Companies Act Case Law Ratnabali Capital Markets Ltd Vs Securities & Exchange Board of India & Ors

CASE NO.:
Appeal (civil) 4945 of 2007

PETITIONER:
Ratnabali Capital Markets Ltd

RESPONDENT:
Securities & Exchange Board of India & Ors

DATE OF JUDGMENT: 23/10/2007

BENCH:
S. H. Kapadia & B. Sudershan Reddy

JUDGMENT:
J U D G M E N T

CIVIL APPEAL NO. 4945 OF 2007
(D. No. 18381/07)
with Civil Appeal No. 3674 of 2007
KAPADIA, J.

Delay condoned.

2. Admit.

3. The 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.

4. The 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 SEBI.

5. For the sake of convenience, we may mention
hereinafter the facts in the case of Ratnabali Capital
Markets Ltd. (“RCML”) which are as under.

6. In 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.

7. 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.

8. On 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).

9. After 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 under:
“After 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”
A 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.

10. 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.

11. In 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.
In the 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.
According 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 market.
According 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.

12. We quote hereinbelow the said provision, which reads
as under:
“Merger/Amalgamations
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.”

13. 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.

14. We 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.

15. As 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 entity.
We are 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.

16. In 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:
“(6) 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.

The 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.

He has 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:

‘Section 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.

The 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.

This 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:

‘The 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 391.”

17. We 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/ registration fees.
Such 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.
Under 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.
18. 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.

19. 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.

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