Bombay High Court
Mrs. Sejal Rikeeh Dalal And Others vs Stock Exchange, Bombay, And Another on 12 April, 1990
Equivalent citations: [1990]69COMPCAS709(BOM)
Author: Sujata Manohar
Bench: Sujata V. Manohar
JUDGMENT Mrs. Sujata Manohar, J.
1. Pradip Harkishondas Dalal was a member of the Stock exchange, Bombay. He died in an air crash at Ahmedabad on October 19, 1988. The first petitioner, Sejal Dalal, is the daughter-in-law of Pradip. The third petitioner is the widow of Pradip. Petitioner No. 2 is son of Pradip and petitioner No. 4 is daughter of Pradip. The first petitioner, Sejal is the wife of second petitioner. On December 6, 1988, petitioners Nos. 2 to 4 as the heirs and close relatives of Pradip nominated the first petitioner, Sejal, for being made a member of stock exchange, Bombay. Accordingly, on December 15, 1988, the first petitioner applied for membership of the stock exchange, Bombay, supported by this nomination. Her application was seconded by two members of the stock exchange as per requisite rules. On march 2, 1989, the stock exchange addressed a letter to petitioner No. 1 enquiring whether late Pradip Harkisondas Dalal had made any payment in respect of the outstanding liabilities of Harkisondas Laxmidas. The letter also sought details regarding the constitution of the firm of Harkshah which was a client of Harkisondas laxmidas and whether dues were required to be paid by Harakshah to Harkisondas Laxmidas.
2. It seems that Harkisondas Laxmidas was a firm of long standing. The operations of this firm, from the beginning of 1970 had become highly speculative. The speculative dealings were being conducted in the name of another firm, Harakshah and Co., which is said to have been promoted by the firm of Harkisondas Laxmidas. Originally in the firm of Harkisondas Laxmidas, there were two partners, Harkisondas Laxmidas (father of Pradip) and his brother, Manharkant Laxmidas. After the death of Harkisondas Laxmidas in 1957 or thereabouts, the son of Harkisondas, Mukul Harkisondas, who is the brother of Pradip, became a partner along with Manharkant Laxmidas. In the firm of harakshah and Co., the wives of Mukul Harkisondas, late Pradip, Manharkant Laxmidas were partners, each having an 18% share ; the remaining 10% share belonged to Shantilal Kothari. The firm of Harakshah and Co., was established in the year 1972 or thereabouts.
3. It is the case of respondents that although Pradip Harkisondas was not a partner on the firm of Harkisondas Laxmidas, he held himself out as a partner of that firm. Manharkant Laxmidas died and on his death, the firm of Harkisondas Laxmidas was dissolved in October, 1982. On the date of closure, it was found that the firm was required to pay the claims of about 90 members of the stock exchange amounting to Rs. 32,34,900. It seems that there are a number of arbitration references against the firm of Harkisondas Laxmidas by various customers and constituents of the firm. The total claim in these arbitration references aggregated over RS. 1 crore. In one of the references, the heirs of late Pradip were also made parties on the footing that Pradip had held himself out as a partner of Harkisondas Laxmidas. It is the case of the first respondent that the speculative business which was the bulk of the business of Harkisondas Laxmidas and Co., owes a substantial amount to the firm of Harkisondas Laxmidas.
4. The stock exchange also received a letter dated March 2, 1989, from Mukul Harkisondas stating that he had filed a suit against Pradip Harkisondas being Suit No. 3384 of 1985 claiming a sum of Rs. 14 lakhs from him in respect of certain business dealings between the firm of Harkisondas Laxmidas and Pradip Harkisondas to her at the instance of the heirs and legal representatives of Pradip Harkisondas.
5. The stock exchange forwarded a copy of this letter dated March 2, 1989, to the first petitioner for comments. In her replies, the first petitioner pointed out that Pradip was not a partner of the firm of Harkisondas Laxmidas. She proclaimed ignorance about the dealings of the firm of Harakshah and Co. Thereafter, a meeting of the governing body of the stock exchange was held on May 19, 1989, In the notice convening the meeting which is dated May 12, 1989, one of the items on the agenda was to consider the membership application of the first petitioner. Annexure 5 of the agenda note for this meeting sets out that the stock exchange has on their second note for this meeting sets out that the stock exchange has on their record claims of members in the capacity of creditors admitted against Harkisondas Laxmidas involving an amount of Rs. 32,34,900 as per the enclosed list as on October 30, 1982.
6. At the meeting of the governing board of the stock exchange, Bombay, held on May 19, 1989, the application of the first petitioner for transfer of membership of late Pradip Harkisondas in favour of the first petitioner in pursuance of the nomination made by petitioners Nos. 2, 3 and 4 in her favour, was considered. As required by rule 28 of the Rules of the Stock exchange, a ballot was taken in which two members of the governing board voted in favour of admitting the first petitioner as a member while 15 members voted against admitting the first petitioner as a member. As a result, it was decided by a majority of 15 : 2 not to admit the first petitioner as a member of the stock exchange. By a letter dated May 24, 1989, the first respondent informed the first petitioner about the rejection of her application by the governing board of the stock exchange. The present petition is filed challenging this decision of the governing board of the stock exchange not to grant membership to the first petitioner.
7. It is contended by the stock exchange, Bombay, who is the first respondent, that it is not an "authority" within the meaning of article 226 of the Constitution of India. Hence, a writ does not lie against it. The Supreme Court, however, has construed article 226 very widely to include within the ambit of article 226 not merely statutory authorities and instrumentalities of the State, but to cover any other person or body performing public duties.
8. In the case of Shri Anadi Mukta Sadguru Shreee Muktajee Vandasjiswami Suvarna Jayanti Mahotsav Smarak Trust v. V.R. Rudani, , the Supreme Court said that the term "authority" used in article 226 in the context must receive a liberal meaning unlike the term in article 12. It said (headnote) : "The words 'any person or authority' used in article 226 are, therefore, not to be confined only to statutory authorities and instrumentalities of the State. They may cover any other person or body performing public duties. The form of the body concerned is not very much relevant. What is relevant is the nature of the duty imposed on the person or authority to the effected party, no matter by what means the duty is imposed. If a positive obligation exists, mandamus cannot be denied." The first respondent stock exchange is a recognised stock exchange under Securities Contracts (Regulation) Act, 1956. The preamble to the Act to prevent undesirable transactions in securities by regulating the business of dealing therein, by prohibiting and by providing for certain other matters connected therewith. Under section 3 of the Act, any stock exchange which is desirous of being recognised for the purposes of this Act make an application in the prescribed manner to the Central Government. Under section 4, the Central Government is empowered to grant recognition to a stock exchange. Among the factors to be considered in granting recognition, the Government has to consider whether the rules and bye-laws of the stock exchange applying for registration are in conformity with such conditions as may be prescribed with a view to ensure fair dealing and to protect investors. It has also to consider whether it would be in the interest of the trade as also in the public interest to grant recognition to the stock exchange. The first respondent has been recognised by the Central Government under this Act and a notification to that effect being Notification No. SRO 27828, dated August 31, 1957, has been published in the Gazette of India, Extraordinary, Part II, section 3, dated August 31, 1957. The first respondent is, therefore, a statutory body and the Central Government is vested with supervisory powers under the said Act over the functioning of the first respondent. The stock exchange is, inter alia, established to assist, regulate and control dealings in securities and to ensure fair dealings. These are objects of public interest. Therefore, looking to the wide interpretation given in article 226 of the Constitution, the first respondent can be considered, for the purpose of this petition, as amenable to the jurisdiction of the High Court under article 226 of the constitution.
9. It is submitted by the petitioners that, by denying membership to the 1st petitioner, the stock exchange has violated the right of the 1st petitioner under article 300A of the Constitution of India and that she has been deprived of property without the authority of law. The petitioners also contend that denial of membership to the 1st petitioner is in violation of the fundamental right of the petitioners to carry on their trade or occupation. On both these counts, the action of the stock exchange is bad in law and must be set aside. In this connection, it is necessary to examine the rules, bye-laws, and regulations framed by the stock exchange in 1957 which are statutory bye-laws and approved by the Government of India under the Securities Contracts (Regulation) ACt. 1956. Under rule 4 of these Rules, the main objects of the stock exchange are, "to support and protect in the public interest the character and status of brokers and dealers and to further the interest of both of brokers and dealers and of he public interest in securities, to assit, regulate and control in the public interest dealing in securities, to ensure fair dealings, to maintain high standards of commercial honour and integrity, to promote and inculcate honourable practices and just and equitable principles of trade and business, to discourage and to suppress malpractices, to settle disputes and to decide all questions of usage, custom or courtesy in the conduct of trade and business." These aims and objects are important because the decision taken by the 1st respondent will have to be examined in the light of theses aims and objects.
10. In order to decide whether there is any property in the membership of the stock exchange, it is necessary to refer to the rules relating to the membership of the stock exchange. Under rule 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. The membership, therefore, is not a transferable right. It is only a personal permission granted by the stock exchange to an individual member. This is brought out further by rule 6 which states that he the right of membership is inalienable. The membership rules give to a member a right of nomination which shall be personal and non-transferable. This right under rule 11 can be exercised by a member of not less than 7 years standing who desires to resign. He may in turn nominate a member as set out in rule 11. In the case of a deceased member, under rule 9, on his death, his right of nomination ceases and vests in the exchange. There is, therefore, no property in membership.
11. Under rule 11(b), however, "legal representatives of a deceased member or his heirs or the persons mentioned in Appendix C to these rules, may with the sanction of the governing board, nominate any person eligible under these rules for admission to membership of the exchange as a candidate for admission in the place of the deceased member." The nomination does not, however, automatically secure membership of the stock exchange. Rule 28 provides "the election of all new members (whether they shall have been nominated or not) shall be by ballot and a candidate shall be deemed duly elected if approved by a majority of not less than two-thirds of the votes cast at a meeting of the governing board at which not less than one-half of the total number of the members of the governing board are present in addition to the Government nominee (if any) attending the meeting." Rule 28, therefore, makes it clear that even persons who have been nominated as per the prescribed rules will have to be elected by the governing board by the requisite majority before they can become members.
12. Rule 18 lays down qualifications for memberships which all nominees must also necessarily possess. However, when a person seeking membership is succeeding to the established business of (inter alia) a deceased member who is the father, uncle , brother or a close relative, he need not say, under rule 18, he need no possess the qualifications prescribed under sub-clauses (1) and (2) of rule 18.
13. Under rule 15 of the rules of the stock exchange, the governing board shall not approve a nomination unless the nominating member, or in the case of a deceased member, his legal representatives or heirs or persons mentioned in Appendix C or any other person on his behalf, shall have paid and satisfied in full, inter alia, all debts, liabilities, obligations and claims arising out of any contracts made by such member subject to the rules, bye-laws and regulations of the exchange as shall have been admitted by the governing board. In the present case, the first petitioner is being nominated by the heirs and legal representatives of a deceased member. She has, apparately, not been considered as not fulfilling the requirements of rule 15, because her name was put up for ballot under rule 28 before the governing board. Her contention, therefore, that the deceased member himself did not have any liabilities arising out of any contract made by the deceased member appears to have been accepted. The first petitioner is 23 years of age and does not have any experience of the business of stock exchange. But, sub- clauses (1) and (2) of rule 18 do not apply to her. Her name, however, when it was put up for membership before the governing board, failed to secure the required majority in the ballot. Hence her application for membership has been rejected.
14. This is right to deny membership and the exercise of this right cannot be considered to be in violation of article 19(1)(g) of the Constitution. A professional or trade body is entitled to regulate its membership. It is entitled to ensure that an unsuitable person is not admitted to membership. The test of suitability is not always explicit. Often, it may be difficult to articulate. The question of judging suitability may be left by members of mature and experienced judgment of respected members of the profession such as those constituting its governing board or managing committee. The members may consider these persons as the best and most qualified to decide on the suitability of new candidate for membership. If a governing board, in exercise of its discretion, decides that the person is unsuitable its decision cannot be labelled as arbitrary or unreasonable simply because it is in the exercise of its discretion. It would also be incorrect to call such discretion unguided. Such discretion is required to be exercised bearing in mind the aims and objects of the organisation. Of course, if the decision not bona fide, or is based on ill-formed prejudice, it can be challenged as a mala fide exercise of discretion, the exercise of discretion is not per se bad in law. A decision of the governing board arrived at bona fide not to grant membership to a candidate in not violative of article 19(1)(g) The right to regulate admission to professional restriction on the right to carry on a profession or trade. Such transaction standards, for ensuring probity of conduct and in public interest.
15. In the present case, the aims and objects of the stock exchange are, inte alia, to support and to protect in public interest the character and status of brokers and dealers ; in furtherance of its objects, it has to ensure high standard of commercial honour and integrity. One of its aims is to promote and inculcate honourable practices and just and equitable principles of trade and business. The stock exchange is also required to discourage and supress malpractices. In the present case, the governing board had, before it, the past conduct of a firm which had, as its partners, close relatives of the deceased member as also of the first petitioner who was seeking nomination in his place. The firm of Harkisondas Laxmidas has large undischarged liabilities which are admitted by the stock exchange. The brother and uncle of the deceased were partners of this firm. The firs respondents have stated in their affidavit that the deceased also held himself out as a partner of this firm and that there are claims which are referred to arbitration in which the heirs and legal representatives of the deceased member have also been joined as respondents because of this fact. The stock exchange also had before it a letter from Mukul Harkisondas stating that he had filed a suit to recover from the firm of Harkisondas Laxmidas. The stock exchange has also pointed out that Harakshah was a firm which was floated by close relatives of Pradip Harkisondas. These included the wife of Pradip Harkisondas. It was through this firm that substantial speculative business of the firm of Harkisondas Laxmidas was conducted. In these circumstances, if the governing board, by a substantial majority decides against granting membership to the daughter-in-law of the deceased member, they cannot be said to have exercised their discretion mala fide. The governing board is required to enjoin fair dealings and high standards of commercial honour. The fact that the son of the deceased or his wife did not apply for membership but nominated a 23 year old daughter-in-law itself somewhat significant. In these circumstances, the denial of membership to the first petitioner is valid exercise of a right which the governing board has of granting or not granting membership to a candidate. Rule 28 does not violate article 19. Under rule 28, all new members whether they are nominated or not, have to be elected by ballot. Each candidate has to secure a majority of not less than 2/3rds of the votes cast. The first petitioner failed to secure even a simple majority. Only 2 votes were cast in her favour and 15 were against her. When the election is by ballot, there is no question of giving any reason for rejection.
16. Looking to the circumstances of the present case, the rejection does not appear to mala fide or based on grounds which are not germane to the objects of the stock exchange.
17. In these circumstances, therefore, no intervention is called for under 226 of the Constitution.
18. The petition is, therefore, dismissed with costs.