At, SEBI Securities Exchange Board of India Securities Appellate Tribunal
By, CORAM : JUSTICE N.K. SODHI
By, PRESIDING OFFICER
By, ARUN BHARGAVA
By, UTPAL BHATTACHARYA
Mr. Ravikumar Varanasi Advocate for the Appellants. Dr. Poornima Advani Advocate with Mr. Kaushik Rajkhowa Advocate for the Respondent No.1, None present for the Respondent No.2.
Justice N.K. Sodhi, Presiding Officer
Magnum Capital Services (for short the firm) was a registered partnership firm with seven partners. It was carrying on its business as a stock broker and was a member of the National Stock Exchange Limited (NSE). The seven partners together filed an application for the registration of a company under the Companies Act, 1956. While this application was pending, one of the partners withdrew from the firm. A company under the name and style of Magnum Equity Services Ltd (for short the company) the appellant herein came to be incorporated on 22.5.1995 with the Registrar of Companies, Mumbai with its corporate office at Mumbai. All the six partners of the firm became the whole time directors in the company. On September 14, 1995 the firm filed an application with NSE to transfer its membership card in the name of the company and it is not in dispute that the said card was transferred on 25.4.1996 and the company became a member of the NSE. The company then applied to the Securities and Exchange Board of India (hereinafter called the Board) for registration as a stock broker and it is common case of the parties that the company was registered as a stock broker on 29.5.1997. In December 1997, three of the directors resigned from the company and walked out of the business transferring their shares to the remaining directors and their family members. It is the admitted case of the parties that the remaining three directors of the company who were the erstwhile partners of the firm held more than 40% shares of the paid up equity capital of the company for a period of more than three years. After getting itself registered as a stock broker, the company started its broking business and claimed the benefit of the fee which the firm had earlier paid to the Board. This claim was made on the basis that the earlier business carried on by the firm had been transferred to the company and there was continuity of that business. The claim of the company has been rejected by the Board on the ground that only three out of the seven partners of the firm were its whole time directors for a period of three years and, therefore, the conditions laid down in para I (4) in Schedule III to the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (for short the regulations) were not satisfied.
There is no merit in the stand taken by the Board.
We have heard the learned counsel for the parties. As already noticed, the company was incorporated on 22.5.1995 and it was registered as a stock broker on 29.5.1997. The policy of the Government and that of the Board has been to encourage stock brokers to become corporate entities so that there is transparency in their working. Paragraph I(4) in Schedule III to the regulations was introduced on 21.1.1998 to give effect to this policy and it provides for exemption from payment of fee where a corporate entity is formed by converting the individual or partnership card of the exchange. The benefit of this para was given to those corporatised on or after 21.1.1998. When the stock brokers who had corporatised themselves prior to the introduction of paragraph I(4) represented to the Board that they should also be given the benefit of fee continuity, the Board came out with a circular on March 28, 2002 which gave the benefit to the brokers who had converted themselves into corporate entities between April 1, 1997 and January 21, 1998. Such brokers obviously could not anticipate beforehand the conditions which the Board incorporated in para I(4). The Board then came out with a circular dated 6.2.2004 stating that where corporatisation took place between 1.4.1997 and 21.1.1998 it would be enough if the converted corporate entity satisfied the conditions of para I(4) in spirit. Since the circular of March 28, 2002 restricted the benefit to such brokers who corporatised themselves on or after 1.4.1997, the stock brokers who had converted their individual/partnership membership into a corporate entity prior to that date challenged the circular in Alliance Finstock Ltd. & Anr. vs. Securities and Exchange Board of India Appeal no. 123 of 2004 decided on 9.5.2006 and this Tribunal held that those who corporatised themselves even prior to 1.4.1997 were entitled to the benefit of fee which the erstwhile individual / partnership had already paid. In the case before us the firm had corporatised itself on 22.5.1995 and became a registered stock broker on 29.5.1997. Paragraph I(4) in Schedule III thus became applicable to the company. This paragraph was interpreted by this Tribunal in Punit Capital & Debt Market Pvt. Ltd.& Ors. vs. Securities and Exchange Board of India Appeal no. 169 of 2004 decided on 4.5.2006 to mean that the conditions enumerated therein stand satisfied if one of the partners of the erstwhile partnership firm becomes a whole time director in the corporate entity after its conversion. Since three erstwhile partners of the firm became whole time directors in the company and held more than 40% shares of the paid up equity capital of the company for a period of more than three years, the conditions set out in para I (4) in Schedule III to the regulations are satisfied. The learned counsel for the respondent, however, brought to our notice the circular dated 12.9.2002 issued by the Board clarifying that in order to get the benefit of paragraph I(4) in Schedule III to the regulations all the erstwhile partners should be whole time directors in the corporate entity so formed. We do not think that this circular issues a clarification. It lays down new parameters for the grant of the benefit of fee continuity. It cannot, therefore, operate retrospectively and shall not apply to the compan
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y which, as already observed, was incorporated on 22.5.1995 and became a registered stock broker on 29.5.1997 much before the issuance of this circular. The question whether it is permissible for the Board to add new conditions to the regulations through a circular, though raised by the learned counsel for the appellant need not be answered and is left open to be decided in an appropriate case. In the result, the appeal is allowed, impugned order set aside and it is held that in the facts and circumstances of the case, the company is entitled to the benefit of fee which the firm had paid. There is no order as to the costs.