The State of Maharashtra v. 63 Moons Technologies Ltd.
DR. DHANANJAYA Y CHANDRACHUD, J.
CONTENTS
A. Facts ......................................................................... 3*
B. Submissions............................................................. 17*
C. Analysis.................................................................... 25*
C. 1 Framework of the MPID Act....................... 25*
C. 2 Framework of NSE........................................ 27*
C. 3 Definitions of ‘Deposit’ and ‘Financial
Establishment’: Interpretation of Section 2(c) and 2(d)
of the MPID Act..................................................... 40*
C. 3.1 Settlement Guarantee Fund: Deposit
under Section 2(c) of the MPID Act... 46*
C. 3. 2 Receipt of commodities: Deposit under
Section 2(c) of the Act........................... 49*
C.4 Uncovering the Conspiracy.................................. 55*
C. 4.1 The Grant Thornton Report..................... 55*
C. 4. 2 63 Moons Judgment................................. 56*
C. 5 Constitutional Validity of the MPID Act.............. 65*
C. 6 The High Court’s Judgment.................................. 71*
1. The appeal arises from a judgment dated 22 August 2019 of
the Bombay High Court, by which certain notifications attaching the
property of the respondent under Section 4 of the Maharashtra Protection
of Interest of Depositors (in Financial Establishments) Act 19991 have
been quashed. The respondent holds 99.99% of the shareholding of
National Spot Exchange Ltd 2. At the core of the dispute is whether
1 “MPID Act”
2 “NSEL”
*Ed. Note : Pagination is as per the original Judege ment.
475
NSEL is a ‘financial establishment’ within the meaning of Section 2(d)
of the MPID Act.
A. Facts
2. NSEL is a company incorporated under the Companies Act
1956, and is a wholly owned subsidiary of Financial Technologies (India)
Limited, which is now known as 63 Moons Technologies Limited3. On 5
June 2007, the Union of India issued a notification under Section 27 of
the Forward Contracts (Regulation) Act 1952 4 exempting forward
contacts of one-day duration for sale and purchase of commodities traded
on NSEL from the application of the provisions of the enactment. NSEL
started operating as an exchange for spot trading in commodities. NSEL
launched contracts for buying and selling of commodities on its trading
platform with different settlement periods, ranging from T +0 to T+36
days. ‘T’ indicates the trade date, that is the date on w hich the trade
took place and +0 or +36, indicates the number of business da ys after
the trading day when the delivery of the commodity and the payment of
price is made.
3. NSEL offered ‘paired’ contracts. Such contracts enabled
traders either by themselves or through their brokers, to simultaneously
enter into paired contracts, such as of T+2 and T+25 duration. The seller
through his broker puts the commodities on sale and the buyer through
his broker looks to purchase commodities of specific requirements. NSEL
then pairs the buyer and the seller if there is a match between the
requirement of the buyer and the available commodities with the seller.
The buyer and the seller simultaneously enter into T+2 and T+25 contracts.
For example, if ‘A’ (the buyer) wants to buy one ton of basmati rice, he
would trade on NSEL’s platform through his broker. The platform would
identify that ‘B’ (the seller) has an offer to sell the quantified commodity.
NSEL would then match both the contracts. The date of matching of the
contracts is termed as the trade date or ‘T’. ‘A’ must then pay the price
of the commodity to NSEL, which checks if ‘B’ has deposited the stock
in a warehouse accredited to NSEL for delivery within two days. Once
NSEL has confirmed that ‘B’ has deposited the stock in the warehouse,
it transfers the money to ‘B’. Simultaneously, the same parties enter into
a T+25 contract by which ‘A’ (who was the buyer in the T+2 contract)
would sell the same quantity of commodity purchased to ‘B’ (who was
3 “FCIL or 63 Moons”
4 “FCRA”
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
the seller in the T+2 contract). The difference between the purchas ing
cost and the selling cost is the profit that the trading member acquires
through the trade. A flow chart indicating a represent ation of the
transaction is set out below:
477
4. A detailed step-wise trading process of the paired contracts is
indicated below:
(i) A trading member of NSEL who wishes to trade in the
platform is required to place a specific quantity of the
commodity in a warehouse accredited to NSEL. The
warehouse would then generate a warehouse receipt;
(ii) The registered trading member or his broker who had placed
his commodity in the warehouse could on the basis of the
standard proforma contracts offered by NSEL place offers
for sale of the commodity on the platform, stipulating the
price and quantity offered;
(iii) The buying trading member or his broker would input buy
orders of a particular commodity and quantity on the NSEL
trading platform;
(iv) When a sale offer and a buy offer coincide, the exchan ge
would be matched by NSEL, stipulating the commodity, the
price, and the quantity;
(v) The Exchange would communicate all the trades effected
at the end of the day;
(vi) On the next day, an obligation report recording the pay-in
and delivery obligations would be forwarded to the trading
members;
(vii) On the day after (that is, settlement date), NSEL woul d
debit the trading member’s designated settlement account
for the amount of the buying member’s pay in obligations
and it would be credited to NSEL’s exchange settlement
account. NSEL’s Operations Department would inform
NSEL’s Delivery Department of the selling member’s
delivery obligations. Based on the intimation, NSEL’s
Delivery Department would confirm to the Operations
Department if the requisite quantity of the particu lar
commodity is available according to the Warehouse
receipts. After such confirmation, the Operations
Department would release the purchase price to the selling
broker’s designated bank account. Simultaneously, a
Delivery Allocation Report would be issued to the buyer’s
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
broker or the buyer informing him that the commodity
purchased was allotted to him; and
(viii) NSEL would then send the buyer’s details to the selling
trading Member and the selling trading member would
arrange for the non-member client/seller to generate a VAT
paid sale invoice of the commodity. On the basis of the
Delivery Allocation Report and the VAT Paid Invoice, NSEL
would issue a Delivery Note authorizing the buyer to take
delivery from the designated warehouse. If the buyer choses
to not take delivery, he would be put in constructi ve
possession of the commodity where he would be entitled to
take possession at any time.
5. On 27 April 2012, the Department of Consumer Affairs5 issued
a show cause notice to NSEL on why action should not be taken against
it for permitting transactions in violation of the exemption notification.
On 12 July 2012, the DCA directed NSEL to give an undertaking that no
contracts shall be launched until further instructions, and that all existing
contracts must be settled on the due dates. In July 2013, about 13,000
persons who traded on the platform of NSEL claimed that other trading
members had defaulted in the payment of approximately Rs 5,600 crores.
NSEL issued a circular on 31 July 2013 suspending its spot excha nge
operations. It stated that the delivery and settlement of a ll pending
contracts would be merged and the contracts would be settled after the
expiry of 15 days. NSEL published a statement on 6 Augu st 2013
representing that it had sufficient stocks valued at Rs 6,032 crores in its
warehouses. A new pay-in schedule was announced by NSEL on 14
August 2013 by which the Exchange commenced the pay-in schedul e
from 16 August 2013 and pay-out schedule from 20 August 2013, in the
same manner every week. It was also represented that the members
would be entitled to get simple interest on their outstanding d ues with
effect from 16 August 2013 on a reducing balance at 8% per annum till
the end of the settlement calendar. The notification is extracted below:
“National Spot Exchange Limited
Circular
August 14, 2013
5 “DCA”
479
Settlement Schedule
In terms of the provisions of the rules, Bye-Laws and Busines s
Rules of the Exchange and further to circular no. NSEL/TRD/
2013/065/ dated July 31 2013, the Members of the Exchange are
hereby notified that the Exchange has finalised the following
revised schedule for settlement of outstanding dues payable t o
the members.
This schedule has been prepared taking into account the exigencies
emerging from sudden closure of trading operation, liquidity problem
accentuated by withdrawal of buyers credit limits by th e banks
from the members, who are in pay in and the extensive discussion
done by the members who have to complete pay in and members
who have to receive the payments. Considering the challenges,
the revised schedule of settlement has been prepared to ensu re
reduction in payment rist and meet the settlement obligation:
1. The Exchange will commence the Pay-in schedule from
Friday, the 16th August, 2013 and pay-out from Tuesday,
the 20th August, 2013 and thereafter in the same manner
every week.
2. The Exchange shall effect pay out on a pro-rata basis eve ry
week based on the money recovered as per the settlement
calendar attached herewith. These payments are subject
to realization of cheques of the members, who have to
complete pay-in. In case any payment is not realised, then
the Exchange shall take measures as per its Rules and Bye
laws.
3. All funds realized up to Friday every week starting f rom
August 16, 2013 shall be disbursed on Tuesday of the
subsequent week.
4. The schedule has taken into account all promised or
expected payment from the members, who have given post-
dated cheques or letters of commitment.
5. Members/clients shall be entitled to get interest on the ir
outstanding dues with effect from 16 th August 2013 on
reducing balance method, based on simple interest rate of
8% per annum till end of settlement calendar. Intere st
amount shall be paid at end of the settlement.
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
6. A detailed settlement Calendar is being enclosed herewith.
For and on behalf of
National Spot Exchange Ltd.
Santhosh Mansingh
Asst. Vice President”
6. By a Notification dated 19 September 2014, the C entral
Government withdrew the exemption granted on 23 July 2008. The
Forward Markets Commission 6 recommended to DCA that steps be
taken to ascertain the quantity and quality of commodities at accredited
warehouses, the financial status of buyers and trading members, and
that liability be fixed on the promoters of NSEL, i.e 63 Moons. On 27
August 2013, FMC directed a forensic audit of NSEL by Grant Thornton
LLP. The Union of India ordered an inspection of accounts of NS EL
and 63 Moons under Section 209A of the Companies Act. The Economic
Offences Wing registered cases against the director s and key
management personnel of the NSEL and 63 Moons and against trading
members and brokers of NSEL under the provisions of the Indian Penal
Code and the MPID Act.
7. Pankaj Ramnaresh Saraf, a Director of Vostak Far East
Securities Prvt. Ltd., a company involved in the business of investment,
trading, and financing filed a complaint7 on 30 September 2013 against
the directors and persons holding key management posts in NSEL, 25
borrowers/trading members and some brokers of NSEL for offence s
under Sections 120B, 409, 465, 468,471,474 and 477A of the Indian Penal
Code 1860. The complainant stated that he had primarily been transacting
in T+2 and T+25 contracts. He further stated that since NSEL suspended
trading and deferred settlement of all one-day forward contracts by fifteen
days, he had not received payment of Rs 202 lakhs that was due to him
under various contracts. On 14 August 2013, he was informed by his
broker that NSEL had issued a settlement schedule for the payment of
outstanding dues after seven months. He alleged that the commodities
were traded by providing ‘false’ warehouse receipts of ‘non - existent
commodities’. It was also alleged in the complaint that NSEL held the
commodities in warehouses accredited to it as a ‘trustee’ on behalf of
the depositors (buyers) and that the misappropriation is a criminal breach
6 “FMC”
7 FIR No 216 of 2013
481
of trust. In addition to the above, he also alleged that the Settlement
Guarantee Fund8 had been misused by NSEL.
8. The FIR was later transferred to the Economic Offences Wing9
of Mumbai Police. The case was registered and Sections 3 and 4 of the
MPID Act were added to the FIR. The case was transfer red to the
Special Court constituted under the MPID Act. 10 NSEL filed a writ
petition challenging the invocation of the MPID Act on the ground that
the exchange is not a ‘financial establishment’ under the provisions of
the Act. By an order dated 1 October 2015, the petition was dismissed
by a Division Bench of the High Court on the following grounds:
(i) The material collected by EOW during the course of the
investigation revealed that NSEL did not carry out its
exchange operations according to the bye-laws. It was
prima facie evident that NSEL represented to the traders
that they would be provided security free loans and that
they would receive fixed returns of 14% to 16% pa;
(ii) The record indicates that the transactions were not
accompanied by physical delivery of goods. In many cases,
the accounts of NSEL and the suppliers of the goods did
not tally. The record also indicates that there were multiple
accommodation entries due to collusion between NSEL and
the trading members;
(iii) Section 2(d) of the MPID Act defines ‘financia l
establishment’ as any person accepting any deposit under
a scheme. Section 2 (c) of the MPID Act provides an
inclusive definition of the term ‘deposit’. Since NSE L
assured the traders that their investments in paired contracts
would secure them a return of 14 to 16% pa, the receipt of
the returns would prima facie fall within the definition of
‘deposit’; and
(iv) A charge-sheet and supplementary charge-sheets have been
filed. NSEL has an alternative remedy of applying for
discharge before the trial Court.
8 “SGF”
9 “EOW”
10 The case was registered as MPID Case 1 of 2014
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
9. The State of Maharashtra issued a notification on 21 September
2016 under Section 4 of the MPID Act by which the properties of the
respondent were attached. The relevant extract of the notifica tion is
reproduced below:
“No. MPI 2016/C.R.541/B/Pol II:- Whereas complaints have been
received from number of depositors against M/s La-Fin Financial
Services Pvt. Ltd. and M/s La-Financial Services Pv t. Ltd.
(hereinafter referred to as “the said Financial Establi shment”)
complaining that they had collected the Fund and have defaulted
to return the said deposits made by the depositors , on demand;
And whereas, the State Government is satisfied that t he said
Financial Establishment and its Chairman/Directors are not likely
to return the deposits to the depositors and hence the Government
has to protect the interests of the depositors;
And whereas the properties in the Scheduled appended hereto
are alleged to have been acquired by the said Finan cial
Establishment and its Chairman/Directors from and out of the
deposits collected by the Financial Establishment;
Now, therefore, in exercise of the powers conferred by sub-Section
(1) of Section 4, Section 5 and Section 8 of the Maharashtra
Protection of Interest of Deposits (in Financial Establis hment)
Act, 1000 (Mah. XVI of 2000) (hereinafter referred to as “the
said Act”) the Government of Maharashtra hereby attaches the
properties of the said financial Establishment and in the name of
its Chairman/Directors as specified in the Schedule.”
10. The Supreme Court on 26 October 2016 dismissed as
withdrawn, the Special Leave Petition filed against the order of the
Bombay High Court. The appellants filed a Writ Petition befor e the
Bombay High Court challenging the notification dated 21 Septem ber
2016 issued under Section 4 of the MPID Act attaching the propert ies
of the respondent. The validity of Sections 4 and 5 of the MPID A ct
was challenged on the ground that they are violative of Articles 14, 19
and 300-A of the Constitution. The reliefs sought in the writ petition are
extracted below:
“a. The Hon’ble Court may declare that Sections 4 and 5 of t he
MPID Act are violative of Articles 14 and 19 of the Constitution
483
and Article 300-A of the Constitution and consequently issue a
Writ of Mandamus and/or any other appropriate Writ, Order or
Direction restraining the Respondent Writ, Order or Directi on
restraining the Respondent, its servants and/or agents from acting
in pursuance of those provisions;
b. In view of Prayer A above, issue a Writ, Order or Direc tion
under Article 226 of the Constitution quashing and setting aside
the Impugned Notification dated 21.09.2016 (being Exhibit-S
herein) issued by the Respondent exercising the power under
Section 4 of the MPID Act;
c. In the alternative, issue a Writ, Order or Direction in the nature
of Certiorari or any other appropriate Writ, Order or Dire ction
under Article 226 of the Constitution quashing and setting aside
the Notification dated 21.09.2016 as being ultra-vires Section 4
and 5 of the MPID Act.
11. The State of Maharashtra issued further notifications dated 4
April 201811, 7 April 201812, 11 April 201813, 19 April 201814, 15 May
201815 and 19 October 201816 under Sections 4 and 5 of the MPID Act,
attaching the properties of the respondent to recover the defaulted money.
The Writ Petitions were heard together and disposed of by a Division
Bench of the Bombay High Court by a judgment dated 22 August 2019.
The petition was allowed on the following grounds:
(i) The pay-in amount received from the buyer was only for
the purpose of passing it over to the seller on the same
date. This amount would not fall within the purview of
Section 2(c) of the MPID Act in terms of which a ‘deposit’
must be the receipt or acceptance of a valuable commodity
which would be ‘repaid’ by the financial establishment after
a specified period;
(ii) NSEL only performed the role of a facilitator, in a manner
similar to the Bombay Stock Exchange. NSEL did not
11 Notification No. MPI/1118/C.R-394/Pol-11
12 Notification No. MPI-1118/C.R. 329/Pol-11
13 Notification No. MPI-1118/C.R. 434/Pol 11 read with corrigendum bearing MPI No.
1118/C.R.-434/Pol 11 dated 19 April 2018.
14 Notification No. MPI 1118/C.R. 4999 Pol 11
15 Notification No. MPI-1118/C.R. 597/Pol 11
16 Notification No. MPI 1118/CR 1040/Pol 11
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
receive money with the obligation to return it on maturity.
The fact that VAT is collected by the selling members from
the buying members and that TDS is not deducted by NSEL
indicates that NSEL is a mere pass through platform;
(iii) The contract notes do not disclose that NSEL received any
money or commodity with an assured return. Rather, the
difference between the buy contract and the sell contract
is the profit that the member receives. The profit from the
transaction is determined by totalling the two amounts by
taking into consideration the number of days when the
commodity was sold and the pay-out was scheduled. It
varies with different products based on the period when
the sell contract (that is the second contract) is scheduled;
(iv) The entries in the ledger of the traders reflect t he delivery
obligation and record the credit/debit pursuant to the trade.
The entries of NSEL’s settlement bank account show the
amount received from a particular trader. The entries of
pay-in and pay-out match with the ledger accounts of
individual traders;
(v) Mr. Pankaj Saraf in his FIR has not stated that he has
deposited money with NSEL. He has stated that trading on
the platform was successful until the cessation of further
trades ;
(vi) The transactions had gone wrong since as depicted in the
show cause notice to NSEL, the outstanding positions of
trade did not result in delivery by the end of the day. After
31 July 2013, 24 sellers failed to honour their part of the
agreement by purchasing back the commodities on T+25
days. This was noted as a violation of the exemption granted.
However, this does not change the fact that NSEL did not
receive any ‘deposits’ within the meaning of Section 2 (c)
of the MPID Act since NSEL did not receive the
commodities or money to be retained. NSEL only received
transaction and warehouse charges which cannot be
considered as a ‘deposit’;
(vii) EOW filed a charge sheet on 4 August 2014 in which it
was stated that the important feature of the exchange i s
485
that it guarantees that both the parties would comply with
their contractual obligations and if the trading member i s
unable to pay, the Exchange would sell the goods and recover
the money. The charge sheet also notes that NSEL
encouraged the investors to enter into contracts without
depositing commodities in the warehouses. However, the
charge sheet makes it evident that even the EOW was of
the opinion that the Exchange was only acting as a
transaction agent. Further by a letter dated 16 August 2013
from FMC, information on defaulters was sought by NSEL;
(viii) Merely because one of the brochures refers to an as sured
yield of 14 to 16% pa, it cannot be held that a ‘deposit’ was
made;
(ix) In the event that accounts of NSEL and the suppliers do
not tally and delivery of commodities has not been provided,
this may constitute an offence under Sections 465 and 467
of the IPC. NSEL is not absolved of any of these liabilities;
(x) At the highest, since the members had to pay back the
amounts due on T+25 , they could be construed as a
‘financial establishment’;
(xi) The warehouse receipts do not establish the nature of the
transaction nor can it be held that the deposit of commodities
would fall within the purview of the definition of ‘deposit’
since the commodity that was to be deposited in a warehouse
was to be sold by the seller;
(xii) The judgment of the Supreme Court in 63 Moons
Technologies v. Union of India 17 does not have any
bearing on whether the attachment of properties initiated
under Section 4 of the MPID Act is valid;
(xiii) The forensic report of the 17 defaulter companies revea ls
that the defaulters have utilized the funds and hav e
transferred them to their sister companies;
(xiv) In another case of one of the defaulting trading memb ers
that is pending before the Gujarat High Court, the Deputy
Secretary, Home Department, Government of Maharashtra
17 (2019) 18 SCC 401
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
had referred to the trading member as a ‘defaulter’ who
had committed offences under Sections 409,465, 467,468,
471 and 474 of the IPC;
(xv) The contention that Section 4 of the MPID Act must be
read down in view of the ‘wide ambit’ of the provisions
which could be misused is left open since the Supreme Court
in KK Bhaskaran v. State and Sonal Hemant Joshi v.
State of Maharashtra has upheld the constitutional validity
of the Depositors Acts in Tamil Nadu and Pondicherry,
specifically noting that the decision would also apply to the
MPID Act since the provisions are pari materia;
(xvi) By an interim order on 24 October 2018, the impugned
notifications attaching the properties were stayed on the
ground that the attachment was in excess of the defaulted
amount. It was noted in the interim order that the defaulted
amount is Rs. 4822.53 Crores whereas the authorities have
attached properties worth Rs. 8547 Crores, including Rs.
2200 Crores from NSEL. This order was challenged before
the Supreme Court and it has refused to interfere; and
(xvii) The audit report submitted US Gandhi and Co. has traced
trade obligations of the trading members who are defaulters.
NSEL has also instituted recovery suits against the
defaulters.
B. Submissions
12. Mr. Jayant Mehta, Senior Counsel appearing for the appellant
submitted:
(i) The definition of ‘deposit’ in Section 2(c) of the MPID Act
is broad and inclusive. The provision must be interpreted
widely keeping in view the statement of objects and reasons
for the enactment of the law;
(ii) NSEL received money from the seller and returned it in
kind (through commodities). NSEL received commodities
from the seller and returned an equivalent amount after a
specified period in cash. Therefore, NSEL accepted deposits
from both the seller and the buyer;
(iii) Through a paired contract, the buying member would buy a
purchasing contract and simultaneously sell a sale contract
487
paired by NSEL. The sale price was pre-designated by
NSEL to offer an annualised return of 14-16% to the buying
member;
(iv) NSEL is both the bailee of cash (at the buyer’s end) and of
valuable commodities (at the seller’s end);
(v) The writ petition filed by the respondent before the High
Court was not maintainable since there was an alternative
remedy of raising an objection against the attachment of
property before the Designated Court under Section 7 of
the MPID Act. Further, any person who is aggrieved by
the order of the Designated Court under Section 10 can
appeal to the High Court within 60 days from the date of
the order in terms of Section 11 of the MPID Act; and
(vi) The settlement cycle broke because:
(a) NSEL, contrary to its bye-laws and rules, did not
warehouse the commodities. The buying member did
not have knowledge of whether the commodities were
warehoused; and
(b) The buying member was lured into a paired contract
on the assurance that the commodity in the
warehouse would constitute a security and NSEL
would be the counter-guarantor. However, NSEL
colluded with the selling members and facilitated
trades without ensuring that the commodities were
deposited in the warehouses.
13. Mr. Vikramjit Banerjee, ASG appearing for the Sta te of
Maharashtra made the following submissions:
(i) NSEL is a financial establishment under Section 2(d) of the
MPID Act since it has accepted deposits as defined under
Section 2(c). NSEL has been trading in different types of
commodities through ‘farmer’ contracts, paired contracts,
e-series contracts, among others. NSEL guaranteed assured
returns to investors;
(ii) The provision of warehouse receipts along with the
assurance of returns indicates that NSEL was accepting
deposits;
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
(iii) This Court in New Horizon Sugar Mills Ltd. v.
Government of Pondicherry 18 has held that the state
legislature is competent to legislate upon financia l
establishments with an object to protect investors. The Court
also held that the expression ‘financial establishme nt’
includes a natural and a juristic person such as a company
incorporated under the Companies Act. This Court has held
in KK Bhaskaran v. State19, State v. KS Palanichamy,20
and PGF v. Union of India 21 that the object of a law
regulating financial establishments is to protect the investors.
Therefore, the provisions of the statute must be interpreted
keeping this salient purpose in mind;
(iv) This Court in 63 Moons Technologies (supra)held that
NSEL carried out trade in paired contracts in commodities
and this created financial transactions distinct from sa le
and purchase transactions; and
(v) The respondent has an alternate statutory remedy available
to it under Section 10 of the MPID Act.
14. Dr Abhishek Manu Singhvi, Senior Counsel appearing for the
respondent submitted that:
(i) The commodity sellers received money from the buyers on
T+2 with an obligation to repay the money on T+25. NSEL
obtained decrees against the defaulters. Therefore, at the
highest, the appellants can only argue that the defaulting
trade members (not NSEL) are ‘financial establishments’;
(ii) The State has characterised the member defaulters of t he
exchange as ‘defaulter companies’ and as ‘financial
establishment’ in notifications issued by the Home
Department on 31 March 2017 and 24 March 2018 which
indicates that NSEL is not a defaulter;
(iii) According to the forensic report submitted by the EOW,
the full money trail has been traced to the default ing
members. NSEL did not receive any money as ‘deposit’;
18 (2012) 10 SCC 575
19 (2011) 3 SCC 793
20 (2017) 16 SCC 384
21 (2015) 13 SCC 50
489
(iv) The State of Maharashtra in a case which is pending before
the Gujarat High Court relating to one of the members
(buyers) submitted on affidavit that the defaulting members
have defrauded the investors;
(v) Even if the impugned judgment is upheld, NSEL will not be
absolved of its criminal liability under the IPC but no criminal
liability arises under the MPID Act. . NSEL and 63 Moons
are being prosecuted in various other criminal proceedings.
They will face civil suits as well;
(vi) As against the current outstanding claim of Rs. 4,676 Crores,
properties in excess of Rs. 6000 Crores are attached;
(vii) NSEL is only obligated to recover the money from t he
defaulters. It has secured decrees/arbitral awards to the
tune of Rs. 3,397 Crores from the members. The Bombay
High Court has accepted the determination of liability of
Rs. 136.98 Crores against defaulters by the Committee
appointed by it. The Committee has crystallised a furthe r
liability of Rs. 760 Crores from the defaulters which is
pending acceptance by the Bombay High Court;
(viii) NSEL has filed proceedings for execution of the decre es
and awards against the defaulters across five States. Since
the process is taking time, NSEL instituted a petition22 before
this Court under Article 32 seeking a consolidation of all
execution proceedings;
(ix) NSEL did not receive any ‘deposit’, as defined under Section
2(c) of the MPID Act since:
(a) The impugned notifications by which the property
of the respondent was attached under Section 4
of the MPID Act proceed only on the basis that
NSEL accepted money which it failed to return
and there is no reference to a deposit founded on
the acceptance of commodities;
(b) The Government cannot improve on the reasons
by a subsequent affidavit (Relied on Mohinder
Singh Gill v. CEC23); and
22 WP (C) No. 995 of 2019
23 (1978) 1 SCC 405
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
(c) According to the definition of ‘deposit’ under
Section 2(c) of the MPID Act, only the deposit of
‘valuable’ commodity is covered. In common
parlance, valuable commodities would be
restricted to gold, silver, or other precious metals.
NSEL only traded in agricultural commodities and
steel. Agricultural commodities are not covered
by the definition.
(x) The traders who participated on NSEL’s platform are
corporate traders. The statement of objects and reasons of
the MPID Act states that the Act is for the protectio n of
‘small’ depositors;
(xi) The proceeding under the MPID Act would short-circuit
the trials in the pending civil suits against both NSEL and
63 Moons. 63 Moons is a public listed company with more
than 50,000 shareholders, 800 employees and 2 million users.
If the property of 63 Moons is attached, the interest of
stakeholders will be prejudiced; and
(xii) NSEL did not have control over any monies received from
the traders. NSEL is a pass through platform, where the
money was sent to the counter party brokers on the same
day.
15. Mr. Mukul Rohatgi, Senior Counsel, appearing fo r the
respondent made the following submissions:
(i) NSEL runs a commodity exchange, similar to a stoc k
exchange. NSEL is only a transacting medium and neither
collects ‘deposits’ nor does it assure returns;
(ii) NSEL receives a commission of Rs. 100 per one lakh of
the trade value (0.1%) from the traders;
(iii) In Bhaskaran, (supra) this Court held that the Tamil Nadu
Protection of Interests of Depositors (in Financial
Establishments) Act 1997 24 is constitutionally valid. In
paragraph 15 of the judgment, the court observed that though
the Tamil Nadu Act and MPID have minor differences, the
view taken in the judgment would equally apply to the validity
24 “Tamil Nadu Act”
491
of the MPID Act. This Court rejected the challenge on the
ground of Articles 14, 19 and 21 without examining the
provisions of the statute. Therefore, the Court in the present
case is not precluded from examining the constitutional
validity of the provisions of the MPID Act;
(iv) Section 4 of the MPID Act is arbitrary and constitutionally
invalid and it suffers from over-breadth since:
(a) Sub-section (1) of Section 4 mandates the attachment of
property of the ‘promoter, director, partner, manager or
memberof the said Financial Establishment.’;
(b) Sub-section (2) of Section 4 divests the title of the atta ched
properties without due process of law; and
(c) Section 7 states that the Designated Court shall is sue a
notice to the financial establishment or any other person
whose property is attached. An objection shall be raised by
all persons who are likely to have a claim. The object ion
shall be decided by a summary procedure under Order 37
of CPC 1908. The divestment of title of a property by a
summary procedure is arbitrary.
(v) Though the transaction by NSEL in its platform seems to
be an exchange of commodities on paper, it was an
agreement between a lender and borrower. A borrower who
has defaulted in paying the loan can be held liable to repay
it;
(vi) The forensic audit traces back the money trail to the
borrowing-traders and not to NSEL;
(vii) Five of the six attachment notifications were “omnibus
notifications” issued by an incompetent authority; and
(viii) NSEL did not make a blanket assurance of 16% returns.
The representations only meant that investors making ‘wise
investments’ would get an annualised return of 16%.
C. Analysis
C. 1 Framework of the MPID Act
16. The MPID Act was enacted by the legislature in Maharashtra
and received the assent of the President on 21 January 2000. The
Statement of Objects and Reasons accompanying the introduction o f
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
the Bill states that the statute is enacted to protect th e public from the
increasing menace of financial establishments grabbing money from the
public in the form of deposits:
“There is a mushroom growth of Financial Establishments in the
State of Maharashtra in the recent past. The sole object of the se
Establishments is of grabbing money received as deposits fr om
public, mostly middle class and poor on the promise s of
unprecedented high attractive interest rates of interest or rewards
and without any obligation to refund the deposit to the investors
on maturity or without any provision for ensuring rendering of the
services in kind in return, as assured. Many of these Financi al
Establishments have defaulted to return the deposits to public. As
such deposits run into crores of rupees, it has resulte d in great
public resentment and uproar, creating law and order problem in
the State of Maharashtra, especially in the city like Mumbai which
is treated as the financial capital of India. It is, therefore, expedient
to a make a suitable legislation in the public interest to cu rb the
unscrupulous activities of such Financial Establishments in the
State of Maharashtra.”
17. Section 3 of the MPID Act envisages punishment upo n
conviction of every person including a promotor, partner, director, manager
or employee responsible for the management of or the conduct of the
business or affairs of the financial establishment which has fraudulently
defaulted in the repayment of deposits on maturity. Section 3 is in the
following terms:
“Any Financial Establishment, which fraudulently defaults any
repayment of deposit on maturity along with any benefit in the
form of interest, bonus, profit or in any other from as promised or
fraudulently fails to render service as assured against the deposit,
every person including the promoter, partner, director, manager or
any other person or an employee responsible for the management
of or conducting of the business or affairs of such Fina ncial
Establishment shall, on conviction, be punished with imprisonment
for a term which may extend to six years and with fine which
may extend to one lac of rupees and such Financial Establishment
also shall be liable for a fine which may extend to six years and
with fine which may extend to one lac of rupees and such Financial
493
Establishment also shall be liable for a fine which may extend to
one lac of rupees.
Explanation- For the purpose of this section, a Fin ancial
Establishment, which commits default in repayment of such deposit
with such benefits in the form of interest, bonus, profit or in any
other form as promised or fails to render any specified se rvice
promised against such deposit with an intention of causing wrongful
gain to one person or wrongful loss to another person or commits
such default due to its inability arising out of impracticabl e or
commercially not viable promises made while accepting s uch
deposit or arising out of deployment of money or assets acquired
out of the deposits in such a manner as it involves inherent risk in
recovering the same when needed shall, be deemed to hav e
committed a default or failed to render the specific service,
fraudulently.”
Section 4 contemplates the levy of attachment on properties of a
financial establishment on default of return of payment. Section 4 provides
that if on a complaint received from the depositors or ot herwise, the
Government is satisfied that any financial establishment has failed to
return the deposit on maturity or demand, or to pay interest or an assured
benefit, or has failed to provide a service that was assure d against the
deposit, or if the Government has reason to believe that a ny financial
establishment is acting in a manner detrimental to the inte rest of the
depositors with the intention to defraud them, it may attach the money or
property acquired by the financial establishment out of the deposit. The
provision states that if such money or property is not avail able to be
attached, the property of the financial establishment or the promoter,
director, partner, manager or member may be attached.
18. Section 5 provides for the appointment of a Comp etent
Authority while Section 6 contains a provision for a Designated Court.
Section 7 enunciates the powers of the Designated Court regard ing
attachment. Under Section 7, upon receipt of an application under Section
5, the Designated Court shall issue a show cause notice to the financial
establishment or any person whose property is attached on why the
order of attachment should not be made. A notice shall also be issued to
all persons who are likely to have an interest in the property, calling them
to submit objections to the attachment of the property on the ground that
they have an interest in the property or a portion of it . If no cause is
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
shown, then the attachment shall be made absolute and directi ons can
be issued for the realisation and equitable distribution of assets. If cause
is shown, the Designated Court shall investigate into it by following a
summary procedure as contemplated under Order 37 of the Civil
Procedure Code 1908. An appeal against an order of the Designat ed
Court is envisaged by the provisions of Section 11.
19. Since NSEL did not have sufficient money or property for
attachment under Section 4 on default of payment of the outs tanding
amounts, the State of Maharashtra attached the prop erties of the
respondent which owns 99.9% of the shares of NSEL.
C. 2 Framework of NSE
20. It is necessary to refer to the bye-laws of NSEL to as certain
the structure of NSEL’s operation and functioning. Bye-law 2.17 defines
“certified warehouse receipt” in the following terms:
“Certified Warehouse receipt means a receipt issued under the
authority of the Exchange or any agency approved by the exchange
as a certified warehouse, evidencing proof of ownership of a
standard quantity of commodities of a stated grade and quality by
the beneficial owner or holder of the certified warehouse receipt.
Certified warehouse receipt may either be in physical form or in
dematerialised/electronic form as may be permitted by law.”
The expression ‘certified warehouse’ is defined in Bye-law 2.18
as a “warehouse approved and designated by the Exchange for making
deliveries to and taking deliveries for fulfilling contractual obligations
resulting from transaction in commodities.” Bye-law 2.51 defines ‘Margin’
as follows:
“Margin means a deposit or payment of cash/other specified
assets/documents to establish or maintain a position in a
commodity and include initial margin, special margin, ordinary
margin, delivery period margin, additional margin and variation
margin or any other type of margin as may be determined by the
Exchange from time to time.”
(emphasis supplied)
21. The expression ‘warehouse receipt’ is defined in Bye-l aw
2.96 to mean a document evidencing that a commodity is being held in
the approved warehouse. Bye-law 3.7 provides for limitation of liability:
495
“The Exchange shall not be liable for any activities of its members
or of any other person, authorised or unauthorised, acting in the
name of any member, and any act of commission or omission by
any one of them, either singly or jointly, at any time shall not be in
any way construed to be an act of commission or omission by any
one of them, as an agent of the Exchange. Save as otherwise
specifically provided in these Bye-Laws and in the Business Rules
and Regulations of the Exchange, the Exchange shall not incur or
shall not be deemed to have incurred any liability and accordingly,
no claim or recourse shall lie against the Exchange, any member
of the Board of Directors/or committee duly appointed by it or
any other authorised person acting for an on behalf of the Exchange,
in respect of or in relation to any transaction entered into through
the exchange made by its members and any other matt ers
connected therewith o related thereto, which are undertaken for
promoting, facilitating, assisting, regulating, or otherwise managing
the affairs of the Exchange to achieve its objects as defined in the
Memorandum and Articles of Association of the Exchange.”
22. Bye-law 4.20(a) states that all outstanding transactions in
commodities shall be compulsorily delivered at one or more deli very
points or in warehouses accredited to the Exchange. Clause (b) of the
bye-law states that if the outstanding transactions have not been settled
by giving or receiving deliveries, then it shall be auctioned by buying-in
or selling-out as per the Business Rules of the Exchange:
(a) All outstanding transactions in commodities shall in general
be for compulsory delivery at any one or more delivery
points and/or warehouses approved, certified and designated
by the Exchange.
(b) All outstanding positions not settled by giving or receiving
deliveries shall be auctioned by way of buying-in or selling-
out as per the Business Rules of the Exchange, together
with a penalty as prescribed by a Managing Director or
such committee for those failing to give or receive delivery.
Bye-Law 7.10.2 states that the Exchange shall be responsible for
its commitments to each clearing member unless the cause for default
was under improper trades not covered by the Settlement Gua rantee
Fund:
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
“The Exchange shall be responsible for its commitments to each
clearing member whether the remaining clearing members with
whom it has dealings have defaulted except under circumstances
where improper trades not covered under the Settlement Guarantee
Fund (SGF) are the cause for default…”
Bye-law 7.11 states that the Clearing House of the Exch ange
shall, among other things, have the responsibility of receiving m argin
payments, certification of warehouse receipts, and tra nsmission of
documents. Bye-law 7.11 reads as follows:
“The Clearing House of the Exchange shall, in the man ner
specified by the Relevant Committee or the relevant aut hority,
have the responsibility of receiving and maintaining margin
payments, monitoring open positions and margins, an d
transmission of documents, payments and certified
warehouse receipts amongst the trading-cum- clearing members
and institutional clearing members of the Exchange.”
(emphasis supplied)
Bye-law 9 provides for clearing and settlement. Bye-laws 9.5,
9.6 and 9.7 provide as follows:
“9.5 An order to buy or sell will become a matched transaction
only when it is matched in the Trading system and the Clearing
House does not find the order to be invalid on any other
consideration and further after verifying that the following are in
agreement and/or in order:
(i) Commodity,
(ii) price indices,
(iii) Quantity,
(iv) Transaction quote,
(emphasis supplied)
9.6 Once a trade is matched and marked to market by the Clearing
House, the Exchange shall be substituted as counter party
for all net financial liabilities of the clearing mem bers in
specified commodities in which the Exchange has decide d
to accept the responsibility of guaranteeing the fi nancial
obligations.
(emphasis supplied)
497
9.7 All outstanding transactions shall be binding upon the original
contracting parties, that is, the members of the Exchange until
issue of delivery notice or delivery order or payment for delivery,
as the case may be.”
23. Bye-law 10 contains provisions with regard to delivery:
“10.1 For the fulfilment of outstanding position, commodity shall
be tendered by Delivery Orders through the respective Clear ing
Members to the Clearing House in such manner as may be
prescribed in the Business Rules or Regulations.
10.2 The Exchange shall prescribe tender days and delivery period
for each commodity during which sellers having outstanding sale
position must issue Delivery Orders through their respec tive
Clearing Members to the Clearing House.
10.3 The Clearing House shall allocate the delivery orders received
by it amongst one or more buyers having outstanding long open
positions in a manner as considered appropriate by the Relevant
Authority.
10.4 The Relevant Authority may specify in advance before
commencement of trading in a commodity various grades of a
commodity that may be tendered and the discounts and premiums
for such grades.
10.5 All positions outstanding at the end ·of the day shall result
into compulsory delivery obligation at the closing rate of the date
of transaction as fixed by the Relevant Authority. The differences
arising out of the actual transaction price and closing price shall
be received from and disbursed to amongst the members on the
next day of trading, pending actual delivery. The Relevant Authority
may prescribe penalty on sellers with outstanding positions who
fail to issue delivery orders and the Exchange may conduct auction
to ensure delivery to the buyers who hold outstanding buy positions
and intended to lift delivery and could not receive Delivery Orders
against such positions due to failure on the part of the sell er. In
case of non availability of commodities during the auction process,
close-out process as defined in the business rule shall be applicable.
The Relevant Authority may prescribe penalty on buyers w ith
outstanding positions who fail to pay against his purchase obligation
and the Exchange may conduct sale out auction to ensure that the
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
sellers gets the price for the commodities delivered against their
sale obligation and could not receive payment due to failure on
the part of the buyers. In case of non availability of suitable buyers
during the auction process, close-out process as defined in the
business rule shall be applicable. Failure to pay the dues a nd
penalties relating to such closing out within the stipulated period
shall cause the member to be declared as defaulter and r ender
him liable for disciplinary action.”
24. Bye-law 10.7 envisages that a seller issuing the delivery order
shall receive from the Clearing House the full price of t he commodity
delivered as per the delivery order rate, subject to additions or deductions
on account of premium or discounts prescribed under the bye-laws. Under
bye-law 10.8, a buyer has to pay to the Clearing House, the v alue of
delivery allocated on his account by the Exchange within the time
specified. However, the money will be passed by the Clearing House to
the seller only on the completion of the delivery process to the satisfaction
of the Exchange. The bye-law reads as follows:
“10.8 A buyer shall pay to the Clearing House the value of delivery
allocated on his account by the Exchange within such time as
may be specified, by the Exchange. After getting full pric e of
delivery from the buyer as per delivery order allocated to him, the
Exchange will endorse the delivery order to him. Thereafter, till
completion of the delivery process, the money will be
retained by the Clearing House and will be passed o n to
the seller only on completion of the delivery process to the
satisfaction of the Exchange . The Clearing House will pass
on the proceeds to the seller after making adjustme nts
relating to quality, quantity and freight factors, as the cas e
may be. The balance amount, if any, remaining after such
adjustments, will be passed on to or recovered from the buyer by
the Clearing House.”
(emphasis supplied)
Bye-law 10.11 provides that at the time of issuing the deli very
order, the seller of the commodity must satisfy the clearing member that
he owns and holds in his possession or his agent’s possession adequate
stocks of the required quantity and quality of the commodity. Bye-law
10.12 prescribes that:
499
“A seller member is entitled to offer delivery only a t the
delivery centers specified by the Exchange in advance for
the respective commodity . Delivery can be tendered at such
specified centers strictly as per the delivery procedure spe cified
by the Exchange. Before tendering delivery, the seller is als o
required to obtain a certificate from a surveyor empanelled by the
Exchange and such certificate shall be accompanied with the
delivery order being tendered by him to the Clearing House. The
surveyor’s certificate shall clearly specify the quality of the goods
tendered and shall also confirm that such quality is tenderable as
per the contract specification of the Exchange. In case of non-
compliance of any of these conditions, the delivery order is
rejected ab initio.”
(emphasis supplied)
25. Thus, under the above bye-law, the selling member is entitled
to offer delivery only at the delivery centre which is sp ecified in the
Exchange strictly in accordance with the delivery procedure p rovided
before tendering delivery. The seller has to obtain a surveyor’s certificate
which is to be accompanied with the delivery order being te ndered by
him to the Clearing House. Bye-laws 10.14, 10.15 and 10.16 contain the
following stipulations:
“10.14 Members of the Exchange and the clients/ constituents
dealing through them shall strictly abide by the delivery procedure,
methods of sampling, survey, transportation, storage, packing ,
weighing and final settlement procedures, as may be specified by
the Relevant Authority from time to time. Any violation of such
method will be dealt with by the Relevant Authority in the manner,
as may be specified from time to time.
10.15 A seller of commodity shall deliver the quantity as per his
net sale position in the commodity during the period specified ·in
the Rules, Business Rules and Regulations of the Exchange and
notices and orders issued thereunder from time to time for the
specified commodity, which should confirm to the quality specified
by the Exchange in the contract specification. In case of a ny
failure to do so, such net sale position shall be closed out by buying
in auction and the seller shall be required to pay the difference, as
determined by the Clearing House and penalty in addition thereto.
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
10.16 A buyer shall be required to lift delivery from the specified
warehouse within the period prescribed by the Relevant Authority,
as per the delivery order assigned to him. In case of his failure to
do so, he shall be required to pay the warehouse charges, insurance
charges and other expenses relating to storage for the incremental
period and also a penalty in addition thereto.”
26. Bye-law 12 contains provisions for a Settlement Guarantee
Fund. The Settlement Guarantee Fund is constituted by deposits made
by the members of the Exchange and is utilised for paying in the event
of a default in payments by the trading members, paying insurance covers
and covering the losses of the Exchange, among other uses. Bye-law
12.1.1 is in the following terms:
“12.1 The Exchange to maintain Settlement Guarantee Fund
12.1.1 The Exchange shall maintain Settlement Guarantee Fund
in respect of different commodity segments of the Exchange for
such purposes, as may be prescribed by the Relevant Authorit y
from time to time.”
27. Bye-Law 12.1.2 states that the relevant authority may prescribe
from time to time, the norms and conditions governing Se ttlement
Guarantee which may among other things specify the amount of deposit
or contribution to be made by each trading member to the S ettlement
Guarantee Fund. The bye-law also states that rules are t o be made on
contributions, conditions of repayment and withdrawal of contribution
from the fund among other stipulations. Bye law 12.1.3 states that the
minimum amount in the fund before starting the trading must be Rs 1
Crore, which can be suitably increased. Bye Law 12.2 stip ulates the
contribution and deposit with the Settlement Guarantee Fund:
“12.2 Contribution to and Deposits with Settlement Guarantee
Fund
12.2.1 Each member shall be required to contribute to and
provide a minimum security deposit , as may be determined
by the Relevant Authority from time to time, to the rele vant
Settlement Guarantee Fund. The Settlement Guarantee Fund shall
be held by the Exchange. The money in the Settlement Guarantee
Fund shall be applied in the manner, as may be provided in these
Bye-laws, Rules, Business Rules and Regulations of the Exchange
and notices and orders issued thereunder from time to time.
501
12.2.2 The Relevant Authority may specify the amount of additional
contribution or deposit to be made by each member a nd/or
category of clearing members, which may, inter alia, include the
minimum amount to be provided by each clearing member.
12.2.3 The Exchange shall, as a result of multi-lateral nett ing
followed by it in respect of settlement of transactions, guarantee
financial settlement of such transactions to the extent it has acted
as a legal counter party, as may be provided in the relevant Bye-
laws from time to time.
12.2.4. The total amount of security deposit and additional deposit,
maintained by a clearing member with the Clearing House of the
exchange, in any form as specified herein, shall form part of the
Settlement Guarantee Fund.
12.2.5 The amount deposited by a clearing member towards the
security deposit shall be refundable, subject to such terms and
conditions as may be specified by the Relevant Authority from
time to time. Any amount deposited or paid by the clearing
member may be refunded provided further that such amount
is in surplus and there is no actual/crytallized or contingent
liability or a claim from any client or clearing bank to be
discharged by the clearing member.
(emphasis supplied)
28. Bye-law 12.3 stipulates that a member may provide a deposit
in the form of cash, fixed deposit receipts, bank guarantees or in such
other form.
12.3 Form of Contribution or Deposit
The Relevant Authority may, in its discretion, permit a member to
contribute to or provide the deposit to be maintained with t he
Settlement Guarantee Fund, in the form of either cash, fixed deposit
receipts, bank Guarantees or in such other form or method and
subject to such terms and conditions, as may be specified by the
relevant Authority from time to time.
Bye-law 12.4 states that the deposit may be replaced by fre sh
deposits. Bye-law 12.5 states that the Settlement Guarantee Fund ma y
be invested in securities or other avenues of investment:
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
12.4 Replacement of Deposit
By giving a suitable notice to the Exchange and subject to such
conditions, as may be specified by the Relevant Authorit y from
time to time, a member may withdraw fixed deposit rec eipts or
bank Guarantees given to the Exchange, representing the member’s
contribution or deposit towards the Settlement Guarantee Fund,
provided that the member has, simultaneously with s uch
withdrawal, deposited cash, fixed deposit receipts, or bank
Guarantees with the Clearing House or the Exchange or made
contribution through such other mode, as may be approved by the
Clearing House or the Exchange from time to time, to meet his
required contribution or deposit, except as provided in these Bye-
Laws.
12.5 Investment of Settlement Guarantee Fund
Funds in the Settlement Guarantee Fund may be invested
in such approved securities and/or other avenues of
investments, as may be provided for by the Board in the
relevant Business Rules and Regulations in force from time t o
time.
(emphasis supplied)
Bye-law 12.6 states that the Settlement Guarantee Fund may be
used for the purpose of (i) maintenance of the fund; (ii) using the fund
temporarily to fulfil the shortfalls and deficiencies arising from clearing
and settlement obligations; (iii) payment of insurance cover; (iv) covering
the loss arising from clearing and settlement obligations; and (v) repaying
to the members, the balance amount available after utilization.
“12.6 Administration and Utilization of Settlement Guarantee Fund
12.6.1 The Settlement Guarantee Fund may be utilised for suc h
purposes as may be provided in these Bye-Laws and Regulations
and subject to such conditions as the relevant Authority may
prescribe from time to time, which may include
a. defraying the expenses of creation and maintenan ce of
Settlement Guarantee Fund;
b. temporary application of Settlement Guarantee Fund to meet
shortfalls and deficiencies arising out of the clearing and settlement
503
obligations of clearing members in respect of such transactions ,
as may be provided in these Bye-Laws, Rules, Business Rules
and Regulations of the Exchange in force from time to time;
c. payment of premium on insurance cover(s) which the Relevant
Authority may take from time to time, and/or for creating a Default
Reserve Fund by transferring a specified amount every yea r, as
may be decided by the Relevant Authority from time to time;
d. Meeting any loss or liability of the Exchange arising out of
clearing and settlement operations of such transaction, as may be
provided in these Bye-Laws, Rules, Business Rules a nd
Regulations of the Exchange in force from time to time;
e. repayment of the balance amount to the member pursuant to
the provisions regarding the repayment of deposit after meet ing
all obligations under Bye-Laws, Rules, Business Rule s and
Regulations of the Exchange, when such member ceases to be
member, and
f. any other purpose, as may be specified by the Relevant Authority,
from time to time.”
29. Bye-laws 12.7 and 12.8 specifically provide for utilization of
the fund for the failure of the trading member to meet his settlement
obligations or when he is declared as a defaulter:
“12.7 Utilization for failure to Meet Obligations
Whenever a member fails to meet his settlement obligati ons to
the Exchange arising out of his clearing and settlement operations
in respect of his transaction, as may be provided in these B ye-
Laws, Rules and Regulations of the Exchange, the Rele vant
Authority may utilise the Settlement Guarantee fund and other
moneys lying to the credit of the said member to the ex tent
necessary to fulfil his obligations under such terms and conditions,
as the Relevant Authority may specify from time to time;
12.8 Utilisation in Case of Failure to Meet Settlement Obligations
or on Declaration of Defaulter
Whenever a member fails to meet his settlement obligation to the
Exchange arising out of the transactions, as may be provided in
these Bye-laws, Rules, Business Rules and Regulations of the
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
Exchange in force from time to time, or whenever a member is
declared a defaulter, the Relevant Authority may utili se the
Settlement Guarantee Fund and other moneys of the member t o
the extent necessary to fulfil his obligations in the following order:
[…]
12.9.2 If the cumulative amount under all the above heads is not
sufficient, the balance obligations shall be assessed against all the
clearing members in the same proportion as their total contribution
and deposit towards security deposit, and the clearing memb ers
shall be required to contribute or deposit the deficient amount in
the Settlement Guarantee Fund within such time, as the Relevant
Authority may specify in this behalf from time to time.”
[…]
Bye-law 12.11 states that the deposit shall be allocated by the
Exchange among various segments of trading:
12.11 Allocation of the Contribution or Deposit
Each clearing member’s contribution and deposit towards the
Settlement Guarantee Fund shall be allocated by the Exchange
among the various segments of trading, which are
designated as such by the exchange and in which the
member may participate, in such proportion as the
Exchange may decide from time to time . The Exchange shall
retain the rights to utilise the fund allocated to a particular segment
of trading to match the losses or liabilities of the Ex change,
incidental to the operation for that segment or for any other
segment, as may be decided by the Exchange at his discretion.
Bye-law 12.12 states that the clearing member shall be repaid his
deposit after making deductions:
12.12 Repayment to the Clearing Member on His Cessation
12.12.1 A members hall be entitled to repayment of the actu al
amount of deposit, if any, made by him to the Settlement Guarantee
Fund provided it is not part of the admission fee after
a. the member ceases to be an exchange member on account of
any reason whatsoever,
505
b. all pending transactions at the time the member ceases to be an
exchange member, which may result in a charge to the settlement
Guarantee Fund, have been closed and settled,
c. all obligations to the Exchange for which the member wa s
responsible while he was an exchange member have been satisfied,
or at the discretion of the Relevant Authority, have been deducted
by the Exchange from the member’s actual deposit; provided, the
member has presented to the Exchange such indemnified or
guarantees as the Relevant Authority may deem necessary or
another clearing member has been substituted owning liability for
all the transaction and obligations of the clearing membe r, who
had ceased to be a member.
d. a suitable amount, as may be determined by the Releva nt
Authority at his discretion, has been set aside for taking c are of
any loss/liability/obligation arising out of his past transactions and
e. a suitable amount, as may be determined by the Rele vant
Authority at its discretion, has been set aside by the Ex change
towards such other obligations, as may be perceived b y the
Exchange to exist or be perceived by the Exchange to arise in
future.
12.12.2 The Relevant Authority may specify norms for repayment
of deposit including the manner, amount and period within which
it may be paid. The repayment amount, at no point of time, will
exceed the actual deposit available to the credit of the clearing
member after deducting the necessary dues or charges pay able
by such clearing member from time to time, including the initial
deposit.
C. 3 Definitions of ‘Deposit’ and ‘Financial Establishment’:
Interpretation of Sections 2(c) and 2(d) of the MPID Ac t
30. The notifications attaching the properties of the res pondent
were issued under Section 4 of the MPID Act. Section 4 covers only
those situations where a ‘financial establishment’ is a defaulting entity.
Section 4 is reproduced below:
“4. (1) Notwithstanding anything contained in any other law for
the time being in force,-
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
(i) where upon complaints received from the deposito rs or
otherwise, the Government is satisfied that any Fin ancial
Establishment has failed,-
(a) to return the deposit after maturity or on demand by the
depositor; or
(b) to pay interest or other assured benefit; or
(c) to provide the service promised against such de posit;
or
(ii) where the Government has reason to believe that any Financial
Establishment is acting in a calculated manner detrimental to the
interest of the depositors with an intention to defraud them;
[…]
(emphasis supplied)
31. The primary issue is whether NSEL is a ‘financi al
establishment’ within the meaning of Section 2(d). Section 2(d) reads as
follows:
“(d) “Financial Establishment” means any person accepting
deposit under any scheme or arrangement or in any other manner
but does not include a corporation or a co-operative society owned
or controlled by any State Government or the Central Government
or a banking company as defined under clause (c) of section 5 of
the Banking Regulation Act, 1949;
Financial Establishment is defined as any person accept ing a
‘deposit’. The definition excludes from its purview (a) a corporation or
cooperative society controlled or owned either by the State or the Central
Government; and (b) a Banking Company as defined under Section 5(c)
of the Banking Regulation Act 1949. Since NSEL does not fall wit hin
any of the exceptions, it would be a ‘financial establis hment’ for the
purposes of the Act if it is a ‘person accepting deposit’. Section 3(42) of
the General Clauses Act 1897 provides an inclusive definition of “person”
to include both incorporated and unincorporated companies25 as:
“ ‘person’ shall include any company or association or body of
individuals, whether incorporated or not.”
25 New Horizon Sugar Mills Limited v. Government of Pondicherry, (2912) 10 SCC 575
(para 58)
507
The expression deposit is defined in Section 2(c) of the M PID
Act in the following terms:
“(c) “deposit” includes and shall be deemed always to hav e
included any receipt of money or acceptance of any valuable
commodity by any Financial Establishment to be returned after
a specified period or otherwise, either in cash or in kind or in
the form of a specified service with or without any benefit in
the form of interest, bonus, profit or in any other form, but
does not include–
(i) amount raised by way of share capital or by way of
debenture, bond or any other instrument covered under the
guidelines given, and regulations made, by the SEBI, established
under the Securities and Exchange Board of India Act, 1992;
(ii) amounts contributed as capital by partners of a firm;
(iii) amounts received from a scheduled bank r a co-operative
bank or any other banking company as defined in clause (c) of
section 5 of the Banking Regulation Act, 1949;
(iv) any amount received from, -
(a) the Industrial Development Bank of India,
(b) a State Financial Corporation,
(c) any financial institution specified in or under section 6A of
the Industrial Development Bank of India Act, 1964, or
(d) any other institution that may be specified by the Government
in this behalf;
(v) amounts received in the ordinary course of business by
way of, -
(a) security deposit,
(b) dealership deposit,
(c) earnest money,
(d) advance against order for goods or services;
(vi) any amount received from an individual or a firm or an
association of individuals not being a body corporate,
registered under any enactment relating to money lending
which is for the time being force in the State; and
(vii) any amount received by way of subscriptions in respe ct of
a Chit.
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
Explanation I. – “Chit” has the meaning as assigned to it in clause
(b) of section 2 of the Chit Funds Act, 1982;
Explanation II. – Any credit given by a seller to a buyer on the
sale of any property (whether movable or immovable) shall not
be deemed to be deposit for the purposes of this clause;
The statutory definition of the expression ‘deposit’ comprises of
the following ingredients:
(i) Any receipt of money or the acceptance of a valuable
commodity by a financial establishment;
(ii) Such acceptance ought to be subject to the money or
commodity being required to be returned after a specified
period or otherwise; and
(iii) The return of the money or commodity may be in cash,
kind or in the form of a specified service, with or without
any benefit in the form of interest, bonus, profit or in any
other form.
These elements of the definition are followed by specific exclusions
contemplated in clauses (i) to (vii). Clause (i) of the exceptions covers
an amount which is raised by way of share capital or by debenture, bond
or other instrument governed by the guidelines and regulations of SEBI.
Clause (v) states that money received in the ordinary course of business
by way of security deposit, dealership deposit, earnest money or advance
against an order of goods or services shall be excluded. The exclusions
in clause (i) to (vii) indicate that transactions which would otherwise fall
within the broad sweep of the definition are excluded.
32. The legislature may define a word artificially by restricting or
expanding its natural meaning. When the legislature employs the phrase
‘means’, the definition is intended to be exhaustive. In Indra Sarma v.
VKV Sarma,26 this Court observed that the definition of the expression
‘domestic relationship’ in Section 2(f) of the Protection of Women from
Domestic Violence Act 2005 is restrictive since it is defined by the use
of the term ‘means’. On the other hand, the Court has taken a consistent
view that where the definition of a word is inclusive, as presaged by the
adoption of the expression “includes,” it is prima facie extensive27. The
26 (2013) 15 SCC 755
27 Karnataka Power Transmission Corporation v. Ashok I ron Work Pvt. Ltd., (2009) 3
SCC 240; Ramanlal Bhailal Patel v. State of Gujarat, (2008) 5 SCC 449
509
definition of ‘deposit’ uses the phrase ‘includes and shall be deemed to
have always included’. The import of this is to create a legal fiction by
which actions which though not included within the natural meaning of
the expression are intended to be included. The combined use of ‘includes’
and ‘deemed to have always included’ while defining the term ‘deposit’
makes the term inclusive and not restrictive.
33. The expression ‘deposit’ is conspicuously broad in its width
and ambit for it includes, not only any receipt of money but also the
acceptance of any valuable commodity by a financial establishment under
any scheme or arrangement. As a matter of interest, we ma y note at
this stage that the expression “any” is used in the substantive part of the
definition of the expression ‘deposit’ on five occasions namely;
(i) Any receipt of money;
(ii) Any valuable commodities;
(iii) By any financial establishment;
(iv) With or without any benefit; and
(v) In any other form.
34. Likewise, the definition of financial establishment refe rs to
the acceptance of deposits:
(i) Under any scheme or arrangement; or
(ii) In any other manner.
35. The repeated use of the expression ‘any’ by the statute while
defining both the above expressions is a clear reflection of the legislative
intent to cast the net of the regulatory provisions of the law in a broad
and comprehensive manner. Unlike many other state enactments which
govern the field, clause (c) of Section 2 of the MPID Act comprehends
within the meaning of a deposit not only the receipt of money but of any
valuable commodity as well. For example, in contrast, Section 2(2) of
the Tamil Nadu Act defines ‘deposit’ only in terms of money and not
commodity. Section 2(2) reads as follows:
“(2) “deposit” means the deposit of money either in one lump sum
or by instalments made with the Financial Establishments for a
fixed period, for interest or for return in any kind or for any service;
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
Similarly, statutes protecting the interest of depositors in Orissa28,
Kerala29, Himachal Pradesh 30, Goa 31, Telangana 32, Andhra Pradesh 33
and Sikkim34 define the phrase ‘deposit’ only in terms of money and not
the acceptance of a commodity.
36. According to the second ingredient of Section 2(c), the money
or commodity must be liable to be returned. However, such return need
not necessarily be in the form of cash or kind but also in the form of a
service, with or without any benefit such as interest. It needs to be
recalled that clause (v) of Section 2(c) states that a deposit of money or
commodity made as a security deposit, dealership deposit or an advance
amount is excluded from the definition of the phrase ‘deposit’. To illustrate,
if a member of a financial establishment deposits Rs. 25,000, a nd that
money is returned on cessation of membership by making de ductions,
the issue of whether the deposit is a security deposit or of the nature
covered under Section 2(c) should be determined with reference to the
structure of operation and functioning of the financial establishment. It
is to be noted that the definition also states that the return may be with or
without interest or any benefit. Therefore, the submissions made by both
the sides on whether NSEL had through its representations assur ed a
16% return on trading in the platform is immaterial for the purpose of
determining if NSEL accepted deposits.
37. Having referred to the relevant bye-laws, we shall determine
if NSEL receives ‘deposits’ as defined by Section 2(c) o f the MPID
Act. The bye-laws elucidate that NSEL receives both money and
commodities from trading members. In order to decide if these receipts
by NSEL could be regarded as ‘deposits’, the test of ‘return’ will have
to be satisfied. The test is that the return be in cash, kind or service. It is
not necessary that the return should be with the benefit of interest, bonus
or profit. Therefore, if the financial establishment is obligated to return
28 The Odisha Protection of Interests of Depositors (i n Financial Establishments) Act
2011
29 The Kerala Protection of Interests of Depositors in Financial Establishment Act
2013
30 The Himachal Pradesh [Protection of interests of de positors (in Financial
Establishments)] Act 1999
31 The Goa Protection of Interests of Depositors (in financial Establishments) Act 1999
32 The Telangana Protection of Depositors of Financial Establishments Act 1999
33 The Andhra Pradesh Protection of Depositors of Fina ncial Establishments Act 1999
34 The Sikkim Protection of interests of Depositors (i n Financial Establishments) Act
2000
511
the deposit without any increments, it shall still fall within the purview of
Section 2(c) of the MPID Act, provided that the deposit does not fall
within any of the exceptions. The exception of relevance to our case is
clause (v) which states that ‘amounts received in the ordinary course of
business by way of (a) security deposit; (b) dealership deposit; (c) earnest
money; and (d) advance against order for goods or servic es shall be
excluded from the purview of the term ‘deposit’.
C. 3.1 Settlement Guarantee Fund: Deposit under Section
2(c) of the MPID Act
38. The trading members pay NSEL a margin deposit and NSEL
maintains a Settlement Guarantee Fund. Regulation 4.12 states that only
transactions of those members who have paid the margin deposi t and
security deposit shall be considered as valid. Therefore, the payment of
margin deposit and security deposit is ‘mandatory’ for a person to trade
on NSEL’s platform. Regulation 4.12 refers to the SGF as a ‘security
deposit’. Similarly, bye-law 12.2.1 stipulates that eac h member shall
contribute a ‘minimum security deposit’. However, merely because the
SGF is referred to as a ‘security deposit’, the except ion would not
automatically be applicable. The meaning of the phrase ‘security deposit’
takes colour from the surrounding phrases. Clause (v) to su b-Section
2(c) excludes security deposit, dealership deposit, earnest m oney, and
an advance against an order for goods and services from the am bit of
the phrase ‘deposit’. The concepts used in sub-Section 2( c) (v) fall in
two categories: (i) token amounts paid to indicate the earnest to purchase
(earnest money and advance money), and (ii) payments required to meet
exigent situations of default by a party (dealership deposit and security
deposit).
39. Black’s Law dictionary35 defines security deposit as “money
deposited by a tenant with a landlord as security for f ull and faithful
performance by the tenant of terms of leases, including damage s to
premises. It is refundable unless the tenant has caused damage or injury
to the property or has breached the terms of tenancy or the laws
governing the tenancy. Certain states also require the landlord to make a
security deposit to cover essential repairs required on rental property.”A
similar phrase, “Client Security Fund” is defined as a fund s et up by
many State Bar Associations to cover losses incurred by pers ons as a
result of dishonest conduct of member-attorneys. The meanings of both
35 Bryan A Garner, Black’s Law Dictionary (11 ed. Thom son Reuters).
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
these phrases suggest the necessary ingredients of a securi ty deposit,
which are:
(i) An advance to ensure faithful performance of the contract;
(ii) A payment to cover essential ‘functions’ for performanc e;
and
(iii) The entitlement to refund being dependent upon whether
damage, injury and default are occasioned.
40. Chapter 12 of the bye-laws provides the features of the SGF:
(i) SGF is utilized for:
(a) defraying the expenses for its creation and
maintenance ;
(b) temporary use of the fund to meet efficiencies arisi ng
out of the performance of obligations;
(c) payment of premia on insurance covers;
(d) payments for the loss or liability of the Exchange
arising out of ‘clearing and settlement operations’;
(e) repayment of the balance deposit to a member;
(f) payment towards the member’s obligations where
the member fails to meet his settlement obligations;
and
(g) payment of the member’s obligation on being declared
as a defaulter;
(ii) The members’ contribution is allocated among various
segments of trading, in which they can participate. The
Exchange also retains the right to utilise the fund allotted to
a particular segment of trading to match the losses or the
liabilities of the Exchange; and
(iii) The settlement fund may be invested in approved securities
or other avenues of investments.
41. The features of the SGF indicate that the fund is used t o
cover those expenses, which are beyond the utilization which is made
out of a regular security fund. Unlike a security deposit between a landlord
and a tenant where the fund is used to meet the ‘essential obligations’ of
513
the landlord such as repair work and deductions are made when t he
tenant has outstanding payments, NSEL uses the deposit to cover the
payment obligations of the trading member (buyer) to anot her trading
member (seller) since NSEL is a counter party to the tr ansactions.
However, NSEL uses the fund to cover functions beyond its role as a
counter-party. For example, the fund is used to cover loses faced by the
NSEL in the settlement operations, investments are made in securities,
and the fund is allotted in various segments of trading, where the funds
are also utilised to cover loses, if any, in the segment. Therefore, these
three features of the SGF indicate that though the SGF is t ermed as a
‘security deposit’ in nomenclature, its features do not represent a security
deposit. Since NSEL receives ‘money’ in the form of SGF that is returned
in money and services, and is not covered by the exceptions, it would fall
within the expression ‘deposit’ as defined in Section 2(c) of the Act.
C. 3. 2 Receipt of commodities: Deposit under Section 2( c)
of the Act
42. A person who wishes to trade in the platform of NSEL is
required to place the commodities in the accredited warehouse of NSEL.
NSEL would then provide the trader with a warehouse receipt. When
the buyer’s offer and the seller’s offer is matched, NSEL would debit
the amount from the buyer member’s pay in obligations and it would be
credited to NSEL’s exchange settlement account. The Operations
Department would confirm with the Delivery Department if the requisite
quantity of a particular commodity of the seller is available. After such
confirmation, the Operations Department would release the p urchase
price to the selling broker’s designated bank account. Simultaneously, a
Delivery Allocation Report would be issued to the buyer’s broker or the
buyer. Once the VAT invoice is paid, NSEL would issue a Delivery Note
authorizing the Buyer to take delivery from the designated ware house
or if the buyer chooses, he can take constructive posses sion of the
commodity. There is nothing in the definition of the term ‘dep osit’ to
mean that the acceptance of the commodity should be accompanied by
a transfer of title to the commodity. Even if the financial establishment is
only in ‘custody’ of the commodity, it would still fall within the purview
of the phrase ‘acceptance of commodity’. On the acceptance of custody
of the commodity, NSEL has to provide various services such as an
obligation to keep the commodity safe and without any damages.
Additionally, the Operations Department and the Delivery Department
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
will have to coordinate while matching the contracts. Similarly, after the
delivery note is sent to the buyer, the commodity is either delivered to
the buyer or the buyer is put in constructive possession of the commodity.
The phrase ‘warehouse receipt’ is defined in Bye-law 2.96 as a document
evidencing that the commodity is being held by NSEL in the approved
warehouse. Clause (b) to Bye law 4.20 states that if the outs tanding
transactions have not been settled by giving or receiving deliveries, then
it (the commodity) shall be auctioned by buying-in or selling-out as per
the Business Rules of the Exchange. Bye-law 10.11 states that the
commodities shall be delivered to and delivery taken from onl y the
designated warehouses. Therefore, NSEL offers a multitude of ‘services’
in return for receiving the commodity. The receipt of the commodities
and holding the commodities (when the members are put in constructive
possession) in the accredited warehouses is a ‘deposit’ under Section
2(c) of the Act.
43. The counsel for the respondent argued that the expression
‘valuable commodity’ used in Section 2(c) would only include precious
metals such as gold and silver. The expression “valuable commodity” is
not defined by the statute. There is no valid basis to accept the submission
of the respondent that the expression should only comprehend within it
precious metals such as gold and silver. If the legislature intended to so
restrict the definition of the expression valuable commodity, it could have
used an explanation importing an artificial meaning to the exp ression.
However, the legislature has desisted from doing so . A valuable
commodity is a commodity which has significant value. This does not
refer only to the intrinsic value of the commodity. Whether or not a
commodity is valuable has to be determined bearing in mind the salutary
object and purpose of the Act which is to protect the interest of depositors.
It is in this context that it becomes necessary to adopt a purposive
construction which would give effect to the meaning and content of the
law. Any attempt to read the definition in a restrictive se nse would be
contrary to legislative intent. The intent of the legislature is to define the
expression ‘deposit’ as well as the expression ‘financial establishment’
in a comprehensive and all-encompassing manner. Therefore, the phrase
‘valuable commodity’ cannot be restricted to only mean precious metals.
Agricultural commodities which NSEL trades in will fall wit hin the
purview of the term.
44. Though it has been observed earlier that it is not nece ssary
that there must be interest or an assured benefit from the deposit for the
515
purposes of Section 2(c) of the MPID Act, it is still ne cessary that we
refer to the representations made by NSEL. NSEL in the cou rse of its
brochures has held out representations about the trading and investment
opportunities available for:
(a) corporate clients;
(b) high net worth individuals; and
(c) retail investors.
45. Under the head of ‘contract specifications’, the following
representation has been held out:
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
The above representation specifies:
(i) Commodities;
(ii) Duration of trades;
(iii) Investment; and
(iv) Yield.
For example, in the case of castor seeds, NSEL held out a bu y
contract (T+3) and sale contract (T+36), in which the yield is stated to
be 16%. Moreover, NSEL represented that:
“Opportunities
• Traders can trade and lock their return
• Trader has to buy in near settlement contract and sell in f ar
settlement contract simultaneously
• Price for both settlement available
• Exchange provides counterparty guarantee risk
• No basis risk, No link with future contracts”
While describing the features of “trading opportunity”, NSEL
represented that:
“Features of Trading Opportunity:
• T+2 and T+25contract offers unique trading opportunity to
traders
• Trader purchases T+2 contract and simultaneously sells
T+25 contract
• Pay-in obligation is on T+2 while Pay-out of the funds will
be on T+25. Entire settlement cycle is of 35-37 days
• Price differential between the two settlement dates i.e
premium if annualized offers interest rate of about 16%
• Income arising out of such trades are treated as Business
Income”
While comparing the investment opportunities of bank fixed
deposits with trading opportunities at NSEL, NSEL represented that:
517
“Comparison
• Bank FD 9.25% for 390 days; NSEL Trading Opportunity
16%;
• Bank FD minimum duration 390 days; NSEL Trade dura tion
35-55 days, depending on the contract
• Traders have an option of rolling over their position as pe r
their convenience”
Under the caption of ‘risk management’, the followi ng
representation has been held out by NSEL:
“Risk Management
• Trades are backed by collaterals in the form of stock
• Cash margin of 10-15% is levied on the open position of
seller in T+2/T+3 contracts
• In case of adverse price movement, Exchange collects
additional margin from the seller in T+2/T+3 contracts
• The exchange has defined guidelines for auction/closeout
(circular: 029/2008)
• Warehouse Management includes Selection, Accreditation,
Quality Resting, Fumigation and Insurance”
The above representation indicates that paired contracts w ere
designed as a unique trading opportunity by NSEL under which a trader
would, for instance, purchase a T+2 contract (with a pay-in obl igation
on T+2) and would simultaneously sell a T+25 contract (with a pay-out
of funds on T+25). The price differential between the two set tlement
dates was represented to offer an annualized return of about 16%. NSEL
categorically represented that all trades were backed by collaterals in
the form of stocks and its management activities included se lection,
accreditation, quality testing, fumigation and insurance. Therefore, NSEL
represented that on receiving money and commodities, the member s
would receive ‘assured returns’ and a ‘service’. Though NSEL has been
receiving ‘deposits’, it has failed to provide services as promised against
the deposits and has failed return the deposits on demand. There fore,
the State of Maharashtra was justified in issuing th e attachment
notifications under Section 4 of the MPID Act.
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
C.4 Uncovering the Conspiracy
C. 4.1 The Grant Thornton Report
46. FMC engaged Grant Thornton LLP to conduct a forensic audit
of the practices and records of NSEL. The report found several instances
where NSEL had repeatedly contravened the rules:
(a) NSEL allowed members who had repeatedly defaulted to
continue trading though under NSEL’s exchange rules, a
member who does not have sufficient collateral to discharge
his obligations would not be allowed to trade further;
(b) Members who were in default or those who had exhausted
their margin limits, were granted an exemption from margin
requirements;
(c) There was an insufficient collateral of commodities i n the
warehouses and NSEL did not diligently conduct the
exercise;
(d) The Bye-laws and rules of the Exchange mandate the
formation of various committees for the effective
management of operations. However, the Board failed to
constitute nine out of ten such committees. There is also no
documentary evidence to demonstrate whether any
committee formed was ever convened;
(e) Client margin deposits and the settlement fund were used
for fulfilling the obligations of the defaulting members. NSEL
also used the deposits made by the members for its own
business purposes on a regular basis. For example, on 28
March 2013, Rs. 236.5 Crore was withdrawn from the
settlement fund to fund NSEL’s business overdraft account.
There is a running deficit in the client settlement fund balance
from 2012 to June 2013. The financial team had raised the
issue on multiple occasions;
(f) Mr. Jignesh Shah, in his presentation dated 10 July 2013 to
FMA had stated that 120 NSEL accredited warehouses
held commodities valued at Rs. 6,000 crores. However, there
was no documentation relating to warehouse activities for
long term trades indicating that the contracts were not
519
secured by stocks. The collateral of the members was not
in custody and NSEL did not have any control over it;
(g) Though the Warehouse Development and Regulatory
Authority had rejected NSEL’s application for registration
of its warehouse in May 2011, the website of the
establishment still represented that the warehouses were
registered with the authority;
(h) Though the warehouse receipts are to evidence tha t a
commodity is held in an approved warehouse, receipts were
issued without deposit of the commodities. NSEL did not
insist on commodities being deposited in the warehouses
prior to executing the sale transactions. NSEL issue d
Delivery Allocation Reports misrepresenting that every
transaction was delivery based and backed with
commodities;
C. 4. 2 63 Moons Judgment
47. NSEL filed third party representations in a suit file d by the
allegedly duped traders for the recovery of Rs 5,600 Crores from the 24
defaulters. Arbitration proceedings were also initiated for the recovery
of dues. An amount of Rs. 3,365 Crores out of Rs 5,000 crores has been
covered through Court decrees and arbitral awards. On 6 January 2014,
the EOW, Mumbai filed a charge sheet against the Managing Director
and CEO of NSEL, the head of warehousing, and two other defaulters.
It was mentioned in the charge sheet that these employees of NSEL had
colluded with the defaulters to enable them to trade on the p latform
without depositing the goods in the accredited warehouses. FMC wrote
to the Union of India on 18 August 2014 that NSEL and 63 Moons b e
merged. In the representative suit which was instituted, t he Bombay
High Court appointed a three-member committee consisting of Mr Justice
VC Daga, Mr J Solomon, and Mr Yogesh Thar for determining the liability
of the defaulters and assisting in the process of recovery. In addition to
Rs. 3,365 Crores covered through court decrees and arbitral a wards,
the high level committee had crystallised a further sum of Rs. 835.88 to
be recovered from the defaulters.
48. On 15 October 2014, the Additional Secretary, Department of
Economic Affairs wrote a letter to the Ministry of Corporate Affairs
stating that 63 Moons and NSEL are maintaining separate identities to
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
deprive the investors of money. It was stated that the corp orate veil
ought to be lifted and both the companies must be amalgamated to recover
the pending dues. On 12 February 2016, an amalgamation order under
Section 396(3) was passed, merging the assets and liabilities of 63 Moons
and NSEL. A writ petition filed under Article 226 for chal lenging the
amalgamation was dismissed by the Bombay High Court. A Sp ecial
Leave Petition before this court challenged the judgment of the Bombay
High Court. The two-Judge Bench in the course of determining the validity
of the amalgamation order, referred to the Grant Thornton report, where
the features and representations made regarding the twin con tracts (
short term and long term), and the role of NSEL in the default of payments
were discussed:
“1.3. These long-term contracts (e.g. T+25) were fir st
traded on the NSEL exchange in September 2009. The Board of
NSEL ratified the circulars introducing such long-term contracts
over a period beginning November 2009.
1.4. Further evidence was obtained with regard to the
existence of a financing business, such as presentations which
stated that a fixed rate of return was guaranteed on investing
in certain products on the NSEL exchange .
Several internal (NSEL) presentations were found, upon a
review of email databases, setting out a yield (e.g. 16%) as
an opportunity for investors for trading in certain products
on the NSEL exchange.
An external presentation was also obtained which had been
made by a brokerage house (Geojit Comtrade Ltd.) for their clients
claiming a fixed return on investments made on the NSEL
exchange. Further, this presentation, declared that actual delivery
of stocks in such transactions would not be required.
1.5. Grant Thornton also obtained evidence of repeated
contraventions of NSEL exchange rules and bye-laws which
facilitated such financing transactions to continue and grow
in size as below :
Repeated defaults : As per the NSEL exchange rules a
member who does not have sufficient collateral/monies, etc. to
discharge his obligations would not be allowed to trade furt her.
This rule was overridden on a recurring basis. Further de spite
521
repeated defaults members were allowed to trade and increas e
their expenses. For example, Lotus Refineries had defaulted, as
per the Rules of the Exchange, on 198 days between the fifteen-
month period of 1-4-2012 and 30-7-2013.
Exemptions from margin requirements : Members who
were in a default position or who had exhausted their margin limits
on trading were granted an exemption from margin requirements
and thus allowed them to increase their exposure by engaging in
new trades. More than 1800 margin limit exemptions were granted
between 2009 through to 2013.
Inadequate monitoring of member collateral : NSEL did
not carry out any diligence to establish the existence of stock at
member managed warehouses, upon which trades were being
executed. Grant Thornton carried out a stock verification exercise
and found significant shortages vis-à-vis expected collateral.”
The judgment referred to the findings of misutilization of client
monies/ settlement fund in the Grant Thornton report:
“1.12. Misutilisation of client monies/settlement fund :
As per the rules and bye-laws of the NSEL exchange “Marg in
deposits received by clearing members from their constituent
members and clients in any forms shall be accounted for and
maintained separately in segregated accounts and shall be use d
solely for the benefit of the respective constituent members’ and
client position.”
Grant Thornton found evidence (including emails) that
client monies/settlement fund, was used regularly f or
fulfilling the obligations of defaulting members .
Further, NSEL utilised client monies/settlement fund
for its own business purposes on a regular basis . For
example, on 28-3-2013, Rs 236.5 crores was withdrawn from the
Settlement Fund in order to fund NSEL’s own business overdraft
account.
There was a running deficit in the client monies/settlement
fund balance from April 2012 to June 2013. The finance team of
FTIL had raised this as an area of concern on several occasions.”
The report’s finding on the lack of documentation o f the
warehousing activities were discussed in the judgment:
THE STA TE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAY A Y CHANDRACHUD, J.]
“The report then goes on to say that there was no
documentation in relation to warehouse activities for lon g-term
trades indicating that such contracts were not secu red by
warehouse stocks. The warehouses were customer manage d
warehouses and the underlying collateral were not in custody of
NSEL. NSEL did not have control over these warehouses and
Grant Thornton was denied access to a number of warehouses.
The Warehouse Development and Regulatory Authority had in
fact rejected NSEL’s application for registration of its warehouses
way back on 16-5-2011. Notwithstanding such rejection, NSEL’s
website represented that its warehouses were registered with the
Authority. No verification or due diligence was ever undertaken
by NSEL to ensure compliance by its members of the conditions
outlined in its rules and bye-laws even though in terms of NSEL
bye-laws, warehouse receipt issued by NSEL were meant t o
evidence a commodity being held in an approved warehouse.
NSEL did not insist upon deposit of commodities in the warehouses
prior to executing sale transactions. Instead NSEL resorted t o
issuing Delivery Allocation Reports (DAR) representing to genuine
investors that each transaction was delivery based and backed at
the time of sale by the required quantity of commodities in its
warehouses.”
The conclusion in the FMC order dated 17.12.2013 which revealed
the conspiracy unfolded by 63 Moons and NSEL was also referred to in
the following extract:
“15.1. Noticee 1: Financial Technologies (India) Ltd.
(FTIL) : We have discussed the equity structure of NSEL, which
is wholly owned by FTIL. We have also pointed out that Shr i
Jignesh Shah, Chairman-cum-Managing Director of FTIL has
been a Director on the Board and also functioning as Vice-
Chairman and a key management person of NSEL since its
inception. Similarly, Shri Joseph Massey and Shri Shree kant
Javalgekar have been Directors of the said company from i ts
very beginning till the settlement crisis at NSEL first came to light
in July 2013. The facts establishing the fraud involving a settlement
default over Rs 5500 crores at NSEL have been discussed at
length in the SCNs issued to the noticees as well as reite rated,
albeit illustratively by us at para 14.7 of this Order. The responsibility
523
of FTIL as the holding company possessing absolute control over
the governance of NSEL has also been highlighted. The control
of FTIL over NSEL becomes further crystallised from the
responses given by M/s Grant Thornton before the Commission
on 3-12-2013 stating that Shri Jignesh Shah, Mr Joseph Massey
and a host of other officials of FTIL reviewed the forensic audit
report and it was only after obtaining their clearance, the forensic
auditor finalised its report.
15.1.1. The violation of conditions prescribed in the
exemption notification, trading in paired contracts to generat e
assured financial returns under the garb of commodity trading ,
admission of members who were thinly capitalised having p oor
net worth and giving margin exemptions to those who were
repeatedly defaulting in settling their dues, poor warehousing
facilities with no or inadequate stocks, no risk manage ment
practices followed, non-provision of funds in SGF, consciously
appointing Shri Mukesh P . Shah as statutory auditors for FY 2012-
13 who was related to Shri Jignesh Shah, and apparent complicity
with the defaulters to defraud the investors, etc., l ead to an
inescapable conclusion that a huge fraud was perpetrated by NSEL
while having the presence of two Board members of FTIL on the
Board of NSEL, one of whom was the Vice-Chairman of the
company.
15.1.2. The facts of the case and the manner in which
the business affairs of NSEL were conducted leaves no doubt in
our minds that FTIL, notwithstanding its contentions that it was
ignorant of the affairs and conduct of NSEL, exerted a dominant
influence on the management, and directed, controll ed and
supervised the governance of NSEL. In the face of a fraud of
such a magnitude involving settlement crises of Rs 5500 crores
owed to over 13,000 sellers/investors on the trading platform of
NSEL, FTIL, cannot seek to take refuge behind the corporate
veil so as to unjustifiably isolate itself from the fraudulent actions
that took place at NSEL resulting in such a huge payment crisis.
15.1.3. FTIL has its principal business of development
of software which has become the technology platform for almost
the entire industry engaged in broking in shares and securit ies,
commodities, foreign exchange, etc. As has been demonstrated
THE STA TE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAY A Y CHANDRACHUD, J.]
by FTIL in their written submission, FTIL has floated a number of
regulated exchanges—both for securities and commodi ties
derivatives—in India as well as abroad. NSEL was incorporated
to provide a trading platform of commodity spot exchange on a
pan-India basis for the purpose of which apparently it sought and
was granted exemption from the operation of the FCRA, 1952.
Since the objective of the NSEL was promoting spot trading
in commodities on an electronic platform, its busin ess
model did not contemplate venturing into trading in forward
contracts . FTIL had already promoted MCX, a regulated
exchange under FCRA, 1952, for the purpose of trading in forward
contracts. Therefore, having secured an exemption fr om the
purview of FCRA, 1952 on the ground that it was intended to
promote spot trading, NSEL was not authorised to allow trading
in forward contracts through the scheme of paired co ntracts,
thereby defying conditions stipulated in the exemption notification
granted to it. The motive behind allowing trading in forwa rd
contracts on the NSEL platform in a circuitous manner on NSEL
which was neither recognised nor registered under FCRA, 1952
indicates mala fide intention on the part of the promoter of FTIL
to use the trading platform of its subsidiary company for illicit
gains away from the eyes of Regulator. The fact that F TIL
promoted NSEL sought exemption from FCRA, 1952 provisions
even before they had started any trading or operation, points to
their intention from the outset. In this manner, it misinterpr eted
the conditions stipulated in the exemption notification in collusion
with a handful of members, which ultimately culminated in a
massive fraud involving Rs 5500 crores, which has the potential
effect of eroding trust and confidence in exchanges and financial
markets.
15.1.4. Keeping in view the foregoing observations and
the facts which reveal misconduct, lack of integrity and unfair
practices on the part of FTIL in planning, directing and controlling
the activities of its subsidiary company, NSEL, we conclude that
FTIL, as the anchor investor in the Multi-Commodity Exchange
Ltd. (MCX) does not carry a good reputation and character, record
of fairness, integrity or honesty to continue to be a shareholder of
the aforesaid regulated exchange. Therefore, in the public interest
and in the interest of the Commodities Derivatives Market
525
which is regulated under FCRA, 1952, the Commission holds
that Financial Technologies (India) Ltd. (FTIL) is not a “fit
and proper person” to continue to be a shareholder of 2% or
more of the paid-up equity capital of MCX as prescribed under
the guidelines issued by the Government of India for cap ital
structure of commodity exchanges post 5 years of opera tion.
It is further ordered that neither FTIL, nor any company/ent ity
controlled by it, either directly or indirectly, shall hold any shares
in any association/Exchange recognised by the Government or
registered by the FMC in excess of the threshold limit of the total
paid-up equity capital of such Association/Exchange as prescribed
under the commodity exchange guidelines and post 5-y ear
guidelines.”
(emphasis supplied)
49. The two-Judge Bench of this Court took note of the modus
operandi through which the trading members were duped by a conspiracy
hatched by a few trading members along with NSEL. However, this
Court held that the order amalgamating NSEL and 63 Moons did not
fulfil the requirements of Section 396 of the Companies Act 1956 as the
‘essentiality’ aspect in Section 396 was not satisfied since the ‘emergency
situation’ requiring amalgamation was short lived. Further, it was observed
that the rationale for the amalgamation was the financial incapability of
NSEL to effect recoveries from the defaulting members. The Court
noted that the final order of amalgamation dated 12 February 2016
referred to the actions taken for recovery by the E OW and the
Enforcement Directorate which indicated methods oth er than
amalgamation through which the monies could be recovered. The action
taken by the EOW and the Enforcement Directorate is referred to in the
following extract:
“92.1. What is important to note is that by the time the final order
of amalgamation was passed i.e. on 12-2-2016, the final order
itself records:
“8.1. Economic Offences Wing, Mumbai:
(i) Total amount due and recoverable from 24 defaulters is
Rs 5689.95 crores.
(ii) Injunctions against assets of defaulters worth Rs 4400.10
crores have been obtained.
THE STA TE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAY A Y CHANDRACHUD, J.]
(iii) Decrees worth Rs 1233.02 crores have been obtained
against 5 defaulters.
(iv) Assets worth Rs 5444.31 crores belonging to the
defaulters have been attached of which assets worth Rs 4654.62
crores have been published in Gazette under the MPID Act for
liquidation under the supervision of MPID Court and balance assets
worth Rs 789.69 crores have been attached/secured f or
attachment by the EOW.
(v) Assets worth Rs 885.32 crores belonging to the Directors
and employees of NSEL have been attached out of which assets
worth Rs 882.32 crores have already been published in Gazette
under the MPID Act for liquidation under the supervision of the
MPID Court and balance assets worth Rs 3 crores have been
attached/secured for attachment by the EOW.
(vi) MPID Court has already issued notices under Sections
4 & 5 of the MPID Act to the persons whose assets have bee n
attached as above. Thus, the process of liquidation of the attached
assets has started.
(vii) The Bombay High Court has appointed a 3-member
committee headed by Mr Justice (Retd.) V .C. Daga and 2 experts
in finance and law to recover and monetise the assets of th e
defaulters.
(viii) Rs 558.83 crores have been recovered so far, out of
which Rs 379.83 crores have been received/recovered from the
defaulters and Rs 179 crores were disbursed by NSEL to sm all
traders/investors.
8.2. Enforcement Directorate:
(i) ED has traced proceeds of crime amounting to Rs
3973.83 crores to the 25 defaulters;
(ii) ED has attached assets worth Rs 837.01 crores
belonging to 12 defaulters;
(iii) As per the recent amendment in the PMLA, the assets
attached by ED can be used for restitution to the victims.
8.3. The above status indicates that the said enforcement
agencies are working as per their mandate….”
(emphasis supplied)
527
This Court noted that the ‘essentiality’ requirement in Section
396 of the Companies Act was not fulfilled:
“92.2. What concerned the FMC in August 2014 has, by the date
of the final amalgamation order, been largely redressed wit hout
amalgamation. The “emergency situation” of 2013 which, even
according to the Central Government, required the emergent step
of compulsory amalgamation has, by the time of the passing of
the Central Government order, disappeared. Thus, the raison d’être
for applying Section 396 of the Companies Act has, by the passage
of time, itself disappeared. In fact, as on today, decrees /awards
worth INR 3365 crores have been obtained against the defaulters,
with INR 835.88 crores crystallised by the committee set up by
the High Court, pending acceptance by the High Court, even without
using the financial resources of FTIL as an amalgamated company.
What is, therefore, important to note is that what was emergent,
and therefore, essential, even according to the FMC an d the
Government in 2013-2014, has been largely redressed in 2016, by
the time the amalgamation order was made. Also, the Centra l
Government order does not apply its mind to the essentiality aspect
of Section 396 at all. In fact, in several places, it refers to “essential
public interest” as if “essential” goes with “public interest” instead
of being a separate and distinct condition precedent to the exercise
of power under Section 396. On facts, therefore, it is clear that
the essentiality test, which is the condition preceden t to the
applicability of Section 396, cannot be said to have been satisfied.”
The judgment held that NSEL had falsely represented that it had
full stock as collateral and that the stock was valued at Rs. 6,000 crores:
“91.3. We have seen that neither FTIL nor NSEL has denied the
fact that paired contracts in commodities were going on, and by
April to July 2013, 99% (and excluding E-series contracts), at
least 46% of the turnover of NSEL was made up of such paired
contracts. There is no doubt that such paired contracts were, in
fact, financing transactions which were distinct from sale and
purchase transactions in commodities and were, thus, in bre ach
of both the exemptions granted to NSEL, and the FCRA. We
have also seen that NSEL throughout kept representing that it
was, in fact, a commodity exchange dealing with spot deliveries.
Apart from the Grant Thornton Report and the FMC order, we
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
have also seen that Shri Jignesh Shah, on 10-7-2013, made
representations to the DCA and the FMC, in which he stated that
NSEL had full stock as collateral; 10-20% of open position as
margin money; and that the stock currently held in NSEL’s 120
warehouses was valued at INR 6000 crores, all of which turned
out to be incorrect. Further, there is no doubt whatsoever that in
July 2013, as a result of NSEL stopping trading on its exchange, a
payment crisis of approximately INR 5600 crores arose. T he
further question that remains is whether, given these facts , the
conditions precedent for the applicability of Section 396 we re
followed.
50. This Court in its decision in 63 Moons (supra) took note of
the modus operandi by which the defaults came about, specifically
highlighting the role of NSEL in not complying with the rules. It set aside
the amalgamation order on the narrow ground that the pre-cond itions
for the exercise of power under Section 396 had not been fulfilled. One
of the reasons which persuaded this Court to set aside the order of
amalgamation was that the EOW and the Enforcement Directorate had
already taken steps to realise the amounts in default. T he judgment in
63 Moons (supra) has after a detailed analysis of the Grant Thornt on
report and the FMC’s order held that the defaulters and NSEL conspired
to dupe the members of their money.
C. 5 Constitutional Validity of the MPID Act
51. The respondents challenged the constitutional validity of the
provisions of the MPID Act before the High Court on the ground that it
is arbitrary. The High Court in the impugned judgment did not deal with
the constitutional validity of the provisions and left the question open.
The respondents contended before this Court that the j udgment in
Bhaskaran (supra) while holding the Tamil Nadu Act to be constitutionally
valid only made a passing reference to the MPID Act. Thu s, it was
argued that this Bench is not bound by the judgment in Bhaskaran (supra)
while deciding on the validity of the provisions of the MPID Act.
52. A Full Bench of the Bombay High Court had held that the
state legislature did not possess the legislative competence to enact the
MPID Act.36 On the other hand, a Full Bench of the Madras High Court
had upheld the constitutional validity of the Tamil Nad u Act. The
36 Vijay C. Puljal v. State of Maharashtra, (2005) 4 C TC 705 (Bom)
529
correctness of the judgment of the Madras High Court was a ssailed
before this Court in Bhaskaran (supra). The judgment of the Full Bench
of the Bombay High Court was cited and considered by the two judge
Bench which heard the appeal against the judgment of the Madras High
Court. This Court held that the state legislature does possess legislative
competence to enact the law in question and that the legislation was not
for the transaction of banking or the acceptance of deposits but for the
protection of the depositors who are deceived by fraudulent financial
establishments. The Court held:
“26. The Tamil Nadu Act was enacted to ameliorate the conditions
of thousands of depositors who had fallen into the clutches of
fraudulent financial establishments who had raised hopes of high
rate of interest and thus duped the depositors. Thus the Tami l
Nadu Act is not focused on the transaction of banking or the
acceptance of deposit, but is focused on remedying the situation
of the depositors who were deceived by the fraudulent financial
establishments. The impugned Tamil Nadu Act was intended to
deal with neither the banks which do the business or banking and
are governed by the Reserve Bank of India Act and the Banking
Regulation Act, nor the non-banking financial companies enacted
under the Companies Act, 1956.
27. The Reserve Bank of India Act, the Banking Regulation Act
and the Companies Act do not occupy the field which the impugned
Tamil Nadu Act occupies, though the latter may incidentally trench
upon the former. The main object of the Tamil Nadu Act is to
provide a solution to wipe out the tears of several lakhs of
depositors to realise their dues effectively and speedily from the
fraudulent financial establishments which duped them or thei r
vendees, without dragging them in a legal battle from pillar to
post. Hence, the decision of this Court in Delhi Cloth Mills [(1983)
4 SCC 166] has no bearing on the constitutional validity of t he
Tamil Nadu Act.”
The judgment of the Full Bench of the Bombay High Court in
Vijay C. Puljal v. State of Maharashtra37 was specifically disapproved
in the decision of this Court in Bhaskaran (supra), where the Court
held:
37 (2005) 4 CTC 705 (Bom)
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
“14. The learned counsel for the appellant relied on the Full Bench
decision of the Bombay High Court in Vijay C. Puljal case [(2005)
4 CTC 705 (Bom)] in support of his contention that the Tamil
Nadu Act, like the Maharashtra Act, was unconstitutional being
beyond the legislative competence of the State Legislatu re. We
do not agree.
15. We have carefully perused the judgment of the Full Bench of
the Bombay High Court in Vijay case [(2005) 4 CTC 705 (Bom)]
and we respectfully disagree with the view taken by the Bombay
High Court. It may be noted that though there are s ome
differences between the Tamil Nadu Act and the
Maharashtra Act, they are minor differences, and hence
the view we are taking herein will also apply in relation t o
the Maharashtra Act.”
(emphasis supplied)
53. Besides holding that the State legislature did not lack legislative
competence to enact the law, the judgment in Bhaskaran (supra) also
concluded that the Tamil Nadu enactment did not violate the provisions
of Articles 14, 19(1)(g) or 21 of the Constitution. In that context, while
dismissing the constitutional challenge against the legislation enacted in
Tamil Nadu, the Court held:
“31. We fail to see how there is any violation of Articles 1 4,
19(1)(g) or 21 of the Constitution. The Act is a salutary measure
to remedy a great social evil. A systematic conspiracy was effected
by certain fraudulent financial establishments which not onl y
committed fraud on the depositors, but also siphoned off or diverted
the depositor’s funds mala fide. We are of the opinion that the act
of the financers in exploiting the depositors is a notorious abuse of
faith of the depositors who innocently deposited their money with
the former for higher rate of interest. These depositors were often
given a small pass book as a token of acknowledgment of their
deposit, which they considered as a passport of their children for
higher education or wedding of their daughters or as a policy of
medical insurance in the case of most of the aged depositors, but
in reality in all cases it was an unsecured promise executed on a
waste paper. The senior citizens above 80 years, senior ci tizens
between 60 and 80 years, widows, handicapped, driven out by
wards, retired government servants and pensioners and persons
531
living below the poverty line constituted the bulk of the depositors.
Without the aid of the impugned Act, it would have been impossible
to recover their deposits and interest thereon.
32. The conventional legal proceedings incurring huge expenses
of court fees, advocates’ fees, apart from other inconven iences
involved and the long delay in disposal of cases due to docket
explosion in courts, would not have made it possible fo r the
depositors to recover their money, leave alone the interest thereon.
Hence, in our opinion the impugned Act has rightly been enacted
to enable the depositors to recover their money speedily by taking
strong steps in this connection.
33. The State being the custodian of the welfare of the citizens as
parens patriae cannot be a silent spectator without finding a solution
for this malady. The financial swindlers, who are nothing but cheats
and charlatans having no social responsibility, but only a lust for
easy money by making false promise of attractive returns for the
gullible investors, had to be dealt with strongly. The small amounts
collected from a substantial number of individual dep ositors
culminated into huge amounts of money. These collections were
diverted in the name of third parties and finally one day th e
fraudulent financers closed their financial establishments leaving
the innocent depositors in the lurch.”
54.The judgment held that the Tamil Nadu Act is constitutionally
valid and constitutes a salutary measure which was long ov er-due to
deal with these matters. Significantly, the above extracts from the decision
in Bhaskaran (supra)indicate that the differences between the
enactment in Tamil Nadu and Maharashtra “are minor” and the view of
the court on the validity of the former will govern the validity of the latter
enactment as well.
55. The judgment in Bhaskaran (supra) was followed by another
two-Judge Bench of this Court in New Horizons Sugar Mills Limited
v. Government of Pondicherry 38. The case arose from the action of
the Government of Pondicherry of attaching the properties acquired by
a company. The validity of the Pondicherry Protection of Interest s of
Depositors in Financial Establishments Act 2004 was also in question. A
two-Judge Bench of this Court considered whether the pith and substance
38 (2012) 10 SCC 575
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
of the enactment istraceable to the entries in the Union List or the State
List of the Seventh Schedule to the Constitution. After adverting to the
earlier decision in Bhaskaran (supra) which upheld the Tamil Nadu
enactment while disapproving the Full Bench decision of the Bombay
High Court on the legislative competence of the State legislature to enact
the MPID Act, this Court held:
“50. In addition to the above, it has also to be noticed that the
objects for which the Tamil Nadu Act, the Maharashtra Act and
the Pondicherry Act were enacted, are identical, namely, to protect
the interests of small depositors from fraud perpet rated on
unsuspecting investors, who entrusted their life sa vings to
unscrupulous and fraudulent persons and who ultimately betrayed
their trust.
51. However, coming back to the constitutional conundrum that
has been presented on account of the two views expressed, by
the Madras High Court and the Bombay High Court, it has to be
considered as to which of the two views would be more consistent
with the constitutional provisions. The task has been simplified to
some extent by the fact that subsequently the decision of the
Bombay High Court [(2005) 4 CTC 705 (Bom)] declaring the
Maharashtra Act to be ultra vires, has been set aside by this Court
[Sonal Hemant Joshi v. State of Maharashtra , (2012) 10 SCC
601] , [State of Maharashtra v. Vijay C. Puljal, (2012) 10 SCC
599] , so that there is now a parity between the judgments relating
to the Maharashtra Act and the Tamil Nadu Act.
[…]
59. […] The objects of the Tamil Nadu Act, the Maharashtra Act
and the Pondicherry Act being the same and/or similar in nature,
and since the validity of the Tamil Nadu and Maharashtra Act
have been upheld, the decision of the Madras High Cou rt in
upholding the validity of the Pondicherry Act must be affirmed.
We have to keep in mind, the beneficial nature o th e three
legislations which is to protect the interests of all depositors, who
invest their life’s earnings and savings in schemes for m aking
profit floated by unscrupulous individuals and companies, both
incorporated and unincorporated.”
533
Following the decision in Bhaskaran (supra), the challenge to the
Pondicherry enactment on the ground of legislative competence w as
repelled.
56. The validity of the MPID Act was specifically dealt with in
two decisions of this Court in State of Maharashtra v. Vijay C. Puljal
39 and Sonal Hemant Joshi v. State of Maharashtra 40. In both the
decisions, this Court upheld the constitutional validity of the MPID Act
in view of the earlier decision in Bhaskaran (supra). In Soma Suresh
Kumar v. Government of Andhra Pradesh41, a two judge Bench of
this Court upheld the provisions of the Andhra Pradesh Prote ction of
Depositors of Financial Establishments Act 1999 following the earlier
decisions in Bhaskaran (supra) and New Horizons Sugar Mills
Limited (supra).
57. Having discussed the judgments of this Court on the
constitutional validity of the state legislations governi ng financial
establishments offering deposit schemes, including the MPID Act, there
is no reason for us to reopen the question. This Court has held that the
MPID Act is constitutionally valid on the grounds o f legislative
competence and when tested against the provisions of Part I II of the
Constitution.
C. 6 The High Court’s Judgment
58. Referring to the Bye-laws and rules of NSEL, the High Court
held that NSEL is an electronic trading platform which only facilitated
transactions between buyers and sellers. In this context, it observed that
NSEL did not receive the pay-in in its own right but only for the purpose
of passing it on to the selling trading member on the same day. The High
Court observed:
“The nature of transaction to be carried out on the NSEL platform
was also therefore, in public domain since the trading on t his
electronic platform commenced. The business/transaction which
operated through NSEL, do not disclose any payin amount received
by NSEL in its own right but it was only received in the process of
settlement of the commodity trade and only for the purpose of
passing it on the selling trading member on the same day . This
39 (2012) 10 SCC 599
40 (2012) 10 SCC 601
41 (2013) 10 SCC 677
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
amount cannot be said to be received as a deposit within t he
meaning of Section 2(c) of the MPID Act which contemplat es
‘deposit’ to be a receipt of money or acceptance of a v aluable
commodity on the promise that such money or valuable commodity
would be returned/repaid by the financial establishment a fter a
specified period or otherwise.”
The High Court has lost sight of the fact that Section 2(c) of the
MPID Act defines ‘deposit’ in broad terms. Further, accord ing to the
definition, the return may be either in money, commodity or service, and
it is not necessary that the commodity or the money must be returned in
the same form. The definition includes the receipt of money and the
return of a commodity, or even the receipt of a commodity and a return
in the form of a service. Further, Bye-law 10.8 indicates that NSEL was
not merely an intermediary. The Bye-law states that the buyer shall pay
the Clearing House the value of the delivery allocation. However, till the
completion of the delivery process, the money will be ret ained by the
Clearing House of NSEL.
59. Referring to the contract notes and the confirmation receipts
generated on the electronic platform, the High Court observed that NSEL
was only a ‘medium’. However, the High Court subsequently noted that
‘something has gone wrong somewhere in these transactions’. Further,
the High Court referred to the First Information Report filed by Mr.
Pankaj Saraf observing that even the complainant had not stated that he
had deposited any amount with NSEL. The Court goes on to note:
“in no way, the complainant in the FIR allege a promised return
in the form of any interest, bonus, profit, but yield- the difference
in the price of a commodity between the two trading date s i.e
T+2 and T+30/33/25 was calculated as a yield but this, in our
view, would not fall within the purview of deposit since neither
the NSEL received the commodities to be retained by its elf nor
did it receive any amount to be deposited in its account.”
60. The High Court also observed in paragraph 33 of the judgment
that at the most, only the sellers in T+2 (and buyers in T+25) could be
referred to as a ‘financial establishment’. This finding was made without
analysing the functioning of the exchange vis-à-vis Sections 2(c ) and
2(d) of the Act. The Court also held that the ‘warehouse receipts’ do not
establish the nature of the transaction that took place in the platform. In
this regard it observed:
535
“… this receipt do not provide an answer to the nat ure of
transaction that took place on the platform of NSEL and though it
is no doubt that the commodity came to be accepted as a deposit,
but it should be accepted with an assured return and in the present
case, the commodity which was accepted was because it was to
be sold to a purchaser and it is not the case of the State that it was
a pure transaction where commodities are accepted as depos it.”
The High Court observed that since transaction charges wer e
charged by NSEL and the amount paid by the buyer used to be paid by
NSEL by the settlement date, it is not a financial establishment.
61. The High Court has formed an erroneous opinion that firstly,
only if the return includes interest, bonus or any other added benefit, it
would be a deposit for the purpose of the MPID Act. However, Section
2(c) states that the return may be “with or without any benef it in the
form of interest, bonus, profit or in any other form”. The definition does
not stipulate that there must be an added benefit, rather that the ‘added
benefit’ is irrelevant for the purpose of the definition; secondly, that for
the purpose of Section 2(c), the receipt of the commodi ty or money
‘must be retained by itself’. The definition does not provid e any such
embargo. Rather, the definition is broadly worded to include even t he
possession of the commodities for a limited purpose. The Hi gh Court
has read the definition of ‘deposit’ narrowly without any refer ence to
the salutary purpose of the MPID Act.
62. The High Court also made observations on the merits of the
criminal proceedings. Referring to the role of NSEL in the de fault in
payments, it observed that at the highest, the actions of NSEL would
constitute offences under Sections 465 and 467 of the IPC. The EOW
filed a charge sheet under Section 173 CrPC before the Sessions Judge,
Special Court under the MPID Act for offences punishable under Sections
409,465,467,468,471,474 and 477(4) read with Section 120(B). The High
Court ought not to have made observations on the merits of the criminal
proceedings when the writ petition was restricted to the issue of whether
NSEL is a financial establishment for the purpose of the MPID Act.
63. The High Court observed that the decision of this Court in 63
Moons (supra) does not have ‘any serious effect on the p resent
proceeding’, though this Court has discussed at lengt h the modus
operandi of NSEL in duping the trading members by throwing light on
the structure of the exchange. Though it was observed that the question
THE STATE OF MAHARASHTRA v. 63 MOONS TECHNOLOGIES
LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
of constitutional validity was settled in Bhaskaran (supra), New
Horizons (supra), Sonal Hemant Joshi (supra) and Vijay Kulijal
(supra), the challenge of the respondent to the constitutional validity of
the MPID Act was still kept open by the High Court. Such an observation
was made in spite of noticing in paragraph 39 of the judgment that this
Court in Bhaskaran (supra) had observed that the MPID Act and the
Tamil Nadu Act have minor differences and that the statute did not
violate Articles 14, 19(1)(g) or 21 of the Constitution.
64. Further, while referring to the earlier order of the D ivision
Bench dated 1 October 2015, where it was prima facie recorded that
NSEL is a ‘financial establishment’ for the purpose of t he MPID Act,
the High Court observed that it was not bound by the prima facie view.
The primary ground for the Division Bench for arriving at a prima facie
view was the representations made assuring a 14% to 16 % yield.
However, the High Court in its impugned judgment dispelled the argument
on the ground that only a ‘faint reference’ was made to assured returns.
Such an observation misrepresents the factual instan ces which are
backed by documentary material.
65. The appellant also contended that the writ petition filed by the
respondent is not maintainable since there was an alternative remedy of
raising an objection before the Designated Court under Section 7 of the
MPID Act. Though there is merit in the argument of the appellant, since
the High Court decided on the validity of the impugned attachment
notifications on merits, and arguments have been addressed in the present
proceedings, we have proceeded to decide the matter on meri ts.
66. For the reasons recorded in this judgment, we allow the appeals
and set aside the impugned judgment of the Bombay High Court dated
22 August 2019. The impugned notifications issued under Section 4 of
the MPID Act attaching the properties of the respondent are valid.
67. Pending application(s), if any, stand disposed of.
Nidhi Jain Appeals allowed.
(Assisted by : Shashwat Jain, LCRA)