TaxTMI 
TaxTMI 
2019 (8) TMI 1038
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....Avhad, Spl.PP and Mr.Mahesh Rawool, Ms.G. R. Shastri, AGP for the Respondent-State. Nupur Desai, Aanchal Jaswani, Ginni Ahuja i/b. M/s.Markhand Gandhi, advocates for the applicants in Chamber Summons No.156 of 2018. Mr. Sandeep Karnik, advocate for the applicants in CHSWST No.193 of 2018 and CHSWST.No.81/2017. Mr. Ramchandra Lothikar, Sr. P.I, Mr. Pawar­ API(EOW) Mr. K. Suryakrishnamurthy­ Competent Authority. JUDGMENT :­ (Per Bharati Dangre, J) 1. A significant and axial issue involved in the two writ petitions before us revolve around the National Spot Exchange Limited (NSEL) and the parties are diversificated on the issue as to whether the said establishment is a Financial Establishment or not, and whether it has accepted the deposits. Both the Writ Petitions are filed by the petitioner which is a listed Company registered under the Companies Act, engaged in the business of developing and selling technology products of facilitating trading on exchanges such as stock exchange and commodity exchange and it claims to have more than 63,000 shareholders and more than 800 employees. The petitioner claims to be a leader in Financial Technologies market and....
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....e petition and it is stated that NSEL provided an electronic trading platform for spot contracts in various commodities on a compulsory delivery basis. It is stated that NSEL commenced its operation in October 2008 in accordance with the Notification dated 5th June 2007 issued by the Department of Consumer Affairs, Government of India under the FCRA, 1952, by which "All forward contracts of one day duration for the sale and purchase of commodities traded on" NSEL were exempted from the purview of Forward Contract Regulations Act, 1952 (for short 'FCRA'). It is the case of the petitioner that the NSEL operated an Exchange in accordance with the Rules, Regulations and bye­laws and in its terms, the brokers became the members of the exchange and traded in commodities on the exchange platform on their own account and on behalf of their clients and the brokers were also bound by the bye­laws and Rules of Exchange. The petition further proceeds to state that these T+2 and T+25 contracts which were traded together, were also referred to as 'paired contracts' where the buyer/investors would enter into a contract to buy a commodity with T+2 delivery cycle and simulta....
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....penal consequences prescribed in FCRA itself for violation of its provisions and in fact, the EOW Mumbai has already registered a separate FIR under the FCRA against NSEL and the brokers for acting in breach of the provisions of the Act. (d) The definition of 'Financial Establishment' must by necessary implications exclude an Exchange/future market to avoid conflict with the legislative powers of the Parliament under Entry 48 of List I of VIIth Schedule of the Constitution of India. (e) Admittedly, the petitioner has not received any part of the sum of Rs. 5600 crores alleged to have been received by NSEL as the alleged 'deposits' and the properties of the petitioner are not acquired out of the alleged deposit purportedly collected by NSEL. (f) The assets/property is already attached by the respondent are sufficient to cover the amount currently outstanding which is about 4822 crore. 4. The petition, has in detail, highlighted the trading process on NSEL's exchange platform and the petitioner has also tendered a compilation of sample documents generated in the course of transactions on NSEL's trading platform. To support the sub....
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.... questioning the said notifications on the ground of wrongful and excessive attachment of accrued income and the permissibility to attach its software "Odin" and the attachment of receivables from Odin, the petitioner has raised a challenge that in terms of Section 4 of the MPID Act, the Government ought to have first attached and liquidated the assets acquired out of the deposits and it is only after liquidating such assets, if there was a short fall in repaying the alleged investors, then the assets of any other person, including the petitioner, would have been attached. The impugned notifications are basically assailed on the ground of misreading of the existing provision of Section 4 of the MPID Act and it is prayed that it is either necessary to read them down or strike down the same as ultra vires. The said relief is sought to be justified on the ground of the vagueness and possible area of misinterpretation leading to the gross abuse and misuse of the latter portion of clause (ii) of sub­section (1) of Section 4 i.e. "such other property of the Financial Establishment or the promoter, Director, Partner or Manager or members of the said Financial Establishment as the Gove....
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.... and sold the same under T+25 contracts and these traders (investors) transacted through the registered members of NSEL who acted as brokers on their behalf. Mr.Nankani would invite our attention to the mechanism in place with NSEL which included the different elements i.e. the brokers (registered members) and the client or traders (so­called investors/buyers). According to him, the brokers and the clients or traders had an independent agreement between them and the clients originally entered into T+2 contracts and thereafter, in T+25 contracts reversed the trade so as to receive monies from the seller in T+2 contracts which expired on 25th day under the T+25 contract, meaning thereby that the seller under the original contract of T+2 was buyer under the T+25 contract. He would submit that the price/amount under T+25 contract was higher than the price/amount under the T+2 contract and the difference being the business profit for the trader/seller under the T+25 contracts. He would further demonstrate by stating that it is the original seller (who was the buyer under T+25 contract) who failed to return the money received under T+2 contract on expiry of 25th day, and therefore, h....
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.... to make payment on T+25 failed to do so and it is not the NSEL, but such sellers who receive monies from buyers on T+2 date with an obligation to make payment on T+25 date who had defaulted and, therefore, they would become the financial establishment well nigh and he would submit that the notification issued on 31st March 2017 issued by the respondent has characterized most of the sellers as Financial Establishment. The learned senior counsel would also further submit that despite the Forensic Audit by EOW, Mumbai establishing the complete trail of further diversion of funds by the 24 defaulters to their associated persons and entities, respondent has not attached the properties of each of the beneficiaries equivalent to the monies that has been traced and without first exhausting the properties of those persons to whom the alleged deposits have been traced, the respondent has illegally attached the properties of the petitioner - Promoter of NSEL. He would further submit that the issue whether NSEL has received deposits, is a jurisdictional issue. 7. Mr.Nankani has elaborated his argument that NSEL is not a financial establishment and he would refer to the investigation of the....
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....in relation to non­availability of commodity would probably attract some offences under the IPC but do not attract the provisions of the MPID. He would also place heavy reliance on the report of the auditor appointed by the Economic Offences Wing to trace out the trail of money which has been deposited by the 24 sellers and their brokers and he submits that the auditor in his report dated 24th February 2018 has clearly reported the names and amounts due from the 24 defaulters to whom the complete fraud amount of Rs. 5600 crore can be traced. He would submit that the report of the auditor supports the submission of the petitioner that NSEL is a pass­through and did not receive any money in its account. In this background and surrounding circumstances, Mr.Nankani would urge to grant the relief as prayed in the petition. 9. As against the said submission advanced by the petitioner, we have before us the affidavit in reply filed by the State Government and also the submission advanced by learned senior counsel Shri Dada in support of the State Government. He has placed reliance on the affidavit filed by Shri Prabhakar Loke, ACP and Chief Investigating Officer NSEL, Economic ....
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....llers and they were in fact liable to pay heavy interest to the NSEL as they got unsecured loan. He would further submit that the contention that money when received was given to the purported sellers, and when repaid was given to the original buyer, is totally misleading assertion and on the other hand, his submission is that money was received by NSEL from investors and it was passed on to borrowers by NSEL and the entire transaction was a financial transaction. Shri Dada would thus emphatically submit that NSEL squarely fall within the term 'Financial Establishment' as contemplated under the MPID Act and by relying on the charge­sheet, he would advance a submission that the actual transaction between NSEL and borrowers are not supported with actual delivery of goods and in many cases, the accounts of the NSEL and borrowers did not match with each other due to unilateral bogus entries made by either of the parties to suit and accommodate each other. He would further submit that the investigation has also concluded that the physical delivery of the commodities has not been checked and there was no control over the stock lying in warehouses and in fact, the entire finan....
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.... the depositors after recording the reasons in writing, it is competent to exercise the power by attaching the property believed to have been acquired by such financial establishment either in its own name or in the name of any other person from out of the deposits collected by the financial establishment. He would submit that if it transpired that such money or other property is not available for attachment or not sufficient for repayment of deposits, such other property of the said financial establishment or the promoter, director, partner or manager or member of the financial establishment can be attached by the State Government. The learned Senior counsel would thus submit that the basis of attachment of the property of the Director, Promoter, Partner or Manager of the financial establishment is to fasten the liability on the promoter who has been defined under the Companies Act to include a person who has control over the affairs of the Company, directly or indirectly or a person in accordance to whose advise, directions or instructions, the Board of Directors of the Company is accustomed to act. According to him, this provision enables to fasten the liability on the persons w....
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.... transaction entered into by the NSEL. 12. We also briefly delve into the events which led to the foundation and formation of NSEL. The Tenth Five Year Plan (2002­2007) conceptualized the idea of an Indian common market and it was an outcome of a policy decision to create a common nation wide market for commodities. NSEL came into being to fulfill a vision of Government to create common Indian market for trading of commodities. It came into existence as one of the several subsidiaries of FTIL which holds 99.99% of its shares. Apart from the NSEL, the NCDEX Limited and National APMC were also established for fulfilling the dream project of an Indian Common Market. 13. The National Spot Exchange Limited is the India's first electronic commodity spot exchange that was established with a vision to create a 'single market' across the country for both the manufactured and agricultural produce. It is a National Level Institutionalised and demutualized Electronic Spot Exchange aimed at creating an unified common Indian market for various commodities. The object of NSEL is to enhance farmers price realization and reduce consumer paid price by reducing cost of intermediation and im....
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....ing any reason in public interest" The NSEL commenced its operations by providing an electronic trading platform in October 2008 and simultaneously six State Governments issued licences under the model Agriculture Produce Market Committee (APMC Act) to the NSEL. The Forward Market Commission was appointed as a designated agency to regulate the Spot Exchanges. The Spot Exchange was mainly regulated by the three main regulators i.e. (i) the State Agriculture Marketing Board, (SAMB) regulating the transaction involving the farmers sale of agricultural commodities on electronic platform, (ii) Forward Market Commission (FMC) which regulated all the trade where netting of intra­day transaction in the commodities contract is followed by Exchange and (iii) Warehouse Development Regulatory Authority (WDRA) which covers the aspect of negotiability of warehouse receipts. In the year 2012, the designated agency for implementation of the notification came to be replaced by Forward Markets Commission, Mumbai". 14. NSEL was granted conditional exemption from applicability of the Forward Contract Regulations Act, 1952 and this exemption was in respect ....
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....e failed to serve the purpose for which they were created and the Government after expressing its opinion to that effect, in view of the various risk associated with trading in such unregulated entities, concluded that forward trading is not in public interest. The Ministry of Finance, therefore, rescinded notification dated 5th June 2007 with immediate effect. II The FIR filed and the subsequent invocation and application of provisions of MPID Act against NSEL. 17. On 30th September 2013, one Mr.Pankaj R. Saraf lodged an FIR (C.R.No.216 of 2013) with the MRA Marg Police Station. In his statement, he stated that he was an investor in Traders contract offered by the NSEL through its broker and he was regularly trading in T+2 and T+25 contracts and on 20th July 2013, he was informed by his broker that NSEL had issued press release on 25th July 2013 based on a circular issued by the Department of Consumer Affairs requiring NSEL to submit an undertaking that new contracts will not be launched until further instructions and that the existing contract should be settled on due date. He also stated that he was informed by his broker that NSEL had issued a Press Release proposing a se....
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....covered by Section 2(c)of the MPID Act under any arrangement or in any other manner. Before we proceed to answer the said question, it would be expedient to make a reference to the enactment of 1999 which is an act to protect the interest of depositors of the financial establishment and known as Maharashtra Protection of Interests of Depositors in Financial Establishments Act, 1999. The MPID Act 1999 was brought into force from 21st January 2000 and the said enactment was necessitated in the backdrop of the fact that there was a mushroom growth of financial establishments in the State and these establishments were in the process of grabbing money received as deposits from public and thereby attracted the middle class and poor on the promise of unprecedented high attractive interest rate or rewards and without any obligation to refund the deposit to the investors on maturity failed to do so. Many of such financial Establishment defaulted to return the deposits to the investors and at times, the deposits ran into crore of rupees causing great public resentment and uproar and creating law and order problem in the State and in particular, city like Mumbai. The State, therefore, deem....
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....on under Section 3. We would be dealing with Section 4 at a slightly later stage. However, at the outset, it would be necessary to ascertain as to whether NSEL is a financial establishment and whether it had accepted any deposit 'as contemplated under the Act of 1999. The definition of the term 'deposit' under Section 2(c) is n inclusive definition and it is deemed to have always included any receipt of money or acceptance of any valuable commodity to be returned after a specified period or otherwise, either in cash or in kind or in form of a specified service with or without any benefit in form of interest, bonus, profit or in any other form. 19. In order to ascertain whether NSEL had received any deposit to bring it within the purview of a financial establishment, we have carefully considered the rival submissions advanced by the learned senior counsels appearing for the petitioner and the State. Mr.Nankani has placed before us the entire gamut of operations carried out by NSEL and he has explained the various stages involved while trading on the online platform provided by NSEL. Our attention was invited to the bye laws as well as the regulations governing the trading process....
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....hange, or an entity designated as such by the Exchange, providing the services of settlement of transactions to the exchange members, and guaranteeing settlement by delivery or otherwise of the obligations to the clearing members, on behalf of the Exchange. 2.26 Clearing member means a trading - cum - clearing member or an institutional clearing member of the Exchange who has the right to clear transactions in commodities that are executed in the trading system of the Exchange. 2.27 Client means a person who has executed an agreement with a member of the Exchange for dealing through such member in commodities permitted on the Exchange. 2.33 Days of tender mean the days on which relevant delivery documents and certified warehouse receipts are permitted to be presented to the Clearing House of the Exchange. 2.35 Delivery order means an order issued by a seller in the prescribed form in favour of the Clearing House offering delivery of goods at one or more permitted delivery centres in fulfillment of his obligation. 2.55 "Member of the Exchange‟ or "Exchange Member" means a person, a sole proprietary firm, joint Hindu family, a partne....
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....all be required to release funds to the respective accounts of the exchange members and/or clients. The Bye­laws in great detail set out the procedure of the nature of transactions taking place on the platform of NSEL and set out the rules for clearing and settlement of transactions, creation of a settlement guarantee fund, client protection fund and other funds. It also contains a clause for conciliation and arbitration in clause 3.1.2. The bye­laws were made applicable to all the members and participants of the exchange, authorized persons, approved users, clients and all entities involved in trading, clearing and settlement of transactions to the extent specified therein. The limitation of liability of the NSEL was made very clear in clause 3.7 of the said bye­laws. 3.7 LIMITATION OF LIABILITY The Exchange shall not be liable for any activities of its members or of any other person, authorized or unauthorized, acting in the name of any member, and any act of commission or omission by any one of them, either singly or jointly, at any time shall not be in any way construed to be an act of commission or omission by any one of them, as an agent....
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....ondition imposed by the authorities regulating spot trading in the area where such trading takes place or these Bye­Laws or Business Rules or Regulations of the Exchange or any agreement, transaction or contract executed or made in pursuance thereof on account of negligence or fraud on the part of any member of the Exchange or the Clearing House that is not a part of the Exchange but is an independent entity or their employees, servants or agents, in the event of the Exchange making good or being required to make good such loss or damages (or any part thereof) to such party or person, the Exchange shall be entitled to recover the amount. Dealing in commodities specify the nature of transaction taking place on the platform of NSEL and it set out that the exchange shall provide its trading platform for spot trading in multiple commodities, multiple verities, which shall be consisting of different types of graded unprocessed, semi­processed, processed agricultural commodities, including those notified commodities by different State Agricultural Marketing Board/Authorities as well as metals of different specifications including precious metals like gold and silver etc.....
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....sits and variation margins for their respective outstanding transactions to remain valid. 4.19 The Exchange shall have the right to specify and charge transaction fee, clearing fee or any other fee from the member of the exchange. The Exchange may specify the maximum and minimum fees a clearing member may charge from other members of the Exchange and an exchange member from their clients. 4.20 (a) All outstanding transactions in commodities shall in general be for compulsory delivery at any one or more delivery points and/or warehouses approved, certified and designated by the Exchange (b) All outstanding positions not settled by giving or receiving deliveries shall be auctioned by way of buying in or selling­out as per the Business Rules of the Exchange, together with a penalty as prescribed by the Managing Director or such committee for those failing to give or receive delivery. 4.24 Any member of the Exchange transacting in any contract and basis varieties that are not specified by the Board shall be liable to be dealt with under Bye­Laws relating to disciplinary action. 4.25 Members shall maintain a record of all their transa....
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....o. 7.9 reads thus :­ 7.9.1 In respect of commodities, or price indices, as may be determined by the Exchange from time to time, and traded and cleared by the Exchange in the manner specified in these Bye­Laws, the Exchange shall be deemed to guarantee the net outstanding financial obligations to clearing members. 7.9.2 Commodities, or price indices not guaranteed by the Exchange shall also be cleared, settled or closed out in accordance with the Bye­Laws and Rules, Business Rules and Regulations of the Exchange in force from time to time. The Exchange however shall not be responsible for the performance of such contracts. If any party to such contract defaults in respect of his financial obligations or fails to deliver goods on maturity of the contract, the defaulting member shall be liable for appropriate disciplinary action by the Relevant Authority and his contract will be closed out by the Relevant Authority in accordance with the Bye­Laws, Rules, Business Rules and Regulations or notices, or orders issued thereunder. The Exchange shall then be entitled to recover dues of any defaulting member from his security deposit and other funds, if any l....
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....tted all trades executed by constituent members or clients with whom he has an agreement to provide clearing and settlement services for their transactions and assist the Clearing House in the form and manner that is specified and prescribed by the Clearing House Committee to enable the Clearing House to provide clearing facility to the clearing members. 9.4 The Clearing House shall process all transactions submitted to the Clearing House and shall accept for substitution of the Exchange only the net liability of the Clearing member to the Clearing House. 9.5 An order to buy or sell will become a matched transaction only when it is matched in the Trading system and the Clearing House does not find the order to be invalid on any other consideration and further after verifying that the following are in agreement and/or in order : (i) Commodity, (ii) price indices, (iii) Quantity, (iv) Transaction quote, 9.6 Once a trade is matched and marked to market by the Clearing House, the Exchange shall be substituted as counter party for all net financial liabilities of the clearing members in specified commodities in which the Exc....
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....sured before the commencement of the trading was fixed at Rs.One crore. Every member was required to contribute and provide a minimum security deposit in the SGF and the money in the SGF would be utilized in terms of the bye­laws. Clause 12.6 provide for administration and utilization of the SGF which include differing the expenses of creation and maintenance of SGF, to meet the shortfalls and deficiencies arising out of clearing and settlement obligations of clearing members, meeting any loss or liability of the exchange arising out of the transactions, etc. The Code of Conduct was also set out apart from the provision of arbitration in bye­law no.15. 23. Apart from the bye­laws, the National Spot Exchange Ltd has also framed the rules of National Spot Exchange Limited, Mumbai which set out the manner in which the exchange would be managed and the functions of various committees constituted under the bye­laws of the exchange, including the Membership Committee, Trading Committee, Clearing House Committee, Vigilance Committee etc. The qualifications and disqualifications of the member of the exchange along with the procedure to obtain the membership are also set ....
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....s are made by the members and this fund is exclusively used to pay off in case of defaults by one of the members in which event, the short fall is also made up by further contributions from the members themselves. NSEL received the margin money which is again used towards pay­in and pay­out obligation of the members. 24. The trading mechanism involved the following salient features based on the Bye laws and Rules of NSEL. (i) All contracts with single day duration (ii) Positions outstanding at the end of the day result into compulsory delivery (iii) Fully automated screen Based trading system with national reach. (iv) An order driven trading system (v) Transparent and fair system for automated order matching. Identity of the participants undisclosed. and flexibility for placing order. 25. The Exchange specified the procedures and operations for every clearing member and every member was required to open their clearing and settlement account with the exchange, and 9 clearing banks were appointed by the exchange for transfer of funds between clearing members and the exchange. Every member was to have a designated bank account....
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....ade accessible to the Trading Members (through the FTP : File Transfer Protocol). 7. On the Settlement date, NSEL would debit the Trading Member's designated Settlement Account for the amount of the Buying Member's Pay in Obligations and the same would be credited to NSEL's Exchange Settlement Account. NSEL's Operations Department would inform NSEL's Delivery Department of the particular Selling Member's delivery obligations. Based on that intimation, NSEL's Delivery Department would confirm to the Operations Department that the requisite quantity of the particular commodity sold was available as per the Warehouse Receipts generated by the Warehouse Department. On the basis of the said confirmation, the Operations Department would (i) release the purchase price amount to the selling broker's designated bank account; and (ii) would issue a Delivery Allocation Report to the Buying Broker / member informing him that the bought quantity of the commodity was allocated to him, from the particular warehouse receipt. 8. NSEL would then send the Buyer's details to the selling Trading Member & the selling Trading Member would arrange for the non­member client/seller to ....
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....The buyer was accordingly aware of the seller to whom the price amount had been paid through the exchange settlement mechanism and in fact, the NSEL performed the same role qua commodity trading as the Bombay Stock Exchange and NSE performed qua stock/equity trading by facilitating trading in equities and by effecting settlement of trades through payment and delivery. The Stock exchange did not accept the money or valuable commodity with the promise of its return with some surplus. The trading on the platform of NSEL did not involve it in the capacity of recipient of the traders money with an obligation to return on maturity. The features of the transaction which involved the VAT being collected by the selling members from the buying members and no deduction of TDS by NSEL against the monies of the buyer which the exchange passed on to the ultimate seller is clearly indicative that NSEL was a mere passthrough platform between seller and buyer and no amount was received by NSEL as a deposit. The nature of transaction which was clearly available to those who were trading on the platform were conscious of their act of trading on the platform and no material has been placed on record b....
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....tage. This yield is calculated and annualized on the basis of the total fund pay­in/pay­out date scheduled for the two transactions i.e. T+2, T+30 and the profit and loss on the above trading was a figure arrived at by totaling the two amounts by taking into consideration the number of days when the commodity was sold and the pay­out was scheduled, the yield was calculated. It varies from product to product depending on the period for which the second contract is scheduled whether 3 days, 30 days, 35 days etc. There was no promised or assured return since it was at variance with the prices of the commodity. Shri Nankani has also placed on record the transaction recorded by the broker in favour of a particular trader on a particular date and by a letter signed by the broker, he is intimating the trader directly that he has carried out the buying and selling as per his instructions in form of transactions and we would like to reproduce one such specimen :­ WAY2HEALTH COMMODITIES PVT LIMITED Directors Authorized Signatory SANDHYA Dealing Office: 3^rd FLOOR, HINCON HOUSE TOWER B, 247, PARK, LBS MARG, VIKROLI (WEST), MUMBAI-40083 Regd. Office: #....
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.... not exceeding the official scale of Brokerage and indicated separately. This contract constitutes and shall be deemed to constitute as provide overleaf an agreement between you and me/us, and in the event of any claim (whether admitted or not), difference or dispute in respect of any dealing and contracts of a date prior or subsequent to the date of this contract (including any question whether such dealing, transaction or comtracts have been entered into or not) shall be referred to arbitration as provided in the Rules, Bye-laws and Business Rules of National Spot Exchange Ltde. (NSEL) Mumbai. Yours faithfully For WAY2WEALTH COMMODITIES PVT.LTD Director/Authorized Signatory Member:National Spot Exchange Ltd. PAN: AAACW6445N S. Tax Regn# AAACW6445NST001 The said letter is accompanied with the terms and conditions relating to the transactions in relation to the purchase transactions and the sell transactions and it would be necessary to reproduce the same. Terms and Conditions relating to the transactions executed on the Trading System of National Spot Exchange Limited and forming part of the Contract Note. 1. For....
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....tters where Exchange is not a party, courts having jurisdiction to try and dispose off such dispute shall have jurisdiction. 27. Bare reading of the said document would divulge that what was contemplated through the platform of NSEL was purchase and sell transaction which was also accompanied with other statutory levies in respect of buy/sell transactions and this contract was deemed to constitute an agreement between the client and a member and was governed by the regulations and the bye­laws. Shri Nankani has also demonstrated before us the summary of trades entered by a particular trader and he has demonstrated the details of the transactions which generated a delivery obligation report and a fund settlement date pursuant to which the entries are taken in the ledger of a particular trade showing debit of obligation. The ledger of the respective traders reflect the delivery obligation and records the credit/debit pursuant to the said obligation on the respective dates. Not only this, the entries are further reflected in the NSEL settlement bank account showing amount received from a particular trader with the entries of the respective pay­in and pay­out and this ma....
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.... the buying broker along with the warehouse receipt. A VAT paid Sale Invoice would be issued in the buyers name for a particular quantity of a particular commodity being sold and on the basis of the delivery allocation report, NSEL would issue a delivery note authorizing the buyer to take delivery of purchase commodity and if the buyer/ trading member opted not to remove the commodity, he would be put in constructive possession. 28. It would be also relevant for us to refer to the FIR lodged by Pankaj Saraf on which basis the provisions of MPID has been invoked against the promoter of NSEL. We have perused the statement of the complainant and on perusal of the same, we have noted that even he has not stated that he had deposited money with the NSEL, on the other hand, he has stated that the trading which he was carrying on the platform of NSEL was successful till the time when the embargo was imposed upon the NSEL not to trade further. We have carefully perused the contract notes for T+2 and T+25 contracts of the complainant Shri Pankaj Saraf placed on record by Shri Nankani. Perusal of the said notes disclose that a contract note executed on the platform of NSEL recorded the tr....
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....riod not exceeding 11 days after the date of the contract and subject to such conditions as specified by notification in the official gazette. The said enactment also contains the power to exempt any contract or class of contracts from operation of all or any of the provisions of the Act. The said Act contains a provision for imposing penalty for certain acts mentioned in Section 20 and make such acts punishable. Thus, any violation of the provision of FCRA is punishable by taking recourse to the said enactment. It is not in dispute that the NSEL was granted exemption from the operation of FCRA Act. It is also to be noted that the EOW, Mumbai has already registered a separate FIR under the FCRA against the NSEL brokers and others. However, the withdrawal of exemption on violation of certain conditions subject to which the exemption was granted would entail the consequences under the FCRA Act, 1952 and there are separate consequences which could then fall upon the NSEL. However, the present offence which has been registered against the NSEL is under the provisions of IPC and the provisions of MPID have been invoked and applied. We have also perused the FIR filed by Mr.Pankaj S....
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.... the contract". He also makes the following averment:­ From the presentations and other information available on the website of NSEL. I understood that warehouses were an integral feature of NSEL as the commodities were required to be deposited int e exchange designated and certified warehouses as part of the pay­in obligations. Also, the circulars issued by NSEL in relation to the specific products, contained details on the quantity, quality, warehouse, assayer details etc. this read along with the risk management practices stated by NSEL in its Bye­Laws, confirmed the statements of NSEL on the warehouse, quantity and quality being under its complete administration. Once I heard about payment defaults, I started reading the bye laws and rules of NSEL to understand the exact nature of the obligations and duties of the exchange. It was then that I came to know that as per the NSEL Bye­laws, a certified warehouse means a warehouse approved and designated by the exchange for making deliveries to and taking deliveries from for fulfilling contractual obligations resulting from transaction in commodities. Further, as per the NSEL Bye laws, a ....
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.... well as the NSEL presentation which included the actual payout settlement, the members who have paid­in and would disclose that the electronic platform of NSEL was used by the traders. In no way, the complainant in the FIR allege a promised return in form of any interest, bonus, profit, but by the very nature of transaction, the yield - the difference in the price of a commodity between the two trading dates i.e.T+2 and T+30/33/25 was calculated as a yield but this, in our view, would not fall within the purview of deposit since neither the NSEL received the commodities to be retained by itself nor did it receive any amount to be deposited in its account. On the other hand, the nature of transaction which we have referred to above, involved bringing in the commodity and selling of the commodity by depositing the amount of pay­in and pay­out in the respective accounts of the traders. Nonetheless, the NSEL had its chunk of charges in form of transaction charges and the charges of warehousing. The purchase and sell of the commodity is apparent since the VAT was paid on such transaction. 31. We have also perused the charge­sheet which is filed in pursuant to an inve....
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....rs of the NSEL" After referring to the transaction, the charge­sheet further records thus : "The trading on the platform of NSEL continued smoothly till mid July 2013. Suddenly, NSEL informed the public, for the first time, by way of the Press Note issued on July 15, 2013 that NSEL had received a directive from the Department of Consumer Affairs on July 2012, 2013 ("DCA Directive") to submit certain undertakings to the effect that (a) new contracts would not be launched until further instructions from the concerned authority; and (b) existing contracts should be settled on the due date. However, in the said Press Note, NSEL clarified that the existing business in the running contract traded on the spot exchanges will continue without any disruption and further stated that since spot exchanges do not have concepts like 'due date' (unlike futures contracts), NSEL was seeking further clarifications on the same. Effectively, the complainants were led to believe that the trades on NSEL would continue without disruption and would continue to remain safe and risk free. It then makes a reference to the various circulars issued by the NSEL and pr....
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....t that on 1st August 2013, the exchange had SGF of 738.55 crores. However, during the interaction with the Board of NSEL, it was informed that the SGF had only 62 crores. Thus, the NSEL is charged with providing misleading information and serious doubt is raised about its authenticity. The direction was also issued to appoint a recruited forensic auditors firm to establish the credibility of books of accounts, record maintained by the exchange. It is in this backdrop, we would be required to determine the question whether NSEL had accepted deposits. As far as the role of the accused persons in the said chargesheet is concerned, the charge­sheet deals with the defaulters i.e. 25 defaulting companies of NSEL and assessed amount of default on part of by each of them. For instance, as far as MSPD Agricultural Process P.Ltd is concerned, the charge­sheet mentions that the outstanding amount against this Company is 633.49 crore and this company was trading on the platform of NSEL in Paddy rice and from the account of the said company, an amount came to be transferred to its sister concern and this is how the default company siphoned out the amount. The charge is that trading was ....
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....davit also leave no doubt in our mind that the respondents are also conscious of the role played by the NSEL and merely on the basis of a brochure, which we have perused, refers to an yield in terms of the commodities/produce, it is attempted to canvass that there was an assurance to the clients with fixed return @ 14 to 16% per annum. The affidavit also proceeds to state that the transaction of the petitioners and the traders/suppliers of the goods are not supported by actual delivery of goods and in many cases, the accounts of the petitioner and the suppliers of the goods are not tallying with each other due to bogus entries and the physical delivery of the commodities have not been verified and there was no control over the stock lying in the warehouse. According to us, this may amount to an offence under section 465, 467 of IPC and we are not, in any case, absolving the NSEL or the petitioner if it has any role to play as a promoter from any of these liabilities and it would be imperative on them to be subjected to the regime of the penal laws. However, what is assailed before us is the invocation of the provisions of the MPID on the very basis that NSEL is a Financial Establis....
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....is is corroborated by the fact that it did not bother to verify the stock in its designated warehouses and in some cases, the prosecution had established that there was no stock at all, yet huge amounts were loaned out to the traders by NSEL. In the wake of this argument, the provisions of MPID would not be in any case, attracted on consideration of the submission of Shri Dada. It is the case of the State Government that the amount from the investors was initially deposited in the accounts of NSEL and thereafter, they were transferred at the end of the trading season i.e. end of the day to the respective trades after deducting the charges of the NSEL. The submission of the State is that NSEL had accepted the money and then paid to the settlement accounts of the defaulters. In any case, such a deposit do not take the colour of the term 'deposit' as is contemplated under section 2(c)of the MPID Act as it would amount to deposit if it is to be returned after a specific period either in cash or in kind or in form of a specified service with or without any benefit. The petitioner has admitted that the amount used to come to NSEL to be paid to the respective traders on the T+25 settlemen....
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.... III An action taken against the present petitioner which is the promoter of NSEL by issuing notifications under Section 4. 34. Now we come to the notifications which are impugned in the present writ petition which are issued by the respondent State under Section 4 of the MPID Act. The petitioner has assailed in the writ petition several notifications issued under sub­clause(1) of Section 4 and Section 5 of the MPID Act, thereby attaching the properties of the petitioner in the capacity of promoter of NSEL. The impugned notifications after making reference to the complaint filed by one Mr.Pankaj Saraf on the basis of which the offence was registered and the investigation was carried out by the EOW mention that the provisions of MPID Act were applied on 24th October 2013. The notification proceeds on a premise that complaints were received from a number of depositors against NSEL (referred to as 'financial establishment') that it had collected money by promising attractive returns to depositors but failed to return the deposits when the time for repayment came. The notification makes reference of the NSEL as a registered company providing an electronic platform for spot tr....
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....2015, 13th January, 2016, 17th March 2016, 21st September, 2016, 31st March, 2017, 4th April, 2018, 7th April,2018, 11th April2018, 19th April,2018, 15th May, 2018 and 24th May,2018. Since, as per section 4(1) (i) of the MPID Act, the Government has received complaints form the depositors and is satisfied that the said Financial Establishment has failed and is not likely to return the deposits and that the attached properties of the said Financial Establishment are not sufficient for repayment of the deposits, the properties of the promoter of the said Financial Establishment i.e. M/s 63 Moons Technologies Ltd, are liable to be attached and utilized under the provisions of section 7 of the MPID Act. The said Financial Establishment is a wholly­owned subsidiary of M/s 63 Moons Technologies Ltd. [(previously known as Financial Technologies (India) Limited (FTIL)]. 63 Moons' shareholding in the said Financial establishment is 99.99/ and it is alos the promoter of the said Financial Establishment. As the Government of Maharashtra is satisfied that the attached properties of the Financial Establishment. As the Government of Maharashtra is satisfied that the attached propert....
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....n pending buying delivery obligation report and has worked out their respective liability. It has calculated the same on the basis of the withdrawals and deposits in the NSEL Settlement Account. Perusal of the said report in detail in respect of the defaulter companies would reveal as to how these Companies have utilized the funds and transferred it to some other sister companies and failed to discharge their pay­out obligations and which has caused the loss to the investors. The Forensic Reports deal with the members of the National Spot Exchange Limited and we are really surprised to note that the EOW has not focused itself on the said forensic reports of the Companies which have traded on the platform of NSEL and have huge outstanding amounts pertaining to its trade obligation as on the date on which the transactions on NSEL were stopped and the audit reports have fixed the liability on these companies based on the pending buying contracts. These calculations are based on the basis of withdrawal and deposits in NSEL settlement accounts and the report is indicative of the diversion of funds by the said companies by transferring it and being utilized by some other companies or....
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....n Rs. 900 crores. A perusal of the said affidavit by the State Government before the Gujarat High Court put forth a completely different case and it is alleged that the N.K. Proteins Limited who had obtained licence membership for trading on NSEL's platform had fraudulently created the stock receipts and in the said affidavit, the transaction is explained in the following manner. "14 That it is submitted that the activities of National Spot Exchange were on electronic system. National Spot Exchange had its godowns. Any person who was the owner of or in possession of the commodities as listed by National Spot Exchange Ltd., would approach the National Stock Exchange through agent or himself. If that person wants to sell his commodity, he will physically place his commodity into the registered approved warehouses of National Spot Exchange Ltd. National Spot Exchange Ltd. Would thereafter issue acknowledgment receipt evidencing the quantity of the commodity and its quality. The receipt issued by National Spot Exchange is a tradable document. The receipt issued by National Stock Exchange would be placed online by the person who has placed his commodities in the approved wareh....
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....st NSEL is that in authenticating these companies, due diligence was not followed and they traded fictitious stocks on the exchange for which they raised fake documents. The remand application state that the member companies as sellers and buyers initially squared off the contracts on the date of maturity, but later when the investment in these Companies grew substantially, they dishonored their commitment and caused wrongful loss to the investors numbering more than 13000. The role attributed to the trading companies was set out in the remand application and it is alleged that the Company siphoned off the amount and certain discrepancies are also attributed to NSEL in not properly supervising the receipt of stock in its warehouse. The indication in the said application is that the trading members have received the funds from NSEL and the investigation was focused on whether the amounts have been divested. In such a scenario when the respondent State has itself alleged certain misdeeds to the NSEL only to a limited extent that the transaction between NSEL and borrowers were not fully supported with actual delivery of goods which emerged into a financial mishap due to collusion betw....
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....s abuse and misuse since it is unguided. Shri Seervai has submitted that the legislature has deliberately omitted the words "promoter, director, partner or manager or member" in earlier part of clause (ii) of Sub­section (1) of Section 4 where the words "any other person" only have been mentioned. According to him, the vital difference in the latter part and former part is that "any other person" would obviously refer to any person/entity other than the "promoter, director, partner, manager or member. Therefore, according to the learned senior counsel, any property of any promoter, director, partner, manager, or member of the financial establishment can be attached like that of "any other person" if it has a direct bearing and relation to be borne "from or out of the deposit" and since these wordings are absent, according to Shri Seervai, the decision of Government may be abused or misused when the intention of the legislature is clear from the reading of the entire sub­section i.e. only that property of the promoter, director, partner or manager of a financial establishment will be attached which has a direct bearing and relation to be borne from or out of the deposits. He....
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....achment hearing to the promoter and the clear distinction between the tainted and untainted property is emphasized by the learned senior counsel to advance his submission that sub­section (2) of Section 4 is clearly violative of the principles of natural justice. He further submit that in any contingency, the provisions of sub­section (2) of Section 4 cannot be construed to fasten the liability on the promoter i.e. the petitioner though the money trail has not been established to the promoter and since the language of section 4 do not contain any express inhibition, he has assailed the constitutional validity of the said provision and has prayed that if the provision is read down to exclude any action against the delinquent promoter/directors and further to enable him to establish that they have not received any benefit from the financial establishment out of which they have acquired the property, then the provision can be saved, but in such circumstances, the impugned notification would be ultra vires the provision and would be required to set aside. 37. The Maharashtra Protection of Interest Depositors Act came to be challenged on the ground of lack of legislative comp....
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....f the depositors by mala fide transfers. Therefore, the question of giving an opportunity before passing such order of ad interim attachment does not arise. 22. What is the reasonable opportunity alleged to havebeen violated in the process, as complained by the financial establishments alas the complaint of lack of reasonable opportunity to the financial establishments in courtesy to the principles of natural justice, before attaching the property, in our considered opinion, could, by itself, not be termed as fatal to the principles of natural justice, as what is sought under such attachment is not to deprive any rights of the financial establishments or the directors, but to prevent any further unjust diversification of the funds of the depositors. Therefore, there cannot be any hesitation or reluctance in exercise of such power of attachment without affording an opportunity to the financial establishments as the Act provides a post­decision opportunity and also permits the innocent third parties to approach the Special Court for variation and modification, and we find sufficient justification in this regard. It also made the following observations in paragra....
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.... the view of the Full Bench of Bombay High Court in Vijay's case and it noted that though there are some differences in the Tamil Nadu Act and Maharashtra Act, but they are minor and the view taken would also be equally applicable to the Maharashtra Act. By applying the doctrine of pith and substance, the Apex Court held that the object of Tamil Nadu Act was to find a solution to the problem of the depositors who were deceived on large scale by the fraudulent activities of certain financial establishments and this resulted into disastrous consequences, both in economic and social life of such depositors who were exploited by false promise of high return of interest. The Court held that the object of the Act is to give a speedy remedy to the innocent depositors who are vulnerable to the temptation of earning high rate of interest and who are victimized by financial establishment. The Apex Court in K.K. Baskaran observed thus : 28 In the case of the Tamil Nadu Act, the attachment of properties is intended to provide an effective and speedy remedy to the aggrieved depositors for the realization of their dues. The offences dealt with in the impugned Act are unique and have bee....
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....stablishments leaving the innocent depositors in the lurch. Shri Dada has vehemently submitted before us that the issue has now been put to rest by K.K. Baskaran (supra) and even the MPID Act was tested on the parameters of Articles 14, 19(1)(g) and 21 of the Constitution and it has been held that the Madras Act do not violate any of the provisions and according to Shri Dada, the provisions of the Madras Act are similar to the one contained in the MPID Act. 39. An attempt is made on behalf of the learned counsel for the petitioners to canvass before us that there is a distinction between the provisions of Section 4 of the MPID Act and the relevant section which permits such an attachment as contemplated under the Tamil Nadu Act. Our attention was invited to Section 4 of the Madras Act and Shri Seervai has submitted before us that the Tamil Nadu Act is distinct in its wording under Section 3(ii). According to Shri Seervai, a similar wording is contained in Section 3(2) of the Odisha Protection of Interest of Depositors Act, 2011. The submission of Shri Seervai is that in this particular context, since the properties of the petitioner in the capacity of a promoter are bei....
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....at the validity of the Tamil Nadu Act and Maharashtra Act has been upheld by the Supreme Court in the said decisions and the object of all these enactments being same, and /or similar in nature, and since the validity of the Tamil Nadu Act and the Maharashtra Act have been upheld, the impugned decision of the Madras High Court in upholding the validity of Pondicherry Act must also be affirmed. The Court took into consideration the beneficial nature of all the three legislations being to protect the interest of small depositors who invest their life's earning and savings in schemes floated by unscrupulous investment in companies and who end up losing their entire deposit. By all the aforestated authoritative pronouncement from the Apex Court to which we have made a reference have tested the provisions of the respective State legislations enacted by the respective State legislatures to protect the interest of depositors in financial establishments and by taking a consistent view, the legislative competence of the respective State legislatures have been upheld and the decision of the Apex Court in case of K.K. Bhaskaran Vs. State, was consistently followed. In light of this scenario e....
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....cability, our attention was also invited to the earlier order passed by this court to which one of us (Justice More) was a party in Writ Petition No.1403 of 2015 decided on 1st October 2015. Criminal Writ Petition was filed by NSEL and the NSEL aggrieved recovery association and the NSEL investor action group intervened in the same. Criminal Writ Petition came to be filed under Article 226 and 227 of the Constitution of India read with Section 482 seeking quashment of the C.R registered with the EOW and later on, renumbered as case no.1 of 2014 after filing charge­sheet. After examining the contents of the First Information Report and on consideration of the submission of the learned Advocate General who had heavily relied upon the brochure which was portrayed as a promise and assurance to the clients to be entitled to the returns of 14% to 16% per annum, the Division Bench accepted the said statement and recorded that the statements recorded by Investigating Agency prima facie reveal that the petitioner represented to the traders/suppliers of the goods that they would be provided security free loan and there was an assurance of fixed returns @ 14% to 16%. The brochure was the ....
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....lected by the said financial establishment from the investors falls within the definition of deposit as per section 2(c) of the MPID Act. Considering this as a promise, the State Government then recorded a conclusion that the Financial Establishment i.e. NSEL does not have sufficient properties which can be attached for the purpose of repayment of deposits and therefore, it invoked the provisions of Section 4(1)(ii) of the MPID Act, which enables the attachment of property of the promoter and then, by issuing several notification, the properties of the petitioner are proceeds to be attached. As far as the sufficiency of attachment is concerned, by our interim order, we have already noted that the properties of the petitioner more than Rs. 2200 crore were attached. A submission came to be advanced that the outstanding default amount is Rs. 4822.53 crore whereas the authorities have attached the properties worth Rs. 8548 crore including the properties of the petitioner. We have dealt with the said submission and noted that in the year 2016, the State had attached properties worth Rs. 6115 crore from the defaulter members and property worth Rs. 2200 crore of the petitioner came to ....
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....itted the Forensic Report and has clearly traced the trade obligation of the said defaulters and fixed their liability on this defaulters on the basis of the details extracted from NSEL ledger account provided by the Economic Offences Wing Office. The audit report also include the flow chart diagram of the funds transfer into settlement account of the individual defaulters and as to how and when the funds came to be transferred to its subsidiary companies or its distinct accounts resulting into a default in discharge of their trade obligations. In this background, merely because the brochure made a faint reference to 14% to 16% of yield and on this very presumption that the NSEL has accepted deposits and since the petitioner is a promoter of NSEL, the axe of the Government agencies by attaching the properties has necessarily fallen on the petitioner, which we see is highly illegal and unsustainable. 42. On examination of the contentions raised by the respective counsel, we are of the view that the clients trading on the NSEL platform did not invest with the NSEL in form of Fixed Deposits, equity or debentures of NSEL but they traded commodities on the platform of NSEL. The NSEL ....
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....WP NO.1181 OF 2018 1 We quash and set aside the following impugned notifications :­ (i) Notification dated 4/4/2018 (ii) Notification dated 7/4/2018 (iii) Notification dated 11/4/2018 (iv) Notification dated 19/4/2018 (v) Notification dated 15/5/2018 (vi) Notification dated 19/9/2018 and further notification dated 21/05/2019. 2 As far as prayer clause (a) is concerned, we are not inclined to enter into the said arena of challenge and keep the said challenge open. 3 In light of the aforesaid relief granted, we dispose of the pending Notices of Motion as well as Chamber Summons filed in WP 1181/2018. ORDER IN WP NO.508 OF 2017 4 The impugned notification dated 21st September 2016 is quashed and set aside and prayer clause (b) is made absolute. 5 As far as prayer clause (a) is concerned, we leave the said challenge open. 6 In light of the aforesaid relief granted, we dispose of the pending Notices of Motion as well as Chamber Summons filed in WP 508/2018. (SMT. BHARATI H. DANGRE, J.) (RANJIT MORE, J.) After we pronounced the judgment, learned senior counsel Shri Dada prays for grant of sta....