Thursday, July 25, 2013

Constitutional Validity of Regulatory Regime for CIS Upheld

Earlier this week, a single judge of the Calcutta High Court in Rose Valley Real Estate & Construction Ltd v. Union of India upheld the constitutional validity of certain sections of the SEBI Act (including section 11AA) and certain provisions of the SEBI (Collective Investment Scheme) Regulations, 1999 (the CIS Regulations). Specifically, a challenge was mounted to amendments to the SEBI Act and the Securities Contracts (Regulation) Act (SCRA) in 1999 when the definition of “securities” was expanded to include units of a collective investment scheme (CIS).

The judgment of the Calcutta High Court considers in detail various precedents where constitutional validity of legislation has been challenged. Ultimately, it found that the policy behind the legislative enactment was intended to achieve its stated objective. The court found:

A case of the present nature, in my view, should not be approached with a narrow legalistic view. Alleviation of human predicament arising out of craftily carved systems with sinister motives and aimed at swindling people, and exercise of regulatory control over companies attracting and inviting deposits from the public being the predominant considerations in introducing the provisions that have been impugned herein, the focus should be on the larger public interest that is sought to be advanced. Whenever a statutory provision providing for economic measures is challenged on the ground that it is not constitutionally valid, the Court ought to examine the policy leading to the impugned legislation and then to ascertain whether implementation of the policy is directed towards achieving social justice and to protect and develop national economy or not. If examination of the impugned provisions reveals an intention of the legislature to protect the rights of the aam aadmi and is based on reasons, which are shown to be coherent and justifiable, the policy has to be allowed to have full play and the Courts ought to keep its hands off unless it is permissible to judicially review the policy through the windows of “manifest unreasonableness” or “patent arbitrariness”. If a rational nexus between the policy and the object it seeks to achieve is discernible, the Court would unhesitatingly guard against substituting its view for the legislative judgment.

In this case, the justification was found based on the objective of the 1999 amendments:

A conjoint reading of the relevant Acts, viz. the SEBI Act and the SCR Act together with the objects and reasons of the 1999 Amending Act would leave no manner of doubt that protection of the investors in securities and the manner of ensuring such protection in fullest measure is the heart and soul of the SEBI Act. … I shall assume that the legislation is open-ended, but one has to pose a question here as to whether there was any valid reason for such open-ended legislation? To my mind, it would be quite reasonable to presume that the legislature deliberately intended the legislation to be open-ended to ensure that people with limited financial means are not ruined in the process of trying to get rich quickly and at the same time, no company would have the freedom to fleece. This being the object of the 1999 Amending Act, I feel it is not only the duty of the judiciary to show deference to the legislative judgment but to zealously thwart any attempt by any company to wriggle out of the regulatory mechanism by ingenious legal
arguments …

This result would operate to bolster SEBI’s efforts to rein in Ponzi schemes and similar arrangements that may fall within the CIS Regulations, which in any case have now been widened (as discussed here).

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