Case: Premium Global Securities Pvt.Ltd Vs. Securities &amp; Exchange Board Of India&amp;Anr

2. Premium Capital Market & Investments Pvt. Ltd. was incorporated on 24.6.1992, which on 9.2.1994 changed its name to Premium Capital Market & Investments Ltd (hereinafter ‘PCMIL?, Appellant No. 3). On an application for Trading Membership of National Stock Exchange of India Ltd. (hereinafter ‘NSE?) in the Capital Markets Segment by PCMIL, vide letter dated 16.5.1994, NSE sent them an offer of membership subject to certain conditions enclosed in Annexure ‘A?. In its letter dated 4.10.1994 SEBI made observations on the Draft Prospectus for Public Offer submitted by PCMIL, including the conditions for NSE membership, namely that the company could not carry on any other activities apart from broking. Pursuant to this observation, the draft prospectus was amended with an undertaking that PCMIL would promote a new company to which it would transfer the NSE membership. Thereafter on 16.12.1994, PCMIL was admitted to the membership of NSE and was registered as a stock broker with SEBI3. On 27.4.1995 SEBI reaffirming the applicability of Rule 8(1)(f) and 8(3)(f) of Securities Contract (Regulation) Rules, 1957 (hereinafter ‘1957 Rules?) to corporate members, via a letter directed all corporate members to ?sever connections with businesses other than securities business forthwith? and requested NSE to report on compliance. In order to comply with this direction, Premium Global Securities Ltd. (later Premium Global Securities Pvt. Ltd., hereinafter ‘PGSL?, Appellant No. 1) was incorporated on 16.5.1995 for taking over the membership card of PCMIL. On 30.9.1995 PCMIL ceased all its fund-based activities. On 8.8.1996 NSE was informed about the formation of PGSL and an application was made for transfer of NSE membership from PCMIL to PGSL. On 14.3.2000 NSE issued a show-cause notice to PCMIL under Rule 8(1)(f) and (3)(f) of the 1957 Rules in pursuance of a complaint that PCMIL was not allowed to engage in any business other than that of securities. To this PCMIL replied that PCMIL had not transacted any other business and that the last leasing transaction was carried out in September 1995 and that PCMIL was only receiving lease amounts4. Thereafter on 4.4.2000 a fresh application was made for transfer of membership to PGSL and the NSE approved the aforesaid application on 12.4.2000 without any transfer fees. Steps for registration with SEBI were initiated and PGSL was issued the Registration Certificate on 20.9.2000. Meanwhile PCMIL received a letter from the NSE Disciplinary Committee dated 7.6.2000 directing PCMIL to cease all business in the nature of fund-based activities and to initiate steps to segregate it within two months. Alternatively the Committee also advised that PCMIL could set up a separate subsidiary to take up the broking activity5. On 30.9.2002 SEBI issued a Circular on Fee Continuity benefits. The relevant portions of the Circular read as follows:TRANSFER OF MEMBERSHIP TO 100% SUBSIDIARY, GROUP COMPANY, HOLDING COMPANY, ETCWhere brokers are forced by compulsion of law to transfer their membership to:-i. 100% subsidiary company orii. Group company oriii. holding company they shall not be required to pay fees afresh. In such cases, the Exchange would have to enumerate the circumstances under law resulting in the said transfer to 100% subsidiary/group/holding company for consideration by SEBIFor this purpose,A company would be classified as a group company of another company, if the controlling persons/entities in both the companies are same i.e. such persons/entities hold atleast 51% of the paid-up capital (40% in case of listed company) in both the companiesA Company would be classified as a holding company of the trading member corporate, if its shareholding in the member corporate was above 51%6. In response to the request for turnover details by NSE, PGSL vide letter dated 12.3.2003 elucidated that there had been a transfer of membership due to compulsion of law and as per SEBI circular dated 27.9.2002, such transfer to group company would not attract any fresh payment of registration fees. SEBI however, refused to grant PGSL the fee continuity benefits sought. On 4.12.2003 PGSL submitted another detailed representation to SEBI seeking grant of fee continuity. However no response was received from SEBI. Meanwhile on 15.7.2004, SEBI (Interest Liability Regularisation) Scheme 2004 came into force. The Scheme envisaged a waiver of 80% outstanding interest if the broker paid the outstanding principal along with 20% outstanding interest during a specified period. SEBI issued a Provisional Fee Liability Statement demanding payment of fees and NSE along with its cover letter sent it to PGSL and PGSL filed an appeal before the SAT7. The primary issue before SAT was whether the Appellants were under any compulsion of law to transfer their brokerage business to a subsidiary. SAT ruled in favour of SEBI stating that since the Appellants were subject to the bar in Rule 8(1)(f) they were therefore required to sever themselves from their fund-based activities to keep in line with the provision. As a natural corollary thereof, SAT stated that although there was a compulsion of law on the Appellants, it did not extend to the extent that they were compelled to sever their brokerage business and transfer it to their subsidiary as they have in the present scenario; rather the Appellants could have severed their non-brokerage businesses, either give it up in entirety or transfer it to a subsidiary. The Appellants have assailed this common judgment of the SAT.

Reasoning:
13. We find merit in the arguments furnished by the Appellants. In our opinion, the restriction imposed was to not have fund-based and trading activities together under one roof. Thus any action taken by the Appellants to comply with restriction of not participating in both the activities simultaneously would be under compulsion of law. The Respondents would have us say that only one line of action was compulsion of law but that would have the effect of adding ‘process? to compulsion of law. The compulsion of law under the 1957 Rules is directed towards the desired end and not concerned with the means, and it would be wrong for us to ascribe otherwise14. We thus set aside the impugned Judgment of SAT and direct that the Appellants be given the benefit of fee continuity15. The original trading membership of the NSE had been obtained by Onida Finance Ltd. on 16.9.1994 but when the NSE raised objections about its fund-based activities, the license was transferred to OFL Securities Ltd. on 7.2.1995. Thereafter in 1999-2000, OFL Securities Ltd. transferred its trading license to Gulita Securities Ltd. (Appellant No. 1). Thus the trading membership was transferred twice but only the first transfer was under compulsion of law. Therefore, we find neither any merit in the Appeal nor any infirmity in the order of the SAT with regard to the Appellants in C.A. No.2310 of 2007.