2020 (12) TMI 29 - SC - SEBI

Tribunal decision upheld, appellant bound by circular, securities realized post-expulsion.

The court upheld the Tribunal's decision, confirming the expulsion of the appellant and the validity of the circular dated 19.05.1997. It was ruled that ... Expulsion against the appellant, from the membership of the National Stock Exchange of India Limited - Validity of respondents’ decision of withdrawal of trading facility and subsequent action of closing out of open transactions - appellant has contended that since the trading facility itself was interdicted, it could not have been expected to keep up with various margins and deposits prescribed by the respondents as no trading was being permitted. Whether prior approval of SEBI/Central Government was essential for enforcing the circular dated 19.05.1997 against trading/clearing members? - HELD THAT:- 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 non­compliance. Whether the circular is invalid as being in conflict with the Byelaws of the Exchange, particularly regarding the manner of closing out prescribed therein? - HELD THAT:- 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 - 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 - on a comprehensive view of the scheme of closing out under the Byelaws of the Exchange, Byelaws of the Clearing Corporation and the circular, we are of the view that 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. Whether the appellant is legally bound by the subject circular which allows the withdrawal of trading facility and forthwith closing out of open positions? - HELD THAT:- It is clear that 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 sub­section expressly provides that matters of admission, qualification, exclusion, suspension, expulsion and re­admission of members must be covered in the Byelaws/Rules. 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. Therefore, we are neither on question of existence of power to expel nor on the factum of whether or not the deposits fell short of the prescribed margins. What falls for our examination, here, is the sole question as to whether the obligation of the appellant to keep up with the adequacy of deposits continued despite the withdrawal of its trading facility. An affirmative answer would justify the expulsion. Whether the appellant was obligated to maintain the prescribed Interest Free Security Deposit and other deposits, despite the withdrawal of its trading facilities, for continued membership of the Exchange? - HELD THAT:- 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 - Schedule­II of the SEBI (Stock Brokers and Sub­Brokers) Regulations, 1992 prescribes a “Code of Conduct” for the stock brokers and clause 5 thereof specifies that compliance with statutory requirements is a mandatory aspect of code of conduct of a stock broker. The appellant consistently failed to comply with the requirements and acted in a manner which was prejudicial to the sanctity of a Member­Exchange relationship. The Tribunal rightly confirmed the order of expulsion. Withholding of securities - vesting period - return of unrealised securities - recovery of unrealised securities - HELD THAT:- The following directions are issued for full and final settlement of all claims between the parties: (i) 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. (ii) 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 from today. (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. Appeal disposed off. Issues Involved:1. Whether prior approval of SEBI/Central Government was essential for enforcing the circular dated 19.05.1997 against trading/clearing members.2. Whether the circular is invalid as being in conflict with the Byelaws of the Exchange, particularly regarding the manner of closing out prescribed therein.3. Whether the appellant is legally bound by the subject circular which allows the withdrawal of trading facility and forthwith closing out of open positions.4. Whether the appellant was obligated to maintain the prescribed Interest Free Security Deposit and other deposits, despite the withdrawal of its trading facilities, for continued membership of the Exchange.5. Whether the respondents are obliged to forthwith realise the withheld securities and appropriate the sale proceeds towards the dues payable by the appellant in terms of Rule 20(f) of Chapter IV of NSE Rules read with Chapter XII on 'Defaults'.6. As a consequence of withholding of securities of a defaulting member, whether the respondents are under a legal obligation to deal therewith as a prudent person and more so as a 'trustee', and in discharge of fiduciary trust/responsibility are obliged to get the same registered with a view to protect the financial interests of the defaulting member and persons claiming through him.Detailed Analysis:Issue 1: Prior Approval of SEBI/Central GovernmentThe court held that prior approval of SEBI/Central Government was not essential for enforcing the circular dated 19.05.1997. The Byelaws of the Exchange provided sufficient authority to issue operational parameters without requiring further approval. The Exchange's actions were within its domain as per the Byelaws, and the circular was a valid operational parameter.Issue 2: Validity of the CircularThe court found that the circular did not conflict with the Byelaws of the Exchange. Clauses 17 and 18 of the Byelaws were interpreted harmoniously, with clause 18 allowing for closing out under conditions prescribed by the Exchange, which included the circular. The circular was deemed to further the intent of the Byelaws and was not ultra vires.Issue 3: Binding Nature of the CircularThe appellant was legally bound by the circular dated 19.05.1997. The appellant had given an unconditional undertaking to comply with the Rules, Byelaws, Regulations, and circulars of both NSE and NSCCL. The circular was a valid operational parameter under the Byelaws, and the appellant was estopped from challenging it.Issue 4: Obligation to Maintain DepositsThe appellant was obligated to maintain the prescribed Interest Free Security Deposit and other deposits despite the withdrawal of its trading facilities. The court noted that withdrawal of trading facilities did not absolve the appellant from its membership obligations, including maintaining capital adequacy norms. The failure to maintain these deposits justified the expulsion.Issue 5: Obligation to Realise Withheld SecuritiesThe court held that the respondents were not obliged to forthwith realise the withheld securities upon expulsion. Realisation could only occur after the legal vesting of the securities, which happened upon expulsion. The respondents were within their rights to withhold the securities and realise them post-expulsion.Issue 6: Obligation to Act as TrusteeThe court observed that the respondents had a fiduciary duty to deal with the withheld securities prudently. However, this duty did not translate into a mandatory obligation to register the securities in their name immediately. The respondents had discretion in dealing with the securities, and their actions were found to be within the bounds of this discretion.Conclusion:The court upheld the Tribunal's decision, confirming the expulsion of the appellant and the validity of the circular. The respondents were found to have acted within their legal rights and obligations in withholding and realising the securities. The court issued specific directions for the final settlement of claims between the parties, ensuring the appellant's liabilities were appropriately addressed.