IMPORTANT POINTS
Provisions of General Clauses Act, 1897 do not apply to SEBI (Stock Brokers and Sub-Brokers) Regulations 1992.
Even if one partner holds 40 % equity and remains director of the corporate entity for three years, the corporate entity will be entitled to fee continuity.
Any circular which is not clarificatory cannot have retrospective effect.

Headnote:(a) SEBI Regulations – Fee continuity – Partnership or sole proprietor corporatized prior to 1.4.1997 – Fee continuity will be available even then. (Para 8)
       (2015) 12 SCALE 271 – Relied upon
       (b) General Clauses Act, 1897 – Section 13(2) – Applicability to SEBI (Stock Brokers and Sub-Brokers) Regulations 1992 – General Clauses Act applies to Central Acts enacted by Parliament – SEBI Regulations framed by SEBI in exercise of powers conferred by section 30 of the SEBI Act, 1992 – Though the Regulations are required to be tabled in Parliament, it does not tantamount to an Act of Parliament – Provisions of General Clauses Act not applicable to SEBI Regulations. (Para 9, 10)
       (c) Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 – Schedule III, Paragraph I(4) – Two requirements for availing continuity of fee – 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 – Subsequent entry or exit of partners to and from the original partnership firm would have no effect on fee continuity entitlement of the newly formed corporate entity – Thus even if one partner holds 40 % equity and remains director of the corporate entity for three years, the corporate entity will be entitled to fee continuity – Thus 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. (Para 11, 12, 13)
       (d) Interpretation – Circular dated 12.9.2002 – Retrospectivity – Circular is not clarificatory – Hence cannot have retrospective effect. (Para 14)
       Facts of the case:
       This case concerns fee continuity under SEBI Regulations.
       Magnum Capital Services 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.
       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.
       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 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
       The Tribunal, vide order dated 23.1.2008, allowed the Appeal and set aside the order of SEBI.
       Finding of the Court:
       There is no infirmity in the impugned judgment.
       Result: Appeals dismissed.

JUDGMENT

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 Tribu

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2015 Supreme(SC) 1095

Cases Referred (1)