GPSK CAPITAL PRIVATE LIMITED (FORMERLY KNOWN AS MANTRI FINANCE LIMITED) versus THE SECURITIES AND EXCHANGE BOARD OF INDIA on 20 March 2023

1. The instant appeal has been filed under Section 15(Z) of theESecurities and Exchange Board of India Act, 1992(hereinafter beingreferred to as the “Act 1992”) assailing the judgment and order dated9[th] August, 2007 passed by the Securities Appellate Tribunal(hereinafterbeing referred to as the “Tribunal”) affirming the order of the Securitiesand Exchange Board of India, Mumbai(hereinafter being referred to asFthe “Board”) dated 7[th] May, 2007 holding that the appellant did not satisfythe conditions of clause (4) of Schedule III of the Securities and ExchangeBoard of India(Stock Brokers and Sub-Brokers) Regulations,1992(hereinafter being referred to as the “Regulations”) hence theexemption from payment of fees for the period for which the erstwhileindividual Srikant Mantri has paid to the Board cannot be converted toGthe corporate entity MFL.

2. The brief facts of the case culled out are that one Srikant Mantribecame a member of the Calcutta Stock Exchange (hereinafter beingreferred to as the “CSE”) and was granted registration as a stock brokeron 30[th] November, 1992. Sometime in the year 1997, he decided toH

transfer his membership card of CSE in favour of Mantri Finance Ltd.-the appellant herein (hereinafter being referred to as the “Company”).It is not in dispute that the company was registered with the Registrar ofCompanies, Calcutta on 27[th] December, 1998 under the name and styleof Ushagram Properties and Finance Ltd. Later, it changed its name toMantri Finance Ltd. on 13[th] November, 1992. The Company had startedthe business of stock broking in 1995 and became a member of NSEand thereafter sought registration with the Board as a stock broker andobtained membership of NSE as a stock broker on 17[th] October, 1995.Thereafter, when the membership card of Srikant Mantri was transferredin the name of the Company, the latter became a member of CSE andwas registered as a stock broker of CSE on 1[st] April, 1998.

3. After obtaining the membership of CSE on transfer of the cardfrom Srikant Mantri, the appellant Company claimed that it should beexempted from payment of registration fee for the period for whichSrikant Mantri had already paid the fees. In other words, it claimed thebenefit of exemption of the fee already paid by Srikant Mantri. At thesame time, also claimed that all the conditions prescribed under para 4of Schedule III to the Regulations were satisfied and, therefore, it wasentitled to claim exemption.

4. The claim of the Company was rejected by the Board by itsOrder dated 7[th] May, 2007 holding that Srikant Mantri was only a Directorin the Company during the three years period after the transfer of hismembership and since he was not the whole time Director, the conditionsprescribed under para 4 of Schedule III are not satisfied and accordingly,was not entitled to claim exemption as prayed for by the appellant.

5. The appellant Company filed appeal against order of the Boarddated 7[th] May, 2007 before the Tribunal on following two issues:-

(i) Whether the stock broker requires multiple registrations tooperate on more than one stock exchange(s) or a singleregistration will suffice for all the stock exchanges.

(ii) Whether the appellant Company is entitled to fee continuitybenefits provided under para 4 of Schedule III.

6. In regard to issue no. (i), the learned Tribunal held that thesingle registration with the Board is sufficient even if the stock brokerhas multiple memberships and functions from several stock exchanges AB

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Aand therefore, will have to pay the fee for initial registration with theBoard and set aside the impugned order and remitted the matter to theBoard for a fresh computation of the registration fee payable by theCompany on the basis of its registration with effect from 17[th] October,1995.B7. So far as issue no. (ii) is concerned, learned Tribunal held thatthe appellant Company has failed to satisfy the conditions of clause (4)of Schedule III to the Regulations and was not eligible to claim exemptionfrom payment of fee over the period for which the erstwhile individualSrikant Mantri has paid the fees.

C8. Hence, appeals have been preferred by the appellant Companyas well as by the Board against the self-same impugned judgment of theTribunal dated 9[th] August, 2007.

9. The main thrust of submissions advanced by learned counselfor the appellant is that Srikant Mantri, in the first instance, was the soleDproprietor of the firm M/s. Govind Prasad Shrikant & Co. which wasregistered with the Board since 30[th] January, 1992. Under Para 4 toSchedule III, it applies for conversion of membership to a corporateentity and membership of the old entity, i.e., M/s. Govind Prasad Shrikant& Co. (SEBI Registration No. INB030054715) was converted into acorporate entity w.e.f. 1[st] April, 1998. Accordingly, the appellant fulfilsEthe pre-conditions as indicated in para 4 of Schedule III annexed to theRegulations and this is the apparent error which has been committed bythe Board in the first instance and the factual matrix has not beenappreciated by the Tribunal as well.

10. Learned counsel further submits that para 4 was added toFSchedule III pursuant to Board’s policy to corporatize individual stockbrokers, and to institutionalize the stock broking activity and furthersubmits that the interpretation ought to be in consonance with the intentand purport of the policy to which para 4 was added to Schedule III.

11. Learned counsel further submits that in the case of conversion,Gthe individual registration has been converted into a corporate registrationand, therefore, the exemption for the payment of fees is available andfurther submits that para 4 to Schedule III does not contemplate tworegistrations. The Explanation to para 4, by a deeming fiction, mandatesa continuity from the erstwhile membership to the converted membershipqua the payment of fees and further submits that the law, therefore,H

mandates that in a case of conversion, no fresh fee will be collectedfrom the converted corporate entity. In the facts and circumstances, thefinding returned by the Tribunal needs to be interfered with by this Court.

12. Per contra, learned counsel for the respondent, while supportingthe finding returned by the Board and affirmed by the Tribunal submitsthat the material which has come on record has been appreciated at twostages by the Board as well as by the Tribunal. It remains uncontrovertedthat Srikant Mantri transferred his membership card of CSE to theappellant Company and he was not a whole time Director therein butonly a Director and the corporate entity is entitled to claim exemptionfrom the payment of registration fee only if the individual or partnershipmembership had been converted into a corporate entity. However, in theinstant case, Srikant Mantri did not convert himself into a corporateentity, instead transferred his membership card of CSE to an existingcompany and became a Director therein.

13. Accordingly, it has rightly been held by the Board and confirmedby the Tribunal in the order impugned holding that the appellant was notentitled to claim exemption invoking Para 4 of Schedule III to theRegulations and no evidence has been placed by the appellant on recordeven in rebuttal before this Court. In the given circumstances, thereappears no reason or justification to disturb the concurrent finding offact in the appeal filed at the instance of the appellant Company.

14. We have heard learned counsel for the parties and with theirassistance perused the material available on record.

15. So far as issue no. (i) in reference to stock broker whichrequires multiple registrations to operate on more than one stockexchange(s) or a single registration will suffice for all the stock exchangesis concerned, it has been decided by this Court in Securities andExchange Board of India Vs. National Stock Exchange MembersAssociation and Another[1] and remains no more res integra in view ofthe judgment of this Court wherein it has been held as under:-

“47. Thus, in our considered view, the conjoint reading of theexpression “a certificate” as referred to in Section 12(1) of theAct read with the scheme of Rules, 1992 and Regulations 1992,leads to an inevitable conclusion that the stock broker not only A

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Ahas to obtain a certificate of registration from SEBI for each ofthe stock exchange where he operates, at the same time, has topay ad valorem fee prescribed in terms of Part III annexed toRegulation 10 of the Regulations, 1992 in reference to eachcertificate of registration from SEBI in terms of the computationprescribed under Circular dated 28[th] March, 2002 and fee is to beBpaid as a guiding principle by the stock broker which is inconformity with the scheme of Regulations 1992.”

16. The issue involved in the instant appeal confines as to whetherthe appellant Company is entitled to fee continuity benefits under Para 4of Schedule III of the Regulations 1992.C17. To examine the said issue no. (ii), it will be apposite to firsttake note of para 4 of Schedule III of Regulations, 1992 which is asfollows:- “Where a corporate entity has been formed by converting suchDindividual or partnership membership card of the exchange, suchcorporate entity shall be exempted from payment of fee for theperiod for which the erstwhile individual or partnership member,as the case may be, has already paid the fees subject to thecondition that the erstwhile individual or partner shall be the wholetime director of the corporate member so converted and suchEdirector will continue to hold minimum 40 per cent shares of thepaid up equity capital of the corporate entity for a person of atleast three years from the date of such conversion.

Explanation- It is clarified that the conversion of individual orpartnership membership card of the exchange into corporate entityFshall be deemed to be in continuation of the old entity and no feeshall be collected again from the converted entity for the periodfor which the erstwhile entity has paid the fee as per theregulations.”

18. The Board, in the first instance, after appraisal of the evidenceGplaced on record under its Order dated 7[th] May, 2007, and taking intoconsideration para 4 of Schedule III of the Regulations, 1992 returnedits finding as follows:- “3.11 Exemption from payment of fees confers a benefit to thecorporate entity. For granting such benefit, the conditions subjectHto which such benefit is available need to be established beyond GPSK CAPITAL PVT. LTD. (FORMERLY KNOWN AS MANTRI FIN. LTD.) v.THE SECURITIES AND EXCHANGE BOARD OF INDIA [AJAY RASTOGI, J.]

doubt. From the true copy of Annual Returns for the relevantperiod provided by MFL, it appears that Shri Shrikant Mantri wasa director, but, not a whole time director during the relevant period.This fact has also been established from the copy retrieved fromROC’s office in respect of AGM dates April 28, 1997 and May19, 1999. MFL was granted registration after the issue ofnotification dated January 21, 1998 i.e. after the conditions subjectto which exemption can be granted to a converted corporate entitywere in place. It is clear from the above that MFL did not satisfyat least one of the conditions of clause I (4) of Schedule III of theRegulations. Hence, MFL cannot become eligible for exemptionfrom payment of fees for the period for which the erstwhileindividual Shri Shrikant Mantri has already paid the fees.”

19. On appeal being preferred by the appellant Company, theBoard, on reappreciating the evidence on record confirmed the findingunder its Order impugned dated 9[th] August, 2007 as follows:-

“…. The Board adopted a policy to encourage the brokers tocorporatize themselves so that their working becomes moretransparent as corporate entities have more and better regulatorycontrols as compared to individuals and partnerships. With thisobject in view, the Board introduced paragraph 4 in Schedule IIIto the Regulations with effect from 21.1.1998 and it decided togive the benefit of the fee already paid by the individual orpartnership prior to its becoming a corporate entity. In the casebefore us the Board has found that when Srikant Mantri transferredhis membership card of CSE to the company, he was not a wholetime director therein but was only a director. This fact is beingdisputed by the appellant before us. It is not necessary for us torecord a finding in this regard because we are of the view that thecompany is not entitled to the benefit under paragraph 4 of theSchedule because there is no continuity. As already noticed, thecorporate entity is not entitled to claim exemption from the paymentof registration fee only if the individual or partnership had beenconverted into a corporate entity. In the instant case, Srikant Mantridid not convert himself into a corporate entity but instead,transferred his membership card of CSE to an existing companyand became a director therein. The Regulations do not providefor exemption in such cases. The company before us was an A

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Aexisting company and therefore, when it became a member ofCSE on the transfer to membership card from Srikant Mantri itcould not claim the benefit under paragraph 4. It could claim sucha benefit only if Srikant Mantri had formed himself into a companyand continued his broking business. Since that was not the case,we are clearly of the view that the company could not claim theBbenefit of paragraph 4. In this view of the matter, we have nohesitation in upholding the order passed by the Board rejectingthe claim of the appellant.”

20. It remains uncontroverted that when Srikant Mantri transferredhis membership card of CSE to the Company, he was not a whole timeCDirector but was only a Director. Neither CSE nor its internal auditors,were clear of the exact date on which Srikant Mantri had acquired 40%shareholding in the appellant Company. At the same time, it was informedby the Board to the CSE vide letter dated 18[th] March, 1998 that SrikantMantri was holding less than 40% of the paid-up capital of the corporateDentity. It was also recorded by the Tribunal that from the true copies ofannual returns provided by the appellant Company, it was revealed thatthe details of the Directors provided by them nowhere indicate SrikantMantri as a whole time Director for any of the relevant years. Thedesignation of Srikant Mantri has been indicated as “Director” in all therelevant years’ Annual Return. It was also established from the copyEretrieved from ROC’s office in respect of AGM dated 28[th] April, 1997and 19[th] May, 1999.

21. At the same time, appellant Company was granted registrationafter para 4 was put in place by notification dated 21[st] January, 1998 andthe appellant Company failed to satisfy that it fulfilled the conditions ofFpara 4 to Schedule III pursuant to which the appellant has claimed hisentitlement of fee continuity benefits.

22. After going through the material on record, we are satisfiedthat the appellant Company failed to fulfil the conditions as referred tounder Para 4 of Schedule III appended to the Regulations of which aGreference has been made.

23. Consequently, the appeal is without any substance andaccordingly dismissed. No costs.

24. Pending application(s), if any, shall stand disposed of.

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GPSK CAPITAL PVT. LTD. (FORMERLY KNOWN AS MANTRI FIN. LTD.) v.THE SECURITIES AND EXCHANGE BOARD OF INDIA [AJAY RASTOGI, J.]

Civil Appeal No. 5636 of 2007

25. This appeal is preferred by the Board against the self-sameimpugned judgment dated 9[th] August, 2007 as in Civil Appeal No. 2402of 2008. Hence, the facts need not be reiterated for the purpose ofinstant appeal.

26. The appeal filed by the Board deserves to succeed as thequestion remains no more res integra in view of judgment of this Courtin Securities and Exchange Board of India Vs. National StockExchange Members Association and Another (supra).

27. Consequently, the appeal succeeds and is allowed.

28. Pending application(s), if any, shall stand disposed of.

Nidhi Jain

Appeals disposed of.

(Assisted by : Shashwat Jain, LCRA)

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