2010 (1) TMI 574 - SC - Companies Law

Whether in the absence of publication of the rules and bye-laws of the Bombay Stock Exchange, which had been framed prior to its recognition in 1956 under the 1956 Act, its activities could be said to be without authority? Held that - Appeal dismissed. Agreeing with the views expressed by the High Court that the petitioner has not been able to make out any case of mala fides or irregularity on the part of the Bombay Stock Exchange with regard to the listing and subsequent de-listing of the scrip of M/s. Presto Finance Ltd. and also of the view that the publication of the rules and bye-laws of the Stock Exchange was not intended in the Securities Contract (Regulation) Act, 1956, as otherwise some provision would have been made in the Act with regard to pre-recognition rules and bye-laws. While the Act provides for publication of amendments to the rules and bye-laws after grant of recognition, the Act is silent with regard to the publication of the pre-recognition rules or bye-laws which were already in existence and had been acted upon all along.

Summary

Issues Involved:
1. Non-compliance with the provisions of sections 7 and 9 of the Securities Contracts (Regulation) Act, 1956.
2. Fraudulent inducement to trade in forged scrips.
3. Validity of the rules, bye-laws, and regulations of the Bombay Stock Exchange (BSE).
4. Delay in approaching the court.
5. Authority and actions of the Securities and Exchange Board of India (SEBI).

Issue-wise Detailed Analysis:

1. Non-compliance with the provisions of sections 7 and 9 of the Securities Contracts (Regulation) Act, 1956:
The petitioner argued that BSE had failed to comply with sections 7 and 9 of the 1956 Act, which required the publication of the recognition granted to BSE in the Gazette of India and the Official Gazette of the State. The petitioner claimed that since the recognition was not published, it had no effect. The respondent countered that the recognition granted to BSE was duly published in the Gazette of India on 31-8-1957, and the rules, bye-laws, and regulations were approved by the Government of India and continuously acted upon since then. The court agreed with the respondent, stating that the rules and bye-laws did not require publication under section 9(4) of the 1956 Act since they were in existence before the enactment of the 1956 Act and the grant of recognition.

2. Fraudulent inducement to trade in forged scrips:
The petitioner alleged that BSE and its members induced him to buy shares of Presto Finance Ltd., which were later found to be forged. The petitioner claimed that BSE failed to protect his interests and asked him to approach the liquidator of Presto Finance Ltd. for damages. The respondent argued that BSE acted promptly upon receiving information of the fraud from the Ahmedabad Stock Exchange and delisted the scrip. The court found no evidence of mala fide motive on the part of BSE and noted that BSE had invited those with forged scrips to submit them for further action.

3. Validity of the rules, bye-laws, and regulations of the Bombay Stock Exchange (BSE):
The petitioner contended that the rules, bye-laws, and regulations of BSE were void and ultra vires the 1956 Act and the Constitution. The respondent argued that the rules and bye-laws were statutory in nature and had the force of enactment. The court agreed with the respondent, stating that the rules and bye-laws were valid and had been continuously acted upon for more than 50 years. The court also noted that amendments to the rules and bye-laws after the grant of recognition were duly published in the Gazette.

4. Delay in approaching the court:
The respondent argued that the petitioner approached the court ten years after the incident, which was sufficient ground for dismissal of the writ petition. The court agreed, citing the doctrine of stare decisis and the need to avoid unsettling long-standing decisions and transactions.

5. Authority and actions of the Securities and Exchange Board of India (SEBI):
The petitioner argued that SEBI failed to protect investors' interests as mandated under section 11 of the SEBI Act. The respondent and SEBI countered that immediate steps were taken to delist the fraudulent scrip and debar the directors of Presto Finance Ltd. SEBI also debarred the companies promoted by the directors from accessing the capital market for five years. The court found no fault with SEBI's actions and noted that SEBI had taken due steps to protect the securities market and investors.

Conclusion:
The court dismissed the Special Leave Petition, agreeing with the Bombay High Court that the petitioner failed to make out any case of mala fides or irregularity on the part of BSE. The court also found that the publication of pre-recognition rules and bye-laws was not required under the 1956 Act. However, the court suggested that it would be prudent to publish the pre-recognition rules and bye-laws in the Official Gazette to prevent similar issues in the future.