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TMI Blog2022 (2) TMI 1348X X X X Extracts X X X X X X X X Extracts X X X X ..... ................................................................. 3 B. Submissions ............................................................................................. 17 C. Analysis ..................................................................................................... 25 C. 1 Framework of the MPID Act ................................................................... 25 C. 2 Framework of NSE .................................................................................. 27 C. 3 Definitions of "Deposit‟ and "Financial Establishment‟: Interpretation of Section 2(c) and 2(d) of the MPID Act ...................................................... 40 C. 3.1 Settlement Guarantee Fund: Deposit under Section 2(c) of the MPID Act ....................................................................................................... 46 C. 3. 2 Receipt of commodities: Deposit under Section 2(c) of the Act . 49 C.4 Uncovering the Conspiracy .................................................................... 55 C. 4.1 The Grant Thornton Report .............................................................. 55 C. 4. 2 63 Moons Judgment .......... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L's platform through his broker. The platform would identify that 'B' (the seller) has an offer to sell the quantified commodity. NSEL would then match both the contracts. The date of matching of the contracts is termed as the trade date or 'T'. 'A' must then pay the price of the commodity to NSEL, which checks if 'B' has deposited the stock in a warehouse accredited to NSEL for delivery within two days. Once NSEL has confirmed that 'B' has deposited the stock in the warehouse, it transfers the money to 'B'. Simultaneously, the same parties enter into a T+25 contract by which 'A' (who was the buyer in the T+2 contract) would sell the same quantity of commodity purchased to 'B' (who was the seller in the T+2 contract). The difference between the purchasing cost and the selling cost is the profit that the trading member acquires through the trade. A flow chart indicating a representation of the transaction is set out below: 4 A detailed step-wise trading process of the paired contracts is indicated below: (i) A trading member of NSEL who wishes to trade in the platform is required to place a specific quantity of the commodity in a warehouse accredit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions in violation of the exemption notification. On 12 July 2012, the DCA directed NSEL to give an undertaking that no contracts shall be launched until further instructions, and that all existing contracts must be settled on the due dates. In July 2013, about 13,000 persons who traded on the platform of NSEL claimed that other trading members had defaulted in the payment of approximately Rs 5,600 crores. NSEL issued a circular on 31 July 2013 suspending its spot exchange operations. It stated that the delivery and settlement of all pending contracts would be merged and the contracts would be settled after the expiry of 15 days. NSEL published a statement on 6 August 2013 representing that it had sufficient stocks valued at Rs 6,032 crores in its warehouses. A new pay-in schedule was announced by NSEL on 14 August 2013 by which the Exchange commenced the pay-in schedule from 16 August 2013 and pay-out schedule from 20 August 2013, in the same manner every week. It was also represented that the members would be entitled to get simple interest on their outstanding dues with effect from 16 August 2013 on a reducing balance at 8% per annum till the end of the settlement calendar. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken to ascertain the quantity and quality of commodities at accredited warehouses, the financial status of buyers and trading members, and that liability be fixed on the promoters of NSEL, i.e 63 Moons. On 27 August 2013, FMC directed a forensic audit of NSEL by Grant Thornton LLP. The Union of India ordered an inspection of accounts of NSEL and 63 Moons under Section 209A of the Companies Act. The Economic Offences Wing registered cases against the directors and key management personnel of the NSEL and 63 Moons and against trading members and brokers of NSEL under the provisions of the Indian Penal Code and the MPID Act. 7 Pankaj Ramnaresh Saraf, a Director of Vostak Far East Securities Prvt. Ltd., a company involved in the business of investment, trading, and financing filed a complaint FIR No 216 of 2013 on 30 September 2013 against the directors and persons holding key management posts in NSEL, 25 borrowers/trading members and some brokers of NSEL for offences under Sections 120B, 409, 465, 468,471,474 and 477A of the Indian Penal Code 1860. The complainant stated that he had primarily been transacting in T+2 and T+25 contracts. He further stated that since NSEL suspend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fall within the definition of 'deposit'; and (iv) A charge-sheet and supplementary charge-sheets have been filed. NSEL has an alternative remedy of applying for discharge before the trial Court. 9 The State of Maharashtra issued a notification on 21 September 2016 under Section 4 of the MPID Act by which the properties of the respondent were attached. The relevant extract of the notification is reproduced below: "No. MPI 2016/C.R.541/B/Pol II:- Whereas complaints have been received from number of depositors against M/s La-Fin Financial Services Pvt. Ltd. and M/s La-Financial Services Pvt. Ltd. (hereinafter referred to as "the said Financial Establishment") complaining that they had collected the Fund and have defaulted to return the said deposits made by the depositors , on demand; And whereas, the State Government is satisfied that the said Financial Establishment and its Chairman/Directors are not likely to return the deposits to the depositors and hence the Government has to protect the interests of the depositors; And whereas the properties in the Scheduled appended hereto are alleged to have been acquired by the said Financial Establishment and its Chairman/Direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PI 1118/C.R. 4999 Pol 11, 15 May 2018 Notification No. MPI-1118/C.R. 597/Pol 11 and 19 October 2018 Notification No. MPI 1118/CR 1040/Pol 11 under Sections 4 and 5 of the MPID Act, attaching the properties of the respondent to recover the defaulted money. The Writ Petitions were heard together and disposed of by a Division Bench of the Bombay High Court by a judgment dated 22 August 2019. The petition was allowed on the following grounds: (i) The pay-in amount received from the buyer was only for the purpose of passing it over to the seller on the same date. This amount would not fall within the purview of Section 2(c) of the MPID Act in terms of which a 'deposit' must be the receipt or acceptance of a valuable commodity which would be 'repaid' by the financial establishment after a specified period; (ii) NSEL only performed the role of a facilitator, in a manner similar to the Bombay Stock Exchange. NSEL did not receive money with the obligation to return it on maturity. The fact that VAT is collected by the selling members from the buying members and that TDS is not deducted by NSEL indicates that NSEL is a mere pass through platform; (iii) The contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assured yield of 14 to 16% pa, it cannot be held that a 'deposit' was made; (ix) In the event that accounts of NSEL and the suppliers do not tally and delivery of commodities has not been provided, this may constitute an offence under Sections 465 and 467 of the IPC. NSEL is not absolved of any of these liabilities; (x) At the highest, since the members had to pay back the amounts due on T+25 , they could be construed as a 'financial establishment'; (xi) The warehouse receipts do not establish the nature of the transaction nor can it be held that the deposit of commodities would fall within the purview of the definition of 'deposit' since the commodity that was to be deposited in a warehouse was to be sold by the seller; (xii) The judgment of the Supreme Court in 63 Moons Technologies v. Union of India (2019) 18 SCC 401 does not have any bearing on whether the attachment of properties initiated under Section 4 of the MPID Act is valid; (xiii) The forensic report of the 17 defaulter companies reveals that the defaulters have utilized the funds and have transferred them to their sister companies; (xiv) In another case of one of the defaulting trading members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was an alternative remedy of raising an objection against the attachment of property before the Designated Court under Section 7 of the MPID Act. Further, any person who is aggrieved by the order of the Designated Court under Section 10 can appeal to the High Court within 60 days from the date of the order in terms of Section 11 of the MPID Act; and (vi) The settlement cycle broke because: (a) NSEL, contrary to its bye-laws and rules, did not warehouse the commodities. The buying member did not have knowledge of whether the commodities were warehoused; and (b) The buying member was lured into a paired contract on the assurance that the commodity in the warehouse would constitute a security and NSEL would be the However, NSEL colluded with the selling members and facilitated trades without ensuring that the commodities were deposited in the warehouses. 13 Mr. Vikramjit Banerjee, ASG appearing for the State of Maharashtra made the following submissions: (i) NSEL is a financial establishment under Section 2(d) of the MPID Act since it has accepted deposits as defined under Section 2(c). NSEL has been trading in different types of commodities through 'farmer' contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... criminal liability under the IPC but no criminal liability arises under the MPID Act. . NSEL and 63 Moons are being prosecuted in various other criminal proceedings. They will face civil suits as well; (vi) As against the current outstanding claim of Rs. 4,676 Crores, properties in excess of Rs. 6000 Crores are attached; (vii) NSEL is only obligated to recover the money from the defaulters. It has secured decrees/arbitral awards to the tune of Rs. 3,397 Crores from the members. The Bombay High Court has accepted the determination of liability of Rs. 136.98 Crores against defaulters by the Committee appointed by it. The Committee has crystallised a further liability of Rs. 760 Crores from the defaulters which is pending acceptance by the Bombay High Court; (viii) NSEL has filed proceedings for execution of the decrees and awards against the defaulters across five States. Since the process is taking time, NSEL instituted a petition WP (C) No. 995 of 2019before this Court under Article 32 seeking a consolidation of all execution proceedings; (ix) NSEL did not receive any 'deposit', as defined under Section 2(c) of the MPID Act since: (a) The impugned notifications by whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the constitutional validity of the provisions of the MPID Act; (iv) Section 4 of the MPID Act is arbitrary and constitutionally invalid and it suffers from over-breadth since: (a) Sub-section (1) of Section 4 mandates the attachment of property of the 'promoter, director, partner, manager or member of the said Financial Establishment.'; (b) Sub-section (2) of Section 4 divests the title of the attached properties without due process of law; and (c) Section 7 states that the Designated Court shall issue a notice to the financial establishment or any other person whose property is attached. An objection shall be raised by all persons who are likely to have a claim. The objection shall be decided by a summary procedure under Order 37 of CPC 1908. The divestment of title of a property by a summary procedure is arbitrary. (v) Though the transaction by NSEL in its platform seems to be an exchange of commodities on paper, it was an agreement between a lender and borrower. A borrower who has defaulted in paying the loan can be held liable to repay it; (vi) The forensic audit traces back the money trail to the borrowing-traders and not to NSEL; (vii) Five of the six attac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or an employee responsible for the management of or conducting of the business or affairs of such Financial Establishment shall, on conviction, be punished with imprisonment for a term which may extend to six years and with fine which may extend to one lac of rupees and such Financial Establishment also shall be liable for a fine which may extend to six years and with fine which may extend to one lac of rupees and such Financial Establishment also shall be liable for a fine which may extend to one lac of rupees. Explanation- For the purpose of this section, a Financial Establishment, which commits default in repayment of such deposit with such benefits in the form of interest, bonus, profit or in any other form as promised or fails to render any specified service promised against such deposit with an intention of causing wrongful gain to one person or wrongful loss to another person or commits such default due to its inability arising out of impracticable or commercially not viable promises made while accepting such deposit or arising out of deployment of money or assets acquired out of the deposits in such a manner as it involves inherent risk in recovering the same when needed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary to refer to the bye-laws of NSEL to ascertain the structure of NSEL's operation and functioning. Bye-law 2.17 defines "certified warehouse receipt" in the following terms: "Certified Warehouse receipt means a receipt issued under the authority of the Exchange or any agency approved by the exchange as a certified warehouse, evidencing proof of ownership of a standard quantity of commodities of a stated grade and quality by the beneficial owner or holder of the certified warehouse receipt. Certified warehouse receipt may either be in physical form or in dematerialised/electronic form as may be permitted by law." The expression 'certified warehouse' is defined in Bye-law 2.18 as a "warehouse approved and designated by the Exchange for making deliveries to and taking deliveries for fulfilling contractual obligations resulting from transaction in commodities." Bye-law 2.51 defines 'Margin' as follows: "Margin means a deposit or payment of cash/other specified assets/documents to establish or maintain a position in a commodity and include initial margin, special margin, ordinary margin, delivery period margin, additional margin and variation margin or any other type ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Exchange shall be responsible for its commitments to each clearing member unless the cause for default was under improper trades not covered by the Settlement Guarantee Fund: "The Exchange shall be responsible for its commitments to each clearing member whether the remaining clearing members with whom it has dealings have defaulted except under circumstances where improper trades not covered under the Settlement Guarantee Fund (SGF) are the cause for default" Bye-law 7.11 states that the Clearing House of the Exchange shall, among other things, have the responsibility of receiving margin payments, certification of warehouse receipts, and transmission of documents. Bye-law 7.11 reads as follows: "The Clearing House of the Exchange shall, in the manner specified by the Relevant Committee or the relevant authority, have the responsibility of receiving and maintaining margin payments, monitoring open positions and margins, and transmission of documents, payments and certified warehouse receipts amongst the trading-cum- clearing members and institutional clearing members of the Exchange." (emphasis supplied) Bye-law 9 provides for clearing and settlement. Bye-laws 9.5, 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders and the Exchange may conduct auction to ensure delivery to the buyers who hold outstanding buy positions and intended to lift delivery and could not receive Delivery Orders against such positions due to failure on the part of the seller. In case of non availability of commodities during the auction process, close-out process as defined in the business rule shall be applicable. The Relevant Authority may prescribe penalty on buyers with outstanding positions who fail to pay against his purchase obligation and the Exchange may conduct sale out auction to ensure that the sellers gets the price for the commodities delivered against their sale obligation and could not receive payment due to failure on the part of the buyers. In case of non availability of suitable buyers during the auction process, close-out process as defined in the business rule shall be applicable. Failure to pay the dues and penalties relating to such closing out within the stipulated period shall cause the member to be declared as defaulter and render him liable for disciplinary action." 24 Bye-law 10.7 envisages that a seller issuing the delivery order shall receive from the Clearing House the full price of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected ab initio." (emphasis supplied) 25 Thus, under the above bye-law, the selling member is entitled to offer delivery only at the delivery centre which is specified in the Exchange strictly in accordance with the delivery procedure provided before tendering delivery. The seller has to obtain a surveyor's certificate which is to be accompanied with the delivery order being tendered by him to the Clearing House. Bye-laws 10.14, 10.15 and 10.16 contain the following stipulations: "10.14 Members of the Exchange and the clients/ constituents dealing through them shall strictly abide by the delivery procedure, methods of sampling, survey, transportation, storage, packing, weighing and final settlement procedures, as may be specified by the Relevant Authority from time to time. Any violation of such method will be dealt with by the Relevant Authority in the manner, as may be specified from time to time. 10.15 A seller of commodity shall deliver the quantity as per his net sale position in the commodity during the period specified *in the Rules, Business Rules and Regulations of the Exchange and notices and orders issued thereunder from time to time for the specified commodity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be applied in the manner, as may be provided in these Bye-laws, Rules, Business Rules and Regulations of the Exchange and notices and orders issued thereunder from time to time. 12.2.2 The Relevant Authority may specify the amount of additional contribution or deposit to be made by each member and/or category of clearing members, which may, inter alia, include the minimum amount to be provided by each clearing member. 12.2.3 The Exchange shall, as a result of multi-lateral netting followed by it in respect of settlement of transactions, guarantee financial settlement of such transactions to the extent it has acted as a legal counter party, as may be provided in the relevant Bye-laws from time to time. 12.2.4. The total amount of security deposit and additional deposit, maintained by a clearing member with the Clearing House of the exchange, in any form as specified herein, shall form part of the Settlement Guarantee Fund. 12.2.5 The amount deposited by a clearing member towards the security deposit shall be refundable, subject to such terms and conditions as may be specified by the Relevant Authority from time to time. Any amount deposited or paid by the clearing mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable after utilization. "12.6 Administration and Utilization of Settlement Guarantee Fund 12.6.1 The Settlement Guarantee Fund may be utilised for such purposes as may be provided in these Bye-Laws and Regulations and subject to such conditions as the relevant Authority may prescribe from time to time, which may include a. defraying the expenses of creation and maintenance of Settlement Guarantee Fund; b. temporary application of Settlement Guarantee Fund to meet shortfalls and deficiencies arising out of the clearing and settlement obligations of clearing members in respect of such transactions, as may be provided in these Bye-Laws, Rules, Business Rules and Regulations of the Exchange in force from time to time; c. payment of premium on insurance cover(s) which the Relevant Authority may take from time to time, and/or for creating a Default Reserve Fund by transferring a specified amount every year, as may be decided by the Relevant Authority from time to time; d. Meeting any loss or liability of the Exchange arising out of clearing and settlement operations of such transaction, as may be provided in these Bye-Laws, Rules, Business Rules and Regulations of the Exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated by the Exchange among the various segments of trading, which are designated as such by the exchange and in which the member may participate, in such proportion as the Exchange may decide from time to time. The Exchange shall retain the rights to utilise the fund allocated to a particular segment of trading to match the losses or liabilities of the Exchange, incidental to the operation for that segment or for any other segment, as may be decided by the Exchange at his discretion. Bye-law 12.12 states that the clearing member shall be repaid his deposit after making deductions: 12.12 Repayment to the Clearing Member on His Cessation 12.12.1 A members hall be entitled to repayment of the actual amount of deposit, if any, made by him to the Settlement Guarantee Fund provided it is not part of the admission fee after a. the member ceases to be an exchange member on account of any reason whatsoever, b. all pending transactions at the time the member ceases to be an exchange member, which may result in a charge to the settlement Guarantee Fund, have been closed and settled, c. all obligations to the Exchange for which the member was responsible while he was an exchange mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Section 2(d). Section 2(d) reads as follows: "(d) "Financial Establishment" means any person accepting deposit under any scheme or arrangement or in any other manner but does not include a corporation or a co-operative society owned or controlled by any State Government or the Central Government or a banking company as defined under clause (c) of section 5 of the Banking Regulation Act, 1949; Financial Establishment is defined as any person accepting a 'deposit'. The definition excludes from its purview (a) a corporation or cooperative society controlled or owned either by the State or the Central Government; and (b) a Banking Company as defined under Section 5(c) of the Banking Regulation Act 1949. Since NSEL does not fall within any of the exceptions, it would be a 'financial establishment' for the purposes of the Act if it is a 'person accepting deposit'. Section 3(42) of the General Clauses Act 1897 provides an inclusive definition of "person" to include both incorporated and unincorporated companies New Horizon Sugar Mills Limited v. Government of Pondicherry, (2912) 10 SCC 575 (para 58) as: "person' shall include any company or association or body of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be returned after a specified period or otherwise; and (iii) The return of the money or commodity may be in cash, kind or in the form of a specified service, with or without any benefit in the form of interest, bonus, profit or in any other form. These elements of the definition are followed by specific exclusions contemplated in clauses (i) to (vii). Clause (i) of the exceptions covers an amount which is raised by way of share capital or by debenture, bond or other instrument governed by the guidelines and regulations of SEBI. Clause (v) states that money received in the ordinary course of business by way of security deposit, dealership deposit, earnest money or advance against an order of goods or services shall be excluded. The exclusions in clause (i) to (vii) indicate that transactions which would otherwise fall within the broad sweep of the definition are excluded. 32 The legislature may define a word artificially by restricting or expanding its natural meaning. When the legislature employs the phrase 'means', the definition is intended to be exhaustive. In Indra Sarma v. VKV Sarma, (2013) 15 SCC 755 this Court observed that the definition of the expression ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de with the Financial Establishments for a fixed period, for interest or for return in any kind or for any service; Similarly, statutes protecting the interest of depositors in Orissa The Odisha Protection of Interests of Depositors (in Financial Establishments) Act 2011, Kerala The Kerala Protection of Interests of Depositors in Financial Establishment Act 2013, Himachal Pradesh The Himachal Pradesh [Protection of interests of depositors (in Financial Establishments)] Act 1999, Goa The Goa Protection of Interests of Depositors (in financial Establishments) Act 1999, Telangana The Telangana Protection of Depositors of Financial Establishments Act 1999 , Andhra Pradesh The Andhra Pradesh Protection of Depositors of Financial Establishments Act 1999 and Sikkim The Sikkim Protection of interests of Depositors (in Financial Establishments) Act 2000 define the phrase 'deposit' only in terms of money and not the acceptance of a commodity. 36 According to the second ingredient of Section 2(c), the money or commodity must be liable to be returned. However, such return need not necessarily be in the form of cash or kind but also in the form of a service, with or without any bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y deposit is 'mandatory' for a person to trade on NSEL's platform. Regulation 4.12 refers to the SGF as a 'security deposit'. Similarly, bye-law 12.2.1 stipulates that each member shall contribute a 'minimum security deposit'. However, merely because the SGF is referred to as a 'security deposit', the exception would not automatically be applicable. The meaning of the phrase 'security deposit' takes colour from the surrounding phrases. Clause (v) to sub-Section 2(c) excludes security deposit, dealership deposit, earnest money, and an advance against an order for goods and services from the ambit of the phrase 'deposit'. The concepts used in sub-Section 2(c) (v) fall in two categories: (i) token amounts paid to indicate the earnest to purchase (earnest money and advance money), and (ii) payments required to meet exigent situations of default by a party (dealership deposit and security deposit). 39 Black's Law dictionary Bryan A Garner, Black's Law Dictionary (11 ed. Thomson Reuters). defines security deposit as "money deposited by a tenant with a landlord as security for full and faithful performance by the tenant of terms of leases, including damages to pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, NSEL uses the fund to cover functions beyond its role as a counter-party. For example, the fund is used to cover loses faced by the NSEL in the settlement operations, investments are made in securities, and the fund is allotted in various segments of trading, where the funds are also utilised to cover loses, if any, in the segment. Therefore, these three features of the SGF indicate that though the SGF is termed as a 'security deposit' in nomenclature, its features do not represent a security deposit. Since NSEL receives 'money' in the form of SGF that is returned in money and services, and is not covered by the exceptions, it would fall within the expression 'deposit' as defined in Section 2(c) of the Act. C. 3. 2 Receipt of commodities: Deposit under Section 2(c) of the Act 42 A person who wishes to trade in the platform of NSEL is required to place the commodities in the accredited warehouse of NSEL. NSEL would then provide the trader with a warehouse receipt. When the buyer's offer and the seller's offer is matched, NSEL would debit the amount from the buyer member's pay in obligations and it would be credited to NSEL's exchange settlement account. The Ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is no valid basis to accept the submission of the respondent that the expression should only comprehend within it precious metals such as gold and silver. If the legislature intended to so restrict the definition of the expression valuable commodity, it could have used an explanation importing an artificial meaning to the expression. However, the legislature has desisted from doing so. A valuable commodity is a commodity which has significant value. This does not refer only to the intrinsic value of the commodity. Whether or not a commodity is valuable has to be determined bearing in mind the salutary object and purpose of the Act which is to protect the interest of depositors. It is in this context that it becomes necessary to adopt a purposive construction which would give effect to the meaning and content of the law. Any attempt to read the definition in a restrictive sense would be contrary to legislative intent. The intent of the legislature is to define the expression 'deposit' as well as the expression 'financial establishment' in a comprehensive and all-encompassing manner. Therefore, the phrase 'valuable commodity' cannot be restricted to only mean precio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 1.7-2.0 16% Refined Mustard Oil T+2 & T+25 6.5 16% Refined Soybean Oil T+2 & T+25 6.5 16% Refined Sunflower Oil T+2 & T+25 6.5 16% RBD Palmolein Oil T+2 & T+25 6.5 16% Sugar T+2 & T+25 3.0 16% Maize T+2 & T+25 3.0 16% The above representation specifies: (i) Commodities; (ii) Duration of trades; (iii) Investment; and (iv) Yield. For example, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presented that all trades were backed by collaterals in the form of stocks and its management activities included selection, accreditation, quality testing, fumigation and insurance. Therefore, NSEL represented that on receiving money and commodities, the members would receive 'assured returns' and a 'service'. Though NSEL has been receiving 'deposits', it has failed to provide services as promised against the deposits and has failed return the deposits on demand. Therefore, the State of Maharashtra was justified in issuing the attachment notifications under Section 4 of the MPID Act. C.4 Uncovering the Conspiracy C. 4.1 The Grant Thornton Report 46 FMC engaged Grant Thornton LLP to conduct a forensic audit of the practices and records of NSEL. The report found several instances where NSEL had repeatedly contravened the rules: (a) NSEL allowed members who had repeatedly defaulted to continue trading though under NSEL's exchange rules, a member who does not have sufficient collateral to discharge his obligations would not be allowed to trade further; (b) Members who were in default or those who had exhausted their margin limits, were granted an exemption from marg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a charge sheet against the Managing Director and CEO of NSEL, the head of warehousing, and two other defaulters. It was mentioned in the charge sheet that these employees of NSEL had colluded with the defaulters to enable them to trade on the platform without depositing the goods in the accredited warehouses. FMC wrote to the Union of India on 18 August 2014 that NSEL and 63 Moons be merged. In the representative suit which was instituted, the Bombay High Court appointed a three-member committee consisting of Mr Justice VC Daga, Mr J Solomon, and Mr Yogesh Thar for determining the liability of the defaulters and assisting in the process of recovery. In addition to Rs. 3,365 Crores covered through court decrees and arbitral awards, the high level committee had crystallised a further sum of Rs. 835.88 to be recovered from the defaulters. 48 On 15 October 2014, the Additional Secretary, Department of Economic Affairs wrote a letter to the Ministry of Corporate Affairs stating that 63 Moons and NSEL are maintaining separate identities to deprive the investors of money. It was stated that the corporate veil ought to be lifted and both the companies must be amalgamated to recover the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g were granted an exemption from margin requirements and thus allowed them to increase their exposure by engaging in new trades. More than 1800 margin limit exemptions were granted between 2009 through to 2013. Inadequate monitoring of member collateral : NSEL did not carry out any diligence to establish the existence of stock at member managed warehouses, upon which trades were being executed. Grant Thornton carried out a stock verification exercise and found significant shortages vis-à-vis expected collateral." The judgment referred to the findings of misutilization of client monies/ settlement fund in the Grant Thornton report: "1.12. Misutilisation of client monies/settlement fund : As per the rules and bye-laws of the NSEL exchange "Margin deposits received by clearing members from their constituent members and clients in any forms shall be accounted for and maintained separately in segregated accounts and shall be used solely for the benefit of the respective constituent members' and client position." Grant Thornton found evidence (including emails) that client monies/settlement fund, was used regularly for fulfilling the obligations of defaulting members. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Joseph Massey and Shri Shreekant Javalgekar have been Directors of the said company from its very beginning till the settlement crisis at NSEL first came to light in July 2013. The facts establishing the fraud involving a settlement default over Rs 5500 crores at NSEL have been discussed at length in the SCNs issued to the noticees as well as reiterated, albeit illustratively by us at para 14.7 of this Order. The responsibility of FTIL as the holding company possessing absolute control over the governance of NSEL has also been highlighted. The control of FTIL over NSEL becomes further crystallised from the responses given by M/s Grant Thornton before the Commission on 3-12-2013 stating that Shri Jignesh Shah, Mr Joseph Massey and a host of other officials of FTIL reviewed the forensic audit report and it was only after obtaining their clearance, the forensic auditor finalised its report. 15.1.1. The violation of conditions prescribed in the exemption notification, trading in paired contracts to generate assured financial returns under the garb of commodity trading, admission of members who were thinly capitalised having poor net worth and giving margin exemptions to those who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of paired contracts, thereby defying conditions stipulated in the exemption notification granted to it. The motive behind allowing trading in forward contracts on the NSEL platform in a circuitous manner on NSEL which was neither recognised nor registered under FCRA, 1952 indicates mala fide intention on the part of the promoter of FTIL to use the trading platform of its subsidiary company for illicit gains away from the eyes of Regulator. The fact that FTIL promoted NSEL sought exemption from FCRA, 1952 provisions even before they had started any trading or operation, points to their intention from the outset. In this manner, it misinterpreted the conditions stipulated in the exemption notification in collusion with a handful of members, which ultimately culminated in a massive fraud involving Rs 5500 crores, which has the potential effect of eroding trust and confidence in exchanges and financial markets. 15.1.4. Keeping in view the foregoing observations and the facts which reveal misconduct, lack of integrity and unfair practices on the part of FTIL in planning, directing and controlling the activities of its subsidiary company, NSEL, we conclude that FTIL, as the anchor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores have been obtained. (iii) Decrees worth Rs 1233.02 crores have been obtained against 5 defaulters. (iv) Assets worth Rs 5444.31 crores belonging to the defaulters have been attached of which assets worth Rs 4654.62 crores have been published in Gazette under the MPID Act for liquidation under the supervision of MPID Court and balance assets worth Rs 789.69 crores have been attached/secured for attachment by the EOW. (v) Assets worth Rs 885.32 crores belonging to the Directors and employees of NSEL have been attached out of which assets worth Rs 882.32 crores have already been published in Gazette under the MPID Act for liquidation under the supervision of the MPID Court and balance assets worth Rs 3 crores have been attached/secured for attachment by the EOW. (vi) MPID Court has already issued notices under Sections 4 & 5 of the MPID Act to the persons whose assets have been attached as above. Thus, the process of liquidation of the attached assets has started. (vii) The Bombay High Court has appointed a 3-member committee headed by Mr Justice (Retd.) V.C. Daga and 2 experts in finance and law to recover and monetise the assets of the defaulters. (viii) Rs 558.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores: "91.3. We have seen that neither FTIL nor NSEL has denied the fact that paired contracts in commodities were going on, and by April to July 2013, 99% (and excluding E-series contracts), at least 46% of the turnover of NSEL was made up of such paired contracts. There is no doubt that such paired contracts were, in fact, financing transactions which were distinct from sale and purchase transactions in commodities and were, thus, in breach of both the exemptions granted to NSEL, and the FCRA. We have also seen that NSEL throughout kept representing that it was, in fact, a commodity exchange dealing with spot deliveries. Apart from the Grant Thornton Report and the FMC order, we have also seen that Shri Jignesh Shah, on 10-7-2013, made representations to the DCA and the FMC, in which he stated that NSEL had full stock as collateral; 10-20% of open position as margin money; and that the stock currently held in NSEL's 120 warehouses was valued at INR 6000 crores, all of which turned out to be incorrect. Further, there is no doubt whatsoever that in July 2013, as a result of NSEL stopping trading on its exchange, a payment crisis of approximately INR 5600 crores arose. The fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived by fraudulent financial establishments. The Court held: "26. The Tamil Nadu Act was enacted to ameliorate the conditions of thousands of depositors who had fallen into the clutches of fraudulent financial establishments who had raised hopes of high rate of interest and thus duped the depositors. Thus the Tamil Nadu Act is not focused on the transaction of banking or the acceptance of deposit, but is focused on remedying the situation of the depositors who were deceived by the fraudulent financial establishments. The impugned Tamil Nadu Act was intended to deal with neither the banks which do the business or banking and are governed by the Reserve Bank of India Act and the Banking Regulation Act, nor the non-banking financial companies enacted under the Companies Act, 1956. 27. The Reserve Bank of India Act, the Banking Regulation Act and the Companies Act do not occupy the field which the impugned Tamil Nadu Act occupies, though the latter may incidentally trench upon the former. The main object of the Tamil Nadu Act is to provide a solution to wipe out the tears of several lakhs of depositors to realise their dues effectively and speedily from the fraudulent financial e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r education or wedding of their daughters or as a policy of medical insurance in the case of most of the aged depositors, but in reality in all cases it was an unsecured promise executed on a waste paper. The senior citizens above 80 years, senior citizens between 60 and 80 years, widows, handicapped, driven out by wards, retired government servants and pensioners and persons living below the poverty line constituted the bulk of the depositors. Without the aid of the impugned Act, it would have been impossible to recover their deposits and interest thereon. 32. The conventional legal proceedings incurring huge expenses of court fees, advocates' fees, apart from other inconveniences involved and the long delay in disposal of cases due to docket explosion in courts, would not have made it possible for the depositors to recover their money, leave alone the interest thereon. Hence, in our opinion the impugned Act has rightly been enacted to enable the depositors to recover their money speedily by taking strong steps in this connection. 33. The State being the custodian of the welfare of the citizens as parens patriae cannot be a silent spectator without finding a solution for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Madras High Court and the Bombay High Court, it has to be considered as to which of the two views would be more consistent with the constitutional provisions. The task has been simplified to some extent by the fact that subsequently the decision of the Bombay High Court [(2005) 4 CTC 705 (Bom)] declaring the Maharashtra Act to be ultra vires, has been set aside by this Court [Sonal Hemant Joshi v. State of Maharashtra, (2012) 10 SCC 601] , [State of Maharashtra v. Vijay C. Puljal, (2012) 10 SCC 599] , so that there is now a parity between the judgments relating to the Maharashtra Act and the Tamil Nadu Act. [...] 59. [...] The objects of the Tamil Nadu Act, the Maharashtra Act and the Pondicherry Act being the same and/or similar in nature, and since the validity of the Tamil Nadu and Maharashtra Act have been upheld, the decision of the Madras High Court in upholding the validity of the Pondicherry Act must be affirmed. We have to keep in mind, the beneficial nature o the three legislations which is to protect the interests of all depositors, who invest their life's earnings and savings in schemes for making profit floated by unscrupulous individuals and companies, both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the financial establishment after a specified period or otherwise." The High Court has lost sight of the fact that Section 2(c) of the MPID Act defines 'deposit' in broad terms. Further, according to the definition, the return may be either in money, commodity or service, and it is not necessary that the commodity or the money must be returned in the same form. The definition includes the receipt of money and the return of a commodity, or even the receipt of a commodity and a return in the form of a service. Further, Bye-law 10.8 indicates that NSEL was not merely an intermediary. The Bye-law states that the buyer shall pay the Clearing House the value of the delivery allocation. However, till the completion of the delivery process, the money will be retained by the Clearing House of NSEL. 59 Referring to the contract notes and the confirmation receipts generated on the electronic platform, the High Court observed that NSEL was only a 'medium'. However, the High Court subsequently noted that 'something has gone wrong somewhere in these transactions'. Further, the High Court referred to the First Information Report filed by Mr. Pankaj Saraf observing that even the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the commodities for a limited purpose. The High Court has read the definition of 'deposit' narrowly without any reference to the salutary purpose of the MPID Act. 62 The High Court also made observations on the merits of the criminal proceedings. Referring to the role of NSEL in the default in payments, it observed that at the highest, the actions of NSEL would constitute offences under Sections 465 and 467 of the IPC. The EOW filed a charge sheet under Section 173 CrPC before the Sessions Judge, Special Court under the MPID Act for offences punishable under Sections 409,465,467,468,471,474 and 477(4) read with Section 120(B). The High Court ought not to have made observations on the merits of the criminal proceedings when the writ petition was restricted to the issue of whether NSEL is a financial establishment for the purpose of the MPID Act. 63 The High Court observed that the decision of this Court in 63 Moons (supra) does not have 'any serious effect on the present proceeding', though this Court has discussed at length the modus operandi of NSEL in duping the trading members by throwing light on the structure of the exchange. Though it was observed that the questio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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