2019 (9) TMI 591 - AT - SEBI

Annulment of a trade - whether the respondent-NSE Clearing Ltd. being a recognized clearing corporation is akin to a recognized stock exchange or not? - application for redressal of their grievances before SEBI - HELD THAT - An order of the recognized stock exchange is appealable under Section 23L of the Act. Some of the duties and functions of a recognized stock exchange has been transferred to a clearing corporation namely, NSE Clearing Ltd. This clearing corporation has been recognized under Section 4 read with Section 8-A(4) which provision is to recognize a stock exchange. Thus if an order of a recognized stock exchange is appealable under Section 23L, the functions and duties of a recognized stock exchange which have been transferred to a clearing corporation would also be appealable under Section 23L. A clearing corporation cannot stand on a better footing or cannot stand outside the provisions of the SCRA Act especially when a superior body, namely, the recognized stock exchange s orders are appealable under Section 23L. In the light of the aforesaid, we hold that the appeal filed by the ISSL is appealable under Section 23L against a decision of the NCL. The objection raised by SEBI is, thus, rejected. ISSL has questioned the legality and validity of the order of NCL dated 24th June, 2019 whereby their application for annulment of the trade was rejected. NCL was of the opinion that since parallel investigation in relation to fraud is being conducted by SEBI and EOW, the said corporation was not willing to start a parallel investigation. We find that the issue as to whether the trades have to be annulled on account of fraud has not as yet been decided by the clearing corporation on merits. A fraud, if any, should be crystalized and decided and should not percolate the entire securities market. Whether there has been a fraudulent transfer of mutual funds units by Allied to ISSL is a question which is required to be decided by some authority. Whether fraud has been perpetuated or whether a trade should be cancelled on a preponderance of probability that a fraud has been perpetuated, is again a question which is required to be decided by an authority. It is not appropriate for this Appellate Tribunal to go into the question at this stage. Such matter is required to be decided by an authority. Since NCL has refused to decide the application for annulment of trade on the ground that parallel investigation is being conducted by SEBI, we dispose of all the aforesaid appeals with the following directions - (i) All the appellants will file an appropriate application for redressal of their grievances before SEBI by 8th July, 2019 annexing their earlier applications / complaints / emails and praying for specific relief / reliefs. (ii) Counter-parties like Citi Bank and similarly connected entities may appear before SEBI and place their objections, if they so desire. (iii) SEBI will consider all the complaints and applications and provide an opportunity of hearing to the appellants, to all interested parties and take a conscious decision by reasoned and speaking order; (iv) All the parties will appear before SEBI on 10th July, 2019 at 3 p.m. on which date SEBI will hear and decide the matter, and if for some reason, the hearing is not concluded on that day, SEBI will hear the same on a day to day basis till it is concluded. SEBI would thereafter pass an order on or before 17th July, 2019. (v) Since an interim direction had been granted by the Supreme Court of India by its order dated 26.6.2019, we direct that the Nifty Option Contract on the F O Segment of NSE which was to expire on 27th June, 2019 will remain in abeyance till 22nd July, 2019.

Summary

Issues Involved:
1. Annulment of trade due to alleged fraud by Allied Financial Services Private Limited.
2. Jurisdiction and maintainability of the appeal under Section 23L of the SCRA Act.
3. SEBI's role and compliance with principles of natural justice.
4. Specific claims for return of securities and annulment of trades by affected parties.

Detailed Analysis:

1. Annulment of Trade Due to Alleged Fraud:
- The core issue revolves around the annulment of a trade involving NIFTY options contracts, which Allied Financial Services Private Limited (Allied) sold based on mutual fund units placed as collateral. ISSL, acting as a clearing member, sought annulment of these trades, alleging fraud by Allied.
- Allied received an upfront premium of around ?380 crore from ISSL for these trades. ISSL contended that the trades were based on fraudulently transferred collaterals and were not in the interest of the securities market, thus seeking annulment.
- SEBI initially rejected ISSL's contention and directed that the appropriate authority for annulment was the Stock Exchange as per SEBI's circular.
- The Clearing Corporation (NCL) later rejected ISSL's application for annulment, stating that appropriate orders could only be passed after investigations by SEBI and the Economic Offence Wing (EOW) were completed.

2. Jurisdiction and Maintainability of the Appeal:
- SEBI raised an objection regarding the maintainability of the appeal under Section 23L of the SCRA Act, arguing that no appeal lies against an order passed by NCL.
- The Tribunal held that an appeal is indeed maintainable under Section 23L against a decision of the NCL, as NCL is a recognized clearing corporation under Section 4 read with Section 8-A of the SCRA Act. The functions and duties of a recognized stock exchange transferred to a clearing corporation would also be appealable under Section 23L.

3. SEBI's Role and Compliance with Principles of Natural Justice:
- SEBI's interim order and subsequent confirmatory order against Allied were challenged by various parties, including Keshav Prasad Misra and others, Navjoy Emporium Private Limited, and Dalmia Cement (Bharat) Limited, who alleged that their securities were illegally transferred by Allied.
- The Tribunal found that SEBI violated the principles of natural justice by not providing an opportunity of hearing to Navjoy and Dalmia before modifying the confirmatory order. SEBI was directed to consider the complaints and provide a hearing to all interested parties.

4. Specific Claims for Return of Securities and Annulment of Trades:
- Affected parties, including Keshav Prasad Misra, Navjoy Emporium, and Dalmia Cement, sought annulment of trades and return of their securities, which they claimed were illegally transferred by Allied.
- The Tribunal noted that these issues had not been addressed by any authority and directed SEBI to consider the specific claims and applications of the appellants, providing an opportunity for a hearing and passing a reasoned order.

Conclusion:
- The Tribunal directed all appellants to file appropriate applications before SEBI by 8th July 2019, and SEBI was instructed to hear and decide the matter by 17th July 2019, ensuring compliance with principles of natural justice.
- The Nifty Option Contract on the F&O Segment of NSE, which was to expire on 27th June 2019, was ordered to remain in abeyance till 22nd July 2019, following an interim direction by the Supreme Court of India.