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Friday, November 6, 2015

whether the appellant is entitled to the fee continuity benefit in terms of the Regulations. Regulation 10 mandates that every applicant eligible for grant of a certificate shall pay such fees and in such manner as specified in Schedule III. For non-payment of requisite fees the SEBI may suspend the registration certificate and in that situation the stock broker shall cease to buy, sell or deal in securities as a stock broker. = We find that the facts of the case have been properly appreciated by SAT for coming to the conclusion 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. Initially the Vadodara Stock Exchange Ltd. had chosen to form another subsidiary company limited by guarantee ignoring the circular of the SEBI dated 16.12.1999 and also the bye rules of NSE laying down conditions for membership but later it decided to have a subsidiary company which could get registration as a broker with NSE. Such decision was effected through amalgamation. Such a situation cannot be treated as a compulsion of law for amalgamation. Even if we accept the submission that the compulsion of law be given a liberal meaning so as to include orders and directions of the SEBI, in the present case it is not possible to accept that amalgamation was forced upon the appellant under orders or directions of the SEBI. Only because the appellant and the parent company Vadodara Stock Exchange Ltd. 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. In the facts of the case it is not possible to accept that there was any compulsion of law for the merger/ amalgamation of the VSE Securities Ltd. with the appellant. So far as legal position is concerned, in the case of Ratnabali Capital Markets the contention that the assets and liabilities of the transferor company have passed into the hands of the transferee company did not cut any ice in respect of fees payable to the SEBI as per Regulations. In para 13 of that judgment it was held that on merger of the two companies, a new entity emerged which was given a right to operate in the derivative segment and therefore it had to pay fresh registration fees on the turnover basis. We find no good ground to take a different view. In paragraph 19 of that judgment this Court clarified that when the facts disclose that amalgamation/ merger had to be resorted to as an alternative to liquidation then it may be successfully urged that merger/ amalgamation was on account of compulsion of law so as to attract the exemption assured by the SEBI under the circular dated 30.09.2002. The facts of this case even remotely do not suggest any such or similar situation. As a result, we find no merit in this appeal and it is accordingly dismissed. However, there shall be no order as to costs.

                                                                  REPORTABLE

                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO.4664 OF 2006

VSE Stock Services Ltd.                             …..Appellant

      Versus

S.E.B.I & Anr.                                            …..Respondents


                               J U D G M E N T

SHIVA KIRTI SINGH, J.

Challenge in this appeal  is  to  order  dated  18.5.2006  rendered  by  the
Securities Appellate Tribunal,  Mumbai  (for  short  ‘SAT’)  whereby  Appeal
No.342/2004 preferred by the appellant was dismissed  by  holding  that  the
appellant is not entitled to the fee continuity benefit  claimed  under  the
provisions of Securities & Exchange Board of India (Stock Brokers  and  Sub-
Brokers) Regulations, 1992 [for short, ‘the Regulations’].
Since there is no dispute on the material facts which  have  been  correctly
recorded in the order under appeal, no useful  purpose  will  be  served  by
recollecting the facts in detail once again.  It would suffice to note  that
in terms of policy decision by respondent no.1, the  Securities  &  Exchange
Board of India (for brevity, ‘the SEBI’) reflected in  its  circulars  dated
26.11.1999 and 16.12.1999, the Vadodara Stock Exchange Ltd.  incorporated  a
subsidiary company named as VSE  Securities  Ltd.  on  24.12.1999.   It  got
membership of Bombay Stock Exchange (BSE) as well as registration under  the
SEBI resulting in commencement of  operation  on  BSE   from  29.5.2000  but
failed to get membership of National Stock Exchange (NSE) for  the  specific
reason that it was a company limited  by  guarantee  and  not  by  stock  or
shares.  To  overcome  this  handicap,  the  Vadodara  Stock  Exchange  Ltd.
corresponded with the SEBI as  well  as  NSE  but  without  success  because
apparently it had ignored the clarifications  contained  in  circular  dated
16.12.1999 indicating that a Stock Exchange  could  acquire  the  membership
right of a major Stock Exchange through a subsidiary company but  it  should
be a company  limited  by  stocks.   The  bye-laws  of  NSE  also  permitted
membership only to such a company and  not  to  one  limited  by  guarantee.
Hence Vadodara Stock Exchange Ltd. incorporated another subsidiary  company,
the appellant herein, on 16.1.2002.  Being limited by stocks, the  appellant
obtained membership  of  NSE  on  16.4.2002.   But  SEBI  refused  to  grant
recognition to the appellant on the  ground  that  as  per  its  policy  and
circular dated 26.11.1999 only one subsidiary  of  Vadodara  Stock  Exchange
Ltd. could claim registration as a broker.  Such decision of the SEBI  dated
31.12.2002 was accepted by the Vadodara Stock Exchange Ltd.  and  was  never
challenged.
In view of stand of the SEBI and clearly because  the  appellant  wanted  to
operate on NSE, steps were taken to get the  earlier  subsidiary  company  –
VSE Securities Ltd. amalgamated with the  appellant.   The  High  Court  was
moved and on completion of necessary  formalities,  amalgamation  order  was
passed by the Gujarat High Court on 17.3.2003.  Under the  above  scheme  of
amalgamation the appellant became  a  transferee  company  entitled  to  the
assets and liabilities of the transferor company.   Post  amalgamation,  the
appellant obtained fresh registration  from  the  SEBI  in  respect  of  its
operation on BSE in the month of October  2003.   On  30.04.2004,  the  SEBI
granted registration for business on NSE on the usual  conditions  including
payment of fees in the manner  provided  in  the  Regulations,  particularly
Regulation 10(1) read with Schedule III of the Regulations.   The  appellant
paid the provisional fee liability but the demand of final fee by  the  SEBI
was challenged before SAT on the ground that the appellant  is  entitled  to
fee continuity benefit in terms of circular of the  SEBI  dated  30.09.2002.
The claim of the appellant, as noticed earlier, was rejected by SAT  by  the
order under appeal.
The moot question falling for determination, as rightly noticed by  SAT,  is
whether the appellant is entitled to the fee continuity benefit in terms  of
the Regulations.  Regulation 10 mandates that every applicant  eligible  for
grant of a certificate shall pay such fees and in such manner  as  specified
in Schedule III.  For non-payment of requisite fees  the  SEBI  may  suspend
the registration certificate and in that situation the  stock  broker  shall
cease to buy, sell or deal in securities as a stock broker.
The Central Government in exercise of the powers conferred by Section 29  of
the Securities & Exchange Board of India Act, 1992  has  made  Rules  called
the Securities & Exchange Board of India  (Stock  Brokers  and  Sub-brokers)
Rules 1992 [hereinafter referred to as ‘the Rules’].  Rule 4 prescribes  the
conditions for grant of certificate to a stock broker and as  per  condition
no.(c), 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 and as per condition no.(d),  he
shall pay the amount of fees for registration in the manner provided in  the
Regulations.   Schedule  III  of  the  Regulations  has  undergone   various
amendments in 1995, 1998, 2000, 2002 and also in 2003.
By policy circular dated 30.09.2002 the SEBI issued  several  clarifications
on the subject of fees payable by  stock  brokers.   The  circular  declares
that the clarification was pursuant to judgment of Hon’ble Supreme Court  in
B.S.E. Brokers’ Forum v. Securities & Exchange Board of India (2001)  3  SCC
482 which necessitated  amendments  in  the  Regulations  to  implement  the
recommendations of R.S. Bhatt Committee.  In respect  of  issues  raised  in
the  representations  received  from  brokers  in   their   individual   and
representative capacities, a circular was issued on March 28,  2002.   Since
some issues remained pending, they were  clarified  by  the  circular  dated
30.09.2002.  Clause 7 of this circular has been pressed into service by  the
appellant to claim the benefit of fee continuity.  It reads as under :

1 “7. Mergers/ Amalgamations


Where mergers/ amalgamations are carried out as a result  of  compulsion  of
law, fees would not have to be  paid  afresh  by  the  resultant  transferee
entity  provided  that  majority  shareholders  of  such  transferor  entity
continue to hold majority shareholding in transferee entity.   The  Exchange
would have to enumerate what constitutes ‘compulsion of  law’  resulting  in
such merger/ amalgamations, for consideration of SEBI.”


For deriving advantage from the afore-quoted clause 7 the appellant has  the
onerous task of showing that  in  its  case  the  merger/  amalgamation  was
carried out as a result  of  compulsion  of  law.   Before  considering  the
submissions on behalf of  appellant  in  this  regard,  the  relevant  legal
position may be concluded by pointing out that many  of  the  clarifications
including clause 7 have not been incorporated as a part of  the  Regulations
inspite of subsequent amendments in the Regulations.  Nonetheless  for  lack
of any issue on this point, the policy  decision  granting  benefit  by  the
circular dated 30.09.2002 is  being  relied  upon  as  valid  and  operative
during the relevant period.   Another  circular  dated  July  09,  2003  was
issued to clarify what kind of changes in the  status  and  constitution  of
the stock brokers shall have to be submitted to  obtain  prior  approval  of
the SEBI under Rule 4(c)  of  the  Rules.   On  and  from  09.07.2003  prior
approval is required, inter-alia,   in  respect  of  consolidation/  merger/
amalgamation of brokers and the ‘remarks’ column shows that full fees  along
with interest as on the date of application for approval is required  to  be
paid.  According to appellant this circular of July 09, 2003 being later  in
time does not apply to the case at hand.
On the question as to what is the compulsion of law for amalgamation of  the
appellant as a transferee  company  with  the  earlier  subsidiary  company,
learned  counsel  for  the  appellant  has  contended  that  in  absence  of
registration  from  the  SEBI,  the  appellant  like  any  other  entity  is
prevented by law to carry on its business as a broker  and  to  acquire  the
registration it had to ensure that in  place  of  two  subsidiary  companies
only one should exist otherwise the Vadodara Stock Exchange Ltd.  could  not
get the benefit of membership of one of  the  major  Exchanges,  i.e.,  NSE.
Hence the condition imposed by the SEBI to have only one subsidiary for  the
purpose  amounts  to  compulsion  of  law  which  led  to  the   scheme   of
amalgamation.  The other contention is that the scheme  of  amalgamation  in
which appellant is the transferee company has been approved by  the  Gujarat
High Court  and  hence  the  benefits  flowing  from  such  scheme  must  be
respected by all concerned including the  SEBI.   As  per  submissions,  the
earlier fees paid by the transferor company to  SEBI  for  registration  are
now an asset with the appellant company and such asset  must  be  respected.
The learned counsel for the appellant realised some difficulties on  account
of law laid down by this Court in the  case  of  Ratnabali  Capital  Markets
Ltd. v. Securities & Exchange Board of India (2008) 1 SCC 439 and  hence  he
sought to distinguish that judgment by pointing out that in paragraph 11  of
that judgment the Court noticed that the merger was with a view to have  the
benefit of enlarged business by entering the  derivative  markets.   In  the
present case, according to him no such reason exists  and  the  amalgamation
was carried out only on account of compulsion  explained  above.   According
to learned counsel for the appellant for accepting a compulsion  as  one  of
law, the term ‘law’ needs to be given a  liberal  interpretation  so  as  to
include orders and directions of a statutory authority such as the SEBI.
On behalf of the SEBI, reliance has been  placed  upon  relevant  dates  and
facts emanating from appellant’s letters to contend  that  the  amalgamation
was for voluntary reasons to access larger business  through  membership  of
NSE; there was no compulsion of law  and  order  under  appeal  requires  no
interference.
We find that the facts of the case have been  properly  appreciated  by  SAT
for coming to the conclusion 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.  Initially  the  Vadodara
Stock Exchange Ltd. had chosen to form another  subsidiary  company  limited
by guarantee ignoring the circular of the SEBI  dated  16.12.1999  and  also
the bye rules of NSE laying down conditions  for  membership  but  later  it
decided to have a subsidiary company  which  could  get  registration  as  a
broker with NSE.  Such decision was effected through amalgamation.   Such  a
situation cannot be treated as a compulsion of law for amalgamation.
Even if we accept the submission that the  compulsion  of  law  be  given  a
liberal meaning so as to include orders and directions of the SEBI,  in  the
present case it is not possible to accept that amalgamation was forced  upon
the appellant under orders or directions of  the  SEBI.   Only  because  the
appellant and the parent company Vadodara Stock Exchange  Ltd.  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.   In  the  facts  of  the  case  it  is  not
possible to accept that there was any compulsion  of  law  for  the  merger/
amalgamation of the VSE Securities Ltd. with the appellant.
So far as legal position is concerned, in  the  case  of  Ratnabali  Capital
Markets the contention that the assets and  liabilities  of  the  transferor
company have passed into the hands of the transferee  company  did  not  cut
any ice in respect of fees payable to the SEBI as per Regulations.  In  para
13 of that judgment it was held that on merger of the two companies,  a  new
entity emerged which was given a right to operate in the derivative  segment
and therefore it had to pay fresh registration fees on the  turnover  basis.
We find no good ground to take a different view.  In paragraph  19  of  that
judgment  this  Court  clarified  that  when   the   facts   disclose   that
amalgamation/ merger had to be resorted to as an alternative to  liquidation
then it may be successfully urged that merger/ amalgamation was  on  account
of compulsion of law so as to attract the  exemption  assured  by  the  SEBI
under the circular dated 30.09.2002.  The facts of this case  even  remotely
do not suggest any such or similar situation.
As a result, we  find  no  merit  in  this  appeal  and  it  is  accordingly
dismissed.  However, there shall be no order as to costs.

                       …………………………………….J.
                       [VIKRAMAJIT SEN]



                       ……………………………………..J.
                             [SHIVA KIRTI SINGH]
New Delhi.
November 04, 2015.
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