REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3696  OF 2005                 

S.E.B.I ...Appellant

Versus

Saikala  Associates Ltd. ...Respondent

With

CIVIL APPEAL NO. 4640  OF 2006

J U D G M E N T

Dr. ARIJIT PASAYAT, J.

1. In both these appeals common points are involved and are, therefore,

taken  up  together  for  disposal.  In  both  these  appeals  challenge  by  the

Securities and Exchange Board of India (in short ‘SEBI’) is to the order

passed by the Securities Appellate Tribunal (in short the ‘Tribunal’).  

2. Factual Position is almost undisputed and in respect of the appellants

stand as follows:

(I) C.A. No. 3696   of 2005:  

The  Respondent  has  acted  as  a  sub-broker  at  the  National  Stock

Exchange with 2 NSE Members, MIS PCS Securities Limited & M/S Zen

Securities Ltd. without being registered as a sub-broker with the SEBI with

the said Exchange for the Period from the years 2000-01, 2001-02 and from

April,2002  to  May,  2002  and  created  the  value  of  Rs.403.29  Crores,  in

breach of Section 12(1) of the Securities and Exchange Board of India Act,

1992 (hereinafter referred to as the "Act") read with Rule 3 of the Securities

and Exchange Board of India (Stock Brokers & Sub Brokers) Rules, 1992

(hereinafter referred to as the " Rules" )

(II) C.A. No. 4640 of 2006 ( SEBI Vs SHILPA STOCK BROKERS P. LTD & M/S   MEHTA VAKIL   &   Co )   

Tribunal has recorded the fair concession of the Respondent that the

Respondent registered as a broker with the SEBI while executing trades on

behalf of their client Kamlesh Shroff, had dealt with M/s Jairam Enterprises,

an unregistered sub-broker, which is admittedly in violation of the Circular

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No. SMD/I POLICY /CIRCULAR/3-97 dated 31.3.1997 issued by SEBI in

exercise  of  powers  under  Section  11  of  the  Act.  As  regards  the  second

charge, the Tribunal did not uphold the finding of the Appellant SEBI.

(iii) As regards M/s. Mehta Vakil & Co P. Ltd.  (Appeal No. 11 of 2000

before the Tribunal) the respondent-co. were involved in purchase of 19400

shares and Sale of 800 shares of V.B. Financial which had been transacted

by the said broker on behalf  of their  sub-broker,  namely, Akshay Dalal,

who was registered as a sub broker only with effect from 14.1.2000 but had

dealt with him since December, 1998 in breach of the Act, Rules Securities

and Exchange  Board  of  India  Regulations  & Circulars  of  SEBI,  (Stock

Brokers and Sub-Brokers) (Hereinafter referred to as “Regulation”).

3. The  only  question  is  whether  Tribunal  has  power  to  modify  the

penalty imposed by SEBI? According to the appellant the Tribunal had no

jurisdiction to modify the sentence.  The Tribunal in each case held that the

proved charges against the respondent were not serious enough to warrant

suspension of certificate of registration.

4. The respondent, on the other hand, supports the order of the Tribunal

and contends that proportional penalty can be leveled and the modification

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done is clearly within the scheme and framework of the Act.  It is submitted

that  when  a  regulator  chooses  to  elect  a  particular  form  of  authority,

amongst various available penalties which is available and it is appealable

the Tribunal has the right to modify it.  Reference in this context is made to

Section 15(T) of the Act.

5. There  is  no  dispute  that  there  was  violation  of  the  provisions  of

Section 12(1) of the Act read with Rule 3 of the Rules.   

6. Section 12, 15A, 15B, Rule 3 of the Rules and Regulation 25 of the

Regulation are relevant and read as follows:

“Regulation of stock brokers, sub-brokers, share transfer agents, etc.

12. (1)  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 this Act:

Provided that a person buying or selling securities or otherwise dealing  with  the  securities  market  as  a  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

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immediately before the establishment of the Board for which no  registration  certificate  was  necessary  prior  to  such establishment,  may continue  to  do  so  for  a  period  of  three months  from  such  establishment  or,  if  he  has  made  an application for such registration within the said period of three months, till the disposal of such application:

Provided  further  that  any  certificate  of  registration, obtained  immediately  before  the  commencement  of  the Securities Laws (Amendment) Act, 1995, shall be deemed to have  been  obtained  from the  Board  in  accordance  with  the regulations providing for such registration.  

(1A)  No  depository,  [participant,]  custodian  of securities, foreign institutional investor, credit rating agency or any other intermediary associated with the securities market as the Board may by notification in this behalf specify, shall buy or  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 this Act:   

Provided  that  a  person  buying  or  selling  securities  or otherwise dealing with the securities market as a depository, [participant,]  custodian  of  securities,  foreign  institutional investor  or  credit  rating  agency  immediately  before  the commencement  of  the  Securities  Laws  (Amendment)  Act, 1995, for which no certificate of registration was required prior to such commencement, may continue to buy or sell securities or  otherwise  deal  with  the securities  market  until  such time regulations  are  made  under  clause  (d)  of  sub-section  (2)  of section 30.  

  (1B) No person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or  collective  investment  schemes  including  mutual  funds,

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unless he obtains a certificate of registration from the Board in accordance with the regulations:   

Provided that  any person sponsoring  or  causing  to  be sponsored, carrying on or causing to be carried on any venture capital funds or collective investment schemes operating in the securities  market  immediately  before  the  commencement  of the  Securities  Laws  (Amendment)  Act,  1995,  for  which  no certificate  of  registration  was  required  prior  to  such commencement,  may  continue  to  operate  till  such  time regulations  are  made  under  clause  (d)  of  sub-section  (2)  of section 30.]  

(2)  Every application  for  registration  shall  be  in  such manner and on payment of such fees as may be determined by regulations.   

(3)  The  Board  may,  by  order,  suspend  or  cancel  a certificate of registration in such manner as may be determined by regulations.   

Provided that  no order  under  this  sub-section shall  be made unless the person concerned has been given a reasonable opportunity of being heard.   

15A. Penalty for failure to furnish information, return, etc.- If any person,  who is  required  under  this  Act  or  any rules  or regulations made thereunder,-   

(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less];   

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(b) to file any return or furnish any information, books or other documents  within  the  time  specified  therefor  in  the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less];   

(c) to maintain books of accounts or records, fails to maintain the same, he shall be liable to [a penalty of one lakh rupees for each  day  during  which  such  failure  continues  or  one  crore rupees, whichever is less.]  

15B. Penalty  for  failure  by  any  person  to  enter  into  an agreement with clients.- If any person, who is registered as an intermediary  and  is  required  under  this  Act  or  any  rules  or regulations made thereunder to enter into an agreement with his client, fails to enter into such agreement, he shall be liable to  [a penalty of  one lakh rupees  for each  day during  which such failure continues or one crore rupees, whichever is less.]  

Rule 3 – No stock broker or sub-broker shall buy, sell, deal in securities, unless he holds a certificate granted by the Board under the Regulations:

Provided that such person may continue to buy, sell or deal in securities if he has made an application for such registration til the disposal of such application.”  

"Regulation 25. Liability for contravention of the Act, rules or the regulations -

A stock broker or  a sub-broker  who contravenes  any of the provisions of the  Act,  rules  or  regulations  framed  thereunder  shall  be liable for any or more of the following actions:

(i) Monetary penalty under Chapter VIA of the Act.

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(ii) Penalties as specified under Securities and Exchange Board

of India (Procedure for Holding Enquiry Officer and Imposing

Penalty) Regulation, 2002 including suspension or

cancellation of certificate of registration as a stock broker or a

sub-broker

(iii) Prosecution under section 24 of the Act.”

7. It is the stand of the appellant-Board that in terms of Regulation 25

which was applicable prior to the amendment with effect from 2.11.2003, it

was provided that any contravention of any provisions of the Act, Rules and

Regulations is to be dealt with in the manner provided in Regulations 26 to

32 of the Regulation prior to the amendment with effect from 27.9.2002.

Therefore, Regulation 25 prior to amendment with effect from 20.11.2003 is

applicable which provides that  any contravention of any provision of the

Act,  Rules  and  Regulation  is  to  be  dealt  with  under  the  Securities  and

Exchange  Board  of  India  (Procedure  For  Holding  Enquiry  By  Enquiry

Officer and Imposing Penalty) Regulation, 2002 (hereinafter referred to as

the ‘2002 Regulations).

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8. The provisions of section 12(3) of the Act confer power on the Board,

by  an  order,  to  suspend  or  cancel  a  certificate  of  Registration  in  such

manner as may be determined by Regulations, provided that no order under

'the said section will be made unless the person concerned has been given a

reasonable opportunity of being heard.

9. Rule 3 prohibits any broker sub-broker from buying, selling, dealing

in securities, unless he holds a certificate granted by the Board under the

Regulations, provided however, those who were already in the said business

on  the  date  of  coming  into  force  of  the  Rules  (i.e.  20.08.1992)  &

Regulations, were allowed to continue with their business during the period

till application for registration was disposed of. This means that the existing

brokers  &  sub-brokers,  in  business  were  allowed  to  continue  pending

registration but no new person commencing the business of the broker or

sub-broker after 20.08.1992 could do the business pending registration and

could commence only after being registered.

10. Regulation 25 is the crucial Regulation. Applicable regulations prior

to  amendment  (w.ef.20.11.2003)  provide  that  any  contravention  of  any

provision of the Act, Rules & Regulation is to be dealt with in the manner 9

provided in Regulations 26 to 32 of  Regulations prior  to amendment w.e.f

27.09.2002  and  thereafter  the  Regulation  25  of  the  Regulations  prior  to

amendment  w.e.f  20.11.2003  provides  that  any  contravention  of  any

provision of the Act, Rules & Regulation is to be dealt with under the 2002

Regulations.  

11. As per provisions of Regulations 13(1)(a) (iv) read with Regulation,

13(4)  of  the  2002  Regulations,  SEBI  can  impose  a  minor  penalty  of

suspension of the Certificate of Registration of the concerned Stock Broker

or  Sub-Broker  upto  three  months  and  can  impose  major  penalty  under

Regulation 13(1)(b)(i) of cancellation of the Certificate of Registration and

suspension of the Certificate of Registration of the concerned stock Broker

or  Sub-Broker  exceeding  three  months.  From the  above  provisions,  it  is

clear that in case of contravention of Section  12(1) and/or Rule 3 of- the

Rules,  the  only penalty  provided  under  the  Act  & the  Regulations  is  of

either suspension or cancellation of the certificate of Registration as set out

in Section '12(3) of the Act. There is no power even on the Board to impose

any monetary penalty.

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12. According to respondents, a Tribunal constituted under Section 15K

of the Act in exercise of powers under Section 15T of the Act read with

Regulation 21 of the Securities Appellate Tribunal [Procedure] Rules, 2000.

(hereinafter referred to as the "SAT Rules, 2000")  can modify the order of

SEBI  so  as  to  modify  the  nature  of  penalty  not  provided  for  under  the

provisions of the Statutes in respect of the concerned violations.

7. The Tribunal has been constituted under section 15K of the Act and is

thus a creation of the said Statute and as such the Tribunal is to exercise the

jurisdiction, powers and authority conferred on it by or under the Act or any

other law for the time being in force.

8. Under Section 15 T (4) of the Act Tribunal has been empowered to

pass such orders on the Appeal  as it  thinks fit,  confirming, modifying or

setting aside the order appealed against.

9. Under Rule 21 of the SAT Rules, 2000 the Tribunal may make such

orders or such directions as may be necessary or expedient to give effect to

its Orders or to prevent abuse of its process or to seek the ends of justice.

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10. In  the  instant  case,  the  position  of  Broker/Sub-Broker  in  case  of

violation is statutorily provided under Section 12 of the Act, which has to

be read  along with  Rule 3  of  the Rules.   No power  is  conferred  on the

Tribunal  to  travel  beyond  the  areas  covered  by Section  12  and  Rule  3.

When something is to be done statutorily in a particular way, it can only be

done that way.  There is no scope for taking shelter under a discretionary

power.      

11. Above being the position the appeals are bound to succeed, which we

direct.   The orders of the Tribunal are set aside and that of SEBI stands

restored.   

12. Appeals are allowed.  

...................................................J.   (Dr. ARIJIT PASAYAT)

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……….………...........................J. (LOKESHWAR SINGH PANTA)

New Delhi, April 21, 2009

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