2024 TaxPub(CL) 161 (SEBI)
SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992
Section
11C
Show cause notice (SCN) was issued to transferor company for cancellation
of its certificate of registration as commodity derivatives broker on the
ground that it was not a 'fit and proper' person, but it was amalgamated with
transferee company, it had ceased to exist and all its rights and
liabilities, initiation of the proceedings and the SCN were dismissed.
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Investigation - Issuance of show cause
notice to transferor company for cancellation of its certificate of
registration as commodity derivatives broker - Transferor amalgamated with
transferee company - Whether determination of 'fit and proper' status of
transferor company will be infructuous
In enquiry proceedings, show cause notice was
issued to transferor company for cancellation of its certificate of
registration as commodity derivatives broker on the ground that it was not a
'fit and proper' person. The noticee filed an appeal for quashing of the
proceedings on the ground that it was amalgamated with transferee company
pursuant to scheme of merger, which was approved by NCLT on 06-01-2020.
Therefore, the noticee was no longer in existence. Question arose for
consideration was that whether the instant enquiry proceedings for determining
the 'fit and proper' status of the Noticee is maintainable, given that it has
been amalgamated with ASP. Held: In terms of clause 7 of Schedule
II of the Intermediaries Regulations (as amended vide the SEBI (Intermediaries)
(Third Amendment) Regulations, 2021, with effect from 17-11-2021), the 'fit and
proper person' criteria is applicable at the time of application of
registration and during the continuity of registration of the intermediary. In
the present case, NCLT vide Order, dated 6-1-2020 sanctioned the Scheme of
Amalgamation of the Noticee with ASPL. The transferor company ceases to exist
and all its rights and liabilities pass on to the transferee company.
Therefore, determination of the 'fit and proper' status of the transferor
company, who had ceased to exist pursuant to the NCLT Order, would be
infructuous. Thus, the initiation of the proceedings and the SCN were
dismissed.
REFERRED : Singer India Ltd. v.
Chander Mohan Chadha (2004) 7 SCC 1; Pr. CIT v. Mahagun Realtors (P.) Ltd.
(2022) 443 ITR 194 (SC) : 2022 TaxPub(DT) 2435 (SC); Saraswati Industrial
Syndicate v. CIT (1990) 186 ITR 278 (SC) : 1990 TaxPub(DT) 1328 (SC)
FAVOUR : In favour of appellant
A.Y. :
IN THE SECURITIES AND EXCHANGE
BOARD OF INDIA
ANANTH NARAYAN G., WHOLE TIME
MEMBER
Aasmaa Commodities
(P.) Ltd., In re
Order No.
WTM/AN/MIRSD/DOP/25920/2023-24
28 September, 2023
Background
1. Aasmaa Commodities Private Limited (hereinafter referred to as
'ACPL'/'Noticee') was registered with Securities and Exchange Board of India
(hereinafter referred to as 'SEBI') as a stock broker bearing SEBI registration
no. INZ000076031. ACPL was earlier a member of National Spot Exchange Limited
(hereinafter referred to as 'NSEL').
2. The present proceedings originated from the enquiry report dated
31-7-2020 (hereinafter referred to as 'DA Report'), submitted by the Designated
Authority (hereinafter referred to as 'DA') in terms of regulation 27 of the
SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as
'Intermediaries Regulations') as it stood at the relevant point of time prior
to its amendment vide SEBI (Intermediaries) (Amendment) Regulations, 2021, with
effect from 21-1-2021. The DA, based on findings recorded in the said DA
Report, recommended that the registration of ACPL as a stock broker may be
cancelled.
Show cause Notice, Reply and
Hearing:
3. Pursuant to the DA Report, a post enquiry Show Cause Notice,
dated 17-8-2020 (hereinafter referred to as 'SCN') was issued to the
Noticee, alongwith copies of (i) the aforesaid DA Report; (ii) Finance Ministry
Letter, dated 30-12-2014 to Forwards Market Commission (hereinafter
referred to as 'FMC'); (iii) Hon'ble Bombay HC's order in [Criminal Bail
Application No. 1263 of 2014, in Jignesh Prakash Shah v. State of
Maharashtra dated 22-8-2014]. In response to the SCN, the Noticee filed a
reply dated 9-9-2020.
4. After considering all material/documents available on record
including Noticee's reply, Designated Member/Whole Time Member (hereinafter
referred to as 'DM'/'WTM') vide Order, dated 29-10-2021 (hereinafter
referred to as 'October 2021 SEBI Order') held that Noticee was not a 'fit and
proper' person and thereby cancelled Noticee's certificate of registration as
commodity derivatives broker. Aggrieved by the said October, 2021 SEBI order,
Noticee preferred an appeal before the Hon'ble Securities Appellate Tribunal
(hereinafter be referred to as 'Hon'ble SAT').
5. While the aforesaid enquiry proceedings were pending, SEBI passed
five separate orders rejecting the applications filed by five other entities
for registration as commodity brokers in NSEL matter during February, 2019.
Aggrieved by the said SEBI orders, the entities filed separate appeals before
the Hon'ble SAT. The Hon'ble SAT vide its common order in the matter of Geofin
Comtrade Ltd. v. SEBI [Appeal No. 214 of 2019, dated 9-6-2022] ('June 2022
SAT Order'), remanded the aforesaid SEBI orders to decide these matters afresh
within six months from the date of the said order. While remanding the said
SEBI orders, the Hon'ble SAT inter alia held as under :--
'42. .....The
matters are remitted to the WTM to decide the matter afresh in the light of the
observations made aforesaid in accordance with law after giving an opportunity
of hearing to the brokers. All issues raised by the brokers for which a
finality has not been reached remains open for them to be raised before the
WTM. It will be open to the WTM to rely upon other material such as the
complaint letters of NSEL, EOW report, EOW charge sheet, etc. provided such
copies are provided to the brokers and opportunity is given to rebut the
allegations. Such additional documents relied upon by the respondent should
form part of the show cause notice for which purpose, it will be open to the
WTM to issue a supplementary show cause notice.....'
6. In the appeal filed by Noticee, Hon'ble SAT vide its Order,
dated 20-7-2022 had remanded the matter back to SEBI to decide the matter
afresh in terms of direction given in aforesaid June, 2022 SAT order.
Supplementary SCN:
7. Pursuant to the June 2022 SAT Order, it was felt necessary to
furnish certain additional documents/material to the Noticee and grant an
opportunity of personal hearing. Accordingly, a supplementary SCN, dated
27-2-2023 (hereinafter referred to as 'SSCN') was served on the Noticee
along with the following documents:
7.1 Copy of SEBI complaint dated 24-9-2018 filed with Economic Offences
Wing (hereinafter referred to as 'EOW');
7.2 Copy of FIR dated 28-9-2018 pursuant to the complaint filed by SEBI
under section 154 of Criminal Procedure Code, 1973 (hereinafter referred to as
'Cr.P.C.'); and
7.3 Amended Schedule II of Intermediaries Regulations.
Hearing:
8. Vide Letter, dated 13-7-2023, Noticee submitted reply to the
SSCN. In compliance with the principles of natural justice, an opportunity of
personal hearing was granted to the Noticee on 12-9-2023 through video
conferencing. The Authorized Representative (hereinafter referred to as 'AR')
of the Noticee appeared online before me on 12-9-2023 and reiterated the
content of the reply dated 13-7-2023. During the course of hearing, the AR
stated that Noticee was merged with Aasmaa Securities Private Limited and
submitted a copy of compilation of orders relied upon in the matter. During the
course of hearing, AR was advised to submit the details of directors/KMPs of
the Noticee and Aasmaa Securities Private Limited, as on date of merger.
However, I note that till date Noticee had not submitted said details.
Reply and written submission:
9. The reply filed by the Notice, dated 13-7-2023 are
summarized hereunder:
9.1 Vide Order, dated 6-1-2020 of the National Company Law
Tribunal, Hyderabad (hereinafter referred to as 'NCLT'), Noticee was
amalgamated with Aasmaa Securities Private Limited (hereinafter referred to as
'ASPL') pursuant to Scheme of Merger dated 28-11-2018 executed between Noticee
and ASPL.
9.2 The Noticee is no longer in existence. Company Master Data of the
Noticee in Ministry of Corporate Affairs (MCA) website reflects the
Noticee/Company Status as 'Amalgamated'.
9.3 In this regard, Noticee placed reliance on the following orders
passed by the Executive Director, SEBI, wherein the proceedings against the
entity was disposed of without issuing any direction.
9.4Order, dated 1-3-2023 passed in respect
of Smart Commodity Brokers Pvt. Ltd. in the matter of NSEL.
9.5Order, dated 4-7-2023 passed in respect
of Prudent Comder Private Limited in the matter of NSEL.
9.6 In view of the aforesaid, the Noticee request to drop the
proceedings initiated by issuance of Show Cause Notice, dated 17-8-2020
and Supplementary Show Cause Notice, dated 27-2-2023, since proceedings
initiated against the Noticee gets abated on the ground that Noticee ceased to
exist with effect from 1-1-2020.
Consideration of issue and
Findings:
10. I have carefully perused the SCN, SSCN, Enquiry Report, reply
submitted by the Noticee and other materials/information as available in the
public domain. After considering the same, the issue which arises for
consideration in the present proceedings is whether the instant enquiry
proceedings for determining the 'fit and proper' status of the Noticee is
maintainable, given that it has been amalgamated with ASPL, and whether the
consequences of such determination may be applied to ASPL, and if so, whether
the Noticee satisfies the 'fit and proper' criteria as laid down in schedule II
of the Intermediaries Regulations.
11. As per available record, the Noticee was only a member of Multi
Commodity Exchange of India Limited ((hereinafter referred to as 'MCX').
Therefore, MCX was asked to provide the status of Noticee's membership. In
reply, MCX stated'..... Pursuant to the said merger, Aasmaa Commodities Private
Limited ceases to be the member of the Exchange and Aasmaa Securities Pvt. Ltd.
the Transferee entity was admitted as the member of the Exchange. Further,
subsequently, Aasmaa Securities Pvt. Ltd. applied for surrender of membership
on 16-4-2021 and the said application was kept on hold by the Exchange due to
SCN issued by SEBI to Aasmaa Commodities Private Limited (Erstwhile Transferor
entity) in the matter of NSEL....'
12. It is noted that the pursuant to merger, Noticee ceased to be a
member of MCX. I note that NCLT vide Order, dated 6-1-2020 sanctioned
the Scheme of Amalgamation of the Noticee with ASPL. This fact is corroborated
from the MCA website where the Noticee's status is shown as 'Amalgamated'.
Membership of an exchange is an essential condition for registration of any
entity as a stockbroker.
13. As regards the effect of amalgamation, it is a settled law that
upon amalgamation, the transferor company ceases to exist and all its rights
and liabilities pass on to the transferee company. Hon'ble Supreme Court vide Order,
dated 17-4-1986 in the matter of General Radio & Appliances Co. Ltd.
v. M.A. Khader (1986) 60 Comp. Cas 1013 (SC) : 1986 TaxPub(CL) 0008 (SC),
held that under the order of amalgamation, the transferor company ceased to be
in existence in the eye of law and it effaced itself for all practical
purposes. This Hon'ble Court laid down that after the amalgamation of two
companies, the transferor company ceased to have any identity and the
amalgamated company acquired a new status.
14. Hon'ble Supreme Court vide Order, dt. 4-9-1990, in the
matter of Saraswati Industrial Syndicate v. CIT (1990) 186 ITR 278 (SC) :
1990 TaxPub(DT) 1328 (SC), held that '....the true effect and character of
the amalgamation largely depends on the terms of the scheme of merger. But
there cannot be any doubt that when two companies amalgamate and merge into one
the transferor company loses its entity as it ceases to have its business.
However, their respective rights of liabilities are determined under scheme of
amalgamation but the corporate entity of the transferor company ceases to exist
with effect from the date the amalgamation is made effective.....'.
15. The implications of amalgamation have also been outlined by the
Hon'ble Supreme Court of India in the matter of Bhagwan Dass Chopra v.
United Bank of India 1987 (Supp) SC 536 as under :--
'.............................
In the
circumstances it is reasonable to hold that in every case of transfer,
devolution, merger, takeover or a scheme of amalgamation under which the rights
and liabilities of one company or corporation stand transferred to or devolve
upon another company or corporation either under a private treaty, or a
judicial order or under a law the transferee company or corporation as a
successor-in-interest becomes subject to all the liabilities of the transferor
company or corporation and becomes entitled to all the rights of the transferor
company or corporation subject to the terms and conditions of the contract of
transfer or merger, the scheme of amalgamation and the legal provisions as the
case may be under which such transfer, devolution, merger, take over or
amalgamation as the case may be may have taken place.'
16. Further, Hon'ble Supreme Court of India vide Order, dated
5-4-2022 in the matter of Pr. CIT v. Mahagun Realtors (P.) Ltd. (2022)
443 ITR 194 (SC) : 2022 TaxPub(DT) 2435 (SC) held that :--
'18.
Amalgamation, thus, is unlike the winding up of a corporate entity. In the case
of amalgamation, the outer shell of the corporate entity is undoubtedly
destroyed; it ceases to exist. Yet, in every other sense of the term, the
corporate venture continues-enfolded within the new or the existing transferee
entity. In other words, the business and the adventure lives on but within a
new corporate residence, i.e., the transferee company...... Broadly, the quest
of legal systems and courts has been to locate if a successor or representative
exists in relation to the particular cause or action, upon whom the assets
might have devolved or upon whom the liability in the event it is adjudicated,
would fall.'
17. The Hon'ble Supreme Court in Singer India Ltd. v. Chander Mohan
Chadha (2004) 7 SCC 1 held that as a result of amalgamation of two
companies into one, 'the Transferor Company loses its entity as it ceases to
have its business'.
18. In light of the above observations of the Hon'ble Supreme Court, it
is clear that the respective rights or liabilities between the amalgamated
entities are determined under the Scheme of Amalgamation but the corporate
entity of the transferor company ceases to exist with effect from the date the
amalgamation is made effective. The transferor in such a case merges with the
transferee who becomes the successor of the assets, liabilities and business to
the extent contemplated in the Scheme of Amalgamation.
19. In this regard, it is pertinent to mention that in terms of clause
7 of Schedule II of the Intermediaries Regulations (as amended vide the SEBI
(Intermediaries) (Third Amendment) Regulations, 2021, with effect from
17-11-2021), the 'fit and proper person' criteria is applicable at the time of
application of registration and during the continuity of registration of the
intermediary. Thus, 'fit and proper' criteria is an essential condition to be
met for continued recognition of an entity as a SEBI registered intermediary.
But, 'fit and proper' is a 'status' and cannot be treated either as an asset or
a liability.
20. Given this understanding of the 'fit and proper' criteria, when a
transferor company amalgamates with the transferee company, the 'fit and
proper' status of the transferor company does not pass on to the resultant
company. Consequently, if the resultant entity is/seeking to be an
intermediary, it would have to separately fulfil the 'fit and proper' criteria.
As a corollary to that, even when the transferor company was not a 'fit and
proper' person, the resultant company would have to separately ensure that it
is 'fit and proper' in adherence to the requirements under the Intermediaries
Regulations. Any disqualification of the transferor entity, that gets
amalgamated, would not have a bearing on the 'fit and proper' person status of
the resultant entity. I have also considered earlier orders passed by SEBI in
respect of Smart Commodity Brokers Private Limited decision dated 1-3-2023,
Prudent Comder Private Limited decision dated 4-7-2023 and Tradebulls
Commodities Broking Private Limited decision dated 20-7-2023, which have
also arrived at the same conclusion noted above.
21. Considering the above, I find that determination of the 'fit and
proper' status of the transferor company (i.e. the Noticee), who had ceased to
exist pursuant to the NCLT Order, dated 6-1-2020 discussed earlier in
this, would be infructuous.
22. In light of the above discussion and the judgments of the Hon'ble
Supreme Court as reproduced earlier, I do not agree with the recommendation of
the DA.
ORDER
23. In view of the facts and circumstances of the case and the
conclusions arrived at discussed above, I, in exercise of powers conferred upon
me under section 12(3) read with section 19 of the SEBI Act and regulation 27
of the Intermediaries Regulations, hereby dispose of the instant proceedings
and the SCN read with SSCN against Aasmaa Commodities Private Limited (bearing
registration no. INZ000076031) without issuing any directions.
24. It is however clarified that this order is without prejudice to any
other proceedings that are or may be initiated against the Noticee by SEBI or
any other authority in accordance with law in respect of the trades executed by
it on the spot exchange platform provided by the NSEL.
25. A copy of this Order shall be served on the Noticee and upon all
recognized stock exchanges and depositories.