2019 (5) TMI 1672 - AT - SEBI

Annulment of a deal - appellant is a clearing member empanelled with NSE Clearing Limited - HELD THAT - Clearing Member can apply for annulment of a deal . In our opinion such deal mentioned in Clause V will also include trades done on the Exchange platform. The relevant authority to decide the annulment of the deal would be the Board of Directors of National Securities Clearing Corporation Limited (now, NCL) and SEBI. The contention of SEBI in the impugned order that it is not within its purview to consider the request for annulment of trades is erroneous. SEBI in exercise of powers u/s 11, 11B of SEBI Act, 1992 read with 12A of the SCRA, 1956 has wide powers to consider a complaint with regard to annulment of the trades. We find that since bye-laws have been framed by NCL in exercise of the powers conferred under Section 9 of SCRA, 1956 therefore, in our opinion, the appropriate measure is for the appellant to approach the relevant clearing house. The appellant is required to file an application under Clause 5 of Chapter VII of the bye-laws of the National Securities Clearing Corporation Limited for annulment of the trades. A perusal of Clause 5 makes it clear that if there is a willful misrepresentation or material mistake or if there is fraud the relevant authority is empowered to annul the trades. In so far as the freezing of the demat account is concerned, we are of the opinion that SEBI was justified in directing the appellant to approach the EOW. No error in this regard. We find that EOW has passed an order for freezing the demat account. The appellant is already pursuing the matter before the Delhi High Court. Thus, no order could be passed by SEBI in this regard. Matter directing the appellant to move an appropriation application under Clause 5 of Chapter VII of the bye-laws of National Securities Clearing Corporation Limited (NCL). If such an application is filed, the said Clearing Corporation will decide the matter at the earliest after hearing all concerned parties. Tribunal observes that the finding of SEBI that the appellant had no locus standi for modification of the ex-parte interim order is erroneous. We are of the opinion that even though the appellant may not be a party in those proceedings but if the appellant is affected either directly or indirectly the appellant has a right to apply for modification of the order. The ex-parte interim order observes that Allied has committed various violations of SEBI bye-laws by misappropriating clients securities which need to be returned. Such securities were given to the appellant as collateral to square off the trades of Allied. In our view, the appellant is an affected party. We thus, leave it as that and hold that in the event the appellant applies for being heard and for protection of its interests the WTM of SEBI cannot deny the opportunity of it being heard.

Summary

Issues Involved:
1. Annulment of trades.
2. Freezing of demat accounts.
3. Locus standi of the appellant for modification of ex-parte interim order.

Issue-wise Detailed Analysis:

1. Annulment of Trades:
The appellant, a clearing member empanelled with NCL, sought annulment of trades executed by Allied, a stockbroker and member of NSE. Allied had provided margins to the appellant through mutual funds and cash, which were later found to be involved in fraudulent activities. SEBI, in its order dated March 29, 2019, stated that the appellant had no locus standi to apply for annulment of trades and directed them to approach the Stock Exchange as per SEBI's Circular dated July 16, 2015. However, the Tribunal found that SEBI has wide powers under Section 11 and 11B of the SEBI Act, 1992, and Section 12A of the SCRA, 1956, to consider annulment requests. The Tribunal noted that the appellant, being a clearing member, could not apply under the Stock Exchange bye-laws but could apply under the NCL bye-laws. The relevant authority for such annulment would be the Board of Directors of NCL and SEBI. The Tribunal directed the appellant to file an application under Clause 5 of Chapter VII of NCL bye-laws for annulment of trades.

2. Freezing of Demat Accounts:
The appellant's demat account was frozen by the Economic Offence Wing (EOW) due to allegations of fraudulent transfer of mutual funds by Allied. SEBI directed the appellant to approach EOW for any relief regarding the freezing of the demat account. The Tribunal upheld SEBI's direction, noting that the appellant was already pursuing the matter before the Delhi High Court and that SEBI could not pass any order in this regard.

3. Locus Standi of the Appellant for Modification of Ex-parte Interim Order:
SEBI's ex-parte interim order dated February 27, 2019, restrained Allied from accessing the securities market and froze their assets. The appellant contended that they were affected by this order and sought its modification. SEBI held that the appellant had no locus standi as they were not a noticee in the interim order. The Tribunal found this to be erroneous, stating that the appellant, being directly or indirectly affected by the order, had the right to apply for its modification. The Tribunal emphasized that the appellant should be given an opportunity to be heard by SEBI for the protection of its interests.

Conclusion:
The Tribunal disposed of the matter, directing the appellant to approach NCL for annulment of trades and upheld SEBI's direction regarding the freezing of the demat account. The Tribunal also clarified that the appellant had locus standi to seek modification of SEBI's ex-parte interim order and should be heard by SEBI.