Case: Desh Bandhu Gupta and Company and Others Vs. Delhi Stock Exchange Assn. Limited

This appeal by certificate is directed against the judgment and order dated October 14, 1969 of the Delhi High Court dismissing the appellants Civil Writ Petition (520 of 1969) whereby the appellants sought to quash certain directions issued on June 28, 1969 and two resolutions passed on July 2 and 3, 1969, by the Delhi Stock Exchange, which adversely affectedDelhi Stock Exchange Association Ltd., New Delhi (the Respondent herein) is a company incorporated under the Indian Companies Act, 1913. It has received recognition from the Central Government under s. 4 of the Securities Contracts Regulation) Act (XLII) of 1956 for the purpose of the said A ct. One Desh Bandhu Gupta (Appellant No. 2) carried on business as a share-broker in the firm name and style of Desh Bandhu Gupta & Co. (Appellant No. 1) and as such was a member of the Respondent. By a notification No. S.O. 2561 dated June 27, 1969 issued under s. 16(1) ofthe Securities Contracts (Regulation) Act, 1956 the Central Government banned with immediate effect all forward trading in shares at all the Stock Exchanges in the country by declaring that "no person, in the territory to which the said Act extends, shall, save with the permission of the Central Government, enter into any contract for the sale or purchase of securities other than such spot delivery contract or contract for cash or hand delivery or special delivery in any securities as is permissible under the said Act and the rules, bye-laws and regulations of recongnised Stock Exchange", but as regards the forward contracts which remained out standing as on that date it was directed under the proviso that these could be closed or liquidated in the normal manner. On June 28, 1969 at an emergent meeting held at 10.30 a.m. the Board of Directors of the Respondent considered the abnormal situation arising from the ban imposed under the notification and decided to issue notice to all its members directing them to submit their lists of outstanding transactions in all the securities on the cleared list and to deposit along with it interim margins in cash or approved s hares calculated on the basis of differences between the rates of the last clearing and certain average specified rates fixed by it. Upon receipt of such notice dated June 28, 1969 from the Respondent the appellant No. 2 addressed a letter of even date to the Board of Directors contending that the demand for interim margins was by way of "carry over" of the forward transactions which in view of the ban contained in the notification was illegal and instead of submitting a list of his outstanding transactions on the basis of the rates which had been fixed by the Respondent he enclosed a statement of his outstanding transactions adjusted at the last official closing rates which were higher than the rates fixed by the Respondent, thus suggesting that he was not liable to pay any thing but was entitled to receive some amount at the foot of closing out or liquidating his outstanding transactions. By a rejoinder of the same date the Board of Directors of the Respondent reiterated that itsaction in fixing the interim clearing rates in the concerned securities and demanding interim margins was in order and that the adjustment of outstanding business claimed by appellant No. 2 was utterly wrong and a s such appellant No. 2 was called upon to comply with its notice by submitting an amended list in accordance with the directions together with the differences, if any, immediately. By a telegram dated June 30, 1969, which was confirmed by a letter of even date the appellant No. 2 was again called upon to submit his list alongwith the amount of differences, if any, by July 1, 1969 failing which he was informed that necessary action would be taken against him. As the appellant No. 2 stuck to his sta nd, the Respondent by its letter dated July 1, 1969 once again stressed that the action of the Board in calling for the list and margin money was in order and in accordance with the rules, byelaws, regulations, practices usages and previous resolutions of the Board and gave further opportunity to him to comply with the directions by July 2, 1969 upto 11.00 a.m. failing which further action was threatened. At the meeting of the Board of Directors of the Respondent held on July 2 , 1969 at 4.00 P.M. the Board noticed that all members, except appellant No. 2, had complied with its directions and on a consideration of the entire matter came to the conclusion that appellant No. 2 was intentionally evading to comply with its direction and to pay the required amount of margins and, therefore, resolved that appellant No. 2 trading in the name and style of Desh Bandhu Gupta &Co. be declared a defaulter for such failure and a notice in that behalf be pasted on t he Notice Board and appellant No. 2 was informed about it by a telegram and a letter. The resolution passed on July 2, 1969 declaring appellant No. 2 as a defaulter exposed him under the bye-laws to a rigorous inquiry by the Respondent into hi s financial condition and entailed other disabilities including termination of his membership of the Respondent under Bye-law 308 read with Article 43(iv) of the Articles of Association. Appellant No. 2 thereupon filed a writ petition (Civil Writ No. 520 of 1969) in Delhi High Court challenging the directions of the Respondent demanding payment of interim margins as also its resolution declaring him to be a defaulter. It appears that after the filing of the petition the Board of Directors of the Respondent at its meeting held on July 3, 1969 passed another resolution calling upon the appellant No. 2 under Article 29 of the Articles of Association to deposit additional security of Rs. 20, 000/- failing which further action was thereatened. The writ petition was amended and a prayer seeking to quash the second resolution was added.

Court's reasoning:
In our view, the notification was in three parts. By the first part the Central Government put a ban on all forward trading in sha res through the Stock Exchanges in the country by declaring that "no person.. shall, save with the permission of the Central Government, enter into any contract for the sale or purchase of securities other than such spot delivery con tract or contract for cash or hand delivery or special delivery in any securities as is permissible under the said Act, and the rules, bye-laws and regulations of a recognised stock exchange."The second part consisted of the proviso and it de alt fully with how all existing contracts remaining outstanding as on the date of the notification should be closed or liquidated, and the direction contained therein in that behalf was to the effect that "a contract other than a spot deli very contract or contract for cash or hand delivery or special delivery (meaning thereby a forward contract).......may be entered into between its members or through or with any such member for the purpose of closing out or liquidating all existing contracts.... remaining to be performed after that date."In other words, for the purpose of closing or liquidating existing outstanding transactions a forward contract (which would include a carry over) was permitted to be entered into. Then follows the third or the last part of the notification which commences with the words "but such contracts shall be subject to ....... " The expression "such contracts" occurring in this last part of the notification meant those as wer e referred to in the first part of the notification the making of which was banned after June 27, 1969 and the last portion provided that such forward contracts that had been banned "shall be subject to the rules, bye-laws or regulations of th e recognised Stock Exchange that come into force (i.e. become applicable) when further new dealings are prohibited ........ and subject also to such terms and conditions as the Central Government may from time to time impose." In our view the expression "such contracts" occurring in the last part of the notification were not referable to the existing outstanding contracts nor to a contract that could be entered into for closing or liquidating the existing outstanding con tracts. In other words, the third part of the notification on which reliance has been placed by the counsel for the appellants, in our view, has nothing to do with the existing outstanding contracts, the closing or liquidating of which was independently provided for by the proviso. It will thus appear clear that on a proper construction of the notification in question the proviso clearly permitted the closing or liquidating of the existing outstanding trans actions in the normal manner by entering into a forward contract (which would include a "carry over") in accordance with the rules, bye-laws and regulations of the Respondent. There was no warrant for the stand taken by the appellant No. 2 that all outstanding transactions had to be or could be adjusted on the basis of "previous official closing".On the construction of the proviso counsel for the Respondent rightly invited our attention to two documents on record which had come into existence almost simultaneously with the issuance of the notification explaining the manner in which outstanding transactions were intended to be closed orcourse, even without the aid of these two documents which contain a contemporaneous exposition of the Governments intention, we have come to the conclusion t hat on a plain construction of the Notification the proviso permitted the closing out or liquidation of all outstanding transactions by entering into a forward contract in accordance with the rules, bye-laws and regulations of theregard to the above construction which appears to us to be the true and proper construction of the notification in question it will be clear that the directions issued by the respondent to all its members including appellant No. 2 on June 28, 1969 in regard to their outstanding transactions as at the close of June 27, 1969 were proper and legal and the appellants stand was clearly erroneous. It cannot be disputed that ample opportunity was given to appellant No. 2 to comply with the directions but the appellant persisted in his erroneous contention, and failed to comply with those directions with the result that the respondent had no alternative but to declare him a defaulter. In our view, the directions dated June 28, 1969 as well as the two resolutions passed by the respondent on July 2 and July 3, 1969 were proper and justified and the appellants case on merits was rightly rejected by the High Court. This conclusion of ours, as stated at the commencement of the judgment, renders unnecessary the determination of the preliminary objection.