Icap India Private Limited vs Sebi

Date of Decision : 19.09.2019

Appeal No. 56 of 2004

ICAP India Private Limited 202, Dalamal Towers, Free Press Journal Road, Nariman Point, Mumbai - 400 021. ..... Appellant

Versus Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ....Respondent

Mr. P.N. Modi, Senior Advocate with Mr. Neville Lashkari, Mr. Sharad Abhayankar, Mr. Manish Chhangani and Ms. Yamini Kumar, Advocates i/b Khaitan & Co. for the Appellant.

Mr. Kevic Setalvad, Senior Advocate with Mr. Abhiraj Arora and Mr. Vivek Shah, Advocates i/b ELP for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Dr. C.K.G. Nair, Member

1.

This appeal has been filed aggrieved by the order of the

Chief General Manager of Securities and Exchange Board of

India ('SEBI' for short) dated November 28, 2003 disposing 2

off thereby the representations of the appellant dated August

22 & 29, 2003. The said order was also issued in compliance

with the direction of the Bombay High Court in Writ Petition

No. 2126 of 2003 dated September 18, 2003. Vide the

impugned order four issues have been decided (1) annual

turnover for the purpose of SEBI registration fees, (2) transfer

of membership and fee continuity benefit, (3) interest on

delayed payment of fees and (4) refund of excess fees paid, if

any.

2. Pursuant to appeals before this Tribunal and further to

the Hon'ble Supreme Court Issue No. 1 relating to what

constitutes annual turnover for the purpose of SEBI

registration fee has since been decided by the judgment of the

Supreme Court dated November 24, 2015 and hence the

appellant submits that this issue is now closed. Therefore,

only the remaining three issues have been remanded by the

Apex Court and which needs to be now decided in this

appeal.

3. The relevant part of the order of the Apex Court is

reproduced here under:-

"As already noted, in the case of B.S.E. Brokers' Forum this Court directed the SEBI to incorporate the relevant recommendations of the Bhatt Committee in the Regulations and as a result the rate of fee on Government securities etc. 3

dealt in the wholesale debt market was lowered and pegged at 1/10th in comparison to fees payable by the stock brokers in other segment.

In view of the above discussions and the interpretation of the term 'annual turnover' indicated by us earlier, we are constrained to hold the impugned order passed by the SAT as erroneous in law. It is accordingly set aside. There is a consensus that in case the impugned judgment and order is set aside, the matter deserves to be remanded back so that other grounds earlier raised by the respondent may now be considered by the SAT in accordance with law. For that purpose the matter is remitted back to the SAT for deciding the other relevant issues and grounds as per law at an early date, preferably within six months. The appeal thus stands allowed to the extent indicated above. In the facts of the case there shall be no order as to costs. The amount of Rs. 2.9 crores deposited by the SEBI with the Registry has been invested in an interest bearing account and the FDR is due to mature on 30.11.2015. As soon as the amount matures, the same should be refunded to the SEBI without any delay."

4. Further facts relevant to the matter are the following:-

(a) The appellant was incorporated as M/s Pennar

Investments Ltd. ('Pennar' for short) on July 11,

1994.

(b) On August 6, 1994 appellant received SEBI

registration No. INB230629530 as a broker. It also

received registration from National Stock

Exchange of India Limited ('NSE' for short), 4

Respondent No. 2 as a trading member in the

Wholesale Debt Market (WDM) segment.

(c) In April 1999 a foreign company, M/s, Garban

PLC decided to invest in the appellant.

Accordingly, appellant wrote to NSE on April 7,

1999 seeking permission to transfer 51% of the

shares of the appellant to Garban PLC, since such

permission had to be obtained as per the rules /

conditions specified in the bye-laws of NSE. On

April 15, 1999 NSE replied specifying certain

conditions including payment of transfer fee,

additional interest fee deposit etc. and stating that

changes in the shareholding of the trading member

company which results in the shareholding of the

dominant shareholders falling below 51% is

treated as transfer of trading membership.

(d) On April 17, 1999 appellant sought further

clarification from NSE stating that since the

appellant is operating successfully in the WDM

segment and in the future also the appellant does

not intend to acquire capital market segment

membership the request to be considered as a 5

transfer of an existing WDM segment membership

and allowing it to continue with the existing

deposit level.

(e) On June 4, 1999 appellant submitted an

amendment application for transfer of their

existing membership. Vide this letter the revised

shareholding was shown as 51% for Garban PLC

and the remaining 49% for India Life Credit &

Holding Pvt. Ltd. and the original applicant Pennar

goes off the radar completely.

(f) On July 1, 1999 the NSE conveyed approval of the

proposed transfer of the shareholding subject to

various conditions, notably including that no

change in the shareholding of the trading member

company Pennar without prior approval of the

Exchange; execution of a fresh membership

undertaking in an enclosed format; SEBI approval

and submission of an undertaking singed by the

new dominant shareholders / promoters to the

Exchange / National Securities Clearing

Corporation Ltd. (NSCCL) in respect of the

present and future obligations / liabilities of the 6

trading member company. This was further

reiterated by NSE vide another letter dated

February 14, 2000. On March 14, 2000 SEBI

wrote to NSE relating to change in the

shareholding pattern of Pennar that the proposal

should be submitted along with all the documents

relating to fresh registration. The appellant

continued to press for transfer of membership

rather than a fresh registration vide further letters.

On October 20, 2000. SEBI granted fresh

registration No. INB231140337 to the appellant

which by this time was renamed as Garban

Intercapital IL Ltd.

(g) On October 31, 2000 following the fresh SEBI

registration NSE wrote to the appellant that fresh

registration has been granted by SEBI and

consequently earlier registration of SEBI in the

name of Pennar has been withdrawn. Appellant

was further directed to open new current bank

account in the name of the company for clearing

and settlement purposes within 15 days so as to

activate the 'National Exchange Automated 7

Trading' (NEAT) system in the name of M/s.

Garban Intercapital IL Ltd.

(h) It is important to note that the fresh registration

certificate granted by SEBI on October 20, 2000 is

in the name of Garban Intercapital IL Ltd. and not

in the name of Pennar and by letter dated October

31, 2000 NSE informed the erstwhile Pennar that

consequent to SEBI registration dated October 20,

2000 earlier registration in the name of Pennar has

been withdrawn. The appellant was also directed

to complete the process (as per an attached list to

the said letter) which are steps to be taken by a

new member of the stock exchange for

operationalising their trading, clearing and

settlement activities.

(i) On February 1, 2001 the Supreme Court directed

SEBI to amend regulations incorporating the

recommendations of the Bhatt Committee relating

to incidence of turnover fees payable to SEBI and

on February 20, 2002 SEBI (Stock Brokers and

Sub-Brokers) Regulations, 1992 were amended to

incorporate the same. Accordingly, ad valorem 8

fees are payable on the stock brokers annual

turnover for the first five years of registration and

after the expiry of five years from the date of

initial registration a fixed sum of Rs. 5,000/- for

every block of five years has to be given.

(j) On March 28, 2003 the appellant filed statement of

turnover certified by an auditor.

(k) In July 2003 appellant's name was further changed

to ICAP India Pvt. Ltd.

(l) On August 8, 2003 NSE informed the appellant

that they were unable to verify the turnover

submitted by the appellant since the auditor's

certificate was not in the prescribed format and

also stating that in the absence of a proper

certificate the fee would be levied at the rate of

0.01% of turnover rather than at the rate of

0.001%.

(m) On August 28, 2003 the appellant submitted the

auditor's certificate about the turnover as stated by

NSE under protest and filed representations with

SEBI.

9

(n) Further, on August 29, 2003 the appellant made a

payment of Rs. 2,42,23,762/- towards registration

fee and interest calculated on the basis of the

turnover stated by NSE without prejudice to the

rights of the appellant. The appellant filed a Writ

Petition in September 2003 before the Bombay

High Court which was disposed of on September

18, 2003 directing SEBI to hear the appellant on

the basis of their representations. Further,

following a show cause notice relating to the

turnover details and fee liability etc and after

giving an opportunity of providing a fresh

auditor's certificate in the prescribed format and

after providing an opportunity of hearing on

October 31, 2003 Chief General Manager, SEBI

passed the impugned order on November 28, 2003.

(o) On March 24, 2004 an appeal was filed against the

said order of the Chief General Manger, SEBI

before this Tribunal.

(p) On December 6, 2004 this Tribunal passed an

interim order staying the notice of payment subject 10

to a further deposit of Rs. 50 lakh by the appellant

with SEBI.

(q) On August 14, 2006 this Tribunal passed the final

order on the issue of annual turnover, allowing the

appeal.

(r) On October 23, 2006 SEBI filed an appeal before

the Supreme Court against this Tribunal's Order.

On November 24, 2015, the Hon'ble Supreme

Court partly allowed the appeal filed by SEBI on

the interpretation of turnover and remanded the

remaining issues for reconsideration by this

Tribunal. Hence, the three issues relating to the

applicability of fee continuity benefit on the basis

of whether appellant is a case of fresh registration

or not; whether interest is applicable on the

pending payment, if any and on refund of excess

amount paid, if any, to be decided afresh.

5. Learned Senior Counsel Shri P.N. Modi extensively

argued that the impugned order is completely unjustified in

treating the appellant's case as a fresh registration when all

along the appellant has been seeking continuation of the

membership originally granted to Pennar. It was contended 11

that the appellant's corporate form remains the same, it is the

same legal entity, only some share capital has been changed

hands which does not change the legal status of the perpetual

corporate legal person. As such, the date of 'initial

registration' of the appellant should be treated as the first date

of registration granted to Pennar on August 6, 1994. It was

further submitted that once the initial registration is treated as

the starting point of the appellant, five years period would be

over by August 5, 1999 for which payments have been made

based on the turnover applicable and no additional fee

liability would be there. The leaned senior counsel drew upon

the various correspondences the appellant had written to both

SEBI as well as NSE with regard to their application/ requests

for continuation of registration and consequent fee continuity

benefit and contended that all along the appellant was on the

firm belief that though a fresh registration was given on

October 20, 2000 this should not come in the way of treating

the appellant as a fresh entity eligible for fee continuity

benefit.

6. The learned Senior Counsel further submitted that

without prejudice to the above submissions the rate of

turnover fee applicable to the WDM segment is only 0.001% 12

of annual turnover while the impugned order has applied the

general turnover fee applicable to other segments at 0.01%.

This is complete travesty of justice since it is an admitted fact

by SEBI, NSE and the Bhatt Committee report that the rate

applicable to WDM segment would be only 1/10 of the rate

applicable to the other segments of the securities market

because of the special nature of the WDM segment. It was

further contended that it is an undisputed fact that the

appellant operates only in the WDM segment as the

registration certificate of NSE shows that the appellant does

not deal in any other segment of the securities market.

Further, when SEBI raised objections to the amount of

turnover submitted by the appellant, the appellant adopted the

turnover figures given by the NSE itself. Based on these

figures Chartered Accountant's certificate was also given to

SEBI as well as to NSE. However, only on a technical ground

that the Chartered Accountant certificate was not in the

prescribed format, the same was rejected and the turnover fee

as applicable to other than WDM segment, which is ten times

more than what is applicable to the WDM segment, has been

imposed on the appellant arbitrarily and without any legal

basis.

13

7. On the issue of interest liability, the learned senior

counsel contended that if the initial period of registration from

1994-99 is taken sufficient amount of money has been paid to

the respondent and no interest should be payable resulting in

some refund due to the appellant from SEBI.

8. It was also contended that the fee liability towards SEBI

got crystallized only with effect from February 20, 2002 when

the Regulations were amended by the SEBI to incorporate the

recommendations of Bhatt Committee. So, if at all any

interest is to be charged it should be done only from February

20, 2002, the date of such amendment.

9. In brief, the learned senior counsel contended that the

transfer of the membership should not be considered as new

membership and fee continuity benefit should be given to the

appellant treating the appellant as the same perpetual legal

entity; turnover fee should be calculated at the rate of 0.001%

because the appellant deals only in the WDM segment;

interest, if any, should be calculated from the date of

amending the relevant regulations and excess payments made

to SEBI should be refunded to the appellant. 14

10. The learned counsel for the appellant relied on a few of

judgments in support of his contention that the appellant is

entitled to have benefit of fee continuity by treating the initial

registration in 1994 as the relevant factor for determining the

turnover fee. To this effect he cited Ratnabali Capital

Markets Ltd. vs. SEBI & Ors. (2008) 1 SCC 439 and

Gurudevdatta Vksss Maryadit and Ors. vs. State of

Maharashtra and Ors. (2001) 4 SCC 534. In addition to

these judgements the appellant also placed before us the

meaning of "initial" according to Black's Law Dictionary and

Oxford Advanced Learner's Dictionary. Further, in order to

support his submission that the company is the same legal

entity in perpetuity he relied on Electronics Corporation of

India Ltd. and Ors. vs. Secretary, Revenue Department,

Govt. of Andhra Pradesh and Ors. (1999) 4 SCC 458. Further it was contended that the SEBI's reliance on circular

dated 28th March, 2002 (SMD/POLICY/Cir-07/2002) cannot

supersede the plain language of the Regulations as held in the

judgements such as Promoters & Builders Assn. of Pune vs.

Pune Muncipal Corpn. And Ors. (2007) 6 SCC 143.

11. Learned Senior Counsel Shri Kevic Setalvad appearing

on behalf of the respondent strenuously argued that the 15

appellant is not the same entity continuing with the initial

registration granted by SEBI. Citing the relevant circulars

and the various correspondences between the appellant and

NSE; NSE and SEBI and SEBI and the appellant and the

interpretation as given in the impugned order, the learned

Senior Counsel argued that it was always treated as a separate

registration because the appellant had changed ownership and

control in favour of Garban which initially owned 51% share

capital of the appellant and subsequently acquired further

equity. Pennar had completely exited from the company

which is now under the control of Garban. Citing the relevant

circulars he further emphasized that only partnership firms

getting converted into corporate form were eligible for fee

continuity benefit at the beginning which was later extended

to cases of mergers and amalgamations but under a number of

conditions. Appellant is neither a case of partnership getting

converted into a corporate form nor a case of merger or

amalgamation. As such, under the provisions of the relevant

SEBI laws appellant is not entitled to the benefit of fee

continuity. When a new registration was given this was

legally made clear and thereafter the appellant cannot

continue to argue that it is entitled to fee continuity benefit.

Appellant is a new entity in structure and form and SEBI is 16

entitled to charge the turnover fee afresh from the date of the

new registration.

12. Learned Senior Counsel also stated that the Bhatt

Committee recommendations in respect of interest on delayed

payment of fees was adopted by SEBI on January 7, 1993

when vide a letter it directed all the stock exchanges to

calculate the fees payable by brokers as per the methodology

recommended by the Bhatt Committee report. Therefore, the

submission that interest is due only from the date of

incorporating the Bhatt Committee recommendations in the

Regulations on February 20, 2002 has no merit. Moreover,

there is another amendment to the Regulations providing for

payment of interest at the rate of 15% per annum with effect

from December 16, 1998.

13. Learned senior counsel further emphasized that the

appellant did not provide the turnover details as per proforma

and hence it was not certified by NSE. Therefore, given that

the detail of the turnover was not clear, the benefit at the rate

of 0.001% could not be given and treating its turnover as if

from multiple segments of the stock market cannot be faulted. 17

14. The learned Senior Counsel further contended that in

SEBI vs. Prebon Yamane (India) Limited (2015) 16 SCC 89

the Supreme Court upheld that only partnership getting

converted into corporate form alone has been bestowed with

the benefit of fee continuity, though subsequently this benefit

was extended to merger and amalgamation subject to a

number of conditions. Similarly the learned counsel also

relied on Uttar Pradesh State Industrial Development

Corporation Limited vs. Monsanto Manufacturers Private

Limited And Another (2015) 12 SCC 501 to canvass for fresh

transfer fee on property even when leased properties are

transferred. Therefore, in the context of the present matter

where the appellant has taken over the earlier Pennar and

Pennar has completely moved out of the original appellant

company no benefit of fee continuity can be granted.

15. We have heard the extensive submissions made by both

the learned senior counsel and perused the various documents

placed before us. On a complete perusal of all the facts and

the provisions in various Circulars/ Regulations more

particularly stated in Circular / Press Note dated August 28,

2003 issued under SEBI (Broker Regulations) Rules, 1992 we

cannot agree with the contentions of the appellant that they 18

are entitled for fee continuity benefit treating the initial

registration granted to Pennar on August 6, 1994. The

correspondences and the relevant regulations make it very

clear that the appellant has been rightly treated as a fresh

registration with effect from the date of granting the new

registration on October 20, 2000 and thereafter cannot

indefinitely continue to claim that it is case of transferring

some portion of equity to Garban and the original legal entity

continues. It is a fact that original legal entity as a company

continues but the question to be answered is whether for the

purpose of granting registration as a broker is it the same

entity. Incorporation as a company and registration as a SEBI

intermediary are two different and distinct processes where

there are additional rules and regulations to be adhered to.

This is a case of a complete takeover of a brokerage by a new

entity Garban and the new registration granted by SEBI is in

the name of Garban. Both the NSE and SEBI have

categorically stated to the appellant through multiple

correspondences that the appellant cannot claim fee continuity

benefit only on the ground that the appellant has been seeking

the same through their earlier correspondences. Those claims

were put to rest the day SEBI granted a fresh registration

number and from that date it has to be treated as a separate 19

broker distinct from the original Pennar as far as its business

is concerned. Accordingly, the orders relied on by the

appellant relating to a Company is a legal entity in perpetuity,

though correct, is not relevant in the context. The date of

initial registration of the appellant is to be treated as October

20, 2000, the date of granting the fresh registration by SEBI

and all fee liabilities arising from its turnover have to be

recalculated with effect from this date. Since rate of interest

of 15% per annum has been implemented on delayed payment

by SEBI from December 16, 1998 interest, if any, on the

registration fee / turnover fee @ 15% per annum also is due

from the appellant on any delay in depositing/ paying the

principal amount of fee.

16. On the issue of the rate of turnover fee applicable to the

appellant we do not agree with the submissions of respondent

SEBI. It is on record that the appellant did give an auditor's

certificate. The turnover proforma produced by SEBI before

us consists of two parts; its upper part showing the turnover

table and lower part showing fee computation table. What is

argued before us is that the auditor certificate provided by the

appellant consisted of only the upper portion of the relevant

proforma giving the turnover table and that too for part of the 20

period i.e. 1999-2000 to 2002-2003; not the full five years

period from October 2000 - October 2005. The latter

argument has no meaning since in 2003 the appellant could

not have provided turnover data upto 2005. Appellant also

disputed that the format at the relevant time contained two

parts. Further, in the actual certificate produced before us

from Haribhakti & Co., Chartered Accountants it is stated that

"The turnover details are recorded by Company in Face

Value. Hence the turnover details are given as per the

Annual Certificate received by the company from the National

Stock Exchange of India Ltd." In any case the impugned order

has taken these figures and calculated the fee liability at the

rate of 0.01% to be Rs. 33,51,45,620/- towards principal and

an interest of Rs. 3,78,29,623/- as on November 30, 2003.

This means that the turnover could be crystallized in the

impugned order as on that date. It is also on record and an

admitted fact that the appellant was dealing only in the WDM

segment. It is only on the ground that the Chartered

Accountant's certificate was not in the prescribed proforma

and therefore the exchange could not certify the details, SEBI

has imposed the turnover fee at the rate of 0.01%. We find

this approach of SEBI completely arbitrary and without any

legal basis. When it is a fact that the appellant was dealing 21

only in WDM segment and the turnover fee applicable to

WDM segment was only 0.001% it was not appropriate for

SEBI to impose a turnover fee at the rate of 0.01% thereby

imposing such a huge burden on the appellant without any

legal basis; which is highly arbitrary. If SEBI had any doubt

regarding the turnover figures, being the regulator those

doubts should have been removed before passing an order,

particularly when the order imposes a very heavy burden on

the appellant. When SEBI could calculate the fee liability

based on the figures given by the appellant it was incumbent

on SEBI to apply the applicable rate of fee based on the

admitted position of the appellant trading only in the WDM

segment. Therefore, we set aside the imposition of fee on the

appellant @ 0.01% of its turnover.

17. In conclusion, we pass the following directions:-

(a) Appellant's claim of fee continuity benefit is

devoid of any merit and is dismissed.

(b) SEBI shall recalculate the turnover fee liability

from October 20, 2000 for a period of five years at

the rate of 0.001% of the turnover of the appellant. 22

(c) After adjusting the deposits / payments already

made by the appellant, if any outstanding amount

of principal is due from the appellant SEBI is at

liberty to impose simple interest on such

outstanding payment at the rate of 15% per annum.

(d) Appellant shall submit the turnover data in the

prescribed proforma for the five year period from

October 20, 2000 within one month from the date

of this order and SEBI shall compute the fee

liability and communicated to the appellant within

a period of one month thereafter. Payment arising

from the revised calculations, from either of the

parties, shall be completed within one month

thereafter.

18. Appeal is partly allowed on above terms. No orders on

costs.

Sd/-

Justice Tarun Agarwala Presiding Officer Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member 19.09.2019 Prepared and compared by:msb