watchoutinvestors.com

IN THE SECURITIES APPELLATE TRIBUNAL MUMBAI

Appeal No.338/2004

2. Heard the counsels from both sides. The fact of the case is that one Sharyans Resources Limited obtained Wholesale Debt Market (WDM) segment membership from NSE in 1993-94. Thereafter, it also obtained membership of NSE in the Capital Markets/Equity Market segment(CM/EM). In May 1994 these membership of both WDM and CM/EM segments were allowed to be transferred to M/s. Oracle Stocks and Shares Ltd., (Oracle). NSE had granted them the registration of both WDM and CM/EM segments. They were also issued a registration certificate by SEBI on May 27, 1994. In the year 1999 Oracle entered into a 50:50 Joint Venture with Prebon Holdings B.V. (Prebon Group) and the name of the joint venture entity was Prebon Yamane (

India

) Ltd., (Prebon). The proposed joint venture was only in respect of WDM segment. NSE advised Oracle to bifurcate the WDM and EM segments. Oracle recorded a proposal in writing seeking NSE’s approval for segregation of the Membership of WDM and CM/EM segments.

3. By its letter dated February 11, 1999 NSE informed Oracle that their proposal for segregation had been approved by NSE subject to the conditions, inter alia, that :

1. There shall be no change in the shareholding pattern of Oracle and Prebon without the prior approval of NSE .

2. Oracle continues to comply with the networth and other requirements as applicable to the corporate trading members of CM segment of NSE.

3. Prebon complies with the networth and other requirements as applicable to the corporate trading members of WDM segment of NSE.

4. Both these trading members submit undertaking and supporting Board resolutions that any request for surrender of the trading membership of NSE after effecting the above proposal will be entertained only after both Prebon and Oracle apply for the same simultaneously for both WDM and CM/EM segments.

4. Both the entities accepted these conditions and complied with all the formalities in order to implement the arrangement. By the said letter of 11/2/1999 NSE also advised Oracle that Prebon would have to obtain SEBI registration as a trading member of NSE. The registration was duly applied for and granted by SEBI in 1999.

5. The learned counsel for the appellant took us through the case history and pointed out that in all the correspondence of NSE with Prebon or Oracle, NSE had always articulated its treatment of both entities as one and the same in so far as it relates to membership obligations. NSE had all along held that WDM segment that was hived off to Prebon was treated as continuation of the WDM membership that was granted to Oracle. Hence, both the memberships of Oracle and Prebon, though vested with different entities, were declared to be “concomitant” by NSE. This stand of NSE was conveyed to the appellant by their letter dated January 30, 2002 which was submitted by the appellant to SEBI with a request to grant fee continuity benefit on the basis of the facts of the case. The respondent admitted that on receipt of this request from the appellant, it was approved in the file of SEBI by the appropriate authority that the two cards could be treated as composite and that the turnover of the two cards may be taken together for the purpose of turnover fees.

6. The appellants were enjoying the benefit of fee continuity and were paying fees as per the provisions of SEBI (Stock Broker and sub brokers) Regulations, 1992. Inspection carried out by SEBI did not also find anything wrong with it.

7. Upto 2003 the appellant has been paying fees on the basis of the benefit permissible for the fee continuity and this position was also accepted by SEBI as both the cards were treated as composite and the turnover of the two cards of Oracle and Prebon were taken together on the ground that Prebon’s WDM membership was a continuation of WDM segment of Oracle’s membership.

8. In 2003, Prebon applied to SEBI through NSE for registration as a trading member of the derivative segment of NSE which was forwarded by NSE to SEBI. In June 2004 SEBI responded to this application by returning the same to NSE with an observation that Prebon has a fee liability of Rs.5,59,45,054/- towards principal and interest after making the necessary adjustments of the amount paid. It was indicated that the application may be resubmitted only after payment of fees as mentioned above. This advice from SEBI to NSE was dated 24^th June, 2004. Subsequently, SEBI vide its letter dated August 27, 2004 enclosed a provisional fee liability statement which, upon its receipt, was promptly forwarded by NSE to Prebon. Being aggrieved by this demand notice or the provisional fee liability statement as it is called, from SEBI, the appellant has filed this appeal.

9. The learned counsel for the respondent in his written submission has submitted that there is no appealable order as contemplated under section 15T of the SEBI Act, 1992. Section 15T(1) of SEBI Act reads as under:

(a) by an order of the Board made, on and after the Commencement of the Securities Laws (Second Amendment) Act, 1999 under this Act or the rules or regulations made there under; or

may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter.”

It is true that in the instant case there is no order made by an adjudicating officer nor is there any formal order by the board or any of its members on this issue. However, by their letter issued on 24^th June to NSE, and thereafter, by the fee liability statement dated August 27, which was forwarded by NSE on 3.9.2004, SEBI has not only reworked the amount of fees payable in the past but has returned the application for derivative trading segment registration. All actions of officials of SEBI are in the name of and derive their sustenance from the powers vested in them by the Board. In this case, action of SEBI has the same effect as that of a formal order by the Board and being aggrieved by this action of the respondents the appeal has been filed by the appellants. This appeal is, therefore, entertained and taken up for hearing.

The question as to whether NSE needs to be impleaded has also been examined. The appellant has referred to NSE’s letter dated 3^rd September, 2004 by which NSE forwarded the provisional fee liability statement received from SEBI as the basis for filing the appeal. It appears from all the correspondence and the facts relating to this case that NSE’s role was limited to conveying the decision and papers received from SEBI. It was not NSE’s decision to revise the basis of charging fees from the appellant. As such neither party felt the need for impleading NSE and we also concur with them.

10. The learned counsel for the Respondent submitted that SEBI had no issue on Oracle and Prebon being treated as two parts of the same membership with Oracle active in the CM/EM segment and Prebon dealing in WDM segment. That is why the appropriate authority in SEBI had approved in the file that the cards could be treated as composite for all practical purposes and the turnover of the two cards may be taken together for the purpose of turnover fees. Benefit of fee continuity was, therefore, allowed upto 2003 in the case of Prebon. However, NSE vide their letter dated January 15, 2004 had informed SEBI that the segmental surrender of trading membership is permitted by NSE since December 2002. Earlier Oracle and Prebon were considered to be a part of the same membership as segmental membership surrender was not permissible. Since the condition based on which fee continuity was approved in the file was withdrawn by NSE, the counsel submitted that the basic premises on which fee continuity benefit was granted was no more valid. Hence, it was decided not to grant fee continuity benefit in this case. He submitted that SEBI has not taken any different position.

11. It is relevant in this context to go through a letter dated August 23, 2004 issued by NSE to the appellant. The letter clearly stated that the proposal made by Oracle in January, 1999 for assignment of the WDM segment of Oracle’s membership to Prebon was accepted by the exchange “on the condition that should any one of these entities decide to surrender their membership then both the entities have to surrender their respective membership simultaneously”. The letter further records that “this condition was placed as segmental surrender of trading membership was not permitted at that time and, therefore, the assignment of WDM Segment to Prebon though a new entity has been treated as a continuation of the WDM membership that was granted to Oracle”. Thereafter in the same letter NSE advised Prebon that “However, the exchange has permitted segmental surrender of trading membership since December, 2002.” Thus, by its above letter while NSE has informed Prebon that segmental surrender is now permissible, it nowhere stated that the earlier conditions specifically imposed while granting assignment of WDM segment from Oracle to Prebon stand revoked or cancelled. This letter only stated that the exchange has since started permitting segmental surrender whenever members so want but does not say that the specifically articulated condition which was earlier laid down while permitting Oracle’s hiving off the WDM segment to Prebon are “withdrawn by NSE” as contended by the respondent. The contention that “the basic premises on which fee continuity benefit was granted was no more valid” is therefore, not correct. So long as the appellant continues to abide by the conditions imposed by NSE at the time of bifurcating the WDM segment from the CM/EM segments and hiving off the WDM segment to Prebon was approved by NSE, the ground on which fee continuity was allowed will continue to hold good in this case.

12. The learned counsel for the respondent also mentioned and this Tribunal is aware that there is a large number of appeals pending on the fee continuity matter which involves basically interpretation of SEBI (Stock brokers & sub brokers) Regulations, 1992 (Regulation 10) read with paragraph 4 of Schedule III and the explanation thereof and the SEBI Circular dated December 28, 2002. The learned counsel rightly drew the attention of the Tribunal to these cases and mentioned that while dealing with the instant case, regard should be had to those issues also. We have carefully examined the issues involved in those cases and the issues relating to this appeal. Those cases stand on a different footing and the issues involved here are quite different. In the instant case fee continuity was a natural corollary of the decision of NSE not to allow segmental surrender of WDM membership in 1999. The subsequent enabling provision whereby segmental surrender has now been made permissible does not alter the fact that under direction from NSE, both Oracle and Prebon continue to have concomitant existence. So long as this concomitant relationship remains undisturbed and is not changed, the fee continuity should continue. In case the appellant or Oracle ever fail to comply with the conditions imposed by NSE for this concomitant relationship or wish to change this position, fee continuity benefit should not be made available to them. Until that happens there is no ground for withdrawing this facility which was granted to them.

13. We, therefore, direct SEBI and NSE to continue to grant the appellant the fee continuity benefit as was available to them before NSE decided to permit segmental surrender of membership to its members. The learned counsel for the appellant informed us during the course of hearing that a sum of Rs.4,37,20,256/- has been paid by the appellants, towards principal amount of SEBI’s claim and a further sum of Rs.26,96,590/- was paid as interest. The counsel for the appellant stated that both the above amounts were paid under protest pending disposal of this appeal We direct that both the amounts should be refunded to the appellants by the respondent after adjusting the fees as are payable under the fee continuity arrangement. The adjustment of fees payable and actual refund of excess amount should be carried out within 4 weeks from the date of receipt of copy of this order.