RUSODAY SECURITIES LTD. versus NATIONAL STOCK EXCHANGE OF INDIA LTD. & ORS. on 20 November 2020

218

SUPREME COURT REPORTS

[2020] 13 S.C.R.

RUSODAY SECURITIES LTD.

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v.

NATIONAL STOCK EXCHANGE OF INDIA LTD. & ORS.

(Civil Appeal No. 2690 of 2009 etc.)

B

NOVEMBER 20, 2020

[A. M. KHANWILKAR AND DINESH MAHESHWARI, JJ.]

Securities Contracts (Regulations) Act, 1956:

Sections 3(2) and 9 – Appellant admitted as trading memberCof NSE (Stock Exchange) – Was authorized by the Stock Exchangeto become a clearing member of National Securities ClearingCorporation Ltd. (NSCCL/ Clearing Corporation) – Appellant hadexecuted undertaking in favour of the Stock Exchange as well asthe Corporation to abide by and comply with the Rules, Byelaws,and Regulations of the Exchange and of the Corporation and alsoDto abide by Circulars, Orders, Directions, Notices or Instructionsissued/modified/amended from time to time – By Circular dated19.05.1997 appellant was permitted to trade to the extent of 7 timesits base capital – Trading facility of appellant was withdrawn bythe Exchange on appellant’s exceeding the permissible limit as perEthe Circular dated 19.05.1997 – Further the Clearing Corporationclosed out all the open positions in the securities trade of theappellant – The Exchange by letter dated 01.11.2004 informed theappellant about periodical appropriation of certain amounts madeby the Exchange from the security deposits of the appellant in lieuof various membership charges – The Exchange also called uponFthe appellant to deposit additional sums to meet the shortfall createdin the security deposit, to retain the membership of the Exchange –Appellant denied such obligation to pay, as its trading facilitieshad stood suspended throughout that period – Thereafter expulsionof membership of the appellant by the Exchange – The SecuritiesGAppellate Tribunal upheld the closing out of all the outstandingpositions of the appellant under clauses 17 and 18 of the Byelaws– Tribunal held the Circular dated 19.5.1997 as valid having bindingvalue – Appeal to Supreme Court – Appellant’s plea that the appellantwas not bound by the Circular dated 19.5.1997 as the same wasinvalid for lack of prior approval of Central Government/SEBI andH

the same being in conflict with Byelaws – Held: Subject matter ofthe Circular falls within ambit of operational parameters –Determination and announcement of operational parameters iswithin the competence of the Stock Exchange – The Exchange isempowered to announce such parameters by way of Circular –Clearing Corporation is also empowered to issue operationalparameters relating to trading limits and consequent actions in caseof non-compliance – No requirement of prior approval is providedfor notifying such operational parameters – The power and modeof prescription of such circular falls within the resudary powersreserved for the Exchange – Since the Byelaws and Rules of theStock Exchange are approved by the Central Government/SEBI,the action taken under the Byelaws/Rules/Regulations, by prescribingsuch operational parameters in the form of Circular would assumeenforceable character – The Circular cannot be said to be ultravires Clauses 17 and 18 of the Byelaws – The appellant is bound bythe Circular – The appellant having submitted an undertaking tocomply with such instructions, notice etc. cannot be allowed to takecontrary plea – The Stock Exchange not only had the Authority tospecify various deposit-related requirements, but also had the powerto expel a member in case of default – The obligation of the appellantto keep up with the adequacy of deposits continued despite thewithdrawal of its trading facility – In the present case, the appellantin having failed to maintain the requisite membership margins withthe Exchange, acted in contravention of the Byelaws and Rules ofthe Exchange necessitating unto termination – National StockExchange Byelaws, 1994 – Clauses (10), (17) and (18); Chapter IXClauses (5), (6) and (24) – Securities and Exchange Board of IndiaAct, 1992 – National Securities Clearing Corporation Ltd. Byelaws– Chapter VI Clauses (11) and (16) – National Securities ClearingCorporation Ltd. Regulations – Chapters 9 and 10 – National StockExchange Rules – Chapter IV Rule 20(f).

National Stock Exchange Byelaws:

Chapter XII Clause (11); Chapter IX clause (24) – Realisationof security deposits – Stock Exchange is vested with the power torealize the assets of a defaulter member in due course – Securitydeposits can be realized by the Exchange per se without anyadditional condition as the Exchange enjoys a statutory lien over ABC

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Asuch deposits by way of clause (24) of Chapter IX – However, suchsecurity deposits do not include forfeited/withheld assets/securities– Expulsion or declaration of defaulter is a pre-condition forrealization of withheld securities – Vesting of withheld securities infavour of Exchange takes place only after expulsion or declarationof defaulter – Withheld securities can be categorized as ‘receivingBsecurities’ and ‘introductory securities’ – In the present case‘introductory securities’ since were in the names of third persons,could not have been realized by the Exchange – Actual recoveryqua appellant/defaulting member could only be made from the‘receiving securities’ as those securities were due/deliverable to theCappellant and were withheld as a collateral – National SecuritiesClearing Corporation Ltd. Regulations – Chapter 9.

National Stock Exchange Rules:

Chapter IV Rule 20(f) – Applicability of – Held: The relevantpoint of time for applicability of this Rule is “the date of expulsion”Dfrom the trading membership of National Stock Exchange.

Chapter XII Clause (ii) – Declaration of trading members asdefaulter – Requirement – Nature of – Held: Though requirement ofdeclaration as defaulter may be discretionary one under NSCCLRegulations, the same is mandatory requirement for vesting in clauseE(ii).

Lien:

Scope, extent and operation of lien – Held: Mere existenceof lien may not entitle the lienee to sell off the property forFsatisfaction of debt without a court order – However, this principleis not absolute – When lien itself is a creation of byelaws, Rules orRegulations etc., the scope, extent and operation of such lien wouldbe governed by the same scheme – No external conditions can beread into such scheme.

Equity:G

Equity is about balancing the competing interests – It neveroperates in an absolute manner – Principles’ of constructive trustand fiduciary relationships are equitable principles.

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Principles:

Principle ‘Nemo dat quod non habet’ – Applicability.

Principles of ‘constructive trust’ and ‘fiduriary relationship’– Nature and applicability of.

Words and Phrases:

“Regulation” – Meaning of.

“Control” – Meaning of.

Disposing of the appeals, the Court

HELD: 1.1 The central scheme of Securities Contracts(Regulations) Act, 1956 reveals that the requirement of priorapproval, in relation to matters specified in sub-section (2) ofSection 3, of the Central Government, be it at the time of originalframing of Rules of the Exchange or upon amendment thereof, isessential or pre-requisite. This mandate of Central Governmentwas later entrusted to SEBI by issuing orders under Section 29Aof the 1956 Act.[Para 25][251-H; 252 A-B]

1.2 The legislature has omitted the usage of the word“Regulations” or “Circulars” in the parent Act; and as far as thegovernance of a stock exchange is concerned, the supervisionor control of the Central Government/SEBI at the time of grantingrecognition to the stock exchange is limited to being satisfiedthat the Rules and Byelaws of the stock exchange applying forregistration are in conformity with such conditions as may beprescribed for ensuring fair dealing and protecting investors. Thedomain of framing Regulations is kept separately in a standalonemanner in the Byelaws of the Exchange and not in the Act. Theframing of Regulations concerning governance of stock exchangeis reserved for the Exchange. [Para 26][252-D-F]

1.3 Clause (10) of National Stock Exchange Byelaws, 1994(NSE Byelaws) defines “Regulations” to include business rules,code of conduct and such other Regulations prescribed by therelevant authority from time to time for the operations of theExchange and they are declared to be subject to the provisionsof the 1956 Act, Rules and Securities and Exchange Board ofIndia Act, 1992. The definition is merely an inclusive definition A

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Aand not exhaustive. The relevant authority here is the Board ofthe Exchange. Such Regulations can be prescribed on a widerange of matters as indicated in “Chapter III – Regulations”,including capital adequacy norms or “any other matter as may bedecided by the Board”. Thus, the scope of “Regulations” that canbe prescribed by the Exchange is expansive so as to cover allBissues relating to governance of the Exchange. [Para 27][252-F-H; 253-A]

1.4 Clause (2) of the Byelaws specifies certain “Conditions”for the Trading Members. Sub-clause (a) of clause (2) signifiesthat apart from framing Regulations, the Byelaws also empowerCthe Exchange to issue instructions regarding operationalparameters, guidance etc. for the trading members. The term“operational parameters” is crucial. Chapter IX of the Byelaws,in clauses (5) and (6), titled “Transactions and Settlements”specifies certain operational parameters for trading. Clause (5)Dempowers the relevant authority of the Exchange to “determineand announce” from time to time certain operational parameterswhich may include “trading limits” and “capital adequacy norms”as per clause (6). Notably, clause (5) of Chapter IX of the Byelawsuses the phrase “the relevant authority may determine andannounce” the operational parameters. Both “determination” andE“announcement” of such parameters is therefore, within thecompetence of the Exchange. Such announcement can be madeby the Exchange by circulating a communication amongst themembers, as it rightfully did in the present case by way of thesubject circular. A similar clause has been inserted in Chapter VI

Fof the Byelaws of the Clearing Corporation as well, therebyempowering the Clearing Corporation to issue operationalparameters relating to trading limits and consequent actions incase of non-compliance. [Para 28][253-B-H; 254-A-B]

1.5 The subject matter of the circular in question pertainsGto trading/exposure limits coupled with sanctions in case of non-compliance. That falls squarely within the ambit of operationalparameters which can be determined and notified by the Exchangefrom time to time. Nothing is brought to the notice of the Courtfrom the text of this circular that it would militate against thenorm of fair dealing and protection of investors. In any case, noHrequirement of prior approval is provided for notifying such operational parameters and as the name suggests, they are meantto tackle “operational” concerns as and when they emerge beforethe Exchange or the Clearing Corporation. The power and modeof prescription of such circular falls within the residuary powersreserved for the Exchange. [Para 29][254-B-D]

1.6 Thus, the legislature has bestowed upon the Exchangesufficient freedom of action to effectively control and regulatethe functioning of stock brokers who use the Exchange as a meansto enter into financial relationships with the investors and commonpublic. This freedom of action is guaranteed in the pre-approvedByelaws which enable the Exchange to frame Regulations,instructions, operational parameters, notice etc. and bring theminto force without subjecting them to any added condition of priorapproval of the Central Government/SEBI. The only limitationon this power of the Exchange is that such Regulations oroperational parameters issued under the Byelaws are subject to1956 Act, 1992 Act and Rules framed thereunder. Strictlyspeaking, this limitation does not ipso facto mean that suchRegulations or operational parameters are subject to priorapproval. [Para 31][255-E-H]

1.7 The provision under s. 9 reinforces that the power toregulate and control the trading contracts enables the Exchangenot only to make Byelaws and Regulations but to provide foreverything therein which might be necessary (and permissible)for ensuring efficacy and vigour in the exercise of just power ofcontrol and regulation. It is in this light that the operationalparameters or Regulations framed under the Byelaws are to beunderstood. For, without such power, the Exchange would berendered toothless in controlling and regulating the contracts.[Para 30][255-D-E]

1.8 Since the Byelaws and Rules of the Exchange are dulyapproved by the Central Government/SEBI, it can safely be statedthat actions taken by the Exchange under the Byelaws orRegulations - by prescribing such operational parameters in theform of a circular and in consequence thereof, would assumeenforceable character. The appellant having submitted anundertaking to comply with such instructions, notice etc., cannotbe heard to argue to the contrary. The Court by interpretative A

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Aprocess ought not to limit the efficacy of such a valid documentby additional pre-conditions such as prior approval, not envisagedby the lawmakers or regulation framing authorities. To do sowould entail in undermining the authority of the Exchange toregulate and control the stock market, directly or indirectly. [Para32][256-C-E]B

1.9 The act of adoption of this circular by the Exchange andcirculation of the same amongst the trading members was withinthe domain of the Exchange in terms of its Byelaws, and unless acase for such instructions to be ultra vires the Byelaws or the Actis made out, there is no reason to undermine its intended effect.C[Para 33][256-E-F]

1.10 The operational freedom of the Exchange cannot bestifled on mere assumptions and the burden lies on the claimantto demonstrate a real conflict between the exercise of power andsource of power. Arguendo, had it been a deviation from theDByelaws, in the sense that the circular was defeating and notfurthering the scope and objective of the Byelaws, it could havebeen examined as a constructive amendment or amendment byimplication. Therefore, the principle of constructive amendmentsignifies that unless a clear case of repugnancy is made out, theElater provisions could not be treated as modification or abrogation,more so when such provisions further the intent of the sourceprovisions. [Para 35][256-H; 257-C-D]

2.1 For the same default, closing out action is contemplatedboth under the Byelaws of the Exchange and the subject circular.FClauses 17 and 18 of the Byelaws of the Exchange provide forclosing out. Clause 17 envisages closing out for failure tocomplete the settlement operation. That, however, has no relationwhatsoever to a situation of closing out due to failure to tradewithin defined limits, as specified by the Exchange, amounting toviolation of the Byelaws of the Clearing Corporation, as in theGpresent case. Whereas, clause 18 caters to another situation andis textually different. [Paras 37 and 39][257-E-F; 258-D-E]

2.2 Clause 18 is of a residuary nature and confers on therelevant authority of the Exchange the power to close out certainpositions on grounds not specified in clause 17. The mischiefH

creators in a stock market operate in a myriad set of ways andone cannot pre-set or comprehend all possible methods ofundermining the health of the market. Thus, residuary situationsof closing out may emerge and clause 18 enables the Exchangeto promptly act against such attempt. The provision is premisedon necessity. By reading in any requirement of due date in clause18, on the lines of clause 17, the court would be doing violenceto the clear intent of the clauses and the broad scheme of theByelaws. Clause 18 would be rendered nugatory. Even logically,by importing a fictional requirement of “due date” in clause 18,the Exchange cannot be expected to gloss over a clear case ofexcessive reckless trading and allow the mischief to continueuntil the due date has arrived. Thus, there is no occasion to controlthe scope of clause 18 by establishing a fictional link with clause17. [Para 44][260-B-F]

2.3 The circular provides for the effect of violation of theexposure limits and lays down that any such violation shall betreated as a violation of the Byelaws of the Clearing Corporation,without prejudice to the power of the Exchange to withdraw thetrading facilities. This withdrawal is contemplated as an imminentaction to protect the market from being exposed to unsecuredfinancial exposure. Consequent thereto, closing out of openpositions has been contemplated. Strictly speaking, the circular,triggers a closing out action upon fulfilment of two conditions: (i)exceeding the gross exposure limits while trading; (ii) failure todeposit additional capital within such time as may be granted bythe Exchange/Clearing Corporation for continuance of trading.The nature of closing out prescribed in the circular does notenvisage any failure in delivery or in payment to complete thesettlement, unlike in clause 17. The conditions in the circularoperate on a more basic level and are concerned essentiallyregarding the eligibility of a trading/clearing member venturingbeyond the market exposure limits defined in the context of theadvance security deposit. That is the condition and procedureprescribed from time to time by the relevant authority for dealingin securities by the member. For such non-compliance, the powerascribable in clause 18 may be attracted. [Paras 40, 41 and 42][258-E-G; 259-C-F]

2.4. In the present case, the appellant violated the conditionand procedure prescribed by the Exchange/Clearing Corporation AB

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Avide subject circular. Thus, the manner of closing outcontemplated in the circular is borne out by clause 18 and thereis no conflict. Apart from the circular, clause 16 of the Byelaws ofthe Clearing Corporation also provides for closing out “on failureof a clearing member to comply with any of the provisions relatingto delivery, payment and settlement of deals or on any failure toBfulfill the terms and conditions subject to which the deal has beenmade”. The nature of action contemplated under clause 16 is infurtherance of the basic mandate laid down under Section 9 ofthe 1956 Act. For, section 9 of the Act clearly provides that allcontracts/deals on the market are subject to the ByelawsC(including Regulations, operational parameters etc. issued underthe Byelaws) and Rules of the Exchange. One of the consequencesof not acting in accordance with the Byelaws is provided underclause 16, apart from other provisions. Understood thus, thisclause is yet another self-contained provision envisaging forthwithclosing out, which goes on to show that forthwith closing out isDnot a new phenomenon in the overall scheme of things. [Paras 45and 46][260-F-H; 261-C-E]

2.5 On a comprehensive view of the scheme of closing outunder the Byelaws of the Exchange, Byelaws of the ClearingCorporation and the circular, an action of forthwith closing out isEpermissible under the said scheme, particularly clause 18, andthus, the circular is not ultra vires clauses 17 and 18 of the Byelaws.Rather, the circular furthers the spirit underlying clause 18. [Para47][261-E-F]3.1. The undertaking given by the appellant to theFrespondents fell within the broad scheme of the Byelaws/Rules,and was a quint-essential requirement for obtaining registrationas a stock broker as both 1956 Act and Byelaws subjected themembers to such conditions. Thus, the appellant is bound by theundertaking so given. [Para 51][262-G-H; 263-A]G

3.2 Even otherwise, assuming the absence of undertaking,the very fact that a valid circular originated from the statutoryscheme of the Byelaws is sufficient to bind the appellant with itsprovisions. Thus, the emergent legal position is that the appellanthad subscribed to both statutory as well as contractual obligationsHwith the respondents for functioning as a stock broker. Any deviation from the said circular could invite action under multipleprovisions spreading across the Byelaws of the Exchange andByelaws of the Clearing Corporation, in addition to the sanctionsprovided in the circular itself. Understood thus, the appellant issquarely bound by the circular and any breach of the same is tobe viewed accordingly. [Para 51][263-A-C]

3.3 The above view is reinforced by the “Master Circularfor Stock Brokers” issued by SEBI on 01.06.2018, bearingheadnote that “This Master Circular is a compilation of relevantcirculars issued by SEBI, which are operational as on date of thiscircular”. Annexure-4 of the Master Circular titled “Rights andObligations of Stock Brokers, Sub-Brokers and Clients” reiteratesthe correct legal position under clause 2 thereof which providesthat the stock brokers are bound by all the Rules, Byelaws andRegulations of the Exchange and circulars/notices issued infurtherance of such Byelaws and Rules. [Para 52][263-C-E]

3.4 The scheme of 1956 Act enables the Exchange to resortto suspension and expulsion of the members, in accordance withits approved Byelaws and Rules. Section 3(2) of the Act specifiescertain matters that must be appropriately covered in the Byelawsor Rules. Clause (c) of the said sub-section expressly providesthat matters of admission, qualification, exclusion, suspension,expulsion and re-admission of members must be covered in theByelaws/Rules. [Para 54][263-G-H; 264-A]

3.5 By SEBI letter No. SMD-I/11087/92 dated 04.11.1992titled “Capital Adequacy Norms for Brokers”, the stockexchanges were directed to provide for norms relating to capitaladequacy in their Byelaws. Apart from specifying certainrequirements, the letter went on to state that “the stock exchangeshall continue to have the authority to impose suitable margins asper their judgment in the context of the market situation.” Therefore,a stock exchange stood empowered not only to specify capitaladequacy requirements for the trading members but also to takeaction against the defaulting members. [Para 55][264-D-F]

3.6 Accordingly, for effectuating the mandate accorded uponthe Exchange as per the Act, NSE Rules, 1994 and the abovesaiddirective, it is obliged to deal with the subject of termination ofmembership on that basis. [Para 56][264-F-G]

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A3.7 The same regulatory intent is reflected in the Byelawsas well. Clause (1)(b) of Chapter-V of NSE Byelaws, 1997 (theoperative Byelaws as regards the question of expulsion)empowers the relevant authority to “specify prerequisites,conditions, formats and procedures for application for admission,termination, re-admission etc. of trading members”. [Para 57][265-BD-E]

3.8 Consequence of failure to maintain the necessarydeposits is addressed in Chapter XII of the Byelaws whereinclause (1) provides that such a member could be declared as adefaulter, which in itself is a ground for expulsion in the NSECRules, 1994. [Para 57][265-G-H; 266-A]

3.9 A holistic view of the scheme vividly reveals that theExchange not only had the authority to specify various depositrelated requirements but also had the power to expel a memberin case of default. In the present case, it is not in dispute that theDInterest Free Security Deposit to be maintained by the appellantactually fell short of the required margins during the relevantperiod. [Para 58][266-C-D]

4.1 The obligation of the appellant to keep up with theadequacy of deposits continued despite the withdrawal of itsEtrading facility. The relationship between a stock exchange andtrading member runs across various levels. Action againstmembers is to be taken only upon violation of conditions andprocedures therefor. It is a serious matter and resorted to onlyupon the fulfilment of conditions specified in the Byelaws, Rules,FRegulations or even in operational parameters. Notably, theconditions required for withdrawing the trading facility aredistinguishable from the conditions required for suspension/expulsion of membership. Under the relevant provisions,withdrawal could take place upon a standalone violation of certainoperational parameters on a given trading day (like exceedingGthe exposure limits as in the present case). Whereas, expulsionwould take place upon a sustained violation of membershipobligations (like failure to maintain the base capital and also forfailure to replenish the prescribed amount) within the time framespecified therefor. The two actions vary not only in their texture,Hbut also in their resultant effect. Withdrawal, for instance, does not extinguish the membership. It acts like a halt for indulging infurther trading activity. [Paras 58 and 59][266-D-E; 266-E-H; 267-A]

4.2 To say that mere withdrawal of trading facility wouldipso facto absolve a trading member from keeping up with otherobligations towards the Exchange for continuation of membershipwould result into an anomalous situation. It would amount to thediffusion of one stage of the relationship with the other, and wouldbecome a concocted way to extend benefit for its own wrong to adefaulting member. Such a consequence could not be intendedto result from an action of withdrawal of trading facility. For, thewithdrawal of trading facility is a temporary or interim action whichis taken against an erring member to prevent him from continuingon a mischievous path during the trading hours and to takecorrective steps forthwith. The nature of this action is preventiveand the provisions governing this action provide for certainremedial acts, like depositing additional sums to increase theexposure limits, the performance of which can help a member inresuming his trading operations. The obligations for continuedadmission as a member are entirely different and merely becausetrading has been halted due to a member’s own default, it doesnot result in a hiatus situation or extricate him from membershipobligations. If that were to be the case, there was no need for theByelaws to provide these actions separately. [Para 60][267-A-E]

4.3 Pertinently, the capital adequacy norms, are meant bothfor admission as a member and for continuation as a member.Even the language of the governing provision i.e. Rule 32,signifies that requirements relating to capital adequacy are meantfor “continued admittance to trading membership” and thus, themandatory obligations would continue, as long as membership isformally continued. Despite the temporary action of withdrawalof trading facility, a member continues to be a member of theExchange with all corresponding rights and obligations intact onboth sides. [Para 61][267-E-G]

4.4 Having observed that the appellant failed to maintainthe requisite membership margins with the Exchange for a longperiod and refused to make up for the shortfalls when called uponto do so by the Exchange, there is nothing to deviate from theview taken by the Tribunal that the appellant acted in AB

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Acontravention of the Byelaws and Rules of the Exchangenecessitating unto termination. The actions taken by theExchange, thus, were in accordance with the law. [Para 62][268-B-D]

5.1 Apart from challenging the expulsion of membership,Bthe appellant had also prayed for the release of withheld securities.No such plea was raised by the respondents in the statedproceedings in 2014. Rather, that appeal was allowed and claimregarding withheld securities was relegated to the Defaulter’sCommittee. That remand order was acted upon by all concernedand against which the present appeal arises before this Court.C[Para 79][273-A-B; 273-E-F]

5.2 It is not correct to say that cause of action accrued onlyafter the Defaulter’s Committee’s order dated 04.12.2014,justifying the withholding of securities. The said order of theDefaulter’s Committee did not result in the withholding ofDsecurities. It merely supplied reasons and justification for suchwithholding. The cause of action, if at all any, had arisen to theappellant from the moment their securities were withheld in 1997.Merely because a subsequent order is passed to justify a prioraction, it cannot be a case of accrual of fresh cause of action toEthe aggrieved. [Para 80][273-F-G]

5.3 In the factual scheme of the present case, there aretwo sets of assets in control of the respondents – first, securitydeposits and second, withheld securities. The security depositscame to be deposited on account of membership obligations andFthe securities were withheld on account of failure to completesettlements. Though the challenge is limited to withheldsecurities, the provisions relating to such securities address boththese categories of assets collectively. [Para 82][274-C-E]

5.4 As per clause (11) of Chapter XII of the NSE ByelawsGtitled “Default”, the Exchange is vested with the power to realisethe assets of a defaulter member in due course. Clause (23)complements this action and provides for the order of priorityfor satisfying the claims. The clause (11) provides for realisationof three categories of assets: (i) security deposits, margin moneysand other deposits; (ii) securities which have been deposited byHthe defaulter member; and (iii) moneys, securities and other assets due, payable or deliverable to the defaulter by any other TradingMember and recovered by the Exchange. Pertinently, differentkinds of assets are subject to a different procedure of realisation.Out of the three categories covered under clause (11), securitydeposits can be called in and realised per se without any additionalcondition. There is no requirement of vesting with respect tosuch deposits neither in the language of clause (11) nor in theoverall scheme. It is so because the Exchange enjoys a statutorylien over such deposits by way of clause (24) of Chapter IX -“Transactions and Settlements”, NSE Byelaws which categoricallyprovides that the Exchange has a first and paramount lien overthe monies, bank deposits and other securities deposited by thetrading member for any sum due to the Exchange. [Paras 83 and84][274-E-F; 275-B-D; 275-E-G]

5.5 But it covers only those assets which are voluntarilydeposited by the member with the Exchange. Forfeited/withheldassets are not included herein. It is true that mere existence oflien may not entitle the lienee to sell off the property forsatisfaction of debt without a court order. However, the sameprinciple is not absolute and the cases in which the statutory/contractual scheme itself provides for such sale/realisation falloutside its purview. It is settled that when lien itself is a creationof Byelaws, Rules or Regulations etc., the scope, extent andoperation of such lien would also be governed by the samescheme. [Para 84][276-B-D]

Unity Company Private Ltd. vs. Diamond Sugar Millsand Ors. AIR 1971 Cal 18 – referred to.

5.6 Therefore, if provisions provide for realisation of suchlien property, the same may be given effect to in accordance withthe provisions. No external conditions can be read in such ascheme. Clause (11) expressly provides for realisation of securitydeposits as and when a member becomes subject to the provisionsrelating to defaulters. The phrase “shall call in and realise”signifies that realisation is warranted as an imminent action upondeclaration of defaulter in case the security deposits areinsufficient. The effect of this phrase is that once a tradingmember has been declared a defaulter, the Exchange is duty boundto realise the security deposits retained by it to satisfy its AB

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Aobligations and return the remaining deposits, if any. If theExchange fails to do so, it may become liable to make good theloss of interest to the defaulter on any amount over and abovethe monetary obligation. [Para 84][276-G-H; 277-A-C]

5.7 In the present case, no fault can be found in the conductBof the Exchange as it had actually realised the deposits at variouspoints of time owing to the inability of the appellant to keep upwith the statutory margin requirements. It holds no merit to statethat the Exchange failed to perform its duty to realise the securitydeposits. The amount of Rs. 1.34 crores came to be added to thetotal obligation again in 2017 when the Exchange returned theCsecurity deposit amount pursuant to an order of this court passedat the insistence of the appellant and thus, in law, that cannot beheld against the Exchange in any manner. [Para 85][277-C-E]

5.8 Unlike the money deposits, no legal requirement offorthwith realisation is envisaged in the case of withheldDsecurities. The withheld securities can be categorised as –securities in which the appellant was a receiving member(receiving securities) and securities in which the appellant was anintroducing member (introductory securities). [Para 86][277-F-G]

6.1 In the transactions during the trading period fromE24.09.1997 to 30.09.1997 and during the trading period from01.10.1997 to 14.10.1997, the appellant was a “receivingmember”. On account of failure of appellant to complete thesettlements made during these periods, by making completepayment, the Exchange withheld the pay-outs of securities atFvarious points of time. The remaining securities were withheldwherein appellant was acting as an “introducing member” in themarket. [Paras 87 and 88][278-C-E]

6.2 As regards the introductory securities, they simplycould not have been realised by the Exchange at any point ofGtime as they were merely introduced by the appellant and did notbelong to it. These introductory securities were registered inthe names of third persons who are not parties to this proceeding.Concededly, there could have been no loss to the appellant relatingto corporate benefits on these securities as it did not have anyright therein, to receive any such benefit. Property in thoseH

securities neither vested in the appellant nor in the Exchangeand they were held by the Exchange only as a lien on the physicalcopies of shares to the limited extent of obliging the appellant tofulfil its obligations. The benefits on those securities remainedin third parties, as they must have, and no one has approachedthis court to raise the grievance that they have suffered anywrongful loss as regards those benefits. Even if any grievanceexists between two clearing members as regards the receipt ornon-receipt of those benefits, the best course of action wouldhave been to proceed by way of a separate proceeding in thatregard. Clause (11) of Chapter VI, NSCCL Byelaws categoricallyprovides for a privity of contract between delivering and receivingclearing members. The interests of those third parties are not apart of the present lis. [Para 89][279-D-H]

6.3 Indisputably, the introductory securities have beenmarked as objectionable by the companies; and securities withoutstanding objections are of no use to the Exchange for thepurpose of recovery so long as such objections are not removed.The introductory securities fall outside the purview of the vestingprovision. Further, the responsibility of the Exchange was limitedto providing the appellant an opportunity to remove the objectionsand continue withholding the securities in the interim. Any enquiryregarding the legality or illegality of objections could have takenplace between the introducing member and the respectivecompanies. The same also cannot form a part of the subject matterbefore this Court. [Para 90][280-A-C]

6.4 The provisions relating to withholding and vesting ofsecurities are provided in two separate documents. Whereasvesting is provided under Chapter-XII of NSE Byelaws titled“Default”, withholding is provided under Chapter 9 of NSCCLRegulations titled “Non-Delivery and Non-Payment”. [Para93][280-E-F]

6.5 Declaration of defaulter upon non-payment is not anexpress pre-requisite for the recovery of dues here. Regulation9.7 provides that all deliveries of securities which were due tothe defaulter shall be handed over to the Clearing Corporationso as to enable it to realise their dues from those deliverablesecurities. Upon receipt of securities as per this Regulation, theaction of withholding is contemplated in Regulation 9.9

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A(Regulation 9.11 in NSE Regulations). In the present case,securities deliverable to the appellant as a receiving memberwere withheld by the respondents to clear their dues. [Para94][281-C-D; 281-F-G]

6.6 On withholding, the stage of vesting comes in and thisBstage is important as vesting is a pre-requisite for dealing withthe securities in any manner. There can be no action, be it of saleor registration, against a property unless the property vests inthe entity. “Nemo dat quod non habet” is the fundamental principleof transfer of property which, if literally translated, means “noone gives what they do not have”. Thus, unlike money deposits,Cwithheld securities cannot be realised without legal vesting underclause (11). [Para 95][281-G-H; 282-A]

6.7 Though the requirement of declaration as defaulter maybe a discretionary one under the NSCCL Regulations, the sameis a mandatory requirement for vesting in clause (11). For, vestingDtakes place upon declaration of any trading member as a defaulter.The expression “and such assets shall vest ipso facto, ondeclaration of any trading member as a defaulter” reinforces theview. Even otherwise, the main vesting provision is included inthe chapter on defaults and therefore, such declaration is necessaryunless otherwise excluded. Therefore, the right of theECorporation to dispose of or realise these securities iscircumscribed by the requirement of declaring such member asa defaulter. In the present case, no such declaration came to bemade. However, despite the absence of any such declaration,vesting took place by way of Rule 20(f) in Chapter IV of NSERules, whereby the requirement of express declaration ofFdefaulter upon expulsion is done away with. [Paras 96 and97][282-A-D]

6.8 The emergent position of law, therefore, is that vestingdoes not take place in favour of the respondent Exchange unlessa formal expulsion order is passed. The relevant point of time,Gtherefore, is the date of expulsion. Without such legal vesting,the Exchange only sits upon the withheld assets as a custodian.There is no question of realisation. Such withholding is done toserve two purposes – first, to persuade the defaulting member tofulfil its obligations during the continuation of membership if itso wishes and second, to secure the liability at the earliestHavailable opportunity as a preventive measure. If liabilities continue to be unfulfilled, expulsion becomes an inevitableconsequence and the withheld assets vest in the Exchange. [Para97][282-G-H; 283-A-B]

6.9 Thus realisation cannot be done unless vesting iscomplete and there is no obligation on the Exchange/Corporationto forthwith realise the securities upon withholding. Expulsionor declaration of defaulter, as the case may be, is a pre-conditionfor realisation, which, in the present case, took place only in2006. Even on applying rule of prudence, such forthwithrealisation would not be appropriate as such action would deprivethe defaulting member from an opportunity to correct its mistakeby settling liabilities within due course of time without giving upmembership. [Para 98][283-B-C]

6.10 The Rule 20(f) clearly signifies that it applies toexpelled members and the moment a member is expelled frommembership, this rule will automatically become operative.Literally understood, the relevant point of time for checking theapplicability of this rule is the “date of expulsion”. In the instantcase, expulsion of the appellant took place in 2006, whereas thesaid rule was inserted beforehand in 2001. Thus, the rule wasvery much in force when the appellant was in fact expelled.Consequently, the respondents were well within their powers torealise the withheld securities in accordance with clause (11) soonafter expulsion in 2006. [Para 99][283-B-C]

6.11 Upon withholding followed by vesting, the manner ofdealing is provided under Regulation 9.10, NSCCL Regulations(Regulation 9.12, NSE Regulations). This Regulation predicatesthat the Clearing Corporation is armoured with a set of measuresas regards the withheld securities. The first part of the Regulationvests the Corporation with the power to deal with the securitiesat “such times” and in “such manner” as it may deem fit. TheRegulation then specifies certain measures which may include:(a) closing out the withheld securities in the name of Exchangeor any other entity; or (b) registering the withheld securities inthe name of Exchange or any other entity. Thereafter, in theconcluding sentence it is further specified that the funds receivedout of closing out of withheld or registered securities may alsobe dealt with in such manner and at such times as the Exchangemay deem fit. It is therefore clear that the respondents had two AB

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Acourses of action open for dealing with the securities – closingout and registration. Chapter 10 of NSCCL Regulations titled“Closing out of Contracts” delineates the manner of closing out.[Paras 100 and 101][283-F-G; 284-B-F]

6.12 Thus, the Corporation is duty bound to close out allBoutstanding deals against the defaulter and “determine” themfor the purpose of its recovery. Regulation 10.9 specifies themanner of such determination. The Corporation is empoweredwith a set of methods to close out the outstanding deals againstthe appellant. Upon vesting, it could have sold out the withheldsecurities through an auction or by placing an order of sale inCExchange or in any other permissible manner. [Para 102][285-A-B; 285-D-E]

7.1 The other action contemplated in Regulation 9.10 is ofregistration. The grievance is that the Exchange held on to thesecurities without registration and that it was abuse ofDdiscretionary powers and the respondents ought to haveregistered the securities in its name forthwith. Once an action ofwithholding is taken, multiple interests come into play and boththe parties assume different roles as regards the withheldsecurities. – role of Exchange and role of defaulting member. [ParasE103 and 104][285-E-G]

7.2 Regulation 10.9 requires the Exchange not to sit idleon the withheld securities and instead, obliges it “to deal” withthem in an appropriate manner. This requirement is amanifestation of the basic “duty of care” implicit in regulatoryFrelationships where one member is in a position to control thefunctionality of the other. The raison d’etre underlying this dutyis to protect the interests of a member and to prevent any unduedamage to its interests as a crucial element of the market. [Para105][286-B-D]

G7.3 In the present case, it is clear that the manner of dealingwith the withheld securities is not circumscribed under strictparameters. The Exchange is bestowed with a discretion tochoose amongst the available options and the appellant holds nocontrol over such choice. To this limited extent, the role of theExchange as regards the withheld assets is of a fiduciary character,Hobligating it to choose the just course of action out of the available options. Traditionally speaking, the relationship of Member-Exchange may not be regarded as a fiduciary one. But the concernof the Court is limited to the dynamics of this relationship quathe withheld securities in light of the regulatory scheme. It isonly for the purpose of performance of functions that a fiduciarycharacter is recognised in this relationship. The scope of fiduciaryduties is “moulded according to the nature of the relationship andfacts of the case’. It is thus clear that constructive trust arises byoperation of law in specific factual scenarios and not by any statuteor contract. However, such trust, and rights and obligations underit would depend strictly upon the prevailing set of facts andgoverning provisions. [Para 106][287-B-F; 288-B-C]

Robert L. Hodgkinson v. David L. Simms [1994] 3 SCR377; Frame v. Smith [1987] 2 SCR 99 – relied on.

Hospital Products Ltd. v. United States SurgicalCorporation Ltd. (1984) 156 C.L.R. 41; ParagonFinance PLc v. DB Thackerar and Co. [1991]1 All ER400 – referred to.

“Fiduciary Law: The Judicial Process and the Duty ofCare” by Professor Frankel, Snell’s Equity, 32nd Edition– referred to.

7.4 The principles of constructive trust and fiduciaryrelationships are equitable principles, and equity never operatesin an absolute manner or in a vacuum. In fact, the very basis ofthe law of equity is its flexibility to take care of mutual concernsof the parties. Equity is about balancing the competing interests– by preventing the erosion of interests of one party whileensuring a free exercise of legally enshrined discretionary powersto the other. No doubt, specific fiduciary duties could definitelybe recognised in the specific facts of the case but the manner ofperformance of such duties cannot be dictated in regulatorymatters. Legal recognition of the role of a trustee and fixing actualobligations to be performed under such role are two separatematters. The latter is dependent on the nature of discretion andon the diligence of other party. [Para 108][288-D-F]

Equity & Trusts, Alastair Hudson, 2nd Edition – referredto.

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A7.5 The duties of a trustee can be broadly classified intomandatory duties and discretionary duties. The court is alwayscircumspect in enforcement of discretionary duties. A perusal ofRegulation 9.12 succinctly reveals that the measure of registrationis not provided as an exclusive one, rather, it is in addition toother residuary steps that an Exchange is entitled to take.BTherefore, there is no express statutory or contractualrequirement of mandatory registration in the applicable law. Aclear element of discretion is involved in the manner of dealing.It is true that such discretion cannot be exercised in a legallyperverse manner, but it is equally true that a discretion cannotCbe converted into a mandatory obligation, more so when suchdiscretion is provided expressly by a statutory provision. [Para109][288-G-H; 289-A-C]

Ashburner’s Principles of Equity, Denis Brownie, 2ndEdition – referred to.

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7.6 It is the fundamental principle of an equitableexamination that “the one who seeks equity must do equity”.Registration of securities or any property for that matter is donein favour of an entity only upon fulfilment of certain alliedconditions, including but not limited to the supply of consideration.EWithout such consideration, contract itself becomes void, letaside entertaining a demand for registration. Upon withholding,it becomes the duty of the stock broker to raise a request for theregistration of securities and to comply with the payment shortfalland other requirements. During the period commencing from1997 to 2008, the appellant did not pursue the cause of dealingFwith the withheld securities in a proactive manner, seeminglybecause of two reasons- first, the appellant was pursuing multiplelegal actions against the respondents at various forums andsecond, such a request would have to be preceded by fulfilmentof conditions relating to settlement and payment. For, theGExchange could not get the securities registered in the name ofany entity until and unless such entity settles the transaction bymaking complete payment for the purchased securities. Clause(3) of Chapter-VI of NSCCL Byelaws titled “Clearing andSettlement of Deals” expresses the same view. [Para 110][289-E-H; 290-A-B]H

7.7 The appellant never offered to make such payment inlieu of registration. In fact, the Defaulter’s Committee did proposeto hand over physical possession of the securities to the appellantfor getting them registered in its name. The appellant refused tocomply with the direction of payment and instead, challenged thisdecision of the Defaulter’s Committee before the Tribunalwherein a consent order was passed upon an undertaking givenby the Exchange that it has no objection in performing its duty as“trustee” in respect of the unregistered withheld securities andtaking appropriate steps by registering them in its name. Eventhis order was a conditional one as it specified that suchregistration shall not affect the legal rights and liabilities of partiesin any manner. In pursuance of this order on 23.09.2015, therespondents got the securities transferred in their name andrealised them after the impugned order in 2019. [Para 112][291-C-F]

7.8 It is thus clear that the respondents were cognizant oftheir duty towards the withheld securities pending determinationof final claim. However, no action of registration could have beentaken without complying with other conditions. The role of thedefaulting member was of an enabler and unless the Exchangewas placed in a position to register, it could not have exercisedits discretion to register. Permitting the Exchange to registerforthwith as a matter of obligation would also be counterproductiveto the interests of the defaulting member. For, such a blanketaction would have the effect of converting a limited right of lieninto that of absolute ownership over the withheld assets withoutgiving the defaulter sufficient time to get his assets released muchless before a declaration of being a defaulter or an order ofexpulsion. Such can never be the purpose of withholding. [Para113][291-F-H; 292-A-B]

7.9 To summarize, registration could only have been doneon fulfilment of the following conditions:(i) request by thedefaulting member; (ii) request to be preceded by fulfilment ofconditions relating to payment; (iii) request to be accompaniedwith undertaking that any such registration in the name of theExchange would be subject to final outcome of the case. [Para114][292-A-C]

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A7.10 The appellant is not correct in saying that it has sufferedloss of corporate benefits due to non-registration by therespondent. Firstly, the receiving securities legally vested in theExchange as on the date of expulsion to the extent of liability.The appellant could not have claimed any right therein to furthercorporate benefits as regards these securities. Even before theBdate of expulsion, the respondents cannot be held liable for anyloss on the withheld securities as the appellant always had theopportunity of making payment and protecting its interests. Theappellant cannot fail to discharge its obligations for a period of23 years and then turn around and claim loss of benefits in thisCmanner. Acceding to such a claim would be akin to rewarding awrong. Thus, the liability for the loss incurred by the appellant, ifat all any, on account of corporate benefits (dividends, bonus etc.)accrued on withheld shares would not fall upon the Exchange, inthe fact situation of the present case. [Para 115][292-C-F]

D7.11 The respondents’ decision of not realising thesecurities or taking any adverse action during the pendency ofmultiple proceedings cannot be outrightly termed as an abuse ofdiscretion. For, the decision of expulsion (and thus, of vesting)itself became sub-judice along with various other civil and criminalproceedings. Admittedly, the appellant had gone to the extent ofEinitiating proceedings for criminal misappropriation against theDirectors of respondents for using security deposits in regularcourse of business. This inevitably resulted in reluctance of therespondents to sell off the securities amidst pending proceedings.It is settled law that statutory appeal is a continuation of theForiginal proceedings and once an appeal was filed, the questionof expulsion remained sub-judice unto these appeals.[Para116][292-F-H]

7.12 The Tribunal misinformed itself by observing that thisissue had already stood answered in the previous judgment ofthe Tribunal in Appeal No. 84 of 2008. The Tribunal simplyGentered into an examination of the provisions relating towithholding whereas the real question was regarding the mannerof dealing with the withheld securities. [Para 117][292-H; 293-A-B]

7.13 The amount of Rs. 1.34 crore was required to beHreturned by the respondents in SLP (Crl.) No. 9642-9643 of 2011, A

which it had held as an interest free security deposit. It was meantto be utilised for the purpose of discharging the monetaryobligation of the appellant during the period between withdrawaland expulsion. The appellants have advanced an erroneousproposition that the return of this amount by the respondentssignified that there was no liability owed by the appellant towardsthem. The return of the security deposit was driven by a desireof the officials of the respondents to avoid the continuation ofcriminal proceeding against them resorted to by the appellant. Itwas neither a confession that they had misappropriated the saiddeposit nor an undertaking that they had no claim over the saidamount for adjustment against the penalties. The effect of thesaid return was limited to the quashment of criminal proceedingsinvolved therein. [Para 119][293-C-F]

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7.14 The loss caused to the Exchange due to return ofinterest free security deposit amount ought to be reckoned indetermining the total liability of the appellant and the same oughtto be adjusted by the respondents appropriately. The quantum ofamount due from the appellant to the respondents, being aquestion of fact, has been decided by the Tribunal. [Paras 120and 121][293-G-H; 294-A-B]

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8. Following directions are issued for full and finalsettlement of all claims between the parties:

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(i) NSE to evaluate and get the remaining transferrablesecurities, if any, transferred in its favour andrecover the remaining amount using the sameevaluation criteria adopted in respect of otherFwithheld securities of the appellant within 6 weeks.

(ii) After realisation, the surplus amount be returnedforthwith to the appellant along with interest at therate of 12% P.A. from the date of determination ofclaim/date of vesting until the date of payment.

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(iii) Respondents to return the unrealised securitiesincluding those with outstanding objections to theappellant within 6 weeks.

(iv) In case recovery is not possible from the remainingsecurities, for any reason whatsoever, the respondentsH

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may communicate the same to the appellant forthwithand the appellant shall then pay the amount sodemanded (including interest, if any), to therespondents within 6 weeks from the date of receiptof such communication.

(v) NSE is directed to oversee the evaluation andrealisation of remaining securities, and settlement ofclaims. [Para 122][294-C-G]

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Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2690

of 2009

From the Judgment and Order dated 13.01.2009 of the SecuritiesAppellate Tribunal in Appeal no. 84 of 2008.

WithD

Civil Appeal No. 9571 of 2019.

Siddhartha Mitra, Shyam Divan, Sr. Advs., Ashok Mathur, RaibalBanerji, Devashish Bharuka, Ajit Warrier, Angad Kochhar, Ms. TanviDubey, Abhilosh Chaturvedi, Devansh Agarwal, S. S. Shroff, RabinMajumder, Bhargava V. Desai, Ms. Aditi Diwan, Advs. for the appearingEparties.

The Judgment of the Court was delivered by

A. M. KHANWILKAR, J.

1. These appeals under Section 22F of the Securities Contracts(Regulation) Act, 1956[1] take exception to the judgment and order passedFby the Securities Appellate Tribunal at Mumbai[2] in Appeal No. 84 of2009 dated 13.01.2009 and in Appeal No. 118 of 2015 dated 04.06.2019.

CIVIL APPEAL NO. 2690 OF 2009

2. In this appeal, the appellant challenges the judgment/order dated13.01.2009 of the Tribunal wherein it had upheld the order of expulsionagainst the appellant, from the membership of the National StockGExchange of India Limited[3] - Respondent 1. The said order was passedin the aftermath of the withdrawal of trading facilities of the appellant on13.10.1997 and consequent closing out of all outstanding positions on 1 for short, “the 1956 Act”

2 for short, “the Tribunal”

H3 for short, “NSE”or “the Exchange”, as the case may be.

14.10.1997 by the National Securities Clearing Corporation Limited[4] -Respondent 2.

3. The appellant herein, desirous of functioning as a stock brokerin the stock market, registered itself as a Trading Member with NSE/Exchange in November, 1994. As a pre-condition of such registration,the appellant was obliged to and did submit an undertaking in favour ofthe Exchange so as to strictly comply with the practice and stipulationsin the applicable Byelaws, Rules, Regulations and other instructions ofthe Exchange issued from time to time. The said undertaking was givenby the appellant on 19.06.1995.

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

5. In the year 1996, NSE transferred its clearing and settlementfunctions to its wholly owned subsidiary company NSCCL/ClearingCorporation. In furtherance of the original undertaking given by theappellant in favour of the Exchange, the Board of Directors of theappellant executed a subsequent undertaking dated 19.03.1996 in favourof the Clearing Corporation, whereby the appellant unconditionallyresolved to abide by all Rules, Regulations, circulars etc., of theCorporation. Consequently, the appellant was admitted as a ClearingMember of the Clearing Corporation.

6. On 19.05.1997, the Exchange adopted and circulated theCircular No. NSCC/CM/C&S/030, originally issued by the ClearingCorporation, to all the trading/clearing members. The circular prescribedcertain conditions to be complied with by the members during trading,including those relating to “Gross Exposure Limits” for daily functioningof the members. The circular further provided for “Effect of violation ofgross exposure limit” and “Effect of failure to pay margins”, whereby itspecified various actions that the Corporation and Exchange could takeagainst a member in case of contravention of the circular. Such actionsincluded the withdrawal of trading facilities, closing out of all outstanding 4 for short, “NSCCL” or “Clearing Corporation”, as the case may be AB

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4 for short, “NSCCL” or “Clearing Corporation”, as the case may be AB

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Apositions and other actions as per the Byelaws. The introductory notespecifying this position is relevant which reads thus:

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

7. On 13.10.1997, the appellant was found to have exceeded thegross exposure limits while trading (as prescribed by the aforesaidcircular) by more than 10% and consequently, the trading facility of theappellant was withdrawn forthwith by the respondents. ConsequentDthereto, communication ensued between the appellant and the ClearingCorporation on the same day whereby the appellant was asked to bringin an additional deposit of Rs.40.70 lakhs (calculated as per the circular)in order to enhance the trading limits. Additionally, the appellant wasalso asked to deposit a margin of Rs.29.10 lakhs towards unsettled tradesEdone on 10.10.1997, along with Rs.41,42,253.25 in lieu of short deliveryunder Settlement No. N1997039 and Rs.6,585.50 in lieu of bad deliveryunder Settlement No. N1997038. As per the communication, the saidamounts were to be deposited before 10:30 AM on 14.10.1997 failingwhich all open positions of the appellant in various securities were to beclosed out forthwith. The appellant failed to deposit the said amountsFand consequently, the Clearing Corporation closed out all the openpositions of the appellant.

8. Subsequent to the withdrawal of trading facilities and closingout of positions, the appellant pursued legal action, both civil and criminal,against the respondents at various forums, including the High Court ofGCalcutta and the Securities & Exchange Board of India[5]. The details ofvarious legal proceedings instituted at the behest of the appellant, beingunnecessary for deciding the subject matter brought before us, are notadverted to. After an unfruitful litigious relationship of 7 years, theExchange addressed to the appellant a letter dated 01.11.2004 informingH5 for short, “SEBI”

about the periodical appropriation of certain amounts made by theExchange from the security deposits of the appellant in lieu of variousmembership charges due from time to time. The Exchange also calledupon the appellant to deposit additional sums to meet the shortfall createdin the Interest Free Security Deposit, in accordance with Rule 32 ofChapter III of Exchange Rules, to retain the membership of the Exchange.

9. In the communication that followed the aforesaid letter, theappellant denied any such obligation to pay as its trading facilities hadstood suspended throughout this period. The appellant was then granteda hearing and upon being dissatisfied with the response, NSE decided tosuspend the membership of the appellant with effect from 16.02.2005.The reasons behind this decision were communicated to the appellantvide letter dated 30.03.2005 titled “Relevant Extract of Minutes of theRelevant Authority”. The relevant extract reads thus:

“….. In view of the above, the Committee after carefulconsideration of the various contentions of RSL was not satisfiedof the merits of the contentions raised by RSL. The Committeeconcluded that RSL failed to substantiate the failure to meet thecapital adequacy requirements for continued admittance of tradingmembership of the Exchange. Therefore, the Committee decidedto suspend the membership of RSL with effect from February 16,2005.”

10. Post suspension, another show-cause notice was served uponthe appellant by NSE on 20.10.2005. This time for the expulsion ofmembership. Despite the second show cause, the appellant refused tofulfil additional requirements relating to the maintenance of deposits asindicated by the Exchange. Resultantly, the Committee on Declarationof Defaults, on 05.01.2006, decided to expel the appellant from themembership of the Exchange primarily citing two reasons – failure tocomply with the requirement of maintaining IFSD and failure to meetcontinued admission norms despite suspension. The relevant extract ofthe communication dated 05.01.2006 reads thus:

“….. You have neither replenished the shortfall in deposits norappeared to show cause before the relevant authority on January05, 2006. The relevant authority, at its meeting held on January05, 2006, after duly considering the material on record ... hasdecided to expel you from the trading membership of the Exchangewith immediate effect. …”

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A11. The order of expulsion was unsuccessfully challenged by theappellant before the Tribunal at Mumbai. The appellant’s primarychallenge rested in reference to respondents’ decision of withdrawal oftrading facility and subsequent action of closing out of opentransactions. While upholding the decision of closing out of all theoutstanding positions of the appellant under clauses 17 and 18, the TribunalBobserved thus:

“5. ….. Byelaws 17 permits closing out of outstanding transactionsonly on failure to complete the same by the trading member bythe due date. However, this Bye-laws is not exhaustive and doesnot preclude closing out the dealings in securities under otherCcircumstances. …”

Interpreting the combined effect of both the clauses, the Tribunal,in the same para, further observed thus:

“5. ….. It is a cardinal rule of interpretation that these provisionsDhave to be read harmoniously and one cannot be read in isolationwithout appreciating the import of the other. Byelaws 18 clearlypermits closing out of contracts or dealings in securities in suchmanner and within such time frame and subject to the conditionsand procedures as may be prescribed from time to time by therelevant authority. Closing out the contracts and the conditionsEand procedures subject to which it could be done under Byelaws18 is in addition to the closing out under Byelaws 17. As alreadyobserved, Byelaws 17 permits closing out only on the failure of atrading member to settle the transaction by the “due date” whereas under Byelaws 18, closing out could be resorted to for anyother reason subject to such conditions and procedures as may beFprescribed by the relevant authority. If Byelaws 17 is read tomean, as was argued by the learned counsel for the appellant,that its provisions are exhaustive and that under no othercircumstances can NSE close out the open positions of a tradingmember, then Byelaws 18 becomes otiose. Where was then theGneed to provide in Byelaws 18 that closing out of contracts “shallbe in such manner within such time frame and subject to suchconditions and procedures” when all these have been prescribedin Byelaws 17. Obviously, Byelaws 18 contemplates reasons andcircumstances for a close out other than that mentioned in Byelaws17. Relevant authority has been defined in the Byelaws to includeHNSE. …”

As regards the validity of the circular, the Tribunal confirmed thatthe circular holds binding value and observed thus:

“5. ….. The word ‘prescribed’ as used in Byelaws 18 has notbeen defined and the conditions and procedures as contemplatedby this Byelaws could be prescribed in any manner includingthrough a circular. It is not in dispute that NSE adopted the circulardated May 19, 1997 which was issued by NSCCL (which is alsoa relevant authority) and circulated the same to its trading membersfor compliance making it clear that non-compliance would betreated as a breach of Rules, Byelaws and Regulations of theExchange. This circular undoubtedly provides for a closing out ofoutstanding positions of the trading members even before the duedate in the event of withdrawal of their trading facilities and thattoo, without any further notice to the trading member. In otherwords, withdrawal of trading facilities of a trading member ascontemplated by the circular furnishes yet another ground to theNSE to close out the outstanding positions or dealings in securities.

…”

The Tribunal also recorded certain observations regarding thenecessity of a power of this nature with the Exchange and noted thus:

“5. ….. We cannot lose sight of the fact that a stock exchangewhich is a primary level market regulator has also a duty to protectthe interest of the investors and the integrity of the securitiesmarket. The conclusion that we have arrived at based on theinterpretation of Byelaws 17 and 18 would advance that object.We are also of the view that it is essential that a stock exchangeshould have the power to close out the open transactions of atrading member when it finds that he (the trading member) istrading recklessly beyond his gross exposure limit as such limits,backed as they are by requisite margins, are prescribed with alaudable objective of investor protection. Such a power is essentialto discipline the recalcitrant trading members. In the absence ofsuch a power, the market and the investors would be exposed toa serious threat and the stock exchange would be reduced to theposition of a mute spectator.”

12. In the present appeal, the appellant has argued at length onvarious aspects of the entire transaction. As regards the decision of AB

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Aexpulsion from membership, it is the case of the appellant that the saiddecision was founded on an illegality as its trading facility was wronglywithdrawn. The appellant has contended that since the trading facilityitself was interdicted, it could not have been expected to keep up withvarious margins and deposits prescribed by the respondents as no tradingwas being permitted.B

13. The primary contention of the appellant relates to the vires ofthe circular under which the trading facility of the appellant waswithdrawn. It has been submitted that the Tribunal failed to appreciatethat the said circular was in contravention of the Byelaws, Rules andRegulations. It is urged that the adoption of the said circular by theCExchange amounted to a violation of 1956 Act and thus being void abinitio, the appellant was not bound by the said circular. To buttress thissubmission, it is argued that NSCCL is merely a clearing house of theExchange and any circular issued by it cannot be accorded a legal sanctityat par with the Byelaws, Rules and Regulations of the Exchange. It isDfurther argued that the disciplinary jurisdiction of the Exchange must beexercised only in accordance with the Byelaws and not any circular.

14. As regards the prescription of the said circular by the Exchangeto all trading members vide communication dated 19.05.1997, it has beensubmitted that by virtue of this communication, the Exchange effectivelyEindulged in amending its own Byelaws by adopting the indirect route ofissuing a circular and thus, the communication was violative of Section9(1) and 9(4) of 1956 Act along with Section 21 of the General ClausesAct, 1897.

15. The next submission relates to the closing out of the outstandingFpositions of the appellant. It is submitted that the closing out was notdone in accordance with clauses 17 and 18 of the Byelaws as it wasdone before the due date. The argument stems from the contention thatclause 17 enjoins the Exchange and Clearing Corporation not to closeout any outstanding position of a trading member until and unless suchmember has failed to complete the delivery or payment by the due date.GThe appellant has further submitted that clause 18 is nothing but aconcomitant provision of clause 17 and comes into play only after closingout is done in accordance with clause 17 by complying with therequirement of due date. Impugning the observation of the Tribunal, ithas been urged that clause 18 does not provide for additional conditions/H

reasons of closing out and does not operate independently of clause 17.Instead, both clauses supplement each other.

16. Furthermore, the appellant has contended that on a properinterpretation of clauses 17 and 18, it can be concluded that once therelevant authority has closed out a transaction by exercising power underclause 17, such closing out would take place in such manner, withinsuch time frame and subject to such conditions and procedures asmay be prescribed from time to time. Closing out, as per the appellant’scontention, begins in clause 17 and culminates in clause 18.

17. To counter the submissions of the appellant, the respondentshave submitted that both for admission and continuation of membership,the Byelaws of the Exchange provide for payment of fees, securitydeposit and other monies as may be specified by the Board or the relevantauthority from time to time. Furthermore, they also provide for maintainingvarious margins with the Exchange and Clearing Corporation, and statethat any contravention of the same is proceeded against as per the Rules.Similar provisions for admission and continued admission are provided inthe Byelaws of the Clearing Corporation as well.

18. Addressing the challenge to the Tribunal’s interpretation ofclauses 17 and 18, the respondents have submitted that the Tribunal hasrightly concluded that clause 17 is not exhaustive as far as the action ofclosing out is concerned, and there could be other circumstances whereinthe action of closing out ought to be taken in the investors’ interest.Clause 17 does not preclude invoking other just circumstances. As perthe respondents, such circumstances are covered by clause 18 whichoperates in addition to clause 17. It is further submitted that a stockexchange must have the power to close out transactions of a tradingmember when it discovers any reckless conduct in the market, includingexceeding the specified gross exposure limits subject to which the tradingplatform is allowed to the trading members.

19. In reference to the existence of authority of the ClearingCorporation to issue such circular, the respondents have submitted thatthe appellant had extended an unconditional undertaking in favour of theClearing Corporation whereby it undertook to comply with and be boundby the Rules, Byelaws, Regulations, circulars etc. issued by theCorporation from time to time. Thus, the appellant is estopped fromgoing back on its undertaking. It is further submitted that the circular A

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Adoes not override or contravene any of the Byelaws, Rules or Regulationsframed by the Exchange.

20. As regards the decision of expulsion, the respondents havesubmitted that the appellant was liable to maintain the Interest FreeSecurity Deposit with the Exchange as he continued being a member ofBthe Exchange despite the suspension of trading facility. It has been furthersubmitted that the appellant was granted multiple opportunities to makegood the shortfall in deposits but failed to comply with its obligationseven after the decision of suspension.

21. Addressing the challenge regarding the requirement of priorCapproval for the subject circular from SEBI/Central Government as per1956 Act, the respondents have submitted that the Byelaws of theExchange were brought into operation only after the approval of theCentral Government, as mandated under the Act, and the said circularwas issued in furtherance of the powers of the Exchange in the Byelaws.Therefore, since the Byelaws were brought into force after approval ofDthe Central Government, no further approval was necessary for takingaction under the said Byelaws. To reinforce, it is urged by the respondentsthat the designated authority of the Exchange, under clause 18, is vestedwith the power to prescribe the “due date”, “manner”, “time frame” and“conditions and procedures” as regards the action of closing out andEthus, any such action does not warrant any further approval from SEBI.

22. We have heard learned counsels for both the parties at length.

23. Having examined the submissions of the parties and documentson record, we are of the view that the following questions of law emergefor our consideration in the present appeal: -F

(i) Whether prior approval of SEBI/Central Government wasessential for enforcing the circular dated 19.05.1997 againsttrading/clearing members?

(ii) Whether the circular is invalid as being in conflict with theByelaws of the Exchange, particularly regarding the mannerGof closing out prescribed therein?

(iii) Whether the appellant is legally bound by the subject circularwhich allows the withdrawal of trading facility and forthwithclosing out of open positions?

H

(iv) Whether the appellant was obligated to maintain theprescribed Interest Free Security Deposit and other deposits,despite the withdrawal of its trading facilities, for continuedmembership of the Exchange?

24. The intertwined nature of the provisions involved in thedetermination of the aforesaid questions requires us to analyse at lengththe scheme and scope of the Byelaws, Rules and Regulations of theExchange and the Clearing Corporation vis-a-vis the 1956 Act andSecurities and Exchange Board of India Act, 1992[6].

25. The 1956 Act was brought into force “to prevent undesirabletransactions in securities” by regulating the securities market. Infurtherance of this objective, the legislature provided for recognition of astock exchange under Section 4 of the Act on the following terms:

“4. (1) If the Central Government is satisfied, after making suchinquiry as may be necessary in this behalf and after obtainingsuch further information, if any, as it may require, —

(a) that the Rules and Byelaws of a stock exchange applyingfor registration are in conformity with such conditions as maybe prescribed with a view to ensure fair dealing and to protectinvestors;

...

...

it may grant recognition to the stock exchange subject to theconditions imposed upon it as aforesaid and in such form as maybe prescribed.”

After specifying that the Byelaws and Rules of a stock exchangerequire prior approval of the Central Government, sub-section (5) ofSection 4 imposes the same condition on any amendment of such Rulesin the following terms:

“(5) No Rules of a recognised stock exchange relating to any ofthe matters specified in sub-section (2) of section 3 shall beamended except with the approval of the Central Government.”

On a plain reading of the afore-quoted provisions, it is seen thatthe central scheme of 1956 Act reveals that the requirement of prior 6 for short, “the 1992 Act”

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Aapproval, in relation to matters specified in sub-section (2) of Section 3,of the Central Government, be it at the time of original framing of Rulesof the Exchange or upon amendment thereof, is essential or pre-requisite.This mandate of Central Government was later entrusted to SEBI videS.O. 672 (E), dated 13-09-1994, published in the Gazette of India, Extra.,Pt. II, Section 3 (ii), Dated 13-09-1994 (for prior approval at the time ofBframing); and vide S.O. 573 (E), dated 30-07-1992, published in theGazette of India, Extra., Pt. II, Section 3 (ii), dated 30-07-1992 (for priorapproval at the time of amendment) by issuing orders under Section 29Aof the 1956 Act, which at the relevant point of time read thus:

“29A. Power to delegate.—The Central Government may, byCorder published in the Official Gazette, direct that the powersexercisable by it under any provision of this Act shall, in relationto such matters and subject to such conditions, if any, as may bespecified in the order, be exercisable also by the Securities andExchange Board of India.”D26. Be it noted that the legislature has omitted the usage of theword “Regulations” or “circulars” in the parent Act; and as far as thegovernance of a stock exchange is concerned, the supervision or controlof the Central Government/SEBI at the time of granting recognition tothe stock exchange is limited to being satisfied that the Rules and ByelawsEof the stock exchange applying for registration are in conformity withsuch conditions as may be prescribed for ensuring fair dealing andprotecting investors. The domain of framing Regulations is kept separatelyin a standalone manner in the Byelaws of the Exchange and not in theAct. The framing of Regulations concerning governance of stockexchange is reserved for the Exchange.F

27. For deciding the first question, we may now advert to NSEByelaws, 1994, to understand the true import of the subject circular. Inthe chapter on “Definitions”, clause (10) defines “Regulations” to includebusiness rules, code of conduct and such other Regulations prescribedby the relevant authority from time to time for the operations of theGExchange and they are declared to be subject to the provisions of the1956 Act, Rules and 1992 Act. The definition is merely an inclusivedefinition and not exhaustive. The relevant authority here is the Boardof the Exchange. Such Regulations can be prescribed on a wide rangeof matters as indicated in “Chapter III – Regulations”, including capitalHadequacy norms or “any other matter as may be decided by the RUSODAY SECURITIES LTD. v. NATIONAL STOCKEXCHANGE OF INDIA LTD. [A. M. KHANWILKAR, J.]

Board”. Thus, the scope of “Regulations” that can be prescribed by theExchange is expansive so as to cover all issues relating to governanceof the Exchange.

28. Coming to “Chapter V- Trading Members” of the Byelaws,clause (2) specifies certain “Conditions” for the Trading Members. Sub-clause (a) of clause (2) is instructive which reads thus:

“(a)Trading members shall adhere to the Byelaws, Rules andRegulations of the Exchange and shall comply with such operational parameters, rulings, notices, guidelines andinstructions of the relevant authority as may be applicable.”

The above clause signifies that apart from framing Regulations,the Byelaws also empower the Exchange to issue instructions regardingoperational parameters, guidance etc. for the trading members. The term“operational parameters” is crucial. Chapter IX of the Byelaws, inclauses (5) and (6), titled “Transactions and Settlements” specifies certainoperational parameters for trading. Clause (5) empowers the relevantauthority of the Exchange to “determine and announce” from time totime certain operational parameters which may include “trading limits”and “capital adequacy norms” as per clause (6). Clauses (5) and (6)read thus:

“Operational Parameters for Trading

(5) The relevant authority may determine and announce from timeto time operational parameters regarding dealing of securities onthe Exchange which trading members shall adhere to.

(6) The operational parameters may, inter alia, include:

(a) trading limits allowed which may include trading limitswith reference to net worth and capital adequacy norms;

…..”

Notably, clause (5) of Chapter IX of the Byelaws uses the phrase“the relevant authority may determine and announce” the operationalparameters. Both “determination” and “announcement” of suchparameters is therefore, within the competence of the Exchange. Suchannouncement can be made by the Exchange by circulating acommunication amongst the members, as it rightfully did in the present A

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Acase by way of the subject circular. A similar clause has been inserted inChapter VI of the Byelaws of the Clearing Corporation as well, therebyempowering the Clearing Corporation to issue operational parametersrelating to trading limits and consequent actions in case of non-compliance.

B29. The subject matter of the circular in question pertains to trading/exposure limits coupled with sanctions in case of non-compliance. Thatfalls squarely within the ambit of operational parameters (as seen inclauses produced above), which can be determined and notified by theExchange from time to time. In this case, the Exchange adopted thecircular from the Clearing Corporation and notified it in the form ofCoperational parameter. Nothing is brought to our notice from the text ofthis circular that it would militate against the norm of fair dealing andprotection of investors. In any case, no requirement of prior approval isprovided for notifying such operational parameters and as the namesuggests, they are meant to tackle “operational” concerns as and whenDthey emerge before the Exchange or the Clearing Corporation. The powerand mode of prescription of such circular falls within the residuary powersreserved for the Exchange.

30. At this stage, we consider it apposite to make a brief referenceto Section 9 of the 1956 Act which provides for the power of a recognisedEstock exchange to make Byelaws for regulation and control of contracts.The terms “regulation” and “control” cannot be narrowed down andmust receive a wide meaning. For, the contours of circumstances thatmay emerge between an exchange and a trading member in the processof regulation and control cannot be comprehended or cabined beforehandand thus, the Act permits the Byelaws to be armoured with a diverse setFof measures so as to enable the Exchange to deal with unspecifiedsituations that may emerge during such regulation and control of contracts.Sub-section (2) and (3) further signify that matters relating to clearinghouse, settlements, suspension and expulsion from membership etc. arebest left to be dealt under the Byelaws. Relevant extract of sub-sectionG(3) reads thus:

“9. Power of recognised stock exchanges to make Byelaws

(3) The Byelaws made under this section may—A

(a) xxxxxxxxx

(b) provide that the contravention of any of theByelaws shall render the member concernedliable to one or more of the followingBpunishments, namely: —

(i) fine;

(ii) expulsion from membership;

(iii) suspension from membership for aspecified period;C

(iv) any other penalty of a like nature notinvolving the payment of money.”

This provision reinforces that the power to regulate and controlthe trading contracts enables the Exchange not only to make Byelawsand Regulations but to provide for everything therein which might benecessary (and permissible) for ensuring efficacy and vigour in theexercise of just power of control and regulation. It is in this light that theoperational parameters or Regulations framed under the Byelaws are tobe understood. For, without such power, the Exchange would be renderedtoothless in controlling and regulating the contracts.

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31. A priori, it must follow that the legislature has bestowed uponthe Exchange sufficient freedom of action to effectively control andregulate the functioning of stock brokers who use the Exchange as ameans to enter into financial relationships with the investors and commonpublic. This freedom of action is guaranteed in the pre-approved Byelawswhich enable the Exchange to frame Regulations, instructions, operationalparameters, notice etc. and bring them into force without subjecting themto any added condition of prior approval of the Central Government/SEBI. The only limitation on this power of the Exchange is that suchRegulations or operational parameters issued under the Byelaws aresubject to 1956 Act, 1992 Act and Rules framed thereunder. Strictlyspeaking, this limitation does not ipso facto mean that such Regulationsor operational parameters are subject to prior approval, as argued. Tosay that would result in rewriting of the provisions in question. The sameis forbidden. The import of this subjection clause is merely to specifythat any such Regulation/operational parameter must not run counter to F

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Athe provisions of 1956 Act or 1992 Act, as the case may be, including theRules framed thereunder.

32. Indubitably, the Exchange provides a middle ground to thestock brokers and investors dealing with public funds/investments, andconsidering the nature of activities undertaken in a stock market, it is theBbounden duty of the Exchange to fortify the public trust. In doing so, theExchange is required to prevent and remedy all possible mischief “on areal time basis”. To that end, it may prescribe a set of parameters forfulfilling its objective of “regulating” and “controlling” the stock market,as stated in the Preamble of the Act. Since the Byelaws and Rules ofthe Exchange are duly approved by the Central Government/SEBI, itCcan safely be stated that actions taken by the Exchange under the Byelawsor Regulations - by prescribing such operational parameters in the formof a circular and in consequence thereof as discussed above – wouldassume enforceable character. The appellant having submitted anundertaking to comply with such instructions, notice etc., cannot be heardDto argue to the contrary. The Court by interpretative process ought notto limit the efficacy of such a valid document by additional pre-conditionssuch as prior approval, not envisaged by the lawmakers or regulationframing authorities. To do so would entail in undermining the authority ofthe Exchange to regulate and control the stock market, directly orindirectly.E

33. The act of adoption of this circular by the Exchange andcirculation of the same amongst the trading members was within thedomain of the Exchange in terms of its Byelaws, and unless a case forsuch instructions to be ultra vires the Byelaws or the Act is made out,there is no reason to undermine its intended effect.F

34. The contention of the appellant that the act of adoption of thiscircular by the Exchange amounts to an indirect amendment of theByelaws is a tenuous argument. For, if every regulation or instructionconcerning any procedural matter for effective regulation and control ofthe stock market prescribed by the Exchange, in furtherance of its powersGcoupled with duty under the Byelaws, is to be deemed as an amendmentmerely because it provides for something in addition to the Byelaws (butnot repugnant thereto), it would make various other operational clausesof the Byelaws repugnant. That cannot be countenanced.

35. The operational freedom of the Exchange cannot be stifled onHmere assumptions and the burden lies on the claimant to demonstrate a real conflict between the exercise of power and source of power.Arguendo, had it been a deviation from the Byelaws, in the sense thatthe circular was defeating and not furthering the scope and objective ofthe Byelaws, it could have been examined as a constructive amendmentor amendment by implication. Black’s Law Dictionary 11th Edition definesan “amendment by implication” as:

“Amendment by Implication (1868). A rule of constructionthat allows a repugnant provision in a statute to be interpreted asan implicit modification or abrogation of a provision that appearsbefore it.”

Therefore, the principle of constructive amendment signifies thatunless a clear case of repugnancy is made out, the later provisionscould not be treated as modification or abrogation, more so whensuch provisions further the intent of the source provisions. Theappellant, in our view, has failed to impress us on this count.

36. In order to assail the validity of the circular, the appellant hasattempted to demonstrate a conflict between the circular and the Byelawsregarding the manner of closing out contemplated in the two. It is thecase of the appellant that the circular contravenes clause 17 of theByelaws and thus, invalid.

37. For the same default, closing out action is contemplated bothunder the Byelaws of the Exchange and the subject circular. Clauses 17and 18 of the Byelaws of the Exchange provide for closing out. It ispertinent to note that since action is open under both, it is necessary toascertain whether these corresponding closing out provisions entail anyconflict amongst each other, as alleged.

38. In order to understand the scheme, it is important to reproducethe relevant provisions. Closing out under clauses 17 and 18 of theByelaws of the Exchange is provided as under:

“Closing out

(17) Subject to the Regulations prescribed by the relevant authorityfrom time to time, any dealing in securities made on the Exchangemaybe closed out by buying in or selling out on the Exchangeagainst a trading member and/or Participant as follows: - (a)in case of the selling trading member/Participant, on failureto complete delivery on the due date; and A

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A(b)in case of the buying trading member/Participant, on failureto pay the amount due on the due date, and any loss, damageor shortfall sustained or suffered as a result of such closingout shall be payable by the trading member or participant who failed to give due delivery or to pay amount due.B(18) Closing out of contracts or dealings in securities and settlementof claims arising therefrom shall be in such manner within suchtime frame and subject to such conditions and procedures as maybe prescribed from time to time by the relevant authority.”

39. Under clause 17, closing out is permitted under specified andCnarrow circumstances i.e. only when a member of the Exchange hasfailed on delivery or on payment. The phrase “on failure to completedelivery” and “on failure to pay the amount due” signify the clearscope of operation of clause 17. Understood thus, clause 17 gets activatedonly when the default is in payment of amount due in case of buyingDmembers or in delivery of shares in case of selling members and nototherwise. Succinctly put, clause 17 envisages closing out for failure tocomplete the settlement operation. That, however, has no relationwhatsoever to a situation of closing out due to failure to trade withindefined limits, as specified by the Exchange, amounting to violation ofthe Byelaws of the Clearing Corporation, as in the present case. Whereas,Eclause 18 caters to another situation and is textually different.

40. Let us now see how the action of closing out is envisaged inthe circular. The circular provides for the effect of violation of the exposurelimits and lays down that any such violation shall be treated as a violationof the Byelaws of the Clearing Corporation, without prejudice to theFpower of the Exchange to withdraw the trading facilities. This withdrawalis contemplated as an imminent action to protect the market from beingexposed to unsecured financial exposure. Consequent thereto, closingout of open positions has been contemplated. The relevant extract of thecircular dated 19.5.1997 reads thus:G“….. Effect of violation of Intra-Day Turn Over Limit and GrossExposure Limit.

Any violation of exposure limits will be treated as violation of theBye Laws of the Clearing Corporation and will entail appropriateaction under the Bye Laws and Rules of the Clearing Corporation.HIn addition, and without prejudice to the foregoing, the Clearing Corporation may, within such time as it may deem fit, advise theExchange to withdraw any or all of the membership rights of theTM clearing member including the withdrawal of trading facilitieswithout any notice. In the event of withdrawal of tradingfacilities, the outstanding positions of the TM clearingmember may be closed out forthwith or any time thereafterby the Exchange, at the discretion of the ClearingCorporation, to the extent possible, by putting counter ordersin respect of the outstanding position of the TM clearing memberwithout any notice to the TM clearing member. …”

41. Strictly speaking, the circular, as discussed above, triggers aclosing out action upon fulfilment of two conditions:

(i) exceeding the gross exposure limits while trading;

(ii) failure to deposit additional capital within such time as maybe granted by the Exchange/Clearing Corporation forcontinuance of trading.

42. It must be carefully noted that the nature of closing outprescribed in the circular does not envisage any failure in delivery or inpayment to complete the settlement, unlike in clause 17. The conditionsin the circular operate on a more basic level and are concerned essentiallyregarding the eligibility of a trading/clearing member venturing beyondthe market exposure limits defined in the context of the advance securitydeposit. That is the condition and procedure prescribed from time totime by the relevant authority for dealing in securities by the member.For such non-compliance, the power ascribable in clause 18 may beattracted.

43. After venturing beyond such limits, it may very well be possiblethat such member is still in a position to deliver the securities or to makethe payment (depending on buying or selling). For, merely venturingbeyond the exposure limits does not ipso facto render a trading memberincapable of completing the settlement. But the circular does not go thatfar and attacks the mischief of exceeding the pre-defined limits in a“reckless fashion”. That is to preserve the interests of the unwaryinvestors. The very fact that a member has over-exposed itself in themarket while trading is enough to give rise to the cause of action underthe circular. The action of forthwith closing out is of an inchoate nature A

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Aas it seeks to curb continued reckless transaction, before it unfolds fullyand damages the sanctity of the market in an irreparable manner.Therefore, what is being done under the circular is not the same as whatis being done under clause 17.

44. Clause 18, on the other hand, is of a residuary nature andBconfers on the relevant authority of the Exchange the power to close outcertain positions on grounds not specified in clause 17. The relevantauthority, under clause 18, is empowered to determine and prescribe the“manner”, “time frame” and “conditions and procedures” in accordancewith which such closing out can take place. The key words used hereare wide in scope and are targeted to enable the Exchange to actCeffectively and promptly according to the prevalent dynamic state of themarket by prescribing manner, conditions, procedures and time framefor a closing out action. The mischief creators in a stock market operatein a myriad set of ways and one cannot pre-set or comprehend all possiblemethods of undermining the health of the market. Thus, residuaryDsituations of closing out may emerge and clause 18 enables the Exchangeto promptly act against such attempt. The provision is premised onnecessity. By reading in any requirement of due date in clause 18, on thelines of clause 17, the court would be doing violence to the clear intent ofthe clauses and the broad scheme of the Byelaws. Clause 18, as theTribunal observed, would be rendered nugatory. Even logically, byEimporting a fictional requirement of “due date” in clause 18, the Exchangecannot be expected to gloss over a clear case of excessive recklesstrading and allow the mischief to continue until the due date has arrived.Thus, there is no occasion to control the scope of clause 18 by establishinga fictional link with clause 17.F

45. Be it noted that clause 18 does not specify the “mode” ofprescribing the manner, time frame, conditions and proceduresnecessitating closing out. In the present case, the appellant violated thecondition and procedure prescribed by the Exchange/Clearing Corporationvide subject circular. Thus, the manner of closing out contemplated inGthe circular is borne out by clause 18 and we do not find any conflict, assuggested. Apart from the circular, clause 16 of the Byelaws of theClearing Corporation also provides for closing out “on failure of aclearing member to comply with any of the provisions relating todelivery, payment and settlement of deals or on any failure to fulfilthe terms and conditions subject to which the deal has been made”.HClause 16 reads thus:

“16. CLOSING OUT

(1) A deal admitted for clearing and settlement may be closed outon failure of a clearing member to comply with any of the provisionsrelating to delivery, payment and settlement of deals or on anyfailure to fulfil the terms and conditions subject to which the dealhas been made, or such other circumstances as the relevantauthority may specify from time to time. The deal may be closedout by the Clearing Corporation in such manner, within such timeframe and subject to such conditions and procedures as the relevantauthority may prescribe from time to time.

…..”

…..”

.46. The nature of action contemplated under clause 16 is infurtherance of the basic mandate laid down under Section 9 of the 1956Act. For, section 9 of the Act clearly provides that all contracts/deals onthe market are subject to the Byelaws (including Regulations, operationalparameters etc. issued under the Byelaws) and Rules of the Exchange.One of the consequences of not acting in accordance with the Byelawsis provided under clause 16, apart from other provisions. Understoodthus, this clause is yet another self-contained provision envisagingforthwith closing out, which goes on to show that forthwith closing out isnot a new phenomenon in the overall scheme of things. We do not delveany deeper into the scope of clause 16, for that is not the question beforeus.

47. To summarize, on a comprehensive view of the scheme ofclosing out under the Byelaws of the Exchange, Byelaws of the ClearingCorporation and the circular, we are of the view that an action of forthwithclosing out is permissible under the said scheme, particularly clause 18,and thus, the circular is not ultra vires clauses 17 and 18 of the Byelaws.Rather, the circular furthers the spirit underlying clause 18.

48. Let us now examine the third question i.e., whether theappellant was bound by the circular dated 19.05.1997.

49. As we move forward, we note that the SEBI (Stock Brokers& Sub-Brokers) Regulations, 1992 were framed under Section 30 of the1992 Act, with an objective to regulate the functioning of stock-brokersby prescribing certain conditions. Regulation 9 specifies that anyregistration granted by SEBI shall be subject to the conditions prescribedtherein and reads thus:

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A“9. Any registration granted by the Board under regulation 6 shallbe subject to the following conditions, namely—

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(b) he shall abide by the Rules, Regulations and Byelaws of thestock exchange which are applicable to him;B...”

The same intent is advanced in Rule 9 of the Securities Contracts(Regulations) Rules, 1957 which reads:

“Contracts between members of recognised stockCexchange.

9. All contracts between the members of a recognised stockexchange shall be confirmed in writing and shall be enforced inaccordance with the Rules and Byelaws of the stock exchangeof which they are members.”

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50. A stock exchange is primarily engaged in three activities –buying, selling and dealing in securities. In order to give effect to theseactivities, the Exchange performs an array of operations of which clearingand settlement form an integral part. As per the Byelaws of the Exchange,the functions of clearing and settlement were transferred to the ClearingECorporation by the Exchange. Accordingly, the Clearing Corporationframed its own Byelaws, similar to the Byelaws of the Exchange, forconducting its operations. The appellant tendered an unconditionalundertaking in favour of both the entities – NSE and NSCCL – statingthat it shall abide by all the Rules, Regulations, Byelaws, circulars etc. ofboth the entities. The undertaking dated 19.3.1996 reads thus:F

“…..

1. That we shall abide by, comply with and be bound by the Rules,Byelaws and Regulations of the Corporation as in existence or asmodified/amended by the relevant authority, from time to timeGand also with any circular, order, direction, notice, instruction issuedand as modified or amended from time to time by the relevantauthority.”

51. Notably, the undertaking given by the appellant to therespondents fell within the broad scheme of the Byelaws/Rules, andHwas a quint-essential requirement for obtaining registration as a stock

broker as both 1956 Act and Byelaws subjected the members to suchconditions. Thus, the appellant is bound by the undertaking so given.Even otherwise, assuming the absence of undertaking, the very fact thata valid circular originated from the statutory scheme of the Byelaws issufficient to bind the appellant with its provisions. Thus, the emergentlegal position is that the appellant had subscribed to both statutory aswell as contractual obligations with the respondents for functioning as astock broker. Any deviation from the said circular could invite actionunder multiple provisions spreading across the Byelaws of the Exchangeand Byelaws of the Clearing Corporation, in addition to the sanctionsprovided in the circular itself. Understood thus, we are of the view thatthe appellant is squarely bound by the circular and any breach of thesame is to be viewed accordingly.

52. We have no hesitation in observing that the view taken by usis reinforced by the “Master Circular for Stock Brokers” issued by SEBIon 01.06.2018 bearing headnote that “This Master Circular is acompilation of relevant circulars issued by SEBI, which areoperational as on date of this circular”. Annexure-4 of the MasterCircular titled “Rights and Obligations of Stock Brokers, Sub-Brokersand Clients” reiterates the correct legal position under clause 2 thereofwhich provides that the stock brokers are bound by all the Rules, Byelawsand Regulations of the Exchange and circulars/notices issued infurtherance of such Byelaws and Rules. The clause reads thus:

“2. The stock broker, sub-broker and the client shall be bound byall the Rules, Byelaws and Regulations of the Exchange andcirculars/notices issued thereunder and Rules andRegulations of SEBI and relevant notifications of Governmentauthorities as may be in force from time to time.”

53. We now advert to the question of expulsion.

54. In light of the above discussion, it is clear that the scheme of1956 Act enables the Exchange to resort to suspension and expulsion ofthe members, in accordance with its approved Byelaws and Rules.Section 3(2) of the Act specifies certain matters that must be appropriatelycovered in the Byelaws or Rules. Clause (c) of the said sub-sectionexpressly provides that matters of admission, qualification, exclusion, AB

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Asuspension, expulsion and re-admission of members must be coveredin the Byelaws/Rules. It reads thus:

“3. Application for recognition of stock exchanges.

(1) xxxxxxxxx

B(2) Every application under sub-section (1) shall contain suchparticulars as may be prescribed, and shall be accompanied by acopy of the byelaws of the stock exchange for the regulation andcontrol of contracts and also a copy of the rules relating in generalto the constitution of the stock exchange, and in particular, to –

(a) xxxxxxxxx(b)xxxxxxxxx

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(c) the admission into the stock exchange of various classesof members, the qualifications for membership, and theexclusion, suspension, expulsion and readmission ofDmembers therefrom or thereinto; …”

55. In 1992, SEBI issued letter No. SMD-I/11087/92 dated04.11.1992 titled “Capital Adequacy Norms for Brokers” whereby theEstock exchanges were directed to provide for norms relating to capitaladequacy in their Byelaws. Apart from specifying certain requirements,the letter went on to state that “the stock exchange shall continue tohave the authority to impose suitable margins as per their judgmentin the context of the market situation.” Therefore, a stock exchangestood empowered not only to specify capital adequacy requirements forFthe trading members but also to take action against the defaulting members.

56. Accordingly, for effectuating the mandate accorded upon theExchange as per the Act, NSE Rules, 1994 and the abovesaid directive,it is obliged to deal with the subject of termination of membership on thatbasis. Rule 28 thereof provides that a trading membership can beGterminated, apart from other ways, by expulsion in accordance with theprovisions contained in the Byelaws, Rules and Regulations. Rules 31and 32 of Chapter III are relevant operative provisions for ourconsideration which lay down various obligations for continued admittanceof membership and read thus:

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“Failure to pay Charges

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(31) Save as otherwise provided in the Byelaws, Rules andRegulations of the Exchange if a member fails to pay his annualsubscription, fees, charges or other monies which may be due byhim to the Exchange or to the Clearing House within such time asthe relevant authority may prescribe from time to time after noticein writing has been served upon him by the Exchange, he may besuspended by the relevant authority until he makes payment andif within a further period of fifteen days he fails to make suchpayment, he may be expelled by the relevant authority.

Continued Admittance

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(32) The relevant authority shall from time to time prescribeconditions and requirements for continued admittance to tradingmembership which may, inter alia, include maintenance of minimumnet worth and capital adequacy. The trading membership of anyperson who fails to meet these requirements shall be liable to beterminated.”

57. The same regulatory intent is reflected in the Byelaws aswell. Clause (1)(b) of Chapter-V of NSE Byelaws, 1997 (the operativeByelaws as regards the question of expulsion) empowers the relevantauthority to “specify prerequisites, conditions, formats and proceduresfor application for admission, termination, re-admission etc. oftrading members”. Furthermore, clause (1)(c) of the same chapterprovides that the members desirous of admission or of continued admissionmay be asked to deposit fees/security deposit in lieu of the same. Theclause reads thus:

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“Appointment and Fees

(1) (a)xxxxxxxxx

(b) xxxxxxxxx

(c) Such fees, security deposit and other monies as areGspecified by the Board or relevant authority would bepayable on appointment as trading member and forcontinued appointment thereof.”

Consequence of failure to maintain the necessary deposits isaddressed in Chapter XII of the Byelaws wherein clause (1) provides H

Athat such a member could be declared as a defaulter, which in itself is aground for expulsion in the NSE Rules, 1994. The clause reads thus:

“(1) Declaration of Default

A trading member may be declared a defaulter by direction/circular/notification of the relevant authority of the trading segmentBif:

(a) he is unable to fulfil his obligations; or

...”

58. A holistic view of the scheme exposited above vividly revealsCthat the Exchange not only had the authority to specify various depositrelated requirements but also had the power to expel a member in caseof default. In the present case, it is not in dispute that the Interest FreeSecurity Deposit to be maintained by the appellant actually fell short ofthe required margins during the relevant period. Therefore, we are neitherDon question of existence of power to expel nor on the factum of whetheror not the deposits fell short of the prescribed margins. What falls forour examination, here, is the sole question as to whether the obligation ofthe appellant to keep up with the adequacy of deposits continued despitethe withdrawal of its trading facility. An affirmative answer would justifythe expulsion.E

59. Be it noted that the relationship between a stock exchangeand trading member runs across various levels. Admission to membership,continuation of membership, denial of trading facilities, imposition of fines,calling for additional deposits, suspension of membership and expulsionof membership are various facets of this relationship. Action againstFmembers is to be taken only upon violation of conditions and procedurestherefor. It is a serious matter and resorted to only upon the fulfilment ofconditions specified in the Byelaws, Rules, Regulations or even inoperational parameters, as seen above. Notably, the conditions requiredfor withdrawing the trading facility are distinguishable from the conditionsrequired for suspension/expulsion of membership. Under the relevantGprovisions, withdrawal could take place upon a standalone violation ofcertain operational parameters on a given trading day (like exceedingthe exposure limits as in the present case). Whereas, expulsion wouldtake place upon a sustained violation of membership obligations (likefailure to maintain the base capital and also for failure to replenish theHprescribed amount) within the time frame specified therefor. The two actions vary not only in their texture, but also in their resultant effect.Withdrawal, for instance, does not extinguish the membership. It actslike a halt for indulging in further trading activity.

60. To say that mere withdrawal of trading facility would ipsofacto absolve a trading member from keeping up with other obligationstowards the Exchange for continuation of membership would result intoan anomalous situation. It would amount to the diffusion of one stage ofthe relationship with the other, and would become a concocted way toextend benefit for its own wrong to a defaulting member. Such aconsequence could not be intended to result from an action of withdrawalof trading facility. For, the withdrawal of trading facility is a temporaryor interim action which is taken against an erring member to prevent himfrom continuing on a mischievous path during the trading hours and totake corrective steps forthwith. The nature of this action is preventiveand the provisions governing this action provide for certain remedialacts, like depositing additional sums to increase the exposure limits, theperformance of which can help a member in resuming his tradingoperations. The obligations for continued admission as a member areentirely different and merely because trading has been halted due to amember’s own default, it does not result in a hiatus situation or extricatehim from membership obligations. If that were to be the case, there wasno need for the Byelaws to provide these actions separately.

61. Pertinently, the capital adequacy norms, as discussed above,are meant both for admission as a member and for continuation as amember. Even the language of the governing provision i.e. Rule 32,signifies that requirements relating to capital adequacy are meant for“continued admittance to trading membership” and thus, themandatory obligations would continue, as long as membership is formallycontinued. Despite the temporary action of withdrawal of trading facility,a member continues to be a member of the Exchange with allcorresponding rights and obligations intact on both sides. A member canalways resign from the membership of the Exchange and move out ofall fiscal obligations after settling his dues, but as long as he opts toretain his membership of the Exchange, there is nothing in the governingprovisions to support the view that withdrawal of trading wouldautomatically extricate the defaulting member from his obligation regardingannual charges and margin requirements, as the case may be. The timelyfulfilment of these requirements has been envisaged in the Byelaws as a AB

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Apre-condition for admission or continued admission in the Exchange.Despite closer examination of the Byelaws, Rules and Regulations ofthe Exchange, we could not find anything to support a contrary view.The continuation of membership and fulfilment of capital adequacy normsrun co-terminously with each other, and failure to comply with the latterwould automatically put the former in jeopardy.B

62. Having observed that the appellant failed to maintain therequisite membership margins with the Exchange for a long period andrefused to make up for the shortfalls when called upon to do so by theExchange, there is nothing to deviate from the view taken by the Tribunalthat the appellant acted in contravention of the Byelaws and Rules ofCthe Exchange necessitating unto termination. The actions taken by theExchange, thus, were in accordance with the law.

63. Schedule-II of the SEBI (Stock Brokers and Sub-Brokers)Regulations, 1992 prescribes a “Code of Conduct” for the stock brokersand clause 5 thereof specifies that compliance with statutory requirementsDis a mandatory aspect of code of conduct of a stock broker. The appellantconsistently failed to comply with the requirements and acted in a mannerwhich was prejudicial to the sanctity of a Member-Exchange relationship.

64. To conclude, we hold that the Tribunal rightly confirmed theorder of expulsion and we uphold the same.

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CIVIL APPEAL NO. 9571 OF 2019

65. The seminal question involved in this appeal is about the modeof dealing with withheld securities of a defaulting member byNSE/NSCCL, consequent to his expulsion. The cause espoused in thisFappeal is in the backdrop of the decision of withdrawal of trading facilitiesof the appellant dated 13.10.1997, followed by withholding of varioussecurities by the Exchange, purportedly belonging to the appellant.Concededly, there was no immediate challenge by the appellant againstthis decision of withholding of securities. It was only in Appeal No. 84 of2008 filed before the Tribunal on 05.05.2008, the appellant had madeGgrievance about the non-return of stated withheld securities.

66. Thereafter, further communication ensued between the partiesas regards the withholding of securities. On 20.10.2008, representativesof the appellant were permitted by the respondent Exchange to inspectthe physical records of securities at the premises of the Exchange and H

as reflected in the records, such inspection did take place. However, nolegal action was initiated by the appellant after this event for securingthe release of the stated securities. The appellant, after a gap of almostsix years, called upon the Exchange vide letter dated 21.02.2014 to returnthe withheld securities. It was done purportedly to prevent the flow ofcorporate benefits on those securities to third parties in whose name thesecurities stood registered in the books of the companies. Similarcommunications were sent on 04.04.2014 and 03.05.2014 to NSE andSEBI respectively.

67. The appellant then approached the Securities Appellate Tribunalin Appeal No. 238 of 2014 praying for the release of withheld securities.On 09.09.2014, the counsel for the Exchange proposed to hear theappellant as regards the question of withheld securities and accordingly,the Tribunal relegated the parties before NSE for passing a reasonedorder on the said question. The Defaulter’s Committee of the Exchangeheard the appellant and passed an elaborate order dated 04.12.2014justifying the withholding of securities. This order was finally challengedby the appellant before the Tribunal on 17.01.2015 in Appeal No. 118 of2015. The challenge was turned down by the Tribunal vide order dated04.06.2019 (impugned order).

68. To understand the present challenge, it is apposite to note thatthe Tribunal decided the appeal on a narrow question which finds mentionin para 5 of the impugned judgment as:

“5. The basic question raised in this appeal therefore is whetherthe respondent NSE is legally entitled to withhold the securitiesof the appellant who has been suspended/expelled with effectfrom 2005/2006.”

69. The Tribunal, after adverting to the relevant provisions, in para8, opined that the stated issue had been and stands answered in AppealNo. 84 of 2008, wherein the order of expulsion was upheld. The Tribunalthen went on to answer the question on merits and observed thus:

“9. In any case dehors this ground of multiple litigations, on meritwe find that the question of dues owed by the appellant to NSEand NSCCL has been communicated to the appellant multipletimes giving calculations etc. The appellant has never questionedthe calculations except stating that sufficient funds were availablewith the respondent in October 1997 which could have been A

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Autilized towards settlement obligation. However, given the trajectoryof the legal recourse resorted to by the appellant and therebylimiting the powers of the respondent in utilizing those deposits,this contention that the respondent could have utilized the moneyavailable does not stand any merit ...”

BSubsequent to this observation, the Tribunal determined the totalliability of the appellant towards the respondents (Exchange) and arrivedat a final figure of Rs.2.41 crores. It further stated that the respondentswere well within their rights to withhold the securities and realise theamount owed to them. The relevant extract of the impugned order inthis regard reads thus:C

“12. After carefully perusing the documents and the submissionsmade by the parties we have no doubt that the appellant owe anamount of Rs.2.41 crore to respondent NSE/NSCCL. Since theappellant is not ready to give this amount Respondent no. 1, iswell within its rights to use the securities of the appellant withheldDby them, to the tune of Rs.2.41 crore. Such calculations shouldalso include corporate benefits such as bonus, dividends etc. ifany accrued to NSE over the period as beneficial owner of thewithheld securities. Needless to say that if any excess value isreceived or if the amount of Rs.2.41 crore is received by disposingEof part of the securities withheld either the excess value or theremaining securities or both shall be returned to the appellant withinone month from the date of this order.”

70. While assailing the order of the Tribunal before this Court, theappellant has primarily contended that the Tribunal misled itself byFanswering whether the respondents could have withheld the securitiesof a defaulting member, whereas, the real question was whether suchsecurities could have been withheld despite the respondents being inpossession of deposits equivalent to an amount exceeding the claim ofthe respondents and also whether such securities could have beenwithheld without getting them registered in the name of the respondents.G

71. It is the case of the appellant that on the relevant date, thealleged amount due from the appellant stood at Rs.1.32 crore and theamount of deposits retained by the respondents was around Rs.1.34crore and since the security deposit already exceeded the amount due,there was no occasion for the respondents to withhold the securities inHorder to realise any amount over and above the stated liability.

72. The thrust of the appellant’s challenge is that as and whensecurities of the defaulting member are withheld by the Exchange, theExchange being trustee thereof is under an obligation to get such securitiesregistered in its name so as to prevent third parties from unduly derivingthe corporate benefits (bonus, rights issues, dividends etc.) thereon, asand when they may accrue. It is the case of the appellant that in thepresent case, the Exchange merely sat over the withheld securitieswithout further dealing with them in any manner whatsoever and for itsinaction the appellant cannot be made to suffer.

73. Though not addressed by the Tribunal in the impugnedjudgment, the appellant had also raised a question as regards theapplicability of Rule 20(f) of Chapter IV of the NSE Rules as the saidrule came into effect from July, 2001 onwards. According to the appellant,since the original decision of withdrawal of trading facilities was takenin 1997, the said rule could not be applied to the appellant. Be it notedthat the said rule permits the application of Chapter XII- “Defaults” ofNSE Byelaws enabling realisation of withheld assets of the expelledmember.

74. Per contra, the respondents would contend that it was notopen to them to use the deposits worth Rs.1.34 crore to settle the duesowed by the appellant for the reason that the appellant had initiated abunch of legal proceedings at various forums across the country from1997 to 2006. Resultantly, the securities had to be withheld as per therules in order to secure the liability and because the appellant had failedto meet its settlement obligations. It was not because of his expulsion assuch. Further, such withholding was in tune with the Regulations of NSEand NSCCL and with the circular dated 19.05.1997.

75. Responding to the appellant’s contention regarding theappropriate manner of dealing with the withheld securities, the respondentshave extensively relied upon Regulation 9.12 of NSE (Capital Market)Regulations whereby they are empowered to deal with the withheldsecurities at such times and in such manner as they may deem fit. Placingreliance upon the bare language of the Regulation, it has been submittedthat “such manner” of dealing may include appropriating the withheldsecurities for the discharge of outstanding obligations, closing out thewithheld securities or registering such securities in the name of therespondent or any other entity as the case may be. In other words, themanner of dealing by the respondents cannot be constricted.

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A76. The respondents would submit that upon expulsion of amember, the Exchange is well within its rights to realize the withheldsecurities in fulfilment of the obligations of defaulting member inaccordance with Rule 20(f) of Chapter IV of NSE Rules which specifiesthe consequences of expulsion. It is further urged that Rule 20(f) becameoperative on 29.06.2000 whereas the appellant was expelled onB05.01.2006 and thus, the said rule was applicable to the case of appellant.

A

77. An objection has also been raised by the respondents as regardsthe maintainability of the original appeal before the Tribunal. It has beenurged that the appeal was barred by the principles underlying Order IIRule 2 of Code of Civil Procedure, 1908[7] and/or res judicata as theCsame issue was raised and not pressed/rejected before the Tribunal inAppeal No. 84 of 2008.

78. Before we proceed, we hasten to note that the real issue isnot about the existence of power and authority of the respondents towithhold the securities or other assets of a trading/clearing member inDcases of default. That is not disputed even by the appellant. Thus, ourexamination revolves essentially around the mode of dealing with thewithheld securities. Having gone through the impugned judgment,submissions of the parties and documents on record, we are of the viewthat the following questions emerge for our consideration in this appeal:E(i)Whether the respondents are obliged to forthwith realisethe withheld securities and appropriate the sale proceedstowards the dues payable by the appellant in terms of Rule20(f) of Chapter IV of NSE Rules read with Chapter XIIon “Defaults”?

F

(ii) As a consequence of withholding of securities of a defaultingmember, whether the respondents are under a legalobligation to deal therewith as a prudent person and moreso as a “trustee”, and in discharge of fiduciary trust/responsibility are obliged to get the same registered with aGview to protect the financial interests of the defaultingmember and persons claiming through him?

79. Before answering the questions of law on merits, it falls uponus to briefly examine the maintainability of the original appeal before the H7 for short, “the 1908 Code”

Tribunal for relief relating to withheld securities. Notably, in previousappeal registered as Appeal No. 84 of 2008, apart from challenging theexpulsion of membership, the appellant had also prayed for the releaseof withheld securities. The prayer reads thus:

“(d) that the securities due to the Appellant and its constituentsand now retained by the first and second Respondents may bepaid out/return to the Appellant.”

It seems that the said relief was not pursued by the appellantbefore the Tribunal in right earnest or taken to its logical end. For, whatis clear is that the afore-quoted relief prayed in the previous appealwhilst questioning the expulsion, was not answered/granted by theTribunal. Either way, the legal consequence is that the second round ofproceedings for the same relief would not be maintainable. If the reliefwas prayed for and given up during the course of the appeal withoutseeking leave for agitating it at a later stage, the principle underlyingOrder II Rule 2 of the 1908 Code may be attracted. Alternatively, if theprayer was duly pursued before the Tribunal in the previous appeal butnot granted, in law, it would deem to be refused. In which case, theprinciple of constructive res judicata would act as a legal bar in thesubsequent proceedings for that very relief. We do not wish to dilate onthis aspect as no such plea was raised by the respondents in the statedproceedings in 2014. Rather, that appeal was allowed and claim regardingwithheld securities was relegated to the Defaulter’s Committee. Thatremand order was acted upon by all concerned and against which thepresent appeal arises before us.

80. The appellant would then contend that cause of action accruedonly after the Defaulter’s Committee’s order dated 04.12.2014, justifyingthe withholding of securities. This plea is ex facie untenable. The saidorder of the Defaulter’s Committee did not result in the withholding ofsecurities. It merely supplied reasons and justification for such withholding.The cause of action, if at all any, had arisen to the appellant from themoment their securities were withheld in 1997. Merely because asubsequent order is passed to justify a prior action, it cannot be a case ofaccrual of fresh cause of action to the aggrieved.

81. Be that as it may, we forbear from non-suiting the appellanton this technical objection, but as aforesaid, in the peculiar facts of thiscase, we deem it appropriate to examine the subject matter on merits.

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AAs per the general scheme of regulation of a trading/clearing member, itis settled position that a member whose membership has been terminatedor who has been expelled is not absolved from fulfilling his contractualor other obligations in any manner. Rule 8(2) of Chapter IV and Rule18(4) of Chapter V of NSCCL Rules textualize this position. Rule 8(2),for instance, reads thus:B

“8. TERMINATION OF MEMBERSHIP

(1) xxxxxxxxx

(2) The termination of Clearing Membership shall not in anyway absolve the Clearing Member from any obligationsCand liabilities incurred by the Clearing Member prior tosuch termination.”

82. In the factual scheme of the present case, the foremost thingto be noted is that there are two sets of assets in control of the respondents– first, security deposits and second, withheld securities. The securityDdeposits came to be deposited on account of membership obligationsand the securities were withheld on account of failure to completesettlements. Though the challenge is limited to withheld securities, theprovisions relating to such securities address both these categories ofassets collectively and thus, they are being discussed accordingly for aEcomprehensive view of their scope and operation.

83. As per clause (11) of Chapter XII of the NSE Byelaws titled“Default”, the Exchange is vested with the power to realise the assetsof a defaulter member in due course. Clause (23) complements thisaction and provides for the order of priority for satisfying the claims.FClause (11) reads thus:

“Vesting of assets in the Exchange

(11) The Defaulters’ Committee shall call in and realise the securitydeposits in any form, margin money, other amounts lying to thecredit of and securities deposited by the defaulter and recover allGmoneys, securities and other assets due, payable or deliverable tothe defaulter by any other Trading Member in respect of anytransaction or dealing made subject to the Bye-laws, Rules andRegulations of the Exchange and such assets shall vest ipsofacto, on declaration of any trading member as a defaulter,in the Exchange for the benefit of and on account of any dues H

of the Exchange, National Securities Clearing CorporationLimited, Securities and Exchange Board of India, other tradingmembers, Constituents and registered sub-brokers of the defaulter,approved banks and any other persons as may be approved bythe Defaulters’ Committee and other recognised stock exchanges.”

It is noted that clause (11) provides for realisation of threecategories of assets:

(i) security deposits, margin moneys and other deposits;

(ii) securities which have been deposited by the defaultermember; and

(iii) moneys, securities and other assets due, payable ordeliverable to the defaulter by any other Trading Memberand recovered by the Exchange.

Pertinently, different kinds of assets are subject to a differentprocedure of realisation. After examining what all can be realised underclause (11), we may now understand the modalities of realisation.

Realisation of security deposits

84. Out of the three categories covered under clause (11), securitydeposits can be called in and realised per se without any additionalcondition. There is no requirement of vesting with respect to such depositsneither in the language of clause (11) nor in the overall scheme. It is sobecause the Exchange enjoys a statutory lien over such deposits by wayof clause (24) of Chapter IX - “Transactions and Settlements”, NSEByelaws which categorically provides that the Exchange has a first andparamount lien over the monies, bank deposits and other securitiesdeposited by the trading member for any sum due to the Exchange. Itreads thus:

“Lien on Margins

“Lien on Margins

(24) The monies, Bank Deposit Receipts and other securities andassets deposited by a trading member by way of margin underthe provisions of these Bye Laws and Regulations shall be subjectto a first and paramount lien for any sum due to the Exchange.Subject to the above, the margin shall be available in preferenceto all other claims of the trading member for the due fulfilment of A

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276SUPREME COURT REPORTS

Aits engagements, obligations and liabilities arising out of or incidentalto any bargains, dealings, transactions and contracts made subjectto the Bye Laws, Rules and Regulations of the Exchange oranything done in pursuance thereof.”

Be it noted that it covers only those assets which are voluntarilyBdeposited by the member with the Exchange. Forfeited/withheld assetsare not included herein. It is so because the property in the depositedassets may vest in the Exchange by operation of membership obligations,whereas such is not the case with withheld securities. It is true thatmere existence of lien may not entitle the lienee to sell off the propertyfor satisfaction of debt without a court order. However, the same principleCis not absolute and the cases in which the statutory/contractual schemeitself provides for such sale/realisation fall outside its purview. It is settledthat when lien itself is a creation of Byelaws, Rules or Regulations etc.,the scope, extent and operation of such lien would also be governed bythe same scheme. In Unity Company Private Ltd. vs. Diamond SugarDMills and Ors.[8], it was observed thus:

“74. The lien in the instant case has been created by the agreementcontained in the Articles of Association of the defendant company.The nature, extent, scope and effect of the lien will, therefore,have to be determined with reference to the Articles of theECompany. While discussing Issue No. 2, I have earlier held thatthe lien created by the Articles in the instant case, cannot be equatedto a mere equitable charge and the lien is wider in its extent,scope and effect. Express and specific power has been conferredon the company by Article 36 to sell the shares in enforcement ofthe lien and by Article 37, to apply the sale proceeds in satisfactionFof the debt. The Articles, to my mind, clearly and unequivocallyexpress the intention that the company, by itself, is competent toenforce the lien by sale of the shares which are subject to suchlien and to apply the sale proceeds in satisfaction of the debt orloan without recourse to an action in a Court of Law forGenforcement of the lien. ...”

Therefore, if provisions provide for realisation of such lien property,the same may be given effect to in accordance with the provisions. Noexternal conditions can be read in such a scheme. Clause (11) expressly H8 AIR 1971 Cal 18

provides for realisation of security deposits as and when a memberbecomes subject to the provisions relating to defaulters. The phrase “shallcall in and realise” signifies that realisation is warranted as an imminentaction upon declaration of defaulter in case the security deposits areinsufficient. The effect of this phrase is that once a trading member hasbeen declared a defaulter, the Exchange is duty bound to realise thesecurity deposits retained by it to satisfy its obligations and return theremaining deposits, if any. If the Exchange fails to do so, it may becomeliable to make good the loss of interest to the defaulter on any amountover and above the monetary obligation.

85. However, in the present case, no fault can be found in theconduct of the Exchange as it had actually realised the deposits at variouspoints of time owing to the inability of the appellant to keep up with thestatutory margin requirements. As reflected in the records, out of thetotal deposit of Rs.1.34 crores, amounts equivalent to Rs.91,72,163.49and Rs.41,00,000 had already stood adjusted in favour of NSCCL andNSE respectively from 1997 to 2006. Thus, a total of Rs.1,32,72,163.49was in fact realised by the Exchange and it holds no merit to state thatthe Exchange failed to perform its duty to realise the security deposits.The amount of Rs.1.34 crores came to be added to the total obligationagain in 2017 when the Exchange returned the security deposit amountpursuant to an order of this court passed at the insistence of the appellantherein and thus, in law, that cannot be held against the Exchange in anymanner.

Withheld securities

86. Unlike the money deposits, no legal requirement of forthwithrealisation is envisaged in the case of withheld securities, as discussedhitherto. To understand the procedure of vesting and realisation ofwithheld securities, it is essential to segregate the two kinds of securitiesand analyse it appropriately. The withheld securities can be categorisedas – securities in which the appellant was a receiving member (receivingsecurities) and securities in which the appellant was an introducingmember (introductory securities). A member is termed as a receivingmember when it is supposed to receive the securities for orders placedby it in a purchase transaction, subject to complete settlement andpayment. NSCCL Byelaws define a receiving member as:

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A“13. RECEIVING MEMBER

“Receiving Member” means a clearing member who has to receiveor has received documents in fulfilment of contracts to whichthese rules, byelaws and regulations apply unless the contextindicates otherwise.””

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Whereas, a member is termed as an introducing member when itintroduces some securities to be transferred to the buyers in a saletransaction, subject to the securities being free from any objections.

87. During the trading period from 24.09.1997 to 30.09.1997, theappellant defaulted in Settlement No. N1997039 and delivered short ofCpayment in lieu of securities for which purchase orders were placed. Anamount of Rs.45,56,513 became due. Thereafter, during the trading periodfrom 01.10.1997 to 14.10.1997, an amount of Rs.29.10 lakhs becamedue as margins for trading on 01.10.1997 in Settlement No. N1997040.In both these transactions the appellant was a “receiving member”. OnDaccount of failure of appellant to complete the aforesaid settlements bymaking complete payment, the Exchange withheld the pay-outs ofsecurities at various points of time.

88. The remaining securities were withheld wherein appellant wasacting as an “introducing member” in the market. The companies refusedEto complete the sale transactions initiated by the appellant and to registerthe said securities in the names of the purchasers citing some unresolvedobjections on the said securities. Resultantly, they were returned back tothe Exchange and it became a case of bad delivery. As per the standardprocedure in force at the relevant point of time, the Exchange participatedin an auction in open market to procure the required securities free fromFobjections so as to complete the purchase orders. Therefore, the objectedsecurities were withheld by the Exchange as a lien on the money paid byit in the auction purchase. SEBI circular dated 16.07.1996 titled“Uniform Norms for Good/Bad Deliveries” specifies this procedure.The relevant extract thereof reads thus:

G“iii) All stock exchanges shall adhere to the following time schedulefor dealing with the cases of bad deliveries.

a) In case of deliveries coming under objection (objectioncases), the first introducing broker of the same stockexchange shall be required to rectify the defects/replace H

the shares alongwith accrued benefits within 21 calendardays from the date of receipt of the objection and sharecertificates from the last buying broker of that exchange. Ifthe former fails to rectify the defects or replace theshares or transfer deeds, the exchange shall hold anauction for shares in the immediately following AuctionSession according to the usual exchange procedure. Theshares obtained from such an auction shall be given by theExchange to the concerned buying broker. Further, theexchange shall debit the price of the shares to the account ofthe introducing broker of that Exchange. In case the sharesare not available through auction, the exchange shall close outthe transaction according to the procedure of the exchangeand the close out amount shall be debited to the first introducingbroker and credited to the last buying broker of the exchange.”

89. As regards the introductory securities, it must be noted at thevery outset that these securities fall outside the purview of our examinationon vesting. For, they simply could not have been realised by the Exchangeat any point of time as they were merely introduced by the appellant anddid not belong to it. These introductory securities were registered in thenames of third persons who are not parties to this proceeding. Concededly,there could have been no loss to the appellant relating to corporate benefitson these securities as it did not have any right therein, to receive anysuch benefit. Property in those securities neither vested in the appellantnor in the Exchange and they were held by the Exchange only as a lienon the physical copies of shares to the limited extent of obliging theappellant to fulfil its obligations. The benefits on those securities remainedin third parties, as they must have, and no one has approached this courtto raise the grievance that they have suffered any wrongful loss asregards those benefits. Even if any grievance exists between two clearingmembers as regards the receipt or non-receipt of those benefits, thebest course of action would have been to proceed by way of a separateproceeding in that regard. Clause (11) of Chapter VI, NSCCL Byelawscategorically provides for a privity of contract between delivering andreceiving clearing members. The interests of those third parties are nota part of the present lis.

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A90. Indisputably, the introductory securities have been marked asobjectionable by the companies; and securities with outstanding objectionsare of no use to the Exchange for the purpose of recovery so long assuch objections are not removed. The introductory securities fall outsidethe purview of the vesting provision. Further, the responsibility of theExchange was limited to providing the appellant an opportunity to removeBthe objections and continue withholding the securities in the interim. Anyenquiry regarding the legality or illegality of objections could have takenplace between the introducing member and the respective companies.The same also cannot form a part of the subject matter before us.

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91. Therefore, actual recovery qua the appellant/defaulting memberCcould only be made from the “receiving securities” as those securitieswere due/deliverable to the appellant and were withheld as a collateralfor the sole reason of non-payment. No third-party stake is involvedtherein.

92. Be that as it may, unlike money deposits, the “receivingDsecurities” withheld or recovered by the respondents require legal vestingbefore they could be realised for the satisfaction of dues. Here, it maybe useful to advert to clause (11). The question is, what procedure oughtto be followed for realisation of “receiving securities”. Is it forthwithrealisation, or only upon its vesting in law?E

93. The provisions relating to withholding and vesting of securitiesare provided in two separate documents. Whereas vesting is providedunder Chapter-XII of NSE Byelaws titled “Default”, withholding isprovided under Chapter 9 of NSCCL Regulations titled “Non-Deliveryand Non-Payment”. It falls upon us to harmonise the two sets ofFprovisions in order to understand the procedure in a holistic manner.

94. Regulation 9.5 provides that when a clearing member fails topay for securities on pay-in day, the Clearing Corporation is entitled towithhold the securities thus: - “9.5 Securities On Hold Or Selling-Out On Failure To PayG

If a CM clearing member fails to pay on pay-in day for thesecurities to be received by him, the Clearing Corporation shallbe, without further notice or intimation to the member, entitled towithhold the securities due to the member or sell-out any/all of H

such securities in accordance with the Bye Laws and Regulationsrelating to closing-out.”

The above provision also enables the Corporation to sell-out suchwithheld securities to recover their dues in accordance with the followingprovisions. Thereafter, Regulation 9.6 provides that failure to makepayment empowers the Corporation to declare such member as defaulter.It reads thus:

“9.6Declaration Of Default

A CM clearing member failing to deliver the documents due fromhim or pay the amount due by him may be declared a defaulter asprovided in these Byelaws and Regulations.”

It is crucial to note that declaration of defaulter upon non-paymentis not an express pre-requisite for the recovery of dues here. Regulation9.7 provides that all deliveries of securities which were due to thedefaulter shall be handed over to the Clearing Corporation so as to enableit to realise their dues from those deliverable securities. It reads thus:

“9.7Deliveries Due To The Defaulter

All deliveries, deliveries or otherwise, and payment due to thedefaulter shall be handed over to the Clearing Corporation. TheClearing Corporation shall reserve the right to dispose of thesecurities to make good non-payment of funds or non-delivery ofsecurities by the defaulting member in such manner it deemsnecessary.”

Upon receipt of securities as per this Regulation, the action ofwithholding is contemplated in Regulation 9.9 (Regulation 9.11 in NSERegulations). In the present case, it is seen that securities deliverable tothe appellant as a receiving member were withheld by the respondentsto clear their dues.

95. On withholding, the stage of vesting comes in and this stage isimportant as vesting is a pre-requisite for dealing with the securities inany manner. There can be no action, be it of sale or registration, againsta property unless the property vests in the entity. “Nemo dat quod nonhabet” is the fundamental principle of transfer of property which, ifliterally translated, means “no one gives what they do not have”.

A

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AThus, unlike money deposits, withheld securities cannot be realised withoutlegal vesting under clause (11).

96. We may now discuss the time/stage of vesting. Though therequirement of declaration as defaulter may be a discretionary one underthe NSCCL Regulations, the same is a mandatory requirement for vestingBin clause (11). For, vesting takes place upon declaration of any tradingmember as a defaulter. The expression “and such assets shall vestipso facto, on declaration of any trading member as a defaulter”reinforces the view.Even otherwise, the main vesting provision is includedin the chapter on defaults and therefore, such declaration is necessaryunless otherwise excluded. Therefore, the right of the Corporation toCdispose of or realise these securities is circumscribed by the requirementof declaring such member as a defaulter. In this case, no such declarationcame to be made. However, despite the absence of any such declaration,vesting took place by way of Rule 20(f) in Chapter IV of NSE Rules.

97. Rule 20(f) does away with the requirement of expressDdeclaration of defaulter upon expulsion. It specifies that Chapter XII ondefaults would automatically become applicable upon a member expelledfrom the Exchange. As per this Rule, declaration of defaulter runssynonymous with the expulsion of a member. It reads thus:

“Consequences of ExpulsionE20. The expulsion of a trading member shall have the followingconsequence, namely:

(a) – (e)xxxxxxxxx

(f) Consequences of declaration of defaulter to follow: TheFprovisions of Chapter XII and Chapter XIII of the Byelawspertaining to default and Protection Fund respectively, shallbecome applicable to the Trading Member expelled from theExchange as if such Trading Member has been declared adefaulter.”

GThe emergent position of law, therefore, is that vesting does nottake place in favour of the respondent Exchange unless a formal expulsionorder is passed. The relevant point of time, therefore, is the date ofexpulsion. Without such legal vesting, the Exchange only sits upon thewithheld assets as a custodian. There is no question of realisation. Suchwithholding is done to serve two purposes – first, to persuade theH

defaulting member to fulfil its obligations during the continuation ofmembership if it so wishes and second, to secure the liability at theearliest available opportunity as a preventive measure. If liabilities continueto be unfulfilled, expulsion becomes an inevitable consequence and thewithheld assets vest in the Exchange.

98. It is thus clear that realisation cannot be done unless vesting iscomplete and there is no obligation on the Exchange/Corporation toforthwith realise the securities upon withholding. Expulsion or declarationof defaulter, as the case may be, is a pre-condition for realisation, which,in this case, took place only in 2006. Even on applying rule of prudence,such forthwith realisation would not be appropriate as such action woulddeprive the defaulting member from an opportunity to correct its mistakeby settling liabilities within due course of time without giving upmembership.

99. Before proceeding further, we may note that a question hasbeen raised by the appellant regarding the applicability of Rule 20(f) inthis case. For, the Rule was not in existence when trading facility of theappellant was withdrawn. This plea, in our opinion, is misconceived. Inthat, the Rule clearly signifies that it applies to expelled members andthe moment a member is expelled from membership, this rule willautomatically become operative. Literally understood, the relevant pointof time for checking the applicability of this rule is the “date of expulsion”.In the instant case, expulsion of the appellant took place in 2006, whereasthe said rule was inserted beforehand in 2001. Thus, the rule was verymuch in force when the appellant was in fact expelled. Consequently,the respondents were well within their powers to realise the withheldsecurities in accordance with clause (11) soon after expulsion in 2006.

100. We now deal with the issue regarding the manner of dealingwith withheld securities and requirement of registration. Upon withholdingfollowed by vesting, the manner of dealing is provided under Regulation9.10, NSCCL Regulations (Regulation 9.12, NSE Regulations), whichreads as:

“9.10. Withheld Securities and Funds – How dealt with:

The securities and funds withheld pursuant to regulation 9.9 andregulation 9.9A above shall be dealt with the relevant authority atsuch times and in such manner as it may deem fit, which mayinclude appropriating the withheld funds for the purpose of fulfilling A

B

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Athe obligations of the clearing member, closing out of thewithheld securities or registering the withheld securitiesin the name of the Clearing Corporation or any other entityas decided by the Clearing Corporation. The funds received outof closing out of withheld or registered securities may be dealtwith by the Clearing Corporation at such time and in such mannerBas it may deem fit.”

This Regulation predicates that the Clearing Corporation isarmoured with a set of measures as regards the withheld securities. TheCfirst part of the Regulation vests the Corporation with the power to dealwith the securities at “such times” and in “such manner” as it maydeem fit. The Regulation then specifies certain measures which mayinclude:

a.closing out the withheld securities in the name of ExchangeDor any other entity; or b.registering the withheld securities in the name of Exchangeor any other entity; Thereafter, in the concluding sentence it is further specified thatthe funds received out of closing out of withheld or registered securitiesEmay also be dealt with in such manner and at such times as the Exchangemay deem fit.

101. It is therefore clear that the respondents had two courses ofaction open for dealing with the securities – closing out and registration.Chapter 10 of NSCCL Regulations titled “Closing out of Contracts”Fdelineates the manner of closing out. Regulation 10.6 provides that oncea member is declared defaulter, the Corporation “shall determine” alloutstanding deals by closing-out against the defaulter member. It readsthus:

“10.6 Closing-Out Contracts With Defaulter CM clearingGmember If a CM clearing member be declared a defaulter, the ClearingCorporation shall determine all outstanding deals by closing-outagainst him in accordance with the Bye Laws and Regulationsrelating to default.”

H

102. Thus, the Corporation is duty bound to close out all outstandingdeals against the defaulter and “determine” them for the purpose of itsrecovery. Regulation 10.9 specifies the manner of such determinationand reads thus:

“10.9 Closing-Out How Effected

Closing out shall be effected against the CM clearing member bythe Clearing Corporation in any of the following manners:

(a) by buying-in or selling-out against the CM clearingmember through an auction initiated by the ClearingCorporation (b)by declaring a closing-out at such prices as may bedecided by the relevant authority

(c) by buying-in or selling-out against the CM clearingmember by placing order in the specified exchange (d)in any other manner as the relevant authority may decidefrom time to time.”

The Corporation is empowered with a set of methods to close outthe outstanding deals against the appellant. Upon vesting, it could havesold out the withheld securities through an auction or by placing an orderof sale in Exchange or in any other permissible manner.

103. The other action contemplated in Regulation 9.10 is ofregistration. The grievance is that the Exchange held on to the securitieswithout registration. According to the appellant, it was abuse ofdiscretionary powers and the respondents ought to have registered thesecurities in its name forthwith.

104. To determine the requirement of registration, we need toresort to a true construction of Regulation 9.10. Once an action ofwithholding is taken, multiple interests come into play and both the partiesassume different roles as regards the withheld securities. We proceedto examine these roles separately – role of Exchange and role ofdefaulting member. Any further action relating to such securities woulddepend upon the fulfilment of these roles, as we shall see.

Role of Exchange

105. It is trite to note that the primary role of the Exchange ismanifested in the phrase “shall be dealt with by the relevant authority A

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Aat such times and in such manner”. That takes within its ambit a powercoupled with a duty. The power of the Exchange to deal with the withheldsecurities in the manner of its choice runs parallel with its duty tomandatorily “deal” with such securities as a prudent person would aftercoming in possession of securities. The usage of the word “shall” beforethe word “dealt” is conscious and instructive here, and its vigour cannotBbe toned down in a light manner. In other words, the Regulation requiresthe Exchange not to sit idle on the withheld securities and instead, obligesit “to deal” with them in an appropriate manner. This requirement is amanifestation of the basic “duty of care” implicit in regulatory relationshipswhere one member is in a position to control the functionality of theCother. The raison d’etre underlying this duty is to protect the interestsof a member and to prevent any undue damage to its interests as acrucial element of the market. No doubt, such dealing could be in any ofthe manners specified in the Regulation or even in any other unspecifiedmanner, but to say that the respondents could sit idle on the withheldsecurities of an amount exceeding the amount owed by the defaultingDmember, without protecting them from being exploited by third parties inany manner, would be akin to permitting a free abuse of this provision.

106. The role of the Exchange is broadly premised on the principleanalogous to fiduciary relationship. Propriety guides that when one partyholds some property on behalf of the other, even for the fulfilment of anyEliability, it must treat the property in a manner in which a prudent personwould. It is so because the property is not directly in dispute betweenthe parties, rather, what is in dispute is an outstanding liability for thedischarge of which the property is being held as a mere security.Ordinarily, the sanctity of such security needs to be preserved. An implied Felement of trust is involved in any action of withholding, which is thebasic foundation of a fiduciary relationship. In Robert L.Hodgkinson v.David L. Simms[9], the Supreme Court of Canada referred to Frame v.Smith[10] wherein three basic characteristics of fiduciary relationship werelaid down thus:

G“In Frame v. Smith [1987] 2 SCR 99 at p. 136, Wilson J. definedthe characteristics of a fiduciary relationship as follows:

“Relationships in which a fiduciary obligation have been imposedseem to possess three general characteristics:

9 [1994] 3 SCR 377H10 [1987] 2 SCR 99

(1) The fiduciary has scope for the exercise of some discretionAor power.

(2) The fiduciary can unilaterally exercise that power ordiscretion so as to affect the beneficiary’s legal or practicalinterests.

BC

(3) The beneficiary is peculiarly vulnerable to or at the mercyof the fiduciary holding the discretion or power.””

In the present case, it is clear that the manner of dealing with thewithheld securities is not circumscribed under strict parameters. TheExchange is bestowed with a discretion to choose amongst the availableoptions and the appellant holds no control over such choice. To this limitedextent, the role of the Exchange as regards the withheld assets is of afiduciary character, obligating it to choose the just course of action outof the available options. We are conscious of the fact that traditionallyspeaking, the relationship of Member-Exchange may not be regarded asa fiduciary one. But we are not examining the nature of this relationshipas a generalised enquiry. Our concern is limited to the dynamics of thisrelationship qua the withheld securities in light of the regulatory scheme.Notably, Professor Frankel, in “Fiduciary Law: The Judicial Processand the Duty of Care”[11] highlights the existence of a limited fiduciaryrelationship thus:

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“The law aims at deterring fiduciaries from misappropriatingthe powers vested in them solely for the purpose of enablingthem to perform their functions.”

Therefore, it is only for the purpose of performance of functionsthat a fiduciary character is recognised in this relationship. In HospitalProducts Ltd. v. United States Surgical Corporation Ltd.[12], it wasrightly observed that the scope of fiduciary duties is “moulded accordingto the nature of the relationship and facts of the case.”[13] Theproposition gets strengthened by the equitable principle of constructivetrust, which received a reasonably acceptable definition in ParagonFinance plc v. DB Thackerar & Co.[14]thus:

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11 The 1993 Isaac Pitblado Lectures, Fiduciary Duties/Conflicts of Interest (1993)12 (1984) 156 C.L.R. 41

13 Snell’s Equity, 32nd Edition

14 [1999] 1 All ER 400

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A“….. A constructive trust arises by operation of law wheneverthe circumstances are such that it would be unconscionable forthe owner of property (usually but not necessarily the legal estate)to assert his own beneficial interest in the property and deny thebeneficial interest of another. …..”

BIt is thus clear that constructive trust arises by operation of law inspecific factual scenarios and not by any statute or contract. However,such trust, and rights and obligations under it would depend strictly uponthe prevailing set of facts and governing provisions.

107. Though the standalone question of law as regards theCrespondents’ duty to act as a prudent person in respect of the withheldsecurities stands answered, what remains to be examined is whethersuch duty of the respondent is an unqualified duty so as to make unilateralregistration a mandatory obligation, as claimed. Additionally, could it besaid that the respondent is obliged to deal with the securities in a particularway despite there being a clear discretion in the relevant provision?D

108. The principles of constructive trust and fiduciary relationshipsare equitable principles, and equity never operates in an absolute manneror in a vacuum. In fact, the very basis of the law of equity is its flexibilityto take care of mutual concerns of the parties. Equity is about balancingthe competing interests – by preventing the erosion of interests of oneEparty while ensuring a free exercise of legally enshrined discretionarypowers to the other. No doubt, specific fiduciary duties could definitelybe recognised in the specific facts of the case but the manner ofperformance of such duties cannot be dictated in regulatory matters.Legal recognition of the role of a trustee and fixing actual obligations toFbe performed under such role are two separate matters. The latter isdependent on the nature of discretion and on the diligence of other party,as we shall see. In Equity & Trusts[15], Alastair Hudson, after notingthe existence of constructive trust in certain matters, notes - “whatremains is the extent to which a constructive trustee would be liable”,which signifies that the exact liability of a constructive trustee isGdeterminable in the specific facts of the case.

109. The duties of a trustee can be broadly classified into mandatoryduties and discretionary duties. The court is always circumspect inenforcement of discretionary duties. A perusal of Regulation 9.12

H15 Equity & Trusts, Alastair Hudson, 2nd Edition succinctly reveals that the measure of registration is not provided as anexclusive one, rather, it is in addition to other residuary steps that anExchange is entitled to take. Therefore, there is no express statutory orcontractual requirement of mandatory registration in the applicable law.A clear element of discretion is involved in the manner of dealing. It istrue that such discretion cannot be exercised in a legally perverse manner,but it is equally true that a discretion cannot be converted into a mandatoryobligation, more so when such discretion is provided expressly by astatutory provision. In Ashburner’s Principles of Equity[16], thediscretionary duties of a trustee are noted in a succinct manner. It isstated that such discretion must be exercised “freely”, “intelligently”and in a “bona fide” manner. More importantly, an exercise of suchdiscretion in commercial relationships is guided by the nature of things,as they exist or vary from time to time. Illustratively, in the present case,it was out of this sound exercise of discretion that the Exchange didactually get some of the securities registered in its name. Equitablecommon law principles cannot be used to create mandatory legalobligations.

Role of defaulting member

Role of defaulting member

110. Even if we consider the argument that the Exchange oughtto have registered forthwith upon appellant’s demand, if not suo motu,such an enquiry cannot be undertaken in isolation. It is the fundamentalprinciple of an equitable examination that “the one who seeks equitymust do equity”. This brings us to the role of the defaulting member(appellant) qua the withheld securities. Registration of securities or anyproperty for that matter is done in favour of an entity only upon fulfilmentof certain allied conditions, including but not limited to the supply ofconsideration. Without such consideration, contract itself becomes void,let aside entertaining a demand for registration. Upon withholding, itbecomes the duty of the stock broker to raise a request for the registrationof securities and to comply with the payment shortfall and otherrequirements. During the period commencing from 1997 to 2008, theappellant did not pursue the cause of dealing with the withheld securitiesin a proactive manner, seemingly because of two reasons- first, theappellant was pursuing multiple legal actions against the respondents atvarious forums and second, such a request would have to be precededby fulfilment of conditions relating to settlement and payment. For, the 16 Ashburner’s Principles of Equity, Denis Brownie, 2nd Edition.

ABCD

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AExchange could not get the securities registered in the name of anyentity until and unless such entity settles the transaction by makingcomplete payment for the purchased securities. Clause (3) of Chapter-VI of NSCCL Byelaws titled “Clearing and Settlement of Deals”expresses the same view and notes thus:

B“3.CONDITIONS AND REQUIREMENTS OF CLEARINGAND SETTLEMENT

The relevant authority may grant admission of deals dealt in theExchange provided all the conditions and requirements specifiedin the Bye Laws and Regulations and such other conditions andCrequirements as the relevant authority may prescribe from timeto time are complied with.”

Clause (10) further notes that:

“10. CLEARING AND SETTLEMENT

DSettlement shall be effected by clearing members giving andreceiving delivery and paying and receiving funds as may bespecified by the relevant authority from time to time in the ByeLaws and Regulations.”

111. Be it noted that the appellant never offered to make suchpayment in lieu of registration. In fact, on one occasion when theEDefaulter’s Committee passed the order justifying the withholding on04.12.2014, the respondents offered to release the securities to theappellant for removal of objections subject to the submission of a bankdeposit to secure the liability. The directions issued by the Defaulter’sCommittee read thus:F

“2. Without prejudice to the above, the Committee directs that thesecurities which have been withheld as per the list of securitiesgiven in Annexure-2 of this Order may be released to RSL, on asis where is basis, to (i) enable it to remove the Objections in respectof securities for which RSL is an introducing member and (ii)Gtransfer the securities in its name in respect of securities for whichRSL is a receiving member and return the securities to NSE indemat form, provided - a.RSL furnishes an undertaking that it has no other claimagainst NSE or NSCC and that it will return the securities H

within a period of one year from the date of releaseafter duly removing the objections and transferring inRSL’s name as the case may be.

b.RSL provides a deposit of or a bank guarantee forRs.1,00,70,529.82 (i.e. the outstanding dues of RSLpayable to NSCC of Rs.1,07,72,098.17 lessRs.7,01,568.35 being the value at closing price on NSEas on December 4, 2014 of securities already transferredin the name of NSCC – list enclosed as Annexure -3) toprotect NSE against failure to return the securities.

c.RSL provides the undertaking and the deposit or bankguarantee within a period of three months from the dateof receipt of this Order.”

112. Thus, the Committee did propose to hand over physicalpossession of the securities to the appellant for getting them registeredin its name. The appellant refused to comply with the direction of paymentand instead, challenged this decision of the Defaulter’s Committee byfiling M.A. No. 295 of 2015 before the Tribunal wherein a consent orderwas passed upon an undertaking given by the Exchange that it has noobjection in performing its duty as “trustee” in respect of the unregisteredwithheld securities and taking appropriate steps by registering them inits name. Be it noted that even this order was a conditional one as itspecified that such registration shall not affect the legal rights and liabilitiesof parties in any manner. In pursuance of this order on 23.09.2015, therespondents got the securities transferred in their name and realisedthem after the impugned order in 2019.

113. It is thus clear from the state of affairs discussed above thatthe respondents were cognizant of their duty towards the withheldsecurities pending determination of final claim. However, no action ofregistration could have been taken without complying with otherconditions. The role of the defaulting member was of an enabler andunless the Exchange was placed in a position to register, it could nothave exercised its discretion to register. It is important to note thatpermitting the Exchange to register forthwith as a matter of obligationwould also be counterproductive to the interests of the defaulting member.For, such a blanket action would have the effect of converting a limitedright of lien into that of absolute ownership over the withheld assets A

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Awithout giving the defaulter sufficient time to get his assets releasedmuch less before a declaration of being a defaulter or an order ofexpulsion. Such can never be the purpose of withholding.

114. To summarize, registration could only have been done onfulfilment of the following conditions:B(i)request by the defaulting member;

(ii) request to be preceded by fulfilment of conditions relatingto payment;

(iii) request to be accompanied with undertaking that any suchregistration in the name of the Exchange would be subjectto final outcome of the case.C

115. The appellant has contended that it has suffered loss ofcorporate benefits due to non-registration by the respondent. The sameis unacceptable. Firstly, the receiving securities legally vested in theExchange as on the date of expulsion to the extent of liability. The appellantcould not have claimed any right therein to further corporate benefits asDregards these securities. Even before the date of expulsion, therespondents cannot be held liable for any loss on the withheld securitiesas the appellant always had the opportunity of making payment andprotecting its interests. The appellant cannot fail to discharge its obligationsfor a period of 23 years and then turn around and claim loss of benefitsin this manner. Acceding to such a claim would be akin to rewarding aEwrong. Understood thus, the liability for the loss incurred by the appellant,if at all any, on account of corporate benefits (dividends, bonus etc.)accrued on withheld shares would not fall upon the Exchange, in thefact situation of the present case.

116. Even otherwise, the respondents’ decision of not realisingFthe securities or taking any adverse action during the pendency of multipleproceedings cannot be outrightly termed as an abuse of discretion. For,the decision of expulsion (and thus, of vesting) itself became sub-judicealong with various other civil and criminal proceedings. Admittedly, theappellant had gone to the extent of initiating proceedings for criminalmisappropriation against the Directors of respondents for using securityGdeposits in regular course of business. This inevitably resulted inreluctance of the respondents to sell off the securities amidst pendingproceedings. It is settled law that statutory appeal is a continuation ofthe original proceedings and once an appeal was filed, the question ofexpulsion remained sub-judice unto these appeals.

117. We may revert to the manner in which the issue underHconsideration has been dealt with by the Tribunal. The Tribunal misinformed itself by observing that this issue had already stood answeredin the previous judgment of the Tribunal in Appeal No. 84 of 2008. TheTribunal simply entered into an examination of the provisions relating towithholding whereas the real question was regarding the manner ofdealing with the withheld securities.

118. Having said thus, what remains for our consideration is thedetermination and recovery of liabilities for final culmination of thecontroversy.The Tribunal determined the final liability of the appellant tobe Rs.2.41 crore in para 10, where it noted:

“10. ... It is abundantly clear that the appellant owed Rs.1.07crore after adjusting for the deposits etc. in October 1997 andsince the said deposit amount of Rs.1.34 crore has beensubsequently returned the unadjusted amount of dues stands atRs.2.41 crore.”

119. It is pertinent to note that the amount of Rs.1.34 crore wasrequired to be returned by the respondents in SLP (Crl.) No. 9642-9643of 2011, which it had held as an interest free security deposit. It wasmeant to be utilised for the purpose of discharging the monetary obligationof the appellant during the period between withdrawal and expulsion.The appellants have advanced an erroneous proposition that the returnof this amount by the respondents signified that there was no liabilityowed by the appellant towards them. We must reiterate that the returnof the security deposit was driven by a desire of the officials of therespondents to avoid the continuation of criminal proceeding against themresorted to by the appellant. It was neither a confession that they hadmisappropriated the said deposit nor an undertaking that they had noclaim over the said amount for adjustment against the penalties. Theeffect of the said return was limited to the quashment of criminalproceedings involved therein. The order of this Court dated 02.11.2017is self-eloquent, as it categorically notes that:

“…..

This order will not affect any other proceedings which may bedealt with independently in accordance with law. …”

120. The matters in issue in the present set of appeals are distinctfrom those involved in the stated special leave petition (criminal).Therefore, the loss caused to the Exchange due to return of interest freesecurity deposit amount ought to be reckoned in determining the totalliability of the appellant and the same ought to be adjusted by therespondents appropriately.

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A121. The quantum of amount due from the appellant to therespondents, being a question of fact, has been decided by the Tribunaland we do not wish to interfere therewith. For, no serious error has beenpointed out in any factual determination made by the Tribunal. Further,the scope of Section-22F is limited to entertaining an appeal on questionsof law, and we have proceeded accordingly.B

A

122. The Tribunal gave one month’s time for recovery of paymentand return of remaining securities to the appellant. It is on record that anamount of Rs.1.74 crores has been recovered by the respondents fromthe transferred securities, fixed deposits and corporate benefits so farand an amount equivalent to Rs.66.81 lakhs (approximately) is remaining.

C123. We hereby issue the following directions for full and finalsettlement of all claims between the parties:

(i) NSE to evaluate and get the remaining transferrablesecurities, if any, transferred in its favour and recover theremaining amount using the same evaluation criteria adoptedin respect of other withheld securities of the appellant withinD6 weeks.

(ii) After realisation, the surplus amount be returned forthwithto the appellant along with interest at the rate of 12% P.A.from the date of determination of claim/date of vesting untilthe date of payment.

E(iii)Respondents to return the unrealised securities includingthose with outstanding objections to the appellant within 6weeks from today.

(iv) In case recovery is not possible from the remainingsecurities, for any reason whatsoever, the respondents maycommunicate the same to the appellant forthwith and theFappellant shall then pay the amount so demanded (includinginterest, if any), to the respondents within 6 weeks fromthe date of receipt of such communication.

(v) NSE is directed to oversee the evaluation and realisation ofremaining securities, and settlement of claims.

G124. Accordingly, both appeals are disposed of in the aforesaidterms and directions with no further order as regards costs.125. Pending applications, if any, also stand disposed of.

H

Kalpana K. Tripathy

Appeals disposed of.