2018 (3) TMI 1830 - AT - SEBI

Claims of the appellants against their broker rejected by the DC - NSE liability to compensate the appellants - Claim of the appellant provided as margin money to Kassa Finvest Private Ltd. a defaulter stock broker of the NSE, was not admitted for payment from the Investor Protection Fund ('IPF') of the NSE - claim was rejected on the ground that the said amount purportedly provided as margin money for trading in securities was in fact a transaction in the nature of loans. HELD THAT - Securities and Exchange Board of India ('SEBI') had issued an interim order against Kassa on March 19, 2015 and the final order was passed on September 5, 2017 whereby, inter alia, Kassa was directed to refund / return client's money / securities with 15% interest thereon. It was also stated in the order that Kassa admitted to taking loans from clients by offering fixed returns. The appellant before us is unable to produce any evidence relating to her trading in securities. The appellant is neither able to provide any convincing reason why no trading was done for about a year of having the trading account except a vague statement that her instructions to the broker was never implemented. Record produced before us clearly indicate that interest was paid to the appellant by Kassa. The statement on dividend itself is not very convincing as there are entries to the effect that the same company has paid dividend twice during a period of three months. All these clearly show that the amount deposited by the appellant with Kassa was in the form of loans. Since the By-laws of the NSE clearly prohibit compensating claims in the nature of loans given to defaulting brokers, we find no fault in the Defaulters' Committee's decision that the appellant's claim cannot be entertained from the IPF which is meant for safeguarding the interests of genuine investors. Appellant is at liberty to approach the appropriate forum to settle her claim against Kassa in case Kassa is not honouring her claim of the deposited amount. No merit in the argument of the appellant that NSE is liable to compensate the appellant for having failed in their duty as a regulator of brokers.

Summary

Issues:
1. Rejection of claim by the National Stock Exchange of India Limited (NSE) regarding margin money provided to a defaulter stockbroker.
2. Interpretation of margin money as loans and its implications on compensation claims.
3. Duty of NSE in regulating brokers and compensating investors for broker failures.

Analysis:

Issue 1: The appellant challenged the rejection of their claim by NSE regarding margin money provided to a defaulter stockbroker, Kassa Finvest Private Ltd. The claim was denied on the basis that the amount provided as margin money was considered a transaction in the form of loans, not eligible for compensation from the Investor Protection Fund (IPF) of NSE.

Issue 2: The appellant argued that they were a small investor who had opened a trading account with Kassa and transferred shares, expecting returns. However, when the committed returns were not received, and NSE expelled Kassa for violations, the appellant sought a refund of the margin money. NSE's Defaulters' Committee rejected the claim, citing by-laws that prohibit compensating claims in the nature of loans from the IPF. The financial ledger of Kassa indicated interest payments to the appellant, supporting the view that the margin money was in the form of loans, not eligible for compensation.

Issue 3: The appellant contended that NSE failed in its duty to regulate brokers properly, leading to the appellant's loss, and sought compensation. The tribunal, however, found that NSE was not liable to compensate for the willful violation committed by the appellant and the broker. The tribunal referred to a previous related appeal where a similar argument was rejected, emphasizing that NSE, as a first-line regulator, is not obligated to compensate for violations. The tribunal dismissed the appeal, stating that the appellant could pursue the claim against Kassa through the appropriate forum if necessary.