RUSODAY SECURITIES LTD. v. NATIONAL STOCK EXCHANGE OF INDIA LTD. & ORS.

EXCHANGE OF INDIA LTD. [A. M. KHANWILKAR, J.]

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.

52Copy pinpoint52. 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”. Annexure-4 of the Master Circular titled “Rights and Obligations of Stock Brokers, Sub-Brokers 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: E

“2. The stock broker, sub-broker 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.” F

(emphasis supplied)

53Copy pinpoint53. We now advert to the question of expulsion.

54Copy pinpoint54. 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 G 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 sub-section expressly provides that matters of admission, qualification, exclusion, H

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A suspension, expulsion and re-admission of members must be covered in the Byelaws/Rules. It reads thus: “3. Application for recognition of stock exchanges. (1) xxx xxx xxx B (2) Every application under sub-section (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 –

C (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;

55Copy pinpoint55. In 1992, SEBI issued letter No. SMD-I/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.

56Copy pinpoint56. 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: H

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EXCHANGE OF INDIA LTD. [A. M. KHANWILKAR, J.]

“Failure to pay Charges A (31) Save as otherwise provided in the Byelaws, 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 B 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 C (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.”

57Copy pinpoint57. The same regulatory intent is reflected in the Byelaws as well. Clause (1)(b) of Chapter-V 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, re-admission 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: F “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 G 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 H

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A 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 ...”

58Copy pinpoint58. 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. E

59Copy pinpoint59. 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

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EXCHANGE OF INDIA LTD. [A. M. KHANWILKAR, J.]

actions vary not only in their texture, but also in their resultant effect. A Withdrawal, for instance, does not extinguish the membership. It acts like a halt for indulging in further trading activity.

60Copy pinpoint60. 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 separately. E

61Copy pinpoint61. 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 H

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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 co-terminously with each other, and failure to comply with the latter would automatically put the former in jeopardy. B

62Copy pinpoint62. 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.

63Copy pinpoint63. Schedule-II of the SEBI (Stock Brokers and Sub-Brokers) 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 Member-Exchange relationship.

64Copy pinpoint64. To conclude, we hold that the Tribunal rightly confirmed the order of expulsion and we uphold the same. E CIVIL APPEAL NO. 9571 OF 2019

65Copy pinpoint65. 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 non-return of stated withheld securities.

66Copy pinpoint66. 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 H

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EXCHANGE OF INDIA LTD. [A. M. KHANWILKAR, J.]

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.

67Copy pinpoint67. 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).

68Copy pinpoint68. 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.” F

69Copy pinpoint69. 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 G 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 H

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A 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 ...” B 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: C “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.”

70Copy pinpoint70. 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. G

71Copy pinpoint71. 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 H order to realise any amount over and above the stated liability.

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EXCHANGE OF INDIA LTD. [A. M. KHANWILKAR, J.]

72Copy pinpoint72. 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.

73Copy pinpoint73. 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.

74Copy pinpoint74. 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 E 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. F

75Copy pinpoint75. 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 G 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 constricted. H

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76Copy pinpoint76. 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 B 05.01.2006 and thus, the said rule was applicable to the case of appellant.

77Copy pinpoint77. 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.

78Copy pinpoint78. 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: E (i) Whether the respondents are obliged to forthwith realise the withheld securities and appropriate the sale 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”? F (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 G view to protect the financial interests of the defaulting member and persons claiming through him?

79Copy pinpoint79. Before answering the questions of law on merits, it falls upon us to briefly examine the maintainability of the original appeal before the

7 H for short, “the 1908 Code”

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EXCHANGE OF INDIA LTD. [A. M. KHANWILKAR, J.]

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 afore-quoted relief prayed in the previous appeal whilst questioning the expulsion, was not answered/granted by the C 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.

80Copy pinpoint80. 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.

81Copy pinpoint81. Be that as it may, we forbear from non-suiting 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. H

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A 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: B “8. TERMINATION OF MEMBERSHIP (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.”

82Copy pinpoint82. 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 E comprehensive view of their scope and operation.

83Copy pinpoint83. 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. F 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 G 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 Bye-laws, 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 H

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EXCHANGE OF INDIA LTD. [A. M. KHANWILKAR, J.]

of the Exchange, National Securities Clearing Corporation A Limited, Securities and Exchange Board of India, other trading members, Constituents and registered sub-brokers of the defaulter, approved banks and any other persons as may be approved by the Defaulters’ Committee and other recognised stock exchanges.” (emphasis supplied) B 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. Realisation of security deposits

84Copy pinpoint84. 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 H

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A 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 D 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 E 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

8 H AIR 1971 Cal 18

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EXCHANGE OF INDIA LTD. [A. M. KHANWILKAR, J.]

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” 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.

85Copy pinpoint85. 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 D 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

86Copy pinpoint86. 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:

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A “13. RECEIVING MEMBER “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.”” B 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 objections.

87Copy pinpoint87. During the trading period from 24.09.1997 to 30.09.1997, the appellant defaulted in Settlement No. N1997039 and delivered short of C 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 D account of failure of appellant to complete the aforesaid settlements by making complete payment, the Exchange withheld the pay-outs of securities at various points of time.

88Copy pinpoint88. 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: G “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 H

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the shares alongwith accrued benefits within 21 calendar A 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 B 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)

89Copy pinpoint89. 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, E 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 non-receipt 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.

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90Copy pinpoint90. 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.

91Copy pinpoint91. 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 non-payment. No third-party stake is involved therein.

92Copy pinpoint92. 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 law?

93Copy pinpoint93. The provisions relating to withholding and vesting of securities are provided in two separate documents. Whereas vesting is provided under Chapter-XII of NSE Byelaws titled “Default”, withholding is provided under Chapter 9 of NSCCL Regulations titled “Non-Delivery and Non-Payment”. It falls upon us to harmonise the two sets of F provisions in order to understand the procedure in a holistic manner.

94Copy pinpoint94. Regulation 9.5 provides that when a clearing member fails to pay for securities on pay-in day, the Clearing Corporation is entitled to withhold the securities thus: - “9.5 Securities On Hold Or Selling-Out On Failure To Pay G If a CM clearing member fails to pay on pay-in 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

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such securities in accordance with the Bye Laws and Regulations A relating to closing-out.” The above provision also enables the Corporation to sell-out 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. B 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 Byelaws and Regulations.” C

It is crucial to note that declaration of defaulter upon non-payment is not an express pre-requisite 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: D “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 E securities to make good non-payment 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 F 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.

95Copy pinpoint95. On withholding, the stage of vesting comes in and this stage is important as vesting is a pre-requisite for dealing with the securities in any manner. There can be no action, be it of sale or registration, against G 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”.

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A Thus, unlike money deposits, withheld securities cannot be realised without legal vesting under clause (11).

96Copy pinpoint96. 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.

97Copy pinpoint97. 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 E

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 F 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.” G 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 H

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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.

98Copy pinpoint98. 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 pre-condition for realisation, which, in this case, took place only in 2006. Even on applying rule of prudence, such forthwith realisation would not be appropriate as such action would deprive the defaulting member from an opportunity to correct its mistake by settling liabilities within due course of time without giving up membership.

99Copy pinpoint99. 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”. E 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. F

100Copy pinpoint100. 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: G “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 H

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A 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 B 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 C 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 D 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 E may also be dealt with in such manner and at such times as the Exchange may deem fit.

101Copy pinpoint101. 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” F 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 Closing-Out Contracts With Defaulter CM clearing G member 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.” H

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102Copy pinpoint102. 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 Closing-Out How Effected Closing out shall be effected against the CM clearing member by the Clearing Corporation in any of the following manners: (a) by buying-in or selling-out against the CM clearing member through an auction initiated by the Clearing Corporation C (b) by declaring a closing-out at such prices as may be decided by the relevant authority (c) by buying-in or selling-out against the CM clearing member by placing order in the specified exchange (d) in any other manner as the relevant authority may decide D 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. E

103Copy pinpoint103. 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. F

104Copy pinpoint104. 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 G defaulting member. Any further action relating to such securities would depend upon the fulfilment of these roles, as we shall see. Role of Exchange

105Copy pinpoint105. 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 H

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A 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.

106Copy pinpoint106. 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: G “In Frame v. Smith [1987] 2 SCR 99 at p. 136, Wilson J. defined the characteristics of a fiduciary relationship as follows: “Relationships in which a fiduciary obligation have been imposed seem to possess three general characteristics: 9

[1994] 3 SCR 377

10 H [1987] 2 SCR 99

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(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 Member-Exchange may not be regarded as a fiduciary one. But we are not examining the nature of this 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: E “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 F 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.14thus: G

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 H

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

107Copy pinpoint107. Though the standalone question of law as regards the C 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? D

108Copy pinpoint108. 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.

109Copy pinpoint109. 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 15 H Equity & Trusts, Alastair Hudson, 2 nd Edition

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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 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 Equity 16, 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

110Copy pinpoint110. 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 16 Ashburner’s Principles of Equity, Denis Brownie, 2 nd Edition. H

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A 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 Chapter- VI of NSCCL Byelaws titled “Clearing and Settlement of Deals” expresses the same view and notes thus: B “3.CONDITIONS AND REQUIREMENTS OF CLEARING AND SETTLEMENT 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 C requirements as the relevant authority may prescribe from time to time are complied with.” Clause (10) further notes that: “10. CLEARING AND SETTLEMENT

D 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.”

111Copy pinpoint111. Be it noted that the appellant never offered to make such payment in lieu of registration. In fact, on one occasion when the E 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: F “2. Without prejudice to the above, the Committee directs that the securities which have been withheld as per the list of securities given in Annexure-2 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) G 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 H

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within a period of one year from the date of release A 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 B 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.”

112Copy pinpoint112. 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. F

113Copy pinpoint113. 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 G 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 H

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A 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.

114Copy pinpoint114. To summarize, registration could only have been done on fulfilment of the following conditions: B (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.

115Copy pinpoint115. The appellant has contended that it has suffered loss of corporate benefits due to non-registration 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 E 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.

116Copy pinpoint116. 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 sub-judice 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 sub-judice unto these appeals.

117Copy pinpoint117. We may revert to the manner in which the issue under consideration has been dealt with by the Tribunal. The Tribunal

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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.

118Copy pinpoint118. 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.”

119Copy pinpoint119. 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. 9642-9643 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 F 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. …”

120Copy pinpoint120. The matters in issue in the present set of appeals are distinct G 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. H

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121Copy pinpoint121. 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 Section-22F is limited to entertaining an appeal on questions of law, and we have proceeded accordingly.

122Copy pinpoint122. 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.

123Copy pinpoint123. 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 D 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. E (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 F 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 claims.

124Copy pinpoint124. Accordingly, both appeals are disposed of in the aforesaid terms and directions with no further order as regards costs.

125Copy pinpoint125. Pending applications, if any, also stand disposed of.

Kalpana K. Tripathy Appeals disposed of.