorpurposeisthesinequanon fortherelationshipof"personsactinginconcert"tocome intobeing.

Hence, it is now a settled principle of law that the relationship whichthewords personsactinginconcert encompassesisone whichcomes into beingbydesign. Theexistence ofthisdesign

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postulates ameetingofminds, theholdingofasharedcommon object or purpose, the existence of an understanding and the implementation of that understanding in fulfilling the shared purposeofacquiringsharesorvotingrightsorgainingcontrolover thetargetCompany.

89.

AsimilarviewhasbeentakeninajudgmentofaDivision

Bench of this Court in K.K. Modi vs. Securities Appellate Tribunal,36 where it has been held that the mere fact that a personisapromoterdoesnotmakehiman acquirer,unlessitis shownthatheeitherintendstoacquireorisactinginconcertwith theacquirerfortheacquisitionofsharesofthetargetCompany. Inordertoestablishthatapersonisactinginconcert,acommon objectiveorpurposemustbeshowntoexist.

90.

Clause(2)ofRegulation2(1)(e)raisesapresumptionin

which certain persons will be deemed to be persons acting in concertwithotherpersonsinthesamecategoryunlessthecontrary isestablished.Thepresumptioninclause(2)is,rebuttable.Sub


36 (2003) 113 Com. Cases 418

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clause(i)ofClause(2)referstoaCompany,aholdingCompanyor subsidiary or such Company or Companies under the same management either individually or together with each other. Regulation2(2)stipulatesthatallotherexpressionsunlessdefined shallhavethesamemeaningassignedtotheminteraliaunderthe Companies' Act, 1956. Section 370(1B) of the Companies' Act, 1956containsadeemingdefinitionofwhentwobodiescorporate shall be deemed to be under the same management, those situationsbeingasfollows: (i)ifthemanagingdirectorormanageroftheonebody, ismanagingdirectorormanageroftheotherbody;or (ii) if a majority of the directors of the one body constitute, or at any time within the six months immediately preceding constituted, a majority of the directorsoftheotherbody; (iii)ifnotlessthanonethirdofthetotalvotingpower withrespect toanymatterrelatingtoeachofthetwo bodiescorporateisexercisedorcontrolledbythesame individualorbodycorporate;or (iv)iftheholdingcompanyoftheonebodycorporateis underthesamemanagementastheotherbodycorporate within the meaning of clause (i), clause (ii) or clause (iii);or (v)ifoneormoredirectorsoftheonebodycorporate while holding, whetherbythemselvesortogetherwith their relatives, the majority of shares in that body

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corporatealsohold,whetherbythemselvesortogether withtheirrelatives,themajorityofsharesintheother bodycorporate.

91.

TheAdditionalSolicitorGeneralsubmittedthatsincethe

provisionsoftheTakeoverRegulationshavebeenincorporatedby reference intotheMIMPS Regulations, theCourt maymakedue alterations in the details of Regulation 2(1)(e) based on the context of the incorporating regulations. In Paresh Chandra Chatterjee vs.TheStateofAssam,37 theSupremeCourt held whileconstruingtheprovisionsoftheAssamLand(Requisitionand Acquisition) Act, 1948, that the legislature having provided that the provisions of the Land Acquisition Act, 1894, shall apply mutatismutandisinrespectofareferencemadetotheCourtunder the State Act, appropriate changes in the phraseology used in Section23oftheCentral Actmayhavetobemadetoapplythe principlesunderlyingthoseprovisionstothestatelegislation.The AdditionalSolicitorGeneralurgedthatthereisadifferenceinthe contextandsettingoftheexpressionpersonsactinginconcert used in the Takeover Regulations and, the definition of the
37 AIR 1962 SC 167

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expression in the Takeover Regulations must apply with due alterationofdetails. Ifsuchaninterpretationisadopted,itwas urged,therewouldbenorequirementofacommonobjectiveof acquisitionforthepurposeoftheMIMPSRegulations.

92.

Now, it must be emphasized that Explanation (IV) to

Regulation 8 provides that the expression persons acting in concertshallhavethemeaningderivedfromRegulation2(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 Regulation2(1)(e)oftheTakeoverRegulations. Inderivingthe meaning of the expression persons acting in concert from the TakeoverRegulationsandapplyingitinthecontextoftheMIMPS 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

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Regulation8priortoitsamendmentin2008regulatedboththe acquisitionandholdingofpaidupequitycapital,thereferenceto acquisitionwasdeletedbytheamendment. Thisisindicativeof thefactthatthecommonpurposeoftheacquisitionofsharesmay not be relevant for the purposes of the MIMPS Regulations. Moreover,eventheTakeoverRegulationsthemselvescontemplate theuseoftheexpressionpersonsactinginconcertinconnection 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 existenceofacommonobjective.SEBIasadelegateofParliament, whenitmadetheMIMPSRegulations,incorporatedthedefinition oftheexpressionfromtheTakeoverRegulations.SEBIwouldbe presumedtohaveknowntheambitofthatexpressionasusedand interpretedintheTakeoverRegulations.Whenthemeaningofthe expressionpersonsactinginconcertisderivedfromtheTakeover Regulations,thelatterconstitutethesourceofthemeaning. The essential attributes of the expression are those which are to be

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foundintheTakeoverRegulations. In extrapolating themeaning containedintheTakeoverRegulationstotheMIMPSRegulations, the essential features of the meaningcannot be destroyed. The process of extrapolation may legitimately involve necessary changesinpointsofdetail. Toincorporatethemeaning mutatis mutandis maybe permissible so asto adapt matters of detail to imparteffectivecontenttotheexpressionwhenitisusedinthe context of the MIMPS Regulations. But that process must necessarily adopt the heart and soul of the meaning and the existenceofacommonobjectandpurposeconstitutestheessence of the meaning of the expression persons acting in concert. Regulation8isbeingappliedtoasituationwherethepromotersof astockexchangeheldtheentireequitycapitalbeforetheprocessof divestmentcommenced.Themerefactthattheyarepromotersis notsufficienttoholdthattheyareactinginconcertforthepurpose ofRegulation8.Ifsuchanextremepositionofinterpretationwere to be adopted, compliance with Regulation 8 norms would be illusoryinasituationwheretheoriginalpositionisthattheentire share capital is held by promoters. Hence, the law requires somethingmore toestablishacase ofpersonsactinginconcert.

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The essential ingredients of the definition in Regulation 2(1)(e) mustbefulfilled.

93.

In Commissioner of Income Tax vs. East Coast

Commercial Co. Ltd.,38 the Supreme Court construed the provisions of Section 23A of the Income Tax Act, 1922, while analysingastowhenitcouldbe saidthataCompany is onein whichthepublicaresubstantiallyinterested.BytheExplanationto Section23A(1),itwasenactedinteraliathatacompanyshallbe deemed to be a company in which the public are substantially interestedifsharescarryingnotlessthantwentyfivepercentof thevotingpowerhavebeenallottedtooracquiredunconditionally or are beneficially held by the public. Under Section 23A, the AssessingOfficerwasrequired,ifsatisfiedthattheprofitsandgains distributedasdividendsbyanycompanywerelessthansixtyper centoftheassessableincomeofthatpreviousyear,asreducedby theincometaxandsupertaxpayable,tomakeanorderthatthe undistributed portion of the assessable income of the company
38 AIR 1967 SC 768

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shallbedeemedtohavebeendistributedasdividendsamongthe shareholders asatthedate ofthegeneral meeting. Thispower couldnotbeexercisedinrespectofacompanyinwhichthepublic are generally interested. The Supreme Court noted that the Tribunalhadtodecide,inthefirstinstance,whethertherewasa groupofpersonsactinginconcertholdingasufficientnumberof shareswhichmaycontrolthevotingasablock.Buttheexistence of a block was held not to be decisive. The Supreme Court advertedtoitsearlierdecisionin CommissionerofIncomeTax vs.JubileeMillsLtd.,39whereitwasheldthatnodirectevidence andovertactofconcertbetweenthemembersofthegrouphaving controlovervotingwasnecessarytoprovethattheCompanyisnot one in which the public is substantially interested. In Jubilee Mills,theSupremeCourtheldthat: The test is not whether they have actually acted in concert but whether the circumstances are such that humanexperiencetellsusthatitcansafelybetakenthat theymustbeactingtogether.

Whilefollowingthisprinciplein EastCoastCommercial (supra), theSupremeCourtapplyingthisprinciple,heldasfollows:


39 1963 (48) ITR 9 (SC)

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Itistheholdingintheaggregateofamajorityofthe sharesissuedbyapersonorpersonsactinginconcertin relationtotheaffairsoftheCompanywhichestablishes theexistenceofablock.Itissufficient,ifhavingregard totheirrelationetc.,theirconduct, andtheircommon interest,thatitmaybeinferredthattheymustbeacting together;evidenceofactualconcertedactingisnormally difficulttoobtain,andisnotinsistedupon.

XIII:Thevalidityoftheimpugnedorder. 94. In the notice to show cause that was issued to the

Petitioner, FTIl and MCX were regarded as persons acting in concertonthebasisofaletterdated14December2009addressed byMCXtoIL&FSandaletterdated20August2009addressedby LaFintoIL&FSFinancialServices. Moreover,itwasallegedthat FTIL and MCX are under the same management in terms of Regulation 2(1)(e)(2)(i) of the Takeover Regulations read with Section370(1B)ofthe CompaniesAct,1956. Moreover, itwas allegedthatFTILason31March2010,held31.18%oftheequity sharecapitalofMCXandthatbyitsdominantholding,FTILisin controlofMCX.

95.

There are two limbs to the finding which has been

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arrived at bythe Whole Time Member on the issue. First, the impugned order adverts to the letters dated 20 August 2009, addressedbyLaFintoIL&FSandtotheletterdated14December 2009,addressedbyMCXtoIL&FS. Theletterdated20August 2009, was addressed by LaFin to IL&FS, following on a Share Purchase Agreement signed between MCX, IL&FS and the Petitioner on the same date. By the letter, LaFin furnished an undertaking to offer to purchase all the shares which under the SPAweresoldbyMCXtoIL&FSwithinastipulatedperiod. The priceatwhichtheshareswouldbeofferedtobepurchasedwould be (i) a price providing an internal rate of return of 15% on investmentorthepriceatwhichthemostrecenttransactionsofthe equitysharesofthePetitionerwascarriedoutbythePetitioneror byMCXortheFTILgroup.Moreover,itwasassuredthatinthe eventthatthePetitionerplansaninitialpublicofferingwithinone year from the date of the investment, LaFin covenanted that it shallnotproceedwiththeIPOincasethepriceattheIPOisless thanthebuybackprice. AspromoterofthePetitioner, LaFin furtherassuredthatsaveandexceptfortheissuanceoftheshares ofthePetitionertosomeBanksandintermsof employeesstock

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optionplans,thePetitionershallnotissueanysharetoanyperson atapricebelowRs.35/perequitysharewithoutthepriorwritten consentofIL&FS.LaFinalsostatedthatpursuanttothepurchase ofthesharesofthePetitioner,itundertooknottosellorissueany equitysharesinthePetitioneronbehalfofFTIL,MCX andour groupCompaniesforastipulatedperiodfromthedateofpurchase forapriceexceedingthebuybackprice.Theletterwassignedon behalfofLaFinbyJigneshShah,itsDirector. Thesecondletter dated14December2009wasissuedbyMCXtoIL&FSreferringto theSharePurchaseAgreementandtotheletterdated20August 2009fromLaFin.MCXbyitslettersoughttheapprovalofIL&FS totheproposedSchemeofReductionwhichwastobediscussedin an extraordinary General Meeting of the Petitioner. The letter containedanassurancethatitwasnotindilutionofthetermsof theSPA. Similarly,MCXfurnishedanundertakingforandonits behalfandonbehalfofFTIL,LaFinandourgroupcompanies not to sell or issue any equity shares of the Petitioner until the warrantsissuedoncapitalreductionareconvertedintosharesby the existing shareholders. On 26 March 2010, when IL&FS exerciseditsrightsunderthebuybackagreements,thewarrants

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werepurchasednotbyLaFin,butbyMCX.

96.

During the course of the hearing, certain factors have

been set out to on behalf of SEBI to indicate that the three companies,thePetitioner,MCXandFTILformpartofonegroup. Theseare:(i)JigneshShahandhiswifeheld100%oftheequity sharecapitalofLaFinasadmittedduringthecourseofthehearing bythePetitionerandbytheThirdandFourthRespondents;(ii)La FintogetherwithJigneshShahandhisfamilyhold45.53%ofthe equitysharecapitalofFTIL;(iii)FTILholds31.18%oftheequity share capital of MCX; and (iv) The website of FTIL shows the PetitionerandMCXaspartoftheFTILgroup.Inparagraph52of hisimpugnedorder,theWholeTimeMemberhasconcludedthat FTILandMCXareCompaniesunderthesamemanagementunder Section 370(1B)(i) of the Companies' Act, 1956 on the ground that they have a common manager, Mr.Jignesh Shah, and are, therefore,deemedtobepersonsactinginconcertforthepurpose ofMIMPSRegulations. Thisfindingintheimpugnedorderisas follows: The letters referred to above are those of Mr.Jignesh

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P.Shah,DirectorofLaFinFinancialServicesPrivateLtd., thepromoterofFTIL.Ifindthat,asbroughtoutinthe Notice,Mr.JigneshShahholdsthepositionsofChairman andGroupChiefExecutiveOfficerofFTIL,(apromoter ofMCXSX)andtheViceChairmanofMCX(thesecond promoterof SCXSX). TheApplicant hasinhiswritten submissions explained that he is only a nonexecutive ViceChairmanofMCX.Mr.JigneshShahhasissuedthe undertakings referred to on behalf of MCX, FTIL, and othergroupcompaniesthatMCXSXwillnotissueshares exceptasprovidedfor. Heisinapositiontoissuean undertakingnotonlyforthecompany(FTIL)thatheis managingdirectorof,butalsofortheCompany(MCX) for which he is designated as its nonexecutive Vice Chairman. I find that MCX, as per publicly available information,hasaregularManagingDirector. Butitis Mr.JigneshShahandnottheManagingDirectorwhohas issuedtheundertakingonbehalfoftheApplicantaswell afactthatfurtherbringsouthispositionofdominance in the management of all these three institutions from the website of FTIL, that MCX is listed as one of the group companies of FTIL and that Mr.Jignesh Shah is designatedastheGroupCEO.Onedoesnothavetogo farther, to see that Mr.Jignesh shah is de facto, a manager for both the promoter companies viz., FTIL and MCX. Using the test of common management in Section 370(1B)(i) of the Companies Act, 1956, it is reasonabletoconcludethatthetwopromotersareunder acommonmanagement.

97.

The finding which is contained in the extract quoted

aboveproceedsonthebasisthatboththeletterswereaddressedby Mr.JigneshShah.Asamatteroffact,onlyoneofthetwoletters, thatdated20August2009addressedbyLaFintoIL&FShasbeen

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signedbyJigneshShah.Theotherletterdated14December2009 addressed by MCX to IL&FS has not been signed by him. That apart, under Section 370(1B) of the Companies' Act, 1956 two bodiescorporatearedeemedtobeunderthesamemanagementif the Manager of one body is the Manager of the other. Section 2(24)definestheexpressionmanager'tomeananindividualwho is subject to the superintendence, control and direction of the Board of Directors and has the management of the whole or substantiallythewholeoftheaffairsoftheCompany.Thetestthat mustbeappliedindeterminingastowhether apersonmustbe regardedasamanager inSection 2(24)waselucidatedinthe judgmentoftheSupremeCourtinCommissionerofIncomeTax, Kerala vs. Alagappa Textile (Cochin) Ltd,40 Mr.Justice V.D. Tulzapurkar,speakingfortheBenchoftheSupremeCourtheldas follows: Beforeweconsidertheprincipalquestionrelatingto the proper construction of the Agreement dated November 10, 1957, it will be desirable to note the relevantprovisionsofthe Indian Companies Act, 1913asalsothenewCompaniesAct,1956,whichhave abearing onthequestionatissue.Sincethe Agreement between the assessee on the one handand theKamalaMillsLtd.Ontheotherwasenteredintoat
40 (1980) 1 SCC 214

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a time when the Indian Companies Act, 1913 was inforceitwillbeproperfirsttorefertothe definitionof'Manager'givenins.2(9)ofthesaidAct. Section2(9)ranthus: "2(9)"manager"meansapersonwho,subject tothecontrolanddirectionofthe directors has themanagementofthewholeaffairsofacompany, andincludesa director or any other person occupyingthepositionofamanagerby whatevernamecalledandwhetherunderacontract ofserviceornot. Itwill beclearthattosatisfytheaforesaiddefinitiona person,whichcouldincludeafirm,bodycorporateor anassociationof persons,apart from being in managementofthewholeaffairsof acompany had to be "subject to the control and direction of the directors". Thisdefinition hasundergone a substantial change underthe CompaniesAct,1956. Under this Acts.2(24)definestheexpression"manager"thus. 2(24) "manager means an individual (not being the managing agent) who, subject to the superintendence, controland directionoftheBoard ofdirectors,hasthemanagementofthewhole,or substantiallythe whole,oftheaffairs ofa company, and includes a director or any other person occupyingthepositionofamanager,bywhatevername called,andwhetherunderacontractofserviceornot." Inthisdefinitionthreeconditionsarerequiredtobe satisfied:(a) the manager must be an individual, which means that a firm or a body corporateoranassociationisexcludedandcannotbea manager(afactwhichisexpresslymadeclearins.384), (b) he should have the management of the whole or substantiallythewholeaffairsofthecompanyand(c)he should be subject to the superintendence, control and

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directions of the Board of Directors in the matter of managing the affairs of the company. Subject to the changesmadeintheaspectscoveredby(a)and(b),in boththedefinitionstheaspectthata manager has to work or exercise his powers under the control and directions of the Board of Directors is common and essential. In fact it is this aspect which distinguishes 'Manager' from'Managing Agent'. Ifthedefinition of 'Manager'asgivenin s. 2(24) is compared withthat of'ManagingAgent' asgiven ins.2(25)it willappearclearthatthoughthereisanoverlappingof thefunctionsofthemanageras wellas themanaging agentofthecompanytheessentialdistinctionseemsto be that whereas the manager has to be subjecttothesuperintendence,controlanddirectionof the Board of directors the managing agent is not so subject.

Thereismeritinthecontentionwhichhasbeenurgedonbehalfof the Petitioner and the Third and Fourth Respondents that the impugnedorderproceedstoholdthatJigneshShahisaManager ofbothFTILandMCXprimarilyonthebasisofoneletterandthe undertakingcontainedtherein. Thetestwhichhasbeenadverted to in the judgment of the Supreme Court in Alagappa Textile (supra)hasnotbeenconsideredwhileassessingtheapplicabilityof Regulation 2(2)(e)(2). Moreover, several of the circumstances whichhavebeenadvertedtoduringthecourseofthesubmissions bytheLearnedAdditionalSolicitorGeneralofIndiadonotform

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thebasisoftheimpugnedorder.Thisisapartfromthefactthatin decidingtheissueastowhetherFTILandMCXarepersonsacting 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, renderedvulnerableonaccountofitsfailuretoapplytherequisite legal standard that must determine whether thepromoters were actinginconcertwithinthemeaningofRegulation2(1)(e).

98.

Duringthecourseofthehearing, ajointstatementhas

been tendered to the Court on behalf of the Third and Fourth Respondents in the form of an undertaking signed by their Advocatesinthefollowingterms: JointStatementbyRespondentNos.3andRespondent No.4 TheRespondentNo.3and4jointlyandseverallyhereby undertake to reduce their total shareholding in the Petitioner so that they do not collectively exceed 5% shareholding in the Petitioner or such limits as prescribed under the MIMPS Regulations from time to time. Suchreduction shalltake place withinsuchtime lineasdirectedbySEBI. FurthertheRespondentno.3and4jointlyandseverally hereby undertake that in the event the options either

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underbuybackorunderthewarrantsisexercisedthen their shareholding either jointly or severally will not exceed5%ofthePetitionerorsuchlimitsasprescribed undertheMIMPSRegulationsfromtimetotime.

99.

The Third and Fourth Respondents have now

unequivocallystatedbeforetheCourtthattheywouldundertake 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 tenderedthateveniftheoptionunderthebuybackorunderthe warrants are exercised, the holding of the Third and Fourth Respondentsjointlyorseverallyshallnotexceedfivepercent.This isanaspectwhichSEBImustberequiredtoreconsideruponthe finalorderthatweproposetopassinthecase.

ConcentrationofEconomicInterest: 100. ThefindingbySEBItotheeffectthattherewouldbea

concentration ofeconomicinteresthasfairlynotbeencanvassed bytheLearnedAdditionalSolicitorGeneralduringthecourse of thesubmissions.NoneoftheRegulationscontainsanindependent

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statutorynorminregardtotheconcentrationofeconomicinterest. Thisgroundintheimpugnedorderis,therefore,extraneoustothe MIMPSRegulations.IftherequirementsoftheMIMPSRegulations arefulfilled,thenindependentofthem,therewouldbenofurther normreferabletotheconcentrationofeconomicinterestonwhich thePetitionerwouldfailinitsapplication.

Fitandproperperson: 101. Inholdingthatitwouldnotbeinthepublicinterestand

the interest of the trade to grant the application, SEBI has concludedinitsimpugnedorderthatthePetitionerisnotafitand proper person. This finding is primarily based on the following premises: (i) There was a failure on the part of the Petitioner to

disclosethebuybackagreements.Theseshouldhavebeenshared withSEBIinordertoenableittodeterminewhetherRegulation 8(1)hasbeencompliedwith;

(ii)

ThebuybackagreementswereillegalundertheSCRA

andthePetitionerwaseitherinstrumentaltothoseagreementsor

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hasknowledgeofthem;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. TheWhole TimeMemberhas,however, concluded thathecannotgosofarastoagreewithwhathasbeenstatedin thenoticethatthePetitionerhasbeendishonestinnotgivingSEBI adequateinformationabouttheSchemeitself.

102.

In the earlier part of this judgment, the issue of

disclosurehasbeenelaborateduponatlength.Therelationshipof astockexchangewithSEBImustbefoundedonutmostgoodfaith. Materialandrelevant factswhichhave abearingon compliance with the Act and the Regulations which SEBI enforces must be disclosed.WhenSEBI,asaconditionfortherecognitionofastock exchangeimposesastipulationofcompliancewiththeprovisions of the MIMPS Regulations and it may be compliance of the relevantprovisionsasthesubsequentnotificationimposesthere hastobeagenuineandhonestcompliancewiththerequirements

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of the Regulations. The Petitioner and its promoters may be correctinassertingthattheexistenceofthebuybackagreements doesnotipsofactoresultinaviolationoftheMIMPSRegulations, inthepresent,oncetheshareholdingofthepromotersisbrought within the permissible limit. The buy back involves an option whichmayormaynotbeexercisedinthefuture. Thepromoters submitthattheyhaveseveralcoursesofactionopentoensurethat theirshareholdingdoesnotexceedthestatutorylimitiftheoption is exercised. New capital can be infused by increasing the authorisedcapital;orthepromotersmayfindanindependentthird partytopurchasethesharesontheexerciseofthebuybackoption. ButtheseareevidentlymatterswhichSEBIasregulatormustbe informedabout.Thebuybackcastsanobligationonthepromissor topurchasethoughanoptionisgiventothepromiseetosellin future.Theregulatorisentitledtobeintheknowoffullfactsand the existence of a buy back agreement is a relevant fact. Even assumingthatthepromoterswouldmakelegitimatearrangements infutureupontheexerciseofthebuybackoptiontoensurethat theirshareholdingcontinuestobewithinthelimitprescribed,SEBI wouldbewithin itsstatutorypowerstodemandassurancesthat

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thoseconditionswouldbefulfilled. Weare,therefore,unableto acceptthesubmissionwhichwasurgedonbehalfofthepromoters that the nondisclosure of the buy back agreements is of no consequencebecausethebuybackagreementswere,accordingto them,awhollyirrelevantconsideration.Thedivestmentofshares held by the promoters in excess of the limit prescribed by Regulation8wastoensureMIMPScompliance.Ifasinthiscase,a divestment of shares was also accompanied by a buy back obligationassumedbythepromoters,disclosureofthebuybackis arelevantconsideration.Theexistenceofthebuybackagreements is a relevant consideration in enabling SEBI to determine as to whether there was a genuine divesting of shares held by the promotersinexeessofthelimit.Compliancewiththeprovisionsof the MIMPS Regulations by the promoters of the stock exchange cannotbecloakedinsecrecyquaSEBIasaregulator.

103.

Buthavingsaidthis,weareoftheviewthatitwouldnot

be justifiable in the facts of the present case to reject the application merelyon thatground. From theperspective ofthe Whole Time Member who made the impugned order, the non

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disclosureofthebuybackagreementsiscoupledwithhisfinding that thebuybackisaforwardcontractand,istherefore,illegal. Thisaspectofthefindingoftheadjudicatingofficerhasbeenheld tobeerroneousintheearlierpartofthejudgment.Oncethebuy back agreement is held not to be a forward contract, then the allegedillegalityoftheagreementasagroundforholdingthatthe Petitionerisnotafitandproperpersonnecessarilyceasestoexist. Anothercircumstancewhichmustbeborneinmindisthatduring thecourseoftheproceedingsbeforeSEBI,anundertakinghasbeen tenderedonbehalfofthepromotersthatthestatutorylimitwhich hasbeenprescribedundertheMIMPSRegulationswouldnotbe exceeded. Moreover,duringthecourseoftheproceedingsbefore this Court, the undertaking which has been tendered by the promoters is even more specific and stringent: that notwithstandingtheexerciseoftheoptionunderthebuybackor the warrants, the shareholding of both the promoters together jointlyorseverallywillnotexceedfivepercent.Therehas,hence, beenabonafideeffortonthepartofthePetitioneranditstwo promoterstoensurethattheydonotbreachtheprovisionsofthe MIMPS Regulations by undertaking to the Court that the

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shareholdingofthepromoterstogethershallnotexceedthelimitof five per cent prescribed under the MIMPS Regulations for a resident.

XIV:Conclusion: 104. Inthisviewofthematter,theconclusionswhichhave

beenarrivedatinthecourseofthejudgmentmaynowberevisited indeterminingtheappropriatefinalordertobepassedinthecase:

(i)

ThoughtheMIMPSRegulationsintermsapplytoastock

exchange in respect of which a Scheme fordemutualisation and corporatisation has been approved under Section 4B, the applicationofthoseregulationswasextendedtothePetitionerby SEBIasaconditionforthegrantofrecognition.Thoughinitially SEBIdemandedfullcompliancewiththeMIMPSRegulations,the requirement which was imposed while extending recognition thereafter,wasfullcompliancewiththerelevantRegulations. In eitherviewofthematter,theremustbeagenuine,bonafideand honestattempttocomplywiththeMIMPSRegulations; (ii) SEBIas aregulatoryauthoritywaswhile exercisingits

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wide ranging statutory powers acting within its jurisdiction in imposingarequirementofcompliancewiththeMIMPSRegulations asaconditionattachingtotherecognitionofthestockexchange;

(iii)

Regulation8prescribesthelimitforholdingofsharesin

astockexchangebyapersonresidentinIndia,individuallyorwith personsactinginconcert. Themannerinwhichadilutionofthe equitystakeofthepromotershadtotakeplaceinordertoensure compliancewiththeprovisionsoftheMIMPSRegulationswasnot confined to the modes specified in Regulation 4. Many of the modalities prescribed in Regulation 4 do not apply to a stock exchange like thePetitionerwhichhasnotradingmembers. So longas thereis agenuinedivestment oftheequitystake ofthe promotersinexcessofthelimitprescribedbyRegulation8,that wouldfulfilltherequirementofRegulation8;

(iv)

Stock exchanges are an integral part of the statutory

framework which SEBI regulates in relation to the securities market. Therelationshipbetweenastockexchange andSEBIis onebasedontrustandutmostgoodfaith.Astockexchangeisduty

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bound to make a full and honest disclosure of all material and relevantfactswhichhaveabearingontheissueastowhetherthe requirementsoftheMIMPSRegulationshavebeenfulfilled. The existenceofthebuybackagreementswasamaterialcircumstance whichoughttohavebeendisclosedtoSEBI;

(v)

The sanctioning of the Scheme of capital reduction by

theCompanyJudgeunderSections391to393readwithSections 100to103oftheCompaniesAct,1956,doesnotprecludeSEBIas astatutoryregulatorfromdeterminingastowhethertheprovisions of the MIMPS Regulations have been complied with. SEBI is independently entitled to ensure compliance with the MIMPS Regulationswhichhavebeenmade aconditionforthegrantof recognition.ThestatutoryfunctionsconferreduponSEBIunderthe SCRAandcognatelegislationarenotdiluted;

(vi)

DuringthecourseoftheproceedingsbeforeSEBIaswell

asbeforethisCourt,undertakingshavebeenfiledbythepromoters to the effect that the provisions of the MIMPS Regulations including the ceiling on the holding of the shares would be

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compliedwithnotwithstandingtheexerciseoftheoptionunderthe buybackagreementandthewarrantsfortheallotmentofshares. Both the promoters have now held themselves down to hold together, jointlyandseverallynomore thanfivepercentofthe equity capital. There is no reasonable basis to reject the undertakingswhichhavebeenfiled;

(vii)

Thebuybackagreementscannotbeheldtobeillegalas

foundintheimpugnedorderoftheWholeTimeMemberofSEBI onthegroundthattheyconstituteforwardcontracts.Abuyback confersanoptiononthepromiseeandnocontractforthepurchase and sale of shares is made until the option is exercised. The promissor cannot compel the exercise of the option and if the promiseewerenottoexercisetheoptioninfuture,therewouldbe nocontractforthesaleandpurchaseofshares.Onceacontractis arrivedatupontheoptionbeingexercised,thecontractwouldbe fulfilledbyspotdeliveryandwould,therefore,notbeunlawful.

(viii)

Thealternatesubmissionwhichhasbeenurgedonbehalf

ofSEBIatthehearingthatthebuybackagreementsconstitutean

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optioninsecuritiesandbeingderivativesviolatetheprovisionsof Section 18AoftheSCRA isnotthebasiseitherofthenotice to showcausethatwasissuedtothePetitioneroroftheorderpassed bytheWhole TimeMemberofSEBI. SEBIhasinfact,issueda notice to show cause to the Petitioner subsequent to the order assertingthatasaground.Inthatviewofthematter,itwillnotbe appropriateorproperforthisCourttorenderanyfindingonthat aspect,particularlywhenitdidnotfindaplaceeitherinthenotice toshowcauseorintheorderpassedthereon;

(ix)

The definition of the expression persons acting in

concertisforthepurposeoftheMIMPSRegulationsderivedfrom theTakeoverRegulations,byExplanation(IV)toRegulation8of the MIMPS Regulations. Regulation 8 after its amendment in 2008,refersonlytotheholdingofsharesandnottotheacquisition andholdingofthesharesasearlier.Inapplyingtheprovisionsof Regulation 2(1)(e) of the Takeover Regulations (which defines personsactinginconcert)totheMIMPSRegulations,itwouldbe permissiblefollowingwellsettledprinciplesinthatregardtomake somealterationindetailtorendertheregulationsmeaningfuland

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effective. However, the essential ingredients of the expression personsactinginconcertintheTakeoverRegulationscannotbe abrogated. SEBIwhenitincorporatedthedefinitionofpersons actinginconcertfromtheTakeoverRegulationswasconsciousof thedefinitioninthoseRegulationsandmustbeattributedwiththe knowledgeofthemannerinwhichithasbeeninterpreted. The SupremeCourthasheldthattheexistenceofacommonobjective orpurposeisanecessaryrequirementoftheexpressionwhichmust befulfilledbyanagreement,formalorinformal;

(x)

TheimpugnedorderpassedbytheWholeTimeMember

hasfailedtoapplytheprincipaltestenunciatedbythejudgmentof theSupremeCourtinDaichiSankyo(supra)indeterminingasto whethercertainpersonsmaybeheldtobeactinginconcert.The mere fact that two persons have come together in promoting a Company does not lead to the inference that they are acting in concertforthepurposesoftheTakeoverRegulations.Thefurther findingoftheWholeTimeMemberofSEBIthatthetwopromoters ofthePetitionerhadacommonManagerisbasedprimarilyonthe executionofoneletter.Thefindingdoesnottakeintoaccountthe

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testspeltoutbytheSupremeCourtin AlagappaTextile (supra) that a person in order to be a manager within the meaning of Section 2(24) of the Companies Act, 1956 must have the managementofthewholeorsubstantiallythewholeoftheaffairs oftheCompanyandbesubjecttothesuperintendence,controland directionsoftheBoardofDirectors.Thefindingswhichhavebeen arrivedat intheimpugnedorderare contrary tolawsincethey ignoretherelevantlegaltestswhichhavebeenlaiddownbythe SupremeCourt;

(xi)

Inanyevent,boththepromotersofthePetitionerhave,

during the course of the hearing of these proceedings, tendered undertakings tothe Court tothe effect that notwithstanding the exerciseoftheoptionconferredbythewarrantsandbythebuy back agreements, their shareholding jointly and severally in the petitionershallnotexceedfivepercentasprescribedinRegulation 8oftheMIMPSRegulations;

(xii)

OntheaspectastowhetherthePetitionerisafitand

properpersonforthegrantofrecognition,thefindingwhichhas

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been arrived at in the impugned order is inter alia based on a conclusionastotheillegalityofthebuybackagreementsonthe ground that they are forward contracts, which is found to be erroneous in the present judgment. The effect of the non disclosure of the buy back agreements to SEBI should be consideredhavingregardtothefact thatagenuineattempt has beenmadebythepromoters bytenderinganundertakingtothe Court that their shareholding together shall not exceed five per cent of the equity capital, notwithstanding the exercise of the options.

105.

Inviewoftheseconclusionsandforthereasonsthatwe

haveindicatedabove,weareoftheviewthattheimpugnedorder passedbytheWholeTimeMemberofSEBIon23September2010 wouldhavetobesetaside.Wedirectaccordingly. Wedirect,in consequence,thattheapplicationfiledbythePetitioneron7April 2010 shall be reconsidered afresh in terms of the observations containedinthisjudgment.Uponremand,afreshdecisionshallbe arrivedatafterfurnishingthePetitioneranopportunityofbeing heard withinaperiodofonemonthfromtoday. Ruleismade

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absoluteintheaforesaidterms.Thereshallbenoorderastocosts.

(Dr.D.Y.Chandrachud,J.)

(AnoopV.Mohta,J.)

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