CASE ANALYSIS

VINAY BUBNA vs. STOCK EXCHANGE, MUMBAI & ORS

By

Name of the Student: N.MANASWINI

Roll No.: 18LLB054

Semester: VIII

Name of the Program: 5 year (B.A., LL.B.)

Name of the Faculty Member: Prof. Dayananda Murthy C P

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

NYAYAPRASTHA, SABBAVARAM,

VISAKHAPATNAM – 531035, ANDHRA PRADESH

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ACKNOWLEDGEMENT

“I would like to use this opportunity to extend my heartiest gratitude to all the people who
have helped me develop this project.”

“First and foremost, I would like to thank CORPORATE LAW professor, Dr. Dayananda
Murthy C P sir who has been constantly supporting me, guiding me and helping me with all
queries and difficulties regarding this project since its fledging stage. Without his enthusiasm,
inspiration and efforts to explain even the toughest of jargons in the most lucid manner, the
successful inception of this project would have been a Herculean task.”

“Next, I would like thank the DSNLU E-library for helping me find the correct resources for
my research and for helping me enrich my knowledge.”

“Finally, I would like to extend my gratitude to my batch mates and seniors for providing me
some unique ideas and insights which helped me make this project even better.”

“I know that despite my sincerest efforts some discrepancies might have crept in, I hope and
believe that I would be pardoned for the same.”

-N. Manaswini
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TABLE OF CONTENTS

1. CASE ANALYSIS: VINAY BUBNA vs. STOCK EXCHANGE BOMBAY AND ORS.
……………………………………………………………………………..04
1.1. CASE…………………………………………………………………………….04
1.2. IDENTIFICATION……………………………………………………………...04
1.3. FACTS IN ISSUE……………………………………………………………….04
1.4. PROCEDURAL HISTORY……………………………………………………..04
1.5. ISSUES AND HOLDING……………………………………………………….05
1.6. ARGUMENTS…………………………………………………………………..05
1.7. EVALUATION OF THE CASE WITH THE PRESENT LAW………………..06
1.8. REASONING……………………………………………………………………09
1.9. SYNTHESIS……………………………………………………………………..09
1.10. RECENT CASES……………………………………………………….…...10
1.11. JUDGMENT…………………………………………………………...……10
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CASE ANALYSIS: VINAY BUBNA vs. STOCK EXCHANGE, MUMBAI & ORS

CASE: VINAY BUBNA vs. STOCK EXCHANGE, MUMBAI & ORS1

IDENTIFICATION

 SEBI entails the jurisdiction to try this case. This case was filed under Art 226 of
Constitution of India.
 The Relevant law: Securities Contracts (Regulations) Act, 1957 SEBI (Substantial
Acquisition of Shares and Takeover) Rules, Insolvency Act.

Facts in issue & Procedural History

The appellant Vinay Bubna and the respondent Yogesh Mehta (Share broker) had dealings in
sale and purchase of shares. The respondent was a member of Bombay Stock Exchange until
he was declared a defaulter by the said Exchange.
On 10th May, 1995 a sum of Rs.21, 81,635.50 P. was due and payable by the share broker
but the payment was not made. Thereupon the appellant filed an arbitration petition against
the said share broker before the Bombay High Court. After hearing both the parties, the court
confirmed ad-interim order passed on 27/12/1996 regarding the pending appointment of a
court receiver in respect of certain items including office premises of the said share broker.
The petitioner, however, was not granted relief in respect of certain items including office
premises of the said share broker. The petitioner however granted relief in respect of
membership card of the share broker and, therefore, he made a grievance in appeal filed
against the said order passed by the single judge and prayed before the appeal court that a
court receiver should have been appointment in respect of membership card of the share
broker also.
The 1st appeal court disposed of the petitioners appeal after recording the statement on behalf
of the Stock Exchange that it shall not apply any amount received by it as consideration on
nomination of the membership to any person falling in the same category for the purpose of
priorities as the appellant under Rule 16 of the stock exchange rules till the award of
arbitrator is received. The petitioner did not succeed in his efforts so the petitioner under Art.
226 of Constitution of India has challenged the denial by the Mumbai Stock Exchange

1
AIR 1999 SC 2517
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(respondent), to amend/alter/delete its rules 16 and 43 as demanded by the petitioner on the

ground that said rules are against law of Insolvency, unconstitutional, capricious and null and
void.

Issues (s) & Holding (s)

ISSUE: Whether a membership of share broker of the Mumbai Stock Exchange amounts to
his personal property or it is merely a personal privilege conferred on share broker by the
Stock Exchange?
HOLDING: The court held that the membership of share broker of Mumbai Stock Exchange
is a personal privilege conferred on share broker by the Stock Exchange.

ARGUMENTS
PETITIONER:
1. The membership card of a share broker is his personal/private property and if it is sold by
the Mumbai Stock Exchange, the consideration received from the said sale of the
membership card should be applied in accordance with the law of insolvency and not in
accordance with Rules 16 and 43.
2. The discretion vested by the said rules on the Stock Exchange to allocate the said sale
consideration in the order of priorities stipulated in the said Rules was bad in law and
arbitrary and violative of Article 19(1)(g) of Constitution of India.
3. The impugned rules deprived a citizen of his share of dues from the assets of a defaulter
of the Stock Exchange.
RESPONDENT:
1) The Rules formed by the Stock Exchange clearly provide the membership of Stock
Exchange is only a personal privilege and rights of membership are inalienable. Rule 16
reveals that it provides for the power to be exercised by the Governing Board, its right of
nomination in respect of membership vesting in the exchange, the consideration received
there for and it specifies how the consideration shall be applied in the order of priority.
Rule 43 is lien on security. Both the rules are in favour of Defaulter hence they are valid.
2) Stock Exchange has right to frame its own Rules for its members and their rights or
privileges in accordance with its requirements. The rules (16, 43) formed by Stock
Exchange are in consonance with objects of Stock Exchange and are not violative of Art.
19(1)(g) of Constitution of India. The court has no jurisdiction to enter.
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3) The member’s right of membership shall finally vest in the Exchange immediately after
he is declared a defaulter, therefore it is only a personal privilege conferred by Stock
Exchange on Share Broker.

Evaluation of the case with the present law

1) RULE 16- ALLOCATION IN ORDER OF PRIORITY: When as pr0vided in these
Rules the G0verning B0ard has exercised the right 0f n0minati0n in respect 0f a
membership vesting in the Exchange the c 0nsiderati0n received theref0re shall be applied
t0 the f0ll0wing purp0ses and in the f0ll0wing 0rder 0f pri0rity namely–
a) Dues 0f Exchange and Clearing H0use- the payment 0f such subscripti0ns, debts,
fines, fees, charges and 0ther m0nies as shall have been determined by the G0verning
B0ard t0 be due t0 the Exchange 0r t0 the Clearing H0use by the f0rmer member
wh0se right 0f membership vests in the Exchange;
b) Liabilities relating t0 C0ntracts- the payment 0f such debts, liabilities, 0bligati0ns and
claims arising 0ut 0f any c0ntracts made by such f0rmer member subject t0 the Rules,
Bye-laws and Regulati0ns 0f the Exchange as shall have been admitted by the
G0verning B0ard: pr0vided that if the am0unt available be insufficient t0 pay and
satisfy all such debts, liabilities, 0bligati0ns and claims in full they shall be paid and
satisfied pr0 rata;
c) Surplus- the payment 0f the surplus if any t0 the funds 0f the Exchange: pr0vided that
the Exchange in general meeting may at its abs0lute discreti0n direct that such surplus
be disp0sed 0f 0r applied in such 0ther manner as it may deem fit.
Rule 16 reveals that it pr0vides f0r the power to be exercised by the Governing Board, its
right of nomination in respect of membership vesting in the exchange, the consideration
received there for and it specifies how the consideration shall be applied in the order of
priority, prescribed therein. The first priority is for the dues of Exchange and Clearing House
to be paid by the former member whose right of membership would vest in the Exchange
from the sale of membership card. No illegality in doing so. The 2 nd priority is to clear the
liabilities of the share broker, relating to contracts so Board may apply the balance of
consideration for debts, liabilities...etc arising out of any contracts made by such former
member. No arbitrariness. This rule is based on equitable consideration. The 3rd clause is to
take care of surplus funds. The distribution of surplus funds is not left to Governing Body
alone, but the decision in required to be taken by the General Meeting. This part is not illegal.
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The consideration received from sale of membership card of a share broker is allocated on
just and fair basis of priorities.
2) RULE – 43: The security pr0vided by a member shall be subject t0 a 1st and param0unt
lien f0r any sum due t0 exchange 0r t0 the Clearing H0use by him 0r by the partnership
0f which he may be a member 0r f0r the due fulfilment 0f his engagements, 0bligati0ns
and liabilities 0r 0f the partnership 0f which he may be a member arising 0ut 0f 0r
incidental t0 any bargains, dealings, transacti0ns and c0ntracts made subject t0 the Rules,
Bye-laws and Regulati0ns 0f the Exchange 0r anything d0ne in pursuance there0f.
Rule 43 is lien on security. If no such lien on security is provided for, the transaction
would very often create insecurity in the minds of people who enter into contracts with
such members of public. This provision creates confidence in the members of public and
gives opportunity to share brokers to clear all debts and gain public confidence. No
reason for arbitrariness.
3) The court has no power/jurisdiction to issue directions to frame/amend/delete Rules
which are legislative in nature though courts can declare Rule as Unconstitutional. It is
exclusive function of Stock Exchange to frame its own Rules for its members and their
rights or privileges in accordance with its requirements. The rules (16, 43) formed by
Stock Exchange are in consonance with objects of Stock Exchange and are not violative
of Art. 19(1)(g) of Constitution of India so they are valid Rules.

4) The member ship shall c0nstitute a pers0nal permissi0n fr0m the exchange t0 exercise the
rights and privileges attached theret0 subject t0 the Rules, Bye-laws and regulati 0ns 0f
the Exchange is given in Rule 5.
A member shall n0t assign, m0rtgage, pledge, hyp0thecate 0r charge his right 0f
membership 0r any rights 0r privileges attached theret0 and n0 such attempted
assignment, m0rtgage, pledge, hyp0thecati0n 0r charge shall be effective as against the
Exchange f0r any purp0se n0r shall any right 0r interest in any membership 0ther than the
pers0nal right 0r interest 0f member therein be rec0gnized by the Exchange. The
G0verning B0ard shall expel any member 0f the Exchange wh0 acts 0r attempts t0 act in
vi0lati0n 0f the pr0visi0ns 0f the Rule 6. It says right of membership is inalienable.
Subject t0 pr0visi0ns 0f these rules a member shall have the right 0f n0minati0n which
shall be pers0nal and n0n-transferable is given in Rule 7-The right of nomination.
Rule 8- Right 0f N0minati0n n0t t0 be exercised by F0rmer Member: the right 0f
n0minati0n shall n0t be exercised by a f0rmer member wh0 has been expelled 0r wh0 has
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ceased t0 be a member under any Rule, Bye-Law 0r Regulati0ns 0f the Exchange f0r the
time being in f0rce.
Rule 9- Right 0f N0minati0n 0f the deceased 0r Defaulter Member: 0n the death 0r
default 0f a member his right 0f n0minati0n shall cease and vest in Exchange.
When a right 0f membership is f0rfeited t0 0r vests in the Exchange under any Rule, Bye-
Law 0r Regulati0n 0f the Exchange f0r the time being in f0rce it shall bel0ng abs0lutely
t0 the exchange free 0f all right claims 0r interest 0f such member 0r any pers0n claiming
thr0ugh such member and the G0verning B0ard shall be entitled t0 deal with 0r disp0se
0f such right 0f membership as it may think fit given in Rule 10.

The rules f0rmed by the Stock Exchange clearly provide the membership of Stock
Exchange is only a personal privilege and rights of membership are inalienable. Rule 5
provides that the membership is only a personal permission given by Exchange to the
share broker to exercise the rights and privileges attached. It is not personal property.

Rule 53- DEFAULT: A member wh0 is declared a defaulter shall at 0nce cease t0 be a
member 0f the Exchange and as such cease t0 enj0y any 0f the rights and privileges 0f
membership but the rights 0f his credit0r members against him shall remain unimpaired.

Rule 54- LAPSE OF MEMBERSHIP RIGHT: A member's right 0f membership shall lapse
t0 and vest in the Exchange immediately he is declared a defaulter.

The membership card is als0 restricted by Rules 6, 7, 9, 53 and 54. The rules also provide
that on date of defaulter of a member, his right of nomination shall cease and vest in the
Stock Exchange. It is clear that the membership of the Stock Exchange constitutes a
permission from S.E to exercise the rights and privileges attached. On his death or
default, he ceases to be a member and the said rights vest in and absolutely belong to SE,
free from all rights claims or interests of such member or any person claiming through
such member. So it is clear that member’s right of membership shall finally vest in the
Exchange immediately after he is declared a defaulter, therefore it is only a personal
privilege conferred by Stock Exchange on Share Broker.
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Reasoning
When there is conflict between the provisions oh statute and the Rules, the Statute will
prevail over the Rules. In our case there is no conflict. As held by Privy Council in Official
Assignee of Bombay vs. K.R.P Shroff2 case, once a defaulting member ceases to be a member
in the SE, no interest in his card remains in himself and none can pass his assignee, and
interest of a member in the SE is not a property defined under S.12 of TP Act.
The result in the case of a member of the Bombay Native Share and Stock Brokers
Association who has lost his membership for being a defaulter clearly enough is that he loses
all the interest both in the property of association and his card. In such a case no interest is
reserved in the defaulters card expect to the members of the Association who have suffered
by his lapse, or to the Association itself. This is the result of Rules 18, 56, 57 and 62. The
defaulting member itself has no interest in the result of the sale provided for under these
neither rules nor can he require a sale to be made. The rules are there for the benefit of his
“exchange creditors” and are doubtless enforceable at their instance.
In case of a defaulting member who is expelled from the Association no interest in his card
remains in himself and so no one can pass to his assignee whether his expulsion does or does
not take place prior to the commencement of his insolvency. Section 12 of T.P Act, has no
application to the card of a member of the Association.

Synthesis
 The same issue has been raised before Privy Council in 1932. In Official Assignee of
Bombay vs. K.R.P Shroff3 the court held as follows- “so soon as membership ceases,
whether on resignation, death, as a result of misconduct, or of non-payment of
subscription, all the interest of the member in the property of association is under the
rules at an end.” Acc to privy council a member who has lost his membership for
being a defaulter loses of interest both in the property of the Association and his card.
 Gujarat High Court in Stock Exchange, Ahmedabad vs. Assistant Commissioner of
Income-tax4. After the death of a stock broker he was declared a defaulter and the
income tax department sought to attach the membership card. It was contended by the
Stock Exchange that on the stock broker being declared a defaulter no right existed
which could be attached. Reliance was placed on the Privy Council's decision in

2
AIR 1932 Privy Council 186
3
AIR 1932 Privy Council 186.
4
(1998) 18 SCL 135
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Shroff's case. The High Court rightly distinguished Shroff's case by observing that
after the death of a stock broker he should not be declared as a defaulter. It appears to
us, without going into the correctness of the said decision of the Gujarat High Court,
that the same is of no relevancy in the present case because the validity of the action
in declaring a member as defaulter has not been challenged in the present case
whereas in the Gujarat case the Court had held that after the death of a stock broker he
could not have been declared as a defaulter. The consequences which follow on a
member being declared as a defaulter did not really come up for consideration in the
Gujarat case.

General Principle- when there is conflict between the provisions oh statute and the Rules, the
Statute will prevail over the Rules. In our case there is no conflict. As held by Privy Council
in Official Assignee of Bombay vs. K.R.P Shroff 5 case, once a defaulting member ceases to be
a member in the SE, no interest in his card remains in himself and none can pass his assignee,
and interest of a member in the SE is not a property defined under S.12 of TP Act.

Identify the recent cases either referred or followed or differentiated or reversed.

Court took same view as in the present case stating Stock exchange Rules will prevail in-
o Mrs. Sejal Riken Dalai vs. The Stock Exchange, Bombay6, AIR 1991 Bombay 30
o Hemendra Shah vs. Stock Exchange, Bombay7 1995(2) MHLJ page 770
o The Executive Director, Bombay vs. Smt. Jaya I.Shah
Court differentiated with the judgment of present case stating Rules of Stock Exchange have
no force of law and therefore Law of Insolvency will prevail in-
o Co-operative Central Bank Ltd. vs. Add. Industrial tribunal8, AP (1969) 2 SCC 43
o Babaji Kondaji Garad vs. Nasik Merchants Co-operative Bank Ltd9. AIR 1984 SC
192

JUDGMENT: For reasons mentioned the court finds no substance in the petition. SO
petition dismissed.
5
AIR 1932 Privy Council 186
6
AIR 1991 Bombay 30
7
1995(2) MHLJ page 770
8
AP (1969) 2 SCC 43
9
AIR 1984 SC 192
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