2026 INSC 941 Page 1 of 56

Civil Appeal No.31 of 2024 etc.

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

Civil Appeal No.31 of 2024

Edelweiss Custodial Services Limited

... Appellant

Versus

NSE Clearing Ltd. & Anr.

… Respondents

With

Civil Appeal No. 7313 of 2024

Civil Appeal No. 2187 of 2024

Civil Appeal No. 3179 of 2024

Civil Appeal No. 4238 of 2026

J U D G M E N T

K. VINOD CHANDRAN, J.

When the future holds out promises and options for

everyone; in the Futures & Options (F&O) Segment they were

faced with eternal damnation and loss of valuable securities,

lament the individual investors, who are the intervenors in these

appeals. Whether the reparations are to be borne by the Share

Broker, herein termed the Trading Member (TM) or the

Professional Clearing Member (PCM), the appellants herein, is

the dispute raised by the appellants, who distance themselves

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Civil Appeal No.31 of 2024 etc.

from the individual clients/investors, on the ground of absence of

privity of contract with those clients of the TM and lack of visibility

of their debit/credit positions.

I) Overview of the F&O Segment and the case:

2. First, a broad overview of the hierarchy and the operations

in the Stock Exchange; here the National Stock Exchange (NSE),

the 2

nd

respondent in Civil Appeal No.31 of 2024, which appeal is

taken as the lead case and the documents referred to therefrom,

unless otherwise specified. The operations, of clearing and

settlement of the various transactions are controlled by the NSE

Clearing Corporation (NCL), a subsidiary of the NSE. The

hierarchy in the NSE, is that, under its subsidiary, the NCL, termed

the Clearing Corporation, there are three types of Clearing

Members: Clearing Members (CM), Professional Clearing

Members (PCM) and Self-Clearing Members (SCM). A CM does

proprietary trades on its own account, has its own clients and also

handles the proprietary trades of the TM and their clients. A Self-

Clearing Member trades in its own account and also for and on

behalf of its clients; while a PCM deals only with their constituent

TMs and do not have proprietary trades or individual clients. The

PCM is registered only with the NCL while CM and SCM are

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Civil Appeal No.31 of 2024 etc.

registered with the NSE and the NCL. The PCMs have as their

constituents a number of TMs, who in turn have clients, the

individual investors, who through their respective TMs carry out

the operations in listed shares and other derivatives on the

platform provided by the NSE.

3. As for the operations, a brief overview of the mechanism of

the F&O Segment, as understood from the records is necessary.

F&O Segment deals in major stock derivatives traded in the stock

market, recognized under Section 18A of the Securities Contract

(Regulations) Act, 1956

1

. Though the F&O Segment operates in a

complex manner, simply put, it allows investors to buy or sell or

lock in the prices of, an underlying asset such as a stock, index or

commodity at a future date without actually owning it. Contracts

are entered for trading a stock asset at a pre-determined price,

applicable on a later date. The NCL ensures that the money and

security change hands safely on completion of the trade and the

obligation of investors to each other are duly met. The NCL acts

as a regulatory body in the operation of the trading platform of the

NSE and provides a settlement guarantee to the participants. The

investment made can lead to astronomical profits, without any

1

For short, the Securities Act

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Civil Appeal No.31 of 2024 etc.

actual purchase or sale being carried out, or lead to massive

losses, often driving the speculators to penury. Quick money is

the lure and therein lies the trap too.

4. The execution of derivatives contracts, in the F&O Segment

as in any other trade and especially so for reason of its speculative

nature, requires collaterals in the form of money/stock/securities.

The clients, the individual investors place their collaterals with the

TM while the TM in turn place their own or their client’s collateral,

with the PCM. The PCM provides collaterals to the NCL and

together this provides a settlement guarantee ecosystem, since

every profit earned has a corresponding loss suffered. When a

client fails to carry out the final settlement, the TM recoups by

enforcing the securities offered to it as collateral and likewise on

the TM’s default, the PCM liquidates the collaterals with them and

similar would be the consequence when the PCM defaults to the

NCL.

5. Insofar as the present case, the default was by the TM whose

collaterals were sold out in the market, allegedly without

reference to the debit/credit positions of their individual clients.

The compelling argument of the appellants, the PCMs, is that they

have no privity of contract with the clients of the TM and it was the

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Civil Appeal No.31 of 2024 etc.

default of the respective TMs that resulted in the collaterals being

sold. It is also the submission of the appellants that the default

occurred within a short period and the sale of collaterals were

made over that period of time, at various instances, on the default

of the TM. While, the end clients contend that the PCM had an

obligation to look at their debit/credit positions; the PCM argues

that neither was there any mechanism in place for the PCM to

know the debit/credit positions of the individual clients nor was

there any statutory obligation on the PCM to find that out. At that

point of time, there were weekly settlements which made the

verification impossible and the system was more complex, unlike

now, when the Securities & Exchange Board of India (SEBI) has

introduced a daily clearing regime which also ensures the

credit/debit positions of the individual client to be known to all

the constituents in the hierarchy of trading in the F&O Segment.

6. By the actions of the TM, the clients lost the security offered

by them; even those who did not have any debit balance, for

reason of the securities offered on their behalf by the TM to the

PCM having been sold out. The TM is nowhere in the picture,

since for all practical purposes they are defunct and bankrupt.

The intervenors (the speculators) approached various forums:-

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Civil Appeal No.31 of 2024 etc.

the SEBI, the Securities Appellate Tribunal (SAT) and the High

Court which were not entertained. They sought for compensation

before the NSE which proceedings were closed on the

compensation being awarded by the impugned order of the

Committee appointed by the NCL. The Committee appointed by

the NCL found the PCM to be guilty of giving too much elbow

room to the TM, thus resulting in a situation where they had to

recoup their losses, by the sale of securities offered by the TM,

which was done without complying with the regulatory

mechanism in place. If remedial measures were taken on the

initial default, the losses could have been minimized; but free play

was given to the TM, putting in jeopardy the valuable securities of

the individual clients of the TM. This, according to the NCL and

the individual investors makes liable the PCM to reimburse those

clients of the TM who, though had proffered securities, but had no

debit balance in their accounts.

II) The Professional Clearing Members:

7. Mr. Shyam Divan, learned Senior Counsel appearing for the

appellant in Civil Appeal No.31 of 2024, who is also the appellant

in Civil Appeal No.3179 of 2024, assails the impugned judgment,

essentially on the ground, the Committee constituted by the NCL

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Civil Appeal No.31 of 2024 etc.

having no jurisdiction to pass an order like the instant one,

directing restitution of securities, which on the date of liquidation

were worth about Rs.460.32 crores and as on the date of the order,

would stand in excess of Rs.900 crores; in Civil Appeal No.31 of

2024. The restitution as ordered by the Committee is in effect, an

order of disgorgement; the power to direct that being available

exclusively under Section 11B of the Securities & Exchange Board

of India Act,1992 (SEBI ACT herein after) and Section 12A of the

Securities Act. Section 9(3)(b) of the Securities Act empowers the

stock exchanges to make Byelaws which only provides for

imposition of penalties as specified therein, which particularly

excludes any penalization in terms of payment of money. The

restitution of securities as ordered by the Committee and

approved by the SAT in effect is penalization by payment of

money, which is without jurisdiction and statutorily prohibited.

8. Mr. Divan also took us through the applicable Regulations

and Circulars to point out that the regulatory mechanism in place

did not oblige the PCM to verify the credit/debit positions of the

individual clients of the TM. Nor was there a verification method

in place for the purpose of liquidation, on the failure of TM to settle

its dues; even those incurred on behalf of the TM’s individual

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Civil Appeal No.31 of 2024 etc.

clients. If the enforcement of collaterals by sale of securities

offered by the TM, is carried out by the PCM, on the TM’s failure;

the remedy of an individual client of the TM against any sale of

securities belonging to that client, proffered by the TM, would be

against the TM and not the PCM. It would also be the

responsibility of the TM to apprise the PCM, with the debit/credit

positions of an individual; bereft of which there can be no such

information ferreted out by the PCM.

9. The Show Cause Notice, never contemplated a penalty in

the nature of the one awarded and there is clear violation of

principles of natural justice in the Committee having imposed a

penalty, impugned herein without any notice to the PCM. It is also

argued that the foundation of such imposition of penalty was never

disclosed to the appellant and the determination of the restitution

was without proper disclosure of the details to the PCM. It is also

alleged, without prejudice to the contention of lack of jurisdiction,

that the penalty imposed is grossly disproportionate.

10. The other two appellants before us, also PCMs, adopt the

arguments of the appellant in Civil Appeal No.31 of 2024, but

pointed out certain distinguishing factors. Mr. Niranjan Reddy,

learned Senior Counsel appearing for the appellants in Civil

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Civil Appeal No.31 of 2024 etc.

Appeal No. 2187 of 2024 pointed out that as against them the

alleged default and liquidation of collaterals occurred between

06.03.2020 and 25.03.2020 wherein regulatory proceedings were

initiated by the National Company Law Tribunal (NCLT),

culminating in the order of the Tribunal to reinstate securities

worth Rs.1.9 crores; which as on the date of the order would have

a value of Rs.7.9 crores. The TM had provided the collaterals for

the purpose of preparatory trading, as belonging to the TM itself.

When the amounts due spiraled, on warnings being issued, the

TM agreed to furnish a bank guarantee and provided one for

Rs.6.05 crores. On 23.03.2020, while scoring off the positions of

the TM, there was remaining an obligation of Rs.7.8 crores of

which Rs.6.5 crores were satisfied on enforcement of the bank

guarantee and the balance by sale of collaterals. It is pointed out

that the clients of the TM filed a Civil Suit against them for

recovery of the monies and some received relief from the

Investors Protection Fund of NSE. The further claim from the PCM

would only result in duplication of the loss and, in any event, there

cannot be any loss recovery from the PCM.

11. Mr. Amar Nath Saini learned Senior Counsel appearing for

the appellants in Civil Appeal No.7313 of 2024 also distinguishes

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Civil Appeal No.31 of 2024 etc.

the case from that of Civil Appeal No.31 of 2024 on the ground that

the TM had specifically instructed the PCM to sell off the

collaterals. The TM was declared a defaulter on 06.09.2021 and

the liquidation of the collaterals insofar as the present appellant is

concerned, occurred between 22.10.2019 and 03.07.2020. It is

also pointed out that there is a specific arbitration clause as

available in the byelaws of the NCL which enables such

arbitration to be carried out, of disputes existing between the TM

and its clients. The attempt to recover loss from the PCM is a

statutory overreach, especially when there is clear collusion

between the TM and its clients. Both the appellants reiterated the

grounds raised of absence of privity of contract with the clients of

the TM, regulatory provisions having been misread by the

Committee and the SAT to find lack of due diligence, when no

such statutory prescription existed. Warning mechanism was

brought in by the SEBI, only later to the liquidation of securities,

which alone brought about the visibility to the PCM, of the

credit/debit positions of the individual clients of the TM. The lack

of jurisdiction to impose the penalty in the nature of restitution of

the liquidated collaterals is asserted by the PCMs.

III) The NSE Clearing Corporation:

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Civil Appeal No.31 of 2024 etc.

12. Sri Arvind P. Dattar, learned Senior Counsel, appeared for

NCL and vehemently categorized the liquidation of the securities

by the appellants as a wrongful act, depriving innocent investors;

the clients of the stockbroker, of valuable securities placed as

collaterals without any dues remaining unpaid from that

individual investor. It is argued that there is no reason for this

Court, much less any question of law arising, to interfere with the

concurrent findings of fact by the Member and Core Settlement

Guarantee Fund Committee (MCSGFC), as upheld by the SAT.

The NCL manages the clearing and settlement of trades in the NSE

which has over 2,200 CMs. The appellants are registered as a CM

under the PCM category, bound to follow the regulations of the

NSE and NCL, as also the notifications of the SEBI, as a member of

the F&O Segment of the NSE. All provisions applicable to a CM

are equally applicable to PCMs and so is the liability and

responsibility of an entity acting as a PCM, to follow the rules,

regulations, bylaws and circulars, regardless of the fact that they

fall under the category of PCM. The regulations are pointed out to

argue that there is clear restriction of utilizing a collateral

furnished by a client to satisfy the dues of one another client, or

even that of a CM.

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Civil Appeal No.31 of 2024 etc.

13. The settlement principles brought in by the regulations

provide a broad definition of ‘client/constituent’ which insofar as

the PCM is concerned, takes in both the TM and the individual

client of the TM. The circulars of the NCL also provide for

reporting of trades, with client-wise collaterals to be uploaded

which provides the necessary visibility insofar as the individual

client-wise credit/debit positions to the PCM also. The SEBI

Circulars also prohibit the collateral of one client being used

against the dues of another. The CM-TM agreement is read to

impress upon us that there is an authority coupled with a duty

enjoining the CM to ensure the debit/credit positions of the

individual clients, before collaterals are accepted and in extreme

cases, liquidated. The TM too has a responsibility to ensure that

the securities proffered as collaterals are in existence and are

owned by the respective clients which are also free from any

charge, lien or encumbrance whether prior or otherwise; to which

end, an undertaking is given by them.

14. Mr. Dattar, emphasizes the power of MCSGFC to direct

restitution relying on the principle of a larger power having within

its fold a lesser power, as has been held by a Constitution Bench

of this Court in Ahmedabad St. Xavier's College Society and

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Another v. State of Gujarat and Another

2

. The larger power,

according to the NCL, is of expulsion, within which is ensconced

the lesser power of restitution of the liquidated securities, which

inure to the benefit of the innocent investors and ensures the

maintenance of integrity of the stock market. The disciplinary

power to impose a penalty, conferred on the NCL, cannot be

restricted on the ground of a restitution not being literally spelt

out in the byelaws. Penalty, according to the NCL, is a larger

concept as held in Director of Enforcement v. M.C.T.M.

Corporation Pvt. Ltd. and Others

3

& Shiv Dutt Rai Fateh Chand

and Others v. Union of India and Another

4. Reliance is also

placed on the extract from Corpus Juris Secundum. The

jurisdiction to make restitution, is inherent in every authority and

has to be exercised when justice demands it, as held in South

Eastern Coalfields Ltd. v. State of M.P. and Others

5 and Kavita

Trehan and Another v. Balsara Hygiene Products Ltd.

6. Dr.

Poornima Advani v. Government of NCT

7 held that restitution is

used in three senses, first and foremost, the restoration of a

2

(1974) 1 SCC 717

3

(1996) 2 SCC 471

4

(1983) 3 SCC 529

5

(2003) 8 SCC 648

6

(1994) 5 SCC 380

7

(2025) 7 SCC 269

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Civil Appeal No.31 of 2024 etc.

specific thing to its rightful owner. The contention raised of the

appellant having not been heard on the aspect of restitution, was

countered, pointing out the additional written statement filed

wherein the appellant had responded to the demand of restitution

of liquidated securities, as coming out in the hearings before the

Committee.

IV) The End Clients of the Trading Members:

15. The investors who had intervened in the proceedings

before the SIT, were represented before this Court and Ms.

Meenakshi Arora, learned Senior Counsel, led the arguments on

their behalf. The rationale behind the introduction of a CM is not

merely to facilitate settlement of trades but also to ensure that the

critical functions are discharged by the various entities in full

compliance of the institutional safeguards. The regulatory

framework places the PCM in a fiduciary capacity and enjoins on

them statutory responsibilities, even when permitting them to

independently discharge their clearing and settlement functions,

in accordance with the applicable regulations. It does not permit

a clearing member to mechanically or indiscriminately discharge

its functions without undertaking due diligence and without

satisfying regulatory obligations cast upon it.

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Civil Appeal No.31 of 2024 etc.

16. The appellants violated SEBI circulars dated 17.04.2008,

26.09.2016 and 20.06.2019, respectively dealing with the

‘Collateral deposited by Clients with Brokers’, the ‘Enhanced

supervision of stockbrokers/depository participants’ and the last

specifically issued by the SEBI to regulate ‘Handling of Clients’

Securities by TMs/CMs’. The appellants are also in violation of NSE

Clearing Circular dated 20.05.2019 and the NCL Regulations,

specifically Regulation 1.7, 10.2.4 and 4.5.4.

17. According to the investors, the CM -TM agreements

expressly empower a CM to obtain client-wise margin details and

constituent information, as also inspect the records and verify the

TM’s accounts. On the persistent defaults of the TM, which was

also brought to its notice by the NSE by a communication dated

02.04.2020, the PCM failed to exercise their contractual

obligations and regulatory powers. The TM was given a long

rope, which raises a presumption of collusion and illegal

enrichment, especially in the context of liquidation of client

securities indiscriminately and without following due diligence

practices.

18. The NCL circular dated 10.09.2019 specifically requires the

provision of daily client-wise margin information including client-

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wise and security-wise margin obligations and market to market

details of constituents of TM. The contention of absence of privity

of contract and lack of client-wise information, hence, is wholly

untenable and deserves to be rejected. The various legal

proceedings undertaken by the investors are specifically

emphasized to sustain the restitution of securities liquidated by

the appellants in violation of statutory byelaws and circulars,

flouting the regulatory mechanism in place. The concept of

restitution in the face of unjust enrichment, is sought to be

supported with reference to the decision of this Court in Indian

Council for Enviro-Legal Action v. Union of India and Others

8.

The PCMs having violated its core regulatory obligations, as

enjoined upon by the SEBI, the NSE and the NCL, cannot escape

from its liability to restore the securities sold away without

looking at the credit/debit positions of the individual clients. The

contention of the appellant that they liquidated the securities so

that the entire trading activity of the NSE does not collapse, cannot

stand in the face of the protection granted by the Settlement

Guarantee Fund, which would have honoured the claims of the

individual investors in the context of such collapse, ensuring the

8

(2011) 8 SCC 161

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Civil Appeal No.31 of 2024 etc.

innocent investors without any debit positions from losing their

valuable securities, procured with their life savings.

V) The MCSGF Committee:

19. The MCSGF Committee constituted by the NCL had ordered

restitution as per Annexure 22; similar orders having been passed

against the others too. The Committee’s order, in Civil Appeal

No.31 of 2024, first noticed the findings in the Limited Purpose

Inspection (LPI) with respect to the execution of the CM-TM

Agreement and the PCM being enjoined to upload trading

member-wise, client-wise, security details to NCL in accordance

with NCL Circular dated 20.05.2019. The books of the PCM

showed large debit balances on multiple dates on account of

losses made by the TM to settle the outstanding dues and the PCM

having sold the securities between January 2020 to July 2020. The

information sought for from the PCM revealed no due diligence

carried out making it clear that the regulatory regime was

violated by the PCM. The email addressed by the NSE to the PCM

dated 02.04.2020, cautioned the PCM about its constituent, the

TM; Anugrah Stock & Broking Private Limited (herein after

Anugrah), having significant settlement obligations/losses and

the liquidation carried out to meet the unpaid obligations with a

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reminder to carry out periodic due diligence. The reply of the

PCM distancing itself from the clients of the TM insofar as the

mandatory weekly reporting in place, not enabling timely

verification of the collaterals with the debit/credit positions of

individual clients were brushed aside. The violations observed

were of the SEBI’s Circulars and the NCL Regulations as pointed

out by the investors and specifically of non-adherence to the NCL

and NSE directives i.e., Clauses 1 and 2 read with Clause 3 (1)(d)

of Chapter V of the Rules of NCL.

20. From the findings of the Committee, it was specifically

pointed out by the respondents that the attempt of the PCM to

distance itself from the clients of the TM is untenable since the

PCM had been uploading on a weekly basis, the client-wise and

ISIN-wise details of the non-cash securities placed by the TM with

it. The CM is not permitted to sell huge quantities of

investors/clients securities without even ascertaining the

balances of the respective clients. The undertaking given by the

TM dated 30.07.2019 specifically spoke of the collaterals

furnished by it being the securities belonging to its clients, in

addition to the undertaking that they are free from any

encumbrances. Violations with respect to the SEBI Circulars were

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separately noticed and so was the violation of Regulation 10.2.4 of

the NCL. The Committee found the sale of the securities worth

Rs.460.32 crores to be in utter disregard of the SEBI Circulars and

the NCL Regulations and without any proper due diligence

carried out, to ensure sale only of those securities which

belonged to clients having debit positions/defaulted obligations.

21. Quoting, interest of justice, equity and good conscience, the

PCM was directed to reinstate the securities which were

liquidated in contravention of the SEBI’s circulars and NCL

Regulations within a period of 15 days, failing which an amount

equivalent to the value of the securities as on the 16

th

day plus the

market value of 5 % was directed to be blocked from the available

collateral of the PCM with NCL, from the date of the expiry of the

aforesaid period of 15 days in Civil Appeal No.31 of 2024;

concerned with the TM, Anugrah. The appellant was further

directed to pay a penalty of Rs.1 lakh by the Committee. Insofar

as Civil Appeal No.3179 of 2024, the very same PCM, with

reference to the sale of collaterals offered by another TM; viz:

VRISE Securities (Pvt.) Ltd. was directed to restitute 22 crores

worth securities liquidated between 15.11.2019 to 04.12.2019. In

Civil Appeal No.2187 of 2024, another PCM with reference to their

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Civil Appeal No.31 of 2024 etc.

TM; Action Financial Services (India) Ltd. was directed to restitute

Rs.1.95 crores worth of securities liquidated between 12.03.2020

to 25.03.2020 and a penalty of Rs. 1.95 lakhs was imposed. Civil

Appeal No.7313 of 2024 is concerned with yet another PCM for the

period August’2019 to July’2021 in which the collaterals of their

TM; Yuvraj Securities liquidated to the tune of Rs. 75,74,712.08

was directed to be restituted and a penalty of Rs. One lakh was

imposed. The further directions as contained in the impugned

order in Civil Appeal No.31 of 2024, on failure to restitute, to block

the securities in the collaterals available with the NCL, to the

extent of the value of the liquidated securities as on the 16

th

day

with an addition of 5% was reiterated in all the orders. Civil

Appeal No. 4238 of 2026 is by a client-investor seeking refund/

restitution of the cash margin he maintained with the TM,

Anugrah.

VI) The Securities Appellate Tribunal:

22. The SAT confirmed the Committee’s order and the specific

argument with respect to the absence of power to direct

restitution was repelled, relying on decisions of this Court,

affirming reparations to be a just and equitable remedy; by which

the damage caused is repaired, thus imposing a punishment far

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Civil Appeal No.31 of 2024 etc.

lesser to that of complete suspension of trading rights. The SAT

also referred to the powers vested with it under Rule 21 of the SAT

(Procedure) Rules, 2000 to hold that even if the Committee does

not have the power, the Tribunal, suo motu could direct restitution

of shares. Immediately we have to raise a caution, in so far as a

provision in the procedural rules being interpreted and relied on

as a substantive power conferred. The rule only enables the

Tribunal to regulate its procedure and may not be mistaken as a

carte blanche to do anything and everything. The Tribunal in

considering an appeal from a Statutory Authority, on the well-

heeled principle of an appeal being a continuation of the original

proceeding, has all the powers of the original authority but cannot

assume for itself a greater power, than the statute permits.

23. Apposite would be reference to Civil Appeal No. 2049 of

2010, SEBI vs. S. Kumars Nationwide Ltd. disposed of on

26.11.2010 by a three Judge Bench of this Court. Before the SAT,

the SEBI was not a party, and the decision assailed was of the

Bombay Stock Exchange (BSE) declining approval for listing and

allotment of shares. The SAT found that the technical default on

the part of the appellant company was for reasons beyond its

control. While observing that they could have remitted the case

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Civil Appeal No.31 of 2024 etc.

back to the Board to consider the request of the appellant, in the

background of the factual situation, the SAT thought it fit to issue

directions in exercise of the powers, the Board was conferred

with. The SEBI was before this Court contending that these powers

cannot be directly exercised by the SAT. The SAT had exercised

powers available to the SEBI in an order, on an issue not agitated

before the SEBI. This Court found that the contention of SEBI was

correct, though the directions were not interfered with since it

was already complied with the by the BSE. The SAT hence, cannot

have omnibus powers to pass directions as it may deem fit and

proper and is regulated by the Statute constituting it.

VII) Questions of Law:

24. From a conspectus of the arguments placed before us, we

frame the following substantial questions of law for

consideration:-

i. Whether the PCM had a statutory obligation to verify the

credit/debit positions of the individual clients of the TM

before the collaterals proffered by the TM were

liquidated, and whether the regulatory mechanism

provided visibility of such credit/debit positions of the

individual clients of the TM to the PCM?

Page 23 of 56

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ii. Whether MCSGF Committee, constituted by the NCL,

has the power to order restitution of the securities and

even if it was conferred with such powers, whether it

should have notified the invocation of such powers,

failing which the order would be vitiated on the ground

of violation of principles of nature justice?

iii. Whether the individual clients can lay a claim against

the PCM for the default committed by the TM, especially

in the context of the TM having been found to have

indulged in illegal schemes, in which the individual

clients had voluntarily participated?

VIII) Our Analysis:

25. We have in the opening paragraphs listed out the hierarchy

of operations in the NSE and the staggered responsibilities of the

NCL, the CMs and the TMs. First, we have to deal with the

contentions raised under the Futures and Options Regulations

issued by the NCL, specifically on the strength of Regulation 1.7

and Regulation 4.5.4 which are extracted hereinbelow: -

1.7 Client/Constituent

A client/Constituent means a person, on whose instructions

and on whose account the Clearing Member clears and settles

deals. For this purpose, the term “Client” shall include all

registered constituents of trading members of Specified

Exchange.

Page 24 of 56

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4.5 Margin from the Constituents

4.5.4 The Clearing Member shall not allow the utilisation of

margin monies paid by one client to the margin money dues

of his own account or of other clients’.

26. The definition clause defines a client/constituent as a person

on whose instructions and on whose account the CM clears and

settles deals. Obviously, the instructions given to the PCM herein,

is by the TM who is entitled to have propriety trades or trades on

behalf of individual clients, for both of which securities and

collaterals are offered to the PCM. The second limb of the

definition brings in the individual clients of the TM and includes

them within the meaning of clients/constituents. Explanation 1 is

with respect to the term ‘constituent and clients’ being used

interchangeably. Explanation 2 specifically speaks of the byelaws

at Chapter IX, X and XI where the term ‘constituent’, in relation to

trades, including a Trading Member, when the trades done on the

specified exchange are cleared and settled on its behalf by a CM.

Explanation 1 & 2 being not relevant for our purposes, what comes

out from the definition clause is that insofar as a PCM is

concerned, which is a category of CM, the client or constituent is

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the TM and insofar as the TM is concerned, the client/constituent

is the individual investor registered with it.

27. Clause 4.5, first (4.5.1) requires the CM to demand margin

monies from its constituents and the CM has a corresponding duty

then (4.5.2), to clear and settle deals in the derivative contracts on

behalf of the constituents, only on receipt of minimum margin as

the relevant authority decides, leaving the CM with discretion to

collect higher margin from its constituents. Thirdly (4.5.3), the CM

is obliged to inform the NCL as to the margins deposited on behalf

of its constituents, on such information being required by the NCL.

Much emphasis has been placed on Regulation 4.5.4 which

prohibits utilisation of margin monies paid by one client in

satisfaction of the margin money dues of another or on the PCM’s

own account. The restriction so provided under the Chapter

dealing with “Margins and Clearing/Exposures limits”; is

applicable to both the CM and TM. The prohibition insofar as the

CM is concerned is with respect to the collaterals offered by one

TM being settled or satisfied against that of another TM’s dues. In

other words, the collaterals furnished by Anugrah (the defaulting

TM, herein) cannot be used by the PCM for the purpose of

clearing or settling dues of another TM who is registered with the

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NSE and NCL and is a constituent/client of the appellant-PCM.

Insofar as the PCM is concerned, there are no propriety trades

and hence there is no question of the margin money being used

on its own account. However the rigour applies to the TM in

relation to his clients, whose margins or collaterals cannot be

mixed up with those of any other client. Clause 10.2.4 of NCL, F&O

Regulations, speaks of no improper use of constituents’ securities

or funds by a CM or a person associated with such CM. In the

present case, there is no such allegation of either the PCM or any

person associated with the PCM having made any such improper

use of the constituents’ securities; which as regards the PCM, the

constituent is the TM.

28. The ‘Margins And Clearing/Exposure Limits’ applies equally

to the TM and it’s the TM’s obligation to ensure that its

clients/constituents; that is to say, the individual investors are

protected insofar as the individual securities of one person are not

used to settle or satisfy the dues of another, nor the monies or

securities proffered as margin money by one client used for

another client. Here we have to specifically notice that margin

money, as provided in Regulation 4.2 can be in the form of either,

cash, deposit receipts, guarantees of banks and securities

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approved by the relevant authorities. The margin proffered by

one client of TM cannot be used for another client, nor can the

collaterals of one be used in satisfaction of debts of another by the

TM. Likewise, the PCM cannot use the collaterals offered by one

TM as margin or in satisfaction of the dues of another TM.

29. The above regulations have to be understood, especially in

the context of the present case, where Anugrah is said to have

indulged in illegal trading and having offered Ponzi Schemes to

its clients. It is admitted at the time of argument that Anugrah was

wearing two hats, one of the TM and another of a Depository

Participant (DP). But it has come out by way of the Application

dated 13.07.2026 that Anugrah, the TM was wearing three hats,

the third of a Derivatives Advisory Services (DAS) assuring fixed

returns to its clients, in the nature of a Portfolio Management

Services (PMS) (erroneously termed as Professional Monitoring

Services in the application); which requires a Certificate issued

under SEBI (Portfolio Managers) Regulations, 2020, which

Anugrah did not possess. Using its DP status & in the role of DAS

Anugrah entered into agreements with their individual clients

who deposited the securities, for a fixed return, which is

prohibited by the NSE. The collaterals offered thus by the

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individual investors on the strength of affidavits and undertakings

of the individual clients, were in turn proffered by the TM to the

PCM.

30. Obviously, the TM was carrying on trading on its own

account using the securities of its individual clients/constituents

and on losses being incurred, the default occurred and the PCM

in turn was constrained to liquidate the securities so offered.

Neither can the TM absolve itself from its liabilities nor can the

investors cry foul, since they entered into the scheme with full

knowledge of their securities being offered as collaterals for a

fixed return. The responsibility of the assured return is only on the

TM and not even indemnified by the NSE; being an outright illegal

activity.

31. We also find that the SEBI had taken proceedings against

Anugrah, its Directors and associated entities. An Adjudicating

Officer by Order No. PM/SM/2020-20/10794 dated 09.03.2021

considered the period from April 2017 to September 2018, long

prior to the period under scrutiny in this case. It was found that

the stock broker had not uploaded the correct and complete

details of the clients in the UCC database of the Exchange, a clear

violation of the SEBI Circular of 2016. Anugrah had misused the

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credit balance clients’ funds to meet obligations of debit balance

clients and had failed to segregate clients’ funds interse, and/or

between clients’ funds and its own funds, and has mis-utilized the

funds of the clients. As early as from 2017-2018, Anugrah had mis-

utilized the client securities by pledging of the securities over and

above the respective client obligations in all the 18 sample days

taken. The shares of the clients, which were pledged by Anugrah

pertained to the clients having i) credit balance, ii) no obligations,

iii) zero balance and iv) credit balance clients having obligations

and v) debit balance clients. There was also an allegation of

incorrect reporting on aggregate value of collateral deposited

with clearing corporations and/or clearing member, under

enhanced supervision of the stock exchanges (SEBI Circular of

2016), violating the Stock Brokers Regulations and NSE Circulars.

32. Relevant also would be reference to the order of the Whole

Time Member of SEBI, Order No.WTM /SM/MIRSD/MIRSD-

DPIEA/25089/2022-23 dated 28.03.2023 based on the

recommendation of an Adjudicating Officer specifically on

offering DAS directly and through its associate entity, Om Sri Sai

Investments (OSSI) in the nature of PMS; which was also with

respect to the subject period. There was found huge shortfall of

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availability of securities, from that reflected in the Register of

Securities to the tune of Rs.683.87 crores, which led to the

inference that the securities were not delivered to the clients and

were misappropriated and misused by the stock broker for

purposes other than, what they were meant for. Meaning thereby,

that Anugrah was using such securities for its own purposes

thereby depriving the clients of their assets. The illegal and

unauthorized use of clients’ security by Anugrah was specifically

noticed as not confined to one or two stray instances, but having

continued unabatedly for a long time. It was concluded that

Anugrah was mis-stating the balance in the books of accounts and

at the same time, was not reporting the adjustment entries to the

clients, in the clients’ ledgers. We merely cite the findings on facts

in the above two orders, without making any comment on the

order itself, lest we pre-empt a challenge to the same. But we have

to emphasize that this is not an open and shut case where on mere

failure to carry out due diligence, a restitution can be ordered;

even if it is statutorily permissible.

33. The working of the F&O segment in the NSE is discernible

from the various rules, regulations and byelaws of the NCL, as also

the Circulars of the SEBI; which are said to have been violated.

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SEBI’s circular dated 17.04.2008 has the subject of ‘Collaterals

deposited by clients with brokers’; specifically applicable to the

brokers; the TM. The circular specifies the norms regulating

transactions between clients and brokers and requires the broker

to have adequate systems and procedures in place to ensure that

client collateral is not used for any other purposes, other than

meeting the respective client’s margin requirements/plans. The

brokers are also required to maintain records which have to be

produced during inspection.

34. The Circular of SEBI dated 26.09.2016 was brought in to

enhance supervision of Stock Brokers/Depository Participants. It

specifically regulated the naming/tagging of banks and demat

accounts of stock brokers, monitoring of client funds lying with

the stock brokers by the stock exchanges, internal audit of stock

brokers, monitoring of financial strength of stock brokers,

standard operating procedures for both stock brokers and

depository participants in event based discrepancies, running

account settlement, providing PAN number and methods of

reconciliation as also uploading clients fund balance and security

balance by the stock brokers on stock exchange system. It has to

be specifically noticed that the Circular applies to stock brokers

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and stock exchanges and even if it applies to CMs, it is to be

emphasized that uploading of clients fund balance and security

balance by the stock brokers as prescribed therein is to be done

on a monthly basis for every client, on to the Stock Exchange

System where the broker is a member. This would not facilitate

real-time visibility that is required when a TM fails to meet its

obligations or the obligations on behalf of their clients, which has

to be met by the PCM by liquidation of the collaterals proffered

by the TM. But violations of even this monthly uploading by

Anugrah was found by the SEBI as noticed hereinabove.

35. As far as the circular of the NCL dated 20.05.2019,

applicable to all members including custodians and PCM, there

was a mechanism brought in of reporting of trading, member-

wise client-wise collateral details by CMs. A standardized report

on details of collaterals placed by the TMs and clients with them,

was to be uploaded on a weekly basis, specifically made

applicable for CMs who are also clearing for other TMs. The CMs

were obliged to make two submissions giving details of the TM

and client wise collaterals, which are as under: -

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“(i) DP account wise, Trading Member and client-wise and

ISIN-wise details of securities (non-cash collateral) held. The

format of reporting is enclosed as Annexure 1.

(ii) Trading Member-wise details of cash and cash equivalent

collateral. The format of reporting is enclosed as Annexure 2”

36. A reading of Annexures 1 and 2 makes it very clear that

positions of the individual clients were not required to be

disclosed by the TM or included in the Annexures before

uploading, by the CM. The holding statement had to be

maintained and submitted scrip-wise for all the demat accounts

where CM is holding TM’s securities in separate collateral

accounts, separately for each TM, and not their constituents. From

the monthly uploading in 2016, SEBI brought in weekly reports in

2019, moving on to daily reporting in 2021, a progression

informed by experience and conditioned through pit-falls.

37. SEBI’s Circular dated 20.06.2019 is with respect to handling

of ‘Client’s securities by Trading Member/Clearing Member’ which

lays emphasis on the Securities Act and the SEBI (Stock Brokers)

Regulations, 1992, both of which specifies that the stock broker

shall segregate, securities or monies of the client or clients and

shall not use the securities or monies of a client or clients for self

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or for any other client. True, the said circular is applicable to CMs

also but insofar the PCM’s, who are the appellants herein are

concerned, they neither have individual clients, nor do they have

any transactions on their own account. The TMs are their

constituents and there is no allegation of the securities or monies

of one TM having been used as against the dues of another TM. In

fact, in the aforesaid circular, the emphasis is on the pledging of

collaterals/securities of the clients by the TM/CM with the

Banks/NBFCs to borrow funds to meet the margin requirements,

which it was cautioned was not contemplated in the Circulars

issued by the SEBI. A rigour has also been brought in by Clause

4.7, by which w.e.f. 01.09.2019, client’s securities lying with the

TM/CM in ‘client collateral account’ ‘client margin trading

securities account’ and ‘client unpaid securities account’ cannot be

pledged to the Banks/NBFCs for raising funds even with

authorisation by the client, as the same would amount to fund

based activities by TM/CM in contravention of the Securities

Contracts (Regulation) Rules, 1957. This again is a pointer to the

fact that the securities were maintained in consolidated accounts

of a client, which insofar as a TM is concerned, would be the

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constituent individual client while insofar as a PCM is concerned,

it would be the constituent TM.

38. The CM-TM agreement is produced as Annexure P2 from

which the relevant clauses with respect to margin, collaterals,

maintenance of accounts and the liquidation alone have to be

looked into. Under the ‘Rights of the Clearing Member’ at Clause

2.7, the CM is entitled to receive from the TM a statement

containing the details in respect of margin account, due and paid

by the TM to the CM, on his own account and a list of client codes,

names, client-wise margin amount collected by the TM from its

clients for the purpose of meeting margin requirements. The CM

has the authority to close out or liquidate the open positions of the

TM in accordance with the NCL regulations in case of non-

payment of dues by the TM towards margins, daily mark to market

settlement, final settled or such other settlement, its brokerage,

commission and/or charges. The CM also has the right to require

the TM to undertake registration of its constituents and to comply

with the requirements of ‘constituent registration form’ and ‘risk

disclosure documents’ for which the CM is entitled to collect

information from the TM about its constituents and the information

pertaining to the constituents’ positions. However, though the

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entitlement is specified, there is no statutory obligation cast on the

CM to carry out liquidation of the collaterals after ascertaining the

constituents’ position.

39. Under Clause 3 of ‘Obligations of the Clearing Member, sub-

clause (2) requires the money deposited by each TM to be kept

in a separate account by the CM distinct from its own account, the

details of which are to be provided to the NCL. As against this

provision of obligation of the CM, to maintain separate accounts

of the TMs, under Clause 5, ‘Obligations of the Trading Member’ at

sub-clause (14), the TM has to maintain separate bank accounts to

distinguish monies received from or on account, or monies paid

or on account, of each of his constituents and the money received

and paid on the TM’s own account. It is the TM’s responsibility by

the aforesaid sub-clause that the monies belonging to one

constituent shall not be utilised for meeting the obligations of the

TM or some other constituent. It is also specified by Clause 5(v)

that the Trading Member shall collect the margins from its

constituents on a gross basis. The liability of the CM and that of

the TM, on a default committed by either of them is also clearly

specified in the agreement but not obliging the CM to protect the

constituent of the TM on any default being committed by the TM.

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40. On a reading of the SEBI’s Circular dated 21.04.2008,

26.09.2016 & 20.06.2019 and the NCL’s Circular dated 20.05.2019

or the Regulations of the NCL for the F&O Segment, specifically

1.7, 4.5.4 and 10.24 as also the CM-TM Agreement we do not find

any violation having been committed by the PCM, insofar as the

requirements in the said circulars and agreement are concerned.

41. Insofar as the ‘Margin obligations by way of pledge/

repledge’, Circular of the SEBI dated 25.02.2020 at Annexure

A-12, applies both to the CM and the TM. The circular has been

issued by the SEBI after extensive consultation with the stock

exchanges, clearing corporations, depositories and industry

representatives of TMs, CMs and DPs. With effect from

01.06.2020, acceptance of collaterals from clients in the form of

securities is only by way of a margin pledge created in the

depository system in accordance with Section 12 of the

Depositories Act, 1996, read with Regulation 79 of the SEBI

(Depositories and Participants) Regulations, 2018 and the

relevant byelaws of the depositories. Clause (vi) of the circular

provides that for the purpose of providing collateral in form of

securities as margin, a client shall pledge securities with the TM

and the TM shall repledge the same with the CM and the CM, in

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turn, shall repledge the same to the Clearing Corporation (NCL);

the complete trail of such repledge being reflected in the demat

account of the pledger. By Clause (xii), the TM/CM were required

to close all existing demat accounts tagged as ‘client margin or

collateral’ by 30.06.2020, after which all client securities lying in

such accounts were to be transferred to the respective clients’

demat accounts and the TM/CM were prohibited from holding

any client securities in any beneficial accounts of TM/CM. Hence,

the procedure by which the complete trail of pledge and

repledge being reflected in the demat account of the pledger; the

individual investor, was made effective only from 30.06.2020,

before which the subject liquidation of collateral securities

occurred. Prior to 30.06.2020, the TM collects collaterals on a

‘gross basis’, as is seen from the CM-TM agreement, from its

constituents and the CM maintains such collaterals proffered by

each TM in a consolidated demat account tagged as ‘client margin

or collateral’.

IX) The Penalty of Restitution:

42. A question was also raised on the NCL or the Committee it

constituted, having not been empowered with the power of

restitution of liquidated securities, as coming out from the statute,

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to make byelaws, which is also absent in the byelaws drawn up in

accordance with the statute. Section 9 (3)(b) of the Securities Act

empowers the Stock Exchanges to make byelaws. It provides as

under: -

9. (3) (b) provide that the contravention of any of the

bye-laws shall render the member concerned liable to

one or more of the following punishments, namely: —

(i) fine,

(ii) expulsion from membership,

(iii) suspension from membership for a

specified period,

(iv) any other penalty of a like nature not

involving the payment of money.

43. In contrast, it has also been pointed out that the SEBI Act,

1992 by Section 11B empowers the SEBI to issue directions and

levy penalty, as per sub-section (1) and sub-section (2) and for

our purposes, the explanation which is relevant is extracted

hereunder: -

Explanation. — For the removal of doubts, it is hereby

declared that the power to issue directions under this section

shall include and always be deemed to have been included

the power to direct any person, who made profit or averted

loss by indulging in any transaction or activity in contravention

of the provisions of this Act or regulations made thereunder,

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to disgorge an amount equivalent to the wrongful gain made

or loss averted by such contravention.

44. Likewise, Section 12 A of the Securities Act dealing with the

powers of the SEBI to issue directions, adds a similar explanation

to the provision. The power of disgorgement, hence, was

specifically conferred on the SEBI and intentionally not permitted

to be conferred, in the byelaws made under Section 9 of the

Securities Act. More importantly, it prohibits by Clause 3(b)(iv)

any penalty involving the payment of money (sic). In this context,

it has to be specifically emphasized that the Committee not only

directed restitution of the liquidated shares which is in the form of

payment of money, and as an alternative, on failure of restitution

directed an amount equivalent to the value of the securities as on

the 16

th

day plus 5% market value to be blocked from the

available collateral of the PCM with NCL. Clearly a prescription

made for payment of money by liquidation of the securities. This

is in stark violation of the power conferred by the statute and the

byelaws also do not speak of any such power being conferred of

disgorgement or payment of money in the nature of restitution of

securities on the NCL, which alone could empower the Committee

constituted by the NCL to impose such penalty. The Legislature

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while conferring the power of disgorgement on the SEBI, in two

related statutes, consciously omitted it from being conferred

under the byelaws of a stock exchange; which cannot be brought

in, that too against the specific statutory bar, on grounds of equity,

justice and good conscience.

45. In the wake of the above findings, we are of the definite

opinion that there was no statutory violation committed by the

PCM and their plea of having no privity of contract with the

constituents of the TM as also no statutory obligation to verify the

debit/credit positions of the individual clients of the TM is

perfectly in order. More onerous is the fact that the TM was

indulging in a Ponzi scheme wherein the investors willingly

enrolled themselves, executing affidavits of undertakings and

furnishing securities to the TM in his status as a DP & DAS, which

was out right illegal, the illegality being known, both to the TM

and its constituents.

X) Restitution Ensconced Within Expulsion:

46. The question of whether the penalty of restitution is one

encompassed within the greater penalty of removal is no more

relevant and is inconsequential on our reasoning, but still we

answer the same. Indian Council for Enviro-Legal Action

8 is not

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at all applicable since it is based on the principle: ‘polluter pays’,

bringing in such liability on those who unjustly enrich themselves

by resorting to delaying tactics and abusing the process of law,

calling for the relief of restitution by way of disgorgement of

illegal gains accrued on the polluter. There can be no parallel

drawn in the present case to environmental remediation costs,

especially in the context of no illegality having been found in the

liquidation carried out by the appellants, nor an unjust or illegal

enrichment. On the other hand, desisting from liquidating the

collaterals proffered by the TM, in the instant case, would have

led to huge losses for the PCMs, by way of their collaterals being

liquidated by the NCL. In fact, the SAT in its concluding paragraph

admits as much when it confirms as valid the restitution since the

appellant, according to the SAT was evading losses through

liquidation. Losses recouped by the PCM in our view was

permissible in the manner it was done as per the regulatory

measures in place at that time; to which end the collaterals were

stipulated.

47. Shiv Dutt Rai Fateh Chand

4 was in the context of a

retrospective amendment levying penalty under the Central

Sales Tax Act, and the validation made of the penalty orders

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passed prior to the amendment; not at all applicable to the facts

of this case. The challenge was on the ground of violation of

Article 20(1) of the Constitution. Maqbool Hussain v. State of

Bombay

9 wherein the confiscation of goods under the Sea

Customs Act was held to be not precluding a criminal proceeding

for the very same transaction was relied on. Looking at the

definition of ‘offence’ under the General Clauses Act and the

words employed of ‘convicted’ ‘commission of the act charged as

an offence’ ‘be subjected to penalty’ ‘commission of the offence’ in

Article 20(1), ‘prosecuted and punished’ in Article 20(2) and

‘accused of any offence’ in Article 20(3) it was held that for

application of Article 20, the prosecution and the punishment of a

person must be in the nature of criminal proceeding, before a

Court of law or Judicial Tribunal. There arises no equation to the

present case.

48. In South Eastern Coalfields Limited

5, based on an interim

order, royalty as enhanced by a Central Government notification

were not paid. When the matter was finally decided against the

petitioner, the principle of restitution as applicable in Section 144

of Code of Civil Procedure, 1908 was held applicable even in the

9

(1953) 1 SCC 736

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absence of any legal or contractual provision for interest. Section

144 of the CPC applies when a decree or an order is varied or

reversed or modified in an appeal, revision or other proceeding

or is set aside or modified in any suit instituted for the purpose.

Then, the party who was prejudiced by the decree or order would

be enabled restitution to the position occupied dehors or prior to

the decree or order, to the extent it stood varied, reversed or

modified. The vacation of an interim order by the final disposal of

the lis brings the liability of not only satisfaction of the dues but

also the interest accrued. There is no such circumstance of a

decree/order and its reversal or modification in an appeal or in

the final disposal of the matter as coming out in the present case.

Section 144 of the CPC hence has no application insofar as the

restitution ordered by the Committee in the present case.

49. Kavita Trehan

6 was also a case in which, under cover of an

ex-parte injunction, the party who was given the custody of goods

sold it and converted it to money. The High Court having found

the interim injunction to be unjustified and improper directed

restoration of status quo ante which was upheld by this Court;

holding that even if Section 144 is not attracted, the exercise of

jurisdiction can be justified under Section 151 of the CPC. Dr.

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Poornima Advani

7 too applied the doctrine of restitution to grant

interest on the principal, when it was retained by the authorities

unjustly. It was held that restitution is applied in three senses i) to

restore a specific thing to its rightful owner or status ii)

compensate for the benefits derived from a wrongdoing and iii)

compensation of restoration for the loss caused to another. What

is relevant in directing restitution and also grant of interest, is that

the retention of the thing or money; by the person from whom it is

sought to be restituted, should be unjust/illegal; which we have

found does not emanate from the facts and circumstances of this

case and no violation perse of the statutory regulatory mechanism

arise. We are neither able to find a remedy of restitution, flowing

naturally in the facts of this case nor are we persuaded to permit

it, in view of the specific statutory prohibition with respect to the

penalties permitted under Section 9(3)(b) of the Securities Act.

XI) The Daily Reporting:

50. Now we come to the circular of the SEBI of 20.07.2021,

produced as Annexure A15, which is relied on by the PCM to

contend that the measures implemented therein, giving clear

visibility to the individual client collaterals and the debit/credit

positions of the investors under a TM being allowed to the CM and

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even the NCL. The circular deals with ‘Segregation and Monitoring

of Collateral at Client Level’. We extract Clauses 4, 5, 44 and 46 as

under: -

‘4. With a view to providing visibility of client-wise

collateral (for each client) at all levels, viz., TM, CM and

Clearing Corporation (CC), a reporting mechanism,

covering both cash and non-cash collateral, shall be

specified by the CCs. Details in respect of the same are

as under:

a. The reporting structure shall entail disaggregated

information (segment-wise and asset type wise break-up)

of each client collateral in the following manner:

• TM shall report disaggregated information on

collaterals up to the level of its clients to the CM.

• CM shall report disaggregated information on

collaterals up to the level of clients of TM and

proprietary collaterals of the TMs to the Stock

Exchanges (SEs) and CCs in respect of each

segment.

b. The details to be submitted in the report shall essentially

cover the following information, in order to provide a

holistic view of the entire client collateral at various levels

up to the level of CC:

TM CM CM SE & CC

Client collateral received by TM Client collateral received by TM

Client collateral retained by TM Client collateral retained by TM

Client collateral placed with CM Client collateral placed with CM

Not legible Client collateral retained by CM

Not legible Client collateral placed with CC

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c. The aforementioned information shall be required to

be reported on a daily basis.

5. A web portal facility shall be provided by the CCs/ SEs to

allow clients to view aforesaid disaggregated collateral

reporting by TM/CM.

… … … … …

44. The procedure for verification and settlement of claims

of constituents of defaulting CM shall be as follows:

a. The process for identification of defaulting

TM/CP/clients and the return of collateral of non-

defaulting TM/CP/clients shall be administered by the

appropriate committee viz., Member and Core

Settlement Guarantee Fund Committee (MCSGFC) of the

Exchange or the CC.

b. The amount that can be claimed by the non-defaulting

TM/CP/clients from the CC shall be limited to the

allocated collateral (including deemed allocated) and

the value of securities collateral provided through

margin pledge/re-pledge to the level of CC, plus the

pay-out (including profit if any during close-out) due to

the constituent, less the losses in close-out of positions of

the constituent.

c. The MCSGFC of the CC/Exchange shall implement the

relevant procedures for verification and settlement of

claims of the non-defaulting TM/CP/clients of the

defaulting CM.

d. The constituents actually in default shall be identified

and the pro-rata attribution of shortages performed in

Stage-3 shall be replaced by the actual attribution of

shortages. If there has been any excess collateral

appropriated at Stage-3 due to pro-rata attribution, such

excess appropriation shall be corrected, and the

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constituents shall be returned the collateral in full along

with the pay-out due to such entities. This amount shall

be recovered from the constituents who have higher

shortage (pursuant to actual attribution) than the one

attributed on pro-rata basis. If such clients do not have

sufficient collateral, then the default waterfall of the CC

(including its Core Settlement Guarantee Fund (Core

SGF), as per the specified order of waterfall) shall be

applied.

e. For any collateral of a client retained by TM/CM, and not

allocated to that client's account, the Exchange or the CC

shall initiate suitable actions before appropriate court of

law for liquidating the assets (movable and immovable)

of the defaulter member as per the existing provisions.

Further, eligible clients will also have the access to

compensation from the Investor Protection Fund, as per

the existing provisions.

*** *** *** ***

46. The following procedure shall be adopted in case of

default of TM to CM:

a. The CM shall continue to meet its obligations towards its

other constituents, as well as the CC.

b. The CM shall close-out all open positions of the

defaulting TM (including clients under the TM).

c. Under the supervision of the CC, the CM shall

appropriate the collateral towards losses. The losses in

closing-out open positions and the settlement

obligations due from clients of the TM shall be

appropriated first from the allocated collateral (as per

allocation provided by TM to CM, including deemed

allocated) and securities collateral provided through

margin pledge/ re-pledge to the level of CM/CC of

respective clients. Any residual losses as well as the

Page 49 of 56

Civil Appeal No.31 of 2024 etc.

losses in closing-out open positions and the settlement

obligations of the TM proprietary account shall be

appropriated from the TM proprietary collateral. In case

of TM proprietary collateral being insufficient, the losses

shall not be appropriated from any other constituent of

the CM or any constituent of the defaulting TM.

d. After the above utilization towards losses in closing-out

open positions of the defaulting TM (and clients under

the TM) and net settlement shortfall, all remaining

collateral/funds received from the defaulting TM (lying

with CM/CC) shall be provided by the CM to the Stock

Exchanges.

e. Since the TM will be leading to default, the Stock

Exchanges shall institute relevant applicable procedures

against the TM as per existing regulatory provisions,

byelaws, rules and regulations of the Stock Exchanges.’

51. We extracted the above only to emphasize that the explicit

measures implemented as coming out from the Circular

addresses the concern of individual investors in the F&O

Segment, raised herein. More particularly it highlights the

absence of such a measure before its implementation, fortifying

the grounds taken by the PCMs/Appellants, of lack of visibility

and absence of privity of contract with the constituents of the TM.

With the above measures visibility of client-based collateral is

available at all levels and the reporting mechanism has to be

complied with on a daily basis. The identification of defaulting

clients and final appropriation of collaterals have been delineated

Page 50 of 56

Civil Appeal No.31 of 2024 etc.

in Clause 44 and the procedure to be followed, when there is

default of TMs to CMs, in Clause 46. Obviously, these measures

were not available earlier, and in that circumstance, we have to

accept the contention of the PCM/Appellants that they had no

visibility of the debit/credit positions of individual clients whose

securities were furnished as collaterals by the TM to the CM. The

absence of privity of contract, with the constituents of the TM, has

also to be reckoned in favour of the PCMs; which even if not

available as of now, by the Circular of 2021 of the SEBI, there is an

obligation cast on the PCM to segregate client collaterals, the

debit/credit positions being visible in the daily reports and

liquidate only those with debit positions.

XII) The Liquidation Proper:

52. Having said that, we also have to dwell upon the procedure

of liquidation as arising in Civil Appeal No. 31 of 2024. The losses

incurred and the liquidation it led to happened in a small window

from 13

th

January to 2

nd

June 2020 in Civil Appeal No.31 of 2024.

The shortfall was duly intimated to the TM and the liquidation

occurred over the entire period at 29 instances. We cannot but

observe that in the short period there were 20 weeks and the

contention that the weekly reporting fell short, for the purpose of

Page 51 of 56

Civil Appeal No.31 of 2024 etc.

ascertaining debit/credit positions of the individual clients is also

a compelling and justifiable ground in favour of the appellant.

Anugrah was also placed in Risk Reduction Mode (RRM) for 23

days in March 2020, 19 days in April 2020 and 15 days in May 2020

and 21 days in June 2020 out of the total trading days respectively

of: 23, 22, 21 and 22. RRM mode is a risk control mechanism where

TM is allowed only to reduce/square off their existing positions

and cannot build any fresh positions. The other appeals relate to

similar facts with the period and quantum of liquidation much

lesser than that in the leading case.

XIII) Against Anugrah:

53. Insofar as Civil Appeal No.31 of 2024 by way of an

application seeking directions, the appellant has brought to our

notice the steps taken against the TM. A suit is filed by the NSE as

Commercial Suit No.202/2022 before the High Court of Judicature

at Bombay, having Ordinary Original Civil Jurisdiction in its

Commercial Division. An interim order is passed on 18.09.2020

appointing a Court Receiver to take symbolic possession of all the

assets of Anugrah including moveables and while continuing the

same, an arrangement was made on consent by order dated

15.07.2025 injuncting Anugrah from opening any new bank

Page 52 of 56

Civil Appeal No.31 of 2024 etc.

accounts, other than the 65 accounts which were kept frozen by

the Economic Offence Wing, with specific direction to inform the

Court if the accounts are defreezed. The individual investors had

also moved the SAT against the NSE seeking compensation from

the Investor Protection Funds, which was declined specifically

based on the findings of the Forensic Audit conducted, which

revealed that Anugrah was offering DAS to its clients assuring

fixed returns and was potentially carrying out the same in the

nature of Portfolio Management Services (PMS); offering two

schemes, termed ‘Gold’ and ‘Platinum’ having minimum

investment of Rs.10 Lakhs and One crore, respectively, with

assured return of 12% per annum. The claim of compensation was

declined by the SAT in two separate batches; one by order dated

14.02.2023 and the order dated 15.05.2023 produced as Annexure

A4 and A3 in the application. We make it clear that the

constituents of the subject TMs, parties to these appeals, will be

left liberty to avail their remedies against their respective TMs,

subject only to just exceptions.

XIV) Questions of Law: Answered:

54. On the above reasoning, we answer the questions of law as

follows:

Page 53 of 56

Civil Appeal No.31 of 2024 etc.

(i) The first question of law framed as to the existence of a

statutory obligation on the PCM to verify the

debit/credit positions of the constituents of the TM,

before the collaterals proffered by the TM are

liquidated, in the negative and in favour of the PCMs.

The question regarding visibility provided by the

regulatory mechanism of the debit/credit positions of

the individual clients of the TM to the PCM, is also

answered in the negative and in favour of the PCM.

(ii) The second question of law with respect of the NCL or

the Committee constituted by it having the power to

order restitution of securities, is also answered in the

negative and against the NCL. The imposition of

penalty of restitution having come forth only in the

discussion and not specifically notified to the appellant,

the violation of principles of natural justice also

assumes significance, but the same is inconsequential

insofar as the penalty of restitution itself being found to

be not statutorily permitted.

(iii) The third question of law is also answered against the

investors/speculators finding that there can be no

claim laid against the PCM for the default committed by

the TM, especially in the context of the TM having

indulged in illegal schemes and the investors having

participated with open eyes in such schemes on the

assurance of an assured return, which, in the F&O

Segment, is downright impossible.

Page 54 of 56

Civil Appeal No.31 of 2024 etc.

55. The respondents repeatedly, in a chorus, argued about the

life savings of ‘innocent investors’ having been frittered away. We

are unable to countenance the assertion, since innocence, can

neither be attributed on the investor nor on the activity they

indulged in, which inherently is highly speculative and hence

volatile and fragile. Here we should reckon a report on the F&O

Segment that was published in the Times of India

10

, wherein the

authors spoke of retail traders losing out because they bring

‘knives to a gun fight’. SEBI’s research, according to the authors,

reveals that 97% of the institutional profits and 96% of the

proprietary trading profits in the Indian F&O market are

generated by algorithmic trading. The retail traders in the

financial year 2024 have incurred a total net loss of Rs.74,800

crores of which Rs.22,450 crores are the transaction costs.

Individual traders suffered a gross trading loss of Rs.52,400 crores

while the proprietary traders booked Rs.33,000 crores in gross

profits and the Foreign Portfolio Investors (FPIs) took home

Rs.28,000 crores. According to the authors this is because the

institutional desks, utilise lightning-fast codes, co-located directly

inside exchange servers, and the retail investors compete against

10

By Sweta Shekhar and Anand Srinivasan

Page 55 of 56

Civil Appeal No.31 of 2024 etc.

highly sophisticated millisecond fast automated strategies, they

cannot access; hence the metaphor, ‘bringing knives to a gun

fight’.

56. Exponential profits hence is a chimera and debilitating

losses is the stark reality. This is the inherent trap hidden between

the multilayered transactions in the F&O Segment, even when

carried on normally, without it being hedged in with illegal

schemes, as is the case in the present cases. The investor with

open eyes dives into the vortex, hoping for easy money, but

without anticipating the undercurrents, which could take them

into the abyssal depths of penury and debt, where they would be

buried forever. The multiple roles of TM, DP & DAS, the last

without permission, facilitated the process, which culminated in

loss of valuable securities to the individual clients; some of whom

at least were willing participants. The affidavits of undertaking,

handing over the shares to the TM for an assured return far higher

than that would be obtained from normal investments sounded

the death knell for their securities in a highly volatile and

inherently fragile, market conditions in the extremely speculative

segment of the Futures & Options.

Page 56 of 56

Civil Appeal No.31 of 2024 etc.

57. The four appeals, Civil Appeal Nos. 31 of 2024, 2187 of 2024,

3179 of 2024 & 7313 of 2024 stand allowed setting aside the

impugned orders of the MCSGF Committee and that of the SAT.

The other appeal, Civil Appeal No. 4238 of 2026 stands rejected

as not maintainable, since the orders impugned therein have

already been set aside by us and the prayer is to grant the benefit

of the orders set-aside, in restoring the cash margin of that

individual appellant.

58. Pending application(s), if any, shall stand disposed of.

.………………………… …... J.

(J. B. PARDIWALA)

..………….…………………. J.

(K. VINOD CHANDRAN )

NEW DELHI;

SEPTEMBER 02, 2026.