PREMIUM GLOBAL SECURITIES PVT.LTD.& ORS Vs. SECURITIES & EXCHANGE BOARD OF INDIA&ANR
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 3682 of 2006, Judgment Date: Dec 09, 2015
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3682 OF 2006
PREMIUM GLOBAL SECURITIES PVT. LTD. & ORS .. APPELLANTS
VERSUS
SECURITIES & EXCHANGE BOARD OF INDIA & ANR. .. RESPONDENTS
WITH
CIVIL APPEAL NO. 3686 OF 2006,
CIVIL APPEAL NO. 2310 OF 2007 &
CIVIL APPEAL NO. 6394 OF 2009
J U D G M E N T
VIKRAMAJIT SEN, J.
CIVIL APPEAL NO. 3682 OF 2006, CIVIL APPEAL NO. 3686 OF 2006 AND CIVIL
APPEAL NO. 6394 OF 2009
1 These Appeals arise against the common Judgment of the Securities
Appellate Tribunal (‘SAT’ for brevity) which affirmed the stance of SEBI
refusing to grant fee continuity benefits to the Appellants herein. Common
question of law and facts arise and for the sake of convenience we shall
keep in perspective the factual matrix in Civil Appeal No. 3682 of 2006, in
which the arguments in the main have been addressed.
2 Premium Capital Market & Investments Pvt. Ltd. was incorporated on
24.6.1992, which on 9.2.1994 changed its name to Premium Capital Market &
Investments Ltd (hereinafter ‘PCMIL’, Appellant No. 3). On an application
for Trading Membership of National Stock Exchange of India Ltd.
(hereinafter ‘NSE’) in the Capital Markets Segment by PCMIL, vide letter
dated 16.5.1994, NSE sent them an offer of membership subject to certain
conditions enclosed in Annexure ‘A’. In its letter dated 4.10.1994 SEBI
made observations on the Draft Prospectus for Public Offer submitted by
PCMIL, including the conditions for NSE membership, namely that the company
could not carry on any other activities apart from broking. Pursuant to
this observation, the draft prospectus was amended with an undertaking that
PCMIL would promote a new company to which it would transfer the NSE
membership. Thereafter on 16.12.1994, PCMIL was admitted to the membership
of NSE and was registered as a stock broker with SEBI.
3 On 27.4.1995 SEBI reaffirming the applicability of Rule 8(1)(f) and
8(3)(f) of Securities Contract (Regulation) Rules, 1957 (hereinafter ‘1957
Rules’) to corporate members, via a letter directed all corporate members
to “sever connections with businesses other than securities business
forthwith” and requested NSE to report on compliance. In order to comply
with this direction, Premium Global Securities Ltd. (later Premium Global
Securities Pvt. Ltd., hereinafter ‘PGSL’, Appellant No. 1) was incorporated
on 16.5.1995 for taking over the membership card of PCMIL. On 30.9.1995
PCMIL ceased all its fund-based activities. On 8.8.1996 NSE was informed
about the formation of PGSL and an application was made for transfer of NSE
membership from PCMIL to PGSL. On 14.3.2000 NSE issued a show-cause notice
to PCMIL under Rule 8(1)(f) and (3)(f) of the 1957 Rules in pursuance of a
complaint that PCMIL was not allowed to engage in any business other than
that of securities. To this PCMIL replied that PCMIL had not transacted any
other business and that the last leasing transaction was carried out in
September 1995 and that PCMIL was only receiving lease amounts.
4 Thereafter on 4.4.2000 a fresh application was made for transfer of
membership to PGSL and the NSE approved the aforesaid application on
12.4.2000 without any transfer fees. Steps for registration with SEBI were
initiated and PGSL was issued the Registration Certificate on 20.9.2000.
Meanwhile PCMIL received a letter from the NSE Disciplinary Committee dated
7.6.2000 directing PCMIL to cease all business in the nature of fund-based
activities and to initiate steps to segregate it within two months.
Alternatively the Committee also advised that PCMIL could set up a separate
subsidiary to take up the broking activity.
5 On 30.9.2002 SEBI issued a Circular on Fee Continuity benefits. The
relevant portions of the Circular read as follows:
TRANSFER OF MEMBERSHIP TO 100% SUBSIDIARY, GROUP COMPANY, HOLDING COMPANY,
ETC.
Where brokers are forced by compulsion of law to transfer their membership
to:-
i. 100% subsidiary company or
ii. Group company or
iii. holding company
they shall not be required to pay fees afresh. In such cases, the Exchange
would have to enumerate the circumstances under law resulting in the said
transfer to 100% subsidiary/group/holding company for consideration by
SEBI.
For this purpose,
A company would be classified as a group company of another company, if the
controlling persons/entities in both the companies are same i.e. such
persons/entities hold atleast 51% of the paid-up capital (40% in case of
listed company) in both the companies.
A Company would be classified as a holding company of the trading member
corporate, if its shareholding in the member corporate was above 51%.
6 In response to the request for turnover details by NSE, PGSL vide
letter dated 12.3.2003 elucidated that there had been a transfer of
membership due to compulsion of law and as per SEBI circular dated
27.9.2002, such transfer to group company would not attract any fresh
payment of registration fees. SEBI however, refused to grant PGSL the fee
continuity benefits sought. On 4.12.2003 PGSL submitted another detailed
representation to SEBI seeking grant of fee continuity. However no
response was received from SEBI. Meanwhile on 15.7.2004, SEBI (Interest
Liability Regularisation) Scheme 2004 came into force. The Scheme envisaged
a waiver of 80% outstanding interest if the broker paid the outstanding
principal along with 20% outstanding interest during a specified period.
SEBI issued a Provisional Fee Liability Statement demanding payment of fees
and NSE along with its cover letter sent it to PGSL and PGSL filed an
appeal before the SAT.
7 The primary issue before SAT was whether the Appellants were under
any compulsion of law to transfer their brokerage business to a subsidiary.
SAT ruled in favour of SEBI stating that since the Appellants were subject
to the bar in Rule 8(1)(f) they were therefore required to sever themselves
from their fund-based activities to keep in line with the provision. As a
natural corollary thereof, SAT stated that although there was a compulsion
of law on the Appellants, it did not extend to the extent that they were
compelled to sever their brokerage business and transfer it to their
subsidiary as they have in the present scenario; rather the Appellants
could have severed their non-brokerage businesses, either give it up in
entirety or transfer it to a subsidiary. The Appellants have assailed this
common judgment of the SAT.
8 The issue for determination before this Court is a neat one - Whether
the Appellants can be granted the benefit of fee continuity? To determine
the answer we must first refer to the Circular under which these Appellants
have made their respective claims. The Circular titled, “Fees Payable by
Stock Brokers” dated 30.9.2002 was issued in the form of a clarification
pursuant to the direction passed by this Court in SEBI v. BSE Brokers’
Forum (2001) 3 SCC 482, to implement the recommendation of the R. S. Bhatt
Committee. The benefit in the said circular can be granted only when the
two essential conditions are satisfied. First that the company to which the
transfer was made is indeed a 100% Subsidiary Company, Group Company or a
Holding Company and secondly, whether there was a compulsion of law to
transfer the said membership. There are no disputes on the satisfaction of
the first essential condition. Thus we find the sole question for
determination before us to be whether there was a compulsion of law to
transfer the membership to PGSL.
9 Mr. S Ganesh, learned Senior Counsel for the Appellant, has relied on
Ratnabali Capital Markets Ltd. v. Securities Exchange Board of India (2008)
1 SCC 439, where the term ‘compulsion of law’ for the first time came to be
discussed in light of the SEBI Circular dated 30.9.2002. The appellants in
Ratnabali Capital Markets Ltd. underwent an amalgamation in order to
increase their reserves and qualify themselves to enter the derivatives
market. On the prevailing facts it was held that raising money to qualify
for membership of a segment did not constitute a compulsion of law for the
said merger. Mr. Ganesh submitted that in Ratnabali Capital Markets Ltd.
this Court clearly demarcated that any action taken by the benefit-seeker
must not be solely for profit-motive; its roots must emerge from a survival
instinct which is so in the case before us. He stated that PGSL was put in
the predicament of choosing one business over another; letting go or
transferring of the financial activities would have brought with it a
difficulty of having to transfer the main business whereas transfer of the
brokerage business would involve the transfer of the trading license. PGSL
therefore chose to transfer its brokerage business to a new group company.
This he said purported to merely re-organisation, not for commercial profit
but for compliance with the provisions of Rule 8(1)(f) and 8(3)(f) of the
1957 Rules. Mr. Sameer Parekh, one of the other Counsels for Appellants,
submitted that PCMIL faced 4 options when told to comply with the aforesaid
1957 Rules. They could either: a) give up the fund-based business; b) give
up the brokerage business; c) transfer the fund-based business to another
company, which would cause great hardship to all involved as numerous
contracts would have to be changed; or, d) transfer the brokerage business,
and of the 4 the last was the path of least resistance and hence the
brokerage business was transferred to PGSL.
10 Learned Senior Counsel for the Respondents, Mr. C U Singh, submitted
that the Appellants are precluded from claiming compulsion of law as they
themselves have admitted that they had other options besides transferring
their brokerage membership to a group company. He submits that the mere
existence of other options means that there was no compulsion imposed by
law to follow this specific course and the Appellants’ plea of
impossibility is neither a compulsion of law nor has it been raised
earlier. Mr. Singh placed reliance on Rules 8(1)(f) and 8(3)(f) of the 1957
Rules to submit that right from the start, the Appellants were under the
restriction to not engage themselves in a business other than that of
securities. He further brought to our attention ‘Annexure A’ of the letter
of acceptance of membership to the Capital Market Segment of the NSE which
placed certain conditions on Appellants to be fulfilled within three months
and one of which was the requirement to sever all fund based activities.
Mr. Singh was also of the opinion that the Appellants’ reliance on
Ratnabali Capital Markets Ltd. is misplaced. According to him, this Court
held that for an action to be compulsion of law, it needed to have been an
alternative to liquidation or a correspondingly calamitous situation,
essentially to prevent winding-up.
11 To these submissions, Mr. Sameer Parekh responded by placing forth on
record a copy of the original advertisement placed in the newspapers
calling for applications for Trading Membership of the Capital Markets
Segment of NSE. He points out that this advertisement was published on
11.2.1994 and the last date for submitting applications was 25.2.1994,
leaving a gap of merely 14 days. He states that this becomes relevant in
light of the submissions placed on record by SEBI that only those companies
who had no other business involving financial liabilities could apply. He
submits that SEBI could not have had the expectation that new companies
would be incorporated and be ready with their applications for trading
membership all within a span of 14 days. He also submitted that Rules 8(4)
and 8(4A) are the provisions relevant to companies and on a reading of
8(4A)(iv) which specifically exempts the Directors of the companies from
the provisions of 8(1)(f) and 8(3)(f) it can be concluded that it was not
intended initially that Rules 8(1)(f) and 8(3)(f) would apply to companies.
12 It is beyond cavil that SEBI, as a trade regulator in the securities
market, is entitled to charge registration fees for enabling it to carry
out its functions as stipulated in Section 11(2) of the SEBI Act, 1992.
However it appears at present that SEBI has pounced at the opportunity to
charge fresh registration fees choosing to ignore the exemptions assured by
it.
13 We find merit in the arguments furnished by the Appellants. In our
opinion, the restriction imposed was to not have fund-based and trading
activities together under one roof. Thus any action taken by the Appellants
to comply with restriction of not participating in both the activities
simultaneously would be under compulsion of law. The Respondents would have
us say that only one line of action was compulsion of law but that would
have the effect of adding ‘process’ to compulsion of law. The compulsion of
law under the 1957 Rules is directed towards the desired end and not
concerned with the means, and it would be wrong for us to ascribe
otherwise.
14 We thus set aside the impugned Judgment of SAT and direct that the
Appellants be given the benefit of fee continuity. These Appeals stand
allowed accordingly. There will be no orders as to costs.
C.A. 2310 of 2007
15 The original trading membership of the NSE had been obtained by Onida
Finance Ltd. on 16.9.1994 but when the NSE raised objections about its fund-
based activities, the license was transferred to OFL Securities Ltd. on
7.2.1995. Thereafter in 1999-2000, OFL Securities Ltd. transferred its
trading license to Gulita Securities Ltd. (Appellant No. 1). Thus the
trading membership was transferred twice but only the first transfer was
under compulsion of law. Therefore, we find neither any merit in the Appeal
nor any infirmity in the order of the SAT with regard to the Appellants in
C.A. No.2310 of 2007. Thus this Appeal is dismissed accordingly. There
will be no orders as to cost.
……………………………….J
[VIKRAMAJIT SEN]
……………………………….J
[SHIVA KIRTI SINGH]
New Delhi,
December 09, 2015.
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