1999(1) ALL MR 107
IN THE HIGH COURT OF JUDICATURE AT BOMBAY

M.B. SHAH AND R.J. KOCHAR, JJ.

Vinay Bubna Vs. The Stock Exchange Of Mumbai & Ors.

Writ Petition No.1177 of 1997

23rd December, 1997

Petitioner Counsel: Mr.PRAKASH GANWANI, with M/s.PARAB i/b PODDAR & CO.
Respondent Counsel: Mr.P.N. MODY with Mr.NIHAR MODI i/b WADIA GANDHY & CO., Mr.KUMAR DESAI with Mr.P.R. DIWAN i/b MANEKSHA & SETHNA

(A) Constitution of India, Art.14 and 19 (1)(g) - Mumbai Stock Exchange Rules Bye-laws and Regulations (1957), Rr. 5,6,7,9,10,16 and 43,53 membership of share broker of Mumbai Stock Exchange - It is not the personal property but merely personal privilege - Rules providing for allocation on member becoming defaulter - Are not violative of Art.14, 19(1)(g) of constitution.

Interpretation of Statutes - Transfer of Property Act (1882), S.12.

A Membership of share broker of the Mumbai stock Exchange does not amount to his personal property but is merely personal privilege conferred on share broker by the stock Exchange. [Para 13]

The Rules are binding between the Member and the Stock Exchange. To a large extent, it is a contract between the Member and the Stock Exchange. Once the Member has agreed to abide by the Rules, it would be clear that the membership of the Stock Exchange constitutes a permission from the Stock Exchange to exercise the rights and privileges attached thereto. On his death or default, he ceases to be a Member and the said rights vest in and absolutely belong to the Stock Exchange, free from all rights, claims or interests of such Member or any person claiming through such Member. [Para 13]

It is a well-settled principle of interpretation that legality or validity of a particular provision of law cannot be decided in isolation, but it should be construed by looking into the entire body of the Statute or the concerned Rules. If the impugned Rules 16 and 43 are considered in the light of the aforesaid other Rules, There is no manner of doubt that the under current of the whole body of the Rules is fairness, justness and reasonableness. It could not be contended that Rules 16 and 43 are in any way illegal or unconstitutional. [Para 14,15]

Provides for the power to be exercised by the Governing Board, its right of nomination in respect of membership vesting in the Exchange, the consideration received therefor and it specifies how the consideration shall be applied in the order of priority, prescribed therein. The first priority is for the dues of Exchange and Clearing House to be paid by the former member whose right of membership would vest in the Exchange. It is but natural that the Exchange would recover as the first charge its dues from the consideration of sale of membership card and there is nothing unusual, illegal or wrong in doing so. The second priority prescribed in the said Rule is to clear the liabilities of the share broker, relating to his contracts and, therefore, the Board would apply the balance of consideration for the debts, liabilities, obligations and claims arising out of any contracts made by such former member. This Rule further provides that if the amount available would be insufficient to pay and satisfy all such debts, liabilities, obligations and claims in full, they shall be paid and satisfied proportionately or on the basis of pro rata. In the Rule there is no illegality or arbitrariness. This rule is totally based on equitable consideration and it provides for the second priority and in case of insufficiency of funds the proportionate satisfaction of the claims. The third clause in Rule 16 has also taken care to provide for a situation where funds are surplus. It is significant to note that the distribution of surplus funds is not left to the Governing Board alone, but the decision in that respect is required to be taken by the General Meeting. [Para 9]

Rule 43 provides for lien on Security. The security provided by a member-share broker is subjected to a first and paramount lien for any sum due to the Exchange or to the Clearing House. The very purpose of getting security from a member/share broker is to ensure fulfillment of all his engagements, obligations and liabilities arising out of or incidental to any bargains, dealings, transactions and contracts made by the member. If no such lien on the security is provided for, the transaction would very often create insecurity in the minds of the people who enter into contracts with such member of the Stock Exchange. This provision creates confidence in the members of the public. There is nothing wrong in this provision, whereby the first lien on the security of the member is retained by the Stock Exchange. The underlying principle of these rules is nothing but fairness and justness in the dealings and transactions entered into by the Share Broker with the members of the public. In the absence of these provisions, it is likely that public would suffer at the hands of defaulting members and consequently lose trust and confidence in Stock Exchange through which all the transactions take place. It is equally significant to note that by these provisions even the share brokers get an opportunity to clear their debts, liabilities and obligations and keep their image clear and continue to maintain public confidence. We feel that these Rules are also in the interest of the share brokers. Therefore, there is no reason to hold that these Rules are arbitrary or illegal. [Para 10]

There is nothing to hold that the Rules are arbitrary, unreasonable or violative of Articles 14 and 19(l)(g) of the constitution of India . The Stock Exchange has framed its Rules and Regulations to govern and administer its own business and in the manner in which its interest will be served best. The preamble to the Rules have pledged faith in the public interest. The Statement of Objects of the Rules aims at high standard in the commercial dealings which are done through the Stock Exchange. Thus the impugned Rules 16 and 43 are also in consonance with the said objects of the Stock Exchange. [Para 12]

(B) Constitution of India, Art.226 - Mumbai Stock Exchange Rules Bye-laws and Regulations (1957), Rules 16, 43 - Writ jurisdiction - Court cannot direct stock exchange to alter, amend or declare Rules.

High court cannot direct the Stock Exchange to amend, alter or delete Rules 16 and 43. It is the exclusive function of the Stock Exchange to frame its own Rules and Byelaws for its members and their rights or privileges in accordance with its requirements. It is the well settled position in law that Courts have no jurisdiction to direct any authority to frame Rules or amend or alter rules or delete any of such Rules though Courts can declare any Rule as unconstitutional being violative of the Constitution of India. [Para 11]

Cases Cited:
AIR 1932 PC 186 [Para 2,16]
AIR 1991 Bom 30 [Para 17]
1995(2) Mh LJ 770 [Para 17]
AIR 1970 SC 245 [Para 18]
AIR 1994 SC 192 [Para 18]


JUDGMENT

R.J. KOCHAR, J.:- In this Petition, the Petitioner has challenged the denial by the Mumbai Stock Exchange, Respondent No.1 herein, to amend/alter/delete its Rules 16 and 43 as demanded by the Petitioner on the ground that said Rules are against the law of Insolvency, unconstitutional, capricious and null and void.

2. The important question of law which has arisen in this petition is that whether a membership of share broker of the Mumbai Stock Exchange amounts to his personal property or it is merely a personal privilege conferred on share broker by the Stock Exchange. The petitioner is seriously contending that a membership card of a share broker is his personal property. In our view, the very same point had arisen before the Privy Council in the year 1932. More or less the same contentions were raised before the Privy Council. It was held in the Judgment in Official Assignee of Bombay v. K.R.P. Shroff & Ors., reported at AIR 1932 Privy Council 186, as follows :-

"So soon as membership ceases, whether on resignation, death, as a result of misconduct, or for nonpayment of his subscription, all the interest of the member in the property of the Association is under the rules at an end."

According to the Privy Council a member who has lost his membership for being a defaulter loses of interest both in the property of the Association and in his card. The head note of the said Judgment is a complete ratio which is reproduced hereinbelow :

"The result in the case of a member of the Bombay Native Share and Stock Brokers' Association who has lost his membership for being a defaulter clearly enough is that he loses all interest both in the property of the Association and in his card. In such a case no interest is reserved in the defaulter's card except to members of the Association who have suffered by his lapse, or to the Association itself. This is the result of Rr. 18, 56, 57 and 62. The defaulting member himself has no interest in the result of the sale provided for under these rules nor can be require a sale to be made. The rules are there for the benefit of his "exchange creditors" and are doubtless enforceable at their instance.

In the case of a defaulting member who is expelled from the Association no interest in his card remains in himself and so none can pass to his assignee whether his expulsion does or does not take place prior to the commencement of his insolvency. S.12, T.P.Act, has no application to the card of a member of the Association."

3. The facts which have given rise to this petition are briefly stated hereinbelow:

4. One Shri Yogesh Mehta, Respondent No.3, (hereinafter referred to as a Share Broker) was a Member of the Mumbai Stock Exchange and he carried on business in the firm, name "Yogesh Mehta" until he was declared as a defaulter by the Stock Exchange. The petitioner had dealings of sale and purchase of shares with the said share broker. According to the petitioner, as on 10.5.1995, at the foot of the account, a sum of Rs.21,81,635.50 was due and payable by the said share broker, but he failed to make payment. The Petitioner, therefore, filed an Arbitration Petition against the said share broker before this Court. After hearing the parties, this Court confirmed its ad-interim order passed on 27.12.1996, pending appointment of a Court Receiver in respect of certain items, including office premises of the said share broker. The Petitioner, however, was not granted relief in respect of the membership card of the share broker and, therefore, he made a grievance in appeal filed against the said order passed by the Learned Single Judge and prayed before the Appeal Court that a Court Receiver should have been appointed in respect of membership card of the share broker also. The Appeal Court disposed of the Petitioner's appeal after recording the statement on behalf of the Stock Exchange that it shall not apply any amount received by it as consideration on nomination of the membership to any person falling in the same category for the purpose of priorities as the appellant under Rule 16 of the Stock Exchange Rules till the Award of the Arbitrator was received.

5. The Petitioner appears to have addressed a number of letters to press his demand for amendment/alteration of the Rules 16 and 43 to the Stock Exchange as well as to the various concerned parties, including the S.E.B.I. The petitioner, however, did not succeed in his efforts to get the Rules amended/altered and, therefore, the Petitioner has filed this petition under article 226 of the Constitution of India with a prayer that Rules 16 and 43 of the Mumbai Stock Exchange Rules, Byelaws and Regulations, 1957, should be declared as illegal, bad in law and ultra vires the Constitution of India. He has further prayed that the Mumbai Stock Exchange may be directed to amend/alter/delete Rules 16 and 43 of the Mumbai Stock Exchange Rules.

6. According to the petitioner, the membership card of a share broker is his private/personal property and if it is sold by the Mumbai Stock Exchange, the consideration received from the said sale of the membership card should be applied in accordance with the law of insolvency and not in accordance with Rules 16 and 43. He further contends that the discretion vested by the said Rules on the Stock Exchange to allocate the said sale consideration in the order of priorities stipulated in the said Rules was bad in law and arbitrary and, therefore, violative of articles 14 and 19(l)(g) of the Constitution of India. The Petitioner further submits that the impugned Rules deprived a citizen of his share of dues from the assets of a defaulter/insolvent member of the Stock Exchange.

7. The Stock Exchange has filed an affidavit-in-reply on 17.11.1997, denying all the allegations and contentions of the petitioner. It has asserted that the impugned Rules are fair, proper and legal and there is no arbitrariness and therefore the Stock Exchange prayed for the dismissal of the petition. The Stock Exchange has further cited certain precedents in support of its contentions. The petitioner has also referred to certain decisions of the Supreme Court of India.

8. It will be relevant to carefully go through the Rules under challenge in this Petition. They are reproduced below for ready reference.

ALLOCATION IN ORDER OF PRIORITY:

"16. When as provided in these Rules the Governing Board has exercised the right of nomination in respect of a membership vesting in the Exchange the consideration received therefor shall be applied to the following purposes and in the following order of priority namely :-

DUES OF EXCHANGE AND CLEARING HOUSE

(i) first - the payment of such subscriptions, debts, fines, fees, charges and other monies as shall have been determined by the Governing Board to be due to the Exchange or to the Clearing House by the former member whose right of membership vests in the Exchange;

LIABILITIES RELATING TO CONTRACT

(ii) Second - the payment of such debts, liabilities, obligations and claims arising out of any contracts made by such former member subject to the Rules, Byelaws and Regulations of the Exchange as shall have been admitted by the Governing Board; provided that if the amount available be insufficient to pay and satisfy all such debts, liabilities, obligations and claims in full they shall be paid and satisfied pro rata; and

SURPLUS

(iii) third - the payment of the surplus if any to the funds of the Exchange provided that the Exchange in general meeting may in its absolute discretion direct that such surplus be disposed of or applied in such other manner as may it deem fit.

"43. The security provided by a member shall be subject to a first and paramount lien for any sum due to the Exchange or to the Clearing House by him or by the partnership of which he may be a member and for the due fulfillment of his engagements, obligations and liabilities or of the partnership of which he may be a member arising out of or incidental to any bargains, dealings, transactions and contracts made subject to the Rules, Byelaws and Regulations of the Exchange or anything done in pursuance thereof."

9. A glance at Rule 16 would reveal that it provides for the power to be exercised by the Governing Board, its right of nomination in respect of membership vesting in the Exchange, the consideration received therefor and it specifies how the consideration shall be applied in the order of priority, prescribed therein. The first priority is for the dues of Exchange and Clearing House to be paid by the former member whose right of membership would vest in the Exchange. It is but natural that the Exchange would recover as the first charge its dues from the consideration of sale of membership card and we do not find anything unusual, illegal or wrong in doing so. The second priority prescribed in the said Rule is to clear the liabilities of the share broker, relating to his contracts and, therefore, the Board would apply the balance of consideration for the debts, liabilities, obligations and claims arising out of any contracts made by such former member. This Rule further provides and according to us very fairly, that if the amount available would be insufficient to pay and satisfy all such debts, liabilities, obligations and claims in full, they shall be paid and satisfied proportionately or on the basis of pro rata. We do not find in this Rule any illegality or arbitrariness. This rule is totally based on equitable consideration and it provides for the second priority and in case of insufficiency of funds the proportionate satisfaction of the claims. The third clause in Rule 16 has also taken care to provide for a situation where funds are surplus. It is significant to note that the distribution of surplus funds is not left to the Governing Board alone, but the decision in that respect is required to be taken by the General Meeting. The general meeting would decide in what manner the surplus should be disposed of or applied. Even in this part of Rule 16 we do not see anything illegal, wrong and arbitrary. Every care is taken in the entire Rule 16 that the consideration received from the sale of the membership card of a share broker is allocated on just and fair basis of priorities.

10. Rule 43 provides for lien on Security. The security provided by a member-share broker is subjected to a first and paramount lien for any sum due to the Exchange or to the Clearing House. The very purpose of getting security from a member/share broker is to ensure fulfillment of all his engagements, obligations and liabilities arising out of or incidental to any bargains, dealings, transactions and contracts made by the member. If no such lien on the security is provided for, the transaction would very often create insecurity in the minds of the people who enter into contracts with such member of the Stock Exchange. This provision creates confidence in the members of the public. We do not find anything wrong in this provision, whereby the first lien on the security of the member is retained by the Stock Exchange. The underlying principle of both these rules is nothing but fairness and justness in the dealings and transactions entered into by the Share Broker with the members of the public. In the absence of these provisions, it is likely that public would suffer at the hands of defaulting members and consequently lose trust and confidence in Stock Exchange through which all the transactions take place. It is equally significant to note that by these provisions even the share brokers get an opportunity to clear their debts, liabilities and obligations and keep their image clear and continue to maintain public confidence. We feel that these Rules are also in the interest of the share brokers. We, therefore, see no reason to hold that these Rules are arbitrary or illegal.

11. The petitioner is seeking a Writ of Mandamus or a direction in the nature of Writ of Mandamus, directing the Stock Exchange to amend/alter/delete the impugned Rules 16 and 43 under Article 226 of the Constitution of India. We have no power to issue such direction which are of legislative nature. We cannot direct the Stock Exchange to amend, alter or delete Rules 16 and 43. It is the exclusive function of the Stock Exchange to frame its own Rules and Byelaws for its members and their rights or privileges in accordance with its requirements. It is the well settled position in law that Courts have no jurisdiction to direct any authority to frame Rules or amend or alter rules or delete any of such Rules though Courts can declare any Rule as unconstitutional being violative of the Constitution of India.

12. In the present case, we do not see that impugned Rules are arbitrary, unreasonable or violative of Articles 14 and 19(l)(g) of the Constitution of India as contended by the petitioner. The Stock Exchange has framed its Rules and Regulations to govern and administer its own business and in the manner in which its interest will be served best. We have also perused the preamble to the Rules which have pledged faith in the public interest. The Statement of Objects of the Rules aims at high standard in the commercial dealings which are done through the Stock Exchange. According to us, the impugned Rules 16 and 43 are also in consonance with the said objects of the Stock Exchange.

13. Further, the learned Counsel for the Stock Exchange has rightly pointed out that other Rules framed by the Stock Exchange clearly provide that membership of the Stock Exchange is only a personal privilege and rights of membership are inalienable. The Rules also specifically provide that on the date of default of a Member, his right of nomination shall cease and vest in the Stock Exchange. The Rules also provide for the procedure to deal with Membership Card. The relevant Rules are reproduced as follows:-

"Membership a personal Privilege.

5. The membership shall constitute a personal permission from the Exchange to exercise the rights and privileges attached thereto subject to the Rules, Bye-laws and Regulations of the Exchange."

"Right to Membership Inalienable.

6. A member shall not assign, mortgage, pledge, hypothecate or charge his right of membership or any rights or privileges attached thereto and no such attempted assignment, mortgage, pledge, hypothecation or charge shall be effective as against the Exchange for any purpose nor shall any right or interest in any membership other than the personal right or interest of the member therein be recognized by the exchange. The Governing Board shall expel any member of the Exchange who acts or attempts to act in violation of the provisions of this Rule."

"Right of Nomination.

7. Subject to the provisions of these Rules a member shall have the right of nomination which shall be personal and nontransferable."

"Right of Nomination Not to be Exercised by Former Member.

8. The right of nomination shall not be exercised by a former member who has been expelled or who has ceased to be a member under any Rule, Bye-law or Regulations of the Exchange for the time being in force."

"Right of Nomination of Deceased or Defaulter Member.

9.On the death or default of a member his right of nomination shall cease and vest in the Exchange."

"Forfeited or Lapsed Right of Membership.

10. When a right of membership is forfeited to or vests in the Exchange under any Rule, Bye-law or Regulation of the Exchange for the time being in force it shall belong absolutely to the exchange free of all rights claims or interest of such member or any person claiming through such member and the Governing Board shall be entitled to deal with or dispose of such right of membership as it may think fit."

"Defaulter"

53. A member who is declared a defaulter shall at once cease to be a member of the Exchange and as such cease to enjoy any of the rights and privileges of membership but the rights of his creditor members against him shall remain unimpaired."

"Lapse of Membership Right.

54. A member's right of membership shall lapse to and vest in the Exchange immediately he is declared a defaulter."

(Emphasis supplied)

The aforesaid Rules are binding between the Member and the Stock Exchange. To a large extent, it is a contract between the Member and the Stock Exchange. Once the Member has agreed to abide by the Rules, it would be clear that the membership of the Stock Exchange constitutes a permission from the Stock Exchange to exercise the rights and privileges attached thereto. On his death or default, he ceases to be a Member and the said rights vest in and absolutely belong to the Stock Exchange, free from all rights, claims or interests of such Member or any person claiming through such Member.

14. Further, it is a well-settled principle of interpretation that legality or validity of a particular provision of law cannot be decided in isolation, but it should be construed by looking into the entire body of the Statute or the concerned Rules. If we consider the impugned Rules 16 and 43 in the light of the aforesaid other Rules, we have absolutely no manner of doubt that the under current of the whole body of the Rules is fairness, justness and reasonableness. We are unable to uphold the contentions of the Petitioner that Rules 16 and 43 are in any way illegal or unconstitutional.

15. According to us, the petitioner's challenge to the impugned Rules 16 and 43 is based on a very wrong presumption that the membership card of a share broker is his personal property. We say so because Rule 5 itself provides that the membership is only a personal permission given by the Exchange to the share broker to exercise the rights and privileges attached thereto, subject to the Rules, Byelaws and Regulations of the Exchange. It is, therefore, clear that it is only a permission given to the share broker to transact through the Exchange. It is not a personal property at all. It is, further significant to note that the aforesaid right to hold a permission card has been circumvented and restricted by Rules 6,7,9,53 and 54. After going through all the aforesaid Rules and particularly Rule 54, which declares that a member's right of membership shall finally vest in the Exchange immediately after he is declared a defaulter, it is crystal clear that the membership card of a share broker is not at all a personal property of the share broker. It is only a personal privilege conferred by the Stock Exchange on the share broker. According to us, as has been rightly urged on behalf of the Stock Exchange, all the Rules, including the impugned Rule 16, operate and stand to benefit the petitioner. In the absence of these Rules, in particular Rule 16, the petitioner would perhaps not get any benefit. The functioning of the Exchange is made smooth and orderly in accordance with the said Rules, so that proper settlements are facilitated and there is no chain of defaults affecting thousands of innocent investors and consequently the whole securities market.

16. We do not agree with the second contention of the petitioner that Rules 16 and 43 are contrary to the Law of Insolvency and, therefore, the said rules were illegal. Before the Privy Council, in the case of Official Assignee of Bombay v. K.R.P. Shroff & Ors., (AIR 1932 Privy Council, 186), similar contention was raised and the Court has negatived the contention that, if the effect of the Rules be that the proceeds of sale of the insolvent's card do not enure for the benefit of the general body of his creditors, the Rules are contrary to Law of Insolvency and, separately, to the provisions of Section 12 of the Transfer of Property Act, 1882. The Court held that, considering the nature and character of the Association and the Rules, a defaulting member who is expelled from the Association, no interest in his card remains in himself and none that can pass to his assignee whether his expulsion does or does not take place prior to the commencement of his insolvency. The Court further held that it is difficult to see how the assumption of membership involves at any stage the transfer of any property on any condition whatever. The Court observed : "It is impossible in their Lordships' judgment to describe the insolvent's status of membership of the Association in language which, however, tortured, could bring it within the terms of the section" (Section 12, Transfer of Property Act).

17. The Learned Counsel for the Stock Exchange rightly pointed out that the aforesaid judgment of the Privy Council is relied upon by this Court in the following three judgments and the same view is taken:

1) Mrs. Sejal Rikeen Dalal & Ors. v. The Stock Exchange, Bombay, & Ors., AIR 1991 Bombay, 30;

2) Hemendra V. Shah v. Stock Exchange, Bombay, & Ors., 1995(2) Mh LJ page 770; and

3) Order in Appeal No.17 of 1996 in Garnishee Notice No.1219 of 1994 in Appeal No.240 of 1993 (The Executive Director, Bombay v. Smt. Jaya I. Shah & anr.).

18. The Learned Counsel has cited the following two decisions of the Supreme Court to buttress his contention that the Rules of the Stock Exchange have no force of law and, therefore, the Law of Insolvency will prevail :-

(1) Co-operative Central Bank Ltd., & Ors. Vs. Additional Industrial Tribunal, Andhra Pradesh & Ors., AIR 1970 Supreme Court, 245; and

(2) Babaji Kondaji Garad & Ors. Vs. Nasik Merchants Co-operative Bank Ltd. & Ors., AIR 1994 Supreme Court, 192.

19. In the aforesaid decisions of the Supreme Court, the ratio was that when there is a conflict between the provisions of the Statute and the Rules, the Statute will prevail over the Rules. There is absolutely no doubt in this respect. In the present case, we do not have any such conflict between the Statute and the Rules framed under the said Statute. As held by the Privy Council in the aforesaid case, once a defaulting member ceases to be a Member of the Stock Exchange, no interest in his card remains in himself and none can pass to his assignee, and interest of a Member in the Stock Exchange is not a property, as defined under Section 12 of the Transfer of Property Act.

20. For the reasons stated above, we find absolutely no substance in the Petition which fails and the same is rejected with no order as to costs.

21. The Learned Counsel for the Petitioner seeks leave to appeal to the Supreme Court. That prayer is rejected as the question is concluded by the decision rendered by the Privy Council and thereafter by various other judgments.

Petition dismissed.