TaxTMI 
TaxTMI 
2015 (1) TMI 204
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....Regulation) (Stock Exchange and Clearing Corporations) Regulations, 2012, issued by the Securities Exchange Board of India (for short, 'SEBI') including the notice dated 28th November 2012 issued by the VSEL on the grounds, inter alia, that the impugned circulars, regulations and notice are ultra vires the Constitution of India and are contrary to the provisions of the Securities Contracts (Regulation) Act, 1956 and the Companies Act, 1956. 3. According to the petitioners, they are Trading Members and shareholders of the VSEL and have preferred the petition in their personal capacity as the Trading Members and also as a representative petition on behalf of the other Trading Members of the VSEL. 4. The respondent no.1 is the Union of India. The respondent no.2 is the Securities and Exchange Board of India established under the Securities and Exchange Board of India Act, 1992 (for short, 'SEBI Act') for the purpose of carrying out the functions assigned to it under the Securities Contracts (Regulation) Act, 1956 (for short, 'SCRA') and the SEBI Act. The respondent no.3 is the Vadodara Stock Exchange Limited of which the petitioners are Trading Members and sh....
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....ining Centre, Investor Information Centre, well-equipped library, etc. It has also developed advanced technological systems for its operations. 8. In or around the period between 1996 and 1998, due to the expansion of terminals of the NSE and BSE all over the country, the trading volume at all the RSEs, including the VSEL, started dwindling. In order to revive the fortunes of the RSEs, the SEBI issued a circular dated 26th November 1999 (subsequently modified by circular dated 16th December 1999) permitting the RSEs to acquire the membership of the NSE and BSE by floating a subsidiary company which would be permitted to acquire membership rights in the BSE and NSE. According to the provisions of the said circular, members of the Stock Exchange were required to register themselves as sub-brokers of the subsidiary to enable them trade through the subsidiary. 9. Pursuant to this, in the year 2000, the VSEL established and promoted a subsidiary company called 'VSE Stock Services Limited' ('VSSL') for acquiring membership of the BSE and NSE. The VSSL is a professionally managed trading and clearing member in cash segment of the BSE and NSE. The VSSL has had an annual t....
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....ointed date (which the SEBI would appoint). Section 4B provided for submission of a Scheme for Corporatisation and Demutualisation, approval and consequent publication thereof by the SEBI. 13. At the time of approving the Scheme, the SEBI has certain powers to restrict the voting rights of shareholder Trading Members, the rights of the Shareholders or Trading Members to appoint representative on the Governing Board and the maximum number of representatives of Trading Members (not exceeding one fourth) to be appointed on the Governing Board. Furthermore, notwithstanding anything to the contrary contained in the SCRA or any other law, agreement, award, judgment, decree or instrument, upon publication, the Scheme would become binding on all persons and authorities. 14. Pursuant to this, in 2005, the VSEL was converted into a company limited by shares and also submitted its Corporatisation and Demutualisation Scheme, 2005 providing, inter alia, that 51% shareholding would be of the public. After certain revisions, the said Scheme was approved by the SEBI under Sections 4B(6) and (7) of the SCRA on 15.9.2005. 15. The Scheme contained several provisions with regard to the shareholding....
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.... be amended after the Due Date in accordance with the applicable laws, provided that no such amendment is inconsistent with any provision of this Scheme. 12. Compliance with this Scheme 12.1 VSEL shall ensure compliance with the provisions of this Scheme at all times and shall not do anything contrary to the provisions of this Scheme. 12.2 Without prejudice to the generality of the provisions in clause 12.1, VSEL shall continuously comply with the provisions in clauses 4.3, 6, 7.3, 7.4, 7.5, 7.6, 9.2, 8.3, 9.3 and 11. 12.3 VSEL shall report compliance with the provisions of this Scheme in such manner as may be required by SEBI from time to time. 16. According to the provisions of the Scheme read with Section 4B(8) of the SCRA, within 12 months from the date of publication of the SEBI's order approving the Scheme, the VSEL was required to ensure that atleast 51% of its equity shares were held by public other than shareholders having trading rights either by fresh issue of shares to the public or by any other means specified by the SEBI. Moreover, on and from the due date, no shareholder, who was also a Trading Member, would have voting rights exceeding 3%. It is clear that ....
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....ent nonexecutive Directors. For the purpose of this clause, the term (i) 'Independent Director' shall have same meaning as assigned to it in the Corporate Governance norms specified by SEBI under the Listing Agreement. (ii) 'strategic partner/majority shareholder' shall mean a shareholder who along with persons acting in concert with him holds 15% or more shares or voting rights in the Exchange. 1.3: General requirements 1.3.1 The Directors, except the Chief Executive such as CEO, ED or MD, etc. shall be elected by the shareholders. 1.3.2. ** ** ** 1.3.3 'Trading Member Directors' shall be elected from amongst the Trading Members. 1.3.4 'Shareholder Directors' shall be elected from amongst the persons, who are not Trading Members or Associates of Trading Members. .......... 1.3.5 'Public Interest Directors' shall be elected from amongst the Persons in the SEBI constituted panel. A person shall not act as 'Public Interest Director' on more than one Stock Exchange simultaneously. 1.3.6 The Chairman shall be elected by the Governing Board from amongst the non-executive non-Trading Member directors. 1.3.7 Manner of election, ap....
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....o the public through issue of prospectus or issue of shares on private placement basis to persons other than shareholder having trading rights or their associates, subject to the SEBI's approval. The said regulations also provided that no person could hold more than 5% in the paid up equity capital of a recognised Stock Exchange and that no person could either individually or together with persons acting in concert with him acquire and/or hold more than 1% of the paid up equity share capital of a recognised Stock Exchange unless he is a fit and proper person and has taken prior approval of the SEBI. 21. In the backdrop of the aforesaid existing conditions/stipulations, since it was necessary to ensure that, within the stipulated period, 51% of the equity share capital was held by the public other than shareholders having trading rights, the VSEL decided to go for the issue of shares on private placement basis and, therefore, issued an Information Memorandum for Inviting Expression of Interest. Pursuant to this, by issuing 51% of its equity shares to the public, the VSEL has complied with the said condition. Thereafter, the Governing Board of the VSEL consisted of 3 Trading Mem....
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....e included reviewing and make recommendations on the said aspects. The Committee gave its report on 22nd November 2010, making several recommendations which would not only be contrary to the SCRA and the Companies Act, 1956, but would also affect the fundamental and legal rights of the Stock Exchanges, their Trading Members, investors and listed companies. 25. After a period of more than 7 years since the approval of the Scheme, the SEBI has recently issued a Circular dated 30th May 2012, modifying the earlier Circular dated 29th August 2008 and, inter alia, containing the following provisions: 2. Process of Derecognition and Exit 2.1 ** ** ** 2.2: Stock Exchanges where the annual turnover on its own platform is less than Rs. 1000 crore can apply to SEBI for voluntary surrender of recognition and exit at any time before the expiry of two years from the date of issuance of this circular. 2.3: If the Stock Exchange is not able to achieve the prescribed turnover of Rs. 1000 crores on continuous basis or does not apply for voluntary surrender of recognition and exit before the expiry of two years from the date of this Circular, SEBI shall proceed with compulsory derecognition and ....
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....trength of 12 posts (excluding Managing Director), 6 posts were reserved for Public Interest Directors and 6 posts were reserved for Shareholder Directors. Sometime thereafter, the Governing Board of the VSEL consisted of only 1 Public Interest Director and 3 Shareholder Directors and the rest of the posts were vacant. 30. On 28th November 2012, the Governing Board of the VSEL issued a notice calling an Extra Ordinary General Meeting of the shareholders of the VSEL to be held on 29th December 2012. According to the said notice, the business to be transacted therein is the appointment of 4 Directors in the category of "Shareholder Director". The said notice is completely contrary to the Scheme and the Companies Act, 1956. Moreover, in view of the Regulations, Trading Members of the VSEL who are also shareholders will not be permitted to vote in the election of the 4 persons who are to be appointed as Shareholder Directors. 31. Thereafter, the SEBI issued another Circular No. CIR/MRD/DSA/33/2012 dated 13th December 2012, inter alia, stipulating that every recognised Stock Exchange having net worth less than Rs. 100 crore as on the date of commencement of the Regulations would be re....
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....rs claiming to be the Trading Members and shareholders of the VSEL have filed the petitions on the premise that their fundamental right as enshrined under Article 19(1)(g) of the Constitution of India has been violated and such violation is the foundation for invoking the jurisdiction of the High Court under Article 226 of the Constitution of India. The rights that can be enforced under Article 226 of the Constitution of India ordinarily must be the rights of the petitioners as an individual except in cases of habeas corpus, quo warranto and public interest litigation. The petition of the present nature is not maintainable and none of the fundamental rights or any other legal rights of the petitioners could be said to have been infringed by issuance of the impugned circulars. (2) The petition mainly highlights the problems caused for the Stock Exchanges on account of the impugned regulations and circulars. The Stock Exchange is not the petitioner before the Court nor it has any grievance with the impugned regulations and circulars. The petitioners who are indisputably the Trading Members are not being divested of their right to trade as the SEBI had permitted the VSEL to form a su....
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.... (9) Out of 23 recognized Stock Exchanges, only 3 Stock Exchanges which include the VSEL, have not put forward any plan for revival or any indication to exit. Three Stock Exchanges have already exited from the business of Stock Exchange, viz. HSE, SKSE, Coimbatore Stock Exchange, and eight Stock Exchanges have applied voluntarily to be derecognized as Stock Exchanges. None of the Stock Exchanges have challenged the provisions of the impugned regulations or circulars. (10) The VSEL is in a pathetic condition. There has been no trading in the VSEL since April 30, 2003. According to the SEBI circular dated 7th October 2009, the Stock Exchanges which are defunct or have been inactive for more than six months are required to seek the approval of the SEBI before commencing with the trade. Such approval is granted after conducting the necessary inspection of the concerned Stock Exchange. This is to ensure that the systems are running effectively in the Stock Exchange and there is no potential risk to the investors using the terminal of such Stock Exchanges. The VSEL has not sought any approval from the SEBI for trading past couple of years. However, the renewal of recognition has been s....
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.... the order. In terms of the Notification dated 13th September 1994, the SEBI was invested with power to grant/withdraw recognition to a Stock Exchange including the power exercisable under following provisions of the SCRA: Section Nature of Power 3 Application for recognition of Stock Exchange 4(1) Grant of recognition to Stock Exchange 4(2) Conditions for grant of recognition of Official Gazette 4(3) Publication of grant of recognition in Official gazette 4(4) Refusal of recognition to be communicated 5 Withdrawal of recognition to Stock Exchange 7A(2) Approval of rules restricting voting rights, etc. 13 Contracts in notified areas illegal 18(2) Applicability of provisions of section 17 to spot delivery contracts 22 Right of appeal to SEBI against such refusal, omission or failure 28(2) SCR Act not to apply to any class of contracts Thus, the SEBI exercises powers concurrently with the Central Government under the SCRA. 37. In addition to the aforesaid delegated powers, the SEBI has also been conferred powers directly by the Parliament under the provisions of the SCRA which include the power- (a) to approve and notify the Scheme in respect of Corporatisation and Dem....
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...., Sections 4A and 4B were inserted in the SCRA vide Securities Laws (Amendment) Act, 2004, (w.e.f. 12th October 2004). Sections 4A and 4B of the SCRA enabled the SEBI to put into place a mechanism of separation of ownership and control of Stock Exchanges from Trading Members by implementing a Scheme for Corporatization and Demutualisation. Conflicts of interest of Trading Members were sought to be obviated by ensuring a disassociation between members who trade on the exchange and control over the ownership of the exchange. Further, every recognised Stock Exchange, in respect of which the Scheme for Corporatization or Demutualisation had been approved was mandated to ensure that at least fifty-one per cent of its equity share capital is held by the public other than shareholders having trading rights, in accordance with the regulations made by the SEBI. For this purpose, the SEBI notified SC(R) (Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges) Regulations, 2006 (hereinafter referred to as 'MIMPS Regulations') which were subsequently repealed by the impugned regulations. 41. Although after corporatisation and demutualisation of Stock Ex....
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....the SEBI. 44. After the demutualization process Stock Exchanges had become for-profit companies and were free to pursue their economic interest objectives, which was in conflict with their role as a first level regulator. Therefore, there was a need to formulate a regulatory policy to resolve the conflict of interest issues and to have a balance between profit making objective of a Stock Exchange versus its regulatory role, conflict between the profit making entity versus its place in security market as a public utility. Therefore, the SEBI appointed an expert committee under the Chairmanship of Dr.Bimal Jalan, Ex-Governor, Reserve Bank of India, to examine issues arising from the ownership and governance of Market Infrastructure Institutions viz. Stock Exchanges, Clearing Corporations and Depositories. The said committee submitted its report to the SEBI on 22nd November 2010, after following consultative approach. 45. The respondent No.3 had given its comments on the said report. The Federation of Indian Stock Exchanges (FISE) of which respondent No.3 is also a member, had also given its comments on the said report. 46. The recommendation of the Jalan Committee and the public c....
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..../eligibility norms, ownership structure and governance norms, etc for Stock Exchanges and clearing corporations. One of the major requirements which were imposed under these regulations was that the board of Stock Exchanges and clearing corporations shall not have Trading Member/clearing member representation and their associates and agents and shall consist only of Public Interest Directors and shareholder directors. 49. The norms restricting the appointment of Trading Members on the board of Stock Exchange was based upon the reasons that the Trading Members on the board of Stock Exchange are privy to confidential information and have a conflict of interest in respect of the following issues: (a) Companies listed on Stock Exchanges are required to make various disclosures to Stock Exchanges in terms of listing agreement entered with Stock Exchanges. These disclosures contain price sensitive information having potential to influence the price of the shares of the company, which may not be available to general public at large, at that time. The presence of Trading Members on the board of Stock Exchanges who trades in securities has the effect of compromising the confidentiality of....
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....nce ♦ Deficiencies in Risk Management System ♦ Violation of exposure limits ♦ Delay in deactivating terminals ♦ Delayed action on dishonoured cheques of margin payment ♦ Conflict of Interest in respect of the elected board members of the exchange were interfering in the day-to-day matters of the exchange. 52. However, the SEBI Board, giving due regard to the need of operational and commercial expertise of Trading Members, in the impugned regulations, a concept of Advisory Committee (comprising only of Trading Members and the Managing Director) has been introduced whose task will be to advise the Board of Stock Exchange on the non-regulatory and operational matters including product design, technology, charges and levies. Advisory Committee has been mandated to have at least four meetings in a year with not more than three months gap between two meetings. Further, impugned regulations mandate that the recommendations of the Advisory Committee shall be placed in the ensuing meeting of the Governing Board of the recognized Stock Exchange for consideration and appropriate decision of the Governing Board, and such recommendations along with the decisi....
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.... 1998 by 12 smaller Stock Exchanges for providing an additional trading platform where the shares listed on any of these 12 exchanges could be traded. Lack of interest on the part of investors in using the platform of the exchange resulted in lack of liquidity and consequently ICSE did not perform well. Since 2003-04, there is no trading on ICSE. The smaller Stock Exchanges were permitted to set up broking subsidiaries and obtain membership of the BSE and NSE to have access to the markets of BSE and NSE. The establishment of subsidiary broking entities were allowed to aid the Trading Members of the smaller Stock Exchanges for their benefit. In spite of the aforementioned efforts, the scope of the smaller Stock Exchanges became limited till they virtually lost their relevance, with the advent of modern telecommunication and information technology and the symbiotic interaction of technology and the markets, which facilitated a fundamental transformation of the market micro structure. Smaller Stock Exchanges took up ancillary activities such as training, investor education and depository participant services. The income generated from listing fees and the ancillary activities, return ....
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....icipants, merchants banks and other various intermediaries registered by the SEBI are required to comply with capital adequacy net worth specified by the SEBI. 58. The Depositories Act, 1996, prescribes a net worth requirement of Rs. 100 crore for depositories. Further, in the year 2008, the RBI-SEBI Standing Technical Committee while laying down the procedures for Exchange Traded currency futures prescribed net worth requirement of at least 100 crore rupees as an eligibility criteria for setting up of currency future segment in a recognized Stock Exchange. Further, in the year 2009, the SEBI Board decided that a new exchange shall have net worth of at least Rs. 100 crores. Taking it forward, the SEBI Board, in its meeting held on 2nd April 2012, decided to prescribe the net worth requirement of Rs. 100 crore which will be applicable to Stock Exchanges and Clearing Corporations, by way of impugned regulations. However, looking at the situation of the existing Stock Exchanges, they were allowed three years time to achieve the same. 59. The Bimal Jalan Committee also observed that MII (including Stock Exchanges) should be a well-capitalized entity so that the net worth of the MII i....
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....f assets of de-recognized Stock Exchanges. The annual trading turnover requirement for Stock Exchanges as imposed by the Exit Circular, is by virtue of the powers of de-recognition of Stock Exchanges, given to the SEBI in terms of Section 5 of the SCRA. Section 5 of the SCRA reads:- "If the Central Government is of the opinion that the recognition granted to a Stock Exchange under the provisions of this Act should, in the interest of the trade or in the public interest, be withdrawn, the Central Government may serve on the Governing Body of the Stock Exchange a written notice that the Central Government is considering the withdrawal of the recognition for the reasons stated in the notice, and after giving an opportunity to the governing body to be heard in the matter, the Central Government may withdraw, by notification in the Official Gazette, the recognition granted to the Stock Exchange." Exchange-wise Cash Segment Turn over Stock Exchange 2008-09 2009-10 2010-11 BSE 11,00,074 13,78,809 11,05,027 NSE 27,52,023 41,38,023 35,77,410 UPSE 89 25 0.12 Calcutta 393 1,612 2,597 Ahmedabad Nil Nil Nil Bangalore Nil Nil Nil Bhubaneswar Nil Nil Nil Cochin ....
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....4 Pune Stock Exchange 2003-04 15 Uttar Pradesh Stock Exchange 2010-11 16 Vadodara 2003-04 63. The impugned circular prescribes that the Stock Exchanges if they are unable to achieve a turnover of Rs. 1000 crore within a period of two years will have to exit. In this situation investors of exclusively listed companies who are unable to exit will be provided an opportunity to exit through Dissemination Board on the NSE and BSE. While this responsibility of providing exit to investors of exclusively listed companies is primarily of the concerned Stock Exchange through trading operations, however in view of nil trading this could not be achieved. 64. The trading at almost all smaller Stock Exchanges have declined and has come to nil in all except one Stock Exchange. Currently, out of the 17 regional recognized Stock Exchanges, trading occurs only at the Calcutta Stock Exchange. These Stock Exchanges can be termed as defunct Stock Exchanges for lack of sustainable operations and the shareholders of companies listed on these Stock Exchanges do not have exit option as these companies do not have listing on Stock Exchanges having nationwide trading terminal. The continued existen....
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....red to the total trading turnover in the country on an annual basis. If a Stock Exchange is not able to satisfy even this minimum amount, it may be inferred that neither the investors nor the Trading Members of VSEL, are interested in using the platform of such an exchange to deal in securities. The continued existence of such exchanges would be detrimental to the health and safety of the securities market. The trading volumes (equity and equity F&O) on all the Stock Exchanges during the last three years, is as follows: Trading Turnover details (Amount in Rs. crore) Name of the Stock Exchange 2009-10 2010-11 2011-12 BSE 13,78,809 11,05,027 6,67,498 NSE 41,38,023 35,77,410 28,10,892 CSE 1,612 2,597 5,991 UPSE 25 0.12 Nil VSEL Nil Nil Nil (The smaller 16 Stock Exchanges do not have any trading/ turnover) 66. From the above it can be seen that the condition of Rs. 1000 crore turnover prescribed is minuscule compared to the trading volumes on the other exchanges. Moreover, a time period of two years has been given to achieve the prescribed turnover of Rs. 1000 crores. In fact, the petitioners had stated in para 10 of the petition that "in or around th....
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....,099 21,884,983 24,444,205 Dividend from subsidiary 4,000,000 2,000,000 4,000,000 2,000,000 License fee & additional charges outside terminal 1,521,764 899,783 2,41,19,630 2,611,509 Infrastructure charges (from subsidiary as it shares infrastructure and Man power expenses) 2,286,900 2,515,590 2,767,152 2,898,924 70. As can be seen from the table above, the income of the VSEL is not from its core function for which it has been granted recognition. The loss of investment for shareholders, if any, is not caused on account of the regulatory structure reviewed by the SEBI, but on account of the investors and brokers not preferring to transact on the VSE. The regulator's functions are done in pursuance of the statutory mandate to protect investors, regulate and develop the securities market. Hence, the condition imposed by the SEBI is reasonable, just and in the interest of investors. 71. The averment by the petitioners that the SEBI has absolute control over the Governing Board and therefore they would not take any interest in promoting the growth of the Stock Exchange is absolutely incorrect, misleading, without basis and irrational. Firstly, the Directors on the....
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....ility criteria for setting up of currency future segment in a recognized Stock Exchange. Further, in the year 2009, the SEBI Board decided that a new exchange shall have net worth of at least Rs. 100 crore. Taking it forward the SEBI Board in its meeting held on 2nd April 2012 decided to prescribe the net worth requirement of Rs. 100 crore which will be applicable to the Stock Exchanges and Clearing Corporations, by way of impugned regulations. However, looking at the situation of existing Stock Exchanges they were allowed three years time to achieve the same. 73. The Bimal Jalan Committee also observed that MII (including Stock Exchanges) should be a well-capitalized entity so that the net worth of the MII is available a last resort to meet exigencies and ensure that it is able to remain as a going concern. In view of the above, the impugned regulations prescribed Rs. 100 crore net worth criteria, which is very reasonable considering the fact that the functional exchanges already had a higher net worth as follows: ♦ NSE - Rs. 3,316 crore ♦ BSE - Rs. 1463.2 crore ♦ MCX-SX - Rs. 240.39 crore ♦ CSE - Rs. 100 crore ♦ USEIL - Rs. 109 crore 74. Secti....
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..... 76. If the SEBI's power to modify schemes for individual Stock Exchanges under Section 4B is recognized, the logical extension of this, considering the SEBI's broad regulatory powers under the Act, would be that the SEBI also has powers with regard to ownership and governance of all Stock Exchanges in general. This power has been exercised by way of framing of regulations. Those aspects of ownership and governance that needed to be clarified by way of circulars, was done so and accordingly the impugned the SEBI Circular dated 13th December 2012 was issued. 77. Both the impugned SECC Regulations as well as impugned Exit Circular dated 30th May 2012 were issued by the SEBI after due consultation with all stakeholders including the recognized Stock Exchanges, even though there is no statutory mandate for SEBI to make consultations before framing regulations or issuing circulars. In fact, the VSE also had submitted its views on the Bimal Jalan Committee Report and the SMAC Committee decisions (which were the eventual basis on the which SECC Regulations and Exit Circular were framed). Therefore to state that the policy was framed without due consultation is not factually cor....
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....e SCRA, the provisions of the Companies Act cannot apply if they are inconsistent with the Act or regulations made thereunder. In the context of Arbitration Act, 1996, the Bombay High Court had noted in the case of Stock Exchange v. Vinay Bubna [1999] 20 SCL 175 that bye-laws made by the Stock Exchange in pursuance of the mandate under the Securities Contracts (Regulation) Act, 1956 are statutory in nature and, therefore, would prevail over the provisions of the Arbitration Act, 1996. Using the same rationale, subordinate legislation under the SCRA would also necessarily prevail over the provisions of the Companies Act, 2013 since the SCRA is a special statute dealing with Stock Exchanges, though they may be companies. The transition of Stock Exchanges from 'Association of Persons' to companies have, in fact, been promoted by the SEBI under the provisions of the SCRA. Therefore, once they have been corporatized and demutualised in terms of the SCRA, the petitioners cannot argue that the provisions of the SCRA and the SEBI's regulatory purview will no longer prevail. The petitioners' argument amounts to stating that under the provisions of the SCRA, the SEBI has dive....
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....in terms of Section 4B (1)) approving the scheme of corporatisation and demutualisation (hereinafter referred to as C&D Scheme) of respective Stock Exchanges, contain a condition to the effect that the SEBI may change the terms of the Scheme in the interest of investors or in the public interest. In particular, para 8.0 of the C&D Scheme of VSE reads as follows: "SEBI reserves rights to amend, alter or modify the Scheme in the interest of the trade and in the public interest and in furtherance of the objectives of the corporatisation and demutualisation of the Stock Exchange." 86. The SCRA gives overriding effect to C & D Scheme once it is approved by the SEBI. Such an approval may be conditional (as mentioned above) or unconditional. Accordingly, Corporatisation & Demutualisation Schemes have overriding effect subject to any condition imposed by the SEBI. The impugned regulations must be seen as directions of the Board modifying the provisions of the Scheme, especially since the impugned regulations, inter alia, deal with the manner of demutualisation. 87. The C & D Scheme of the respective Stock Exchanges, once approved by the SEBI, was required to be incorporated in the Artic....
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....or providing efficient platform/transaction facility. This may affect to the companies listed on such Stock Exchanges and investors at large. Stock Exchanges provide transaction facility to investors and, thus, discover the price of securities traded on them. Prices provide the signal for efficient allocation of financial resources across corporations. In this sense, the role of the Stock Exchanges in efficient allocation of resource in the economy is of great significance. Recognition to Stock Exchanges is provided for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Traditionally, under the open outcry system, a Stock Exchange was understood to be a place where buyers and sellers met in order to buy/sell securities. Over a time, technology has replaced the open outcry system and automated trade engines execute trades based on a price time priority or any other algorithm. To trade through a Stock Exchange, the investor has to become a client of a registered Trading Member of a particular Stock Exchange. Stock Exchanges have been entrusted with various regulatory responsibilities for ensuring market integrity and for prot....
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....nd Demutualisation. 92. Corporatisation and Demutualisation of Stock Exchanges was implemented based on the amendment to the SCRA, 1956 through insertion of Sections 4A and 4B. The basis for this amendment actually flows from the Joint Parliamentary Committee Report on Stock Market Scam and Matters Relating Thereto (2002). In Part I(IX)(4), dealing with the subject of "Demutualisation", the Joint Parliamentary Committee took note of the salient points of change envisaged to be achieved towards demutualisation - "...Separation of management from ownership For demutualisation, separation of management from ownership is required. Basically, the issue involved is composition of board of directors. To achieve this, either the NSE model may be followed or any of the other patterns followed by international Stock Exchanges which have been corporatized and demutualised could be adopted. Under the NSE pattern there is no broker representation on the Board of the National Stock Exchange of India Limited. NSE has an Executive Committee which has broker representation." 93. The JPC Report stated that there are several models of demutualisation globally. In any case, the JPC recognised the n....
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.... Rs.92.12 crore Rs.82.60 crore 27.08.2013 Rs.174.72 crore Rs.12.60 crore Rs.162.12 crore 03.09.2013 Rs.174.72 crore Rs.15.37 crore Rs.159.35 crore 10.09.2013 Rs.174.72 crore Rs.13.46 crore Rs.161.26 crore 17.09.2013 Rs.174.72 crore Rs. 8.58 crore Rs.166.14 crore 24.09.2013 Rs.174.72 crore Rs.11.45 crore Rs.163.27 crore Post Dated Cheques deposited with the NSEL were dishonoured on a regular basis. As a result, investors have suffered greatly. It is estimated that around 5500 crore rupees are owed to various investors. (iii) The gross mismanagement seen in the NSEL matter was further compounded by the lack of adequate net worth leading to the defaults illustrated in para 5. The FMC, in its order dated 17th January 2013 has observed the following "...establish the fact that the entire governance of the company including planning, directing and controlling of its activities was utterly lacking in transparency, integrity, competence, compliance with law, and most importantly an honesty of intent to meet its stated objectives of offering a platform for genuine trading in commodities. (iv) The NSEL issue as brought out in t....
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.... Board, VADODARA - 390 005. For VADODARA Stock Exchange LTD. Sd/ (M.G.Sheikh) Officiating Managing Director Date : 28th November, 2012" 96. The total strength of the Governing Board shall not exceed twelve (excluding the Managing Director) comprising of atleast 50% public interest directors and the balance shall be the shareholders' directors. 97. It has been denied that the impugned notice dated 28th November 2012 issued by the Governing Board of the VSEL is illegal or unreasonable in any manner. IV. Submissions on behalf of the petitioners : 98. Mr.Mihir Thakore, the learned senior advocate assisted by Ms.Amrita Thakore, the learned advocate appearing for the petitioners, vehemently submitted that the provisions of the circular and the regulations are violative of Articles 14 and 19(1)(g) of the Constitution of India. They do not constitute reasonable restrictions and are, therefore, ultra vires the Constitution of India and could be termed as arbitrary, unreasonable and illegal. 99. Mr.Thakore submitted that although a preliminary objection has been raised on behalf of the respondents as regards the maintainability of this petition, more particularly, the locus sta....
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....ircular cannot be termed as law. 104. Mr.Thakore submitted that Section 8 of the Act, 1956 is confined only to Section 3(2) of the Act and, therefore, the condition of Rs. 1000 crore turnover could not have been imposed in exercise of powers under Section 8(1) of the Act. 105. Mr.Thakore submitted that the conditions could have been prescribed only by the Central Government. Section 4(B) of the Act, 1956 could not have been exercised by the SEBI in exercise of powers under Section 11 of the SEBI Act. 106. Mr.Thakore laid much emphasis on the fact that the Scheme was approved by the SEBI and people were invited to invest at a time when there was no condition to achieve turnover of Rs. 1000 crore. To achieve the turnover of Rs. 1000 crore, adequate platform needs to be created and such a platform has to be created by the Board. 107. Mr.Thakore, in such circumstances referred to above, prays that there being merit in this petition, the same deserves to be allowed. V. Submissions on behalf of the respondent no.2 SEBI : 108. Mr.S.N.Shelat, the learned senior advocate assisted by Ms.Dharmistha Raval, the learned advocate appearing for the SEBI, has raised a preliminary objection as....
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....ctive in mind, the impugned circular and the regulations have been framed by the SEBI, and for such purpose, the SEBI relied on the Bimal Jalan Committee report as well as the report of the group on Corporatisation and Demutualisation of Stock Exchanges, headed by Justice M.H.Kania, Former Chief Justice of India, dated 30th January 2003. 115. Mr.Shelat submitted that the circular has a force of law and could be termed as a statutory circular. 116. Mr.Shelat lastly submitted that the SEBI is the statutory regulator of the securities market with the function of protecting the interest of the securities market, promotion of development of and regulation of the securities market. Being an expert statutory body, this Court may not substitute the views of such an expert adjudicator. Mr.Shelat submitted that the laws relating to economic activities should be viewed with greater latitude than laws touching the civil rights, such as freedom of speech, religion, etc. 117. In such circumstances referred to above, Mr.Shelat submitted that there being no merit in this petition, the same deserves to be dismissed. VI. ANALYSIS : 118. Having heard the learned counsel appearing for the parties....
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.... has wrongfully deprived him of something or wrongfully refused him something, or wrongfully affected his title to something ? Has he a special and substantial grievance of his own beyond some grievance or inconvenience suffered by him in common with the rest of the public ? Was he entitled to object and be heard by the authority before it took the impugned action? If so, was he prejudicially affected in the exercise of that right by the act of usurpation of jurisdiction on the part of the authority ? Is the statute, in the context of which the scope of the words 'person aggrieved' is being considered, a social welfare measure designed to lay down ethical or professional standards of conduct for the community ? Or is it a statute dealing with private rights of particular individuals ?" 125. In the aforesaid context, we propose to also rely upon the following observations of the Supreme Court in the case of Ghulam Qadir v. Special Tribunal [2002] 1 SCC 33, which has been subsequently relied upon by another bench of the Supreme Court in the case of Tashi Delek Gaming Solutions Ltd. v. State of Karnataka AIR 2006 SC 661 : "38. There is no dispute regarding the legal proposit....
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....by the ownership and management would be segregated to some extent from the trading rights) of Stock Exchanges. In this regard, Sections 4A and 4B were inserted in the SCRA, inter alia, containing the provisions whereby a scheme was required to be approved by the SEBI for corporatisation and demutualisation of each Stock Exchange. 131. In 2005, the VSEL was converted into a company limited by shares and submitted its Corporatisation and Demutualisation Scheme, 2005, providing, inter alia, that 51% share holding would be of the public. Therefore, a share holding of the Trading Members like the petitioners was reduced to 49%. 132. On 30th May 2012, the SEBI issued a circular stipulating a condition upon the Stock Exchanges of achieving a turnover of Rs. 1000 crore on a continuous basis on their own platform, failing which the SEBI would proceed to derecognise such Stock Exchanges. The SEBI, thereafter, issued the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporation) Regulations, 2012, which provides that no Trading Member or clearing member or their associates and agents shall be on the Governing Board of any recognised Stock Exchange. The SEBI also issued a ....
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....e segregation of ownership and management from the trading rights of the members of a recognised Stock Exchange in accordance with a scheme approved by the Securities and Exchange Board of India; (ac) "derivative" includes-- (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contact which derives its value from the prices, or index of prices, of underlying securities (b) 'Government security' means a security created and issued, whether before or after the commencement of this Act, by the Central Government or a State Government for the purpose of raising a public loan and having one of the forms specified in clause (2) of section 2 of the Public Debt Act, 1944 (13 of 1944); (c) 'member' means a member of a recognised Stock Exchange; (d) 'option in securities' means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities; (e) 'prescribed' means prescribed by rules made und....
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....icial interest of such investor in such debt or receiveable including mortgage debt, as the case may be; (ii) Government securities; and (iii) rights or interests in securities; (i) "spot delivery contract" means a contract which provides for,- (a) actual delivery of securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual period taken for the despatch of the securities or the remittance of money therefore through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality; (b) transfer of the securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository; (j) "Stock Exchange " means- (a) any body of individuals, whether incorporated or not, constituted before corporatisation and demutualisation under sections 4A and 4B, or (b) a body corporate incorporated under the Companies Act, 1956 whether under a scheme of corporatisation and demutualisation or otherwise, for the purpose of assisting, regulating or controlling the b....
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....nditions which the Central Government may prescribe under clause (a) of sub-section (1) for the grant of recognition to the Stock Exchanges may include, among other matters, conditions relating to, (i) the qualifications for membership of Stock Exchanges; (ii) the manner in which contracts shall be entered into and enforced as between members; (iii) the representation of the Central Government on each of the Stock Exchanges by such number of persons not exceeding three as the Central Government may nominate in this behalf; and (iv) the maintenance of accounts of members and their audit by Chartered accountants wherever such audit is required by the Central Government. (3) Every grant of recognition to a Stock Exchange under this section shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the Stock Exchange is situate, and such recognition shall have effect as from the date of its publication in the Gazette of India. (4) No application for the grant of recognition shall be refused except after giving an opportunity to the Stock Exchange concerned to be heard in the matter; and the reasons for such refusal sh....
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.... issue of shares for a lawful consideration or provision of trading rights in lieu of membership card of the members of a recognised Stock Exchange or payment of dividends to members have been proposed out of any reserves or assets of that Stock Exchange. (4) Where the scheme is approved under sub-Section (2), the scheme so approved shall be published immediately by - (a) the Securities and Exchange Board of India in the Official Gazette; (b) the recognised Stock Exchange in such two daily newspapers circulating in India, as may be specified by the Securities and Exchange Board of India, and upon such publication, notwithstanding anything to the contrary contained in this Act or any other law for the time being in force or any agreement, award, judgment, decree or other instrument for the time being in force, the scheme shall have effect and be binding on all persons and authorities including all members, creditors, depositors and employees of the recognised Stock Exchange and on all persons having any contract, right, power, obligation or liability with, against, over, to, or in connection with, the recognised Stock Exchange or its members. (5) Where the Securities and Exchan....
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....f the trade or in the public interest, be withdrawn, the Central Government may serve on the governing body of the Stock Exchange a written notice that the Central Government is considering the withdrawal of the recognition for the reasons stated in the notice, and after giving an opportunity to the governing body to be heard in the matter, the Central Government may withdraw, by notification in the Official Gazette, the recognition granted to the Stock Exchange; Provided that no such withdrawal shall affect the validity of any contract entered into or made before the date of the notification, and the Central Government may, after consultation with the Stock Exchange, make such provision as it deems fit in the notification of withdrawal or in any subsequent notification similarly published for the due performance of any contracts outstanding on that date. (2) Where the recognised Stock Exchange has not been corporatised or demutualised or it fails to submit the scheme referred to in sub-Section (1) of Section 4B within the specified time therefor or the scheme has been rejected by the Securities and Exchange Board of India under sub-Section (5) of Section 4B, the recognition gran....
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....is Act. (2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for- (a) the manner in which applications may be made, the particulars which they should contain and the levy of a fee in respect of such applications; (b) the manner in which any inquiry for the purpose of recognizing any Stock Exchange may be made, the conditions which may be imposed for the grant of such recognition, including conditions as to the admission of members if the Stock Exchange concerned is to be the only recognised Stock Exchange in the area; and the form in which such recognition shall be granted; (c) the particulars which should be contained in the periodical returns and annual reports to be furnished to the Central Government; (d) the documents which should be maintained and preserved under section 6 and the periods for which they should be preserved; (e) the manner in which any inquiry by the governing body of a Stock Exchange shall be made under section 6; (f) the manner in which the bye-laws to be made or amended under this Act shall before being so made or amended be published for criticism; (g) the manner in which applications may be made....
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.... contained in section 30 of the Securities and Exchange Board of India Act, 1992, the Securities and Exchange Board of India, may, by notification in the Official Gazette, make regulations consistent with the provisions of this Act and the rules made thereunder to carry out the purposes of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely: - (a) the manner, in which at least fifty-one per cent, of equity share capital of a recognised Stock Exchange is held within twelve months from the date of publication of the order under sub-section (7) of section 4B by the public other than the shareholders having trading rights under sub-section (8) of that section; (b) the eligibility criteria and other requirements under section 17A. (3) Every regulation made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the s....
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....hed; (f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation: Provided that the Board may, without prejudice to the provisions contained in sub-section (2) or subsection (2A), take any of the measures specified in clause (d) or clause (e) or clause (f), in respect of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognized Stock Exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market: Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned.] [Board to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities. Power to issue directions. 11B. Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied th....
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....power, such regulations may provide for all or any of the following matters, namely:- (a) the times and places of meetings of the Board and the procedure to be followed at such meetings under sub-section (1) of section 7 including quorum necessary for the transaction of business; (b) the terms and other conditions of service of officers and employees of the Board under sub section (2) of section 9; (c) the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which such matters shall be disclosed by the companies under section 11A; (d) the conditions subject to which certificate of registration is to be issued, the amount of fee to be paid for certificate of registration and the manner of suspension or cancellation of certificate of registration under section 12. Rules and regulations to be laid before Parliament. 31. Every rule and every regulation made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of th....
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.... therein enumerates the functions of the Board. Sub section (1) of section 11 provides that subject to the provisions of the Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. Sub section (2), provides without prejudice to the generality of sub section (1) certain specific measures for the purpose. One of the specific measures provided therein is the provision for registering and regulating the working of several types of capital market intermediaries, including Bankers to an Issue. The Act was further amended in 1995, because: - "On the basis of past experience of the Board a need has been felt to amend the said Acts (i.e. SEBI Act and Securities Contracts (Regulation) Act), in respect of certain categories of intermediaries, persons associated with the securities market and companies on matters relating to issue of capital and transfer of securities". 141. Accordingly, several amendments were made to the Act, most of them intended to strengthen the Respondent's role as protector of investors' interest. "In order to enable ....
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....to 'to the rest' and the might of public bodies which are degenerating into storehouses of inaction where papers do not move from one disk to another as a matter of duty and responsibility but for extraneous consideration leaving the common man helpless, bewildered and shocked. The malady is becoming so rampant, widespread and deep that the society instead of bothering, complaining and fighting against it, is accepting it as part of life". 142. The aforenoted observations, in our opinion, are applicable with all force to the case at hand. 143. The Apex Court in the said decision had also Provided guidance for the benefit of the Courts in interpreting such a beneficial legislation: Since the SEBI Act is also a beneficial legislation the approach of the courts in interpreting its provisions should not be different. Following extract from the decision provides the guidance: "The provisions of the Act thus have to be construed in favour of the consumer to achieve the purpose of enactment as it is a social benefit oriented legislation. The primary duty of the court while construing the provisions of such an Act is to adopt a constructive approach subject to that it should not....
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....Board of India, having considered the application for renewal of recognition made under Section 3 of the Securities Contracts (Regulation) Act, 1956 by Vadodara Stock Exchange Limited having its registered office at 3rd Floor, Fortune Tower, Sayajigunj, Vadodara 390005 and being satisfied that it would be in the interest of the trade and also in the public interest so to do, hereby grants, in exercise of the powers conferred under Section 4 of the Securities Contracts (Regulation) Act, 1956, renewal of recognition to the said Exchange under Section 4 of the said Act for a period of one year commencing on the 4th day of January, 2014 and ending on 3rd day of January, 2015 in respect of contracts in securities subject to the conditions stated herein below or as prescribed or imposed hereafter : The exchange can commence trading in securities only after complying with all the regulatory requirements imposed by the Securities and Exchange Board of India including full compliance with Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulation, 2012. The exchange shall comply with such other conditions as may be prescribed by SEBI from time to time. RAJEE....
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....established under Section 3 as a body corporate and the powers and functions of the Board have been clearly stated in Chapter IV and under Section 11 of the said Act. 43. A perusal of Section 11, Sub-Section 2(a) of the said Act makes it clear that the primary function of the Board is to regulate the business in Stock Exchanges and any other securities markets and in order to do so it has been entrusted with various powers. 44. Section 11 had to be amended on several occasions to keep pace with the `felt necessities of time'. One such amendment was made in Sub Section (4) of Section 11 of the said Act, which gives the Board the power to restrain persons from accessing the securities market and to prohibit such persons from being associated with securities market to buy and sell or deal in securities. Such an amendment came in 2002. 45. From the statement of objects and reasons of the Amendment Act of 2002, it appears that the Parliament thought that in view of growing importance of stock market in national economy, SEBI will have to deal with new demands in terms of improving organisational structure and strengthening institutional capacity. 46. Therefore, certain shortcomi....
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....examine whether the company has maintained proper cost accounting records as required by the rules. Companies whose securities are traded on a public market, it is trite law that the disclosure of information about the company is crucial for the correct and accurate pricing of the company's securities and for the official operation of the market. Section 210 of the Companies Act states that at every annual general meeting of the company, the Board of Directors is required to lay before it a balance-sheet as at the end of and a profit and loss account for the financial year. 27. Clause 41 of Listing Agreement between the SEBI and the concerned companies requires the companies to furnish to Stock Exchange and to publish unaudited financial result on a quarterly basis in the prescribed format. Section 55A of the Companies Act deals with the powers of SEBI which says some of the provisions referred to therein, so far as they relate to issue and transfer of securities and non-payment of dividends in the case of listed companies be administered by SEBI. Further, it is also indicated that how the books of accounts have to be kept by the company, so also with regard to audit of accoun....
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....y group after making a detailed study of the then existing non-banking financial intermediaries stated in respect of unincorporated bodies in para 8.25 of its report as under: "8.25 We, therefore, suggest that the Reserve Banks control may be extended to finance corporations and necessary enabling legislation be passed to that effect. We recognise that the administrative task of watching and regulating the operations of a large number of small firms will be difficult. We, therefore, suggest that if the law permits, only companies may be allowed to do the banking business in the sense of accepting deposits from the public for the purpose of lending or investment. IN that case, the Banking Regulation Act would govern the operations of the Bangalore type finance corporations. If, however, the law does not permit it, any scheme of regulation may have as one of its objections the reduction in the number of finance corporations besides, of course, the safeguarding of depositors interest." 23. It was further submitted that the amendments were introduced after taking into account the recommendations of successive committees, appointed by the Bank and Government of India, which had studie....
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....try that exact wisdom and nice adaptation of remedy are not always possible and that judgement is largely a prophecy based on meager and uninterrupted experience. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid.' At page 988 it is further held: "That would depend upon diverse fiscal and economic considerations based on practical necessity and administrative expediency and would also involve a certain amount of experimentation on which the court would be last fitted to pronounce. The court would not have the necessary competence and expertise to adjudicate upon such an economic issue. The court cannot possibly assess or evaluate what would be the impact of a particular immunity or exemption and whether it would sere the purpose in view or not. 24. Even if these restrictions incorporated in the Act amount to a total prohibition, such ....
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....velopment of joint stock enterprise would never have reached its present stage but for the facilities which the Stock Exchanges provided for dealing in securities. They have a very important function to fulfill in the country's economy. Their main function, in the words of an eminent writer, is 'to liquify capital by enabling a person who has invested money in, say, a factory or a railway, to convert it into cash by disposing of his share in the enterprise to someone else'. Without the Stock Exchange, capital would become immobilized. The proper working of a Stock Exchange depends upon not only the moral stature of the members but also on their caliber. It is a trite saying that a jobber or dealer is born and not made. In the words of the same author, a jobber must be a man of good nerve, cool judgment, and ready to deal under any ordinary conditions, and he must be a man of financial standing, considerable experience, with an understanding of market psychology. There are three modes of dealing in shares and stores, namely, (1) spot delivery contract, i.e., a contract which provides for the actual delivery of securities on the payment of a price thereof either on the da....
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....a recognised Stock Exchange. The notification further gave some concessions to such active members in the matter of payment of the membership fee. They had to apply for membership before October 15, 1957, or before such period as the Board of the recognised Stock Exchange might think fit to extend. It appears that within the extended time a number of active members of the Indian Stock Exchange Limited as defined by the notification applied for membership and were admitted as members of the recognised Stock Exchange. Though three years have passed by, no member other than the petitioner has so far thought fit to question the validity of the notification, that is, the validity of the notification has been accepted and the recognised Stock Exchange has become stabilised on that basis. Subsequent to the filing of. the petition on November 30, 1957, the Central Government issued another notification applying S.13 of the Act to Greater Bombay; with the result that thereafter every contract in shares between the members of any unrecognised Stock Exchange in that City would be illegal." "Re. (1): Article 19(1)(g) of the Constitution states that every citizen shall have the right to carry ....
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....ing admission to membership in the place of' the deceased; and (2) a person recommended for admission to membership in the place of a member who has forfeited his right to membership. A careful scrutiny of the Rules does not bear out the contention; nor do they enable us to cut down the wide amplitude of Rr. 17 to 22. Rule 10 says: "When a right of membership is forfeited to or vests in the Exchange under any Rule, Bye-law, or Regulation of the Exchange for the time being in force it shall belong absolutely to the Exchange free of all rights, claims or interest of such member or any person claiming through such member and the Governing Body shall be entitled to deal with or dispose of such right of membership as it may think fit." Rule 54 is to the following effect: "A member's right of membership shall lapse to and vest in the Exchange immediately be is declared a defaulter." Rule 11 is as follows.. "(a) A member of not less than seven years' standing who desires to resign may nominate a person eligible under these Rules for admission to membership of the Exchange as a candidate for admission in his place (b) The legal representatives of a deceased member or his ....
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....es. All the three categories of candidates must be recommended by two members. But the candidates belonging to the first category shall in addition be nominated in the manner provided by the Rules. We, therefore, hold that the Stock Exchange Rules do not operate as a bar against the petitioner becoming a member of the Stock Exchange subject to the rules governing such application. The petitioner has the right to do business in shares: in spite of the notifications he can still do business in spot delivery contracts. He can apply to become a member of the Stock Exchange subject to the conditions laid down by the Rules. The Act the validity of which he has not chosen to question, enables the State to give or refuse recognition to any Stock Exchange and it has chosen to give recognition to the Stock Exchange, Bombay, subject to the conditions prescribed. The restrictions, in our view, are not unreasonable, having regard to the importance of the business of a Stock Exchange in the country's national economy and having regard to the magnitude of the mischief sought to be remedied in the interest of the general public. At another place we have already dealt with the necessity for str....
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....itrary or unreasonable. We must make it clear that this finding must be confined only to the validity of the impugned notification dated August 31, 1956.' 153. In the case of SEBI v. Alka Synthetics Ltd. [1999] 19 SCL 460, a Division Bench of this Court has observed as under : "While considering the question as to whether the SEBI has the authority of law under the existing statute to impound or forfeit the monies, we may observe in the very beginning that the learned single judge has approached and decided this question on the basis of the principles of law, which have been laid down by the courts in matters relating to fiscal and taxing statutes and the inhibition against the imposition of levy and collection of any tax and the consequential deprivation of property. In our considered opinion, the very approach and the principles on which this question has been decided by the learned single judge were not at all germane because here is a case in which the court is concerned with the provisions of a comprehensive legislation, which was enacted to give effect to the reformed economic policy investing the SEBI with statutory powers to regulate the securities market with the obj....
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....ction 11B of the SEBI Act is an enabling provision enacted to empower the SEBI Board to regulate securities market in order to protect the interest of the investors. Such an enabling provision must be so construed as to subserve the purpose for which it has been enacted. The SEBI is charged with the duty to protect the public and the integrity of the capital market, and as a regulator, it has powers to issue the circular impugned in this petition in public interest including the regulations, and the interference at the end of the court in such type of matters should be minimal unless it is established that the same is in gross violation of any of the provisions of law or the Constitution of India. 155. It appears from the materials on record that the SEBI considered various reports of the experts on the issue and the impugned circular and the regulations are based on the findings recorded in the report of the experts. 156. We shall now look into the Report of the Group on Corporatisation and Demutualisation of Stock Exchanges headed by Justice M.H.Kania, Former Chief Justice of India, dated 30th January 2003 : '4. Existing structure of the Stock Exchanges in India 4.1 In ter....
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....ted liability. The shareholders in a corporatised Stock Exchange may be a diverse group, as members may decide to retain their shares or to sell them. Demutualisation however, does not insulate them from competition. A Stock Exchange whose management does not effectively work to maintain its position in the market may soon become a take-over target." "9. The Stock Exchanges, which had demutualised have followed different models. However, a common feature has been that members surrender their mutual membership rights and in lieu thereof, they are issued shares in the demutualised company. The number of shares issued has some relationship to the value of the assets of the Stock Exchange. In several cases, a public issue of shares was also made." "5. A basic character of the Stock Exchanges in India, saving NSE, irrespective of their legal constitution, is that they are meant to be voluntary, not for-profit mutual entities. It is on this ground that the Stock Exchanges (except NSE) have claimed tax exemptions, though in dispute in some cases. Demutualisation fundamentally alters this position of the Stock Exchanges, as these would no longer retain their voluntary, not for-profit mut....
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.... role in the management of the Stock Exchange. The fall-out of this practice has been that most Stock Exchanges have failed to develop good corporate governance practices and strong management teams. This has not only been a perception but also a reality in most Stock Exchanges. Conflicts of interest have bedeviled the operations of the Stock Exchanges in the past to the detriment of the securities market. If the Stock Exchanges are to function in a modern competitive environment these deficiencies would have to be removed and they would have to adhere to the high standards of corporate governance. Indeed this is one of the objectives to be achieved through this entire exercise of demutualisation of the Stock Exchanges." "24. Divergent views have been expressed on the issue of broker representation on the governing boards of Stock Exchanges. The case for broker representation has been made by almost all Stock Exchanges and brokers' association. Their argument is that the brokers are major stakeholders in a Stock Exchange and they are affected by the manner in which an Stock Exchange functions. They also have the experience and knowledge of the market and therefore should have ....
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....itable exit route that will enable the members to recoup the investments made by them in those Stock Exchanges." "9.40 In order to explore the possibilities of utilisation of the existing IT infrastructure put in place by all these Stock Exchanges the Group examined the Euronext initiative in Europe, which has led to the merger of the Stock Exchanges of Paris, Brussels and Amsterdam. The Euronext Stock Exchange now allows for the creation of a common order book for any share listed on any of the three Stock Exchanges. The trading is done on a common trading platform. The Euronext trades are settled through Clear Net, which acts as a common clearing house acting as counter party and the Euro Clear which acts as a depository. The key to the success of the Euronext appears to be the unification of the back offices, the order book, harmonization of the trading platforms of the three Stock Exchanges and a single clearing house have contributed to the success of Euronext despite the Stock Exchanges being under three different regulatory regimes." "9.44 In sum, the Group is of the view that - a. uniform model for corporatisation and demutualisation would have to be adopted by all the S....
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.... as association of persons and those which are set up as companies limited by guarantee be converted into companies limited by shares; (b) a common model for corporatisation and demutualisation be adopted for all Stock Exchanges; and (c) the clause (j) of section 2 of SCRA be amended to mean that the Stock Exchanges could be companies incorporated under the companies act. The present provisions under clause (j) of section of 2 of SCRA defines Stock Exchanges to "mean any body of individuals, whether incorporated or not, constituted for the purpose of assisting regulating or controlling the business of buying, selling or dealing in securities". This clause would need to be amended to provide that a Stock Exchange should be a company incorporated under the Companies Act." "iv.(a) the three stakeholders viz. shareholders, brokers and investing public through the regulatory body should be equally represented on the governing board of the demutualised exchange;" "viii. There should be a ceiling of 5% of the voting rights which can be exercised by a single entity or groups of related entities, irrespective of the size of ownership of the shares." "xi. On the issue of alternative use....
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....upreme Court, in the case of Sudhir Shantilal Mehta v. CBI [2009] 96 SCL 403, had considered an identical issue with the only distinguishing feature that in that case the circular was issued by the Reserve Bank of India exercising control over the banking companies. The Supreme Court made the following observations, which are worth noting : '...Having regard to the fact that the Reserve Bank of India exercises control over the Banking Companies, we are of the opinion that the said Circular letter was binding on the Banking Companies. The officials of UCO Bank were, therefore, bound by the said circular letter. The Madhya Pradesh High Court in The State of Madhya Pradesh v. Ramcharan AIR 1977 MP 68 held: "6. Although the Constitution does not contain any generic definition of law, it defines "law" for purposes of Article 13 to include "any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the force of law". Article 366(10) of the Constitution also defines the expression "existing law" to mean "any law, Ordinance, Order, bye-law, rule or regulation passed or made before the commencement of this Constitution by any legis....
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....rally to give advice to any banking companies, and held that a circular issued by the RBI which stated that the banks were advised to follow the Guidelines given thereunder, the word 'advised' cannot be read in isolation and the said document was meant to be binding on the banking companies. 162. In the case of Central Bank of India (supra), the Supreme Court observed that the RBI is a prime banking institution of the country entrusted with a supervisory role over banking and conferred with the authority of issuing binding directions, having statutory force, in the interest of public in general and preventing banking affairs from deterioration and prejudice as also to secure the proper management of any banking company generally. It was further observed as below : "...RBI has been issuing directions/circulars from time to time which, inter alia, deal with rate of interest which can be charged and the periods at the end of which rests can be struck down, interest calculated thereon and charged and capitalised. It should continue to issue such directives. Its circulars shall bind those who fall within the net of such directives. For such transaction which are not squarely g....
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....tion refer to s. 87 of the Bombay Reorganisation Act, 1960 which reads: "87. Territorial extent of laws.-The provisions of Part II shall not be deemed to have effected any change in the territories to which any law in force immediately before the appointed day extends or supplies, and territorial reference in any such law to the State of Bombay shall until otherwise provided by a competent legislature or other competent authority, be construed as meaning the territories within that State immediately before the appointed day." Law is defined in that Act in s. 2(d) as follows: "law" includes any enactment, ordinance, regulation, order, bye-law, rule, scheme, notification or other instrument having, immediately before the appointed day, the force of law in the whole or in any part of the State of Bombay;" The memorandum of Central Government dated 11th May, 1957 was an approval in terms of the proviso to sub-section (7) of section 115 of the States Reorganisation Act. It is, therefore, an order or other instrument having the force of the law for the purposes of the definition of 'law'. That circular had certainly the force of law in the whole of the State of Bombay and as ....
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....ry instrument, bye-law or other statement of law made by a person or body with legislative powers by the appropriate means." In the dictionary of Modern Legal Usage, second edition, by Bryan A. Garner, at page 313, the word "enactment" has been defined to have more than one sense namely (i) the action or process of making (a legislative bill) into law; enactment of the bills; or (ii) a statute - a recent enactment - As far as the sense (iii) is concerned, it means "statute or Act of Parliament; statutory instrument, bye-law or other statement of law made of a person or body with legislative powers. 39. In P.Ramanatha Aiyar's Law Lexicon 1997 edition at page 261, "bye-law" has been defined to include all orders, ordinances, regulations, rules and statutes made by any authority subordinate to the Legislature. The subordinate authority must, of course, have power expressly or impliedly conferred on it to legislate on the matters to which the bye-law relates. At page 1697, of the same law dictionary "Rule" has been defined as "a prescribed, suggested or self imposed guide for conduct or action; a principle; a kind of regulation or bye-law: a principle regulating some action. In D.....
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....over of Rs. 1000 crore on continuous basis or does not apply for voluntary surrender of recognition and exit before the expiry of two years from the date of the circular, it shall proceed with compulsory derecognition and exit of such Stock Exchanges in terms of the conditions as may be specified by the SEBI. 170. Mr.Thakore's submission in this regard is that when the Scheme is put forward for approval, at that point of time, after making necessary inquiry as may be necessary and after obtaining such further information, if any, and after being satisfied that it would be in the interest of the trade and also in the public interest, the SEBI may approve the Scheme with or without modification. Therefore, according to Mr.Thakore, if any modification is necessary in view of the SEBI, then it can ask the Stock Exchange to make the necessary modification, but once the scheme is approved and made final, thereafter at a later stage, it cannot impose any further condition. In addition to this, according to Mr.Thakore, the SEBI, while approving the scheme under sub-section (2) of Section 4B, can restrict only three things as laid down under Section 4(B)(6)(a), (b) and (c). 171. We ar....
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....ct, the SEBI can issue direction to secure proper management of the Stock Exchange. Therefore, there is ample power under the Act to make regulation. The Vadodara Stock Exchange is granted renewal every year, and while granting renewal, it is competent for the SEBI to provide further condition from time to time under Section 4 of the SCR Act read with rule 6 of 1957 Rules, and while seeking recognition, the Stock Exchange is required to give an undertaking to comply with other conditions and terms as may be imposed. 172. The scope of regulation 11(1) is sufficiently wide to meet situations, for which measures are not specifically provided in the regulation. Merely because in section 11(2) it is provided that "the measures referred to therein may provide for" cannot be taken to mean that such measures have to be laid down in advance. It is a matter of common knowledge that the SEBI has to regulate a speculative market and in case of speculative market varied situations may arise and all such exigencies and situations cannot be contemplated in advance and, therefore, looking to the exigencies and the requirement, it has been entrusted with the duty and function to take such measures....
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....ndate for the SEBI to make such consultations before framing the regulations or issuing the circulars. The VSEL also had submitted its views on the Bimal Jalan Committee Report and the SMAC Committee decisions which were the basis on which the SECC Regulations and the Exit Circular were framed. 176. There is one another important aspect which needs to be noted and that is the Parliament has not treated the Stock Exchanges like any other public limited companies which are ordinarily governed in such matters exclusively by the provisions of the Companies Act. The Parliament has made special provisions for regulating the formation of the Stock Exchanges and also for their governance including the constitution of the Governing Board of the Stock Exchange. If the Stock Exchange were intended by the Parliament to be treated like any other public limited company, there was no need for the Parliament to make a special enactment like the Securities Act. Such is the reason why there is no violation of the Companies Act as contended. 177. Security Contract Regulation Act and the SEBI Act are special Acts and have an overriding effect over some of the provisions of the Companies Act. Section....
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....nt on the economic policy of the SEBI. 182. In Shri Sitaram Sugar Co. Ltd. v. Union of India AIR 1990 SC 1277, the Supreme Court observed in para 57 as under:- 'Judicial review is not concerned with matters of economic policy. The Court does not substitute its judgment for that of the legislature or its agents as to matters within the province of either. The Court does not supplant the "feel of the expert" by its own views ................. Judicial inquiry is confined to the question whether the findings of fact are reasonably based on evidence and whether such findings are consistent with the laws of the land .......... Price fixation is not within the province of the Courts. Judicial function in respect of such matters is exhausted when there is found to be a rational basis for the conclusions reached by the concerned authority.' 183. In P.T.R. Exports (Madras) (P.) Ltd. v. Union of India AIR 1996 SC 3461, the Supreme Court observed in paras 3 and 5 as under :- "The power to lay policy by executive decision or by legislation includes power to withdraw the same unless in the former case, it is by mala fide exercise of power or the decision or action taken is in abuse ....
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....lar, the VSEL gets derecognized, then it cannot be said that with such derecognition the fundamental right of the petitioners to trade in shares at the VSEL would get infringed under Article 19(1)(g) of the Constitution of India. The fundamental rights guaranteed under Article 19 of the Constitution of India are not absolute but the same are subject to reasonable restrictions to be imposed against the enjoyment of such rights. Such reasonable restrictions seek to strike a balance between the freedom guaranteed by any of the clauses under Article 19(1) and the social control permitted by the clauses (2) to (6) under Article 19 of the Constitution of India. As held by the Supreme Court in Krishnan Kakkanth v. Government of Kerala AIR 1997 SC 128, that the reasonableness of restriction is to be determined in an objective manner and from the stand point of the interests of general public and not from the stand point of the interests of the persons upon whom the restrictions are imposed or upon abstract consideration. A restriction cannot be said to be unreasonable merely because in a given case, like in the present case, it operates harshly. In determining the infringement of the right....
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....arious terms and conditions." "34.To ascertain unreasonableness and arbitrariness in the context of Article 14 of the Constitution, it is not necessary to enter upon any exercise for finding out the wisdom in the policy decision of the State Government. It is immaterial if a better or more comprehensive policy decision should have been taken. It is equally immaterial if it can be demonstrated that the policy decision is unwise and is likely to defeat the purpose for which such decision has been taken. Unless the policy decision is demonstrably capricious or arbitrary and not informed by any reason whatsoever or it suffers from the vice of discrimination or infringes any statute or provisions of the Constitution, the policy decision cannot be struck down. It should be borne in mind that except for the limited purpose of testing a public policy in the context of illegality and unconstitutionality, Court should avoid "embarking on uncharted ocean of public policy".' 188. Mr. Thakore very strenuously contended that it is only the Central Government who is empowered to impose the conditions under Section 30 of the Act, 1956 and not the SEBI. Mr.Thakore submitted that assuming for ....
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....e conditions relating to the area served by the Stock Exchange, its standing and the nature of the securities dealt with by it. This is not what cl. (b) of s. 4(1) says. The conditions under cl. (b) of s. 4(1) no doubt shall be such as may be imposed by the Government, having regard to the aforesaid three considerations, but they need not necessarily be confined only to the said considerations. The Government may impose any conditions, no doubt germane to the recognition of a Stock Exchange, after consultation with its governing board, and having regard to the said considerations." "...The condition is, germane to the recognition of Stock Exchange and is, therefore, a condition within the meaning of 'any other conditions' in Cl.(b) of sub-s.(1) of S.4 of the Act."' 191. Therefore, once it is found that the condition is, germane to the recognition of the Stock Exchange, then such a condition would fall within the meaning of 'any other conditions' in Clause (b) of sub-section (1) of Section 4 of the Act. 192. Mr.Thakore further submitted that on the plain reading of Section 4B(6)(c), it suggests the number of Directors of the share brokers group. To put it in o....