SECURITIES & EXCHANGE BOARD OF INDIA Vs. ICAP INDIA PVT. LTD.
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 5275 of 2006, Judgment Date: Nov 24, 2015
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.5275 OF 2006
Securities & Exchange Board of India …..Appellant
Versus
ICAP India Pvt. Ltd. …..Respondent
J U D G M E N T
SHIVA KIRTI SINGH, J.
This appeal under Section 15Z of the Securities & Exchange Board of India
Act, 1992 (for brevity, ‘the SEBI Act’) has been preferred by the
Securities & Exchange Board of India (for brevity, ‘the SEBI’) to challenge
the judgment and order dated 14.08.2006 passed by the learned Securities
Appellate Tribunal (hereinafter referred to as ‘the SAT’) in Appeal No.56
of 2004.
The substantial question of law falling for determination involves
interpretation of the term ‘annual turnover’ as it finds mention in the
Explanation after paragraph 3 of Schedule III to the Securities & Exchange
Board of India (Stock Brokers & Sub-brokers) Regulations, 1992 (for
brevity, ‘the Regulations’). The aforesaid Explanation reads as follows :
“Explanation. – For the purpose of paragraphs 1, 2 and 3, “annual turnover”
means the aggregate of the sale and purchase prices of securities received
and receivable by the stock broker on his own account as well as on account
of his clients in respect of sale and purchase or dealing in securities
during any financial year.”
The factual matrix may be noted only in brief. The respondent is a stock
broker in the wholesale debt market segment of the National Stock Exchange
and deals in debt market securities. The stand of the respondent is that
the price of the dealt with securities would not form part of the concerned
broker’s ‘annual turnover’ and the same cannot be the basis for computing
the registration fee of stock brokers like the respondent. This stand is
based on a circular of Reserve Bank of India (for brevity, ‘RBI’) dated
June 20, 1992, issued with a view to regulate the wholesale debt market.
The dispute in respect of quantum of registration fee demanded by the SEBI
was brought before the SAT by way of challenge to SEBI’s order dated
November 28, 2003 directing the respondent to pay Rs.33,51,45,620/- towards
principal and Rs.3,78,29,623/- towards interest as on November 30, 2003.
As noticed above the SAT allowed the appeal of the respondent and set aside
the order passed by SEBI vide its judgment and order under appeal.
The circular dated June 20, 1992 issued by RBI as a regulator of the
wholesale debt market is the basis for the SAT to hold that for the
permissible activity of bringing the parties together, no amount is
received or receivable by the stock broker when he deals in the wholesale
debt segment of the market and therefore the definition of “annual
turnover” for the purpose of paragraphs 1, 2 and 3, as contained in the
Explanation to Paragraph 3 of Schedule III to the Regulations is not
satisfied. Before adverting to other relevant facts it is useful to notice
the relevant part of this circular which reads as under :
“III. DEALINGS THROUGH BROKERS
(i) If a deal is put through with the help of a broker, the role of the
broker should be restricted to that of bringing the two parties to the deal
together.
(ii) While negotiating the deal, the broker is not obliged to disclose the
identity of the counterparty to the deal. However, on conclusion of the
deal, he should disclose the counter party and his contract note should
clearly indicate the name of the counterparty.
(iii) On the basis of the contract note disclosing the name of the
counterparty, settlement of deals between banks, viz., both fund settlement
and delivery of security, should be directly between the banks, and the
broker should have no role to play in the process.
(iv) With the approval of their top managements, banks should prepare a
panel of approved brokers which should be reviewed annually, or more often
if so warranted. Clear-cut criteria should be laid down for empanelment of
brokers, including verification of their creditworthiness, market
reputation, etc. A record of broker wise details of deals put through and
brokerage paid, should be maintained.
(v) A disproportionate part of the business should not be transacted
through only one or a few brokers. Banks should consider fixing aggregate
contract limits for each of the approved brokers, and ensure that these
limits are not exceeded.”
The stand of the appellants is that the SAT has mis-interpreted the
Explanation to paragraph 3 to hold that the “turnover” for purpose of fee
will not be the value of the stocks under transaction but only the value of
brokerage earned by the stock brokers like the respondent. According to
Mr. C.U. Singh, learned senior counsel for the SEBI the respondent is bound
by the provisions of the SEBI Act, the rules framed thereunder as well as
the Regulations. The law does not permit any one to act as a stock broker
either in respect of shares in the equities segment or the Government
securities in the wholesale debt segment until he is registered with the
SEBI. Such registered broker has to pay the prescribed fee as per Schedule
III of the Regulations. He highlighted clause 1(bb)(ii) of Schedule III
which was inserted by the Amendment Regulations of 2002 w.e.f. February 20,
2002. It is the case of the appellant that clause 1(bb)(ii) was introduced
in the Regulations because the SEBI accepted the Bhatt Committee’s
recommendations for fixing a lower rate of fees for transactions in bonds
and securities. The lower rate for transactions in bonds and Government
securities was on account of comparative higher value of such transactions
leading to higher turnover and that justified imposition of lower rate of
fees. The grievance of the appellant is that the SAT did not consider such
clear substantive provision and its history while interpreting the
Explanation in a manner which amounts to doing violence to the main
provision itself. Learned counsel for the appellant also referred to
judgment of this Court in the case of B.S.E. Brokers’ Forum v. Securities &
Exchange Board of India (2001) 3 SCC 482 and pointed out that in paragraph
43 the Court noted that the petitioners of that case had strongly relied
upon the Report submitted by the Bhatt Committee. Further in paragraph 47
the Court rejected the contention of the petitioners after noticing the
recommendations of the Bhatt Committee to the effect that “on Government
securities, PSU bonds and units, the turnover will have to be calculated
separately and a fee of 1000th of 1% may be charged on such turnover than
the present scale of 100th of 1%.” Thereafter the Court observed that the
Board was bound to bring about the corresponding changes so as to remove
the anomalies pointed out by the Committee. It also noted that the Board
or the SEBI had accepted the recommendations and they would be incorporated
in the Regulations. The Court concluded that subject to the
recommendations of the Bhatt Committee to be incorporated in the
Regulations, the challenge made to the levy based on the measure of
turnover had to be rejected.
On behalf of appellant it was further pointed out that through Notification
No.S.O. 184(E) issued by the SEBI and Notification No.S.O.(E) issued by
RBI, both dated March 01, 2000 it was made clear that all contracts for
sale or purchase of Government securities when entered into through
recognized stock exchanges, would be subject to the SEBI Act, Securities
Contracts (Regulation) Act, 1956 as well as rules, regulations, bye-laws
and circulars made under those Acts. It was also pointed out that Section
2(h) of the Securities Contracts (Regulation) Act, 1956 defines
“securities” to include not only Government securities but also rights or
interests in securities. Hence, according to appellant the physical receipt
of securities or payments is not necessary. It was further contended on
behalf of appellant that the circular of RBI of 1992 cannot affect the
statutory regime governing fees payable by a registered broker to the SEBI
as per provisions in the Regulations. Lastly it was submitted that the
appellant has calculated and demanded the fee as per clause 1(b) instead of
clause 1(bb) because the respondent did not disclose details of its
different transactions.
On behalf of appellant reliance was placed upon judgment of this Court in
the case of K.P. Varghese v. Income-tax Officer, Ernakulam (1981) 4 SCC 173
to highlight various principles relating to interpretation of statutes. In
particular, reliance was placed upon the principle that plain meaning or
literal construction may not be relied upon if it results in absurdity,
injustice and unconstitutionality. In such a situation Court should
construe the real meaning having regard to the object and purpose behind
enacting the provision as well as the context of the setting in which it
occurs and with a view to suppress the mischief sought to be remedied by
the Legislature.
In reply Mr. Jayant Bhushan, learned senior advocate submitted that in the
case of B.S.E. Brokers’ Forum this Court upheld the validity of the
registration fees levied by the SEBI but there was no occasion in that case
to interpret the term ‘turnover’ as defined through the Explanation. He
also referred to an Explanation to clause 2 of Schedule IV of the
Regulations only for comparing the two Explanations and pointing out that
while laying down the Schedule of Fees to be paid by the Trading or
Clearing Member or Self Clearing Member the expression ‘annual turnover’
has been defined differently so as to take into account “the aggregate
value of all trades executed by the trading member …..”. By placing
reliance upon pleadings of the SEBI, the view taken by the SAT in the
impugned judgment was sought to be supported further on the ground that in
respect of wholesale debt market SEBI merely ‘monitors’ and does not
‘regulate’ and therefore there can be no justification to include the
entire value of stocks in the turnover for calculating the registration
fee. It was conceded however that the wholesale debt market was
considerably widened in 2003 and SEBI may claim that it is required to
regulate the wholesale debt market from 2003 onwards but that should not
affect the present case which is related to an earlier period, only upto
December 2002. Mr. Bhushan took us through the documents and pleadings to
counter the allegation that respondent did not disclose the details and
particulars of its business deals/accounts. According to him, it is
admitted in the inspection report that the respondent dealt only in the
wholesale debt market segment.
On behalf of respondent reliance was placed upon case of Income-tax
Officer, Alleppey v. I.M.C. Ponnoose AIR 1970 SC 385 and case of
Government of Andhra Pradesh v. P. Laxmi Devi (2008) 4 SCC 720 in support
of a well established proposition of law that unless the Statute empowers
the concerned authority to make a rule or regulation with retrospective
effect, such authority cannot make a rule, regulation or bye-law with
retrospective effect.
Lastly it was pointed out from the materials on record that respondent had
raised several other grounds for objecting to the impugned action of the
SEBI but the SAT allowed respondent’s appeal on the basis of interpretation
of the term ‘annual turnover’ and did not deal with other grounds.
We do not find any merit in the contention advanced on behalf of the
respondent that the Explanation under clause 2 of Schedule IV can be used
in contradistinction of differently worded Explanation under paragraph 3 of
Schedule III to support the interpretation of the term ‘annual turnover’
given by the SAT. While Schedule III relates to Regulation 10 which
governs fees to be paid by the stock broker or sub-broker, Schedule IV
relates to Regulation 16G(1) which governs fees to be paid by the Trading
or Clearing Member or Self Clearing Member of Derivatives Exchange/
Derivatives Segment/ Clearing Corporation/ Clearing House. In such a
situation, in our view, the term ‘annual turnover’ has to be understood
only in the light of Schedule III and its contents including the relevant
Explanation.
On a careful analysis of the Explanation occurring after paragraph 3 of
Schedule III and the definition of ‘annual turnover’ contained therein as
also the reasonings in the impugned order we are constrained to hold that
the SAT has erred in limiting the annual turnover of the respondent only to
the amount of brokerage earned by it. The earning by way of brokerage
represents only the part of price of securities received by the stock
broker on his own account. The other and more significant part of the
‘annual turnover’ as per the Explanation is the aggregate of the sale and
purchase prices of securities, received or receivable by the stock broker
on account of his clients in respect of sale and purchase or dealing in
securities during the financial year. The view taken by the SAT that since
in the wholesale debt market segment the broker has a limited role as per
the RBI circular and since the broker does not receive the sale or purchase
price because the payment is directly made to the seller, the broker will
be saved from inclusion of the sale and purchase prices in his annual
turnover, suffers from an apparent error. The error lies in not
appreciating that the component of aggregate of sale and purchase prices
which is receivable by the stock broker even on account of his clients is
included in the annual turnover. Such sale and purchase price receivable
by the stock broker on account of his clients, under the directions of the
RBI through the circular dated June 20, 1992 presently goes directly to the
seller but it is of no significance. Even if such sale and purchase price
had actually been received by the stock broker not on his own account but
on account of his clients, it could not belong to the broker and had to be
passed on to the seller because such amount was receivable clearly on
account of his clients in contradistinction to any part of sale and
purchase price received or receivable by the stock broker on his own
account. Thus viewed, the annual turnover of the stock broker as per the
Explanation must include the value of entire transaction for the purpose of
computing the registration fee as per Schedule III of the Regulations. In
no case the term ‘annual turnover’ can be so interpreted as to mean only
the amount earned by the stock broker by way of brokerage.
The same conclusion will emerge on considering the legislative history
leading to insertion of clause 1(bb) in Schedule III whereby transactions
in Government securities, bonds issued by any public sector undertaking and
the units, traded in a similar manner were placed in a separate category
for which the fee is kept at a much lower rate of 1000th of 1% of the
turnover. The SAT erred in not considering the obvious purpose of such a
provision brought through an amendment in the light of recommendations of
the Bhatt Committee which had received not only approval of the SEBI but
also of this Court as per judgment in the case of B.S.E. Brokers’ Forum.
So far as defence of the respondent that in the wholesale debt market
segment, at least prior to 2003, the SEBI was required only to ‘monitor’
and not to ‘regulate’ such market cannot cut any ice because the provisions
relating to registration fee by the SEBI have already been held valid and
in the present proceedings there is no challenge to the relevant provisions
including those in Schedule III of the Regulations. As already noted, in
the case of B.S.E. Brokers’ Forum this Court directed the SEBI to
incorporate the relevant recommendations of the Bhatt Committee in the
Regulations and as a result the rate of fee on Government securities etc.
dealt in the wholesale debt market was lowered and pegged at 1/10th in
comparison to fees payable by the stock brokers in other segment.
In view of the above discussions and the interpretation of the term ‘annual
turnover’ indicated by us earlier, we are constrained to hold the impugned
order passed by the SAT as erroneous in law. It is accordingly set aside.
There is a consensus that in case the impugned judgment and order is set
aside, the matter deserves to be remanded back so that other grounds
earlier raised by the respondent may now be considered by the SAT in
accordance with law. For that purpose the matter is remitted back to the
SAT for deciding the other relevant issues and grounds as per law at an
early date, preferably within six months. The appeal thus stands allowed
to the extent indicated above. In the facts of the case there shall be no
order as to costs. The amount of Rs.2.9 crores deposited by the SEBI with
the Registry has been invested in an interest bearing account and the FDR
is due to mature on 30.11.2015. As soon as the amount matures, the same
should be refunded to the SEBI without any delay.
…………………………………….J.
[VIKRAMAJIT SEN]
..…………………………………..J.
[SHIVA KIRTI SINGH]
New Delhi.
November 24, 2015.
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