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C.A.No.4664/06

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4664 OF 2006

VSE Stock Services Ltd.        …..Appellant   

Versus

S.E.B.I & Anr.               …..Respondents  

J U D G M E N T

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.342/2004  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’].

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  of  India  (for  

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brevity, ‘the SEBI’) reflected in its circulars dated 26.11.1999 and  

16.12.1999,  the  Vadodara  Stock  Exchange  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 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 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 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 and circular dated 26.11.1999 only one subsidiary of  

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Vadodara 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.

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  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 of its operation on BSE in the month of October  

2003.  On 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 III of the Regulations.  The appellant paid the  

provisional fee liability but the demand of final fee by the SEBI was  

challenged before SAT on the ground that the appellant is entitled  

to  fee  continuity  benefit  in  terms  of  circular  of  the  SEBI  dated  

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30.09.2002.   The claim of  the appellant,  as noticed earlier,  was  

rejected by SAT by the order under appeal.

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 Schedule III.  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 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 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  provided  in  the  Regulations.   Schedule  III  of  the  

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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 several  

clarifications on the subject of fees payable by stock brokers.  The  

circular declares that the clarification was pursuant to judgment of  

Hon’ble Supreme Court in B.S.E. Brokers’ Forum v. Securities &  

Exchange Board of India (2001) 3 SCC 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 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 not have to be  paid afresh by the resultant transferee entity provided  that  majority  shareholders  of  such  transferor  entity  continue 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.”

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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 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, 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  

obtain prior approval of the SEBI under Rule 4(c) of the Rules.  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 that full 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 later in time does not  

apply to the case at hand.

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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  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 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  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 fees  

paid by the transferor company to SEBI for registration are now an  

asset  with  the  appellant  company  and  such  asset  must  be  

respected.   The  learned counsel  for  the  appellant  realised  some  

difficulties on account of law laid down by this Court in the case of  

Ratnabali Capital Markets Ltd. v. Securities & Exchange Board  

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of India (2008) 1 SCC 439 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  

amalgamation  was  carried  out  only  on  account  of  compulsion  

explained above.  According to learned counsel for the appellant for  

accepting a compulsion as one of law, the term ‘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 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  been  properly  

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  company  

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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.  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 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 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.   

12. So far as legal position is concerned, in the case of Ratnabali  

Capital Markets the contention that the assets and liabilities of the  

transferor company have passed into the hands of the transferee  

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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,  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  

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 not suggest  

any such or similar situation.

13. As  a  result,  we  find  no  merit  in  this  appeal  and  it  is  

accordingly  dismissed.   However,  there  shall  be  no  order  as  to  

costs.

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

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

New Delhi. November 04, 2015.

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