Capital Markets Ltd Vs. Securities & Exchange Board of India & Ors
 Insc 1095 (23
H. Kapadia & B. Sudershan Reddy
APPEAL NO. 4945 OF 2007 (D. No. 18381/07) with Civil Appeal No. 3674 of 2007
above two civil appeals are directed against the decisions dated 18.5.2006 and
4.5.2007 delivered by the Securities Appellate Tribunal, Mumbai in appeal Nos.
267/04 and 245/04 respectively.
short question that arises for our consideration in these civil appeals filed
under Section 15Z of the Securities and Exchange Board of India Act, 1992 (for
short the "1992 Act") is whether the appellants were entitled to the
benefit of fee continuity under para 7 of Circular dated 30.9.2002 issued by
the sake of convenience, we may mention hereinafter the facts in the case of Ratnabali
Capital Markets Ltd. ("RCML") which are as under.
1995 Ratnabali Securities Ltd. ("RSL") was registered as a broker
with National Stock Exchange ("NSE"). In terms of Schedule III of
SEBI (Stock-brokers and Sub-brokers) Regulations, 1992 ("the
Regulations"), RSL had paid initial registration fees for the first year
and thereafter it had paid fees on turnover basis for subsequent four years. No
further fees on turnover basis was paid by RSL under the said Regulations for
continuation of registration except a fee of rupees five thousand for a block
of next five years. RSL operated in cash and spot market.
SEBI adopted recommendations of Gupta Committee stating that no company whose
net worth was less than rupees three crores would be allowed to trade as a
broker in the derivative segment of the Stock Exchange. To meet this net worth
criteria, RSL and RCML merged under the Scheme of Amalgamation sanctioned by
the order of the Calcutta High Court. Under that order, all rights, licences,
assets, properties and registrations of RSL stood transferred by operation of
law to RCML.
30.9.2002 SEBI issued a circular stating that in the case of merger carried out
as a result of compulsion of law, fees would not have to be paid afresh by a
transferee entity provided that majority shareholders of transferor entity
(RSL) continues to hold majority shareholding in the transferee entity (RCML).
the merger of RSL with RCML, a demand was made by SEBI for registration fees on
turnover basis. Under the said Regulations, no stock-broker can buy, sell or
deal in securities unless he holds a certificate granted by SEBI under its
Regulations. Under the said Regulations, the stock-broker is required to pay
fees for registration in the manner provided in the Regulations. Under
Regulation 10, every applicant eligible for grant of a certificate has to pay
fees in the manner specified in Schedule III. Under that Schedule, every
stock-broker whose annual turnover does not exceed rupees one crore during any
financial year has to pay rupees five thousand as registration fees for each
financial year and whereas the annual turnover exceeds rupees one crore during
any financial year he has to pay rupees five thousand plus one hundredth of one
per cent of the turnover in excess of rupees one crore for each financial year.
We quote hereinbelow clause (c) of para 1 of Schedule III, which reads as
the expiry of five financial years from the date of initial registration as a
stock-broker, he shall pay a sum of rupees five thousand for every block of
five financial years commencing from the sixth financial year after the date of
grant of initial registration to keep his registration in force"
reading of clause (c) makes it clear that where the stock-broker has paid
registration fees either under clause (a) or clause (b) he shall have to pay
rupees five thousand for every block of five financial years commencing from
the sixth financial year after the date of initial registration in order to
keep his registration in force.
What RCML is now claiming is the benefit of initial registration of RSL as a
stock-broker. According to RCML, when the above two companies stood merged on
9.2.2000, which merger was approved by Calcutta High Court, all assets and
liabilities, including benefits in the form of licences obtained by RSL, stood
transferred by operation of law in the hands of RCML. According to RCML, the concept
of merger constitutes transfer by operation of law. According to RCML, the
concept of merger operates on account of legal compulsion or compulsion in law.
According to RCML, in the case of merger, which takes place after complying
with the procedure prescribed by Sections 391 to 394 of the Companies Act, duly
approved by the High Court, the assets and liabilities of the transferor
company comes into the hands of RCML on account of legal compulsion. There is
nothing voluntary in such cases of merger. According to RCML, the registration
fees once paid by RSL should be given the benefit of continuity vide para 7 of
Circular dated 30.9.2002 issued by SEBI. In other words, RCML now claims that
it is entitled to the benefit of registration fees which RSL had paid from time
to time as a broker in the cash and spot market. This claim of RCML has been
rejected by the impugned decision. Hence, this civil appeal.
the present case, the two companies merged because after 2000, derivative
markets opened out. RSL basically operated under the licences in cash and spot
markets. They did not operate in the derivative markets. When the two companies
merged, a new entity emerged. That entity was RCML. At this stage, it is
important to bear in mind that licence from NSE/BSE only provided a platform to
RSL/RCML to carry on the business of buying and selling shares on the stock
exchange. However, trade had to be regulated by SEBI. The Companies Act has
been enacted with a view to consolidate and amend the law relating to companies
and certain other associations. On the other hand, the 1992 Act has been
enacted to provide for the establishment of a Board to protect the investors'
interests in securities and to regulate the securities market and for matters
connected thereto. Under the said 1992 Act, SEBI is required to provide for
regulating the business in stock exchanges, registering and regulating the
working of stock brokers and numerous other functions which are enlisted in
section 11(2) of the said 1992 Act. Under section 11B of the 1992 Act, SEBI is
also empowered to issue directions inter alia to any person associated with the
securities market. As a regulator, therefore, SEBI is entitled to charge
registration fees for enabling it to carry out the functions stipulated in
section 11(2) of the 1992 Act. We repeat that there is a dichotomy between
functions of the stock exchange and the functions performed by SEBI. The licences
given by the stock exchange enables the stock- broker to buy and sell
securities on the exchange whereas the regulation of the trade per se is done
by SEBI for which it is entitled to charge requisite registration fees.
present case, we have no doubt in our mind that, on merger of the above two
companies, a new entity stood emerged/constituted, which was given a right to
operate in the derivative segment and, therefore, it had to pay fresh
registration fees on the turnover basis. That new entity (RCML) was not
entitled to the benefit of continuity of fees deposited earlier by RSL, which got
merged into RCML.
to RCML, the two companies were required to merge because of acceptance of
recommendations of Gupta Committee by SEBI. According to the report of the said
Committee, if a broker desires to enter derivative market then he is required
to have a net worth of at least rupees three crores. According to RCML, the
said requirement constituted a pre-condition for entering the derivative
to RCML, this pre-condition of possessing net worth of rupees three crores constituted
compulsion of law, which made RSL merged into RCML and, in the circumstances,
the appellants were entitled to the benefit of Circular dated 30.9.2002 issued
by SEBI. Under the said circular, mergers/amalgamations carried out as a result
of compulsion of law stood excluded from payment of fees afresh.
quote hereinbelow the said provision, which reads as under:
Where mergers/amalgamations are carried out as a result of compulsion of law,
fees would not have to be paid afresh to hold majority shareholding in
transferee entity. The Exchange would have to enumerate what constitutes
"compulsion of law" resulting in such merger/amalgamations, for
consideration of SEBI."
Placing reliance on the aforesaid clause, RCML contended that, in the present
case, RSL had merged into RCML on account of compulsion of law and, therefore,
they were entitled to the benefit of continuity of fees earlier paid by RSL.
According to RCML, but for the recommendations of Gupta Committee, RSL would
not have merged into RCML. According to RCML, because of Gupta Committee
prescribing the net worth of rupees three crores for entering into derivative
market, RSL had to merge in RCML, which, according to the appellant,
constituted legal compulsion.
do not find any merit in the above arguments. Two points arises for
determination in the present case. They are interconnected. Firstly, whether
RCML, on amalgamation, duly sanctioned by Calcutta High Court, was entitled to
claim the benefit of Fee Continuity and, secondly, whether the demand made by
SEBI imposing fresh turnover/registration fees on the merged entity (RCML)
constituted an act in derogation of the provisions of any other law for the
time being in force in terms of section 32 of the said 1992 Act.
stated above, on 30.9.2002 SEBI had issued a circular stating that in the case
of amalgamation/merger carried out as a result of compulsion of law, fresh
turnover/registration fees would not have to be paid afresh by a transferee
concerned with the expression "compulsion of law" in that circular.
It is true that, in the present case, RSL had merged into RCML after complying
with the provisions of sections 391 to 394 of the Companies Act. It is equally
true that the Scheme of Amalgamation has been approved by the Calcutta High
Court. However, what is "compulsion of law" has not been defined by
SEBI. The reason is obvious. Under section 391 of the Companies Act, a
compromise or arrangement is proposed generally as an alternative to
liquidation. Where a scheme appears to be feasible and workable, it should be
preferred to a winding up order.
the case of Himalaya Bank Ltd. v. L. Roshan Lal Mehra reported in AIR (48) 1961
PUNJAB 550 it has been held vide para 6 that the scheme of arrangement under
section 391 is an alternative to liquidation. We quote hereinbelow para 6 of
the said judgment:
Mr. D.N. Avasthy, learned counsel for the bank has next drawn my attention to
Section 37 of the Banking Companies Act which provides that the High Court may
on the application of a banking company which is temporarily unable to meet its
obligations, make an order staying commencement or continuance of all actions
and proceedings against the company for a fixed period of time on such terms
and conditions as it shall think fit and proper.
High Court is empowered under Section 37(3) to appoint a special officer who is
required to take into custody or control the assets, books etc., including
actionable claims to which the banking company may be entitled. Section 38
empowers the High Court to order the winding up of banking company if it is
unable to pay its debts. Mr. D.N. Avasthy also maintains that the scheme of
arrangement is an alternative mode of winding up and, therefore, such powers as
the High Court possesses under Section 45-D of the Banking Companies Act, 1949,
will also entitle it to exercise the same powers for enforcement of the scheme
of arrangement etc.
rested his argument on three decisions reported in Madan Gopal v. Peoples Bank
of Northern India, Ltd., AIR 1935 Lah 779 (SB), Motilal Kanji and Co. v. Natwarlal
M. Jhaveri, AIR 1932 Bom 78, In re Travancore National and Quilon Bank Ltd.,
AIR 1939 Mad 318. In AIR 1935 Lah 779 (SB), Tek Chand J. said:
153, Companies Act, makes provision not merely for schemes for the
'resuscitation' or 're-organisation' of companies, but it also provides for
'schemes of arrangement', which in the words of Vaughan Williams J. (used in
reference to the corresponding section of the English Act) provide an
alternative mode of liquidation, which the law allows the statutory majority of
creditors to substitute for winding-up whether voluntary or under the Court. In
re London Chartered Bank of Australia, (1893) 3 Ch. 540 at p. 546.' On the strength of these decisions,
it was argued that the scheme of arrangement was an alternative mode of
liquidation. This does not appear to be so either under the Companies Act,
1956, or under the Indian Companies Act, 1913, which preceded the present
statute. Provisions of the Companies Act relating to "Arbitration,
Compromises, Arrangements and Reconstruction" covered by Sections 389 to
396 are placed in Chapter V of Part VI which deals with Management and
Administration. Part VII is devoted to Winding Up. A scheme, therefore, cannot
be said to be an alternative mode of liquidation but only an alternative to
liquidation. The incidents of scheme of arrangement and of winding up are
distinct both in principle and in consequences.
dictum of Vaughan Williams, J., which was cited in the three decisions referred
to above, was examined by a Full Bench of this Court in Sm. Bhagwanti v. New
Bank of India Ltd., Amritsar, AIR 1950 EP 111. It was held by
the Full Bench that in the corresponding English Act all the sections relating
to the scheme were contained within the bar dealing with winding-up; and,
therefore, a scheme of that particular kind was correctly described as an
alternative mode of winding up. That particular provision which was being considered
was applicable only to a company in liquidation.
is also clear from the observations of Vaughan Williams, J., only a portion of
which was noticed in the three decisions referred to above. He said:
scheme of arrangement under the Act of 1879 is -- as I have had occasion to
point out in several cases -- an alternative mode of liquidation which the law
allows the statutory majority of Creditors to substitute for the pending
winding-up, whether voluntary or under the Court, just as the Bankruptcy Act,
1869, allowed the creditors the substituted liquidation by arrangement under
Section 125, or composition under Section 126, of that Act, for a pending
bankruptcy ........' In view of this, I am not persuaded by this argument of
the learned counsel for the bank, that the scheme of arrangement should be
treated as a specie of liquidation. I am, therefore, satisfied that this Court
has jurisdiction to entertain the petition and to pass appropriate order in
view of the provisions of section 392 of the Companies Act read with Section
make it clear that it would depend on the facts of each case whether a scheme
under section 391 could be construed as an alternative to liquidation. It is
not in every matter that the scheme under section 391 would constitute an
alternative to liquidation. Therefore, it would depend on the facts of each
case. Under circular dated 30.9.2002 what SEBI intends to say is that fresh
turnover/registration fees would not be payable by a company which goes for
amalgamation/merger as an alternative to liquidation. In other words, if the
company's net worth is negative and if that company is on the brink of
liquidation, which compels it to go for a scheme under section 391, then in
such cases SEBI exempts such companies from payment of fresh turnover/
is not the case herein. On the contrary, in the present case, amalgamation has
taken place in order to increase the "reserves" component of the net
worth. The difference between the amount recorded as fresh share capital issued
by the transferee company on amalgamation and the amount of share capital of
the transferor company to be reflected in the Revenue Reserve(s) of the
transferee company was the sole object behind amalgamation. (see page 429 of vol.
II in civil appeal No. 3674/07). Therefore, SEBI was right, in the present
case, in refusing to give the benefit of exemption to the transferee companies.
These transferee companies were not on the brink of liquidation. The scheme
under section 391 was not an alternative to liquidation. Hence, the transferee
companies were not entitled to claim the benefit of Circular dated 30.9.2002.
Further, we do not find any merit in the argument that the demand raised by
SEBI for fresh turnover/registration fees constituted an act derogatory of the
provisions of the Companies Act. In our view, on the emergence of a new entity,
which was entitled to operate in derivative market, SEBI was certainly entitled
to regulate its trade in the derivative segment for which it was entitled to
charge requisite fees.
the 1992 Act, a duty is cast on SEBI to protect the interest of investors in
securities and to regulate the trade in securities on the Stock Exchange. Such
Regulation is not a part of the Companies Act. Derivative market is highly
speculative. It carries lot of risks. In fact, history shows that many
investors and traders lost money earlier when badla transactions were
prevalent. Derivative market, to a certain extent, replaces badla. The point to
be noted is that Gupta Committee recommended the net worth of rupees three crores
in order to secure the interests of investors and traders who regularly play in
derivatives. In the circumstances, it cannot be said that raising of an amount
of rupees three crores as net worth constituted legal compulsion for RSL to
merge into RCML. As stated above, the Government decided to vest SEBI with
statutory powers in order to deal effectively with all matters relating to
capital market. The main function of SEBI is to regulate the trade which takes
place in the securities market and for that purpose it is entitled to charge
registration fees. In the present case, we are concerned with merger of two
distinct independent companies. In the present case, we are not concerned with
merger of firms. In the present case, we are not concerned with joint ventures.
After the merger of RSL into RCML a new entity has emerged. In the
circumstances, SEBI was entitled to charge the stipulated fees. For the aforestated
reasons, we find no merit in these two civil appeals.
Before concluding, we may note that, according to the appellants, in the past
SEBI has not charged registration charges at the rates prescribed in case of
two other companies. According to the appellants, SKP Securities Ltd. and BNK
Securities Pvt. Ltd. were given in the past the benefit of fee continuity under
para 7 of Circular dated 30.9.2002 whereas the said benefit has been denied to
RCML. We do not know all the facts of those transactions. Be that as it may, we
are concerned with the position in law. We reiterate that there is no merit in
these civil appeals.
For the aforestated reasons, we see no reason to interfere with the impugned
orders passed by the Securities Appellate Tribunal, Mumbai. Accordingly, both
the civil appeals stand dismissed with no order as to costs.