Madhubhai Amathalal Gandhi Vs. The
Union of India [1960] INSC 125 (17 August 1960)
SUBBARAO, K.
SINHA, BHUVNESHWAR P.(CJ) KAPUR, J.L.
GAJENDRAGADKAR, P.B.
WANCHOO, K.N.
CITATION: 1961 AIR 21 1961 SCR (1) 191
CITATOR INFO :
RF 1964 SC 648 (46) R 1972 SC1982 (4) R 1987
SC1527 (21)
ACT:
Stock Exchange-Rules for
membership-Notification laying conditions restricting membership-Classification
between active members and others-Whether unreasonable or infringed fundamental
rights-Securities Contracts (Regulation) Act, 1956, (42 of 1956) s. 4.
--Securities-Contracts (Regulation) Rules, 1957, rr. 17-22.
HEADNOTE:
The Securities Contracts (Regulation) Act,
1956, was enacted with the object of preventing undesirable transactions in
securities by regulating the stock exchange business, and the Act conferred an
effective controlling power on the Central Government over the stock exchange.
In exercise of the power conferred on the Central Government to make rules the
Central Government made rules described as the Securities Contracts
(Regulation) Rules, 1957, providing, inter alia, for the qualification for
membership of a stock exchange seeking recognition etc. After the Act came into
force two Companies, namely, the Native Share and Stock Brokers' Association
and the Indian Stock Exchange Limited doing stock exchange business in Greater
Bombay applied for recognition under the Act. The Government after considering
the merits of the companies and the relevant circumstances issued a
notification dated August 31, 1957, recognising the Native Share and Stock
Brokers' Association under the name " The Stock Exchange, Bombay "
subject to certain conditions.
One of the conditions was that the members of
the other company, India Stock Exchange Limited, would be entitled to apply for
membership of the Stock Exchange, Bombay, provided they were active members of
the Indian Stock Exchange Limited for 12 months immediately preceding August 6,
1957, and they were also eligible under r. 8(i) of the Securities Contracts
(Regulation) Rules, 1957, to be members of a recognised stock exchange. Within
the time granted for applying for membership a number 'of active members of the
Indian Stock Exchange Limited applied for membership and were admitted as
members of the recognised Stock Exchange.
Though three years had elapsed after this no
member other than the petitioner questioned the validity of the notification
which was accepted and the recognised Stock Exchange became established. The
petitioner, however, filed a petition under Art. 32 Of the Constitution praying
that the Union be directed to withdraw or cancel the notification dated August
31, 1957, recognising the Stock Exchange, Bombay, under S. 4 Of the Securities
Contracts (Regulation) Act, 1956. Subsequently on November 30, 1957, the
Central Government 192 issued another notification applying s. 13 Of the Act to
Greater Bombay with the result that thereafter every contract in shares between
the members of any unrecognised stock exchange in that city would be illegal.
The contentions of the petitioner in the petition for the issue of a writ of
mandamus were that under Art. 19(i)(g) of the Constitution he had a fundamental
right to carry on business in shares and the two notifications in question
imposed unreasonable restrictions on his right, that the notification dated
August 31, 1957, was void as it was not sanctioned by the provisions Of s. 4 Of
the' Act, that the condition 2(i)(a) of the said notification classifying
members of the Indian Stock Exchange Limited as active members and members who were
not active infringed fundamental right granted under Art. 14 Of the
Constitution and as the said condition was not severable the entire
notification was bad. The respondent besides controverting the said contentions
further contended that as the petitioner had not questioned the validity of the
Act itself the notification issued there under could not be questioned.
Held, that the validity of a notification
could not be questioned if it was issued under a self contained Act and
restated the provisions of the Act the validity of which was accepted. If,
however, the Act conferred a power on the State in general terms and the
notification issued there under infringed any of the fundamental rights it
could be attacked even though the Act was valid.
The Stock Exchange Rules did not operate as a
bar against the petitioner becoming a member of the Stock Exchange subject to
the rules governing such application.
The restrictions and conditions imposed under
the notification in question were not unreasonable. The condition restricting
membership to active members only is germane to the recognition of the Stock
Exchange and is therefore, a condition within the meaning of " any other
conditions " in cl. (b) of sub s. (1) Of s. 4 Of the Act.
The classification between active members and
others was justifiable and the period fixed by the Government as the standard
for ascertaining the active membership was neither arbitrary nor unreasonable.
There was a presumption in favour of the
State that there was a reasonable basis for the classification and the burden
to prove that it violated the guarantee of equal protection lay on the
petitioner who impeached it.
ORIGINAL JURISDICTION: Writ Petition No. 136
of 1957.
Writ Petition under Art. 32 of the
Constitution of India for enforcement of Fundamental Rights.
193 Purshottam Tricumdas, Mukund R. Mody,
Anil B. Divan, Ramesh A. Shroff and I. N. Shroff, for the petitioner.
C. K. Daphtary, Solicitor-General of India,
R. Ganapathy Iyer and R. H. Dhebar, for respondent.
1960. August 17. The Judgment of the Court
was delivered by SUBBA RAO J.-This is a petition under Art. 32 of the
Constitution for the issue of a writ of mandamus or a writ in the nature of
mandamus or any other appropriate direction, order or writ to direct the
respondent, the Union of India, to withdraw or cancel the notification dated
August 31, 1957, recognising " the Stock Exchange, Bombay " under s.
4 of the Securities Contracts (Regulation) Act, 1956 (XLII of 1956),
(hereinafter referred to as “the Act ").
At the outset it is necessary to notice
briefly how a Stock Exchange is worked and how it is controlled or regulated by
the State. " Stock Exchange " means, " anybody of individuals,
whether incorporated or not, constituted for the purpose of assisting or con.
trolling the business of buying, selling or dealing in securities ". The
history of stock exchanges in foreign countries as well as in India shows that
the development of joint stock enterprise would never have reached its present
stage but for the facilities which the stock exchanges provided for dealing in
securities. They have a very important function to fulfill in the country's
economy. Their main function, in the words of an eminent writer, is " to
liquify capital by enabling a person who has invested money in, say, a factory
or a railway, to convert it into cash by disposing of his share in the
enterprise to someone else ". Without the stock exchange, capital would
become immobilized. The proper working of a stock exchange depends upon not only
the moral stature of the members but also on their calibre. It is a trite
saying that a jobber or dealer is born and not made.
In the words of the same author, a jobber
must be a man of good nerve, cool judgment, and ready to deal 25 194 under any
ordinary conditions, and he must be a man of financial standing, considerable
experience, with an understanding of market psychology. There are three modes
of dealing in shares and stores, namely, (1) spot delivery contract, i.e., a
contract which provides for the actual delivery of securities on the payment of
a price thereof either on the day of the contract or the next day, excluding
perhaps the period taken for the despatch of the securities or the remittance
of money from one place to another; (2) ready delivery contract, which means a
contract for the purchase or sale of securities for the performance of which no
time is specified and which is to be performed immediately or within a
reasonable time; (3) forward contracts, i.e., contracts where under the parties
agree for their performance at a future date. If the stock exchange is in the
hands of unscrupulous members, the second and third categories of contracts to
buy or sell shares may degenerate into highly speculative transactions or, what
is worse, purely gambling ones. Where the parties do not intend while entering
into a contract of sale or purchase of securities that only difference in
prices should be paid, the transaction, even though speculative, is valid and
not void, for " there is no law against speculation as there is against
gambling ". But, if the parties do not intend that there should be any
delivery of the shares but only the difference in prices should be accounted
for, the contract, being a wager, is void. More often than not it is difficult
for a court to distinguish one from the other, as a wagering transaction may be
so cleverly camouflaged as to pass off as a speculative transaction. These
mischievous potentialities inherent in the transactions, if left uncontrolled,
would tend to subvert the main object of the institution of stock exchange and
convert it into a den of gambling which would ultimately upset the industrial
economy of the country.
For that reason, in Bombay as early as 1925,
the Bombay Securities Contracts Control Act was passed to regulate and control
contracts for the purchase and sale of securities in the City of Bombay and
elsewhere in the Bombay Presidency.
Under s. 6 of that Act, 195 " Every
contract for the purchase or sale of securities, other than a ready delivery
contract, entered into after a date to be notified in this behalf by the
Provincial Government shall be void, unless the same is made subject to and in
accordance with the rules duly sanctioned under s. 5 and every such contract
shall be void unless the same is made between members or through a member of a
recognised stock exchange; and no claim shall be allowed in any Civil Court for
the recovery of any commission, brokerage, fee or reward in respect of any such
contract ". But this Act defined " ready delivery contract " to
mean " a contract for the purchase or sale of securities for performance
of which no time is specified and which is to be performed immediately or
within a reasonable time ". It was also stated therein by way of explanation
that what was reasonable time was in each particular case a question of fact.
This Act did not achieve its purpose, for under s. 6 thereof contracts entered
into in contravention of the provisions of that section were not made illegal
but only void, with the result that even members of a stock exchange not
recognised under that Act were able to do business in that line. What is more,
the explanation to the definition of " ready delivery contract "
which is excluded from the operation of the Act was so elastic that in the name
of ready delivery contracts unrecognised stock exchanges. and individuals were
able to carry on business in forward contracts. (-,ambling in shares went on
unchecked in Bombay as elsewhere. After the Second World War, the post-war boom
gave an unhealthy impetus to the stock exchange transactions. Various expert
committees appointed by the Government from time to time considered the
question of regulation of stock exchanges and the latest of those committees
was the Gorwalla Committee. The report of that Committee was circulated to the
principal stock exchanges, Chambers of Commerce, and other interested
associations and individuals. After considering the reports of the committees
and the comments made thereon by the various bodies, the Government introduced
a bill in the Parliament, which became law on 196 September 4, 1956. The Act
was passed to prevent undesirable transactions in securities by regulating the
business therein by prohibiting auction and by providing for certain other
matters connected therewith. The Act mainly provides for the recognition of
stock exchanges and for controlling the rule-making of the said exchanges.
Section 4 of the Act empowers the Central Government to recognise stock
exchanges subject to two conditions. Section 13 enables it to issue a
notification that in a particular State or area every contract which is entered
into after the date of the notification otherwise than between members of a
recognised stock exchange in such State or area or through or with such member
shall be illegal. Without resorting to such drastic procedure the Government is
also given power to prohibit contracts in certain securities in certain areas
from doing business without obtaining a licence. Spot delivery contracts are
excluded from the operation of ss.
13, 14, 15 and 17 of the Act, unless the
Central Government by notification thinks fit to extend the operation of s. 17
of the Act to such contracts. Section 19 prohibits formation of stock exchanges
other than recognised ones except with the permission of the Central
Government. It declares all auctions in securities entered into after the
commencement of the Act illegal. It also provides penalties for the
infringements of the provisions of the Act. In short, the Act confers an
effective controlling power on the Central Government over the stock exchanges.
In exercise of the power conferred upon the
Central Government to make rules, the Central Government made rules described
as the Securities Contracts (Regulation) Rules, 1957, providing, inter alia,
for the qualification for membership of a stock exchange seeking recognition,
the procedure for recognition, the manner of keeping accounts, the submission
of annual reports, the constitution of governing bodies and for taking
disciplinary action against any member of such bodies and other similar
matters.
In Greater Bombay there were two stock
exchanges, 197 one called the Native Share & Stock Brokers' Association,
and the other the Indian Stock Exchange Limited. The former was in existence for
more than., 80 years and it was registered under the Bombay Securities
Contracts Control Act, 1925. Its rules and bye-laws were approved by the
Government of Bombay and it was doing business in both forward as well as ready
transactions. It has a clearing house and was doing extensive business in
different kinds of securities.
The other, namely, the Indian Stock Exchange
Limited, was a company incorporated under the Indian Companies Act, 1913, as a
company limited by guarantee without any share capital.
The said Company had been functioning since
1937, but was not registered under the Bombay Securities Contracts Control Act,
1925. It was mainly doing business in Tata Ordinary and Bombay Dyeing shares
and had hardly any investment business. Not being registered under the Bombay
Securities Contracts Control Act, 1925, it could only deal in ready delivery
contracts; and as the definition of " ready delivery contract " under
that Act was elastic and as forward contracts were not made illegal there under,
this Exchange was also doing speculative business mainly in the said two
shares.
After the Act came into force, both the
Exchanges applied for recognition under the Act. The Government, after
considering the relative merits and the relevant circumstances, issued a
notification dated August 31, 1957, recognising the Native Share and Stock
Brokers' Association under the name " The Stock Exchange, Bombay "
subject to the conditions mentioned therein. One of the conditions imposed was
that the members of the Indian Stock Exchange Limited would be entitled to
apply for membership of the Stock Exchange, Bombay, provided they were active
members of the Indian Stock Exchange Limited for 12 months immediately
preceding August 6, 1957, and they were also eligible under r. 8(1) of the
Securities Contracts (Regulation) Rules, 1957, to be members of a recognised
stock exchange. The notification 198 further gave some concessions to such
active members in the matter of payment of the membership fee. They had to
apply for membership before October 15, 1957, or before such period as the
Board of the recognised Stock Exchange might think fit to extend. It appears
that within the extended time a number of active members of the Indian Stock
Exchange Limited as defined by the notification applied for membership and were
admitted as members of the recognised Stock Exchange. Though three years have
passed by, no member other than the petitioner has so far thought fit to
question the validity of the notification, that is, the validity of the
notification has been accepted and the recognised Stock Exchange has become
stabilised on that basis. Subsequent to the filing of. the petition on November
30, 1957, the Central Government issued another notification applying s. 13 of
the Act to Greater Bombay;
with the result that thereafter every
contract in shares between the members of any unrecognised stock exchange in
that City would be illegal.
The petitioner had become a member of the
Indian Stock Exchange Limited on February 27, 1956, but he had not been
transacting any business on the floor of the said Stock Exchange either on his
own account or on account of his clients. He avers in the affidavit filed in
support of the petition that he has been doing considerable business on his own
account or on account of his clients through other members of the Stock
Exchange and that he intends to commence business directly in ready delivery
contracts. As the impugned notifications affect his right to do business, he
seeks for the issue of a writ of mandamus for the aforesaid reliefs.
Shri Purshottam Trikumdas, learned counsel
for the petitioner, raised before us the following contentions: (1) under Art.
19(1)(g) of the Constitution the petitioner has a fundamental right to carry on
the business in shares and the notification dated August 31, 1957, and the
subsequent notification dated November 30, 1957, imposed unreasonable
restrictions on his said right; (2) the notification dated August 31, 199 1957,
is void inasmuch as it is not sanctioned by the provisions of s. 4 of the Act;
and (3) the condition 2(i)(a) of the said notification classifying members of A
the Indian Stock Exchange Limited as active members and members who were not
active infringes the fundamental right enshrined in Art. 14 of the Constitution
and that as the said condition is not severable the entire notification is bad.
Learned Solicitor-General in addition to
controverting the said contentions pressed on us to hold that as the vires of
the Act was not questioned, the notification issued there under could not be
questioned by the petitioner on the ground that it contravened one or other of
the said fundamental rights.
It would be convenient to take first the
contention of the learned Solicitor-General as it is in the nature of a preliminary
point. He says that as the validity of the Act was not questioned the
notification issued in the exercise of the power conferred there under cannot
also be questioned.
There is a fallacy underlying this
contention. Under Art.
13(2) of the Constitution, the State shall
not make any law which takes away or abridges the rights conferred by Part III
thereof; and " law " is defined under Art. 3(a) to include a
notification. Therefore, the validity of a notification issued by the State, it
being law, is as much vulnerable to attack as that of the Act itself on the
ground that it infringes any of the fundamental rights. If an Act is a
self-contained one and the notification issued there under only restates the
provisions of the Act, the validity of the notification cannot obviously be
questioned as the validity of its contents were accepted. But if the Act
confers a power on the State in general terms and the notification issued there
under infringes one or other of the fundamental rights, the validity of the Act
cannot equally obviously prevent an attack on the notification. In the former
case the notification only reflects the provisions of a valid Act and in the
latter it is the notification and not the Act that infringes the fundamental
rights. Take an example of an Act imposing restrictions on the freedom of
speech. The Act authorizes the State to impose conditions on 200 the said
freedom in the interests of security of State. The Act is constitutionally
valid. But, if a notification issued under that Act imposes unreasonable
restrictions infringing the said rights, it is liable to be challenged on the
ground of unconstitutionality. So too, in the instant case s. 4 of the Act
empowers the Central Government to issue a notification recognising a stock exchange
subject to certain conditions expressed in general terms. The general terms can
comprehend both reasonable and unreasonable restrictions. If the notification
imposes unreasonable restrictions-if the contention of the learned counsel for
the petitioner be accepted, the restrictions imposed would certainly be
unreasonable-it is liable to be set aside. We cannot, therefore, accept this
contention.
Re. (1): Article 19(1)(g) of the Constitution
states that every citizen shall have the right to carry on any business;
but the State in empowered under el. (6) of
the said Article to make any law imposing in the interest of the general public
reasonable restrictions on the exercise of the said right. Briefly stated, the
argument is that the combined effect of the two notifications is that the
petitioner is driven out of his business of stock exchange in as much as, it is
said, they confer a monopoly on the Stock Exchange, Bombay, and the rules of
the said Stock Exchange exclude any outsider from becoming its member without
obtaining a nomination and that too only in the place of an existing member. To
put it differently, the argument proceeds that under the rules of the Stock
Exchange, Bombay, membership is not thrown open to the public. This leads us to
the consideration of the relevant provisions of the Stock Exchange Rules,
Bye-laws and Regulations, 1957. Under r. 3 the membership of the Exchange shall
consist of such number of members as the Exchange in general meeting may from
time to time determine. It is common case that the membership of the Exchange
is not limited. Under the heading " Election of New Members ", the
Rules prescribe the conditions of eligibility for election as a member of the
Exchange. These Rules adopt the provisions of r. 8 of the Securities 201
Contracts (Regulation) Rules, 1957. The Rules do not contain any limitation on
the eligibility of a person to be elected as a member such as that the person,
should be nominated in the manner provided by the Rules or that he should come
only in the vacancy caused by another member ceasing to be one in one of the
ways mentioned there under.
The words " no person " in r. 17
are comprehensive enough to take in any outsider seeking for election as a,
member.
Rule 22 provides for an application for admission
in the form prescribed in Appendix A to the Rules. This rule also does not
impose any such limitation. The admission application form in Appendix A is
also general in terms and enables any person of India to apply for membership
provided he agrees to abide by the conditions imposed therein. In the form also
there is no such limitation. But it is contended that a fair reading of the
provisions of rr. 20 and 21 makes it clear that a candidate for admission is
confined only to two categories, viz., (1) a candidate nominated by a member or
a legal representative of a deceased member seeking admission to membership in
the place of' the deceased; and (2) a person recommended for admission to
membership in the place of a member who has forfeited his right to membership.
A careful scrutiny of the Rules does not bear out the contention; nor do they
enable us to cut down the wide amplitude of rr. 17 to 22. Rule 10 says:
" When a right of membership is
forfeited to or vests in the Exchange under any Rule, Byelaw, or Regulation of
the Exchange for the time being in force it shall belong absolutely to the
Exchange free of all rights, claims or interest of such member or any person
claiming through such member and the Governing Body shall be entitled to deal
with or dispose of such right of membership as it may think fit." Rule 54
is to the following effect:
" A member's right of membership shall
lapse to and vest in the Exchange immediately be is declared a defaulter."
Rule 11 is as follows..
26 202 "(a) A member of not less than
seven years' standing who desires to resign may nominate a person eligible
under these Rules for admission to membership of the Exchange as a candidate
for admission in his place (b) The legal representatives of a deceased member
or his heirs or the persons mentioned in Appendix C to these Rules may with the
sanction of the Governing Board nominate any person eligible under these Rules
for admission to membership of the Exchange as a candidate for admission in the
place of the deceased member. In considering such nomination the Governing
Board shall be guided so far as practicable by the instructions set out in
Appendix C to these Rules." Appendix B gives the nomination forms Nos. 1
and 2 to be filled by a member or a legal representative, as the case may be,
under r. 11 (a) and (b). Now it would be convenient to read rr. 20 and 21. They
are as follows:
Rule 20: " A candidate for admission
except' a candidate applying for a membership vesting in the Exchange must
obtain a nomination in the manner provided in these Rules." Rule 21:
" A candidate for admission must be recommended by two members none of
whom should be a member of the Governing Board. The recommenders must have such
personal knowledge of the candidate and of his past and present circumstances
as shall satisfy the Governing Board." The argument is that under r. 20 a
candidate for ad. mission falls under two categories, namely, (1) a candidate
who must obtain a nomination in the manner provided in the Rules, i.e., r. 11
(a) and (b); and (2) a candidate applying for a membership vesting in the
Exchange; and, therefore, these two categories exhaust the candidates for
admission and that when under r. 21 the same words, " a candidate for
admission ", are used they must carry the same meaning as in r. 20, that
is, they must be confined only to the two categories comprehended by r. 20.
This argument appears to be plausible and even incontrovertible, if 203 rr. 20
and 21 are taken out of their setting and construed independently of other rules.
But in the setting in which they appear they can bear only one meaning, namely,
that r.
20 provides for nomination only in the case
of a candidate for admission who requires a nomination in the manner provided
by the rule and r. 21 provides, for all the candidates for admission, that they
should be recommended by two members who have personal knowledge of the
candidates.
To put it in other words, under the Rules
candidates for admission fall under three groups, viz., (1) candidates falling
under r. 11, (a) and (b); (2) candidates applying for membership vesting in the
Exchange; and (3) other candidates. All the three categories of candidates must
be recommended by two members. But the candidates belonging to the first
category shall in addition be nominated in the manner provided by the Rules.
We, therefore, hold that the Stock Exchange Rules do not operate as a bar
against the petitioner becoming a member of the Stock Exchange subject to the
rules governing such application. The petitioner has the right to do business
in shares: in spite of the notifications he can still do business in spot
delivery contracts. He can apply to become a member of the Stock Exchange
subject to the conditions laid down by the Rules.
The Act the validity of which he has not
chosen to question, enables the State to give or refuse recognition to any
Stock Exchange and it has chosen to give recognition to the Stock Exchange,
Bombay, subject to the conditions prescribed. The restrictions, in our view,
are not unreasonable, having regard to the importance of the business of a
stock exchange in the country's national economy and having regard to the
magnitude of the mischief sought to be remedied in the interest of the general
public. At another place we have already dealt with the necessity for stringent
rules governing this type of business For the reasons Mentioned we reject the
first contention.
Re. (2): The second contention also has no
merits. The criticism is that condition 2(i) (a) annexed to the notification
cannot be supported on the basis of any 204 of the provisions of s. 4 of the
Act. Condition 2 (i) reads as follows:
" The Members of the Indian Stock
Exchange Limited, Bombay, will be entitled to apply for Membership of the Stock
Exchange, Bombay, provided they fulfill or comply with the following terms and
conditions:(a) they have been active members of the Indian Stock Exchange
Limited, for twelve months immediately preceding the 6th August, 1957.
Explanation:" Active Members " for
purpose of this condition means members who have themselves transacted business
regularly on the floor of the Indian Stock Exchange Limited either on their own
account or on account of their clients.
To appreciate the argument it is also
necessary to read the material provisions of s. 4 of the Act.
Section 4: " (1) If the Central
Government is satisfied, after making such inquiry as may be necessary in this
behalf and after obtaining such further information, if any, as it may require,(a)
that the rules and bye-laws of a stock exchange applying for registration are
in conformity with such conditions as may be prescribed with a view to ensure
fair dealing and to protect investors;
(b) that the stock exchange is willing to
comply with any other conditions (including conditions as to the number of
members) which the Central Government after consultation with the governing
body of the stock exchange and having regard to the area served by the stock
exchange and its standing and the nature of the securities dealt with by it,
may impose for the purpose of carrying, out the objects of this Act; and (c)
that it would be in the interest of the trade and also in the public interest
to grant recognition to the stock exchange;
It may grant recognition to the stock
exchange subject to the conditions imposed upon it as aforesaid and in such
form as may be prescribed.
(2) The conditions which the Central
Government 205 may prescribe under clause (a) of sub-section (1) for the grant
of recognition to the stock exchanges may include, among other matters,
conditions relating. to,-(i) the qualifications for membership of stock
exchanges;
(ii) the manner in which contracts shall be
entered into and enforced as between members;
(iii) the representation of the Central
Government on each of the stock exchanges by such number of persons not
exceeding three as the Central Government may nominate in this behalf; and (iv)
the maintenance of accounts of members and their audit by chartered accountants
whenever such audit is required by the Central Government. " The argument
proceeds that condition 2(i)(a) enables only the active members of the Indian
Stock Exchange Limited to apply for membership of the Stock Exchange, Bombay
and that such a condition can be imposed only if it amounts to a qualification
of membership within the meaning of sub-s. (2) of s. 4, as the other conditions
in that sub-section are obviously inapplicable. It is further pointed out that
subs. (2) refers back to sub-s. (i)(a) and under that clause the condition
imposed must only be that prescribed by the Rules made under the Act and that
the condition imposed by the notification is not a condition so prescribed.
There is force in this argument; but, the acceptance of this contention does
not advance the case of the petitioner, for, if the condition is not covered by
cl. (a) of s. 4(1), it falls under cl. (b) thereof. Under that clause, the
Central Government may grant recognition to a stock exchange if the said stock
exchange is willing to comply with " any other conditions ". It is
said that the other conditions in s. 4 (1) (b) must only be conditions relating
to the area served by the stock exchange, its standing and the nature of the
securities dealt with by it. This is not what cl.
(b) of s. 4(1) says. The conditions under cl.
(b) of s. 4(1) no doubt shall be such as may be imposed by the Government,
having regard to the aforesaid three considerations, but they need not
necessarily be 206 confined only to the said considerations. The Government may
impose any conditions, no doubt germane to the recognition of a stock exchange,
after consultation with its governing board, and having regard to the said
considerations. It cannot be said that condition 2(i)(a) imposed on the Stock
Exchange is not a condition germane to its recognition. The record discloses
that the Central Government in recognising the Stock Exchange sought to avoid
the consequential hardship on the members of the rival stock exchange and
therefore imposed the said condition on the Stock Exchange, Bombay, as a
condition for its recognition.
The condition is germane to recognition of
the Stock Exchange and is, therefore, a condition within the meaning of "
any other conditions " in cl. (b) of sub-s. (1) of s. 4 of the Act.
Re. (3): Learned counsel for the petitioner
advanced a forcible argument questioning the validity of condition 2(i)(a) of
the notification on the ground that it infringed Art. 14 of the Constitution.
Elaborating his argument, the learned counsel stated that the said condition
classified members of the Indian Stock Exchange Limited into two groups, one
active members and the other who were not active members, and that that
classification was arbitrary and had no reasonable relation to the object
sought to be achieved by the notification. He further pointed out that the
defining of active members as those who had themselves transacted business
regularly on the floor of the Indian Stock Exchange Limited either on their own
account or on account of their clients for 12 months immediately preceding
August 6, 1957, was not only arbitrary and vague but also, if analysed, would
lead to anomalies destructive of any standard of reasonableness. It is alleged
in the affidavit filed by the petitioner that from the inception of the Indian
Stock Exchange Limited, 199 members of the said Stock Exchange were actually
trading on the floor of the said Exchange from time to time but for some reason
or the other were not trading during the period of 12 months immediately
preceding August 6, 1957; that there were 34 members of the said Stock Exchange
who were regularly 207 transacting business on the floor of the said Stock
Exchange prior to August 6, 1956, and for some time after August 6, 1956, but
not during the entire period of 12 months from August 6, 1956 to August 6,
1957; and that there were 24 members of the said Stock Exchange who started
transacting business regularly on the floor of the said Stock Exchange some
time after August 6, 1956 and continued to transact business right upto and
after August 6, 1957. It was asked what was the reasonable basis for confining
the definition of active members to those who were carrying on business during
the period of 12 months from August 6, 1956 to August 6, 1957, while excluding
the aforesaid three categories who were equally active members and indeed more
active than those included in the definition. It was further asked what was the
justification for excluding a member who was an active member for years before
the crucial year and irregularly conducted business on the floor of the Stock Exchange
during the crucial year while including a member who might have been a newcomer
or who might have been earlier a nominal member but began to do business
regularly only during the said year. Emphasis was also laid upon the alleged
elastic and indefinite content of the word " regular " and it was
suggested that the said word could not possibly afford a precise standard.
These are all weighty considerations and we must confess that there is force in
them.
But there is the other side of the picture.
It is well settled that a classification must have reasonable relation to the
object sought to be achieved. The standard of reasonableness is inextricably
conditioned by the extent and nature of the evil and the urgency for
eradicating the same.
The object of the notification is twofold.
The main object is to carry out the purpose of the Act, namely, to prevent
undesirable transactions in securities by regulating the business in them. The
subsidiary object is to assuage the hardship that recognition of only one stock
exchange would cause to the members of the other association. To achieve this
twin object the classification is made between active members and inactive
members. While 208 on the one hand the Government found it necessary to exclude
the nominal members who would add their deadweight to the recognised
association and bring down its efficiency and affect its disciplined conduct of
business, on the other hand it gave opportunity to persons who were actively
interested in the business to become regular members of the Stock Exchange,
Bombay. There is every justification for excluding members who had not been
taking active interest in the business, for, as we have already pointed out,
the efficient carrying out of the business of the Stock Exchange depends upon
the moral stature, high caliber, and genuine and active interest evinced by the
members. The active members justified themselves to the preferential treatment
by their sustained interest in the business whereas the members who were not
active showed their continued indifference to that line of business. But the
crux of the question is, what is the justification for fixing twelve months
immediately preceding August 6, 1957, as the standard for active membership ?
The Under Secretary to the Government of India, Ministry of Finance, filed an
affidavit describing the circumstances where under this classification was
made. It discloses that the notification was issued after taking into
consideration the representations made on behalf of both the Stock Exchanges
and also the facts pertaining to the course of business conducted by the Indian
Stock Exchange Limited. It also gives the vicissitudes through which the said
Stock Exchange passed from the date of its formation and the circumstances
under which the membership of that Exchange was divided into full members and
associate members. It points out that the Indian Stock Exchange Limited became
moribund in a few years and to revive its activities it allowed the members of
the East India Chamber of Commerce, by relaxing its entrance fee and security
deposit requirements in 1950-51 and created a new class of Associate Members,
which facilitated the enrollment of hundreds of Associate Members on payment of
a nominal entrance fee of Rs. 100. The Government on a consideration of the
necessary data and presumably 209 having regard to the record of the activities
of the various members fixed the activities in the crucial year 1956-57 as the
standard of activity for membership.
There is a presumption in favour of the State
that there is a reasonable basis for the classification. Except the mere
allegations in the affidavit which are not admitted, the petitioner has not
placed before us any materials to ascertain that any other members, who were
regularly doing business on the floor of the Indian Stock Exchange Limited
before August 6,1956, temporarily suspended their business for one reason or
other over which they had no control. No statement from the accounts has been
produced to enable us to evaluate the activities of the members before the
crucial date so as to enable us to form a view that really active members were
excluded by the fixing of this period. Nor are we in a position to verify
whether any of the members excluded were regularly doing business during a part
of the year in continuation of their business in the earlier period. We cannot
also say that the words "carrying on business regularly " are so
vague that the parties did not understand their connotation, for it is admitted
that some of the regular members applied for membership of the Stock Exchange,
Bombay and most of them were admitted. There is also the fact that though three
years have elapsed since the date of the notification no other member of the
Indian Stock Exchange Limited thought fit to question the notification on the
ground that the period fixed was unreasonable and that really active members
were excluded from membership of the Stock Exchange, Bombay. So far as the
petitioner is concerned, he was admittedly not an active member, though lie now
pretends that he was doing business through other members. There is also no
material placed before us to support the said assertion. If the classification,
between active members and others who were not, is justifiable-we hold it
is-the Government has to draw a line somewhere and to fix a period of activity
reasonable in its opinion as a 27 210 standard to satisfy the test of "
active member ". The burden which lies upon the petitioner who impeaches
the validity of the classification to show that it violates the guarantee of
equal protection has not been discharged. On the material placed before us we
cannot say that the period fixed by the Government as the standard for
ascertaining the active membership is arbitrary or unreasonable. We must make it
clear that this finding must be confined only to the validity of the impugned
notification dated August 31, 1956.
The petition accordingly fails and is
dismissed with costs.
Petition dismissed.
Back