REPORTABLE
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
& Another ..
Respondents
WITH
CIVIL APPEAL Nos.2951, 3004, 3008, 3009,
3010, 3015, 3016, 3017, 3058, 3082 of
2006.
JUDGMENT
Dalveer Bhandari, J.
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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,
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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
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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
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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
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“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
7erstwhile entity has paid the fee as per the
regulations.”
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
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Regulation 10 of the Regulations on the rates mentioned
in Schedule-III.
Rule 4 of the Rules reads thus:
“4. Conditions for grant of certificate to
stock-broker.– The Board may grant a
certificate to a stock-broker subject to the
following conditions namely:–
(a) he holds the membership of any stock exchange;
(b) he shall abide by the rules, regulations and bye-
laws of the stock exchange or stock exchanges of
which he is a member;
(c) 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 stock exchange;
(d) 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 reads thus:
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“10. Payment of fees and the consequences
of failure to pay fees.– (1) Every 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 due.
(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
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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 Tribunal.
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
11shall 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
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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
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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.
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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. Vakharia.
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,
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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.
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21. In the facts and circumstances of the case, we
direct the parties in all the appeals to bear their own
costs.
………………………………….J.
(Tarun Chatterjee)
…………………………………..J.
(Dalveer Bhandari)
New Delhi;
May 15, 2008.