TaxTMI 
TaxTMI 
2026 (9) TMI 206
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....Akhileshwar Jha, Adv., Mr. Hitesh Kumar Sharma, Adv., Mr. Satvik Sharma, Adv., Mr. Mudit Gupta, AOR, Mr. Mahfooz Ahsan Nazki, AOR, Mr. Ashish Prasad, Adv., Ms. Mukta Dutta, Adv., Mr. Pruthvi Dhinoja, Adv., Ms. Siddhi Jain, Adv., Mr. Pranjal Kishore, AOR, Mr. Ishan Agrawal, Adv., Mr. Anshit Aggarwal, Adv., Mr. Ashutosh Mishra, Adv., Mr. Nagarjun Sahu, Adv., Mr. Shreya Kak, Adv., Dr. Yusuf Iqbal Yusuf, Adv., Mr. Bhavya Sethi, Adv., Mr. Zubin Sheth, Adv., Mr. Bhavya Sethhi, Adv., Mr. Kailash Uday Kapoor, Adv., Ms. Neelam Singh, AOR, Ms. Apurva Ambasth, Adv., Mr. Shiven Khurana, Adv., Mr. Sameer Singh, Adv., Mr. P. V. Yogeswaran, AOR, Mr. Neeraj Malhotra, Sr. Adv., Ms. Sonali Jaitley Bakhshi, Adv., Mr. Jaiyesh Bakhshi, Adv., Mr. Ravi Tyagi, AOR, Mr. Mayank Mishra, Adv., Mr. Gaurav Mishra, Adv., Mr. Daman Popli, Adv., Ms. Sudiksha Saini, Adv., Mr. Abhijay Basu, Adv., Mr. Anuj Kumar, Adv., Mr. Sudhanshu Prakash, AOR, Mr. Kausik Chatterjee, Adv., Mr. Soumya Dutta, AOR, Ms. Samriddhi, Adv., Mr. Siddhant Upmanyu, Adv., Ms. Nisstha Balodia, Adv., Ms. Meenakshi Arora, Sr. Adv., Dr. Dinesh Rattan Bhardwaj, AOR, Mr. Ravichandra Hegde, Adv., Mr. Mahesh Singh, Adv., Ms. Mitravinda Chunduru, Adv.,....
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....is necessary. F&O Segment deals in major stock derivatives traded in the stock market, recognized under Section 18A of the Securities Contract (Regulations) Act, 1956 [Securities Act]. Though the F&O Segment operates in a complex manner, simply put, it allows investors to buy or sell or lock in the prices of, an underlying asset such as a stock, index or commodity at a future date without actually owning it. Contracts are entered for trading a stock asset at a pre-determined price, applicable on a later date. The NCL ensures that the money and security change hands safely on completion of the trade and the obligation of investors to each other are duly met. The NCL acts as a regulatory body in the operation of the trading platform of the NSE and provides a settlement guarantee to the participants. The investment made can lead to astronomical profits, without any actual purchase or sale being carried out, or lead to massive losses, often driving the speculators to penury. Quick money is the lure and therein lies the trap too. 4. The execution of derivatives contracts, in the F&O Segment as in any other trade and especially so for reason of its speculative nature, requires collate....
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....h were not entertained. They sought for compensation before the NSE which proceedings were closed on the compensation being awarded by the impugned order of the Committee appointed by the NCL. The Committee appointed by the NCL found the PCM to be guilty of giving too much elbow room to the TM, thus resulting in a situation where they had to recoup their losses, by the sale of securities offered by the TM, which was done without complying with the regulatory mechanism in place. If remedial measures were taken on the initial default, the losses could have been minimized; but free play was given to the TM, putting in jeopardy the valuable securities of the individual clients of the TM. This, according to the NCL and the individual investors makes liable the PCM to reimburse those clients of the TM who, though had proffered securities, but had no debit balance in their accounts. II) The Professional Clearing Members: 7. Mr. Shyam Divan, learned Senior Counsel appearing for the appellant in Civil Appeal No. 31 of 2024, who is also the appellant in Civil Appeal No. 3179 of 2024, assails the impugned judgment, essentially on the ground, the Committee constituted by the NCL having n....
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....proportionate. 10. The other two appellants before us, also PCMs, adopt the arguments of the appellant in Civil Appeal No. 31 of 2024, but pointed out certain distinguishing factors. Mr. Niranjan Reddy, learned Senior Counsel appearing for the appellants in Civil Appeal No. 2187 of 2024 pointed out that as against them the alleged default and liquidation of collaterals occurred between 06.03.2020 and 25.03.2020 wherein regulatory proceedings were initiated by the National Company Law Tribunal (NCLT), culminating in the order of the Tribunal to reinstate securities worth Rs.1.9 crores; which as on the date of the order would have a value of Rs.7.9 crores. The TM had provided the collaterals for the purpose of preparatory trading, as belonging to the TM itself. When the amounts due spiraled, on warnings being issued, the TM agreed to furnish a bank guarantee and provided one for Rs.6.05 crores. On 23.03.2020, while scoring off the positions of the TM, there was remaining an obligation of Rs. 7.8 crores of which Rs.6.5 crores were satisfied on enforcement of the bank guarantee and the balance by sale of collaterals. It is pointed out that the clients of the TM filed a Civil Suit ag....
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.... category, bound to follow the regulations of the NSE and NCL, as also the notifications of the SEBI, as a member of the F&O Segment of the NSE. All provisions applicable to a CM are equally applicable to PCMs and so is the liability and responsibility of an entity acting as a PCM, to follow the rules, regulations, bylaws and circulars, regardless of the fact that they fall under the category of PCM. The regulations are pointed out to argue that there is clear restriction of utilizing a collateral furnished by a client to satisfy the dues of one another client, or even that of a CM. 13. The settlement principles brought in by the regulations provide a broad definition of 'client/constituent' which insofar as the PCM is concerned, takes in both the TM and the individual client of the TM. The circulars of the NCL also provide for reporting of trades, with client-wise collaterals to be uploaded which provides the necessary visibility insofar as the individual client-wise credit/debit positions to the PCM also. The SEBI Circulars also prohibit the collateral of one client being used against the dues of another. The CM-TM agreement is read to impress upon us that there is an authorit....
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....ore this Court and Ms. Meenakshi Arora, learned Senior Counsel, led the arguments on their behalf. The rationale behind the introduction of a CM is not merely to facilitate settlement of trades but also to ensure that the critical functions are discharged by the various entities in full compliance of the institutional safeguards. The regulatory framework places the PCM in a fiduciary capacity and enjoins on them statutory responsibilities, even when permitting them to independently discharge their clearing and settlement functions, in accordance with the applicable regulations. It does not permit a clearing member to mechanically or indiscriminately discharge its functions without undertaking due diligence and without satisfying regulatory obligations cast upon it. 16. The appellants violated SEBI circulars dated 17.04.2008, 26.09.2016 and 20.06.2019, respectively dealing with the 'Collateral deposited by Clients with Brokers', the 'Enhanced supervision of stockbrokers/depository participants' and the last specifically issued by the SEBI to regulate 'Handling of Clients' Securities by TMs/CMs'. The appellants are also in violation of NSE Clearing Circular dated 20.05.2019 and th....
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....others too. The Committee's order, in Civil Appeal No. 31 of 2024, first noticed the findings in the Limited Purpose Inspection (LPI) with respect to the execution of the CM-TM Agreement and the PCM being enjoined to upload trading member-wise, client-wise, security details to NCL in accordance with NCL Circular dated 20.05.2019. The books of the PCM showed large debit balances on multiple dates on account of losses made by the TM to settle the outstanding dues and the PCM having sold the securities between January 2020 to July 2020. The information sought for from the PCM revealed no due diligence carried out making it clear that the regulatory regime was violated by the PCM. The email addressed by the NSE to the PCM dated 02.04.2020, cautioned the PCM about its constituent, the TM; Anugrah Stock & Broking Private Limited (herein after Anugrah), having significant settlement obligations/losses and the liquidation carried out to meet the unpaid obligations with a reminder to carry out periodic due diligence. The reply of the PCM distancing itself from the clients of the TM insofar as the mandatory weekly reporting in place, not enabling timely verification of the collaterals with t....
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....r TM; Action Financial Services (India) Ltd. was directed to restitute Rs. 1.95 crores worth of securities liquidated between 12.03.2020 to 25.03.2020 and a penalty of Rs. 1.95 lakhs was imposed. Civil Appeal No.7313 of 2024 is concerned with yet another PCM for the period August'2019 to July'2021 in which the collaterals of their TM; Yuvraj Securities liquidated to the tune of Rs. 75,74,712.08 was directed to be restituted and a penalty of Rs. One lakh was imposed. The further directions as contained in the impugned order in Civil Appeal No. 31 of 2024, on failure to restitute, to block the securities in the collaterals available with the NCL, to the extent of the value of the liquidated securities as on the 16th day with an addition of 5% was reiterated in all the orders. Civil Appeal No. 4238 of 2026 is by a client-investor seeking refund/ restitution of the cash margin he maintained with the TM, Anugrah. VI) The Securities Appellate Tribunal: 22. The SAT confirmed the Committee's order and the specific argument with respect to the absence of power to direct restitution was repelled, relying on decisions of this Court, affirming reparations to be a just and equitable remed....
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....the TM before the collaterals proffered by the TM were liquidated, and whether the regulatory mechanism provided visibility of such credit/debit positions of the individual clients of the TM to the PCM? ii. Whether MCSGF Committee, constituted by the NCL, has the power to order restitution of the securities and even if it was conferred with such powers, whether it should have notified the invocation of such powers, failing which the order would be vitiated on the ground of violation of principles of nature justice? iii. Whether the individual clients can lay a claim against the PCM for the default committed by the TM, especially in the context of the TM having been found to have indulged in illegal schemes, in which the individual clients had voluntarily participated? VIII) Our Analysis: 25. We have in the opening paragraphs listed out the hierarchy of operations in the NSE and the staggered responsibilities of the NCL, the CMs and the TMs. First, we have to deal with the contentions raised under the Futures and Options Regulations issued by the NCL, specifically on the strength of Regulation 1.7 and Regulation 4.5.4 which are extracted hereinbelow:- ....
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....ded under the Chapter dealing with "Margins and Clearing/Exposures limits"; is applicable to both the CM and TM. The prohibition insofar as the CM is concerned is with respect to the collaterals offered by one TM being settled or satisfied against that of another TM's dues. In other words, the collaterals furnished by Anugrah (the defaulting TM, herein) cannot be used by the PCM for the purpose of clearing or settling dues of another TM who is registered with the NSE and NCL and is a constituent/client of the appellant-PCM. Insofar as the PCM is concerned, there are no propriety trades and hence there is no question of the margin money being used on its own account. However the rigour applies to the TM in relation to his clients, whose margins or collaterals cannot be mixed up with those of any other client. Clause 10.2.4 of NCL, F&O Regulations, speaks of no improper use of constituents' securities or funds by a CM or a person associated with such CM. In the present case, there is no such allegation of either the PCM or any person associated with the PCM having made any such improper use of the constituents' securities; which as regards the PCM, the constituent is the TM. 28. T....
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.... the scheme with full knowledge of their securities being offered as collaterals for a fixed return. The responsibility of the assured return is only on the TM and not even indemnified by the NSE; being an outright illegal activity. 31. We also find that the SEBI had taken proceedings against Anugrah, its Directors and associated entities. An Adjudicating Officer by Order No. PM/SM/2020-20/10794 dated 09.03.2021 considered the period from April 2017 to September 2018, long prior to the period under scrutiny in this case. It was found that the stock broker had not uploaded the correct and complete details of the clients in the UCC database of the Exchange, a clear violation of the SEBI Circular of 2016. Anugrah had misused the credit balance clients' funds to meet obligations of debit balance clients and had failed to segregate clients' funds interse, and/or between clients' funds and its own funds, and has mis-utilized the funds of the clients. As early as from 2017-2018, Anugrah had mis-utilized the client securities by pledging of the securities over and above the respective client obligations in all the 18 sample days taken. The shares of the clients, which were pledged by An....
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....e circular specifies the norms regulating transactions between clients and brokers and requires the broker to have adequate systems and procedures in place to ensure that client collateral is not used for any other purposes, other than meeting the respective client's margin requirements/plans. The brokers are also required to maintain records which have to be produced during inspection. 34. The Circular of SEBI dated 26.09.2016 was brought in to enhance supervision of Stock Brokers/Depository Participants. It specifically regulated the naming/tagging of banks and demat accounts of stock brokers, monitoring of client funds lying with the stock brokers by the stock exchanges, internal audit of stock brokers, monitoring of financial strength of stock brokers, standard operating procedures for both stock brokers and depository participants in event based discrepancies, running account settlement, providing PAN number and methods of reconciliation as also uploading clients fund balance and security balance by the stock brokers on stock exchange system. It has to be specifically noticed that the Circular applies to stock brokers and stock exchanges and even if it applies to CMs, it is....
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.... of a client or clients for self or for any other client. True, the said circular is applicable to CMs also but insofar the PCM's, who are the appellants herein are concerned, they neither have individual clients, nor do they have any transactions on their own account. The TMs are their constituents and there is no allegation of the securities or monies of one TM having been used as against the dues of another TM. In fact, in the aforesaid circular, the emphasis is on the pledging of collaterals/securities of the clients by the TM/CM with the Banks/NBFCs to borrow funds to meet the margin requirements, which it was cautioned was not contemplated in the Circulars issued by the SEBI. A rigour has also been brought in by Clause 4.7, by which w.e.f. 01.09.2019, client's securities lying with the TM/CM in 'client collateral account' 'client margin trading securities account' and 'client unpaid securities account' cannot be pledged to the Banks/NBFCs for raising funds even with authorisation by the client, as the same would amount to fund based activities by TM/CM in contravention of the Securities Contracts (Regulation) Rules, 1957. This again is a pointer to the fact that the securitie....
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....also specified by Clause 5(v) that the Trading Member shall collect the margins from its constituents on a gross basis. The liability of the CM and that of the TM, on a default committed by either of them is also clearly specified in the agreement but not obliging the CM to protect the constituent of the TM on any default being committed by the TM. 40. On a reading of the SEBI's Circular dated 21.04.2008, 26.09.2016 & 20.06.2019 and the NCL's Circular dated 20.05.2019 or the Regulations of the NCL for the F&O Segment, specifically 1.7, 4.5.4 and 10.24 as also the CM-TM Agreement we do not find any violation having been committed by the PCM, insofar as the requirements in the said circulars and agreement are concerned. 41. Insofar as the 'Margin obligations by way of pledge/ repledge', Circular of the SEBI dated 25.02.2020 at Annexure A-12, applies both to the CM and the TM. The circular has been issued by the SEBI after extensive consultation with the stock exchanges, clearing corporations, depositories and industry representatives of TMs, CMs and DPs. With effect from 01.06.2020, acceptance of collaterals from clients in the form of securities is only by way of a margin pled....
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....o issue directions and levy penalty, as per sub-section (1) and sub-section (2) and for our purposes, the explanation which is relevant is extracted hereunder:- Explanation. - For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention. 44. Likewise, Section 12 A of the Securities Act dealing with the powers of the SEBI to issue directions, adds a similar explanation to the provision. The power of disgorgement, hence, was specifically conferred on the SEBI and intentionally not permitted to be conferred, in the byelaws made under Section 9 of the Securities Act. More importantly, it prohibits by Clause 3(b)(iv) any penalty involving the payment of money (sic). In this context, it has to be specifically emphasized that the Committee not only directed restitution of the liquidated shares which i....
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....llants, nor an unjust or illegal enrichment. On the other hand, desisting from liquidating the collaterals proffered by the TM, in the instant case, would have led to huge losses for the PCMs, by way of their collaterals being liquidated by the NCL. In fact, the SAT in its concluding paragraph admits as much when it confirms as valid the restitution since the appellant, according to the SAT was evading losses through liquidation. Losses recouped by the PCM in our view was permissible in the manner it was done as per the regulatory measures in place at that time; to which end the collaterals were stipulated. 47. Shiv Dutt Rai Fateh Chand was in the context of a retrospective amendment levying penalty under the Central Sales Tax Act, and the validation made of the penalty orders passed prior to the amendment; not at all applicable to the facts of this case. The challenge was on the ground of violation of Article 20(1) of the Constitution. Maqbool Hussain v. State of Bombay (1953) 1 SCC 736 wherein the confiscation of goods under the Sea Customs Act was held to be not precluding a criminal proceeding for the very same transaction was relied on. Looking at the definition of 'offence....
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.... i) to restore a specific thing to its rightful owner or status ii) compensate for the benefits derived from a wrongdoing and iii) compensation of restoration for the loss caused to another. What is relevant in directing restitution and also grant of interest, is that the retention of the thing or money; by the person from whom it is sought to be restituted, should be unjust/illegal; which we have found does not emanate from the facts and circumstances of this case and no violation perse of the statutory regulatory mechanism arise. We are neither able to find a remedy of restitution, flowing naturally in the facts of this case nor are we persuaded to permit it, in view of the specific statutory prohibition with respect to the penalties permitted under Section 9(3)(b) of the Securities Act. XI) The Daily Reporting: 50. Now we come to the circular of the SEBI of 20.07.2021, produced as Annexure A15, which is relied on by the PCM to contend that the measures implemented therein, giving clear visibility to the individual client collaterals and the debit/credit positions of the investors under a TM being allowed to the CM and even the NCL. The circular deal....
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....ay-out (including profit if any during close-out) due to the constituent, less the losses in close-out of positions of the constituent. c. The MCSGFC of the CC/Exchange shall implement the relevant procedures for verification and settlement of claims of the non-defaulting TM/CP/clients of the defaulting CM. d. The constituents actually in default shall be identified and the pro-rata attribution of shortages performed in Stage-3 shall be replaced by the actual attribution of shortages. If there has been any excess collateral appropriated at Stage-3 due to pro-rata attribution, such excess appropriation shall be corrected, and the constituents shall be returned the collateral in full along with the pay-out due to such entities. This amount shall be recovered from the constituents who have higher shortage (pursuant to actual attribution) than the one attributed on pro-rata basis. If such clients do not have sufficient collateral, then the default waterfall of the CC (including its Core Settlement Guarantee Fund (Core SGF), as per the specified order of waterfall) shall be applied. e. For any collateral of a client retained by TM/CM, and not allocated to that....
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....act with the constituents of the TM. With the above measures visibility of client-based collateral is available at all levels and the reporting mechanism has to be complied with on a daily basis. The identification of defaulting clients and final appropriation of collaterals have been delineated in Clause 44 and the procedure to be followed, when there is default of TMs to CMs, in Clause 46. Obviously, these measures were not available earlier, and in that circumstance, we have to accept the contention of the PCM/Appellants that they had no visibility of the debit/credit positions of individual clients whose securities were furnished as collaterals by the TM to the CM. The absence of privity of contract, with the constituents of the TM, has also to be reckoned in favour of the PCMs; which even if not available as of now, by the Circular of 2021 of the SEBI, there is an obligation cast on the PCM to segregate client collaterals, the debit/credit positions being visible in the daily reports and liquidate only those with debit positions. XII) The Liquidation Proper: 52. Having said that, we also have to dwell upon the procedure of liquidation as arising in Civil Appeal No. 31 of....
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.... of compensation was declined by the SAT in two separate batches; one by order dated 14.02.2023 and the order dated 15.05.2023 produced as Annexure A4 and A3 in the application. We make it clear that the constituents of the subject TMs, parties to these appeals, will be left liberty to avail their remedies against their respective TMs, subject only to just exceptions. XIV) Questions of Law: Answered: 54. On the above reasoning, we answer the questions of law as follows: (i) The first question of law framed as to the existence of a statutory obligation on the PCM to verify the debit/credit positions of the constituents of the TM, before the collaterals proffered by the TM are liquidated, in the negative and in favour of the PCMs. The question regarding visibility provided by the regulatory mechanism of the debit/credit positions of the individual clients of the TM to the PCM, is also answered in the negative and in favour of the PCM. (ii) The second question of law with respect of the NCL or the Committee constituted by it having the power to order restitution of securities, is also answered in the negative and against the NCL. The imposition of penalty of re....