TMI Blog2015 (7) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... s for and on behalf of the appellant. Argument of the appellant that the securities once accepted under the prevailing norms cannot be made ineligible by revising the norms is without any substance, because it is the duty of NSE/NSCCL to constantly monitor the dealings on the Exchange and take suitable steps to preserve the market integrity, if necessary, by amending the prescribed norms. In the present case, even after revising the norms, considerable time was given to the concerned parties to get acclimatized with the revised norms and in fact several meetings were also held in that behalf between the appellant and NSE/NSCCL. Although the said settlement shortfall was brought down to ₹ 3,77,79,826.89 by adjusting the cash collaterals/ adjustment of FDR’s etc, it is an admitted fact that on expiry of rolled over contracts in June 2013, there was once again settlement shortfall to the tune of ₹ 91,01,08,825/-. Thus, the cumulative settlement shortfall rose to ₹ 94,78,88,651.89. As a result of further adjustments made by NSCCL the outstanding settlement shortfall stood reduced to ₹ 91,49,72,804.51. As the appellant failed to discharge that liability, NS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws, Rules and Regulations of NSE. On February 15, 2003 appellant executed a deed of pledge in favour of NSCCL, where under, the appellant has pledged various securities including 20 lac shares of Gitanjali Gems Limited ( Gitanjali for short) towards margin deposit requirement. d) On February 23, 2005 SEBI issued a circular whereby a comprehensive risk management framework for the cash market was announced. By the said circular Stock Exchanges were called upon to put in place necessary systems to ensure the operationalization of the comprehensive risk management framework. The Stock Exchanges were also advised to ensure that their risk management framework is in line with the provisions contained in the annexure to the said circular and take steps to make necessary amendments to the relevant Bye-Laws, Rules and Regulations for the implementation of the above decision immediately. The Stock Exchanges were also called upon to bring the provisions of the said circular to the notice of member brokers/ Clearing Members of the Exchange. e) On December 31, 2010 SEBI issued a master circular on matters relating to Exchange Traded Derivatives. As per clause 1.2.1 of the said master ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med in the said circular. g) Since June 2012, the appellant had entered into long dated NIFTY options contracts for a value of ₹ 400 crore, having maturity in September 2012 and December 2012 which were subsequently party rolled over to March 2013 and June 2013. h) During the period from January to December 2012 several meeting were held between NSCCL and its members including the appellant wherein the meaning, implementation and impact of the norms laid down in the circular dated December 13, 2011 were explained. On September 12, 2012 appellant sent an E-mail to NSCCL acknowledging the meetings that were held with a view to clarify the scope and ambit of the circular dated December 13, 2011. While appreciating the concern of the Exchange in imposing the restrictions, the appellant requested that the current rules be continued till the end of the fiscal year. NSCCL in its reply E-mail also dated September 12, 2012 stated that NSCCL will be happy to provide further clarification if needed and requested the appellant to inform its plan of action to comply with the revised norms. i) In order to give enough time to the members to adjust to the new norms and prepare thems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... March 2013. o) On March 14, 2013 officials of NSCCL had a meeting with N. Jayakumar of the appellant, wherein, proximity of the maturity of its options contracts were discussed and the appellant was informed that even after repeated assurance appellant had failed to make good the margin shortfall. It was also decided that if the appellant does not make good the margin shortfall by March 18, 2013 NSCCL shall be constrained to sell the pledged securities including shares of Gitanjali in order to reduce the margin shortfall. p) On March 18, 2013, NSCCL received two complaints, one from Sarvin Mercantile Private Limited ( Sarvin for short) and another from Trusha Infrastructure Private Limited ( Trusha for short) against appellant alleging non-delivery of 7 lac shares and 13 lac shares of Gitanjali respectively which were alleged to have been brought by them through the appellant six months back. In the complaints it was also stated that 20 lac shares of Gitanjali bought by them have been parked with NSE by the appellant without their consent and therefore, the appellant should be directed to release those shares into their account. Copies of the said complaints were also marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment charges in respect thereof. However, no such funds were arranged. u) On April 11, 2013 NSCCL addressed a letter to the appellant stating therein that the appellant has continuously fallen short of the settlement obligation and margin requirement in the F O Segment and failed to arrange funds pay-in within the stipulated time. By its letter dated April 12, 2013 appellant admitted its pay-in obligation and stated that all efforts are being made to meet the shortfall in the pay in obligation and while requesting for more time, agreed to bare any delayed payment charges payable on the pay-in shortage. v) On April 27, 2013 EOW passed an order under Section 102 of the Code of Criminal Procedure, 1973 ( CrPC for short). By that order, NSCCL was directed to freeze the shares of Gitanjali pledged with it by the appellant. NSCCL challenged the said order of EOW before the Bombay High Court by filing a Criminal Application under Section 482 of CrPC. By its interim order dated May 10, 2013 the Bombay High Court held that the disputes raised by Sarvin and Trusha fall within the realm of Civil Law and directed that the order passed by EOW shall remain in force till May 24, 2013 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 91,49,72,804.51. aa) On July 31, 2013 appellant through its advocates addressed a letter to the advocates for the appellant raising a counterclaim of ₹ 213.02 crore (Rs. 80 crore towards reputational loss, ₹ 20 crore towards business loss, ₹ 101.85 crore towards loss in value of Gitanjali shares, ₹ 2.93 crore being loss in value of other shares, ₹ 8.24 crore towards wrongly imposed penalties). By the said letter NSCCL was called to adjust the outstanding liability of ₹ 90.90 crore and pay the balance amount of ₹ 122.12 crore to the appellant within 7 days of receipt of the said letter. Since no such payment was made, appellant has filed a suit against NSCCL in the Bombay High Court and the same is pending. bb) On August 2, 2013 NSCCL issued a show cause notice to the appellant to show cause as to why the appellant should not be declared as defaulter in view of the appellant failing to pay the cumulative settlement shortfall amounting of ₹ 91,49,72,804.51. On August 28, 2013 a show cause notice was also issued by NSE to the appellant to show cause as to why action should not be initiated against the appellant for failure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (emphasis supplied) 6. Admittedly due to the revised prudential norms laid down by SEBI and implemented by NSE/NSCCL, certain securities furnished by the appellant towards margin money had become ineligible in December 2012 and had to be substituted or equivalent cash collateral furnished by January 1, 2013. As the appellant failed to replace ineligible shares in accordance with the circular of NSCCL dated December 20, 2012, there was margin shortfall in the F O Segment amounting to ₹ 92,08,16,556.95 as on January 1, 2013. Fact that there was margin shortfall on January 01, 2013 is admitted by the Chairman-Managing Director of the appellant, by his letter dated January 30, 2013. Fact that on expiry of rolled over contracts at the end of March 2013 there was settlement shortfall amounting to ₹ 158,04,00,000/- is also admitted by the appellant by its letter dated April 2, 2013. Admittedly, the said settlement shortfall of ₹ 158.04 crore stood reduced to ₹ 3,77,79,826.89 on April 2, 2013, by adjusting the appellant s fixed and cash deposits, as per the request of the appellant. It is not in dispute that the said settlement shortfall of ₹ 3,77,79 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... faulter. It is further contended on behalf of the appellant that for the gross negligence on part of NSCCL in failing to sell all 20 lac shares of Gitanjali during the period from March 19, 2013 to March 22, 2013, appellant cannot be penalized and therefore, impugned order of the Defaulters Committee is liable to be quashed and set aside. 8. There is no merit in the above contention for the following reasons:- a) Under the Pledge Deed power was conferred on NSCCL to sell the pledged shares in case the appellant commits breach of margin money norms or settlement norms and that power was for the benefit of NSCCL and the Pledge Deed did not require NSCCL to exercise the said power in a particular time. On the appellant committing breach of the margin money norms, whether to sell the pledged shares or to give some more time to the appellant to comply with the norms was at the discretion of NSCCL. Therefore, assuming that in the meeting held on March 14, 2013 it was decided that if the appellant fails to make good the margin deficit by March 18, 2013, NSCCL could invoke the pledge and sell the pledged Gitanjali shares, it cannot be said that in law NSCCL was bound and liable to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etters addressed by the appellant to NSCCL after March 19, 2013. In none of those letters appellant has made any grievance that NSCCL has failed to sell the shares of Gitanjali in breach of the understanding arrived at between the parties on March 14, 2013. On the contrary, in the letter addressed to NSCCL on April 02, 2013, appellant admitted its pay-in obligation in the F O Segment amounting to ₹ 158.04 crore and requested NSCCL to adjust the pay-in obligation against its fixed deposit/cash lying in with NSCCL as margin deposit in F O Segment. Admittedly, the market price of Gitanjali shares between March 18, 2013 and March 22, 2013 was around ₹ 600/- per share and if the understanding between the parties in the meeting held on March 14, 2013 was to liquidate 20 lac shares of Gitanjali from March 19, 2013, then the appellant in its letter dated April 2, 2013, instead of requesting NSCCL to adjust the fixed deposit/cash lying with NSCCL, towards margin deficit would have accused that the NSCCL has committed breach of the understanding arrived at on March 14, 2013. Very fact that there is not a whisper in the letter addressed by the appellant on April 02, 2013 relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree from encumbrances, NSCCL proceeded to invoke the pledge and proceeded to sell the pledged Gitanjali shares from March 19, 2013 inspite of the complaints received on March 18, 2013. g) It is a matter of record that after selling some of the pledged Gitanjali shares on 19th, 20th, 21st March 2013, NSCCL sold 9763 shares of Gitanjali on March 22, 2013 upto 10:34 A.M. and thereafter abruptly stopped selling shares of Gitanjali. Although no cogent explanation is given by NSE/ NSCCL for abruptly stopping sale of Gitanjali shares on March 22, 2013, it is possible that on March 22, 2013 NSCCL anticipated some follow up action by EOW and therefore NSCCL deemed it to stop further sale of pledged Gitanjali shares. Assuming that there was no such information received by NSCCL, it was open to NSCCL to reconsider its decision to sell the pledged Gitanjali shares in view of complaints received in respect of those pledged shares. In other words, fact that NSCCL proceeded to sell pledged Gitanjali shares even after receiving complaints in respect thereof did not preclude NSCCL from deciding not to sell the pledged Gitanjali shares, as NSCCL was not obliged to sell the pledged shares within a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dged shares or not to sell the shares. Fact that initially NSCCL inspite of the complaints chose to sell the Gitanjali shares would not mean that NSCCL was bound and liable to liquidate all 20 lac Gitanjali shares after March 18, 2013. In any event, these facts on record distinguish the present case from various decisions relied upon by the counsel for the appellant. 9. Argument of the appellant that the securities once accepted under the prevailing norms cannot be made ineligible by revising the norms is without any substance, because it is the duty of NSE/NSCCL to constantly monitor the dealings on the Exchange and take suitable steps to preserve the market integrity, if necessary, by amending the prescribed norms. In the present case, even after revising the norms, considerable time was given to the concerned parties to get acclimatized with the revised norms and in fact several meetings were also held in that behalf between the appellant and NSE/NSCCL. Therefore, the argument of the appellant that the securities once accepted as eligible cannot be made ineligible or the argument that the revised norms were not clear is without any merit and deserves to be rejected. 10. Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated March 23, 2013, was received by NSE/NSCCL on March 25, 2013, it was open to the NSCCL to stop selling the Gitanjali shares on the basis of the complaints received on December 18, 2013. 12. Argument of the appellant that NSCCL did not bother to keep the appellant informed about the developments with EOW and thus NSCCL acted in complete disregard and flagrant violation of its fiduciary responsibility is devoid of any merit. Admittedly copies of the two complaints both dated March 18, 2013 were marked to the appellant. Appellant has not disputed receipt of those complaints. If there was no merit in the complaints, appellant ought to have addressed a letter to NSE/NSCCL stating that there is no merit in the complaints and that NSCCL must ignore the complaints and sell the shares immediately. Very fact that the appellant did not address any letter in that behalf speaks volume about the conduct of the appellant. It is relevant to note that even though the Bombay High Court treated the complaints as Civil disputes, the Apex Court held that till the Criminal complaints are investigated by EOW, NSE/NSCCL shall not sell the Gitanjali shares. Admittedly, appellant has not initiated a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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