1999 (9) TMI 830 - HC - Companies Law

Disqualification of directors Stock exchange Grant of recognition to stock exchanges Powers of stock exchange to make rules/bye-laws

Issues Involved:
1. Validity of additional disqualification imposed by the stock exchange under Article 74(2) of its Articles of Association.
2. Applicability of Section 274 of the Companies Act, 1956 to public limited companies and stock exchanges governed by the Securities Contracts (Regulation) Act, 1956.
3. Interpretation of Section 7A and Section 8 of the Securities Contracts (Regulation) Act, 1956.

Detailed Analysis:

1. Validity of Additional Disqualification Imposed by the Stock Exchange:

The petitioner challenged Article 74(2) of the Articles of Association of the respondent-stock exchange, which disqualified members with less than three years of membership from contesting elections to the governing council. The petitioner argued that such disqualification was not provided for under Section 274(1) of the Companies Act, 1956, which lists the only permissible disqualifications for directors of public limited companies.

The court held that the stock exchange, being governed by the Securities Contracts (Regulation) Act, 1956 (Securities Act), could impose additional disqualifications. The Securities Act provides for the regulation and governance of stock exchanges, including the constitution of their governing bodies, and allows for additional conditions to ensure proper governance. Therefore, the additional disqualification in Article 74(2) was valid and enforceable.

2. Applicability of Section 274 of the Companies Act, 1956:

The petitioner contended that Section 274(3) of the Companies Act only allows private companies to impose additional disqualifications, implying a prohibition for public limited companies. The petitioner relied on the Bombay High Court's decision in Cricket Club of India Ltd. v. Madhav L. Apte, which interpreted Section 274(3) as prohibiting public companies from adding disqualifications.

The court distinguished the present case from the Cricket Club of India case, noting that the stock exchange is governed by the Securities Act, a special enactment that provides for the regulation of stock exchanges. The court concluded that the principle of necessary implication applied by the Bombay High Court did not extend to stock exchanges governed by the Securities Act. Therefore, the stock exchange could impose additional disqualifications despite Section 274(3) of the Companies Act.

3. Interpretation of Section 7A and Section 8 of the Securities Contracts (Regulation) Act, 1956:

The respondent argued that the Securities Act allows for the imposition of additional conditions for the governance of stock exchanges, including the qualifications for members of the governing body. Sections 7A and 8 of the Securities Act provide the Central Government with the authority to direct stock exchanges to make or amend rules, which can include additional qualifications or disqualifications.

The court agreed with the respondent, stating that the Securities Act's provisions override the Companies Act in matters related to the governance of stock exchanges. Section 8(2) of the Securities Act gives overriding effect to rules made or amended under the direction of the Central Government, even if they conflict with the Companies Act. Therefore, the stock exchange's rule requiring three years of membership before contesting elections was valid.

Conclusion:

The court concluded that the additional disqualification imposed by the stock exchange under Article 74(2) was valid and enforceable. The Securities Act allows for such additional conditions to ensure proper governance of stock exchanges, and these provisions override the Companies Act. The petition was dismissed, upholding the stock exchange's rule requiring three years of membership before contesting elections to the governing council.

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