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Withdrawal of trading not automatically extricate defaulting member;annual charges&marginrequirement

Withdrawal of trading would not automatically extricate the defaulting member from his

obligation regarding annual charges and margin requirements


Rusoday Securities Ltd v. National Stock Exchange of India and Ors.

Civil Appeak No. 2690 of 2009

20 November. 2020

The Hon’ble Supreme Court comprising of Justice A.M.Khanwilkar and Justice Dinesh Maheshwari held in a case that withdrawal of trading would not automatically extricate the defaulting member from his obligation regarding annual charges and margin requirements

In this appeal, the appellant challenges the judgment/order dated 13.01.2009 of the Tribunal wherein it had upheld the order of expulsion against the appellant, from the membership of the National Stock Exchange of India Limited - Respondent 1.

The brief facts of the case are, the appellant was a stock broker in the respondent stock exchange. As per the conditions prescribed in the Bye Laws, Regulations and Rules of the Exchange, the appellant was obliged to maintain a set of deposits with the Exchange, namely Interest Free Security Deposit (IFSD), security deposit (bank guarantee), margin money in cash and margin money in the form of bank guarantee.

In the year 1996 NSE transferred its clearing and settlement functions to its wholly owned subsidiary company NSCCL/Clearing Corporation. In furtherance of the original undertaking given by the appellant in favour of the Exchange, the Board of Directors of the appellant executed a subsequent undertaking dated 19.03.1996 in favour of the Clearing Corporation, whereby the appellant unconditionally resolved to abide by all Rules, Regulations, circulars etc., of the Corporation. Consequently, the appellant was admitted as a Clearing Member of the Clearing Corporation. On 19.05.1997, the Exchange adopted and circulated the Circular No. NSCC/CM/C&S/030, originally issued by the Clearing Corporation, to all the trading/clearing members. The circular prescribed certain conditions to be complied with by the members during trading, including those relating to “Gross Exposure Limits” for daily functioning of the members.

The appellant violated the Gross exposure limit. As a result of this, the appellant was asked to deposit additional amount. Failing to deposit, the Clearing Corporation closed out all the open positions of the appellant. The Committee on Declaration of Defaults, on 05.01.2006, decided to expel the appellant from the membership of the Exchange primarily citing two reasons – failure to comply with the requirement of maintaining IFSD and failure to meet continued admission norms despite suspension.

The order of expulsion was challenged before the Tribunal at Bombay. The Tribunal held in favour of the Exchange. It is against this Judgment this judgment, the present appeal is preferred by the appellant.

The questions of law framed and answered by the Court are as follows:

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

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

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

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


Counsel for the appellants, among other things, contended that (i) as regards the decision of expulsion from membership, the said decision was founded on an illegality as its trading facility was wrongly withdrawn. (ii) that the adoption of the said circular by the Exchange amounted to a violation of 1956 Act and thus being void ab initio, the appellant was not bound by the said circular. (iii) that the communication was in violation of Section 9(1) and 9(4) of 1956 Act along with Section 21 of the General Clauses Act, 1897. (iv) that the closing out was not done in accordance with clauses 17 and 18 of the Byelaws as it was done before the due date.


The counsel or the respondent, among other things, contended (i) that the Tribunal has rightly concluded that clause 17 is not exhaustive as far as the action of closing out is concerned, and there could be other circumstances wherein the action of closing out ought to be taken in the investors’ interest. Clause 17 does not preclude invoking other just circumstances. (ii) that the circular does not override or contravene any of the Byelaws, Rules or Regulations framed by the Exchange. (iii) As regards the decision of expulsion, the respondents have submitted that the appellant was liable to maintain the Interest Free Security Deposit with the Exchange as he continued being a member of the Exchange despite the suspension of trading facility. (iv) that since the Byelaws were brought into force after approval of the Central Government, no further approval was necessary for taking action under the said Byelaws.


The Court, after referring to section 3,4 and 29A of the 1956 Act and certain by laws of the Stock Exchange, observed the following with regard to the first question:

The subject matter of the circular in question pertains to trading/exposure limits coupled with sanctions in case of noncompliance. That falls squarely within the ambit of operational parameters (as seen in clauses produced above), which can be determined and notified by the Exchange from time to time. In this case, the Exchange adopted the circular from the Clearing Corporation and notified it in the form of operational parameter. Nothing is brought to our notice from the text of this circular that it would militate against the norm of fair dealing and protection of investors. In any case, no requirement of prior approval is provided for notifying such operational parameters and as the name suggests, they are meant to tackle “operational” concerns as and when they emerge before the Exchange or the Clearing Corporation. The power and mode of prescription of such circular falls within the residuary powers reserved for the Exchange. (Para 29)


Further, bringing out the role of the Exchange as a regulator in the stock market, the court brought out the legislative intent behind the 1956 Act and the 1992 Act and observed the following:

A priori, it must follow that the legislature has bestowed upon the Exchange sufficient freedom of action to effectively control and regulate the functioning of stock brokers who use the Exchange as a means to enter into financial relationships with the investors and common public. This freedom of action is guaranteed in the preapproved Byelaws which enable the Exchange to frame Regulations, instructions, operational parameters, notice etc. and bring them into force without subjecting them to any added condition of prior approval of the Central Government/SEBI. The only limitation on this power of the Exchange is that such Regulations or operational parameters issued under the Byelaws are subject to 1956 Act, 1992 Act and Rules framed thereunder. Strictly speaking, this limitation does not ipso facto mean that such Regulations or operational parameters are subject to prior approval, as argued. To say that would result in rewriting of the provisions in question. The same is forbidden. The import of this subjection clause is merely to specify that any such Regulation/operational parameter must not run counter to the provisions of 1956 Act or 1992 Act, as the case may be, including the Rules framed thereunder. (Para 31)


Indubitably, the Exchange provides a middle ground to the stock brokers and investors dealing with public funds/investments, and considering the nature of activities undertaken in a stock market, it is the bounden duty of the Exchange to fortify the public trust. In doing so, the Exchange is required to prevent and remedy all possible mischief “on a real time basis”. To that end, it may prescribe a set of parameters for fulfilling its objective of “regulating” and “controlling” the stock market, as stated in the Preamble of the Act. Since the Byelaws and Rules of the Exchange are duly approved by the Central Government/SEBI, it can safely be stated that actions taken by the Exchange under the Byelaws or Regulations by prescribing such operational parameters in the form of a circular and in consequence thereof as discussed above – would assume enforceable character. The appellant having submitted an undertaking to comply with such instructions, notice etc., cannot be heard to argue to the contrary. The Court by interpretative process ought not to limit the efficacy of such a valid document by additional preconditions such as prior approval, not envisaged by the lawmakers or regulation framing authorities. To do so would entail in undermining the authority of the Exchange to regulate and control the stock market, directly or indirectly. (Para 32)


Answering the second question, the court referred to clause 17 and 18 of the bylaws and brought out how the same is in consistent with the circular dated 19.05.1997 and observed the following:

Clause 18, on the other hand, is of a residuary nature and confers on the relevant authority of the Exchange the power to close out certain positions on grounds not specified in clause 17. The relevant authority, under clause 18, is empowered to determine and prescribe the “manner”, “time frame” and “conditions and procedures” in accordance with which such closing out can take place. The key words used here are wide in scope and are targeted to enable the Exchange to act effectively and promptly according to the prevalent dynamic state of the market by prescribing manner, conditions, procedures and time frame for a closing out action. The mischief creators in a stock market operate in a myriad set of ways and one cannot preset or comprehend all possible methods of undermining the health of the market. Thus, residuary situations of closing out may emerge and clause 18 enables the Exchange to promptly act against such attempt. The provision is premised on necessity. By reading in any requirement of due date in clause 18, on the lines of clause 17, the court would be doing violence to the clear intent of the clauses and the broad scheme of the Byelaws. Clause 18, as the Tribunal observed, would be rendered nugatory. Even logically, by importing a fictional requirement of “due date” in clause 18, the Exchange cannot be expected to gloss over a clear case of excessive reckless trading and allow the mischief to continue until the due date has arrived. Thus, there is no occasion to control the scope of clause 18 by establishing a fictional link with clause 17. (Para 44)


In the above regard, the Court observed:

To summarize, on a comprehensive view of the scheme of closing out under the Byelaws of the Exchange, Byelaws of the Clearing Corporation and the circular, we are of the view that an action of forthwith closing out is permissible under the said scheme, particularly clause 18, and thus, the circular is not ultra vires clauses 17 and 18 of the Byelaws. Rather, the circular furthers the spirit underlying clause 18. (Para 47)


The Court with regard to the third question referred to SEBI (Stock Brokers & SubBrokers) Regulations, 1992 Rule 9 of the Securities Contracts (Regulations) Rules, 1957 and the undertaking given by the appellant on account of the circular and observed the following:

Notably, the undertaking given by the appellant to the respondents fell within the broad scheme of the Byelaws/Rules, and was a quintessential requirement for obtaining registration as a stock broker as both 1956 Act and Byelaws subjected the members to such conditions. Thus, the appellant is bound by the undertaking so given. Even otherwise, assuming the absence of undertaking, the very fact that a valid circular originated from the statutory scheme of the Byelaws is sufficient to bind the appellant with its provisions. Thus, the emergent legal position is that the appellant had subscribed to both statutory as well as contractual obligations with the respondents for functioning as a stock broker. Any deviation from the said circular could invite action under multiple provisions spreading across the Byelaws of the Exchange and Byelaws of the Clearing Corporation, in addition to the sanctions provided in the circular itself. Understood thus, we are of the view that the appellant is squarely bound by the circular and any breach of the same is to be viewed accordingly. (Para 51)


The Court answered the fourth question in the following words:

Pertinently, the capital adequacy norms, as discussed above, are meant both for admission as a member and for continuation as a member. Even the language of the governing provision i.e. Rule 32, signifies that requirements relating to capital adequacy are meant for “continued admittance to trading membership” and thus, the mandatory obligations would continue, as long as membership is formally continued. Despite the temporary action of withdrawal of trading facility, a member continues to be a member of the Exchange with all corresponding rights and obligations intact on both sides. A member can always resign from the membership of the Exchange and move out of all fiscal obligations after settling his dues, but as long as he opts to retain his membership of the Exchange, there is nothing in the governing provisions to support the view that withdrawal of trading would automatically extricate the defaulting member from his obligation regarding annual charges and margin requirements, as the case may be. The timely fulfillment of these requirements has been envisaged in the Byelaws as a precondition for admission or continued admission in the Exchange. Despite closer examination of the Byelaws, Rules and Regulations of the Exchange, we could not find anything to support a contrary view. The continuation of membership and fulfillment of capital adequacy norms run conterminously with each other, and failure to comply with the latter would automatically put the former in jeopardy. (Para 61)

Concluding, the Court upheld the Tribunal’s Judgment of confirming the order of expulsion.



Jhanavi M

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