Prime Broking Company Limited vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Order Reserved On: 24.06.2015 Date of Decision : 30.06.2015

Misc. Application No. 117 of 2013 And Appeal No. 185 of 2013

Prime Broking Company Limited Ashford Centre, 7th Floor, Shankarrao Naram Marg, Opp. Peninsula Corporate Park, Lower Patel, Mumbai- 400 013 ...Appellant

Versus

1.

National Securities Clearing Corporation Limited Exchange Plaza, Bandra-Kurla Complex, Bandra (East), Mumbai-400 051

2. National Stock Exchange of India Limited Exchange Plaza, Bandra-Kurla Complex, Bandra (East), Mumbai- 400 051

3. Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai -400 051 ...Respondents

Mr. Zal Andhyarujina, Advocate with Mr. Nirav Shah and Mr. Rishikesh Soni, Advocates, i/b DSK Legal for the Appellant.

Mr. Rafique Dada, Senior Advocate with Mr. Sachin Chandrana, Advocate and Mr. Pritvish Shetty, Advocate i/b Manilal Kher Ambalal & Co. for Respondent Nos. 1 & 2.

Mr. Mihir Mody, Advocate with Mr. Rushin Kapadia, Advocate i/b K. Ashar & Co. for Respondent No. 3.

CORAM: Justice J.P. Devadhar, Presiding Officer Jog Singh, Member 2

Per: Justice J.P. Devadhar

1. Appellant is aggrieved by the impugned order passed by the

Committee on Declaration of Default of National Securities Clearing

Corporation Limited ("NSCCL" for short) on October 15, 2013. By that

order the appellant is declared to be a defaulter under Bye Laws 1(1),

1(2) and 1(4) of Chapter XI of the Bye Law on NSCCL (Futures and

Options Segment) and consequently the appellant is also declared a

defaulter in the capital market segment with immediate effect.

2. Facts which have bearing on the present appeal are as follows:

a) Appellant is a company registered under the

Companies Act, 1956 and is a Stock Broker

duly registered with Securities and Exchange

Board of India ("SEBI" for short) and is a

Member of Bombay Stock Exchange ("BSE"

for short) and National Stock Exchange

("NSE" for short).

b) Respondent No. 1 (NSCCL) is a Clearing

Corporation to whom the Respondent No. 2

(NSE) has conferred duties and functions of a

Clearing House as stipulated under Section

8(A) of the Securities Contracts (Regulation)

Act, 1956 ("SCRA" for short).

c) On January 16, 2003 appellant executed a

Clearing Membership Undertaking (F&O 3

Segment) in favour of NSCCL, thereby

agreeing to abide by the Bye Laws, Rules and

Regulations of NSCCL. On January 17, 2003

appellant executed a Trading Membership

Undertaking (F&O Segment) in favour of NSE

thereby agreeing to abide by the Bye Laws,

Rules and Regulations of NSE. On February

15, 2003 appellant executed a deed of pledge

in favour of NSCCL, where under, the

appellant has pledged various securities

including 20 lac shares of Gitanjali Gems

Limited ("Gitanjali" for short) towards margin

deposit requirement.

d) On February 23, 2005 SEBI issued a circular

whereby a comprehensive risk management

framework for the cash market was

announced. By the said circular Stock

Exchanges were called upon to put in place

necessary systems to ensure the

operationalization of the comprehensive risk

management framework. The Stock Exchanges

were also advised to ensure that their risk

management framework is in line with the

provisions contained in the annexure to the

said circular and take steps to make necessary 4

amendments to the relevant Bye-Laws, Rules

and Regulations for the implementation of the

above decision immediately. The Stock

Exchanges were also called upon to bring the

provisions of the said circular to the notice of

member brokers/ Clearing Members of the

Exchange.

e) On December 31, 2010 SEBI issued a master

circular on matters relating to Exchange

Traded Derivatives. As per clause 1.2.1 of the

said master circular, the Clearing Member's

liquid Net Worth must satisfy both the

conditions set out therein on a real time basis

viz (one) Liquid Net Worth shall not be less

than Rs. 50 lac at any point of time and (two)

the mark to market value of gross open

positions at any point of time of all trades

cleared through the Clearing Member shall not

exceed 33 1/3 (thirty three one by three) times

his liquid net worth. The said clause further

provides that the notional value of gross open

positions at any point in time in the case of

Index Futures shall not exceed 33 1/3 (thirty

three one by three) times the liquid net worth

of a member. As per clause 1.2.4 of the said 5

master circular, Equity Securities classified

under Group 1 in the underlying cash market

may be accepted towards liquid assets in the

derivative markets and the equity securities

shall be valued/marked to market on a daily

basis after applying a haircut equivalent to the

respective Value at Risk ("VaR" for short) of

equity security. The said clause further

stipulates that the list of acceptable equity

securities shall be updated on the basis of

trading and mean impact cost on the 15th day

of each month and when a security is dropped

from the list of acceptable equity securities,

the existing deposit of that security shall

continue to be counted towards liquid assets

till the end of month.

f) On December 13, 2011, NSCCL issued a

circular to all Clearing Members including the

appellant, requesting them to take note of the

revised norms with respect to acceptance of

securities as collaterals. By the said circular,

market wide permissible security limit across

all the segments and member specific limits

for each segment were also set out in the said

circular. It was stated in the said circular that 6

the permissible quantity for a security shall be

upfront announced to the market along with

the list of approved securities for the month, so

that the said limits could be adjusted

accordingly. It was further stated in the said

circular that the date of implementation of the

revised norms shall be intimated subsequently.

However, all members were requested to take

note of the norms mentioned therein, identify

the security wise and member wise excess

quantities and initiate steps for adherence to

the revised norms. If any clarification was

needed, the members were requested to contact

the officials of NSCCL named in the said

circular.

g) Since June 2012, the appellant had entered into

long dated NIFTY options contracts for a

value of Rs. 400 crore, having maturity in

September 2012 and December 2012 which

were subsequently party rolled over to March

2013 and June 2013.

h) During the period from January to December

2012 several meeting were held between

NSCCL and its members including the 7

appellant wherein the meaning,

implementation and impact of the norms laid

down in the circular dated December 13, 2011

were explained. On September 12, 2012

appellant sent an E-mail to NSCCL

acknowledging the meetings that were held

with a view to clarify the scope and ambit of

the circular dated December 13, 2011. While

appreciating the concern of the Exchange in

imposing the restrictions, the appellant

requested that the current rules be continued

till the end of the fiscal year. NSCCL in its

reply E-mail also dated September 12, 2012

stated that NSCCL will be happy to provide

further clarification if needed and requested

the appellant to inform its plan of action to

comply with the revised norms.

i) In order to give enough time to the members to

adjust to the new norms and prepare

themselves to the circular dated December 13,

2011, NSCCL published circulars with a list of

approved securities with market wide and

member specific permissible limits every

month from June 2012 applicable from the 1st

day of the subsequent month.

8

j) By a circular dated December 20, 2012,

NSCCL brought into effect the market wide

and member specific limits with effect from

January 1, 2013. Along with that circular a list

of securities for which market wide and

member specific limits shall become

applicable with effect from January 1, 2013

were annexed and the members were requested

to take note of the market wide and member

specific permissible limits provided therein

and comply accordingly.

k) As per the circular dated December 20, 2012

read with circular dated November 13, 2011,

appellant was required to replace the following

pledged ineligible securities by January 1,

2013:-

i) 1,71,431 shares of ABG Shipyard Ltd.

ii) 37,98,757 shares of Alok Industries Ltd.

iii) 10,93,252 shares of Ananjneya Lifecare

Ltd. (Now known as Dr. Datsons Labs

Ltd.)

iv) 28,000 shares of Flexituff International

Ltd. &

v) 3,72,917 shares of Gitanjali Gems Ltd.

('Gitanjali' for short) 9

l) As the appellant failed to replace the ineligible

securities by January 1, 2013 there was margin

shortfall in the F&O Segment amounting

Rs. 92,08,16,556.95 and in view of the margin

shortfall, NSCCL was constrained to disable

the appellant from trading on the NSE

platform with effect from January 1, 2013.

m) With a view to minimize margine shortfall

appellant brought in cash collateral from time

to time and wide its letters dated January

14th,16th, 17th, 2013, February 1st, 11th, 12th,

2013 and March 12th & 13th 2013 requested

NSCCL to release the ineligible securities to

the extent specified therein. By letters dated

1st, 5th, 13th, 14th, 15th and 18th March, 2013 the

appellant requested NSCCL to sell the pledged

shares to the extent specified therein at market

rate and adjust the sale proceeds towards the

margin shortfall.

n) On January 30, 2013, Mr. N. Jayakumar,

Chairman-Managing Director of the appellant

sent an E-mail to NSCCL acknowledging

therein that due to the securities which have

become ineligible from January 1, 2013 there 10

is margin shortfall of Rs. 92 crore (approx.)

and assured NSCCL that the appellant would

make good the margin shortfall before end of

March 2013.

o) On March 14, 2013 officials of NSCCL had a

meeting with N. Jayakumar of the appellant,

wherein, proximity of the maturity of its

options contracts were discussed and the

appellant was informed that even after

repeated assurance appellant had failed to

make good the margin shortfall. It was also

decided that if the appellant does not make

good the margin shortfall by March 18, 2013

NSCCL shall be constrained to sell the

pledged securities including shares of Gitanjali

in order to reduce the margin shortfall.

p) On March 18, 2013, NSCCL received two

complaints, one from Sarvin Mercantile

Private Limited ("Sarvin" for short) and

another from Trusha Infrastructure Private

Limited ("Trusha" for short) against appellant

alleging non-delivery of 7 lac shares and 13

lac shares of Gitanjali respectively which were

alleged to have been brought by them through 11

the appellant six months back. In the

complaints it was also stated that 20 lac shares

of Gitanjali bought by them have been parked

with NSE by the appellant without their

consent and therefore, the appellant should be

directed to release those shares into their

account. Copies of the said complaints were

also marked to Mr. N. Jayakumar, Chairman-

Managing Director of the appellant, Additional

Commissioner of Police, Economic Offences

Wing ("EOW" for short) Mumbai and DIG,

Central Bureau of Investigation, Mumbai.

q) As the appellant failed to make good the

margin shortfall by March 18, 2013, NSCCL,

despite complaints received on March 18,

2013, invoked the pledge and from March 19,

2013 started liquidating the equity shares of

Gitanjali with a view to minimize the margin

shortfall. Accordingly, during the period from

March 19, 2013 to March 22, 2013 NSCCL

sold 2,97,731 shares of Gitanjali.

r) On March 25, 2013 NSCCL received a letter

dated March 23, 2013 from the EOW. By that

letter, EOW requested NSCCL to withhold the 12

shares of Gitanjali pledged by the appellant till

further orders in view of the fact that the said

shares are subject matter of investigation

pursuant to criminal complaints filed by Sarvin

and Trusha which are duly registered and

being investigated by EOW.

s) By its letters dated March 26, 2013, April 1,

2013 and April 10, 2013 NSCCL requested the

EOW to withdraw the letter dated March 23,

2013 inter alia on the ground that the shares of

Gitanjali were pledged by the appellant with

NSCCL and since the appellant failed to

comply with its margin shortfall obligation,

NSCCL was entitled to invoke the pledge and

sell the said shares in the open market.

t) After expiry of the rolled over contracts of the

appellant in March 2013, there was settlement

shortfall of Rs. 158.04 crore. By its letter dated

April 2, 2013, appellant admitted its pay-in

obligation in F&O Segment amounting to

Rs. 158.04 crore and requested NSCCL to

adjust the pay in obligation against its fixed

deposit and cash lying with NSCCL as margin

deposit in F&O Segment. Accordingly, 13

Rs. 130,23,80,854, in the form of fixed deposit

receipt, Rs. 1,52,39,319.11 in the form of cash

collaterals and Rs. 22,50,00,000 in the form of

bank guarantee were adjusted against the

settlement shortage of Rs. 158.04 crore by

liquidating the aforesaid deposits/cash

collaterals/bank guarantee. As a result of

above adjustment, the settlement shortage as

on April 2, 2013 was reduced to

Rs. 3,77,79,826.89. By a letter dated April 3,

2013, appellant requested time till April 8,

2013 to arrange funds to make good the

aforesaid settlement shortfall and also agreed

to pay delayed payment charges in respect

thereof. However, no such funds were

arranged.

u) On April 11, 2013 NSCCL addressed a letter

to the appellant stating therein that the

appellant has continuously fallen short of the

settlement obligation and margin requirement

in the F&O Segment and failed to arrange

funds pay-in within the stipulated time. By its

letter dated April 12, 2013 appellant admitted

its pay-in obligation and stated that all efforts

are being made to meet the shortfall in the pay- 14

in obligation and while requesting for more

time, agreed to bare any delayed payment

charges payable on the pay-in shortage.

v) On April 27, 2013 EOW passed an order under

Section 102 of the Code of Criminal

Procedure, 1973 ("CrPC" for short). By that

order, NSCCL was directed to freeze the

shares of Gitanjali pledged with it by the

appellant. NSCCL challenged the said order of

EOW before the Bombay High Court by filing

a Criminal Application under Section 482 of

CrPC. By its interim order dated May 10,

2013 the Bombay High Court held that the

disputes raised by Sarvin and Trusha fall

within the realm of Civil Law and directed that

the order passed by EOW shall remain in force

till May 24, 2013 and before that date the

parties who are claiming right in the shares

including the two complainants should obtain

an order from the competent Civil Court. It

was further held that in the event, NSCCL

wish to exercise their rights in terms of the

pledge deed without the intervention of the

Court, they may do so after May 24, 2013. 15

w) Challenging the aforesaid order, Sarvin and

Trusha filed Special Leave Petition before the

Apex Court and by its order dated May 22,

2013 the Apex Court set aside the order of

Bombay High Court dated May 10, 2013 and

while restraining NSCCL from dealing with

the shares of Gitanjali, the Apex Court

directed the Bombay High Court to hear the

criminal application filed by NSCCL finally at

the earliest. Accordingly, the Bombay High

Court heard the matter and by its order dated

August 22, 2013 rejected the criminal

application filed by NSCCL. NSCCL has filed

Special Leave Petition challenging the order of

the Bombay High Court dated August 22,

2013 which is pending before the Apex Court.

x) While the settlement shortfall of

Rs. 3,77,79,826.89 remained outstanding,

there was further settlement shortfall to the

tune of Rs. 91.01,08,825 on the expiry of the

rolled over contracts in June 2013. Thus, the

total settlement shortage as on June 28, 2013

was Rs. 94,78,88,651.89 (Rs. 91,01,08,825+

Rs. 3,77,79,826.89).

16

y) By its letter dated June 28, 2013, NSCCL

called upon the appellant to fulfill its

cumulative settlement obligation amounting to

Rs. 94,78,88,651.89 by July 3, 2013, failing

which NSCCL would initiate suitable actions

including suspension of membership,

expulsion or declaration of default.

Challenging the said notice appellant filed a

writ petition before the Bombay High Court

which was disposed of on July 2, 2013 by

recording a statement made by the counsel for

NSCCL that a show cause notice would be

issued and thereafter an order would be passed

in accordance with law after giving an

opportunity of hearing to the appellant.

z) On July 12, 2013 NSCCL liquidated following

deposits/securities and adjusted the same

towards the cumulative settlement shortfall

amounting to Rs. 94.78 crore.

i) Additional Base Capital Cash (CM

Segment) Rs. 1,70,00,000.

ii) Sale proceeds of liquid Bees

Rs. 1,59,15,847.38. As a result of above

adjustment, the cumulative settlement 17

shortfall stood reduced to

Rs. 91,49,72,804.51.

aa) On July 31, 2013 appellant through its

advocates addressed a letter to the advocates

for the appellant raising a counterclaim of

Rs. 213.02 crore (Rs. 80 crore towards

reputational loss, Rs. 20 crore towards

business loss, Rs. 101.85 crore towards loss in

value of Gitanjali shares, Rs. 2.93 crore being

loss in value of other shares, Rs. 8.24 crore

towards wrongly imposed penalties). By the

said letter NSCCL was called to adjust the

outstanding liability of Rs. 90.90 crore and pay

the balance amount of Rs. 122.12 crore to the

appellant within 7 days of receipt of the said

letter. Since no such payment was made,

appellant has filed a suit against NSCCL in the

Bombay High Court and the same is pending.

bb) On August 2, 2013 NSCCL issued a show

cause notice to the appellant to show cause as

to why the appellant should not be declared as

defaulter in view of the appellant failing to pay

the cumulative settlement shortfall amounting

of Rs. 91,49,72,804.51. On August 28, 2013 a

show cause notice was also issued by NSE to 18

the appellant to show cause as to why action

should not be initiated against the appellant for

failure to pay dues of NSCCL. After

considering the reply filed by the appellant and

after hearing the representative of the appellant

the Committee on Declaration of Default of

NSCCL passed the impugned order dated

October 15, 2013 thereby declaring the

appellant to be a defaulter for the reasons

stated therein. Challenging the aforesaid order

present appeal is filed.

3. Mr. Zal Andhyarujina, learned counsel appearing on behalf of the

appellant extensively argued before us by submitting that failure on part

of NSCCL in taking prompt action to sell the pledged shares has led to

continued margin/settlement shortfall and therefore for the lapses

committed by NSCCL the appellant could not be declared as defaulter

so as to shut the business of the appellant completely. Mr. Rafique

Dada, learned Senior Advocate appearing on behalf of Respondent Nos.

1 & 2 on the other hand submitted that the appellant has consistently

failed to make good the margin money deficit from January 01, 2013

and thereafter consistently failed to discharge the settlement shortfall

that took place in March/June 2013. Mr. Dada submits that as a result of

the default committed by the appellant in discharging the pay in

obligation, NSCCL had to pay to the counter parties on behalf of the

appellant a sum of Rs. 91,49,72,804.51 out of its own profits and its 19

accumulated reserves which amount has not reimbursed by the appellant

till date and hence no fault can be found with the impugned order passed

by the Committee on Declaration of Default of NSCCL.

4. Basic dispute in the present case is, whether the Committee on

Declaration of Default of NSCCL is justified in declaring the appellant

to be a defaulter under Bye Laws 1(1), 1(2) & 1(4) of Chapter XI of the

Bye Laws of NSCCL (F&O) Segment.

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

NSCCL (F&O Segment) read thus:-

"CHAPTER XI: DEFAULT

1. DECLARATION OF DEFAULT

A clearing member may be declared a defaulter by

direction/circular/notification of the relevant

authority of the segment if:

(1) he is unable to fulfill his clearing, settlement

or obligations; or

(2) he admits or discloses his inability to fulfill or

discharge his duties, obligations and liabilities;

or

(3) ....

(4) he fails to pay any sum due to the Clearing

Corporation as the relevant authority may from

time to time prescribe; or

(5) to (9)...."

(emphasis supplied) 20

6. Admittedly due to the revised prudential norms laid down by

SEBI and implemented by NSE/NSCCL, certain securities furnished by

the appellant towards margin money had become ineligible in December

2012 and had to be substituted or equivalent cash collateral furnished by

January 1, 2013. As the appellant failed to replace ineligible shares in

accordance with the circular of NSCCL dated December 20, 2012, there

was margin shortfall in the F&O Segment amounting to

Rs. 92,08,16,556.95 as on January 1, 2013. Fact that there was margin

shortfall on January 01, 2013 is admitted by the Chairman-Managing

Director of the appellant, by his letter dated January 30, 2013. Fact that

on expiry of rolled over contracts at the end of March 2013 there was

settlement shortfall amounting to Rs. 158,04,00,000/- is also admitted by

the appellant by its letter dated April 2, 2013. Admittedly, the said

settlement shortfall of Rs. 158.04 crore stood reduced to

Rs. 3,77,79,826.89 on April 2, 2013, by adjusting the appellant's fixed

and cash deposits, as per the request of the appellant. It is not in dispute

that the said settlement shortfall of Rs. 3,77,79,826.89 was not made

good by the appellant till the end of June 2013. Admittedly, on expiry of

the rolled over contracts at the end of June 2013, there was additional

settlement shortage amounting to Rs. 91,01,08,825/-. Thus, the

cumulative settlement shortage at the end of June 2013 was

Rs. 94,78,88,651.89 (Rs. 3,77,79,826.89+Rs. 91,01,08,825). Due to

further adjustment of Rs. 1,70,00,000/- (from Additional Base Capital

Cash [CM Segment]) and Rs. 1,59,15,847.38 (sale proceeds of Liquid

Bees) made by NSCCL, the cumulative settlement shortfall stood 21

reduced to Rs. 91, 49,72,804.51. Admittedly, the appellant has not

discharged that settlement shortfall obligation till date even though

NSCCL has discharged that obligation by making payment to counter

parties out of its own profits and its accumulated reserves in accordance

the Bye-Laws, Rules and Regulations of NSCCL. Thus, the appellant

who became defaulter on January 1, 2013 due to failure to make good

the margin shortfall, further defaulted in making good the settlement

shortage that occurred during March and June 2013 settlement, and the

appellant continues to be defaulter as the appellant has failed and

neglected to reimburse the settlement shortfall of Rs. 91,49,72,804.51

which is paid by NSCCL to third parties for and on behalf of the

appellant. In these circumstances no fault can be found with the decision

of the Defaulters Committee in declaring the appellant to be defaulter

under Bye Laws 1(1),1(2) & 1(4) of Chapter XI of the Bye Laws framed

by NSCCL.

7. However, it is argued on behalf of the appellant, that in the

meeting held on March 14, 2013 between the appellant and NSCCL it

was decided that if the appellant does not make good the margin

shortfall by March 18, 2013, then, NSCCL shall sell the pledged shares

including shares of Gitanjali in order to reduce margin shortfall. As the

appellant failed to make good the margin shortfall, NSCCL invoked the

pledge and sold 2,97,731 Gitanjali shares during the period from March

19, 2013 till March 22, 2013 up to 10:34 A.M. and thereafter abruptly

stopped to sell Gitanjali shares. It is vehemently argued on behalf of the

appellant that if all the 20 lac pledged Gitanjali shares were sold 22

between March 19, 2013 to March 22, 2013 there would not have been

any margin shortfall and in such a case appellant would have ceased to

be a defaulter. It is further contended on behalf of the appellant that for

the gross negligence on part of NSCCL in failing to sell all 20 lac shares

of Gitanjali during the period from March 19, 2013 to March 22, 2013,

appellant cannot be penalized and therefore, impugned order of the

Defaulters Committee is liable to be quashed and set aside.

8. There is no merit in the above contention for the following

reasons:-

a) Under the Pledge Deed power was conferred

on NSCCL to sell the pledged shares in case

the appellant commits breach of margin money

norms or settlement norms and that power was

for the benefit of NSCCL and the Pledge Deed

did not require NSCCL to exercise the said

power in a particular time. On the appellant

committing breach of the margin money

norms, whether to sell the pledged shares or to

give some more time to the appellant to

comply with the norms was at the discretion of

NSCCL. Therefore, assuming that in the

meeting held on March 14, 2013 it was decided

that if the appellant fails to make good the

margin deficit by March 18, 2013, NSCCL

could invoke the pledge and sell the pledged 23

Gitanjali shares, it cannot be said that in law

NSCCL was bound and liable to sell entire

quantity of pledged Gitanjali shares from

March 19, 2013 and consequently, it cannot be

said that the appellant ceased to be a defaulter

merely because NSCCL has not sold entire

quantity of pledged Gitanjali shares.

b) As rightly contended by the counsel for

NSCCL, selling 20 lac shares of Gitanjali on

March 19, 2013 or immediately thereafter,

would have adversely affected the market price

and NSCCL could not have sold shares at the

cost of affecting the market integrity and

public interest. Argument of the appellant that

from March 19, 2013 if every day NSCCL had

sold the pledged Gitanjali shares upto the level

of prescribed circuit breaker limit there would

not have been any margin shortfall is without

any merit, because, if large quantity of shares

were off loaded every day, there was every

possibility that share prices of Gitanjali coming

down and in such a case selling shares of

Gitanjali at a lower price would have harmed

the interest of the appellant.

24

c) It is relevant to note that at no point of time

appellant had instructed NSCCL to liquidate

shares of Gitanjali and appropriate the sale

proceeds towards margin money deficit. In fact

by letters dated 14th, 16th, 17th January, 2013,

1st, 11th, 12th February, 2013 and 12th & 13th

March, 2013 appellant chose to transfer cash

collateral from time to time and sought release

of various pledged securities (except shares of

Gitanjali) which became ineligible pursuant to

circular dated December 20, 2013. It is also

relevant to note that by letters dated 1st, 5th,

13th, 14th, 15th and 18th March 2013 appellant

requested NSCCL to sell various pledged

securities (but not Gitanjali shares) at market

rate on its behalf to meet its margin obligation

in the F&O Segment. Thus, the appellant who

from time to time authorized NSCCL to sell

various other pledged shares which had

become ineligible, but never authorized

NSCCL to sell the Gitanjali shares is not

justified in contending that if NSCCL had

invoked the pledge and sold the Gitanjali

shares then there would not have been any

margin deficit in March 2013.

25

d) Argument of the appellant that in the meeting

held on March 14, 2013 it was conveyed to the

appellant that since the appellant had not

brought in additional margins in the form of

cash, NSCCL would sell the shares of Gitanjali

with immediate effect from March 19, 2013 is

falsified from the letters addressed by the

appellant to NSCCL after March 19, 2013. In

none of those letters appellant has made any

grievance that NSCCL has failed to sell the

shares of Gitanjali in breach of the

understanding arrived at between the parties on

March 14, 2013. On the contrary, in the letter

addressed to NSCCL on April 02, 2013,

appellant admitted its pay-in obligation in the

F&O Segment amounting to Rs. 158.04 crore

and requested NSCCL to adjust the pay-in

obligation against its fixed deposit/cash lying

in with NSCCL as margin deposit in F&O

Segment. Admittedly, the market price of

Gitanjali shares between March 18, 2013 and

March 22, 2013 was around Rs. 600/- per share

and if the understanding between the parties in

the meeting held on March 14, 2013 was to

liquidate 20 lac shares of Gitanjali from March 26

19, 2013, then the appellant in its letter dated

April 2, 2013, instead of requesting NSCCL to

adjust the fixed deposit/cash lying with

NSCCL, towards margin deficit would have

accused that the NSCCL has committed breach

of the understanding arrived at on March 14,

2013. Very fact that there is not a whisper in

the letter addressed by the appellant on April

02, 2013 relating to the alleged obligation of

NSCCL to sell the shares of Gitanjali after

March 18, 2013 clearly shows that the plea of

the appellant that as per the understanding

arrived at on March 14, 2013, NSCCL was

obliged to sell entire 20 lac shares of Gitanjali

after March 18, 2013 is patently false and such

a plea is raised by the appellant as an

afterthought. Even in the letter addressed to

NSCCL on April 03, 2013 the appellant has

asked for time to arrange funds and agreed to

pay delayed payment charges but not referred

to the understanding that was allegedly arrived

at on March 14, 2013. Therefore, the letters

addressed by the appellant on 2nd and 3rd April,

2013 clearly falsify the claim of the appellant

that after March 18, 2013 NSCCL was bound 27

and liable to sell the pledged shares of

Gitanjali.

e) It is relevant to note that in its letter dated July

01, 2013, appellant for the first time raised the

issue relating to the alleged obligation of

NSCCL to sell the Gitanjali shares after March

18, 2013. Even in the said letter it is merely

alleged that NSCCL could have sold pledged

Gitanjali shares during the period from March

18, 2013 to April 27, 2013. From the aforesaid

letter it is abundantly clear that On March 14,

2013 NSCCL had threatened that if margin

obligation was not met with by March 18,

2013, NSCCL would be constrained to sell the

pledged Gitanjali shares after March 18, 2013

and that there was no obligation on part of

NSCCL to sell those shares by a particular

date. Therefore, the appellant who is guilty of

violating the margin money norms is not

justified in accusing that NSCCL has failed to

sell the pledged Gitanjali shares between

March 18, 2013 to April 27, 2013.

f) Apart from the above, admittedly on March 18,

2013 appellant as also NSCCL had received 28

two complaints one from Sarvin and another

from Trusha. In those complaints it was stated

that 20 lac shares of Gitanjali (7 lac shares by

Sarvin and 13 lac shares by Trusha) were

purchased by them from the appellant about six

months back and instead of delivering 20 lac

shares of Gitanjali to them, the appellant had

illegally parked those shares with NSE without

their consent and therefore the complainants

requested NSE to direct the appellant to release

those shares into the complaint's accounts. It

appears that in view of the statement contained

in the Pledge Deed that the pledged shares are

free from encumbrances, NSCCL proceeded to

invoke the pledge and proceeded to sell the

pledged Gitanjali shares from March 19, 2013

inspite of the complaints received on March

18, 2013.

g) It is a matter of record that after selling some

of the pledged Gitanjali shares on 19th, 20th,

21st March 2013, NSCCL sold 9763 shares of

Gitanjali on March 22, 2013 upto 10:34 A.M.

and thereafter abruptly stopped selling shares

of Gitanjali. Although no cogent explanation is

given by NSE/ NSCCL for abruptly stopping 29

sale of Gitanjali shares on March 22, 2013, it is

possible that on March 22, 2013 NSCCL

anticipated some follow up action by EOW and

therefore NSCCL deemed it to stop further sale

of pledged Gitanjali shares. Assuming that

there was no such information received by

NSCCL, it was open to NSCCL to reconsider

its decision to sell the pledged Gitanjali shares

in view of complaints received in respect of

those pledged shares. In other words, fact that

NSCCL proceeded to sell pledged Gitanjali

shares even after receiving complaints in

respect thereof did not preclude NSCCL from

deciding not to sell the pledged Gitanjali

shares, as NSCCL was not obliged to sell the

pledged shares within any specified period.

h) Relying on a decision of the Apex Court in case

of Vimal Chandra Grover v/s Bank of India

reported in (2000) 5 SCC 122 & relying on two

decisions of the High Court of Justice Queen's

Bench Division Commercial Court in the cae of

Euroption Strategic Fund Limited v/s

Skandinaviska Enskilda Banken AB reported in

(2012) EWHC 584 (comm.) & in the case of

Marex Financial Limited v/s Creative Finance 30

Ltd. reported in (2013) EWHC 2155 (comm.) it

is contended on behalf of the appellant that

having exercised its right invoke the pledge and

sell the pledged shares, NSCCL had a duty to

act honestly, in good faith and not to act

arbitrarily, capriciously, perversely or

irrationally. In the present case, it is contended

that since NSCCL abruptly stopped selling

pledged Gitanjali shares on March 22, 2013

without any justification, the impugned order is

liable to be quashed and set aside. There is no

merit in the above contentions. Decision of the

Apex Court in case of Vimal Chandra Grover

(supra) is distinguishable on facts as in that case

appellant therein had written a letter to the bank

for selling the shares, but the bank had failed to

sell the shares, whereas, in the present case, in

none of the letters addressed by the appellant it

is stated that the appellant had authorized

NSCCL to sell the pledged Gitanjali shares.

Similarly, decision in the case of Euroption

(supra) is distinguishable on facts, because, in

that case parties thereto did not intend to create

pledge of the property transferred as margin

whereas, in the present Gitanjali shares were 31

pledged to secure the margin money. Similarly,

decision in case of Marex Financial Ltd. (supra)

is distinguishable on facts as in that the dispute

related to closing out between the broker and

two of its clients and the same did not relate to

invocation of pledge whereas, in the present

case dispute between the parties is in relation to

sale of shares by invoking the pledge. As noted

earlier, even before NSCCL could invoke the

pledge and sell shares, there were complaints

received from two complainants alleging that

the shares in question were purchased by them

from the appellant six months prior to the

complaints and without their consent appellant

had pledged the shares with NSCCL. Once

complaints were received against the appellant,

it was within the discretion of NSCCL either to

sell the pledged shares or not to sell the shares.

Fact that initially NSCCL inspite of the

complaints chose to sell the Gitanjali shares

would not mean that NSCCL was bound and

liable to liquidate all 20 lac Gitanjali shares after

March 18, 2013. In any event, these facts on

record distinguish the present case from various 32

decisions relied upon by the counsel for the

appellant.

9. Argument of the appellant that the securities once accepted under

the prevailing norms cannot be made ineligible by revising the norms is

without any substance, because it is the duty of NSE/NSCCL to

constantly monitor the dealings on the Exchange and take suitable steps

to preserve the market integrity, if necessary, by amending the

prescribed norms. In the present case, even after revising the norms,

considerable time was given to the concerned parties to get acclimatized

with the revised norms and in fact several meetings were also held in

that behalf between the appellant and NSE/NSCCL. Therefore, the

argument of the appellant that the securities once accepted as eligible

cannot be made ineligible or the argument that the revised norms were

not clear is without any merit and deserves to be rejected.

10. Argument of the appellant that having extended the deadline for

compliance of the circular dated December 20, 2013, NSCCL was not

justified in shutting down the terminal of the appellant on January 01,

2013 is also without any merit, because, it is only after giving sufficient

time to get acclimatized with revised norms, circular dated December

20, 2013 was issued stating that the revised norms would come into

force with effect from January 01, 2013. As the appellant as also various

other members failed to comply with the revised norms, their terminals

were shut down and the terminals were restored only when the revised 33

norms were complied with. Although various other members complied

with the revised norms though belatedly, appellant has failed to comply

with the norms and therefore action had to be taken against the

appellant.

11. It is contended on behalf of the appellant that the letter of EOW

dated March 23, 2013 requesting NSE/NSCCL not to sell the pledged

Gitanjali shares was received by them on March 25, 2013 and if the

entire pledged Gitanjali shares were sold between March 19, 2013 till

March 22, 2013, there would not have been any margin deficit at all. It

is also contended on behalf of the appellant that having taken a stand

before the High Court in their Criminal Application that as a pledgee

NSE/NSCCL has the right to sell the pledged shares it is not open to the

NSE/NSCCL to take a contrary stand before this Tribunal. There is no

merit in the above contention. Fact that NSE/NSCCL had right to sell

the pledged shares in case of default committed by the appellant is not in

dispute. But when the EOW is investigating the complaints in relation to

the Gitanjali shares pledged by the appellant, whether, the NSE/NSCCL

would be justified in selling the pledged Gitanjali shares is the question.

Fact that NSCCL initially sold Gitanjali shares by disregarding the

complaints received and thereafter abruptly decided to stop selling the

Gitanjali shares cannot be a ground to find fault with NSCCL, because,

in the first instance NSCCL could not have sold Gitanjali shares without

verifying the grievance made in the complaints that the pledged

Gitanjali shares were encumbered or not. In any event, it was open to the 34

NSCCL to stop selling the disputed shares so that corrective measures

could be taken. Therefore, irrespective of the fact that the letter of EOW

dated March 23, 2013, was received by NSE/NSCCL on March 25,

2013, it was open to the NSCCL to stop selling the Gitanjali shares on

the basis of the complaints received on December 18, 2013.

12. Argument of the appellant that NSCCL did not bother to keep the

appellant informed about the developments with EOW and thus NSCCL

acted in complete disregard and flagrant violation of its fiduciary

responsibility is devoid of any merit. Admittedly copies of the two

complaints both dated March 18, 2013 were marked to the appellant.

Appellant has not disputed receipt of those complaints. If there was no

merit in the complaints, appellant ought to have addressed a letter to

NSE/NSCCL stating that there is no merit in the complaints and that

NSCCL must ignore the complaints and sell the shares immediately.

Very fact that the appellant did not address any letter in that behalf

speaks volume about the conduct of the appellant. It is relevant to note

that even though the Bombay High Court treated the complaints as Civil

disputes, the Apex Court held that till the Criminal complaints are

investigated by EOW, NSE/NSCCL shall not sell the Gitanjali shares.

Admittedly, appellant has not initiated any proceedings against the two

complainants till date. Merely because NSE/NSCCL have initiated

proceedings to secure their rights under the pledge, appellant is not

justified in contending that NSE/NSCCL were obliged to intimate to the

appellant the steps taken by them in the matter. 35

13. Fact that the appellant has filed a suit in the High Court at

Bombay claiming damages from NSE/NSCCL on various grounds set

out therein cannot be a ground to hold that the appellant has actionable

claim against NSE/NSCCL. It is only when the claim is established and

the suit is decreed, appellant would have actionable claim against

NSE/NSCCL. Therefore, fact that the appellant has filed a suit for

damages against NSE/NSCCL would not affect the decision of the

Committee in declaring the appellant to be a defaulter, as the appellant

had failed to discharge the settlement shortfall amounting to

Rs. 91,49,72,804.51 from April 2013 till the passing of the impugned

order.

14. Argument of the appellant that the impugned order is based on

several statement of facts which were not put to the appellant does not

merit consideration, because, in various letters the appellant has

admitted that on January 01, 2013, there was margin shortfall to the tune

of Rs. 92,08,16,556.95. Admittedly, that margin shortfall was not made

good inspite of seeking time to comply with. It is admitted by the

appellant that on expiry of rolled over contracts in March 2013 there

was settlement shortfall to the tune of Rs. 158.04 crore. Although the

said settlement shortfall was brought down to Rs. 3,77,79,826.89 by

adjusting the cash collaterals/ adjustment of FDR's etc, it is an admitted

fact that on expiry of rolled over contracts in June 2013, there was once

again settlement shortfall to the tune of Rs. 91,01,08,825/-. Thus, the 36

cumulative settlement shortfall rose to Rs. 94,78,88,651.89. As a result

of further adjustments made by NSCCL the outstanding settlement

shortfall stood reduced to Rs. 91,49,72,804.51. As the appellant failed to

discharge that liability, NSCCL was obliged to discharge that liability by

paying Rs. 91,49,72,804.51 to third parties from its own profits and the

accumulated reserves and settle the trades of the appellant. Admittedly,

the appellant has failed to reimburse that amount to NSCCL till date. In

these circumstances, no fault can be found with the decision of the

Committee in declaring the appellant to be a defaulter under the Bye

Laws framed by NSCCL in the F&O Segment.

15. For all the aforesaid reasons, we see no merit in the Appeal and

the same is hereby dismissed with no order as to costs. In view of the

dismissal of the Appeal, the Miscellaneous Application No. 117 of 2013

becomes infructuous and is disposed of accordingly with no order as to

costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member 30.06.2015 Prepared & Compared By: PK