- (1.) The petitioners have challenged the constitutional validity of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012, Referred to in the judgment as the SECC Regulations. These regulations have been framed by the Securities and Exchange Board of India, "SEBI" in exercise of statutory powers conferred by two legislative enactments: the Securities Contracts (Regulation) Act, 1956, "SCRA" and the Securities and Exchange Board of India Act, 1992, "SEBI Act".
(2.) The first petitioner before the Court is a society registered under the Societies Registration Act, 1860 and is an association representing the interests of stock exchange brokers whose members are stated to have been engaged in trading shares and securities on the Regional Stock Exchange at Kanpur. The second petitioner is its President, while the third petitioner is a trading Member and Director of the governing body of the Uttar Pradesh Stock Exchange Limited, a body corporate, which is impleaded as the second respondent to these proceedings.
(3.) The challenge has been confined at the hearing to the validity of Regulations 6, 7, 14, 16, 17, 19, 20, 21(1)(b), 23, 24 and 25. The validity of the regulations has been challenged on four grounds: (i)the regulations "completely muzzle" the fundamental right guaranteed by Article 19 (1) (c) of the Constitution, on a citizen to form an association by choosing its members and directors; (ii)the regulations "totally supplant" the provisions of Section 4(b), 5, 7A, 11 and 31 of the SCRA and Rules 4, 5 & 6 (read with Form A) of the Securities Contracts Rules, "the Rules"; (iii)the regulations "sail far beyond the bounds set down by the SCRA and the rules and since they constitute sub delegated legislation, must yield to the statute, Propositions (ii) and (iii) are essentially interrelated and can conveniently be dealt with together.; and (iv)the regulations amount to a prohibition on the fundamental right to carry on business and trade under Article 19 (1) (g) of the Constitution and make a deep inroad into the rights of the petitioners to carry on their trade and business. The provisions under challenge The SECC Regulations are referable to the provisions of Sections 4, 8A and 31 of the SCRA and Sections 11 and 31 of the SEBI Act. Recognition Regulation 3 provides that no person shall conduct, organize or assist in organizing any stock exchange or clearing corporation unless he has obtained recognition from SEBI in accordance with the SCRA, rules and regulations. A stock exchange, which was recognized under the SCRA, at the commencement of the regulations is deemed to have been recognized under the regulations. An existing clearing house of a recognized stock exchange was allowed to continue for a period of three months from the commencement of the regulations or, if an application was made under Regulation 4 for recognition, till the disposal of the application. Regulation 4 provides for an application for recognition as a stock exchange. Regulation 6(1) stipulates that an application for recognition has to be accompanied by copies of the memorandum of association, articles of association, bye laws and other documents provided in Sections 3 and 4 of the SCRA, Rule 5 of the Rules and the Regulations. The application is also to be accompanied by agreements entered into by the applicant with recognized stock exchanges and depositories. Clauses (1) and (2) of Regulation 7 govern, inter alia, applications seeking recognition as a stock exchange or clearing corporation. Clauses (1), (2) and (3) of Regulation 7 provides as follows: "7. (1) The application under regulation 4 shall be governed by the provisions of the Act, rules and these regulations. (2) An applicant seeking recognition as a stock exchange or clearing corporation shall comply with the following conditions, namely:-- (a) the applicant is a company limited by shares; (b) the applicant is demutualised; (c) the applicant, its directors and its shareholders who hold or intend to hold shares, are fit and proper persons as described in regulation 20; (d) the applicant satisfies requirements relating to ownership and governance structure specified in these regulations; (e) the applicant satisfies net worth requirements specified in these regulations; (f) the applicant satisfies requisite capability including its financial capacity, functional expertise and infrastructure. Explanation.--For the purposes of this sub-regulation, the term "demutualised" means that the ownership and management of the applicant is segregated from the trading rights or clearing rights, as the case may be, in terms of these regulations. (3) An applicant seeking recognition as a stock exchange shall, in addition to conditions as specified in sub-regulations (1) and (2), comply with the following conditions, namely:-- (a) the applicant has the necessary infrastructure for orderly execution of trades; (b) the applicant has an online screen-based trading system; (c) the applicant has an online surveillance capability which monitors positions, prices and volumes in real time so as to ensure market integrity; (d) the applicant has adequate infrastructure to list securities for trading on its platform, wherever applicable; (e) the applicant has necessary capability to have a nationwide network of trading members and has adequate facility to admit and regulate its members; (f) the applicant has made necessary arrangements to establish connectivity with its trading members and clearing corporation; (g) the applicant has adequate Investor Protection Fund and Investor Services Fund; (h) the applicant has adequate investor grievances redressal mechanism and arbitration mechanism to resolve disputes arising out of trades and its settlement; (i) the applicant has the facility to disseminate information about trades, quantities and quotes in real time to at least two information vending networks which are accessible to investors in the country; (j) the applicant has adequate systems' capacity supported by a business continuity plan including a disaster recovery site; (k) the applicant has in its employment, sufficient number of persons having adequate professional and other relevant experience; (l) the business feasibility plan has been appraised by a reputed agency having expertise in securities market; and (m) any other conditions as may be specified by the Board.";