1
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
SPECIAL LEAVE PETITION (C) NO.21686 OF 2006
Mahesh Ratilal Shah .. Petitioner
Vs.
Union of India & Ors. .. Respondents
J U D G M E N T
ALTAMAS KABIR, J.
1. Claiming to be a Sub-broker with one Yogesh B.
Mehta, a Member of the Bombay Stock Exchange
(hereinafter referred to “BSE”), the petitioner
herein filed a writ petition before the Bombay High
Court under Article 226 of the Constitution against
the Union of India, the Securities and Exchange
Board of India (hereinafter referred to as the
2
“SEBI”) and the BSE, inter alia, for a direction
upon the Union of India and SEBI to withdraw the
recognition granted to BSE for alleged non-
compliance with the provisions of Sections 7 and 9
of the Securities Contracts (Regulation) Act, 1956
(hereinafter referred to as “the 1956 Act”). A
further direction was also sought for for
cancellation of SEBI registration of all relevant
90 members of the Stock Exchange for fraudulently
inducing investors to trade in forged scrips of M/s
Presto Finance Ltd. and to declare the Rules, Bye-
laws and Regulations of the BSE as illegal, void
and ultra vires the 1956 Act as also the
Constitution of India. Various ancillary and
interim reliefs were also prayed for connected with
the main reliefs.
2. The case of the Petitioner is that he had been
induced by the BSE and its Members to buy 4,50,800
shares of “Presto Finance Ltd.” and under the
3
assurance of the Exchange, he had deposited the
entire purchase amount, amounting to
Rs.71,19,817.30 with the Exchange. It is the
Petitioner’s further case that the Exchange and its
Members had intentionally and deliberately cheated
him by giving him delivery of 1,56,100 forged share
certificates and refused to cancel the said dealing
when the same was discovered and instead asked the
Petitioner to go to the Liquidator of Presto
Finance Ltd. for claiming damages.
3. Appearing in support of the Special Leave
Petition, Mr. Manohar Lal Sharma, learned Advocate,
submitted that the SEBI as a statutory body
established under Section 3 of the Securities and
Exchange Board of India Act, 1992 (hereinafter
referred to as the “SEBI Act”), was empowered under
Section 11 of the Act to protect the interests of
the investors in securities and to promote the
development of and to regulate the securities
4
market by such measures as it thought fit for
prohibiting fraudulent and unfair trade practice
relating to the securities market.
4. Mr. Sharma further submitted that the BSE is a
body of individuals which has been granted
recognition as a “Stock Exchange” under Section 4
of the 1956 Act, subject to the provisions of
Section 9 thereof, to function as a Stock Exchange
in Bombay. Under Section 12 of the SEBI Act, SEBI
has granted registration to the Members of the BSE
to deal in the securities market in the country
within the ambit of the said Act and the
Regulations made thereunder. Mr. Sharma submitted
that the main object of the BSE is to protect the
interests both of the brokers and dealers and of
the public interested in securities. Rules, Bye-
laws and Regulations had, therefore, been framed by
the BSE for trading and settlement of shares
through the BSE terminal. Mr. Sharma submitted
5
that the said Rules, Bye-laws and Regulations were
contrary to the provisions of the 1956 Act, and
were, therefore, void and ultra-vires the Act and
the Constitution. The Writ Petitioner had,
therefore, been compelled to move the High Court in
its writ jurisdiction, inter alia, for the reliefs
indicated hereinabove.
5. Referring to the Prospectus of M/s Presto
Finance Ltd., Mr. Sharma pointed out that since it
had been indicated out therein that the shares of
Presto Finance Ltd. were to be listed both on the
Regional Exchange at Ahmedabad and in the BSE, the
Petitioner and other investors were induced into
investing in the shares of the company which were
ultimately de-listed from trading in both the Stock
Exchanges on account of fraudulent dealings, which
left the Petitioner holding a large number of
forged shares traded by the Company from the BSE.
Mr. Sharma urged that the BSE had completely failed
6
to protect the interests of the investors as it was
bound to do under Section 4 of the 1956 Act.
6. Mr. Sharma contended that the very existence of
the BSE and its activities must be held to have
been vitiated from its very inception since it had
failed to comply with the provisions of Section 4
of the Act of 1956 relating to grant of recognition
to Stock Exchanges by the Central Government and,
in particular, Sub-section (3) thereof, which reads
as follows :-
“4(3). Every grant of recognition to a
Stock Exchange under this section shall be
published in the Gazette of India and also
in the Official Gazette of the State in
which the principal office of the Stock
Exchange is situate, and such recognition
shall have effect as from the date of its
publication in the Gazette of India.”
7. Mr. Sharma submitted that since the recognition
granted to BSE has neither been published in the
Gazette of India or in the Official Gazette of the
State, such recognition did not have any effect at
7
all and in addition to the above, ever since its
recognition, the BSE has not also complied with the
provision of Section 9 of the aforesaid Act and
framed Byelaws for the regulation and control of
contracts with the previous approval of SEBI. It
was submitted that Sub-section (4) of Section 9
also provides for publication of the Byelaws and
reads as follows :-
"9(4). Any Bye-laws made under this
section shall be subject to such
conditions in regard to previous
publication as may be prescribed and when
approved by the Securities and Exchange
Board of India in the Gazette of India and
in which the principal office of the
recognised Stock Exchange is situate, and
shall have effect as from the date of its
publication in the Gazette of India:
Provided that if the Securities and
Exchange Board of India Government is
satisfied in any case that in the interest
of the trade or in the public interest any
Bye-law should be made immediately, it
may, by order in writing specifying the
reasons therefor, dispense with the
condition of previous publication.”
8
8. Referring to the decision of this Court in
Ritesh Agarwal vs. SEBI [(2008) 8 SCC 205], wherein
the question as to whether proceedings should also
be taken against minors in view of Section 11 of
the Contract Act, 1872, was under consideration,
this Court held that since the father of the minors
had committed fraud in their names, it is he who
should have been proceeded against. Mr. Sharma
urged that once it was shown that a promoter had
committed fraud, as in this case, in listing its
shares with the Exchange, thereby inducing
investors to invest in such shares, it must be held
that the Exchange had failed to comply with the
provisions of clause (a) of Sub-section (1) of
Section 4 of the 1956 Act, which makes it mandatory
that the Rules and Byelaws of a Stock Exchange have
to be in conformity with such conditions as may be
prescribed with a view to ensure fair dealing and
to protect investors. [Emphasis supplied]
9
9. On behalf of BSE, Mr. Shyam Diwan, learned
Senior Advocate, submitted that all Stock
Exchanges, including the BSE, acted on the basis of
information received from other Stock Exchanges in
the country. In the instant case, since the Scrip
of Presto Finance Ltd. had been listed for trading
on the Ahmedabad Stock Exchange, the same were also
listed for trading on the Bombay Stock Exchange,
but as soon as information of fraud was received
from the former Stock Exchange, BSE immediately
stopped trading in the said Scrip. Mr. Diwan
submitted that it was required to be noted that the
Petitioner had approached the Court ten years after
the incident, which in itself, was sufficient
ground for dismissal of the Writ Petition.
10. Mr. Diwan submitted that the BSE had been
established in 1875 as “The Native Shares and Stock
Brokers Association” and was the first Stock
Exchange in the country which obtained permanent
10
recognition in 1956 from the Government of India
under the 1956 Act and had played a pivotal role in
the development of the Indian Capital Market. The
recognition granted to the BSE was duly published
by the Ministry of Finance, Government of India, in
its Stock Exchange Division in the Gazette of India
dated 31st August, 1957. Thereafter, the Stock
Exchange Rules, Bye-laws and Regulations were
framed in 1957 and advance print of the same,
together with all amendments up to date, was sent
to the Government of India. Receipt and approval
of the same by the Government of India under the
1956 Act was also conveyed to the Secretary of the
Stock Exchange by the Deputy Secretary in the
Ministry of Finance, Department of Economic
Affairs, by his letter dated 1st May, 1959. Mr.
Diwan submitted that the Rules, Regulations and
Bye-laws of the Bombay Stock Exchange had been
acted upon since they were framed and the
Petitioner also claims to have traded on the Stock
11
Exchange as a Sub-broker through Yogesh Mehta, said
to be a member of the Stock Exchange. Mr. Diwan
submitted that when the Rules, Bye-laws and
Regulations had been continuously acted upon for
more than 50 years, it would be inequitable to hold
that the same were not valid on account of non-
publication in the Official Gazette or the Gazette
of India in terms of Sub-section (4) of Section 9
of the 1956 Act.
11. Mr. Diwan then urged that the scheme of Section
4 of the 1956 Act relating to grant of recognition
to Stock Exchanges, makes it clear that before such
grant of recognition, the Central Government has to
be satisfied that the Rules and Bye-laws of the
Stock Exchange applying for registration were in
conformity with such conditions as might be
prescribed with a view to ensuring fair dealing and
to protect investors. Mr. Diwan submitted that
under Section 9 of the 1956 Act the recognized
12
Stock Exchange is required to make Bye-laws for the
regulation and control of contracts and any Bye-
laws made under the said section would be subject
to such conditions in regard to previous
publication as may be prescribed, and, when
approved by SEBI, is to be published in the Gazette
of India and also in the official Gazette of the
State in which the principal office of the
recognized Stock Exchange is situate, and shall
have effect as from the date of its publication in
the Gazette of India.
12. Mr. Diwan reiterated that it would be amply
clear from the above that the Rules and Bye-laws
framed by the Stock Exchange before grant of
recognition under Section 4 were not required to be
published in the manner indicated in Sub-Section
(3) of Section 4 of the 1956 Act. Mr. Diwan
submitted that only amendments effected to the
Rules and Bye-laws after grant of recognition would
13
require publication as provided for in Sub-Section
(4) of Section 9 of the above Act. Mr. Diwan also
urged that since the BSE had been functioning as
perhaps the most important Stock Exchange in India,
since it was granted permanent recognition in 1956,
its performance over the past 33 years cannot be
diluted and has to be taken into consideration
while considering the case sought to be made out by
the Petitioner. Learned counsel submitted that,
although, the question now sought to be raised had
not at any point of time been raised in this Court,
the same question did arise before the Bombay High
Court in Appeal No.1101/98 arising out of
Arbitration Petition No.130/98, Stock Exchange,
Mumbai vs. Vijay Bubna & Ors., reported in 1999 (2)
LJ 289. In the said decision, where the primary
issue was whether an Arbitral Tribunal constituted
under the Bye-laws framed by the BSE under the 1956
Act was in contravention of the provisions of
Section 10 of the Arbitration and Conciliation Act,
14
1996, the question arose as to whether the said
Bye-laws of the BSE required publication in the
Official Gazette. Upon construction of the
provisions of the Bye-laws of the BSE and the
decision of this Court in Dr. Indramani Pyarelal
Gupta & Ors. Vs. W.R. Natu & Ors. [AIR 1964 SC
274], the High Court held that the Bye-laws of the
BSE were subordinate legislation and that the same
were statutory in nature having the force of
enactment within the meaning of Sub-Section (4) of
Section 2 of the Arbitration and Conciliation Act,
1996. Mr. Diwan drew our attention to paragraph 42
of the judgment in which reference was made to
another decision of the Bombay High Court in the
case of V.V. Ruia vs. S. Dalmia [AIR 1968 Bombay
347], where the question arose as to whether the
Bye-laws of the BSE, which were made prior to its
recognition under Section 4, needed publication
under Sub-Section (4) of Section 9 of the 1956 Act.
It was held that the Bye-laws made by the Bombay
15
Stock Exchange prior to its recognition did not
require publication in the Official Gazette, on
account of the fact that for the purpose of
obtaining recognition from the Central Government,
the Stock Exchange was required to submit a copy of
the Bye-laws and Rules and it is only after
scrutiny thereof that recognition was granted under
Section 4. It was also mentioned that if, after
recognition, any subsequent Bye-law was made under
Section 9 of the Act, then, by virtue of Sub-
Section (4) of Section 9 such a post-recognition
Bye-law required publication.
13. Mr. Diwan then referred to the decision in V.V.
Ruia’s case (supra,) referred to by the Division
Bench of the High Court in the aforesaid judgment,
wherein it had been held that the Bye-laws made by
the Stock Exchange prior to its recognition in 1956
did not require publication under Section 9(4) of
the 1956 Act.
16
14. Mr. Diwan’s next contention was that a
procedure, which had been consistently followed
over a long period, should not be interfered with
except for very compelling reasons as that could
otherwise lead to chaos and unsettle the position
which had been settled over such period.
15. Referring to the Three-Judge Bench decision of
this Court in Raj Narain Pandey & Ors. Vs. Sant
Prasad Tewari & Ors. [(1973) 2 SCC 35], Mr. Diwan
submitted that while interpreting the doctrine of
stare decisis, this Court had held that a decision
of long-standing on the basis of which many persons
would, in the course of time, have arranged their
affairs, should not lightly be disturbed by a
superior court not strictly bound itself by the
decision. It was further observed that in the
matter of the interpretation of a local statute,
the view taken by the High Court over a number of
years should normally be adhered to and not
17
disturbed. A different view would not only
introduce an element of uncertainty and confusion,
it would also have the effect of unsettling
transactions which might have been entered into on
the faith of those decisions. It was held that the
doctrine of stare decisis can be aptly invoked in
such a situation.
16. Apart from being guilty of delay and laches,
Mr. Diwan submitted that the petitioner was himself
in default, not being a registered sub-broker of
the BSE, although, he claimed to be a sub-broker of
Yogesh B. Mehta, a member of the Stock Exchange.
Mr. Diwan submitted that the Special Leave Petition
bristled with malice in law and was, therefore,
liable to be dismissed with costs.
17. Mr. Jaideep Gupta, learned Advocate who
appeared for SEBI, took us through the letter dated
1st August, 1996, addressed on behalf of the
Ahmedabad Stock Exchange to Shri L.K. Singhvi,
18
Executive Director, SEBI, informing him of the
Report of the Committee in the matter of Presto
Finance Ltd. In the said letter it was indicated
that based on a number of complaints received from
the investors in the scrip of Presto Finance Ltd.,
a Special Committee consisting of three members,
including SEBI, and a nominated public
representative, had been constituted and after
inquiry it had recommended that the trading in the
scrip of Presto Finance Ltd. should not be
recommended and might be de-listed permanently.
Mr. Jaideep Gupta referred to the inquiry report of
the Assistant Police Inspector, General Branch,
Crime Branch, C.I.D., Mumbai, submitted to the
learned Metropolitan Magistrate, 33rd Court, Ballard
Estate, Mumbai, stating that the BSE had acted
promptly and diligently to protect the interest of
the market and as such no offence had been
committed by BSE and those who were involved in the
transactions of the shares of Presto Finance Ltd.
19
in 1996. It was stated that on the contrary, the
complainant was not a registered sub-broker of the
Bombay Stock Exchange and had himself violated the
provisions of Section 23(h) of the 1956 Act, as he
had also dealt with the above transactions as sub-
broker, without being registered with the BSE.
18. Mr. Gupta submitted that based on the
complaints received from various investors relating
to the issuance of fake and forged share
certificates of M/s. Presto Finance Ltd., the Stock
Exchange, Ahmedabad, had constituted a Special
Committee, as indicated hereinabove, and had found
the Managing Director and other Directors of the
company to be guilty of irregularities.
Accordingly, in a proceeding under Section 11B of
the SEBI Act, 1992, SEBI had taken stringent
measures against the Managing Director and other
Directors of the company for having received
payments for issuance of fake and forged shares of
20
the company. Mr. Gupta pointed out that on such
finding, in the interest of investors in securities
and the securities market, SEBI had debarred Shri
Hitendra Vasa and the companies promoted by him and
the group companies of M/s. Presto Finance Ltd.,
from accessing the capital market for a period of
five years with effect from 22nd April, 1998.
19. Mr. Gupta submitted that as far as SEBI was
concerned, on receipt of information about the
fraudulent share scrips issued by M/s. Presto
Finance Ltd., immediate steps had been by SEBI to
have the share scrips of the said company de-listed
from the Ahmedabad Stock Exchange as well as from
the Bombay Stock Exchange.
20. Mr. Gupta submitted that no fault could be
found with BSE in listing the shares of Presto
Finance Ltd., since the same had been listed on the
Ahmedabad Stock Exchange earlier, but as soon as
information was received from the Ahmedabad Stock
21
Exchange that there was an element of fraud
involved, and the scrips had been delisted in the
Ahmedabad Stock Exchange, BSE took immediate steps
to delist the scrips and to close trading of the
said shares in order to protect the securities
market and the investors who traded in such
securities. Mr. Gupta submitted that the entire
allegations made by the petitioner against the
Bombay Stock Exchange was devoid of any merit and
did not warrant any interference in these
proceedings.
21. As would be evident from the pleadings and
submissions made on behalf of the respective
parties, the main question which we are called upon
to consider is whether in the absence of
publication of the Rules and Bye-laws of the Bombay
Stock Exchange, which had been framed prior to its
recognition in 1956 under the 1956 Act, its
activities could be said to be without authority.
22
The further question which falls for consideration
is whether it can be said, as has been urged on
behalf of the petitioner, that in listing the
shares of M/s. Presto Finance Ltd. on the Stock
Exchange, the Bombay Stock Exchange had acted in a
manner which failed to ensure fair dealing and to
protect the investors.
22. As we have noticed hereinbefore, the scrip of
M/s. Presto Finance Ltd. was listed on the Bombay
Stock Exchange after it had been listed in the
Stock Exchange at Ahmedabad and on receipt of
information thereof. However, as soon as
information was received that the said company was
involved in fraudulent dealing of its scrip, again
on intimation from the Ahmedabad Stock Exchange,
the said scrip was delisted and debarred from
trading by the BSE. In our view, the Bombay Stock
Exchange had not acted in a manner which tended to
23
promote the share scrip of M/s. Presto Finance Ltd.
with any malafide motive. Apart from the above,
the delay of 10 years in approaching the High Court
over the transactions in the said scrip cannot be
ignored since, as observed by this Court in Raj
Narain Pandey’s case (supra) a long standing
decision should not be easily interfered with,
having regard to the fact that over the years,
people have already settled their business in
accordance therewith. Except for the bald
allegations that the Bombay Stock Exchange had
acted in a manner which was contrary to the
interest of the securities market and investors in
listing the share scrips of M/s. Presto Finance
Ltd. for trading, there is nothing else to
establish any ulterior motive on the part of the
aforesaid Stock Exchange in listing the said scrip
and, in fact, in terms of remedial measures the
Stock Exchange also invited all those who had been
24
given forged scrips, to submit the same to the
Stock Exchange for further action.
23. On the question of non-publication of the Bye-
laws, we agree with the views of the Bombay High
Court in V.V. Ruia’s case (supra) that since the
said Rules and Bye-laws had been in existence from
long before the enactment of 1956 Act and the grant
of recognition to the Stock Exchange, the same did
not require publication in terms of Section 4 of
the 1956 Act. In any event, as has been submitted
by Mr. Diwan on behalf of the BSE, all amendments
to the Rules and Bye-laws made after grant of
recognition had been duly published in the Gazette.
24. Upon considering the case made out by the
petitioner in the writ petition, the Bombay High
Court held that the writ petition, which was
lacking in particulars relating to the
constitutional challenge, was not the appropriate
remedy for the petitioner, who, along with a member
25
of the Stock Exchange, had traded in the shares of
the above-mentioned company. The High Court also
observed that upon the complaints made to SEBI,
action had been initiated against the Company as
far back as in 1998-99 under Section 11B of the
SEBI Act and SEBI had come to a finding that all
the Directors of the Company, including one
Hitendra Vasa, were guilty of dealing in fake and
bogus shares and cheating the investing public at
large. The High Court also observed that the
market regulator had taken due steps in the matter
of individual transactions and the remedy of the
petitioner, who was aggrieved by the acts of the
promoters of the company in question, as well as
its Directors, would be in approaching the
appropriate Court to initiate criminal prosecution
against the offenders. Observing that it would not
be appropriate to issue any blanket writ, as
claimed by the Petitioner, when admittedly his case
was restricted to dealing in shares of one of the
26
companies listed at the Stock Exchange, the High
Court summarily dismissed the writ petition. While
doing so, the High Court also noted that no
material had been produced by the petitioner for
issuing directions for de-recognition of the BSE or
to declare its Rules, Bye-laws and Regulations to
be illegal, void and ultra vires.
25. Agreeing with the views expressed by the High
Court, we are of the view that the Petitioner has
not been able to make out any case of malafides or
irregularity on the part of the Bombay Stock
Exchange with regard to the listing and subsequent
de-listing of the scrip of M/s Presto Finance Ltd.
and we are also of the view that the publication of
the Rules and Bye-laws of the Stock Exchange was
not intended in the Securities Contract
(Regulation) Act, 1956, as otherwise some provision
would have been made in the Act with regard to pre-
recognition Rules and Bye-laws. While the Act
27
provides for publication of amendments to the Rules
and Bye-laws after grant of recognition, the Act is
silent with regard to the publication of the pre-
recognition Rules or Bye-laws which were already in
existence and had been acted upon all along.
26. In that view of the matter, we see no reason to
interfere with the order of the Bombay High Court
impugned in the present Special Leave Petition and
the same is, therefore, dismissed, but without any
order as to costs.
27. Before parting, we would, however, indicate
that even if the 1956 Act did not contemplate
publication of the pre-recognition Rules and Bye-
laws, the position is and would continue to be
rather ambivalent if the amended Rules and Bye-laws
were published in the Official Gazette while the
main Rules and Bye-laws remain unpublished. It
may, therefore, be in the fitness of things to have
the said Rules and Bye-laws also published in the
28
Official Gazette and the State Gazette to prevent
questions similar to those raised in this Special
Leave Petition from being raised in future.
…………………………………………J.
(ALTAMAS KABIR)
…………………………………………J.
(CYRIAC JOSEPH)
New Delhi,
Dated: 19.01.2010.