LexSECURITIES & EXCHANGE BOARD OF INDIA versus MAGNUM EQUITY SERVICES LTD. & ORS.
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[2015] 12 S.C.R. 102 A SECURITIES & EXCHANGE BOARD OF INDIA B v. MAGNUM EQUITY SERVICES LTD. & ORS. NOVEMBER 30, 2015 (Civil Appeal No. 4719 of 2008) [VIKRAMAJIT SEN AND SHIVA KIRTI SINGH, JJ.) Securities and Exchange Board of India (Stock Brokers C and S/Jb-brokers) Regulations, 1992: Schedule Ill, Paragraph 1 (4) - Fee continuity benefit - Partnership firm comprising of seven partners carrying on business as a stock broker- Partners moved application for registration of company during pend&ncy of which one of partner exited - Company o incorporated with remaining 6 partners who all became the whole-time directors - Membership card of firm transferred to the company - Company registered as stock broker - Three of such directors resigned- It was not the case of SEBI that equity holding of three continuing whole-time directors E had fallen below 40% criterion - Claim for fee continuity benefit - Held: In order to qualify for the benefit of fee continuity, the two fold requirement, i.e. corporate entity must earlier be either a sole proprietorship or a partnership and erstwhile partner should own at least 40% of paid up equity F share ¢a pita I and should also be a whole time Director of the company for a minimum period of three years - Tribunal observed that in the case at hand, since three of the erstwhile partners of the firm remained whole-time directors and continl'led to hold more than 40% shares of paid up equity G capital for a period of more than three years, the conditions set out in paragraph 1(4) stood satisfied - Tribunal's order granti~g fee continuity benefit upheld. Administrative law: Circulars - Clarificatory circular - H Held: Is for the purpose of elaborating the existing provision 102 SECURITIES & EXCHANGE BOARD OF INDIA v. 103 MAGNUM EQUITY SERVICES LTD. and removing ambiguities without altering the effect of the A said provision. Circulars/Government Orders/Notification: Circular dated 12. 09. 2002 issued by SEBI - Held: Is not clarificatory in nature. Dismissing the appeals, the Court B HELD: 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 C 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, 0 leaving behind only the Whole-time Director who was also an erstwhile partner. The said corporate entity will still be eligible for the benefit of fee continuity under Paragraph 1(4) of Schedule Ill of the Regulations. In order to qualify for the benefit of the said provision, there is a E 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 F 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 G 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 H 104 SUPREME COURT REPORTS [2015] 12 S.C.R. A 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 B 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.[Paras 11-13] [112-F-H; 113- C A-F] 2. Circular dated 12.9.2002 is not clarificatory. A clarificatory Circular is for the purpose of elaborating the existing provision and removing ambiguities, without D altering the effect of the s
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