TMI Blog2022 (2) TMI 1348X X X X Extracts X X X X X X X X Extracts X X X X ..... all determine if NSEL receives 'deposits' as defined by Section 2(c) of the MPID Act. The bye-laws elucidate that NSEL receives both money and commodities from trading members. In order to decide if these receipts by NSEL could be regarded as 'deposits', the test of 'return' will have to be satisfied. The test is that the return be in cash, kind or service. It is not necessary that the return should be with the benefit of interest, bonus or profit. Therefore, if the financial establishment is obligated to return the deposit without any increments, it shall still fall within the purview of Section 2(c) of the MPID Act, provided that the deposit does not fall within any of the exceptions. The exception of relevance to our case is clause (v) which states that amounts received in the ordinary course of business by way of (a) security deposit; (b) dealership deposit; (c) earnest money; and (d) advance against order for goods or services shall be excluded from the purview of the term 'deposit'. The validity of the MPID Act was specifically dealt with in two decisions of this Court in State of Maharashtra v. Vijay C. Puljal [ 2005 (9) TMI 303 - HIGH COUR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rns. Such an observation misrepresents the factual instances which are backed by documentary material. The appellant also contended that the writ petition filed by the respondent is not maintainable since there was an alternative remedy of raising an objection before the Designated Court under Section 7 of the MPID Act. Though there is merit in the argument of the appellant, since the High Court decided on the validity of the impugned attachment notifications on merits, and arguments have been addressed in the present proceedings, we have proceeded to decide the matter on merits. The impugned notifications issued under Section 4 of the MPID Act attaching the properties of the respondent are valid - Appeal allowed. - Civil Appeal Nos. 2748-49 of 2022, Civil Appeal Nos. 2750-51 of 2022 - - - Dated:- 22-2-2022 - Justice Dr Dhananjaya Y Chandrachud, Justice Surya Kant Justice. Bela M Trivedi For the Appellant(s) : Ms. Sanjana Saddy, Adv. Mr. Sanyat Lodha, AOR Mr. Vikramjit Banerjee, ASG Mr. Rahul Chitnis, Adv. Mr. Sachin Patil, AOR Mr. Aaditya Pandey, Adv. Mr. Geo Joseph, Adv. Ms. Shwetal Shepal, Adv. Mr. Siddhartha Sinha, Adv. Mr. Tathagat, Adv. Mr. Abhishek Mahajan, Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ID Act have been quashed. The respondent holds 99.99% of the shareholding of National Spot Exchange Ltd NSEL . At the core of the dispute is whether NSEL is a 'financial establishment within the meaning of Section 2(d) of the MPID Act. A. Facts 2 NSEL is a company incorporated under the Companies Act 1956, and is a wholly owned subsidiary of Financial Technologies (India) Limited, which is now known as 63 Moons Technologies Limited FCIL or 63 Moons On 5 June 2007, the Union of India issued a notification under Section 27 of the Forward Contracts (Regulation) Act 1952 FCRA exempting forward contacts of one-day duration for sale and purchase of commodities traded on NSEL from the application of the provisions of the enactment. NSEL started operating as an exchange for spot trading in commodities. NSEL launched contracts for buying and selling of commodities on its trading platform with different settlement periods, ranging from T+0 to T+36 days. 'T indicates the trade date, that is the date on which the trade took place and +0 or +36, indicates the number of business days after the trading day when the delivery of the commodity and the payment of price is made. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncide, the exchange would be matched by NSEL, stipulating the commodity, the price, and the quantity; (v) The Exchange would communicate all the trades effected at the end of the day; (vi) On the next day, an obligation report recording the pay-in and delivery obligations would be forwarded to the trading members; (vii) On the day after (that is, settlement date), NSEL would debit the trading member s designated settlement account for the amount of the buying member s pay in obligations and it would be credited to NSEL s exchange settlement account. NSEL s Operations Department would inform NSEL s Delivery Department of the selling member s delivery obligations. Based on the intimation, NSEL s Delivery Department would confirm to the Operations Department if the requisite quantity of the particular commodity is available according to the Warehouse receipts. After such confirmation, the Operations Department would release the purchase price to the selling broker s designated bank account. Simultaneously, a Delivery Allocation Report would be issued to the buyer s broker or the buyer informing him that the commodity purchased was allotted to him; and (viii) NSEL w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account the exigencies emerging from sudden closure of trading operation, liquidity problem accentuated by withdrawal of buyers credit limits by the banks from the members, who are in pay in and the extensive discussion done by the members who have to complete pay in and members who have to receive the payments. Considering the challenges, the revised schedule of settlement has been prepared to ensure reduction in payment rist and meet the settlement obligation: 1. The Exchange will commence the Pay-in schedule from Friday, the 16th August, 2013 and pay-out from Tuesday, the 20th August, 2013 and thereafter in the same manner every week. 2. The Exchange shall effect pay out on a pro-rata basis every week based on the money recovered as per the settlement calendar attached herewith. These payments are subject to realization of cheques of the members, who have to complete pay-in. In case any payment is not realised, then the Exchange shall take measures as per its Rules and Bye laws. 3. All funds realized up to Friday every week starting from August 16, 2013 shall be disbursed on Tuesday of the subsequent week. 4. The schedule has taken into account all promised o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alleged in the complaint that NSEL held the commodities in warehouses accredited to it as a 'trustee on behalf of the depositors (buyers) and that the misappropriation is a criminal breach of trust. In addition to the above, he also alleged that the Settlement Guarantee Fund SGF had been misused by NSEL. 8 The FIR was later transferred to the Economic Offences Wing EOW of Mumbai Police. The case was registered and Sections 3 and 4 of the MPID Act were added to the FIR. The case was transferred to the Special Court constituted under the MPID Act. The case was registered as MPID Case 1 of 2014 NSEL filed a writ petition challenging the invocation of the MPID Act on the ground that the exchange is not a 'financial establishment under the provisions of the Act. By an order dated 1 October 2015, the petition was dismissed by a Division Bench of the High Court on the following grounds: (i) The material collected by EOW during the course of the investigation revealed that NSEL did not carry out its exchange operations according to the bye-laws. It was prima facie evident that NSEL represented to the traders that they would be provided security free loans and that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and in the name of its Chairman/Directors as specified in the Schedule. 10 The Supreme Court on 26 October 2016 dismissed as withdrawn, the Special Leave Petition filed against the order of the Bombay High Court. The appellants filed a Writ Petition before the Bombay High Court challenging the notification dated 21 September 2016 issued under Section 4 of the MPID Act attaching the properties of the respondent. The validity of Sections 4 and 5 of the MPID Act was challenged on the ground that they are violative of Articles 14, 19 and 300-A of the Constitution. The reliefs sought in the writ petition are extracted below: a. The Hon ble Court may declare that Sections 4 and 5 of the MPID Act are violative of Articles 14 and 19 of the Constitution and Article 300-A of the Constitution and consequently issue a Writ of Mandamus and/or any other appropriate Writ, Order or Direction restraining the Respondent Writ, Order or Direction restraining the Respondent, its servants and/or agents from acting in pursuance of those provisions; b. In view of Prayer A above, issue a Writ, Order or Direction under Article 226 of the Constitution quashing and setting aside the Impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod when the sell contract (that is the second contract) is scheduled; (iv) The entries in the ledger of the traders reflect the delivery obligation and record the credit/debit pursuant to the trade. The entries of NSEL s settlement bank account show the amount received from a particular trader. The entries of pay-in and pay-out match with the ledger accounts of individual traders; (v) Mr. Pankaj Saraf in his FIR has not stated that he has deposited money with NSEL. He has stated that trading on the platform was successful until the cessation of further trades ; (vi) The transactions had gone wrong since as depicted in the show cause notice to NSEL, the outstanding positions of trade did not result in delivery by the end of the day. After 31 July 2013, 24 sellers failed to honour their part of the agreement by purchasing back the commodities on T+25 days. This was noted as a violation of the exemption granted. However, this does not change the fact that NSEL did not receive any'deposits within the meaning of Section 2 (c) of the MPID Act since NSEL did not receive the commodities or money to be retained. NSEL only received transaction and warehouse charges whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... open since the Supreme Court in KK Bhaskaran v. State and Sonal Hemant Joshi v. State of Maharashtra has upheld the constitutional validity of the Depositors Acts in Tamil Nadu and Pondicherry, specifically noting that the decision would also apply to the MPID Act since the provisions are pari materia; (xvi) By an interim order on 24 October 2018, the impugned notifications attaching the properties were stayed on the ground that the attachment was in excess of the defaulted amount. It was noted in the interim order that the defaulted amount is Rs. 4822.53 Crores whereas the authorities have attached properties worth Rs. 8547 Crores, including Rs. 2200 Crores from NSEL. This order was challenged before the Supreme Court and it has refused to interfere; and (xvii) The audit report submitted US Gandhi and Co. has traced trade obligations of the trading members who are defaulters. NSEL has also instituted recovery suits against the defaulters. B. Submissions 12 Mr. Jayant Mehta, Senior Counsel appearing for the appellant submitted: (i) The definition of 'deposit in Section 2(c) of the MPID Act is broad and inclusive. The provision must be interpreted widely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is competent to legislate upon financial establishments with an object to protect investors. The Court also held that the expression 'financial establishment includes a natural and a juristic person such as a company incorporated under the Companies Act. This Court has held in KK Bhaskaran v. State (2011) 3 SCC 793 , State v. KS Palanichamy, (2017) 16 SCC 384 and PGF v. Union of India (2015) 13 SCC 50 that the object of a law regulating financial establishments is to protect the investors. Therefore, the provisions of the statute must be interpreted keeping this salient purpose in mind; (iv) This Court in 63 Moons Technologies (supra) held that NSEL carried out trade in paired contracts in commodities and this created financial transactions distinct from sale and purchase transactions; and (v) The respondent has an alternate statutory remedy available to it under Section 10 of the MPID Act. 14 Dr Abhishek Manu Singhvi, Senior Counsel appearing for the respondent submitted that: (i) The commodity sellers received money from the buyers on T+2 with an obligation to repay the money on T+25. NSEL obtained decrees against the defaulters. Therefore, at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it (Relied on Mohinder Singh Gill v. CEC (1978) 1 SCC 405 ); and (c) According to the definition of 'deposit under Section 2(c) of the MPID Act, only the deposit of 'valuable commodity is covered. In common parlance, valuable commodities would be restricted to gold, silver, or other precious metals. NSEL only traded in agricultural commodities and steel. Agricultural commodities are not covered by the definition. (x) The traders who participated on NSEL s platform are corporate traders. The statement of objects and reasons of the MPID Act states that the Act is for the protection of 'small depositors; (xi) The proceeding under the MPID Act would short-circuit the trials in the pending civil suits against both NSEL and 63 Moons. 63 Moons is a public listed company with more than 50,000 shareholders, 800 employees and 2 million users. If the property of 63 Moons is attached, the interest of stakeholders will be prejudiced; and (xii) NSEL did not have control over any monies received from the traders. NSEL is a pass through platform, where the money was sent to the counter party brokers on the same day. 15 Mr. Mukul Rohatgi, Senior Counsel, appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 16%. C. Analysis C. 1 Framework of the MPID Act 16 The MPID Act was enacted by the legislature in Maharashtra and received the assent of the President on 21 January 2000. The Statement of Objects and Reasons accompanying the introduction of the Bill states that the statute is enacted to protect the public from the increasing menace of financial establishments grabbing money from the public in the form of deposits: There is a mushroom growth of Financial Establishments in the State of Maharashtra in the recent past. The sole object of these Establishments is of grabbing money received as deposits from public, mostly middle class and poor on the promises of unprecedented high attractive interest rates of interest or rewards and without any obligation to refund the deposit to the investors on maturity or without any provision for ensuring rendering of the services in kind in return, as assured. Many of these Financial Establishments have defaulted to return the deposits to public. As such deposits run into crores of rupees, it has resulted in great public resentment and uproar, creating law and order problem in the State of Maharashtra, especially in the city like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovides that if on a complaint received from the depositors or otherwise, the Government is satisfied that any financial establishment has failed to return the deposit on maturity or demand, or to pay interest or an assured benefit, or has failed to provide a service that was assured against the deposit, or if the Government has reason to believe that any financial establishment is acting in a manner detrimental to the interest of the depositors with the intention to defraud them, it may attach the money or property acquired by the financial establishment out of the deposit. The provision states that if such money or property is not available to be attached, the property of the financial establishment or the promoter, director, partner, manager or member may be attached. 18 Section 5 provides for the appointment of a Competent Authority while Section 6 contains a provision for a Designated Court. Section 7 enunciates the powers of the Designated Court regarding attachment. Under Section 7, upon receipt of an application under Section 5, the Designated Court shall issue a show cause notice to the financial establishment or any person whose property is attached on why the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng held in the approved warehouse. Bye-law 3.7 provides for limitation of liability: The Exchange shall not be liable for any activities of its members or of any other person, authorised or unauthorised, acting in the name of any member, and any act of commission or omission by any one of them, either singly or jointly, at any time shall not be in any way construed to be an act of commission or omission by any one of them, as an agent of the Exchange. Save as otherwise specifically provided in these Bye-Laws and in the Business Rules and Regulations of the Exchange, the Exchange shall not incur or shall not be deemed to have incurred any liability and accordingly, no claim or recourse shall lie against the Exchange, any member of the Board of Directors/or committee duly appointed by it or any other authorised person acting for an on behalf of the Exchange, in respect of or in relation to any transaction entered into through the exchange made by its members and any other matters connected therewith o related thereto, which are undertaken for promoting, facilitating, assisting, regulating, or otherwise managing the affairs of the Exchange to achieve its objects as defined in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to be invalid on any other consideration and further after verifying that the following are in agreement and/or in order: ( i) Commodity, (ii) price indices, (iii) Quantity, (iv) Transaction quote, (emphasis supplied) 9.6 Once a trade is matched and marked to market by the Clearing House, the Exchange shall be substituted as counter party for all net financial liabilities of the clearing members in specified commodities in which the Exchange has decided to accept the responsibility of guaranteeing the financial obligations. (emphasis supplied) 9.7 All outstanding transactions shall be binding upon the original contracting parties, that is, the members of the Exchange until issue of delivery notice or delivery order or payment for delivery, as the case may be. 23 Bye-law 10 contains provisions with regard to delivery: 10.1 For the fulfilment of outstanding position, commodity shall be tendered by Delivery Orders through the respective Clearing Members to the Clearing House in such manner as may be prescribed in the Business Rules or Regulations. 10.2 The Exchange shall prescribe tender days and delivery period for each com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the bye-laws. Under bye-law 10.8, a buyer has to pay to the Clearing House, the value of delivery allocated on his account by the Exchange within the time specified. However, the money will be passed by the Clearing House to the seller only on the completion of the delivery process to the satisfaction of the Exchange. The bye-law reads as follows: 10.8 A buyer shall pay to the Clearing House the value of delivery allocated on his account by the Exchange within such time as may be specified, by the Exchange. After getting full price of delivery from the buyer as per delivery order allocated to him, the Exchange will endorse the delivery order to him. Thereafter, till completion of the delivery process, the money will be retained by the Clearing House and will be passed on to the seller only on completion of the delivery process to the satisfaction of the Exchange. The Clearing House will pass on the proceeds to the seller after making adjustments relating to quality, quantity and freight factors, as the case may be. The balance amount, if any, remaining after such adjustments, will be passed on to or recovered from the buyer by the Clearing House. (emphasis supplied) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to do so, such net sale position shall be closed out by buying in auction and the seller shall be required to pay the difference, as determined by the Clearing House and penalty in addition thereto. 10.16 A buyer shall be required to lift delivery from the specified warehouse within the period prescribed by the Relevant Authority, as per the delivery order assigned to him. In case of his failure to do so, he shall be required to pay the warehouse charges, insurance charges and other expenses relating to storage for the incremental period and also a penalty in addition thereto. 26 Bye-law 12 contains provisions for a Settlement Guarantee Fund. The Settlement Guarantee Fund is constituted by deposits made by the members of the Exchange and is utilised for paying in the event of a default in payments by the trading members, paying insurance covers and covering the losses of the Exchange, among other uses. Bye-law 12.1.1 is in the following terms: 12.1 The Exchange to maintain Settlement Guarantee Fund 12.1.1 The Exchange shall maintain Settlement Guarantee Fund in respect of different commodity segments of the Exchange for such purposes, as may be prescribed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual/crytallized or contingent liability or a claim from any client or clearing bank to be discharged by the clearing member. (emphasis supplied) 28 Bye-law 12.3 stipulates that a member may provide a deposit in the form of cash, fixed deposit receipts, bank guarantees or in such other form. 12.3 Form of Contribution or Deposit The Relevant Authority may, in its discretion, permit a member to contribute to or provide the deposit to be maintained with the Settlement Guarantee Fund, in the form of either cash, fixed deposit receipts, bank Guarantees or in such other form or method and subject to such terms and conditions, as may be specified by the relevant Authority from time to time. Bye-law 12.4 states that the deposit may be replaced by fresh deposits. Bye-law 12.5 states that the Settlement Guarantee Fund may be invested in securities or other avenues of investment: 12.4 Replacement of Deposit By giving a suitable notice to the Exchange and subject to such conditions, as may be specified by the Relevant Authority from time to time, a member may withdraw fixed deposit receipts or bank Guarantees given to the Exchange, representing the member s contri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . repayment of the balance amount to the member pursuant to the provisions regarding the repayment of deposit after meeting all obligations under Bye-Laws, Rules, Business Rules and Regulations of the Exchange, when such member ceases to be member, and f. any other purpose, as may be specified by the Relevant Authority, from time to time. 29 Bye-laws 12.7 and 12.8 specifically provide for utilization of the fund for the failure of the trading member to meet his settlement obligations or when he is declared as a defaulter: 12.7 Utilization for failure to Meet Obligations Whenever a member fails to meet his settlement obligations to the Exchange arising out of his clearing and settlement operations in respect of his transaction, as may be provided in these Bye-Laws, Rules and Regulations of the Exchange, the Relevant Authority may utilise the Settlement Guarantee fund and other moneys lying to the credit of the said member to the extent necessary to fulfil his obligations under such terms and conditions, as the Relevant Authority may specify from time to time; 12.8 Utilisation in Case of Failure to Meet Settlement Obligations or on Declaration of Default ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n exchange member have been satisfied, or at the discretion of the Relevant Authority, have been deducted by the Exchange from the member s actual deposit; provided, the member has presented to the Exchange such indemnified or guarantees as the Relevant Authority may deem necessary or another clearing member has been substituted owning liability for all the transaction and obligations of the clearing member, who had ceased to be a member. d. a suitable amount, as may be determined by the Relevant Authority at his discretion, has been set aside for taking care of any loss/liability/obligation arising out of his past transactions and e. a suitable amount, as may be determined by the Relevant Authority at its discretion, has been set aside by the Exchange towards such other obligations, as may be perceived by the Exchange to exist or be perceived by the Exchange to arise in future. 12.12.2 The Relevant Authority may specify norms for repayment of deposit including the manner, amount and period within which it may be paid. The repayment amount, at no point of time, will exceed the actual deposit available to the credit of the clearing member after deducting the necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall include any company or association or body of individuals, whether incorporated or not. The expression deposit is defined in Section 2(c) of the MPID Act in the following terms: (c) deposit includes and shall be deemed always to have included any receipt of money or acceptance of any valuable commodity by any Financial Establishment to be returned after a specified period or otherwise, either in cash or in 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, but does not include (i) amount raised by way of share capital or by way of debenture, bond or any other instrument covered under the guidelines given, and regulations made, by the SEBI, established under the Securities and Exchange Board of India Act, 1992; (ii) amounts contributed as capital by partners of a firm; (iii) amounts received from a scheduled bank r a co-operative bank or any other banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949; (iv) any amount received from, - (a) the Industrial Development Bank of India, (b) a State Financial Corporation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be exhaustive. In Indra Sarma v. VKV Sarma, (2013) 15 SCC 755 this Court observed that the definition of the expression 'domestic relationship in Section 2(f) of the Protection of Women from Domestic Violence Act 2005 is restrictive since it is defined by the use of the term 'means . On the other hand, the Court has taken a consistent view that where the definition of a word is inclusive, as presaged by the adoption of the expression includes, it is prima facie extensive Karnataka Power Transmission Corporation v. Ashok Iron Work Pvt. Ltd., (2009) 3 SCC 240; Ramanlal Bhailal Patel v. State of Gujarat, (2008) 5 SCC 449. The definition of 'deposit uses the phrase 'includes and shall be deemed to have always included . The import of this is to create a legal fiction by which actions which though not included within the natural meaning of the expression are intended to be included. The combined use of 'includes and 'deemed to have always included while defining the term 'deposit makes the term inclusive and not restrictive. 33 The expression 'deposit is conspicuously broad in its width and ambit for it includes, not only any receipt of money b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable 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 benefit such as interest. It needs to be recalled that clause (v) of Section 2(c) states that a deposit of money or commodity made as a security deposit, dealership deposit or an advance amount is excluded from the definition of the phrase 'deposit . To illustrate, if a member of a financial establishment deposits Rs. 25,000, and that money is returned on cessation of membership by making deductions, the issue of whether the deposit is a security deposit or of the nature covered under Section 2(c) should be determined with reference to the structure of operation and functioning of the financial establishment. It is to be noted that the definition also states that the return may be with or without interest or any benefit. Therefore, the submissions made by both the sides on whether NSEL had through its representations assured a 16% return on trading in the platform is immaterial for the purpose of determining if NSEL accepted deposits. 37 Having referred to the relevant bye-laws, we shall determine if NSEL receives 'deposits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 premises. It is refundable unless the tenant has caused damage or injury to the property or has breached the terms of tenancy or the laws governing the tenancy. Certain states also require the landlord to make a security deposit to cover essential repairs required on rental property. A similar phrase, Client Security Fund is defined as a fund set up by many State Bar Associations to cover losses incurred by persons as a result of dishonest conduct of member-attorneys. The meanings of both these phrases suggest the necessary ingredients of a security deposit, which are: (i) An advance to ensure faithful performance of the contract; (ii) A payment to cover essential 'functions for performance; and (iii) The entitlement to refund being dependent upon whether damage, injury and default are occasioned. 40 Chapter 12 of the bye-laws provides the features of the SGF: (i) SGF is utilized for: (a) defraying the expenses for its creation and maintenance ; (b) temporary use of the fund to meet eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Operations Department would confirm with the Delivery Department if the requisite quantity of a particular commodity of the seller is available. After such confirmation, the Operations Department would release the purchase price to the selling broker s designated bank account. Simultaneously, a Delivery Allocation Report would be issued to the buyer s broker or the buyer. Once the VAT invoice is paid, NSEL would issue a Delivery Note authorizing the Buyer to take delivery from the designated warehouse or if the buyer chooses, he can take constructive possession of the commodity. There is nothing in the definition of the term 'deposit to mean that the acceptance of the commodity should be accompanied by a transfer of title to the commodity. Even if the financial establishment is only in 'custody of the commodity, it would still fall within the purview of the phrase 'acceptance of commodity . On the acceptance of custody of the commodity, NSEL has to provide various s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion '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 precious metals. Agricultural commodities which NSEL trades in will fall within the purview of the term. 44 Though it has been observed earlier that it is not necessary that there must be interest or an assured benefit from the deposit for the purposes of Section 2(c) of the MPID Act, it is still necessary that we refer to the representations made by NSEL. NSEL in the course of its brochures has held out representations about the trading and investment opportunities available for: (a) corporate clients; (b) high net worth individuals; and (c) retail investors. 45 Under the head of 'contract specifications , the following representation has been held out: Commodity Duration Investment (lacs.) Yield Castor Seed T+3 T+36 7.5 -9 Lacs 16% Castor Oil T+5 T+30 7-9 16% Cotton Wash Oil T+2 T+25 10 16% Paddy T+2 T+25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of stock Cash margin of 10-15% is levied on the open position of seller in T+2/T+3 contracts In case of adverse price movement, Exchange collects additional margin from the seller in T+2/T+3 contracts The exchange has defined guidelines for auction/closeout (circular: 029/2008) Warehouse Management includes Selection, Accreditation, Quality Resting, Fumigation and Insurance The above representation indicates that paired contracts were designed as a unique trading opportunity by NSEL under which a trader would, for instance, purchase a T+2 contract (with a pay-in obligation on T+2) and would simultaneously sell a T+25 contract (with a pay-out of funds on T+25). The price differential between the two settlement dates was represented to offer an annualized return of about 16%. NSEL categorically represented 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the warehouses were registered with the authority; (h) Though the warehouse receipts are to evidence that a commodity is held in an approved warehouse, receipts were issued without deposit of the commodities. NSEL did not insist on commodities being deposited in the warehouses prior to executing the sale transactions. NSEL issued Delivery Allocation Reports misrepresenting that every transaction was delivery based and backed with commodities; C. 4. 2 63 Moons Judgment 47 NSEL filed third party representations in a suit filed by the allegedly duped traders for the recovery of Rs 5,600 Crores from the 24 defaulters. Arbitration proceedings were also initiated for the recovery of dues. An amount of Rs. 3,365 Crores out of Rs 5,000 crores has been covered through Court decrees and arbitral awards. On 6 January 2014, the EOW, Mumbai filed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lared that actual delivery of stocks in such transactions would not be required. 1.5. Grant Thornton also obtained evidence of repeated contraventions of NSEL exchange rules and bye-laws which facilitated such financing transactions to continue and grow in size as below: Repeated defaults : As per the NSEL exchange rules a member who does not have sufficient collateral/monies, etc. to discharge his obligations would not be allowed to trade further. This rule was overridden on a recurring basis. Further despite repeated defaults members were allowed to trade and increase their expenses. For example, Lotus Refineries had defaulted, as per the Rules of the Exchange, on 198 days between the fifteen-month period of 1-4-2012 and 30-7-2013. Exemptions from margin requirements : Members who were in a default position or who had exhausted their margin limits on trading 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing held in an approved warehouse. NSEL did not insist upon deposit of commodities in the warehouses prior to executing sale transactions. Instead NSEL resorted to issuing Delivery Allocation Reports (DAR) representing to genuine investors that each transaction was delivery based and backed at the time of sale by the required quantity of commodities in its warehouses. The conclusion in the FMC order dated 17.12.2013 which revealed the conspiracy unfolded by 63 Moons and NSEL was also referred to in the following extract: 15.1. Noticee 1: Financial Technologies (India) Ltd. (FTIL) : We have discussed the equity structure of NSEL, which is wholly owned by FTIL. We have also pointed out that Shri Jignesh Shah, Chairman-cum-Managing Director of FTIL has been a Director on the Board and also functioning as Vice-Chairman and a key management person of NSEL since its inception. Similarly, Shri 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, etc. As has been demonstrated by FTIL in their written submission, FTIL has floated a number of regulated exchanges-both for securities and commodities derivatives-in India as well as abroad. NSEL was incorporated to provide a trading platform of commodity spot exchange on a pan-India basis for the purpose of which apparently it sought and was granted exemption from the operation of the FCRA, 1952. Since the objective of the NSEL was promoting spot trading in commodities on an electronic platform, its business model did not contemplate venturing into trading in forward contracts. FTIL had already promoted MCX, a regulated exchange under FCRA, 1952, for the purpose of trading in forward contracts. Therefore, having secured an exemption from the purview of FCRA, 1952 on the ground that it was intended to promote spot trading, NSEL was not authorised to allow trading in forward contracts through the scheme 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 indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed since the 'emergency situation requiring amalgamation was short lived. Further, it was observed that the rationale for the amalgamation was the financial incapability of NSEL to effect recoveries from the defaulting members. The Court noted that the final order of amalgamation dated 12 February 2016 referred to the actions taken for recovery by the EOW and the Enforcement Directorate which indicated methods other than amalgamation through which the monies could be recovered. The action taken by the EOW and the Enforcement Directorate is referred to in the following extract: 92.1. What is important to note is that by the time the final order of amalgamation was passed i.e. on 12-2-2016, the final order itself records: 8.1. Economic Offences Wing, Mumbai: (i) Total amount due and recoverable from 24 defaulters is Rs 5689.95 crores. (ii) Injunctions against assets of defaulters worth Rs 4400.10 crores 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court, even without using the financial resources of FTIL as an amalgamated company. What is, therefore, important to note is that what was emergent, and therefore, essential, even according to the FMC and the Government in 2013-2014, has been largely redressed in 2016, by the time the amalgamation order was made. Also, the Central Government order does not apply its mind to the essentiality aspect of Section 396 at all. In fact, in several places, it refers to essential public interest as if essential goes with public interest instead of being a separate and distinct condition precedent to the exercise of power under Section 396. On facts, therefore, it is clear that the essentiality test, which is the condition precedent to the applicability of Section 396, cannot be said to have been satisfied. The judgment held that NSEL had falsely represented that it had full stock as collateral and that the stock was valued at Rs. 6,000 crores: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the judgment in Bhaskaran (supra) while deciding on the validity of the provisions of the MPID Act. 52 A Full Bench of the Bombay High Court had held that the state legislature did not possess the legislative competence to enact the MPID Act. Vijay C. Puljal v. State of Maharashtra, (2005) 4 CTC 705 (Bom) On the other hand, a Full Bench of the Madras High Court had upheld the constitutional validity of the Tamil Nadu Act. The correctness of the judgment of the Madras High Court was assailed before this Court in Bhaskaran (supra). The judgment of the Full Bench of the Bombay High Court was cited and considered by the two judge Bench which heard the appeal against the judgment of the Madras High Court. This Court held that the state legislature does possess legislative competence to enact the law in question and that the legislation was not for the transaction of banking or the acceptance of deposits but for the protection of the depositors who are deceived 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concluded that the Tamil Nadu enactment did not violate the provisions of Articles 14, 19(1)(g) or 21 of the Constitution. In that context, while dismissing the constitutional challenge against the legislation enacted in Tamil Nadu, the Court held: 31. We fail to see how there is any violation of Articles 14, 19(1)(g) or 21 of the Constitution. The Act is a salutary measure to remedy a great social evil. A systematic conspiracy was effected by certain fraudulent financial establishments which not only committed fraud on the depositors, but also siphoned off or diverted the depositor's funds mala fide. We are of the opinion that the act of the financers in exploiting the depositors is a notorious abuse of faith of the depositors who innocently deposited their money with the former for higher rate of interest. These depositors were often given a small pass book as a token of acknowledgment of their deposit, which they considered as a passport of their children for higher 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also in question. A two-Judge Bench of this Court considered whether the pith and substance of the enactment istraceable to the entries in the Union List or the State List of the Seventh Schedule to the Constitution. After adverting to the earlier decision in Bhaskaran (supra) which upheld the Tamil Nadu enactment while disapproving the Full Bench decision of the Bombay High Court on the legislative competence of the State legislature to enact the MPID Act, this Court held: 50. In addition to the above, it has also to be noticed that the objects for which the Tamil Nadu Act, the Maharashtra Act and the Pondicherry Act were enacted, are identical, namely, to protect the interests of small depositors from fraud perpetrated on unsuspecting investors, who entrusted their life savings to unscrupulous and fraudulent persons and who ultimately betrayed their trust. 51. However, coming back to the constitutional conundrum that has been presented on account of the two views expressed, by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L is an electronic trading platform which only facilitated transactions between buyers and sellers. In this context, it observed that NSEL did not receive the pay-in in its own right but only for the purpose of passing it on to the selling trading member on the same day. The High Court observed: The nature of transaction to be carried out on the NSEL platform was also therefore, in public domain since the trading on this electronic platform commenced. The business/transaction which operated through NSEL, do not disclose any payin amount received by NSEL in its own right but it was only received in the process of settlement of the commodity trade and only for the purpose of passing it on the selling trading member on the same day. This amount cannot be said to be received as a deposit within the meaning of Section 2(c) of the MPID Act which contemplates 'deposit to be a receipt of money or acceptance of a valuable commodity on the promise that such money or valuable commodity would be returned/repaid 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the State that it was a pure transaction where commodities are accepted as deposit. The High Court observed that since transaction charges were charged by NSEL and the amount paid by the buyer used to be paid by NSEL by the settlement date, it is not a financial establishment. 61 The High Court has formed an erroneous opinion that firstly, only if the return includes interest, bonus or any other added benefit, it would be a deposit for the purpose of the MPID Act. However, Section 2(c) states that the return may be with or without any benefit in the form of interest, bonus, profit or in any other form . The definition does not stipulate that there must be an added benefit, rather that the 'added benefit is irrelevant for the purpose of the definition; secondly, that for the purpose of Section 2(c), the receipt of the commodity or money 'must be retained by itself . The definition does not provide any such embargo. Rather, the definition is broadly worded to include even the possession of 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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