2014 (5) TMI 901 - HC - Companies Law

Validity of Regulations 6, 7, 14, 16, 17, 19, 20, 21(1)(b), 23, 24 and 25 - Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 - Regulations completely muzzle the fundamental right guaranteed by Article 19 (1) (c) of the Constitution, on a citizen to form an association by choosing its members and directors - regulations totally supplant the provisions of Section 4(b), 5, 7A, 11 and 31 of the SCRA and Rules 4, 5 & 6 (read with Form A) of the Securities Contracts Rules5 - regulations sail far beyond the bounds set down by the SCRA and the rules and since they constitute sub delegated legislation, must yield to the statute - prohibition on the fundamental right to carry on business and trade under Article 19 (1) (g) - Held that - Stock exchanges are, as the Jalan Committee observed, vital elements of the economic infrastructure of a modern economy. They provide a platform for investors to transact in securities. The probity and integrity of the functioning of stock exchanges deeply reflects upon the sense of confidence which investors have in the securities market. These investors are not just individual investors but institutional investors. Investments in the stock market are not confined to national boundaries but have a transnational character. Institutional decisions to invest in the stock market have a close and integral connection with the state of the economy, financial stability and the nature of regulatory governance. The market for securities has an integral connection with the allocation of capital and financial resources in a modern economy. Anything which affects the stability of the capital market has an impact on investor wealth and can severely imperil a stable financial order. Hence, the requirements which have been imposed by the SECC regulations must be assessed in the backdrop of the need to ensure transparency in the functioning of the securities market. Coupled with this is a felt necessity of ensuring the financial stability of stock exchanges, the dispersal of ownership and the avoidance of conflicts of interest which can jeopardize a stable and efficient market for securities. Regulation 20 (1) SECC Regulations stipulates when a person shall be deemed to be fit and proper. Undoubtedly, the considerations which have been specified in Regulation 20 (1) (a) have a broad connotation, but the Court must be circumspect in striking down such a provision on the anvil of a scrutiny with a fine-tooth comb because so long as they fall within the general ambit of reasonableness, the regulation must be sustained. Financial integrity, reputation, character and honesty are matters which have a serious bearing on the objective, transparent and fair functioning of the securities market. Regulation 20 (1) (b) similarly specifies that the person should not have undergone any of the stated disqualifications. Though, the decision of SEBI on whether a person is fit and proper person has been made final, such finality would exclude the jurisdiction of a civil court. At the same time, a right of appeal is available under Section 15T (1) (a) of the SEBI Act to the Securities Appellate Tribunal to any person aggrieved by an order of SEBI made under the Act or the rules or regulations. When SEBI rejects an application for want of satisfaction of the fit and proper criterion, it must, in our view, record reasons which would be amenable to the appellate jurisdiction of the Tribunal under Section 15T. Recording of reasons would ensure that the exercise is not based on a subjective assessment but is based on an objective analysis. There is no merit in the challenge, which has been leveled by the petitioners to the SECC Regulations. The Regulations are not ultra vires SCRA. They do not supplant the SCRA or travel beyond the bounds which are set by the statute or rules made thereunder. There is no merit in the contention that the regulations muzzle the fundamental right guaranteed under Article 19 (1) (c) or infringe the right to carry on trade or business under Article 19 (1) (g) - Decided against Appellants.

Issues Involved:
1. Constitutional validity of the SECC Regulations, 2012.
2. Alleged violation of Article 19(1)(c) of the Constitution.
3. Alleged violation of Article 19(1)(g) of the Constitution.
4. Ultra vires challenge to the SECC Regulations.
5. Fit and proper person criterion.
6. Ownership and governance structure of stock exchanges.

Detailed Analysis:

1. Constitutional Validity of the SECC Regulations, 2012:
The petitioners challenged the constitutional validity of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC Regulations), framed by SEBI under the Securities Contracts (Regulation) Act, 1956 (SCRA) and the Securities and Exchange Board of India Act, 1992 (SEBI Act).

2. Alleged Violation of Article 19(1)(c) of the Constitution:
The petitioners argued that the SECC Regulations "completely muzzle" the fundamental right guaranteed by Article 19(1)(c) of the Constitution, which allows citizens to form associations by choosing their members and directors. The court held that while the right to form an association is guaranteed, the right to recognition is not. The regulations do not alter the composition of the association but regulate the business and activities of stock exchanges, which is permissible under the law.

3. Alleged Violation of Article 19(1)(g) of the Constitution:
The petitioners contended that the SECC Regulations amount to a prohibition on the fundamental right to carry on business and trade under Article 19(1)(g) of the Constitution. The court applied the test of reasonableness and held that the regulations are not excessively restrictive. The requirements for minimum net worth, ownership dispersal, and governance structure are justified to ensure transparency, financial stability, and avoidance of conflicts of interest in the functioning of stock exchanges.

4. Ultra Vires Challenge to the SECC Regulations:
The petitioners argued that the SECC Regulations "totally supplant" the provisions of the SCRA and the rules made thereunder. The court held that SEBI, in framing the SECC Regulations, acted within the statutory powers conferred by Sections 4, 8A, and 31 of the SCRA and Sections 11 and 30 of the SEBI Act. The regulations are consistent with the provisions of the SCRA and the rules, and SEBI has not acted ultra vires.

5. Fit and Proper Person Criterion:
The petitioners challenged the "fit and proper person" criterion under Regulation 20, arguing it is vague and arbitrary. The court held that financial integrity, reputation, character, and honesty are reasonable considerations for determining eligibility. The decision of SEBI on whether a person is fit and proper must be based on objective analysis and reasons, which are subject to appellate jurisdiction under Section 15T of the SEBI Act.

6. Ownership and Governance Structure of Stock Exchanges:
The SECC Regulations impose restrictions on the ownership and governance structure of stock exchanges, including a minimum net worth requirement of Rs. 100 crore, dispersal of ownership, and the inclusion of public interest directors on the governing board. The court upheld these provisions, noting that they are designed to ensure the orderly development and functioning of the securities market, prevent conflicts of interest, and maintain investor confidence.

Conclusion:
The court dismissed the petition, holding that the SECC Regulations are not ultra vires the SCRA, do not infringe the fundamental rights under Articles 19(1)(c) and 19(1)(g), and are justified in the interest of maintaining transparency, financial stability, and integrity in the securities market. The regulations are within the statutory powers conferred upon SEBI and are reasonable and necessary to achieve the objectives of the SCRA and the SEBI Act.

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