2014 (5) TMI 901 - HC - Companies Law

Court upholds constitutionality of Securities Regulations 2012, ensuring market transparency and investor protection

UP. Stock Exchange Brokers' Association & Others Versus Security and Exchange Board of India & Another

UP. Stock Exchange Brokers' Association & Others Versus Security and Exchange Board of India & Another - TMI Issues Involved:1. Constitutional validity of the SECC Regulations, 2012.2. Alleged violation of Article 19(1)(c) of the Constitution.3. Alleged violation of Article 19(1)(g) of the Constitution.4. Ultra vires challenge to the SECC Regulations.5. Fit and proper person criterion.6. Ownership and governance structure of stock exchanges.Detailed Analysis:1. Constitutional Validity of the SECC Regulations, 2012:The petitioners challenged the constitutional validity of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC Regulations), framed by SEBI under the Securities Contracts (Regulation) Act, 1956 (SCRA) and the Securities and Exchange Board of India Act, 1992 (SEBI Act).2. Alleged Violation of Article 19(1)(c) of the Constitution:The petitioners argued that the SECC Regulations 'completely muzzle' the fundamental right guaranteed by Article 19(1)(c) of the Constitution, which allows citizens to form associations by choosing their members and directors. The court held that while the right to form an association is guaranteed, the right to recognition is not. The regulations do not alter the composition of the association but regulate the business and activities of stock exchanges, which is permissible under the law.3. Alleged Violation of Article 19(1)(g) of the Constitution:The petitioners contended that the SECC Regulations amount to a prohibition on the fundamental right to carry on business and trade under Article 19(1)(g) of the Constitution. The court applied the test of reasonableness and held that the regulations are not excessively restrictive. The requirements for minimum net worth, ownership dispersal, and governance structure are justified to ensure transparency, financial stability, and avoidance of conflicts of interest in the functioning of stock exchanges.4. Ultra Vires Challenge to the SECC Regulations:The petitioners argued that the SECC Regulations 'totally supplant' the provisions of the SCRA and the rules made thereunder. The court held that SEBI, in framing the SECC Regulations, acted within the statutory powers conferred by Sections 4, 8A, and 31 of the SCRA and Sections 11 and 30 of the SEBI Act. The regulations are consistent with the provisions of the SCRA and the rules, and SEBI has not acted ultra vires.5. Fit and Proper Person Criterion:The petitioners challenged the 'fit and proper person' criterion under Regulation 20, arguing it is vague and arbitrary. The court held that financial integrity, reputation, character, and honesty are reasonable considerations for determining eligibility. The decision of SEBI on whether a person is fit and proper must be based on objective analysis and reasons, which are subject to appellate jurisdiction under Section 15T of the SEBI Act.6. Ownership and Governance Structure of Stock Exchanges:The SECC Regulations impose restrictions on the ownership and governance structure of stock exchanges, including a minimum net worth requirement of Rs. 100 crore, dispersal of ownership, and the inclusion of public interest directors on the governing board. The court upheld these provisions, noting that they are designed to ensure the orderly development and functioning of the securities market, prevent conflicts of interest, and maintain investor confidence.Conclusion:The court dismissed the petition, holding that the SECC Regulations are not ultra vires the SCRA, do not infringe the fundamental rights under Articles 19(1)(c) and 19(1)(g), and are justified in the interest of maintaining transparency, financial stability, and integrity in the securities market. The regulations are within the statutory powers conferred upon SEBI and are reasonable and necessary to achieve the objectives of the SCRA and the SEBI Act.