SECURITIES & EXCHANGE BOARD OF INDIAversusMAGNUM EQUITY SERVICES LTD. & ORS.

                        [2015] 12 S.C.R. 102


A         SECURITIES & EXCHANGE BOARD OF INDIA
                                  v.
           MAGNUM EQUITY SERVICES LTD. & ORS.
                       NOVEMBER 30, 2015
B
                  (Civil Appeal No. 4719 of 2008)
        [VIKRAMAJIT SEN AND SHIVA KIRTI SINGH, JJ.)
         Securities and Exchange Board of India (Stock Brokers
C and S/Jb-brokers) Regulations, 1992: Schedule Ill, Paragraph
   1(4) - Fee continuity benefit - Partnership firm comprising
  of seven partners carrying on business as a stock broker-
  Partners moved application for registration of company during
  pend&ncy of which one of partner exited - Company
o incorporated with remaining 6 partners who all became the
  whole-time directors - Membership card of firm transferred
  to the company - Company registered as stock broker -
  Three of such directors resigned- It was not the case of SEBI
  that equity holding of three continuing whole-time directors
E had fallen below 40% criterion - Claim for fee continuity
  benefit - Held: In order to qualify for the benefit of fee
  continuity, the two fold requirement, i.e. corporate entity must
  earlier be either a sole proprietorship or a partnership and
  erstwhile partner should own at least 40% of paid up equity
F share ¢apita I and should also be a whole time Director of the
  company for a minimum period of three years - Tribunal
  observed that in the case at hand, since three of the erstwhile
  partners of the firm remained whole-time directors and
  continl'led to hold more than 40% shares of paid up equity
G capital for a period of more than three years, the conditions
  set out in paragraph 1(4) stood satisfied - Tribunal's order
  granti~g fee continuity benefit upheld.

       Administrative law: Circulars - Clarificatory circular -
H Held: Is for the purpose of elaborating the existing provision
                                 102
    SECURITIES & EXCHANGE BOARD OF INDIA v.                      103
        MAGNUM EQUITY SERVICES LTD.

and removing ambiguities without altering the effect of the A
said provision.
      Circulars/Government Orders/Notification: Circular
dated 12. 09. 2002 issued by SEBI - Held: Is not clarificatory
in nature.
                                                                 B
     Dismissing the appeals, the Court
      HELD: A partnership firm which consists of five
partners and which holds a membership card of a stock
exchange, may decide to convert itself into a corporate          C
entity. After incorporation, of the five erstwhile partners,
one of the partners holds 40 per cent shares of the paid-
up equity capital of the newly formed corporate entity
and is also its Whole-time Director. Subsequently, four
of the partners decide to exit from the corporate entity,        0
leaving behind only the Whole-time Director who was
also an erstwhile partner. The said corporate entity will
still be eligible for the benefit of fee continuity under
Paragraph 1(4) of Schedule Ill of the Regulations. In order
to qualify for the benefit of the said provision, there is a     E
two-fold requirement. First, the corporate entity must
earlier have been either a sole proprietorship or a
partnership. Second, an erstwhile partner should own
at least 40 per cent of the paid-up equity share capital
and should also be the Whole-time Director of the                F
company, for a minimum period of three years.
Alternatively, erstwhile partners who together hold at
least 40 per cent equity must remain Whole-time
Directors for a minimum of three years. Thus the
subsequent entry or exit of partners to and from the             G
original partnership firm would have no relevance on the
entitlement of the newly formed corporate entity to take
advantage of the benefit not only of fee continuity under
the said provision but also fillip to the growth of the
corporate sector and the national economy. The same              H
104         SUPREME COURT REPORTS              [2015] 12 S.C.R.


A benefit would also be extended to erstwhile partners who
  after corporatization jointly retain at least 40 per cent of
  the paid-up equity capital of the corporate entity and were
  its Whole-time Directors. In other words, if there are five
  partners, of which three partners subsequent to
B corporatization jointly hold 40 per cent of the shares of
  the paid-up equity capital and are also the Whole-time
  Directors of the company, then the departure of the other
  two erstwhile partners will not deny the corporate entity
  the benefits of fee continuity.[Paras 11-13] [112-F-H; 113-
C A-F]
        2. Circular dated 12.9.2002 is not clarificatory. A
  clarificatory Circular is for the purpose of elaborating the
  existing provision and removing ambiguities, without
D altering the effect of the said provision. However, in the
  instant case, interpretation of Paragraph 1(4) prior to the
  issuance of Circular dated 12.9.2002, is contrary to that
  mentioned in the said circular. Hence this Circular
  cannot be held to be clarificatory in nature, and as a
E logical corollary is not capable of having any retroactive
  effect. [Para 14] [113-G-H; 114-A-B]
           SEBI v. Alliance Finstock Ltd. (2015) 12 SCALE
           271 - referred to.
F                         Case Law Reference

           (2015) 12 SCALE 271         referred to.   Para 8
            CIVIL APPELLATE JURISDICTION : Civil Appeal No.
      471!;) of 2008
G
           From the Judgment and Order dated 23.01.2008 of the
      Learned Securities Appellate Tribunal in Appeal No. 146 of
      2007.
                                WITH
H          C. A. No. 5235 of 2008
     SECURITIES & EXCHANGE BOARD OF INOIA v.                    105
         MAGNUM EQUITY SERVICES LTD.

     C. U. Singh, Dhawal Mehrotra, Bhargava V. Desai,           A
Sau my a Mehrotra, Rishi Gautam for the Appellant.

    Mahesh Chibber, Kaveeta Wadi, Shashank Tripathi,
Pawan Kumar Bahl, Vijay Kumar Ahluwalia, Veeresh Kumar
Sharma forthe Respondents.                                      B

     The Judgment of the Court was delivered by

       VIKRAMAJIT SEN, J. 1. These Appeals assail the
decisions of the Securities Appellate Tribunal (for brevity
'Tribunal') dated 23.1.2008 and 29.1.2008, both of which C
reversed the Order dated 12.6.2007 of Securities Exchange
Board of India (SEBI) declining to grant fee continuity to the
Respondents before us. In these Appeals SEBI seeks to
reaffirm its stance that the Respondents lost all entitlement to D
the advantage of fee continuity, no sooner any of the erstwhile
partners ceased to be Whole-time Directors of the corporate
entity which was the metamorphosed partnership firm.

     C.A. No. 4719 of2008.
                                                                E
      2. Magnum Capital Services (hereinafter referred to as
the Firm) was a registered partnership firm, comprising of seven
partners, carrying on business as a stock broker; and was a
member of the National Stock Exchange (NSE). All the seven
partners moved a conjoint application for registration of a F
company under the CompaniesAct, 1956, during the pendency
of which one of the partners exited from the Firm. The company
was incorporated on 22.5.1995 consisting of the remaining
six partners, in the name and style of Magnum Equity Services
Limited (hereinafter referred to as Magnum). There has not G
even been a semblance of a debate that the six partners had
less than 40 per cent shareholding in the firm and/or that they
do not hold forty per cent of the equity of Magnum. All the
remaining erstwhile partners became the Whole-time Directors H
of Magnum. In pursuance to an application filed by the Firm,
106        SUPREME COl,JRT REPORTS                [2015] 12S.C.R.


A NSE transferred the membership card of the Firm to Magnum
   on 25.4.1996. Thus Magnum became a member of NSE with
   effect from 25.4.1996. Subsequently, the Company applied
   to the Securities and Exchange Board of India (SEBI) for
   registration as a stock broker, which request was granted on
B 29.5.1S97. After being registered as a stock broker, Magnum
   commenced its broking business. In December 1997, three
   Directors resigned from Magnum and transferred their shares
  to the remaining Directors and their family members. We
   must again hasten to clarify, that it is not the Appellant's case
C that the equity holding of the three continuing Whole-time
   Directors had fallen below the 40 per cent criterion. Magnum
  also claimed the benefit of the fee which the Firm had paid
  earlier to SEBI. This claim was made on the ground that the
D earlier business carried on by the Firm had been transferred
  to Magnum and as a result there was continuity of that business.
  SEBI r¢jected this claim vide Order dated 12.6.2007 on the
  predication that only three out of the seven partners of the firm
  continued as its Whole-time Directors for the mandatory period
E of three years, which was in contravention of the conditions
  laid down in Paragraph 1(4) of Schedule Ill of the Securities
  and Exchange Board of India (Stock Brokers and Sub-brokers)
  Regulations, 1992 (Regulations for brevity). For the facility of
  reference, Paragraph 1(4) is reproduced below:
F        "4. Where a corporate entity has been formed by
         converting the individual or partnership membership card
         oflthe 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,
G
         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 a minimum of 40 per cent
H        shares of the paid-up equity capital of the corporate entity
   SECURITIES & EXCHANGE BOARD OF INDIA v.       107
MAGNUM EQUITY SERVICES LTD. [VIKRAMAJIT SEN, J.]

     for a period of at least three years from the date of such A
     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 B
     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."
      3. Aggrieved by the said Order, Magnum appealed C
before the Tribunal. The Tribunal observed that Paragraph 1(4)
in Schedule Ill of the Regulations was introduced on 21.1.1998.
It provided for exemption from payment of fee where a
corporate entity was formed by conversion of the individual or. D
partnership card of the exchange. The Tribunal noted thatthe
benefit of this provision was initially only given to those who
corporatized on or after 21.1.1998. However, on
representations made by those stock brokers who corporatized
themselves prior to 21.1.1998, SEBI issued the Circular dated E
28.3.2002 which extended the benefit to stock brokers who
converted themselves into corporate entities between
1.4.1997 and 21.1.1998. The stock brokers who had
corporatized prior to 1.4.1997 and who had been denied the
fee continuity benefit challenged the said Circular in Alliance F
Finstock Ltd. v. Securities and Exchange Board of India in
Appeal No. 123 of 2004 decided on 9.5.2006, wherein the
Trlbunal had held that the benefit of fee continuity be given
even to those entities which corporatized themselves prior to
1.4.1997. It transpires that this view has attained finality, in G
terms of the decision of this Court in C.A. No.4493 of 2006,
SEBI v. Alliance Finstock Ltd. (2015) 12 SCALE 271.

     4. The other issue which was a ground for refusal of the
fee continuity benefit was that at the time of incorporation of H
'108       SUPREME COURT REPORTS                   [2015] 12 S.C.R.


 A Magnum, viz. 22.5.1995, it consisted of six members all of
     whom were erstwhile partners of the Firm and were also the
     Whole-time Directors of Magnum. However in December
     1997, three out of the six erstwhile partners left. According to
     SEBI, the exit of these three partners disqualified Magnum
 B · from the benefit offee continuity. The Tribunal referred to Punit
     Capital &Debt Market Pvt. Ltd. Vs. Securities and Exchange
     Board of India in Appeal No. 169 of 2004 decided on 4 .5 .2006,
     where the Tribunal had interpreted Paragraph 1(4) and had held
     that the conditions enum.erated in the said Paragraph would
 C stand satisfied if one of the partners of the erstwhile partnership
     firm became a Whole-time Director in the corporate entity after
     its conversion. This decision was challenged before this Court,
     but was dismissed on the ground of delay, vide Order dated
 D 25.11.2009. The Tribunal observed that in the case at hand,
     since three of the erstwhile partners of the firm remained Whole-
     time Directors in Magnum and continued to hold more than 40
     per cent shares of the paid-up equity capital for a period of
     more thari three years, the conditions set out in Paragraph 1(4)
 E stood satisfied. Before the Tribunal, SEBI placed reliance on
     its CirculC)r dated 12.9.2002, which stated that in order to get
     the benefit of Paragraph 1(4), all the erstwhile partners should
     be Who lei-time Directors in the corporate entity so formed.
     SEBI contended that the Circular issued a clarification, and
 F hence was effective and effica~ious retrospectively. The
     Tribunal rejected this contention, finding that the Circular was
     not clarificatory in nature, as it determined new parameters
     for the grant of the benefit of fee continuity and it was !'lot
     effective retrospectively. The Tribunal, vide order dated
 G 23.1.2008,, allowed the Appeal and set aside the order of SEBI.

           C.A. No. 5235 of 2008

        5. M/s. Sodhani and Company was a reg~siered
 H partnership firm carrying on business of stock broking as a
   SECURITIES & EXCHANGE BOARD OF INDIA v.       109
MAGNUM EQUITY SERVICES LTD. [VIKRAMAJIT SEN, J.]

 member of the NSE since November 1994. The firm consisted A
 of four partners having equal share holding. In June 1997, the·
 partnership firm corporatized itself as Sodhani Securities Ltd.
 and three out of the four erstwhile partners became its Whole-
 time Directors and continued to hold more than 40 per cent
 shares for three years subsequent to corporatization; the fourth B
 partner continued only in his capacity of a shareholder.
 Sodhani Securities Ltd. was issued a certificate of registration
 as a broker by SEBI on 31. 3.1998 and thereupon it claimed
the benefit offee continuity, which was rejected by SEBI vide
 order dated 12.6.2007. Reliance was placed on the C
 aforementioned Circular dated 12.9.2002. Aggrieved by the
said Order, Sodhani Securities Ltd. filed an Appeal before the
Tribunal which, on 29.1.2008, held in favour of Sodhani
Securities Ltd. stating that a plain reading of the Regulation D
indicates that "the erstwhile partner" had to become "the
Whole-time Director" and that the reference was to any one of
the partners. The Tribunal also referred to and applied Punit
Capital and Debt Market Pvt Ltd.; it reiterated that the
Circular dated 12.9.2002 was not retrospective. Thus, as E
Sodhani Securities Ltd. got itself registered with SEBI as a
corporate entity on 31.3.1998, which was well before the date
of the Circular, viz. 12.9.2002, it had no applicability or
relevance to Sodhani Securities Ltd. Further, the Tribunal
observed that a similar view had been taken by the Tribunal in F
the case of Magnum Equity Services Ltd.
                                                   •
      6. Learned Senior Counsel for the Appellant has relied
on Section 13 of the General Clauses Act, 1897, sub-section
(2) of which provides that singular includes plural and vice G
versa. In light of this provision, Counsel has submitted that the
term "partner" as used in Paragraph 1(4) of Schedule Ill implies
'partners', and that all the partners who comprised the
partnership firm at the time of corporatization would have to
remain part of the corporate entity for at least three years post H
110        SUPREME COURT REPORTS                  [2015) 12 S.C.R.

A   conversion. Further, the exit of any partner other than due to
    death shall amount to altering the nature of the entity which is
    not in keeping with the spirit of continuity as envisaged by the
  . provision. Counsel further contended that giving the provision
    a strict interpretation would lead to an absurdity, as that would
 B imply that one person is to hold 40 per cent shares because
    the term used in the provision is "Whole-time Director"
    indic(!lting a singular person.

        7. Counsel for the Respondents have contended that on
C a plain reading of Paragraph 1(4) it is evident that the
  requirement was only that an erstwhile partner must be
  appointed as a Whole-time Director after the corporatisation
  of the .firm for a minimum period of three years from the date
  of conversion, and that such Whole-time Director should hold
D at least 40 per cent shares of the paid-up equity capital.
  Counsel submitted that it was the prerogative of the corporate
  entity as to the number of erstwhile partners it appointed as its
  Whole~time Directors. Thus so long as the Respondents
  satisfied the criteria of an erstwhile partner being appointed
E as a Whole-time Director and that such person held 40 per
  cent shares of the paid-up equity capital of the company, the
  Resporlldents could not be found to be in violation of Paragraph
  1(4) of Schedule Ill.

 F       8. We have carefully cogitated upon the arguments
   articulated before us. As already mentioned, the issue
   regarding the benefit offee continuity being granted to entities
   which corporatized prior to 1.4.1997 has been settled by this
   Court in SEBI v. Alliance Finstock Ltd. (2015) 12 SCALE
 G 271 [Civil Appeal No. 4493 of 2006) wherein it has been held
   that even if a partnership or sole proprietor corporatized prior
   to 1.4.1997, fee continuity benefit could be availed of.

         9. The other issue that remains to be decided by us is
 H with respect to the interpretation of Paragraph 1(4) of Schedule
   SECURITIES & EXCHANGE BOARD OF INDIA v.       111
MAGNUM EQUITY SERVICES LTD. [VIKRAMAJIT SEN, J.]

Ill of SEBI (Stock Brokers and Sub-Brokers) Regulations 1992.     A
The main contention raised by learned Senior Counsel for the
Appellant is based on the application of The General Clauses
Act, 1897 which under Section 13(2) states that plural includes
singular. However, before we consider Section 13, we shall
have to determine whether the General Clauses Act itself is       B
applicable to the SEBI (Stock Brokers and Sub-Brokers)
Regulations 1992. Section 3 ofTne General Clauses Act, 1897
states that the said Act is applicable to all Central Acts and
Regulations made after the commencement of this Act.
Further, the term Central Act has been defined under sub-         C
section (7) as an Act of Parliament, which includes (a) an Act
of the Dominion Legislature or of the Indian Legislature passed
before the commencement of the Constitution, and (b) an Act
made before such commencement by the Governor-General.            D
in Council or the Governor-General, acting in a legislative
capacity. The SEBI (Stock Brokers and Sub-Brokers)
Regulations 1992 are issued by SEBI in exercise of the powers
conferred on it under Section 30 of the SEBIAct, 1992. Section
31 of the SEBI Act, reproduced below for the facility of          E
reference, provides that Rules and Regulations are to be laid
before Parliament.
     Every rule and every regulation made under this Act shall
     be laid, as soon as maybe after it is made, before each
     House of Parliament, while it is in session, for a total F
     period of thirty days which may be comprise~ in one
     session or in two or more successive sessions, and if,
     before the expiry of the session immediately following
     the session or the successive sessions aforesaid, both. G
     Houses agree in making any modification in the rule or
     regulation or both Houses agree that the rule or regulation
     should not be made, the rule or regulation shall thereafter
     have effect only in such modified form or be of no effect,
     as the case may be; so, however, that any such H
112        SUPREME COURT REPORTS                   [2015] 12 S.C.R.


A          modification or annulment shall be without prejudice to
           the validity of anything previously done under that rule or
           regulation.
         10. Thus in light of the provisions of the SEBI Act, 1992
8 underwhich the said Regulations have been issued, the latter
  do not tantamount to a Central Act as defined under sub-
  section (7) of the definition clause of The General Clauses
  Act, 1897. As a result we cannot accept the submission made
  by the Senior Counsel for the Appellant that The General
c Clauses Act is applicable while interpreting the language of
  Paragraph 1(4) of Schedule Ill of the Regulations. Ergo, what
  is postulated and prescribed is that even if an individual
  erstwhile partner holds 40 per cent of the equity and remains
  a Whole-time Director for the stipulated period of three years,
D fee continuity would become available. Moreover, the figure
  of 40 percent cannot be rendered nugatory; it has a purpose
  viz. the umbilical cord between the firm and the company is
  present and palpable, and yet fluidity and growth, the raison
  d'etre for allowing corporatisation is also respected. The
E mutation ii:; substantially of the same legal entity, in that process
  the erstwhile firm has no continuity of identity.

          11. We are in agreement with the Tribunal on the
    interpretation it has given to Paragraph 1(4) of Schedule Ill. We
  F shall elucidate our understanding of Paragraph 1(4) as it stood,
    up until the issuance of Circular dated 12.9.2002. Anecdotally,
    a partnership firm which consists of five partners and which
    holds a membership card of a stock exchange, may decide to
    convert itself into a corporate entity. After incorporation, of the
 G five erstwhile partners, one of the partners holds 40 per cent
    shares of the paid-up equity capital of the newly formed
    corporate entity and is also its Whole-time Director.
    Subsequently, four of the partners decide to exit from the
. H corporate entity, leaving behind only the Whole-time Director
   SECURITIES & EXCHANGE BOARD OF INDIA v.       113
MAGNUM EQUITY SERVICES LTD. [VIKRAMAJIT SEN, J.]

who was also an erstwhile partner. In our opinion the said A
corporate entity will still be eligible for the benefit of fee
continuity under Paragraph 1(4) of ·schedule Ill of the
Regulations.

      12. In order to qualify for the benefit of the said provision, B
there is a two-fold requirement. First, the corporate entity must
earlier have been either a sole proprietorship or a partnership.
Second, an erstwhile partner should own at least 40 per cent
of the paid-up equity share capital and should also be the
Whole-time Director of the company, for a minimum period of C
three years. Alternatively, erstwhile partners who together hold
at least 40 per cent equity must remain Whole-time Directors
for a minimum of three years. Thus the subsequent entry or
exit of partners to and from the original partnership firm would
have no relevance on the entitlement of the newly formed D
corporate entity to take advantage of the benefit not only of
fee continuity under the said provision but also fillip to the growth
of the corporate sector and the national economy.

       13. The same benefit would also be extended to erstwhile E
partners who after corporatization jointly retain at least 40 per
cent of the paid-up equity capital of the corporate entity and
were its Whole-time Directors. In other words, if there are five
partners, of which three partners subsequent to corporatization
jointly hold 40 per cent of the shares of the paid-up equity capital F
and are also the Whole-time Directors of the company, then
the departure of the other two erstwhile partners will not deny
the corporate entity the benefits of fee continuity.

     .14. We also agree with the finding of the Tribunal that the   G
Circular dated 12.9.2002 is not clarificatory. A clarificatory
Circular is for the purpose of elaborating the existing provision
and removing ambiguities, without altering the effect of the said
provision. However, in the instant case, our interpretation of
                                                                    H
114          SUPREME COURT REPORTS              [2015] 12 S.C.R.


A Paragraph 1(4) prior to the issuance of Circular dated
  12.9.2002, is contrary to that mentioned in the said circular.
  Hence this Circular cannot be held to be clarificatory in nature,
  and as a logical corollary is not capable of having any
  retroactive effect.
B
        15. We thus find no merit in these Appeals and
  accordingly dismiss the same. There will be no orders as to
  costs.

C     Devika Gujral                               Appeals dismissed.