2018 (5) TMI 1953 - AT - SEBI

Tribunal Upholds Decision on Defaulter Broker Claims

The Tribunal upheld the Defaulter's Committee's decision, ruling that claims against the defaulter broker were not admissible from the Investor Protection ... Claims of the appellants against their broker rejected by the DC - NSE liability to compensate the appellants - whether all claims of the investors / clients against their defaulter broker can be paid out of the Investor Protection Fund ('IPF' for short) of the stock exchange - HELD THAT:- The relationship between the appellants and Kassa was in the nature of a client - broker one rather than an investor - broker one. Very fact that the clients did not do a single trade for a long period after opening their trading accounts and they had entered into agreements which specified the percentage of fixed returns to the appellants make it very clear that the appellants were supporting the illegal para banking activity of their broker. The submissions made by some of the appellants that they were uninformed investors cannot be accepted since the claims of all the appellants (except one) are in millions of rupees (in the range of ₹ 2 million to ₹ 8 million). It is also a fact that SEBI and exchanges have widely publicized the specific manner in which clients accounts should be maintained by the brokers and how such accounts should be settled in every quarter etc. as evidenced through the Bye-laws and circulars. From the Bye-laws and the relevant circulars, we note that the process of refunding investors when a broker is declared as defaulter is as follows : a) On inviting claims against the defaulter broker by the exchange investors would submit their claims. b) These claims are scrutinized by the IGRP of the exchange who validates the admissible claims against the said broker. c) The exchange would refund the claims using the funds of the defaulter broker available with the exchange in the form of deposits, margin money etc. d) In case of shortage of funds in the defaulter broker's account with the exchange, the unpaid claims / remaining claims would be placed before the DC of the exchange which will verify such claims as to whether they can be paid out of the IPF. e) Claims found to be payable from the IPF as per the Bye-laws will be entertained and others would be rejected. f) Finally, whatever claims are pending i.e. after pay out from the broker's own fund with the exchange and as admissible under IPF, all the remaining claims have to be settled by the broker itself. Given these procedures and the reasons cited in para no. 9 above, we find no fault with the DC's decision that the appellants' claims cannot be entertained from the IPF. Appellants are at liberty to approach the appropriate forum to settle their claims against Kassa in case Kassa is not honoring their claims. We do not find any merit in the argument of the appellants that NSE is liable to compensate the appellants for having failed in their duty as a regulator of brokers. Issues:1. Challenge to the decision of the Defaulter's Committee rejecting claims against broker.2. Interpretation of claims against defaulter broker under the Investor Protection Fund.3. Differentiating between genuine investors and loan transactions with the broker.4. Obligations of the stock exchange and SEBI in protecting investors.5. Compliance with Bye-laws of the stock exchange in handling defaulter broker claims.Analysis:1. The appeals challenged the decision of the Defaulter's Committee (DC) of the National Stock Exchange of India Ltd. (NSE) rejecting claims against the broker. The main issue was whether claims against a defaulter broker can be paid from the Investor Protection Fund (IPF) of the stock exchange.2. The appellants argued that their claims were genuine and admitted by the NSE's Investors Grievance Resolution Panel (IGRP). They maintained that they were legitimate investors who deposited margin money for trading purposes, even though they did not trade immediately. However, the DC rejected their claims stating that the transactions were in the form of loans, not margins for trading.3. The legal representatives of the appellants contended that NSE and SEBI failed in their duty to protect investors from the broker's default. They emphasized that the appellants were unaware of the regulations and were misled by the broker. However, the DC and NSE argued that the claims were inadmissible as they were loan transactions, not genuine trading activities.4. The Senior Counsel for NSE explained the legal provisions, highlighting the Bye-laws of NSE governing the handling of defaulter brokers and IPF claims. He clarified that the IPF is meant for genuine investors, not for clients engaging in loan transactions with brokers for fixed returns.5. The Tribunal dismissed the appeals, stating that the relationship between the appellants and the broker was more of a client-broker nature than investor-broker. The Tribunal found that the appellants did not engage in trading activities for an extended period and had agreements specifying fixed returns, indicating support for illegal para banking activities.6. The Tribunal upheld the DC's decision, emphasizing that the claims could not be entertained from the IPF. The appellants were advised to seek recourse through appropriate forums against the broker if their claims were not honored, as per the established procedures and Bye-laws.7. Lastly, the Tribunal rejected the argument that NSE was liable to compensate the appellants for regulatory failures, citing a previous related appeal where such claims were dismissed. NSE was deemed not liable for willful violations committed by the broker and the appellants. Both appeals were dismissed with no costs awarded.