2015 (12) TMI 49 - SC - Companies Law

Supreme Court affirms fee continuity benefits for partners turned directors

The Supreme Court upheld the Tribunal's decisions, affirming that the Respondents were entitled to fee continuity benefits. The Court clarified that the ... Decline of grant fee continuity to the Respondents - SEBI seeks to reaffirm its stance that the Respondents lost all entitlement to the advantage of fee continuity, no sooner any of the erstwhile partners ceased to be Whole-time Directors of the corporate entity which was the metamorphosed partnership firm - Held that:- We are in agreement with the Tribunal on the interpretation it has given to Paragraph I(4) of Schedule III. We shall elucidate our understanding of Paragraph I(4) as it stood, up until the issuance of Circular dated 12.9.2002. Anecdotally, a partnership firm which consists of five partners and which holds a membership card of a stock exchange, may decide to convert itself into a corporate entity. After incorporation, of the five erstwhile partners, one of the partners holds 40 per cent shares of the paid-up equity capital of the newly formed corporate entity and is also its Whole-time Director. Subsequently, four of the partners decide to exit from the corporate entity, leaving behind only the Whole-time Director who was also an erstwhile partner. In our opinion the said corporate entity will still be eligible for the benefit of fee continuity under Paragraph I(4) of Schedule III of the Regulations. In order to qualify for the benefit of the said provision, there is a two-fold requirement. First, the corporate entity must earlier have been either a sole proprietorship or a partnership. Second, an erstwhile partner should own at least 40 per cent of the paid-up equity share capital and should also be the Whole-time Director of the company, for a minimum period of three years. Alternatively, erstwhile partners who together hold at least 40 per cent equity must remain Whole-time Directors for a minimum of three years. Thus the subsequent entry or exit of partners to and from the original partnership firm would have no relevance on the entitlement of the newly formed corporate entity to take advantage of the benefit not only of fee continuity under the said provision but also fillip to the growth of the corporate sector and the national economy. The same benefit would also be extended to erstwhile partners who after corporatization jointly retain at least 40 per cent of the paid-up equity capital of the corporate entity and were its Whole-time Directors. In other words, if there are five partners, of which three partners subsequent to corporatization jointly hold 40 per cent of the shares of the paid-up equity capital and are also the Whole-time Directors of the company, then the departure of the other two erstwhile partners will not deny the corporate entity the benefits of fee continuity. We also agree with the finding of the Tribunal that the Circular dated 12.9.2002 is not clarificatory. A clarificatory Circular is for the purpose of elaborating the existing provision and removing ambiguities, without altering the effect of the said provision. However, in the instant case, our interpretation of Paragraph I(4) prior to the issuance of Circular dated 12.9.2002, is contrary to that mentioned in the said circular. Hence this Circular cannot be held to be clarificatory in nature, and as a logical corollary is not capable of having any retroactive effect. Issues Involved:1. Entitlement to fee continuity benefit after conversion of a partnership firm into a corporate entity.2. Interpretation of Paragraph I(4) of Schedule III of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.3. Applicability of Section 13 of the General Clauses Act, 1897 to SEBI Regulations.4. Retrospective applicability of SEBI Circular dated 12.9.2002.Issue-wise Detailed Analysis:1. Entitlement to Fee Continuity Benefit:The Appeals challenged the Securities Appellate Tribunal's decisions that reversed SEBI's order denying fee continuity to the Respondents. SEBI's stance was that the Respondents lost entitlement to fee continuity once any of the erstwhile partners ceased to be Whole-time Directors of the corporate entity formed from the partnership firm. The Tribunal had allowed the appeals, granting fee continuity benefits to the Respondents.2. Interpretation of Paragraph I(4) of Schedule III of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992:Paragraph I(4) states that a corporate entity formed by converting a partnership membership card of the exchange is exempted from fee payment if the erstwhile partner remains a Whole-time Director and holds at least 40% of the equity for three years. SEBI contended that all partners must remain Whole-time Directors to qualify for fee continuity. The Tribunal interpreted that the requirement was satisfied if any one of the erstwhile partners became a Whole-time Director holding 40% equity for the stipulated period. The Supreme Court agreed with the Tribunal, stating that the provision does not necessitate all partners to remain Whole-time Directors but only requires that an erstwhile partner must meet the conditions.3. Applicability of Section 13 of the General Clauses Act, 1897 to SEBI Regulations:SEBI argued that under Section 13 of the General Clauses Act, the term 'partner' includes 'partners,' implying that all partners must remain Whole-time Directors. The Court examined whether the General Clauses Act applies to SEBI Regulations and concluded that SEBI Regulations do not qualify as a Central Act under the General Clauses Act. Therefore, Section 13 does not apply, and the term 'partner' in Paragraph I(4) should be interpreted in the singular.4. Retrospective Applicability of SEBI Circular dated 12.9.2002:SEBI relied on the Circular dated 12.9.2002, which required all erstwhile partners to be Whole-time Directors for fee continuity. The Tribunal rejected this, stating the Circular was not clarificatory but imposed new conditions and was not retrospective. The Supreme Court concurred, noting that the Circular could not retroactively alter the conditions of Paragraph I(4). Therefore, entities corporatized before the Circular's issuance were not bound by its conditions.Conclusion:The Supreme Court upheld the Tribunal's decisions, affirming that the Respondents were entitled to fee continuity benefits. The Court clarified that the requirement under Paragraph I(4) is satisfied if any one of the erstwhile partners becomes a Whole-time Director holding 40% equity for three years. The General Clauses Act does not apply to SEBI Regulations, and the Circular dated 12.9.2002 is not retrospective. The Appeals were dismissed with no orders as to costs.