Securities Contract (Regulations) Act, 1956 – ss.9(3)(b) and 12A – Securities & Exchange Board of India Act,1992 – Securities Contracts (Regulation) Rules, 1957 – Trading Members (TMs) – Professional Clearing Members (PCMs) – Liquidation of collaterals – Individual investors/clients in the Futures and Options (F&O) segment, placed their collaterals in the form of money/stock/securities with the TMs while the TM, in turn, placed with PCMs – Default by the TM whose collaterals sold out in the market, allegedly without reference to the debit/credit positions of their individual clients – PCM-appellants liquidated the collaterals with them – By the actions of the TM, the clients lost the security offered by them, even those who did not have any debit balance, for reason of the securities offered on their behalf by the TM to the PCM having been sold out – Challenged by the investors – Case of the PCM that they have no privity of contract with the clients of the TM, it was the default of the respective TMs that resulted in the collaterals being sold; that the default occurred within a short period and the sale of collaterals were made over that period of time, at various instances, on the default of the TM; and that neither was there any mechanism in place for the PCM to know the debit/credit positions of the individual clients nor was there any statutory obligation on the PCM to find that out – Intervenors-speculators approached various forums – Committee constituted by the NCL ordered restitution of securities – Approved by the SAT – Correctness: Held: Neither can the TM absolve itself from its liabilities nor can the investors cry foul, since they entered into the scheme with full knowledge of their securities being offered as collaterals for a fixed return – Responsibility of the assured return is only on the TM and not even indemnified by the NSE; being an outright illegal activity – Power of disgorgement was specifically conferred on the SEBI and intentionally not permitted to be conferred, in the byelaws made u/s.9 of the Securities Act – Committee directed restitution of the liquidated shares which is in the form of payment of money – Clearly a prescription made for payment of money by liquidation of the securities – This is in stark violation of the power conferred by the statute and the byelaws also do not speak of any such power being conferred of disgorgement or payment of money in the nature of restitution of securities on the NCL, which alone could empower the Committee constituted by the NCL to impose such penalty – There was no statutory violation committed by the PCM and their plea of having no privity of contract with the constituents of the TM as also no statutory obligation to verify the debit/credit positions of the individual clients of the TM is perfectly in order – More onerous is the fact that the TM was indulging in a Ponzi scheme wherein the investors willingly enrolled themselves, executing affidavits of undertakings and furnishing securities to the TM in his status as a DP & DAS, which was out right illegal, the illegality being known, both to the TM and its constituents – No illegality having been found in the liquidation carried out by the appellants, nor an unjust or illegal enrichment, on the other hand, desisting from liquidating the collaterals proffered by the TM, would have led to huge losses for the PCMs, by way of their collaterals being liquidated by the NCL – In fact, SAT admits as much when it confirms as valid the restitution since the appellant, according to the SAT was evading losses through liquidation – Losses recouped by the PCM was permissible in the manner it was done as per the regulatory measures in place at that time; to which end the collaterals were stipulated – What is relevant in directing restitution and also grant of interest, is that the retention of the thing or money; by the person from whom it is sought to be restituted, should be unjust/illegal; which does not emanate from the facts of the instant case and no violation perse of the statutory regulatory mechanism arise – Neither any remedy of restitution found, flowing naturally nor persuaded to permit it, in view of the specific statutory prohibition with respect to the penalties permitted u/s.9(3)(b) – There can be no claim laid against the PCM for the default committed by the TM, especially in the context of the TM having indulged in illegal schemes and the investors having participated with open eyes in such schemes on the assurance of an assured return, which, in the F&O Segment, is downright impossible – Impugned orders of the MCSGF Committee and that of the SAT set aside. [Paras 30, 44-46, 49, 51, 54, 57]
Securities Contract (Regulations) Act, 1956 – ss. 9(3)(b) and 12A – Securities & Exchange Board of India Act,1992 – Securities Contracts (Regulation) Rules, 1957 – Trading Members (TMs) – Professional Clearing Members (PCMs) – Liquidation of collaterals – PCM, if under a statutory obligation to verify the credit/debit positions of the individual clients of the TM before the collaterals proffered by the TM were liquidated – Whether the regulatory mechanism provided visibility of such credit/debit positions of the individual clients of the TM to the PCM:
Held: As to the existence of a statutory obligation on the PCM to verify the debit/credit positions of the constituents of the TM, before the collaterals proffered by the TM are liquidated, answered in the negative and in favour of the PCMs – Question regarding visibility provided by the regulatory mechanism of the debit/credit positions of the individual clients of the TM to the PCM, also answered in the negative and in favour of the PCM. [Para 54]
Securities Contract (Regulations) Act, 1956 – ss.9(3)(b) and 12A – Securities & Exchange Board of India Act,1992 – Securities Contracts (Regulation) Rules, 1957 – Trading Members (TMs) – Professional Clearing Members (PCMs) – Liquidation of collaterals – Member and Core Settlement Guarantee Fund (MCSGF) Committee, constituted by the NSE Clearing Corporation (NCL), if has the power to order restitution of the securities and even if it was conferred with such powers, whether it should have notified the invocation of such powers, failing which the order would be vitiated on the ground of violation of principles of nature justice Held: NCL or the Committee constituted by it does not have the power to order restitution of securities – Imposition of penalty of restitution having come forth only in the discussion and not specifically notified to the appellant, the violation of principles of natural justice also assumes significance, but the same is inconsequential insofar as the penalty of restitution itself being found to be not statutorily permitted. [Para 54] Securities Contract (Regulations) Act, 1956 – ss.9(3)(b) and 12A – Securities & Exchange Board of India Act,1992 – Securities Contracts (Regulation) Rules, 1957 – Trading Members (TMs) – Professional Clearing Members (PCMs) – Liquidation of collaterals – TM having been found to have indulged in illegal schemes, in which the individual clients had voluntarily participated – Individual clients, if can lay a claim against the PCM for the default committed by the TM:
Held: Investors/speculators can lay no claim against the PCM for the default committed by the TM, especially in the context of the TM having indulged in illegal schemes and the investors having participated with open eyes in such schemes on the assurance of an assured return, which, in the F&O Segment, is downright impossible. [Para 54]
As published in the Supreme Court Reports, Supreme Court of India. Headnotes prepared by: Nidhi Jain. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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