9911796707
TMI Blog1966 (11) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... ecided by arbitration as provided by the rules, bye-laws and regulations of the Stock Exchange, Bombay. Accordingly, the petitioner intimated to the Stock Exchange on the prescribed forms that he had appointed one Shah as his arbitrator and called upon the respondents to appoint an arbitrator on their own behalf. Thereafter, the Stock Exchange informed the respondents about it and called upon them to appoint their own arbitrator to act jointly with the arbitrator appointed by the petitioner. The respondents by their letter in reply dated 5th December, 1961, wrote to the Stock Exchange that there was no agreement for arbitration between the parties and that the petitioner did not therefore have any right to call upon the respondents to appoint their own arbitrator. The petitioner thereupon filed this petition mainly for a declaration that there exists a valid arbitration agreement between the parties in respect of the disputes. The respondents in the affidavits filed on their behalf in the matter of this petition raised numerous contentions. It is, however, unnecessary to refer to them because, Mr. Sanghvi, their learned counsel, stated at the outset of the hearing before me that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re all its rules, bye-laws and regulations being those of an illegal association are themselves illegal and that therefore the provisions for arbitration contained in the bye-laws is itself illegal and not binding on the parties. He further contended that although that provision for arbitration in accordance with the rules, bye-laws and regulations of the Stock Exchange is again incorporated in the contract notes between the parties, it is not a valid agreement even as a contract between the parties; ( 2 ) that its bye-law 250 confers a power on the governing board, or the president of the Stock Exchange to appoint an arbitrator on behalf of the respondents, but that the provisions of that bye-law conflict with the statutory provisions of section 9 of the Arbitration Act, 1940, and, that, therefore the provision contained in bye-law 250 is void and in effective ; and ( 3 ) that under the provisions of sub-section (4) of section 9 of the Securities Contracts (Regulation) Act, 1956, (hereinafter referred to as "the Act") the bye-laws of a recognised stock exchange can have effect only after they are published in the Gazette of India and the Official Gazette of the State in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntimation dated the 6th August, 1957, that it had decided to issue a certificate of recognition to the Exchange, the Central Government issued that certificate and published the necessary notification granting recognition in the Gazette of India Extraordinary, Part II, section 3, dated 31st August, 1957. The first of the said three contentions of Mr. Sanghvi is that the Stock Exchange is an illegal Association in view of the provisions of section 11 of the Companies Act. The relevant sub-sections of section 11 are sub-sections (1), (2) and (5) and they read as follows : "11. (1) No company, association or partnership consisting of more than ten persons shall be formed for the purpose of carrying on the business of banking, unless it is registered as a company under this Act, or is formed in pursuance of some other Indian law. (2) No company, association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any other business that has for its object the acquisition of gain by the company, association or partnership, or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbay Stock Exchange has rules, has bye-laws and has regulations also. The regulations are, however, merely incidental and ancillary to and form part of the bye-laws. Mr. Sanghvi relied upon several rules and bye-laws of the Stock Exchange to support his contention that the Stock Exchange was formed for the purpose of carrying on business and that the object of the business was the acquisition of gain by the Stock Exchange and/or its members. The objects of the Stock Exchange are set out in its rule 4, which has fifteen objects clauses. Clauses ( i ), ( ii ) ( iii ), ( iv ) and ( xi ) are relevant and together with their respective headings they read as follows : "OBJECTS 4. The Exchange is established The interests of brokers, dealers and the public ( i ) to support and protect the character and status of brokers and dealers and to further the interests both of brokers and dealers and of the public interested in securities, to assist, regulate and control the trade or business in securities, to maintain high standards of commercial honour and integrity, to promote and inculcate honourable practices and just and equitable principles of trade and business, to discharge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the control of the governing board and that the clearing house shall act as the common agent of the members for clearing contracts between members and for delivering securities to and receiving securities from members and for receiving or paying any amounts payable to or payable by such members in connection with any of the contracts and to do all things necessary or proper for carrying out these purposes. Mr. Sanghvi contended that therefore the Stock Exchange was itself envisaged as an entity, that it was a market, and was carrying on the business of a market and that it was formed to carry on the business of a safe deposit vault and a clearing house. He further contended that that business had for its object the acquisition of gain by the association and/or by the individual members thereof. He pointed out certain rules and bye-laws which, according to him, show that the association was formed for making such gain. He pointed out that the association, viz ., the Exchange, can recover from its members entrance fees under rule 32, admission fees under rule 33, annual subscriptions under rule 68 from the authorised clerks, annual subscription under rule 242 from persons who wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning "any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities". Under section 3(1) any stock exchange desirous of being recognised for the purposes of the Act has to make an application to the Central Government. Section 3(2) requires, inter alia , that every such application shall be accompanied by a copy of the bye-laws of the stock exchange for the regulation and control of contracts and also a copy of the rules relating in general to the constitution of the stock exchange. Under section 4(1) the Central Government may grant recognition to a stock exchange if the Central Government is satisfied and this is material that its rules and bye-laws are in conformity with such conditions prescribed with a view to ensure fair dealing and to protect investors and that it would be in the interest of the trade and also in the public interest to grant recognition to the Stock Exchange. As stated earlier, after the Act was passed, the stock exchange first adopted new rules and bye-laws but did not bring them into force, submitted them to the Central Government for its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an investment and not a business. It would be a business in immovable property only if there is buying and selling. That is not even the contention of Mr. Sanghvi. But in this particular case, as seen earlier, the power to own immovable property is conferred on the Stock Exchange for the only purpose of enabling the Stock Exchange to efficiently discharge its primary purpose of regulating and controlling transactions in securities. It is but incidental thereto. For the purpose of carrying out its various functions as a stock exchange, the Stock Exchange would need funds for purchasing or at least hiring a building, for engaging the necessary staff, for stationery, for postage and various other like expenses. The Stock Exchange must, therefore, have some source for providing the funds required for that purpose. To acquire such funds the obvious source would be to charge its members. In my opinion, it is for that purpose that the bye-laws provide that the Stock Exchange shall be entitled to levy the fees and charges mentioned in rules 32, 33, 68 and 242 and bye-laws 38, 264, 312 and 341. In my opinion, the power conferred on the Stock Exchange to recover such fees and charges doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would levy some charges by way of clearing house charges. It is for that reason that bye-laws 116 and 188 empower the Stock Exchange to levy certain clearing house charges. In these circumstances, in my opinion, the provision in clause ( xi ) of rule 4, enabling the Stock Exchange to establish and run a clearing house and in the bye-laws enabling the Stock Exchange to levy charges by way of clearing house charges is not for the purpose of the Stock Exchange carrying on a business as a clearing house. Sufficient importance must also be given to the provision in the said clause ( xi ) that the power to establish a clearing house is for the purpose of the trade, meaning the trade in securities, to be carried on under the aegis of the Stock Exchange. The clause does not empower the Stock Exchange to conduct a clearing house for any other trade. I therefore hold that though having a clearing house was, in view of the said clause ( xi ), one of the purposes for which the Stock Exchange was formed, the clearing house was not its business and that it was merely incidental to its primary function or purpose of regulating and controlling transactions in securities. In the course of effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , has the motive or purpose or object of profit. But these activities of the Stock Exchange are only for effectually regulating and controlling transactions in shares and securities. Profit may, of course, result because the fees and charges which the Stock Exchange may levy cannot be so fixed that their aggregate would, every year, equal its anticipated expenses. Loss also may result if the fees and charges turn out to be less than the expenses in fact incurred. But what is more important is that these activities are not intended for the Stock Exchange making a profit or gain. The most significant factor which cannot be over-emphasised is that there is no rule or bye-law or regulation of the Stock Exchange which empowers or even envisages a distribution by the Stock Exchange of its profits between its members. When an association of persons carries on business, its fundamental aim would be to make profits for distribution between its members. There is, however, no such provision in the case of the Stock Exchange, Bombay. It, therefore, shows that it was intended that the Stock Exchange was to carry on the said activities of what Mr. Sanghvi called a market and of owning immoveable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced as to the validity or otherwise of the arbitration agreement on the basis of his contention that the Stock Exchange is an illegal association by reason of its contravention of sub-section (2) of section 11 of the Companies Act. Mr. Sanghvi's second contention was that the provisions of bye-law 250 conflict with the provisions of section 9 of the Arbitration Act and that because the arbitration agreement between the parties is made subject to the bye-laws of the association and in any event in itself incorporates by agreement that provision which is contained in bye-law 250-the arbitration agreement is invalid in law. Bye-law 250, in so far as it is material for the purposes of this petition, provides that if after one party to a dispute has appointed an arbitrator ready and willing to act, there is failure, neglect or refusal on the part of the other party to appoint an arbitrator within seven days after service of written notice of that appointment or within such extended time as the governing board or the president may on the application of the other party allow, the governing board or the president shall appoint an arbitrator. That provision of the bye-law 250 has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he governing board or the president of the Stock Exchange to appoint a second arbitrator to act jointly with the arbitrator appointed by the first party. He contended that, therefore, the provision of bye-law 250 violates the statutory provision of section 9 of the Arbitration Act and that, therefore, not only is that provision void, but it also renders the entire arbitration agreement void because it takes away an integral part of the machinery contemplated by that bye-law. Now, in my opinion, this entire contention proceeds on a misconception or a misinterpretation of the provisions of section 9 of the Arbitration Act. The material words of section 9 are, "unless a different intention is expressed in the agreement". In my opinion, the provision contained in section 9, read with its clause ( b ), can operate only if and in so far as a different intention is not expressed in the agreement of arbitration. To put it in different words, in cases in which a particular arbitration agreement contains no provision to operate in the contingency contemplated by clause ( b ), the statutory provision contained in that clause will, by implication of law, provide for the deficiency. Conversel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State in which Bombay was, meaning the State of Bombay as it then was, or the State of Maharashtra, newly created thereafter, that the bye-laws were not published in the Gazette of India and also in the Gazette of the then State of Bombay or the present State of Maharashtra, that the bye-laws do not therefore become legally effective and that therefore the agreement of arbitration, the factum of which is admitted by the respondents, is not effective in law. This contention of Mr. Sanghvi about publication is confined only to the bye-laws, which include the regulations and as it does not apply to rules, reference to the provisions about rules will be omitted. The material provisions of the Act concerning recognition by the Central Government of a Stock Exchange for the purposes of the Act are as follows : "3. (1) Any Stock exchange, which is desirous of being recognised for the purposes of this Act, may make an application in the prescribed manner to the Central Government. (2) Every application under sub-section (1) shall contain such parti culars as may be prescribed, and shall be accompained by a copy of the bye- laws of the Stock Exchange for the regulation and contro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and regulations into force as from 31st August, 1957. It was only thereafter, on the 31st of August, 1957, that the recognition granted by the Central Government to the Stock Exchange, Bombay, was published in the Gazette of the Central Government as required by sub-section (3) of section 4. It is, therefore, clear that the recognition became effective from 31st August, 1957. Now the relevant portions of section 9 of the Securities Contracts (Regulation) Act are as follows : "9. (1) Any recognised stock exchange may, subject to the previous approval of the Central Government, make bye-laws for the regulation and control of contracts. (2) In particular, and without prejudice to the generality of the fore going power, such bye-laws may provide for.....". There are clauses ( a ) to ( w ) mentioning diverse topics in respect of which bye-laws can be made. "9. (4) Any bye-laws made under this section shall be subject to such conditions in regard to previous publication as may be prescribed, and when approved by the Central Government, shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the recognised stock e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at imperative requirement, either make new bye-laws or at least re-make even the same pre-recognition bye-laws and publish them as required by section 9(4). Under the provisions of section 3(2), the application of a stock exchange for recognition is to be accompanied by a copy of its bye-laws. Under the provisions of section 4(1) the Central Government can grant recognition to a stock exchange after it is satisfied after making such inquiry as may be necessary in that behalf and obtaining further information that the bye-laws are in conformity with such conditions as may ensure fair dealing and protection to the investors. The provisions of section 3(2) read with section 4 on the one hand and section 9, sub-sections (1) and (4) on the other are similar and parallel but only to a limited extent. Pre-recognition bye-laws require Government satisfaction as stated in section 4(1). Post-recognition bye-laws require Government's approval as stated in section 9(1). That feature is similar. But although section 4 by its sub-section (3) provides that the recognition granted by the Government to a stock exchange should be published in the Gazette, it does not provide that the bye-laws on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernment along with an application for recognition are both rules and bye-laws. There is an omission about the provision about publication in the Official Gazette of not only the bye-laws but also the rules on the basis whereof recognition is granted to the stock exchange. The provision about rules clearly shows an intention on the part of the Legislature that it was never intended by the Legislature that either the rules or the bye-laws on the basis of which recognition is granted should be published in the Official Gazette. The addition of section 7A subsequently by an amendment shows that only when rules are subsequently made by an association after recognition is granted to it, that the rules should be published in the Official Gazette and that that provision is similar to that in respect of the post-recognition bye-laws contained in section 9. To my mind, the omission about publication of pre-recognition bye-laws, as also pre-recognition rules, has been deliberately made by the Legislature, that there is no justification in ascribing an intention to the Legislature that it wanted publicity by way of publication in the Official Gazette in respect of pre-recognition bye-laws also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here would, therefore, be no disparity or dissimilarity in the powers of the Government in respect of those two categories of bye-laws. Mr. Sanghvi replied upon the phraseology of section 10(1) when it confers the said second power. He argued that it confers upon the Government power to amend bye-laws made by a recognised stock exchange "under that section". Now, as contended by Mr. Sanghvi, it is quite clear that this power refers to the bye-laws made under section 9, namely, post-recognition bye-laws, only and that the power to amend is conferred by section 10(1) only in respect of post-recognition bye-laws, but not in respect of pre-recognition bye-laws. But that difference, to my mind, is of no substance because the power to amend pre-recognition bye-laws is included in the first power which confers power to make bye-laws, because the word "make" includes also the power to amend, alter or rescind. The said second power to amend was again specifically granted, perhaps, only by way of abundant caution, but such addition does not justify placing a narrow construction on the first power and confine it as referring only to post-recognition bye-laws and exclude thereform pre-recogn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a bye-law specifying the bye-laws the contravention of which shall make a contract entered into otherwise than in accordance with the bye-laws under section 9 void, if no notification has been issued, the sanction provided by section 14 will not exist, whereas in respect of recognised stock exchanges in respect of which there is a notification under section 13, the sanction provided by section 14 would apply. As there is such a distinction even within the category of recognised stock exchanges themselves there is no reason to assume that the legislature did not want to make a similar distinction between the post-recognition bye-laws and pre-recognition bye-laws. As a matter of fact, there is no obligation under the Act cast upon all recognised stock exchanges to have a bye-law of the nature contemplated under sub-section (3) of section 9. The Government can, therefore, if it so thinks fit, after issuing a notification under section 13, and if it thinks that it is so necessary in the particular case of a stock exchange make it a condition of recognition that the stock exchange shall, immediately upon recognition, pass a bye-law of the nature contemplated in sub-section (3) of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bye-laws of the stock exchange before recognition is granted to it. That provision of sections 3 and 4 will be rendered unnecessary, because section 9(1) itself provides that before a recognised stock exchange makes any bye-laws, it shall first seek and obtain the approval of the Central Government. The approval of the Central Government can, therefore, be obtained by reason of the application under sub-section (1) of section 9 and there would then be no necessity for the Central Government to first satisfy itself about the provisions of the bye-laws of a stock exchange before granting a stock exchange recognition, because such bye-laws, being pre-recognition bye-laws, would, on the argument of Mr. Sanghvi, have no effect whatever and it would be totally unnecessary for Government to waste its energy and time over it. There is another difficulty also in the way of accepting this particular contention of Mr. Sanghvi, as, on his contention, the pre-recognition bye-laws will have no efficacy or operation whatever, and a stock exchange, after it is granted recognition, must, of necessity, permit no transaction of its exchange in the interval between the date of recognition and the dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djourned chamber matter. The hearing before me has lasted, I am told by counsel, for about 28 hours. Lump sum costs are therefore totally inadequate. I therefore direct that the respondents shall pay the petitioner's costs as taxed costs where one counsel is allowed. Mr. Purohit applies that I should make an order under rule 600 of the rules applicable on the original side of this court that the taxing master may allow as instruction item a sum exceeding Rs. 1,000. As regards the facts the preparation required in this matter was not very significant. It is true that the respondents had in the affidavit denied the factum of the contracts, namely, their signature on the acknowledgment slips relating to the contracts and the petitioner had to keep his evidence ready to prove the respondents' signatures. But the work relating to the same was not considerable. The rest of the petition and the arguments thereon were only on point of law mainly confined to the provisions of the Securities Contracts (Regulation) Act and the rules, bye-laws and regulations of the Stock Exchange, Bombay. I, therefore, do not think that there is any reason to make any order under rule 600 as applied for. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tition only for the purpose of protecting its own interests and that the respondents should not therefore be ordered to pay the costs of the Stock Exchange. This contention, which the respondents have instructed their counsel to advance, is, to say the least, a naive one. If it was held on this petition that the Stock Exchange was an illegal association or that the rules, bye-laws and regulations, lock stock and barrel, of the Stock Exchange were inoperative and invalid by reason of their not having been published in the Official Gazette as contended by the respondents, the result would have affected not merely the petitioner and the respondents but every one having pending dealings on the Stock Exchange. A judgment of that nature would definitely have received publicity and the public is hardly likely to consider the niceties of law whether that judgment is binding on the Stock Exchange or not. But, even if that judgment can be held not to be binding on the Stock Exchange, as it is not a direct party to the petition, the holding of the rules, bye-laws and regulations of the Stock Exchange as being invalid would undoubtedly affect all pending transactions on the Stock Exchange, unl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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