SECURITIES APPELLATE TRIBUNAL MUMBAI
Nam Securities Ltd.
v.
Securities and Exchange Board of
JUSTICE N.K. SODHI, PRESIDING OFFICER
ARUN BHARGAVA AND UTPAL BHATTACHARYA, JJ
APPEAL NO. 166 OF 2007
NOVEMBER 01, 2007
Regulation 10, read with Paragraph 4 in Schedule to SEBI
(Stock Brokers and Sub-brokers) Regulations, 1992 - Payment of fees and
consequences of failure to pay fees - Whether before exemption can be claimed
under para 4 of Schedule III, a new corporate entity must come into existence
and that entity should be result of conversion of an individual or partnership
carrying on broking business, Paragraph 4 does not grant exemption where
membership of an exchange is transferred to a company already in existence -
Held, yes - One G, a stock broker registered with SEBI was a member of DSE - He,
claiming to hold 40.03 percent shares of appellant company transferred his
membership of DSE in favour of appellant - On becoming a member of DSE,
appellant obtained registration as a stock broker from SEBI and claimed benefit
of fee which ‘G’ had earlier paid to SEBI in terms of paragraph 4 in Schedule
III - Whether since appeal company did not come into existence by conversion of
‘G’ into a corporate entity, but it was already in existence when membership of
DSE was transferred in its favour, appellant was not entitled to benefit of fee
earlier paid by ‘G’ as an individual - Held, yes
facts
One
‘G’, a stock broker registered with the SEBI, was a member of the Delhi Stock
Exchange (DSE). He claimed to be holding 40.03 percent shares in the
appellant-company and decided to transfer his membership of DSE in favour of
the appellant which was allowed by the Board on becoming a member of the DSE,
the appellant was granted registration as a stock broker by the SEBI and thereafter
it claimed the benefit of the fee which ‘G’ had earlier paid to the SEBI in
terms of Para 4 in Schedule III. However, the SEBI disallowed the claim.
On
appeal:
HELD
A
reading of the provision of Paragraph 4 in Schedule III leaves no room for
doubt that before a corporate entity can claim exemption, it has to be formed
by conversion of the individual or partnership into that entity. In other
words, an individual or a partnership should have been carrying on broking
business and that individual or partnership should then form a company and
transfer the broking business to that company by getting the membership card
transferred in its name. In other words, before exemption can be claimed, a new
corporate entity must come into existence and that entity should be the result
of conversion of an individual or partnership. To put it differently, an
individual or a partnership, which was carrying on broking business, should
form itself into a corporate entity and then claim exemption under paragraph 4,
provided, of course, the individual or the partner is a whole time director of
the corporate entity and continues to hold 40 percent shares of the paid up
capital of that entity for atleast three years from the date of conversion. If
all these conditions are satisfied, then the corporate entity, while getting
itself registered as a stock broker, shall be entitled to the benefit of the
fee which the individual or the partnership had earlier paid. It is on the
fulfillment of those conditions that the new corporate entity would be deemed
to be in continuation of the old entity and no fee would be collected again
from the converted entity for the period for which the erstwhile entity had
paid the fee as per the Regulations. The new corporate entity is admittedly
distinct in law from the erstwhile entity but for the deeming provision in para
4 read with its explanation, the new entity would have had to pay the
registration fee afresh at the time of seeking registration. It is the deeming
provision which makes the new entity a continuation of the old one. In the very
nature of things, a deeming provision has to be construed strictly and the
deeming fiction cannot be stretched beyond the limits prescribed in paragraph
4. In the instant case, ‘G’, who was the individual stock broker, did not
convert himself into a corporate entity. What he did was that, he transferred
his membership of DSE in favour of the appellant company, i.e., he transferred his membership to an existing company and
after becoming a member of the DSE, the appellant applied for registration as a
stock broker which was granted by the Board on 21-12-1998. Paragraph 4 does not
grant exemption where the membership of an exchange is transferred to a
company. The words ‘converting’, ‘conversion’ and ‘converted’ as used in paragraph
4 have some significance and these have to be assigned some meaning. They
cannot be ignored altogether. These words point to the fact that the individual
or partnership, as the case may be, has to get himself/itself formed into a
company before exemption can be claimed. Having obtained the registration as a
stock broker the appellant claimed the benefit of the fee which ‘G’ had earlier
paid to the Board. The claim made by the appellant was misconceived and was not
covered by the provisions of paragraph 4 in schedule III to the Regulations.
The appellant did not come into existence by the conversion of ‘G’ into a
corporate entity. It was already in existence when the membership of the DSE
was transferred in its favour. The object of introducing paragraph 4 in
Schedule III to the Regulations was to encourage corporatisation of stock
brokers most of whom were individuals or partnership firms and the Board wanted
them to become corporate entities. [
Therefore,
the appellant was not entitled to the benefit of the fee earlier paid by ‘G’ as
an individual. [
In
the result, the appeal was to be dismissed. The impugned order of the Board,
disallowing the claim of the appellant, was to be upheld. [