INDIAN INSTITUTE OF MANAGEMENT, ROHTAK

Submission of the CASE COMMENT, Company Law -II

TITLE
B.S.E. BROKERS FORUM, BOMBAY AND ORS.
….Petitioner
VS.
SECURITIES AND EXCHANGE BOARD OF INDIA AND ORS.
….Respondent
MANU/SC/0069/2001
Transfer Case (civil) 20 of 2000, Writ Petition (Civil) 502 of 2000
Hon'ble Judges/Coram: B.N. Kirpal, N. Santosh Hegde and Brijesh Kumar, JJ.

Decided On: 01.02.2001

Submitted To Submitted By
Prof. Jyotirmoy Banerjee Disha Kar
IIM Rohtak Roll IPL01038
 Table of Contents

BACKGROUND ...................................................................................................................... 2

FACTS OF THE CASE ............................................................................................................ 2

ISSUES OF THE CASE ........................................................................................................... 4

ARGUMENTS ADVANCED BY PETITIONERS ................................................................. 5

ARGUMENTS ADVANCED BY RESPONDENTS .............................................................. 8

JUDGEMENT......................................................................................................................... 10

RATIO DICTUM.................................................................................................................... 12

ANALYSIS ............................................................................................................................. 13

1
 BACKGROUND
The President of India on 31st Jan, 1992, exercised the powers which are conferred upon him
by Article 123(1) of the Constitution of India1 to promulgate the Securities & Exchange Board
of India Ordinance, 1992. After that this ordinance changed into an act which was Securities
& Exchange Board of India Act, 1992.
The objective behind enactment of such an Act was to protect the interest of the investor in
securities and to develop and to promote the development of and to regulate the securities
market. Under Section 3 of the act it provided for establishment of Securities & Exchange
Board of India. Number of Writ Petitions was filed before different High Courts challenging
the validity of Regulation 10 of the Securities & Exchange Board of India (Stock Brokers &
Sub-Brokers) Regulation, 1992 read with Schedule III of the Regulation which was issued by
the Securities & Exchange Board of India2.

FACTS OF THE CASE

1. After the commencement of the SEBI Act of 1992 there was a letter which was sent by SEBI
to all the President, Executive Directors, & stock brokers of the recognised stock exchanges
all over the India to submit their application to the board so that they get themselves registered
with the SEBI in accordance with Section 12(1) of the Act3.

2. The letter was sent by the SEBI to the members of different stock exchanges, stock brokers,
and president of stock exchanges which required them to submit the application form with the
required fees for getting themselves registered with the Board. The fees were to be paid on the
basis laid down by the SEBI.

3. Such a demand of the fees from stock brokers led to a nation-wide perturbation of stock

1
THE CONSTITUTION OF INDIA, § 123(1), (India)
2
THE SECURITIES & EXCHANGE BOARD OF INDIA (STOCK BROKERS & SUB-BROKERS)
REGULATION, 1992, Regulation 10, (India)
3
THE SECURITIES & EXCHANGE BOARD OF INDIA (STOCK BROKERS & SUB-BROKERS)
REGULATION, 1992, Schedule III, (India)

2
brokers due to which stock exchanges all over the India was closed down for several days. The
only reason behind such an agitation was the high registration fee levied by the Board. Such
was the pressure made by the stock brokers that led the SEBI Board to change the fees structure
& gave two options to the stock brokers to get themselves register with the Board. Under
Option a onetime registration fee had to pe paid by the stock brokers in five annual instalments.
Under Option B one time registration fee at rate of 1% had to be paid by the members on the
basis of annual turnover of each broker for 5 years from 1990-91.

4. The Central Government on 20th Aug, 1992 issued a notification exercising the powers
conferred under Section 29 of the SEBI Act4, 1992 came out with notification enacting the
Securities & Exchange Board of India (Stock brokers & Sub-brokers) Rules, 1992. Under Rule
3 it provided that no stock broker shall buy, sell and deal in securities unless he holds a
certificate granted by the board. The Regulation 10 of the said Rules read with Schedule III is
reason behind the arising of the dispute.

5. There was a considerable amount of change made in the new proposal which was made by
the Board. One of the most significant changes in the revised fee structure made by the Board
was that the initial fee for registration was reduced by 50% and more instalment facility option
was being given to the stock brokers. Though the registration fee was reduced then also the
members, stock brokers were not satisfied and opposed the fee structure of the Board.

6. When the members of the stock exchange and the stock brokers addressed letters to the
Finance Minister and SEBI Board and when they did not get any positive response from them,
so they filed various Writ Petitions in different High Courts.

7. A Writ Petition filed before the Bombay High Court having Petition Number 126/93 was
file by BSE Brokers Forum, Bombay. This Petition is by a transfer order and was numbered
Transfer Case No. 20/2000 and Writ Petition (Civil) 502 of 2000. The Petitioner in this case is
the BSE Brokers Forum, Bombay & others & the Respondent are the SEBI.

4
Securities and Exchange Board of India Act, 1992, § 29, (India)

3
 ISSUES OF THE CASE

1. Whether the Board has legislative competence to levy such registration fees on the
brokers.
2. Whether levy of fees is impugned on the ground that the same is based on concept of
annual turnover.
3. Whether the demand of Board was excessively for taxation purposes to render
Regulation 10 of Schedule III ultra vires and void ab initio.

4
 ARGUMENTS ADVANCED BY PETITIONERS

Whether the Board has legislative competence to levy such registration fees on the
brokers.

The petitioners contend that there are at present 491 stock brokers operating from its exchange
out of which more than 460 stock brokers are members of the first petitioner Society. It is also
stated that both the Union of India and the Board lack the legislative competence to levy a tax
which is in the nature of a professional tax which power being exclusively with the States under
Entry 60, List II, Schedule VII of the Constitution of India.

Whether levy of fees is impugned on the ground that the same is based on concept
of annual turnover.

The petitioners contended that Brokers are being subject to a hostile discrimination because
they are made to pay the fee on the bases of annual turnover and such levy of fee on basis of
annual turnover does not have any nexus with the purpose for which the levy of fee is imposed
because it is unreasonable and arbitrary in nature. The levy was further impugned on the ground
that the same was based on vague and imprecise concept of annual turnover and registration
fee on its very nature can only be one-time fee, hence, demand for collection based on annual
turnover extending over 5 years is arbitrary and unreasonable.
On behalf of the petitioners, such fee, cannot be levied on them because a fee can be levied
only if the collector of the fee is rendering any service to the contributories of the fee. They
contended that no such service is being rendered by the Board to them which can even remotely
be equated to the quantum of the levy. They also contended that the amount collected as fee
was used as a general fund by the Board for its various activities which has no nexus with the
services to be rendered to the contributories. Hence, the impugned levy cannot be treated even
as a regulatory fee.
In the case of The Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakshmindra

5
Thirtha Swamiar of Sri Shirur Mutt5, while enumerating the different characteristics of tax and
fee, this Court held that the distinction between a tax and a fee lies primarily in the fact that a
tax is levied as a part of common burden while fee is a payment for a special benefit or
privilege.
The petitioners also relied on another judgment of this Court in The Chief Commissioner, Delhi
& Anr. v. The Delhi Cloth & General Mills Co. Ltd. & Ors6, wherein this Court has held that
there are two essential elements required to be established for justifying a levy of fee. Firstly,
such levy should be in consideration of certain services which the individuals accept either
willingly or unwillingly and secondly the collection from such levy should not be set apart or
merged in the general revenue of the State to be spent for general public purposes but should
be appropriated for the specific purpose for which the levy is being made.
The petitioners argued that the brokers have been subjected to a hostile discrimination vis-a-
vis other intermediaries in the stock market inasmuch as they as a class alone are made to pay
the fee on the basis of the annual turnover while others have to pay only on a flat rate. Thus,
they have been compelled to bear the maximum burden of the levy while the other
intermediaries are liable to pay only a nominal part of the levy.
The petitioners in light of these judgements argued that the levying of fees was unjust.

Whether the demand of Board was excessively for taxation purposes to render
Regulation 10 of Schedule III7 ultra vires and void ab initio.

The issue raised before the court was that the Regulation 10 read with Schedule III of the SEBI
(Stock brokers & Sub-brokers) Rules, 1992 was ultra vires to the act and void ab intio.
The petitioners contended that it was clear that what was demanded by the Board from them
was a fee under Section 12(2) of the Act8 which is a registration fee simpliciter. They supported
this contention by pointing out that the application for registration has to be made in Form 'A'

5
The Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirur
Mutt, MANU/SC/0136/1954
6
The Chief Commissioner, Delhi & Anr. v. The Delhi Cloth & General Mills Co. Ltd. & Ors,
MANU/SC/0036/1978
7
Supra note 2, at 2
8
Securities and Exchange Board of India Act, 1992, § 12(2), (India)

6
and the registration certificate was issued in Form 'D', which were statutory forms and which
showed that these Forms issued under Regulations 3 and 6, referable only to Section 12 of the
Act9. Therefore, they contended that the Board could not contend that the impugned fee was
collected for any purpose other than for registration.
The members of the stock exchanges contended that the levy of such a high amount of fee for
registration is not justifiable as it amounts to levy of a tax which is without any authority of
law and not a fee. Stock Brokers all over the country contended that the board should put forth
their justification regarding levy of such a high amount of ‘fee’ and challenged the method of
levy also. They contend that the registration fee sought to be levied by the Board on stock
brokers for the purpose of registration is ex facie illegal and void ab initio being ultra vires of
the Act and the Rules and the demand is without authority of law being a tax in the guise of a
fee which is ultra vires Article 265 of the Constitution of India10. The said fee which is levied
merely for the purpose of registration is so excessive that the same is nothing short of a
colourable attempt on the part of the Board to tax the petitioners for carrying on their
professions/business.

9
Securities and Exchange Board of India Act, 1992, § 12, (India)
10
THE CONSTITUTION OF INDIA, § 265, (India)

7
 ARGUMENTS ADVANCED BY RESPONDENTS

Whether the Board has legislative competence to levy such registration fees on the
brokers.

In reply to the above contentions in the petition, first respondent-Board has filed its objections
denying that there was lack of legislative competence to levy registration fee as contended in
the petition.

Whether levy of fees is impugned on the ground that the same is based on concept
of annual turnover

It was contended that from the facilities that will be provided by the Board, the brokers would
stand to benefit a great deal and that the Board intends to provide improved system of the
trading which would fetch larger income to the brokers, by regulating the system the Board
contends the inflow of foreign investment in the country also would increase substantially.
According to the Board, the money that will be received by the levy would be reasonably
sufficient to meet its expenses arising out of its statutory obligations.
It contends that it is a reasonable classification taking into account the object of the Act. They,
further, contended that when earlier a proposal was made to levy a flat fee the brokers opposed
the same strongly, hence, the said decision to levy flat fee had to be withdrawn.
It also disputed the petitioners’ argument that the collection from the levy far exceeded the
requirement of funds by the Board. It also denied that imposition of fee on the basis of turnover
was either vague, unreasonable, arbitrary or discriminatory. It contends that a levy of .01% of
the annual turnover when compared to the brokerage fee charged by a broker was hardly
unreasonable. It further contended that on the representations made by the petitioners it had
appointed an Expert Committee and this Committee after hearing various members of the
Bombay stock Exchange by its report dated 18th of December, 1992 in effect approved the
levy.

8
 Whether the demand of Board was excessively for taxation purposes to render
Regulation 10 of Schedule III11 ultra vires and void ab initio.

It was denied that the levy was a tax in the guise of a fee. On the contrary, it is asserted that
the said levy is a fee towards the service rendered by it to the petitioners and others involved
in the business of stocks and shares and in furtherance of the object enumerated in Section 11
of the Act12. It also denied that the levy would amount to an unreasonable restriction on
trade/business. It denied that any unreasonable hardship would be caused to the brokers by
virtue of the levy being linked with the annual turnover of theirs and their classification vis-a-
vis other intermediaries is an unreasonable classification.
It was further contended that the mere fact that Forms 'A' and 'D' are referable to Section 12(2)
13
only, ipso facto does not make the demand a registration fee simpliciter. It specifically denied
that the levy is a registration fee simpliciter but the same includes a fee required for establishing
the necessary infrastructure for fulfilling and maintaining the objectives of the Act.
They denied that Regulation 10 of Schedule III to the Regulations14 is either ultra vires of the
Act or unconstitutional. Justifying the fee levied by them the Board contended that it had to
render multifaceted and multitude of services contemplated under Section 11(2) of the Act15.
On behalf of the Board, it is contended that though the demand is termed as registration fees,
as a matter of fact, the fee that is collected is a combination of a regulatory fee as well as a
registration fee as contemplated under Sections 11(2)(k)16 and 1217 of the Act respectively.
They also pointed out that, the collection from that levy was credited to a fund created under
Section 1418 of the Act and the amount from the said fund was utilised only towards the
expenses incurred by the Board in performing its duties mandated under the said Act.

11
Supra note 2, at 2
12
Securities and Exchange Board of India Act, 1992, § 11, (India)
13
Supra note, 8 at 6
14
Supra note, 2 at 2
15
Securities and Exchange Board of India Act, 1992, § 11(2), (India)
16
Securities and Exchange Board of India Act, 1992, § 11(2)(k), (India)
17
Supra note, 9 at 7
18
Securities and Exchange Board of India Act, 1992, § 14, (India)

9
 JUDGEMENT

The Board has legislative competence to levy such registration fees on the brokers.

The Act in question is an Act to provide for the establishment of a Board to protect the interests
of investors in securities and to promote the development of, and to regulate, the securities
market and for matters connected therewith or incidental thereto. Section 11 of the Act defines
the powers and functions of the Board which mandates that it shall be the duty of the Board to
protect the interests of investors in securities and to promote the development of, and to
regulate the securities market, by such measures as it thinks fit. 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 Act19. Section 1220 requires the stock brokers, sub-brokers, share transfer
agents, 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)21 empowers the Board to collect such fees
as may be determined by the Regulations from the applicants who seek registration. The
Government of India has already delegated to the Board the functions under the SCR Act, the
Depositories Act as also some of the functions under the Companies Act.
Hence, the Board has legislative competence to levy such registration fees on the brokers.

The levy of fees is not impugned on the ground that the same is based on concept
of annual turnover.

The Hon’ble Court held that the 'annual turnover' of a broker is not the subject matter of the
levy but is only a measure of the levy. 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

19
Supra note, 12 at 9
20
Supra note, 9 at 7
21
Supra note, 8 at 6

10
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.
The court after going through the material on record concluded that approx 50% of the total
expenditure which the board would incur would be on broker related services and due to which
the brokers form a distinct & separate class when they are compared to other intermediaries.
Therefore the brokers form a separate class & are subject to levy on the bases of annual
turnover because the number 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.

The demand of Board was not excessive and Regulation 10 of Schedule III is valid.

Referring to the case of City Corporation of Calicut v. Thachambalath Sadasivan & Ors 22.
wherein the Hon’ble Court reflected, “The change that is taking place in the judicial thinking
as to the difference between a tax and a fee. It held that if one who is liable to pay receives
general benefit from the authority levying the fee the element of service required for collecting
fee is satisfied.”, it was observed that in furtherance of the requirements of the Statute, the
Board requires substantial sums of money towards capital expenditure in the form of acquiring
office premises, residential premises, office equipments and to provide the necessary facilities
for inducting the information technology in its day-to-day functions. It is to be noticed that the
Board has to control and regulate 23 stock exchanges all over India which have more than
10,000 listed companies, 9500 brokers, 5500 sub-brokers, 250 merchant brokers with similar
number of Registrars to the Issue, share transfer agents, more than 300 depository participants
and other categories of intermediaries.
This Court in the case of Goodbricke Group Ltd. & Ors. v. State of West Bengal & Ors23 stated.
“No one can say that a tax under a particular entry must be levied only in a particular manner,
which may have been adopted hitherto. The legislature is free to adopt such method of levy as
it chooses and so long as the character of levy remains the same.”

22
City Corporation of Calicut v. Thachambalath Sadasivan & Ors, M ANU/SC/0014/1985
23
Goodbricke Group Ltd. & Ors. v. State of West Bengal & Ors, MANU/SC/0964/1995

11
Applying the said principle, the Hon’ble Court was 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.
It was held 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.

RATIO DICTUM

The Hon’ble Supreme Court held that the Transfer Case No 20/2000 failed and the same was
dismissed. The Writ Petition was dismissed by the court.

The Court considered the fact that such a levy of fee on the brokers on basis of turnover would
not amount to a turnover tax or tax on income. The court accepted the levy of fee on the basis
of turnover as valid & noticed that the changes recommended by the expert committee
appointed by the board should be brought about. The court further stated that there is no need
to go into the niceties of the levy of fee which is not in the realm of their jurisdiction but the
reasonableness of the levy was in accordance with the statutory powers conferred upon them.

12
 ANALYSIS

The Section11 of the SEBI Act24, 1992 provide the powers and function of the board and it
makes compulsory for the board to protect the interest of the investors in securities and to
promote and develop the security market. The provision mandates the board to regulate the
business in stock exchanges and to register and regulate the working of the depositors. Section
11(225) of the abovementioned Act empowers the board to levy fees or other necessary charges
for achieving the goals which are provided under Section 11 of the Act26. Under Section 30 of
the Act the Board enacted the Securities & Exchange Board of India (Stock broker & Sub-
broker) Rules, 1992 with the prior approval of the Central Government. Under Regulation 10
of the abovementioned Regulation it provided for payment of fees to be made by the stock
brokers for registering themselves with the SEBI & the basis of payment was specified under
Schedule III of the Regulation. It is evident from the provisions of the Act & the Regulation
that the Board is empowered to levy two types of fee, the 1st one being levy of fee under
Section 11(2)27 of the Act so that Section 1128 purposes are achieved and the 2nd one being a
fee for the purpose of registering the applicants under Section 12(2)29 of the Act.
Due to this, it cannot be contended by the Petitioner that the levy of fee was not authorised by
law and of arbitrary nature and this contention was rejected by the court. The other contention
of the appellants that brokers are being subject to hostile discrimination was negated by the
court. The court after going through the material on record has rightfully concluded that the
Board which had the authority to levy such fee was not in contravention of any law and the
disputed Regulation stood valid.
Recently, In National Stock Exchange Member’s Association v. Union of India30, the
petitioner dealt with sale & purchase of the securities & shares in India. There members were
registered under SEBI (Stock Brokers & Sub-Brokers) Regulation, 1992. SEBI issued a

24
Supra note, 12 at 9
25
Supra note, 15 at 9
26
Supra note, 24
27
Supra note, 25
28
Supra note, 26
29
Supra note, 13 at 6
30
National Stock Exchange Member’s Association v. Union of India, Civil Appeal No. 435 of 2007

13
circular in which it required separate registration fee for multiple registrations. A Writ Petition
was filed by the petitioner challenging the multiple registration fees adopted by the SEBI on
the grounds that it is contrary to Schedule III of the SEBI Regulation, 1992. The Delhi High
Court held that there is no straight jacket formula for levying registration fee. The mode &
manner in which fee should be levied depends upon the SEBI to decide. The court held that
the circular was intra vies to the Regulations.

14