Calcutta High Court upholds validity of SEBI’s Exit Policy and SECC Regulations; directs Calcutta Stock Exchange to comply with SECC Regulations

calcutta high court

Calcutta High Court: In an appeals file by Calcutta Stock Exchange Limited against two writ petitions challenging a letter issued by the Securities and Exchange Board of India (SEBI), and further actions taken by SEBI under the Exit circular, a division bench comprising of Tapabrata Chakraborty* and Raja Basu Chowdhury, JJ., held that SEBI’s Exit Policy and Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC Regulations) are valid and in consonance with statutory provisions. The Court directed the Calcutta Stock Exchange Limited to establish a clearing corporation or tie up with an existing one within six months to comply with SECC Regulations, failing which SEBI could take further steps in accordance with the law.

Factual Matrix

In the instant matter, the appellant, Calcutta Stock Exchange Limited, preferred present appeals challenging the judgment delivered in two writ petitions by Single Judge the filed against respondent, SEBI. The first writ petition challenged a letter issued by SEBI on 03-11-2014, calling upon the appellant to apply for voluntary exit, while the second writ petition was filed against further steps taken by SEBI under the Exit circular. The single-judge bench framed issues pertaining to the legality of SEBI’s actions, including the validity of the Exit Policy and SECC Regulations.

Moot Point

  1. Whether the Exit Policy of SEBI, as promulgated by the circular dated May 30, 2012, is in consonance with Section 5 of the Securities Contracts (Regulation) Act, 1956 (SCR Act)?

  2. Was the appellant obligated to apply for the continuance of its clearing house business in accordance with the SECC Regulations?

  3. Is the procedure undertaken by SEBI to close the appellant’s clearing house business vitiated by the breach of the principles of natural justice?

  4. In the facts of this case, is SEBI justified in taking steps to make the appellant exit the market compulsorily?

Parties’ Contentions

The appellant argued that SEB’’s Exit Policy and SECC Regulations were not in consonance with the SCR Act and violated principles of natural justice. It was contended that the imposition of conditions, such as a minimum annual turnover of Rs.1000 crore, was arbitrary and without a rational basis. Additionally, the appellant challenged SEBI’s authority to compel CSE to set up a separate clearing corporation. On the other hand, SEBI defended its actions and contended that their actions were aimed at protecting investors and regulating the securities market. SEBI justified the conditions imposed under the Exit Policy and SECC Regulations based on recommendations from the Bimal Jalan Committee.

Court’s Assessment

The Court observed that in the circular issued by the SEBI, it is clearly mentioned the circular is issued in exercise of powers conferred under Sections 11(1) and 11(2)(j) of the SEBI Act, 1992 read with Section 5 of the SCR Act “to protect the interest of investors in securities and to promote the development of and to regulate the securities market.” The Court held that SEBI had the statutory authority to issue such regulations issued with a particular object, i.e., to protect investors and regulate the securities market.

The Court stated that “such regulation is permissible because there is a serious element of public interest involved in the activities of stock exchanges. Stock exchanges produce, as the Jalan Committee noted, a public good. The public has a vital interest in ensuring that the determination of the prices of securities and the transactional operations which are put through stock exchanges, are free from taint.” The Court opined that the regulations which define the conditions for recognition, of minimum net worth, composition of the board of directors, dispersal of ownership and norms for governance, do not infringe any legal right of the stock exchange. The Court cited U.P. Stock Exchange Brokers’ Assn. v. SEBI, 2014 SCC OnLine All 8608 and Nikhil T. Parikh v. Union of India, 2014 SCC OnLine Guj 359 and stated that the validity of the Exit policy and the SECC Regulations have already been upheld in the above cited precedents

The Court noted that the SEBI has “a force of law and is binding to all the stock exchanges in the country” and upheld the validity of SEBI’s Exit Policy and SECC Regulations, finding them in consonance with the SCR Act. Additionally, the Court ruled that the appellant was obligated to comply with the SECC Regulations and set up a separate clearing corporation. The Court noted that the appellant failed to comply with SECC Regulations by not applying for permission under the SECC Regulations, leading to SEBI’s closure of the appellant’s clearing business.

The Court found no fault in SEBI’s actions, especially since the appellant had been given opportunities to comply but failed to do so. However, considering the unique circumstances of the case and the longstanding presence of the appellant in the market, the Court directed the appellant to establish a clearing corporation within six months to achieve the prescribed net worth. Failure to do so would allow SEBI to take necessary steps in accordance with the law.

Court’s Decision

The Court disposed of the appeals and all connected applications with the direction for the appellant to comply with SECC Regulations within six months, failing which SEBI would be free to take further action. No costs are awarded in this case.

[Calcutta Stock Exchange Ltd. v. SEBI, 2024 SCC OnLine Cal 1566, order dated 19-02-2024]

*Judgment by Justice Tapabrata Chakraborty

Advocates who appeared in this case:

Mr. Soumendra Nath Mookherjee, Sr. Adv., Mr. Arunabha Deb, Mr. Deepan Kumar Sarkar, Mr. Saptarshi Banerjee, Mr. Ayush Jain, Ms. Deepti Priya, Counsel for the Appellants

Mr. Hirak Kumar Mitra, Sr. Adv., Mr. Tilak K. Bose, Sr. Adv., Mr. Prasanta Kr. Dutt, Mr. Rupak Ghosh, Mr. Susanta Kumar Dutt, Mr. Syamantak Banerjee, Counsel for the SEBI

Mr. Anunay Basu, Counsel for the Indian Clearing Corporation Ltd.

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