Rusoday Securities Ltd. vs National Stock Exchange Of India … on 20 November, 2020

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Supreme Court of India

Rusoday Securities Ltd. vs National Stock Exchange Of India … on 20 November, 2020

Author: A.M. Khanwilkar

Bench: A.M. Khanwilkar, B.R. Gavai


                                 IN THE SUPREME COURT OF INDIA

                                  CIVIL APPELLATE JURISDICTION

                                  CIVIL APPEAL NO. 2690 OF 2009

         RUSODAY SECURITIES LTD.                                 ...APPELLANT


         OF INDIA LTD. & ORS.                                    ...RESPONDENT(S)


                                  CIVIL APPEAL NO. 9571 OF 2019


A.M. Khanwilkar, J.

1. These appeals under Section 22F of the Securities Contracts

(Regulation) Act, 19561 take exception to the judgment and order

passed by the Securities Appellate Tribunal at Mumbai 2 in Appeal

No. 84 of 2009 dated 13.01.2009 and in Appeal No. 118 of 2015

dated 04.06.2019.

Signature Not Verified

Digitally signed by
Date: 2020.11.20
13:41:55 IST

1 for short, “the 1956 Act”
2 for short, “the Tribunal”

2. In this appeal, the appellant challenges the judgment/order

dated 13.01.2009 of the Tribunal wherein it had upheld the order

of expulsion against the appellant, from the membership of the

National Stock Exchange of India Limited3 ­ Respondent 1. The

said order was passed in the aftermath of the withdrawal of

trading facilities of the appellant on 13.10.1997 and consequent

closing out of all outstanding positions on 14.10.1997 by the

National Securities Clearing Corporation Limited4 ­ Respondent


3. The appellant herein, desirous of functioning as a stock

broker in the stock market, registered itself as a Trading Member

with NSE/Exchange in November, 1994. As a pre­condition of

such registration, the appellant was obliged to and did submit an

undertaking in favour of the Exchange so as to strictly comply

with the practice and stipulations in the applicable Byelaws,

Rules, Regulations and other instructions of the Exchange issued

from time to time. The said undertaking was given by the

appellant on 19.06.1995.

3 for short, “NSE” or “the Exchange”, as the case may be.
4 for short, “NSCCL” or “Clearing Corporation”, as the case may be

4. As per the conditions prescribed in the Bye Laws,

Regulations and Rules of the Exchange, the appellant was obliged

to maintain a set of deposits with the Exchange, namely ­

Interest Free Security Deposit (IFSD), security deposit (bank

guarantee), margin money in cash and margin money in the form

of bank guarantee. The sum total of these deposits of the

appellant, collectively termed as the Base Capital of the trading

member, amounted to Rs.1.29 crores.

5. In the year 1996, NSE transferred its clearing and

settlement functions to its wholly owned subsidiary company

NSCCL/Clearing Corporation. In furtherance of the original

undertaking given by the appellant in favour of the Exchange, the

Board of Directors of the appellant executed a subsequent

undertaking dated 19.03.1996 in favour of the Clearing

Corporation, whereby the appellant unconditionally resolved to

abide by all Rules, Regulations, circulars etc., of the Corporation.

Consequently, the appellant was admitted as a Clearing Member

of the Clearing Corporation.

6. On 19.05.1997, the Exchange adopted and circulated the

Circular No. NSCC/CM/C&S/030, originally issued by the

Clearing Corporation, to all the trading/clearing members. The

circular prescribed certain conditions to be complied with by the

members during trading, including those relating to “Gross

Exposure Limits” for daily functioning of the members. The

circular further provided for “Effect of violation of gross exposure

limit” and “Effect of failure to pay margins”, whereby it specified

various actions that the Corporation and Exchange could take

against a member in case of contravention of the circular. Such

actions included the withdrawal of trading facilities, closing out

of all outstanding positions and other actions as per the Byelaws.

The introductory note specifying this position is relevant which

reads thus:

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

7. On 13.10.1997, the appellant was found to have exceeded

the gross exposure limits while trading (as prescribed by the

aforesaid circular) by more than 10% and consequently, the

trading facility of the appellant was withdrawn forthwith by the

respondents. Consequent thereto, communication ensued

between the appellant and the Clearing Corporation on the same

day whereby the appellant was asked to bring in an additional

deposit of Rs.40.70 lakhs (calculated as per the circular) in order

to enhance the trading limits. Additionally, the appellant was

also asked to deposit a margin of Rs.29.10 lakhs towards

unsettled trades done on 10.10.1997, along with

Rs.41,42,253.25 in lieu of short delivery under Settlement No.

N1997039 and Rs.6,585.50 in lieu of bad delivery under

Settlement No. N1997038. As per the communication, the said

amounts were to be deposited before 10:30 AM on 14.10.1997

failing which all open positions of the appellant in various

securities were to be closed out forthwith. The appellant failed to

deposit the said amounts and consequently, the Clearing

Corporation closed out all the open positions of the appellant.

8. Subsequent to the withdrawal of trading facilities and

closing out of positions, the appellant pursued legal action, both

civil and criminal, against the respondents at various forums,

including the High Court of Calcutta and the Securities &

Exchange Board of India5. The details of various legal proceedings

instituted at the behest of the appellant, being unnecessary for

deciding the subject matter brought before us, are not adverted

to. After an unfruitful litigious relationship of 7 years, the

Exchange addressed to the appellant a letter dated 01.11.2004

informing about the periodical appropriation of certain amounts

made by the Exchange from the security deposits of the appellant

in lieu of various membership charges due from time to time. The

Exchange also called upon the appellant to deposit additional

sums to meet the shortfall created in the Interest Free Security

Deposit, in accordance with Rule 32 of Chapter III of Exchange

Rules, to retain the membership of the Exchange.

9. In the communication that followed the aforesaid letter, the

appellant denied any such obligation to pay as its trading

facilities had stood suspended throughout this period. The

appellant was then granted a hearing and upon being dissatisfied

with the response, NSE decided to suspend the membership of

the appellant with effect from 16.02.2005. The reasons behind

this decision were communicated to the appellant vide letter

5 for short, “SEBI”
dated 30.03.2005 titled “Relevant Extract of Minutes of the

Relevant Authority”. The relevant extract reads thus:

“….. In view of the above, the Committee after careful
consideration of the various contentions of RSL was not
satisfied of the merits of the contentions raised by RSL. The
Committee concluded that RSL failed to substantiate the
failure to meet the capital adequacy requirements for
continued admittance of trading membership of the
Exchange. Therefore, the Committee decided to suspend the
membership of RSL with effect from February 16, 2005.”

10. Post suspension, another show­cause notice was served

upon the appellant by NSE on 20.10.2005. This time for the

expulsion of membership. Despite the second show cause, the

appellant refused to fulfil additional requirements relating to the

maintenance of deposits as indicated by the Exchange.

Resultantly, the Committee on Declaration of Defaults, on

05.01.2006, decided to expel the appellant from the membership

of the Exchange primarily citing two reasons – failure to comply

with the requirement of maintaining IFSD and failure to meet

continued admission norms despite suspension. The relevant

extract of the communication dated 05.01.2006 reads thus:

“….. You have neither replenished the shortfall in deposits
nor appeared to show cause before the relevant authority on
January 05, 2006. The relevant authority, at its meeting held
on January 05, 2006, after duly considering the material on
record … has decided to expel you from the trading
membership of the Exchange with immediate effect. …”


11. The order of expulsion was unsuccessfully challenged by the

appellant before the Tribunal at Mumbai. The appellant’s primary

challenge rested in reference to respondents’ decision of

withdrawal of trading facility and subsequent action of closing

out of open transactions. While upholding the decision of

closing out of all the outstanding positions of the appellant under

clauses 17 and 18, the Tribunal observed thus:

“5. ….. Bye­law 17 permits closing out of outstanding
transactions only on failure to complete the same by the
trading member by the due date. However, this Bye­law is not
exhaustive and does not preclude closing out the dealings in
securities under other circumstances. …”

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
provisions have to be read harmoniously and one cannot be
read in isolation without appreciating the import of the other.
Bye­law 18 clearly permits closing out of contracts or dealings
in securities in such manner and within such time frame and
subject to the conditions and procedures as may be
prescribed from time to time by the relevant authority.

Closing out the contracts and the conditions and procedures
subject to which it could be done under Bye­law 18 is in
addition to the closing out under Bye­law 17. As already
observed, Bye­law 17 permits closing out only on the failure
of a trading member to settle the transaction by the “due
date” where as under Bye­law 18, closing out could be
resorted to for any other reason subject to such conditions
and procedures as may be prescribed by the relevant
authority. If Bye­law 17 is read to mean, as was argued by the
learned counsel for the appellant, that its provisions are
exhaustive and that under no other circumstances can NSE
close out the open positions of a trading member, then Bye­
law 18 becomes otiose. Where was then the need to provide in
Bye­law 18 that closing out of contracts “shall be in such
manner within such time frame and subject to such
conditions and procedures” when all these have been
prescribed in Bye­law 17. Obviously, Bye­law 18 contemplates
reasons and circumstances for a close out other than that
mentioned in Bye­law 17. Relevant authority has been defined
in the Byelaws to include NSE. …”

As regards the validity of the circular, the Tribunal confirmed

that the circular holds binding value and observed thus:

“5. ….. The word ‘prescribed’ as used in Bye­law 18 has not
been defined and the conditions and procedures as
contemplated by this Bye­law could be prescribed in any
manner including through a circular. It is not in dispute that
NSE adopted the circular dated May 19, 1997 which was
issued by NSCCL (which is also a relevant authority) and
circulated the same to its trading members for compliance
making it clear that non­compliance would be treated as a
breach of Rules, Byelaws and Regulations of the Exchange.

This circular undoubtedly provides for a closing out of
outstanding positions of the trading members even before the
due date in the event of withdrawal of their trading facilities
and that too, without any further notice to the trading
member. In other words, withdrawal of trading facilities of a
trading member as contemplated by the circular furnishes yet
another ground to the NSE to close out the outstanding
positions or dealings in securities. …”

The Tribunal also recorded certain observations regarding the

necessity of a power of this nature with the Exchange and noted


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

12. In the present appeal, the appellant has argued at length on

various aspects of the entire transaction. As regards the decision

of expulsion from membership, it is the case of the appellant that

the said decision was founded on an illegality as its trading

facility was wrongly withdrawn. The appellant has contended that

since the trading facility itself was interdicted, it could not have

been expected to keep up with various margins and deposits

prescribed by the respondents as no trading was being permitted.

13. The primary contention of the appellant relates to the vires

of the circular under which the trading facility of the appellant

was withdrawn. It has been submitted that the Tribunal failed to

appreciate that the said circular was in contravention of the

Byelaws, Rules and Regulations. It is urged that the adoption of

the said circular by the Exchange amounted to a violation of

1956 Act and thus being void ab initio, the appellant was not

bound by the said circular. To buttress this submission, it is

argued that NSCCL is merely a clearing house of the Exchange

and any circular issued by it cannot be accorded a legal sanctity
at par with the Byelaws, Rules and Regulations of the Exchange.

It is further argued that the disciplinary jurisdiction of the

Exchange must be exercised only in accordance with the Byelaws

and not any circular.

14. As regards the prescription of the said circular by the

Exchange to all trading members vide communication dated

19.05.1997, it has been submitted that by virtue of this

communication, the Exchange effectively indulged in amending

its own Byelaws by adopting the indirect route of issuing a

circular and thus, the communication was violative of Section

9(1) and 9(4) of 1956 Act along with Section 21 of the General

Clauses Act, 1897.

15. The next submission relates to the closing out of the

outstanding positions of the appellant. It is submitted that the

closing out was not done in accordance with clauses 17 and 18 of

the Byelaws as it was done before the due date. The argument

stems from the contention that clause 17 enjoins the Exchange

and Clearing Corporation not to close out any outstanding

position of a trading member until and unless such member has

failed to complete the delivery or payment by the due date. The

appellant has further submitted that clause 18 is nothing but a

concomitant provision of clause 17 and comes into play only after

closing out is done in accordance with clause 17 by complying

with the requirement of due date. Impugning the observation of

the Tribunal, it has been urged that clause 18 does not provide

for additional conditions/reasons of closing out and does not

operate independently of clause 17. Instead, both clauses

supplement each other.

16. Furthermore, the appellant has contended that on a proper

interpretation of clauses 17 and 18, it can be concluded that

once the relevant authority has closed out a transaction by

exercising power under clause 17, such closing out would take

place in such manner, within such time frame and subject to such

conditions and procedures as may be prescribed from time to

time. Closing out, as per the appellant’s contention, begins in

clause 17 and culminates in clause 18.

17. To counter the submissions of the appellant, the

respondents have submitted that both for admission and

continuation of membership, the Byelaws of the Exchange

provide for payment of fees, security deposit and other monies as

may be specified by the Board or the relevant authority from time

to time. Furthermore, they also provide for maintaining various

margins with the Exchange and Clearing Corporation, and state

that any contravention of the same is proceeded against as per

the Rules. Similar provisions for admission and continued

admission are provided in the Byelaws of the Clearing

Corporation as well.

18. Addressing the challenge to the Tribunal’s interpretation of

clauses 17 and 18, the respondents have submitted that the

Tribunal has rightly concluded that clause 17 is not exhaustive

as far as the action of closing out is concerned, and there could

be other circumstances wherein the action of closing out ought to

be taken in the investors’ interest. Clause 17 does not preclude

invoking other just circumstances. As per the respondents, such

circumstances are covered by clause 18 which operates in

addition to clause 17. It is further submitted that a stock

exchange must have the power to close out transactions of a

trading member when it discovers any reckless conduct in the

market, including exceeding the specified gross exposure limits

subject to which the trading platform is allowed to the trading



19. In reference to the existence of authority of the Clearing

Corporation to issue such circular, the respondents have

submitted that the appellant had extended an unconditional

undertaking in favour of the Clearing Corporation whereby it

undertook to comply with and be bound by the Rules, Byelaws,

Regulations, circulars etc. issued by the Corporation from time to

time. Thus, the appellant is estopped from going back on its

undertaking. It is further submitted that the circular does not

override or contravene any of the Byelaws, Rules or Regulations

framed by the Exchange.

20. As regards the decision of expulsion, the respondents have

submitted that the appellant was liable to maintain the Interest

Free Security Deposit with the Exchange as he continued being a

member of the Exchange despite the suspension of trading

facility. It has been further submitted that the appellant was

granted multiple opportunities to make good the shortfall in

deposits but failed to comply with its obligations even after the

decision of suspension.

21. Addressing the challenge regarding the requirement of prior

approval for the subject circular from SEBI/Central Government

as per 1956 Act, the respondents have submitted that the

Byelaws of the Exchange were brought into operation only after

the approval of the Central Government, as mandated under the

Act, and the said circular was issued in furtherance of the

powers of the Exchange in the Byelaws. Therefore, since the

Byelaws were brought into force after approval of the Central

Government, no further approval was necessary for taking action

under the said Byelaws. To reinforce, it is urged by the

respondents that the designated authority of the Exchange,

under clause 18, is vested with the power to prescribe the “due

date”, “manner”, “time frame” and “conditions and procedures” as

regards the action of closing out and thus, any such action does

not warrant any further approval from SEBI.

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


23. Having examined the submissions of the parties and

documents on record, we are of the view that the following

questions of law emerge for our consideration in the present

appeal: ­


(i) Whether prior approval of SEBI/Central Government
was essential for enforcing the circular dated
19.05.1997 against trading/clearing members?

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

(iii) Whether the appellant is legally bound by the subject
circular which allows the withdrawal of trading facility
and forthwith closing out of open positions?

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

24. The intertwined nature of the provisions involved in the

determination of the aforesaid questions requires us to analyse at

length the scheme and scope of the Byelaws, Rules and

Regulations of the Exchange and the Clearing Corporation vis­a­

vis the 1956 Act and Securities and Exchange Board of India Act,


25. The 1956 Act was brought into force “to prevent undesirable

transactions in securities” by regulating the securities market. In

furtherance of this objective, the legislature provided for

6 for short, “the 1992 Act”
recognition of a stock exchange under Section 4 of the Act on the

following terms:

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

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

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

After specifying that the Byelaws and Rules of a stock exchange

require prior approval of the Central Government, sub­section (5)

of Section 4 imposes the same condition on any amendment of

such Rules in the following terms:

“(5) No Rules of a recognised stock exchange relating to any
of the matters specified in sub­section (2) of section 3 shall be
amended except with the approval of the Central

On a plain reading of the afore­quoted provisions, it is seen that

the central scheme of 1956 Act reveals that the requirement of

prior approval, in relation to matters specified in sub­section (2)

of Section 3, of the Central Government, be it at the time of

original framing of Rules of the Exchange or upon amendment

thereof, is essential or pre­requisite. This mandate of Central

Government was later entrusted to SEBI vide S.O. 672 (E), dated

13­09­1994, published in the Gazette of India, Extra., Pt. II,

Section 3 (ii), Dated 13­09­1994 (for prior approval at the time of

framing); and vide S.O. 573 (E), dated 30­07­1992, published in

the Gazette of India, Extra., Pt. II, Section 3 (ii), dated 30­07­

1992 (for prior approval at the time of amendment) by issuing

orders under Section 29A of the 1956 Act, which at the relevant

point of time read thus:

“29A. Power to delegate.—The Central Government may, by
order published in the Official Gazette, direct that the powers
exercisable by it under any provision of this Act shall, in
relation to such matters and subject to such conditions, if
any, as may be specified in the order, be exercisable also by
the Securities and Exchange Board of India.”

26. Be it noted that the legislature has omitted the usage of the

word “Regulations” or “circulars” in the parent Act; and as far as

the governance of a stock exchange is concerned, the supervision

or control of the Central Government/SEBI at the time of

granting recognition to the stock exchange is limited to being

satisfied that the Rules and Byelaws of the stock exchange

applying for registration are in conformity with such conditions

as may be prescribed for ensuring fair dealing and protecting

investors. The domain of framing Regulations is kept separately

in a standalone manner in the Byelaws of the Exchange and not

in the Act. The framing of Regulations concerning governance of

stock exchange is reserved for the Exchange.

27. For deciding the first question, we may now advert to NSE

Byelaws, 1994, to understand the true import of the subject

circular. In the chapter on “Definitions”, clause (10) defines

“Regulations” to include business rules, code of conduct and

such other Regulations prescribed by the relevant authority from

time to time for the operations of the Exchange and they are

declared to be subject to the provisions of the 1956 Act, Rules

and 1992 Act. The definition is merely an inclusive definition and

not exhaustive. The relevant authority here is the Board of the

Exchange. Such Regulations can be prescribed on a wide range of

matters as indicated in “Chapter III – Regulations”, including

capital adequacy norms or “any other matter as may be decided

by the Board”. Thus, the scope of “Regulations” that can be

prescribed by the Exchange is expansive so as to cover all issues

relating to governance of the Exchange.


28. Coming to “Chapter V­ Trading Members” of the Byelaws,

clause (2) specifies certain “Conditions” for the Trading Members.

Sub­clause (a) of clause (2) is instructive which reads thus:

“(a) Trading members shall adhere to the Bye Laws, Rules
and Regulations of the Exchange and shall comply with such
operational parameters, rulings, notices, guidelines and
instructions of the relevant authority as may be applicable.”
(emphasis supplied)

The above clause signifies that apart from framing Regulations,

the Byelaws also empower the Exchange to issue instructions

regarding operational parameters, guidance etc. for the trading

members. The term “operational parameters” is crucial.

Chapter IX of the Byelaws, in clauses (5) and (6), titled

“Transactions and Settlements” specifies certain operational

parameters for trading. Clause (5) empowers the relevant

authority of the Exchange to “determine and announce” from

time to time certain operational parameters which may include

“trading limits” and “capital adequacy norms” as per clause (6).

Clauses (5) and (6) read thus:

“Operational Parameters for Trading
(5) The relevant authority may determine and announce
from time to time operational parameters regarding dealing of
securities on the Exchange which trading members shall
adhere to.

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


(a) trading limits allowed which may include
trading limits with 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

operational parameters. Both “determination” and

“announcement” of such parameters is therefore, within the

competence of the Exchange. Such announcement can be made

by the Exchange by circulating a communication amongst the

members, as it rightfully did in the present case by way of the

subject circular. A similar clause has been inserted in Chapter VI

of the Byelaws of the Clearing Corporation as well, thereby

empowering the Clearing Corporation to issue operational

parameters relating to trading limits and consequent actions in

case of non­compliance.

29. The subject matter of the circular in question pertains to

trading/exposure limits coupled with sanctions in case of non­

compliance. That falls squarely within the ambit of operational

parameters (as seen in clauses produced above), which can be

determined and notified by the Exchange from time to time. In

this case, the Exchange adopted the circular from the Clearing

Corporation and notified it in the form of operational parameter.

Nothing is brought to our notice from the text of this circular that

it would militate against the norm of fair dealing and protection

of investors. In any case, no requirement of prior approval is

provided for notifying such operational parameters and as the

name suggests, they are meant to tackle “operational” concerns

as and when they emerge before the Exchange or the Clearing

Corporation. The power and mode of prescription of such circular

falls within the residuary powers reserved for the Exchange.

30. At this stage, we consider it apposite to make a brief

reference to Section 9 of the 1956 Act which provides for the

power of a recognised stock exchange to make Byelaws for

regulation and control of contracts. The terms “regulation” and

“control” cannot be narrowed down and must receive a wide

meaning. For, the contours of circumstances that may emerge

between an exchange and a trading member in the process of

regulation and control cannot be comprehended or cabined

beforehand and thus, the Act permits the Byelaws to be

armoured with a diverse set of measures so as to enable the

Exchange to deal with unspecified situations that may emerge

during such regulation and control of contracts. Sub­section (2)
and (3) further signify that matters relating to clearing house,

settlements, suspension and expulsion from membership etc. are

best left to be dealt under the Byelaws. Relevant extract of sub­

section (3) reads thus:

“9. Power of recognised stock exchanges to make bye­Laws
(1) xxx xxx xxx

(2) xxx xxx xxx
(3) The Byelaws made under this section may—

(a) xxx xxx xxx

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

(i) fine;

(ii) expulsion from membership;

(iii) suspension from membership for a
specified period;

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

This provision reinforces that the power to regulate and control

the trading contracts enables the Exchange not only to make

Byelaws and Regulations but to provide for everything therein

which might be necessary (and permissible) for ensuring efficacy

and vigour in the exercise of just power of control and regulation.

It is in this light that the operational parameters or Regulations

framed under the Byelaws are to be understood. For, without

such power, the Exchange would be rendered toothless in

controlling and regulating the contracts.

31. A priori, it must follow that the legislature has bestowed

upon the Exchange sufficient freedom of action to effectively

control and regulate the functioning of stock brokers who use the

Exchange as a means to enter into financial relationships with

the investors and common public. This freedom of action is

guaranteed in the pre­approved Byelaws which enable the

Exchange to frame Regulations, instructions, operational

parameters, notice etc. and bring them into force without

subjecting them to any added condition of prior approval of the

Central Government/SEBI. The only limitation on this power of

the Exchange is that such Regulations or operational parameters

issued under the Byelaws are subject to 1956 Act, 1992 Act and

Rules framed thereunder. Strictly speaking, this limitation does

not ipso facto mean that such Regulations or operational

parameters are subject to prior approval, as argued. To say that

would result in rewriting of the provisions in question. The same

is forbidden. The import of this subjection clause is merely to

specify that any such Regulation/operational parameter must not

run counter to the provisions of 1956 Act or 1992 Act, as the

case may be, including the Rules framed thereunder.

32. Indubitably, the Exchange provides a middle ground to the

stock brokers and investors dealing with public

funds/investments, and considering the nature of activities

undertaken in a stock market, it is the bounden duty of the

Exchange to fortify the public trust. In doing so, the Exchange is

required to prevent and remedy all possible mischief “on a real

time basis”. To that end, it may prescribe a set of parameters for

fulfilling its objective of “regulating” and “controlling” the stock

market, as stated in the Preamble of the Act. Since the Byelaws

and Rules of the Exchange are duly approved by the Central

Government/SEBI, it can safely be stated that actions taken by

the Exchange under the Byelaws or Regulations ­ by prescribing

such operational parameters in the form of a circular and in

consequence thereof as discussed above – would assume

enforceable character. The appellant having submitted an

undertaking to comply with such instructions, notice etc., cannot

be heard to argue to the contrary. The Court by interpretative

process ought not to limit the efficacy of such a valid document

by additional pre­conditions such as prior approval, not

envisaged by the lawmakers or regulation framing authorities. To

do so would entail in undermining the authority of the Exchange

to regulate and control the stock market, directly or indirectly.

33. The act of adoption of this circular by the Exchange and

circulation of the same amongst the trading members was within

the domain of the Exchange in terms of its Byelaws, and unless a

case for such instructions to be ultra vires the Byelaws or the Act

is made out, there is no reason to undermine its intended effect.

34. The contention of the appellant that the act of adoption of

this circular by the Exchange amounts to an indirect amendment

of the Byelaws is a tenuous argument. For, if every regulation or

instruction concerning any procedural matter for effective

regulation and control of the stock market prescribed by the

Exchange, in furtherance of its powers coupled with duty under

the Byelaws, is to be deemed as an amendment merely because it

provides for something in addition to the Byelaws (but not

repugnant thereto), it would make various other operational

clauses of the Byelaws repugnant. That cannot be countenanced.


35. The operational freedom of the Exchange cannot be stifled

on mere assumptions and the burden lies on the claimant to

demonstrate a real conflict between the exercise of power and

source of power. Arguendo, had it been a deviation from the

Byelaws, in the sense that the circular was defeating and not

furthering the scope and objective of the Byelaws, it could have

been examined as a constructive amendment or amendment by

implication. Black’s Law Dictionary 11th Edition defines an

“amendment by implication” as:

“Amendment by Implication (1868). A rule of construction
that allows a repugnant provision in a statute to be
interpreted as an implicit modification or abrogation of a
provision that appears before it.”

Therefore, the principle of constructive amendment signifies that

unless a clear case of repugnancy is made out, the later

provisions could not be treated as modification or abrogation,

more so when such provisions further the intent of the source

provisions. The appellant, in our view, has failed to impress us on

this count.

36. In order to assail the validity of the circular, the appellant

has attempted to demonstrate a conflict between the circular and

the Byelaws regarding the manner of closing out contemplated in

the two. It is the case of the appellant that the circular

contravenes clause 17 of the Byelaws and thus, invalid.

37. For the same default, closing out action is contemplated

both under the Byelaws of the Exchange and the subject circular.

Clauses 17 and 18 of the Byelaws of the Exchange provide for

closing out. It is pertinent to note that since action is open under

both, it is necessary to ascertain whether these corresponding

closing out provisions entail any conflict amongst each other, as


38. In order to understand the scheme, it is important to

reproduce the relevant provisions. Closing out under clauses 17

and 18 of the Byelaws of the Exchange is provided as under:

“Closing out

(17) Subject to the Regulations prescribed by the relevant
authority from time to time, any dealing in securities made on
the Exchange maybe closed out by buying in or selling out on
the Exchange against a trading member and/or Participant as
follows: ­

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

(b) in case of the buying trading member/Participant, on
failure to pay the amount due on the due date, and
any loss, damage or shortfall sustained or suffered as
a result of such closing out shall be payable by the
trading member or participant who failed to give due
delivery or to pay amount due.

(18) Closing out of contracts or dealings in securities and
settlement of claims arising therefrom shall be in such

manner within such time frame and subject to such
conditions and procedures as may be prescribed from time to
time by the relevant authority.”

39. Under clause 17, closing out is permitted under specified

and narrow circumstances i.e. only when a member of the

Exchange has failed on delivery or on payment. The phrase “on

failure to complete delivery” and “on failure to pay the amount

due” signify the clear scope of operation of clause 17. Understood

thus, clause 17 gets activated only when the default is in

payment of amount due in case of buying members or in delivery

of shares in case of selling members and not otherwise.

Succinctly put, clause 17 envisages closing out for failure to

complete the settlement operation. That, however, has no relation

whatsoever to a situation of closing out due to failure to trade

within defined limits, as specified by the Exchange, amounting to

violation of the Byelaws of the Clearing Corporation, as in the

present case. Whereas, clause 18 caters to another situation and

is textually different.

40. Let us now see how the action of closing out is envisaged in

the circular. The circular provides for the effect of violation of the

exposure limits and lays down that any such violation shall be

treated as a violation of the Byelaws of the Clearing Corporation,
without prejudice to the power of the Exchange to withdraw the

trading facilities. This withdrawal is contemplated as an

imminent action to protect the market from being exposed to

unsecured financial exposure. Consequent thereto, closing out of

open positions has been contemplated. The relevant extract of the

circular dated 19.5.1997 reads thus:

“….. Effect of violation of Intra­Day Turn Over Limit and
Gross Exposure Limit.

Any violation of exposure limits will be treated as violation of
the Bye Laws of the Clearing Corporation and will entail
appropriate action under the Bye Laws and Rules of the
Clearing Corporation. In addition, and without prejudice to
the foregoing, the Clearing Corporation may, within such time
as it may deem fit, advise the Exchange to withdraw any or all
of the membership rights of the TM clearing member
including the withdrawal of trading facilities without any
notice. In the event of withdrawal of trading facilities, the
outstanding positions of the TM clearing member may be
closed out forthwith or any time thereafter by the
Exchange, at the discretion of the Clearing Corporation,
to the extent possible, by putting counter orders in respect
of the outstanding position of the TM clearing member
without any notice to the TM clearing member. …”
(emphasis supplied)

41. Strictly speaking, the circular, as discussed above, triggers

a closing out action upon fulfilment of two conditions:

(i) exceeding the gross exposure limits while trading;

(ii) failure to deposit additional capital within such time as

may be granted by the Exchange/Clearing Corporation

for continuance of trading.


42. It must be carefully noted that the nature of closing out

prescribed in the circular does not envisage any failure in

delivery or in payment to complete the settlement, unlike in

clause 17. The conditions in the circular operate on a more basic

level and are concerned essentially regarding the eligibility of a

trading/clearing member venturing beyond the market exposure

limits defined in the context of the advance security deposit. That

is the condition and procedure prescribed from time to time by

the relevant authority for dealing in securities by the member.

For such non­compliance, the power ascribable in clause 18 may

be attracted.

43. After venturing beyond such limits, it may very well be

possible that such member is still in a position to deliver the

securities or to make the payment (depending on buying or

selling). For, merely venturing beyond the exposure limits does

not ipso facto render a trading member incapable of completing

the settlement. But the circular does not go that far and attacks

the mischief of exceeding the pre­defined limits in a “reckless

fashion”. That is to preserve the interests of the unwary

investors. The very fact that a member has over­exposed itself in

the market while trading is enough to give rise to the cause of

action under the circular. The action of forthwith closing out is of

an inchoate nature as it seeks to curb continued reckless

transaction, before it unfolds fully and damages the sanctity of

the market in an irreparable manner. Therefore, what is being

done under the circular is not the same as what is being done

under clause 17.

44. Clause 18, on the other hand, is of a residuary nature and

confers on the relevant authority of the Exchange the power to

close out certain positions on grounds not specified in clause 17.

The relevant authority, under clause 18, is empowered to

determine and prescribe the “manner”, “time frame” and

“conditions and procedures” in accordance with which such

closing out can take place. The key words used here are wide in

scope and are targeted to enable the Exchange to act effectively

and promptly according to the prevalent dynamic state of the

market by prescribing manner, conditions, procedures and time

frame for a closing out action. The mischief creators in a stock

market operate in a myriad set of ways and one cannot pre­set or

comprehend all possible methods of undermining the health of

the market. Thus, residuary situations of closing out may emerge
and clause 18 enables the Exchange to promptly act against such

attempt. The provision is premised on necessity. By reading in

any requirement of due date in clause 18, on the lines of clause

17, the court would be doing violence to the clear intent of the

clauses and the broad scheme of the Byelaws. Clause 18, as the

Tribunal observed, would be rendered nugatory. Even logically,

by importing a fictional requirement of “due date” in clause 18,

the Exchange cannot be expected to gloss over a clear case of

excessive reckless trading and allow the mischief to continue

until the due date has arrived. Thus, there is no occasion to

control the scope of clause 18 by establishing a fictional link with

clause 17.

45. Be it noted that clause 18 does not specify the “mode” of

prescribing the manner, time frame, conditions and procedures

necessitating closing out. In the present case, the appellant

violated the condition and procedure prescribed by the

Exchange/Clearing Corporation vide subject circular. Thus, the

manner of closing out contemplated in the circular is borne out

by clause 18 and we do not find any conflict, as suggested. Apart

from the circular, clause 16 of the Byelaws of the Clearing

Corporation also provides for closing out “on failure of a clearing

member to comply with any of the provisions relating to delivery,

payment and settlement of deals or on any failure to fulfil the

terms and conditions subject to which the deal has been

made”. Clause 16 reads thus:

(1) A deal admitted for clearing and settlement may be closed
out on failure of a clearing member to comply with any of
the provisions relating to delivery, payment and settlement
of deals or on any failure to fulfil the terms and conditions
subject to which the deal has been made, or such other
circumstances as the relevant authority may specify from
time to time. The deal may be closed out by the Clearing
Corporation in such manner, within such time frame and
subject to such conditions and procedures as the relevant
authority may prescribe from time to time.

46. The nature of action contemplated under clause 16 is in

furtherance of the basic mandate laid down under Section 9 of

the 1956 Act. For, section 9 of the Act clearly provides that all

contracts/deals on the market are subject to the Byelaws

(including Regulations, operational parameters etc. issued under

the Byelaws) and Rules of the Exchange. One of the

consequences of not acting in accordance with the Byelaws is

provided under clause 16, apart from other provisions.

Understood thus, this clause is yet another self­contained

provision envisaging forthwith closing out, which goes on to show

that forthwith closing out is not a new phenomenon in the overall

scheme of things. We do not delve any deeper into the scope of

clause 16, for that is not the question before us.

47. To summarize, on a comprehensive view of the scheme of

closing out under the Byelaws of the Exchange, Byelaws of the

Clearing Corporation and the circular, we are of the view that an

action of forthwith closing out is permissible under the said

scheme, particularly clause 18, and thus, the circular is not ultra

vires clauses 17 and 18 of the Byelaws. Rather, the circular

furthers the spirit underlying clause 18.

48. Let us now examine the third question i.e., whether the

appellant was bound by the circular dated 19.05.1997.

49. As we move forward, we note that the SEBI (Stock Brokers

& Sub­Brokers) Regulations, 1992 were framed under Section 30

of the 1992 Act, with an objective to regulate the functioning of

stock­brokers by prescribing certain conditions. Regulation 9

specifies that any registration granted by SEBI shall be subject to

the conditions prescribed therein and reads thus:

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

(a) xxx xxx xxx

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

The same intent is advanced in Rule 9 of the Securities Contracts

(Regulations) Rules, 1957 which reads:

“Contracts between members of recognised stock

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

50. A stock exchange is primarily engaged in three activities –

buying, selling and dealing in securities. In order to give effect to

these activities, the Exchange performs an array of operations of

which clearing and settlement form an integral part. As per the

Byelaws of the Exchange, the functions of clearing and

settlement were transferred to the Clearing Corporation by the

Exchange. Accordingly, the Clearing Corporation framed its own

Byelaws, similar to the Byelaws of the Exchange, for conducting

its operations. The appellant tendered an unconditional

undertaking in favour of both the entities – NSE and NSCCL –

stating that it shall abide by all the Rules, Regulations, Byelaws,

circulars etc. of both the entities. The undertaking dated

19.3.1996 reads thus:


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

51. Notably, the undertaking given by the appellant to the

respondents fell within the broad scheme of the Byelaws/Rules,

and was a quint­essential requirement for obtaining registration

as a stock broker as both 1956 Act and Byelaws subjected the

members to such conditions. Thus, the appellant is bound by the

undertaking so given. Even otherwise, assuming the absence of

undertaking, the very fact that a valid circular originated from

the statutory scheme of the Byelaws is sufficient to bind the

appellant with its provisions. Thus, the emergent legal position is

that the appellant had subscribed to both statutory as well as

contractual obligations with the respondents for functioning as a

stock broker. Any deviation from the said circular could invite

action under multiple provisions spreading across the Byelaws of

the Exchange and Byelaws of the Clearing Corporation, in

addition to the sanctions provided in the circular itself.
Understood thus, we are of the view that the appellant is

squarely bound by the circular and any breach of the same is to

be viewed accordingly.

52. We have no hesitation in observing that the view taken by

us is reinforced by the “Master Circular for Stock Brokers” issued

by SEBI on 01.06.2018 bearing headnote that “This Master

Circular is a compilation of relevant circulars issued by SEBI,

which are operational as on date of this circular”. Annexure­4 of

the Master Circular titled “Rights and Obligations of Stock

Brokers, Sub­Brokers and Clients” reiterates the correct legal

position under clause 2 thereof which provides that the stock

brokers are bound by all the Rules, Byelaws and Regulations of

the Exchange and circulars/notices issued in furtherance of

such Byelaws and Rules. The clause reads thus:

“2. The stock broker, sub­broker and the client shall be
bound by all the Rules, Byelaws and Regulations of the
Exchange and circulars/notices issued thereunder and
Rules and Regulations of SEBI and relevant notifications of
Government authorities as may be in force from time to time.”
(emphasis supplied)

53. We now advert to the question of expulsion.


54. In light of the above discussion, it is clear that the scheme

of 1956 Act enables the Exchange to resort to suspension and

expulsion of the members, in accordance with its approved

Byelaws and Rules. Section 3(2) of the Act specifies certain

matters that must be appropriately covered in the Byelaws or

Rules. Clause (c) of the said sub­section expressly provides that

matters of admission, qualification, exclusion, suspension,

expulsion and re­admission of members must be covered in the

Byelaws/Rules. It reads thus:

“3. Application for recognition of stock exchanges.

(1) xxx xxx xxx
(2) Every application under sub­section (1) shall
contain such particulars as may be prescribed, and shall
be accompanied by a copy of the bye­laws of the stock
exchange for the regulation and control of contracts and
also a copy of the rules relating in general to the
constitution of the stock exchange, and in particular, to –

(a) xxx xxx xxx

(b) xxx xxx xxx

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


55. In 1992, SEBI issued letter No. SMD­I/11087/92 dated

04.11.1992 titled “Capital Adequacy Norms for Brokers” whereby

the stock exchanges were directed to provide for norms relating
to capital adequacy in their Byelaws. Apart from specifying

certain requirements, the letter went on to state that “the stock

exchange shall continue to have the authority to impose suitable

margins as per their judgment in the context of the market

situation.” Therefore, a stock exchange stood empowered not only

to specify capital adequacy requirements for the trading members

but also to take action against the defaulting members.

56. Accordingly, for effectuating the mandate accorded upon the

Exchange as per the Act, NSE Rules, 1994 and the abovesaid

directive, it is obliged to deal with the subject of termination of

membership on that basis. Rule 28 thereof provides that a

trading membership can be terminated, apart from other ways,

by expulsion in accordance with the provisions contained in the

Byelaws, Rules and Regulations. Rules 31 and 32 of Chapter III

are relevant operative provisions for our consideration which lay

down various obligations for continued admittance of

membership and read thus:

“Failure to pay Charges
(31) Save as otherwise provided in the Bye Laws, Rules and
Regulations of the Exchange if a member fails to pay his
annual subscription, fees, charges or other monies which may
be due by him to the Exchange or to the Clearing House
within such time as the relevant authority may prescribe from
time to time after notice in writing has been served upon him
by the Exchange, he may be suspended by the relevant
authority until he makes payment and if within a further
period of fifteen days he fails to make such payment, he may
be expelled by the relevant authority.

Continued Admittance
(32) The relevant authority shall from time to time prescribe
conditions and requirements for continued admittance to
trading membership which may, inter alia, include
maintenance of minimum net worth and capital adequacy.
The trading membership of any person who fails to meet these
requirements shall be liable to be terminated.”

57. The same regulatory intent is reflected in the Byelaws as

well. Clause (1)(b) of Chapter­V of NSE Byelaws, 1997 (the

operative Byelaws as regards the question of expulsion)

empowers the relevant authority to “specify prerequisites,

conditions, formats and procedures for application for admission,

termination, re­admission etc. of trading members”.

Furthermore, clause (1)(c) of the same chapter provides that the

members desirous of admission or of continued admission may

be asked to deposit fees/security deposit in lieu of the same. The

clause reads thus:

“Appointment and Fees
(1) (a) xxx xxx xxx

(b) xxx xxx xxx

(c) Such fees, security deposit and other monies as
are specified by the Board or relevant authority would be
payable on appointment as trading member and for
continued appointment thereof.”

Consequence of failure to maintain the necessary deposits is

addressed in Chapter XII of the Byelaws wherein clause (1)

provides that such a member could be declared as a defaulter,

which in itself is a ground for expulsion in the NSE Rules, 1994.

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 segment if:

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

58. A holistic view of the scheme exposited above vividly reveals

that the Exchange not only had the authority to specify various

deposit related requirements but also had the power to expel a

member in case of default. In the present case, it is not in dispute

that the Interest Free Security Deposit to be maintained by the

appellant actually fell short of the required margins during the

relevant period. Therefore, we are neither on question of existence

of power to expel nor on the factum of whether or not the

deposits fell short of the prescribed margins. What falls for our

examination, here, is the sole question as to whether the

obligation of the appellant to keep up with the adequacy of

deposits continued despite the withdrawal of its trading facility.

An affirmative answer would justify the expulsion.

59. Be it noted that the relationship between a stock exchange

and 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 expulsion of membership are

various facets of this relationship. Action against members is to

be taken only upon violation of conditions and procedures

therefor. It is a serious matter and resorted to only upon the

fulfilment of conditions specified in the Byelaws, Rules,

Regulations or even in operational parameters, as seen above.

Notably, the conditions required for withdrawing the trading

facility are distinguishable from the conditions required for

suspension/expulsion of membership. Under the relevant

provisions, withdrawal could take place upon a standalone

violation of certain operational parameters on a given trading day

(like exceeding the exposure limits as in the present case).

Whereas, expulsion would take place upon a sustained violation

of membership obligations (like failure to maintain the base

capital and also for failure to replenish the prescribed amount)
within the time frame specified therefor. The two actions vary not

only in their texture, but also in their resultant effect.

Withdrawal, for instance, does not extinguish the membership. It

acts like a halt for indulging in further trading activity.

60. To say that mere withdrawal of trading facility would ipso

facto absolve a trading member from keeping up with other

obligations towards the Exchange for continuation of

membership would result into an anomalous situation. It would

amount to the diffusion of one stage of the relationship with the

other, and would become a concocted way to extend benefit for

its own wrong to a defaulting member. Such a consequence could

not be intended to result from an action of withdrawal of trading

facility. For, the withdrawal of trading facility is a temporary or

interim action which is taken against an erring member to

prevent him from continuing on a mischievous path during the

trading hours and to take corrective steps forthwith. The nature

of this action is preventive and the provisions governing this

action provide for certain remedial acts, like depositing additional

sums to increase the exposure limits, the performance of which

can help a member in resuming his trading operations. The

obligations for continued admission as a member are entirely

different and merely because trading has been halted due to a

member’s own default, it does not result in a hiatus situation or

extricate him from membership obligations. If that were to be the

case, there was no need for the Byelaws to provide these actions


61. Pertinently, the capital adequacy norms, as discussed

above, are meant both for admission as a member and for

continuation as a member. Even the language of the governing

provision i.e. Rule 32, signifies that requirements relating to

capital adequacy are meant for “continued admittance to trading

membership” and thus, the mandatory obligations would

continue, as long as membership is formally continued. Despite

the temporary action of withdrawal of trading facility, a member

continues to be a member of the Exchange with all corresponding

rights and obligations intact on both sides. A member can always

resign from the membership of the Exchange and move out of all

fiscal obligations after settling his dues, but as long as he opts to

retain his membership of the Exchange, there is nothing in the

governing provisions to support the view that withdrawal of

trading would automatically extricate the defaulting member

from his obligation regarding annual charges and margin

requirements, as the case may be. The timely fulfilment of these

requirements has been envisaged in the Byelaws as a pre­

condition for admission or continued admission in the

Exchange. Despite closer examination of the Byelaws, Rules and

Regulations of the Exchange, we could not find anything to

support a contrary view. The continuation of membership and

fulfilment of capital adequacy norms run co­terminously with

each other, and failure to comply with the latter would

automatically put the former in jeopardy.

62. Having observed that the appellant failed to maintain the

requisite membership margins with the Exchange for a long

period and refused to make up for the shortfalls when called

upon to do so by the Exchange, there is nothing to deviate from

the view taken by the Tribunal that the appellant acted in

contravention of the Byelaws and Rules of the Exchange

necessitating unto termination. The actions taken by the

Exchange, thus, were in accordance with the law.


63. Schedule­II of the SEBI (Stock Brokers and Sub­Brokers)

Regulations, 1992 prescribes a “Code of Conduct” for the stock

brokers and clause 5 thereof specifies that compliance with

statutory requirements is a mandatory aspect of code of conduct

of a stock broker. The appellant consistently failed to comply with

the requirements and acted in a manner which was prejudicial to

the sanctity of a Member­Exchange relationship.

64. To conclude, we hold that the Tribunal rightly confirmed the

order of expulsion and we uphold the same.


65. The seminal question involved in this appeal is about the

mode of dealing with withheld securities of a defaulting member

by NSE/NSCCL, consequent to his expulsion. The cause

espoused in this appeal is in the backdrop of the decision of

withdrawal of trading facilities of the appellant dated 13.10.1997,

followed by withholding of various securities by the Exchange,

purportedly belonging to the appellant. Concededly, there was no

immediate challenge by the appellant against this decision of

withholding of securities. It was only in Appeal No. 84 of 2008
filed before the Tribunal on 05.05.2008, the appellant had made

grievance about the non­return of stated withheld securities.

66. Thereafter, further communication ensued between the

parties as regards the withholding of securities. On 20.10.2008,

representatives of the appellant were permitted by the respondent

Exchange to inspect the physical records of securities at the

premises of the Exchange and as reflected in the records, such

inspection did take place. However, no legal action was initiated

by the appellant after this event for securing the release of the

stated securities. The appellant, after a gap of almost six years,

called upon the Exchange vide letter dated 21.02.2014 to return

the withheld securities. It was done purportedly to prevent the

flow of corporate benefits on those securities to third parties in

whose name the securities stood registered in the books of the

companies. Similar communications were sent on 04.04.2014

and 03.05.2014 to NSE and SEBI respectively.

67. The appellant then approached the Securities Appellate

Tribunal in Appeal No. 238 of 2014 praying for the release of

withheld securities. On 09.09.2014, the counsel for the Exchange

proposed to hear the appellant as regards the question of

withheld securities and accordingly, the Tribunal relegated the

parties before NSE for passing a reasoned order on the said

question. The Defaulter’s Committee of the Exchange heard the

appellant and passed an elaborate order dated 04.12.2014

justifying the withholding of securities. This order was finally

challenged by the appellant before the Tribunal on 17.01.2015 in

Appeal No. 118 of 2015. The challenge was turned down by the

Tribunal vide order dated 04.06.2019 (impugned order).

68. To understand the present challenge, it is apposite to note

that the Tribunal decided the appeal on a narrow question which

finds mention in para 5 of the impugned judgment as:

“5. The basic question raised in this appeal therefore is
whether the respondent NSE is legally entitled to withhold the
securities of the appellant who has been suspended/expelled
with effect from 2005/2006.”

69. The Tribunal, after adverting to the relevant provisions, in

para 8, opined that the stated issue had been and stands

answered in Appeal No. 84 of 2008, wherein the order of

expulsion was upheld. The Tribunal then went on to answer the

question on merits and observed thus:

“9. In any case dehors this ground of multiple litigations, on
merit we find that the question of dues owed by the appellant
to NSE and NSCCL has been communicated to the appellant
multiple times giving calculations etc. The appellant has

never questioned the calculations except stating that
sufficient funds were available with the respondent in October
1997 which could have been utilized towards settlement
obligation. However, given the trajectory of the legal recourse
resorted to by the appellant and thereby limiting the powers
of the respondent in utilizing those deposits, this contention
that the respondent could have utilized the money available
does not stand any merit …”

Subsequent to this observation, the Tribunal determined the total

liability of the appellant towards the respondents (Exchange) and

arrived at a final figure of Rs.2.41 crores. It further stated that

the respondents were well within their rights to withhold the

securities and realise the amount owed to them. The relevant

extract of the impugned order in this regard reads thus:

“12. After carefully perusing the documents and the
submissions made by the parties we have no doubt that the
appellant owe an amount of Rs.2.41 crore to respondent
NSE/NSCCL. Since the appellant is not ready to give this
amount Respondent no. 1, is well within its rights to use the
securities of the appellant withheld by them, to the tune of
Rs.2.41 crore. Such calculations should also include
corporate benefits such as bonus, dividends etc. if any
accrued to NSE over the period as beneficial owner of the
withheld securities. Needless to say that if any excess value is
received or if the amount of Rs.2.41 crore is received by
disposing of part of the securities withheld either the excess
value or the remaining securities or both shall be returned to
the appellant within one month from the date of this order.”

70. While assailing the order of the Tribunal before this Court,

the appellant has primarily contended that the Tribunal misled

itself by answering whether the respondents could have withheld

the securities of a defaulting member, whereas, the real question

was whether such securities could have been withheld despite

the respondents being in possession of deposits equivalent to an

amount exceeding the claim of the respondents and also whether

such securities could have been withheld without getting them

registered in the name of the respondents.

71. It is the case of the appellant that on the relevant date, the

alleged amount due from the appellant stood at Rs.1.32 crore

and the amount of deposits retained by the respondents was

around Rs.1.34 crore and since the security deposit already

exceeded the amount due, there was no occasion for the

respondents to withhold the securities in order to realise any

amount over and above the stated liability.

72. The thrust of the appellant’s challenge is that as and when

securities of the defaulting member are withheld by the

Exchange, the Exchange being trustee thereof is under an

obligation to get such securities registered in its name so as to

prevent third parties from unduly deriving the corporate benefits

(bonus, rights issues, dividends etc.) thereon, as and when they

may accrue. It is the case of the appellant that in the present

case, the Exchange merely sat over the withheld securities

without further dealing with them in any manner whatsoever and

for its inaction the appellant cannot be made to suffer.

73. Though not addressed by the Tribunal in the impugned

judgment, the appellant had also raised a question as regards the

applicability of Rule 20(f) of Chapter IV of the NSE Rules as the

said rule came into effect from July, 2001 onwards. According to

the appellant, since the original decision of withdrawal of trading

facilities was taken in 1997, the said rule could not be applied to

the appellant. Be it noted that the said rule permits the

application of Chapter XII­ “Defaults” of NSE Byelaws enabling

realisation of withheld assets of the expelled member.

74. Per contra, the respondents would contend that it was not

open to them to use the deposits worth Rs.1.34 crore to settle the

dues owed by the appellant for the reason that the appellant had

initiated a bunch of legal proceedings at various forums across

the country from 1997 to 2006. Resultantly, the securities had to

be withheld as per the rules in order to secure the liability and

because the appellant had failed to meet its settlement

obligations. It was not because of his expulsion as such. Further,

such withholding was in tune with the Regulations of NSE and

NSCCL and with the circular dated 19.05.1997.

75. Responding to the appellant’s contention regarding the

appropriate manner of dealing with the withheld securities, the

respondents have extensively relied upon Regulation 9.12 of NSE

(Capital Market) Regulations whereby they are empowered to deal

with the withheld securities at such times and in such manner as

they may deem fit. Placing reliance upon the bare language of the

Regulation, it has been submitted that “such manner” of dealing

may include appropriating the withheld securities for the

discharge of outstanding obligations, closing out the withheld

securities or registering such securities in the name of the

respondent or any other entity as the case may be. In other

words, the manner of dealing by the respondents cannot be


76. The respondents would submit that upon expulsion of a

member, the Exchange is well within its rights to realize the

withheld securities in fulfilment of the obligations of defaulting

member in accordance with Rule 20(f) of Chapter IV of NSE Rules

which specifies the consequences of expulsion. It is further urged

that Rule 20(f) became operative on 29.06.2000 whereas the

appellant was expelled on 05.01.2006 and thus, the said rule

was applicable to the case of appellant.

77. An objection has also been raised by the respondents as

regards the maintainability of the original appeal before the

Tribunal. It has been urged that the appeal was barred by the

principles underlying Order II Rule 2 of Code of Civil Procedure,

19087 and/or res judicata as the same issue was raised and not

pressed/rejected before the Tribunal in Appeal No. 84 of 2008.

78. Before we proceed, we hasten to note that the real issue is

not about the existence of power and authority of the

respondents to withhold the securities or other assets of a

trading/clearing member in cases of default. That is not disputed

even by the appellant. Thus, our examination revolves essentially

around the mode of dealing with the withheld securities. Having

gone through the impugned judgment, submissions of the parties

and documents on record, we are of the view that the following

questions emerge for our consideration in this appeal:

(i) Whether the respondents are obliged to forthwith
realise the withheld securities and appropriate the sale

7 for short, “the 1908 Code”
proceeds towards the dues payable by the appellant in
terms of Rule 20(f) of Chapter IV of NSE Rules read
with Chapter XII on “Defaults”?

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

79. Before answering the questions of law on merits, it falls

upon us to briefly examine the maintainability of the original

appeal before the Tribunal for relief relating to withheld

securities. Notably, in previous appeal registered as Appeal No.

84 of 2008, apart from challenging the expulsion of membership,

the appellant had also prayed for the release of withheld

securities. The prayer reads thus:

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

It seems that the said relief was not pursued by the appellant

before the Tribunal in right earnest or taken to its logical end.

For, what is clear is that the afore­quoted relief prayed in the

previous appeal whilst questioning the expulsion, was not
answered/granted by the Tribunal. Either way, the legal

consequence is that the second round of proceedings for the

same relief would not be maintainable. If the relief was prayed for

and given up during the course of the appeal without seeking

leave for agitating it at a later stage, the principle underlying

Order II Rule 2 of the 1908 Code may be attracted. Alternatively,

if the prayer was duly pursued before the Tribunal in the

previous appeal but not granted, in law, it would deem to be

refused. In which case, the principle of constructive res judicata

would act as a legal bar in the subsequent proceedings for that

very relief. We do not wish to dilate on this aspect as no such

plea was raised by the respondents in the stated proceedings in

2014. Rather, that appeal was allowed and claim regarding

withheld securities was relegated to the Defaulter’s Committee.

That remand order was acted upon by all concerned and against

which the present appeal arises before us.

80. The appellant would then contend that cause of action

accrued only after the Defaulter’s Committee’s order dated

04.12.2014, justifying the withholding of securities. This plea is

ex facie untenable. The said order of the Defaulter’s Committee

did not result in the withholding of securities. It merely supplied

reasons and justification for such withholding. The cause of

action, if at all any, had arisen to the appellant from the moment

their securities were withheld in 1997. Merely because a

subsequent order is passed to justify a prior action, it cannot be

a case of accrual of fresh cause of action to the aggrieved.

81. Be that as it may, we forbear from non­suiting the appellant

on this technical objection, but as aforesaid, in the peculiar facts

of this case, we deem it appropriate to examine the subject

matter on merits. As per the general scheme of regulation of a

trading/clearing member, it is settled position that a member

whose membership has been terminated or who has been

expelled is not absolved from fulfilling his contractual or other

obligations in any manner. Rule 8(2) of Chapter IV and Rule 18(4)

of Chapter V of NSCCL Rules textualize this position. Rule 8(2),

for instance, reads thus:

(1) xxx xxx xxx
(2) The termination of Clearing Membership shall not
in any way absolve the Clearing Member from any
obligations and liabilities incurred by the Clearing
Member prior to such termination.”


82. In the factual scheme of the present case, the foremost

thing to be noted is that there are two sets of assets in control of

the respondents – first, security deposits and second, withheld

securities. The security deposits came to be deposited on account

of membership obligations and the securities were withheld on

account of failure to complete settlements. Though the challenge

is limited to withheld securities, the provisions relating to such

securities address both these categories of assets collectively and

thus, they are being discussed accordingly for a comprehensive

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

assets of a defaulter member in due course. Clause (23)

complements this action and provides for the order of priority for

satisfying the claims. Clause (11) reads thus:

“Vesting of assets in the Exchange
(11) The Defaulters’ Committee shall call in and realise the
security deposits in any form, margin money, other amounts
lying to the credit of and securities deposited by the defaulter
and recover all moneys, securities and other assets due,
payable or deliverable to the defaulter by any other Trading
Member in respect of any transaction or dealing made subject
to the Bye­laws, Rules and Regulations of the Exchange and
such assets shall vest ipso facto, on declaration of any
trading member as a defaulter, in the Exchange for the
benefit of and on account of any dues of the Exchange,
National Securities Clearing Corporation Limited, Securities
and Exchange Board of India, other trading members,
Constituents and registered sub­brokers of the defaulter,
approved banks and any other persons as may be approved
by the Defaulters’ Committee and other recognised stock
(emphasis supplied)

It is noted that clause (11) provides for realisation of three

categories of assets:

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

(ii) securities which have been deposited by the defaulter

member; and

(iii) moneys, securities and other assets due, payable or

deliverable to the defaulter by any other Trading

Member and recovered by the Exchange.

Pertinently, different kinds of assets are subject to a different

procedure of realisation. After examining what all can be realised

under clause (11), we may now understand the modalities of


Realisation of security deposits

84. Out of the three categories covered under clause (11),

security deposits can be called in and realised per se without any

additional condition. There is no requirement of vesting with

respect to such deposits neither in the language of clause (11)

nor in the overall scheme. It is so because the Exchange enjoys a
statutory lien over such deposits by way of clause (24) of Chapter

IX ­ “Transactions and Settlements”, NSE Byelaws which

categorically provides that the Exchange has a first and

paramount lien over the monies, bank deposits and other

securities deposited by the trading member for any sum due to

the Exchange. It reads thus:

“Lien on Margins
(24) The monies, Bank Deposit Receipts and other securities
and assets deposited by a trading member by way of margin
under the provisions of these Bye Laws and Regulations shall
be subject to a first and paramount lien for any sum due to
the Exchange. Subject to the above, the margin shall be
available in preference to all other claims of the trading
member for the due fulfilment of its engagements, obligations
and liabilities arising out of or incidental to any bargains,
dealings, transactions and contracts made subject to the Bye
Laws, Rules and Regulations of the Exchange or anything
done in pursuance thereof.”

Be it noted that it covers only those assets which are voluntarily

deposited by the member with the Exchange. Forfeited/withheld

assets are not included herein. It is so because the property in

the deposited assets may vest in the Exchange by operation of

membership obligations, whereas such is not the case with

withheld securities. It is true that mere existence of lien may not

entitle the lienee to sell off the property for satisfaction of debt

without a court order. However, the same principle is not

absolute and the cases in which the statutory/contractual

scheme itself provides for such sale/realisation fall outside its

purview. It is settled that when lien itself is a creation of Byelaws,

Rules or Regulations etc., the scope, extent and operation of such

lien would also be governed by the same scheme. In Unity

Company Private Ltd. vs. Diamond Sugar Mills and Ors.8, it

was observed thus:

“74. The lien in the instant case has been created by the
agreement contained 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 the Company. While discussing Issue No. 2, I
have earlier held that the lien created by the Articles in the
instant case, cannot be equated to a mere equitable charge
and the lien is wider in its extent, scope and effect. Express
and specific power has been conferred on the company by
Article 36 to sell the shares in enforcement of the lien and by
Article 37, to apply the sale proceeds in satisfaction of the
debt. The Articles, to my mind, clearly and unequivocally
express the intention that the company, by itself, is
competent to enforce the lien by sale of the shares which are
subject to such lien and to apply the sale proceeds in
satisfaction of the debt or loan without recourse to an action
in a Court of Law for enforcement 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. No external conditions can be read in such a scheme.

Clause (11) expressly provides for realisation of security deposits

as and when a member becomes subject to the provisions

relating to defaulters. The phrase “shall call in and realise”

8 AIR 1971 Cal 18
signifies that realisation is warranted as an imminent action

upon declaration of defaulter in case the security deposits are

insufficient. The effect of this phrase is that once a trading

member has been declared a defaulter, the Exchange is duty

bound to realise the security deposits retained by it to satisfy its

obligations and return the remaining deposits, if any. If the

Exchange fails to do so, it may become liable to make good the

loss of interest to the defaulter on any amount over and above

the monetary obligation.

85. However, in the present case, no fault can be found in the

conduct of the Exchange as it had actually realised the deposits

at various points of time owing to the inability of the appellant to

keep up with the statutory margin requirements. As reflected in

the records, out of the total deposit of Rs.1.34 crores, amounts

equivalent to Rs.91,72,163.49 and Rs.41,00,000 had already

stood adjusted in favour of NSCCL and NSE respectively from

1997 to 2006. Thus, a total of Rs.1,32,72,163.49 was in fact

realised by the Exchange and it holds no merit to state that the

Exchange failed to perform its duty to realise the security

deposits. The amount of Rs.1.34 crores came to be added to the

total obligation again in 2017 when the Exchange returned the
security deposit amount pursuant to an order of this court

passed at the insistence of the appellant herein and thus, in law,

that cannot be held against the Exchange in any manner.

Withheld securities

86. Unlike the money deposits, no legal requirement of

forthwith realisation is envisaged in the case of withheld

securities, as discussed hitherto. To understand the procedure of

vesting and realisation of withheld securities, it is essential to

segregate the two kinds of securities and analyse it appropriately.

The withheld securities can be categorised as – securities in

which the appellant was a receiving member (receiving securities)

and securities in which the appellant was an introducing member

(introductory securities). A member is termed as a receiving

member when it is supposed to receive the securities for orders

placed by it in a purchase transaction, subject to complete

settlement and payment. NSCCL Byelaws define a receiving

member as:

“Receiving Member” means a clearing member who has
to receive or has received documents in fulfilment of
contracts to which these rules, bye­laws and regulations
apply unless the context indicates otherwise.””

Whereas, a member is termed as an introducing member when it

introduces some securities to be transferred to the buyers in a

sale transaction, subject to the securities being free from any


87. During the trading period from 24.09.1997 to 30.09.1997,

the appellant defaulted in Settlement No. N1997039 and

delivered short of payment in lieu of securities for which

purchase orders were placed. An amount of Rs.45,56,513 became

due. Thereafter, during the trading period from 01.10.1997 to

14.10.1997, an amount of Rs.29.10 lakhs became due as

margins for trading on 01.10.1997 in Settlement No. N1997040.

In both these transactions the appellant was a “receiving

member”. On account of failure of appellant to complete the

aforesaid settlements by making complete payment, the

Exchange withheld the pay­outs of securities at various points of


88. The remaining securities were withheld wherein appellant

was acting as an “introducing member” in the market. The

companies refused to complete the sale transactions initiated by

the appellant and to register the said securities in the names of

the purchasers citing some unresolved objections on the said

securities. Resultantly, they were returned back to the Exchange

and it became a case of bad delivery. As per the standard

procedure in force at the relevant point of time, the Exchange

participated in an auction in open market to procure the required

securities free from objections so as to complete the purchase

orders. Therefore, the objected securities were withheld by the

Exchange as a lien on the money paid by it 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:

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

a) In case of deliveries coming under objection
(objection cases), the first introducing broker of the
same stock exchange shall be required to rectify the
defects/replace the shares alongwith accrued
benefits within 21 calendar days from the date of
receipt of the objection and share certificates from the
last buying broker of that exchange. If the former fails
to rectify the defects or replace the shares or transfer
deeds, the exchange shall hold an auction for shares
in the immediately following Auction Session
according to the usual exchange procedure. The
shares obtained from such an auction shall be given by
the Exchange to the concerned buying broker. Further,
the exchange shall debit the price of the shares to the
account of the introducing broker of that Exchange. In
case the shares are not available through auction, the
exchange shall close out the transaction according to the
procedure of the exchange and the close out amount

shall be debited to the first introducing broker and
credited to the last buying broker of the exchange.”
(emphasis supplied)

89. As regards the introductory securities, it must be noted at

the very outset that these securities fall outside the purview of

our examination on vesting. For, they simply could not have been

realised by the Exchange at any point of time as they were merely

introduced by the appellant and did not belong to it. These

introductory securities were registered in the names of third

persons who are not parties to this proceeding. Concededly, there

could have been no loss to the appellant relating to corporate

benefits on these securities as it did not have any right therein,

to receive any such benefit. Property in those securities neither

vested in the appellant nor in the Exchange and they were held

by the Exchange only as a lien on the physical copies of shares to

the limited extent of obliging the appellant to fulfil its obligations.

The benefits on those securities remained in third parties, as they

must have, and no one has approached this court to raise the

grievance that they have suffered any wrongful loss as regards

those benefits. Even if any grievance exists between two clearing

members as regards the receipt or non­receipt of those benefits,

the best course of action would have been to proceed by way of a

separate proceeding in that regard. Clause (11) of Chapter VI,

NSCCL Byelaws categorically provides for a privity of contract

between delivering and receiving clearing members. The interests

of those third parties are not a part of the present lis.

90. Indisputably, the introductory securities have been marked

as objectionable by the companies; and securities with

outstanding objections are of no use to the Exchange for the

purpose of recovery so long as such objections are not removed.

The introductory securities fall outside the purview of the vesting

provision. Further, the responsibility of the Exchange was

limited to providing the appellant an opportunity to remove the

objections and continue withholding the securities in the interim.

Any enquiry regarding the legality or illegality of objections could

have taken place between the introducing member and the

respective companies. The same also cannot form a part of the

subject matter before us.

91. Therefore, actual recovery qua the appellant/defaulting

member could only be made from the “receiving securities” as

those securities were due/deliverable to the appellant and were

withheld as a collateral for the sole reason of non­payment. No

third­party stake is involved therein.


92. Be that as it may, unlike money deposits, the “receiving

securities” withheld or recovered by the respondents require legal

vesting before they could be realised for the satisfaction of dues.

Here, it may be useful to advert to clause (11). The question is,

what procedure ought to be followed for realisation of “receiving

securities”. Is it forthwith realisation, or only upon its vesting in


93. The provisions relating to withholding and vesting of

securities are provided in two separate documents. Whereas

vesting is provided under Chapter­XII of NSE Byelaws titled

“Default”, withholding is provided under Chapter 9 of NSCCL

Regulations titled “Non­Delivery and Non­Payment”. It falls upon

us to harmonise the two sets of provisions in order to understand

the procedure in a holistic manner.

94. Regulation 9.5 provides that when a clearing member fails

to pay for securities on pay­in day, the Clearing Corporation is

entitled to withhold the securities thus: ­

“9.5 Securities On Hold Or Selling­Out On Failure To Pay
If a CM clearing member fails to pay on pay­in day for the
securities to be received by him, the Clearing Corporation
shall be, without further notice or intimation to the member,
entitled to withhold the securities due to the member or sell­
out any/all of such securities in accordance with the Bye
Laws and Regulations relating to closing­out.”

The above provision also enables the Corporation to sell­out such

withheld securities to recover their dues in accordance with the

following provisions. Thereafter, Regulation 9.6 provides that

failure to make payment empowers the Corporation to declare

such member as defaulter. It reads thus:

“9.6 Declaration Of Default
A CM clearing member failing to deliver the documents due
from him or pay the amount due by him may be declared a
defaulter as provided in these Bye Laws and Regulations.”

It is crucial to note that declaration of defaulter upon non­

payment is not an express pre­requisite for the recovery of dues

here. Regulation 9.7 provides that all deliveries of securities

which were due to the defaulter shall be handed over to the

Clearing Corporation so as to enable it to realise their dues from

those deliverable securities. It reads thus:

“9.7 Deliveries Due To The Defaulter
All deliveries, deliveries or otherwise, and payment due to the
defaulter shall be handed over to the Clearing Corporation.

The Clearing Corporation shall reserve the right to dispose of
the securities to make good non­payment of funds or non­
delivery of securities by the defaulting member in such
manner it deems necessary.”

Upon receipt of securities as per this Regulation, the action of

withholding is contemplated in Regulation 9.9 (Regulation 9.11 in
NSE Regulations). In the present case, it is seen that securities

deliverable to the appellant as a receiving member were withheld

by the respondents to clear their dues.

95. On withholding, the stage of vesting comes in and this stage

is important as vesting is a pre­requisite for dealing with the

securities in any manner. There can be no action, be it of sale or

registration, against a property unless the property vests in the

entity. “Nemo dat quod non habet” is the fundamental principle of

transfer of property which, if literally translated, means “no one

gives what they do not have”. Thus, unlike money deposits,

withheld securities cannot be realised without legal vesting under

clause (11).

96. We may now discuss the time/stage of vesting. Though the

requirement of declaration as defaulter may be a discretionary

one under the NSCCL Regulations, the same is a mandatory

requirement for vesting in clause (11). For, vesting takes place

upon declaration of any trading member as a defaulter. The

expression “and such assets shall vest ipso facto, on declaration

of any trading member as a defaulter” reinforces the view. Even

otherwise, the main vesting provision is included in the chapter

on defaults and therefore, such declaration is necessary unless

otherwise excluded. Therefore, the right of the Corporation to

dispose of or realise these securities is circumscribed by the

requirement of declaring such member as a defaulter. In this

case, no such declaration came to be made. However, despite the

absence of any such declaration, vesting took place by way of

Rule 20(f) in Chapter IV of NSE Rules.

97. Rule 20(f) does away with the requirement of express

declaration of defaulter upon expulsion. It specifies that Chapter

XII on defaults would automatically become applicable upon a

member expelled from the Exchange. As per this Rule,

declaration of defaulter runs synonymous with the expulsion of a

member. It reads thus:

“Consequences of Expulsion

20. The expulsion of a trading member shall have the
following consequence, namely:

(a) – (e) xxx xxx xxx

(f) Consequences of declaration of defaulter to follow:

The provisions of Chapter XII and Chapter XIII of the
Byelaws pertaining to default and Protection Fund
respectively, shall become applicable to the Trading
Member expelled from the Exchange as if such Trading
Member has been declared a defaulter.”

The emergent position of law, therefore, is that vesting does not

take place in favour of the respondent Exchange unless a formal

expulsion order is passed. The relevant point of time, therefore, is

the date of expulsion. Without such legal vesting, the Exchange

only sits upon the withheld assets as a custodian. There is no

question of realisation. Such withholding is done to serve two

purposes – first, to persuade the defaulting member to fulfil its

obligations during the continuation of membership if it so wishes

and second, to secure the liability at the earliest available

opportunity as a preventive measure. If liabilities continue to be

unfulfilled, expulsion becomes an inevitable consequence and the

withheld assets vest in the Exchange.

98. It is thus clear that realisation cannot be done unless

vesting is complete and there is no obligation on the

Exchange/Corporation to forthwith realise the securities upon

withholding. Expulsion or declaration of defaulter, as the case

may be, is a pre­condition 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

would deprive the defaulting member from an opportunity to

correct its mistake by settling liabilities within due course of time

without giving up membership.


99. Before proceeding further, we may note that a question has

been raised by the appellant regarding the applicability of Rule

20(f) in this case. For, the Rule was not in existence when

trading facility of the appellant was withdrawn. This plea, in our

opinion, is misconceived. In that, the Rule clearly signifies that it

applies to expelled members and the moment a member is

expelled from membership, this rule will automatically become

operative. Literally understood, the relevant point of 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,

whereas the said rule was inserted beforehand in 2001. Thus, the

rule was very much in force when the appellant was in fact

expelled. Consequently, the respondents were well within their

powers to realise the withheld securities in accordance with

clause (11) soon after expulsion in 2006.

100. We now deal with the issue regarding the manner of dealing

with withheld securities and requirement of registration. Upon

withholding followed by vesting, the manner of dealing is

provided under Regulation 9.10, NSCCL Regulations (Regulation

9.12, NSE Regulations), which reads as:

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

The securities and funds withheld pursuant to regulation 9.9
and regulation 9.9A above shall be dealt with the relevant
authority at such times and in such manner as it may deem
fit, which may include appropriating the withheld funds for
the purpose of fulfilling the obligations of the clearing
member, closing out of the withheld securities or
registering the withheld securities in the name of the
Clearing Corporation or any other entity as decided by the
Clearing Corporation. The funds received out of closing out of
withheld or registered securities may be dealt with by the
Clearing Corporation at such time and in such manner as it
may deem fit.”
(emphasis supplied)

This Regulation predicates that the Clearing Corporation is

armoured with a set of measures as regards the withheld

securities. The first part of the Regulation vests the Corporation

with the power to deal with the securities at “such times” and in

“such manner” as it may deem fit. The Regulation then specifies

certain measures which may include:

a. closing out the withheld securities in the name of

Exchange or any other entity; or

b. registering the withheld securities in the name of

Exchange or any other entity;

Thereafter, in the concluding sentence it is further specified that

the funds received out of closing out of withheld or registered

securities may also be dealt with in such manner and at such

times as the Exchange may deem fit.

101. It is therefore clear that the respondents had two courses of

action open for dealing with the securities – closing out and

registration. Chapter 10 of NSCCL Regulations titled “Closing out

of Contracts” delineates the manner of closing out. Regulation

10.6 provides that once a member is declared defaulter, the

Corporation “shall determine” all outstanding deals by closing­

out against the defaulter member. It reads thus:

“10.6 Closing­Out Contracts With Defaulter CM clearing
If a CM clearing member be declared a defaulter, the Clearing
Corporation shall determine all outstanding deals by closing­
out against him in accordance with the Bye Laws and
Regulations relating to default.”

102. Thus, the Corporation is duty bound to close out all

outstanding deals against the defaulter and “determine” them for

the purpose of its recovery. Regulation 10.9 specifies the manner

of such determination and reads thus:

“10.9 Closing­Out How Effected
Closing out shall be effected against the CM clearing member
by the Clearing Corporation in any of the following manners:

(a) by buying­in or selling­out against the CM clearing
member through an auction initiated by the Clearing


(b) by declaring a closing­out at such prices as may be
decided by the relevant authority

(c) by buying­in or selling­out against the CM clearing
member by placing order in the specified exchange

(d) in any other manner as the relevant authority may
decide from time to time.”

The Corporation is empowered with a set of methods to close out

the outstanding deals against the appellant. Upon vesting, it

could have sold out the withheld securities through an auction or

by placing an order of sale in Exchange or in any other

permissible manner.

103. The other action contemplated in Regulation 9.10 is of

registration. The grievance is that the Exchange held on to the

securities without registration. According to the appellant, it was

abuse of discretionary powers and the respondents ought to have

registered the securities in its name forthwith.

104. To determine the requirement of registration, we need to

resort to a true construction of Regulation 9.10. Once an action

of withholding is taken, multiple interests come into play and

both the parties assume different roles as regards the withheld

securities. We proceed to examine these roles separately – role of

Exchange and role of defaulting member. Any further action

relating to such securities would depend 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 is

manifested in the phrase “shall be dealt with by the relevant

authority at such times and in such manner”. That takes within

its ambit a power coupled with a duty. The power of the

Exchange to deal with the withheld securities in the manner of

its choice runs parallel with its duty to mandatorily “deal” with

such securities as a prudent person would after coming in

possession of securities. The usage of the word “shall” before the

word “dealt” is conscious and instructive here, and its vigour

cannot be toned down in a light manner. In other words, the

Regulation requires the Exchange not to sit idle on the withheld

securities and instead, obliges it “to deal” with them in an

appropriate manner. This requirement is a manifestation of the

basic “duty of care” implicit in regulatory relationships where one

member is in a position to control the functionality of the other.
The raison d’etre underlying this duty is to protect the interests of

a member and to prevent any undue damage to its interests as a

crucial element of the market. No doubt, such dealing could be in

any of the manners specified in the Regulation or even in any

other unspecified manner, but to say that the respondents could

sit idle on the withheld securities of an amount exceeding the

amount owed by the defaulting member, without protecting them

from being exploited by third parties in any manner, would be

akin to permitting a free abuse of this provision.

106. The role of the Exchange is broadly premised on the

principle analogous to fiduciary relationship. Propriety guides

that when one party holds some property on behalf of the other,

even for the fulfilment of any liability, it must treat the property

in a manner in which a prudent person would. It is so because

the property is not directly in dispute between the parties, rather,

what is in dispute is an outstanding liability for the discharge of

which the property is being held as a mere security. Ordinarily,

the sanctity of such security needs to be preserved. An implied

element of trust is involved in any action of withholding, which is

the basic foundation of a fiduciary relationship. In Robert L.

Hodgkinson v. David L. Simms9, the Supreme Court of Canada

referred to Frame v. Smith10 wherein three basic characteristics

of fiduciary relationship were laid down thus:

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

“Relationships in which a fiduciary obligation have been
imposed seem to possess three general characteristics:
(1) The fiduciary has scope for the exercise of some
discretion or power.

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

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

In the present case, it is clear that the manner of dealing with the

withheld securities is not circumscribed under strict parameters.

The Exchange is bestowed with a discretion to choose amongst

the available options and the appellant holds no control over

such choice. To this limited extent, the role of the Exchange as

regards the withheld assets is of a fiduciary character, obligating

it to choose the just course of action out of the available options.

We are conscious of the fact that traditionally speaking, the

relationship of Member­Exchange may not be regarded as a

fiduciary one. But we are not examining the nature of this

9 [1994] 3 SCR 377
10 [1987] 2 SCR 99
relationship as a generalised enquiry. Our concern is limited to

the dynamics of this relationship qua the withheld securities in

light of the regulatory scheme. Notably, Professor Frankel, in

“Fiduciary Law: The Judicial Process and the Duty of Care” 11

highlights the existence of a limited fiduciary relationship thus:

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

Therefore, it is only for the purpose of performance of functions

that a fiduciary character is recognised in this relationship. In

Hospital Products Ltd. v. United States Surgical

Corporation Ltd.12, it was rightly observed that the scope of

fiduciary duties is “moulded according to the nature of the

relationship and facts of the case.” 13 The proposition gets

strengthened by the equitable principle of constructive trust,

which received a reasonably acceptable definition in Paragon

Finance plc v. DB Thackerar & Co.14 thus:

“….. A constructive trust arises by operation of law whenever
the circumstances are such that it would be unconscionable
for the owner of property (usually but not necessarily the legal

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
estate) to assert his own beneficial interest in the property
and deny the beneficial interest of another. …..”

It is thus clear that constructive trust arises by operation of law

in specific factual scenarios and not by any statute or contract.

However, such trust, and rights and obligations under it would

depend strictly upon the prevailing set of facts and governing


107. Though the standalone question of law as regards the

respondents’ duty to act as a prudent person in respect of the

withheld securities stands answered, what remains to be

examined is whether such duty of the respondent is an

unqualified duty so as to make unilateral registration a

mandatory obligation, as claimed. Additionally, could it be said

that the respondent is obliged to deal with the securities in a

particular way despite there being a clear discretion in the

relevant provision?

108. The principles of constructive trust and fiduciary

relationships are equitable principles, and equity never operates

in an absolute manner or in a vacuum. In fact, the very basis of

the law of equity is its flexibility to take care of mutual concerns

of the parties. Equity is about balancing the competing interests

– by preventing the erosion of interests of one party while

ensuring a free exercise of legally enshrined discretionary powers

to the other. No doubt, specific fiduciary duties could definitely

be recognised in the specific facts of the case but the manner of

performance of such duties cannot be dictated in regulatory

matters. Legal recognition of the role of a trustee and fixing

actual obligations to be performed under such role are two

separate matters. The latter is dependent on the nature of

discretion and on the diligence of other party, as we shall see. In

Equity & Trusts15, Alastair Hudson, after noting the existence

of constructive trust in certain matters, notes ­ “what remains is

the extent to which a constructive trustee would be liable”, which

signifies that the exact liability of a constructive trustee is

determinable in the specific facts of the case.

109. The duties of a trustee can be broadly classified into

mandatory duties and discretionary duties. The court is always

circumspect in enforcement of discretionary duties. A perusal of

Regulation 9.12 succinctly reveals that the measure of

registration is not provided as an exclusive one, rather, it is in

addition to other residuary steps that an Exchange is entitled to

15 Equity & Trusts, Alastair Hudson, 2nd Edition
take. Therefore, there is no express statutory or contractual

requirement of mandatory registration in the applicable law. A

clear element of discretion is involved in the manner of dealing. It

is true that such discretion cannot be exercised in a legally

perverse manner, but it is equally true that a discretion cannot

be converted into a mandatory obligation, more so when such

discretion is provided expressly by a statutory provision. In

Ashburner’s Principles of Equity16, the discretionary duties of a

trustee are noted in a succinct manner. It is stated that such

discretion must be exercised “freely”, “intelligently” and in a

“bona fide” manner. More importantly, an exercise of such

discretion 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 did actually get some of the securities

registered in its name. Equitable common law principles cannot

be used to create mandatory legal obligations.

Role of defaulting member

16 Ashburner’s Principles of Equity, Denis Brownie, 2nd Edition.

110. Even if we consider the argument that the Exchange ought

to have registered forthwith upon appellant’s demand, if not suo

motu, such an enquiry cannot be undertaken in isolation. It is

the fundamental principle of an equitable examination that “the

one who seeks equity must do equity”. This brings us to the role

of the defaulting member (appellant) qua the withheld securities.

Registration of securities or any property for that matter is done

in favour of an entity only upon fulfilment of certain allied

conditions, including but not limited to the supply of

consideration. Without such consideration, contract itself

becomes void, let aside entertaining a demand for registration.

Upon withholding, it becomes the duty of the stock broker to

raise a request for the registration of securities and to comply

with the payment shortfall and other requirements. During the

period commencing from 1997 to 2008, the appellant did not

pursue the cause of dealing with the withheld securities in a

proactive manner, seemingly because of two reasons­ first, the

appellant was pursuing multiple legal actions against the

respondents at various forums and second, such a request would

have to be preceded by fulfilment of conditions relating to

settlement and payment. For, the Exchange could not get the
securities registered in the name of any entity until and unless

such entity settles the transaction by making complete payment

for the purchased securities. Clause (3) of Chapter­VI of NSCCL

Byelaws titled “Clearing and Settlement of Deals” expresses the

same view and notes thus:

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

Clause (10) further notes that:

Settlement shall be effected by clearing members giving and
receiving delivery and paying and receiving funds as may be
specified by the relevant authority from time to time in the
Bye Laws and Regulations.”

111. Be it noted that the appellant never offered to make such

payment in lieu of registration. In fact, on one occasion when the

Defaulter’s Committee passed the order justifying the withholding

on 04.12.2014, the respondents offered to release the securities

to the appellant for removal of objections subject to the

submission of a bank deposit to secure the liability. The

directions issued by the Defaulter’s Committee read thus:

“2. Without prejudice to the above, the Committee directs
that the securities which have been withheld as per the list of
securities given in Annexure­2 of this Order may be released
to RSL, on as is where is basis, to (i) enable it to remove the
Objections in respect of securities for which RSL is an
introducing member and (ii) transfer the securities in its
name in respect of securities for which RSL is a receiving
member and return the securities to NSE in demat form,
provided ­

a. RSL furnishes an undertaking that it has no other
claim against NSE or NSCC and that it will return
the securities within a period of one year from the
date of release after duly removing the objections
and transferring in RSL’s name as the case may be.
b. RSL provides a deposit of or a bank guarantee for
Rs.1,00,70,529.82 (i.e. the outstanding dues of RSL
payable to NSCC of Rs.1,07,72,098.17 less
Rs.7,01,568.35 being the value at closing price on
NSE as on December 4, 2014 of securities already
transferred in the name of NSCC – list enclosed as
Annexure ­3) to protect NSE against failure to return
the securities.

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

112. Thus, the Committee did propose to hand over physical

possession of the securities to the appellant for getting them

registered in its name. The appellant refused to comply with the

direction of payment and instead, challenged this decision of the

Defaulter’s Committee by filing M.A. No. 295 of 2015 before the

Tribunal wherein a consent order was passed upon an

undertaking given by the Exchange that it has no objection in

performing its duty as “trustee” in respect of the unregistered

withheld securities and taking appropriate steps by registering

them in its name. Be it noted that even this order was a

conditional one as it specified that such registration shall not

affect the legal rights and liabilities of parties in any manner. In

pursuance of this order on 23.09.2015, the respondents got the

securities transferred in their name and realised them after the

impugned order in 2019.

113. It is thus clear from the state of affairs discussed above that

the respondents were cognizant of their duty towards the

withheld securities pending determination of final claim.

However, no action of registration could have been taken without

complying with other conditions. The role of the defaulting

member was of an enabler and unless the Exchange was placed

in a position to register, it could not have exercised its discretion

to register. It is important to note that permitting the Exchange

to register forthwith as a matter of obligation would also be

counterproductive to the interests of the defaulting member. For,

such a blanket action would have the effect of converting a

limited right of lien into that of absolute ownership over the

withheld assets without giving the defaulter sufficient time to get

his assets released much less before a declaration of being a

defaulter or an order of expulsion. Such can never be the purpose

of withholding.

114. To summarize, registration could only have been done on

fulfilment of the following conditions:

     (i)     request by the defaulting member;
     (ii)    request to be preceded by fulfilment of conditions
             relating to payment;

(iii) request to be accompanied with undertaking that any
such registration in the name of the Exchange would
be subject to final outcome of the case.

115. The appellant has contended that it has suffered loss of

corporate benefits due to non­registration by the respondent. The

same is unacceptable. Firstly, the receiving securities legally

vested in the Exchange as on the date of expulsion to the extent

of liability. The appellant could not have claimed any right

therein to further corporate benefits as regards these securities.

Even before the date of expulsion, the respondents cannot be

held liable for any loss on the withheld securities as the appellant

always had the opportunity of making payment and protecting its

interests. The appellant cannot fail to discharge its obligations for

a period of 23 years and then turn around and claim loss of

benefits in this manner. Acceding to such a claim would be akin

to rewarding a wrong. 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 the fact situation of the

present case.

116. Even otherwise, the respondents’ decision of not realising

the securities or taking any adverse action during the pendency

of multiple proceedings cannot be outrightly termed as an abuse

of discretion. For, the decision of expulsion (and thus, of vesting)

itself became sub­judice along with various other civil and

criminal proceedings. Admittedly, the appellant had gone to the

extent of initiating proceedings for criminal misappropriation

against the Directors of respondents for using security deposits

in regular course of business. This inevitably resulted in

reluctance of the respondents to sell off the securities amidst

pending proceedings. It is settled law that statutory appeal is a

continuation of the original proceedings and once an appeal was

filed, the question of expulsion remained sub­judice unto these



117. We may revert to the manner in which the issue under

consideration has been dealt with by the Tribunal. The Tribunal

misinformed itself by observing that this issue had already stood

answered in the previous judgment of the Tribunal in Appeal No.

84 of 2008. The Tribunal simply entered into an examination of

the provisions relating to withholding whereas the real question

was regarding the manner of dealing with the withheld securities.

118. Having said thus, what remains for our consideration is the

determination and recovery of liabilities for final culmination of

the controversy. The Tribunal determined the final liability of the

appellant to be Rs.2.41 crore in para 10, where it noted:

“10. … It is abundantly clear that the appellant owed Rs.1.07
crore after adjusting for the deposits etc. in October 1997 and
since the said deposit amount of Rs.1.34 crore has been
subsequently returned the unadjusted amount of dues stands
at Rs.2.41 crore.”

119. It is pertinent to note that the amount of Rs.1.34 crore was

required to be returned by the respondents in SLP (Crl.) No.

9642­9643 of 2011, which it had held as an interest free security

deposit. It was meant to be utilised for the purpose of discharging

the monetary obligation of the appellant during the period

between withdrawal and expulsion. The appellants have

advanced an erroneous proposition that the return of this

amount by the respondents signified that there was no liability

owed by the appellant towards them. We must reiterate that the

return of the security deposit was driven by a desire of the

officials of the respondents to avoid the continuation of criminal

proceeding against them resorted to by the appellant. It was

neither a confession that they had misappropriated the said

deposit nor an undertaking that they had no claim over the said

amount for adjustment against the penalties. The effect of the

said return was limited to the quashment of criminal proceedings

involved therein. The order of this Court dated 02.11.2017 is self­

eloquent, as it categorically notes that:


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

120. The matters in issue in the present set of appeals are

distinct from those involved in the stated special leave petition

(criminal). Therefore, the loss caused to the Exchange due to

return of interest free security deposit amount ought to be

reckoned in determining the total liability of the appellant and

the same ought to be adjusted by the respondents appropriately.

121. The quantum of amount due from the appellant to the

respondents, being a question of fact, has been decided by the

Tribunal and we do not wish to interfere therewith. For, no

serious error has been pointed out in any factual determination

made by the Tribunal. Further, the scope of Section­22F is

limited to entertaining an appeal on questions of law, and we

have proceeded accordingly.

122. The Tribunal gave one month’s time for recovery of payment

and return of remaining securities to the appellant. It is on

record that an amount of Rs.1.74 crores has been recovered by

the respondents from the transferred securities, fixed deposits

and corporate benefits so far and an amount equivalent to

Rs.66.81 lakhs (approximately) is remaining.

123. We hereby issue the following directions for full and final

settlement of all claims between the parties:

(i) NSE to evaluate and get the remaining transferrable
securities, if any, transferred in its favour and recover
the remaining amount using the same evaluation
criteria adopted in respect of other withheld securities
of the appellant within 6 weeks.

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


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

(iv) In case recovery is not possible from the remaining
securities, for any reason whatsoever, the respondents
may communicate the same to the appellant forthwith
and the appellant shall then pay the amount so
demanded (including interest, if any), to the
respondents within 6 weeks from the date of receipt of
such communication.

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

124. Accordingly, both appeals are disposed of in the aforesaid

terms and directions with no further order as regards costs.

125. Pending applications, if any, also stand disposed of.


(A.M. Khanwilkar)


(Dinesh Maheshwari)
New Delhi;

November 20, 2020.


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