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2015 (7) TMI 299 - SECURITIES APPELLATE TRIBUNAL MUMBAI

2015 (7) TMI 299 - SECURITIES APPELLATE TRIBUNAL MUMBAI - TMI - 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 th .....

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reimburse the settlement shortfall of ₹ 91,49,72,804.51 which 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 norm .....

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ttlement 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, 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. .....

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esh Soni, Advocates, i/b DSK Legal For The Respondent : Mr. Rafique 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 th .....

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) and is a Member of Bombay Stock Exchange ( BSE for short) and 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 .....

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d 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, .....

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z (one) Liquid Net Worth shall not be less than ₹ 50 lac at 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 wo .....

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ading and mean impact cost on the 15th day of each month and when 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 se .....

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bers were requested to take note of the norms mentioned therein, 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 p .....

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ing 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 themselves to the circular dated Dece .....

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1, 2013 were annexed and the members were requested to take note 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 .....

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shortfall appellant brought in cash collateral from time to time 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 .....

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ons 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 .....

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opies of the said complaints were also marked to Mr. N. Jayakumar, 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 .....

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vestigated by EOW. s) By its letters dated March 26, 2013, April 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, ther .....

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rantee were adjusted against the settlement shortage of ₹ 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 .....

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layed 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 Sar .....

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Sarvin and Trusha filed Special Leave Petition before the Apex 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 file .....

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. y) By its letter dated June 28, 2013, NSCCL called upon the appellant 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 n .....

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stood reduced to ₹ 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 t .....

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tfall 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 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 reaso .....

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arned Senior Advocate appearing on behalf of Respondent Nos. 1 & 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 .....

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t. 5. Bye Laws 1(1), 1(2) & 1(4) of Chapter XI of the Bye Laws 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 .....

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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 d .....

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nting to ₹ 91,01,08,825/-. Thus, the cumulative settlement 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 t .....

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nd neglected to reimburse the settlement shortfall of ₹ 91,49,72,804.51 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 i .....

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ellant that if all the 20 lac pledged Gitanjali shares were sold 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 Defaulter .....

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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 sell entire quantity of pledged Gitanjali shares from March 19, 2013 and consequently, it cannot b .....

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d Gitanjali shares upto the level of prescribed circuit breaker 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 Gitanjal .....

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nt requested NSCCL to sell various pledged securities (but not Gitanjali 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 Marc .....

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erstanding 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 i .....

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3 relating to the alleged obligation of NSCCL to sell the shares 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 pa .....

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after March 18, 2013. Even in the said letter it is merely alleged 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 particul .....

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em from the appellant about six months back and instead of delivering 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 pledge .....

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CCL 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 decidi .....

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cial Limited v/s Creative Finance Ltd. reported in (2013) EWHC 2155 (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 .....

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of Euroption (supra) is distinguishable on facts, because, in that 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 dis .....

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ll the pledged 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 r .....

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ment 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. 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 acclimat .....

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ion had to be taken against the appellant. 11. It is contended on 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 A .....

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Gitanjali shares is the question. Fact that NSCCL initially sold 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 .....

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sibility 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 .....

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L were obliged to intimate to the appellant the steps taken by them 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 agai .....

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