SC: Delegated Legislation That Is Excessively Disproportionate Can Be Manifestly Arbitrary

Background

• The name of the case is Franklin Templeton Trustee Services Private Limited v. Amruta Garg.
• The constitutional validity of the Clause (a) of Regulation 39 (2) of the SEBI (Mutual Funds) Regulations is challenged as arbitrary as it does not provide for any regulation on the use of power by the trustees.
• Regulation 39 (3) is also contended as arbitrary as it performs the function of a drop box.
• Regulation 41 (2) (b) prescribes for the sale proceeds under clause (a) to be used to the scheme’s liabilities that are due and payable, with the remaining funds being distributed to unitholders in proportion to their individual interests in the scheme’s assets as of the date the decision to wind up was made.
• Regulation 42 is said to suffer from arbitrariness because SEBI is only to conduct ministerial tasks, not the functions of a regulator.

Court’s Observation

• The notion of manifest arbitrariness requires something to be done in the form of delegated legislation that is arbitrary, irrational, or without proper deciding basis.
• The regulations have enough provisions that ensure that the trustees’ power on winding up of fund is not excessive.
• The provision on delegated legislation is not to be used in isolation but with the statute.

Court’s Decree

• The Court said that delegated laws that are excessively or disproportionately prohibitive can also be unreasonable.
• Because the Regulations are in the nature of economic regulations, restraint is to be exercised in the judicial review power, unless there are compelling reasons to interfere.
• The provisions of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 are not affected with arbitrariness.

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