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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

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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

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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

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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

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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

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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

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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.