Pro Fin Capital Services Ltd. vs Sebi

Order Reserved On: 03.05.2016 Date of Decision : 10.05.2016

Appeal No. 380 of 2014

Pro Fin Capital Services Ltd. B-503, Western Edge 2, Fifth Floor, Western Express Highway, Borivali (East), Mumbai- 400 066 ...Appellant

Versus

1.

Over the Counter Exchange of India (OTCEI) 92, Maker Tower "F", 9th Floor Cuffe Parade, Mumbai-400 005

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

Mr. Karan Bhosale, Advocate i/b Neha Bhosale, Advocate for the Appellant.

Ms. Ankita Singhania, Advocate with Mr. Nishith Doshi, Advocate i/b DSK Legal for Respondent No. 1

Mr. Kumar Desai, Advocate with Mr. Roopadaksha Basu, Advocate i/b The Law Point for Respondent No. 2

CORAM: Justice J.P. Devadhar, Presiding Officer Jog Singh, Member Dr. C.K.G. Nair, Member

Per: Justice J.P. Devadhar

1. By filing this appeal, the appellant initially sought an order

directing the 'Over the Counter Exchange of India' ("OTCEI" for short)

to refund of ` 20 lac paid by the appellant as advance towards the

onetime membership fee with interest at the rate of 15% per annum. The 2

appellant had also annexed to the appeal an order passed by OTCEI on

13.08.2014 whereby the appellant was expelled from the membership of

OTCEI with effect from 30.08.2014. Appellant had also annexed to the

appeal various letters addressed by the appellant to the Securities and

Exchange Board of India ("SEBI" for short) seeking their intervention in

recovering ` 20 lac from OTCEI. As the appellant had not specifically

prayed for quashing the expulsion order dated 13.08.2014 and had not

made SEBI as party respondent, amendment of the Appeal Memo was

allowed, thereby adding a prayer to the Memorandum of Appeal for

quashing the expulsion order dated 13.08.2014 and also adding SEBI as

party respondent in the appeal.

2. During the course of hearing, counsel for the parties including

counsel for SEBI submitted that the dispute in the present case being the

interse dispute between OTCEI and the appellant, it would be just and

proper that the appeal is heard on merits, instead of directing SEBI to

pass an order on the letters addressed by the appellant against OTCEI.

Hence, the appeal is heard on merits.

3. Facts relevant for the purposes of this appeal are as follows:-

a) By a letter dated 27.10.1994, appellant submitted an

application seeking sponsor membership of OTCEI in the

prescribed format. In the said letter it was stated that the

appellant is a professionally managed company with a three

year profitable record of dealing in capital and money

markets. It was further stated that the company has

successfully concluded their maiden public issue and having 3

rich experience in all segments of money market and capital

markets, the company now proposes to focus on issue

management and related activities. It was also stated that

with a view to obtain sponsor membership from OTCEI the

appellant has sought registration as Category 1 Merchant

Banker from SEBI and that the company is committed to

bring at least 9-10 issues on OTCEI in the first year of

operation.

b) OTCEI by its letter dated 17.04.1995, informed the appellant

that the Board of Directors of OTCEI have approved

appointment of the appellant as a member of OTCEI subject

to the conditions set out therein. The said letter addressed by

OTCEI reads thus:-

"Ref. No. 04/17/11 Date: 17th April 1995

Mr. Rajan Sehgal Managing Director Profin Capital Services Ltd.

202, Nidhi House, B-2/1B Safdarjung Enclave, New Delhi-110 029

Dear Sir,

Ref: Order of OTCEI Membership

This is with reference to your application for

Membership on the OTC Exchange of India and

subsequent interview. We are pleased to inform you

that the Board of Directors have approved your

appointment as a Member of our Exchange. You are 4

now requested to comply with the following

formalities at the earliest.

1. Please arrange for a demand draft of Rs. 21.50

lacs to be made out in favour of "OTC Exchange of

India" payable at Bombay (Rs. 20 lac towards

onetime, non-refundable membership fees and Rs. 1.5

lacs towards annual membership fees, for the period

ending September 1995).

2. Please send us an undertaking (on Rs. 20/-

stamp paper) agreeing to comply with the

conditions/requirements of a Member of OTC

Exchange and Form A to be submitted. The format of

the same is enclosed.

3. Please send us the name(s) of the designated

official(s) in your organisation, for future

correspondence and interactions.

This offer for appointment as a member of our

exchange is valid upto 15th May 1995. We reserve the

right to reconsider this offer, if the same is not

accepted and the conditions set forth are not complied

with prior to the above mentioned date. OTC

Exchange of India may consider extension of the

validity period, at its sole discretion, upon such terms 5

and conditions as it deems fit, including levy of

interest on the amount payable.

We look forward to your active participation on the

OTC Exchange and view this as the beginning of a

longterm association with your organisation. OTC

Exchange expects that the member will sponsor and

list a minimum of six companies on the Exchange

during the financial year.

We are enclosing alongwith the Byelaws, Code of

Conduct and Business Rules of the OTC Exchange,

which you are requested to study carefully before

commencement of operations. Please do contact us

for any clarifications that you may need.

Thanking you,

Yours sincerely,

SASI NAMBIAR REGIONAL MANAGER (emphasis supplied)"

c) By a letter dated 20.04.1995 the appellant accepted the offer

of membership of OTCEI. Thereafter appellant addressed a

letter on 30.05.1995 to OTCEI, enclosing therewith an

undertaking on ` 20/- stamp paper executed on 28.04.1995

and a pay order for ` 20 lac towards the membership fee

(not ` 21.50 lac is stipulated in the letter dated 17.04.1995).

By the said letter the appellant sought clarification from 6

OTCEI as to whether the appellant, in the absence of SEBI

registration be able to act as sponsor member and if so,

would the annual charges of `1.50 lac (referred to in letter

dated 17.04.1995 as a condition for grant of membership)

commence from the date of registration with SEBI.

d) There is nothing on record to suggest that OTCEI responded

to the aforesaid letter addressed by the appellant on

30.05.1995.

e) By a letter dated 13.11.1995, appellant called upon OTCEI

to pursue the matter with SEBI so that the appellant could

procure business as member of OTCEI. In para 11 of the

affidavit in reply filed by OTCEI on 26.02.2016 it is

submitted by OTCEI that since the appellant had not paid

the annual membership fees, had not paid fees of ` 5000/-

required to be paid as SEBI registration and had not

submitted requisite documents, OTCEI could not forward

the application of the appellant for SEBI registration.

f) Thereafter, by a letter dated 25.08.2003 appellant informed

OTCEI that the appellant was never registered as a member

with SEBI and hence the question of paying annual fees

does not arise. By the said letter appellant called upon

OTCEI to refund the advance amount of ` 20 lac lying with

OTCEI. Similar letter was also addressed by the appellant to

OTCEI on 05.09.2003.

7

g) By a letter dated 16.09.2003, OTCEI informed the appellant

that on 17.04.1995, the appellant was appointed as a dealer

on the Exchange and the amount of ` 20 lac paid by the

appellant towards non-refundable admission fees cannot be

refunded. It was further stated in the said letter that since the

appellant continues to be a dealer on the Exchange, the

appellant is bound and liable to comply with the directives

of OTCEI/SEBI and also liable to pay the annual fees and

SEBI fees.

h) By a letter dated 06.10.2003 the appellant reiterated that

` 20 lac was paid as advance for admission as a sponsor

member and not as a dealer as stated by OTCEI in their

letter dated 16.09.2003.

i) Thereafter several letters were exchanged between the

parties, wherein the appellant insisted on refund of ` 20 lac

on ground that the appellant was not admitted as a member

and therefore, the appellant is entitled to seek refund of ` 20

lac whereas, OTCEI maintained that the appellant was

admitted as a member and hence the non-refundable amount

of ` 20 lac paid towards membership fee cannot be

refunded.

j) Appellant addressed several letters to SEBI seeking their

intervention in obtaining refund of ` 20 lac from OTCEI.

However, there was no response from SEBI.

8

k) Ultimately OTCEI issued show cause notice to the appellant

on 15.01.2014 and after giving an opportunity of hearing by

its order dated 13.08.2014 OTCEI expelled the appellant

from the membership of the Exchange with effect from

30.08.2014. Challenging the said order present appeal is

filed.

4. Counsel on both sides have extensively argued the case on behalf

of their respective clients. From the arguments advanced by counsel on

both sides, it is apparent that the following two questions arise for

consideration in this appeal, viz:-

a) Whether OTCEI is justified in contending that the appellant

was admitted as a member of OTCEI and hence the non-

refundable amount of ` 20 lac paid as admission fee cannot

be refunded to the appellant.

b) If so, whether OTCEI by its order dated 13.08.2014 is

justified in expelling the appellant from the membership of

OTCEI on ground that the appellant consistently failed to

comply with the terms and conditions of OTCEI as well as

the Bye-laws framed by OTCEI.

5. At the outset, it is relevant to note that there is some confusion in

the arguments advanced on behalf of the respective parties. According to

the appellant only provisional membership was granted but the same

could not be confirmed in the absence of registration of the appellant

with SEBI, whereas OTCEI on one hand claims that the appellant was 9

admitted as a member, and on the other hand in its letter dated

16.09.2003 OTCEI states that the appellant was admitted as a dealer and

the appellant continues to be a dealer. Counsel for OTCEI submitted

before us that the appellant was not admitted as a 'dealer' and the

statement made to that effect in the letter dated 16.09.2003 is an error on

part of OTCEI.

6. Basic argument of OTCEI is that the appellant could not be

appointed as a 'sponsor' because under the Bye-law framed by OTCEI,

only a Merchant Banker registered with SEBI can be appointed as a

sponsor. Admittedly, appellant is not registered with SEBI as Merchant

Banker and hence the appellant could not be appointed as a 'sponsor'. It

is the case of OTCEI that the appellant was admitted as a 'member' and

because the appellant failed to pay requisite fees, the application of the

appellant in Form 'A' was not forwarded to SEBI. It is further contended

by the counsel for OTCEI that as per the terms and conditions set out in

the letter dated 17.04.1995, appellant was to be appointed as a member

on payment of ` 21.50 lac (` 20 lac towards admission fees and ` 1.5 lac

towards annual fees for the period ending September 1995) and that the

admission fee of ` 20 lac was neither refundable nor the membership was

transferable. Therefore, having accepted the terms and conditions and

having paid the amount of ` 20 lac knowing fully well that the said

amount was not refundable, the appellant is not justified in seeking

refund of the said amount. Counsel for OTCEI further submitted that

grant of membership by OTCEI and registration as a member with SEBI

are two different processes and it is only after a person is appointed as a 10

member by OTCEI, registering that member with SEBI arises. In the

present case, the appellant by paying ` 20 lac became member of OTCEI

but failed to pay the requisite fees and therefore, the application for

registration in Form 'A' was not forwarded to SEBI. In these

circumstances, it is submitted that the appellant who after becoming a

member has failed to pay requisite annual fees and SEBI fees is not

justified in seeking refund of the non-refundable amount of ` 20 lac paid

towards admission fees.

7. We see no merit in the above contentions.

8. In the application filed on 27.10.1994, the appellant has

specifically sought 'sponsor membership' of OTCEI. Since the Bye-laws

of OTCEI provide that only a 'Merchant Banker' duly registered with

SEBI is entitled to be appointed as a 'sponsor' by OTCEI, it was stated in

the application that the appellant has applied to SEBI seeking registration

as a Merchant Banker Category I and the approval from SEBI is awaited.

Thus, it is crystal clear that the appellant had applied for being appointed

as a 'sponsor' by OTCEI.

9. However, OTCEI by its letter dated 17.04.1995 informed the

appellant that the Board of Directors of OTCEI have approved

appellant's appointment as a Member of OTCEI and that OTCEI expects

that the appellant as a member will sponsor and list a minimum of six

companies on the Exchange during the financial year. In the affidavit in

reply filed by OTCEI on 22.01.2015 it is stated in para 14, that the 11

appellant has failed to use the membership of OTCEI for sponsorship

activities for which registration with SEBI was not required.

10. Since the appellant had applied for 'sponsor' membership by

stating that it has applied for registration as Category 1 Merchant

Banking status from SEBI, OTCEI could either admit the appellant as a

'sponsor' or reject the application and refund the amount deposited by

the appellant. However, contrary to the application, OTCEI deemed it fit

to admit appellant as a 'member' subject to the conditions set out therein.

11. Assuming that the appellant by paying ` 20 lac had agreed to be a

'member', appellant could not appointed or admitted as a 'member',

because the appellant had failed to comply with the conditions set out in

the approval letter dated 17.04.1995. As per the letter dated 17.04.1995,

appellant could be admitted as a member of OTCEI only on payment of `

21.50 lac (` 20 lac towards onetime, non-refundable membership fees

and ` 1.5 lac towards annual membership fees, for the period ending

September 1995). Since the appellant failed to comply with that

condition, the appellant could not be admitted as a member of OTCEI.

12. Thus, the argument of OTCEI that on payment of ` 20 lac,

appellant stood admitted as a member is not correct, because, admittedly

appellant failed to pay ` 21.50 lac which was condition precedent for

being admitted as a member. Therefore, argument of OTCEI that the

appellant was admitted as a member of OTCEI and hence OTCEI was

not obliged to refund the amount of ` 20 lac cannot be accepted. 12

13. It is relevant to note that while paying ` 20 lac on 30.05.1995, the

appellant had specifically sought clarification from OTCEI as to whether

the appellant, in the absence of SEBI registration be able to act as

sponsor member and if so, whether the annual charges of ` 1.5 lac

demanded by OTCEI would commence from the date of registration with

SEBI. Instead of giving the clarification sought by the appellant, OTCEI

purported to appropriate ` 20 lac paid by the appellant which is wholly

unjustified.

14. In the facts of present case, since the appellant had failed to

comply with the conditions set out in the letter 17.04.1995, in the first

instance, OTCEI ought to have rejected the application of the appellant

and refunded the membership fees of ` 20 lac received from the

appellant. Alternatively, OTCEI could have furnished the clarification

sought by the appellant and call upon the appellant to comply with the

condition by paying ` 1.5 lac within such time as extended by OTCEI.

Without giving any clarification and without extending the time for

compliance of the conditions, OTCEI could not arbitrarily treat the

appellant to have been admitted as a member and appropriate ` 20 lac

paid towards the membership fee.

15. It is not the case of OTCEI, that as per their Bye-laws, on payment

of ` 20 lac, a person is deemed to be admitted as a member even if the

conditions for admission as member are not fully met with. There is

nothing on record to suggest that OTCEI had permitted the appellant to

carry on activities as a member even though the appellant had not

complied with the conditions imposed for being appointed as a member. 13

Very fact that OTCEI after receiving ` 20 lac from the appellant on

30.05.1995, addressed a letter after about 2 ½ years on 12.01.1998

demanding annual charges clearly shows that initially OTCEI had not

considered the appellant to have been appointed as a member and that

plea is raised belatedly with a view to avoid refund of the amount of ` 20

lac due to the appellant.

16. Argument of OTCEI that by treating the appellant to be a member

it had assigned Unique ID Number to the appellant and had shown the

name of the appellant as member in the unpublished membership list

maintained by OTCEI is without any merit because it is not known as to

the date on which Unique ID was assigned to the appellant. In any event

OTCEI could grant Unique ID only if the appellant complied with the

conditions imposed. Apart from the above, it is strange that OTCEI

deemed if fit not to interact with its deemed member (appellant) for years

together even after allegedly treating the appellant as member on receipt

of ` 20 lac on 30.05.1998 and deemed it fit to address a letter on

12.01.1998 for the first time demanding the annual fees for several years.

Thus, it is evident that OTCEI was only interested in saving ` 20 lac and

had not taken any steps to extract work from the appellant which

obviously goes to show that the appellant was not treated as a member.

17. As noted earlier, admission fee of ` 20 lac was not refundable only

when a person is admitted as a member. If a person fails to comply with

the conditions imposed for being admitted as a member, then that person

cannot be admitted as a member and in that case, the amount deposited 14

towards membership fee would have to be returned. Unless all conditions

were fulfilled, appellant could not said to have been admitted as a

member only on payment of ` 20 lac. Fact that OTCEI, though belatedly

has demanded annual fees from the appellant cannot be a ground to hold

that the appellant was admitted as a member, because in the absence of

fulfilling the preconditions, appellant could neither be treated as a

member nor annual charges be demanded from the appellant. It is

relevant to note that it was not a condition that in case of failure to

comply with the conditions, the amount of ` 20 lac would be forfeited.

The condition imposed was that ` 20 lac paid as admission fee is non-

refundable which obviously means that once admitted as a member, the

admission fee becomes non-refundable. Therefore, in the facts of present

case, since the appellant had not fulfilled the conditions, the appellant

could not be admitted as a member and consequently, OTCEI was liable

to refund the amount of ` 20 lac paid by the appellant.

18. For all the aforesaid reasons we hold that OTCEI is not justified in

contending that the appellant was admitted as a member of OTCEI and

therefore, ` 20 lac paid towards admission fee cannot be refunded to the

appellant. Since the appellant could not be admitted as a member on

account of failure to comply with the preconditions, the question of

expelling the appellant from the membership of OTCEI does not arise. In

this view of the matter, the order of OTCEI dated 13.08.2014 purporting

to expel the appellant as a member of OTCEI is quashed and set aside. 15

19. Although, the appellant has claimed interest on the said amount of

` 20 lac, we see no reason to grant interest on the said amount of ` 20 lac

because the appellant is also guilty of not approaching this Tribunal

within a reasonable time. Apart from the above, it would not be just and

proper to award interest on the amount of ` 20 lac from 1995 till date

because as on date OTCEI has become defunct.

20. In the result appeal succeeds. OTCEI is directed to refund the

amount of ` 20 lac within four weeks from today. If OTCEI fails to pay

` 20 lac to the appellant within four weeks from today, the appellant

would be entitled to recover the said amount of ` 20 lac with interest at

the rate of 15% per annum from today till payment.

21. Appeal is disposed of in the above terms with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C.K.G. Nair Member 10.05.2016 Prepared & Compared By: PK