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Diwali gift to brokers: SC dismisses Sebi plea in 18-yr-old case

Decision clears ambiguity over turnover fee dues that swelled to several crores

N Sundaresha Subramanian  |  New Delhi 

Diwali gift to brokers: SC dismisses Sebi plea in 18-yr-old case

Scores of stock brokers whose capital had been stuck with bourses for years got something to cheer about ahead of Diwali, with the Supreme Court dismissing a Securities and Exchange Board of India (Sebi) appeal, pending since 2006, in an 18-year-old case.

The apex court decision, which came in relation to a Sebi appeal against Pune-based broker Alliance Finstock, is applicable to more than 50 brokers affected by a Sebi missive of 2002.

A senior Delhi-based broker said this was a big relief for the broker community, which had been fighting the case for years. Explaining the details of the case, he added: “A Sebi notification giving the benefit of continuity for payment of turnover-based registration fee was issued in January 1998, where no cut-off date relating to conversion was envisaged. Things were going on fine until March 2002, when Sebi issued a circular saying those that corporatised before April 1, 1997, were not eligible for the benefit of continuity. Since this meant huge financial liabilities, brokers had no choice except appealing.”

The matter dates back to the early days of Sebi, when as a new regulator it felt more comfortable dealing with corporate entities than individual members of exchanges. Sebi encouraged individual brokers to convert themselves into corporate entities. As an incentive, brokers were told that the converted entities would not be required to pay fresh registration fees.

The registration charge itself was linked to a broker’s turnover. The rules, in force then, required that such fees be paid for five years. The continuity clause meant the corporatised brokers would not need to pay fresh registration fees. “Due to introduction of computers, turnovers had shot up in those days,” another broker added.

To further hasten this process, P Chidambaram had in his dream Budget of 1997 announced that a one-time exemption of capital gains would be allowed for brokers corporatising themselves.

While the capital gains exemption was an additional incentive, brokers said there was confusion within Sebi which transformed into a circular of 2002.

This 2002 circular said the incentive of fee waiver was applicable only to entities converting after April 1, 1997. According to brokers, the then Sebi chairman, D R Mehta, had come out with a circular in the last days of his term, giving a cut-off date of April 1, 1997. This translated into huge financial liabilities for several brokers who corporatised before the cut-off date. It hit brokers across various stock exchanges like BSE and the Delhi Stock Exchange. They challenged this and won their appeal at the Securities Appellate Tribunal (SAT) in 2006.

Following this, Sebi moved the Supreme Court challenging the SAT order. It argued it did not have powers to make any retrospective regulations and rules, and regulations could only be prospective, unless explicitly provided for.

As ambiguity over the dues continued for years, the exchanges withheld the base capital of many brokers as a security against their dues. They continued to slap penal interest on the dues. The matter of turnover fee dues became a contentious issue in the exit of the Delhi Stock Exchange. An amount of Rs 25.39 crore was shown as contingent liability in the exchange’s books under the turnover fee dues and the interest thereof. Some 16 brokers affected in DSE alone wrote several times to the exchange, saying the amount was inflated, erroneous and not legitimately due. Sebi saw four more chairmen but a relief remained elusive until it finally arrived last week from Supreme Court.

Dismissing the Sebi appeal, the Supreme Court Bench of judges Vikramjit Sen and Shiva Kirti Singh said: “Even if we were to apply the test of fairness, no exception can be taken to extension of the benefit of fee exemption as provided by the relevant provision in the regulations. Since the policy behind grant of benefits is to encourage corporatisation of individual or partnership members of a stock exchange, the action of extending such benefits without any curb on the basis of date of conversions cannot be held as unfair.”

The Bench added: “As noted earlier, Sebi itself extended the benefit to those converting not only from January 21, 1998, but from April 1, 1997. There is nothing in paragraph 4 or in the explanation to support the stand of Sebi that the benefits must be confined to conversions taking place after a particular date when no such date finds place in the regulations. As a result, appeals preferred by Sebi are dismissed and the judgments and orders under appeal passed by SAT are upheld.”

First Published: Wed, November 11 2015. 23:34 IST