Supreme Court: Fees Paid by Director Not Entitled to Exemption under Clause 4 of Schedule III of SEBI Stock Broker Regulations

Supreme Court: Fees Paid by Director Not Entitled to Exemption under Clause 4 of Schedule III of SEBI Stock Broker Regulations

The Supreme Court by its division bench of Justices Ajay Rastogi and Bela M. Trivedi upheld the order passed by the Securities Exchange Board of India (SEBI) to not to grant exemption to a corporate entity from payment of fees under Clause 4 of Schedule III of SEBI (Stock-Brokers and Sub-Brokers) Regulations 1992, since it was the Director and not the Whole Time Director who transferred stock exchange registration to the corporate entity and paid the registration fees. No exemption can be claimed on the ground that Director had already paid the fees.

The brief facts of the case culled out were that- Srikant Mantri became a member of the Calcutta Stock Exchange (hereinafter being referred to as the “CSE”) and was granted registration as a stock broker on 30th November, 1992.

In the year 1997, he decided to transfer his membership card of CSE in favor of Mantri Finance Ltd. The appellant- Gpsk Capital Private Limited (formerly known as Mantri Finance Limited) (hereinafter being referred to as the “Company”).

The company was registered with the Registrar of Companies, Calcutta on 27th December, 1998 under the name and style of Ushagram Properties and Finance Ltd. Later, it changed its name to Mantri Finance Ltd. on 13th November, 1992. The Company had started the business of stock broking in 1995 and became a member of NSE and thereafter sought registration with the Board as a stock broker and obtained membership of NSE as a stock broker on 17th October, 1995.

Thereafter, when the membership card of Srikant Mantri was transferred in the name of the Company, the latter became a member of CSE and was registered as a stock broker of CSE on 1st April, 1998.

After obtaining the membership of CSE on transfer of the card from Srikant Mantri, the appellant Company claimed that it should be exempted from payment of registration fee for the period for which Srikant Mantri had already paid the fees. In other words, it the benefit of exemption of the fee already paid by Srikant Mantri. At the same time, also claimed that all the conditions prescribed under para 4 of Schedule III to the Regulations were satisfied and, therefore, it was entitled to claim exemption.

Subsequently, the claim of the Company was rejected by the SEBI by its Order dated 7th May, 2007 holding that Srikant Mantri was only a Director in the Company during the three years period after the transfer of his membership and since he was not the whole time Director, the conditions prescribed under para 4 of Schedule III are not satisfied and accordingly, was not entitled to claim exemption as prayed for by the appellant.

Hence, appeals were preferred by the appellant Company as well as by the Board against the self­same impugned judgment of the Tribunal dated 9th August, 2007.

With respect to the issue of whether a stock broker requires multiple registrations from SEBI to operate on more than one stock exchange(s) or a single registration will suffice, the Apex Court referred the judgment in the case of Securities and Exchange Board of India vs. National Stock Exchange Members Association and Anr., 2022 wherein it has been held that-

“In our considered view, the conjoint reading of the expression ‘a certificate’ as referred to in Section 12(1) of the Act read with the scheme of Rules, 1992 and Regulations 1992, leads to an inevitable conclusion that the stock broker not only has to obtain a certificate of registration from SEBI for each of the stock exchange where he operates, at the same time, has to pay ad valorem fee prescribed in terms of Part III annexed to Regulation 10 of the Regulations, 1992 in reference to each certificate of registration from SEBI in terms of the computation prescribed under Circular dated 28th March, 2002 and fee is to be paid as a guiding principle by the stock broker which is in conformity with the scheme of Regulations 1992.”

Thus, the Apex Court reiterated that a separate Registration Certificate must be obtained from SEBI for each stock exchange where the stock broker operates.

With respect to the second issue, whether the Appellant Company is entitled to fee continuity benefits under Clause 4 of Schedule III of the Regulations 1992. It was observed that Mr. Mantri was a Director and not a Whole Time Director of the Appellant Company when he transferred his CSE membership to the Appellant Company.

Moreover, the Apex Court concurred with SEBI’s contention that a corporate entity is entitled to claim exemption from the payment of registration fee only if the individual or partnership membership had been converted into a corporate entity. However, Mr. Mantri did not convert himself into a corporate entity, instead transferred his membership card of CSE to an existing company and became a Director therein.

After going through the material on record, the Apex Court was satisfied that the appellant Company had failed to fulfil the conditions as referred to under Para 4 of Schedule III appended to the Regulations of which a reference was made.

Consequently, the bench noted that appeal was without any substance and accordingly dismissed.