Nikhil Kanchanlal Vakharia Vs. S.E.B.I. & ANR.  INSC 942 (15 May 2008)
IN THE SUPREME COURT OF INDIA
CIVIL APPEALLTE JURISDICTION CIVIL APPEAL NO. 4210 OF 2006 Nikhil Kanchanlal
Vakharia .. Appellant Versus Securities & Exchange Board of India &
CIVIL APPEAL Nos.2951, 3004, 3008, 3009, 3010, 3015, 3016, 3017, 3058, 3082 of
Dalveer Bhandari, J.
1. This batch of appeals involve
the similar issue, therefore, all these appeals are disposed-of by this common
judgment. For the sake of convenience, the facts of Civil Appeal No. 4210 of
2006 are recapitulated.
2. This statutory appeal under
section 15Z of the Securities and
Exchange Board of India Act, 1992 (hereinafter referred to as "the
Act") is directed against the order dated 12th May, 2006 passed by the
Securities Appellate Tribunal, Mumbai in Appeal No.221 of 2004.
3. The impugned order is a one
line order which makes a reference to the detailed order passed on 12th May,
2006 in a companion matter being Appeal No.211 of 2004 titled as Kamlesh
Ramanlal Shah v. SEBI and Another.
4. The question which calls for
adjudication in this case is regarding "fee continuity benefit".
Under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 3 1992 (for short
"the Regulations") a fee is required to be paid by the stock brokers.
Broadly, the fee was structured in two distinct phases. In the first five years
of operation of a broker, the quantum of the fee was linked to the turnover of
the stock broker. Greater the turnover, higher the fee.
5. The second phase comprised
blocks of five years from the sixth financial year after the grant of initial
registration. During each block period of five years, the stock broker was
required to pay a flat rate of Rs.5000/- in order to keep the registration in
force. The flat fee had no link to the turnover.
6. The appellant claims that
whenever the event of transmission occurs within five years, they should be
given the fee continuity benefit and should not be made to pay the turnover
basis fee for the remainder of initial period of five years. The appellant is
claiming that on account of transmission, since the business and trade 4
continues in the same name or entity and the Stock Exchange permits
continuation of the same membership under the same number and clearing code,
they should also be given the benefit under the same registration of the
earlier Stock-Broker and thus grant the benefit of fee continuity.
7. According to the appellant, the
present case involves a situation where at all material times the stock broking
firm was a partnership firm carrying on business in the name and style of M/s.
Kanchanlal & Sons. The appellant along with his son, wife and daughter-in-law
constituted a partnership firm. Late Shri Kanchanlal K. Vakharia because of his ill health
decided to nominate the appellant in his place as a member of Stock Exchange,
Mumbai (respondent no.2). The appellant claimed that he is a partner of M/s.
Kanchanlal & Sons and, therefore, now the Security Exchange Board of India
(for short SEBI) should give the benefit of fee continuity as for the first
five years they have already been charged 5 from the partnership on a turnover
basis, therefore, they must now charge on a flat rate of Rs.5000/- per annum
for the registration. The appellant claims on account of transmission since the
business and trade continued in the same name or entity and the stock exchange
permits continuation of the same membership under the same number and clearing
code. They should also be given the benefit under the same registration of the
earlier stock broker and the benefit of fee continuity.
8. Mr. Altaf Ahmed, learned senior
counsel appearing for the SEBI submitted that there is no provision in the SEBI
Act, Rules and/or Regulations of the SEBI in this behalf which recognizes the
registration of stock-brokers by inheritance and/or transmission for the
purpose of granting fee continuity benefit. The appellant who is son of Late
Shri Kanchanlal K. Vakharia on transmission can be registered only as a new
stock broker with SEBI in accordance with the Act, Regulations and the SEBI
(Stock-Brokers and Sub-Brokers) Rules, 1992 (for short 6 "the Rules")
and subject to payment of registration fee for a new stock-broker as per the
schedule fixed in the Regulations. He further submitted that there is no
provision for grant of fee continuity benefit in cases of such transmission.
The only situation under which fee continuity benefit is granted is under para
4 of Schedule III under Regulation 10 of the Regulations, which reads thus:
"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 wholetime 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 7 erstwhile entity has paid the fee as per the
9. Mr. Ahmed further contended
that it was an incentive for corporatisation since a corporate entity is
required to maintain all records under law and as such it facilitates
regulating of the stock brokers. Under no other circumstances fee continuity
benefit is available under the statutory regulations and hence the appellant
cannot be granted benefit of fee continuity on account of transmission.
10. Mr. Ahmed also submitted that
every stock-broker who wants to deal in securities in the securities market is
required to be a member of a stock exchange and then get himself registered
with SEBI under section 12 of the Act in accordance with the procedure as
provided in the Regulations subject to the payment of registration fee for a
new stock-broker under rule 4 of the Rules and 8 Regulation 10 of the
Regulations on the rates mentioned in Schedule-III.
Rule 4 of the Rules reads thus:
Conditions for grant of certificate to stock-broker.-- The Board may grant a
certificate to a stock-broker subject to the following conditions namely:--
he holds the
membership of any stock exchange;
abide by the rules, regulations and bye- laws of the stock exchange or stock
exchanges of which he is a member;
in case of
any change in the status and constitution, the stock-broker shall obtain prior
permission of the Board to continue to buy, sell or deal in securities in any
he shall pay
the amount of fees for registration in the manner provided in the regulations;
and (e) he shall take adequate steps for redressal of grievances of the
investors within one month of the date of the receipt of the complaint and keep
the Board informed about the number, nature and other particulars of the
complaints received from such investors."
Regulation 10 of the Regulations
Payment of fees and the consequences of failure to pay fees.--
applicant eligible for grant of a certificate shall pay such fees and in such
manner as specified in Schedule III;
Provided that the Board may on
sufficient cause being shown permit the stock-broker to pay such fees at any
time before the expiry of six months from the date on which such fees become
(2) Where a stock-broker fails to
pay the fees as provided in regulation 10, the Board may suspend the
registration certificate, whereupon the stock-broker shall cease to buy, sell
or deal in securities as a stock- broker.
11. Mr. Ahmed contended that in
order to become a member of the stock exchange, the person is required to be
qualified as per rule 8 of the Securities Contracts (Regulations) Rules, 1957.
This right is also not inheritable, since every person on transmission may not
even be qualified to become a member of a particular stock exchange. It is
pertinent to mention here that membership of a stock exchange is a privilege
and not a 10 matter of right and thus this cannot be claimed as inheritable.
12. Mr. Ahmed also contended that
SEBI has no discretion in implementation of the Act, Rules or Regulations and
has to strictly adhere to the provisions as laid down and, therefore, has no
power to waive the said requirement. It may also be relevant to mention that
out of the 19 stock brokers who prayed for waiver of the fresh registration or
new entities upon transmission, only 9 or 10 have come to challenge the same
before this court and balance have accepted the judgment of the learned
13. Mr. Ahmed further submitted
that the SEBI has applied the turnover regime for the period 1992-93 to 1996-97
and, therefore, charged on the flat rate basis.
Clause I(1)(c) of Schedule III of
the Regulations reads thus:
"after the expiry of five
financial years from the date of initial registration as a stock-broker, he 11
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."
14. Learned senior counsel also
submitted that, under section 12 of the Act, no person can deal in securities
in the securities market without being registered with the SEBI. In the present
case, admittedly, Late Shri Kanchanlal K. Vakharia, father of the appellant,
was a member of the stock exchange and not the firm M/s.
Kanchanlal & Sons. Ordinarily,
if M/s. Kanchanlal &
Sons is not a member of the stock
exchange, the firm would not be entitled to deal with securities in securities
market in the Bombay Stock Exchange. The Bombay Stock Exchange does not enroll
partnership firm as members. As such, Late Shri Kanchanlal K. Vakharia alone
was the member of the stock exchange and he alone was thus entitled to deal in
securities in the Bombay Stock Exchange. However, under rule 179 of the Bombay
Stock Exchange Rules, an individual 12 member can do business in partnership
with certain categorized relations and, therefore, the Bombay Stock Exchange
permits trading by the individual in the name of the partnership firm. Rule 179
of the Bombay Stock Exchange reads thus:
"179. No partnership shall be
formed except- (i) between two or more members of the Exchange; or (ii) between
a member of the Exchange and his father or mother or wife or his son or sons or
daughter or daughter-in-law or daughters-in-law or father's brother or brothers
or unmarried sister or sisters or brother's or brother's son or sons; or (iii)
between two or more members of the Exchange and their father, mothers or wives
or son or sons or daughter or daughters or daughter-in-law or daughters-in-law
or brother or brothers or father's brother or brothers or unmarried sister or
sisters or brother's or brothers' son or sons;
Provided that a son or daughter or
son's son or brother or father's brother or unmarried sister of brother's shall
not be taken into partnership unless he or she be in all respects eligible for
membership of the Exchange."
15. It was contended by Mr. Ahmed
that Late Shri Kanchanlal K. Vakharia alone was a member and 13 through his
partnership, the entire partnership firm was allowed to trade on the Bombay
Stock Exchange, the entire turnover of trade on the Bombay Stock Exchange is
relatable to the individual member Late Shri Kanchanlal K. Vakharia as
otherwise the partnership firm and non-member partners would not have been able
to deal in securities on the Bombay Stock Exchange.
Consequently, this partnership
firm could also not deal with securities unless the member of the stock
exchange namely the individual member Late Shri Kanchanlal K.
Vakharia gets registered with
SEBI. It is through that individual member Late Shri K. Vakharia that the
partnership firm and registered partners are able to deal in securities on the
Bombay Stock Exchange. Even otherwise, the entire turnover of the partnership
firm on the stock exchange is on securities and, therefore, relatable to the
registered member i.e. Late Shri Kanchanlal K. Vakharia under whose membership
of Bombay Stock Exchange and registration of SEBI, such trading is permitted.
16. It was also submitted on
behalf of the SEBI that the appellant wants only his turnover to be considered
as a member of the Exchange and the other partners being non-member partners
want to be outside the purview of the registration of the SEBI since they
cannot be registered but at the same time want to deal in securities on the
exchange under the membership and registration of Late Shri Kanchanlal K.
17. According to the learned
counsel for the SEBI, the entire dealing in securities by the non-member
partners would be illegal and contrary to section 12 of the Act and liable to
all such consequences in law. In fact, if the stand taken is correct then the
partnership firm is also the non-member partnership and cannot deal in
securities but are dealing in securities in breach of law.
18. We have heard the learned counsel
for the parties at length and carefully analysed the provisions of the Act, 15
Rules and Regulations. By clear interpretation of the Regulations, it is
abundantly clear that no provision of succession to registration is
permissible. Nikhil K.
Vakharia son of Late Shri
Kanchanlal K. Vakharia in order to operate in the stock exchange has to obtain
a fresh registration from the SEBI and for the first five years, he would be
required to pay the quantum of fee linked to the turnover and thereafter at the
flat rate of Rs.5000/- in order to keep the registration in force.
19. In view of the provisions of
the Act, Rules and Regulations, we have no difficulty in arriving at the
conclusion that the appeal is devoid of any merit and is accordingly dismissed.
CIVIL APPEAL Nos.2951, 3004, 3008,
3009, 3010, 3015, 3016, 3017, 3058, 3082 of 2006.
20. In view of our decision in
Civil Appeal No.4210 of 2006, these appeals also stand disposed of accordingly.
21. In the facts and circumstances
of the case, we direct the parties in all the appeals to bear their own costs.
(Dalveer Bhandari) New Delhi;
May 15, 2008.