2023 (8) TMI 1669 - AT - SEBI

Appeal allowed: Committee must admit and pay IPF claim within six weeks; post-death trades and inactivity rule inapplicable

The AT allowed the appeal, set aside the impugned rejection, and directed the Committee to admit and process the appellant's IPF claim and disburse within ... Claim under the Investor Protection Fund (IPF) - Order passed by the Member and Core Settlement Guarantee Fund Committee of National Stock Exchange Board of India (‘NSE’) rejecting the claim as inadmissible - the appellant’s husband had died on October 10, 2012 and that the claim was filed for the trades which were executed after the death of the claimant and that certain payments were also received from the broker in the account of the claimant during 2012 to 2018 - HELD THAT:- Where funds and securities generate assured returns, then such claim would not be considered admissible as depicted from Clause (a) to (p) and will not be entertained. However, the CORE Committee in exceptional circumstances depending on the facts and circumstance of the case, consider the claim to be eligible. Nothing has been indicated by the respondent as to how the agreement entered between Nanak Chand and the broker Amrapali would cease to have effect upon the death of Nanak Chand. In the absence of any provision, it cannot be presumed that upon the death of Nanak Chand his trading account would cease to exist. In any case, the record indicates that trades were executed even after the death of Nanak Chand and therefore the trading account continued to exist. Contention that trades executed after the death of Nanak Chand in 2012 will not be taken into consideration is patently erroneous and is not based on sound reasoning. We further find that the finding that more than 24 months have been elapsed from the last trade executed by Nanak Chand and, therefore, the claim is inadmissible is again patently erroneous and is against the guidelines indicated in the minutes of the 35th meeting of Defaulter’s Committee dated July 2, 2010. The aforesaid minutes clearly lay down the guidelines as to how a transaction is to be treated as a loan transaction or not under Bye-law 24 of the Chapter XII of the Bye-laws of NSE. A perusal of the minutes which have been extracted earlier and especially Clause 8 indicates that if there is no trading activity for a substantial period of time then the claim is inadmissible. Substantial period was clarified in the minutes of the 56th meeting of the Defaulter’s Committee held on June 9, 2015 to mean 24 months prior to the date of expulsion. Trading activity has not been specified to mean that the trading activity is to be executed only by Nanak Chand. The record indicates that trading activity continued after the death of Nanak Chand till 2017 and, therefore, on a reading of the aforesaid guidelines and bye-laws of the stock exchange, it is clear that since the trading activity continued till 2017 and the defaulter’s trading terminal was also disabled in 2017, the period of 24 months did not expire and, therefore, the claim filed by the appellant was admissible. In our view, the death of the appellant’s husband has nothing to do in so far as the claim filed under IPF. The Committee was justified in admitting the claim in its earlier order of June 28, 2019 and committed an error in rejecting the claim subsequently on May 14, 2020 and again by the impugned order. Appellant is entitled for the relief claimed. The claim of the appellant is admissible and she is entitled to the claim under the IPF. The impugned order is set aside. The appeal is allowed and a direction is issued to the Committee to process the claim of the appellant and pass an appropriate order for disbursement within six weeks. ISSUES PRESENTED AND CONSIDERED 1. Whether a claim under the Investor Protection Fund (IPF) is admissible where trades were executed on an exchange trading account after the death of the account holder. 2. Whether an agreement/authorization between a trading member and a constituent automatically ceases on the constituent's death such that subsequent trades cannot be recognized for IPF claims. 3. Whether deposits of funds or securities with a defaulting trading member should be treated as 'loan transactions' (and thus ineligible under Bye-law 24(d)) where there has been no trading activity for a 'substantial period' prior to the member's expulsion or terminal disablement. 4. How the Defaulters' Committee's guidelines (including the clarification that 'substantial period' = 24 months) and SEBI circulars (2004 and 2017) apply to the admissibility of claims for non-receipt of funds/securities executed on the exchange platform. 5. Whether a prior acceptance of a claim by the Committee (interim approval directing indemnity) should be revisited and set aside where subsequent review found facts suggesting ineligibility. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of IPF claim where trades occurred after the account-holder's death Legal framework: SEBI's 2004 circular and Bye-laws Chapter XIII permit compensation from IPF where a constituent suffers loss from a trading member declared a defaulter; SEBI's 2017 circular (Clause D) provides that 'all transactions executed on exchange platform shall be eligible for settlement from IPF ... subject to appropriate norms laid down by the Defaulters' Committee.' Precedent Treatment: The Tribunal relied on the exchange's Bye-laws and committee minutes rather than external case law; the Committee's earlier interim approval of the claim was also part of the administrative record. Interpretation and reasoning: The Court found no provision in the Bye-laws or circulars stating that an account or agreement terminates automatically on the death of the constituent. Because trades were shown to have been executed post-dates of death and the trading account continued to operate until the broker's terminal was disabled, these transactions were 'executed on exchange platform' and thus prima facie eligible for IPF processing subject to the Defaulters' Committee norms. Ratio vs. Obiter: Ratio - absence of any rule automatically terminating the agreement on death means post-death trades may be considered for IPF claims if executed on the exchange platform. Obiter - general remarks that death 'has nothing to do' with IPF claims beyond applied facts. Conclusion: The death of the account-holder, without a specific contractual or byelaw provision terminating the trading relationship, does not by itself render trades executed thereafter ineligible for IPF relief; the claim was therefore admissible on this ground. Issue 2 - Whether the agreement automatically ceases on death Legal framework: Bye-laws and exchange procedures govern constituent-trading member relations; no express byelaw provides for automatic cessation of an agreement on the constituent's death. Precedent Treatment: The Tribunal followed the textual absence of such a provision in the exchange rules and evaluated factual records showing trading activity after death. Interpretation and reasoning: In the absence of any express provision, it cannot be presumed that the trading account or agreement terminated upon death. The continued execution of trades after the date of death evidenced continuation of the account and contractual relations for IPF purposes. Ratio vs. Obiter: Ratio - absence of express byelaw leads to non-presumption of automatic cessation on death; continued trading activity is determinative of account existence for IPF. Conclusion: The Committee erred in rejecting the claim on the basis that the agreement ceased upon death; such a conclusion lacked statutory or byelaw support. Issue 3 - Characterisation as 'loan transaction' where no trading activity for a 'substantial period' Legal framework: Bye-law 24(d) of Chapter XII excludes claims 'in respect of a loan with or without security.' Defaulters' Committee guidelines (35th meeting minutes, 2 Jul 2010) list circumstances constituting transactions in the nature of loans. Subsequent minutes (56th and 59th meetings) clarified 'substantial period' to mean 24 months prior to expulsion or prior to withdrawal of trading facility. Precedent Treatment: The Tribunal relied on the Committee's own guidelines and their clarifying minutes as the normative standard to determine loan-characterisation. Interpretation and reasoning: The guidelines require (inter alia) absence of trading for a substantial period plus evidence that the defaulter passed on credits that could be construed as interest to characterise deposits as loans. The Tribunal found trading activity continued until the broker's terminal was disabled in 2017; therefore the 24-month period contemplated by the guidelines did not elapse. Moreover, the Committee had not established the requisite evidential predicate (passage of credits in nature of interest) to treat the deposits as loans. Ratio vs. Obiter: Ratio - where trading activity continued within the 24-month window and there is no evidential basis of credits constituting interest, funds/securities should not be treated as loans under Bye-law 24(d). Obiter - detailed application of each guideline point to hypothetical variations of fact. Conclusion: The Committee's finding that the claim was inadmissible as a loan transaction because more than 24 months had elapsed was erroneous on the facts and inconsistent with its own guidelines; the claim could not be rejected on that basis. Issue 4 - Application of SEBI circulars and Defaulters' Committee norms to claims executed on exchange platform Legal framework: SEBI's 2004 circular mandates creation/use of IPF for legitimate investor claims; SEBI's 2017 circular states all transactions executed on exchange platform are eligible for IPF settlement 'subject to the appropriate norms laid down by the Defaulters' Committee.' The Committee's 2010 guidelines and later clarifications define loan-transaction criteria and the 24-month 'substantial period.' The exchange's 2021 evaluation policy (Annexure A) expressly excludes claims where funds/securities were given to generate assured returns and lists items rendering claims ineligible, while allowing exceptional consideration by the CORE Committee. Precedent Treatment: The Tribunal uniformly applied the textual provisions of the circulars and Committee minutes; it held that SEBI's circulars make eligibility contingent on transactions being on the exchange platform and compliance with committee norms. Interpretation and reasoning: Two cumulative requirements flow from the 2017 circular: (i) the transactions must be exchange-executed; (ii) claims are subject to Defaulters' Committee norms. The record satisfied (i). As to (ii), the Committee must apply its loan-transaction guidelines and evidentiary thresholds (including the 24-month test) before excluding claims; arbitrary application or misreading of those norms is impermissible. The exchange's 2021 policy reinforces ineligibility where assured-return arrangements are shown but permits exceptional discretion. Ratio vs. Obiter: Ratio - eligibility requires (a) execution on exchange platform and (b) proper application of Defaulters' Committee norms; misapplication of those norms invalidates exclusion. Obiter - observations on CORE Committee's exceptional power under 2021 policy. Conclusion: The claim satisfied the requirement of being executed on the exchange platform and the Defaulters' Committee misapplied its own norms in rejecting the claim; proper application would render the claim admissible unless proven to be an assured-return/loan arrangement per the policy. Issue 5 - Effect of earlier interim approval and later disallowance by the Committee Legal framework: Administrative decisions by the Defaulters' Committee are subject to reasoned orders and correct application of Bye-laws and Committee guidelines; appellate review examines legal and factual correctness. Precedent Treatment: The Tribunal noted the Committee's earlier approval (with indemnity undertaking) and subsequent rejection; it ordered a reasoned reexamination in the prior round and, on review of the impugned order, found the later rejection unsound. Interpretation and reasoning: The Court observed that the Committee originally approved the claim and required an indemnity undertaking; later rejection relied on factual inferences (agreement ceasing on death; 24-month lapse) that lacked byelaw support or were inconsistent with the record showing continued trading. Because the later orders failed to apply the Committee's own norms correctly, the earlier approval should not have been reversed without proper basis. Ratio vs. Obiter: Ratio - a Committee's reversal of an earlier admission requires adherence to Bye-laws and guidelines; an unsupported reversal is susceptible to appellate intervention. Obiter - remedial direction that the result should not be treated as precedent given peculiar facts. Conclusion: The Committee's subsequent rejection was erroneous; the Tribunal set aside the impugned order, restored the admissibility of the claim, and directed the Committee to process and disburse as appropriate within a limited timeframe, while noting that the decision is to be confined to the peculiar facts of the case and not to operate as general precedent.