Subscription   Feedback   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Articles Highlights TMI Notes SMS News Newsletters Calendar Imp. Links Database Experts Contact us More....
Extracts
Home List
← Previous Next →

Prime Broking Company Limited Versus National Securities Clearing Corporation Limited and Others

2015 (7) TMI 299 - SECURITIES APPELLATE TRIBUNAL MUMBAI

Declaration as a defaulter - Whether the Committee on declaration of Default of National Securities Clearing Corporation Limited (NSCCL) is justified in declaring the appellant to be a defaulter under Bye Laws 1(1), 1(2) & 1(4) of Chapter XI of the Bye Laws of NSCCL (F&O) Segment - Defaulter in the capital market segment - Held that:- Admittedly, the appellant has not discharged that settlement shortfall obligation till date even though NSCCL has discharged that obligation by making payment to c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ich is paid by NSCCL to third parties 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, considera .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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, NSCCL was obliged to discharge that liability by paying ₹ 91,49,72,804.51 to third parties from its own profits and the accumulated reserves and settle the trades of the appellant. Admittedly, the appellant has failed to reimburse that amount t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

que Dada, Senior Advocate with Mr. Sachin Chandrana, Advocate and Mr. Pritvish Shetty, Advocate i/b Manilal Kher Ambalal & Co., Mr. Mihir Mody, Advocate with Mr. Rushin Kapadia, Advocate i/b K. Ashar & Co. Per: Justice J.P. Devadhar 1. Appellant is aggrieved by the impugned order passed by the Committee on Declaration of Default of National Securities Clearing Corporation Limited ( NSCCL for short) on October 15, 2013. By that order the appellant is declared to be a defaulter under Bye L .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

National Stock Exchange ( NSE for short). b) Respondent No. 1 (NSCCL) is a Clearing Corporation to whom the Respondent No. 2 (NSE) has conferred duties and functions of a Clearing House as stipulated under Section 8(A) of the Securities Contracts (Regulation) Act, 1956 ( SCRA for short). c) On January 16, 2003 appellant executed a Clearing Membership Undertaking (F&O Segment) in favour of NSCCL, thereby agreeing to abide by the Bye Laws, Rules and Regulations of NSCCL. On January 17, 2003 ap .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

or 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 decisi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t any point of time and (two) the mark to market value of gross open positions at any point of time of all trades cleared through the Clearing Member shall not exceed 33 1/3 (thirty three one by three) times his liquid net worth. The said clause further provides that the notional value of gross open positions at any point in time in the case of Index Futures shall not exceed 33 1/3 (thirty three one by three) times the liquid net worth of a member. As per clause 1.2.4 of the said master circular .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n a security is dropped from the list of acceptable equity securities, the existing deposit of that security shall continue to be counted towards liquid assets till the end of month. f) On December 13, 2011, NSCCL issued a circular to all Clearing Members including the appellant, requesting them to take note of the revised norms with respect to acceptance of securities as collaterals. By the said circular, market wide permissible security limit across all the segments and member specific limits .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

identify the security wise and member wise excess quantities and initiate steps for adherence to the revised norms. If any clarification was needed, the members were requested to contact the officials of NSCCL named 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 peri .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e 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 themselves to the circular dated December 13, 2011, NSCCL published circulars with a list of approved .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e of the market wide and member specific permissible limits provided therein and comply accordingly. k) As per the circular dated December 20, 2012 read with circular dated November 13, 2011, appellant was required to replace the following pledged ineligible securities by January 1, 2013:- i) 1,71,431 shares of ABG Shipyard Ltd. ii) 37,98,757 shares of Alok Industries Ltd. iii) 10,93,252 shares of Ananjneya Lifecare Ltd. (Now known as Dr. Datsons Labs Ltd.) iv) 28,000 shares of Flexituff Interna .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

and wide its letters dated January 14th,16th, 17th, 2013, February 1st, 11th, 12th, 2013 and March 12th & 13th 2013 requested NSCCL to release the ineligible securities to the extent specified therein. By letters dated 1st, 5th, 13th, 14th, 15th and 18th March, 2013 the appellant requested NSCCL to sell the pledged shares to the extent specified therein at market rate and adjust the sale proceeds towards the margin shortfall. n) On January 30, 2013, Mr. N. Jayakumar, Chairman-Managing Direc .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

r, Chairman- Managing Director of the appellant, Additional Commissioner of Police, Economic Offences Wing ( EOW for short) Mumbai and DIG, Central Bureau of Investigation, Mumbai. q) As the appellant failed to make good the margin shortfall by March 18, 2013, NSCCL, despite complaints received on March 18, 2013, invoked the pledge and from March 19, 2013 started liquidating the equity shares of Gitanjali with a view to minimize the margin shortfall. Accordingly, during the period from March 19, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

1, 2013 and April 10, 2013 NSCCL requested the EOW to withdraw the letter dated March 23, 2013 inter alia on the ground that the shares of Gitanjali were pledged by the appellant with NSCCL and since the appellant failed to comply with its margin shortfall obligation, NSCCL was entitled to invoke the pledge and sell the said shares in the open market. t) After expiry of the rolled over contracts of the appellant in March 2013, there was settlement shortfall of ₹ 158.04 crore. By its lette .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

158.04 crore by liquidating the aforesaid deposits/cash collaterals/bank guarantee. As a result of above adjustment, the settlement shortage as on April 2, 2013 was reduced to ₹ 3,77,79,826.89. By a letter dated April 3, 2013, appellant requested time till April 8, 2013 to arrange funds to make good the aforesaid settlement shortfall and also agreed to pay delayed payment charges in respect thereof. However, no such funds were arranged. u) On April 11, 2013 NSCCL addressed a letter to the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

l 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 t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Court and by its order dated May 22, 2013 the Apex Court set aside the order of Bombay High Court dated May 10, 2013 and while restraining NSCCL from dealing with the shares of Gitanjali, the Apex Court directed the Bombay High Court to hear the criminal application filed by NSCCL finally at the earliest. Accordingly, the Bombay High Court heard the matter and by its order dated August 22, 2013 rejected the criminal application filed by NSCCL. NSCCL has filed Special Leave Petition challenging t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

pellant to fulfill its cumulative settlement obligation amounting to ₹ 94,78,88,651.89 by July 3, 2013, failing which NSCCL would initiate suitable actions including suspension of membership, expulsion or declaration of default. Challenging the said notice appellant filed a writ petition before the Bombay High Court which was disposed of on July 2, 2013 by recording a statement made by the counsel for NSCCL that a show cause notice would be issued and thereafter an order would be passed in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 bala .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 to pay dues of NSCCL. After considering the reply filed by the appellant and after hearing the representative of the appellant the Committee on Declaration of Default of NSCCL passed the impugned order dated October 15, 2013 thereby declaring the appellant to be a defaulter for the reasons stated therein. Challenging the aforesaid order present appea .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

amp; 2 on the other hand submitted that the appellant has consistently failed to make good the margin money deficit from January 01, 2013 and thereafter consistently failed to discharge the settlement shortfall that took place in March/June 2013. Mr. Dada submits that as a result of the default committed by the appellant in discharging the pay in obligation, NSCCL had to pay to the counter parties on behalf of the appellant a sum of ₹ 91,49,72,804.51 out of its own profits and its accumula .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ws of NSCCL (F&O Segment) read thus:- CHAPTER XI: DEFAULT 1. DECLARATION OF DEFAULT A clearing member may be declared a defaulter by direction/circular/notification of the relevant authority of the segment if: (1) he is unable to fulfill his clearing, settlement or obligations; or (2) he admits or discloses his inability to fulfill or discharge his duties, obligations and liabilities; or (3) …. (4) he fails to pay any sum due to the Clearing Corporation as the relevant authority may f .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rtfall 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

shortage at the end of June 2013 was ₹ 94,78,88,651.89 (Rs. 3,77,79,826.89+Rs. 91,01,08,825). Due to further adjustment of ₹ 1,70,00,000/- (from Additional Base Capital Cash [CM Segment]) and ₹ 1,59,15,847.38 (sale proceeds of Liquid Bees) made by NSCCL, the cumulative settlement shortfall stood reduced to ₹ 91, 49,72,804.51. Admittedly, the appellant has not discharged that settlement shortfall obligation till date even though NSCCL has discharged that obligation by mak .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

,49,72,804.51 which is paid by NSCCL to third parties for and on behalf of the appellant. In these circumstances no fault can be found with the decision of the Defaulters Committee in declaring the appellant to be defaulter under Bye Laws 1(1),1(2) & 1(4) of Chapter XI of the Bye Laws framed by NSCCL. 7. However, it is argued on behalf of the appellant, that in the meeting held on March 14, 2013 between the appellant and NSCCL it was decided that if the appellant does not make good the margi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

between March 19, 2013 to March 22, 2013 there would not have been any margin shortfall and in such a case appellant would have ceased to be a defaulter. 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 n .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

mply 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 sell entire quantity of pledged Gitanjali shares from March 19, 2013 and consequently, it cannot be said that the appellant ceased to be a defaulter merely becaus .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

limit there would not have been any margin shortfall is without any merit, because, if large quantity of shares were off loaded every day, there was every possibility that share prices of Gitanjali coming down and in such a case selling shares of Gitanjali at a lower price would have harmed the interest of the appellant. c) It is relevant to note that at no point of time appellant had instructed NSCCL to liquidate shares of Gitanjali and appropriate the sale proceeds towards margin money deficit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

itanjali shares) at market rate on its behalf to meet its margin obligation in the F&O Segment. Thus, the appellant who from time to time authorized NSCCL to sell various other pledged shares which had become ineligible, but never authorized NSCCL to sell the Gitanjali shares is not justified in contending that if NSCCL had invoked the pledge and sold the Gitanjali shares then there would not have been any margin deficit in March 2013. d) Argument of the appellant that in the meeting held on .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 M .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of Gitanjali after March 18, 2013 clearly shows that the plea of the appellant that as per the understanding arrived at on March 14, 2013, NSCCL was obliged to sell entire 20 lac shares of Gitanjali after March 18, 2013 is patently false and such a plea is raised by the appellant as an afterthought. Even in the letter addressed to NSCCL on April 03, 2013 the appellant has asked for time to arrange funds and agreed to pay delayed payment charges but not referred to the understanding that was all .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ed that NSCCL could have sold pledged Gitanjali shares during the period from March 18, 2013 to April 27, 2013. From the aforesaid letter it is abundantly clear that On March 14, 2013 NSCCL had threatened that if margin obligation was not met with by March 18, 2013, NSCCL would be constrained to sell the pledged Gitanjali shares after March 18, 2013 and that there was no obligation on part of NSCCL to sell those shares by a particular date. Therefore, the appellant who is guilty of violating the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ering 20 lac shares of Gitanjali to them, the appellant had illegally parked those shares with NSE without their consent and therefore the complainants requested NSE to direct the appellant to release those shares into the complaint s accounts. It appears that in view of the statement contained in the Pledge Deed that the pledged shares are free from encumbrances, NSCCL proceeded to invoke the pledge and proceeded to sell the pledged Gitanjali shares from March 19, 2013 inspite of the complaints .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 ob .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

155 (comm.) it is contended on behalf of the appellant that having exercised its right invoke the pledge and sell the pledged shares, NSCCL had a duty to act honestly, in good faith and not to act arbitrarily, capriciously, perversely or irrationally. In the present case, it is contended that since NSCCL abruptly stopped selling pledged Gitanjali shares on March 22, 2013 without any justification, the impugned order is liable to be quashed and set aside. There is no merit in the above contention .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

at case parties thereto did not intend to create pledge of the property transferred as margin whereas, in the present Gitanjali shares were pledged to secure the margin money. Similarly, decision in case of Marex Financial Ltd. (supra) is distinguishable on facts as in that the dispute related to closing out between the broker and two of its clients and the same did not relate to invocation of pledge whereas, in the present case dispute between the parties is in relation to sale of shares by inv .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ally 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 du .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ble cannot be made ineligible or the argument that the revised norms were not clear is without any merit and deserves to be rejected. 10. Argument of the appellant that having extended the deadline for compliance of the circular dated December 20, 2013, NSCCL was not justified in shutting down the terminal of the appellant on January 01, 2013 is also without any merit, because, it is only after giving sufficient time to get acclimatized with revised norms, circular dated December 20, 2013 was is .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n behalf of the appellant that the letter of EOW dated March 23, 2013 requesting NSE/NSCCL not to sell the pledged Gitanjali shares was received by them on March 25, 2013 and if the entire pledged Gitanjali shares were sold between March 19, 2013 till March 22, 2013, there would not have been any margin deficit at all. It is also contended on behalf of the appellant that having taken a stand before the High Court in their Criminal Application that as a pledgee NSE/NSCCL has the right to sell the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Gitanjali shares by disregarding the complaints received and thereafter abruptly decided to stop selling the Gitanjali shares cannot be a ground to find fault with NSCCL, because, in the first instance NSCCL could not have sold Gitanjali shares without verifying the grievance made in the complaints that the pledged Gitanjali shares were encumbered or not. In any event, it was open to the NSCCL to stop selling the disputed shares so that corrective measures could be taken. Therefore, irrespectiv .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

mplaints 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 thou .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

hem in the matter. 13. Fact that the appellant has filed a suit in the High Court at Bombay claiming damages from NSE/NSCCL on various grounds set out therein cannot be a ground to hold that the appellant has actionable claim against NSE/NSCCL. It is only when the claim is established and the suit is decreed, appellant would have actionable claim against NSE/NSCCL. Therefore, fact that the appellant has filed a suit for damages against NSE/NSCCL would not affect the decision of the Committee in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 

what is new what is new
  ↓     bird's eye view     ↓  


|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version