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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4719 OF 2008                              

SECURITIES & EXCHANGE BOARD OF INDIA   ... APPELLANT  

VERSUS

MAGNUM  EQUITY SERVICES LTD. & ORS.           ... RESPONDENTS  

                                                         WITH

CIVIL APPEAL NO. 5235 OF 2008

SECURITIES & EXCHANGE BOARD OF INDIA     ... APELLANT

VERSUS

SODHANI SECURITIES LTD. & ANR.   ... RESPONDENTS

J U D G M E N T

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 reversed

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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 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 of 2008.

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  

company under the Companies Act, 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  

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 of Magnum.   In pursuance to an application filed by the Firm, NSE  

transferred the membership card of the Firm to Magnum on 25.4.1996. Thus

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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 29.5.1997.   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 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 earlier business  

carried on by the Firm had been transferred to Magnum and as a result there  

was  continuity  of  that  business.  SEBI  rejected  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 of three years,  

which was in contravention of the conditions laid down in Paragraph I(4) of  

Schedule III of the Securities and Exchange Board of India (Stock Brokers and  

Sub-brokers) Regulations, 1992 (Regulations for brevity).   For the facility of  

reference, Paragraph I(4) is reproduced below:

“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

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director of the corporate member so converted and such director will  continue to hold a minimum of 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.”     

3 Aggrieved  by  the  said  Order,  Magnum  appealed  before  the  Tribunal.  

The Tribunal observed that Paragraph I(4) in Schedule III 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  

partnership card of the exchange.    The Tribunal noted that the 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  

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 Finstock Ltd.  v.  

Securities and Exchange Board of India in Appeal No. 123 of 2004 decided on  

9.5.2006, wherein the Tribunal had held that the benefit of fee continuity be  

given even to those entities which corporatized themselves prior to 1.4.1997.

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It transpires that this view has attained finality, in 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  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 from the  benefit  of  fee  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  I(4)  and  had  held  that  the  

conditions enumerated in the said Paragraph would 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 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 than three years, the conditions set out in Paragraph I(4) stood satisfied.  

Before  the  Tribunal,  SEBI  placed  reliance  on  its  Circular  dated  12.9.2002,

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which stated that in order to get the benefit of Paragraph I(4), all the erstwhile  

partners  should  be  Whole-time  Directors  in  the  corporate  entity  so  formed.  

SEBI contended that the Circular issued a clarification, and hence was effective  

and efficacious 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  not  effective  

retrospectively.  The Tribunal, vide order dated 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 registered partnership firm carrying on  

business of stock broking as a member of the NSE since November 1994.  The  

firm consisted 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 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  of  fee continuity, which was  

rejected  by  SEBI  vide  order  dated  12.6.2007.   Reliance  was  placed  on  the  

aforementioned  Circular  dated  12.9.2002.   Aggrieved  by  the  said  Order,  

Sodhani  Securities  Ltd.  filed  an  Appeal  before  the  Tribunal  which,  on

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29.1.2008, held in favour of  Sodhani Securities Ltd. stating that a plain reading  

of  the  Regulation  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 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 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 versa.  In light of this provision, Counsel has submitted  

that  the  term  “partner”  as  used  in  Paragraph  I(4)  of  Schedule  III  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 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 imply that one person is to hold 40 per cent shares

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because the term used in the provision is “Whole-time Director” indicating a  

singular person.  

7 Counsel for the Respondents have contended that on a plain reading of  

Paragraph I(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 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 as a Whole-time Director and that such person  

held  40  per  cent  shares  of  the  paid-up  equity  capital  of  the  company,  the  

Respondents  could  not  be  found  to  be  in  violation  of  Paragraph   I(4)  of  

Schedule III.  

8 We have carefully cogitated upon the arguments articulated before us.  As  

already  mentioned,  the  issue  regarding  the  benefit  of  fee  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 271 [Civil Appeal  

No. 4493 of 2006] wherein it has been held that even if a partnership or sole

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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 with respect to the  

interpretation of  Paragraph I(4)  of Schedule III of SEBI (Stock Brokers and  

Sub-Brokers) Regulations 1992.  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 applicable to the SEBI (Stock Brokers and Sub-

Brokers) Regulations 1992.  Section 3 of The 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-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 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  SEBI  Act,  1992.   Section  31  of  the  SEBI  Act,  

reproduced  below  for  the  facility  of  reference,  provides  that  Rules  and  

Regulations are to be laid before Parliament.

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Every rule and every regulation made under this Act shall be laid, as  soon as may be after it  is made,  before each House of Parliament,  while it is in session, for a total period of thirty days which may be  comprised 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 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  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 under which 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  Clauses  Act  is  applicable  while  

interpreting the language of Paragraph I(4) of Schedule III 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,  fee  continuity would  become available.  

Moreover,  the  figure  of  40  per  cent  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 mutation is substantially of the same legal  

entity, in that process the erstwhile firm has no continuity of identity.

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11 We are in agreement with the Tribunal on the interpretation it has given to  

Paragraph  I(4)  of  Schedule  III.  We  shall  elucidate  our  understanding  of  

Paragraph I(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 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, leaving behind only the  

Whole-time Director who was also an erstwhile partner.  In our opinion the said  

corporate  entity  will  still  be  eligible  for  the  benefit  of  fee  continuity  under  

Paragraph I(4) of Schedule III of the Regulations.  

12 In order to qualify for the benefit of the said provision, 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  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 corporate

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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 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 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 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 Paragraph I(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.

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15 We thus find no merit in these Appeals and accordingly dismiss the same.  

There will be no orders as to costs.  

....................................................J. [VIKRAMAJIT SEN]  

....................................................J. [SHIVA KIRTI SINGH]

NEW DELHI, NOVEMBER 30, 2015.