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TMI Blog2023 (1) TMI 459X X X X Extracts X X X X X X X X Extracts X X X X ..... to be regulated is, generally speaking, the extent to which permissible restrictions may go in order to satisfy the test of reasonableness. A wide the range of powers is conferred on the Board under Regulation 31 since different corrective actions may have to be taken depending on the nature of the violation committed by the Research Analyst. In a given case if such powers are exercised arbitrarily or disproportionately to the misconduct committed by a Research Analyst, the affected party can approach the Securities Appellate Tribunal or invoke the jurisdiction under art.226 of the Constitution of India. But the mere possibility of abuse of such a power cannot be ground to declare them as violative of Art.19(1) (g) of the Constitution of India. In our opinion, Regulation 27 or Regulation 31 are not violative of rights conferred on the Research Analyst under Articles 19(1)(a) 19(1)(g) or Art.14 of the Constitution of India. The fact that the Astrologers or Management consultants are allowed to give consultancy, and are not regulated, does not mean that Research Analysts who provided investors with information on the basis of which investment decisions are made, should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and ideas. He also alleges that the restrictions imposed by the said Regulations do not fall within the ambit of Clause (2) of Article 19 of the Constitution of India which permits certain reasonable restrictions to be imposed on the fundamental Right of free speech and expression. It is his further grievance that his right to equality guaranteed by Article 14 of the Constitution of India is also violated because there are many businesses in India where citizens are doing consultancy, but which are not regulated by any Regulator. He gives illustration of the Astrologers and Management Consultancy done by the persons possessing qualification of the Masters in Business Administration. According to him, the impugned Regulations are also not in pursuance to the directive principles of the State Policy guaranteed by Part IV of the Constitution of India. Further his contention is that Article 19(1)(g) of the Constitution of India gives him a right/freedom to practice any profession or to carry on any occupation, trade or business; that such a freedom can only be curtailed to some extent by Article 19(6) of the Constitution of India which permits the State to impose, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecified period. In his opinion, this amounts to conferring of unfettered, excessive and complete discretion on the respondents to take excessive and unreasonable action against the Research Analyst. The doctrine of proportionality also, according to the petitioner, is violated by these Regulations. CONSIDERATION BY THE COURT We may point out that the SEBI Act was enacted to provide for the establishment of the Board to protect the interests of the investors in securities, and to promote the development of, and to regulate, the securities market, and for the matters connected therewith or incidental thereto. Section 11 of the SEBI Act provides that inter alia it is the duty of the Board to protect the interests of the investors in securities, and to promote the development of, and to regulate securities market, by such measures as it deem fit which would include regulation of substantial acquisition of shares, and taking over of companies. Coming to the impugned Regulations, before issuing the same, a consultation paper on the proposed Regulations of Research Analyst was issued by the Board for inviting public comments on 29.11.2013. This document reveals th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of interest by the Research Analyst posed regulatory gaps in the management and mitigation of possible conflicts of interest that may arise in their activities in the securities market. According to the consultative paper, there was a need to have mechanism to ensure that business relationship of the intermediary or financial or trading interest of the Research Analyst or intermediary or compensation arrangement of the Research Analyst etc. do not prejudice research report or the recommendations. It was felt that the comprehensive regulatory framework would be required to address conflicts of interest and to minimize market malpractices so that at the end of the day, impartiality in the research reports is largely ensured. With the above noble objectives in mind, the impugned Regulations have been enacted by the Board. Regulation 2 (u) defines the term Research Analyst as under:- (u) research analyst means a person who is primarily responsible for,- i. preparation or publication of the content of the research report; or ii. providing research report; or iii. making 'buy/sell/hold' recommendation; or iv. giving price target; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistered as Research Analyst or by individuals employed as Research Analyst and partners of Research Analyst. It states as under:- Regulation 7 (1) An individual registered as research analyst under these regulations, individuals employed as research analyst and partners of a research analyst, if any, engaged in preparation and/or publication of research report or research analysis shall have the following minimum qualifications, at all times: (i)A professional qualification or post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, financial services or markets provided by: (a) a university which is recognized by University Grants Commission or by any other commission/council/board/body established under an Act of Parliament in India for the purpose; or (b) an institute/association affiliated with such university; or (c) an institute/ association/university established by the central government or state government; or (d) autonomous institute falling under administrative control of Government of India; or (ii) professional qualification or post-graduate degree or post ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has come up for interpretation on several occasions before American Courts which have held that the word regulate means to adjust by rule, method, or established mode; to direct by rule or restrictions; to subject to governing principles or laws. (See: Words and Phrases, Vol. 36, p. 687 by West Publishing Co.). The Court held in the said case that the true test is whether the effect of the impugned action is to take away or abridge fundamental rights. Where more than fundamental right guaranteed by Part II of the Constitution is alleged to have been violated, the true test for determining the validity of a restriction imposed by a regulation/action is against which of the freedoms is the restriction directly leveled against? [See Commentary on the Constitution of India by Sri Durga Das Basu , 8th Edition,2007 vol.2 pg.2431] This is what the Supreme Court held in the decision of Hamdard Dawakhana v. Union of India [AIR 1960 SC 554] . In that case there was a challenge to the Drug and Magic Remedies (Objectionable Advertisement) Act (21 of 1954) on the ground that it violated Art.19(1) (a) of the Constitution of India. The preamble of the Act stated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) which it seeks to aid by bringing it to the notice of the public. When it takes the form of a commercial advertisement which has an element of trade or commerce it no longer falls within the concept of freedom of speech for the object is not propagation of ideas - social, political or economic or furtherance of literature or human thought; but as in the present case the commendation of the efficacy, value and importance in treatment of particular diseases by certain drugs and medicines. In such a case, advertisement is a part of business even though as described by Mr Munshi its creative part, and it was being used for the purpose of furthering the business of the petitioners and had no relationship with what may be called the essential concept of the freedom of speech. It cannot be said that the right to publish and distribute commercial advertisements advertising an individual s personal business is a part of freedom of speech guaranteed by the Constitution. It cannot be said therefore that every advertisement is a matter dealing with freedom of speech nor can it be said that it is an expression of ideas. In every case one has to see what is the nature of the adve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion or carrying on any occupation, trade or business. As regards the contention of the petitioner that the explanation to Clause (u) of Regulation 2 includes in the definition of the Research Analyst even an associate person who reports directly or indirectly to such Research Analyst in connection with the activities mentioned in the said regulation is concerned, it appears that such explanation is included in order to ensure that only professionally qualified people registered pursuant to the regulations are engaged and associated with a Research Analyst for preparation of research reports. This is obviously intended to maintain high quality and neutrality of the reports and to discourage people with sketchy or no knowledge of the subject from getting associated with the Research Analysts and contributing his views which form part of the reports of the Research Analysts for consumption of the public. Regulation 7 which prescribes professional qualifications is also undoubtedly in public interest in view of the fact that the person who professes to be a Research Analyst should possess proper qualifications which would ensure that the research report which he authors mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search analyst or research entity to refund any money collected as fees, charges or commissions or otherwise to the concerned clients along with the requisite interest. (ii) prohibiting the research analyst or research entity from operating in the capital market or accessing the capital market for a specified period. A wide the range of powers is conferred on the Board under Regulation 31 since different corrective actions may have to be taken depending on the nature of the violation committed by the Research Analyst. In a given case if such powers are exercised arbitrarily or disproportionately to the misconduct committed by a Research Analyst, the affected party can approach the Securities Appellate Tribunal or invoke the jurisdiction under art.226 of the Constitution of India. But the mere possibility of abuse of such a power cannot be ground to declare them as violative of Art.19(1) (g) of the Constitution of India. In our opinion, Regulation 27 or Regulation 31 are not violative of rights conferred on the Research Analyst under Articles 19(1)(a) 19(1)(g) or Art.14 of the Constitution of India. The fact that the Astrologers or Management consultants are all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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