2015 (11) TMI 1220 - SC - Companies Law

Interpretation of the term annual turnover - 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 - Held that - 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. 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 2001 (2) TMI 957 - SUPREME COURT OF INDIA 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. Thus impugned order passed by the SAT as erroneous in law. It is accordingly set aside. Appeal allowed

Summary

Issues Involved:
1. Interpretation of the term "annual turnover" in the context of the Securities & Exchange Board of India (Stock Brokers & Sub-brokers) Regulations, 1992.
2. Applicability of the RBI circular dated June 20, 1992, in determining the "annual turnover" for registration fee computation.
3. Legislative history and amendments related to the calculation of registration fees for stock brokers.
4. The role of SEBI in regulating the wholesale debt market before 2003.

Issue-Wise Detailed Analysis:

1. Interpretation of the term "annual turnover":
The central issue in this case revolves around the interpretation of "annual turnover" as defined in the Explanation after paragraph 3 of Schedule III to the Securities & Exchange Board of India (Stock Brokers & Sub-brokers) Regulations, 1992. The Supreme Court scrutinized the definition, which includes "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." The Court found that the Securities Appellate Tribunal (SAT) had erred in interpreting "annual turnover" to mean only the brokerage earned by the stock broker. The Court emphasized that "annual turnover" must include the aggregate value of all transactions conducted by the broker, not just the brokerage earned.

2. Applicability of the RBI circular dated June 20, 1992:
The respondent argued that the RBI circular, which limits the broker's role to merely bringing parties together in the wholesale debt market, should influence the interpretation of "annual turnover." The SAT had accepted this argument, leading to its decision that the broker's turnover should not include the transaction values. However, the Supreme Court rejected this view, stating that the RBI circular's operational guidelines do not alter the statutory definition of "annual turnover" under SEBI regulations. The Court clarified that the sale and purchase prices receivable by the broker on behalf of clients must be included in the turnover calculation, regardless of whether these amounts pass through the broker's hands.

3. Legislative history and amendments related to the calculation of registration fees:
The Court examined the legislative history, particularly the introduction of clause 1(bb)(ii) in Schedule III following the Bhatt Committee's recommendations. This clause was designed to lower the fee rate for transactions in Government securities and bonds due to their higher transaction values. The Court noted that the SAT failed to consider the purpose of this amendment, which was to ensure that the registration fee reflected the true turnover, including the value of securities traded. The Court referred to its previous judgment in B.S.E. Brokers' Forum, which upheld the validity of the fee structure based on turnover, including the Bhatt Committee's recommendations.

4. The role of SEBI in regulating the wholesale debt market before 2003:
The respondent contended that SEBI's role in the wholesale debt market was limited to monitoring rather than regulating before 2003, implying that the SEBI's fee structure should not apply. The Supreme Court dismissed this argument, stating that the validity of SEBI's fee regulations had already been established, and there was no challenge to these provisions in the current proceedings. The Court reiterated that the SEBI's regulatory framework, including the fee schedule, applied to all registered brokers, irrespective of the market segment they operated in.

Conclusion:
The Supreme Court concluded that the SAT had misinterpreted the term "annual turnover" and set aside its judgment. The Court held that the "annual turnover" must include the total transaction values handled by the broker, not just the brokerage earned. The case was remanded to the SAT to consider other grounds raised by the respondent. The appeal was allowed, and the SEBI was directed to refund the deposited amount upon maturity.