SECURITIES APPELLATE TRIBUNAL, MUMBAI

Sodhani Securities Ltd.

v.

Securities and Exchange Board of India

JUSTICE N.K. SODHI, PRESIDING OFFICER

ARUN BHARGAVA AND UTPAL BHATTACHARYA, MEMBER

APPEAL NO. 151 OF 2007

January 29, 2008

Regulation 10, read with Schedule III, of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 - Payment of fees and consequences of failure to pay fees - A partnership firm engaged in business of stock broking corporatised itself into appellant company - At time of corporatisation of erstwhile partnership firm, three of its four partners became whole time directors of company and they continued to hold more than 40 per cent shares for three years since then - Appellant was not granted exemption from payment of registration fees on corporatisation of partnership membership of stock exchange in terms of para I(4) of Schedule III on ground that appellant did not satisfy condition of Circular No. SMD/DBA - II / CIR - 22/2002 dated 12-9-2002 to effect that all partners of erstwhile firm did not become whole time directors of company - Whether circular dated 12-9-2002 could not have any retrospective operation - Held, yes - Whether, therefore, in view of fact that appellant had got incorporated itself in June 1997 and even got registered with Board as corporate entity on 31-3-1998 i.e., much before issue of circular dated 12-9-2002, terms of circular could not be enforced vis-à-vis appellant - Held, yes - Whether consequently, impugned order was to be set aside and appellant was to be granted benefit claimed - Held, yes

Circular & Notification

Board’s Circular No. SMD/DBA-II/CIR-22/2002 dated 12-9-2002

FACTS

One ‘S’ & Co., a registered partnership firm was a member of the National Stock Exchange (NSE) and had been in the business of stock broking since 1994. Four members of family held 25 per cent shares each in the said firm. In June 1997 the firm corporatised itself as the company (appellant-company). The Board issued the certificate of registration as a broker in favour of the appellant on 31-3-1998. At time of corporatisation of the erstwhile firm three of the four partners became whole time directors of the appellant and they continued to hold more than 40 per cent shares for three years since then. The appellant filed an application for exemption from payment of registration fee on corporatisation of partnership membership of the exchange in terms of Para 1(4) of Schedule III to the Regulations. This application was rejected by the Board on the ground that the appellant did not satisfy the conditions laid down in circular No. SMD/DBA-II/CIR-22/2002 dated 12-9-2002 to the effect that all the partners of erstwhile firm did not become the whole time directors of the appellant company.

On appeal:

HELD

The expression “the erstwhile individual or partner shall be the whole time Director of the corporate member so converted and such Director will continue to hold minimum 40 per cent of the shares” would on a plain reading, indicate that ‘the erstwhile partner’ had to become ‘the whole time Director’ and that the reference was to any one of the partners. The appellant had got incorporated in 1997 and even got registered with the Board as a corporate entity on 31-3-1998 much before the issue of the circular of 12-9-2002. This circular could not have any retrospective operation. Even before the circular was issued, the appellant appointed three out of four erstwhile partners as whole time directors at the time of incorporation and their combined shareholding was more than 40 per cent and remained so for more than three years after incorporation. The appellate satisfied the criteria for fee exemption contained in paragraph I(4) of Schedule III to the regulations. The stricter criterion of every partner having to be a whole time director of the newly formed corporate entity could not be derived from paragraph I(4) of Schedule III to the Regulations and since introduction of such a criterion could not possibly be anticipated at the time of incorporation and registration of the appellant, there could not be any case for the Board to enforce it vis-à-vis the appellant. Accordingly, the instant appeal was allowed and it was held that the appellant was entitled to the benefit claimed. [Para 5]