Supreme Court clarifies SEBI registration for stock brokers operating across multiple exchanges: SEBI vs. National Stock Exchange Members Association (2022)

Date of the Judgment: 13 October 2022

Citation: (2022) INSC 907

Judges: Justices Ajay Rastogi and B.V. Nagarathna

Can a stockbroker who is a member of multiple stock exchanges be required to obtain a separate certificate of registration from the Securities and Exchange Board of India (SEBI) for each exchange? The Supreme Court of India recently addressed this question, clarifying the regulatory framework for stock brokers. The core issue was whether a single registration with SEBI is sufficient for a stock broker operating across various stock exchanges, or if multiple registrations are required. This judgment was delivered by a bench of Justices Ajay Rastogi and B.V. Nagarathna.

Case Background

The Securities and Exchange Board of India (SEBI) was established under the Securities and Exchange Board of India Act, 1992, to protect investors’ interests and regulate the securities market. Before SEBI, stock exchanges managed their own members. The Securities Contracts (Regulation) Act, 1956, and the Securities Contracts (Regulation) Rules, 1957, governed the market. After SEBI’s formation, the Central Government framed the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules, 1992, and SEBI framed the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992.

Initially, SEBI levied fees on stock brokers as per Regulation 10 read with Schedule III of the Regulations, 1992. This was challenged in the Supreme Court in BSE Brokers’ Forum, Bombay and Others v. Securities and Exchange Board of India and Others, which upheld SEBI’s right to charge fees. The Court directed SEBI to amend regulations based on the R.S. Bhatt Committee’s recommendations.

Following the Supreme Court’s directions, SEBI issued a circular on March 28, 2002, clarifying that every stock broker must pay the prescribed fees for each registration certificate held. This meant that a broker with multiple registrations across different stock exchanges would have to pay fees for each certificate. The National Stock Exchange Members Association challenged this circular, arguing that a single registration with SEBI should suffice, regardless of the number of stock exchanges a broker operates in.

The High Court of Delhi initially upheld SEBI’s circular, but a Division Bench later overturned this decision, stating that only one registration was needed. SEBI then appealed to the Supreme Court.

Timeline

Course of Proceedings

The National Stock Exchange Members Association challenged SEBI’s circular of March 28, 2002, which mandated that stock brokers pay fees for each registration certificate they held. The association argued that a single registration should be sufficient, regardless of the number of stock exchanges a broker operates in.

A Single Judge of the High Court of Delhi upheld SEBI’s circular, agreeing that multiple registrations were envisaged under the regulations. However, on appeal, a Division Bench of the same High Court overturned this decision. The Division Bench held that Section 12(1) of the Securities and Exchange Board of India Act, 1992, which uses the term “a certificate,” implies that only one registration is required, even if a broker operates in multiple stock exchanges. The Division Bench directed SEBI to refund fees collected for subsequent registrations after the initial one, leading SEBI to appeal to the Supreme Court.

Legal Framework

The Securities and Exchange Board of India Act, 1992, established SEBI to regulate the securities market and protect investors. Section 12(1) of the Act states:

“No stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with the conditions of a certificate of registration obtained from the Board in accordance with the (regulations) made under the Act:”

The Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules, 1992, framed under Section 29 of the Act, define “stock broker” as a member of a stock exchange (Rule 2(e)) and state that no stock broker shall deal in securities without a certificate granted by the Board (Rule 3). Rule 4 outlines the conditions for granting a certificate, including membership of a stock exchange and adherence to its rules.

The Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992, framed under Section 30 of the Act, detail the procedure for registration. Regulation 3 requires brokers to apply for registration in Form A through the stock exchange they are members of. Regulation 6 states that the Board shall grant a certificate in Form D to eligible brokers and inform the relevant stock exchanges. Regulation 10 and Schedule III specify the fees for registration.

Schedule III of the Regulations specifies the fees payable by stock brokers. Clause 1(1)(c) of Schedule III states: “after the expiry of five financial years from the date of initial registration as a stock-broker, he shall pay a sum of rupees five thousand for [every] block of five financial years commencing from the sixth financial year after the date of grant of initial registration to keep his registration in force.”

Arguments

Appellant (SEBI)’s Arguments:

• SEBI argued that the circular dated March 28, 2002, was a clarification of existing regulations and in line with the scheme of the regulations.
• The fee charged by SEBI is regulatory and not a tax. Quid pro quo is not necessary for a regulatory fee.
• Each stock exchange is separately registered under the Securities Contracts (Regulation) Act, 1956, and SEBI endorses different stock exchanges. Therefore, fees must be separate for each registration.
• Multiple registrations are envisaged because brokers enroll in different categories of memberships (e.g., equity, debt, derivatives). Expertise for one type of security does not automatically qualify them for another.
• The term “a certificate” in Section 12(1) can refer to both singular and plural. The High Court overlooked the scheme of Regulations, 1992, and Form A, which indicate separate registrations for each exchange.
• The application for registration must be made through each stock exchange where the broker is a member. The respective stock exchange forwards the application to SEBI, which grants registration.
• A broker who is a member of multiple stock exchanges (e.g., Madras, Calcutta, Bombay) must register separately with SEBI for each exchange.

Respondent (National Stock Exchange Members Association)’s Arguments:

• The scheme of the Act and Regulations does not require separate registrations for each stock exchange.
• The term “initial registration” in Schedule III is only to indicate the starting point for calculating the five-year period for ad valorem fees.
• Schedules to Regulations cannot override the main scheme of the Regulations.
• The practice of multiple registrations was out of abundant caution, as Form D reflected the names of stock exchanges of which they were members on the date of initial registration.
• Irrespective of single or multiple registrations, the ad valorem fee should only be paid once for five years from the first registration.
• The circular dated March 28, 2002, is ultra vires to the Act as it compels brokers to pay ad valorem fees for multiple blocks of five years from the dates of multiple registrations.

Submissions by Parties

Issues Framed by the Supreme Court

1. Whether under the Act 1992, a stock broker has to obtain a certificate of registration from SEBI for each of the stock exchanges where he operates or whether a single certificate of registration from SEBI is sufficient and the same would enable him to trade in all other stock exchanges?
2. Whether the ad valorem fee to be paid for an initial period of five years will recur with every such registration?

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Judgment

How each authority was viewed by the Court:

• The Supreme Court relied on its previous judgment in BSE Brokers’ Forum, Bombay and Others v. Securities and Exchange Board of India and Others [2001] 3 SCC 482* to affirm that the fees charged by SEBI are regulatory in nature and not a tax.
• The Court interpreted Section 12(1) of the Securities and Exchange Board of India Act, 1992* to mean that the term “a certificate” can refer to both singular and plural, and that the certificate is linked to the stock exchange of which the stock broker is a member.
• The Court considered Rule 2(e), Rule 3, and Rule 4 of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules, 1992* to emphasize that a stock broker is a member of a stock exchange and must have a certificate to deal in securities.
• The Court considered Regulation 3, Regulation 6, and Regulation 10 of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992* to state the procedure for registration.
• The Court interpreted Schedule III of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992* to mean that the fee is linked to each certificate of registration and is payable after five years from the initial registration with reference to a particular stock exchange.
• The Court distinguished K.P. Varghese v. Income Tax Officer, Ernakulam and Another [1981] 4 SCC 173*, stating that the prevailing practice cannot be used in aid of interpretation if it is contrary to the plain language of the statute.
• The Court cited Chief Justice of Andhra Pradesh and Others v. L.V.A. Dixitulu and Others [1979] 2 SCC 34* to discuss the principles of purposive construction and interpretation of statutes.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by a purposive interpretation of the Securities and Exchange Board of India Act, 1992, and the rules and regulations framed thereunder. The Court emphasized that the legislative intent was to ensure the proper regulation of stock brokers across all stock exchanges. The Court considered the following points:

• Statutory Interpretation: The Court held that the term “a certificate” in Section 12(1) of the Act can refer to both singular and plural. This interpretation was crucial in determining that multiple registrations were permissible.
• Regulatory Framework: The Court emphasized that the scheme of Rules and Regulations, which has a statutory force, requires stock brokers to obtain separate registrations for each stock exchange they operate in.
• Fee Structure: The Court upheld the fee structure prescribed in Schedule III of the Regulations, stating that it was linked to each certificate of registration and was not a tax but a regulatory fee.
• Purposive Construction: The Court adopted a purposive approach to statutory interpretation, aiming to give effect to the legislative intent of regulating the securities market effectively.

Logical Reasoning:

The Court considered the arguments of both sides, but ultimately emphasized the importance of maintaining a robust regulatory framework for the securities market. It rejected the argument that a single registration would suffice, holding that the scheme of the Act, Rules, and Regulations clearly indicates the need for separate registrations. The Court also rejected the argument that the fee should be paid only once, stating that the fee is linked to each certificate of registration.

The Court rejected the High Court’s view that the expression ‘a certificate’ signifies a single certificate of registration, stating that the expression can be used for both singular and plural. The Court also rejected the High Court’s view that the rules and regulations framed by the Central Government or the Board have to be in conformity with the mandate of the Act, 1992, and that the Act will prevail over subordinate legislation. The Court stated that the scheme of rules and regulations has a statutory force.

The Court quoted “The primary principle of interpretation is that a constitutional or statutory provision should be construed ‘according to the intent of they that made it’ (Coke).” The Court also quoted, “A purposive construction of an enactment is one which gives effect to the legislative purpose by following the literal meaning of the enactment where that meaning is in accordance with the legislative purpose, or applying a strained meaning where the literal meaning is not in accordance with the legislative purpose.”

The Court noted that “each certificate of registration with SEBI remains co-terminus with the stock exchange (s) to which the stock broker is a member.”

Key Takeaways

• Stock brokers operating in multiple stock exchanges must obtain separate registration certificates from SEBI for each exchange.
• The fee for registration is payable for each certificate, and the ad valorem fee recurs every five years from the date of each initial registration.
• The Supreme Court emphasized the importance of a purposive interpretation of the law to ensure the effective regulation of the securities market.
• The term “a certificate” in Section 12(1) of the Securities and Exchange Board of India Act, 1992, can refer to both singular and plural.
• The scheme of the Rules and Regulations has a statutory force and supplements the mechanism for obtaining a certificate of registration.

Directions

The Supreme Court allowed the appeals and quashed the judgment of the Division Bench of the High Court. The Court did not give any specific directions, but the effect of the judgment is that SEBI’s circular of March 28, 2002, is upheld, and stock brokers must pay fees for each registration certificate they hold.

Development of Law

The ratio decidendi of this case is that a stock broker must obtain a separate certificate of registration from SEBI for each stock exchange they operate in, and the ad valorem fee is payable for each registration. This judgment clarifies the regulatory framework for stock brokers and upholds SEBI’s authority to charge separate fees for each registration. This judgment does not change any previous position of law, but rather clarifies the existing position of law.

Conclusion

The Supreme Court’s judgment in Securities and Exchange Board of India vs. National Stock Exchange Members Association and Anr. clarifies that stock brokers must obtain separate registration certificates from SEBI for each stock exchange they operate in. The Court interpreted the relevant provisions of the Securities and Exchange Board of India Act, 1992, and the rules and regulations framed thereunder to conclude that the term “a certificate” can refer to both singular and plural and that the fee for registration is payable for each certificate. This decision upholds SEBI’s regulatory authority and ensures the proper functioning of the securities market.