2001 Supreme(SC) 189

2001(1) Supreme 479
Supreme Court of India
(Under Art. 139A of the Constitution of India)
B.N. Kirpal, N. Santosh Hegde and Brijesh Kumar, JJ.
B.S.E. Brokers Forum, Bombay & Ors. etc. —Petitioners
versus
Securities & Exchange Board of India & Ors. etc. —Respondents
Transferred Case (C) No. 20 of 2000
With
W.P. (C) No. 502 of 2000
Decided on 1-2-2001
Counsel for the Parties :
For the Appearing Parties : Kirit N. Raval, Additional Solicitor General, S.K. Dholakia, Joseph Vellapally, Ashok H. Desai, Mahendra Anand, Shanti Bhushan, P. Chidambaram, Sr. Advocates, Navroj Seervai, S. Merchant, Ms. Krishna Tanna, Ms. Bina Gupta, Ms. Vanita Bhargava, Ms. Rakhi Ray, Bharat Merchant, Arivind Minocha, Kumar Desai, Bhargava V. Desai, Ms. Kumud Singh, K.J. John, P. Venugopal, P.S. Sudheer, Sandeep Sethi, Ms. Kavita Wadia, Ms. Pratibha M. Singh, Maninder Singh, Kalpesh S. Jhaveri, Aseem Mehrotra, Abhijat P. Medh, Divyang K. Chhaya, Devendra Singh, Rana Mukherjee, Susanta Bose, Ms. Sumita Mukherjee, P.L. Narayanan, R. Anand Padmanabhan, Pramod Dayal, Prem Prasad Juneja, Rajiv Tyagi, Ms. Sushma Suri, Sanjay Sen, Rana S. Biswas, Ms. Indra Sawhney, Advocates.

Important points
1. SEBI has the necessary authority to collect a cumulative fee both for the purpose of regulating the activities contemplated under Section 11 of the Act as also for the purpose of registration under Section 12(2) of the Act, and the fee levied is both regulatory and registration fee leviable under Sections 11(2)(k) and 12(2) of the SEBI Act, 1992.
2. Levy of registration charge on share brokers by SEBI on basis of annual turnover, while charging flat rate on other intermediaries is not discriminatory.
3. Trading members of the National Stock Exchange are liable to pay registration charges to SEBI Under Regulation 10(1) r/w Schedule III of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.

Headnote:(i) Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992—Regulation 10 r/w Schedule III—Fee for registration of brokers and sub-brokers—Validity of—Sections 11(2)(k) and 12(2) of the SEBI Act empower Board to collect fees—Board has necessary authority to collect cumulative fee for regulating activities contemplated u/s 11 as also for registration of brokers etc. ­under Section 12—Levy of fee on brokers for registration cannot be attacked on ground of lack of authority of law—Fee levied is both regulatory fee and registration fee.

       Section 11(2)(k) of the Act empowers the Board to levy fees or other charges for carrying out the purposes enumerated in Section 11 of the Act. Section 12 requires the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustee of trust deed, Registrar to an issue, merchant banker, underwriter, portfolio managers, investment advisors and such other intermediaries who may be associated with securities market to get themselves registered and obtain a certificate of registration from the Board in accordance with the Regulations made under this Act. Section 12(2) empowers the Board to collect such fees as may be determined by the Regulations from the applicants who seek registration. Section 29 of the Act empowers the Central Government to make, by notification, rules for carrying out the purposes of the Act. It is an undisputed fact that such Rules have been notified. Pursuant to the power vested in the Board under Section 30 of the Act, the Board has framed the Securities and Exchange Board of India (Stock-brokers and Sub-brokers) Regulations, 1992 (the Regulations) with previous approval of the Central Government which came into force w.e.f. 23.10.1992. Regulation 10 of the said Regulations provides for payment of fees as specified in Schedule III of the said Regulations. Schedule III of the said Regulations provides that every stock broker will have to pay a registration fee where his annual turnover does not exceed Rs.1 crore a sum of Rs.5,000/- for each financial year. In case of stock brokers whose annual turnover exceeds Rs.1 crore during any financial year, the fee payable is a sum of Rs. 5,000 plus 100th of 1 per cent of the turnover in excess of Rs.1 crore for each financial year. It also provides that after the expiry of 5 financial years from the date of initial registration as a stock broker, he will have to pay a sum of Rs.5,000/- for a block of 5 financial years commencing from the 6th financial year after the date of grant of initial registration to keep his registration in force. It also provides for instalments for payment of the said fee from the stock brokers. In regard to sub-brokers and other intermediaries, the Schedule provides for a flat rate of fee. From the enumeration of the above provisions of the Act, Rules and Regulations, it is clear that the Board is empowered to collect two types of fees, namely, the fee under Section 11(2)(k) for carrying out the purposes of Section 11 and a fee for the purpose of registering the applicants under Section 12(2) of the Act. The quantum of fee to be paid is fixed under Schedule III of the Regulations as provided under the Act. Therefore, there is no room to attack the levy on the ground that the same is not authorised by law. (Paras 16 to 18)

       It is no doubt true that a perusal of Form `A and `D shows that these forms are issued pursuant to the requirement of Regulations 3 and 6 and Section 12(2) of the Act which, however, does not by itself determine the nature of the fee in question. It is a well established principle in law that so long as the impugned power is traceable to the concerned Statute, mere omission or error in reciting the correct provision of law does not denude the power of the authority of taking a statutory action so long as its action is legitimately traceable to a statutory power governing such action. In such cases, this Court will always rely upon Section 114(e) of the Evidence Act to draw a statutory presumption that the official acts are regularly performed and if satisfied that the action in question is traceable to a statutory power, the courts will uphold such State action. (Para 21)

       The Board has the necessary competence to collect the fees for the purpose of carrying out the mandates under Section 11(2)(k) of the Act and also the power to collect the registration fee under Section 12(2) of the Act. Therefore, in our opinion, the Board has the necessary authority to collect a cumulative fee both for the purpose of regulating the activities contemplated under Section 11 of the Act as also for the purpose of registration under Section 12(2) of the Act, and the fee levied is both regulatory and registration fee leviable under Sections 11(2)(k) and 12(2) of the Act. (Para 21)

       (ii) Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992—Regulation 10 r/w Schedule III—Registration of brokers and sub-brokers—Fees for—Nature of—Requirement of quid pro quo—Levy regulatory in nature—Requirement of quid pro quo recedes to background and same need not be confined to contributories alone—Levy cannot be challenged on ground of equivalent quid pro quo—Utilisation of levy for acquisition of capital assets like building and infrastructure for Board cannot invalidate levy.

       The traditional concept of quid pro quo in a fee has undergone considerable transformation. From a conspectus of the ratio of the above judgments, we find that so far as the regulatory fee is concerned, the service to be rendered is not a condition precedent and the same does not lose the character of fee provided the fee so charged is not excessive. It is also not necessary that the services to be rendered by the collecting authority should be confined to the contributories alone. If the levy is for the benefit of the entire industry, there is sufficient quid pro quo between the levy recovered and services rendered to the industry as a whole. (Para 37)

       Statute under Section 11 of the Act requires the Board to undertake various activities to regulate the business of the securities market which requires constant and continuing supervision including investigation and instituting legal proceedings against the offending traders, wherever necessary. Such activities are clearly regulatory activities and the Board is empowered under Section 11(2)(k) to charge the required fee for the said purpose, and once it is held that the fee levied is also regulatory in nature then the requirement of quid pro quo recedes to the background and the same need not be confined to the contributories alone. (Para 37)

       While examining the reasonableness of the quantum of levy, the same will not be done with a view to find out whether there is a co-relatable quid pro quo to the quantum of levy, because as noticed hereinabove, the quid pro quo is not a condition precedent for the levy of a regulatory fee. Such examination will have to be made in the context of the levy being either excessive or unreasonable for the requirement of the authority for fulfilling its statutory obligations. Once we come to the conclusion that the fee in question is primarily a regulatory fee then the argument that the service rendered by the Board should be confined to the contributories alone, cannot be accepted. What the Court has to investigate while examining a challenge of this nature is to see what is the primary object of the Regulations for which the fee is being collected and find out whether the Regulation in question is in public interest or not. Once the levy is in public interest and connected with the larger trade in which the contributories are involved then confining the services only to the contributories does not arise. As has been held by this Court in City Corporation of Calicut v. Thachambalath Sadasivan & Ors., 1985(2) SCC 112. Applying the said principle, we are of the opinion that since the amount collected under the impugned levy is being spent by the Board on various activities of the stock and securities market with which the petitioners are directly connected, the fact that the entire benefit of the levy does not accrue to contributories i.e. the petitioners would not make the levy invalid. (Para 39)

       The next contention of the petitioners that the Board cannot be permitted to levy the fee for its capital expenditure should also meet with the same fate. This Court in Salvation Army s case (supra) has specifically held “The expenditure in constructing buildings for locating the head office and regional offices and the increase in the allowances or other amenities to the staff have also to be included in the costs of the services”. That being the position in law, this argument should also fail. Even the argument that the amount required for the capital expenditure of the Board should be met by the Government of India and not out of the regulatory fee charged by the Board, has no force. The Board is an autonomous body created by an Act of Parliament to control the activities of the securities market in which thousands of members of gullible public will be investing huge sums of money. Therefore, there is every need for a vigilant supervision of the activities of the market and for that purpose if the Statute intends that the necessary funds should be met by collection of fees from the securities market itself then the said levy cannot be questioned on the ground that the monies required for the capital expenditure of the Board should be met by the Government of India. (Para 40)

       (iii) Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992—Regulation 10(1) r/w Schedule III—Registration of Brokers etc.—Fee for—Levy on Brokers on basis of annual turnover and flat rate on other intermediaries—Not discriminatory—Classification reasonable and has a direct nexus with object to be achieved—Article 14 of Constitution not violated.

       It is true that every classification must have a reasonable nexus with the object to be achieved. In the instant case the question that arises in answering this argument of the petitioners is whether all persons involved in the business of stock exchange should be equally burdened or is it open to the Board to distribute the burden based on certain classification. At this stage, it should be borne in mind that the collection made from a class of persons even if it is a fee can also enure to the benefit of the non-contributories so long as they are within the object governing the levy. From the material on record, it is seen that approx. 50 per cent of the total expenditure to be incurred by the Board would be on brokers’ related services and from amongst all the players in the share market brokers form a distinct and separate class as compared to others including other intermediaries. Therefore, in our opinion, there is nothing wrong in either classifying the brokers as a separate class for the subject of levy based on their annual turnover because the volume of transaction of the brokers has a direct bearing on the regulatory expenses of the Board. Hence, this classification has a direct nexus with the object to be achieved. (Para 41)

       (iv) Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992—Regulation 10(1) r/w Schedule III—Registration of Brokers—Fees for—Levy on basis of annual turnover—Validity of—Levy is not on turnover as such—Levy is on brokers—Turnover is a measure—Levy neither tax nor fee on turnover—Levy valid.

       It cannot be disputed that the ‘annual turnover’ of a broker is not the subject matter of the levy but is only a measure of the levy. In other words, the fee is not being levied on the turnover as such but the fee is being levied on the brokers making their annual turnover as a measure of the levy which is a fee for regulating the activities of the securities market and for registration of the brokers and other intermediaries in the said market. Therefore, it is futile to contend that such levy would be either a tax or a fee on turnover. It is a settled principle in law that if the State has the authority to impose a levy then it has a wide discretion in choosing the measure of levy provided, of course, it withstands the test of reasonableness. Many levies may have a similar measure but by such similarity in the measure, the levies do not become the same. Therefore, if the impugned levy adopts a measure which is either similar to the one adopted while levying turnover tax or income-tax, the impugned levy ipso facto by adoption of such measure, would not become either an income-tax or a turnover tax or even a fee on income or a fee on turnover. Therefore, it would be futile to contend that the impugned fee merely because it is levied on the basis of the turnover of the brokers would either amount to a turnover tax or a tax on income. While we accept the levy based on annual turnover of the brokers as valid, we have to notice that the Expert Committee appointed by the Board has in its report held that there should be certain changes brought about in the definition of annual turnover’ as also in the quantum of the levy pertaining to certain specific transactions which are treated as part of the turnover. It has recommended that for “jobbing transactions” the scale of fees may be reduced to One Two hundredth of 1 per cent, and in regard to carry forward, renewal or badla transactions, the off-setting entries made by the Exchange, may not be counted as part of the turnover, and further on Government securities, PSU Bonds and Units, the turnover will have to be calculated separately and a fee of one thousandth of one per cent may be charged on such turnover than the present scale of one hundredth of one per cent. It has also recommended that the activities such as underwriting and collection of deposits should not be taken into account for the purpose of calculating the turnover of the brokers. These recommendations of the Committee were, as a matter of fact, accepted by the Government of India also but as on date, the necessary changes have not been brought about by the Board in its Regulations. Consequently, to the extent of the recommendations made by the Expert Committee, we are of the opinion that the Board is bound to bring about corresponding changes so as to remove the anomalies pointed out by the Committee. This was pointed out to learned counsel for the respondents when it was submitted that the Board has accepted these recommendations and the proposed changes were not brought about because of the pendency of this petition and the necessary changes to incorporate the recommendations of the Bhatt Committee would be done after disposal of these petitions. We record this submission on behalf of the Board and direct that the said changes recommended by the Bhatt Committee will be incorporated in the Regulations. Subject to the above, we are of the view that the challenge made to the levy based on the measure of turnover has to be rejected. (Paras 44 and 45)

       (v) Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992—Regulation 10(1) r/w Schedule III—SEBI Act, 1992—Section 12(2)—­Securities Contract Regulations Act, 1956—Sections 2(e) and 3(2)(c)—Registration of Brokers—Fee for—National Stock Exchange—Trading Members—Liability to pay regis­tration fee—Trading member of NSE have been recognised to be members of Stock Exchange though with limited rights—Cannot escape from levy of registration fee.

       The argument was the stock brokers of NSE are not the members as defined under Section 2(e) of the Act and the NSE being a company of which shareholders are only institutions and trading members not being shareholders, they do not fall within the definition of a member of a stock exchange. It is difficult to accept this argument Section 3(2)(c) of the SCR Act requires a stock exchange which applies for recognition to specify various classes of members who will be admitted as members of the stock exchange. This does not make any distinction between a full-fledged member and a trading member of the NSE. Further, Clause 9 of Part II of Annexure to Form ‘A’ requires a stock exchange, inter alia, to state the different classes of members, if any, and such number of members thereof, and the privileges enjoined by such class of persons. Definition of a trading member under the NSE bye-laws itself shows that a trading member to be a stock broker and a member of the NSE registered in accordance with Chapter V of its bye-laws. Article 1(m) of the Articles of NSE defines a ‘trading member’ to mean a member of the stock exchange. Explanation to it further clarifies that there may be more than one class of trading members of the Exchange as may be determined by its Board from time to time. A trading member of the NSE need not necessarily be a member of the company that is NSE. Therefore, it is clear from the Articles of NSE that the said Exchange itself recognises a trading member to be a member of the Stock Exchange though with limited rights. Therefore, it is clear that there can be more than one class of members who can be admitted as members of the stock exchange and any of those members belonging to any of those classes so long as they are registered as such by a stock exchange, will fall within the definition of ‘member’ as defined in Section 2(c) of the SCR Act and Rule 2(e) of the SEBI Rules. It is also undisputed that the trading members of the NSE are carrying on the business of stock brokering, hence, keeping in mind the objects of the Act, it would be futile to contend that the trading members of the NSE cannot be considered to be the stock brokers for the limited purpose of the liability to pay the impugned fee under the Act, Rules and Regulations. (Para 47)