DR. D.Y.CHANDRACHUD, J.

1. Rule, by consent returnable forthwith. With the consent of Counsel and at their request the Petition is taken up for hearing and final disposal.

2. The Whole Time Member of the Securities and Exchange Board of India has rejected an application filed by the Petitioner for permission to undertake business as a Stock Exchange, other than for the Currency Derivatives Segment. The order is under Section 4 of the Securities Contracts (Regulation) Act, 1956 (SCRA) and Sections 11(1) and 19 of the Securities and Exchange Board of India Act, 1992. The Petition challenges the legality of the order.

3. For convenience of exposition, this judgment is divided into Parts, which are as follows:

? I - Facts (Paragraphs 4-27).

? II - Show Cause Notice by SEBI and the Impugned order. (Paragraphs 28-30)

? III – Submissions (Paragraphs 31-36).

? IV – The SCRA and MIMPs Regulations (Paragraphs 37-46).

? V - Role of Stock Exchanges (Paragraphs 47-53).

? VI – Regulation 4 and Regulation 8 (Paragraphs 54-55).

? VII – The process of dilution (Paragraphs 56-57).

? VIII – Share warrants (Paragraphs 58-62).

? IX – Buy back arrangements (Paragraphs 63-66).

? X – Duty of disclosure (Paragraphs 67-69).

? XI – Legality of buy backs (Paragraphs 70-81).

? XII – Persons Acting in concert (Paragraphs 82-93).

? XIII – The Validity of the impugned order (Paragraphs 94-103).

? XIV – Conclusion (Paragraph 104).

I : Facts.

4. The Fourth Respondent, Multi Commodity Exchange of India Limited, who is a promoter of the Petitioner made an application on 12 August 2008 for recognition of the Petitioner as a Stock Exchange. The Petitioner was incorporated on 14 August 2008 and received a certificate for commencement of business on 19 August 2008. The Petitioner has two promoters, Financial Technologies (India) Limited (FTIL) and Multi Commodities Exchange of India (MCX), the Third and the Fourth Respondents. On 22 August 2008, the Petitioner applied to SEBI for the grant of recognition as a Stock Exchange under the provisions of Section 3 of the SCRA. On 23 August 2008, SEBI granted an in-principle approval to the Petitioner to set up a Stock Exchange initially in the Currency Derivatives Segment in accordance with the SCRA and its Regulations. On 18 September 2008, SEBI addressed a letter to the Petitioner granting recognition under Section 4 of the SCRA for operating a Stock Exchange for a period of one year commencing on 16 September 2008 and ending on 15 September 2009. The approval was subject to various conditions, among them being the following:

“Full compliance with the provisions of the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges) Regulations, 2006 within one year from the date of recognition of the stock exchange.”

The acronym MMIPS Regulations will be utilised in this judgment for those Regulations.

5. The Petitioner commenced operations in the Currency Derivatives Segment on 7 October 2008. The MIMPS Regulations have a background. In August 2002, a Committee headed by Mr.Justice M.H.Kania, former Chief Justice of India recommended that (i) Stock Exchanges should be corporatised and demutualised; and (ii) Ownership of Stock Exchanges should not be concentrated in the hands of a single entity or groups of related entities. Parliament introduced Sections 4A and 4B into the SCRA to foster the separation of ownership and control of stock exchanges from their trading members by implementing a scheme of corporatisation and demutualisation. When the MIMPS Regulations were issued in 2006, they were intended to provide for corporatisation and demutualisation of old Stock Exchanges and diversification of the ownership of Stock Exchanges. Full compliance with the provisions of MIMPS Regulations was mandated by SEBI in this background on 18 September 2008 when it granted recognition to the Petitioner for a period of one year under Section 4 of the