Securities Appellate Tribunal
Anupama Parashar & Ors. vs Sebi on 7 June, 2023
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Date of Hearing: 08.05.2023
Date of Decision: 07.06.2023
Misc. Application No.438 of 2023
And
Appeal No.366 of 2023
Anupama Parashar
G.K. 285, Kalindipuram,
Prayagraj, U.P.-211015. ...Appellant
Versus
The National Stock Exchange of India Ltd.
Exchange Plaza, C-1, Block G,
Bandra Kurla Complex,
Bandra (E), Mumbai-400051. ...Respondent
Mr. Anurag Soan, Advocate with Mr. Nishank Vashistha,
Advocate for the Appellant.
Ms. Krushi Barfiwala, Advocate with Mr. Rudra
Deosthali, Advocate i/b. Parinam Law Associates for the
Respondent.
Date of Hearing: 15.05.2023
Date of Decision: 07.06.2023
With
Appeal No.441 of 2023
2
Bhanwarlal S. Lodha
Ground Floor, T-1122, Surat
Textile Market, Ring Road,
Surat-395002, Gujarat. ...Appellant
Versus
The National Stock Exchange of India Ltd.
Exchange Plaza, C-1, Block G,
Bandra Kurla Complex,
Bandra (E), Mumbai-400051. ...Respondent
Mr. Saurabh Bachhawat, Advocate with FCA Kamal
Agrawal, for the Appellant.
Mr. Ishan Agrawal, Advocate with Mr. Ashutosh Mishra,
Mr. Karma Vivan, Advocates i/b. Nyaayam Associates
for the Respondent.
With
Appeal No.248 of 2023
Vikrant Leasing Ltd.
P-27, Princep Street,
3rd Floor, Kolkata-700072. ...Appellant
Versus
The National Stock Exchange of India Ltd.
Exchange Plaza, C-1, Block G,
Bandra Kurla Complex,
Bandra (E), Mumbai-400051. ...Respondent
3
Mr. Saurabh Bachhawat, Advocate with Mr. Kamal
Agrawal for the Appellant.
Mr. Ankit Lohia, Advocate with Krushi N Barfiwala, Mr.
Shlok Bodas and Mr. Rudra Deosthali, Advocates i/b.
Parinam Law Associates for the Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer
Ms. Meera Swarup, Technical Member
Per: Justice Tarun Agarwala, Presiding Officer
1.For the reasons stated in the application, the delay in the filing of Appeal no.366 of 2023 is condoned. The application is allowed.
2. Even though different orders have been passed by the Member and Core Settlement Guarantee Fund Committee of the National Stock Exchange of India Ltd. (hereinafter referred to as 'Committee'), the issue involved is common and, accordingly, these three appeals are being decided together.
3. In all these appeals the claim of the appellants for receiving compensation under the Investor Protection 4 Fund (hereinafter referred to as 'IPF') has been rejected/disallowed on the ground that there has been no transaction in the trading account for more than 24 months and, therefore, the deposit with the defaulter is in respect of a loan with or without security.
4. In Appeal No.366 of 2023, Ms. Anupama Parashar vs. NSE, Karvy Stock Broking Ltd. was the broker and trading member of NSE. On 23rd November, 2020, Karvy was expelled under Rule 1 and Rule 2 of Chapter IV of the Rules of the Exchange and Byelaw (1) of Chapter XII of Byelaw (1) of Byelaws of the Exchange.
5. On 7th March, 2022, the said appellant lodged a claim for Rs.6,35,039.10 for compensation under the Investors Protection Fund. The Committee rejected the claim on the ground that there had been no trading activity for more than 24 months.
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6. In Appeal no.441 of 2023, the claim was for Rs.34,80,065.60 from the Investor Protection Fund on account of Karvy being declared a defaulter. The claim was lodged on 9th January, 2021 which was found to be inadmissible by an order of 29th June, 2021. A review was filed which was again rejected on 29th June, 2021. A second review application was filed on 6th September, 2021 which was dismissed as not maintainable. The appellant thereafter filed Appeal no.130 of 2023 which was allowed and by an order dated 2nd February, 2023, this Tribunal directed the Committee to decide the review application within four weeks. Based on the directions, the Committee passed the impugned order rejecting the claim on the ground that no trading activity had taken place by the appellant during 24 months from the date when Karvy had become a defaulter.
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7. In Appeal no.248 of 2023, Vikrant Leasing Ltd. vs. NSE, the broker/trading member of NSE was BMA Wealth Creators Ltd., who was declared a defaulter on 13th February, 2020. The said appellant lodged a claim for Rs.35,50,750 on 6th July, 2020 which claim was found to be inadmissible by an order dated 12th January, 2021. A review application was filed which has been rejected by the impugned order dated 6th January, 2023 on the ground that no transaction was executed by the appellant on the stock exchange platform for more than 24 months.
8. We have heard Mr. Anurag Soan, Advocate assisted by Mr. Nishank Vashistha, Advocate for the appellant and Ms. Krushi Barfiwala, Advocate assisted by Mr. Rudra Deosthali, Advocate for the respondent in Appeal no.366 of 2023, Mr. Saurabh Bachhawat, Advocate assisted by FCA Kamal Agrawal, for the appellant and Mr. Ishan Agrawal, Advocate assisted by 7 Mr. Ashutosh Mishra and Mr. Karma Vivan, Advocates for the respondent in Appeal no.441 of 2023 and Mr. Saurabh Bachhawat, Advocate assisted by Mr. Kamal Agrawal for the appellant and Mr. Ankit Lohia, Advocate assisted by Krushi N Barfiwala, Mr. Shlok Bodas and Mr. Rudra Deosthali, Advocates for the respondent in Appeal No.248 of 2023.
9. In order to decide the aforesaid controversy it would be essential to peruse the Bye-laws and the circulars issued from time to time.
10. SEBI issued a circular dated 28th October, 2004 stipulating that the Central Government vide notification dated 22nd August, 1985 had stipulated the setting up of an Investor Protection Fund by the stock exchange. The said notification further contemplated to create a compensation fund to take care of the legitimate investment claims which are not of speculative nature of the clients of defaulting member. 8 Clause 12 of Annexure 1 to this circular dated 28th October, 2004 provided as under:
"12. The claims received against the defaulter members during the specified period shall be eligible for compensation from the IPF/CPF."
11. The aforesaid indicates that claims received against defaulting members would be eligible for compensation under IPF. Chapter XII of the Bye-laws of NSE deals with a declaration of a trading member as a defaulter and the procedure that is required to be followed. Bye-law 24 of Chapter XII provides that certain claims against a defaulter cannot be entertained by the Defaulter's Committee. For facility, Clause 24 of Chapter XII is extracted hereunder:
"Certain claims cannot be entertained
24. The Defaulters' Committee shall not entertain any claim against a defaulter:
(a) which arises out of a contract in securities dealings in which are not permitted or which are not made subject to Bye Laws, Rules and Regulations of the Exchange or in which the claimant has either not paid 9 himself or colluded with the defaulter in evasion of margin payable on bargains in any security;
(b) [deleted]
(c) which arises from any arrangement for settlement of claims in lieu of bona fide money payment in full on the day when such claims become due;
(d) which is in respect of a loan with or without security;
(e) which is not filed with the Defaulters' Committee within such time of date of declaration of default as may be prescribed by the relevant authority."
A perusal of Clause (d) of the Bye-law 24 indicates that claims in respect of a loan with or without security will not be entertained by the Defaulter's Committee.
12. Chapter XIII of the Bye-laws provides that where a trading member's constituent suffers a loss from the said trading member being declared as a defaulter by the Exchange under Chapter XII then no claim of a claimant shall be eligible for compensation from IPF 10 unless he has acted as a constituent of the said trading member to the extent permitted by the Exchange. In effect, a constituent of a defaulter if he is unable to get a claim under Chapter XII then he can apply for compensation under the IPF subject to the eligibility of his claim. Clause 8 of Chapter XIII provides that a claim for compensation filed by a constituent would be processed in accordance with the procedure laid down by the Defaulter's Committee and if the assets of the defaulter are insufficient to meet the approved claims, it shall forward the claims along with the recommendations of the Defaulters' Committee to the Trust.
13. SEBI issued a circular dated 23rd February, 2017. Clause 'D' of the said circular relates to admissibility of the claim for making payment out of IPF in the stock exchange. This Clause D is extracted hereunder:
"(D). Admissibility of claim for making payment out of IPF in Stock Exchanges 11 In the event of default by the member, all transactions executed on exchange platform shall be eligible for settlement from IPF (subject to maximum limit), subject to the appropriate norms laid down by the Defaulters' Committee."
14. The aforesaid provisions provides that in the event of default by a member, all transactions executed on exchange platform shall be eligible for settlement from IPF (subject to maximum limit), subject to the appropriate norms laid down by the Defaulters' Committee. From the aforesaid two things are relevant, namely,
(i) One that all transactions must be executed on the exchange platform.
(ii) Claim would be subject to the appropriate norms laid down by the Defaulters' Committee.
15. One of the norms/procedure laid down by the Defaulter's Committee is found in the minutes of the 35th meeting of Defaulter's Committed dated 2nd July, 12 2010 which laid down certain guidelines as to how a transaction is to be treated as a loan transaction or not under Bye-law 24 of Chapter XII of the Bye-laws of NSE. For facility, item no.4 of the minutes which relates to the guidelines for loan transaction is extracted hereunder:
"Item No.4 To consider and approve the guidelines for loan transactions.
The Committee noted that The Defaulters' Committee is empowered under Byelaw 24 of Chapter XII of the Byelaws of NSEIL not to entertain certain claims against a defaulter and Bye-Law 24(d) further provides that Defaulters' Committee shall not entertain claims in respect of a loan with or without security.
The Committee deliberated on the nature of claims which could be construed as transactions in the nature of loan and thereafter decided that for the purpose of processing of claims following could be considered as broad guidelines in assessing a claim as loan with or without security.
1. Where the claimant has given funds to the defaulter with the apparent intention to trade but, however, the claimant has not furnished any evidence with respect to the execution of trades for a substantial period of time after entering into an agreement with the defaulter and from the 13 available records it is evident that the defaulter had passed on credits which may be construed to be payments in the nature of interest;
2. Where the claimant has given securities to the defaulter with the apparent intention to trade but, however, the claimant has not furnished any evidence with respect to the execution of trades for a substantial period of time after entering into an agreement with the defaulter and from the available records it is evident that the defaulter had passed on credits which may be construed to be payments in the nature of interest;
3. Where the claimant has made payment to the defaulter despite having substantial credit balance with the apparent intention to trade but, however, the claimant has not furnished any evidence with respect to the execution of trades for a substantial period of time after such payment;
4. Where the claimant has delivered securities to the defaulter despite having substantial credit balance with the apparent intention to trade but, however, the claimant has not furnished any evidence with respect to the execution of trades for a substantial period of time after such payment;
5. Where the claimant has made payment and/or delivered securities to the defaulter with the express understanding that the defaulter would in turn give fixed return on funds and/or securities so given as the case may be as evidenced in the correspondent by the claimant or defaulter to the 14 Defaulters' Committee or in the correspondent between the claimant and the defaulter and vice versa.
6. Where the defaulter has given credits to the claimant against the funds and/or securities provided by the claimant to the defaulter as evidenced from the available records that the defaulter had passed on these credits which may be construed to be payments in the nature of interest as the same are in excess of the value of the trades executed on the Exchange;
7. Where the claimant has deposited substantial amounts of funds and/or securities with the defaulter with the apparent intention to trade but, however, the claimant has not furnished any evidence with respect to the execution of trades for the amounts which are proportionate to the value of the amounts of funds and/or securities deposited;
8. Where the claimant has failed to withdraw the credit balance and/or securities from the defaulter for a substantial period of time without any trading activity or substantially meager trading disproportionate in value to the quantum of the trade balance or securities lying with the defaulter;
9. Where the claimant has given funds and/or securities to the defaulter with the apparent intention to trade and the trades have been executed in the Futures and Options segment of the Exchange but for which trades corresponding evidence of utilization of funds deposited is not 15 apparent from the records furnished by the claimant.
The Committee also decided that the above guidelines are generic in nature and the conclusion would further depend on documents submitted by each of the claimants and hence, Committee would ultimately take a view of every claim based on the above guidelines and the relevant documents."
16. These guidelines provides that where a claimant has given funds or securities to the defaulter with an intention to trade but has not executed any trade for a substantial period of time and from the available records it is found that the defaulter has passed on credits which may be construed in the nature of payment of interest then such fund/interest given by the claimant will be treated as a loan under Chapter XII of the Bye-laws. Item no.8 of the guidelines further provides that where a claimant has failed to withdraw the credit balance and/or securities from the defaulter for a substantial period of time without any trading 16 activity then the said deposit of funds/securities would be treated as a loan.
17. In addition to the above, in the 56th minutes of the meeting of the Defaulter's Committee held on 9th June, 2015 that the word 'substantial period' was clarified to mean 24 months prior to the date of expulsion. Subsequently, in the 59th minutes of the Defaulter's Committee dated 28th August, 2015 the word 'substantial period' was further clarified to mean 24 months from the date of withdrawal of trading facility prior to expulsion or declaration of defaulter.
18. Thus, if any fund or security is deposited with a defaulter with the intention to trade but if the claimant has not traded for 24 months from the date of withdrawal of trading facility prior to expulsion or declaration of defaulter, then such deposit of funds/securities of the claimant would be treated as a loan but the same has to be supported by evidence that 17 the defaulter has passed on credits which may be construed to be a payment in the nature of interest.
19. NSE issued a circular dated 7th July, 2021, coming out with a policy for evaluation of claims. Annexure 'A' to this circular provides for claims for non-receipt for funds and securities where the client has entered into an agreement/understanding. For facility, the said clause from Annexure 'A' to the circular dated 7th July, 2021 is extracted hereunder:
"Claims for non-receipt of funds and securities where the client has entered into an agreement/understanding:
Where the claimant has given funds and/or securities to the defaulter member by executing an undertaking or with an understanding that defaulter would in turn generate assured return on funds and/or securities so given as the case may be as evidenced in the correspondence by the claimant or defaulter or in the correspondence between the claimant and the defaulter and vice versa where the defaulter may or may not have passed on credits which may be construed to be payments in the nature of return, such claims would not be considered admissible.18
Notwithstanding the above, the Member and Core Settlement Guarantee Fund Committee (MCSGFC) may in exceptional cases, depending on the facts and circumstances of the case, consider as eligible for processing applications received from the investors, which may not be in line with the methodology set out herein.
Further, below mentioned claims against the defaulter/expelled member shall not be accepted by the Exchange.
(a) which arises out of a contract in securities dealings which are not permitted, or which are not made subject to Bye-Laws, Rules and Regulations of the Exchange;
(b) which arises from any arrangement for settlement of claims in lieu of bona fide money payment in full on the day when such claims become due;
(c) which is in respect of a loan with or without security;
(d) which is not filed with the Defaulters' Committee (MCSGFC) within such time of the date of declaration of default as may be prescribed by the relevant authority;
(e) Claims of associate persons (f) Claims not supported by adequate documents
in respect of payments made to/received from trading member and also securities delivered/received, etc. 19
(g) Claims for trades that are not executed on the Exchange.
(h) Claims of investors whose unique client codes are not registered with Exchange.
(i) Claim for damages/harassment/miscellaneous charges
(j) Claim for the interest on the amount claimed
(k) Loss emanating from delayed delivery of securities.
(l) Subscription/redemption of units under MFSS (Mutual Fund Service System) platform, trades executed on SLB (Securities Lending and Borrowing).
(m) Sham, non-genuine and collusive transactions.
(n) Claims lodged by Authorised Persons for return of security deposit/refund of brokerage/commission.
(o) Claims lodged by persons associated with the defaulting Trading member against whom disciplinary action has been taken by the regulator/relevant authority vide their orders.
(p) Any other criteria/condition, which in the opinion of the MCSGFC renders the claim as ineligible, based on the facts of the case."20
20. The aforesaid circular clearly indicates that where funds and securities generate assured returns, then such claim would not be considered admissible as depicted from Clause (a) to (p) and will not be entertained. However, the CORE Committee in exceptional circumstances depending on the facts and circumstance of the case, consider the claim to be eligible.
21. In the light of the aforesaid Bye-laws, circulars and norms laid down by the stock exchange, we find that in the instant case there is no trading activity of the appellants for a substantial period of time and, in any case, there has been no trading activity for more than 24 months from the date of withdrawal of trading facility prior to expulsion or declaration of the defaulter. Consequently, in our opinion, the claim is not admissible under Bye-law 24D of the Chapter XII of the Bye-laws of NSE as the claim was in respect of 21 a loan since there has been no transaction for a substantial period of more than 24 months. Thus, the impugned order does not suffer from any error of law. The appeals are accordingly dismissed. In the circumstances of the case, parties shall bear their own costs.
22. This order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Certified copy of this order is also available from the Registry on payment of usual charges.
Justice Tarun Agarwala Presiding Officer Ms. Meera Swarup Technical Member RAJALAKS Digitally signed by HMI RAJALAKSHMI 7.6.2023 HARISH HARISH NAIR NAIR Date: 2023.06.07 16:21:19 +05'30' RHN