2015 (11) TMI 307 - SC - Companies Law

Denial of benefit of fee continuity in terms of paragraph 4 of Schedule III to the Securities & Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 - whether stock brokers who have converted their individual/partnership membership into a corporate entity prior to April 01, 1997 are entitled to the fee continuity benefit in terms of paragraph 4 of Schedule III - Held that - Levy and collection are not synonyms and generally they occur at different stages. In the present case the legislative intention is to put an embargo on collection in future, in case the converted corporate entity is found entitled to the benefits of fee continuity. Such embargo is clearly to operate prospectively even if there existed some kind of liability in the past on account of fees leviable prior to insertion of paragraph 4 of Schedule III to the Regulations. In any case the rationale in not permitting retrospective operation of laws is only to ensure that subjects are not adversely affected by creation of legal liabilities and obligations for a period already bygone. In the present case the provisions do not create any obligation or liability. They only confer benefits by way of fee continuity on account of fees already paid by the earlier entity before its conversion into a new corporate entity. Even if we were to apply the test of fairness, no exception can be taken to extention of the benefit of fee exemption as provided by the relevant provision in the Regulations. Since the policy behind grant of benefits is to encourage corporatization of individual or partnership members of a stock exchange, the action of extending such benefits without any curb on the basis of date of conversions cannot be held as unfair. As noted earlier the SEBI itself extended the benefit to those converting not only from 21.1.1998 but from 1.4.1997. There is nothing in paragraph 4 or in the explanation to support the stand of the SEBI that the benefits must be confined to conversions taking place after a particular date when no such date finds place in the Regulations. As a result, appeals preferred by SEBI are dismissed and the judgments and orders under appeal passed by SAT are upheld.

Summary

Issues Involved:
1. Entitlement to Fee Continuity Benefit for Stock Brokers Converting to Corporate Entities Prior to April 1, 1997
2. Retrospective Application of Regulations
3. Interpretation of Paragraph 4 of Schedule III to the SEBI Regulations
4. Validity of SEBI Circulars and Policy Decisions
5. Distinction Between Levy and Collection of Fees

Detailed Analysis:

Entitlement to Fee Continuity Benefit for Stock Brokers Converting to Corporate Entities Prior to April 1, 1997
The core issue was whether stock brokers who converted their individual or partnership memberships into corporate entities before April 1, 1997, were entitled to the fee continuity benefit under Paragraph 4 of Schedule III of the SEBI Regulations. The Securities Appellate Tribunal (SAT) ruled in favor of the stock brokers, prompting SEBI to appeal.

Retrospective Application of Regulations
SEBI argued that Paragraph 4, introduced by an amendment effective January 21, 1998, should not be applied retrospectively. SEBI contended that the amendment could only affect fees payable from April 1, 1997, onwards. SEBI's stance was that regulations generally operate prospectively unless explicitly stated otherwise, supported by precedents like K Narayanan v. State of Karnataka and Mohd. Rashid Ahmad v. State of U.P.

Interpretation of Paragraph 4 of Schedule III to the SEBI Regulations
Paragraph 4 exempts corporate entities formed by converting individual or partnership memberships from paying fees for periods already covered by previous payments, provided certain conditions are met. The explanation added in 2002 clarified that such conversions would be deemed a continuation of the old entity, and no additional fees would be collected for periods already paid for by the previous entity.

Validity of SEBI Circulars and Policy Decisions
Respondents cited a SEBI Press Release from December 28, 2001, which extended the fee-continuity benefit to brokers who corporatized before April 1, 1997, provided SEBI had not already collected fees. This was argued to reflect SEBI's intention and policy, supported by principles like contemporanea expositio, as seen in K.P. Varghese v. Income Tax Officer Ernakulam.

Distinction Between Levy and Collection of Fees
The court acknowledged the distinction between levy and collection, as noted in Somaiya Organics (India) Ltd. v. State of U.P. Levy refers to the assessment or imposition of a fee, while collection pertains to its fiscal realization. The court found that Paragraph 4 and its explanation created a prospective embargo on the collection of fees from converted corporate entities, without retroactively invalidating past levies.

Conclusion:
The court concluded that Paragraph 4 and its explanation did not explicitly or implicitly exclude entities converted before January 21, 1998, from fee continuity benefits. The legislative intent was to encourage corporatization without imposing retrospective liabilities. Consequently, the court upheld the SAT's decision, dismissing SEBI's appeals and confirming that stock brokers converting to corporate entities prior to April 1, 1997, were entitled to fee continuity benefits. Each party was ordered to bear its own costs.