TaxTMI 
TaxTMI 
2015 (1) TMI 204
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....ember 2012 and the Securities Contracts (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 whi....
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....g Investor Services Centres, Investor Education/Training 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 s....
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....isation of all recognised Stock Exchanges on and from the appointed 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 ....
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....he Due Date. 9.3 Memorandum and Articles of Association, Rules, Bye-Laws and Regulations of VSEL may 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 ....
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....In case, the Exchange has strategic partner(s)/majority shareholders, at least one third of the Shareholder Directors shall be independent 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 simultaneousl....
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....roved by the SEBI and prescribed by the manner in which public shareholding could be increased, which could be done by various means including fresh issue of equity shares to 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....
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....ges, etc. had already been provided for in the SCRA and the approved Schemes of Corporatisation and Demutualisation, including the Scheme, yet the terms of reference of the Committee 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 continuo....
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....ree months. Hence, as on 20th September 2012, the composition of the Governing Board of the VSEL was altered by removing all the three Trading Members from the Governing Board and, out of the total strength 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/MR....
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....d just and expedient be granted." I. Stance of the respondent no.2 SEBI 33. (A) Preliminary objections raised on behalf of the respondent no.2 as regards the maintainability of the writ-petition : (1) The petitioners 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 Co....
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....terest. A handful of Trading Members of a Stock Exchange (i.e. 7%), if are aggrieved by the policy formulated in public interest, then the same cannot be modified only with a view to benefit 7% of the Trading Members of a Stock Exchange. (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 t....
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....ecurities Contracts (Regulation) Act, 1956 provides for delegation of powers to be exercisable by the Central Government to the SEBI by an order of the Central Government, in relation to such matters and subject to such conditions as may be specified in 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 ....
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....ading rights would be segregated from each other. Accordingly, the SEBI constituted a group headed by Justice M.H.Kania, Hon'ble the then Chief Justice of India, on Corporatisation & Demutualisation of Stock Exchanges in India. The group submitted its report on August 28, 2002. Subsequently, 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....
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....able by the SEBI by virtue of general delegation made by the Central Government in favour of the SEBI. Earlier, the Central Government had framed the Securities Contracts (Regulation) Rules, 1957 (hereinafter known as 'SCRR'), however, the administration and enforcement of the SCRR lies with 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 ....
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....ther persons providing trading or clearing or settlement facility in respect of securities. 48. The impugned regulations retain the principles of SC(R) (MIMPS) Regulations, 2006 (since repealed) which prescribed the ownership norms for Stock Exchanges. The impugned regulations, additionally prescribes entry/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 co....
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....detail the reasons for the crisis in Chapter VI of the Report. The Report had, inter alia, brought out that CSE could have prevented the "payment crisis" by strictly following the SEBI directives on margins and exposure limits. Further the report also brought out the following deficiencies : ♦ Deficiencies in Surveillance ♦ 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 ....
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....Exchange has a trading operations while the business in all other smaller Stock Exchanges is nil. 55. The first among the initiatives for the revival of the Regional Stock Exchanges was the setting up of the Inter Connected Stock Exchange (ISE) to regroup the Regional Stock Exchanges to provide a third national market. The ISE was promoted in 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 techno....
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....ket. Hence, it would be reasonable to stipulate that only those entities with substantial financial health and net worth and other specified criteria should be permitted to be Stock Exchanges. One of the parameters used by the SEBI is the criteria of net worth requirement for registration of various classes of intermediaries. The depositories, the depository participants, 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 ....
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....ket participants, though the SEBI is not statutorily mandated to undertake prior consultation. The Exit Circular issued by the SEBI on May 30, 2012 deals with the following aspects viz., voluntary surrender of recognition, compulsory de-recognition, companies exclusively listed on the de-recognized Stock Exchanges, Trading Members of de-recognized Stock Exchanges and treatment of 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 ....
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.... has been no trading activity on non-operational Stock Exchanges: Sr. No. Name of the Stock Exchange No trading since 1 Ahmedabad Stock Exchange 2004-05 2 Bangalore Stock Exchange 2002-03 3 Bhubaneswar Stock Exchange 2000-01 4 Cochin Stock Exchange 2002-03 5 Coimbatore Stock Exchange 2000-01 6 Delhi Stock Exchange 2004-05 7 Gauhati Stock Exchange 1999-00 8 Inter-connected Stock Exchange 2003-04 9 Jaipur Stock Exchange 2000-01 10 Ludhiana Stock Exchange 2002-03 11 Madhya Pradesh Stock Exchange 2002-03 12 Madras Stock Exchange 2007-08 13 OTCEI 2004-05 14 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 ....
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....ral Government is of 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." 65. The amount of trading turnover required i.e.1000 crore, is in itself a very small figure when compared 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 t....
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....d deserves to be rejected. 69. It is further submitted that the Stock Exchanges, in view of the provisions of the SCRA, do not have right to state that the regulator cannot impose any terms and conditions regarding the functioning and administration of the Stock Exchange. It is further submitted that when the share holders invested in the VSE, there was no trading activity being carried out at the VSE and the Stock Exchange was more in the nature of a defunct Stock Exchange. The major sources of income for the VSEL, as provided in its Annual Reports, may be seen as under: Major Revenue income of the VSE for last 4 Years. Particulars 2008-09 2009-10 2010-11 2011-12 DP operations 18,325,670 19,990,851 19,926,000 16,309,848 Interest income 9,504,888 21,521,099 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 ....
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....1* 2 01* 1 01** 2008-09 9 9 9 9 9 8 2009-10 7 7 7 7 7 4 2010-11 9 9 9 8 9 7 2011-12 8 7 8 4 8 4 2012-13 - - 03*** 3 - - Note: * Appointed on 26th December 2007. ** Appointed on 13th February 2008. ***In the financial year 2012-13, till present date 03 Board Meetings are held. Shri Nilkanth Jani gave his resignation on 23.02.2012 so there is no question to attend any meeting of FY 2012-13. Shri Yogendra Shukla gave his resignation on 25.02.2012 so there is no question to attend any meeting of FY 2012-13. 72. 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 crore. Taking it forward the SEB....
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....Such an interpretation would nullify all other provisions of the SCRA as well as the SEBI Act. Also, stating that a scheme once framed under Section 4B would be sacrosanct unto eternity, without leaving any scope for the SEBI as a regulator to review the regulatory structure, would defeat the purpose of regulatory powers conferred on the SEBI by the SCRA and the SEBI Act. Therefore, the contention that the SEBI is denuded of any power to make incursion on the provisions of Sections 3(2) and 4B, is an incorrect understanding of the provisions and framework of the SCRA and is accordingly denied. In fact, proviso to sub-section (1) of Section 4B provides that exchanges which were already corporatized and demutualised do not have to submit a scheme for approval by the SEBI. If the petitioner's argument was to be taken to its logical conclusion, it would mean that the SEBI was powerless to further regulate those exchanges as regards its ownership and governance structure. 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....
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.... SEBI to make regulations. 81. The Securities Contract (Regulation) Act, 1956 being a special enactment will prevail over other Acts including the Companies Act, especially in respect of regulation of Stock Exchanges. The Statement of Objects and Reasons appended to the Bill which was later enacted as SCRA begins with the following sentence: "The object of this Bill is to provide for the regulation of Stock Exchanges and of transactions in securities dealt with in on them. with a view to preventing undesirable speculation in them." 82. Also, Section 616D of the erstwhile Companies Act, 1956 reads: "The provisions of this Act, shall apply to any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act;" A pari materia provision in the new Companies Act, 2013 may be seen in Section 1(4)(e). Therefore, in the case of Stock Exchanges which are companies regulated under the 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 ....
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....ing the impugned regulations and circular. Substantive power to restrict voting rights of shareholders may be traced to Section 4B (6) of the SCRA which provides that voting rights of Stock Broker Shareholders of Stock Exchanges can be restricted. In the present case, the SEBI has imposed such restriction by way of the impugned SECC Regulation. Hence, existence of substantive power regarding imposition of such restrictions is beyond any doubt. This respondent also relies on the provisions of Section 4B, Section 7A of the SCRA for the purposes of demonstrating that this respondent has the power to issue the impugned regulation and circular. Section 7A envisages imposition of such a restriction on the voting rights of the Stock Broker Shareholders. Section 7A exists even prior to introduction of Section 4B. Therefore, the SEBI has got sufficient statutory powers under the SCR Act to impose such a restriction notwithstanding anything contained in the Companies Act, 1956. 85. The orders of the SEBI (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 ....
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....cator for another view merely because it commends itself to the Court." 89. The order of the Securities Appellate Tribunal in the Ketan Parekh matter (SAT order dated 14th July 2006) has also explained lucidly the central relevance of Stock Exchanges in the securities market, inter alia, noting that "a Stock Exchange is an association of member brokers, whether incorporated or not, for the purpose of facilitating and regulating the trading in securities" and that Stock Exchanges are platforms for fair price discovery of a scrip based on the market forces of demand and supply. 90. Net worth requirement is meant for determining the financial health of the company/organization. It is required to ensure that only serious and sound players who can provide the required infrastructure for capital market can enter the market. The impact on the net worth could be very high in extreme scenarios. With depleted net worth Stock Exchange may not be in a position to update and advance its technologies and infrastructure for providing efficient platform/transaction facility. This may affect to the companies listed on such Stock Exchanges and investors at large. Stock Exchanges provide transa....
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....g system, terrorist activity, natural calamity and for ensuring incessant trading in the securities listed on Stock Exchange, Stock Exchanges are also required to maintain a disaster recovery system. Setting up of such disaster recovery system and its maintenance involves huge cost which calls for huge net worth. Huge expenditure made by other Stock Exchanges on the technology in the last three years: Name of the Stock Exchange Expenditure (Rs. In crore) during last three financial years Total 2010-11 2011-12 2012-13 NSE 191.37 185.13 258.13 634.62 BSE 59.41 63.54 69.52 192.47 MCX-SX 18.84 34.21 123.48 176.53 91. The impugned SECC Regulations aims at complete demutualisation in Stock Exchanges by ensuring that Trading Members or their associates/agents have no role in the management of the Stock Exchanges. This is a step further in making the governing board of the Stock Exchanges without any conflict and in furtherance to the erstwhile Scheme of Corporatisation and Demutualisation. 92. Corporatisation and Demutualisation of Stock Exchanges was implemented based on the amendment to....
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.... maintain adequate documentation to support the existence of the stock at the designated warehouses. c Despite repeated defaults members were allowed to trade and increase their exposure. For example, one of the members had defaulted 198 times during a fifteen month period. d. Members who were in a default position or who had exhausted their margin limits on trading were granted an exemption from margin requirements. More than 1800 such exemptions were granted between 2009 to 2013. e. The IBMA, a subsidiary of the NSEL (60.88% stake) was loaned several hundred crore by the NSEL as working capital and provided margin exemption to trade on the NSEL itself, a clear conflict of interest. (ii) Subsequently, a plan for settlement and meeting payout obligations on installment basis was put into operation, however, the NSEL has defaulted in all six payouts till date as illustrated below: Date of Payout Amount to be collected from buyers & to be disbursed to the Members as per the settlement plan Amount actually disbursed Shortfall 20.08.2013 Rs.174.72 crore Rs.92.12 crore Rs.82.60 crore 27.08.2013 Rs.174.72 crore Rs....
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....ns) Regulations, 2012. Consequently, it was decided that total strength of the Governing Board shall be 12 (Twelve) (excluding Managing Director) comprising of 50% Public Interest Directors and remaining shall be shareholder Directors. The status of present composition of the Governing Board of the Exchange is as under : Category Available Seats Appointed Vacancy Public Interest Director 6 4 02* Shareholder Director 6 2 4 Managing Director 1 - 1 The Exchange has requested the SEBI for approving two further names of Public Interest Directors of the Exchange. Accordingly, the Exchange has decided to fill up four vacancies in the category of Shareholder Directors in order to comply with SEBI's Guidelines and Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 subject to approval of SEBI. Therefore, the Governing Board of the Exchange recommends the resolutions for approval of the Shareholder. None of the Members of the Governing Board of the Exchange is interested or concerned in these Resolutions. Registered Office : 3rd Floor, F....
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....holders, shareholders of the companies listed in such Stock Exchanges. It is submitted that for no fault on the part of such persons, they would lose their means of livelihood. 101. Mr.Thakore submitted that the SEBI has essentially altered the policy with regard to the Stock Exchanges in India by issuing the circular and the regulations and, therefore, could be said to have exceeded the powers conferred upon it by the Securities Contracts (Regulation) Act, 1956 and the SEBI Act. Mr.Thakore submitted that the impugned circular cannot be termed as law. It is submitted that the circular cannot be termed as a statutory circular having any force of law even in terms of Article 13 of the Constitution of India. It is further submitted that the invocation of Article 19(6) of the Constitution of India on the basis of the circular is unsustainable in law. 102. Mr.Thakore, by relying on Section 5 of the SCRA, submitted that a circular cannot be issued as a regulation under Section 31 of the SCRA, or a rule under Section 30 of the Act, 1956. 103. Mr.Thakore placed reliance on Section 11 of the SEBI Act and submitted that although Section 11 speaks of the powers and functions of the B....
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....manner violative of Articles 14 and 19(1)(g) of the Constitution of India. Mr.Shelat submitted that the powers exercisable by the Central Government under the SCRA are also exercisable by the SEBI by virtue of general delegation made by the Central Government in favour of the SEBI. Earlier, the Central Government had framed the Securities Contracts (Regulation) Rules, 1957, however, the administration and enforcement of the SCRR lies with the SEBI. 111. Mr.Shelat submitted that the impugned regulations have been framed by the SEBI in exercise of its powers conferred by Sections 4, 8A and 31 of the SCRA read with Sections 11 and 30 of the SEBI Act. Under Section 11 of the SEBI Act, the SEBI has been entrusted with the task of protection of investors and development of securities market. 112. It is submitted that the SEBI has wide powers to protect the interest of the investors and for the development of the securities market. 113. Mr.Shelat submitted that under Section 12A of the SCRA, the SEBI is also empowered to issue directions to Stock Exchanges, listed companies and other persons associated with the securities market, inter alia, in the interest of the investors or or....
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....an aggrieved or interested person. 122. The traditional rule in regard to the locus standi was that the judicial redress was available only to a person who had suffered a legal injury by reason of violation of his legal right or legally protected interest by the impugned action of the State or a public authority or any other person who was likely to suffer a legal injury by a reason of threatened violation of his legal right or legally protected interest by any such action. 123. The right that can be enforced under Article 226 of the Constitution of India ordinarily shall be personal or individual right of the petitioner himself. 124. In Jasbhai Motibhai Desai v. Roshan Kumar [1976] 1 SCC 671, after referring to several English, American and Indian cases, the Supreme Court observed that various tests have to be applied to decide whether a person can be said to be an 'aggrieved person'. The Court stated : "Whether the applicant is a person whose legal right has been infringed ? Has he suffered a legal wrong or injury, in the sense that his interest, recognised by law, has been prejudicially and directly affected by the act or omission of the authority, complained....
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....cus standi. In other words, if the person is found to be not merely a stranger having no right whatsoever to any post or property, he cannot be non-suited on the ground of his not having the locus standi." 126. Bearing the aforesaid principle in mind, we proceed to consider the locus standi of the petitioners. 127. It appears from the materials on record that the VSEL, which is a regional Stock Exchange (RSE) was established in 1990 as a company limited by guarantee, in which ownership and trading rights were vested upon its Trading Members. The petitioners herein are Trading Members and shareholders of the VSEL. 128. It also appears that the SEBI issued a circular in 1999 permitting the RSEs to acquire membership of the NSE and BSE by floating a subsidiary which would be permitted to acquire membership rights in BSE and NSE. 129. The members of such RSE were required to register themselves as sub-brokers of the subsidiary to enable them to trade through the subsidiary. 130. It also appears that the VSEL established a subsidiary called 'VSE Stock Services Limited' (VSSL) for acquiring membership of BSE and NSE. The SCRA was amended to provide for corporatisat....
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....ions itself on the ground that it offends against the fundamental right guaranteed under Article 19(1) (g) of the Constitution of India by showing that the restrictions goes in excess of the object or because the activities which are not pernicious are included within the sweep of the statute or because the procedure laid down in the statute is unreasonable or unjust or arbitrary. 135. We, thus, reject the preliminary objection raised by the respondents and proceed to consider the submissions on merits. 136. Before adverting to the rival submissions canvassed on either sides, we deem it necessary to look into various provisions of the SCRA, 1956 and the SEBI Act, 1992 : Securities Contracts (Regulation) Act, 1956 'Section 2 - Definitions.- In this Act, unless the context otherwise requires,- (a) 'Contract' means a contract for or relating to the purchase or sale of securities; (aa) "corporatisation" means the succession of a recognised Stock Exchange, being a body of individuals or a society registered under the Societies Registration Act, 1860 (21 of 1860), by another Stock Exchange, being a company incorporated for the purpose of assisting, regulatin....
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.... given to, or by, the recognised Stock Exchange; (iv) the transfer of employees of a recognised Stock Exchange to another recognised Stock Exchange; (v) any other matter required for the purpose of, or in connection with, the corporatisation or demutualisation, as the case may be, of the recognised Stock Exchange;'; (gb) "Securities Appellate Tribunal" means a Securities Appellate Tribunal established under subsection (1) of section 15K of the Securities and Exchange Board of India Act, 1992 (15 of 1992) (h) 'securities' include- (i) shares, scrips stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; 7 [(ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;] (id) units or any other such instrument issued to the investors under any mutual fund scheme; 12[(ie) any certificate or instrument (by whatever name c....
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....n, expulsion and re-admission of members there from or therein to; (d) the procedure for the registration of partnerships as members of the Stock Exchange in cases where the rules provide for such membership; and the nomination and appointment of authorised representatives and clerks. Section 4 - Grant of recognition to Stock Exchanges.- (1) If the Central Government is satisfied, after making such inquiry as may be necessary in this behalf and after obtaining such to further information, if any, as it may require, (a) that the rules and bye-laws of a Stock Exchange applying for registration are in conformity with such conditions as may be prescribed with a view to ensure fair dealing and to protect investors; (b) that the Stock Exchange is willing to comply with any other conditions (including conditions as to the number of members) which the Central Government, after consultation with the governing body of the Stock Exchange and having regard to the area served by the Stock Exchange and its standing and the nature of the securities dealt with by its, may impose for the purpose of carrying out the objects of this Act; and (c) that it would be in the interest of the ....
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....inue as such before such appointed date. Explanation.-- For the purposes of this Section, "appointed date" means the date which the Securities and Exchange Board of India may, by notification in the Official Gazette, appoint and different appointed dates may be appointed for different recognised Stock Exchanges] Section 4B - Procedure for corporatisation and demutualisation Section 4B - Procedure for corporatisation and demutualisation.- (1) All recognised Stock Exchanges referred to in Section 4A shall, within such time as may be specified by the Securities and Exchange Board of India, submit a scheme for corporatisation and demutualisation for its approval: Provided that the Securities and Exchange Board of India, may, by notification in the Official Gazette, specify name of the recognised Stock Exchange, which had already been corporatised and demutualised, and such Stock Exchange shall not be required to submit the scheme under this Section. (2) On receipt of the scheme referred to in sub-Section (1), the Securities and Exchange Board of India may, after making such enquiry as may be necessary in this behalf and obtaining such further information, if any, as it m....
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....he maximum number of representatives of the stock brokers of the recognised Stock Exchange to be appointed on the governing board of the recognised Stock Exchange, which shall not exceed one-fourth of the total strength of the governing board. (7) The order made under sub-Section (6) shall be published in the Official Gazette and on the publication thereof, the order shall, notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of 1956), or any other law for the time being in force, have full effect. (8) Every recognised Stock Exchange, in respect of which the scheme for corporatisation or demutualisation has been approved under sub-Section (2), shall, either by fresh issue of equity shares to the public or in any other manner as may be specified by the regulations made by the Securities and Exchange Board of India, ensure that at least fifty-one per cent. of its equity share capital is held, within twelve months from the date of publication of the order under sub-Section (7), by the public other than shareholders having trading rights: Provided that the Securities and Exchange Board of India may, on sufficient cause being shown to it and in the p....
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....curities market; or (b) to prevent the affairs of any recognised Stock Exchange, or, clearing corporation, or such other agency or person, providing trading or clearing or settlement facility in respect of securities, being conducted in a manner detrimental to the interests of investors or securities market; or (c) to secure the proper management of any such Stock Exchange or clearing corporation or agency or person, referred to in clause (b), it may issue such directions, - (i) to any Stock Exchange or clearing corporation or agency or person referred to in clause (b) or any person or class of persons associated with the securities market; or (ii) to any company whose securities are listed or proposed to be listed in a recognised Stock Exchange, as may be appropriate in the interests of investors in securities and the securities market." 1 29A. power to delegate The Central Government may, by order published in the Official Gazette, direct that the powers (except the power under section 30) exercisable by it under any provision of this Act shall, in relation to such matters and subject to such conditions, if any, as may be specified in the order, be exercis....
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....ection (1) of Section 21A; (hb) the form in which an appeal may be filed before the Securities Appellate Tribunal under sub-Section (2) of Section 21A and the fees payable in respect of such appeal; (hc) the form in which an appeal may be filed before the Securities Appellate Tribunal under Section 22A and the fees payable in respect of such appeal; (hd) the manner of inquiry under sub-Section (1) of Section 23-I; (he) the form in which an appeal may be filed before the Securities Appellate Tribunal under Section 23L and the fees payable in respect of such appeal;" (i) any other matter which is to be or may be prescribed. 4(3)" Every rule 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 successive sessions aforesaid, both Houses agree in making any modification in the rule or both Houses agree that the rule should not be made, the rule shall thereafter have effect only in such modified form or be ....
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....ay provide for - (a) regulating the business in Stock Exchanges and any other securities markets; (4) Without prejudice to the provisions contained in subsections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:- (a) suspend the trading of any security in a recognized Stock Exchange; (b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; (c) suspend any office-bearer of any Stock Exchange or self-regulatory organization from holding such position; (d) impound and retain the proceeds or securities in respect of any transaction which is under investigation; (e) attach, after passing of an order on an application made for approval by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the secur....
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....ct. (2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely:- (a) the term of office and other conditions of service of the Chairman and the members under subsection (1) of section 5; (b) the additional functions that may be performed by the Board under section 11; (c)** ** ** (d) the manner in which the accounts of the Board shall be maintained under section 15; (da) the manner of inquiry under sub-section (1) of section 15-I; (db) the salaries and allowances and other terms and conditions of service of the [Presiding Officers, Members] and other officers and employees of the Securities Appellate Tribunal under section 15-O and sub-section (3) of section 15S; (dc) the procedure for the investigation of misbehaviour or incapacity of the [Presiding Officers, or other Members] of the Securities Appellate Tribunal under sub-section (3) of section 15Q; (dd) the form in which an appeal may be filed before the Securities Appellate Tribunal under section 15 -T and the fees payable in respect of such appeal;] (e) the form and the manner in which returns and report....
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.... : 137. To understand the object, it is necessary to know the background of the legislation and the object and scheme of the Act as well. 138. "The Securities and Exchange Board of India Ordinance, 1992", "to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and matters connected therewith or incidental thereto" was promulgated on January 30, 1992. This Ordinance was converted into an Act viz. "The Securities and Exchange Board of India Act, 1992 by Parliament in April 1992. What prompted the Government to place in position a legislation focussed on investor protection is evident from the following Objects and Reasons of the Bill. "The capital market has witnessed tremendous growth in recent times characterised particularly by the increasing participation of the public. Investor's confidence in the capital market can be sustained largely by investor protection. With this end in view Government decided to clothe SEBI immediately with statutory powers required to deal effectively with all matters relating to capital market." 139. Section 3 of the Act pro....
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....onstructive approach in interpreting the provisions of the law. The Supreme Court observed that: " it appears appropriate to ascertain the purpose of the Act, the objective it seeks to achieve and the nature of social purpose it seeks to promote as it shall facilitate in comprehending the issue involved and assist in construing various provisions of the Act effectively. To begin with the preamble of the Act, which can afford useful assistance to ascertain the legislative intention, it was enacted, ' to provide for the protection of the interest of consumers'. Use of the word, protection' furnishes key to the minds of makers of the Act. Various definitions and provisions which elaborately attempt to achieve this objective have to be construed in this light without departing from the settled view that a preamble cannot control otherwise plain meaning of a provision. In fact the law meets long felt necessity of protecting the common man from such wrongs for which the remedy under ordinary law for various reasons has become illusory. Various legislations and regulations permitting the State to intervene and protect interest of the consumers have become a haven for unscru....
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....with or incidental thereto. 145. The Securities Contracts (Regulation) Act, 1956 is an Act to prevent undesirable transactions in securities by regulating the business of dealing therein by providing for certain other matters connected therewith. 146. At this stage, it may not be out of place to make a mention of the three notifications issued by the Ministry of Finance. They are as under : "MINISTRY OF FINANCE (Department of Economic Affairs) NOTIFICATION New Delhi, the 30th July, 1992 S.O. 573(E). - In exercise of the powers conferred by section 29A of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Central Government hereby directs that the powers exercisable by it under sub-section (5) of section 4, section 7, section 8, section 11, section 12 and section 16 of the said Act shall also be exercisable by the Securities and Exchange Board of India. [F. No.1(27)SE/92] KAMAL PANDE, Jt.Secy." "MINISTRY OF FINANCE (Department of Economic Affairs) (ECB and Investment Division) NOTIFICATIONS New Delhi, the 13th September, 1994 S.O. 672(E). - In exercise of powers conferred by Section 29A of the Securities Contracts (Regulati....
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....of the Supreme Court, wherein the power of the SEBI and the legislative intent for enacting the SEBI Act has been explained. 149. In SEBI v. Ajay Agarwal [2010] 98 SCL 424, the Supreme Court considered the question, whether Section 11B of the Securities and Exchange Board of India Act could be invoked by the Chairman of the SEBI in conjunction with Sections 4(3) and 11 for restraining the respondent of that case from associating with any corporate body in accessing the securities market and prohibiting him from buying, selling or dealing in securities. While considering the said question, the Supreme Court made the following observations, which are worth noting : "39. If we look at the legislative intent for enacting the said Act, it transpires that the same was enacted to achieve the twin purposes of promoting orderly and healthy growth of securities market and for protecting the interest of the investors. The requirement of such an enactment was felt in view of substantial growth in the capital market by increasing participation of the investors. In fact such enactment was necessary in order to ensure the confidence of the investors in the capital market by giving them some....
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....e Statements of Objects and Reasons). Section 11B of the Act thus empowers the Board to give directions in the interest of the investors and for orderly development of securities market, which, as noted above, is one of the twin purposes to be achieved by the said Act. Therefore, by the 1995 amendment by way of Section 11B Board has been empowered to carry out the purposes of the said Act." 150. In N.Narayan v. Adjudicating Officer, SEBI, AIR 2003 SC 3191, while considering the unfair trade practices relating to securities market and the market abuse, the Court made the following observations, which are worth noting : "25. In Sahara India Real Estate Corpn. Ltd.v. SEBI [2013] 1 SCC 1, this Court has noticed that though the Indian Companies Act, 1956 was modeled on English Companies Act, 1948, no efforts have been made to incorporate universally accepted principles and concepts into our company law. Of late, however, some efforts have been made by carrying out few amendments to the Companies Act, 1956, so also in the SEBI Act, 1992 and Rules and Regulations framed therein to keep pace with the English Companies Act and related legislations. When we interpret the provisio....
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....dicate that the obligations of the Directors in listed companies are particularly onerous especially when the Board of Directors makes itself accountable for the performance of the company to share holders and also for the production of its accounts and financial statements especially when the company is a listed company. 30. The Directors of the company or the person in charge directly or indirectly use or employ, in connection with the issue, purchase or sale of any securities listed in Stock Exchange, any manipulative or deceptive device or contrivance in contravention of SEBI Act or the Regulations made thereunder have necessarily to be dealt with in accordance with the provisions of the Act and the Regulations which is absolutely necessary for the investor's protection and to avoid market abuse." 151. In Bhavesh D.Parish v. Union of India [2000] 26 SCL 454 the issue before the Supreme Court was the validity of Section 9 of the Reserve Bank of India Act, on the ground that the said provision was violative of Articles 14 and 19(1)(g) of the Constitution of India. While considering the validity, the Supreme Court made the following observations in paras 22, 23 and 24, w....
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....er latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes,J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or straight jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislature judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey V. Dond 354 US 457 where Frankfurther J. said in his inimitable style: "In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the....
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....Act, 1978 (Srinivasa Enterprises v. Union of India [1980] 4 SCC 507 this Honble Court pointed out that for saving the poor and unwary public from the unscrupulous racketeers who glamourise and prey upon the gambling instinct to get rich through prizes, banning was necessary. The court observed how can you save moth from the fire except by putting out the fatal fire ? On the same analogy for safeguarding or protecting the public from the loss which was likely to be caused to them by the failure of unincorporated bodies promising high returns, it was necessary to prohibit unincorporated bodies from accepting deposits from the public. Further, as observed by this Court in Srinivas Enterprises case (supra) it is a constitutional truism that restrictions in extreme cases should be pushed to the point of prohibition, if any lesser strategy will not achieve the purpose." 152. In Madhubhai Amathalal Gandhi v. Union of India AIR 1961 SC 21, the challenge before the Supreme Court was a notification dated 31st August 1957 recognising the Stock Exchange, Bombay, under Section 4 of the Securities Contracts (Regulation) Act, 1956. The Supreme Court noted briefly while examining the legality a....
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....o buy or sell shares may degenerate into highly speculative transactions or, what is worse, purely gambling ones. Where the parties do not intend while entering into a contract of sale or purchase of securities that only difference in prices should be paid, the transaction, even though speculative, is valid and not void, for 'there is no law against speculation as there is against gambling'. But, if the parties do not intend that there should be any delivery of the shares but only the difference in prices should be accounted for, the contract, being a wager, is void. More often than not it is difficult for a court to distinguish one from the other, as a wagering transaction may be so cleverly camouflaged as to pass off as a speculative transaction. These mischievous potentialities inherent in the transactions, if left uncontrolled, would tend to subvert the main object of the institution of Stock Exchange and convert it into a den of gambling which would ultimately upset the industrial economy of the country." "After the Act came into force, both the Exchanges applied for recognition under the Act. The Government, after considering the relative merits and the relevant ci....
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....of an existing member. To put it differently, the argument proceeds that under the rules of the Stock Exchange, Bombay, membership is not thrown open to the public. This leads us to the consideration of the relevant provisions of the Stock Exchange Rules, Bye-laws and Regulations, 1957. Under R.3 the membership of the Exchange shall consist of such number of members as the Exchange in general meeting may from time to time determine. It is common case that the membership of the Exchange is not limited. Under the heading 'Election of New Members', the Rules prescribe the conditions of eligibility for election as a member of the Exchange. These Rules adopt the provisions of R. 8 of the Securities 201 Contracts (Regulation) Rules, 1957. The Rules do not contain any limitation on the eligibility of a person to be elected as a member such as that the person, should be nominated in the manner provided by the Rules or that he should come only in the vacancy caused by another member ceasing to be one in one of the ways mentioned thereunder. The words 'no person' in R.17 are comprehensive enough to take in any outsider seeking for election as a member. Rule 22 provides for an....
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.... be convenient to read Rr. 20 and 21. They are as follows: Rule 20: "A candidate for admission except' a candidate applying for a membership vesting in the Exchange must obtain a nomination in the manner provided in these Rules." Rule 21: "A candidate for admission must be recommended by two members none of whom should be a member of the Governing Board. The recommenders must have such personal knowledge of the candidate and of his past and present circumstances as shall satisfy the Governing Board." The argument is that under R.20 a candidate for admission falls under two categories, namely, (1) a candidate who must obtain a nomination in the manner provided in the Rules, i.e., R.11(a) and (b); and (2) a candidate applying for a membership vesting in the Exchange; and, therefore, these two categories exhaust the candidates for admission and that when under r. 21 the same words, 'a candidate for admission', are used they must carry the same meaning as in R.20, that is, they must be confined only to the two categories comprehended by R.20. This argument appears to be plausible and even incontrovertible, if Rr. 20 and 21 are taken out of their setting and constru....
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....ontrol. No statement from the accounts has been produced to enable us to evaluate the activities of the members before the crucial date so as to enable us to form a view that really active members were excluded by the fixing of this period. Nor are we in a position to verify whether any of the members excluded were regularly doing business during a part of the year in continuation of their business in the earlier period. We cannot also say that the words "carrying on business regularly" are so vague that the parties did not understand their connotation, for it is admitted that some of the regular members applied for membership of the Stock Exchange, Bombay and most of them were admitted. There is also the fact that though three years have elapsed since the date of the notification no other member of the Indian Stock Exchange Limited thought fit to question the notification on the ground that the period fixed was unreasonable and that really active members were excluded from membership of the Stock Exchange, Bombay. So far as the petitioner is concerned, he was admittedly not an active member, though lie now pretends that he was doing business through other members. There is also no....
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....basis of which the impugned orders were passed cannot be said to be without authority of law in face of the provisions contained in section 11 and section 11B of the Act. As the languagd of section 11(1) itself shows and as the matters for which the measures can be taken are provided in sub-section (2) of section 11. It is clearly made out by a plain reading of the language of the section itself that the SEBI has to protect the interests of the investors in securities and has to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in sub-section (2) of section 11 and in due discharge of this duty cast upon the SEBI as a part of its statutory function, it has been invested with the powers to issue directions under section 11B." 154. Thus, from the aforesaid decisions, it is amply clear that under Section 11 of the SEBI Act, the SEBI has to protect the interest of the investors in securities and to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in subsection (2) of Section 11, and in due discharge of its duties cast upon the ....
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....ted SE, Jaipur, Ludhiana, Madras, Magadh, Managalore, NSE, Pune, OTCEI, Saurashtra-Kutch, Uttar Pradesh, and Vadodara. Of these, the Stock Exchanges of Ahmedabad, Bangalore, BSE, Calcutta, Delhi, Hyderabad, Madhya Pradesh, Madras and Gauhati were given permanent recognition by the Central Government at the time of setting up of these Stock Exchanges. Apart from NSE, all Stock Exchanges whether established as corporate bodies or Association of Persons (AOPs), are non-profit making organizations. 4.2 It is thus clear that BSE, ASE and Indore Stock Exchange will have to be both corporatised and demutualised, while of the balance 20 Stock Exchanges, 18 Stock Exchanges which are already corporate entities, will only have to be demutualised. Two Stock Exchanges, NSE and OTCEI, are not only corporatised but also demutualised with segregation of ownership and trading rights of members. Further, NSEIL is a for-profit company and the Board of NSEIL comprises of representatives of shareholders, (some of whom have 100% stock broking subsidiaries) and outside non-shareholder directors. But even these two Stock Exchanges may if necessary, have to undergo changes in organizational structure co....
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.... of an Stock Exchange which were not taxed when it had the character of a not for profit entity should not be taxed when its character changes. In other words, the accumulated reserves of the Stock Exchange as on the day of corporatisation should not be taxed. However, there would be no objection to taxation of these reserves, in the hands of the shareholders when these are distributed to shareholders as dividend at the net applicable tax rate; equally all future profits of the Stock Exchange after it becomes a for profit company may be taxed;" "Segregation of trading rights and ownership 9.19 For the purpose of segregation of ownership and trading rights, the Group examined the present systems of membership prevailing in the Stock Exchanges in the country. It was noted that except for NSE, which offers trading rights against deposits, all other Stock Exchanges have the concept of membership cards for their members. In some Stock Exchanges e.g. BSE, the trading right is exercised through the ownership of a trading card, which subject to BSE's approval can be transferred for a consideration. Cards can be sold by members and also by the Stock Exchange when new members are i....
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....stors' association have felt that in a sense the presence of brokers on the governing boards affects the independence of the executives of the Stock Exchange who may be answerable to the very persons whose actions they are expected to control." "26. The issues of conflict of interest which may have arisen in the Stock Exchanges in the past could be further addressed separately, by building up strong management teams and putting in place appropriate systems and procedures which would ensure that brokers are not able to interfere in the day to day functioning of the Stock Exchanges. The Group therefore recommends that - 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 Stock Exchange; b to f.** ** ** g. the maximum number of directors on the board will be governed by the relevant provisions of the Companies Act. 1956;" "32. The Stock Exchanges and brokers' association have represented to the Group that with the advent of NSE and the trading by NSE and BSE on a national scale, most of the Stock Exchanges have nil or negligible turnover. Fu....
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....r after demutualisation is a commercial decision and the choice should be left to the concerned Stock Exchanges and it is not within the purview of the Group to recommend a specific course of action. However, the Group strongly feels that corporatisation and demutualisation will facilitate the process of consolidation of Stock Exchanges; and d. while the Group does not wish to recommend measures which may provide an exit route to the members of the Stock Exchanges, any Stock Exchange which fails to comply with the requirement of corporatisation and demutualisation by the appointed date and is accordingly derecognised, will have to distribute its assets in accordance with the provisions of the respective articles/ rules of the Stock Exchange and the relevant tax laws shall become applicable." "Legal changes required 9.45 The Group felt that some of the provisions in the various relevant statutes would have to be amended to implement the recommendations. Without these amendments it would be difficult to enforce the recommendations. The Group noted that the Stock Exchanges and the representatives of brokers have also suggested similar changes. The Group also noted that in sev....
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....the Stock Exchanges adopt the Euronext model, SEBI will have to work out the eligibility criteria for the brokers, model rules and bye-laws for such an Stock Exchange, the risk containment measures, and the listing guidelines." VIII. Legality and validity of the impugned circular : 157. The above takes us to consider the contention canvassed on behalf of the petitioners as regards the legality and validity of the circular in question. It has been strenuously contended before us by Mr.Thakore, the learned senior advocate appearing for the petitioners that the impugned circular has no force in law and cannot be termed as a statutory circular. In short, the sum and substance of the submission canvassed on behalf of the petitioners is that, if the SEBI wanted to introduce the exit policy for derecognized/non-operational Stock Exchanges by imposing a condition of a turnover of Rs. 1000 crore on continuous basis, the same could have been done only by enacting a law within the meaning of Article 13 of the Constitution of India, otherwise a circular will have no force of law. 158. We are not impressed by such submission of Mr.Thakore. First, in the circular issued by the SEBI, it ....
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.... has the force of law in any Part A State or Part C State or part thereof, but does not include any Act of Parliament of the United Kingdom or any Order in Council, rule or other instrument made under such Act". These definitions go to confirm that under our legal order "law" does not include only legislative enactments but it also includes rules, orders, notifications etc. made or issued by the Government or any subordinate authority in the exercise of delegated legislative power. ... 7. The question relating to a post-constitution order or notification in the context whether it amounts to law was considered by the Supreme Court in Jayantilal Amratlal v F.N. Rana AIR 1964 SC 648. ...The Court further observed as follows: "This is not to say that every order issued by an executive authority has the force of law. If the order is purely administrative, or is not issued in exercise of any statutory authority it may not have the force of law. But where a general order is issued even by an executive authority which confers power exercisable under a statute, and which thereby in substance modifies or adds to the statute, such conferment of powers must be regarded as having the forc....
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.... said case, the appellants before the Supreme Court as well as the respondents were originally servants of the State of Bombay and were allotted to the State of Gujarat on its formation on 1st May 1960. The respondents alleged that they had passed all the prescribed departmental examination as required by the rules of the State of Bombay and challenged the validity of certain orders of the Government of Gujarat. One of those was an order which provided that persons already promoted would have to pass the examination of G.D.C. & A. within a period of three years and if they failed to do so, then their increment would be stopped and if they had reached the maximum of the scale, their pay would be reduced to the next lower stage, until they passed the examination. In short, the main grievance of the respondents before the High Court of Gujarat was the laying down of the qualification of G.D.C. & A. for the purposes of earning increments as well as promotion. The question before the Supreme Court was as to what were the conditions of service applicable immediately before the appointed day to the parties in that case. The conditions of service applicable included not merely the rules ma....
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....circular of the Central Government dated 11th May, 1957 the Gujarat Government was competent to make the rules which they had made in 1962. The argument on behalf of the petitioners therefore that no approval could have been, given in terms of section 87 of the Bombay Reorganisation Act by a circular issued even in 1957 before that Act was passed has no force.' 165. A Division Bench of the Bombay High Court, in the case of Vinay Bubna (supra), had also the occasion to consider such issue, more particularly, the interpretation of the word 'enactment'. We quote the following observations made in paras 37, 38 and 39 : '37. It is well settled that subordinate or delegated legislation takes different forms. Subordinate legislation is divided into two main classes, namely, (a) statutory rules and (b) bye-laws or regulations made by (i) authorities concerned with local Government and (ii) persons, societies or Corporation. This is clearly enunciated in the judgment of the Apex Court in Dr.Indramani Pyarelal Gupta v. W.R. Natu AIR 1963 SC 274, to which a reference has been made in paras 26 and 27 above. Again, in the case of the Trustees of the Port of Madras v. Aminc....
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....n, administration or management of some local area, property undertaking etc. which are binding on all persons who come within their scope.' 166. Thus, from the above, we are of the view that the circular dated 30th May 2012 passed by the SEBI in exercise of its powers under Sections 11(1) and 11(2)(j) of the SEBI Act, 1992 read with Section 5 of the SCRA Act, 1956, which is the subject matter of challenge in this petition, could be termed as a statutory circular having a force of law and binding to all the Stock Exchanges in the country. IX. Legality and validity of the regulations : 167. The following provisions of the regulations are challenged by the petitioners : A. Section 2(r) (definition of Shareholders' Director) whereby he is denied voting right to elect Shareholders' Director. B. Regulations 14(1) and 14(3) providing net worth for requirement of Rs. 100/- crore. C. Regulation 23(7) provides that no Trading Member or Clearing Member of their associates and agents shall be on the Governing Board on any recognized Stock Exchange or recognized Clearing Corporation. 168. The challenge to the regulation 2(r) and regulation 23(7) of Chapter V is....
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.... power to regulate the Governing Board of Stock Exchanges does not solely flow from Section 4(B) of the Act, 1956. Such an interpretation would render all other provisions of the SCRA as well as the SEBI Act otiose. It is too much to say that a scheme once framed under Section 4(B) would be sacrosanct for all times to come without leaving any scope for the SEBI as a regulator to review the regulatory structure. In our opinion, the interpretation put forward on behalf of the petitioners would defeat the purpose of regulatory powers conferred on the SEBI by the SCRA and the SEBI Act. Mr.Shelat is right in submitting that it is an on-going process. The proviso under sub-section (1) of Section 4B of the SCRA Act provides that exchanges, which were already corporatised and demutualised, do not have to submit a scheme for approval by the SEBI. If the submission of Mr.Thakore is accepted, it would mean that the SEBI would be powerless to further regulate those exchanges as regards its ownership and governance structure. While granting sanction under Section 4(B)(6) and 4(B)(7), it is specifically provided that sanction is conditional reserving right to amend, alter or modifying the Scheme....
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....der section 11B. Thus, there is an authority under law to take the measures and merely because the measures have not been laid down in advance and published. It cannot be said that SEBI had no other authority under law to issue the directions, as contained in the impugned circular. The authority has been given under the law to take appropriate measures as it thinks fit and that by itself is sufficient to cloth the SEBI with the authority of law. 173. Section 11 and Section 11B are interconnected and coextensive as both these sections are mainly focused on investor protection. The SEBI has been in no uncertain terms mandated to protect the interests of investors in securities by such measures as it thinks fit, subject to the provisions of the Act. The expression 'measure' has not been defined in the Act. So we have to go by its generally understood meaning. According to Corpus Juris Secundum measure means "anything desired or done with a view to the accomplishment of a purpose, a plan or course of action intended to obtain some object, any course of action proposed or adopted by a Government". 174. If the SEBI's powers to modify the scheme for individual Stock Exch....
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....SEBI. (c) Section 7A recognition Stock Exchange to make rules restricting voting rights. (d) Section 4-B(6) provides that the SEBI is authorized to restrict the maximum number of representatives of the stock brokers on the Governing Board which shall not exceed one-fourth of the total strength of the Governing Board. (e) Section 12-A(c) provides for direction by the SEBI for securing proper management of any Stock Exchange or Clearing House. (f) Regulations framed under Section 31 of the Act are required to be laid before the Parliament and it becomes part of the statutory law. 178. Section 7A of the SCRA Act, 1956, makes it clear that the rules as approved by the Central Government shall be deemed to have been made validly notwithstanding anything contained to the contrary in the Companies Act, 1956. 179. The above takes us to consider the submission canvassed on behalf of the petitioners as regards the justification and the rationale in imposing the condition of turnover of Rs. 1000 crore in the circular. According to the petitioners, there is no valid reason or rationale behind the regulations and the circulars. On the contrary, by imposing such a harsh conditi....
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.... executive and the legislature. . ............... Government would take diverse factors for formulating the policy ........ in the overall larger interest of the economy of the country. It is, therefore, by exercise of the power given to the executive or as the case may be, the legislature is at liberty to evolve such policies. A prior decision would not bind the Government for all times to come. When the Government is satisfied that change in the policy was necessary in the public interest, it would be entitled to revise the policy and lay down new policy. The Court, therefore, would prefer to allow free play to the Government to evolve fiscal policy in the public interest and to act upon the same." 184. In our opinion there should be judicial restraint in fiscal and economic regulatory measures. The State should not be hampered by the Court in such measures unless they are clearly illegal or unconstitutional. All administrative decisions in the economic and social spheres are essentially ad hoc and experimental. Since economic matters are extremely complicated, this inevitably entails special treatment for distinct social phenomena. The State must therefore be left with wide l....
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....itizen has a fundamental right to carry on a trade or business, yet he has no fundamental right to insist upon the State that he will carry on trade or business only at the Vadodara Stock Exchange. 187. In the aforesaid context, we may quote the observations of the Supreme Court as contained in paras 32 and 34 of Krishnan Kakkanth (supra) as under : '32. It has already been indicated that in Vikalad Coal Marchant v. Union of India AIR 1984 SC 95, it has been held by this Court that infringement of fundamental right under Article 19(1)(g) must have a direct impact on the restriction on the freedom to carry on trade and not ancillary or incidental effects on such freedom to trade arising out of any governmental action.It has also been held in that case that unless the trader or merchant is not wholly denied to carry on his trade, the restriction imposed in denying the allotment of wagon in favour of such trader or merchant to transport coal for carrying out trading activities does not offend Article 19(1)(g) of the Constitution. No restriction has been imposed on the trading activity of dealers in pumpsets in the state of Kerala including northern region comprising eight di....
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....tion of Mr.Thakore flows from the provision of Section 4(1)(b). We are afraid, we are not impressed by such submission of Mr.Thakore as this issue is no longer res integra after the pronouncement of the decision of the Supreme Court in the case of Madhubhai Amathalal Gandhi (supra). 190. In the case before the Supreme Court, condition 2(i)(a) was imposed, which provided that the members of the Indian Stock Exchange Limited, Bombay, would be entitled to apply for membership of the Stock Exchange, Bombay, provided they fulfil or comply with certain terms and conditions. The contention before the Supreme Court was that condition 2(i)(a) enabled only the active members of the Indian Stock Exchange Limited to apply for membership of the Stock Exchange, Bombay, and such condition could be imposed only if it amounts to a qualification of membership within the meaning of sub-section (2) of Section 4. Repelling such argument, the Supreme Court observed the following : '"...The argument proceeds that condition 2(i)(a) enables only the active members of the Indian Stock Exchange Limited to apply for membership of the Stock Exchange, Bombay and that such a condition can be imposed on....
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....he total strength of the Governing Board. The words 'not exceeding' provided for the maximum number of stock brokers to be appointed on the Governing Board. The minimum could be zero also. 193. Mr.Shelat, the learned senior advocate appearing for the SEBI, in this context has placed reliance on the term 'not exceeding' as explained in Stroud's Judicial Dictionary of Words and Phrases, Sixth Edition. It reads as under : 'A sum 'not exceeding' : see per Bayley J., Cortis v. Kent Water Works Co., 7 B. & C. 340; Palmer v. Newell [1872] W.N. 9; see further R. v. St.George's Southwark, 19 Q.B.D. 533. In Cortis v. Kent Water Works Co., 7 B. & C. 314, the phrase was held, under the circumstances, as connoting a minimum." "Not more than [S.154 IPC (45 of 1860)]; [S.57(a)(2), TP Act (4 of 1882)]."' 194. In our opinion, the words 'not exceeding' means that it confers upon the SEBI the discretion to determine the number of stock brokers on the Governing Board. However, in this regard, Mr.Shelat submitted that the words 'not exceeding' could also mean zero number of brokers on the Governing Board. 195. The denial of right to....