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TMI Blog2013 (9) TMI 623X X X X Extracts X X X X X X X X Extracts X X X X ..... whom they have and intend to have business relationships - If a rational nexus between the policy and the object it seeks to achieve is discernible, the Court would unhesitatingly guard against substituting its view for the legislative judgment. Should the policy be found sustainable, it would then exercise the consideration of the Court as to how implementation of the policy is to be worked out by the administrative authority. If guidelines exist for regulating the exercise of power, which are not unreasonable or unworkable, the Court would stay at a distance - However, if the policy, its object and ways and means to implement it are found to serve the cause of public good, irrespective of some crudity here and there, prejudicial affectation of one's business interest by reason of the regulatory framework being put in place has to yield to larger public interest or else the latter would be the casualty. The preamble of an Act is said to afford useful light as to what the statute intends - Insofar as the charge of excessive delegation of essential legislative functions is concerned, the same is equally without merit. As regards laying down of principles or guiding norms, law see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lamities. Indeed they toil hard, whenever called upon, to give succour and relief to the affected people. The purpose sought to be achieved by the disaster management system being noble and attempts to save the aam aadmi being sincere and laudable, none can possibly have 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mending Act) with effect from 22nd February, 2000. The amendments, inter alia, included amendment of the definition of "securities" in the Securities Contract (Regulation) Act, 1956 (hereafter the SCR Act) to include within its ambit the units or any other instruments issued 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. Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can carry on or sponsor or launch a CIS without obtaining a certificate of registration. Accordingly, information was sought for on the points mentioned therein. 6. The petitioners replied on 22nd January, 2010 that they were in the process of preparing 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and order dated 23rd March, 2011. The stay application filed in connection with the 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmence regular hearing of the writ petition. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts application could be ascertained. Such 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or arrangements which "shall not be a Collective 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same analogy, Regulation 9(g) 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e referred to extensively before me 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 there has been an excessive d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision, 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 provision and the sub-sections thereof were violative of Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 national development ignited the impugned legislation. The State moved to stop thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 individualizations." The second contention did not meet with approval because : "14. *** We do not agree. Not o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 were abuse of the power, the Courts had ample power to undo the mischief; (vi) Shri Sitaram Sugar Co. Ltd. v. Union of India [1990] 3 SCC 223, for the proposition that the person assailing a classification on the ground that it is not fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual 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 impugned provisions are directed to sub-serve public good and well-being and the Parliament was competent to enact Section 11AA. 48. To support his contention that the Supreme Court has recently upheld the constitutional validity of Section 11AA of the SEBI Act by holding that the Parliament had the necessary compet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Act is not to target legitimate commercial activities but to suppress such commercial activities by organisations, which are involved in deceitful innovation to dupe investors. Referring to clauses (i) to (iv) of sub-section 2 of Section 11AA of the SEBI Act, he contended that the Parliament rightly decided to provide coverage to enc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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; (ii) the restrictions referred to in Regulation 13 and the obligations of the CIS company envisaged in Regulation 14 are in effect a demand for focused expertise in the area of business activities rather than curbs imposed on such activities; (iii) the provisions requiring, inter alia, holding of the corpus in trust, control in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itra 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 provisions are capable of precise application and there being no invasion of Article 14 of the Constitution, the writ petition merits dismissal. 61. In reply Mr. Pal reiterated that the wide discretion that has been conferred, on the face of Section 11AA of the SEBI Act having no standard at all, is violative of Article 14. The field being undefined, the executive power to pick and choose ought to result in the impugn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vate 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 object." 63. The aspect dealt with in paragraph 13 (on which reliance was placed by the SEBI), according to Mr. Pal, is not the declaration of law under Article 141, but the observation of V.R. Krishna Iyer, J. (as His Lordship then was) in his inimitable style. In any event, it was made on the basis that 'the Legislature cannot easily make meticulous exceptions and has to proceed on broad categorizations.' Insofar as the instant case i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 the public safety or the maintenance of public order would include the security of the State, and thus the impugned provisions were covered by clause (2) of Article 19 and ought to be held to be valid was repelled by holding that clause (2) of Article 19 having allowed the imposition of restriction on the freedom of speech and expression only in cases where danger to public security is involved, an enactment, which is capable o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. Pal. Relevant portions therefrom are quoted below: "246. We are not concerned with the actual decisions in these cases. The decisions are to be valued in so far as they lay down any principles. The manner of applying the principles to the facts of a particular case is not at all material. The decisions referred to above clearly lay down that the legislature cannot part with its essential legislative function which consists in declaring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 whether a person fell in the first part of the definition, and it was left to the unguided discretion of the magistrate to treat any citizen as a goonda which was hardly proper. The Supreme Court declared the Act invalid on the ground, inter alia, that the definition of a 'goonda' afforded no assistance in deciding who fell in that category. The Court insisted that the Act must have clearly indicated when and under what circumstances a person could be called a 'goon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence 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 the ground that it infringes the equality clause in Article 14, though the Courts are not concerned with the policy underlying a taxing statute or whether a particular tax could not have been imposed in a different way or in a way that the Court might think more just and equitable. The Act was examined with reference to the attack based on Article 14 of the Constitution and it was held that clearly inequality was writ large on the Act and no attempt at classif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 competence of the State Legislature under entry 27 of List II. They also urged that Sections 4(4), 4(5), 5(1) and 5(2) of the Act suffered from excessive delegation of legislative power, that restrictions imposed by Sections 27, 32, 46, 88 and 100 of the Act were unreasonable and not in public interest and hence violated Article 19(1)(g) and (f) of the Constitution, and that Sections 27 and 39 also were violative of Article 14 thereof. In-depth analysis of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 called upon to enforce the unreasonable and unfair part of the Standing Order. It therefore follows that part of Rule 10 which confers absolute discretion on the employer (not) to pay gratuity even if it is earned, at its absolute discretion is ineffective and unenforceable....." It was also held : " ..Our Constitution envisages a society governed by rule of law. Absolute discretion uncontrolled by guidelines which may permit denial of equality before law is the antith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eviewed 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 be open to judicial review but when the wisdom takes the concrete form of law, the same must stand the test of being in tune with the fundamental rights and if it trenches upon any of the fundamental rights, it is void as ordained by Article 13." The Court in the next paragraph ruled: "It thus appears well-settled that Article 14 strikes at arbitrariness in executive/administrative action because any action that is arbitrary must necessarily involve the negation of equality. One need not confine the den ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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 issued by the Cantonment Board. The conditions of service of the employees of the Cantonment Board, a statutory body, were governed by the provisions of the Rules. At the time the respondent was appointed, the Rules then prevailing did not contemplate transfer. His appointment letter also did not include any condition for transfer from one Board to another. By a notification dated 16th December, 1972, the Rules were amended and a new rule, being Rule 5-C was added to the Rules laying down that the service of a servant shall be tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 Government to hear the parties before remitting the award to the concerned adjudicating authority, the Government was not required to give reasons for remitting the award, the Government was not required to inform the authority the specific points on which it was to reconsider the award. Section 6(4) was so widely worded that it was likely to result in grave injustice to a party in whose favour an award was made as it could be used to reopen the whole case. It conferred 'unguided and uncontrolled powers' on the Government. The power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 land holdings in the State of Himachal Pradesh, the Legislative Assembly of Himachal Pradesh enacted the Himachal Pradesh Ceiling on Land Holdings Act, 1972. Sub-section (1) of Section 26 of the Act conferred power on the State Government to make rules, by notification, for carrying out the purposes of the Act. Sub-sections (2) and (3) thereof provided for previous publication of the rules and the rule being laid on the floor of the State Legislature as soon as may be after it was made. In exercise of the power so conferred, the State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 arbitrator appointed with or without the intervention of the Court, has jurisdiction to award interest on the sums found due and payable, for the pre-reference period, in the absence of any specific stipulation or prohibition in the contract to claim or grant any such interest. While holding so, what is substantive law and what is remedial or adjective law were discussed. 86. District Registrar and Collector v. Canara Bank [2005] 1 SCC 496, was a case where the Supreme Court held Section 73 of the Stamp Act, 1899, as amended and applicable in Andhra Pradesh, to suffer f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the sample is sent for and is analyzed, the volume of ethyl alcohol may increase. The definition of 'toddy' did not limit the extent of fermentation. Fermented toddy would, therefore, come within the purview of definition of toddy. Manufacture and sale of toddy, which is fermented, were not prohibited. The Excise Manual provided that the contents of ethyl alcohol by reason of fermentation in toddy could go up to 12%, whereafter only it would cease to be toddy. It was held that when a subordinate legislation imposes conditions upon a licensee regulating the manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 challenging the vires of Section 11AA of the SEBI Act, we feel that it is worthwhile to state and note certain precaution to be observed whenever a vires of any provision of law is raised before the Court by way of a writ petition. It will be worthwhile to lay down certain guidelines in that respect, since we have noticed that on very many occasions a challenge to a provision of law, as to its constitutionality is raised with a view to thwart the applicability and rigour of those provisions and as an escape route from the applicability of those provisions of law and thereby create an im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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- -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 that the challenge raised requires to be considered, then again it will have to be examined, while entertaining the challenge raised for consideration, whether it calls for prevention of the operation of the provision in the larger interest of the public. We have only attempted to set out some of the basic considerations to be borne in mind by the writ Court and the same is not exhaustive. In other words, the Writ Court should examine such other grounds on the above lines for consideration while considering a challenge on the ground of vires to a Statute or provision of law made before it for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contributions, which are made in the nature of subscription to a mutual fund, which again is governed by a SEBI (Mutual Fund) Regulations 1996. Therefore, by specifically stipulating the various ingredients for bringing any scheme or arrangement under the definition of collective investment scheme as stipulated under sub-Section (2) of Section 11AA, when the Parliament specifically carved out such of those schemes or arrangements governed by other statutes to be excluded from the operation of Section 11AA, one can easily visualize that the purport of the enactment was to ensure that no one who seeks to collect and deal with the monies of any other individual un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest 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 upon or by any misfortune happen to be abandoned, where again there would be sufficient safeguards made for an assured refund of investments made, if not in full, at least a part of it." 95. One decision of the Constitution Bench of the Supreme Court that has formally not been cited at the bar but considered in the decisions in Delhi Cloth General Mills Co. Ltd. (supra) and Peerless General Finance and Investment Co. Ltd. (supra) and referred to by Mr. Mitra while placing the latter decision is R.K. Garg v. Union of India AIR 1981 SC 2138. That was a case where the writ petitions under Article 32 raised a common question of law relating to the constitutional validity of the Special Bearer Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability.' The Court must always remember that, 'legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry' that exact wisdom and nice adaption of remedy are not always possible and that 'judgment is largely a prophecy based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 relation of the action with the purposes of the enabling legislation is what should be attempted to save it from being declared unconstitutional. Insofar as challenge to an enactment seeking to bring about economic reforms is concerned, deference to the legislative judgment should be followed by the Courts. 98. In the conspectus of the principles that emerge from the several cited decisions of the Supreme Court and the prefatory observations in R.K. Garg (supra), I now proceed to examine the worth of the contentions raised in respect of constitutional invalidity of the provisions inserted in the SEBI Act by the 1999 Amendment Act, and the CIS Regulations. 99. Securing JUSTICE, social, economic and political, and EQUALITY of status and of opportunity to all the citizens of the country is the promise that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pulsory 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 the claims took into consideration various decisions, out of which some have been cited before me by Mr. Mitra, and observed that the concept of equality and equal protection of laws guaranteed by Article 14 in its proper spectrum encompasses social and economic justice in a political democracy; the preamble of the Constitution is the epitome of the basic structure built in the Constitution to establish an egalitarian social order; and the trinity - the preamble, the Fundamental Rights in Part III and the Directive Principles of State Policy in Part IV delineated the socio-economic justice. The principal end of society is to protect the enjoyment of the rights of the individuals, subject to social order, well-being and morality. While relying on the decision in R.K. Garg (supra) and holding the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 framework being put in place has to yield to larger public interest or else the latter would be the casualty. 102. On the authority of the decisions in R.K. Garg (supra) and those following it and considering the limited extent of judicial scrutiny of a legislation that seeks to bring on economic reforms, the challenge to the provisions of the SEBI Act ought to fail. However, is it the law that an economic legislation can never be challenged? If such legal position has to be conceded, then much of the authorities on the import, content and scope of Article 14 would be wasted eloquence. I am minded to hold that even legislation laying down economic policy could be challenged on the very limited grounds of being so manifestly unreasonable, that is to say there is absolutely no nexus between the policy and the object it seek ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the Insurance Act, 1938 (4 of 1938), applies; (iv) providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 (19 of 1952); (v) under which deposits are accepted under section 58A of the Companies Act, 1956 (1 of 1956); (vi) under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under Section 620A of the Companies Act, 1956 (1 of 1956); (vii) falling within the meaning of Chit business as defined in clause (d) of section 2 of the Chit Fund Act, 1982(40 of 1982); (viii) under which contributions made are in the nature of subscription to a mutual fund; shall not be a collective incentive scheme." 105. The preamble of an Act is said to afford useful light as to what the statute intends. To examine the point of over-breadth, it would be useful to look into the preamble of the SEBI Act. It says that it is an "Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end the definition of 'securities' so as to include within its ambit the derivatives and the units or any other instrument issued by any collective investment scheme to the investors in such schemes. 3. It is also proposed to substitute section 29A of the aforesaid Act relating to delegation of powers. At present powers can be delegated to the Securities and Exchange Board of India. It is now proposed to also delegate powers to the Reserve Bank of India. 4. The Securities Contracts (Regulation) Amendment Bill, 1998 was introduced in Lok Sabha on the 4th July, 1998 proposing amendments in the Securities Contracts (Regulation) Act, 1956 to give effect to the amendments mentioned above. The Bill was referred to the Standing Committee on Finance on the 10th July, 1998 for examination and report thereon by the Hon'ble Speaker, Lok Sabha. The Committee submitted its report on the 17th March, 1999. The committee was of the opinion that the introduction of derivatives, if implemented with proper safeguards and risk containment measures, will certainly give a fillip to the sagging market, result in enhanced investment activity and instil greater confidence among the investors/part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accepted the above recommendations and incorporated the same in the Bill. 5. The Bill seeks to achieve the above objectives." [Emphasis supplied] 108. It would appear from the above extract that the Standing Committee on Finance examined the Securities Contracts (Regulation) Amendment Bill, 1998 pursuant to an order of the Hon'ble Speaker of the Lok Sabha and, inter alia, reported on the need to define CIS on the lines of the recommendation of the Dave Committee and to include the same in the SCR Act. Proceedings of the Lok Sabha dated 30th November, 1999 would also show that the motion was adopted after thorough deliberations. 109. A conjoint reading of the relevant Acts, viz. the SEBI Act and the SCR Act together with the objects and reasons of the 1999 Amending Act would leave no manner of doubt that protection of the investors in securities and the manner of ensuring such protection in fullest measure is the heart and soul of the SEBI Act. However, Mr. Pal argued that Section 11AA is so wide that businesses of diverse nature may be caught in the net and in the absence of adequate guidelines, there is likelihood of abuse of discretionary power. I shall assume that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the right direction for saving the gullible investors from falling prey to unregulated and uncontrolled schemes leading to their ruination (paragraphs 37, 38, 40 and 42). The reason for devising exclusionary operation of activities of certain classes, as in sub-section (3) of Section11AA, has also been clearly discussed as evident from paragraph 39 thereof and I see no reason to dilate thereon. 111. Insofar as the charge of excessive delegation of essential legislative functions is concerned, the same is equally without merit. As regards laying down of principles or guiding norms, law seems to be well-settled that it is not essential that the very section in the statute which confers the power should also lay down the rules of guidance, or the policy for the administrator to follow. If the same can be gathered from the preamble, or the long title of the statute and other provisions therein, the discretion would not be regarded as uncontrolled or unguided and the statute in question will not be invalid. At times, even vague policy statements to guide administrative discretion have been held by the courts as complying with Article 14. I have no hesitation to hold that the CIS Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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