Monday, April 30, 2012



By Dr T Padma., LLM., Ph D (Law)

Both for developed and emerging stock markets, the possibility that the markets can be manipulated,  is an important issue for both the regulation of trading and the efficiency of the market. Manipulation can occur in a variety of ways, from insiders taking actions that influence the stock price (e.g., accounting and earnings manipulation) to the release of false information or rumors in Internet chat rooms.

Establishment of Regulator

A major initiative of regulation in India was establishment of a statutory autonomous agency, called SEBI, to provide reassurance that it is safe to undertake transactions in securities. It was empowered adequately and assigned the responsibility to (a) protect the interests of investors in securities, (b) promote the development of the securities market, and (c) regulate the securities market. Its regulatory jurisdiction extends over corporate in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market.

Therefore, to fight against these manipulators,  the SEBI should strong enough to  play a proactive and vigilant role by introducing stringent measures designed to provide greater deterrence, detection and punishment to the persons involved in price manipulations. It should introduce greater transparencies, keep a check on sudden abnormal trends in the market, prior to corporate announcements viz. mergers, takeovers, monitor the trading patterns and undertake swift investigations in case of a spurt of buying or selling activity in the market, take stringent action against the guilty to act as deterrence for others. At the same time, it is the prerogative of companies to strictly adhere to the code of conduct prescribed by SEBI, and ensure good corporate governance in order to protect the overall interest of investors against unfair and inequitable practices of price manipulations.

Despite regulations, at times SEBI is finding it difficult to frame manipulators because of the nature of the offence. Identifying the manipulators and then proving the charges is an onerous task due to the heavy burden of proof involved in each case. Although SEBI has implemented laws against price manipulations trading mechanism, yet the number of offenders actually brought to book is dismal. In fact, many a time SEBI has been unable to detect instances of manipulations. SEBI Regulations do stipulate safeguards like initial and continual disclosures by listed companies etc. but there is room for improvement. Manipulation of the share markets is considered to be a serious economic offence.

Share Market Manipulations

The Stock Market Scams of 90’s affected millions of small investors across the country. Fly-by-night operators entered the primary markets and through Initial Public Offers (IPOs), collected hundreds of crores and vanished! The irony is that the whereabouts of over 100 companies are still not known either to SEBI or to the other investigating agencies. Even those companies, which did not vanish, used the people’s money for purposes other than for which it was collected. As a result, the value of their shares plummeted resulting in heavy losses to the investors.

Insider trading has the dangerous potential of market manipulation and misuse of un published price sensitive information by a privileged few insiders who are in possession of such information. This kind of malpractice defeats the very principle of fair and ethical business practices, besides spelling a doom for the common and small investors. The Capital Markets in India have been victims of this malady for years and more particularly when liberalization attracted small investors to the markets. Instances of artificially jacking up prices of shares and thereby inducing gullible people to buy them are also common. People have lost heavily on account of frauds of this nature committed by unscrupulous market players.

To prevent stock manipulation through spreading rumours, SEBI has issued regulations relate to Fraudulent and Unfair Trade Practices (FUTP) relating to the securities market known as SEBI (FUTP) Regulations, 2003.

According to Regulation 12, the SEBI has the power by an order, for reasons to be recorded in writing, in the interests of investors and securities market to take the following action against an intermediary:

(a)  issue a warning or censure;
(b)  suspend the registration of the intermediary; or
(c)  cancel of the registration of the intermediary.

Recent Initiatives by SEBI

SEBI has also issued vide its circular dated 23/03/2011 ordered a new set of Code of Conduct, including restricting access to Internet forums for employees, for market intermediaries to ensure that unsubstantiated news, which could distort normal functioning and prices of stocks, are not circulated. This comes in the wake of observations by the Regulator that unauthenticated news related to various scrips are circulated in blogs, chat forums or e-mails by employees of broking houses and other intermediaries in violation of rules.

Penal provisions under other Laws

White Collar Crimes are not a new phenomenon in India. Even one and a half century ago, when the Indian Penal Code was enacted, punishment was provided for Cheating (Sec.420), Criminal Breach of Trust (Sec.409), Counterfeiting of Coins (Sec. 232), Making and Selling of Adulterated Drugs (Sec. 274&275), Fraudulent use of Weights and Measures (Sec. 265), Counterfeiting Govt. Stamps and their sale (Sec 255 and 258), Making and Selling of Fake Goods (Sec. 481 to 489). Soon after the introduction of currency notes in our country, counterfeiting of the currency led to addition of section 489-A and B in the Indian Penal Code in the year 1955. But what has changed in the past few decades is the magnitude and enormity of economic crimes owing to the development in technology and improved means of transport and communication and their use by the perpetrators of these crimes.

Position in US

In April 2008, the US Securities Exchange Commission (SEC) brought a well publicized enforcement action involving rumor-mongering.[1] The agency claimed that Paul Berliner, a propriety trader at the Schottenfeld Group, had spread the false rumor that a target company’s board had agreed to a reduced buyout price. The agency also claimed Berliner had profited from the rumor by shorting the stock and covering those sales as the price of the stock fell. Berliner allegedly spread the rumor through instant messages to 31 traders and other securities professionals.

The rumor spread across Wall Street and was reported in the media. The price of the stock Berliner shorted fell from $77 per share to as low as $63.65 per share, a 17 percent decline. Berliner quickly settled with the SEC, agreeing to disgorge all profits ($26,129), pay a $130,000 fine, and submit to a lifetime bar from association with a broker-dealer.

Meaning of Rumor Mongering

In US, there is little prior case law concerning what the government would have to prove if a false rumor case like Berliner actually proceeded to trial.

According to the complaint in Berliner’s case, the purposeful spreading of false information violates §17(a) of the Securities Act and §9(a) (4) and §10(b) and Rule 10b-5 of the Exchange Act.  Essentially, all these claims require the SEC to prove that the defendant:

(1)  made a material misrepresentation;
(2)  with scienter;
(3)  in connection with the purchase or sale of securities.[2]

Essential Elements to establish Rumor Mongering

In a false rumor case, SEC would require to prove that:

(i)       first, the rumor was inaccurate;
(ii)    second, the market was impacted by the rumor; and
(iii)  third, the defendant knew or should have known that the rumor was inaccurate.

These elements would seem to present challenges to prosecution and potential help to defendants.

Many rumors are either accurate or believed so. In a case that could be the 20-year-old cousin of Berliner, In re Olympia Brewing Company, the main defendant, a general partner of an investor partnership, was sued for using short selling to depress Olympia Brewing Company’s stock price.

During dinner, the defendant informed a writer for Barron’s that he believed that the company was “going down,” that its stock price was too “high” compared to the company’s “fundamentals,” and that it was “the biggest rig he ever saw.” The court dismissed the case because the SEC failed to prove that information was inaccurate.

In Olympia, there was no evidence that the defendant’s conclusions about the company were wrong. On the other hand, in the Berliner case, the SEC’s charge was that Berliner’s rumor was false. The inaccuracy of his rumor would have been easier to prove at trial because the defendant claimed meetings took place that in reality had never occurred and were never contemplated.

Necessity of a Clear Market Impact

Although the government could argue that it does not have to prove that the false rumor actually impacted the market price of a stock, a court is less likely to find a defendant liable if a defendant’s scheme to manipulate a stock price had no chance of succeeding.[3] In private actions, where reliance is an essential element of the offense, it has been recognized that reliance must be reasonable, and unsubstantiated observations of bystanders are not sufficiently reliable to support a claim of reasonable reliance.

Practically, given its limited resources and current motivation to stabilize the market, the SEC is unlikely to act, in the absent an actual market impact. For example, in the Berliner complaint, the agency alleged that Berliner’s actions caused a stock price to plunge 17 percent in 30 minutes.

Must Defendant Personally Profit?

In Berliner, the government alleged that the defendant spread the rumor so that he would profit from his short position.

While that case involved rumor-mongering in connection with short selling, in analogous cases, the agency has also successfully prosecuted research analysts who benefited in other ways because their recommendations were followed.

In SEC v. Johnson, the defendant was a research analyst who wrote reports giving a “buy” rating to various public companies that he held stock in. After the price of one company fell to $24 per share, the defendant made a private statement that he would not buy the company’s stock unless it fell to $12, yet a few days later the defendant again gave the stock a “buy” rating. At the same time the defendant was making his “buy” recommendation, he sold all of his shares in the company he was recommending. He also had a financial interest in two other companies he recommended.

The defendant was found liable by a jury of violating §17(a), §10(b) and Rule 10b-5, was enjoined from trading for five years, and ordered to disgorge $1,868,796 and pay $125,000 in civil penalties.[4] On a motion to overturn the verdict, the court commented that the decision was a “close call” but upheld the jury’s decision. The court held that a jury could find that the defendant’s specific financial interests in the stock were material, and that his contradictory actions of recommending stocks as a “buy” while simultaneously making private derogatory statements concerning the stock and selling his own financial stake for a profit should have made the defendant realize he was acting improperly.

It is worth noting that while Berliner also personally profited from his recommendation, unlike in Johnson, Berliner’s financial decision to short-sell was in accordance with his public recommendation.

In contrast to this case, two other SEC cases, against posters of fake online messages, alleged no financial motives for spreading false rumors. In both cases, the postings affected the price of a company’s stock, but neither involved a claim that the defendant profited from the impact of his postings on a stock’s price, as was the case in Berliner.[5]

In Moldofsky, the defendant was convicted of a criminal violation of Rule 10b-5, and in St. Heart, the defendant settled.

These cases involved clear misstatements: One defendant used multiple “screen names” and postings to create the illusion of a widespread acceptance of the rumor, while the other involved a misrepresentation that the defendant was the president and CEO of a large company that had filed a $20 million suit against another company. In both of these cases, there was no allegation that the defendant personally profited.

Judicial Approach - Free Speech Vs Gossip  

The SEC’s drive to prevent gossip could have a grave impact on the efficient dissemination of information in the market, which in turn could affect the efficiency of the market, and even implicate First Amendment free speech considerations. This crackdown could deter legitimate behaviour—disseminating truthful insights—which the law should protect and encourage.

The US Supreme Court has recognized there in First Amendment protection for commercial speech. Of late, the courts have crafted an exception from the First Amendment for speech related to commercial transactions. There is a serious question, however, whether the investigation of rumors oversteps the limitations of this exception.

Even though rumors can be characterized as “commercial speech,” it has been clear that the First Amendment protects such speech since Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council[6] which observed that in a free enterprise economy “the free flow of commercial information is indispensable.” Under Central Hudson Gas & Electric Corp. v. Public Service Commission[7] courts deciding commercial speech cases are required to examine:

(1)  whether the speech at issue concerns lawful activity and is not misleading,
(2)  whether the asserted governmental interest is substantial; and, if so,
(3)  whether the regulation directly advances the governmental interest asserted and
(4)  whether it is not more extensive than is necessary to serve that interest.

With respect to the first part of the test, observations about the value of securities are not only “lawful” but vital. In Dirks v. SEC[8] the US Supreme Court noted that imposing liability for making such statements “could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market.”

In a few instances, the courts have skirted the issue of First Amendment protection for commercial speech by narrowing the SEC’s enforcement authority based upon factual issues or restrictive statutory construction. Nonetheless, these cases reflect judicial sensitivity to the First Amendment limitations on the SEC’s authority.

For example, SEC v. Siebel[9] a case involving the agency’s Regulation Fair Disclosure (Reg FD), probably could have invoked First Amendment protection, but instead the court decided the case on the facts. In Siebel, the CEO of Siebel Systems made comments to a group of private investors the SEC claimed were materially different than a public statement he made earlier.

Finding that the comments were merely worded differently, not materially altered, the judge chastised the SEC, stating that “applying Regulation FD in an overly aggressive manner cannot effectively discourage full and complete public disclosure of facts reasonably deemed relevant to investment decision making.” Furthermore, excessive scrutiny “has a potential chilling effect which can discourage, rather than encourage public disclosure of material information.” However, the case did not address the First Amendment grounds upon which the commercial speech could have been protected.

A similar concern with First Amendment protections arose in the case of Lowe v. SEC.[10] The Commission attempted to enjoin an unregistered publisher of investment material from continuing to publish its newsletters. Justice Byron White, concurring in the result but not on the merits, said that advisory speech not protected by licensing should be constitutionally protected under the First Amendment, and that the court should not engage in “constitutional avoidance” by dismissing cases on statutory or factual interpretation grounds. Justice White stated that “at some point, a measure is no longer a regulation of a profession but a regulation of speech.”

Justice White argued that even though the speech may not be considered fully protected under the First Amendment, “even where mere ‘commercial speech’ is concerned, the First Amendment permits restraints on speech only when they are narrowly tailored to advance a legitimate governmental interest.” Even though the stated governmental interest was the protection of investors from “scoundrels and swindlers” the measures taken were “extreme.”

The Court’s commercial speech cases have “consistently rejected the proposition that such drastic prohibitions on speech may be justified by a mere possibility that the speech will be fraudulent.” Justice White’s words in Lowe strike a resonant chord with the current SEC investigations into rumor-mongering. Simply because rumors and gossip could be used for market manipulation for personal gain does not mean that the agency should be allowed to prohibit dissemination of good faith opinions and beliefs about companies.


Efficient markets require the free dissemination of information. The flow of information, when communicated responsibly, is an essential element of efficient markets. Rumours are legitimately circulated through the financial system for a variety of reasons. It is customary for market participants to discuss rumours when accounting for the source of market volatility; when offering an objective assessment of a rumour’s likelihood to a client; and when attempting to better understand observable market behaviour.

At times, it is virtually impossible not to discuss rumors in fielding investor questions about the causes of otherwise unexplained market volatility. In such circumstances, the ability to freely discuss rumors with investors or other market professionals for the purpose of debunking them can be enormously helpful to investors and issuers alike, and highly beneficial to the efficiency of the market. On the other hand an excessively zealous crackdown on rumors could inhibit the flow of information in the market and thereby make the markets less efficient. Therefore, it is all the more required that diligent market analysis and its dissemination should be encouraged.

Economic offenders have exploited weaknesses in almost all areas of economic activity and siphoned off thousands of crores. Their depredations will continue till the law makers plug loopholes in the affected system. But the economic offenders, as they have the knack of exploiting weaknesses in any system either traverse a new territory or subvert the system which is their specialized field. In the recent past alone, scams have cost the exchequer and millions of Indians, astronomical sums of money. These crimes have the propensity to cause havoc and undermine not only the economy of the country, but the national security as well. Therefore, SEBI should invoke all the available penal provisions under different statutes and take stringent measures to stop these price manipulations through rumor-mongering in the trading system and protect the investors from these ‘scoundrels and swindlers’.

[1] SEC v. Berliner, Civil Action No. 08-CV-3859 (S.D.N.Y.), SEC Litigation Release No. 20537 (April 24, 2008).
[2] SEC v. Monarch Funding Corp., 192 F.3d 295, 308
[3] In re eSpeed Inc. Sec. Litig., 457 F. Supp. 2d 266, 281 (S.D.N.Y. 2006).
[4] SEC v. Johnson, 2006 WL 2053379, 11 (S.D.N.Y. 2006).
[5] SEC v. St. Heart, Civil Action No. 01-CV-00695 (D.D.C.), SEC Litig. Rel. No. 16947, (filed March 29, 2001); United States v. Moldofsky, No. 00 CR. 388, 2002 WL 313858819 (S.D.N.Y. 2002) (denying motion to preclude imposition of sentence of imprisonment).
[6] Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, 425 U.S. 748 (1976)
[7] Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557 (1980)
[8] Dirks v. SEC, 463 U.S. 646 (1983)
[9] SEC v. Siebel, 384 F.Supp.2d 694 (S.D.N.Y. 2005)
[10] Lowe v. SEC, 472 U.S. 181 (1985)

 [Published in Supreme CourtJournal  / Weekly January, 2012]

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By Dr T Padma,
LLM., Ph D (Law)
LLD Scholar (A P Law University)

“If the Indian Constitution is our heritage bequeathed to us by our founding fathers, no less are we, the people of India, the trustee and custodians of the values which pulsate within its provisions! A constitution is not a parchment of paper, it is a way of life and has to be lived up to. Eternal vigilance is the price of liberty and in the final analysis, its only keepers are the people. Imbecility of men, history teaches us, always invites the impudence of power.”[1]
- Justice H.R. Khanna


The recent years have witnessed a vigorous debate about the working of our judiciary, including the higher judiciary. At one level, serious charges of corruption, nepotism and acquisition of assets disproportionate to known sources of income have been levelled against some members of the judiciary, raising concerns about the integrity and impartiality of our judicial system and processes. While these have undoubtedly damaged the high regard in which the judiciary is usually held, there is simultaneous appreciation that the judiciary is not only the last bastion for the citizen against state excess, arbitrary behaviour and apathy but also the ultimate guarantor and upholder of the Constitution and democracy.

During Indira Gandhi’s rule, there was political stability in the country and the Congress enjoyed a majority in Parliament. Days after the historic Kesavananda Bharati case verdict [2] in April 1973, in which Supreme Court propounded the theory of basic structure, four senior SC judges were superseded and Justice AN Ray was appointed the CJI.  As a result, four senior-most judges resigned. Later, Justice HR Khanna too was superseded. During the Emergency, several judges became victims of punitive transfers as they were transferred without the consent of the CJI.

Since the 1989 general elections, no individual political party has got a majority in the Lok Sabha. With political instability and coalitions being the norm of the day, the fear of the power of the political establishment in the mind of the judiciary seems to have vanished.

Under Article 124(2) and Article 217(1) of the Constitution, a judge of the Supreme Court (SC) and that of a high court respectively have to be appointed by the President after ‘consultation’ with the Chief Justice of India (CJI).  However, via a judgement in 1993, the SC effectively took over the executive’s power to appoint judges to the higher judiciary and started what has come to be known as the ‘Collegium System [3] . A nine-judge Constitution Bench in 1998 further ruled that primacy has to be given to the collegium’s view over that of the President.

The Collegium System, has tilted the balance of power between the judiciary and the executive envisaged under the Constitution in favour of the former in appointment of judges. This makes India the only country in the world where judges appoint judges through a procedure wrapped in complete secrecy.

It is not a coincidence that during the phase of political instability, the country witnessed ‘judicial activism’ and the judiciary steadily asserted its powers in various spheres, including judicial appointments. Many recent judgements of both the High Courts and the Supreme Court have enhanced the regard of the judiciary, paving the way for citizen-friendly legislation and protection of human rights. It is increasingly realized that the fearlessness of these judicial pronouncements is predicated on the constitutionally mandated judicial independence from the executive, which should in no instance be undermined.

Judicial Standards - Need for a Statutory Mechanism

The need for a statutory mechanism to address complaints of the public in this regard has been felt to bring greater transparency in the judiciary. The Judges (Inquiry) Act, 1968 which ‘The Judicial Standards and Accountability Bill, 2010’ seeks to replace lay down a procedure for removal, for proved misbehaviour or incapacity, of Judges of the High Courts and the Supreme Court by way of address of the Houses of Parliament to the President. The Act does not require proceedings of investigation to be conducted behind closed doors. There is, however, no legal provision at present for dealing with complaints filed by the   public against Judges of the High Courts and the Supreme Court.

Restatement of Values of Judicial Life

However, the Full Court meeting of Supreme Court of India on 7 May, 1997 had adopted "the Restatement of Values of Judicial Life". The above Restatement lays down certain judicial standards which are to be followed by the Judges of the Supreme Court and the High Courts. However, this Restatement of Values of Judicial Life does not have any legal authority and cannot be enforced. Therefore, it is felt that the judicial standards also be made a part of the statute to give it the requisite legal sanction. This measure is also likely to increase public confidence in the judiciary considerably as the Judges would be required to follow the prescribed judicial standards.

Declaration of Assets & Liabilities of Judges

There is also no legal provision at present that requires Judges of the Supreme Court and High Courts to declare their assets and liabilities. The Resolution adopted at the Full Court meeting of the Supreme Court of India on 7 May, 1997 requires every Judge to declare his assets within a reasonable time of assuming office and thereafter whenever acquisition of substantial nature is made. The Second Administrative Reforms commission, in its fourth Report on Ethics in Governance, endorsed the above resolution after noting that independence of Judiciary by the citizens and, therefore, the conduct of a judge should be above reproach. In the Writ Petition (C) No. 288/09 filed on behalf of the Hon'ble Supreme Court in the Delhi High Court challenging the order date 6th January, 2009 passed by the Central Information Commission under the Right to Information Act, 2005, it has been asserted on behalf of the Supreme Court that the Judiciary has no objection to the disclosure of assets of Judges provided this is done in a formal manner by an Act of Parliament with adequate safeguards [4].

In this backdrop, it is considered necessary to enact a law in this regard to meet with the larger public interest as well as ensuring and maintaining the independence of the judiciary.

The Judicial Standards and Accountability Bill, 2010

The Judicial Standards and Accountability Bill, 2010 as introduced in the Parliament   seeks to (a) lay down judicial standards, (b) provide for the accountability of judges, and (c) establish mechanisms for investigating individual complaints for misbehaviour or incapacity of a judge of the Supreme Court or High Courts. It also provides to regulate the procedure for such investigation; and for the presentation of an address by parliament to the president in relation to proceeding for removal of a judge and for matters connected with such matters.

The Bill was introduced in the Lok Sabha 1st December, 2010 and was then sent to the parliamentary standing committee on personnel, law and justice, which made a crucial recommendation that seeks to "restrain" judges from making "unwarranted comments" against other constitutional bodies or persons. Thereafter, the Bill was passed by the Lok Sabha on 29th March, 2012 and will be taken up for debate in the Upper House.

Significant points of the Bill

(1)    The Judicial Standards and Accountability Bill, 2010 requires judges to declare their assets, lays down judicial standards, and establishes processes for removal of judges of the Supreme Court and High Courts. 
(2)     Judges will be required to declare their assets and liabilities, and also that of their spouse and children.
(3)     The Bill establishes the National Judicial Oversight Committee, the Complaints Scrutiny Panel and an investigation committee.  Any person can make a complaint against a judge to the Oversight Committee on grounds of ‘misbehaviour’.
(4)     A motion for removal of a judge on grounds of misbehaviour can also be moved in Parliament.  Such a motion will be referred for further inquiry to the Oversight Committee.(5)    Complaints and inquiries against judges will be confidential and frivolous complaints will be penalised.
(6)    The Oversight Committee may issue advisories or warnings to judges, and also recommend their removal to the President.

Critical Issues

(a)     The main issue is whether the balance between independence and accountability is maintained by the proposed mechanism in the Bill.  The Oversight Committee has non-judicial members which might impinge on the independence of the judiciary.
(b)     The Scrutiny Panel has judges from the same High Court.  This is different from the in-house procedure of the Supreme Court.
(c)     The Bill does not mention whether a judge has the right to appeal to the Supreme Court against an order of removal issued by the President after Parliament finds him guilty of ‘misbehaviour’. 
(d)     The Oversight Committee has non-judicial members.  The procedure of the Committee is not an in-house procedure of the judiciary.  It is not clear whether the power of the Oversight Committee to impose minor measures is constitutionally valid.
(e)     The Bill penalises anyone who breaches the confidentiality of complaints.  It is questionable whether a penalty is needed for a frivolous complaint that remains confidential.

Analysis of the Bill

Without changing the present reference procedure for the removal of corrupt judges, the Bill seeks to empower the common man to lodge complaints against corrupt judges and proposes to set up a mechanism to deal with such complaints.  It also seeks to make unwarranted comments by judges against other constitutional functionaries a judicial misconduct.

The Bill which was passed by the Lok Sabha on 29th March, 2012 in just 15 minutes has missed out some important points.

(1)    Restatement of Values of Judicial Life

The Bill lays down standards of conduct for the members of the higher judiciary and requires judges to practise universally accepted values of judicial life. These include a prohibition on: (a) close association with individual members of the Bar who practise in the same court as the judge, (b) allowing family members who are members of the Bar to use the judge’s residence for professional work, (c) hearing or deciding matters in which a member of the judge’s family or relative or friend is concerned, (d) entering into public debate on political matters or matters which the judge is likely to decide, and (e) engaging in trade or business and speculation in securities.

However Article 124(5) of the Constitution empowers Parliament to make laws only to regulate the procedure for:

a)        The presentation of an address to the President seeking the removal of a judge; and
b)        The investigation and proof of misbehaviour or incapacity of a judge.

The Constitution is silent on the issue as to who is competent to define standards of behaviour for members of the higher judiciary. Given this grey area it is important for any legislative proposal for dealing with complaints of misbehaviour to be in accordance with the principle of the independence of the judiciary.

Further, the Bill does not provide for any code of behaviour that applies to a judge after retirement. Therefore, it is also necessary to lay down a code of conduct for judges post-retirement in order to prevent situations where a Government may lure them with plum postings after they have demitted office. A cooling off period of one year may be stipulated in the law.

2)     Declaration of Assets & Liabilities of Judges

The Bill seeks to make it mandatory for judges to declare their assets and liabilities as well as those of his/her spouse and dependent children.

Such declaration has to take place within 30 days of the judge taking his oath to enter his office. Every judge will also have to file an annual report of his assets and liabilities. The assets and liabilities of the judge will be displayed on the website of the court to which he belongs.

3)    Investigation mechanism

The Bill establishes two authorities to investigate complaints against judges. The two authorities are:

a)     National Judicial Oversight Committee; and
b)    Scrutiny Panel.

Initial complaints will be made to the Oversight Committee, and they will be referred to the Scrutiny Panel.

A Scrutiny Panel will be constituted in the Supreme Court and every High Court. It shall consist of a former Chief Justice and two sitting judges of that court. If the Scrutiny Panel feels there are sufficient grounds for proceeding against the judge, it shall report on its findings to the Oversight Committee. If it finds that the complaint is frivolous, or that there not sufficient grounds for inquiring against into the complaint, it shall submit a report to the Oversight Committee giving its findings for not proceeding with the complaint.

As contemplated in the 195th Report of the Law Commission on the Judges’ (Inquiry) Bill 2005, an inquiry into any complaint made under this Act must be taken to its logical conclusion. If the findings establish that the complaint was not proved or disproved there will be no consequences for the judge concerned. However retirement or demitting office should not be a ground for stopping the inquiry. The truth must be discovered and if the Judge is found guilty he or she must face some consequence for the misbehaviour. This can include stoppage or reduction of pension and ensuring that the person is not appointed to any public office in future. The recommendation of the Judicial Oversight Committee should be binding on the Central Government.

4)     Frivolous or vexatious complaints

The Oversight Committee will consist a retired Chief Justice of India as the Chairperson, a judge of the Supreme Court nominated by the sitting Chief Justice of India, a Chief Justice of the High Court, the Attorney General for India, and an eminent person appointed by the President.

If the Scrutiny Panel recommends investigation into a complaint against a judge, the Oversight Committee will constitute an investigation committee to investigate into the complaint. The inquiry committee will consist of not more than three members. It will have some powers of a civil court and also the power to seize documents and keep them in its custody.

The investigation committee will frame definite charges against the judge and shall communicate the same to the judge. The judge shall be given an opportunity to present his case, but if he/ she chooses not be heard, the proceedings may be heard without him present.

If the charges against a judge are proved, the Oversight Committee may recommend that judicial work shall not be assigned to the judge. It may also issue advisories and warnings if it feels that the charges proved do not warrant the removal of the judge. If the Committee feels that the charges proved merit the removal of the judge, it shall (a) request the judge to resign voluntarily, and if he fails to do so, (b) advise the president to proceed with the removal of the judge. In such a case, the President shall refer the matter to Parliament.

The punishment should be imposed only when the allegations against a judge are disproved and it can be shown that the allegations were made with malicious intent. The terms “vexatious” and “frivolous” are impossible to objectively define.

5)     Removal of a Judge

A motion for removal of a judge can also be introduced in Parliament by members of Parliament. In such a case, the Speaker or the Chairman can either admit the notice, or refuse to admit it. If the notice is admitted, the matter shall be referred to the Oversight Committee for inquiry.

So what is more important is whether the removal of corrupt judges? Or the appointment of honest ones? The basic problem relates to the appointment of judges and not their removal. If only honest and deserving people make it to the higher judiciary, the occasion for their removal would never arise. Unfortunately, there is no transparency in the present appointment system.

6)     Exemption under Right to Information Act, 2005

The Bill exempts documents and records of proceedings related to a complaint from the purview of the Right to Information Act, 2005.

The reports of the investigation committee and the order of the Oversight Committee shall be made public.


If a fair system for judges’ selection has to be put in place and the balance of power between the judiciary and the executive envisaged under the Constitution in matters of appointments of judges is to be restored, it would require a constitutional amendment. We need a political consensus on setting up a broad-based National Judicial Commission comprising of a woman of outstanding stature in public or judicial affairs, a representative of the Scheduled Castes or the Scheduled Tribes, and care should be taken to ensure that there is broad representation from the north, south, east and west of the country. Not an oligarchic club with a class bias, but a democratic instrument with a high vision, so that, We, the People of India must not be alienated or are out of bounds vis-à-vis the Judicial Commission’s functional ambit. The Commission so constituted, with powers to appoint, transfer and remove SC and HC judges on the lines of similar bodies in other democracies and without giving the veto power to either the executive or the judiciary, has thus become the need of the hour.  

Since the Lok Sabha has already passed the Bill, it will now be debated in the Rajya Sabha, where the ruling alliance does not have a majority. Let’s hope that the Upper House will discuss it threadbare and suggest the much needed measures for course correction and to increase public confidence in the Indian judiciary.

[ Published in Supreme Court Journal (weekly law journal), Part -13,  2012 during March, (2012(3) SCJ]


1)      Forty Seventh Report on the Judicial Standards and Accountability Bill, 2010. Presented to the Rajya Sabha on 30th August, 2011 & Laid on the Table of the Lok Sabha on 30th August, 2011.
2)      195th Report of the Law Commission of India on the Judges (Inquiry) Bill, 2005 submitted during 2006.
3)      214th Report of the Law Commission of India on ‘Proposal for Reconsideration of Judges cases I, II and III’ submitted during 2008.

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[1]Extract from ‘Making of India’s Constitution’ by Justice H.R.Khanna (1981)

[2] Kesavananda Bharati v. The State of Kerala and Others;AIR 1973 SC 1461
[3]It is a system under which appointments and transfers of judges are decided by a forum of the Chief Justice of India and the four senior-most judges of the Supreme Court. It has no place in the Indian Constitution.
  Article 124 deals with the appointment of Supreme Court judges. It says the appointment should be made by the President after consultation with such judges of the High Courts and the Supreme Court as the President may deem necessary. The CJI is to be consulted in all appointments, except his or her own. Article 217 deals with the appointment of High Court judges. It says a judge should be appointed by the President after consultation with the CJI and the Governor of the state. The Chief Justice of the High Court concerned too should be consulted.
  The collegium system has its genesis in a series of three judgments that is now clubbed together as the “Three Judges Cases”. The S P Gupta case [AIR 1982 SC 149] (December 30, 1981) is called the “First Judges Case”. It declared that the “primacy” of the CJI’s recommendation to the President can be refused for “cogent reasons”. This brought a paradigm shift in favour of the executive having primacy over the judiciary in judicial appointments for the next 12 years.
  On October 6, 1993, came a nine-judge bench decision in the Supreme Court Advocates-on Record Association vs Union of India case [1993 (4) SCC 441] — the “Second Judges Case”. This was what ushered in the Collegium System. The majority verdict written by Justice J S Verma said “justiciability” and “primacy” required that the CJI be given the “primal” role in such appointments. It overturned the S P Gupta judgment, saying “the role of the CJI is primal in nature because this being a topic within the judicial family, the executive cannot have an equal say in the matter.
[4] The Statement of Objects and Reasons, appended to the Judicial Standards and Accountability Bill, 2010