TaxTMI 
TaxTMI 
2020 (12) TMI 29
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....ng positions on 14.10.1997 by the National Securities Clearing Corporation Limited- for short, "NSCCL" or "Clearing Corporation", as the case may be ­ Respondent 2. 3. The appellant herein, desirous of functioning as a stock broker in the stock market, registered itself as a Trading Member with NSE/Exchange in November, 1994. As a pre­condition of such registration, the appellant was obliged to and did submit an undertaking in favour of the Exchange so as to strictly comply with the practice and stipulations in the applicable Byelaws, Rules, Regulations and other instructions of the Exchange issued from time to time. The said undertaking was given by the appellant on 19.06.1995. 4. As per the conditions prescribed in the Bye Laws, Regulations and Rules of the Exchange, the appellant was obliged to maintain a set of deposits with the Exchange, namely ­ Interest Free Security Deposit (IFSD), security deposit (bank guarantee), margin money in cash and margin money in the form of bank guarantee. The sum total of these deposits of the appellant, collectively termed as the Base Capital of the trading member, amounted to Rs. 1.29 crores. 5. In the year 1996, NSE trans....
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....lant was asked to bring in an additional deposit of Rs. 40.70 lakhs (calculated as per the circular) in order to enhance the trading limits. Additionally, the appellant was also asked to deposit a margin of Rs. 29.10 lakhs towards unsettled trades done on 10.10.1997, along with Rs. 41,42,253.25 in lieu of short delivery under Settlement No. N1997039 and Rs. 6,585.50 in lieu of bad delivery under Settlement No. N1997038. As per the communication, the said amounts were to be deposited before 10:30 AM on 14.10.1997 failing which all open positions of the appellant in various securities were to be closed out forthwith. The appellant failed to deposit the said amounts and consequently, the Clearing Corporation closed out all the open positions of the appellant. 8. Subsequent to the withdrawal of trading facilities and closing out of positions, the appellant pursued legal action, both civil and criminal, against the respondents at various forums, including the High Court of Calcutta and the Securities & Exchange Board of India- for short, "SEBI". The details of various legal proceedings instituted at the behest of the appellant, being unnecessary for deciding the subject matter brough....
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.... 05, 2006. The relevant authority, at its meeting held on January 05, 2006, after duly considering the material on record ... has decided to expel you from the trading membership of the Exchange with immediate effect. ..." 11. The order of expulsion was unsuccessfully challenged by the appellant before the Tribunal at Mumbai. The appellant's primary challenge rested in reference to respondents' decision of withdrawal of trading facility and subsequent action of closing out of open transactions. While upholding the decision of closing out of all the outstanding positions of the appellant under clauses 17 and 18, the Tribunal observed thus: "5. ..... Bye­law 17 permits closing out of outstanding transactions only on failure to complete the same by the trading member by the due date. However, this Bye­law is not exhaustive and does not preclude closing out the dealings in securities under other circumstances. ..." Interpreting the combined effect of both the clauses, the Tribunal, in the same para, further observed thus: "5. ..... It is a cardinal rule of interpretation that these provisions have to be read harmoniously and one cannot be read in isolati....
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....ing facilities of a trading member as contemplated by the circular furnishes yet another ground to the NSE to close out the outstanding positions or dealings in securities. ..." The Tribunal also recorded certain observations regarding the necessity of a power of this nature with the Exchange and noted thus: "5. ..... We cannot lose sight of the fact that a stock exchange which is a primary level market regulator has also a duty to protect the interest of the investors and the integrity of the securities market. The conclusion that we have arrived at based on the interpretation of Byelaws 17 and 18 would advance that object. We are also of the view that it is essential that a stock exchange should have the power to close out the open transactions of a trading member when it finds that he (the trading member) is trading recklessly beyond his gross exposure limit as such limits, backed as they are by requisite margins, are prescribed with a laudable objective of investor protection. Such a power is essential to discipline the recalcitrant trading members. In the absence of such a power, the market and the investors would be exposed to a serious threat and the stock exchan....
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....ed that clause 18 is nothing but a concomitant provision of clause 17 and comes into play only after closing out is done in accordance with clause 17 by complying with the requirement of due date. Impugning the observation of the Tribunal, it has been urged that clause 18 does not provide for additional conditions/reasons of closing out and does not operate independently of clause 17. Instead, both clauses supplement each other. 16. Furthermore, the appellant has contended that on a proper interpretation of clauses 17 and 18, it can be concluded that once the relevant authority has closed out a transaction by exercising power under clause 17, such closing out would take place in such manner, within such time frame and subject to such conditions and procedures as may be prescribed from time to time. Closing out, as per the appellant's contention, begins in clause 17 and culminates in clause 18. 17. To counter the submissions of the appellant, the respondents have submitted that both for admission and continuation of membership, the Byelaws of the Exchange provide for payment of fees, security deposit and other monies as may be specified by the Board or the relevant authority f....
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....ws of the Exchange were brought into operation only after the approval of the Central Government, as mandated under the Act, and the said circular was issued in furtherance of the powers of the Exchange in the Byelaws. Therefore, since the Byelaws were brought into force after approval of the Central Government, no further approval was necessary for taking action under the said Byelaws. To reinforce, it is urged by the respondents that the designated authority of the Exchange, under clause 18, is vested with the power to prescribe the "due date", "manner", "time frame" and "conditions and procedures" as regards the action of closing out and thus, any such action does not warrant any further approval from SEBI. 22. We have heard learned counsels for both the parties at length. 23. Having examined the submissions of the parties and documents on record, we are of the view that the following questions of law emerge for our consideration in the present appeal: ­ (i) Whether prior approval of SEBI/Central Government was essential for enforcing the circular dated 19.05.1997 against trading/clearing members? (ii) Whether the circular is invalid as being in confl....
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....the time of original framing of Rules of the Exchange or upon amendment thereof, is essential or pre­requisite. This mandate of Central Government was later entrusted to SEBI vide S.O. 672 (E), dated 13­09­1994, published in the Gazette of India, Extra., Pt. II, Section 3 (ii), Dated 13­09­1994 (for prior approval at the time of framing); and vide S.O. 573 (E), dated 30­07­1992, published in the Gazette of India, Extra., Pt. II, Section 3 (ii), dated 30­07­ 1992 (for prior approval at the time of amendment) by issuing orders under Section 29A of the 1956 Act, which at the relevant point of time read thus: "29A. Power to delegate.-The Central Government may, by order published in the Official Gazette, direct that the powers exercisable by it under any provision of this Act shall, in relation to such matters and subject to such conditions, if any, as may be specified in the order, be exercisable also by the Securities and Exchange Board of India." 26. Be it noted that the legislature has omitted the usage of the word "Regulations" or "circulars" in the parent Act; and as far as the governance of a stock exchange is concerned, the superv....
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....rmine and announce" from time to time certain operational parameters which may include "trading limits" and "capital adequacy norms" as per clause (6). Clauses (5) and (6) read thus: "Operational Parameters for Trading (5) The relevant authority may determine and announce from time to time operational parameters regarding dealing of securities on the Exchange which trading members shall adhere to. (6) The operational parameters may, inter alia, include: (a) trading limits allowed which may include trading limits with reference to net worth and capital adequacy norms; ....." Notably, 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 Corporatio....
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.... (ii) expulsion from membership; (iii) suspension from membership for a specified period; (iv) any other penalty of a like nature not involving the payment of money." This provision reinforces that the power to regulate and control the trading contracts enables the Exchange not only to make Byelaws and Regulations but to provide for everything therein which might be necessary (and permissible) for ensuring efficacy and vigour in the exercise of just power of control and regulation. It is in this light that the operational parameters or Regulations framed under the Byelaws are to be understood. For, without such power, the Exchange would be rendered toothless in controlling and regulating the contracts. 31. A priori, it must follow that the legislature has bestowed upon the Exchange sufficient freedom of action to effectively control and regulate the functioning of stock brokers who use the Exchange as a means to enter into financial relationships with the investors and common public. This freedom of action is guaranteed in the pre­approved Byelaws which enable the Exchange to frame Regulations, instructions, operational parameters, notice etc. and....
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....ws or the Act is made out, there is no reason to undermine its intended effect. 34. The contention of the appellant that the act of adoption of this circular by the Exchange amounts to an indirect amendment of the Byelaws is a tenuous argument. For, if every regulation or instruction concerning any procedural matter for effective regulation and control of the stock market prescribed by the Exchange, in furtherance of its powers coupled with duty under the Byelaws, is to be deemed as an amendment merely because it provides for something in addition to the Byelaws (but not repugnant thereto), it would make various other operational clauses of the Byelaws repugnant. That cannot be countenanced. 35. The operational freedom of the Exchange cannot be stifled on mere assumptions and the burden lies on the claimant to demonstrate a real conflict between the exercise of power and source of power. Arguendo, had it been a deviation from the Byelaws, in the sense that the circular was defeating and not furthering the scope and objective of the Byelaws, it could have been examined as a constructive amendment or amendment by implication. Black's Law Dictionary 11th Edition defines an "amen....
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....ed from time to time by the relevant authority." 39. Under clause 17, closing out is permitted under specified and narrow circumstances i.e. only when a member of the Exchange has failed on delivery or on payment. The phrase "on failure to complete delivery" and "on failure to pay the amount due" signify the clear scope of operation of clause 17. Understood thus, clause 17 gets activated only when the default is in payment of amount due in case of buying members or in delivery of shares in case of selling members and not otherwise. Succinctly put, clause 17 envisages closing out for failure to complete the settlement operation. That, however, has no relation whatsoever to a situation of closing out due to failure to trade within defined limits, as specified by the Exchange, amounting to violation of the Byelaws of the Clearing Corporation, as in the present case. Whereas, clause 18 caters to another situation and is textually different. 40. Let us now see how the action of closing out is envisaged in the circular. 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....
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....limits, it may very well be possible that such member is still in a position to deliver the securities or to make the payment (depending on buying or selling). For, merely venturing beyond the exposure limits does not ipso facto render a trading member incapable of completing the settlement. But the circular does not go that far and attacks the mischief of exceeding the pre­defined limits in a "reckless fashion". That is to preserve the interests of the unwary investors. The very fact that a member has over­exposed itself in the market while trading is enough to give rise to the cause of action under the circular. The action of forthwith closing out is of an inchoate nature as it seeks to curb continued reckless transaction, before it unfolds fully and damages the sanctity of the market in an irreparable manner. Therefore, what is being done under the circular is not the same as what is being done under clause 17. 44. Clause 18, on the other hand, is of a residuary nature and confers on the relevant authority of the Exchange the power to close out certain positions on grounds not specified in clause 17. The relevant authority, under clause 18, is empowered to determine a....
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....h the deal has been made, or such other circumstances as the relevant authority may specify from time to time. The deal may be closed out by the Clearing Corporation in such manner, within such time frame and subject to such conditions and procedures as the relevant authority may prescribe from time to time. ....." 46. 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. Understood thus, this clause is yet another self­contained provision envisaging forthwith closing out, which goes on to show that forthwith closing out is not a new phenomenon in the overall scheme of things. We do not delve any deeper into the scope of clause 16, for that is not the question before us. 47. To summarize, on a comprehensive view of the scheme of closing out under the B....
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....s of the Corporation as in existence or as modified/amended by the relevant authority, from time to time and also with any circular, order, direction, notice, instruction issued and as modified or amended from time to time by the relevant authority." 51. Notably, the undertaking given by the appellant to the respondents fell within the broad scheme of the Byelaws/Rules, and was a quint­essential requirement for obtaining registration as a stock broker as both 1956 Act and Byelaws subjected the members to such conditions. Thus, the appellant is bound by the undertaking so given. Even otherwise, assuming the absence of undertaking, the very fact that a valid circular originated from the statutory scheme of the Byelaws is sufficient to bind the appellant with its provisions. Thus, the emergent legal position is that the appellant had subscribed to both statutory as well as contractual obligations with the respondents for functioning as a stock broker. Any deviation from the said circular could invite action under multiple provisions spreading across the Byelaws of the Exchange and Byelaws of the Clearing Corporation, in addition to the sanctions provided in the circular itself.....
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....of members therefrom or thereinto; ..." 55. In 1992, SEBI issued letter No. SMD­I/11087/92 dated 04.11.1992 titled "Capital Adequacy Norms for Brokers" whereby the stock exchanges were directed to provide for norms relating to capital adequacy in their Byelaws. Apart from specifying certain requirements, the letter went on to state that "the stock exchange shall continue to have the authority to impose suitable margins as per their judgment in the context of the market situation." Therefore, a stock exchange stood empowered not only to specify capital adequacy requirements for the trading members but also to take action against the defaulting members. 56. Accordingly, for effectuating the mandate accorded upon the Exchange as per the Act, NSE Rules, 1994 and the abovesaid directive, it is obliged to deal with the subject of termination of membership on that basis. Rule 28 thereof provides that a trading membership can be terminated, apart from other ways, by expulsion in accordance with the provisions contained in the Byelaws, Rules and Regulations. Rules 31 and 32 of Chapter III are relevant operative provisions for our consideration which lay down various oblig....
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....tions; or ..." 58. A holistic view of the scheme exposited above vividly reveals that the Exchange not only had the authority to specify various deposit related requirements but also had the power to expel a member in case of default. 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. 59. Be it noted that the relationship between a stock exchange and trading member runs across various levels. Admission to membership, continuation of membership, denial of trading facilities, imposition of fines, calling for additional deposits, suspension of membership and expulsion of membership are various facets of this relationship. Action aga....
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....61. Pertinently, the capital adequacy norms, as discussed above, are meant both for admission as a member and for continuation as a member. Even the language of the governing provision i.e. Rule 32, signifies that requirements relating to capital adequacy are meant for "continued admittance to trading membership" and thus, the mandatory obligations would continue, as long as membership is formally continued. Despite the temporary action of withdrawal of trading facility, a member continues to be a member of the Exchange with all corresponding rights and obligations intact on both sides. A member can always resign from the membership of the Exchange and move out of all fiscal obligations after settling his dues, but as long as he opts to retain his membership of the Exchange, there is nothing in the governing provisions to support the view that withdrawal of trading would automatically extricate the defaulting member from his obligation regarding annual charges and margin requirements, as the case may be. The timely fulfilment of these requirements has been envisaged in the Byelaws as a pre­condition for admission or continued Admission in the Exchange. Despite closer examinatio....
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....e. However, no legal action was initiated by the appellant after this event for securing the release of the stated securities. The appellant, after a gap of almost six years, called upon the Exchange vide letter dated 21.02.2014 to return the withheld securities. It was done purportedly to prevent the flow of corporate benefits on those securities to third parties in whose name the securities stood registered in the books of the companies. Similar communications were sent on 04.04.2014 and 03.05.2014 to NSE and SEBI respectively. 67. The appellant then approached the Securities Appellate Tribunal in Appeal No. 238 of 2014 praying for the release of withheld securities. On 09.09.2014, the counsel for the Exchange proposed to hear the appellant as regards the question of withheld securities and accordingly, the Tribunal relegated the parties before NSE for passing a reasoned order on the said question. The Defaulter's Committee of the Exchange heard the appellant and passed an elaborate order dated 04.12.2014 justifying the withholding of securities. This order was finally challenged by the appellant before the Tribunal on 17.01.2015 in Appeal No. 118 of 2015. The challenge was tu....
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....at if any excess value is received or if the amount of Rs. 2.41 crore is received by disposing of part of the securities withheld either the excess value or the remaining securities or both shall be returned to the appellant within one month from the date of this order." 70. While assailing the order of the Tribunal before this Court, the appellant has primarily contended that the Tribunal misled itself by answering whether the respondents could have withheld the securities of a defaulting member, whereas, the real question was whether such securities could have been withheld despite the respondents being in possession of deposits equivalent to an amount exceeding the claim of the respondents and also whether such securities could have been withheld without getting them registered in the name of the respondents. 71. It is the case of the appellant that on the relevant date, the alleged amount due from the appellant stood at Rs. 1.32 crore and the amount of deposits retained by the respondents was around Rs. 1.34 crore and since the security deposit already exceeded the amount due, there was no occasion for the respondents to withhold the securities in order to realise any amo....
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....s, closing out the withheld securities or registering such securities in the name of the respondent or any other entity as the case may be. In other words, the manner of dealing by the respondents cannot be constricted. 76. The respondents would submit that upon expulsion of a member, the Exchange is well within its rights to realize the withheld securities in fulfilment of the obligations of defaulting member in accordance with Rule 20(f) of Chapter IV of NSE Rules which specifies the consequences of expulsion. It is further urged that Rule 20(f) became operative on 29.06.2000 whereas the appellant was expelled on 05.01.2006 and thus, the said rule was applicable to the case of appellant. 77. An objection has also been raised by the respondents as regards the maintainability of the original appeal before the Tribunal. It has been urged that the appeal was barred by the principles underlying Order II Rule 2 of Code of Civil Procedure, 1908- for short, "the 1908 Code" and/or res judicata as the same issue was raised and not pressed/rejected before the Tribunal in Appeal No. 84 of 2008. 78. Before we proceed, we hasten to note that the real issue is not about the existence o....
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....ious appeal but not granted, in law, it would deem to be refused. In which case, the principle of constructive res judicata would act as a legal bar in the subsequent proceedings for that very relief. We do not wish to dilate on this aspect as no such plea was raised by the respondents in the stated proceedings in 2014. Rather, that appeal was allowed and claim regarding withheld securities was relegated to the Defaulter's Committee. That remand order was acted upon by all concerned and against which the present appeal arises before us. 80. The appellant would then contend that cause of action accrued only after the Defaulter's Committee's order dated 04.12.2014, justifying the withholding of securities. This plea is ex facie untenable. The said order of the Defaulter's Committee did not result in the withholding of securities. It merely supplied reasons and justification for such withholding. The cause of action, if at all any, had arisen to the appellant from the moment their securities were withheld in 1997. Merely because a subsequent order is passed to justify a prior action, it cannot be a case of accrual of fresh cause of action to the aggrieved. 81. Be that as it may,....
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....he Exchange, National Securities Clearing Corporation Limited, Securities and Exchange Board of India, other trading members, Constituents and registered sub­brokers of the defaulter, approved banks and any other persons as may be approved by the Defaulters' Committee and other recognised stock exchanges." (emphasis supplied) It is noted that clause (11) provides for realisation of three categories of assets: (i) security deposits, margin moneys and other deposits; (ii) securities which have been deposited by the defaulter member; and (iii) moneys, securities and other assets due, payable or deliverable to the defaulter by any other Trading Member and recovered by the Exchange. Pertinently, different kinds of assets are subject to a different procedure of realisation. After examining what all can be realised under clause (11), we may now understand the modalities of realisation. Realisation of security deposits 84. Out of the three categories covered under clause (11), security deposits can be called in and realised per se without any additional condition. There is no requirement of vesting with respect to such deposits neithe....
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....annot be equated to a mere equitable charge and the lien is wider in its extent, scope and effect. Express and specific power has been conferred on the company by Article 36 to sell the shares in enforcement of the lien and by Article 37, to apply the sale proceeds in satisfaction of the debt. The Articles, to my mind, clearly and unequivocally express the intention that the company, by itself, is competent to enforce the lien by sale of the shares which are subject to such lien and to apply the sale proceeds in satisfaction of the debt or loan without recourse to an action in a Court of Law for enforcement of the lien " Therefore, if provisions provide for realisation of such lien property, the same may be given effect to in accordance with the provisions. No external conditions can be read in such a scheme. Clause (11) expressly provides for realisation of security deposits as and when a member becomes subject to the provisions relating to defaulters. The phrase "shall call in and realise" signifies that realisation is warranted as an imminent action upon declaration of defaulter in case the security deposits are insufficient. The effect of this phrase is that once a trading m....
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.... some securities to be transferred to the buyers in a sale transaction, subject to the securities being free from any objections. 87. During the trading period from 24.09.1997 to 30.09.1997, the appellant defaulted in Settlement No. N1997039 and delivered short of payment in lieu of securities for which purchase orders were placed. An amount of Rs. 45,56,513 became due. Thereafter, during the trading period from 01.10.1997 to 14.10.1997, an amount of Rs. 29.10 lakhs became due as margins for trading on 01.10.1997 in Settlement No. N1997040. In both these transactions the appellant was a "receiving member". On account of failure of appellant to complete the aforesaid settlements by making complete payment, the Exchange withheld the pay­outs of securities at various points of time. 88. The remaining securities were withheld wherein appellant was acting as an "introducing member" in the market. The companies refused to complete the sale transactions initiated by the appellant and to register the said securities in the names of the purchasers citing some unresolved objections on the said securities. Resultantly, they were returned back to the Exchange and it became a case of ....
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....n the Exchange and they were held by the Exchange only as a lien on the physical copies of shares to the limited extent of obliging the appellant to fulfil its obligations. The benefits on those securities remained in third parties, as they must have, and no one has approached this court to raise the grievance that they have suffered any wrongful loss as regards those benefits. Even if any grievance exists between two clearing members as regards the receipt or non­receipt of those benefits, the best course of action would have been to proceed by way of a separate proceeding in that regard. Clause (11) of Chapter VI, NSCCL Byelaws categorically provides for a privity of contract between delivering and receiving clearing members. The interests of those third parties are not a part of the present lis. 90. Indisputably, the introductory securities have been marked as objectionable by the companies; and securities with outstanding objections are of no use to the Exchange for the purpose of recovery so long as such objections are not removed. The introductory securities fall outside the purview of the vesting provision. Further, the responsibility of the Exchange was limited to pr....
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....on Of Default A CM clearing member failing to deliver the documents due from him or pay the amount due by him may be declared a defaulter as provided in these Bye Laws and Regulations." It is crucial to note that declaration of defaulter upon non­ payment is not an express pre­requisite for the recovery of dues here. Regulation 9.7 provides that all deliveries of securities which were due to the defaulter shall be handed over to the Clearing Corporation so as to enable it to realise their dues from those deliverable securities. It reads thus: "9.7 Deliveries Due To The Defaulter All deliveries, deliveries or otherwise, and payment due to the defaulter shall be handed over to the Clearing Corporation. The Clearing Corporation shall reserve the right to dispose of the securities to make good non­payment of funds or non­ delivery of securities by the defaulting member in such manner it deems necessary." Upon receipt of securities as per this Regulation, the action of withholding is contemplated in Regulation 9.9 (Regulation 9.11 in NSE Regulations). In the present case, it is seen that securities deliverable to the appellant as a receiv....
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....e place in favour of the respondent Exchange unless a formal expulsion order is passed. The relevant point of time, therefore, is the date of expulsion. Without such legal vesting, the Exchange only sits upon the withheld assets as a custodian. There is no question of realisation. Such withholding is done to serve two purposes - first, to persuade the defaulting member to fulfil its obligations during the continuation of membership if it so wishes and second, to secure the liability at the earliest available opportunity as a preventive measure. If liabilities continue to be unfulfilled, expulsion becomes an inevitable consequence and the withheld assets vest in the Exchange. 98. It is thus clear that realisation cannot be done unless vesting is complete and there is no obligation on the Exchange/Corporation to forthwith realise the securities upon withholding. Expulsion or declaration of defaulter, as the case may be, is a pre­condition for realisation, which, in this case, took place only in 2006. Even on applying rule of prudence, such forthwith realisation would not be appropriate as such action would deprive the defaulting member from an opportunity to correct its mistak....
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....ich may include: a. closing out the withheld securities in the name of Exchange or any other entity; or b. registering the withheld securities in the name of Exchange or any other entity; Thereafter, in the concluding sentence it is further specified that the funds received out of closing out of withheld or registered securities may also be dealt with in such manner and at such times as the Exchange may deem fit. 101. It is therefore clear that the respondents had two courses of action open for dealing with the securities - closing out and registration. Chapter 10 of NSCCL Regulations titled "Closing out of Contracts" delineates the manner of closing out. Regulation 10.6 provides that once a member is declared defaulter, the Corporation "shall determine" all outstanding deals by closing­ out against the defaulter member. It reads thus: "10.6 Closing­Out Contracts With Defaulter CM clearing member If a CM clearing member be declared a defaulter, the Clearing Corporation shall determine all outstanding deals by closing­ out against him in accordance with the Bye Laws and Regulations relating to default." 102. Thus, the Corporat....
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.... before the word "dealt" is conscious and instructive here, and its vigour cannot be toned down in a light manner. In other words, the Regulation requires the Exchange not to sit idle on the withheld securities and instead, obliges it "to deal" with them in an appropriate manner. This requirement is a manifestation of the basic "duty of care" implicit in regulatory relationships where one member is in a position to control the functionality of the other. The raison d'etre underlying this duty is to protect the interests of a member and to prevent any undue damage to its interests as a crucial element of the market. No doubt, such dealing could be in any of the manners specified in the Regulation or even in any other unspecified manner, but to say that the respondents could sit idle on the withheld securities of an amount exceeding the amount owed by the defaulting member, without protecting them from being exploited by third parties in any manner, would be akin to permitting a free abuse of this provision. 106. The role of the Exchange is broadly premised on the principle analogous to fiduciary relationship. Propriety guides that when one party holds some property on behalf o....
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.... "The law aims at deterring fiduciaries from misappropriating the powers vested in them solely for the purpose of enabling them to perform their functions." Therefore, it is only for the purpose of performance of functions that a fiduciary character is recognised in this relationship. In hospital products ltd. V. United states surgical corporation Ltd. (1984) 156 C.L.R. 41, it was rightly observed that the scope of fiduciary duties is "moulded according to the nature of the relationship and facts of the case." Snell's Equity, 32nd Edition The proposition gets strengthened by the equitable principle of constructive trust, which received a reasonably acceptable definition in Paragon Finance plc v. Db thackerar & Co. [1999] 1 All ER 400 thus: "..... A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another " It is thus clear that constructive trust arises by operation of law in specific factual scenarios and not by any statute or ....
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..... A clear element of discretion is involved in the manner of dealing. It is true that such discretion cannot be exercised in a legally perverse manner, but it is equally true that a discretion cannot be converted into a mandatory obligation, more so when such discretion is provided expressly by a statutory provision. In Ashburner's Principles of Equity- Ashburner's Principles of Equity, Denis Brownie, 2nd Edition, the discretionary duties of a trustee are noted in a succinct manner. It is stated that such discretion must be exercised "freely", "intelligently" and in a "bona fide" manner. More importantly, an exercise of such discretion in commercial relationships is guided by the nature of things, as they exist or vary from time to time. Illustratively, in the present case, it was out of this sound exercise of discretion that the Exchange did actually get some of the securities registered in its name. Equitable common law principles cannot be used to create mandatory legal obligations. Role of defaulting member 110. Even if we consider the argument that the Exchange ought to have registered forthwith upon appellant's demand, if not suo motu, such an enquiry cannot be undertak....
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....ubmission of a bank deposit to secure the liability. The directions issued by the Defaulter's Committee read thus: "2. Without prejudice to the above, the Committee directs that the securities which have been withheld as per the list of securities given in Annexure­2 of this Order may be released to RSL, on as is where is basis, to (i) enable it to remove the Objections in respect of securities for which RSL is an introducing member and (ii) transfer the securities in its name in respect of securities for which RSL is a receiving member and return the securities to NSE in demat form, provided ­ a. RSL furnishes an undertaking that it has no other claim against NSE or NSCC and that it will return the securities within a period of one year from the date of release after duly removing the objections and transferring in RSL's name as the case may be. b. RSL provides a deposit of or a bank guarantee for Rs. 1,00,70,529.82 (i.e. the outstanding dues of RSL payable to NSCC of Rs. 1,07,72,098.17 less Rs. 7,01,568.35 being the value at closing price on NSE as on December 4, 2014 of securities already transferred in the name of NSCC - list enclosed as Annex....
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....h registration in the name of the Exchange would be subject to final outcome of the case. 115. The appellant has contended that it has suffered loss of corporate benefits due to non­registration by the respondent. The same is unacceptable. Firstly, the receiving securities legally vested in the Exchange as on the date of expulsion to the extent of liability. The appellant could not have claimed any right therein to further corporate benefits as regards these securities. Even before the date of expulsion, the respondents cannot be held liable for any loss on the withheld securities as the appellant always had the opportunity of making payment and protecting its interests. The appellant cannot fail to discharge its obligations for a period of 23 years and then turn around and claim loss of benefits in this manner. Acceding to such a claim would be akin to rewarding a wrong. Understood thus, the liability for the loss incurred by the appellant, if at all any, on account of corporate benefits (dividends, bonus etc.) accrued on withheld shares would not fall upon the Exchange, in the fact situation of the present case. 116. Even otherwise, the respondents' decision of not real....
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....e officials of the respondents to avoid the continuation of criminal proceeding against them resorted to by the appellant. It was neither a confession that they had misappropriated the said deposit nor an undertaking that they had no claim over the said amount for adjustment against the penalties. The effect of the said return was limited to the quashment of criminal proceedings involved therein. The order of this Court dated 02.11.2017 is self­ eloquent, as it categorically notes that: "..... This order will not affect any other proceedings which may be dealt with independently in accordance with law. ..." 120. The matters in issue in the present set of appeals are distinct from those involved in the stated special leave petition (criminal). Therefore, the loss caused to the Exchange due to return of interest free security deposit amount ought to be reckoned in determining the total liability of the appellant and the same ought to be adjusted by the respondents appropriately. 121. The quantum of amount due from the appellant to the respondents, being a question of fact, has been decided by the Tribunal and we do not wish to interfere therewith. For, no ....