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.