The State of Maharashtra vs 63 Moons Technologies Ltd

The State of Maharashtra vs 63 Moons Technologies Ltd

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले



Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal Nos. 2748-49 of 2022
The State of Maharashtra .…Appellant
Versus
63 Moons Technologies Ltd. …Respondent
And With
Civil Appeal Nos. 2750-51 of 2022
2
J U D G M E N T
Dr Dhananjaya Y Chandrachud, J
Contents
A. Facts............................................................................................................3
B. Submissions.............................................................................................17
C. Analysis.....................................................................................................25
C. 1 Framework of the MPID Act ...................................................................25
C. 2 Framework of NSE ..................................................................................27
C. 3 Definitions of „Deposit‟ and „Financial Establishment‟: Interpretation
of Section 2(c) and 2(d) of the MPID Act ......................................................40
C. 3.1 Settlement Guarantee Fund: Deposit under Section 2(c) of the
MPID Act.......................................................................................................46
C. 3. 2 Receipt of commodities: Deposit under Section 2(c) of the Act .49
C.4 Uncovering the Conspiracy ....................................................................55
C. 4.1 The Grant Thornton Report..............................................................55
C. 4. 2 63 Moons Judgment ........................................................................56
C. 5 Constitutional Validity of the MPID Act.................................................65
C. 6 The High Court‟s Judgment...................................................................71
PART A
3
1 The appeal arises from a judgment dated 22 August 2019 of the Bombay
High Court, by which certain notifications attaching the property of the respondent
under Section 4 of the Maharashtra Protection of Interest of Depositors (in
Financial Establishments) Act 19991
have been quashed. The respondent holds
99.99% of the shareholding of National Spot Exchange Ltd2
. At the core of the
dispute is whether NSEL is a ‗financial establishment‘ within the meaning of
Section 2(d) of the MPID Act.
A. Facts
2 NSEL is a company incorporated under the Companies Act 1956, and is a
wholly owned subsidiary of Financial Technologies (India) Limited, which is now
known as 63 Moons Technologies Limited3
. On 5 June 2007, the Union of India
issued a notification under Section 27 of the Forward Contracts (Regulation) Act
19524
exempting forward contacts of one-day duration for sale and purchase of
commodities traded on NSEL from the application of the provisions of the
enactment. NSEL started operating as an exchange for spot trading in
commodities. NSEL launched contracts for buying and selling of commodities on
its trading platform with different settlement periods, ranging from T+0 to T+36
days. ‗T‘ indicates the trade date, that is the date on which the trade took place
and +0 or +36, indicates the number of business days after the trading day when
the delivery of the commodity and the payment of price is made.
3 NSEL offered ‗paired‘ contracts. Such contracts enabled traders either by
themselves or through their brokers, to simultaneously enter into paired

1
“MPID Act”
2
“NSEL”
3
“FCIL or 63 Moons”
4
“FCRA”
PART A
4
contracts, such as of T+2 and T+25 duration. The seller through his broker puts
the commodities on sale and the buyer through his broker looks to purchase
commodities of specific requirements. NSEL then pairs the buyer and the seller if
there is a match between the requirement of the buyer and the available
commodities with the seller. The buyer and the seller simultaneously enter into
T+2 and T+25 contracts. For example, if ‗A‘ (the buyer) wants to buy one ton of
basmati rice, he would trade on NSEL‘s platform through his broker. The platform
would identify that ‗B‘ (the seller) has an offer to sell the quantified commodity.
NSEL would then match both the contracts. The date of matching of the contracts
is termed as the trade date or ‗T‘. ‗A‘ must then pay the price of the commodity to
NSEL, which checks if ‗B‘ has deposited the stock in a warehouse accredited to
NSEL for delivery within two days. Once NSEL has confirmed that ‗B‘ has
deposited the stock in the warehouse, it transfers the money to ‗B‘.
Simultaneously, the same parties enter into a T+25 contract by which ‗A‘ (who
was the buyer in the T+2 contract) would sell the same quantity of commodity
purchased to ‗B‘ (who was the seller in the T+2 contract). The difference between
the purchasing cost and the selling cost is the profit that the trading member
acquires through the trade. A flow chart indicating a representation of the
transaction is set out below:
PART A
5
T+2
Commodity Seller
 NSEL
 Broker

 T+25
 Investor
Commodity Seller
 NSEL

Money is transferred
from NSEL’s settlement
account to seller’s
settlement account
Deposits commodity in
NSEL accredited
warehouse
Money is transferred
from broker’s
settlement account to
NSEL’s settlement
account
Issues warehouse receipt
and displays it on
exchange terminal
Pay money to brokers Places order on behalf of
investor for purchasing of
commodity
Sells back the same
commodity purchased on
T+2
NSEL pays the commodity
seller
The seller’s broker pays
NSEL for the sale of
commodity
PART A
6
4 A detailed step-wise trading process of the paired contracts is indicated
below:
(i) A trading member of NSEL who wishes to trade in the platform is
required to place a specific quantity of the commodity in a warehouse
accredited to NSEL. The warehouse would then generate a warehouse
receipt;
(ii) The registered trading member or his broker who had placed his
commodity in the warehouse could on the basis of the standard
proforma contracts offered by NSEL place offers for sale of the
commodity on the platform, stipulating the price and quantity offered;
(iii) The buying trading member or his broker would input buy orders of a
particular commodity and quantity on the NSEL trading platform;
(iv) When a sale offer and a buy offer coincide, the exchange would be
matched by NSEL, stipulating the commodity, the price, and the
quantity;
(v) The Exchange would communicate all the trades effected at the end of
the day;
(vi) On the next day, an obligation report recording the pay-in and delivery
obligations would be forwarded to the trading members;
(vii) On the day after (that is, settlement date), NSEL would debit the
trading member‘s designated settlement account for the amount of the
buying member‘s pay in obligations and it would be credited to NSEL‘s
exchange settlement account. NSEL‘s Operations Department would
inform NSEL‘s Delivery Department of the selling member‘s delivery
PART A
7
obligations. Based on the intimation, NSEL‘s Delivery Department
would confirm to the Operations Department if the requisite quantity of
the particular commodity is available according to the Warehouse
receipts. After such confirmation, the Operations Department would
release the purchase price to the selling broker‘s designated bank
account. Simultaneously, a Delivery Allocation Report would be issued
to the buyer‘s broker or the buyer informing him that the commodity
purchased was allotted to him; and
(viii) NSEL would then send the buyer‘s details to the selling trading
Member and the selling trading member would arrange for the nonmember client/seller to generate a VAT paid sale invoice of the
commodity. On the basis of the Delivery Allocation Report and the VAT
Paid Invoice, NSEL would issue a Delivery Note authorizing the buyer
to take delivery from the designated warehouse. If the buyer choses to
not take delivery, he would be put in constructive possession of the
commodity where he would be entitled to take possession at any time.
5 On 27 April 2012, the Department of Consumer Affairs5
issued a show
cause notice to NSEL on why action should not be taken against it for permitting
transactions in violation of the exemption notification. On 12 July 2012, the DCA
directed NSEL to give an undertaking that no contracts shall be launched until
further instructions, and that all existing contracts must be settled on the due
dates. In July 2013, about 13,000 persons who traded on the platform of NSEL
claimed that other trading members had defaulted in the payment of

5
“DCA”
PART A
8
approximately Rs 5,600 crores. NSEL issued a circular on 31 July 2013
suspending its spot exchange operations. It stated that the delivery and
settlement of all pending contracts would be merged and the contracts would be
settled after the expiry of 15 days. NSEL published a statement on 6 August 2013
representing that it had sufficient stocks valued at Rs 6,032 crores in its
warehouses. A new pay-in schedule was announced by NSEL on 14 August
2013 by which the Exchange commenced the pay-in schedule from 16 August
2013 and pay-out schedule from 20 August 2013, in the same manner every
week. It was also represented that the members would be entitled to get simple
interest on their outstanding dues with effect from 16 August 2013 on a reducing
balance at 8% per annum till the end of the settlement calendar. The notification
is extracted below:
―National Spot Exchange Limited
Circular
August 14, 2013
Settlement Schedule
In terms of the provisions of the rules, Bye-Laws and
Business Rules of the Exchange and further to circular
no. NSEL/TRD/2013/065/ dated July 31 2013, the
Members of the Exchange are hereby notified that the
Exchange has finalised the following revised schedule for
settlement of outstanding dues payable to the members.
This schedule has been prepared taking into account the
exigencies emerging from sudden closure of trading
operation, liquidity problem accentuated by withdrawal of
buyers credit limits by the banks from the members, who
are in pay in and the extensive discussion done by the
members who have to complete pay in and members
who have to receive the payments. Considering the
challenges, the revised schedule of settlement has been
prepared to ensure reduction in payment rist and meet
the settlement obligation:
1. The Exchange will commence the Pay-in schedule from
Friday, the 16th August, 2013 and pay-out from Tuesday,
the 20th August, 2013 and thereafter in the same manner
every week.
PART A
9
2. The Exchange shall effect pay out on a pro-rata basis
every week based on the money recovered as per the
settlement calendar attached herewith. These payments
are subject to realization of cheques of the members,
who have to complete pay-in. In case any payment is not
realised, then the Exchange shall take measures as per
its Rules and Bye laws.
3. All funds realized up to Friday every week starting from
August 16, 2013 shall be disbursed on Tuesday of the
subsequent week.
4. The schedule has taken into account all promised or
expected payment from the members, who have given
post-dated cheques or letters of commitment.
5. Members/clients shall be entitled to get interest on their
outstanding dues with effect from 16th August 2013 on
reducing balance method, based on simple interest rate
of 8% per annum till end of settlement calendar. Interest
amount shall be paid at end of the settlement.
6. A detailed settlement Calendar is being enclosed
herewith.
For and on behalf of
National Spot Exchange Ltd.
Santhosh Mansingh
Asst. Vice President‖
6 By a Notification dated 19 September 2014, the Central Government
withdrew the exemption granted on 23 July 2008. The Forward Markets
Commission6
recommended to DCA that steps be taken to ascertain the quantity
and quality of commodities at accredited warehouses, the financial status of
buyers and trading members, and that liability be fixed on the promoters of NSEL,
i.e 63 Moons. On 27 August 2013, FMC directed a forensic audit of NSEL by
Grant Thornton LLP. The Union of India ordered an inspection of accounts of
NSEL and 63 Moons under Section 209A of the Companies Act. The Economic
Offences Wing registered cases against the directors and key management

6
“FMC”
PART A
10
personnel of the NSEL and 63 Moons and against trading members and brokers
of NSEL under the provisions of the Indian Penal Code and the MPID Act.
7 Pankaj Ramnaresh Saraf, a Director of Vostak Far East Securities Prvt.
Ltd., a company involved in the business of investment, trading, and financing
filed a complaint7
on 30 September 2013 against the directors and persons
holding key management posts in NSEL, 25 borrowers/trading members and
some brokers of NSEL for offences under Sections 120B, 409, 465, 468,471,474
and 477A of the Indian Penal Code 1860. The complainant stated that he had
primarily been transacting in T+2 and T+25 contracts. He further stated that since
NSEL suspended trading and deferred settlement of all one-day forward
contracts by fifteen days, he had not received payment of Rs 202 lakhs that was
due to him under various contracts. On 14 August 2013, he was informed by his
broker that NSEL had issued a settlement schedule for the payment of
outstanding dues after seven months. He alleged that the commodities were
traded by providing ‗false‘ warehouse receipts of ‗non - existent commodities‘. It
was also alleged in the complaint that NSEL held the commodities in warehouses
accredited to it as a ‗trustee‘ on behalf of the depositors (buyers) and that the
misappropriation is a criminal breach of trust. In addition to the above, he also
alleged that the Settlement Guarantee Fund8
had been misused by NSEL.
8 The FIR was later transferred to the Economic Offences Wing9
of Mumbai
Police. The case was registered and Sections 3 and 4 of the MPID Act were
added to the FIR. The case was transferred to the Special Court constituted

7
FIR No 216 of 2013
8
“SGF”
9
“EOW”
PART A
11
under the MPID Act.10 NSEL filed a writ petition challenging the invocation of the
MPID Act on the ground that the exchange is not a ‗financial establishment‘ under
the provisions of the Act. By an order dated 1 October 2015, the petition was
dismissed by a Division Bench of the High Court on the following grounds:
(i) The material collected by EOW during the course of the investigation
revealed that NSEL did not carry out its exchange operations according
to the bye-laws. It was prima facie evident that NSEL represented to
the traders that they would be provided security free loans and that
they would receive fixed returns of 14% to 16% pa;
(ii) The record indicates that the transactions were not accompanied by
physical delivery of goods. In many cases, the accounts of NSEL and
the suppliers of the goods did not tally. The record also indicates that
there were multiple accommodation entries due to collusion between
NSEL and the trading members;
(iii) Section 2(d) of the MPID Act defines ‗financial establishment‘ as any
person accepting any deposit under a scheme. Section 2 (c) of the
MPID Act provides an inclusive definition of the term ‗deposit‘. Since
NSEL assured the traders that their investments in paired contracts
would secure them a return of 14 to 16% pa, the receipt of the returns
would prima facie fall within the definition of ‗deposit‘; and
(iv) A charge-sheet and supplementary charge-sheets have been filed.
NSEL has an alternative remedy of applying for discharge before the
trial Court.

10 The case was registered as MPID Case 1 of 2014
PART A
12
9 The State of Maharashtra issued a notification on 21 September 2016
under Section 4 of the MPID Act by which the properties of the respondent were
attached. The relevant extract of the notification is reproduced below:
―No. MPI 2016/C.R.541/B/Pol II:- Whereas complaints
have been received from number of depositors against
M/s La-Fin Financial Services Pvt. Ltd. and M/s LaFinancial Services Pvt. Ltd. (hereinafter referred to as
―the said Financial Establishment‖) complaining that they
had collected the Fund and have defaulted to return the
said deposits made by the depositors , on demand;
And whereas, the State Government is satisfied that the
said Financial Establishment and its Chairman/Directors
are not likely to return the deposits to the depositors and
hence the Government has to protect the interests of the
depositors;
And whereas the properties in the Scheduled appended
hereto are alleged to have been acquired by the said
Financial Establishment and its Chairman/Directors from
and out of the deposits collected by the Financial
Establishment;
Now, therefore, in exercise of the powers conferred by
sub-Section (1) of Section 4, Section 5 and Section 8 of
the Maharashtra Protection of Interest of Deposits (in
Financial Establishment) Act, 1000 (Mah. XVI of 2000)
(hereinafter referred to as ―the said Act‖) the Government
of Maharashtra hereby attaches the properties of the said
financial Establishment and in the name of its
Chairman/Directors as specified in the Schedule.‖
10 The Supreme Court on 26 October 2016 dismissed as withdrawn, the
Special Leave Petition filed against the order of the Bombay High Court. The
appellants filed a Writ Petition before the Bombay High Court challenging the
notification dated 21 September 2016 issued under Section 4 of the MPID Act
attaching the properties of the respondent. The validity of Sections 4 and 5 of the
MPID Act was challenged on the ground that they are violative of Articles 14, 19
PART A
13
and 300-A of the Constitution. The reliefs sought in the writ petition are
extracted below:
―a. The Hon‘ble Court may declare that Sections 4 and 5
of the MPID Act are violative of Articles 14 and 19 of the
Constitution and Article 300-A of the Constitution and
consequently issue a Writ of Mandamus and/or any other
appropriate Writ, Order or Direction restraining the
Respondent Writ, Order or Direction restraining the
Respondent, its servants and/or agents from acting in
pursuance of those provisions;
b. In view of Prayer A above, issue a Writ, Order or
Direction under Article 226 of the Constitution quashing
and setting aside the Impugned Notification dated
21.09.2016 (being Exhibit-S herein) issued by the
Respondent exercising the power under Section 4 of the
MPID Act;
c. In the alternative, issue a Writ, Order or Direction in the
nature of Certiorari or any other appropriate Writ, Order
or Direction under Article 226 of the Constitution
quashing and setting aside the Notification dated
21.09.2016 as being ultra-vires Section 4 and 5 of the
MPID Act.
11 The State of Maharashtra issued further notifications dated 4 April 201811
,
7 April 201812, 11 April 201813, 19 April 201814, 15 May 201815 and 19 October
201816 under Sections 4 and 5 of the MPID Act, attaching the properties of the
respondent to recover the defaulted money. The Writ Petitions were heard
together and disposed of by a Division Bench of the Bombay High Court by a
judgment dated 22 August 2019. The petition was allowed on the following
grounds:

11 Notification No. MPI/1118/C.R-394/Pol-11
12 Notification No. MPI-1118/C.R. 329/Pol-11
13 Notification No. MPI-1118/C.R. 434/Pol 11 read with corrigendum bearing MPI No. 1118/C.R.-434/Pol 11 dated
19 April 2018.
14 Notification No. MPI 1118/C.R. 4999 Pol 11
15 Notification No. MPI-1118/C.R. 597/Pol 11
16 Notification No. MPI 1118/CR 1040/Pol 11
PART A
14
(i) The pay-in amount received from the buyer was only for the purpose of
passing it over to the seller on the same date. This amount would not
fall within the purview of Section 2(c) of the MPID Act in terms of which
a ‗deposit‘ must be the receipt or acceptance of a valuable commodity
which would be ‗repaid‘ by the financial establishment after a specified
period;
(ii) NSEL only performed the role of a facilitator, in a manner similar to the
Bombay Stock Exchange. NSEL did not receive money with the
obligation to return it on maturity. The fact that VAT is collected by the
selling members from the buying members and that TDS is not
deducted by NSEL indicates that NSEL is a mere pass through
platform;
(iii) The contract notes do not disclose that NSEL received any money or
commodity with an assured return. Rather, the difference between the
buy contract and the sell contract is the profit that the member receives.
The profit from the transaction is determined by totalling the two
amounts by taking into consideration the number of days when the
commodity was sold and the pay-out was scheduled. It varies with
different products based on the period when the sell contract (that is the
second contract) is scheduled;
(iv) The entries in the ledger of the traders reflect the delivery obligation
and record the credit/debit pursuant to the trade. The entries of NSEL‘s
settlement bank account show the amount received from a particular
PART A
15
trader. The entries of pay-in and pay-out match with the ledger
accounts of individual traders;
(v) Mr. Pankaj Saraf in his FIR has not stated that he has deposited money
with NSEL. He has stated that trading on the platform was successful
until the cessation of further trades ;
(vi) The transactions had gone wrong since as depicted in the show cause
notice to NSEL, the outstanding positions of trade did not result in
delivery by the end of the day. After 31 July 2013, 24 sellers failed to
honour their part of the agreement by purchasing back the commodities
on T+25 days. This was noted as a violation of the exemption granted.
However, this does not change the fact that NSEL did not receive any
‗deposits‘ within the meaning of Section 2 (c) of the MPID Act since
NSEL did not receive the commodities or money to be retained. NSEL
only received transaction and warehouse charges which cannot be
considered as a ‗deposit‘;
(vii) EOW filed a charge sheet on 4 August 2014 in which it was stated that
the important feature of the exchange is that it guarantees that both the
parties would comply with their contractual obligations and if the trading
member is unable to pay, the Exchange would sell the goods and
recover the money. The charge sheet also notes that NSEL
encouraged the investors to enter into contracts without depositing
commodities in the warehouses. However, the charge sheet makes it
evident that even the EOW was of the opinion that the Exchange was
PART A
16
only acting as a transaction agent. Further by a letter dated 16 August
2013 from FMC, information on defaulters was sought by NSEL;
(viii) Merely because one of the brochures refers to an assured yield of 14 to
16% pa, it cannot be held that a ‗deposit‘ was made;
(ix) In the event that accounts of NSEL and the suppliers do not tally and
delivery of commodities has not been provided, this may constitute an
offence under Sections 465 and 467 of the IPC. NSEL is not absolved
of any of these liabilities;
(x) At the highest, since the members had to pay back the amounts due on
T+25 , they could be construed as a ‗financial establishment‘;
(xi) The warehouse receipts do not establish the nature of the transaction
nor can it be held that the deposit of commodities would fall within the
purview of the definition of ‗deposit‘ since the commodity that was to be
deposited in a warehouse was to be sold by the seller;
(xii) The judgment of the Supreme Court in 63 Moons Technologies v.
Union of India17 does not have any bearing on whether the attachment
of properties initiated under Section 4 of the MPID Act is valid;
(xiii) The forensic report of the 17 defaulter companies reveals that the
defaulters have utilized the funds and have transferred them to their
sister companies;
(xiv) In another case of one of the defaulting trading members that is
pending before the Gujarat High Court, the Deputy Secretary, Home
Department, Government of Maharashtra had referred to the trading

17 (2019) 18 SCC 401
PART B
17
member as a ‗defaulter‘ who had committed offences under Sections
409,465, 467,468, 471 and 474 of the IPC;
(xv) The contention that Section 4 of the MPID Act must be read down in
view of the ‗wide ambit‘ of the provisions which could be misused is left
open since the Supreme Court in KK Bhaskaran v. State and Sonal
Hemant Joshi v. State of Maharashtra has upheld the constitutional
validity of the Depositors Acts in Tamil Nadu and Pondicherry,
specifically noting that the decision would also apply to the MPID Act
since the provisions are pari materia;
(xvi) By an interim order on 24 October 2018, the impugned notifications
attaching the properties were stayed on the ground that the attachment
was in excess of the defaulted amount. It was noted in the interim order
that the defaulted amount is Rs. 4822.53 Crores whereas the
authorities have attached properties worth Rs. 8547 Crores, including
Rs. 2200 Crores from NSEL. This order was challenged before the
Supreme Court and it has refused to interfere; and
(xvii) The audit report submitted US Gandhi and Co. has traced trade
obligations of the trading members who are defaulters. NSEL has also
instituted recovery suits against the defaulters.
B. Submissions
12 Mr. Jayant Mehta, Senior Counsel appearing for the appellant submitted:
(i) The definition of ‗deposit‘ in Section 2(c) of the MPID Act is broad and
inclusive. The provision must be interpreted widely keeping in view the
statement of objects and reasons for the enactment of the law;
PART B
18
(ii) NSEL received money from the seller and returned it in kind (through
commodities). NSEL received commodities from the seller and returned
an equivalent amount after a specified period in cash. Therefore, NSEL
accepted deposits from both the seller and the buyer;
(iii) Through a paired contract, the buying member would buy a purchasing
contract and simultaneously sell a sale contract paired by NSEL. The
sale price was pre-designated by NSEL to offer an annualised return of
14-16% to the buying member;
(iv) NSEL is both the bailee of cash (at the buyer‘s end) and of valuable
commodities (at the seller‘s end);
(v) The writ petition filed by the respondent before the High Court was not
maintainable since there was an alternative remedy of raising an
objection against the attachment of property before the Designated
Court under Section 7 of the MPID Act. Further, any person who is
aggrieved by the order of the Designated Court under Section 10 can
appeal to the High Court within 60 days from the date of the order in
terms of Section 11 of the MPID Act; and
(vi) The settlement cycle broke because:
(a) NSEL, contrary to its bye-laws and rules, did not warehouse
the commodities. The buying member did not have knowledge
of whether the commodities were warehoused; and
(b) The buying member was lured into a paired contract on the
assurance that the commodity in the warehouse would
constitute a security and NSEL would be the counter-guarantor.
PART B
19
However, NSEL colluded with the selling members and
facilitated trades without ensuring that the commodities were
deposited in the warehouses.
13 Mr. Vikramjit Banerjee, ASG appearing for the State of Maharashtra made
the following submissions:
(i) NSEL is a financial establishment under Section 2(d) of the MPID
Act since it has accepted deposits as defined under Section 2(c).
NSEL has been trading in different types of commodities through
‗farmer‘ contracts, paired contracts, e-series contracts, among
others. NSEL guaranteed assured returns to investors;
(ii) The provision of warehouse receipts along with the assurance of
returns indicates that NSEL was accepting deposits;
(iii) This Court in New Horizon Sugar Mills Ltd. v. Government of
Pondicherry18 has held that the state legislature is competent to
legislate upon financial establishments with an object to protect
investors. The Court also held that the expression ‗financial
establishment‘ includes a natural and a juristic person such as a
company incorporated under the Companies Act. This Court has
held in KK Bhaskaran v. State19
, State v. KS Palanichamy,
20 and
PGF v. Union of India21 that the object of a law regulating financial
establishments is to protect the investors. Therefore, the provisions

18 (2012) 10 SCC 575
19 (2011) 3 SCC 793
20 (2017) 16 SCC 384
21 (2015) 13 SCC 50
PART B
20
of the statute must be interpreted keeping this salient purpose in
mind;
(iv) This Court in 63 Moons Technologies (supra) held that NSEL
carried out trade in paired contracts in commodities and this created
financial transactions distinct from sale and purchase transactions;
and
(v) The respondent has an alternate statutory remedy available to it
under Section 10 of the MPID Act.
14 Dr Abhishek Manu Singhvi, Senior Counsel appearing for the respondent
submitted that:
(i) The commodity sellers received money from the buyers on T+2 with
an obligation to repay the money on T+25. NSEL obtained decrees
against the defaulters. Therefore, at the highest, the appellants can
only argue that the defaulting trade members (not NSEL) are
‗financial establishments‘;
(ii) The State has characterised the member defaulters of the exchange
as ‗defaulter companies‘ and as ‗financial establishment‘ in
notifications issued by the Home Department on 31 March 2017 and
24 March 2018 which indicates that NSEL is not a defaulter;
(iii) According to the forensic report submitted by the EOW, the full
money trail has been traced to the defaulting members. NSEL did
not receive any money as ‗deposit‘;
(iv) The State of Maharashtra in a case which is pending before the
Gujarat High Court relating to one of the members (buyers)
PART B
21
submitted on affidavit that the defaulting members have defrauded
the investors;
(v) Even if the impugned judgment is upheld, NSEL will not be absolved
of its criminal liability under the IPC but no criminal liability arises
under the MPID Act. . NSEL and 63 Moons are being prosecuted in
various other criminal proceedings. They will face civil suits as well;
(vi) As against the current outstanding claim of Rs. 4,676 Crores,
properties in excess of Rs. 6000 Crores are attached;
(vii) NSEL is only obligated to recover the money from the defaulters. It
has secured decrees/arbitral awards to the tune of Rs. 3,397 Crores
from the members. The Bombay High Court has accepted the
determination of liability of Rs. 136.98 Crores against defaulters by
the Committee appointed by it. The Committee has crystallised a
further liability of Rs. 760 Crores from the defaulters which is
pending acceptance by the Bombay High Court;
(viii) NSEL has filed proceedings for execution of the decrees and
awards against the defaulters across five States. Since the process
is taking time, NSEL instituted a petition22 before this Court under
Article 32 seeking a consolidation of all execution proceedings;
(ix) NSEL did not receive any ‗deposit‘, as defined under Section 2(c) of
the MPID Act since:
(a) The impugned notifications by which the property of the
respondent was attached under Section 4 of the MPID Act

22 WP (C) No. 995 of 2019
PART B
22
proceed only on the basis that NSEL accepted money which it
failed to return and there is no reference to a deposit founded on
the acceptance of commodities;
(b) The Government cannot improve on the reasons by a
subsequent affidavit (Relied on Mohinder Singh Gill v. CEC23);
and
(c) According to the definition of ‗deposit‘ under Section 2(c) of the
MPID Act, only the deposit of ‗valuable‘ commodity is covered. In
common parlance, valuable commodities would be restricted to
gold, silver, or other precious metals. NSEL only traded in
agricultural commodities and steel. Agricultural commodities are
not covered by the definition.
(x) The traders who participated on NSEL‘s platform are corporate
traders. The statement of objects and reasons of the MPID Act
states that the Act is for the protection of ‗small‘ depositors;
(xi) The proceeding under the MPID Act would short-circuit the trials in
the pending civil suits against both NSEL and 63 Moons. 63 Moons
is a public listed company with more than 50,000 shareholders, 800
employees and 2 million users. If the property of 63 Moons is
attached, the interest of stakeholders will be prejudiced; and
(xii) NSEL did not have control over any monies received from the
traders. NSEL is a pass through platform, where the money was
sent to the counter party brokers on the same day.

23 (1978) 1 SCC 405
PART B
23
15 Mr. Mukul Rohatgi, Senior Counsel, appearing for the respondent made
the following submissions:
(i) NSEL runs a commodity exchange, similar to a stock exchange.
NSEL is only a transacting medium and neither collects ‗deposits‘
nor does it assure returns;
(ii) NSEL receives a commission of Rs. 100 per one lakh of the trade
value (0.1%) from the traders;
(iii) In Bhaskaran, (supra) this Court held that the Tamil Nadu
Protection of Interests of Depositors (in Financial Establishments)
Act 199724 is constitutionally valid. In paragraph 15 of the judgment,
the court observed that though the Tamil Nadu Act and MPID have
minor differences, the view taken in the judgment would equally
apply to the validity of the MPID Act. This Court rejected the
challenge on the ground of Articles 14, 19 and 21 without examining
the provisions of the statute. Therefore, the Court in the present
case is not precluded from examining the constitutional validity of
the provisions of the MPID Act;
(iv) Section 4 of the MPID Act is arbitrary and constitutionally invalid and
it suffers from over-breadth since:
(a) Sub-section (1) of Section 4 mandates the attachment of
property of the ‗promoter, director, partner, manager or member
of the said Financial Establishment.‘;

24 ―Tamil Nadu Act”
PART B
24
(b) Sub-section (2) of Section 4 divests the title of the attached
properties without due process of law; and
(c) Section 7 states that the Designated Court shall issue a notice to
the financial establishment or any other person whose property is
attached. An objection shall be raised by all persons who are
likely to have a claim. The objection shall be decided by a
summary procedure under Order 37 of CPC 1908. The
divestment of title of a property by a summary procedure is
arbitrary.
(v) Though the transaction by NSEL in its platform seems to be an
exchange of commodities on paper, it was an agreement between a
lender and borrower. A borrower who has defaulted in paying the loan
can be held liable to repay it;
(vi) The forensic audit traces back the money trail to the borrowingtraders and not to NSEL;
(vii) Five of the six attachment notifications were ―omnibus notifications‖
issued by an incompetent authority; and
(viii) NSEL did not make a blanket assurance of 16% returns. The
representations only meant that investors making ‗wise investments‘
would get an annualised return of 16%.
PART C
25
C. Analysis
C. 1 Framework of the MPID Act
16 The MPID Act was enacted by the legislature in Maharashtra and received
the assent of the President on 21 January 2000. The Statement of Objects and
Reasons accompanying the introduction of the Bill states that the statute is
enacted to protect the public from the increasing menace of financial
establishments grabbing money from the public in the form of deposits:
―There is a mushroom growth of Financial Establishments
in the State of Maharashtra in the recent past. The sole
object of these Establishments is of grabbing money
received as deposits from public, mostly middle class and
poor on the promises of unprecedented high attractive
interest rates of interest or rewards and without any
obligation to refund the deposit to the investors on
maturity or without any provision for ensuring rendering of
the services in kind in return, as assured. Many of these
Financial Establishments have defaulted to return the
deposits to public. As such deposits run into crores of
rupees, it has resulted in great public resentment and
uproar, creating law and order problem in the State of
Maharashtra, especially in the city like Mumbai which is
treated as the financial capital of India. It is, therefore,
expedient to a make a suitable legislation in the public
interest to curb the unscrupulous activities of such
Financial Establishments in the State of Maharashtra.‖
17 Section 3 of the MPID Act envisages punishment upon conviction of every
person including a promotor, partner, director, manager or employee responsible
for the management of or the conduct of the business or affairs of the financial
establishment which has fraudulently defaulted in the repayment of deposits on
maturity. Section 3 is in the following terms:
―Any Financial Establishment, which fraudulently defaults
any repayment of deposit on maturity along with any
benefit in the form of interest, bonus, profit or in any other
from as promised or fraudulently fails to render service as
assured against the deposit, every person including the
PART C
26
promoter, partner, director, manager or any other person
or an employee responsible for the management of or
conducting of the business or affairs of such Financial
Establishment shall, on conviction, be punished with
imprisonment for a term which may extend to six years
and with fine which may extend to one lac of rupees and
such Financial Establishment also shall be liable for a fine
which may extend to six years and with fine which may
extend to one lac of rupees and such Financial
Establishment also shall be liable for a fine which may
extend to one lac of rupees.
Explanation- For the purpose of this section, a Financial
Establishment, which commits default in repayment of
such deposit with such benefits in the form of interest,
bonus, profit or in any other form as promised or fails to
render any specified service promised against such
deposit with an intention of causing wrongful gain to one
person or wrongful loss to another person or commits
such default due to its inability arising out of impracticable
or commercially not viable promises made while accepting
such deposit or arising out of deployment of money or
assets acquired out of the deposits in such a manner as it
involves inherent risk in recovering the same when
needed shall, be deemed to have committed a default or
failed to render the specific service, fraudulently.‖
Section 4 contemplates the levy of attachment on properties of a financial
establishment on default of return of payment. Section 4 provides that if on a
complaint received from the depositors or otherwise, the Government is satisfied
that any financial establishment has failed to return the deposit on maturity or
demand, or to pay interest or an assured benefit, or has failed to provide a
service that was assured against the deposit, or if the Government has reason to
believe that any financial establishment is acting in a manner detrimental to the
interest of the depositors with the intention to defraud them, it may attach the
money or property acquired by the financial establishment out of the deposit. The
provision states that if such money or property is not available to be attached, the
PART C
27
property of the financial establishment or the promoter, director, partner, manager
or member may be attached.
18 Section 5 provides for the appointment of a Competent Authority while
Section 6 contains a provision for a Designated Court. Section 7 enunciates the
powers of the Designated Court regarding attachment. Under Section 7, upon
receipt of an application under Section 5, the Designated Court shall issue a
show cause notice to the financial establishment or any person whose property is
attached on why the order of attachment should not be made. A notice shall also
be issued to all persons who are likely to have an interest in the property, calling
them to submit objections to the attachment of the property on the ground that
they have an interest in the property or a portion of it. If no cause is shown, then
the attachment shall be made absolute and directions can be issued for the
realisation and equitable distribution of assets. If cause is shown, the Designated
Court shall investigate into it by following a summary procedure as contemplated
under Order 37 of the Civil Procedure Code 1908. An appeal against an order of
the Designated Court is envisaged by the provisions of Section 11.
19 Since NSEL did not have sufficient money or property for attachment
under Section 4 on default of payment of the outstanding amounts, the State of
Maharashtra attached the properties of the respondent which owns 99.9% of the
shares of NSEL.
C. 2 Framework of NSE
20 It is necessary to refer to the bye-laws of NSEL to ascertain the structure
of NSEL‘s operation and functioning. Bye-law 2.17 defines ―certified warehouse
receipt‖ in the following terms:
PART C
28
―Certified Warehouse receipt means a receipt issued
under the authority of the Exchange or any agency
approved by the exchange as a certified warehouse,
evidencing proof of ownership of a standard quantity of
commodities of a stated grade and quality by the
beneficial owner or holder of the certified warehouse
receipt. Certified warehouse receipt may either be in
physical form or in dematerialised/electronic form as may
be permitted by law.‖
The expression ‗certified warehouse‘ is defined in Bye-law 2.18 as a ―warehouse
approved and designated by the Exchange for making deliveries to and taking
deliveries for fulfilling contractual obligations resulting from transaction in
commodities.‖ Bye-law 2.51 defines ‗Margin‘ as follows:
―Margin means a deposit or payment of cash/other
specified assets/documents to establish or maintain
a position in a commodity and include initial margin,
special margin, ordinary margin, delivery period margin,
additional margin and variation margin or any other type
of margin as may be determined by the Exchange from
time to time.‖
 (emphasis supplied)
21 The expression ‗warehouse receipt‘ is defined in Bye-law 2.96 to mean a
document evidencing that a commodity is being held in the approved warehouse.
Bye-law 3.7 provides for limitation of liability:
―The Exchange shall not be liable for any activities of its
members or of any other person, authorised or
unauthorised, acting in the name of any member, and
any act of commission or omission by any one of them,
either singly or jointly, at any time shall not be in any way
construed to be an act of commission or omission by any
one of them, as an agent of the Exchange. Save as
otherwise specifically provided in these Bye-Laws and in
the Business Rules and Regulations of the Exchange, the
Exchange shall not incur or shall not be deemed to have
incurred any liability and accordingly, no claim or
recourse shall lie against the Exchange, any member of
the Board of Directors/or committee duly appointed by it
or any other authorised person acting for an on behalf of
the Exchange, in respect of or in relation to any
transaction entered into through the exchange made by
PART C
29
its members and any other matters connected therewith o
related thereto, which are undertaken for promoting,
facilitating, assisting, regulating, or otherwise managing
the affairs of the Exchange to achieve its objects as
defined in the Memorandum and Articles of Association
of the Exchange.‖
22 Bye-law 4.20(a) states that all outstanding transactions in commodities
shall be compulsorily delivered at one or more delivery points or in warehouses
accredited to the Exchange. Clause (b) of the bye-law states that if the
outstanding transactions have not been settled by giving or receiving deliveries,
then it shall be auctioned by buying-in or selling-out as per the Business Rules of
the Exchange:
(a) All outstanding transactions in commodities shall in
general be for compulsory delivery at any one or
more delivery points and/or warehouses approved,
certified and designated by the Exchange.
(b) All outstanding positions not settled by giving or
receiving deliveries shall be auctioned by way of
buying-in or selling-out as per the Business Rules of
the Exchange, together with a penalty as prescribed
by a Managing Director or such committee for those
failing to give or receive delivery.
Bye-Law 7.10.2 states that the Exchange shall be responsible for its
commitments to each clearing member unless the cause for default was under
improper trades not covered by the Settlement Guarantee Fund:
―The Exchange shall be responsible for its commitments
to each clearing member whether the remaining clearing
members with whom it has dealings have defaulted
except under circumstances where improper trades not
covered under the Settlement Guarantee Fund (SGF) are
the cause for default…‖
PART C
30
Bye-law 7.11 states that the Clearing House of the Exchange shall, among other
things, have the responsibility of receiving margin payments, certification of
warehouse receipts, and transmission of documents. Bye-law 7.11 reads as
follows:
―The Clearing House of the Exchange shall, in the
manner specified by the Relevant Committee or the
relevant authority, have the responsibility of receiving
and maintaining margin payments, monitoring open
positions and margins, and transmission of
documents, payments and certified warehouse
receipts amongst the trading-cum- clearing members
and institutional clearing members of the Exchange.‖
 (emphasis supplied)
Bye-law 9 provides for clearing and settlement. Bye-laws 9.5, 9.6 and 9.7 provide
as follows:
―9.5 An order to buy or sell will become a matched
transaction only when it is matched in the Trading
system and the Clearing House does not find the order to
be invalid on any other consideration and further after
verifying that the following are in agreement and/or in
order:
( i) Commodity,
(ii) price indices,
(iii) Quantity,
(iv) Transaction quote,
 (emphasis supplied)
9.6 Once a trade is matched and marked to market by the
Clearing House, the Exchange shall be substituted as
counter party for all net financial liabilities of the
clearing members in specified commodities in which
the Exchange has decided to accept the responsibility
of guaranteeing the financial obligations.
 (emphasis supplied)
9.7 All outstanding transactions shall be binding upon the
original contracting parties, that is, the members of the
Exchange until issue of delivery notice or delivery order or
payment for delivery, as the case may be.‖
PART C
31
23 Bye-law 10 contains provisions with regard to delivery:
―10.1 For the fulfilment of outstanding position, commodity
shall be tendered by Delivery Orders through the
respective Clearing Members to the Clearing House in
such manner as may be prescribed in the Business Rules
or Regulations.
10.2 The Exchange shall prescribe tender days and
delivery period for each commodity during which sellers
having outstanding sale position must issue Delivery
Orders through their respective Clearing Members to the
Clearing House.
10.3 The Clearing House shall allocate the delivery orders
received by it amongst one or more buyers having
outstanding long open positions in a manner as
considered appropriate by the Relevant Authority.
10.4 The Relevant Authority may specify in advance
before commencement of trading in a commodity various
grades of a commodity that may be tendered and the
discounts and premiums for such grades.
10.5 All positions outstanding at the end ·of the day shall
result into compulsory delivery obligation at the closing
rate of the date of transaction as fixed by the Relevant
Authority. The differences arising out of the actual
transaction price and closing price shall be received from
and disbursed to amongst the members on the next day
of trading, pending actual delivery. The Relevant Authority
may prescribe penalty on sellers with outstanding
positions who fail to issue delivery orders and the
Exchange may conduct auction to ensure delivery to the
buyers who hold outstanding buy positions and intended
to lift delivery and could not receive Delivery Orders
against such positions due to failure on the part of the
seller. In case of non availability of commodities during
the auction process, close-out process as defined in the
business rule shall be applicable. The Relevant Authority
may prescribe penalty on buyers with outstanding
positions who fail to pay against his purchase obligation
and the Exchange may conduct sale out auction to ensure
that the sellers gets the price for the commodities
delivered against their sale obligation and could not
receive payment due to failure on the part of the buyers.
In case of non availability of suitable buyers during the
auction process, close-out process as defined in the
business rule shall be applicable. Failure to pay the dues
and penalties relating to such closing out within the
stipulated period shall cause the member to be declared
as defaulter and render him liable for disciplinary action.‖
PART C
32
24 Bye-law 10.7 envisages that a seller issuing the delivery order shall
receive from the Clearing House the full price of the commodity delivered as per
the delivery order rate, subject to additions or deductions on account of premium
or discounts prescribed under the bye-laws. Under bye-law 10.8, a buyer has to
pay to the Clearing House, the value of delivery allocated on his account by the
Exchange within the time specified. However, the money will be passed by the
Clearing House to the seller only on the completion of the delivery process to the
satisfaction of the Exchange. The bye-law reads as follows:
―10.8 A buyer shall pay to the Clearing House the value
of delivery allocated on his account by the Exchange
within such time as may be specified, by the Exchange.
After getting full price of delivery from the buyer as per
delivery order allocated to him, the Exchange will
endorse the delivery order to him. Thereafter, till
completion of the delivery process, the money will be
retained by the Clearing House and will be passed on
to the seller only on completion of the delivery
process to the satisfaction of the Exchange. The
Clearing House will pass on the proceeds to the
seller after making adjustments relating to quality,
quantity and freight factors, as the case may be. The
balance amount, if any, remaining after such
adjustments, will be passed on to or recovered from the
buyer by the Clearing House.‖
 (emphasis supplied)
Bye-law 10.11 provides that at the time of issuing the delivery order, the seller of
the commodity must satisfy the clearing member that he owns and holds in his
possession or his agent‘s possession adequate stocks of the required quantity
and quality of the commodity. Bye-law 10.12 prescribes that:
―A seller member is entitled to offer delivery only at
the delivery centers specified by the Exchange in
advance for the respective commodity. Delivery can be
tendered at such specified centers strictly as per the
delivery procedure specified by the Exchange. Before
tendering delivery, the seller is also required to obtain a
certificate from a surveyor empanelled by the Exchange
PART C
33
and such certificate shall be accompanied with the
delivery order being tendered by him to the Clearing
House. The surveyor's certificate shall clearly specify the
quality of the goods tendered and shall also confirm that
such quality is tenderable as per the contract specification
of the Exchange. In case of non-compliance of any of
these conditions, the delivery order is rejected ab
initio.”
 (emphasis supplied)
25 Thus, under the above bye-law, the selling member is entitled to offer
delivery only at the delivery centre which is specified in the Exchange strictly in
accordance with the delivery procedure provided before tendering delivery. The
seller has to obtain a surveyor‘s certificate which is to be accompanied with the
delivery order being tendered by him to the Clearing House. Bye-laws 10.14,
10.15 and 10.16 contain the following stipulations:
―10.14 Members of the Exchange and the clients/
constituents dealing through them shall strictly abide by
the delivery procedure, methods of sampling, survey,
transportation, storage, packing, weighing and final
settlement procedures, as may be specified by the
Relevant Authority from time to time. Any violation of such
method will be dealt with by the Relevant Authority in the
manner, as may be specified from time to time.
10.15 A seller of commodity shall deliver the quantity as
per his net sale position in the commodity during the
period specified ·in the Rules, Business Rules and
Regulations of the Exchange and notices and orders
issued thereunder from time to time for the specified
commodity, which should confirm to the quality specified
by the Exchange in the contract specification. In case of
any failure to do so, such net sale position shall be closed
out by buying in auction and the seller shall be required to
pay the difference, as determined by the Clearing House
and penalty in addition thereto.
10.16 A buyer shall be required to lift delivery from the
specified warehouse within the period prescribed by the
Relevant Authority, as per the delivery order assigned to
him. In case of his failure to do so, he shall be required to
pay the warehouse charges, insurance charges and other
expenses relating to storage for the incremental period
and also a penalty in addition thereto.‖
PART C
34
26 Bye-law 12 contains provisions for a Settlement Guarantee Fund. The
Settlement Guarantee Fund is constituted by deposits made by the members of
the Exchange and is utilised for paying in the event of a default in payments by
the trading members, paying insurance covers and covering the losses of the
Exchange, among other uses. Bye-law 12.1.1 is in the following terms:
―12.1 The Exchange to maintain Settlement Guarantee
Fund
12.1.1 The Exchange shall maintain Settlement
Guarantee Fund in respect of different commodity
segments of the Exchange for such purposes, as may be
prescribed by the Relevant Authority from time to time.‖
27 Bye-Law 12.1.2 states that the relevant authority may prescribe from time
to time, the norms and conditions governing Settlement Guarantee which may
among other things specify the amount of deposit or contribution to be made by
each trading member to the Settlement Guarantee Fund. The bye-law also states
that rules are to be made on contributions, conditions of repayment and
withdrawal of contribution from the fund among other stipulations. Bye law 12.1.3
states that the minimum amount in the fund before starting the trading must be
Rs 1 Crore, which can be suitably increased. Bye Law 12.2 stipulates the
contribution and deposit with the Settlement Guarantee Fund:
―12.2 Contribution to and Deposits with Settlement
Guarantee Fund
12.2.1 Each member shall be required to contribute to
and provide a minimum security deposit, as may be
determined by the Relevant Authority from time to time,
to the relevant Settlement Guarantee Fund. The
Settlement Guarantee Fund shall be held by the
Exchange. The money in the Settlement Guarantee Fund
shall be applied in the manner, as may be provided in
these Bye-laws, Rules, Business Rules and Regulations
of the Exchange and notices and orders issued
thereunder from time to time.
PART C
35
12.2.2 The Relevant Authority may specify the amount of
additional contribution or deposit to be made by each
member and/or category of clearing members, which
may, inter alia, include the minimum amount to be
provided by each clearing member.
12.2.3 The Exchange shall, as a result of multi-lateral
netting followed by it in respect of settlement of
transactions, guarantee financial settlement of such
transactions to the extent it has acted as a legal counter
party, as may be provided in the relevant Bye-laws from
time to time.
12.2.4. The total amount of security deposit and
additional deposit, maintained by a clearing member with
the Clearing House of the exchange, in any form as
specified herein, shall form part of the Settlement
Guarantee Fund.
12.2.5 The amount deposited by a clearing member
towards the security deposit shall be refundable, subject
to such terms and conditions as may be specified by the
Relevant Authority from time to time. Any amount
deposited or paid by the clearing member may be
refunded provided further that such amount is in
surplus and there is no actual/crytallized or
contingent liability or a claim from any client or
clearing bank to be discharged by the clearing
member.
 (emphasis supplied)
28 Bye-law 12.3 stipulates that a member may provide a deposit in the form of
cash, fixed deposit receipts, bank guarantees or in such other form.
12.3 Form of Contribution or Deposit
The Relevant Authority may, in its discretion, permit a
member to contribute to or provide the deposit to be
maintained with the Settlement Guarantee Fund, in the
form of either cash, fixed deposit receipts, bank
Guarantees or in such other form or method and subject
to such terms and conditions, as may be specified by the
relevant Authority from time to time.
PART C
36
Bye-law 12.4 states that the deposit may be replaced by fresh deposits. Bye-law
12.5 states that the Settlement Guarantee Fund may be invested in securities or
other avenues of investment:
12.4 Replacement of Deposit
By giving a suitable notice to the Exchange and subject
to such conditions, as may be specified by the Relevant
Authority from time to time, a member may withdraw fixed
deposit receipts or bank Guarantees given to the
Exchange, representing the member‘s contribution or
deposit towards the Settlement Guarantee Fund,
provided that the member has, simultaneously with such
withdrawal, deposited cash, fixed deposit receipts, or
bank Guarantees with the Clearing House or the
Exchange or made contribution through such other mode,
as may be approved by the Clearing House or the
Exchange from time to time, to meet his required
contribution or deposit, except as provided in these ByeLaws.
12.5 Investment of Settlement Guarantee Fund
Funds in the Settlement Guarantee Fund may be
invested in such approved securities and/or other
avenues of investments, as may be provided for by
the Board in the relevant Business Rules and
Regulations in force from time to time.
 (emphasis supplied)
Bye-law 12.6 states that the Settlement Guarantee Fund may be used for the
purpose of (i) maintenance of the fund; (ii) using the fund temporarily to fulfil the
shortfalls and deficiencies arising from clearing and settlement obligations; (iii)
payment of insurance cover; (iv) covering the loss arising from clearing and
settlement obligations; and (v) repaying to the members, the balance amount
available after utilization.
―12.6 Administration and Utilization of Settlement
Guarantee Fund
12.6.1 The Settlement Guarantee Fund may be utilised
for such purposes as may be provided in these Bye-Laws
and Regulations and subject to such conditions as the
PART C
37
relevant Authority may prescribe from time to time, which
may include
a. defraying the expenses of creation and maintenance of
Settlement Guarantee Fund;
b. temporary application of Settlement Guarantee Fund to
meet shortfalls and deficiencies arising out of the clearing
and settlement obligations of clearing members in
respect of such transactions, as may be provided in these
Bye-Laws, Rules, Business Rules and Regulations of the
Exchange in force from time to time;
c. payment of premium on insurance cover(s) which the
Relevant Authority may take from time to time, and/or for
creating a Default Reserve Fund by transferring a
specified amount every year, as may be decided by the
Relevant Authority from time to time;
d. Meeting any loss or liability of the Exchange arising out
of clearing and settlement operations of such transaction,
as may be provided in these Bye-Laws, Rules, Business
Rules and Regulations of the Exchange in force from
time to time;
e. repayment of the balance amount to the member
pursuant to the provisions regarding the repayment of
deposit after meeting all obligations under Bye-Laws,
Rules, Business Rules and Regulations of the Exchange,
when such member ceases to be member, and
f. any other purpose, as may be specified by the Relevant
Authority, from time to time.‖
29 Bye-laws 12.7 and 12.8 specifically provide for utilization of the fund for the
failure of the trading member to meet his settlement obligations or when he is
declared as a defaulter:
“12.7 Utilization for failure to Meet Obligations
Whenever a member fails to meet his settlement
obligations to the Exchange arising out of his clearing
and settlement operations in respect of his transaction,
as may be provided in these Bye-Laws, Rules and
Regulations of the Exchange, the Relevant Authority may
utilise the Settlement Guarantee fund and other moneys
lying to the credit of the said member to the extent
necessary to fulfil his obligations under such terms and
PART C
38
conditions, as the Relevant Authority may specify from
time to time;
12.8 Utilisation in Case of Failure to Meet Settlement
Obligations or on Declaration of Defaulter
Whenever a member fails to meet his settlement
obligation to the Exchange arising out of the transactions,
as may be provided in these Bye-laws, Rules, Business
Rules and Regulations of the Exchange in force from
time to time, or whenever a member is declared a
defaulter, the Relevant Authority may utilise the
Settlement Guarantee Fund and other moneys of the
member to the extent necessary to fulfil his obligations in
the following order:
[…]
12.9.2 If the cumulative amount under all the above
heads is not sufficient, the balance obligations shall be
assessed against all the clearing members in the same
proportion as their total contribution and deposit towards
security deposit, and the clearing members shall be
required to contribute or deposit the deficient amount in
the Settlement Guarantee Fund within such time, as the
Relevant Authority may specify in this behalf from time to
time.‖
[…]
Bye-law 12.11 states that the deposit shall be allocated by the Exchange among
various segments of trading:
12.11 Allocation of the Contribution or Deposit
Each clearing member‘s contribution and deposit towards
the Settlement Guarantee Fund shall be allocated by the
Exchange among the various segments of trading,
which are designated as such by the exchange and in
which the member may participate, in such
proportion as the Exchange may decide from time to
time. The Exchange shall retain the rights to utilise the
fund allocated to a particular segment of trading to match
the losses or liabilities of the Exchange, incidental to the
operation for that segment or for any other segment, as
may be decided by the Exchange at his discretion.
PART C
39
Bye-law 12.12 states that the clearing member shall be repaid his deposit after
making deductions:
12.12 Repayment to the Clearing Member on His
Cessation
12.12.1 A members hall be entitled to repayment of the
actual amount of deposit, if any, made by him to the
Settlement Guarantee Fund provided it is not part of the
admission fee after
a. the member ceases to be an exchange member on
account of any reason whatsoever,
b. all pending transactions at the time the member
ceases to be an exchange member, which may result in a
charge to the settlement Guarantee Fund, have been
closed and settled,
c. all obligations to the Exchange for which the member
was responsible while he was an exchange member
have been satisfied, or at the discretion of the Relevant
Authority, have been deducted by the Exchange from the
member‘s actual deposit; provided, the member has
presented to the Exchange such indemnified or
guarantees as the Relevant Authority may deem
necessary or another clearing member has been
substituted owning liability for all the transaction and
obligations of the clearing member, who had ceased to
be a member.
d. a suitable amount, as may be determined by the
Relevant Authority at his discretion, has been set aside
for taking care of any loss/liability/obligation arising out of
his past transactions and
e. a suitable amount, as may be determined by the
Relevant Authority at its discretion, has been set aside by
the Exchange towards such other obligations, as may be
perceived by the Exchange to exist or be perceived by
the Exchange to arise in future.
12.12.2 The Relevant Authority may specify norms for
repayment of deposit including the manner, amount and
period within which it may be paid. The repayment
amount, at no point of time, will exceed the actual deposit
available to the credit of the clearing member after
deducting the necessary dues or charges payable by
such clearing member from time to time, including the
initial deposit.
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C. 3 Definitions of „Deposit‟ and „Financial Establishment‟: Interpretation of
Sections 2(c) and 2(d) of the MPID Act
30 The notifications attaching the properties of the respondent were issued
under Section 4 of the MPID Act. Section 4 covers only those situations where a
‗financial establishment‘ is a defaulting entity. Section 4 is reproduced below:
“4. (1) Notwithstanding anything contained in any other
law for the time being in force,-
(i) where upon complaints received from the depositors
or otherwise, the Government is satisfied that any
Financial Establishment has failed,-
(a) to return the deposit after maturity or on
demand by the depositor; or
(b) to pay interest or other assured benefit; or
(c) to provide the service promised against such
deposit; or
(ii) where the Government has reason to believe that
any Financial Establishment is acting in a calculated
manner detrimental to the interest of the depositors with
an intention to defraud them;
[…]
 (emphasis supplied)
31 The primary issue is whether NSEL is a ‗financial establishment‘ within the
meaning of Section 2(d). Section 2(d) reads as follows:
―(d) ―Financial Establishment‖ means any person
accepting deposit under any scheme or arrangement or
in any other manner but does not include a corporation or
a co-operative society owned or controlled by any State
Government or the Central Government or a banking
company as defined under clause (c) of section 5 of the
Banking Regulation Act, 1949;
Financial Establishment is defined as any person accepting a ‗deposit‘. The
definition excludes from its purview (a) a corporation or cooperative society
controlled or owned either by the State or the Central Government; and (b) a
Banking Company as defined under Section 5(c) of the Banking Regulation Act
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41
1949. Since NSEL does not fall within any of the exceptions, it would be a
‗financial establishment‘ for the purposes of the Act if it is a ‗person accepting
deposit‘. Section 3(42) of the General Clauses Act 1897 provides an inclusive
definition of ―person‖ to include both incorporated and unincorporated
companies25 as:
― ‗person‘ shall include any company or association or
body of individuals, whether incorporated or not.‖
The expression deposit is defined in Section 2(c) of the MPID Act in the following
terms:
―(c) ―deposit‖ includes and shall be deemed always to
have included any receipt of money or acceptance of any
valuable commodity by any Financial Establishment to be
returned after a specified period or otherwise, either in
cash or in kind or in the form of a specified service with or
without any benefit in the form of interest, bonus, profit or
in any other form, but does not include–
(i) amount raised by way of share capital or by way
of debenture, bond or any other instrument covered
under the guidelines given, and regulations made, by the
SEBI, established under the Securities and Exchange
Board of India Act, 1992;
(ii) amounts contributed as capital by partners of a
firm;
(iii) amounts received from a scheduled bank r a cooperative bank or any other banking company as defined
in clause (c) of section 5 of the Banking Regulation Act,
1949;
(iv) any amount received from, -
(a) the Industrial Development Bank of India,
(b) a State Financial Corporation,
(c) any financial institution specified in or under section 6A of
the Industrial Development Bank of India Act, 1964, or
(d) any other institution that may be specified by the
Government in this behalf;
(v) amounts received in the ordinary course of
business by way of, -
(a) security deposit,
(b) dealership deposit,
(c) earnest money,
(d) advance against order for goods or services;

25 New Horizon Sugar Mills Limited v. Government of Pondicherry, (2912) 10 SCC 575 (para 58)
PART C
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(vi) any amount received from an individual or a firm or an
association of individuals not being a body corporate,
registered under any enactment relating to money
lending which is for the time being force in the State; and
(vii) any amount received by way of subscriptions in respect
of a Chit.
Explanation I. – ―Chit‖ has the meaning as assigned to it
in clause (b) of section 2 of the Chit Funds Act, 1982;
Explanation II. – Any credit given by a seller to a buyer on
the sale of any property (whether movable or immovable)
shall not be deemed to be deposit for the purposes of this
clause;
The statutory definition of the expression ‗deposit‘ comprises of the following
ingredients:
(i) Any receipt of money or the acceptance of a valuable commodity by a
financial establishment;
(ii) Such acceptance ought to be subject to the money or commodity being
required to be returned after a specified period or otherwise; and
(iii) The return of the money or commodity may be in cash, kind or in the form
of a specified service, with or without any benefit in the form of interest,
bonus, profit or in any other form.
These elements of the definition are followed by specific exclusions contemplated
in clauses (i) to (vii). Clause (i) of the exceptions covers an amount which is
raised by way of share capital or by debenture, bond or other instrument
governed by the guidelines and regulations of SEBI. Clause (v) states that money
received in the ordinary course of business by way of security deposit, dealership
deposit, earnest money or advance against an order of goods or services shall be
excluded. The exclusions in clause (i) to (vii) indicate that transactions which
would otherwise fall within the broad sweep of the definition are excluded.
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32 The legislature may define a word artificially by restricting or expanding its
natural meaning. When the legislature employs the phrase ‗means‘, the definition
is intended to be exhaustive. In Indra Sarma v. VKV Sarma,
26 this Court
observed that the definition of the expression ‗domestic relationship‘ in Section
2(f) of the Protection of Women from Domestic Violence Act 2005 is restrictive
since it is defined by the use of the term ‗means‘. On the other hand, the Court
has taken a consistent view that where the definition of a word is inclusive, as
presaged by the adoption of the expression ―includes,‖ it is prima facie
extensive27. The definition of ‗deposit‘ uses the phrase ‗includes and shall be
deemed to have always included‘. The import of this is to create a legal fiction by
which actions which though not included within the natural meaning of the
expression are intended to be included. The combined use of ‗includes‘ and
‗deemed to have always included‘ while defining the term ‗deposit‘ makes the
term inclusive and not restrictive.
33 The expression ‗deposit‘ is conspicuously broad in its width and ambit for it
includes, not only any receipt of money but also the acceptance of any valuable
commodity by a financial establishment under any scheme or arrangement. As a
matter of interest, we may note at this stage that the expression ―any‖ is used in
the substantive part of the definition of the expression ‗deposit‘ on five occasions
namely;
(i) Any receipt of money;
(ii) Any valuable commodities;
(iii) By any financial establishment;

26 (2013) 15 SCC 755
27 Karnataka Power Transmission Corporation v. Ashok Iron Work Pvt. Ltd., (2009) 3 SCC 240; Ramanlal Bhailal
Patel v. State of Gujarat, (2008) 5 SCC 449
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44
(iv) With or without any benefit; and
(v) In any other form.
34 Likewise, the definition of financial establishment refers to the acceptance
of deposits:
(i) Under any scheme or arrangement; or
(ii)In any other manner.
35 The repeated use of the expression ‗any‘ by the statute while defining both
the above expressions is a clear reflection of the legislative intent to cast the net
of the regulatory provisions of the law in a broad and comprehensive manner.
Unlike many other state enactments which govern the field, clause (c) of Section
2 of the MPID Act comprehends within the meaning of a deposit not only the
receipt of money but of any valuable commodity as well. For example, in contrast,
Section 2(2) of the Tamil Nadu Act defines ‗deposit‘ only in terms of money and
not commodity. Section 2(2) reads as follows:
―(2) ―deposit‖ means the deposit of money either in one lump
sum or by instalments made with the Financial Establishments
for a fixed period, for interest or for return in any kind or for any
service;
Similarly, statutes protecting the interest of depositors in Orissa28, Kerala29
,
Himachal Pradesh30, Goa31, Telangana32, Andhra Pradesh33 and Sikkim34 define
the phrase ‗deposit‘ only in terms of money and not the acceptance of a
commodity.

28 The Odisha Protection of Interests of Depositors (in Financial Establishments) Act 2011
29 The Kerala Protection of Interests of Depositors in Financial Establishment Act 2013
30 The Himachal Pradesh [Protection of interests of depositors (in Financial Establishments)] Act 1999
31 The Goa Protection of Interests of Depositors (in financial Establishments) Act 1999
32 The Telangana Protection of Depositors of Financial Establishments Act 1999
33 The Andhra Pradesh Protection of Depositors of Financial Establishments Act 1999
34 The Sikkim Protection of interests of Depositors (in Financial Establishments) Act 2000
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36 According to the second ingredient of Section 2(c), the money or
commodity must be liable to be returned. However, such return need not
necessarily be in the form of cash or kind but also in the form of a service, with or
without any benefit such as interest. It needs to be recalled that clause (v) of
Section 2(c) states that a deposit of money or commodity made as a security
deposit, dealership deposit or an advance amount is excluded from the definition
of the phrase ‗deposit‘. To illustrate, if a member of a financial establishment
deposits Rs. 25,000, and that money is returned on cessation of membership by
making deductions, the issue of whether the deposit is a security deposit or of the
nature covered under Section 2(c) should be determined with reference to the
structure of operation and functioning of the financial establishment. It is to be
noted that the definition also states that the return may be with or without interest
or any benefit. Therefore, the submissions made by both the sides on whether
NSEL had through its representations assured a 16% return on trading in the
platform is immaterial for the purpose of determining if NSEL accepted deposits.
37 Having referred to the relevant bye-laws, we shall determine if NSEL
receives ‗deposits‘ as defined by Section 2(c) of the MPID Act. The bye-laws
elucidate that NSEL receives both money and commodities from trading
members. In order to decide if these receipts by NSEL could be regarded as
‗deposits‘, the test of ‗return‘ will have to be satisfied. The test is that the return be
in cash, kind or service. It is not necessary that the return should be with the
benefit of interest, bonus or profit. Therefore, if the financial establishment is
obligated to return the deposit without any increments, it shall still fall within the
purview of Section 2(c) of the MPID Act, provided that the deposit does not fall
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within any of the exceptions. The exception of relevance to our case is clause (v)
which states that ‗amounts received in the ordinary course of business by way of
(a) security deposit; (b) dealership deposit; (c) earnest money; and (d) advance
against order for goods or services shall be excluded from the purview of the
term ‗deposit‘.
C. 3.1 Settlement Guarantee Fund: Deposit under Section 2(c) of the MPID
Act
38 The trading members pay NSEL a margin deposit and NSEL maintains a
Settlement Guarantee Fund. Regulation 4.12 states that only transactions of
those members who have paid the margin deposit and security deposit shall be
considered as valid. Therefore, the payment of margin deposit and security
deposit is ‗mandatory‘ for a person to trade on NSEL‘s platform. Regulation 4.12
refers to the SGF as a ‗security deposit‘. Similarly, bye-law 12.2.1 stipulates that
each member shall contribute a ‗minimum security deposit‘. However, merely
because the SGF is referred to as a ‗security deposit‘, the exception would not
automatically be applicable. The meaning of the phrase ‗security deposit‘ takes
colour from the surrounding phrases. Clause (v) to sub-Section 2(c) excludes
security deposit, dealership deposit, earnest money, and an advance against an
order for goods and services from the ambit of the phrase ‗deposit‘. The concepts
used in sub-Section 2(c) (v) fall in two categories: (i) token amounts paid to
indicate the earnest to purchase (earnest money and advance money), and (ii)
payments required to meet exigent situations of default by a party (dealership
deposit and security deposit).
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39 Black‘s Law dictionary35 defines security deposit as ―money deposited by a
tenant with a landlord as security for full and faithful performance by the tenant of
terms of leases, including damages to premises. It is refundable unless the
tenant has caused damage or injury to the property or has breached the terms of
tenancy or the laws governing the tenancy. Certain states also require the
landlord to make a security deposit to cover essential repairs required on rental
property.‖ A similar phrase, ―Client Security Fund‖ is defined as a fund set up by
many State Bar Associations to cover losses incurred by persons as a result of
dishonest conduct of member-attorneys. The meanings of both these phrases
suggest the necessary ingredients of a security deposit, which are:
(i) An advance to ensure faithful performance of the contract;
(ii) A payment to cover essential ‗functions‘ for performance; and
(iii) The entitlement to refund being dependent upon whether damage, injury
and default are occasioned.
40 Chapter 12 of the bye-laws provides the features of the SGF:
(i) SGF is utilized for:
(a) defraying the expenses for its creation and maintenance ;
(b) temporary use of the fund to meet efficiencies arising out of the
performance of obligations;
(c) payment of premia on insurance covers;
(d) payments for the loss or liability of the Exchange arising out of
‗clearing and settlement operations‘;
(e) repayment of the balance deposit to a member;

35 Bryan A Garner, Black’s Law Dictionary (11 ed. Thomson Reuters).
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(f) payment towards the member‘s obligations where the member fails
to meet his settlement obligations; and
(g) payment of the member‘s obligation on being declared as a
defaulter;
(ii) The members‘ contribution is allocated among various segments of
trading, in which they can participate. The Exchange also retains the
right to utilise the fund allotted to a particular segment of trading to
match the losses or the liabilities of the Exchange; and
(iii) The settlement fund may be invested in approved securities or other
avenues of investments.
41 The features of the SGF indicate that the fund is used to cover those
expenses, which are beyond the utilization which is made out of a regular
security fund. Unlike a security deposit between a landlord and a tenant where
the fund is used to meet the ‗essential obligations‘ of the landlord such as repair
work and deductions are made when the tenant has outstanding payments,
NSEL uses the deposit to cover the payment obligations of the trading member
(buyer) to another trading member (seller) since NSEL is a counter party to the
transactions. However, NSEL uses the fund to cover functions beyond its role as
a counter-party. For example, the fund is used to cover loses faced by the NSEL
in the settlement operations, investments are made in securities, and the fund is
allotted in various segments of trading, where the funds are also utilised to cover
loses, if any, in the segment. Therefore, these three features of the SGF indicate
that though the SGF is termed as a ‗security deposit‘ in nomenclature, its features
do not represent a security deposit. Since NSEL receives ‗money‘ in the form of
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49
SGF that is returned in money and services, and is not covered by the
exceptions, it would fall within the expression ‗deposit‘ as defined in Section 2(c)
of the Act.
C. 3. 2 Receipt of commodities: Deposit under Section 2(c) of the Act
42 A person who wishes to trade in the platform of NSEL is required to place
the commodities in the accredited warehouse of NSEL. NSEL would then provide
the trader with a warehouse receipt. When the buyer‘s offer and the seller‘s offer
is matched, NSEL would debit the amount from the buyer member‘s pay in
obligations and it would be credited to NSEL‘s exchange settlement account. The
Operations Department would confirm with the Delivery Department if the
requisite quantity of a particular commodity of the seller is available. After such
confirmation, the Operations Department would release the purchase price to the
selling broker‘s designated bank account. Simultaneously, a Delivery Allocation
Report would be issued to the buyer‘s broker or the buyer. Once the VAT invoice
is paid, NSEL would issue a Delivery Note authorizing the Buyer to take delivery
from the designated warehouse or if the buyer chooses, he can take constructive
possession of the commodity. There is nothing in the definition of the term
‗deposit‘ to mean that the acceptance of the commodity should be accompanied
by a transfer of title to the commodity. Even if the financial establishment is only
in ‗custody‘ of the commodity, it would still fall within the purview of the phrase
‗acceptance of commodity‘. On the acceptance of custody of the commodity,
NSEL has to provide various services such as an obligation to keep the
commodity safe and without any damages. Additionally, the Operations
Department and the Delivery Department will have to coordinate while matching
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the contracts. Similarly, after the delivery note is sent to the buyer, the commodity
is either delivered to the buyer or the buyer is put in constructive possession of
the commodity. The phrase ‗warehouse receipt‘ is defined in Bye-law 2.96 as a
document evidencing that the commodity is being held by NSEL in the approved
warehouse. Clause (b) to Bye law 4.20 states that if the outstanding transactions
have not been settled by giving or receiving deliveries, then it (the commodity)
shall be auctioned by buying-in or selling-out as per the Business Rules of the
Exchange. Bye-law 10.11 states that the commodities shall be delivered to and
delivery taken from only the designated warehouses. Therefore, NSEL offers a
multitude of ‗services‘ in return for receiving the commodity. The receipt of the
commodities and holding the commodities (when the members are put in
constructive possession) in the accredited warehouses is a ‗deposit‘ under
Section 2(c) of the Act.
43 The counsel for the respondent argued that the expression ‗valuable
commodity‘ used in Section 2(c) would only include precious metals such as gold
and silver. The expression ―valuable commodity‖ is not defined by the statute.
There is no valid basis to accept the submission of the respondent that the
expression should only comprehend within it precious metals such as gold and
silver. If the legislature intended to so restrict the definition of the expression
valuable commodity, it could have used an explanation importing an artificial
meaning to the expression. However, the legislature has desisted from doing so.
A valuable commodity is a commodity which has significant value. This does not
refer only to the intrinsic value of the commodity. Whether or not a commodity is
valuable has to be determined bearing in mind the salutary object and purpose of
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the Act which is to protect the interest of depositors. It is in this context that it
becomes necessary to adopt a purposive construction which would give effect to
the meaning and content of the law. Any attempt to read the definition in a
restrictive sense would be contrary to legislative intent. The intent of the
legislature is to define the expression ‗deposit‘ as well as the expression ‗financial
establishment‘ in a comprehensive and all-encompassing manner. Therefore, the
phrase ‗valuable commodity‘ cannot be restricted to only mean precious metals.
Agricultural commodities which NSEL trades in will fall within the purview of the
term.
44 Though it has been observed earlier that it is not necessary that there must
be interest or an assured benefit from the deposit for the purposes of Section 2(c)
of the MPID Act, it is still necessary that we refer to the representations made by
NSEL. NSEL in the course of its brochures has held out representations about
the trading and investment opportunities available for:
(a) corporate clients;
(b) high net worth individuals; and
(c) retail investors.
45 Under the head of ‗contract specifications‘, the following representation
has been held out:
Commodity Duration Investment (lacs.) Yield
Castor Seed T+3 & T+36 7.5 -9 Lacs 16%
Castor Oil T+5 & T+30 7-9 16%
Cotton Wash Oil T+2 & T+25 10 16%
Paddy T+2 & T+25 3.5-4.5 16%
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Steel T+2 & T+25 4.5-5 16%
Raw Wool T+2 & T+25 3.5-4 16%
Wool Top T+2 & T+25 1.8-2 16%
Crude Soybean
Oil
T+2 & T+25 3.3.-3.5 16%
Soya DOC T+2 & T+25 1.7-2.0 16%
Refined Mustard
Oil
T+2 & T+25 6.5 16%
Refined Soybean
Oil
T+2 & T+25 6.5 16%
Refined
Sunflower Oil
T+2 & T+25 6.5 16%
RBD Palmolein
Oil
T+2 & T+25 6.5 16%
Sugar T+2 & T+25 3.0 16%
Maize T+2 & T+25 3.0 16%
The above representation specifies:
(i) Commodities;
(ii) Duration of trades;
(iii) Investment; and
(iv) Yield.
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For example, in the case of castor seeds, NSEL held out a buy contract (T+3)
and sale contract (T+36), in which the yield is stated to be 16%. Moreover, NSEL
represented that:
―Opportunities
 Traders can trade and lock their return
 Trader has to buy in near settlement contract and sell in
far settlement contract simultaneously
 Price for both settlement available
 Exchange provides counterparty guarantee risk
 No basis risk, No link with future contracts‖
While describing the features of ―trading opportunity‖, NSEL represented that:
“Features of Trading Opportunity:
 T+2 and T+25contract offers unique trading
opportunity to traders
 Trader purchases T+2 contract and simultaneously
sells T+25 contract
 Pay-in obligation is on T+2 while Pay-out of the funds
will be on T+25. Entire settlement cycle is of 35-37
days
 Price differential between the two settlement dates i.e
premium if annualized offers interest rate of about
16%
 Income arising out of such trades are treated as
Business Income‖
While comparing the investment opportunities of bank fixed deposits with trading
opportunities at NSEL, NSEL represented that:
―Comparison
 Bank FD 9.25% for 390 days; NSEL Trading Opportunity
16%;
 Bank FD minimum duration 390 days; NSEL Trade
duration 35-55 days, depending on the contract
 Traders have an option of rolling over their position as
per their convenience‖
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Under the caption of ‗risk management‘, the following representation has been
held out by NSEL:
“Risk Management
 Trades are backed by collaterals in the form of stock
 Cash margin of 10-15% is levied on the open position of
seller in T+2/T+3 contracts
 In case of adverse price movement, Exchange collects
additional margin from the seller in T+2/T+3 contracts
 The exchange has defined guidelines for auction/closeout
(circular: 029/2008)
 Warehouse Management includes Selection,
Accreditation, Quality Resting, Fumigation and
Insurance‖
The above representation indicates that paired contracts were designed as a
unique trading opportunity by NSEL under which a trader would, for instance,
purchase a T+2 contract (with a pay-in obligation on T+2) and would
simultaneously sell a T+25 contract (with a pay-out of funds on T+25). The
price differential between the two settlement dates was represented to offer an
annualized return of about 16%. NSEL categorically represented that all trades
were backed by collaterals in the form of stocks and its management activities
included selection, accreditation, quality testing, fumigation and insurance.
Therefore, NSEL represented that on receiving money and commodities, the
members would receive ‗assured returns‘ and a ‗service‘. Though NSEL has
been receiving ‗deposits‘, it has failed to provide services as promised against the
deposits and has failed return the deposits on demand. Therefore, the State of
Maharashtra was justified in issuing the attachment notifications under Section 4
of the MPID Act.
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C.4 Uncovering the Conspiracy
C. 4.1 The Grant Thornton Report
46 FMC engaged Grant Thornton LLP to conduct a forensic audit of the
practices and records of NSEL. The report found several instances where NSEL
had repeatedly contravened the rules:
(a) NSEL allowed members who had repeatedly defaulted to continue trading
though under NSEL‘s exchange rules, a member who does not have
sufficient collateral to discharge his obligations would not be allowed to
trade further;
(b) Members who were in default or those who had exhausted their margin
limits, were granted an exemption from margin requirements;
(c) There was an insufficient collateral of commodities in the warehouses and
NSEL did not diligently conduct the exercise;
(d) The Bye-laws and rules of the Exchange mandate the formation of various
committees for the effective management of operations. However, the
Board failed to constitute nine out of ten such committees. There is also no
documentary evidence to demonstrate whether any committee formed
was ever convened;
(e) Client margin deposits and the settlement fund were used for fulfilling the
obligations of the defaulting members. NSEL also used the deposits made
by the members for its own business purposes on a regular basis. For
example, on 28 March 2013, Rs. 236.5 Crore was withdrawn from the
settlement fund to fund NSEL‘s business overdraft account. There is a
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running deficit in the client settlement fund balance from 2012 to June
2013. The financial team had raised the issue on multiple occasions;
(f) Mr. Jignesh Shah, in his presentation dated 10 July 2013 to FMA had
stated that 120 NSEL accredited warehouses held commodities valued at
Rs. 6,000 crores. However, there was no documentation relating to
warehouse activities for long term trades indicating that the contracts were
not secured by stocks. The collateral of the members was not in custody
and NSEL did not have any control over it;
(g) Though the Warehouse Development and Regulatory Authority had
rejected NSEL‘s application for registration of its warehouse in May 2011,
the website of the establishment still represented that the warehouses
were registered with the authority;
(h) Though the warehouse receipts are to evidence that a commodity is held
in an approved warehouse, receipts were issued without deposit of the
commodities. NSEL did not insist on commodities being deposited in the
warehouses prior to executing the sale transactions. NSEL issued Delivery
Allocation Reports misrepresenting that every transaction was delivery
based and backed with commodities;
C. 4. 2 63 Moons Judgment
47 NSEL filed third party representations in a suit filed by the allegedly duped
traders for the recovery of Rs 5,600 Crores from the 24 defaulters. Arbitration
proceedings were also initiated for the recovery of dues. An amount of Rs. 3,365
Crores out of Rs 5,000 crores has been covered through Court decrees and
arbitral awards. On 6 January 2014, the EOW, Mumbai filed a charge sheet
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against the Managing Director and CEO of NSEL, the head of warehousing, and
two other defaulters. It was mentioned in the charge sheet that these employees
of NSEL had colluded with the defaulters to enable them to trade on the platform
without depositing the goods in the accredited warehouses. FMC wrote to the
Union of India on 18 August 2014 that NSEL and 63 Moons be merged. In the
representative suit which was instituted, the Bombay High Court appointed a
three-member committee consisting of Mr Justice VC Daga, Mr J Solomon, and
Mr Yogesh Thar for determining the liability of the defaulters and assisting in the
process of recovery. In addition to Rs. 3,365 Crores covered through court
decrees and arbitral awards, the high level committee had crystallised a further
sum of Rs. 835.88 to be recovered from the defaulters.
48 On 15 October 2014, the Additional Secretary, Department of Economic
Affairs wrote a letter to the Ministry of Corporate Affairs stating that 63 Moons
and NSEL are maintaining separate identities to deprive the investors of money.
It was stated that the corporate veil ought to be lifted and both the companies
must be amalgamated to recover the pending dues. On 12 February 2016, an
amalgamation order under Section 396(3) was passed, merging the assets and
liabilities of 63 Moons and NSEL. A writ petition filed under Article 226 for
challenging the amalgamation was dismissed by the Bombay High Court. A
Special Leave Petition before this court challenged the judgment of the Bombay
High Court. The two-Judge Bench in the course of determining the validity of the
amalgamation order, referred to the Grant Thornton report, where the features
and representations made regarding the twin contracts ( short term and long
term), and the role of NSEL in the default of payments were discussed:
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―1.3. These long-term contracts (e.g. T+25) were first
traded on the NSEL exchange in September 2009. The
Board of NSEL ratified the circulars introducing such
long-term contracts over a period beginning November
2009.
1.4. Further evidence was obtained with regard to the
existence of a financing business, such as presentations
which stated that a fixed rate of return was
guaranteed on investing in certain products on the
NSEL exchange.
Several internal (NSEL) presentations were found,
upon a review of email databases, setting out a yield
(e.g. 16%) as an opportunity for investors for trading
in certain products on the NSEL exchange.
An external presentation was also obtained which
had been made by a brokerage house (Geojit Comtrade
Ltd.) for their clients claiming a fixed return on
investments made on the NSEL exchange. Further, this
presentation, declared that actual delivery of stocks in
such transactions would not be required.
1.5. Grant Thornton also obtained evidence of
repeated contraventions of NSEL exchange rules and
bye-laws which facilitated such financing
transactions to continue and grow in size as below:
Repeated defaults : As per the NSEL exchange rules
a member who does not have sufficient collateral/monies,
etc. to discharge his obligations would not be allowed to
trade further. This rule was overridden on a recurring
basis. Further despite repeated defaults members were
allowed to trade and increase their expenses. For
example, Lotus Refineries had defaulted, as per the
Rules of the Exchange, on 198 days between the fifteenmonth period of 1-4-2012 and 30-7-2013.
Exemptions from margin requirements : Members
who were in a default position or who had exhausted their
margin limits on trading were granted an exemption from
margin requirements and thus allowed them to increase
their exposure by engaging in new trades. More than
1800 margin limit exemptions were granted between
2009 through to 2013.
Inadequate monitoring of member collateral : NSEL
did not carry out any diligence to establish the existence
of stock at member managed warehouses, upon which
trades were being executed. Grant Thornton carried out a
stock verification exercise and found significant shortages
vis-à-vis expected collateral.‖
The judgment referred to the findings of misutilization of client monies/ settlement
fund in the Grant Thornton report:
―1.12. Misutilisation of client monies/settlement fund :
As per the rules and bye-laws of the NSEL exchange
―Margin deposits received by clearing members from their
constituent members and clients in any forms shall be
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accounted for and maintained separately in segregated
accounts and shall be used solely for the benefit of the
respective constituent members' and client position.‖
Grant Thornton found evidence (including emails)
that client monies/settlement fund, was used
regularly for fulfilling the obligations of defaulting
members.
Further, NSEL utilised client monies/settlement
fund for its own business purposes on a regular
basis. For example, on 28-3-2013, Rs 236.5 crores was
withdrawn from the Settlement Fund in order to fund
NSEL's own business overdraft account.
There was a running deficit in the client
monies/settlement fund balance from April 2012 to June
2013. The finance team of FTIL had raised this as an
area of concern on several occasions.‖
The report‘s finding on the lack of documentation of the warehousing activities
were discussed in the judgment:
―The report then goes on to say that there was no
documentation in relation to warehouse activities for longterm trades indicating that such contracts were not
secured by warehouse stocks. The warehouses were
customer managed warehouses and the underlying
collateral were not in custody of NSEL. NSEL did not
have control over these warehouses and Grant Thornton
was denied access to a number of warehouses. The
Warehouse Development and Regulatory Authority had
in fact rejected NSEL's application for registration of its
warehouses way back on 16-5-2011. Notwithstanding
such rejection, NSEL's website represented that its
warehouses were registered with the Authority. No
verification or due diligence was ever undertaken by
NSEL to ensure compliance by its members of the
conditions outlined in its rules and bye-laws even though
in terms of NSEL bye-laws, warehouse receipt issued by
NSEL were meant to evidence a commodity being held in
an approved warehouse. NSEL did not insist upon
deposit of commodities in the warehouses prior to
executing sale transactions. Instead NSEL resorted to
issuing Delivery Allocation Reports (DAR) representing to
genuine investors that each transaction was delivery
based and backed at the time of sale by the required
quantity of commodities in its warehouses.‖
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The conclusion in the FMC order dated 17.12.2013 which revealed the
conspiracy unfolded by 63 Moons and NSEL was also referred to in the following
extract:
―15.1. Noticee 1: Financial Technologies (India) Ltd.
(FTIL) : We have discussed the equity structure of NSEL,
which is wholly owned by FTIL. We have also pointed out
that Shri Jignesh Shah, Chairman-cum-Managing
Director of FTIL has been a Director on the Board and
also functioning as Vice-Chairman and a key
management person of NSEL since its inception.
Similarly, Shri Joseph Massey and Shri Shreekant
Javalgekar have been Directors of the said company
from its very beginning till the settlement crisis at NSEL
first came to light in July 2013. The facts establishing the
fraud involving a settlement default over Rs 5500 crores
at NSEL have been discussed at length in the SCNs
issued to the noticees as well as reiterated, albeit
illustratively by us at para 14.7 of this Order. The
responsibility of FTIL as the holding company possessing
absolute control over the governance of NSEL has also
been highlighted. The control of FTIL over NSEL
becomes further crystallised from the responses given by
M/s Grant Thornton before the Commission on 3-12-2013
stating that Shri Jignesh Shah, Mr Joseph Massey and a
host of other officials of FTIL reviewed the forensic audit
report and it was only after obtaining their clearance, the
forensic auditor finalised its report.
15.1.1. The violation of conditions prescribed in the
exemption notification, trading in paired contracts to
generate assured financial returns under the garb of
commodity trading, admission of members who were
thinly capitalised having poor net worth and giving margin
exemptions to those who were repeatedly defaulting in
settling their dues, poor warehousing facilities with no or
inadequate stocks, no risk management practices
followed, non-provision of funds in SGF, consciously
appointing Shri Mukesh P. Shah as statutory auditors for
FY 2012-13 who was related to Shri Jignesh Shah, and
apparent complicity with the defaulters to defraud the
investors, etc., lead to an inescapable conclusion that a
huge fraud was perpetrated by NSEL while having the
presence of two Board members of FTIL on the Board of
NSEL, one of whom was the Vice-Chairman of the
company.
15.1.2. The facts of the case and the manner in which
the business affairs of NSEL were conducted leaves no
doubt in our minds that FTIL, notwithstanding its
contentions that it was ignorant of the affairs and conduct
of NSEL, exerted a dominant influence on the
management, and directed, controlled and supervised the
governance of NSEL. In the face of a fraud of such a
magnitude involving settlement crises of Rs 5500 crores
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owed to over 13,000 sellers/investors on the trading
platform of NSEL, FTIL, cannot seek to take refuge
behind the corporate veil so as to unjustifiably isolate
itself from the fraudulent actions that took place at NSEL
resulting in such a huge payment crisis.
15.1.3. FTIL has its principal business of
development of software which has become the
technology platform for almost the entire industry
engaged in broking in shares and securities,
commodities, foreign exchange, etc. As has been
demonstrated by FTIL in their written submission, FTIL
has floated a number of regulated exchanges—both for
securities and commodities derivatives—in India as well
as abroad. NSEL was incorporated to provide a trading
platform of commodity spot exchange on a pan-India
basis for the purpose of which apparently it sought and
was granted exemption from the operation of the FCRA,
1952. Since the objective of the NSEL was promoting
spot trading in commodities on an electronic
platform, its business model did not contemplate
venturing into trading in forward contracts. FTIL had
already promoted MCX, a regulated exchange under
FCRA, 1952, for the purpose of trading in forward
contracts. Therefore, having secured an exemption from
the purview of FCRA, 1952 on the ground that it was
intended to promote spot trading, NSEL was not
authorised to allow trading in forward contracts through
the scheme of paired contracts, thereby defying
conditions stipulated in the exemption notification granted
to it. The motive behind allowing trading in forward
contracts on the NSEL platform in a circuitous manner on
NSEL which was neither recognised nor registered under
FCRA, 1952 indicates mala fide intention on the part of
the promoter of FTIL to use the trading platform of its
subsidiary company for illicit gains away from the eyes of
Regulator. The fact that FTIL promoted NSEL sought
exemption from FCRA, 1952 provisions even before they
had started any trading or operation, points to their
intention from the outset. In this manner, it misinterpreted
the conditions stipulated in the exemption notification in
collusion with a handful of members, which ultimately
culminated in a massive fraud involving Rs 5500 crores,
which has the potential effect of eroding trust and
confidence in exchanges and financial markets.
15.1.4. Keeping in view the foregoing observations
and the facts which reveal misconduct, lack of integrity
and unfair practices on the part of FTIL in planning,
directing and controlling the activities of its subsidiary
company, NSEL, we conclude that FTIL, as the anchor
investor in the Multi-Commodity Exchange Ltd. (MCX)
does not carry a good reputation and character, record of
fairness, integrity or honesty to continue to be a
shareholder of the aforesaid regulated
exchange. Therefore, in the public interest and in the
interest of the Commodities Derivatives Market which is
regulated under FCRA, 1952, the Commission holds that
Financial Technologies (India) Ltd. (FTIL) is not a “fit and
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proper person” to continue to be a shareholder of 2% or
more of the paid-up equity capital of MCX as prescribed
under the guidelines issued by the Government of India
for capital structure of commodity exchanges post 5
years of operation. It is further ordered that neither FTIL,
nor any company/entity controlled by it, either directly or
indirectly, shall hold any shares in any
association/Exchange recognised by the Government or
registered by the FMC in excess of the threshold limit of
the total paid-up equity capital of such
Association/Exchange as prescribed under the
commodity exchange guidelines and post 5-year
guidelines.‖
 (emphasis supplied)
49 The two-Judge Bench of this Court took note of the modus operandi
through which the trading members were duped by a conspiracy hatched by a
few trading members along with NSEL. However, this Court held that the order
amalgamating NSEL and 63 Moons did not fulfil the requirements of Section 396
of the Companies Act 1956 as the ‗essentiality‘ aspect in Section 396 was not
satisfied since the ‗emergency situation‘ requiring amalgamation was short lived.
Further, it was observed that the rationale for the amalgamation was the financial
incapability of NSEL to effect recoveries from the defaulting members. The Court
noted that the final order of amalgamation dated 12 February 2016 referred to the
actions taken for recovery by the EOW and the Enforcement Directorate which
indicated methods other than amalgamation through which the monies could be
recovered. The action taken by the EOW and the Enforcement Directorate is
referred to in the following extract:
―92.1. What is important to note is that by the time the
final order of amalgamation was passed i.e. on 12-2-
2016, the final order itself records:
―8.1. Economic Offences Wing, Mumbai:
(i) Total amount due and recoverable from 24
defaulters is Rs 5689.95 crores.
(ii) Injunctions against assets of defaulters worth Rs
4400.10 crores have been obtained.
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(iii) Decrees worth Rs 1233.02 crores have been
obtained against 5 defaulters.
(iv) Assets worth Rs 5444.31 crores belonging to the
defaulters have been attached of which assets worth Rs
4654.62 crores have been published in Gazette under the
MPID Act for liquidation under the supervision of MPID
Court and balance assets worth Rs 789.69 crores have
been attached/secured for attachment by the EOW.
(v) Assets worth Rs 885.32 crores belonging to the
Directors and employees of NSEL have been attached
out of which assets worth Rs 882.32 crores have already
been published in Gazette under the MPID Act for
liquidation under the supervision of the MPID Court and
balance assets worth Rs 3 crores have been
attached/secured for attachment by the EOW.
(vi) MPID Court has already issued notices under
Sections 4 & 5 of the MPID Act to the persons whose
assets have been attached as above. Thus, the process
of liquidation of the attached assets has started.
(vii) The Bombay High Court has appointed a 3-
member committee headed by Mr Justice (Retd.) V.C.
Daga and 2 experts in finance and law to recover and
monetise the assets of the defaulters.
(viii) Rs 558.83 crores have been recovered so far,
out of which Rs 379.83 crores have been
received/recovered from the defaulters and Rs 179
crores were disbursed by NSEL to small
traders/investors.
8.2. Enforcement Directorate:
(i) ED has traced proceeds of crime amounting to Rs
3973.83 crores to the 25 defaulters;
(ii) ED has attached assets worth Rs 837.01 crores
belonging to 12 defaulters;
(iii) As per the recent amendment in the PMLA, the
assets attached by ED can be used for restitution to the
victims.
8.3. The above status indicates that the said
enforcement agencies are working as per their
mandate….‖
 (emphasis supplied)
This Court noted that the ‗essentiality‘ requirement in Section 396 of the
Companies Act was not fulfilled:
―92.2. What concerned the FMC in August 2014 has, by
the date of the final amalgamation order, been largely
redressed without amalgamation. The ―emergency
situation‖ of 2013 which, even according to the Central
Government, required the emergent step of compulsory
amalgamation has, by the time of the passing of the
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Central Government order, disappeared. Thus, the raison
d'être for applying Section 396 of the Companies Act has,
by the passage of time, itself disappeared. In fact, as on
today, decrees/awards worth INR 3365 crores have been
obtained against the defaulters, with INR 835.88 crores
crystallised by the committee set up by the High Court,
pending acceptance by the High Court, even without
using the financial resources of FTIL as an amalgamated
company. What is, therefore, important to note is that
what was emergent, and therefore, essential, even
according to the FMC and the Government in 2013-2014,
has been largely redressed in 2016, by the time the
amalgamation order was made. Also, the Central
Government order does not apply its mind to the
essentiality aspect of Section 396 at all. In fact, in several
places, it refers to ―essential public interest‖ as if
―essential‖ goes with ―public interest‖ instead of being a
separate and distinct condition precedent to the exercise
of power under Section 396. On facts, therefore, it is
clear that the essentiality test, which is the condition
precedent to the applicability of Section 396, cannot be
said to have been satisfied.‖
The judgment held that NSEL had falsely represented that it had full stock as
collateral and that the stock was valued at Rs. 6,000 crores:
―91.3. We have seen that neither FTIL nor NSEL has
denied the fact that paired contracts in commodities were
going on, and by April to July 2013, 99% (and excluding
E-series contracts), at least 46% of the turnover of NSEL
was made up of such paired contracts. There is no doubt
that such paired contracts were, in fact, financing
transactions which were distinct from sale and purchase
transactions in commodities and were, thus, in breach of
both the exemptions granted to NSEL, and the FCRA.
We have also seen that NSEL throughout kept
representing that it was, in fact, a commodity exchange
dealing with spot deliveries. Apart from the Grant
Thornton Report and the FMC order, we have also seen
that Shri Jignesh Shah, on 10-7-2013, made
representations to the DCA and the FMC, in which he
stated that NSEL had full stock as collateral; 10-20% of
open position as margin money; and that the stock
currently held in NSEL's 120 warehouses was valued at
INR 6000 crores, all of which turned out to be incorrect.
Further, there is no doubt whatsoever that in July 2013,
as a result of NSEL stopping trading on its exchange, a
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payment crisis of approximately INR 5600 crores arose.
The further question that remains is whether, given these
facts, the conditions precedent for the applicability of
Section 396 were followed.
50 This Court in its decision in 63 Moons (supra) took note of the modus
operandi by which the defaults came about, specifically highlighting the role of
NSEL in not complying with the rules. It set aside the amalgamation order on the
narrow ground that the pre-conditions for the exercise of power under Section
396 had not been fulfilled. One of the reasons which persuaded this Court to set
aside the order of amalgamation was that the EOW and the Enforcement
Directorate had already taken steps to realise the amounts in default. The
judgment in 63 Moons (supra) has after a detailed analysis of the Grant Thornton
report and the FMC‘s order held that the defaulters and NSEL conspired to dupe
the members of their money.
C. 5 Constitutional Validity of the MPID Act
51 The respondents challenged the constitutional validity of the provisions of
the MPID Act before the High Court on the ground that it is arbitrary. The High
Court in the impugned judgment did not deal with the constitutional validity of the
provisions and left the question open. The respondents contended before this
Court that the judgment in Bhaskaran (supra) while holding the Tamil Nadu Act
to be constitutionally valid only made a passing reference to the MPID Act. Thus,
it was argued that this Bench is not bound by the judgment in Bhaskaran (supra)
while deciding on the validity of the provisions of the MPID Act.
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52 A Full Bench of the Bombay High Court had held that the state legislature
did not possess the legislative competence to enact the MPID Act.36 On the other
hand, a Full Bench of the Madras High Court had upheld the constitutional
validity of the Tamil Nadu Act. The correctness of the judgment of the Madras
High Court was assailed before this Court in Bhaskaran (supra). The judgment
of the Full Bench of the Bombay High Court was cited and considered by the two
judge Bench which heard the appeal against the judgment of the Madras High
Court. This Court held that the state legislature does possess legislative
competence to enact the law in question and that the legislation was not for the
transaction of banking or the acceptance of deposits but for the protection of the
depositors who are deceived by fraudulent financial establishments. The Court
held:
―26. The Tamil Nadu Act was enacted to ameliorate the
conditions of thousands of depositors who had fallen into
the clutches of fraudulent financial establishments who
had raised hopes of high rate of interest and thus duped
the depositors. Thus the Tamil Nadu Act is not focused on
the transaction of banking or the acceptance of deposit,
but is focused on remedying the situation of the
depositors who were deceived by the fraudulent financial
establishments. The impugned Tamil Nadu Act was
intended to deal with neither the banks which do the
business or banking and are governed by the Reserve
Bank of India Act and the Banking Regulation Act, nor the
non-banking financial companies enacted under the
Companies Act, 1956.
27. The Reserve Bank of India Act, the Banking
Regulation Act and the Companies Act do not occupy the
field which the impugned Tamil Nadu Act occupies,
though the latter may incidentally trench upon the former.
The main object of the Tamil Nadu Act is to provide a
solution to wipe out the tears of several lakhs of
depositors to realise their dues effectively and speedily
from the fraudulent financial establishments which duped
them or their vendees, without dragging them in a legal
battle from pillar to post. Hence, the decision of this Court

36 Vijay C. Puljal v. State of Maharashtra, (2005) 4 CTC 705 (Bom)
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in Delhi Cloth Mills [(1983) 4 SCC 166] has no bearing on
the constitutional validity of the Tamil Nadu Act.‖
The judgment of the Full Bench of the Bombay High Court in Vijay C. Puljal v.
State of Maharashtra37 was specifically disapproved in the decision of this Court
in Bhaskaran (supra), where the Court held:
―14. The learned counsel for the appellant relied on the
Full Bench decision of the Bombay High Court in Vijay C.
Puljal case [(2005) 4 CTC 705 (Bom)] in support of his
contention that the Tamil Nadu Act, like the Maharashtra
Act, was unconstitutional being beyond the legislative
competence of the State Legislature. We do not agree.
15. We have carefully perused the judgment of the Full
Bench of the Bombay High Court in Vijay case [(2005) 4
CTC 705 (Bom)] and we respectfully disagree with the
view taken by the Bombay High Court. It may be noted
that though there are some differences between the
Tamil Nadu Act and the Maharashtra Act, they are
minor differences, and hence the view we are taking
herein will also apply in relation to the Maharashtra
Act.”
 (emphasis supplied)
53 Besides holding that the State legislature did not lack legislative
competence to enact the law, the judgment in Bhaskaran (supra) also concluded
that the Tamil Nadu enactment did not violate the provisions of Articles 14,
19(1)(g) or 21 of the Constitution. In that context, while dismissing the
constitutional challenge against the legislation enacted in Tamil Nadu, the Court
held:
―31. We fail to see how there is any violation of Articles
14, 19(1)(g) or 21 of the Constitution. The Act is a salutary
measure to remedy a great social evil. A systematic
conspiracy was effected by certain fraudulent financial
establishments which not only committed fraud on the
depositors, but also siphoned off or diverted the
depositor's funds mala fide. We are of the opinion that the

37 (2005) 4 CTC 705 (Bom)
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act of the financers in exploiting the depositors is a
notorious abuse of faith of the depositors who innocently
deposited their money with the former for higher rate of
interest. These depositors were often given a small pass
book as a token of acknowledgment of their deposit,
which they considered as a passport of their children for
higher education or wedding of their daughters or as a
policy of medical insurance in the case of most of the
aged depositors, but in reality in all cases it was an
unsecured promise executed on a waste paper. The
senior citizens above 80 years, senior citizens between 60
and 80 years, widows, handicapped, driven out by wards,
retired government servants and pensioners and persons
living below the poverty line constituted the bulk of the
depositors. Without the aid of the impugned Act, it would
have been impossible to recover their deposits and
interest thereon.
32. The conventional legal proceedings incurring huge
expenses of court fees, advocates' fees, apart from other
inconveniences involved and the long delay in disposal of
cases due to docket explosion in courts, would not have
made it possible for the depositors to recover their money,
leave alone the interest thereon. Hence, in our opinion the
impugned Act has rightly been enacted to enable the
depositors to recover their money speedily by taking
strong steps in this connection.
33. The State being the custodian of the welfare of the
citizens as parens patriae cannot be a silent spectator
without finding a solution for this malady. The financial
swindlers, who are nothing but cheats and charlatans
having no social responsibility, but only a lust for easy
money by making false promise of attractive returns for
the gullible investors, had to be dealt with strongly. The
small amounts collected from a substantial number of
individual depositors culminated into huge amounts of
money. These collections were diverted in the name of
third parties and finally one day the fraudulent financers
closed their financial establishments leaving the innocent
depositors in the lurch.‖
54 The judgment held that the Tamil Nadu Act is constitutionally valid and
constitutes a salutary measure which was long over-due to deal with these
matters. Significantly, the above extracts from the decision in Bhaskaran (supra)
indicate that the differences between the enactment in Tamil Nadu and
Maharashtra ―are minor‖ and the view of the court on the validity of the former will
govern the validity of the latter enactment as well.
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55 The judgment in Bhaskaran (supra) was followed by another two-Judge
Bench of this Court in New Horizons Sugar Mills Limited v. Government of
Pondicherry38. The case arose from the action of the Government of
Pondicherry of attaching the properties acquired by a company. The validity of
the Pondicherry Protection of Interests of Depositors in Financial Establishments
Act 2004 was also in question. A two-Judge Bench of this Court considered
whether the pith and substance of the enactment istraceable to the entries in the
Union List or the State List of the Seventh Schedule to the Constitution. After
adverting to the earlier decision in Bhaskaran (supra) which upheld the Tamil
Nadu enactment while disapproving the Full Bench decision of the Bombay High
Court on the legislative competence of the State legislature to enact the MPID
Act, this Court held:
―50. In addition to the above, it has also to be noticed that
the objects for which the Tamil Nadu Act, the Maharashtra
Act and the Pondicherry Act were enacted, are identical,
namely, to protect the interests of small depositors from
fraud perpetrated on unsuspecting investors, who
entrusted their life savings to unscrupulous and fraudulent
persons and who ultimately betrayed their trust.
51. However, coming back to the constitutional
conundrum that has been presented on account of the
two views expressed, by the Madras High Court and the
Bombay High Court, it has to be considered as to which of
the two views would be more consistent with the
constitutional provisions. The task has been simplified to
some extent by the fact that subsequently the decision of
the Bombay High Court [(2005) 4 CTC 705 (Bom)]
declaring the Maharashtra Act to be ultra vires, has been
set aside by this Court [Sonal Hemant Joshi v. State of
Maharashtra, (2012) 10 SCC 601] , [State of
Maharashtra v. Vijay C. Puljal, (2012) 10 SCC 599] , so
that there is now a parity between the judgments relating
to the Maharashtra Act and the Tamil Nadu Act.
[…]

38 (2012) 10 SCC 575
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59. […] The objects of the Tamil Nadu Act, the
Maharashtra Act and the Pondicherry Act being the same
and/or similar in nature, and since the validity of the Tamil
Nadu and Maharashtra Act have been upheld, the
decision of the Madras High Court in upholding the validity
of the Pondicherry Act must be affirmed. We have to keep
in mind, the beneficial nature o the three legislations
which is to protect the interests of all depositors, who
invest their life‘s earnings and savings in schemes for
making profit floated by unscrupulous individuals and
companies, both incorporated and unincorporated.‖
Following the decision in Bhaskaran (supra), the challenge to the Pondicherry
enactment on the ground of legislative competence was repelled.
56 The validity of the MPID Act was specifically dealt with in two decisions of
this Court in State of Maharashtra v. Vijay C. Puljal 39 and Sonal Hemant
Joshi v. State of Maharashtra40. In both the decisions, this Court upheld the
constitutional validity of the MPID Act in view of the earlier decision in Bhaskaran
(supra). In Soma Suresh Kumar v. Government of Andhra Pradesh41, a two
judge Bench of this Court upheld the provisions of the Andhra Pradesh Protection
of Depositors of Financial Establishments Act 1999 following the earlier decisions
in Bhaskaran (supra) and New Horizons Sugar Mills Limited (supra).
57 Having discussed the judgments of this Court on the constitutional validity
of the state legislations governing financial establishments offering deposit
schemes, including the MPID Act, there is no reason for us to reopen the
question. This Court has held that the MPID Act is constitutionally valid on the
grounds of legislative competence and when tested against the provisions of Part
III of the Constitution.

39 (2012) 10 SCC 599
40 (2012) 10 SCC 601
41 (2013) 10 SCC 677
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C. 6 The High Court‟s Judgment
58 Referring to the Bye-laws and rules of NSEL, the High Court held that
NSEL is an electronic trading platform which only facilitated transactions between
buyers and sellers. In this context, it observed that NSEL did not receive the payin in its own right but only for the purpose of passing it on to the selling trading
member on the same day. The High Court observed:
―The nature of transaction to be carried out on the NSEL
platform was also therefore, in public domain since the
trading on this electronic platform commenced. The
business/transaction which operated through NSEL, do
not disclose any payin amount received by NSEL in its
own right but it was only received in the process of
settlement of the commodity trade and only for the
purpose of passing it on the selling trading member on
the same day. This amount cannot be said to be
received as a deposit within the meaning of Section 2(c)
of the MPID Act which contemplates ‗deposit‘ to be a
receipt of money or acceptance of a valuable commodity
on the promise that such money or valuable commodity
would be returned/repaid by the financial establishment
after a specified period or otherwise.‖
The High Court has lost sight of the fact that Section 2(c) of the MPID Act defines
‗deposit‘ in broad terms. Further, according to the definition, the return may be
either in money, commodity or service, and it is not necessary that the commodity
or the money must be returned in the same form. The definition includes the
receipt of money and the return of a commodity, or even the receipt of a
commodity and a return in the form of a service. Further, Bye-law 10.8 indicates
that NSEL was not merely an intermediary. The Bye-law states that the buyer
shall pay the Clearing House the value of the delivery allocation. However, till the
completion of the delivery process, the money will be retained by the Clearing
House of NSEL.
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59 Referring to the contract notes and the confirmation receipts generated on
the electronic platform, the High Court observed that NSEL was only a ‗medium‘.
However, the High Court subsequently noted that ‗something has gone wrong
somewhere in these transactions‘. Further, the High Court referred to the First
Information Report filed by Mr. Pankaj Saraf observing that even the complainant
had not stated that he had deposited any amount with NSEL. The Court goes on
to note:
―in no way, the complainant in the FIR allege a promised
return in the form of any interest, bonus, profit, but yieldthe difference in the price of a commodity between the
two trading dates i.e T+2 and T+30/33/25 was calculated
as a yield but this, in our view, would not fall within the
purview of deposit since neither the NSEL received the
commodities to be retained by itself nor did it receive any
amount to be deposited in its account.‖
60 The High Court also observed in paragraph 33 of the judgment that at the
most, only the sellers in T+2 (and buyers in T+25) could be referred to as a
‗financial establishment‘. This finding was made without analysing the functioning
of the exchange vis-à-vis Sections 2(c) and 2(d) of the Act. The Court also held
that the ‗warehouse receipts‘ do not establish the nature of the transaction that
took place in the platform. In this regard it observed:
―… this receipt do not provide an answer to the nature of
transaction that took place on the platform of NSEL and
though it is no doubt that the commodity came to be
accepted as a deposit, but it should be accepted with an
assured return and in the present case, the commodity
which was accepted was because it was to be sold to a
purchaser and it is not the case of the State that it was a
pure transaction where commodities are accepted as
deposit.‖
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The High Court observed that since transaction charges were charged by NSEL
and the amount paid by the buyer used to be paid by NSEL by the settlement
date, it is not a financial establishment.
61 The High Court has formed an erroneous opinion that firstly, only if the
return includes interest, bonus or any other added benefit, it would be a deposit
for the purpose of the MPID Act. However, Section 2(c) states that the return may
be ―with or without any benefit in the form of interest, bonus, profit or in any other
form‖. The definition does not stipulate that there must be an added benefit,
rather that the ‗added benefit‘ is irrelevant for the purpose of the definition;
secondly, that for the purpose of Section 2(c), the receipt of the commodity or
money ‗must be retained by itself‘. The definition does not provide any such
embargo. Rather, the definition is broadly worded to include even the possession
of the commodities for a limited purpose. The High Court has read the definition
of ‗deposit‘ narrowly without any reference to the salutary purpose of the MPID
Act.
62 The High Court also made observations on the merits of the criminal
proceedings. Referring to the role of NSEL in the default in payments, it observed
that at the highest, the actions of NSEL would constitute offences under Sections
465 and 467 of the IPC. The EOW filed a charge sheet under Section 173 CrPC
before the Sessions Judge, Special Court under the MPID Act for offences
punishable under Sections 409,465,467,468,471,474 and 477(4) read with
Section 120(B). The High Court ought not to have made observations on the
merits of the criminal proceedings when the writ petition was restricted to the
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issue of whether NSEL is a financial establishment for the purpose of the MPID
Act.
63 The High Court observed that the decision of this Court in 63 Moons
(supra) does not have ‗any serious effect on the present proceeding‘, though this
Court has discussed at length the modus operandi of NSEL in duping the trading
members by throwing light on the structure of the exchange. Though it was
observed that the question of constitutional validity was settled in Bhaskaran
(supra), New Horizons (supra), Sonal Hemant Joshi (supra) and Vijay Kulijal
(supra), the challenge of the respondent to the constitutional validity of the MPID
Act was still kept open by the High Court. Such an observation was made in spite
of noticing in paragraph 39 of the judgment that this Court in Bhaskaran (supra)
had observed that the MPID Act and the Tamil Nadu Act have minor differences
and that the statute did not violate Articles 14, 19(1)(g) or 21 of the Constitution.
64 Further, while referring to the earlier order of the Division Bench dated 1
October 2015, where it was prima facie recorded that NSEL is a ‗financial
establishment‘ for the purpose of the MPID Act, the High Court observed that it
was not bound by the prima facie view. The primary ground for the Division
Bench for arriving at a prima facie view was the representations made assuring a
14% to 16% yield. However, the High Court in its impugned judgment dispelled
the argument on the ground that only a ‗faint reference‘ was made to assured
returns. Such an observation misrepresents the factual instances which are
backed by documentary material.
65 The appellant also contended that the writ petition filed by the respondent
is not maintainable since there was an alternative remedy of raising an objection
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before the Designated Court under Section 7 of the MPID Act. Though there is
merit in the argument of the appellant, since the High Court decided on the
validity of the impugned attachment notifications on merits, and arguments have
been addressed in the present proceedings, we have proceeded to decide the
matter on merits.
66 For the reasons recorded in this judgment, we allow the appeals and set
aside the impugned judgment of the Bombay High Court dated 22 August 2019.
The impugned notifications issued under Section 4 of the MPID Act attaching the
properties of the respondent are valid.
67 Pending application(s), if any, stand disposed of.
…..…..…....…........……………….…........J.
[Dr Dhananjaya Y Chandrachud]
…..…..…....…........……………….…........J.
 [Surya Kant]
…..…..…....…........……………….…........J.
 [Bela M Trivedi]
New Delhi;
April 22, 2022

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