Tarun Agarwala, Presiding Officer
1. This group of appeals are connected with each other in one way or the other and revolves around an issue with regard to an annulment of a trade. Thus all these appeals are being decided together.
2. We have heard the learned senior counsel for the parties at some length.
3. IL&FS Securities Services Limited (hereinafter referred to as ‘ISSL’) is a clearing member empanelled with NSE Clearing Limited (hereinafter referred to as ‘NCL’). ISSL entered into a ‘Clearing Member–Trading Member Agreement’ dated 14th November, 2017 with Allied Financial Services Private Limited (hereinafter referred to as ‘Allied’) as a result of which, ISSL acted as a clearing member for Allied on the F&O Segment of NCL. Under this agreement Allied was obligated to place the margin with ISSL. In case of nonpayment of margins, ISSL as a clearing member was entitled to close out/liquidate open positions or disable trading facility of the trading member.
4. On 26th and 27th December, 2018, Allied sold NIFTY options contract on the F&O Segment of National Stock Exchange of India Ltd. (referred to hereinafter as ‘NSE’) which was to expire on 28th March, 2019 and 27th June, 2019 on the basis of mutual fund units that were placed as collateral by Allied to ISSL. These NIFTY option contracts were purchased by investors on NSE and Allied received an upfront premium of around Rs.380 crore from ISSL.
5. The NIFTY options contract which has now expired on 27th June, 2019 is the subject matter of the present appeal of ISSL wherein the appellant has prayed for annulment of the trades. ISSL filed an application dated 20th March, 2019 before SEBI praying that it has become a victim of fraud perpetrated by Allied and, therefore, SEBI should protect the interest of the appellant. It was contended that the option contract entered into by Allied were based on fraudulently transferred collaterals which was not in the interest of the securities market and, therefore, the trades made by Allied should be annulled.
6. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) passed an ex-parte interim order dated 27th February, 2019 against Allied and other noticees and rejected the contention of ISSL that it had no locus standi to apply for modification of the ex-parte interim order. SEBI further held in its order of 29th March, 2019 that the appropriate authority for annulment of the trade was the Stock Exchange in terms of SEBI circular dated 16th July, 2016.
7. ISSL being aggrieved by the said order filed Appeal no.138 of 2019 which was disposed of by the Tribunal’s order dated 15th May, 2019 directing ISSL to move an appropriate application under Clause 5 of Chapter VII of the Bye Laws of NCL for annulment of trades. This Tribunal directed that if such an application was filed, the Clearing Corporation would decide the matter at the earliest after hearing the parties.
8. The Clearing Corporation NCL by an order dated 24 th June, 2019 rejected the application of ISSL for annulment of trade on the ground that appropriate orders can only be passed after investigation on all allegations of fraud is completed by SEBI and Economic Offence Wing (hereinafter referred to as ‘EOW’). The Clearing Corporation was of the view that it is not an appropriate case where NCL should start a parallel investigation and exercise its powers under Clause 5 of Chapter VII of the Bye Laws of NCL or pass any interim order.
9. Against the order of the Tribunal dated 15th May, 2019, ISSL filed a Special Leave Petition before the Supreme Court of India which was disposed of by an order dated 26th June, 2019 directing ISSL to file an appropriate appeal/petition before the appropriate forum questioning the veracity and legality of the order dated 24th June, 2019 passed by the Clearing Corporation. Based on the aforesaid direction, ISSL has filed the present appeal.
10. Appeal no.257 of 2019 Keshav Prasad Misra and 43 others have filed the appeal praying for a variety of reliefs, and one of them is, that NIFTY contract which was expiring on 27th June, 2019 should be annulled. The said appellants contended that they are innocent investors and victims of fraud perpetuated by Allied and that Allied have illegally diverted their investments for fraudulent trades. It was contended that the appellants had invested in monies in M/s. Allied Financial Services Private Limited which was transferred illegally by one Awanish Kumar Misra into his own firm Money Misra Financial Services Ltd. which in turn were used in creating assets in pool account or were transferred to other entities by Awanish Kumar Misra. It was contended that the appellants individually sent emails during the period 12th May, 2019 to 17th May, 2019 and requested for a personal hearing but the same was not granted. Instead SEBI issued a confirmatory order dated 17th May, 2019. The complainant had again sent email on 2nd June, 2019 and 3rd June, 2019 requesting for annulment of the alleged trades and also lodged a formal complaint thereafter. Since no action was taken by SEBI nor there was any opportunity of hearing was granted the present appeal was filed praying for annulment of trades and further directed SEBI to pass appropriate orders on their complaints.
11. Navjoy Emporium Private Limited has filed Appeal Lodging No.353 of 2019 questioning the validity of the order dated 20th June, 2019 wherein SEBI modified the exparte interim order dated 27th February, 2019 which was subsequently confirmed on 17th May, 2019. The said appellant contends that they had opened a demat account with Allied and, without their authorization, certain units of mutual funds from their demat account was debited and was credited to another account. The appellant alleged that Awanish Kumar Misra who was the Managing Director of Allied had illegally transferred its mutual fund units and placed as collateral for the NIFTY option trades. The appellant made a formal complaint to SEBI on 31st December, 2019 praying that the units which were transferred illegally to ISSL by Allied should be restored to their demat account. Further, a complaint was made to SEBI on 21st January, 2019 requesting that a personal hearing be granted. Emails dated 30th January, 2019 and 4th February, 2019 was sent seeking return of their securities. Since no action was taken nor any opportunity of hearing was given at the time of passing the exparte interim order by SEBI on 27th February, 2019 nor any opportunity was given to them by SEBI when the exparte interim order was confirmed on 17th May, 2019 nor any opportunity was given to the appellant when SEBI passed an order dated 20th June, 2019 modifying its earlier orders, the appellant has approached this Tribunal praying that they are vitally affected by the order dated 20th June, 2019 and, therefore, the said order should be set aside.
10. Dalmia Cement (Bharat) Limited has filed Appeal Lodging No.358 of 2019. Dalmia cement also alleged that certain shares and units kept in their demat account was illegally transferred by Allied to ISSL. Complaints were made to SEBI as well as to EOW. SEBI did not act on their complaint. On the other hand EOW passed an order directing ISSL not to deal with the securities till further orders.
12. This appellant (Dalmia) contends that SEBI should have protected their interest while passing the exparte order and confirmatory order and should have heard them before modifying the confirmatory order. It was contended that since they are affected parties, the appellants have a right to be heard and since they were not given as appropriate hearing the order of 20th June, 2019 modifying the confirmatory order on the application of ISSL was in violation of the principles of natural justice.
13. One of the counterparties to the option contract, namely CITI Bank has requested that they may be heard. Though no impleadment application was filed, we, permitted the learned senior counsel Shri Dwarkadas to make his submissions.
14. Various submissions were made by the learned senior counsel for ISSL, SEBI and others and we proceed to decide this matter.
15. An objection was raised by the learned Senior Counsel for SEBI namely, that the present appeal filed by ISSL is not maintainable inasmuch as no appeal lies under Section 23L of the Securities Contract (Regulation) Act, 1956 (hereinafter referred to as SCRA Act) against an order passed by the NCL. In this regard, we have heard the learned counsels for the parties at some length.
16. The appeal has been filed under Section 23L of the SCRA Act. For facility, the said provision is extracted hereunder:-
“23L. Appeal to Securities Appellate Tribunal.—
(1) Any person aggrieved, by the order or decision of the recognized stock exchange or the adjudicating officer or any order made by the Securities and Exchange Board of India under section 4B, may prefer an appeal before the Securities Appellate Tribunal and the provisions of sections 22B, 22C, 22D and 22E of this Act, shall apply, as far as may be, to such appeals.
(2) Every appeal under sub-section (1) shall be filed within a period of forty-five days from the date on which a copy of the order or decision is received by the appellant and it shall be in such form and be accompanied by such fee as may be prescribed: Provided that the Securities Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within that period.
(3) On receipt of an appeal under sub-section (1), the Securities Appellate Tribunal may, after giving the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.
(4) The Securities Appellate Tribunal shall send a copy of every order made by it to the parties to the appeal and to the concerned adjudicating officer.
(5) The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal.”
From a perusal of the aforesaid it is clear that, an appeal can be filed against an order or decision of a recognized stock exchange or the Adjudicating Officer or any order made by SEBI.
17. Section 2(J) defines stock exchange as under:-
“(j) “stock exchange” means—
(a) any body of individuals, whether incorporated or not, constituted before corporatisation and demutualisation under sections 4-A and 4-B, or (b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956), whether under a scheme of corporatisation and demutualisation or otherwise,
for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.”
The purpose of a stock exchange is to assist, regulate or control the business of buying, selling or dealing in securities.
18. Section 2(f) defines recognized stock exchange as under:-
“recognised stock exchange” means a stock exchange which is for the time being recognised by the Central Government under section 4.”
19. Section 4 of the Act gives power to the Central Government to recognize a stock exchange. Such recognition is required to be published in the Gazette of India and in the Official Gazette of the State under Section 4(3) of the Act.
20. From the aforesaid it is clear that, any decision made by a stock exchange which is recognized under Section 4 by the Central Government is appealable under Section 23L of the Act.
21. Section 8-A was inserted in the Act by Act 1 of 2005 with effect from 12/10/2004. The said provision is extracted hereunder:-
“8A. Clearing corporation.—
(1) A recognized stock exchange may, with the prior approval of the Securities and Exchange Board of India, transfer the duties and functions of a clearing house to a clearing corporation, being a company incorporated under the Companies Act, 1956 (1 of 1956), for the purpose of—
(a) the periodical settlement of contracts and differences thereunder;
(b) the delivery of, and payment for, securities;
(c) any other matter incidental to, or connected with, such transfer.
(2) Every clearing corporation shall, for the purpose of transfer of the duties and functions of a clearing house to a clearing corporation referred to in sub-section (1), make bye-laws and submit the same to the Securities and Exchange Board of India for its approval.
(3) The Securities and Exchange Board of India may, on being satisfied that it is in the interest of the trade and also in the public interest to transfer the duties and functions of a clearing house to a clearing corporation, grant approval to the bye-laws submitted to it under sub-section (2) and approve the transfer of the duties and functions of a clearing house to a clearing corporation referred to in sub-section (1).
(4) The provisions of sections 4, 5, 6, 7, 8, 9, 10, 11 and 12 shall, as far as may be, apply to a clearing corporation referred to in sub-section (1) as they apply in relation to a recognized stock exchange.”
From the aforesaid it is clear that, some of the duties and functions of a recognized stock exchange as a clearing house namely, the periodical settlement of contracts and differences thereunder, delivery of, and payment for, securities, and any other matter incidental to, or connected with was transferred to a clearing corporation. Sub-Section (4) of Section 8-A provides that the provisions of Sections 4, 5, 6, 7, 8, 9, 10, 11 and 12 of the Act will apply to a clearing corporation as it applies to a recognized stock exchange.
22. Pursuant thereto, the NSE Clearing Limited (NCL) came into existence as a clearing corporation under Section 8-A of the SCRA Act by a notification dated 26th September, 2017. The SEBI renewed the recognition for a period of three years under Section 4 read with Section 8-A of the SCRA Act. As a result of this notification, NCL is a recognized clearing corporation under the SCRA Act.
23. The limited question is, whether the respondent-NSE Clearing Ltd. being a recognized clearing corporation is akin to a recognized stock exchange or not? We find that an order of the recognized stock exchange is appealable under Section 23L of the Act. Some of the duties and functions of a recognized stock exchange has been transferred to a clearing corporation namely, NSE Clearing Ltd. This clearing corporation has been recognized under Section 4 read with Section 8-A(4) which provision is to recognize a stock exchange. Thus if an order of a recognized stock exchange is appealable under Section 23L, the functions and duties of a recognized stock exchange which have been transferred to a clearing corporation would also be appealable under Section 23L. A clearing corporation cannot stand on a better footing or cannot stand outside the provisions of the SCRA Act especially when a superior body, namely, the recognized stock exchange’s orders are appealable under Section 23L.
24. In the light of the aforesaid, we hold that the appeal filed by the ISSL is appealable under Section 23L against a decision of the NCL. The objection raised by SEBI is, thus, rejected.
25. ISSL has questioned the legality and validity of the order of NCL dated 24th June, 2019 whereby their application for annulment of the trade was rejected. NCL was of the opinion that since parallel investigation in relation to fraud is being conducted by SEBI and EOW, the said corporation was not willing to start a parallel investigation. We find that the issue as to whether the trades have to be annulled on account of fraud has not as yet been decided by the clearing corporation on merits.
26. In the appeal of Keshav Prasad Mishra and others, the said appellants have also complained before SEBI for annulling the trades and for return of their securities which have been illegally used by Allied.
27. Similarly a complaint was made by Novjoy to SEBI that their securities have been illegally transferred by Allied to ISSL which needs to be returned. Similar, Dalmia and Novjoy are aggrieved by the modification of the confirmatory order dated 17.5.2019 passed by SEBI. The confirmatory order relates to the prima facie fraudulent activities being found against Allied in relation to the utilization of shares and mutual funds of other entities.
28. In the light of the aforesaid, we find that the NCL under its bye-laws can only hear an application for annulment of the trade by a clearing member, which NCL refused to do so on the application filed by ISSL on the ground that parallel investigation of fraud is being conducted by SEBI and EOW. Further, the appellants Keshav Prasad Mishra and others, Novjoy and Dalmia are not clearing members and thus cannot apply for annulment of a trade / deal under clause 5 of the Byelaws of the clearing corporation.
29. We find that Section 11 and 11B of the SEBI Act gives wide powers to the SEBI (Board) to protect the interest of investors in securities and to promote the development and regulate the securities market. Under Section 12A of the SCRA Act, SEBI (Board) has power to issue directions to any stock exchange, clearing corporation or an agency associated with the securities market. By our earlier Order dated 15/5/2019 in Appeal No.138 of 2019, IL&FS Securities Services Ltd. vs. SEBI and others, we held that SEBI has wide powers to consider the complaint with regard to an annulment of a trade.
30. We had also held in the said order held that even where a person is affected either directly or indirectly, the said person would have a right to apply for modification of the order and if such a person applies for being heard for protection of its interest, SEBI could not deny the opportunity of being heard. In the light of the aforesaid, we find that Novjoy and Dalmia made a specific request to SEBI for being heard because of which they were kept outside the hearing room and were not heard leading to an order being passed by SEBI dated 20.6.2019 modifying the confirmatory order dated 17.5.2019. In our opinion, SEBI violated the principles of natural justice in denying Navjoy and Dalmia right to be heard inspite of specific directions given by this Tribunal in its order of 15/5/2019.
31. We find that SEBI after considering the complaints of Dalmia and Novjoy and others, investigated the matter and passed an ex-parte interim order which was subsequently confirmed and thereafter modified. The assets of Allied have been frozen and Allied have been debarred from accessing the securities market. Such interim arrangement is not sufficient by itself as the appellants before us are making specific claims namely, for annulment of a trade / trades, for return of their securities which have been illegally transferred by Allied to ISSL. Such issues for return of the securities, for annulment of the trades are not being considered by any authority till today and these entity/entities are running around in circle. These questions are required to be addressed at the earliest.
32. On the other hand, counter parties to the Nifty contracts and one such entity being Citi Bank has contended that a valid trade which has been executed in which they have paid a premium upfront to Allied and which is required to be honoured on the expiry of the Nifty Option contract on the F&O segment of NSE on 27/6/2019. It was urged that the delay in the squaring off the contract is not only putting the counter parties to a huge loss, but will also have a cascading effect downstream which the counter parties will have to settle with other parties. In addition to the aforesaid NCL contends that any annulment will deny the protection bought by
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the option buyers and will shake the confidence in the risk management products even though in the instant case, it is a small amount. 33. Considering the aforesaid, we are of the opinion that a fraud, if any, should be crystalized and decided and should not percolate the entire securities market. Whether there has been a fraudulent transfer of mutual funds units by Allied to ISSL is a question which is required to be decided by some authority. Whether fraud has been perpetuated or whether a trade should be cancelled on a preponderance of probability that a fraud has been perpetuated, is again a question which is required to be decided by an authority. It is not appropriate for this Appellate Tribunal to go into the question at this stage. We are of the opinion that such matter is required to be decided by an authority. Since NCL has refused to decide the application for annulment of trade on the ground that parallel investigation is being conducted by SEBI, we dispose of all the aforesaid appeals with the following directions:- (i) All the appellants will file an appropriate application for redressal of their grievances before SEBI by 8th July, 2019 annexing their earlier applications / complaints / emails and praying for specific relief / reliefs. (ii) Counter-parties like Citi Bank and similarly connected entities may appear before SEBI and place their objections, if they so desire. (iii) SEBI will consider all the complaints and applications and provide an opportunity of hearing to the appellants, to all interested parties and take a conscious decision by reasoned and speaking order; (iv) All the parties will appear before SEBI on 10 th July, 2019 at 3 p.m. on which date SEBI will hear and decide the matter, and if for some reason, the hearing is not concluded on that day, SEBI will hear the same on a day to day basis till it is concluded. SEBI would thereafter pass an order on or before 17th July, 2019. (v) Since an interim direction had been granted by the Supreme Court of India by its order dated 26.6.2019, we direct that the Nifty Option Contract on the F&O Segment of NSE which was to expire on 27th June, 2019 will remain in abeyance till 22nd July, 2019.