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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.

1. 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.  

2. 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 :

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“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.”

3. 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.

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4. 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  

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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.”

5. 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  

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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  

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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.

6. 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.  

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7. 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.

8. 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  

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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.

9. 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.

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10. 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.

11. 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.

12. 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  

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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  

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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.

13. 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.

14. So far as defence of the respondent that in the wholesale  

debt  market  segment,  at  least  prior  to  2003,  the  SEBI  was  

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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.

15. 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  

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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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