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 ..................................................
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.... (the buyer) wants to buy one ton of basmati rice, he would trade on NSEL's platform 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 ....
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....artment of Consumer Affairs "DCA" issued a show cause notice to NSEL on why action should not be taken against it for permitting transactions 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 th....
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....h Asst. Vice President" 6 By a Notification dated 19 September 2014, the Central Government withdrew the exemption granted on 23 July 2008. The Forward Markets Commission "FMC" recommended to DCA that steps be taken to 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 f....
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....on 2 (c) of the MPID Act provides an inclusive definition of the term 'deposit'. Since NSEL assured the traders that their investments in paired contracts would secure them a return of 14 to 16% pa, the receipt of the returns would prima facie fall within 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....
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....ther notifications dated 4 April 2018 Notification No. MPI/1118/C.R-394/Pol-11, 7 April 2018 Notification No. MPI-1118/C.R. 329/Pol-11, 11 April 2018 Notification No. MPI-1118/C.R. 434/Pol 11 read with corrigendum bearing MPI No. 1118/C.R.-434/Pol 11 dated 19 April 2018 19 April 2018 Notification No. MPI 1118/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 fa....
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....er into contracts without depositing commodities in the warehouses. However, the charge sheet makes it evident that even the EOW was of the opinion that the Exchange was only acting as a transaction agent. Further by a letter dated 16 August 2013 from FMC, information on defaulters was sought by NSEL; (viii) Merely because one of the brochures refers to an assured 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 Te....
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....ii) Through a paired contract, the buying member would buy a purchasing contract and simultaneously sell a sale contract paired by NSEL. The sale price was pre-designated by NSEL to offer an annualised return of 14-16% to the buying member; (iv) NSEL is both the bailee of cash (at the buyer's end) and of valuable commodities (at the seller's end); (v) The writ petition filed by the respondent before the High Court was not maintainable since there was an 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 N....
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....March 2017 and 24 March 2018 which indicates that NSEL is not a defaulter; (iii) According to the forensic report submitted by the EOW, the full money trail has been traced to the defaulting members. NSEL did not receive any money as 'deposit'; (iv) The State of Maharashtra in a case which is pending before the Gujarat High Court relating to one of the members (buyers) submitted on affidavit that the defaulting members have defrauded the investors; (v) Even if the impugned judgment is upheld, NSEL will not be absolved of its criminal 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 i....
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....f Rs. 100 per one lakh of the trade value (0.1%) from the traders; (iii) In Bhaskaran, (supra) this Court held that the Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act 1997 "Tamil Nadu Act" is constitutionally valid. In paragraph 15 of the judgment, the court observed that though the Tamil Nadu Act and MPID have minor differences, the view taken in the judgment would equally apply to the validity of the MPID Act. This Court rejected the challenge on the ground of Articles 14, 19 and 21 without examining the provisions of the statute. Therefore, the Court in the present case is not precluded from examining the constitutional 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 i....
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.... Maharashtra." 17 Section 3 of the MPID Act envisages punishment upon conviction of every person including a promotor, partner, director, manager or employee responsible for the management of or the conduct of the business or affairs of the financial establishment which has fraudulently defaulted in the repayment of deposits on maturity. Section 3 is in the following terms: "Any Financial Establishment, which fraudulently defaults any repayment of deposit on maturity along with any benefit in the form of interest, bonus, profit or in any other from as promised or fraudulently fails to render service as assured against the deposit, every person including the promoter, partner, director, manager or any other person or an 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 liab....
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....have an interest in the property or a portion of it. If no cause is shown, then the attachment shall be made absolute and directions can be issued for the realisation and equitable distribution of assets. If cause is shown, the Designated Court shall investigate into it by following a summary procedure as contemplated under Order 37 of the Civil Procedure Code 1908. An appeal against an order of the Designated Court is envisaged by the provisions of Section 11. 19 Since NSEL did not have sufficient money or property for attachment under Section 4 on default of payment of the outstanding amounts, the State of Maharashtra attached the properties of the respondent which owns 99.9% of the shares of NSEL. C. 2 Framework of NSE 20 It is necessary 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 b....
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....ses accredited to the Exchange. Clause (b) of the bye-law states that if the outstanding transactions have not been settled by giving or receiving deliveries, then it shall be auctioned by buying-in or selling-out as per the Business Rules of the Exchange: (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 selling-out as per the Business Rules of the Exchange, together with a penalty as prescribed by a Managing Director or such committee for those failing to give or receive delivery. Bye-Law 7.10.2 states that the 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....
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.... 10.3 The Clearing House shall allocate the delivery orders received by it amongst one or more buyers having outstanding long open positions in a manner as considered appropriate by the Relevant Authority. 10.4 The Relevant Authority may specify in advance before commencement of trading in a commodity various grades of a commodity that may be tendered and the discounts and premiums for such grades. 10.5 All positions outstanding at the end *of the day shall result into compulsory delivery obligation at the closing rate of the date of transaction as fixed by the Relevant Authority. The differences arising out of the actual transaction price and closing price shall be received from and disbursed to amongst the members on the next day of trading, pending actual delivery. The Relevant Authority may prescribe penalty on sellers with outstanding positions who fail to issue delivery orders and 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 commoditie....
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.... that he owns and holds in his possession or his agent's possession adequate stocks of the required quantity and quality of the commodity. Bye-law 10.12 prescribes that: "A seller member is entitled to offer delivery only at the delivery centers specified by the Exchange in advance for the respective commodity. Delivery can be tendered at such specified centers strictly as per the delivery procedure specified by the Exchange. Before tendering delivery, the seller is also required to obtain a certificate from a surveyor empanelled by the Exchange and such certificate shall be accompanied with the delivery order being tendered by him to the Clearing House. The surveyor's certificate shall clearly specify the quality of the goods tendered and shall also confirm that such quality is tenderable as per the contract specification of the Exchange. In case of non-compliance of any of these conditions, the delivery order is rejected 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 ....
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....ibe from time to time, the norms and conditions governing Settlement Guarantee which may among other things specify the amount of deposit or contribution to be made by each trading member to the Settlement Guarantee Fund. The bye-law also states that rules are to be made on contributions, conditions of repayment and withdrawal of contribution from the fund among other stipulations. Bye law 12.1.3 states that the minimum amount in the fund before starting the trading must be Rs 1 Crore, which can be suitably increased. Bye Law 12.2 stipulates the contribution and deposit with the Settlement Guarantee Fund: "12.2 Contribution to and Deposits with Settlement Guarantee Fund 12.2.1 Each member shall be required to contribute to and provide a minimum security deposit, as may be determined by the Relevant Authority from time to time, to the relevant Settlement Guarantee Fund. The Settlement Guarantee Fund shall be held by the Exchange. The money in the Settlement Guarantee Fund shall 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.....
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....ded that the member has, simultaneously with such withdrawal, deposited cash, fixed deposit receipts, or bank Guarantees with the Clearing House or the Exchange or made contribution through such other mode, as may be approved by the Clearing House or the Exchange from time to time, to meet his required contribution or deposit, except as provided in these Bye-Laws. 12.5 Investment of Settlement Guarantee Fund Funds in the Settlement Guarantee Fund may be invested in such approved securities and/or other avenues of investments, as may be provided for by the Board in the relevant Business Rules and Regulations in force from time to time. (emphasis supplied) Bye-law 12.6 states that the Settlement Guarantee Fund may be used for the purpose of (i) maintenance of the fund; (ii) using the fund temporarily to fulfil the shortfalls and deficiencies arising from clearing and settlement obligations; (iii) payment of insurance cover; (iv) covering the loss arising from clearing and settlement obligations; and (v) repaying to the members, the balance amount available after utilization. "12.6 Administration and Utilization of Settlement Guarantee Fund ....
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.... Whenever a member fails to meet his settlement obligation to the Exchange arising out of the transactions, as may be provided in these Bye-laws, Rules, Business Rules and Regulations of the Exchange in force from time to time, or whenever a member is declared a defaulter, the Relevant Authority may utilise the Settlement Guarantee Fund and other moneys of the member to the extent necessary to fulfil his obligations in the following order: [...] 12.9.2 If the cumulative amount under all the above heads is not sufficient, the balance obligations shall be assessed against all the clearing members in the same proportion as their total contribution and deposit towards security deposit, and the clearing members shall be required to contribute or deposit the deficient amount in the Settlement Guarantee Fund within such time, as the Relevant Authority may specify in this behalf from time to time." [...] Bye-law 12.11 states that the deposit shall be allocated by the Exchange among various segments of trading: 12.11 Allocation of the Contribution or Deposit Each clearing member's contribution and deposit towards the Settlement Guarantee Fund ....
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....the clearing member after deducting the necessary dues or charges payable by such clearing member from time to time, including the initial deposit. C. 3 Definitions of "Deposit‟ and "Financial Establishment‟: Interpretation of Sections 2(c) and 2(d) of the MPID Act 30 The notifications attaching the properties of the respondent were issued under Section 4 of the MPID Act. Section 4 covers only those situations where a 'financial establishment' is a defaulting entity. Section 4 is reproduced below: "4. (1) Notwithstanding anything contained in any other law for the time being in force,- (i) where upon complaints received from the depositors or otherwise, the Government is satisfied that any Financial Establishment has failed,- (a) to return the deposit after maturity or on demand by the depositor; or (b) to pay interest or other assured benefit; or (c) to provide the service promised against such deposit; or (ii) where the Government has reason to believe that any Financial Establishment is acting in a calculated manner detrimental to the interest of the depositors with an intention to defraud them; [...] ....
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.... from, - (a) the Industrial Development Bank of India, (b) a State Financial Corporation, (c) any financial institution specified in or under section 6A of the Industrial Development Bank of India Act, 1964, or (d) any other institution that may be specified by the Government in this behalf; (v) amounts received in the ordinary course of business by way of, - (a) security deposit, (b) dealership deposit, (c) earnest money, (d) advance against order for goods or services; (vi) any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is for the time being force in the State; and (vii) any amount received by way of subscriptions in respect of a Chit. Explanation I. - "Chit" has the meaning as assigned to it in clause (b) of section 2 of the Chit Funds Act, 1982; Explanation II. - Any credit given by a seller to a buyer on the sale of any property (whether movable or immovable) shall not be deemed to be deposit for the purposes of this clause; The statut....
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....he term inclusive and not restrictive. 33 The expression 'deposit' is conspicuously broad in its width and ambit for it includes, not only any receipt of money but also the acceptance of any valuable commodity by a financial establishment under any scheme or arrangement. As a matter of interest, we may note at this stage that the expression "any" is used in the substantive part of the definition of the expression 'deposit' on five occasions namely; (i) Any receipt of money; (ii) Any valuable commodities; (iii) By any financial establishment; (iv) With or without any benefit; and (v) In any other form. 34 Likewise, the definition of financial establishment refers to the acceptance of deposits: (i) Under any scheme or arrangement; or (ii) In any other manner. 35 The repeated use of the expression 'any' by the statute while defining both the above expressions is a clear reflection of the legislative intent to cast the net of the regulatory provisions of the law in a broad and comprehensive manner. Unlike many other state enactments which govern the field, clause (c) of Section 2 of the MPID Act compreh....
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....% return on trading in the platform is immaterial for the purpose of determining if NSEL accepted deposits. 37 Having referred to the relevant bye-laws, we shall determine if NSEL receives 'deposits' as defined by Section 2(c) of the MPID Act. The bye-laws elucidate that NSEL receives both money and commodities from trading members. In order to decide if these receipts by NSEL could be regarded as 'deposits', the test of 'return' will have to be satisfied. The test is that the return be in cash, kind or service. It is not necessary that the return should be with the benefit of interest, bonus or profit. Therefore, if the financial establishment is obligated to return the deposit without any increments, it shall still fall within the purview of Section 2(c) of the MPID Act, provided that the deposit does not fall within any of the exceptions. The exception of relevance to our case is clause (v) which states that 'amounts received in the ordinary course of business by way of (a) security deposit; (b) dealership deposit; (c) earnest money; and (d) advance against order for goods or services shall be excluded from the purview of the term 'deposit'. C. 3.1 Sett....
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....sioned. 40 Chapter 12 of the bye-laws provides the features of the SGF: (i) SGF is utilized for: (a) defraying the expenses for its creation and maintenance ; (b) temporary use of the fund to meet efficiencies arising out of the performance of obligations; (c) payment of premia on insurance covers; (d) payments for the loss or liability of the Exchange arising out of 'clearing and settlement operations'; (e) repayment of the balance deposit to a member; (f) payment towards the member's obligations where the member fails to meet his settlement obligations; and (g) payment of the member's obligation on being declared as a defaulter; (ii) The members' contribution is allocated among various segments of trading, in which they can participate. The Exchange also retains the right to utilise the fund allotted to a particular segment of trading to match the losses or the liabilities of the Exchange; and (iii) The settlement fund may be invested in approved securities or other avenues of investments. 41 The features of the SGF indicate that the fund is used to cover those expenses, which are beyond the u....
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....modity. Even if the financial establishment is only in 'custody' of the commodity, it would still fall within the purview of the phrase 'acceptance of commodity'. On the acceptance of custody of the commodity, NSEL has to provide various services such as an obligation to keep the commodity safe and without any damages. Additionally, the Operations Department and the Delivery Department will have to coordinate while matching the contracts. Similarly, after the delivery note is sent to the buyer, the commodity is either delivered to the buyer or the buyer is put in constructive possession of the commodity. The phrase 'warehouse receipt' is defined in Bye-law 2.96 as a document evidencing that the commodity is being held by NSEL in the approved warehouse. Clause (b) to Bye law 4.20 states that if the outstanding transactions have not been settled by giving or receiving deliveries, then it (the commodity) shall be auctioned by buying-in or selling-out as per the Business Rules of the Exchange. Bye-law 10.11 states that the commodities shall be delivered to and delivery taken from only the designated warehouses. Therefore, NSEL offers a multitude of 'services' in return ....
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.... Yield Castor Seed T+3 & T+36 7.5 -9 Lacs 16% Castor Oil T+5 & T+30 7-9 16% Cotton Wash Oil T+2 & T+25 10 16% Paddy T+2 & T+25 3.5-4.5 16% Steel T+2 & T+25 4.5-5 16% Raw Wool T+2 & T+25 3.5-4 16% Wool Top T+2 & T+25 1.8-2 16% Crude Soybean Oil T+2 & T+25 3.3.-3.5 16% Soya DOC T+2 & T+25 1.7-2.0 16% Refined Mustard Oil T+2 & T+25 6.5 16% Refined Soybean Oil T+2 & T+25 6.5 16% Refined Sunflower Oil T+2 & T+25 6.5 16% RBD Palmolein Oil T+2 & T+25 6.5 16% Sugar T+2 & T+25 3.0 16% Maize T+2 & T+25 3.0 16% The above representation specifies: (i) Commodities; (ii) Duration of trades; (iii) Investment; and (iv) Yield. For example, in the case of castor seeds, NSEL held out a buy contract (T+3) and sale contract (T+36), in which the yield is stated to be 16%. Moreover, NSEL represented that: "Opportunities • Traders can trade and lock their return • Trader has to buy in near settlement contract and sell in far settlement contract simult....
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....included selection, accreditation, quality testing, fumigation and insurance. Therefore, NSEL represented that on receiving money and commodities, the members would receive 'assured returns' and a 'service'. Though NSEL has been receiving 'deposits', it has failed to provide services as promised against the deposits and has failed return the deposits on demand. Therefore, the State of Maharashtra was justified in issuing the attachment notifications under Section 4 of the MPID Act. C.4 Uncovering the Conspiracy C. 4.1 The Grant Thornton Report 46 FMC engaged Grant Thornton LLP to conduct a forensic audit of the practices and records of NSEL. The report found several instances where NSEL had repeatedly contravened the rules: (a) NSEL allowed members who had repeatedly defaulted to continue trading though under NSEL's exchange rules, a member who does not have sufficient collateral to discharge his obligations would not be allowed to trade further; (b) Members who were in default or those who had exhausted their margin limits, were granted an exemption from margin requirements; (c) There was an insufficient collateral of commodities in ....
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....ector and CEO of NSEL, the head of warehousing, and two other defaulters. It was mentioned in the charge sheet that these employees of NSEL had colluded with the defaulters to enable them to trade on the platform without depositing the goods in the accredited warehouses. FMC wrote to the Union of India on 18 August 2014 that NSEL and 63 Moons be merged. In the representative suit which was instituted, the Bombay High Court appointed a three-member committee consisting of Mr Justice VC Daga, Mr J Solomon, and Mr Yogesh Thar for determining the liability of the defaulters and assisting in the process of recovery. In addition to Rs. 3,365 Crores covered through court decrees and arbitral awards, the high level committee had crystallised a further sum of Rs. 835.88 to be recovered from the defaulters. 48 On 15 October 2014, the Additional Secretary, Department of Economic Affairs wrote a letter to the Ministry of Corporate Affairs stating that 63 Moons and NSEL are maintaining separate identities to deprive the investors of money. It was stated that the corporate veil ought to be lifted and both the companies must be amalgamated to recover the pending dues. On 12 February 2016, an a....
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....trading were granted an exemption from margin requirements and thus allowed them to increase their exposure by engaging in new trades. More than 1800 margin limit exemptions were granted between 2009 through to 2013. Inadequate monitoring of member collateral : NSEL did not carry out any diligence to establish the existence of stock at member managed warehouses, upon which trades were being executed. Grant Thornton carried out a stock verification exercise and found significant shortages vis-à-vis expected collateral." The judgment referred to the findings of misutilization of client monies/ settlement fund in the Grant Thornton report: "1.12. Misutilisation of client monies/settlement fund : As per the rules and bye-laws of the NSEL exchange "Margin deposits received by clearing members from their constituent members and clients in any forms shall be accounted for and maintained separately in segregated accounts and shall be used solely for the benefit of the respective constituent members' and client position." Grant Thornton found evidence (including emails) that client monies/settlement fund, was used regularly for fulfilling the obligat....
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....ement person of NSEL since its inception. Similarly, Shri Joseph Massey and Shri Shreekant Javalgekar have been Directors of the said company from its very beginning till the settlement crisis at NSEL first came to light in July 2013. The facts establishing the fraud involving a settlement default over Rs 5500 crores at NSEL have been discussed at length in the SCNs issued to the noticees as well as reiterated, albeit illustratively by us at para 14.7 of this Order. The responsibility of FTIL as the holding company possessing absolute control over the governance of NSEL has also been highlighted. The control of FTIL over NSEL becomes further crystallised from the responses given by M/s Grant Thornton before the Commission on 3-12-2013 stating that Shri Jignesh Shah, Mr Joseph Massey and a host of other officials of FTIL reviewed the forensic audit report and it was only after obtaining their clearance, the forensic auditor finalised its report. 15.1.1. The violation of conditions prescribed in the exemption notification, trading in paired contracts to generate assured financial returns under the garb of commodity trading, admission of members who were thinly capitalised ha....
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.... was not authorised to allow trading in forward contracts through the scheme of paired contracts, thereby defying conditions stipulated in the exemption notification granted to it. The motive behind allowing trading in forward contracts on the NSEL platform in a circuitous manner on NSEL which was neither recognised nor registered under FCRA, 1952 indicates mala fide intention on the part of the promoter of FTIL to use the trading platform of its subsidiary company for illicit gains away from the eyes of Regulator. The fact that FTIL promoted NSEL sought exemption from FCRA, 1952 provisions even before they had started any trading or operation, points to their intention from the outset. In this manner, it misinterpreted the conditions stipulated in the exemption notification in collusion with a handful of members, which ultimately culminated in a massive fraud involving Rs 5500 crores, which has the potential effect of eroding trust and confidence in exchanges and financial markets. 15.1.4. Keeping in view the foregoing observations and the facts which reveal misconduct, lack of integrity and unfair practices on the part of FTIL in planning, directing and controlling the a....
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....from 24 defaulters is Rs 5689.95 crores. (ii) Injunctions against assets of defaulters worth Rs 4400.10 crores have been obtained. (iii) Decrees worth Rs 1233.02 crores have been obtained against 5 defaulters. (iv) Assets worth Rs 5444.31 crores belonging to the defaulters have been attached of which assets worth Rs 4654.62 crores have been published in Gazette under the MPID Act for liquidation under the supervision of MPID Court and balance assets worth Rs 789.69 crores have been attached/secured for attachment by the EOW. (v) Assets worth Rs 885.32 crores belonging to the Directors and employees of NSEL have been attached out of which assets worth Rs 882.32 crores have already been published in Gazette under the MPID Act for liquidation under the supervision of the MPID Court and balance assets worth Rs 3 crores have been attached/secured for attachment by the EOW. (vi) MPID Court has already issued notices under Sections 4 & 5 of the MPID Act to the persons whose assets have been attached as above. Thus, the process of liquidation of the attached assets has started. (vii) The Bombay High Court has appointed a 3-member committee heade....
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....ity of Section 396, cannot be said to have been satisfied." The judgment held that NSEL had falsely represented that it had full stock as collateral and that the stock was valued at Rs. 6,000 crores: "91.3. We have seen that neither FTIL nor NSEL has denied the fact that paired contracts in commodities were going on, and by April to July 2013, 99% (and excluding E-series contracts), at least 46% of the turnover of NSEL was made up of such paired contracts. There is no doubt that such paired contracts were, in fact, financing transactions which were distinct from sale and purchase transactions in commodities and were, thus, in breach of both the exemptions granted to NSEL, and the FCRA. We have also seen that NSEL throughout kept representing that it was, in fact, a commodity exchange dealing with spot deliveries. Apart from the Grant Thornton Report and the FMC order, we have also seen that Shri Jignesh Shah, on 10-7-2013, made representations to the DCA and the FMC, in which he stated that NSEL had full stock as collateral; 10-20% of open position as margin money; and that the stock currently held in NSEL's 120 warehouses was valued at INR 6000 crores, all of which....
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.... does possess legislative competence to enact the law in question and that the legislation was not for the transaction of banking or the acceptance of deposits but for the protection of the depositors who are deceived by fraudulent financial establishments. The Court held: "26. The Tamil Nadu Act was enacted to ameliorate the conditions of thousands of depositors who had fallen into the clutches of fraudulent financial establishments who had raised hopes of high rate of interest and thus duped the depositors. Thus the Tamil Nadu Act is not focused on the transaction of banking or the acceptance of deposit, but is focused on remedying the situation of the depositors who were deceived by the fraudulent financial establishments. The impugned Tamil Nadu Act was intended to deal with neither the banks which do the business or banking and are governed by the Reserve Bank of India Act and the Banking Regulation Act, nor the non-banking financial companies enacted under the Companies Act, 1956. 27. The Reserve Bank of India Act, the Banking Regulation Act and the Companies Act do not occupy the field which the impugned Tamil Nadu Act occupies, though the latter may incide....
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....depositors who innocently deposited their money with the former for higher rate of interest. These depositors were often given a small pass book as a token of acknowledgment of their deposit, which they considered as a passport of their children for higher education or wedding of their daughters or as a policy of medical insurance in the case of most of the aged depositors, but in reality in all cases it was an unsecured promise executed on a waste paper. The senior citizens above 80 years, senior citizens between 60 and 80 years, widows, handicapped, driven out by wards, retired government servants and pensioners and persons living below the poverty line constituted the bulk of the depositors. Without the aid of the impugned Act, it would have been impossible to recover their deposits and interest thereon. 32. The conventional legal proceedings incurring huge expenses of court fees, advocates' fees, apart from other inconveniences involved and the long delay in disposal of cases due to docket explosion in courts, would not have made it possible for the depositors to recover their money, leave alone the interest thereon. Hence, in our opinion the impugned Act has right....
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.... perpetrated on unsuspecting investors, who entrusted their life savings to unscrupulous and fraudulent persons and who ultimately betrayed their trust. 51. However, coming back to the constitutional conundrum that has been presented on account of the two views expressed, by the Madras High Court and the Bombay High Court, it has to be considered as to which of the two views would be more consistent with the constitutional provisions. The task has been simplified to some extent by the fact that subsequently the decision of the Bombay High Court [(2005) 4 CTC 705 (Bom)] declaring the Maharashtra Act to be ultra vires, has been set aside by this Court [Sonal Hemant Joshi v. State of Maharashtra, (2012) 10 SCC 601], [State of Maharashtra v. Vijay C. Puljal, (2012) 10 SCC 599], so that there is now a parity between the judgments relating to the Maharashtra Act and the Tamil Nadu Act. [...] 59. [...] The objects of the Tamil Nadu Act, the Maharashtra Act and the Pondicherry Act being the same and/or similar in nature, and since the validity of the Tamil Nadu and Maharashtra Act have been upheld, the decision of the Madras High Court in upholding the validity o....
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....trading member on the same day. This amount cannot be said to be received as a deposit within the meaning of Section 2(c) of the MPID Act which contemplates 'deposit' to be a receipt of money or acceptance of a valuable commodity on the promise that such money or valuable commodity would be returned/repaid by the financial establishment after a specified period or otherwise." The High Court has lost sight of the fact that Section 2(c) of the MPID Act defines 'deposit' in broad terms. Further, according to the definition, the return may be either in money, commodity or service, and it is not necessary that the commodity or the money must be returned in the same form. The definition includes the receipt of money and the return of a commodity, or even the receipt of a commodity and a return in the form of a service. Further, Bye-law 10.8 indicates that NSEL was not merely an intermediary. The Bye-law states that the buyer shall pay the Clearing House the value of the delivery allocation. However, till the completion of the delivery process, the money will be retained by the Clearing House of NSEL. 59 Referring to the contract notes and the confirmation receipts generated....
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....enefit, rather that the 'added benefit' is irrelevant for the purpose of the definition; secondly, that for the purpose of Section 2(c), the receipt of the commodity or money 'must be retained by itself'. The definition does not provide any such embargo. Rather, the definition is broadly worded to include even the possession of the commodities for a limited purpose. The High Court has read the definition of 'deposit' narrowly without any reference to the salutary purpose of the MPID Act. 62 The High Court also made observations on the merits of the criminal proceedings. Referring to the role of NSEL in the default in payments, it observed that at the highest, the actions of NSEL would constitute offences under Sections 465 and 467 of the IPC. The EOW filed a charge sheet under Section 173 CrPC before the Sessions Judge, Special Court under the MPID Act for offences punishable under Sections 409,465,467,468,471,474 and 477(4) read with Section 120(B). The High Court ought not to have made observations on the merits of the criminal proceedings when the writ petition was restricted to the issue of whether NSEL is a financial establishment for the purpose of the MPID Act....