TaxTMI 
TaxTMI 
2015 (7) TMI 299
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.... the capital market segment with immediate effect. 2. Facts which have bearing on the present appeal are as follows: a) Appellant is a company registered under the Companies Act, 1956 and is a Stock Broker duly registered with Securities and Exchange Board of India ("SEBI" for short) and is a Member of Bombay Stock Exchange ("BSE" for short) and National Stock Exchange ("NSE" for short). b) Respondent No. 1 (NSCCL) is a Clearing Corporation to whom the Respondent No. 2 (NSE) has conferred duties and functions of a Clearing House as stipulated under Section 8(A) of the Securities Contracts (Regulation) Act, 1956 ("SCRA" for short). c) On January 16, 2003 appellant executed a Clearing Membership Undertaking (F&O Segment) in favour of NSCCL, thereby agreeing to abide by the Bye Laws, Rules and Regulations of NSCCL. On January 17, 2003 appellant executed a Trading Membership Undertaking (F&O Segment) in favour of NSE thereby agreeing to abide by the Bye Laws, Rules and Regulations of NSE. On February 15, 2003 appellant executed a deed of pledge in favour of NSCCL, where under, the appellant has pledged various securities including 20 lac shares of Gitanjali Gems Limited ("G....
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....Clearing Members including the appellant, requesting them to take note of the revised norms with respect to acceptance of securities as collaterals. By the said circular, market wide permissible security limit across all the segments and member specific limits for each segment were also set out in the said circular. It was stated in the said circular that the permissible quantity for a security shall be upfront announced to the market along with the list of approved securities for the month, so that the said limits could be adjusted accordingly. It was further stated in the said circular that the date of implementation of the revised norms shall be intimated subsequently. However, all members were requested to take note of the norms mentioned therein, identify the security wise and member wise excess quantities and initiate steps for adherence to the revised norms. If any clarification was needed, the members were requested to contact the officials of NSCCL named in the said circular. g) Since June 2012, the appellant had entered into long dated NIFTY options contracts for a value of Rs. 400 crore, having maturity in September 2012 and December 2012 which were subsequently party....
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....appellant from trading on the NSE platform with effect from January 1, 2013. m) With a view to minimize margine shortfall appellant brought in cash collateral from time to time and wide its letters dated January 14th,16th, 17th, 2013, February 1st, 11th, 12th, 2013 and March 12th & 13th 2013 requested NSCCL to release the ineligible securities to the extent specified therein. By letters dated 1st, 5th, 13th, 14th, 15th and 18th March, 2013 the appellant requested NSCCL to sell the pledged shares to the extent specified therein at market rate and adjust the sale proceeds towards the margin shortfall. n) On January 30, 2013, Mr. N. Jayakumar, Chairman-Managing Director of the appellant sent an E-mail to NSCCL acknowledging therein that due to the securities which have become ineligible from January 1, 2013 there is margin shortfall of Rs. 92 crore (approx.) and assured NSCCL that the appellant would make good the margin shortfall before end of March 2013. o) On March 14, 2013 officials of NSCCL had a meeting with N. Jayakumar of the appellant, wherein, proximity of the maturity of its options contracts were discussed and the appellant was informed that even after repeated as....
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....e appellant in March 2013, there was settlement shortfall of Rs. 158.04 crore. By its letter dated April 2, 2013, appellant admitted its pay-in obligation in F&O Segment amounting to Rs. 158.04 crore and requested NSCCL to adjust the pay in obligation against its fixed deposit and cash lying with NSCCL as margin deposit in F&O Segment. Accordingly, Rs. 130,23,80,854, in the form of fixed deposit receipt, Rs. 1,52,39,319.11 in the form of cash collaterals and Rs. 22,50,00,000 in the form of bank guarantee were adjusted against the settlement shortage of Rs. 158.04 crore by liquidating the aforesaid deposits/cash collaterals/bank guarantee. As a result of above adjustment, the settlement shortage as on April 2, 2013 was reduced to Rs. 3,77,79,826.89. By a letter dated April 3, 2013, appellant requested time till April 8, 2013 to arrange funds to make good the aforesaid settlement shortfall and also agreed to pay delayed payment charges in respect thereof. However, no such funds were arranged. u) On April 11, 2013 NSCCL addressed a letter to the appellant stating therein that the appellant has continuously fallen short of the settlement obligation and margin requirement in the F&O ....
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....obligation amounting to Rs. 94,78,88,651.89 by July 3, 2013, failing which NSCCL would initiate suitable actions including suspension of membership, expulsion or declaration of default. Challenging the said notice appellant filed a writ petition before the Bombay High Court which was disposed of on July 2, 2013 by recording a statement made by the counsel for NSCCL that a show cause notice would be issued and thereafter an order would be passed in accordance with law after giving an opportunity of hearing to the appellant. z) On July 12, 2013 NSCCL liquidated following deposits/securities and adjusted the same towards the cumulative settlement shortfall amounting to Rs. 94.78 crore. i) Additional Base Capital Cash (CM Segment) Rs. 1,70,00,000. ii) Sale proceeds of liquid Bees Rs. 1,59,15,847.38. As a result of above adjustment, the cumulative settlement shortfall stood reduced to Rs. 91,49,72,804.51. aa) On July 31, 2013 appellant through its advocates addressed a letter to the advocates for the appellant raising a counterclaim of Rs. 213.02 crore (Rs. 80 crore towards reputational loss, Rs. 20 crore towards business loss, Rs. 101.85 crore towards loss in value of Gitan....
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.... 4. Basic dispute in the present case is, whether the Committee on Declaration of Default of NSCCL is justified in declaring the appellant to be a defaulter under Bye Laws 1(1), 1(2) & 1(4) of Chapter XI of the Bye Laws of NSCCL (F&O) Segment. 5. Bye Laws 1(1), 1(2) & 1(4) of Chapter XI of the Bye Laws of NSCCL (F&O Segment) read thus:- "CHAPTER XI: DEFAULT 1. DECLARATION OF DEFAULT A clearing member may be declared a defaulter by direction/circular/notification of the relevant authority of the segment if: (1) he is unable to fulfill his clearing, settlement or obligations; or (2) he admits or discloses his inability to fulfill or discharge his duties, obligations and liabilities; or (3) .... (4) he fails to pay any sum due to the Clearing Corporation as the relevant authority may from time to time prescribe; or (5) to (9)...." (emphasis supplied) 6. Admittedly due to the revised prudential norms laid down by SEBI and implemented by NSE/NSCCL, certain securities furnished by the appellant towards margin money had become ineligible in December 2012 and had to be substituted or equivalent cash collateral furnished by January 1, 2013. As the appella....
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.... argued on behalf of the appellant, that in the meeting held on March 14, 2013 between the appellant and NSCCL it was decided that if the appellant does not make good the margin shortfall by March 18, 2013, then, NSCCL shall sell the pledged shares including shares of Gitanjali in order to reduce margin shortfall. As the appellant failed to make good the margin shortfall, NSCCL invoked the pledge and sold 2,97,731 Gitanjali shares during the period from March 19, 2013 till March 22, 2013 up to 10:34 A.M. and thereafter abruptly stopped to sell Gitanjali shares. It is vehemently argued on behalf of the appellant that if all the 20 lac pledged Gitanjali shares were sold between March 19, 2013 to March 22, 2013 there would not have been any margin shortfall and in such a case appellant would have ceased to be a defaulter. It is further contended on behalf of the appellant that for the gross negligence on part of NSCCL in failing to sell all 20 lac shares of Gitanjali during the period from March 19, 2013 to March 22, 2013, appellant cannot be penalized and therefore, impugned order of the Defaulters Committee is liable to be quashed and set aside. 8. There is no merit in the above ....
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....h March 2013 appellant requested NSCCL to sell various pledged securities (but not Gitanjali shares) at market rate on its behalf to meet its margin obligation in the F&O Segment. Thus, the appellant who from time to time authorized NSCCL to sell various other pledged shares which had become ineligible, but never authorized NSCCL to sell the Gitanjali shares is not justified in contending that if NSCCL had invoked the pledge and sold the Gitanjali shares then there would not have been any margin deficit in March 2013. d) Argument of the appellant that in the meeting held on March 14, 2013 it was conveyed to the appellant that since the appellant had not brought in additional margins in the form of cash, NSCCL would sell the shares of Gitanjali with immediate effect from March 19, 2013 is falsified from the letters addressed by the appellant to NSCCL after March 19, 2013. In none of those letters appellant has made any grievance that NSCCL has failed to sell the shares of Gitanjali in breach of the understanding arrived at between the parties on March 14, 2013. On the contrary, in the letter addressed to NSCCL on April 02, 2013, appellant admitted its pay-in obligation in the F&O....
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....tified in accusing that NSCCL has failed to sell the pledged Gitanjali shares between March 18, 2013 to April 27, 2013. f) Apart from the above, admittedly on March 18, 2013 appellant as also NSCCL had received two complaints one from Sarvin and another from Trusha. In those complaints it was stated that 20 lac shares of Gitanjali (7 lac shares by Sarvin and 13 lac shares by Trusha) were purchased by them from the appellant about six months back and instead of delivering 20 lac shares of Gitanjali to them, the appellant had illegally parked those shares with NSE without their consent and therefore the complainants requested NSE to direct the appellant to release those shares into the complaint's accounts. It appears that in view of the statement contained in the Pledge Deed that the pledged shares are free from encumbrances, NSCCL proceeded to invoke the pledge and proceeded to sell the pledged Gitanjali shares from March 19, 2013 inspite of the complaints received on March 18, 2013. g) It is a matter of record that after selling some of the pledged Gitanjali shares on 19th, 20th, 21st March 2013, NSCCL sold 9763 shares of Gitanjali on March 22, 2013 upto 10:34 A.M. and thereaft....
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....es were pledged to secure the margin money. Similarly, decision in case of Marex Financial Ltd. (supra) is distinguishable on facts as in that the dispute related to closing out between the broker and two of its clients and the same did not relate to invocation of pledge whereas, in the present case dispute between the parties is in relation to sale of shares by invoking the pledge. As noted earlier, even before NSCCL could invoke the pledge and sell shares, there were complaints received from two complainants alleging that the shares in question were purchased by them from the appellant six months prior to the complaints and without their consent appellant had pledged the shares with NSCCL. Once complaints were received against the appellant, it was within the discretion of NSCCL either to sell the pledged shares or not to sell the shares. Fact that initially NSCCL inspite of the complaints chose to sell the Gitanjali shares would not mean that NSCCL was bound and liable to liquidate all 20 lac Gitanjali shares after March 18, 2013. In any event, these facts on record distinguish the present case from various decisions relied upon by the counsel for the appellant. 9. Argument o....
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.... by the appellant is not in dispute. But when the EOW is investigating the complaints in relation to the Gitanjali shares pledged by the appellant, whether, the NSE/NSCCL would be justified in selling the pledged Gitanjali shares is the question. Fact that NSCCL initially sold Gitanjali shares by disregarding the complaints received and thereafter abruptly decided to stop selling the Gitanjali shares cannot be a ground to find fault with NSCCL, because, in the first instance NSCCL could not have sold Gitanjali shares without verifying the grievance made in the complaints that the pledged Gitanjali shares were encumbered or not. In any event, it was open to the NSCCL to stop selling the disputed shares so that corrective measures could be taken. Therefore, irrespective of the fact that the letter of EOW dated March 23, 2013, was received by NSE/NSCCL on March 25, 2013, it was open to the NSCCL to stop selling the Gitanjali shares on the basis of the complaints received on December 18, 2013. 12. Argument of the appellant that NSCCL did not bother to keep the appellant informed about the developments with EOW and thus NSCCL acted in complete disregard and flagrant violation of its ....