Nikhil Kanchanlal Vakharia vs S.E.B.I. & Anr

structured in two distinct phases. In the first five years of

operation of a broker, the quantum of the fee was linked

to the turnover of the stock broker. Greater the

turnover, higher the fee.

5. The second phase comprised blocks of five years

from the sixth financial year after the grant of initial

registration. During each block period of five years, the

stock broker was required to pay a flat rate of Rs.5000/-

in order to keep the registration in force. The flat fee had

no link to the turnover.

6. The appellant claims that whenever the event of

transmission occurs within five years, they should be

given the fee continuity benefit and should not be made

to pay the turnover basis fee for the remainder of initial

period of five years. The appellant is claiming that on

account of transmission, since the business and trade 4

continues in the same name or entity and the Stock

Exchange permits continuation of the same membership

under the same number and clearing code, they should

also be given the benefit under the same registration of

the earlier Stock-Broker and thus grant the benefit of fee

continuity.

7. According to the appellant, the present case

involves a situation where at all material times the stock

broking firm was a partnership firm carrying on business

in the name and style of M/s. Kanchanlal & Sons. The

appellant along with his son, wife and daughter-in-law

constituted a partnership firm. Late Shri Kanchanlal K.

Vakharia because of his ill health decided to nominate

the appellant in his place as a member of Stock

Exchange, Mumbai (respondent no.2). The appellant

claimed that he is a partner of M/s. Kanchanlal & Sons

and, therefore, now the Security Exchange Board of India

(for short SEBI) should give the benefit of fee continuity

as for the first five years they have already been charged 5

from the partnership on a turnover basis, therefore, they

must now charge on a flat rate of Rs.5000/- per annum

for the registration. The appellant claims on account of

transmission since the business and trade continued in

the same name or entity and the stock exchange permits

continuation of the same membership under the same

number and clearing code. They should also be given

the benefit under the same registration of the earlier

stock broker and the benefit of fee continuity.

8. Mr. Altaf Ahmed, learned senior counsel appearing

for the SEBI submitted that there is no provision in the

SEBI Act, Rules and/or Regulations of the SEBI in this

behalf which recognizes the registration of stock-brokers

by inheritance and/or transmission for the purpose of

granting fee continuity benefit. The appellant who is son

of Late Shri Kanchanlal K. Vakharia on transmission can

be registered only as a new stock broker with SEBI in

accordance with the Act, Regulations and the SEBI

(Stock-Brokers and Sub-Brokers) Rules, 1992 (for short 6

"the Rules") and subject to payment of registration fee for

a new stock-broker as per the schedule fixed in the

Regulations. He further submitted that there is no

provision for grant of fee continuity benefit in cases of

such transmission. The only situation under which fee

continuity benefit is granted is under para 4 of Schedule

III under Regulation 10 of the Regulations, which reads

thus:

"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 wholetime Director of the corporate member so converted and such Director will continue to hold minimum 40% 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 7

erstwhile entity has paid the fee as per the regulations."

9. Mr. Ahmed further contended that it was an

incentive for corporatisation since a corporate entity is

required to maintain all records under law and as such it

facilitates regulating of the stock brokers. Under no

other circumstances fee continuity benefit is available

under the statutory regulations and hence the appellant

cannot be granted benefit of fee continuity on account of

transmission.

10. Mr. Ahmed also submitted that every stock-broker

who wants to deal in securities in the securities market

is required to be a member of a stock exchange and then

get himself registered with SEBI under section 12 of the

Act in accordance with the procedure as provided in the

Regulations subject to the payment of registration fee for

a new stock-broker under rule 4 of the Rules and 8 Regulation 10 of the Regulations on the rates mentioned

in Schedule-III.

Rule 4 of the Rules reads thus:

"4. Conditions for grant of certificate to stock-broker.-- The Board may grant a certificate to a stock-broker subject to the following conditions namely:--

(a) he holds the membership of any stock exchange;

(b) he shall abide by the rules, regulations and bye-

laws of the stock exchange or stock exchanges of which he is a member;

(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;

(d) he shall pay the amount of fees for registration in the manner provided in the regulations; and

(e) he shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep the Board informed about the number, nature and other particulars of the complaints received from such investors."

Regulation 10 of the Regulations reads thus: 9

"10. Payment of fees and the consequences of failure to pay fees.-- (1) Every applicant eligible for grant of a certificate shall pay such fees and in such manner as specified in Schedule III;

Provided that the Board may on sufficient cause being shown permit the stock-broker to pay such fees at any time before the expiry of six months from the date on which such fees become due.

(2) Where a stock-broker fails to pay the fees as provided in regulation 10, the Board may suspend the registration certificate, whereupon the stock-broker shall cease to buy, sell or deal in securities as a stock-

broker.

11. Mr. Ahmed contended that in order to become a

member of the stock exchange, the person is required to

be qualified as per rule 8 of the Securities Contracts

(Regulations) Rules, 1957. This right is also not

inheritable, since every person on transmission may not

even be qualified to become a member of a particular

stock exchange. It is pertinent to mention here that

membership of a stock exchange is a privilege and not a 10

matter of right and thus this cannot be claimed as

inheritable.

12. Mr. Ahmed also contended that SEBI has no

discretion in implementation of the Act, Rules or

Regulations and has to strictly adhere to the provisions

as laid down and, therefore, has no power to waive the

said requirement. It may also be relevant to mention

that out of the 19 stock brokers who prayed for waiver of

the fresh registration or new entities upon transmission,

only 9 or 10 have come to challenge the same before this

court and balance have accepted the judgment of the

learned Tribunal.

13. Mr. Ahmed further submitted that the SEBI has

applied the turnover regime for the period 1992-93 to

1996-97 and, therefore, charged on the flat rate basis.

Clause I(1)(c) of Schedule III of the Regulations reads

thus:

"after the expiry of five financial years from the date of initial registration as a stock-broker, he 11

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."

14. Learned senior counsel also submitted that, under

section 12 of the Act, no person can deal in securities in

the securities market without being registered with the

SEBI. In the present case, admittedly, Late Shri

Kanchanlal K. Vakharia, father of the appellant, was a

member of the stock exchange and not the firm M/s.

Kanchanlal & Sons. Ordinarily, if M/s. Kanchanlal &

Sons is not a member of the stock exchange, the firm

would not be entitled to deal with securities in securities

market in the Bombay Stock Exchange. The Bombay

Stock Exchange does not enroll partnership firm as

members. As such, Late Shri Kanchanlal K. Vakharia

alone was the member of the stock exchange and he

alone was thus entitled to deal in securities in the

Bombay Stock Exchange. However, under rule 179 of

the Bombay Stock Exchange Rules, an individual 12

member can do business in partnership with certain

categorized relations and, therefore, the Bombay Stock

Exchange permits trading by the individual in the name

of the partnership firm. Rule 179 of the Bombay Stock

Exchange reads thus:

"179. No partnership shall be formed except-

(i) between two or more members of the Exchange; or

(ii) between a member of the Exchange and his father or mother or wife or his son or sons or daughter or daughter-in-law or daughters-in-law or father's brother or brothers or unmarried sister or sisters or brother's or brother's son or sons; or

(iii) between two or more members of the Exchange and their father, mothers or wives or son or sons or daughter or daughters or daughter-in-law or daughters-in-law or brother or brothers or father's brother or brothers or unmarried sister or sisters or brother's or brothers' son or sons;

Provided that a son or daughter or son's son or brother or father's brother or unmarried sister of brother's shall not be taken into partnership unless he or she be in all respects eligible for membership of the Exchange."

15. It was contended by Mr. Ahmed that Late Shri

Kanchanlal K. Vakharia alone was a member and 13

through his partnership, the entire partnership firm was

allowed to trade on the Bombay Stock Exchange, the

entire turnover of trade on the Bombay Stock Exchange

is relatable to the individual member Late Shri

Kanchanlal K. Vakharia as otherwise the partnership

firm and non-member partners would not have been able

to deal in securities on the Bombay Stock Exchange.

Consequently, this partnership firm could also not deal

with securities unless the member of the stock exchange

namely the individual member Late Shri Kanchanlal K.

Vakharia gets registered with SEBI. It is through that

individual member Late Shri K. Vakharia that the

partnership firm and registered partners are able to deal

in securities on the Bombay Stock Exchange. Even

otherwise, the entire turnover of the partnership firm on

the stock exchange is on securities and, therefore,

relatable to the registered member i.e. Late Shri

Kanchanlal K. Vakharia under whose membership of

Bombay Stock Exchange and registration of SEBI, such

trading is permitted.

14

16. It was also submitted on behalf of the SEBI that the

appellant wants only his turnover to be considered as a

member of the Exchange and the other partners being

non-member partners want to be outside the purview of

the registration of the SEBI since they cannot be

registered but at the same time want to deal in securities

on the exchange under the membership and registration

of Late Shri Kanchanlal K. Vakharia.

17. According to the learned counsel for the SEBI, the

entire dealing in securities by the non-member partners

would be illegal and contrary to section 12 of the Act and

liable to all such consequences in law. In fact, if the

stand taken is correct then the partnership firm is also

the non-member partnership and cannot deal in

securities but are dealing in securities in breach of law.

18. We have heard the learned counsel for the parties

at length and carefully analysed the provisions of the Act, 15

Rules and Regulations. By clear interpretation of the

Regulations, it is abundantly clear that no provision of

succession to registration is permissible. Nikhil K.

Vakharia son of Late Shri Kanchanlal K. Vakharia in

order to operate in the stock exchange has to obtain a

fresh registration from the SEBI and for the first five

years, he would be required to pay the quantum of fee

linked to the turnover and thereafter at the flat rate of

Rs.5000/- in order to keep the registration in force.

19. In view of the provisions of the Act, Rules and

Regulations, we have no difficulty in arriving at the

conclusion that the appeal is devoid of any merit and is

accordingly dismissed.

CIVIL APPEAL Nos.2951, 3004, 3008, 3009, 3010, 3015, 3016, 3017, 3058, 3082 of 2006.

20. In view of our decision in Civil Appeal No.4210 of

2006, these appeals also stand disposed of accordingly. 16

21. In the facts and circumstances of the case, we

direct the parties in all the appeals to bear their own

costs.

........................................J. (Tarun Chatterjee)

.........................................J. (Dalveer Bhandari) New Delhi;

May 15, 2008.