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2015 (12) TMI 49 - SUPREME COURT

2015 (12) TMI 49 - SUPREME COURT - TMI - Decline of grant fee continuity to the Respondents - 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 - Held that:- We are in agreement with the Tribunal on the interpretation it has given to Paragraph I(4) of Schedule III. We shall elucidate our unders .....

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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.

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 pa .....

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f 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.

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 .....

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e 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. - Civil Appeal No. 4719 of 2008, Civil Appeal No. 5235 of 2008 - Dated:- 30-11-2015 - Vikramajit Sen And Shiva Kirti Singh, JJ. JUDGMENT Vikramajit Sen, J. 1. These Appeals assail the decisions of the S .....

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tnership 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 .....

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m 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 .....

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artners 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, s .....

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onversion. 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 Regulat .....

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s 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 .....

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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 ent .....

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ce 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 .....

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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 .....

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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, .....

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ntended 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 per .....

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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 c .....

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l 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 commenceme .....

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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 .....

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s 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 cen .....

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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 t .....

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