S.E.B.I. Vs. MAGNUM EQUITY SERVICES LTD. & ORS.
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 4719 of 2008, Judgment Date: Nov 30, 2015
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4719 OF 2008
SECURITIES & EXCHANGE BOARD OF INDIA ... APPELLANT
VERSUS
MAGNUM EQUITY SERVICES LTD. & ORS. ... RESPONDENTS
WITH
CIVIL APPEAL NO. 5235 OF 2008
SECURITIES & EXCHANGE BOARD OF INDIA ... APELLANT
VERSUS
SODHANI SECURITIES LTD. & ANR. ... RESPONDENTS
J U D G M E N T
VIKRAMAJIT SEN, J.
1 These Appeals assail the decisions of the Securities Appellate
Tribunal (for brevity ‘Tribunal’) dated 23.1.2008 and 29.1.2008, both of
which reversed the Order dated 12.6.2007 of Securities Exchange Board of
India (SEBI) declining to grant fee continuity to the Respondents before
us. In these Appeals SEBI seeks to reaffirm its stance that the
Respondents lost all entitlement to the advantage of fee continuity, no
sooner any of the erstwhile partners ceased to be Whole-time Directors of
the corporate entity which was the metamorphosed partnership firm.
C.A. No. 4719 of 2008.
2 Magnum Capital Services (hereinafter referred to as the Firm) was a
registered partnership firm, comprising of seven partners, carrying on
business as a stock broker; and was a member of the National Stock Exchange
(NSE). All the seven partners moved a conjoint application for
registration of a company under the Companies Act, 1956, during the
pendency of which one of the partners exited from the Firm. The company
was incorporated on 22.5.1995 consisting of the remaining six partners, in
the name and style of Magnum Equity Services Limited (hereinafter referred
to as Magnum). There has not even been a semblance of a debate that the
six partners had less than 40 per cent shareholding in the firm and/or that
they do not hold forty per cent of the equity of Magnum. All the remaining
erstwhile partners became the Whole-time Directors of Magnum. In
pursuance to an application filed by the Firm, NSE transferred the
membership card of the Firm to Magnum on 25.4.1996. Thus Magnum became a
member of NSE with effect from 25.4.1996. Subsequently, the Company
applied to the Securities and Exchange Board of India (SEBI) for
registration as a stock broker, which request was granted on 29.5.1997.
After being registered as a stock broker, Magnum commenced its broking
business. In December 1997, three Directors resigned from Magnum and
transferred their shares to the remaining Directors and their family
members. We must again hasten to clarify, that it is not the Appellant’s
case that the equity holding of the three continuing Whole-time Directors
had fallen below the 40 per cent criterion. Magnum also claimed the
benefit of the fee which the Firm had paid earlier to SEBI. This claim was
made on the ground that the earlier business carried on by the Firm had
been transferred to Magnum and as a result there was continuity of that
business. SEBI rejected this claim vide Order dated 12.6.2007 on the
predication 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 Paragraph I(4) of
Schedule III of the Securities and Exchange Board of India (Stock Brokers
and Sub-brokers) Regulations, 1992 (Regulations for brevity). For the
facility of reference, Paragraph I(4) is reproduced below:
“4. 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 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 of 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.
Explanation – It is clarified that 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.”
3 Aggrieved by the said Order, Magnum appealed before the Tribunal.
The Tribunal observed that Paragraph I(4) in Schedule III of the
Regulations was introduced on 21.1.1998. It provided for exemption from
payment of fee where a corporate entity was formed by conversion of the
individual or partnership card of the exchange. The Tribunal noted that
the benefit of this provision was initially only given to those who
corporatized on or after 21.1.1998. However, on representations made by
those stock brokers who corporatized themselves prior to 21.1.1998, SEBI
issued the Circular dated 28.3.2002 which extended the benefit to stock
brokers who converted themselves into corporate entities between 1.4.1997
and 21.1.1998. The stock brokers who had corporatized prior to 1.4.1997
and who had been denied the fee continuity benefit challenged the said
Circular in Alliance Finstock Ltd. v. Securities and Exchange Board of
India in Appeal No. 123 of 2004 decided on 9.5.2006, wherein the Tribunal
had held that the benefit of fee continuity be given even to those entities
which corporatized themselves prior to 1.4.1997. It transpires that this
view has attained finality, in terms of the decision of this Court in C.A.
No.4493 of 2006, SEBI v. Alliance Finstock Ltd. (2015) 12 SCALE 271
4 The other issue which was a ground for refusal of the fee continuity
benefit was that at the time of incorporation of Magnum, viz. 22.5.1995, it
consisted of six members all of whom were erstwhile partners of the Firm
and were also the Whole-time Directors of Magnum. However in December
1997, three out of the six erstwhile partners left. According to SEBI, the
exit of these three partners disqualified Magnum from the benefit of fee
continuity. The Tribunal referred to Punit Capital & Debt Market Pvt. Ltd.
Vs. Securities and Exchange Board of India in Appeal No. 169 of 2004
decided on 4.5.2006, where the Tribunal had interpreted Paragraph I(4) and
had held that the conditions enumerated in the said Paragraph would stand
satisfied if one of the partners of the erstwhile partnership firm became a
Whole-time Director in the corporate entity after its conversion. This
decision was challenged before this Court, but was dismissed on the ground
of delay, vide Order dated 25.11.2009. The Tribunal observed that in the
case at hand, since three of the erstwhile partners of the firm remained
Whole-time Directors in Magnum and continued to hold more than 40 per cent
shares of the paid-up equity capital for a period of more than three years,
the conditions set out in Paragraph I(4) stood satisfied. Before the
Tribunal, SEBI placed reliance on its Circular dated 12.9.2002, which
stated that in order to get the benefit of Paragraph I(4), all the
erstwhile partners should be Whole-time Directors in the corporate entity
so formed. SEBI contended that the Circular issued a clarification, and
hence was effective and efficacious retrospectively. The Tribunal rejected
this contention, finding that the Circular was not clarificatory in nature,
as it determined new parameters for the grant of the benefit of fee
continuity and it was not effective retrospectively. The Tribunal, vide
order dated 23.1.2008, allowed the Appeal and set aside the order of SEBI.
C.A. No. 5235 of 2008
5 M/s. Sodhani and Company was a registered partnership firm carrying
on business of stock broking as a member of the NSE since November 1994.
The firm consisted of four partners having equal share holding. In June
1997, the partnership firm corporatized itself as Sodhani Securities Ltd.
and three out of the four erstwhile partners became its Whole-time
Directors and continued to hold more than 40 per cent shares for three
years subsequent to corporatization; the fourth partner continued only in
his capacity of a shareholder. Sodhani Securities Ltd. was issued a
certificate of registration as a broker by SEBI on 31.3.1998 and thereupon
it claimed the benefit of fee continuity, which was rejected by SEBI vide
order dated 12.6.2007. Reliance was placed on the aforementioned Circular
dated 12.9.2002. Aggrieved by the said Order, Sodhani Securities Ltd.
filed an Appeal before the Tribunal which, on 29.1.2008, held in favour of
Sodhani Securities Ltd. stating that a plain reading of the Regulation
indicates that “the erstwhile partner” had to become “the Whole-time
Director” and that the reference was to any one of the partners. The
Tribunal also referred to and applied Punit Capital and Debt Market Pvt.
Ltd.; it reiterated that the Circular dated 12.9.2002 was not
retrospective. Thus, as Sodhani Securities Ltd. got itself registered with
SEBI as a corporate entity on 31.3.1998, which was well before the date of
the Circular, viz. 12.9.2002, it had no applicability or relevance to
Sodhani Securities Ltd. Further, the Tribunal observed that a similar
view had been taken by the Tribunal in the case of Magnum Equity Services
Ltd.
6 Learned Senior Counsel for the Appellant has relied on Section 13 of
the General Clauses Act, 1897, sub-section (2) of which provides that
singular includes plural and vice versa. In light of this provision,
Counsel has submitted that the term “partner” as used in Paragraph I(4) of
Schedule III implies ‘partners’, and that all the partners who comprised
the partnership firm at the time of corporatization would have to remain
part of the corporate entity for at least three years post conversion.
Further, the exit of any partner other than due to death shall amount to
altering the nature of the entity which is not in keeping with the spirit
of continuity as envisaged by the provision. Counsel further contended that
giving the provision a strict interpretation would lead to an absurdity, as
that would imply that one person is to hold 40 per cent shares because the
term used in the provision is “Whole-time Director” indicating a singular
person.
7 Counsel for the Respondents have contended that on a plain reading of
Paragraph I(4) it is evident that the requirement was only that an
erstwhile partner must be appointed as a Whole-time Director after the
corporatisation of the firm for a minimum period of three years from the
date of conversion, and that such Whole-time Director should hold at least
40 per cent shares of the paid-up equity capital. Counsel submitted that it
was the prerogative of the corporate entity as to the number of erstwhile
partners it appointed as its Whole-time Directors. Thus so long as the
Respondents satisfied the criteria of an erstwhile partner being appointed
as a Whole-time Director and that such person held 40 per cent shares of
the paid-up equity capital of the company, the Respondents could not be
found to be in violation of Paragraph I(4) of Schedule III.
8 We have carefully cogitated upon the arguments articulated before us.
As already mentioned, the issue regarding the benefit of fee continuity
being granted to entities which corporatized prior to 1.4.1997 has been
settled by this Court in SEBI v. Alliance Finstock Ltd. (2015) 12 SCALE 271
[Civil Appeal No. 4493 of 2006] wherein it has been held that even if a
partnership or sole proprietor corporatized prior to 1.4.1997, fee
continuity benefit could be availed of.
9 The other issue that remains to be decided by us is with respect to
the interpretation of Paragraph I(4) of Schedule III of SEBI (Stock Brokers
and Sub-Brokers) Regulations 1992. The main contention raised by learned
Senior Counsel for the Appellant is based on the application of The General
Clauses Act, 1897 which under Section 13(2) states that plural includes
singular. However, before we consider Section 13, we shall have to
determine whether the General Clauses Act itself is applicable to the SEBI
(Stock Brokers and Sub-Brokers) Regulations 1992. Section 3 of The General
Clauses Act, 1897 states that the said Act is applicable to all Central
Acts and Regulations made after the commencement of this Act. Further, the
term Central Act has been defined under sub-section (7) as an Act of
Parliament, which includes (a) an Act of the Dominion Legislature or of the
Indian Legislature passed before the commencement of the Constitution, and
(b) an Act made before such commencement by the Governor-General in Council
or the Governor-General, acting in a legislative capacity. The SEBI (Stock
Brokers and Sub-Brokers) Regulations 1992 are issued by SEBI in exercise of
the powers conferred on it under Section 30 of the SEBI Act, 1992. Section
31 of the SEBI Act, reproduced below for the facility of reference,
provides that Rules and Regulations are to be laid before Parliament.
Every rule and every regulation made under this Act shall be laid, as soon
as may be after it is made, before each House of Parliament, while it is in
session, for a total period of thirty days which may be comprised in one
session or in two or more successive sessions, and if, before the expiry of
the session immediately following the session or the successive sessions
aforesaid, both Houses agree in making any modification in the rule or
regulation or both Houses agree that the rule or regulation should not be
made, the rule or regulation shall thereafter have effect only in such
modified form or be of no effect, as the case may be; so, however, that any
such modification or annulment shall be without prejudice to the validity
of anything previously done under that rule or regulation.
10 Thus in light of the provisions of the SEBI Act, 1992 under which the
said Regulations have been issued, the latter do not tantamount to a
Central Act as defined under sub-section (7) of the definition clause of
The General Clauses Act, 1897. As a result we cannot accept the submission
made by the Senior Counsel for the Appellant that The General Clauses Act
is applicable while interpreting the language of Paragraph I(4) of Schedule
III of the Regulations. Ergo, what is postulated and prescribed is that
even if an individual erstwhile partner holds 40 per cent of the equity and
remains a Whole-time Director for the stipulated period of three years, fee
continuity would become available. Moreover, the figure of 40 per cent
cannot be rendered nugatory; it has a purpose viz. the umbilical cord
between the firm and the company is present and palpable, and yet fluidity
and growth, the raison d'etre for allowing corporatisation is also
respected. The mutation is substantially of the same legal entity, in that
process the erstwhile firm has no continuity of identity.
11 We are in agreement with the Tribunal on the interpretation it has
given to Paragraph I(4) of Schedule III. We shall elucidate our
understanding of Paragraph I(4) as it stood, up until the issuance of
Circular dated 12.9.2002. Anecdotally, a partnership firm which consists
of five partners and which holds a membership card of a stock exchange, may
decide to convert itself into a corporate entity. After incorporation, of
the five erstwhile partners, one of the partners holds 40 per cent shares
of the paid-up equity capital of the newly formed corporate entity and is
also its Whole-time Director. Subsequently, four of the partners decide
to exit from the corporate entity, leaving behind only the Whole-time
Director who was also an erstwhile partner. In our opinion the said
corporate entity will still be eligible for the benefit of fee continuity
under Paragraph I(4) of Schedule III of the Regulations.
12 In order to qualify for the benefit of the said provision, there is a
two-fold requirement. First, the corporate entity must earlier have been
either a sole proprietorship or a partnership. Second, an erstwhile
partner should own at least 40 per cent of the paid-up equity share capital
and should also be the Whole-time Director of the company, for a minimum
period of three years. Alternatively, erstwhile partners who together hold
at least 40 per cent equity must remain Whole-time Directors for a minimum
of three years. Thus the subsequent entry or exit of partners to and from
the original partnership firm would have no relevance on the entitlement of
the newly formed corporate entity to take advantage of the benefit not only
of fee continuity under the said provision but also fillip to the growth of
the corporate sector and the national economy.
13 The same benefit would also be extended to erstwhile partners who
after corporatization jointly retain at least 40 per cent of the paid-up
equity capital of the corporate entity and were its Whole-time Directors.
In other words, if there are five partners, of which three partners
subsequent to corporatization jointly hold 40 per cent of the shares of the
paid-up equity capital and are also the Whole-time Directors of the
company, then the departure of the other two erstwhile partners will not
deny the corporate entity the benefits of fee continuity.
14 We also agree with the finding of the Tribunal that the Circular
dated 12.9.2002 is not clarificatory. A clarificatory Circular is for the
purpose of elaborating the existing provision and removing ambiguities,
without altering the effect of the said provision. However, in the instant
case, our interpretation of Paragraph I(4) prior to the issuance of
Circular dated 12.9.2002, is contrary to that mentioned in the said
circular. Hence this Circular cannot be held to be clarificatory in nature,
and as a logical corollary is not capable of having any retroactive effect.
15 We thus find no merit in these Appeals and accordingly dismiss the
same. There will be no orders as to costs.
....................................................J.
[VIKRAMAJIT SEN]
....................................................J.
[SHIVA KIRTI SINGH]
NEW DELHI,
NOVEMBER 30, 2015.