2013 (9) TMI 623 - HC - Companies Law

Constitutional validity of certain provisions of SEBI Act - Violation of Article 14 - Held that - The doctrine of equality embodied in Article 14 as well as the other articles in the Constitution have to be understood in the light of social justice assured by Articles 38, 39, 39A, 41 and 46 thereof. The State exists for serving the public good and to advance public interest. While considering a challenge to a provision of law enacted by the Parliament or by any of the legislatures as offending any of the fundamental rights that the Constitution guarantees, the Court has to presume that the law is valid and has validly been enacted. The onus of establishing that the law in question is ultra vires is quite heavy. Nevertheless, whatever be the impugned law and the ground on which a challenge is thrown, the aforesaid principles are imperatively to be borne in mind. After all, Article 14 guarantees equality before law and equal protection of the laws not only to the petitioners before me who challenge a particular law but also to the vast cross-section of the society with whom they have and intend to have business relationships - If a rational nexus between the policy and the object it seeks to achieve is discernible, the Court would unhesitatingly guard against substituting its view for the legislative judgment. Should the policy be found sustainable, it would then exercise the consideration of the Court as to how implementation of the policy is to be worked out by the administrative authority. If guidelines exist for regulating the exercise of power, which are not unreasonable or unworkable, the Court would stay at a distance - However, if the policy, its object and ways and means to implement it are found to serve the cause of public good, irrespective of some crudity here and there, prejudicial affectation of one s business interest by reason of the regulatory framework being put in place has to yield to larger public interest or else the latter would be the casualty. The preamble of an Act is said to afford useful light as to what the statute intends - Insofar as the charge of excessive delegation of essential legislative functions is concerned, the same is equally without merit. As regards laying down of principles or guiding norms, law seems to be well-settled that it is not essential that the very section in the statute which confers the power should also lay down the rules of guidance, or the policy for the administrator to follow. If the same can be gathered from the preamble, or the long title of the statute and other provisions therein, the discretion would not be regarded as uncontrolled or unguided and the statute in question will not be invalid. At times, even vague policy statements to guide administrative discretion have been held by the courts as complying with Article 14. I have no hesitation to hold that the CIS Regulations viewed in the light of the object that the SEBI Act after its amendment seeks to achieve - Besides, it appears that the CIS Regulations were duly placed before the Lok Sabha on December 10, 1999 and the Rajya Sabha on December 14, 1999 in accordance with the statutory mandate in Section 31 of the SEBI Act. If indeed the SEBI, as delegate, had transgressed the permissible limits, the Parliament had the authority to intervene to set things right. No modification having been suggested by the Parliament, it is clear that the CIS Regulations were found to be in order. Abdication of authority by the Parliament, on facts and in the circumstances, also does not arise - impugned provisions do not suffer from any over-breadth. The net of coverage had to be spread wide and high to check each and every attempt to loot the hard earned money of the aam aadmi for one s personal wrongful gain and so long as abuse of discretionary power is not demonstrated, the petitioners cannot expect any relief - Decided against petitioner.

Summary

Issues Involved:
1. Constitutional validity of certain provisions of the SEBI Act and CIS Regulations.
2. Alleged excessive delegation of legislative functions.
3. Applicability of SEBI Act and CIS Regulations to the petitioners' business activities.
4. Alleged arbitrariness and vagueness of SEBI Act Section 11AA.
5. Petitioners' challenge to SEBI's order dated January 3, 2011.

Detailed Analysis:

1. Constitutional Validity of SEBI Act and CIS Regulations:
The petitioners challenged the constitutional validity of clause (ba) of sub-section (1) of Section 2, Section 11AA, the third proviso to clause (f) of sub-section (4) of Section 11, and sub-section (1B) of Section 12 of the SEBI Act, and Regulations 2(1)(b)(i), 3, 5, 9, 13, 14, 65, 73, and 74 of the CIS Regulations. The court evaluated whether these provisions were arbitrary and violated Article 14 of the Constitution. The court noted that the amendments were introduced to protect investors from fraudulent schemes and ensure proper regulation. The court concluded that these provisions did not suffer from any over-breadth and were necessary to prevent the swindling of investors' money.

2. Alleged Excessive Delegation of Legislative Functions:
The petitioners argued that the CIS Regulations constituted excessive delegation of legislative functions. The court held that the regulations were within the scope of the SEBI Act and were necessary to implement its objectives. The court referred to the principle that the legislature can delegate ancillary or subordinate legislative functions, and found that the CIS Regulations did not exceed this permissible limit.

3. Applicability of SEBI Act and CIS Regulations to Petitioners:
The petitioners contended that their business activities did not fall within the definition of a Collective Investment Scheme (CIS) under the SEBI Act. The court examined the nature of the petitioners' business and found that it involved pooling of investors' contributions and managing them on their behalf, which brought it within the ambit of a CIS. The court emphasized that the regulatory framework was designed to protect investors and ensure transparency in such schemes.

4. Alleged Arbitrariness and Vagueness of SEBI Act Section 11AA:
The petitioners claimed that Section 11AA of the SEBI Act was vague, uncertain, and conferred unguided discretion, violating Article 14. The court rejected this argument, stating that the section provided clear criteria for identifying a CIS and was necessary to cover various schemes that could potentially defraud investors. The court noted that the legislative intent was to ensure comprehensive regulation of all investment schemes to protect public interest.

5. Petitioners' Challenge to SEBI's Order Dated January 3, 2011:
The petitioners also challenged SEBI's order dated January 3, 2011, which directed them to cease their CIS activities without registration. The court noted that the petitioners had the liberty to appeal this order before the Securities Appellate Tribunal. The court emphasized that the petitioners' challenge to the SEBI Act and CIS Regulations was primarily aimed at avoiding compliance with regulatory requirements and prolonging litigation.

Conclusion:
The court dismissed the writ petition, upholding the constitutional validity of the challenged provisions of the SEBI Act and CIS Regulations. The court imposed costs of Rs.10,00,000 on the petitioners, to be deposited with the Registrar, Original Side, and directed the amount to be shared equally between the State Legal Services Authority and the Calcutta High Court Legal Services Authority. The court allowed the petitioners to challenge the SEBI order before the Tribunal in accordance with the law.