Prashant Commercial vs Rajratan R. Mohta
2006 Latest Caselaw 3 Bom

JUDGMENT

B.P. Dharmadhikari, J.

1. The present petition challenges the order dated 4th December, 1999 passed by the Civil Judge, Senior Division, Wardha in Special Civil Suit No. 236/1998. It appears that earlier Civil Revision Application No. 402/2000, was filed before this Court, but in view of the subsequent amendment to provisions of Section 115 of Civil Procedure Code by Act No. 46 of 1999, the said revision was withdrawn on 15-3-2004, and thereafter the present Writ Petition under Article 227 of the Constitution of India, has been filed. In this view of the matter the parties requested the Court to dispose of the Writ Petition at the stage of admission itself. Accordingly, parties have been heard finally, and opportunity was also given to them to file xerox copies of the relevant case laws.

2. The present petitioners are original plaintiffs, while the respondent sole is the original defendant. The suit filed by the plaintiff was for recovery of amount of Rs. 23 lakhs and the contention of the present petitioner was that the said amount was handed over to the present respondent for purchase of shares of State Bank of India, TISCO etc. The petitioners contends that they on various occasions demanded the delivery of shares, but the respondent did not deliver the same and kept on assuring about its delivery. Ultimately the suit as mentioned above came to be filed for refund of Rs. 23 lakhs, paid by the petitioners to the respondent for purchase of shares with 18% interest per annum. The present respondent appeared in the said Special Civil Suit No. 236/1998, before the Joint Civil Judge, Senior Division, Wardha and raised preliminary objection contending inter alia that the Civil Court could not take cognizance of the matter in view of the bye-law No. 248(a) to (d) and Rule 2(c) of the Rules/Bye-laws and Regulation of Stock Exchange of Bombay framed in 1997. They contended that the dispute between the petitioners and the respondent is covered therein and is to be adjudicated only by Arbitrator. It appears that after filing this preliminary objection, the respondent also moved the Arbitrator and Arbitrator issued summons to the present petitioners. The petitioners made grievance about the Arbitration before the Civil Court and sought its stay and on 1-7-1999, by ex-parte order said proceedings were stayed. The said stay has been confirmed by the trial Court thereafter.

3. The trial Court heard the parties in this background and found that though the petitioners are non-members, the dispute between them is to be referred to Arbitration in view of the provisions of Bye-law No. 248 and therefore, held that the Civil Court does not have jurisdiction to try such dispute, it therefore, returned the plaint to the petitioners. It also vacated the stay granted to the proceedings before the Arbitrator.

4. I have heard Advocate Chandurkar, for petitioners and Advocate Dandekar, for respondent.

5. Advocate Chandurkar, has contended that the present petitioners are not members as contemplated by Securities Contract (Regulation) Act, 1956 (hereinafter referred to as "1956 Act." for short), and as such the provisions of Bombay Stock Exchange Regulation (hereinafter referred to as "the Regulations" for short), are not applicable to the transactions. He contended that the reliance by the trial Court upon the provisions of bye-laws is totally misconceived and the dispute was rightly filed before the trial Court. He has taken the Court through the provisions of the relevant bye-laws for this purpose.

6. As against this, Advocate Dandekar, contended that the Regulation/Bye-law completely govern the controversy and Civil Court therefore has no jurisdiction. He states that the controversy between members as also non members is specifically made subject to arbitration and the said term of arbitration is deemed to have been agreed, by the parties in view of the express stipulation to that effect in the regulation. He relies upon the judgment of this Court reported at 1995 (2) Mh.LJ. 770, Hemendra V. Shah v. Stock Exchange, Bombay and Ors. and also the judgment reported at 1999 (3) Mh.L.J. 810, Stock Exchange, Mumbai v. Vinay Bubna and Ors.. He contends that the Court below has correctly applied its mind and the arguments of petitioner are misconceived.

7. Before proceedings to consider the provisions of Regulations/Bye-laws, it will be necessary to make reference to the provisions of 1956 Act. Section 2 which contains definition clause, defines contract, Member and other relevant terms as under:

2. Definitions. In this Act, unless the context otherwise requires -

(a) 'contract' means a contract for or relating to the purchase or sale of securities;

(b) 'Government Security' means a security created and issued, whether before or after the commencement of this Act, by the Central Government or a State Government for the purpose of raising a public loan and having one of the forms specified in Clause (2) of Section 2 of the Public Debt Act, 1944.

(c) 'member' means a member of a recognized stock exchange.

(d) 'option in securities' means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes ateji, a mandi, a teji mandi a galli, a put, a call or a put and call in securities;

(e) 'prescribed' means prescribed by rules made under this Act'

(f) 'recognized stock exchange' means a stock exchange which is for the time being recognized by the Central Government under Section 4;

(g) 'rules' with reference to the rules relating to general to the constitution and management of a stock exchange, includes, in the case of stock exchange which is an incorporated association, its memorandum and articles of association;

(h) "Securities " include -

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate:

(ii) government securities:

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities;.

(i) 'spot delivery contract' means a contract which provides for -

(a) actual delivery of securities and the payment of a price therefor either on the same day as the date of the contract or on the next day, the actual periods taken for the dispatch of the securities or the remittance of money therefor through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality;

(b) transfer of the securities by the depository from the account of a beneficial owner to the account of other beneficial owner when such securities are dealt with by a depository;

(j) 'stock exchange' means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

The other terms are not relevant for the purpose of present controversy. Section 4 onwards of the said Act, deals with the grant of recognition of Stock Exchanges. Section 17 deals with the licence of Dealers in Securities in certain areas. Section 9 empowers the Stock Exchange to make Bye-laws. The relevant provisions for the purpose of present controversy are in Section 9(2)(k) and (m), which are as under:

9(2)(k) the regulation of the entering into, making, performance, recession and termination, or contracts, including contracts between members or between a member and his constituent or between member and a person who is not a member, and the consequences of default or insolvency on the part of a seller or buyer or intermediary, the consequences of a breach, or omissions by a seller or buyer, and the responsibility of members who are not parties to such contracts. 9(2)(m) the listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any specified securities.

Section 23, provides for conviction and punishment of person who deals with securities and induces any person to believe that contract can be entered into or performed under this Act (1956 Act), through him though he is not a member of the recognised Stock Exchange, not being a member canvasses, advertises, or touts in any manner for any business, it is in contravention of the provisions of 1956 Act. It is thus to be noted that a phrase 'non-member' has not been defined in 1956 Act. The provisions of bye-law/regulation, thereafter need to be seen. Bye-law No. 226 deals with rights and liabilities of members and constituents. The same reads as under:

All contracts subject to Rules, Bye-laws and Regulations.

226. (a) All contracts made by a member for or with a non-member for the purchase or sale of securities in which dealings are permitted on the Exchange shall in all cases be deemed made subject to the Rules, Bye-laws, Regulations and Usage of the Exchange which shall be a part of the terms and conditions of all such contracts and they shall be subject to the exercise by the Governing Board and the President of the powers with respect thereto vested in it or him by the Rules, Bye-laws and Regulations of the Exchange.

Performance of Contract in Bombay.

(b) The delivery of all documents and papers and the payment in relation to all contracts referred to in Sub-clause (a) shall be within the City of Bombay and except when delivery is taken and given and payment made and received from and to the Clearing House through Clearing Members Banks as provided in these Bye-laws and Regulations the parties to all contracts shall be bound to take and give delivery and make and receive payment at the office of the concerned within the Fort Area of the City of Bombay.

Contract subject to Bombay Jurisdiction.

(c) In case of all claims (whether admitted or not), differences and disputes arising out of or in relation to all contracts referred to in Sub-clause (a) the parties concerned shall be deemed to have agreed and acknowledged that such contracts have been entered into and are to be performed within the City of Bombay, that they are subject to arbitration in accordance with the provisions relating to arbitration other than between members contained in these Bye-laws and Regulations and that they are subject to the jurisdiction of the Courts in Bombay.

8. As per Bye-law 226 (a), it is apparent that the contract made by member with non-member for purchase or sale of securities is deemed to be made subject to the Rules, Bye-laws, Regulations and usage of Bombay Stock Exchange. As per Bye-law No. 226(b), delivery of all documents papers and payments, in relation to such contract is within the Fort area of city of Bombay. Sub-clause (c) thereof, states that parties to such contract are deemed to have agreed and exchanged though such contract have been entered into and are to be performed within the City of Bombay, that they are subject to arbitration in accordance with the provisions as contained in the bye-laws. In this background the procedure for arbitration as prescribed under Article 248(a) and (b) needs to be looked into. The said Article 248 appears under chapter with Head A - Arbitration other than between members and sub-head has reference to Arbitration. The said provisions read as under:

248. (a) All claims (whether admitted or not) difference and disputes between a member and a non-member or non-members, (the term 'non-member' and 'non-members' shall include a remisier, authorised clerk, a sub-broker who is registered with SEBI as affiliated with that member or employee or any other person with whom the member shares brokerage) arising out of or in relation to dealings, transactions and contracts made subject to the Rules, bye-laws and regulations of the Exchange or with reference to anything incidental thereto or in pursuance thereof or relating to their construction, fulfilment or validity or in relation to the rights, obligations and liabilities of remisiers, authorised clerks, sub-brokers, constituents, employees or any other persons with whom the member shares brokerage in relation to such dealings, transactions and contracts shall be referred to and decided by arbitration as provided in the Rules, Bye-laws and Regulations of the exchange.

Contract Constitutes Arbitration Agreement.

(b) An acceptance whether express or implied of a contract subject to arbitration as provided in Sub-clause (a) and with this provision for arbitration incorporated therein shall constitute and shall be deemed to constitute an agreement between the member and the non-member or non-members concerned that all claims (whether admitted or not), differences and disputes of the nature referred to a Sub-clause (a), in respect of all dealings, transactions and contracts of a date prior or subsequent to the date of contract shall be submitted to and decided by arbitration as provided in the Rules, Bye-laws and Regulations of the exchange and that in respect thereof any question whether such dealings, transactions and contracts have been entered into or not shall also be submitted to and decided by arbitration as provided in the Rules, Bye-laws and Regulations of the Exchange.

9. Thus any dispute or claim, arising out of a dealing or a contract made subject to the rules, bye-laws, regulations etc., is to be referred to and, decided by a arbitrator as per Sub-clause (b). There has to be a deemed constitution of agreement between the member and non-member about such arbitration agreement as per the rules, bye-laws, regulations. The Bye-Law No. 248(a) used the word 'non-member', but then does not define it and only clarifies that it includes remisiers, authorised clerk, a sub-broker who is registered with SEBI, as affiliated with that member or employee or any other person with whom he shares brokerage. Thus the definition of non-member is not there and if it is construed, this definition itself is inclusive one. Hence the employee working with such member, as sub-broker, affiliated to that member or any other person with whom the member shares brokerage is included in the said definition. In view of this wide sweep given to the word "non-member" it is clear that every body who is not a member as defined under 1956 Act, has been treated as non-member. It is to be noted that even dispute between two non-members is regulated under it and full effect needs to be given to these fictions. Considering the deeming fictions mentioned above, and also the purpose of the 1956 Act, and the bye-laws/regulations of Bombay Stock Exchange, it is clear that a complete code in relation to the dealing in securities has been evolved, and as such no loophole therein can be created so as to defeat the very purpose behind creation of such special machinery and special procedure. If the arguments of the learned Counsel for petitioner are accepted and it is held that the purchaser of security like the present petitioner are not covered by the phrase non-member, it will tentamount to a lacunae in otherwise complete provisions in this respect.

10. The judgment of this Court between Hemendra Shah v. Stock Exchange, Mumbai, considers the provisions of Bye-law No. 226(a) and 226(c) and para Nos. 18 and 19 thereof are important. The said paragraphs reads as under:

18. I am unable to accept even these submissions. Bye-law 226(a) provides that all contracts made by a member for or with a non-member for the purchase or sale of securities in which dealings are permitted on the exchange, shall in all cases be deemed to be made subject to the Rules, Bye-laws, Regulations and Usage of the Exchange. The said Bye-law also provides that all such contracts shall be subject to the exercise by the Governing Board and the President of the powers with respect thereto vested in it or him by the Rules, Bye-laws and Regulations of the Exchange.

19. Further bye-law 226(c) provides that in cases of all claims (whether admitted or not), differences and disputes arising out of or in relation to all contracts referred to in Sub-clause (a) the parties concerned shall be deemed to have agreed and acknowledged that such contracts have been entered into and are to be performed within the City of Bombay, that they are subject to Arbitration in accordance with the provisions relating to Arbitration contained in these bye-laws and Regulations. Thus bye-laws 226(a) and 226(c) make it very clear that all such contracts or dealings, irrespective of the fact that they may be no contract notes, are deemed to be subject to these Rules, Bye-laws and Regulations. It is clear that these Rules, Bye-laws and Regulations will govern such contracts and dealings. Such contracts and dealings are also subject to Arbitration in accordance with these Rules, Bye-laws and Regulations.

11. The High Court there was considering the dispute between the petitioner and sixth respondent and the declaration sought was that the 3rd respondent before the High Court was not entitled to fill in any vacancy caused by resignation of one Mr. G. B. Desai, and also purported appointment of one Mr. Bhat, and that vacancy was questioned. The petitioner was admittedly a clerk when the sixth respondent who happened to be member of the Bombay Stock Exchange. Thus this was not the case between the purchaser like the petitioners who is a non-member and a member. However, in para Nos. 17 and 18 it is apparent that a contract between a member and non-member for sale of securities in which dealings are permitted in Exchange are deemed to have been made subject to Bye-Laws, Rules, Regulations etc. Paragraph No. 19 further points out the other deeming fiction in respect of arbitration agreement and also the place where the dispute can be raised.

12. In 1999 ruling between the Stock Exchange, Mumbai v. Vinay Bubna, the Division Bench of this Court found that the dispute was already referred, to arbitration and the reference was to two arbitrators. The Single Judge, of this Court held that it was in contravention of Section 10 of the Arbitration Act and therefore, the award was liable to be quashed and set aside. The other side tried to justify the reference to even Board of Arbitrators by pointing out the provisions of bye-law No. 249(a), but the said argument was not accepted, by the learned Single Judge. The Division Bench, after considering the provisions of the said bye-law No. 249(a) and various cases on the point concluded that the phrase "any other enactment" in said Clause 249(a) includes the provisions of bye-law framed under 1956 Act, and the same would therefore, prevail over Section 10 of the Arbitration Act, 1996. In view of this, the judgment of learned Single Judge, of this Court was quashed and set aside and the appeal came to be allowed.

13. Thus, the above case law demonstrates that by 1956 Act, and regulations/bye-laws of Bombay Stock Exchange, a special procedure and machinery has been evolved, for looking into the grievance of persons dealing with the sales and purchase of securities. The deeming fictions above add to its vigour. The trial Court has correctly appreciated this controversy and has found, that the petitioners/plaintiffs before it though non-members are bound to abide by the provisions of the bye-laws mentioned above. I therefore, find that no case is made out for taking a different view in the matter. The order dated 4th December, 1999 does not suffer from any jurisdictional error or perversity. No case is made out for interference in writ jurisdiction. Writ Petition is thus dismissed. No costs.