Bitcoin: Myth or Reality?

Digital currency Bitcoin made its debut in 2009 and ushered in a new era of cryptocurrency. There are more than 500 cryptocurrencies to choose from but Bitcoin remains the favourite. Regulators, tax authorities and enforcement agencies are exploring the phenomenon. But the one question that pops up every time and everywhere is ‘Is Bitcoin legal or illegal?’ Well, the answer depends on which part of the world you are in.

-By Mr Pankaj Sinha an Advocate, Founder of Right Direction

Uncertainty occupies a lot of space in India’s cryptocurrency system. The first question that arises is the status –neither legal nor illegal – it holds in India. To add to the confusion are the government and central bank’s take on it, expressing their discomfort with virtual currencies. Finance Minister Arun Jaitley has on multiple occasions stated that India doesn’t recognize cryptocurrencies as legal tender and has cautioned the citizens against investing in them. However, this stand of government doesn’t immediately term cryptocurrencies as illegal. “As of now Bitcoin is neither legal nor illegal and the issue is pending in the apex court. Even the RBI has not stated Bitcoin transactions as illegal and for the time being, it is being kept on hold. Reserve Bank of India’s (RBI) concerns the introduction of parallel currency to the Indian rupee,” explains Pankaj Sinha, an advocate and founder of Right Directions. Bitcoins are neither ‘commodities derivative’ nor ‘securities’ under the Securities Contracts (Regulation) Act, 1956 and just amending the definition of ‘securities may not resolve the issue of Bitcoin regulation.

Currently, in India, there are no rules and regulations on Bitcoin by the Government of India. It seems that the government and the Reserve Bank of India (RBI) has put the issue in a grey zone by not emphasizing it as legal or announcing it as illegal. “The Bombay Stock Exchange (BSE) was established in 1875 and trading is happening since then. The Share Market’s regulator Securities and Exchange Board of India (SEBI) has been established in 1992. So does that mean share market was illegal before 1992? The answer is ‘no’. The awareness regarding share market came only after Harshad Mehta’s scam in 1992. The Government of India learned a lesson from the scam and then regularized the share market under Security Annexure Board of India 1992. So are we waiting for another scam related to cryptocurrency to make it legal?” asks Sinha. He further adds, “Today cryptocurrency has become a global product. It is neither a currency nor a derivative. I personally feel it should be included in the securities contract law as a security and should be treated as equity with KYC and other formalities.”

Government’s concern of trading in Bitcoins

To avoid uncertainty among the common man, the government should introduce taxation norms or laws to regulate the space. The delay will only add to the confusion and discourage people from investing in virtual currencies. Sinha flags certain areas of concern of Indian regulators and the solutions to it.

Cross-border terrorism – The Government of India can create certain bracket by limiting the transactions to a certain amount. If any person does any heavy transaction the KYC will help the bank to notify it. If the transactions are government recognized then it helps to avoid cross-border transactions.

Foreign transaction – In the case of heavy transactions banks are always notified. Similarly, in cryptocurrency, there are digital wallets that keep a track of every minute transaction. For instance, if any funds are transferred through cryptocurrency from any foreign countries in our country then with the help of KYC it can be notified. The government should create a bracket mentions a specific number of Bitcoins that can be credited to an account. If the user exhausts the limit then it can be easily brought to the notice.

Fake currencies

There are several reports of cyber criminals hacking virtual currencies around the world. There are many fake virtual currencies that pop us every day exposing users to risk their money. These currencies do not have any value or digital wallet.

Employment opportunities

Crypto usage in India is quite small as compared to the rest of the world. Amidst regulatory uncertainty about cryptocurrency, there is a high demand in the sector, especially in the metro cities. The virtual currency related jobs have caught the fancy of many Indians and in the last few months, our country has witnessed a significant growth in the employers as well as employees in the crypto sector. “The introduction of cryptocurrency by the government will have a positive impact on the employment sector. For instance, two decades back, the share market was seen as a gambling and with time people have started recognizing it. Today there are several channels that run 24*7 providing information only on equity and share markets, creating many employment opportunities. If Bitcoin is recognized then a different vertical on employment will be generated,” says Sinha. 

Laxmicoin – Indian version of Bitcoin

If reports are to be believed, Laxmicoin – promoted as an Indian version of Bitcoin – has sought clarifications from regulatory authorities. The name ‘Laxmicoin’ is derived from the Hindu goddess of wealth Lakshmi. It seems that the RBIs warning against the use of virtual currencies is proving a hurdle into the launch of Laxmicoin.

Advocate Sinha seconds the decision to have our country’s own cryptocurrency. Sinha says, “It is still unofficial and has not yet been confirmed by the government of India. In case, if the government has any plans to introduce it I feel we all should wholeheartedly welcome it. India has no virtual currency yet. Bitcoin is introduced in Japan and is a legal tender there.” The government should understand the current structure and legal implications and suggest a framework for regulation of such virtual currencies. Also, new products like patents, copyrights, and trademark will be introduced and proper guidelines for its smooth functioning should be made.


There were reports of the Income Tax department has carried out surveys and has sent legal notices to over 5,00,000 investors who earned profit from Bitcoin.

Introduction to Securities and Exchange Board of India

SEBI-IndiaSiddhartha Arora

The Security and Exchange Board of India was established by the government of India on 12 April 1988 an interim administrative body to promote orderly and healthy growth of the securities orderly and healthy growth of the securities market and to protect investor’s rights. It is functioning under administrative control of Ministry of Finance. The SEBI was given statutory status on 30th January 1992 through and ordinance, later it was replaced by an act of parliament, Securities and Exchange Board of India Act, 1992. The capital market had witness a heavy growth during 1980’s. This ever expending investor population and market capitalization led to variety of malpractices on the part of companies, brokers merchant brokers, investment consultants involved in Securities Market. Such malpractices and unfair practices have eroded investor confidence and multiplied investor grievances. The example of malpractices include existence of self-styled merchant bankers, unofficial private placement, rigging of prices unofficial premium in new issues, non-adherence of provisions of the companies act, violation of rules and regulation of stock exchange listing requirements, delay in delivering shares etc. The government and stock exchanges were rather helpless in redressing the investor’s complaints because of lack of proper penal provisions in the existing legislation.

Market intermediaries play a very important role in development of the market by providing a variety of services. Market intermediaries can be classified on the basis of the services provided by them. Typically, they are classified as:merchant bankers, stock brokers, bankers to issues, debenture trustees, portfolio managers, registrars to issues, share transfer agents, function in inter alia in the primary markets. These entities are regulated by SEBI.

Implementation of the Regulations entails a multi-stage process of supervision through on-site and off-site inspections, enforcement through initiation of adjudication, enquiry against violations of rules and regulations, and prosecutions. Inspections of intermediaries are carried out directly by SEBI or by stock exchanges, depositories, etc. SEBI conducts inspections on a periodic basis to verify the compliance levels of intermediaries. It also conducts specific/ limited purpose inspections on the basis of complaints, references, surveillance reports, specific concerns etc. SEBI also directs stock exchanges and depositories to carry out periodic/specific purpose inspections of their members/participants. Under various regulations, SEBI seeks information from the stock brokers, sub brokers, and other intermediaries.

A Historical Perspective of the Securities Market Reforms in India

Loan securities of the East Indian Company used to be traded towards close of the 18th century. By 1830’s, the trading in shares of banks started. The trader by the name of broker emerged in 1830 when 6 persons called themselves as share brokers. This number grew gradually. Till 1850, they traded in shares of banks and securities of the East India Company in Mumbai. In 1850, the Companies Act introducing limited liability was enacted heralding the era of modern joint stock company which propelled trading volumes.

The great and sudden spurt in wealth produced by cotton price propelled setting up companies for every conceivable purpose after the American Civil War broke out in 1861and exports increased from India. Between 1863 and 1865, the new ventures raised nearly Rs.30 crore in the form of paid up capital.

The subscription for shares was in large numbers and the people woke up only when the American Civil war ended. Then all rushed to sell their securities but there were no buyers. They were left with huge mass of unsaleable paper. The depression was so severe that it paved way for setting up of a formal market.

On 3rd December 1887, the brokers affected from the depression established a stock exchange called ‘Native Share and Stock Brokers’ Association’. This laid the foundation of the oldest stock exchange in India. The word ‘native’ indicated that only natives of India could be brokers of the Exchange.

In 1880s a number textile mills came up in Ahmedabad. This created a need for trading of shares of these mills. In 1894, the brokers of Ahmedabad formed “The Ahmedabad Share and Stock Brokers’ Association”.

The 1870s saw a boom in jute prices, 1880s and 1890s saw boom in tea prices, then followed coal boom. When the booms ended, there were endless differences and disputes among brokers in eastern India which was home to production of jute, tea and coal. This provoked the establishment of “The Calcutta Stock Exchange Association” on June 15, 1908.

Control of capital issues was introduced through the Defence of India Rules in 1943 under the Defence of India Act, 1939 to channel resources to support the war effort. The control was retained after the war with some modifications as a means of controlling the raising of capital by companies and to ensure that national resources were channelled to serve the goals and priorities of the government, and to protect the interests of investors. The relevant provisions in the Defence of India Rules were replaced by the Capital Issues (Continuance of Control) Act in April 1947.

Though the stock exchanges were in operation, there was no legislation for their regulation till the Bombay Securities Contracts Control Act was enacted in 1925. This was, however, deficient in many respects. Under the constitution which came into force on January 26, 1950, stock exchanges and forward markets came under the exclusive authority of the central government. Following the recommendations of the A. D. Gorwala Committee in 1951, the Securities Contracts (Regulation) Act, 1956 was enacted to provide for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and to prevent undesirable transactions in securities.

In 1980s and 19990s, it was increasingly realized that an efficient and well developed securities market was essential for sustenance of economic growth. A major initiative of regulation was establishment of a statutory autonomous agency, called SEBI, to provide reassurance that it is safe to undertake transactions in securities. It was empowered adequately and assigned the responsibility to (a) protect the interests of investors in securities, (b) promote the development of the securities market, and (c) regulate the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. All market intermediaries are registered and regulated by SEBI. They are also required to appoint a compliance officer who is responsible for monitoring compliance with securities laws and for redressal of investor grievances.

An Overview to the Primary Market

The primary market is the part of the capital market that deals with issuing of new securities. Companies, governments or public sector institutions can obtain funds through the sale of a new stock or bond issues through primary market. This is typically done through an investment bank or finance syndicate of securities dealers.

The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets create long term instruments through which corporate entities borrow from capital market. This is the market which deals in new securities. That is why new share or debentures are offered for the first time. Therefore it is also referred to as the new issue market (NIM). Here the buyers obtain new securities. In other words companies issue securities directly to the investors. Companies obtain money & in turn issues certificates. Issue made of this type is known as primary issue.

Once issued the securities typically trade on a secondary market such as a stock exchange, bond market or derivatives exchange.

Establishment of SEBI as a Regulator

A major initiative of regulation was establishment of a statutory autonomous agency, called SEBI, to provide reassurance that it is safe to undertake transactions in securities. It was empowered adequately and assigned the responsibility to (a) protect the interests of investors in securities, (b) promote the development of the securities market, and (c) regulate the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. All market intermediaries are registered and regulated by SEBI. They are also required to appoint a compliance officer who is responsible for monitoring compliance with securities laws and for redressal of investor grievances.

The structure and processes of the SEBI have been developed over the year. In 1602 when Amsterdam stock exchange was admitted by the East India Company for dealings in its own securities the establishment of the native share and stock Brokers Association (now remand as Bombay Stock Exchange) in 1875 in the existing India undoubtedly marked a beginning of the stock exchange in India despite being the first ever stock exchange in Asia. The earliest legislative efforts to regulate the securities market in India was made by the Bombay Securities Contracts control act 1925, which was enacted to regulate and control certain contras acts for purchase and sale of securities in the city of Bombay.

SEBI’s Regulation of the Indian Securities Market

The primary market is the market which provides a conduit for sale of new securities. This market provides chance to issuers of securities, the government as well as corporate, to raise capital to meet their requirements of investments or for liberation of their obligations. Securities laws are needed mainly because of the unique informational needs of the investors because selling securities to investors in the various capital markets provides the means for corporations, governments and government agencies to satisfy their need for capital. And to regulate and control various volatile natured reforms of the market the regulation of the capital market is highly needed.

The security market is regulated by various agencies, such as the Department of Economics Affairs (DAE), the Department of Company Affairs (DC), the Reserve Bank of India (RBI) and the SEBI.

The multi crore securities scam that rocked The Indian financial system in 1992 (Harshad Mehta, The 1992 Security Scam)had the existing regulatory framework to be fragmented and inadequate and hence, a need for an autonomous, statutory, and integrated organization to ensure the smooth functioning of capital market was felt. To fulfil this need, the Securities and Exchange Board of India (S.E.B.I), which was already in existence since April 1988, was conferred statutory powers to regulate the capital market.

The SEBI got legal teeth through an ordinance issued on 30 January 1992. The ordinance conferred wide- ranging powers on the SEBI, including the authority to prohibit insider trading and regulate substantial acquisition of shares and takeover of business. The function of market development includes containing risk, board basing, maintaining market integrity and promoting long-term investment. The SEBI Act, 1992 which establishes the SEBI with four-fold objectives of protection of the interests of investors in securities, development of the securities market, regulation of the securities market and matters connected therewith and incidental thereto. The capital market, i.e., the market for equity and debt securities is regulated by the Securities and Exchange Board of India (SEBI). The SEBI has full autonomy and authority to regulate and develop the capital market. The government has framed rules under Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board of India Act, 1992 and Depositories Act, 1996. The SEBI has framed regulations under the SEBI Act and the Depositories Act for registration and regulation of all market intermediaries, for prevention of unfair trade practices, and insider trading. As everyone could know that these i.e. the Government and the SEBI issue notifications, guidelines and circulars which need to be complied with by market participants. All the rules and regulations are administered by the SEBI.

SEBI’s efforts are to create effective surveillance mechanism for the securities market, and encourage responsible and accountable autonomy on the part of all players the market, who should discipline themselves and observes and observe the rules of the game. This would be possible, if the intermediaries set themselves up as effective self-regulatory bodies. Self-regulation is therefore the cornerstone of the regulatory framework advocated by SEBI, which like management by exception would result in regulation by exception. However, self-regulation can work only if there is an effective regulatory body overseeing activities of self-regulatory organisations. SEBI endeavours to provide a controller structure which would simplification an effective mobilisation and allotment of wealth through the securities market a structure, which would encourage effective of the market so that it could manage the essential services to business and commerce and personal investors in the most effective economic route jog competition and promote innovation, be responsive to international growth a structure which is flexible and cost effective so that it has clarity to guide and not cramp the changes, and finally in breath trust on the part of the investors and other users of the market by ensuring the market place is, and is also seen to be, clean to do trade in a fair, transparent and efficient manner

The judgment by the Delhi high court in Kimsuk Krishna Sinha v. SEBI throws interesting light on the role of SEBI in ensuring Correct Disclosure in offer documents and actions that SEBI can or should take.

“The purpose of inserting Section 55A in the Companies Act was to empower the SEBI to take both corrective and preventive action. This is perhaps because as a regulatory body SEBI gets to see the draft prospectus preceding a public issue by a company even before the public gets to see the RHP. SEBI is enabled and empowered to examine the DRHP and insist on complete and truthful disclosure of all relevant facts therein. The very purpose of having an independent regulatory authority like SEBI, and vesting it with statutory powers of inquiry, is to enable it to take prompt action in matters relating to issue and transfer of shares”

Role of SEBI in regulating Disclosures of Offer Documents and Code of Advertisement

Chapter VI of Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 talks about the content of the offer document, Section I contents of the prospectus which says that other than disclosures specified in Schedule II of the Companies

Act, 1956, the prospectus shall contain all the information which shall be true and adequate so as to facilitate the investors to make an informed decision on the investments in the issue. The information must be substantial enough for the investor to make an informed choice.

In addition to regulations regarding the disclosure requirements SEBI also looks into the fact that investor does not get be fooled by misleading advertisement. SEBI has issued guidelines for the same to ensure that the advertisement is truthful, fair and clear. For e.g. it shall be the responsibility of the Lead Manager to ensure strict compliance with the code of advertisement by the issuer company.

Chapter IX of Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 deals with guidelines on advertisement. It clearly mentions that an advertisement shall be in a clear, concise and understandable language. Excess use of technical terminology should be avoided. Along with that it also mentions what amounts to misleading advertisement. The code mentions that

“Advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise. It should not contain statements which are false, misleading, biased or deceptive, based on assumption/projections. It should not be designed as likely to be misunderstood, it should not contain statements which directly or by implication or by omission may mislead the investor.”

Advertisements shall not be so framed as to exploit the lack of experience or knowledge of the investors. No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons and it shall be accompanied by a standard warning in legible fonts.

This is all done by SEBI with an aim to protect the investor, in reality the term “Investor Protection” is a very broad term encompassing a range of measures intended to protect the investors from malpractices of companies, brokers, merchant bankers, etc. Since all investments include some risk element, so “Investors Beware” should be the motto of all programs for enlistment of savings for investment. The investor can suffer the loss either by his own mistake of carelessness or by malpractice done by the company or by any broker. For the latter part they have every right to complain. The main purpose of SEBI behind all the above mentioned regulations is to protect the investor from being befooled. By providing all this information SEBI is trying to protect the shareholders interest by making him do transactions on the basis of informed decisions. As part of SEBI’s efforts to protect investors’ interests, it has initiated many primary market reforms which include improved disclosure standards in public issue documents, introduction of prudential norms and simplification of issue procedures.

Role of SEBI in Preserving the Shareholders’ Interests through Regulation over Intermediaries
One of the main objectives of SEBI is ‘Promotion of efficient services by brokers, merchant Bankers and other intermediaries so that they become competitive and professional.’

Risks are inherent in any competitive market, and investors benefit from competitive markets so therefore management of the intermediaries are required to develop and implement effective processes and management systems commensurate with their business operations and risk characteristics in accordance with the general principles set out in the regulation.

In order to interpose between issuers and investors, regulators recognize various classes of intermediaries in the capital market. Regulation through intermediaries has been found, perhaps more effective in certain spheres of activity. SEBI, over the period, has recognized many types of capital market intermediaries in India. Intermediaries such as merchant bankers, underwriters, debenture trustees, bankers to an issue, registrars to an issue and share transfer agents and portfolio manager are the intermediaries that function in the inter alia in the primary markets. Regulating and registering the workings of such intermediaries’ forms and essential function of the SEBI.

Role of SEBI in regulating Insider Trading

Company insiders have information unavailable to the public. These individuals have firsthand knowledge of what the company is doing and better information concerning what the future might hold. If there are likely problems for the company in the future, such as poor earnings, slow growth, or lawsuits, then insiders can sell their stock before these events happen. When this information becomes public, the stock’s price should decrease. However, this price decrease occurs after the insider has sold his or her shares, thus avoiding the loss. In this case the insider beats the market. On the other hand, insiders know when their company has a bright future, high potential earnings, innovative products being developed, etc. When the future looks bright, insiders can buy shares before the public becomes aware of these facts. The price, later, fully increases to represent the positive information. In both cases, insiders use private information to beat the market.

Earlier, the concept of insider trading was limited to the aspect of a company insider tipping of an outsider and the outsider using the tip and trading in the company’s shares, this constitutes a breach of fiduciary duty owed by the insider to the company’s shareholders; it was called the classical theory of insider trading. Later US Supreme Court in the case

United States vs James Herman O’Hagan

in 1997 extended the scope of insider trading by including the misappropriation theory which said that a person commits insider trading when he obtains material confidential information and uses it in securities transactions in breach of fiduciary duty or similar relationship of confidence to the source of information but not necessarily to the shareholders of the company whose stocks are traded.

It is said that the information captured by insider trading modifies the responsiveness of returns to annual unexpected earnings and also the information captured by insider training differs from that captured by annual unexpected earnings.

Insider trading weakens the confidence of the investor in the fairness and honesty of the securities markets and this is reason SEBI has treated the recognition and suit of insider trading violation as one of its main concern. SEBI’s first enactment to restrain insider trading, namely, SEBI (Prohibition of Insider Trading) Regulations, 1992 did not make much advancement due to poor enforcement. These regulations, again, have been amended substantially over time. SEBI’s current approach centers around prevention of insider trading by requiring listed companies, intermediaries, and advisors to set up internal systems for preventing insider trading and reporting on compliance or otherwise to SEBI. The insider trading regulations provide for disclosure of smaller amounts and provides for disclosure on selling shares (something which the takeover code does not mandate).

Regulation 2 (e) of SEBI (Prohibition of Insider Trading) Regulations defines an ‘insider’ as a person connected or deemed to be connected and who is reasonably expected to have access to any unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished information.

The directors, officer, employers of the company, & persons involving a professional or business relationship including Charted accountants and legal advisors are connected person as per regulations 2 (c).

The insider trading Regulations provide for disclosure of smaller amounts and provides for disclosure on selling shares (something which the takeover code does not mandate).

Regulation 3 & 3A enumerates the various acts that an insider and company are prohibited to do; these regulations prohibit an insider and a company to ‘deal’ in certain circumstances; The term ‘deal’ is defined under regulation 2(d) which describe dealing in securities to mean an act of subscribing, buying, selling or agreeing to do so by any person either as principal or agent.

The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 1992 requires that a person who is connected with a listed company and is in possession of any unpublished price sensitive information likely to materially affect the price of securities of company, shall not (i) On his behalf or on behalf of any other person deal in securities or (ii) Communicate such information to any other person, who while in possession of such information shall not deal in securities.

“Price sensitive information” means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.

It is thus reasonable to claim that the regulatory framework is fairly comprehensive in its coverage of the securities trade. SEBI has mandated an enormous increase in the flow of information at the time of listing, after listing and relating to the trade. The long history of the functioning of the capital market and securities industry in India suggest that voluntary disclosure may not have become a pervasive trend and that without a regulatory push, there would have been underproduction of information. The cost of transaction and the risk of settlement have been minimized, making Indian stock exchanges one of the safest and the lowest cost securities markets in the world. The Indian mechanism for securities issuance is among the more sophisticated in the world with the introduction of the guidelines for book-building of issues.

The complex web of contracts that govern the issuance process provide a mechanism by which the responsibility for defaults and non-compliance may be affixed on either or both of the important factors in the issuance process, namely, the issuer and the issue manager. Many of the agency problems that affected the securities trade have been addressed through the corporatization and demutualization of securities exchanges.

Significant Developmental & Regulatory Functions

These functions are performed by the SEBI to promote and develop activities in stock exchange and increase the business in stock exchange. Under developmental categories following functions are performed by SEBI:
i. SEBI promotes training of intermediaries of the securities market.
ii. SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in following way:
iii. SEBI has permitted internet trading through registered stock brokers.
iv. SEBI has made underwriting optional to reduce the cost of issue.
v. Even initial public offer of primary market is permitted through stock exchange.
vi. SEBI undertakes steps to educate investors so that they are able to evaluate the securities of various companies and select the most profitable securities.
vii. SEBI promotes fair practices and code of conduct in security market by taking following steps:
viii. SEBI has issued guidelines to protect the interest of debenture-holders wherein companies cannot change terms in midterm.

SEBI has achieved considerable progress in terms of detecting and disposing of instances of non-compliance. There have also been concerns that SEBI awards penalties too late and too little in comparison to the financial scale of the infraction. SEBI is also said to have had a poor record in carrying its award through the appellate and the judicial systems.

The regulatory activity of SEBI imposes a cost on issuers. However, in the absence of an analysis that measures the impact of the regulation on the efficiency of the market, it is not possible to assess whether the cost incurred is justified by the benefits. The vigorous pace at which the SEBI Act and SC(R)A have been amended in the last decade in response to the requirements of the equity market— has helped position SEBI to take on new challenges of:
i. Dematerialization of share certificates; The need for this initiative was felt to avoid the threat of forgery or theft of share certificates coupled with inordinate delay by transfer agents and post offices.
ii. Approvals to Foreign Institutional Investors and is consistently revising the FII investment limit in both corporate as well as government debt.
iii. Keeping with the times, SEBI has also introduced e-IPO procedure for electronic bidding in public offers to help investors bid for shares in a cost-effective manner.
iv. SEBI has a web-based centralized grievance redress system called SEBI Complaints Redress System – SCORES for assisting investors to lodge their complaints in a structured way.

Proposed Amendments to the Framework
With effect from May 15th 2015 there is a broadening to the definitions of unpublished price-sensitive information (USPI), insider and connected persons, the legal perspective to have graver consequences for company officials involved in selective exchange of information.

The Budget talks of 2015 proposed the merger of commodity futures market regulator Forward Markets Commission (FMC) with stock market regulator Securities and Exchange Board of India (SEBI), a move intended to strengthen regulation of the 11-year commodities market, facilitate domestic and foreign institutional participation and launch of new products like options. SEBI would therefore find it easier to regulate trading of non-farm products like gold, silver, crude oil and base metals, of which the latter two are traded in the paper form and are non-deliverable.

End Notes:
# Securities and Exchange Board of India Act 15 of 1992
# Sabarinathan, G., Securities and Exchange Board of India and the Indian Capital Markets – A Survey of the Regulatory Provisions (July 30, 2004). IIM Bangalore Research Paper No. 228.
# Primary Securities Market, visited on 25th of February 2015
# Annual Report 2006-07 Part Three: Regulation of Securities Market. Report delineates the functions of SEBI as specified in Section 11 of the SEBI Act, 1992. Page 81
# Gorwala Committee Report; The Economic Weekly October 13, 1951
# A Historical Perspective of the Securities Market Reforms in India, visited on 25th of Feb 2015
# Indian Journal of Research, Research Paper by Harshesh Purohit on Role of SEBI in Indian Securities Market. Page 87, Volume 3, Issue 3 of March 2014
Ibid., Page. 86
# Harshad Mehta, The 1992 Security Scam
# SEBI (Capital Market) & its Future Growth in Indian Economy, visited on 1st march 2015
# Securities Contracts (Regulation) Act, 1956 42 of 1956
# A Study On Role Of SEBI in Indian Capital Market : An Empirical Analysis, International Journal of Multidisciplinary Research Vol.2 Issue 3, March 2012, ISSN 2231 5780
# Role of SEBI in Indian Securities Market, visited on 1st March 2015
# Kimsuk Krishna Sinha v. SEBI (2010) 100 SCL 197
# Securities And Exchange Board Of India (Disclosure And Investor Protection) Guidelines (2000)
# Sixth Schedule Regulation 30 ,THE GAZETTE OF INDIA , Part III Section 4, Security and Exchange Board of India (Mutual Funds) amendment regulations (2012)
# The Role of Financial Intermediaries and Financial Markets; last visited on 25th February 2015
# Regulatory Framework for Intermediaries, Securities and Futures Commission (June 2011)
# Part-III Functions of SEBI in Respect of Matters specified in Section 11 of the SEBI Act, 1992; SEBI Annual Report (2002-2003); last visited on 25th February 2015
# registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner; as laid under subregulation (2) (b) of 11 of Securities and Exchange Board of India Act, 1992
# Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992; In exercise of the powers conferred by section 30 of the Securities and Exchange Board of India Act, 1992
# Insider Trading by William Wang & Marc Steinberg page 788
# United States v. O’Hagan, 521 U.S. 642, 655–666 (1997)
# Court Decisions on Insider trading, last visited on 2nd march 2015
# Steven Allen and Ramachandran Ramanan , Insider Trading, Earning Changes, and Stock Prices, Management Science Vol. 41, No. 4, Apr., 1995; available at
# SEBI on Insider Trading; last visited at 2nd March 2015
# Consultative Paper on amendments to SEBI (Prohibition of Insider Trading) Regulations 1992, Securities And Exchange Board Of India; available at
# SEBI’s Regulation of the Indian Securities Market: A Critical Review of the Major Developments by G Sabarinathan; last visited on 2nd march 2015
# SEBI: The Purpose, Objective and Functions of SEBI; last visited on 2nd March 2015
# SEBI: A Credible & Effective Regulator; last visited on 2nd march 2015
# Budget 2015: Proposal to merge Forward Markets Commission with SEBI to add teeth to commodities market regulation; last visited on 2nd March 2015

Insider Trading


The article comprehensively deals with the recent controversial judgement of Rajat Gupta on Insider trading in United States of America and its impact on Indian Securities market. The author has mainly focused on the circumstances of Rajat Gupta’s case, if such situation arises in India then how the laws in India will impact the trial. The author has also focused on Insider trading laws in United States of America and United Kingdom.

The episode of Rajat Gupta “Insider Trading”

‘SEC V. Rajat Gupta (Civil Action No. 11-cv-7566 (SDNY))’

On September 2008, Rajat Gupta disclosed to Rajaratnam material non-public information he learned as a member of Goldman Sachs Board of Director concerning Berkshire’s 5 billion investments in Goldman Sachs. Rajaratnam, in turn, caused certain Galleon hedge fund to trade on the basis of the material non-public information that Gupta disclosed. On September 22, after Goldman Sachs Board meeting, Rajaratnam received a call from Mr. Rajat Gupta’s office, afterward Galleon hedge fund purchased 1,00,000 Goldman Sachs shares.

The very next day Rajaratnam placed a call to Mr. Gupta and after the call Rajaratnam caused Galleon hedge fund purchased additional 50,000 Goldman Sachs shares. Through a Board meeting, Goldman Sachs approved the 5 billion preferred stock investment by Berkshire. As Gupta knew, Berkshire was a respected and influential investors and its decision to make such a large investment in Goldman Sachs would be favourably viewed by investor as a strong vote of confidence in the firm when the information was disclosed to public. Just after a Board meeting, Rajaratnam caused certain Galleon hedge funds to purchase more than 2, 17,200 Goldman Sachs shares. When Goldman Sachs publicly announced the Berkshire investment along with 2.5 billion stock offering its stock prices from $125.05 per share to $133.00. On the next day Rajaratnam liquidated Goldman Sachs shares generating a profit of $8, 00,000.

Mr. Gupta also disclosed the negative list for the fourth quarter of 2008, reporting a $2.1 billion loss, the first quarterly loss that Goldman Sachs had sustained. As a result of Rajaratnam’s trades on the basis of the material non-public information that Mr. Gupta provided, Galleon hedge funds avoided losses of more than $3.6 million.

The financial result for second quarter of 2008 were also disclosed to Rajaratnam, due to which total illicit profits made by the Galleon hedge funds by virtue of their trading on the basis of Gupta’s material non-public information concerning Goldman Sachs second quarter of 2008 results were nearly $18.5 million.

Non-public information of Procter & Gamble’s were disclosed to Rajaratnam who then passed the material non-public information to his Galleon colleagues, who then caused certain Galleon funds to trade on the basis of the information. Through this non-public information, the Galleon funds generated illicit profits of over $5, 70,000.


The Prosecution in this case majorly relied on phone tapping where Mr. Gupta tipped Rajaratnam about information which was not meant to be public at that time. Earlier the United States Court did not allow the wire tapping’s by stating that Government is not authorized to use wire taps to investigate the matters of Insider Trading.

Later U.S District Judge Richard Holwell allowed the tapping’s by stating that “Prior to the Rajaratnam case, you look at insider trading rings, and they are very small. Prosecutors would wind up getting one, two, three people. The Rajaratnam case showed that with wiretaps, you can sweep in rings of tippers, leading to a vast array of prosecution.”

The Government asked U.S Senior District Judge for a pre-trial ruling that tapes be admissible because they contains statements that were against Rajaratnam’s interest and were made in furtherance.

In Insider Trading cases the investigating agencies have to establish three basic elements. First of all, one has to have evidence of action in the market, whether a buy or a sell, then one has to prove that the insider had particular information that others did not have and then the investigators have to establish one caused the other. The key frustration for investigators often comes in establishing the cause and effect. Even in the high profile Raj Rajaratnam-Rajat Gupta case in the US, it is not clear if the authorities would have the conversation, taping of which incidentally was permitted to crack the insider trading case.

The case of Rajat Gupta challenged the powers of Securities Exchange Board of India where an Insider is prosecuted mainly on the basis of Telephone Tapping and no motive to secure profit.


According to laws in India the main issue would be that can such wiretapping amounts to violation of fundamental right of an individual or not?

In the case of People’s Union for Civil Liberties Vs Union of India and ans “Telephone tapping is a serious invasion of an individual’s privacy. With the growth of highly sophisticated communication technology, the right to hold telephone conversation, in the privacy of one’s home or office without interference, is increasingly susceptible to abuse. It is no doubt correct that every Government, howsoever democratic, exercises some degree of sub rosa operation as a part of its intelligence outfit but at the same time citizen’s right to privacy has to be protected from being abused by the authorities of the day. ”

“No person shall be deprived of his of his life or personal liberty except according to ‘procedure established by law’.”

Through the case of A.K Gopalan vs State of Madras the apex court interpreted that the words “procedure established by law” in Article 21 refers to only state made statues, if any statutory law prescribed procedure for depriving a person of his rights or requirement of Article 21.

In the subsequent cases such as R.C Cooper v. Union of India it was held that any law that deprives the life and liberty must be fair and just.

The apex court widened the scope of article 21 and has provided with the rights article 21 within itself, on of them are of ‘Right to Privacy’

The right to personal liberty takes in not only a right to be free from restrictions placed on his moment, but also free from encroachment on his private life. It is true that our constitution does not expressly declare a right to privacy as a fundamental right but the said right is an essential ingredient of personal liberty.

Before a person is deprived of his life and personal liberty the procedure established by law must be strictly followed and must not be departed from to the disadvantage of the person affected.

As the Constitution of India suggests it an essential requirement that a statute should be there so that a person’s phone can be tapped. A written statute provides power to a state and the words ‘procedure established by law’ are fulfilled making the act not against Article 21 i.e Right to Privacy.

Stating more in the case of People’s Union of Civil Liberties v. Union of India , The Court has ruled that telephone conversation is an important facet of a man’s private life. The right to hold a telephone conversation in the privacy of one’s home or office without interference can certainly be claimed as “right to privacy”. Conversations on the telephone are often an intimate and confidential character. Telephone conversation is a part of modern man’s life. Tapping of telephones is a serious invasion of privacy. “Right to privacy” would certainly include telephone conversation in the privacy of one’s home or office. This means that telephone tapping would infract Article 21 unless it is permitted under the procedure established by law. The procedure has to be just fair and reasonable.


The powers to tap phone lines are being mentioned under section 5(2) of Indian Telegraph act 1885 which states, “On the occurrence of any public emergency, or in the interest of the public safety, the Central Government or a State Government or any officer specially authorised in this behalf by the Central Government or a State Government may, if satisfied that it is necessary or expedient so to do in the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States or public order or for preventing incitement to the commission of an offence, for reasons to be, recorded in writing, by order, direct that any message’ or class of messages to or from any person or, class of persons, or relating to any particular subject, brought for transmission by or transmitted or received by any telegraph, shall not be transmitted, or shall be intercepted or detained, or shall be disclosed to the Government making the order or an officer thereof mentioned in the order: Provided that press messages intended to be published in India of correspondents accredited Central Government or a State Government shall not be intercepted or detained, unless their transmission has been Prohibited under this sub- section.”

Telephone tapping is permissible in India under section 5(2) of Telegraph Act 1885. The Court has held that this section is constitutionally valid. This section lays down the circumstances and the grounds when an order for tapping of a telephone may be passed. The constitutional validity of this provision has not been questioned, but no procedure for making order is laid down therein.

The Indian Telegraph Act 1885 carries few provision under which the Indian Government and its agencies can tap phones in India but these provision are not sufficient an outdated. As on the date there is no constitutionally sound lawful interception and phone tapping law in India. Phone tapping is permitted based on court order only and such permission is granted only if it is required to prevent a major offence involving national security or to gather intelligence on anti national terrorist activities. Though economic offences/ tax evasions were initially covered under the reasons of interception of phones, the same was withdrawn in 1999 by Government based on a Supreme Court order citing protection of the privacy of the individual.

In 1996 Judgment, The Supreme Court of India stated that “wire taps are serious invasion of an individual’s privacy”. The Court also set out guidelines for wire tapping by the government that who can and under what conditions phone lines can be tapped. Only the Union Home Ministry, or his counterpart in the state, can issue an order for a wiretap. The Government is also required to show that the information sought cannot be obtained through any other means. Recordings or transcript of the tapped phone calls are not generally accepted as primary evidence in Indian Court, such evidences are permitted under Prevention of Terrorism Act and the Unlawful Activities Act.

After the Judgment of Rajat Gupta’s case, the Indian market regulator i.e. Securities Exchange Board of India has sought approval from the government to use telephone call records as evidence in the insider trading cases.


When a person is talking on telephone, he is exercising his right to freedom of speech and expression. Telephone tapping, accordingly infracts Article 19(1) (a) unless it falls within the grounds of restrictions falling under Article 19(2).

The grounds mentioned in Article 19(2), that the competent authority under Section 5(2) of Indian Telegraph Act, 1885 is empowered to pass an order of interception after recording its satisfaction that it is necessary or expedient to do in interest of-

1. Sovereignty and integrity of India;

2. The security of the State;

3. Friendly relations with foreign state;

4. Public order;

5. For preventing incitement to commission of an offence

When any of the five situations mentioned above to the satisfaction of the competent authority requires, then the said authority may pass the order for interception of messages by recording reasons in writing for doing so. Thus, so far as the power to intercept conversation is concerned Section 5 clearly laws down the situation under which it can be exercised, but the substantive law as laid down in Section 5(2) must have procedural backing so that the exercise of power is fair and reasonable. The said procedure itself must be fair, just, and reasonable.

In absence of just and fair procedure for regulating the exercise of power under section 5(2) of the Act, it is not possible to safeguard the rights of the citizens guaranteed under Article 19 and 21. Accordingly, the court has itself filled in the gap by issuing procedural directions for exercise of power under S.5 (2) of Telegraph Act 1885.

Through Hukum Chand Shyamlal case the Court has laid down inter alia that an order of telephone tapping under section 5(2) shall not be made except by the Home Secretary, Government of India and Home Secretaries of the State Governments.



In the case of Securities Exchange Commission v. Roger .D. Blackwell , the honourable US District Court for the Southern court of Ohio states that for convicting some person liable for Insider trading it is not necessary that there should be direct profit motive in the mind of Insider.

A different judgment in the case of Raymond L. Dirks v. Securities and Exchange Commission , Where Mr. Ray Driks who worked as securities analyst found the insurance company for which he was working was involved in securities fraud. Mr. Driks disclosed this fraud to public. The SEC censured him for “insider trading” because he provided his clients with non-public information. The Supreme Court found Mr. Driks not guilty and stated that “Even though Mr. Driks client had profited from his action, Driks was not guilty because profit had not been his intent in uncovering the fraud.”

Circumstances plays an important role in the cases of Insider trading, on comparing both the above mentioned case Mr. Blackwell disclosed the information to those person with whom he was having fiduciary relations or family or friends, but in the case of Dirks, where the accused just acted as a whistleblower against the insurance company where he worked. Securities laws, whether in India or USA are formed to save the interest of the investors. The act of revealing the unpublished information of the insurance company by Raymond Driks was to save the interest of the investor and to gain any profit out it.


In India, according to SEBI (Insider Trading) Regulations there are two conditions need to be fulfilled to hold somebody guilty as an insider.

1. The “insider” must be a connected person with access to unpublished price sensitive information or he is a deemed to be a connected person.

2. He has traded in those securities on the basis of unpublished price sensitive information.

In the case of Rakesh Agarwal v. Securities Exchange Board of India , Mr. Rakesh Agarwal, the Managing Director of ABS Industries Ltd, was involved in negotiations with Bayer A.G, regarding their intention to take over ABS. Being the Managing Director he had access to the price sensitive information. Before announcement of the merger is made public Mr. Rakesh Agarwal through a collusive agreement with his brother-in- law to take over the shares of ABS from market, thereafter he tendered the same shares through the open offer making huge profit. Later Bayer AG acquired ABS and Mr. Agarwal was also considered as an insider.

In defence Mr. Agarwal denied the allegations levelled against him by SEBI stating that he has acted in such a manner for the benefits of the company and he has no intention to have personal gains. He wanted to acquire 51% shares of the company of ABS through Bayer and he wanted to plan to be executed in clinical precision. Taking into consideration of the defence taken Securities Appellate Tribunal held that Mr. Agarwal did that in interest of the ABS.


The Patel Committee in 1986 in India defined Insider Trading as “Insider trading generally means trading in the shares of a company by the person who are in the management of the company or are close to them on the basis of undisclosed price sensitive information regarding the working of the company, which they possess but which is not available to others”. The Patel Committee also recommended that the securities contract (Regulation) Act, 1956 may be amended to make exchanges curb insider trading and unfair insider trading and unfair stock deals.

To strengthen the existing Insider Trading Regulations and to create a framework for prevention of insider trading, committee was constituted by SEBI under chairmanship of Mr. Kumar Mangalam Birla. The recommendations of the committee were considered by the SEBI Board and the amended regulations were notified .

The SEBI (Prohibition of Insider Trading) Regulation 1992, comprise of four chapters and three schedules encompassing the various regulations related to insider trading. Chapter I deal mainly with the definitions used in regulation. Chapter II provides for prohibitions on dealing, communicating or counselling by insider. It also contains the defences available to a company in proceeding against it on allegation of Insider trading. Chapter III narrates the investigating powers of SEBI under the regulation and also enumerates the prohibitory orders or directions that it can issue against the guilty in the interest of the capital market regulation. Chapter IV deals with the code of internal procedure and conduct to be followed by listed companies and other entities, disclosure requirements be followed by company. It also contains appeal provisions which an aggrieved person may like to follow against the orders of SEBI.

Hindustan Level Limited- The definition of insider was amended after the famous case of Hindustan Level Limited in 1998 in which the definition included those persons also who “has received or has had access to such unpublished price sensitive information”, and not just a person who is or was connected with the company. A concept of deemed connected person which included all the relatives of that particular connected person.



The rules regarding insider trading are contained in Securities Exchange Act 1934. There are other laws to prevent insider trading like Insider Trading Sanction Act 1984, the Insider Trading and Securities Fraud Enforcement Act, 1988. The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading. The penalties are indeed burdensome and stringent in nature. It may be as high as three times the profit gained or the loss avoided from the illegal trading.

The Securities Exchange Act, 1934 imposed statutory curbs on Insider Trading, requiring public disclosures of insider’s transactions in the shares of their companies and providing for recovery of ‘shortswing’ profit by them. The act provided the remedial measures for protection of investors against sharp practices and fraudulent schemes by insiders in making short- term, speculative profit.

In USA the act of Insider trading was addressed through introduction of section 16(b) and 10(b) of Securities Exchange Act 1934. Section 16(b) prohibits short term profits by corporate insiders whereas Section 10(b) makes it unlawful for any person to use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulation as the SEC may prescribe. These anti-fraud provisions make fraud or misrepresentation in connection with the purchase or sale of a security, an unlawful aspect.

The Insider trading law in USA is a part of the general law relating to fraud. Under the federal system prevailing in the USA, there were state laws know as “Blue sky” laws which contain anti-fraud provisions which are used to deal with insider trading.

In the case of Driks v SEC the Court held that the tippers are liable if they had reason to believe that the tipper had breached a fiduciary duty in disclosing confidential information and the tipper received any personal benefits from the disclosure. The Driks case also defined the concept of ‘constructive insiders’ who are lawyers, investment bankers who receive confidential information from a corporation while providing service.


There are four key ingredients where the regulations of Insider Trading apply in United Kingdom.

• It must relate to the securities and the particular issue of the securities and not just be concerned with the securities and issuer of securities in general. Thus information would constitute insider information if it relates to the particular industry even if it does not relate to the issuer.

• However, the information pertaining to the Government economic policy and bank rate would not come within the purview of the unpublished information.

• Information may be either specific or precise. The information regarding the takeover bid is specific information but the price at which the bid would take place is precise information.

• Information must not have been made public


The laws regarding insider trading in United Kingdom are divided into 3 parts.

1. Part V of Criminal Justice act 1993

2. Section 118 of Finance Services and Market act 2000

3. Companies Securities (Insider Trading) Act 1985

Part V of Criminal Justice Act 1993 provides for the offence of insider dealing that seeks to prevent individuals from engaging in three classes of conduct in certain circumstances like “it prohibits dealing in price- affected securities on the basis of inside information. It prohibits the encouragement of another person to deal in price- affected securities on the basis of insider information and it prohibits knowing disclosure of insider information to another.”

As per Section 52 which states

1. An individual who has information as an insider is guilty of insider dealing if, in the circumstances mentioned in sub-section (3) he deals in securities that are price affected securities in relation to information.

2. An individual who has information as an insider is also guilty of insider dealing if

a. He encourages another person to deal in securities that are price- affected securities in relation to information, knowingly or having reasonable cause to believe that the dealing would take place in the circumstances mentioned in sub section 3

b. He discloses information otherwise than in proper performance of the functions of his employment, office or profession, to another person

Section 57(1) of Criminal Justice Act 1993 provides that a person has information as an insider if and only if it is and he knows that it is inside information, and he has it and knows that he has it from an inside source. This act makes insider trading illegal on the basis of unpublished specific information likely to materially affect the market price of stock if the insider knew the information was price sensitive. Under British Laws the alleged offender will not be guilty of insider trading if he had neither knowledge nor any cause to believe that dealing would take place based on the information.

There were certain loop holes in Criminal Justice Act 1993, to fill these gapes Financial Services and Market act 2000 was passed to prevent insider trading, this act made the offence of market abuse applicable to legal entities and natural persons. FSA i.e Financial Services authority which is empowered to prosecute the criminal offence of market manipulation and the offence of insider trading

Even Section 118(2) lays down three tests which need to be satisfied to constitute market abuse:

1. That the behaviour must occur in connection which a qualifying investment traded on a prescribed market.

2. One or more of the following as misuse of information, false or misleading impression or market distortion

3. The behaviour must fall below the standard of behaviour that a regular user of the market would reasonably expect of a person in the position of the person in question. Behaviour will amount to market abuse only if it satisfies all three tests


Advertisement and freedom of speech

“Give me the liberty to know, to utter, and to argue freely according to conscience, above all liberties”. – John Milton

The essence of free speech is the ability to think and speak freely and to obtain information from others through publications and public discourse without fear of retribution, restriction, or repression by the government. Advertising is a form of communication for marketing and used to encourage orpersuade an audience (viewers, readers or listeners; sometimes a specific group) to continue or take some new action. Most commonly, the desired result is to drive consumer behaviour with respect to a commercial offering, although political and ideological advertising is also common.

In John W. Rast v. Van Deman& Lewis Company, Mr. Justice Mckenna, dealing with advertisements said:-

“Advertising is merely identification and description, apprising of quality and place. It has no other object than to draw attention to the article to be sold and the acquisition of the article to be sold constitutes the only inducement to its purchase.”above advertisement takes the same attributes as the object it seeks to promote or bring to the notice of the public to be used by it. Examples can be multiplied which would show that advertisement dealing with trade and business has relation with the item “business or trade” and not with “freedom of speech”.


The principles, as stated in the case of Reckitt & Coleman of India Ltd v Kiwi TTKLtd (63 (1996) DLT 29), are as follows:

a) An advertisement can declare that theadvertised goods are the best in theworld, even though this declaration isuntrue;

b) An advertisement can state that theadvertised goods are better than thoseof competitors, even if this statement isuntrue;

c) An advertisement can compare theadvertised goods with those ofcompetitors;

d) An advertisement cannot, while statingthat the advertised goods are betterthan those of a competitor, state thatthe competitor’s products are bad, as this would be defamation;

e) In a case of defamation, damages can beclaimed. The court can also grant aninjunction against repetition of the defamatory action.


Today, new era of advertising has evolved, which is both cost-effective as well as efficient at global level. Online advertising is the fastest growing medium of advertising that has proven its effectiveness and stability in the advertising world.In a developing economy like India, advertising has a profound impact on how people understand life, the world and themselves, especially with regard to their values, choices and behaviour. Advertising is considered to be the cornerstone of our socio-economic system and may be viewed as the lifeline of free media, paying costs and making media widely accessible. Advertising agencies perform deep research before they create and feature the advertisement for the targeted audience. Few platforms dominated the advertising market and offered an opportunity for the advertisers to pass on the message to people, and market their products.

Freedom to speak freely, without limitation or regulation is termed as the Freedom of Speech. Freedom of Expression implies not only the freedom to speak but also to distribute and access of the information through various media modes. In the advertising and media industry, a self-regulatory guideline of code and conduct is a self-imposed discipline, whose primary objective is to monitor and prescribe the advertising standards for public interest. This system complements government legislation and regulations as well. As the categories of sensitive advertisers are constantly increasing; consumer groups, governments and regulators became more cautious to take lively interest. Monitoring and voluntary self-regulations in advertising, allow reasonable freedom of speech and expression. The members of Communication Council should be aware about the importance of self-regulation.

In many countries, the government controls media so that nobody can publish or broadcast anything that the government considers harmful, immoral or threatening for the stability of the country. Censorship is regulated by a particular body or the government that retains the power base, on the media content.

Right To Advertisement As A Part Of Freedom Of Speech And Expression

Advertising which is no more than a commercial transaction, is nonetheless dissemination of information regarding the product advertised. Public at large is benefitted by the information made available through the advertisement. In a democratic economy free flow ofcommercial information is indispensable. There cannot be honest and economical marketing by the public at large without being educated by the information disseminated through advertisements. The economic system in a democracy would be handicapped without there being freedom of “commercial speech” and when examined from another angle, the public at large has a right to receive the “Commercial speech”. Article (19) (1) (a) not only guarantees freedom of speech and expression, it also protects the rights of an individual to listen, read and receive the said speech. So far as the economic needs of a citizen are concerned, their fulfilment has to be guided by the information disseminated through the advertisements. An advertisement giving information regarding a life saving drug may be of much more importance to general public than to the advertiser who may be having purely a trade consideration.

An advertisement is no doubt a form of speech but its true character is reflected by the object for the promotion of which it is employed. It assumes the attributes and elements of the activity under Article 19(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.

It was asserted in HamdardDawakhana (WAKF) LalKuan, Delhi and Another v Union of India, [SCR 1960 (2) 671]that an advertisement is no doubt a form of speech but its true character is reflected by the object for the promotion of which it is employed. It assumes the attributes and elements of the activity under Art. 19(1) which it seeks to aid by bringing it to the notice of the public.

It allows us to freely express our ideas and thoughts through any medium such as print, visual, and voice. One can use any communication medium of visual representation such as signs, pictures, or movies. Freedom of speech would amount to nothing if it were not possible to propagate the ideas. Thus, the freedom of publication is also covered under freedom of speech. Freedom of speech serves 4 purposes:

a) Allows an individual to attain self fulfillment.

b) Assists in the discovery of truth.

c) It strengthens the capacity of a person to make decisions.

d) It facilitates a balance between stability and social change.


This right is not only about communicating your ideas to others but also about being able to publish and propagate other people’s views as well. Thus, freedom of speech and expression is linked to the people’s right to know. Freedom of speech and expression is a broad term and encompasses several things Freedom of speech is guaranteed not only by the constitution or statutes of various states but also by various international conventions like Universal Declaration of Human Rights, European convention on Human Rights and fundamental freedoms, International Covenant on Civil and Political Rights etc. These declarations expressly talk about protection of freedom of speech and expression.

Right to know, to information is other facet of freedom of speech. The right to know, to receive and to impart information has been recognized within the right to freedom of speech and expression. A citizen has a fundamental right to use the best means of imparting and receiving information and as such to have an access to telecasting for the purpose. In State of Uttar Pradesh v. Raj Narain it was observed that, “The people of this country have a right to know every public act by their public functionaries. The right to know is derived from the concept of freedom of speech.” Through advertisements, not only is the right to know is assured but it is directly proportional to the advertisers freedom of speech and expression. Advertisements maintain competition in the market and help in educating the public.

In Reliance Petrochemicals Ltd v. Indian Express it has been observed by the bench deciding the case that “We must remember that people at large have a right to know in order to be able to take part in a participatory development in the industrial life and democracy. Right to know is a basic right which citizens of a free country aspire in the broader horizon of the right to live n this age on our land under Art. 21 of the Constitution.”

Since, advertising is a form of communication for marketing and is used to encourage or persuade audience. It is nonetheless dissemination of information regarding the product advertised and the public at large is benefitted by the information made available through the advertisement. In a democratic economy free flow of commercial information is indispensable. There cannot be honest and economical marketing by the public at large without being educated by the information disseminated through advertisements.

It is necessary to maintain and preserve freedom of speech and expression in a democracy, so also it is necessary to place some restrictions on this freedom for the maintenance of social order, because no freedom can be absolute or completely unrestricted. Accordingly, under Article 19(2) of the Constitution of India, the State may make a law imposing “reasonable restrictions” on the exercise of the right to freedom of speech and expression “in the interest of” the public on the following grounds:

a) Security of State

b) Friendly relations with foreign states

c) Public Order

d) Decency or morality

e) Contempt of Court

f) Defamation

g) Incitement to an offence Sovereignty and integrity of India.


However, advertisers often view these rules and regulations as violating their right to freedom of speech. Some ads, in particular, were considered derogatory and banned by the government, such as:

  •  A deodorant advertisement that showed a man accompanied by scantily clad women was banned by the government after several complaints were received from viewers about the advertisement being offensive to family viewers.
  • A soft drink advertisement that showed a child bringing the drink for the Indian cricket players was banned after complaints from child labor activists.
  • Advertisements of two underwear ads were banned due to vulgarity and indecency. Objectionable content in ad is usually a reason for taking it off channels.


As stated previously, no right can be absolute and without restrictions or else they might not act in the best interest of the public. Advertisement has been considered as an act of communication or expressing one’s views but the said right may be exploited by the advertisers if not guarded. Restrictions on advertisements might be imposed when the advertiser indulges in the following acts, for it is necessary for the government/the appropriate authorities to intervene if such advertisements are detrimental to the interests of the public at large:

 1. Deception– exists when an advertisement is introduced into the perceptual process of the audience in such a way that the output of that perceptual process differs from the reality of the situation. It includes a misrepresentation, omission or a practice that is likely to mislead. These may include the following:

  • Violates Consumers’ Right to Information: Use of untrue paid testimonials to convince buyers, quoting misleading prices, disparaging a rival product in a misleading manner are some examples of deception. Advertisers of anti- aging creams, complexion improving creams, weight loss programs, anti-dandruff shampoos, and manufacturers of vitamins or dietary supplements are usually guilty of making exaggerated product claims. Some of the examples of advertisements in this category are:

“A fairness cream is advertised with the claim that its user will get a fair complexion within a month” is deceptive in nature  as it deceives/misleads the public into believing such facts which might not take place.

  • Violates Consumers’ Right to Safety: When an advertisement for cooking oil says that using the said oil frees the user from heart problems, and then such an advertisement is misrepresenting the facts. Companies advertise products highlighting health cures and drugs of questionable efficacy and health gadgets of unknown values.
  • Violates Consumers’ Right to Choice: When material facts which are likely to influence buying decisions are not disclosed the advertisement becomes deceptive. In several advertisements it is stated that ‘conditions apply’ but these conditions are not stated. Not disclosing material facts amounts to deception. For example, the recent print ad for Videocon mentions a 1-ton split-AC available for Rs. 15,990/, a very attractive offer. But there is a small asterisk which mentions three things in small font, such as “Conditions apply”, “Prices valid in Delhi and NCR under exchange only”.

2. Bait advertising :It means taking advantage of consumer psychology and depriving consumers of a choice. For example, a consumer is lured into a retail outlet by an advertisement for a low cost item and then is sold a higher priced version or to be defective. Once the consumer enters the store, he or she is pressured to purchase another more expensive item. On visiting such stores, one finds a handful of outdated products on the discount announced and other better products as ‘fresh stock’.

3. Advertising of harmful products: Advertising is not restricted to products that are good for people. According to law in India advertisements for cigarettes, liquor, paan masala, products that are harmful to the public continue to find a place despite the ban imposed by the government in private channels, cable, and through the use of surrogates.

4. Puffery/Fraudulation: Very often we hear that advertisement exaggerates about the product qualities. Now a days ‘puffery’ i.e. “metaphor of idea” forms to be main element in advertising. On the one hand critics accuse it, while on the other defenders i.e. advertisers and advertising professionals opined it as a helping agent to differentiate their brands from the competitors. Puffery is considered to be an ‘opinion’ and not a ‘factual information’. Advertisers claim that the consumers are intelligent enough to distinguish between truth and exaggeration. Moreover they are not blindly going to believe everything as such presented in an advertisement.

5. For a better understanding of the above and relationship between commercial advertisement and freedom of speech and expression, the remarks made by the Hon’ble judge in Colgate Palmolive (India) Limited v Anchor Health & Beauty Care Private Limited (Case (2008) 7 MLJ 1119) might be of utmost relevance: it was heldthat false claims by traders about the superiority of their products, either directly or by comparing them against the products of their rivals, were not permissible. Recognizing the right of producers to puff their own products even with untrue claims, but without denigrating or slandering each other’s products, would be to ‘de-recognize’ the rights of the consumers guaranteed under the Consumer Protection Act 1986.”

To permit two rival traders to indulge in puffery, without denigrating each other’s products, would benefit both of them, but would leave the consumer helpless. If on the other hand, the falsity of the claim of a trader about the quality and utility value of his product is exposed by his rival, the consumer stands to benefit by the knowledge derived out of such exposure. After all, in a free market economy, the products will find their place, as water would find its level, provided the consumers are well informed. Consumer education, in a country with limited resources and a low literacy level, is possible only by allowing a free play for the trade rivals in the advertising arena, so that each exposes the other and the consumer thereby derives a fringe benefit.

Notably, the court found to be permissible advertisements which “tend to enlighten the consumer, either by exposing the falsity or misleading nature of the claim made by the trade rival or by presenting a comparison of the merits (or demerits) of their respective products”. Interpreting such advertisements to be in the ‘public good’, the court cited two instances as an exception to this – namely, if an advertisement is motivated by malice, and if it is false. The court held that this sort of advertising would benefit society because competitors are naturally better equipped to expose a rival’s untrue claims.

The court also held that the benefit to society from such an exposure would “outweigh the loss of business for the person affected”. This observation was based on the court’s assumption that comparative advertising, even if it did not amount to a disparagement of other goods, could result in consumers being misled.

The Court in HamdardDawakhana (WAKF) LalKuan, Delhi v Union of Indiaprimarily relied on the judgment of the United States Supreme Court in Valentine v Chrestensen for the proposition that “purely commercial advertising” is not protected by Article 19(1) (a) of the Constitution. As also in Bigelow v Virginia,421 U.S. 804 the United States Supreme Court reversed the conviction of a Virginia newspaper editor who had been found guilty of publishing an advertisement which offered assistance to women seeking abortion. Abortion was illegal in Virginia in 1971 when the advertisement was published. The women Pavilion, a New York group, urged women who wanted an abortion to come to New York. Blackmun, J. analysing earlier judgments of the Court observed that speech does not lose the protection of the First Amendment merely because it appears in the form of a commercial advertisement.

Laws Imposing Restrictions On Advertising:

1. Consumer Protection Act– This statute provides for the establishment of a Central Consumer Protection Council with the object of promotion and protection of the rights of the consumer, including protection against unfair trade practices. The Act also empowers the District Forum to take measures to discontinue the unfair trade practices. The Forum also has the power to issue corrective advertisements to neutralize the effect of a misleading advertisement. India does have other legislations that regulate unfair trade practices, in addition to the Consumer Protection Act.

2. The Monopolies and Restrictive Trade Practice act, 1969: It had been the most effective Act in the eighties and nineties to regulate undesirable advertising. In the year 1984, the government brought, through an amendment, “unfair trade practices” under the purview of the MRTP Commission and the Office of the Director General (Investigation and Registration). However, this Act is being replaced by the Competition Act, 2002 but the cases pending under the MRTP Commission are still being heard. Moreover, a Competition Commission has been set up under the Competition Act to deal with monopolies and restrictive trade practices. The complaints pertaining to unfair trade practices are still being handled by the MRTP Commission or the consumer courts. The MRTP Act has been very effective in hauling a number of advertisers to stop advertisements which are prejudicial to consumer interest through its ‘cease and desist orders’.

3. Information Technology Act, 2000 (IT Act): The IT Act makes the publication and transmission in electronic form of material which is lascivious or appeals to the prurient interest or it its effect is such as to tend to deprave and corrupt persons who arelikely, having regard to all relevant circumstances, to read, see or hear the matter contained or embodied in it, punishable with imprisonment and fine. The IT Act applies to any offence committed by any person outside India, if it involves a computer, computer system or computer network located in India. The offences under the IT Act are punishable with imprisonment and/or fine.

4. Indian Penal Code, 1860 (IPC): The IPC makes it a punishable offence to advertise any obscene publication or its distribution, sale, hire or circulation. It is also an offence under IPC to publish advertisements relating to any lottery which is not a state lottery or which is not authorized by the State Government. The IPC prohibits the sale, distribution, public exhibition or circulation of any obscene book, pamphlet, paper, drawing, painting, representation, figure or any other obscene object.

5. The Cigarettes and other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003 (CTPA): The CTPA prohibits advertisement of cigarettes and other tobacco products which, directly or indirectly, suggest or promote the use or consumption of cigarettes or any other tobacco products, by any person who is either engaged in the production, supply or distribution of such products or by a person having control over a medium who causes such advertisements to be advertised through that medium or by a person who takes part in such advertisement.

6. The Drugs and Magic Remedies (Objectionable Advertisements) Act : This statute prohibits advertisements of drugs for certain purposes and of treatment of certain diseases and disorders. It also prohibits misleading advertisements relating to drugs and advertisements of magical remedies for the treatment of certain diseases and disorders. Under this Act, “advertisement” includes any notice, circular, label, wrapper or other document and any announcement made orally or by means of producing or transmitting light, sound or smoke.

7. The Emblems and Names (Prevention of Improper Use) Act, 1950: This statute prohibits the use, for professional or commercial purposes, of select emblems and names of national or international significance. An advertiser who makes commercial use of such emblems and names would be liable under this statute

 8. SEBI (Mutual Funds Regulation), 1996: SEBI Guidelines for Advertisements by Mutual Funds – the Guidelines list out detailed requirements for advertisements by Mutual Funds. The guidelines apply to all forms of advertisements, communications, released in any form and through any media including websites. It defines an “advertisement” as any material published or designed to be published on which a mutual fund has no control over the audience and which is broadly distributed.

9. The Prenatal Diagnostic Techniques (Regulation and Prevention of Misuse) Act, 1994: This statute prohibits advertisements relating to predetermination of sex.

10.The Transplantation of Human Organs Act, 1994: This statute makes it a punishable offence to issue advertisements inviting persons to supply, for payment a human organ.




HamdardDawakhana (WAKF) LalKuan, Delhi v. Union of India, [SCR 1960 (2) 671] – The Court in this case dealt with advertising of prohibited drugs and commodities. The Court was principally dealing with the right to advertise prohibited drugs, to prevent self-medication and self-treatment. It is in no doubt true that some of the observations referred to above go beyond the needs of the case and tend to affect the right to publish all commercial advertisements. A Constitution Bench of this Court held that an advertisement is no doubt a form of speech but its true character is reflected by the object for the promotion of which it is employed. It assumes the attributes and elements of the activity under Art. 19(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 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.

The Court came to the conclusion that the sale of prohibited drugs was not in the interest of the general public and as such “could not be a speech” within the meaning of freedom of speech and expression under Article 19(1) (a) of the Constitution. The Court further held in the said case that an advertisement is no doubt a form of speech but its true character is reflected by the object for the promotion of which it is employed.

HamdardDawakhana’s case was considered by this Court in Indian Express Newspapers (Bombay) Private Ltd. &Ors. etc. etc. vs. Union of India, 1985(2) SCR 287 – herein, the Parliament of India enacted a statute that was aimed at controlling advertisements of drugs in some specified cases [Drugs and Magic Remedies (ObjectionableAdvertisements) Act (1954)]. Purpose of the act was to prevent ‘objectionable’ and‘unethical’ advertisements in order to discourage self-medication and self treatment. Theconstitutionality of this Act was challenged by the plaintiff on the grounds that itrestricted his right to freedom of speech and expression unfairly, in contravention of Arts19(1)(a) and Art 19(2) and also that it violated his rights to carry on business because therestrictions were allegedly in contravention of Art 19(1)(g) .

The Judgment: The Bench that decided the case acknowledge that advertisement was no doubt a form of speech but that “it’s true character is detected by the object for the promotion of which it is employed. The judgment acknowledged that advertisements acquire some, but notall, elements of speech or expression intended for protection by Art 19(1)(a) by bringing to the notice of the public”.

The activity or product or service that it seeks to publicize [the right to disseminate and receive information that Art 19(1)(a) recognizes in certain cases]. But the judgment goes onto to state that the content and intent of the advertisement is extremely important when deciding whether it deserves protection under Arts 19(1)(a) and 19(2).When it (advertisement)takes the form of a commercial advertisement which has an element of trade and 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 the commendation of the efficacy , value and importance of certain goods.

This statement forms the crux of the judgment and encapsulates the legal position occupied by commercial speech when it comes to protection under Art 19(1)(a).The judgment iterated that advertisements prohibited by the impugned Act relate to trade and commerce and not the propagation of ideas and that advertising of prohibited drugs and commodities of which the sale is not in the interest of the general public cannot be speech within the meaning of Art 19(1)(a).

The observations in HamdardDawakhana’s case to the effect that advertising by itself would not come within Article 19(1) (a) of the Constitution, were explained by this Court in Indian Express Newspapers’s case in the following words: The main plank of that decision was that the type of advertisement dealt with there did not carry with it the protection of Article 19(1) (a). the court finally opined that all commercial advertisements cannot be denied the protection of Article 19(1) (a) of the Constitution merely because they are issued by businessmen.”

The combined reading of HamdardDawakhana’s case and the Indian Express Newspapers’s case leads us to the conclusion that “commercial speech” cannot be denied the protection of Article 19(1) (a) of the Constitution merely because the same are issued by businessmen. Advertising is considered to be the cornerstone of our economic system. Low prices for consumers are dependent upon mass production, mass production is dependent upon volume sales, and volume sales are dependent upon advertising. Apart from the lifeline of the free economy in a democratic country, advertising can be viewed as the life blood of free media, paying most of the costs and thus making the media widely available. Without advertising, the resources available for expenditure on the “news” would decline, which may lead to an erosion of quality and quantity. The cost of the “news” to the public would increase, thereby restricting its “democratic” availability.

In the case of Secretary, Ministry of Information and Broadcasting v. Cricket Association of Bengal reported in (1995) 5 SCC 161 Supreme Could held that commercial advertisement no doubt is a form of speech but its true character is reflected by the object for promotion of which it is employed. Only when an advertisement is concerned with the expression or prorogation of ideas that it can be said to be related to freedom of expression and speech. The object and purpose for which advertisement is published is the determining factor. When propagation of ideas and thoughts is inconsequential, but the real purpose and object is promotion of sales of goods and services and personal benefit without any social purpose, commercial advertisement cannot have the same decree of constitutional protection as in case of social or political speeches.

The Supreme Court further observed that commercial advertisements helps dissemination of information regarding the product and the public also benefits by the information which is available and honest and economic marketing is protected under Article 19(1)(a). It was observed that said freedom is both for the speaker as well as the recipient of the speech, but an advertisement for a life saving drug may be more important and leads greater public interest than an advertisement for pure trade consideration.

Mahesh Bhatt and anrv. Union Of India, 147 (2008) DLT 561was another landmark judgement on the said point – herein, the Writ Petitions challenged the legality and validity of some of the provisions of the Cigarette and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003 under which “advertisement” was defined to include any visible representation by way of notice, circular, label, wrapper or other document and also includes any announcement made orally or by any means of producing or transmitting light, sound, smoke or gas.

The court had observed advertisements means to make an announcement and inform public and disseminate information through media and other means, to draw the attention of the public/individual concerned to some information.It was held thatAdvertisements of tobacco products cannot per-se be regarded as immoral. Consumption Consumption of tobacco or smoking is unhealthy but is not immoral. The term ‘decency’ is more expansive in its scope. Commercial advertisements are entitled to limited protection under Article 19(1)(a) of the Constitution if they are in public interest. Commercial advertisements of tobacco products are not expressions protected under Article 19(1)(a) of the Constitution. Commercial advertisements will include indirect or surrogate advertisements which promote and encourage use of tobacco products. However, commercial advertisements are different and distinct from news. The purpose and object behind news is to disseminate information, thoughts and ideas. Pre-dominant nature and character of the article, picture, etc, will determine whether it is a commercial advertisement or a news item/picture.

Curtailment Of The Advertisements

A Constitution Bench held in Sakal Papers (p) Ltd. and others. vs. Union of India, AIR 1962 SC 305 – considered the constitutional validity of the Newspaper (Price and Page) Act, 1956. The said Act empowered the Government to regulate the prices of newspaper in relation to their pages and sizes and to regulate allocation of space for advertisement matter. This Court held that the Act placed restraints on the freedom of press to circulate. This Court further held that the curtailment of the advertisements would bring down the circulation of the newspaper and as such would be hit by Article 19(1) (a) of the Constitution of India.

It was argued before this Court that the publication of advertisements was a trading activity. The diminution of advertisement revenue could not be regarded as an infringement of the right under Article 19(1) (a). It was further argued before this Court that devoting large volume of space to advertisements could not be the lawful exercise of the right of freedom to speech and expression or the right of dissemination of news and views. It was also contended that instead of raising the price of the newspaper the object could be achieved by reducing the advertisements. The Supreme Court ruled that it is not open to the State to curtail the freedom of the press for promoting the general welfare of a section or a group of people unless its action can be justified by a law strictly falling under clause 2 of Article 19. Freedom of the Press cannot be curtailed on such omnibus grounds as in the interest of the general public as in the case of the freedom to carry on trade, business or profession. The restriction must be reasonable. In other words, it must not be excessive or disproportionate. The procedure and the manner of imposition of the restriction also must be just, fair and reasonable.

In Bennett Coleman & Co. &Ors. v. Union of India, 1973 2 SCR 757it was held that the law which lays excessive and prohibitive burden which would restrict the circulation of a newspaper will not be saved by Article 19 (2). If the area of advertisements is restricted, price of paper goes up. If the price goes up circulation will go down.The High Court did not accept the contention that a newspaper has a constitutional right to obtain advertisements from the government. It, however, held that the government cannot exercise this power or privilege to favour one set of newspapers or to show its displeasure against another section of the press. It should not use the power over such large funds in its hands to muzzle the press, or as a weapon to punish newspapers which criticise its policies and actions. It has to use the funds in a reasonable manner consistently with the object of the advertisement viz. to educate and inform the public about the activities of the government.

Advertisement And Freedom Of Speech

It was later held in the landmark case of Tata Press Limited v.Mahanagar Telephone-Nigam, 1995 AIR 2438 that it cannot be said 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 advertisement and what activity falling under Art. 19(1) it seeks to further. The advertisements in the instant case relate to commerce or trade and not to propagating of ideas; and advertising of prohibited drugs or commodities of which the sale is not in the interest of the general public cannot be speech within the meaning of freedom of speech and would not fall within Art. 19(1) (a). The main purpose and true intent and aim, object and scope of the Act is to prevent self- medication or self-treatment and for that purpose advertisements commending certain drugs and medicines have been prohibited.

TheSupreme Court of India gave out one of the most progressive pieces of judicial interpretation: the right to commercial freedom of speech and expression. Of far reaching consequence to media and business, wholly synonymous with the spirit of liberalisation “this great constitutional advance was made on simple and relatively boring facts”.

In a nutshell it means that, for the first time in India, advertising is protected as a form of free speech.

The judgement results from a dispute between Tata Press and MTNL whose monopoly on printing telephone directories under the Indian Telegraph Act, was successfully challenged by Tata’s Yellow Pages.

It was contended that it is the public’s right to receive information by way of advertising implicit in the concept of “free speech and expression” guaranteed under Article 19(1)A of the Constitution. In taking a holistic approach to the issue, Justice Kuldip Singh described the free flow of commercial information as “the cornerstone of our economic system. Low prices for consumers are dependent on mass production (which) is dependent on volume sales (which) is dependent on advertising.”

To safeguard free enterprise, the heart of liberalisation, advertising is vital to both manufacturer and consumer. In fact, Justice Singh goes further in supporting the right of the consumer, ‘the recipient of commercial speech’, with a striking example: “An advertisement giving information regarding a life saving drug may be of much more importance to the general public than to the advertiser who may be having purely a trade consideration Article 19(1) (a) not only guarantees freedom of speech and expression, it also protects the rights of


Individuals to listen, read and receive the said speech.”

The judgement is also interpreted “as a resounding victory for the media,” because it dwells at length on the role of “advertising as the life blood of a free media…the newspaper industry obtains 60 to 80 per cent of it’s revenue from advertising.For a democratic press the advertising ‘subsidy’ is crucial. Without advertising,’ the resources available for expenditure on ‘news’ would decline, which may lead to the erosion of quality and quantity. The cost of ‘news’ to the public would increase, thereby restricting it’s ‘democratic’ availability.” “Cutting off advertising is like cutting off the lifeblood of a newspaper and state authorities which have indulged in this form of coercion in the past have been pulled up by the court.” The absolute right of a newspaper to receive advertising “as commercial free speech” is an issue which bears further legislative review in the light of the new law.

Freedom of speech goes to the heart of the natural right of an organised freedom-loving society to “impart and acquire information about that common interest”. If any limitation is placed which results in the society being deprived of such right then no doubt it would fall within the guaranteed freedom under Art. 19(1) (a). But if all it does is that it deprives a trader from commending his wares it would not fall within that term.


Misleading & Surrogate Advertising:

The Consumer Protection Act, the advertising Code, the Censor Boardand the working group on Misleading Advertisements set up by the Consumer Affairs, Food and Public Distribution Department, Government of India, have all dealt with the issue of misleading advertisements. The preferred solution is to ask the advertiser to issue a corrective advertisement to neutralize the effect of misleading advertisements. In India, due to severe restrictions on advertising certain products like alcohol, tobacco products, medicines and baby food, a whole genre of misleading / surrogate advertising has emerged. In such advertising, a brand is endorsed using a product different from the actual product being promoted.

Like in the matter of United Breweries Limited v. Mumbai GrahakPanchayat, the matter of debate included the advertisements of Bagpiper Soda. This advertisement was held to be a surrogate advertisement for Bagpiper whiskey.

The National Consumer Disputes Redressal Commission, New Delhi, held that the word “soda” was used in an inconspicuous manner, while the word “Bagpiper” was boldly stated, with the baseline “India’s largest, World’s No. 3”. Advertisements canbe direct and also indirect whereby surrogate or product placement, use or trade name display, techniques are adopted but with the object and purpose of drawing attention to the object of publicity. In the present day context, direct and indirect advertisements are employed to attract attention and interest, make the product known and justify it’s consumption and use. Supply of free medicines to doctors by pharmaceutical companies has been held to be publicity and advertisement.


Advertising Regulation in India

The Government of India has not set up a regulatory body in India to regulate advertisements. Depending on the nature of the grievances, the power to regulate advertisements may be exercised by a vast variety of authorities, including the courts, Central and State Governments, tribunalsor the police authorities. In addition to these authorities, is the Press Council of India Act, 1978 which is also empowered to regulate press advertisements. The Council is guided by its “Norms of Journalistic Conduct”. in the regulation of advertisements. The Press Council has the power to hold an inquiry into a complaint against a newspaper and if it finds that the newspaper has violated the standards prescribed by the council, it may warn, admonish or censure the newspaper, the editor or journalist as the case may be.

India however, does have a self regulatory body dealing with both online and other forms of advertising. The Advertising Standards Council of India (ASCI) monitors certain standards and fairness in the domain of advertising. It was established in India in 1985. It is a self regulatory voluntary organization whose role and function of the ASCI is to deal with complaints received from consumers and industry against advertisements which are considered as false, misleading, indecent, illegal, leading to unsafe practices or unfair to competition and in contravention to the advertising codelaid down by the ASCI. While safeguarding consumer interests, ASCI also monitors and guides the commercial communications of practitioners in advertising. The aim of advertisement is to promote sales of products or service by affecting a purchasing decision. Although the benefits of advertising are numerous it is one aspect of marketing that is subjected to a severe criticisms. And now there is a new medium for advertisers to explore, the Internet!

While there may be no specific legislations governing online advertising in India, ASCI does recognize online advertising. ASCI’s Code of advertising and existing statutes provides necessary guidance and arsenal to combat errant advertisers. Finally, guidance may be sought by simplify reading the Terms and Condition’s of the website, the advertiser wants to advertise on. This exercise will avoid any negative repercussions following release of an online advertisement.


Advertising as a “commercial speech” has two facets. Advertising which is no more than a commercial transaction, is nonetheless dissemination of information regarding the product-advertised. Public at large is benefitted by the information made available through the advertisement. In a democratic economy free flow of commercial information is indispensable. There cannot be honest and economical marketing by the public at large without being educated by the information disseminated through advertisements.

The economic system in a democracy would be handicapped without there being freedom of “commercial speech”. In relation to the publication and circulation of newspapers, this Court in Indian Express newspaper’s case, Sakal paper’s case and Bennett Coleman’s case has authoritatively held that any restraint or curtailment of advertisements would affect the fundamental right under Article 19(1) (a) on the aspects of propagation, publication and circulation. Examined from another angle, the public at large has a right to receive the “Commercial speech”. Article (19) (1) (a) not only guarantees freedom of speech and expression, it also protects the rights of an individual to listen, read and receive the said speech. So far as the economic needs of a citizen are concerned, their fulfilment has to be guided by the information disseminated through the advertisements.

The protection of Article 19(1)(a) is available to the speaker as well as to the recipient of the speech. The recipient of “commercial speech” may be having much deeper interest in the advertisement than the businessman who is behind the publication. An advertisement giving information regarding a life saving drug may be of much more importance to general public than to the advertiser who may be having purely a trade consideration.We, therefore, hold that “commercial speech” is a part of the freedom of speech and expression guaranteed under Article 19(1) (a) of the constitution.


SEBI & ART FUNDS – An Analysis

Another area where SEBI is trying to protect the interest of the investors is art-fund. It was come to the knowledge of SEBI that most of the entities are operating the art-fund without having been registered with the SEBI. As per the SEBI regulations no entity can be allowed to start a schemes or funds without obtaining a certificate of registration in accordance with the SEBI CIS (Regulations) 1999. SEBI has cautioned that an art fund is deemed to be a collective investment scheme (CIS) as defined under section 11AA(2) of the SEBI Act, 1992.  And that presently no entity offering such investments has been registered.[1]

            Therefore, the launching/floating of the ‘art funds’ or schemes without obtaining a certificate of registration from the Board in terms of the provisions of the Regulations amounts to violation of the provisions of section 12 read with sections 11 and 11AA of the SEBI Act and the Regulations. For such violations, appropriate actions, civil and criminal, under the SEBI Act may be taken by SEBI against such funds/companies.[2]

            In Osian’s-Connoisseurs of Art Private Ltd Vs SEBI, in this case the Osian’s is a leading archive and auction house.  On June 1st 2006, it announced the launch of a private fund called Osian’s Art Fund, worth over Rs 100 crore. The objective of the fund is to generate significant medium and long-term income and capital growth from a cohesive, historically driven portfolio of investment and management in contemporary fine arts from the Indian sub-continent. As a result the Osian Art Fund which was launched in 2006 has received a show-cause notice by SEBI in November 2007 asking as to why the Fund should not be regulated. This is the first fund winch was floating at that time. But as per the CIS Regulations, Osian Art Fund, which pooled investors’ money to invest in art, was supposed to be regulated by SEBI. But the Osian Art Fund was not registered with SEBI. As a result the SEBI has issued an advisory against unregistered art funds in 2008, and it allowed to hear the contentions of the party in 2008.[3]


Along with that SEBI in its press release on February 13, 2008 in its official website stated that “Art Funds” are “Collective Investment Schemes” as defined under the SEBI Act. In that press release it further stated that “launching or floating of “Art Funds” or Schemes without obtaining registration from SEBI amounts to violation of the SEBI Act and Regulations. Appropriate actions, civil and criminal, under the SEBI Act may be taken by SEBI against such funds/companies.”  In response to that press release SEBI has given another opportunity to Osian on September 5, 2008, to appear before it. But in November 9, 2009 the art fund was redeemed as per the redemption guidelines as shared with the unit holders in June 2009. The company further stated that it may refund the money back to its unit’s holders before December 2009.[4]

[1]  (February 10, 2010).

[2]  (February 10, 2010)


[4], (February 14, 2010).