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PETITIONER: MADHUBHAI AMATHALAL GANDHI

       Vs.

RESPONDENT: THE UNION OF INDIA.

DATE OF JUDGMENT: 17/08/1960

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SINHA, BHUVNESHWAR P.(CJ) KAPUR, J.L. GAJENDRAGADKAR, P.B. WANCHOO, K.N.

CITATION:  1961 AIR   21            1961 SCR  (1) 191  CITATOR INFO :  RF         1964 SC 648  (46)  R          1972 SC1982  (4)  R          1987 SC1527  (21)

ACT: Stock  Exchange-Rules  for  membership-Notification   laying conditions  restricting  membership-Classification   between active members and others-Whether unreasonable or  infringed fundamental  rights-Securities Contracts  (Regulation)  Act, 1956, (42 of 1956) s. 4. --Securities-Contracts (Regulation) Rules, 1957, rr. 17-22.

HEADNOTE: The Securities Contracts (Regulation) Act, 1956, was enacted with  the object of preventing undesirable  transactions  in securities  by regulating the stock exchange  business,  and the  Act  conferred an effective controlling  power  on  the Central Government over the stock exchange.  In exercise  of the power conferred on the Central Government to make  rules the   Central  Government  made  rules  described   as   the Securities  Contracts (Regulation) Rules,  1957,  providing, inter alia, for the qualification for membership of a  stock exchange  seeking recognition etc.  After the Act came  into force  two  Companies, namely, the Native  Share  and  Stock Brokers’  Association and the Indian Stock Exchange  Limited doing stock exchange business in Greater Bombay applied  for recognition under the Act.  The Government after considering the  merits of the companies and the relevant  circumstances issued a notification dated August 31, 1957, recognising the Native Share and Stock Brokers’ Association under the name " The Stock Exchange, Bombay " subject to certain  conditions. One of the conditions was that the members of the other com- pany,  India  Stock Exchange Limited, would be  entitled  to apply for membership of the Stock Exchange, Bombay, provided they  were  active  members of  the  Indian  Stock  Exchange Limited for 12 months immediately preceding August 6,  1957, and they were also eligible under r. 8(i) of the  Securities Contracts  (Regulation)  Rules,  1957, to be  members  of  a recognised  stock  exchange.  Within the  time  granted  for

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applying  for membership a number ’of active members of  the Indian  Stock  Exchange Limited applied for  membership  and were  admitted as members of the recognised Stock  Exchange. Though  three years had elapsed after this no  member  other than   the  petitioner  questioned  the  validity   of   the notification  which  was accepted and the  recognised  Stock Exchange became established.  The petitioner, however, filed a  petition under Art. 32 Of the Constitution  praying  that the Union be directed to withdraw or cancel the notification dated  August  31,  1957, recognising  the  Stock  Exchange, Bombay, under S. 4 Of the Securities Contracts  (Regulation) Act,  1956.  Subsequently on November 30, 1957, the  Central Government 192 issued  another  notification applying s. 13 Of the  Act  to Greater  Bombay  with  the  result  that  thereafter   every contract  in shares between the members of any  unrecognised stock  exchange  in   that  city  would  be  illegal.    The contentions of the petitioner in the petition for the  issue of  a writ of mandamus were that under Art. 19(i)(g) of  the Constitution he had a fundamental right to carry on business in  shares  and the two notifications  in  question  imposed unreasonable   restrictions   on   his   right,   that   the notification  dated August 31, 1957, was void as it was  not sanctioned  by the provisions Of s. 4 Of the’ Act, that  the condition  2(i)(a)  of  the  said  notification  classifying members  of  the  Indian Stock Exchange  Limited  as  active members   and   members  who  were  not   active   infringed fundamental right granted under Art. 14 Of the  Constitution and  as  the  said condition was not  severable  the  entire notification was bad.  The respondent besides  controverting the   said  contentions  further  contended  that   as   the petitioner had not questioned the validity of the Act itself the notification issued thereunder could not be questioned. Held, that the validity of a notification could not be ques- tioned  if  it  was issued under a self  contained  Act  and restated the provisions of the Act the validity of which was accepted.   If,  however, the Act conferred a power  on  the State   in  general  terms  and  the   notification   issued thereunder infringed any of the fundamental rights it  could be attacked even though the Act was valid. The  Stock Exchange Rules did not operate as a  bar  against the petitioner becoming a member of the Stock Exchange  sub- ject to the rules governing such application. The restrictions and conditions imposed under the  notifica- tion  in  question  were not  unreasonable.   The  condition restricting membership to active members only is germane  to the  recognition of the 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 the Act. The  classification  between active members and  others  was justifiable  and the period fixed by the Government  as  the standard for ascertaining the active membership was  neither arbitrary nor unreasonable. There  was a presumption in favour of the State  that  there was a reasonable basis for the classification and the burden to prove that it violated the guarantee of equal  protection lay on the petitioner who impeached it.

JUDGMENT: ORIGINAL JURISDICTION: Writ Petition No. 136 of 1957. Writ Petition under Art. 32 of the Constitution of India for enforcement of Fundamental Rights.

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193 Purshottam Tricumdas, Mukund R. Mody, Anil B. Divan,  Ramesh A. Shroff and I. N. Shroff, for the petitioner. C.   K.  Daphtary, Solicitor-General of India, R.  Ganapathy Iyer and R. H. Dhebar, for respondent. 1960.   August 17.  The Judgment of the Court was  delivered by SUBBA  RAO  J.-This  is  a petition under  Art.  32  of  the Constitution  for the issue of a writ of mandamus or a  writ in   the  nature  of  mandamus  or  any  other   appropriate direction, order or writ to direct the respondent, the Union of  India,  to  withdraw or cancel  the  notification  dated August 31, 1957, recognising " the Stock Exchange, Bombay  " under  s.  4 of the Securities Contracts  (Regulation)  Act, 1956 (XLII of 1956), (hereinafter referred to as"the Act "). At the outset it is necessary to notice briefly how a  Stock Exchange is worked and how it is controlled or regulated  by the  State.   "  Stock  Exchange "  means,  "  any  body  of individuals,  whether incorporated or not,  constituted  for the  purpose of assisting or con. trolling the  business  of buying,  selling or dealing in securities ". The history  of stock  exchanges  in foreign countries as well as  in  India shows  that the development of joint stock enterprise  would never have reached its present stage but for the  facilities which   the   stock  exchanges  provided  for   dealing   in securities.   They have a very important function to  fulfil in the country’s economy.  Their main function, in the words of an eminent writer, is " to liquify capital by enabling  a person  who  has  invested money in, say,  a  factory  or  a railway,  to convert it into cash by disposing of his  share in  the  enterprise  to someone else ".  Without  the  stock exchange,  capital  would become  immobilized.   The  proper working of a stock exchange depends upon not only the  moral stature  of the members but also on their calibre.  It is  a trite  saying that a jobber or dealer is born and not  made. In  the words of the same author, a jobber must be a man  of good nerve, cool judgment, and ready to deal 25 194 under  any  ordinary  conditions, and he must be  a  man  of financial   standing,  considerable  experience,   with   an understanding  of market psychology.  There are three  modes of  dealing in shares and stores, namely, (1) spot  delivery contract,  i.e.,  a contract which provides for  the  actual delivery  of  securities on the payment of a  price  thereof either on the day of the contract or the next day, excluding perhaps the period taken for the despatch of the  securities or  the remittance of money from one place to  another;  (2) ready  delivery  contract, which means a  contract  for  the purchase or sale of securities for the performance of  which no   time  is  specified  and  which  is  to  be   performed immediately  or  within  a  reasonable  time;  (3)   forward contracts, i.e., contracts whereunder the parties agree  for their  performance at a future date.  If the stock  exchange is  in  the hands of unscrupulous members,  the  second  and third  categories  of contracts to buy or  sell  shares  may degenerate into highly speculative transactions or, what  is worse,  purely  gambling  ones.  Where the  parties  do  not intend while entering into a contract of sale or purchase of securities  that only difference in prices should  be  paid, the  transaction, even though speculative, is valid and  not void, for " there is no law against speculation as there  is against  gambling ". But, if the parties do not intend  that there  should  be any delivery of the shares  but  only  the difference in prices should be accounted for, the  contract,

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being a wager, is void.  More often than not it is difficult for a court to distinguish one from the other, as a wagering transaction may be so cleverly camouflaged as to pass off as a speculative transaction.  These mischievous potentialities inherent  in the transactions, if left  uncontrolled,  would tend to subvert the main object of the institution of  stock exchange  and convert it into a den of gambling which  would ultimately upset the industrial economy of the country. For  that  reason, in Bombay as early as  1925,  the  Bombay Securities Contracts Control Act was passed to regulate  and control contracts for the purchase and sale of securities in the  City of Bombay and elsewhere in the Bombay  Presidency. Under s. 6 of that Act, 195 "  Every  contract for the purchase or sale  of  securities, other  than a ready delivery contract, entered into after  a date  to  be  notified  in this  behalf  by  the  Provincial Government shall be void, unless the same is made subject to and in accordance with the rules duly sanctioned under s.  5 and  every  such contract shall be void unless the  same  is made  between  members or through a member of  a  recognised stock  exchange; and no claim shall be allowed in any  Civil Court for the recovery of any commission, brokerage, fee  or reward  in  respect  of any such contract ".  But  this  Act defined " ready delivery contract " to mean " a contract for the purchase or sale of securities for performance of  which no   time  is  specified  and  which  is  to  be   performed immediately  or  within  a reasonable time ".  It  was  also stated   therein  by  way  of  explanation  that  what   was reasonable  time was in each particular case a  question  of fact.  This Act did not achieve its purpose, for under s.  6 thereof  contracts  entered  into in  contravention  of  the provisions  of that section were not made illegal  but  only void, with the result that even members of a stock  exchange not  recognised under that Act were able to do  business  in that line.  What is more, the explanation to the  definition of  "  ready delivery contract " which is excluded from  the operation  of  the Act was so elastic that in  the  name  of ready  delivery contracts unrecognised stock exchanges.  and individuals  were  able  to carry  on  business  in  forward contracts. (-,ambling in shares went on unchecked in  Bombay as elsewhere.  After the Second World War, the post-war boom gave   an   unhealthy   impetus  to   the   stock   exchange transactions.   Various expert committees appointed  by  the Government  from  time to time considered  the  question  of regulation  of  stock  exchanges and  the  latest  of  those committees  was the Gorwalla Committee.  The report of  that Committee  was circulated to the principal stock  exchanges, Chambers of Commerce, and other interested associations  and individuals.    After   considering  the  reports   of   the committees  and  the comments made thereon  by  the  various bodies, the Government introduced a bill in the  Parliament, which became law on 196 September   4,  1956.   The  Act  was  passed   to   prevent undesirable  transactions  in securities by  regulating  the business therein by prohibiting auction and by providing for certain  other matters connected therewith.  The Act  mainly provides  for  the recognition of stock  exchanges  and  for controlling the rule-making of the said exchanges.   Section 4  of the Act empowers the Central Government  to  recognise stock  exchanges  subject  to two  conditions.   Section  13 enables  it  to issue a notification that  in  a  particular State or area every contract which is entered into after the date of the notification otherwise than between members of a

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recognised  stock exchange in such State or area or  through or with such member shall be illegal.  Without resorting  to such drastic procedure the Government is also given power to prohibit  contracts in certain securities in  certain  areas from  doing  business  without obtaining  a  licence.   Spot delivery  contracts are excluded from the operation  of  ss. 13, 14, 15 and 17 of the Act, unless the Central  Government by notification thinks fit to extend the operation of s.  17 of  the  Act  to  such  contracts.   Section  19   prohibits formation  of  stock exchanges other  than  recognised  ones except  with the permission of the Central  Government.   It declares  all auctions in securities entered into after  the commencement of the Act illegal.  It also provides penalties for  the  infringements of the provisions of  the  Act.   In short, the Act confers an effective controlling power on the Central Government over the stock exchanges. In  exercise  of  the  power  conferred  upon  the   Central Government to make rules, the Central Government made  rules described  as the Securities Contracts  (Regulation)  Rules, 1957,  providing,  inter  alia, for  the  qualification  for membership  of  a stock exchange  seeking  recognition,  the procedure  for recognition, the manner of keeping  accounts, the  submission  of  annual  reports,  the  constitution  of governing bodies and for taking disciplinary action  against any member of such bodies and other similar matters. In Greater Bombay there were two stock exchanges, 197 one  called the Native Share & Stock  Brokers’  Association, and the other the Indian Stock Exchange Limited.  The former was  in  existence  for  more than., 80  years  and  it  was registered  under  the Bombay Securities  Contracts  Control Act,  1925.   Its rules and bye-laws were  approved  by  the Government  of  Bombay  and it was doing  business  in  both forward  as well as ready transactions.  It has  a  clearing house and was doing extensive business in different kinds of securities. The other, namely, the Indian Stock Exchange Limited, was  a company  incorporated under the Indian Companies Act,  1913, as a company limited by guarantee without any share capital. The  said Company had been functioning since 1937,  but  was not registered under the Bombay Securities Contracts Control Act,  1925.  It was mainly doing business in  Tata  Ordinary and  Bombay  Dyeing  shares and had  hardly  any  investment business.  Not being registered under the Bombay  Securities Contracts  Control  Act, 1925, it could only deal  in  ready delivery  contracts;  and  as  the  definition  of  "  ready delivery  contract  "  under that Act  was  elastic  and  as forward  contracts  were not made illegal  thereunder,  this Exchange  was also doing speculative business mainly in  the said two shares. After  the Act came into force, both the  Exchanges  applied for  recognition  under  the  Act.   The  Government,  after considering   the   relative   merits   and   the   relevant circumstances, issued a notification dated August 31,  1957, recognising the Native Share and Stock Brokers’  Association under the name " The Stock Exchange, Bombay " subject to the conditions mentioned therein.  One of the conditions imposed was  that the members of the Indian Stock  Exchange  Limited would  be  entitled  to apply for membership  of  the  Stock Exchange,  Bombay, provided they were active members of  the Indian  Stock  Exchange Limited for  12  months  immediately preceding August 6, 1957, and they were also eligible  under r.  8(1)  of the Securities  Contracts  (Regulation)  Rules, 1957,  to  be members of a recognised stock  exchange.   The notification

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198 further gave some concessions to such active members in  the matter of payment of the membership fee.  They had to  apply for  membership  before  October 15, 1957,  or  before  such period  as the Board of the recognised Stock Exchange  might think  fit to extend.  It appears that within  the  extended time a number of active members of the Indian Stock Exchange Limited   as  defined  by  the  notification   applied   for membership  and were admitted as members of  the  recognised Stock  Exchange.   Though  three years have  passed  by,  no member  other than the petitioner has so far thought fit  to question  the  validity of the notification,  that  is,  the validity  of  the  notification has been  accepted  and  the recognised  Stock  Exchange has become  stabilised  on  that basis.   Subsequent  to  the  filing  of.  the  petition  on November  30,  1957, the Central Government  issued  another notification  applying s. 13 of the Act to  Greater  Bombay; with  the  result that thereafter every contract  in  shares between  the members of any unrecognised stock  exchange  in that City would be illegal. The  petitioner  had  become a member of  the  Indian  Stock Exchange  Limited on February 27, 1956, but he had not  been transacting  any  business on the floor of  the  said  Stock Exchange  either  on his own account or on  account  of  his clients.  He avers in the affidavit filed in support of  the petition that he has been doing considerable business on his own  account  or  on account of his  clients  through  other members  of  the  Stock  Exchange and  that  he  intends  to commence business directly in ready delivery contracts.   As the impugned notifications affect his right to do  business, he  seeks  for  the  issue of a writ  of  mandamus  for  the aforesaid reliefs. Shri   Purshottam   Trikumdas,  learned  counsel   for   the petitioner, raised before us the following contentions:  (1) under Art. 19(1)(g) of the Constitution the petitioner has a fundamental right to carry on the business in shares and the notification  dated  August  31, 1957,  and  the  subsequent notification  dated November 30, 1957, imposed  unreasonable restrictions  on his said right; (2) the notification  dated August 31, 199 1957,  is  void  inasmuch as it is  not  sanctioned  by  the provisions of s. 4 of the Act; and (3) the condition 2(i)(a) of the said notification classifying members of A the Indian Stock  Exchange  Limited as active members and  members  who were not active infringes the fundamental right enshrined in Art.  14 of the Constitution and that as the said  condition is not severable the entire notification is bad. Learned  Solicitor-General in addition to controverting  the said contentions pressed on us to hold that as the vires  of the   Act  was  not  questioned,  the  notification   issued thereunder could not be questioned by the petitioner on  the ground  that  it  contravened  one  or  other  of  the  said fundamental rights. It  would be convenient to take first the contention of  the learned  Solicitor-General  as  it is in  the  nature  of  a preliminary point.  He says that as the validity of the  Act was  not questioned the notification issued in the  exercise of the power conferred thereunder cannot also be questioned. 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.  3(a)  to include  a  notification.   Therefore,  the  validity  of  a notification  issued by the State, it being law, is as  much

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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 one and the notification issued  there- under 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 200 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  imposes  unreasonable restrictions-if  the contention of the learned  counsel  for the  petitioner be accepted, the restrictions imposed  would certainly be unreasonable-it is liable to be set aside.   We cannot, therefore, accept this contention. Re.  (1): Article 19(1)(g) of the Constitution  states  that every citizen shall have the right to carry on any business; but the State in empowered under el. (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 in as much  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 member.   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 201 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

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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.   But  it  is contended  that a fair reading of the provisions of  rr.  20 and  21  makes it clear that a candidate  for  admission  is confined  only  to  two categories, viz.,  (1)  a  candidate nominated  by  a  member  or a  legal  representative  of  a deceased member seeking admission to membership in the place of’ the deceased; and (2) a person recommended for admission to membership in the place of a member who has forfeited his right  to membership.  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 to 22.  Rule 10 says:               "  When a right of membership is forfeited  to               or vests in the Exchange under any Rule,  Bye-               law,  or  Regulation of the Exchange  for  the               time being in force it shall belong absolutely               to the Exchange free of all rights, claims  or               interest of such member or any person claiming               through  such  member and the  Governing  Body               shall  be entitled to deal with or dispose  of               such right of membership as it may think fit."               Rule 54 is to the following effect: " A member’s right of membership shall lapse to and vest  in the Exchange immediately be is declared a defaulter." Rule 11 is as follows..     26 202               "(a)  A member of not less than  seven  years’               standing who desires to resign may nominate  a               person   eligible   under  these   Rules   for               admission  to membership of the Exchange as  a               candidate for admission in his place (b)  The legal representatives of a deceased member  or  his heirs or the persons mentioned in Appendix C to these  Rules may  with the sanction of the Governing Board  nominate  any person   eligible  under  these  Rules  for   admission   to membership  of the Exchange as a candidate for admission  in the  place  of  the deceased member.   In  considering  such nomination  the  Governing Board shall be guided so  far  as practicable  by  the instructions set out in Appendix  C  to these Rules." Appendix  B gives the nomination forms Nos.  1 and 2  to  be filled  by a member or a legal representative, as  the  case may be, under r. 11 (a) and (b).  Now it would be convenient to read rr. 20 and 21.  They are as follows: Rule  20:  " A candidate for admission except’  a  candidate applying  for  a  membership vesting in  the  Exchange  must obtain a nomination in the manner provided in these Rules." Rule 21: " A candidate for admission must be recommended  by two members none of whom should be a member of the Governing Board.   The recommenders must have such personal  knowledge of  the candidate and of his past and present  circumstances as shall satisfy the Governing Board." The argument is that under r. 20 a candidate for ad. mission falls under two categories, namely, (1) a candidate who must obtain  a  nomination in the manner provided in  the  Rules, i.e., r. 11 (a) and (b); and (2) a candidate applying for  a membership  vesting in the Exchange; and,  therefore,  these two categories exhaust the candidates for admission and that when under r. 21 the same words, " a candidate for admission

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",  are used they must carry the same meaning as in  r.  20, that  is, they must be confined only to the  two  categories comprehended  by  r.  20.   This  argument  appears  to   be plausible and even incontrovertible, if 203 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  shares:  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 country’s 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  stringent   rules governing this type of business For the reasons Mentioned we reject the first contention. Re.  (2):  The second contention also has  no  merits.   The criticism  is  that  condition  2(i)  (a)  annexed  to   the notification cannot be supported on the basis of any 204 of the provisions of s. 4 of the Act.  Condition 2 (i) reads as follows:    "  The  Members  of the Indian  Stock  Exchange  Limited, Bombay,  will  be entitled to apply for  Membership  of  the Stock Exchange, Bombay, provided they fulfil or comply  with the following terms and conditions:-    (a)  they  have been active members of the  Indian  Stock Exchange  Limited, for twelve months  immediately  preceding the 6th August, 1957. Explanation:" Active Members " for purpose of this condition means  members  who  have  themselves  transacted   business regularly on the floor of the Indian Stock Exchange  Limited either on their own account or on account of their clients. To appreciate the argument it is also necessary to read  the material provisions of s. 4 of the Act. Section  4:  " (1) If the Central Government  is  satisfied, after making such inquiry as may be necessary in this behalf and after obtaining such further information, if any, as  it may require,- (a) that the rules and bye-laws of a stock exchange applying for  registration are in conformity with such conditions  as

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may be prescribed with a view to ensure fair dealing and  to protect investors; (b)  that the stock exchange is willing to comply  with  any other  conditions (including conditions as to the number  of members)  which  the Central Government  after  consultation with  the  governing body of the stock exchange  and  having regard  to  the area served by the stock  exchange  and  its standing and the nature of the securities dealt with by  it, may  impose for the purpose of carrying, out the objects  of this Act; and (c)  that it would be in the interest of the trade and  also in  the  public interest to grant recognition to  the  stock exchange; It  may grant recognition to the stock exchange  subject  to the conditions imposed upon it as aforesaid and in such form as may be prescribed. (2)  The conditions which the Central Government 205 may  prescribe under clause (a) of sub-section (1)  for  the grant  of  recognition to the stock exchanges  may  include, among other matters, conditions relating. to,-- (i) the qualifications for membership of stock exchanges; (ii) the manner in which contracts shall be entered into and enforced as between members; (iii)  the representation of the Central Government on  each of  the  stock  exchanges  by such  number  of  persons  not exceeding  three as the Central Government may  nominate  in this behalf; and (iv) the maintenance of accounts of members and their  audit by chartered accountants whenever such audit is required  by the Central Government.  " The  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. (i)(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.  There 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 206 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

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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  recognition  of  the  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 the Act. Re.  (3):  Learned  counsel for the  petitioner  advanced  a forcible  argument  questioning the  validity  of  condition 2(i)(a) of the notification on the ground that it  infringed Art. 14 of the Constitution.  Elaborating his argument,  the learned  counsel stated that the said  condition  classified members  of  the  Indian Stock  Exchange  Limited  into  two groups, one active members and the other who were not active members, and that that classification was arbitrary and  had no  reasonable relation to the object sought to be  achieved by  the  notification.   He further  pointed  out  that  the defining  of  active  members as those  who  had  themselves transacted  business  regularly on the floor of  the  Indian Stock  Exchange  Limited either on their own account  or  on account of their clients for 12 months immediately preceding August  6, 1957, was not only arbitrary and vague but  also, if  analysed,  would lead to anomalies  destructive  of  any standard of reasonableness.  It is alleged in the  affidavit filed  by  the  petitioner that from the  inception  of  the Indian Stock Exchange Limited, 199 members of the said Stock Exchange  were  actually trading on the floor  of  the  said Exchange from time to time but for some reason or the  other were not trading during the period of 12 months  immediately preceding August 6, 1957; that there were 34 members of  the said Stock Exchange who were regularly 207 transacting business on the floor of the said Stock Exchange prior  to August 6, 1956, and for some time after August  6, 1956,  but  not during the entire period of 12  months  from August  6,  1956 to August 6, 1957; and that there  were  24 members  of the said Stock Exchange who started  transacting business  regularly on the floor of the said Stock  Exchange some  time  after August 6, 1956 and continued  to  transact business right upto and after August 6, 1957.  It was  asked what  was the reasonable basis for confining the  definition of  active  members to those who were carrying  on  business during the period of 12 months from August 6, 1956 to August 6, 1957, while excluding the aforesaid three categories  who were  equally  active members and indeed  more  active  than those included in the definition.  It was further asked what was  the  justification for excluding a member  who  was  an active  member  for  years  before  the  crucial  year   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  con- siderations 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 twofold.  The main  object is  to carry out the purpose of the Act, namely, to  prevent undesirable  transactions  in securities by  regulating  the

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business  in them.  The subsidiary object is to assuage  the 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 208 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 caliber,  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  Govern- ment  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  Exchange  Limited.  It also  gives  the  vicissitudes through  which the said Stock Exchange passed 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 enrollment of  hundreds  of Associate Members on payment of  a  nominal entrance fee of Rs. 100.  The Government on a  consideration of the necessary data and presumably 209 having regard to the record of the activities of the various members fixed the activities in the crucial year 1956-57  as the standard of activity for membership. 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  the  earlier period.   We  cannot also say that the  words  "carrying  on business  regularly " are so vague that the parties did  not

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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 lie  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    27 210 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. The petition accordingly fails and is dismissed with costs.      Petition dismissed.