# RUSODAY SECURITIES LTD v. NATIONAL STOCK EXCHANGE OF INDIA LTD. & ORS

- **Citation:** [2020] 13 S.C.R. 218
- **Court:** Supreme Court of India
- **Decided:** 2020-11-20
- **Case number:** Civil Appeal No. 2690 of 2009
- **Bench:** A. M. Khanwilkar, Dinesh Maheshwari
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/rusoday-securities-ltd-v-national-stock-exchange-of-india-ltd-ors-34558
- **Pages:** 77

## Headnote

Securities Contracts (Regulations) Act, 1956:
Sections 3(2) and 9 - Appellant admitted as trading member
of NSE (Stock Exchange) - Was authorized by the Stock Exchange
to become a clearing member of National Securities Clearing
Corporation Ltd. (NSCCL/ Clearing Corporation) - Appellant had
executed undertaking in favour of the Stock Exchange as well as
the Corporation to abide by and comply with the Rules, Byelaws,
and Regulations of the Exchange and of the Corporation and also
to abide by Circulars, Orders, Directions, Notices or Instructions
issued/modified/amended from time to time - By Circular dated
19.05.1997 appellant was permitted to trade to the extent of 7 times
its base capital - Trading facility of appellant was withdrawn by
the Exchange on appellant's exceeding the permissible limit as per
the Circular dated 19.05.1997 - Further the Clearing Corporation
closed out all the open positions in the securities trade of the
appellant - The Exchange by letter dated 01.11.2004 informed the
appellant about periodical appropriation of certain amounts made
by the Exchange from the security deposits of the appellant in lieu
of various membership charges - The Exchange also called upon
the appellant to deposit additional sums to meet the shortfall created
in the security deposit, to retain the membership of the Exchange -
Appellant denied such obligation to pay, as its trading facilities
had stood suspended throughout that period - Thereafter expulsion
of membership of the appellant by the Exchange - The Securities
Appellate Tribunal upheld the closing out of all the outstanding
positions of the appellant under clauses 17 and 18 of the Byelaws
- Tribunal held the Circular dated 19.5.1997 as valid having binding
value - Appeal to Supreme Court - Appellant's plea that the appellant
was not bound by the Circular dated 19.5.1997 as the same was
invalid for lack of prior approval of Central Government/SEBI and
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the same being in conflict with Byelaws - Held: Subject matter of
the Circular falls within ambit of operational parameters -
Determination and announcement of operational parameters is
within the competence of the Stock Exchange - The Exchange is
empowered to announce such parameters by way of Circular -
Clearing Corporation is also empowered to issue operational
parameters relating to trading limits and consequent actions in case
of non-compliance - No requirement of prior approval is provided
for notifying such operational parameters - The power and mode
of prescription of such circular falls within the resudary powers
reserved for the Exchange - Since the Byelaws and Rules of the
Stock Exchange are approved by the Central Government/SEBI,
the action taken under the Byelaws/Rules/Regulations, by prescribing
such operational parameters in the form of Circular would assume
enforceable character - The Circular cannot be said to be ultra
vires Clauses 17 and 18 of the Byelaws - The appellant is bound by
the Circular - The appellant having submitted an undertaking to
comply with such instructions, notice etc. cannot be allowed to take
contrary plea - The Stock Exchange not only had the Authority to
specify various deposit-related requirements, but also had the power
to expel a member in case of default - The obligation of the appellant
to keep up with the adequacy of deposits continued despite the
withdrawal of its trading facility - In the present case, the appellant
in having failed to maintain the requisite membership margins with
the Exchange, acted in contravention of the Byelaws and Rules of
the Exchange necessitating unto termination - National Stock
Exchange Byelaws, 1994 - Clauses (10), (17) and (18); Chapter IX
Clauses (5), (6) and (24) - Securities and Exchange Board of India
Act, 1992 - National Securities Clearing Corporation Ltd. Byelaws
- Chapter VI Clauses (11) and (16) - National Securities Clearing
Corporation Ltd. Regulations - Chapters 9 and 10 - National Stock

## Text

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RUSODAY SECURITIES LTD.
v.
NATIONAL STOCK EXCHANGE OF INDIA LTD. & ORS.
(Civil Appeal No. 2690 of 2009 etc.)
NOVEMBER 20, 2020
[A. M. KHANWILKAR AND DINESH MAHESHWARI, JJ.]
Securities Contracts (Regulations) Act, 1956:
Sections 3(2) and 9 - Appellant admitted as trading member
of NSE (Stock Exchange) - Was authorized by the Stock Exchange
to become a clearing member of National Securities Clearing
Corporation Ltd. (NSCCL/ Clearing Corporation) - Appellant had
executed undertaking in favour of the Stock Exchange as well as
the Corporation to abide by and comply with the Rules, Byelaws,
and Regulations of the Exchange and of the Corporation and also
to abide by Circulars, Orders, Directions, Notices or Instructions
issued/modified/amended from time to time - By Circular dated
19.05.1997 appellant was permitted to trade to the extent of 7 times
its base capital - Trading facility of appellant was withdrawn by
the Exchange on appellant's exceeding the permissible limit as per
the Circular dated 19.05.1997 - Further the Clearing Corporation
closed out all the open positions in the securities trade of the
appellant - The Exchange by letter dated 01.11.2004 informed the
appellant about periodical appropriation of certain amounts made
by the Exchange from the security deposits of the appellant in lieu
of various membership charges - The Exchange also called upon
the appellant to deposit additional sums to meet the shortfall created
in the security deposit, to retain the membership of the Exchange -
Appellant denied such obligation to pay, as its trading facilities
had stood suspended throughout that period - Thereafter expulsion
of membership of the appellant by the Exchange - The Securities
Appellate Tribunal upheld the closing out of all the outstanding
positions of the appellant under clauses 17 and 18 of the Byelaws
- Tribunal held the Circular dated 19.5.1997 as valid having binding
value - Appeal to Supreme Court - Appellant's plea that the appellant
was not bound by the Circular dated 19.5.1997 as the same was
invalid for lack of prior approval of Central Government/SEBI and
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the same being in conflict with Byelaws - Held: Subject matter of
the Circular falls within ambit of operational parameters -
Determination and announcement of operational parameters is
within the competence of the Stock Exchange - The Exchange is
empowered to announce such parameters by way of Circular -
Clearing Corporation is also empowered to issue operational
parameters relating to trading limits and consequent actions in case
of non-compliance - No requirement of prior approval is provided
for notifying such operational parameters - The power and mode
of prescription of such circular falls within the resudary powers
reserved for the Exchange - Since the Byelaws and Rules of the
Stock Exchange are approved by the Central Government/SEBI,
the action taken under the Byelaws/Rules/Regulations, by prescribing
such operational parameters in the form of Circular would assume
enforceable character - The Circular cannot be said to be ultra
vires Clauses 17 and 18 of the Byelaws - The appellant is bound by
the Circular - The appellant having submitted an undertaking to
comply with such instructions, notice etc. cannot be allowed to take
contrary plea - The Stock Exchange not only had the Authority to
specify various deposit-related requirements, but also had the power
to expel a member in case of default - The obligation of the appellant
to keep up with the adequacy of deposits continued despite the
withdrawal of its trading facility - In the present case, the appellant
in having failed to maintain the requisite membership margins with
the Exchange, acted in contravention of the Byelaws and Rules of
the Exchange necessitating unto termination - National Stock
Exchange Byelaws, 1994 - Clauses (10), (17) and (18); Chapter IX
Clauses (5), (6) and (24) - Securities and Exchange Board of India
Act, 1992 - National Securities Clearing Corporation Ltd. Byelaws
- Chapter VI Clauses (11) and (16) - National Securities Clearing
Corporation Ltd. Regulations - Chapters 9 and 10 - National Stock
Exchange Rules - Chapter IV Rule 20(f).
National Stock Exchange Byelaws:
Chapter XII Clause (11); Chapter IX clause (24) - Realisation
of security deposits - Stock Exchange is vested with the power to
realize the assets of a defaulter member in due course - Security
deposits can be realized by the Exchange per se without any
additional condition as the Exchange enjoys a statutory lien over
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such deposits by way of clause (24) of Chapter IX - However, such
security deposits do not include forfeited/withheld assets/securities
- Expulsion or declaration of defaulter is a pre-condition for
realization of withheld securities - Vesting of withheld securities in
favour of Exchange takes place only after expulsion or declaration
of defaulter - Withheld securities can be categorized as 'receiving
securities' and 'introductory securities' - In the present case
'introductory securities' since were in the names of third persons,
could not have been realized by the Exchange - Actual recovery
qua appellant/defaulting member could only be made from the
'receiving securities' as those securities were due/deliverable to the
appellant and were withheld as a collateral - National Securities
Clearing Corporation Ltd. Regulations - Chapter 9.
National Stock Exchange Rules:
Chapter IV Rule 20(f) - Applicability of - Held: The relevant
point of time for applicability of this Rule is "the date of expulsion"
from the trading membership of National Stock Exchange.
Chapter XII Clause (ii) - Declaration of trading members as
defaulter - Requirement - Nature of - Held: Though requirement of
declaration as defaulter may be discretionary one under NSCCL
Regulations, the same is mandatory requirement for vesting in clause
(ii).
Lien:
Scope, extent and operation of lien - Held: Mere existence
of lien may not entitle the lienee to sell off the property for
satisfaction of debt without a court order - However, this principle
is not absolute - When lien itself is a creation of byelaws, Rules or
Regulations etc., the scope, extent and operation of such lien would
be governed by the same scheme - No external conditions can be
read into such scheme.
Equity:
Equity is about balancing the competing interests - It never
operates in an absolute manner - Principles' of constructive trust
and fiduciary relationships are equitable principles.
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Principles:
Principle 'Nemo dat quod non habet' - Applicability.
Principles of 'constructive trust' and 'fiduriary relationship'
- Nature and applicability of.
Words and Phrases:
"Regulation" - Meaning of.
"Control" - Meaning of.
Disposing of the appeals, the Court
HELD: 1.1 The central scheme of Securities Contracts
(Regulations) Act, 1956 reveals that the requirement of prior
approval, in relation to matters specified in sub-section (2) of
Section 3, of the Central Government, be it at the time of original
framing of Rules of the Exchange or upon amendment thereof, is
essential or pre-requisite. This mandate of Central Government
was later entrusted to SEBI by issuing orders under Section 29A
of the 1956 Act.[Para 25][251-H; 252 A-B]
1.2 The legislature has omitted the usage of the word
"Regulations" or "Circulars" in the parent Act; and as far as the
governance of a stock exchange is concerned, the supervision
or control of the Central Government/SEBI at the time of granting
recognition to the stock exchange is limited to being satisfied
that the Rules and Byelaws of the stock exchange applying for
registration are in conformity with such conditions as may be
prescribed for ensuring fair dealing and protecting investors. The
domain of framing Regulations is kept separately in a standalone
manner in the Byelaws of the Exchange and not in the Act. The
framing of Regulations concerning governance of stock exchange
is reserved for the Exchange. [Para 26][252-D-F]
1.3 Clause (10) of National Stock Exchange Byelaws, 1994
(NSE Byelaws) defines "Regulations" to include business rules,
code of conduct and such other Regulations prescribed by the
relevant authority from time to time for the operations of the
Exchange and they are declared to be subject to the provisions
of the 1956 Act, Rules and Securities and Exchange Board of
India Act, 1992. The definition is merely an inclusive definition
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and not exhaustive. The relevant authority here is the Board of
the Exchange. Such Regulations can be prescribed on a wide
range of matters as indicated in "Chapter III - Regulations",
including capital adequacy norms or "any other matter as may be
decided by the Board". Thus, the scope of "Regulations" that can
be prescribed by the Exchange is expansive so as to cover all
issues relating to governance of the Exchange. [Para 27][252-FH; 253-A]
1.4 Clause (2) of the Byelaws specifies certain "Conditions"
for the Trading Members. Sub-clause (a) of clause (2) signifies
that apart from framing Regulations, the Byelaws also empower
the Exchange to issue instructions regarding operational
parameters, guidance etc. for the trading members. The term
"operational parameters" is crucial. Chapter IX of the Byelaws,
in clauses (5) and (6), titled "Transactions and Settlements"
specifies certain operational parameters for trading. Clause (5)
empowers the relevant authority of the Exchange to "determine
and announce" from time to time certain operational parameters
which may include "trading limits" and "capital adequacy norms"
as per clause (6). Notably, clause (5) of Chapter IX of the Byelaws
uses the phrase "the relevant authority may determine and
announce" the operational parameters. Both "determination" and
"announcement" of such parameters is therefore, within the
competence of the Exchange. Such announcement can be made
by the Exchange by circulating a communication amongst the
members, as it rightfully did in the present case by way of the
subject circular. A similar clause has been inserted in Chapter VI
of the Byelaws of the Clearing Corporation as well, thereby
empowering the Clearing Corporation to issue operational
parameters relating to trading limits and consequent actions in
case of non-compliance. [Para 28][253-B-H; 254-A-B]
1.5 The subject matter of the circular in question pertains
to trading/exposure limits coupled with sanctions in case of noncompliance. That falls squarely within the ambit of operational
parameters which can be determined and notified by the Exchange
from time to time. Nothing is brought to the notice of the Court
from the text of this circular that it would militate against the
norm of fair dealing and protection of investors. In any case, no
requirement of prior approval is provided for notifying such
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operational parameters and as the name suggests, they are meant
to tackle "operational" concerns as and when they emerge before
the Exchange or the Clearing Corporation. The power and mode
of prescription of such circular falls within the residuary powers
reserved for the Exchange. [Para 29][254-B-D]
1.6 Thus, the legislature has bestowed upon the Exchange
sufficient freedom of action to effectively control and regulate
the functioning of stock brokers who use the Exchange as a means
to enter into financial relationships with the investors and common
public. This freedom of action is guaranteed in the pre-approved
Byelaws which enable the Exchange to frame Regulations,
instructions, operational parameters, notice etc. and bring them
into force without subjecting them to any added condition of prior
approval of the Central Government/SEBI. The only limitation
on this power of the Exchange is that such Regulations or
operational parameters issued under the Byelaws are subject to
1956 Act, 1992 Act and Rules framed thereunder. Strictly
speaking, this limitation does not ipso facto mean that such
Regulations or operational parameters are subject to prior
approval. [Para 31][255-E-H]
1.7 The provision under s. 9 reinforces that the power to
regulate and control the trading contracts enables the Exchange
not only to make Byelaws and Regulations but to provide for
everything therein which might be necessary (and permissible)
for ensuring efficacy and vigour in the exercise of just power of
control and regulation. It is in this light that the operational
parameters or Regulations framed under the Byelaws are to be
understood. For, without such power, the Exchange would be
rendered toothless in controlling and regulating the contracts.
[Para 30][255-D-E]
1.8 Since the Byelaws and Rules of the Exchange are duly
approved by the Central Government/SEBI, it can safely be stated
that actions taken by the Exchange under the Byelaws or
Regulations - by prescribing such operational parameters in the
form of a circular and in consequence thereof, would assume
enforceable character. The appellant having submitted an
undertaking to comply with such instructions, notice etc., cannot
be heard to argue to the contrary. The Court by interpretative
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process ought not to limit the efficacy of such a valid document
by additional pre-conditions such as prior approval, not envisaged
by the lawmakers or regulation framing authorities. To do so
would entail in undermining the authority of the Exchange to
regulate and control the stock market, directly or indirectly. [Para
32][256-C-E]
1.9 The act of adoption of this circular by the Exchange and
circulation of the same amongst the trading members was within
the domain of the Exchange in terms of its Byelaws, and unless a
case for such instructions to be ultra vires the Byelaws or the Act
is made out, there is no reason to undermine its intended effect.
[Para 33][256-E-F]
1.10 The operational freedom of the Exchange cannot be
stifled on mere assumptions and the burden lies on the claimant
to demonstrate a real conflict between the exercise of power and
source of power. Arguendo, had it been a deviation from the
Byelaws, in the sense that the circular was defeating and not
furthering the scope and objective of the Byelaws, it could have
been examined as a constructive amendment or amendment by
implication. Therefore, the principle of constructive amendment
signifies that unless a clear case of repugnancy is made out, the
later provisions could not be treated as modification or abrogation,
more so when such provisions further the intent of the source
provisions. [Para 35][256-H; 257-C-D]
2.1 For the same default, closing out action is contemplated
both under the Byelaws of the Exchange and the subject circular.
Clauses 17 and 18 of the Byelaws of the Exchange provide for
closing out. Clause 17 envisages closing out for failure to
complete the settlement operation. That, however, has no relation
whatsoever to a situation of closing out due to failure to trade
within defined limits, as specified by the Exchange, amounting to
violation of the Byelaws of the Clearing Corporation, as in the
present case. Whereas, clause 18 caters to another situation and
is textually different. [Paras 37 and 39][257-E-F; 258-D-E]
2.2 Clause 18 is of a residuary nature and confers on the
relevant authority of the Exchange the power to close out certain
positions on grounds not specified in clause 17. The mischief
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creators in a stock market operate in a myriad set of ways and
one cannot pre-set or comprehend all possible methods of
undermining the health of the market. Thus, residuary situations
of closing out may emerge and clause 18 enables the Exchange
to promptly act against such attempt. The provision is premised
on necessity. By reading in any requirement of due date in clause
18, on the lines of clause 17, the court would be doing violence
to the clear intent of the clauses and the broad scheme of the
Byelaws. Clause 18 would be rendered nugatory. Even logically,
by importing a fictional requirement of "due date" in clause 18,
the Exchange cannot be expected to gloss over a clear case of
excessive reckless trading and allow the mischief to continue
until the due date has arrived. Thus, there is no occasion to control
the scope of clause 18 by establishing a fictional link with clause
17. [Para 44][260-B-F]
2.3 The circular provides for the effect of violation of the
exposure limits and lays down that any such violation shall be
treated as a violation of the Byelaws of the Clearing Corporation,
without prejudice to the power of the Exchange to withdraw the
trading facilities. This withdrawal is contemplated as an imminent
action to protect the market from being exposed to unsecured
financial exposure. Consequent thereto, closing out of open
positions has been contemplated. Strictly speaking, the circular,
triggers a closing out action upon fulfilment of two conditions: (i)
exceeding the gross exposure limits while trading; (ii) failure to
deposit additional capital within such time as may be granted by
the Exchange/Clearing Corporation for continuance of trading.
The nature of closing out prescribed in the circular does not
envisage any failure in delivery or in payment to complete the
settlement, unlike in clause 17. The conditions in the circular
operate on a more basic level and are concerned essentially
regarding the eligibility of a trading/clearing member venturing
beyond the market exposure limits defined in the context of the
advance security deposit. That is the condition and procedure
prescribed from time to time by the relevant authority for dealing
in securities by the member. For such non-compliance, the power
ascribable in clause 18 may be attracted. [Paras 40, 41 and 42][258E-G; 259-C-F]
2.4. In the present case, the appellant violated the condition
and procedure prescribed by the Exchange/Clearing Corporation
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vide subject circular. Thus, the manner of closing out
contemplated in the circular is borne out by clause 18 and there
is no conflict. Apart from the circular, clause 16 of the Byelaws of
the Clearing Corporation also provides for closing out "on failure
of a clearing member to comply with any of the provisions relating
to delivery, payment and settlement of deals or on any failure to
fulfill the terms and conditions subject to which the deal has been
made". The nature of action contemplated under clause 16 is in
furtherance of the basic mandate laid down under Section 9 of
the 1956 Act. For, section 9 of the Act clearly provides that all
contracts/deals on the market are subject to the Byelaws
(including Regulations, operational parameters etc. issued under
the Byelaws) and Rules of the Exchange. One of the consequences
of not acting in accordance with the Byelaws is provided under
clause 16, apart from other provisions. Understood thus, this
clause is yet another self-contained provision envisaging forthwith
closing out, which goes on to show that forthwith closing out is
not a new phenomenon in the overall scheme of things. [Paras 45
and 46][260-F-H; 261-C-E]
2.5 On a comprehensive view of the scheme of closing out
under the Byelaws of the Exchange, Byelaws of the Clearing
Corporation and the circular, an action of forthwith closing out is
permissible under the said scheme, particularly clause 18, and
thus, the circular is not ultra vires clauses 17 and 18 of the Byelaws.
Rather, the circular furthers the spirit underlying clause 18. [Para
47][261-E-F]
3.1. The undertaking given by the appellant to the
respondents fell within the broad scheme of the Byelaws/Rules,
and was a quint-essential requirement for obtaining registration
as a stock broker as both 1956 Act and Byelaws subjected the
members to such conditions. Thus, the appellant is bound by the
undertaking so given. [Para 51][262-G-H; 263-A]
3.2 Even otherwise, assuming the absence of undertaking,
the very fact that a valid circular originated from the statutory
scheme of the Byelaws is sufficient to bind the appellant with its
provisions. Thus, the emergent legal position is that the appellant
had subscribed to both statutory as well as contractual obligations
with the respondents for functioning as a stock broker. Any
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deviation from the said circular could invite action under multiple
provisions spreading across the Byelaws of the Exchange and
Byelaws of the Clearing Corporation, in addition to the sanctions
provided in the circular itself. Understood thus, the appellant is
squarely bound by the circular and any breach of the same is to
be viewed accordingly. [Para 51][263-A-C]
3.3 The above view is reinforced by the "Master Circular
for Stock Brokers" issued by SEBI on 01.06.2018, bearing
headnote that "This Master Circular is a compilation of relevant
circulars issued by SEBI, which are operational as on date of this
circular". Annexure-4 of the Master Circular titled "Rights and
Obligations of Stock Brokers, Sub-Brokers and Clients" reiterates
the correct legal position under clause 2 thereof which provides
that the stock brokers are bound by all the Rules, Byelaws and
Regulations of the Exchange and circulars/notices issued in
furtherance of such Byelaws and Rules. [Para 52][263-C-E]
3.4 The scheme of 1956 Act enables the Exchange to resort
to suspension and expulsion of the members, in accordance with
its approved Byelaws and Rules. Section 3(2) of the Act specifies
certain matters that must be appropriately covered in the Byelaws
or Rules. Clause (c) of the said sub-section expressly provides
that matters of admission, qualification, exclusion, suspension,
expulsion and re-admission of members must be covered in the
Byelaws/Rules. [Para 54][263-G-H; 264-A]
3.5 By SEBI letter No. SMD-I/11087/92 dated 04.11.1992
titled "Capital Adequacy Norms for Brokers", the stock
exchanges were directed to provide for norms relating to capital
adequacy in their Byelaws. Apart from specifying certain
requirements, the letter went on to state that "the stock exchange
shall continue to have the authority to impose suitable margins as
per their judgment in the context of the market situation." Therefore,
a stock exchange stood empowered not only to specify capital
adequacy requirements for the trading members but also to take
action against the defaulting members. [Para 55][264-D-F]
3.6 Accordingly, for effectuating the mandate accorded upon
the Exchange as per the Act, NSE Rules, 1994 and the abovesaid
directive, it is obliged to deal with the subject of termination of
membership on that basis. [Para 56][264-F-G]
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3.7 The same regulatory intent is reflected in the Byelaws
as well. Clause (1)(b) of Chapter-V of NSE Byelaws, 1997 (the
operative Byelaws as regards the question of expulsion)
empowers the relevant authority to "specify prerequisites,
conditions, formats and procedures for application for admission,
termination, re-admission etc. of trading members". [Para 57][265D-E]
3.8 Consequence of failure to maintain the necessary
deposits is addressed in Chapter XII of the Byelaws wherein
clause (1) provides that such a member could be declared as a
defaulter, which in itself is a ground for expulsion in the NSE
Rules, 1994. [Para 57][265-G-H; 266-A]
3.9 A holistic view of the scheme vividly reveals that the
Exchange not only had the authority to specify various deposit
related requirements but also had the power to expel a member
in case of default. In the present case, it is not in dispute that the
Interest Free Security Deposit to be maintained by the appellant
actually fell short of the required margins during the relevant
period. [Para 58][266-C-D]
4.1 The obligation of the appellant to keep up with the
adequacy of deposits continued despite the withdrawal of its
trading facility. The relationship between a stock exchange and
trading member runs across various levels. Action against
members is to be taken only upon violation of conditions and
procedures therefor. It is a serious matter and resorted to only
upon the fulfilment of conditions specified in the Byelaws, Rules,
Regulations or even in operational parameters. Notably, the
conditions required for withdrawing the trading facility are
distinguishable from the conditions required for suspension/
expulsion of membership. Under the relevant provisions,
withdrawal could take place upon a standalone violation of certain
operational parameters on a given trading day (like exceeding
the exposure limits as in the present case). Whereas, expulsion
would take place upon a sustained violation of membership
obligations (like failure to maintain the base capital and also for
failure to replenish the prescribed amount) within the time frame
specified therefor. The two actions vary not only in their texture,
but also in their resultant effect. Withdrawal, for instance, does
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not extinguish the membership. It acts like a halt for indulging in
further trading activity. [Paras 58 and 59][266-D-E; 266-E-H; 267A]
4.2 To say that mere withdrawal of trading facility would
ipso facto absolve a trading member from keeping up with other
obligations towards the Exchange for continuation of membership
would result into an anomalous situation. It would amount to the
diffusion of one stage of the relationship with the other, and would
become a concocted way to extend benefit for its own wrong to a
defaulting member. Such a consequence could not be intended
to result from an action of withdrawal of trading facility. For, the
withdrawal of trading facility is a temporary or interim action which
is taken against an erring member to prevent him from continuing
on a mischievous path during the trading hours and to take
corrective steps forthwith. The nature of this action is preventive
and the provisions governing this action provide for certain
remedial acts, like depositing additional sums to increase the
exposure limits, the performance of which can help a member in
resuming his trading operations. The obligations for continued
admission as a member are entirely different and merely because
trading has been halted due to a member's own default, it does
not result in a hiatus situation or extricate him from membership
obligations. If that were to be the case, there was no need for the
Byelaws to provide these actions separately. [Para 60][267-A-E]
4.3 Pertinently, the capital adequacy norms, are meant both
for admission as a member and for continuation as a member.
Even the language of the governing provision i.e. Rule 32,
signifies that requirements relating to capital adequacy are meant
for "continued admittance to trading membership" and thus, the
mandatory obligations would continue, as long as membership is
formally continued. Despite the temporary action of withdrawal
of trading facility, a member continues to be a member of the
Exchange with all corresponding rights and obligations intact on
both sides. [Para 61][267-E-G]
4.4 Having observed that the appellant failed to maintain
the requisite membership margins with the Exchange for a long
period and refused to make up for the shortfalls when called upon
to do so by the Exchange, there is nothing to deviate from the
view taken by the Tribunal that the appellant acted in
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contravention of the Byelaws and Rules of the Exchange
necessitating unto termination. The actions taken by the
Exchange, thus, were in accordance with the law. [Para 62][268B-D]
5.1 Apart from challenging the expulsion of membership,
the appellant had also prayed for the release of withheld securities.
No such plea was raised by the respondents in the stated
proceedings in 2014. Rather, that appeal was allowed and claim
regarding withheld securities was relegated to the Defaulter's
Committee. That remand order was acted upon by all concerned
and against which the present appeal arises before this Court.
[Para 79][273-A-B; 273-E-F]
5.2 It is not correct to say that cause of action accrued only
after the Defaulter's Committee's order dated 04.12.2014,
justifying the withholding of securities. The said order of the
Defaulter's Committee did not result in the withholding of
securities. It merely supplied reasons and justification for such
withholding. The cause of action, if at all any, had arisen to the
appellant from the moment their securities were withheld in 1997.
Merely because a subsequent order is passed to justify a prior
action, it cannot be a case of accrual of fresh cause of action to
the aggrieved. [Para 80][273-F-G]
5.3 In the factual scheme of the present case, there are
two sets of assets in control of the respondents - first, security
deposits and second, withheld securities. The security deposits
came to be deposited on account of membership obligations and
the securities were withheld on account of failure to complete
settlements. Though the challenge is limited to withheld
securities, the provisions relating to such securities address both
these categories of assets collectively. [Para 82][274-C-E]
5.4 As per clause (11) of Chapter XII of the NSE Byelaws
titled "Default", the Exchange is vested with the power to realise
the assets of a defaulter member in due course. Clause (23)
complements this action and provides for the order of priority
for satisfying the claims. The clause (11) provides for realisation
of three categories of assets: (i) security deposits, margin moneys
and other deposits; (ii) securities which have been deposited by
the defaulter member; and (iii) moneys, securities and other assets
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due, payable or deliverable to the defaulter by any other Trading
Member and recovered by the Exchange. Pertinently, different
kinds of assets are subject to a different procedure of realisation.
Out of the three categories covered under clause (11), security
deposits can be called in and realised per se without any additional
condition. There is no requirement of vesting with respect to
such deposits neither in the language of clause (11) nor in the
overall scheme. It is so because the Exchange enjoys a statutory
lien over such deposits by way of clause (24) of Chapter IX -
"Transactions and Settlements", NSE Byelaws which categorically
provides that the Exchange has a first and paramount lien over
the monies, bank deposits and other securities deposited by the
trading member for any sum due to the Exchange. [Paras 83 and
84][274-E-F; 275-B-D; 275-E-G]
5.5 But it covers only those assets which are voluntarily
deposited by the member with the Exchange. Forfeited/withheld
assets are not included herein. It is true that mere existence of
lien may not entitle the lienee to sell off the property for
satisfaction of debt without a court order. However, the same
principle is not absolute and the cases in which the statutory/
contractual scheme itself provides for such sale/realisation fall
outside its purview. It is settled that when lien itself is a creation
of Byelaws, Rules or Regulations etc., the scope, extent and
operation of such lien would also be governed by the same
scheme. [Para 84][276-B-D]
Unity Company Private Ltd. vs. Diamond Sugar Mills
and Ors. AIR 1971 Cal 18 - referred to.
5.6 Therefore, if provisions provide for realisation of such
lien property, the same may be given effect to in accordance with
the provisions. No external conditions can be read in such a
scheme. Clause (11) expressly provides for realisation of security
deposits as and when a member becomes subject to the provisions
relating to defaulters. The phrase "shall call in and realise"
signifies that realisation is warranted as an imminent action upon
declaration of defaulter in case the security deposits are
insufficient. The effect of this phrase is that once a trading
member has been declared a defaulter, the Exchange is duty bound
to realise the security deposits retained by it to satisfy its
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obligations and return the remaining deposits, if any. If the
Exchange fails to do so, it may become liable to make good the
loss of interest to the defaulter on any amount over and above
the monetary obligation. [Para 84][276-G-H; 277-A-C]
5.7 In the present case, no fault can be found in the conduct
of the Exchange as it had actually realised the deposits at various
points of time owing to the inability of the appellant to keep up
with the statutory margin requirements. It holds no merit to state
that the Exchange failed to perform its duty to realise the security
deposits. The amount of Rs. 1.34 crores came to be added to the
total obligation again in 2017 when the Exchange returned the
security deposit amount pursuant to an order of this court passed
at the insistence of the appellant and thus, in law, that cannot be
held against the Exchange in any manner. [Para 85][277-C-E]
5.8 Unlike the money deposits, no legal requirement of
forthwith realisation is envisaged in the case of withheld
securities. The withheld securities can be categorised as -
securities in which the appellant was a receiving member
(receiving securities) and securities in which the appellant was an
introducing member (introductory securities). [Para 86][277-F-G]
6.1 In the transactions during the trading period from
24.09.1997 to 30.09.1997 and during the trading period from
01.10.1997 to 14.10.1997, the appellant was a "receiving
member". On account of failure of appellant to complete the
settlements made during these periods, by making complete
payment, the Exchange withheld the pay-outs of securities at
various points of time. The remaining securities were withheld
wherein appellant was acting as an "introducing member" in the
market. [Paras 87 and 88][278-C-E]
6.2 As regards the introductory securities, they simply
could not have been realised by the Exchange at any point of
time as they were merely introduced by the appellant and did not
belong to it. These introductory securities were registered in
the names of third persons who are not parties to this proceeding.
Concededly, there could have been no loss to the appellant relating
to corporate benefits on these securities as it did not have any
right therein, to receive any such benefit. Property in those
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securities neither vested in the appellant nor in the Exchange
and they were held by the Exchange only as a lien on the physical
copies of shares to the limited extent of obliging the appellant to
fulfil its obligations. The benefits on those securities remained
in third parties, as they must have, and no one has approached
this court to raise the grievance that they have suffered any
wrongful loss as regards those benefits. Even if any grievance
exists between two clearing members as regards the receipt or
non-receipt of those benefits, the best course of action would
have been to proceed by way of a separate proceeding in that
regard. Clause (11) of Chapter VI, NSCCL Byelaws categorically
provides for a privity of contract between delivering and receiving
clearing members. The interests of those third parties are not a
part of the present lis. [Para 89][279-D-H]
6.3 Indisputably, the introductory securities have been
marked as objectionable by the companies; and securities with
outstanding objections are of no use to the Exchange for the
purpose of recovery so long as such objections are not removed.
The introductory securities fall outside the purview of the vesting
provision. Further, the responsibility of the Exchange was limited
to providing the appellant an opportunity to remove the objections
and continue withholding the securities in the interim. Any enquiry
regarding the legality or illegality of objections could have taken
place between the introducing member and the respective
companies. The same also cannot form a part of the subject matter
before this Court. [Para 90][280-A-C]
6.4 The provisions relating to withholding and vesting of
securities are provided in two separate documents. Whereas
vesting is provided under Chapter-XII of NSE Byelaws titled
"Default", withholding is provided under Chapter 9 of NSCCL
Regulations titled "Non-Delivery and Non-Payment". [Para
93][280-E-F]
6.5 Declaration of defaulter upon non-payment is not an
express pre-requisite for the recovery of dues here. Regulation
9.7 provides that all deliveries of securities which were due to
the defaulter shall be handed over to the Clearing Corporation
so as to enable it to realise their dues from those deliverable
securities. Upon receipt of securities as per this Regulation, the
action of withholding is contemplated in Regulation 9.9
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(Regulation 9.11 in NSE Regulations). In the present case,
securities deliverable to the appellant as a receiving member
were withheld by the respondents to clear their dues. [Para
94][281-C-D; 281-F-G]
6.6 On withholding, the stage of vesting comes in and this
stage is important as vesting is a pre-requisite for dealing with
the securities in any manner. There can be no action, be it of sale
or registration, against a property unless the property vests in
the entity. "Nemo dat quod non habet" is the fundamental principle
of transfer of property which, if literally translated, means "no
one gives what they do not have". Thus, unlike money deposits,
withheld securities cannot be realised without legal vesting under
clause (11). [Para 95][281-G-H; 282-A]
6.7 Though the requirement of declaration as defaulter may
be a discretionary one under the NSCCL Regulations, the same
is a mandatory requirement for vesting in clause (11). For, vesting
takes place upon declaration of any trading member as a defaulter.
The expression "and such assets shall vest ipso facto, on
declaration of any trading member as a defaulter" reinforces the
view. Even otherwise, the main vesting provision is included in
the chapter on defaults and therefore, such declaration is necessary
unless otherwise excluded. Therefore, the right of the
Corporation to dispose of or realise these securities is
circumscribed by the requirement of declaring such member as
a defaulter. In the present case, no such declaration came to be
made. However, despite the absence of any such declaration,
vesting took place by way of Rule 20(f) in Chapter IV of NSE
Rules, whereby the requirement of express declaration of
defaulter upon expulsion is done away with. [Paras 96 and
97][282-A-D]
6.8 The emergent position of law, therefore, is that vesting
does not take place in favour of the respondent Exchange unless
a formal expulsion order is passed. The relevant point of time,
therefore, is the date of expulsion. Without such legal vesting,
the Exchange only sits upon the withheld assets as a custodian.
There is no question of realisation. Such withholding is done to
serve two purposes - first, to persuade the defaulting member to
fulfil its obligations during the continuation of membership if it
so wishes and second, to secure the liability at the earliest
available opportunity as a preventive measure. If liabilities
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continue to be unfulfilled, expulsion becomes an inevitable
consequence and the withheld assets vest in the Exchange.