Rusoday Securities Ltd. vs National Stock Exchange of India Ltd. & Ors.

Sections 3(2) and 9 – Appellant admitted as trading member of NSE (Stock Exchange) – Was authorized by the Stock Exchange to become a clearing member of National Securities Clearing Corporation Ltd. (NSCCL/ Clearing Corporation) – Appellant had executed undertaking in favour of the Stock Exchange as well as the Corporation to abide by and comply with the Rules, Byelaws, and Regulations of the Exchange and of the Corporation and also to abide by Circulars, Orders, Directions, Notices or Instructions issued/modified/amended from time to time – By Circular dated 19.05.1997 appellant was permitted to trade to the extent of 7 times its base capital – Trading facility of appellant was withdrawn by the Exchange on appellant’s exceeding the permissible limit as per the Circular dated 19.05.1997 – Further the Clearing Corporation closed out all the open positions in the securities trade of the appellant – The Exchange by letter dated 01.11.2004 informed the appellant about periodical appropriation of certain amounts made by the Exchange from the security deposits of the appellant in lieu of various membership charges – The Exchange also called upon the appellant to deposit additional sums to meet the shortfall created in the security deposit, to retain the membership of the Exchange – Appellant denied such obligation to pay, as its trading facilities had stood suspended throughout that period – Thereafter expulsion of membership of the appellant by the Exchange – The Securities Appellate Tribunal upheld the closing out of all the outstanding positions of the appellant under clauses 17 and 18 of the Byelaws – Tribunal held the Circular dated 19.5.1997 as valid having binding value – Appeal to Supreme Court – Appellant’s plea that the appellant was not bound by the Circular dated 19.5.1997 as the same was invalid for lack of prior approval of Central Government/SEBI and the same being in conflict with Byelaws – Held: Subject matter of the Circular falls within ambit of operational parameters – Determination and announcement of operational parameters is within the competence of the Stock Exchange – The Exchange is empowered to announce such parameters by way of Circular – Clearing Corporation is also empowered to issue operational parameters relating to trading limits and consequent actions in case of non-compliance – No requirement of prior approval is provided for notifying such operational parameters – The power and mode of prescription of such circular falls within the resudary powers reserved for the Exchange – Since the Byelaws and Rules of the Stock Exchange are approved by the Central Government/SEBI, the action taken under the Byelaws/Rules/Regulations, by prescribing such operational parameters in the form of Circular would assume enforceable character – The Circular cannot be said to be ultra vires Clauses 17 and 18 of the Byelaws – The appellant is bound by the Circular – The appellant having submitted an undertaking to comply with such instructions, notice etc. cannot be allowed to take contrary plea – The Stock Exchange not only had the Authority to specify various deposit-related requirements, but also had the power to expel a member in case of default – The obligation of the appellant to keep up with the adequacy of deposits continued despite the withdrawal of its trading facility – In the present case, the appellant in having failed to maintain the requisite membership margins with the Exchange, acted in contravention of the Byelaws and Rules of the Exchange necessitating unto termination – National Stock Exchange Byelaws, 1994 – Clauses (10), (17) and (18); Chapter IX Clauses (5), (6) and (24) – Securities and Exchange Board of India Act, 1992 – National Securities Clearing Corporation Ltd. Byelaws – Chapter VI Clauses (11) and (16) – National Securities Clearing Corporation Ltd. Regulations – Chapters 9 and 10 – National Stock Exchange Rules – Chapter IV Rule 20(f).

National Stock Exchange Byelaws:

Chapter XII Clause (11); Chapter IX clause (24) – Realisation of security deposits – Stock Exchange is vested with the power to realize the assets of a defaulter member in due course – Security deposits can be realized by the Exchange per se without any additional condition as the Exchange enjoys a statutory lien over such deposits by way of clause (24) of Chapter IX – However, such security deposits do not include forfeited/withheld assets/securities – Expulsion or declaration of defaulter is a pre-condition for realization of withheld securities – Vesting of withheld securities in favour of Exchange takes place only after expulsion or declaration of defaulter – Withheld securities can be categorized as ‘receiving securities’ and ‘introductory securities’ – In the present case ‘introductory securities’ since were in the names of third persons, could not have been realized by the Exchange – Actual recovery qua appellant/defaulting member could only be made from the ‘receiving securities’ as those securities were due/deliverable to the appellant and were withheld as a collateral – National Securities Clearing Corporation Ltd. Regulations – Chapter 9. National Stock Exchange Rules:

Chapter IV Rule 20(f) – Applicability of – Held: The relevant point of time for applicability of this Rule is “the date of expulsion” from the trading membership of National Stock Exchange.

Chapter XII Clause (ii) – Declaration of trading members as defaulter – Requirement – Nature of – Held: Though requirement of declaration as defaulter may be discretionary one under NSCCL Regulations, the same is mandatory requirement for vesting in clause (ii).

Lien:

Scope, extent and operation of lien – Held: Mere existence of lien may not entitle the lienee to sell off the property for satisfaction of debt without a court order – However, this principle is not absolute – When lien itself is a creation of byelaws, Rules or Regulations etc., the scope, extent and operation of such lien would be governed by the same scheme – No external conditions can be read into such scheme.

Equity:

Equity is about balancing the competing interests – It never operates in an absolute manner – Principles’ of constructive trust and fiduciary relationships are equitable principles. Principles:

Principle ‘Nemo dat quod non habet’ – Applicability. Principles of ‘constructive trust’ and ‘fiduriary relationship’ – Nature and applicability of.

Words and Phrases:

“Regulation” – Meaning of.

“Control” – Meaning of.

Disposing of the appeals, the Court

HELD: 1.1 The central scheme of Securities Contracts (Regulations) Act, 1956 reveals that the requirement of prior approval, in relation to matters specified in sub-section (2) of Section 3, of the Central Government, be it at the time of original framing of Rules of the Exchange or upon amendment thereof, is essential or pre-requisite. This mandate of Central Government was later entrusted to SEBI by issuing orders under Section 29A of the 1956 Act.[Para 25][251-H; 252 A-B]

1.2 The legislature has omitted the usage of the word “Regulations” or “Circulars” in the parent Act; and as far as the governance of a stock exchange is concerned, the supervision or control of the Central Government/SEBI at the time of granting recognition to the stock exchange is limited to being satisfied that the Rules and Byelaws of the stock exchange applying for registration are in conformity with such conditions as may be prescribed for ensuring fair dealing and protecting investors. The domain of framing Regulations is kept separately in a standalone manner in the Byelaws of the Exchange and not in the Act. The framing of Regulations concerning governance of stock exchange is reserved for the Exchange. [Para 26][252-D-F]

1.3 Clause (10) of National Stock Exchange Byelaws, 1994 (NSE Byelaws) defines “Regulations” to include business rules, code of conduct and such other Regulations prescribed by the relevant authority from time to time for the operations of the Exchange and they are declared to be subject to the provisions of the 1956 Act, Rules and Securities and Exchange Board of India Act, 1992. The definition is merely an inclusive definition and not exhaustive. The relevant authority here is the Board of the Exchange. Such Regulations can be prescribed on a wide range of matters as indicated in “Chapter III – Regulations”, including capital adequacy norms or “any other matter as may be decided by the Board”. Thus, the scope of “Regulations” that can be prescribed by the Exchange is expansive so as to cover all issues relating to governance of the Exchange. [Para 27][252-FH; 253-A]

1.4 Clause (2) of the Byelaws specifies certain “Conditions” for the Trading Members. Sub-clause (a) of clause (2) signifies that apart from framing Regulations, the Byelaws also empower the Exchange to issue instructions regarding operational parameters, guidance etc. for the trading members. The term “operational parameters” is crucial. Chapter IX of the Byelaws, in clauses (5) and (6), titled “Transactions and Settlements” specifies certain operational parameters for trading. Clause (5) empowers the relevant authority of the Exchange to “determine and announce” from time to time certain operational parameters which may include “trading limits” and “capital adequacy norms” as per clause (6). Notably, clause (5) of Chapter IX of the Byelaws uses the phrase “the relevant authority may determine and announce” the operational parameters. Both “determination” and “announcement” of such parameters is therefore, within the competence of the Exchange. Such announcement can be made by the Exchange by circulating a communication amongst the members, as it rightfully did in the present case by way of the subject circular. A similar clause has been inserted in Chapter VI of the Byelaws of the Clearing Corporation as well, thereby empowering the Clearing Corporation to issue operational parameters relating to trading limits and consequent actions in case of non-compliance. [Para 28][253-B-H; 254-A-B]

1.5 The subject matter of the circular in question pertains to trading/exposure limits coupled with sanctions in case of noncompliance. That falls squarely within the ambit of operational parameters which can be determined and notified by the Exchange from time to time. Nothing is brought to the notice of the Court from the text of this circular that it would militate against the norm of fair dealing and protection of investors. In any case, no requirement of prior approval is provided for notifying such operational parameters and as the name suggests, they are meant to tackle “operational” concerns as and when they emerge before the Exchange or the Clearing Corporation. The power and mode of prescription of such circular falls within the residuary powers reserved for the Exchange. [Para 29][254-B-D]

1.6 Thus, the legislature has bestowed upon the Exchange sufficient freedom of action to effectively control and regulate the functioning of stock brokers who use the Exchange as a means to enter into financial relationships with the investors and common public. This freedom of action is guaranteed in the pre-approved Byelaws which enable the Exchange to frame Regulations, instructions, operational parameters, notice etc. and bring them into force without subjecting them to any added condition of prior approval of the Central Government/SEBI. The only limitation on this power of the Exchange is that such Regulations or operational parameters issued under the Byelaws are subject to 1956 Act, 1992 Act and Rules framed thereunder. Strictly speaking, this limitation does not ipso facto mean that such Regulations or operational parameters are subject to prior approval. [Para 31][255-E-H]

1.7 The provision under s. 9 reinforces that the power to regulate and control the trading contracts enables the Exchange not only to make Byelaws and Regulations but to provide for everything therein which might be necessary (and permissible) for ensuring efficacy and vigour in the exercise of just power of control and regulation. It is in this light that the operational parameters or Regulations framed under the Byelaws are to be understood. For, without such power, the Exchange would be rendered toothless in controlling and regulating the contracts. [Para 30][255-D-E]

1.8 Since the Byelaws and Rules of the Exchange are duly approved by the Central Government/SEBI, it can safely be stated that actions taken by the Exchange under the Byelaws or Regulations - by prescribing such operational parameters in the form of a circular and in consequence thereof, would assume enforceable character. The appellant having submitted an undertaking to comply with such instructions, notice etc., cannot be heard to argue to the contrary. The Court by interpretative process ought not to limit the efficacy of such a valid document by additional pre-conditions such as prior approval, not envisaged by the lawmakers or regulation framing authorities. To do so would entail in undermining the authority of the Exchange to regulate and control the stock market, directly or indirectly. [Para 32][256-C-E]

1.9 The act of adoption of this circular by the Exchange and circulation of the same amongst the trading members was within the domain of the Exchange in terms of its Byelaws, and unless a case for such instructions to be ultra vires the Byelaws or the Act is made out, there is no reason to undermine its intended effect. [Para 33][256-E-F]

1.10 The operational freedom of the Exchange cannot be stifled on mere assumptions and the burden lies on the claimant to demonstrate a real conflict between the exercise of power and source of power. Arguendo, had it been a deviation from the Byelaws, in the sense that the circular was defeating and not furthering the scope and objective of the Byelaws, it could have been examined as a constructive amendment or amendment by implication. Therefore, the principle of constructive amendment signifies that unless a clear case of repugnancy is made out, the later provisions could not be treated as modification or abrogation, more so when such provisions further the intent of the source provisions. [Para 35][256-H; 257-C-D]

2.1 For the same default, closing out action is contemplated both under the Byelaws of the Exchange and the subject circular. Clauses 17 and 18 of the Byelaws of the Exchange provide for closing out. Clause 17 envisages closing out for failure to complete the settlement operation. That, however, has no relation whatsoever to a situation of closing out due to failure to trade within defined limits, as specified by the Exchange, amounting to violation of the Byelaws of the Clearing Corporation, as in the present case. Whereas, clause 18 caters to another situation and is textually different. [Paras 37 and 39][257-E-F; 258-D-E]

2.2 Clause 18 is of a residuary nature and confers on the relevant authority of the Exchange the power to close out certain positions on grounds not specified in clause 17. The mischief creators in a stock market operate in a myriad set of ways and one cannot pre-set or comprehend all possible methods of undermining the health of the market. Thus, residuary situations of closing out may emerge and clause 18 enables the Exchange to promptly act against such attempt. The provision is premised on necessity. By reading in any requirement of due date in clause 18, on the lines of clause 17, the court would be doing violence to the clear intent of the clauses and the broad scheme of the Byelaws. Clause 18 would be rendered nugatory. Even logically, by importing a fictional requirement of “due date” in clause 18, the Exchange cannot be expected to gloss over a clear case of excessive reckless trading and allow the mischief to continue until the due date has arrived. Thus, there is no occasion to control the scope of clause 18 by establishing a fictional link with clause

17. [Para 44][260-B-F]

2.3 The circular provides for the effect of violation of the exposure limits and lays down that any such violation shall be treated as a violation of the Byelaws of the Clearing Corporation, without prejudice to the power of the Exchange to withdraw the trading facilities. This withdrawal is contemplated as an imminent action to protect the market from being exposed to unsecured financial exposure. Consequent thereto, closing out of open positions has been contemplated. Strictly speaking, the circular, triggers a closing out action upon fulfilment of two conditions: (i) exceeding the gross exposure limits while trading; (ii) failure to deposit additional capital within such time as may be granted by the Exchange/Clearing Corporation for continuance of trading. The nature of closing out prescribed in the circular does not envisage any failure in delivery or in payment to complete the settlement, unlike in clause 17. The conditions in the circular operate on a more basic level and are concerned essentially regarding the eligibility of a trading/clearing member venturing beyond the market exposure limits defined in the context of the advance security deposit. That is the condition and procedure prescribed from time to time by the relevant authority for dealing in securities by the member. For such non-compliance, the power ascribable in clause 18 may be attracted. [Paras 40, 41 and 42][258E-G; 259-C-F]

2.4. In the present case, the appellant violated the condition and procedure prescribed by the Exchange/Clearing Corporation vide subject circular. Thus, the manner of closing out contemplated in the circular is borne out by clause 18 and there is no conflict. Apart from the circular, clause 16 of the Byelaws of the Clearing Corporation also provides for closing out “on failure of a clearing member to comply with any of the provisions relating to delivery, payment and settlement of deals or on any failure to fulfill the terms and conditions subject to which the deal has been made”. The nature of action contemplated under clause 16 is in furtherance of the basic mandate laid down under Section 9 of the 1956 Act. For, section 9 of the Act clearly provides that all contracts/deals on the market are subject to the Byelaws (including Regulations, operational parameters etc. issued under the Byelaws) and Rules of the Exchange. One of the consequences of not acting in accordance with the Byelaws is provided under clause 16, apart from other provisions. Understood thus, this clause is yet another self-contained provision envisaging forthwith closing out, which goes on to show that forthwith closing out is not a new phenomenon in the overall scheme of things. [Paras 45 and 46][260-F-H; 261-C-E]

2.5 On a comprehensive view of the scheme of closing out under the Byelaws of the Exchange, Byelaws of the Clearing Corporation and the circular, an action of forthwith closing out is permissible under the said scheme, particularly clause 18, and thus, the circular is not ultra vires clauses 17 and 18 of the Byelaws. Rather, the circular furthers the spirit underlying clause 18. [Para 47][261-E-F]

3.1. The undertaking given by the appellant to the respondents fell within the broad scheme of the Byelaws/Rules, and was a quint-essential requirement for obtaining registration as a stock broker as both 1956 Act and Byelaws subjected the members to such conditions. Thus, the appellant is bound by the undertaking so given. [Para 51][262-G-H; 263-A]

3.2 Even otherwise, assuming the absence of undertaking, the very fact that a valid circular originated from the statutory scheme of the Byelaws is sufficient to bind the appellant with its provisions. Thus, the emergent legal position is that the appellant had subscribed to both statutory as well as contractual obligations with the respondents for functioning as a stock broker. Any deviation from the said circular could invite action under multiple provisions spreading across the Byelaws of the Exchange and Byelaws of the Clearing Corporation, in addition to the sanctions provided in the circular itself. Understood thus, the appellant is squarely bound by the circular and any breach of the same is to be viewed accordingly. [Para 51][263-A-C]

3.3 The above view is reinforced by the “Master Circular for Stock Brokers” issued by SEBI on 01.06.2018, bearing headnote that “This Master Circular is a compilation of relevant circulars issued by SEBI, which are operational as on date of this circular”. Annexure-4 of the Master Circular titled “Rights and Obligations of Stock Brokers, Sub-Brokers and Clients” reiterates the correct legal position under clause 2 thereof which provides that the stock brokers are bound by all the Rules, Byelaws and Regulations of the Exchange and circulars/notices issued in furtherance of such Byelaws and Rules. [Para 52][263-C-E]

3.4 The scheme of 1956 Act enables the Exchange to resort to suspension and expulsion of the members, in accordance with its approved Byelaws and Rules. Section 3(2) of the Act specifies certain matters that must be appropriately covered in the Byelaws or Rules. Clause (c) of the said sub-section expressly provides that matters of admission, qualification, exclusion, suspension, expulsion and re-admission of members must be covered in the Byelaws/Rules. [Para 54][263-G-H; 264-A]

3.5 By SEBI letter No. SMD-I/11087/92 dated 04.11.1992 titled “Capital Adequacy Norms for Brokers”, the stock exchanges were directed to provide for norms relating to capital adequacy in their Byelaws. Apart from specifying certain requirements, the letter went on to state that “the stock exchange shall continue to have the authority to impose suitable margins as per their judgment in the context of the market situation.” Therefore, a stock exchange stood empowered not only to specify capital adequacy requirements for the trading members but also to take action against the defaulting members. [Para 55][264-D-F]

3.6 Accordingly, for effectuating the mandate accorded upon the Exchange as per the Act, NSE Rules, 1994 and the abovesaid directive, it is obliged to deal with the subject of termination of membership on that basis. [Para 56][264-F-G]

3.7 The same regulatory intent is reflected in the Byelaws as well. Clause (1)(b) of Chapter-V of NSE Byelaws, 1997 (the operative Byelaws as regards the question of expulsion) empowers the relevant authority to “specify prerequisites, conditions, formats and procedures for application for admission, termination, re-admission etc. of trading members”. [Para 57][265D-E]

3.8 Consequence of failure to maintain the necessary deposits is addressed in Chapter XII of the Byelaws wherein clause (1) provides that such a member could be declared as a defaulter, which in itself is a ground for expulsion in the NSE Rules, 1994. [Para 57][265-G-H; 266-A]

3.9 A holistic view of the scheme vividly reveals that the Exchange not only had the authority to specify various deposit related requirements but also had the power to expel a member in case of default. In the present case, it is not in dispute that the Interest Free Security Deposit to be maintained by the appellant actually fell short of the required margins during the relevant period. [Para 58][266-C-D]

4.1 The obligation of the appellant to keep up with the adequacy of deposits continued despite the withdrawal of its trading facility. The relationship between a stock exchange and trading member runs across various levels. Action against members is to be taken only upon violation of conditions and procedures therefor. It is a serious matter and resorted to only upon the fulfilment of conditions specified in the Byelaws, Rules, Regulations or even in operational parameters. Notably, the conditions required for withdrawing the trading facility are distinguishable from the conditions required for suspension/expulsion of membership. Under the relevant provisions, withdrawal could take place upon a standalone violation of certain operational parameters on a given trading day (like exceeding the exposure limits as in the present case). Whereas, expulsion would take place upon a sustained violation of membership obligations (like failure to maintain the base capital and also for failure to replenish the prescribed amount) within the time frame specified therefor. The two actions vary not only in their texture, but also in their resultant effect. Withdrawal, for instance, does not extinguish the membership. It acts like a halt for indulging in further trading activity. [Paras 58 and 59][266-D-E; 266-E-H; 267A]

4.2 To say that mere withdrawal of trading facility would ipso facto absolve a trading member from keeping up with other obligations towards the Exchange for continuation of membership would result into an anomalous situation. It would amount to the diffusion of one stage of the relationship with the other, and would become a concocted way to extend benefit for its own wrong to a defaulting member. Such a consequence could not be intended to result from an action of withdrawal of trading facility. For, the withdrawal of trading facility is a temporary or interim action which is taken against an erring member to prevent him from continuing on a mischievous path during the trading hours and to take corrective steps forthwith. The nature of this action is preventive and the provisions governing this action provide for certain remedial acts, like depositing additional sums to increase the exposure limits, the performance of which can help a member in resuming his trading operations. The obligations for continued admission as a member are entirely different and merely because trading has been halted due to a member’s own default, it does not result in a hiatus situation or extricate him from membership obligations. If that were to be the case, there was no need for the Byelaws to provide these actions separately. [Para 60][267-A-E]

4.3 Pertinently, the capital adequacy norms, are meant both for admission as a member and for continuation as a member. Even the language of the governing provision i.e. Rule 32, signifies that requirements relating to capital adequacy are meant for “continued admittance to trading membership” and thus, the mandatory obligations would continue, as long as membership is formally continued. Despite the temporary action of withdrawal of trading facility, a member continues to be a member of the Exchange with all corresponding rights and obligations intact on both sides. [Para 61][267-E-G]

4.4 Having observed that the appellant failed to maintain the requisite membership margins with the Exchange for a long period and refused to make up for the shortfalls when called upon to do so by the Exchange, there is nothing to deviate from the view taken by the Tribunal that the appellant acted in contravention of the Byelaws and Rules of the Exchange necessitating unto termination. The actions taken by the Exchange, thus, were in accordance with the law. [Para 62][268B-D]

5.1 Apart from challenging the expulsion of membership, the appellant had also prayed for the release of withheld securities. No such plea was raised by the respondents in the stated proceedings in 2014. Rather, that appeal was allowed and claim regarding withheld securities was relegated to the Defaulter’s Committee. That remand order was acted upon by all concerned and against which the present appeal arises before this Court. [Para 79][273-A-B; 273-E-F]

5.2 It is not correct to say that cause of action accrued only after the Defaulter’s Committee’s order dated 04.12.2014, justifying the withholding of securities. The said order of the Defaulter’s Committee did not result in the withholding of securities. It merely supplied reasons and justification for such withholding. The cause of action, if at all any, had arisen to the appellant from the moment their securities were withheld in 1997. Merely because a subsequent order is passed to justify a prior action, it cannot be a case of accrual of fresh cause of action to the aggrieved. [Para 80][273-F-G]

5.3 In the factual scheme of the present case, there are two sets of assets in control of the respondents – first, security deposits and second, withheld securities. The security deposits came to be deposited on account of membership obligations and the securities were withheld on account of failure to complete settlements. Though the challenge is limited to withheld securities, the provisions relating to such securities address both these categories of assets collectively. [Para 82][274-C-E]

5.4 As per clause (11) of Chapter XII of the NSE Byelaws titled “Default”, the Exchange is vested with the power to realise the assets of a defaulter member in due course. Clause (23) complements this action and provides for the order of priority for satisfying the claims. The clause (11) provides for realisation of three categories of assets: (i) security deposits, margin moneys and other deposits; (ii) securities which have been deposited by the defaulter member; and (iii) moneys, securities and other assets due, payable or deliverable to the defaulter by any other Trading Member and recovered by the Exchange. Pertinently, different kinds of assets are subject to a different procedure of realisation. Out of the three categories covered under clause (11), security deposits can be called in and realised per se without any additional condition. There is no requirement of vesting with respect to such deposits neither in the language of clause (11) nor in the overall scheme. It is so because the Exchange enjoys a statutory lien over such deposits by way of clause (24) of Chapter IX “Transactions and Settlements”, NSE Byelaws which categorically provides that the Exchange has a first and paramount lien over the monies, bank deposits and other securities deposited by the trading member for any sum due to the Exchange. [Paras 83 and 84][274-E-F; 275-B-D; 275-E-G]

5.5 But it covers only those assets which are voluntarily deposited by the member with the Exchange. Forfeited/withheld assets are not included herein. It is true that mere existence of lien may not entitle the lienee to sell off the property for satisfaction of debt without a court order. However, the same principle is not absolute and the cases in which the statutory/contractual scheme itself provides for such sale/realisation fall outside its purview. It is settled that when lien itself is a creation of Byelaws, Rules or Regulations etc., the scope, extent and operation of such lien would also be governed by the same scheme. [Para 84][276-B-D]

Unity Company Private Ltd. vs. Diamond Sugar Mills and Ors. AIR 1971 Cal 18 – referred to.

5.6 Therefore, if provisions provide for realisation of such lien property, the same may be given effect to in accordance with the provisions. No external conditions can be read in such a scheme. Clause (11) expressly provides for realisation of security deposits as and when a member becomes subject to the provisions relating to defaulters. The phrase “shall call in and realise” signifies that realisation is warranted as an imminent action upon declaration of defaulter in case the security deposits are insufficient. The effect of this phrase is that once a trading member has been declared a defaulter, the Exchange is duty bound to realise the security deposits retained by it to satisfy its obligations and return the remaining deposits, if any. If the Exchange fails to do so, it may become liable to make good the loss of interest to the defaulter on any amount over and above the monetary obligation. [Para 84][276-G-H; 277-A-C]

5.7 In the present case, no fault can be found in the conduct of the Exchange as it had actually realised the deposits at various points of time owing to the inability of the appellant to keep up with the statutory margin requirements. It holds no merit to state that the Exchange failed to perform its duty to realise the security deposits. The amount of Rs. 1.34 crores came to be added to the total obligation again in 2017 when the Exchange returned the security deposit amount pursuant to an order of this court passed at the insistence of the appellant and thus, in law, that cannot be held against the Exchange in any manner. [Para 85][277-C-E]

5.8 Unlike the money deposits, no legal requirement of forthwith realisation is envisaged in the case of withheld securities. The withheld securities can be categorised as – securities in which the appellant was a receiving member (receiving securities) and securities in which the appellant was an introducing member (introductory securities). [Para 86][277-F-G]

6.1 In the transactions during the trading period from 24.09.1997 to 30.09.1997 and during the trading period from 01.10.1997 to 14.10.1997, the appellant was a “receiving member”. On account of failure of appellant to complete the settlements made during these periods, by making complete payment, the Exchange withheld the pay-outs of securities at various points of time. The remaining securities were withheld wherein appellant was acting as an “introducing member” in the market. [Paras 87 and 88][278-C-E]

6.2 As regards the introductory securities, they simply could not have been realised by the Exchange at any point of time as they were merely introduced by the appellant and did not belong to it. These introductory securities were registered in the names of third persons who are not parties to this proceeding. Concededly, there could have been no loss to the appellant relating to corporate benefits on these securities as it did not have any right therein, to receive any such benefit. Property in those securities neither vested in the appellant nor in the Exchange and they were held by the Exchange only as a lien on the physical copies of shares to the limited extent of obliging the appellant to fulfil its obligations. The benefits on those securities remained in third parties, as they must have, and no one has approached this court to raise the grievance that they have suffered any wrongful loss as regards those benefits. Even if any grievance exists between two clearing members as regards the receipt or non-receipt of those benefits, the best course of action would have been to proceed by way of a separate proceeding in that regard. Clause (11) of Chapter VI, NSCCL Byelaws categorically provides for a privity of contract between delivering and receiving clearing members. The interests of those third parties are not a part of the present lis. [Para 89][279-D-H]

6.3 Indisputably, the introductory securities have been marked as objectionable by the companies; and securities with outstanding objections are of no use to the Exchange for the purpose of recovery so long as such objections are not removed. The introductory securities fall outside the purview of the vesting provision. Further, the responsibility of the Exchange was limited to providing the appellant an opportunity to remove the objections and continue withholding the securities in the interim. Any enquiry regarding the legality or illegality of objections could have taken place between the introducing member and the respective companies. The same also cannot form a part of the subject matter before this Court. [Para 90][280-A-C]

6.4 The provisions relating to withholding and vesting of securities are provided in two separate documents. Whereas vesting is provided under Chapter-XII of NSE Byelaws titled “Default”, withholding is provided under Chapter 9 of NSCCL Regulations titled “Non-Delivery and Non-Payment”. [Para 93][280-E-F]

6.5 Declaration of defaulter upon non-payment is not an express pre-requisite for the recovery of dues here. Regulation

9.7 provides that all deliveries of securities which were due to the defaulter shall be handed over to the Clearing Corporation so as to enable it to realise their dues from those deliverable securities. Upon receipt of securities as per this Regulation, the action of withholding is contemplated in Regulation 9.9 (Regulation 9.11 in NSE Regulations). In the present case, securities deliverable to the appellant as a receiving member were withheld by the respondents to clear their dues. [Para 94][281-C-D; 281-F-G]

6.6 On withholding, the stage of vesting comes in and this stage is important as vesting is a pre-requisite for dealing with the securities in any manner. There can be no action, be it of sale or registration, against a property unless the property vests in the entity. “Nemo dat quod non habet” is the fundamental principle of transfer of property which, if literally translated, means “no one gives what they do not have”. Thus, unlike money deposits, withheld securities cannot be realised without legal vesting under clause (11). [Para 95][281-G-H; 282-A]

6.7 Though the requirement of declaration as defaulter may be a discretionary one under the NSCCL Regulations, the same is a mandatory requirement for vesting in clause (11). For, vesting takes place upon declaration of any trading member as a defaulter. The expression “and such assets shall vest ipso facto, on declaration of any trading member as a defaulter” reinforces the view. Even otherwise, the main vesting provision is included in the chapter on defaults and therefore, such declaration is necessary unless otherwise excluded. Therefore, the right of the Corporation to dispose of or realise these securities is circumscribed by the requirement of declaring such member as a defaulter. In the present case, no such declaration came to be made. However, despite the absence of any such declaration, vesting took place by way of Rule 20(f) in Chapter IV of NSE Rules, whereby the requirement of express declaration of defaulter upon expulsion is done away with. [Paras 96 and 97][282-A-D]

6.8 The emergent position of law, therefore, is that vesting does not take place in favour of the respondent Exchange unless a formal expulsion order is passed. The relevant point of time, therefore, is the date of expulsion. Without such legal vesting, the Exchange only sits upon the withheld assets as a custodian. There is no question of realisation. Such withholding is done to serve two purposes – first, to persuade the defaulting member to fulfil its obligations during the continuation of membership if it so wishes and second, to secure the liability at the earliest available opportunity as a preventive measure. If liabilities continue to be unfulfilled, expulsion becomes an inevitable consequence and the withheld assets vest in the Exchange. [Para 97][282-G-H; 283-A-B]

6.9 Thus realisation cannot be done unless vesting is complete and there is no obligation on the Exchange/Corporation to forthwith realise the securities upon withholding. Expulsion or declaration of defaulter, as the case may be, is a pre-condition for realisation, which, in the present case, took place only in 2006. Even on applying rule of prudence, such forthwith realisation would not be appropriate as such action would deprive the defaulting member from an opportunity to correct its mistake by settling liabilities within due course of time without giving up membership. [Para 98][283-B-C]

6.10 The Rule 20(f) clearly signifies that it applies to expelled members and the moment a member is expelled from membership, this rule will automatically become operative. Literally understood, the relevant point of time for checking the applicability of this rule is the “date of expulsion”. In the instant case, expulsion of the appellant took place in 2006, whereas the said rule was inserted beforehand in 2001. Thus, the rule was very much in force when the appellant was in fact expelled. Consequently, the respondents were well within their powers to realise the withheld securities in accordance with clause (11) soon after expulsion in 2006. [Para 99][283-B-C]

6.11 Upon withholding followed by vesting, the manner of dealing is provided under Regulation 9.10, NSCCL Regulations (Regulation 9.12, NSE Regulations). This Regulation predicates that the Clearing Corporation is armoured with a set of measures as regards the withheld securities. The first part of the Regulation vests the Corporation with the power to deal with the securities at “such times” and in “such manner” as it may deem fit. The Regulation then specifies certain measures which may include:

(a) closing out the withheld securities in the name of Exchange or any other entity; or (b) registering the withheld securities in the name of Exchange or any other entity. Thereafter, in the concluding sentence it is further specified that the funds received out of closing out of withheld or registered securities may also be dealt with in such manner and at such times as the Exchange may deem fit. It is therefore clear that the respondents had two courses of action open for dealing with the securities – closing out and registration. Chapter 10 of NSCCL Regulations titled “Closing out of Contracts” delineates the manner of closing out. [Paras 100 and 101][283-F-G; 284-B-F]

6.12 Thus, the Corporation is duty bound to close out all outstanding deals against the defaulter and “determine” them for the purpose of its recovery. Regulation 10.9 specifies the manner of such determination. The Corporation is empowered with a set of methods to close out the outstanding deals against the appellant. Upon vesting, it could have sold out the withheld securities through an auction or by placing an order of sale in Exchange or in any other permissible manner. [Para 102][285-AB; 285-D-E]

7.1 The other action contemplated in Regulation 9.10 is of registration. The grievance is that the Exchange held on to the securities without registration and that it was abuse of discretionary powers and the respondents ought to have registered the securities in its name forthwith. Once an action of withholding is taken, multiple interests come into play and both the parties assume different roles as regards the withheld securities. – role of Exchange and role of defaulting member. [Paras

103 and 104][285-E-G]

7.2 Regulation 10.9 requires the Exchange not to sit idle on the withheld securities and instead, obliges it “to deal” with them in an appropriate manner. This requirement is a manifestation of the basic “duty of care” implicit in regulatory relationships where one member is in a position to control the functionality of the other. The raison d’etre underlying this duty is to protect the interests of a member and to prevent any undue damage to its interests as a crucial element of the market. [Para 105][286-B-D]

7.3 In the present case, it is clear that the manner of dealing with the withheld securities is not circumscribed under strict parameters. The Exchange is bestowed with a discretion to choose amongst the available options and the appellant holds no control over such choice. To this limited extent, the role of the Exchange as regards the withheld assets is of a fiduciary character, obligating it to choose the just course of action out of the available options. Traditionally speaking, the relationship of MemberExchange may not be regarded as a fiduciary one. But the concern of the Court is limited to the dynamics of this relationship qua the withheld securities in light of the regulatory scheme. It is only for the purpose of performance of functions that a fiduciary character is recognised in this relationship. The scope of fiduciary duties is “moulded according to the nature of the relationship and facts of the case’. It is thus clear that constructive trust arises by operation of law in specific factual scenarios and not by any statute or contract. However, such trust, and rights and obligations under it would depend strictly upon the prevailing set of facts and governing provisions. [Para 106][287-B-F; 288-B-C]

Robert L. Hodgkinson v. David L. Simms [1994] 3 SCR 377; Frame v. Smith [1987] 2 SCR 99 – relied on. Hospital Products Ltd. v. United States Surgical Corporation Ltd. (1984) 156 C.L.R. 41; Paragon Finance PLc v. DB Thackerar and Co. [1991]1 All ER

400 – referred to.

“Fiduciary Law: The Judicial Process and the Duty of Care” by Professor Frankel, Snell’s Equity, 32nd Edition – referred to.

7.4 The principles of constructive trust and fiduciary relationships are equitable principles, and equity never operates in an absolute manner or in a vacuum. In fact, the very basis of the law of equity is its flexibility to take care of mutual concerns of the parties. Equity is about balancing the competing interests – by preventing the erosion of interests of one party while ensuring a free exercise of legally enshrined discretionary powers to the other. No doubt, specific fiduciary duties could definitely be recognised in the specific facts of the case but the manner of performance of such duties cannot be dictated in regulatory matters. Legal recognition of the role of a trustee and fixing actual obligations to be performed under such role are two separate matters. The latter is dependent on the nature of discretion and on the diligence of other party. [Para 108][288-D-F] Equity & Trusts, Alastair Hudson, 2nd Edition – referred to.

7.5 The duties of a trustee can be broadly classified into mandatory duties and discretionary duties. The court is always circumspect in enforcement of discretionary duties. A perusal of Regulation 9.12 succinctly reveals that the measure of registration is not provided as an exclusive one, rather, it is in addition to other residuary steps that an Exchange is entitled to take. Therefore, there is no express statutory or contractual requirement of mandatory registration in the applicable law. A clear element of discretion is involved in the manner of dealing. It is true that such discretion cannot be exercised in a legally perverse manner, but it is equally true that a discretion cannot be converted into a mandatory obligation, more so when such discretion is provided expressly by a statutory provision. [Para 109][288-G-H; 289-A-C]

Ashburner’s Principles of Equity, Denis Brownie, 2nd Edition – referred to.

7.6 It is the fundamental principle of an equitable examination that “the one who seeks equity must do equity”. Registration of securities or any property for that matter is done in favour of an entity only upon fulfilment of certain allied conditions, including but not limited to the supply of consideration. Without such consideration, contract itself becomes void, let aside entertaining a demand for registration. Upon withholding, it becomes the duty of the stock broker to raise a request for the registration of securities and to comply with the payment shortfall and other requirements. During the period commencing from 1997 to 2008, the appellant did not pursue the cause of dealing with the withheld securities in a proactive manner, seemingly because of two reasons- first, the appellant was pursuing multiple legal actions against the respondents at various forums and second, such a request would have to be preceded by fulfilment of conditions relating to settlement and payment. For, the Exchange could not get the securities registered in the name of any entity until and unless such entity settles the transaction by making complete payment for the purchased securities. Clause

(3) of Chapter-VI of NSCCL Byelaws titled “Clearing and Settlement of Deals” expresses the same view. [Para 110][289E-H; 290-A-B]

7.7 The appellant never offered to make such payment in lieu of registration. In fact, the Defaulter’s Committee did propose to hand over physical possession of the securities to the appellant for getting them registered in its name. The appellant refused to comply with the direction of payment and instead, challenged this decision of the Defaulter’s Committee before the Tribunal wherein a consent order was passed upon an undertaking given by the Exchange that it has no objection in performing its duty as “trustee” in respect of the unregistered withheld securities and taking appropriate steps by registering them in its name. Even this order was a conditional one as it specified that such registration shall not affect the legal rights and liabilities of parties in any manner. In pursuance of this order on 23.09.2015, the respondents got the securities transferred in their name and realised them after the impugned order in 2019. [Para 112][291C-F]

7.8 It is thus clear that the respondents were cognizant of their duty towards the withheld securities pending determination of final claim. However, no action of registration could have been taken without complying with other conditions. The role of the defaulting member was of an enabler and unless the Exchange was placed in a position to register, it could not have exercised its discretion to register. Permitting the Exchange to register forthwith as a matter of obligation would also be counterproductive to the interests of the defaulting member. For, such a blanket action would have the effect of converting a limited right of lien into that of absolute ownership over the withheld assets without giving the defaulter sufficient time to get his assets released much less before a declaration of being a defaulter or an order of expulsion. Such can never be the purpose of withholding. [Para 113][291-F-H; 292-A-B]

7.9 To summarize, registration could only have been done on fulfilment of the following conditions:(i) request by the defaulting member; (ii) request to be preceded by fulfilment of conditions relating to payment; (iii) request to be accompanied with undertaking that any such registration in the name of the Exchange would be subject to final outcome of the case. [Para 114][292-A-C]

7.10 The appellant is not correct in saying that it has suffered loss of corporate benefits due to non-registration by the respondent. Firstly, the receiving securities legally vested in the Exchange as on the date of expulsion to the extent of liability. The appellant could not have claimed any right therein to further corporate benefits as regards these securities. Even before the date of expulsion, the respondents cannot be held liable for any loss on the withheld securities as the appellant always had the opportunity of making payment and protecting its interests. The appellant cannot fail to discharge its obligations for a period of

23 years and then turn around and claim loss of benefits in this manner. Acceding to such a claim would be akin to rewarding a wrong. Thus, the liability for the loss incurred by the appellant, if at all any, on account of corporate benefits (dividends, bonus etc.) accrued on withheld shares would not fall upon the Exchange, in the fact situation of the present case. [Para 115][292-C-F]

7.11 The respondents’ decision of not realising the securities or taking any adverse action during the pendency of multiple proceedings cannot be outrightly termed as an abuse of discretion. For, the decision of expulsion (and thus, of vesting) itself became sub-judice along with various other civil and criminal proceedings. Admittedly, the appellant had gone to the extent of initiating proceedings for criminal misappropriation against the Directors of respondents for using security deposits in regular course of business. This inevitably resulted in reluctance of the respondents to sell off the securities amidst pending proceedings. It is settled law that statutory appeal is a continuation of the original proceedings and once an appeal was filed, the question of expulsion remained sub-judice unto these appeals.[Para 116][292-F-H]

7.12 The Tribunal misinformed itself by observing that this issue had already stood answered in the previous judgment of the Tribunal in Appeal No. 84 of 2008. The Tribunal simply entered into an examination of the provisions relating to withholding whereas the real question was regarding the manner of dealing with the withheld securities. [Para 117][292-H; 293-AB]

7.13 The amount of Rs. 1.34 crore was required to be returned by the respondents in SLP (Crl.) No. 9642-9643 of 2011, which it had held as an interest free security deposit. It was meant to be utilised for the purpose of discharging the monetary obligation of the appellant during the period between withdrawal and expulsion. The appellants have advanced an erroneous proposition that the return of this amount by the respondents signified that there was no liability owed by the appellant towards them. The return of the security deposit was driven by a desire of the officials of the respondents to avoid the continuation of criminal proceeding against them resorted to by the appellant. It was neither a confession that they had misappropriated the said deposit nor an undertaking that they had no claim over the said amount for adjustment against the penalties. The effect of the said return was limited to the quashment of criminal proceedings involved therein. [Para 119][293-C-F]

7.14 The loss caused to the Exchange due to return of interest free security deposit amount ought to be reckoned in determining the total liability of the appellant and the same ought to be adjusted by the respondents appropriately. The quantum of amount due from the appellant to the respondents, being a question of fact, has been decided by the Tribunal. [Paras 120 and 121][293-G-H; 294-A-B]

8. Following directions are issued for full and final settlement of all claims between the parties: (i)

(ii)

NSE to evaluate and get the remaining transferrable securities, if any, transferred in its favour and recover the remaining amount using the same

evaluation criteria adopted in respect of other withheld securities of the appellant within 6 weeks. After realisation, the surplus amount be returned forthwith to the appellant along with interest at the rate of 12% P.A. from the date of determination of claim/date of vesting until the date of payment.

(iii) Respondents to return the unrealised securities including those with outstanding objections to the appellant within 6 weeks.

(iv)

In case recovery is not possible from the remaining securities, for any reason whatsoever, the respondents may communicate the same to the appellant forthwith and the appellant shall then pay the amount so demanded (including interest, if any), to the respondents within 6 weeks from the date of receipt of such communication.

(v)

NSE is directed to oversee the evaluation and realisation of remaining securities, and settlement of claims. [Para 122][294-C-G]