2015 (1) TMI 204 - HC - Companies Law

Maintainability of the writ-petition under Article 226 of the Constitution of India Held that - Locus standi of the petitioners is a sine qua non or condition precedent for the exercise of power or jurisdiction by the Court, inasmuch as, the legal capacity of a party to any litigation, where any private or any public action in relation to a remedy sought has to be decided before granting a relief, the issue as to locus standi touches the jurisdiction of the Court - 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 relying upon Ghulam Qadir v. Special Tribunal 2001 (10) TMI 1105 - SUPREME COURT - the petitioners who are the Trading Members holding 49% of shares in the company are apprehending that in view of the circular and the regulations their right to trade in securities as enshrined under Article 19(1)(g) of the Constitution of India will get infringed as it is not possible to fulfill the conditions imposed by the SEBI, although in public interest - although a person may not claim a fundamental right to carry on trade in securities at a particular Stock Exchange only, yet the petitioners as the Trading Members, if prohibited in any manner or are unable to trade on account of the restrictions imposed, it would not prevent them from challenging the constitutionality of the circular or the regulations 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 thus, the preliminary objection raised by the respondents is rejected. Validity of notice issued by the VSEL - Legality and validity of the circulars dated 30th May 2012 and 13th December 2012 and the Securities Contracts (Regulation) (Stock Exchange and Clearing Corporations) Regulations, 2012, issued by the Securities Exchange Board of India (for short, SEBI ) - Whether the 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 Held that - U/s 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 SEBI as part of its statutory function, it has been invested with the powers to issue directions under Section 11B - The SEBI is invested with the statutory powers to regulate the securities market with the object of ensuring investors protection, orderly and healthy growth of securities market so as to make the SEBI s control over the capital market to be effective and meaningful - The SEBI has to regulate speculative market, and in case of speculative market, varied situations may arise and looking into the exigencies and requirements, it has been entrusted with the duties and functions to take such measures as it thinks fit - Section 11B of the SEBI Act is an enabling provision enacted to empower the SEBI Board to regulate securities market in order to protect the interest of the investors - Such an enabling provision must be so construed as to subserve the purpose for which it has been enacted - The SEBI is charged with the duty to protect the public and the integrity of the capital market, and as a regulator, it has powers to issue the circular impugned in this petition in public interest including the regulations, and the interference at the end of the court in such type of matters should be minimal unless it is established that the same is in gross violation of any of the provisions of law or the Constitution of India - the SEBI considered various reports of the experts on the issue and the impugned circular and the regulations are based on the findings recorded in the report of the experts. Legality and validity of the impugned circular Held that - In the circular issued by the SEBI, it has been stated that the same has been issued in exercise of powers conferred under Sections 11(1) and 11(2)(j) of the SEBI Act, 1992 read with Section 5 of the SCRA Act, 1956, to protect the interests of investors in securities and to promote the development of and to regulate the securities market - Thus, the circular has been issued with a particular object and in exercise of the statutory power conferred on the SEBI as a statutory authority - whether a circular issued by a statutory authority would be binding or not, or whether the same has a statutory force or not, would depend upon the nature of the statute - For the said purpose, the intention of the Legislature must be considered - the issue as regards the statutory force of a circular has been considered in BOI. Finance Ltd. Versus Custodian 1997 (3) TMI 457 - SUPREME COURT OF INDIA - a circular issued by the RBI which stated that the banks were advised to follow the Guidelines given thereunder, the word advised cannot be read in isolation and the said document was meant to be binding on the banking companies thus, 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. Legality and validity of the regulations Held that - Petitioner contended that after the approval of the Scheme under Section 4(B)(2) of the SCRA Act, 1956, the SEBI could not have imposed any new condition in the form of a circular, directing that if the Stock Exchange is not able to achieve the prescribed turnover of ₹ 1000 crore on continuous basis or does not apply for voluntary surrender of recognition and exit before the expiry of two years from the date of the circular, it shall proceed with compulsory derecognition and exit of such Stock Exchanges in terms of the conditions as may be specified by the SEBI - the schemes approved by the SEBI under Section 4(B) of the SCRA Act, 1956, do not restrain or denude the SEBI of the power to regulate the Stock Exchanges through other measures including by way of subordinate legislation or issuance of regulatory direction - 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 - 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 - 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 is in the public interest and in furtherance of the objects of the Corporatisation and Demutualisation of the Stock Exchanges. Therefore, in view of clause (8) of the order, the SEBI is competent to impose further condition as regards voting rights of the Trading Members and deny voting rights to the Trading Members and deny right to vote for electing Shareholders Director - therefore, there is ample power under the Act to make regulation - The Vadodara Stock Exchange is granted renewal every year, and while granting renewal, it is competent for the SEBI to provide further condition from time to time under Section 4 of the SCR Act read with rule 6 of 1957 Rules, and while seeking recognition, the Stock Exchange is required to give an undertaking to comply with other conditions and terms as may be imposed - the SECC Regulations as well as the impugned Exit Circular dated 30th May 2012 were issued by the SEBI after due consultation with all the stakeholders including the recognized Stock Exchanges although there is no such statutory mandate for the SEBI to make such consultations before framing the regulations or issuing the circulars. Justification and the rationale in imposing the condition of turnover of ₹ 1000 crore in the circular Held that - There is no prohibition in the circular which prevents the petitioners from carrying on trade and earn livelihood as traders or brokers - it is very difficult to accept the submissions of the petitioners that they have a fundamental right under Article 19(1)(g) of the Constitution of India to trade at a particular Stock Exchange only and that is the Vadodara Stock Exchange - it is not for this Court to comment on the economic policy of the SEBI. 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 latitude in devising ways and means of imposing fiscal or regulatory measures, and the Court should not, unless compelled by the statute or by the Constitution, encroach into this field. It cannot be said that with such derecognition the fundamental right of the petitioners to trade in shares at the VSEL would get infringed under Article 19(1)(g) of the Constitution of India - The fundamental rights guaranteed under Article 19 of the Constitution of India are not absolute but the same are subject to reasonable restrictions to be imposed against the enjoyment of such rights - Such reasonable restrictions seek to strike a balance between the freedom guaranteed by any of the clauses under Article 19(1) and the social control permitted by the clauses (2) to (6) under Article 19 of the Constitution of India - in determining the infringement of the right guaranteed under Article 19(1) of the Constitution of India, the nature of right alleged to have been infringed, the underlying purpose of the restriction imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, enter into judicial verdict - Therefore, although a citizen 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. The words not exceeding means that it confers upon the SEBI the discretion to determine the number of stock brokers on the Governing Board - the denial of right to be on the Board of Management and/or denial of right to vote for Shareholders Director is because with the experience gained it has been found by the SEBI that there is total conflict of interest if the Trading Members are on the Board of Directors - the Trading Members were influencing the decision making process - The importance of the net worth has been explained in the Bimal Jalan Report - even as a shareholder, the petitioners other rights are protected - The petitioners have a right to attend the General Meeting, Special Meeting, and by majority, can participate in the decision making policy at the General Board. The Directors are not within the control of the SEBI, as is alleged - The Public Interest Directors are independent Directors and it is erroneous to suggest that only the Trading Members can alone provide for greater turnover and/or net worth thus, the petitioners are not entitled to any of the reliefs as prayed for in the petition Decided against petitioner.

Summary

Issues Involved:
1. Legality and validity of SEBI circulars dated 30th May 2012 and 13th December 2012, and the Securities Contracts (Regulation) (Stock Exchange and Clearing Corporations) Regulations, 2012.
2. Whether the SEBI circulars and regulations are ultra vires the Constitution of India and contrary to the provisions of the Securities Contracts (Regulation) Act, 1956 and the Companies Act, 1956.
3. Whether the SEBI circulars and regulations infringe the fundamental rights of the petitioners under Article 19(1)(g) of the Constitution of India.
4. Whether the SEBI has the authority to impose conditions on Stock Exchanges post-approval of the Corporatisation and Demutualisation Scheme.
5. Whether the SEBI circulars and regulations are arbitrary, unreasonable, discriminatory, and unjust.

Detailed Analysis:

1. Legality and Validity of SEBI Circulars and Regulations:
The SEBI issued circulars and regulations 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. The circulars and regulations aim to protect the interests of investors and promote the development and regulation of the securities market. The court held that the circulars and regulations have statutory force and are binding on all Stock Exchanges in the country. The SEBI has the authority to issue such circulars and regulations to ensure the orderly development of the securities market and to protect investors.

2. Ultra Vires the Constitution and Contrary to Provisions of SCRA and Companies Act:
The petitioners argued that the SEBI circulars and regulations are ultra vires the Constitution and contrary to the provisions of the SCRA and the Companies Act. However, the court held that the SEBI has broad regulatory powers under the SCRA and the SEBI Act to issue directions and regulations for the proper management of Stock Exchanges. The SEBI's power to regulate the Governing Board of Stock Exchanges does not solely flow from Section 4B of the SCRA. The SEBI can impose conditions even after the approval of the Corporatisation and Demutualisation Scheme.

3. Infringement of Fundamental Rights under Article 19(1)(g):
The petitioners claimed that the SEBI circulars and regulations infringe their fundamental right to trade in securities under Article 19(1)(g) of the Constitution. The court rejected this argument, stating that the petitioners do not have a fundamental right to trade at a particular Stock Exchange. The SEBI's conditions do not prohibit the petitioners from carrying on trade and earning a livelihood as traders or brokers. The restrictions imposed by the SEBI are reasonable and in the interest of the general public.

4. SEBI's Authority to Impose Conditions Post-Approval of the Scheme:
The petitioners contended that the SEBI cannot impose new conditions after the approval of the Corporatisation and Demutualisation Scheme. The court disagreed, stating that the schemes approved by the SEBI do not denude it of the power to regulate Stock Exchanges through other measures, including subordinate legislation or regulatory directions. The SEBI has the authority to modify the scheme if necessary in the public interest.

5. Arbitrariness, Unreasonableness, Discrimination, and Injustice:
The petitioners argued that the SEBI circulars and regulations are arbitrary, unreasonable, discriminatory, and unjust. The court held that the SEBI's actions are based on expert reports and are aimed at ensuring investor protection and the orderly development of the securities market. The imposition of a turnover condition of Rs. 1000 crore is a policy decision within the SEBI's regulatory powers. The court emphasized judicial restraint in matters of economic policy and deferred to the SEBI's expertise in regulating the securities market.

Conclusion:
The court dismissed the petition, upholding the legality and validity of the SEBI circulars and regulations. The SEBI's actions were found to be within its statutory powers and aimed at protecting investors and ensuring the orderly development of the securities market. The restrictions imposed by the SEBI were deemed reasonable and in the public interest. The court emphasized the need for judicial restraint in matters of economic policy and deferred to the SEBI's expertise.