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.
-----------------------
10
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.
-----------------------
10
