Court upholds NSE's power to annul trades due to fraud, orders compensation for genuine buyers

The court dismissed the writ petitions challenging the annulment of trades by the National Stock Exchange (NSE) during settlement No. 27 for shares of Maruti Organics Limited. It upheld the NSE's authority to annul trades in cases of fraud or market manipulation, citing statutory power under the Securities Contracts (Regulation) Act, 1956. The court directed compensation for genuine buyers not involved in fraud and disciplinary action against errant stock brokers.

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Issues Involved:
1. Legality and vires of by-law 5(a) of National Stock Exchange Ltd.
2. Annulment of transactions by the National Stock Exchange (NSE).
3. Evidence of fraud or market manipulation.
4. Jurisdiction and competence of the Stock Exchange to annul settlements.
5. Discrimination in annulment decisions.
6. Compensation for genuine buyers.

Detailed Analysis:

1. Legality and Vires of By-law 5(a):
The petitioners initially challenged the legality of by-law 5(a) of the National Stock Exchange Ltd., claiming it was ultra vires. However, this challenge was later withdrawn, and the court did not address the legality or vires of by-law 5(a).

2. Annulment of Transactions by NSE:
The primary issue was the annulment of all trades executed during settlement No. 27 in respect of shares of Maruti Organics Limited (MOL) by a circular dated 21-11-2000. The petitioners, who dealt in securities, challenged this annulment, arguing it was arbitrary, illegal, and violated their fundamental rights under Articles 14, 19(1)(g), and 300(A) of the Constitution of India.

3. Evidence of Fraud or Market Manipulation:
The petitioners contended that there was no evidence of fraud or market manipulation. However, the court found that there was sufficient evidence to support the conclusion that there was a planned selling activity and widespread fraud in the trading of MOL shares during settlement No. 27. The investigation revealed a nexus between major seller clients and selling members, and the sudden disappearance of buyers with major net buy positions in different centers simultaneously.

4. Jurisdiction and Competence of the Stock Exchange to Annul Settlements:
The petitioners argued that the NSE had no authority to annul the settlement under any Act or law. The court, however, held that the NSE, as a recognized Stock Exchange under the Securities Contracts (Regulation) Act, 1956, had the statutory power to frame bye-laws, including the power to annul trades in cases of fraud, material mistake, misrepresentation, or market manipulation. This interpretation was supported by a purposive construction of section 9(2)(k) of the Act, which allows the regulation of contracts between members and non-members of the Stock Exchange.

5. Discrimination in Annulment Decisions:
The petitioners argued that the initial annulment decision only affected some transactions, while the subsequent circular annulled all transactions, including those previously accepted. The court noted that the earlier decision was quashed by the High Court, which directed a fresh and non-discriminatory inquiry. The NSE's assurance that genuine buyers would be compensated addressed this concern.

6. Compensation for Genuine Buyers:
The court emphasized that genuine buyers who were not part of the fraud or manipulation would be compensated. The NSE assured the court that such buyers would be paid the market value of the shares on the relevant date of the sale, calculated as the average value quoted in various other Stock Exchanges.

Conclusion:
The writ petitions were dismissed, with the court affirming the NSE's authority to annul trades in cases of fraud or market manipulation. The court also directed the NSE to compensate genuine buyers and take disciplinary action against delinquent stock brokers.

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