REGISTRATION FEE CONTINUITY BENEFIT

[Mr. M. GOVINDARAJAN]

Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 provides for registration of stock brokers, registration of sub brokers, registration of trading and clearing members, registration of trading and clearing members of currency derivative segment.  The Regulations prescribes the obligations on the part of such brokers, sub brokers etc.,  SEBI is having to cause inspection on the stock brokers etc.,  Inquiry will be conducted and a report will be furnished to SEBI, on the basis of which action will be taken against the stock brokers etc., if there is a contravention of the Act and Regulations.  Schedule III to these regulations prescribe the fees.

Para 1 (4) of Schedule III to these regulations provides that where a corporate entity has been formed by converting the individual or partnership 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 40% of 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 explanation to this para clarifies as 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.

The allowability of this Registration fee continuity benefit may be well explained with the following case laws:

In ‘VSE Stock Services Limited V. SEBI and another’ – 2015 (11) TMI 308 - SUPREME COURT Vadodara Stock Echange,(VSE) in terms of policy decision by SEBI, incorporated a subsidiary company named as VSE Securities Limited on 24.12.1999.   It got membership of BSE as well as registration under SEBI but failed to get membership of National Stock Exchange.  NSE rejected the application on the ground that VSE had ignored the clarifications contained in Circular dated 16.12.1999 indicating that a stock exchange could acquire the membership through a subsidiary company which is limited by shares.  The subsidiary is a company limited by guarantee.  Therefore VSE incorporated another subsidiary company, the appellant herein.  After this NSE granted membership.  But SEBI refused to grant recognition to the appellant on the ground that as per its policy only one subsidiary of VSE could claim registration as a broker.  This decision of SEBI was not challenged by VSE.

The VSE  get VSE Securities Limited amalgamated with the appellant.  Under the above scheme the appellant became a transferee company entitled to the assets and liabilities of the transferor company.  The appellant obtain fresh registration from SEBI.  The appellant paid the provisional fee but the demand of final fee by SEBI was challenged before SAT on the ground that the appellant is entitled to fee continuity benefit in terms of circular of SEBI, dated 30.09.2002.  SAT rejected the claim of the appellant and so he approached the Supreme Court.

The Supreme Court found that SAT had been properly appreciated that the amalgamation was not on account of any compulsion of law.  The compulsion of the appellant was a business compulsion to do business as a broker with NSE.  The amalgamation is not a compulsion of law.  It was not forced upon the appellant under orders or directions of SEBI.  Only because the appellant and the parent company VSE subsequently decided and opted to do business as a broker with NSE they chose the path of amalgamation.   They could have as well chosen the path of winding up of the earlier subsidiary company.  It was further held that when the facts disclose the amalgamation had to be resorted to as an alternative to liquidation then it may be successfully urged that amalgamation was on account of compulsion of law so as to attract the exemption assured by SEBI under circular dated 30.09.2002.   The facts of this case even remotely do not suggest any such or similar situation.  The Supreme Court dismissed the appeal filed by the appellant.

In ‘SEBI V. Alliance Finstock Limited and others’ – 2015 (11) TMI 307 - SUPREME COURT (decided on 03.11.2015) the appeal was filed by SEBI before Supreme Court against the order of SAT which formulated the question for determination as to whether stock brokers who have converted their individual/partnership membership into a corporate entity prior to April 01.04.1997 are entitled to the fee continuity benefit in terms of Para 4 of Schedule III of the Regulations and decided in favor of the stock brokers.

SEBI contended that since Para 4 of Schedule III was introduced with effect from 21.01.1998 annual fee payable by the registered brokers would remain unaffected for the earlier year ending 31.03.1997 and it can be at best be effected only respect of fees payable for the year 01.04.1997 onwards.  The SAT has erred in granting retrospectivity to the provisions of para 4 by granting the benefit of fee continuity even to entities which acquired corporate members on conversion even prior to 01.04.1997.  The Supreme Court analyzed the provisions of para 4 as well as the explanations thereto in Schedule III of the Regulations.  The Supreme Court held that it does not disclose, either explicitly or even by necessary implication, that although possessing the required qualifications, a corporate entity formed earlier to 21.01.1998 would not be exempted from payment of fee for the period for which erstwhile individual or partnership members has already paid the fees.  In respect of a legislation of fiscal character such as the present provision which relates to fees, it will not be proper or permissible to read into or delete words, which do not exist in the provision.  Further even if there is any scope of doubt, the benefit of such doubt will go to the subject i.e., the stock brokers and not to authority i.e., SEBI.   Further the explanation to para 4 introduced with effect from 20.02.2002 takes complete care of any doubt, if at all it could exist, by providing a deeming fiction that in the   case of conversion of entities having individual or partnership membership card into a corporate entity, the corporate entity shall be deemed to be a continuation of the entity in respect of collection of fees from the converted corporate entity.  The explanation is statutory in nature and it   does not restrict the benefits of conversion to entities converted on or after any particular date.  The Supreme Court dismissed the appeal upholding the order of SAT.

In ‘SEBI V. Magnum Equity Services Limited and Others’ – 2015 (12) TMI 49 - SUPREME COURT Magnum Capital Services was a registered partnership firm comprising of 7 partners, carrying on a business of stock broker and member of NSE.  All the seven partners moved a conjoint application for registration of a company under the Companies Act, 1956.  The company was incorporated on 22.05.1995 consisting of the six partners (one of the partners exited from the firm during the pendency of the proceedings).  NSE transferred the membership card to the new company on 25.04.1996.  SEBI also registered the company on 29.05.1997.  In December 1997 the three directors resigned and transferred their shares to the remaining directors and their family members.  Magnum claimed the benefit of the fee which the Firm had paid earlier to SEBI on the ground that there was continuity of the business.  SEBI rejected the claim vide letter dated 12.06.2007 on the ground 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 para I(4) of Schedule III of these regulations. SAT, in the appeal filed by the company, allowed the appeal on the ground that SEBI itself allowed the benefit to stock brokers who converted themselves into corporate entities between 01.04.1997 and 21l01.1998.  The Tribunal held that the benefit of fee continuity should be given even to those entities which corporatized themselves prior to 01.04.1997.