Case: Vse Stock Services Ltd Vs. S.E.B.I.

was carried out as a result of compulsion of law. Before considering the submissions on behalf of appellant in this regard, the relevant legal position may be concluded by pointing out that many of the clarifications including clause 7 have not been incorporated as a part of the Regulations inspite of subsequent amendments in the Regulations. Nonetheless for lack of any issue on this point, the policy decision granting benefit by the circular dated 30.09.2002 is being relied upon as valid and operative during the relevant period. Another circular dated July 09, 2003 was issued to clarify what kind of changes in the status and constitution of the stock brokers shall have to be submitted to obtain prior approval of the SEBI under Rule 4(c) of the Rules. On and from 09.07.2003 prior approval is required, inter-alia, in respect of consolidation/ merger/ amalgamation of brokers and the ‘remarks’ column shows that full fees along with interest as on the date of application for approval is required to be paid. According to appellant this circular of July 09, 2003 being later in time does not apply to the case at hand. 8. On the question as to what is the compulsion of law for amalgamation of the appellant as a transferee company with the earlier subsidiary company, learned counsel for the appellant has contended that in absence of registration from the SEBI, the appellant like any other entity is prevented by law to carry on its business as a broker and to acquire the registration it had to ensure that in place of two subsidiary companies only one should exist otherwise the Vadodara Stock Exchange Ltd. could not get the benefit of membership of one of the major Exchanges, i.e., NSE. Hence the condition imposed by the SEBI to have only one subsidiary for the purpose amounts to compulsion of law which led to the scheme of amalgamation. The other contention is that the scheme of amalgamation in which appellant is the transferee company has been approved by the Gujarat High Court and hence the benefits flowing from such scheme must be respected by all concerned including the SEBI. As per submissions, the earlier fees paid by the transferor company to SEBI for registration are now an asset with the appellant company and such asset must be respected. The learned counsel for the appellant realised some difficulties on account of law laid down by this Court in the case of Ratnabali Capital Markets Ltd. v. Securities & Exchange Board of India (2008) 1 SCC 439 and hence he sought to distinguish that judgment by pointing out that in paragraph 11 of that judgment the Court noticed that the merger was with a view to have the benefit of enlarged business by entering the derivative markets. In the present case, according to him no such reason exists and the amalgamation was carried out only on account of compulsion explained above. According to learned counsel for the appellant for accepting a compulsion as one of law, the term ‘law’ needs to be given a liberal interpretation so as to include orders and directions of a statutory authority such as the SEBI.9. On behalf of the SEBI, reliance has been placed upon relevant dates and facts emanating from appellant’s letters to contend that the amalgamation was for voluntary reasons to access larger business through membership of NSE; there was no compulsion of law and order under appeal requires no interference.10. We find that the facts of the case have been properly appreciated by SAT for coming to the conclusion that the amalgamation was not on account of any compulsion of law. The compulsion of the appellant was a business compulsion to do business as a broker with NSE. Initially the Vadodara Stock Exchange Ltd. had chosen to form another subsidiary company limited by guarantee ignoring the circular of the SEBI dated 16.12.1999 and also the bye rules of NSE laying down conditions for membership but later it decided to have a subsidiary company which could get registration as a broker with NSE. Such decision was effected through amalgamation. Such a situation cannot be treated as a compulsion of law for amalgamation.11. Even if we accept the submission that the compulsion of law be given a liberal meaning so as to include orders and directions of the SEBI, in the present case it is not possible to accept that amalgamation was forced upon the appellant under orders or directions of the SEBI. Only because the appellant and the parent company Vadodara Stock Exchange Ltd. subsequently decided and opted to do business as a broker with NSE, they chose the path of amalgamation. They could have as well chosen the path of winding up of the earlier subsidiary company. In the facts of the case it is not possible to accept that there was any compulsion of law for the merger/ amalgamation of the VSE Securities Ltd. with the appellant.12. So far as legal position is concerned, in the case of Ratnabali Capital Markets the contention that the assets and liabilities of the transferor company have passed into the hands of the transferee company did not cut any ice in respect of fees payable to the SEBI as per Regulations. In para 13 of that judgment it was held that on merger of the two companies, a new entity emerged which was given a right to operate in the derivative segment and therefore it had to pay fresh registration fees on the turnover basis. We find no good ground to take a different view. In paragraph 19 of that judgment this Court clarified that when the facts disclose that amalgamation/ merger had to be resorted to as an alternative to liquidation then it may be successfully urged that merger/amalgamation was on account of compulsion of law so as to attract the exemption assured by the SEBI under the circular dated 30.09.2002. The facts of this case even remotely do not suggest any such or similar situation.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]3. In view of stand of the SEBI and clearly because the appellant wanted to operate on NSE, steps were taken to get the earlier subsidiary company – VSE Securities Ltd. amalgamated with the appellant. The High Court was moved and on completion of necessary formalities, amalgamation order was passed by the Gujarat High Court on 17.3.2003. Under the above scheme of amalgamation the appellant became a transferee company entitled to the assets and liabilities of the transferor company. Post amalgamation, the appellant obtained fresh registration from the SEBI in respect of its operation on BSE in the month of October 2003. On 30.04.2004, the SEBI granted registration for business on NSE on the usual conditions including payment of fees in the manner provided in the Regulations, particularly Regulation 10(1) read with Schedule III of the Regulations. The appellant paid the provisional fee liability but the demand of final fee by the SEBI was challenged before SAT on the ground that the appellant is entitled to fee continuity benefit in terms of circular of the SEBI dated 30.09.2002. The claim of the appellant, as noticed earlier, was rejected by SAT by the order under appeal.We find that the facts of the case have been properly appreciated by SAT for coming to the conclusion that the amalgamation was not on account of any compulsion of law. The compulsion of the appellant was a business compulsion to do business as a broker with NSE. Initially the Vadodara Stock Exchange Ltd. had chosen to form another subsidiary company limited by guarantee ignoring the circular of the SEBI dated 16.12.1999 and also the bye rules of NSE laying down conditions for membership but later it decided to have a subsidiary company which could get registration as a broker with NSE. Such decision was effected through amalgamation. Such a situation cannot be treated as a compulsion of law for amalgamation.11. Even if we accept the submission that the compulsion of law be given a liberal meaning so as to include orders and directions of the SEBI, in the present case it is not possible to accept that amalgamation was forced upon the appellant under orders or directions of the SEBI. Only because the appellant and the parent company Vadodara Stock Exchange Ltd. subsequently decided and opted to do business as a broker with NSE, they chose the path of amalgamation. They could have as well chosen the path of winding up of the earlier subsidiary company. In the facts of the case it is not possible to accept that there was any compulsion of law for the merger/ amalgamation of the VSE Securities Ltd. with the appellant.12. So far as legal position is concerned, in the case of Ratnabali Capital Markets the contention that the assets and liabilities of the transferor company have passed into the hands of the transferee company did not cut any ice in respect of fees payable to the SEBI as per Regulations. In para 13 of that judgment it was held that on merger of the two companies, a new entity emerged which was given a right to operate in the derivative segment and therefore it had to pay fresh registration fees on the turnover basis. We find no good ground to take a different view. In paragraph 19 of that judgment this Court clarified that when the facts disclose that amalgamation/ merger had to be resorted to as an alternative to liquidation then it may be successfully urged that merger/amalgamation was on account of compulsion of law so as to attract the exemption assured by the SEBI under the circular dated 30.09.2002. The facts of this case even remotely do not suggest any such or similar situation.