Case: Securities &amp; Exchange Board Of India Vs. M/S.Prebon Yamane (I) Ltd

1 This Appeal assails the Judgment dated 17.8.2005 pronounced by the Securities Appellate Tribunal (hereinafterdirecting the Appellant as well as the National Stock Exchange (NSE for brevity) to continue to grant the Respondent theas was available to them before the NSE decided to permit segmental surrender of membership to its members. In response to the fee demanded by the Appellant, namely the Securities and Exchange Board of India (SEBI for short), the Respondent has paid, albeit under protest, the principal amount of Rs.4,37,20,256/- together with Rs.26,96,590/- being the interest accrued thereon. The factual matrix is that on 27.5.1994, Oracle Stocks and Shares Ltd. (hereinafterwas registered by the NSE as a Trading member in two segments, that is the Wholesale Debt Market (WDM) as well as in the Equity Market/Capital Market (EM/CM). Subsequently, on 14.1.1999, Oracle informed the NSE that it had entered into a 50:50 Joint Venture with Prebon Holdings B.V. (Prebon Group), namely Prebon Yamane (India) Ltd. (the Respondent), but restricted in respect to the WDM segment alone. NSE advised Oracle to bifurcate the WDM and the EM/CM segments whereupon Oracle forwarded a proposal in writing seeking the approval of NSE for the segregation of its Membership of WDM and of the EM/CM segments. By its letter dated 11.2.1999, NSE approved the proposal of Oracle for segregation but subject to certain conditions, inter alia, that if the trading member Oracle was desirous of surrendering its trading membership, both the entities viz. Oracle and the Respondent would have to surrender their respective memberships simultaneously. As is palpably apparent, NSE looked after its own financial interests by demanding Rs.10 Lacs as approval fee together with an interest free security of Rs.50 Lacs. Both entities were also required to maintain their shareholding pattern and comply with the net worth and all other requirements - Oracle in respect of corporate trading of the Capital Market and the Respondent in respect of the corporate trading in the WDM segment. The Respondent was also called upon to submit its shareholding pattern. It seems facially obvious to us that even the NSE was alive to the possibility of Oracle hiving off or transferring its WDM operations to the Respondent without complying with all the applicable Rules and Regulations. NSE maintained this position even later on, as is evident from a perusal of its letter to the Respondent positing that both memberships, though vesting in separate parties, were treated asIt is also relevant to underscore that the Appellant was not privy to these negotiations.2. We must hasten to add that shortly subsequent to these events, the Appellant by its letter dated 4.4.1999 to the Respondent had granted registration to itThe Appellant made its permission conditional inter alia, upon payment of fees for registration provided in the Securities and Exchange Board of India [Stock-Brokers and Sub-Brokers] Regulations, 1992, the salient parts of which we shall extract for ease of reference. However, the relevant terms contained in the letter dated 4.4.1999 are these -2 d) It shall pay the amount fees for registration in the manner provided in the Securities and Exchange Board of India [Stock Brokers and Sub Brokers] Regulations, 1992; and5. You are now, in terms of clause [d] of the conditions of grant of registration certificate, required to pay the fees in accordance with regulation 10[1] read with Schedule-III of the Securities and Exchange Board of India [Stock Brokers and Sub Brokers] Regulations, 1992 and remit the same through the stock exchange of which you are a member. All the stock exchange have been separately given necessary instructions in regard to collection of fees from the stock brokers and remittance thereof to the Board.3. In this continuum NSE, in its letter dated 30.1.2002, again conveyed to the Respondent that both the memberships, though vesting in different entities, wereThis reiterated stand of the NSE was submitted by the Respondent to the Appellant with a request to grant fee continuity benefit on the basis of the facts of the case. The Appellant has admitted that on receipt of this request from the Respondent, it recorded in its file notings that the two membership cards could be treated as composite and that the turnover of the two cards may be taken together for the purpose of turnover fees. It is not in dispute that till 2003 the Respondent had been availing of the benefits permissible under the fee continuity provisions. This position was also accepted by the Appellant, as both the membership cards were treated as composite andand the turnover of the two cards of Oracle and the Respondent were taken together on the predication that theWDM membership was a continuation of WDM segment ofmembership.4. On 18.9.2003, the Respondent applied to the NSE for membership in the Derivatives Segment which the NSE, as per procedure, forwarded to the Appellant for its approval. On 24.6.2004, the Appellant returned the application and issued a provisional fee liability statement disclosing that after making the necessary adjustments of the amount paid with respect to its membership in the WDM Segment, there were unpaid dues in the name of the Respondent to the tune of Rs.5,59,45,054 towards principal and interest. It was indicated that the application may be resubmitted only after payment of the outstanding fees. In its letter dated 23.8.2004 to the Respondent, NSE clarified that although segmental surrender of the trading membership was permissible since December, 2002, it had nevertheless to be kept in perspective that when the Respondent and Oracle had made the subject proposal in January, 1999, it was accepted on the condition thatAfter receiving the provisional fee liability statement which stated a fee liability of Rs.5,59,45,054, Respondent filed an Appeal on 8.11.2004 under Section 15T of the SEBI Act, 1992. This was contested by the Appellant before the Securities Appellate Tribunal (SAT), which observed that at the time that NSE had granted fee continuity to the Respondent, there was no provision for segmental surrender, as a result of which, subject to certain conditions, fee continuity was granted to Respondent despite it being a new entity. The SAT held that this letter did not have the effect of revocation or cancellation of the earlier conditions which were specifically imposed while granting assignment of WDM Segment from Oracle to the Respondent. Counsel for the Respondent brought to the notice of the SAT that the Respondent had already paid, albeit under protest pending disposal of the appeal, a sum of Rs.4,37,20,256 towards the principal amount of theclaim and a further sum of Rs.26,96,590 as interest. However, the SAT directed the Appellant to refund both the amounts to the Respondent. Hence, the present Appeal.

Reasoning:
13. After considering the submissions of the learned Senior Counsel for both parties and appreciating the facts of the case, it is evident to us that as per Clause 4 of Schedule III, the Respondent was not anas envisaged in the Regulations as would be entitled toor exemption from payment of fees. The Regulation 4 clearly refers to a newly formed entity through conversion from either a sole proprietorship or a partnership to a limited Company, which alone has been bestowed the benefit of continuity. Given that the Respondent is barred by the provisions, theinternal file notings are of no consequence and the Appellant is not estopped from coming to a contrary conclusion. Theargument that the Appellant experienced a change of heart after the issuance of the Circular dated 28.3.2002 is untenable, because if that was indeed what the Respondent believed, it would not have written a letter requesting fee continuity on 4.2.2002, a date prior to the issuance of the circular dated 28.3.2002. Thus, the Respondent has failed to prove that it believed it was granted fee continuity, in light of its letter to the Appellant requesting the same. Further, it appears to us that the Respondent was an entity quite distinct from Oracle, with the consequence that it would be bound to pay the fee in accordance with Schedule III, Clause (a) or (b) as the case may be, and would not be entitled to claim the advantage of Clause (c). In fact, this is the very understanding of the Respondent since fees were deposited by them under Clause (a) in sharp contradistinction of Clause (c).