[Any/All views expressed here are solely of the authors]
For most part during the June of 1969, newspapers teemed with headlines on the bull run in the market. “Bears were on the run, hotly chased by the aggressive bulls. Equities simply soared. It was the sharpest rise that the stock market has had for any single week for months. In fact, rarely has the market been known to perform such a feat.” reads an EPW Article dated June 21, 1969.[1] This, it may be noted was just two days after the Indian Government announced nationalisation of several commercial banks. The same article noted that the self-adjusting mechanism to correct errors of excessive optimism and pessimism in speculative markets do sometimes get affected by the large element of manipulation, which may have been an attribute of this bull run as well (which showed no significant reaction to political events that were occurring at the time).[2]
Just a week later on June 27, 1969, the Central Government under Section 16(1) of the Securities Contracts (Regulation) Act, 1956 (“SCRA”),[3] issued notification S.O. 2561 imposing an immediate and blanket ban on all forward trading in shares. The ban continued till 2000. This blogpost takes you through this critical notification, its surrounding backdrop and a caselaw that arose on its consequence.
The official press note dated June 27, 1969 that accompanied the notification is reproduced below:
“Certain unhealthy trends have been developing of late in the shares and securities business. If they are allowed to continue unabated, there is a danger to the health of the stock market and to the investment climate, particularly when there is a revival of public investment interest in the capital market. To curb these unhealthy trends and to prevent undesirable speculation, the Central Government has, by a notification issued today (June 27) in the Gazette of India Extraordinary, banned, with immediate effect, forward trading in shares at all the stock exchanges. Existing contracts entered into upto the date of the notification and remaining to be performed arc, however, permitted by the same notification to be liquidated in accordance with the rules, bye-laws and regulations of the stock exchanges concerned”
As an obvious corollary, the markets demonstrated the change in sentiments by plunging a downward spiral. “The official announcement…came like a bolt from the blue and the avalanche of panicky selling that swept the market.”, another EPW article noted.[4] While this important policy shift was rightly criticized for its suddenness and severity, for the lack of any tightening that could have phased forward contracts out or regulate the ills plaguing their allowance, it was also rather imminent. This was because the presence of certain big bull operators having a stranglehold over the market and the manipulation exerted by them was a known fact as was the inability of stock exchange authorities to take effective measures because of the widely conflicting interests at stake.[5] Of course, the enforcement of the ban was not without complications, and no noteworthy liquidation of outstanding contracts was seen for a considerable amount of time.[6]
Desh Bandhu Gupta v. Delhi Stock Exchange
The Supreme Court in Desh Bandhu Gupta & Co & Ors., v. Delhi Stock Exchange,[7] had the opportunity to witness one such complication, in this case, a member of Delhi Stock Exchange (“DSE”) attempted to resist the directions of the exchange towards timely and appropriate closing out of the outstanding positions.
The Board of Directors of DSE (“DSE Board”) had considered the abnormal situation arising from the ban and issued a notice to all its members directing them to submit their lists of outstanding transactions in all cleared list securities and to deposit also interim margins in cash/approved securities calculated ‘on the basis of differences between the rates of the last clearing and certain average specified rates fixed’.
The Appellant preferred an appeal before the Supreme Court after the Delhi High Court dismissed his writ petition challenging the directions of DSE demanding payment of interim margins, the resolution declaring him to be a defaulter for failure to adhere to the directions and the decision of DSE calling upon him to additionally deposit security.
The Supreme Court examined the proper construction of the scope and ambit of the proviso to the notification, to determine whether after imposition of the ban, the contracts that remained outstanding were permitted to be closed or liquidated under proviso in accordance with the rules, byelaws and regulations of the DSE or not.
In light of the above background, it merits now reproducing the text of the notification
“In exercise of the powers conferred by sub-section (1) of Section 16 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Central Government, being of opinion that it is necessary to prevent undesirable speculation in securities in the whole of India, hereby declares that no person, in the territory to which the said Act extends, shall, save with the permission of the Central Government, enter into any contracts for the sale or purchase of securities other than such spot delivery contract or contract for cash or hand delivery or special delivery in any securities as is permissible under the said Act, and the rules, byelaws and regulations of a recognized stock exchange:
Provided that a contract other than a spot delivery contract or contract for cash or hand delivery or special delivery in any securities on the Cleared Securities List of a recognised stock exchange may be entered into between its members or through or with any such member for the purpose of closing out or liquidating all existing contracts entered into up to the date of this notification and remaining to be performed after the said date,
But such contracts shall be subject to the rules, bye-laws and regulations of the recognized stock exchange that come into force when further new dealings are prohibited in any securities on the Cleared Securities List and subject also to such terms and conditions, if any, as the Central Government may from time to time impose.”
Acknowledging that the drafting of the notification was far from happy, the Supreme Court opined that it still was clear enough on the points for consideration. It noted that the proviso dealt fully with how all existing contracts remaining outstanding as on the date of the notification should be closed/liquidated and that this was meant for all outstanding transactions of forward contract which would include carry over. The Court noted that the expression “such contracts” occurring in the last part of the notification had nothing to do with the existing outstanding contracts, the closing or liquidating of which was independently provided for by the proviso.
It opined that on proper construction of the notification in question the proviso clearly permitted the closing or liquidating of existing outstanding transactions in the normal manner by entering into a forward contract which would include carry over, in accordance with the rules, byelaws and regulations of the DSE. Besides taking into account the press note issued (as discussed earlier), the Supreme Court noted a response dated June 29, 1969, of the Ministry of Finance to the President of DSE, reproduced below:
“As stated in the notification itself, all outstanding contracts which were not liquidated till the date of the notification, will have to be liquidated in accordance with the relevant rules, bye-laws and regulations of your exchange in that regard.
A statement of outstanding position in each of the cleared securities on your Exchange, as on the date of the notification may please be forwarded to us as early as possible and thereafter at each settlement so as to enable Government to know the reduction in the outstanding business effected from time to time. As will be seen, no specific period has been mentioned in the notification for liquidation of the outstandings. It is, however, hoped that you will issue suitable instructions to your members to ensure that the outstandings are cleared in a smooth and orderly manner within a reasonable period.”
Supreme Court invoked the principle of contemporanea expositio (interpreting a statute/any other document by reference to the exposition it has received from contemporary authority). The Hon’ble court held that even without aid of these two documents which contain a contemporaneous exposition of the Government’s intention, and on a plain construction of the notification, it was clear that the proviso permitted the closing out or liquidation of all outstanding transactions by entering into a forward contract in accordance with the rules, bye-laws and regulations of the respondent.
Backdrop
It is quite important to understand that the notification was issued amidst a significant shift in India’s economic policy. Besides nationalization of several commercial banks, the Monopolies and Restrictive Trade Practices Act, 1969 was also passed in the same year towards striking out a balance between the twin objective of social policy, i.e., economic development and equity (as stated in the Introduction to the Act).
Sharing an excerpt from a very interesting article in the EPW titled “Luxury- No Social Purpose”[8] succinctly capturing the complexities of the time while discussing the then Prime Minister Indira Gandhi’s statements during a press conference in October 1969:
“Stock exchange operators in Bombay refrained from trading on October 27 to register their protest against the Prime Minister's remarks that forward trading was a "luxury" and it served no "social purpose". But this only reflected the prevailing mood of frustration as a sequel to the continued ban on forward trading…. The stock exchange authorities have mainly themselves to blame for the present situation. Official attitude toward resumption of forward deals seems to have stiffened largely because of the failure on the part of market authorities to secure any worthwhile reduction in the speculative positions of big operators outstanding at the time of the announcement of the ban on June 27.”
This view was a shift from the parliamentary discussions that took place while passing the SCRA, where the stock markets (though not forward trading as such nor expressly) were viewed to indeed serve an important social function.
[1] Need for Discipline, Economic and Political Weekly, Vol. 4, Issue No. 25, 21 Jun, 1969.
[2] Need for Discipline, Economic and Political Weekly, Vol. 4, Issue No. 25, 21 Jun, 1969.
[3] Power to prohibit contracts in certain cases.—(1) If the Central Government is of opinion that it is necessary to prevent undesirable speculation in specified securities in any State or area, it may, by notification in the Official Gazette, declare that no person in the State or area specified in the notification shall, save with the permission of the Central Government, enter into any contract for the sale or purchase of any security specified in the notification except to the extent and in the manner, if any, specified therein.
(2) All contracts in contravention of the provisions of sub-section (1) entered into after the date of the notification issued thereunder shall be illegal.
[4] Ill-advised and Unwarranted, Economic and Political Weekly, Vol. 4, Issue No. 27, 05 Jul, 1969.
[5] Ill-advised and Unwarranted, Economic and Political Weekly, Vol. 4, Issue No. 27, 05 Jul, 1969.
[6] Plea for forward trading, EPW, Vol. 4, Issue No. 39, 27 Sep, 1969
[7] 1979 4 SCC 565
[8] November 01, 1989, EPW.
تعليقات