TMI Blog2020 (12) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... inserted in Chapter VI of the Byelaws of the Clearing Corporation as well, thereby empowering the Clearing Corporation to issue operational parameters relating to trading limits and consequent actions in case of non compliance. Whether the circular is invalid as being in conflict with the Byelaws of the Exchange, particularly regarding the manner of closing out prescribed therein? - HELD THAT:- The circular provides for the effect of violation of the exposure limits and lays down that any such violation shall be treated as a violation of the Byelaws of the Clearing Corporation, without prejudice to the power of the Exchange to withdraw the trading facilities. This withdrawal is contemplated as an imminent action to protect the market from being exposed to unsecured financial exposure. Consequent thereto, closing out of open positions has been contemplated - The nature of action contemplated under clause 16 is in furtherance of the basic mandate laid down under Section 9 of the 1956 Act. For, section 9 of the Act clearly provides that all contracts/deals on the market are subject to the Byelaws (including Regulations, operational parameters etc. issued under the Byelaws) and Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmination - Schedule II of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 prescribes a Code of Conduct for the stock brokers and clause 5 thereof specifies that compliance with statutory requirements is a mandatory aspect of code of conduct of a stock broker. The appellant consistently failed to comply with the requirements and acted in a manner which was prejudicial to the sanctity of a Member Exchange relationship. The Tribunal rightly confirmed the order of expulsion. Withholding of securities - vesting period - return of unrealised securities - recovery of unrealised securities - HELD THAT:- The following directions are issued for full and final settlement of all claims between the parties: (i) NSE to evaluate and get the remaining transferrable securities, if any, transferred in its favour and recover the remaining amount using the same evaluation criteria adopted in respect of other withheld securities of the appellant within 6 weeks. (ii) After realisation, the surplus amount be returned forthwith to the appellant along with interest at the rate of 12% P.A. from the date of determination of claim/date of vesting until the date of payment. (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the Exchange, the appellant was obliged to maintain a set of deposits with the Exchange, namely Interest Free Security Deposit (IFSD), security deposit (bank guarantee), margin money in cash and margin money in the form of bank guarantee. The sum total of these deposits of the appellant, collectively termed as the Base Capital of the trading member, amounted to ₹ 1.29 crores. 5. In the year 1996, NSE transferred its clearing and settlement functions to its wholly owned subsidiary company NSCCL/Clearing Corporation. In furtherance of the original undertaking given by the appellant in favour of the Exchange, the Board of Directors of the appellant executed a subsequent undertaking dated 19.03.1996 in favour of the Clearing Corporation, whereby the appellant unconditionally resolved to abide by all Rules, Regulations, circulars etc., of the Corporation. Consequently, the appellant was admitted as a Clearing Member of the Clearing Corporation. 6. On 19.05.1997, the Exchange adopted and circulated the Circular No. NSCC/CM/C S/030, originally issued by the Clearing Corporation, to all the trading/clearing members. The circular prescribed certain conditions to be compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Subsequent to the withdrawal of trading facilities and closing out of positions, the appellant pursued legal action, both civil and criminal, against the respondents at various forums, including the High Court of Calcutta and the Securities Exchange Board of India- for short, SEBI . The details of various legal proceedings instituted at the behest of the appellant, being unnecessary for deciding the subject matter brought before us, are not adverted to. After an unfruitful litigious relationship of 7 years, the Exchange addressed to the appellant a letter dated 01.11.2004 informing about the periodical appropriation of certain amounts made by the Exchange from the security deposits of the appellant in lieu of various membership charges due from time to time. The Exchange also called upon the appellant to deposit additional sums to meet the shortfall created in the Interest Free Security Deposit, in accordance with Rule 32 of Chapter III of Exchange Rules, to retain the membership of the Exchange. 9. In the communication that followed the aforesaid letter, the appellant denied any such obligation to pay as its trading facilities had stood suspended throughout this perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he due date. However, this Bye law is not exhaustive and does not preclude closing out the dealings in securities under other circumstances. Interpreting the combined effect of both the clauses, the Tribunal, in the same para, further observed thus: 5. .. It is a cardinal rule of interpretation that these provisions have to be read harmoniously and one cannot be read in isolation without appreciating the import of the other. Bye law 18 clearly permits closing out of contracts or dealings in securities in such manner and within such time frame and subject to the conditions and procedures as may be prescribed from time to time by the relevant authority. Closing out the contracts and the conditions and procedures subject to which it could be done under Bye law 18 is in addition to the closing out under Bye law 17. As already observed, Bye law 17 permits closing out only on the failure of a trading member to settle the transaction by the due date where as under Bye law 18, closing out could be resorted to for any other reason subject to such conditions and procedures as may be prescribed by the relevant authority. If Bye law 17 is read to mean, as was argued by the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limit as such limits, backed as they are by requisite margins, are prescribed with a laudable objective of investor protection. Such a power is essential to discipline the recalcitrant trading members. In the absence of such a power, the market and the investors would be exposed to a serious threat and the stock exchange would be reduced to the position of a mute spectator. 12. In the present appeal, the appellant has argued at length on various aspects of the entire transaction. As regards the decision of expulsion from membership, it is the case of the appellant that the said decision was founded on an illegality as its trading facility was wrongly withdrawn. The appellant has contended that since the trading facility itself was interdicted, it could not have been expected to keep up with various margins and deposits prescribed by the respondents as no trading was being permitted. 13. The primary contention of the appellant relates to the vires of the circular under which the trading facility of the appellant was withdrawn. It has been submitted that the Tribunal failed to appreciate that the said circular was in contravention of the Byelaws, Rules and Regulations. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17 and culminates in clause 18. 17. To counter the submissions of the appellant, the respondents have submitted that both for admission and continuation of membership, the Byelaws of the Exchange provide for payment of fees, security deposit and other monies as may be specified by the Board or the relevant authority from time to time. Furthermore, they also provide for maintaining various margins with the Exchange and Clearing Corporation, and state that any contravention of the same is proceeded against as per the Rules. Similar provisions for admission and continued admission are provided in the Byelaws of the Clearing Corporation as well. 18. Addressing the challenge to the Tribunal s interpretation of clauses 17 and 18, the respondents have submitted that the Tribunal has rightly concluded that clause 17 is not exhaustive as far as the action of closing out is concerned, and there could be other circumstances wherein the action of closing out ought to be taken in the investors interest. Clause 17 does not preclude invoking other just circumstances. As per the respondents, such circumstances are covered by clause 18 which operates in addition to clause 17. It is further s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that the following questions of law emerge for our consideration in the present appeal: (i) Whether prior approval of SEBI/Central Government was essential for enforcing the circular dated 19.05.1997 against trading/clearing members? (ii) Whether the circular is invalid as being in conflict with the Byelaws of the Exchange, particularly regarding the manner of closing out prescribed therein? (iii) Whether the appellant is legally bound by the subject circular which allows the withdrawal of trading facility and forthwith closing out of open positions? (iv) Whether the appellant was obligated to maintain the prescribed Interest Free Security Deposit and other deposits, despite the withdrawal of its trading facilities, for continued membership of the Exchange? 24. The intertwined nature of the provisions involved in the determination of the aforesaid questions requires us to analyse at length the scheme and scope of the Byelaws, Rules and Regulations of the Exchange and the Clearing Corporation vis a vis the 1956 Act and Securities and Exchange Board of India Act, 1992- for short, the 1992 Act . 25. The 1956 Act was brought into force to prevent un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd of India. 26. Be it noted that the legislature has omitted the usage of the word Regulations or circulars in the parent Act; and as far as the governance of a stock exchange is concerned, the supervision or control of the Central Government/SEBI at the time of granting recognition to the stock exchange is limited to being satisfied that the Rules and Byelaws of the stock exchange applying for registration are in conformity with such conditions as may be prescribed for ensuring fair dealing and protecting investors. The domain of framing Regulations is kept separately in a standalone manner in the Byelaws of the Exchange and not in the Act. The framing of Regulations concerning governance of stock exchange is reserved for the Exchange. 27. For deciding the first question, we may now advert to NSE Byelaws, 1994, to understand the true import of the subject circular. In the chapter on Definitions , clause (10) defines Regulations to include business rules, code of conduct and such other Regulations prescribed by the relevant authority from time to time for the operations of the Exchange and they are declared to be subject to the provisions of the 1956 Act, Rules and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of the subject circular. A similar clause has been inserted in Chapter VI of the Byelaws of the Clearing Corporation as well, thereby empowering the Clearing Corporation to issue operational parameters relating to trading limits and consequent actions in case of non compliance. 29. The subject matter of the circular in question pertains to trading/exposure limits coupled with sanctions in case of non compliance. That falls squarely within the ambit of operational parameters (as seen in clauses produced above), which can be determined and notified by the Exchange from time to time. In this case, the Exchange adopted the circular from the Clearing Corporation and notified it in the form of operational parameter. Nothing is brought to our notice from the text of this circular that it would militate against the norm of fair dealing and protection of investors. In any case, no requirement of prior approval is provided for notifying such operational parameters and as the name suggests, they are meant to tackle operational concerns as and when they emerge before the Exchange or the Clearing Corporation. The power and mode of prescription of such circular falls within the residua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yelaws which enable the Exchange to frame Regulations, instructions, operational parameters, notice etc. and bring them into force without subjecting them to any added condition of prior approval of the Central Government/SEBI. The only limitation on this power of the Exchange is that such Regulations or operational parameters issued under the Byelaws are subject to 1956 Act, 1992 Act and Rules framed thereunder. Strictly speaking, this limitation does not ipso facto mean that such Regulations or operational parameters are subject to prior approval, as argued. To say that would result in rewriting of the provisions in question. The same is forbidden. The import of this subjection clause is merely to specify that any such Regulation/operational parameter must not run counter to the provisions of 1956 Act or 1992 Act, as the case may be, including the Rules framed thereunder. 32. Indubitably, the Exchange provides a middle ground to the stock brokers and investors dealing with public funds/investments, and considering the nature of activities undertaken in a stock market, it is the bounden duty of the Exchange to fortify the public trust. In doing so, the Exchange is required to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructive amendment or amendment by implication. Black s Law Dictionary 11th Edition defines an amendment by implication as: Amendment by Implication (1868). A rule of construction that allows a repugnant provision in a statute to be interpreted as an implicit modification or abrogation of a provision that appears before it. Therefore, the principle of constructive amendment signifies that unless a clear case of repugnancy is made out, the later provisions could not be treated as modification or abrogation, more so when such provisions further the intent of the source provisions. The appellant, in our view, has failed to impress us on this count. 36. In order to assail the validity of the circular, the appellant has attempted to demonstrate a conflict between the circular and the Byelaws regarding the manner of closing out contemplated in the two. It is the case of the appellant that the circular contravenes clause 17 of the Byelaws and thus, invalid. 37. For the same default, closing out action is contemplated both under the Byelaws of the Exchange and the subject circular. Clauses 17 and 18 of the Byelaws of the Exchange provide for closing out. It is pertinent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any such violation shall be treated as a violation of the Byelaws of the Clearing Corporation, without prejudice to the power of the Exchange to withdraw the trading facilities. This withdrawal is contemplated as an imminent action to protect the market from being exposed to unsecured financial exposure. Consequent thereto, closing out of open positions has been contemplated. The relevant extract of the circular dated 19.5.1997 reads thus: .. Effect of violation of Intra Day Turn Over Limit and Gross Exposure Limit. Any violation of exposure limits will be treated as violation of the Bye Laws of the Clearing Corporation and will entail appropriate action under the Bye Laws and Rules of the Clearing Corporation. In addition, and without prejudice to the foregoing, the Clearing Corporation may, within such time as it may deem fit, advise the Exchange to withdraw any or all of the membership rights of the TM clearing member including the withdrawal of trading facilities without any notice. In the event of withdrawal of trading facilities, the outstanding positions of the TM clearing member may be closed out forthwith or any time thereafter by the Exchange, at the discretion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is empowered to determine and prescribe the manner , time frame and conditions and procedures in accordance with which such closing out can take place. The key words used here are wide in scope and are targeted to enable the Exchange to act effectively and promptly according to the prevalent dynamic state of the market by prescribing manner, conditions, procedures and time frame for a closing out action. The mischief creators in a stock market operate in a myriad set of ways and one cannot pre set or comprehend all possible methods of undermining the health of the market. Thus, residuary situations of closing out may emerge and clause 18 enables the Exchange to promptly act against such attempt. The provision is premised on necessity. By reading in any requirement of due date in clause 18, on the lines of clause 17, the court would be doing violence to the clear intent of the clauses and the broad scheme of the Byelaws. Clause 18, as the Tribunal observed, would be rendered nugatory. Even logically, by importing a fictional requirement of due date in clause 18, the Exchange cannot be expected to gloss over a clear case of excessive reckless trading and allow the mischief to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Byelaws of the Exchange, Byelaws of the Clearing Corporation and the circular, we are of the view that an action of forthwith closing out is permissible under the said scheme, particularly clause 18, and thus, the circular is not ultra vires clauses 17 and 18 of the Byelaws. Rather, the circular furthers the spirit underlying clause 18. 48. Let us now examine the third question i.e., whether the appellant was bound by the circular dated 19.05.1997. 49. As we move forward, we note that the SEBI (Stock Brokers Sub Brokers) Regulations, 1992 were framed under Section 30 of the 1992 Act, with an objective to regulate the functioning of stock brokers by prescribing certain conditions. Regulation 9 specifies that any registration granted by SEBI shall be subject to the conditions prescribed therein and reads thus: 9. Any registration granted by the Board under regulation 6 shall be subject to the following conditions, namely- (a) xxx xxx xxx (b) he shall abide by the Rules, Regulations and Byelaws of the stock exchange which are applicable to him; ... The same intent is advanced in Rule 9 of the Securities Contracts (Regulations) Rules, 1957 which re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the appellant is squarely bound by the circular and any breach of the same is to be viewed accordingly. 52. We have no hesitation in observing that the view taken by us is reinforced by the Master Circular for Stock Brokers issued by SEBI on 01.06.2018 bearing headnote that This Master Circular is a compilation of relevant circulars issued by SEBI, which are operational as on date of this circular . Annexure 4 of the Master Circular titled Rights and Obligations of Stock Brokers, Sub Brokers and Clients reiterates the correct legal position under clause 2 thereof which provides that the stock brokers are bound by all the Rules, Byelaws and Regulations of the exchange and circulars/notices issued in furtherance of such byelaws and rules. the clause reads thus: 2. The stock broker, sub broker and the client shall be bound by all the Rules, Byelaws and Regulations of the Exchange and circulars/notices issued thereunder and Rules and Regulations of SEBI and relevant notifications of Government authorities as may be in force from time to time. (emphasis supplied) 53. We now advert to the question of expulsion. 54. In light of the above discussion, it is clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erwise provided in the Bye Laws, Rules and Regulations of the Exchange if a member fails to pay his annual subscription, fees, charges or other monies which may be due by him to the Exchange or to the Clearing House within such time as the relevant authority may prescribe from time to time after notice in writing has been served upon him by the Exchange, he may be suspended by the relevant authority until he makes payment and if within a further period of fifteen days he fails to make such payment, he may be expelled by the relevant authority. Continued Admittance (32) The relevant authority shall from time to time prescribe conditions and requirements for continued admittance to trading membership which may, inter alia, include maintenance of minimum net worth and capital adequacy. The trading membership of any person who fails to meet these requirements shall be liable to be terminated. 57. The same regulatory intent is reflected in the Byelaws as well. Clause (1)(b) of Chapter V of NSE Byelaws, 1997 (the operative Byelaws as regards the question of expulsion) empowers the relevant authority to specify prerequisites, conditions, formats and procedures for applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified in the Byelaws, Rules, Regulations or even in operational parameters, as seen above. Notably, the conditions required for withdrawing the trading facility are distinguishable from the conditions required for suspension/expulsion of membership. Under the relevant provisions, withdrawal could take place upon a standalone violation of certain operational parameters on a given trading day (like exceeding the exposure limits as in the present case). Whereas, expulsion would take place upon a sustained violation of membership obligations (like failure to maintain the base capital and also for failure to replenish the prescribed amount) within the time frame specified therefor. The two actions vary not only in their texture, but also in their resultant effect. Withdrawal, for instance, does not extinguish the membership. It acts like a halt for indulging in further trading activity. 60. To say that mere withdrawal of trading facility would ipso facto absolve a trading member from keeping up with other obligations towards the Exchange for continuation of membership would result into an anomalous situation. It would amount to the diffusion of one stage of the relationship with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adequacy norms run co terminously with each other, and failure to comply with the latter would automatically put the former in jeopardy. 62. Having observed that the appellant failed to maintain the requisite membership margins with the Exchange for a long period and refused to make up for the shortfalls when called upon to do so by the Exchange, there is nothing to deviate from the view taken by the Tribunal that the appellant acted in contravention of the Byelaws and Rules of the Exchange necessitating unto termination. The actions taken by the Exchange, thus, were in accordance with the law. 63. Schedule II of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 prescribes a Code of Conduct for the stock brokers and clause 5 thereof specifies that compliance with statutory requirements is a mandatory aspect of code of conduct of a stock broker. The appellant consistently failed to comply with the requirements and acted in a manner which was prejudicial to the sanctity of a Member Exchange relationship. 64. To conclude, we hold that the Tribunal rightly confirmed the order of expulsion and we uphold the same. CIVIL APPEAL NO. 9571 OF 2019 65. The semina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow question which finds mention in para 5 of the impugned judgment as: 5. The basic question raised in this appeal therefore is whether the respondent NSE is legally entitled to withhold the securities of the appellant who has been suspended/expelled with effect from 2005/2006. 69. The Tribunal, after adverting to the relevant provisions, in para 8, opined that the stated issue had been and stands answered in Appeal No. 84 of 2008, wherein the order of expulsion was upheld. The Tribunal then went on to answer the question on merits and observed thus: 9. In any case dehors this ground of multiple litigations, on merit we find that the question of dues owed by the appellant to NSE and NSCCL has been communicated to the appellant multiple times giving calculations etc. The appellant has never questioned the calculations except stating that sufficient funds were available with the respondent in October 1997 which could have been utilized towards settlement obligation. However, given the trajectory of the legal recourse resorted to by the appellant and thereby limiting the powers of the respondent in utilizing those deposits, this contention that the respondent could have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Exchange being trustee thereof is under an obligation to get such securities registered in its name so as to prevent third parties from unduly deriving the corporate benefits (bonus, rights issues, dividends etc.) thereon, as and when they may accrue. It is the case of the appellant that in the present case, the Exchange merely sat over the withheld securities without further dealing with them in any manner whatsoever and for its inaction the appellant cannot be made to suffer. 73. Though not addressed by the Tribunal in the impugned judgment, the appellant had also raised a question as regards the applicability of Rule 20(f) of Chapter IV of the NSE Rules as the said rule came into effect from July, 2001 onwards. According to the appellant, since the original decision of withdrawal of trading facilities was taken in 1997, the said rule could not be applied to the appellant. Be it noted that the said rule permits the application of Chapter XII Defaults of NSE Byelaws enabling realisation of withheld assets of the expelled member. 74. Per contra, the respondents would contend that it was not open to them to use the deposits worth ₹ 1.34 crore to settle the dues o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant. Thus, our examination revolves essentially around the mode of dealing with the withheld securities. Having gone through the impugned judgment, submissions of the parties and documents on record, we are of the view that the following questions emerge for our consideration in this appeal: (i) Whether the respondents are obliged to forthwith realise the withheld securities and appropriate the sale proceeds towards the dues payable by the appellant in terms of Rule 20(f) of Chapter IV of NSE Rules read with Chapter XII on Defaults ? (ii) As a consequence of withholding of securities of a defaulting member, whether the respondents are under a legal obligation to deal therewith as a prudent person and more so as a trustee , and in discharge of fiduciary trust/responsibility are obliged to get the same registered with a view to protect the financial interests of the defaulting member and persons claiming through him? 79. Before answering the questions of law on merits, it falls upon us to briefly examine the maintainability of the original appeal before the Tribunal for relief relating to withheld securities. Notably, in previous appeal registered as Appeal No. 84 of 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per the general scheme of regulation of a trading/clearing member, it is settled position that a member whose membership has been terminated or who has been expelled is not absolved from fulfilling his contractual or other obligations in any manner. Rule 8(2) of Chapter IV and Rule 18(4) of Chapter V of NSCCL Rules textualize this position. Rule 8(2), for instance, reads thus: 8. TERMINATION OF MEMBERSHIP (1) xxx xxx xxx (2) The termination of Clearing Membership shall not in any way absolve the Clearing Member from any obligations and liabilities incurred by the Clearing Member prior to such termination. 82. In the factual scheme of the present case, the foremost thing to be noted is that there are two sets of assets in control of the respondents first, security deposits and second, withheld securities. The security deposits came to be deposited on account of membership obligations and the securities were withheld on account of failure to complete settlements. Though the challenge is limited to withheld securities, the provisions relating to such securities address both these categories of assets collectively and thus, they are being discussed accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y provides that the Exchange has a first and paramount lien over the monies, bank deposits and other securities deposited by the trading member for any sum due to the Exchange. It reads thus: Lien on Margins (24) The monies, Bank Deposit Receipts and other securities and assets deposited by a trading member by way of margin under the provisions of these Bye Laws and Regulations shall be subject to a first and paramount lien for any sum due to the Exchange. Subject to the above, the margin shall be available in preference to all other claims of the trading member for the due fulfilment of its engagements, obligations and liabilities arising out of or incidental to any bargains, dealings, transactions and contracts made subject to the Bye Laws, Rules and Regulations of the Exchange or anything done in pursuance thereof. Be it noted that it covers only those assets which are voluntarily deposited by the member with the Exchange. Forfeited/withheld assets are not included herein. It is so because the property in the deposited assets may vest in the Exchange by operation of membership obligations, whereas such is not the case with withheld securities. It is true that mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loss of interest to the defaulter on any amount over and above the monetary obligation. 85. However, in the present case, no fault can be found in the conduct of the Exchange as it had actually realised the deposits at various points of time owing to the inability of the appellant to keep up with the statutory margin requirements. As reflected in the records, out of the total deposit of ₹ 1.34 crores, amounts equivalent to ₹ 91,72,163.49 and ₹ 41,00,000 had already stood adjusted in favour of NSCCL and NSE respectively from 1997 to 2006. Thus, a total of ₹ 1,32,72,163.49 was in fact realised by the Exchange and it holds no merit to state that the Exchange failed to perform its duty to realise the security deposits. The amount of ₹ 1.34 crores came to be added to the total obligation again in 2017 when the Exchange returned the security deposit amount pursuant to an order of this court passed at the insistence of the appellant herein and thus, in law, that cannot be held against the Exchange in any manner. Withheld securities 86. Unlike the money deposits, no legal requirement of forthwith realisation is envisaged in the case of withhe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Therefore, the objected securities were withheld by the Exchange as a lien on the money paid by it in the auction purchase. SEBI circular dated 16.07.1996 titled Uniform Norms for Good/Bad Deliveries specifies this procedure. The relevant extract thereof reads thus: iii) All stock exchanges shall adhere to the following time schedule for dealing with the cases of bad deliveries. a) In case of deliveries coming under objection (objection cases), the first introducing broker of the same stock exchange shall be required to rectify the defects/replace the shares alongwith accrued benefits within 21 calendar days from the date of receipt of the objection and share certificates from the last buying broker of that exchange. If the former fails to rectify the defects or replace the shares or transfer deeds, the exchange shall hold an auction for shares in the immediately following Auction Session according to the usual exchange procedure. The shares obtained from such an auction shall be given by the Exchange to the concerned buying broker. Further, the exchange shall debit the price of the shares to the account of the introducing broker of that Exchange. In case the shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective companies. The same also cannot form a part of the subject matter before us. 91. Therefore, actual recovery qua the appellant/defaulting member could only be made from the receiving securities as those securities were due/deliverable to the appellant and were withheld as a collateral for the sole reason of non payment. No third party stake is involved therein. 92. Be that as it may, unlike money deposits, the receiving securities withheld or recovered by the respondents require legal vesting before they could be realised for the satisfaction of dues. Here, it may be useful to advert to clause (11). The question is, what procedure ought to be followed for realisation of receiving securities . Is it forthwith realisation, or only upon its vesting in law? 93. The provisions relating to withholding and vesting of securities are provided in two separate documents. Whereas vesting is provided under Chapter XII of NSE Byelaws titled Default , withholding is provided under Chapter 9 of NSCCL Regulations titled Non Delivery and Non Payment . It falls upon us to harmonise the two sets of provisions in order to understand the procedure in a holistic manner. 94. Regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Nemo dat quod non habet is the fundamental principle of transfer of property which, if literally translated, means no one gives what they do not have . Thus, unlike money deposits, withheld securities cannot be realised without legal vesting under clause (11). 96. We may now discuss the time/stage of vesting. Though the requirement of declaration as defaulter may be a discretionary one under the NSCCL Regulations, the same is a mandatory requirement for vesting in clause (11). For, vesting takes place upon declaration of any trading member as a defaulter. The expression and such assets shall vest ipso facto, on declaration of any trading member as a defaulter reinforces the view. Even otherwise, the main vesting provision is included in the chapter on defaults and therefore, such declaration is necessary unless otherwise excluded. Therefore, the right of the Corporation to dispose of or realise these securities is circumscribed by the requirement of declaring such member as a defaulter. In this case, no such declaration came to be made. However, despite the absence of any such declaration, vesting took place by way of Rule 20(f) in Chapter IV of NSE Rules. 97. Rule 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived. In that, the Rule clearly signifies that it applies to expelled members and the moment a member is expelled from membership, this rule will automatically become operative. Literally understood, the relevant point of time for checking the applicability of this rule is the date of expulsion . In the instant case, expulsion of the appellant took place in 2006, whereas the said rule was inserted beforehand in 2001. Thus, the rule was very much in force when the appellant was in fact expelled. Consequently, the respondents were well within their powers to realise the withheld securities in accordance with clause (11) soon after expulsion in 2006. 100. We now deal with the issue regarding the manner of dealing with withheld securities and requirement of registration. Upon withholding followed by vesting, the manner of dealing is provided under Regulation 9.10, NSCCL Regulations (Regulation 9.12, NSE Regulations), which reads as: 9.10. Withheld Securities and Funds How dealt with: The securities and funds withheld pursuant to regulation 9.9 and regulation 9.9A above shall be dealt with the relevant authority at such times and in such manner as it may deem fit, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the CM clearing member through an auction initiated by the Clearing Corporation (b) by declaring a closing out at such prices as may be decided by the relevant authority (c) by buying in or selling out against the CM clearing member by placing order in the specified exchange (d) in any other manner as the relevant authority may decide from time to time. The Corporation is empowered with a set of methods to close out the outstanding deals against the appellant. Upon vesting, it could have sold out the withheld securities through an auction or by placing an order of sale in Exchange or in any other permissible manner. 103. The other action contemplated in Regulation 9.10 is of registration. The grievance is that the Exchange held on to the securities without registration. According to the appellant, it was abuse of discretionary powers and the respondents ought to have registered the securities in its name forthwith. 104. To determine the requirement of registration, we need to resort to a true construction of Regulation 9.10. Once an action of withholding is taken, multiple interests come into play and both the parties assume different roles as rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of withholding, which is the basic foundation of a fiduciary relationship. In Robert L. Hodgkinson v. David L. Simms [1994] 3 SCR 377 , the Supreme Court of Canada referred to Frame v. Smith [1987] 2 SCR 99 wherein three basic characteristics of fiduciary relationship were laid down thus: In Frame v. Smith [1987] 2 SCR 99 at p. 136, Wilson J. defined the characteristics of a fiduciary relationship as follows: Relationships in which a fiduciary obligation have been imposed seem to possess three general characteristics: (1) The fiduciary has scope for the exercise of some discretion or power. (2) The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary's legal or practical interests. (3) The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power. In the present case, it is clear that the manner of dealing with the withheld securities is not circumscribed under strict parameters. The Exchange is bestowed with a discretion to choose amongst the available options and the appellant holds no control over such choice. To this limited extent, the role of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claimed. Additionally, could it be said that the respondent is obliged to deal with the securities in a particular way despite there being a clear discretion in the relevant provision? 108. The principles of constructive trust and fiduciary relationships are equitable principles, and equity never operates in an absolute manner or in a vacuum. In fact, the very basis of the law of equity is its flexibility to take care of mutual concerns of the parties. Equity is about balancing the competing interests by preventing the erosion of interests of one party while ensuring a free exercise of legally enshrined discretionary powers to the other. No doubt, specific fiduciary duties could definitely be recognised in the specific facts of the case but the manner of performance of such duties cannot be dictated in regulatory matters. Legal recognition of the role of a trustee and fixing actual obligations to be performed under such role are two separate matters. The latter is dependent on the nature of discretion and on the diligence of other party, as we shall see. In Equity Trusts Equity Trusts, Alastair Hudson, 2nd Edition , Alastair Hudson, after noting the existence of const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf becomes void, let aside entertaining a demand for registration. Upon withholding, it becomes the duty of the stock broker to raise a request for the registration of securities and to comply with the payment shortfall and other requirements. During the period commencing from 1997 to 2008, the appellant did not pursue the cause of dealing with the withheld securities in a proactive manner, seemingly because of two reasons first, the appellant was pursuing multiple legal actions against the respondents at various forums and second, such a request would have to be preceded by fulfilment of conditions relating to settlement and payment. For, the Exchange could not get the securities registered in the name of any entity until and unless such entity settles the transaction by making complete payment for the purchased securities. Clause (3) of Chapter VI of NSCCL Byelaws titled Clearing and Settlement of Deals expresses the same view and notes thus: 3. CONDITIONS AND REQUIREMENTS OF CLEARING AND SETTLEMENT The relevant authority may grant admission of deals dealt in the Exchange provided all the conditions and requirements specified in the Bye Laws and Regulations and such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filing M.A. No. 295 of 2015 before the Tribunal wherein a consent order was passed upon an undertaking given by the Exchange that it has no objection in performing its duty as trustee in respect of the unregistered withheld securities and taking appropriate steps by registering them in its name. Be it noted that even this order was a conditional one as it specified that such registration shall not affect the legal rights and liabilities of parties in any manner. In pursuance of this order on 23.09.2015, the respondents got the securities transferred in their name and realised them after the impugned order in 2019. 113. It is thus clear from the state of affairs discussed above that the respondents were cognizant of their duty towards the withheld securities pending determination of final claim. However, no action of registration could have been taken without complying with other conditions. The role of the defaulting member was of an enabler and unless the Exchange was placed in a position to register, it could not have exercised its discretion to register. It is important to note that permitting the Exchange to register forthwith as a matter of obligation would also be counte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the respondents to sell off the securities amidst pending proceedings. It is settled law that statutory appeal is a continuation of the original proceedings and once an appeal was filed, the question of expulsion remained sub judice unto these appeals. 117. We may revert to the manner in which the issue under consideration has been dealt with by the Tribunal. The Tribunal misinformed itself by observing that this issue had already stood answered in the previous judgment of the Tribunal in Appeal No. 84 of 2008. The Tribunal simply entered into an examination of the provisions relating to withholding whereas the real question was regarding the manner of dealing with the withheld securities. 118. Having said thus, what remains for our consideration is the determination and recovery of liabilities for final culmination of the controversy. The Tribunal determined the final liability of the appellant to be ₹ 2.41 crore in para 10, where it noted: 10. ... It is abundantly clear that the appellant owed ₹ 1.07 crore after adjusting for the deposits etc. in October 1997 and since the said deposit amount of ₹ 1.34 crore has been subsequently returned the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 66.81 lakhs (approximately) is remaining. 123. We hereby issue the following directions for full and final settlement of all claims between the parties: (i) NSE to evaluate and get the remaining transferrable securities, if any, transferred in its favour and recover the remaining amount using the same evaluation criteria adopted in respect of other withheld securities of the appellant within 6 weeks. (ii) After realisation, the surplus amount be returned forthwith to the appellant along with interest at the rate of 12% P.A. from the date of determination of claim/date of vesting until the date of payment. (iii) Respondents to return the unrealised securities including those with outstanding objections to the appellant within 6 weeks from today. (iv) In case recovery is not possible from the remaining securities, for any reason whatsoever, the respondents may communicate the same to the appellant forthwith and the appellant shall then pay the amount so demanded (including interest, if any), to the respondents within 6 weeks from the date of receipt of such communication. (v) NSE is directed to oversee the evaluation and realisation of remaining securities, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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