Subhash Chand Jain & Ors. vs Sebi

Order Reserved on: 08.05.2018

Date of Decision : 17.05.2018

Appeal No. 153 of 2017

1.

Mr. Kabir Oberoi S/o. Late Shri H. S. Oberoi, R/o C-67, First Floor, Defence Colony, New Delhi - 110024.

2. Ms. Natasha Oberoi W/o. Mr. Kabir Oberoi C-67, First Floor, Defence Colony, New Delhi - 110024. .....Appellants

Versus

1. Securities and Exchange Board of India SEBI Bhavan, C-4A, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051.

2. National Stock Exchange of India Ltd.

Exchange Plaza, C-1, Block G, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051.

3. M/s. Kassa Finvest Pvt. Ltd.

Through its Managing Director Mr. Ashok Kumar, H-35/3, Ground Floor, Connaught Circus, New Delhi - 110001. ....Respondents

Mr. Saurabh Bachhawat, Advocate i/b Mindspright Legal for the Appellants. Mr. Pulkit Sukhramani, Advocate with Ms. Vidhi Jhawar, Advocate i/b The Law Point for the Respondent Nos. 1.

Mr. Gaurav Joshi, Senior Advocate with Mr. Rashid Boatwalla, Mr. Rahul Jain, Advocates i/b Manilal Kher Ambalal & Co. for the Respondent Nos. 2. None for the Respondent Nos. 3.

With Appeal No. 356 of 2017 2

1. Subhash Chand Jain E-41, Oxford Apartment, P. Ext.

Parparganj, Delhi - 110092.

2. Subhash Chand Jain (HUF) E-41, Oxford Apartment, P. Ext.

Parparganj, Delhi - 110092.

3. Sunita Jain E-41, Oxford Apartment, P. Ext.

Parparganj, Delhi - 110092.

4. Amit Singh MC 125, Agaman, SBI Colony, Kankarbagh, Patna 800020.

5. Brajesh Kumar 170/12A, North Anandpuri, West Bering Canal Road, Patna - 800001.

6. Kusum Singh Block F, Flat No. 105, Mundeshawari Enclave, Akasvani Road, Khajpura, Patna - 800014.

7. Kumar Tripurari Singh 601, Santosha Complex, Bandra Bagicha, Patna - 800001.

8. Karun Kataria House No. 261, Sector 37 C, Chandigarh - 160036. .....Appellants

Versus

National Stock Exchange of India Limited Exchange Plaza, C-1, Block G, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051. ....Respondent

Mr. Gaayan Sethi, Advocate for the Appellants. Mr. Rashid Boatwalla, Advocate with Ms. Lipsa Unadkat, Advocate i/b Manilal Kher Ambalal & Co. for the Respondent.

CORAM : Justice J. P. Devadhar, Presiding Officer Dr. C. K. G. Nair, Member

Per : Dr. C. K. G. Nair, Member 3

1. These two appeals have been filed challenging the decision of the

Defaulter's Committee ('DC' for short) of the National Stock Exchange of

India Ltd. ('NSE' for short) whereby the claims of the appellants herein

against their broker M/s. Kassa Finvest Pvt. Ltd. ('Kassa' for short) have been

rejected by the DC. Since the basic question raised in both the appeals is

whether all claims of the investors / clients against their defaulter broker can

be paid out of the Investor Protection Fund ('IPF' for short) of the stock

exchange, both the appeals are heard together and are disposed of by this

common decision.

2. In Appeal No. 153 of 2017 there were three appellants who are

aggrieved investors. However, after hearing the matter for some time it was

submitted by the counsel for the appellants that the case of appellant no. 3

(Shri Rajesh) is distinguishable. Accordingly, appeal of appellant no. 3 was

allowed to be withdrawn and file a separate appeal if he so desires.

3. Appellant No. 1 and 2 in appeal No. 153 of 2017 opened their trading

account with Kassa in January 2013 and in October 2012 respectively.

Subsequent to opening the trading accounts appellants entered into agreement

and supplementary agreements etc. with Kassa wherein the appellants

deposited certain amount of cash / securities with Kassa in return for interest /

return / loyalty bonus on the unused margin money. The last date of such an

agreement (an extension agreement) entered into by both the appellants was

on September 18, 2014 whereby they transferred their mutual funds units

maturing in a few days to the account of Kassa.

4. On March 19, 2015, based on several complaints, SEBI passed an ex-

parte ad-interim order against Kassa, its promoters and its directors, inter-alia,

restraining them from dealing in securities market. The appellants filed their

individual claims against Kassa before NSE Investors Grievance Resolution 4

Panel ('IGRP' for short) which was considered by the IGRP and admitted

their claims on March 24, 2015. On April 21, 2015 NSE expelled Kassa as a

trading member. On April 24, 2015 NSE published a newspaper advertisement

inviting legitimate claims against Kassa. On June 19, 2015 the appellants

filed their claims before the DC of NSE seeking relief under IPF. Vide letter

dated December 28, 2015 NSE informed the appellants that their claims were

inadmissible for compensation under IPF. Further representation to NSE was

also rejected and this appeal has been filed challenging the decision of the DC

of NSE rejecting their claims of Rs. 80 lac of Appellant no. 1 and Rs. 20 lac of

appellant no. 2 on the ground that the appellants did not do any trading in

securities since the opening of their accounts in October 2012 / February 2013

and they received credits of interest and TDS had been deducted on the same

as per the ledger of Kassa and hence the transactions between Kassa and the

appellants were in the form of loan rather than as margin for trading in

securities.

5. The basic argument of Shri Saurabh Bachhawat, learned counsel for the

appellants in appeal no. 153 of 2017 are follows :-

a) Their claims have been admitted by the IGRP of NSE.

b) They are genuine investors and opened trading accounts and

deposited the margin money for the genuine purpose of trading.

c) They did not actually trade for some time awaiting the best

opportunity for trading

d) The amount of money received from Kassa was only in the form of

dividend, bonus etc. and not in the form of any interest / loyalty

bonus.

e) They always believed that the broker (Kassa) was collecting the

margin money as per SEBI Act, Regulations and bye-laws of NSE 5

etc. They did not doubt anything malafide from the side of Kassa

since they had been given post dated refund cheques for their

margin deposits.

f) From May 2014 onwards when they were having some doubts

about Kassa they started complaining to SEBI and NSE but no

action was taken till March 2015 by SEBI and April 2015 by NSE.

g) Since IGRP has declared their claims as eligible claims NSE is

under obligation to make the payment. Therefore, the decision of

DC is arbitrary and without any legal basis.

6. In Appeal No. 356 of 2017 there are eight appellants who are also

aggrieved investors on account of unsettled claims arising from the default of

their broker Kassa. These appellants opened the trading accounts with Kassa

on different dates between November 2011 and March 2014. They also did

not trade in any securities. Kassa credited some amount to the appellants

account in the form of corporate benefits etc. However, when they asked

Kassa to refund their margin money Kassa did not oblige. Therefore, they

complained to NSE and SEBI. Later Kassa was expelled by NSE on April 21,

2015. Appellants' claims and review application thereon were rejected by the

DC of NSE for payment out of IPF in its meeting held on different dates

during 2015, 2016 and 2017. Rejection of the claims, according to DC, was

because the transactions between the appellants and their broker Kassa were in

the nature of loan transactions and payment in the form of interest has been

given to the appellants and TDS also has been deducted on the same.

7. Learned counsel Mr. Gaayan Sethi for the appellants made submissions

similar to that of the appellants in appeal no. 153 of 2017 as recorded in para 5

above. Further, he stated that the appellants did not trade in any securities

since they were told by Kassa that the market conditions were not good. He 6

emphasized that NSE as a regulator of the broker Kassa has failed in its duty

to protect the investors. Though the appellants have taken up the matter of

Kassa default with NSE, no timely action was taken by NSE and the

appellants have been adversely impacted in terms of large amounts of loss; it

is the duty of the regulators, NSE and SEBI, to ensure that regulated entities

such as brokers deal with their clients only as per the regulations; clients are

not always aware of the rules and regulations. In view of the fact that NSE

and SEBI failed to discharge their investor protection duty and by the time

they took action against Kassa it was too late and that too despite several

investor grievances pending over a long period. As such the claims which

were declared admissible by NSE's own IGRP must be given to the investors.

8. Learned Senior Counsel Shri Gaurav Joshi and learned counsel Shri

Rashid Boatwalla appearing for NSE, apart from explaining the details

relating to the facts of the matter, also walked us through the relevant legal

provisions. Accordingly, Chapter XII of the Bye-laws of NSE details how

default of a broker has to be dealt with. Chapter XIII of the Bye-laws deals

with various aspects of the IPF. In Chapter XII, Bye-law 24 specifies the

claims that cannot be admitted by the DC. One of the inadmissible claims is

"in respect of a loan with or without security". Accordingly, the DC is bound

by the Bye-laws while considering claims from investors / clients for payment

from IPF. He further submitted that these conditions are meant to protect the

genuine investors who trade in securities market and not meant for those

clients who enter into loan transactions with their broker for predecided

returns / loyalty bonus etc. The appellants in both these appeals belong to the

latter category who were not genuine investors. That is why they did not trade

in securities even on a single occasion for years after opening the trading

account. They provided cash and securities to the broker Kassa in the form of

loan. Accordingly, their claims cannot be accepted for payment from the IPF. 7

However, he clarified that their admissible claims can be enforced against the

broker Kassa, not from the IPF, as specifically recorded in the order of the

Whole Time Member ('WTM') of SEBI issued against Kassa, its promoters

and its directors on September 5, 2017 whereby various directions including

refunding all the claims of the clients / investors and debarring Kassa and its

directors etc. from the securities market have been issued. The allegation that

NSE had failed in discharging its duty is unfounded since the show cause

notice issued to NSE in this regard had been disposed of by the WTM of SEBI

vide order dated August 30, 2017 without any direction as it was found that

NSE had taken whatever steps they could in the matter of Kassa. He

particularly emphasized the table detailing settlement of a large number of

claims from investors given at page no. 17 of the said order.

9. We find no merit in the arguments advanced by the appellants in both

the appeals. The legal position is very clear as laid down in the bye-laws of

the NSE as to who can be and who cannot be paid out of IPF. In the instant

matter before us, it is undoubtedly clear that the relationship between the

appellants and Kassa was in the nature of a client - broker one rather than an

investor - broker one. Very fact that the clients did not do a single trade for a

long period after opening their trading accounts and they had entered into

agreements which specified the percentage of fixed returns to the appellants

make it very clear that the appellants were supporting the illegal para banking

activity of their broker. The submissions made by some of the appellants that

they were uninformed investors cannot be accepted since the claims of all the

appellants (except one) are in millions of rupees (in the range of Rs. 2 million

to Rs. 8 million). It is also a fact that SEBI and exchanges have widely

publicized the specific manner in which clients accounts should be maintained

by the brokers and how such accounts should be settled in every quarter etc. as

evidenced through the Bye-laws and circulars. 8

10. From the Bye-laws and the relevant circulars, we note that the process

of refunding investors when a broker is declared as defaulter is as follows :

a) On inviting claims against the defaulter broker by the exchange

investors would submit their claims.

b) These claims are scrutinized by the IGRP of the exchange who

validates the admissible claims against the said broker.

c) The exchange would refund the claims using the funds of the

defaulter broker available with the exchange in the form of

deposits, margin money etc.

d) In case of shortage of funds in the defaulter broker's account with

the exchange, the unpaid claims / remaining claims would be

placed before the DC of the exchange which will verify such

claims as to whether they can be paid out of the IPF.

e) Claims found to be payable from the IPF as per the Bye-laws will

be entertained and others would be rejected.

f) Finally, whatever claims are pending i.e. after pay out from the

broker's own fund with the exchange and as admissible under IPF,

all the remaining claims have to be settled by the broker itself.

11. Given these procedures and the reasons cited in para no. 9 above, we

find no fault with the DC's decision that the appellants' claims cannot be

entertained from the IPF. Appellants are at liberty to approach the appropriate

forum to settle their claims against Kassa in case Kassa is not honoring their

claims.

12. We do not find any merit in the argument of the appellants that NSE is

liable to compensate the appellants for having failed in their duty as a

regulator of brokers. In our order dated January 4, 2018 on a related appeal

(Appeal No. 357 of 2017 by Sh. Subhash Chand Bithal vs SEBI) this 9

argument of the appellant therein was rejected since the WTM of SEBI had

recalled the SCN against NSE. Moreover, NSE as a first line regulator is not

liable to compensate for the willful violation committed by the appellants

alongwith the broker.

13. Accordingly, both the appeals are dismissed with no order as to costs.

Sd/-

Justice J. P. Devadhar Presiding Officer

Sd/-

Dr. C. K. G. Nair Member

17.05.2018 Prepared & Compared by PTM