At, SEBI Securities Exchange Board of India Securities Appellate Tribunal
By, CORAM: JUSTICE N. K. SODHI
By, PRESIDING OFFICER
By, C. BHATTACHARYA
By, R. N. BHARDWAJ
Appellant – Represented by Mr. Bharat Merchant, Advocate. Respondent – Represented by Mr. Dipan Merchant, Advocate
Per: Justice N. K. Sodhi, Presiding Officer (Oral)
Facts giving rise to this appeal lie in a narrow compass and these may first be noticed.
Mohitkumar V. Sahita was a member of the Bombay Stock Exchange (BSE) and he was registered as a broker with that exchange on 5/4/1990. He formed a partnership with his wife Yogini Sahita with effect from 1/4/1992. This partnership was in conformity with bye-law 179 of the Bye-laws of BSE which permits such partnerships. Despite the partnership, it was M. V. Sahita who continued as a registered member of the BSE. On 8/12/1998 the partnership firm got corporatised under the name and style of Amit Sahita Finance Pvt. Ltd., as a company under the Companies Act, 1956. In this corporate entity M. V. Sahita and his wife Yogini Sahita each held 30% share capital and the remaining 40% is held by their son Amit. There is no other shareholder in the company. The company claimed benefit of fee continuity in terms of paragraph 4 of Schedule III to the Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992 (for short the Regulations). This Paragraph was introduced in the schedule with effect from 21/1/1998. The appellant was called upon by the Securities and Exchange Board of India by demand notice dated 11/3/2000 to deposit the amount of registration fee including fee for the period for which exemption had been claimed. Feeling aggrieved by this communication the appellant filed the present appeal. During the pendency of the appeal Shri M V Sahita expired on 8/9/2003 and we are informed that his shareholding devolved on his wife and son. The company then made another claim seeking exemption in terms of paragraph 4 and the Board rejected the same as per its letter dated April 19, 2004 on the ground that its claim was not covered by the Board’s letter dated February 6, 2004. The company then filed an application seeking amendment in the memorandum of appeal and a prayer was made to allow it to challenge the communication dated April 19, 2004. Notice of this application was given to the counsel for the respondent and the same was ordered to be heard along with the appeal. This is how the application and the appeal have both come up for final disposal.
We have heard the learned counsel for the parties. The short question that arises for consideration in this appeal is whether the company is entitled to be exempted from payment of fee for the period for which the erstwhile partnership firm had already paid the fee. Paragraph 4 of Schedule III to the Regulations provides that where a corporate entity has been formed by converting a partnership then the corporate entity shall be exempted from payment of fee for the period for which the erstwhile partnership firm had already paid the fee subject to the condition that the erstwhile partner shall be the whole time director of the corporate entity and the said director continues to hold a minimum of 40% shares of the paid up equity capital in the corporate entity for a period of at least three years from the date of such conversion. In the case before us the partnership was corporatised on 8/12/1998 and M V Sahita till the date of his death continued to remain a director in the company. His widow also continued to hold 30% shares in the company and Amit, the son of deceased held 40% shares. Admittedly, M V Sahita who was the member of BSE held 30% shares in the company and did not satisfy the requirement of paragraph 4 but he, his wife and son held 100% shares in the company. It is also not in dispute that Yogini Sahita, the wife of M. V. Sahita was also a director in the company and they together held 60% shares in the paid up capital. The Board by its circular dated 12/9/2002 clarified that the benefit of paragraph 4 of Schedule III would be given to such corporate entities where all the erstwhile partners are whole time directors and jointly hold at least 40% of the paid up equity capital in the corporate entity. In the instant case M. V. Sahita and his wife who were both directors in the company together held 60% shares in the paid up equity capital of the company. It is thus clear that the claim of the appellant is covered by the clarification issued by the Board on 12/9/2002. In this view of the matter, the action of the Board in rejecting the claim of the appellant for the benefit of fee continuity cannot be sustained.
The learned counsel for the respondent however, pointed out that Shri M. V. Sahita alone was the member of BSE and was registered as broker with the Board and not the partnership firm and, therefore, on the corporatisation of the partnership firm on 8/12/1998 M. V. Sahita did not hold 40% of paid up equity capital in the company for the period of three years and, therefore, the company was not entitled to the benefit of fee continuity. Here again we find that this issue has been discussed by the Board and a clarification issued by its circular dated 12/9/2002 wherein it was further clarified as under:
“It was further clarified that in case of Exchanges which do not grant membership to the partnership firms, but permit individual members to form partnerships, each of the erstwhile member partner, now whole time director of the corporate entity, will have to individually or jointly as above hold at least 40% of the paid-up capital of the corporate entity so formed for a period of at least three years from the date of such conversion.”
Even though M. V. Sahita by himself did not hold 40% shares in the company but held 60% shares jointly with his wife, and therefore, the company is entitled to the benefit of the continuity in terms of the aforesaid clarifications. We may hasten to mention here tha
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t even though BSE does not register partnerships as its members it allows individual members to work in partnership as per bye law 179 of its Byelaws to which a reference has been made in the earlier part of this order. We are, therefore, satisfied that the case of the appellant is fully covered by the aforesaid circular issued by the Board. In the result, the appeal and the application for amendment are both allowed and the impugned communications dated 11/3/2003 and 19/4/2004 set aside. It is held that the appellant is entitled to the benefit of paragraph 4 of Schedule III to the Regulations. There is no order as to costs.