1 These Appeals assail the decisions of the Securities Appellate Tribunal
(for brevity ‘Tribunal’) dated 23.1.2008 and 29.1.2008, both of which reversed
the Order dated 12.6.2007 of Securities Exchange Board of India (SEBI)
declining to grant fee continuity to the Respondents before us. In these Appeals
SEBI seeks to reaffirm its stance that the Respondents lost all entitlement to the
advantage of fee continuity, no sooner any of the erstwhile partners ceased to be
Whole-time Directors of the corporate entity which was the metamorphosed
partnership firm.
C.A. No. 4719 of 2008.
2 Magnum Capital Services (hereinafter referred to as the Firm) was a
registered partnership firm, comprising of seven partners, carrying on business
as a stock broker; and was a member of the National Stock Exchange (NSE).
All the seven partners moved a conjoint application for registration of a
company under the Companies Act, 1956, during the pendency of which one of
the partners exited from the Firm. The company was incorporated on 22.5.1995
consisting of the remaining six partners, in the name and style of Magnum JUDGMENT Equity Services Limited (hereinafter referred to as Magnum). There has not
even been a semblance of a debate that the six partners had less than 40 per cent
shareholding in the firm and/or that they do not hold forty per cent of the equity
of Magnum. All the remaining erstwhile partners became the Whole-time
Directors of Magnum. In pursuance to an application filed by the Firm, NSE
transferred the membership card of the Firm to Magnum on 25.4.1996. Thus
Magnum became a member of NSE with effect from 25.4.1996. Subsequently,
the Company applied to the Securities and Exchange Board of India (SEBI) for
registration as a stock broker, which request was granted on 29.5.1997. After
being registered as a stock broker, Magnum commenced its broking business.
In December 1997, three Directors resigned from Magnum and transferred their
shares to the remaining Directors and their family members. We must again
hasten to clarify, that it is not the Appellant’s case that the equity holding of the
three continuing Whole-time Directors had fallen below the 40 per cent
criterion. Magnum also claimed the benefit of the fee which the Firm had paid
earlier to SEBI. This claim was made on the ground that the earlier business
carried on by the Firm had been transferred to Magnum and as a result there
was continuity of that business. SEBI rejected this claim vide Order dated
12.6.2007 on the predication that only three out of the seven partners of the firm
continued as its Whole-time Directors for the mandatory period of three years, which was in contravention of the conditions laid down in Paragraph I(4) of Schedule III of the Securities and Exchange Board of India (Stock Brokers and
Sub-brokers) Regulations, 1992 (Regulations for brevity). For the facility of
reference, Paragraph I(4) is reproduced below:
“4. Where a corporate entity has been formed by converting the
individual or partnership membership card of the exchange, such
corporate entity shall be exempted from payment of fee for the
period for which the erstwhile individual or partnership member, as
the case may be, has already paid the fees subject to the condition
that the erstwhile individual or partner shall be the whole time
director of the corporate member so converted and such director will
continue to hold a minimum of 40 per cent shares of the paid-up
equity capital of the corporate entity for a period of at least three
years from the date of such conversion.
Explanation – It is clarified that the conversion of individual or
partnership membership card of the exchange into corporate entity
shall be deemed to be in continuation of the old entity and no fee
shall be collected again from the converted corporate entity for the
period for which the erstwhile entity has paid the fee as per the
regulations.”
3 Aggrieved by the said Order, Magnum appealed before the Tribunal.
The Tribunal observed that Paragraph I(4) in Schedule III of the Regulations
was introduced on 21.1.1998. It provided for exemption from payment of fee
where a corporate entity was formed by conversion of the individual or
partnership card of the exchange. The Tribunal noted that the benefit of this
provision was initially only given to those who corporatized on or after
21.1.1998. However, on representations made by those stock brokers who
corporatized themselves prior to 21.1.1998, SEBI issued the Circular dated 28.3.2002 which extended the benefit to stock brokers who converted
themselves into corporate entities between 1.4.1997 and 21.1.1998. The stock
brokers who had corporatized prior to 1.4.1997 and who had been denied the
fee continuity benefit challenged the said Circular in Alliance Finstock Ltd. v.
Securities and Exchange Board of India in Appeal No. 123 of 2004 decided on
9.5.2006, wherein the Tribunal had held that the benefit of fee continuity be
given even to those entities which corporatized themselves prior to 1.4.1997.
It transpires that this view has attained finality, in terms of the decision of this
Court in C.A. No.4493 of 2006, SEBI v. Alliance Finstock Ltd. (2015) 12
SCALE 271
4 The other issue which was a ground for refusal of the fee continuity
benefit was that at the time of incorporation of Magnum, viz. 22.5.1995, it
consisted of six members all of whom were erstwhile partners of the Firm and
were also the Whole-time Directors of Magnum. However in December 1997,
three out of the six erstwhile partners left. According to SEBI, the exit of these
three partners disqualified Magnum from the benefit of fee continuity. The
Tribunal referred to Punit Capital & Debt Market Pvt. Ltd. Vs. Securities and
Exchange Board of India in Appeal No. 169 of 2004 decided on 4.5.2006,
where the Tribunal had interpreted Paragraph I(4) and had held that the
conditions enumerated in the said Paragraph would stand satisfied if one of the
partners of the erstwhile partnership firm became a Whole-time Director in the
corporate entity after its conversion. This decision was challenged before this JUDGMENT Court, but was dismissed on the ground of delay, vide Order dated 25.11.2009.
The Tribunal observed that in the case at hand, since three of the erstwhile
partners of the firm remained Whole-time Directors in Magnum and continued
to hold more than 40 per cent shares of the paid-up equity capital for a period of
more than three years, the conditions set out in Paragraph I(4) stood satisfied.
Before the Tribunal, SEBI placed reliance on its Circular dated 12.9.2002,
which stated that in order to get the benefit of Paragraph I(4), all the erstwhile
partners should be Whole-time Directors in the corporate entity so formed.
SEBI contended that the Circular issued a clarification, and hence was effective
and efficacious retrospectively. The Tribunal rejected this contention, finding
that the Circular was not clarificatory in nature, as it determined new parameters
for the grant of the benefit of fee continuity and it was not effective
retrospectively. The Tribunal, vide order dated 23.1.2008, allowed the Appeal
and set aside the order of SEBI.
C.A. No. 5235 of 2008
5 M/s. Sodhani and Company was a registered partnership firm carrying on
business of stock broking as a member of the NSE since November 1994. The
firm consisted of four partners having equal share holding. In June 1997, the
partnership firm corporatized itself as Sodhani Securities Ltd. and three out of
the four erstwhile partners became its Whole-time Directors and continued to hold more than 40 per cent shares for three years subsequent to corporatization;
the fourth partner continued only in his capacity of a shareholder. Sodhani
Securities Ltd. was issued a certificate of registration as a broker by SEBI on
31.3.1998 and thereupon it claimed the benefit of fee continuity, which was
rejected by SEBI vide order dated 12.6.2007. Reliance was placed on the
aforementioned Circular dated 12.9.2002. Aggrieved by the said Order,
Sodhani Securities Ltd. filed an Appeal before the Tribunal which, on
29.1.2008, held in favour of Sodhani Securities Ltd. stating that a plain reading
of the Regulation indicates that “the erstwhile partner” had to become “the
Whole-time Director” and that the reference was to any one of the partners. The
Tribunal also referred to and applied Punit Capital and Debt Market Pvt.
Ltd.; it reiterated that the Circular dated 12.9.2002 was not retrospective. Thus,
as Sodhani Securities Ltd. got itself registered with SEBI as a corporate entity
on 31.3.1998, which was well before the date of the Circular, viz. 12.9.2002, it
had no applicability or relevance to Sodhani Securities Ltd. Further, the
Tribunal observed that a similar view had been taken by the Tribunal in the case
of Magnum Equity Services Ltd.
6 Learned Senior Counsel for the Appellant has relied on Section 13 of the
General Clauses Act, 1897, sub-section (2) of which provides that singular
includes plural and vice versa. In light of this provision, Counsel has submitted that the term “partner” JUDGMENTas used in Paragraph I(4) of Schedule III implies ‘partners’, and that all the partners who comprised the partnership firm at the
time of corporatization would have to remain part of the corporate entity for at
least three years post conversion. Further, the exit of any partner other than due
to death shall amount to altering the nature of the entity which is not in keeping
with the spirit of continuity as envisaged by the provision. Counsel further
contended that giving the provision a strict interpretation would lead to an
absurdity, as that would imply that one person is to hold 40 per cent shares
because the term used in the provision is “Whole-time Director” indicating a
singular person.
7 Counsel for the Respondents have contended that on a plain reading of
Paragraph I(4) it is evident that the requirement was only that an erstwhile
partner must be appointed as a Whole-time Director after the corporatisation of
the firm for a minimum period of three years from the date of conversion, and
that such Whole-time Director should hold at least 40 per cent shares of the
paid-up equity capital. Counsel submitted that it was the prerogative of the
corporate entity as to the number of erstwhile partners it appointed as its Whole-
time Directors. Thus so long as the Respondents satisfied the criteria of an
erstwhile partner being appointed as a Whole-time Director and that such person
held 40 per cent shares of the paid-up equity capital of the company, the
Respondents could not be found to be in violation of Paragraph I(4) of Schedule III. JUDGMENT
8 We have carefully cogitated upon the arguments articulated before us. As
already mentioned, the issue regarding the benefit of fee continuity being
granted to entities which corporatized prior to 1.4.1997 has been settled by this
Court in SEBI v. Alliance Finstock Ltd. (2015) 12 SCALE 271 [Civil Appeal
No. 4493 of 2006] wherein it has been held that even if a partnership or sole
proprietor corporatized prior to 1.4.1997, fee continuity benefit could be availed
of.
9 The other issue that remains to be decided by us is with respect to the
interpretation of Paragraph I(4) of Schedule III of SEBI (Stock Brokers and
Sub-Brokers) Regulations 1992. The main contention raised by learned Senior
Counsel for the Appellant is based on the application of The General Clauses
Act, 1897 which under Section 13(2) states that plural includes singular.
However, before we consider Section 13, we shall have to determine whether
the General Clauses Act itself is applicable to the SEBI (Stock Brokers and Sub-
Brokers) Regulations 1992. Section 3 of The General Clauses Act, 1897 states
that the said Act is applicable to all Central Acts and Regulations made after the
commencement of this Act. Further, the term Central Act has been defined
under sub-section (7) as an Act of Parliament, which includes (a) an Act of the Dominion Legislature JUDGMENTor of the Indian Legislature passed before the commencement of the Constitution, and (b) an Act made before such
commencement by the Governor-General in Council or the Governor-General,
acting in a legislative capacity. The SEBI (Stock Brokers and Sub-Brokers)
Regulations 1992 are issued by SEBI in exercise of the powers conferred on it
under Section 30 of the SEBI Act, 1992. Section 31 of the SEBI Act,
reproduced below for the facility of reference, provides that Rules and
Regulations are to be laid before Parliament.
Every rule and every regulation made under this Act shall be laid, as
soon as may be after it is made, before each House of Parliament,
while it is in session, for a total period of thirty days which may be
comprised in one session or in two or more successive sessions, and
if, before the expiry of the session immediately following the session
or the successive sessions aforesaid, both Houses agree in making any
modification in the rule or regulation or both Houses agree that the
rule or regulation should not be made, the rule or regulation shall
thereafter have effect only in such modified form or be of no effect, as
the case may be; so, however, that any such modification or
annulment shall be without prejudice to the validity of anything
previously done under that rule or regulation.
10 Thus in light of the provisions of the SEBI Act, 1992 under which the
said Regulations have been issued, the latter do not tantamount to a Central Act
as defined under sub-section (7) of the definition clause of The General Clauses
Act, 1897. As a result we cannot accept the submission made by the Senior
Counsel for the Appellant that The General Clauses Act is applicable while
interpreting the language of Paragraph I(4) of Schedule III of the Regulations. Ergo, what is postulated and prescribed is that even if an individual erstwhile partner holds 40 per cent of the equity and remains a Whole-time Director for
the stipulated period of three years, fee continuity would become available.
Moreover, the figure of 40 per cent cannot be rendered nugatory; it has a
purpose viz. the umbilical cord between the firm and the company is present
and palpable, and yet fluidity and growth, the raison d'etre for allowing
corporatisation is also respected. The mutation is substantially of the same legal
entity, in that process the erstwhile firm has no continuity of identity.
11 We are in agreement with the Tribunal on the interpretation it has given to
Paragraph I(4) of Schedule III. We shall elucidate our understanding of
Paragraph I(4) as it stood, up until the issuance of Circular dated 12.9.2002.
Anecdotally, a partnership firm which consists of five partners and which holds
a membership card of a stock exchange, may decide to convert itself into a
corporate entity. After incorporation, of the five erstwhile partners, one of the
partners holds 40 per cent shares of the paid-up equity capital of the newly
formed corporate entity and is also its Whole-time Director. Subsequently, four
of the partners decide to exit from the corporate entity, leaving behind only the
Whole-time Director who was also an erstwhile partner. In our opinion the said
corporate entity will still be eligible for the benefit of fee continuity under
Paragraph I(4) of Schedule III of the Regulations.
12 In order to qualify for the benefit of the said provision, there is a two-fold requirement. First, the corporate entity must earlier have been either a sole proprietorship or a partnership. Second, an erstwhile partner should own at
least 40 per cent of the paid-up equity share capital and should also be the
Whole-time Director of the company, for a minimum period of three years.
Alternatively, erstwhile partners who together hold at least 40 per cent equity
must remain Whole-time Directors for a minimum of three years. Thus the
subsequent entry or exit of partners to and from the original partnership firm
would have no relevance on the entitlement of the newly formed corporate
entity to take advantage of the benefit not only of fee continuity under the said
provision but also fillip to the growth of the corporate sector and the national
economy.
13 The same benefit would also be extended to erstwhile partners who after
corporatization jointly retain at least 40 per cent of the paid-up equity capital of
the corporate entity and were its Whole-time Directors. In other words, if there
are five partners, of which three partners subsequent to corporatization jointly
hold 40 per cent of the shares of the paid-up equity capital and are also the
Whole-time Directors of the company, then the departure of the other two
erstwhile partners will not deny the corporate entity the benefits of fee
continuity.
14 We also agree with the finding of the Tribunal that the Circular dated 12.9.2002 is not clarificatory.JUDGMENTA clarificatory Circular is for the purpose of elaborating the existing provision and removing ambiguities, without altering
the effect of the said provision. However, in the instant case, our interpretation
of Paragraph I(4) prior to the issuance of Circular dated 12.9.2002, is contrary
to that mentioned in the said circular. Hence this Circular cannot be held to be
clarificatory in nature, and as a logical corollary is not capable of having any
retroactive effect.
15 We thus find no merit in these Appeals and accordingly dismiss the same.
There will be no orders as to costs.