INDIA BUSINESS WORLD - OCTOBER 21^st - NOVEMBER 15^th - 2007

SUPREME COURT OKAYS POST- M&A REGISTRATION FEE BY SEBI

The Supreme Court has ruled that the Securities & Exchange Board of India (Sebi) is empowered to levy fresh registration fee on the companies which go for mergers and amalgamations to increase the reserves component of their net worth.

In the case of companies which go for amalgamation/merger as an alternative to liquidation, however, fee continuity benefits could be availed and fresh turnover/registration fees would not be payable. A bench comprising Justice SH Kapadia and Justice BS Reddy said: "Fresh turnover/registration fees would not be payable by a company which goes for amalgamation/merger as an alternative to liquidation. In other words, if the company's net worth is negative and if that company is on the brink of liquidation, which compels it to go for a scheme under section 391 of the Companies Act, then in such cases Sebi exempts such companies from payment of fresh turnover/ registration fees."

If the amalgamation has taken place in order to increase the reserves component of the net worth, the market regulator can deny the benefits of fee continuity, said Justice Kapadia.

The court dismissed the appeals of Ratnabali Capital Markets and Sumedha Fiscal Services. They had challenged Sebi's demand of fresh registration fee after five years of the merger with Capital Resources International Ltd (CRIL), a member of NSE.

The transferor company, CRIL, had paid the turnover based fee to Sebi.

In terms of Schedule-III of Sebi (Stock Brokers & Sub-Brokers) Regulations, 1992, CRIL had paid initial registration fee for first year and fee on turnover basis for subsequent four years.

No further fee on turnover basis was required to be paid except for a fee of Rs 5,000 for a block of next five years, appellants had said.

We do not find any merit in the argument that the demand raised by Sebi for fresh turnover/registration fees constituted an act derogatory of the provisions of the Companies Act.

In our view, on the emergence of a new entity, which was entitled to operate in derivative market, Sebi was certainly entitled to regulate its trade in the derivative segment for which it was entitled to charge requisite fees, said court.

"After the merger of RSL into RCML, a new entity has emerged. In the circumstances, Sebi was entitled to charge the stipulated fees," court said.

The apex court, while hearing the case, had said that the turnover based registeration fee was required to be paid by the transferee brokerage firm otherwise the merger and acquisition could be misused to evade the increased turnover due to foray into new areas of business.