While upholding an order passed by the member and core settlement guarantee fund committee (Committee) of NSE Clearing Ltd (NCL), the securities appellate tribunal (SAT) directed Edelweiss Custodial Services Ltd (now known as Nuvama Clearing Services Ltd) to reinstate shares belonging to clients of Anugrah Stock & Broking Pvt Ltd (Anugrah). In 2020, to recover these dues, Edelweiss sold the collaterals worth Rs460.32 crore furnished by Anugrah and applied the proceeds to meet Anugrah's clearing obligation towards NCL. The tribunal also directed Edelweiss to reinstate the securities of clients of VRise Securities Pvt Ltd. In the same order, SAT directed two clearing members (CMs), SMC Global Securities Ltd and Yes Bank Ltd, to reinstate the securities of their clients, Yuvraj Securities and Action Financial Services (India) Ltd, respectively. In separate orders, the Committee had directed all Edelweiss, SMC Global Securities and Yes Bank to reinstate securities belonging to their client-members which were sold illegally to recover dues from their client-members.
In an order last week, the SAT bench of Justice Tarun Agarwala (presiding officer) and Meera Swarup (technical member) said, "Edelweiss' contention that it sold the clients securities only for the dues of the trading member-TM is not relevant. The clients' shares were wrongly sold off by Edelweiss without ensuring that it sold off the trading members' -TMs clients’ shares only for the respective end clients' obligations and, therefore, in our opinion, the clients are entitled to get back their shares as held in the impugned order."
"We are also of the opinion that if the Committee has the power to suspend trading rights, it would include the power to direct a clearing member to reverse the damage caused by unlawful sales of clients' shares. In fact, the Committee has the power to suspend membership rights and, therefore, a far more stringent and onerous order could always be passed directing the membership rights to be suspended till Edelweiss rectifies the situation by restoring the status quo ante by returning the clients shares," the bench says.
Edelweiss Custodial Services (Nuvama Clearing Services) is a member of NCL and is registered as a professional clearing member (PCM) since 2018 and provides clearing and settlement services to brokers and TMs.
Anugrah was the client of Edelweiss, who provided clearing services to Anugrah only for the trades executed on the future & options (F&O) segment of National Stock Exchange of India Ltd (NSE) as per the bye-laws of NCL. Edelweiss collected collaterals from Anugrah towards Anugrah's margin requirement for the settlement of trades on an aggregate basis. These collaterals were transferred directly by Anugrah to Edelweiss. Most of the collaterals were in the form of shares.
Between 15 January 2020 and 2 June 2020, Anugrah failed to pay its dues to Edelweiss on multiple occasions. To recover these dues, Edelweiss sold the collaterals furnished by Anugrah to the tune of Rs460.32 crore and applied the proceeds to meet Anugrah's clearing obligation towards NCL. All such proceeds were duly shown as credit entries in Anugrah's ledger account with the appellant Edelweiss. The collaterals sold were utilised by Edelweiss for the purpose of meeting Anugrah's closing obligation.
On 2 April 2020, Edelweiss received an email from NSE advising it to perform adequate due diligence while handling clients' assets and ensure that the client's securities were utilised only for meeting the respective clients' obligations. On 13 July 2020, Anugrah terminated its relationship with Edelweiss and shifted to another clearing member. On 3 August 2020, NSE passed an order turning off Anugrah's terminals.
On 19 September 2020, NCL issued a show-cause notice (SCN) to Edelweiss alleging that it had failed to carry out due diligence and to ascertain whether there were any debit balances for the clients before the liquidation of the securities. The SCN called upon Edelweiss to show cause as to why appropriate disciplinary proceedings in terms of rule 1 and rule 2 of chapter V of rules of NCL (F&O) should not be taken for the non-compliances mentioned in the SCN.
Edelweiss denied the allegations and contended that they had committed no wrong. The Committee, after considering the submissions, passed an order on 20 October 2020 holding that Edelweiss had failed to perform adequate due diligence while handling client securities and failed to ensure that the clients' securities were only utilised for meeting the clients' obligations and, therefore, the appellant Edelweiss was in contravention of clause 1 and clause 2 read with clause 3(1)(b) and 3(1)(c) of chapter V of NCL rules. The Committee directed the appellant Edelweiss to reinstate the securities by procuring them from the market.
During the hearing before SAT, Edelweiss contended that under the bye-laws of NCL, it is a PCM and not a clearing member -CM and, therefore, the circulars issued by Securities and Exchange Board of India (SEBI), NSE and NCL are not applicable to the firm. It also urged that being a PCM or a CM, Edelweiss had no relationship with the end client of the trading member (Anugrah) and, therefore, the securities that Anugrah provided were the broker’s and which had been sold by Edelweiss to meet its obligation and such sale of the securities was not violative of any rules, regulation or circular.
However, the tribunal rejected the contention. It says, "Once it is evident that Edelweiss has wrongly sold off the shares of clients, it would make a mockery of disciplinary regulation and be a travesty of justice to hold that the NCL has no power to direct the appellant to reinstate and return the shares to the clients. Such a conclusion would place a premium on dishonesty and encourage brokers to misappropriate clients' securities. In fact, the very fact that Edelweiss has chosen even to raise such an allegation only proves its intentional defiance of the authority of NCL and NSE to regulate the markets and the conduct of the brokers."
Many interveners have filed applications seeking leave to intervene in these proceedings. These interveners were individual investors whose securities had been sold illegally by the appellants while meeting the obligations of the TM.. The interveners were those who supported the Committee's order and adopted NCL's submissions.
VRise Securities had defaulted and accordingly, Edelweiss sold off the securities of the client of VRise for Rs22 crore to recover the outstanding dues of VRise proprietary trading.
SMC Global Securities also sold off the securities worth Rs75.74 lakh of the client of Yuvraj Securities, the trading member, for the recovery of its dues from the TM.
Yes Bank wrongly sold off the securities of the client of Action Financial worth Rs1.95 crore to clear the outstanding dues of the proprietary trades of Action Financial, despite knowing that the securities were of the clients of Action Financial.
SAT says, "We are of the opinion that the Committee has the power for restitution to reverse the damage wrongfully caused. The appellants (Edelweiss, SMC Global Securities and Yes Bank), having committed a wrongful act, cannot be permitted to take advantage of its own wrong. Where restitution can be directed, it would be totally contrary to the cause of justice to deny the same. It would be a travesty of justice and totally undermine the regulation of the markets if any intermediary is permitted to misuse or misappropriate a client's securities by selling off the same unilaterally when the concerned investor has no outstanding obligation or liability and then permitting the intermediary to benefit from the same at the cost of the expense of the investors."
"The contention that any order for restitution must be contingent on unjust enrichment is incorrect and misconceived. In fact, by wrongfully selling off the client's shares, the appellants did evade the losses which it would otherwise have suffered since it had to complete the pay-in obligations of the trading member. In the present case, the restitution directed is on the basis that the concerned clients’ shares had to be returned to them since their shares had been wrongly sold off," the bench says.
