Fees Paid By Director Does Not Attract Exemption Under Clause 4 Of Schedule III Of SEBI Stock Broker Regulations: Supreme Court

The Supreme Court has upheld SEBI’s decision 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 Bench comprising of Justice Ajay Rastogi and Justice Bela M. Trivedi, while adjudicating an appeal filed in GPSK Capital Private Limited (formerly Mantri Finance Limited) v The Securities and Exchange Board of India, has further reiterated that a separate Registration Certificate must be obtained from SEBI for each stock exchange where the stock broker operates.

BACKGROUND FACTS

Mr. Srikant Mantri was a member of the Calcutta Stock Exchange (“CSE”) and registered as a stock broker since 1992. He was the Director of Mantri Finance Ltd., now known as GPSK Capital Pvt. Ltd. (“Appellant Company”). The Appellant Company was earlier registered with National Stock Exchange (“NSE”). In 1997, Mr. Mantri transferred his CSE membership to the Appellant Company and the latter got registered as a stock broker on 01.04.1998.

In the meanwhile, Clause 4 was incorporated in Schedule III of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 on 21.01.1998. This provision exempted a corporate entity from payment of fees, if it has been formed by converting the individual or partnership membership card of the exchange and such erstwhile individual or partnership member has already paid the fees. However, the erstwhile individual or partner shall be the whole-time director of the corporate member so converted and such director will continue to hold a minimum of 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.

The Appellant Company sought the benefit of Clause 4 of Schedule III of the Regulations 1992 and claimed exemption from payment of fees on the ground that its Director, Mr. Mantri, had already paid the fees.

The claim of the Appellant Company was rejected by SEBI while holding that Mr. Mantri was only a Director and not a whole time Director in the Company during the three years period after the transfer of his membership. Therefore, the conditions prescribed under Clause 4 of Schedule III were not satisfied and no exemption could be given.

The SEBI order was challenged before the Appellate Tribunal and twin issues were framed, (i) Whether the stock broker requires single or multiple registrations to operate on more than one stock exchange(s); and (ii)Whether the Appellant Company is entitled to fee continuity benefits provided under Clause 4 of Schedule III.

The SEBI Appellate Tribunal held that a single registration with SEBI is sufficient even if the stock broker has multiple memberships and functions from several stock exchanges. Therefore, the stock broker will have to pay the fee for initial registration with SEBI. Further, the Appellant Company was not entitled to exemption of fees since Mr. Mantri was merely a Director and not a whole time Director and hence the conditions under Clause (4) of Schedule III to the Regulations 1992 were not satisfied.

The Appellant Company preferred an appeal before the Supreme Court against the Appellate Tribunal’s order.

SUPREME COURT VERDICT

Separate Registration Certificate from SEBI for each stock exchange the broker is operating in

On 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 Bench placed reliance on the judgment in Securities and Exchange Board of India v National Stock Exchange Members Association and Anr., 2022 SCC Online SC 1392, wherein it has been held that:

“47. Thus, 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, it has been reiterated that a separate Registration Certificate must be obtained from SEBI for each stock exchange where the stock broker operates.

No exemption of fees under Clause 4 of Schedule III if registration transferred by Director rather than Whole Time Director

The Bench opined that the issue at hand is 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.

The Bench found substance in 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.

Further, neither CSE nor its internal auditors, were clear of the exact date on which Mr. Mantri acquired 40% shareholding in the Appellant Company. Even SEBI had informed CSE on 18.03.1998 that Mr. Mantri was holding less than 40% of the paid­up capital of the corporate entity.

The Bench stood satisfied that the Appellant Company failed to fulfil the conditions as referred to under Clause 4 of Schedule III of the Regulations, 1992 and thus no exemption could be granted. The appeal has been dismissed.

Case Title: GPSK Capital Private Limited (Formerly Known as Mantri Finance Limited) v The Securities and Exchange Board Of India.

Citation: 2023 LiveLaw (SC) 222

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