TaxTMI 
TaxTMI 
2022 (2) TMI 1348
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.............................................................. 3 B. Submissions ............................................................................................. 17 C. Analysis ..................................................................................................... 25 C. 1 Framework of the MPID Act ................................................................... 25 C. 2 Framework of NSE .................................................................................. 27 C. 3 Definitions of "Deposit‟ and "Financial Establishment‟: Interpretation of Section 2(c) and 2(d) of the MPID Act ...................................................... 40 C. 3.1 Settlement Guarantee Fund: Deposit under Section 2(c) of the MPID Act ....................................................................................................... 46 C. 3. 2 Receipt of commodities: Deposit under Section 2(c) of the Act . 49 C.4 Uncovering the Conspiracy .................................................................... 55 C. 4.1 The Grant Thornton Report .............................................................. 55 C. 4. 2 63 Moons Judgment .....................
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....atform through his broker. The platform would identify that 'B' (the seller) has an offer to sell the quantified commodity. NSEL would then match both the contracts. The date of matching of the contracts is termed as the trade date or 'T'. 'A' must then pay the price of the commodity to NSEL, which checks if 'B' has deposited the stock in a warehouse accredited to NSEL for delivery within two days. Once NSEL has confirmed that 'B' has deposited the stock in the warehouse, it transfers the money to 'B'. Simultaneously, the same parties enter into a T+25 contract by which 'A' (who was the buyer in the T+2 contract) would sell the same quantity of commodity purchased to 'B' (who was the seller in the T+2 contract). The difference between the purchasing cost and the selling cost is the profit that the trading member acquires through the trade. A flow chart indicating a representation of the transaction is set out below: 4 A detailed step-wise trading process of the paired contracts is indicated below: (i) A trading member of NSEL who wishes to trade in the platform is required to place a specific quantity of the commodity in a warehouse accredited to ....
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....ons in violation of the exemption notification. On 12 July 2012, the DCA directed NSEL to give an undertaking that no contracts shall be launched until further instructions, and that all existing contracts must be settled on the due dates. In July 2013, about 13,000 persons who traded on the platform of NSEL claimed that other trading members had defaulted in the payment of approximately Rs 5,600 crores. NSEL issued a circular on 31 July 2013 suspending its spot exchange operations. It stated that the delivery and settlement of all pending contracts would be merged and the contracts would be settled after the expiry of 15 days. NSEL published a statement on 6 August 2013 representing that it had sufficient stocks valued at Rs 6,032 crores in its warehouses. A new pay-in schedule was announced by NSEL on 14 August 2013 by which the Exchange commenced the pay-in schedule from 16 August 2013 and pay-out schedule from 20 August 2013, in the same manner every week. It was also represented that the members would be entitled to get simple interest on their outstanding dues with effect from 16 August 2013 on a reducing balance at 8% per annum till the end of the settlement calendar. The no....
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.... ascertain the quantity and quality of commodities at accredited warehouses, the financial status of buyers and trading members, and that liability be fixed on the promoters of NSEL, i.e 63 Moons. On 27 August 2013, FMC directed a forensic audit of NSEL by Grant Thornton LLP. The Union of India ordered an inspection of accounts of NSEL and 63 Moons under Section 209A of the Companies Act. The Economic Offences Wing registered cases against the directors and key management personnel of the NSEL and 63 Moons and against trading members and brokers of NSEL under the provisions of the Indian Penal Code and the MPID Act. 7 Pankaj Ramnaresh Saraf, a Director of Vostak Far East Securities Prvt. Ltd., a company involved in the business of investment, trading, and financing filed a complaint FIR No 216 of 2013 on 30 September 2013 against the directors and persons holding key management posts in NSEL, 25 borrowers/trading members and some brokers of NSEL for offences under Sections 120B, 409, 465, 468,471,474 and 477A of the Indian Penal Code 1860. The complainant stated that he had primarily been transacting in T+2 and T+25 contracts. He further stated that since NSEL suspended trad....
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....thin the definition of 'deposit'; and (iv) A charge-sheet and supplementary charge-sheets have been filed. NSEL has an alternative remedy of applying for discharge before the trial Court. 9 The State of Maharashtra issued a notification on 21 September 2016 under Section 4 of the MPID Act by which the properties of the respondent were attached. The relevant extract of the notification is reproduced below: "No. MPI 2016/C.R.541/B/Pol II:- Whereas complaints have been received from number of depositors against M/s La-Fin Financial Services Pvt. Ltd. and M/s La-Financial Services Pvt. Ltd. (hereinafter referred to as "the said Financial Establishment") complaining that they had collected the Fund and have defaulted to return the said deposits made by the depositors, on demand; And whereas, the State Government is satisfied that the said Financial Establishment and its Chairman/Directors are not likely to return the deposits to the depositors and hence the Government has to protect the interests of the depositors; And whereas the properties in the Scheduled appended hereto are alleged to have been acquired by the said Financial Establishment and its Chairman/Directors from....
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....C.R. 4999 Pol 11, 15 May 2018 Notification No. MPI-1118/C.R. 597/Pol 11 and 19 October 2018 Notification No. MPI 1118/CR 1040/Pol 11 under Sections 4 and 5 of the MPID Act, attaching the properties of the respondent to recover the defaulted money. The Writ Petitions were heard together and disposed of by a Division Bench of the Bombay High Court by a judgment dated 22 August 2019. The petition was allowed on the following grounds: (i) The pay-in amount received from the buyer was only for the purpose of passing it over to the seller on the same date. This amount would not fall within the purview of Section 2(c) of the MPID Act in terms of which a 'deposit' must be the receipt or acceptance of a valuable commodity which would be 'repaid' by the financial establishment after a specified period; (ii) NSEL only performed the role of a facilitator, in a manner similar to the Bombay Stock Exchange. NSEL did not receive money with the obligation to return it on maturity. The fact that VAT is collected by the selling members from the buying members and that TDS is not deducted by NSEL indicates that NSEL is a mere pass through platform; (iii) The contract notes do....
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....ed yield of 14 to 16% pa, it cannot be held that a 'deposit' was made; (ix) In the event that accounts of NSEL and the suppliers do not tally and delivery of commodities has not been provided, this may constitute an offence under Sections 465 and 467 of the IPC. NSEL is not absolved of any of these liabilities; (x) At the highest, since the members had to pay back the amounts due on T+25, they could be construed as a 'financial establishment'; (xi) The warehouse receipts do not establish the nature of the transaction nor can it be held that the deposit of commodities would fall within the purview of the definition of 'deposit' since the commodity that was to be deposited in a warehouse was to be sold by the seller; (xii) The judgment of the Supreme Court in 63 Moons Technologies v. Union of India (2019) 18 SCC 401 does not have any bearing on whether the attachment of properties initiated under Section 4 of the MPID Act is valid; (xiii) The forensic report of the 17 defaulter companies reveals that the defaulters have utilized the funds and have transferred them to their sister companies; (xiv) In another case of one of the defaulting trading members that is....
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.... alternative remedy of raising an objection against the attachment of property before the Designated Court under Section 7 of the MPID Act. Further, any person who is aggrieved by the order of the Designated Court under Section 10 can appeal to the High Court within 60 days from the date of the order in terms of Section 11 of the MPID Act; and (vi) The settlement cycle broke because: (a) NSEL, contrary to its bye-laws and rules, did not warehouse the commodities. The buying member did not have knowledge of whether the commodities were warehoused; and (b) The buying member was lured into a paired contract on the assurance that the commodity in the warehouse would constitute a security and NSEL would be the However, NSEL colluded with the selling members and facilitated trades without ensuring that the commodities were deposited in the warehouses. 13 Mr. Vikramjit Banerjee, ASG appearing for the State of Maharashtra made the following submissions: (i) NSEL is a financial establishment under Section 2(d) of the MPID Act since it has accepted deposits as defined under Section 2(c). NSEL has been trading in different types of commodities through 'farmer' contracts, pa....
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.... liability under the IPC but no criminal liability arises under the MPID Act. . NSEL and 63 Moons are being prosecuted in various other criminal proceedings. They will face civil suits as well; (vi) As against the current outstanding claim of Rs. 4,676 Crores, properties in excess of Rs. 6000 Crores are attached; (vii) NSEL is only obligated to recover the money from the defaulters. It has secured decrees/arbitral awards to the tune of Rs. 3,397 Crores from the members. The Bombay High Court has accepted the determination of liability of Rs. 136.98 Crores against defaulters by the Committee appointed by it. The Committee has crystallised a further liability of Rs. 760 Crores from the defaulters which is pending acceptance by the Bombay High Court; (viii) NSEL has filed proceedings for execution of the decrees and awards against the defaulters across five States. Since the process is taking time, NSEL instituted a petition WP (C) No. 995 of 2019 before this Court under Article 32 seeking a consolidation of all execution proceedings; (ix) NSEL did not receive any 'deposit', as defined under Section 2(c) of the MPID Act since: (a) The impugned notifications by which the ....
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....nstitutional validity of the provisions of the MPID Act; (iv) Section 4 of the MPID Act is arbitrary and constitutionally invalid and it suffers from over-breadth since: (a) Sub-section (1) of Section 4 mandates the attachment of property of the 'promoter, director, partner, manager or member of the said Financial Establishment.'; (b) Sub-section (2) of Section 4 divests the title of the attached properties without due process of law; and (c) Section 7 states that the Designated Court shall issue a notice to the financial establishment or any other person whose property is attached. An objection shall be raised by all persons who are likely to have a claim. The objection shall be decided by a summary procedure under Order 37 of CPC 1908. The divestment of title of a property by a summary procedure is arbitrary. (v) Though the transaction by NSEL in its platform seems to be an exchange of commodities on paper, it was an agreement between a lender and borrower. A borrower who has defaulted in paying the loan can be held liable to repay it; (vi) The forensic audit traces back the money trail to the borrowing-traders and not to NSEL; (vii) Five of the six attachment n....
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....employee responsible for the management of or conducting of the business or affairs of such Financial Establishment shall, on conviction, be punished with imprisonment for a term which may extend to six years and with fine which may extend to one lac of rupees and such Financial Establishment also shall be liable for a fine which may extend to six years and with fine which may extend to one lac of rupees and such Financial Establishment also shall be liable for a fine which may extend to one lac of rupees. Explanation- For the purpose of this section, a Financial Establishment, which commits default in repayment of such deposit with such benefits in the form of interest, bonus, profit or in any other form as promised or fails to render any specified service promised against such deposit with an intention of causing wrongful gain to one person or wrongful loss to another person or commits such default due to its inability arising out of impracticable or commercially not viable promises made while accepting such deposit or arising out of deployment of money or assets acquired out of the deposits in such a manner as it involves inherent risk in recovering the same when needed shall,....
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....y to refer to the bye-laws of NSEL to ascertain the structure of NSEL's operation and functioning. Bye-law 2.17 defines "certified warehouse receipt" in the following terms: "Certified Warehouse receipt means a receipt issued under the authority of the Exchange or any agency approved by the exchange as a certified warehouse, evidencing proof of ownership of a standard quantity of commodities of a stated grade and quality by the beneficial owner or holder of the certified warehouse receipt. Certified warehouse receipt may either be in physical form or in dematerialised/electronic form as may be permitted by law." The expression 'certified warehouse' is defined in Bye-law 2.18 as a "warehouse approved and designated by the Exchange for making deliveries to and taking deliveries for fulfilling contractual obligations resulting from transaction in commodities." Bye-law 2.51 defines 'Margin' as follows: "Margin means a deposit or payment of cash/other specified assets/documents to establish or maintain a position in a commodity and include initial margin, special margin, ordinary margin, delivery period margin, additional margin and variation margin or any other type of mar....
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....e Exchange shall be responsible for its commitments to each clearing member unless the cause for default was under improper trades not covered by the Settlement Guarantee Fund: "The Exchange shall be responsible for its commitments to each clearing member whether the remaining clearing members with whom it has dealings have defaulted except under circumstances where improper trades not covered under the Settlement Guarantee Fund (SGF) are the cause for default" Bye-law 7.11 states that the Clearing House of the Exchange shall, among other things, have the responsibility of receiving margin payments, certification of warehouse receipts, and transmission of documents. Bye-law 7.11 reads as follows: "The Clearing House of the Exchange shall, in the manner specified by the Relevant Committee or the relevant authority, have the responsibility of receiving and maintaining margin payments, monitoring open positions and margins, and transmission of documents, payments and certified warehouse receipts amongst the trading-cum- clearing members and institutional clearing members of the Exchange." (emphasis supplied) Bye-law 9 provides for clearing and settlement. Bye-laws 9.5, 9.6 and ....
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....d the Exchange may conduct auction to ensure delivery to the buyers who hold outstanding buy positions and intended to lift delivery and could not receive Delivery Orders against such positions due to failure on the part of the seller. In case of non availability of commodities during the auction process, close-out process as defined in the business rule shall be applicable. The Relevant Authority may prescribe penalty on buyers with outstanding positions who fail to pay against his purchase obligation and the Exchange may conduct sale out auction to ensure that the sellers gets the price for the commodities delivered against their sale obligation and could not receive payment due to failure on the part of the buyers. In case of non availability of suitable buyers during the auction process, close-out process as defined in the business rule shall be applicable. Failure to pay the dues and penalties relating to such closing out within the stipulated period shall cause the member to be declared as defaulter and render him liable for disciplinary action." 24 Bye-law 10.7 envisages that a seller issuing the delivery order shall receive from the Clearing House the full price of the com....
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....d ab initio." (emphasis supplied) 25 Thus, under the above bye-law, the selling member is entitled to offer delivery only at the delivery centre which is specified in the Exchange strictly in accordance with the delivery procedure provided before tendering delivery. The seller has to obtain a surveyor's certificate which is to be accompanied with the delivery order being tendered by him to the Clearing House. Bye-laws 10.14, 10.15 and 10.16 contain the following stipulations: "10.14 Members of the Exchange and the clients/ constituents dealing through them shall strictly abide by the delivery procedure, methods of sampling, survey, transportation, storage, packing, weighing and final settlement procedures, as may be specified by the Relevant Authority from time to time. Any violation of such method will be dealt with by the Relevant Authority in the manner, as may be specified from time to time. 10.15 A seller of commodity shall deliver the quantity as per his net sale position in the commodity during the period specified *in the Rules, Business Rules and Regulations of the Exchange and notices and orders issued thereunder from time to time for the specified commodity, which....
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....be applied in the manner, as may be provided in these Bye-laws, Rules, Business Rules and Regulations of the Exchange and notices and orders issued thereunder from time to time. 12.2.2 The Relevant Authority may specify the amount of additional contribution or deposit to be made by each member and/or category of clearing members, which may, inter alia, include the minimum amount to be provided by each clearing member. 12.2.3 The Exchange shall, as a result of multi-lateral netting followed by it in respect of settlement of transactions, guarantee financial settlement of such transactions to the extent it has acted as a legal counter party, as may be provided in the relevant Bye-laws from time to time. 12.2.4. The total amount of security deposit and additional deposit, maintained by a clearing member with the Clearing House of the exchange, in any form as specified herein, shall form part of the Settlement Guarantee Fund. 12.2.5 The amount deposited by a clearing member towards the security deposit shall be refundable, subject to such terms and conditions as may be specified by the Relevant Authority from time to time. Any amount deposited or paid by the clearing member may....
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.... after utilization. "12.6 Administration and Utilization of Settlement Guarantee Fund 12.6.1 The Settlement Guarantee Fund may be utilised for such purposes as may be provided in these Bye-Laws and Regulations and subject to such conditions as the relevant Authority may prescribe from time to time, which may include a. defraying the expenses of creation and maintenance of Settlement Guarantee Fund; b. temporary application of Settlement Guarantee Fund to meet shortfalls and deficiencies arising out of the clearing and settlement obligations of clearing members in respect of such transactions, as may be provided in these Bye-Laws, Rules, Business Rules and Regulations of the Exchange in force from time to time; c. payment of premium on insurance cover(s) which the Relevant Authority may take from time to time, and/or for creating a Default Reserve Fund by transferring a specified amount every year, as may be decided by the Relevant Authority from time to time; d. Meeting any loss or liability of the Exchange arising out of clearing and settlement operations of such transaction, as may be provided in these Bye-Laws, Rules, Business Rules and Regulations of the Exchange in....
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....he Exchange among the various segments of trading, which are designated as such by the exchange and in which the member may participate, in such proportion as the Exchange may decide from time to time. The Exchange shall retain the rights to utilise the fund allocated to a particular segment of trading to match the losses or liabilities of the Exchange, incidental to the operation for that segment or for any other segment, as may be decided by the Exchange at his discretion. Bye-law 12.12 states that the clearing member shall be repaid his deposit after making deductions: 12.12 Repayment to the Clearing Member on His Cessation 12.12.1 A members hall be entitled to repayment of the actual amount of deposit, if any, made by him to the Settlement Guarantee Fund provided it is not part of the admission fee after a. the member ceases to be an exchange member on account of any reason whatsoever, b. all pending transactions at the time the member ceases to be an exchange member, which may result in a charge to the settlement Guarantee Fund, have been closed and settled, c. all obligations to the Exchange for which the member was responsible while he was an exchange member have ....
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.... 2(d). Section 2(d) reads as follows: "(d) "Financial Establishment" means any person accepting deposit under any scheme or arrangement or in any other manner but does not include a corporation or a co-operative society owned or controlled by any State Government or the Central Government or a banking company as defined under clause (c) of section 5 of the Banking Regulation Act, 1949; Financial Establishment is defined as any person accepting a 'deposit'. The definition excludes from its purview (a) a corporation or cooperative society controlled or owned either by the State or the Central Government; and (b) a Banking Company as defined under Section 5(c) of the Banking Regulation Act 1949. Since NSEL does not fall within any of the exceptions, it would be a 'financial establishment' for the purposes of the Act if it is a 'person accepting deposit'. Section 3(42) of the General Clauses Act 1897 provides an inclusive definition of "person" to include both incorporated and unincorporated companies New Horizon Sugar Mills Limited v. Government of Pondicherry, (2912) 10 SCC 575 (para 58) as: "person' shall include any company or association or body of individua....
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....eturned after a specified period or otherwise; and (iii) The return of the money or commodity may be in cash, kind or in the form of a specified service, with or without any benefit in the form of interest, bonus, profit or in any other form. These elements of the definition are followed by specific exclusions contemplated in clauses (i) to (vii). Clause (i) of the exceptions covers an amount which is raised by way of share capital or by debenture, bond or other instrument governed by the guidelines and regulations of SEBI. Clause (v) states that money received in the ordinary course of business by way of security deposit, dealership deposit, earnest money or advance against an order of goods or services shall be excluded. The exclusions in clause (i) to (vii) indicate that transactions which would otherwise fall within the broad sweep of the definition are excluded. 32 The legislature may define a word artificially by restricting or expanding its natural meaning. When the legislature employs the phrase 'means', the definition is intended to be exhaustive. In Indra Sarma v. VKV Sarma, (2013) 15 SCC 755 this Court observed that the definition of the expression 'domestic ....
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....the Financial Establishments for a fixed period, for interest or for return in any kind or for any service; Similarly, statutes protecting the interest of depositors in Orissa The Odisha Protection of Interests of Depositors (in Financial Establishments) Act 2011, Kerala The Kerala Protection of Interests of Depositors in Financial Establishment Act 2013, Himachal Pradesh The Himachal Pradesh [Protection of interests of depositors (in Financial Establishments)] Act 1999, Goa The Goa Protection of Interests of Depositors (in financial Establishments) Act 1999, Telangana The Telangana Protection of Depositors of Financial Establishments Act 1999, Andhra Pradesh The Andhra Pradesh Protection of Depositors of Financial Establishments Act 1999 and Sikkim The Sikkim Protection of interests of Depositors (in Financial Establishments) Act 2000 define the phrase 'deposit' only in terms of money and not the acceptance of a commodity. 36 According to the second ingredient of Section 2(c), the money or commodity must be liable to be returned. However, such return need not necessarily be in the form of cash or kind but also in the form of a service, with or without any benefit such ....
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.... is 'mandatory' for a person to trade on NSEL's platform. Regulation 4.12 refers to the SGF as a 'security deposit'. Similarly, bye-law 12.2.1 stipulates that each member shall contribute a 'minimum security deposit'. However, merely because the SGF is referred to as a 'security deposit', the exception would not automatically be applicable. The meaning of the phrase 'security deposit' takes colour from the surrounding phrases. Clause (v) to sub-Section 2(c) excludes security deposit, dealership deposit, earnest money, and an advance against an order for goods and services from the ambit of the phrase 'deposit'. The concepts used in sub-Section 2(c) (v) fall in two categories: (i) token amounts paid to indicate the earnest to purchase (earnest money and advance money), and (ii) payments required to meet exigent situations of default by a party (dealership deposit and security deposit). 39 Black's Law dictionary Bryan A Garner, Black's Law Dictionary (11 ed. Thomson Reuters). defines security deposit as "money deposited by a tenant with a landlord as security for full and faithful performance by the tenant of terms of leases, including damages to premises. It....
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....SEL uses the fund to cover functions beyond its role as a counter-party. For example, the fund is used to cover loses faced by the NSEL in the settlement operations, investments are made in securities, and the fund is allotted in various segments of trading, where the funds are also utilised to cover loses, if any, in the segment. Therefore, these three features of the SGF indicate that though the SGF is termed as a 'security deposit' in nomenclature, its features do not represent a security deposit. Since NSEL receives 'money' in the form of SGF that is returned in money and services, and is not covered by the exceptions, it would fall within the expression 'deposit' as defined in Section 2(c) of the Act. C. 3. 2 Receipt of commodities: Deposit under Section 2(c) of the Act 42 A person who wishes to trade in the platform of NSEL is required to place the commodities in the accredited warehouse of NSEL. NSEL would then provide the trader with a warehouse receipt. When the buyer's offer and the seller's offer is matched, NSEL would debit the amount from the buyer member's pay in obligations and it would be credited to NSEL's exchange settlement account. The Operations D....
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....no valid basis to accept the submission of the respondent that the expression should only comprehend within it precious metals such as gold and silver. If the legislature intended to so restrict the definition of the expression valuable commodity, it could have used an explanation importing an artificial meaning to the expression. However, the legislature has desisted from doing so. A valuable commodity is a commodity which has significant value. This does not refer only to the intrinsic value of the commodity. Whether or not a commodity is valuable has to be determined bearing in mind the salutary object and purpose of the Act which is to protect the interest of depositors. It is in this context that it becomes necessary to adopt a purposive construction which would give effect to the meaning and content of the law. Any attempt to read the definition in a restrictive sense would be contrary to legislative intent. The intent of the legislature is to define the expression 'deposit' as well as the expression 'financial establishment' in a comprehensive and all-encompassing manner. Therefore, the phrase 'valuable commodity' cannot be restricted to only mean precious metals....
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....re treated as Business Income" While comparing the investment opportunities of bank fixed deposits with trading opportunities at NSEL, NSEL represented that: "Comparison * Bank FD 9.25% for 390 days; NSEL Trading Opportunity 16%; * Bank FD minimum duration 390 days; NSEL Trade duration 35-55 days, depending on the contract * Traders have an option of rolling over their position as per their convenience" Under the caption of 'risk management', the following representation has been held out by NSEL: "Risk Management * Trades are backed by collaterals in the form of stock * Cash margin of 10-15% is levied on the open position of seller in T+2/T+3 contracts * In case of adverse price movement, Exchange collects additional margin from the seller in T+2/T+3 contracts * The exchange has defined guidelines for auction/closeout (circular: 029/2008) * Warehouse Management includes Selection, Accreditation, Quality Resting, Fumigation and Insurance" The above representation indicates that paired contracts were designed as a unique trading opportunity by NSEL under which a trader would, for instance, purchase a T+2 contract (with a pay-in obligation on T+2) and would....
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....n dated 10 July 2013 to FMA had stated that 120 NSEL accredited warehouses held commodities valued at Rs. 6,000 crores. However, there was no documentation relating to warehouse activities for long term trades indicating that the contracts were not secured by stocks. The collateral of the members was not in custody and NSEL did not have any control over it; (g) Though the Warehouse Development and Regulatory Authority had rejected NSEL's application for registration of its warehouse in May 2011, the website of the establishment still represented that the warehouses were registered with the authority; (h) Though the warehouse receipts are to evidence that a commodity is held in an approved warehouse, receipts were issued without deposit of the commodities. NSEL did not insist on commodities being deposited in the warehouses prior to executing the sale transactions. NSEL issued Delivery Allocation Reports misrepresenting that every transaction was delivery based and backed with commodities; C. 4. 2 63 Moons Judgment 47 NSEL filed third party representations in a suit filed by the allegedly duped traders for the recovery of Rs 5,600 Crores from the 24 defaulters. Arbitration pro....
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....d that a fixed rate of return was guaranteed on investing in certain products on the NSEL exchange. Several internal (NSEL) presentations were found, upon a review of email databases, setting out a yield (e.g. 16%) as an opportunity for investors for trading in certain products on the NSEL exchange. An external presentation was also obtained which had been made by a brokerage house (Geojit Comtrade Ltd.) for their clients claiming a fixed return on investments made on the NSEL exchange. Further, this presentation, declared that actual delivery of stocks in such transactions would not be required. 1.5. Grant Thornton also obtained evidence of repeated contraventions of NSEL exchange rules and bye-laws which facilitated such financing transactions to continue and grow in size as below: Repeated defaults : As per the NSEL exchange rules a member who does not have sufficient collateral/monies, etc. to discharge his obligations would not be allowed to trade further. This rule was overridden on a recurring basis. Further despite repeated defaults members were allowed to trade and increase their expenses. For example, Lotus Refineries had defaulted, as per the Rules of the Exc....
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....and Regulatory Authority had in fact rejected NSEL's application for registration of its warehouses way back on 16-5-2011. Notwithstanding such rejection, NSEL's website represented that its warehouses were registered with the Authority. No verification or due diligence was ever undertaken by NSEL to ensure compliance by its members of the conditions outlined in its rules and bye-laws even though in terms of NSEL bye-laws, warehouse receipt issued by NSEL were meant to evidence a commodity being held in an approved warehouse. NSEL did not insist upon deposit of commodities in the warehouses prior to executing sale transactions. Instead NSEL resorted to issuing Delivery Allocation Reports (DAR) representing to genuine investors that each transaction was delivery based and backed at the time of sale by the required quantity of commodities in its warehouses." The conclusion in the FMC order dated 17.12.2013 which revealed the conspiracy unfolded by 63 Moons and NSEL was also referred to in the following extract: "15.1. Noticee 1: Financial Technologies (India) Ltd. (FTIL) : We have discussed the equity structure of NSEL, which is wholly owned by FTIL. We have also pointed o....
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....Rs 5500 crores owed to over 13,000 sellers/investors on the trading platform of NSEL, FTIL, cannot seek to take refuge behind the corporate veil so as to unjustifiably isolate itself from the fraudulent actions that took place at NSEL resulting in such a huge payment crisis. 15.1.3. FTIL has its principal business of development of software which has become the technology platform for almost the entire industry engaged in broking in shares and securities, commodities, foreign exchange, etc. As has been demonstrated by FTIL in their written submission, FTIL has floated a number of regulated exchanges-both for securities and commodities derivatives-in India as well as abroad. NSEL was incorporated to provide a trading platform of commodity spot exchange on a pan-India basis for the purpose of which apparently it sought and was granted exemption from the operation of the FCRA, 1952. Since the objective of the NSEL was promoting spot trading in commodities on an electronic platform, its business model did not contemplate venturing into trading in forward contracts. FTIL had already promoted MCX, a regulated exchange under FCRA, 1952, for the purpose of trading in forward contracts. ....
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....d under the commodity exchange guidelines and post 5-year guidelines." (emphasis supplied) 49 The two-Judge Bench of this Court took note of the modus operandi through which the trading members were duped by a conspiracy hatched by a few trading members along with NSEL. However, this Court held that the order amalgamating NSEL and 63 Moons did not fulfil the requirements of Section 396 of the Companies Act 1956 as the 'essentiality' aspect in Section 396 was not satisfied since the 'emergency situation' requiring amalgamation was short lived. Further, it was observed that the rationale for the amalgamation was the financial incapability of NSEL to effect recoveries from the defaulting members. The Court noted that the final order of amalgamation dated 12 February 2016 referred to the actions taken for recovery by the EOW and the Enforcement Directorate which indicated methods other than amalgamation through which the monies could be recovered. The action taken by the EOW and the Enforcement Directorate is referred to in the following extract: "92.1. What is important to note is that by the time the final order of amalgamation was passed i.e. on 12-2-2016, the final or....
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....rgent step of compulsory amalgamation has, by the time of the passing of the Central Government order, disappeared. Thus, the raison d'être for applying Section 396 of the Companies Act has, by the passage of time, itself disappeared. In fact, as on today, decrees/awards worth INR 3365 crores have been obtained against the defaulters, with INR 835.88 crores crystallised by the committee set up by the High Court, pending acceptance by the High Court, even without using the financial resources of FTIL as an amalgamated company. What is, therefore, important to note is that what was emergent, and therefore, essential, even according to the FMC and the Government in 2013-2014, has been largely redressed in 2016, by the time the amalgamation order was made. Also, the Central Government order does not apply its mind to the essentiality aspect of Section 396 at all. In fact, in several places, it refers to "essential public interest" as if "essential" goes with "public interest" instead of being a separate and distinct condition precedent to the exercise of power under Section 396. On facts, therefore, it is clear that the essentiality test, which is the condition precedent to t....
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....MPID Act before the High Court on the ground that it is arbitrary. The High Court in the impugned judgment did not deal with the constitutional validity of the provisions and left the question open. The respondents contended before this Court that the judgment in Bhaskaran (supra) while holding the Tamil Nadu Act to be constitutionally valid only made a passing reference to the MPID Act. Thus, it was argued that this Bench is not bound by the judgment in Bhaskaran (supra) while deciding on the validity of the provisions of the MPID Act. 52 A Full Bench of the Bombay High Court had held that the state legislature did not possess the legislative competence to enact the MPID Act. Vijay C. Puljal v. State of Maharashtra, (2005) 4 CTC 705 (Bom) On the other hand, a Full Bench of the Madras High Court had upheld the constitutional validity of the Tamil Nadu Act. The correctness of the judgment of the Madras High Court was assailed before this Court in Bhaskaran (supra). The judgment of the Full Bench of the Bombay High Court was cited and considered by the two judge Bench which heard the appeal against the judgment of the Madras High Court. This Court held that the state legislature doe....
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....n by the Bombay High Court. It may be noted that though there are some differences between the Tamil Nadu Act and the Maharashtra Act, they are minor differences, and hence the view we are taking herein will also apply in relation to the Maharashtra Act." (emphasis supplied) 53 Besides holding that the State legislature did not lack legislative competence to enact the law, the judgment in Bhaskaran (supra) also concluded that the Tamil Nadu enactment did not violate the provisions of Articles 14, 19(1)(g) or 21 of the Constitution. In that context, while dismissing the constitutional challenge against the legislation enacted in Tamil Nadu, the Court held: "31. We fail to see how there is any violation of Articles 14, 19(1)(g) or 21 of the Constitution. The Act is a salutary measure to remedy a great social evil. A systematic conspiracy was effected by certain fraudulent financial establishments which not only committed fraud on the depositors, but also siphoned off or diverted the depositor's funds mala fide. We are of the opinion that the act of the financers in exploiting the depositors is a notorious abuse of faith of the depositors who innocently deposited their money....
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.... well. 55 The judgment in Bhaskaran (supra) was followed by another two-Judge Bench of this Court in New Horizons Sugar Mills Limited v. Government of Pondicherry (2012) 10 SCC 575. The case arose from the action of the Government of Pondicherry of attaching the properties acquired by a company. The validity of the Pondicherry Protection of Interests of Depositors in Financial Establishments Act 2004 was also in question. A two-Judge Bench of this Court considered whether the pith and substance of the enactment istraceable to the entries in the Union List or the State List of the Seventh Schedule to the Constitution. After adverting to the earlier decision in Bhaskaran (supra) which upheld the Tamil Nadu enactment while disapproving the Full Bench decision of the Bombay High Court on the legislative competence of the State legislature to enact the MPID Act, this Court held: "50. In addition to the above, it has also to be noticed that the objects for which the Tamil Nadu Act, the Maharashtra Act and the Pondicherry Act were enacted, are identical, namely, to protect the interests of small depositors from fraud perpetrated on unsuspecting investors, who entrusted their life savin....
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....deposit schemes, including the MPID Act, there is no reason for us to reopen the question. This Court has held that the MPID Act is constitutionally valid on the grounds of legislative competence and when tested against the provisions of Part III of the Constitution. C. 6 The High Court‟s Judgment 58 Referring to the Bye-laws and rules of NSEL, the High Court held that NSEL is an electronic trading platform which only facilitated transactions between buyers and sellers. In this context, it observed that NSEL did not receive the pay-in in its own right but only for the purpose of passing it on to the selling trading member on the same day. The High Court observed: "The nature of transaction to be carried out on the NSEL platform was also therefore, in public domain since the trading on this electronic platform commenced. The business/transaction which operated through NSEL, do not disclose any payin amount received by NSEL in its own right but it was only received in the process of settlement of the commodity trade and only for the purpose of passing it on the selling trading member on the same day. This amount cannot be said to be received as a deposit within the meaning ....
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.... regard it observed: "... this receipt do not provide an answer to the nature of transaction that took place on the platform of NSEL and though it is no doubt that the commodity came to be accepted as a deposit, but it should be accepted with an assured return and in the present case, the commodity which was accepted was because it was to be sold to a purchaser and it is not the case of the State that it was a pure transaction where commodities are accepted as deposit." The High Court observed that since transaction charges were charged by NSEL and the amount paid by the buyer used to be paid by NSEL by the settlement date, it is not a financial establishment. 61 The High Court has formed an erroneous opinion that firstly, only if the return includes interest, bonus or any other added benefit, it would be a deposit for the purpose of the MPID Act. However, Section 2(c) states that the return may be "with or without any benefit in the form of interest, bonus, profit or in any other form". The definition does not stipulate that there must be an added benefit, rather that the 'added benefit' is irrelevant for the purpose of the definition; secondly, that for the purpose of Sec....