Delegated Legislation That Are Forbiddingly Excessive Or Disproportionate Can Also Be Manifestly Arbitrary: Supreme Court In Franklin Templeton Case

Delegated legislations that are forbiddingly excessive or disproportionate can also be manifestly arbitrary, the Supreme Court observed in the order passed in Franklin Templeton case today.

The bench comprising Justices S. Abdul Nazeer and Sanjiv Khanna, however, held that the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 under challenge do not suffer from the vice of manifest arbitrariness.

The court added that the principle of manifest arbitrariness requires 'something to be done in exercise in the form of delegated legislation which is capricious, irrational or without adequate determining principle'.

In this case, the petitioners who challenged the constitutional validity of SEBI (Mutual Funds) Regulations, had contended that clause (a) to Regulation 39(2) suffers from manifest arbitrariness in the absence of any prescription regulating the exercise of the power by the trustees. Similarly, Regulation 39(3) equally suffers from the vice of manifest arbitrariness as SEBI merely acts as a drop-box, it was contended. According to petitioners, the Regulation 41(2)(b) is also manifestly arbitrary as it states that the sale proceeds under clause (a) shall be first discharged for such liabilities as are due and payable under the scheme and only the balance amount shall be paid to the unit-holders in proportion to their respective interests in the assets of the scheme as on the date of the decision for winding up was taken. Regulation 42 is also manifestly arbitrary as SEBI is to perform only ministerial functions, much less than the functions of a regulator, they urged.

Answering these contentions, the bench observed that the opinion of the trustees under clause (a) to Regulation 39(2), therefore, must be consented to by the unit-holders in terms of the mandate of Regulation 18(15)(c).

"In view of this interpretation, the argument challenging constitutional validity of the Regulations on the ground that they give unbridled and absolute power to the trustees loses much of its sting and force. There are, therefore, sufficient guidance and safeguards in the Regulations itself on the power of the trustees to decide on winding up of the fund.", the court said. The court also observed that the words used in the statute including delegated legislation are to be understood in the light of that particular statute and not in isolation.

"63. Since the Regulations are in the nature of economic regulations, while exercising the power of judicial review, we would exercise restraint unless clear grounds justify interference. We would not supplant our views for that of the experts as this can put the marketplace into serious jeopardy and cause unintended complications. Policy decisions can only be faulted on the grounds of malafides, unreasonableness, arbitrariness and unfairness, in addition to violation of fundamental rights or exercise of power beyond the legal limits. The principle of manifest arbitrariness requires something to be done in exercise in the form of delegated legislation which is capricious, irrational or without adequate determining principle. Delegated legislations that are forbiddingly excessive or disproportionate can also be manifestly arbitrary. ", the bench said while holding that the Regulations under challenge do not suffer from the vice of manifest arbitrariness.

Case:  Franklin Templeton Trustee Services Private Limited vs. Amruta Garg 
Coram: Justices S. Abdul Nazeer and Sanjiv Khanna,
Citation: LL 2021 SC 295

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