BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 141 of 2007
Date of decision : 19.2.2008
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Shriyam Broking Intermediary Ltd.
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…… Appellant
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Versus
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1. Securities and Exchange Board of India
2. Calcutta Stock Exchange Ltd.
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…… Respondents
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Mr. Navroze H. Seervai Senior Advocate with Mr. Arif Doctor and Sandeep H. Junnarkar Advocates for Appellant.
Dr.Poornima Advani Advocate with Mr. Hihangrang Newme Advocate for Respondent No.1
None for Respondent No.2.
Coram : Justice N.K. Sodhi, Presiding Officer
Arun Bhargava, Member
Utpal Bhattacharya, Member
Per : Justice N.K. Sodhi, Presiding Officer
Whether the appellant is entitled to exemption from payment of registration fee for the period for which one D.D. Chaturvedi (Chaturvedi) a member of the Calcutta Stock Exchange (CSE) and a registered stock broker had already paid prior to the transfer of his card in the name of the appellant is the short question which arises for our consideration in this appeal filed under section 15T of the Securities and Exchange Board of India Act, 1992. Facts giving rise to this appeal lie in a narrow compass and these may first be noticed.
The appellant, a public limited company which was incorporated on 23.9.1994 is a registered stock broker and a member of the National Stock Exchange (NSE). It is a 100% subsidiary of Shardul Securities Ltd. (previously known as M/s. Shriyam Securities and Finance Ltd.) Chaturvedi is a director of the holding company and claims to hold alongwith his family members more than 40% shares in it. Chaturvedi was a member of the CSE and was registered as a stock broker on 23.11.1994 with the Securities and Exchange Board of India (for short the Board). He filed an application on 21.8.1996 for the transfer of his membership card of CSE in favour of the appellant. This application was allowed and thereafter the appellant was given another registration by the Board on 31.12.1997 on the basis of the membership of CSE. It was then that the appellant company claimed exemption from payment of fee for the period for which Chaturvedi had already paid on the ground that he held more than 40% shares of the paid up equity capital of the holding company namely, Shardul Securities Ltd. for more than three years. The claim of the appellant was rejected and the Board issued a fee liability statement calling upon the appellant to deposit the amount stated therein. Feeling aggrieved by the rejection and the issuance of the fee liability statement, the appellant filed Appeal no.348 of 2004 before this Tribunal which came up for hearing on 4.5.2006 alongwith other similar appeals and the same was allowed on the ground that the appellant had not been heard by the Board before the demand notice was issued claiming registration fee due from it including fee for the period for which exemption was claimed. The case was remitted back to the Board for passing a fresh order in accordance with law after affording an opportunity of hearing to the appellant. The appellant was then heard by the deputy general manager who had been authorized by the chairman to dispose of such claims and by her order dated 7.5.2007 the claim of the appellant has again been rejected. It is against this order that the present appeal has been filed.
A reading of the impugned order would show that the appellant claimed before the Board that Chaturvedi had indirect control over the appellant company in as much as he and his close relatives alongwith group companies held more than 40% shares of the paid up equity capital of the holding company. The deputy general manager who heard the case concluded that even though indirect control of Chaturvedi over the appellant company through its holding company could enable the appellant to qualify for exemption, she rejected the claim on the ground that Chaturvedi did not have the requisite control as, according to her, the persons acting in concert with Chaturvedi were not his “close relatives” as defined in the Articles of Association of CSE. Shri. N.H. Seervai learned senior counsel appearing for the appellant seriously challenged the correctness of the findings recorded by the deputy general manager in the impugned order. It is not necessary to examine the contentions of the learned senior counsel as we are of the view that the deputy general manager in the impugned order went off the track in examining the claim of the appellant for exemption from payment of registration fee though we agree with the end result that the claim has to be rejected as will be discussed hereinafter. The concept of control – direct or indirect over the corporate entity is alien to the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (for short the regulations) under which the claim for exemption had been made.
Rule 3 of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Rules, 1992 (hereinafter called the rules) provides that no stock broker shall buy, sell or deal in securities unless he holds a certificate of registration granted by the Board under the regulations. Rule 4 lays down conditions for the grant of certificate to a stock broker and one of the conditions is that he should hold membership of any stock exchange. Another condition prescribed therein is that he shall pay the amount of fees for registration in the manner provided in the regulations. Regulation 10 provides for payment of fees and lays down that every applicant eligible for grant of a certificate shall pay such fees and in such manner as specified in Schedule III. Paragraph I(1) of Schedule III requires every stock broker to pay registration fee in the manner setout therein subject to paragraphs 2 and 3. The fee payable by a stock broker is based on his annual turnover. Paragraph I(4) provides for exemption to a stock broker from payment of registration fee on satisfying the conditions specified therein. Since the appellant made a claim for exemption under this para and this being the only provision to claim exemption, it is necessary to reproduce the same for facility of reference. It reads as under :
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“I. Fees to be paid by the Stock Broker.
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1….
2….
3….
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.”
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A reading of the aforesaid provision leaves no room for doubt that before a corporate entity could 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. This is clear from the opening words of paragraph 4 which read “Where a corporate entity has been formed by converting the individual or partnership membership card of the exchange….”. It is, thus, clear that before exemption could 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 firm carrying on broking business should form itself into a corporate entity and then claim exemption under paragraph 4 on transferring the membership card provided, of course, the individual or the partner is a whole time director of the corporate entity and continues to hold 40% shares of the paid up capital of that entity for at least three years from the date of conversion. If all these conditions are satisfied, the corporate entity while getting itself registered as a stock broker would be entitled to the benefit of the fee which the individual or the partnership had already paid prior to corporatisation. It is on the fulfillment of these conditions that the new corporate entity, though different in law, shall be deemed to be a continuation of the old entity and no fee shall be collected again from the converted entity for which the erstwhile entity (individual or partnership) had paid as per the regulations. The explanation to paragraph 4 brings in the concept of continuity.
Now we shall deal with the facts of the case before us. The appellant was already incorporated on 23.9.1994 and was carrying on broking business as a member of NSE. Chaturvedi was also a registered stock broker w.e.f. 23.11.1994 and a member of CSE. He transferred his membership card to the appellant company for which an application was filed in August 1996 and that was allowed. This is not a case where Chaturvedi corporatised himself and then transferred his broking business to that new entity. He merely transferred his card to an already existing stock broker. Paragraph 4 does not grant the benefit of exemption when a membership card is transferred by one broker to another which is the case here. The claim of the appellant deserves to be rejected on this short ground. We have taken a similar view in Nam Securities Ltd. vs. Securities and Exchange Board of India & Anr. Appeal no. 166 of 2007 decided on 1.11.2007. This apart, Chaturvedi is not even a shareholder of the appellant company and in any case does not hold 40% shareholding therein. It is the appellant’s own case that Chaturvedi alongwith his close relatives holds more than 40% shareholding in Shardul Securities Ltd. which is the holding company. This being so, it is clear that the requirements of paragraph 4 are not satisfied.
In the result, we uphold the impugned order for reasons other than those which weighed with the adjudicating officer and dismiss the appeal. There is no order as to costs.
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Justice N.K. Sodhi
Presiding Officer
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Arun Bhargava
Member
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Utpal Bhattacharya
Member
19.2.2008
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