VSE STOCK SERVICES LTD.versusS.E.B.I. &ANR.

                   [2015] 12 S.C.R. 909


              VSE STOCK SERVICES LTD.                          A

                             v.
                      S.E.B.I. &ANR.
              (Civil Appeal No.4664 of 2006)
                                                               8
                   NOVEMBER 04, 2015
   [VIKRAMAJIT SEN AND SHIVA KIRTI SINGH, JJ.]
    Securities & Exchange Board of India (Stock Brokers
and Sub-Brokers) Regulation.s, 1992- Reg 10(1) read with
schedule Ill - Fee continuity benefit- Entitlement- Parent c
company incorporated a subsidiary company (company
limited by guarantee) and got membership of Bombay stock
exchange but failed to get membership of National Stock
Exchange - To overcome this, the parent company
incorporated another subsidiary company-appellant D
company, (company limited by stocks) - Said company
obtained membership of NSE but SEBI refused to grant
recognition since only one subsidiary could claim registration
as a broker - Subsequently, to operate on NSE, earlier
subsidiary company amalgamated with the appellant E
company - Payment of provisional fee liability by appellant.
- However, demand of final fee by SEBI - Challenge to, on
the ground that appellant entitled to fee continuity benefit in
t0rms of circular of SEBI - Rejection of claim by tribunal -
                                                                F
On appeal, held: Compulsion of the appellant was a business
compulsion to do business as a broker with NSE - Such a
situation cannot be treated as a compulsion of law for
amalgamation - Only because the appellant and the parent
company subsequently decided and opted to do business G
as a broker with NSE, they chose the path ofamalgamation
- They could have as weir chosen the path of winding up of
the earlier subsidiary company- Thus, order passed by the
tribunal upheld.
    B.S.E: Brokers' Forum v. Securities & Exchange Board       H
                            909
910         SUPREMECOURTREPORTS                   [2015] 12 S.C.R.


A     of India (2001) 3 SCC 482; Ratnabali Capital Markets Ltd. v.
      Securities & Exchange Board of India 2007 (11) SCR 629:
      (2008) 1 sec 439 - referred to.
                        Case Law Reference
 B       (2001) 3 sec 482          referred to.       Para 6
         2007 (11) SCR 629         referred to.       Para 8
          CIVIL APPELLATE JURISDICTION: Civil Appeal No.
      4664 of 2006.
 c
          From the Judgment and Order dated 18.05.2006 of the •.
      Securities Appellate Tribunal, Mumbai in Appeal No. 342 of
      2004.

          Amar Dave, E.C. Agrawala, Advs., for the Appellant.
 D
         C.U. Singh, Sr.Adv., Dhawal Mehrotra, Bhargava V. Desai,
      Ms. Saumya Mehrotra, Rishi Gautam, Advs., for the
      Respondent.

 E        The Judgment of the Court was delivered by

        SHIVA KIRTI SINGH, J. 1. Challenge in this appeal is to
   order dated 18.5.2006 rendered by the Securities Appellate
   Tribunal, Mumbai (for short 'SAT') whereby Appeal No.342/
 F 2004 preferred by the appellant was dismissed by holding that
   the appellant is not entitled to the fee continuity benefit claimed
   under the provisions of Securities & Exchange Board of India
   (Stock Brokers and Sub-Brokers) Regulations, 1992 [for short,
   'the Regulations'].
 G      2. Since there is no dispute on the material facts which
   have been correctly recorded in the .order under appeal, no
   useful purpose will be served by recollecting the facts in detail
   once again. It would suffice to note that in terms of policy
   decision by respondent no.1, the Securities & Exchange Board
 H of India (for brevity, 'the SEBI') reflected in its circulars dated
      VSE STOCK SERVICES LTD. v. S.E.B.I. &ANR                      911
              [SHIVAKIRTI SINGH, J.]

26.11.1999 and 16.12.1999, the Vadodara Stock Exchange              A
Ltd. incorporated a subsidiary company named as VSE
Securities Ltd. on 24.12.1999. It got membership of Bombay
Stock Exchange (BSE) as well as registration under the SEBI
resulting in commencement of operation on BSE from
29.5.2000 but failed to get membership of National Stock            B
Exchange (NSE) for the specific reason that it was a company
limited by guarantee and not by stock or shares. To overcome
this handicap, the Vadodara Stock Exchange Ltd.
corresponded with the SEBI as well as NSE but without
success because apparently it had ignored the clarifications        C
contained in circular dated 16.12.1999 indicating that a Stock
Exchange could acquire the membership right of a major Stock
Exchange through a subsidiary company but it should be a
company limited by stocks. The bye-laws of NSE also
permitted membership only to such a company and not to one          D
limited by guarantee. Hence Vadodara Stock Exchange Ltd.
incorporated another subsidiary company, the appellant herein,
on 16.1.2002. Being limited by stocks, the appellant obtained
membership of NSE on 16.4.2002. But SEBI refused to grant
recognition to the appellant on the ground that as per its policy   E
and circular dated 26.11.1999 only one subsidiary ofVadodara
Stock Exchange Ltd. could claim registration as a broker. Such
decision of the SEBI dated 31.12.2002 was accepted by the
Vadodara Stock Exchange Ltd. and was never challenged.
                                                               F
      3. In view of stand of the SEBI and clearly because the
appellant wanted to operate on NSE, steps were taken to get
the earlier subsidiary company - VSE Securities Ltd.
amalgamated with the appellant. The High Court was moved
and on completion of necessary formalities, amalgamation G
order was passed by the Gujarat High Court on 17.3.2003.
Under the above scheme of amalgamation the appellant
became a transferee company entitled to the assets and
liabiLities of the transferor company. Post amalgamation, the
appellant obtained fresh registration from the SEBI in respect H
of its operation on BSE in the month of October 2003. On
912         SUPREME COURT REPORTS                    (2015] 12 S.C.R.


A     30.04.2004, the SEBI granted registration for business on NSE
      on the usual conditions including payment of fees in the manner
      provided in the Regulations, particularly Regulation 10(1) read
      with Schedule Ill of the Regulations. The appellant paid the
      provisional fee liability but the demand of final fee by the SEBI
 l3   was challenged before SAT on the ground that the appellant i.s
      entitled to fee continuity benefit in terms of circular of the SEBI
      dated 30.09.2002. The claim of the appellant, as noticed
      earlier, was rejected by SAT by the order under appeal.

 c      4. The moot question falling for determination, as rightly
   noticed by SAT, is whether the appellant is entitled to the fee
   continuity benefit in terms of the Regulations. Regulation 10
   mandates that every applicant eligible for grant of a certificate
   shall pay such fees and in such manner as specified in
 D Schedule Ill. For non-payment of requisite fees the SEBI may
   suspend the registration certificate and in that situation the
   stock broker shall cease to buy, sell or deal in securities as a
   stock broker.
        5. The Central Government in exercise of the powers
 E conferred by Section 29 of the Securities & Exchange Board
   of India Act, 1992 has made Rules called the Securities &
   Exchange Board of India (Stock Brokers and Sub-brokers)
   Rules 1992 [hereinafter referred to as 'the Rules']. Rule 4
   prescribes the conditions for grant of certificate to a stock
 F broker and as per condition no.(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 and as per condition no.(d),
   he shall pay the amount of fees for registration in the manner
 G provided in the Regulations. Schedule Iii of the Regulations
   has undergone various amendments in 1995, 1998, 2000,
   2002 and also in 2003.
          6. By policy circular dated 30.09.2002 the SEBI issued
 H    several clarifications on the subject of fees payable by stock
      brokers. The circular declares that the clarification was
      VSE STOCK SERVICES LTD. v. S.E.B.I. &ANR                    913
              [SHIVAKIRTI SINGH, J.]

 pursuant to judgment of Hon'ble Supreme Court in B.S.E. A
·Brokers' Forum v. Securities &Exchange Board of India
 (2001) 3 sec 482 which necessitated amendments in the
 Regulations to implement the recommendations of R.S. Bhatt
 Committee. In respect of issues raised in the representations
 received from brokers in their individual and representative B
 capacities, a circular was issued on March 28, 2002. Since
 some issues remained pending, they were clarified by the
 circular dated 30.09.2002. Clause 7 of this circular has been
 pressed into service by the appellant to claim the benefit of
                                                               ('
 fee continuity. It reads as under:                            -
      "7. Mergers/ Amalgamations
      Where mergers/ amalgamations are carried out as a
      result of compulsion of law, fees would riot have to be
      paid afresh by the resultant transferee entity provided     o
      that majority shareholders of such transferor entity con-
      tinue to hold majority shareholding in transferee entity.
      The Exchange would have to enumerate what constitutes
      'compulsion of law' resulting in such merger/ amalgamc
      ations, for consideration of SEBI."                         E
      7. For deriving advantage from the afore-quoted clause
 7 the appellant has the onerous task of showing that in its case
the merger/ amalgamation was carried out as a result of
 compulsion of law. Before considering the submissions on
                                                                  F
 behalf of appellant in this regard, the relevant legal position
 may be concluded by pointing out that many of the clarifications
·including clause 7 have not been incorporated as a part of the
 Regulations inspite of subsequent amendments in the
 Regulations. Nonetheless for lack of any issue on this point, G
 the policy decision granting benefit by the circular dated
 30.09.2002 is being relied upon as valid and operative during
 the relevant period. Another circular dated July 09, 2003 was
 issued to clarify what kind of changes in the status and
 constitution of the stock brokers shall have to be submitted to
                                                                  H
 obtain prior approval of the SEBI under Rule 4(c) of the Rules.
914         SUPREME COURT REPORTS                [2015] 12 S.C.R.


A  On and from 09,07.2003 prior approval is required, inter-alia,
   in respect of consolidation/ merger/ amalgamation of brokers
   and the 'remarks' column shows thatfull fees along with interest
   as on the date of application for approval is required to be
   paid. According to appellant this circular of July 09, 2003 being
 B later in Ume does not apply to the case at hand.
           8. On the question as to what is the compulsion of law for
      amalgamation of the appellant as a transferee company with
      the earlier subsidiary company, learned counsel for the
      appellant has contended that in absence of registration from
c
      the SEBI, the appellant like any other entity is prevented by
      law to carry on its business as a broker and to acquire the
      registration it had to ensure that in place of two subsidiary
      companies only one should exist otherwise the Vadodara Stock
      Exchange Ltd. could not get the benefit of membership of one
 0
      of the major Exchanges, i.e., NSE. Hence the condition
      imposed by the SEBI to have only one subsidiary for the
      purpose amounts to compulsion of law which led to the scheme
      of amalgamation. The other contention is that the scheme of
 E    amalgamation in which appellant is the transferee company
      has been approved by the Gujarat High Court and hence the
      benefits flowing from such scheme must be respected by all
      concerned including the SEBI. As per submissions, the earlier
      foes paid by the transferor company to SEBI for registration
 F    are now an asset with the appellant company and such asset
      must be respected. The learned counsel for the appellant
      rE~alised some difficulties on account of law laid down by this
      Court in· the case of Ratnabali Capital Markets Ltd. v.
       Securities & Exchange Board of India (2008) 1 SCC 439
 G    and hence he sought to distinguish that judgment by pointing
      out that in paragraph 11 of that judgment the Court noticed
      that the merger was with a view to have the benefit of enlarged
       business by entering the derivative markets. In the present
       case, according to him no such reason exists and the .
 H     amalgamation was carried out only on account of compulsion
       explained above. According to learned counsel for the
   VSE STOCK SERVICES LTD. v. S.E.B.I. &ANR                      915
            [SHIVAKIRTI SINGH, J.]

appellant for accepting a compulsion as one of law, the term A
'law' needs to be given a liberal interpretation so as to include
orders and directions of a statutory authority such as the SEBI.
     9. On behalf of the SEBI, reliance has been placed upon
relevant dates and facts emanating from appellant's letters to
                                                                 8
contend that the amalgamation was for voluntary reasons to
access larger business through membership of NSE; there
was no compulsion of law and order under appeal requires no
interference.
     10. We find that the facts of the case have qeen properly c
appreciated by SAT for coming to the conclusion that the
amalgamation was not on account of any compulsion of law.
The compulsion of the appellant was a business compulsion
to do business as a broker with NSE. Initially the Vadodara
Stock Exchange Ltd. had chosen to form another subsidiary o
company limited by guarantee ignoring the circular of the SEBI
dated 16.12.1999 and also the bye rules of NSE laying down
conditions for membership but later it decided to have a .
subsidiary company which could get registration as a broker
with NSE. Such decision was effected through amalgamation. E
Such a situation cannot be treated as a compulsion of law for
amalgamation.
     11. Even if we accept the submission that the compulsion
of law be given a liberal meaning so as to include orders and F
directions of the SEBI, in the present case it is not possible to
accept that amalgamation was forced upon the appellant under
orders or directions of the SEBI. Only because the appellant
and the parent company Vadodara Stock Exchange Ltd.·
subsequently decided and opted to do business as a broker · G
with NSE, they chose the path of amalgamation. They could
have as well chosen the path of winding up of the earlier
subsidiary company. In the facts of the case it is not possible
to accept that there was any compulsion of law for the merger/
amalgamation of the VSE Securities Ltd. with the appellant. . H
    12. So far as legal position is concerned, in the case of
916          SUPREME COURT REPORTS                [2015] 12 S.C.R.


 A Ratnabali Capital Markets the contention that the assets and
   liabilities of the transferor company have passed into the hands
   of the transferee company did not cut any ice in respect of
   fees payable to the SEBI as per Regulations. In para 13 of
   that judgment it was held that on merger of the two companies,
 B a new entity emerged which was given a right to operate in the
   derivative segment and therefore it had to pay fresh
   registration fees on the turnover basis. We find no good
   ground to take a different view. In paragraph 19 of that
   judgment this Court clarified that when the facts disclose that
 c amalgamation/ merger had to be resorted to as an alternative
   to liquidation then it may be successfully urged that merger/
   amalgamation was on account of compulsion of law so as to
   attract the exemption assured by the SEBI under the circular
   dated 30.09.2002. The facts of this case even remotely do
 D not suggest any such or similar situation.

           13. As a result, we find no merit in this appeal and it is
      accordingly drsmissed. However, there shall be no order as
      to costs.
 E    Nidhi Jain                                     Appeal dismissed.