THE STATE OF MAHARASHTRA versus 63 MOONS TECHNOLOGIES LTD. on 22 April 2022

[2022] 10 S.C.R. 465

THE STATE OF MAHARASHTRA

v.

63 MOONS TECHNOLOGIES LTD.

(Civil Appeal Nos. 2748-49 of 2022)

APRIL 22, 2022

[DR. DHANANJAYA Y. CHANDRACHUD, SURYA KANTAND BELA M. TRIVEDI, JJ.]

Maharashtra Protection of Interest of Depositors (inFinancial Establishments) Act, 1999: ss. 2(c), 2(d), 4 and 5 – NSEL,Financial Establishment or not – Respondent holds 99.99% of theshareholding of NSEL company - NSEL started operating as anexchange for spot trading in commodities – It launched contractsfor buying and selling of commodities on its trading platform withdifferent settlement periods – Subsequently, there was a fraudinvolving settlement crises of Rs 5500 crores owed to over 13,000sellers/investors on the trading platform of NSEL – NSEL defaultedin payment of the outstanding dues – Since it did not have sufficientmoney or property for attachment u/s. 4, the State attached propertiesof the respondent which owns 99.99% of the shareholding of NSEL– Petition by the respondents challenging the invocation of MPIDAct on the ground that the exchange is not a ‘financial establishment’u/s 2(c) – High Court quashed the Notification holding that theNSEL only performed the role of a facilitator, in a manner similar tothe Bombay Stock Exchange; that NSEL did not receive money withthe obligation to return it on maturity; that the fact that VAT iscollected by the selling members from the buying members and TDSis not deducted by NSEL indicates that NSEL is a mere pass-throughplatform; that NSEL did not receive any deposits within the meaningof s.2 (c) since NSEL did not receive the commodities or money tobe retained; that NSEL only received transaction and warehousecharges which cannot be considered as a deposit, thus, the NSEL isnot a ‘financial establishment’ – On appeal, held: NSEL is a financialestablishment – Impugned notifications issued u/s. 4 of the MPIDAct attaching the properties of the respondent are valid – NSELreceives ‘money’ in the form of Settlement Guarantee Fund that isreturned in money and service – SGF is not covered by the exceptionsof the s..2(c) thus, it would fall within the expression ‘deposit’ u/s

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A2(c) – NSEL offers a multitude of 3services‘ in return for receivingthe commodity – Receipt of the commodities and holding thecommodities in the accredited warehouses is a ‘deposit’ u/s 2(c) –Thus, the High Court erred in holding that only if the return includesinterest, bonus or any other added benefit, it would be a deposit forthe purpose of the MPID Act – High Court read the definition ofB‘deposit’ narrowly without any reference to the salutary purpose ofthe MPID Act – Thus, the order passed by the High Court is setaside.s. 2(c) and 2(d) – Definitions of Deposit and FinancialEstablishment – Interpretation of.Cs. 2(c) - Deposit under - Settlement Guarantee Fund –Explained.

s. 2(c) - Deposit under - Receipt of commodities – Held: Receiptof the commodities and holding the commodities (when the membersDare put in constructive possession) in the accredited warehouses isa ‘deposit’ u/s. 2(c) of the Act.

Allowing the appeals, the Court

HELD: 1.1 The notifications attaching the properties of therespondent were issued under Section 4 of the MaharashtraEProtection of Interest of Depositors (in Financial Establishments)Act, 1999. Section 4 covers only those situations where a financialestablishment is a defaulting entity. [Para 30][505-G]

Conclusion

1.2 Financial Establishment is defined as any personaccepting a deposit‘. The definition excludes from its purviewF(a) a corporation or cooperative society controlled or owned eitherby the State or the Central Government; and (b) a BankingCompany as defined under Section 5(c) of the Banking RegulationAct 1949. Since NSEL does not fall within any of the exceptions,it would be a ‘financial establishment’ for the purposes of the Actif it is a person accepting deposit. Section 3(42) of the GeneralGClauses Act 1897 provides an inclusive definition of ‘person’ toinclude both incorporated and unincorporated companies. Theexpression deposit is defined in Section 2(c) of the MPID Act.The statutory definition of the expression deposit comprises ofthe following ingredients: (i) Any receipt of money or theH

acceptance of a valuable commodity by a financial establishment;(ii) Such acceptance ought to be subject to the money orcommodity being required to be returned after a specified periodor otherwise; and (iii) The return of the money or commoditymay be in cash, kind or in the form of a specified service, with orwithout any benefit in the form of interest, bonus, profit or in anyother form. These elements of the definition are followed byspecific exclusions contemplated in clauses (i) to (vii). Clause (i)of the exceptions covers an amount which is raised by way ofshare capital or by debenture, bond or other instrument governedby the guidelines and regulations of SEBI. Clause (v) states thatmoney received in the ordinary course of business by way ofsecurity deposit, dealership deposit, earnest money or advanceagainst an order of goods or services shall be excluded. Theexclusions in clause (i) to (vii) indicate that transactions whichwould otherwise fall within the broad sweep of the definition areexcluded. [Para 31][506-F-G; 507-A; 508-B-F]

1.3 The definition of ‘deposit’ uses the phrase ‘includes’and ‘shall be deemed to have always included’. The import ofthis is to create a legal fiction by which actions which though notincluded within the natural meaning of the expression are intendedto be included. The combined use of ‘includes’ and ‘deemed tohave always included’ while defining the term ‘deposit’ makesthe term inclusive and not restrictive. [Para 32][509-A-B]

1.4 The expression ‘deposit’ is conspicuously broad in itswidth and ambit for it includes, not only any receipt of money butalso the acceptance of any valuable commodity by a financialestablishment under any scheme or arrangement. The expression‘any’ is used in the substantive part of the definition of theexpression ‘deposit’ on five occasions namely; (i) Any receipt ofmoney; (ii) Any valuable commodities; (iii) By any financialestablishment; (iv) With or without any benefit; and (v) In anyother form. [Para 33][509-B-E]

1.5 The repeated use of the expression ‘any’ by the statutewhile defining both the above expressions is a clear reflection ofthe legislative intent to cast the net of the regulatory provisionsof the law in a broad and comprehensive manner. Unlike manyother state enactments which govern the field, clause (c) of Section AB

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A2 of the MPID Act comprehends within the meaning of a depositnot only the receipt of money but of any valuable commodity aswell. [Para 35][509-F-G]

1.6 According to the second ingredient of Section 2(c), themoney or commodity must be liable to be returned. However,Bsuch return need not necessarily be in the form of cash or kindbut also in the form of a service, with or without any benefit suchas interest. It needs to be recalled that clause (v) of Section 2(c)states that a deposit of money or commodity made as a securitydeposit, dealership deposit or an advance amount is excludedfrom the definition of the phrase ‘deposit’. To illustrate, if aCmember of a financial establishment deposits Rs. 25,000, andthat money is returned on cessation of membership by makingdeductions, the issue of whether the deposit is a security depositor of the nature covered under Section 2(c) should be determinedwith reference to the structure of operation and functioning ofDthe financial establishment. It is to be noted that the definitionalso states that the return may be with or without interest or anybenefit. Therefore, the submissions made by both the sides onwhether NSEL had through its representations assured a 16%return on trading in the platform is immaterial for the purpose ofdetermining if NSEL accepted deposits. [Para 36][510-B-E]

E

1.7 The bye-laws elucidate that NSEL receives both moneyand commodities from trading members. In order to decide ifthese receipts by NSEL could be regarded as ‘deposits’, the testof ‘return’ will have to be satisfied. The test is that the return bein cash, kind or service. It is not necessary that the return shouldFbe with the benefit of interest, bonus or profit. Therefore, if thefinancial establishment is obligated to return the deposit withoutany increments, it shall still fall within the purview of Section 2(c)of the MPID Act, provided that the deposit does not fall withinany of the exceptions. The exception of relevance is clause (v)Gwhich states that amounts received in the ordinary course ofbusiness by way of (a) security deposit; (b) dealership deposit;(c) earnest money; and (d) advance against order for goods orservices shall be excluded from the purview of the term ‘deposit’.[Para 37][510-E-F; 511-A-B]

H

1.8 The trading members pay NSEL a margin deposit andNSEL maintains a Settlement Guarantee Fund-SGF. Regulation4.12 states that only transactions of those members who havepaid the margin deposit and security deposit shall be consideredas valid. Therefore, the payment of margin deposit and securitydeposit is ‘mandatory’ for a person to trade on NSEL‘s platform.Regulation 4.12 refers to the SGF as a ‘security deposit’. Similarly,bye-law 12.2.1 stipulates that each member shall contribute aminimum security ‘deposit’. However, merely because the SGFis referred to as a security ‘deposit’, the exception would notautomatically be applicable. The meaning of the phrase ‘securitydeposit’ takes colour from the surrounding phrases. Clause (v)to sub-Section 2(c) excludes security deposit, dealership deposit,earnest money, and an advance against an order for goods andservices from the ambit of the phrase ‘deposit’. The conceptsused in sub-Section 2(c) (v) fall in two categories: (i) tokenamounts paid to indicate the earnest to purchase (earnest moneyand advance money), and (ii) payments required to meet exigentsituations of default by a party (dealership deposit and securitydeposit). [Para 38][511-C-F]

1.9 The features of the SGF indicate that the fund is usedto cover those expenses, which are beyond the utilization whichis made out of a regular security fund. Unlike a security depositbetween a landlord and a tenant where the fund is used to meetthe ‘essential obligations’ of the landlord such as repair workand deductions are made when the tenant has outstandingpayments, NSEL uses the deposit to cover the paymentobligations of the trading member (buyer) to another tradingmember (seller) since NSEL is a counter party to the transactions.However, NSEL uses the fund to cover functions beyond its roleas a counter-party. For example, the fund is used to cover losesfaced by the NSEL in the settlement operations, investments aremade in securities, and the fund is allotted in various segmentsof trading, where the funds are also utilised to cover loses, if any,in the segment. Therefore, these three features of the SGFindicate that though the SGF is termed as a ‘security deposit’ innomenclature, its features do not represent a security deposit.

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ASince NSEL receives ‘money’ in the form of SGF that is returnedin money and services, and is not covered by the exceptions, itwould fall within the expression ‘deposit’ as defined in u/s 2(c).[Para 41][512-G-H; 513-A-C]

1.10 A person who wishes to trade in the platform of NSELBis required to place the commodities in the accredited warehouseof NSEL. NSEL would then provide the trader with a warehousereceipt. When the buyer‘s offer and the seller‘s offer is matched,NSEL would debit the amount from the buyer member‘s pay inobligations and it would be credited to NSEL‘s exchangesettlement account. The Operations Department would confirmCwith the Delivery Department if the requisite quantity of aparticular commodity of the seller is available. After suchconfirmation, the Operations Department would release thepurchase price to the selling broker’s designated bank account.Simultaneously, a Delivery Allocation Report would be issued to Dthe buyer’s broker or the buyer. Once the VAT invoice is paid,NSEL would issue a Delivery Note authorizing the Buyer to takedelivery from the designated warehouse or if the buyer chooses,he can take constructive possession of the commodity. There isnothing in the definition of the term ‘deposit’ to mean that theacceptance of the commodity should be accompanied by a transferEof title to the commodity. Even if the financial establishment isonly in ‘custody’ of the commodity, it would still fall within thepurview of the phrase ‘acceptance of commodity’. On theacceptance of custody of the commodity, NSEL has to providevarious services such as an obligation to keep the commodityFsafe and without any damages. Additionally, the OperationsDepartment and the Delivery Department will have to coordinatewhile matching the contracts. Similarly, after the delivery note issent to the buyer, the commodity is either delivered to the buyeror the buyer is put in constructive possession of the commodity.

The phrase ‘warehouse receipt’ is defined in Bye-law 2.96 as aGdocument evidencing that the commodity is being held by NSELin the approved warehouse. Clause (b) to Bye law 4.20 statesthat if the outstanding transactions have not been settled by givingor receiving deliveries, then it (the commodity) shall be auctionedby buying-in or selling-out as per the Business Rules of theH

Exchange. Bye-law 10.11 states that the commodities shall bedelivered to and delivery taken from only the designatedwarehouses. Therefore, NSEL offers a multitude of ‘services’ inreturn for receiving the commodity. The receipt of thecommodities and holding the commodities (when the membersare put in constructive possession) in the accredited warehousesis a ‘deposit’ under Section 2(c) of the Act. [Para 42][513-D-H;514-A-C]

1.11 The expression valuable commodity is not defined bythe statute. There is no valid basis to accept the submission ofthe respondent that the expression should only comprehendwithin it precious metals such as gold and silver. If the legislatureintended to so restrict the definition of the expression valuablecommodity, it could have used an explanation importing anartificial meaning to the expression. However, the legislature hasdesisted from doing so. A valuable commodity is a commoditywhich has significant value. This does not refer only to the intrinsicvalue of the commodity. Whether or not a commodity is valuablehas to be determined bearing in mind the salutary object andpurpose of the Act which is to protect the interest of depositors.It is in this context that it becomes necessary to adopt a purposiveconstruction which would give effect to the meaning and contentof the law. Any attempt to read the definition in a restrictive sensewould be contrary to legislative intent. The intent of the legislatureis to define the expression deposit‘ as well as the expressionfinancial establishment‘ in a comprehensive and all-encompassingmanner. Therefore, the phrase valuable commodity‘ cannot berestricted to only mean precious metals. Agricultural commoditieswhich NSEL trades in will fall within the purview of the term.[Para 43][514-D-G]

1.12 The paired contracts were designed as a unique tradingopportunity by NSEL under which a trader would, for instance,purchase a T+2 contract (with a pay-in obligation on T+2) andwould simultaneously sell a T+25 contract (with a pay-out of fundson T+25). The price differential between the two settlement dateswas represented to offer an annualized return of about 16%. NSELcategorically represented that all trades were backed by collateralsin the form of stocks and its management activities included A

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Aselection, accreditation, quality testing, fumigation and insurance.Therefore, NSEL represented that on receiving money andcommodities, the members would receive assured returns‘ anda service‘. Though NSEL has been receiving deposits‘, it hasfailed to provide services as promised against the deposits andhas failed return the deposits on demand. Therefore, the State ofBMaharashtra was justified in issuing the attachment notificationsunder Section 4 of the MPID Act. [Para 45][517-E-H]

1.13 The High Court has formed an erroneous opinion thatfirstly, only if the return includes interest, bonus or any otheradded benefit, it would be a deposit for the purpose of the MPIDCAct. However, Section 2(c) states that the return may be with orwithout any benefit in the form of interest, bonus, profit or in anyother form. The definition does not stipulate that there must bean added benefit, rather that the added benefit is irrelevant forthe purpose of the definition; secondly, that for the purpose of u/Ds 2(c), the receipt of the commodity or money must be retainedby itself. The definition does not provide any such embargo.Rather, the definition is broadly worded to include even thepossession of the commodities for a limited purpose. The HighCourt has read the definition of ‘deposit’ narrowly without anyreference to the salutary purpose of the MPID Act.The impugnedEjudgment of the Bombay High Court is set aside. The impugnednotifications issued under Section 4 of the MPID Act attachingthe properties of the respondent are valid. [Para 61, 66][535-C-E; 536-F]

63 Moons Technologies v. Union of India (2019) 18FSCC 401; New Horizon Sugar Mills Ltd. v. Governmentof Pondicherry (2012) 10 SCC 575 : [2012]8 SCR 874; KK Bhaskaran v. State (2011) 3 SCC 793: [2011] 3 SCR 527; State v. KS Palanichamy (2017)16 SCC 384 : [2017] 4 SCR 34; PGF v. Union of India(2015) 13 SCC 50 : [2013] 6 SCR 32; Mohinder SinghGGill v. CEC (1978) 1 SCC 405 : [1978] 2 SCR 272;Indra Sarma v. VKV Sarma (2013) 15 SCC 755 : [2013]14 SCR 1019; Vijay C. Puljal v. State of Maharashtra(2005) 4 CTC 705 (Bom); New Horizons Sugar MillsLimited v. Government of Pondicherry (2012) 10 SCCH575 : [2012] 8 SCR 874; State of Maharashtra v. Vijay THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIESLTD.

C. Puljal (2012) 10 SCC 599; Sonal Hemant Joshi v.State of Maharashtra (2012) 10 SCC 60; Soma SureshKumar v. Government of Andhra Pradesh (2013) 10SCC 677: [2013] 10 SCR 328 – referred to.

A

Bryan A Garner, Black’s Law Dictionary (11 ed.Thomson Reuters) – referred to.

B

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.2748-49 of 2022.

From the Judgment and Order dated 22.08.2019 of the High Courtof Judicature at Bombay in Writ Petition No.508 of 2017 and Writ PetitionNo.1181 of 2018.

F

With

Civil Appeal Nos.2750-51 of 2022

Vikramjit Banerjee, ASG, Jayant Mehta, Sr. Adv., Rahul Chitnis,GSachin Patil, Aaditya A. Pande, Geo Joseph, Ms. Shwetal Shepal,Siddhartha Sinha, Tathagat Sharma, Ms. Jahnvi Prakash, Prashant Rawat,Aditya Mishra, Abhishek Mahajan, Ms. Sanjana Saddy, Bhushan Shah,Sanyat Lodha, Advs. for the Appellant.

H

ADr. A. M. Singhvi, Sr. Adv., Mahesh Agarwal, Ankur Saigal, ArvindLakhawat, Ms. Priyanka Vora, Ms. Misha Rohatgi, Amit Bhandari, Ms.Mansi Taneja, Ms. Ayushi Amod, Karan Verma, E. C. Agrawala, Ms.Anindita Mitra, Akhil Sachar, Sangram Singh, Ms. Jasmine Damkewala,M/s Legal Options, Advs. for the Respondent.

BThe Judgment of the Court was delivered byDR. DHANANJAYA Y CHANDRACHUD, J.CONTENTS

A.Facts ......................................................................... 3*

B.Submissions.............................................................17*

C

C.Analysis....................................................................25*

C. 1 Framework of the MPID Act .......................25*

C. 2 Framework of NSE ........................................27*

C. 3 Definitions of ‘Deposit’ and ‘FinancialDEstablishment’: Interpretation of Section 2(c) and 2(d)

of the MPID Act .....................................................40*

C. 3.1 Settlement Guarantee Fund: Depositunder Section 2(c) of the MPID Act ...46*

C. 3. 2 Receipt of commodities: Deposit underESection 2(c) of the Act ...........................49*

C.4Uncovering the Conspiracy ..................................55*

C. 4.1 The Grant Thornton Report .....................55*

C. 4. 2 63 Moons Judgment .................................56*

F

C. 5 Constitutional Validity of the MPID Act ..............65*

C. 6 The High Court’s Judgment ..................................71*

1. The appeal arises from a judgment dated 22 August 2019 ofthe Bombay High Court, by which certain notifications attaching theproperty of the respondent under Section 4 of the Maharashtra ProtectionGof Interest of Depositors (in Financial Establishments) Act 1999[1] havebeen quashed. The respondent holds 99.99% of the shareholding ofNational Spot Exchange Ltd[2]. At the core of the dispute is whether 1 “MPID Act”

2 “NSEL”H* Ed. Note : Pagination is as per the original Judegement.

NSEL is a ‘financial establishment’ within the meaning of Section 2(d)of the MPID Act.

A. Facts

2. NSEL is a company incorporated under the Companies Act1956, and is a wholly owned subsidiary of Financial Technologies (India)Limited, which is now known as 63 Moons Technologies Limited[3]. On 5June 2007, the Union of India issued a notification under Section 27 ofthe Forward Contracts (Regulation) Act 1952[4] exempting forwardcontacts of one-day duration for sale and purchase of commodities tradedon NSEL from the application of the provisions of the enactment. NSELstarted operating as an exchange for spot trading in commodities. NSELlaunched contracts for buying and selling of commodities on its tradingplatform with different settlement periods, ranging from T+0 to T+36days. ‘T’ indicates the trade date, that is the date on which the tradetook place and +0 or +36, indicates the number of business days afterthe trading day when the delivery of the commodity and the payment ofprice is made.

3. NSEL offered ‘paired’ contracts. Such contracts enabledtraders either by themselves or through their brokers, to simultaneouslyenter into paired contracts, such as of T+2 and T+25 duration. The sellerthrough his broker puts the commodities on sale and the buyer throughhis broker looks to purchase commodities of specific requirements. NSELthen pairs the buyer and the seller if there is a match between therequirement of the buyer and the available commodities with the seller.The buyer and the seller simultaneously enter into T+2 and T+25 contracts.For example, if ‘A’ (the buyer) wants to buy one ton of basmati rice, hewould trade on NSEL’s platform through his broker. The platform wouldidentify that ‘B’ (the seller) has an offer to sell the quantified commodity.NSEL would then match both the contracts. The date of matching of thecontracts is termed as the trade date or ‘T’. ‘A’ must then pay the priceof the commodity to NSEL, which checks if ‘B’ has deposited the stockin a warehouse accredited to NSEL for delivery within two days. OnceNSEL has confirmed that ‘B’ has deposited the stock in the warehouse,it transfers the money to ‘B’. Simultaneously, the same parties enter intoa T+25 contract by which ‘A’ (who was the buyer in the T+2 contract)would sell the same quantity of commodity purchased to ‘B’ (who was 3 “FCIL or 63 Moons”

4 “FCRA”

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Athe seller in the T+2 contract). The difference between the purchasingcost and the selling cost is the profit that the trading member acquiresthrough the trade. A flow chart indicating a representation of thetransaction is set out below:

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4. A detailed step-wise trading process of the paired contracts isindicated below:

A

(i) A trading member of NSEL who wishes to trade in theplatform is required to place a specific quantity of thecommodity in a warehouse accredited to NSEL. Thewarehouse would then generate a warehouse receipt;B

(ii) The registered trading member or his broker who had placedhis commodity in the warehouse could on the basis of thestandard proforma contracts offered by NSEL place offersfor sale of the commodity on the platform, stipulating theprice and quantity offered; C

(iii) The buying trading member or his broker would input buyorders of a particular commodity and quantity on the NSELtrading platform;

(iv) When a sale offer and a buy offer coincide, the exchangewould be matched by NSEL, stipulating the commodity, theDprice, and the quantity;

(v) The Exchange would communicate all the trades effectedat the end of the day;

(vi) On the next day, an obligation report recording the pay-inEand delivery obligations would be forwarded to the tradingmembers;

(vii) On the day after (that is, settlement date), NSEL woulddebit the trading member’s designated settlement accountfor the amount of the buying member’s pay in obligationsand it would be credited to NSEL’s exchange settlementaccount. NSEL’s Operations Department would informNSEL’s Delivery Department of the selling member’sdelivery obligations. Based on the intimation, NSEL’sDelivery Department would confirm to the OperationsDepartment if the requisite quantity of the particularcommodity is available according to the Warehousereceipts. After such confirmation, the OperationsDepartment would release the purchase price to the sellingbroker’s designated bank account. Simultaneously, aDelivery Allocation Report would be issued to the buyer’s F

G

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478SUPREME COURT REPORTS

Abroker or the buyer informing him that the commoditypurchased was allotted to him; and

(viii) NSEL would then send the buyer’s details to the sellingtrading Member and the selling trading member wouldarrange for the non-member client/seller to generate a VATBpaid sale invoice of the commodity. On the basis of theDelivery Allocation Report and the VAT Paid Invoice, NSELwould issue a Delivery Note authorizing the buyer to takedelivery from the designated warehouse. If the buyer chosesto not take delivery, he would be put in constructivepossession of the commodity where he would be entitled toCtake possession at any time.

5. On 27 April 2012, the Department of Consumer Affairs[5] issueda show cause notice to NSEL on why action should not be taken againstit for permitting transactions in violation of the exemption notification.On 12 July 2012, the DCA directed NSEL to give an undertaking that noDcontracts shall be launched until further instructions, and that all existingcontracts must be settled on the due dates. In July 2013, about 13,000persons who traded on the platform of NSEL claimed that other tradingmembers had defaulted in the payment of approximately Rs 5,600 crores.NSEL issued a circular on 31 July 2013 suspending its spot exchangeEoperations. It stated that the delivery and settlement of all pendingcontracts would be merged and the contracts would be settled after theexpiry of 15 days. NSEL published a statement on 6 August 2013representing that it had sufficient stocks valued at Rs 6,032 crores in itswarehouses. A new pay-in schedule was announced by NSEL on 14August 2013 by which the Exchange commenced the pay-in scheduleFfrom 16 August 2013 and pay-out schedule from 20 August 2013, in thesame manner every week. It was also represented that the memberswould be entitled to get simple interest on their outstanding dues witheffect from 16 August 2013 on a reducing balance at 8% per annum tillthe end of the settlement calendar. The notification is extracted below:

G

“National Spot Exchange Limited

CircularAugust 14, 2013

Settlement Schedule

In terms of the provisions of the rules, Bye-Laws and BusinessRules of the Exchange and further to circular no. NSEL/TRD/2013/065/ dated July 31 2013, the Members of the Exchange arehereby notified that the Exchange has finalised the followingrevised schedule for settlement of outstanding dues payable tothe members.

This schedule has been prepared taking into account the exigenciesemerging from sudden closure of trading operation, liquidity problemaccentuated by withdrawal of buyers credit limits by the banksfrom the members, who are in pay in and the extensive discussiondone by the members who have to complete pay in and memberswho have to receive the payments. Considering the challenges,the revised schedule of settlement has been prepared to ensurereduction in payment rist and meet the settlement obligation:

1. The Exchange will commence the Pay-in schedule fromFriday, the 16[th] August, 2013 and pay-out from Tuesday,the 20[th] August, 2013 and thereafter in the same mannerevery week.

2. The Exchange shall effect pay out on a pro-rata basis everyweek based on the money recovered as per the settlementcalendar attached herewith. These payments are subjectto realization of cheques of the members, who have tocomplete pay-in. In case any payment is not realised, thenthe Exchange shall take measures as per its Rules and Byelaws.

3. All funds realized up to Friday every week starting fromAugust 16, 2013 shall be disbursed on Tuesday of thesubsequent week.

4. The schedule has taken into account all promised orexpected payment from the members, who have given post-dated cheques or letters of commitment.

5. Members/clients shall be entitled to get interest on theiroutstanding dues with effect from 16[th] August 2013 onreducing balance method, based on simple interest rate of8% per annum till end of settlement calendar. Interestamount shall be paid at end of the settlement.

B

C

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6. A detailed settlement Calendar is being enclosed herewith.For and on behalf of A

National Spot Exchange Ltd.

Santhosh Mansingh

BAsst. Vice President”

6. By a Notification dated 19 September 2014, the CentralGovernment withdrew the exemption granted on 23 July 2008. TheForward Markets Commission[6] recommended to DCA that steps betaken to ascertain the quantity and quality of commodities at accreditedCwarehouses, the financial status of buyers and trading members, andthat liability be fixed on the promoters of NSEL, i.e 63 Moons. On 27August 2013, FMC directed a forensic audit of NSEL by Grant ThorntonLLP. The Union of India ordered an inspection of accounts of NSELand 63 Moons under Section 209A of the Companies Act. The EconomicDOffences Wing registered cases against the directors and keymanagement personnel of the NSEL and 63 Moons and against tradingmembers and brokers of NSEL under the provisions of the Indian PenalCode and the MPID Act.

7. Pankaj Ramnaresh Saraf, a Director of Vostak Far EastSecurities Prvt. Ltd., a company involved in the business of investment,Etrading, and financing filed a complaint[7] on 30 September 2013 againstthe directors and persons holding key management posts in NSEL, 25borrowers/trading members and some brokers of NSEL for offencesunder Sections 120B, 409, 465, 468,471,474 and 477A of the Indian PenalCode 1860. The complainant stated that he had primarily been transactingFin T+2 and T+25 contracts. He further stated that since NSEL suspendedtrading and deferred settlement of all one-day forward contracts by fifteendays, he had not received payment of Rs 202 lakhs that was due to himunder various contracts. On 14 August 2013, he was informed by hisbroker that NSEL had issued a settlement schedule for the payment ofoutstanding dues after seven months. He alleged that the commoditiesGwere traded by providing ‘false’ warehouse receipts of ‘non - existentcommodities’. It was also alleged in the complaint that NSEL held thecommodities in warehouses accredited to it as a ‘trustee’ on behalf ofthe depositors (buyers) and that the misappropriation is a criminal breach6 “FMC”H7 FIR No 216 of 2013

of trust. In addition to the above, he also alleged that the SettlementGuarantee Fund[8] had been misused by NSEL.

A

8. The FIR was later transferred to the Economic Offences Wing[9]of Mumbai Police. The case was registered and Sections 3 and 4 of theMPID Act were added to the FIR. The case was transferred to theSpecial Court constituted under the MPID Act.[10] NSEL filed a writpetition challenging the invocation of the MPID Act on the ground thatthe exchange is not a ‘financial establishment’ under the provisions ofthe Act. By an order dated 1 October 2015, the petition was dismissedby a Division Bench of the High Court on the following grounds:

B

(i) The material collected by EOW during the course of theinvestigation revealed that NSEL did not carry out itsexchange operations according to the bye-laws. It wasprima facie evident that NSEL represented to the tradersthat they would be provided security free loans and thatthey would receive fixed returns of 14% to 16% pa; C

D

(ii) The record indicates that the transactions were notaccompanied by physical delivery of goods. In many cases,the accounts of NSEL and the suppliers of the goods didnot tally. The record also indicates that there were multipleaccommodation entries due to collusion between NSEL andthe trading members;E

(iii) Section 2(d) of the MPID Act defines ‘financialestablishment’ as any person accepting any deposit undera scheme. Section 2 (c) of the MPID Act provides aninclusive definition of the term ‘deposit’. Since NSELassured the traders that their investments in paired contractswould secure them a return of 14 to 16% pa, the receipt ofthe returns would prima facie fall within the definition of‘deposit’; and F

(iv) A charge-sheet and supplementary charge-sheets have beenfiled. NSEL has an alternative remedy of applying forGdischarge before the trial Court.

8 “SGF”

9 “EOW”

10 The case was registered as MPID Case 1 of 2014

A9. The State of Maharashtra issued a notification on 21 September2016 under Section 4 of the MPID Act by which the properties of therespondent were attached. The relevant extract of the notification isreproduced below:

“No. MPI 2016/C.R.541/B/Pol II:- Whereas complaints have beenBreceived from number of depositors against M/s La-Fin FinancialServices Pvt. Ltd. and M/s La-Financial Services Pvt. Ltd.(hereinafter referred to as “the said Financial Establishment”)complaining that they had collected the Fund and have defaultedto return the said deposits made by the depositors , on demand; CAnd whereas, the State Government is satisfied that the saidFinancial Establishment and its Chairman/Directors are not likelyto return the deposits to the depositors and hence the Governmenthas to protect the interests of the depositors;

And whereas the properties in the Scheduled appended heretoDare alleged to have been acquired by the said FinancialEstablishment and its Chairman/Directors from and out of thedeposits collected by the Financial Establishment; Now, therefore, in exercise of the powers conferred by sub-Section(1) of Section 4, Section 5 and Section 8 of the MaharashtraEProtection of Interest of Deposits (in Financial Establishment)Act, 1000 (Mah. XVI of 2000) (hereinafter referred to as “thesaid Act”) the Government of Maharashtra hereby attaches theproperties of the said financial Establishment and in the name ofits Chairman/Directors as specified in the Schedule.”

F10. The Supreme Court on 26 October 2016 dismissed aswithdrawn, the Special Leave Petition filed against the order of theBombay High Court. The appellants filed a Writ Petition before theBombay High Court challenging the notification dated 21 September2016 issued under Section 4 of the MPID Act attaching the propertiesof the respondent. The validity of Sections 4 and 5 of the MPID ActGwas challenged on the ground that they are violative of Articles 14, 19and 300-A of the Constitution. The reliefs sought in the writ petition areextracted below:

“a. The Hon’ble Court may declare that Sections 4 and 5 of theMPID Act are violative of Articles 14 and 19 of the ConstitutionH

and Article 300-A of the Constitution and consequently issue aWrit of Mandamus and/or any other appropriate Writ, Order orDirection restraining the Respondent Writ, Order or Directionrestraining the Respondent, its servants and/or agents from actingin pursuance of those provisions;

b. In view of Prayer A above, issue a Writ, Order or Directionunder Article 226 of the Constitution quashing and setting asidethe Impugned Notification dated 21.09.2016 (being Exhibit-Sherein) issued by the Respondent exercising the power underSection 4 of the MPID Act;

c. In the alternative, issue a Writ, Order or Direction in the natureof Certiorari or any other appropriate Writ, Order or Directionunder Article 226 of the Constitution quashing and setting asidethe Notification dated 21.09.2016 as being ultra-vires Section 4and 5 of the MPID Act.

11. The State of Maharashtra issued further notifications dated 4April 2018[11], 7 April 2018[12], 11 April 2018[13], 19 April 2018[14], 15 May2018[15] and 19 October 2018[16] under Sections 4 and 5 of the MPID Act,attaching the properties of the respondent to recover the defaulted money.The Writ Petitions were heard together and disposed of by a DivisionBench of the Bombay High Court by a judgment dated 22 August 2019.The petition was allowed on the following grounds:

(i) The pay-in amount received from the buyer was only forthe purpose of passing it over to the seller on the samedate. This amount would not fall within the purview ofSection 2(c) of the MPID Act in terms of which a ‘deposit’must be the receipt or acceptance of a valuable commoditywhich would be ‘repaid’ by the financial establishment aftera specified period;

(ii) NSEL only performed the role of a facilitator, in a mannersimilar to the Bombay Stock Exchange. NSEL did not 11 Notification No. MPI/1118/C.R-394/Pol-11

12 Notification No. MPI-1118/C.R. 329/Pol-1113 Notification No. MPI-1118/C.R. 434/Pol 11 read with corrigendum bearing MPI No.1118/C.R.-434/Pol 11 dated 19 April 2018.

14 Notification No. MPI 1118/C.R. 4999 Pol 11

15 Notification No. MPI-1118/C.R. 597/Pol 11

16 Notification No. MPI 1118/CR 1040/Pol 11

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Areceive money with the obligation to return it on maturity.The fact that VAT is collected by the selling members fromthe buying members and that TDS is not deducted by NSELindicates that NSEL is a mere pass through platform;

(iii) The contract notes do not disclose that NSEL received anyBmoney or commodity with an assured return. Rather, thedifference between the buy contract and the sell contractis the profit that the member receives. The profit from thetransaction is determined by totalling the two amounts bytaking into consideration the number of days when thecommodity was sold and the pay-out was scheduled. ItCvaries with different products based on the period whenthe sell contract (that is the second contract) is scheduled;

(iv) The entries in the ledger of the traders reflect the deliveryobligation and record the credit/debit pursuant to the trade.The entries of NSEL’s settlement bank account show theDamount received from a particular trader. The entries ofpay-in and pay-out match with the ledger accounts ofindividual traders;

(v) Mr. Pankaj Saraf in his FIR has not stated that he hasdeposited money with NSEL. He has stated that trading onEthe platform was successful until the cessation of furthertrades ;

(vi) The transactions had gone wrong since as depicted in theshow cause notice to NSEL, the outstanding positions oftrade did not result in delivery by the end of the day. AfterF31 July 2013, 24 sellers failed to honour their part of theagreement by purchasing back the commodities on T+25days. This was noted as a violation of the exemption granted.However, this does not change the fact that NSEL did notreceive any ‘deposits’ within the meaning of Section 2 (c)of the MPID Act since NSEL did not receive theGcommodities or money to be retained. NSEL only receivedtransaction and warehouse charges which cannot beconsidered as a ‘deposit’;

(vii) EOW filed a charge sheet on 4 August 2014 in which itwas stated that the important feature of the exchange isH

that it guarantees that both the parties would comply withtheir contractual obligations and if the trading member isunable to pay, the Exchange would sell the goods and recoverthe money. The charge sheet also notes that NSELencouraged the investors to enter into contracts withoutdepositing commodities in the warehouses. However, thecharge sheet makes it evident that even the EOW was ofthe opinion that the Exchange was only acting as atransaction agent. Further by a letter dated 16 August 2013from FMC, information on defaulters was sought by NSEL;

(viii) Merely because one of the brochures refers to an assuredyield of 14 to 16% pa, it cannot be held that a ‘deposit’ wasmade;

(ix) In the event that accounts of NSEL and the suppliers donot tally and delivery of commodities has not been provided,this may constitute an offence under Sections 465 and 467of the IPC. NSEL is not absolved of any of these liabilities;

(x) At the highest, since the members had to pay back theamounts due on T+25 , they could be construed as a‘financial establishment’;

(xi) The warehouse receipts do not establish the nature of thetransaction nor can it be held that the deposit of commoditieswould fall within the purview of the definition of ‘deposit’since the commodity that was to be deposited in a warehousewas to be sold by the seller;

(xii) The judgment of the Supreme Court in 63 MoonsTechnologies v. Union of India[17 ]does not have anybearing on whether the attachment of properties initiatedunder Section 4 of the MPID Act is valid;

(xiii) The forensic report of the 17 defaulter companies revealsthat the defaulters have utilized the funds and havetransferred them to their sister companies;

(xiv) In another case of one of the defaulting trading membersthat is pending before the Gujarat High Court, the DeputySecretary, Home Department, Government of Maharashtra 17 (2019) 18 SCC 401

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486SUPREME COURT REPORTS

had referred to the trading member as a ‘defaulter’ whohad committed offences under Sections 409,465, 467,468,471 and 474 of the IPC; A

(xv) The contention that Section 4 of the MPID Act must beread down in view of the ‘wide ambit’ of the provisionsBwhich could be misused is left open since the Supreme Courtin KK Bhaskaran v. State and Sonal Hemant Joshi v.State of Maharashtra has upheld the constitutional validityof the Depositors Acts in Tamil Nadu and Pondicherry,specifically noting that the decision would also apply to theMPID Act since the provisions are pari materia; C

(xvi) By an interim order on 24 October 2018, the impugnednotifications attaching the properties were stayed on theground that the attachment was in excess of the defaultedamount. It was noted in the interim order that the defaultedamount is Rs. 4822.53 Crores whereas the authorities haveDattached properties worth Rs. 8547 Crores, including Rs.2200 Crores from NSEL. This order was challenged beforethe Supreme Court and it has refused to interfere; and

(xvii) The audit report submitted US Gandhi and Co. has tracedtrade obligations of the trading members who are defaulters.ENSEL has also instituted recovery suits against thedefaulters.

B. Submissions

12. Mr. Jayant Mehta, Senior Counsel appearing for the appellantsubmitted:

F

(i) The definition of ‘deposit’ in Section 2(c) of the MPID Actis broad and inclusive. The provision must be interpretedwidely keeping in view the statement of objects and reasonsfor the enactment of the law;

(ii) NSEL received money from the seller and returned it inGkind (through commodities). NSEL received commoditiesfrom the seller and returned an equivalent amount after aspecified period in cash. Therefore, NSEL accepted depositsfrom both the seller and the buyer;

(iii) Through a paired contract, the buying member would buy aHpurchasing contract and simultaneously sell a sale contract paired by NSEL. The sale price was pre-designated byNSEL to offer an annualised return of 14-16% to the buyingmember; A

(iv) NSEL is both the bailee of cash (at the buyer’s end) and ofvaluable commodities (at the seller’s end);

(v) The writ petition filed by the respondent before the HighBCourt was not maintainable since there was an alternativeremedy of raising an objection against the attachment ofproperty before the Designated Court under Section 7 ofthe MPID Act. Further, any person who is aggrieved bythe order of the Designated Court under Section 10 canCappeal to the High Court within 60 days from the date ofthe order in terms of Section 11 of the MPID Act; and

(vi) The settlement cycle broke because:

(a) NSEL, contrary to its bye-laws and rules, did notwarehouse the commodities. The buying member didnot have knowledge of whether the commodities werewarehoused; and D

(b) The buying member was lured into a paired contracton the assurance that the commodity in thewarehouse would constitute a security and NSELwould be the counter-guarantor. However, NSELcolluded with the selling members and facilitatedtrades without ensuring that the commodities weredeposited in the warehouses.

E

13. Mr. Vikramjit Banerjee, ASG appearing for the State ofMaharashtra made the following submissions:

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(i) NSEL is a financial establishment under Section 2(d) of theMPID Act since it has accepted deposits as defined underSection 2(c). NSEL has been trading in different types ofcommodities through ‘farmer’ contracts, paired contracts,e-series contracts, among others. NSEL guaranteed assuredreturns to investors; G

(ii) The provision of warehouse receipts along with theassurance of returns indicates that NSEL was acceptingdeposits; H

[2022] 10 S.C.R.

A(iii)This Court in New Horizon Sugar Mills Ltd. v.Government of Pondicherry[18 ]has held that the statelegislature is competent to legislate upon financialestablishments with an object to protect investors. The Courtalso held that the expression ‘financial establishment’includes a natural and a juristic person such as a companyBincorporated under the Companies Act. This Court has heldin KK Bhaskaran v. State[19], State v. KS Palanichamy,[20]and PGF v. Union of India[21 ]that the object of a lawregulating financial establishments is to protect the investors.Therefore, the provisions of the statute must be interpretedCkeeping this salient purpose in mind;

(iv) This Court in 63 Moons Technologies (supra)held thatNSEL carried out trade in paired contracts in commoditiesand this created financial transactions distinct from saleand purchase transactions; and D(v)The respondent has an alternate statutory remedy availableto it under Section 10 of the MPID Act.

14. Dr Abhishek Manu Singhvi, Senior Counsel appearing for therespondent submitted that:

E(i)The commodity sellers received money from the buyers onT+2 with an obligation to repay the money on T+25. NSELobtained decrees against the defaulters. Therefore, at thehighest, the appellants can only argue that the defaultingtrade members (not NSEL) are ‘financial establishments’; F(ii)The State has characterised the member defaulters of theexchange as ‘defaulter companies’ and as ‘financialestablishment’ in notifications issued by the HomeDepartment on 31 March 2017 and 24 March 2018 whichindicates that NSEL is not a defaulter;

(iii) According to the forensic report submitted by the EOW,Gthe full money trail has been traced to the defaultingmembers. NSEL did not receive any money as ‘deposit’; 18 (2012) 10 SCC 57519 (2011) 3 SCC 79320 (2017) 16 SCC 384H21 (2015) 13 SCC 50

(iv) The State of Maharashtra in a case which is pending beforethe Gujarat High Court relating to one of the members(buyers) submitted on affidavit that the defaulting membershave defrauded the investors; A

(v) Even if the impugned judgment is upheld, NSEL will not beabsolved of its criminal liability under the IPC but no criminalliability arises under the MPID Act. . NSEL and 63 Moonsare being prosecuted in various other criminal proceedings.They will face civil suits as well; B

(vi) As against the current outstanding claim of Rs. 4,676 Crores,properties in excess of Rs. 6000 Crores are attached; C

(vii) NSEL is only obligated to recover the money from thedefaulters. It has secured decrees/arbitral awards to thetune of Rs. 3,397 Crores from the members. The BombayHigh Court has accepted the determination of liability ofRs. 136.98 Crores against defaulters by the Committeeappointed by it. The Committee has crystallised a furtherDliability of Rs. 760 Crores from the defaulters which ispending acceptance by the Bombay High Court;

(viii) NSEL has filed proceedings for execution of the decreesand awards against the defaulters across five States. Sincethe process is taking time, NSEL instituted a petition[22] beforethis Court under Article 32 seeking a consolidation of allexecution proceedings; E

(ix) NSEL did not receive any ‘deposit’, as defined under Section2(c) of the MPID Act since:

(a) The impugned notifications by which the propertyof the respondent was attached under Section 4of the MPID Act proceed only on the basis thatNSEL accepted money which it failed to returnand there is no reference to a deposit founded onthe acceptance of commodities; F

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(b) The Government cannot improve on the reasonsby a subsequent affidavit (Relied on MohinderSingh Gill v. CEC[23]); and 22 WP (C) No. 995 of 2019

23 (1978) 1 SCC 405

A(c)According to the definition of ‘deposit’ underSection 2(c) of the MPID Act, only the deposit of‘valuable’ commodity is covered. In commonparlance, valuable commodities would berestricted to gold, silver, or other precious metals.NSEL only traded in agricultural commodities andBsteel. Agricultural commodities are not coveredby the definition.

(x) The traders who participated on NSEL’s platform arecorporate traders. The statement of objects and reasons ofthe MPID Act states that the Act is for the protection ofC‘small’ depositors;

(xi) The proceeding under the MPID Act would short-circuitthe trials in the pending civil suits against both NSEL and63 Moons. 63 Moons is a public listed company with morethan 50,000 shareholders, 800 employees and 2 million users.DIf the property of 63 Moons is attached, the interest ofstakeholders will be prejudiced; and

(xii) NSEL did not have control over any monies received fromthe traders. NSEL is a pass through platform, where themoney was sent to the counter party brokers on the sameEday.

15. Mr. Mukul Rohatgi, Senior Counsel, appearing for therespondent made the following submissions:

(i) NSEL runs a commodity exchange, similar to a stockFexchange. NSEL is only a transacting medium and neithercollects ‘deposits’ nor does it assure returns;

(ii) NSEL receives a commission of Rs. 100 per one lakh ofthe trade value (0.1%) from the traders;

(iii) In Bhaskaran, (supra) this Court held that the Tamil NaduGProtection of Interests of Depositors (in FinancialEstablishments) Act 1997[24] is constitutionally valid. Inparagraph 15 of the judgment, the court observed that thoughthe Tamil Nadu Act and MPID have minor differences, theview taken in the judgment would equally apply to the validity H24 “Tamil Nadu Act”

of the MPID Act. This Court rejected the challenge on theground of Articles 14, 19 and 21 without examining theprovisions of the statute. Therefore, the Court in the presentcase is not precluded from examining the constitutionalvalidity of the provisions of the MPID Act; A

(iv) Section 4 of the MPID Act is arbitrary and constitutionallyinvalid and it suffers from over-breadth since:

B

(a) Sub-section (1) of Section 4 mandates the attachment ofproperty of the ‘promoter, director, partner, manager ormemberof the said Financial Establishment.’; (b)Sub-section (2) of Section 4 divests the title of the attachedproperties without due process of law; and C

(c) Section 7 states that the Designated Court shall issue anotice to the financial establishment or any other personwhose property is attached. An objection shall be raised byall persons who are likely to have a claim. The objectionshall be decided by a summary procedure under Order 37of CPC 1908. The divestment of title of a property by asummary procedure is arbitrary.

D

(v) Though the transaction by NSEL in its platform seems tobe an exchange of commodities on paper, it was anEagreement between a lender and borrower. A borrower whohas defaulted in paying the loan can be held liable to repayit;

(vi) The forensic audit traces back the money trail to theborrowing-traders and not to NSEL; F

(vii) Five of the six attachment notifications were “omnibusnotifications” issued by an incompetent authority; and(viii) NSEL did not make a blanket assurance of 16% returns.The representations only meant that investors making ‘wiseinvestments’ would get an annualised return of 16%.

G

C. Analysis

C. 1 Framework of the MPID Act

16. The MPID Act was enacted by the legislature in Maharashtraand received the assent of the President on 21 January 2000. TheStatement of Objects and Reasons accompanying the introduction of H

[2022] 10 S.C.R.

Athe Bill states that the statute is enacted to protect the public from theincreasing menace of financial establishments grabbing money from thepublic in the form of deposits:

“There is a mushroom growth of Financial Establishments in theState of Maharashtra in the recent past. The sole object of theseBEstablishments is of grabbing money received as deposits frompublic, mostly middle class and poor on the promises ofunprecedented high attractive interest rates of interest or rewardsand without any obligation to refund the deposit to the investorson maturity or without any provision for ensuring rendering of theservices in kind in return, as assured. Many of these FinancialCEstablishments have defaulted to return the deposits to public. Assuch deposits run into crores of rupees, it has resulted in greatpublic resentment and uproar, creating law and order problem inthe State of Maharashtra, especially in the city like Mumbai whichis treated as the financial capital of India. It is, therefore, expedientDto a make a suitable legislation in the public interest to curb theunscrupulous activities of such Financial Establishments in theState of Maharashtra.”

17. Section 3 of the MPID Act envisages punishment uponconviction of every person including a promotor, partner, director, managerEor employee responsible for the management of or the conduct of thebusiness or affairs of the financial establishment which has fraudulentlydefaulted in the repayment of deposits on maturity. Section 3 is in thefollowing terms:

“Any Financial Establishment, which fraudulently defaults anyFrepayment of deposit on maturity along with any benefit in theform of interest, bonus, profit or in any other from as promised orfraudulently fails to render service as assured against the deposit,every person including the promoter, partner, director, manager orany other person or an employee responsible for the managementof or conducting of the business or affairs of such FinancialGEstablishment shall, on conviction, be punished with imprisonmentfor a term which may extend to six years and with fine whichmay extend to one lac of rupees and such Financial Establishmentalso shall be liable for a fine which may extend to six years andwith fine which may extend to one lac of rupees and such Financial H

Establishment also shall be liable for a fine which may extend toone lac of rupees.

Explanation- For the purpose of this section, a FinancialEstablishment, which commits default in repayment of such depositwith such benefits in the form of interest, bonus, profit or in anyother form as promised or fails to render any specified servicepromised against such deposit with an intention of causing wrongfulgain to one person or wrongful loss to another person or commitssuch default due to its inability arising out of impracticable orcommercially not viable promises made while accepting suchdeposit or arising out of deployment of money or assets acquiredout of the deposits in such a manner as it involves inherent risk inrecovering the same when needed shall, be deemed to havecommitted a default or failed to render the specific service,fraudulently.”

Section 4 contemplates the levy of attachment on properties of afinancial establishment on default of return of payment. Section 4 providesthat if on a complaint received from the depositors or otherwise, theGovernment is satisfied that any financial establishment has failed toreturn the deposit on maturity or demand, or to pay interest or an assuredbenefit, or has failed to provide a service that was assured against thedeposit, or if the Government has reason to believe that any financialestablishment is acting in a manner detrimental to the interest of thedepositors with the intention to defraud them, it may attach the money orproperty acquired by the financial establishment out of the deposit. Theprovision states that if such money or property is not available to beattached, the property of the financial establishment or the promoter,director, partner, manager or member may be attached.

18. Section 5 provides for the appointment of a CompetentAuthority while Section 6 contains a provision for a Designated Court.Section 7 enunciates the powers of the Designated Court regardingattachment. Under Section 7, upon receipt of an application under Section5, the Designated Court shall issue a show cause notice to the financialestablishment or any person whose property is attached on why theorder of attachment should not be made. A notice shall also be issued toall persons who are likely to have an interest in the property, calling themto submit objections to the attachment of the property on the ground thatthey have an interest in the property or a portion of it. If no cause is A

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Ashown, then the attachment shall be made absolute and directions canbe issued for the realisation and equitable distribution of assets. If causeis shown, the Designated Court shall investigate into it by following asummary procedure as contemplated under Order 37 of the CivilProcedure Code 1908. An appeal against an order of the DesignatedCourt is envisaged by the provisions of Section 11.B

19. Since NSEL did not have sufficient money or property forattachment under Section 4 on default of payment of the outstandingamounts, the State of Maharashtra attached the properties of therespondent which owns 99.9% of the shares of NSEL.

CC. 2 Framework of NSE

20. It is necessary to refer to the bye-laws of NSEL to ascertainthe structure of NSEL’s operation and functioning. Bye-law 2.17 defines“certified warehouse receipt” in the following terms:

“Certified Warehouse receipt means a receipt issued under theDauthority of the Exchange or any agency approved by the exchangeas a certified warehouse, evidencing proof of ownership of astandard quantity of commodities of a stated grade and quality bythe beneficial owner or holder of the certified warehouse receipt.Certified warehouse receipt may either be in physical form or inEdematerialised/electronic form as may be permitted by law.”

The expression ‘certified warehouse’ is defined in Bye-law 2.18as a “warehouse approved and designated by the Exchange for makingdeliveries to and taking deliveries for fulfilling contractual obligationsresulting from transaction in commodities.” Bye-law 2.51 defines ‘Margin’as follows:F

“Margin means a deposit or payment of cash/other specifiedassets/documents to establish or maintain a position in acommodity and include initial margin, special margin, ordinarymargin, delivery period margin, additional margin and variationmargin or any other type of margin as may be determined by theGExchange from time to time.”

21. The expression ‘warehouse receipt’ is defined in Bye-law2.96 to mean a document evidencing that a commodity is being held inHthe approved warehouse. Bye-law 3.7 provides for limitation of liability:

“The Exchange shall not be liable for any activities of its membersor of any other person, authorised or unauthorised, acting in thename of any member, and any act of commission or omission byany one of them, either singly or jointly, at any time shall not be inany way construed to be an act of commission or omission by anyone of them, as an agent of the Exchange. Save as otherwisespecifically provided in these Bye-Laws and in the Business Rulesand Regulations of the Exchange, the Exchange shall not incur orshall not be deemed to have incurred any liability and accordingly,no claim or recourse shall lie against the Exchange, any memberof the Board of Directors/or committee duly appointed by it orany other authorised person acting for an on behalf of the Exchange,in respect of or in relation to any transaction entered into throughthe exchange made by its members and any other mattersconnected therewith o related thereto, which are undertaken forpromoting, facilitating, assisting, regulating, or otherwise managingthe affairs of the Exchange to achieve its objects as defined in theMemorandum and Articles of Association of the Exchange.”

22. Bye-law 4.20(a) states that all outstanding transactions incommodities shall be compulsorily delivered at one or more deliverypoints or in warehouses accredited to the Exchange. Clause (b) of thebye-law states that if the outstanding transactions have not been settledby giving or receiving deliveries, then it shall be auctioned by buying-inor selling-out as per the Business Rules of the Exchange:

(a) All outstanding transactions in commodities shall in generalbe for compulsory delivery at any one or more deliverypoints and/or warehouses approved, certified and designatedby the Exchange.

(b) All outstanding positions not settled by giving or receivingdeliveries shall be auctioned by way of buying-in or selling-out as per the Business Rules of the Exchange, togetherwith a penalty as prescribed by a Managing Director orsuch committee for those failing to give or receive delivery.

Bye-Law 7.10.2 states that the Exchange shall be responsible forits commitments to each clearing member unless the cause for defaultwas under improper trades not covered by the Settlement GuaranteeFund:

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A“The Exchange shall be responsible for its commitments to eachclearing member whether the remaining clearing members withwhom it has dealings have defaulted except under circumstanceswhere improper trades not covered under the Settlement GuaranteeFund (SGF) are the cause for default…”

BBye-law 7.11 states that the Clearing House of the Exchangeshall, among other things, have the responsibility of receiving marginpayments, certification of warehouse receipts, and transmission ofdocuments. Bye-law 7.11 reads as follows:

“The Clearing House of the Exchange shall, in the mannerspecified by the Relevant Committee or the relevant authority,Chave the responsibility of receiving and maintaining marginpayments, monitoring open positions and margins, andtransmission of documents, payments and certifiedwarehouse receipts amongst the trading-cum- clearing membersand institutional clearing members of the Exchange.”

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Bye-law 9 provides for clearing and settlement. Bye-laws 9.5,9.6 and 9.7 provide as follows:

“9.5 An order to buy or sell will become a matched transactiononly when it is matched in the Trading system and the ClearingEHouse does not find the order to be invalid on any otherconsideration and further after verifying that the following are inagreement and/or in order:

(i) Commodity,

(ii) price indices,

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(iii) Quantity,

(iv) Transaction quote,

9.6 Once a trade is matched and marked to market by the ClearingHouse, the Exchange shall be substituted as counter partyGfor all net financial liabilities of the clearing members inspecified commodities in which the Exchange has decidedto accept the responsibility of guaranteeing the financialobligations.

(emphasis supplied)

9.7 All outstanding transactions shall be binding upon the originalcontracting parties, that is, the members of the Exchange untilissue of delivery notice or delivery order or payment for delivery,as the case may be.”

23. Bye-law 10 contains provisions with regard to delivery:

“10.1 For the fulfilment of outstanding position, commodity shallbe tendered by Delivery Orders through the respective ClearingMembers to the Clearing House in such manner as may beprescribed in the Business Rules or Regulations.

10.2 The Exchange shall prescribe tender days and delivery periodfor each commodity during which sellers having outstanding saleposition must issue Delivery Orders through their respectiveClearing Members to the Clearing House.

10.3 The Clearing House shall allocate the delivery orders receivedby it amongst one or more buyers having outstanding long openpositions in a manner as considered appropriate by the RelevantAuthority.

10.4 The Relevant Authority may specify in advance beforecommencement of trading in a commodity various grades of acommodity that may be tendered and the discounts and premiumsfor such grades.

10.5 All positions outstanding at the end ·of the day shall resultinto compulsory delivery obligation at the closing rate of the dateof transaction as fixed by the Relevant Authority. The differencesarising out of the actual transaction price and closing price shallbe received from and disbursed to amongst the members on thenext day of trading, pending actual delivery. The Relevant Authoritymay prescribe penalty on sellers with outstanding positions whofail to issue delivery orders and the Exchange may conduct auctionto ensure delivery to the buyers who hold outstanding buy positionsand intended to lift delivery and could not receive Delivery Ordersagainst such positions due to failure on the part of the seller. Incase of non availability of commodities during the auction process,close-out process as defined in the business rule shall be applicable.The Relevant Authority may prescribe penalty on buyers withoutstanding positions who fail to pay against his purchase obligationand the Exchange may conduct sale out auction to ensure that the A

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Asellers gets the price for the commodities delivered against theirsale obligation and could not receive payment due to failure onthe part of the buyers. In case of non availability of suitable buyersduring the auction process, close-out process as defined in thebusiness rule shall be applicable. Failure to pay the dues andpenalties relating to such closing out within the stipulated periodBshall cause the member to be declared as defaulter and renderhim liable for disciplinary action.”

24. Bye-law 10.7 envisages that a seller issuing the delivery ordershall receive from the Clearing House the full price of the commoditydelivered as per the delivery order rate, subject to additions or deductionsCon account of premium or discounts prescribed under the bye-laws. Underbye-law 10.8, a buyer has to pay to the Clearing House, the value ofdelivery allocated on his account by the Exchange within the timespecified. However, the money will be passed by the Clearing House tothe seller only on the completion of the delivery process to the satisfactionDof the Exchange. The bye-law reads as follows:

“10.8 A buyer shall pay to the Clearing House the value of deliveryallocated on his account by the Exchange within such time asmay be specified, by the Exchange. After getting full price ofdelivery from the buyer as per delivery order allocated to him, theEExchange will endorse the delivery order to him. Thereafter, tillcompletion of the delivery process, the money will beretained by the Clearing House and will be passed on tothe seller only on completion of the delivery process to thesatisfaction of the Exchange. The Clearing House will passon the proceeds to the seller after making adjustmentsFrelating to quality, quantity and freight factors, as the casemay be. The balance amount, if any, remaining after suchadjustments, will be passed on to or recovered from the buyer bythe Clearing House.”

G

Bye-law 10.11 provides that at the time of issuing the deliveryorder, the seller of the commodity must satisfy the clearing member thathe owns and holds in his possession or his agent’s possession adequatestocks of the required quantity and quality of the commodity. Bye-law10.12 prescribes that:H

“A seller member is entitled to offer delivery only at thedelivery centers specified by the Exchange in advance forthe respective commodity. Delivery can be tendered at suchspecified centers strictly as per the delivery procedure specifiedby the Exchange. Before tendering delivery, the seller is alsorequired to obtain a certificate from a surveyor empanelled by theExchange and such certificate shall be accompanied with thedelivery order being tendered by him to the Clearing House. Thesurveyor’s certificate shall clearly specify the quality of the goodstendered and shall also confirm that such quality is tenderable asper the contract specification of the Exchange. In case of non-compliance of any of these conditions, the delivery order isrejected ab initio.”

25. Thus, under the above bye-law, the selling member is entitledto offer delivery only at the delivery centre which is specified in theExchange strictly in accordance with the delivery procedure providedbefore tendering delivery. The seller has to obtain a surveyor’s certificatewhich is to be accompanied with the delivery order being tendered byhim to the Clearing House. Bye-laws 10.14, 10.15 and 10.16 contain thefollowing stipulations:

“10.14 Members of the Exchange and the clients/ constituentsdealing through them shall strictly abide by the delivery procedure,methods of sampling, survey, transportation, storage, packing,weighing and final settlement procedures, as may be specified bythe Relevant Authority from time to time. Any violation of suchmethod will be dealt with by the Relevant Authority in the manner,as may be specified from time to time.

10.15 A seller of commodity shall deliver the quantity as per hisnet sale position in the commodity during the period specified ·inthe Rules, Business Rules and Regulations of the Exchange andnotices and orders issued thereunder from time to time for thespecified commodity, which should confirm to the quality specifiedby the Exchange in the contract specification. In case of anyfailure to do so, such net sale position shall be closed out by buyingin auction and the seller shall be required to pay the difference, asdetermined by the Clearing House and penalty in addition thereto.

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A10.16 A buyer shall be required to lift delivery from the specifiedwarehouse within the period prescribed by the Relevant Authority,as per the delivery order assigned to him. In case of his failure todo so, he shall be required to pay the warehouse charges, insurancecharges and other expenses relating to storage for the incrementalperiod and also a penalty in addition thereto.”B

26. Bye-law 12 contains provisions for a Settlement GuaranteeFund. The Settlement Guarantee Fund is constituted by deposits madeby the members of the Exchange and is utilised for paying in the eventof a default in payments by the trading members, paying insurance coversand covering the losses of the Exchange, among other uses. Bye-lawC12.1.1 is in the following terms:

“12.1 The Exchange to maintain Settlement Guarantee Fund 12.1.1 The Exchange shall maintain Settlement Guarantee Fundin respect of different commodity segments of the Exchange forDsuch purposes, as may be prescribed by the Relevant Authorityfrom time to time.”

27. Bye-Law 12.1.2 states that the relevant authority may prescribefrom time to time, the norms and conditions governing SettlementGuarantee which may among other things specify the amount of depositEor contribution to be made by each trading member to the SettlementGuarantee Fund. The bye-law also states that rules are to be made oncontributions, conditions of repayment and withdrawal of contributionfrom the fund among other stipulations. Bye law 12.1.3 states that theminimum amount in the fund before starting the trading must be Rs 1Crore, which can be suitably increased. Bye Law 12.2 stipulates theFcontribution and deposit with the Settlement Guarantee Fund:

“12.2 Contribution to and Deposits with Settlement GuaranteeFund 12.2.1 Each member shall be required to contribute to andprovide a minimum security deposit, as may be determinedGby the Relevant Authority from time to time, to the relevantSettlement Guarantee Fund. The Settlement Guarantee Fund shallbe held by the Exchange. The money in the Settlement GuaranteeFund shall be applied in the manner, as may be provided in theseBye-laws, Rules, Business Rules and Regulations of the ExchangeHand notices and orders issued thereunder from time to time.

12.2.2 The Relevant Authority may specify the amount of additionalcontribution or deposit to be made by each member and/orcategory of clearing members, which may, inter alia, include theminimum amount to be provided by each clearing member.

12.2.3 The Exchange shall, as a result of multi-lateral nettingfollowed by it in respect of settlement of transactions, guaranteefinancial settlement of such transactions to the extent it has actedas a legal counter party, as may be provided in the relevant Bye-laws from time to time.

12.2.4. The total amount of security deposit and additional deposit,maintained by a clearing member with the Clearing House of theexchange, in any form as specified herein, shall form part of theSettlement Guarantee Fund.

12.2.5 The amount deposited by a clearing member towards thesecurity deposit shall be refundable, subject to such terms andconditions as may be specified by the Relevant Authority fromtime to time. Any amount deposited or paid by the clearingmember may be refunded provided further that such amountis in surplus and there is no actual/crytallized or contingentliability or a claim from any client or clearing bank to bedischarged by the clearing member.

28. Bye-law 12.3 stipulates that a member may provide a depositin the form of cash, fixed deposit receipts, bank guarantees or in suchother form.

12.3 Form of Contribution or Deposit

The Relevant Authority may, in its discretion, permit a member tocontribute to or provide the deposit to be maintained with theSettlement Guarantee Fund, in the form of either cash, fixed depositreceipts, bank Guarantees or in such other form or method andsubject to such terms and conditions, as may be specified by therelevant Authority from time to time.

Bye-law 12.4 states that the deposit may be replaced by freshdeposits. Bye-law 12.5 states that the Settlement Guarantee Fund maybe invested in securities or other avenues of investment:

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A12.4 Replacement of Deposit

By giving a suitable notice to the Exchange and subject to suchconditions, as may be specified by the Relevant Authority fromtime to time, a member may withdraw fixed deposit receipts orbank Guarantees given to the Exchange, representing the member’sBcontribution or deposit towards the Settlement Guarantee Fund,provided that the member has, simultaneously with suchwithdrawal, deposited cash, fixed deposit receipts, or bankGuarantees with the Clearing House or the Exchange or madecontribution through such other mode, as may be approved by theClearing House or the Exchange from time to time, to meet hisCrequired contribution or deposit, except as provided in these Bye-Laws.

12.5 Investment of Settlement Guarantee Fund Funds in the Settlement Guarantee Fund may be investedDin such approved securities and/or other avenues ofinvestments, as may be provided for by the Board in therelevant Business Rules and Regulations in force from time totime.

E

EBye-law 12.6 states that the Settlement Guarantee Fund may beused for the purpose of (i) maintenance of the fund; (ii) using the fundtemporarily to fulfil the shortfalls and deficiencies arising from clearingand settlement obligations; (iii) payment of insurance cover; (iv) coveringthe loss arising from clearing and settlement obligations; and (v) repayingto the members, the balance amount available after utilization.F

“12.6 Administration and Utilization of Settlement Guarantee Fund 12.6.1 The Settlement Guarantee Fund may be utilised for suchpurposes as may be provided in these Bye-Laws and Regulationsand subject to such conditions as the relevant Authority mayGprescribe from time to time, which may include

a. defraying the expenses of creation and maintenance ofSettlement Guarantee Fund;

b. temporary application of Settlement Guarantee Fund to meetshortfalls and deficiencies arising out of the clearing and settlement H

obligations of clearing members in respect of such transactions,as may be provided in these Bye-Laws, Rules, Business Rulesand Regulations of the Exchange in force from time to time;

c. payment of premium on insurance cover(s) which the RelevantAuthority may take from time to time, and/or for creating a DefaultReserve Fund by transferring a specified amount every year, asmay be decided by the Relevant Authority from time to time;

d. Meeting any loss or liability of the Exchange arising out ofclearing and settlement operations of such transaction, as may beprovided in these Bye-Laws, Rules, Business Rules andRegulations of the Exchange in force from time to time;

e. repayment of the balance amount to the member pursuant tothe provisions regarding the repayment of deposit after meetingall obligations under Bye-Laws, Rules, Business Rules andRegulations of the Exchange, when such member ceases to bemember, and

f. any other purpose, as may be specified by the Relevant Authority,from time to time.”

29. Bye-laws 12.7 and 12.8 specifically provide for utilization ofthe fund for the failure of the trading member to meet his settlementobligations or when he is declared as a defaulter:

“12.7 Utilization for failure to Meet Obligations Whenever a member fails to meet his settlement obligations tothe Exchange arising out of his clearing and settlement operationsin respect of his transaction, as may be provided in these Bye-Laws, Rules and Regulations of the Exchange, the RelevantAuthority may utilise the Settlement Guarantee fund and othermoneys lying to the credit of the said member to the extentnecessary to fulfil his obligations under such terms and conditions,as the Relevant Authority may specify from time to time; 12.8 Utilisation in Case of Failure to Meet Settlement Obligationsor on Declaration of Defaulter Whenever a member fails to meet his settlement obligation to theExchange arising out of the transactions, as may be provided inthese Bye-laws, Rules, Business Rules and Regulations of the A

B

C

D

E

F

G

H

Exchange in force from time to time, or whenever a member isdeclared a defaulter, the Relevant Authority may utilise theSettlement Guarantee Fund and other moneys of the member tothe extent necessary to fulfil his obligations in the following order:

A

[…]

B

12.9.2 If the cumulative amount under all the above heads is notsufficient, the balance obligations shall be assessed against all theclearing members in the same proportion as their total contributionand deposit towards security deposit, and the clearing membersshall be required to contribute or deposit the deficient amount inCthe Settlement Guarantee Fund within such time, as the RelevantAuthority may specify in this behalf from time to time.”

[…]

Bye-law 12.11 states that the deposit shall be allocated by theExchange among various segments of trading:

D12.11 Allocation of the Contribution or Deposit Each clearing member’s contribution and deposit towards theSettlement Guarantee Fund shall be allocated by the Exchangeamong the various segments of trading, which aredesignated as such by the exchange and in which theEmember may participate, in such proportion as theExchange may decide from time to time. The Exchange shallretain the rights to utilise the fund allocated to a particular segmentof trading to match the losses or liabilities of the Exchange,incidental to the operation for that segment or for any otherFsegment, as may be decided by the Exchange at his discretion.

Bye-law 12.12 states that the clearing member shall be repaid hisdeposit after making deductions:

12.12 Repayment to the Clearing Member on His Cessation

12.12.1 A members hall be entitled to repayment of the actualamount of deposit, if any, made by him to the Settlement GuaranteeFund provided it is not part of the admission fee after G

a. the member ceases to be an exchange member on account ofany reason whatsoever, H

b. all pending transactions at the time the member ceases to be anexchange member, which may result in a charge to the settlementGuarantee Fund, have been closed and settled,

c. all obligations to the Exchange for which the member wasresponsible while he was an exchange member have been satisfied,or at the discretion of the Relevant Authority, have been deductedby the Exchange from the member’s actual deposit; provided, themember has presented to the Exchange such indemnified orguarantees as the Relevant Authority may deem necessary oranother clearing member has been substituted owning liability forall the transaction and obligations of the clearing member, whohad ceased to be a member.

d. a suitable amount, as may be determined by the RelevantAuthority at his discretion, has been set aside for taking care ofany loss/liability/obligation arising out of his past transactions and

e. a suitable amount, as may be determined by the RelevantAuthority at its discretion, has been set aside by the Exchangetowards such other obligations, as may be perceived by theExchange to exist or be perceived by the Exchange to arise infuture.

12.12.2 The Relevant Authority may specify norms for repaymentof deposit including the manner, amount and period within whichit may be paid. The repayment amount, at no point of time, willexceed the actual deposit available to the credit of the clearingmember after deducting the necessary dues or charges payableby such clearing member from time to time, including the initialdeposit.

C. 3 Definitions of ‘Deposit’ and ‘Financial Establishment’:Interpretation of Sections 2(c) and 2(d) of the MPID Act

30. The notifications attaching the properties of the respondentwere issued under Section 4 of the MPID Act. Section 4 covers onlythose situations where a ‘financial establishment’ is a defaulting entity.Section 4 is reproduced below:

“4. (1) Notwithstanding anything contained in any other law forthe time being in force,- A

B

C

D

EF

G

H

A(i) where upon complaints received from the depositors orotherwise, the Government is satisfied that any FinancialEstablishment has failed,- (a) to return the deposit after maturity or on demand by thedepositor; or B

(b) to pay interest or other assured benefit; or

(c) to provide the service promised against such deposit;or

(ii) where the Government has reason to believe that any FinancialCEstablishment is acting in a calculated manner detrimental to theinterest of the depositors with an intention to defraud them; […]

31. The primary issue is whether NSEL is a ‘financialDestablishment’ within the meaning of Section 2(d). Section 2(d) reads asfollows:

“(d) “Financial Establishment” means any person acceptingdeposit under any scheme or arrangement or in any other mannerbut does not include a corporation or a co-operative society ownedEor controlled by any State Government or the Central Governmentor a banking company as defined under clause (c) of section 5 ofthe Banking Regulation Act, 1949;

Financial Establishment is defined as any person accepting a‘deposit’. The definition excludes from its purview (a) a corporation orFcooperative society controlled or owned either by the State or the CentralGovernment; and (b) a Banking Company as defined under Section 5(c)of the Banking Regulation Act 1949. Since NSEL does not fall withinany of the exceptions, it would be a ‘financial establishment’ for thepurposes of the Act if it is a ‘person accepting deposit’. Section 3(42) ofGthe General Clauses Act 1897 provides an inclusive definition of “person”to include both incorporated and unincorporated companies[25] as:

“ ‘person’ shall include any company or association or body ofindividuals, whether incorporated or not.”

25 New Horizon Sugar Mills Limited v. Government of Pondicherry, (2912) 10 SCC 575H(para 58)

The expression deposit is defined in Section 2(c) of the MPIDAct in the following terms:

“(c) “deposit” includes and shall be deemed always to haveincluded any receipt of money or acceptance of any valuablecommodity by any Financial Establishment to be returned aftera specified period or otherwise, either in cash or in kind or inthe form of a specified service with or without any benefit inthe form of interest, bonus, profit or in any other form, butdoes not include–

(i) amount raised by way of share capital or by way ofdebenture, bond or any other instrument covered under theguidelines given, and regulations made, by the SEBI, establishedunder the Securities and Exchange Board of India Act, 1992;

(ii) amounts contributed as capital by partners of a firm;(iii) amounts received from a scheduled bank r a co-operativebank or any other banking company as defined in clause (c) ofsection 5 of the Banking Regulation Act, 1949;

(iv) any amount received from, -

(a) the Industrial Development Bank of India,(b)a State Financial Corporation,

(c) any financial institution specified in or under section 6A ofthe Industrial Development Bank of India Act, 1964, or (d)any other institution that may be specified by the Governmentin this behalf;

(v) amounts received in the ordinary course of business byway of, - (a)security deposit, (b)dealership deposit,

(c) earnest money,

(d) advance against order for goods or services;

(vi) any amount received from an individual or a firm or anassociation of individuals not being a body corporate,registered under any enactment relating to money lendingwhich is for the time being force in the State; and

(vii) any amount received by way of subscriptions in respect ofa Chit.

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AExplanation I. – “Chit” has the meaning as assigned to it in clause(b) of section 2 of the Chit Funds Act, 1982; Explanation II. – Any credit given by a seller to a buyer on thesale of any property (whether movable or immovable) shall notbe deemed to be deposit for the purposes of this clause; B

The statutory definition of the expression ‘deposit’ comprises ofthe following ingredients:

(i) Any receipt of money or the acceptance of a valuablecommodity by a financial establishment;

(ii) Such acceptance ought to be subject to the money orCcommodity being required to be returned after a specifiedperiod or otherwise; and

(iii) The return of the money or commodity may be in cash,kind or in the form of a specified service, with or withoutany benefit in the form of interest, bonus, profit or in anyDother form.

These elements of the definition are followed by specific exclusionscontemplated in clauses (i) to (vii). Clause (i) of the exceptions coversan amount which is raised by way of share capital or by debenture, bondor other instrument governed by the guidelines and regulations of SEBI.EClause (v) states that money received in the ordinary course of businessby way of security deposit, dealership deposit, earnest money or advanceagainst an order of goods or services shall be excluded. The exclusionsin clause (i) to (vii) indicate that transactions which would otherwise fallwithin the broad sweep of the definition are excluded.

F32. The legislature may define a word artificially by restricting orexpanding its natural meaning. When the legislature employs the phrase‘means’, the definition is intended to be exhaustive. In Indra Sarma v.VKV Sarma,[26] this Court observed that the definition of the expression‘domestic relationship’ in Section 2(f) of the Protection of Women fromDomestic Violence Act 2005 is restrictive since it is defined by the useGof the term ‘means’. On the other hand, the Court has taken a consistentview that where the definition of a word is inclusive, as presaged by theadoption of the expression “includes,” it is prima facie extensive[27]. The 26 (2013) 15 SCC 75527 Karnataka Power Transmission Corporation v. Ashok Iron Work Pvt. Ltd., (2009) 3HSCC 240; Ramanlal Bhailal Patel v. State of Gujarat, (2008) 5 SCC 449

definition of ‘deposit’ uses the phrase ‘includes and shall be deemed tohave always included’. The import of this is to create a legal fiction bywhich actions which though not included within the natural meaning ofthe expression are intended to be included. The combined use of ‘includes’and ‘deemed to have always included’ while defining the term ‘deposit’makes the term inclusive and not restrictive.

33. The expression ‘deposit’ is conspicuously broad in its widthand ambit for it includes, not only any receipt of money but also theacceptance of any valuable commodity by a financial establishment underany scheme or arrangement. As a matter of interest, we may note atthis stage that the expression “any” is used in the substantive part of thedefinition of the expression ‘deposit’ on five occasions namely;

(i) Any receipt of money;

(ii) Any valuable commodities;

(iii) By any financial establishment;

(iv) With or without any benefit; and

(v) In any other form.

34. Likewise, the definition of financial establishment refers tothe acceptance of deposits:

(i) Under any scheme or arrangement; or

(ii) In any other manner.

35. The repeated use of the expression ‘any’ by the statute whiledefining both the above expressions is a clear reflection of the legislativeintent to cast the net of the regulatory provisions of the law in a broadand comprehensive manner. Unlike many other state enactments whichgovern the field, clause (c) of Section 2 of the MPID Act comprehendswithin the meaning of a deposit not only the receipt of money but of anyvaluable commodity as well. For example, in contrast, Section 2(2) ofthe Tamil Nadu Act defines ‘deposit’ only in terms of money and notcommodity. Section 2(2) reads as follows:

“(2) “deposit” means the deposit of money either in one lump sumor by instalments made with the Financial Establishments for afixed period, for interest or for return in any kind or for any service; A

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ASimilarly, statutes protecting the interest of depositors in Orissa[28],Kerala[29], Himachal Pradesh[30], Goa[31], Telangana[32], Andhra Pradesh[33]and Sikkim[34] define the phrase ‘deposit’ only in terms of money and notthe acceptance of a commodity.

36. According to the second ingredient of Section 2(c), the moneyBor commodity must be liable to be returned. However, such return neednot necessarily be in the form of cash or kind but also in the form of aservice, with or without any benefit such as interest. It needs to berecalled that clause (v) of Section 2(c) states that a deposit of money orcommodity made as a security deposit, dealership deposit or an advanceamount is excluded from the definition of the phrase ‘deposit’. To illustrate,Cif a member of a financial establishment deposits Rs. 25,000, and thatmoney is returned on cessation of membership by making deductions,the issue of whether the deposit is a security deposit or of the naturecovered under Section 2(c) should be determined with reference to thestructure of operation and functioning of the financial establishment. ItDis to be noted that the definition also states that the return may be with orwithout interest or any benefit. Therefore, the submissions made by boththe sides on whether NSEL had through its representations assured a16% return on trading in the platform is immaterial for the purpose ofdetermining if NSEL accepted deposits.

E37. Having referred to the relevant bye-laws, we shall determineif NSEL receives ‘deposits’ as defined by Section 2(c) of the MPIDAct. The bye-laws elucidate that NSEL receives both money andcommodities from trading members. In order to decide if these receiptsby NSEL could be regarded as ‘deposits’, the test of ‘return’ will haveto be satisfied. The test is that the return be in cash, kind or service. It isFnot necessary that the return should be with the benefit of interest, bonusor profit. Therefore, if the financial establishment is obligated to return 28 The Odisha Protection of Interests of Depositors (in Financial Establishments) Act2011

29 The Kerala Protection of Interests of Depositors in Financial Establishment Act2013G30 The Himachal Pradesh [Protection of interests of depositors (in FinancialEstablishments)] Act 1999

31 The Goa Protection of Interests of Depositors (in financial Establishments) Act 1999

32 The Telangana Protection of Depositors of Financial Establishments Act 1999

33 The Andhra Pradesh Protection of Depositors of Financial Establishments Act 199934 The Sikkim Protection of interests of Depositors (in Financial Establishments) ActH2000

the deposit without any increments, it shall still fall within the purview ofSection 2(c) of the MPID Act, provided that the deposit does not fallwithin any of the exceptions. The exception of relevance to our case isclause (v) which states that ‘amounts received in the ordinary course ofbusiness by way of (a) security deposit; (b) dealership deposit; (c) earnestmoney; and (d) advance against order for goods or services shall beexcluded from the purview of the term ‘deposit’.

C. 3.1 Settlement Guarantee Fund: Deposit under Section2(c) of the MPID Act

C. 3.1 Settlement Guarantee Fund: Deposit under Section2(c) of the MPID Act

38. The trading members pay NSEL a margin deposit and NSELmaintains a Settlement Guarantee Fund. Regulation 4.12 states that onlytransactions of those members who have paid the margin deposit andsecurity deposit shall be considered as valid. Therefore, the payment ofmargin deposit and security deposit is ‘mandatory’ for a person to tradeon NSEL’s platform. Regulation 4.12 refers to the SGF as a ‘securitydeposit’. Similarly, bye-law 12.2.1 stipulates that each member shallcontribute a ‘minimum security deposit’. However, merely because theSGF is referred to as a ‘security deposit’, the exception would notautomatically be applicable. The meaning of the phrase ‘security deposit’takes colour from the surrounding phrases. Clause (v) to sub-Section2(c) excludes security deposit, dealership deposit, earnest money, andan advance against an order for goods and services from the ambit ofthe phrase ‘deposit’. The concepts used in sub-Section 2(c) (v) fall intwo categories: (i) token amounts paid to indicate the earnest to purchase(earnest money and advance money), and (ii) payments required to meetexigent situations of default by a party (dealership deposit and securitydeposit).

39. Black’s Law dictionary[35] defines security deposit as “moneydeposited by a tenant with a landlord as security for full and faithfulperformance by the tenant of terms of leases, including damages topremises. It is refundable unless the tenant has caused damage or injuryto the property or has breached the terms of tenancy or the lawsgoverning the tenancy. Certain states also require the landlord to make asecurity deposit to cover essential repairs required on rental property.”Asimilar phrase, “Client Security Fund” is defined as a fund set up bymany State Bar Associations to cover losses incurred by persons as aresult of dishonest conduct of member-attorneys. The meanings of both 35 Bryan A Garner, Black’s Law Dictionary (11 ed. Thomson Reuters).

A

B

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Athese phrases suggest the necessary ingredients of a security deposit,which are:

(i) An advance to ensure faithful performance of the contract;(ii)A payment to cover essential ‘functions’ for performance;and B

(iii) The entitlement to refund being dependent upon whetherdamage, injury and default are occasioned.

40. Chapter 12 of the bye-laws provides the features of the SGF:

(i) SGF is utilized for:

C

(a) defraying the expenses for its creation andmaintenance ; (b)temporary use of the fund to meet efficiencies arisingout of the performance of obligations;

(c) payment of premia on insurance covers; D

(d) payments for the loss or liability of the Exchangearising out of ‘clearing and settlement operations’; (e)repayment of the balance deposit to a member; (f)payment towards the member’s obligations wherethe member fails to meet his settlement obligations;and E

(g) payment of the member’s obligation on being declaredas a defaulter; F(ii)The members’ contribution is allocated among varioussegments of trading, in which they can participate. TheExchange also retains the right to utilise the fund allotted toa particular segment of trading to match the losses or theliabilities of the Exchange; and G(iii)The settlement fund may be invested in approved securitiesor other avenues of investments.

41. The features of the SGF indicate that the fund is used tocover those expenses, which are beyond the utilization which is madeout of a regular security fund. Unlike a security deposit between a landlordHand a tenant where the fund is used to meet the ‘essential obligations’ of

the landlord such as repair work and deductions are made when thetenant has outstanding payments, NSEL uses the deposit to cover thepayment obligations of the trading member (buyer) to another tradingmember (seller) since NSEL is a counter party to the transactions.However, NSEL uses the fund to cover functions beyond its role as acounter-party. For example, the fund is used to cover loses faced by theNSEL in the settlement operations, investments are made in securities,and the fund is allotted in various segments of trading, where the fundsare also utilised to cover loses, if any, in the segment. Therefore, thesethree features of the SGF indicate that though the SGF is termed as a‘security deposit’ in nomenclature, its features do not represent a securitydeposit. Since NSEL receives ‘money’ in the form of SGF that is returnedin money and services, and is not covered by the exceptions, it would fallwithin the expression ‘deposit’ as defined in Section 2(c) of the Act.

C. 3. 2 Receipt of commodities: Deposit under Section 2(c)of the Act

42. A person who wishes to trade in the platform of NSEL isrequired to place the commodities in the accredited warehouse of NSEL.NSEL would then provide the trader with a warehouse receipt. Whenthe buyer’s offer and the seller’s offer is matched, NSEL would debitthe amount from the buyer member’s pay in obligations and it would becredited to NSEL’s exchange settlement account. The OperationsDepartment would confirm with the Delivery Department if the requisitequantity of a particular commodity of the seller is available. After suchconfirmation, the Operations Department would release the purchaseprice to the selling broker’s designated bank account. Simultaneously, aDelivery Allocation Report would be issued to the buyer’s broker or thebuyer. Once the VAT invoice is paid, NSEL would issue a Delivery Noteauthorizing the Buyer to take delivery from the designated warehouseor if the buyer chooses, he can take constructive possession of thecommodity. There is nothing in the definition of the term ‘deposit’ tomean that the acceptance of the commodity should be accompanied bya transfer of title to the commodity. Even if the financial establishment isonly in ‘custody’ of the commodity, it would still fall within the purviewof the phrase ‘acceptance of commodity’. On the acceptance of custodyof the commodity, NSEL has to provide various services such as anobligation to keep the commodity safe and without any damages.Additionally, the Operations Department and the Delivery Department AB

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Awill have to coordinate while matching the contracts. Similarly, after thedelivery note is sent to the buyer, the commodity is either delivered tothe buyer or the buyer is put in constructive possession of the commodity.The phrase ‘warehouse receipt’ is defined in Bye-law 2.96 as a documentevidencing that the commodity is being held by NSEL in the approvedwarehouse. Clause (b) to Bye law 4.20 states that if the outstandingBtransactions have not been settled by giving or receiving deliveries, thenit (the commodity) shall be auctioned by buying-in or selling-out as perthe Business Rules of the Exchange. Bye-law 10.11 states that thecommodities shall be delivered to and delivery taken from only thedesignated warehouses. Therefore, NSEL offers a multitude of ‘services’Cin return for receiving the commodity. The receipt of the commoditiesand holding the commodities (when the members are put in constructivepossession) in the accredited warehouses is a ‘deposit’ under Section2(c) of the Act.

43. The counsel for the respondent argued that the expressionD‘valuable commodity’ used in Section 2(c) would only include preciousmetals such as gold and silver. The expression “valuable commodity” isnot defined by the statute. There is no valid basis to accept the submissionof the respondent that the expression should only comprehend within itprecious metals such as gold and silver. If the legislature intended to sorestrict the definition of the expression valuable commodity, it could haveEused an explanation importing an artificial meaning to the expression.However, the legislature has desisted from doing so. A valuablecommodity is a commodity which has significant value. This does notrefer only to the intrinsic value of the commodity. Whether or not acommodity is valuable has to be determined bearing in mind the salutaryFobject and purpose of the Act which is to protect the interest of depositors.It is in this context that it becomes necessary to adopt a purposiveconstruction which would give effect to the meaning and content of thelaw. Any attempt to read the definition in a restrictive sense would becontrary to legislative intent. The intent of the legislature is to define theexpression ‘deposit’ as well as the expression ‘financial establishment’Gin a comprehensive and all-encompassing manner. Therefore, the phrase‘valuable commodity’ cannot be restricted to only mean precious metals.Agricultural commodities which NSEL trades in will fall within thepurview of the term.

44. Though it has been observed earlier that it is not necessaryHthat there must be interest or an assured benefit from the deposit for the

purposes of Section 2(c) of the MPID Act, it is still necessary that werefer to the representations made by NSEL. NSEL in the course of itsbrochures has held out representations about the trading and investmentopportunities available for:

(a) corporate clients;

(b) high net worth individuals; and

(c) retail investors.

45. Under the head of ‘contract specifications’, the followingrepresentation has been held out:

B

C

D

E

F

G

H

516SUPREME COURT REPORTS

[2022] 10 S.C.R.

AThe above representation specifies:

(i) Commodities;

(ii) Duration of trades;

(iii) Investment; and

B(iv) Yield.

For example, in the case of castor seeds, NSEL held out a buycontract (T+3) and sale contract (T+36), in which the yield is stated tobe 16%. Moreover, NSEL represented that:

“OpportunitiesC

•Traders can trade and lock their return •Trader has to buy in near settlement contract and sell in farsettlement contract simultaneously •Price for both settlement available D

•Exchange provides counterparty guarantee risk •No basis risk, No link with future contracts”

While describing the features of “trading opportunity”, NSELrepresented that:

E

“Features of Trading Opportunity:

•T+2 and T+25contract offers unique trading opportunity totraders •Trader purchases T+2 contract and simultaneously sellsFT+25 contract •Pay-in obligation is on T+2 while Pay-out of the funds willbe on T+25. Entire settlement cycle is of 35-37 days •Price differential between the two settlement dates i.epremium if annualized offers interest rate of about 16%

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•Income arising out of such trades are treated as BusinessIncome”

While comparing the investment opportunities of bank fixeddeposits with trading opportunities at NSEL, NSEL represented that:

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“Comparison

•Bank FD 9.25% for 390 days; NSEL Trading Opportunity16%; •Bank FD minimum duration 390 days; NSEL Trade duration35-55 days, depending on the contract •Traders have an option of rolling over their position as pertheir convenience”

Under the caption of ‘risk management’, the followingrepresentation has been held out by NSEL:

“Risk Management

•Trades are backed by collaterals in the form of stock

•Cash margin of 10-15% is levied on the open position ofseller in T+2/T+3 contracts •In case of adverse price movement, Exchange collectsadditional margin from the seller in T+2/T+3 contracts •The exchange has defined guidelines for auction/closeout(circular: 029/2008)

•Warehouse Management includes Selection, Accreditation,Quality Resting, Fumigation and Insurance”

The above representation indicates that paired contracts weredesigned as a unique trading opportunity by NSEL under which a traderwould, for instance, purchase a T+2 contract (with a pay-in obligationon T+2) and would simultaneously sell a T+25 contract (with a pay-outof funds on T+25). The price differential between the two settlementdates was represented to offer an annualized return of about 16%. NSELcategorically represented that all trades were backed by collaterals inthe form of stocks and its management activities included selection,accreditation, quality testing, fumigation and insurance. Therefore, NSELrepresented that on receiving money and commodities, the memberswould receive ‘assured returns’ and a ‘service’. Though NSEL has beenreceiving ‘deposits’, it has failed to provide services as promised againstthe deposits and has failed return the deposits on demand. Therefore,the State of Maharashtra was justified in issuing the attachmentnotifications under Section 4 of the MPID Act.

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518SUPREME COURT REPORTS

AC.4 Uncovering the Conspiracy

C. 4.1 The Grant Thornton Report

46. FMC engaged Grant Thornton LLP to conduct a forensic auditof the practices and records of NSEL. The report found several instanceswhere NSEL had repeatedly contravened the rules:B

(a) NSEL allowed members who had repeatedly defaulted tocontinue trading though under NSEL’s exchange rules, amember who does not have sufficient collateral to dischargehis obligations would not be allowed to trade further; (b)Members who were in default or those who had exhaustedtheir margin limits, were granted an exemption from marginrequirements; C

(c) There was an insufficient collateral of commodities in thewarehouses and NSEL did not diligently conduct theexercise;D

(d) The Bye-laws and rules of the Exchange mandate theformation of various committees for the effectivemanagement of operations. However, the Board failed toconstitute nine out of ten such committees. There is also nodocumentary evidence to demonstrate whether anyEcommittee formed was ever convened; (e)Client margin deposits and the settlement fund were usedfor fulfilling the obligations of the defaulting members. NSELalso used the deposits made by the members for its ownbusiness purposes on a regular basis. For example, on 28FMarch 2013, Rs. 236.5 Crore was withdrawn from thesettlement fund to fund NSEL’s business overdraft account.There is a running deficit in the client settlement fund balancefrom 2012 to June 2013. The financial team had raised theissue on multiple occasions; G

(f) Mr. Jignesh Shah, in his presentation dated 10 July 2013 toFMA had stated that 120 NSEL accredited warehousesheld commodities valued at Rs. 6,000 crores. However, therewas no documentation relating to warehouse activities forlong term trades indicating that the contracts were not H

secured by stocks. The collateral of the members was notAin custody and NSEL did not have any control over it;

(g) Though the Warehouse Development and RegulatoryAuthority had rejected NSEL’s application for registrationof its warehouse in May 2011, the website of theestablishment still represented that the warehouses wereBregistered with the authority; (h)Though the warehouse receipts are to evidence that acommodity is held in an approved warehouse, receipts wereissued without deposit of the commodities. NSEL did notinsist on commodities being deposited in the warehousesprior to executing the sale transactions. NSEL issuedDelivery Allocation Reports misrepresenting that everytransaction was delivery based and backed withcommodities; C

C. 4. 2 63 Moons Judgment

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47. NSEL filed third party representations in a suit filed by theallegedly duped traders for the recovery of Rs 5,600 Crores from the 24defaulters. Arbitration proceedings were also initiated for the recoveryof dues. An amount of Rs. 3,365 Crores out of Rs 5,000 crores has beencovered through Court decrees and arbitral awards. On 6 January 2014,the EOW, Mumbai filed a charge sheet against the Managing Directorand CEO of NSEL, the head of warehousing, and two other defaulters.It was mentioned in the charge sheet that these employees of NSEL hadcolluded with the defaulters to enable them to trade on the platformwithout depositing the goods in the accredited warehouses. FMC wroteto the Union of India on 18 August 2014 that NSEL and 63 Moons bemerged. In the representative suit which was instituted, the BombayHigh Court appointed a three-member committee consisting of Mr JusticeVC Daga, Mr J Solomon, and Mr Yogesh Thar for determining the liabilityof the defaulters and assisting in the process of recovery. In addition toRs. 3,365 Crores covered through court decrees and arbitral awards,the high level committee had crystallised a further sum of Rs. 835.88 tobe recovered from the defaulters.

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48. On 15 October 2014, the Additional Secretary, Department ofEconomic Affairs wrote a letter to the Ministry of Corporate Affairsstating that 63 Moons and NSEL are maintaining separate identities to H

Adeprive the investors of money. It was stated that the corporate veilought to be lifted and both the companies must be amalgamated to recoverthe pending dues. On 12 February 2016, an amalgamation order underSection 396(3) was passed, merging the assets and liabilities of 63 Moonsand NSEL. A writ petition filed under Article 226 for challenging theamalgamation was dismissed by the Bombay High Court. A SpecialBLeave Petition before this court challenged the judgment of the BombayHigh Court. The two-Judge Bench in the course of determining the validityof the amalgamation order, referred to the Grant Thornton report, wherethe features and representations made regarding the twin contracts (short term and long term), and the role of NSEL in the default of paymentsCwere discussed:

“1.3. These long-term contracts (e.g. T+25) were firsttraded on the NSEL exchange in September 2009. The Board ofNSEL ratified the circulars introducing such long-term contractsover a period beginning November 2009.

D1.4. Further evidence was obtained with regard to theexistence of a financing business, such as presentations whichstated that a fixed rate of return was guaranteed on investingin certain products on the NSEL exchange.

Several internal (NSEL) presentations were found, upon aEreview of email databases, setting out a yield (e.g. 16%) asan opportunity for investors for trading in certain productson the NSEL exchange.

An external presentation was also obtained which had beenmade by a brokerage house (Geojit Comtrade Ltd.) for their clientsFclaiming a fixed return on investments made on the NSELexchange. Further, this presentation, declared that actual deliveryof stocks in such transactions would not be required.

1.5. Grant Thornton also obtained evidence of repeatedcontraventions of NSEL exchange rules and bye-laws whichGfacilitated such financing transactions to continue and growin size as below:

Repeated defaults : As per the NSEL exchange rules amember who does not have sufficient collateral/monies, etc. todischarge his obligations would not be allowed to trade further.This rule was overridden on a recurring basis. Further despite H

repeated defaults members were allowed to trade and increasetheir expenses. For example, Lotus Refineries had defaulted, asper the Rules of the Exchange, on 198 days between the fifteen-month period of 1-4-2012 and 30-7-2013.

Exemptions from margin requirements : Members whowere in a default position or who had exhausted their margin limitson trading were granted an exemption from margin requirementsand thus allowed them to increase their exposure by engaging innew trades. More than 1800 margin limit exemptions were grantedbetween 2009 through to 2013.

Inadequate monitoring of member collateral : NSEL didnot carry out any diligence to establish the existence of stock atmember managed warehouses, upon which trades were beingexecuted. Grant Thornton carried out a stock verification exerciseand found significant shortages vis-à-vis expected collateral.”

The judgment referred to the findings of misutilization of clientmonies/ settlement fund in the Grant Thornton report:

“1.12. Misutilisation of client monies/settlement fund :As per the rules and bye-laws of the NSEL exchange “Margindeposits received by clearing members from their constituentmembers and clients in any forms shall be accounted for andmaintained separately in segregated accounts and shall be usedsolely for the benefit of the respective constituent members’ andclient position.”

Grant Thornton found evidence (including emails) thatclient monies/settlement fund, was used regularly forfulfilling the obligations of defaulting members.

Further, NSEL utilised client monies/settlement fundfor its own business purposes on a regular basis. Forexample, on 28-3-2013, Rs 236.5 crores was withdrawn from theSettlement Fund in order to fund NSEL’s own business overdraftaccount.

There was a running deficit in the client monies/settlementfund balance from April 2012 to June 2013. The finance team ofFTIL had raised this as an area of concern on several occasions.”

The report’s finding on the lack of documentation of thewarehousing activities were discussed in the judgment:

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A“The report then goes on to say that there was nodocumentation in relation to warehouse activities for long-termtrades indicating that such contracts were not secured bywarehouse stocks. The warehouses were customer managedwarehouses and the underlying collateral were not in custody ofNSEL. NSEL did not have control over these warehouses andBGrant Thornton was denied access to a number of warehouses.The Warehouse Development and Regulatory Authority had infact rejected NSEL’s application for registration of its warehousesway back on 16-5-2011. Notwithstanding such rejection, NSEL’swebsite represented that its warehouses were registered with theCAuthority. No verification or due diligence was ever undertakenby NSEL to ensure compliance by its members of the conditionsoutlined in its rules and bye-laws even though in terms of NSELbye-laws, warehouse receipt issued by NSEL were meant toevidence a commodity being held in an approved warehouse.NSEL did not insist upon deposit of commodities in the warehousesDprior to executing sale transactions. Instead NSEL resorted toissuing Delivery Allocation Reports (DAR) representing to genuineinvestors that each transaction was delivery based and backed atthe time of sale by the required quantity of commodities in itswarehouses.”

EThe conclusion in the FMC order dated 17.12.2013 which revealedthe conspiracy unfolded by 63 Moons and NSEL was also referred to inthe following extract:

“15.1. Noticee 1: Financial Technologies (India) Ltd.(FTIL) : We have discussed the equity structure of NSEL, whichis wholly owned by FTIL. We have also pointed out that ShriJignesh Shah, Chairman-cum-Managing Director of FTIL hasbeen a Director on the Board and also functioning as Vice-Chairman and a key management person of NSEL since itsinception. Similarly, Shri Joseph Massey and Shri ShreekantJavalgekar have been Directors of the said company from itsvery beginning till the settlement crisis at NSEL first came to lightin July 2013. The facts establishing the fraud involving a settlementdefault over Rs 5500 crores at NSEL have been discussed atlength in the SCNs issued to the noticees as well as reiterated,albeit illustratively by us at para 14.7 of this Order. The responsibility F

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of FTIL as the holding company possessing absolute control overthe governance of NSEL has also been highlighted. The controlof FTIL over NSEL becomes further crystallised from theresponses given by M/s Grant Thornton before the Commissionon 3-12-2013 stating that Shri Jignesh Shah, Mr Joseph Masseyand a host of other officials of FTIL reviewed the forensic auditreport and it was only after obtaining their clearance, the forensicauditor finalised its report.

15.1.1. The violation of conditions prescribed in theexemption notification, trading in paired contracts to generateassured financial returns under the garb of commodity trading,admission of members who were thinly capitalised having poornet worth and giving margin exemptions to those who wererepeatedly defaulting in settling their dues, poor warehousingfacilities with no or inadequate stocks, no risk managementpractices followed, non-provision of funds in SGF, consciouslyappointing Shri Mukesh P. Shah as statutory auditors for FY 2012-13 who was related to Shri Jignesh Shah, and apparent complicitywith the defaulters to defraud the investors, etc., lead to aninescapable conclusion that a huge fraud was perpetrated by NSELwhile having the presence of two Board members of FTIL on theBoard of NSEL, one of whom was the Vice-Chairman of thecompany.

15.1.2. The facts of the case and the manner in whichthe business affairs of NSEL were conducted leaves no doubt inour minds that FTIL, notwithstanding its contentions that it wasignorant of the affairs and conduct of NSEL, exerted a dominantinfluence on the management, and directed, controlled andsupervised the governance of NSEL. In the face of a fraud ofsuch a magnitude involving settlement crises of Rs 5500 croresowed to over 13,000 sellers/investors on the trading platform ofNSEL, FTIL, cannot seek to take refuge behind the corporateveil so as to unjustifiably isolate itself from the fraudulent actionsthat took place at NSEL resulting in such a huge payment crisis.

15.1.3. FTIL has its principal business of developmentof software which has become the technology platform for almostthe entire industry engaged in broking in shares and securities,commodities, foreign exchange, etc. As has been demonstrated A

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Aby FTIL in their written submission, FTIL has floated a number ofregulated exchanges—both for securities and commoditiesderivatives—in India as well as abroad. NSEL was incorporatedto provide a trading platform of commodity spot exchange on apan-India basis for the purpose of which apparently it sought andwas granted exemption from the operation of the FCRA, 1952.BSince the objective of the NSEL was promoting spot tradingin commodities on an electronic platform, its businessmodel did not contemplate venturing into trading in forwardcontracts. FTIL had already promoted MCX, a regulatedexchange under FCRA, 1952, for the purpose of trading in forwardCcontracts. Therefore, having secured an exemption from thepurview of FCRA, 1952 on the ground that it was intended topromote spot trading, NSEL was not authorised to allow tradingin forward contracts through the scheme of paired contracts,thereby defying conditions stipulated in the exemption notificationgranted to it. The motive behind allowing trading in forwardDcontracts on the NSEL platform in a circuitous manner on NSELwhich was neither recognised nor registered under FCRA, 1952indicates mala fide intention on the part of the promoter of FTILto use the trading platform of its subsidiary company for illicitgains away from the eyes of Regulator. The fact that FTILEpromoted NSEL sought exemption from FCRA, 1952 provisionseven before they had started any trading or operation, points totheir intention from the outset. In this manner, it misinterpretedthe conditions stipulated in the exemption notification in collusionwith a handful of members, which ultimately culminated in amassive fraud involving Rs 5500 crores, which has the potentialFeffect of eroding trust and confidence in exchanges and financialmarkets.

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15.1.4. Keeping in view the foregoing observations andthe facts which reveal misconduct, lack of integrity and unfairpractices on the part of FTIL in planning, directing and controllingthe activities of its subsidiary company, NSEL, we conclude thatFTIL, as the anchor investor in the Multi-Commodity ExchangeLtd. (MCX) does not carry a good reputation and character, recordof fairness, integrity or honesty to continue to be a shareholder ofthe aforesaid regulated exchange. Therefore, in the public interestand in the interest of the Commodities Derivatives Market G

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which is regulated under FCRA, 1952, the Commission holdsthat Financial Technologies (India) Ltd. (FTIL) is not a “fitand proper person” to continue to be a shareholder of 2% ormore of the paid-up equity capital of MCX as prescribed underthe guidelines issued by the Government of India for capitalstructure of commodity exchanges post 5 years of operation.It is further ordered that neither FTIL, nor any company/entitycontrolled by it, either directly or indirectly, shall hold any sharesin any association/Exchange recognised by the Government orregistered by the FMC in excess of the threshold limit of the totalpaid-up equity capital of such Association/Exchange as prescribedunder the commodity exchange guidelines and post 5-yearguidelines.”

49. The two-Judge Bench of this Court took note of the modusoperandi through which the trading members were duped by a conspiracyhatched by a few trading members along with NSEL. However, thisCourt held that the order amalgamating NSEL and 63 Moons did notfulfil the requirements of Section 396 of the Companies Act 1956 as the‘essentiality’ aspect in Section 396 was not satisfied since the ‘emergencysituation’ requiring amalgamation was short lived. Further, it was observedthat the rationale for the amalgamation was the financial incapability ofNSEL to effect recoveries from the defaulting members. The Courtnoted that the final order of amalgamation dated 12 February 2016referred to the actions taken for recovery by the EOW and theEnforcement Directorate which indicated methods other thanamalgamation through which the monies could be recovered. The actiontaken by the EOW and the Enforcement Directorate is referred to in thefollowing extract:

“92.1. What is important to note is that by the time the final orderof amalgamation was passed i.e. on 12-2-2016, the final orderitself records:

“8.1. Economic Offences Wing, Mumbai:

(i) Total amount due and recoverable from 24 defaulters isRs 5689.95 crores.

(ii) Injunctions against assets of defaulters worth Rs 4400.10crores have been obtained.

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(iii) Decrees worth Rs 1233.02 crores have been obtainedagainst 5 defaulters.

(iv) Assets worth Rs 5444.31 crores belonging to thedefaulters have been attached of which assets worth Rs 4654.62crores have been published in Gazette under the MPID Act forliquidation under the supervision of MPID Court and balance assetsworth Rs 789.69 crores have been attached/secured forattachment by the EOW.

(v) Assets worth Rs 885.32 crores belonging to the Directorsand employees of NSEL have been attached out of which assetsworth Rs 882.32 crores have already been published in Gazetteunder the MPID Act for liquidation under the supervision of theMPID Court and balance assets worth Rs 3 crores have beenattached/secured for attachment by the EOW.

(vi) MPID Court has already issued notices under Sections4 & 5 of the MPID Act to the persons whose assets have beenattached as above. Thus, the process of liquidation of the attachedassets has started.

(vii) The Bombay High Court has appointed a 3-membercommittee headed by Mr Justice (Retd.) V.C. Daga and 2 expertsin finance and law to recover and monetise the assets of thedefaulters.

(viii) Rs 558.83 crores have been recovered so far, out ofwhich Rs 379.83 crores have been received/recovered from thedefaulters and Rs 179 crores were disbursed by NSEL to smalltraders/investors.

8.2. Enforcement Directorate:

(i) ED has traced proceeds of crime amounting to Rs3973.83 crores to the 25 defaulters;

(ii) ED has attached assets worth Rs 837.01 croresbelonging to 12 defaulters;

(iii) As per the recent amendment in the PMLA, the assetsattached by ED can be used for restitution to the victims.

8.3. The above status indicates that the said enforcementagencies are working as per their mandate….”

This Court noted that the ‘essentiality’ requirement in Section396 of the Companies Act was not fulfilled:

“92.2. What concerned the FMC in August 2014 has, by the dateof the final amalgamation order, been largely redressed withoutamalgamation. The “emergency situation” of 2013 which, evenaccording to the Central Government, required the emergent stepof compulsory amalgamation has, by the time of the passing ofthe Central Government order, disappeared. Thus, the raison d’êtrefor applying Section 396 of the Companies Act has, by the passageof time, itself disappeared. In fact, as on today, decrees/awardsworth INR 3365 crores have been obtained against the defaulters,with INR 835.88 crores crystallised by the committee set up bythe High Court, pending acceptance by the High Court, even withoutusing the financial resources of FTIL as an amalgamated company.What is, therefore, important to note is that what was emergent,and therefore, essential, even according to the FMC and theGovernment in 2013-2014, has been largely redressed in 2016, bythe time the amalgamation order was made. Also, the CentralGovernment order does not apply its mind to the essentiality aspectof Section 396 at all. In fact, in several places, it refers to “essentialpublic interest” as if “essential” goes with “public interest” insteadof being a separate and distinct condition precedent to the exerciseof power under Section 396. On facts, therefore, it is clear thatthe essentiality test, which is the condition precedent to theapplicability of Section 396, cannot be said to have been satisfied.”

The judgment held that NSEL had falsely represented that it hadfull stock as collateral and that the stock was valued at Rs. 6,000 crores:

“91.3. We have seen that neither FTIL nor NSEL has denied thefact that paired contracts in commodities were going on, and byApril to July 2013, 99% (and excluding E-series contracts), atleast 46% of the turnover of NSEL was made up of such pairedcontracts. There is no doubt that such paired contracts were, infact, financing transactions which were distinct from sale andpurchase transactions in commodities and were, thus, in breachof both the exemptions granted to NSEL, and the FCRA. Wehave also seen that NSEL throughout kept representing that itwas, in fact, a commodity exchange dealing with spot deliveries.Apart from the Grant Thornton Report and the FMC order, we A

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SUPREME COURT REPORTS

Ahave also seen that Shri Jignesh Shah, on 10-7-2013, maderepresentations to the DCA and the FMC, in which he stated thatNSEL had full stock as collateral; 10-20% of open position asmargin money; and that the stock currently held in NSEL’s 120warehouses was valued at INR 6000 crores, all of which turnedout to be incorrect. Further, there is no doubt whatsoever that inBJuly 2013, as a result of NSEL stopping trading on its exchange, apayment crisis of approximately INR 5600 crores arose. Thefurther question that remains is whether, given these facts, theconditions precedent for the applicability of Section 396 werefollowed.

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50. This Court in its decision in 63 Moons (supra) took note ofthe modus operandi by which the defaults came about, specificallyhighlighting the role of NSEL in not complying with the rules. It set asidethe amalgamation order on the narrow ground that the pre-conditionsfor the exercise of power under Section 396 had not been fulfilled. OneDof the reasons which persuaded this Court to set aside the order ofamalgamation was that the EOW and the Enforcement Directorate hadalready taken steps to realise the amounts in default. The judgment in63 Moons (supra) has after a detailed analysis of the Grant Thorntonreport and the FMC’s order held that the defaulters and NSEL conspiredto dupe the members of their money.E

C. 5 Constitutional Validity of the MPID Act

51. The respondents challenged the constitutional validity of theprovisions of the MPID Act before the High Court on the ground that itis arbitrary. The High Court in the impugned judgment did not deal withFthe constitutional validity of the provisions and left the question open.The respondents contended before this Court that the judgment inBhaskaran (supra) while holding the Tamil Nadu Act to be constitutionallyvalid only made a passing reference to the MPID Act. Thus, it wasargued that this Bench is not bound by the judgment in Bhaskaran (supra)while deciding on the validity of the provisions of the MPID Act.G

52. A Full Bench of the Bombay High Court had held that thestate legislature did not possess the legislative competence to enact theMPID Act.[36] On the other hand, a Full Bench of the Madras High Courthad upheld the constitutional validity of the Tamil Nadu Act. The H36 Vijay C. Puljal v. State of Maharashtra, (2005) 4 CTC 705 (Bom)

correctness of the judgment of the Madras High Court was assailedbefore this Court in Bhaskaran (supra). The judgment of the Full Benchof the Bombay High Court was cited and considered by the two judgeBench which heard the appeal against the judgment of the Madras HighCourt. This Court held that the state legislature does possess legislativecompetence to enact the law in question and that the legislation was notfor the transaction of banking or the acceptance of deposits but for theprotection of the depositors who are deceived by fraudulent financialestablishments. The Court held:

“26. The Tamil Nadu Act was enacted to ameliorate the conditionsof thousands of depositors who had fallen into the clutches offraudulent financial establishments who had raised hopes of highrate of interest and thus duped the depositors. Thus the TamilNadu Act is not focused on the transaction of banking or theacceptance of deposit, but is focused on remedying the situationof the depositors who were deceived by the fraudulent financialestablishments. The impugned Tamil Nadu Act was intended todeal with neither the banks which do the business or banking andare governed by the Reserve Bank of India Act and the BankingRegulation Act, nor the non-banking financial companies enactedunder the Companies Act, 1956.

27. The Reserve Bank of India Act, the Banking Regulation Actand the Companies Act do not occupy the field which the impugnedTamil Nadu Act occupies, though the latter may incidentally trenchupon the former. The main object of the Tamil Nadu Act is toprovide a solution to wipe out the tears of several lakhs ofdepositors to realise their dues effectively and speedily from thefraudulent financial establishments which duped them or theirvendees, without dragging them in a legal battle from pillar topost. Hence, the decision of this Court in Delhi Cloth Mills [(1983)4 SCC 166] has no bearing on the constitutional validity of theTamil Nadu Act.”

The judgment of the Full Bench of the Bombay High Court inVijay C. Puljal v. State of Maharashtra[37 ]was specifically disapprovedin the decision of this Court in Bhaskaran (supra), where the Courtheld:

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“14. The learned counsel for the appellant relied on the Full Benchdecision of the Bombay High Court in Vijay C. Puljal case [(2005)4 CTC 705 (Bom)] in support of his contention that the TamilNadu Act, like the Maharashtra Act, was unconstitutional beingbeyond the legislative competence of the State Legislature. Wedo not agree.

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15. We have carefully perused the judgment of the Full Bench ofthe Bombay High Court in Vijay case [(2005) 4 CTC 705 (Bom)]and we respectfully disagree with the view taken by the BombayHigh Court. It may be noted that though there are somedifferences between the Tamil Nadu Act and theCMaharashtra Act, they are minor differences, and hencethe view we are taking herein will also apply in relation tothe Maharashtra Act.”

D53. Besides holding that the State legislature did not lack legislativecompetence to enact the law, the judgment in Bhaskaran (supra) alsoconcluded that the Tamil Nadu enactment did not violate the provisionsof Articles 14, 19(1)(g) or 21 of the Constitution. In that context, whiledismissing the constitutional challenge against the legislation enacted inTamil Nadu, the Court held:E

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“31. We fail to see how there is any violation of Articles 14,19(1)(g) or 21 of the Constitution. The Act is a salutary measureto remedy a great social evil. A systematic conspiracy was effectedby certain fraudulent financial establishments which not onlycommitted fraud on the depositors, but also siphoned off or divertedFthe depositor’s funds mala fide. We are of the opinion that the actof the financers in exploiting the depositors is a notorious abuse offaith of the depositors who innocently deposited their money withthe former for higher rate of interest. These depositors were oftengiven a small pass book as a token of acknowledgment of theirGdeposit, which they considered as a passport of their children forhigher education or wedding of their daughters or as a policy ofmedical insurance in the case of most of the aged depositors, butin reality in all cases it was an unsecured promise executed on awaste paper. The senior citizens above 80 years, senior citizensbetween 60 and 80 years, widows, handicapped, driven out byHwards, retired government servants and pensioners and persons living below the poverty line constituted the bulk of the depositors.Without the aid of the impugned Act, it would have been impossibleto recover their deposits and interest thereon.

32. The conventional legal proceedings incurring huge expensesof court fees, advocates’ fees, apart from other inconveniencesinvolved and the long delay in disposal of cases due to docketexplosion in courts, would not have made it possible for thedepositors to recover their money, leave alone the interest thereon.Hence, in our opinion the impugned Act has rightly been enactedto enable the depositors to recover their money speedily by takingstrong steps in this connection.

33. The State being the custodian of the welfare of the citizens asparens patriae cannot be a silent spectator without finding a solutionfor this malady. The financial swindlers, who are nothing but cheatsand charlatans having no social responsibility, but only a lust foreasy money by making false promise of attractive returns for thegullible investors, had to be dealt with strongly. The small amountscollected from a substantial number of individual depositorsculminated into huge amounts of money. These collections werediverted in the name of third parties and finally one day thefraudulent financers closed their financial establishments leavingthe innocent depositors in the lurch.”

54. The judgment held that the Tamil Nadu Act is constitutionallyvalid and constitutes a salutary measure which was long over-due todeal with these matters. Significantly, the above extracts from the decisionin Bhaskaran (supra)indicate that the differences between theenactment in Tamil Nadu and Maharashtra “are minor” and the view ofthe court on the validity of the former will govern the validity of the latterenactment as well.

55. The judgment in Bhaskaran (supra) was followed by anothertwo-Judge Bench of this Court in New Horizons Sugar Mills Limitedv. Government of Pondicherry[38]. The case arose from the action ofthe Government of Pondicherry of attaching the properties acquired bya company. The validity of the Pondicherry Protection of Interests ofDepositors in Financial Establishments Act 2004 was also in question. Atwo-Judge Bench of this Court considered whether the pith and substance A

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Aof the enactment istraceable to the entries in the Union List or the StateList of the Seventh Schedule to the Constitution. After adverting to theearlier decision in Bhaskaran (supra) which upheld the Tamil Naduenactment while disapproving the Full Bench decision of the BombayHigh Court on the legislative competence of the State legislature to enactthe MPID Act, this Court held:B

“50. In addition to the above, it has also to be noticed that theobjects for which the Tamil Nadu Act, the Maharashtra Act andthe Pondicherry Act were enacted, are identical, namely, to protectthe interests of small depositors from fraud perpetrated onCunsuspecting investors, who entrusted their life savings tounscrupulous and fraudulent persons and who ultimately betrayedtheir trust.

51. However, coming back to the constitutional conundrum thathas been presented on account of the two views expressed, bythe Madras High Court and the Bombay High Court, it has to beconsidered as to which of the two views would be more consistentwith the constitutional provisions. The task has been simplified tosome extent by the fact that subsequently the decision of theBombay High Court [(2005) 4 CTC 705 (Bom)] declaring theMaharashtra Act to be ultra vires, has been set aside by this Court[Sonal Hemant Joshi v. State of Maharashtra, (2012) 10 SCC601] , [State of Maharashtra v. Vijay C. Puljal, (2012) 10 SCC599] , so that there is now a parity between the judgments relatingto the Maharashtra Act and the Tamil Nadu Act.

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59. […] The objects of the Tamil Nadu Act, the Maharashtra Actand the Pondicherry Act being the same and/or similar in nature,and since the validity of the Tamil Nadu and Maharashtra Acthave been upheld, the decision of the Madras High Court inupholding the validity of the Pondicherry Act must be affirmed.We have to keep in mind, the beneficial nature o the threelegislations which is to protect the interests of all depositors, whoinvest their life’s earnings and savings in schemes for makingprofit floated by unscrupulous individuals and companies, bothincorporated and unincorporated.”

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Following the decision in Bhaskaran (supra), the challenge to thePondicherry enactment on the ground of legislative competence wasrepelled.

56. The validity of the MPID Act was specifically dealt with intwo decisions of this Court in State of Maharashtra v. Vijay C. Puljal39 and Sonal Hemant Joshi v. State of Maharashtra40. In both thedecisions, this Court upheld the constitutional validity of the MPID Actin view of the earlier decision in Bhaskaran (supra). In Soma SureshKumar v. Government of Andhra Pradesh[41], a two judge Bench ofthis Court upheld the provisions of the Andhra Pradesh Protection ofDepositors of Financial Establishments Act 1999 following the earlierdecisions in Bhaskaran (supra) and New Horizons Sugar MillsLimited (supra).

57. Having discussed the judgments of this Court on theconstitutional validity of the state legislations governing financialestablishments offering deposit schemes, including the MPID Act, thereis no reason for us to reopen the question. This Court has held that theMPID Act is constitutionally valid on the grounds of legislativecompetence and when tested against the provisions of Part III of theConstitution.

C. 6 The High Court’s Judgment

58. Referring to the Bye-laws and rules of NSEL, the High Courtheld that NSEL is an electronic trading platform which only facilitatedtransactions between buyers and sellers. In this context, it observed thatNSEL did not receive the pay-in in its own right but only for the purposeof passing it on to the selling trading member on the same day. The HighCourt observed:

“The nature of transaction to be carried out on the NSEL platformwas also therefore, in public domain since the trading on thiselectronic platform commenced. The business/transaction whichoperated through NSEL, do not disclose any payin amount receivedby NSEL in its own right but it was only received in the process ofsettlement of the commodity trade and only for the purpose ofpassing it on the selling trading member on the same day. This 39 (2012) 10 SCC 59940 (2012) 10 SCC 60141 (2013) 10 SCC 677

AB

C

D

EF

G

H

534SUPREME COURT REPORTS

Aamount cannot be said to be received as a deposit within themeaning of Section 2(c) of the MPID Act which contemplates‘deposit’ to be a receipt of money or acceptance of a valuablecommodity on the promise that such money or valuable commoditywould be returned/repaid by the financial establishment after aspecified period or otherwise.”B

The High Court has lost sight of the fact that Section 2(c) of theMPID Act defines ‘deposit’ in broad terms. Further, according to thedefinition, the return may be either in money, commodity or service, andit is not necessary that the commodity or the money must be returned inthe same form. The definition includes the receipt of money and theCreturn of a commodity, or even the receipt of a commodity and a returnin the form of a service. Further, Bye-law 10.8 indicates that NSEL wasnot merely an intermediary. The Bye-law states that the buyer shall paythe Clearing House the value of the delivery allocation. However, till thecompletion of the delivery process, the money will be retained by theDClearing House of NSEL.

59. Referring to the contract notes and the confirmation receiptsgenerated on the electronic platform, the High Court observed that NSELwas only a ‘medium’. However, the High Court subsequently noted that‘something has gone wrong somewhere in these transactions’. Further,Ethe High Court referred to the First Information Report filed by Mr.Pankaj Saraf observing that even the complainant had not stated that hehad deposited any amount with NSEL. The Court goes on to note:

“in no way, the complainant in the FIR allege a promised returnin the form of any interest, bonus, profit, but yield- the differenceFin the price of a commodity between the two trading dates i.eT+2 and T+30/33/25 was calculated as a yield but this, in ourview, would not fall within the purview of deposit since neitherthe NSEL received the commodities to be retained by itself nordid it receive any amount to be deposited in its account.”

G60. The High Court also observed in paragraph 33 of the judgmentthat at the most, only the sellers in T+2 (and buyers in T+25) could bereferred to as a ‘financial establishment’. This finding was made withoutanalysing the functioning of the exchange vis-à-vis Sections 2(c) and2(d) of the Act. The Court also held that the ‘warehouse receipts’ do notestablish the nature of the transaction that took place in the platform. InHthis regard it observed:

“… this receipt do not provide an answer to the nature oftransaction that took place on the platform of NSEL and though itis no doubt that the commodity came to be accepted as a deposit,but it should be accepted with an assured return and in the presentcase, the commodity which was accepted was because it was tobe sold to a purchaser and it is not the case of the State that it wasa pure transaction where commodities are accepted as deposit.”

The High Court observed that since transaction charges werecharged by NSEL and the amount paid by the buyer used to be paid byNSEL by the settlement date, it is not a financial establishment.

61. The High Court has formed an erroneous opinion that firstly,only if the return includes interest, bonus or any other added benefit, itwould be a deposit for the purpose of the MPID Act. However, Section2(c) states that the return may be “with or without any benefit in theform of interest, bonus, profit or in any other form”. The definition doesnot stipulate that there must be an added benefit, rather that the ‘addedbenefit’ is irrelevant for the purpose of the definition; secondly, that forthe purpose of Section 2(c), the receipt of the commodity or money‘must be retained by itself’. The definition does not provide any suchembargo. Rather, the definition is broadly worded to include even thepossession of the commodities for a limited purpose. The High Courthas read the definition of ‘deposit’ narrowly without any reference tothe salutary purpose of the MPID Act.

62. The High Court also made observations on the merits of thecriminal proceedings. Referring to the role of NSEL in the default inpayments, it observed that at the highest, the actions of NSEL wouldconstitute offences under Sections 465 and 467 of the IPC. The EOWfiled a charge sheet under Section 173 CrPC before the Sessions Judge,Special Court under the MPID Act for offences punishable under Sections409,465,467,468,471,474 and 477(4) read with Section 120(B). The HighCourt ought not to have made observations on the merits of the criminalproceedings when the writ petition was restricted to the issue of whetherNSEL is a financial establishment for the purpose of the MPID Act.

63. The High Court observed that the decision of this Court in 63Moons (supra) does not have ‘any serious effect on the presentproceeding’, though this Court has discussed at length the modusoperandi of NSEL in duping the trading members by throwing light onthe structure of the exchange. Though it was observed that the question AB

CD

E

F

G

H

Aof constitutional validity was settled in Bhaskaran (supra), NewHorizons (supra), Sonal Hemant Joshi (supra) and Vijay Kulijal(supra), the challenge of the respondent to the constitutional validity ofthe MPID Act was still kept open by the High Court. Such an observationwas made in spite of noticing in paragraph 39 of the judgment that thisCourt in Bhaskaran (supra) had observed that the MPID Act and theBTamil Nadu Act have minor differences and that the statute did notviolate Articles 14, 19(1)(g) or 21 of the Constitution.

64. Further, while referring to the earlier order of the DivisionBench dated 1 October 2015, where it was prima facie recorded thatNSEL is a ‘financial establishment’ for the purpose of the MPID Act,Cthe High Court observed that it was not bound by the prima facie view.The primary ground for the Division Bench for arriving at a prima facieview was the representations made assuring a 14% to 16% yield.However, the High Court in its impugned judgment dispelled the argumenton the ground that only a ‘faint reference’ was made to assured returns.DSuch an observation misrepresents the factual instances which arebacked by documentary material.

65. The appellant also contended that the writ petition filed by therespondent is not maintainable since there was an alternative remedy ofraising an objection before the Designated Court under Section 7 of theEMPID Act. Though there is merit in the argument of the appellant, sincethe High Court decided on the validity of the impugned attachmentnotifications on merits, and arguments have been addressed in the presentproceedings, we have proceeded to decide the matter on merits.

66. For the reasons recorded in this judgment, we allow the appealsFand set aside the impugned judgment of the Bombay High Court dated22 August 2019. The impugned notifications issued under Section 4 ofthe MPID Act attaching the properties of the respondent are valid.

67. Pending application(s), if any, stand disposed of.

GNidhi Jain(Assisted by : Shashwat Jain, LCRA)

Appeals allowed.

H