MEMBERSHIP OF STOCK EXCHANGE IS NOT INHERITABLE

[Mr. M. GOVINDARAJAN]

Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992 deals with the stock exchange brokers and sub brokers. Regulation 4 dealt with the conditions of grant of Certificate to stock brokers. It provides that the Board may grant a certificate to a stock broker subject to the following conditions:

  >>> He holds the membership of any stock exchange;

  >>> He shall abide by the rules, regulations and bye-laws of the stock exchange or stock exchanges of which he is a member;

  >>> In case of any change in the status and constitution, the stock broker shall obtain prior permission of the Board to continue to buy, sell or deal in securities in any stock exchange;

  >>> He shall pay the amount of fees for registration in the manner provided in the manner provided in the regulations; and

  >>> He shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep the Board informed about the member, nature and other particulars of the complaints received from such investors.

Regulation 10 deals with the payment of fees and the consequences of failure to pay fees. Every applicant eligible for grant of a certificate shall pay such fees and in such manner as specified in Schedule III. The Board may on sufficient cause being shown permit the stock broker to pay such fees at any time before the expiry of six months from the date on which such fees become due. Where a stock broker fails to pay the fees the Board may suspend the registration certificate, whereupon the stock broker shall cease to buy, sell or deal in securities as a stock broker. The fee is structured in two distinct phases. In the first five years of operation of a stock broker, the quantum of the fee is linked to the turn over of the stock broker. Greater the turn over, higher is the fee. The second phase comprised blocks of five years from the sixth year after the grant of initial registration, during which the stock broker requires to pay a flat rate of Rs.5,000/- in order to keep the registration in force.

Rule 8 of Securities Contracts (Regulations) Rules, 1957 provides that in order to become a member of the stock exchange the person is required to be qualified.

The Supreme Court in 'Nikhil Kanchanlal Vakharia V. SEBI and another' (2008) 85 CLA 46 SC decided whether the membership of the stock exchange is inheritable. The facts of the case run as follows:

The present case involves a situation whereat all material times the stock broking firm was a partnership firm carrying on business in the name and style of Knachanlal & Sons. Late Shri Kanchanlal K. Vakharia because of his ill health decided to nominate the appellant in his place as a member of stock exchange, Mumbai. The appellant claimed that he is a partner of Kanchalal & Sons and therefore now SEBI should give the benefit of fee continuity as far as the first five years they have already been charged from the partnership on a turnover basis, therefore, they must now charge on a flat rate of Rs.5000 per annum for the registration. The appellant claims on account of transmission since the business and trade continued in the same name or entity and the stock exchange permits continuation of the same membership under the sane number and clearing code. They should also be given the benefit under the same registration of the earlier stock broker and the benefit of fee continuity.

The claim of the appellant was contested by SEBI. The arguments put forth by SEBI are -

  >>> There is no provision in the SEBI Act, Rules and/or regulations of the SEBI in this behalf which recognizes the registration of stock brokers by inheritance and/or transmission for the purpose of granting fee continuity benefit;

  >>> The appellant who is the son of late Shri Kanchanlal K. Vakharia on transmission can be registered only as a new stock broker with SEBI in accordance with the Act, Regulations and SEBI (Stock brokers and Sub Brokers) Rules, 1992 and subject to payment of registration fee for a new stock broker as prescribed in the schedules;

  >>> The only situation under which the continuity benefit is granted 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 of 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 minimum 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. The benefit of fee continuity is an incentive for corporation since a corporate entity is required to maintain all records under law and as such it facilitates regulating of the stock brokers. Under no other circumstances fee continuity benefit is available under the statutory regulations and, hence, the appellant cannot be granted benefit of continuity on account of transmission;

  >>> Every stock broker who wants to deal in securities in the securities market is required to be a member of stock exchange and then get registered with SEBI under Sec. 12 of SEBI Act in accordance with the procedure as provided in the Regulations subject to the payment of registration fee for a new stock broker under Rule 4 of the Rules and regulation 10 of the Regulations on the rates mentioned in the Schedule III;

  >>> The membership of a stock exchange is a privilege and not a matter of right and, thus, this cannot be claimed as inheritable. SEBI has no discretion in implementation of the Act, Rules or Regulations and has to strictly to adhere to the provisions as laid down, and, therefore, has no power to waive the requirements of the appellant;

  >>> No person can deal in securities in the securities market without being registered with SEBI. In the present case admittedly late Shri Kanchanlal K. Vakharia, father of the appellant, was a member of the stock exchange and not the firm Kanchanlal & Sons. Ordinarily if Kanchanlal & Sons is not a member of the stock exchange the firm would not be entitled to deal with the securities in the securities market in the Bombay Stock Exchange. The Bombay Stock Exchange does not enroll partnership firm as members;

  >>> Under Rule 179 of the Bombay Stock Exchange Rules, an individual member can do business in partnership with certain categorized relations and, therefore, the Bombay Stock Exchange permits trading by the individual in the name of the partnership firm. According to Rule 179 of the Bombay Stock Exchange no partnership shall be formed except-

  >>> Between two or more members of the exchange; or

  >>> Between a member of the exchange and his father or mother or wife or his sons or daughter or daughter-in-law or daughters-in-law or father's brother or brothers or unmarried sister or sisters or brother's or brothers' son or sons; or

  >>> Between two or more members of the exchange and their father, mothers, wives or son or sons or daughter or daughters or daughter-in-law or daughters-in-law or brother or brothers or father's brother or brothers or unmarried sister or sisters or brother's or brothers' son or sons;

  >>> Late Shri Kanchalal K.Vakharia alone was a member and through his partnership, the entire partnership firm was allowed to trade on Bombay Stock exchange, the entire turnover of trade is relatable to the individual member of late Shri Kanchanlal K. Vakharia as otherwise the partnership firm and non member partners would not have been able to deal in securities;

  >>> The appellant wants only his turnover to be considered as a member of the exchange and the other partners being non member partners want to be outside the purview of the registration of the SEBI since they cannot be registered but at the same time want to deal in securities on the exchange under the membership and registration of late Shri Kanchalal K. Vakharia;

  >>> The entire dealing in securities by a non member partners would be illegal and contrary to Sec. 12 of the Act and liable to all such consequences of law.

The Supreme Court considered the arguments and carefully analyzed the provisions of the Act, Rules and regulations. It held that by clear interpretation of the Regulations, it is abundantly clear that no provision of succession to registration is permissible. Nikhil K. Vakharia son of late Shri Kanchanlal K. Vakharia in order to operate in the stock exchange has to obtain afresh registration from the SEBI and for the first five years, he would be required to pay the quantum of fee linked to the turnover and thereafter at the flat rate of Rs.5000 in order to keep the registration in force.