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TMI Blog2019 (8) TMI 1038X X X X Extracts X X X X X X X X Extracts X X X X ..... ge its transaction charges. This would clearly dispel the case of the respondent State that the NSEL was accepting deposit and therefore, it was a financial establishment. The clients trading on the NSEL platform did not invest with the NSEL in form of Fixed Deposits, equity or debentures of NSEL but they traded commodities on the platform of NSEL. The NSEL has always voiced its stand by stating that it is not a Financial Establishment and in response o the notices issued to it, it pin pointed towards the defaulters who are responsible for the loss to the investors and the said contention of the NSEL was found to be substantiated by the audit reports. The NSEL has even instituted recovery suits against the defaulters. Since the investors raised an alarm about the losses caused to them, as a knee jerk reaction, the NSEL and its promoter came to be proceeded under the provisions of the MPID Act without deliberating on the core issue to be determined as a jurisdictional fact as to whether the entity was a Financial Establishment, thereby permitting the authorities to proceed against it under the statue intended to govern Financial Establishments. Thus, it can be concluded that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med that this software has provided a platform for online trading and it is claimed by the petitioner that it has become a market leader due to its effort and determination. 2. The petitioner has posed a challenge to the Constitutional validity of Sections 4 and 5 of the Maharashtra Protection of Interests of Depositors in Financial Establishments Act, 1999 (for short 'MPID Act') being violative of Article 14, 19 and Article 300A of the Constitution and also to the levy of attachment on the petitioner's assets by six notifications issued by the respondent no.1 by invoking the powers conferred on the authority under the said enactment. Writ Petition No.1181 of 2018 assails several notifications issued by the State and it also sought several interim reliefs and the said reliefs came to be granted in favour of the petitioner by passing several interim order from time to time. Writ Petition No. 508 of 2017 assails the validity of the relevant provisions of the Maharashtra Protection of Interest of Depositors Act (for short 'MPID') to the extent which affects the petitioner as a promoter of the alleged Financial Establishment. 3. Since both the Writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract to sell the commodity with T+25 delivery cycle with the same parties as the first contract. However, NSEL was charged with violation of terms and conditions of the Exemption Notification dated 5th June 2007 since complaints were received from a number of depositors against NSEL and it was alleged that as a Financial Establishment, it had collected money by promising attractive returns to depositors, but there was a failure to return the deposits when the time for repayment came. On a complaint filed by one Pankaj Ramnaresh Saraf on 30th September 2014, an FIR came to be registered under Section 120 B read with Sections 409, 465, 467, 471, 474 and 477(A) of the IPC. It was alleged that by unilaterally closing down the Exchange, the NSEL defaulted in repayment of approximately ₹ 5600 crore which was due to be paid to approximately 13,000 investors. It was also alleged that the money collected by NSEL from the investors fell within the definition of the term deposit as per section 2(c) of the MPID Act and hence the provisions of MPID Act were invoked and applied on 24th October 2013. The petitioner was roped in as its subsidiary company, since NSEL did not have sufficient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... platform where willing buyers and willing sellers purchased and sold various commodities and earned its profits due to difference of the prices of commodities in short and longer duration contracts, the thrust of the petition is on the fact that the business model of NSEL was operative only as a platform or pipeline and NSEL never accepted any Deposits and, therefore, it is asserted that it was not a Financial Establishment as defined under Section 2(d) of the MPID Act, thereby attracting the provisions of the said enactment. 5. The petition further proceeds to state that the Economic Offences Wing of Mumbai Police (EOW) who was subsequently investigating C.R.No.89 of 2013 has filed three charge sheets but in those charge sheets, not a single rupee has been traced by money trail to the petitioner as a promoter nor the petitioner was named as an accused. The petitioner company was, however, served with notices alleging that the company has received an amount of ₹ 84 crore from NSEL and the petitioner was restrained from disposing, alienating or creating any third party rights in relation to its assets. The petitioner challenged the said notice and the said writ petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tible of a misuse. Because of the words such other property instead of any other property offering in the last part of the section which has a vital impact when read with As the Government may think fit and unless the decision of the Government is directed to be guided by these yardsticks, the provisions can be subjected to misuse and abuse. The provisions of sub section (2) of Section 4 is also challenged as ex proprietary in nature and as violative of Article 300 A of the Constitution. It is further averred that even if assuming for a moment, that the trading platform of NSEL was abused for doing financial transactions in the garb of commodity trading, that itself do not make the NSEL actual recipient accepting deposits and it cannot be termed as 'Financial Establishment' under Section 2(d) of the MPID Act. The petitions therefore seeks a relief of quashing of the impugned notifications (i) (ii), (iii), (iv), (v) and (vi) apart from seeking a declaration to the effect that section 4 and 5 of the MPID Act are violative of Article 14, 19(1)(g) and Article 300 A of the Constitution. 6. In support of the petitioner, we have heard the learned senior counsel Shri V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to Mr.Nankani, in all 24 such original sellers who received or collect monies under T+ 25 contract but defaulted in payment on an aggregate sum of ₹ 5600 crore under the T+ 25 contracts. He would submit that all the transactions are screen based and takes place on real time basis where the brokers on both sides place their orders for trade and accept orders for trade on their respective computer terminal and a situation emerged on 31st July 2013 when the 24 sellers and their brokers who had entered into reverse trades on T+2 date and received monies thereunder failed to honor their commitment of squaring off their position by buying back the commodities on T+25 date. As a result, 148 buyers and brokers could not receive monies on their open positions due to default committed by 24 sellers and their brokers. Mr.Nankani would submit that in this transaction, there was no question of any deposit being accepted by NSEL and therefore, it cannot be termed as 'Financial Establishment' which would attract the provisions of MPID Act. He would submit that all trades entered into NSEL exchange were governed by its bye laws which were available in public domain and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the NSEL has acted only as a pass through or a platform and could not be termed as 'financial establishment'. He would place reliance on the investigation conducted by EOW which has revealed that the entire trail of monies lost by the investors/trader have been traced to the 24 defaulters and their group companies and associates and conversely no part of the alleged deposits have been traced to the Board Members of NSEL or to the petitioner as a promoter of NSEL. He makes an extensive reference to the judgment of the Hon'ble Apex Court in case of 63 Moons Technologies Vs. Union of India delivered on 30th April 2019 and he would rely upon certain portions of the said judgment and its concluding paragraphs. In a nutshell, Shri Nankani has submitted that the six impugned notifications issued by the respondent attaching immovable and movable properties of the petitioner deserve to be quashed, after declaring that NSEL is not a financial establishment under the MPID Act and rather declaring that each of the 24 defaulters are the financial establishments. 8. Mr.Nankani has invited our attention to the methodology adopted by the NSEL and he submits that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 29th June 2018. The said affidavit, according to him, deals exhaustively with the challenge of the constitutional validity of the said Enactment in question and also set out in detail the modus operandi of the NSEL, justifying invocation of provisions of the Enactment against NSEL and the petitioner who is its promoter. Based on the affidavit, the learned senior counsel submits that the petitioner is the promoter of NSEL and holds 99.99% total share capital. He would submit that the NSEL had indulged in large scale financial transactions whereby investors were promised heavy returns and Shri Dada would rely upon following circumstances to establish that NSEL is a Financial Establishment accepting deposits and he would highlight the said circumstances as follows : (i) All the parties trading on the NSEL platform were forced to execute paired contracts of T+2 and T+25 simultaneously. (ii) None of the parties were given a choice to make any singular trades and the trades had to be in paired contracts. (iii) The price for the paired contracts, at the stage of buy and sell i.e. for T+2 and T+25 was fixed before hand and simultaneous contracts were exec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ap has occurred due to the collusion between NSEL, its owners, Directors, management, sellers, borrowers and others and it is a clear cut case of criminal conspiracy and criminal breach of trust where innocent people were duped of their investment on account of the financial jugglery and fraudulent entries in the books of accounts. Thus, according to Mr.Dada, the NSEL is a financial establishment and he would rely on the observations made of the Division Bench in Writ Petition No.1403 of 2015 wherein it was held that NSEL had accepted the deposits as defined under the MPID Act and hence, it is covered within the definition of Financial Establishment and therefore, according to him, the issues stand foreclosed. He would painstakingly invite our attention to the purpose of enacting the MPID Act and would submit that it is a fit case where the petitioner who is a promoter of NSEL has rightly been pinned down by taking assistance to the provisions of the enactment since the NSEL did not own any property and about 13000 investors have been duped to the tune of ₹ 5600 crore. Mr.Dada has also justified the impugned enactment and submit that the vires of the MPID Act being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who are in control and management and it is they who must bear the responsibility of returning the money taken by way of deposits. We would deal with the submissions advanced by learned Senior counsel Shri Seervai a little later. 10. With the assistance of the learned counsel appearing on both sides, we have perused the Writ Petition along with its annexures and also the affidavits tendered on behalf of the respondent. On hearing the learned counsel for the parties and on perusal of the writ petition, in order to effectively adjudicate the issues raised before us, we would deal with the issues under the following particular heads : I The nature of transaction entered into by the NSEL. II The FIR filed and the subsequent invocation and application of provisions of MPID Act against NSEL. III An action taken against the present petitioner which is the promoter of NSEL by issuing notifications under Section 4. IV The constitutional validity of the Maharashtra Protection of Interest of Depositors Act, 1999 Shri Nankani has raised the jurisdictional issue and he has submitted that the entire initiation of action again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price by reducing cost of intermediation and improving market efficiency. It thus aimed to provide a delivery based platform to achieve price efficiency. It operated in 24 commodities with its most active contracts being Castor seeds, Cotton seed, cotton, barley and maize. The Cotton Corporation of India became member of NSEL to sell cotton bales on NSEL platform. Similarly, the Food Corporation of India also became a member of NSEL in March 2010 and commenced sale of wheat through National Spot Exchange. The key features of the National Spot Exchange included a Centralized Trading Platform on which numerous buyers and sellers interfaced with one another to carry out transactions. Another key feature, being Counter Party Guarantee, where all the trades were made subject to margin/security payable in advance and the NSEL being monitoring the positions based on automated risk management system, the NSEL provided counter party guarantee. The remote market access was also a key feature of the mechanism along with the assurance of quality specification. The Government of India, therefore, granted permission to NSEL along with two other spot exchanges to start its operation and it issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orward Contract Regulations Act, 1952 and this exemption was in respect of contracts of one day duration for sale and purchase of commodities traded on the Spot Exchange established by NSEL. The conditions placed an absolute bar on short sales and stipulated that all outstanding positions at the end of the day must result in delivery of commodities. The NSEL started its activity in the year 2008 and it started trading in T+2 and T+25 based contracts which were traded together and were called as paired contracts where the buyer/investor would enter into a contract to buy the commodity with T+2 delivery cycle and simultaneously, the buyer/investor would also enter into a contract to sell the commodity with a T+25 delivery cycle with the same parties as the first contract. 15. The NSEL continued to enjoy the exemption until it was served with a show cause notice on 27th April 2012 by the Central Government, alleging contravention of the specific condition imposed while granting exemption from the provisions of the FCRA and the Central Government by its letter dated 12th July 2013, directed the National Spot Exchange not to launch any fresh contracts till further instruction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date. He also stated that he was informed by his broker that NSEL had issued a Press Release proposing a settlement cycle in consultation with the planters on payment in a staggered manner and he placed on record the said press release. However, since he was to receive payments under various trades of commodities, under various contracts entered by him, he apprehended that the settlement terms worked out by NSEL would not be implemented and since he did not receive the amounts of the payments due to him, he lodged the FIR. He alleged that he was cheated by NSEL, the defaulters and there was practically very little hope for recovery of the amount due and outstanding on the contract, which he had invested in NSEL. He also alleged that NSEL has cheated him by creating a false impression of being a proper spot exchange with correct risk management systems in order to induce him into the trade on the spot exchange and deliberately misled him that the trades were backed up by genuine warehouse receipts and in fact, the loss could not be recovered since the funds from the settlement guarantee fund of the exchange was misappropriated, leaving no security to ensure payment of his outstandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentment and uproar and creating law and order problem in the State and in particular, city like Mumbai. The State, therefore, deemed it expedient to make a suitable legislation to curb the unscrupulous activities of such financial establishments in the State and enacted the Act of 1999. The said enactment define financial establishment in Section 2(d) as follows : 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 (10 of 1949) . The term deposit was defined as follows 2(c) Deposit includes and shall deemed always to have been included any receipts 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 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 includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while trading on the online platform provided by NSEL. Our attention was invited to the bye laws as well as the regulations governing the trading process on the platform of NSEL and we would make a brief mention to the said bye laws as well as the regulations. 20. The NSEL was governed by the Bye laws known as the 'bye laws of National Spot Exchange Limited, Mumbai' which came into force with effect from June 2008. The byelaws governed its functioning in addition to the provisions of business rules and regulations framed by NSEL. The bye laws contained and introduced certain terminology with reference to the transactions taking place on the platform of NSEL and we would make a reference to certain relevant terms. It defined Automated Trading System or the Trading System of Exchange to the following effect : 2.7 Automated Trading System or Trading system of the Exchange means National Electronic Spot Trading System, which shall be the computerized system provided by the Exchange for conducting spot trading in commodities permitted by the Exchange, access to which is made available to an exchange member, for use either by himself or by his authorized person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in fulfillment of his obligation. 2.55 Member of the Exchange‟ or Exchange Member means a person, a sole proprietary firm, joint Hindu family, a partnership firm, a company (as defined under the Companies Act), a co operative society, a body corporate or public sector organization or statutory corporation or a government department or nongovernment entity or any other entity admitted as such by the Exchange for trading, clearing or settlement in a commodity permitted by the Exchange and shall not mean a shareholder of the Company unless expressly stated. Membership of the Exchange in this context shall not mean or require or entitle shareholding in the Company. 2.72 Seller means and includes, unless the context indicates otherwise, the selling client, and the selling exchange member acting as an agent on behalf of such selling client and denotes the selling exchange member when he is dealing on his own account. 2.86 Trader Work Station (hereafter referred to as TWS ) means a computer terminal of an exchange member which is approved by the Exchange and which is installed and connected to NEST or any other trading system of the Exchange, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 authorized person acting for and 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 matters connected therewith or 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. A clause of secrecy in the Bye laws made it imperative for the exchange to take necessary steps to preserve and protect the details, particulars, date or information available in nest and its computer systems. Indemnity cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Agricultural Marketing Board/Authorities as well as metals of different specifications including precious metals like gold and silver etc. The following stipulations in the bye laws need to be noted : 4.6 While entering an order in the system, the member shall specify whether such order is on his own account or on account of his client. If the order is for and on behalf of a client, he should specify the respective client identification number. 4.7 Before executing a trade for a client, the member shall sign a written agreement with the client, as per the procedure and in the format, as may be specified by the Exchange. 4.8 All transactions in commodities permitted on the Exchange shall be cleared, registered and settled by the Clearing House and shall be subject to these Bye Laws, Rules, Business Rules and Regulations framed thereunder by the Exchange. The Clearing House shall clear, register and settle the trades entered into on the exchange. 4.9 Members of the Exchange shall issue contract note for each of the transaction done by them for their respective clients on the trading system of the Exchange. Such Contract notes shall be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be liable to be dealt with under Bye Laws relating to disciplinary action. 4.25 Members shall maintain a record of all their transactions in all commodities permitted by the Exchange. Members shall have separate records of their own account transactions and those of registered non members, including orders from registered non members for execution of transactions in commodities. Members shall preserve the records of registered non members orders for transactions‟ for each registered non member separately with the time and date of receipt of order, details of executed transactions for each registered non member and books of accounts relating to the same, for a period of three years for production whenever required by the Board of Directors or any committee of the Exchange. 21. The mechanism of trading on the exchange was set out by bye law no.5 and it contemplate the members of the exchange or their authorized representatives or approved users trade through the Traders Work Station (TWS) connected to the Nest or any other trading system of the exchange and 5.6 set out that the members of the exchange shall be solely responsible for all the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to recover dues of any defaulting member from his security deposit and other funds, if any lying with the Exchange, as also from his debtor members and appropriate the amount so recovered for distribution amongst his creditor members on pro rata basis. 7.9.3 The Exchange shall not be deemed to guarantee the financial obligations of a defaulting clearing member to other members, who are doing clearing and settlement through him. 7.9.4 The Exchange shall not be deemed to guarantee the financial obligations of any member of the Exchange to his/its clients; and 7.9.5 The Exchange shall not be deemed to guarantee the delivery, the title, genuineness, quality or validity of any goods or any documents passing through the Clearing House of the Exchange. 22. The margins are then set out in bye law no.8 and in respect of the transactions taking place in the exchange, it is imperative for the buyers and sellers to deposit an amount as initial margin and margin accounts are marked to market daily by clearing members and it is open for the exchange member to close out upon position of a client, when the call for further margin or any other pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuted as counter party for all net financial liabilities of the clearing members in specified commodities in which the Exchange has decided to accept the responsibility of guaranteeing the financial obligations. 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. 9.8.1 Each trading day shall be a settlement day, unless it is declared otherwise by the Relevant Authority at its discretion; 9.8.2 All transactions in commodities permitted on the Exchange shall be subject to marking to market and settlement through the Clearing House, at intervals specified by the Relevant Authority under the Business Rules and Regulations of the Exchange, except on holidays when there is no trading and clearing. The Relevant Authority shall have the right to effect marking to market and settlements through the Clearing House more than once during the course of a working day, if deemed fit on account of the market risk and other parameters; and 9.8.3 Settlement of differences due on outstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d disqualifications of the member of the exchange along with the procedure to obtain the membership are also set out in the said rules. It also provides for the duties cast on the members and the power of the Board to cancel, suspend, expel a member from the exchange. The relating bye laws set out the rights and obligations of the brokers vis vis the trades of NSEL exchanges and all the brokers who wish to trade on behalf of their clients must necessarily obtain registration with NSEL and become its trading member and are bound by the Rules, regulations and bye laws of the NSEL. We have perused the bye laws of NSEL and from the said bye laws, it could be seen that the methodology which was adopted by NSEL could be summarized in a stepwise manner as follows : (i) It was the broker or member of the NSEL who had access to the online trading system set up by NSEL on his computer terminal and this access could be gained by the broker upon registration as a member. (ii) The broker / member placed an order either to buy or sell any commodity which is being traded on the exchange and he can also put an order for buying or selling of the same commodi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of funds between clearing members and the exchange. Every member was to have a designated bank account with electronic fund transfer facility and the members were permitted to operate the settlement account for the purpose of settlement of deals entered through the exchange for payment of margin money or any other purpose as specified in the exchange. It contemplated the delivery procedure at NSEL warehouse where the seller desirous to sell/buy through NSEL had to compulsorily deliver the commodity in the NSEL designated warehouse of a particular location. The quality and the weight of the commodity was monitored and certified by the warehouse supervisor. The commodity inward document is to be issued by the depositor for depositing the commodity in the exchange warehouse. The quality certificate and the commodity inward document are issued on deposit of the commodity and the warehouse receipt to be issued to the depositor the next day. The Commodity came to be traded on the platform of NSEL in the following manner : 1. A Trading Member of the NSEL, who possessed and wished to trade in a particular commodity, was required to place that quantity of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details to the selling Trading Member the selling Trading Member would arrange for the non member client/seller to generate a VAT paid sale invoice in the Buyer s name for the particular quantity of the particular commodity sold. On application of the Buyer, and on the basis of the said Delivery Allocation Report the VAT Paid Invoice, NSEL would issue a Delivery Note authorizing the Buyer to take delivery of the purchased commodity from the stipulated warehouse. In the event the buyer trading member opted not to remove the commodity from the Exchange designated warehouse, such trading member would be put in constructive possession of the commodity and could further trade therein and he was entitled to take physical possession thereof at any time in the manner provided by the Rules and ByeLaws of the NSEL Exchange. 26. Perusal of the mechanism clearly divulge that NSEL was an electronic trading platform for purchase and sale of commodities by registered trading members (and their client non trading members) and the settlement of such contracts by payment from the buyer and seller through the exchange and the sell/delivery of the commodity by the seller to the buyer. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the platform were conscious of their act of trading on the platform and no material has been placed on record by the State to disclose that the money came to be deposited with the NSEL. Shri Nankani has placed on record the trading process on the NSEL exchange platform and he has explained the said process through the contract notes which have been placed on record in form of convenience compilation and also the illustrative copy of the summary of trades entered into by one of the trader i.e. Dani Commodities Pvt Ltd. He has also explained the NSEL trading mechanism through screen shots. We have carefully perused the same and attempted to comprehend the same in the backdrop of the byelaws/regulation framed by NSEL. From the said documents, we would decipher that NSEL was operating through its registered trading member who was a medium/conduit for the sale/purchase of the commodities. A registered trading member who had placed the requisite commodity stock in the warehouse on the basis of the standard/proforma contract issued by NSEL for that commodity would place the sell order for sell of the commodity online through the exchange platform highlighting the price and qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchase transactions and the sell transactions and it would be necessary to reproduce the same. Terms and Conditions relating to the transactions executed on the Trading System of National Spot Exchange Limited and forming part of the Contract Note. 1. For Purchase Transactions: The client will be liable to pay the sales tax/VAT/Excise, levies including APMC Cess and other charges as applicable under the VAT/State Tax laws APMC or other applicable Central and State enactments and the Rules, Terms Conditions specified by National Spot Exchange Ltd. (NSEL). The Client shall issue valid sales tax/VAT/Excise/certificates/declaration forms as may be applicable or appoint the member as his agent for compliance of Sales Tax/VAT/Excise laws, APMC acts and Rules thereunder upon sale of commodities covered under this contract. In such cases, the client shall be liable to reimburse the statutory charges/taxes paid by the member. 2. For Sale Transactions: The client will be responsible for recovery of sales tax/VAT/Excise and other levies and other charges as applicable under the VAT/Sales Tax laws/other Central and State enactments applicable and the Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd records the credit/debit pursuant to the said obligation on the respective dates. Not only this, the entries are further reflected in the NSEL settlement bank account showing amount received from a particular trader with the entries of the respective pay in and pay out and this matches with the individual ledger accounts of the respective traders. Shri Nankani has also demonstrated the said transaction through the watch screens of the NSEL where the order for buy and sell is placed after the quantity and price of the commodity is displayed. From the screen shots produced before us, we can note that several commodities find place in the typical market watch screen which is accessible to the brokers and various commodities with its quoted price and the type of settlement are displayed. Anyone who wants to trade in the commodities will have to place an order through his broker and a buy order entry when clicked by a broker, the quantity and price would be decided by the buyer. Once such buy order is entered, the market watch window displays the quantity and price for the commodity. On seeing the price of the commodity, if any trader wishes to sell a particular commodity, he enters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon the NSEL not to trade further. We have carefully perused the contract notes for T+2 and T+25 contracts of the complainant Shri Pankaj Saraf placed on record by Shri Nankani. Perusal of the said notes disclose that a contract note executed on the platform of NSEL recorded the trading date, trade number, quantity bought/quantity sold and the brokerage. It also corresponded with the entry of buying and selling with the addition of the warehouse charges, CNF charges, service tax, trading charges, etc. for a further T+30 contract. We have taken note of various such contract notes placed on record for various commodities and have also perused the market watch screen placed on record in the compilation submitted by Shri Nankani which depicts the transaction entered into in respect of a particular commodity. We have also taken note of the confirmation receipts generated on the electronic platform and our attention was also invited to the amount deposited in the respective accounts known as settlement account . 29. This leaves no doubt in our mind that the transaction was between two persons i.e. buyer and seller through medium of NSEL. No doubt something has gone wrong somewh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CRA Act, 1952 and there are separate consequences which could then fall upon the NSEL. However, the present offence which has been registered against the NSEL is under the provisions of IPC and the provisions of MPID have been invoked and applied. We have also perused the FIR filed by Mr.Pankaj Saraf on 30th September 2013 and on careful perusal of the FIR, it disclose that the complainant through his broker has traded on the platform of NSEL and he did not ever deposit any amount with NSEL. The NSEL is alleged even on the complaint to be a medium through which the complainant entered into transaction through his broker. In the statement of Shri Saraf, the complainant before the EOW disclose that he had certain surplus funds and he was interested in investigating in the commodities market. Prior to his investment, he had visited the website of NSEL and he had carefully reviewed the presentations displayed on his website where NSEL had claimed that it monitors the positions on automated risk management system and offers counter party guarantee in respect of all trades. He also further make a reference to the undertaking in the presentation that the quality of the underlyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now that as per the NSEL Bye laws, a certified warehouse means a warehouse approved and designated by the exchange for making deliveries to and taking deliveries from for fulfilling contractual obligations resulting from transaction in commodities. Further, as per the NSEL Bye laws, a 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 stated quantity of commodities of a stated grade and quality by the beneficial owner or the holder of the certified warehouse receipt. Such certified warehouse receipt may either be in physical form or in materialized /electronic from as may be permitted. As per Regulation 4.20 (a) of the NSEL Bye laws, all outstanding transactions in commodities is generally required to be for compulsory delivery at any one or more delivery points, and/ or warehouses approved, certified and designated by NSEL. Further under Regulation 7.11 of the NSEL Bye laws the clearing house of the exchange has the responsibility of receiving and maintaining margin payments, monitoring open positions and margins, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aders. Nonetheless, the NSEL had its chunk of charges in form of transaction charges and the charges of warehousing. The purchase and sell of the commodity is apparent since the VAT was paid on such transaction. 31. We have also perused the charge sheet which is filed in pursuant to an investigation in the FIR lodged by Pankaj Saraf. The charge sheet is filed by the EOW on 4th August 2014 and is placed on record of the Writ Petition. In the chargesheet, NSEL is referred to as a 'Spot Exchange' designed to help the activity of buying and selling of a commodity, paying cash for and receiving goods on the spot. In the charge sheet, it is stated that the important feature of any such exchange is that it has to stand guarantee subject to its bye laws to either party that it will ensure that the contract is settled and if the buyer cannot bring the money for any reason, the Exchange would then sell the goods to someone else and recover the money and similar exercise if the seller defaults. 32. The charge sheet further proceeds to state that when the seller and buyer are far away how does the exchange guarantee the delivery and it makes a reference to the warehou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts), NSEL was seeking further clarifications on the same. Effectively, the complainants were led to believe that the trades on NSEL would continue without disruption and would continue to remain safe and risk free. It then makes a reference to the various circulars issued by the NSEL and proceeds to narrate the contents of the letter dated 16th August 2013 sent by the FMC to the NSEL published on the website of FMC. The entire letter is reproduced in the chargesheet. After making a reference to the said letter, charge sheet contains the following statement : It is alleged in the FIR that during the period from Oct, 2008 to July, 2013, NSEL allowed 25 Members, named as accused, to trade on the exchange as sellers. It is alleged that in authenticating these companies due diligence was not followed. It is further alleged that during the relevant period these 25 Members (Sellers) in connivance with NSEL traded fictitious stocks on the exchange for which they raised fake documents. During the initial contracts between these Member Companies as sellers buyers, the companies squared off the contracts on the date of maturity, but later on when the investments i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 633.49 crore and this company was trading on the platform of NSEL in Paddy rice and from the account of the said company, an amount came to be transferred to its sister concern and this is how the default company siphoned out the amount. The charge is that trading was taking place on the platform of NSEL but the defaulters who were not able to discharge their pay out obligation and resultantly, the buyers who brought the goods on the platform of exchange were left without the actual commodities in hand and the squaring of the contracts entered between the buyer and seller did not fructify. We also have before us an affidavit filed by the respondent in Writ Petition No.508 of 2017 which contain following statements: f. The promoter of NSEL is Financial Technologies (India) Ltd (FTIL) which holds 99.99% of the total share capital of NSEL. The Founder Chairman and Group CEO of FTIL is Jignesh Shah. Jignesh Shah along with Joseph Massey and Anjani Sinha are in charge of the overall management and affairs of NSEL. The key officials of NSEL listed above are very central to the operations of the NSEL. g. There are 25 defaulters i.e. Mohan India Pvt.Ltd, N.K. Prote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has any role to play as a promoter from any of these liabilities and it would be imperative on them to be subjected to the regime of the penal laws. However, what is assailed before us is the invocation of the provisions of the MPID on the very basis that NSEL is a Financial Establishment and that it had accepted 'deposit'. 33. In the backdrop of the aforesaid facts placed before us, we are satisfied that the NSEL has not accepted any deposit and if it has not accepted any deposit, then it would not fall within the definition of financial establishment . The NSEL has received money from the buyers at T+2 date and it was immediately paid to the sellers at T+2 date. However, on T+25 date, the parties who were sellers on T+2 date, and who were under obligation to make payment on T+25 date, failed to do so and it is not the NSEL but the sellers who receive the money from the buyers on T+2 date with an underlying obligation to make the payment of T+25 date but failed to do so and therefore, at the most, they could be referred to as financial establishment . The Forensic Audit of EOW has revealed the complete trail of diversion of funds by the 24 defaulters to their as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it would amount to deposit if it is to be returned after a specific period either in cash or in kind or in form of a specified service with or without any benefit. The petitioner has admitted that the amount used to come to NSEL to be paid to the respective traders on the T+25 settlement date and the NSEL was entitled to charge its transaction charges. This would clearly dispel the case of the respondent State that the NSEL was accepting deposit and therefore, it was a financial establishment. Shri Dada has also relied upon the judgment of the Apex Court in case of amalgamation of 63 Moons by the Central Government with the NSEL and he would place on record the judgment of the Supreme Court delivered on 30th April 2019 setting aside the said amalgamation. He has placed heavy reliance on the said judgment. We have perused the said judgment which deals with the issue of applicability and construction of Section 396 of the Companies Act, 1956 and the amalgamation of companies by the Central Government in public interest. In fact, the said judgment recognizes that NSEL was incorporated in 2005 by Multi commodities exchange and its nominee and it provided an electronic platform for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (referred to as financial establishment ) that it had collected money by promising attractive returns to depositors but failed to return the deposits when the time for repayment came. The notification makes reference of the NSEL as a registered company providing an electronic platform for spot trading and commodities and operating in 16 States across the State. It also mentioned that it is promoted by FTIL (now known as 63 Moon Technologies). After making a reference to the nature of transactions taking place on the platform of NSEL, it also makes a reference to the notification dated 12th July 2013 issued by the Department of Consumer Affairs directing the NSEL to submit certain undertakings in light of the alleged violation of the exemption notification. It then alleges that by unilaterally closing down the financial establishment, it defaulted into repayment of approximately 5600 crores which was due to be paid to 13000 investors and since the financial establishment had collected deposit, the provisions of the MPID Act are invoked. The notification then proceeds to state that as to why the properties of the petitioner are required to be attached and it states as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholding in the said Financial establishment is 99.99/ and it is alos the promoter of the said Financial Establishment. As the Government of Maharashtra is satisfied that the attached properties of the Financial Establishment. As the Government of Maharashtra is satisfied that the attached properties of the Financial Establishment are not sufficient for repayment and that the said Financial Establishment does not have sufficient properties which can be attached for the purpose of repayment of the deposits, as per section 4 (1) of the MPID Act the properties of the promoter of the said Financial Establishment i.e. M/s 63 Moons Technologies Ltd. Are liable to be attached and utilized under the provisions of section 7 of the MPID Act. Reference is then made to seven notifications issued earlier in respect of whom the allegation has been made that they are not signed by a person atleast of a rank of a Secretary to the Government of Maharashtra and therefore, as a measure of abundant caution, the Government ratified the said notifications and issued the impugned notification, thereby attaching the properties, including properties in addition to those already stand attach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the liability on these companies based on the pending buying contracts. These calculations are based on the basis of withdrawal and deposits in NSEL settlement accounts and the report is indicative of the diversion of funds by the said companies by transferring it and being utilized by some other companies or the individual family members. The audit report placed on record at Exhibit EE contains a statement in respect of 17 defaulters including the big defaulters like N.K. Proteins Limited, Astha Group, Ark Importers Pvt.Ltd, Loil Group, Lotus Refinery Pvt. Ltd, Metkore Alloys and Industries Limited. It also gives the figures of the amount not attached as per EOW money trail and the amount attached and disclose that 1,720.63 crore is not yet attached. Our attention was also invited to the affidavit filed by the Deputy Secretary, Home Department, Government of Maharashtra in the High Court of Gujarat at Ahmedabad in the Special Civil Application No.18637 of 2015 in case of Ashita Nilesh Patel, where the application was filed by one Ashita, daughter of Chairman of NSEL and married to one Nilesh Patel, Chairman of N.K. Group who is a defaulter member of NSEL. The said af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. National Spot Exchange Ltd. Would thereafter issue acknowledgment receipt evidencing the quantity of the commodity and its quality. The receipt issued by National Spot Exchange is a tradable document. The receipt issued by National Stock Exchange would be placed online by the person who has placed his commodities in the approved warehouses of National Spot Exchange Ltd. It is the case of the Investigation agency that the N. K. Proteins Ltd, and its office bearers, in collusion with the official of National Spot Exchange Ltd., created fabricated and forged documents. For example take a case that on a given day N. K. Proteins Ltd, and its office bearers, in collusion with the officials of National Spot Exchange Ltd., crated fabricated and forged documents. For example take a case that on a given day N. K. Proteins Ltd, has placed goods of 100 MT commodities. A receipt is given of 100 MT, evidencing the goods having placed. Say for example, the value of the goods which is ₹ 1 crore. But as a matter of fact, commodity is not placed at all in the godown. Based on this receipt generated and obtained, N. K. Proteins will display this receipt online for sale of goods by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from NSEL and the investigation was focused on whether the amounts have been divested. In such a scenario when the respondent State has itself alleged certain misdeeds to the NSEL only to a limited extent that the transaction between NSEL and borrowers were not fully supported with actual delivery of goods which emerged into a financial mishap due to collusion between the NSEL, borrowers and their clients and this is a clear cut case of criminal conspiracy and criminal breach of trust where the innocent's money to the tune of ₹ 5600 crore have been washed out. If this is the case of the prosecution, then we are fully justified in taking a view that the transaction entered on the platform of NSEL was not the one of deposit of the amount or commodity and if it is not so within the meaning of Section 2(c) of the MPID Act, then NSEL cannot be charged of being a financial establishment and proceeded against under the provisions of the MPID Act. 36. We will now proceed to deal with the contention advanced by the petitioner through the learned Senior counsel Shri Seervai in Writ Petition No.508 of 2017 where the petitioner has sought a declaration that Sections 4 and 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to Shri Seervai, the decision of Government may be abused or misused when the intention of the legislature is clear from the reading of the entire sub section i.e. only that property of the promoter, director, partner or manager of a financial establishment will be attached which has a direct bearing and relation to be borne from or out of the deposits. He has expressed that the State Government as it may think fit, would be entitled to attach even untainted and unconnected properties of the promoter, director, manager, etc and such unguided delegation would result only in the subject satisfaction of the Government being based on whims and fancies and would also lead to absurdity. Shri Seervai has also argued that sub section (2) of Section 4 of the MPID Act is ex proprietary in nature and violative of Article 14 and 300 of the Constitution. He submits that unless the provisions are read down, the said provision would violate Articles 14 and 300A since if an order of attachment is made in relation to the assets of the petitioner in its capacity as a promoter of the financial establishment, then on publication of the order in the gazette, the property vests in the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... establishment out of which they have acquired the property, then the provision can be saved, but in such circumstances, the impugned notification would be ultra vires the provision and would be required to set aside. 37. The Maharashtra Protection of Interest Depositors Act came to be challenged on the ground of lack of legislative competency and the Full Bench of this Court in Vijay C. Puljal Vs. State of Maharashtra (2005) 4 CTC 705 declare the said enactment to be unconstitutional being beyond the legislative competence of the said legislature. The provisions of the Tamil Nadu Protection of Interest of Depositors (in Financial Establishment) 1997 which is also a legislation to curb the mushroom growth of financial establishments which were grabbing money received as deposits from the public on false promises for exorbitant and unprecedented high rate of interest without any obligation to refund these deposits to the investors on maturity was a subject matter of challenge before the Full Bench of the Madras High Court. The said enactment came to be challenged on the ground of violation of Article 14, 19(1)(g) and Article 21 of the Constitution. It also came to be ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower of attachment without affording an opportunity to the financial establishments as the Act provides a post decision opportunity and also permits the innocent third parties to approach the Special Court for variation and modification, and we find sufficient justification in this regard. It also made the following observations in paragraph no.26. 26. Wide option was also provided under the Act for settling the amount without payment of interest, thus giving a fair play in the joints. That apart, during the course of making the ad interim order of attachment absolute, by contemplating notice to the interested parties and permitting them to file their objections and also hearing the third parties, who have not even been served with notice, but filed their objections, requiring the Special Court to pass appropriate orders within 6 months from the date of filing the application under Section 4(3) of the Act, and then requiring the Special Court to pass appropriate orders on merits under section 7(4) of the Act, by which it may make the ad interim order of attachment absolute, vary it or cancel it and also by providing the Special Court to release the excess amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of interest and who are victimized by financial establishment. The Apex Court in K.K. Baskaran observed thus : 28 In the case of the Tamil Nadu Act, the attachment of properties is intended to provide an effective and speedy remedy to the aggrieved depositors for the realization of their dues. The offences dealt with in the impugned Act are unique and have been enacted to deal with the economic and social disorder in society, caused by the fraudulent activities of such financial establishments. 29 Under Section 3 4 of the Tamil Nadu Act, certain properties can be attached, and there is also provision for interim orders for attachment after which a post decisional hearing is provided for. In our opinion this is valid in view of the prevailing realities. 30 ............... 31 We fail to see how there is any violation of Article 145, 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 only committed fraud on the depositor, but also siphoned off or diverted the depositor's funds mala fide. We are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Shri Seervai has submitted before us that the Tamil Nadu Act is distinct in its wording under Section 3(ii). According to Shri Seervai, a similar wording is contained in Section 3(2) of the Odisha Protection of Interest of Depositors Act, 2011. The submission of Shri Seervai is that in this particular context, since the properties of the petitioner in the capacity of a promoter are being sought to be attached, the attachment of the petitioner s property without a money trail being traced and unless and until some default has been established on the part of the petitioner as promoter, the properties could not be attached. As against this, the argument of the State through Shri Dada is to the effect that the present enactment is distinct in its character and the promoter like the petitioner who wear the cloak of manifest arbitrariness when monies of depositors are lost and cannot be repaid except by attaching the properties of promoters, the principle of restitution would come into picture to protect the need of depositors and the need to obviate the evil effect of financial establishment who operate to deprive investors of their investment have sufficient reasons to justify the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave tested the provisions of the respective State legislations enacted by the respective State legislatures to protect the interest of depositors in financial establishments and by taking a consistent view, the legislative competence of the respective State legislatures have been upheld and the decision of the Apex Court in case of K.K. Bhaskaran Vs. State, was consistently followed. In light of this scenario emerging from the aforesaid judgments and in particular, when we have already recorded that NSEL did not accept deposits and this observation which we have made on the basis of the entire transaction conducted on the platform of NSEL being placed before us, if NSEL itself is not a financial establishment, then, we do not think that there is any propriety in dealing with the arguments advanced by Shri Seervai and to deal in his challenge to the validity of the enactment on the forefront of Article 300A of the Constitution. We do not intend to touch the validity of the MPID Act on this count by leaving the said challenge and contention of Shri Seervai as regards reading down of Section 4 of the MPID Act, open. 40. As far as the argument of the petitioner in regards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a promise and assurance to the clients to be entitled to the returns of 14% to 16% per annum, the Division Bench accepted the said statement and recorded that the statements recorded by Investigating Agency prima facie reveal that the petitioner represented to the traders/suppliers of the goods that they would be provided security free loan and there was an assurance of fixed returns @ 14% to 16%. The brochure was the basis of the observations made by the earlier Division Bench. However, since at this stage, the entire functioning of the NSEL along with the actual nature of its transaction along with the bye laws have been placed before us in great detail, we do not think that we are bound by the said prima facie observation and moresoever, it was also observed that since further investigation was in process, at that relevant stage, the petition could not have been entertained in light of an alternative efficacious remedy to apply for discharge before the trial Court. Further, the Division Bench had also observed that the observations are prima facie in nature and made for the limited purpose to consider the grant of relief for quashing the action of invocation/application of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were attached. A submission came to be advanced that the outstanding default amount is ₹ 4822.53 crore whereas the authorities have attached the properties worth ₹ 8548 crore including the properties of the petitioner. We have dealt with the said submission and noted that in the year 2016, the State had attached properties worth ₹ 6115 crore from the defaulter members and property worth ₹ 2200 crore of the petitioner came to be attached upto November 2017. It was not disputed that the EOW has thus attached properties worth ₹ 8583.04 crore of the alleged defaulters. In view of the undisputed fact that the properties attached were worth ₹ 8548 crore, we had granted stay to the impugned notification dated 7th April 2018 relating to Odin and its receivables and we stayed the notification dated 11th April 2018, 17/4/2018, 19/4/2018, 15/5/2018 which purported to attach the properties in the form of accrued benefits on the investment of the petitioner and we also granted stay to the notification dated 19th September 2018 to the extend of attaching the Odin and its receivables and attachment of accrued benefits on the ground that the said attachments ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omoter of NSEL, the axe of the Government agencies by attaching the properties has necessarily fallen on the petitioner, which we see is highly illegal and unsustainable. 42. On examination of the contentions raised by the respective counsel, we are of the view that the clients trading on the NSEL platform did not invest with the NSEL in form of Fixed Deposits, equity or debentures of NSEL but they traded commodities on the platform of NSEL. The NSEL has always voiced its stand by stating that it is not a Financial Establishment and in response o the notices issued to it, it pin pointed towards the defaulters who are responsible for the loss to the investors and the said contention of the NSEL was found to be substantiated by the audit reports. The NSEL has even instituted recovery suits against the defaulters. Since the investors raised an alarm about the losses caused to them, as a knee jerk reaction, the NSEL and its promoter came to be proceeded under the provisions of the MPID Act without deliberating on the core issue to be determined as a jurisdictional fact as to whether the entity was a Financial Establishment, thereby permitting the authorities to proceed against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P NO.508 OF 2017 4 The impugned notification dated 21st September 2016 is quashed and set aside and prayer clause (b) is made absolute. 5 As far as prayer clause (a) is concerned, we leave the said challenge open. 6 In light of the aforesaid relief granted, we dispose of the pending Notices of Motion as well as Chamber Summons filed in WP 508/2018. (SMT. BHARATI H. DANGRE, J.) (RANJIT MORE, J.) After we pronounced the judgment, learned senior counsel Shri Dada prays for grant of stay to the effect and operation of the said Judgment. He raise an apprehension that if the attachments are lifted, the properties would be immediately disposed of by the petitioner who is the promoter of NSEL. This prayer is opposed by the learned Senior counsel Shri Rohatgi as well learned Senior counsel Shri Seervai by making a categorical submission that all this while on a pretext that NSEL is a Financial Establishment, they had already suffered the brunt and since now the Court, on merits, has held that NSEL is not a Financial Establishment, the petitioner who is a promoter should not be made to suffer further. The prayer for grant of stay to the Judg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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