Calcutta High Court Sets Aside Calcutta Stock Exchange Penalty Against Dalmia Securities Over Invalid Board

The Calcutta High Court has set aside a penalty order passed by the Calcutta Stock Exchange Ltd (CSE) against Dalmia Securities Pvt Ltd, holding that the decision was taken by an unlawfully constituted governing board. The court, however, upheld the validity of the underlying investigation.

Justice Sabyasachi Bhattacharyya partly allowed the writ petition filed by Dalmia Securities and its director. He held that the investigation into alleged violations was legally valid, but the final order could not stand as it was passed by a board comprising only public interest directors, without mandatory shareholder directors, in violation of Regulation 23 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018.

“As per the above discussion, sub-clause (4) of Regulation 23 per se does not equate a Managing Director with a Shareholder Director but merely brings the former within the category of the latter for specific purposes of compliance of Regulation 23. Thus, the SEBI exemption regarding appointment of Managing Director, due to the funds crunch of CSE and on its own prayer, cannot automatically imply that the appointment of Shareholder Directors in the Governing Board was also exempted” the court said

The proceedings arose from alleged irregular trading by Dalmia Securities dating back to 2002. The CSE issued show cause notices in March 2004 alleging synchronised and off-market transactions in breach of its bye-laws. The matter remained unresolved for years, with correspondence continuing between the parties.

In 2022, Dalmia Securities moved the high court after the CSE withheld its excess security deposit. On February 2, 2022, the court directed the exchange to take a final decision within 45 days. That order was later set aside by a division bench, which sent the matter back for fresh consideration.

The CSE subsequently passed a final order on March 15, 2022, imposing penalties. Dalmia challenged the decision, citing inordinate delay in passing of the order. It also raised issues such as the absence of a valid show cause notice, violation of natural justice, and the availability of arbitration as an alternative remedy.

The court rejected all these objections.

It held that adequate notice and opportunity had been given and that the investigation remained alive. It also clarified that SEBI's exemption related only to the appointment of a managing director.

However, the court struck down the penalty order due to the improper constitution of the CSE's governing board. It directed the exchange to reconstitute the board and take a fresh decision. The security deposit may continue to be withheld until then.