Anuj Halfway

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---Project on---

InvestorsProtection inCorporatedomain

Submitted by---

Faculty of Law

University of Allahabad Abhijeet Dwivedi

Role of Judiciary in changing timesby Anuj Agarwal


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Roll No. - 01

Enrollment No. U0620037

B.A.LL.B. (Hons), VIII Semester

Preface

Any state is recognized by t In this project I have tried to analysis the structure of

financial market, regulatory framework, kinds of investment and a separate chapter

dealing with investors protection. I have tried to provide the up to date information and

have thoroughly gone through all the literature which I can get and prepared this project.

I have gone through all the laws, rules, regulations, notifications and guidelines on the

matters related to investors protection.

Acknowledgement

There is a famous English quote To remember is to forget, however I seek this

opportunity to express my gratitude to the people who have been key to this project.

First and foremost, I would like to thankMrs. Uma Tripathi, project teacher to

provide her knowledgeable direction to complete the project. She provided me full

support in this. Her timely instructions and easy to mingle behavior has played a huge

role in this.



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I will also take this opportunity to thank Prof. B.P.Singh, Coordinator,

B.A.LL.B(Hons) who accepted my topic and allowed me to work on my area of interest.

I am thankful for his able guidance and always ready to help approach.

I also wish to thankSanjay Khanduja Sir,Chartered Accountant who gave me

his valuable time to suggest me the appropriate topic as a lawyer to work in the

interdisciplinary field of law, finance and securitization. I will be always thankful to him

for this. He has been a source of inspiration for me and has played a major role in my

academic career as and when required.

I am thankful to the Librarians of Ratan Tata Library, University of Delhi to give

me access to avail their library.

I wonot miss to thank my family especially my elder brother Sumeet Dwivedi and

my sister Nimisha Tripathi without whom it could have never been completed.

Abhijeet Dwivedi

Dated - 29/6/2010 B.A.LL.B.(HONS) VIII Semester

Faculty of Law

Content

Cover pagei

Preface..iiAcknowledgment...v

Content.vi

Abbreviationsviii

List of Statutes/regulations/guidelines...ix

Table of cases.xi



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Introduction.1-10

Financial market2

Regulatory framework7

Instruments of Investment..11-32Money Market12

Capital Market17

Capital Market Intermediaries24

Mutual Funds.28

Venture Capital..30

Collective Investment Scheme...31

Investors Protection: Framework.33-54

Who regulate which type of entity.35

Rights of Investors.37

Common Grievances of Investors..38

Redressal of Investor Grievances...39

Legal Framework for Investor Protection in India.41

Unique Identification Number....49

IEPF....49

Ombudsman....51

Investors education52

Suggestions54-62

Suggestions for Better Investors Protection57

Conclusion61

Bibliography.63



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Abbreviations

SEBI Securities and Exchange Board of India

IEPF Investor Education and Protection Fund

ICDR Issue of Capital and Disclosure Requirement

AIR All India Reporter

SC Supreme Court

Comp CAS Company Cases



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V. Versus

Corpt. Corporation

SCRA Securities Contract (Regulation) Act

DEA Department of Economic Affairs

RBI Reserve Bank of India

T-Bill Treasury Bill

CRR Cash Reserve Ratio

LIC Life Insurance Corporation

UTI Unit Trust of India

FCD Fully Convertible Debenture

NCD Non Convertible Debenture

PCD Partly Convertible Debenture

IRDA Insurance Regulatory & Development

Authority

List of Statutes/ Regulations/ Guidelines

1. SEBI Act, 1992

2. Companies Act, 1956,3. Securities Contract (Regulation) Act,1956

4. Depositories Act,1996

5. SEBI Notification SO(953)E dated 21.8.2003

6. SEBI (Ombudsman) Regulations, 2003.

7. SEBI (Central Database of Market Participants) Regulations, 2003



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8. SEBI (Prohibition of fraudulent and unfair practices relating

to securities markets) Regulations, 1995

9. SEBI (Prohibition of Fraudulent and Unfair Trade Practices

relating to Securities Market) Regulations, 2003

10. Companies ( Acceptance of Deposit)Rules, 1975

11. SEBI (Collective Investment Scheme) Regulations, 1999

12. SEBI (Venture Capital Funds) Regulations, 1996

13. SEBI (Mutual Funds) Regulations, 1996

14. SEBI vide Circular No. MRD/DoP/SE/DEp/Cir-14/2007

dated December 20, 2007

15. Securities Contracts (Regulation) (Procedure for Holding Inquiry

and Imposing Penalties by Adjudicating Officers) Rules, 2005

16. Securities contracts (Regulation) (Appeals to Securities Appellate

Tribunal) Rules, 2000

17. Securities Contracts (Regulation) Rules, 1957

18. SEBI (Bankers to an Issue) Regulations, 1994

19. SEBI (Underwriters) Regulations, 1993

20. SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993

21. SEBI (Merchant Banker) Rules, 1992

22. SEBI (Merchant Bankers) Regulation,1992.

23. Companies (Issue of Share Capital with Differential Voting Rights)

Rules, 2001 vide GSR No. 167(E) dated 9th of March, 2001

24. SEBI vide Circular No. MFD/C1R1/1/189/2000

25. SEBI( Issue of Capital and Disclosure Requirements) Regulations,2009



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Table ofCases

1. Bacha F. Guzdar v. CIT (AIR 1955 SC 74)....43

2. CIT v. Standard Vacuum Oil Co. (AIR 1966 SC 1393).....43

3. Harinagar Sugar Mills v. Shyam Sunder Jhunjhunwala

(AIR 1961 SC 1669)...........44

4. Harison and Crossfield (India) Ltd.v. ROC

[(1980) 50 Comp Cas 346 Cal]....45



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5. Indian Chemicals Products Ltd. V. State of Orrisa

AIR 1967 SC 253....44

6. K. Madhava v. Popular Bank[(1969)39 Comp cases 717]..44

7. New Brunswick and Canada Rly and Land Com v. Muggeridge1

(1860) 3 LT 65144

8. Pragma Desai v. National Stock Exchange of India

[(2006) 132 Comp Cas 909]..50

9. V.B.Rangraj v. V.B. Gopalalkrishna ( AIR 1992 SC 45))...44

10.Vijay Kumar Gupta v. Eagle Paints & Pigment Industries (P) Ltd.

(1997) 26 Corpt LA 236 CLB ..41



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Chapter -

1

Introduction

This chapter provides a brief overview of the financial markets and regulatory framework

for the investors protection. Mayya has observed that investors are a heterogeneous


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group, that may be large or small, rich or poor, expert or layman and not all the investors

need equal degree of protection. An investor has three objectives while investing his

money, namely safety of investment money, liquidity position of invested money and

return on investment.

The government is trying hard to achieve enough transferability, openness and

honesty in the market but it ahs almost failed in achieving most of its objective in this

field. In this chapter, I have tried to present an overview of the structure of financial

system and regulatory mechanism.

1) Financial System

Every modern economy is based on a sound financial system which helps in production,

capital and economic growth by encouraging saving habits, mobilizing savings from

households and other segments and allocating savings into productive usage such as

trade, commerce and manufacture etc.

Financial systems cover both credit and cash transactions. All financial

transactions are dealt with by cash payment or by way of negotiable instruments like

cheque, bills of exchange, hundies etc. Thus a financial system is a set of financial

instruments through which financial surpluses are mobilized from the units generating

surplus income and transferring them to others in need of them. The functions of a good

financial system are manifold. They are-:

(a) Regulation of currency.

(b) Banking functions

(c) Performance of agency services and custody of cash reserves.

(d) Management of national reserves of international currency.



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(e) Credit control

(f) Administering national, fiscal and monetary policy to ensure stability of the

economy.

(g) Supply and deployment of funds for productive use.

(h) Maintaining liquidity.

Organisational structure of Financial System:

Broadly, organisational structure of financial system includes various components i.e.,

Financial Markets, Product and market participants.

Financial Markets

Efficient transfer of resources from those having idle resources to others who have a

pressing need for them id achieved through financial markets. Stated formally, financial

markets provide channels for allocation of savings to investment. These provide variety

of assets to savers as well as various forms in which the investors can raise funds and

thereby decouple the acts of saving and investments. The financial markets have two

major components; the money market and the capital market.

Money market

The money market refers to the markets where borrowers and lenders exchange short

term funds to solve their liquidity needs. These instruments are generally financial claims

that have low default risk, maturities under one year and high marketability.

Capital market

The capital market is a market for financial investment that are direct or indirect claims to

capital (Gart, 1988). It is wider than the securities market and embraces all forms of



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lending and borrowing, whether or not evidenced by the creation of a negotiable financial

instrument (Darke, 1980).

The capital market and in particular the stock exchange is referred to as the

barometer of the economy. Governments policy is so molded that the creation of wealth

through products and services is facilitated and surpluses and profits are channelised into

productive uses through capital market operations.

Securities Market

The securities market, however, refers to the markets for those financial

instruments/claims/obligations that are commonly and readily transferable by sale. The

Securities Market has two inter-dependent and inseparable segments, the new issues

(primary) market and the stock (secondary) market.

Primary Market

The primary market provides the channel for sale of new securities while the secondary

market deals in securities previously issued. The issuer of securities sells the securities in

the primary market to raise funds for investment and/or to discharge some obligations.

In other words, the market wherein the resources are mobilized by companies by

issue of new securities is called the primary market. These resources are required for new

project as well as for existing projects with a view to expansion, modernization,

diversifications and upgradation.

The issue of securities by companies can take place in any of the following

methods:

(1) Initial public offer (securities issued for the first time to the public by the

company);



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(2) Further issue of capital.

(3) Rights issue to the existing shareholders (on their renunciation, the shares can be

sold by the company to others)

(4) Offer of securities under reservation/ firm allotment basis to:

(a) foreign partners and collaborators,

(b) mutual funds

(c) merchant bankers

(d) banks and institutions

(e) Employees.

(5) Offer to public;

(6) Bonus Issue.

The primary market is of great significance to the economy of a country. It is through this

only that funds flow for productive purposes from investors to entrepreneurs.

Secondary Market

The secondary market enables those who hold securities to adjust their holdings in

response to changes in their assessment of risk and return. They also sell their securities

for cash to meet their liquidity needs.

Secondary market essentially comprises of stock exchanges which provide

platform for purchase and sale of securities by investors. The trading platforms of the

stock exchange are accessible only through brokers and trading of securities is confined

only to stock exchanges.

The stock exchanges are the exclusive centers for the trading in securities and that

too only through brokers. The regulatory framework heavily favors the recognized stock



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penalize them in case of violation of rules; regulations and guidelines issued under the

powers under the Act. SEBI has full autonomy and authority to regulate and evolve an

orderly securities market.

Securities Contract (Regulation) Act, 1956: It provides for direct and indirect control of

virtually all aspects of securities trading and the running of stock exchanges and aims to

prevent undesirable transactions in securities. It gives Central Government/ SEBI

regulatory jurisdiction over (a) stock exchange through a process of recognition and

continued supervision (b) contracts in securities and (c) listing of securities in the stock

exchanges. As a condition of recognition, a Stock exchange follows the conditions and

procedure prescribed by the Central Government. Organised trading activities in the

securities take place on a specified recognized stock exchange.

Depositories Act, 1996: The Act provides for the establishment of depositories in

securities with the objective of ensuring free transferability of securities with speed,

accuracy and security by (a) making securities of public limited companies freely

transferable subject to certain exception (b) dematerilaisng the securities in the depository

mode and (c) providing for maintenance of ownership records in a book entry form.

Companies Act, 1956: It deals with the issue, allotment and transfer of securities and

various aspects relating to company management. It provides for disclosure in public

issues of capital, particularly in the fields of company managements and projects,

information about the other listed companies under the same management and

management perception of risk factors

Rules and Regulations



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The government has framed under the SCRA, SEBI Act and the Depositories Act. SEBI

has framed regulations under the SEBI Act and the Depositories Act for registration and

regulations of all market intermediaries, and for the prevention of unfair trade practices,

inside trading etc. Under these Acts, Government and SEBI issues notifications,

guidelines and circulars which need to be complied with by market participants.

Regulators

The responsibility of regulating securities market is shared by the Department of

Economic Affairs (DEA), Ministry of Corporate Affairs, RBI and SEBI. The activities of

these agencies are regulated by a High Level Committee on Capital Markets. The order

of SEBI under the securities law is appellable before a Securities Appellate Tribunal.

The second chapter of this project Instruments of investment deals with the

salient features of the important and prominent instruments of investment and the code of

conduct to be observed in this regard. This chapter deals with the instrument of both the

capital market and money market. I have tried to give a brief overview of the entire

structure however due to limitation in regard to page limit; I have tried to keep it as short

as possible.

The third chapter Investors Protection specifically concentrates on the topic.

In this chapter, I have dealt with all the kinds of authorities and also provided a list of the

authorities dealing with specific instruments. I have provided a brief sketch of the rights

which investors have under various acts and also provided an overview of the

ombudsman and the IEPF etc.



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The final chapter Suggestions deals with report of some of the committees on

Investor Protection and provides suggestions for the better working of investor protection

mechanism.

In the end I have given some suggestions to change the position in regard to the

world of investor and to provide him a good sleep without the tension of his money/

funds being swallowed by the fraudulent players of the market.

I have tried to keep it English and do not make it look like Greek.



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Chapter -

2

CONSTITUTIONAL PROVISIONS

RELATING TO JUDICIARY

A notable feature of the Constitution is that it accords a dignified and crucial

position to the judiciary. The Supreme Court, High Courts and the lower Courts

constitute a single, unified, judiciary having jurisdiction over all cases arising under any

law whether enacted by Parliament or State Legislatures. The appointment of Judges of

the Supreme Court and their removal are governed by Article 124 of the Constitution of

India. Articles 125 to 129 provide for certain incidental matters. The appointment and

removal of the Judges of the High Courts are governed by Article 217. Articles 218 to

221 and 223 to 224A provide for certain matters incidental thereto. Article 222 provides

for transfer of Judges from one High Court to another.



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So far as the subordinate judiciary is concerned, the constitutional provisions

relating thereto are contained in Articles 233 to 237. These provisions are, of course,

supplemented by the rules made by the respective Governors of the States under the

proviso to Article 309 of the Constitution.

Jurisdiction of the Supreme Court

Supreme Court of India enjoys the topmost position in the judicial hierarchy of

the country. It is the ultimate court of appeal in all civil and criminal matters and the final

interpreter of the law of the land and thus helps in maintaining a uniformity of law

throughout the country. The present strength of the Supreme Court consists of one Chief

Justice and twenty seven other judges. The jurisdiction of the Supreme Court and the

High Courts is truly extensive. The Supreme Court is clothed with the power to issue

writs for enforcement of Fundamental Rights mentioned in Part III of the Constitution

(Article 32). It also acts as the appellate court in civil, revenue, taxation and many other

matters over the High Courts and other Tribunals. The powers of the Supreme Court are

set out in Articles 131 to 140. The law declared by the Supreme Court is binding on all

courts within the territory of India (Article 141) and it is the duty of every person and

authority in the country to act in aid of and render necessary assistance for the

enforcement of the orders of the Supreme Court (Article 144). The President has the

power to seek the opinion of the Supreme Court on such questions of public importance

as he thinks necessary (Article 143).

Articles 131 to 135 encompass the various jurisdictional aspects undertaken by

the Supreme Court. Article 136 speaks about the distinctive power of the apex court to



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grant special leave. By this a person can appeal to the Supreme Court only with its

consent or permission. Some of the distinguishing features of this rule are:

i. It is not confined to judgments, decrees, or final orders of the High Court.

ii. It shall lie from orders or determinations of all courts or tribunals of all courts or

tribunals in the territory of India.

iii. Since there is no condition that the previous order should be final, appeals against

interlocutory orders are permissible.

iv. The order or determination of the court or tribunal may be in any cause or matter.

It confers a wide discretion to the Court to entertain appeals in suitable cases not

otherwise provided for by the Constitution-civil, criminal, income tax cases or cases from

any kinds or tribunals existing within our country.

According to Article 141 it is said that the law declared by the Supreme Court

shall be binding on all the courts within the territory of India. It implies the law creating

role of the Supreme Court. Thus all the courts lower in the hierarchy are bound to follow

the earlier laid down decisions.1 While the Supreme Court is not bound by its own

decisions and may overrule its previous decisions.2 It can be done either by expressly

saying or impliedly by not following them in the subsequent case. However the Supreme

Court can review its own decisions even though the decision has held the field for a

considerably long time, if it is satisfied of its error or the baneful effect which a decision

would have on the general interests of the public or if it is inconsistent with the legal

philosophy of our constitution.3 And if there is an apparent conflict between the decisions

of the Supreme Court, the opinion expressed by the larger benches must be followed in

1T.K.N Rajagopalv. T.M.Karunanidhi, (1972) 4 SCC 2672State of W.B v. Corporation of Calcutta, AIR 1967 SC 9973Shambu Nath Sarkarv. State of W.B , (1973) 1 SCC 856



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preference to those of smaller benches unless the former can be distinguished by giving

reasons.4 The only thing that is binding in a judges decision is the principle upon which

the case is decided or the ratio decidendi of the case. But decisionsper in curium orsub

silentio does not have binding effect or presidential value.

Overruling of cases:

The general rule is that the overruling of an earlier decision is retrospective except

as regards matters that are res judicata or accounts that have been settled in the

meantime. In the case ofGolak Nath v. State of Punjab,

5

Supreme Court established the

rule of Prospective overruling, whereby the overruling decision shall not effect the

intermediate transactions made on the basis of the overruled decision or even the parties

in the instant case, but shall apply only to cases that arise in the future. The conditions

under which the doctrine can apply are:

i. It can be invoked only in the matters arising under the Constitution.

ii. It can be applied only in the highest Court of the Country.

iii. The scope of the law is left to the discretion of the Court mould in accordance

with the justice of the cause or matter before it.

The kinds of jurisdiction exercised by the Supreme Court are:

Original Jurisdiction:

Jurisdiction enshrined in the Article 131 is both exclusive and original. A court has

original jurisdiction when it has authority to hear and determine a case in the first

instance. By exercising the exclusive jurisdiction the Court can hear and determine a case

4Union of India v.K.S.Subramanium , (1976) 3 SCC 6775 AIR 1967 SC 1643



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The case ofunion of India v. State of Rajasthan7,a suit was filed by the State government

for compensation against the railways. Court held that the suit cannot be filed under

Article 131 as they do not involve any question with respect to the rights of the State or

the Union, but only to the rights and claims relating to ordinary business or commercial

transaction which are similar to the transaction between private individuals.

Article 131 provides a forum for the dissolution of disputes which must involve a

question (of fact/law) on which a legal right is based and not a mere political issue. In

State of Karnataka v. Union of India,8 the central government had appointed a

commission of inquiry against the Chief Minister of Karnataka. State filed a suit in the

Supreme Court for the declaration that the appointment of the commission was illegal

and ultra-vires on the grounds that

(1) Commission of Inquiry Act, 1952 does not authorize the central government to

constitute such a commission in regard to matters falling exclusively within the sphere of

the legislative and executive powers of the State.

(2) Even if the provisions of the Act do so empower they are ultra-vires for the

contravention of the terms of the Constitution as well as the federal structure, i.e. the

inviolable and basic feature of the Constitution.

(3)Section 3(1)(b) of the Act prohibits the central government from appointing another

commission to enquire into the same matter, as the commission appointed by the State

government is functioning. The Defendant contended that since the enquiry was made

against the Chief Minister and certain other ministers as individuals and not against the

State of Karnataka and so not maintainable.

7 (1984)4 SCC 2388 (1977) 4 SCC 608



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Constitutional machinery in States). The defendants raised two important contentions: 1)

Under Article 131 what is mentioned is the State and so the State government should not

be the party 2) that the present matter didnt involve a legal dispute. Court held that the

suit was maintainable under the Constitution due to the unconstitutional exercise of the

power by the President under Article 356 affecting adversely the rights of the members of

the legislative assembly and the constitutional rights of the States to insist that their

constitutional status shall not be violated by unconstitutional assault under Article 356.

In a much more recent decision of State of Karnataka v. State of A.P10 , an

agreement existed between the riparian States for setting the disputes concerning the

share of water of the River Thungabhadra in 1944. But the court held that a suit under

this article is maintainable if one of the parties refuses to honor the decisions of the Inter-

State Water Dispute Tribunal.

Constitution excludes certain matters from the exclusive jurisdiction of the Supreme

Court under this article.

I. Proviso to this section says that the jurisdiction shall not extend to a

dispute raising out of any treaty, agreement, covenant, engagement,

sanad or other similar instrument which having being entered into or

executed before the commencement of this constitution continues in

operation after such commencement or which provides that the said

jurisdiction shall not extend to such a dispute.

II. Parliament empowered under Article 262 can exclude the jurisdiction

of the Supreme Court in disputes between the States regarding the use,

distribution or control of waters of any inter-state river or river valley.

10 (2000) 9 SCC 572



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III. As per article 280 certain matters are referred to the Finance

Commission.

IV. Under article 290 adjustment of certain expense between the Union and

the States is possible.

Appellate Jurisdiction:

Article 132 deals with questions involving interpretation of the Constitution, arising out

of any proceeding (civil or criminal) in a High Court. The basic idea behind such a

provision is that on questions involving constitutional interpretation Supreme Court

should have the final say and that divergent interpretations by different High Courts

would not be desirable. Thus where a certificate is given by the High Court that the case

involves a substantial question of law, as to interpretation of the Constitution an appeal

would lie to the Supreme Court. Three conditions need to be satisfied here:

i. Order appealed should be a decree or a final order made by the High Court.

ii. The case should involve a substantial question of law as to the interpretation

of the Constitution.

iii. It should be a substantial question of law.

In T.M Krishna Swami Pillai v. Governor-General-in-council,11 it was said that the

word substantial means a question regarding which there is a difference of opinion.

Article 133 deals with the appellate jurisdiction in civil matters. The jurisdiction can be

exercised only:

11 AIR 1947 SC 37



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i. If it involves a substantial question of law of general importance and in the

opinion of the High Court the question needs to be addressed by the Supreme

Court.

ii. It must be a judgment, decree or final order of the High Court.

iii. It should be given in a civil proceeding.

Before the Amendment of 1973 an appeal could lie to the Supreme Court on a

certificate given by the High Court that the amount or the value of the subject matter of

the dispute was not less than Rs. 20,000 or that the judgment directly or indirectly

involves question respecting the property of the like amount. It has been amended

because an important question can arise even in suits of small value.

Such orders of the High Court are appeallable which finally determine the rights or

liabilities of the parties in dispute and the order becomes final if it is a final decision in

that particular civil proceeding.

Civil proceeding is one in which a person seeks to enforce by appropriate relief the

alleged infringement of his civil rights against another person or the State and which if

the claim is proved would result in the declaration express or implied of the right claimed

and the relief. The proper test for determining whether a question of law raised in a case

is substantial is whether it is of general public importance or whether it directly or

substantially affects the rights of the parties. There have been very many instances where

the certificate issued by the High Court has been revoked by the Supreme Court.

Article 134 speaks about the appellate jurisdiction in criminal matters which can

be exercised:



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i. If on appeal the High Court had reversed an order of acquittal of an accused

person and sentenced him to death; or

ii. If High Court has withdrawn for trial before itself any case from any court

subordinate to its authority and has in such trial convicted the person and

sentenced him to death.

iii. If under Article 134A it is certified by the High Court that the case is fit for

appeal to the Supreme Court.

Thus the first and the second deal with an appeal without a certificate, while the third

with a certificate from the High Court (under Article 134A).If a case does not involve

any question of law then however difficult the question of fact may be that would not

justify the granting of certificate underArticle 134(1)(c) . Though it is the sole discretion

of the High Court it should be exercised properly as the discretion is a judicial one. Thus

in one sense the power granted by Article 134(1) is limited to some extent. But that

limitation is overcome by the clause (2) of the same Article, which empowers the

Parliament to enlarge the appellate jurisdiction of the Supreme Court in regard to

criminal matters through enactment of legislations. Eg: Supreme Court (Enlargement of

Criminal Appellate Jurisdiction) Act, 1970.

Article 138 of the Constitution which speaks regarding the enlargement of the jurisdiction

of the Supreme Court, empower the Parliament to invest the Supreme Court with

additional jurisdiction with respect to enforcement of any of the matters enumerated on

the Union List. i.e. if the Union Legislature is competent to legislate on a certain matter,

it is obviously competent to confer judicial power in respect of that matter on a tribunal

of its choice ; and if it chooses the Supreme Court for that the Court will have the



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jurisdiction so conferred. This provision keeps open the powers of the Supreme Court so

wide and vague so that Judicial Activism can be encouraged to its maximum.

Jurisdiction of High Courts

A High Court consists of the Chief Justice and such other judges as the President may

appoint from time to time (Article 216). The number of judges of the High Court is

flexible and it can be settled by the Central executive from time to time by keeping in

view of the work load. The jurisdiction of the High Courts is equally extensive, if not

more. Under Article 226, the High Court is invested with power to issue writs

throughout the territory over which it exercises jurisdiction for the enforcement of the

Fundamental Rights mentioned in Part III or for any other purpose. Every High Court

exercises power of superintendence and control over all the Tribunals and Courts within

its jurisdiction. It exercises appellate, revisional and reference powers over the decisions

of the Courts, Tribunals and other authorities within its jurisdiction.

Empowered under Article 134A High Courts can grant certificate for appeal to

the Supreme Court under the circumstances:

i. if it deems fit on its own motion; and

ii. if an oral application is made by or on behalf of the aggrieved parties immediately

after the passing of the judgment

iii. It is not an independent provision but is ancillary to Articles 132(1), 133(1) and

134(1)

Subordinate Judiciary

The civil and criminal courts below the High Court which may be referred to as

subordinate judiciary are empowered to entertain and adjudicate upon all civil disputes



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and all kinds of criminal cases (except those which have been excluded from their

jurisdiction). The higher-level officers, namely, district judges, exercise appellate power

in both civil and criminal matters over the orders of Munsiffs and Magistrates. The

structure of subordinate judiciary varies from State to State since it is within the power of

the State to organize the subordinate judiciary in an appropriate manner. Broadly

speaking, however, at the base of the pyramid, on the civil side, is the munsiff (or by

what other name he is called). His jurisdiction is limited not only by territory but also by

monetary limit. His orders are amenable to appeal. In between munsiff and district

judge, there is a layer which may broadly be called subordinate judge. He exercises

original civil jurisdiction on all matters and very often appeal against his order lies to the

High Court. On the criminal side, the First Class Magistrate is at the base of the pyramid.

He can try offences punishable with three years or less. Against his order an appeal lies

to the sessions judge (who is called district judge on the civil side). In between these two

officers, there is the Assistant Sessions Judge. He tries session cases punishable up to ten

years. Generally speaking, an appeal against his order lies to the High Court.

Constitution being the supreme law of the land and all governmental organs owe their

origins to the Constitution and derive their powers from its provisions; the government

must function within the framework of the Constitution and must not do anything which

is inconsistent with the provisions of the Constitution. Thus for the efficient functioning

of the governmental machinery two of the important concepts that need to be upheld are:

a) Independence of Judiciary

b) Judicial review



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Chapter 4

Concept of Judicial Review and

its limitations

Overview of the concept of judicial review

Though under the Constitution the polity is dual, the judiciary is integrated which

can interpret and adjudicate upon both the Central and State laws. This power of judicial

review is a right protecting service rendered by the Courts so as to ensure the rule of law.

The court in its exercise of its power of judicial review would zealously guard the human

rights, fundamental rights and the citizens rights of life and liberty as also many non-



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statutory powers of governmental bodies as regards their control over property and assets

of various kinds, which could be expended on building, hospitals, roads and the like, or

overseas aid, or compensating victims of crime.

This power is exercised by the Supreme Court through Article 32(the right to

move to the apex court by appropriate proceeding for the enforcement of rights conferred

by Part III is guaranteed) and the High Courts through article 226. Supreme Court can

issue directions or orders or writs including writs in the nature of Habeas Corpus,

mandamus, prohibition, quo warranto, and certiorari for the enforcement of the said

rights.

The scope of the provision is very wide, that the judiciary can perform the

reviewing power in all cases of abridgement of a fundamental right for legislative

enactments as well as executive actions. Article 226 has a wider ambit as it guarantees

both fundamental and constitutional rights on to the citizens. Article 32 which by itself

forms a fundamental right (Right to Constitutional remedies) has a reduced scope

guaranteeing enforcement of only the fundamental rights. Thus, judicial review is a

highly complex and developing subject. It has its roots long back and its scope and extent

varies from case to case.

Judicial review in India comprises of three aspects:

I. Judicial review of legislative action

II. Judicial review of judicial decisions and

III. Judicial review of administrative action.

Scope of the concept of judicial review



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Article 32 differs from Article 226 in that whereas Article 32 can be invoked

only for the enforcement of fundamental rights, Article 226 can be invoked not only for

the enforcement of fundamental rights but also for any other purpose as well. Thus the

Supreme Courts power under Article 32 is restricted as compared with the power of a

High Court under Article 226. But Article 32 can be invoked even when a law declares a

particular administrative action as final.12

Article 32(1) does not say what proceedings the Supreme Court may be moved

for the enforcement of the fundamental rights. The only limitation is that the proceedings

must be appropriate for the enforcement of fundamental rights. Article 32(2) confers

power on the Court in its widest terms not only confining to issue high prerogative writs

but also to issue any directions, orders, or writs which may be appropriate for the

enforcement of the fundamental rights.

Since the Constitution has bee silent with regard to the procedure to be followed,

the Court has even accepted a letter addressed to the Court as an appropriate proceeding.

By and large the Supreme Court has its jurisdiction under Article 32 in a creative manner

and it is that jurisdiction and procedure that is necessary to fulfill a purpose that is applied

to be permissible to the Court. Thus the actual scope of the provision is broader enough

to promote a vivid platform for the actual implementation of judicial activism in our

country.

A comparison between the position in India and United States of

America

Judicial Review in India bears resemblance to that available in the United States,

where the Supreme Court have endowed powers to declare a law unconstitutional, if it is

12Gopalan v. State of Madras, AIR 1950 SC 27



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In India the judicial review goes far beyond that of US, as here the validity of

amendments can be reviewed by the Courts on the grounds that the amendments violates

the basic structure or features of the Constitution.18

Principle of proportionality

The court as far back as in 1952 in State ofMadras v V.G.Row19 had observed so: The

test of reasonableness, wherever prescribed, should be applied to each individual statute

impugned, and no abstract standard or general pattern of reasonableness can be laid down

as applicable to all the cases. The nature of right alleged to have been infringed, the

underlying purpose of the restrictions imposed, the extent and urgency of the evil sought

to be remedied thereby, the disproportion of the imposition, the prevailing conditions at

that time, should all enter the judicial verdict. In evaluating such elusive factors and

forming their own conceptions of what is reasonable, in all the circumstances of a given

case, it is inevitable that the social philosophy and the scale of values of the judge

participating in the decision would play an important part, and limit to their interference

with legislative judgment in such cases can only be dictated by their sense of

responsibility and self-restraint and the sobering reflection that the Constitution is meant

not only for people of their way of thinking but for all, and the majority of the elected

representatives of the people have, in authorizing the imposition of the restrictions,

considered them to be reasonable.

Ever since 1952, the principle of proportionality has been applied vigorously to

legislative and administrative action in India. Thus, administrative action in India

affecting the fundamental rights has always been tested on the anvil of the proportionality

18Kesavananda Bharathi v. State of Kerala , AIR 1973 SC 146119 AIR 1952 SC 196



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in the last 50 years even though it has not been expressly stated that the principle that is

applied is the proportionality principle.

PART II :---Limits of Judicial Review

It is true that the courts have wide powers of judicial review of Constitutional and

statutory provisions. These powers, however, must be exercised with great caution and

self-control. The courts should not step out of the limits of their legitimate powers of

judicial review. The parameters of judicial review of Constitutional provisions and

statutory provisions are totally different. In J.P.Bansal v State of Rajasthan 20 the

Supreme Court observed:

It is true that this court in interpreting the Constitution enjoys a freedom which

is not available in interpreting a statute. It endangers continued public interest in

the impartiality of the judiciary, which is essential to the continuance of rule of

law, if judges, under guise of interpretation, provide their own preferred

amendments to statutes which experience of their operation has shown to have

had consequences that members of the court before whom the matters come

consider to be injurious to public interest. Where the words are clear, there is no

obscurity, there is no ambiguity and the intention of the legislature is clearly

conveyed, there is no scope for the court to innovate or to take upon itself the task

of amending or altering the statutory provisions. In that situation the judge should

not proclaim that they are playing the role of lawmaker merely for an exhibition

of judicial valor. They have to remember that there is a line, though thin, which

separates adjudication from legislation. That line should not be crossed or erased.

20 2003(3) SCALE 154.



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This can be vouchsafed by an alert recognition of the necessity not to cross it and

instinctive, as well as trained reluctance to do so.

If in case the court forgets to appreciate this judicial wisdom, it would undermine the

constitutional mandate and will disturb the equilibrium between the three sovereign

organs of the Constitution. In State (Govt of NCT of Delhi) v Prem Raj21 the Supreme

Court took a serious note of this disturbing exercise when the High Court commuted the

sentence by transgressing its limits. The court observed vey categorically that the

following should be adopted as a rule:

The power of commutation exclusively vests with the appropriate government.

The appropriate government means the Central government in cases where the

sentence or order relates to a matter to which the executive power of the Union

extends, and the state government in other cases. Thus, the order of the high Court

is set aside.

Similarly, inSyed T.A. Haqshbandi v State of J&K22, the Supreme Court observed:

Judicial review is permissible only to the extent of finding whether the process in

reaching the decision has been observed correctly and not the decision itself, as

such. Critical or independent analysis or appraisal of the materials by the court

exercising powers of judicial review unlike the case of an appellate court would

neither be permissible nor conducive to the interests of either the officer

concerned or the system and institutions. Grievances must be sufficiently

substantiated to have firm or concrete basis on properly established facts and

further proved to be well justified in law, for being countenanced by the court in

21 (2003) 7 SCC 121.22 (2003) 7 SCC 121.



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exercise of its powers of judicial review. Unless the exercise of power is shown to

violate any other provision of the Constitution of India or any of the statutory

rules, the same cannot be challenged by making it a justifiable issue before the

court.

The courts are further required not to interfere in policy matters and political questions

unless it is absolutely essential to do so. Even then also the courts can interfere on

selective grounds only. In Peoples Union of Civil Liberties v Union of India23 the

Supreme Court observed:

This court cannot go into and examine the need of Prevention of Terrorism Act.

It is a matter of policy. Once legislation is passed, the government has an

obligation to exercise all available options to prevent terrorism within the bounds

of the Constitution. Moreover, mere possibility of abuse cannot be counted as a

ground for denying the vesting of powers or for declaring a statute

unconstitutional.

Similarly, in U.O.I. v International Trading Co24the Supreme Court observed:

Article 14 of the Constitution applies also to matters of government policy and

if the policy or any action of the government, even in contractual matters, fails to

satisfy the test of reasonableness, it would be unconstitutional. While the

discretion to change the policy in exercise of the executive power, when not

trammeled by any statute or rule is wide enough, what is imperative and implicit

in terms of Article 14 is that a change in policy must be made fairly and should

not give the impression that it was so done arbitrarily or by any other ulterior

23 2003 (10) SCALE 967.24 (2003) 5 SCC 437.



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criteria. The wide sweep of Article 14 and the requirement of every state action

qualifying for its validity on this touchstone, irrespective of the field of activity of

the state, is an accepted tenet. The basic requirement of Article 14 is fairness in

action by the state, and non-arbitrariness in essence and substance is the heartbeat

of fair play. Every state action must be informed by reason and it follows that an

act uninformed by reason is per se arbitrary.

Similarly, where a political question is involved, the courts normally should not interfere.

It is also equally settled law that the court should not shrink its duty from performing its

functions merely because it has political thicket.

Thus merely because the question has a political complexion that by itself is no

ground why the court should shrink from performing its duty under the constitution if it

raises an issue of constitutional determination. Every constitutional question concerns the

allocation and exercise of governmental power and no constitutional question can,

therefore, fail to be political. As large as a question arises whether an authority under the

Constitution has acted within the limits of its power or exceeded it, it can certainly be

decided by the court. Indeed it would be its constitutional obligation to do so.

InB.R.Kapur v State of T.N25 the Supreme Court held that it is the duty of the

court to interpret the Constitution. It must perform the duty regardless of the fact that the

answer to the question would have a political effect.

Thus, judicial review is a highly complex and developing subject. It has its roots

long back and its scope and extent varies from case to case. It is considered to be the

basic feature of the Constitution. The court in its exercise of its power of judicial review

25 (2001) 7 SCC 231.



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would zealously guard the human rights, fundamental rights and the citizens rights of

life and liberty as also many non-statutory powers of governmental bodies as regards

their control over property and assets of various kinds, which could be expended on

building, hospitals, roads and the like, or overseas aid, or compensating victims of crime.

The limitation on the power of judicial review is a recurring theme in the evolution of our

Constitution. In some of its distinguished judgments, the Supreme Court has defined the

outline of sovereign power as distributed amongst the three branches of Government

namely, the legislature, the executive and the judiciary.

There is a compelling case that the power of judicial review delegated to our

superior courts in various provisions of the Constitution itself is as much by the command

of the people. But people who are in favour of this view argues that judicial inquiry of the

validity of legislation is a necessary protection against the oppression of majorities, that

the judges do not check the people, the Constitution does and since the Constitution itself

is popularly ratified, there is nothing undemocratic in the power of judicial review.

The decision of the Honourable Supreme Court of India in Kesavananda

Bhartis case marked and explained the term which is called basic structure to measure

whether the Parliament is seeking to destroy the Constitution, by using its powers under

art. 368, which was so far, understood to be a power, the exercise of which was not

subject to Judicial scrutiny. Basic Structure is not contained in one or more provisions of

the Constitution of India, but it is supposed to be the sum total of the core of our

Constitution.

Also in the same case the Apex Court has interpreted the scope and meaning of

judicial review:



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...The power of judicial review is, however, confined not merely to deciding

whether in making the impugned laws the Central or state legislatures have acted

within the four corners of the legislative lists earmarked for them; the courts also

deal with the question as to whether the laws are made in conformity with and not

in violation of the other provisions of the Constitution.... As long as some

fundamental rights exist and are a part of the Constitution, the power of judicial

review has also to be exercised with a view to see that the guarantees afforded by

those rights are not contravened.... review has thus become an integral part of our

constitutional system and a power has been vested in the high courts and the

Supreme Court to decide about the constitutional validity of provisions of statutes.

If the provisions of the statute are found to be violative of any Art. Of the

Constitution, which is the touchstone for the validity of all laws, the Supreme

Court and the high courts are empowered to strike down the said provisions.

In Minerva Mills vs. Union of India, it was observed by the Supreme Court that the

clauses of art. 31-C as introduced by the Constitution (42nd Amendment) Act, 1976,

which required to take away the power of judicial review were unconstitutional.

However, judicial review was not held to be part of the basic structure of the Constitution

by the majority in this decision, although Bhagwati J in his minority decision traced the

power of judicial review to Arts. 32 and 226 and observed it to be a part of the basic

structure of the Constitution, and if taken away by a constitutional amendment would

amount to subversion of the Constitution.

Justice Ahmadi referred the case ofState of Madras v. V. G. Row, where Chief Justice

Patanjali Shastri held that:



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. Our Constitution contains express provision for judicial review of legislation

as to its conformity with the Constitution If, then, the courts in this country face

up to such important and none too easy task, it is not out of any desire to tilt at

legislative authority in a crusader's spirit, but in discharge of a duty plainly laid

upon them by the Constitution. This is especially true as regards the 'fundamental

rights', as to which this court has been assigned the role of a sentinel on the qui

vive. While the court naturally attaches great weight to the legislative judgment, it

may not desert its own duty to determine finally the Constitutionality of an

impugned statute.

Justice Ahmadi then went on to examine whether the power of judicial review vested in

the High Courts and in the Supreme Court under Arts. 226, 227 and 32 is part of the basic

structure of the Constitution: It is to be presumed that those who work the Constitution,

those who compose the legislature and those who compose the executive and the

judiciary know their functions, their limitations and their duties. It is therefore to be

expected that if the executive is honest in working the Constitution, then the executive is

bound to obey the legislature without any kind of compulsion laid down in the

Constitution. Similarly, if the executive is honest in working the Constitution, it must act

in accordance with the judicial decisions given by the Supreme Court. In so far as the

Constitution gives supremacy to that is a matter of constitutional obligation which is

implicit in the Constitution itself.

Golaknath v. State of Punjab was the first time that limitations on the amending

power of Parliament under Article 368 were recognized. The majority judgment was

written by Chief Justice Subba Rao proceeding on the premise that:



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i. Article 368 contained merely the procedure, not the power of amendment;

ii. The power of Amendment lay in Entry 97of List I and

iii. As a consequence of the above, a Constitutional Amendment would be

law within the meaning of Article 13.

So, from the above arguments and references we came to the conclusion that the power of

judicial review is a part of the basic structure of the Constitution, permanent even by a

constitutional amendment as affirmed by the Supreme Court in Keshvananda Bharti.

And, representative democracy as an expression of the peoples will, speaking through

their elected representatives is a non-negotiable principle of our republican agreement

which itself is the product of an exercise of the unbroken sovereign power. The Supreme

Court of India as the guardian of democratic morality will without a doubt remember that

the exercise of constitutional power is persistent in the final analysis by the intellectual

integrity, independence and fearlessness of judges.



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BIBLIOGRAPHY

BOOKS REFFERED

SECURITISATION, ASSET RECONSTRUCTION & ENFORCEMENT

OF SECURITY INTEREST (Also Covering Resolution of NPAs, Corporate debt

restructuring, Securitisation as a financial instrument, Detailed commentary on RBI

Guidelines on Securitisation), VINOD KOTHARI, 2nd Edition, 2007, Published

by Lexis-nexis Buttleworth Wadhwa.

Law & Practice Relating to Securitisation & Reconstruction of Financial

Assets & Enforcement of Security Interest, M.R. UMARJI,5th

Edition,

2010,Published by Taxmann.

GUIDE TO COMPANY LAW PROCEDURES (With Corporate Governance

& E-Filing), M C BHANDARI, 20th Edition, 2007, Published by Lexis-nexis

Buttleworth Wadhwa.

Executive programme on Securities Laws and Compliances, Module-II,

Paper-6, Study Material of ICSI

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www.ebc -india.com/practicallawyer

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http://www.ficci.com/http://www.indlaw.com/http://www.ficci.com/http://www.indlaw.com/


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www.lawcommissionofindia.nic.in

www.legalservicesindia.com

www.manupatra.com

www.mca.gov.in

www.sebi.gov.in

www.rbi.org.in

www.iepf.gov.in

http://www.legalservicesindia.com/http://www.manupatra.com/http://www.mca.gov.in/http://www.sebi.gov.in/http://www.rbi.org.in/http://www.iepf.gov.in/http://www.legalservicesindia.com/http://www.manupatra.com/http://www.mca.gov.in/http://www.sebi.gov.in/http://www.rbi.org.in/http://www.iepf.gov.in/


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Documents

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