9911796707
TMI Blog2013 (9) TMI 623X X X X Extracts X X X X X X X X Extracts X X X X ..... e any grievance in respect of its functioning except the bereaved who silently mourn the loss of their near and dear one. However, disasters which are man-made belong to classes of their own. From times immemorial, men have been attracted to the triumvirate of 'W's. Investment companies had mushroomed in the last century comprising of people, having no scruples and sense of morality. They cashed on the opportunity to enrich themselves by luring the aam aadmi with a triumvir, i.e. 'wealth'. Attractive schemes, craftily thought of, were put in place followed by tantalizing advertisements to lure the aam aadmi to invest his hard earned money with the promise of hefty returns, if he were to invest. The gullible aam aadmi having numerous responsibilities to shoulder, which perhaps may not have been possible without liquid cash, relied whole-heartedly on such companies without even thinking of the risk factors and the need to take an informed decision and plunged towards disaster investing whatever he had with the cherished hope of obtaining the returns that were promised. Little did he know that such companies had surfaced to swindle him. Out of the innumerable people who had invested, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued by any CIS to the investors in such schemes, and insertion of clause (ba) in sub-section (1) of Section 2 and introduction of Section 11AA in the SEBI Act. The amendments in the SEBI Act, as aforesaid, also necessitated framing of appropriate regulations, resulting in the SEBI (Collective Investment Scheme) Regulations, 1999 (hereafter the CIS Regulations) being brought into existence. Undoubtedly, such measures were in the nature of 'damage control' intended to save the aam aadmi from ruination. 2. It is 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 that are questioned by the petitioners in this writ petition under Article 226 of the Constitution dated July 19, 2011. Incidentally, this is the third round of litigation between the parties. 3. The first petitioner (established in 1999) is a public limited company and registered under the Companies Act 1956. Real Estate Development is its principal business. The second petitioner is the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all documents and requested that they may be granted 15 days' time to submit the required documents/information. The SEBI extended the time to respond by 8th February, 2010, by its letter dated 4th February, 2010. 7. Apprehending coercive action at the end of the SEBI prior to submission of reply, the petitioners had launched the first round of litigation (W.P No. 136 of 2010) before this Court. It stood disposed of by an order dated 5th February, 2010 recording the submission of the learned counsel of the SEBI that till 8th February, 2010 or till submission of reply by petitioners, whichever is earlier, no coercive action shall be taken. The petitioners were granted liberty to furnish the requisite information/documents by 8th February, 2010. 8. After disposal of the writ petition, by its reply letter dated 8th February 2010, the first petitioner informed the SEBI that neither it nor its group companies were carrying on any business within the meaning of CIS or had sponsored or launched any CIS. 9. The first petitioner and the SEBI thereafter exchanged number of correspondences. Ultimately, an order dated 3rd January, 2011 was made by the whole time member of the SEBI. The last ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... writ appeal was disposed of on 5th April, 2011 recording the submission of the learned senior counsel for the SEBI that no hearing in pursuance of the notice dated 24th March, 2011 would be taken for the time being. 13. The writ appeal was disposed of on 13th July, 2011. The order of the Division Bench reads as follows: "Mr. Sen, learned Senior Counsel appearing for the appellant with Mr. Pal and above learned counsels submits on instruction that his clients do not want to press this provisions of law. Hence, his client may be allowed to withdraw the same as well as the writ petition. Mr. H. K. Mitra, learned Sr. Counsel contends that question of withdrawal of the writ petition does not arise as it has been dismissed, however, the appeal may be dismissed as not being pressed. We have considered the respective submissions of the learned Counsel. It appears that learned Trial Judge has dismissed the writ petition on the ground of existence of alternative remedy and at that point of time in the writ petition there was no challenge as to vires of regulation. The right to challenge against legislation by any citizen or for that matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tition. In view thereof, Mr. Ghosh, learned counsel for the SEBI submitted that the application for vacating the interim order shall not be pressed. Consequently, the application stood dismissed as not pressed. 19. Regular hearing having commenced, extensive arguments were advanced on behalf of the parties. After close of hearing, written arguments have also been filed on behalf of the petitioners and the SEBI. 20. It is considered necessary, before I proceed to note the detailed submissions of the parties, to place on record the fact of making it clear to Mr. Pal, learned senior counsel for the petitioners at the inception of the hearing that in view of the order of the Division Bench dated 13th July, 2011, no argument touching the legality and/or propriety of the order of the whole time member of the SEBI dated 3rd January, 2011 would be allowed to be advanced unless the petitioners succeed in their challenge to the constitutional validity of the SEBI Act and the CIS Regulations. Mr. Pal had prayed for and was granted an adjournment to seek instructions from the petitioners. He obtained instructions and commenced his arguments confined to the issue of constitutional validity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incomprehensible provision and its inherent vice of uncertainty cannot be made certain, by reference to any internal guidelines (like the long title) or any external aid (like reports). Sub-section (3) of Section 11AA categorises specific 8 (eight) types of activities, which do not amount to CIS. The said 8 (eight) categories are not exhaustive, for, several entities carrying on business with money contributed by investors could also be labeled as CIS. The Dave Committee recognized the over-breadth of the expression CIS while considering its definition in Chapter II of its report when it observed that "while finalizing the definition, the Committee recognizes that it may be possible that some arrangements of this nature like time shares, club memberships etc. would also get covered in the definition." Such unguided factoring leads to discriminatory application as exemplified in the instant case of treating the first petitioner as a company carrying on business activity falling within CIS, as sought to be defined. The Dave Committee, however, failed to narrow down or provide guidelines for narrowing down the concept of CIS. In fact, it has or perhaps was directed to do the opposite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive Investment Scheme". He contended that it would be absurd to suggest that these 8 (eight) classes specified in sub-section (3) are exhaustive. The activities of these 8 (eight) classes are also referred to as scheme or arrangement as is apparent from the non-obstante clause occurring at the beginning of sub-section (3) which says: - "Notwithstanding anything contained in sub-section (2), any scheme or arrangement . . .". This means that the activities of the 8 (eight) categories also come within the ambit of "scheme" or "arrangement". Exclusionary operation of sub-section (3) shows that but for this exclusion, all kinds of business schemes or arrangements are within the scope of Section 11AA(2) and can be treated as a CIS. Significantly business schemes or arrangements by individual proprietors, partnership firms, registered societies etc. are not excluded nor are they included because Section 11AA(2) applies only to companies. There is no rational basis for this discriminatory treatment disclosed in the SEBI Act. Such uncertainty renders the section unconstitutional as it gives rise to a power of arbitrary selection and the very conferment of such p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot sustain. Reference was also made to provisions contained in Regulations 11(c), 24(2), 26(1), 25, 26(2) read with the 6th Schedule of the CIS Regulations, which are incapable of compliance by the petitioners. According to him, whether a regulation is reasonable or not is justiciable and having regard to its utter unreasonableness qua the petitioners, it ought to be struck down as ultra vires the Act under which it is framed. 30. The decisions of the Supreme Court in Special Ref. No. 1 of 1951, Art 143, Constitution of India and Delhi Laws Act [1912] etc. In re AIR 1951 SC 332; General Officer Commanding-in-Chief v. Dr. Subhas Chandra Yadav [1988] 2 SCC 351; Kunj Behari Lal Butail v. State of Himachal Pradesh [2000] 3 SCC 40; Additional District Magistrate (Rev.) Delhi Admn. v. Siri Ram [2000] 5 SCC 451; and Municipal Committee Malerkotla v. Haji Ismail AIR 1967 Punjab 32 were relied on in support of the aforementioned contentions. 31. In course of his submissions, Mr. Pal placed the decision in Executive Engg. Dhenkanal Minor Irrigation Division v. N. C. Budharaj (Deceased) by LRS. [2001] 2 SCC 721, to show the contrast between "substantive law", which creates, defines and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it was submitted that proper consideration of the requirement to immediately introduce provisions for protecting the interest of the poor investors and due application of mind led to introduction of the impugned provisions in the SEBI Act by the 1999 Amendment Act. 36. Countering the submission of Mr. Pal that Section 11AA of the SEBI Act suffers from an over-breadth, that is to say, it is susceptible to be made applicable to myriad situations which are not regulated or defined by the Act, it was contended by Mr. Mitra that the concept of over-breadth is almost totally alien in India. One judgment that contains reference to it is reported in Minerva Mills Ltd. v. Union of India AIR 1980 SC 1789. In paragraph 50, it has been referred to by mentioning the case of Barbara Elfbrandt v. Imogena Russel [1966] 16 L ed 2d 321, 326. It was further contended that such decision is clearly distinguishable, as would appear from paragraph 49 and the relevant extract from paragraph 50 itself, containing the opinion of Justice Douglas of the American Supreme Court speaking for the majority. The same are quoted hereunder: "49. It is needless to cite decisions which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of any Indian statute, Mr. Mitra submitted that the principles enunciated in the decision in Jyoti Pershad v. Administrator for the Union Territory of Delhi AIR 1961 SC 1602, are universally followed. To cull out the relevant principles, reliance was placed on the following passages: "17. .... In the context of modern conditions and the variety and complexity of the situations which present themselves for solution, it is not possible for the Legislature to envisage in detail every possibility and make provision for them. The Legislature, therefore, is forced to leave the authorities created by it an ample discretion, limited, however, by the guidance afforded by the Act. This is the ratio of delegated legislation, and is a process which has come to stay, and which one may be permitted to observe is not without its advantages. So long therefore, as the Legislature indicates, in the operative provision of the statute with certainty, the policy and purpose of the enactment, the mere fact that the legislation is skeletal, or the fact that a discretion is left to those entrusted with administering the law, affords no basis either for the contention that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ole." 39. Mr. Mitra also read out paragraph 12 from the said decision, summarizing the principles of law declared in previous decisions of the Supreme Court on the import, content and scope of Article 14 and referred to the facts of that case. Three writ petitions under Article 32, challenging the constitutionality of Section 19 and particularly sub-section (3) of the Slum Areas (Improvement and Clearance) Act, 1956 on the ground that it offends the fundamental right of the petitioners guaranteed to them by Articles 14 and 19(1)(f) of the Constitution, came up for consideration. The contents of paragraph 10 were referred to, which outlined the arguments advanced on behalf of the petitioners before the Supreme Court, and while bringing it to my notice that none of the contentions succeeded and the writ petitions were dismissed, it was submitted by Mr. Mitra that Mr. Pal's contentions are quite similar and ought to be meted similar treatment. 40. Next, Mr. Mitra referred to the decision in Pathumma v. State of Kerala AIR 1978 SC 771, wherein a challenge to the constitutionality of Section 20 of the Kerala Agriculturists' Debt Relief Act, 1970 was raised on the ground that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promoters of a building as also business of time sharing in resorts would also be covered by the expression CIS, it was submitted that the above view was taken care of by the Parliament by introducing clause (ii) in sub-section (2) of Section 11AA. Timeshares, it was contended, did not fulfil the requirements contained in Section 11AA(2)(ii). The same characteristics were also wanting in the business of promotion of flats etc. 43. Heavy reliance was placed by Mr. Mitra on the decision in Srinivasa Enterprises v. Union of India [1980] 4 SCC 507 to drive home his point of argument that the ratio thereof is a complete answer to all the contentions raised on behalf of the petitioners in relation to constitutional invalidity of the impugned provisions. The Prize Chits and Money Circulation Schemes (Banning) Act, 1978 defined 'prize chits' inclusively but a 'conventional chit' stood excluded. The noxious net cast by the prize chit promoters was large and the grim picture of the luckless many, who were losing their money appetized by gambling prospects, and the sterilization of people's resources which were siphoned off by private adventurists through prize chits to the detriment of nati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rich quick through prizes. So long as there is the resistless spell of a chance though small, of securing a prize, though on paper, people chase the prospect by subscribing to the speculative scheme only to lose what they had. Can you save moths from the fire except by putting out the fatal glow? Once this prize facet of the chit scheme is given up, it becomes substantially a 'conventional chit' and the ban of the law ceases to operate. We are unable to persuade ourselves that the State is wrong in its assertion, based upon expert opinions that a complete ban of prize chits is an over-kill or excessive blow. Therefore, we decline to strike down the legislation on the score of Article 19 (1) (f) and (g) of the Constitution. 13. We may not be taken to mean that every prize chit promoter is a bloodsucker. Indeed, Shri Venugopal persuasively presented the case of his client to make us feel that responsible business was being done by the petitioner. May be. But when a general evil is sought to be suppressed some martyrs may have to suffer for, the legislature cannot easily make meticulous exceptions and has to proceed on broad categorization, not singular indiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C 1381, for the proposition that the legislature has to perform its essential legislative function of determining and choosing the legislative policy and of formally enacting that policy into a binding rule of conduct, and further that it is open to the legislature to formulate that policy as broadly and with as little or as much details as it thought proper, and once a policy is laid down and the standard established by statute, there is no question of delegation of legislative power and all that remains is the making of subordinate rules within the prescribed limits which may be left to selected instrumentalities; (v) Harishankar Bagla v. State of Madhya Pradesh AIR 1954 SC 465, for the proposition that the grant or refusal of a permit was to be governed by the policy of the impugned Control Order i.e. to regulate the transport of cotton textile in a manner that would ensure even distribution of the commodity in the country and to make it available at a fair price to all, and the discretion given to the Textile Commissioner had to be exercised in such a way as to effectuate this policy, and the conferment of such a discretion was not invalid and if there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the interest of the country or community as a whole. For judging the reasonability of restrictions imposed on fundamental rights the relevant considerations are not only those as stated in Article 19 itself or in Part III of the Constitution: the directive principles stated in Part IV are also relevant. Changing factual conditions and State policy, including the one reflected in the impugned enactment, have to be considered and given weightage to by the courts while deciding the constitutional validity of legislative enactments. A restriction placed on any fundamental right, aimed at securing directive principles will be held as reasonable and hence intra vires subject to two limitations: first, that it does not run in clear conflict with the fundamental right, and secondly, that it has been enacted within the legislative competence of the enacting legislature under Part XI Chapter I of the Constitution." Mr. Mitra submitted that if the two tests referred to in the above extract, ordinarily, the private interest of an individual has to yield to the public interest and the law legislated for the common good ought to be allowed its full play, for, there can be no dispute that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt observed that the requirement that the rules are to be placed before both Houses of Parliament with power to suggest modification would make it perfectly clear that Parliament has in no way abdicated its authority, but is keeping strict vigilance and control over its delegate." 51. Based on the submissions noted above, Mr. Mitra urged that absolutely no case had been set up by the petitioners for interference and prayed for dismissal of the writ petition with heavy costs. 52. Mr. Kuhad, learned Additional Solicitor General representing the Union of India submitted that the SEBI Act and in particular the provisions under challenge have been enacted to secure the interests of investors, and more than adequate safeguards exist to prevent abuse of power and to guide exercise of discretion in a reasonable manner to achieve the purposes of the statute. The argument of over breadth advanced on behalf of the petitioners by Mr. Pal, according to Mr. Kuhad, would not apply in the present case since the authorities under the SEBI Act have not been conferred unfettered discretion and, therefore, cannot misuse their power. He further contended that the object of Section 11AA of the SEBI Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or every clever structuring that can be thought of to dupe investors; the mischief that might ensue if the clever structuring were allowed to have free play being the problem to be addressed. That clever structuring would be rendered unfruitful if the regulatory mechanism were to work, he contended, can never be an argument before a Court of law and the challenge does not merit interference. 55. Relying on the judgment in P.G.F. (supra), it was submitted that the bona fides of the litigant seeking to challenge the statutory provisions ought to be examined, viz. whether there is any hidden agenda behind the challenge or not, or whether the endeavour is to prolong the litigation or not. According to Mr. Kuhad, the petitioners have been attempting to stall the inevitable. 56. Referring to the various chapters of the CIS Regulations and the Regulations appearing thereunder, it was submitted as under:- (i) each one of the conditions for eligibility in Regulation 9 are aimed at protecting the interest of the investors and there could be no conceivable ground for a reasonable person to nurse a grievance in respect of such conditions of eligibility; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply. Provisions which are in the realm of regulatory character can never be castigated on the anvil of Article 14. Viewed in the context of regulatory provisions, it was reiterated that there is no element of over-breadth. 58. Opposing the argument that there has been delegation of legislative functions to the executive which is incurably bad and ought to be interdicted, Mr. Kuhad reiterated the submissions of Mr. Mitra in respect of placement of the CIS Regulations before the Parliament as mandated by Section 31 of the SEBI Act. 59. In course of submission, Mr. Kuhad stressed that the impact of the regulations cannot be overlooked. Not a single creditworthy and appraisal worthy scheme has been operated after the CIS Regulations were put in place. If a company bona fide wished to continue, it would have to abide by the CIS Regulations and this bears testimony that the menace of gullible investors being duped has been arrested. 60. Mr. Kuhad concluded by submitting that the State has the constitutional obligation to protect the poor and it would amount to a failure of performance of its obligations to protect the poor unless control mechanisms were introduced. The statutory pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prize chits under Section 11 of the Act. This provided that it would not apply to any prize chits or money circulation scheme promoted by the State Government, public sector banks or charitable or educational institutions notified by the State Government, etc. On this aspect, the Court had observed : "A bare reading of that provision makes it clear that the exempted categories do not possess the vices of private prize chits. For one thing, what are exempted are prize chits and money circulation schemes promoted by or controlled by the State Governments, the Central Government or the State Bank of India or the Reserved Bank. Even rural banks and cooperatives covered by Section 11, are subject to public control. Likewise, charitable and educational institutions are exempted only if they are notified by the State Government in consultation with the Reserve Bank. There are enough arguments to justify the different classification of these items and their exemption cannot be called in question on the ground of violation of Article 14. Reasonable classification wins absolution from the charge of discrimination if the differentia has nexus with the statutory objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to freedom of speech and expression conferred on him by Article 19(1)(a) of the Constitution. He also challenged the validity of Section 9(1-A) of the Act claiming that it was void under Article 13(1) of the Constitution by reason of its being inconsistent with his fundamental right aforesaid. The Court proceeded to hold that unless a law restricting freedom of subjects and expression is directed solely against the undermining of the security of the State or the overthrow of it, such law cannot fall within the reservation under clause (2) of Article 19, although the restrictions which it sought to impose may have been conceived generally in the interest of public order. It followed that Section 9(I-A) which authorized imposition of restrictions for the wider purpose of securing public safety or the maintenance of public order fell outside the scope of authorized restrictions under clause (2), and was, therefore, void and unconstitutional. The argument of the respondents that Section 9(I-A) could not be considered wholly void, as, under Article 13(1) an existing law inconsistent with a fundamental right is void only to the extent of the inconsistency and no more and that securing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The prohibition was held to be unreasonable in the following words: "The statute as it stands, not only compels those who can be engaged in agricultural work front not taking to other avocations, but it also prohibits persons who have no connection or relation to agricultural operations from engaging in the business of bidi making and thus earning their livelihood. These provisions of the statute, in our opinion, cannot be said to amount to reasonable restrictions on the right of the applicants and that being so, the statute is not in conformity with the provisions of Part III of the Constitution. The law even to the extent that it could be said to authorize the imposition of restrictions in regard to agricultural labour cannot be held valid because the language employed is wide enough to cover restrictions both within and without the limits of constitutionally permissible legislative action affecting the right. So long as the possibility of its being applied for purposes not sanctioned by the Constitution cannot be ruled out, it must be held to be wholly void." 69. Paragraph 246 of the decision in Special Reference No.1 of 1951 (supra) was placed by Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and reasonable classification. Since the Act made no reasonable classification, laid down 'no yardstick or measure for the grouping either of persons or of cases or of offences' so as to distinguish them from others outside the purview of the Act, it was held invalid. 71. State of Madhya Pradesh v. Baldeo Prasad AIR 1961 SC 293, was a decision on an appeal that was carried to the Supreme Court with a certificate issued by the Nagpur High Court under Article 132(1) of the Constitution. It raised a question about the validity of the Central Provinces and Berar Goondas Act, 1946, as amended by the Madhya Pradesh Act XLIX of 1950. The law that was challenged by the respondent authorized the district magistrate, in an area declared by the State Government as disturbed, to direct a 'goonda' not to remain within, or enter into, a specified part of the district, if he was satisfied that his presence was prejudicial to the interests of the general public. 'Goonda' had been defined as meaning a hooligan, rouge or a vagabond and included a person who was dangerous to public peace or tranquility. This was an inclusive definition. The law did not indicate any tests to be applied to decide whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith a view to determining the extent and character of the land. According to the Court, in view of the stand taken by the State of Kerala, the most important question that arose for consideration was whether Article 265 of the Constitution is a complete answer to the attack against the constitutionality of the Act. It was held that if the Legislature has classified properties into different categories, which are subjected to different rates of taxation with reference to income or property, such a classification would not be open to the attack of inequality on the ground that the total burden resulting from such a classification is unequal. Similarly, different kinds of property may be subjected to different rates of taxation, but so long as there is a rational basis for the classification, Article 14 will not be in the way of such a classification resulting in unequal burdens on different classes of properties. But if the same class of property similarly situated is subjected to an incident of taxation, which results in inequality, the law may be struck down as creating an inequality amongst holders of the same kind of property. A taxing statute was not wholly immune from attack on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by auction, had been limited to those obtaining a right to do so under a public auction in four shops only in the Sabzi Mandi of Malerkotla, were declared void and ineffective. Two questions arose for consideration, (a) whether the bye-laws in question were ultra vires the provisions of the Punjab Municipal Act, 1911, and (b) whether the same were to be struck down as creating a monopoly for the wholesale sale of vegetables and fruits in favour of four persons only who obtained right to do so on a public auction in regard to the four shops in the Sabzi Mandi of Malerkotla. The Division Bench upheld the finding of the learned single Judge that the bye-laws imposed more than a reasonable restriction on the right of Haji Ismail. 75. Whether the Gold (Control) Act, 1968 was constitutionally valid was the common question that arose for determination on several writ petitions under Article 32 of the Constitution in Harakchand Ratanchand Banthia v. Union of India [1969] 2 SCC 166. The petitioners questioned the competence of the Parliament to enact the impugned Act with reference to entry 52 of List I and entry 33 of List III. According to them the legislation fell within the exclusive c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the conditions subject to which it is earned, any rule conferring absolute discretion not testable on reason, justice or fair play must be treated as utterly arbitrary and, unreasonable and discarded. If rules for payment of gratuity became incorporated in the Standing Orders and thereby acquired the status of statutory condition of service, an arbitrary denial referable to whim, fancy or sweet will of the employer must be rejected as arbitrary. Section 4 of the 1946 Act which confers power on the Certifying Officer or appellate authority to adjudicate upon the fairness or reasonableness of the provisions would enable this Court to reject that part of Rule 10 conferring absolute discretion on the employer to pay or not to pay the gratuity even if it is earned as utterly unreasonable and unfair. It must be treated as ineffective and unenforceable. It is well settled that if the Certifying Officer and the appellate authority under the 1946 Act while certifying the Standing Orders has power to adjudicate upon the fairness or reasonableness of the provisions of any standing orders, this Court in appeal under Art. 136 shall have the power to do the same thing when especially it is ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it with precision and accuracy so that any ex post facto interpretation of some incident may not be camouflaged as misconduct. There was thus no ground for initiating inquiry. Moreover with-holding of salary and then removing the appellant from service would expose him to double jeopardy. It was held in paragraph 18 as follows: "It is difficult to accept the submission that executive action which results in denial of equal protection of law or equality before law cannot be judicially reviewed nor can it be struck down on the ground of arbitrariness as being violative of Article 14. Conceding for the present purpose that legislative action follows a legislative policy and the legislative policy is not judicially reviewable, but while giving concrete shape to the legislative policy in the form of a statute, if the law violates any of the fundamental rights including Article 14, the same is void to the extent as provided in Article 13. If the law is void being in violation of any of the fundamental rights set out in Part III of the Constitution, it cannot be shielded on the ground that it enacts a legislative policy. Wisdom of the legislative policy may not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the Act extended, a hearing preceding a decision was of the essence of the matter. Further, no distinction was made by the Act between land-owners who had themselves constructed unauthorized structures on their land and those on whose lands trespassers had constructed such structures. Massive encroachments on private lands had led to the virtual deprivation of the title of rightful owners of those properties. The Act penalized such owners for no fault of theirs and, that too, without giving them an opportunity of being heard. This class of owners were silent spectators to the forcible and lawless deprivation of their title to their lands but had been placed on par with the trespassers who, taking the law into their hands, defied not merely the private owners but even the public authority. The lack of classification was held to be hit by Article 14 as it suffered from the infirmity of according equal treatment to unequals. 79. In Subhash Chandra Yadav (supra), the respondent was appointed a Sub-Charge, Cantonment General Hospital, Lucknow by the Cantonment Board by an appointment letter dated 23rd April, 1969. He was confirmed in that post on 1st December, 1969 by an order is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer of an employee from one Cantonment Board to another would mean the termination of appointment of the employee in the Cantonment Board from which he is transferred and a fresh appointment in the Board where he is so transferred. The GOC-in-Chief, Central Command, was not the appointing authority of the respondent or the employees of the Cantonment Board, and so transfer of the respondent by the GOC-in-Chief was not permissible. In any event, it was further held that one autonomous body cannot transfer its employee to another autonomous body even within the same State, unless the services of the employees of these two bodies were under a centralised or a State-level service. 80. B. B. Rajwanshi v. State of Uttar Pradesh AIR 1988 SC 1089, the Supreme Court had to consider Section 6(4) of the U.P. Industrial Disputes Act, 1947 and to decide on its validity bearing in mind Article 14 of the Constitution. The provision authorized the State Government to remit an order of a labour tribunal for reconsideration of the adjudicating authority and that authority was to submit the award to the Government after reconsideration. The Court noted that Section 6(4) did not require the Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the power to grant or refuse permission could be exercised according to the whims of the authority and it could differ from person to person holding the office. The Government was left with 'unrestricted and unguided discretion' rendering the provision 'unfair and discriminatory' vis-à-vis Article 19(1)(g) of the Constitution. The power to cancel a license on contravention of any direction issued by the competent authority was held to suffer from the vice of arbitrariness. 82. In Kumari Shrilekha Vidyarthi v. State of Uttar Pradesh AIR 1991 SC 537, en bloc removal of District Government Counsel by the State Government of Uttar Pradesh, even though the appointments were all individual, without showing a common reason applicable to all justifying termination was held to be arbitrary and liable to be struck down under Article 14 of the Constitution. It was held that even in contractual matters, public authorities have to act fairly, and if they fail to do so, approach to Article 226 would always be permissible because exclusion of Article 14 in contractual matters is not permissible in our constitutional scheme. 83. To consolidate and amend the laws relating to ceiling on lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Land Revenue Act did not empower the rule making authority either to classify land or exclude any area from preparation of record-of-rights and Annual Register and therefore if the amendments were upheld, the result would be that a person would be deprived of his valuable right of possession in the excluded area as his name would not be recorded in the record-of-rights. It was also held that by amending the rule, the rule making authority had excluded certain classes of land defined as "Extended Abadi" from the operation of preparation of map and the field book and that the Act did not authorise the rule making authority to exclude any area from the purview of Section 16 of the Land Revenue Act. While holding that the rule making authority acted beyond its power, it was observed as follows: "It is well recognised principle of interpretation of a statute that conferment of rule making power by an Act does not enable the rule making authority to make rule which travels beyond the scope of the enabling Act or which is inconsistent therewith or repugnant thereto. ...." 85. The majority in N. C. Budharaj (supra) decided a reference holding that the arbit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y could not be ruled out. Any number of documents may be inspected, may be seized and may be removed and at the end the whole exercise could turn out to be an exercise in futility. The exercise may prove to be absolutely disproportionate to the purpose sought to be achieved. A reasonable nexus between stringency of the provision and the purpose sought to be achieved must exist. 87. State of Kerala v. Unni [2007] 2 SCC 365, was a case where writ petitions were filed, inter alia, questioning the validity or otherwise of Rule 9(2) of the Kerala Abkari Shops (Disposal in Auction) Rules, 2002 and/or applicability of Section 57(a) of the Abkari Act, in the event sample of toddy was found to have exceeded the specified limit. The Court found Rule 9(2) to be unworkable and unreasonable, for, there did not exist any mechanical devise to measure the contents of ethyl alcohol present in toddy. Contents of ethyl alcohol in toddy would depend upon various factors including weather, season or pot in which it is kept etc. Each village would not have a chemical laboratory where the process of analysis of ethyl alcohol can be carried out. For example, if a sample is taken in a village, by the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petition. 91. It is now time to look into the other decisions cited by the parties that commend to me to be relevant. 92. The vires of Section 11AA of the SEBI Act has been considered by the Supreme Court in P.G.F. Ltd. (supra). It was contended by the petitioners before the Supreme Court that introduction of Section 11AA by the Parliament was ultra vires the Constitution on the ground of lack of competence. The contention failed and the civil appeal was dismissed with costs of Rs.50,00,000/-. 93. Mr. Pal contended that Section 11AA of the SEBI Act and the other provisions have been challenged in this writ petition on the ground that the same are repugnant to Article 14 of the Constitution and it was not an issue before the Supreme Court; therefore, the decision in PGF Ltd. (supra) would be of no assistance. 94. Mr. Pal seems to be right to the limited extent that the ground of challenge was different, but the observations made in paragraphs 31, 32, 37 to 40 and 42 of the decision are not irrelevant for the present exercise. In the said decision, the Supreme Court ruled as follows : "31. Before adverting to the various contentions raised in challengin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court can, in the first instance, examine whether there is a prima facie strong ground made out in order to examine the vires of the provisions raised in the writ petition. The Court can also note whether such challenge is made at the earliest point of time when the statute came to be introduced or any provision was brought into the statute book or any long time gap exist as between the date of the enactment and the date when the challenge is made. It should also be noted as to whether the grounds of challenge based on the facts pleaded and the implication of provision really has any nexus apart from the grounds of challenge made. With reference to those relevant provisions, the Court should be conscious of the position as to the extent of public interest involved when the provision operates the field as against the prevention of such operation. The Court should also examine the extent of financial implications by virtue of the operation of the provision vis-à-vis the State and alleged extent of sufferance by the person who seeks to challenge based on the alleged invalidity of the provision with particular reference to the vires made. Even if the writ Court is of the view t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gullible investors and also to monitor the operation of such schemes and arrangements based on the regulations framed under Section 11AA of the Act. When such was the laudable object with which the main Act was enacted and Section 11AA was introduced as from 22.02.2000, the challenge made to the said Section will have to be examined by keeping in mind the above said background and test the grounds of challenge as to whether there is any good ground made out to defeat the purport of the enactment. 39. A reading of sub-Section (3) of Section 11AA also throws some light on this aspect, wherein it is provided that those institutions and schemes governed by sub-clause (i) to (viii) of sub-Section (3) of Section 11AA will not fall under the definition of collective investment scheme. A cursory glance of sub-clause (i) to (viii) shows that those are all the schemes, which are operated upon either by a cooperative society or those institutions, which are controlled by the Reserve Bank of India Act, 1934 or the Insurance Act of 1938 or the Employees Provident Fund and Miscellaneous Provisions Act, 1952 or the Companies Act, 1956 or the Chit Fund Act of 1982 and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operated upon by a cooperative society or State machinery and there would be no scope for the concerned persons or the institutions who operate such schemes within the required parameters and thereby the common man or the contributory's rights or benefits will not be in any way jeopardized. It is, therefore, apparent that all other schemes/arrangements operated by all others, namely, other than those who are governed by sub-section 3 of Section 11AA are to be controlled in order to ensure proper working of the scheme primarily in the interest of the investors. 42. Therefore, in reality what sub-section (2) of Section 11AA intends to achieve is only to safeguard the interest of the investors whenever any scheme or arrangement is announced by such promoters by making a thorough study of such schemes and arrangements before registering such schemes with the SEBI and also later on monitor such schemes and arrangements in order to ensure proper statutory control over such promoters and whatever investment made by any individual is provided necessary protection for their investments in the event of such schemes or arrangements either being successfully operated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes. J., that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or straight jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The Court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud, (1957) 354 US 457 where Frankfurter, J. said in his inimitable style : 'In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The Courts have only the power to destroy, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uide and inspire the legislature in dealing with complex economic issues." 96. In Shri Sitaram Sugar Company Ltd. (supra) too, it has been reiterated as follows: "57. Judicial review is not concerned with matters of economic policy. The court does not substitute its judgment for that of the legislature or its agents as to matters within the province of either. The court does not supplant the 'feel of the expert' by its own views. ..." 97. It follows from the cited decisions that once the legislative policy is determined and formally transposed in an enactment laying down a binding rule of conduct, the power that is exercisable under the enactment has to be in furtherance of the objects sought to be achieved by such enactment but necessarily limited by its terms. The power has to be exercised bona fide, with due application of mind and on relevant consideration of all material facts, and in accordance with principles of natural justice to the extent applicable. A decision, either legislative or administrative or quasi-judicial, if not in harmony with the Constitution and other laws of the land, would be susceptible of being declared invalid. Reasonable re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h whom they have and intend to have business relationships. 100. I am tempted at this juncture to refer to the decision in Dalmia Cement (Bharat) Ltd. v. Union of India [1996] 10 SCC 104. The petitioners (manufacturers of cement, sugar and other commodities and plastic bags, and who had secured loans from banks) alleged that due to operation of the Jute Packaging Material (Compulsory Use in Packing Commodities) Act, 1987, their industries were running into losses and many of them had been compelled to close their business. The capital obtained from the nationalised banks had become bad debt. Repeal of the Act or gradually phasing out compulsory packing of the commodities with gunny bags, it was claimed, would relieve their hardship. The constitutionality of the Act and the Jute Packaging Material (Compulsory Use in Packing Commodities) Rules and Statutory Order No. 539(E) dated 29th May, 1987 were impugned as ultra vires and mandatory direction to the respondents to forbear enforcement thereof in packing their finished products with jute bags etc., was sought for. The Court, while upholding the impugned insistence of the State to use jute bags for packing purpose and dismissing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ep its hands off unless it is permissible to judicially review the policy through the windows of "manifest unreasonableness" or "patent arbitrariness". 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. It is in cases such as those cited by Mr. Pal, where the conflict was between a party and the administration without affectation of the rights of the common people, or where the regulations were so unreasonable that it became unworkable, that judicial interference could be considered necessary. 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 fram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such scheme or arrangement; (iii) the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors; (iv) the investors do not have day-to-day control over the management and operation of the scheme or arrangement. (3) Notwithstanding anything contained in sub-section (2), any scheme or arrangement - (i) made or offered by a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or a society being a society registered or deemed to be registered under any law relating to cooperative societies for the time being in force in any State; (ii) under which deposits are accepted by non-banking financial companies as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934); (iii) being a contract of insurance to which the Insurance Act, 1938 (4 of 1938), applies; (iv) providing for any Scheme, Pension Scheme or the Insurance Scheme framed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the last few years there have been substantial improvements in the functioning of capital markets in India. Market and credit risks have been reduced by requirement of adequate capitalisation, margining and establishment of clearing corporations in stock exchanges, etc. Systemic improvements have been made by introduction of screen based trading and depositories to allow book entry transfer of securities, etc. However, there are inadequate advanced risk management tools. With a view to provide such tools and to strengthen and deepen markets, there is an urgent need to include derivatives as securities in the Securities Contracts (Regulation) Act, 1956 whereby trading in derivatives may be possible within the framework of that Act. 2. Recently many companies especially plantation companies have been raising capital from investors through schemes which are in the form of collective investment schemes. However, there is not an adequate regulatory framework to allow an orderly development of this market. In order that the interests of investors are protected, it has been decided that the Securities and Exchange Board of India would frame regulations with regard to collec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 'Notwithstanding anything contained in any other Act, contracts in derivatives as per this Act shall be legal and valid'. (ii) The Committee was convinced that stock exchanges which are presently working would be better equipped to undertake trading in derivatives in a sophisticated environment. They further observed that most of these exchanges have already been modernised having state-of-the-art technology, the facility of depository and clearance house and moreover, since they are in a better position to handle the risk profiles of the retail investors, institutional investors and corporate bodies, it would be prudent to allow trading in derivatives by such exchanges only. The Committee had, therefore, proposed that the following Explanation may be added in the Bill, namely:- 'The derivatives shall be traded and settled on the stock exchange and clearing house of the stock exchange respectively in accordance with the rules and bye-laws of the stock exchanges.', and (iii) The Committee was of the opinion that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal filed by the petitioners against the order dismissing the second writ petition filed by them. In P.G.F. Ltd. (supra), the Supreme Court cautioned that the motives of laying a belated challenge to a statutory provision is a factor that the Court should bear in mind. I am of the view, having regard to the facts and circumstances discussed above and more particularly the attempt of the petitioners to urge the Supreme Court to recall an innocuous order (of requesting the High Court to take up the writ petition for hearing within two weeks or to consider vacating of the interim relief) as well as to assert that the order of the Division Bench does not preclude them from contending before me to examine the decision dated 3rd January, 2011 of the whole time member of the SEBI on merits, that the legislation was challenged to prolong the proceedings as well as negate the objection to the entertainability of the writ petition because of availability of an alternative remedy. That apart, in Govt. of A.P. v. Smt. Laxmi Devi [2008] 4 SCC 720, the Court has reiterated the principle that mere likelihood of abuse of discretionary power conferred under statute would not render the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
