Case: Madhubhai Amathalal Gandhi Vs. The Union Of India

years and irregularly conducted business on the floor of the Stock Exchange during the crucial year while including a member who might have been a newcomer or who might have been earlier a nominal member but began to do business regularly only during the said year.Emphasis was also laid upon the alleged elastic and indefinite content of the word "regular" and it was suggested that the said word could not possibly afford a precise standard. These are all weighty considerations and we must confess that there is force in them. But there is the other side of the picture. It is well settled that a classification must have reasonable relation to the object sought to be achieved. The standard of reasonableness is inextricably conditioned by the extent and nature of the evil and the urgency for eradicating the same. The object of the notification is two-fold. The main object is to carry out the purpose of the Act, namely, to prevent undesirable transactions in securities by regulating the business in them. The subsidiary object is to assuage to hardship that recognition of only one stock exchange would cause to the members of the other association. To achieve this twin object the classification is made between active members and inactive members. While on the one hand the Government found it necessary to exclude the nominal members who would add their deadweight to the recognised association and bring down its efficiency and affect its disciplined conduct of business, on the other hand it gave opportunity to persons who were actively interested in the business to become regular members of the Stock Exchange, Bombay. There is every justification for excluding members who had not been taking active interest in the business, for as we have already pointed out the efficient carrying out of the business of the Stock Exchange depends upon the moral stature, high calibre, and genuine and active interest evinced by the members. The active members justified themselves to the preferential treatment by their sustained interest in the business whereas the members who were not active showed their continued indifference to that line of business. But the crux of the question is, what is the justification for fixing twelve months immediately preceding August 6, 1957, as the standard for active membership? The Under-Secretary to the Government of India, Ministry of Finance, filed an affidavit describing the circumstances whereunder this classification was made. It discloses that the notification was issued after taking into consideration the representations made on behalf of both the Stock Exchanges and also the facts pertaining to the course of business conducted by the Indian Stock. Ex-change Limited. It also gives the vicissitudes through which the said Stock Exchange passes from the date of its formation and the circumstances under which the membership of that exchange was divided into full members and associate members. It points out that the Indian Stock Exchange Limited became moribund in a few years and to revive its activities it allowed the members of the East India Chamber of Commerce, by relaxing its entrance fee and security deposit requirements in 1950-51 and created a new class of Associate Members, which facilitated the enrolment of hundreds of Associated Members on payment of a nominal entrance fee of Rs. 100.The Government on a consideration of the necessary data and presumably having regard to the record of the activities of the various members fixed the activities in the crucial years 1956-57 as the standard of activity for membership.16. There is a presumption in favour of the State that there is a reasonable basis for the classification. Except the mere allegations in the affidavit which are not admitted, the petitioner has not placed before us any materials to ascertain that any other members, who were regularly doing business on the floor of the Indian Stock Exchange Limited before August 6, 1956, temporarily suspended their business for one reason or other over which they had no control. No statement from the accounts has been produced to enable us to evaluate the activities of the members before the crucial date so as to enable us to form a view that really active members were excluded by the fixing of this period. Nor are we in a position to verify whether any of the members excluded were regularly doing business during a part of the year in continuation of their business in earlier period. We cannot also say that the words "carrying on business regularly" are so vague that the parties did not understand their connotation, for it is admitted that some of the regular members applied for membership of the Stock Exchange, Bombay and most of them were admitted. There is also the fact that though three years have elapsed since the date of the notification no other member of the Indian Stock Exchange Limited thought fit to question the notification on the ground that the period fixed was unreasonable and that really active members were excluded from membership of the Stock Exchange, Bombay. So far as the petitioner is concerned, he was admittedly not an active member, though he now pretends that he was doing business through other members. There is also no material placed before us to support the said assertion. If the classification, between active members and others who were not, is justifiable - we hold it is - the Government has to draw a line somewhere and to fix a period of activity reasonable in its opinion as a standard to satisfy the test of "active member". The burden which lies upon the petitioner who impeaches the validity of the classification to show that it violates the guarantee of equal protection has not been discharged. On the material placed before us we cannot say that the period fixed by the Government as the standard for ascertaining the active membership is arbitrary or unreasonable. We must make it clear that this finding must be confined only to the validity of the impugned notification dated August 31, 1956.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]There is a fallacy underlying this contention. Under Art. 13(2) of the Constitution, the State shall not make any law which takes away or abridges the rights conferred by Part III thereof; and "law" is defined under Art. 13(3)(a) to include a notification. Therefore, the validity of a notification issued by the State, it being law, is as much vulnerable to attack as that of the Act itself on the ground that it infringes any of the fundamental rights. If an Act is a self-contained on and the notification issued thereunder only restates the provisions of the Act, the validity of the notification cannot obviously be questioned as the validity of its contents were accepted. But if the Act confers a power on the State in general terms and the notification issued thereunder infringes one or other of the fundamental rights, the validity of the Act cannot equally obviously prevent an attack on the notification. In the former case the notification only reflects the provisions of a valid Act and in the latter it is the notification and not the Act that infringes the fundamental rights. Take an example of an Act imposing restrictions on the freedom of speech. The Act authorizes the State to impose conditions on the said freedom in the interests of security of State. The Act is constitutionally valid. But, if a notification issued under that Act imposes unreasonable restrictions infringing the said rights, it is liable to be challenged on the ground of unconstitutionality. So too, in the instant case S. 4 of the Act empowers the Central Government to issue a notification recognising a stock exchange subject to certain conditions expressed in general terms. The general terms can comprehend both reasonable and unreasonable restrictions. If the notification impose unreasonable restrictions - if the contention of the learned counsel for the petitioner be accepted, the restriction imposed would certainly be unreasonable - it is liable to be set aside. We cannot, therefore, accept this19(1)(g) of the Constitution states that every citizen shall have the right to carry on any business; but the State is empowered under cl. (6) of the said Article to make any law, imposing in the interest of the general public reasonable restrictions on the exercise of the said right. Briefly stated, the argument is that the combined effect of the two notifications is that the petitioner is driven out of his business of stock exchange inasmuch as, it is said, they confer a monopoly on the Stock Exchange. Bombay, and the rules of the said Stock Exchange exclude any outsider from becoming its member without obtaining a nomination and that too only in the place of an existing members. To put it differently, the argument proceeds that under the rules of the Stock Exchange, Bombay, membership is not thrown open to the public. This leads us to the consideration of the relevant provisions of the Stock Exchange Rules, Bye-laws and Regulations, 1957. Under R. 3 the membership of the Exchange shall consist of such number of members as the Exchange in general meeting may from time to time determine. It is common case that the membership of the Exchange is not limited. Under the heading "Election of New Members", the Rules prescribe the conditions of eligibility for election as a member of the Exchange. These Rules adopt the provisions of R. 8 of the Securities Contracts (Regulation) Rules, 1957. The Rules do not contain any limitation on the eligibility of a person to be elected as a member such as that the person should be nominated in the manner provided by the Rules or that he should come only in the vacancy caused by another member ceasing to be one in one of the ways mentioned thereunder. The words "no person" in R. 17 are comprehensive enough to take in any outsider seeking for election as a member. Rule 22 provides for an application for admission in the form prescribed in Appendix A to the Rules. This rule also does not impose any such limitation. The admission application form in Appendix A is also general in terms and enables any person of India to apply for membership provided he agrees to abide by the conditions imposed therein. In the form also there is no such limitation.A careful scrutiny of the Rules does not bear out the contention; nor do they enable us to cut down the wide amplitude of Rr. 17 toThis argument appears to be plausible and even incontrovertible, if Rr. 20 and 21 are taken out of their setting and construed independently of other rules.But in the setting in which they appear they can bear only one meaning, namely, that R. 20 provides for nomination only in the case of a candidate for admission who requires a nomination in the manner provided by the rule and R. 21 provides, for all the candidates for admission, that they should be recommended by two members who have personal knowledge of the candidates. To put it in other words, under the Rules candidates for admission fall under three groups, viz., (1) candidates falling under R. 11, (a) and (b); (2) candidates applying for membership vesting in the Exchange; and (3) other candidates. All the three categories of candidates must be recommended by two members. But the candidates belonging to the first category shall in addition be nominated in the manner provided by the Rules. We, therefore, hold that the Stock Exchange Rules do not operate as a bar against the petitioner becoming a member of the Stock Exchange subject to the rules governing such application. The petitioner has the right to do business in share : in spite of the notifications he can still do business in spot delivery contracts. He can apply to become a member of the Stock Exchange subject to the conditions laid down by the Rules. The Act, the validity of which he has not chosen to question, enables the State to give or refuse recognition to any Stock Exchange and it has chosen to give recognition to the Stock Exchange, Bombay subject to the conditions prescribed. The restrictions, in our view, are not unreasonable, having regard to the importance of the business of a stock exchange in the countrys national economy and having regard to the magnitude of the mischief sought to be remedied in the interest of the general public. At another place we have already dealt with the necessity for stringenet rules governing this type of business. For the reasons mentioned we reject the firstsecond contention also has no merits. The criticism is that condition 2(1)(a) annexed to the notification cannot be supported on the basis of any of the provisions of S. 4 of the Act.e argument proceeds that condition 2(i)(a) enables only the active members of the Indian Stock Exchange Limited to apply for membership of the Stock Exchange, Bombay and that such a condition can be imposed only if it amounts to a qualification of membership within the meaning of sub-s. (2) of S. 4, as the other conditions in that sub-section are obviously inapplicable. It is further pointed out that sub-s. (2) refers back to sub-s. (1)(a) and under that clause the condition imposed must only be that prescribed by the Rules made under the Act and that the condition imposed by the notification is not a condition so prescribed.Then is force in this argument; but the acceptance of this contention does not advance the case of the petitioner, for if the condition is not covered by Cl. (a) of S. 4(1), it falls under Cl. (b) thereof. Under that clause the Central Government may grant recognition to a stock exchange if the said stock exchange is willing to comply with "any other conditions". It is said that the other conditions in S. 4(1) (b) must only be conditions relating to the area served by the stock exchange, its standing and the nature of the securities dealt with by it. This is not what Cl. (b) of S. 4(1) says. The conditions under Cl. (b) of S. 4(1) no doubt shall be such as may be imposed by the Government, having regard to the aforesaid three considerations, but they need not necessarily be confined only to the said considerations. The Government may impose any conditions, no doubt germane to the recognition of a stock exchange, after consultation with its governing board, and having regard to the said considerations. It cannot be said that condition 2(i)(a) imposed on the Stock Exchange is not a condition germane to its recognition. The record discloses that the Central Government in recognising the Stock Exchange sought to avoid the consequential hardship on the members of the rival stock exchange and therefore imposed the said condition on the Stock Exchange, Bombay, as a condition for its recognition. The condition is, germane to the recognition of Stock Exchange and is, therefore, a condition within the meaning of "any other conditions" in Cl. (b) of sub-s. (1) of S. 4 of theare all weighty considerations and we must confess that there is force in them. But there is the other side of the picture. It is well settled that a classification must have reasonable relation to the object sought to be achieved. The standard of reasonableness is inextricably conditioned by the extent and nature of the evil and the urgency for eradicating the same. The object of the notification is two-fold. The main object is to carry out the purpose of the Act, namely, to prevent undesirable transactions in securities by regulating the business in them. The subsidiary object is to assuage to hardship that recognition of only one stock exchange would cause to the members of the other association. To achieve this twin object the classification is made between active members and inactive members. While on the one hand the Government found it necessary to exclude the nominal members who would add their deadweight to the recognised association and bring down its efficiency and affect its disciplined conduct of business, on the other hand it gave opportunity to persons who were actively interested in the business to become regular members of the Stock Exchange, Bombay. There is every justification for excluding members who had not been taking active interest in the business, for as we have already pointed out the efficient carrying out of the business of the Stock Exchange depends upon the moral stature, high calibre, and genuine and active interest evinced by the members. The active members justified themselves to the preferential treatment by their sustained interest in the business whereas the members who were not active showed their continued indifference to that line ofUnder-Secretary to the Government of India, Ministry of Finance, filed an affidavit describing the circumstances whereunder this classification was made. It discloses that the notification was issued after taking into consideration the representations made on behalf of both the Stock Exchanges and also the facts pertaining to the course of business conducted by the Indian Stock. Ex-change Limited. It also gives the vicissitudes through which the said Stock Exchange passes from the date of its formation and the circumstances under which the membership of that exchange was divided into full members and associate members. It points out that the Indian Stock Exchange Limited became moribund in a few years and to revive its activities it allowed the members of the East India Chamber of Commerce, by relaxing its entrance fee and security deposit requirements in 1950-51 and created a new class of Associate Members, which facilitated the enrolment of hundreds of Associated Members on payment of a nominal entrance fee of Rs. 100.The Government on a consideration of the necessary data and presumably having regard to the record of the activities of the various members fixed the activities in the crucial years 1956-57 as the standard of activity for membership.16. There is a presumption in favour of the State that there is a reasonable basis for the classification. Except the mere allegations in the affidavit which are not admitted, the petitioner has not placed before us any materials to ascertain that any other members, who were regularly doing business on the floor of the Indian Stock Exchange Limited before August 6, 1956, temporarily suspended their business for one reason or other over which they had no control. No statement from the accounts has been produced to enable us to evaluate the activities of the members before the crucial date so as to enable us to form a view that really active members were excluded by the fixing of this period. Nor are we in a position to verify whether any of the members excluded were regularly doing business during a part of the year in continuation of their business in earlier period. We cannot also say that the words "carrying on business regularly" are so vague that the parties did not understand their connotation, for it is admitted that some of the regular members applied for membership of the Stock Exchange, Bombay and most of them were admitted. There is also the fact that though three years have elapsed since the date of the notification no other member of the Indian Stock Exchange Limited thought fit to question the notification on the ground that the period fixed was unreasonable and that really active members were excluded from membership of the Stock Exchange, Bombay. So far as the petitioner is concerned, he was admittedly not an active member, though he now pretends that he was doing business through other members. There is also no material placed before us to support the said assertion. If the classification, between active members and others who were not, is justifiable - we hold it is - the Government has to draw a line somewhere and to fix a period of activity reasonable in its opinion as a standard to satisfy the test of "active member". The burden which lies upon the petitioner who impeaches the validity of the classification to show that it violates the guarantee of equal protection has not been discharged. On the material placed before us we cannot say that the period fixed by the Government as the standard for ascertaining the active membership is arbitrary or unreasonable. We must make it clear that this finding must be confined only to the validity of the impugned notification dated August 31, 1956.