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TMI Blog1998 (8) TMI 479X X X X Extracts X X X X X X X X Extracts X X X X ..... e-laws/Articles of Association of the Stock Exchanges, the entry of proficient man into this field of business was effectively being prevented by vested interests. The second respon- dent did not take step to implement the directives of the High Powered Committee headed by Mr. G.S. Patel. For two years after these directives, the 2nd respondent did not take steps to implement these directives, but only flooded the exchange with persons of their own choice. Later, the 2nd respondent herein, by advertisements in Newspaper made in September, 1987, invited applications from two categories of persons, viz., ( 1 ) Post Graduate Degree holders in Commerce, Economics and Business Admini-stration from recognised/approved Universities/Institutions and Members of Professional Bodies such as the Institute of Chartered Accountants of India the Institute of Costs and Works Accountants of India and the Institute of Company Secretaries of India and (2) Persons, who have a pass in plus Two or XII Standard Examination with an experience of 3 years in the business of shares and securities. He sent his application in the prescribed format along with an Earnest Money Deposit of Rs. 5,000. He was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsons, who monopolise this business opportu- nity to themselves; ( iv )There is no rationale for the restrictions laid down under rule 8(2) and inasmuch as it reserves the right to carry on this particular business to a privileged few, it is ultra virus the Constitution and offends articles 14 and 29( i )( g ) of the Constitution of India; ( v )While there can be reasonable restrictions on the method of carrying on any business, there cannot be any restrictions on the very right to carry on a business. Inasmuch as rule 8(2) of the Rules purports to curtail the rights of a person to carry on this business, the same is liable to be struck down; and ( vi )No reasons have been stated for rejection and the same is done with mala fide intention. 6. On the other hand, Mr. R. Muthukumaraswami, the learned Senior Central Government Standing Counsel, after taking me through the relevant provisions of the Act and rules, has raised the following conten-tions : ( i )By virtue of rule making power under section 30 of the Securities and Exchange Board of India Act, 1992, ('the Act') the first respon-dent has framed necessary rules; accordingly the Government is also competent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0(2)( b ) of the Securities Contracts (Regulation) Act, 1956 (Act No. 42 of 1956) which runs as follows: "Power to make rules. (1) The Central Government may, by notification in the Official Gazette, make rules for the purpose of carrying into effect the objects of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for, ( a )****** ( b )the manner in which any inquiry for the purpose of recognising any stock exchange may be made, the conditions which may be imposed for the grant of such recognition, including conditions as to the admission of members if the stock exchange concerned is to be the only recognised stock exchange in the area; and the form in which such recognition shall be granted." In pursuance of the rule making power under section 30 of Act No. 42 of 1956, the Central Government framed rules called 'The Securities Contracts (Regulation) Rules, 1957'. Among other rules, we are concerned with rule 8(1) enumerates the eligibility of a person to be elected as a member of a recognised Stock Exchange. We are more concerned with rule 8(2) which runs as follows: "(2). No person eligible for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition to all his contracts becoming illegal, by virtue of section 13. Stock Exchanges other than recognised Stock Exchanges are prohibited under section 19 of the Act and, therefore, any person intending to carry on business in shares and securities must necessarily apply to a recognised Stock Exchange existing in his area. The right of admission is restricted both by the Act and the Rules framed thereunder as well as the Articles of Association of the second respondent. While in respect of all other types of business, the restrictions imposed by the Government relate only to the mode in which they are to be carried on, the restrictions imposed by the Government in respect of the business of stocks and securities hit even at the very right to carry on this business, this according to the petitioner, offends articles 14 and 19(1)( g ) of the Constitution of India. The Govern-ment exercised very deep and pervasive control over the stock exchanges, for which he cited so many instances in the affidavit. In such circumstan-ces, it is stated that their membership should be thrown open to all and there can be no artificial embargo on the right of a person to become a member of a recognise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the present one. However, it is clear that his only grievance is that in view of the unreasonable conditions imposed under rule 8(2) and of the fact that some arbitrary power has been entrusted with the governing body of the Stock Exchange, the same violatives articles 14 and 19(1)( a ). 11. In an answer to the contentions Mr. R. Muthukumaraswami. The learned Senior Central Government Standing Counsel took me through the object of the Securities Contracts (Regulation) Act, 1956 relevant provisions therein as well as Rules, namely, Securities Contract (Regula-tion) Rules, 1957, framed in pursuance of section 30 of the said Act. After pointing out the qualifications of a membership of the recognised stock exchange from rule 8(1) and (2) of the said rules, he has submitted that the rules, more particularly, the impugned rule 8(2) is within the rule making power of the Government and it would not violate article 19(1)( g ) as contended. In support of his contention, he very much relied on a decision of the Apex Court reported in Madhubhai Amathalal Gandhi v. Union of India AIR 1961 SC 21. Before the Supreme Court, a petition under article 32 of the Constitution for the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6) of the said article to make any law imposing in the interest of the general public reasonable restrictions on the exercises of the said right. Briefly stated, the argument is that the combined affect of the two notifications is that the petitioner is driven out of his business of Stock Exchange inasmuch, as, it is said, they confer a monopoly on the Stock Exchange, Bombay, and the rules of the said Stock Exchange excludes any outsider from becoming its member without obtaining a nomination and that too only in the place of an existing member. To put it differently, the argument proceeds that under the rules of the Stock Exchange, Bombay, membership is not thrown open to the public. This leads us to the consideration of the relevant provisions of the Stock Exchange Rules, Bye-laws and Regulations, 1957. Under Rule 3 the membership of the Exchange shall consist of such number of members as the Exchange in general meeting may from time to time determine. It is common case that the membership of the Exchange is not limited. Under the heading "Election of New Member, the Rules prescribe the conditions of eligibility for selection as a member of the Exchange. These rules adopt the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may with the sanction of the Governing Board nominate any person eligible under these rules for admission to membership of the exchange as a candidate for admission in the place of the deceased member. In considering such nomination the Governing Board shall be guided so far as practicable by the instructions set out in Appendix C to these rules'. Appendix B gives the nomination Form Nos. 1 and 2 to be filled by a member or a legal representative, as the case may be, under rule 11 ( a ) and ( b ). Now it would be convenient to read rules 20 and 21. They are as follows: Rule 20: 'A candidate for admission except a candidate applying for a membership vesting in the Exchange must obtain a nomination in the manner provided in these rules.' Rule 21: 'A candidate for admission must be recommended by two members none of whom should be a member of the Governing Board. The recommenders must have such personal knowledge of the candidates and of his past and present circumstances as shall, satisfy the Governing Board.' The argument is that under rule 20 a candidate for admission falls under two categories, namely, ( i ) a candidate who must obtain a nomination in the manner provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rning this type of business. For the reasons mentioned we reject the first contention.', (p. 25) "15. Re. (3): Learned counsel for the petitioner advanced a forcible argument questioning the validity of condition 2(i)( a ) of the notification on the ground that it infringed article 14 of the Constitution. Elaborating his argument, the learned counsel stated that the said condition classified members of the Indian Stock Exchange Limited into two groups, one active members and the other who were not active members, and that that classification was arbitrary and had no reasonable relation to the object sought to be achieved by the notification. He further pointed out that the defining of active members of those who had themselves transacted business regularly on the floor of the Indian Stock Exchange Limited either on their own account or on account of their clients for 12 months immediately preceding August 6, 1957, was not only arbitrary and vague but also, if analysed, would lead to anomalies destructive of any standard of reasonableness. It is alleged in the affidavit filed by the petitioner that from the inception of the Indian Stock Exchange Limited, 199 members of the said S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation is made between active members and inactive members. While on the one hand the Government found it necessary to exclude the nominal members who would add their dead weight to the recognised association and bring down its efficiency and affect its disciplined conduct of business, on the other hand it gave opportunity to persons who were actively interested in the business to become regular members of the Stock Exchange, Bombay. There is every justification for excluding members who had not been taking active interest in the business, for, as we have already pointed out the efficient carrying out of the business of the Stock Exchange depends upon the moral stature, high caliber, and genuine and active interest evinced by the members. The active members justified themsalves to the preferential treatment by their sustained interest in the business whereas the members who were not active showed their continued indifference to that line of business. But the crux of the question is, what is the justification for fixing twelve months immediately preceding August 6, 1957, as the standard for active membership? The Under Secretary to the Government of India, Ministry of Finance, filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs have elapsed since the date of the notification no other member of the Indian Stock Exchange Limited thought fit to question the notification on the ground that the period fixed was unreasonable and that really active members were excluded from membership of the Stock Exchange, Bombay. So far as the petitioner is concerned, he was admittedly not an active member, though he now pretends that he was doing business through other members. There is also no material placed before us to support the said assertion. If the classification, between active members and others who were not, is justifiable we hold it is - the Government has to draw a line somewhere and to fix a period of activity reasonable in its opinion as a standard to satisfy the test of 'active member'. The burden which lies upon the petitioner who impeaches the validity of the classification to show that it violates the guarantee of equal protection has not been discharged. On the material placed before us we cannot say that the period fixed by the Government as the standard for ascertaining the active membership is arbitrary or unreasonable. We must make it clear that this finding must be confined only to the validity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted in Pathumma v. State of Kerala AIR 1978 SC 771 wherein Their Lordships have formulated the following guidelines to determine the question of reasonableness of 'Restriction': ( i )In judging the reasonableness of the restrictions imposed by clause (5) of article 19, the Court has to bear in mind the Directive Principles of State Policy; ( ii )Restrictions must not be arbitrary or of an excessive nature so as to go beyond the requirement of the interest of the general public; ( iii )In order to judge the quality of the reasonableness no abstract or general pattern or a fixed principle can be laid down so as to be of universal application and the same will vary from case to case; ( iv )A just balance has to be struck between the restriction imposed and the social control envisaged by clause (6) of article 19; ( v )There must be a direct and proximate nexus or a reasonable connection between the restriction imposed and the object which is sought to be achieved. In other words, the Court has to see whether by virtue of the restriction imposed on the right of the citizen the object of the statute is really fulfilled or frustrated; ( vi )The Court must see the preva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed by the second respondent. Like-wise, the petitioner has not challenged section 30(2)( b ) of Act 42 of 1956 which is in pari materia rule 8(2). Further, the petitioner has also not challenged the Articles of Association of the second respondent relating to qualification for membership of the second respondent Stock Exchange. In the ab- sence of any challenge as stated above, according to him, the challenge with regard to rule 8(2) cannot be countenanced. As rightly contended, even without reference to rule (2) of the Rules, as per the provisions of Act 15 of 1992, more particularly, after registering himself as per section 12 of the said Act, he can very well do business in securities. Accordingly, the contention that by virtue of rejection of his claim by the respondent Board and in view of rule 8(2). The petitioner's right to do business in securities is barred cannot be accepted. 15. The learned counsel appearing for the second respondent, by drawing my attention to the second part of the prayer in the writ petition, namely, direction to the second respondent to grant membership without impo- sing any unreasonable and arbitrary terms, has contended that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot put forth a case that it is a public authority but only confined to the argument that it discharges public duty. In the decision of the Delhi High Court neither this point was raised nor decided. Hence these decisions cannot be of any assistance to the petitioner. 10. In Sri Anadi Muktasadguru Shree Muktaiss Vandasjiswami Suvarna layanthi Mahotsav Smarak Trust v. V.R. Rudani AIR 1989 SC 1607 the Supreme Court explained that Article 226 empowers the Court to issue writs for enforcement of the fundamental rights or other rights in respect of a company, person or authority not confined to statutory authorities and instrumentalities of the state. They would cover other persons or bodies who perform public duty. In explaining the scope of such public duty or the meaning to be attributed to that public duty, the Court noticed that what is relevant is the nature of the duty imposed on the body and that duty must be judged in the light of positive obligation owed by a person or authority to the affected party. In this case, the affected party is a member who apprehends that he may be expelled from the Stock Exchange and that right to continue to be a member of the Stock Excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the only question that arose for consideration was whether Cochin Stock Exchange Ltd. is an authority under article 12 of the Constitution of India and whether it is amenable to writ jurisdiction? After considering the various Articles of Associations of the Cochin Stock Exchange as well as the Provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 and after discussing various decisions of the Supreme Court including the decision rendered in Ajay Hasia v. Khalid Mujib AIR 1981 SC 487, the learned Judges in the Division Bench have concluded as follows: "By applying this principle the Supreme Court in that decision held that the Society is an instrumentality or the agency of the state and the Central Government and it is an 'authority' with the meaning of article 12. The Supreme Court found in that case having regard to the Memorandum of Association and the Rules of the Society, the composition of the Society is dominated by the representatives appointed by the Central Government and the Governments of Jammu and Kashmir, Punjab, Rajasthan and Uttar Pradesh with the approval of the Central Government. The monie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to the provisions of the Securities Contracts (Regulation) Act, 1956. Similarly the Act provides for regulatory measures like recognition, withdrawal of recognition, direction to make rules, power to suspend business and power to supersede the governing body. As it could be seen in the preamble to the Act, the Securities Contracts (Regulation) Act is an Act to prevent undesirable transactions in securities by regulating the business of dealing therein, by prohibiting options and by providing for certain other matters connected therewith. Thus the said Act is purely regulatory in character. 26. Applying the tests laid down by the series of Supreme Court decisions, we do not find that these regulatory measures by itself are sufficient in the absence of any other factors like financial assistance, control of management and policies, State protected monopoly status and public functions, so as to come to the conclusion that the 1st respondent company is an authority amenable to writ jurisdiction under article 226 of the Constitution. 27. The subject-matter in both the matters are purely contractual in character. Therefore, in any event, the issue relating to the violatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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