BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.163 of 2007
Date of Decision: 29.2.2008
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Hasmukh Lalbhai Share Brokers Pvt Ltd
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...... Appellant
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Versus
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Securities and Exchange Board of India
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..… Respondent
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Present: Shri Vinay Chauhan with Shri Manish P. Gitay, Advocates for the
Appellant
Dr. Poornima Advani with Shri H. E. H. Newme, Advocates for the
Respondents
CORAM
Arun Bhargava, Member
Utpal Bhattacharya, Member
Per: Utpal Bhattacharya, Member
This appeal challenges the action of the Securities and Exchange Board of India (the Board, for short) to raise a demand on the appellant for payment of registration fees without allowing any concession in terms of paragraph I (4) of Schedule III to the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (the regulations, for short).
The facts relating to the appeal are that Hasmukh Lalbhai Share Brokers Pvt. Ltd. (the appellant) was incorporated on December 26, 2000 and was admitted by the exchange as a corporate member on April 9, 2001 in conversion of the individual membership card of Shri Hasmukh Lalbhai Chitharia. Four days later, on April 13, 2001 Shri Chitharia expired. It was Shri Chitharia’s sons who, as his legal heirs, were in control of the appellant company when the latter was granted registration by the Board on August 13, 2001. In August, 2004 the appellant received the provisional fee liability statement of the Board in which it was not given the fee continuity benefit. In its letter dated September1, 2004 to the appellant, the Board clarified that this had been done since it did not fulfill the conditions prescribed in clause I(4) of schedule III to the regulations. Being aggrieved by the Board’s decision, the appellant challenged the Board’s decision before this Tribunal in appeal no.288 of 2004 which was remitted back to the Board alongwith ten other similar appeals. The Board after hearing the appellants reaffirmed its earlier decision in its impugned order dated August16, 2007 which led to the present appeal.
The Board allows the benefit of fee continuity to corporate entities under circumstances mentioned in paragraph I (4) of Schedule III to the regulations which is reproduced below for facility of reference.
“When 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 minimum 40% 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.”
The learned counsel for the appellants drew our attention to the Board’s circular no. SMD/POLICY/Cir -25/19058/2002 dated September 30, 2002. He argued that the appellant’s case fell squarely within the ambit of this circular and it was, therefore, eligible for the fee continuity benefit. The circular contained the following clarification among others:
“It is clarified that all converted corporate entities which were otherwise eligible for fee continuity benefit under clause 4 of the Part I of the SEBI (Stock Brokers and Sub-Brokers) Regulations 1992 read with circular dated March 28, 2002, are eligible for fee continuity benefit even in case of death of the erstwhile individual/partner who has been inducted as whole time director in the corporate member after conversion, within a period of three years from date of conversion of membership provided that:-
<!--[if !supportLists]-->a. <!--[endif]-->the erstwhile individual/partner (member partners in case of Exchanges which admit members as partners but do not admit partnership firms as members of the Exchange) was satisfying the conditions laid down in clause 4 of part I of Schedule III above, till his/her death and
<!--[if !supportLists]-->b. <!--[endif]-->the legal heirs of such whole time directors of corporate members satisfy the above conditions till the completion of the remaining period.”
The learned -counsel for the appellant, in the course of his arguments also cited this Tribunal’s decision in appeal no.101 of 2004 Amit Sahita Finance Pvt. Ltd. and Others vs. Securities and Exchange Board of India in which the issue was fee continuity benefit in respect of a corporate entity formed by conversion of a partnership firm in which the partners were an individual member of the exchange, his wife and his son. The individual member expired before completing three years as a director since the conversion of the partnership firm. In this case the Board denied the fee continuity benefit to the corporate entity not on the ground that the erstwhile individual member had expired before completing three years of directorship but on the ground that his shareholding in the corporate entity had only been 30 percent and not 40 percent, as required under paragraph I(4) of Schedule III. This Tribunal held that since the individual member together with his wife, who was also a director, held more than 40 percent shares, the corporate entity was entitled to the fee continuity benefit. This decision is not applicable to the present appeal because no dispute regarding transmission or conversion of the membership card was involved in that appeal whereas in the present appeal that is the only issue.
The learned counsel for the Board argued that the appeal deserves to be dismissed because when the membership right of a stock exchange is transmitted to the legal heirs upon the death of a broker member, as happened in this case, it can not be treated as the same membership continuing entitling it to the fee continuity benefit as has been held by this Tribunal in appeal no.211 of 2007 Kamlesh Ramanlal Shah versus Securities and Exchange Board of India and the Stock Exchange, Mumbai. The relevant portion of this Tribunal’s order is quoted below:
“The correct position is that when a stock broker who is a member of an exchange dies, his heir or successor who wants to be admitted as a member of the exchange has to apply and the exchange has full discretion to decide whether to admit him or not as member. He may be allowed, for the sake of convenience and for the sake of not to inconvenience the investors who were operating in the market through that broker, to continue with the same business and trade in the interregnum until the exchange decides to admit him as a member. Such continuation in the interregnum does not automatically make him entitled to become a member of the exchange nor can it be claimed by him as a matter of automatic right. Similarly, for obtaining the certificate of registration from the Board, the heir or successor of the deceased member i.e. the stock broker, has to apply afresh and obtain a fresh certificate of registration. Here also the grant of certificate of registration is neither automatic nor can it be claimed as a matter of right. As such, we cannot agree with the contention of the learned counsel for the appellant that in cases of transmission where the membership right is transmitted to the heir upon death, it will be treated as the same membership continuing and that they will be entitled to exemption on the same lines of paragraph 4 of Schedule III of the Regulations.”
There is one crucial difference between the case cited by the learned counsel for the appellant and the present appeal. The former did not involve conversion of any individual/partnership member to a corporate entity whereas in the latter, that is the main issue. In the present appeal, the appellant was elected a corporate member of the exchange on March 31, 2001. The process of formation of the corporate entity by conversion of the individual membership card, as required in terms of paragraph I(4) of schedule III to the regulations, was thus complete when Shri Chitharia was alive. That he expired before the corporate entity was granted registration by the Board is not of any consequence as far as the grant of fee continuity benefit is concerned since neither paragraph I(4) of schedule III nor the Board’s circular of September 30, 2002 lays down any condition regarding registration. All the conditions prescribed in paragraph I(4) of schedule III had already been fulfilled except that he could not continue for 3 years as a whole time director because death intervened. But the Board’s circular of September 30, 2002 allows fee continuity benefit in case of the death of erstwhile individual/partnership members within 3 years of conversion subject to the fulfillment of the conditions mentioned therein. No deficiency in that regard has been pointed out by the Board. In this view of the matter, the appellant is clearly entitled to the benefit of fee continuity in terms of the Board’s circular of September 30, 2002.
In the result, we allow the appeal and set aside the impugned order. No order as to costs.
Sd/-
Arun Bhargava
Member
Sd/-
Utpal Bhattacharya
Member
29.02.2008
RHN