ORDER
N.K. Sodhi, J. (Presiding Officer)
1. The scope of paragraph 4 in Schedule III to the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (‘the Regulations’) has come up for consideration in this appeal filed under Section 15T of the Securities and Exchange Board of India Act, 1992 (for short ‘the Act’). Facts giving rise to this appeal lie in a narrow compass and these may first be noticed.
2. One Ashwani Kumar Goyal (for short ‘Goyal’) was a stock broker registered with the Securities and Exchange Board of India (hereinafter referred to as ‘the Board’) and he had been carrying on his broking business with effect from 1-12-1992. He was a member of the Delhi Stock Exchange (DSE). A company under the name and style of Nam Securities Ltd. (hereinafter called ‘the company’) which is the appellant herein came to be incorporated under the provisions of the Companies Act, 1956 on 5-7-1994 in which Goyal claims to be holding 40.03 per cent of its shares. The fact that Goyal is holding this percentage of shares is seriously disputed by the Board. Sometime in the year 1998 Goyal decided to transfer his membership of DSE in favour of the company which was allowed by the Board of Directors of DSE in their meeting held on 23-11-1998. The company on becoming a member of the DSE, applied to the Board for registration as a stock broker. Section 12 of the Act provides that no stock broker shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under the Act. This application for registration was accepted by the Board and the company was granted registration as a stock broker with effect from 21-12-1998. A new registration number was allotted to it as is clear from the certificate of registration which is Annexure ‘B’ on the record. It was, however, allowed trading only with effect from 12-4-1999, Rule 4 of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules, 1992 (for short ‘the Rules’) lays down the conditions for the grant of certificate to a stock broker and one of the conditions prescribed therein is that he holds the membership of any stock exchange. Another condition is that he shall pay the amount of fees for registration in the manner provided in the Regulations. Regulation 10 provides that every applicant eligible for grant of a certificate shall pay such fees and in such manner as specified in Schedule III. It is this schedule which prescribes the mode and manner in which fee is to be paid by a stock broker. Paragraph 1 in the Schedule lays down that where the annual turnover of a stock broker does not exceed rupees one crore during any financial year, he has to pay a sum of rupees five thousand as registration fee for each financial year and where the annual turnover exceeds rupees one crore during any financial year then he has to pay a sum of rupees five thousand plus one hundredth of one per cent of the turnover in excess of rupees one crore for each financial year. After the expiry of five financial years from the date of initial registration as a stock broker he is required to pay a sum of rupees five thousand for every block of five financial years commencing from the sixth financial year after the date of initial registration to keep his registration in force. The registration fee in respect of the financial year 1992-93 had to be paid within one month of the commencement of the Regulations and in respect of the financial year beginning on 1-4-1993 and the following financial years it has to be paid on the first day of October of the financial year to which the payment relates. The fee payable by a stock broker is computed with reference to his annual turnover relating to the preceding financial year.
3. From a reading of Rule 4 of the Rules it is clear that every stock broker on registration with the Board has to pay registration fee.Paragraph4 in Schedule III however, provides for exemption from payment of fee. This paragraph was inserted in the Regulations only with effect from 21-1-1998. Since the entire case depends upon the interpretation of this paragraph the same is reproduced hereunder for facility of reference:
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 minimum 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.
4. A reading of the aforesaid provision leaves no room for doubt that before a corporate entity can 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 member-ship 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 ex-change”. In other words, before exemption can 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 which was carrying on broking business should form itself into a corporate entity and then claim exemption under paragraph 4 provided, of course, the individual or the partner is a whole time director of the corporate entity and continues to hold 40 per cent 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, then the corporate entity while getting itself registered as a stock broker shall be entitled to the benefit of the fee which the individual or the partnership had earlier paid. It is on the fulfilment of these conditions that the new corporate entity shall be deemed to be in continuation of the old entity and no fee shall be collected again from the converted entity for the period for which the erstwhile entity had paid the fee as per the regulations. The new corporate entity is admittedly distinct in law from the erstwhile entity and but for the deeming provision in para 4 read with its explanation, the new entity would have had to pay the registration fee afresh at the time of seeking registration. It is the deeming provision which makes the new entity a continuation of the old one. In the very nature of things, a deeming provision has to be construed strictly and the deeming fiction cannot be stretched beyond the limits prescribed in para 4.
5. In the case before us Goyal who was the individual stock broker did not convert himself into a corporate entity. What he did was, he transferred his membership of DSE in favour of the company, that is, he transferred his membership to an existing company and after becoming a member of the DSE, the company applied for registration as a stock broker which, as already observed, was granted by the Board on 21-12-1998. Paragraph 4 does not grant exemption where the membership of an exchange is transferred to a company. The words ‘converting’, ‘conversion’ and ‘converted’ as used in this para have some significance and these have to be assigned some meaning. They cannot be ignored altogether. These words, in our opinion, point to the fact that the individual or partnership, as the case may be, has to get himself/itself formed into a company before exemption could be claimed. Having obtained the registration as a stock broker the company claims the benefit of the fee which Goyal had earlier paid to the Board. Is it entitled to make such a claim is the question before us. We are clearly of the view that the claim made by the company is misconceived and is not covered by the provisions of para 4 in Schedule III to the Regulations. As already observed, the company did not come into existence by the conversion of Goyal into a corporate entity. It was already in existence when the membership of DSE was transferred in its favour. The object of introducing para 4 in Schedule III to the Regulations was to encourage corporatisation of stock brokers most of whom were individuals or partnership firms and the Board wanted them to become corporate entities. A similar question came up for consideration before us in Mantri Finance Ltd. v. SEBI Appeal No. 76 of 2007, dated 9-8-2007 wherein we observed as under:
Paragraph 4 then provides some relief to stock brokers who convert their individual or partnership membership card of an exchange into a corporate entity. This paragraph provides that where an individual or a partnership firm gets converted into a corporate entity then the corporate entity shall be exempt from payment of fee for the period for which the erstwhile individual or partnership member, as the case may be had already paid the fees subject, of course, to the fulfilment of the other conditions enumerated in this paragraph. One of the conditions is that the erstwhile individual should become a whole time director of the corporate entity so converted and should continue to hold 40 per cent shares of the paid up equity capital of the corporate entity for a period of three years from the date of conversion. The explanation to this paragraph makes it abundantly clear that where an individual or a partnership has been converted into a corporate entity, then the latter (corporate entity) shall be deemed in continuation of the old entity. It follows that if there is no conversion, there will be no continuity and the corporate entity will not get the benefit of the fee already paid by the individual or the partnership, as the case may be. Large number of brokers in the securities market were either individuals or partnership firms and obviously their working was not very transparent. The Board adopted a policy to encourage the brokers to corporatise themselves so that their working becomes more transparent as corporate entities have more and better regulatory controls as compared to individuals and partnerships. With this object in view, the Board introduced paragraph 4 in Schedule III to the Regulations with effect from 21-1-1998 and it decided to give the benefit of the fee already paid by the individual or partnership prior to its becoming a corporate entity.
The aforesaid observations apply with full force to the facts of the present case.
6. For the reasons recorded above we hold that the company is not entitled to to the benefit of the fee earlier paid by Goyal as an individual. The Board has, however, rejected the claim of the company on the ground that Goyal does not hold 40 per cent of the shares therein and, therefore, the conditions enumerated in para 4 are not satisfied. The company, on the other hand, contends that Goyal holds 40.03 per cent. In view of our finding that the company is not entitled to the claim made by it, it is not necessary for us to go into the percentage of shareholding of Goyal in the company.
In the result, the appeal fails and the same is dismissed. The impugned order of the Board disallowing the claim of the company is upheld though for different reasons. There is no order as to costs.