Before the High Court of Gujarat
(1999) 1 GLR 275
Petitioner
Securities and Exchange Board of India
Respondent
Alka Synthetics Ltd. and Ors.
Date of Judgement
29 Dec. 1998
Bench
Justice J.R. Vora and; Justice M.R. Calla
Background:
This appeal concerns itself with the limits of power of the Security and Exchanges Board of India to issue orders and directions for the regulation of the Securities Market and the protection of the interest of the investors. This appeal also deals with the question of whether or not SEBI can withhold a property for fulfilling the aforesaid duty.
Facts:
Magan Industries Limited is a public limited company listed on the Bombay Stock Exchange. The price and volume movement of the company between December 5, 1995, and January 25, 1996, was unreasonably high, calling for an intervention by the Securities and Exchange Board of India (hereafter referred to as SEBI) to initiate an investigation. Price and volume are high, short-sellers failed in delivering the shares which they had sold which resulted in an auction of the shares of the company called by Bombay Stock Exchange. This auction was to be held on February 7, 1996. Alka Synthetics Limited is a registered public limited company having its office at Ahmadabad. It offered to sell its 50,000 shares which it owned in Magan Industries. The sale was to be conducted through a short seller.
The auction was held and the price of the shares which the Alka Synthetics had offered was received by the stock exchange from the purchasers. But before this amount could be paid to Alka Synthetics, SEBI through a notification dated 15 February 1996 directed the retention of the payment by the Clearing House until the completion of the investigation. This was done to ascertain whether or not any provision of the Security and Exchange Board of India Act, 1992 has been violated or not. SEBI was of the view that artificial manipulation of the price of the scrip of Magan Industries had been done and that Alka Synthetics had been heavily buying and selling in these scrips. The report of the Bombay Stock Exchange dated 11 April 1996 further cemented this view.
In March, a petition was filed challenging the SEBI notification dated February 15 on which judgment was delivered by a single judge bench on the date May 6, 1996, in which the court directed interim relief to Alka Synthetics. On 4 July 1996 SEBI directed the Bombay Stock Exchange to credit the impounded monies to its Investors Protection Fund. Thereafter on the date July 14, 1996, the petition was amended and the order dated February 15 was challenged on the grounds of being violative of Article 300A of the Constitution of India. On October 17, 1996, SEBI called upon Alka Synthetics to appear before its committee on the question of impounding to which Alka Synthetics made no response and did not turn up on the day on which it was asked to. Therefore, this appeal has been filed before this court against the relief order given by the Single Judge Bench.
Statutes and Provisions discussed:
- Section 11 of the Securities and Exchange Board of India Act, 1992
- Article 300A of The Indian Constitution, 1950
Issues:
- Whether SEBI has the authority to impound or forfeit monies received by the stock exchange during the auction from the purchasers?
- Whether the order passed by SEBI is violative of Article 300A of the Constitution of India?
Arguments Advanced:
Arguments on behalf of the Appellant:
The Counsel appearing for the appellant contended that the order dated July 4 is only an interim order and has been passed to preserve the subject matter till the final decision is taken. The Counsel also contended that SEBI has the power to regulate the Stock Market which includes regulation through issuing prohibitory orders.
The appellant also contended that Section 11 of the Act makes it the duty of the Board to protect the interest of the investors to regulate the securities market and to work for its development.
Arguments on behalf of Respondent:
The Counsel appearing on behalf of the respondent contended that SEBI has no power to issue an order to impound the money and deprive the respondent of its property resulting in violation of Article 300A of the Constitution of India.
He further contended that the term ‘law’ used in Article 300A means a law made by the legislative authority and not an executive authority and SEBI being the latter, is transgressing its power limit. The respondents also contended that the Principles of Natural Justice has also not been followed.
Judgment:
The Court held that the order dated July 4, 1996, issued by the Securities and Exchange Board of India is valid and has been issued under the authority of law. The Court further held that there is no violation of Article 300A of the Constitution of India and hence, the finding of the single judge bench was withheld.
Ratio Decidendi
Issue 1:
The Court held that the legislation by which SEBI has been constituted is reformative legislation enacted to reform the economic conditions and it invests the SEBI with statutory powers to regulate the securities market to protect the interest of the investors and so that there is a healthy growth of the securities market. Therefore, the order dated July 4 cannot be said to be without the authority of law. On the reading of Section 11 and Section 11(2), it can easily be understood that SEBI is empowered to regulate the securities market to protect the interest of the investors and for this purpose, it can take whatever steps which it deems fit. The securities market is speculative markets and therefore its exigencies and measures to be taken to reform it cannot be comprehended beforehand. Thus, SEBI has been empowered under the act to take measures and such measures cannot be declared wrong just because they have not been laid down in advance.
Issue 2:
Court held that it had already held that the order dated July 4 is under the ‘Authority of Law’ as contemplated in Article 300A and hence no question of its violation is arising. It was further observed that the order dated July 4 does not deprive the respondent of its property. It is just not allowing the respondent to take always the money until the proceedings are pending.
Conclusion:
The Securities and Exchange Board of India has been constituted for the protection of the interest of the investors in securities and to promote healthy security exchange. For this purpose, SEBI has been empowered to issue such orders as it deems fit by considering the statue of the market as the exigency at hand.
Edited by Parul Soni
Approved & Published – Sakshi Raje
