The State of Maharashtra vs 63 Moons Technologies Ltd.

s. 2(c) and 2(d) – Definitions of Deposit and Financial Establishment – Interpretation of.

s. 2(c) - Deposit under - Settlement Guarantee Fund – Explained.

s. 2(c) - Deposit under - Receipt of commodities – Held: Receipt of the commodities and holding the commodities (when the members are put in constructive possession) in the accredited warehouses is a ‘deposit’ u/s. 2(c) of the Act.

Allowing the appeals, the Court

HELD: 1.1 The notifications attaching the properties of the respondent were issued under Section 4 of the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999. Section 4 covers only those situations where a financial establishment is a defaulting entity. [Para 30][505-G]

1.2 Financial Establishment is defined as any person accepting a deposit‘. The definition excludes from its purview

(a) a corporation or cooperative society controlled or owned either by the State or the Central Government; and (b) a Banking Company as defined under Section 5(c) of the Banking Regulation Act 1949. Since NSEL does not fall within any of the exceptions, it would be a ‘financial establishment’ for the purposes of the Act if it is a person accepting deposit. Section 3(42) of the General Clauses Act 1897 provides an inclusive definition of ‘person’ to include both incorporated and unincorporated companies. The expression deposit is defined in Section 2(c) of the MPID Act. The statutory definition of the expression deposit comprises of the following ingredients: (i) Any receipt of money or the acceptance of a valuable commodity by a financial establishment;

(ii) Such acceptance ought to be subject to the money or commodity being required to be returned after a specified period or otherwise; and (iii) The return of the money or commodity may be in cash, kind or in the form of a specified service, with or without any benefit in the form of interest, bonus, profit or in any other form. These elements of the definition are followed by specific exclusions contemplated in clauses (i) to (vii). Clause (i) of the exceptions covers an amount which is raised by way of share capital or by debenture, bond or other instrument governed by the guidelines and regulations of SEBI. Clause (v) states that money received in the ordinary course of business by way of security deposit, dealership deposit, earnest money or advance against an order of goods or services shall be excluded. The exclusions in clause (i) to (vii) indicate that transactions which would otherwise fall within the broad sweep of the definition are excluded. [Para 31][506-F-G; 507-A; 508-B-F]

1.3 The definition of ‘deposit’ uses the phrase ‘includes’ and ‘shall be deemed to have always included’. The import of this is to create a legal fiction by which actions which though not included within the natural meaning of the expression are intended to be included. The combined use of ‘includes’ and ‘deemed to have always included’ while defining the term ‘deposit’ makes the term inclusive and not restrictive. [Para 32][509-A-B]

1.4 The expression ‘deposit’ is conspicuously broad in its width and ambit for it includes, not only any receipt of money but also the acceptance of any valuable commodity by a financial establishment under any scheme or arrangement. The expression ‘any’ is used in the substantive part of the definition of the expression ‘deposit’ on five occasions namely; (i) Any receipt of money; (ii) Any valuable commodities; (iii) By any financial establishment; (iv) With or without any benefit; and (v) In any other form. [Para 33][509-B-E]

1.5 The repeated use of the expression ‘any’ by the statute while defining both the above expressions is a clear reflection of the legislative intent to cast the net of the regulatory provisions of the law in a broad and comprehensive manner. Unlike many other state enactments which govern the field, clause (c) of Section

2 of the MPID Act comprehends within the meaning of a deposit not only the receipt of money but of any valuable commodity as well. [Para 35][509-F-G]

1.6 According to the second ingredient of Section 2(c), the money or commodity must be liable to be returned. However, such return need not necessarily be in the form of cash or kind but also in the form of a service, with or without any benefit such as interest. It needs to be recalled that clause (v) of Section 2(c) states that a deposit of money or commodity made as a security deposit, dealership deposit or an advance amount is excluded from the definition of the phrase ‘deposit’. To illustrate, if a member of a financial establishment deposits Rs. 25,000, and that money is returned on cessation of membership by making deductions, the issue of whether the deposit is a security deposit or of the nature covered under Section 2(c) should be determined with reference to the structure of operation and functioning of the financial establishment. It is to be noted that the definition also states that the return may be with or without interest or any benefit. Therefore, the submissions made by both the sides on whether NSEL had through its representations assured a 16% return on trading in the platform is immaterial for the purpose of determining if NSEL accepted deposits. [Para 36][510-B-E]

1.7 The bye-laws elucidate that NSEL receives both money and commodities from trading members. In order to decide if these receipts by NSEL could be regarded as ‘deposits’, the test of ‘return’ will have to be satisfied. The test is that the return be in cash, kind or service. It is not necessary that the return should be with the benefit of interest, bonus or profit. Therefore, if the financial establishment is obligated to return the deposit without any increments, it shall still fall within the purview of Section 2(c) of the MPID Act, provided that the deposit does not fall within any of the exceptions. The exception of relevance is clause (v) which states that amounts received in the ordinary course of business by way of (a) security deposit; (b) dealership deposit;

(c) earnest money; and (d) advance against order for goods or services shall be excluded from the purview of the term ‘deposit’. [Para 37][510-E-F; 511-A-B]

1.8 The trading members pay NSEL a margin deposit and NSEL maintains a Settlement Guarantee Fund-SGF. Regulation

4.12 states that only transactions of those members who have paid the margin deposit and security deposit shall be considered as valid. Therefore, the payment of margin deposit and security deposit is ‘mandatory’ for a person to trade on NSEL‘s platform. Regulation 4.12 refers to the SGF as a ‘security deposit’. Similarly, bye-law 12.2.1 stipulates that each member shall contribute a minimum security ‘deposit’. However, merely because the SGF is referred to as a security ‘deposit’, the exception would not automatically be applicable. The meaning of the phrase ‘security deposit’ takes colour from the surrounding phrases. Clause (v) to sub-Section 2(c) excludes security deposit, dealership deposit, earnest money, and an advance against an order for goods and services from the ambit of the phrase ‘deposit’. The concepts used in sub-Section 2(c) (v) fall in two categories: (i) token amounts paid to indicate the earnest to purchase (earnest money and advance money), and (ii) payments required to meet exigent situations of default by a party (dealership deposit and security deposit). [Para 38][511-C-F]

1.9 The features of the SGF indicate that the fund is used to cover those expenses, which are beyond the utilization which is made out of a regular security fund. Unlike a security deposit between a landlord and a tenant where the fund is used to meet the ‘essential obligations’ of the landlord such as repair work and deductions are made when the tenant has outstanding payments, NSEL uses the deposit to cover the payment obligations of the trading member (buyer) to another trading member (seller) since NSEL is a counter party to the transactions. However, NSEL uses the fund to cover functions beyond its role as a counter-party. For example, the fund is used to cover loses faced by the NSEL in the settlement operations, investments are made in securities, and the fund is allotted in various segments of trading, where the funds are also utilised to cover loses, if any, in the segment. Therefore, these three features of the SGF indicate that though the SGF is termed as a ‘security deposit’ in nomenclature, its features do not represent a security deposit. Since NSEL receives ‘money’ in the form of SGF that is returned in money and services, and is not covered by the exceptions, it would fall within the expression ‘deposit’ as defined in u/s 2(c). [Para 41][512-G-H; 513-A-C]

1.10 A person who wishes to trade in the platform of NSEL is required to place the commodities in the accredited warehouse of NSEL. NSEL would then provide the trader with a warehouse receipt. When the buyer‘s offer and the seller‘s offer is matched, NSEL would debit the amount from the buyer member‘s pay in obligations and it would be credited to NSEL‘s exchange settlement account. The Operations Department would confirm with the Delivery Department if the requisite quantity of a particular commodity of the seller is available. After such confirmation, the Operations Department would release the purchase price to the selling broker’s designated bank account. Simultaneously, a Delivery Allocation Report would be issued to the buyer’s broker or the buyer. Once the VAT invoice is paid, NSEL would issue a Delivery Note authorizing the Buyer to take delivery from the designated warehouse or if the buyer chooses, he can take constructive possession of the commodity. There is nothing in the definition of the term ‘deposit’ to mean that the acceptance of the commodity should be accompanied by a transfer of title to the commodity. Even if the financial establishment is only in ‘custody’ of the commodity, it would still fall within the purview of the phrase ‘acceptance of commodity’. On the acceptance of custody of the commodity, NSEL has to provide various services such as an obligation to keep the commodity safe and without any damages. Additionally, the Operations Department and the Delivery Department will have to coordinate while matching the contracts. Similarly, after the delivery note is sent to the buyer, the commodity is either delivered to the buyer or the buyer is put in constructive possession of the commodity. The phrase ‘warehouse receipt’ is defined in Bye-law 2.96 as a document evidencing that the commodity is being held by NSEL in the approved warehouse. Clause (b) to Bye law 4.20 states that if the outstanding transactions have not been settled by giving or receiving deliveries, then it (the commodity) shall be auctioned by buying-in or selling-out as per the Business Rules of the Exchange. Bye-law 10.11 states that the commodities shall be delivered to and delivery taken from only the designated warehouses. Therefore, NSEL offers a multitude of ‘services’ in return for receiving the commodity. The receipt of the commodities and holding the commodities (when the members are put in constructive possession) in the accredited warehouses is a ‘deposit’ under Section 2(c) of the Act. [Para 42][513-D-H; 514-A-C]

1.11 The expression valuable commodity is not defined by the statute. There is no valid basis to accept the submission of the respondent that the expression should only comprehend within it precious metals such as gold and silver. If the legislature intended to so restrict the definition of the expression valuable commodity, it could have used an explanation importing an artificial meaning to the expression. However, the legislature has desisted from doing so. A valuable commodity is a commodity which has significant value. This does not refer only to the intrinsic value of the commodity. Whether or not a commodity is valuable has to be determined bearing in mind the salutary object and purpose of the Act which is to protect the interest of depositors. It is in this context that it becomes necessary to adopt a purposive construction which would give effect to the meaning and content of the law. Any attempt to read the definition in a restrictive sense would be contrary to legislative intent. The intent of the legislature is to define the expression deposit‘ as well as the expression financial establishment‘ in a comprehensive and all-encompassing manner. Therefore, the phrase valuable commodity‘ cannot be restricted to only mean precious metals. Agricultural commodities which NSEL trades in will fall within the purview of the term. [Para 43][514-D-G]

1.12 The paired contracts were designed as a unique trading opportunity by NSEL under which a trader would, for instance, purchase a T+2 contract (with a pay-in obligation on T+2) and would simultaneously sell a T+25 contract (with a pay-out of funds on T+25). The price differential between the two settlement dates was represented to offer an annualized return of about 16%. NSEL categorically represented that all trades were backed by collaterals in the form of stocks and its management activities included selection, accreditation, quality testing, fumigation and insurance. Therefore, NSEL represented that on receiving money and commodities, the members would receive assured returns‘ and a service‘. Though NSEL has been receiving deposits‘, it has failed to provide services as promised against the deposits and has failed return the deposits on demand. Therefore, the State of Maharashtra was justified in issuing the attachment notifications under Section 4 of the MPID Act. [Para 45][517-E-H]

1.13 The High Court has formed an erroneous opinion that firstly, only if the return includes interest, bonus or any other added benefit, it would be a deposit for the purpose of the MPID Act. However, Section 2(c) states that the return may be with or without any benefit in the form of interest, bonus, profit or in any other form. The definition does not stipulate that there must be an added benefit, rather that the added benefit is irrelevant for the purpose of the definition; secondly, that for the purpose of u/s 2(c), the receipt of the commodity or money must be retained by itself. The definition does not provide any such embargo. Rather, the definition is broadly worded to include even the possession of the commodities for a limited purpose. The High Court has read the definition of ‘deposit’ narrowly without any reference to the salutary purpose of the MPID Act.The impugned judgment of the Bombay High Court is set aside. The impugned notifications issued under Section 4 of the MPID Act attaching the properties of the respondent are valid. [Para 61, 66][535-CE; 536-F]

63 Moons Technologies v. Union of India (2019) 18 SCC 401; New Horizon Sugar Mills Ltd. v. Government of Pondicherry (2012) 10 SCC 575 : [2012]

8 SCR 874; KK Bhaskaran v. State (2011) 3 SCC 793 : [2011] 3 SCR 527; State v. KS Palanichamy (2017)

16 SCC 384 : [2017] 4 SCR 34; PGF v. Union of India (2015) 13 SCC 50 : [2013] 6 SCR 32; Mohinder Singh Gill v. CEC (1978) 1 SCC 405 : [1978] 2 SCR 272; Indra Sarma v. VKV Sarma (2013) 15 SCC 755 : [2013]

14 SCR 1019; Vijay C. Puljal v. State of Maharashtra (2005) 4 CTC 705 (Bom); New Horizons Sugar Mills Limited v. Government of Pondicherry (2012) 10 SCC

575 : [2012] 8 SCR 874; State of Maharashtra v. Vijay C. Puljal (2012) 10 SCC 599; Sonal Hemant Joshi v. State of Maharashtra (2012) 10 SCC 60; Soma Suresh Kumar v. Government of Andhra Pradesh (2013) 10 SCC 677: [2013] 10 SCR 328 – referred to.

Bryan A Garner, Black’s Law Dictionary (11 ed. Thomson Reuters) – referred to.