RUSODAY SECURITIES LTD. V/S NATIONAL STOCK EXCHANGE OF INDIA LTD

Case Analysis

RUSODAY SECURITIES LTD. V/S NATIONAL STOCK EXCHANGE OF INDIA LTD

July 8, 2021

By:- Kirtika Chakraborty

In Supreme Court of India

NAME OF THE CASE	Rusoday Securities V/S National Stock Exchange of India
CITATION	Civil Appeal No. 2690 OF 2009 Civil Appeal No. 9571 OF 2019
DATE OF THE CASE	20 November 2020
APPELANT	Rusoday Securities
RESPONDENT	National Stock Exchange of India
BENCH/JUDGE	A.M. Khanwilkar, B.R. Gavai, Krishna Murari
STATUTES/CONSTITUTION INVOLVED	The Clearing Corporation visa vis the 1956 Act, The Securities and Exchange Board of India Act, 1992, The General Clauses Act, 1897.
STATUTES/CONSTITUTION INVOLVED	Section 9 of the Securities Contracts (Regulation) Act, 1956, Section 21 of the General Clauses Act, 1897, Section 4 of the Clearing Corporation visa vis the 1956 Act

ABSTRACT

The legislature has bestowed upon the Exchange sufficient freedom of action to effectively control and regulate the functioning of stockbrokers who use the Exchange as a means to enter into financial relationships with the investors and common public. In the factual scheme of the present case, the foremost thing to be noted is that there are two sets of assets in control of the respondent’s 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 and thus, they are being discussed accordingly for a comprehensive view of their scope and operation. The principles of constructive trust and fiduciary relationships are equitable principles, and equity never operates in an absolute manner or in a vacuum. In fact, the very basis of the law of equity is its flexibility to take care of mutual concerns of the parties. Equity is about balancing the competing interests by preventing the erosion of interests of one party while ensuring a free exercise of legally enshrined discretionary powers to the other. No doubt, specific fiduciary duties could definitely be recognised in the specific facts of the case but the manner of performance of such duties cannot be dictated in regulatory matters.

INTRODUCTION

The Bye-laws, Rules and Regulations of NSE require a trading member to retain with the Exchange an interest-free security deposit, bank guarantee as to the security deposit, margin money in cash and margin money in the form of bank guarantee. The sum total of these constitutes the base capital of a trading member. Sometime in the year, 1996 NSE transferred its clearing functions to its newly formed subsidiary company called the National Securities Clearing Corporation Ltd., (for short NSCCL) which is the second respondent before us.

As required under the Bye-laws, Rules and Regulations of NSE, the appellant deposited a sum of Rs 45 lacs as interest-free deposit, furnished a bank guarantee in a sum of Rs 25 lacs as a security deposit, margin money in cash to the extent of Rs 25.45 lacs and margin money in the form of bank guarantee of the value of Rs 33.75 lacs. In all, the appellant deposited in October 1997 a sum of Rs 1,29,20,000/- with NSE and this became its base capital.

As per the circular dated May 19, 1997, issued by NSCCL and circulated by NSE to its trading members, every trading member is subject to gross exposure limits not exceeding seven times the base capital. Gross exposure is the total of the net outstanding positions (purchases or sales) in each security of the trading member at any time. If a member desires to exceed the limit, margins in the form of additional deposit by way of cash or bank guarantee have to be submitted to NSCCL in advance and such additional margins once furnished cannot be withdrawn for a period of three months.

However, if a member in the course of trading were to exceed the gross exposure limit, he shall be required to restrict his dealings on the Exchange to his exposure limit or else to bring in margins in the form of an additional deposit equivalent to one-seventh of the amount exceeding the gross exposure limit and for this, he may be given a maximum time of 15 days. Where a member neither brings in additional deposits nor restricts his trading to his permissible limits, the relevant authority in its discretion may suspend that trading member.

However, if a member while trading exceeds the gross exposure limit by 10 per cent or more, he shall not be permitted to trade with immediate effect until the margin deposits required are paid or the gross exposure is reduced to below five times the base capital. Where a trading member exceeds the gross exposure limit by ten per cent or more, his trading facility shall be withdrawn forthwith and if he were to opt for reducing the gross exposure to below five times the base capital, he is required to make a written request to NSE. If no such request is made upon the withdrawal of trading facilities, the Exchange may at its discretion close out the outstanding positions of the trading member. In pursuance to the power given by Section 9 of the Securities Contracts (Regulation) Act, 1956, NSE has framed its Bye-laws and Bye-law 17 in chapter IX provides for closing out of any deal in securities made on the Exchange. Closing out means completing an unexecuted sale contract in securities.

If the selling trading member were to default in giving delivery on the due date, the exchange steps in to complete the contract by purchasing the relevant securities from the market and giving delivery of the same to the buying member(s). Again, closing out could be restored if the buying member were to default in making payment for the securities purchased. In that event also the Exchange steps in and makes payment to the selling member(s) and receives the securities. In case of closing out, the loss, if any, suffered by the exchange has to be borne by the defaulting trading member.

BACKGROUND

The appellant challenges the judgment/order dated 13.01.2009 of the Tribunal wherein it had upheld the order of expulsion against the appellant, from the membership of the National Stock Exchange of India Limited3 Respondent 1. The said order was passed in the aftermath of the withdrawal of trading facilities of the appellant on 13.10.1997 and consequent closing out of all outstanding positions on 14.10.1997 by the National Securities Clearing Corporation Limited4 Respondent. The appellant herein, desirous of functioning as a stockbroker in the stock market, registered itself as a Trading Member with NSE/Exchange in November 1994.

As a precondition of such registration, the appellant was obliged to and did submit an undertaking in favour of the Exchange so as to strictly comply with the practice and stipulations in the applicable Byelaws, Rules, Regulations and other instructions of the Exchange issued from time to time. The said undertaking was given by the appellant on 19.06.1999 for short, “NSE” or “the Exchange”, as the case may be. 4 for short, “NSCCL” or “Clearing Corporation”, as the case may be.

As per the conditions prescribed in the Bye Laws, Regulations and Rules of the Exchange, the appellant was obliged to maintain a set of deposits with the Exchange, namely Interest-Free Security Deposit (IFSD), security deposit (bank guarantee), margin money in cash and margin money in the form of bank guarantee. The sum total of these deposits of the appellant, collectively termed as the Base Capital of the trading member, amounted to Rs.1.29 crores.

FACTS

In the year 1996, NSE transferred its clearing and settlement functions to its wholly owned subsidiary company NSCCL/Clearing Corporation. In furtherance of the original undertaking given by the appellant in favour of the Exchange, the Board of Directors of the appellant executed a subsequent undertaking dated 19.03.1996 in favour of the Clearing Corporation, whereby the appellant unconditionally resolved to abide by all Rules, Regulations, circulars etc., of the Corporation. Consequently, the appellant was admitted as a Clearing Member of the Clearing Corporation. On 19.05.1997, the Exchange adopted and circulated the Circular No. NSCC/CM/C&S/030, originally issued by the Clearing Corporation, to all the trading/clearing members.

The circular prescribed certain conditions to be complied with by the members during trading, including those relating to “Gross Exposure Limits” for daily functioning of the members. The circular further provided for “Effect of violation of gross exposure limit” and “Effect of failure to pay margins”, whereby it specified various actions that the Corporation and Exchange could take against a member in case of contravention of the circular. Such actions included the withdrawal of trading facilities, closing out of all outstanding positions and other actions as per the Byelaws. The introductory note specifying this position is relevant which reads thus:

“Circular No. NSCC/CM/C&S/030 dated 19.5.1997 issued by National Securities Clearing Corporation Limited (NSCCL) to the Clearing Members of NSCCL is enclosed. All Trading Members of the Exchange who are also the Clearing Members of the Clearing Corporation are required to comply with the said Circular and any modifications thereto as may be issued by the Clearing Corporation from time to time. Non compliance with the said Circular will be treated as breach of the Rules, Byelaws and Regulations of the exchange. The Clearing Corporation will monitor the compliance and take suitable action for noncompliance.”

On 13.10.1997, the appellant was found to have exceeded the gross exposure limits while trading (as prescribed by the aforesaid circular) by more than 10% and consequently, the trading facility of the appellant was withdrawn forthwith by the respondents. Consequent thereto, communication ensued between the appellant and the Clearing Corporation on the same day whereby the appellant was asked to bring in an additional deposit of Rs.40.70 lakhs (calculated as per the circular) in order to enhance the trading limits.

Additionally, the appellant was also asked to deposit a margin of Rs.29.10 lakhs towards unsettled trades done on 10.10.1997, along with Rs.41,42,253.25 in lieu of short delivery under Settlement No. N1997039 and Rs.6,585.50 in lieu of bad delivery under Settlement No. N1997038. As per the communication, the said amounts were to be deposited before 10:30 AM on 14.10.1997 failing which all open positions of the appellant in various securities were to be closed out forthwith. The appellant failed to deposit the said amounts and consequently, the Clearing Corporation closed out all the open positions of the appellant.

ISSUE

Securities Contracts (Regulation) Act, 1956 enables the Exchange to resort to suspension and expulsion of the members, in accordance with its approved Byelaws and Rules*SC-In an Appeal against the order of the *Securities Appellate Tribunal,* the *Hon’ble SC* has opined that *sec. 9* of the *Securities Contracts (Regulation) 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 *National Stock Exchange of India.*

ARGUMENTS FROM THE APPELANT SIDE

The appellant has argued at length on various aspects of the entire transaction. As regards the decision of expulsion from membership, it is the case of the appellant that the said decision was founded on an illegality as its trading facility was wrongly withdrawn. The appellant has contended that since the trading facility itself was interdicted, it could not have been expected to keep up with various margins and deposits prescribed by the respondents as no trading was being permitted.

The primary contention of the appellant relates to the vires of the circular under which the trading facility of the appellant was withdrawn. It has been submitted that the Tribunal failed to appreciate that the said circular was in contravention of the Byelaws, Rules and Regulations. It is urged that the adoption of the said circular by the Exchange amounted to a violation of 1956 Act and thus being void ab initio, the appellant was not bound by the said circular. To buttress this submission, it is argued that NSCCL is merely a clearing house of the Exchange and any circular issued by it cannot be accorded a legal sanctity at par with the Byelaws, Rules and Regulations of the Exchange. It is further argued that the disciplinary jurisdiction of the Exchange must be exercised only in accordance with the Byelaws and not any circular.

As regards the prescription of the said circular by the Exchange to all trading members vide communication dated 19.05.1997, it has been submitted that by virtue of this communication, the Exchange effectively indulged in amending its own Byelaws by adopting the indirect route of issuing a circular and thus, the communication was violative of Section 9(1) and 9(4) of 1956 Act along with Section 21 of the General Clauses Act, 1897.

The next submission relates to the closing out of the outstanding positions of the appellant. It is submitted that the closing out was not done in accordance with clauses 17 and 18 of the Byelaws as it was done before the due date. The argument stems from the contention that clause 17 enjoins the Exchange and Clearing Corporation not to close out any outstanding position of a trading member until and unless such member has failed to complete the delivery or payment by the due date.

The appellant has further submitted that clause 18 is nothing but a concomitant provision of clause 17 and comes into play only after closing out is done in accordance with clause 17 by complying with the requirement of the due date. Impugning the observation of the Tribunal, it has been urged that clause 18 does not provide for additional conditions/reasons of closing out and does not operate independently of clause 17. Instead, both clauses supplement each other.

. Furthermore, the appellant has contended that on a proper interpretation of clauses 17 and 18, it can be concluded that once the relevant authority has closed out a transaction by exercising power under clause 17, such closing out would take place in such manner, within such time frame and subject to such conditions and procedures as may be prescribed from time to time. Closing out, as per the appellant’s contention, begins in clause 17 and culminates in clause 18.

ARGUMENTS FROM THE RESPONDENT

Addressing the challenge to the Tribunal’s interpretation of clauses 17 and 18, the respondents have submitted that the Tribunal has rightly concluded that clause 17 is not exhaustive as far as the action of closing out is concerned, and there could be other circumstances wherein the action of closing out ought to be taken in the investors’ interest. Clause 17 does not preclude invoking other just circumstances. As per the respondents, such circumstances are covered by clause 18 which operates in addition to clause 17. It is further submitted that a stock exchange must have the power to close out transactions of a trading member when it discovers any reckless conduct in the market, including exceeding the specified gross exposure limits subject to which the trading platform is allowed to the trading members.

In reference to the existence of authority of the Clearing Corporation to issue such circular, the respondents have submitted that the appellant had extended an unconditional undertaking in favour of the Clearing Corporation whereby it undertook to comply with and be bound by the Rules, Byelaws, Regulations, circulars etc. issued by the Corporation from time to time. Thus, the appellant is estopped from going back on its undertaking. It is further submitted that the circular does not override or contravene any of the Byelaws, Rules or Regulations framed by the Exchange.

As regards the decision of expulsion, the respondents have submitted that the appellant was liable to maintain the Interest-Free Security Deposit with the Exchange as he continued being a member of the Exchange despite the suspension of the trading facility. It has been further submitted that the appellant was granted multiple opportunities to make good the shortfall in deposits but failed to comply with its obligations even after the decision of suspension.

Addressing the challenge regarding the requirement of prior approval for the subject circular from SEBI/Central Government as per 1956 Act, the respondents have submitted that the Byelaws of the Exchange were brought into operation only after the approval of the Central Government, as mandated under the Act, and the said circular was issued in furtherance of the powers of the Exchange in the Byelaws. Therefore, since the Byelaws were brought into force after approval of the Central Government, no further approval was necessary for taking action under the said Byelaws. To reinforce, it is urged by the respondents that the designated authority of the Exchange, under clause 18, is vested with the power to prescribe the “due date”, “manner”, “time frame” and “conditions and procedures” as regards the action of closing out and thus, any such action does not warrant any further approval from SEBI.

RELATED PROVISIONS

Section 3 in The Securities Contracts (Regulation) Act, 1956

3. Application for recognition of stock exchanges. —

(1) Any stock exchange, which is desirous of being recognised for the purposes of this Act, may make an application in the prescribed manner to the Central Government.

(2) Every application under sub-section (1) shall contain such particulars as may be prescribed, and shall be accompanied by a copy of the bye-laws of the stock exchange for the regulation and control of contracts and also a copy of the rules relating in general to the constitution of the stock exchange, and in particular, to—

(a) the governing body of such stock exchange, its constitution and powers of management and the manner in which its business is to be transacted;

(b) the powers and duties of the office-bearers of the stock exchange;

(c) the admission into the stock exchange of various classes of members, the qualifications for membership, and the exclusion, suspension, expulsion and re-admission of members therefrom or thereinto;

(d) the procedure for the registration of partnership as members of the stock exchange in cases where the rules provide for such membership; and the nomination and appointment of authorised representatives and clerks.

Section 9 in The Securities Contracts (Regulation) Act, 1956

9. Power of recognised stock exchanges to make bye-laws. —

(1) Any recognised stock exchange may, subject to the previous approval of the 1[Securities and Exchange Board of India], make bye-laws for the regulation and control of contracts.

(2) In particular, and without prejudice to the generality of the foregoing power, such bye-laws may provide for—

(a) the opening and closing of markets and the regulation of the hours of trade;

(b) a clearing house for the periodical settlement of contracts and differences thereunder, the delivery of and payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing house;

(c) the submission to the 1[Securities and Exchange Board of India], by the clearing house as soon as may be after each periodical settlement of all or any of the following particulars as the 1[Securities and Exchange Board of India] may, from time to time, require, namely: —

(i) the total number of each category of security carried over from one settlement period to another;

(ii) the total number of each category of security, contracts in respect of which have been squared up during the course of each settlement period;

(iii) the total number of each category of security actually delivered at each clearing.

(d) the publication by the clearing house of all or any of the particulars submitted to the 1[Securities and Exchange Board of India] under clause (c) subject to the directions, if any, issued by the 1[Securities and Exchange Board of India] in this behalf;

(e) the regulation or prohibition of blank transfers;

(f) the number and classes of contracts in respect of which settlements shall be made or differences paid through the clearing house;

(g) the regulation or prohibition of budlas or carry-over facilities;

(h) the fixing, altering or postponing of days for settlements;

(i) the determination and declaration of market rates, including the opening, closing, highest and lowest rates for securities;

(j) the terms, conditions and incidents of contracts, including the prescription of margin requirements, if any, and conditions relating thereto, and the forms of contracts in writing;

(k) the regulation of the entering into, making, performance, rescission and termination, of contracts, including contracts between members or between a member and his constituent or between a member and a person who is not a member, and the consequences of default or insolvency on the part of a seller or buyer or intermediary, the consequences of a breach or omission by a seller or buyer, and the responsibility of members who are not parties to such contracts;

(l) the regulation of taravani business including the placing of limitations thereon;

(m) the listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any specified securities;

(n) the method and procedure for the settlement of claims or disputes, including settlement by arbitration;

(o) the levy and recovery of fees, fines and penalties;

(p) the regulation of the course of business between parties to contracts in any capacity;

(q) the fixing of a scale of brokerage and other charges;

(r) the making, comparing, settling and closing of bargains;

(s) the emergencies in trade which may arise, whether as a result of pool or syndicated operations or cornering or otherwise, and the exercise of powers in such emergencies, including the power to fix maximum and minimum prices for securities;

(t) the regulation of dealings by members for their own account;

(u) the separation of the functions of jobbers and brokers;

(v) the limitations on the volume of trade done by any individual member in exceptional circumstances;

(w) the obligation of members to supply such information or explanation and to produce such documents relating to the business as the governing body may require.

(3) The bye-laws made under this section may—

(a) specify the bye-laws the contravention of which shall make a contract entered into otherwise than in accordance with the bye-laws void under sub-section (1) of section 14;

(b) provide that the contravention of any of the bye-laws shall render the member concerned liable to one or more of the following punishments, namely: —

(i) fine;

(ii) expulsion from membership;

(iii) suspension from membership for a specified period;

(iv) any other penalty of a like nature not involving the payment of money.

(4) Any bye-laws made under this section shall be subject to such conditions in regard to previous publication as may be prescribed, and, when approved by the [Securities and Exchange Board of India], shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the recognised stock exchange is situate, and shall have effect as from the date of its publication in the Gazette of India: Provided that if the 1[Securities and Exchange Board of India] is satisfied in any case that in the interest of the trade or in the public interest any bye-law should be made immediately, it may, by order in writing specifying the reasons therefor, dispense with the condition of previous publication.

Section 4 in The Securities Contracts (Regulation) Act, 1956

4. Grant of recognition to stock exchanges. —

(1) If the Central Government is satisfied, after making such inquiry as may be necessary in this behalf and after obtaining such further information, if any, as it may require, —

(a) that the rules and bye-laws of a stock exchange applying for registration are in conformity with such conditions as may be prescribed with a view to ensure fair dealing and to protect investors;

(b) that the stock exchange is willing to comply with any other conditions (including conditions as to the number of members) which the Central Government, after consultation with the governing body of the stock exchange and having regard to the area served by the stock exchange and its standing and the nature of the securities dealt with by it, may impose for the purpose of carrying out the objects of this Act; and

(c) that it would be in the interest of the trade and also in the public interest to grant recognition to the stock exchange, it may grant recognition to the stock exchange subject to the conditions imposed upon it as aforesaid and in such form as may be prescribed.

(2) The conditions which the Central Government may prescribe under clause (a) of sub-section (1) for the grant of recognition to the stock exchanges may include, among other matters, conditions relating to, —

(i) the qualifications for membership of stock exchanges;

(ii) the manner in which contracts shall be entered into and enforced as between members;

(iii) the representation of the Central Government on each of the stock exchanges by such number of persons not exceeding three as the Central Government may nominate in this behalf; and

(iv) the maintenance of accounts of members and their audit by chartered accountants whenever such audit is required by the Central Government.

(3) Every grant of recognition to a stock exchange under this section shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the stock exchange is situated, and such recognition shall have effect as from the date of its publication in the Gazette of India.

(4) No application for the grant of recognition shall be refused except after giving an opportunity to the stock exchange concerned to be heard in the matter, and the reasons for such refusal shall be communicated to the stock exchange in writing.

(5) No rules of a recognised stock exchange relating to any of the matters specified in sub-section (2) of section 3 shall be amended except with the approval of the Central Government.

JUDGEMENT

Subject to the regulations prescribed by the relevant authority from time to time any dealing in securities made on the Exchange may be closed out by buying in or selling out on the Exchange against a trading member and/or Participant as follows:

(a) in case of the selling trading member/Participant, on failure to complete delivery on the due date; and

(b) in case of the buying trading member/Participant, on failure to pay the amount due on the due date, and any loss, damage or shortfall sustained or suffered as a result of such closing out shall be payable by the trading member or participant who failed to give due delivery or to pay amount due.” The grievance of the appellant is that NSE closed out the open positions before the due date. In order to understand the grievance of the appellant, it is necessary to know that at the relevant time the system of weekly settlement of trades was in vogue according to which trades executed during a particular week were required to be settled during the following week.

What the appellant contends is that NSE was bound to wait till the due date of settlement and that it could not close out the open positions prior to that date as the appellant could not be said to have defaulted either in payment or in delivery prior thereto. We have given our thoughtful consideration to the contention of the learned Counsel for the appellant but are unable to accept the same. Bye-law 17 permits closing out of outstanding transactions only on failure to complete the same by the trading member by the due date. However, this Bye-law is not exhaustive and does not preclude closing out the dealings in securities under other circumstances. We say so having regard to the provisions of Bye-law 18 of the Bye-laws which reads as under:

Closing out of contracts or dealings in securities and settlement of claims arising therefrom shall be in such manner within such time frame and subject to such conditions and procedures as may be prescribed from time to time by the relevant authority.

It is a cardinal rule of interpretation that these provisions have to be read harmoniously and one cannot be read in isolation without appreciating the import of the other. Byelaw 18 clearly permits closing out of contracts or dealings in securities in such manner and within such time frame and subject to the conditions and procedures as may be prescribed from time to time by the relevant authority. Closing out the contracts and the conditions and procedures subject to which it could be done under Bye-law 18 is in addition to the closing out under Bye-law 17. As already observed, Bye-law 17 permits closing out only on the failure of a trading member to settle the transaction by the “due date” whereas under Bye-law 18, closing out could be resorted to for any other reason subject to such conditions and procedures as may be prescribed by the relevant authority. If Bye-law 17 is read to mean, as was argued by the learned Counsel for the appellant, that its provisions are exhaustive and that under no other circumstances can NSE close out the open positions of a trading member, then Bye-law 18 becomes otiose.

Where was then the need to provide in Bye-law 18 that closing out of contracts “shall be in such manner within such time frame and subject to such conditions and procedures” when all these have been prescribed in Bye-law 17? Obviously, Bye-law 18 contemplates reasons and circumstances for a close out other than that mentioned in Bye-law 17. The relevant authority has been defined in the Bye-laws to include NSE. The word prescribed as used in Bye-law 18 has not been defined and the conditions and procedures as contemplated by this Bye-law could be prescribed in any manner including through a circular. It is not in dispute that NSE adopted the circular dated May 19, 1997 which was issued by NSCCL (which is also a relevant authority) and circulated the same to its trading members for compliance making it clear that non-compliance would be treated as a breach of Rules, Bye-laws and Regulations of the Exchange. This circular undoubtedly provides for closing out of outstanding positions of the trading members even before the due date in the event of withdrawal of their trading facilities and that too, without any further notice to the trading member.

In other words, withdrawal of trading facilities of a trading member as contemplated by the circular furnishes yet another ground to the NSE to close out the outstanding positions or dealings in securities. Admittedly, in the case before us, the trading facilities of the appellant were withdrawn on 14.10.1997 at 11.45 am on account of its failure to enhance the base capital to the required extent or for its failure to bring down the gross exposure to below five times its base capital. In this view of the matter, we are of the opinion that NSE had the power to close out under the circular and no fault could be found with the impugned order(s) in this regard. We cannot lose sight of the fact that a stock exchange which is a primary level market regulator has also a duty to protect the interest of the investors and the integrity of the securities market.

The conclusion that we have arrived at based on the interpretation of Bye-laws 17 and 18 would advance that object. We are also of the view that it is essential that a stock exchange should have the power to close out the open transactions of a trading member when it finds that he (the trading member) is trading recklessly beyond his gross exposure limit as such limits, backed as they are by requisite margins, are prescribed with a laudable objective of investor protection. Such a power is essential to discipline the recalcitrant trading members. In the absence of such a power, the market and the investors would be exposed to a serious threat and the stock exchange would be reduced to the position of a mute spectator.

At this stage, we may notice another aspect of the aforesaid argument advanced by the learned Counsel for the appellant. He referred to the ten letters addressed by the appellant to NSE/NSCCL all of which were written on 14.10.1997 in which the appellant had made a request to both NSE and NSCCL to buy some specified equity shares from the market on its behalf as the appellants trading terminal had been disabled. The learned Counsel took us through these letters and strenuously urged that the request made to NSE/ NSCCL in these letters amounted to a request on behalf of the appellant to bring down its gross exposure in terms of the circular of May 19, 1997. We cannot accept this contention.

As already observed, the only request made to NSE and NSCCL was to buy specified shares on behalf of the appellant. Why should NSE purchase shares which are specified by the trading member and in quantities which have also been specified by him, as if NSE were a broker of the trading member? We have not been able to appreciate this request made by the appellant to the NSE. Not a word has been stated in any of these letters except in one to which a reference will shortly be made requesting for the reduction of the gross exposure. This apart, the request made in the letters can by no stretch of reasoning be understood to mean that the appellant wanted to bring down its gross exposure in terms of the aforesaid circular.

This brings us to the letter dated 14.10.1997 addressed by the appellant to NSCCL and referred to above in which the following request was made:

Today is the last day of the current Clearing/Settlement and since our terminals are not active, we request you now to square off all our outstanding positions immediately. Please note that any loss incurring (sic) due to non-implementing of our request due to timing of transactions will be solely at your risk and responsibility. This letter, as is clear from the other letters of the same date, was dispatched in the latter half of the day that is, after 13:46 hrs. Since NSE had not acted upon the requests made by the appellant in the earlier part of the day for the purchase of specific shares, the appellant then through the aforesaid letter stated that “we request you now to square-off all our outstanding positions immediately.”

This request of the appellant literally means that it wanted all its outstanding open positions to be closed out and, quite understandably, because otherwise the appellant would have been declared a defaulter as the settlement was to close on that day. Having made this request sometime after 13:46 hrs on 14.10.1997 and the NSE having actually closed out the appellant’s transactions at 11.45 hrs. on the same day, we see no reason for the appellant to have any grievance at all. Loss, if any, suffered by the appellant due to the difference in timing of actual close out and the request for closeout is not a grievance made in the appeal. In this view of the matter, we are clearly of the opinion that the appellant is not a person aggrieved because its request for closeout had been acceded to by NSE and the appeal deserves to be dismissed on this ground alone.

Faced with this situation, the learned Counsel for the appellant then contended that the circular of May 19, 1997 runs counter to Bye-law 17 inasmuch as it enables NSE to close out the open positions even prior to the “due date”. We are not impressed with this argument. We have already held that Bye-law 17 is not exhaustive and there can be other circumstances in which NSE can resort to the close out of the open positions. Those circumstances are prescribed by the aforesaid circular which supplements Bye-law and is protected by Bye-law 18. The present case is squarely covered by the circumstances prescribed by the circular and, therefore, we are of the view that it was open to NSE to close out the open positions of the appellant. As the result, we find no merit in the appeal and the same stands dismissed leaving the parties to bear their own costs.

CONCLUSION

The realisation of security deposits after this case was,

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. It provides for the realisation of three categories of assets: security deposits, margin moneys and other deposits; securities which have been deposited by the defaulter member; and moneys, securities and other assets due, payable or deliverable to the defaulter by any other Trading Member and recovered by the Exchange.

Out of these three categories, 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 as the Exchange enjoys a statutory lien over such deposits by way of clause (24) of Chapter IX – “Transactions and Settlements”, NSE Byelaws. It, however, does not include forfeited/withheld assets because the property in the deposited assets may vest in the Exchange by operation of membership obligations, whereas such is not the case with withheld securities.

“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, 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. “The phrase “shall call in and realise” in Clause (11) signifies that realisation is warranted as an imminent action upon declaration of defaulter in case the security deposits are insufficient. Hence, 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 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.