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

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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